G.R. No. 96322 December 20, 1991 (CTA Decision, p. 4; Records, p.

10)

ACCRA INVESTMENTS CORPORATION, petitioner,  The withholding agents aforestated paid and remitted the above amounts representing taxes on
vs. rental, commission and consultancy income of the petitioner corporation to the Bureau of
THE HONORABLE COURT OF APPEALS, COMMISSIONER OF INTERNAL Internal Revenue from February to December 1981.
REVENUE and THE COURT OF TAX APPEALS, respondents.
In a letter dated December 29, 1983 addressed to the respondent Commissioner of Internal
Angara, Abello, Concepcion, Regala & Cruz for petitioner. Revenue (Exh. "G"), the petitioner corporation filed a claim for refund inasmuch as it had no
tax liability against which to credit the amounts withheld.

GUTIERREZ, JR., J.: Pending action of the respondent Commissioner on its claim for refund, the petitioner
corporation, on April 13, 1984, filed a petition for review with the respondent Court of Tax
Appeals (CTA) asking for the refund of the amounts withheld as overpaid income taxes.
This petition for review on certiorari presents the issue of whether or not the petitioner
corporation is barred from recovering the amount of P82,751.91 representing overpaid taxes
for the taxable year 1981. On January 27, 1988, the respondent CTA dismissed the petition for review after a finding that
the two-year period within which the petitioner corporation's claim for refund should have
been filed had already prescribed pursuant to Section 292 of the National Internal Revenue
The petitioner corporation is a domestic corporation engaged in the business of real estate Code of 1977, as amended.
investment and management consultancy.
Acting on the petitioner corporation's motion for reconsideration, the respondent CTA in its
On April 15, 1982, the petitioner corporation filed with the Bureau of Internal Revenue its resolution dated September 27, 1988 denied the same for having been filed out of time. It
annual corporate income tax return for the calendar year ending December 31, 1981 reporting ruled that the reckoning date for purposes of counting the two-year prescriptive period within
a net loss of P2,957,142.00 (Exhibits "B", "B-1" to "B-10"). In the said return, the petitioner which the petitioner corporation could file a claim for refund was December 31, 1981 when
corporation declared as creditable all taxes withheld at source by various withholding agents, the taxes withheld at source were paid and remitted to the Bureau of Internal Revenue by its
as follows: withholding agents, not April 15, 1982, the date when the petitioner corporation filed its final
adjustment return.
Withholding Agent Amount Withheld
On January 14, 1989, the petitioner corporation filed with us its petition for review which we
a) Malayan Insurance Co., Inc. P1,429.97 referred to the respondent appellate court in our resolution dated February 15, 1990 for proper
determination and disposition.
(Exh. "C")
On May 28, 1990, the respondent appellate court affirmed the decision of the respondent CTA
b) Angara Concepcion Regala opining that the two-year prescriptive period in question commences "from the date of
payment of the tax" as provided under Section 292 of the Tax Code of 1977 (now Sec. 230 of
the National Internal Revenue Code of 1986), i.e., "from the end of the tax year when a
& Cruz Law Offices P73,588.00 taxpayer is deemed to have paid all taxes withheld at source", and not "from the date of the
filing of the income tax return" as posited by the petitioner corporation (CA Decision, pp. 3-5;
(Exh. "D") Rollo, pp. 27-29).

c) MJ Development Corp. P 1,155.00 (Exh. "E") Its motion for reconsideration with the respondent appellate court having been denied in a
resolution dated November 20, 1990, the petitioner corporation (ACCRAIN) elevated this case
d) Philippine Global Communications, to us presenting as main arguments, to wit:

Inc. (Exh. "F") 6,578.94 I

TOTAL P82,751.91 ACCRAIN'S JUDICIAL ACTION FOR RECOVERY OF CREDITABLE TAXES

ERRONEOUSLY WITHHELD AT SOURCE WAS FILED ON TIME.
II
THE RECKONING DATE FOR THE COMMENCEMENT OF THE TWO-YEAR
PRESCRIPTIVE PERIOD IS 15 APRIL 1982. ACCORDINGLY, THE 13 APRIL
1984 ACTION OFACCRAIN FOR THE RECOVERY OF TAXES
ERRONEOUSLY WITHHELD AT SOURCE IN 1981 IS NOT BARRED AND
ACCRAIN IS ENTITLED TO THE REFUND OF P82,751.91 OF SUCH TAXES.
(Rollo, p. 116)
We find merit in the petitioner corporation's postures.
Crucial in our resolution of the instant case is the interpretation of the phraseology "from the
date of payment of the tax" in the context of Section 230 (formerly sec. 292) of the National
Internal Revenue Code of 1986, as amended, which provides that:
Sec. 230. Recovery of tax erroneously or illegally collected. — No suit or
proceeding shall be maintained in any court for the recovery of any national internal
revenue tax hereafter alleged to have been erroneously or illegally assessed or
collected, or of any penalty claimed to have been collected without authority, or of
any sum alleged to have been excessive or in any manner wrongfully collected, until
a claim for refund or credit has been duly filed with the Commissioner; but such suit
or proceeding may be maintained, whether or not such tax, penalty or sum has been
paid under protest or duress.
In any case, no such suit or proceeding shall begin after the expiration of two
years from the date of payment of the tax or penalty regardless of any supervening
cause that may arise after payment: Provided, however, that the Commissioner may,
even without a written claim therefor, refund or credit any tax, where on the face of
the return upon which payment was made, such payment appears to have been
erroneously paid. (Emphasis supplied)
The respondent appellate court citing the case of Gibbs v. Commissioner of Internal
Revenue (155 SCRA 318 [1965]), construed the phrase "from the date of payment" as to be
reckoned from "the end of the tax year" when the petitioner corporation was deemed to have
paid its tax liabilities in question under the withholding tax system. (CA Decision, pp. 4-5;
Rollo, pp. 28-29)
The respondent appellate court in this case has misapplied jurisprudential law. In
the Gibbs case, supra, cited by the Court of Appeals, we have clearly stated that:
Payment is a mode of extinguishing obligations (Art. 1231, Civil Code) and it means
not only the delivery of money but also the performance, in any other manner, of an
obligation (id., Art. 1231). A taxpayer, resident or non-resident, does so not really to
deposit an amount to the Commissioner of Internal Revenue, but, in truth, to
perform and extinguish his tax obligation for the year concerned. In other words, he
is paying his tax liabilities for that year. Consequently, a taxpayer whose income is
withheld at source will be deemed to have paid his tax liability end of the tax year. It
is from twhen the same falls due at the his latter date then, or when thtwo-year
prescriptive period under Section 306 (now pae tax liability falls due, that the rt of
Section 230) of the Revenue Code starts to run with respect to payments effected
through the withholding tax system. ... (At p. 325; Emphasis supplied)
The aforequoted ruling presents two alternative reckoning dates, i.e., (1) the end of the tax
year; and (2) when the tax liability falls due. In the instant case, it is undisputed that the
petitioner corporation's withholding agents had paid the corresponding taxes withheld at
source to the Bureau of Internal Revenue from February to December 1981. In having applied
the first alternative date - "the end of the tax year" in order to determine whether or not the
petitioner corporation's claim for refund had been seasonably filed, the respondent appellate
court failed to appreciate properly the attending circumstances of this case.
The petitioner corporation is not claiming a refund of overpaid withholding taxes, per se. It is
asking for the recovery of the sum of P82,751.91.00, the refundable or creditable amount
determined upon the petitioner corporation's filing of the its final adjustment tax return on or
before 15 April 1982 when its tax liability for the year 1981 fell due. The distinction is
essential in the resolution of this case for it spells the difference between being barred by
prescription and entitlement to a refund.
Under Section 49 of the National Internal Revenue Code of 1986, as amended, it is explicitly
provided that:
Sec. 49. Payment and assessment of income tax for individuals and corporations.
(a) Payment of tax — (1) In general. —- The total amount of tax imposed by this
Title shall be paid by the person subject thereto at the time the return is filed. ...
Section 70, subparagraph (b) of the same Code states when the income tax return with respect
to taxpayers like the petitioner corporation must be filed. Thus:
Sec. 70 (b) Time of filing the income return - The corporate quarterly declaration
shall be filed within sixty (60) days following the close of each of the first three
quarters of the taxable year. The final adjustment return shall be filed on or before
the 15th day of the 4th month following the close of the fiscal year, as the case may
be. The petitioner corporation's taxable year is on a calendar year basis, hence, with
respect to the 1981 taxable year, ACCRAIN had until 15 April 1982 within which to
file its final adjustment return. The petitioner corporation duly complied with this
requirement. On the basis of the corporate income tax return which ACCRAIN filed
on 15 April 1982, it reported a net loss of P2,957,142.00. Consequently, as reflected
thereon, the petitioner corporation, after due computation, had no tax liability for the
year 1981. Had there been any, payment thereof would have been due at the time the
return was filed pursuant to subparagraph (c) of the aforementioned codal provision
which reads:
Sec. 70 (c) - Time payment of the income tax - The income tax due on the corporate
quarterly returns and the final income tax returns computed in accordance with
Sections 68 and 69 shall be paid at the time the declaration or return is filed
asprescribed by the Commissioner of Internal Revenue. If we were to uphold the
respondent appellate court in making the "date of payment" coincide with the "end
of the taxable year," the petitioner corporation at the end of the 1981 taxable year
 was in no position then to determine whether it was liable or not for the payment of ACCRAIN's case was when its tax liability, if any, fell due upon its filing of its final
its 1981 income tax. adjustment return on April 15, 1982.

Anent claims for refund, section 8 of Revenue Regulation No. 13-78 issued by the Bureau of WHEREFORE, in view of the foregoing, the petition is GRANTED. The decision of the Court
Internal Revenue requires that: of Appeals dated May 28, 1990 and its resolution of November 20, 1990 are hereby
REVERSED and SET ASIDE. The respondent Commissioner of Internal Revenue is directed
Section 8. Claims for tax credit or refund — Claims for tax credit or refund of to refund to the petitioner corporation the amount of P82,751.91.
income tax deducted and withheld on income payments shall be given due course
only when it is shown on the return that the income payment received was declared SO ORDERED.
as part of the gross income and the fact of withholding is established by a copy of
the statement, duly issued by the payor to the payee (BIR Form No. 1743-A) G.R. No. 115838           July 18, 2002
showing the amount paid and the amount of tax withheld therefrom.
CONSTANTE AMOR DE CASTRO and CORAZON AMOR DE CASTRO, petitioners, 
The term "return" in the case of domestic corporations like ACCRAIN refers to the final vs.
adjustment return as mentioned in Section 69 of the Tax Code of 1986, as amended, which COURT OF APPEALS and FRANCISCO ARTIGO, respondents.
partly reads:
CARPIO, J.:
Sec. 69. Final Adjustment Return - Every corporation liable to tax under Section 24
shall file a final adjustment return covering the total taxable income for the
preceding calendar or fiscal year. If the sum of the quarterly tax payments made The Case
during the said taxable year is not equal to the total tax due on the entire taxable
income of that year the corporation shall either: Before us is a Petition for Review on Certiorari1 seeking to annul the Decision of the Court of
Appeals2 dated May 4, 1994 in CA-G.R. CV No. 37996, which affirmed in toto the
(a) Pay the excess tax still due; or decision3 of the Regional Trial Court of Quezon City, Branch 80, in Civil Case No. Q-89-
2631. The trial court disposed as follows:
(b) Be refunded the excess amount paid, as the case may be.
"WHEREFORE, the Court finds defendants Constante and Corazon Amor de Castro
jointly and solidarily liable to plaintiff the sum of:
Clearly, there is the need to file a return first before a claim for refund can prosper inasmuch
as the respondent Commissioner by his own rules and regulations mandates that the corporate
taxpayer opting to ask for a refund must show in its final adjustment return the income it a) P303,606.24 representing unpaid commission;
received from all sources and the amount of withholding taxes remitted by its withholding
agents to the Bureau of Internal Revenue. The petitioner corporation filed its final adjustment b) P25,000.00 for and by way of moral damages;
return for its 1981 taxable year on April 15, 1982. In our Resolution dated April 10, 1989 in
the case of Commissioner of Internal Revenue v. Asia Australia Express, Ltd. (G. R. No. c) P45,000.00 for and by way of attorney's fees;
85956), we ruled that the two-year prescriptive period within which to claim a refund
commences to run, at the earliest, on the date of the filing of the adjusted final tax return.
Hence, the petitioner corporation had until April 15, 1984 within which to file its claim for d) To pay the cost of this suit.
refund. Considering that ACCRAIN filed its claim for refund as early as December 29, 1983
with the respondent Commissioner who failed to take any action thereon and considering Quezon City, Metro Manila, December 20, 1991."
further that the non-resolution of its claim for refund with the said Commissioner prompted
ACCRAIN to reiterate its claim before the Court of Tax Appeals through a petition for review
The Antecedent Facts
on April 13, 1984, the respondent appellate court manifestly committed a reversible error in
affirming the holding of the tax court that ACCRAIN's claim for refund was barred by
prescription. On May 29, 1989, private respondent Francisco Artigo ("Artigo" for brevity) sued petitioners
Constante A. De Castro ("Constante" for brevity) and Corazon A. De Castro ("Corazon" for
brevity) to collect the unpaid balance of his broker's commission from the De Castros. 4 The
It bears emphasis at this point that the rationale in computing the two-year prescriptive period
Court of Appeals summarized the facts in this wise:
with respect to the petitioner corporation's claim for refund from the time it filed its final
adjustment return is the fact that it was only then that ACCRAIN could ascertain whether it
made profits or incurred losses in its business operations. The "date of payment", therefore, in
 "x x x. Appellants5 were co-owners of four (4) lots located at EDSA corner New
York and Denver Streets in Cubao, Quezon City. In a letter dated January 24, 1984
(Exhibit "A-1, p. 144, Records), appellee6 was authorized by appellants to act as real
estate broker in the sale of these properties for the amount of P23,000,000.00, five
percent (5%) of which will be given to the agent as commission. It was appellee who
first found Times Transit Corporation, represented by its president Mr. Rondaris, as
prospective buyer which desired to buy two (2) lots only, specifically lots 14 and 15.
Eventually, sometime in May of 1985, the sale of lots 14 and 15 was consummated.
Appellee received from appellants P48,893.76 as commission.
It was then that the rift between the contending parties soon emerged. Appellee
apparently felt short changed because according to him, his total commission should
be P352,500.00 which is five percent (5%) of the agreed price of P7,050,000.00 paid
by Times Transit Corporation to appellants for the two (2) lots, and that it was he
who introduced the buyer to appellants and unceasingly facilitated the negotiation
which ultimately led to the consummation of the sale. Hence, he sued below to
collect the balance of P303,606.24 after having received P48,893.76 in
advance.1âwphi1.nêt
On the other hand, appellants completely traverse appellee's claims and essentially
argue that appellee is selfishly asking for more than what he truly deserved as
commission to the prejudice of other agents who were more instrumental in the
consummation of the sale. Although appellants readily concede that it was appellee
who first introduced Times Transit Corp. to them, appellee was not designated by
them as their exclusive real estate agent but that in fact there were more or less
eighteen (18) others whose collective efforts in the long run dwarfed those of
appellee's, considering that the first negotiation for the sale where appellee took
active participation failed and it was these other agents who successfully brokered in
the second negotiation. But despite this and out of appellants' "pure liberality,
beneficence and magnanimity", appellee nevertheless was given the largest cut in
the commission (P48,893.76), although on the principle of quantum meruit he would
have certainly been entitled to less. So appellee should not have been heard to
complain of getting only a pittance when he actually got the lion's share of the
commission and worse, he should not have been allowed to get the entire
commission. Furthermore, the purchase price for the two lots was only P3.6 million
as appearing in the deed of sale and not P7.05 million as alleged by appellee. Thus,
even assuming that appellee is entitled to the entire commission, he would only be
getting 5% of the P3.6 million, or P180,000.00."
Ruling of the Court of Appeals
The Court of Appeals affirmed in toto the decision of the trial court.
First. The Court of Appeals found that Constante authorized Artigo to act as agent in the sale
of two lots in Cubao, Quezon City. The handwritten authorization letter signed by Constante
clearly established a contract of agency between Constante and Artigo. Thus, Artigo sought
prospective buyers and found Times Transit Corporation ("Times Transit" for brevity). Artigo
facilitated the negotiations which eventually led to the sale of the two lots. Therefore, the
Court of Appeals decided that Artigo is entitled to the 5% commission on the purchase price
as provided in the contract of agency.
Second. The Court of Appeals ruled that Artigo's complaint is not dismissible for failure to
implead as indispensable parties the other co-owners of the two lots. The Court of Appeals
explained that it is not necessary to implead the other co-owners since the action is exclusively
based on a contract of agency between Artigo and Constante.
Third. The Court of Appeals likewise declared that the trial court did not err in admitting parol
evidence to prove the true amount paid by Times Transit to the De Castros for the two lots.
The Court of Appeals ruled that evidence aliunde could be presented to prove that the actual
purchase price was P7.05 million and not P3.6 million as appearing in the deed of sale.
Evidence aliunde is admissible considering that Artigo is not a party, but a mere witness in the
deed of sale between the De Castros and Times Transit. The Court of Appeals explained that,
"the rule that oral evidence is inadmissible to vary the terms of written instruments is generally
applied only in suits between parties to the instrument and strangers to the contract are not
bound by it." Besides, Artigo was not suing under the deed of sale, but solely under the
contract of agency. Thus, the Court of Appeals upheld the trial court's finding that the
purchase price was P7.05 million and not P3.6 million.
Hence, the instant petition.
The Issues
According to petitioners, the Court of Appeals erred in -
I. NOT ORDERING THE DISMISSAL OF THE COMPLAINT FOR FAILURE
TO IMPLEAD INDISPENSABLE PARTIES-IN-INTEREST;
II. NOT ORDERING THE DISMISSAL OF THE COMPLAINT ON THE
GROUND THAT ARTIGO'S CLAIM HAS BEEN EXTINGUISHED BY FULL
PAYMENT, WAIVER, OR ABANDONMENT;
III. CONSIDERING INCOMPETENT EVIDENCE;
IV. GIVING CREDENCE TO PATENTLY PERJURED TESTIMONY;
V. SANCTIONING AN AWARD OF MORAL DAMAGES AND ATTORNEY'S
FEES;
VI. NOT AWARDING THE DE CASTRO'S MORAL AND EXEMPLARY
DAMAGES, AND ATTORNEY'S FEES.
The Court's Ruling
The petition is bereft of merit.
First Issue: whether the complaint merits dismissal for failure to implead other co-owners
as indispensable parties
The De Castros argue that Artigo's complaint should have been dismissed for failure to
implead all the co-owners of the two lots. The De Castros claim that Artigo always knew that
the two lots were co-owned by Constante and Corazon with their other siblings Jose and
Carmela whom Constante merely represented. The De Castros contend that failure to implead
such indispensable parties is fatal to the complaint since Artigo, as agent of all the four co-
owners, would be paid with funds co-owned by the four co-owners.
The De Castros' contentions are devoid of legal basis.
An indispensable party is one whose interest will be affected by the court's action in the
litigation, and without whom no final determination of the case can be had. 7 The joinder of
indispensable parties is mandatory and courts cannot proceed without their
presence.8 Whenever it appears to the court in the course of a proceeding that an indispensable
party has not been joined, it is the duty of the court to stop the trial and order the inclusion of
such party.9
However, the rule on mandatory joinder of indispensable parties is not applicable to the instant
case.
There is no dispute that Constante appointed Artigo in a handwritten note dated January 24,
1984 to sell the properties of the De Castros for P23 million at a 5 percent commission. The
authority was on a first come, first serve basis. The authority reads in full:
"24 Jan. 84
To Whom It May Concern:
This is to state that Mr. Francisco Artigo is authorized as our real estate broker in
connection with the sale of our property located at Edsa Corner New York &
Denver, Cubao, Quezon City.
Asking price P 23,000,000.00 with 5% commission as agent's fee.
C.C. de Castro
owner & representing
co-owners
This authority is on a first-come
First serve basis –CAC"
Constante signed the note as owner and as representative of the other co-owners. Under this
note, a contract of agency was clearly constituted between Constante and Artigo. Whether
Constante appointed Artigo as agent, in Constante's individual or representative capacity, or
both, the De Castros cannot seek the dismissal of the case for failure to implead the other co-
owners as indispensable parties. The De Castros admit that the other co-owners are solidarily
liable under the contract of agency,10 citing Article 1915 of the Civil Code, which reads:
Art. 1915. If two or more persons have appointed an agent for a common transaction
or undertaking, they shall be solidarily liable to the agent for all the consequences of
the agency.
The solidary liability of the four co-owners, however, militates against the De Castros' theory
that the other co-owners should be impleaded as indispensable parties. A noted commentator
explained Article 1915 thus –
"The rule in this article applies even when the appointments were made by the
principals in separate acts, provided that they are for the same transaction. The
solidarity arises from the common interest of the principals, and not from the
act of constituting the agency. By virtue of this solidarity, the agent can recover
from any principal the whole compensation and indemnity owing to him by the
others. The parties, however, may, by express agreement, negate this solidary
responsibility. The solidarity does not disappear by the mere partition effected by
the principals after the accomplishment of the agency.
If the undertaking is one in which several are interested, but only some create the
agency, only the latter are solidarily liable, without prejudice to the effects
of negotiorum gestio with respect to the others. And if the power granted includes
various transactions some of which are common and others are not, only those
interested in each transaction shall be liable for it."11
When the law expressly provides for solidarity of the obligation, as in the liability of co-
principals in a contract of agency, each obligor may be compelled to pay the entire
obligation.12 The agent may recover the whole compensation from any one of the co-
principals, as in this case.
Indeed, Article 1216 of the Civil Code provides that a creditor may sue any of the solidary
debtors. This article reads:
Art. 1216. The creditor may proceed against any one of the solidary debtors or some
or all of them simultaneously. The demand made against one of them shall not be an
obstacle to those which may subsequently be directed against the others, so long as
the debt has not been fully collected.
Thus, the Court has ruled in Operators Incorporated vs. American Biscuit Co., Inc.13 that –
"x x x solidarity does not make a solidary obligor an indispensable party in a suit
filed by the creditor. Article 1216 of the Civil Code says that the creditor `may
proceed against anyone of the solidary debtors or some or all of them
simultaneously'." (Emphasis supplied)
Second Issue: whether Artigo's claim has been extinguished by full payment, waiver or
abandonment
The De Castros claim that Artigo was fully paid on June 14, 1985, that is, Artigo was given
"his proportionate share and no longer entitled to any balance." According to them, Artigo was
just one of the agents involved in the sale and entitled to a "proportionate share" in the
commission. They assert that Artigo did absolutely nothing during the second negotiation but
to sign as a witness in the deed of sale. He did not even prepare the documents for the
transaction as an active real estate broker usually does.
The De Castros' arguments are flimsy.
A contract of agency which is not contrary to law, public order, public policy, morals or good
custom is a valid contract, and constitutes the law between the parties. 14 The contract of
agency entered into by Constante with Artigo is the law between them and both are bound to
comply with its terms and conditions in good faith.
The mere fact that "other agents" intervened in the consummation of the sale and were paid
their respective commissions cannot vary the terms of the contract of agency granting Artigo a
5 percent commission based on the selling price. These "other agents" turned out to be
employees of Times Transit, the buyer Artigo introduced to the De Castros. This prompted the
trial court to observe:
"The alleged `second group' of agents came into the picture only during the so-called
`second negotiation' and it is amusing to note that these (sic) second group,
prominent among whom are Atty. Del Castillo and Ms. Prudencio, happened to be
employees of Times Transit, the buyer of the properties. And their efforts were
limited to convincing Constante to 'part away' with the properties because the
redemption period of the foreclosed properties is around the corner, so to speak. (tsn.
June 6, 1991).
xxx
To accept Constante's version of the story is to open the floodgates of fraud and
deceit. A seller could always pretend rejection of the offer and wait for sometime for
others to renew it who are much willing to accept a commission far less than the
original broker. The immorality in the instant case easily presents itself if one has
to consider that the alleged `second group' are the employees of the buyer, Times
Transit and they have not bettered the offer secured by Mr. Artigo for P7 million.
It is to be noted also that while Constante was too particular about the unrenewed
real estate broker's license of Mr. Artigo, he did not bother at all to inquire as to the
licenses of Prudencio and Castillo. (tsn, April 11, 1991, pp. 39-40)." 15 (Emphasis
supplied)
In any event, we find that the 5 percent real estate broker's commission is reasonable and
within the standard practice in the real estate industry for transactions of this nature.
The De Castros also contend that Artigo's inaction as well as failure to protest estops him from
recovering more than what was actually paid him. The De Castros cite Article 1235 of the
Civil Code which reads:
Art. 1235. When the obligee accepts the performance, knowing its incompleteness
and irregularity, and without expressing any protest or objection, the obligation is
deemed fully complied with.
The De Castros' reliance on Article 1235 of the Civil Code is misplaced. Artigo's acceptance
of partial payment of his commission neither amounts to a waiver of the balance nor puts him
in estoppel. This is the import of Article 1235 which was explained in this wise:
"The word accept, as used in Article 1235 of the Civil Code, means to take as
satisfactory or sufficient, or agree to an incomplete or irregular performance. Hence,
the mere receipt of a partial payment is not equivalent to the required acceptance
of performance as would extinguish the whole obligation."16(Emphasis supplied)
There is thus a clear distinction between acceptance and mere receipt. In this case, it is evident
that Artigo merely received the partial payment without waiving the balance. Thus, there is no
estoppel to speak of.
The De Castros further argue that laches should apply because Artigo did not file his
complaint in court until May 29, 1989, or almost four years later. Hence, Artigo's claim for the
balance of his commission is barred by laches.
Laches means the failure or neglect, for an unreasonable and unexplained length of time, to do
that which by exercising due diligence could or should have been done earlier. It is negligence
or omission to assert a right within a reasonable time, warranting a presumption that the party
entitled to assert it either has abandoned it or declined to assert it.17
Artigo disputes the claim that he neglected to assert his rights. He was appointed as agent on
January 24, 1984. The two lots were finally sold in June 1985. As found by the trial court,
Artigo demanded in April and July of 1985 the payment of his commission by Constante on
the basis of the selling price of P7.05 million but there was no response from
Constante.18 After it became clear that his demands for payment have fallen on deaf ears,
Artigo decided to sue on May 29, 1989.
Actions upon a written contract, such as a contract of agency, must be brought within ten years
from the time the right of action accrues. 19 The right of action accrues from the moment the
breach of right or duty occurs. From this moment, the creditor can institute the action even as
the ten-year prescriptive period begins to run.20
The De Castros admit that Artigo's claim was filed within the ten-year prescriptive period. The
De Castros, however, still maintain that Artigo's cause of action is barred by laches. Laches
does not apply because only four years had lapsed from the time of the sale in June 1985.
Artigo made a demand in July 1985 and filed the action in court on May 29, 1989, well within
the ten-year prescriptive period. This does not constitute an unreasonable delay in asserting
one's right. The Court has ruled, "a delay within the prescriptive period is sanctioned by law
and is not considered to be a delay that would bar relief." 21 In explaining that laches applies
only in the absence of a statutory prescriptive period, the Court has stated -
"Laches is recourse in equity. Equity, however, is applied only in the absence,
never in contravention, of statutory law. Thus, laches, cannot, as a rule, be used to
 abate a collection suit filed within the prescriptive period mandated by the Civil
Code."22
Clearly, the De Castros' defense of laches finds no support in law, equity or jurisprudence.
Third issue: whether the determination of the purchase price was made in violation of the
Rules on Evidence
The De Castros want the Court to re-examine the probative value of the evidence adduced in
the trial court to determine whether the actual selling price of the two lots was P7.05 million
and not P3.6 million. The De Castros contend that it is erroneous to base the 5 percent
commission on a purchase price of P7.05 million as ordered by the trial court and the appellate
court. The De Castros insist that the purchase price is P3.6 million as expressly stated in the
deed of sale, the due execution and authenticity of which was admitted during the trial.
The De Castros believe that the trial and appellate courts committed a mistake in considering
incompetent evidence and disregarding the best evidence and parole evidence rules. They
claim that the Court of Appeals erroneously affirmed sub silentio the trial court's reliance on
the various correspondences between Constante and Times Transit which were mere
photocopies that do not satisfy the best evidence rule. Further, these letters covered only the
first negotiations between Constante and Times Transit which failed; hence, these are
immaterial in determining the final purchase price.
The De Castros further argue that if there was an undervaluation, Artigo who signed as
witness benefited therefrom, and being equally guilty, should be left where he presently
stands. They likewise claim that the Court of Appeals erred in relying on evidence which were
not offered for the purpose considered by the trial court. Specifically, Exhibits "B", "C", "D"
and "E" were not offered to prove that the purchase price was P7.05 Million. Finally, they
argue that the courts a quo erred in giving credence to the perjured testimony of Artigo. They
want the entire testimony of Artigo rejected as a falsehood because he was lying when he
claimed at the outset that he was a licensed real estate broker when he was not.
Whether the actual purchase price was P7.05 Million as found by the trial court and affirmed
by the Court of Appeals, or P3.6 Million as claimed by the De Castros, is a question of fact
and not of law. Inevitably, this calls for an inquiry into the facts and evidence on record. This
we can not do.
It is not the function of this Court to re-examine the evidence submitted by the parties, or
analyze or weigh the evidence again.23 This Court is not the proper venue to consider a factual
issue as it is not a trier of facts. In petitions for review on certiorari as a mode of appeal under
Rule 45, a petitioner can only raise questions of law. Our pronouncement in the case
of Cormero vs. Court of Appeals24 bears reiteration:
"At the outset, it is evident from the errors assigned that the petition is anchored on a
plea to review the factual conclusion reached by the respondent court. Such task
however is foreclosed by the rule that in petitions for certiorari as a mode of appeal,
like this one, only questions of law distinctly set forth may be raised. These
questions have been defined as those that do not call for any examination of the
probative value of the evidence presented by the parties. (Uniland Resources vs.
Development Bank of the Philippines, 200 SCRA 751 [1991] citing Goduco vs.
Court of appeals, et al., 119 Phil. 531; Hernandez vs. Court of Appeals, 149 SCRA
67). And when this court is asked to go over the proof presented by the parties, and
analyze, assess and weigh them to ascertain if the trial court and the appellate court
were correct in according superior credit to this or that piece of evidence and
eventually, to the totality of the evidence of one party or the other, the court cannot
and will not do the same. (Elayda vs. Court of Appeals, 199 SCRA 349 [1991]).
Thus, in the absence of any showing that the findings complained of are totally
devoid of support in the record, or that they are so glaringly erroneous as to
constitute serious abuse of discretion, such findings must stand, for this court is not
expected or required to examine or contrast the oral and documentary evidence
submitted by the parties. (Morales vs. Court of Appeals, 197 SCRA 391 [1991]
citing Santa Ana vs. Hernandez, 18 SCRA 973 [1966])."
We find no reason to depart from this principle. The trial and appellate courts are in a much
better position to evaluate properly the evidence. Hence, we find no other recourse but to
affirm their finding on the actual purchase price.1âwphi1.nêt
Fourth Issue: whether award of moral damages and attorney's fees is proper
The De Castros claim that Artigo failed to prove that he is entitled to moral damages and
attorney's fees. The De Castros, however, cite no concrete reason except to say that they are
the ones entitled to damages since the case was filed to harass and extort money from them.
Law and jurisprudence support the award of moral damages and attorney's fees in favor of
Artigo. The award of damages and attorney's fees is left to the sound discretion of the court,
and if such discretion is well exercised, as in this case, it will not be disturbed on
appeal.25 Moral damages may be awarded when in a breach of contract the defendant acted in
bad faith, or in wanton disregard of his contractual obligation.26 On the other hand, attorney's
fees are awarded in instances where "the defendant acted in gross and evident bad faith in
refusing to satisfy the plaintiff's plainly valid, just and demandable claim."27 There is no reason
to disturb the trial court's finding that "the defendants' lack of good faith and unkind treatment
of the plaintiff in refusing to give his due commission deserve censure." This warrants the
award of P25,000.00 in moral damages and P 45,000.00 in attorney's fees. The amounts are, in
our view, fair and reasonable. Having found a buyer for the two lots, Artigo had already
performed his part of the bargain under the contract of agency. The De Castros should have
exercised fairness and good judgment in dealing with Artigo by fulfilling their own part of the
bargain - paying Artigo his 5 percent broker's commission based on the actual purchase price
of the two lots.
WHEREFORE, the petition is denied for lack of merit. The Decision of the Court of Appeals
dated May 4, 1994 in CA-G.R. CV No. 37996 is AFFIRMED in toto.
SO ORDERED.
G.R. No. 160347             November 29, 2006
ARCADIO and MARIA LUISA CARANDANG, Petitioners, 
vs.
HEIRS OF QUIRINO A. DE GUZMAN, namely: MILAGROS DE GUZMAN, VICTOR
DE GUZMAN, REYNALDO DE GUZMAN, CYNTHIA G. RAGASA and QUIRINO
DE GUZMAN, JR., Respondents.
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari assailing the Court of Appeals Decision 1 and
Resolution affirming the Regional Trial Court (RTC) Decision rendering herein petitioners
Arcadio and Luisa Carandang [hereinafter referred to as spouses Carandang] jointly and
severally liable for their loan to Quirino A. de Guzman.
The Court of Appeals summarized the facts as follows:
[Quirino de Guzman] and [the Spouses Carandang] are stockholders as well as corporate
officers of Mabuhay Broadcasting System (MBS for brevity), with equities at fifty four
percent (54%) and forty six percent (46%) respectively.
On November 26, 1983, the capital stock of MBS was increased, from ₱500,000 to P1.5
million and ₱345,000 of this increase was subscribed by [the spouses Carandang]. Thereafter,
on March 3, 1989, MBS again increased its capital stock, from ₱1.5 million to ₱3 million, [the
spouses Carandang] yet again subscribed to the increase. They subscribed to ₱93,750 worth of
newly issued capital stock.
[De Guzman] claims that, part of the payment for these subscriptions were paid by him,
₱293,250 for the November 26, 1983 capital stock increase and ₱43,125 for the March 3, 1989
Capital Stock increase or a total of ₱336,375. Thus, on March 31, 1992, [de Guzman] sent a
demand letter to [the spouses Carandang] for the payment of said total amount.
[The spouses Carandang] refused to pay the amount, contending that a pre-incorporation
agreement was executed between [Arcadio Carandang] and [de Guzman], whereby the latter
promised to pay for the stock subscriptions of the former without cost, in consideration for
[Arcadio Carandang’s] technical expertise, his newly purchased equipment, and his skill in
repairing and upgrading radio/communication equipment therefore, there is no indebtedness
on their part [sic].
On June 5, 1992, [de Guzman] filed his complaint, seeking to recover the ₱336,375 together
with damages. After trial on the merits, the trial court disposed of the case in this wise:
"WHEREFORE, premises considered, judgment is hereby rendered in favor of [de Guzman].
Accordingly, [the spouses Carandang] are ordered to jointly and severally pay [de Guzman],
to wit:
(1) ₱336,375.00 representing [the spouses Carandang’s] loan to de Guzman;
(2) interest on the preceding amount at the rate of twelve percent (12%) per annum
from June 5, 1992 when this complaint was filed until the principal amount shall
have been fully paid;
(3) ₱20,000.00 as attorney’s fees;
(4) Costs of suit.
The spouses Carandang appealed the RTC Decision to the Court of Appeals, which affirmed
the same in the 22 April 2003 assailed Decision:
WHEREFORE, in view of all the foregoing the assailed Decision is hereby AFFIRMED. No
costs.2
The Motion for Reconsideration filed by the spouses Carandang was similarly denied by the
Court of Appeals in the 6 October 2003 assailed Resolution:
WHEREFORE, in view thereof, the motion for reconsideration is hereby DENIED and our
Decision of April 22, 2003, which is based on applicable law and jurisprudence on the matter
is hereby AFFIRMED and REITERATED.3
The spouses Carandang then filed before this Court the instant Petition for Review on
Certiorari, bringing forth the following issues:
I.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED
MANIFEST ERROR IN FAILING TO STRICTLY COMPLY WITH SECTION 16, RULE 3
OF THE 1997 RULES OF CIVIL PROCEDURE.
II.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN
ITS FINDING THAT THERE IS AN ALLEGED LOAN FOR WHICH PETITIONERS ARE
LIABLE, CONTRARY TO EXPRESS PROVISIONS OF BOOK IV, TITLE XI, OF THE
NEW CIVIL CODE PERTAINING TO LOANS.
III.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN
FINDING THAT THE RESPONDENTS WERE ABLE TO DISCHARGE THEIR BURDEN
OF PROOF, IN COMPLETE DISREGARD OF THE REVISED RULES ON EVIDENCE.
IV.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED
REVERSIBLE ERROR WHEN IT FAILED TO APPLY SECTIONS 2 AND 7, RULE 3 OF
THE 1997 RULES OF CIVIL PROCEDURE.
V.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN
FINDING THAT THE PURPORTED LIABILITY OF PETITIONERS ARE JOINT AND
SOLIDARY, IN VIOLATION OF ARTICLE 1207 OF THE NEW CIVIL CODE.4
Whether or not the RTC Decision is void for failing to comply with Section 16, Rule 3 of the
Rules of Court
The spouses Carandang claims that the Decision of the RTC, having been rendered after the
death of Quirino de Guzman, is void for failing to comply with Section 16, Rule 3 of the Rules
of Court, which provides:
SEC. 16. Death of party; duty of counsel. – Whenever a party to a pending action dies, and the
claim is not thereby extinguished, it shall be the duty of his counsel to inform the court within
thirty (30) days after such death of the fact thereof, and to give the name and address of his
legal representative or representatives. Failure of counsel to comply with this duty shall be a
ground for disciplinary action.
The heirs of the deceased may be allowed to be substituted for the deceased, without requiring
the appointment of an executor or administrator and the court may appoint a guardian ad litem
for the minor heirs.
The court shall forthwith order the legal representative or representatives to appear and be
substituted within a period of thirty (30) days from notice.
If no legal representative is named by the counsel for the deceased party, or if the one so
named shall fail to appear within the specified period, the court may order the opposing party,
within a specified time, to procure the appointment of an executor or administrator for the
estate of the deceased and the latter shall immediately appear for and on behalf of the
deceased. The court charges in procuring such appointment, if defrayed by the opposing party,
may be recovered as costs.
The spouses Carandang posits that such failure to comply with the above rule renders void the
decision of the RTC, in adherence to the following pronouncements in Vda. de Haberer v.
Court of Appeals5 and Ferreria v. Vda. de Gonzales6 :
Thus, it has been held that when a party dies in an action that survives and no order is issued
by the court for the appearance of the legal representative or of the heirs of the deceased in
substitution of the deceased, and as a matter of fact no substitution has ever been effected, the
trial held by the court without such legal representatives or heirs and the judgment rendered
after such trial are null and void because the court acquired no jurisdiction over the persons of
the legal representatives or of the heirs upon whom the trial and judgment would be binding.7
In the present case, there had been no court order for the legal representative of the deceased
to appear, nor had any such legal representative appeared in court to be substituted for the
deceased; neither had the complainant ever procured the appointment of such legal
representative of the deceased, including appellant, ever asked to be substituted for the
deceased. As a result, no valid substitution was effected, consequently, the court never
acquired jurisdiction over appellant for the purpose of making her a party to the case and
making the decision binding upon her, either personally or as a representative of the estate of
her deceased mother.8
However, unlike jurisdiction over the subject matter which is conferred by law and is not
subject to the discretion of the parties, 9 jurisdiction over the person of the parties to the case
may be waived either expressly or impliedly. 10Implied waiver comes in the form of either
voluntary appearance or a failure to object.11
In the cases cited by the spouses Carandang, we held that there had been no valid substitution
by the heirs of the deceased party, and therefore the judgment cannot be made binding upon
them. In the case at bar, not only do the heirs of de Guzman interpose no objection to the
jurisdiction of the court over their persons; they are actually claiming and embracing such
jurisdiction. In doing so, their waiver is not even merely implied (by their participation in the
appeal of said Decision), but express (by their explicit espousal of such view in both the Court
of Appeals and in this Court). The heirs of de Guzman had no objection to being bound by the
Decision of the RTC.
Thus, lack of jurisdiction over the person, being subject to waiver, is a personal defense which
can only be asserted by the party who can thereby waive it by silence.
It also pays to look into the spirit behind the general rule requiring a formal substitution of
heirs. The underlying principle therefor is not really because substitution of heirs is a
jurisdictional requirement, but because non-compliance therewith results in the undeniable
violation of the right to due process of those who, though not duly notified of the proceedings,
are substantially affected by the decision rendered therein. 12 Such violation of due process can
only be asserted by the persons whose rights are claimed to have been violated, namely the
heirs to whom the adverse judgment is sought to be enforced.
Care should, however, be taken in applying the foregoing conclusions. In People v.
Florendo,13 where we likewise held that the proceedings that took place after the death of the
party are void, we gave another reason for such nullity: "the attorneys for the offended party
ceased to be the attorneys for the deceased upon the death of the latter, the principal x x x."
Nevertheless, the case at bar had already been submitted for decision before the RTC on 4
June 1998, several months before the passing away of de Guzman on 19 February 1999.
Hence, no further proceedings requiring the appearance of de Guzman’s counsel were
conducted before the promulgation of the RTC Decision. Consequently, de Guzman’s counsel
cannot be said to have no authority to appear in trial, as trial had already ceased upon the death
of de Guzman.
In sum, the RTC Decision is valid despite the failure to comply with Section 16, Rule 3 of the
Rules of Court, because of the express waiver of the heirs to the jurisdiction over their
persons, and because there had been, before the promulgation of the RTC Decision, no further
proceedings requiring the appearance of de Guzman’s counsel.
Before proceeding with the substantive aspects of the case, however, there is still one more
procedural issue to tackle, the fourth issue presented by the spouses Carandang on the non-
inclusion in the complaint of an indispensable party.
Whether or not the RTC should have dismissed the case for failure to state a cause of action,
considering that Milagros de Guzman, allegedly an indispensable party, was not included as a
party-plaintiff
The spouses Carandang claim that, since three of the four checks used to pay their stock
subscriptions were issued in the name of Milagros de Guzman, the latter should be considered
an indispensable party. Being such, the spouses Carandang claim, the failure to join Mrs. de
Guzman as a party-plaintiff should cause the dismissal of the action because "(i)f a suit is not
brought in the name of or against the real party in interest, a motion to dismiss may be filed on
the ground that the complaint states no cause of action."14
The Court of Appeals held:
We disagree. The joint account of spouses Quirino A de Guzman and Milagros de Guzman
from which the four (4) checks were drawn is part of their conjugal property and under both
the Civil Code and the Family Code the husband alone may institute an action for the recovery
or protection of the spouses’ conjugal property.
Thus, in Docena v. Lapesura [355 SCRA 658], the Supreme Court held that "x x x Under the
New Civil Code, the husband is the administrator of the conjugal partnership. In fact, he is the
sole administrator, and the wife is not entitled as a matter of right to join him in this endeavor.
The husband may defend the conjugal partnership in a suit or action without being joined by
the wife. x x x Under the Family Code, the administration of the conjugal property belongs to
the husband and the wife jointly. However, unlike an act of alienation or encumbrance where
the consent of both spouses is required, joint management or administration does not require
that the husband and wife always act together. Each spouse may validly exercise full power of
management alone, subject to the intervention of the court in proper cases as provided under
Article 124 of the Family Code. x x x."
The Court of Appeals is correct. Petitioners erroneously interchange the terms "real party in
interest" and "indispensable party." A real party in interest is the party who stands to be
benefited or injured by the judgment of the suit, or the party entitled to the avails of the
suit.15 On the other hand, an indispensable party is a party in interest without whom no final
determination can be had of an action,16 in contrast to a necessary party, which is one who is
not indispensable but who ought to be joined as a party if complete relief is to be accorded as
to those already parties, or for a complete determination or settlement of the claim subject of
the action.17
The spouses Carandang are indeed correct that "(i)f a suit is not brought in the name of or
against the real party in interest, a motion to dismiss may be filed on the ground that the
complaint states no cause of action."18 However, what dismissal on this ground entails is an
examination of whether the parties presently pleaded are interested in the outcome of the
litigation, and not whether all persons interested in such outcome are actually pleaded. The
latter query is relevant in discussions concerning indispensable and necessary parties,
but not in discussions concerning real parties in interest. Both indispensable and necessary
parties are considered as real parties in interest, since both classes of parties stand to be
benefited or injured by the judgment of the suit.
Quirino and Milagros de Guzman were married before the effectivity of the Family Code on 3
August 1988. As they did not execute any marriage settlement, the regime of conjugal
partnership of gains govern their property relations.19
All property acquired during the marriage, whether the acquisition appears to have been made,
contracted or registered in the name of one or both spouses, is presumed to be conjugal unless
the contrary is proved.20 Credits are personal properties,21 acquired during the time the loan or
other credit transaction was executed. Therefore, credits loaned during the time of the
marriage are presumed to be conjugal property.
Consequently, assuming that the four checks created a debt for which the spouses Carandang
are liable, such credits are presumed to be conjugal property. There being no evidence to the
contrary, such presumption subsists. As such, Quirino de Guzman, being a co-owner of
specific partnership property,22 is certainly a real party in interest. Dismissal on the ground of
failure to state a cause of action, by reason that the suit was allegedly not brought by a real
party in interest, is therefore unwarranted.
So now we come to the discussion concerning indispensable and necessary parties. When an
indispensable party is not before the court, the action should likewise be dismissed. 23 The
absence of an indispensable party renders all subsequent actuations of the court void, for want
of authority to act, not only as to the absent parties but even as to those present.24 On the other
hand, the non-joinder of necessary parties do not result in the dismissal of the case. Instead,
Section 9, Rule 3 of the Rules of Court provides for the consequences of such non-joinder:
Sec. 9. Non-joinder of necessary parties to be pleaded. – Whenever in any pleading in which a
claim is asserted a necessary party is not joined, the pleader shall set forth his name, if known,
and shall state why he is omitted. Should the court find the reason for the omission
unmeritorious, it may order the inclusion of the omitted necessary party if jurisdiction over his
person may be obtained.
The failure to comply with the order for his inclusion, without justifiable cause, shall be
deemed a waiver of the claim against such party.
The non-inclusion of a necessary party does not prevent the court from proceeding in the
action, and the judgment rendered therein shall be without prejudice to the rights of such
necessary party.
Non-compliance with the order for the inclusion of a necessary party would not warrant the
dismissal of the complaint. This is an exception to Section 3, Rule 17 which allows the
dismissal of the complaint for failure to comply with an order of the court, as Section 9, Rule 3
specifically provides for the effect of such non-inclusion: it shall not prevent the court from
proceeding in the action, and the judgment rendered therein shall be without prejudice to the
rights of such necessary party. Section 11, Rule 3 likewise provides that the non-joinder of
parties is not a ground for the dismissal of the action.
Other than the indispensable and necessary parties, there is a third set of parties: the pro-forma
parties, which are those who are required to be joined as co-parties in suits by or against
another party as may be provided by the applicable substantive law or procedural rule. 25 An
example is provided by Section 4, Rule 3 of the Rules of Court:
Sec. 4. Spouses as parties. – Husband and wife shall sue or be sued jointly, except as provided
by law.
Pro-forma parties can either be indispensable, necessary or neither indispensable nor
necessary. The third case occurs if, for example, a husband files an action to recover a
property which he claims to be part of his exclusive property. The wife may have no legal
interest in such property, but the rules nevertheless require that she be joined as a party.
In cases of pro-forma parties who are neither indispensable nor necessary, the general rule
under Section 11, Rule 3 must be followed: such non-joinder is not a ground for dismissal.
Hence, in a case concerning an action to recover a sum of money, we held that the failure to
join the spouse in that case was not a jurisdictional defect. 26 The non-joinder of a spouse does
not warrant dismissal as it is merely a formal requirement which may be cured by
amendment.27
Conversely, in the instances that the pro-forma parties are also indispensable or necessary
parties, the rules concerning indispensable or necessary parties, as the case may be, should be
applied. Thus, dismissal is warranted only if the pro-forma party not joined in the complaint is
an indispensable party.
Milagros de Guzman, being presumed to be a co-owner of the credits allegedly extended to the
spouses Carandang, seems to be either an indispensable or a necessary party. If she is an
indispensable party, dismissal would be proper. If she is merely a necessary party, dismissal is
not warranted, whether or not there was an order for her inclusion in the complaint pursuant to
Section 9, Rule 3.
Article 108 of the Family Code provides:
Art. 108. The conjugal partnership shall be governed by the rules on the contract of
partnership in all that is not in conflict with what is expressly determined in this Chapter or by
the spouses in their marriage settlements.
This provision is practically the same as the Civil Code provision it superceded:
Art. 147. The conjugal partnership shall be governed by the rules on the contract of
partnership in all that is not in conflict with what is expressly determined in this Chapter.
In this connection, Article 1811 of the Civil Code provides that "[a] partner is a co-owner with
the other partners of specific partnership property." Taken with the presumption of the
conjugal nature of the funds used to finance the four checks used to pay for petitioners’ stock
subscriptions, and with the presumption that the credits themselves are part of conjugal funds,
Article 1811 makes Quirino and Milagros de Guzman co-owners of the alleged credit.
Being co-owners of the alleged credit, Quirino and Milagros de Guzman may separately bring
an action for the recovery thereof. In the fairly recent cases of Baloloy v. Hular28 and Adlawan
v. Adlawan,29 we held that, in a co-ownership, co-owners may bring actions for the recovery of
co-owned property without the necessity of joining all the other co-owners as co-plaintiffs
because the suit is presumed to have been filed for the benefit of his co-owners. In the latter
case and in that of De Guia v. Court of Appeals,30 we also held that Article 487 of the Civil
Code, which provides that any of the co-owners may bring an action for ejectment, covers all
kinds of action for the recovery of possession.31
In sum, in suits to recover properties, all co-owners are real parties in interest. However,
pursuant to Article 487 of the Civil Code and relevant jurisprudence, any one of them may
bring an action, any kind of action, for the recovery of co-owned properties. Therefore, only
one of the co-owners, namely the co-owner who filed the suit for the recovery of the co-owned
property, is an indispensable party thereto. The other co-owners are not indispensable parties.
They are not even necessary parties, for a complete relief can be accorded in the suit even
without their participation, since the suit is presumed to have been filed for the benefit of all
co-owners.32
We therefore hold that Milagros de Guzman is not an indispensable party in the action for the
recovery of the allegedly loaned money to the spouses Carandang. As such, she need not have
been impleaded in said suit, and dismissal of the suit is not warranted by her not being a party
thereto.
Whether or not respondents were able to prove the loan sought to be collected from petitioners
In the second and third issues presented by the spouses Carandang, they claim that the de
Guzmans failed to prove the alleged loan for which the spouses Carandang were held liable.
As previously stated, spouses Quirino and Milagros de Guzman paid for the stock
subscriptions of the spouses Carandang, amounting to ₱336,375.00. The de Guzmans claim
that these payments were in the form of loans and/or advances and it was agreed upon between
the late Quirino de Guzman, Sr. and the spouses Carandang that the latter would repay him.
Petitioners, on the other hand, argue that there was an oral pre-incorporation agreement
wherein it was agreed that Arcardio Carandang would always maintain his 46% equity
participation in the corporation even if the capital structures were increased, and that Quirino
de Guzman would personally pay the equity shares/stock subscriptions of Arcardio Carandang
with no cost to the latter.
On this main issue, the Court of Appeals held:
[The spouses Carandang] aver in its ninth assigned error that [the de Guzmans] failed to prove
by preponderance of evidence, either the existence of the purported loan or the non-payment
thereof.
Simply put, preponderance of evidence means that the evidence as a whole adduced by one
side is superior to that of the other. The concept of preponderance of evidence refers to
evidence that is of greater weight, or more convincing, than that which is offered in opposition
to it; it means probability of truth.
[The spouses Carandang] admitted that it was indeed [the de Guzmans] who paid their stock
subscriptions and their reason for not reimbursing the latter is the alleged pre-incorporation
agreement, to which they offer no clear proof as to its existence.
It is a basic rule in evidence that each party must prove his affirmative allegation. Thus, the
plaintiff or complainant has to prove his affirmative allegations in the complaints and the
defendant or respondent has to prove the affirmative allegations in his affirmative defenses
and counterclaims.33
The spouses Carandang, however, insist that the de Guzmans have not proven the loan itself,
having presented evidence only of the payment in favor of the Carandangs. They claim:
It is an undeniable fact that payment is not equivalent to a loan. For instance, if Mr. "A"
decides to pay for Mr. "B’s" obligation, that payment by Mr. "A" cannot, by any stretch of
imagination, possibly mean that there is now a loan by Mr. "B" to Mr. "A". There is a
possibility that such payment by Mr. "A" is purely out of generosity or that there is a mutual
agreement between them. As applied to the instant case, that mutual agreement is the pre-
incorporation agreement (supra) existing between Mr. de Guzman and the petitioners --- to the
effect that the former shall be responsible for paying stock subscriptions of the latter. Thus,
when Mr. de Guzman paid for the stock subscriptions of the petitioners, there was no loan to
speak of, but only a compliance with the pre-incorporation agreement.34
The spouses Carandang are mistaken. If indeed a Mr. "A" decides to pay for a Mr. "B’s"
obligation, the presumption is that Mr. "B" is indebted to Mr. "A" for such amount that has
been paid. This is pursuant to Articles 1236 and 1237 of the Civil Code, which provide:
Art. 1236. The creditor is not bound to accept payment or performance by a third person who
has no interest in the fulfillment of the obligation, unless there is a stipulation to the contrary.
Whoever pays for another may demand from the debtor what he has paid, except that if he
paid without the knowledge or against the will of the debtor, he can recover only insofar as the
payment has been beneficial to the debtor.
Art. 1237. Whoever pays on behalf of the debtor without the knowledge or against the will of
the latter, cannot compel the creditor to subrogate him in his rights, such as those arising from
a mortgage, guarantee, or penalty.
Articles 1236 and 1237 are clear that, even in cases where the debtor has no knowledge of
payment by a third person, and even in cases where the third person paid against the will of
the debtor, such payment would produce a debt in favor of the paying third person. In fact, the
only consequences for the failure to inform or get the consent of the debtor are the following:
(1) the third person can recover only insofar as the payment has been beneficial to the debtor;
and (2) the third person is not subrogated to the rights of the creditor, such as those arising
from a mortgage, guarantee or penalty.35
We say, however, that this is merely a presumption. By virtue of the parties’ freedom to
contract, the parties could stipulate otherwise and thus, as suggested by the spouses
Carandang, there is indeed a possibility that such payment by Mr. "A" was purely out of
generosity or that there was a mutual agreement between them. But such mutual agreement,
being an exception to presumed course of events as laid down by Articles 1236 and 1237,
must be adequately proven.
The de Guzmans have successfully proven their payment of the spouses Carandang’s stock
subscriptions. These payments were, in fact, admitted by the spouses Carandang.
Consequently, it is now up to the spouses Carandang to prove the existence of the pre-
incorporation agreement that was their defense to the purported loan.
Unfortunately for the spouses Carandang, the only testimony which touched on the existence
and substance of the pre-incorporation agreement, that of petitioner Arcardio Carandang, was
stricken off the record because he did not submit himself to a cross-examination of the
opposing party. On the other hand, the testimonies of Romeo Saavedra, 36 Roberto S.
Carandang,37 Gertrudes Z. Esteban,38 Ceferino Basilio,39 and Ma. Luisa Carandang40touched on
matters other than the existence and substance of the pre-incorporation agreement. So aside
from the fact that these witnesses had no personal knowledge as to the alleged existence of the
pre-incorporation agreement, the testimonies of these witnesses did not even mention the
existence of a pre-incorporation agreement.
Worse, the testimonies of petitioners Arcadio Carandang and Ma. Luisa Carandang even
contradicted the existence of a pre-incorporation agreement because when they were asked by
their counsel regarding the matter of the check payments made by the late Quirino A. de
Guzman, Sr. in their behalf, they said that they had already paid for it thereby negating their
own defense that there was a pre-incorporation agreement excusing themselves from paying
Mr. de Guzman the amounts he advanced or loaned to them. This basic and irrefutable fact can
be gleaned from their testimonies which the private respondents are quoting for easy
reference:
a. With respect to the testimony of Ma. Luisa Carandang
Q: Now, can you tell this Honorable Court how do you feel with respect to the Complaint of
the plaintiff in this case charging you that you paid for this year and asking enough to paid
(sic) your tax?
A: We have paid already, so, we are not liable for anything payment (sic).41
b. With respect to the testimony of Arcadio Carandang
"Q: How much?
A: ₱40,000.00 to ₱50,000.00 per month.
Q: The plaintiff also claimed thru witness Edgar Ragasa, that there were receipts issued for the
payment of your shares; which receipts were marked as Exhibits "G" to "L" (Plaintiff).
I’m showing to you these receipts so marked by the plaintiff as their exhibits which were
issued in the name of Ma. Luisa Carandang, your wife; and also, Arcadio M. Carandang. Will
you please go over this Official Receipt and state for the records, who made for the payment
stated in these receipts in your name?
A: I paid for those shares."42
There being no testimony or documentary evidence proving the existence of the pre-
incorporation agreement, the spouses Carandang are forced to rely upon an alleged admission
by the original plaintiff of the existence of the pre-incorporation agreement.
Petitioners claim that the late Quirino A. de Guzman, Sr. had admitted the existence of the
pre-incorporation agreement by virtue of paragraphs 13 and 14 of their Answer and paragraph
4 of private respondents’ Reply.
Paragraphs 13 and 14 of petitioners’ Answer dated 7 July 1992 state in full:
13. Sometime in November, 1973 or thereabout, herein plaintiff invited defendant Arcadio M.
Carandang to a joint venture by pooling together their technical expertise, equipments,
financial resources and franchise. Plaintiff proposed to defendant and mutually agreed on the
following:
1. That they would organize a corporation known as Mabuhay Broadcasting
Systems, Inc.
2. Considering the technical expertise and talent of defendant Arcadio M. Carandang
and his new equipments he bought, and his skill in repairing and modifying
radio/communication equipments into high proficiency, said defendant would have
an equity participation in the corporation of 46%, and plaintiff 54% because of his
financial resources and franchise.
3. That defendant would always maintain his 46% equity participation in the
corporation even if the capital structures are increased, and that plaintiff would
personally pay the equity shares/stock subscriptions of defendant with no cost to the
latter.
4. That because of defendant’s expertise in the trade including the marketing
aspects, he would be the President and General Manager, and plaintiff the Chairman
of the Board.
5. That considering their past and trustworthy relations, they would maintain such
relations in the joint venture without any mental reservation for their common
benefit and success of the business.
14. Having mutually agreed on the above arrangements, the single proprietorship of
plaintiff was immediately spun-off into a corporation now known as Mabuhay
Broadcasting System, Inc. The incorporators are plaintiff and his family
members/nominees controlling jointly 54% of the stocks and defendant Arcadio M.
Carandang controlling singly 46% as previously agreed.43
Meanwhile, paragraphs 3 and 4 of private respondents’ Reply dated 29 July 1992 state in full:
3. Plaintiffs admits the allegation in paragraph 13.1 of the Answer only insofar the plaintiff
and defendant Arcadio M. Carandang organized a corporation known as Mabuhay
Broadcasting Systems, Inc. Plaintiff specifically denies the other allegations in paragraph 13
of the Answer, the same being devoid of any legal or factual bases. The truth of the matter is
that defendant Arcadio M. Carandang was not able to pay plaintiff the agreed amount of the
lease for a number of months forcing the plaintiff to terminate lease. Additionally, the records
would show that it was the defendant Arcadio M. Carandang who proposed a joint venture
with the plaintiff.
It appears that plaintiff agreed to the formation of the corporation principally because of a
directive of then President Marcos indicating the need to broaden the ownership of radio
broadcasting stations. The plaintiff owned the franchise, the radio transmitter, the antenna
tower, the building containing the radio transmitter and other equipment. Verily, he would be
placed in a great disadvantage if he would still have to personally pay for the shares of
defendant Arcadio M. Carandang.
4. Plaintiff admits the allegations in paragraph 14 of the Answer.44
In effect, the spouses Carandang are relying on the fact that Quirino de Guzman stated that he
admitted paragraph 14 of the Answer, which incidentally contained the opening clause
"(h)aving mutually agreed on the above arrangements, x x x."
Admissions, however, should be clear and unambiguous. This purported admission by Quirino
de Guzman reeks of ambiguity, as the clause "(h)aving mutually agreed on the above
arrangements," seems to be a mere introduction to the statement that the single proprietorship
of Quirino de Guzman had been converted into a corporation. If Quirino de Guzman had
meant to admit paragraph 13.3, he could have easily said so, as he did the other paragraphs he
categorically admitted. Instead, Quirino de Guzman expressly stated the opposite: that
"(p)laintiff specifically denies the other allegations of paragraph 13 of the Answer."45 The
Reply furthermore states that the only portion of paragraph 13 which Quirino de Guzman had
admitted is paragraph 13.1, and only insofar as it said that Quirino de Guzman and Arcardio
Carandang organized Mabuhay Broadcasting Systems, Inc.46
All the foregoing considered, we hold that Quirino de Guzman had not admitted the alleged
pre-incorporation agreement. As there was no admission, and as the testimony of Arcardio
Carandang was stricken off the record, we are constrained to rule that there was no pre-
incorporation agreement rendering Quirino de Guzman liable for the spouses Carandang’s
stock subscription. The payment by the spouses de Guzman of the stock subscriptions of the
spouses Carandang are therefore by way of loan which the spouses Carandang are liable to
pay.1âwphi1
Whether or not the liability of the spouses Carandang is joint and solidary
Finally, the Court of Appeals also upheld the RTC Decision insofar as it decreed a solidary
liability. According to the Court of Appeals:
With regards (sic) the tenth assigned error, [the spouses Carandang] contend that:
"There is absolutely no evidence, testimonial or documentary, showing that the purported
obligation of [the spouses Carandang] is joint and solidary. x x x
"Furthermore, the purported obligation of [the spouses Carandang] does not at all qualify as
one of the obligations required by law to be solidary x x x."
It is apparent from the facts of the case that [the spouses Carandang] were married way before
the effectivity of the Family Code hence; their property regime is conjugal partnership under
the Civil Code.
It must be noted that for marriages governed by the rules of conjugal partnership of gains, an
obligation entered into by the husband and wife is chargeable against their conjugal
partnership and it is the partnership, which is primarily bound for its repayment. Thus, when
the spouses are sued for the enforcement of the obligation entered into by them, they are being
impleaded in their capacity as representatives of the conjugal partnership and not as
independent debtors, such that the concept of joint and solidary liability, as between them,
does not apply.47
The Court of Appeals is correct insofar as it held that when the spouses are sued for the
enforcement of the obligation entered into by them, they are being impleaded in their capacity
as representatives of the conjugal partnership and not as independent debtors. Hence, either of
them may be sued for the whole amount, similar to that of a solidary liability, although the
amount is chargeable against their conjugal partnership property. Thus, in the case cited by the
Court of Appeals, Alipio v. Court of Appeals, 48 the two sets of defendant-spouses therein were
held liable for ₱25,300.00 each, chargeable to their respective conjugal partnerships.
WHEREFORE, the Decision of the Court of Appeals, affirming the judgment rendered against
the spouses Carandang, is hereby AFFIRMED with the following MODIFICATION: The
spouses Carandang are ORDERED to pay the following amounts from their conjugal
partnership properties:
(1) ₱336,375.00 representing the spouses Carandang’s loan to Quirino de Guzman;
and
(2) Interest on the preceding amount at the rate of twelve percent (12%) per annum
from 5 June 1992 when the complaint was filed until the principal amount can be
fully paid; and
(3) ₱20,000.00 as attorney’s fees.
No costs.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 176246               February 13, 2009
PREMIERE DEVELOPMENT BANK, Petitioner, 
vs.
CENTRAL SURETY & INSURANCE COMPANY, INC., Respondent.
DECISION
NACHURA, J.:
Before us is a petition for review on certiorari assailing the Court of Appeals (CA)
Decision1 in CA-G.R. CV No. 85930, which reversed and set aside the decision of the
Regional Trial Court (RTC), Branch 132, Makati City in Civil Case No. 0051306.2
On August 20, 1999, respondent Central Surety & Insurance Company (Central Surety)
obtained an industrial loan of ₱6,000,000.00 from petitioner Premiere Development Bank
(Premiere Bank) with a maturity date of August 14, 2000. This ₱6,000,000.00 loan, evidenced
by Promissory Note (PN) No. 714-Y,3 stipulates payment of 17% interest per annum payable
monthly in arrears and the principal payable on due date. In addition, PN No. 714-Y provides
for a penalty charge of 24% interest per annum based on the unpaid amortization/installment
or the entire unpaid balance of the loan. In all, should Central Surety fail to pay, it would be
liable to Premiere Bank for: (1) unpaid interest up to maturity date; (2) unpaid penalties up to
maturity date; and (3) unpaid balance of the principal.
To secure payment of the ₱6,000,000.00 loan, Central Surety executed in favor of Premiere
Bank a Deed of Assignment with Pledge4 covering Central Surety’s Membership Fee
Certificate No. 217 representing its proprietary share in Wack Wack Golf and Country Club
Incorporated (Wack Wack Membership). In both PN No. 714-Y and Deed of Assignment,
Constancio T. Castañeda, Jr. and Engracio T. Castañeda, president and vice-president of
Central Surety, respectively, represented Central Surety and solidarily bound themselves to the
payment of the obligation.
Parenthetically, Central Surety had another commercial loan with Premiere Bank in the
amount of ₱40,898,000.00 maturing on October 10, 2001. This loan was, likewise, evidenced
by a PN numbered 376-X5 and secured by a real estate mortgage over Condominium
Certificate of Title No. 8804, Makati City. PN No. 376-X was availed of through a renewal of
Central Surety’s prior loan, then covered by PN No. 367-Z.6 As with the ₱6,000,000.00 loan
and the constituted pledge over the Wack Wack Membership, the ₱40,898,000.00 loan with
real estate mortgage was transacted by Constancio and Engracio Castañeda on behalf of
Central Surety.
It appears that on August 22, 2000, Premiere Bank sent a letter to Central Surety demanding
payment of the ₱6,000,000.00 loan, to wit:
August 22, 2000
CENTRAL SURETY AND INSURANCE CO. Sir:
2nd Floor Universalre Bldg.
No. 106 Paseo de Roxas, Legaspi Village With reference to this 6.0 Million loan account, we have informed Ms. Evangeline Veloira
Makati City that we are intending to settle the account by the end of September. As of 14 August 2000 we
made payment to your bank as per receipt attached.
Attention: Mr. Constancio T. Castaneda, Jr.
President As you may know, present conditions have been difficult for the insurance industry whose
performance is so closely linked to the nation’s economic prosperity; and we are now asking
Mr. Engracio T. Castaneda for some consideration and leeway on your very stiff and immediate demands.
Vice President
Kindly extend to us your favorable approval.
-------------------------------------------------
Very truly yours,
Gentlemen:
(sgd.)
This has reference to your overdue loan of ₱6.0 Million. ENGRACIO T. CASTANEDA
Vice-President8
We regret to inform you that despite efforts to restructure the same, you have failed up to this
time, to submit the required documents and come up with equity necessary to implement the Accordingly, by September 20, 2000, Central Surety issued Bank of Commerce (BC) Check
restructuring scheme. No. 081149 dated September 22, 2000 in the amount of ₱6,000,000.00 and payable to
Premiere Bank. The check was received by Premiere Bank’s Senior Account Manager,
In view thereof, we regret that unless the above loan is settled on or before five (5) days from Evangeline Veloira, with the notation "full payment of loan-Wack Wack," as reflected in
the date hereof, we shall exercise our option to have the Stock Certificate No. 217 with Serial Central Surety’s Disbursement Voucher.10 However, for undisclosed reasons, Premiere Bank
No. 1793 duly issued by Wack Wack Golf and Country Club, Inc. transferred in the name of returned BC Check No. 08114 to Central Surety, and in its letter dated September 28, 2000,
Premiere Development Bank in accordance with the terms and conditions of the Deed of demanded from the latter, not just payment of the ₱6,000,000.00 loan, but also the
Assignment with Pledge executed in favor of Premiere Development Bank. ₱40,898,000.00 loan which was originally covered by PN No. 367-Z. 11 In the same letter,
Premiere Bank threatened foreclosure of the loans’ respective securities, the pledge and real
estate mortgage, should Central Surety fail to pay these within ten days from date, thus:
We shall appreciate your prompt compliance.
28 September 2000
Very truly yours,
CENTRAL SURETY & INSURANCE CO.
(sgd.) By: Constancio T. Castañeda Jr. – President
IGNACIO R. NEBRIDA, JR. Engracio T. Castañeda – Vice President
Senior Asst. Vice President/ 2nd Floor Universalre Bldg. No. 106
Business Development Group - Head7 Paseo de Roxas, Legaspi Village, Makati City

Posthaste, Central Surety responded and sent the following letter dated August 24, 2000: RE: YOUR COMMERCIAL LOAN OF ₱40,898,000.00 &
₱6,000,000.00 WITH PREMIERE DEVELOPMENT BANK
24 August 2000 UNDER ACCOUNT NOS. COM-367-Z AND COM 714-Y

Mr. Ignacio R. Nebrida, Jr. **************************************************

Senior Asst. Vice President/
Business Development Group – Head Dear Sirs:
Premiere Bank
EDSA cor. Magallanes Avenue
Makati City We write on behalf of our client, Premiere Development Bank, in connection with your above-
captioned loan account.
While our client has given you all the concessions, facilities and opportunities to service your Should you again refuse to accept this cheque, then I shall advise my client to deposit it in
loans, we regret to inform you that you have failed to settle the same despite their past due court for proper disposition.
status.
Thank you.
In view of the foregoing and to protect the interest of our client, please be advised that unless
the outstanding balances of your loan accounts as of date plus interest, penalties and other fees Very truly yours,
and charges are paid in full or necessary arrangements acceptable to our client is made by you
within ten (10) days from date hereof, we shall be constrained much to our regret, to file
foreclosure proceedings against the collateral of the loan mortgaged to the Bank or pursue (sgd.)
such action necessary in the premises. EPIFANIO E. CUA
Counsel for Central Surety & Insurance Company13
(italics supplied)
We trust, therefore, that you will give this matter your preferential attention.
On even date, a separate letter with another BC Check No. 08115 in the amount of
Very truly yours, ₱2,600,000.00 was also tendered to Premiere Bank as payment for the Spouses Engracio and
Lourdes Castañeda’s (Spouses Castañeda’s) personal loan covered by PN No. 717-X and
(sgd.) secured by Manila Polo Club, Inc. membership shares.
PACITA M. ARAOS12
(italics supplied) On October 13, 2000, Premiere Bank responded and signified acceptance of Central Surety’s
checks under the following application of payments:
The very next day, on September 29, 2000, Central Surety, through its counsel, wrote
Premiere Bank and re-tendered payment of the check: 13 October 2000

29 September 2000 ATTY. EPIFANIO E. CUA

2/F Universalre Condominium
PREMIERE BANK 106 Paseo de Roxas
EDSA cor. Magallanes Avenue Legaspi Village, Makati City
Makati City
Dear Atty. Cua:
Attention: Mr. Ignacio R. Nebrida, Jr.
Senior Asst. Vice President/ Thank you for your two (2) letters both dated 29 September 2000 on behalf of your clients
Business Development Group – Head with the enclosed check nos. 0008114 and 0008115 for the total of ₱8,600,000.00.

