ARTICLES 1226 – 1229 OBLIGATIONS WITH A PENAL CLAUSE
Equitable reduction of penalty even if there is non-performance
LIGUTAN v. CA 376 S 560
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;
"2. To pay the further sum equivalent to 10% of the total amount
of indebtedness for 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 decision3 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.4 Petitioners 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.
1
"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 xxx xxx
"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 xxx xxx
"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
2
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
3
stage when they could have done so in the earlier pleadings filed before agreement should be complete by itself; certain terms and conditions
this court. may be carried, expressly or by implication, over to the new obligation.

"The propriety or acceptability of such a second motion for WHEREFORE, the petition is DENIED.
reconsideration is not contingent upon the averment of 'new' grounds to
assail the judgment, i.e., grounds other than those theretofore presented SO ORDERED.
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

4
 PRYCE CORP v. PAGCOR 458 S 164
In legal contemplation, the termination of a contract is not equivalent to
its rescission. When an agreement is terminated, it is deemed valid at
inception. Prior to termination, the contract binds the parties, who are
thus obliged to observe its provisions. However, when it is rescinded, it
is deemed inexistent, and the parties are returned to their status quo
ante. Hence, there is mutual restitution of benefits received. The
consequences of termination may be anticipated and provided for by the
contract. As long as the terms of the contract are not contrary to law,
morals, good customs, public order or public policy, they shall be
respected by courts. The judiciary is not authorized to make or modify
contracts; neither may it rescue parties from disadvantageous
stipulations. Courts, however, are empowered to reduce iniquitous or
unconscionable liquidated damages, indemnities and penalties agreed
upon by the parties.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court,
assailing the May 22, 2002 Decision2 of the Court of Appeals (CA) in
CA-GR CV No. 51629 and its March 4, 2003 Resolution3 denying
petitioner's Motion for Reconsideration. The assailed Decision disposed
thus:
"WHEREFORE, in view of the foregoing, judgment is hereby rendered
as follows: (1) In Civil Case No. 93-68266, the appealed decision[,] is
AFFIRMED with MODIFICATION[,] ordering [Respondent] Philippine
Amusement and Gaming Corporation to pay [Petitioner] Pryce
Properties Corporation the total amount of P687,289.50 as actual
damages representing the accrued rentals for the quarter September to
November 1993 with interest and penalty at the rate of two percent (2%)
per month from date of filing of the complaint until the amount shall have
been fully paid, and the sum of P50,000.00 as attorney's fees; (2) In Civil
Case No. 93-68337, the appealed decision is REVERSED and SET
ASIDE and a new judgment is rendered ordering [Petitioner] Pryce
Properties Corporation to reimburse [Respondent] Philippine
Amusement and Gaming Corporation the amount of P687,289.50
representing the advanced rental deposits, which amount may be
compensated by [Petitioner] Pryce Properties Corporation with its award
in Civil Case No. 93-68266 in the equal amount of P687,289.50."4
The Facts
According to the CA, the facts are as follows:
"Sometime in the first half of 1992, representatives from Pryce
Properties Corporation (PPC for brevity) made representations with the
Philippine Amusement and Gaming Corporation (PAGCOR) on the
possibility of setting up a casino in Pryce Plaza Hotel in Cagayan de Oro
City. [A] series of negotiations followed. PAGCOR representatives went
to Cagayan de Oro City to determine the pulse of the people whether
the presence of a casino would be welcomed by the residents. Some
local government officials showed keen interest in the casino operation
and expressed the view that possible problems were surmountable.
Their negotiations culminated with PPC's counter-letter proposal dated
October 14, 1992.
"On November 11, 1992, the parties executed a Contract of Lease x x x
involving the ballroom of the Hotel for a period of three (3) years starting
December 1, 1992 and until November 30, 1995. On November 13,
1992, they executed an addendum to the contract x x x which included
a lease of an additional 1000 square meters of the hotel grounds as
living quarters and playground of the casino personnel. PAGCOR
advertised the start of their casino operations on December 18, 1992.
"Way back in 1990, the Sangguniang Panlungsod of Cagayan de Oro
City passed Resolution No. 2295 x x x dated November 19, 1990
declaring as a matter of policy to prohibit and/or not to allow the
establishment of a gambling casino in Cagayan de Oro City. Resolution
No. 2673 x x x dated October 19, 1992 (or a month before the contract
of lease was executed) was subsequently passed reiterating with vigor
and vehemence the policy of the City under Resolution No. 2295, series
of 1990, banning casinos in Cagayan de Oro City. On December 7,
1992, the Sangguniang Panlungsod of Cagayan de Oro City enacted
Ordinance No. 3353 x x x prohibiting the issuance of business permits
and canceling existing business permits to any establishment for using,
or allowing to be used, its premises or any portion thereof for the
operation of a casino.
"In the afternoon of December 18, 1992 and just hours before the actual
formal opening of casino operations, a public rally in front of the hotel
was staged by some local officials, residents and religious leaders.
Barricades were placed [which] prevented some casino personnel and
hotel guests from entering and exiting from the Hotel. PAGCOR was
constrained to suspend casino operations because of the rally. An
agreement between PPC and PAGCOR, on one hand, and
5
representatives of the rallyists, on the other, eventually ended the rally
on the 20th of December, 1992.
"On January 4, 1993, Ordinance No. 3375-93 x x x was passed by the
Sangguniang Panlungsod of Cagayan de Oro City, prohibiting the
operation of casinos and providing for penalty for violation thereof. On
January 7, 1993, PPC filed a Petition for Prohibition with Preliminary
Injunction x x x against then public respondent Cagayan de Oro City
and/or Mayor Pablo P. Magtajas x x x before the Court of Appeals,
docketed as CA G.R. SP No. 29851 praying inter alia, for the declaration
of unconstitutionality of Ordinance No. 3353. PAGCOR intervened in
said petition and further assailed Ordinance No. 4475-93 as being
violative of the non-impairment of contracts and equal protection
clauses. On March 31, 1993, the Court of Appeals promulgated its
decision x x x, the dispositive portion of which reads:
'IN VIEW OF ALL THE FOREGOING, Ordinance No. 3353 and
Ordinance No. 3375-93 are hereby DECLARED UNCONSTITUTIONAL
and VOID and the respondents and all other persons acting under their
authority and in their behalf are PERMANENTLY ENJOINED from
enforcing those ordinances.
'SO ORDERED. '
"Aggrieved by the decision, then public respondents Cagayan de Oro
City, et al. elevated the case to the Supreme Court in G.R. No. 111097,
where, in an En Banc Decision dated July 20, 1994 x x x, the Supreme
Court denied the petition and affirmed the decision of the Court of
Appeals.
"In the meantime, PAGCOR resumed casino operations on July 15,
1993, against which, however, another public rally was held. Casino
operations continued for some time, but were later on indefinitely
suspended due to the incessant demonstrations. Per verbal advice x x
x from the Office of the President of the Philippines, PAGCOR decided
to stop its casino operations in Cagayan de Oro City. PAGCOR stopped
its casino operations in the hotel prior to September, 1993. In two
Statements of Account dated September 1, 1993 x x x, PPC apprised
PAGCOR of its outstanding account for the quarter September 1 to
November 30, 1993. PPC sent PAGCOR another Letter dated
September 3, 1993 x x x as a follow-up to the parties' earlier conference.
PPC sent PAGCOR another Letter dated September 15, 1993 x x x
stating its Board of Directors' decision to collect the full rentals in case
of pre-termination of the lease.
"PAGCOR sent PPC a letter dated September 20, 1993 x x x [stating]
that it was not amenable to the payment of the full rentals citing as
reasons unforeseen legal and other circumstances which prevented it
from complying with its obligations. PAGCOR further stated that it had
no other alternative but to pre-terminate the lease agreement due to the
relentless and vehement opposition to their casino operations. In a letter
dated October 12, 1993 x x x, PAGCOR asked PPC to refund the total
of P1,437,582.25 representing the reimbursable rental deposits and
expenses for the permanent improvement of the Hotel's parking lot. In a
letter dated November 5, 1993 x x x, PAGCOR formally demanded from
PPC the payment of its claim for reimbursement.
"On November 15, 1993 x x x, PPC filed a case for sum of money in the
Regional Trial Court of Manila docketed as Civil Case No. 93-68266. On
November 19, 1993, PAGCOR also filed a case for sum of money in the
Regional Trial Court of Manila docketed as Civil Case No. 93-68337.
"In a letter dated November 25, 1993, PPC informed PAGCOR that it
was terminating the contract of lease due to PAGCOR's continuing
breach of the contract and further stated that it was exercising its rights
under the contract of lease pursuant to Article 20 (a) and (c) thereof.
"On February 2, 1994, PPC filed a supplemental complaint x x x in Civil
Case No. 93-68266, which the trial court admitted in an Order dated
February 11, 1994. In an Order dated April 27, 1994, Civil Case No. 93-
68377 was ordered consolidated with Civil Case No. 93-68266. These
cases were jointly tried by the court a quo. On August 17, 1995, the court
a quo promulgated its decision. Both parties appealed."5
In its appeal, PPC faulted the trial court for the following reasons: 1)
failure of the court to award actual and moral damages; 2) the 50 percent
reduction of the amount PPC was claiming; and 3) the court's ruling that
the 2 percent penalty was to be imposed from the date of the
promulgation of the Decision, not from the date stipulated in the
Contract.
On the other hand, PAGCOR criticized the trial court for the latter's
failure to rule that the Contract of Lease had already been terminated as
early as September 21, 1993, or at the latest, on October 14, 1993,
when PPC received PAGCOR's letter dated October 12, 1993. The
gaming corporation added that the trial court erred in 1) failing to
consider that PPC was entitled to avail itself of the provisions of Article
XX only when PPC was the party terminating the Contract; 2) not finding
6
that there were valid, justifiable and good reasons for terminating the
Contract; and 3) dismissing the Complaint of PAGCOR in Civil Case No.
93-68337 for lack of merit, and not finding PPC liable for the
reimbursement of PAGCOR'S cash deposits and of the value of
improvements.
Ruling of the Court of Appeals
First, on the appeal of PAGCOR, the CA ruled that the PAGCOR'S
pretermination of the Contract of Lease was unjustified. The appellate
court explained that public demonstrations and rallies could not be
considered as fortuitous events that would exempt the gaming
corporation from complying with the latter's contractual obligations.
Therefore, the Contract continued to be effective until PPC elected to
terminate it on November 25, 1993.
Regarding the contentions of PPC, the CA held that under Article 1659
of the Civil Code, PPC had the right to ask for (1) rescission of the
Contract and indemnification for damages; or (2) only indemnification
plus the continuation of the Contract. These two remedies were
alternative, not cumulative, ruled the CA.
As PAGCOR had admitted its failure to pay the rentals for September to
November 1993, PPC correctly exercised the option to terminate the
lease agreement. Previously, the Contract remained effective, and PPC
could collect the accrued rentals. However, from the time it terminated
the Contract on November 25, 1993, PPC could no longer demand
payment of the remaining rentals as part of actual damages, the CA
added.
Denying the claim for moral damages, the CA pointed out the failure of
PPC to show that PAGCOR had acted in gross or evident bad faith in
failing to pay the rentals from September to November 1993. Such
failure was shown especially by the fact that PPC still had in hand three
(3) months advance rental deposits of PAGCOR. The former could have
simply applied this deposit to the unpaid rentals, as provided in the
Contract. Neither did PPC adequately show that its reputation had been
besmirched or the hotel's goodwill eroded by the establishment of the
casino and the public protests.
Finally, as to the claimed reimbursement for parking lot improvement,
the CA held that PAGCOR had not presented official receipts to prove
the latter's alleged expenses. The appellate court, however, upheld the
trial court's award to PPC of P50,000 attorney's fees.
Hence this Petition.6
Issues
In their Memorandum, petitioner raised the following issues:
"MAIN ISSUE:
"Did the Honorable Court of Appeals commit x x x grave and reversible
error by holding that Pryce was not entitled to future rentals or lease
payments for the unexpired period of the Contract of Lease between
Pryce and PAGCOR?cralawlibrary
"Sub-Issues:
"1. Were the provisions of Sections 20(a) and 20(c) of the Contract of
Lease relative to the right of PRYCE to terminate the Contract for cause
and to moreover collect rentals from PAGCOR corresponding to the
remaining term of the lease valid and binding?cralawlibrary
"2. Did not Article 1659 of the Civil Code supersede Sections 20(a) and
20(c) of the Contract, PRYCE having 'rescinded' the Contract of
Lease?cralawlibrary
"3. Do the case of Rios, et al. v. Jacinto Palma Enterprises, et al. and
the other cases cited by PAGCOR support its position that PRYCE was
not entitled to future rentals?cralawlibrary
"4. Would the collection by PRYCE of future rentals not give rise to
unjust enrichment?cralawlibrary
"5. Could we not have 'harmonized' Article 1659 of the Civil Code and
Article 20 of the Contract of Lease?cralawlibrary
"6. Is it not a basic rule that the law, i.e. Article 1659, is deemed written
in contracts, particularly in the PRYCE-PAGCOR Contract of Lease?"7
The Court's Ruling
The Petition is partly meritorious.
Main Issue:
Collection of Remaining Rentals
PPC anchors its right to collect future rentals upon the provisions of the
Contract. Likewise, it argues that termination, as defined under the
Contract, is different from the remedy of rescission prescribed under
Article 1659 of the Civil Code. On the other hand, PAGCOR contends,
7
as the CA ruled, that Article 1659 of the Civil Code governs; hence, PPC
is allegedly no longer entitled to future rentals, because it chose to
rescind the Contract.
Contract Provisions
Clear and Binding
Article 1159 of the Civil Code provides that "obligations arising from
contracts have the force of law between the contracting parties and
should be complied with in good faith."8 In deference to the rights of the
parties, the law9 allows them to enter into stipulations, clauses, terms
and conditions they may deem convenient; that is, as long as these are
not contrary to law, morals, good customs, public order or public policy.
Likewise, it is settled that if the terms of the contract clearly express the
intention of the contracting parties, the literal meaning of the stipulations
would be controlling.10
In this case, Article XX of the parties' Contract of Lease provides in part
as follows:
"XX. BREACH OR DEFAULT
"a) The LESSEE agrees that all the terms, conditions and/or covenants
herein contained shall be deemed essential conditions of this contract,
and in the event of default or breach of any of such terms, conditions
and/or covenants, or should the LESSEE become bankrupt, or
insolvent, or compounds with his creditors, the LESSOR shall have the
right to terminate and cancel this contract by giving them fifteen (15
days) prior notice delivered at the leased premises or posted on the
main door thereof. Upon such termination or cancellation, the LESSOR
may forthwith lock the premises and exclude the LESSEE therefrom,
forcefully or otherwise, without incurring any civil or criminal liability.
During the fifteen (15) days notice, the LESSEE may prevent the
termination of lease by curing the events or causes of termination or
cancellation of the lease.
"b) x x x x x x x x x
"c) Moreover, the LESSEE shall be fully liable to the LESSOR for the
rentals corresponding to the remaining term of the lease as well as for
any and all damages, actual or consequential resulting from such default
and termination of this contract.
"d) x x x x x x x x x." (Italics supplied)
The above provisions leave no doubt that the parties have covenanted
1) to give PPC the right to terminate and cancel the Contract in the event
of a default or breach by the lessee; and 2) to make PAGCOR fully liable
for rentals for the remaining term of the lease, despite the exercise of
such right to terminate. Plainly, the parties have voluntarily bound
themselves to require strict compliance with the provisions of the
Contract by stipulating that a default or breach, among others, shall give
the lessee the termination option, coupled with the lessor's liability for
rentals for the remaining term of the lease.
For sure, these stipulations are valid and are not contrary to law, morals,
good customs, public order or public policy. Neither is there anything
objectionable about the inclusion in the Contract of mandatory
provisions concerning the rights and obligations of the parties.11 Being
the primary law between the parties, it governs the adjudication of their
rights and obligations. A court has no alternative but to enforce the
contractual stipulations in the manner they have been agreed upon and
written.12 It is well to recall that courts, be they trial or appellate, have
no power to make or modify contracts.13 Neither can they save parties
from disadvantageous provisions.
Termination or Rescission?
Well-taken is petitioner's insistence that it had the right to ask for
"termination plus the full payment of future rentals" under the provisions
of the Contract, rather than just rescission under Article 1659 of the Civil
Code. This Court is not unmindful of the fact that termination and
rescission are terms that have been used loosely and interchangeably
in the past. But distinctions ought to be made, especially in this
controversy, in which the terms mean differently and lead to equally
different consequences.
The term "rescission" is found in 1) Article 119114 of the Civil Code, the
general provision on rescission of reciprocal obligations; 2) Article
1659,15 which authorizes rescission as an alternative remedy, insofar
as the rights and obligations of the lessor and the lessee in contracts of
lease are concerned; and 3) Article 138016 with regard to the rescission
of contracts.
In his Concurring Opinion in Universal Food Corporation v. CA,17
Justice J. B. L. Reyes differentiated rescission under Article 1191 from
that under Article 1381 et seq. as follows:
"x x x. The rescission on account of breach of stipulations is not
predicated on injury to economic interests of the party plaintiff but on the
breach of faith by the defendant, that violates the reciprocity between
8
the parties. It is not a subsidiary action, and Article 1191 may be scanned
without disclosing anywhere that the action for rescission thereunder is
subordinated to anything other than the culpable breach of his
obligations to the defendant. This rescission is a principal action
retaliatory in character, it being unjust that a party be held bound to fulfill
his promises when the other violates his. As expressed in the old Latin
aphorism: Non servanti fidem, non est fides servanda. 'Hence, the
reparation of damages for the breach is purely secondary.
"On the contrary, in rescission by reason of lesion or economic
prejudice, the cause of action is subordinated to the existence of that
prejudice, because it is the raison d etre as well as the measure of the
right to rescind. x x x."18
Relevantly, it has been pointed out that resolution was originally used in
Article 1124 of the old Civil Code, and that the term became the basis
for rescission under Article 1191 (and, conformably, also Article 1659).19
Now, as to the distinction between termination (or cancellation) and
rescission (more properly, resolution), Huibonhoa v. CA20 held that,
where the action prayed for the payment of rental arrearages, the
aggrieved party actually sought the partial enforcement of a lease
contract. Thus, the remedy was not rescission, but termination or
cancellation, of the contract. The Court explained:
"x x x. By the allegations of the complaint, the Gojoccos' aim was to
cancel or terminate the contract because they sought its partial
enforcement in praying for rental arrearages. There is a distinction in law
between cancellation of a contract and its rescission. To rescind is to
declare a contract void in its inception and to put an end to it as though
it never were. It is not merely to terminate it and release parties from
further obligations to each other but to abrogate it from the beginning
and restore the parties to relative positions which they would have
occupied had no contract ever been made.
"x x x. The termination or cancellation of a contract would necessarily
entail enforcement of its terms prior to the declaration of its cancellation
in the same way that before a lessee is ejected under a lease contract,
he has to fulfill his obligations thereunder that had accrued prior to his
ejectment. However, termination of a contract need not undergo judicial
intervention. x x x."21 (Italics supplied)
Rescission has likewise been defined as the "unmaking of a contract, or
its undoing from the beginning, and not merely its termination."
Rescission may be effected by both parties by mutual agreement; or
unilaterally by one of them declaring a rescission of contract without the
consent of the other, if a legally sufficient ground exists or if a decree of
rescission is applied for before the courts.22 On the other hand,
termination refers to an "end in time or existence; a close, cessation or
conclusion." With respect to a lease or contract, it means an ending,
usually before the end of the anticipated term of such lease or contract,
that may be effected by mutual agreement or by one party exercising
one of its remedies as a consequence of the default of the other.23
Thus, mutual restitution is required in a rescission (or resolution), in
order to bring back the parties to their original situation prior to the
inception of the contract.24 Applying this principle to this case, it means
that PPC would re-acquire possession of the leased premises, and
PAGCOR would get back the rentals it paid the former for the use of the
hotel space.
In contrast, the parties in a case of termination are not restored to their
original situation; neither is the contract treated as if it never existed.
Prior to its termination, the parties are obliged to comply with their
contractual obligations. Only after the contract has been cancelled will
they be released from their obligations.
In this case, the actions and pleadings of petitioner show that it never
intended to rescind the Lease Contract from the beginning. This fact was
evident when it first sought to collect the accrued rentals from
September to November 1993 because, as previously stated, it actually
demanded the enforcement of the Lease Contract prior to termination.
Any intent to rescind was not shown, even when it abrogated the
Contract on November 25, 1993, because such abrogation was not the
rescission provided for under Article 1659.
Future Rentals
As to the remaining sub-issue of future rentals, Rios v. Jacinto25 is
inapplicable, because the remedy resorted to by the lessors in that case
was rescission, not termination. The rights and obligations of the parties
in Rios were governed by Article 1659 of the Civil Code; hence, the
Court held that the damages to which the lessor was entitled could not
have extended to the lessee's liability for future rentals.
9
Upon the other hand, future rentals cannot be claimed as compensation
for the use or enjoyment of another's property after the termination of a
contract. We stress that by abrogating the Contract in the present case,
PPC released PAGCOR from the latter's future obligations, which
included the payment of rentals. To grant that right to the former is to
unjustly enrich it at the latter's expense.
However, it appears that Section XX (c) was intended to be a penalty
clause. That fact is manifest from a reading of the mandatory provision
under subparagraph (a) in conjunction with subparagraph (c) of the
Contract. A penal clause is "an accessory obligation which the parties
attach to a principal obligation for the purpose of insuring the
performance thereof by imposing on the debtor a special prestation
(generally consisting in the payment of a sum of money) in case the
obligation is not fulfilled or is irregularly or inadequately fulfilled."26
Quite common in lease contracts, this clause functions to strengthen the
coercive force of the obligation and to provide, in effect, for what could
be the liquidated damages resulting from a breach.27 There is nothing
immoral or illegal in such indemnity/penalty clause, absent any showing
that it was forced upon or fraudulently foisted on the obligor.28
In obligations with a penal clause, the general rule is that the penalty
serves as a substitute for the indemnity for damages and the payment
of interests in case of noncompliance; that is, if there is no stipulation to
the contrary,29 in which case proof of actual damages is not necessary
for the penalty to be demanded.30 There are exceptions to the
aforementioned rule, however, as enumerated in paragraph 1 of Article
1226 of the Civil Code: 1) when there is a stipulation to the contrary, 2)
when the obligor is sued for refusal to pay the agreed penalty, and 3)
when the obligor is guilty of fraud. In these cases, the purpose of the
penalty is obviously to punish the obligor for the breach. Hence, the
obligee can recover from the former not only the penalty, but also other
damages resulting from the nonfulfillment of the principal obligation.31
In the present case, the first exception applies because Article XX (c)
provides that, aside from the payment of the rentals corresponding to
the remaining term of the lease, the lessee shall also be liable "for any
and all damages, actual or consequential, resulting from such default
and termination of this contract." Having entered into the Contract
voluntarily and with full knowledge of its provisions, PAGCOR must be
held bound to its obligations. It cannot evade further liability for
liquidated damages.
Reduction of Penalty
In certain cases, a stipulated penalty may nevertheless be equitably
reduced by the courts.32 This power is explicitly sanctioned by Articles
1229 and 2227 of the Civil Code, which we quote:
"Art. 1229. The judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by the
debtor. Even if there has been no performance, the penalty may also be
reduced by the courts if it is iniquitous or unconscionable."
"Art. 2227. Liquidated damages, whether intended as an indemnity or a
penalty, shall be equitably reduced if they are iniquitous or
unconscionable."
The question of whether a penalty is reasonable or iniquitous is
addressed to the sound discretion of the courts. To be considered in
fixing the amount of penalty are factors such as - - but not limited to - -
the type, extent and purpose of the penalty; the nature of the obligation;
the mode of the breach and its consequences; the supervening realities;
the standing and relationship of the parties; and the like.33
In this case, PAGCOR's breach was occasioned by events that,
although not fortuitous in law, were in fact real and pressing. From the
CA's factual findings, which are not contested by either party, we find
that PAGCOR conducted a series of negotiations and consultations
before entering into the Contract. It did so not only with the PPC, but
also with local government officials, who assured it that the problems
were surmountable. Likewise, PAGCOR took pains to contest the
ordinances34 before the courts, which consequently declared them
unconstitutional. On top of these developments, the gaming corporation
was advised by the Office of the President to stop the games in Cagayan
de Oro City, prompting the former to cease operations prior to
September 1993.
Also worth mentioning is the CA's finding that PAGCOR's casino
operations had to be suspended for days on end since their start in
December 1992; and indefinitely from July 15, 1993, upon the advice of
the Office of President, until the formal cessation of operations in
September 1993. Needless to say, these interruptions and stoppages
meant that PAGCOR suffered a tremendous loss of expected revenues,
not to mention the fact that it had fully operated under the Contract only
for a limited time.
10
While petitioner's right to a stipulated penalty is affirmed, we consider
the claim for future rentals to the tune of P7,037,835.40 to be highly
iniquitous. The amount should be equitably reduced. Under the
circumstances, the advanced rental deposits in the sum of P687,289.50
should be sufficient penalty for respondent's breach.

WHEREFORE, the Petition is GRANTED in part. The assailed Decision

and Resolution are hereby MODIFIED to include the payment of penalty.
Accordingly, respondent is ordered to pay petitioner the additional
amount of P687,289.50 as penalty, which may be set off or applied
against the former's advanced rental deposits. Meanwhile, the CA's
award to petitioner of actual damages representing the accrued rentals
for September to November 1993 - - with interest and penalty at the rate
of two percent (2%) per month, from the date of filing of the Complaint
until the amount shall have been fully paid - - as well as the P50,000
award for attorney's fees, is AFFIRMED. No costs.

SO ORDERED.

11
 FLORENTINO v. SUPERVALUE 533 S 156
Before this Court is a Petition for Review on Certiorari under Rule 45 of
the Revised Rules of Court, filed by petitioner Erminda F. Florentino,
seeking to reverse and set aside the Decision,1 dated 10 October 2003
and the Resolution,2 dated 19 April 2006 of the Court of Appeals in CA-
G.R. CV No. 73853. The appellate court, in its assailed Decision and
Resolution, modified the Decision dated 30 April 2001 of the Regional
Trial Court (RTC) of Makati, Branch 57, in Civil Case No. 00-1015,
finding the respondent Supervalue, Inc., liable for the sum of
₱192,000.00, representing the security deposits made by the petitioner
upon the commencement of their Contract of Lease. The dispositive
portion of the assailed appellate court’s Decision thus reads:
WHEREFORE, premises considered, the appeal is PARTLY
GRANTED. The April 30, 2001 Decision of the Regional Trial Court of
Makati, Branch 57 is therefore MODIFIED to wit: (a) the portion ordering
the [herein respondent] to pay the amount of ₱192,000.00 representing
the security deposits and ₱50,000.00 as attorney’s fees in favor of the
[herein petitioner] as well as giving [respondent] the option to reimburse
[petitioner] ½ of the value of the improvements introduced by the
[petitioner] on the leased [premises] should [respondent] choose to
appropriate itself or require the [petitioner] to remove the improvements,
is hereby REVERSED and SET ASIDE; and (b) the portion ordering the
return to [petitioner] the properties seized by [respondent] after the
former settled her obligation with the latter is however MAINTAINED.3
The factual and procedural antecedents of the instant petition are as
follows:
Petitioner is doing business under the business name "Empanada
Royale," a sole proprietorship engaged in the retail of empanada with
outlets in different malls and business establishments within Metro
Manila.4
Respondent, on the other hand, is a domestic corporation engaged in
the business of leasing stalls and commercial store spaces located
inside SM Malls found all throughout the country.5
On 8 March 1999, petitioner and respondent executed three Contracts
of Lease containing similar terms and conditions over the cart-type stalls
at SM North Edsa and SM Southmall and a store space at SM Megamall.
The term of each contract is for a period of four months and may be
renewed upon agreement of the parties.6
Upon the expiration of the original Contracts of Lease, the parties
agreed to renew the same by extending their terms until 31 March 2000.7
Before the expiration of said Contracts of Lease, or on 4 February 2000,
petitioner received two letters from the respondent, both dated 14
January 2000, transmitted through facsimile transmissions.8
In the first letter, petitioner was charged with violating Section 8 of the
Contracts of Lease by not opening on 16 December 1999 and 26
December 1999.9
Respondent also charged petitioner with selling a new variety of
empanada called "mini-embutido" and of increasing the price of her
merchandise from ₱20.00 to ₱22.00, without the prior approval of the
respondent.10
Respondent observed that petitioner was frequently closing earlier than
the usual mall hours, either because of non-delivery or delay in the
delivery of stocks to her outlets, again in violation of the terms of the
contract. A stern warning was thus given to petitioner to refrain from
committing similar infractions in the future in order to avoid the
termination of the lease contract.11
In the second letter, respondent informed the petitioner that it will no
longer renew the Contracts of Lease for the three outlets, upon their
expiration on 31 March 2000.12
In a letter-reply dated 11 February 2000, petitioner explained that the
"mini-embutido" is not a new variety of empanada but had similar fillings,
taste and ingredients as those of pork empanada; only, its size was
reduced in order to make it more affordable to the buyers.13
Such explanation notwithstanding, respondent still refused to renew its
Contracts of Lease with the petitioner. To the contrary, respondent took
possession of the store space in SM Megamall and confiscated the
equipment and personal belongings of the petitioner found therein after
the expiration of the lease contract.14
12
In a letter dated 8 May 2000, petitioner demanded that the respondent
release the equipment and personal belongings it seized from the SM
Megamall store space and return the security deposits, in the sum of
₱192,000.00, turned over by the petitioner upon signing of the Contracts
of Lease. On 15 June 2000, petitioner sent respondent another letter
reiterating her previous demands, but the latter failed or refused to
comply therewith. 15
On 17 August 2000, an action for Specific Performance, Sum of Money
and Damages was filed by the petitioner against the respondent before
the RTC of Makati, Branch 57.16
In her Complaint docketed as Civil Case No. 00-1015, petitioner alleged
that the respondent made verbal representations that the Contracts of
Lease will be renewed from time to time and, through the said
representations, the petitioner was induced to introduce improvements
upon the store space at SM Megamall in the sum of ₱200,000.00, only
to find out a year later that the respondent will no longer renew her lease
contracts for all three outlets.17
In addition, petitioner alleged that the respondent, without justifiable
cause and without previous demand, refused to return the security
deposits in the amount of ₱192,000.00.18
Further, petitioner claimed that the respondent seized her equipment
and personal belongings found inside the store space in SM Megamall
after the lease contract for the said outlet expired and despite repeated
written demands from the petitioner, respondent continuously refused to
return the seized items.19
Petitioner thus prayed for the award of actual damages in the sum of
₱472,000.00, representing the sum of security deposits, cost of
improvements and the value of the personal properties seized.
Petitioner also asked for the award of ₱300,000.00 as moral damages;
₱50,000.00 as exemplary damages; and ₱80,000.00 as attorney’s fees
and expenses of litigation.20
For its part, respondent countered that petitioner committed several
violations of the terms of their Contracts of Lease by not opening from
16 December 1999 to 26 December 1999, and by introducing a new
variety of empanada without the prior consent of the respondent, as
mandated by the provision of Section 2 of the Contract of Lease.
Respondent also alleged that petitioner infringed the lease contract by
frequently closing earlier than the agreed closing hours. Respondent
finally averred that petitioner is liable for the amount ₱106,474.09,
representing the penalty for selling a new variety of empanada,
electricity and water bills, and rental adjustment, among other charges
incidental to the lease agreements. Respondent claimed that the seizure
of petitioner’s personal belongings and equipment was in the exercise
of its retaining lien, considering that the petitioner failed to settle the said
obligations up to the time the complaint was filed.21
Considering that petitioner already committed several breaches of
contract, the respondent thus opted not to renew its Contracts of Lease
with her anymore. The security deposits were made in order to ensure
faithful compliance with the terms of their lease agreements; and since
petitioner committed several infractions thereof, respondent was
justified in forfeiting the security deposits in the latter’s favor.
On 30 April 2001, the RTC rendered a Judgment22 in favor of the
petitioner and found that the physical takeover by the respondent of the
leased premises and the seizure of petitioner’s equipment and personal
belongings without prior notice were illegal. The decretal part of the RTC
Judgment reads:
WHEREFORE, premises duly considered, judgment is hereby rendered
ordering the [herein respondent] to pay [herein petitioner] the amount of
₱192,000.00 representing the security deposits made by the [petitioner]
and ₱50,000.00 as and for attorney’s fees.
The [respondent] is likewise ordered to return to the [petitioner] the
various properties seized by the former after settling her account with
the [respondent].
Lastly, the [respondent] may choose either to reimburse the [petitioner]
one half (1/2) of the value of the improvements introduced by the plaintiff
at SM Megamall should [respondent] choose to appropriate the
improvements to itself or require the [petitioner] to remove the
improvements, even though the principal thing may suffer damage
thereby. [Petitioner] shall not, however, cause anymore impairment
upon the said leased premises than is necessary.
The other damages claimed by the plaintiff are denied for lack of merit.
13
Aggrieved, the respondent appealed the adverse RTC Judgment to the
Court of Appeals.
In a Decision23 dated 10 October 2003, the Court of Appeals modified
the RTC Judgment and found that the respondent was justified in
forfeiting the security deposits and was not liable to reimburse the
petitioner for the value of the improvements introduced in the leased
premises and to pay for attorney’s fees. In modifying the findings of the
lower court, the appellate court declared that in view of the breaches of
contract committed by the petitioner, the respondent is justified in
forfeiting the security deposits. Moreover, since the petitioner did not
obtain the consent of the respondent before she introduced
improvements on the SM Megamall store space, the respondent has
therefore no obligation to reimburse the petitioner for the amount
expended in connection with the said improvements.24 The Court of
Appeals, however, maintained the order of the trial court for respondent
to return to petitioner her properties after she has settled her obligations
to the respondent. The appellate court denied petitioner’s Motion for
Reconsideration in a Resolution25 dated 19 April 2006.
Hence, this instant Petition for Review on Certiorari26 filed by the
petitioner assailing the Court of Appeals Decision. For the resolution of
this Court are the following issues:
I. Whether or not the respondent is liable to return the security
deposits to the petitions.
II. Whether or not the respondent is liable to reimburse the
petitioner for the sum of the improvements she introduced in the
leased premises.
III. Whether or not the respondent is liable for attorney’s fees.27
The appellate court, in finding that the respondent is authorized to forfeit
the security deposits, relied on the provisions of Sections 5 and 18 of
the Contract of Lease, to wit:
Section 5. DEPOSIT. The LESSEE shall make a cash deposit in the
sum of SIXTY THOUSAND PESOS (P60,000.00) equivalent to three (3)
months rent as security for the full and faithful performance to each and
every term, provision, covenant and condition of this lease and not as a
pre-payment of rent. If at any time during the term of this lease the rent
is increased[,] the LESSEE on demand shall make an additional deposit
equal to the increase in rent. The LESSOR shall not be required to keep
the deposit separate from its general funds and the deposit shall not be
entitled to interest. The deposit shall remain intact during the entire term
and shall not be applied as payment for any monetary obligations of the
LESSEE under this contract. If the LESSEE shall faithfully perform every
provision of this lease[,] the deposit shall be refunded to the LESSEE
upon the expiration of this Lease and upon satisfaction of all monetary
obligation to the LESSOR.
xxxx
Section 18. TERMINATION. Any breach, non-performance or non-
observance of the terms and conditions herein provided shall constitute
default which shall be sufficient ground to terminate this lease, its
extension or renewal. In which event, the LESSOR shall demand that
LESSEE immediately vacate the premises, and LESSOR shall forfeit in
its favor the deposit tendered without prejudice to any such other
appropriate action as may be legally authorized.28
Since it was already established by the trial court that the petitioner was
guilty of committing several breaches of contract, the Court of Appeals
decreed that she cannot therefore rightfully demand the return of the
security deposits for the same are deemed forfeited by reason of evident
contractual violations.
It is undisputed that the above-quoted provision found in all Contracts of
Lease is in the nature of a penal clause to ensure petitioner’s faithful
compliance with the terms and conditions of the said contracts.
A penal clause is an accessory undertaking to assume greater liability
in case of breach. It is attached to an obligation in order to insure
performance and has a double function: (1) to provide for liquidated
damages, and (2) to strengthen the coercive force of the obligation by
the threat of greater responsibility in the event of breach.29 The obligor
would then be bound to pay the stipulated indemnity without the
necessity of proof of the existence and the measure of damages caused
by the breach.30 Article 1226 of the Civil Code states:
Art. 1226. In obligations with a penal clause, the penalty shall substitute
the indemnity for damages and the payment of interests in case of
14
noncompliance, if there is no stipulation to the contrary. Nevertheless,
damages shall be paid if the obligor refuses to pay the penalty or is guilty
of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance
with the provisions of this Code.
As a general rule, courts are not at liberty to ignore the freedoms of the
parties to agree on such terms and conditions as they see fit as long as
they are not contrary to law, morals, good customs, public order or public
policy. Nevertheless, courts may equitably reduce a stipulated penalty
in the contracts in two instances: (1) if the principal obligation has been
partly or irregularly complied with; and (2) even if there has been no
compliance if the penalty is iniquitous or unconscionable in accordance
with Article 1229 of the Civil Code which clearly provides:
Art. 1229. The judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by the
debtor. Even if there has been no performance, the penalty may also be
reduced by the courts if it is iniquitous or unconscionable.31
In ascertaining whether the penalty is unconscionable or not, this court
set out the following standard in Ligutan v. Court of Appeals,32 to wit:
The question of whether a penalty is reasonable or iniquitous can be
partly subjective and partly objective. Its resolution would depend on
such factor 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. xxx.
In the instant case, the forfeiture of the entire amount of the security
deposits in the sum of ₱192,000.00 was excessive and unconscionable
considering that the gravity of the breaches committed by the petitioner
is not of such degree that the respondent was unduly prejudiced
thereby. It is but equitable therefore to reduce the penalty of the
petitioner to 50% of the total amount of security deposits.
It is in the exercise of its sound discretion that this court tempered the
penalty for the breaches committed by the petitioner to 50% of the
amount of the security deposits. The forfeiture of the entire sum of
₱192,000.00 is clearly a usurious and iniquitous penalty for the
transgressions committed by the petitioner. The respondent is therefore
under the obligation to return the 50% of ₱192,000.00 to the petitioner.
Turning now to the liability of the respondent to reimburse the petitioner
for one-half of the expenses incurred for the improvements on the
leased store space at SM Megamall, the following provision in the
Contracts of Lease will enlighten us in resolving this issue:
Section 11. ALTERATIONS, ADDITIONS, IMPROVEMENTS, ETC. The
LESSEE shall not make any alterations, additions, or improvements
without the prior written consent of LESSOR; and all alterations,
additions or improvements made on the leased premises, except
movable or fixtures put in at LESSEE’s expense and which are
removable, without defacing the buildings or damaging its floorings,
shall become LESSOR’s property without compensation/reimbursement
but the LESSOR reserves the right to require the removal of the said
alterations, additions or improvements upon expiration of the lease.
The foregoing provision in the Contract of Lease mandates that before
the petitioner can introduce any improvement on the leased premises,
she should first obtain respondent’s consent. In the case at bar, it was
not shown that petitioner previously secured the consent of the
respondent before she made the improvements on the leased space in
SM Megamall. It was not even alleged by the petitioner that she obtained
such consent or she at least attempted to secure the same. On the other
hand, the petitioner asserted that respondent allegedly misrepresented
to her that it would renew the terms of the contracts from time to time
after their expirations, and that the petitioner was so induced thereby
that she expended the sum of ₱200,000.00 for the improvement of the
store space leased.
This argument was squarely addressed by this court in Fernandez v.
Court of Appeals,33 thus:
The Court ruled that the stipulation of the parties in their lease contract
"to be renewable" at the option of both parties stresses that the faculty
to renew was given not to the lessee alone nor to the lessor by himself
but to the two simultaneously; hence, both must agree to renew if a new
contract is to come about.
15
Petitioner’s contention that respondents had verbally agreed to extend
the lease indefinitely is inadmissible to qualify the terms of the written
contract under the parole evidence rule, and unenforceable under the
statute of frauds.34
Moreover, it is consonant with human experience that lessees, before
occupying the leased premises, especially store spaces located inside
malls and big commercial establishments, would renovate the place and
introduce improvements thereon according to the needs and nature of
their business and in harmony with their trademark designs as part of
their marketing ploy to attract customers. Certainly, no inducement or
misrepresentation from the lessor is necessary for this purpose, for it is
not only a matter of necessity that a lessee should re-design its place of
business but a business strategy as well.
In ruling that the respondent is liable to reimburse petitioner one half of
the amount of improvements made on the leased store space should it
choose to appropriate the same, the RTC relied on the provision of
Article 1678 of the Civil Code which provides:
Art. 1678. If the lessee makes, in good faith, useful improvements which
are suitable to the use for which the lease is intended, without altering
the form or substance of the property leased, the lessor upon the
termination of the lease shall pay the lessee one-half of the value of the
improvements at that time. Should the lessor refuse to reimburse said
amount, the lessee may remove the improvements, even though the
principal thing may suffer damage thereby. He shall not, however, cause
any more impairment upon the property leased than is necessary.
While it is true that under the above-quoted provision of the Civil Code,
the lessor is under the obligation to pay the lessee one-half of the value
of the improvements made should the lessor choose to appropriate the
improvements, Article 1678 however should be read together with
Article 448 and Article 546 of the same statute, which provide:
Art. 448. The owner of the land on which anything has been built, sown
or planted in good faith, shall have the right to appropriate as his own
the works, sowing or planting, after payment of the indemnity provided
for in articles 546 and 548, or to oblige the one who built or planted to
pay the price of the land, and the one who sowed, the proper rent.
However, the builder or planter cannot be obliged to buy the land if its
value is considerably more than that of the building or trees. In such
case, he shall pay reasonable rent, if the owner of the land does not
choose to appropriate the building or trees after proper indemnity. The
parties shall agree upon the terms of the lease and in case of
disagreement, the court shall fix the terms thereof.
xxxx
Art. 546. Necessary expenses shall be refunded to every possessor; but
only possessor in good faith may retain the thing until he has been
reimbursed therefor.
Useful expenses shall be refunded only to the possessor in good faith
with the same right of retention, the person who has defeated him in the
possession having the option of refunding the amount of the expenses
or of paying the increase in value which the thing may have acquired by
reason thereof.
Thus, to be entitled to reimbursement for improvements introduced on
the property, the petitioner must be considered a builder in good faith.
Further, Articles 448 and 546 of the Civil Code, which allow full
reimbursement of useful improvements and retention of the premises
until reimbursement is made, apply only to a possessor in good faith,
i.e., one who builds on land with the belief that he is the owner thereof.
A builder in good faith is one who is unaware of any flaw in his title to
the land at the time he builds on it.35 In this case, the petitioner cannot
claim that she was not aware of any flaw in her title or was under the
belief that she is the owner of the subject premises for it is a settled fact
that she is merely a lessee thereof.1âwphi1
In Geminiano v. Court of Appeals,36 this Court was emphatic in declaring
that lessees are not possessors or builders in good faith, thus:
Being mere lessees, the private respondents knew that their occupation
of the premises would continue only for the life of the lease. Plainly, they
cannot be considered as possessors nor builders in good faith.
In a plethora of cases, this Court has held that Article 448 of the Civil
Code, in relation to Article 546 of the same Code, which allows full
reimbursement of useful improvements and retention of the premises
until reimbursement is made, applies only to a possessor in good faith,
i.e., one who builds on land with the belief that he is the owner thereof. It
16
does not apply where one's only interest is that of a lessee under a rental
contract; otherwise, it would always be in the power of the tenant to
"improve" his landlord out of his property.