Re : Promissory Note No. 714-Y As previously relayed to your client, Premiere Bank cannot accept the two (2) checks as full
settlement of the obligation under Account Nos. PN #714-Y and PN # 717-X, as the amount is
Sir: insufficient.

This is further to our client’s letter to you dated 24 August 2000, informing you that it would In accordance with the terms and conditions of the Promissory Notes executed by your clients
settle its account by the end of September 2000. in favor of Premiere Development Bank, we have applied the two (2) checks to the due
obligations of your clients as follows:
Please be advised that on 20 September 2000 our client delivered to your bank BC cheque no.
08114 payable to Premiere Bank in the amount of SIX MILLION PESOS (₱6,000,000.00), 1) Account No.: COM 235-Z14 ₱1,044,939.45
which was received by your Senior Account Manager, Ms. Evangeline Veloira. However, for
unexplained reasons the cheque was returned to us. 2) Account No.: IND 717-X ₱1,459,693.15

We are again tendering to you the said cheque of SIX MILLION PESOS (₱6,000,000.00), in 3) Account No.: COM 367-Z15 ₱4,476,200.18
payment of PN#714-Y. Please accept the cheque and issue the corresponding receipt thereof.
 4) Account No.: COM 714-Y ₱1,619,187.22
TOTAL ₱8,600,000.00
We are enclosing Xerox copy each of four (4) official receipts covering the above payments.
The originals are with us which your clients or their duly authorized representative may pick-
up anytime during office hours.
We shall appreciate the settlement in full of the accounts of your client or necessary
arrangements for settlement thereof be made as soon as possible to put the accounts on up to-
date status.
Thank you.
Very truly yours,
(sgd.)
MS. ELSA M. SAPAPO
Manager
Loans Accounting and 
Control Department16
Significantly, the ₱8,600,000.00 check payments were not applied in full to Central Surety’s
₱6,000,000.00 loan under PN No. 714-Y and the Spouses Castañeda’s personal loan of
₱2,600,000.00 under PN No. 717-X. Premiere Bank also applied proceeds thereof to a
commercial loan under PN No. 235-Z taken out by Casent Realty and Development
Corporation (Casent Realty),17 and to Central Surety’s loan originally covered by PN No. 367-
Z, renewed under PN No. 376-X, maturing on October 20, 2001.
Strongly objecting to Premiere Bank’s application of payments, Central Surety’s counsel
wrote Premiere Bank and reiterated Central Surety’s demand for the application of the check
payments to the loans covered by PN Nos. 714-X and 714-Y. Additionally, Central Surety
asked that the Wack Wack Membership pledge, the security for the ₱6,000,000.00 loan,
should be released.
In the final exchange of correspondence, Premiere Bank, through its SAVP/Acting Head-
LGC, Atty. Pacita Araos, responded and refused to accede to Central Surety’s demand.
Premiere Bank insisted that the PN covering the ₱6,000,000.00 loan granted Premiere Bank
sole discretion respecting: (1) debts to which payments should be applied in cases of several
obligations by an obligor and/or debtor; and (2) the initial application of payments to other
costs, advances, expenses, and past due interest stipulated thereunder.
As a result, Central Surety filed a complaint for damages and release of security collateral,
specifically praying that the court render judgment: (1) declaring Central Surety’s
₱6,000,000.00 loan covered by PN No. 714-Y as fully paid; (2) ordering Premiere Bank to
release to Central Surety its membership certificate of shares in Wack Wack; (3) ordering
Premiere Bank to pay Central Surety compensatory and actual damages, exemplary damages,
attorney’s fees, and expenses of litigation; and (4) directing Premiere Bank to pay the cost of
suit.
On July 12, 2005, the RTC rendered a decision dismissing Central Surety’s complaint and
ordering it to pay Premiere Bank ₱100,000.00 as attorney’s fees. The RTC ruled that the
stipulation in the PN granting Premiere Bank sole discretion in the application of payments,
although it partook of a contract of adhesion, was valid. It disposed of the case, to wit:
Now that the issue as to the validity of the stipulation is settled, [Premiere Bank] was right in
contending that it had the right to apply [Central Surety’s] payment to the most onerous
obligation or to the one it sees fit to be paid first from among the several obligations. The
application of the payment to the other two loans of Central Surety namely, account nos. COM
367-Z and IND 714-Y was within [Premiere Bank’s] valid exercise of its right according the
stipulation.lawphil.net However, [Premiere Bank] erred in applying the payment to the loan of
Casent Realty and to the personal obligation of Mr. Engracio Castañeda despite their
connection with one another. Therefore, [Premiere Bank] cannot apply the payment tendered
by Central Surety to the other two entities capriciously and expressly violating the law and
pertinent Central Bank rules and regulations. Hence, the application of the payment to the loan
of Casent Realty (Account No. COM 236-Z) and to the loan of Mr. Engracio Castañeda
(Account No. IND 717-X) is void and must be annulled.
As to the issue of whether or not [Central Surety] is entitled to the release of Membership Fee
Certificate in the Wack Wack Golf and Country Club, considering now that [Central Surety]
cannot compel [Premiere Bank] to release the subject collateral.
With regard to the issue of damages and attorney’s fees, the court finds no basis to grant
[Premiere Bank’s] prayer for moral and exemplary damages but deems it just and equitable to
award in its favor attorney’s fees in the sum of Php 100,000.00.
WHEREFORE, judgment is hereby rendered dismissing the complaint and ordering [Central
Surety] to pay [Premiere Bank] Php 100,000.00 as attorney’s fees.18 (emphasis supplied)
On appeal by Central Surety, the CA reversed and set aside the trial court’s ruling. The
appellate court held that with Premiere Bank’s letter dated August 22, 2000 specifically
demanding payment of Central Surety’s ₱6,000,000.00 loan, it was deemed to have waived
the stipulation in PN No. 714-Y granting it the right to solely determine application of
payments, and was, consequently, estopped from enforcing the same. In this regard, with the
holding of full settlement of Central Surety’s ₱6,000,000.00 loan under PN No. 714-Y, the CA
ordered the release of the Wack Wack Membership pledged to Premiere Bank.
Hence, this recourse by Premiere Bank positing the following issues:
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED
REVERSIBLE AND PALPABLE ERROR WHEN IT APPLIED THE PRINCIPLE OF
WAIVER AND ESTOPPEL IN THE PRESENT CASE INSOFAR AS THE DEMAND
LETTER SENT TO [CENTRAL SURETY] IS CONCERNED NULLIFYING THE
APPLICATION OF PAYMENTS EXERCISED BY [PREMIERE BANK]
WHETHER OR NOT THE FINDING OF WAIVER AND ESTOPPEL BY THE
HONORABLE COURT OF APPEALS COULD PREVAIL OVER THE CLEAR AND
UNMISTAKABLE STATUTORY AND CONTRACTUAL RIGHT OF [PREMIERE BANK]
TO EXERCISE APPLICATION OF PAYMENT AS WARRANTED BY THE
PROMISSORY NOTE
EVEN ASSUMING EX GRATIA THAT THE 6 MILLION SHOULD BE APPLIED TO
THE SUBJECT LOAN OF RESPONDENT, WHETHER OR NOT THE SUBJECT WACK-
WACK SHARES COULD BE RELEASE[D] DESPITE THE CROSS DEFAULT AND
CROSS GUARANTEE PROVISIONS OF THE DEED OF ASSIGNMENT WITH PLEDGE
AND RELEVANT REAL ESTATE MORTGAGE CONTRACTS EXECUTED BY
[CENTRAL SURETY], CASENT REALTY AND SPS. CASTAÑEDA.
WHETHER OR NOT THERE IS A VALID TENDER OF PAYMENT AND
CONSIGNATION OF THE SUBJECT TWO CHECK PAYMENTS BY [CENTRAL
SURETY].
WHETHER OR NOT, AS CORRECTLY FOUND BY THE COURT A QUO [CENTRAL
SURETY] IS ESTOPPED FROM CONTESTING THE STIPULATIONS OR PROVISIONS
OF THE PROMISSORY NOTES AUTHORIZING [PREMIERE BANK] TO MAKE SUCH
APPLICATION OF PAYMENTS
WHETHER OR NOT AS CORRECTLY FOUND BY THE LOWER COURT [PREMIERE
BANK] IS ENTITLED TO AN AWARD OF DAMAGES AS OCCASIONED BY THE
MALICIOUS FILING OF THIS SUIT.19
At the outset, we qualify that this case deals only with the extinguishment of Central Surety’s
₱6,000,000.00 loan secured by the Wack Wack Membership pledge. We do not dispose herein
the matter of the ₱2,600,000.00 loan covered by PN No. 717-X subject of BC Check No.
08115.
We note that both lower courts were one in annulling Premiere Bank’s application of
payments to the loans of Casent Realty and the Spouses Castañeda under PN Nos. 235-Z and
717-X, respectively, thus:
It bears stressing that the parties to PN No. 714-Y secured by Wack Wack membership
certificate are only Central Surety, as debtor and [Premiere Bank], as creditor. Thus, when the
questioned stipulation speaks of "several obligations", it only refers to the obligations of
[Central Surety] and nobody else.
[I]t is plain that [Central Surety] has only two loan obligations, namely: 1.) Account No. 714-
Y – secured by Wack Wack membership certificate; and 2.) Account No. 367-Z – secured
by Condominium Certificate of Title. The two loans are secured by separate and different
collaterals. The collateral for Account No. 714-Y, which is the Wack Wack membership
certificate answers only for that account and nothing else. The collateral for Account No. 367-
Z, which is the Condominium Certificate of Title, is answerable only for the said account.
The fact that the loan obligations of [Central Surety] are secured by separate and distinct
collateral simply shows that each collateral secures only a particular loan obligation and does
not cover loans including future loans or advancements.
As regards the loan covered by Account No. 235-Z, this was obtained by Casent Realty, not
by [Central Surety]. Although Mr. Engracio Castañeda is the vice-president of [Central
Surety], and president of Casent Realty, it does not follow that the two corporations are one
and the same. Both are invested by law with a personality separate and distinct from each
other.
Thus, [Central Surety] cannot be held liable for the obligation of Casent Realty, absent
evidence showing that the latter is being used to defeat public convenience, justify wrong,
protect fraud or defend crime; or used as a shield to confuse the legitimate issues, or when it is
merely an adjunct, a business conduit or an alter ego of [Central Surety] or of another
corporation; or used as a cloak to cover for fraud or illegality, or to work injustice, or where
necessary to achieve equity or for the protection of creditors.1avvphi1
Likewise, [Central Surety] cannot be held accountable for the loan obligation of spouses
Castañeda under Account No. IND 717-X. Settled is the rule that a corporation is invested by
law with a personality separate and distinct from those of the persons composing it. The
corporate debt or credit is not the debt or credit of the stockholder nor is the stockholder’s debt
or credit that of the corporation.
The mere fact that a person is a president of the corporation does not render the property he
owns or possesses the property of the corporation, since that president, as an individual, and
the corporation are separate entities.20
In fact, Premiere Bank did not appeal or question the RTC’s ruling specifically annulling the
application of the ₱6,000,000.00 check payment to the respective loans of Casent Realty and
the Spouses Castañeda. Undoubtedly, Premiere Bank cannot be allowed, through this petition,
to surreptitiously include the validity of its application of payments concerning the loans to
Casent Realty and the Spouses Castañeda.
Thus, we sift through the issues posited by Premiere Bank and restate the same, to wit:
1. Whether Premiere Bank waived its right of application of payments on the loans
of Central Surety.
2. In the alternative, whether the ₱6,000,000.00 loan of Central Surety was
extinguished by the encashment of BC Check No. 08114.
3. Corollarily, whether the release of the Wack Wack Membership pledge is in
order.
The Petition is meritorious.
We shall take the first and the second issues in tandem.
Creditor given right to apply payments
At the hub of the controversy is the statutory provision on application of payments,
specifically Article 1252 of the Civil Code, viz.:
Article 1252. He who has various debts of the same kind in favor of one and the same creditor,
may declare at the time of making the payment, to which of them the same must be applied.
Unless the parties so stipulate, or when the application of payment is made by the party for
whose benefit the term has been constituted, application shall not be made as to debts which
are not yet due.
If the debtor accepts from the creditor a receipt in which an application of the payment is
made, the former cannot complain of the same, unless there is a cause for invalidating the
contract.
The debtor’s right to apply payment is not mandatory. This is clear from the use of the word
"may" rather than the word "shall" in the provision which reads: "He who has various debts of
the same kind in favor of one and the same creditor, may declare at the time of making the
payment, to which of the same must be applied."
Indeed, the debtor’s right to apply payment has been considered merely directory, and not
mandatory,21 following this Court’s earlier pronouncement that "the ordinary acceptation of
the terms ‘may’ and ‘shall’ may be resorted to as guides in ascertaining the mandatory or
directory character of statutory provisions."22
Article 1252 gives the right to the debtor to choose to which of several obligations to apply a
particular payment that he tenders to the creditor. But likewise granted in the same provision is
the right of the creditor to apply such payment in case the debtor fails to direct its application.
This is obvious in Art. 1252, par. 2, viz.: "If the debtor accepts from the creditor a receipt in
which an application of payment is made, the former cannot complain of the same." It is the
directory nature of this right and the subsidiary right of the creditor to apply payments when
the debtor does not elect to do so that make this right, like any other right, waivable.
Rights may be waived, unless the waiver is contrary to law, public order, public policy, morals
or good customs, or prejudicial to a third person with a right recognized by law.23
A debtor, in making a voluntary payment, may at the time of payment direct an application of
it to whatever account he chooses, unless he has assigned or waived that right. If the debtor
does not do so, the right passes to the creditor, who may make such application as he chooses.
But if neither party has exercised its option, the court will apply the payment according to the
justice and equity of the case, taking into consideration all its circumstances.24
Verily, the debtor’s right to apply payment can be waived and even granted to the creditor if
the debtor so agrees.25This was explained by former Senator Arturo M. Tolentino, an
acknowledged expert on the Civil Code, thus:
The following are some limitations on the right of the debtor to apply his payment:
xxxx
5) when there is an agreement as to the debts which are to be paid first, the debtor cannot vary
this agreement.26
Relevantly, in a Decision of the Supreme Court of Kansas in a case with parallel facts, it was
held that:
The debtor requested Planters apply the payments to the 1981 loan rather than to the 1978
loan. Planters refused. Planters notes it was expressly provided in the security agreement on
the 1981 loan that Planters had a legal right to direct application of payments in its sole
discretion. Appellees do not refute this. Hence, the debtors had no right by agreement to direct
the payments. This also precludes the application of the U.S. Rule, which applies only in
absence of a statute or specific agreement. Thus the trial court erred. Planters was entitled to
apply the Hi-Plains payments as it saw fit.27
In the case at bench, the records show that Premiere Bank and Central Surety entered into
several contracts of loan, securities by way of pledges, and suretyship agreements. In at least
two (2) promissory notes between the parties, Promissory Note No. 714-Y and Promissory
Note No. 376-X, Central Surety expressly agreed to grant Premiere Bank the authority to
apply any and all of Central Surety’s payments, thus:
In case I/We have several obligations with [Premiere Bank], I/We hereby empower [Premiere
Bank] to apply without notice and in any manner it sees fit, any or all of my/our deposits and
payments to any of my/our obligations whether due or not. Any such application of deposits or
payments shall be conclusive and binding upon us.
This proviso is representative of all the other Promissory Notes involved in this case. It is in
the exercise of this express authority under the Promissory Notes, and following Bangko
Sentral ng Pilipinas Regulations, that Premiere Bank applied payments made by Central
Surety, as it deemed fit, to the several debts of the latter.
All debts were due; There was no 
waiver on the part of petitioner
Undoubtedly, at the time of conflict between the parties material to this case, Promissory Note
No. 714-Y dated August 20, 1999, in the amount of ₱6,000,000.00 and secured by the pledge
of the Wack Wack Membership, was past the due and demand stage. By its terms, Premiere
Bank was entitled to declare said Note and all sums payable thereunder immediately due and
payable, without need of "presentment, demand, protest or notice of any kind." The
subsequent demand made by Premiere Bank was, therefore, merely a superfluity, which
cannot be equated with a waiver of the right to demand payment of all the matured obligations
of Central Surety to Premiere Bank.
Moreover, this Court may take judicial notice that the standard practice in commercial
transactions to send demand letters has become part and parcel of every collection effort,
especially in light of the legal requirement that demand is a prerequisite before default may set
in, subject to certain well-known exceptions, including the situation where the law or the
obligations expressly declare it unnecessary.28
Neither can it be said that Premiere Bank waived its right to apply payments when it
specifically demanded payment of the ₱6,000,000.00 loan under Promissory Note No. 714-Y.
It is an elementary rule that the existence of a waiver must be positively demonstrated since a
waiver by implication is not normally countenanced. The norm is that a waiver must not only
be voluntary, but must have been made knowingly, intelligently, and with sufficient awareness
of the relevant circumstances and likely consequences. There must be persuasive evidence to
show an actual intention to relinquish the right. Mere silence on the part of the holder of the
right should not be construed as a surrender thereof; the courts must indulge every reasonable
presumption against the existence and validity of such waiver.29
Besides, in this case, any inference of a waiver of Premiere Bank’s, as creditor, right to apply
payments is eschewed by the express provision of the Promissory Note that: "no failure on the
part of [Premiere Bank] to exercise, and no delay in exercising any right hereunder, shall
operate as a waiver thereof."
Thus, we find it unnecessary to rule on the applicability of the equitable principle of waiver
that the Court of Appeals ascribed to the demand made by Premiere Bank upon Central Surety
to pay the amount of ₱6,000,000.00, in the face of both the express provisions of the law and
the agreements entered into by the parties. After all, a diligent creditor should not needlessly
be interfered with in the prosecution of his legal remedies.30
When Central Surety directed the application of its payment to a specific debt, it knew it had
another debt with Premiere Bank, that covered by Promissory Note 367-Z, which had been
renewed under Promissory Note 376-X, in the amount of ₱40.898 Million. Central Surety is
aware that Promissory Note 367-Z (or 376-X) contains the same provision as in Promissory
Note No 714-Y which grants the Premiere Bank authority to apply payments made by Central
Surety, viz.:
In case I/We have several obligations with [Premiere Bank], I/We hereby empower [Premiere
Bank] to apply without notice and in any manner it sees fit, any or all of my/our deposits and
payments to any of my/our obligations whether due or not. Any such application of deposits or
payments shall be conclusive and binding upon us.31
Obviously, Central Surety is also cognizant that Promissory Note 367-Z contains the proviso
that:
the bank shall be entitled to declare this Note and all sums payable hereunder to be
immediately due and payable, without need of presentment, demand, protest or notice of nay
kind, all of which I/We hereby expressly waive, upon occurrence of any of the following
events: x x x (ii) My/Our failure to pay any amortization or installment due hereunder; (iii)
My/Our failure to pay money due under any other document or agreement evidencing
obligations for borrowed money x x x.32
by virtue of which, it follows that the obligation under Promissory Note 367-Z had become
past due and demandable, with further notice expressly waived, when Central Surety defaulted
on its obligations under Promissory Note No. 714-Y.
Mendoza v. Court of Appeals33 forecloses any doubt that an acceleration clause is valid and
produces legal effects. In fact, in Selegna Management and Development Corporation v.
United Coconut Planters Bank,34 we held that:
Considering that the contract is the law between the parties, respondent is justified in invoking
the acceleration clause declaring the entire obligation immediately due and payable. That
clause obliged petitioners to pay the entire loan on January 29, 1999, the date fixed by
respondent.
It is worth noting that after the delayed payment of ₱6,000,000.00 was tendered by Central
Surety, Premiere Bank returned the amount as insufficient, ostensibly because there was, at
least, another account that was likewise due. Obviously, in its demand of 28 September 2000,
petitioner sought payment, not just of the ₱6,000,000.00, but of all these past due accounts.
There is extant testimony to support this claim, as the transcript of stenographic notes on the
testimony of Atty. Araos reveals:
Atty. Opinion: Q. But you accepted this payment of Six Million (₱6,000,000.00) later on when
together with this was paid another check for 1.8 Million?
Witness: A. We accepted.
Atty. Opinion: Q. And you applied this to four (4) other accounts three (3) other accounts or to
four (4) accounts mentioned in Exhibit "J." Is that correct?
Atty. Tagalog: We can stipulate on that. Your Honor.
Court: This was stipulated?
Atty. Tagalog: Yes, Your Honor. In fact, there is already stipulation that we confirm that those
are the applications of payments made by the defendant Bank on those loan accounts.
Atty. Opinion: Q. Were these accounts due already when you made this application,
distribution of payments?
Witness: A. Yes sir.35
Conversely, in its evidence-in-chief, Central Surety did not present any witness to testify on
the payment of its obligations. In fact, the record shows that after marking its evidence,
Central Surety proceeded to offer its evidence immediately. Only on the rebuttal stage did
Central Surety present a witness; but even then, no evidence was adduced of payment of any
other obligation. In this light, the Court is constrained to rule that all obligations of Central
Surety to Premiere Bank were due; and thus, the application of payments was warranted.
Being in receipt of amounts tendered by Central Surety, which were insufficient to cover its
more onerous obligations, Premiere Bank cannot be faulted for exercising the authority
granted to it under the Promissory Notes, and applying payment to the obligations as it
deemed fit. Subject to the caveat that our ruling herein shall be limited only to the transactions
entered into by the parties to this case, the Court will not disturb the finding of the lower court Date Instrument Amount Stipulation
that Premiere Bank rightly applied the payments that Central Surety had tendered. Corollary covered
thereto, and upon the second issue, the tender of the amount of ₱6,000,000.00 by Central
Surety, and the encashment of BC Check No. 08114 did not totally extinguish the debt August 20, 1999 PN 714-Y P 6 M
covered by PN No. 714-Y.
August 29, 1999 Deed of ₱ 15 M As security for PN 714-Y and/o
Assignment with Promissory Note/s which
Release of the pledged
Pledge ASSIGNOR / PLEDGOR
hereafter execute in favor
Wack Wack Membership ASSIGNEE/PLEDGEE

Contract of Adhesion
To the extent that the subject promissory notes were prepared by the Premiere Bank and
presented to Central Surety for signature, these agreements were, indeed, contracts of
adhesion. But contracts of adhesion are not invalid per se. Contracts of adhesion, where one
party imposes a ready-made form of contract on the other, are not entirely prohibited. The one
who adheres to the contract is, in reality, free to reject it entirely; if he adheres, he gives his
consent.
In interpreting such contracts, however, courts are expected to observe greater vigilance in
order to shield the unwary or weaker party from deceptive schemes contained in ready-made
covenants.36 Thus, Article 24 of the Civil Code pertinently states:
In all contractual, property or other relations, when one of the parties is at a disadvantage on
account of his moral dependence, ignorance, indigence, mental weakness, tender age or other
handicap, the courts must be vigilant for his protection.
From these transactions and the proviso in the Deed of Assignment with Pledge, it is clear that
the security, which peculiarly specified an amount at ₱15,000,000.00 (notably greater than the
amount of the promissory note it secured), was intended to guarantee not just the obligation
under PN 714-Y, but also future advances. Thus, the said deed is explicit:
As security for the payment of loan obtained by the ASSIGNOR/PLEDGOR from the
ASSIGNEE/PLEDGEE in the amount of FIFTEEN MILLION PESOS (15,000,000.00)
Philippine Currency in accordance with the Promissory Note attached hereto and made an
integral part hereof as Annex "A" and/or such Promissory Note/s which the
ASSIGNOR/PLEDGOR shall hereafter execute in favor of the ASSIGNEE/PLEDGEE, the
ASSIGNOR/PLEDGOR hereby transfers, assigns, conveys, endorses, encumbers and delivers
by way of first pledge unto the ASSIGNEE/PLEDGEE, its successors and assigns, that certain
Membership fee Certificate Share in Wack Wack Golf and Country Club Incorporate covered
by Stock Certificate No. 217 with Serial No. 1793 duly issue by Wack Wack Golf and
Country Club Incorporated on August 27, 1996 in the name of the ASSIGNOR." (Emphasis
made in the Petition.)

But in this case, Central Surety does not appear so weak as to be placed at a distinct Then, a Continuing Guaranty/Comprehensive Surety Agreement was later executed by Central
disadvantage vis-à-vis the bank. As found by the lower court: Surety as follows:

Considering that [Central Surety] is a known business entity, the [Premiere Bank] was right in Date Instrument Amount Stipulation
assuming that the [Central Surety] could not have been cheated or misled in agreeing thereto,
it could have negotiated with the bank on a more favorable term considering that it has already Notarized, Sept. 22, Continuing ₱40,898,000.00 In consideration of
established a certain reputation with the [Premiere Bank] as evidenced by its numerous 1999 Guaranty/Comprehensive any credit accommod
transactions. It is therefore absurd that an established company such as the [Central Surety] Surety Agreement (petitioner) have exte
has no knowledge of the law regarding bank practice in loan transactions. extend to Central
Insurance Co.
The Dragnet Clause.
And on October 10, 2000, Promissory Note 376-X was entered into, a renewal of the prior
The factual circumstances of this case showing the chain of transactions and long-standing Promissory Note 367-Z, in the amount of ₱40,898,000.00. In all, the transactions that
relationship between Premiere Bank and Central Surety militate against the latter’s prayer in transpired between Premiere Bank and Central Surety manifest themselves, thusly:
its complaint for the release of the Wack Wack Membership, the security attached to
Promissory Note 714-Y.
Date Amount
Instrument Stipulation
covered
A tally of the facts shows the following transactions between Premiere Bank and Central
Surety: August 20, 1999 PN 714-Y ₱6M
August 29, 1999 Deed of Assignment with ₱ 15 M As security for
 Pledge Promissory Note/sThat for and
which in consideration
the ASSIGNOR / of certain loans, overdraft and other credit accommodations
PLEDGOR shallobtained
hereafterfrom the Mortgagee
execute in favor by the Mortgagor and/or ________________ hereinafter referred
to, irrespective of number, as DEBTOR, and to secure the payment of the same and those that
of the ASSIGNEE/PLEDGEE
may hereafter be obtained, the principal or all of which is hereby fixed at Two Hundred Fifty
Notarized,  Continuing ₱40,898,000.00 In considerationThousand (₱250,000.00)
of the loan and/or anyPesos, Philippine Currency, as well as those that the Mortgagee may
Sept. 22, 1999 Guaranty/Comprehensive credit extend to thewhich
accommodation Mortgagor youand/or DEBTOR, including interest and expenses or any other
Surety Agreement (petitioner) haveobligation
extended owing to thewill
and/or Mortgagee, whether direct or indirect, principal or secondary as
extend to Centralappears in the
Surety and accounts,
Insurance Co. books and records of the Mortgagee, the Mortgagor does hereby
transfer and convey by way of mortgage unto the Mortgagee, its successors or assigns, the
October 10, 2000 Promissory Note 376-X (PN ₱40,898,000.00 parcels of land which are described in the list inserted on the back of this document, and/or
367-Z) appended hereto, together with all the buildings and improvements now existing or which may
hereafter be erected or constructed thereon, of which the Mortgagor declares that he/it is the
absolute owner free from all liens and incumbrances. . . .
From the foregoing, it is more than apparent that when, on August 29, 1999, the parties
executed the Deed of Assignment with Pledge (of the Wack Wack Membership), to serve as
security for an obligation in the amount of ₱15,000,000.00 (when the actual loan covered by xxxx
PN No. 714-Y was only ₱6,000,000.00), the intent of the parties was for the Wack Wack
Membership to serve as security also for future advancements. The subsequent loan was In the case at bar, the subsequent loans obtained by respondents were secured by other
nothing more than a fulfillment of the intention of the parties. Of course, because the securities, thus: PN BD#76/C-345, executed by Don Alviar was secured by a "hold-out" on his
subsequent loan was for a much greater amount (₱40,898,000.00), it became necessary to put foreign currency savings account, while PN BD#76/C-430, executed by respondents for
up another security, in addition to the Wack Wack Membership. Thus, the subsequent surety Donalco Trading, Inc., was secured by "Clean-Phase out TOD CA 3923" and eventually by a
agreement and the specific security for PN No. 367-X were, like the Wack Wack Membership, deed of assignment on two promissory notes executed by Bancom Realty Corporation with
meant to secure the ballooning debt of the Central Surety. Deed of Guarantee in favor of A.U. Valencia and Co., and by a chattel mortgage on various
heavy and transportation equipment. The matter of PN BD#76/C-430 has already been
The above-quoted provision in the Deed of Assignment, also known as the "dragnet clause" in discussed. Thus, the critical issue is whether the "blanket mortgage" clause applies even to
American jurisprudence, would subsume all debts of respondent of past and future origins. It subsequent advancements for which other securities were intended, or particularly, to PN
is a valid and legal undertaking, and the amounts specified as consideration in the contracts do BD#76/C-345.
not limit the amount for which the pledge or mortgage stands as security, if from the four
corners of the instrument, the intent to secure future and other indebtedness can be gathered. A Under American jurisprudence, two schools of thought have emerged on this question. One
pledge or mortgage given to secure future advancements is a continuing security and is not school advocates that a "dragnet clause" so worded as to be broad enough to cover all other
discharged by the repayment of the amount named in the mortgage until the full amount of all debts in addition to the one specifically secured will be construed to cover a different debt,
advancements shall have been paid.37 although such other debt is secured by another mortgage. The contrary thinking maintains that
a mortgage with such a clause will not secure a note that expresses on its face that it is
Our ruling in Prudential Bank v. Alviar38 is instructive: otherwise secured as to its entirety, at least to anything other than a deficiency after exhausting
the security specified therein, such deficiency being an indebtedness within the meaning of the
mortgage, in the absence of a special contract excluding it from the arrangement.
A "blanket mortgage clause," also known as a "dragnet clause" in American jurisprudence, is
one which is specifically phrased to subsume all debts of past or future origins. Such clauses
are "carefully scrutinized and strictly construed." Mortgages of this character enable the The latter school represents the better position. The parties having conformed to the "blanket
parties to provide continuous dealings, the nature or extent of which may not be known or mortgage clause" or "dragnet clause," it is reasonable to conclude that they also agreed to an
anticipated at the time, and they avoid the expense and inconvenience of executing a new implied understanding that subsequent loans need not be secured by other securities, as the
security on each new transaction. A "dragnet clause" operates as a convenience and subsequent loans will be secured by the first mortgage. In other words, the sufficiency of the
accommodation to the borrowers as it makes available additional funds without their having to first security is a corollary component of the "dragnet clause." But of course, there is no
execute additional security documents, thereby saving time, travel, loan closing costs, costs of prohibition, as in the mortgage contract in issue, against contractually requiring other
extra legal services, recording fees, et cetera. Indeed, it has been settled in a long line of securities for the subsequent loans. Thus, when the mortgagor takes another loan for which
decisions that mortgages given to secure future advancements are valid and legal contracts, another security was given it could not be inferred that such loan was made in reliance solely
and the amounts named as consideration in said contracts do not limit the amount for which on the original security with the "dragnet clause," but rather, on the new security given. This is
the mortgage may stand as security if from the four corners of the instrument the intent to the "reliance on the security test."
secure future and other indebtedness can be gathered.
Hence, based on the "reliance on the security test," the California court in the cited case made
The "blanket mortgage clause" in the instant case states: an inquiry whether the second loan was made in reliance on the original security containing a
"dragnet clause." Accordingly, finding a different security was taken for the second loan no
intent that the parties relied on the security of the first loan could be inferred, so it was held.
The rationale involved, the court said, was that the "dragnet clause" in the first security
instrument constituted a continuing offer by the borrower to secure further loans under the
security of the first security instrument, and that when the lender accepted a different security
he did not accept the offer.
In another case, it was held that a mortgage with a "dragnet clause" is an "offer" by the
mortgagor to the bank to provide the security of the mortgage for advances of and when they
were made. Thus, it was concluded that the "offer" was not accepted by the bank when a
subsequent advance was made because (1) the second note was secured by a chattel mortgage
on certain vehicles, and the clause therein stated that the note was secured by such chattel
mortgage; (2) there was no reference in the second note or chattel mortgage indicating a
connection between the real estate mortgage and the advance; (3) the mortgagor signed the
real estate mortgage by her name alone, whereas the second note and chattel mortgage were
signed by the mortgagor doing business under an assumed name; and (4) there was no
allegation by the bank, and apparently no proof, that it relied on the security of the real estate
mortgage in making the advance.
Indeed, in some instances, it has been held that in the absence of clear, supportive evidence of
a contrary intention, a mortgage containing a "dragnet clause" will not be extended to cover
future advances unless the document evidencing the subsequent advance refers to the
mortgage as providing security therefor.
It was therefore improper for petitioner in this case to seek foreclosure of the mortgaged
property because of non-payment of all the three promissory notes. While the existence and
validity of the "dragnet clause" cannot be denied, there is a need to respect the existence of the
other security given for PN BD#76/C-345. The foreclosure of the mortgaged property should
only be for the ₱250,000.00 loan covered by PN BD#75/C-252, and for any amount not
covered by the security for the second promissory note. As held in one case, where deeds
absolute in form were executed to secure any and all kinds of indebtedness that might
subsequently become due, a balance due on a note, after exhausting the special security given
for the payment of such note, was in the absence of a special agreement to the contrary, within
the protection of the mortgage, notwithstanding the giving of the special security. This is
recognition that while the "dragnet clause" subsists, the security specifically executed for
subsequent loans must first be exhausted before the mortgaged property can be resorted to.
The security clause involved in the case at bar shows that, by its terms:
As security for the payment of loan obtained by the ASSIGNOR/PLEDGOR from the
ASSIGNEE/PLEDGEE in the amount of FIFTEEN MILLION PESOS (15,000,000.00)
Philippine Currency in accordance with the Promissory Note attached hereto and made an
integral part hereof as Annex "A" and/or such Promissory Note/s which the
ASSIGNOR/PLEDGOR shall hereafter execute in favor of the ASSIGNEE/PLEDGEE, the
ASSIGNOR/ PLEDGOR hereby transfers, assigns, conveys, endorses, encumbers and delivers
by way of first pledge unto the ASSIGNEE/PLEDGEE, its successors and assigns, that certain
Membership fee Certificate Share in Wack Wack Golf and Country Club Incorporated covered
by Stock Certificate No. 217 with Serial No. 1793 duly issue by Wack Wack Golf and
Country Club Incorporated on August 27, 1996 in the name of the ASSIGNOR."
it is comparable with the security clause in the case of Prudential, viz.:
That for and in consideration of certain loans, overdraft and other credit accommodations
obtained from the Mortgagee by the Mortgagor and/or ________________ hereinafter referred
to, irrespective of number, as DEBTOR, and to secure the payment of the same and those that
may hereafter be obtained, the principal or all of which is hereby fixed at Two Hundred Fifty
Thousand (₱250,000.00) Pesos, Philippine Currency, as well as those that the Mortgagee may
extend to the Mortgagor and/or DEBTOR, including interest and expenses or any other
obligation owing to the Mortgagee, whether direct or indirect, principal or secondary as
appears in the accounts, books and records of the Mortgagee, the Mortgagor does hereby
transfer and convey by way of mortgage unto the Mortgagee, its successors or assigns, the
parcels of land which are described in the list inserted on the back of this document, and/or
appended hereto, together with all the buildings and improvements now existing or which may
hereafter be erected or constructed thereon, of which the Mortgagor declares that he/it is the
absolute owner free from all liens and incumbrances. . . .
and there is no substantive difference between the terms utilized in both clauses securing
future advances.
To recall, the critical issue resolved in Prudential was whether the "blanket mortgage" clause
applies even to subsequent advancements for which other securities were intended. We then
declared that the special security for subsequent loans must first be exhausted in a situation
where the creditor desires to foreclose on the "subsequent" loans that are due. However, the
"dragnet clause" allows the creditor to hold on to the first security in case of deficiency after
foreclosure on the special security for the subsequent loans.
In Prudential, we disallowed the petitioner’s attempt at multiple foreclosures, as it foreclosed
on all of the mortgaged properties serving as individual securities for each of the three loans.
This Court then laid down the rule, thus:
where deeds absolute in form were executed to secure any and all kinds of indebtedness that
might subsequently become due, a balance due on a note, after exhausting the special security
given for the payment of such note, was, in the absence of a special agreement to the contrary,
within the protection of the mortgage, notwithstanding the giving of the special security. This
is recognition that while the "dragnet clause" subsists, the security specifically executed for
subsequent loans must first be exhausted before the mortgaged property can be resorted to.
However, this does not prevent the creditor from foreclosing on the security for the first loan if
that loan is past due, because there is nothing in law that prohibits the exercise of that right.
Hence, in the case at bench, Premiere Bank has the right to foreclose on the Wack Wack
Membership, the security corresponding to the first promissory note, with the deed of
assignment that originated the "dragnet clause." This conforms to the doctrine in Prudential,
as, in fact, acknowledged in the decision’s penultimate paragraph, viz.:
Petitioner, however, is not without recourse. Both the Court of Appeals and the trial court
found that respondents have not yet paid the ₱250,000.00 and gave no credence to their claim
that they paid the said amount when they paid petitioner ₱2,000,000.00. Thus, the mortgaged
property could still be properly subjected to foreclosure proceedings for the unpaid
₱250,000.00 loan, and as mentioned earlier, for any deficiency after D/A SFDX#129, security
for PN BD#76/c-345, has been exhausted, subject of course to defenses which are available to
respondents.
In any event, even without this Court’s prescription in Prudential, the release of the Wack
Wack Membership as the pledged security for Promissory Note 714-Y cannot yet be done as
sought by Central Surety. The chain of contracts concluded between Premiere Bank and
Central Surety reveals that the Wack Wack Membership, which stood as security for
Promissory Note 714-Y, and which also stands as security for subsequent debts of Central
Surety, is a security in the form of a pledge. Its return to Central Surety upon the pretext that
Central Surety is entitled to pay only the obligation in Promissory Note No. 714-Y, will result
in the extinguishment of the pledge, even with respect to the subsequent obligations, because
Article 2110 of the Civil Code provides:
(I)f the thing pledged is returned by the pledgor or owner, the pledge is extinguished. Any
stipulation to the contrary is void.
This is contrary to the express agreement of the parties, something which Central Surety wants
this Court to undo. We reiterate that, as a rule, courts cannot intervene to save parties from
disadvantageous provisions of their contracts if they consented to the same freely and
voluntarily.39
Attorney’s Fees
The final issue is the propriety of attorney’s fees. The trial court based its award on the
supposed malice of Central Surety in instituting this case against Premiere Bank. We find no
malice on the part of Central Surety; indeed, we are convinced that Central Surety filed the
case in the lower court in good faith, upon the honest belief that it had the prerogative to
choose to which loan its payments should be applied.
Malicious prosecution, both in criminal and civil cases, requires the presence of two elements,
to wit: (a) malice and (b) absence of probable cause. Moreover, there must be proof that the
prosecution was prompted by a sinister design to vex and humiliate a person; and that it was
initiated deliberately, knowing that the charge was false and baseless. Hence, the mere filing
of what turns out to be an unsuccessful suit does not render a person liable for malicious
prosecution, for the law could not have meant to impose a penalty on the right to
litigate.40 Malice must be proved with clear and convincing evidence, which we find wanting
in this case.
WHEREFORE, the instant petition is PARTIALLY GRANTED. The assailed Decision of the
Court of Appeals in CA-G.R. CV No. 85930 dated July 31, 2006, as well as its Resolution
dated January 4, 2007, are REVERSED and SET ASIDE. The Decision of the Regional Trial
Court of Makati City, Branch 132, in Civil Case No. 00-1536, dated July 12, 2005, is
REINSTATED with the MODIFICATION that the award of attorney’s fees to petitioner is
DELETED. No pronouncement as to costs.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 159748               July 31, 2007
SPOUSES VIRGILIO AND DIGNA ANASTACIO-CALINA, Petitioners, 
vs.
DEVELOPMENT BANK OF THE PHILIPPINES, Respondent.
DECISION
PUNO, C.J.:
Before the Court is a petition for review on certiorari filed under Rule 45 of the Revised Rules
of Court. Petitioner spouses VIRGILIO AND DIGNA ANASTACIO-CALINA (Spouses
Calina) seek to reverse the decision1 of the Court of Appeals in CA-G.R. CV No. 570655,
which set aside the decision of the trial court dated October 14, 1996.
On July 16, 1975, the Spouses Calina and respondent DEVELOPMENT BANK OF THE
PHILIPPINES (DBP) entered into an agricultural (deep-sea fishing) loan agreement, whereby
respondent lent to petitioners the amount of ₱1,356,000.00.
On July 24, 1975, as security for payment of the loan, petitioners executed a promissory
note2 in favor of respondent, promising to pay the aforementioned sum, together with 12%
interest per annum, in the following manner:
- At the end of the third month after date of full release or completion of boat (if full
release is not availed of), only interest and advances due shall be paid;
- Thereafter, the loan shall be repayable within five (5) years, the first payment to be
made on ____________ and the subsequent payments on the _____day of every
three (3) months thereafter, and each of all such payments shall be NINETY ONE
THOUSAND ONE HUNDRED FORTY FOUR AND 50/100 PESOS (₱91,144.50),
which shall cover amortizations on the principal and interest at the above mentioned
rate.3
On the same date, petitioners also executed a Deed of Undertaking,4 which provided the
following pertinent conditions for the loan:
1. That the loan shall be utilized specifically to finance 80% of the total fixed cost portion of
the loan as follows:
₱1,345,258.00 - Acquisition of one (1) unit "Purse Seine" Type fishing vessel complete with
engine and accessories; and
350,000.00 - Purchase of "Purse Seine" nets and accessories
₱1,695,258.00 - Total Fixed Cost
₱ 339,258.00 - Borrower’s Equity
₱1,356,000.00 - DBP/IBRD Fund
2. Borrower shall put up out of his own funds the amount of ₱614,658.00 (₱339,258.00 for
fixed cost and ₱275,400.00 for operating cost) representing his counterpart of total project
costs to be financed. Borrower shall show proof of the availability of the amount of
₱275,400.00 required for operating cost before initial release of the loan.
3. Borrower shall avail of the proceeds of the loan within a period of six (6) months from date
of perfection of documents for the loan.
xxx
5. This loan shall be secured by chattel mortgage on one (1) unit "Purse Seine" type fishing
boat, complete with engine and accessories, including purse seine nets.
xxx
10. That should the borrower fail to avail of the loan or any balance thereof within the said
period and should he request for the extension thereof, he shall thereby be obligated to pay
thereafter a commitment fee of ¼ of 1% per month on the unreleased proceeds of the loan
until the same are fully released or cancelled upon written request of the borrower. This
provision is, however, without prejudice to the right of the Bank to cancel the loan, recover
such amounts as may have been already released therefrom and/or avail of the remedies
provided for in the promissory note and mortgage contract or alternatively, the ordinary
remedies in law should the delays in the borrower’s availing of the proceeds of the loan
constitute a violation of the promissory note and mortgage contract in accordance with the
provisions thereof, and/or impair the security position of the Bank.
11. That the Bank reserves the right to reduce or stop releases/advances if after inspection and
verification the accomplishment in the financed project does not justify giving full amount, or
if the conditions of the project do not show improvements commensurate with the amounts
already advanced/released. In such an event or in the event of abandonment of the project, all
advances/releases made shall automatically become due and demandable and the Bank shall
take such legal steps as are necessary to protect its interest.
xxx
17. That the fishing vessel to be mortgaged in favor of DBP shall be covered by an "all risk"
insurance policy. In the event that any of the fishing vessel(s) become uninsurable the
borrower shall reduce the outstanding balance of the loan to the loan value of the remaining
acceptable securities.
xxx
21. That the borrower shall secure and submit the following:
xxx
c. A performance bond equivalent to 80% of hull cost to guarantee that the fishing vessel shall
be constructed in accordance with the plan approved by the said Commission, within one (1)
year from date of first release of loan, said performance bond to be cancelled only upon
completion of the vessel and presentation to the DBP of a Certificate of Admeasurement and
Safety issued by said Commission for the vessel.
x x x.
Pursuant to the conditions set by the Deed of Undertaking, on July 31, 1975, Towers
Assurance Corporation, acting as surety for petitioners, executed a Performance Bond for the
amount of ₱319,085.60.
In August 1975, using the first release of the loan from DBP and their own funds to pay for
materials and labor costs, the Spouses Calina commenced the construction of a fishing boat on
a beach in Panakan, Palawan.5 In September 1975, the second release of the loan was given to
petitioners by DBP. Petitioners used 95% of this amount to purchase one unit of a Cummins
Marine Diesel Engine. Prior to installation in the fishing boat, the engine was placed in
storage. On September 25, 1975, the third release of the loan was given to purchase other
equipment. At this point, DBP had already released ₱451,589.80 to petitioners.
In December 1975, petitioners requested DBP to conduct its inspection of the partially
completed keel of the fishing boat. However, the inspectors of DBP were unavailable and
failed to visit the construction site.
In the last week of January 1976, typhoon Asyang hit Palawan, and totally destroyed the
fishing boat under construction. All materials were washed out to sea.
On January 26, 1978, petitioner Virgilio Calina informed the DBP of his decision to abandon
the project.6 He requested the DBP to grant him 60 days within which to sell the Cummins
Marine Diesel Engine and out of the proceeds thereof, pay all his obligations to DBP.
On October 3, 1978, the DBP wrote a letter to the petitioners, demanding immediate payment
of ₱666,195.55, representing the amount of their obligation plus interest from August 18,
1978, excluding daily additional interest.7
On December 11, 1980, DBP filed a complaint for sum of money, with a prayer for the
issuance of a writ of preliminary attachment for the Cummins Marine Diesel Engine, against
the Spouses Calina and Towers Assurance Corporation. Defendant Towers Assurance
Corporation raised the defenses of laches and of the fact that the surety bond was never
exposed to any risk, as the amount of the debt was used for the purchase of the Cummins
Marine Diesel Engine, and not for the purpose of constructing the fishing vessel. 8 The Spouses
Calina filed their Answer with Counterclaim 9 for payment of damages on August 14, 1981. On
October 20, 1981, the court issued the writ of attachment against the Cummins Marine Diesel
Engine.
In a bid to settle their financial obligations to DBP, petitioners sought buyers for the Cummins
Marine Diesel Engine by advertising in several newspapers. On September 17, 1984, Pacific
Power and Process Corporation offered to buy the Cummins Marine Diesel Engine for
₱600,000.00.10 On October 29, 1984, petitioners requested11 the DBP to signify its conformity
to the sale. The DBP refused, and decided to sell the engine at public auction. The auction was
held on March 8, 1985, but no bids were made for the engine. On August 26, 1985, DBP
wrote petitioners a letter,12 finally agreeing to the sale of the engine for ₱600,000.00, and the
payment of the proceeds thereof as settlement for their agricultural (deep-sea fishing) loan.
DBP also agreed to condone any penalty charges and interest on past due interest computed up
to the date of payment of the said amount.
Unfortunately, the petitioners’ buyer had already lost interest. 13 They tried to find other buyers
but to no avail. Thus, the Cummins Marine Diesel Engine remained unsold.
In the course of the trial, the parties finally came to an agreement for the disposition of the
engine. On August 28, 1989, they filed a Joint Motion to Lift the Writ of Attachment so that
they could sell the engine pending litigation and apply the proceeds of the sale to the payment
of the Spouses Calina’s outstanding account with DBP, "without prejudice to whatever
negotiation and agreements that the parties may enter into to settle the case amicably in the
event the sales proceeds of the Cummins Marine Diesel Engine is not sufficient to pay off the
total obligation."14 The trial court granted the motion.
On February 3, 1992, the engine was sold for the sum of ₱550,000.00, and the amount was
applied to the loan. The parties, however, could not agree whether the total amount of the loan
had been fully settled, hence the trial continued.
Finally, the trial court rendered its decision, the dispositive portion of which stated:
FINDINGS AND CONCLUSIONS:
The Court finds that the CALINA (sic) received from DBP only the amount of ₱451,589.80 of
the agreed ₱1,356,000.00 loan, and this amount was used to purchase the subject Cummins
Engine. The non-completion of the vessel was caused by fortuitous event which affected both
parties that the DBP novated the contract when it agreed to condone the interest and penalties
but was revoked by the failure of CALINA to pay the amount of ₱600,000.00. However, the
Court finds that the subsequent agreement of both parties to sell the subject Engine for
₱550,000.00 is considered by the Court as substantial compliance of the novated contract for
the DBP to condone the interests and penalties, and is in fact more than sufficient to offset the
loan of ₱451,589.80 after condonation of the interest and penalties.
On the above findings, the Court concludes that, based on the subsequent novation of the
contract after the project was discontinued due to fortuitous event, and with the proceeds of
the mutually agreed sale of the subject Cummins Engine absorbed by the DBP, the loan
obligation is considered as settled and/or fully paid.
WHEREFORE, premises above considered, this case is hereby DISMISSED.15
On July 29, 1998, DBP filed a petition for review 16 with the Court of Appeals, assigning the
following errors to the decision of the trial court:
1. The court a quo gravely erred in concluding that "DBP novated the contract when
it agreed to condone the interest and penalties but was revoked by the failure of
Calina to pay the amount of ₱600,000.00";
2. The court a quo gravely erred in concluding "that the subsequent agreement of
both parties to sell the subject engine for ₱550,000.00 is considered by the [c]ourt as
substantial compliance of the novated contract for the DBP to condone the interests
and penalties";
3. The court a quo gravely erred in concluding that the receipt of DBP of the amount
of ₱550,000.00 realized from the sale of the marine diesel engine "is more than
sufficient to offset the loan of ₱451,589.80 after condonation of interest and
penalties." Hence, "the loan obligation x x x is considered as settled and/or fully
paid"; and
4. The court a quo gravely erred is (sic) not ordering the defendants-appellees
Spouses Virgilio G. Calina and Digna Anastacio to pay DBP the remaining balance
of their loan obligation, plus interest until fully paid, and the pre-agreed attorney’s
fees.
It was also averred that even if "the DBP through its Board of Governors expressly approved
and agreed not only to condone the penalty charges and interest, but also the dismissal of the
complaint upon payment of ₱600,000.00,"17this issue of novation is already moot as it had
been revoked by the petitioners’ failure to pay the said amount.
On August 27, 2003, the appellate court rendered its Decision,18 reversing the trial court, viz:
WHEREFORE, in view of the foregoing, the October 14, 1996 Decision of Branch 61,
Regional Trial Court, Makati City in Civil Case No. 1622 is REVERSED and SET ASIDE
and a new one entered ordering defendants-appellees, Spouses Virgilio Calina and Digna
Anastacio, to pay plaintiff-appellant, Development Bank of the Philippines, the amount of
₱666,195.55 plus 12% interest from August 18, 1878 (sic) until fully paid to be computed
based on diminishing balance method less the ₱550,000.00 proceeds from the sale of the
aforesaid Cummins Engine and 10% attorney’s fees.19
In their Petition for Review on Certiorari,20 petitioners assigned the following errors to the
appellate court’s decision:
1. The Court of Appeals gravely erred when it required petitioners to pay interest on
the advance of ₱451,589.80 made by DBP, in violation of the Agreement between
the parties and without any valid document in support thereof.
2. The Court of Appeals gravely erred when it ruled that there was partial
condonation of the interest due, but the said condonation was revoked when
petitioners still did not pay the loan despite the reduction in interest.
 3. The Court of Appeals seriously erred when it failed to consider and appreciate
that what transpired between the parties, after the filing of the complaint in the trial
court, was a compromise settlement and not a condonation of interest.
4. The Court of Appeals erred in not holding that the ₱550,000.00 proceeds in the
sale of the Cummins Diesel engine was more than sufficient to off-set the principal
loan of ₱451,589.80.
5. The Court of Appeals gravely erred in awarding 10% attorney’s fees despite the
absence of bad faith on the part of petitioners, and neither does this case fall under
any of the circumstances provided for in Art. 2208 of our Civil Code.
6. In the remote possibility, this Honorable Court is not persuaded by petitioners’
argument, it is respectfully submitted that the interest to be awarded should be
reckoned from the date of the compromise settlement between the parties, and only
on the remaining balance of ₱50,000.00.
In its Comment, 21 respondent DBP contended:
1. The petition raises only questions of fact, and should not be given due course.
2. The Court of Appeals did not err when it ordered petitioners to pay interest on the
amount actually received as proceeds of their loan, as the promissory note they
executed provides for this. Moreover, as petitioners were in default in the payment
of their debt, they are liable to pay additional interest equal to 12% of the entire
unpaid obligation as indemnity for damages sustained by the respondent.
3. The petitioners did not challenge the finding of the court a quo that although the
DBP novated the contract by agreeing to condone interest and penalties, this
condonation was revoked by the petitioners’ failure to pay the agreed amount.
Therefore, the petitioners could not state as erroneous the decision of the Court of
Appeals when it affirmed the aforestated finding of the trial court and not as a
compromise settlement. The July 14, 1989 Motion (Exhibit 16) was not connected to
DBP’s letter dated August 26, 1985 (Exhibit 13).
Since the petitioners raised the defense of novation before the trial court and the
Court of Appeals, it is now barred from abandoning this theory and adopting a new
one. They can no longer claim that there had been no novation, but that the parties
had entered into a compromise agreement.
Respondent never entered into any compromise agreement with petitioners. What it
only sought was the trial court’s approval to sell the Cummins engine and to
partially apply the proceeds thereof to the outstanding obligations of petitioners.
4. The CA did not err in finding that the proceeds from the sale of the Cummins
engine was not sufficient to fully offset the petitioners’ outstanding obligation to
respondent. As of August 18, 1978, petitioners already owed respondent
₱666,195.55. Petitioners are liable to pay 12% regular interest per annum to the
principal obligation (₱451,589.80), plus attorney’s fees of 10%.
5. In the promissory note and the deed of undertaking, petitioners agreed to pay
attorney’s fees in case the respondent is forced to engage a lawyer to enforce its
right against the petitioners.
6. Because the compromise agreement based on DBP’s letter (exhibit 13) did not
come to fruition, the amount of petitioners’ debt to the respondent cannot be pegged
at ₱600,000.00 only.
We affirm the ruling of the appellate court with modifications.
First, it is a fact that petitioners owe respondent a debt of money. Both parties agree that of the
amount stipulated in the promissory note, ₱451,589.80 had already been given to petitioners
by the respondent. When petitioners informed respondent of their intention to desist from
continuing the project due to the impossibility of complying with the conditions in the
promissory note and deed of undertaking, that immediately rendered due and demandable any
amount advanced to them by the respondent. From this time onward, petitioners had the
obligation to pay respondent the amount of ₱451,589.80. On October 3, 1978, pursuant to
paragraph 11 of the Deed of Undertaking, the respondent formalized its demand and wrote the
petitioners, seeking immediate payment of ₱666,195.55, representing the amount of
petitioners’ obligation plus interest from August 18, 1978, excluding daily additional interest.
Second, it is improper for this Court to determine whether there was a compromise agreement
entered into by the parties. This Court is not a trier of facts, nor will it disturb the trial court’s
findings of fact, such findings being, as a rule, binding and conclusive.22 This doctrine admits
of only a few exceptions, such as when the findings are grounded entirely on speculation,
surmises or conjectures; when an interference made by the appellate court from its factual
findings is manifestly mistaken, absurd or impossible; when there is grave abuse of discretion
in the appreciation of facts; when the findings of the appellate court go beyond the issues of
the case, run contrary to the admissions of the parties to the case or fail to notice certain
relevant facts which, if properly considered, will justify a different conclusion; when there is a
misappreciation of facts; when the findings of fact are conclusions without mention of the
specific evidence on which they are based, are premised on the absence of evidence or are
contradicted by evidence on record.23 None of these exceptions are present in the case at bar.
From the onset of the trial, the Spouses Calina had advocated the theory that there had been a
novation of the contract they had entered into with DBP. Based on this stance and the
evidence presented by both parties, the trial court declared that it is an admitted fact that the
"DBP considered to condone interest and penalties, but this was subsequently revoked when
CALINA failed to comply with the condition to pay the amount of ₱600,000.00" and that "the
DBP novated the contract when it agreed to condone the interest and penalties but was
revoked by the failure of CALINA to pay the amount of ₱600,000.00." Petitioners did not
challenge this ruling of the trial court in the appellate court. They cannot now raise this issue
in their petition before this Court. To countenance such action would be unfair to the
respondent and offensive to the basic rules of fair play, justice and due process.24
There is no question that petitioners failed to comply with the original terms of the SO ORDERED.
agreement.1avvphi1 It is erroneous for the petitioners to blame the respondent for their failure
to comply with their contract. The respondent was well within right when it sought to sell the Republic of the Philippines
engine at public auction. Indeed, if the auction succeeded, it would have benefited all the SUPREME COURT
parties concerned, as the engine could have been sold at a much higher price. Manila

We note that throughout the proceedings before the trial court, the appellate court and before THIRD DIVISION
this Court, petitioners have not assailed the computation of their debt. Thus, it is settled that as
of August 18, 1978, petitioners owed ₱666,195.55 to the respondent. As of February 3, 1992,
petitioners had paid ₱550,000.00 to the respondent. G.R. No. 203133               February 18, 2015

Plainly, the petitioners have not fully paid their obligation to the respondent. Persons who YULIM INTERNATIONAL COMPANY LTD., JAMES YU, JONATHAN YU, and
receive loans of money are bound by law to pay to the creditor an equal amount of the same ALMERICK TIENG LIM, Petitioners,
quality.25 vs.
INTERNATIONAL EXCHANGE BANK (now Union Bank of the
Philippines), Respondent.
In addition, respondent had the right to demand interest on its loan based on their contract. In
their promissory note,26 petitioners agreed to pay 12% interest per annum on their loan. Article
1253 of the New Civil Code provides that, if the debt produces interest, payment of the DECISION
principal shall not be deemed to have been made until the interests have been
covered. The respondent is a bank. To hold that bank debtors should not pay interest on their REYES, J.:
loans would be anathema to the nature of any bank’s business. The charging of interest for
loans forms a very essential and fundamental element of the banking business. In fact, it may In the assailed Decision1 dated February 1, 2012 in CA-G.R. CV No. 95522, the Court of
be considered to be the very core of the banking’s existence or being.27 Appeals (CA) modified the Decision2 dated December 21, 2009 of the Regional Trial Court
(RTC) of Makati City, Branch 145, in Civil Case No. 02-749, holding that James Yu (James),
We now determine the obligation owed by petitioners to respondent. It is clear that petitioners Jonathan Yu (Jonathan) and Almerick Tieng Lim (Almerick), who were capitalist partners in
have to pay ₱666,195.55, plus 12% interest based on the principal amount of the debt, Yulim International Company Ltd. (Yulim), collectively called as the petitioners, were jointly
computed from August 18, 1978 to February 2, 1992. From this sum, the ₱550,000.00 paid by and severally liable with Yulim for its loan obligations with respondent International
petitioners must be deducted. The remaining balance, plus 12% interest thereto until the date Exchange Bank (iBank).
of full payment, constitute the liability of the petitioners to the respondent.
The Facts
Finally, we disallow the payment of attorney’s fees awarded by the appellate court. Attorney’s
fees partake of the nature of liquidated damages. It is true that the promissory note and the On June 2, 2000, iBank, a commercial bank, granted Yulim, a domestic partnership, a credit
deed of undertaking executed by the petitioners provided for the payment of attorney’s fees facility in the form of an Omnibus Loan Line for ₱5,000,000.00, as evidenced by a Credit
should respondent be forced to litigate. However, a fortuitous event, typhoon Asyang, caused Agreement3 which was secured by a Chattel Mortgage4 over Yulim’s inventories in its
the destruction of the fishing boat subject of the project. This supervening event, independent merchandise warehouse at 106 4th Street, 9th Avenue, Caloocan City. As further guarantee,
of the will of the obligor, cannot render the latter liable28 beyond the restitution of what they the partners, namely, James, Jonathan and Almerick, executed a Continuing Surety
may have received in advance from the creditor. Consequently, petitioners cannot be made to Agreement5in favor of iBank.
pay attorney’s fees on damages.29

Yulim availed of its aforesaid credit facility with iBank, as follows:

IN VIEW WHEREOF, the decision of the Court of Appeals is affirmed, with the modification
that the petitioners are ordered to pay to respondent the amount of ₱666,195.55, plus 12%
interest computed from August 18, 1978 until February 2, 1992. From this sum, ₱550,000.00, Promissory Note No. Face Value PN Date Date of Maturity
representing the previous payment of the petitioners, must be deducted. On the remaining
balance shall be added the payment of 12% interest, to be computed from February 3, 1992 2110005852 ₱1,298,926.00 10/26/2000 01/29/2001
until full payment.
2110006026 1,152,963.00 11/18/2000 02/05/2001

The award of attorney’s fees is deleted. 2110006344 499,890.00 12/04/2000 03/12/2001

2110006557 798,010.00 12/18/2000 04/23/2001
No pronouncement as to costs.
 2110100189 496,521.00 01/11/2001 05/07/20016
The above promissory notes (PN) were later consolidated under a single promissory note, PN
No. SADDK001014188, for ₱4,246,310.00, to mature on February 28, 2002.7 Yulim defaulted
on the said note. On April 5, 2002, iBank sent demand letters to Yulim, through its President,
James, and through Almerick,8 but without success. iBank then filed a Complaint for Sum of
Money with Replevin9 against Yulim and its sureties. On August 8, 2002, the Court granted
the application for a writ of replevin. Pursuant to the Sheriff’s Certificate of Sale dated
November 7, 2002,10 the items seized from Yulim’s warehouse were worth only ₱140,000.00,
not ₱500,000.00 as the petitioners have insisted.11
On October 2, 2002, the petitioners moved to dismiss the complaint insisting that their loan
had been fully paid after they assigned to iBank their Condominium Unit No. 141, with
parking space, at 20 Landsbergh Place in Tomas Morato Avenue, Quezon City. 12 They
claimed that while the pre-selling value of the condominium unit was ₱3.3 Million, its market
value has since risen to 5.5 Million.13 The RTC, however, did not entertain the motion to
dismiss for non-compliance with Rule 15 of the Rules of Court.
On May 16, 2006, the petitioners filed their Answer reiterating that they have paid their loan
by way of assignment of a condominium unit to iBank, as well as insisting that iBank’s
penalties and charges were exorbitant, oppressive and unconscionable.14
Ruling of the RTC
After trial on the merits, the RTC rendered judgment on December 21, 2009, the dispositive
portion of which reads, as follows:
WHEREFORE, in view of the foregoing considerations, the Court finds the individual
defendants James Yu, Jonathan Yu and Almerick Tieng Lim, not liable to the plaintiff, iBank,
hence the complaint against them is hereby DISMISSED for insufficiency of evidence,
without pronouncement as to cost.
This court, however, finds defendant corporation Yulim International Company Ltd. liable;
and it hereby orders defendant corporation to pay plaintiff the sum of ₱4,246,310.00 with
interest at 16.50% per annum from February 28, 2002 until fully paid plus cost of suit.
The counterclaims of defendants against plaintiff iBank are hereby DISMISSED for
insufficiency of evidence.
SO ORDERED.15
Thus, the RTC ordered Yulim alone to pay iBank the amount of ₱4,246,310.00, plus interest at
16.50% per annum from February 28, 2002 until fully paid, plus costs of suit, and dismissed
the complaint against petitioners James, Jonathan and Almerick, stating that there was no iota
of evidence that the loan proceeds benefited their families.16
The petitioners moved for reconsideration on January 12, 2010;17 iBank on January 19, 2010
likewise filed a motion for partial reconsideration.18 In its Joint Order19 dated March 8, 2010,
the RTC denied both motions.
Ruling of the CA
On March 23, 2010, Yulim filed a Notice of Partial Appeal, followed on March 30, 2010 by
iBank with a Notice of Appeal.
Yulim interposed the following as errors of the court a quo:
I. THE LOWER COURT ERRED IN ORDERING [YULIM] TO PAY [iBANK]
THE AMOUNT OF ₱4,246,310.00 WITH INTEREST AT 16.5% PER
ANNUMFROM FEBRUARY 28, 2002 UNTIL FULLY PAID.
II. THE LOWER COURT ERRED IN NOT ORDERING [iBANK] TO PAY
ATTORNEY’S FEES, MORAL DAMAGES AND EXEMPLARY DAMAGES.20
For its part, iBank raised the following as errors of the RTC:
I. THE TRIAL COURT ERRED IN NOT HOLDING INDIVIDUAL
[PETITIONERS JAMES, JONATHAN AND ALMERICK] SOLIDARILY
LIABLE WITH [YULIM] ON THE BASIS OF THE CONTINUING
SURETYSHIP AGREEMENT EXECUTED BY THEM.
II. THE TRIAL COURT ERRED IN NOT HOLDING ALL THE [PETITIONERS]
LIABLE FOR PENALTY CHARGES UNDER THE CREDIT AGREEMENT
AND PROMISSORY NOTES SUED UPON.
III. THE TRIAL COURT ERRED IN NOT HOLDING [THE PETITIONERS]
LIABLE TO [iBANK] FOR ATTORNEY’S FEES AND INDIVIDUAL
[PETITIONERS] JOINTLY AND SEVERALLY LIABLE WITH [YULIM] FOR
COSTS OF SUIT INCURRED BY [iBANK] IN ORDER TO PROTECT ITS
RIGHTS.21
Chiefly, the factual issue on appeal to the CA, raised by petitioners James, Jonathan and
Almerick, was whether Yulim’s loans have in fact been extinguished with the execution of a
Deed of Assignment of their condominium unit in favor of iBank, while the corollary legal
issue, raised by iBank, was whether they should be held solidarily liable with Yulim for its
loans and other obligations to iBank.
The CA ruled that the petitioners failed to prove that they have already paid Yulim’s
consolidated loan obligations totaling 4,246,310.00, for which it issued to iBank PN No.
SADDK001014188 for the said amount. It held that the existence of a debt having been
established, the burden to prove with legal certainty that it has been extinguished by payment
devolves upon the debtors who have offered such defense. The CA found the records bereft of
any evidence to show that Yulim had fully settled its obligation to iBank, further stating that
the so-called assignment by Yulim of its condominium unit to iBank was nothing but a mere
temporary arrangement to provide security for its loan pending the subsequent execution of a
real estate mortgage. Specifically, the CA found nothing in the Deed of Assignment which
could signify that iBank had accepted the said property as full payment of the petitioners’
loan. The CA cited Manila Banking Corporation v. Teodoro, Jr.22 which held that an
assignment to guarantee an obligation is in effect a mortgage and not an absolute conveyance
of title which confers ownership on the assignee.
Concerning the solidary liability of petitioners James, Jonathan and Almerick, the CA
disagreed with the trial court’s ruling that it must first be shown that the proceeds of the loan
redounded to the benefit of the family of the individual petitioners before they can be held
liable. Article 161 of the Civil Code and Article 121 of the Family Code cited by the RTC
apply only where the liability is sought to be enforced against the conjugal partnership itself.
In this case, regardless of whether the loan benefited the family of the individual petitioners,
they signed as sureties, and iBank sought to enforce the loan obligation against them as
sureties of Yulim.
Thus, the appellate court granted the appeal of iBank, and denied that of the petitioners, as
follows:
WHEREFORE, the foregoing considered, [iBank’s] appeal is PARTLY GRANTED while
[the petitioners’] appeal is DENIED. Accordingly, the appealed decision is hereby
MODIFIED in that [petitioners] James Yu, Jonathan Yu and A[l]merick Tieng Lim are hereby
held jointly and severally liable with defendant-appellant Yulim for the payment of the
monetary awards. The rest of the assailed decision is AFFIRMED.
SO ORDERED.23
Petition for Review to the Supreme Court
In the instant petition, the following assigned errors are before this Court:
1. The CA erred in ordering petitioners James, Jonathan and Almerick jointly and
severally liable with petitioner Yulim to pay iBank the amount of ₱4,246,310.00
with interest at 16.5% per annum from February 28, 2002 until fully paid.
2. The CA erred in not ordering iBank to pay the petitioners moral damages,
exemplary damages, and attorney’s fees.24
The petitioners insist that they have paid their loan to iBank. They maintain that the letter of
iBank to them dated May 4, 2001, which "expressly stipulated that the petitioners shall
execute a Deed of Assignment over one condominium unit No. 141, 3rd Floor and a parking
slot located at 20 Landsbergh Place, Tomas Morato Avenue, Quezon City," was with the
understanding that the Deed of Assignment, which they in fact executed, delivering also to
iBank all the pertinent supporting documents, would serve to totally extinguish their loan
obligation to iBank. In particular, the petitioners state that it was their understanding that upon
approval by iBank of their Deed of Assignment, the same "shall be considered as full and final
payment of the petitioners’ obligation." They further assert that iBank’s May 4, 2001 letter
expressly carried the said approval.
The petitioner invoked Article1255 of the Civil Code, on payment by cession, which provides:
Art. 1255. The debtor may cede or assign his property to his creditors in payment of his debts.
This cession, unless there is stipulation to the contrary, shall only release the debtor from
responsibility for the net proceeds of the thing assigned. The agreements which, on the effect
of the cession, are made between the debtor and his creditors shall be governed by special
laws. Ruling of the Court
The petition is bereft of merit.
Firstly, the individual petitioners do not deny that they executed the Continuing Surety
Agreement, wherein they "jointly and severally with the PRINCIPAL [Yulim], hereby
unconditionally and irrevocably guarantee full and complete payment when due, whether at
stated maturity, by acceleration, or otherwise, of any and all credit accommodations that have
been granted" to Yulim by iBank, including interest, fees, penalty and other charges.25Under
Article 2047 of the Civil Code, these words are said to describe a contract of suretyship. It
states: Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to
fulfill the obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4,
Chapter 3, Title I of this Book shall be observed. In such case the contract is called a
suretyship.
In a contract of suretyship, one lends his credit by joining in the principal debtor’s obligation
so as to render himself directly and primarily responsible with him without reference to the
solvency of the principal.26 According to the above Article, if a person binds himself solidarily
with the principal debtor, the provisions of Articles 1207 to 1222, or Section 4, Chapter 3,
Title I, Book IV of the Civil Code on joint and solidary obligations, shall be observed. Thus,
where there is a concurrence of two or more creditors or of two or more debtors in one and the
same obligation, Article 1207 provides that among them, "[t]here is a solidary liability only
when the obligation expressly so states, or when the law or the nature of the obligation
requires solidarity."
"A surety is considered in law as being the same party as the debtor in relation to whatever is
adjudged touching the obligation of the latter, and their liabilities are interwoven as to be
inseparable."27 And it is well settled that when the obligor or obligors undertake to be "jointly
and severally" liable, it means that the obligation is solidary,28 as in this case. There can be no
mistaking the same import of Article I of the Continuing Surety Agreement executed by the
individual petitioners:
ARTICLE I
LIABILITIES OF SURETIES
SECTION 1.01. The SURETIES, jointly and severally with the PRINCIPAL, hereby
unconditionally and irrevocably guarantee full and complete payment when due,
whether at stated maturity, by acceleration, or otherwise, of any and all credit
accommodations that have been granted or may be granted, renewed and/or
extended by the BANK to the PRINCIPAL. The liability of the SURETIES shall not
be limited to the maximum principal amount of FIVE MILLION PESOS
 (₱5,000,000.00) but shall include interest, fees, penalty and other charges due delivered to iBank. This is so because the petitioners would then execute a Deed of Real
thereon. Estate Mortgage over the property in favor of iBank as security for their loan obligations.