Since petitioner’s interest in the store space is merely that of the lessee
under the lease contract, she cannot therefore be considered a builder
in good faith. Consequently, respondent may appropriate the
improvements introduced on the leased premises without any obligation
to reimburse the petitioner for the sum expended.

Anent the claim for attorney’s fees, we resolve to likewise deny the
award of the same. Attorney’s fees may be awarded when a party is
compelled to litigate or to incur expenses to protect its interest by reason
of unjustified act of the other.37

In the instant petition, it was not shown that the respondent unjustifiably
refused to grant the demands of the petitioner so as to compel the latter
to initiate legal action to enforce her right. As we have found herein,
there is basis for respondent’s refusal to return to petitioner the security
deposits and to reimburse the costs of the improvements in the leased
premises. The award of attorney’s fees is therefore not proper in the
instant case.

WHEREFORE, premises considered, the instant Petition is PARTLY

GRANTED. The Court of Appeals Decision dated 10 October 2003 in
CA-G.R. CV No. 73853 is hereby AFFIRMED with the MODIFICATION
that the respondent may forfeit only 50% of the total amount of the
security deposits in the sum of ₱192,000.00, and must return the
remaining 50% to the petitioner. No costs.

SO ORDERED.

17
 DIAMOND BUILDERS v. COUNTRY BANKERS 540 S 194
Befo re us is a Petition for Review on Certiorari to annul the Decision1
of the Court of Appeals (CA) in CA-G.R. C.V. No. 48603, which reversed
the Decision2 of the Regional Trial Court, Branch 7, Manila (RTC
Manila) in Civil Case No. 92-62029 and granted respondent Country
Bankers Insurance Corporation's (Country Bankers') prayer for a sum of
money against the petitioners.
The controversy originated from a civil case3 pending before the
Regional Trial Court, Branch 125, Caloocan City (RTC Caloocan) filed
by Marceliano Borja (Borja) against Rogelio S. Acidre (Rogelio) for the
latter's breach of his obligation to construct a residential and commercial
building. Rogelio is the sole proprietor of petitioner Diamond Builders
Conglomeration (DBC).
To put an end to the foregoing litigation, the parties entered into a
Compromise Agreement4 which provided, in part:
COMPROMISE AGREEMENT
1. x x x
A. In lieu of rescission, the parties have mutually agreed, subject to the
provisions hereunder, to fully implement the building contract dated
October 1, 1990 and supplemented on October 2, 1990 with an
additional scope of work marked as Annex "A" of the complaint and the
Letter-Agreement dated November 16, 1991 signed by the [petitioner
Rogelio] and plaintiff's son(,) Ferdinand A. Borja, marked as Annex "B"
of the complaint, which required full compliance of the structural design
of Engr. Ramos and explicit reminders in the constructing of the
residential/commercial building and the additional works therein
specified for the added consideration of P100,000.00 as alleged in
paragraphs 2 and 3 of the complaint, Annex "C" hereof.
b. [Petitioner Rogelio] admits full payment of plaintiff to him the amount
of P1,530,000.00 leaving the balance of P570,000.00 of the contractual
price of P2,100,000.00 for the construction of the buildings
aforementioned.
c. [Petitioner Rogelio] agrees to fully complete the construction of the
residential/commercial building mentioned in paragraph 1 hereof
provided plaintiff would pay to him, subject to hereunder terms, the
aforesaid amount of P570,000.00.
d. The plaintiff agrees to pay [petitioner Rogelio] the amount of
P570,000.00 subject to the terms hereunder set forth and subject strictly
to the condition that [petitioner Rogelio] will finish the building above-
described pursuant to the agreements [Annex(es) "A" and "B"] set forth
in paragraph 1 hereof.
e. Plaintiff shall pay [petitioner Rogelio] the amount of P570,000.00 as
follows:
i. P370,000.00 - the 5th day from approval of this compromise
agreement by this Honorable Court and to coincide (with) the start of the
75 days for [petitioner Rogelio] to complete the construction of the
building.
ii. P200,000.00 - When the aforedescribed building is fully constructed
pursuant to agreements stated in paragraph 1 hereof.
iii. Said building must be fully finished pursuant to the agreement stated
in paragraph 1 hereof within 75 days (excluding Sundays and Holidays)
counted from receipt of payment of P370,000.00. The date of receipt to
be issued by [petitioner Rogelio] will control. The 75th day will be 12:00
noon of the 75th day.
iv. From receipt of the aforesaid amount of P370,000.00, [petitioner
Rogelio] shall submit in favor of plaintiff a performance or surety bond in
the equivalent amount of P370,000.00 - to answer or indemnify plaintiff
in the event the building is not finished on the 75th day.
v. In the event the building is finished within 75 days as heretofore stated
and pursuant to the agreements set forth in paragraph 1 hereof, in
addition to the amount of P200,000.00, the plaintiff shall also pay
[petitioner Rogelio] the amount of P90,000.00 by way of [bonus].
However, in the event [petitioner Rogelio] shall fail to fully complete the
construction of the building pursuant to the agreements set forth in
paragraph 1 hereof within 75 days as heretofore stated, [petitioner
Rogelio] shall not be entitled to any further payments and the
performance or surety bond above-mentioned shall be fully
implemented by way of penalizing [petitioner Rogelio] and/or as award
for damages in favor of plaintiff.
18
xxx
f. x x x
g. That the construction herein contemplated shall not extend beyond
75 days. Said period shall commence five days from the date of the final
approval hereof by this Honorable Court.
i. That any violation and/or avoidance of the terms and conditions of this
Compromise Agreement by either of the parties herein shall forthwith
entitle the aggrieved party to an immediate execution hereof and to the
necessary and corresponding reliefs and remedies therefore.
(Emphasis supplied.)
The RTC Caloocan approved the Compromise Agreement and rendered
a Decision5 in accordance with the terms and conditions contained
therein.
In compliance with the Compromise Agreement, Rogelio obtained a
Surety Bond6 from Country Bankers in favor of the spouses Borja.7 In
this regard, Rogelio and his spouse, petitioner Teresita P. Acidre,
together with DBC employees Grace C. Osias, Violeta S. Faiyaz and
Emma S. Cutillar (the other petitioners herein), signed an Indemnity
Agreement8 consenting to their joint and several liability to Country
Bankers should the surety bond be executed upon.
On April 23, 1992, Country Bankers received a Motion for Execution9 of
the surety bond filed by Borja with the RTC Caloocan for Rogelio's
alleged violation of the Compromise Agreement. Consequently, Country
Bankers, in a letter10 dated May 13, 1992, advised petitioners that in
the event it is constrained to pay under the surety bond to Borja, it shall
proceed against petitioners for reimbursement.
In turn, petitioners wrote Country Bankers informing the latter of the filing
of an Opposition to Borja's Motion for Execution.11 In spite of the
opposition, however, the RTC Caloocan issued a Writ of Execution12 on
May 25, 1992. Petitioners then filed a motion for reconsideration.
On May 29, 1992, Sheriff Perceverando Pangan of RTC Caloocan
served Country Bankers a copy of the writ. Posthaste, Country Bankers,
in writing, requested Sheriff Pangan for a 10-day grace period within
which to settle the claim.13
Subsequently, Rogelio filed an Urgent Omnibus Motion14 to suspend
the Writ of Execution and to resolve the Motion for Reconsideration
dated June 3, 1992. Upon receipt of the Omnibus Motion, Country
Bankers forthwith wrote Sheriff Pangan and requested that the
implementation of the Writ of Execution be held in abeyance so as not
to render moot and academic the RTC Caloocan's resolution on the
Omnibus Motion.15
Nonetheless, on June 9, 1992, Country Bankers was served a Notice of
Levy/Sheriff's Sale16 with a list of its personal properties to be sold at
the scheduled public auction on June 15, 1992.
The next day, or on June 10, 1992, Country Bankers verified with the
RTC Caloocan the status of petitioners' Omnibus Motion. It was
informed that the motion had yet to be acted upon. On the same date,
Sheriff Pangan arrived at Country Bankers' office, and the latter was
thus constrained to pay the amount of the surety bond.17
Significantly, on June 22, 1992, twelve (12) days after the satisfaction of
judgment in Civil Case No. C-14745, Rogelio filed a Petition for
Certiorari and Prohibition with Preliminary Injunction and Restraining
Order18 with the CA, docketed as CA-G.R. SP No. 28205. Although the
appellate court issued a Temporary Restraining Order (TRO), the
petition was eventually denied due course and dismissed outright for
being fait accompli, as what it sought to enjoin or prohibit had already
been fully satisfied and executed.19
In the meantime, after Country Bankers was compelled to pay the
amount of the surety bond, it demanded reimbursement from the
petitioners under the Indemnity Agreement.20 However, petitioners
refused to reimburse Country Bankers.
In addition, upon the dismissal of their petition in CA-G.R. SP No. 28205,
petitioners wrote Country Bankers and informed the latter that the
voluntary payment of the bond effectively prevented them from
contesting the validity of the issuance of the Writ of Execution.21
As a result, Country Bankers filed a complaint for sum of money against
the petitioners which, as previously stated, the RTC Manila dismissed.
It disposed of the case, thus:
WHEREFORE, and considering the foregoing, judgment is hereby
rendered:
19