SECTION 1.02. This INSTRUMENT is a guarantee of payment and not merely of
collection and is intended to be a perfect and continuing indemnity in favor of the
BANK for the amounts and to the extent stated above.
The liability of the SURETIES shall be direct, immediate and not contingent upon the pursuit
of the BANK of whatever remedies it may have against the PRINCIPAL of the other
securities for the Accommodation.29
Thereunder, in addition to binding themselves "jointly and severally" with Yulim to
"unconditionally and irrevocably guarantee full and complete payment" of any and all credit
accommodations that have been granted to Yulim, the petitioners further warrant that their
liability as sureties "shall be direct, immediate and not contingent upon the pursuit [by] the
BANK of whatever remedies it may have against the PRINCIPAL of other securities." There
can thus be no doubt that the individual petitioners have bound themselves to be solidarily
liable with Yulim for the payment of its loan with iBank.
As regards the petitioners’ contention that iBank in its letter dated May 4, 2001 had
"accepted/approved" the assignment of its condominium unit in Tomas Morato Avenue as full
and final payment of their various loan obligations, the Court is far from persuaded. On the
contrary, what the letter accepted was only the collaterals provided for the loans, as well as the
consolidation of the petitioners’ various PN’s under one PN for their aggregate amount of
₱4,246,310.00. The letter goes on to spell out the terms of the new PN, such as, that its expiry
would be February 28, 2002 or a term of 360 days, that interest would be due every 90 days,
and that the rate would be based on the 91-day Treasury Bill rate or other market reference.
Respondent iBank certainly does not share the petitioners’ interpretation of its May 4,2001
letter. Joy Valerie Gatdula, Senior Bank Officer of iBank and the Vice President of iBank’s
Commercial Banking Group, declared in her testimony that the purpose of the Deed of
Assignment was merely to serve as collateral for their loan:
Q: And during the time that the defendant[,] James Yu[,] was negotiating with your bank, [is
it] not a fact that the defendant offered to you a [condominium] unit so that – that will
constitute full payment of his obligation?
A: No ma’am. It was not offered that way. It was offered as security or collateral to pay the
outstanding loans. But the premise is, that he will pay x x x in cash. So, that property was
offered as a security or collateral.
Q: That was your position?
A: That was the agreement and that was how the document was signed. It was worded out[.]
xxxx
Q: Do you remember if a real estate mortgage was executed over this property that was being
assigned to the plaintiff?
A: To my recollection, none at all.

Nowhere can it be remotely construed that the letter even intimates an understanding by iBank Q: Madam Witness, this Deed of Assignment was considered as full payment by the plaintiff
that the Deed of Assignment would serve to extinguish the petitioners’ loan. Otherwise, there bank, what document was executed by the plaintiff bank?
would have been no need for iBank to mention therein the three "collaterals" or "supports"
provided by the petitioners, namely, the Deed of Assignment, the Chattel Mortgage and the
Continuing Surety Agreement executed by the individual petitioners. In fact, Section 2.01 of A: It should have been a Dacion en Pago.
the Deed of Assignment expressly acknowledges that it is a mere "interim security for the
repayment of any loan granted and those that may be granted in the future by the BANK to the Q: Was there such document executed in this account?
ASSIGNOR and/or the BORROWER, for compliance with the terms and conditions of the
relevant credit and/or loan documents thereof."30 The condominium unit, then, is a mere
A: None.33
temporary security, not a payment to settle their promissory notes.31

To stress, the assignment being in its essence a mortgage, it was but a security and not a
Even more unmistakably, Section 2.02 of the Deed of Assignment provides that as soon as
satisfaction of the petitioners’ indebtedness.34 Article 125535 of the Civil Code invoked by the
title to the condominium unit is issued in its name, Yulim shall "immediately execute the
petitioners contemplates the existence of two or more creditors and involves the assignment of
necessary Deed of Real Estate Mortgage in favor of the BANK to secure the loan obligations
the entire debtor’s property, not a dacion en pago.36 Under Article 1245 of the Civil Code,
of the ASSIGNOR and/or the BORROWER." 32 This is a plain and direct acknowledgement
"[d]ationin payment, whereby property is alienated to the creditor in satisfaction of a debt in
that the parties really intended to merely constitute a real estate mortgage over the
money, shall be governed by the law on sales." Nowhere in the Deed of Assignment can it be
property.1âwphi1 In fact, the Deed of Assignment expressly states, by way of a resolutory
remotely said that a sale of the condominium unit was contemplated by the parties, the
condition concerning the purpose or use of the Deed of Assignment, that after the petitioners
consideration for which would consist of the amount of outstanding loan due to iBank from
have delivered or caused the delivery of their title to iBank, the Deed of Assignment shall then
the petitioners.
become null and void. Shorn of its legal efficacy as an interim security, the Deed of
Assignment would then become functus officio once title to the condominium unit has been
WHEREFORE, premises considered, the petition is DENIED.
SO ORDERED.
G.R. No. 156846             February 23, 2004
TEDDY G. PABUGAIS, petitioner  Respondent’s counsel, on the other hand, admitted that his office received petitioner’s letter
vs.
DAVE P. SAHIJWANI, respondent.
DECISION
YNARES-SANTIAGO, J.:
Assailed in this petition for review on certiorari is the January 16, 2003 Amended
Decision1 of the Court of Appeals2in CA-G.R. CV No. 55740 which set aside the November
29, 1996 Decision3 of the Regional Trial Court of Makati, Branch 64, in Civil Case No. 94-
2363.
Pursuant to an "Agreement And Undertaking"4 dated December 3, 1993, petitioner Teddy G.
Pabugais, in consideration of the amount of Fifteen Million Four Hundred Eighty Seven
Thousand Five Hundred Pesos (P15,487,500.00), agreed to sell to respondent Dave P.
Sahijwani a lot containing 1,239 square meters located at Jacaranda Street, North Forbes Park,
Makati, Metro Manila. Respondent paid petitioner the amount of P600,000.00 as
option/reservation fee and the balance of P14,887,500.00 to be paid within 60 days from the
execution of the contract, simultaneous with delivery of the owner’s duplicate Transfer
Certificate of Title in respondent’s name the Deed of Absolute Sale; the Certificate of Non-
Tax Delinquency on real estate taxes and Clearance on Payment of Association Dues. The
parties further agreed that failure on the part of respondent to pay the balance of the purchase
price entitles petitioner to forfeit the P600,000.00 option/reservation fee; while non-delivery
by the latter of the necessary documents obliges him to return to respondent the said
option/reservation fee with interest at 18% per annum, thus –
5. DEFAULT – In case the FIRST PARTY [herein respondent] fails to pay the balance of the
purchase price within the stipulated due date, the sum of P600,000.00 shall be deemed
forfeited, on the other hand, should the SECOND PARTY [herein petitioner] fail to deliver
within the stipulated period the documents hereby undertaken, the SECOND PARTY shall
return the sum of P600,000.00 with interest at 18% per annum.5
Petitioner failed to deliver the required documents. In compliance with their agreement, he
returned to respondent the latter’s P600,000.00 option/reservation fee by way of Far East Bank
& Trust Company Check No. 25AO54252P, which was, however, dishonored.
What transpired thereafter is disputed by both parties. Petitioner claimed that he twice
tendered to respondent, through his counsel, the amount of P672,900.00 (representing the
P600,000.00 option/reservation fee plus 18% interest per annum computed from December 3,
1993 to August 3, 1994) in the form of Far East Bank & Trust Company Manager’s Check
No. 088498, dated August 3, 1994, but said counsel refused to accept the same. His first
attempt to tender payment was allegedly made on August 3, 1994 through his
messenger;6 while the second one was on August 8, 1994,7 when he sent via DHL Worldwide
Services, the manager’s check attached to a letter dated August 5, 1994.8 On August 11, 1994,
petitioner wrote a letter to respondent saying that he is consigning the amount tendered with
the Regional Trial Court of Makati City.9 On August 15, 1994, petitioner filed a complaint for
consignation.10
dated August 5, 1994, but claimed that no check was appended thereto. 11 He averred that there
was no valid tender of payment because no check was tendered and the computation of the
amount to be tendered was insufficient,12 because petitioner verbally promised to pay 3%
monthly interest and 25% attorney’s fees as penalty for default, in addition to the interest of
18% per annum on the P600,000.00 option/reservation fee.13
On November 29, 1996, the trial court rendered a decision declaring the consignation invalid
for failure to prove that petitioner tendered payment to respondent and that the latter refused to
receive the same. It further held that even assuming that respondent refused the tender, the
same is justified because the manager’s check allegedly offered by petitioner was not legal
tender, hence, there was no valid tender of payment. The trial court ordered petitioner to pay
respondent the amount of P600,000.00 with interest of 18% per annum from December 3,
1993 until fully paid, plus moral damages and attorney’s fees.14
Petitioner appealed the decision to the Court of Appeals. Meanwhile, his counsel, Atty.
Wilhelmina V. Joven, died and she was substituted by Atty. Salvador P. De Guzman, Jr.15 On
December 20, 2001, petitioner executed a "Deed of Assignment"16 assigning in favor of Atty.
De Guzman, Jr., part of the P672,900.00 consigned with the trial court as partial payment of
the latter’s attorney’s fees.17 Thereafter, on January 7, 2002, petitioner filed an Ex Parte
Motion to Withdraw Consigned Money.18 This was followed by a "Motion to Intervene" filed
by Atty. De Guzman, Jr., praying that the amount consigned be released to him by virtue of
the Deed of Assignment.19
Petitioner’s motion to withdraw the amount consigned was denied by the Court of Appeals
and the decision of the trial court was affirmed with modification as to the amount of moral
damages and attorney’s fees.20
On a motion for reconsideration, the Court of Appeals declared the consignation as valid in an
Amended Decision dated January 16, 2003. It held that the validity of the consignation had the
effect of extinguishing petitioner’s obligation to return the option/reservation fee to
respondent. Hence, petitioner can no longer withdraw the same. The decretal portion of the
Amended Decision states:
WHEREFORE, premises considered, our decision dated April 26, 2002 is RECONSIDERED.
The trial court’s decision is hereby REVERSED and SET ASIDE, and a new one is entered
(1) DECLARING as valid the consignation by the plaintiff-appellant in favor of defendant-
appellee of the amount of P672,900.00 with the Makati City RTC Clerk of Court and
deposited under Official Receipt No. 379061 dated 15 August 1994 and (2) DECLARING as
extinguished appellant’s obligation in favor of appellee under paragraph 5 of the parties’
"AGREEMENT AND UNDERTAKING". Neither party shall recover costs from the other.
SO ORDERED.21
Unfazed, petitioner filed the instant petition for review contending, inter alia, that he can
withdraw the amount deposited with the trial court as a matter of right because at the time he
moved for the withdrawal thereof, the Court of Appeals has yet to rule on the consignation’s
validity and the respondent had not yet accepted the same.
The resolution of the case at bar hinges on the following issues: (1) Was there a valid
consignation? and (2) Can petitioner withdraw the amount consigned as a matter of right?
Consignation is the act of depositing the thing due with the court or judicial authorities
whenever the creditor cannot accept or refuses to accept payment and it generally requires a
prior tender of payment.22 In order that consignation may be effective, the debtor must show
that: (1) there was a debt due; (2) the consignation of the obligation had been made because
the creditor to whom tender of payment was made refused to accept it, or because he was
absent or incapacitated, or because several persons claimed to be entitled to receive the
amount due or because the title to the obligation has been lost; (3) previous notice of the
consignation had been given to the person interested in the performance of the obligation; (4)
the amount due was placed at the disposal of the court; and (5) after the consignation had been
made the person interested was notified thereof. Failure in any of these requirements is enough
ground to render a consignation ineffective.23
The issues to be resolved in the instant case concerns one of the important requisites of
consignation, i.e, the existence of a valid tender of payment. As testified by the counsel for
respondent, the reasons why his client did not accept petitioner’s tender of payment were – (1)
the check mentioned in the August 5, 1994 letter of petitioner manifesting that he is settling
the obligation was not attached to the said letter; and (2) the amount tendered was insufficient
to cover the obligation. It is obvious that the reason for respondent’s non-acceptance of the
tender of payment was the alleged insufficiency thereof – and not because the said check was
not tendered to respondent, or because it was in the form of manager’s check. While it is true
that in general, a manager’s check is not legal tender, the creditor has the option of refusing or
accepting it.24 Payment in check by the debtor may be acceptable as valid, if no prompt
objection to said payment is made. 25 Consequently, petitioner’s tender of payment in the form
of manager’s check is valid.
Anent the sufficiency of the amount tendered, it appears that only the interest of 18% per
annum on the P600,000.00 option/reservation fee stated in the default clause of the
"Agreement And Undertaking" was agreed upon by the parties, thus –
5. DEFAULT – In case the FIRST PARTY [herein respondent] fails to pay the balance of the
purchase price within the stipulated due date, the sum of P600,000.00 shall be deemed
forfeited, on the other hand, should the SECOND PARTY [herein petitioner] fail to deliver
within the stipulated period the documents hereby undertaken, the SECOND PARTY shall
return the sum of P600,000.00 with interest at 18% per annum.26
The manager’s check in the amount of P672,900.00 (representing the P600,000.00
option/reservation fee plus 18% interest per annum computed from December 3, 1993 to
August 3, 1994) which was tendered but refused by respondent, and thereafter consigned with
the court, was enough to satisfy the obligation.
There being a valid tender of payment in an amount sufficient to extinguish the obligation, the
consignation is valid.
As regards petitioner’s right to withdraw the amount consigned, reliance on Article 1260 of
the Civil Code is misplaced. The said Article provides –
Art. 1260. Once the consignation has been duly made, the debtor may ask the judge to order
the cancellation of the obligation.
Before the creditor has accepted the consignation, or before a judicial confirmation that the
consignation has been properly made, the debtor may withdraw the thing or the sum deposited,
allowing the obligation to remain in force.
The amount consigned with the trial court can no longer be withdrawn by petitioner because
respondent’s prayer in his answer that the amount consigned be awarded to him is equivalent
to an acceptance of the consignation, which has the effect of extinguishing petitioner’s
obligation.
Moreover, petitioner failed to manifest his intention to comply with the "Agreement And
Undertaking" by delivering the necessary documents and the lot subject of the sale to
respondent in exchange for the amount deposited. Withdrawal of the money consigned would
enrich petitioner and unjustly prejudice respondent.
The withdrawal of the amount deposited in order to pay attorney’s fees to petitioner’s counsel,
Atty. De Guzman, Jr., violates Article 1491 of the Civil Code which forbids lawyers from
acquiring by assignment, property and rights which are the object of any litigation in which
they may take part by virtue of their profession.27 Furthermore, Rule 10 of the Canons of
Professional Ethics provides that "the lawyer should not purchase any interest in the subject
matter of the litigation which he is conducting." The assailed transaction falls within the
prohibition because the Deed assigning the amount of P672,900.00 to Atty. De Guzman, Jr., as
part of his attorney’s fees was executed during the pendency of this case with the Court of
Appeals. In his Motion to Intervene, Atty. De Guzman, Jr., not only asserted ownership over
said amount, but likewise prayed that the same be released to him. That petitioner knowingly
and voluntarily assigned the subject amount to his counsel did not remove their agreement
within the ambit of the prohibitory provisions.28 To grant the withdrawal would be to sanction
a void contract.29
WHEREFORE, in view of all the foregoing, the instant petition for review is DENIED. The
January 16, 2003 Amended Decision of the Court of Appeals in CA-G.R. CV No. 55740,
which declared the consignation by the petitioner in favor of respondent of the amount of
P672,900.00 with the Clerk of Court of the Regional Trial Court of Makati City valid, and
which declared petitioner’s obligation to respondent under paragraph 5 of the "Agreement
And Undertaking" as having been extinguished, is AFFIRMED. No costs.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 181723               August 11, 2014
ELIZABETH DEL CARMEN, Petitioner, 
vs.
SPOUSES RESTITUTO SABORDO and MIMA MAHILUM-SABORDO, Respondents.
DECISION
PERALTA, J.:
This treats of the petition for review on certiorari assailing the Decision 1 and Resolution2 of
the Court of Appeals (CA), dated May 25, 2007 and January 24, 2008, respectively, in CA-
G.R. CV No. 75013.
The factual and procedural antecedents of the case are as follows:
Sometime in 1961, the spouses Toribio and Eufrocina Suico (Suico spouses), along with
several business partners, entered into a business venture by establishing a rice and com mill at
Mandaue City, Cebu. As part of their capital, they obtained a loan from the Development
Bank of the Philippines (DBP), and to secure the said loan, four parcels of land owned by the
Suico spouses, denominated as Lots 506, 512, 513 and 514, and another lot owned by their
business partner, Juliana Del Rosario, were mortgaged. Subsequently, the Suico spouses and
their business partners failed to pay their loan obligations forcing DBP to foreclose the
mortgage. After the Suico spouses and their partners failed to redeem the foreclosed
properties, DBP consolidated its ownership over the same. Nonetheless, DBP later allowed the
Suico spouses and Reginald and Beatriz Flores (Flores spouses), as substitutes for Juliana Del
Rosario, to repurchase the subject lots by way of a conditional sale for the sum of
₱240,571.00. The Suico and Flores spouses were able to pay the downpayment and the first
monthly amortization, but no monthly installments were made thereafter. Threatened with the
cancellation of the conditional sale, the Suico and Flores spouses sold their rights over the said
properties to herein respondents Restituto and Mima Sabordo, subject to the condition that the
latter shall pay the balance of the sale price. On September 3, 1974, respondents and the Suico
and Flores spouses executed a supplemental agreement whereby they affirmed that what was
actually sold to respondents were Lots 512 and 513, while Lots 506 and 514 were given to
them as usufructuaries. DBP approved the sale of rights of the Suico and Flores spouses in
favor of herein respondents. Subsequently, respondents were able to repurchase the foreclosed
properties of the Suico and Flores spouses.
On September 13, 1976, respondent Restituto Sabordo (Restituto) filed with the then Court of
First Instance of Negros Occidental an original action for declaratory relief with damages and
prayer for a writ of preliminary injunction raising the issue of whether or not the Suico
spouses have the right to recover from respondents Lots 506 and 514.
In its Decision dated December 17, 1986, the Regional Trial Court (RTC) of San Carlos City,
Negros Occidental, ruled in favor of the Suico spouses directing that the latter have until
August 31, 1987 within which to redeem or buy back from respondents Lots 506 and 514.
On appeal, the CA, in its Decision3 in CA-G.R. CV No. 13785, dated April 24, 1990, modified
the RTC decision by giving the Suico spouses until October 31, 1990 within which to exercise
their option to purchase or redeem the subject lots from respondents by paying the sum of
₱127,500.00. The dispositive portion of the CADecision reads as follows:
xxxx
For reasons given, judgment is hereby rendered modifying the dispositive portion of [the]
decision of the lower court to read:
1) The defendants-appellees are granted up to October 31, 1990 within which
toexercise their option to purchase from the plaintiff-appellant Restituto Sabordo
and Mima Mahilum Lot No. 506, covered by Transfer Certificate of Title No. T-
102598 and Lot No. 514, covered by Transfer Certificate of Title No. T-102599,
both of Escalante Cadastre, Negros Occidental by reimbursing or paying to the
plaintiff the sum of ONE HUNDRED TWENTY-SEVEN THOUSAND FIVE
HUNDRED PESOS (₱127,500.00);
2) Within said period, the defendants-appellees shall continue to have usufructuary
rights on the coconut trees on Lots Nos. 506 and 514, Escalante Cadastre, Negros
Occidental;
3) The Writ of Preliminary Injunction dated August 12, 1977 shall be effective
untildefendants-appellees shall have exercised their option to purchase within said
period by paying or reimbursing to the plaintiff-appellant the aforesaid amount.
No pronouncement as to costs.
SO ORDERED.4
In a Resolution5 dated February 13, 1991, the CA granted the Suico spouses an additional
period of 90 days from notice within which to exercise their option to purchase or redeem the
disputed lots.
In the meantime, Toribio Suico (Toribio) died leaving his widow, Eufrocina, and several
others, includingherein petitioner, as legal heirs. Later, they discovered that respondents
mortgaged Lots 506 and 514 with Republic Planters Bank (RPB) as security for a loan which,
subsequently, became delinquent.
Thereafter, claiming that theyare ready with the payment of ₱127,500.00, but alleging that
they cannot determine as to whom such payment shall be made, petitioner and her co-heirs
filed a Complaint6 with the RTC of San Carlos City, Negros Occidental seeking to compel
herein respondents and RPB to interplead and litigate between themselves their respective
interests on the abovementioned sum of money.1âwphi1 The Complaint also prayed that
respondents be directed to substitute Lots 506 and 514 with other real estate properties as
collateral for their outstanding obligation with RPB and that the latter be ordered toaccept the
substitute collateral and release the mortgage on Lots 506 and 514. Upon filing of their
complaint, the heirs of Toribio deposited the amount of ₱127,500.00 with the RTC of San
Carlos City, Branch 59.
Respondents filed their Answer7 with Counterclaim praying for the dismissal of the above
Complaint on the grounds that (1) the action for interpleader was improper since RPB isnot
laying any claim on the sum of ₱127,500.00; (2) that the period withinwhich the complainants
are allowed to purchase Lots 506 and 514 had already expired; (3) that there was no valid
consignation, and (4) that the case is barred by litis pendenciaor res judicata.
On the other hand, RPB filed a Motion to Dismiss the subject Complaint on the ground that
petitioner and her co-heirs had no valid cause of action and that they have no primary legal
right which is enforceable and binding against RPB.
On December 5, 2001, the RTC rendered judgment, dismissing the Complaint of petitioner
and her co-heirs for lack of merit.8 Respondents' Counterclaim was likewise dismissed.
Petitioner and her co-heirs filed an appeal with the CA contending that the judicial deposit or
consignation of the amount of ₱127,500.00 was valid and binding and produced the effect of
payment of the purchase price of the subject lots.
In its assailed Decision, the CA denied the above appeal for lack of merit and affirmed the
disputed RTC Decision.
Petitioner and her co-heirs filed a Motion for Reconsideration,9 but it was likewise denied by
the CA.
Hence, the present petition for review on certiorariwith a lone Assignment of Error, to wit:
THE COURT OF APPEALS ERRED IN AFFIRMING THE DECISION OF THE LOWER
COURT WHICH HELD THAT THE JUDICIAL DEPOSIT OF ₱127,500.00 MADE BY
THE SUICOS WITH THE CLERK OF COURT OF THE RTC, SAN CARLOS CITY, IN
COMPLIANCE WITH THE FINAL AND EXECUTORY DECISION OF THE COURT OF
APPEALS IN CA-G.R. CV-13785 WAS NOT VALID.10
Petitioner's main contention is that the consignation which she and her co-heirs made was a
judicial deposit based on a final judgment and, as such, does not require compliance with the
requirements of Articles 125611 and 125712of the Civil Code.
The petition lacks merit. At the outset, the Court quotes withapproval the discussion of the CA
regarding the definition and nature of consignation, to wit: … consignation [is] the act of
depositing the thing due with the court or judicial authorities whenever the creditor cannot
accept or refuses to accept payment, and it generally requires a prior tender of payment. It
should be distinguished from tender of payment which is the manifestation by the debtor to the
creditor of his desire to comply with his obligation, with the offer of immediate
performance.Tender is the antecedent of consignation, thatis, an act preparatory to the
consignation, which is the principal, and from which are derived the immediate consequences
which the debtor desires or seeks to obtain. Tender of payment may be extrajudicial, while
consignation is necessarily judicial, and the priority of the first is the attempt to make a private
settlement before proceeding to the solemnities of consignation. Tender and consignation,
where validly made, produces the effect of payment and extinguishes the obligation.13
In the case of Arzaga v. Rumbaoa, 14 which was cited by petitioner in support of his contention,
this Court ruled that the deposit made with the court by the plaintiff-appellee in the saidcase is
considered a valid payment of the amount adjudged, even without a prior tender of payment
thereof to the defendants-appellants,because the plaintiff-appellee, upon making such deposit,
expressly petitioned the court that the defendants-appellees be notified to receive the tender of
payment.This Court held that while "[t]he deposit, by itself alone, may not have been
sufficient, but with the express terms of the petition, there was full and complete offer of
payment made directly to defendants-appellants."15 In the instant case, however, petitioner and
her co-heirs, upon making the deposit with the RTC, did not ask the trial court that
respondents be notified to receive the amount that they have deposited. In fact, there was no
tender of payment. Instead, what petitioner and her co-heirs prayed for is thatrespondents and
RPB be directed to interplead with one another to determine their alleged respective rights
over the consigned amount; that respondents be likewise directed to substitute the subject lots
with other real properties as collateral for their loan with RPB and that RPB be also directed to
accept the substitute real properties as collateral for the said loan. Nonetheless,the trial court
correctly ruled that interpleader is not the proper remedy because RPB did notmake any claim
whatsoever over the amount consigned by petitioner and her co-heirs with the court.
In the cases of Del Rosario v. Sandico16 and Salvante v. Cruz,17 likewise cited as authority by
petitioner, this Court held that, for a consignation or deposit with the court of an amount due
on a judgment to be considered as payment, there must beprior tender to the judgment creditor
who refuses to accept it. The same principle was reiterated in the later case of Pabugais v.
Sahijwani.18 As stated above, tender of payment involves a positive and unconditional act by
the obligor of offering legal tender currency as payment to the obligee for the former’s
obligation and demanding that the latter accept the same. 19 In the instant case, the Court finds
no cogent reason to depart from the findings of the CA and the RTC that petitioner and her co-
heirs failed to make a prior valid tender of payment to respondents.
It is settled that compliance with the requisites of a valid consignation is mandatory. 20 Failure
to comply strictly with any of the requisites will render the consignation void. One of these
requisites is a valid prior tender of payment.21
Under Article 1256, the only instances where prior tender of payment is excused are: (1) when
the creditor is absent or unknown, or does not appear at the place of payment; (2) when the
creditor is incapacitated to receive the payment at the time it is due; (3) when, without just
cause, the creditor refuses to give a receipt; (4) when two or more persons claim the same right
to collect; and (5) when the title of the obligation has been lost. None of these instances are
present in the instant case. Hence, the fact that the subject lots are in danger of being
foreclosed does not excuse petitioner and her co-heirs from tendering payment to respondents,
as directed by the court.
WHEREFORE, the instant petition is DENIED. The Decision of the Court of Appeals, dated
May 25, 2007, and its Resolution dated January 24, 2008, both in CA-G.R. CV No. 75013, are
AFFIRMED.
SO ORDERED.
G.R. No. 153134             June 27, 2006
BANCO FILIPINO SAVINGS AND MORTGAGE BANK, Petitioner,  petitioner bank was declared in default. In addition to the facts established in the previous
vs.
ANTONIO G. DIAZ and ELSIE B. DIAZ, Respondents.
DECISION
CALLEJO, SR., J.:
Before the Court is the Petition for Review on Certiorari filed by Banco Filipino Savings and
Mortgage Bank of the Decision1 dated November 12, 2001 of the Court of Appeals (CA) in
CA-G.R. SP No. 64475 allowing respondents spouses Antonio and Elsie Diaz to withdraw
their deposit on consignation in the amount of P1,034,600.002 held by the Regional Trial
Court (RTC) of Makati City, Branch 61. The assailed decision reversed and set aside the
orders of the said lower court which had denied the respondents' motion to withdraw deposit.
Likewise assailed is the Resolution of April 12, 2002 of the appellate court denying the
reconsideration of the assailed decision.
The present case is an offshoot of the CA Decision3 of October 31, 1990 in CA-G.R. SP No.
21089 and Decision4 of November 14, 1997 in CA-G.R. CV No. 42899, both of which had
already become final and executory. As culled therefrom and from the pleadings filed by the
parties in the present case, the factual and procedural antecedents are as follows:
On March 8, 1979, spouses Antonio and Elsie Diaz (the respondents) secured a loan from
Banco Filipino Savings and Mortgage Bank (petitioner bank) in the amount of P400,000.00
bearing an interest rate of 16% per annum. In November 1982, the said loan was restructured
or consolidated in the increased amount of P3,163,000.00 payable within a period of 20 years
at an interest rate of 21% per annum. The obligation was to be paid in equal monthly
amortization of P56,227.00, and secured by a real estate mortgage over two commercial lots
situated at Bolton and Bonifacio Streets in Davao City. As additional collateral, the
respondents assigned the rentals on the mortgaged properties in favor of petitioner bank.
Despite repeated demands made on them, the respondents defaulted in the payment of their
obligation beginning October 1986. Before petitioner bank could institute the proceedings to
foreclose on the mortgaged properties, the respondents filed with the RTC of Davao City a
complaint for "Declaration of Interest Rates and Penalty Charges as Unconscionable and Its
Reduction, Reformation of Contract, Annulment of Assignment of Rentals, Damages and
Attorney's Fees with Injunction," docketed as Civil Case No. 17840. The RTC of Davao City
(Branch 12) denied the application for the issuance of a writ of preliminary injunction. It held
that, by respondent Antonio Diaz' own admission, the respondents had been remiss in paying
the amortization as agreed upon in the contract; hence, the conditions in the real estate
mortgage contract had been violated. As such, petitioner bank could rightfully foreclose the
mortgaged properties. On appeal by the respondent spouses, the CA, in its Decision of
October 31, 1990 in CA-G.R. SP No. 21089, affirmed the said Order of the RTC of Davao
City.
Thereafter, the respondents filed another complaint with the RTC of Makati City for
"Consignation and Declaration of Cancellation of Obligation, with Prayer for Issuance of a
Preliminary Injunction and Temporary Restraining Order." The case was docketed as Civil
Case No. 91-3090, and raffled to Branch 61 of the said RTC. For failure to file its answer,
case, the RTC of Makati City, based on the ex parte evidence of the respondents, made the
finding that during the period of January 3, 1983 and January 25, 1985, when petitioner bank
was ordered closed by the Central Bank, the respondents paid a total amount
of P1,311,308.48. Further, as of January 25, 1985, the respondents' total obligation amounted
to P3,391,501.99. The respondents made additional payments from February 11, 1985 until
September 1991 amounting to P2,356,910.00. If these additional payments were to be applied
to the principal, the remaining balance would only be P1,034,600.00 as of September 16,
1991. The respondents tried to settle their account by tendering the sum of P1,034,600.00 as
full payment of their loan obligation. However, petitioner bank, through its then Liquidator
Ricardo P. Lirio, refused to accept the said amount. According to petitioner bank, the
respondents' obligation at that time amounted to P10,160,649.13.
The respondents then deposited by way of consignation with the RTC of Makati City, a
manager's check dated December 5, 1991, in the amount of P1,034,600.00 as full payment of
their loan obligation. Petitioner bank was duly informed of such consignation.
In its Decision dated March 6, 1992, the RTC of Makati City ruled that the respondents' total
obligation to petitioner bank amounted only to P1,034,600.00 exclusive of interests, and the
latter could not charge and/or collect any interest during the time that it was closed by the
Central Bank as, in fact, banks that were ordered closed by the Central Bank ceased to be
liable for the payment of interests on deposits. It also considered the deposited check as
consignation of the respondents' entire debt and that there was a valid consignation.
Accordingly, the respondents' obligation to petitioner bank was declared as fully paid and/or
cancelled.
On appeal by petitioner bank, the CA, in its Decision dated November 14, 1997 in CA-G.R.
CV No. 42899, reversed and set aside the decision of the RTC of Makati City. On the
procedural aspect, the CA found that the lower court erred in denying petitioner bank's motion
to lift order of default. Regarding the substantive issue, the CA held that the lower court
likewise erroneously declared that petitioner bank, during the time that it was ordered closed
by the Central Bank, could not charge or collect interests on the respondents' loan obligation.
Citing the principle of unjust enrichment, the CA posited that it was with more reason that
distressed banks, like petitioner bank, should be allowed to collect interests on the loans that
they had extended to their borrowers. According to the CA, the fact that distressed banks were
freed from the obligation to pay any interest due on deposits when they were closed and
ordered to stop operations did not mean that their borrowers were similarly freed from their
contractual obligation to pay interests. It distinguished the contracts between the banks and
their depositors from those between the banks and their borrowers.
The CA declared that the deposited amount of P1,034,600.00 failed to effect a valid
consignation in law because it did not include all interests due. It ratiocinated that for a valid
consignation to exist, the tender of the principal must be accompanied with the tender of
interests which had accrued; otherwise, the said tender would not be effective. The CA then
reversed and set aside the decision of the RTC of Makati City and entered a new one
dismissing Civil Case No. 91-3090.
The subsequent facts pertain to the case now before the Court:
Upon finality of the decision of the CA in CA-G.R. CV No. 42899, declaring that there was no
valid consignation and dismissing Civil Case No. 91-3090, the respondents filed with the RTC
of Makati City a motion to withdraw deposit. They averred therein that with the finality of the
CA decision dismissing their complaint, they are now withdrawing the amount
of P1,034,600.00 which they had deposited by way of consignation with the said lower court.
In addition, they alleged that their loan obligation was eventually settled with the payment of
the amount of P25,000,000.00 through negotiations made with petitioner bank by the brothers
James and Francisco Gaisano as attorneys-in-fact of the respondents. Upon such payment,
Corazon L. Costan, petitioner bank's 2nd Assistant Vice-President and Davao Main Branch
Manager, issued on February 10, 1999 the Cancellation of the Real Estate Mortgage over the
respondents' commercial lots. According to the respondents, there was no longer any obstacle
to the immediate release of their deposit. They prayed that they be allowed to withdraw the
money which they deposited on consignation with the said court (RTC of Makati City).
Petitioner bank opposed the respondents' motion. It alleged that as of December 31, 1998, the
respondents' loan obligation stood at P28,810,330.51. Petitioner bank asserted that the deposit
in question should be released to it as part of the full payment of the respondents' obligation. It
maintained that it accepted the said consignation; hence, the respondents could no longer
withdraw the said amount.
Petitioner bank refuted the respondents' claim that there was already full payment of their
obligation with the payment by the Gaisanos of P25,000,000.00. Petitioner bank stated that it
negotiated with the Gaisanos on January 7, 1999 and the sum agreed thereon was allegedly for
the payment of the respondents' obligation as of December 31, 1998 which amounted
to P28,810,330.51. Petitioner bank added that during this negotiation, it took into account and
deducted from the said total obligation the amounts of P1,462,901.00, representing the
payments made by the respondents in 1990 and 1991, and P1,034,600.00, representing the
deposit made by the respondents with the RTC of Makati City. The net obligation of the
respondents after deducting these amounts stood at P26,312,828.52 and it was this amount that
petitioner bank agreed to be settled with the payment by the Gaisanos of P25,100,000.00,
not P25,000,000.00 as alleged by the respondents.
Petitioner bank accused the respondents of being in bad faith in that while its negotiation with
the Gaisanos had not yet been finalized, the respondents sought to withdraw the deposit in
question - which was part of the consideration that induced petitioner bank to agree to settle
the respondents' obligation with the payment by the Gaisanos of P25,100,000.00 Petitioner
bank prayed that the deposit in question be released to it in order that it could be applied to the
respondents' total loan obligation.
After consideration of the parties' respective arguments, the RTC of Makati City issued the
Order dated July 31, 2000 stating as follows:
Acting on the Motion to Withdraw Deposit mailed by plaintiff[s], [the respondents herein] on
26 January 1999 in Davao City with Opposition thereto filed by defendant Banco Filipino
Savings and Mortgage Bank on 08 February 1999.
It appears on record that the Complaint for Consignation filed by the plaintiff[s] before this
Court, dated 13 December 1991 and was dismissed by the Court of Appeals on 14 November
1997 which found that the deposited amount of P1,034,600.00 did not include the interest due
and was not in full satisfaction of the defendant's claim and there was no valid tender of
payment and consignation.
The dismissal of the complaint for Consignation by the Appellate Court did not absolve the
obligation of plaintiff to apply the consignation to the outstanding obligation to the defendant
and thus, the deposited amount may still be applied for payment of the obligation after due
hearing on the deficiency claim of the defendant against the plaintiff.
WHEREFORE, in view of the foregoing, the MOTION TO WITHDRAW DEPOSIT is hereby
DENIED for lack of merit.
SO ORDERED.5
The respondents sought the reconsideration thereof but the RTC of Makati City denied their
motion in its Order dated December 14, 2000. They then filed with the CA a Petition for
Certiorari alleging grave abuse of discretion on the part of the presiding judge 6 of the said
lower court in promulgating the orders denying their motion to withdraw deposit.
Acting on the said petition, the CA rendered the Decision dated November 12, 2001 in CA-
G.R. SP No. 64475 reversing and setting aside the Orders dated July 31, 2000 and December
14, 2000 of the RTC of Makati City. It declared that the respondents had the statutory
unilateral right to withdraw their deposit by way of consignation because there was no
acceptance of the same by petitioner bank. On this point, the CA relied on Article 1260 of the
Civil Code which provides, in part, that "[b]efore the creditor has accepted the consignation,
or before a judicial declaration that the consignation has been properly made, the debtor may
withdraw the thing or sum deposited, allowing the obligation to remain in force."
The CA stressed that petitioner bank had not "performed any prior unmistakable and
deliberate act denominating a preemptive acceptance of the deposit in partial settlement of the
loan obligation."7 The claim of "acceptance" was found to be an afterthought on the part of
petitioner bank and proffered for the sole purpose of opposing the respondents' motion to
withdraw deposit.
Even assuming that there was acceptance by petitioner bank, the CA opined that such
acceptance must retroact to December 5, 1991 when the deposit was judicially made. In such a
case, petitioner bank's computation of the respondents' outstanding loan obligation would have
to be modified and reduced accordingly because the interest rate of 21% would then have to be
applied to the reduced loan balance as of December 5, 1991.
The CA strongly condemned the fact that the respondents' original loan of P400,000.00 in
1972 ballooned to P28,810,330.51 as of December 31, 1998 based on petitioner bank's
statement of account. The principal amount plus interests, surcharges, insurance premiums,
sheriff's and attorney's fees, notarization fees, etc., all added up to the respondents' outstanding
balance. According to the CA, the surcharges for missed monthly payments that petitioner
bank charged the respondents amounted to twice as much as the 21% interest rate, resulting in
an effective interest rate of more than 60% per annum. Citing Medel v. Court of Appeals,8 this
rate was characterized by the CA as "excessive, iniquitous, unconscionable and exorbitant"
and likened petitioner bank to Shylock, the moneylender in William Shakespeare's The
Merchant of Venice, who asked for a literal pound of flesh as payment for the money he lent.
The CA found as credible the respondents' claim that, on their behalf, the Gaisanos had
secured a compromise agreement with petitioner bank with the payment of P25,100,000.00
and, consequently, the mortgage over the respondents' commercial lots was cancelled. Further,
the auction sale of these properties which was scheduled on January 27, 1999 was cancelled
by petitioner bank itself in its letter to the Sheriff.
The dispositive portion of the assailed decision of the CA reads:
WHEREFORE, the foregoing premises considered, the petitioners' [the respondents herein]
petition for certiorari is GRANTED. The Orders dated July 31, 2000 and December 14, 2000
of the public court in Civil Case No. 91-3090 are REVERSED and SET ASIDE, and another
one entered allowing the withdrawal by the petitioners of their deposit of P1,034,600.00 held
in custodia legis with said court. No costs.
SO ORDERED.9
Petitioner bank sought the reconsideration of the said decision but the CA, in its Resolution
dated April 12, 2002, denied its motion. Hence, petitioner bank's recourse to the Court.
The basic contention of petitioner bank is that the CA erred in reversing the Orders dated July
31, 2000 and December 14, 2000 of the RTC 
of Makati City which had denied the respondents' motion to withdraw deposit. Petitioner bank
posits that the said lower court did not commit grave abuse of discretion in issuing the said
orders because, as stated in the CA Decision of November 14, 1997 in CA-G.R. CV No.
42899, there was no valid consignation since the amount tendered (P1,034,600.00) by the
respondents did not include the interests that accrued on the principal and, therefore, was not
in full settlement of their outstanding obligation. Petitioner bank maintains that the dismissal
of the respondents' complaint for consignation in Civil Case No. 91-3090 did not discharge
their obligation to petitioner bank. Hence, the deposited amount may still be applied to the
payment of such obligation.
Petitioner bank claims that it accepted the respondents' deposit on consignation as partial
payment of their obligation after the CA had declared the same to have been improperly made
and ineffective to discharge the respondents of their obligation to petitioner bank. The RTC of
Makati City thus did not allegedly commit grave abuse of discretion in holding that the
deposited amount of P1,034,600.00 may still be applied to the payment of their outstanding
obligation of P28,810,330.51 as of December 31, 1998.
It is likewise petitioner bank's view that respondents erroneously resorted to the remedy of
certiorari in assailing the orders of the RTC of Makati City. By filing their motion to withdraw
deposit with the said lower court, the respondents allegedly recognized its jurisdiction and
assuming arguendo that it committed an error in the exercise thereof, the appropriate remedy
to correct the same was by ordinary appeal, not certiorari.
Petitioner bank emphasizes that it already accepted the deposit of P1,034,600.00 such that it
could no longer be withdrawn by the respondents. It reiterated that as of December 31, 1998,
the respondents' total obligation was P28,810,330.51 and when it negotiated with the Gaisanos
in January 1999, it deducted therefrom the sums of P1,462,901.00, representing previous
payments of the respondents, and P1,034,600.00, representing the deposit in question. After
these deductions, the respondents' net obligation stood at P26,312,828.52, and it was this
amount that petitioner bank agreed to be settled with the payment of P25,100,000.00 by the
Gaisanos. This allegedly showed its acceptance of the deposit in question as it was part of the
consideration for the settlement of the respondents' obligation of P28,810,330.51.
Petitioner bank strongly takes exception to the portion of the assailed CA decision comparing
it to Shylock and characterizing the surcharges and interests as "excessive, iniquitous,
unconscionable and exorbitant." It faults the respondents for being remiss in paying their
amortization. Had they been religious in paying the same, then their obligation would not have
reached the amount of over P28,000,000.00. Petitioner bank denies that it delayed the
foreclosure of the respondents' mortgaged properties in order to allow the loan arrearages to
accumulate. Rather, the delay was allegedly the respondents' doing as they filed with the RTC
of Davao City a complaint to enjoin the said foreclosure. Moreover, petitioner bank points out
that in several cases,10 the Court recognized that interests and surcharges are two entirely
different things that may be simultaneously collected in connection with loan agreements.
Petitioner bank, thus, prays for the reversal of the Decision dated November 12, 2001 and
Resolution dated April 12, 2002 of the appellate court allowing the respondents to withdraw
their deposit on consignation of P1,034,600.00 held by the RTC of Makati City.
The petition is denied.
The Court shall first address the procedural issue on the propriety of respondents' filing with
the CA of a petition for certiorari in assailing the Orders of the RTC of Makati City denying
their motion to withdraw deposit. Petitioner bank submits that such tack was erroneous, as
they should have filed an appeal. Petitioner bank's submission is not correct.
A special civil action for certiorari may be instituted when any tribunal, board or officer,
exercising judicial or quasi-judicial functions, has acted without or in excess of jurisdiction, or
with grave abuse of discretion amounting to lack or excess of jurisdiction, and there is no
appeal, nor any plain, speedy and adequate remedy in the ordinary course of law. 11 To recall,
in the present case, the RTC of Makati City had already rendered its original judgment in Civil
Case No 91-3090 and the same was appealed to the CA. Acting on the appeal, the CA
reversed the judgment of the RTC of Makati City and dismissed the respondents' complaint for
consignation. The CA decision became final and executory. Subsequently, the respondents
filed the motion to withdraw deposit with the RTC of Makati City and which the latter denied
in the Orders of July 31, 2000 and December 14, 2000. These orders, issued after the original
judgment had already been rendered, were interlocutory and, therefore, not appealable. Since
no appeal was available against such orders, the respondents properly availed of the remedy of
certiorari before the CA.
On the other hand, the only substantive issue for the Court's resolution is whether the appellate
court erred in reversing the Orders dated July 31, 2000 and December 14, 2000 of the RTC of
Makati City which denied the respondents' motion to withdraw deposit and, consequently,
allowing them to withdraw their deposit of P1,034,600.00 held on consignation by the said
lower court.
Consignation is the act of depositing the thing due with the court or judicial authorities
whenever the creditor cannot accept or refuses to accept payment and it generally requires a
prior tender of payment.12 In order that consignation may be effective, the debtor must show
that: (1) there was a debt due; (2) the consignation of the obligation had been made because
the creditor to whom tender of payment was made refused to accept it, or because he was
absent or incapacitated, or because several persons claimed to be entitled to receive the
amount due or because the title to the obligation has been lost; (3) previous notice of the
consignation had been given to the person interested in the performance of the obligation; (4)
the amount due was placed at the disposal of the court; and (5) after the consignation had been
made, the person interested was notified thereof. 13 As earlier mentioned, the CA, in its
Decision of November 14, 1997 in CA-G.R. CV No. 42899, ruled that there was no valid
consignation because the amount tendered as payment was insufficient. In other words, the
element of a valid tender of payment was not satisfied. This decision became final and
executory.
The issue that now confronts the Court relates to the right of the respondents to withdraw the
amount deposited with the RTC of Makati City. Article 1260 of the Civil Code of the
Philippines pertinently provides:
Art. 1260. Once the consignation has been duly made, the debtor may ask the judge to order
the cancellation of the obligation.
Before the creditor has accepted the consignation, or before a judicial confirmation that the
consignation has been properly made, the debtor may withdraw the thing or the sum deposited,
allowing the obligation to remain in force.
This provision has been explained in this wise:
x x x The right of the debtor to withdraw the thing or amount deposited in court, depends upon
whether or not the consignation has already been accepted or judicially declared proper.
Before that time, the debtor is still the owner, and he may withdraw it; in this case, the
obligation will remain in full force as before the deposit. But once the consignation has been
accepted by the creditor or judicially declared as properly made, the debtor loses his right over
the thing or amount deposited, and he cannot withdraw the same without the consent of the
creditor; if the creditor consents to the withdrawal in such case, the obligation is revived as
against the debtor personally, but all rights of preference of the creditor over the thing and all
his actions against co-debtors, guarantors and sureties are extinguished.
xxxx
x x x We believe, however, that the contrary view is more acceptable. Before the consignation
has been accepted by the creditor or judicially declared as properly made, the debtor is still the
owner of the thing or amount deposited, and, therefore, the other parties liable for the
obligation have no right to oppose his withdrawal of such thing or amount. The debtor merely
uses his right, and unless the law expressly limits that use of his right, it cannot be prevented
by the objections of anyone. Our law grants to the debtor the right to withdraw, without any
limitation, and we should not read a non-existing limitation into the law. Although the other
parties liable for the obligation would have been benefited if the consignation had been
allowed to become effective, before that moment they have not acquired such an interest as
would give them a right to oppose the exercise of the right of the debtor to withdraw the
consignation.
Before the consignation has been judicially declared proper, the creditor may prevent the
withdrawal by the debtor, by accepting the consignation, even with reservations. Thus, when
the amount consigned does not cover the entire obligation, the creditor may accept it,
reserving his right to the balance. x x x14
Thus, under Article 1260 of the Civil Code, the debtor may withdraw, as a matter of right, the
thing or amount deposited on consignation in the following instances:
(1) Before the creditor has accepted the consignation; or
(2) Before a judicial declaration that the consignation has been properly made.
Obviously, in this case, there was no judicial declaration that the consignation had been
properly made. On the contrary, the CA declared that there was no valid consignation. What
remains to be determined then is whether petitioner bank had already accepted the deposit in
question so as to prevent the respondents from exercising their right to withdraw the same.
Petitioner bank insists that it had already done so. In fact, petitioner bank avers, it took into
account and deducted the deposit in question from the respondents' outstanding obligation
of P28,810,330.51 as of December 31, 1998 when it negotiated with the Gaisanos. Deducting
the deposit in question as well as the payments made by the respondents during the period of
1990 and 1991, their net obligation stood at P26,312,828.52. It was this amount that petitioner
bank allegedly agreed to be settled with the payment of P25,100,000.00 by the Gaisanos on
behalf of the respondents.
To prove this claim, petitioner bank relies on the statement of account 15 prepared by its
employees purportedly showing that the deposit in question was deducted from the
respondents' outstanding obligation as of December 31, 1998. This statement of account,
however, is self-serving and has no probative value especially considering that the persons
who prepared the same were not presented in court. Thus, other than its bare allegation,
petitioner bank has failed to establish by convincing evidence that it had made such
acceptance of the deposit in question prior to the respondents' filing of their motion to
withdraw deposit as to effectively prevent them from withdrawing the sum of P1,034,600.00
held by the RTC of Makati City.
On the other hand, in the assailed decision, the CA categorically made the finding that
petitioner bank made no acceptance of the deposit in question, even if only as partial payment
of the respondents' outstanding obligation:
Nor could it be successfully argued with any modicum of persuasion, x x x, that the bank had
performed any prior unmistakable and deliberate act denominating a preemptive acceptance of
the deposit in partial settlement of the loan obligation. Otherwise, it would not have waited
until the petitioners [the respondents herein] filed their motion to withdraw more than a year
after this Court's aforecited decision. The claimed "acceptance" was obviously an afterthought,
and proffered for the sole purpose of opposing the deposit withdrawal.16
This finding of fact of the CA that petitioner bank had not accepted the deposit in question,
even with reservation, is accorded respect by this Court following the salutary rule that
findings of facts of the appellate court are generally conclusive on the Supreme Court.17 It is
significant to note that the RTC of Makati City never made any factual finding on whether or
not there had been acceptance of the deposit in question by petitioner bank.18 The said lower
court did not even apply Article 1260 of the Civil Code when it denied the respondents'
motion to withdraw deposit.
With the finding that petitioner bank had not made any prior acceptance of the deposit in
question, the CA accordingly did not commit reversible error in setting aside the Orders of the
RTC of Makati City which had denied the respondents' motion to withdraw deposit. Indeed,
absent this prior acceptance by petitioner bank or a judicial declaration that the consignation
had been properly made, the respondents remain the owners of the sum of P1,034,600.00
deposited with the RTC of Makati City. When they filed their motion to withdraw the deposit,
they did so in the exercise of their right.
At this point, it bears mentioning that it is not disputed that the Gaisano brothers, as attorneys-
in-fact of the respondents, eventually paid to petitioner bank some time in January 1999 the
sum of P25,100,000.00 as settlement of the respondents' obligation. To the Court's mind, the
payment of the said sum already constituted substantial compliance by the respondents of their
obligation considering that their loan, as restructured or consolidated in November 1982,
amounted to only P3,163,000.00.
As noted by the CA, the surcharges imposed by petitioner bank on the respondents as of
November 15, 1998 reached P16,569,534.62.19 Article 122920 of the Civil Code specifically
empowers the judge to reduce the civil penalty equitably, when the principal obligation has
been partly or irregularly complied with. Upon this premise, the Court holds that the said
surcharges should be equitably reduced such that the payment of P25,100,000.00 constituted
substantial compliance by the respondents of their obligation to petitioner bank.
The Court need not delve on the other issues raised, particularly relating to the interests
imposed by petitioner bank in connection with the respondents' loan, as these were already
passed upon in the other cases (CA-G.R. SP No. 21089 and CA-G.R. CV No. 42899)
involving the same parties.
WHEREFORE, premises considered, the petition is DENIED. The Decision dated November
12, 2001 and Resolution of April 12, 2002 of the Court of Appeals in CA-G.R. SP No. 64475
are AFFIRMED.
SO ORDERED.
G.R. No. 147839             June 8, 2006
GAISANO CAGAYAN, INC. Petitioner,  IMC and LSPI and, by virtue thereof, respondent was subrogated to their rights against
vs.
INSURANCE COMPANY OF NORTH AMERICA, Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
Before the Court is a petition for review on certiorari of the Decision 1 dated October 11, 2000
of the Court of Appeals (CA) in CA-G.R. CV No. 61848 which set aside the Decision dated
August 31, 1998 of the Regional Trial Court, Branch 138, Makati (RTC) in Civil Case No. 92-
322 and upheld the causes of action for damages of Insurance Company of North America
(respondent) against Gaisano Cagayan, Inc. (petitioner); and the CA Resolution dated April
11, 2001 which denied petitioner's motion for reconsideration.
The factual background of the case is as follows:
Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans. Levi Strauss
(Phils.) Inc. (LSPI) is the local distributor of products bearing trademarks owned by Levi
Strauss & Co.. IMC and LSPI separately obtained from respondent fire insurance policies with
book debt endorsements. The insurance policies provide for coverage on "book debts in
connection with ready-made clothing materials which have been sold or delivered to various
customers and dealers of the Insured anywhere in the Philippines."2 The policies defined book
debts as the "unpaid account still appearing in the Book of Account of the Insured 45 days
after the time of the loss covered under this Policy." 3 The policies also provide for the
following conditions:
1. Warranted that the Company shall not be liable for any unpaid account in respect
of the merchandise sold and delivered by the Insured which are outstanding at the
date of loss for a period in excess of six (6) months from the date of the covering
invoice or actual delivery of the merchandise whichever shall first occur.
2. Warranted that the Insured shall submit to the Company within twelve (12) days
after the close of every calendar month all amount shown in their books of accounts
as unpaid and thus become receivable item from their customers and dealers. x x x4
xxxx
Petitioner is a customer and dealer of the products of IMC and LSPI. On February 25, 1991,
the Gaisano Superstore Complex in Cagayan de Oro City, owned by petitioner, was consumed
by fire. Included in the items lost or destroyed in the fire were stocks of ready-made clothing
materials sold and delivered by IMC and LSPI.
On February 4, 1992, respondent filed a complaint for damages against petitioner. It alleges
that IMC and LSPI filed with respondent their claims under their respective fire insurance
policies with book debt endorsements; that as of February 25, 1991, the unpaid accounts of
petitioner on the sale and delivery of ready-made clothing materials with IMC
was P2,119,205.00 while with LSPI it was P535,613.00; that respondent paid the claims of
petitioner; that respondent made several demands for payment upon petitioner but these went
unheeded.5
In its Answer with Counter Claim dated July 4, 1995, petitioner contends that it could not be
held liable because the property covered by the insurance policies were destroyed due to
fortuities event or force majeure; that respondent's right of subrogation has no basis inasmuch
as there was no breach of contract committed by it since the loss was due to fire which it could
not prevent or foresee; that IMC and LSPI never communicated to it that they insured their
properties; that it never consented to paying the claim of the insured.6
At the pre-trial conference the parties failed to arrive at an amicable settlement. 7 Thus, trial on
the merits ensued.
On August 31, 1998, the RTC rendered its decision dismissing respondent's complaint. 8 It held
that the fire was purely accidental; that the cause of the fire was not attributable to the
negligence of the petitioner; that it has not been established that petitioner is the debtor of IMC
and LSPI; that since the sales invoices state that "it is further agreed that merely for purpose of
securing the payment of purchase price, the above-described merchandise remains the
property of the vendor until the purchase price is fully paid", IMC and LSPI retained
ownership of the delivered goods and must bear the loss.
Dissatisfied, petitioner appealed to the CA.9 On October 11, 2000, the CA rendered its
decision setting aside the decision of the RTC. The dispositive portion of the decision reads:
WHEREFORE, in view of the foregoing, the appealed decision is REVERSED and SET
ASIDE and a new one is entered ordering defendant-appellee Gaisano Cagayan, Inc. to pay:
1. the amount of P2,119,205.60 representing the amount paid by the plaintiff-
appellant to the insured Inter Capitol Marketing Corporation, plus legal interest from
the time of demand until fully paid;
2. the amount of P535,613.00 representing the amount paid by the plaintiff-appellant
to the insured Levi Strauss Phil., Inc., plus legal interest from the time of demand
until fully paid.
With costs against the defendant-appellee.
SO ORDERED.10
The CA held that the sales invoices are proofs of sale, being detailed statements of the nature,
quantity and cost of the thing sold; that loss of the goods in the fire must be borne by
petitioner since the proviso contained in the sales invoices is an exception under Article 1504
(1) of the Civil Code, to the general rule that if the thing is lost by a fortuitous event, the risk is
borne by the owner of the thing at the time the loss under the principle of res perit domino;
that petitioner's obligation to IMC and LSPI is not the delivery of the lost goods but the
payment of its unpaid account and as such the obligation to pay is not extinguished, even if the
fire is considered a fortuitous event; that by subrogation, the insurer has the right to go against
petitioner; that, being a fire insurance with book debt endorsements, what was insured was the
vendor's interest as a creditor.11
Petitioner filed a motion for reconsideration12 but it was denied by the CA in its Resolution
dated April 11, 2001.13
Hence, the present petition for review on certiorari anchored on the following Assignment of
Errors:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE
INSTANT CASE WAS ONE OVER CREDIT.
THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE
SUBJECT GOODS IN THE INSTANT CASE HAD TRANSFERRED TO PETITIONER
UPON DELIVERY THEREOF.
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS AUTOMATIC
SUBROGATION UNDER ART. 2207 OF THE CIVIL CODE IN FAVOR OF
RESPONDENT.14
Anent the first error, petitioner contends that the insurance in the present case cannot be
deemed to be over credit since an insurance "on credit" belies not only the nature of fire
insurance but the express terms of the policies; that it was not credit that was insured since
respondent paid on the occasion of the loss of the insured goods to fire and not because of the
non-payment by petitioner of any obligation; that, even if the insurance is deemed as one over
credit, there was no loss as the accounts were not yet due since no prior demands were made
by IMC and LSPI against petitioner for payment of the debt and such demands came from
respondent only after it had already paid IMC and LSPI under the fire insurance policies.15
As to the second error, petitioner avers that despite delivery of the goods, petitioner-buyer
IMC and LSPI assumed the risk of loss when they secured fire insurance policies over the
goods.
Concerning the third ground, petitioner submits that there is no subrogation in favor of
respondent as no valid insurance could be maintained thereon by IMC and LSPI since all risk
had transferred to petitioner upon delivery of the goods; that petitioner was not privy to the
insurance contract or the payment between respondent and its insured nor was its consent or
approval ever secured; that this lack of privity forecloses any real interest on the part of
respondent in the obligation to pay, limiting its interest to keeping the insured goods safe from
fire.
For its part, respondent counters that while ownership over the ready- made clothing materials
was transferred upon delivery to petitioner, IMC and LSPI have insurable interest over said
goods as creditors who stand to suffer direct pecuniary loss from its destruction by fire; that
petitioner is liable for loss of the ready-made clothing materials since it failed to overcome the
presumption of liability under Article 126516 of the Civil Code; that the fire was caused
through petitioner's negligence in failing to provide stringent measures of caution, care and
maintenance on its property because electric wires do not usually short circuit unless there are
defects in their installation or when there is lack of proper maintenance and supervision of the
property; that petitioner is guilty of gross and evident bad faith in refusing to pay respondent's
valid claim and should be liable to respondent for contracted lawyer's fees, litigation expenses
and cost of suit.17
As a general rule, in petitions for review, the jurisdiction of this Court in cases brought before
it from the CA is limited to reviewing questions of law which involves no examination of the
probative value of the evidence presented by the litigants or any of them. 18 The Supreme Court
is not a trier of facts; it is not its function to analyze or weigh evidence all over
again.19 Accordingly, findings of fact of the appellate court are generally conclusive on the
Supreme Court.20
Nevertheless, jurisprudence has recognized several exceptions in which factual issues may be
resolved by this Court, such as: (1) when the findings are grounded entirely on speculation,
surmises or conjectures; (2) when the inference made is manifestly mistaken, absurd or
impossible; (3) when there is grave abuse of discretion; (4) when the judgment is based on a
misapprehension of facts; (5) when the findings of facts are conflicting; (6) when in making its
findings the CA went beyond the issues of the case, or its findings are contrary to the
admissions of both the appellant and the appellee; (7) when the findings are contrary to the
trial court; (8) when the findings are conclusions without citation of specific evidence on
which they are based; (9) when the facts set forth in the petition as well as in the petitioner's
main and reply briefs are not disputed by the respondent; (10) when the findings of fact are
premised on the supposed absence of evidence and contradicted by the evidence on record;
and (11) when the CA manifestly overlooked certain relevant facts not disputed by the parties,
which, if properly considered, would justify a different conclusion.21 Exceptions (4), (5), (7),
and (11) apply to the present petition.
At issue is the proper interpretation of the questioned insurance policy. Petitioner claims that
the CA erred in construing a fire insurance policy on book debts as one covering the unpaid
accounts of IMC and LSPI since such insurance applies to loss of the ready-made clothing
materials sold and delivered to petitioner.
The Court disagrees with petitioner's stand.
It is well-settled that when the words of a contract are plain and readily understood, there is no
room for construction.22 In this case, the questioned insurance policies provide coverage for
"book debts in connection with ready-made clothing materials which have been sold or
delivered to various customers and dealers of the Insured anywhere in the Philippines." 23 ; and
defined book debts as the "unpaid account still appearing in the Book of Account of the
Insured 45 days after the time of the loss covered under this Policy."24 Nowhere is it provided
in the questioned insurance policies that the subject of the insurance is the goods sold and
delivered to the customers and dealers of the insured.
Indeed, when the terms of the agreement are clear and explicit that they do not justify an
attempt to read into it any alleged intention of the parties, the terms are to be understood
literally just as they appear on the face of the contract. 25 Thus, what were insured against were
the accounts of IMC and LSPI with petitioner which remained unpaid 45 days after the loss
through fire, and not the loss or destruction of the goods delivered.
Petitioner argues that IMC bears the risk of loss because it expressly reserved ownership of the
goods by stipulating in the sales invoices that "[i]t is further agreed that merely for purpose of
securing the payment of the purchase price the above described merchandise remains the
property of the vendor until the purchase price thereof is fully paid."26
The Court is not persuaded.
The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:
ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the ownership
therein is transferred to the buyer, but when the ownership therein is transferred to the buyer
the goods are at the buyer's risk whether actual delivery has been made or not, except that:
(1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer, in
pursuance of the contract and the ownership in the goods has been retained by the seller
merely to secure performance by the buyer of his obligations under the contract, the goods are
at the buyer's risk from the time of such delivery; (Emphasis supplied)
xxxx
Thus, when the seller retains ownership only to insure that the buyer will pay its debt, the risk
of loss is borne by the buyer.27 Accordingly, petitioner bears the risk of loss of the goods
delivered.
IMC and LSPI did not lose complete interest over the goods. They have an insurable interest
until full payment of the value of the delivered goods. Unlike the civil law concept of res perit
domino, where ownership is the basis for consideration of who bears the risk of loss, in
property insurance, one's interest is not determined by concept of title, but whether insured has
substantial economic interest in the property.28
Section 13 of our Insurance Code defines insurable interest as "every interest in property,
whether real or personal, or any relation thereto, or liability in respect thereof, of such nature
that a contemplated peril might directly damnify the insured." Parenthetically, under Section
14 of the same Code, an insurable interest in property may consist in: (a) an existing interest;
(b) an inchoate interest founded on existing interest; or (c) an expectancy, coupled with an
existing interest in that out of which the expectancy arises.
Therefore, an insurable interest in property does not necessarily imply a property interest in, or
a lien upon, or possession of, the subject matter of the insurance, and neither the title nor a
beneficial interest is requisite to the existence of such an interest, it is sufficient that the
insured is so situated with reference to the property that he would be liable to loss should it be
injured or destroyed by the peril against which it is insured.29 Anyone has an insurable interest
in property who derives a benefit from its existence or would suffer loss from its
destruction.30Indeed, a vendor or seller retains an insurable interest in the property sold so long
as he has any interest therein, in other words, so long as he would suffer by its destruction, as
where he has a vendor's lien.31 In this case, the insurable interest of IMC and LSPI pertain to
the unpaid accounts appearing in their Books of Account 45 days after the time of the loss
covered by the policies.
The next question is: Is petitioner liable for the unpaid accounts?
Petitioner's argument that it is not liable because the fire is a fortuitous event under Article
117432 of the Civil Code is misplaced. As held earlier, petitioner bears the loss under Article
1504 (1) of the Civil Code.
Moreover, it must be stressed that the insurance in this case is not for loss of goods by fire but
for petitioner's accounts with IMC and LSPI that remained unpaid 45 days after the fire.
Accordingly, petitioner's obligation is for the payment of money. As correctly stated by the
CA, where the obligation consists in the payment of money, the failure of the debtor to make
the payment even by reason of a fortuitous event shall not relieve him of his liability. 33 The
rationale for this is that the rule that an obligor should be held exempt from liability when the
loss occurs thru a fortuitous event only holds true when the obligation consists in the delivery
of a determinate thing and there is no stipulation holding him liable even in case of fortuitous
event. It does not apply when the obligation is pecuniary in nature.34
Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic thing, the loss or
destruction of anything of the same kind does not extinguish the obligation." If the obligation
is generic in the sense that the object thereof is designated merely by its class or genus without
any particular designation or physical segregation from all others of the same class, the loss or
destruction of anything of the same kind even without the debtor's fault and before he has
incurred in delay will not have the effect of extinguishing the obligation.35 This rule is based
on the principle that the genus of a thing can never perish. Genus nunquan perit.36 An
obligation to pay money is generic; therefore, it is not excused by fortuitous loss of any
specific property of the debtor.37
Thus, whether fire is a fortuitous event or petitioner was negligent are matters immaterial to
this case. What is relevant here is whether it has been established that petitioner has
outstanding accounts with IMC and LSPI.
With respect to IMC, the respondent has adequately established its claim. Exhibits "C" to "C-
22"38 show that petitioner has an outstanding account with IMC in the amount
of P2,119,205.00. Exhibit "E"39 is the check voucher evidencing payment to IMC. Exhibit
"F"40 is the subrogation receipt executed by IMC in favor of respondent upon receipt of the
insurance proceeds. All these documents have been properly identified, presented and marked
as exhibits in court. The subrogation receipt, by itself, is sufficient to establish not only the
relationship of respondent as insurer and IMC as the insured, but also the amount paid to settle
the insurance claim. The right of subrogation accrues simply upon payment by the insurance
company of the insurance claim.41 Respondent's action against petitioner is squarely
sanctioned by Article 2207 of the Civil Code which provides:
Art. 2207. If the plaintiff's property has been insured, and he has received indemnity from the
insurance company for the injury or loss arising out of the wrong or breach of contract
complained of, the insurance company shall be subrogated to the rights of the insured against
the wrongdoer or the person who has violated the contract. x x x
Petitioner failed to refute respondent's evidence.
As to LSPI, respondent failed to present sufficient evidence to prove its cause of action. No
evidentiary weight can be given to Exhibit "F Levi Strauss",42 a letter dated April 23, 1991
from petitioner's General Manager, Stephen S. Gaisano, Jr., since it is not an admission of
petitioner's unpaid account with LSPI. It only confirms the loss of Levi's products in the
amount of P535,613.00 in the fire that razed petitioner's building on February 25, 1991.
Moreover, there is no proof of full settlement of the insurance claim of LSPI; no subrogation
receipt was offered in evidence. Thus, there is no evidence that respondent has been
subrogated to any right which LSPI may have against petitioner. Failure to substantiate the
claim of subrogation is fatal to petitioner's case for recovery of the amount of P535,613.00.
WHEREFORE, the petition is partly GRANTED. The assailed Decision dated October 11,
2000 and Resolution dated April 11, 2001 of the Court of Appeals in CA-G.R. CV No. 61848
are AFFIRMED with the MODIFICATION that the order to pay the amount of P535,613.00
to respondent is DELETED for lack of factual basis.
No pronouncement as to costs.
SO ORDERED.
G.R. No. 91029             February 7, 1991
NORKIS DISTRIBUTORS, INC., petitioner, 
vs.
THE COURT OF APPEALS & ALBERTO NEPALES, respondents.
Jose D. Palma for petitioner.
Public Attorney's Office for private respondent.
GRIÑO-AQUINO, J.:
Subject of this petition for review is the decision of the Court of Appeals (Seventeenth
Division) in CA-G.R. No. 09149, affirming with modification the judgment of the Regional
Trial Court, Sixth (6th) Judicial Region, Branch LVI. Himamaylan, Negros Occidental, in
Civil Case No. 1272, which was private respondent Alberto Nepales' action for specific
performance of a contract of sale with damages against petitioner Norkis Distributors, Inc.
The facts borne out by the record are as follows:
Petitioner Norkis Distributors, Inc. (Norkis for brevity), is the distributor of Yamaha
motorcycles in Negros Occidental with office in Bacolod City with Avelino Labajo as its
Branch Manager. On September 20, 1979, private respondent Alberto Nepales bought from
the Norkis-Bacolod branch a brand new Yamaha Wonderbike motorcycle Model YL2DX with
Engine No. L2-329401K Frame No. NL2-0329401, Color Maroon, then displayed in the
Norkis showroom. The price of P7,500.00 was payable by means of a Letter of Guaranty from
the Development Bank of the Philippines (DBP), Kabankalan Branch, which Norkis' Branch
Manager Labajo agreed to accept. Hence, credit was extended to Nepales for the price of the
motorcycle payable by DBP upon release of his motorcycle loan. As security for the loan,
Nepales would execute a chattel mortgage on the motorcycle in favor of DBP. Branch
Manager Labajo issued Norkis Sales Invoice No. 0120 (Exh.1) showing that the contract of
sale of the motorcycle had been perfected. Nepales signed the sales invoice to signify his
conformity with the terms of the sale. In the meantime, however, the motorcycle remained in
Norkis' possession.
On November 6, 1979, the motorcycle was registered in the Land Transportation Commission
in the name of Alberto Nepales. A registration certificate (Exh. 2) in his name was issued by
the Land Transportation Commission on November 6, 1979 (Exh. 2-b). The registration fees
were paid by him, evidenced by an official receipt, Exhibit 3.
On January 22, 1980, the motorcycle was delivered to a certain Julian Nepales who was
allegedly the agent of Alberto Nepales but the latter denies it (p. 15, t.s.n., August 2, 1984).
The record shows that Alberto and Julian Nepales presented the unit to DBP's Appraiser-
Investigator Ernesto Arriesta at the DBP offices in Kabankalan, Negros Occidental Branch (p.
12, Rollo). The motorcycle met an accident on February 3, 1980 at Binalbagan, Negros
Occidental. An investigation conducted by the DBP revealed that the unit was being driven by
a certain Zacarias Payba at the time of the accident (p. 33, Rollo). The unit was a total wreck
(p. 36, t.s.n., August 2,1984; p. 13, Rollo), was returned, and stored inside Norkis' warehouse.
On March 20, 1980, DBP released the proceeds of private respondent's motorcycle loan to
Norkis in the total sum of P7,500. As the price of the motorcycle later increased to P7,828 in
March, 1980, Nepales paid the difference of P328 (p. 13, Rollo) and demanded the delivery of
the motorcycle. When Norkis could not deliver, he filed an action for specific performance
with damages against Norkis in the Regional Trial Court of Himamaylan, Negros Occidental,
Sixth (6th) Judicial Region, Branch LVI, where it was docketed as Civil Case No. 1272. He
alleged that Norkis failed to deliver the motorcycle which he purchased, thereby causing him
damages.
Norkis answered that the motorcycle had already been delivered to private respondent before
the accident, hence, the risk of loss or damage had to be borne by him as owner of the unit.
After trial on the merits, the lower court rendered a decision dated August 27, 1985 ruling in
favor of private respondent (p. 28, Rollo.) thus:
WHEREFORE, judgment is rendered in favor of the plaintiff and against the
defendants. The defendants are ordered to pay solidarity to the plaintiff the present
value of the motorcycle which was totally destroyed, plus interest equivalent to what
the Kabankalan Sub-Branch of the Development Bank of the Philippines will have
to charge the plaintiff on fits account, plus P50.00 per day from February 3, 1980
until full payment of the said present value of the motorcycle, plus P1,000.00 as
exemplary damages, and costs of the litigation. In lieu of paying the present value of
the motorcycle, the defendants can deliver to the plaintiff a brand-new motorcycle of
the same brand, kind, and quality as the one which was totally destroyed in their
possession last February 3, 1980. (pp. 28-29, Rollo.)
On appeal, the Court of appeals affirmed the appealed judgment on August 21, 1989, but
deleted the award of damages "in the amount of Fifty (P50.00) Pesos a day from February 3,
1980 until payment of the present value of the damaged vehicle" (p35, Rollo). The Court of
Appeals denied Norkis' motion for reconsideration. Hence, this Petition for Review.
The principal issue in this case is who should bear the loss of the motorcycle. The answer to
this question would depend on whether there had already been a transfer of ownership of the
motorcycle to private respondent at the time it was destroyed.
Norkis' theory is that:
. . . After the contract of sale has been perfected (Art. 1475) and even before
delivery, that is, even before the ownership is transferred to the vendee, the risk of
loss is shifted from the vendor to the vendee. Under Art. 1262, the obligation of the
vendor to deliver a determinate thing becomes extinguished if the thing is lost by
fortuitous event (Art. 1174), that is, without the fault or fraud of the vendor and
before he has incurred in delay (Art. 11 65, par. 3). If the thing sold is generic, the
loss or destruction does not extinguish the obligation (Art. 1263). A thing is
determinate when it is particularly designated or physically segregated from all
others of the same class (Art. 1460). Thus, the vendor becomes released from his
obligation to deliver the determinate thing sold while the vendee's obligation to pay
the price subsists. If the vendee had paid the price in advance the vendor may retain
the same. The legal effect, therefore, is that the vendee assumes the risk of loss by
fortuitous event (Art. 1262) after the perfection of the contract to the time of
delivery. (Civil Code of the Philippines, Ambrosio Padilla, Vol. 5,1987 Ed., p. 87.)
Norkis concedes that there was no "actual" delivery of the vehicle. However, it insists that
there was constructive delivery of the unit upon: (1) the issuance of the Sales Invoice No.
0120 (Exh. 1) in the name of the private respondent and the affixing of his signature thereon;
(2) the registration of the vehicle on November 6, 1979 with the Land Transportation
Commission in private respondent's name (Exh. 2); and (3) the issuance of official receipt
(Exh. 3) for payment of registration fees (p. 33, Rollo).
That argument is not well taken. As pointed out by the private respondent, the issuance of a
sales invoice does not prove transfer of ownership of the thing sold to the buyer. An invoice is
nothing more than a detailed statement of the nature, quantity and cost of the thing sold and
has been considered not a bill of sale (Am. Jur. 2nd Ed., Vol. 67, p. 378).
In all forms of delivery, it is necessary that the act of delivery whether constructive or actual,
be coupled with the intention of delivering the thing. The act, without the intention, is
insufficient (De Leon, Comments and Cases on Sales, 1978 Ed., citing Manresa, p. 94).
When the motorcycle was registered by Norkis in the name of private respondent, Norkis did
not intend yet to transfer the title or ownership to Nepales, but only to facilitate the execution
of a chattel mortgage in favor of the DBP for the release of the buyer's motorcycle loan. The
Letter of Guarantee (Exh. 5) issued by the DBP, reveals that the execution in its favor of a
chattel mortgage over the purchased vehicle is a pre-requisite for the approval of the buyer's
loan. If Norkis would not accede to that arrangement, DBP would not approve private
respondent's loan application and, consequently, there would be no sale.
In other words, the critical factor in the different modes of effecting delivery, which gives
legal effect to the act, is the actual intention of the vendor to deliver, and its acceptance by the
vendee. Without that intention, there is no tradition (Abuan vs. Garcia, 14 SCRA 759).
In the case of Addison vs. Felix and Tioco (38 Phil. 404, 408), this Court held:
The Code imposes upon the vendor the obligation to deliver the thing sold. The
thing is considered to be delivered when it is "placed in the hands and possession of
 the vendee." (Civil Code, Art. 1462). It is true that the same article declares that the RAYMUNDO, ANTONIO S. RAYMUNDO, RENE S. RAYMUNDO, and AMADOR S.
execution of a public instrument is equivalent to the delivery of the thing which is RAYMUNDO, respondents.
the object of the contract, but, in order that this symbolic delivery may produce the
effect of tradition, it is necessary that the vendor shall have had such control over
the thing sold that, at the moment of the sale, its material delivery could have been
made. It is not enough to confer upon the purchaser the ownership and the right of
possession. The thing sold must be placed in his control. When there is no DAVIDE, JR., J.:
impediment whatever to prevent the thing sold passing into the tenancy of the
purchaser by the sole will of the vendor, symbolic delivery through the execution of This petition for review on certiorari has its roots in Civil Case No. 53444, which was sparked
a public instrument is sufficient. But if notwithstanding the execution of the by petitioner's refusal to pay the rentals as stipulated in the contract of lease 1 on an undivided
instrument, the purchaser cannot have the enjoyment and material tenancy of the portion of 30,000 square meters of a parcel of land owned by private respondents.
thing and make use of it himself or through another in his name, because such
tenancy and enjoyment are opposed by the interposition of another will, then fiction The lease contract, executed on 18 November 1985, reads in part as follows:
yields to reality-the delivery has riot been effects .(Emphasis supplied.)

The Court of Appeals correctly ruled that the purpose of the execution of the sales invoice
dated September 20, 1979 (Exh. B) and the registration of the vehicle in the name of plaintiff-
appellee (private respondent) with the Land Registration Commission (Exhibit C) was not to
transfer to Nepales the ownership and dominion over the motorcycle, but only to comply with
the requirements of the Development Bank of the Philippines for processing private
respondent's motorcycle loan. On March 20, 1980, before private respondent's loan was
released and before he even paid Norkis, the motorcycle had already figured in an accident
while driven by one Zacarias Payba. Payba was not shown by Norkis to be a representative or
relative of private respondent. The latter's supposed relative, who allegedly took possession of
the vehicle from Norkis did not explain how Payba got hold of the vehicle on February 3,
1980. Norkis' claim that Julian Nepales was acting as Alberto's agent when he allegedly took
delivery of the motorcycle (p. 20, Appellants' Brief), is controverted by the latter. Alberto
denied having authorized Julian Nepales to get the motorcycle from Norkis Distributors or to
enter into any transaction with Norkis relative to said motorcycle. (p. 5, t.s.n., February 6,
1985). This circumstances more than amply rebut the disputable presumption of delivery upon
which Norkis anchors its defense to Nepales' action (pp. 33-34, Rollo).
1. TERM OF LEASE — This lease shall be for a period of five (5) years,
commencing on the date of issuance of the industrial clearance by the
Ministry of Human Settlements, renewable for a like or other period at the
option of the LESSEE under the same terms and conditions.
2. RATE OF RENT — LESSEE shall pay to the LESSOR rent at the
monthly rate of TWENTY THOUSAND PESOS (P20,000.00), Philippine
Currency, in the manner set forth in Paragraph 3 below. This rate shall be
increased yearly by Five Percent (5%) based on the agreed monthly rate of
P20,000.00 as follows:
Monthly Rate Period Applicable
P21,000.00 Starting on the 2nd
year

P22,000.00 Starting on the 3rd

Article 1496 of the Civil Code which provides that "in the absence of an express assumption
year
of risk by the buyer, the things sold remain at seller's risk until the ownership thereof is
transferred to the buyer," is applicable to this case, for there was neither an actual nor
constructive delivery of the thing sold, hence, the risk of loss should be borne by the seller, P23,000.00 Starting on the 4th
Norkis, which was still the owner and possessor of the motorcycle when it was wrecked. This year
is in accordance with the well-known doctrine of res perit domino.
P24,000.00 Starting on the 5th
WHEREFORE, finding no reversible error in the decision of the Court of Appeals in CA-G.R. year
No. 09149, we deny the petition for review and hereby affirm the appealed decision, with
costs against the petitioner. 3. TERMS OF PAYMENT — The rent stipulated in Paragraph 2 above
shall be paid yearly in advance by the LESSEE. The first annual rent in
SO ORDERED. the amount of TWO HUNDRED FORTY THOUSAND PESOS
(P240,000.00), Philippine currency, shall be due and payable upon the
execution of this Agreement and the succeeding annual rents shall be
G.R. No. 116896 May 5, 1997
payable every twelve (12) months thereafter during the effectivity of this
Agreement.
PHILIPPINE NATIONAL CONSTRUCTION CORPORATION, petitioner, 
vs.
COURT OF APPEALS, MA. TERESA S. RAYMUNDO-ABARRA, JOSE S.
 4. USE OF LEASED PROPERTY — It is understood that the Property
shall be used by the LESSEE as the site, grounds and premises of a rock
crushing plant and field office, sleeping quarters and canteen/mess hall.
The LESSORS hereby grant to the LESSEE the right to erect on the
Leased Property such structure(s) and/or improvement(s) necessary for or
incidental to the LESSEE's purposes.
xxx xxx xxx
11. TERMINATION OF LEASE — This Agreement may be terminated by
mutual agreement of the parties. Upon the termination or expiration of the
period of lease without the same being renewed, the LESSEE shall vacate
the Leased Property at its expense.
On 7 January 1986, petitioner obtained from the Ministry of Human Settlements a Temporary
Use Permit 2 for the proposed rock crushing project. The permit was to be valid for two years
unless sooner revoked by the Ministry.
On 16 January 1986, private respondents wrote petitioner requesting payment of the first
annual rental in the amount of P240,000 which was due and payable upon the execution of the
contract. They also assured the latter that they had already stopped considering the proposals
of other aggregates plants to lease the property because of the existing contract with
petitioner. 3
In its reply-letter, petitioner argued that under paragraph 1 of the lease contract, payment of
rental would commence on the date of the issuance of an industrial clearance by the Ministry
of Human Settlements, and not from the date of signing of the contract. It then expressed its
intention to terminate the contract, as it had decided to cancel or discontinue with the rock
crushing project "due to financial, as well as technical, difficulties." 4
Private respondents refused to accede to petitioner's request for the pretermination of the lease
contract. They insisted on the performance of petitioner's obligation and reiterated their
demand for the payment of the first annual rental. 5
Petitioner objected to private respondents' claim and argued that it was "only obligated to pay .
. . the amount of P20,000.00 as rental payments for the one-month period of lease, counted
from 07 January 1986 when the Industrial Permit was issued by the Ministry of Human
Settlements up to 07 February 1986 when the Notice of Termination was served" 6 on private
respondents.
On 19 May 1986, private respondents instituted with the Regional Trial Court of Pasig an
action against petitioner for Specific Performance with Damages. 7 The case was docketed as
Civil Case No. 53444 at Branch 160 of the said court. After the filing by petitioner of its
Answer with Counterclaim, the case was set for trial on the merits.
What transpired next was summarized by the trial court in this wise:
Plaintiffs rested their case on September 7, 1987 (p. 87 rec.). Defendant
asked for postponement of the reception of its evidence scheduled on
August 10, 1988 and as prayed for, was reset to August 25, 1988 (p. 91
rec.) Counsel for defendant again asked for postponement, through
representative, as he was presently indisposed. The case was reset,
intransferable to September 15 and 26, 1988 (p. 94 rec.) On September 2,
1988, the office of the Government Corporate Counsel entered its
appearance for defendant (p. 95, rec.) and the original counsel later
withdrew his appearance. On September 15, 1988 the Government
Corporate Counsel asked for postponement, represented by Atty. Elpidio
de Vega, and with his conformity in open court, the hearing was reset,
intransferable to September 26 and October 17, 1988, (p. 98, rec.) On
September 26, 1988 during the hearing, defendant's counsel filed a motion
for postponement (urgent) as he had "sore eyes", a medical certificate
attached.
Counsel for plaintiffs objected to the postponement and the court
considered the evidence of the government terminated or waived. The case
was deemed submitted for decision upon the filing of the memorandum.
Plaintiffs filed their memorandum on October 26, 1988. (p. 111, rec.).
On October 18, 1988 in the meantime, the defendant filed a motion for
reconsideration of the order of the court on September 26, 1988 (p. 107,
rec.) The motion was not asked to be set for hearing (p. 110 rec.) There
was also no proof of notice and service to counsel for plaintiff . The court
in the interest of justice set the hearing on the motion on November 29,
1988. (p. 120, rec.) but despite notice, again defendant's counsel was
absent (p. 120-A, dorsal side, rec.) without reason. The court reset the
motion to December 16, 1988, in the interest of justice. The motion for
reconsideration was denied by the court. A second motion for
reconsideration was filed and counsel set for hearing the motion on
January 19, 1989. During the hearing, counsel for the government was
absent. The motion was deemed abandoned but the court at any rate, after
a review of the incidents and the grounds relied upon in the earlier motion
of defendant, found no reason to disturb its previous order. 8
On 12 April 1989, the trial court rendered a decision ordering petitioner to pay private
respondents the amount of P492,000 which represented the rentals for two years, with legal
interest from 7 January 1986 until the amount was fully paid, plus attorney's fees in the
amount of P20,000 and costs. 9
Petitioner then appealed to the Court of Appeals alleging that the trial court erred in ordering it
to pay private respondent the amount of P492,000 and in denying it the right to be heard.
Upon the affirmance of the trial court's decision 10 and the denial of its motion for
reconsideration, petitioner came to this Court ascribing to respondent Court of Appeals the
same alleged errors and reiterating their arguments.
First. Petitioner invites the attention of this Court to paragraph 1 of the lease contract, which
reads: "This lease shall be for a period of five (5) years, commencing on the date of issuance
of the industrial clearance by the Ministry of Human Settlements. . . ." It then submits that the
issuance of an industrial clearance is a suspensive condition without which the rights under the
contract would not be acquired. The Temporary Use Permit is not the industrial clearance
referred to in the contract; for the said permit requires that a clearance from the National
Production Control Commission be first secured, and besides, there is a finding in the permit
that the proposed project does not conform to the Zoning Ordinance of Rodriguez, (formerly
Montalban), Rizal, where the leased property is located. Without the industrial clearance the
lease contract could not become effective and petitioner could not be compelled to perform its
obligation under the contract.
Petitioner is now estopped from claiming that the Temporary Use Permit was not the industrial
clearance contemplated in the contract. In its letter dated 24 April 1986, petitioner states:
We wish to reiterate PNCC Management's previous stand that it is only
obligated to pay your clients the amount of P20,000.00 as rental payments
for the one-month period of the lease, counted from 07 January 1986
when the Industrial Permit was issued by the Ministry of Human
Settlements up to 07 February 1986 when the Notice of Termination was
served on your clients. 11 (Emphasis Supplied).
The "Industrial Permit" mentioned in the said letter could only refer to the
Temporary Use Permit issued by the Ministry of Human Settlements on 7 January
1986. And it can be gleaned from this letter that petitioner has considered the permit
as industrial clearance; otherwise, petitioner could have simply told private
respondents that its obligation to pay rentals has not yet arisen because the
Temporary Use Permit is not the industrial clearance contemplated by them. Instead,
petitioner recognized its obligation to pay rentals counted from the date the permit
was issued.
Also worth noting is petitioner's earlier letter, thus:
[P]lease be advised of PNCC Management's decision to cancel or
discontinue with the rock crushing project due to financial as well as
technical difficulties. In view thereof, we would like to terminate our
Lease Contract dated 18 November, 1985. Should you agree to the mutual
termination of our Lease Contract, kindly indicate your conformity hereto
by affixing your signature on the space provided below. May we likewise
request Messrs. Rene, Jose and Antonio, all surnamed Raymundo and
Mrs. Socorro A. Raymundo as Attorney-in-Fact of Amador S. Raymundo
to sign on the spaces indicated below. 12
It can be deduced from this letter that the suspensive condition — issuance of industrial
clearance — has already been fulfilled and that the lease contract has become operative.
Otherwise, petitioner did not have to solicit the conformity of private respondents to the
termination of the contract for the simple reason that no juridical relation was created because
of the non- fulfillment of the condition.
Moreover, the reason of petitioner in discontinuing with its project and in consequently
cancelling the lease contract was "financial as well as technical difficulties," not the alleged
insufficiency of the Temporary Use Permit.
Second. Invoking Article 1266 and the principle of rebus sic stantibus, petitioner asserts that it
should be released from the obligatory force of the contract of lease because the purpose of the
contract did not materialize due to unforeseen events and causes beyond its control, i.e., due to
the abrupt change in political climate after the EDSA Revolution and financial difficulties.
It is a fundamental rule that contracts, once perfected, bind both contracting parties, and
obligations arising therefrom have the force of law between the parties and should be
complied with in good faith. 13 But the law recognizes exceptions to the principle of the
obligatory force of contracts. One exception is laid down in Article 1266 of the Civil Code,
which reads: "The debtor in obligations to do shall also be released when the prestation
becomes legally or physically impossible without the fault of the obligor."
Petitioner cannot, however, successfully take refuge in the said article, since it is applicable
only to obligations "to do," and not to obligations "to give." 14 An obligation "to do" includes
all kinds of work or service; while an obligation "to give" is a prestation which consists in the
delivery of a movable or an immovable thing in order to create a real right, or for the use of
the recipient, or for its simple possession, or in order to return it to its owner. 15
The obligation to pay rentals 16 or deliver the thing in a contract of
lease 17 falls within the prestation "to give"; hence, it is not covered within the scope of Article
1266. At any rate, the unforeseen event and causes mentioned by petitioner are not the legal or
physical impossibilities contemplated in the said article. Besides, petitioner failed to state
specifically the circumstances brought about by "the abrupt change in the political climate in
the country" except the alleged prevailing uncertainties in government policies on
infrastructure projects.
The principle of rebus sic stantibus 18 neither fits in with the facts of the case. Under this
theory, the parties stipulate in the light of certain prevailing conditions, and once these
conditions cease to exist, the contract also ceases to exist. 19 This theory is said to be the basis
of Article 1267 of the Civil Code, which provides:
Art. 1267. When the service has become so difficult as to be manifestly
beyond the contemplation of the parties, the obligor may also be released
therefrom, in whole or in part.
This article, which enunciates the doctrine of unforeseen events, is not, however, an absolute
application of the principle of rebus sic stantibus, which would endanger the security of
contractual relations. The parties to the contract must be presumed to have assumed the risks
of unfavorable developments. It is therefore only in absolutely exceptional changes of
circumstances that equity demands assistance for the debtor. 20
In this case, petitioner wants this Court to believe that the abrupt change in the political
climate of the country after the EDSA Revolution and its poor financial condition "rendered
the performance of the lease contract impractical and inimical to the corporate survival of the
petitioner."
This Court cannot subscribe to this argument. As pointed out by private respondents: 21
It is a matter of record that petitioner PNCC entered into a contract with
private respondents on November 18, 1985. Prior thereto, it is of judicial
notice that after the assassination of Senator Aquino on August 21, 1983,
the country has experienced political upheavals, turmoils, almost daily
mass demonstrations, unprecedented, inflation, peace and order
deterioration, the Aquino trial and many other things that brought about
the hatred of people even against crony corporations. On November 3,
1985, Pres. Marcos, being interviewed live on U.S. television announced
that there would be a snap election scheduled for February 7, 1986.
On November 18, 1985, notwithstanding the above, petitioner PNCC
entered into the contract of lease with private respondents with open eyes
of the deteriorating conditions of the country.
Anent petitioner's alleged poor financial condition, the same will neither release petitioner
from the binding effect of the contract of lease. As held in Central Bank v. Court of
Appeals, 22 cited by private respondents, mere pecuniary inability to fulfill an engagement does
not discharge a contractual obligation, nor does it constitute a defense to an action for specific
performance.
With regard to the non-materialization of petitioner's particular purpose in entering into the
contract of lease, i.e., to use the leased premises as a site of a rock crushing plant, the same
will not invalidate the contract. The cause or essential purpose in a contract of lease is the use
or enjoyment of a thing. 23 As a general principle, the motive or particular purpose of a party in
entering into a contract does not affect the validity nor existence of the contract; an exception
is when the realization of such motive or particular purpose has been made a condition upon
which the contract is made to depend. 24 The exception does not apply here.
Third. According to petitioner, the award of P492,000.00 representing the rent for two years is
excessive, considering that it did not benefit from the property. Besides, the temporary permit,
conformably with the express provision therein, was deemed automatically revoked for failure
of petitioner to use the same within one year from the issuance thereof. Hence, the rent
payable should only be for one year.
Petitioner cannot be heard to complain that the award is excessive. The temporary permit was
valid for two years but was automatically revoked because of its non-use within one year from
its issuance. The non-use of the permit and the non-entry into the property subject of the lease
contract were both imputable to petitioner and cannot, therefore, be taken advantage of in
order to evade or lessen petitioner's monetary obligation. The damage or prejudice to private
respondents is beyond dispute. They unquestionably suffered pecuniary losses because of their
inability to use the leased premises. Thus, in accordance with Article 1659 of the Civil
Code, 25 they are entitled to indemnification for damages; and the award of P492,000.00 is fair
and just under the circumstances of the case.
Finally, petitioner submits that the trial court gravely abused its discretion in denying
petitioner the right to be heard.
We disagree. The trial court was in fact liberal in granting several postponements 26 to
petitioner before it deemed terminated and waived the presentation of evidence in petitioner's
behalf.
It must be recalled that private respondents rested their case on 7 September 1987
yet. 27 Almost a year after, or on 10 August 1988 when it was petitioner's turn to present
evidence, petitioner's counsel asked for postponement of the hearing to 25 August 1988 due to
conflict of schedules, 28 and this was granted. 29 At the rescheduled hearing, petitioner's
counsel, through a representative, moved anew for postponement, as he was allegedly
indisposed. 30 The case was then reset "intransferable" to September 15 and 26, 1988. 31 On 2
September 1988, the Office of the Government Corporate Counsel, through Atty. Elpidio J.
Vega, entered its appearance for the
petitioner, 32 and later the original counsel withdrew his appearance. 33 On 15 September 1988,
Atty. Vega requested for postponement to enable him to go over the records of the
case. 34 With his conformity, the hearing was reset "intransferable" to September 26 and
October 17, 1988. 35 In the morning of 26 September 1988, the court received Atty. Vega's
Urgent Motion for Postponement on the ground that he was afflicted with conjunctivitis or
sore eyes. 36 This time, private respondents objected; and upon their motion, the court deemed
terminated and waived the presentation of evidence for the petitioner. 37 Nevertheless, before
the court considered the case submitted for decision, it required the parties to submit their
respective memoranda within thirty days. 38 But petitioner failed to comply.
Likewise, the court was liberal with respect to petitioner's motion for reconsideration.
Notwithstanding the lack of request for hearing and proof of notice and service to private
respondents, the court set the hearing of the said motion on 29 November 1988. 39 Upon the
denial of the said motion for lack of merit, 40 petitioner filed a second motion for
reconsideration. But during the hearing of the motion on a date selected by him, Atty. Vega
was absent for no reason at all, despite due notice. 41
From the foregoing narration of procedural antecedents, it cannot be said that petitioner was
deprived of its day in court. The essence of due process is simply an opportunity to he
heard. 42 To be heard does not only mean oral arguments in court; one may be heard also
through pleadings. Where opportunity to be heard, either through oral arguments or pleadings,
is accorded, there is no denial of procedural due process. 43
WHEREFORE, the instant petition is DENIED and the challenge decision of the Court of
Appeals is AFFIRMED in toto.
No pronouncements as to costs.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 140944             April 30, 2008
RAFAEL ARSENIO S. DIZON, in his capacity as the Judicial Administrator of the Estate Tax Due NIL.11
Estate of the deceased JOSE P. FERNANDEZ, petitioner, 
vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL On April 27, 1990, BIR Regional Director for San Pablo City, Osmundo G. Umali issued
REVENUE, respondents. Certification Nos. 2052[12]and 2053[13] stating that the taxes due on the transfer of real and
personal properties[14] of Jose had been fully paid and said properties may be transferred to his
heirs. Sometime in August 1990, Justice Dizon passed away. Thus, on October 22, 1990, the
DECISION probate court appointed petitioner as the administrator of the Estate.15

NACHURA, J.:
Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Civil
Procedure seeking the reversal of the Court of Appeals (CA) Decision 2 dated April 30, 1999
which affirmed the Decision3 of the Court of Tax Appeals (CTA) dated June 17, 1997.4
The Facts
Petitioner requested the probate court's authority to sell several properties forming part of the
Estate, for the purpose of paying its creditors, namely: Equitable Banking Corporation
(P19,756,428.31), Banque de L'Indochine et. de Suez (US$4,828,905.90 as of January 31,
1988), Manila Banking Corporation (P84,199,160.46 as of February 28, 1989) and State
Investment House, Inc. (P6,280,006.21). Petitioner manifested that Manila Bank, a major
creditor of the Estate was not included, as it did not file a claim with the probate court since it
had security over several real estate properties forming part of the Estate.16

On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for the probate of However, on November 26, 1991, the Assistant Commissioner for Collection of the BIR,
his will5 was filed with Branch 51 of the Regional Trial Court (RTC) of Manila (probate Themistocles Montalban, issued Estate Tax Assessment Notice No. FAS-E-87-91-
court).[6] The probate court then appointed retired Supreme Court Justice Arsenio P. Dizon 003269,17 demanding the payment of P66,973,985.40 as deficiency estate tax, itemized as
(Justice Dizon) and petitioner, Atty. Rafael Arsenio P. Dizon (petitioner) as Special and follows:
Assistant Special Administrator, respectively, of the Estate of Jose (Estate). In a letter 7dated
October 13, 1988, Justice Dizon informed respondent Commissioner of the Bureau of Internal Deficiency Estate Tax- 1987
Revenue (BIR) of the special proceedings for the Estate.
Estate tax P31,868,414.48
Petitioner alleged that several requests for extension of the period to file the required estate tax 25% surcharge- late filing 7,967,103.62
return were granted by the BIR since the assets of the estate, as well as the claims against it, late payment 7,967,103.62
had yet to be collated, determined and identified. Thus, in a letter8 dated March 14, 1990,
Justice Dizon authorized Atty. Jesus M. Gonzales (Atty. Gonzales) to sign and file on behalf Interest 19,121,048.68
of the Estate the required estate tax return and to represent the same in securing a Certificate Compromise-non filing 25,000.00
of Tax Clearance. Eventually, on April 17, 1990, Atty. Gonzales wrote a letter 9 addressed to
non payment 25,000.00
the BIR Regional Director for San Pablo City and filed the estate tax return 10 with the same
BIR Regional Office, showing therein a NIL estate tax liability, computed as follows: no notice of death 15.00
no CPA Certificate 300.00
COMPUTATION OF TAX Total amount due & collectible P66,973,985.4018
Conjugal Real Property (Sch. 1) P10,855,020.00
Conjugal Personal Property (Sch.2) 3,460,591.34 In his letter19 dated December 12, 1991, Atty. Gonzales moved for the reconsideration of the
said estate tax assessment. However, in her letter20 dated April 12, 1994, the BIR
Taxable Transfer (Sch. 3)
Commissioner denied the request and reiterated that the estate is liable for the payment
Gross Conjugal Estate 14,315,611.34 of P66,973,985.40 as deficiency estate tax. On May 3, 1994, petitioner received the letter of
Less: Deductions (Sch. 4) 187,822,576.06 denial. On June 2, 1994, petitioner filed a petition for review 21 before respondent CTA. Trial
on the merits ensued.
Net Conjugal Estate NIL
Less: Share of Surviving Spouse NIL. As found by the CTA, the respective parties presented the following pieces of evidence, to
Net Share in Conjugal Estate NIL wit:
xxx
In the hearings conducted, petitioner did not present testimonial evidence but merely
Net Taxable Estate NIL. documentary evidence consisting of the following:
 Nature of Document (sic) Respondent's [BIR] counsel presented on June 26, 1995 one witness in the
person of Alberto Enriquez, who was one of the revenue examiners who
1. Letter dated October 13, 1988 from Arsenio P. Dizon addressed to the conducted the investigation on the estate tax case of the late Jose P. Fernandez.
Commissioner of Internal Revenue informing the latter of the special In the course of the direct examination of the witness, he identified the
proceedings for the settlement of the estate (p. 126, BIR records); following:
2. Petition for the probate of the will and issuance of letter of administration
filed with the Regional Trial Court (RTC) of Manila, docketed as Sp.
Documents/Signatures B
Proc. No. 87-42980 (pp. 107-108, BIR records);
1. Estate Tax Return prepared by the BIR; p
3. Pleading entitled "Compliance" filed with the probate Court submitting the
final inventory of all the properties of the deceased (p. 106, BIR records); 2. Signatures of Ma. Anabella Abuloc and Alberto Enriquez, Jr. appearing at -d
the lower Portion of Exh. "1";
4. Attachment to Exh. "C" which is the detailed and complete listing of the
properties of the deceased (pp. 89-105, BIR rec.); 3. Memorandum for the Commissioner, dated July 19, 1991, prepared by p
revenue examiners, Ma. Anabella A. Abuloc, Alberto S. Enriquez and
5. Claims against the estate filed by Equitable Banking Corp. with the
Raymund S. Gallardo; Reviewed by Maximino V. Tagle
probate Court in the amount of P19,756,428.31 as of March 31, 1988,
together with the Annexes to the claim (pp. 64-88, BIR records); 4. Signature of Alberto S. Enriquez appearing at the lower portion on p. 2 of -d
Exh. "2";
6. Claim filed by Banque de L' Indochine et de Suez with the probate Court
in the amount of US $4,828,905.90 as of January 31, 1988 (pp. 262-265, 5. Signature of Ma. Anabella A. Abuloc appearing at the lower portion on p. -d
BIR records); 2 of Exh. "2";
7. Claim of the Manila Banking Corporation (MBC) which as of November 6. Signature of Raymund S. Gallardo appearing at the Lower portion on p. 2 -d
7, 1987 amounts to P65,158,023.54, but recomputed as of February 28, of Exh. "2";
1989 at a total amount of P84,199,160.46; together with the demand letter 7. Signature of Maximino V. Tagle also appearing on p. 2 of Exh. "2"; -d
from MBC's lawyer (pp. 194-197, BIR records);
8. Summary of revenue Enforcement Officers Audit Report, dated July 19, p
8. Demand letter of Manila Banking Corporation prepared by Asedillo, 1991;
Ramos and Associates Law Offices addressed to Fernandez Hermanos,
Inc., represented by Jose P. Fernandez, as mortgagors, in the total amount 9. Signature of Alberto Enriquez at the lower portion of Exh. "3"; -d
of P240,479,693.17 as of February 28, 1989 (pp. 186-187, BIR records); 10. Signature of Ma. Anabella A. Abuloc at the lower portion of Exh. "3"; -d
9. Claim of State Investment House, Inc. filed with the RTC, Branch VII of 11. Signature of Raymond S. Gallardo at the lower portion of Exh. "3"; -d
Manila, docketed as Civil Case No. 86-38599 entitled "State Investment
House, Inc., Plaintiff, versus Maritime Company Overseas, Inc. and/or 12. Signature of Maximino V. Tagle at the lower portion of Exh. "3"; -d
Jose P. Fernandez, Defendants," (pp. 200-215, BIR records); 13. Demand letter (FAS-E-87-91-00), signed by the Asst. Commissioner for p
10. Letter dated March 14, 1990 of Arsenio P. Dizon addressed to Atty. Jesus Collection for the Commissioner of Internal Revenue, demanding payment
M. Gonzales, (p. 184, BIR records); of the amount of P66,973,985.40; and

11. Letter dated April 17, 1990 from J.M. Gonzales addressed to the Regional 14. Assessment Notice FAS-E-87-91-00 p
Director of BIR in San Pablo City (p. 183, BIR records);
12. Estate Tax Return filed by the estate of the late Jose P. Fernandez through The CTA's Ruling
its authorized representative, Atty. Jesus M. Gonzales, for Arsenio P.
Dizon, with attachments (pp. 177-182, BIR records); On June 17, 1997, the CTA denied the said petition for review. Citing this Court's ruling
Certified true copy of the Letter of Administration issued by RTC Manila, in Vda. de Oñate v. Court of Appeals,  the CTA opined that the aforementioned pieces of
23
13.
Branch 51, in Sp. Proc. No. 87-42980 appointing Atty. Rafael S. Dizon as evidence introduced by the BIR were admissible in evidence. The CTA ratiocinated:
Judicial Administrator of the estate of Jose P. Fernandez; (p. 102, CTA
records) and Although the above-mentioned documents were not formally offered as evidence for
14. Certification of Payment of estate taxes Nos. 2052 and 2053, both dated respondent, considering that respondent has been declared to have waived the presentation
April 27, 1990, issued by the Office of the Regional Director, Revenue thereof during the hearing on March 20, 1996, still they could be considered as evidence for
Region No. 4-C, San Pablo City, with attachments (pp. 103-104, CTA respondent since they were properly identified during the presentation of respondent's witness,
records.). whose testimony was duly recorded as part of the records of this case. Besides, the documents
marked as respondent's exhibits formed part of the BIR records of the case.24
Nevertheless, the CTA did not fully adopt the assessment made by the BIR and it came up On April 30, 1999, the CA affirmed the CTA's ruling. Adopting in full the CTA's findings, the
with its own computation of the deficiency estate tax, to wit: CA ruled that the petitioner's act of filing an estate tax return with the BIR and the issuance of
BIR Certification Nos. 2052 and 2053 did not deprive the BIR Commissioner of her authority
to re-examine or re-assess the said return filed on behalf of the Estate.28
Conjugal Real Property P 5,062,016.00
Conjugal Personal Prop. 33,021,999.93 On May 31, 1999, petitioner filed a Motion for Reconsideration 29 which the CA denied in its
Gross Conjugal Estate 38,084,015.93 Resolution30 dated November 3, 1999.
Less: Deductions 26,250,000.00
Hence, the instant Petition raising the following issues:
Net Conjugal Estate P 11,834,015.93
Less: Share of Surviving Spouse 5,917,007.96 1. Whether or not the admission of evidence which were not formally offered by the
Net Share in Conjugal Estate P 5,917,007.96 respondent BIR by the Court of Tax Appeals which was subsequently upheld by the
Court of Appeals is contrary to the Rules of Court and rulings of this Honorable
Add: Capital/Paraphernal
Court;
Properties – P44,652,813.66
Less: Capital/Paraphernal Deductions 44,652,813.66 2. Whether or not the Court of Tax Appeals and the Court of Appeals erred in
recognizing/considering the estate tax return prepared and filed by respondent BIR
Net Taxable Estate P 50,569,821.62
knowing that the probate court appointed administrator of the estate of Jose P.
============
Fernandez had previously filed one as in fact, BIR Certification Clearance Nos.
2052 and 2053 had been issued in the estate's favor;
Estate Tax Due P 29,935,342.97
Add: 25% Surcharge for Late Filing 7,483,835.74 3. Whether or not the Court of Tax Appeals and the Court of Appeals erred in
Add: Penalties for-No notice of death 15.00 disallowing the valid and enforceable claims of creditors against the estate, as lawful
deductions despite clear and convincing evidence thereof; and
No CPA certificate 300.00
Total deficiency estate tax P 37,419,493.71 4. Whether or not the Court of Tax Appeals and the Court of Appeals erred in
============ validating erroneous double imputation of values on the very same estate properties
in the estate tax return it prepared and filed which effectively bloated the estate's
exclusive of 20% interest from due date of its payment until full payment thereof assets.31

[Sec. 283 (b), Tax Code of 1987].25
Thus, the CTA disposed of the case in this wise:
WHEREFORE, viewed from all the foregoing, the Court finds the petition
unmeritorious and denies the same. Petitioner and/or the heirs of Jose P. Fernandez
are hereby ordered to pay to respondent the amount of P37,419,493.71 plus 20%
interest from the due date of its payment until full payment thereof as estate tax
liability of the estate of Jose P. Fernandez who died on November 7, 1987.
SO ORDERED.26
Aggrieved, petitioner, on March 2, 1998, went to the CA via a petition for review.27
The CA's Ruling
The petitioner claims that in as much as the valid claims of creditors against the Estate are in
excess of the gross estate, no estate tax was due; that the lack of a formal offer of evidence is
fatal to BIR's cause; that the doctrine laid down in Vda. de Oñate has already been abandoned
in a long line of cases in which the Court held that evidence not formally offered is without
any weight or value; that Section 34 of Rule 132 of the Rules on Evidence requiring a formal
offer of evidence is mandatory in character; that, while BIR's witness Alberto Enriquez
(Alberto) in his testimony before the CTA identified the pieces of evidence aforementioned
such that the same were marked, BIR's failure to formally offer said pieces of evidence and
depriving petitioner the opportunity to cross-examine Alberto, render the same inadmissible in
evidence; that assuming arguendo that the ruling in Vda. de Oñate is still applicable, BIR
failed to comply with the doctrine's requisites because the documents herein remained simply
part of the BIR records and were not duly incorporated in the court records; that the BIR failed
to consider that although the actual payments made to the Estate creditors were lower than
their respective claims, such were compromise agreements reached long after the Estate's
liability had been settled by the filing of its estate tax return and the issuance of BIR
Certification Nos. 2052 and 2053; and that the reckoning date of the claims against the Estate
and the settlement of the estate tax due should be at the time the estate tax return was filed by
the judicial administrator and the issuance of said BIR Certifications and not at the time the
aforementioned Compromise Agreements were entered into with the Estate's creditors.32
On the other hand, respondent counters that the documents, being part of the records of the
case and duly identified in a duly recorded testimony are considered evidence even if the same
were not formally offered; that the filing of the estate tax return by the Estate and the issuance
of BIR Certification Nos. 2052 and 2053 did not deprive the BIR of its authority to examine
the return and assess the estate tax; and that the factual findings of the CTA as affirmed by the
CA may no longer be reviewed by this Court via a petition for review.33
The Issues
There are two ultimate issues which require resolution in this case:
First. Whether or not the CTA and the CA gravely erred in allowing the admission of the
pieces of evidence which were not formally offered by the BIR; and
Second. Whether or not the CA erred in affirming the CTA in the latter's determination of the
deficiency estate tax imposed against the Estate.
The Court’s Ruling
The Petition is impressed with merit.
Under Section 8 of RA 1125, the CTA is categorically described as a court of record. As cases
filed before it are litigated de novo, party-litigants shall prove every minute aspect of their
cases. Indubitably, no evidentiary value can be given the pieces of evidence submitted by the
BIR, as the rules on documentary evidence require that these documents must be formally
offered before the CTA.34 Pertinent is Section 34, Rule 132 of the Revised Rules on Evidence
which reads:
SEC. 34. Offer of evidence. — The court shall consider no evidence which has not
been formally offered. The purpose for which the evidence is offered must be
specified.
The CTA and the CA rely solely on the case of Vda. de Oñate, which reiterated this Court's
previous rulings in People v. Napat-a35 and People v. Mate36 on the admission and
consideration of exhibits which were not formally offered during the trial. Although in a long
line of cases many of which were decided after Vda. de Oñate, we held that courts cannot
consider evidence which has not been formally offered,37 nevertheless, petitioner cannot
validly assume that the doctrine laid down in Vda. de Oñate has already been abandoned.
Recently, in Ramos v. Dizon,38this Court, applying the said doctrine, ruled that the trial court
judge therein committed no error when he admitted and considered the respondents' exhibits in
the resolution of the case, notwithstanding the fact that the same were not formally offered.
Likewise, in Far East Bank & Trust Company v. Commissioner of Internal Revenue,39 the
Court made reference to said doctrine in resolving the issues therein. Indubitably, the doctrine
laid down in Vda. De Oñate still subsists in this jurisdiction. In Vda. de Oñate, we held that:
From the foregoing provision, it is clear that for evidence to be considered, the same
must be formally offered. Corollarily, the mere fact that a particular document is
identified and marked as an exhibit does not mean that it has already been offered as
part of the evidence of a party. In Interpacific Transit, Inc. v. Aviles [186 SCRA
385], we had the occasion to make a distinction between identification of
documentary evidence and its formal offer as an exhibit. We said that the first is
done in the course of the trial and is accompanied by the marking of the evidence as
an exhibit while the second is done only when the party rests its case and not before.
A party, therefore, may opt to formally offer his evidence if he believes that it will
advance his cause or not to do so at all. In the event he chooses to do the latter, the
trial court is not authorized by the Rules to consider the same.
However, in People v. Napat-a [179 SCRA 403] citing People v. Mate [103 SCRA
484], we relaxed the foregoing rule and allowed evidence not formally offered
to be admitted and considered by the trial court provided the following
requirements are present, viz.: first, the same must have been duly identified by
testimony duly recorded and, second, the same must have been incorporated in
the records of the case.40
From the foregoing declaration, however, it is clear that Vda. de Oñate is merely an exception
to the general rule. Being an exception, it may be applied only when there is strict compliance
with the requisites mentioned therein; otherwise, the general rule in Section 34 of Rule 132 of
the Rules of Court should prevail.
In this case, we find that these requirements have not been satisfied. The assailed pieces of
evidence were presented and marked during the trial particularly when Alberto took the
witness stand. Alberto identified these pieces of evidence in his direct testimony. 41 He was
also subjected to cross-examination and re-cross examination by petitioner. 42 But Alberto’s
account and the exchanges between Alberto and petitioner did not sufficiently describe the
contents of the said pieces of evidence presented by the BIR. In fact, petitioner sought that the
lead examiner, one Ma. Anabella A. Abuloc, be summoned to testify, inasmuch as Alberto
was incompetent to answer questions relative to the working papers. 43 The lead examiner
never testified. Moreover, while Alberto's testimony identifying the BIR's evidence was duly
recorded, the BIR documents themselves were not incorporated in the records of the case.
A common fact threads through Vda. de Oñate and Ramos that does not exist at all in the
instant case. In the aforementioned cases, the exhibits were marked at the pre-trial proceedings
to warrant the pronouncement that the same were duly incorporated in the records of the case.
Thus, we held in Ramos:
In this case, we find and so rule that these requirements have been satisfied. The
exhibits in question were presented and marked during the pre-trial of the case
thus, they have been incorporated into the records. Further, Elpidio himself
explained the contents of these exhibits when he was interrogated by respondents'
counsel...
xxxx
But what further defeats petitioner's cause on this issue is that respondents' exhibits
were marked and admitted during the pre-trial stage as shown by the Pre-Trial Order
quoted earlier.44
While the CTA is not governed strictly by technical rules of evidence,45 as rules of procedure
are not ends in themselves and are primarily intended as tools in the administration of justice,
the presentation of the BIR's evidence is not a mere procedural technicality which may be
disregarded considering that it is the only means by which the CTA may ascertain and verify
the truth of BIR's claims against the Estate.46 The BIR's failure to formally offer these pieces
of evidence, despite CTA's directives, is fatal to its cause. 47 Such failure is aggravated by the
fact that not even a single reason was advanced by the BIR to justify such fatal omission. This,
we take against the BIR.
Per the records of this case, the BIR was directed to present its evidence48 in the hearing of
February 21, 1996, but BIR's counsel failed to appear. 49 The CTA denied petitioner's motion to
consider BIR's presentation of evidence as waived, with a warning to BIR that such
presentation would be considered waived if BIR's evidence would not be presented at the next
hearing. Again, in the hearing of March 20, 1996, BIR's counsel failed to appear. 50 Thus, in its
Resolution51 dated March 21, 1996, the CTA considered the BIR to have waived presentation
of its evidence. In the same Resolution, the parties were directed to file their respective
memorandum. Petitioner complied but BIR failed to do so.52 In all of these proceedings, BIR
was duly notified. Hence, in this case, we are constrained to apply our ruling in Heirs of Pedro
Pasag v. Parocha:53
A formal offer is necessary because judges are mandated to rest their findings of
facts and their judgment only and strictly upon the evidence offered by the parties at
the trial. Its function is to enable the trial judge to know the purpose or purposes for
which the proponent is presenting the evidence. On the other hand, this allows
opposing parties to examine the evidence and object to its admissibility. Moreover,
it facilitates review as the appellate court will not be required to review documents
not previously scrutinized by the trial court.
Strict adherence to the said rule is not a trivial matter. The Court in Constantino v.
Court of Appeals ruled that the formal offer of one's evidence is deemed waived
after failing to submit it within a considerable period of time. It explained that
the court cannot admit an offer of evidence made after a lapse of three (3)
months because to do so would "condone an inexcusable laxity if not non-
compliance with a court order which, in effect, would encourage needless
delays and derail the speedy administration of justice."
Applying the aforementioned principle in this case, we find that the trial court had
reasonable ground to consider that petitioners had waived their right to make a
formal offer of documentary or object evidence. Despite several extensions of time
to make their formal offer, petitioners failed to comply with their commitment and
allowed almost five months to lapse before finally submitting it. Petitioners' failure
to comply with the rule on admissibility of evidence is anathema to the efficient,
effective, and expeditious dispensation of justice.
Having disposed of the foregoing procedural issue, we proceed to discuss the merits of the
case.
Ordinarily, the CTA's findings, as affirmed by the CA, are entitled to the highest respect and
will not be disturbed on appeal unless it is shown that the lower courts committed gross error
in the appreciation of facts.54 In this case, however, we find the decision of the CA affirming
that of the CTA tainted with palpable error.
It is admitted that the claims of the Estate's aforementioned creditors have been condoned. As
a mode of extinguishing an obligation,55 condonation or remission of debt56 is defined as:
an act of liberality, by virtue of which, without receiving any equivalent, the creditor
renounces the enforcement of the obligation, which is extinguished in its entirety or
in that part or aspect of the same to which the remission refers. It is an essential
characteristic of remission that it be gratuitous, that there is no equivalent received
for the benefit given; once such equivalent exists, the nature of the act changes. It
may become dation in payment when the creditor receives a thing different from that
stipulated; or novation, when the object or principal conditions of the obligation
should be changed; or compromise, when the matter renounced is in litigation or
dispute and in exchange of some concession which the creditor receives.57
Verily, the second issue in this case involves the construction of Section 79 58 of the National
Internal Revenue Code59 (Tax Code) which provides for the allowable deductions from the
gross estate of the decedent. The specific question is whether the actual claims of the
aforementioned creditors may be fully allowed as deductions from the gross estate of Jose
despite the fact that the said claims were reduced or condoned through compromise
agreements entered into by the Estate with its creditors.
"Claims against the estate," as allowable deductions from the gross estate under Section 79 of
the Tax Code, are basically a reproduction of the deductions allowed under Section 89 (a) (1)
(C) and (E) of Commonwealth Act No. 466 (CA 466), otherwise known as the National
Internal Revenue Code of 1939, and which was the first codification of Philippine tax laws.
Philippine tax laws were, in turn, based on the federal tax laws of the United States. Thus,
pursuant to established rules of statutory construction, the decisions of American courts
construing the federal tax code are entitled to great weight in the interpretation of our own tax
laws.60
It is noteworthy that even in the United States, there is some dispute as to whether the
deductible amount for a claim against the estate is fixed as of the decedent's death which is the
general rule, or the same should be adjusted to reflect post-death developments, such as where
a settlement between the parties results in the reduction of the amount actually paid. 61 On one
hand, the U.S. court ruled that the appropriate deduction is the "value" that the claim had at the
date of the decedent's death. 62 Also, as held in Propstra v. U.S., 63 where a lien claimed against
the estate was certain and enforceable on the date of the decedent's death, the fact that the
claimant subsequently settled for lesser amount did not preclude the estate from deducting the
entire amount of the claim for estate tax purposes. These pronouncements essentially confirm
the general principle that post-death developments are not material in determining the amount
of the deduction.
On the other hand, the Internal Revenue Service (Service) opines that post-death settlement
should be taken into consideration and the claim should be allowed as a deduction only to the
extent of the amount actually paid.64Recognizing the dispute, the Service released Proposed
Regulations in 2007 mandating that the deduction would be limited to the actual amount
paid.65
In announcing its agreement with Propstra,66 the U.S. 5th Circuit Court of Appeals held:
We are persuaded that the Ninth Circuit's decision...in Propstra correctly apply
the Ithaca Trust date-of-death valuation principle to enforceable claims against the
estate. As we interpret Ithaca Trust, when the Supreme Court announced the date-
of-death valuation principle, it was making a judgment about the nature of the
federal estate tax specifically, that it is a tax imposed on the act of transferring
property by will or intestacy and, because the act on which the tax is levied occurs at
a discrete time, i.e., the instance of death, the net value of the property transferred
should be ascertained, as nearly as possible, as of that time. This analysis supports
broad application of the date-of-death valuation rule.67
We express our agreement with the date-of-death valuation rule, made pursuant to the ruling
of the U.S. Supreme Court in Ithaca Trust Co. v. United States.68 First. There is no law, nor do
we discern any legislative intent in our tax laws, which disregards the date-of-death valuation
principle and particularly provides that post-death developments must be considered in
determining the net value of the estate. It bears emphasis that tax burdens are not to be
imposed, nor presumed to be imposed, beyond what the statute expressly and clearly imports,
tax statutes being construed strictissimi juris against the government.69 Any doubt on whether
a person, article or activity is taxable is generally resolved against taxation. 70 Second. Such
construction finds relevance and consistency in our Rules on Special Proceedings wherein the
term "claims" required to be presented against a decedent's estate is generally construed to
mean debts or demands of a pecuniary nature which could have been enforced against the
deceased in his lifetime, or liability contracted by the deceased before his death.71 Therefore,
the claims existing at the time of death are significant to, and should be made the basis of, the
determination of allowable deductions.
WHEREFORE, the instant Petition is GRANTED. Accordingly, the assailed Decision dated
April 30, 1999 and the Resolution dated November 3, 1999 of the Court of Appeals in CA-
G.R. S.P. No. 46947 are REVERSED and SET ASIDE. The Bureau of Internal Revenue's
deficiency estate tax assessment against the Estate of Jose P. Fernandez is
hereby NULLIFIED. No costs.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 180144               September 24, 2014
LEONARDO BOGNOT, Petitioner,  promissory note, the disclosure statement, and the check dated July 30, 1997. Mrs. Bognot,
vs.
RRI LENDING CORPORATION, represented by its General Manager, DARIO J.
BERNARDEZ, Respondent.
DECISION
BRION, J.:
Before the Court is the petition for review on certiorari1 filed by Leonardo Bognot (petitioner)
assailing the March 28, 2007 decision2 and the October 15, 2007 resolution3 of the Court of
Appeals (CA) in CA-G.R. CV No. 66915.
Background Facts
RRI Lending Corporation (respondent) is an entity engaged in the business of lending money
to its borrowers within Metro Manila. It is duly represented by its General Manager, Mr. Dario
J. Bernardez (Bernardez).
Sometime in September 1996, the petitioner and his younger brother, Rolando A. Bognot
(collectively referred to as the "Bognot siblings"), applied for and obtained a loan of Five
Hundred Thousand Pesos (₱500,000.00) from the respondent, payable on November 30,
1996.4 The loan was evidenced by a promissory note and was secured by a post dated
check5 dated November 30, 1996.
Evidence on record shows that the petitioner renewed the loan several times on a monthly
basis. He paid a renewal fee of ₱54,600.00 for each renewal, issued a new post-dated checkas
security, and executed and/or renewed the promissory note previouslyissued. The respondent
on the other hand, cancelled and returned to the petitioner the post-dated checks issued prior to
their renewal.
Sometime in March 1997, the petitioner applied for another loan renewal. He again executed
as principal and signed Promissory Note No. 97-0356 payable on April 1, 1997; his co-maker
was again Rolando. As security for the loan, the petitioner also issued BPI Check No.
0595236,7 post dated to April 1, 1997.8
Subsequently, the loan was again renewed on a monthly basis (until June 30, 1997), as shown
by the Official Receipt No. 7979 dated May 5, 1997, and the Disclosure Statement dated May
30, 1997 duly signed by Bernardez. The petitioner purportedly paid the renewal fees and
issued a post-dated check dated June 30, 1997 as security. As had been done in the past, the
respondent superimposed the date "June 30, 1997" on the upper right portion of Promissory
Note No. 97-035 to make it appear that it would mature on the said date.
Several days before the loan’s maturity, Rolando’s wife, Julieta Bognot (Mrs. Bognot), went
to the respondent’s office and applied for another renewal of the loan. She issued in favor of
the respondent Promissory Note No. 97-051, and International Bank Exchange (IBE) Check
No. 00012522, dated July 30, 1997, in the amount of ₱54,600.00 as renewal fee.
On the excuse that she needs to bring home the loan documents for the Bognot siblings’
signatures and replacement, Mrs. Bognot asked the respondent’s clerk to release to her the
however, never returned these documents nor issued a new post-dated check. Consequently,
the respondent sent the petitioner follow-up letters demanding payment of the loan, plus
interest and penalty charges. These demands went unheeded.
On November 27, 1997, the respondent, through Bernardez, filed a complaint for sum of
money before the Regional Trial Court (RTC) against the Bognot siblings. The respondent
mainly alleged that the loan renewal payable on June 30, 1997 which the Bognot siblings
applied for remained unpaid; that before June30, 1997, Mrs. Bognot applied for another loan
extension and issued IBE Check No. 00012522 as payment for the renewal fee; that Mrs.
Bognot convinced the respondent’s clerk to release to her the promissory note and the other
loan documents; that since Mrs. Bognot never issued any replacement check, no loanextension
took place and the loan, originally payable on June 30, 1997, became due on this date; and
despite repeated demands, the Bognot siblings failed to pay their joint and solidary obligation.
Summons were served on the Bognotsiblings. However, only the petitioner filed his answer.
In his Answer,10 the petitioner claimed that the complaint states no cause of action because the
respondent’s claim had been paid, waived, abandoned or otherwise extinguished. He denied
being a party to any loan application and/or renewal in May 1997. He also denied having
issued the BPI check post-dated to June 30, 1997, as well as the promissory note dated June
30, 1997, claiming that this note had been tampered. He claimed that the one (1) month loan
contracted by Rolando and his wife in November 1996 which was lastly renewed in March
1997 had already been fully paid and extinguished in April 1997.11
Trial on the merits thereafter ensued.
The Regional Trial Court Ruling
In a decision12 dated January 17, 2000,the RTC ruled in the respondent’s favor and ordered the
Bognot siblings to pay the amount of the loan, plus interest and penalty charges. It considered
the wordings of the promissory note and found that the loan they contracted was joint and
solidary. It also noted that the petitioner signed the promissory note as a principal (and not
merely as a guarantor), while Rolando was the co-maker. It brushed the petitioner’s defense of
full payment aside, ruling that the respondent had successfully proven, by preponderance of
evidence, the nonpayment of the loan. The trial court said:
Records likewise reveal that while he claims that the obligation had been fully paid in his
Answer, he did not, in order to protect his right filed (sic) a cross-claim against his co-
defendant Rolando Bognot despite the fact that the latter did not file any responsive pleading.
In fine, defendants are liable solidarily to plaintiff and must pay the loan of ₱500,000.00 plus
5% interest monthly as well as 10% monthly penalty charges from the filing of the complaint
on December 3, 1997 until fully paid. As plaintiff was constrained to engage the services of
counsel in order to protect his right,defendants are directed to pay the former jointly and
severally the amount of ₱50,000.00 as and by way of attorney’s fee.
The petitioner appealed the decision to the Court of Appeals.
The Court of Appeals Ruling
In its decision dated March 28, 2007, the CA affirmed the RTC’s findings. It found the
petitioner’s defense of payment untenable and unsupported by clear and convincing evidence.
It observed that the petitioner did not present any evidence showing that the check dated June
30, 1997 had, in fact, been encashed by the respondent and the proceeds applied to the loan, or
any official receipt evidencing the payment of the loan. It further stated that the only document
relied uponby the petitioner to substantiate his defense was the April 1, 1997 checkhe issued
which was cancelled and returned to him by the respondent.
The CA, however, noted the respondent’s established policy of cancelling and returning the
post-dated checks previously issued, as well as the subsequent loan renewals applied for by
the petitioner, as manifested by the official receipts under his name. The CA thus ruled that the
petitioner failed to discharge the burden of proving payment.
The petitioner moved for the reconsideration of the decision, but the CA denied his motion in
its resolution of October 15, 2007, hence, the present recourse to us pursuant toRule 45 of the
Rules of Court.
The Petition
The petitioner submits that the CA erred in holding him solidarily liable with Rolando and his
wife. Heclaimed that based on the legal presumption provided by Article 1271 of the Civil
Code,13 his obligation had been discharged by virtue of his possession of the post-dated check
(stamped "CANCELLED") that evidenced his indebtedness. He argued that it was Mrs.
Bognot who subsequently assumed the obligation by renewing the loan, paying the fees and
charges, and issuing a check. Thus, there is an entirely new obligation whose payment is her
sole responsibility.
The petitioner also argued that as a result of the alteration of the promissory note without his
consent (e.g., the superimposition of the date "June 30, 1997" on the upper right portion of
Promissory Note No. 97-035 to make it appear that it would mature on this date), the
respondent can no longer collect on the tampered note, let alone, hold him solidarily liable
with Rolando for the payment of the loan. He maintained that even without the proof of
payment, the material alteration of the promissory note is sufficient to extinguish his liability.
Lastly, he claimed that he had been released from his indebtedness by novation when Mrs.
Bognot renewed the loan and assumed the indebtedness.
The Case for the Respondents
The respondent submits that the issues the petitioner raised hinge on the appreciation of the
adduced evidence and of the factual lower courts’ findings that, as a rule, are notreviewable by
this Court.
The Issues
The case presents to us the following issues:
1. Whether the CA committed a reversible error in holding the petitioner solidarily
liable with Rolando;
 2. Whether the petitioner is relieved from liability by reason of the material
alteration in the promissory note; and
3. Whether the parties’ obligation was extinguished by: (i) payment; and (ii)
novation by substitution of debtors.
Our Ruling
We find the petition partly meritorious.
As a rule, the Court’s jurisdiction in a Rule 45 petition is limited to the review of pure
questions of law.14 Appreciation of evidence and inquiry on the correctness of the appellate
court's factual findings are not the functions of this Court; we are not a trier of facts.15
A question of law exists when the doubt or dispute relates to the application of the law on
given facts. On the other hand, a question of fact exists when the doubt or dispute relates to the
truth or falsity of the parties’ factual allegations.16
As the respondent correctly pointedout, the petitioner’s allegations are factual issuesthat are
not proper for the petition he filed. In the absence of compelling reasons, the Court cannot re-
examine, review or re-evaluate the evidence and the lower courts’ factual conclusions. This is
especially true when the CA affirmed the lower court’s findings, as in this case. Since the
CA’s findings of facts affirmed those of the trial court, they are binding on this Court,
rendering any further factual review unnecessary.
If only to lay the issues raised - both factual and legal – to rest, we shall proceed to discuss
their merits and demerits.
No Evidence Was Presented to Establish the Fact of Payment
Jurisprudence tells us that one who pleads payment has the burden of proving it;17 the burden
rests on the defendant to prove payment, rather than on the plaintiff to prove non-
payment.18 Indeed, once the existence of an indebtedness is duly established by evidence, the
burden of showing with legal certainty that the obligation has been discharged by payment
rests on the debtor.19
In the present case, the petitioner failed to satisfactorily prove that his obligation had already
been extinguished by payment. As the CA correctly noted, the petitioner failed to present any
evidence that the respondent had in fact encashed his check and applied the proceeds to the
payment of the loan. Neither did he present official receipts evidencing payment, nor any
proof that the check had been dishonored.
We note that the petitioner merely relied on the respondent’s cancellation and return to him of
the check dated April 1, 1997. The evidence shows that this check was issued to secure the
indebtedness. The acts imputed on the respondent, standing alone, do not constitute sufficient
evidence of payment.
Article 1249, paragraph 2 of the Civil Code provides:
xxxx
The delivery of promissory notes payable to order, or bills of exchange or other mercantile
documents shall produce the effect of payment only when they have been cashed, or when
through the fault of the creditor they have been impaired. (Emphasis supplied)
Also, we held in Bank of the Philippine Islands v. Spouses Royeca:20
Settled is the rule that payment must be made in legal tender. A check is not legal tender and,
therefore, cannot constitute a valid tender of payment. Since a negotiable instrument is only a
substitute for money and not money, the delivery of such an instrument does not, by itself,
operate as payment. Mere delivery of checks does not discharge the obligation under a
judgment. The obligation is not extinguished and remains suspended until the payment by
commercial document is actually realized.(Emphasis supplied)
Although Article 1271 of the Civil Code provides for a legal presumption of renunciation of
action (in cases where a private document evidencing a credit was voluntarily returned by the
creditor to the debtor), this presumption is merely prima facieand is not conclusive; the
presumption loses efficacy when faced with evidence to the contrary.
Moreover, the cited provision merely raises a presumption, not of payment, but of the
renunciation of the credit where more convincing evidence would be required than what
normally would be called for to prove payment.21Thus, reliance by the petitioner on the legal
presumption to prove payment is misplaced.
To reiterate, no cash payment was proven by the petitioner. The cancellation and return of the
check dated April 1, 1997, simply established his renewal of the loan – not the fact of
payment. Furthermore, it has been established during trial, through repeated acts, that the
respondent cancelled and surrendered the post-dated check previously issued whenever the
loan is renewed. We trace whatwould amount to a practice under the facts of this case, to the
following testimonial exchanges:
Civil Case No. 97-0572
TSN December 14, 1998, Page 13.
Atty. Almeda:
Q: In the case of the renewal of the loan you admitted that a renewal fee is charged to the
debtor which he or she must pay before a renewal is allowed. I show you Exhibit "3" official
receipt of plaintiff dated July 3, 1997, would this be your official receipt which you issued to
your client which they make renewal of the loan?
A: Yes, sir.
x x x           x x x          x x x Although the respondent did not dispute the fact of alteration, he nevertheless denied that the
alteration was done without the petitioner’s consent. The parties’ Pre-Trial Order dated
Q: And naturally when a loan has been renewed, the old one which is replaced by the renewal November 3, 199824 states that:
has already been cancelled, is that correct?
xxx There being no possibility of a possible compromise agreement, stipulations, admissions,
A: Yes, sir. and denials were made, to wit:

Q: It is also true to say that all promissory notes and all postdated checks covered by the old
loan which have been the subject of the renewal are deemed cancelled and replaced is that
correct?
A: Yes, sir. xxx22
FOR DEFENDANT LEONARDO BOGNOT
13. That the promissory note subject of this case marked as Annex "A" of the complaint was
originally dated April 1, 1997 with a superimposed rubber stamp mark "June 30, 1997" to
which the plaintiff admitted the superimposition.