1. Dismissing the complaint for lack of merit;
2. On the counterclaim, ordering [Country Bankers] to pay [petitioners]
attorney's fees of P50,000.00, plus the costs of suit.
SO ORDERED.
On appeal, the CA reversed and set aside the decision of the RTC
Manila, to wit:
WHEREFORE, premises considered, the Appeal is GRANTED and the
Decision dated November 2, 1992 of Branch 7 of the Regional Trial
Court of Manila is hereby REVERSED and a new one entered, ordering
[petitioners] to pay [Country Bankers] the sum of THREE HUNDRED
SEVENTY THOUSAND PESOS (P370,000.00), as reimbursement or
actual damages, plus interest thereon at the rate of 12% per annum
computed from the date of judicial demand, or from July 24, 1992, the
date of filing of the complaint until the said amount has been fully paid.
SO ORDERED.
In reversing the trial court, the CA ruled that Country Bankers, as surety
of Rogelio's loan obligation, did not effect voluntary payment on the
bond. The appellate court found that what Country Bankers paid was an
obligation legally due and demandable. It declared that Country Bankers
acted upon compulsion of a writ of execution, which appears to have
been regularly, and validly issued, and, by its very nature, is immediately
enforceable.
Hence, this appeal positing a sole issue for our resolution, to wit:
Whether petitioners should indemnify Country Bankers for the payment
of the surety bond.
In fine, petitioners contend that Country Bankers is not entitled to
reimbursement when it voluntarily paid the surety bond considering it
knew full well the remedies availed of by petitioners to stay the execution
of the compromise judgment. Thus, Country Bankers must bear the loss
or damage arising from its voluntary act.
We deny the appeal and affirm the appellate court's ruling. Country
Bankers should be reimbursed for the P370,000.00 it paid to Borja under
the surety bond.
In impugning the CA's decision, petitioners invoke their pending
Omnibus Motion to stay the execution of the compromise judgment.
Petitioners' theory is that, although the RTC Caloocan had already
issued a writ of execution and Country Bankers had been served a
Notice of Levy/Sheriff's Sale of its properties at the impending public
auction, the payment made by Country Bankers to Borja is a voluntary
act. Petitioners push their theory even further, and deign to suggest that
Country Bankers should have itself intervened in the proceedings before
the RTC Caloocan to stay the writ of execution.
We reject this preposterous suggestion. Petitioners ought to be
reminded of the nature of a judgment on a compromise and a writ of
execution issued in connection therewith.
A compromise judgment is a decision rendered by a court sanctioning
the agreement between the parties concerning the determination of the
controversy at hand. Essentially, it is a contract, stamped with judicial
imprimatur, between two or more persons, who, for preventing or putting
an end to a lawsuit, adjust their difficulties by mutual consent in the
manner which they agree on, and which each of them prefers in the
hope of gaining, balanced by the danger of losing.22 Upon court
approval of a compromise agreement, it transcends its identity as a
mere contract binding only upon the parties thereto, as it becomes a
judgment that is subject to execution in accordance with Rule 39 of the
Rules of Court.23
Ordinarily, a judgment based on compromise is not appealable. It should
not be disturbed except upon a showing of vitiated consent or forgery.
The reason for the rule is that when both parties enter into an agreement
to end a pending litigation and request that a decision be rendered
approving said agreement, it is only natural to presume that such action
constitutes an implicit, as undeniable as an express, waiver of the right
to appeal against said decision.24 Thus, a decision on a compromise
agreement is final and executory, and is conclusive between the
parties.25
It is beyond cavil that if a party fails or refuses to abide by a compromise
agreement, the other party may either enforce the compromise or regard
it as rescinded and insist upon his original demand.26 Following this
20
mandatory rule, the RTC Caloocan granted Borja's motion, and
subsequently issued an order to the sheriff to execute the compromise
judgment. Notwithstanding the foregoing, petitioners still maintain that
since they had taken steps to stay the execution of the compromise
judgment, Country Bankers, with full knowledge of their active
opposition to the execution thereof, should not have readily complied
with the RTC Caloocan Order.
Petitioners' argument contemplates a brazen defiance of a validly issued
court order, which had not been restrained by the appellate court or this
Court. The argument is unacceptable.
The Compromise Agreement between Borja and Rogelio explicitly
provided that the latter's failure to complete construction of the building
within the stipulated period27 shall cause the full implementation of the
surety bond as a penalty for the default, and as an award of damages
to Borja. Furthermore, the Compromise Agreement contained a default
executory clause in case of a violation or avoidance of the terms and
conditions thereof. Therefore, the payment made by Country Bankers to
Borja was proper, as failure to pay would have amounted to
contumacious disobedience of a valid court order.
Clearly, even without the aforesaid default clause, the compromise
judgment remained executory as against Rogelio, as the principal
obligor (co-debtor), and Country Bankers as surety of the obligation.
Section 4, Rule 39 of the Rules of Court provides:
SEC. 4. Judgments not stayed by appeal. - Judgments in actions for
injunction, receivership, accounting and support, and such other
judgments as are now or may hereafter be declared to be immediately
executory, shall be enforceable after their rendition and shall not be
stayed by an appeal taken therefrom, unless otherwise ordered by the
trial court. On appeal therefrom, the appellate court in its discretion may
make an order suspending, modifying, restoring or granting the
injunction, receivership, accounting, or award of support.
The stay of execution shall be upon such terms as to bind or otherwise
as may be considered proper for the security or protection of the rights
of the adverse party.
Other judgments in actions declared to be immediately executory and
not stayed by the filing of an appeal are for: (1) compromise,28 (2)
forcible entry and unlawful detainer,29 (3) direct contempt,30 and (4)
expropriation.31
Likewise, Section 9, paragraph (a),32 of the same Rule outlines the
procedure for execution of judgments for money, thus:
SEC. 9 Execution of judgments for money, how enforced.'
(a) Immediate payment on demand. - The officer shall enforce an
execution of a judgment for money by demanding from the judgment
obligor the immediate payment of the full amount stated in the writ of
execution and all lawful fees. The judgment obligor shall pay in case,
certified bank check payable to the judgment oblige, or any other form
of payment acceptable to the latter, the amount of the judgment debt
under proper receipt directly to the judgment oblige or his authorized
representative if present at the time of payment. The lawful fees shall be
handed under proper receipt to the executing sheriff who shall turn over
the said amount within the same day to the clerk of court of the court
that issued the writ.
As Rogelio's obligation under the compromise agreement, and
approved by the RTC Caloocan, had a penal clause33 which is
monetary in nature,34 the writ of execution availed of by Borja, and paid
by Country Bankers, strictly complied with the rules on execution of
money judgments.
It is true that the petitioners did not directly question the compromise
judgment. What was pending before the Caloocan RTC was petitioners'
Omnibus Motion praying for a stay in the implementation of the writ of
execution. However, the bottom line issue raised in the Omnibus Motion
is, actually, a question on the compromise judgment, since its resolution
would require an inquiry into the stipulations contained in the
Compromise Agreement, particularly the provision on immediate
execution.
Thus, when the RTC Manila ruled that the payment on the bond made
by Country Bankers was voluntary, the lower court effectively
disregarded the rule on the non-appealable nature and the immediately
executory character of a judgment on a compromise.
Moreover, it has not escaped our attention that petitioners belatedly filed
a Petition for Certiorari and Prohibition with prayer for a TRO with the
CA, ostensibly to stop the execution of the compromise judgment. Not
21
only was the filing thereof late, it was done twelve (12) days after the
satisfaction of the compromise judgment. We are, therefore, perplexed
why, despite the urgency of the matter, petitioners merely banked on a
pending motion for reconsideration to stay the enforcement of an
already issued writ of execution. Petitioners' total reliance thereon was
certainly misplaced.
Admittedly, the general rule is that certiorari will not lie unless a motion
for reconsideration is first filed before the respondent tribunal to allow it
an opportunity to correct the imputed errors.35 Nonetheless, the rule
admits of exceptions, thus:
(a) where the order is a patent nullity, as where the court a quo has no
jurisdiction;
(b) where the questions raised in the certiorari proceedings have been
duly raised and passed upon by the lower court, or are the same as
those raised and passed upon in the lower court;
(c) where there is an urgent necessity for the resolution of the question
and any further delay would prejudice the interests of the Government
or of the petitioner or the subject matter of the action is perishable;
(d) where, under the circumstances, a motion for reconsideration would
be useless;
(e) where petitioner was deprived of due process and there is extreme
urgency for relief;
(f) where, in a criminal case, relief from an order of arrest is urgent and
the granting of such relief by the trial court is improbable;
(g) where the proceedings in the lower court are a nullity for lack of due
process;
(h) where the proceedings was ex-parte or in which the petitioner had
no opportunity to object; andcralawlibrary
(i) where the issue raised is one purely of law or where public interest is
involved.36
Evidently, it would not have been premature for petitioners to have filed
a petition before the CA, upon the issuance by the RTC Caloocan of a
writ of execution, because the RTC Caloocan already denied their
Opposition to Borja's Motion for Execution on the surety bond. If, as
petitioners insist, they had a meritorious challenge to the satisfaction of
the writ of execution, they should have immediately filed a Petition for
Certiorari with the CA and therein alleged the exceptional circumstance
warranting the non-filing of a motion for reconsideration. Petitioners
should not have persisted on waiting for the resolution of their Omnibus
Motion.
We have consistently ruled that an order for the issuance of a writ of
execution is ordinarily not appealable. The reason for this is that the
merits of the case should not be delved into anew after a determination
has been made thereon with finality.37 Otherwise, there would be
practically no end to litigation since the losing party would always try to
thwart execution by appealing from every order granting the writ. In this
case, this aphorism should apply. Rogelio, after agreeing to an amicable
settlement with Borja to put an end to the case before the RTC
Caloocan, cannot flout compliance of the court order of execution by
refusing to reimburse Country Bankers, the surety of his obligation in the
compromise agreement.
Still, petitioners stubbornly refuse to pay Country Bankers, contending
that the CA itself, in CA-G.R. SP No. 28205, declared that the payment
effected was voluntary.
We are not persuaded.
Article 2047 of the Civil Code specifically calls for the application of the
provisions on solidary obligations to suretyship contracts. In particular,
Article 1217 of the Civil Code recognizes the right of reimbursement
from a co-debtor (the principal co-debtor, in case of suretyship) in favor
of the one who paid (i.e., the surety).38 In contrast, Article 1218 of the
Civil Code is definitive on when reimbursement is unavailing, such that
only those payments made after the obligation has prescribed or
became illegal shall not entitle a solidary debtor to reimbursement.
Nowhere in the invoked CA Decision does it declare that a surety who
pays, by virtue of a writ of execution, is not entitled to reimbursement
from the principal co-debtor. The CA Decision was confined to the
mootness of the issue presented and petitioners' preclusion from the
relief it prayed for, i.e., a stay of the writ of execution, considering that
the writ had already been satisfied.
22
More importantly, the Indemnity Agreement signed by Rogelio and the
other petitioners explicitly provided for an incontestability clause on
payments made by Country Bankers.ςηαñrοblεš �νιr†υαl
�lαω �lιbrαrÿ
The said clause reads:
INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY: - Any
payment or disbursement made by [Country Bankers] on account of the
above-mentioned Bond, its renewals, extensions, alterations or
substitutions either in the belief that [Country Bankers] was obligated to
make such payment or in the belief that said payment was necessary or
expedient in order to avoid greater losses or obligations for which
[Country Bankers] might be liable by virtue of the terms of the above-
mentioned Bond, its renewals, extensions, alterations, or substitutions,
shall be final and shall not be disputed by the undersigned, who hereby
jointly and severally bind themselves to indemnify [Country Bankers] of
any and all such payments, as stated in the preceding clauses.
In case [Country Bankers] shall have paid, settled or compromised any
liability, loss, costs, damages, attorney's fees, expenses, claims,
demands, suits, or judgments as above-stated, arising out of or in
connection with said bond, an itemized statement thereof, signed by an
officer of [Country Bankers] and other evidence to show said payment,
settlement or compromise, shall be prima facie evidence of said
payment, settlement or compromise, as well as the liability of
[petitioners] in any and all suits and claims against [petitioners] arising
out of said bond or this bond application.
In the recent case of Escaňo v. Ortigas,39 we elucidated on the
distinction between a surety as a co-debtor under a suretyship
agreement and a joint and solidary co-debtor, thus:
(A)s indicated by Article 2047, a suretyship requires a principal debtor
to whom the surety is solidarily bound by way of an ancillary obligation
of segregate identity from the obligation between the principal debtor
and the creditor. The suretyship does not bind the surety to the creditor,
inasmuch as the latter is vested with the right to proceed against the
former to collect the credit in lieu of proceeding against the principal
debtor for the same obligation. At the same time, there is also a legal tie
created between the surety and the principal debtor to which the creditor
is not privy or party to. The moment the surety fully answers to the
creditor for the obligation created by the principal debtor, such obligation
is extinguished. At the same time, the surety may seek reimbursement
from the principal debtor for the amount paid, for the surety does in fact
"become subrogated to all the rights and remedies of the creditor."
WHEREFORE, the Petition is DENIED. The Decision of the Court of
Appeals in CA-G.R. C.V. No. 48603 is hereby AFFIRMED. Costs against
the petitioner.
SO ORDERED

Ineluctably, petitioners are obligated to reimburse Country Bankers the

amount of P370,000.00.

Finally, petitioners desperately attempt to inveigle out of this burden,

which is of their own making, by imputing a lack of initiative on Country
Banker's part to intervene in the execution proceedings before the RTC.

This contention, as with the rest of petitioners' arguments, deserves

scant consideration. Suffice it to state that Country Bankers is a surety
of the obligation with a penal clause, constituted in the compromise
judgment; it is not a joint and solidary co-debtor of Rogelio.

23
 RIVERA v. SPS. CHUA 746 S 1
Before us are consolidated Petitions for Review on Certiorari under Rule
45 of the Rules of Court assailing the Decision[1] of the Court of Appeals
in CA-G.R. SP No. 90609 which affirmed with modification the separate
rulings of the Manila City trial courts, the Regional Trial Court, Branch
17 in Civil Case No. 02-105256[2] and the Metropolitan Trial Court
(MeTC), Branch 30, in Civil Case No. 163661,[3] a case for collection of
a sum of money due a promissory note. While all three (3) lower courts
upheld the validity and authenticity of the promissory note as duly signed
by the obligor, Rodrigo Rivera (Rivera), petitioner in G.R. No. 184458,
the appellate court modified the trial courts’ consistent awards: (1) the
stipulated interest rate of sixty percent (60%) reduced to twelve percent
(12%) per annum computed from the date of judicial or extrajudicial
demand, and (2) reinstatement of the award of attorney’s fees also in a
reduced amount of P50,000.00.
In G.R. No. 184458, Rivera persists in his contention that there was no
valid promissory note and questions the entire ruling of the lower courts.
On the other hand, petitioners in G.R. No. 184472, Spouses Salvador
and Violeta Chua (Spouses Chua), take exception to the appellate
court’s reduction of the stipulated interest rate of sixty percent (60%) to
twelve percent (12%) per annum.
We proceed to the facts.
The parties were friends of long standing having known each other since
1973: Rivera and Salvador are kumpadres, the former is the godfather
of the Spouses Chua’s son.
On 24 February 1995, Rivera obtained a loan from the Spouses Chua:
PROMISSORY NOTE
120,000.00
FOR VALUE RECEIVED, I, RODRIGO RIVERA promise to pay spouses
SALVADOR C. CHUA and VIOLETA SY CHUA, the sum of One
Hundred Twenty Thousand Philippine Currency (P120,000.00) on
December 31, 1995.
It is agreed and understood that failure on my part to pay the amount of
(P120,000.00) One Hundred Twenty Thousand Pesos on December 31,
1995. (sic) I agree to pay the sum equivalent to FIVE PERCENT (5%)
interest monthly from the date of default until the entire obligation is fully
paid for.
Should this note be referred to a lawyer for collection, I agree to pay the
further sum equivalent to twenty percent (20%) of the total amount due
and payable as and for attorney’s fees which in no case shall be less
than P5,000.00 and to pay in addition the cost of suit and other incidental
litigation expense.
Any action which may arise in connection with this note shall be brought
in the proper Court of the City of Manila.
Manila, February 24, 1995[.]
(SGD.) RODRIGO RIVERA[4]
In October 1998, almost three years from the date of payment stipulated
in the promissory note, Rivera, as partial payment for the loan, issued
and delivered to the Spouses Chua, as payee, a check numbered
012467, dated 30 December 1998, drawn against Rivera’s current
account with the Philippine Commercial International Bank (PCIB) in the
amount of P25,000.00.
On 21 December 1998, the Spouses Chua received another check
presumably issued by Rivera, likewise drawn against Rivera’s PCIB
current account, numbered 013224, duly signed and dated, but blank as
to payee and amount. Ostensibly, as per understanding by the parties,
PCIB Check No. 013224 was issued in the amount of P133,454.00 with
“cash” as payee. Purportedly, both checks were simply partial payment
for Rivera’s loan in the principal amount of P120,000.00.
Upon presentment for payment, the two checks were dishonored for the
reason “account closed.”
As of 31 May 1999, the amount due the Spouses Chua was pegged at
P366,000.00 covering the principal of P120,000.00 plus five percent
(5%) interest per month from 1 January 1996 to 31 May 1999.
The Spouses Chua alleged that they have repeatedly demanded
payment from Rivera to no avail. Because of Rivera’s unjustified refusal
24
to pay, the Spouses Chua were constrained to file a suit on 11 June
1999. The case was raffled before the MeTC, Branch 30, Manila and
docketed as Civil Case No. 163661.
In his Answer with Compulsory Counterclaim, Rivera countered that: (1)
he never executed the subject Promissory Note; (2) in all instances
when he obtained a loan from the Spouses Chua, the loans were always
covered by a security; (3) at the time of the filing of the complaint, he still
had an existing indebtedness to the Spouses Chua, secured by a real
estate mortgage, but not yet in default; (4) PCIB Check No. 132224
signed by him which he delivered to the Spouses Chua on 21 December
1998, should have been issued in the amount of only P1,300.00,
representing the amount he received from the Spouses Chua’s
saleslady; (5) contrary to the supposed agreement, the Spouses Chua
presented the check for payment in the amount of P133,454.00; and (6)
there was no demand for payment of the amount of P120,000.00 prior
to the encashment of PCIB Check No. 0132224. [5]
In the main, Rivera claimed forgery of the subject Promissory Note and
denied his indebtedness thereunder.
The MeTC summarized the testimonies of both parties’ respective
witnesses:
[The spouses Chua’s] evidence include[s] documentary evidence and
oral evidence (consisting of the testimonies of [the spouses] Chua and
NBI Senior Documents Examiner Antonio Magbojos). x x x
xxxx
Witness Magbojos enumerated his credentials as follows: joined the NBI
(1987); NBI document examiner (1989); NBI Senior Document
Examiner (1994 to the date he testified); registered criminologist;
graduate of 18th Basic Training Course [i]n Questioned Document
Examination conducted by the NBI; twice attended a seminar on US
Dollar Counterfeit Detection conducted by the US Embassy in Manila;
attended a seminar on Effective Methodology in Teaching and
Instructional design conducted by the NBI Academy; seminar lecturer
on Questioned Documents, Signature Verification and/or Detection; had
examined more than a hundred thousand questioned documents at the
time he testified.
Upon [order of the MeTC], Mr. Magbojos examined the purported
signature of [Rivera] appearing in the Promissory Note and compared
the signature thereon with the specimen signatures of [Rivera]
appearing on several documents. After a thorough study, examination,
and comparison of the signature on the questioned document
(Promissory Note) and the specimen signatures on the documents
submitted to him, he concluded that the questioned signature appearing
in the Promissory Note and the specimen signatures of [Rivera]
appearing on the other documents submitted were written by one and
the same person. In connection with his findings, Magbojos prepared
Questioned Documents Report No. 712-1000 dated 8 January 2001,
with the following conclusion: “The questioned and the standard
specimen signatures RODGRIGO RIVERA were written by one and the
same person.”
[Rivera] testified as follows: he and [respondent] Salvador are
“kumpadres;” in May 1998, he obtained a loan from [respondent]
Salvador and executed a real estate mortgage over a parcel of land in
favor of [respondent Salvador] as collateral; aside from this loan, in
October, 1998 he borrowed P25,000.00 from Salvador and issued PCIB
Check No. 126407 dated 30 December 1998; he expressly denied
execution of the Promissory Note dated 24 February 1995 and alleged
that the signature appearing thereon was not his signature; [respondent
Salvador’s] claim that PCIB Check No. 0132224 was partial payment for
the Promissory Note was not true, the truth being that he delivered the
check to [respondent Salvador] with the space for amount left blank as
he and [respondent] Salvador had agreed that the latter was to fill it in
with the amount of ?1,300.00 which amount he owed [the spouses
Chua]; however, on 29 December 1998 [respondent] Salvador called
him and told him that he had written P133,454.00 instead of P1,300.00;
x x x. To rebut the testimony of NBI Senior Document Examiner
Magbojos, [Rivera] reiterated his averment that the signature appearing
on the Promissory Note was not his signature and that he did not
execute the Promissory Note.[6]
After trial, the MeTC ruled in favor of the Spouses Chua:
WHEREFORE, [Rivera] is required to pay [the spouses Chua]:
P120,000.00 plus stipulated interest at the rate of 5% per month from 1
January 1996, and legal interest at the rate of 12% percent per annum
from 11 June 1999, as actual and compensatory damages; 20% of the
whole amount due as attorney’s fees.[7]
25