Civil Case No. 97-0572 14. The superimposition was done without the knowledge, consent or prior consultation with
Leonardo Bognot which was denied by plaintiff."25 (Emphasis supplied)
TSN November 27, 1998, Page 27.
Significantly, the respondent also admitted in the Pre-Trial Order that part of its company
practice is to rubber stamp, or make a superimposition through a rubber stamp, the old
Q: What happened to the check that Mr. Bognot issued? promissory note which has been renewed to make it appear that there is a new loan obligation.
The petitioner did not rebut this statement. To our mind, the failure to rebut is tantamount to
Court: There are two Bognots. Who in particular? an admission of the respondent’s allegations:

Q: Leonardo Bognot, Your Honor. "22. That it is the practice of plaintiff to just rubber stamp or make superimposition through a
rubber stamp on old promissory note which has been renewed to make it appear that there is a
A: Every month, they were renewed, he issued a new check, sir. new loan obligation to which the plaintiff admitted." (Emphasis Supplied).26

Q: Do you have a copy of the checks?
A: We returned the check upon renewing the loan.23
In light of these exchanges, wefind that the petitioner failed to discharge his burden ofproving
payment.
The Alteration of the Promissory Note
Did Not Relieve the Petitioner From Liability
We now come to the issue of material alteration. The petitioner raised as defense the alleged
material alteration of Promissory Note No. 97-035 as basis to claim release from his loan. He
alleged that the respondent’s superimposition of the due date "June 30, 1997" on the
promissory note without his consent effectively relieved him of liability.
We find this defense untenable.
Even assuming that the note had indeed been tampered without the petitioner’s consent, the
latter cannot totally avoid payment of his obligation to the respondent based on the contract of
loan.
Based on the records, the Bognot Siblings had applied for and were granted a loan of
₱500,000.00 by the respondent. The loan was evidenced by a promissory note and secured by
a post-dated check27 dated November 30, 1996. In fact, the petitioner himself admitted his loan
application was evidenced by the Promissory Note dated April 1, 1997.28 This loan was
renewed several times by the petitioner, after paying the renewal fees, as shown by the
Official Receipt Nos. 79729 and 58730 dated May 5 and July 3, 1997, respectively. These
official receipts were issued in the name of the petitioner. Although the petitioner had insisted
that the loan had been extinguished, no other evidence was presented to prove payment other
than the cancelled and returnedpost-dated check.
Under this evidentiary situation, the petitioner cannot validly deny his obligation and liability
to the respondent solely on the ground that the Promissory Note in question was tampered.
Notably, the existence of the obligation, as well as its subsequent renewals, have been duly
established by: first, the petitioner’s application for the loan; second, his admission that the
loan had been obtained from the respondent; third, the post-dated checks issued by the
petitioner to secure the loan; fourth, the testimony of Mr. Bernardez on the grant, renewal and
non-payment of the loan; fifth, proof of non-payment of the loan; sixth, the loan renewals; and
seventh, the approval and receipt of the loan renewals.
In Guinsatao v. Court of Appeals,31 this Court pointed out that while a promissory note is
evidence of an indebtedness, it is not the only evidence, for the existence of the obligation can
be proven by other documentary evidence such as a written memorandum signed by the
parties. In Pacheco v. Court of Appeals,32 this Court likewise expressly recognized that a
check constitutes anevidence of indebtedness and is a veritable proof of an obligation. It canbe
used in lieu of and for the same purpose as a promissory note and can therefore be presented to
establish the existence of indebtedness.33
In the present petition, we find that the totality of the evidence on record sufficiently
established the existence of the petitioner’s indebtedness (and liability) based on the contract
ofloan. Even with the tampered promissory note, we hold that the petitioner can still be held
liable for the unpaid loan.
The Petitioner’s BelatedClaim of Novation by Substitution May no Longer be Entertained
It has not escaped the Court’s attention that the petitioner raised the argument that the
obligation had been extinguished by novation. The petitioner never raised this issue before the
lower courts.
It is a settled principle of law thatno issue may be raised on appeal unless it has been brought
before the lower tribunal for its consideration. 34 Matters neither alleged in the pleadingsnor
raised during the proceedings below cannot be ventilated for the first time on appeal before the
Supreme Court.35
In any event, we find no merit in the defense of novation as we discuss at length below.
Novation cannot be presumed and must be clearly and unequivocably proven.
Novation is a mode of extinguishing an obligation by changing its objects or principal
obligations, by substituting a new debtor in place of the old one, or by subrogating a third
person to the rights of the creditor.36
Article 1293 of the Civil Code defines novation as follows:
"Art. 1293. Novation which consists insubstituting a new debtor in the place of the
originalone, may be made even without the knowledge or against the will of the latter, but not
without the consent of the creditor. Payment by the new debtor gives him rights mentioned in
Articles 1236 and 1237."
To give novation legal effect, the original debtor must be expressly released from the
obligation, and the new debtor must assume the original debtor’s place in the contractual
relationship. Depending on who took the initiative, novation by substitution of debtor has two
forms – substitution by expromision and substitution by delegacion. The difference between
these two was explained in Garcia v. Llamas:37
"In expromision, the initiative for the change does not come from -- and may even be made
without the knowledge of -- the debtor, since it consists of a third person’s assumption of the
obligation. As such, it logically requires the consent of the third person and the creditor. In
delegacion, the debtor offers, and the creditor accepts, a third person who consents to the
substitution and assumes the obligation; thus, the consent of these three persons are
necessary."
In both cases, the original debtor must be released from the obligation; otherwise, there can be
no valid novation.38Furthermore, novation by substitution of debtor must alwaysbe made with
the consent of the creditor.39
The petitioner contends thatnovation took place through a substitution of debtors when Mrs.
Bognot renewed the loan and assumed the debt. He alleged that Mrs. Bognot assumed the
obligation by paying the renewal fees and charges, and by executing a new promissory note.
He further claimed that she issued her own check40 to cover the renewal fees, which fact,
according to the petitioner, was done with the respondent’s consent.
Contrary to the petitioner’s contention, Mrs. Bognot did not substitute the petitioner as debtor.
She merely attempted to renew the original loan by executing a new promissory note 41 and
check. The purported one month renewal of the loan, however, did not push through, as Mrs.
Bognot did not return the documents or issue a new post dated check. Since the loan was not
renewed for another month, the originaldue date, June 30,1997, continued to stand.
More importantly, the respondent never agreed to release the petitioner from his obligation.
That the respondent initially allowed Mrs. Bognot to bring home the promissory note,
disclosure statement and the petitioner’s previous check dated June 30, 1997, does not ipso
factoresult in novation. Neither will this acquiescence constitute an implied acceptance of the
substitution of the debtor.
In order to give novation legal effect, the creditor should consent to the substitution of a new
debtor. Novation must be clearly and unequivocally shown, and cannot be presumed.
Since the petitioner failed to show thatthe respondent assented to the substitution, no valid
novation took place with the effect of releasing the petitioner from his obligation to the
respondent.
Moreover, in the absence of showing that Mrs. Bognot and the respondent had agreed to
release the petitioner, the respondent can still enforce the payment of the obligation against the
original debtor. Mere acquiescence to the renewal of the loan, when there is clearly no
agreement to release the petitioner from his responsibility, does not constitute novation.
The Nature of the Petitioner’s Liability
On the nature of the petitioner’s liability, we rule however, that the CA erred in holding the
petitioner solidarily liable with Rolando.
A solidary obligation is one in which each of the debtors is liable for the entire obligation, and
each of the creditors is entitled to demand the satisfaction of the whole obligation from any or
all of the debtors.42 There is solidary liability when the obligation expressly so states, when the
law so provides, or when the nature of the obligation so requires. 43 Thus, when the obligor
undertakes to be "jointly and severally" liable, the obligation is solidary,
In this case, both the RTC and the CA found the petitioner solidarily liable with Rolando
based on Promissory Note No. 97-035 dated June 30, 1997. Under the promissory note, the
Bognot Siblings defined the parameters of their obligation as follows:
"FOR VALUE RECEIVED, I/WE, jointly and severally, promise to pay to READY
RESOURCES INVESTORS RRI LENDING CORPO. or Order, its office at Paranaque, M.M.
the principal sum of Five Hundred Thousand PESOS (₱500,000.00), PhilippineCurrency, with
interest thereon at the rate of Five percent (5%) per month/annum, payable in One Installment
(01) equal daily/weekly/semi-monthly/monthly of PESOS Five Hundred Thousand Pesos
(₱500,000.00), first installment to become due on June 30, 1997. xxx"44 (Emphasis Ours).
Although the phrase "jointly and severally" in the promissory note clearly and unmistakably
provided for the solidary liability of the parties, we note and stress that the promissory note is
merely a photocopyof the original, which was never produced.
Under the best evidence rule, whenthe subject of inquiry is the contents of a document, no
evidence isadmissible other than the original document itself except in the instances
mentioned in Section 3, Rule 130 of the Revised Rules of Court.45
The records show that the respondenthad the custody of the original promissory note dated
April 1, 1997, with a superimposed rubber stamp mark "June 30, 1997", and that it had been
given every opportunity to present it. The respondent even admitted during pre-trial that it
could not present the original promissory note because it is in the custody of its cashier who is
stranded in Bicol.46 Since the respondent never produced the original of the promissory note,
much less offered to produce it, the photocopy of the promissory note cannot be admitted as
evidence. Other than the promissory note in question, the respondent has not presented any
other evidence to support a finding of solidary liability. As we earlier noted, both lower courts
completely relied on the note when they found the Bognot siblingssolidarily liable.
The well-entrenched rule is that solidary obligation cannot be inferred lightly. It must be
positively and clearly expressed and cannot be presumed.47
In view of the inadmissibility of the promissory note, and in the absence of evidence showing
that the petitioner had bound himself solidarily with Rolando for the payment of the loan, we
cannot but conclude that the obligation to pay is only joint.48
The 5% Monthly Interest Stipulated in the Promissory Note is Unconscionable and Should be
Equitably Reduced
Finally, on the issue of interest, while we agree with the CA that the petitioner is liable to the
respondentfor the unpaid loan, we find the imposition of the 5% monthly interest to be
excessive, iniquitous, unconscionable and exorbitant, and hence, contrary to morals and
jurisprudence. Although parties to a loan agreement have wide latitude to stipulate on the
applicable interest rate under Central Bank Circular No. 905 s. 1982 (which suspended the
Usury Law ceiling on interest effective January 1, 1983), we stress that unconscionable
interest rates may still be declared illegal.49
In several cases, we haveruled that stipulations authorizing iniquitous or unconscionable
interests are contrary to morals and are illegal. In Medel v. Court of Appeals, 50 we annulled a
stipulated 5.5% per month or 66% per annum interest on a ₱500,000.00 loan, and a 6% per
month or 72% per annum interest on a ₱60,000.00 loan, respectively, for being excessive,
iniquitous, unconscionableand exorbitant.1âwphi1
We reiterated this ruling in Chua v. Timan,51 where we held that the stipulated interest rates of
3% per month and higher are excessive, iniquitous, unconscionable and exorbitant, and must
therefore be reduced to 12% per annum.
Applying these cited rulings, we now accordingly hold that the stipulated interest rate of 5%
per month, (or 60% per annum) in the promissory note is excessive, unconscionable, contrary
to morals and is thus illegal. It is void ab initiofor violating Article 1306 52 of the Civil
Code.1âwphi1 We accordingly find it equitable to reduce the interest rate from 5% per month
to 1% per month or 12% per annum in line with the prevailing jurisprudence.
WHEREFORE, premises considered, the Decision dated March 28, 2007 of the Court of
Appeals in CA-G.R. CV No. 66915 is hereby AFFIRMED with MODIFICATION, as follows:
1. The petitioner Leonardo A. Bognotand his brother, Rolando A. Bognot are
JOINTLY LIABLE to pay the sum of ₱500,000.00 plus 12% interest per annum
from December 3, 1997 until fully paid.
2. The rest of the Court of Appeals' dispositions are hereby AFFIRMED.
Costs against petitioner Leonardo A. Bognot.
SO ORDERED.
G.R. No. 117660               December 18, 2000
AGRO CONGLOMERATES, INC. and MARIO SORIANO, petitioners, 
vs.
THE HON. COURT OF APPEALS and REGENT SAVINGS and LOAN BANK,
INC., respondents.
DECISION
QUISUMBING, J.:
This is a petition for review challenging the decision 1 dated October 17, 1994 of the Court of
Appeals in CA-G.R. No. 32933, which affirmed in toto the judgment of the Manila Regional
Trial Court, Branch 27, in consolidated Cases Nos. 86-37374, 86-37388, 86-37543.
This petition springs from three complaints for sums of money filed by respondent bank
against herein petitioners. In the decision of the Court of Appeals, petitioners were ordered to
pay respondent bank, as follows:
Wherefore, judgment is hereby rendered in favor of plaintiff and against defendants, as
follows:
1) In Civil Case No. 86-37374, defendants [petitioners, herein] are ordered jointly
and severally, to pay to plaintiff the amount of P78,212.29, together with interest
and service charge thereon, at the rates of 14% and 3% per annum, respectively,
computed from November 10, 1982, until fully paid, plus stipulated penalty on
unpaid principal at the rate of 6% per annum, computed from November 10, 1982,
plus 15% as liquidated damage plus 10% of the total amount due, as attorney’s fees,
plus costs;
2) In Civil Case No. 86-37388, defendant is ordered to pay plaintiff the amount of
P632,911.39, together with interest and service charge thereon at the rate of 14%
and 3% per annum, respectively, computed from January 15, 1983, until fully paid,
plus stipulated penalty on unpaid principal at the rate of 6% per annum, computed
from January 15, 1983, plus liquidated damages equivalent to 15% of the total
amount due, plus attorney’s fees equivalent to 10% of the total amount due, plus
costs; and
3) In Civil Case No. 86-37543, defendant is ordered to pay plaintiff, on the first
cause of action, the amount of P510,000.00, together with interest and service
charge thereon, at the rates of 14% and 2% per annum, respectively, computed from
March 13, 1983, until fully paid, plus a penalty of 6% per annum, based on the
outstanding principal of the loan, computed from March 13, 1983, until fully paid;
and on the second cause of action, the amount of P494,936.71, together with interest
and service charge thereon at the rates of 14% and 2%, per annum, respectively,
computed from March 30, 1983, until fully paid, plus a penalty charge of 6% per
annum, based on the unpaid principal, computed from March 30, 1983, until fully
paid, plus (on both causes of action) an amount equal to 15% of the total amounts
due, as liquidated damages, plus attorney’s fees equal to 10% of the total amounts
due, plus costs.2
Based on the records, the following are the factual antecedents.
On July 17, 1982, petitioner Agro Conglomerates, Inc. as vendor, sold two parcels of land to
Wonderland Food Industries, Inc. In their Memorandum of Agreement,3 the parties covenanted
that the purchase price of Five Million (P5,000,000.00) Pesos would be settled by the vendee,
under the following terms and conditions: (1) One Million (P1,000,000.00) Pesos shall be paid
in cash upon the signing of the agreement; (2) Two Million (P2,000,000.00) Pesos worth of
common shares of stock of the Wonderland Food Industries, Inc.; and (3) The balance of
P2,000,000.00 shall be paid in four equal installments, the first installment falling due, 180
days after the signing of the agreement and every six months thereafter, with an interest rate of
18% per annum, to be advanced by the vendee upon the signing of the agreement.
On July 19, 1982, the vendor, the vendee, and the respondent bank Regent Savings & Loan
Bank (formerly Summa Savings & Loan Association), executed an Addendum4 to the previous
Memorandum of Agreement. The new arrangement pertained to the revision of settlement of
the initial payments of P1,000,000.00 and prepaid interest of P360,000.00 (18% of
P2,000,000.00) as follows:
Whereas, the parties have agreed to qualify the stipulated terms for the payment of the said
ONE MILLION THREE HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS.
WHEREFORE, in consideration of the mutual covenant and agreement of the parties, they do
further covenant and agree as follows:
1. That the VENDEE instead of paying the amount of ONE MILLION THREE
HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS in cash, hereby
authorizes the VENDOR to obtain a loan from Summa Savings and Loan
Association with office address at Valenzuela, Metro Manila, being represented
herein by its President, Mr. Jaime Cariño and referred to hereafter as Financier; in
the amount of ONE MILLION THREE HUNDRED SIXTY THOUSAND
(P1,360,000.00)PESOS, plus interest thereon at such rate as the VENDEE and the
Financier may agree, which amount shall cover the ONE MILLION (P1,000,000.00)
PESOS cash which was agreed to be paid upon signing of the Memorandum of
Agreement, plus 18% interest on the balance of two million pesos stipulated upon in
Item No. 1(c) of the said agreement; provided however, that said loan shall be made
for and in the name of the VENDOR.
2. The VENDEE also agrees that the full amount of ONE MILLION THREE
HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS be paid directly to the
VENDOR; however, the VENDEE hereby undertakes to pay the full amount of the
said loan to the Financier on such terms and conditions agreed upon by the Financier
and the VENDOR, it being understood that while the loan will be secured from and
in the name of the VENDOR, the VENDEE will be the one liable to pay the entire
proceeds thereof including interest and other charges.5
This addendum was not notarized.
Consequently, petitioner Mario Soriano signed as maker several promissory notes,6 payable to
the respondent bank. Thereafter, the bank released the proceeds of the loan to petitioners.
However, petitioners failed to meet their obligations as they fell due. During that time, the
bank was experiencing financial turmoil and was under the supervision of the Central Bank.
Central Bank examiner and liquidator Cordula de Jesus, endorsed the subject promissory notes
to the bank’s counsel for collection. The bank gave petitioners opportunity to settle their
account by extending payment due dates. Mario Soriano manifested his intention to re-
structure the loan, yet did not show up nor submit his formal written request.
Respondent bank filed three separate complaints before the Regional Trial Court of Manila for
Collection of Sums of money. The corresponding case histories are illustrated in the table
below:
Date Amount Payment Payment
of Due Extension
Loan Date Dates
Civil Case 86-37374 P 78,212.29 Nov. 10, 1982 Feb. 8, 1983
 (with the participation of respondent bank) executed an addendum providing instead, that the
August 12, 1982 May 9, 1983 petitioners would secure a loan in the name of Agro Conglomerates Inc. for the total amount
Aug. 7, 1983 of the initial payments, while the settlement of said loan would be assumed by Wonderland.
Thereafter, petitioner Soriano signed several promissory notes and received the proceeds in
Civil Case 86-37388 P 632,911.39 Jan. 15, 1983 May 16, 1983 behalf of petitioner-company.
July 19, 1982 Aug. 14, 1983
By this time, we note a subsidiary contract of suretyship had taken effect since petitioners
Civil Case 86-37543 P 510,000.00 March 13, 1983 June 11, 1983 signed the promissory notes as maker and accommodation party for the benefit of
September 14, 1982 P 494,936.71 March 30, 1983 Sept. 9, 1983 Wonderland. Petitioners became liable as accommodation party. An accommodation party is a
October 1, 1982 June 28, 1983 person who has signed the instrument as maker, acceptor, or indorser, without receiving value
Sept. 26, 1983 therefor, and for the purpose of lending his name to some other person and is liable on the
instrument to a holder for value, notwithstanding such holder at the time of taking the
instrument knew (the signatory) to be an accommodation party.8 He has the right, after paying
In their answer, petitioners interposed the defense of novation and insisted there was a valid the holder, to obtain reimbursement from the party accommodated, since the relation between
substitution of debtor. They alleged that the addendum specifically states that although the them has in effect become one of principal and surety, the accommodation party being the
promissory notes were in their names, Wonderland shall be responsible for the payment surety.9 Suretyship is defined as the relation which exists where one person has undertaken an
thereof. obligation and another person is also under the obligation or other duty to the obligee, who is
entitled to but one performance, and as between the two who are bound, one rather than the
other should perform.10 The surety’s liability to the creditor or promisee of the principal is said
The trial court held that petitioners are liable, to wit: to be direct, primary and absolute; in other words, he is directly and equally bound with the
principal.11 And the creditor may proceed against any one of the solidary debtors.12
The evidences, however, disclose that Wonderland did not comply with its obligation under
said ‘Addendum’ (Exh. ‘S’) as the agreement to turn over the farmland to it, did not We do not give credence to petitioners’ assertion that, as provided by the addendum, their
materialize (57 tsn, May 29, 1990), and there was, actually no sale of the land (58 tsn, ibid). obligation to pay the promissory notes was novated by "substitution" of a new debtor,
Hence, Wonderland is not answerable. And since the loans obtained under the four promissory Wonderland. Contrary to petitioners’ contention, the attendant facts herein do not make a case
notes (Exhs. ‘A’, ‘C’, ‘G’, and ‘E’) have not been paid, despite opportunities given by plaintiff of novation.
to defendants to make payments, it stands to reason that defendants are liable to pay their
obligations thereunder to plaintiff. In fact, defendants failed to file a third-party complaint
against Wonderland, which shows the weakness of its stand that Wonderland is answerable to Novation is the extinguishment of an obligation by the substitution or change of the obligation
make said payments.7 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.13 In order that a novation can take place, the concurrence of
Petitioners appealed to the Court of Appeals. The trial court’s decision was affirmed by the the following requisites14 are indispensable:
appellate court.
1) There must be a previous valid obligation;
Hence, this recourse, wherein petitioners raise the sole issue of:
2) There must be an agreement of the parties concerned to a new contract;
WHETHER THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE
ADDENDUM, SIGNED BY THE PETITIONERS, RESPONDENT BANK AND
WONDERLAND INC., CONSTITUTES A NOVATION OF THE CONTRACT BY 3) There must be the extinguishment of the old contract; and
SUBSTITUTION OF DEBTOR, WHICH EXEMPTS THE PETITIONERS FROM ANY
LIABILITY OVER THE PROMISSORY NOTES. 4) There must be the validity of the new contract.

Revealed by the facts on record, the conflict among the parties started from a contract of sale
of a farmland between petitioners and Wonderland Food Industries, Inc. As found by the trial
court, no such sale materialized.
A contract of sale is a reciprocal transaction. The obligation or promise of each party is the
cause or consideration for the obligation or promise by the other. The vendee is obliged to pay
the price, while the vendor must deliver actual possession of the land. In the instant case the
original plan was that the initial payments would be paid in cash. Subsequently, the parties
In the instant case, the first requisite for a valid novation is lacking. There was no novation by
"substitution" of debtor because there was no prior obligation which was substituted by a new
contract. It will be noted that the promissory notes, which bound the petitioners to pay, were
executed after the addendum. The addendum modified the contract of sale, not the stipulations
in the promissory notes which pertain to the surety contract. At this instance, Wonderland
apparently assured the payment of future debts to be incurred by the petitioners. Consequently,
only a contract of surety arose. It was wrong for petitioners to presume a novation had taken
place. The well-settled rule is that novation is never presumed, 15 it must be clearly and
unequivocally shown.16
As it turned out, the contract of surety between Wonderland and the petitioners was
extinguished by the rescission of the contract of sale of the farmland. With the rescission,
there was confusion or merger in the persons of the principal obligor and the surety, namely
the petitioners herein. The addendum which was dependent thereon likewise lost its efficacy.
It is true that the basic and fundamental rule in the interpretation of contract is that, if the
terms thereof are clear and leave no doubt as to the intention of the contracting parties, the
literal meaning shall control. However, in order to judge the intention of the parties, their
contemporaneous and subsequent acts should be considered.17
The contract of sale between Wonderland and petitioners did not materialize. But it was
admitted that petitioners received the proceeds of the promissory notes obtained from
respondent bank.
Sec. 22 of the Civil Code provides:
Every person who through an act of performance by another, or any other means, acquires or
comes into possession of something at the expense of the latter without just or legal ground,
shall return the same to him.
Petitioners had no legal or just ground to retain the proceeds of the loan at the expense of
private respondent. Neither could petitioners excuse themselves and hold Wonderland still
liable to pay the loan upon the rescission of their sales contract. If petitioners sustained
damages as a result of the rescission, they should have impleaded Wonderland and asked
damages. The non-inclusion of a necessary party does not prevent the court from proceeding
in the action, and the judgment rendered therein shall be without prejudice to the rights of such
necessary party.18 But respondent appellate court did not err in holding that petitioners are
duty-bound under the law to pay the claims of respondent bank from whom they had obtained
the loan proceeds.
WHEREFORE, the petition is DENIED for lack of merit. The assailed decision of the Court
of Appeals dated October 17, 1994 is AFFIRMED. Costs against petitioners.
SO ORDERED.
G.R. No. 111890 May 7, 1997
CKH INDUSTRIAL AND DEVELOPMENT CORPORATION and RUBI
SAW, petitioners, 
vs.
THE COURT OF APPEALS, (FORMER 13TH DIVISION), THE REGISTER OF
DEEDS OF METRO MANILA — DISTRICT III (VALENZUELA), CENTURY-WELL
PHIL. CORPORATION, LOURDES CHONG, CHONG TAK KEI and UY CHI
KIM, respondents.
TORRES, JR., J.:
The present petition springs from a civil action instituted by herein petitioners, to rescind
and/or annul the sale of two parcels of land, from petitioner CKH Industrial and Development
Corporation (CKH, for brevity) to private respondent Century-Well Phil. Corporation
(Century-Well, for brevity), for failure to pay the stipulated price of P800,000.00.
Petitioners specifically assail the Decision1 of the respondent Court of Appeals, which denied
the annulment of the sale. The appellate court found that there was payment of the
consideration by way of compensation, and ordered petitioners to pay moral damages and
attorney's fees to private respondents. The dispositive portion of the questioned decision reads:
WHEREFORE, in view of all the foregoing, the appealed Decision is
REVERSED. The complaint is DISMISSED with costs against the
plaintiffs. The plaintiffs jointly and severally are required to pay each of
the defendants Lourdes Chong, Chong Tak Kei, and Uy Chi Kim moral
damages of P20,000.00; and further requiring the plaintiffs, jointly and
severally, to pay to each of the defendants Century-Well Phil.
Corporation, Lourdes Chong, Chong Tak Kei and Uy Chi Kim attorney's
fees of P20,000.00.
With costs in this instance against the plaintiffs-appellees.
SO ORDERED.2
The said decision reversed the disposition of the Regional Trial Court of Valenzuela, Branch
172 in Civil Case No. 2845-V-88 entitled "CKH Industrial & Development Corporation vs.
Century-Well Philippine Corporation, Lourdes Chong, Chong Tak Kei, Uy Chi Kim, and the
Register of Deeds of Metro Manila, District III (Valenzuela)." The trial court's decision stated
pertinently:
WHEREFORE, in view of the foregoing, judgment is hereby rendered in
favor of plaintiff:
1. Ordering the rescission/annulment of the Deed of Absolute Sale of
Reality.
2. Ordering defendants Lourdes Chong, Chong Tak Kei and Century-Well
to pay plaintiffs moral damages in the sum of P200,000.00;
3. Ordering defendants Lourdes Chong, Chong Tak Kei and Century Well
to pay plaintiffs Attorney's fees in the amount of 15% of the agreed price
of P800,000.00 per appearance fees of P500.00 per appearance;
 4. Ordering defendants Lourdes Chong, Chong Tak Kei and Century Well
to pay the costs of suit;
5. As the writ of preliminary injunction was denied, the defendant Register
of Deeds of Valenzuela is hereby ordered to cancel the certificates of title
issued to Century-Well by virtue of the Deed of Absolute Sale of Realty
and to reissue a new title in the name of CKH.
The case is dismissed as far as defendant Uy Chi Kim is concerned. His
counterclaim is likewise dismissed considering that by his mediation he
took it upon himself to assume the damages he allegedly suffered.
SO ORDERED.3
The records disclosed that petitioner CKH is the owner of two parcels of land, consisting of
4,590 sq. m. and 300 sq. m. respectively, located in Karuhatan, Valenzuela, and covered by
Transfer Certificates of Tittle Nos. 8710 and 8711, Register of Deeds of Caloocan City (now
Register of Deeds District III [Valenzuela]). 4 CKH is a corporation established under
Philippine law by the late Cheng Kim Heng (Cheng), an immigrant of Chinese descent. Upon
Cheng's demise, control over the petitioner corporation was transferred to Rubi Saw, also of
Chinese descent, and Cheng's second wife.
It also appear that before coming to the Philippines, Cheng Kim Heng was married to Hung
Yuk Wah (Wah), who lived in Hongkong together with their children, Chong Tak Kei (Kie),
Chong Tak Choi (Choi), and Chong Tak Yam (Yam). After Cheng immigrated to the
Philippines in 1976, and married Rubi Saw in 1977, he brought his first wife, Heng, and their
children to this country, and established himself and his Chinese family as naturalized Filipino
citizens. Heng died in 1984.
On May 8, 1988, Rubi Saw and Lourdes Chong, the wife of Cheng's son, Kei, met at the 1266
Soler St., Sta. Cruz, Manila, the residence of Cheng's friend, Uy Chi Kim, and executed a
Deed of Absolute Sale,5 whereby Rubi Saw, representing CKH, agreed to sell the subject
properties to Century-Well, a corporation owned in part by Lourdes Chong, Kei and Choi.6
The pertinent portions of the Deed of Sale are hereby reproduced:
KNOW ALL MEN BY THESE PRESENTS:
This Deed of Absolute Sale of Realty executed by and between:
CKH INDUSTRIAL & DEVELOPMENT CORPORATION, a
corporation duly organized and existing under and by virtue of the laws of
the Republic of the Philippines, with business address at 553 Bermuda
St.., Sta. Cruz, Manila, represented in this act by its authorized
representative, Ms. RUBI SAW, hereinafter referred to as VENDOR,
— in favor of —
CENTURY-WELL PHIL. CORPORATION, a corporation duly organized
and existing under and by virtue of the laws of the Republic of the
Philippines at least sixty 60%) percent of the subscribed capital stock of
which is owned by Filipino citizens, duly qualified to own and acquire
lands in the Philippines, with office and business address at 66 F Bautista
St., Valenzuela, Metro Manila and represented in this act by its Treasurer
and authorized representative, Ms. Lourdes Chong, hereinafter referred to
as VENDEE,
W I T N E S S E T H:
That vendor is the registered owner of two adjacent parcels of residential
land situated in the Bo. of Karuhatan, Municipality of Valenzuela, Metro
Manila, covered by Transfer Certificates of Titles Nos. B-8710 and B-
8711 of the Registry of Deeds for Metro Manila District III, and more
particularly described as follows:
xxx xxx xxx
That for and in consideration of the sum of EIGHT HUNDRED
THOUSAND (P800,000.00) PESOS, Philippine Currency, paid by
VENDEE to VENDOR, receipt of which is hereby acknowledged by the
letter to its entire satisfaction, said VENDOR, by these presents, has
SOLD, CEDED, TRANSFERRED, and CONVEYED by way of absolute
sale unto said VENDEE, its successors and assigns, the two parcels of
land above described and any and all improvements therein;
That the above-described parcels of land are free from liens and
encumbrances of whatever kind and nature.
IN WITNESS WHEREOF, the parties hereto and their instrumental
witnesses have hereunto set their hand on _____at_____.
Rubi Saw signed on behalf of CKH, while Lourdes Chong signed for Century Well. 7 The
document was notarized the day after the parties signed the same, i.e., March 9, 1988.8
Claiming that the consideration for the sale of the subject properties was not paid by the
private respondent-vendee despite several demands to do so, Petitioners CKH and Rubi Saw
filed the instant complaint 9 on May 23, 1988, with the Regional Trial Court of Valenzuela,
Branch 172, against Century-Well, Lourdes Chong, Chong Tak Kei and Uy Chi Kim.
Petitioners prayed for the annulment/rescission of the Deed of Absolute Sale, and in the
meantime, for the issuance of a writ of preliminary injunction restraining the Register of
Deeds of Valenzuela from registering the Certificates of Title over the subject properties in the
name of the private respondent Century-Well.
The trial court synthesized the petitioners' submissions as follows:
The complaint alleges the following:
Lourdes Chong and Rubi Saw agreed that the full payment of P800,000.00
as purchase price shall be in the form of a Manager's Check, to be
delivered to Rubi Saw upon the execution of the Deed of Sale, the
preparation of which, Lourdes Chong undertook. On May 8, 1988, the
date agreed upon for the execution of the Deed of Sale, plaintiff Rubi Saw,
accompanied by her friend Aurora Chua Ng, went to 1266 Soler St., Sta.
Cruz, Manila which is the residence and place of business of defendant Uy
Chi Kim, an elderly man of Chinese ancestry and the place suggested by
Lourdes Chong as their meeting place. During the meeting, Uy Chi Kim
who was there presented to Rubi Saw a Deed of Absolute Sale in favor of
defendant Century Well for her signature. Before Rubi Saw signed the
Deed of Absolute Sale she inquired about the payment of the P800,000.00.
Defendant Uy Chi Kim presented to her a personal check but she refused
the same because it was contrary to her arrangement with Lourdes Chong
that the payment would be in the form of Manager's Check. Uy Chi Kim
then explained to Rubi Saw that since it was a Sunday that day, they were
unable to obtain the Manager's Check. He assured her that he had
sufficient cash money at the first floor of his residence which is a store
owned by Uy Chi Kim. Before Uy Chi Kim left on the pretext of getting
the money, he persuaded plaintiff Rubi Saw to sign the Deed of Absolute
Sale and give the same to Lourdes Chong together with the two
Certificates of Title. Since Uy Chi Kim is an elderly Chinese whom Rubi
Saw had no reason to mistrust, following Chinese custom, plaintiff Rubi
Saw acceded to the request of Uy Chi Kim, trusting that he had sufficient
cash amounting to P800,000.00 kept in the first floor of his residence.
When Uy Chi Kim returned, he told Rubi Saw that he had only P20,000
on hand. He assured plaintiff, however, that there was no cause for her to
worry (as) he was certain he would have the entire amount ready by the
next day when the banks would be open. Again, trusting the elderly
defendant Uy Chi Kim, Rubi Saw did not object and did not insist on the
return of the Deed of Absolute Sale that she signed, together with the
Certificate of Title which she delivered to Lourdes Chong. The next day,
May 9, 1988 Rubi Saw called Lourdes Chong and Uy Chi Kim over the
telephone but was told they were not around. She could not go to the
residence of Uy Chi Kim because she could not leave her office due to
business concerns. On May 10, 1988 Rubi Saw repeatedly called the two
but was informed they were not around. On May 11, 1988 already
anxious, she personally went to the residences and offices of the two
defendants but they were not around. On May 12, 1988 Rubi Saw wrote
defendant Century Well advising Lourdes Chong of the rescission and
cancellation of the Deed of Absolute Sale because of lack of
consideration. Lourdes Chong refused to receive the letter. Thereafter,
several demand letters were sent to the defendants but they refused to pay
plaintiffs. Worried that defendants might surreptitiously transfer the
certificates of title to their names, Rubi Saw wrote the public defendant
Register of Deeds on May 16, 1988, giving information about the
circumstances of the sale and requesting not to allow registration of the
Deed of Absolute Sale, together with an Affidavit of Adverse Claim. On
May 20, 1988, plaintiffs representative was informed by the Register of
Deeds that defendants have made representations with defendant to
Register the Deed of Absolute Sale on May 23, 1988.
Plaintiff Rubi Saw filed this Complaint alleging that Lourdes Chong and
Uy Chi Kim maliciously misled her to believe that they would pay the
P800,000 as consideration when in fact they had no intention to pay
plaintiffs, and prayed that they should be awarded moral damages; that
defendants be restrained from registering the Deed of Absolute Sale, and
be ordered to return to them the 2 titles of the properties together with the
Deed of Absolute Sale. 10
On the other hand, private respondents Century-Well, Lourdes Chong, and Chong Tak Kei
alleged that:
. . . the consideration for the two parcels of land was paid by means of off-
setting or legal compensation in the amount of P700,000 thru alleged
promissory notes executed by Cheng Kim Heng in favor of his sons
Chong Tak Choi and Chong Tak Kei (Exh. 6, 7, & 8) and payment of
P100,000.00 in cash.
The defendant Century Well filed its Answer stating that during the
operation of plaintiff CKH, the latter borrowed from Chong Tak Choi and
Chong Tak Kei the total sum of P700,000.00 paying interest on
P300,000.00 while the remaining P400,000.00 was interest free, and upon
the death of Cheng Kim Heng, it stopped making said payments.
Defendant tried to prove that the source of this P700,000 was Hung Yuk
Wah while she was still residing in Hongkong, sent via bank draft from
Hongkong to Chong Tak Choi and Chong Tak Kei on a bank to bank
transfer. Defendant likewise tried to prove that after the death of Cheng
Kim Heng, Rubi Saw unilaterally arrogated to herself the executive
positions in plaintiff corporation such as President, Secretary, Treasurer
and General Manager; thus effectively shunting aside Hung Yuk Wah and
her children in the management of plaintiff corporation. Family
differences (arose) between Rubi Saw on one hand, and Hung Yuk Wah
and her children on the other hand which turned to worst after the death of
Cheng Kim Heng. This brought about the entry of Chinese mediators
between them, one of whom is defendant Uy Chi Kim, a reason why the
execution of the Deed of Absolute Sale was to be done at the residence
and business address of Uy Chi Kim. 11
Uy Chi Kim, on the other hand, answered on his behalf, that:
. . . his only participation in the transaction was as a mediator, he being
one of the closest friends of Cheng Kim Heng; that because the heirs of
Cheng Kim Heng could not settle their problems he, together with Machao
Chan and Tomas Ching tried to mediate in accordance with Chinese
traditions; that after long and tedious meetings the parties finally agreed to
meet at his residence at 1266 Solar St., Sta. Cruz, Manila for the purpose
of pushing thru the sale of the properties in question as part of the
settlement of the estate. Defendant Uy Chi Kim corroborated the defense
of his co-defendants that the purchase price of the properties was
P800,000.00 the payment of which consists in the form of P100,000.00 in
cash Philippine Currency; and the balance of P700,000.00 will be applied
 as a set-off to the amount borrowed by plaintiff CKH from Chong Tak
Choi and Chong Tak Kei. He advanced the amount of P100,000.00 by
way of his personal check to Rubi Saw but because Rubi Saw refused, he
gave Rubi Saw P100,000 in the form of P100 bills which Rubi Saw and
Jacinto Say even counted. After the P100,000.00 cash was given and the
promissory notes, Rubi Saw signed the document of sale. It was during the
registration of the sale that a problem arose as to the payment of the
capital gains (tax) which Rubi Saw refused to pay. The buyer likewise
refused to pay the same. The complaint against him is baseless and which
besmirched his reputation. Hence his counterclaim for damages. 12
The trial court denied the petitioners' prayer for issuance of the writ of preliminary injunction
in its Order dated August 4, 1988. 13
After trial, the lower court rendered its Decision on February 4, 1991, finding that the
annulment of the Deed of Absolute Sale was merited, as there was no payment of the
stipulated consideration for the sale of the real properties involved to Rubi Saw.
In the first place, said the court, the Deed of Sale itself, which is the best evidence of the
agreement between the parties, did not provide for payment by offsetting a portion of the
purchase price with the outstanding obligation of Cheng Kim Heng to his sons Chong Tak
Choi and Chong Tak Kei. On the contrary, it provided for payment in cash, in the amount of
P800,000.00. The evidence presented, however, did not disclose that payment of the said
amount had ever been made by the private respondent. Moreover, there cannot be any valid
off-setting or compensation in this case, as Article 1278 of the Civil
Code 14 requires, as a prerequisite for compensation, that the parties be mutually bound
principally as creditors and debtors, which is not the case in this instance. The rescission of the
contract is, therefore, called for, ruled the court.
Upon appeal, the respondent Court of Appeals reversed the findings and pronouncements of
the trial court. In its Decision 15 dated April 21, 1993, the appellate court expressed its own
findings, that the execution of the Deed of Absolute Sale was in settlement of a dispute
between Rubi Saw and the first family of Cheng Kim Heng, which arose upon Cheng's death.
The appellate court described the history of their dispute as follows:
In 1977, Heng formed plaintiff-appellee CKH Industrial & Development
Corporation (CKH), with his first wife Wah, children Choi and Kei, and
second wife Rubi as his co-incorporators/stockholders, along with other
individuals (Exhs. C and D; ibid., p. 9 and pp. 10-13, respectively). On
April 15 and July 17 the following year, Heng, on behalf of CHK [sic],
obtained loans of P400,000.00 and P100,000.00 from Choi, for which
Heng executed two promissory notes in Choi's favor (Exhs. 6 and 7; ibid.,
p. 40 and p. 41, respectively). On November 24, 1981, Heng obtained
from his other son, Kei, another loan this time in the sum of P200,000.00
on behalf of CKH for which he issued another promissory note. (Exh.
8, ibid., p. 42.)
After its incorporation, CKH acquired two parcels of land situated in
Karuhatan, Valenzuela, Bulacan (now Metro Manila) covered by Transfer
Certificates of Title Nos. B-8710 (Annex A-Complaint; Record, p. 13) and
B-8711 (Annex B-Complaint; ibid., p. 14), which are now the subject of
litigation in instant case.
On October 11, 1982, Kei was married to defendant-appellant Lourdes
Chong nee Lourdes Gochico Hai Huat (Lourdes). During their marriage,
Kei and Lourdes resided in the house on Tetuan St., Sta. Cruz, Manila,
which CKH was then utilizing as its office. At about this time, Heng and
Rubi had moved residence from Valenzuela, Metro Manila, to Bermuda
St., Sta. Cruz, Manila.
Two years later, or in late 1984, Heng died. Thenceforth, there appeared to
be a falling out between Heng's first wife Wah and their three children on
the one hand, and his second wife Rubi, on the other, which came to a
head when, Rubi as president of CKH wrote a letter dated August 21,
1985 to the mayor of Valenzuela, Metro Manila, to prevent issuance of a
business permit to American Metals managed by Chong Tak Choi, stating
that CKH has not allowed it to make use of the property, and on
November 7, 1985, when CKH, through counsel, demanded that Wah,
Choi and Yam vacate the residential and factory buildings and premises
owned by CKH and located on one of the subject lots on 76 F. Bautista
St., Valenzuela, which the three and the corporation (of which two of them
were stockholders), had been allegedly illegally occupying (Exhs. 10 and
10-A; Folio, pp. 44-45).
Respected mediators from the Chinese community in the persons of
defendant-appellant Uy Chi Kim, Ma Chao, Tomas Cheng and Johnny
Saw, were called in to mediate. The mediation efforts which resulted in
the withdrawal by Rubi Saw of her letter about the withholding of a
license to American Metals, Inc. and much later, had culminated in the
transaction now under litigation.
The formula for settlement in the dispute was for the Valenzuela
properties of CKH to be sold to Century Well for the amount of
P800,000.00, P100,000.00 of which will be paid in cash and the balance of
P700,000.00 to be set-off by the three (3) promissory notes executed in
behalf of CKH in favor of Chong Tak Choi and Chong Tak Kei (Exhs. 6,
7 and 8) the accumulated interests thereon to be waived as unstated
consideration of the sale.
Having reached such agreement, on May 8, 1988, the parties met at the
residence of Kim at Soler St., where the corresponding deed of absolute
sale of realty was executed (Exhs. 11, 11-A to 11-C; ibid., pp. 46-49), with
mediator Cheng and CKH stockholder and Rubi's secretary, Jacinto Say,
signing as instrumental witnesses. After having received the cash
consideration of P100,000.00 and the promissory notes amounting to
P700,000.00 Rubi had signed the deed, and thereafter delivered to Lourdes
the document of sale and the owner's copies of the certificates of tittle for
the two lots. The deed having been executed on a Sunday, the parties
agreed to have the same notarized the following day, May 9, 1988. The
 parties again met the next day, May 9, 1988, when they acknowledge the
deed before a notary public. 16
In sum, the appellate court found that there was indeed payment of the purchase price,
partially in cash for P100,000.00 and partially by compensation by off-setting the debt of
Cheng Kim Heng to his sons Choi and Kei for P500,000.00 and P200,000.00 respectively,
against the remainder of the stipulated price. Such mode of payment is recognized under
Article 1249 17 of the Civil Code.
As observed by the appellate court:
We are of the considered view that the appellees have not established what
they claim to be the invalidity of the subject deed of sale. The appellees
are therefore neither entitled to the rescission or annulment of the
document nor to the award made in their favor in the decision under
question and those other reliefs they are seeking. 18
The question the Court is now tasked to answer is whether or not there was payment of the
consideration for the sale of real property subject of this case. More specifically, was there a
valid compensation of the obligations of Cheng Kim Heng to his sons with the purchase price
of the sale?
To resolve this issue, it is first required that we establish the true agreement of the parties.
Both parties take exception to the provisions of the Deed of Absolute Sale to bolster their
respective claims. Petitioners, while submitting that as worded, the Deed of Absolute Sale
does not provide for payment by compensation, thereby ruling out the intention of the parties
to provide for such mode of payment, submit on the other hand, that they had not received
payment of the stipulated cash payment of P800,000.00. The testimony of Rubi Saw during
the hearings for preliminary injunction and during trial was submitted to advance the
submission that she was never paid the price of the subject lots, in cash or in promissory notes.
On the other side of the fence, private respondents, who, ironically, were the parties, who
drafted the subject document, claim that the Deed of Sale does not express the true agreement
of the parties, specifically with regard to the mode of payment. Private respondents allege that
the execution of the deed of absolute sale was the culmination of mediation of the dispute of
the first and second families of Cheng Kim Heng, over the properties of the decedent; that the
price of the real property subject of the contract of sale was partly in cash, and the reminder to
be compensated against Cheng's indebtedness to his sons Choi and Kei, reflected in the
promissory notes submitted as Exhibits 6, 7 and 8 during the trial; that by virtue of such
compensation, the sale has been consummated and the private respondent Century-Well is
entitled to the registration of the certificates of title over the subject properties in its name.
These contrasting submissions of the circumstances surrounding the execution of the subject
document have led to this stalemate of sorts. Still, the best test to establish the true intent of
the parties remains to be the Deed of Absolute Sale, whose genuineness and due execution, are
unchallenged. 19
Section 9 of Rule 130 of the Rules of Court states that "when the terms of an agreement have
been reduced to writing, it is considered as containing all the terms agreed upon and there can
be, between the parties and their successors-in-interest, no evidence of such terms other than
the contents of the written agreement."
The so-called "parol evidence rule" forbids any addition to or contradiction of the terms of a
written instrument by testimony or other evidence purporting to show that, at or before the
execution of the parties' written agreement, other or different terms were agreed upon by the
parties, varying the purport of the written contract. When an agreement has been reduced to
writing, the parties cannot be permitted to adduce evidence to prove alleged practices which to
all purposes would alter the terms of the written agreement. Whatever is not found in the
writing is understood to have been waived and abandoned. 20
The rule is not without exceptions, however, as it is likewise provided that a party to an action
may present evidence to modify, explain, or add to the terms of the written agreement if he
puts in issue in his pleadings: (a) An intrinsic ambiguity, mistake or imperfection in the
written agreement; (b) The failure of the written agreement to express the true intent and
agreement of the parties thereto; (c) The validity of the written agreement; or (d) The
existence of other terms agreed to by the parties or their successors in interest after the
execution of the written agreement. 21
We reiterate the pertinent provisions of the deed:
That for and in consideration of the sum of EIGHT HUNDRED
THOUSAND (P800,000.00) PESOS, Philippine Currency, paid by
VENDEE to VENDOR, receipt of which is hereby acknowledged by the
latter to its entire satisfaction, said VENDOR, by these presents, has
SOLD, CEDED, TRANSFERRED, and CONVEYED by way of absolute
sale unto said VENDEE, its successors and assigns, the two parcels of
land above described and any and all improvements therein; 22
The foregoing stipulation is clear enough in manifesting the vendor's admission of receipt of
the purchase price, thereby lending sufficient, though reluctant, credence to the private
respondents' submission that payment had been made by off-setting P700,000.00 of the
purchase price with the obligation of Cheng Kim Heng to his sons Choi and Kei. By signing
the Deed of Absolute Sale, petitioner Rubi Saw has given her imprimatur to the provisions of
the deed, and she cannot now challenge its veracity.
However, the suitability of the said stipulations as benchmarks for the intention of the
contracting parties, does not come clothed with the cloak of validity. It must be remembered
that agreements affecting the civil relationship of the contracting parties must come under the
scrutiny of the provisions of law existing and effective at the time of the execution of the
contract.
We refer particularly to the provisions of the law on compensation as a mode of
extinguishment of obligations. Under Article 1231 of the Civil Code, an obligation may be
extinguished: (1) by payment or performance; (2) by the loss of the thing due, (3) by the
condonation or remission of the debt; (4) by the confusion or merger of the rights of creditor
and debtor, (5) by compensation; or (6) by novation. Other causes of extinguishment of
obligations include annulment, rescission, fulfillment of a resolutory condition and
prescription.
Compensation may take place by operation of law (legal compensation), when two persons, in
their own right, are creditors and debtors of each other. 23 Article 1279 of the Civil Code
provides for the requisites of legal compensation:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at
the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;
Rm. 330, MTM Bldg. 1002 C. M. Recto Avenue, Manila, promises [sic] to
pay on demand to Mr. CHONG TAK CHOI, the sum of FOUR HUNDRED
THOUSAND PESOS, Philippine currency (P400,000.00)
To certify the correctness of the indebtedness to the party, I, CHENG KIM
HENG, President of CKH INDUSTRIAL & DEVELOPMENT
CORPORATION, do hereby signed [sic] in behalf of the Corporation.
CKH INDUSTRIAL & DEVELOPMENT
CORPORATION
signed:
CHENG KIM HENG
Exhibit 7

(3) That the two debts be due; Manila,

(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.
Compensation may also be voluntary or conventional, that is, when the parties, who are
mutually creditors and debtors agree to compensate their respective obligations, even though
not all the requisites for legal compensation are present. Without the confluence of the
characters of mutual debtors and creditors, contracting parties cannot stipulate to the
compensation of their obligations, for then the legal tie that binds contracting parties to their
obligations would be absent. At least one party would be binding himself under an authority
he does not possess. As observed by a noted author, the requirements of conventional
compensation are (1) that each of the parties can dispose of the credit he seeks to compensate,
and (2) that they agree to the mutual extinguishment of their credits. 24
In the instant case, there can be no valid compensation of the purchase price with the
obligations of Cheng Kim Heng reflected in the promissory notes, for the reason that CKH and
Century-Well the principal contracting parties, are not mutually bound as creditors and debtors
in their own name. A close scrutiny of the promissory notes does not indicate the late Cheng,
as then president of CKH, acknowledging any indebtedness to Century-Well. As worded, the
promissory notes reveal CKH's indebtedness to Chong Tak Choi and Chong Tak Kei.
Exhibit 6
Metro
April 15, 1978
For Value Received, We, CKH INDUSTRIAL & DEVELOPMENT
CORPORATION, a duly registered corporation with postal address at
July 17, 1978
For Value received, we, CKH INDUSTRIAL & DEVELOPMENT
CORPORATION, a duly registered domestic corporation in the City of
Manila, represented by its presidents, CHENG KIM HENG with residence
certificate no. 118824650 issued at Manila, on 2-28-78 do promise to pay
on demand the sum of ONE HUNDRED THOUSAND PESOS ONLY
(P100,000.00), Philippine currency with interest from the date hereof at
the rate of ten per cent (10%) per annum to Mr. CHONG TAK CHOI.
In witness hereof on the consents [sic] of the parties to this promissory
note, I, CHENG KIM HENG, president of CKH INDUSTRIAL &
DEVELOPMENT CORPORATION do hereby affixed [sic] my signature
below.
signed:
CHENG KIM HENG
Exhibit 8
Manila, Philippines,
November 24, 1981
I, CHENG KIM HENG, President of CKH INDUSTRIAL &
Manila, DEVELOPMENT
Philippines CORPORATION, 831 Tetuan St. (2nd floor) Sta. Cruz,
Manila, promises to pay to CHONG TAK KEI, with postal address at 76
F. Bautista St., Valenzuela, Metro Manila, the sum of PESOS: TWO
HUNDRED THOUSAND ONLY (P200,000.00) Philippine Currency, with
interest at the rate of Ten per cent (10%) per annum from date stated
above to a period of one year and I hereby consent to any renewal, or
 extension of same amount to a same period which may be requested by BERSAMIN, J.:
any one of us for the payment of this note.
This case concerns the applicability of the legal principles of recoupment and compensation.
I also acknowledge the receipt of the above sum of money today from MR.
CHONG TAK KEI. The Case

CKH IND.Under
& DEV. CORP.
review is the decision promulgated on July 26, 2004, 1 whereby the Court of Appeals
CA) affirmed the judgment rendered on May 14 1996 by the Regional Trial Court, Branch
signed: 107, in Quezon City adjudging the petitioners defendants) liable to pay to the respondent
CHENG plaintiff) various
KIM sums of moneyHENG and damages.2
President
Antecedents
In fact, there is no indication at all, that such indebtedness was contracted by Cheng from
Choi and Kei as stockholders of Century-Well. Choi and Kei, in turn, are not parties to the Petitioner First United Constructors Corporation (FUCC) and petitioner Blue Star
Deed of Absolute Sale. They are merely stockholders of Century-Well, 25 and as such, are not Construction Corporation (Blue Star) were associate construction firms sharing financial
bound principally, not even in a representative capacity, in the contract of sale. Thus, their resources, equipment and technical personnel on a case-to-case basis. From May 27, 1992 to
interest in the promissory notes cannot be off-set against the obligations between CKH and July 8, 1992, they ordered six units of dump trucks from the respondent, a domestic
Century-Well arising out of the deed of absolute sale, absent any allegation, much less, even a corporation engaged in the business of importing and reconditioning used Japan-made trucks,
scintilla of substantiation, that Choi and Kei's interest in Century-Well are so considerable as and of selling the trucks to interested buyers who were mostly engaged in the construction
to merit a declaration of unity of their civil personalities. Under present law, corporations, business, to wit:
such as Century-Well, have personalities separate and distinct from their
stockholders, 26 except only when the law sees it fit to pierce the veil of corporate identity,
particularly when the corporate fiction is shown to be used to defeat public convenience, TO WHOM
UNIT DATE OF DELIVERY
justify wrong, protect fraud or defend crime, or where a corporation the mere alter ego or DELIVERY
business conduit of a person. 27 The Court cannot, in this instance make such a ruling absent a
demonstration of the merit of such a disposition. Isuzu Dump Truck FUCC 27 May 1992
Isuzu Dump Truck FUCC 27 May 1992
Considering the foregoing premises, the Court finds it proper to grant the prayer for
rescission of the subject deed of sale, for failure of consideration. 28 Isuzu Dump Truck FUCC 10 June 1992
Isuzu Dump Truck FUCC 18 June 1992
IN VIEW WHEREOF, the Court hereby RESOLVED to GRANT the present petition. The
decision of the Court of Appeals dated April 21, 1993, is hereby REVERSED and SET ASIDE. Isuzu Dump Truck Blue Star 4 July 1992
The decision of the Regional Trial Court of Valenzuela, Branch 173 dated February 4, 1991,
is hereby REINSTATED, with the MODIFICATION that the award of moral damages and Isuzu Dump Truck FUCC 8 July 1992
attorney's fees to Rubi Saw, and the order for payment of costs are DELETED.
The parties established a good business relationship, with the respondent extending service
The parties shall bear their respective costs. and repair work to the units purchased by the petitioners. The respondent also practiced
liberality towards the petitioners in the latter’s manner of payment by later on agreeing to
SO ORDERED. payment on terms for subsequent purchases.

G.R. No. 164985               January 15, 2014 On September 19, 1992, FUCC ordered from the respondent one unit of Hino Prime Mover
that the respondent delivered on the same date. On September 29, 1992, FUCC again ordered
from the respondent one unit of Isuzu Transit Mixer that was also delivered to the petitioners.
FIRST UNITED CONSTRUCTORS CORPORATION and BLUE STAR For the two purchases, FUCC partially paid in cash, and the balance through post-dated
CONSTRUCTION CORPORATION,Petitioners,  checks, as follows:
vs.
BAYANIHAN AUTOMOTIVE CORPORATION, Respondent.
BANK/CHECK NO. DATE AMOUNT
DECISION
 Pilipinas Bank 18027379 23 November 1992 ₱360,000.00
Pilipinas Bank 18027384 1 December 1992 ₱375,000.00
Upon presentment of the checks for payment, the respondent learned that FUCC had ordered
the payment stopped. The respondent immediately demanded the full settlement of their
obligation from the petitioners, but to no avail. Instead, the petitioners informed the
respondent that they were withholding payment of the checks due to the breakdown of one of
the dump trucks they had earlier purchased from respondent, specifically the second dump
truck delivered on May 27, 1992.
Due to the refusal to pay, the respondent commenced this action for collection on April 29,
1993, seeking payment of the unpaid balance in the amount of ₱735,000.00 represented by the
two checks.
In their answer, the petitioners averred that they had stopped the payment on the two checks
worth ₱735,000.00 because of the respondent’s refusal to repair the second dump truck; and
that they had informed the respondent of the defects in that unit but the respondent had refused
to comply with its warranty, compelling them to incur expenses for the repair and spare parts.
They prayed that the respondent return the price of the defective dump truck worth
₱830,000.00 minus the amounts of their two checks worth ₱735,000.00, with 12% per annum
interest on the difference of ₱90,000.00 from May 1993 until the same is fully paid; that the
respondent should also reimburse them the sum of ₱247,950.00 as their expenses for the repair
of the dump truck, with 12% per annum interest from December 16, 1992, the date of demand,
until fully paid; and that the respondent pay exemplary damages as determined to be just and
reasonable but not less than ₱500,000, and attorney’s fees of ₱50,000 plus ₱1,000.00 per court
appearance and other litigation expenses.
It was the position of the respondent that the petitioners were not legally justified in
withholding payment of the unpaid balance of the purchase price of the Hino Prime Mover
and the Isuzu Transit Mixer due the alleged defects in second dump truck because the
purchase of the two units was an entirely different transaction from the sale of the dump
trucks, the warranties for which having long expired.
Judgment of the RTC
On May 14, 1996, the RTC rendered its judgment, 3 finding the petitioners liable to pay for the
unpaid balance of the purchase price of the Hino Prime Mover and the Isuzu Transit Mixer
totaling ₱735,000.00 with legal interest and attorney’s fees; and declaring the respondent
liable to pay to the petitioners the sum of ₱71,350.00 as costs of the repairs incurred by the
petitioners. The RTC held that the petitioners could not avail themselves of legal
compensation because the claims they had set up in the counterclaim were not liquidated and
demandable. The fallo of the judgment states:
WHEREFORE, judgment is hereby rendered:
1. Ordering defendants, jointly and severally to pay plaintiff the sum of ₱360,000.00
and ₱375,000.00 with interest at the legal rate of 12% per annum computed from
February 11, 1993, which is the date of the first extrajudicial demand, until fully
paid;
2. Ordering the defendants, jointly and severally, to pay plaintiff the sum equivalent
to 10% of the principal amount due, for attorney’s fees;
3. On the counterclaim, ordering plaintiff to pay defendants the sum of ₱71,350.00
with interest at the legal rate of 12% per annum computed from the date of this
decision until fully paid;
4. Ordering plaintiff to pay the defendants attorney’s fees equivalent to 10% of the
amount due;
5. No pronouncement as to costs.
SO ORDERED.4
Decision of the CA
The petitioners appealed, stating that they could justifiably stop the payment of the checks in
the exercise of their right of recoupment because of the respondent’s refusal to settle their
claim for breach of warranty as to the purchase of the second dump truck.
In its decision promulgated on July 26, 2004, 5 however, the CA affirmed the judgment of the
RTC. It held that the remedy of recoupment could not be properly invoked by the petitioners
because the transactions were different; that the expenses incurred for the repair and spare
parts of the second dump truck were not a proper subject of recoupment because they did not
arise out of the purchase of the Hino Prime Mover and the Isuzu Transit Mixer; and that the
petitioners’ claim could not also be the subject of legal compensation or set-off, because the
debts in a set-off should be liquidated and demandable.
Issues
The petitioners are now before the Court asserting in their petition for review on certiorari that
the CA erred in:
I
x x x NOT UPHOLDING THE RIGHT OF PETITIONER[S] TO RECOUPMENT
UNDER PAR. (1) OF ART. 1599 OF THE CIVIL CODE, WHICH PROVIDES
[FOR] THE RIGHTS AND REMEDIES AVAILABLE TO A BUYER AGAINST
A SELLER’S BREACH OF WARRANTY.
II
 x x x RULING THAT PETITIONERS CANNOT AVAIL OF COMPENSATION
ALLEGEDLY BECAUSE THEIR CLAIMS AGAINST RESPONDENT ARE NOT
LIQUIDATED AND DEMANDABLE.
III
x x x NOT HOLDING RESPONDENT LIABLE TO PETITIONERS FOR LEGAL
INTEREST COMPUTED FROM THE FIRST EXTRAJUDICIAL DEMAND,
AND FOR ACTUAL EXEMPLARY DAMAGES.6
The petitioners submit that they were justified in stopping the payment of the two checks due
to the respondent’s breach of warranty by refusing to repair or replace the defective second
dump truck earlier purchased; that the withholding of payments was an effective exercise of
their right of recoupment as allowed by Article 1599(1) of the Civil Code; due to the seller’s
breach of warranty that the CA’s interpretation (that recoupment in diminution or extinction of
price in case of breach of warranty by the seller should refer to the reduction or extinction of
the price of the same item or unit sold and not to a different transaction or contract of sale)
was not supported by jurisprudence; that recoupment should not be restrictively interpreted but
should include the concept of compensation or set-off between two parties who had claims
arising from different transactions; and that the series of purchases and the obligations arising
therefrom, being inter-related, could be considered as a single and ongoing transaction for all
intents and purposes.
The respondent counters that the petitioners could not refuse to pay the balance of the
purchase price of the Hino Prime Mover and the Isuzu Transit Mixer on the basis of the right
of recoupment under Article 1599 of the Civil Code; that the buyer’s remedy of recoupment
related only to the same transaction; and that compensation was not proper because the claims
of the petitioners as alleged in their counterclaim were not liquidated and demandable.
There is no longer any question that the petitioners were liable to the respondent for the unpaid
balance of the purchase price of the Hino Prime Mover and the Isuzu Transit Mixer. What
remain to be resolved are strictly legal, namely: one, whether or not the petitioners validly
exercised the right of recoupment through the withholding of payment of the unpaid balance
of the purchase price of the Hino Prime Mover and the Isuzu Transit Mixer; and, two, whether
or not the costs of the repairs and spare parts for the second dump truck delivered to FUCC on
May 27, 1992 could be offset for the petitioners’ obligations to the respondent.
Ruling
We affirm the decision of the CA with modification.
1.
Petitioners could not validly resort to recoupment against respondent
Recoupment (reconvencion) is the act of rebating or recouping a part of a claim upon which
one is sued by means of a legal or equitable right resulting from a counterclaim arising out of
the same transaction.7 It is the setting up of a demand arising from the same transaction as the
plaintiff’s claim, to abate or reduce that claim.
The legal basis for recoupment by the buyer is the first paragraph of Article 1599 of the Civil
Code, viz:
Article 1599. Where there is a breach of warranty by the seller, the buyer may, at his election:
(1) Accept or keep the goods and set up against the seller, the breach of warranty by
way of recoupment in diminution or extinction of the price;
(2) Accept or keep the goods and maintain an action against the seller for damages
for the breach of warranty;
(3) Refuse to accept the goods, and maintain an action against the seller for damages
for the breach of warranty;
(4) Rescind the contract of sale and refuse to receive the goods or if the goods have
already been received, return them or offer to return them to the seller and recover
the price or any part thereof which has been paid.
When the buyer has claimed and been granted a remedy in anyone of these ways, no other
remedy can thereafter be granted, without prejudice to the provisions of the second paragraph
of article 1191. (Emphasis supplied)
xxxx
In its decision, the CA applied the first paragraph of Article 1599 of the Civil Code to this
case, explaining thusly:
Paragraph (1) of Article 1599 of the Civil Code which provides for the remedy of recoupment
in diminution or extinction of price in case of breach of warranty by the seller should therefore
be interpreted as referring to the reduction or extinction of the price of the same item or unit
sold and not to a different transaction or contract of sale. This is more logical interpretation of
the said article considering that it talks of breach of warranty with respect to a particular item
sold by the seller. Necessarily, therefore, the buyer’s remedy should relate to the same
transaction and not to another.
Defendants-appellants’ act of ordering the payment on the prime mover and transit mixer
stopped was improper considering that the said sale was a different contract from that of the
dump trucks earlier purchased by defendants-appellants.
The claim of defendants-appellants for breach of warranty, i.e. the expenses paid for the repair
and spare parts of dump truck no. 2 is therefore not a proper subject of recoupment since it
does not arise out of the contract or transaction sued on or the claim of plaintiff-appellee for
unpaid balances on the last two (2) purchases, i. e. the prime mover and the transit mixer.8
The CA was correct. It was improper for petitioners to set up their claim for repair expenses
and other spare parts of the dump truck against their remaining balance on the price of the
prime mover and the transit mixer they owed to respondent.1avvphi1 Recoupment must arise
out of the contract or transaction upon which the plaintiff’s claim is founded.9To be entitled to
recoupment, therefore, the claim must arise from the same transaction, i.e., the purchase of the
prime mover and the transit mixer and not to a previous contract involving the purchase of the
dump truck. That there was a series of purchases made by petitioners could not be considered
as a single transaction, for the records show that the earlier purchase of the six dump trucks
was a separate and distinct transaction from the subsequent purchase of the Hino Prime Mover
and the Isuzu Transit Mixer. Consequently, the breakdown of one of the dump trucks did not
grant to petitioners the right to stop and withhold payment of their remaining balance on the
last two purchases.
2.
Legal compensation was permissible
Legal compensation takes place when the requirements set forth in Article 1278 and Article
1279 of the Civil Code are present, to wit:
Article 1278. Compensation shall take place when two persons, in their own right, are
creditors and debtors of each other."
Article 1279. In order that compensation may be proper, it is necessary:
(1) That each of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
(2) That both debts consists in a sum of money, or if the things due are consumable,
they be of the same kind, and also of the same quality if the latter has been stated;
(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.
As to whether petitioners could avail themselves of compensation, both the RTC and CA ruled
that they could not because the claims of petitioners against respondent were not liquidated
and demandable.
The Court cannot uphold the CA and the RTC.
The RTC already found that petitioners were entitled to the amount of ₱71,350.00 stated in
their counterclaim, and the CA concurred in the finding, stating thusly:
It is noteworthy that in the letter of December 16, 1992 (Exh. "1") defendants were charging
plaintiff only for the following items of repair:
1. Cost of repair and spare parts - ₱46,800.00
2. Cost of repair and spare parts - 24,550.00
₱71,350.00
Said amounts may be considered to have been spent for repairs covered by the warranty period
of three (3) months. While the invoices (Exhs. "2-B" and "3-A") dated September 26, 1992
and September 18, 1992, this delay in repairs is attributable to the fact that when defects were
brought to the attention of the plaintiff in the letter of August 14, 1992 (Exh. "8") which was
within the warranty period, the plaintiff did not respond with the required repairs and actual
repairs were undertaken by defendants. Thereafter, the spare parts covered by Exhibits "2-B"
and "3-A" pertain to the engine, which was covered by the warranty.
x x x. Defendants in their letter of August 14, 1992 (Exhb. "8") demanded correction of
defects. In their letter of August 22, 1992 (Exh. "9") they demanded replacement. In their
letter of August 27, 1992 (Exh. "10"), they demanded ‘replacement/repair’. In September,
1992, they undertook repairs themselves (Exhs. "2-B" and "3-A") and demanded payment for
the expenses in their letter of December 16, 1992 (Exh. "1"). All other items of expenses
connected with subsequent breakdowns are no longer chargeable to plaintiff which granted
only a 3-month warranty. x x x10
Considering that preponderant evidence showing that petitioners had spent the amount of
₱71,350.00 for the repairs and spare parts of the second dump truck within the warranty period
of three months supported the finding of the two lower courts, the Court accepts their finding.
Verily, factual findings of the trial court, when affirmed by the CA, are conclusive on the
Court when supported by the evidence on record.11
A debt is liquidated when its existence and amount are determined. 12 Accordingly, an
unliquidated claim set up as a counterclaim by a defendant can be set off against the plaintiff’s
claim from the moment it is liquidated by judgment. 13 Article 1290 of the Civil Code provides
that when all the requisites mentioned in Article 1279 of the Civil Code are present,
compensation takes effect by operation of law, and extinguishes both debts to the concurrent
amount. With petitioners’ expenses for the repair of the dump truck being already established
and determined with certainty by the lower courts, it follows that legal compensation could
take place because all the requirements were present. Hence, the amount of ₱71,350.00 should
be set off against petitioners’ unpaid obligation of ₱735,000.00, leaving a balance of
₱663,650.00, the amount petitioners still owed to respondent.
We deem it necessary to modify the interest rate imposed by the trial and appellate
courts.1âwphi1 The legal interest rate to be imposed from February 11, 1993, the time of the
extrajudicial demand by respondent, should be 6% per annum in the absence of any stipulation
in writing in accordance with Article 2209 of the Civil Code, which provides:
Article 2209. If the obligation consists in the payment of a sum of money, and the debtor
incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be
the payment of the interest agreed upon, and in the absence of stipulation, the legal interest,
which is six per cent per annum.
WHEREFORE, the Court AFFIRMS the decision promulgated on July 26, 2004 in all respects making it appear thereat that offended party has received the sum of ₱85,607.00, when in truth
subject to the MODIFICATION that petitioners are ordered, jointly and severally, to pay to and in fact accused has not paid the same; that inspite of that misrepresented entries in the
respondent the sum of 1 663,650.00, plus interest of 6% per annum computed from February Cash Voucher above-cited, the accused further directed to collect the same amount from a
neighbor of the offended party in OId.Nungnungan, above-mentioned; that perplexed about
11, 1993, the date of the first extrajudicial demand, until fully paid; and ORDERS the the actions of Mrs. Adelaida Soriano, offended party proceeded to demand payment from her
petitioners to pay the costs of suit. but the accused failed to pay her monetary obligation [to] the offended party as the accused
and her business establishment disappeared from Piaping Puti, Macabalan, this City after the
incident, and transferred to an unknown location; that she couId.not also get back the said 398
SO ORDERED. sacks of corn grits anymore because the accused had disposed of it already; thus misapplying,
misappropriating and converting the said sum of ₱85,607.00 the value of 398 sacks of corn
Republic of the Philippines grits, to her own gain and benefit, to the damage and prejudice of the said offended party, in
SUPREME COURT the aforestated sum of ₱85,607.00, Philippine currency.
Manila
Contrary to and in violation to Article 315, par. 2(a), of the Revised Penal Code, as amended.3
FIRST DIVISION
When arraigned, petitioner pleaded not guilty.4
G.R. No. 181692               August 14, 2013
During pre-trial, the following transpired:
ADELAIDA SORIANO, PETITIONER, 
vs. 1. Parties admitted that on September 9, 1993, private complainant Consolacion
PEOPLE OF THE PHILIPPINES, RESPONDENT. Alagao borrowed cash from the accused in the amount of ₱10,000, guaranteed by a
titled land, owned by her daughter Evelyn Alagao;
DECISION
2. Parties also agreed that the aforesaid debt was fully paid with corn grains by the
VILLARAMA, JR., J.: private complainant in February, 1994;

Before this Court is a petition for review on certiorari assailing the May 19, 2005 3. Parties also agreed that subsequent to this transaction, private complainant’s
Decision1 and January 11, 2008 Resolution2 of the Court of Appeals (CA) in CA-G.R. CR No. daughter Evelyn Alagao executed a Contract of Loan secured by Real Estate
23108 insofar as it ordered petitioner to pay ₱74,807 plus interest to private complainant Mortgage now marked Exh. "1" for the defense, to secure the payment of
Consolacion R. Alagao. ₱40,000.00 which private complainant admitted to have received ₱51,730.00 in the
form of fertilizers and cash advances [:]
Petitioner Adelaida Soriano was charged with the crime of estafa on January 30, 1995 under
an Information which reads as follows: Fertilizers & Pioneer corn seeds ₱17,910.00
(Exh. "A")
That on September 9, 1994, at more or less 2:00 o'clock [sic] in the afternoon, and days
thereafter, at Piaping Puti, Macabalan, Cagayan de Oro City, Philippines, and within the 110 bags chicken dung 6,600.00
jurisdiction of this Honorable Court, the above-named accused, with intent to defraud and (Chicken manure)
cause damage and prejudice by means of deceit, and false pretenses or fraudulent acts
executed prior to or simultaneously with the commission of the fraud, did then and there Hauling expense of th[e]se materials 1,570.00
wil[l]fully, unlawfully and feloniously represent and pretend to the offended party,
Consolacion Alagao y Regala, who was then canvassing for buyers of her one (1) truck load of
corn grits containing 398 sacks, that she (accused Adelaida Soriano) was engaged in the
Additional fertilizers 9,550.00
business of buying corn grits, among others from the public under the business style of A & R
(As shown in Exh. "B")
Soriano Trading, paying it in cash, with place of business located at Piaping Puti,
Macab[a]lan, this City; that due to accused[’s] representation, said offended party was
persuaded and convinced to sell her own corn grits to the former, which cereals came all the and several cash advances as follows:
way from Old Nungnungan, Don Carlos, Bukidnon; that after unloading said 398 sacks of
corn grains in the establishment of said Adelaida Soriano, said accused did not pay offended
party for the said goods delivered, but instead she let offended party to sign a Cash Voucher,
 2-7-94 ₱4,000.00 6. Parties agreed that there was a Cash Voucher of the amount of corn grains
delivered to the accused on September 9, 1994, now marked [as] Exh.
"C."5 (Emphasis and underscoring supplied.)
2-14-94 2,000.00
Trial on the merits ensued.

3-3-94 2,000.00 Based on the evidence presented and what transpired during the pre-trial, the facts are:

On February 18, 1994, Evelyn Alagao (Evelyn), daughter of private complainant Consolacion
No date 100.00 Alagao (Alagao), as borrower-mortgagor, executed a "Contract of Loan Secured by Real
Estate Mortgage with Special Power to Sell Mortgage Property without Judicial
Proceedings"6 in favor of petitioner as lender-mortgagee. The instrument provides for a
5-1-94 2,000.00 ₱40,000 loan secured by a parcel of land covered by Original Certificate of Title No. P-
6254,7 located in OId.Nongnongan, Don Carlos, Bukidnon, registered in Evelyn’s name. It
likewise provides that the loan was to be paid two years from the date of execution of the
5-6-94 2,000.00 contract, or on February 18, 1996, and that Evelyn agrees to give petitioner ¼ of every harvest
from her cornland until the full amount of the loan has been paid, starting from the first
harvest. Based on Alagao’s testimony, the first harvest was made only in September
7-19-94 500.00 1994.8 Petitioner on the other hand claims that from the time the loan was obtained until
September 1994, there were already four harvests. During pre-trial, it was admitted by Alagao
that she did not only receive ₱40,000 as provided in the contract of loan but ₱51,730 in the
form of fertilizers and cash advances.9
7-20-94 500.00

On September 9, 1994, Alagao and some companions delivered 398 sacks of corn grains to
(but which accused claimed [to be] petitioner. Petitioner prepared a voucher indicating that Alagao had received the amount of
₱1,500.00) ₱85,607 as full payment for the 398 sacks of corn grains. Alagao signed said voucher even if
she only received ₱3,000.10 According to Alagao, 64 of the 398 sacks will serve as partial
payment of her ₱40,000 loan with petitioner while the remaining balance will come from the
9-10-94 3,000.00 16,100.00
₱85,607 cash she was supposed to receive as payment for the corn grains delivered so she can
redeem her daughter’s land title.11
Total ₱51,730.00
On March 16, 1999, the Regional Trial Court (RTC) of Misamis Oriental, Branch 40, rendered
a decision12 finding petitioner guilty beyond reasonable doubt of the crime of estafa. The fallo
4. That private complainant claimed that x x x on August 17, 1994, she delivered a of the RTC decision reads:
10-wheeler corn grains (sic) to the accused which parties agreed [was] worth more
than ₱80,000.00. And the private complainant claimed having paid the accused
WHEREFORE, IN VIEW OF THE FOREGOING PREMISES, accused Adelaida Soriano is
partially in the amount of ₱8,060.00 which accused denied. The latter claimed that
hereby found guilty beyond reasonable doubt of the crime of Estafa as defined and penalized
no payment was ever made because the corn grains were owned by private
under Article 315, par. 2(a) of the Revised Penal Code, and is hereby sentenced to suffer
complainant and another person and that private complainant and companion were
imprisonment of Four (4) Years, Two (2) Months and One (1) day of Prision Correccional, as
paid of the worth of the delivery;
minimum, to Thirteen (13) Years, Four (4) Months of Reclusion Temporal, as maximum and,
is hereby further ordered to pay the offended party in this case the amount of ₱85,607.00
5. Parties agreed that on September 9, 1994 at 2:00 o’clock (sic) in the afternoon[,] representing the value of the 398 sacks of corn grains. Costs against the accused.
there was a delivery by the private complainant with her companions, corn grains
worth ₱85,607.00. Private complainant claimed that she was only paid ₱3,000.00
SO ORDERED.13
and which accused claimed that she did not pay her because that delivery was in
payment of her account and the ₱3,000.00 which she received was advanced
payment of whatever remaining after paying her previous accounts to the accused; Petitioner’s conviction, however, was set aside by the CA in the assailed decision. The CA
disposed as follows:
WHEREFORE, premises considered, the assailed Decision of the Regional Trial Court of
Misamis Oriental, Branch 40, dated 16 March 1999 in Criminal Case No. 95-41 is
REVERSED and SET ASIDE. Appellant ADELAIDA SORIANO is ACQUITTED of the
crime charged on the ground of reasonable doubt. However, Appellant ADELAIDA
SORIANO is hereby ordered to pay private complainant CONSOLACION R. ALAGAO the
sum of seventy-four thousand, eight hundred seven pesos (₱74,807.00) as payment for the
remaining balance of the cash value of the 398 sacks of corn grains, plus, legal interest at the
rate of 12% per annum computed from 9 September 1994 until fully paid.
SO ORDERED.14
The CA ruled that the prosecution failed to establish that petitioner made false pretenses,
fraudulent acts or fraudulent means to induce Alagao to deliver to her the 398 sacks of corn
grains. In fact, in Alagao’s testimony, she admitted that she delivered the corn grains to
petitioner because the latter was demanding payment from her and she wanted to pay her
obligation of ₱40,000 to petitioner so that she couId.get back the title of her daughter’s
mortgaged property and the balance of the total cash value of the 398 sacks of corn. Thus, the
CA heId. in the absence of deceit, petitioner’s liability is only civil.
In determining petitioner’s civil liability, the CA deducted from ₱85,607 – the total value of
the 398 sacks of corn grains delivered to petitioner – the ₱3,000 petitioner had paid Alagao
and the ₱7,800 which the CA considered as the value of the 64 sacks of corn grains which
Alagao intended as partial payment for the ₱40,000 loan, thus leaving the balance of ₱74,807.
Unsatisfied, petitioner is now before this Court questioning her civil liability. She assigns to
the CA the following errors:
1)
The Court of Appeals committed error in the computation of petitioner’s civil
liability as it failed to apply correctly the principle of set-off or compensation.
2)
The Court of Appeals, in applying set-off or compensation, erroneously placed
private complainant’s indebtedness to petitioner at ₱40,000.00 instead of ₱51,730.00
as found by it and as stipulated during pre-trial.
3)
The Court of [A]ppeals omitted to off-set the amount equivalent to ¼ share of the
harvest (or ₱57,200.00) against petitioner’s indebtedness to private complainant in
the amount of ₱85,607.00 despite admission by private complainant.15
Petitioner argues that while the CA found her indebted to Alagao in the sum of ₱85,607, it
only offset ₱40,000 instead of ₱51,730 which was the amount stipulated during pre-trial.
Petitioner contends that the compensation should be as follows:
Petitioner’s indebtedness: [Alagao’s] Indebtedness:
₱85,607.00 (value of 398 sacks) ₱51,730.00 (instead of ₱40,000.00)
- 3,000.00 (cash payment) - 7,800.00 (value of 64 sacks)
₱82,607.00 ₱43,930.00
- 7,800.00 (value of 64 sacks)
₱74,807.00 (as correctly found by
the Court of Appeals)16
Thus, deducting Alagao’s indebtedness of ₱43,930 from petitioner’s indebtedness amounting
to ₱74,807, petitioner’s remaining indebtedness shouId.only be ₱30,877.
Petitioner likewise argues that the CA also failed to consider Alagao’s obligation to deliver to
her ¼ of every harvest. Petitioner claims that her ¼ share in the harvest amounted to ₱57,200
for four harvests. Therefore, applying the principle of set off, it is Alagao who is indebted to
petitioner in the amount of ₱26,323 (₱57,200 minus ₱30,877).
Respondent on the other hand contends that the amount of loan extended to Alagao was
₱40,000 and not ₱51,730 as claimed by petitioner. Moreover, the entire value of the 398 sacks
of corn grains shouId.not be set off with Alagao’s loan since (1) the loan was not yet due and
demandable at the time of delivery of the 398 sacks of corn grains in September 1994; and (2)
only 154 of the 398 sacks of corn grains belong to Alagao. Respondent also claims that
₱13,765.9517 should be considered as the correct value of the 64 sacks intended by Alagao as
partial payment for the loan and not ₱7,800 as found by the CA.
The petition is partly meritorious.
Compensation is a mode of extinguishing to the concurrent amount, the debts of persons who
in their own right are creditors and debtors of each other. The object of compensation is the
prevention of unnecessary suits and payments through the mutual extinction by operation of
law of concurring debts.18 Article 1279 of the Civil Code provides for the requisites for
compensation to take effect:
ART. 1279. In order that compensation may be proper, it is necessary:
(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 Value of the 398 sacks of corn grains ₱85,607
third persons and communicated in due time to the debtor.
Cash payment by petitioner upon delivery - 3,000
This Court rules that all the above requisites for compensation are present in the instant case.

₱82,607
First, petitioner and Alagao are debtors and creditors of each other. It is undisputable that
petitioner and Alagao owe each other sums of money. Petitioner owes ₱85,607 for the value of Alagao's debt - 51,730
the corn grains delivered to her by Alagao in September 1994 while Alagao owes petitioner
₱51,730 by virtue of a loan extended by the latter in February 1994.
Petitioner's net civil liability to Alagao ₱30.877
Second, both debts consist in a sum of money. There is no issue as to the ₱85,607 debt by ========
petitioner that it consists a sum of money. As to the ₱51,730 received by Alagao from
petitioner, though what was extended by petitioner consists of cash advances and fertilizers,
With respect to the 114 share in the harvest due to petitioner as provided in the contract of
there is no dispute that said amount is payable in money.
loan, the same cannot be considered in the legal compensation of the debts of the parties since
it does not consist in a sum of money, said share being in the form of harvests. More
Third, both debts are due. Upon delivery of the 398 sacks to petitioner, she was under the importantly, it is not yet liquidated. There is still a dispute as to how many harvests were made
obligation to pay for the value thereof as buyer. As to Alagao’s debt, the contract of loan from the time of the execution of contract of loan up to the time the action was commenced
provided that it is payable in February 1996. Though it was not yet due in September 1994 against petitioner and even when the principal obligation became due in February 1996. Thus,
when she delivered the 398 sacks of corn grains to petitioner, it eventually became due at the the harvests due petitioner is not capable of determination.
time of trial of the instant case.
WHEREFORE, the May 19, 2005 Decision and January 11, 2008 Resolution of the Court of
Fourth, both debts are liquidated and demandable.1âwphi1 A debt is liquidated when the Appeals in CA-G.R. CR No. 23108 are hereby AFFIRMED with MODIFICATION. Petitioner
amount is known or is determinable by inspection of the terms and conditions of relevant Adelaida Soriano is hereby ordered to pay ₱30,877 as payment for the remaining balance of
documents.19 There is no dispute that the value of the 398 sacks of corn grains is ₱85,607. As the cash value of the 398 sacks of corn grains, plus legal interest at the rate of 6% 21 per annum
to Alagao’s debt, we disagree with respondent People that the loan amount is only ₱40,000 computed from finality of this Decision until its full satisfaction.
since during pre-trial, Alagao herself admitted that she did not only receive ₱40,000 but
₱51,730 in the form of cash advances and fertilizers from petitioner. It is well settled that an
No pronouncement as to costs.
admission made in a stipulation of facts at pre-trial by the parties is considered a judicial
admission and, under the Rules of Court, requires no proof. Such admission may be
controverted only by a showing that it was made through a palpable mistake or that no such SO ORDERED.
admission was made.20
Republic of the Philippines
And lastly, neither of the debts are subject of a controversy commenced by a third person. SUPREME COURT
There are no third-party claims with respect to Alagao’s ₱51,730 loan. As to petitioner’s Manila
₱85,607 debt representing the 398 sacks of corn grains, Alagao claims that she is not the sole
owner of all the 398 sacks. This claim of Alagao, however, was never substantiated and a SECOND DIVISION
perusal of the information for estafa shows that the subject corn grains are all owned by her.
Moreover, the alleged other owners have not commenced any action to protect their claim
over it. Thus, the ₱85, 607 debt cannot be considered subject of a controversy by a third G.R. No. 173565               May 8, 2009
person.
TRANSPACIFIC BATTERY, CORPORATION and MICHAEL G. SAY, Petitioners, 
With the presence of all the requisites mentioned in Article 1279, legal compensation took vs.
effect by operation of law as provided in Article 1290 of the Civil Code, to wit: SECURITY BANK & TRUST CO., Respondent.

ART. 1290. When all the requisites mentioned in Article 1279 are present, compensation takes x - - - - - - - - - - - - - - - - - - - - - - -x
effect by operation of law, and extinguishes both debts to the concurrent amount, even though
the creditors and debtors are not aware of the compensation. G.R. No. 173607               May 8, 2009

Thus, the computation of petitioner's civil liability should be as follows:

MICHAEL G. SAY and JOSEPHINE G. SAY, Petitioners,  1983 Myrna E.
vs. Magpantay8
SECURITY BANK & TRUST COMPANY, Respondent.
73 DC- 731B-83/9461 9 8 December ₱68,772.19 Michael G. Say,
DECISION 6994 September 1983 Melchor G. Say,
1983 Myrna E.
Magpantay9
TINGA, J.:
73 DC- 731B-83/9617 27 26 December ₱84,032.62 Michael G. Say,
Before this Court are two petitions for review on certiorari 1 under Rule 45 of the Rules of 6990 September 1983 Melchor G. Say,
Court seeking the reversal of the decision2 of the Court of Appeals in CA-G.R. CV No. 74644 1983 Myrna E.
which affirmed with modification the decision3 of Branch 64 of the Regional Trial Court of Magpantay10
Makati City, ordering petitioners Transpacific Battery Company (Transpacific), Michael Go
73 DC- 731B-83/587 6 October 4 January ₱661,122.00 Michael G. Say,
Say (Michael), Melchor G. Say (Melchor) and Josephine G. Say (Josephine) jointly and
83/5580 1983 1984 Melchor G. Say,
severally liable to Security Bank and Trust Company (The Bank).
Myrna E.
Magpantay11
The facts, as culled from the records, follow.
73 DC- 731B-83/588 6 October 4 January ₱826,402.50 Michael G. Say,
83/5581 1983 1984 Melchor G. Say,
Transpacific, represented by its officers, Michael G. Say, Josephine G. Say and Myrna
Myrna E.
Magpantay, entered into a Credit Line Agreement4 with the Bank. Consequently, the officers
Magpantay12
in behalf of Transpacific applied for nine (9) letters of credit (LC) with the Bank to facilitate
the importation and/or purchases of certain merchandise, goods and supplies for its business. 73 DC- 731B-83/8110 8 9 January ₱338,500.00 Michael G. Say,
The Bank issued the corresponding LCs to Transpacific. Transpacific then executed and 83/432 November 1984 Melchor G. Say,
delivered to the Bank, as entrustor, nine (9) trust receipt agreements 1983 Myrna E.
Magpantay13
with for the release of the imported merchandise and supplies in its favor, with the
aforementioned officers, individual petitioners herein, binding themselves to be solidarily
liable with Transpacific to the Bank for the value of the merchandise and supplies covered by Under the terms of the trust receipts, the entrustees agreed to hold the goods, merchandise and
the trust receipts. The letters of credit and their corresponding trust receipts are listed below: supplies, as well as the proceeds of the sale and collection thereof, in trust for the Bank for the
payment of petitioners’ acceptance, bank commissions and charges, and/or any

Letter of Trust Receipt Date Expiry Date Amount of Entrustees other indebtedness of petitioners to the Bank, and deliver the same to the Bank upon maturity
Credit Agreement Issued of Trust Trust Receipt date of said trust receipts.14
No. Ref. No. Receipt
73 DC- 731B-83/8927 21 July 19 October ₱359,040.00 Michael G.Say, On the maturity dates of the trust receipts, petitioners failed to account for and to deliver to the
82/492 1983 1983 Josephine G. Say, Bank the proceeds of the sale and collection of the goods, merchandise and supplies subject of
Myrna E. the trust receipts. Despite repeated demands, petitioners reneged on their
Magpantay5 obligation.lavvphil.zw+

73 DC- 731B-83/9126 8 August 7 November ₱369,600.00 Michael G. Say,

On 8 February 1984, petitioners and the Bank executed a letter-agreement restructuring the
83/504 1983 1983 Melchor G. Say,
former’s obligation in the sum of ₱3,082,029.00, subject to the following terms and
Myrna E.
conditions:
Magpantay6
73 DC- 731B-83/9259 17 August 15 ₱355,200.00 Michael G. Say, 1. Payment of all interest and other charges prior to restructuring;
83/517 1983 November Melchor G. Say,
1983 Myrna E.
2. TR term is for one year with equal monthly principal payments;
Magpantay7
73 DC- 731B-83/9187 24 August 22 ₱119,359.69 Michael G. Say, 3. Interest at 5% p.a. over prime rate or 30% p.a., whichever is higher, amortized
83/6278 1983 November Melchor G. Say, monthly;
 4. Interest rate subject to review every amortization due; and
5. Against the joint and solidary liability of Sps. Miguel and Mary Say and Michael
Go Say.15
Failure to meet one monthly installment when due shall cause the unmatured balance to
become due and demandable. The account shall be referred automatically to our Special
Accounts Department for collection.16
Alleging that out of the total obligation of ₱3,082,029.00, the amount of ₱2,290,865.41
remained unpaid, the Bank demanded in writing the payment of the unpaid balance.17
Despite repeated demands, petitioners failed to comply with the restructuring agreement,
prompting the Bank to file a criminal complaint for violation of Presidential Decree No. 115
or the Trust Receipts Law. However, said complaint was dismissed.
On 24 January 1992, the Bank filed a complaint for recovery of a sum of money with the RTC
of Makati.18
In his answer,19 Michael countered that the obligation had already been paid or if not totally
paid, the same is very minimal. He further contended that said obligation had already been
extinguished by novation when the Bank restructured the obligation of Transpacific. He also
claimed that the Bank is guilty of laches for its inaction for an unreasonable length of time.20
Melchor and Josephine, for their part, argued that the trust receipts have not been executed in
strict compliance with the requirements of the Trust Receipts Law; that their participation in
the questioned transactions was in their capacity as officers of Transpacific and consequently,
cannot be held liable in their individual capacities; that their signatures in some of the
documents were forged; and that the obligation had been extinguished by novation.21
Ma. Fe Rosadio (Rosadio), who was employed at the Foreign Department of the Bank and
tasked with documentation, processing and releasing of import bills and trust receipts, testified
for the Bank. She identified the trust receipts and attested to the genuineness of the signatures
of petitioners.
Instead of presenting their witnesses, petitioners filed a demurrer to evidence22 which the trial
court denied on 8 December 1995.
In a decision dated 5 March 2002, the trial court ruled in favor of the Bank. The dispositive
portion reads:
WHEREFORE, IN VIEW OF THE FOREGOING, judgment is rendered in favor of plaintiff
Security Bank and Trust Company and against defendants Transpacific Battery Company,
Michael Go Say, Melchor G. Say and Josephine G. Say ordering the defendants to pay jointly
and severally to the plaintiff the following amounts:
1. The sum of ₱2,290,865.41 representing the balance of defendants’ outstanding
and unpaid obligation as of the filing of the complaint on February 4, 1992 plus
interest at the rate of 12% per annum from February 4, 1992 until full payment of
the defendants’ obligation under the aforecited Trust Receipts and/or Letter
Agreement is made;
2. Attorney’s fees in the amount equivalent to 25% on the amount due;
3. Cost of suit.
SO ORDERED.23
The trial court lent credence to the testimony of Rosadio and upheld the authenticity and
genuineness of the signatures of the individual petitioners on the trust receipts. It also ruled
that the restructuring of the obligation did not relieve individual petitioners of their liability as
solidary debtors to the Bank as there was an express agreement on their part to be bound
jointly and severally with Transpacific under the trust receipts.24
On appeal, the Court of Appeals affirmed the ruling of the trial court with modification in that
it deleted the award of attorney’s fees.
The Court of Appeals’ decision centered on the finding that there was no novation in the
restructuring of the obligation, therefore, the individual petitioners as solidary debtors cannot
be exonerated from the obligation of Transpacific. The appellate court also dismissed the
allegation of forgery for failure of petitioners to present evidence to support their allegation
that the purported signatures in the trust receipts were forged. With respect to the amount of
the unpaid obligation, the appellate court concluded that since the issue is factual in nature, the
finding of the trial court should not be disturbed on appeal.
In the petition filed by Michael, he insists that novation had taken place and effectively
extinguished his obligation to the Bank. Moreover, he argues that he did not sign the
restructuring agreement; hence, he should not be made liable to pay any obligation due to the
Bank under said agreement.25
Melchor and Josephine question the credibility of witness Rosadio to testify on the
authenticity of their signatures on the trust receipts. They likewise point out the deficiencies in
the trust receipts. Finally, they assert that whatever obligation they may have assumed under
the agreements in the trust receipts they signed was fully novated by the restructuring
agreement entered into between the Bank and Transpacific without their knowledge and
consent.
The Bank posits that the arguments presented by petitioners involve factual questions and the
findings thereof by the courts below are conclusive upon this Court. It also contends that there
is no novation and the restructuring agreement was executed only to make it less onerous for
the debtors to perform their obligation. It avers that although petitioners were no longer
signatories in the restructuring agreement, they are still bound as they were not expressly
released from their obligation. On the contrary, it points out that the restructuring agreement
was even made subject to their joint and solidary liability.
Novation is a mode of extinguishing an obligation by changing its objects or principal
obligations, by substituting a new debtor in place of the old one, or by subrogating a third
person to the rights of the creditor.26 Article 1292 of the Civil Code expressly provides:
Art. 1292. In order that an obligation may be extinguished by another which substitute the
same, it is imperative that it be so declared in unequivocal terms, or that the old and new
obligations be in every point incompatible with each other.
In order for novation to take place, the concurrence of the following requisites are
indispensable:
1. There must be a previous valid obligation;
2. There must be an agreement of the parties concerned to a new contract;
3. There must be the extinguishment of the old contract; and
4. There must be the validity of the new contract.27
Novation is never presumed, and the animus novandi, whether totally or partially, must appear
by express agreement of the parties, or by their acts that are too clear and unmistakable. The
extinguishment of the old obligation by the new one is a necessary element of novation, which
may be effected either expressly or impliedly. The contracting parties must incontrovertibly
disclose that their object in executing the new contract is to extinguish the old one. Upon the
other hand, no specific form is required for an implied novation, and all that is prescribed by
law would be an incompatibility between the two contracts.28
The test of incompatibility is whether the two obligations can stand together, each one having
its independent existence. If they cannot, they are incompatible and the latter obligation
novates the first. Corollarily, changes that breed incompatibility must be essential in nature
and not merely accidental. The incompatibility must take place in any of the essential elements
of the obligation, such as its object, cause or principal conditions thereof; otherwise, the
change would be merely modificatory in nature and insufficient to extinguish the original
obligation.29
Petitioners proffer that the terms of the restructuring agreement are absolutely incompatible
with the terms of the trust receipts. First, the maturity date under the trust receipts is reckoned
at ninety (90) days from their respective issuance dates whereas it is one (1) year under the
restructuring agreement. Second, payment is in full under the trust receipts while under the
restructured obligation, it is to be made in equal monthly installments. Third, the rate of
interest under the trust receipts is 16% or 18% per annum whereas it is 5% per annum over
prime rate or 30% per annum, whichever is higher, under the restructured obligation. Fourth,
the restructuring agreement has a provision on the time of interest payments, as well as a
review of the interest rate, whereas there are no such provisions under the trust receipts. Fifth,
the obligation under the trust receipts is secured by the joint and solidary liability of the
alleged signatories, whereas the restructured obligation is secured by the joint and solidary
liability of Spouses Miguel and Mary Say and Michael G. Say. Sixth, there is no acceleration
clause under the trust receipts whereas the restructured obligation is subject to an acceleration
clause.
On the other hand, the Bank dismisses any incompatibility between the restructuring
agreement and the trust receipt transactions. It alleges that the restructuring agreement even
made an express recognition of the trust receipts when it obliged the debtors pay all interests
and other charges prior to restructuring. Moreover, only the interest rates and the term of the
trust receipts were modified, according to the Bank. In fact, it claims that the restructuring
agreement was executed to make it less onerous for the debtors to perform their obligation.
The primary issue for resolution is whether the obligation under the trust receipts was novated
by the restructuring agreement. We rule in the negative.
The material portions of the restructuring agreement is hereby reproduced for brevity:
Gentlemen:
We are pleased to inform you that our Executive Committee has approved the restructuring of
your outstanding past due trust receipts amounting to ₱3,082,029.00, subject to:
1. Payment of all interest and other charges prior to restructuring;
2. TR term is for one year with equal monthly principal payments
3. Interest at 5% p.a. over prime rate or 30% p.a., whichever is higher, amortized
monthly;
4. Interest rate subject to review every amortiaton due;
5. Against the joint and solidary liability of Sps. Miguel and Mary Say and Michael
Go Say;
Failure to meet one monthly installment when due shall cause the unmatured balance to
become due and demandable. The account shall be referred automatically to our Special
Accounts Department for collection.30
Undoubtedly, there is no express novation since the restructuring agreement does not state in
clear terms that the obligation under the trust receipts is extinguished and in lieu thereof the
restructuring agreement will be substituted. Neither is there an implied novation since the
restructuring agreement is not incompatible with the trust receipt transactions.
Indeed, the restructuring agreement recognizes the obligation due under the trust receipts
when it required "payment of all interest and other charges prior to restructuring." With
respect to Michael, there was even a proviso under the agreement that the amount due is
subject to "the joint and solidary liability of Spouses Miguel and Mary Say and Michael Go
Say." While the names of Melchor and Josephine do not appear on the restructuring
agreement, it cannot be presumed that they have been relieved from the obligation. The old
obligation continues to subsist subject to the modifications agreed upon by the parties.
The circumstance that motivated the parties to enter into a restructuring agreement was the
failure of petitioners to account for the goods received in trust and/or deliver the proceeds
thereof. To remedy the situation, the parties executed an agreement to restructure
Transpacific’s obligations.
The Bank only extended the repayment term of the trust receipts from 90 days to one year
with monthly installment at 5% per annum over prime rate or 30% per annum whichever is
higher. Furthermore, the interest rates were flexible in that they are subject to review every
amortization due. Whether the terms appeared to be more onerous or not is immaterial. Courts
are not authorized to extricate parties from the necessary consequences of their acts. The
parties will not be relieved from their obligations as there was absolutely no intention by the
parties to supersede or abrogate the trust receipt transactions. The intention of the new
agreement was precisely to revive the old obligation after the original period expired and the
loan remained unpaid. Well-settled is the rule that, with respect to obligations to pay a sum of
money, the obligation is not novated by an instrument that expressly recognizes the old,
changes only the terms of payment, adds other obligations not incompatible with the old ones,
or the new contract merely supplements the old one.31
Equally unmeritorious is petitioners’ claim that they cannot be held liable to pay any
obligation due to the Bank under the restructuring agreement because they did not participate
or sign the same. To reiterate, there is no novation. The trust receipts transactions and the
restructuring agreement can both stand together. Petitioners have not shown that they were
expressly released from the obligation. From the beginning, they were joint and solidary
debtors under the trust receipts, the obligation of which subsist vis-à-vis the restructuring
agreement. Being joint and solidary debtors, they are liable for the entirety of the obligation.
While petitioners Melchor and Josephine insist that they never claimed forgery, the crux of the
matter still pertains to the credibility of the witness, which the courts below chose to uphold.
Suffice it to say that in the absence of any of the recognized exceptions,32 the factual findings
of the trial court, especially when affirmed by the Court of Appeals are conclusive on this
Court.
WHEREFORE, the twin petitions are DENIED. The Decision of the Court of Appeals in CA-
G.R. CV No. 74644 is AFFIRMED. Costs against petitioners.
SO ORDERED.
G.R. No. 138677               February 12, 2002
TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA, petitioners,  "2. To pay the further sum equivalent to 10% of the total amount of indebtedness for
vs.
HON. COURT OF APPEALS & SECURITY BANK & TRUST
COMPANY, respondents.
DECISION
VITUG, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court,
assailing the decision and resolutions of the Court of Appeals in CA-G.R. CV No. 34594,
entitled "Security Bank and Trust Co. vs. Tolomeo Ligutan, et al."
Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained on 11 May 1981 a loan in the
amount of P120,000.00 from respondent Security Bank and Trust Company. Petitioners
executed a promissory note binding themselves, jointly and severally, to pay the sum
borrowed with an interest of 15.189% per annum upon maturity and to pay a penalty of 5%
every month on the outstanding principal and interest in case of default. In addition,
petitioners agreed to pay 10% of the total amount due by way of attorney’s fees if the matter
were indorsed to a lawyer for collection or if a suit were instituted to enforce payment. The
obligation matured on 8 September 1981; the bank, however, granted an extension but only up
until 29 December 1981.
Despite several demands from the bank, petitioners failed to settle the debt which, as of 20
May 1982, amounted to P114,416.10. On 30 September 1982, the bank sent a final demand
letter to petitioners informing them that they had five days within which to make full payment.
Since petitioners still defaulted on their obligation, the bank filed on 3 November 1982, with
the Regional Trial Court of Makati, Branch 143, a complaint for recovery of the due amount.
After petitioners had filed a joint answer to the complaint, the bank presented its evidence and,
on 27 March 1985, rested its case. Petitioners, instead of introducing their own evidence, had
the hearing of the case reset on two consecutive occasions. In view of the absence of
petitioners and their counsel on 28 August 1985, the third hearing date, the bank moved, and
the trial court resolved, to consider the case submitted for decision.
Two years later, or on 23 October 1987, petitioners filed a motion for reconsideration of the
order of the trial court declaring them as having waived their right to present evidence and
prayed that they be allowed to prove their case. The court a quo denied the motion in an order,
dated 5 September 1988, and on 20 October 1989, it rendered its decision, 1 the dispositive
portion of which read:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendants, ordering the latter to pay, jointly and severally, to the plaintiff, as follows:
"1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per annum,
2% service charge and 5% per month penalty charge, commencing on 20 May 1982
until fully paid;
and as attorney’s fees; and
"3. To pay the costs of the suit."2
Petitioners interposed an appeal with the Court of Appeals, questioning the rejection by the
trial court of their motion to present evidence and assailing the imposition of the 2% service
charge, the 5% per month penalty charge and 10% attorney's fees. In its decision 3 of 7 March
1996, the appellate court affirmed the judgment of the trial court except on the matter of the
2% service charge which was deleted pursuant to Central Bank Circular No. 783. Not fully
satisfied with the decision of the appellate court, both parties filed their respective motions for
reconsideration.4Petitioners prayed for the reduction of the 5% stipulated penalty for being
unconscionable. The bank, on the other hand, asked that the payment of interest and penalty be
commenced not from the date of filing of complaint but from the time of default as so
stipulated in the contract of the parties.
On 28 October 1998, the Court of Appeals resolved the two motions thusly:
"We find merit in plaintiff-appellee’s claim that the principal sum of P114,416.00 with interest
thereon must commence not on the date of filing of the complaint as we have previously held
in our decision but on the date when the obligation became due.
"Default generally begins from the moment the creditor demands the performance of the
obligation. However, demand is not necessary to render the obligor in default when the
obligation or the law so provides.
"In the case at bar, defendants-appellants executed a promissory note where they undertook to
pay the obligation on its maturity date 'without necessity of demand.' They also agreed to pay
the interest in case of non-payment from the date of default.
"x x x           x x x          x x x
"While we maintain that defendants-appellants must be bound by the contract which they
acknowledged and signed, we take cognizance of their plea for the application of the
provisions of Article 1229 x x x.
"Considering that defendants-appellants partially complied with their obligation under the
promissory note by the reduction of the original amount of P120,000.00 to P114,416.00 and in
order that they will finally settle their obligation, it is our view and we so hold that in the
interest of justice and public policy, a penalty of 3% per month or 36% per annum would
suffice.
"x x x           x x x          x x x
"WHEREFORE, the decision sought to be reconsidered is hereby MODIFIED. The
defendants-appellants Tolomeo Ligutan and Leonidas dela Llana are hereby ordered to pay the
plaintiff-appellee Security Bank and Trust Company the following:
"1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per annum
and 3% per month penalty charge commencing May 20, 1982 until fully paid;
"2. The sum equivalent to 10% of the total amount of the indebtedness as and for
attorney’s fees."5
On 16 November 1998, petitioners filed an omnibus motion for reconsideration and to admit
newly discovered evidence,6 alleging that while the case was pending before the trial court,
petitioner Tolomeo Ligutan and his wife Bienvenida Ligutan executed a real estate mortgage
on 18 January 1984 to secure the existing indebtedness of petitioners Ligutan and dela Llana
with the bank. Petitioners contended that the execution of the real estate mortgage had the
effect of novating the contract between them and the bank. Petitioners further averred that the
mortgage was extrajudicially foreclosed on 26 August 1986, that they were not informed about
it, and the bank did not credit them with the proceeds of the sale. The appellate court denied
the omnibus motion for reconsideration and to admit newly discovered evidence, ratiocinating
that such a second motion for reconsideration cannot be entertained under Section 2, Rule 52,
of the 1997 Rules of Civil Procedure. Furthermore, the appellate court said, the newly-
discovered evidence being invoked by petitioners had actually been known to them when the
case was brought on appeal and when the first motion for reconsideration was filed.7
Aggrieved by the decision and resolutions of the Court of Appeals, petitioners elevated their
case to this Court on 9 July 1999 via a petition for review on certiorari under Rule 45 of the
Rules of Court, submitting thusly -
"I. The respondent Court of Appeals seriously erred in not holding that the 15.189%
interest and the penalty of three (3%) percent per month or thirty-six (36%) percent
per annum imposed by private respondent bank on petitioners’ loan obligation are
still manifestly exorbitant, iniquitous and unconscionable.
"II. The respondent Court of Appeals gravely erred in not reducing to a reasonable
level the ten (10%) percent award of attorney’s fees which is highly and grossly
excessive, unreasonable and unconscionable.
"III. The respondent Court of Appeals gravely erred in not admitting petitioners’
newly discovered evidence which could not have been timely produced during the
trial of this case.
"IV. The respondent Court of Appeals seriously erred in not holding that there was a
novation of the cause of action of private respondent’s complaint in the instant case
due to the subsequent execution of the real estate mortgage during the pendency of
this case and the subsequent foreclosure of the mortgage."8
Respondent bank, which did not take an appeal, would, however, have it that the penalty
sought to be deleted by petitioners was even insufficient to fully cover and compensate for the
cost of money brought about by the radical devaluation and decrease in the purchasing power
of the peso, particularly vis-a-vis the U.S. dollar, taking into account the time frame of its
occurrence. The Bank would stress that only the amount of P5,584.00 had been remitted out of
the entire loan of P120,000.00.9
A penalty clause, expressly recognized by law, 10 is an accessory undertaking to assume greater
liability on the part of an obligor in case of breach of an obligation. It functions to strengthen
the coercive force of the obligation11 and to provide, in effect, for what could be the liquidated
damages resulting from such a breach. The obligor would then be bound to pay the stipulated
indemnity without the necessity of proof on the existence and on the measure of damages
caused by the breach.12 Although a court may not at liberty ignore the freedom of the parties to
agree on such terms and conditions as they see fit that contravene neither law nor morals, good
customs, public order or public policy, a stipulated penalty, nevertheless, may be equitably
reduced by the courts if it is iniquitous or unconscionable or if the principal obligation has
been partly or irregularly complied with.13
The question of whether a penalty is reasonable or iniquitous can be partly subjective and
partly objective. 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. In Rizal Commercial Banking Corp. vs. Court of Appeals,14 just an example, the Court
has tempered the penalty charges after taking into account the debtor’s pitiful situation and its
offer to settle the entire obligation with the creditor bank. The stipulated penalty might
likewise be reduced when a partial or irregular performance is made by the debtor.15 The
stipulated penalty might even be deleted such as when there has been substantial performance
in good faith by the obligor,16 when the penalty clause itself suffers from fatal infirmity, or
when exceptional circumstances so exist as to warrant it.17
The Court of Appeals, exercising its good judgment in the instant case, has reduced the
penalty interest from 5% a month to 3% a month which petitioner still disputes. Given the
circumstances, not to mention the repeated acts of breach by petitioners of their contractual
obligation, the Court sees no cogent ground to modify the ruling of the appellate court..
Anent the stipulated interest of 15.189% per annum, petitioners, for the first time, question its
reasonableness and prays that the Court reduce the amount. This contention is a fresh issue
that has not been raised and ventilated before the courts below. In any event, the interest
stipulation, on its face, does not appear as being that excessive. The essence or rationale for
the payment of interest, quite often referred to as cost of money, is not exactly the same as that
of a surcharge or a penalty. A penalty stipulation is not necessarily preclusive of interest, if
there is an agreement to that effect, the two being distinct concepts which may separately be
demanded.18 What may justify a court in not allowing the creditor to impose full surcharges
and penalties, despite an express stipulation therefor in a valid agreement, may not equally
justify the non-payment or reduction of interest. Indeed, the interest prescribed in loan
financing arrangements is a fundamental part of the banking business and the core of a bank's
existence.19
Petitioners next assail the award of 10% of the total amount of indebtedness by way of
attorney's fees for being grossly excessive, exorbitant and unconscionable vis-a-vis the time
spent and the extent of services rendered by counsel for the bank and the nature of the case.
Bearing in mind that the rate of attorney’s fees has been agreed to by the parties and intended
to answer not only for litigation expenses but also for collection efforts as well, the Court, like
the appellate court, deems the award of 10% attorney’s fees to be reasonable.
Neither can the appellate court be held to have erred in rejecting petitioners' call for a new trial
or to admit newly discovered evidence. As the appellate court so held in its resolution of 14
May 1999 -
"Under Section 2, Rule 52 of the 1997 Rules of Civil Procedure, no second motion for
reconsideration of a judgment or final resolution by the same party shall be entertained.
Considering that the instant motion is already a second motion for reconsideration, the same
must therefore be denied.
"Furthermore, it would appear from the records available to this court that the newly-
discovered evidence being invoked by defendants-appellants have actually been existent when
the case was brought on appeal to this court as well as when the first motion for
reconsideration was filed.1âwphi1 Hence, it is quite surprising why defendants-appellants
raised the alleged newly-discovered evidence only at this stage when they could have done so
in the earlier pleadings filed before this court.
"The propriety or acceptability of such a second motion for reconsideration is not contingent
upon the averment of 'new' grounds to assail the judgment, i.e., grounds other than those
theretofore presented and rejected. Otherwise, attainment of finality of a judgment might be
stayed off indefinitely, depending on the party’s ingenuousness or cleverness in conceiving
and formulating 'additional flaws' or 'newly discovered errors' therein, or thinking up some
injury or prejudice to the rights of the movant for reconsideration."20
At any rate, the subsequent execution of the real estate mortgage as security for the existing
loan would not have resulted in the extinguishment of the original contract of loan because of
novation. Petitioners acknowledge that the real estate mortgage contract does not contain any
express stipulation by the parties intending it to supersede the existing loan agreement
between the petitioners and the bank.21 Respondent bank has correctly postulated that the
mortgage is but an accessory contract to secure the loan in the promissory note.
Extinctive novation requires, first, a previous valid obligation; second, the agreement of all the
parties to the new contract; third, the extinguishment of the obligation; and fourth, the validity
of the new one.22 In order that an obligation may be extinguished by another which substitutes
the same, it is imperative that it be so declared in unequivocal terms, or that the old and the
new obligation be on every point incompatible with each other.23 An obligation to pay a sum of
money is not extinctively novated by a new instrument which merely changes the terms of
payment or adding compatible covenants or where the old contract is merely supplemented by
the new one.24 When not expressed, incompatibility is required so as to ensure that the parties
have indeed intended such novation despite their failure to express it in categorical terms. The
incompatibility, to be sure, should take place in any of the essential elements of the obligation,
i.e., (1) the juridical relation or tie, such as from a mere commodatum to lease of things, or
from negotiorum gestio to agency, or from a mortgage to antichresis, 25 or from a sale to one of
loan;26(2) the object or principal conditions, such as a change of the nature of the prestation; or
(3) the subjects, such as the substitution of a debtor27 or the subrogation of the creditor.
Extinctive novation does not necessarily imply that the new agreement should be complete by
itself; certain terms and conditions may be carried, expressly or by implication, over to the
new obligation.
WHEREFORE, the petition is DENIED.
Republic of the Philippines
SUPREME COURT
SECOND DIVISION
G.R. No. 152346 November 25, 2005
ISAIAS F. FABRIGAS and MARCELINA R. FABRIGAS, Petitioners,  entered into an agreement, denominated as Contract to Sell No. 2482-V, whereby the latter
vs.
SAN FRANCISCO DEL MONTE, INC., Respondent.
DECISION
Tinga, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil
Procedure, which assails the Decision of the Court of Appeals in CA-G.R. CV No. 45203 and
its Resolution therein denying petitioners’ motion for reconsideration. Said Decision affirmed
the Decision dated January 3, 1994 of the Regional Trial Court (RTC), Branch 63, Makati City
in Civil Case No. 90-2711 entitled San Francisco Del Monte, Inc. v. Isaias F. Fabrigas and
Marcelina R. Fabrigas.
The dispositive portion of the trial court’s Decision reads:
In the light of the foregoing, the Court is convinced that plaintiff has proven by preponderance
of evidence, the allegation appearing in its complaint and is therefore, entitled to the reliefs
prayed for.
Considering, however, that defendants had already paid ₱78,152.00, the Court exercising its
discretion, hereby renders judgment as follows:
1. Ordering defendant to make complete payment under the conditions of Contract to Sell No.
2491-V dated January 21, 1985, within twenty days from receipt of this Decision, and in the
event that defendant fail or refuse to observe the latter, defendants and all persons claiming
right of possession or occupation from defendants are ordered to vacate and leave the
premises, described as Lot No. 9 Block No. 3 of Subdivision Plan (LRC) Psd-50064 covered
by Transfer Certificate of Title No. 4980 (161653) T-1083 of the Registry of Deeds of Rizal,
and to surrender possession thereof to plaintiff or any of its authorized representatives;
2. That in the event that defendants chose to surrender possession of the property, they are
further ordered to pay plaintiff ₱206,223.80 as unpaid installments on the land inclusive of
interests;
3. Ordering defendants to jointly and severally pay plaintiff the amount of ₱10,000.00 as and
for attorney’s fees; and
4. Ordering defendants to pay the costs of suit.
SO ORDERED. 1
The following factual antecedents are matters of record.
On April 23, 1983, herein petitioner spouses Isaias and Marcelina Fabrigas ("Spouses
Fabrigas" or "petitioners") and respondent San Francisco Del Monte, Inc. ("Del Monte")
agreed to sell to Spouses Fabrigas a parcel of residential land situated in Barrio Almanza, Las
Piñas, Manila for and in consideration of the amount of ₱109,200.00. Said property, which is
known as Lot No. 9, Block No. 3 of Subdivision Plan (LRC) Psd-50064, is covered by
Transfer Certificate of Title No. 4980 (161653) T-1083 registered in the name of respondent
Del Monte. The agreement stipulated that Spouses Fabrigas shall pay ₱30,000.00 as
downpayment and the balance within ten (10) years in monthly successive installments of
₱1,285.69.2 Among the clauses in the contract is an automatic cancellation clause in case of
default, which states as follows:
7. Should the PURCHASER fail to make any of the payments including interest as herein
provided, within 30 days after the due date, this contract will be deemed and considered as
forfeited and annulled without necessity of notice to the PURCHASER, and said SELLER
shall be at liberty to dispose of the said parcel of land to any other person in the same manner
as if this contract had never been executed. In the event of such forfeiture, all sums of money
paid under this contract will be considered and treated as rentals for the use of said parcel of
land, and the PURCHASER hereby waives all right to ask or demand the return thereof and
agrees to peaceably vacate the said premises.3
After paying ₱30,000.00, Spouses Fabrigas took possession of the property but failed to make
any installment payments on the balance of the purchase price. Del Monte sent demand letters
on four occasions to remind Spouses Fabrigas to satisfy their contractual obligation. 4 In
particular, Del Monte’s third letter dated November 9, 1983 demanded the payment of arrears
in the amount of ₱8,999.00. Said notice granted Spouses Fabrigas a fifteen-day grace period
within which to settle their accounts. Petitioners’ failure to heed Del Monte’s demands
prompted the latter to send a final demand letter dated December 7, 1983, granting Spouses
Fabrigas another grace period of fifteen days within which to pay the overdue amount and
warned them that their failure to satisfy their obligation would cause the rescission of the
contract and the forfeiture of the sums of money already paid. Petitioners received Del
Monte’s final demand letter on December 23, 1983. Del Monte considered Contract to Sell
No. 2482-V cancelled fifteen days thereafter, but did not furnish petitioners any notice
regarding its cancellation.5
On November 6, 1984, petitioner Marcelina Fabrigas ("petitioner Marcelina") remitted the
amount of ₱13,000.00 to Del Monte.6 On January 12, 1985, petitioner Marcelina again
remitted the amount of ₱12,000.00.7 A few days thereafter, or on January 21, 1985, petitioner
Marcelina and Del Monte entered into another agreement denominated as Contract to Sell No.
2491-V, covering the same property but under restructured terms of payment. Under the
second contract, the parties agreed on a new purchase price of ₱131,642.58, the amount of
₱26,328.52 as downpayment and the balance to be paid in monthly installments of ₱2,984.60
each.8
Between March 1985 and January 1986, Spouses Fabrigas made irregular payments
under Contract to Sell No. 2491-V, to wit:
March 19, 1985 ₱1, 328.52
July 2, 1985 ₱2, 600.00
September 30, 1985 ₱2, 600.00
November 27, 1985 ₱2, 600.00
January 20, 1986 ₱2, 000.009
Del Monte sent a demand letter dated February 3, 1986, informing petitioners of their overdue
account equivalent to nine (9) installments or a total amount of ₱26,861.40. Del Monte
required petitioners to satisfy said amount immediately in two subsequent letters dated March
5 and April 2, 1986.10 This prompted petitioners to pay the following amounts:
February 3, 1986 ₱2, 000.00
March 10, 1986 ₱2, 000.00
April 9, 1986 ₱2, 000.00
May 13, 1986 ₱2, 000.00
June 6, 1986 ₱2, 000.00
July 14, 1986 ₱2, 000.0011
No other payments were made by petitioners except the amount of ₱10,000.00 which
petitioners tendered sometime in October 1987 but which Del Monte refused to accept, the
latter claiming that the payment was intended for the satisfaction of Contract to Sell No. 2482-
V which had already been previously cancelled. On March 24, 1988, Del Monte sent a letter
demanding the payment of accrued installments under Contract to Sell No. 2491-V in the
amount of ₱165,759.60 less ₱48,128.52, representing the payments made under the
restructured contract, or the net amount of ₱117,631.08. Del Monte allowed petitioners a grace
period of thirty (30) days within which to pay the amount asked to avoid rescission of the
contract. For failure to pay, Del Monte notified petitioners on March 30, 1989 that Contract to
Sell No. 2482-V had been cancelled and demanded that petitioners vacate the property.12
On September 28, 1990, Del Monte instituted an action for Recovery of Possession with
Damages against Spouses Fabrigas before the RTC, Branch 63 of Makati City. The complaint
alleged that Spouses Fabrigas owed Del Monte the principal amount of ₱206,223.80 plus
interest of 24% per annum. In their answer, Spouses Fabrigas claimed, among others, that Del
Monte unilaterally cancelled the first contract and forced petitioner Marcelina to execute the
second contract, which materially and unjustly altered the terms and conditions of the original
contract.13
After trial on the merits, the trial court rendered a Decision on January 3, 1994, upholding the
validity of Contract to Sell No. 2491-V and ordering Spouses Fabrigas either to complete
payments thereunder or to vacate the property.
Aggrieved, Spouses Fabrigas elevated the matter to the Court of Appeals, arguing that the trial
court should have upheld the validity and existence of Contract to Sell No. 2482-V instead and
nullified Contract to Sell No. 2491-V. The Court of Appeals rejected this argument on the
ground that Contract to Sell No. 2482-V had been rescinded pursuant to the automatic
rescission clause therein. While the Court of Appeals declared Contract to Sell No. 2491-V as
merely unenforceable for having been executed without petitioner Marcelina’s signature, it
upheld its validity upon finding that the contract was subsequently ratified.
Hence, the instant petition attributing the following errors to the Court of Appeals:
A. THE COURT OF APPEALS GRAVELY ERRED WHEN IT IGNORED THE
PROVISIONS OF R.A. NO. 6552 (THE MACEDA LAW) AND RULED THAT
CONTRACT TO SELL NO. 2482-V WAS VALIDLY CANCELLED BY SENDING A
MERE NOTICE TO THE PETITIONERS.
B. THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT THERE WAS AN
IMPLIED RATIFICATION OF CONTRACT TO SELL NO. 2491-V.
C. THE COURT OF APPEALS ERRED IN ITS APPLICATION OF THE RULES OF
NOVATION TO THE INSTANT CASE.14
As reframed for better understanding, the questions are the following: Was Contract to Sell
No. 2482-V extinguished through rescission or was it novated by the subsequent Contract to
Sell No. 2491-V? If Contract to Sell No. 2482-Vwas rescinded, should the manner of rescission
comply with the requirements of Republic Act No. (R.A.) 6552? If Contract to Sell No. 2482-
V was subsequently novated by Contract to Sell No. 2491-V, are petitioners liable for breach
under the subsequent agreement?
Petitioners theorize that Contract to Sell No. 2482-V should remain valid and subsisting
because the notice of cancellation sent by Del Monte did not observe the requisites under
Section 3 of R.A. 6552.15 According to petitioners, since respondent did not send a notarial
notice informing them of the cancellation or rescission of Contract to Sell No. 2482-V and also
did not pay them the cash surrender value of the payments on the property, the Court of
Appeals erred in concluding that respondent correctly applied the automatic rescission clause
of Contract to Sell No. 2482-V. Petitioners also cite Section 716 of said law to bolster their
theory that the automatic rescission clause in Contract to Sell No. 2482-V is invalid for being
contrary to law and public policy.
The Court of Appeals erred in ruling that Del Monte was "well within its right to cancel the
contract by express grant of paragraph 7 without the need of notifying [petitioners], 17" instead
of applying the pertinent provisions of R.A. 6552. Petitioners’ contention that none of Del
Monte’s demand letters constituted a valid rescission of Contract to Sell No. 2482-V is correct.
Petitioners defaulted in all monthly installments. They may be credited only with the amount
of ₱30,000.00 paid upon the execution of Contract to Sell No. 2482-V, which should be
deemed equivalent to less than two (2) years’ installments. Given the nature of the contract
between petitioners and Del Monte, the applicable legal provision on the mode of cancellation
of Contract to Sell No. 2482-V is Section 4 and not Section 3 of R.A. 6552. Section 4 is
applicable to instances where less than two years installments were paid. It reads:
SECTION 4. In case where less than two years of installments were paid, the seller shall give
the buyer a grace period of not less than sixty days from the date the installment became due.
If the buyer fails to pay the installments due at the expiration of the grace period, the seller
may cancel the contract after thirty days from receipt by the buyer of the notice of cancellation
or the demand for rescission of the contract by a notarial act.
Thus, the cancellation of the contract under Section 4 is a two-step process. First, the seller
should extend the buyer a grace period of at least sixty (60) days from the due date of the
installment. Second, at the end of the grace period, the seller shall furnish the buyer with a
notice of cancellation or demand for rescission through a notarial act, effective thirty (30) days
from the buyer’s receipt thereof. It is worth mentioning, of course, that a mere notice or letter,
short of a notarial act, would not suffice.
While the Court concedes that Del Monte had allowed petitioners a grace period longer than
the minimum sixty (60)-day requirement under Section 4, it did not comply, however, with the
requirement of notice of cancellation or a demand for rescission. Instead, Del Monte applied
the automatic rescission clause of the contract. Contrary, however, to Del Monte’s position
which the appellate court sustained, the automatic cancellation clause is void under Section
718 in relation to Section 4 of R.A. 6552.19
Rescission, of course, is not the only mode of extinguishing obligations. Ordinarily,
obligations are also extinguished by payment or performance, by the loss of the thing due, by
the condonation or remission of the debt, by the confusion or merger of the rights of the
creditor and debtor, by compensation, or by novation.20
Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive when
an old obligation is terminated by the creation of a new obligation that takes the place of the
former; it is merely modificatory when the old obligation subsists to the extent it remains
compatible with the amendatory agreement. An extinctive novation results either by changing
the object or principal conditions (objective or real), or by substituting the person of the debtor
or subrogating a third person in the rights of the creditor (subjective or personal). Under this
mode, novation would have dual functions—one to extinguish an existing obligation, the other
to substitute a new one in its place—requiring a conflux of four essential requisites: (1) a
previous valid obligation; (2) an agreement of all parties concerned to a new contract; (3) the
extinguishment of the old obligation; and (4) the birth of a valid new obligation.21
Notwithstanding the improper rescission, the facts of the case show that Contract to Sell No.
2482-V was subsequently novated by Contract to Sell No. 2491-V. The execution of Contract
to Sell No. 2491-V accompanied an upward change in the contract price, which constitutes a
change in the object or principal conditions of the contract. In entering into Contract to Sell
No. 2491-V, the parties were impelled by causes different from those obtaining under Contract
to Sell No. 2482-V. On the part of petitioners, they agreed to the terms and conditions
of Contract to Sell No. 2491-V not only to acquire ownership over the subject property but
also to avoid the consequences of their default under Contract No. 2482-V. On Del Monte’s
end, the upward change in price was the consideration for entering into Contract to Sell No.
2491-V.
In order that an obligation may be extinguished by another which substitutes the same, it is
imperative that it be so declared in unequivocal terms, or that the old and the new obligations
be on every point incompatible with each other. 22 The test of incompatibility is whether or not
the two obligations can stand together, each one having its independent existence. If they
cannot, they are incompatible and the latter obligation novates the first.23 The execution
of Contract to Sell No. 2491-V created new obligations in lieu of those under Contract to Sell
No. 2482-V, which are already considered extinguished upon the execution of the second
contract. The two contracts do not have independent existence for to hold otherwise would
present an absurd situation where the parties would be liable under each contract having only
one subject matter.
To dispel the novation of Contract to Sell No. 2482-V by Contract to Sell No. 2491-
V, petitioners contend that the subsequent contract is void for two reasons: first, petitioner
Isaias Fabrigas did not give his consent thereto, and second, the subsequent contract is a
contract of adhesion.
Petitioner rely on Article 172 of the Civil Code governing their property relations as spouses.
Said article states that the wife cannot bind the conjugal partnership without the husband’s
consent except in cases provided by law. Since only petitioner Marcelina executed Contract to
Sell No. 2491-V, the same is allegedly void, petitioners conclude.
Under the Civil Code, the husband is the administrator of the conjugal partnership. 24 Unless
the wife has been declared a non compos mentis or a spendthrift, or is under civil interdiction
or is confined in a leprosarium, the husband cannot alienate or encumber any real property of
the conjugal partnership without the wife's consent. 25Conversely, the wife cannot bind the
conjugal partnership without the husband’s consent except in cases provided by law.26
Thus, if a contract entered into by one spouse involving a conjugal property lacks the consent
of the other spouse, as in the case at bar, is it automatically void for that reason alone?
Article 17327 of the Civil Code expressly classifies a contract executed by the husband without
the consent of the wife as merely annullable at the instance of the wife. However, there is no
comparable provision covering an instance where the wife alone has consented to a contract
involving conjugal property. Article 172 of the Civil Code, though, does not expressly declare
as void a contract entered by the wife without the husband’s consent. It is also not one of the
contracts considered as void under Article 140928 of the Civil Code.
In Felipe v. Heirs of Maximo Aldon,29 the Court had the occasion to rule on the validity of a
sale of lands belonging to the conjugal partnership made by the wife without the consent of the
husband. Speaking through Mr. Justice Abad Santos, the Court declared such a contract as
voidable because one of the parties is incapable of giving consent to the contract. The capacity
to give consent belonged not even to the husband alone but to both
spouses.30 In that case, the Court anchored its ruling on Article 173 of the Civil Code which
states that contracts entered by the husband without the consent of the wife when such consent
is required, are annullable at her instance during the marriage and within ten years from the
transaction mentioned.31
The factual milieu of the instant case, however, differs from that in Felipe. The defect
which Contract to Sell No. 2491-V suffers from is lack of consent of the husband, who was out
of the country at the time of the execution of the contract. There is no express provision in the
Civil Code governing a situation where the husband is absent and his absence incapacitates
him from administering the conjugal partnership property. The following Civil Code
provisions, however, are illuminating:
ARTICLE 167. In case of abuse of powers of administration of the conjugal partnership
property by the husband, the courts, on petition of the wife, may provide for receivership, or
administration by the wife, or separation of property.
ARTICLE 168. The wife may, by express authority of the husband embodied in a public
instrument, administer the conjugal partnership property.
No. 2491-V is taken to be valid and binding. The fact that she has paid monthly amortizations
subsequent to the execution of Contract to Sell No. 2491-V, is an indication that she had
recognized the validity of such contract. . . .34
In sum, Contract to Sell No. 2491-V is valid and binding. There is nothing to prevent
respondent Del Monte from enforcing its contractual stipulations and pursuing the proper
court action to hold petitioners liable for their breach thereof.
WHEREFORE, the instant Petition for Review is DENIED and the September 28,
2001 Decision of the Court of Appeals in CA-G.R. CV No. 45203 is AFFIRMED. Costs
against petitioners.
SO ORDERED.