On appeal, the Regional Trial Court, Branch 17, Manila affirmed the
Decision of the MeTC, but deleted the award of attorney’s fees to the
Spouses Chua:
WHEREFORE, except as to the amount of attorney’s fees which is
hereby deleted, the rest of the Decision dated October 21, 2002 is
hereby AFFIRMED.[8]
Both trial courts found the Promissory Note as authentic and validly bore
the signature of Rivera.
Undaunted, Rivera appealed to the Court of Appeals which affirmed
Rivera’s liability under the Promissory Note, reduced the imposition of
interest on the loan from 60% to 12% per annum, and reinstated the
award of attorney’s fees in favor of the Spouses Chua:
WHEREFORE, the judgment appealed from is hereby AFFIRMED,
subject to the MODIFICATION that the interest rate of 60% per annum
is hereby reduced to 12% per annum and the award of attorney’s fees
is reinstated at the reduced amount of P50,000.00 Costs against
[Rivera].[9]
Hence, these consolidated petitions for review on certiorari of Rivera in
G.R. No. 184458 and the Spouses Chua in G.R. No. 184472,
respectively raising the following issues:
A. In G.R. No. 184458
1. WHETHER OR NOT THE HONORABLE COURT OF APPEALS
ERRED IN UPHOLDING THE RULING OF THE RTC AND M[e]TC
THAT THERE WAS A VALID PROMISSORY NOTE EXECUTED BY
[RIVERA].
2. WHETHER OR NOT THE HONORABLE COURT OF APPEALS
ERRED IN HOLDING THAT DEMAND IS NO LONGER NECESSARY
AND IN APPLYING THE PROVISIONS OF THE NEGOTIABLE
INSTRUMENTS LAW.
3. WHETHER OR NOT THE HONORABLE COURT OF APPEALS
ERRED IN AWARDING ATTORNEY’S FEES DESPITE THE FACT
THAT THE SAME HAS NO BASIS IN FACT AND IN LAW AND
DESPITE THE FACT THAT [THE SPOUSES CHUA] DID NOT APPEAL
FROM THE DECISION OF THE RTC DELETING THE AWARD OF
ATTORNEY’S FEES.[10]
B. In G.R. No. 184472
[WHETHER OR NOT] THE HONORABLE COURT OF APPEALS
COMMITTED GROSS LEGAL ERROR WHEN IT MODIFIED THE
APPEALED JUDGMENT BY REDUCING THE INTEREST RATE
FROM 60% PER ANNUM TO 12% PER ANNUM IN SPITE OF THE
FACT THAT RIVERA NEVER RAISED IN HIS ANSWER THE
DEFENSE THAT THE SAID STIPULATED RATE OF INTEREST IS
EXORBITANT, UNCONSCIONABLE, UNREASONABLE,
INEQUITABLE, ILLEGAL, IMMORAL OR VOID.[11]
As early as 15 December 2008, we already disposed of G.R. No.
184472 and denied the petition, via a Minute Resolution, for failure to
sufficiently show any reversible error in the ruling of the appellate court
specifically concerning the correct rate of interest on Rivera’s
indebtedness under the Promissory Note.[12]
On 26 February 2009, Entry of Judgment was made in G.R. No. 184472.
Thus, what remains for our disposition is G.R. No. 184458, the appeal
of Rivera questioning the entire ruling of the Court of Appeals in CA-
G.R. SP No. 90609.
Rivera continues to deny that he executed the Promissory Note; he
claims that given his friendship with the Spouses Chua who were money
lenders, he has been able to maintain a loan account with them.
However, each of these loan transactions was respectively “secured by
checks or sufficient collateral.”
Rivera points out that the Spouses Chua “never demanded payment for
the loan nor interest thereof (sic) from [Rivera] for almost four (4) years
from the time of the alleged default in payment [i.e., after December 31,
1995].”[13]
On the issue of the supposed forgery of the promissory note, we are not
inclined to depart from the lower courts’ uniform rulings that Rivera
indeed signed it.
Rivera offers no evidence for his asseveration that his signature on the
26
promissory note was forged, only that the signature is not his and varies
from his usual signature. He likewise makes a confusing defense of
having previously obtained loans from the Spouses Chua who were
money lenders and who had allowed him a period of “almost four (4)
years” before demanding payment of the loan under the Promissory
Note.
First, we cannot give credence to such a naked claim of forgery over the
testimony of the National Bureau of Investigation (NBI) handwriting
expert on the integrity of the promissory note.
On that score, the appellate court aptly disabled Rivera’s contention:
[Rivera] failed to adduce clear and convincing evidence that the
signature on the promissory note is a forgery. The fact of forgery cannot
be presumed but must be proved by clear, positive and convincing
evidence. Mere variance of signatures cannot be considered as
conclusive proof that the same was forged. Save for the denial of Rivera
that the signature on the note was not his, there is nothing in the records
to support his claim of forgery. And while it is true that resort to experts
is not mandatory or indispensable to the examination of alleged forged
documents, the opinions of handwriting experts are nevertheless helpful
in the court’s determination of a document’s authenticity.
To be sure, a bare denial will not suffice to overcome the positive value
of the promissory note and the testimony of the NBI witness. In fact,
even a perfunctory comparison of the signatures offered in evidence
would lead to the conclusion that the signatures were made by one and
the same person.
It is a basic rule in civil cases that the party having the burden of proof
must establish his case by preponderance of evidence, which simply
means “evidence which is of greater weight, or more convincing than
that which is offered in opposition to it.”
Evaluating the evidence on record, we are convinced that [the Spouses
Chua] have established a prima facie case in their favor, hence, the
burden of evidence has shifted to [Rivera] to prove his allegation of
forgery. Unfortunately for [Rivera], he failed to substantiate his
defense.[14]
Well-entrenched in jurisprudence is the rule that factual findings of the
trial court, especially when affirmed by the appellate court, are accorded
the highest degree of respect and are considered conclusive between
the parties.[15] A review of such findings by this Court is not warranted
except upon a showing of highly meritorious circumstances, such as: (1)
when the findings of a trial court are grounded entirely on speculation,
surmises or conjectures; (2) when a lower court's inference from its
factual findings is manifestly mistaken, absurd or impossible; (3) when
there is grave abuse of discretion in the appreciation of facts; (4) when
the findings of the appellate court go beyond the issues of the case, or
fail to notice certain relevant facts which, if properly considered, will
justify a different conclusion; (5) when there is a misappreciation of facts;
(6) when the findings of fact are conclusions without mention of the
specific evidence on which they are based, are premised on the
absence of evidence, or are contradicted by evidence on
record.[16] None of these exceptions obtains in this instance. There is no
reason to depart from the separate factual findings of the three (3) lower
courts on the validity of Rivera’s signature reflected in the Promissory
Note.
Indeed, Rivera had the burden of proving the material allegations which
he sets up in his Answer to the plaintiff’s claim or cause of action, upon
which issue is joined, whether they relate to the whole case or only to
certain issues in the case.[17]
In this case, Rivera’s bare assertion is unsubstantiated and directly
disputed by the testimony of a handwriting expert from the NBI. While it
is true that resort to experts is not mandatory or indispensable to the
examination or the comparison of handwriting, the trial courts in this
case, on its own, using the handwriting expert testimony only as an aid,
found the disputed document valid.[18]
Hence, the MeTC ruled that:
[Rivera] executed the Promissory Note after consideration of the
following: categorical statement of [respondent] Salvador that [Rivera]
signed the Promissory Note before him, in his ([Rivera’s]) house; the
conclusion of NBI Senior Documents Examiner that the questioned
signature (appearing on the Promissory Note) and standard specimen
signatures “Rodrigo Rivera” “were written by one and the same person”;
actual view at the hearing of the enlarged photographs of the questioned
signature and the standard specimen signatures.[19]
Specifically, Rivera insists that: “[i]f that promissory note indeed exists,
27
it is beyond logic for a money lender to extend another loan on May 4,
1998 secured by a real estate mortgage, when he was already in default
and has not been paying any interest for a loan incurred in February
1995.”[20]
We disagree.
It is likewise likely that precisely because of the long standing friendship
of the parties as “kumpadres,” Rivera was allowed another loan, albeit
this time secured by a real estate mortgage, which will cover Rivera’s
loan should Rivera fail to pay. There is nothing inconsistent with the
Spouses Chua’s two (2) and successive loan accommodations to
Rivera: one, secured by a real estate mortgage and the other, secured
by only a Promissory Note.
Also completely plausible is that given the relationship between the
parties, Rivera was allowed a substantial amount of time before the
Spouses Chua demanded payment of the obligation due under the
Promissory Note.
In all, Rivera’s evidence or lack thereof consisted only of a barefaced
claim of forgery and a discordant defense to assail the authenticity and
validity of the Promissory Note. Although the burden of proof rested on
the Spouses Chua having instituted the civil case and after they
established a prima facie case against Rivera, the burden of evidence
shifted to the latter to establish his defense.[21] Consequently, Rivera
failed to discharge the burden of evidence, refute the existence of the
Promissory Note duly signed by him and subsequently, that he did not
fail to pay his obligation thereunder. On the whole, there was no
question left on where the respective evidence of the parties
preponderated—in favor of plaintiffs, the Spouses Chua.
Rivera next argues that even assuming the validity of the Promissory
Note, demand was still necessary in order to charge him liable
thereunder. Rivera argues that it was grave error on the part of the
appellate court to apply Section 70 of the Negotiable Instruments Law
(NIL).[22]
We agree that the subject promissory note is not a negotiable instrument
and the provisions of the NIL do not apply to this case. Section 1 of the
NIL requires the concurrence of the following elements to be a
negotiable instrument:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum
certain in money;
(c) Must be payable on demand, or at a fixed or determinable
future time;
(d) Must be payable to order or to bearer; and
(b)
(e) Where the instrument is addressed to a drawee, he must be
named or otherwise indicated therein with reasonable certainty.
On the other hand, Section 184 of the NIL defines what negotiable
promissory note is:
SECTION 184. Promissory Note, Defined. – A negotiable promissory
note within the meaning of this Act is an unconditional promise in writing
made by one person to another, signed by the maker, engaging to pay
on demand, or at a fixed or determinable future time, a sum certain in
money to order or to bearer. Where a note is drawn to the maker’s own
order, it is not complete until indorsed by him.
The Promissory Note in this case is made out to specific persons, herein
respondents, the Spouses Chua, and not to order or to bearer, or to the
order of the Spouses Chua as payees.
However, even if Rivera’s Promissory Note is not a negotiable
instrument and therefore outside the coverage of Section 70 of the NIL
which provides that presentment for payment is not necessary to charge
the person liable on the instrument, Rivera is still liable under the terms
of the Promissory Note that he issued.
The Promissory Note is unequivocal about the date when the obligation
falls due and becomes demandable—31 December 1995. As of 1
January 1996, Rivera had already incurred in delay when he failed to
pay the amount of P120,000.00 due to the Spouses Chua on 31
December 1995 under the Promissory Note.
Article 1169 of the Civil Code explicitly provides:
Art. 1169. Those obliged to deliver or to do something incur in delay from
the time the obligee judicially or extrajudicially demands from them the
fulfillment of their obligation.
28

However, the demand by the creditor shall not be necessary in
order that delay may exist:
(1) When the obligation or the law expressly so declare; or
(2) When from the nature and the circumstances of the obligation it
appears that the designation of the time when the thing is to be delivered
or the service is to be rendered was a controlling motive for the
establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered
it beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the other does
not comply or is not ready to comply in a proper manner with what is
incumbent upon him. From the moment one of the parties fulfills his
obligation, delay by the other begins. (Emphasis supplied)
There are four instances when demand is not necessary to constitute
the debtor in default: (1) when there is an express stipulation to that
effect; (2) where the law so provides; (3) when the period is the
controlling motive or the principal inducement for the creation of the
obligation; and (4) where demand would be useless. In the first two
paragraphs, it is not sufficient that the law or obligation fixes a date for
performance; it must further state expressly that after the period lapses,
default will commence.
We refer to the clause in the Promissory Note containing the stipulation
of interest:
It is agreed and understood that failure on my part to pay the amount of
(P120,000.00) One Hundred Twenty Thousand Pesos on December 31,
1995. (sic) I agree to pay the sum equivalent to FIVE PERCENT (5%)
interest monthly from the date of default until the entire obligation is fully
paid for.[23]
which expressly requires the debtor (Rivera) to pay a 5% monthly
interest from the “date of default” until the entire obligation is fully paid
for. The parties evidently agreed that the maturity of the obligation at a
date certain, 31 December 1995, will give rise to the obligation to pay
interest. The Promissory Note expressly provided that after 31
December 1995, default commences and the stipulation on payment of
interest starts.
The date of default under the Promissory Note is 1 January 1996, the
day following 31 December 1995, the due date of the obligation. On that
date, Rivera became liable for the stipulated interest which the
Promissory Note says is equivalent to 5% a month. In sum, until 31
December 1995, demand was not necessary before Rivera could be
held liable for the principal amount of P120,000.00. Thereafter, on 1
January 1996, upon default, Rivera became liable to pay the Spouses
Chua damages, in the form of stipulated interest.
The liability for damages of those who default, including those who are
guilty of delay, in the performance of their obligations is laid down on
Article 1170[24] of the Civil Code.
Corollary thereto, Article 2209 solidifies the consequence of payment of
interest as an indemnity for damages when the obligor incurs in delay:
Art. 2209. If the obligation consists 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 percent per annum. (Emphasis supplied)
Article 2209 is specifically applicable in this instance where: (1) the
obligation is for a sum of money; (2) the debtor, Rivera, incurred in delay
when he failed to pay on or before 31 December 1995; and (3) the
Promissory Note provides for an indemnity for damages upon default of
Rivera which is the payment of a 5% monthly interest from the date of
default.
We do not consider the stipulation on payment of interest in this case as
a penal clause although Rivera, as obligor, assumed to pay additional
5% monthly interest on the principal amount of P120,000.00 upon
default.
Article 1226 of the Civil Code provides:
Art. 1226. In obligations with a penal clause, the penalty shall
substitute the indemnity for damages and the payment of interests
in case of noncompliance, if there is no stipulation to the
contrary. Nevertheless, damages shall be paid if the obligor refuses to
pay the penalty or is guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance
with the provisions of this Code.
29

The penal clause is generally undertaken to insure performance and
works as either, or both, punishment and reparation. It is an exception
to the general rules on recovery of losses and damages. As an
exception to the general rule, a penal clause must be specifically set
forth in the obligation.[25]
In high relief, the stipulation in the Promissory Note is designated as
payment of interest, not as a penal clause, and is simply an indemnity
for damages incurred by the Spouses Chua because Rivera defaulted
in the payment of the amount of P120,000.00. The measure of damages
for the Rivera’s delay is limited to the interest stipulated in the
Promissory Note. In apt instances, in default of stipulation, the interest
is that provided by law.[26]
In this instance, the parties stipulated that in case of default, Rivera will
pay interest at the rate of 5% a month or 60% per annum. On this score,
the appellate court ruled:
It bears emphasizing that the undertaking based on the note clearly
states the date of payment to be 31 December 1995. Given this
circumstance, demand by the creditor is no longer necessary in order
that delay may exist since the contract itself already expressly so
declares. The mere failure of [Spouses Chua] to immediately demand
or collect payment of the value of the note does not exonerate [Rivera]
from his liability therefrom. Verily, the trial court committed no reversible
error when it imposed interest from 1 January 1996 on the ratiocination
that [Spouses Chua] were relieved from making demand under Article
1169 of the Civil Code.
xxxx
As observed by [Rivera], the stipulated interest of 5% per month or 60%
per annum in addition to legal interests and attorney’s fees is, indeed,
highly iniquitous and unreasonable. Stipulated interest rates are illegal
if they are unconscionable and the Court is allowed to temper interest
rates when necessary. Since the interest rate agreed upon is void, the
parties are considered to have no stipulation regarding the interest rate,
thus, the rate of interest should be 12% per annum computed from the
date of judicial or extrajudicial demand.[27]
The appellate court found the 5% a month or 60% per annum interest
rate, on top of the legal interest and attorney’s fees, steep, tantamount
to it being illegal, iniquitous and unconscionable.
Significantly, the issue on payment of interest has been squarely
disposed of in G.R. No. 184472 denying the petition of the Spouses
Chua for failure to sufficiently show any reversible error in the ruling of
the appellate court, specifically the reduction of the interest rate imposed
on Rivera’s indebtedness under the Promissory Note. Ultimately, the
denial of the petition in G.R. No. 184472 is res judicata in its concept of
“bar by prior judgment” on whether the Court of Appeals correctly
reduced the interest rate stipulated in the Promissory Note.
Res judicata applies in the concept of “bar by prior judgment” if the
following requisites concur: (1) the former judgment or order must be
final; (2) the judgment or order must be on the merits; (3) the decision
must have been rendered by a court having jurisdiction over the subject
matter and the parties; and (4) there must be, between the first and the
second action, identity of parties, of subject matter and of causes of
action.[28]
In this case, the petitions in G.R. Nos. 184458 and 184472 involve an
identity of parties and subject matter raising specifically errors in the
Decision of the Court of Appeals. Where the Court of Appeals’
disposition on the propriety of the reduction of the interest rate was
raised by the Spouses Chua in G.R. No. 184472, our ruling thereon
affirming the Court of Appeals is a “bar by prior judgment.”
At the time interest accrued from 1 January 1996, the date of default
under the Promissory Note, the then prevailing rate of legal interest was
12% per annum under Central Bank (CB) Circular No. 416 in cases
involving the loan or forbearance of money.[29] Thus, the legal interest
accruing from the Promissory Note is 12% per annum from the date of
default on 1 January 1996.
However, the 12% per annum rate of legal interest is only applicable
until 30 June 2013, before the advent and effectivity of Bangko Sentral
ng Pilipinas (BSP) Circular No. 799, Series of 2013 reducing the rate of
legal interest to 6% per annum. Pursuant to our ruling in Nacar v.
Gallery Frames,[30] BSP Circular No. 799 is prospectively applied from 1
July 2013. In short, the applicable rate of legal interest from 1 January
1996, the date when Rivera defaulted, to date when this Decision
becomes final and executor is divided into two periods reflecting two
30
rates of legal interest: (1) 12% per annum from 1 January 1996 to 30
June 2013; and (2) 6% per annum FROM 1 July 2013 to date when this
Decision becomes final and executory.
As for the legal interest accruing from 11 June 1999, when judicial
demand was made, to the date when this Decision becomes final and
executory, such is likewise divided into two periods: (1) 12% per
annum from 11 June 1999, the date of judicial demand to 30 June 2013;
and (2) 6% per annum from 1 July 2013 to date when this Decision
becomes final and executor.[31] We base this imposition of interest
on interest due earning legal intereston Article 2212 of the Civil Code
which provides that “interest due shall earn legal interest from the time
it is judicially demanded, although the obligation may be silent on this
point.”
From the time of judicial demand, 11 June 1999, the actual amount
owed by Rivera to the Spouses Chua could already be determined with
reasonable certainty given the wording of the Promissory Note.[32]
We cite our recent ruling in Nacar v. Gallery Frames:[33]
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-
contracts, delicts or quasi-delicts is breached, the contravenor can be
held liable for damages. The provisions under Title XVIII on “Damages”
of the Civil Code govern in determining the measure of recoverable
damages.
II. With regard particularly to an award of interest in the concept of actual
and compensatory damages, the rate of interest, as well as the accrual
thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance
of money, the interest due should be that which may
have been stipulated in writing. Furthermore, the
interest due shall itself earn legal interest from the time
it is judicially demanded. In the absence of stipulation,
the rate of interest shall be 6% per annum to be
computed from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions of Article
1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of
money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the
rate of 6% per annum. No interest, however, shall be
adjudged on unliquidated claims or damages, except when
or until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the
time the claim is made judicially or extrajudicially (Art. 1169,
Civil Code), but when such certainty cannot be so
reasonably established at the time the demand is made, the
interest shall begin to run only from the date the judgment of
the court is made (at which time the quantification of
damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally
adjudged.
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest,
whether the case falls under paragraph 1 or paragraph 2,
above, shall be 6% per annum from such finality until its
satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become
final and executory prior to July 1, 2013, shall not be
disturbed and shall continue to be implemented applying the
rate of interest fixed therein. (Emphasis supplied)
On the reinstatement of the award of attorney’s fees based on the
stipulation in the Promissory Note, we agree with the reduction thereof
but not the ratiocination of the appellate court that the attorney’s fees
are in the nature of liquidated damages or penalty. The interest imposed
in the Promissory Note already answers as liquidated damages for
Rivera’s default in paying his obligation. We award attorney’s fees, albeit
in a reduced amount, in recognition that the Spouses Chua were
compelled to litigate and incurred expenses to protect their
interests.[34] Thus, the award of P50,000.00 as attorney’s fees is proper.
For clarity and to obviate confusion, we chart the breakdown of the total
amount owed by Rivera to the Spouses Chua:
31
Face value Stipulated Interest Interest due Attorney’s Total (5) 6% per annum applied to the total amount of paragraphs 2 and 3
of the A & B earning legal fees Amount from 1 July 2013 to date when this Decision becomes final and
Promissory interest A & B executor, as interest due earning legal interest;
Note (6) Attorney’s fees in the amount of P50,000.00; and
February 24, A. January 1, A. June 11, 1999 Wholesale
1995 to 1996 to June 30, (date of judicial amount (7) 6% per annum interest on the total of the monetary awards from the
December 2013 demand) to June finality of this Decision until full payment thereof.
31, 1995 30, 2013 Costs against petitioner Rodrigo Rivera.
B. July 1 2013 to B. July 1, 2013 to
date when this date when this
Decision Decision SO ORDERED.
becomes final and becomes final
executory and executory
P120,000.00 A. 12 % per A. 12% per P50,000.00 Total
annum on the annum on the amount
principal amount total amount of of
of P120,000.00 column 2 Columns
B. 6% per B. 6% per 1-4
annum on the annum on the
principal amount total amount of
of P120,000.00 column 2[35]