ARTICLE 169. The wife may also, by express authority of the husband appearing in a public CONTRACTS
instrument, administer the latter's estate.

Republic of the Philippines

While the husband is the recognized administrator of the conjugal property under the Civil
SUPREME COURT
Code, there are instances when the wife may assume administrative powers or ask for the
Manila
separation of property. In the abovementioned instances, the wife must be authorized either by
the court or by the husband. Where the husband is absent and incapable of administering the
conjugal property, the wife must be expressly authorized by the husband or seek judicial FIRST DIVISION
authority to assume powers of administration. Thus, any transaction entered by the wife
without the court or the husband’s authority is unenforceable in accordance with Article  
131732 of the Civil Code. That is the status to be accorded Contract to Sell No. 2491-V, it
having been executed by petitioner Marcelina without her husband’s conformity.
G.R. No. 128690 January 21, 1999

Being an unenforceable contract, Contract to Sell No. 2491-V is susceptible to ratification. As

ABS-CBN BROADCASTING CORPORATION, petitioner, 
found by the courts below, after being informed of the execution of the contract, the husband,
vs.
petitioner Isaias Fabrigas, continued remitting payments for the satisfaction of the obligation
HONORABLE COURT OF APPEALS, REPUBLIC BROADCASTING CORP, VIVA
under Contract to Sell No. 2491-V. These acts constitute ratification of the contract. Such
PRODUCTION, INC., and VICENTE DEL ROSARIO, respondents.
ratification cleanses the contract from all its defects from the moment it was constituted. The
factual findings of the courts below are beyond review at this stage.

Anent Del Monte’s claim that Contract to Sell No. 2491-V is a contract of adhesion, suffice it
to say that assuming for the nonce that the contract is such the characterization does not
automatically render it void. A contract of adhesion is so-called because its terms are prepared
by only one party while the other party merely affixes his signature signifying his adhesion
thereto. Such contracts are not void in themselves. They are as binding as ordinary contracts.
Parties who enter into such contracts are free to reject the stipulations entirely.33
The Court quotes with approval the following factual observations of the trial court, which
cannot be disturbed in this case, to wit:
DAVIDE, JR., CJ.:
In this petition for review on certiorari, petitioner ABS-CBN Broadcasting Corp. (hereafter
ABS-CBN) seeks to reverse and set aside the decision 1 of 31 October 1996 and the
resolution 2 of 10 March 1997 of the Court of Appeals in CA-G.R. CV No. 44125. The former
affirmed with modification the decision 3 of 28 April 1993 of the Regional Trial Court (RTC)
of Quezon City, Branch 80, in Civil Case No. Q-92-12309. The latter denied the motion to
reconsider the decision of 31 October 1996.

The Court notes that defendant, Marcelina Fabrigas, although she had to sign contract No.
2491-V, to avoid forfeiture of her downpayment, and her other monthly amortizations, was
entirely free to refuse to accept the new contract. There was no clear case of intimidation or
threat on the part of plaintiff in offering the new contract to her. At most, since she was of
sufficient intelligence to discern the agreement she is entering into, her signing of Contract
The antecedents, as found by the RTC and adopted by the Court of Appeals, are as follows:
In 1990, ABS-CBN and Viva executed a Film Exhibition Agreement
(Exh. "A") whereby Viva gave ABS-CBN an exclusive right to exhibit
some Viva films. Sometime in December 1991, in accordance with
paragraph 2.4 [sic] of said agreement stating that —.
1.4 ABS-CBN shall have the right of first refusal to the next twenty-four
(24) Viva films for TV telecast under such terms as may be agreed upon
by the parties hereto, provided, however, that such right shall be exercised
by ABS-CBN from the actual offer in writing.
Viva, through defendant Del Rosario, offered ABS-CBN, through its vice-
president Charo Santos-Concio, a list of three(3) film packages (36 title)
from which ABS-CBN may exercise its right of first refusal under the
afore-said agreement (Exhs. "1" par, 2, "2," "2-A'' and "2-B"-Viva). ABS-
CBN, however through Mrs. Concio, "can tick off only ten (10) titles"
(from the list) "we can purchase" (Exh. "3" - Viva) and therefore did not
accept said list (TSN, June 8, 1992, pp. 9-10). The titles ticked off by Mrs.
Concio are not the subject of the case at bar except the film ''Maging Sino
Ka Man."
For further enlightenment, this rejection letter dated January 06, 1992
(Exh "3" - Viva) is hereby quoted:
6 January 1992
Dear Vic,
This is not a very formal business letter I am writing to you as I would like
to express my difficulty in recommending the purchase of the three film
packages you are offering ABS-CBN.
From among the three packages I can only tick off 10 titles we can
purchase. Please see attached. I hope you will understand my position.
Most of the action pictures in the list do not have big action stars in the
cast. They are not for primetime. In line with this I wish to mention that I
have not scheduled for telecast several action pictures in out very first
contract because of the cheap production value of these movies as well as
the lack of big action stars. As a film producer, I am sure you understand
what I am trying to say as Viva produces only big action pictures.
In fact, I would like to request two (2) additional runs for these movies as I
can only schedule them in our non-primetime slots. We have to cover the
amount that was paid for these movies because as you very well know that
non-primetime advertising rates are very low. These are the unaired titles
in the first contract.
1. Kontra Persa [sic].
2. Raider Platoon.
3. Underground guerillas
4. Tiger Command
5. Boy de Sabog
6. Lady Commando
7. Batang Matadero
8. Rebelyon
I hope you will consider this request of mine.
The other dramatic films have been offered to us before and have been
rejected because of the ruling of MTRCB to have them aired at 9:00 p.m.
due to their very adult themes.
As for the 10 titles I have choosen [sic] from the 3 packages please
consider including all the other Viva movies produced last year. I have
quite an attractive offer to make.
Thanking you and with my warmest regards.
(Signed)
Charo San
On February 27, 1992, defendant Del Rosario approached ABS-CBN's
Ms. Concio, with a list consisting of 52 original movie titles (i.e. not yet
aired on television) including the 14 titles subject of the present case, as
well as 104 re-runs (previously aired on television) from which ABS-CBN
may choose another 52 titles, as a total of 156 titles, proposing to sell to
ABS-CBN airing rights over this package of 52 originals and 52 re-runs
for P60,000,000.00 of which P30,000,000.00 will be in cash and
P30,000,000.00 worth of television spots (Exh. "4" to "4-C" Viva; "9" -
Viva).
On April 2, 1992, defendant Del Rosario and ABS-CBN general manager,
Eugenio Lopez III, met at the Tamarind Grill Restaurant in Quezon City to
discuss the package proposal of Viva. What transpired in that lunch
meeting is the subject of conflicting versions. Mr. Lopez testified that he
and Mr. Del Rosario allegedly agreed that ABS-CRN was granted
exclusive film rights to fourteen (14) films for a total consideration of P36
million; that he allegedly put this agreement as to the price and number of
films in a "napkin'' and signed it and gave it to Mr. Del Rosario (Exh. D;
TSN, pp. 24-26, 77-78, June 8, 1992). On the other hand, Del Rosario
 denied having made any agreement with Lopez regarding the 14 Viva
films; denied the existence of a napkin in which Lopez wrote something;
and insisted that what he and Lopez discussed at the lunch meeting was
Viva's film package offer of 104 films (52 originals and 52 re-runs) for a
total price of P60 million. Mr. Lopez promising [sic]to make a counter
proposal which came in the form of a proposal contract Annex "C" of the
complaint (Exh. "1"·- Viva; Exh. "C" - ABS-CBN).
On April 06, 1992, Del Rosario and Mr. Graciano Gozon of RBS Senior
vice-president for Finance discussed the terms and conditions of Viva's
offer to sell the 104 films, after the rejection of the same package by ABS-
CBN.
On April 07, 1992, defendant Del Rosario received through his secretary,
a handwritten note from Ms. Concio, (Exh. "5" - Viva), which reads:
"Here's the draft of the contract. I hope you find everything in order," to
which was attached a draft exhibition agreement (Exh. "C''- ABS-CBN;
Exh. "9" - Viva, p. 3) a counter-proposal covering 53 films, 52 of which
came from the list sent by defendant Del Rosario and one film was added
by Ms. Concio, for a consideration of P35 million. Exhibit "C" provides
that ABS-CBN is granted films right to 53 films and contains a right of
first refusal to "1992 Viva Films." The said counter proposal was however
rejected by Viva's Board of Directors [in the] evening of the same day,
April 7, 1992, as Viva would not sell anything less than the package of
104 films for P60 million pesos (Exh. "9" - Viva), and such rejection was
relayed to Ms. Concio.
On April 29, 1992, after the rejection of ABS-CBN and following several
negotiations and meetings defendant Del Rosario and Viva's President
Teresita Cruz, in consideration of P60 million, signed a letter of agreement
dated April 24, 1992. granting RBS the exclusive right to air 104 Viva-
produced and/or acquired films (Exh. "7-A" - RBS; Exh. "4" - RBS)
including the fourteen (14) films subject of the present case. 4
On 27 May 1992, ABS-CBN filed before the RTC a complaint for specific performance with a
prayer for a writ of preliminary injunction and/or temporary restraining order against private
respondents Republic Broadcasting Corporation 5 (hereafter RBS ), Viva Production (hereafter
VIVA), and Vicente Del Rosario. The complaint was docketed as Civil Case No. Q-92-12309.
On 27 May 1992, RTC issued a temporary restraining order 6 enjoining private respondents
from proceeding with the airing, broadcasting, and televising of the fourteen VIVA films
subject of the controversy, starting with the film Maging Sino Ka Man, which was scheduled
to be shown on private respondents RBS' channel 7 at seven o'clock in the evening of said
date.
On 17 June 1992, after appropriate proceedings, the RTC issued an  (2) Plaintiff ABS-CBN is ordered to pay defendant
order 7 directing the issuance of a writ of preliminary injunction upon ABS-CBN's posting of
P35 million bond. ABS-CBN moved for the reduction of the bond, 8 while private respondents
moved for reconsideration of the order and offered to put up a counterbound. 9
In the meantime, private respondents filed separate answers with counterclaim. 10 RBS also set
up a cross-claim against VIVA..
On 3 August 1992, the RTC issued an order 11 dissolving the writ of preliminary injunction
upon the posting by RBS of a P30 million counterbond to answer for whatever damages ABS-
CBN might suffer by virtue of such dissolution. However, it reduced petitioner's injunction
bond to P15 million as a condition precedent for the reinstatement of the writ of preliminary
injunction should private respondents be unable to post a counterbond.
At the pre-trial 12 on 6 August 1992, the parties, upon suggestion of the court, agreed to
explore the possibility of an amicable settlement. In the meantime, RBS prayed for and was
granted reasonable time within which to put up a P30 million counterbond in the event that no
settlement would be reached.
As the parties failed to enter into an amicable settlement RBS posted on 1 October 1992 a
counterbond, which the RTC approved in its Order of 15 October 1992.13
On 19 October 1992, ABS-CBN filed a motion for reconsideration 14 of the 3 August and 15
October 1992 Orders, which RBS opposed. 15
On 29 October 1992, the RTC conducted a pre-trial. 16
Pending resolution of its motion for reconsideration, ABS-CBN filed with the Court of
Appeals a petition17challenging the RTC's Orders of 3 August and 15 October 1992 and
praying for the issuance of a writ of preliminary injunction to enjoin the RTC from enforcing
said orders. The case was docketed as CA-G.R. SP No. 29300.
On 3 November 1992, the Court of Appeals issued a temporary restraining order 18 to enjoin
the airing, broadcasting, and televising of any or all of the films involved in the controversy.
On 18 December 1992, the Court of Appeals promulgated a decision 19 dismissing the petition
in CA -G.R. No. 29300 for being premature. ABS-CBN challenged the dismissal in a petition
for review filed with this Court on 19 January 1993, which was docketed as G.R. No. 108363.
In the meantime the RTC received the evidence for the parties in Civil Case No. Q-192-1209.
Thereafter, on 28 April 1993, it rendered a decision 20 in favor of RBS and VIVA and against
ABS-CBN disposing as follows:
WHEREFORE, under cool reflection and prescinding from the foregoing,
judgments is rendered in favor of defendants and against the plaintiff.
(1) The complaint is hereby dismissed;
RBS the following:
 a) P107,727.00, the amount of
premium paid by RBS to the
surety which issued defendant
RBS's bond to lift the injunction;
b) P191,843.00 for the amount of
print advertisement for "Maging
Sino Ka Man" in various
newspapers;
c) Attorney's fees in the amount of
P1 million;
d) P5 million as and by way of
moral damages;
e) P5 million as and by way of
exemplary damages;
(3) For defendant VIVA, plaintiff ABS-CBN is
ordered to pay P212,000.00 by way of reasonable
attorney's fees.
(4) The cross-claim of defendant RBS against
defendant VIVA is dismissed.
(5) Plaintiff to pay the costs.
According to the RTC, there was no meeting of minds on the price and terms of the offer. The
alleged agreement between Lopez III and Del Rosario was subject to the approval of the
VIVA Board of Directors, and said agreement was disapproved during the meeting of the
Board on 7 April 1992. Hence, there was no basis for ABS-CBN's demand that VIVA signed
the 1992 Film Exhibition Agreement. Furthermore, the right of first refusal under the 1990
Film Exhibition Agreement had previously been exercised per Ms. Concio's letter to Del
Rosario ticking off ten titles acceptable to them, which would have made the 1992 agreement
an entirely new contract.
On 21 June 1993, this Court denied21 ABS-CBN's petition for review in G.R. No. 108363, as
no reversible error was committed by the Court of Appeals in its challenged decision and the
case had "become moot and academic in view of the dismissal of the main action by the
court a quo in its decision" of 28 April 1993.
Aggrieved by the RTC's decision, ABS-CBN appealed to the Court of Appeals claiming that
there was a perfected contract between ABS-CBN and VIVA granting ABS-CBN the
exclusive right to exhibit the subject films. Private respondents VIVA and Del Rosario also
appealed seeking moral and exemplary damages and additional attorney's fees.
In its decision of 31 October 1996, the Court of Appeals agreed with the RTC that the contract
between ABS-CBN and VIVA had not been perfected, absent the approval by the VIVA
Board of Directors of whatever Del Rosario, it's agent, might have agreed with Lopez III. The
appellate court did not even believe ABS-CBN's evidence that Lopez III actually wrote down
such an agreement on a "napkin," as the same was never produced in court. It likewise rejected
ABS-CBN's insistence on its right of first refusal and ratiocinated as follows:
As regards the matter of right of first refusal, it may be true that a Film
Exhibition Agreement was entered into between Appellant ABS-CBN and
appellant VIVA under Exhibit "A" in 1990, and that parag. 1.4 thereof
provides:
1.4 ABS-CBN shall have the right of first refusal to
the next twenty-four (24) VIVA films for TV telecast
under such terms as may be agreed upon by the parties
hereto, provided, however, that such right shall be
exercised by ABS-CBN within a period of fifteen (15)
days from the actual offer in writing (Records, p. 14).
[H]owever, it is very clear that said right of first refusal in favor of ABS-
CBN shall still be subject to such terms as may be agreed upon by the
parties thereto, and that the said right shall be exercised by ABS-CBN
within fifteen (15) days from the actual offer in writing.
Said parag. 1.4 of the agreement Exhibit "A" on the right of first refusal
did not fix the price of the film right to the twenty-four (24) films, nor did
it specify the terms thereof. The same are still left to be agreed upon by the
parties.
In the instant case, ABS-CBN's letter of rejection Exhibit 3 (Records, p.
89) stated that it can only tick off ten (10) films, and the draft contract
Exhibit "C" accepted only fourteen (14) films, while parag. 1.4 of Exhibit
"A'' speaks of the next twenty-four (24) films.
The offer of V1VA was sometime in December 1991 (Exhibits 2, 2-A. 2-
B; Records, pp. 86-88; Decision, p. 11, Records, p. 1150), when the first
list of VIVA films was sent by Mr. Del Rosario to ABS-CBN. The Vice
President of ABS-CBN, Ms. Charo Santos-Concio, sent a letter dated
January 6, 1992 (Exhibit 3, Records, p. 89) where ABS-CBN exercised its
right of refusal by rejecting the offer of VIVA.. As aptly observed by the
trial court, with the said letter of Mrs. Concio of January 6, 1992, ABS-
CBN had lost its right of first refusal. And even if We reckon the fifteen
(15) day period from February 27, 1992 (Exhibit 4 to 4-C) when another
list was sent to ABS-CBN after the letter of Mrs. Concio, still the fifteen
(15) day period within which ABS-CBN shall exercise its right of first
refusal has already expired.22
Accordingly, respondent court sustained the award of actual damages consisting in the cost of
print advertisements and the premium payments for the counterbond, there being adequate
proof of the pecuniary loss which RBS had suffered as a result of the filing of the complaint
by ABS-CBN. As to the award of moral damages, the Court of Appeals found reasonable
basis therefor, holding that RBS's reputation was debased by the filing of the complaint in
Civil Case No. Q-92-12309 and by the non-showing of the film "Maging Sino Ka Man."
Respondent court also held that exemplary damages were correctly imposed by way of
example or correction for the public good in view of the filing of the complaint despite
petitioner's knowledge that the contract with VIVA had not been perfected, It also upheld the
award of attorney's fees, reasoning that with ABS-CBN's act of instituting Civil Case No, Q-
92-1209, RBS was "unnecessarily forced to litigate." The appellate court, however, reduced
the awards of moral damages to P2 million, exemplary damages to P2 million, and attorney's
fees to P500, 000.00.
On the other hand, respondent Court of Appeals denied VIVA and Del Rosario's appeal
because it was "RBS and not VIVA which was actually prejudiced when the complaint was
filed by ABS-CBN."
Its motion for reconsideration having been denied, ABS-CBN filed the petition in this case,
contending that the Court of Appeals gravely erred in
I exemplary damages. The controversy involving ABS-CBN and RBS did not in any way
. . . RULING THAT THERE WAS NO PERFECTED CONTRACT
BETWEEN PETITIONER AND PRIVATE RESPONDENT VIVA
NOTWITHSTANDING PREPONDERANCE OF EVIDENCE
ADDUCED BY PETITIONER TO THE CONTRARY.
II
. . . IN AWARDING ACTUAL AND COMPENSATORY DAMAGES
IN FAVOR OF PRIVATE RESPONDENT RBS.
III
. . . IN AWARDING MORAL AND EXEMPLARY DAMAGES IN
FAVOR OF PRIVATE RESPONDENT RBS.
IV
. . . IN AWARDING ATTORNEY'S FEES IN FAVOR OF RBS.
ABS-CBN claims that it had yet to fully exercise its right of first refusal over twenty-four
titles under the 1990 Film Exhibition Agreement, as it had chosen only ten titles from the first
list. It insists that we give credence to Lopez's testimony that he and Del Rosario met at the
Tamarind Grill Restaurant, discussed the terms and conditions of the second list (the 1992
Film Exhibition Agreement) and upon agreement thereon, wrote the same on a paper napkin.
It also asserts that the contract has already been effective, as the elements thereof, namely,
consent, object, and consideration were established. It then concludes that the Court of
Appeals' pronouncements were not supported by law and jurisprudence, as per our decision of
1 December 1995 in Limketkai Sons Milling, Inc. v. Court of Appeals, 23 which cited Toyota
Shaw, Inc. v. Court of Appeals, 24 Ang Yu Asuncion v. Court of Appeals, 25 and Villonco Realty
Company v. Bormaheco. Inc.26
Anent the actual damages awarded to RBS, ABS-CBN disavows liability therefor. RBS spent
for the premium on the counterbond of its own volition in order to negate the injunction issued
by the trial court after the parties had ventilated their respective positions during the hearings
for the purpose. The filing of the counterbond was an option available to RBS, but it can
hardly be argued that ABS-CBN compelled RBS to incur such expense. Besides, RBS had
another available option, i.e., move for the dissolution or the injunction; or if it was
determined to put up a counterbond, it could have presented a cash bond. Furthermore under
Article 2203 of the Civil Code, the party suffering loss or injury is also required to exercise the
diligence of a good father of a family to minimize the damages resulting from the act or
omission. As regards the cost of print advertisements, RBS had not convincingly established
that this was a loss attributable to the non showing "Maging Sino Ka Man"; on the contrary, it
was brought out during trial that with or without the case or the injunction, RBS would have
spent such an amount to generate interest in the film.
ABS-CBN further contends that there was no clear basis for the awards of moral and
originate from business transaction between them. The claims for such damages did not arise
from any contractual dealings or from specific acts committed by ABS-CBN against RBS that
may be characterized as wanton, fraudulent, or reckless; they arose by virtue only of the filing
of the complaint, An award of moral and exemplary damages is not warranted where the
record is bereft of any proof that a party acted maliciously or in bad faith in filing an
action. 27 In any case, free resort to courts for redress of wrongs is a matter of public policy.
The law recognizes the right of every one to sue for that which he honestly believes to be his
right without fear of standing trial for damages where by lack of sufficient evidence, legal
technicalities, or a different interpretation of the laws on the matter, the case would lose
ground. 28 One who makes use of his own legal right does no injury. 29 If damage results front
the filing of the complaint, it is damnum absque injuria. 30 Besides, moral damages are
generally not awarded in favor of a juridical person, unless it enjoys a good reputation that
was debased by the offending party resulting in social humiliation.31
As regards the award of attorney's fees, ABS-CBN maintains that the same had no factual,
legal, or equitable justification. In sustaining the trial court's award, the Court of Appeals acted
in clear disregard of the doctrines laid down in Buan v. Camaganacan 32 that the text of the
decision should state the reason why attorney's fees are being awarded; otherwise, the award
should be disallowed. Besides, no bad faith has been imputed on, much less proved as having
been committed by, ABS-CBN. It has been held that "where 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, attorney's fees shall not be recovered as cost." 33
On the other hand, RBS asserts that there was no perfected contract between ABS-CBN and
VIVA absent any meeting of minds between them regarding the object and consideration of
the alleged contract. It affirms that the ABS-CBN's claim of a right of first refusal was
correctly rejected by the trial court. RBS insist the premium it had paid for the counterbond
constituted a pecuniary loss upon which it may recover. It was obliged to put up the
counterbound due to the injunction procured by ABS-CBN. Since the trial court found that
ABS-CBN had no cause of action or valid claim against RBS and, therefore not entitled to the
writ of injunction, RBS could recover from ABS-CBN the premium paid on the counterbond.
Contrary to the claim of ABS-CBN, the cash bond would prove to be more expensive, as the
loss would be equivalent to the cost of money RBS would forego in case the P30 million came
from its funds or was borrowed from banks.
RBS likewise asserts that it was entitled to the cost of advertisements for the cancelled
showing of the film "Maging Sino Ka Man" because the print advertisements were put out to
announce the showing on a particular day and hour on Channel 7, i.e., in its entirety at one
time, not a series to be shown on a periodic basis. Hence, the print advertisement were good
and relevant for the particular date showing, and since the film could not be shown on that
particular date and hour because of the injunction, the expenses for the advertisements had
gone to waste.
As regards moral and exemplary damages, RBS asserts that ABS-CBN filed the case and
secured injunctions purely for the purpose of harassing and prejudicing RBS. Pursuant then to
Article 19 and 21 of the Civil Code, ABS-CBN must be held liable for such
damages. Citing Tolentino,34 damages may be awarded in cases of abuse of rights even if the
act done is not illicit and there is abuse of rights were plaintiff institutes and action purely for
the purpose of harassing or prejudicing the defendant.
In support of its stand that a juridical entity can recover moral and exemplary damages, private
respondents RBS cited People v. Manero,35 where it was stated that such entity may recover
moral and exemplary damages if it has a good reputation that is debased resulting in social
humiliation. it then ratiocinates; thus:
There can be no doubt that RBS' reputation has been debased by ABS-
CBN's acts in this case. When RBS was not able to fulfill its commitment
to the viewing public to show the film "Maging Sino Ka Man" on the
scheduled dates and times (and on two occasions that RBS advertised), it
suffered serious embarrassment and social humiliation. When the showing
was canceled, late viewers called up RBS' offices and subjected RBS to
verbal abuse ("Announce kayo nang announce, hindi ninyo naman
ilalabas," "nanloloko yata kayo") (Exh. 3-RBS, par. 3). This alone was not
something RBS brought upon itself. it was exactly what ABS-CBN had
planned to happen.
The amount of moral and exemplary damages cannot be said to be
excessive. Two reasons justify the amount of the award.
The first is that the humiliation suffered by RBS is national extent. RBS
operations as a broadcasting company is [sic] nationwide. Its clientele, like
that of ABS-CBN, consists of those who own and watch television. It is
not an exaggeration to state, and it is a matter of judicial notice that almost
every other person in the country watches television. The humiliation
suffered by RBS is multiplied by the number of televiewers who had
anticipated the showing of the film "Maging Sino Ka Man" on May 28
and November 3, 1992 but did not see it owing to the cancellation. Added
to this are the advertisers who had placed commercial spots for the telecast
and to whom RBS had a commitment in consideration of the placement to
show the film in the dates and times specified.
The second is that it is a competitor that caused RBS to suffer the
humiliation. The humiliation and injury are far greater in degree when
caused by an entity whose ultimate business objective is to lure customers
(viewers in this case) away from the competition. 36
For their part, VIVA and Vicente del Rosario contend that the findings of fact of the trial court
and the Court of Appeals do not support ABS-CBN's claim that there was a perfected contract.
Such factual findings can no longer be disturbed in this petition for review under Rule 45, as
only questions of law can be raised, not questions of fact. On the issue of damages and
attorneys fees, they adopted the arguments of RBS.
The key issues for our consideration are (1) whether there was a perfected contract between
VIVA and ABS-CBN, and (2) whether RBS is entitled to damages and attorney's fees. It may
be noted that the award of attorney's fees of P212,000 in favor of VIVA is not assigned as
another error.
I.
The first issue should be resolved against ABS-CBN. A contract is a meeting of minds
between two persons whereby one binds himself to give something or to render some service
to another 37 for a consideration. there is no contract unless the following requisites concur: (1)
consent of the contracting parties; (2) object certain which is the subject of the contract; and
(3) cause of the obligation, which is established.38 A contract undergoes three stages:
(a) preparation, conception, or generation, which is the period of
negotiation and bargaining, ending at the moment of agreement of the
parties;
(b) perfection or birth of the contract, which is the moment when the
parties come to agree on the terms of the contract; and
(c) consummation or death, which is the fulfillment or performance of the
terms agreed upon in the contract. 39
Contracts that are consensual in nature are perfected upon mere meeting of the minds, Once
there is concurrence between the offer and the acceptance upon the subject matter,
consideration, and terms of payment a contract is produced. The offer must be certain. To
convert the offer into a contract, the acceptance must be absolute and must not qualify the
terms of the offer; it must be plain, unequivocal, unconditional, and without variance of any
sort from the proposal. A qualified acceptance, or one that involves a new proposal,
constitutes a counter-offer and is a rejection of the original offer. Consequently, when
something is desired which is not exactly what is proposed in the offer, such acceptance is not
sufficient to generate consent because any modification or variation from the terms of the offer
annuls the offer.40
When Mr. Del Rosario of VIVA met with Mr. Lopez of ABS-CBN at the Tamarind Grill on 2
April 1992 to discuss the package of films, said package of 104 VIVA films was VIVA's offer
to ABS-CBN to enter into a new Film Exhibition Agreement. But ABS-CBN, sent, through
Ms. Concio, a counter-proposal in the form of a draft contract proposing exhibition of 53 films
for a consideration of P35 million. This counter-proposal could be nothing less than the
counter-offer of Mr. Lopez during his conference with Del Rosario at Tamarind Grill
Restaurant. Clearly, there was no acceptance of VIVA's offer, for it was met by a counter-offer
which substantially varied the terms of the offer.
ABS-CBN's reliance in Limketkai Sons Milling, Inc. v. Court of
Appeals 41 and Villonco Realty Company v. Bormaheco, Inc., 42 is misplaced. In these cases, it
was held that an acceptance may contain a request for certain changes in the terms of the offer
and yet be a binding acceptance as long as "it is clear that the meaning of the acceptance is
positively and unequivocally to accept the offer, whether such request is granted or not." This
ruling was, however, reversed in the resolution of 29 March 1996, 43 which ruled that the
acceptance of all offer must be unqualified and absolute, i.e., it "must be identical in all
respects with that of the offer so as to produce consent or meeting of the minds."
On the other hand, in Villonco, cited in Limketkai, the alleged changes in the revised counter-
offer were not material but merely clarificatory of what had previously been agreed upon.
It cited the statement in Stuart v. Franklin Life Insurance Co.44 that "a vendor's change in a
phrase of the offer to purchase, which change does not essentially change the terms of the
offer, does not amount to a rejection of the offer and the tender of a counter-offer." 45However,
when any of the elements of the contract is modified upon acceptance, such alteration amounts
to a counter-offer.
In the case at bar, ABS-CBN made no unqualified acceptance of VIVA's offer. Hence, they
underwent a period of bargaining. ABS-CBN then formalized its counter-proposals or counter-
offer in a draft contract, VIVA through its Board of Directors, rejected such counter-offer,
Even if it be conceded arguendo that Del Rosario had accepted the counter-offer, the
acceptance did not bind VIVA, as there was no proof whatsoever that Del Rosario had the
specific authority to do so.
Under Corporation Code,46 unless otherwise provided by said Code, corporate powers, such as
the power; to enter into contracts; are exercised by the Board of Directors. However, the
Board may delegate such powers to either an executive committee or officials or contracted
managers. The delegation, except for the executive committee, must be for specific
purposes, 47 Delegation to officers makes the latter agents of the corporation; accordingly, the
general rules of agency as to the bindings effects of their acts would 
apply. 48 For such officers to be deemed fully clothed by the corporation to exercise a power of
the Board, the latter must specially authorize them to do so. That Del Rosario did not have the
authority to accept ABS-CBN's counter-offer was best evidenced by his submission of the
draft contract to VIVA's Board of Directors for the latter's approval. In any event, there was
between Del Rosario and Lopez III no meeting of minds. The following findings of the trial
court are instructive:
A number of considerations militate against ABS-CBN's claim that a
contract was perfected at that lunch meeting on April 02, 1992 at the
Tamarind Grill.
FIRST, Mr. Lopez claimed that what was agreed upon at the Tamarind
Grill referred to the price and the number of films, which he wrote on a
napkin. However, Exhibit "C" contains numerous provisions which, were
not discussed at the Tamarind Grill, if Lopez testimony was to be believed
nor could they have been physically written on a napkin. There was even
doubt as to whether it was a paper napkin or a cloth napkin. In short what
were written in Exhibit "C'' were not discussed, and therefore could not
have been agreed upon, by the parties. How then could this court compel
the parties to sign Exhibit "C" when the provisions thereof were not
previously agreed upon?
SECOND, Mr. Lopez claimed that what was agreed upon as the subject
matter of the contract was 14 films. The complaint in fact prays for
delivery of 14 films. But Exhibit "C" mentions 53 films as its subject
matter. Which is which If Exhibits "C" reflected the true intent of the
parties, then ABS-CBN's claim for 14 films in its complaint is false or if
what it alleged in the complaint is true, then Exhibit "C" did not reflect
what was agreed upon by the parties. This underscores the fact that there
was no meeting of the minds as to the subject matter of the contracts, so as
to preclude perfection thereof. For settled is the rule that there can be no
contract where there is no object which is its subject matter (Art. 1318,
NCC).
THIRD, Mr. Lopez [sic] answer to question 29 of his affidavit testimony
(Exh. "D") states:
We were able to reach an agreement. VIVA gave us
the exclusive license to show these fourteen (14)
films, and we agreed to pay Viva the amount of
P16,050,000.00 as well as grant Viva commercial slots
worth P19,950,000.00. We had already earmarked this
P16, 050,000.00.
which gives a total consideration of P36 million (P19,950,000.00 plus
P16,050,000.00. equals P36,000,000.00).
On cross-examination Mr. Lopez testified:
Q. What was written in this napkin?
A. The total price, the breakdown the known Viva
movies, the 7 blockbuster movies and the other 7 Viva
movies because the price was broken down
accordingly. The none [sic] Viva and the seven other
Viva movies and the sharing between the cash portion
and the concerned spot portion in the total amount of
P35 million pesos.
Now, which is which? P36 million or P35 million? This weakens ABS-
CBN's claim.
FOURTH. Mrs. Concio, testifying for ABS-CBN stated that she
transmitted Exhibit "C" to Mr. Del Rosario with a handwritten note,
describing said Exhibit "C" as a "draft." (Exh. "5" - Viva; tsn pp. 23-24
June 08, 1992). The said draft has a well defined meaning.
Since Exhibit "C" is only a draft, or a tentative, provisional or preparatory
writing prepared for discussion, the terms and conditions thereof could not
have been previously agreed upon by ABS-CBN and Viva Exhibit "C''
could not therefore legally bind Viva, not having agreed thereto. In fact,
Ms. Concio admitted that the terms and conditions embodied in Exhibit
"C" were prepared by ABS-CBN's lawyers and there was no discussion on
said terms and conditions. . . .
As the parties had not yet discussed the proposed terms and conditions in
Exhibit "C," and there was no evidence whatsoever that Viva agreed to the
terms and conditions thereof, said document cannot be a binding contract.
The fact that Viva refused to sign Exhibit "C" reveals only two [sic] well
that it did not agree on its terms and conditions, and this court has no
authority to compel Viva to agree thereto.
FIFTH. Mr. Lopez understand [sic] that what he and Mr. Del Rosario
agreed upon at the Tamarind Grill was only provisional, in the sense that it
was subject to approval by the Board of Directors of Viva. He testified:
Q. Now, Mr. Witness, and after that Tamarind meeting
... the second meeting wherein you claimed that you
have the meeting of the minds between you and Mr.
Vic del Rosario, what happened?
A. Vic Del Rosario was supposed to call us up and tell
us specifically the result of the discussion with the
Board of Directors.
Q. And you are referring to the so-called agreement
which you wrote in [sic] a piece of paper?
A. Yes, sir.
Q. So, he was going to forward that to the board of
Directors for approval?
A. Yes, sir. (Tsn, pp. 42-43, June 8, 1992)
Q. Did Mr. Del Rosario tell you that he will submit it
to his Board for approval?
A. Yes, sir. (Tsn, p. 69, June 8, 1992).
The above testimony of Mr. Lopez shows beyond doubt that he knew Mr.
Del Rosario had no authority to bind Viva to a contract with ABS-CBN
until and unless its Board of Directors approved it. The complaint, in fact,
alleges that Mr. Del Rosario "is the Executive Producer of defendant
Viva" which "is a corporation." (par. 2, complaint). As a mere agent of
Viva, Del Rosario could not bind Viva unless what he did is ratified by its
Board of Directors. (Vicente vs. Geraldez, 52 SCRA 210; Arnold
vs. Willetsand Paterson, 44 Phil. 634). As a mere agent, recognized as such
by plaintiff, Del Rosario could not be held liable jointly and severally with
Viva and his inclusion as party defendant has no legal basis. (Salonga
vs. Warner Barner [sic] , COLTA , 88 Phil. 125; Salmon vs. Tan, 36 Phil.
556).
The testimony of Mr. Lopez and the allegations in the complaint are clear
admissions that what was supposed to have been agreed upon at the
Tamarind Grill between Mr. Lopez and Del Rosario was not a binding
agreement. It is as it should be because corporate power to enter into a
contract is lodged in the Board of Directors. (Sec. 23, Corporation Code).
Without such board approval by the Viva board, whatever agreement
Lopez and Del Rosario arrived at could not ripen into a valid contract
binding upon Viva (Yao Ka Sin Trading vs. Court of Appeals, 209 SCRA
763). The evidence adduced shows that the Board of Directors of Viva
rejected Exhibit "C" and insisted that the film package for 140 films be
maintained (Exh. "7-1" - Viva ). 49
The contention that ABS-CBN had yet to fully exercise its right of first refusal over twenty-
four films under the 1990 Film Exhibition Agreement and that the meeting between Lopez and
Del Rosario was a continuation of said previous contract is untenable. As observed by the trial
court, ABS-CBN right of first refusal had already been exercised when Ms. Concio wrote to
VIVA ticking off ten films, Thus:
[T]he subsequent negotiation with ABS-CBN two (2) months after this
letter was sent, was for an entirely different package. Ms. Concio herself
admitted on cross-examination to having used or exercised the right of
first refusal. She stated that the list was not acceptable and was indeed not
accepted by ABS-CBN, (TSN, June 8, 1992, pp. 8-10). Even Mr. Lopez
himself admitted that the right of the first refusal may have been already
exercised by Ms. Concio (as she had). (TSN, June 8, 1992, pp. 71-75). Del
Rosario himself knew and understand [sic] that ABS-CBN has lost its
rights of the first refusal when his list of 36 titles were rejected (Tsn, June
9, 1992, pp. 10-11) 50
II
However, we find for ABS-CBN on the issue of damages. We shall first take up actual
damages. Chapter 2, Title XVIII, Book IV of the Civil Code is the specific law on actual or
compensatory damages. Except as provided by law or by stipulation, one is entitled to
compensation for actual damages only for such pecuniary loss suffered by him as he has duly
proved. 51 The indemnification shall comprehend not only the value of the loss suffered, but
also that of the profits that the obligee failed to obtain. 52 In contracts and quasi-contracts the
damages which may be awarded are dependent on whether the obligor acted with good faith or
otherwise, It case of good faith, the damages recoverable are those which are the natural and
probable consequences of the breach of the obligation and which the parties have foreseen or
could have reasonably foreseen at the time of the constitution of the obligation. If the obligor
acted with fraud, bad faith, malice, or wanton attitude, he shall be responsible for all damages
which may be reasonably attributed to the non-performance of the obligation. 53 In crimes and
quasi-delicts, the defendant shall be liable for all damages which are the natural and probable
consequences of the act or omission complained of, whether or not such damages has been
foreseen or could have reasonably been foreseen by the defendant.54
Actual damages may likewise be recovered for loss or impairment of earning capacity in cases
of temporary or permanent personal injury, or for injury to the plaintiff's business standing or
commercial credit.55
The claim of RBS for actual damages did not arise from contract, quasi-contract, delict, or
quasi-delict. It arose from the fact of filing of the complaint despite ABS-CBN's alleged
knowledge of lack of cause of action. Thus paragraph 12 of RBS's Answer with Counterclaim
and Cross-claim under the heading COUNTERCLAIM specifically alleges:
12. ABS-CBN filed the complaint knowing fully well that it has no cause
of action RBS. As a result thereof, RBS suffered actual damages in the
amount of P6,621,195.32. 56
Needless to state the award of actual damages cannot be comprehended under the above law
on actual damages. RBS could only probably take refuge under Articles 19, 20, and 21 of the
Civil Code, which read as follows:
Art. 19. Every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and
observe honesty and good faith.
Art. 20. Every person who, contrary to law, wilfully or negligently causes
damage to another, shall indemnify the latter for tile same.
Art. 21. Any person who wilfully causes loss or injury to another in a
manner that is contrary to morals, good customs or public policy shall
compensate the latter for the damage.
It may further be observed that in cases where a writ of preliminary injunction is issued, the
damages which the defendant may suffer by reason of the writ are recoverable from the
injunctive bond. 57 In this case, ABS-CBN had not yet filed the required bond; as a matter of
fact, it asked for reduction of the bond and even went to the Court of Appeals to challenge the
order on the matter, Clearly then, it was not necessary for RBS to file a counterbond. Hence,
ABS-CBN cannot be held responsible for the premium RBS paid for the counterbond.
Neither could ABS-CBN be liable for the print advertisements for "Maging Sino Ka Man" for
lack of sufficient legal basis. The RTC issued a temporary restraining order and later, a writ of
preliminary injunction on the basis of its determination that there existed sufficient ground for
the issuance thereof. Notably, the RTC did not dissolve the injunction on the ground of lack of
legal and factual basis, but because of the plea of RBS that it be allowed to put up a
counterbond.
As regards attorney's fees, the law is clear that in the absence of stipulation, attorney's fees
may be recovered as actual or compensatory damages under any of the circumstances
provided for in Article 2208 of the Civil Code. 58
The general rule is that attorney's fees cannot be recovered as part of damages because of the
policy that no premium should be placed on the right to litigate. 59 They are not to be awarded
every time a party wins a suit. The power of the court to award attorney's fees under Article
2208 demands factual, legal, and equitable justification.60Even when claimant is compelled to
litigate with third persons or to incur expenses to protect his rights, still attorney's fees may not
be awarded where no sufficient showing of bad faith could be reflected in a party's persistence
in a case other than erroneous conviction of the righteousness of his cause. 61
As to moral damages the law is Section 1, Chapter 3, Title XVIII, Book IV of the Civil Code.
Article 2217 thereof defines what are included in moral damages, while Article 2219
enumerates the cases where they may be recovered, Article 2220 provides that moral damages
may be recovered in breaches of contract where the defendant acted fraudulently or in bad
faith. RBS's claim for moral damages could possibly fall only under item (10) of Article 2219,
thereof which reads:
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34,
and 35.
Moral damages are in the category of an award designed to compensate the claimant for actual
injury suffered. and not to impose a penalty on the wrongdoer.62 The award is not meant to
enrich the complainant at the expense of the defendant, but to enable the injured party to
obtain means, diversion, or amusements that will serve to obviate then moral suffering he has
undergone. It is aimed at the restoration, within the limits of the possible, of the spiritual status
quo ante, and should be proportionate to the suffering inflicted. 63 Trial courts must then guard
against the award of exorbitant damages; they should exercise balanced restrained and
measured objectivity to avoid suspicion that it was due to passion, prejudice, or corruption on
the part of the trial court. 64
The award of moral damages cannot be granted in favor of a corporation because, being an
artificial person and having existence only in legal contemplation, it has no feelings, no
emotions, no senses, It cannot, therefore, experience physical suffering and mental anguish,
which call be experienced only by one having a nervous system. 65 The statement in People
v. Manero 66 and Mambulao Lumber Co. v. PNB 67 that a corporation may recover moral
damages if it "has a good reputation that is debased, resulting in social humiliation" is
an obiter dictum. On this score alone the award for damages must be set aside, since RBS is a
corporation.
The basic law on exemplary damages is Section 5, Chapter 3, Title XVIII, Book IV of the
Civil Code. These are imposed by way of example or correction for the public good, in
addition to moral, temperate, liquidated or compensatory damages. 68 They are recoverable in
criminal cases as part of the civil liability when the crime was committed with one or more
aggravating circumstances; 69 in quasi-contracts, if the defendant acted with gross
negligence; 70 and in contracts and quasi-contracts, if the defendant acted in a wanton,
fraudulent, reckless, oppressive, or malevolent manner.71
It may be reiterated that the claim of RBS against ABS-CBN is not based on contract, quasi-
contract, delict, or quasi-delict, Hence, the claims for moral and exemplary damages can only
be based on Articles 19, 20, and 21 of the Civil Code.
The elements of abuse of right under Article 19 are the following: (1) the existence of a legal
right or duty, (2) which is exercised in bad faith, and (3) for the sole intent of prejudicing or
injuring another. Article 20 speaks of the general sanction for all other provisions of law
which do not especially provide for their own sanction; while Article 21 deals with acts contra
bonus mores, and has the following elements; (1) there is an act which is legal, (2) but which
is contrary to morals, good custom, public order, or public policy, and (3) and it is done with
intent to injure. 72
Verily then, malice or bad faith is at the core of Articles 19, 20, and 21. Malice or bad faith
implies a conscious and intentional design to do a wrongful act for a dishonest purpose or
moral obliquity. 73 Such must be substantiated by evidence. 74
There is no adequate proof that ABS-CBN was inspired by malice or bad faith. It was honestly
convinced of the merits of its cause after it had undergone serious negotiations culminating in
its formal submission of a draft contract. Settled is the rule that the adverse result of an action
does not per se make the action wrongful and subject the actor to damages, for the law could
not have meant to impose a penalty on the right to litigate. If damages result from a person's
exercise of a right, it is damnum absque injuria.75
WHEREFORE, the instant petition is GRANTED. The challenged decision of the Court of
Appeals in CA-G.R. CV No, 44125 is hereby REVERSED except as to unappealed award of
attorney's fees in favor of VIVA Productions, Inc.1âwphi1.nêt
No pronouncement as to costs.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 182128               February 19, 2014
PHILIPPINE NATIONAL BANK, Petitioner,  3. Directing respondents PEPI and AFP-RSBS to pay [the petitioner] the redemption
vs.
TERESITA TAN DEE, ANTIPOLO PROPERTIES, INC., (now PRIME EAST
PROPERTIES, INC.) and AFP-RSBS, INC., Respondents.
DECISION
REYES, J.:
This is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the
Decision2 dated August 13, 2007 and Resolution3 dated March 13, 2008 rendered by the Court
of Appeals (CA) in CA-G.R. SP No. 86033, which affirmed the Decision 4 dated August 4,
2004 of the Office of the President (OP) in O.P. Case No. 04-D-182 (HLURB Case No. REM-
A-030724-0186).
Facts of the Case
Some time in July 1994, respondent Teresita Tan Dee (Dee) bought from respondent Prime
East Properties Inc.5(PEPI) on an installment basis a residential lot located in Binangonan,
Rizal, with an area of 204 square meters6 and covered by Transfer Certificate of Title (TCT)
No. 619608. Subsequently, PEPI assigned its rights over a 213,093-sq m property on August
1996 to respondent Armed Forces of the Philippines-Retirement and Separation Benefits
System, Inc. (AFP-RSBS), which included the property purchased by Dee.
Thereafter, or on September 10, 1996, PEPI obtained a ₱205,000,000.00 loan from petitioner
Philippine National Bank (petitioner), secured by a mortgage over several properties,
including Dee’s property. The mortgage was cleared by the Housing and Land Use Regulatory
Board (HLURB) on September 18, 1996.7
After Dee’s full payment of the purchase price, a deed of sale was executed by respondents
PEPI and AFP-RSBS on July 1998 in Dee’s favor. Consequently, Dee sought from the
petitioner the delivery of the owner’s duplicate title over the property, to no avail. Thus, she
filed with the HLURB a complaint for specific performance to compel delivery of TCT No.
619608 by the petitioner, PEPI and AFP-RSBS, among others. In its Decision 8 dated May 21,
2003, the HLURB ruled in favor of Dee and disposed as follows:
WHEREFORE, premises considered, judgment is hereby rendered as follows:
1. Directing [the petitioner] to cancel/release the mortgage on Lot 12, Block 21-A,
Village East Executive Homes covered by Transfer Certificate of Title No. -619608-
(TCT No. -619608-), and accordingly, surrender/release the title thereof to [Dee];
2. Immediately upon receipt by [Dee] of the owner’s duplicate of Transfer
Certificate of Title No. -619608- (TCT No. -619608-), respondents PEPI and AFP-
RSBS are hereby ordered to deliver the title of the subject lot in the name of [Dee]
free from all liens and encumbrances;
value of Lot 12, Block 21-A, Village East Executive Homes covered by Transfer
Certificate of Title No. -619608- (TCT No. -619608-) as agreed upon by them in
their Real Estate Mortgage within six (6) months from the time the owner’s
duplicate of Transfer Certificate of Title No. -619608- (TCT No. -619608-) is
actually surrendered and released by [the petitioner] to [Dee];
 4. In the alternative, in case of legal and physical impossibility on the part of [PEPI,
AFP-RSBS, and the petitioner] to comply and perform their respective obligation/s,
as above-mentioned, respondents PEPI and AFP-RSBS are hereby ordered to jointly
and severally pay to [Dee] the amount of FIVE HUNDRED TWENTY
THOUSAND PESOS ([P]520,000.00) plus twelve percent (12%) interest to be
computed from the filing of complaint on April 24, 2002 until fully paid; and
5. Ordering [PEPI, AFP-RSBS, and the petitioner] to pay jointly and severally [Dee]
the following sums:
a) The amount of TWENTY FIVE THOUSAND PESOS ([P]25,000.00)
as attorney’s fees;
b) The cost of litigation[;] and
c) An administrative fine of TEN THOUSAND PESOS ([P]10,000.00)
payable to this Office fifteen (15) days upon receipt of this decision, for
violation of Section 18 in relation to Section 38 of PD 957.
SO ORDERED.9
The HLURB decision was affirmed by its Board of Commissioners per Decision dated March
15, 2004, with modification as to the rate of interest.10
On appeal, the Board of Commissioners’ decision was affirmed by the OP in its Decision
dated August 4, 2004, with modification as to the monetary award.11
Hence, the petitioner filed a petition for review with the CA, which, in turn, issued the assailed
Decision dated August 13, 2007, affirming the OP decision. The dispositive portion of the
decision reads:
WHEREFORE, in view of the foregoing, the petition is DENIED. The Decision dated August
4, 2004 rendered by the Office of the President in O. P. Case No. 04-D-182 (HLURB Case
No. REM-A-030724-0186) is hereby AFFIRMED.
SO ORDERED.12
Its motion for reconsideration having been denied by the CA in the Resolution dated March
13, 2008, the petitioner filed the present petition for review on the following grounds:
I. THE HONORABLE COURT OF APPEALS ERRED IN ORDERING
OUTRIGHT RELEASE OF TCT NO. 619608 DESPITE PNB’S DULY
REGISTERED AND HLURB[-] APPROVED MORTGAGE ON TCT NO. 619608.
II. THE HONORABLE COURT OF APPEALS ERRED IN ORDERING
CANCELLATION OF MORTGAGE/RELEASE OF TITLE IN FAVOR OF
RESPONDENT DEE DESPITE THE LACK OF PAYMENT OR SETTLEMENT
BY THE MORTGAGOR (API/PEPI and AFP-RSBS) OF ITS EXISTING LOAN
OBLIGATION TO PNB, OR THE PRIOR EXERCISE OF RIGHT OF
REDEMPTION BY THE MORTGAGOR AS MANDATED BY SECTION 25 OF
PD 957 OR DIRECT PAYMENT MADE BY RESPONDENT DEE TO PNB
PURSUANT TO THE DEED OF UNDERTAKING WHICH WOULD WARRANT
RELEASE OF THE SAME.13
The petitioner claims that it has a valid mortgage over Dee’s property, which was part of the
property mortgaged by PEPI to it to secure its loan obligation, and that Dee and PEPI are
bound by such mortgage. The petitioner also argues that it is not privy to the transactions
between the subdivision project buyers and PEPI, and has no obligation to perform any of
their respective undertakings under their contract.14
The petitioner also maintains that Presidential Decree (P.D.) No. 95715 cannot nullify the
subsisting agreement between it and PEPI, and that the petitioner’s rights over the mortgaged
properties are protected by Act 313516. If at all, the petitioner can be compelled to release or
cancel the mortgage only after the provisions of P.D. No. 957 on redemption of the mortgage
by the owner/developer (Section 25) are complied with. The petitioner also objects to the
denomination by the CA of the provisions in the Affidavit of Undertaking as stipulations pour
autrui,17 arguing that the release of the title was conditioned on Dee’s direct payment to it.18
Respondent AFP-RSBS, meanwhile, contends that it cannot be compelled to pay or settle the
obligation under the mortgage contract between PEPI and the petitioner as it is merely an
investor in the subdivision project and is not privy to the mortgage.19
Respondent PEPI, on the other hand, claims that the title over the subject property is one of
the properties due for release by the petitioner as it has already been the subject of a
Memorandum of Agreement and dacion en pago entered into between them.20 The agreement
was reached after PEPI filed a petition for rehabilitation, and contained the stipulation that the
petitioner agreed to release the mortgage lien on fully paid mortgaged properties upon the
issuance of the certificates of title over the dacioned properties.21
For her part, respondent Dee adopts the arguments of the CA in support of her prayer for the
denial of the petition for review.22
Ruling of the Court
The petition must be DENIED.
The petitioner is correct in arguing that it is not obliged to perform any of the undertaking of
respondent PEPI and AFP-RSBS in its transactions with Dee because it is not a privy thereto.
The basic principle of relativity of contracts is that contracts can only bind the parties who
entered into it,23 and cannot favor or prejudice a third person, even if he is aware of such
contract and has acted with knowledge thereof.24 "Where there is no privity of contract, there
is likewise no obligation or liability to speak about."25
The petitioner, however, is not being tasked to undertake the obligations of PEPI and AFP-
RSBS.1avvphi1 In this case, there are two phases involved in the transactions between
respondents PEPI and Dee – the first phase is the contract to sell, which eventually became the
second phase, the absolute sale, after Dee’s full payment of the purchase price. In a contract of
sale, the parties’ obligations are plain and simple. The law obliges the vendor to transfer the
ownership of and to deliver the thing that is the object of sale. 26 On the other hand, the
principal obligation of a vendee is to pay the full purchase price at the agreed time. 27 Based on
the final contract of sale between them, the obligation of PEPI, as owners and vendors of Lot
12, Block 21-A, Village East Executive Homes, is to transfer the ownership of and to deliver
Lot 12, Block 21-A to Dee, who, in turn, shall pay, and has in fact paid, the full purchase price
of the property. There is nothing in the decision of the HLURB, as affirmed by the OP and the
CA, which shows that the petitioner is being ordered to assume the obligation of any of the
respondents. There is also nothing in the HLURB decision, which validates the petitioner’s
claim that the mortgage has been nullified. The order of cancellation/release of the mortgage is
simply a consequence of Dee’s full payment of the purchase price, as mandated by Section 25
of P.D. No. 957, to wit:
Sec. 25. Issuance of Title. The owner or developer shall deliver the title of the lot or unit to the
buyer upon full payment of the lot or unit. No fee, except those required for the registration of
the deed of sale in the Registry of Deeds, shall be collected for the issuance of such title. In the
event a mortgage over the lot or unit is outstanding at the time of the issuance of the title to the
buyer, the owner or developer shall redeem the mortgage or the corresponding portion thereof
within six months from such issuance in order that the title over any fully paid lot or unit may
be secured and delivered to the buyer in accordance herewith.
It must be stressed that the mortgage contract between PEPI and the petitioner is merely an
accessory contract to the principal three-year loan takeout from the petitioner by PEPI for its
expansion project. It need not be belaboured that "[a] mortgage is an accessory undertaking to
secure the fulfillment of a principal obligation,"28 and it does not affect the ownership of the
property as it is nothing more than a lien thereon serving as security for a debt.29
Note that at the time PEPI mortgaged the property to the petitioner, the prevailing contract
between respondents PEPI and Dee was still the Contract to Sell, as Dee was yet to fully pay
the purchase price of the property. On this point, PEPI was acting fully well within its right
when it mortgaged the property to the petitioner, for in a contract to sell, ownership is retained
by the seller and is not to pass until full payment of the purchase price. 30 In other words, at the
time of the mortgage, PEPI was still the owner of the property. Thus, in China Banking
Corporation v. Spouses Lozada,31 the Court affirmed the right of the owner/developer to
mortgage the property subject of development, to wit: "[P.D.] No. 957 cannot totally prevent
the owner or developer from mortgaging the subdivision lot or condominium unit when the
title thereto still resides in the owner or developer awaiting the full payment of the purchase
price by the installment buyer."32 Moreover, the mortgage bore the clearance of the HLURB,
in compliance with Section 18 of P.D. No. 957, which provides that "[n]o mortgage on any
unit or lot shall be made by the owner or developer without prior written approval of the
[HLURB]."
Nevertheless, despite the apparent validity of the mortgage between the petitioner and PEPI,
the former is still bound to respect the transactions between respondents PEPI and Dee. The
petitioner was well aware that the properties mortgaged by PEPI were also the subject of
existing contracts to sell with other buyers. While it may be that the petitioner is protected by
Act No. 3135, as amended, it cannot claim any superior right as against the installment buyers.
This is because the contract between the respondents is protected by P.D. No. 957, a social
justice measure enacted primarily to protect innocent lot buyers.33 Thus, in Luzon
Development Bank v. Enriquez,34the Court reiterated the rule that a bank dealing with a
property that is already subject of a contract to sell and is protected by the provisions of P.D.
No. 957, is bound by the contract to sell.35
However, the transferee BANK is bound by the Contract to Sell and has to respect Enriquez’s
rights thereunder. This is because the Contract to Sell, involving a subdivision lot, is covered
and protected by PD 957.
x x x.
xxxx
x x x Under these circumstances, the BANK knew or should have known of the possibility and
risk that the assigned properties were already covered by existing contracts to sell in favor of
subdivision lot buyers. As observed by the Court in another case involving a bank regarding a
subdivision lot that was already subject of a contract to sell with a third party:
"[The Bank] should have considered that it was dealing with a property subject of a real estate
development project. A reasonable person, particularly a financial institution x x x, should
have been aware that, to finance the project, funds other than those obtained from the loan
could have been used to serve the purpose, albeit partially. Hence, there was a need to verify
whether any part of the property was already intended to be the subject of any other contract
involving buyers or potential buyers. In granting the loan, [the Bank] should not have been
content merely with a clean title, considering the presence of circumstances indicating the
need for a thorough investigation of the existence of buyers x x x. Wanting in care and
prudence, the [Bank] cannot be deemed to be an innocent mortgagee. x x x"36 (Citation
omitted)
More so in this case where the contract to sell has already ripened into a contract of absolute
sale.1âwphi1
Moreover, PEPI brought to the attention of the Court the subsequent execution of a
Memorandum of Agreement dated November 22, 2006 by PEPI and the petitioner. Said
agreement was executed pursuant to an Order dated February 23, 2004 by the Regional Trial
Court (RTC) of Makati City, Branch 142, in SP No. 02-1219, a petition for Rehabilitation
under the Interim Rules of Procedure on Corporate Rehabilitation filed by PEPI. The RTC
order approved PEPI’s modified Rehabilitation Plan, which included the settlement of the
latter’s unpaid obligations to its creditors by way of dacion of real properties. In said order, the
RTC also incorporated certain measures that were not included in PEPI’s plan, one of which is
that "[t]itles to the lots which have been fully paid shall be released to the purchasers within 90
days after the dacion to the secured creditors has been completed."37 Consequently, the
agreement stipulated that as partial settlement of PEPI’s obligation with the petitioner, the
former absolutely and irrevocably conveys by way of "dacion en pago" the properties listed
therein,38 which included the lot purchased by Dee. The petitioner also committed to –
[R]elease its mortgage lien on fully paid Mortgaged Properties upon issuance of the
certificates of title over the Dacioned Properties in the name of the [petitioner]. The request for
release of a Mortgaged Property shall be accompanied with: (i) proof of full payment by the
buyer, together with a certificate of full payment issued by the Borrower x x x. The
[petitioner] hereby undertakes to cause the transfer of the certificates of title over the Dacioned
Properties and the release of the Mortgaged Properties with reasonable dispatch.39
Dacion en pago or dation in payment is the delivery and transmission of ownership of a thing
by the debtor to the creditor as an accepted equivalent of the performance of the obligation. 40 It
is a mode of extinguishing an existing obligation41 and partakes the nature of sale as the
creditor is really buying the thing or property of the debtor, the payment for which is to be
charged against the debtor’s debt.42 Dation in payment extinguishes the obligation to the extent
of the value of the thing delivered, either as agreed upon by the parties or as may be proved,
unless the parties by agreement – express or implied, or by their silence – consider the thing as
equivalent to the obligation, in which case the obligation is totally extinguished.43
There is nothing on record showing that the Memorandum of Agreement has been nullified or
is the subject of pending litigation; hence, it carries with it the presumption of
validity.44 Consequently, the execution of the dation in payment effectively extinguished
respondent PEPI’s loan obligation to the petitioner insofar as it covers the value of the
property purchased by Dee. This negates the petitioner’s claim that PEPI must first redeem the
property before it can cancel or release the mortgage. As it now stands, the petitioner already
stepped into the shoes of PEPI and there is no more reason for the petitioner to refuse the
cancellation or release of the mortgage, for, as stated by the Court in Luzon Development
Bank, in accepting the assigned properties as payment of the obligation, "[the bank] has
assumed the risk that some of the assigned properties are covered by contracts to sell which
must be honored under PD 957."45 Whatever claims the petitioner has against PEPI and AFP-
RSBS, monetary or otherwise, should not prejudice the rights and interests of Dee over the
property, which she has already fully paid for.
As between these small lot buyers and the gigantic financial institutions which the developers
deal with, it is obvious that the law—as an instrument of social justice—must favor the
weak.46 (Emphasis omitted)
Finally, the Court will not dwell on the arguments of AFP-RSBS given the finding of the OP
that "[b]y its non-payment of the appeal fee, AFP-RSBS is deemed to have abandoned its
appeal and accepts the decision of the HLURB."47 As such, the HLURB decision had long
been final and executory as regards AFP-RSBS and can no longer be altered or modified.48
WHEREFORE, the petition for review is DENIED for lack of merit. Consequently, the
Decision dated August 13, 2007 and Resolution dated March 13, 2008 of the Court of Appeals
in CA-G.R. SP No. 86033 are AFFIRMED.
Petitioner Philippine National Bank and respondents Prime East Properties Inc. and Armed
Forces of the Philippines-Retirement and Separation Benefits System, Inc. are hereby
ENJOINED to strictly comply with the Housing and Land Use Regulatory Board Decision
dated May 21, 2003, as modified by its Board of Commissioners Decision dated March 15,
2004 and Office of the President Decision dated August 4, 2004.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
 
G.R. No. 124290 January 16, 1998
ALLIED BANKING CORPORATION, petitioner, 
vs.
COURT OF APPEALS , HON. JOSE C. DE GUZMAN, OSCAR D. TAN-QUECO,
LUCIA D. TANQUECO-MATIAS, RUBEN D. TANQUECO and NESTOR D.
TANQUECO, respondents.
BELLOSILLO, J.:
There are two (2) main issues in this petition for review: namely, (a) whether a stipulation in a
contract of lease to the effect that the contract "may be renewed for a like term at the option of
the lessee" is void for being potestative or violative of the principle of mutuality of contracts
under Art. 1308 of the Civil Code and, corollarily, what is the meaning of the clause "may be
renewed for a like term at the option of the lessee;" and, (b) whether a lessee has the legal
personality to assail the validity of a deed of donation executed by the lessor over the leased
premises.
Spouses Filemon Tanqueco and Lucia Domingo-Tanqueco owned a 512-square meter lot
located at No. 2 Sarmiento Street corner Quirino Highway, Novaliches, Quezon City, covered
by TCT No. 136779 in their name. On 30 June 1978 they leased the property to petitioner
Allied Banking Corporation (ALLIED) for a monthly rental of P1,000.00 for the first three (3)
years, adjustable by 25% every three (3) years thereafter. 1 The lease contract specifically
states in its Provision No. 1 that "the term of this lease shall be fourteen (14) years
commencing from April 1, 1978 and may be renewed for a like term at the option of the
lessee."
Pursuant to their lease agreement, ALLIED introduced an improvement on the property
consisting of a concrete building with a floor area of 340-square meters which it used as a
branch office. As stipulated, the ownership of the building would be transferred to the lessors
upon the expiration of the original term of the lease.
Sometime in February 1988 the Tanqueco spouses executed a deed of donation over the
subject property in favor of their four (4) children, namely, private respondents herein Oscar
D. Tanqueco, Lucia Tanqueco-Matias, Ruben D. Tanqueco and Nestor D. Tanqueco, who
accepted the donation in the same public instrument.
On 13 February 1991, a year before the expiration of the contract of lease, the Tanquecos
notified petitioner ALLIED that they were no longer interested in renewing the
lease. 2 ALLIED replied that it was exercising its option to renew their lease under the same
terms with additional proposals. 3 Respondent Ruben D. Tanqueco, acting in behalf of all the
donee-lessors, made a counter-proposal.4 ALLIED however rejected the counter-proposal and
insisted on Provision No. 1 of their lease contract.
When the lease contract expired in 1992 private respondents demanded that ALLIED vacate
the premises. But the latter asserted its sole option to renew the lease and enclosed in its reply
letter a cashier's check in the amount of P68,400.00 representing the advance rental payments
for six (6) months taking into account the escalation clause. Private respondents however
returned the check to ALLIED, prompting the latter to consign the amount in court.
An action for ejectment was commenced before the Metropolitan Trial Court of Quezon City.
After trial, the MeTC-Br. 33 declared Provision No. 1 of the lease contract void for being
violative of Art. 1308 of the Civil Code thus —
. . . but such provision [in the lease contract], to the mind of the Court,
does not add luster to defendant's cause nor constitutes as an unbridled or
unlimited license or sanctuary of the defendants to perpetuate its
occupancy on the subject property. The basic intention of the law in any
contract is mutuality and equality. In other words, the validity of a contract
cannot be left at (sic) the will of one of the contracting parties. Otherwise,
it infringes (upon) Article 1308 of the New Civil Code, which provides:
The contract must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them . . . Using the principle laid down
in the case of Garcia v. Legarda as cornerstone, it is evident that the
renewal of the lease in this case cannot be left at the sole option or will of
the defendant notwithstanding provision no. 1 of their expired contract.
For that would amount to a situation where the continuance and effectivity
of a contract will depend only upon the sole will or power of the lessee,
which is repugnant to the very spirit envisioned under Article 1308 of the
New Civil Code . . . . the theory adopted by this Court in the case at bar
finds ample affirmation from the principle echoed by the Supreme Court
in the case of Lao Lim v. CA, 191 SCRA 150, 154, 155.
On appeal to the Regional Trial Court, and later to the Court of Appeals, the assailed decision
was affirmed.5
On 20 February 1993, while the case was pending in the Court of Appeals ALLIED vacated
the leased premises by reason of the controversy.6
ALLIED insists before us that Provision No. 1 of the lease contract was mutually agreed upon
hence valid and binding on both parties, and the exercise by petitioner of its option to renew
the contract was part of their agreement and in pursuance thereof.
We agree with petitioner. Article 1308 of the Civil Code expresses what is known in law as
the principle of mutuality of contracts. It provides that "the contract must bind both the
contracting parties; its validity or compliance cannot be left to the will of one of them." This
binding effect of a contract on both parties is based on the principle that the obligations arising
from the contracts have the force of law between the contracting parties, and there must be
mutuality between them based essentially on their equality under which it is repugnant to have
one party bound by the contract while leaving the other free therefrom. The ultimate purpose
is to render void a contract containing a condition which makes its fulfillment dependent
solely upon the uncontrolled will of one of the contracting parties.
An express agreement which gives the lessee the sole option to renew the lease is frequent and
subject to statutory restrictions, valid and binding on the parties. This option, which is
provided in the same lease agreement, is fundamentally part of the consideration in the
contract and is no different from any other provision of the lease carrying an undertaking on
the part of the lessor to act conditioned on the performance by the lessee. It is a purely
executory contract and at most confers a right to obtain a renewal if there is compliance with
the conditions on which the rights is made to depend. The right of renewal constitutes a part of
the lessee's interest in the land and forms a substantial and integral part of the agreement.
The fact that such option is binding only on the lessor and can be exercised only by the lessee
does not render it void for lack of mutuality. After all, the lessor is free to give or not to give
the option to the lessee. And while the lessee has a right to elect whether to continue with the
lease or not, once he exercises his option to continue and the lessor accepts, both parties are
thereafter bound by the new lease agreement. Their rights and obligations become mutually
fixed, and the lessee is entitled to retain possession of the property for the duration of the new
lease, and the lessor may hold him liable for the rent therefor. The lessee cannot thereafter
escape liability even if he should subsequently decide to abandon the premises. Mutuality
obtains in such a contract and equality exists between the lessor and the lessee since they
remain with the same faculties in respect to fulfillment.7
The case of Lao Lim v. Court of Appeals 8 relied upon by the trial court is not applicable here.
In that case, the stipulation in the disputed compromise agreement was to the effect that the
lessee would be allowed to stay in the premises "as long as he needs it and can pay the rents."
In the present case, the questioned provision states that the lease "may be renewed for a like
term at the option of the lessee." The lessor is bound by the option he has conceded to the
lessee. The lessee likewise becomes bound only when he exercises his option and the lessor
cannot thereafter be executed from performing his part of the agreement.
Likewise, reliance by the trial court on the 1967 case of Garcia v. Rita Legarda, Inc., 9 is
misplaced. In that case, what was involved was a contract to sell involving residential lots,
which gave the vendor the right to declare the contract called and of no effect upon the failure
of the vendee to fulfill any of the conditions therein set forth. In the instant case, we are
dealing with a contract of lease which gives the lessee the right to renew the same.
With respect to the meaning of the clause "may be renewed for a like term at the option of the
lessee," we sustain petitioner's contention that its exercise of the option resulted in the
automatic extension of the contract of lease under the same terms and conditions. The subject
contract simply provides that "the term of this lease shall be fourteen (14) years and may be
renewed for a like term at the option of the lessee." As we see it, the only term on which there
has been a clear agreement is the period of the new contract, i.e., fourteen (14) years, which is
evident from the clause "may be renewed for a like term at the option of the lessee," the
phrase "for a like term" referring to the period. It is silent as to what the specific terms and
conditions of the renewed lease shall be. Shall it be the same terms and conditions as in the
original contract, or shall it be under the terms and conditions as may be mutually agreed upon
by the parties after the expiration of the existing lease?
In Ledesma v. Javellana 10 this Court was confronted with a similar problem. In the case the
lessee was given the sole option to renew the lease, but the contract failed to specify the terms
and conditions that would govern the new contract. When the lease expired, the lessee
demanded an extension under the same terms and conditions. The lessor expressed conformity
to the renewal of the contract but refused to accede to the claim of the lessee that the renewal
should be under the same terms and conditions as the original contract. In sustaining the
lessee, this Court made the following pronouncement:
. . . in the case of Hicks v. Manila Hotel Company, a similar issue was
resolved by this Court. It was held that "such a clause relates to the very
contract in which it is placed, and does not permit the defendant upon the
renewal of the contract in which the clause is found, to insist upon
different terms and those embraced in the contract to be renewed;" and
that "a stipulation to renew always relates to the contract in which it is
found and the rights granted thereunder, unless it expressly provides for
variations in the terms of the contract to be renewed."
The same principle is upheld in American Law regarding the renewal of
lease contracts. In 50 Am. Jur. 2d, Sec. 1159, at p. 45, we find the
following citations: "The rule is well-established that a general covenant
to renew or extend a lease which makes no provision as to the terms of a
renewal or extension implies a renewal or extension upon the same terms
as provided in the original lease."
In the lease contract under consideration, there is no provision to indicate
that the renewal will be subject to new terms and conditions that the
parties may yet agree upon. It is to renewal provisions of lease contracts of
the kind presently considered that the principles stated above squarely
apply. We do not agree with the contention of the appellants that if it was
intended by the parties to renew the contract under the same terms and
conditions stipulated in the contract of lease, such should have expressly
so stated in the contract itself. The same argument could easily be
interposed by the appellee who could likewise contend that if the intention
was to renew the contract of lease under such new terms and conditions
that the parties may agree upon, the contract should have so specified.
Between the two assertions, there is more logic in the latter.
The settled rule is that in case of uncertainty as to the meaning of a
provision granting extension to a contract of lease, the tenant is the one
favored and not the landlord. "As a general rule, in construing provisions
relating to renewals or extensions, where there is any uncertainty, the
tenants is favored, and not the landlord, because the latter, having the
power of stipulating in his own favor, has neglected to do so; and also
upon the principle that every man's grant is to be taken most strongly
against himself (50 Am Jur. 2d, Sec. 1162, p. 48; see also 51 C.J.S. 599).
Besides, if we were to adopt the contrary theory that the terms and conditions to be embodied
in the renewed contract were still subject to mutual agreement by and between the parties, then
the option — which is an integral part of the consideration for the contract — would be
rendered worthless. For then, the lessor could easily defeat the lessee's right of renewal by
simply imposing unreasonable and onerous conditions to prevent the parties from reaching an
agreement, as in the case at bar. As in a statute no word, clause, sentence, provision or part of
a contract shall be considered surplusage or superfluous, meaningless, void, insignificant or
nugatory, if that can be reasonably avoided. To this end, a construction which will render
every word operative is to be preferred over that which would make some words idle and
nugatory.11
Fortunately for respondent lessors, ALLIED vacated the premises on 20 February 1993
indicating its abandonment of whatever rights it had under the renewal clause. Consequently,
what remains to be done is for ALLIED to pay rentals for the continued use of premises until
it vacated the same, computed from the expiration of the original term of the contract on 31
March 1992 to the time it actually left the premises on 20 February 1993, deducting therefrom
the amount of P68,400.00 consigned in court by ALLIED and any other amount which it may
have deposited or advanced in connection with the lease. Since the old lease contract was
deemed renewed under the same terms and conditions upon the exercise by ALLIED of its
option, the basis of the computation of rentals should be the rental rate provided for in the
existing contract.
Finally, ALLIED cannot assail the validity of the deed of donation, not being a party thereto.
A person who is not principally or subsidiarily bound has no legal capacity to challenge the
validity of the contract. 12 He must first have an interest in it. "Interest" within the meaning of
the term means material interest, an interest to be affected by the deed, as distinguished from a
mere incidental interest. Hence, a person who is not a party to a contract and for whose benefit
it was not expressly made cannot maintain an action on it, even if the contract, if performed by
the parties thereto would incidentally affect him, 13 except when he is prejudiced in his rights
with respect to one of the contracting parties and can show the detriment which could
positively result to him from the contract in which he had no intervention. 14 We find none in
the instant case.
WHEREFORE, the Decision of the Court of Appeals is REVERSED and SET ASIDE.
Considering that petitioner ALLIED BANKING CORPORATION already vacated the leased
premises as of 20 February 1993, the renewed lease contract is deemed terminated as of that
date. However, petitioner is required to pay rentals to respondent lessors at the rate provided in
their existing contract, subject to computation in view of the consignment in court of
P68,400.00 by petitioner, and of such other amounts it may have deposited or advanced in
connection with the lease.
SO ORDERED.
THIRD DIVISION
G.R. No. 162333             December 23, 2008
BIENVENIDO C. TEOCO and JUAN C. TEOCO, JR., petitioners,  Metrobank also said the assignment of the right of redemption by the spouses Co in favor of
vs.
METROPOLITAN BANK AND TRUST COMPANY, respondent.
DECISION
REYES, R.T., J.:
REAL creditors are rarely unwilling to receive their debts from any hand which will pay
them.1 Ang tunay na may pautang ay bihirang tumanggi sa kabayaran mula kaninuman.
This is a petition for review on certiorari seeking the reversal of the Decision2 of the Court of
Appeals (CA) in CA-G.R. CV No. 58891 dated February 20, 2004 which annulled and set
aside the decision of the Regional Trial Court (RTC) of Catbalogan, Samar on July 22, 1997 in
Cadastral Record No. 1378. The RTC originally dismissed the petition for writ of possession
filed by respondent Metropolitan Bank and Trust Company (Metrobank) on the ground that
intervenors and present petitioners, the brothers Bienvenido Teoco and Juan Teoco, Jr. (the
brothers Teoco), have redeemed the subject property. The CA reversed this dismissal and
ordered the issuance of a writ of possession in favor of respondent Metrobank.
Culled from the records, the facts are as follows:
Lydia T. Co, married to Ramon Co, was the registered owner of two parcels of land situated in
Poblacion, Municipality of Catbalogan, Province of Samar under Transfer Certificate of Title
(TCT) Nos. T-6220 and T-6910.3Ramon Co mortgaged the said parcels of land to Metrobank
for a sum of P200,000.00.
On February 14, 1991, the properties were sold to Metrobank in an extrajudicial foreclosure
sale under Act No. 3135. One year after the registration of the Certificates of Sale, the titles to
the properties were consolidated in the name of Metrobank for failure of Ramon Co to redeem
the same within the one year period provided for by law. TCT Nos. T-6220 and T-6910 were
cancelled and TCT Nos. T-8482 and T-8493 were issued in the name of Metrobank.
On November 29, 1993, Metrobank filed a petition for the issuance of a writ of possession
against Ramon Co and Lydia Co (the spouses Co). However, since the spouses Co were no
longer residing in the Philippines at the time the petition was filed, the trial court ordered
Metrobank, on January 12, 1994 and again on January 26, 1994 to effect summons by
publication against the spouses Co.
On May 17, 1994, the brothers Teoco filed an answer-in-intervention alleging that they are the
successors-in-interest of the spouses Co, and that they had duly and validly redeemed the
subject properties within the reglementary period provided by law. The brothers Teoco thus
prayed for the dismissal of Metrobank’s petition for a writ of possession, and for the
nullification of the TCTs issued in the name of Metrobank. The brothers Teoco further prayed
for the issuance in their name of new certificates of title.
Metrobank, in its reply, alleged that the amount deposited by the brothers Teoco as redemption
price was not sufficient, not being in accordance with Section 78 of the General Banking Act.
the brothers Teoco was not properly executed, as it lacks the necessary authentication from the
Philippine Embassy.
On February 24, 1995, the trial court was informed that the brothers Teoco had deposited the
amount of P356,297.57 to the clerk of court of the RTC in Catbalogan, Samar. The trial court
ordered Metrobank to disclose whether it is allowing the brothers Teoco to redeem the subject
properties. Metrobank refused to accept the amount deposited by the brothers Teoco, alleging
that they are obligated to pay the spouses Co’s subsequent obligations to Metrobank as well.
The brothers Teoco claimed that they are not bound to pay all the obligations of the spouses
Co, but only the value of the property sold during the public auction.
On February 26, 1997, the trial court reiterated its earlier order directing Metrobank to effect
summons by publication to the spouses Co. Metrobank complied with said order by submitting
documents showing that it caused the publication of summons against the spouses Co. The
brothers Teoco challenged this summons by publication, arguing that the newspaper where the
summons by publication was published, the Samar Reporter, was not a newspaper of general
circulation in the Philippines. The brothers Teoco furthermore argued that Metrobank did not
present witnesses to identify the documents to prove summons by publication.
RTC Disposition
On July 22, 1997, the RTC rendered its decision in favor of the brothers Teoco, to wit:
WHEREFORE, judgment is hereby rendered dismissing the petition for a writ of
possession under Section 7 of Act 3135 it appearing that intervenor Atty. Juan C.
Teoco, Jr. and his brother Atty. Bienvenido C. Teoco have legally and effectively
redeemed Lot 61 and 67 of Psd-66654, Catbalogan, Cadastre, from the petitioner
Metropolitan Bank and Trust Company.
Accordingly, Metrobank may now withdraw the aforesaid redemption money
of P356,297.57 deposited by Juan C. Teoco, Jr., on February 10, 1992 with the clerk
of court and it is ordered that the Transfer Certificate of Title Nos. T-8492 and T-
8493 of Metropolitan Bank and Trust Company be and are cancelled and in their
place new transfer certificates of title be issued in favor of Intervenors Attys.
Bienvenido C. Teoco and Juan C. Teoco, Jr., of legal age, married, and residents of
Calbiga, Samar, Philippines, upon payment of the prescribed fees therefore. No
pronouncement as to costs.4
According to the RTC, the case filed by Metrobank should be dismissed since intervenor Juan
C. Teoco, Jr., by his tender of P356,297.57 to Metrobank on February 10, 1992, within the
reglementary period of redemption of the foreclosed property, had legally and effectively
redeemed the subject properties from Metrobank. This redemption amount is a fair and
reasonable price and is in keeping with the letter and spirit of Section 78 of the General
Banking Act because Metrobank purchased the mortgaged properties from the sheriff of the
same court for only P316,916.29. In debunking the argument that the amount tendered was
insufficient, the RTC held:
 It is contended for Metrobank that the redemption money deposited by Juan C.
Teoco, Jr., is insufficient and ineffective because the spouses Ramon Co and Lydia
T. Co owe it the total amount of P6,856,125 excluding interest and other charges
and the mortgage contract executed by them in favor of Metrobank in 1985 and
1986 (Exh. A and B) are not only security for payment of their obligation in the
amount of P200,000 but also for those obligations that may have been previously
and later extended to the Co couple including interest and other charges as appears
in the accounts, books and records of the bank.
Metrobank cites the case of Mojica v. Court of Appeals, 201 SCRA 517 (1991)
where the Supreme Court held that mortgages given to secure future advancements
are valid and legal contracts; that the amounts named as consideration in said
contract do not limit the amount for which the mortgage may stand as security; that
a mortgage given to secure the advancements is a continuing security and is not
discharged by repayment of the amount named in the mortgage until the full amount
of the advancements are paid. In the opinion of this court, it is not fair and just to
apply this rule to the case at bar. There is no evidence offered by Metrobank that
these other obligations of Ramon Co and his wife were not secured by real estate
mortgages of other lands. If the other indebtedness of the Co couple to Metrobank
are secured by a mortgage on their other lands or properties the obligation can be
enforced by foreclosure which the court assumes Metrobank has already done. There
is no proof that Metrobank asked for a deficiency judgment for these unpaid loans.
The Supreme Court in the Mojica case was dealing with the rights of the mortgagee
under a mortgage from an owner of the land. It determined the security covered by
the mortgage the intention of the parties and the equities of the case. What was held
in that case was hedged about so as to limit the decision to the particular facts. It
must be apparent that the Mojica ruling cannot be construed to give countenance or
approval to the theory that in all cases without exception mortgages given to secure
past and future advancements are valid and legal contracts.
In construing a contract between the bank and a borrower such a construction as
would be more favorable to the borrower should be adopted since the alleged past
and future indebtedness of Ramon Co to the bank was not described and specified
therein and that the addendum was made because the mortgage given therefore were
not sufficient or that these past and future advancements were unsecured. That being
the case the mortgage contracts, Exh. A and B should be interpreted against
Metrobank which drew said contracts. A written contract should, in case of doubt,
be interpreted against the party who has drawn the contract (6 R.C.L. 854; H.E.
Heackock Co. vs. Macondray & Co., 42 Phil. 205). Here, the mortgage contracts are
in printed form prepared by Metrobank and therefore ambiguities therein should be
construed against the party causing it (Yatco vs. El Hogar Filipino, 67 Phil. 610;
Hodges vs. Tazaro, CA, 57 O.G. 6970).5
The RTC added that there is another reason for dismissing Metrobank’s petition: the RTC
failed to acquire jurisdiction over the spouses Co. The RTC noted that Metrobank published
its petition for writ of possession, but did not publish the writ of summons issued by said court
on February 16, 1994. According to the RTC:
A petition for a writ of possession of foreclosed property is in reality a possession
suit. That Metrobank prayed for a writ of possession in an independent special
proceeding does not alter the nature of the case as a possessory suit (Cabrera v.
Sinoy, L.-12648, 23 November 1959).
The defendant or owner of the property foreclosed by the petitioner should be
summoned to answer the petition. Accordingly, the publication made by the
petitioner is fatally flawed and defective and on that basis alone this court acquired
no jurisdiction over the person of respondents Ramon Co and his wife (Mapa vs.
Court of Appeals, G.R. No. 79394, October 2, 1992; Lopez vs. Philippine National
Bank, L-34223, December 10, 1982).6
Metrobank appealed to the CA. In its appeal, Metrobank claimed that the RTC erred in finding
that the publication made by it is fatally flawed, and that the brothers Teoco had effectively
redeemed the properties in question.
CA Disposition
On February 20, 2004, the CA decided the appeal in favor of Metrobank, with the following
disposition:
WHEREFORE, the appeal is hereby GRANTED. The assailed Decision dated July
22, 1997 rendered by the Regional Trial Court of Catbalogan, Samar Branch 29 in
Cadastral Record No. 1378 is hereby ANNULLED and SET ASIDE. Accordingly,
let a writ of possession in favor of petitioner-appellant METROPOLITAN BANK
AND TRUST COMPANY be issued over the properties and improvements covered
by Transfer Certificates of Title Nos. T-8492 and T-8493 of the Registry of Deeds
of Western Samar.
SO ORDERED.7
As regards the question of jurisdiction, the CA ruled that since the parcels of land in question
were already registered in the name of Metrobank at the time the petition was filed, and since
the certificates of title of the spouses Co were already cancelled, there is no more need to issue
summons to the spouses Co. The CA noted that the best proof of ownership of the parcel of
land is a certificate of title.8
The CA also held that the issue of the validity of summons to the spouses Co is unimportant
considering that the properties in question were mortgaged to Metrobank and were
subsequently sold to the same bank after the spouses Co failed to satisfy the principal
obligation. Hence, the applicable law is Act No. 3135,9 as amended by Act No. 4118. Section
7 of said Act No. 3135 states that a petition for the issuance of a writ of possession filed by the
purchaser of a property in an extrajudicial foreclosure sale may be done ex parte. It is the
ministerial duty of the trial court to grant such writ of possession. No discretion is left to the
trial court. Any question regarding the cancellation of the writ, or with respect to the validity
and regularity of the public sale should be determined in a subsequent proceeding as outlined
in Section 9 of Act No. 3135.10
Further, the CA held that the brothers Teoco were not able to effectively redeem the subject
properties, because the amount tendered was insufficient, and the brothers Teoco have not
sufficiently shown that the spouses Co’s right of redemption was properly transferred to them.
Issues
In this Rule 45 petition, the brothers Teoco impute to the CA the following errors:
I such subsequent obligations are secured by said mortgage contract and not by any other form
THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS ERROR OF
JUDGMENT IN HOLDING THAT PETITIONERS FAILED TO REDEEM THE
SUBJECT PROPERTIES WITHIN THE REGLEMENTARY PERIOD OF ONE
YEAR AND THAT THE REDEMPTION PRICE TENDERED IS INSUFFICIENT.
II
THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS ERROR OF
JUDGMENT IN HOLDING PETITIONERS TO PAY NOT ONLY THE P200,000
PRINCIPAL OBLIGATION BUT ALSO THAT PREVIOUSLY EXTENDED,
WHETHER DIRECT OR INDIRECT, PRINCIPAL OR SECONDARY AS
APPEARS IN THE ACCOUNTS, BOOKS AND RECORDS.
III
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE
PETITIONERS HAVE NOT SUFFICIENTLY SHOW(N) THAT THE RIGHT OF
REDEMPTION WAS PROPERLY TRANSFERRED TO THEM.
IV
THE HONORABLE COURT OF APPEALS ERRED IN REVERSING THE
DECISION OF THE REGIONAL TRIAL COURT, BRANCH 29, AND
GRANTING THE WRIT OF POSSESSION TO THE
RESPONDENT.11(Underscoring supplied)
Our Ruling
Sufficiency of Amount Tendered
We find that neither petitioners, the brothers Teoco, nor respondent, Metrobank, were able to
present sufficient evidence to prove whether the additional loans granted to the spouses Co by
Metrobank were covered by the mortgage agreement between them. The brothers Teoco failed
to present any evidence of the supposed trust receipt agreement between Metrobank and the
spouses Co, or an evidence of the supposed payment by the spouses Co of the other loans
extended by Metrobank. Metrobank, on the other hand, merely relied on the stipulation on the
mortgage deed that the mortgage was intended to secure "the payment of the same
(P200,000.00 loan) and those that may hereafter be obtained."12 However, there was no
mention whatsoever of the mortgage agreement in the succeeding loans entered into by the
spouses Co.
While we agree with Metrobank that mortgages intended to secure future advancements are
valid and legal contracts,13 entering into such mortgage contracts does not necessarily put
within its coverage all loan agreements that may be subsequently entered into by the parties. If
Metrobank wishes to apply the mortgage contract in order to satisfy loan obligations not stated
on the face of such contract, Metrobank should prove by a preponderance of evidence that
of security.
In order to prevent any injustice to, or unjust enrichment of, any of the parties, this Court holds
that the fairest resolution is to allow the brothers Teoco to redeem the foreclosed properties
based on the amount for which it was foreclosed (P255,441.14 plus interest). This is subject,
however, to the right of Metrobank to foreclose the same property anew in order to satisfy the
succeeding loans entered into by the spouses Co, if they were, indeed, covered by the
mortgage contract. The right of Metrobank to foreclose the mortgage would not be hampered
by the transfer of the properties to the brothers Teoco as a result of this decision, since Article
2127 of the Civil Code provides:
Art. 2127. The mortgage extends to the natural accessions, to the improvements,
growing fruits, and the rents or income not yet received when the obligation
becomes due, and to the amount of the indemnity granted or owing to the proprietor
from the insurers of the property mortgaged, or in virtue of expropriation for public
use, with the declarations, amplifications and limitations established by law, whether
the estate remains in the possession of the mortgagor, or it passes into the hands of a
third person. (Emphasis supplied)
Further, Article 2129 of the Civil Code provides:
Art. 2129. The creditor may claim from a third person in possession of the
mortgaged property, the payment of the part of the credit secured by the property
which said third person possesses, in the terms and with the formalities which the
law establishes.
The mortgage directly and immediately subjects the property upon which it is imposed,
whoever the possessor may be to the fulfillment of the obligation for whose security it was
constituted. Otherwise stated, a mortgage creates a real right which is enforceable against the
whole world. Hence, even if the mortgage property is sold or its possession transferred to
another, the property remains subject to the fulfillment of the obligation for whose security it
was constituted.14
Thus, the redemption by the brothers Teoco shall be without prejudice to the subsequent
foreclosure of same properties by Metrobank in order to satisfy other obligations covered by
the Real Estate Mortgage.
Transfer of Right of Redemption
The CA held that the brothers Teoco have not sufficiently shown that the spouses Co’s right of
redemption was properly transferred to them. The assignment of the right of redemption only
stated that the spouses Co are transferring the right of redemption to their parents, brothers,
and sisters, but did not specifically include the brothers Teoco, who are just brothers-in-law of
Ramon Co. Furthermore, the spouses Co no longer reside in the Philippines, and the
assignment of the right of redemption was not properly executed and/or authenticated.
The alleged transfer of the right of redemption is couched in the following language:
KNOW ALL MEN BY THESE PRESENTS:
That we, RAMON CO and LYDIA CO, of legal ages, for and in
consideration of preserving the continuous ownership and possession of
family owned properties, by these presents, hereby cede, transfer and
convey in favor of my parents, brothers and sisters, the right to redeem
the properties under TCT Nos. T-6910 and T-6220, located in Patag
district, Catbalogan, Samar, sold by public auction sale on February 14,
1991 to the Metropolitan Bank and Trust Company.
Furthermore, we waived whatever rights we may have over the properties
in favor of the successor-in-interest including that of transferring the title
to whoever may redeem the aforesaid properties.
IN WITNESS WHEREOF, we have hereunto affixed our signatures this 10 th day of
January, 1992 at Vancouver, Canada.15
The brothers Teoco may be brothers-in-law only of Ramon Co, but they are also the brothers
of Lydia Teoco Co, who is actually the registered owner of the properties covered by TCT
Nos. T-6910 and T-6220. Clearly, the brothers Teoco are two of the persons referred to in the
above transfer of the right of redemption executed by the spouses Co.
Anent the CA observation that the assignment of the right of redemption was not properly
executed and/or authenticated, Lopez v. Court of Appeals16 is instructive. In Lopez, this Court
ruled that a special power of attorney executed in a foreign country is generally not admissible
in evidence as a public document in our courts. The Court there held:
Is the special power of attorney relied upon by Mrs. Ty a public document? We find
that it is. It has been notarized by a notary public or by a competent public official
with all the solemnities required by law of a public document. When executed and
acknowledged in the Philippines, such a public document or a certified true copy
thereof is admissible in evidence. Its due execution and authentication need not be
proven unlike a private writing.
Section 25, Rule 132 of the Rules of Court provides –
Sec. 25. Proof of public or official record. – An official record or an entry
therein, when admissible for any purpose, may be evidenced by an official
publication thereof or by a copy attested by the officer having the legal
custody of the record, or by his deputy, and accompanied, if the record is
not kept in the Philippines, with a certificate that such officer has the
custody. If the office in which the record is kept is in a foreign country,
the certificate may be made by a secretary of embassy or legation consul
general, consul, vice consul, or consular agent or by any officer in the
foreign service of the Philippines stationed in the foreign country in which
the record is kept, and authenticated by the seal of his office.
From the foregoing provision, when the special power of attorney is executed and
acknowledged before a notary public or other competent official in a foreign
country, it cannot be admitted in evidence unless it is certified as such in accordance
with the foregoing provision of the rules by a secretary of embassy or legation,
consul general, consul, vice consul, or consular agent or by any officer in the foreign
service of the Philippines stationed in the foreign country in which the record is kept
of said public document and authenticated by the seal of his office. A city judge-
notary who notarized the document, as in this case, cannot issue such certification.17
Verily, the assignment of right of redemption is not admissible in evidence as a public
document in our courts. However, this does not necessarily mean that such document has no
probative value.
There are generally three reasons for the necessity of the presentation of public
documents. First, public documents are prima facie evidence of the facts stated in them, as
provided for in Section 23, Rule 132 of the Rules of Court:
SEC. 23. Public documents as evidence. – Documents consisting of entries in public
records made in the performance of a duty by a public officer are  prima
facie evidence of the facts therein stated. All other public documents are evidence,
even against a third person, of the fact which gave rise to their execution and of the
date of the latter. (Underscoring supplied)
Second, the presentation of a public document dispenses with the need to prove a document’s
due execution and authenticity, which is required under Section 20, Rule 132 of the Rules of
Court for the admissibility of private documents offered as authentic:
SEC. 20. Proof of private document. – Before any private document offered as
authentic is received in evidence, its due execution and authenticity must be
proved either:
(a) By anyone who saw the document executed or written; or
(b) By evidence of the genuineness of the signature or handwriting of the
maker.
Any other private document need only be identified as that which it is claimed to be.
(Underscoring supplied)
In the presentation of public documents as evidence, on the other hand, due execution and
authenticity are already presumed:
SEC. 23. Public documents are evidence. – Documents consisting of entries in
public records made in the performance of a duty by a public officer are prima facie
evidence of the facts therein stated. All other public documents are evidence, even
against a third person, of the fact which gave rise to their execution and of the date
of the latter. (Underscoring supplied)
SEC. 30. Proof of notarial documents. – Every instrument duly acknowledged or
proved and certified as provided by law, may be presented in evidence without
further proof, the certificate of acknowledgment being prima facie evidence of
the execution of the instrument or document involved. (Underscoring supplied)
Third, the law may require that certain transactions appear in public instruments, such as
Articles 1358 and 1625 of the Civil Code, which respectively provide:
Art. 1358. The following must appear in a public document:
(1) Acts and contracts which have for their object the creation, transmission,
modification or extinguishment of real rights over immovable property; sales of real
property or of an interest therein governed by Articles 1403, No. 2, and 1405;
(2) The cession, repudiation or renunciation of hereditary rights or of those of the
conjugal partnership of gains;
(3) The power to administer property, or any other power which has for its object an
act appearing or which should appear in a public document, or should prejudice a
third person;
(4) The cession of actions or rights proceeding from an act appearing in a public
document.
All other contracts where the amount involved exceeds five hundred pesos must
appear in writing, even a private one. But sales of goods, chattels or things in action
are governed by Articles 1403, No. 2, and 1405.
Art. 1625. An assignment of a credit, right or action shall produce no effect as
against third person, unless it appears in a public instrument, or the instrument is
recorded in the Registry of Property in case the assignment involves real property.
(Underscoring supplied)
Would the exercise by the brothers Teoco of the right to redeem the properties in question be
precluded by the fact that the assignment of right of redemption was not contained in a public
document? We rule in the negative.
Metrobank never challenged either the content, the due execution, or the genuineness of the
assignment of the right of redemption. Consequently, Metrobank is deemed to have admitted
the same. Having impliedly admitted the content of the assignment of the right of redemption,
there is no necessity for a prima facie evidence of the facts there stated. In the same manner,
since Metrobank has impliedly admitted the due execution and genuineness of the assignment
of the right of redemption, a private document evidencing the same is admissible in
evidence.18
True it is that the Civil Code requires certain transactions to appear in public documents.
However, the necessity of a public document for contracts which transmit or extinguish real
rights over immovable property, as mandated by Article 1358 of the Civil Code, is only
for convenience; it is not essential for validity or enforceability. 19 Thus, in Cenido v.
Apacionado,20 this Court ruled that the only effect of noncompliance with the provisions of
Article 1358 of the Civil Code is that a party to such a contract embodied in a private
document may be compelled to execute a public document:
Article 1358 does not require the accomplishment of the acts or contracts in a public
instrument in order to validate the act or contract but only to insure its efficacy, so
that after the existence of said contract has been admitted, the party bound may be
compelled to execute the proper document. This is clear from Article 1357, viz.:
"Art. 1357. If the law requires a document or other special form, as in the
acts and contracts enumerated in the following article (Article 1358), the
contracting parties may compel each other to observe that form, once the
contract has been perfected. This right may be exercised simultaneously
with the action upon the contract."21
On the other hand, Article 1625 of the Civil Code provides that "[a]n assignment of a credit,
right or action shall produce no effect as against third person, unless it appears in a public
instrument, or the instrument is recorded in the Registry of Property in case the assignment
involves real property."
In Co v. Philippine National Bank,22 the Court interpreted the phrase "effect as against a third
person" to be damage or prejudice to such third person, thus:
x x x In Lichauco vs. Olegario, et al., 43 Phil. 540, this Court held that "whether or
not x x x an execution debtor was legally authorized to sell his right of redemption,
is a question already decided by this Court in the affirmative in numerous decisions
on the precepts of Sections 463 and 464 and other sections related thereto, of the
Code of Civil Procedure." (The mentioned provisions are carried over in Rule 39 of
the Revised Rules of Court.) That the transfers or conveyances in question were not
registered is of miniscule significance, there being no showing that PNB was
damaged or could be damaged by such omission. When CITADEL made its tender
on May 5, 1976, PNB did not question the personality of CITADEL at all. It is now
too late and purely technical to raise such innocuous failure to comply with Article
1625 of the Civil Code.23
In Ansaldo v. Court of Appeals,24 the Court held:
 In its Decision, the First Division of the Appellate Tribunal, speaking through the
Presiding Justice at the time, Hon. Magno S. Gatmaitan, held as regards Arnaldo’s
contentions, that –
xxxx
2) there was no need that the assignment be in a public document this
being required only "to produce x x x effect as against third persons"
(Article 1625, Civil Code), i.e., "to adversely affect 3rd persons," i.e., "a
3rd person with a right against original creditor, for example, an original
creditor of creditor, – against whom surely such an assignment by his
debtor (creditor in the credit assigned) would be prejudicial, because he,
creditor of assigning creditor, would thus be deprived of an attachable
asset of his debtor x x x;
xxxx
Except for the question of the claimed lack of authority on the part of TFC’s
president to execute the assignment of credit in favor of PCIB improperly raised for
the first time on appeal, as observed by the Court of Appeals – the issues raised by
Ansaldo were set up by him in, and after analysis and assessment rejected by, both
the Trial Court and the Appellate Tribunal. This court sees no error whatever in the
appreciation of the facts by either Court or their application of the relevant law and
jurisprudence to those facts, inclusive of the question posed anew by Ansaldo
relative to the alleged absence of authority on the part of TFC’s president to assign
the corporation’s credit to PCIB.25
In the case at bar, Metrobank would not be prejudiced by the assignment by the spouses Co of
their right of redemption in favor of the brothers Teoco. As conceded by Metrobank, the
assignees, the brothers Teoco, would merely step into the shoes of the assignors, the spouses
Co. The brothers Teoco would have to comply with all the requirements imposed by law on
the spouses Co. Metrobank would not lose any security for the satisfaction of any loan
obtained from it by the spouses Co. In fact, the assignment would even prove to be beneficial
to Metrobank, as it can foreclose on the subject properties anew, provided it proves that the
subsequent loans entered into by the spouses Co are covered by the mortgage contract.
WHEREFORE, the decision of the Court of Appeals is SET ASIDE. The decision of the
Regional Trial Court in Catbalogan, Samar is REINSTATED with the
following MODIFICATION: the redemption by Bienvenido C. Teoco and Juan C. Teoco, Jr.
of the properties covered by TCT Nos. T-6910 and T-6220 shall be without prejudice to the
subsequent foreclosure of same properties by Metropolitan Bank and Trust Company to satisfy
other loans covered by the Real Estate Mortgage.
G.R. No. 162523               November 25, 2009
NORTON RESOURCES AND DEVELOPMENT CORPORATION, Petitioner,  withhold the same upon the request of petitioner. Thus, respondent filed an action to recover
vs.
ALL ASIA BANK CORPORATION,* Respondent.
DECISION
NACHURA, J.:
Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Civil
Procedure, seeking the reversal of the Court of Appeals (CA) Decision2 dated November 28,
2002 which set aside the Decision3 of the Regional Trial Court (RTC) of Davao City, Branch
14, dated August 27, 1999.
The Facts
Petitioner Norton Resources and Development Corporation (petitioner) is a domestic
corporation engaged in the business of construction and development of housing subdivisions
based in Davao City, while respondent All Asia Bank Corporation (respondent), formerly
known as Banco Davao-Davao City Development Bank, is a domestic banking corporation
operating in Davao City.
On April 13, 1982, petitioner applied for and was granted a loan by respondent in the amount
of Three Million Eight Hundred Thousand Pesos (₱3,800,000.00) as evidenced by a Loan
Agreement.4 The loan was intended for the construction of 160 housing units on a 3.9 hectare
property located in Matina Aplaya, Davao City which was subdivided by petitioner per
Subdivision Sketch Plan.5 To speed up the processing of all documents necessary for the
release of the funds, petitioner allegedly offered respondent a service/commitment fee of
₱320,000.00 for the construction of 160 housing units, or at ₱2,000.00 per unit. The offer
having been accepted, both parties executed a Memorandum of Agreement 6 (MOA) on the
same date.
As guarantor, the Home Financing Corporation (HFC), a government entity tasked to
encourage lending institutions to participate in the government's housing programs, extended
security coverage obligating itself to pay the said loan upon default of petitioner. Out of the
loan proceeds in the amount of ₱3,800,000.00, respondent deducted in advance the amount of
₱320,000.00 as commitment/service fee.
Unfortunately, petitioner was only able to construct 35 out of the 160 housing units proposed
to be constructed under the contract. In addition, petitioner defaulted in the payment of its loan
obligation. Thus, respondent made a call on the unconditional cash guarantee of HFC. In order
to recover from HFC, respondent assigned to HFC its interest over the mortgage by virtue of a
Deed of Assignment7 on August 28, 1983 coupled with the delivery of the Transfer Certificate
of Title.
As of August 2, 1983, the outstanding obligation of petitioner amounted to ₱3,240,757.99.
HFC paid only ₱2,990,757.99, withholding the amount of ₱250,000.00. Upon payment, HFC
executed a Deed of Release of Mortgage8 on February 14, 1984, thereby canceling the
mortgage of all properties listed in the Deed of Assignment. Respondent made several
demands from HFC for the payment of the amount of ₱250,000.00 but HFC continued to
the ₱250,000.00 with the RTC, Branch 15, of Davao City, docketed as Civil Case No.
17048.9 On April 13, 1987, said RTC rendered a Decision10 in favor of respondent, the
dispositive portion thereof reads as follows:
IN VIEW WHEREOF, judgment is hereby rendered as follows: 2. To pay the plaintiff the sum of THIRTY THOUSAND PESOS (₱30,000.00)
representing litigation expenses;
1. The defendant shall return to the plaintiff the ₱250,000.00 with legal interest to be
computed from April 12, 1984 until fully paid. 3. To pay the plaintiff the sum of SIXTY TWO THOUSAND FIVE HUNDRED
PESOS (₱62,500.00) as and for attorney’s fees; and
2. The defendant shall pay the plaintiff fifty thousand pesos (₱50,000.00) as
attorney’s fees and ₱7,174.82 as collection expenses. 4. To pay the costs.

3. The defendant shall pay the costs of this suit. SO ORDERED.15

SO ORDERED.11 Aggrieved, respondent appealed to the CA.16

HFC appealed to the CA which, in turn, sustained the decision of the RTC. The CA decision
became final and executory.
However, on February 22, 1993, petitioner filed a Complaint 12 for Sum of Money, Damages
and Attorney’s Fees against respondent with the RTC, docketed as Civil Case No. 21-880-93.
Petitioner alleged that the ₱320,000.00 commitment/service fee mentioned in the MOA was to
be paid on a per-unit basis at ₱2,000.00 per unit. Inasmuch as only 35 housing units were
constructed, petitioner posited that it was only liable to pay ₱70,000.00 and not the whole
amount of ₱320,000.00, which was deducted in advance from the proceeds of the loan. As
such, petitioner demanded the return of ₱250,000.00, representing the commitment fee for the
125 housing units left unconstructed and unduly collected by respondent.
In its Answer,13 respondent denied that the ₱320,000.00 commitment/service fee provided in
the MOA was broken down into ₱2,000.00 per housing unit for 160 units. Moreover,
respondent averred that petitioner’s action was already barred by res judicata considering that
the present controversy had already been settled in a previous judgment rendered by RTC,
Branch 15, of Davao City in Civil Case No. 17048.
The RTC's Ruling
After trial on the merits, the RTC rendered a Decision 14 on August 27, 1999 in favor of
petitioner. It held that the amount of ₱320,000.00, as commitment/service fee provided in the
MOA, was based on the 160 proposed housing units at ₱2,000.00 per unit. Since petitioner
was able to
construct only 35 units, there was overpayment to respondent in the amount of ₱250,000.00.
Thus, the RTC disposed of the case in this wise:
The CA's Ruling
On November 28, 2002, the CA reversed the ruling of the RTC. The CA held that from the
literal import of the MOA, nothing was mentioned about the arrangement that the payment of
the commitment/service fee of ₱320,000.00 was on a per unit basis valued at ₱2,000.00 per
housing unit and dependent upon the actual construction or completion of said units. The CA
opined that the MOA duly contained all the terms agreed upon by the parties.
Undaunted, petitioner filed a Motion for Reconsideration17 which was, however, denied by the
CA in its Resolution18dated February 13, 2004.
Hence, this Petition which raised the following issues:
1. WHETHER OR NOT THE MEMORANDU[M] OF AGREEMENT (MOA)
REFLECTS THE TRUE INTENTION OF THE PARTIES[;]
2. WHETHER OR NOT HEREIN PETITIONER IS ENTITLED TO RECOVER
THE AMOUNT OF TWO HUNDRED [FIFTY] THOUSAND PESOS
REPRESENTING THE ONE HUNDRED TWENTY FIVE (125)
UNCONSTRUCTED HOUSING UNITS AT TWO THOUSAND PESOS (PHP.
2,000.00) EACH AS AGREED [; AND]
3. WHETHER OR NOT VICTOR FACUNDO AS THE VICE PRESIDENT AND
GENERAL MANAGER AT THE TIME THE AFOREMENTIONED MOA WAS
EXECUTED, WAS AUTHORIZED TO ENTER INTO [AN] AGREEMENT AND
TO NEGOTIATE THE TERMS AND CONDITIONS THEREOF TO THEIR
CLIENTELE.19

THE FOREGOING CONSIDERED, judgment is hereby rendered for the plaintiff and against Our Ruling
the defendant ordering the said defendant:
The instant Petition is bereft of merit.
1. To pay the plaintiff the amount of TWO HUNDRED FIFTY THOUSAND
PESOS (₱250,000.00) with interest at the legal rate reckoned from February 22,
1993, the date of the filing of the plaintiff’s complaint until the same shall have been Our ruling in Benguet Corporation, et al. v. Cesar Cabildo20 is instructive:
fully paid and satisfied;
The cardinal rule in the interpretation of contracts is embodied in the first paragraph of Article
1370 of the Civil Code: "[i]f the terms of a contract are clear and leave no doubt upon the
intention of the contracting parties, the literal meaning of its stipulations shall control." This
provision is akin to the "plain meaning rule" applied by Pennsylvania courts, which assumes
that the intent of the parties to an instrument is "embodied in the writing itself, and when the
words are clear and unambiguous the intent is to be discovered only from the express language
of the agreement." It also resembles the "four corners" rule, a principle which allows courts in
some cases to search beneath the semantic surface for clues to meaning. A court's purpose in
examining a contract is to interpret the intent of the contracting parties, as objectively
manifested by them. The process of interpreting a contract requires the court to make a
preliminary inquiry as to whether the contract before it is ambiguous. A contract provision is
ambiguous if it is susceptible of two reasonable alternative interpretations. Where the written
terms of the contract are not ambiguous and can only be read one way, the court will interpret
the contract as a matter of law. If the contract is determined to be ambiguous, then the
interpretation of the contract is left to the court, to resolve the ambiguity in the light of the
intrinsic evidence.
In our jurisdiction, the rule is thoroughly discussed in Bautista v. Court of Appeals:
The rule is that where the language of a contract is plain and unambiguous, its meaning should
be determined without reference to extrinsic facts or aids. The intention of the parties must be
gathered from that language, and from that language alone. Stated differently, where the
language of a written contract is clear and unambiguous, the contract must be taken to mean
that which, on its face, it purports to mean, unless some good reason can be assigned to show
that the words should be understood in a different sense. Courts cannot make for the parties
better or more equitable agreements than they themselves have been satisfied to make, or
rewrite contracts because they operate harshly or inequitably as to one of the parties, or alter
them for the benefit of one party and to the detriment of the other, or by construction, relieve
one of the parties from the terms which he voluntarily consented to, or impose on him those
which he did not.21
Moreover, Section 9, Rule 130 of the Revised Rules of Court clearly provides:
SEC. 9. Evidence of written agreements. — When the terms of an agreement have been
reduced to writing, it is considered as containing all the terms agreed upon and there can be,
between the parties and their successors in interest, no evidence of such terms other than the
contents of the written agreement.
However, a party may present evidence to modify, explain or add to the terms of the written
agreement if he puts in issue in his pleading:
(a) An intrinsic ambiguity, mistake, or imperfection in the written agreement;
(b) The failure of the written agreement to express the true intent and agreement of
the parties thereto;
(c) The validity of the written agreement; or
(d) The existence of other terms agreed to by the parties or their successors in
interest after the execution of the written agreement.
The "parol evidence rule" forbids any addition to or contradiction of the terms of a written
instrument by testimony or other evidence purporting to show that, at or before the execution
of the parties' written agreement, other or different terms were agreed upon by the parties,
varying the purport of the written contract. When an agreement has been reduced to writing,
the parties cannot be permitted to adduce evidence to prove alleged practices which, to all
purposes, would alter the terms of the written agreement. Whatever is not found in the writing
is understood to have been waived and abandoned. 22 None of the above-cited exceptions finds
application in this case, more particularly the alleged failure of the MOA to express the true
intent and agreement of the parties concerning the commitment/service fee of ₱320,000.00.
In this case, paragraph 4 of the MOA plainly states:
4. That the CLIENT offers and agrees to pay a commitment and service fee of THREE
HUNDRED TWENTY THOUSAND PESOS (₱320,000.00), which shall be paid in two (2)
equal installments, on the same dates as the first and second partial releases of the proceeds of
the loan.23
As such, we agree with the findings of the CA when it aptly and judiciously held, to wit:
Unmistakably, the testimonies of Antonio Soriano and Victor Facundo jibed in material points
especially when they testified that the ₱320,000.00 commitment/service fee mentioned in
Paragraph 4 of Exhibit "B" is not to be paid in lump sum but on a per unit basis valued at
₱2,000.00 per housing unit. But a careful scrutiny of such testimonies discloses that they are
not in accord with the documentary evidence on record. It must be stressed that both Antonio
Soriano and Victor Facundo testified that the ₱320,000.00 commitment/service fee was
arrived at by multiplying ₱2,000.00, the cost per housing unit; by 160, the total number of
housing units proposed to be constructed by the [petitioner] as evidenced by a certain
subdivision survey plan of [petitioner] marked as Exhibit "C."
xxxx
Looking closely at Exhibit "C," noticeable are the date of survey of the subdivision which is
May 15-31, 1982 and the date of its approval which is June 25, 1982, which dates are
unmistakably later than the execution of the Loan Agreement (Exhibit "A") and Exhibit "B"
which was on April 13, 1982. With these dates, we cannot lose sight of the fact that it was
impossible for Victor Facundo to have considered Exhibit "C" as one of the documents
presented by [petitioner] to support its proposal that the commitment/service fee be paid on a
per unit basis at ₱2,000.00 a unit. x x x.
xxxx
To stress, there is not even a slim possibility that said blue print (referring to Exhibit "C") was
submitted to [respondent] bank during the negotiation of the terms of Exhibit "B" and was
made the basis for the computation of ₱320,000.00 commitment/service fee. As seen on its
face, Exhibit "C" was approved in a much later date than the execution of Exhibit "B" which
was on April 13, 1982. In addition, as viewed from the foregoing testimony, no less than
Victor Facundo himself admitted that there were only 127 proposed housing units instead of
160. Considering these factual milieus, there is sufficient justification to discredit the stance of
[petitioner] that Exhibit "B" was not reflective of the true intention or agreement of the parties.
Paragraph 4 of Exhibit "B" is clear and explicit in its terms, leaving no room for different
interpretation. Considering the absence of any credible and competent evidence of the alleged
true and real intention of the parties, the terms of Paragraph 4 of Exhibit "B" remains as it was
written. Therefore, the payment of ₱320,000.00 commitment/service fee mentioned in Exhibit
"B" must be paid in lump sum and not on a per unit basis. Consequently, we rule that
[petitioner] is not entitled to the return of ₱250,000.00.241avvphi1
The agreement or contract between the parties is the formal expression of the parties' rights,
duties and obligations. It is the best evidence of the intention of the parties. Thus, when the
terms of an agreement have been reduced to writing, it is considered as containing all the
terms agreed upon and there can be no evidence of such terms other than the contents of the
written agreement between the parties and their successors in interest. 25 Time and again, we
have stressed the rule that a contract is the law between the parties, and courts have no choice
but to enforce such contract so long as it is not contrary to law, morals, good customs or public
policy. Otherwise, courts would be interfering with the freedom of contract of the parties.
Simply put, courts cannot stipulate for the parties or amend the latter's agreement, for to do so
would be to alter the real intention of the contracting parties when the contrary function of
courts is to give force and effect to the intention of the parties.26
Finally, as correctly observed by respondent, petitioner's claim that the MOA is a contract of
adhesion was never raised by petitioner before the lower courts. Settled is the rule that points
of law, theories, issues, and arguments not adequately brought to the attention of the trial court
need not be, and ordinarily will not be, considered by a reviewing court. They cannot be raised
for the first time on appeal. To allow this would be offensive to the basic rules of fair play,
justice and due process.27
A contract of adhesion is defined as one in which one of the parties imposes a ready-made
form of contract, which the other party may accept or reject, but which the latter cannot
modify. One party prepares the stipulation in the contract, while the other party merely affixes
his signature or his "adhesion" thereto, giving no room for negotiation and depriving the latter
of the opportunity to bargain on equal footing.28 It must be borne in mind, however, that
contracts of adhesion are not invalid per se. Contracts of adhesion, where one party imposes a
ready-made form of contract on the other, are not entirely prohibited. The one who adheres to
the contract is, in reality, free to reject it entirely; if he adheres, he gives his consent.29
All told, we find no reason to disturb, much less, to reverse the assailed CA Decision.
WHEREFORE, the instant Petition is DENIED and the assailed Court of Appeals Decision is
AFFIRMED. Costs against petitioner.
SO ORDERED.
G.R. Nos. 198729-30               January 15, 2014
CBK POWER COMPANY LIMITED, Petitioner, 
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
SERENO, CJ:
This is a Petition for Review on Certiorari1 under Rule 45 of the 1997 Rules of Civil
Procedure filed by CBK Power Company Limited (petitioner). The Petition assails the
Decision2 dated 27 June 2011 and Resolution3 dated 16 September 2011 of the Court of Tax
Appeals En Banc (CTA En Banc in C.T.A. EB Nos. 658 and 659. The assailed Decision and
Resolution reversed and set aside the Decision4 dated 3 March 2010 and Resolution5 dated 6
July 2010 rendered by the CTA Special Second Division in C.T.A. Case No. 7621, which
partly granted the claim of petitioner for the issuance of a tax credit certificate representing the
latter's alleged unutilized input taxes on local purchases of goods and services attributable to
effectively zero-rated sales to National Power Corporation (NPC) for the second and third
quarters of 2005.
The Facts
Petitioner is engaged, among others, in the operation, maintenance, and management of the
Kalayaan II pumped-storage hydroelectric power plant, the new Caliraya Spillway, Caliraya,
Botocan; and the Kalayaan I hydroelectric power plants and their related facilities located in
the Province of Laguna.6
On 29 December 2004, petitioner filed an Application for VAT Zero-Rate with the Bureau of
Internal Revenue (BIR) in accordance with Section 108(B)(3) of the National Internal
Revenue Code (NIRC) of 1997, as amended. The application was duly approved by the BIR.
Thus, petitioner ’s sale of electr icity to the NPC from 1 January 2005 to 31 October 2005 was
declared to be entitled to the benefit of effectively zero-rated value added tax (VAT).7
Petitioner filed its administrative claims for the issuance of tax credit certificates for its alleged
unutilized input taxes on its purchase of capital goods and alleged unutilized input taxes on its
local purchases and/or importation of goods and services, other than capital goods, pursuant to
Sections 112(A) and (B) of the NIRC of 1997, as amended, with BIR Revenue District Office
(RDO) No. 55 of Laguna, as follows:8
Period Covered Date Of Filing
1st quarter of 2005 30-Jun-05
2nd quarter of 2005 15-Sep-05
3rd quarter of 2005 28-Oct-05
Alleging inaction of the Commissioner of Internal Revenue (CIR), petitioner filed a Petition
for Review with the CTA on 18 April 2007.
THE CTA SPECIAL SECOND DIVISION RULING
After trial on the merits, the CTA Special Second Division rendered a Decision on 3 March (A) Zero-rated or Effectively Zero-rated Sales. - Any VAT-registered person, whose
2010. Applying Commissioner of Internal Revenue v. Mirant Pagbilao Corporation sales are zero-rated or effectively zero-rated may, within two (2) years after the
(Mirant),9 the court close of the taxable quarter when the sales were made, apply for the issuance of a
tax credit certificate or refund of creditable input tax due or paid attributable to such
a quo ruled that petitioner had until the following dates within which to file both sales, except transitional input tax, to the extent that such input tax has not been
administrative and judicial claims: applied against output tax: Provided, however, That in the case of zero-rated sales
under Section 106(A)(2)(a)(1),(2) and (B) and Section 108 (B)(1) and (2), the
acceptable foreign currency exchange proceeds thereof had been duly accounted for
Taxable Quarter Last Day to in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas
File Claim for (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or
Refund effectively zero-rated sale and also in taxable or exempt sale of goods or properties
2005 Close of the quarter or services, and the amount of creditable input tax due or paid cannot be directly and
1st quarter 31-Mar-05 31-Mar-07 entirely attributed to any one of the transactions, it shall be allocated proportionately
2nd quarter 30-Jun-05 30-Jun-07 on the basis of the volume of sales.
3rd quarter 30-Sep-05 30-Sep-07
xxxx
Accordingly, petitioner timely filed its administrative claims for the three quarters of 2005.
However, considering that the judicial claim was filed on 18 April 2007, the CTA Division
denied the claim for the first quarter of 2005 for having been filed out of time. (D) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In
proper cases, the Commissioner shall grant a refund or issue the tax credit certificate
for creditable input taxes within one hundred twenty (120) days from the date of
After an evaluation of petitioner’s claim for the second and third quarters of 2005, the court a submission of complete documents in support of the application filed in accordance
quo partly granted the claim and ordered the issuance of a tax credit certificate in favor of with Subsections (A) and (B) hereof.
petitioner in the reduced amount of ₱27,170,123.36.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the
The parties filed their respective Motions for Partial Reconsideration, which were both denied part of the Commissioner to act on the application within the period prescribed above, the
by the CTA Division. taxpayer affected may, within thirty (30) days from the receipt of the decision denying the
claim or after the expiration of the one hundred twenty day-period, appeal the decision or the
THE CTA EN BANC RULING unacted claim with the Court of Tax Appeals.

On appeal, relying on Commissioner of Internal Revenue v. Aichi Forging Company of Asia,
Inc. (Aichi),10 the CTA En Banc ruled that petitioner’s judicial claim for the first, second, and
third quarters of 2005 were belatedly filed.
The CTA Special Second Division Decision and Resolution were reversed and set aside, and
the Petition for Review filed in CTA Case No. 7621 was dismissed. Petitioner’s Motion for
Reconsideration was likewise denied for lack of merit.
Hence, this Petition.ISSUE
Petitioner’s sales to NPC are effectively zero-rated
As aptly ruled by the CTA Special Second Division, petitioner’s sales to NPC are effectively
subject to zero percent (0%) VAT. The NPC is an entity with a special charter, which
categorically exempts it from the payment of any tax, whether direct or indirect, including
VAT. Thus, services rendered to NPC by a VAT-registered entity are effectively zero-rated. In
fact, the BIR itself approved the application for zero-rating on 29 December 2004, filed by
petitioner for its sales to NPC covering January to October 2005.12 As a consequence,
petitioner claims for the refund of the alleged excess input tax attributable to its effectively
zero-rated sales to NPC.

Petitioner’s assigned errors boil down to the principal issue of the applicable prescriptive
period on its claim for refund of unutilized input VAT for the first to third quarters of 2005.11 In Panasonic Communications Imaging Corporation of the Philippines v. Commissioner of
Internal Revenue,13 this Court ruled:

THE COURT’S RULING

Under the 1997 NIRC, if at the end of a taxable quarter the seller charges output taxes equal to
the input taxes that his suppliers passed on to him, no payment is required of him. It is when
The pertinent provision of the NIRC at the time when petitioner filed its claim for refund his output taxes exceed his input taxes that he has to pay the excess to the BIR. If the input
provides: taxes exceed the output taxes, however, the excess payment shall be carried over to the
succeeding quarter or quarters. Should the input taxes result from zero-rated or effectively
SEC. 112. Refunds or Tax Credits of Input Tax. –
zero-rated transactions or from the acquisition of capital goods, any excess over the output
taxes shall instead be refunded to the taxpayer.
The crux of the controversy arose from the proper application of the prescriptive periods set
forth in Section 112 of the NIRC of 1997, as amended, and the interpretation of the applicable
jurisprudence.
Although the ponente in this case expressed a different view on the mandatory application of
the 120+30 day period as prescribed in Section 112, with the finality of the Court’s
pronouncement on the consolidated tax cases Commissioner of Internal Revenue v. San Roque
Power Corporation, Taganito Mining Corporation v. Commissioner of Internal Revenue, and
Philex Mining Corporation v. Commissioner of Internal Revenue 14 (hereby collectively
referred as San Roque), we are constrained to apply the dispositions therein to the facts herein
which are similar.
Administrative Claim
Section 112(A) provides that after the close of the taxable quarter when the sales were made,
there is a two-year prescriptive period within which a VAT-registered person whose sales are
zero-rated or effectively zero-rated may apply for the issuance of a tax credit certificate or
refund of creditable input tax.
Our VAT Law provides for a mechanism that would allow VAT-registered persons to recover
the excess input taxes over the output taxes they had paid in relation to their sales. For the
refund or credit of excess or unutilized input tax, Section 112 is the governing law. Given the
distinctive nature of creditable input tax, the law under Section 112 (A) provides for a
different reckoning point for the two-year prescriptive period, specifically for the refund or
credit of that tax only.
We agree with petitioner that Mirant was not yet in existence when their administrative claim
was filed in 2005; thus, it should not retroactively be applied to the instant case.
However, the fact remains that Section 112 is the controlling provision for the refund or credit
of input tax during the time that petitioner filed its claim with which they ought to comply. It
must be emphasized that the Court merely clarified in Mirant that Sections 204 and 229, which
prescribed a different starting point for the two-year prescriptive limit for filing a claim for a
refund or credit of excess input tax, were not applicable. Input tax is neither an erroneously
paid nor an illegally collected internal revenue tax.15
Section 112(A) is clear that for VAT-registered persons whose sales are zero-rated or
effectively zero-rated, a claim for the refund or credit of creditable input tax that is due or
paid, and that is attributable to zero-rated or effectively zero-rated sales, must be filed within
two years after the close of the taxable quarter when such sales were made. The reckoning
frame would always be the end of the quarter when the pertinent sale or transactions were
made, regardless of when the input VAT was paid.16
Pursuant to Section 112(A), petitioner’s administrative claims were filed well within the two-
year period from the close of the taxable quarter when the effectively zero-rated sales were
made, to wit:
Period Covered Close of the
Taxable
Quarter Last day to File Administrative
Claim Date of Filing
1st quarter 2005 31-Mar-05 31-Mar-07 30-Jun-05
2nd quarter 2005 30-Jun-05 30-Jun-07 15-Sep-05
3rd quarter 2005 30-Sep-05 30-Sep-07 28-Oct-05
Judicial Claim
Section 112(D) further provides that the CIR has to decide on an administrative claim within
one hundred twenty (120) days from the date of submission of complete documents in support
thereof.
Bearing in mind that the burden to prove entitlement to a tax refund is on the taxpayer, it is
presumed that in order to discharge its burden, petitioner had attached complete supporting
documents necessary to prove its entitlement to a refund in its application, absent any
evidence to the contrary.
Thereafter, the taxpayer affected by the CIR’s decision or inaction may appeal to the CTA
within 30 days from the receipt of the decision or from the expiration of the 120-day period
within which the claim has not been acted upon.
Considering further that the 30-day period to appeal to the CTA is dependent on the 120-day
period, compliance with both periods is jurisdictional. The period of 120 days is a prerequisite
for the commencement of the 30-day period to appeal to the CTA.
Prescinding from San Roque in the consolidated case Mindanao II Geothermal Partnership v.
Commissioner of Internal Revenue and Mindanao I Geothermal Partnership v. Commissioner
of Internal Revenue,17 this Court has ruled thus:
Notwithstanding a strict construction of any claim for tax exemption or refund, the Court in
San Roque recognized that BIR Ruling No. DA-489-03 constitutes equitable estoppel in favor
of taxpayers. BIR Ruling No. DA-489-03 expressly states that the "taxpayer-claimant need not
wait for the lapse of the 120-day period before it could seek judicial relief with the CTA by
way of Petition for Review." This Court discussed BIR Ruling No. DA-489-03 and its effect
on taxpayers, thus:
Taxpayers should not be prejudiced by an erroneous interpretation by the Commissioner,
particularly on a difficult question of law. The abandonment of the Atlas doctrine by Mirant
and Aichi is proof that the reckoning of the prescriptive periods for input VAT tax refund or
credit is a difficult question of law. The abandonment of the Atlas doctrine did not result in
Atlas, or other taxpayers similarly situated, being made to return the tax refund or credit they
received or could have received under Atlas prior to its abandonment. This Court is applying
Mirant and Aichi prospectively. Absent fraud, bad faith or misrepresentation, the reversal by
this Court of a general interpretative rule issued by the Commissioner, like the reversal of a
specific BIR ruling under Section 246, should also apply prospectively. x x x.
xxxx
Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general interpretative rule
applicable to all taxpayers or a specific ruling applicable only to a particular taxpayer. BIR
Ruling No. DA-489-03 is a general interpretative rule because it was a response to a query
made, not by a particular taxpayer, but by a government agency asked with processing tax
refunds and credits, that is, the One Stop Shop Inter-Agency Tax Credit and Drawback Center
of the Department of Finance. This government agency is also the addressee, or the entity
responded to, in BIR Ruling No. DA-489-03. Thus, while this government agency mentions in
its query to the Commissioner the administrative claim of Lazi Bay Resources Development,
Inc., the agency was in fact asking the Commissioner what to do in cases like the tax claim of
Lazi Bay Resources Development, Inc., where the taxpayer did not wait for the lapse of the
120-day period.
Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule.1âwphi1 Thus, all
taxpayers can rely on BIR Ruling No. DA-489-03 from the time of its issuance on 10
December 2003 up to its reversal by this Court in Aichi on 6 October 2010, where this Court
held that the 120+30 day periods are mandatory and jurisdictional. (Emphasis supplied)
In applying the foregoing to the instant case, we consider the following pertinent dates:
1âwphi1
Period Covered Administrative Claim Filed Expiration of 120-
days Last day to file Judicial Claim Judicial Claim
Filed
1st quarter 2005 30-Jun-05 28-Oct-05 27-Nov-05
07
2nd quarter 2005 15-Sep-05 13-Jan-06 13-Feb-06
3rd quarter 2005 28-Oct-05 26-Feb-06 28-Mar-06
It must be emphasized that this is not a case of premature filing of a judicial claim. Although
petitioner did not file its judicial claim with the CTA prior to the expiration of the 120-day
waiting period, it failed to observe the 30-day prescriptive period to appeal to the CTA
counted from the lapse of the 120-day period.
Petitioner is similarly situated as Philex in the same case, San Roque,18 in which this Court
ruled:
Unlike San Roque and Taganito, Philex’s case is not one of premature filing but of late filing.
Philex did not file any petition with the CTA within the 120-day period. Philex did not also
file any petition with the CTA within 30 days after the expiration of the 120-day period.
Philex filed its judicial claim long after the expiration of the 120-day period, in fact 426 days
after the lapse of the 120-day period. In any event, whether governed by jurisprudence before,
during, or after the Atlas case, Philex’s judicial claim will have to be rejected because of late
filing. Whether the two-year prescriptive period is counted from the date of payment of the
output VAT following the Atlas doctrine, or from the close of the taxable quarter when the
sales attributable to the input VAT were made following the Mirant and Aichi doctrines,
Philex’s judicial claim was indisputably filed late.
The Atlas doctrine cannot save Philex from the late filing of its judicial claim. The inaction of
the Commissioner on Philex’s claim during the 120-day period is, by express provision of law,
"deemed a denial" of Philex’s claim. Philex had 30 days from the expiration of the 120-day
period to file its judicial claim with the CTA. Philex’s failure to do so rendered the "deemed a
denial" decision of the Commissioner final and inappealable. The right to appeal to the CTA
from a decision or "deemed a denial" decision of the Commissioner is merely a statutory
privilege, not a constitutional right. The exercise of such statutory privilege requires strict
compliance with the conditions attached by the statute for its exercise. Philex failed to comply
with the statutory conditions and must thus bear the consequences. (Emphases in the original)
Likewise, while petitioner filed its administrative and judicial claims during the period of
applicability of BIR Ruling No. DA-489-03, it cannot claim the benefit of the exception period
as it did not file its judicial claim prematurely, but did so long after the lapse of the 30-day
period following the expiration of the 120-day period. Again, BIR Ruling No. DA-489-03
allowed premature filing of a judicial claim, which means non-exhaustion of the 120-day
period for the Commissioner to act on an administrative claim,19 but not its late filing.
As this Court enunciated in San Roque , petitioner cannot rely on Atlas either, since the latter
case was promulgated only on 8 June 2007. Moreover, the doctrine in Atlas which reckons the
two-year period from the date of filing of the return and payment of the tax, does not interpret
− expressly or impliedly − the 120+30 day periods. 20 Simply stated, Atlas referred only to the
reckoning of the prescriptive period for filing an administrative claim.
For failure of petitioner to comply with the 120+30 day mandatory and jurisdictional period,
petitioner lost its right to claim a refund or credit of its alleged excess input VAT.
With regard to petitioner’s argument that Aichi should not be applied retroactively, we
reiterate that even without that ruling, the law is explicit on the mandatory and jurisdictional
nature of the 120+30 day period.
Also devoid of merit is the applicability of the principle of solutio indebiti to the present case.
According to this principle, if something is received when there is no right to demand it, and it
was unduly delivered through mistake, the obligation to return it arises. In that situation, a
creditor-debtor relationship is created under a quasi-contract, whereby the payor becomes the
creditor who then has the right to demand the return of payment made by mistake, and the
person who has no right to receive the payment becomes obligated to return it. 21 The quasi-
contract of solutio indebiti is based on the ancient principle that no one shall enrich oneself
unjustly at the expense of another.22
There is solutio indebiti when:
(1) Payment is made when there exists no binding relation between the payor, who
has no duty to pay, and the person who received the payment; and
(2) Payment is made through mistake, and not through liberality or some other
cause.23
Though the principle of solutio indebiti may be applicable to some instances of claims for a
refund, the elements thereof are wanting in this case.
First, there exists a binding relation between petitioner and the CIR, the former being a
taxpayer obligated to pay VAT.

Second, the payment of input tax was not made through mistake, since petitioner was legally
obligated to pay for that liability. The entitlement to a refund or credit of excess input tax is
solely based on the distinctive nature of the VAT system. At the time of payment of the input
VAT, the amount paid was correct and proper.24

Finally, equity, which has been aptly described as "a justice outside legality," is applied only
in the absence of, and never against, statutory law or judicial rules of procedure.25 Section 112
is a positive rule that should preempt and prevail over all abstract arguments based only on
equity. Well-settled is the rule that tax refunds or credits, just like tax exemptions, are strictly
construed against the taxpayer.26 The burden is on the taxpayer to show strict compliance with
the conditions for the grant of the tax refund or credit.27

WHEREFORE, premises considered, the instant Petition is DENIED.

SO ORDERED.