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

WHEREFORE, the petition in G.R. No. 184458 is DENIED. The

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

(1) the principal amount of P120,000.00;

(2) legal interest of 12% per annum of the principal amount of

P120,000.00 reckoned from 1 January 1996 until 30 June 2013;
(3) legal interest of 6% per annum of the principal amount of
P120,000.00 form 1 July 2013 to date when this Decision becomes
final and executory;
(4) 12% per annum applied to the total of paragraphs 2 and 3 from 11
June 1999, date of judicial demand, to 30 June 2013, as interest due
earning legal interest;

32
 BUENAVENTURA v. METROPOLITAN BANK 799 S 239
A duly executed contract is the law between the parties, and, as such,
commands them to comply fully and not selectively with its terms. A
contract of adhesion, of itself, does not exempt the parties from
compliance with what was mutually agreed upon by them.
The Case
In this appeal, the petitioner seeks the reversal of the decision
promulgated on April 23, 2004,[1] whereby the Court of Appeals (CA)
affirmed with modification the judgment[2] rendered on July 11, 2002 by
the Regional Trial Court (RTC), Branch 61, in Makati City. Also being
appealed is the resolution[3] promulgated on February 9, 2005, whereby
the CA denied her motion for reconsideration.
Antecedents
The following factual and procedural antecedents are narrated by the
CA in its assailed decision, to wit:
On January 20, 1997 and April 17, 1997, Teresita Buenaventura (or
"appellant") executed Promissory Note (or "PN") Nos. 232663 and
232711, respectively, each in the amount of PI,500,000.00 and payable
to Metropolitan Bank and Trust Company (or "appellee"). PN No.
232663 was to mature on July 1, 1997, with interest and credit
evaluation and supervision fee (or "CESF") at the rate of 17.532% per
annum, while PN No. 232711 was to mature on April 7, 1998, with
interest and CESF at the rate of 14.239% per annum. Both PNs provide
for penalty of 18% per annum on the unpaid principal from date of
default until full payment of the obligation.
Despite demands, there remained unpaid on PN Nos. 232663 and
232711 the amounts of P2,061,208.08 and PI,492,236.37, respectively,
as of July 15, 1998, inclusive of interest and penalty. Consequently,
appellee filed an action against appellant for recovery of said amounts,
interest, penalty and attorney's fees before the Regional Trial Court of
Makati City (Branch 61).
In answer, appellant averred that in 1997, she received from her
nephew, Rene Imperial (Or "Imperial"), three postdated checks drawn
against appellee (Tabaco Branch), i.e., Check No. TA 1270484889PA
dated January 5, 1998 in the amount of PI,200,000.00, Check No.
1270482455PA dated March 31, 1998 in the amount of PI,197,000.00
and Check No. TA1270482451PA dated March 31, 1998 in the amount
of P500,000.00 (or "subject checks"), as partial payments for the
purchase of her properties; that she rediscounted the subject checks
with appellee (Timog Branch), for which she was required to execute the
PNs to secure payment thereof; and that she is a mere guarantor and
cannot be compelled to pay unless and until appellee shall have
exhausted all the properties of Imperial.[4]
On July 11, 2002, the RTC rendered its judgment,[5] viz.:
WHEREFORE, in view of the foregoing, the Court finds in favor of
plaintiff METROPOLITAN BANK AND TRUST COMPANY and against
defendant TERESITA BUENAVENTURA.
As a consequence of this judgment, defendant Buenaventura is directed
to pay plaintiff bank the amount of P3,553,444.45 plus all interest and
penalties due as stipulated in Promissory Notes Nos. 232663 and
232711 beginning July 15, 1998 until the amount is fully paid and 10%
of the total amount due as attorney's fees.
SO ORDERED.
Dissatisfied, the petitioner appealed, assigning the following as errors,
namely:
I
THE TRIAL COURT ERRED IN HOLDING THAT THE
REDISCOUNTING TRANSACTION BETWEEN APPELLANT AND
METROBANK RESULTED TO A LOAN OBLIGATION SECURED BY
THE SUBJECT CHECKS AND PROMISSORY NOTES.
A. Rediscounting transactions do not create loan obligations
between the parties.
B. By the rediscounting, Metrobank subrogated appellant as
creditor of Rene Imperial, the issuer of the checks.
C. Legal subrogation was presumed when Metrobank paid the
obligation of Mr. Imperial with the latter's knowledge and
consent.
II
33

THE TRIAL COURT ERRED IN GRANTING METROBANK'S CLAIMS
ON THE BASIS OF THE PROMISSORY NOTES.
A. The promissory notes are null and void for being simulated
and fictitious.
B. Assuming that the promissory notes are valid, these only
serve as guaranty to secure the payment of the rediscounted
checks.
III
THE TRIAL COURT ERRED IN NOT RULING THAT APPELLANT IS
ENTITLED TO HER COUNTERCLAIMS FOR EXEMPLARY
DAMAGES, ATTTORNEY'S FEES, LITIGATION EXPENSES AND
COSTS OF SUIT.[6]
On April 23, 2004, the CA promulgated the assailed decision affirming
the decision of the RTC with modification,[7]as follows:
WHEREFORE, the appealed decision is AFFIRMED with
MODIFICATION of the second paragraph of its dispositive portion,
which should now read:
"As a consequence of this judgment, defendant Buenaventura is
directed to pay plaintiff bank the amount of P3,553,444.45 plus interest
and penalty therein at 14.239% per annum and 18% per annum,
respectively, from July 15, 1998 until fully paid and 10% of said amount
as attorney's fees."
SO ORDERED.[8]
On May 21, 2004, the petitioner moved for the reconsideration of the
decision, but the CA denied her motion for that purpose on February 9,
2005.[9]
Hence, this appeal by the petitioner.
Issues
The petitioner ascribes the following errors to the CA, to wit:
I xxx per centum xxx per annum, inclusive, from date hereof and until fully
THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER
IS LIABLE UNDER THE PROMISSORY NOTES.
A. The promissory notes executed by petitioner are null and
void for being simulated and fictitious.
B. Even assuming that the promissory notes are valid, these
are intended as mere guaranty to secure Rene Imperial's
payment of the rediscounted checks. Hence, being a mere
guarantor, the action against petitioner under the said
promissory notes is premature.
C. Metrobank is deemed to have subrogated petitioner as
creditor of Mr. Imperial (the issuer of the checks). Hence,
Metrobank's recourse as creditor, is against Mr. Imperial.
II
THE COURT OF APPEALS ERRED IN NOT RULING THAT
PETITIONER IS ENTITLED TO HER COUNTER-CLAIM FOR
EXEMPLARY DAMAGES, ATTORNEY'S FEES, LITIGATION
EXPENSES AND COSTS OF SUIT.[10]
Ruling
The appeal lacks merit.
First of all, the petitioner claims that the promissory notes she executed
were contracts of adhesion because her only participation in their
execution was affixing her signature,[11] and that the terms of the
promissory notes should consequently be strictly construed against the
respondent as the party responsible for their preparation.[12] In contrast,
the respondent counters that the terms and conditions of the promissory
notes were clear and unambiguous; hence, there was no room or need
for interpretation thereof.[13]
The respondent is correct.
The promissory notes were written as follows:
FOR VALUE RECEIVED, I/we jointly and severally promise to pay
Metropolitan Bank and Trust Company, at its office x x x the principal
sum of PESOS xxx, Philippine currency, together with interest and credit
evaluation and supervision fee (CESF) thereon at the effective rate of
paid.[14]
What the petitioner advocates is for the Court to now read into the
promissory notes terms and conditions that would contradict their clear
34
and unambiguous terms in the guise of such promissory notes being
contracts of adhesion. This cannot be permitted, for, even assuming that
the promissory notes were contracts of adhesion, such circumstance
alone did not necessarily entitle her to bar their literal enforcement
against her if their terms were unequivocal. It is preposterous on her part
to disparage the promissory notes for being contracts of adhesion, for
she thereby seems to forget that the validity and enforceability of
contracts of adhesion were the same as those of other valid contracts.
The Court has made this plain in Avon Cosmetics, Inc. v.
Luna,[15] stating:
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 contract is just as binding as
ordinary contracts.
It is true that we have, on occasion, struck down such contracts as void
when the weaker party is imposed upon in dealing with the dominant
bargaining party and is reduced to the alternative of taking it or leaving
it, completely deprived of the opportunity to bargain on equal footing.
Nevertheless, contracts of adhesion are not invalid per se and they 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.
xxxx
Accordingly, a contract duly executed is the law between the parties,
and they are obliged to comply fully and not selectively with its terms. A
contract of adhesion is no exception.
As a rule, indeed, the contract of adhesion is no different from any other
contract. Its interpretation still aligns with the literal meaning of its terms
and conditions absent any ambiguity, or with the intention of the
parties.[16] The terms and conditions of the promissory notes involved
herein, being clear and beyond doubt, should then be enforced
accordingly. In this regard, we approve of the observation by the CA,
citing Cruz v. Court of Appeals, [17] that the intention of the parties should
be "deciphered not from the unilateral post facto assertions of one of the
parties, but from the language used in the contract."[18] As fittingly
declared in The Insular Life Assurance Company, Ltd. vs. Court of
Appeals and Sun Brothers & Company,[19] "[w]hen the language of the
contract is explicit leaving no doubt as to the intention of the drafters
thereof, the courts may not read into it any other intention that would
contradict its plain import." Accordingly, no court, even this Court, can
"make new contracts for the parties or ignore those already made by
them, simply to avoid seeming hardships. Neither abstract justice nor
the rule of liberal construction justifies the creation of a contract for the
parties which they did not make themselves or the imposition upon one
party to a contract of an obligation not assumed."[20]
Secondly, the petitioner submits that the promissory notes were null and
void for being simulated and fictitious; hence, the CA erred in enforcing
them against her.
The submission contradicts the records and the law pertinent to
simulated contracts.
Based on Article 1345[21] of the Civil Code, simulation of contracts is of
two kinds, namely: (1) absolute; and (2) relative. Simulation is absolute
when there is color of contract but without any substance, the parties
not intending to be bound thereby.[22] It is relative when the parties come
to an agreement that they hide or conceal in the guise of another
contract.[23]
The effects of simulated contracts are dealt with in Article 1346 of
the Civil Code, to wit:
Art. 1346. An absolutely simulated or fictitious contract is void. A relative
simulation, when it does not prejudice a third person and is not intended
for any purpose contrary to law, morals, good customs, public order or
public policy binds the parties to their real agreement.
The burden of showing that a contract is simulated rests on the party
impugning the contract. This is because of the presumed validity of the
contract that has been duly executed.[24] The proof required to overcome
the presumption of validity must be convincing and preponderant.
Without such proof, therefore, the petitioner's allegation that she had
been made to believe that the promissory notes would be guaranties for
the rediscounted checks, not evidence of her primary and direct liability
under loan agreements,[25] could not stand.
Moreover, the issue of simulation of contract was not brought up in the
RTC. It was raised for the first time only in the CA.[26] Such belatedness
forbids the consideration of simulation of contracts as an issue. Indeed,
the appellate courts, including this Court, should adhere to the rule that
issues not raised below should not be raised for the first time on appeal.
Basic considerations of due process and fairness impel this adherence,
for it would be violative of the right to be heard as well as unfair to the
35
parties and to the administration of justice if the points of law, theories,
issues and arguments not brought to the attention of the lower courts
should be considered and passed upon by the reviewing courts for the
first time.
Thirdly, the petitioner insists that the promissory notes, even if valid,
were meant as guaranties to secure payment of the checks by the
issuer, Rene Imperial; hence, her liability was that of a guarantor, and
would take effect only upon exhaustion of all properties and after resort
to all legal remedies against Imperial.[27]
The insistence of the petitioner is bereft of merit.
The CA rejected this insistence, expounding as follows:
A guaranty is not presumed; it must be expressed (Art. 2055, New Civil
Code). The PNs provide, in clear language, that appellant is primarily
liable thereunder. On the other hand, said PNs do not state that Imperial,
who is not even privy thereto, is the one primarily liable and that
appellant is merely a guarantor. Parenthetically, the disclosure
statement (Exh. "D") executed by appellant states that PN No. 232711
is "secured by postdated checks". In other words, it does not appear that
the PNs were executed as guaranty for the payment of the subject
checks.
Nevertheless, appellant insists that she did not obtain a short-term loan
from appellee but rediscounted the subject checks, with the PNs as
guaranty. The contention is untenable.
In Great Asian Sales Center Corporation vs. Court of Appeals (381
SCRA 557), which was cited in support of appellant's claim, the
Supreme Court explained the meaning of "discounting line", thus:
"In the financing industry, the term 'discounting line' means a credit
facility with a financing company or bank which allows a business entity
to sell, on a continuing basis, its accounts receivable at a discount. The
term 'discount' means the sale of a receivable at less than its face value.
The purpose of a discounting line is to enable a business entity to
generate instant cash out of its receivables which are still to mature at
future dates. The financing company or bank which buys the receivables
makes its profit out of the difference between the face value of the
receivable and the discounted price."
A guarantor may bind himself for less, but not for more than the principal
debtor, both as regards the amount and the onerous nature of the
conditions (Art. 2054, id). Curiously, the face amounts of the PNs
(totaling P3,000,000.00) are more than those of the subject checks
(totaling P2,897,000.00). And unlike the subject checks, the PNs provide
for interest, CESF and penalty.
Moreover, the maturity date (July 1, 1997) of PN No. 232663 is ahead
of the dates (January 5, 1998 and March 31, 1998) of the subject
checks. In other words, appellant, as "guarantor", was supposed to
make good her "guaranty", i.e. PNs in question, even before the
"principal" obligations, i.e. subject checks, became due. It is also noted
that the rediscounting of the subject checks (in January 1997) occurred
months ahead of the execution of PN No. 232711 (on April 17, 1997)
even as the PNs were supposedly a precondition to said rediscounting.
xxxx
Stated differently, appellant is primarily liable under the subject checks.
She is a principal debtor and not a guarantor. Consequently, the benefit
of excussion may not be interposed as a defense in an action to enforce
appellant's warranty as indorser of the subject checks.
Moreover, it is absurd that appellant (as maker of the PNs) may act as
guarantor of her own obligations (as indorser of the subject checks).
Thus, Art. 2047 of the New Civil Code provides that "(b)y 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."[28] (Emphasis supplied)
The CA was correct. A contract of guaranty is one where a person, the
guarantor, binds himself or herself to another, the creditor, to fulfill the
obligation of the principal debtor in case of failure of the latter to do
so.[29] It cannot be presumed, but must be express and in writing to be
enforceable,[30] especially as it is considered a special promise to
answer for the debt, default or miscarriage of another.[31] It being clear
that the promissory notes were entirely silent about the supposed
guaranty in favor of Imperial, we must read the promissory notes literally
due to the absence of any ambiguities about their language and
meaning. In other words, the petitioner could not validly insist on the
guaranty. In addition, the disclosure statements[32] and the statements
of loan release[33] undeniably identified her, and no other, as the
borrower in the transactions. Under such established circumstances,
she was directly and personally liable for the obligations under the
promissory notes.
36
Fourth, the petitioner argues that the respondent was immediately .
subrogated as the creditor of the accounts by its purchase of the checks
from her through its rediscounting facility;[34] and that legal subrogation
should be presumed because the petitioner, a third person not
interested in the obligation, paid the debt with the express or tacit
approval of the debtor.[35]
The argument is barren of factual and legal support.
Legal subrogration finds no application because there is no evidence
showing that Imperial, the issuer of the checks, had consented to the
subrogation, expressly or impliedly.[36] This circumstance was pointed
out by the RTC itself.[37]Also, as the CA emphatically observed,[38] the
argument was off-tangent because the suit was not for the recovery of
money by virtue of the checks of Imperial but for the enforcement of her
obligation as the maker of the promissory notes.
Fifth, the petitioner posits that she was made to believe by the manager
of the respondent's Timog Avenue, Quezon City Branch that the
promissory notes would be mere guaranties for the rediscounted
checks;[39] that despite the finding of the RTC and the CA that she was
a seasoned businesswoman presumed to have read and understood all
the documents given to her for signature, she remained a layman faced
with and puzzled by complex banking terms; and that her acceding to
signing the promissory notes should not be taken against her as to
conclude her.[40]
The petitioner's position is unworthy of serious consideration.
After having determined that the terms and conditions of the promissory
notes were clear and unambiguous, and thus should be given their literal
meaning and not be interpreted differently, we insist and hold that she
should be bound by such terms and conditions. Verily, the promissory
notes as contracts should bind both contracting parties; hence, the
validity or compliance therewith should not be left to the will of the
petitioner.[41] Otherwise, she would contravene and violate the principles
of mutuality and of the obligatory force of contracts. A respected
commentator on civil law has written in this respect.
The binding effect of the contract on both parties is based on the
principles (1) that obligations arising from contracts have the force of law
between the contracting parties; and (2) that there must be mutuality
between the parties based on their essential equality, to which is
repugnant to have one party bound by the contract leaving the other free
therefrom.
xxxx
Just as nobody can be forced to enter into a contract, in the same
manner once a contract is entered into, no party can renounce it
unilaterally or without the consent of the other. It is a general principle
of law that no one may be permitted to change his mind or disavow and
go back upon his own acts, or to proceed contrary thereto, to the
prejudice of the other party.
If, after a perfect and binding contract has been executed between the
parties, it occurs to one of them to allege some defect therein as a
reason for annulling it, the alleged defect must be conclusively proven,
since the validity and fulfillment of contracts cannot be left to the will of
one of the contracting parties. The fact that a party may not have fully
understood the legal effect of the contract is no ground for setting it
aside.[42]
And, lastly, there is need to revise the monetary awards by the CA.
Although no issue is raised by the petitioner concerning the monetary
awards, the Court feels bound to make this revision as a matter of law
in order to arrive at a just resolution of the controversy.
Involved here are two loans of the petitioner from the respondent,
specifically: (1) the principal amount of PI,500,000.00 covered by
Promissory Note No. 232663 to be paid on or before July 1, 1997 with
interest and credit evaluation and supervision fee (CESF) at the rate of
17.532% per annum and penalty charge of 18% per annumbased on
the unpaid principal to be computed from the date of default until full
payment of the obligation; and (2) the principal amount of PI,500,000.00
covered by Promissory Note No. 232711 to be paid on or before April 7,
1998 with interest and CESF at the rate of 14.239% per annum and
penalty charge of 18% per annum based on the unpaid principal to be
computed from the date of default until full payment of the obligation.
The RTC adjudged the petitioner liable to pay to the respondent the total
of P3,553,444.45 representing her outstanding obligation, including
accrued interests and penalty charges under the promissory notes, plus
attorney's fees.[43] On appeal, the CA ruled that she was liable to the
respondent for the sum of P3,553,444.45 with interest and penalties at
37
14.239% per annum and 18% per annum, respectively, from July 15,
1998 until fully paid.[44]
TOTAL OUTSTANDING LOAN
The bases of the amounts being claimed from the petitioner were
apparently the two statements of past due interest and penalty charges AS OF JULY 15, 1998 P2,061,208.08
as of July 15, 1998, one corresponding to Promissory Note No.
232711,[45] and the other to Promissory Note No.
232663,[46] Respondent's witness Patrick N. Miranda, testifying on the
obligation and the computation thereof,[47] attested as follows: Promissory Note No. 232663[50]
1. What is the amount of her loan obligation?

-Under Promissory Note No. 232663, her loan obligation is PRINCIPAL AMOUNT P1,200,000.00
Pl,492,236.37 inclusive of interest and penalty charges as of July
15, 1998. Under Promissory Note No. 232711, her loan
obligation is P2,061,208.08, inclusive of interest and penalty
charges as of July 15, 1998. Thus, the total is P3,553,444.45 as PAST DUE INTEREST - 191 days
of July 15, 1998. Two (2) Statements of Account were prepared @27.901%
to show the computation and penalty charges. fr. [J]an. 05, 1998 to [J]uly 15, 1998 P177,636.37

2. Do you have these Statements of Account?

PENALTY CHARGES - 191 days
-Yes, sir. (Copies are hereto attached as Exhibits "H" and
@18.0%
"I".) [48]
fr. [J]an. 05, 1998 to [J]uly 15, 1998 P114,600.00
Promissory Note No. 232711[49]

PRINCIPAL AMOUNT P1,500,000.00

TOTAL OUTSTANDING LOAN

PAST DUE INTEREST - 334 days AS OF JULY 15, 1998 P1,492,236.37

@34.991%
fr. Aug. 15, 1997 to July 15, 1998
PENALTY CHARGES - 99 days
@18.0%
fr. April 07, 1998 to July 15, 1998
The total of P3,553,444.45 was the final sum of the computations
P486,958.08 contained in the statements of past due interest and penalty charges as
of July 15, 1998, and was inclusive of interest at the rate of 34.991% (on
the principal of P1,500,000.00) and 27.901% (on the principal of
P1,200,00.00). Yet, such interest rates were different from the interest
rates stipulated in the promissory notes, namely: 14.239% for
promissory Note No. 232711 and 17.532% for Promissory Note No.
P74,250.00 232663. As a result, the P3,553,444.45 claimed by the respondent as
the petitioner's aggregate oustanding loan obligatopn included interest
of almost double the rates stipulated by the parties.

38
We hold that the respondent had no legal basis for imposing rates far
higher than those agreed upon and stipulated in the promissory notes.
It did not suitably justify the imposition of the increased rates of 34.991%
and 27.901%, as borne out by the statements of past due interest and
penalty charges as of July 15, 1998, although it certainly was its burden
to show the legal and factual support for the imposition. We need not
remind that the burden of proof is the duty of any party to present
evidence to establish its claim or defense by the amount of evidence
required by law, which in civil cases is preponderance of
evidence.[51] Consequently, we have to strike down the imposition.
Parenthetically, we observe that the stipulation in the promissory notes
on the automatic increase of the interest rate to the prevailing rate[52] did
not justify the increase of the interest rates because the respondent did
not adduce evidence about the prevailing rates at the time material to
this case.
On May 16, 2013, the Monetary Board of the Bangko Sentral ng
Pilipinas, in the exercise of its statutory authority to review and fix
interest rates, issued Circular No. 799, Series of 2013 to lower to 6% per
annum the rate of interest for loan or forbearance of any money, goods
or credits, and the rate allowed in judgment.[53] The revised rate applies
only in the absence of stipulation in loan contracts. Hence, the
contractual stipulations on the rates of interest contained in the
promissory notes remained applicable.
Considering that, as mentioned, the P3,553,444.45 was an aggregate
inclusive of the interest {i.e., at the rates of 34.991% and 27.901% per
annum); and that the penalty charges contravened the express
provisions of the promissory notes, the RTC and the CA both erred on
a matter of law, and we should correct their error as a matter of law in
the interest of justice.
It is further held that the CA could not validly apply the lower interest rate
of 14.239% per annum to the whole amount of P3,553,444.45 in
contravention of the stipulation of the parties. In Mallari v. Prudential
Bank,[54] the Court declared that the interest rate of "3% per month and
higher are excessive, unconscionable and exorbitant, hence, the
stipulation was void for being contrary to morals." Even so, the Court did
not consider as unconscionable the interest rate of 23% per
annum agreed upon by the parties. Upholding the 23% per
annum interest rate agreed upon, the Court instead opined that "the
borrowers cannot renege on their obligation to comply with what is
incumbent upon them under the contract of loan as the said contract is
the law between the parties and they are bound by its
stipulations."[55] Consequently, the respondent could not impose the flat
interest rate of 14.239% per annum on the petitioner's loan obligation.
Verily, the obligatory force of the stipulations between the parties called
for the imposition of the interest rates stipulated in the promissory notes.
To accord with the prevailing jurisprudence, the Court pronounces that
the respondent was entitled to recover the principal amount of
P1,500,000.00 subject to the stipulated interest of 14.239%per
annum from date of default until full payment;[56] and the principal
amount of P1,200,000.00 subject to the stipulated interest of
17.532%per annumfrom date of default until full payment.[57]
The next matter to be considered and determined is the date of default.
According to Article 1169 of the Civil Code, there is delay or default from
the time the obligee judicially or extrajudically demands from the obligor
the fulfillment of his or her obligation. The records reveal that the
respondent did not establish when the petitioner defaulted in her
obligation to pay based on the two promissory notes. As such, its claim
for payment computed from July 15, 1998 until full payment of the
obligation had no moorings other than July 15, 1998 being the date
reflected in the statements of past due interest and penalty charges as
of July 15, 1998. Nonetheless, its counsel, through the letter dated July
7, 1998,[58] made a final demand in writing for the petitioner to settle her
total obligation within five days from receipt. As the registry return receipt
indicated,[59] the final demand letter was received for the petitioner by
one Elisa dela Cruz on July 28, 1998. Hence, the petitioner had five days
from such receipt, or until August 2, 1998, within which to comply. The
reckoning date of default is, therefore, August 3, 1998.
As to the penalty charge, the same was warranted for being expressly
stipulated in the promissory notes, to wit:
I/we further agree to pay the Bank, in addition to the agreed interest rate,
a penalty charge of eighteen per centum (18%) per annum based on
any unpaid principal to be computed from date of default until full
payment of the obligation.[60]
Verily, a penal clause is an accessory undertaking attached to a
principal obligation. It has for its purposes, firstly, to provide for
liquidated damages; and, secondly, to strengthen the coercive force of
the obligation by the threat of greater responsibility in the event of
39
breach of obligation.[61] Under Article 1226 of the Civil Code,[62] a penal
clause is a substitute indemnity for damages and the payment of
interests in case of noncompliance, unless there is a stipulation to the
contrary. In Tan v. Court of Appeals[63] the Court has elaborated on the
nature of a penalty clause in the following:
Penalty on delinquent loans may take different forms. In Government
Service Insurance System v. Court of Appeals,this Court has ruled that
the New Civil Code permits an agreement upon a penalty apart from the
monetary interest. If the parties stipulate this kind of agreement, the
penalty does not include the monetary interest, and as such the two are
different and distinct from each other and may be demanded separately.
Quoting Equitable Banking Corp. v. Liwanag, the GSIS case went on to
state that such a stipulation about payment of an additional interest rate
partakes of the nature of a penalty clause which is sanctioned by law,
more particularly under Article 2229 of the New Civil Code which
provides that:
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 the absence of stipulation, the legal interest, which is six per
cent per annum.
The penalty charge of two percent (2%) per month in the case at bar
began to accrue from the time of default by the petitioner. There is no
doubt that the petitioner is liable for both the stipulated monetary interest
and the stipulated penalty charge. The penalty charge is also called
penalty or compensatory interest.
The Court has explained the rate of compensatory interest on monetary
awards adjudged in decisions of the Court in Planters Development
Bank v. Lopez,[64] citing Nacar v. Gallery Frames [65] to wit:
With respect to the computation of compensatory interest, Section 1 of
Bangko Sentral ng Pilipinas (BSP) Circular No. 799, Series of 2013,
which took effect on July 1, 2013, provides:
Section 1. The rate of interest for the loan or forbearance of any money,
goods or credits and the rate allowed in judgments, in the absence of an
express contract as to such rate of interest, shall be six percent (6%) per
annum.
This provision amends Section 2 of Central Bank (CB) Circular No. 905-
82, Series of 1982, which took effect on January 1, 1983. Notably, we
recently upheld the constitutionality of CB Circular No. 905-82
in Advocates for Truth in Lending, Inc., et al. v. Bangko Sentral ng
Pilipinas Monetary Board, etc. Section 2 of CB Circular No. 905-82
provides:
Section 2. The rate of interest for the loan or forbearance of any money,
goods or credits and the rate allowed in judgments, in the absence of
express contract as to such rate of interest, shall continue to be twelve
percent (12%) per annum.
Pursuant to these changes, this Court modified the guidelines in Eastern
Shipping Lines, Inc. v. Court of Appeals in the case of Dario Nacar v.
Gallery Frames, et al.(Nacar). In Nacar, we established the following
guidelines:
I. When an obligation, regardless of its source, i.e., law, contracts,
quasi-contracts, delicts or quasi-delicts is breached, the
contravenor can be held liable for damages. The provisions
under Title XVIII on "Damages" of the Civil Code govern in
determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate
of interest, as well as the accrual thereof, is imposed, as
follows:
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance
of money, the interest due should be that which may
have been stipulated in writing.Furthermore, the
interest due shall itself earn legal interest from the time
it is judicially demanded. In the absence of stipulation,
the rate of interest shall be 6% per annum to be
computed from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions of Article
1169 of the Civil Code,(emphasis and underscore
supplied)
2. When an obligation, not constituting a loan or forbearance of
money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the
rate of 6% per annum. No interest, however, shall be
adjudged on unliquidated claims or damages, except when
or until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the
time the claim is made judicially or extrajudicially (Art. 1169,
Civil Code), but when such certainty cannot be so
reasonably established at the time the demand is made, the
40
 interest shall begin to run only from the date the judgment of
the court is made (at which time the quantification of
damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally
adjudged.

3. When the judgment of the court awarding a sum of money

becomes final and executory, the rate of legal interest,
whether the case falls under paragraph 1 or paragraph 2,
above, shall be 6% per annum from such finality until its
satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become final and
executory prior to July 1, 2013, shall not be disturbed and shall continue
to be implemented applying the rate of interest fixed therein.
To accord with the foregoing rulings, the 17.532% and 14.239% annual
interest rates shall also respectively earn a penalty charge of 18% per
annum reckoned on the unpaid principals computed from the date of
default (August 3, 1998) until fully paid. This is in line with the express
agreement between the parties to impose such penalty charge.

Article 2212 of the Civil Code requires that interest due shall earn legal
interest from the time it is judicially demanded, although the obligation
may be silent upon this point. Accordingly, the interest due shall itself
earn legal interest of 6% per annum from the date of finality of the
judgment until its full satisfaction, the interim period being deemed to be
an equivalent to a forbearance of credit.[66]

WHEREFORE, the Court AFFIRMS the decision promulgated on April

23, 2004 with the MODIFICATION that the petitioner shall pay to the
respondent: (1) the principal sum of PI,500,000.00 under Promissory
Note No. 232711, plus interest at the rate of 14.239% per
annum commencing on August 3, 1998 until fully paid; (2) the principal
sum of PI,200,000.00 under Promissory Note No. 232663, plus interest
at the rate of 17.532% per annum commencing on August 3, 1998 until
fully paid; (3) penalty interest on the unpaid principal amounts at the rate
of 18% per annumcommencing on August 3, 1998 until fully paid; (4)
legal interest of 6% per annum on the interests commencing from the
finality of this judgment until fully paid; (5) attorney's fees equivalent to
10% of the total amount due to the respondent; and (6) costs of suit.

SO ORDERED

41
 DM Ragasa Enterprises v. BDO G.R. 190512, June 20, 2018
Before the Court is a Petition for Review1 on Certiorari (Petition) under
Rule 45 of the Rules of Court (Rules) filed by petitioner D.M. Ragasa
Enterprises, Inc., (Ragasa) against respondent Banco de Oro, Inc.,2
formerly Equitable PCI Bank, Inc. (bank), assailing the Decision3 dated
March 27, 2009 (questioned Decision) and Resolution4 dated
November 25, 2009, both of the Court of Appeals (CA) Special
Thirteenth (13th) Division and Former Special Thirteenth Division,
respectively, in CA-G.R. CV. No. 88322.
The CA reversed and set aside the rulings in favor of Ragasa of the
Regional Trial Court (RTC) of Quezon City, Branch 216, in its Decision
dated April 4, 20065 and Order dated October 3, 20066 (denying the
corresponding Motion for Reconsideration) in Civil Case No. Q-02-
46341.
The Facts
On January 30, 1998, Ragasa and then Equitable Banking Corporation
(Equitable Bank) executed a Contract of Lease7 (Lease Contract), as
lessor and lessee, respectively, over the ground and second floors of a
commercial building located at 175 Tomas Morato Avenue corner Scout
Castor, Quezon City (subject premises), for a period of five years,
commencing on February 1, 19988 up to January 31, 20039, with a
monthly rental of P122,607.00.10 The pertinent provisions of the Lease
Contract state, viz.:
2. The TERM of this Lease shall be for a period of five (5) years,
commencing on February 1, 1998. x x x
3. The TENANT shall pay a monthly rental of ONE HUNDRED TWENTY
TWO THOUSAND SIX HUNDRED SEVEN (122,607) pesos based on
P463.16 per square meter per month inclusive of Value Added Tax and
withholding tax and payable in advance in the first five days of the
month, that is 1st to 5th of every month. An annual increase of 10% shall
be applied during the term of the lease.
4. The failure to pay two consecutive monthly rentals within the first five
(5) days of any month, as stated in No. 3, shall automatically terminate
this Contract, without need of any further notice to the TENANT. The
LESSOR is hereby authorized, and has the right to show the premises
to prospective tenants, and within five (5) days following the last day of
the grace period stated in No. 3, the TENANT shall vacate the premises
without the need of the usual judicial proceedings, and/or the LESSOR
shall padlock the premises until the TENANT settles his obligations. The
TENANT agrees to this padlocking as a sign of his good faith in his
compliance with No. 3 of this Contract and the LESSOR is not liable or
answerable for any damage that the TENANT may incur or suffer due to
his non-entrance to the premises, or the LESSOR may confiscate any
property found in the premises equivalent to the unpaid rental, penalty,
and interests thereto, as guaranty and/or pledge, and can be retrieved
anytime upon full payment of his accounts but must not be for more than
three (3) months from the date of default [;] otherwise, the confiscated
property or properties shall become permanently owned by the LESSOR
as partial payment of his unpaid rentals, penalties and interests, and in
case of any unpaid balance, the TENANT is still liable.
xxxx
7. The parties hereby covenant and agree upon the signing of this
Contract of Lease that [the] TENANT shall pay to the LESSOR or his
representative, the amount of SEVEN HUNDRED THIRTY FIVE
THOUSAND SIX HUNDRED FORTY TWO (P735,642) pesos,
Philippine Currency, P367,821 as three months advanced rental, and
P367,821 as three months deposit, which deposit shall be refunded to
the TENANT only upon termination of this Lease, that is, after expiration
of the lease, paid occupancy of the said premises, and after vacating
the same and also after deducting the unpaid water bills[,] if any, electric
bills, extraordinary wear and tear of the premises, losses and breakages
of the premises, and other damages sustained by the LESSOR.
8. The TENANT voluntarily binds himself and agrees to the following
without any coercion or force by the LESSOR;
xxxx
m) The full deposit shall be forfeited in favor of the LESSOR upon non-
compliance of the Term of the Contract of Lease by the TENANT, and
cannot be applied to Rental;
n) To pay a penalty of 3% of the monthly rental, for every month of delay
of payment of the monthly rental, [with] a fraction of the month x x x
considered [as] one month;
42
p) Breach or non-compliance of any of the provisions of this Contract,
especially non-payment of two consecutive monthly rentals on time,
shall mean the termination of this Contract, and within five (5) days from
the date of breach, non-compliance, or default, the TENANT shall
vacate the premises quietly and peacefully without need of the required
judicial proceedings. If he does not vacate the premises, the TENANT
has agreed that the LESSOR has no liability whatsoever due to the
padlocking of the same;
xxxx
10. In the event that a Court Litigation has been resorted to by the
LESSOR or LESSEE, due to non-compliance of any of the foregoing
provisions, the aggrieved party shall be paid by the other party, no less
than fifteen thousand (P15,000) pesos, Philippine Currency, for
Attorney's fees, and other damages that the honorable court may allow;
the cost of litigations shall be born[e] or paid by the party in fault, or in
default. All unpaid accounts and obligations of the TENANT shall earn
interest or bear interest at the rate of 14% per annum or at the allowable
rate of interest from the date of default. The legal suits shall be brought
in the town of Quezon City.11
Pursuant to the Lease Contract, Equitable Bank paid the amounts of
P367,821.00 representing three months advance rentals, and
P367,821.00 representing three months rentals as security deposit.12
Meanwhile, Equitable Bank entered into a merger with Philippine
Commercial International Bank (PCI Bank) thereby forming Equitable
PCI Bank, Inc.13 The latter would eventually, pending the present case,
merge with Banco de Oro, Inc. to form the respondent bank.14
As a result of the merger, the bank closed and joined the branches of its
constituent banks which were in close proximity with each other as
maintaining said branches would be impractical.15 One of the branches
which had to be closed is the branch located in the subject premises.16
For this reason, the bank sent a notice dated May 28, 2001, informing
Ragasa that the former was pre-terminating their Lease Contract
effective June 30, 2001 (Notice of Pre-termination)17. Ragasa
responded with a demand letter dated June 20, 200118 for payment of
monthly rentals for the remaining term of the Lease Contract from July
1, 2001 to January 31, 2003 totaling P3,146,596.42, inasmuch as there
is no express provision in the Lease Contract allowing pre-
termination.19 The bank countered, through a letter dated June 26,
2001,20 that its only liability for pre-terminating the contract is the
forfeiture of its security deposit pursuant to item 8(m) of the Lease
Contract.21 On June 30, 2001, the bank vacated the subject premises
without heeding Ragasa's demand for payment.
After sending two more reiterative demand letters,22 which were both
ignored by the bank, Ragasa finally filed on March 11, 2002 with the
RTC the Complaint for Collection of Sum of Money (amounting to
P3,146,596.42 representing the monthly rentals under the Lease
Contract for the period July 1, 2001 to January 31, 2003) and Damages.
Ragasa argued that under the Lease Contract, the forfeiture of the
bank's security deposit does not exempt it from payment of the rentals
for the remaining term of the lease because the bank's act of pre-
terminating the contract was a major breach of its terms. Moreover, item
8(m) expressly provides that the security deposit shall not be applied to
the rentals.
In its Answer filed on April 26, 2002, the bank argued, in gist, that item
8(m) of the Lease Contract is actually a penalty clause which, in line with
Article 122623 of the Civil Code, takes the place of damages and
interests in case of breach. Hence, for breaching the Lease Contract by
pre-terminating the same, the bank is liable to forfeit its security deposit
in favor of Ragasa but would not be liable for rentals corresponding to
the remaining life of the Contract. Moreover, the bank is not liable for the
penalty at the rate of 3% under item 8(n) of the Lease Contract because
the bank paid the due rentals up to the time it pre-terminated the
same.24
Ruling of the RTC
The RTC ruled in Ragasa's favor in a Decision dated April 4, 2006, the
dispositive portion of which reads:
WHEREFORE, the Court finds that plaintiff has established its case
against defendant by preponderance of evidence and judgment is
hereby rendered ordering defendant Equitable PCI Bank, Inc. to pay
plaintiff the following:
The amount of Php 3,146,596.42 Philippine Currency, representing the
monthly rentals from July 1, 2001 to January 31, 2003;
A penalty of 3% of the monthly rental for every month of delay;
43

An interest of 14% per annum on the full amount due until fully paid;
Attorney's fees in the amount of Php 30,000.00; and
Costs of litigation.
Defendant's Counterclaim is dismissed.
SO ORDERED.25
The RTC held that the bank may not unilaterally pre-terminate the Lease
Contract; hence, it is still liable to pay the rentals for the remaining
duration of the said contract. Likewise, in addition to item 8(m) of the
Lease Contract providing for the forfeiture of the bank's security deposit,
item 8(n), another penalty clause providing for additional 3% of the
monthly rental for each month of delay in payment, also applies. Finally,
pursuant to Section 10, an interest of 14% per annum on the amount
due was awarded.
The bank filed a Motion for Reconsideration which was denied by the
RTC in its Order dated October 3, 2006.26
On October 23, 2006, the bank filed a Notice of Appeal to the CA,
arguing that the Lease Contract was automatically terminated by the act
of the bank in pre-terminating the lease or based on the provisions of
the Lease Contract, and that upon termination of the lease, the bank has
been released from its future contractual obligations including the
payment of "future rentals."27
Ruling of the CA
In the questioned Decision dated March 27, 2009, the CA granted the
bank's appeal and reversed and set aside the RTC's ruling, disposing of
the case as follows:
WHEREFORE, the appeal is hereby GRANTED. The ruling of the trial
court is hereby REVERSED and SET ASIDE. The complaint is
dismissed for lack of legal basis.
SO ORDERED.28
The CA ruled that the bank's failure to continue the Lease Contract until
its expiration constituted a breach of its provision. As such, the Lease
Contract was automatically terminated by virtue of item 8(p) thereof
providing for its outright termination in case of breach of any of its
provisions. Hence, there is no legal basis to hold the bank liable for
payment of rentals for the unexpired period of the contract. However,
the bank is liable to forfeit its security deposit pursuant to the penalty
clause under item 8(m) of the contract. The CA ruled that to allow
Ragasa to collect the value of the unexpired term of the lease plus
penalty would constitute unjust enrichment.
Ragasa filed a Motion for Reconsideration of the questioned Decision,
which the CA denied for lack of merit, in its Resolution dated November
25, 2009.29
Refusing to concede, Ragasa filed the present Petition on January 21,
2010 raising four main issues, namely:
Issues
1.) WHETHER OR NOT THE COURT OF APPEALS SERIOUSLY
ERRED IN LAW IN GRANTING THE APPEAL OF RESPONDENT
BANK AND IN DENYING THE MOTION FOR RECONSIDERATION OF
THE PETITIONER WHICH IS CONTRARY TO ARTICLES 1170 AND
1308 OF THE NEW CIVIL CODE[.]
2.) WHETHER OR NOT THE COURT OF APPEALS SERIOUSLY
ERRED IN LAW IN RULING THAT THE PENALTY CLAUSE
APPLICABLE IN THE CASE IS ITEM NO. 8(m) OF THE CONTRACT,
AND NOT ITEM 8(n) OF THE SAME CONTRACT[.]
3.) WHETHER OR NOT THE COURT OF APPEALS SERIOUSLY
ERRED IN LAW IN RULING THAT THE SUBJECT CONTRACT HAD
BEEN TERMINATED[.]
4.) WHETHER OR NOT THE COURT OF APPEALS SERIOUSLY
ERRED IN LAW IN RULING THAT THE PETITIONER IS GUILTY OF
UNJUST ENRICHMENT[.]30
The fundamental issue that the Court is called upon to resolve is: What
is the liability of the bank, if any, for its act of pre-terminating the Lease
Contract?
At the outset, it is well to remember that a contract is the law between
the parties.31 Obligations arising from contracts have the force of law
44
between the contracting parties and should be complied with in good
faith.32 The parties are allowed by law33 to enter into stipulations,
clauses, terms and conditions they may deem convenient which bind
the parties as long as they are not contrary to law, morals, good
customs, public order or public policy.34
The pertinent provisions of the Lease Contract are as follows:
2. The TERM of this Lease shall be for a period of five (5) years,
commencing on February 1, 1998. x x x
xxxx
7. The parties hereby covenant and agree upon the signing of this
Contract of Lease that [the] TENANT shall pay to the LESSOR or his
representative, the amount of SEVEN HUNDRED THIRTY FIVE
THOUSAND SIX HUNDRED FORTY TWO (P735,642) pesos,
Philippine Currency, P367,821 as three months advanced rental, and
P367,821 as three months deposit, which deposit shall be refunded to
the TENANT only upon termination of this Lease, that is, after expiration
of the lease, paid occupancy of the said premises, and after vacating
the same and also after deducting the unpaid water bills[,] if any, electric
bills, extraordinary wear and tear of the premises, losses and breakages
of the premises, and other damages sustained by the LESSOR.
8. The TENANT voluntarily binds himself and agrees to the following
without any coercion or force by the LESSOR;
xxxx
m) The full deposit shall be forfeited in favor of the LESSOR upon non-
compliance of the Term of the Contract of Lease by the TENANT, and
cannot be applied to Rental;
xxxx
p) Breach or non-compliance of any of the provisions of this Contract,
especially non-payment of two consecutive monthly rentals on time,
shall mean the termination of this Contract, and within five (5) days from
the date of breach, non-compliance, or default, the TENANT shall
vacate the premises quietly and peacefully without need of the required
judicial proceedings. If he does not vacate the premises, the TENANT
has agreed that the LESSOR has no liability whatsoever due to the
padlocking of the same;
xxxx
10. In the event that a Court Litigation has been resorted to by the
LESSOR or LESSEE, due to non-compliance of any of the foregoing
provisions, the aggrieved party shall be paid by the other party, no less
than fifteen thousand (P15,000) pesos, Philippine Currency, for
Attorney's fees, and other damages that the honorable court may allow;
the cost of litigations shall be born[e] or paid by the party in fault, or in
default. All unpaid accounts and obligations of the TENANT shall earn
interest or bear interest at the rate of 14% per annum or at the allowable
rate of interest from the date of default. The legal suits shall be brought
in the town of Quezon City.35 (Underscoring supplied)
The foregoing stipulations are clear and show no contravention of law,
morals, good customs, public order or public policy. As such, they are
valid, and the parties' rights shall be adjudicated according to them,
being the primary law between them. When the terms of the contract are
clear and leave no doubt as to the intention of the contracting parties,
the rule is settled that the literal meaning of its stipulations should
control.36
In the case at bar, there is no question that the bank breached the Lease
Contract. When it served upon Ragasa the Notice of Pre-termination
effective June 30, 2001 and when it, indeed, vacated the subject
premises on said date, the bank, in effect, breached item 2 of the Lease
Contract, providing for a five-year term. It must be noted that the Lease
Contract does not contain a pre-termination clause.
The Lease Contract has a specific provision in case of non-compliance
of its "Term" � "a period of five (5) years, commencing on February 1,
1998," to wit:
8. The TENANT voluntarily binds himself and agrees to the following
without any coercion or force by the LESSOR;
xxxx
m) The full deposit shall be forfeited in favor of the LESSOR upon non-
compliance of the Term of the Contract of Lease by the TENANT, and
cannot be applied to Rental;37
45

The word "term" appears only in three instances, but in three forms, in
the five-page Lease Contract. Firstly, "TERM" (a defined word as the
letters are all capitalized) is used in item 2, as quoted above, to indicate
the five-year period of the lease. Secondly, "Term" is used in item 8(m),
as quoted above, and being with a capitalized initial letter it also
indicates that it is a defined word. Lastly, it is provided in item 8(g) that
the lessee voluntarily binds itself and agrees: "To pay from time to time,
during the term of this Lease, all expenses such as salaries, wages, etc.,
if for business, all charges for telephone if any, and/or any such other
services in the Leased Premises."38
Given the fact that in item 2 and item 8(g), the words "TERM" and "term"
definitely refer to the period of the lease, the word "Term" in item 8(m)
should likewise be understood to have the same meaning.
The word "Term" could not mean stipulation, provision, condition,
covenant or clause as the word "term" can also be understood. In the
default clauses of the Lease Contract, i.e., items 8(p) and 10, the word
employed is "provisions." It is the word "provisions" which the parties
intended to refer to any stipulation, condition, covenant or clause and
not the word "term."
Consequently, the correct interpretation of the word "Term" in item 8(m)
is that it refers to the period of the lease, and not to any other provision
of the Lease Contract.
Article 1170 of the Civil Code mandates that those who, in the
performance of their obligations, are guilty of fraud, negligence, or delay,
and those who, in any manner, contravene the tenor thereof, are liable
for damages.
Thus, having contravened the tenor of the Lease Contract regarding its
term or period, the bank should be liable for damages. However, how
much in damages should the bank be liable?
Generally, if the lessor or the lessee should not comply with their
obligations, the aggrieved party may ask for either the rescission of the
contract and indemnification for damages, or only the latter, allowing the
contract to remain in force.39
In the present case, there is an express stipulation in item 8(p) of the
Lease Contract that "[b]reach or non-compliance of any of the provisions
of this Contract, especially non-payment of two consecutive monthly
rentals on time, shall mean the termination of this Contract."40
The validity of an automatic termination clause such as the one quoted
above is well-settled.
In Manila Bay Club Corp. v. Court of Appeals41 (Manila Bay Club Corp.),
the lease period agreed upon was from March 4, 1988 to March 4, 1998
but was short-lived because the private respondents therein unilaterally
terminated the lease with the request that petitioner therein vacate the
leased premises and peacefully surrender its possession for the failure,
among others, to insure the leased building in violation of paragraph 22
of the lease contract between the parties therein.42 The private
respondents therein invoked the "Special Clause" as found in paragraph
19 of the said lease contract to justify their actions, to wit:
19. If the rental herein stipulated or any part thereof at any time, shall be
in arrears or unpaid, or if the tenant shall at any time fail or neglect to
perform or comply with any of the covenants, conditions, agreements or
restrictions stipulated or if the tenant shall become bankrupt or insolvent
or shall compound with his creditors, then and in any of such above
cases, this lease contract shall become automatically terminated and
cancelled and the said premises shall be peacefully vacated by the
LESSEE for the LESSOR to hold and enjoy henceforth as if these
presents have not been made and it shall be lawful for the LESSOR or
any person duly authorized in his behalf, without any formal notice or
demand to enter into and upon said leased premises or any part thereof
without prejudice on the part of the LESSOR to exercise all rights on the
contract of lease and those given by law. And upon such cancellation of
the contract, the LESSEE hereby grants the LESSOR the legal right to
enter into and take possession of the leased premises as though the
term of the leased contract has expired.43
The Court justified the validity of the above automatic termination
clause, thus:
Certainly, there is nothing wrong if the parties to the lease contract
agreed on certain mandatory provisions concerning their respective
rights and obligations, such as the procurement of the insurance and
rescission clause. For it is well to recall that contracts are respected as
the law between the contracting parties, and may establish such
stipulations, clauses, terms and conditions as they may want to include.
As long as such agreements are not contrary to law, morals, good
46
customs, public policy or public order they shall have the force of law
between them.44
In Riesenbeck v. Spouses Silvino Maceren, Jr. and Patricia Maceren45
(Riesenbeck), the Court observed:
The Contract of Lease was called off by respondents in virtue of Clauses
No. 1046 and No. 1347 thereof to which the parties voluntarily bound
themselves. In Manila Bay Club Corp. v. Court of Appeals,48 this Court
interpreted as requiring mandatory compliance by the parties a provision
in a lease contract that failure or neglect to perform or comply with any
of the covenants, conditions, agreements or restrictions stipulated shall
result in the automatic termination and cancellation of the lease.
In accord with this ruling is Peoples Industrial and Commercial Corp. v.
Court of Appeals49 where the Court held that there is nothing wrong if
the parties to a lease contract agreed on certain mandatory provisions
concerning their respective rights and obligations, such as the
procurement of insurance and the rescission clause. Thus �
[I]t is well to recall that contracts are respected as the law between the
contracting parties, and they may establish such stipulations, clauses,
terms and conditions as they may want to include. As long as such
agreements are not contrary to law, morals, good customs, public policy
or public order they shall have the force of law between them.
The foregoing legal truism finds equal potency in the case at bar. No
doubt, the pre-termination was properly resorted to by respondents
pursuant to Clause 10 of the Contract of Lease. Indeed, the law on
obligations and contracts does not prohibit parties from entering into
agreement providing that a violation of the terms of the contract would
cause its cancellation even without judicial intervention.50 This is what
petitioner and respondents entered into, a lease contract with a
stipulation that the contract is rescinded upon violation of its substantial
provisions, which petitioner, does not deny having violated.51
Pursuant to the automatic termination clause of the Lease Contract,
which is in furtherance of the autonomy characteristic of contracts, the
Lease Contract was terminated upon its unauthorized pre-termination
by the bank on June 30, 2001. Ragasa is, thus, precluded from availing
of the second option which is to claim damages by reason of the breach
and allow the lease to remain in force. With the lease having been
automatically resolved or terminated by agreement of the parties,
Ragasa is entitled only to indemnification for damages.
To force either party to continue with a contract that is automatically
terminated in case of its breach by either party (pursuant to its express
provision) is not in furtherance of or sanctioned by the contract. Rather,
it is a contravention thereof and it negates the autonomy characteristic
of contracts.
Is the claim of Ragasa that it is entitled to damages in the amount of
P3,146,596.42, representing the monthly rentals from July 1, 2001 to
January 31, 2003, or the unexpired period of the lease, valid?
Entitlement to rentals after the termination of the lease pursuant to an
automatic rescission or termination clause is possible in the case where
the lessor invokes the clause and the lessee refuses to vacate the
leased premises. The lessee will be liable for damages equivalent to the
rentals for the duration of its possession from the termination of the
lease until he vacates the premises. This was in effect the ruling of the
Court in Manila Bay Club Corp. when it affirmed the award of the monthly
rental equivalent to P 250,000.00, which was the valuation of the trial
court as affirmed by the CA, viz.:
Petitioner in its third assignment of error assails the P250,000.00
monthly rental adjudged against it by the trial court and as affirmed by
respondent Court of Appeals, claiming that there was no basis for such
finding.
Again, we disagree. In reaching that amount, the trial court took into
consideration the following factors: 1) prevailing rates in the vicinity; 2)
location of the property; 3) use of the property; 4) inflation rate; and 5)
the testimony of private respondent Modesta Sabeniano that she was
offered by a Japanese-Filipino investor a monthly rental of P400,000.00
for the leased premises then occupied by petitioner.52 Petitioner for its
part should have presented its controverting evidence below to support
what it believes to be the fair rental value of the leased building since
the burden of proof to show that the rental demanded is unconscionable
or exorbitant rests upon the lessee.53 But petitioner failed to do so.
Hence, the valuation by the trial court, as affirmed by respondent Court
of Appeals, stands.
It is worth stressing at this juncture that the trial court had the authority
to fix the reasonable value for the continued use and occupancy of the
47
leased premises after the termination of the lease contract, and that it
was not bound by the stipulated rental in the contract of lease since it is
equally settled that upon termination or expiration of the contract of
lease, the rental stipulated therein may no longer be the reasonable
value for the use and occupation of the premises as a result or by reason
of the change or rise in values.54 Moreover, the trial court can take
judicial notice of the general increase in rentals of real estate especially
of business establishments55 like the leased building owned by private
respondents.56
That is, however, not the situation here. The bank did not continue to
possess the Leased Premises after its automatic termination, as it
vacated the same on June 30, 2001.
As explained above, the provision or clause that is applicable in case of
non-compliance of the Term or period of the Lease Contract is item 8(m)
which mandates that the full deposit of P367,821.00 or the equivalent of
three months rentals shall be forfeited with the proviso that the deposit
cannot be applied to rental. This proviso as to non-application to rental
of the deposit means that the forfeiture is without prejudice to the
payment of any unpaid rental at the time of the non-compliance or
breach of the Term or period of the Lease Contract. Since the bank had
no unpaid rental as of June 30, 2001, the proviso finds no application in
the present case.
What is the nature of item 8(m) of the Lease Contract: "The full deposit
shall be forfeited in favor of the LESSOR upon non-compliance of the
Term of the Contract of Lease by the TENANT, and cannot be applied to
Rental"?
The Court believes and so holds that item No. 8(m) is a penalty or penal
clause.
A penal clause is an accessory obligation which the parties attach to a
principal obligation for the purpose of insuring the performance thereof
by imposing on the debtor a special prestation (generally consisting in
the payment of a sum of money) in case the obligation is not fulfilled or
is irregularly or inadequately fulfilled.57 Quite common in lease
contracts, this clause functions to strengthen the coercive force of the
obligation and to provide, in effect, for what would be the liquidated
damages resulting from a breach.58
A penal clause has a three-fold purpose: (1) a coercive purpose or one
of guarantee � this is to urge the debtor to the fulfillment of the main
obligation under pain of paying the penalty; (2) to serve as liquidated
damages � this is to evaluate in advance the damages that may be
occasioned by the non-compliance of the obligation; and (3) a strictly
penal purpose � this is to punish the debtor for non-fulfillment of the
main obligation.59 While the first purpose is always present, the second
purpose is presumed and the third purpose must be expressly agreed
upon.60
Stated otherwise, the purposes of penalty or penal clause are: (1)
funcion coercitiva o de guarantia or to insure the performance of the
obligation; (2) funcion liquidatoria or to liquidate the amount of damages
to be awarded to the injured party in case of breach of the principal
obligation; and (3) funcion estrictamente penal or to punish the obligor
in case of breach of the principal obligation, in certain exceptional
cases.61 The second is evidently compensatory and the third is punitive
in character, while the first is the general purpose regardless of whether
the penalty is compensatory or punitive.62
Evidently, the penal clause may be considered either reparation,
compensation or substitute for damages, on one hand, or as a
punishment in case of breach of the obligation, on the other. When
considered as reparation or compensation, the question as to the
appropriate amount of damages is resolved once and for all because
the stipulated indemnity represents a legitimate estimate made by the
contracting parties of the damages caused by the nonfulfillment or
breach of the obligation. Proof of actual damages is, consequently, not
necessary in order that the stipulated penalty may be demanded. When
considered as a punishment, the question of damages is not yet
resolved inasmuch as the right to damages, besides the penalty, still
subsists. Thus, if the injured party desires to recover the damages
actually suffered by him in addition to the penalty, he must prove such
damages.63
Penal clause may be classified into: (1) according to source: (a) legal
(when it is provided by law) and (b) conventional (when it is provided for
by stipulation of the parties); (2) according to demandability: (a)
subsidiary (when only the penalty may be enforced) and (b)
complementary (when both the principal obligation and the penalty may
be enforced); and (3) according to purpose: (a) cumulative (when
damages may be collected in addition to penalty) and (b) reparatory
(when the penalty substitutes indemnity for damages).64
48

Item 8(m) of the Lease Contract is an accessory obligation or prestation
to the principal obligation of lease. It specifies the stipulated amount of
liquidated damages � the full deposit � to be awarded to the injured
party in case of breach of the Term or period of the principal obligation.
Hence, as to source, it is conventional.
As defined, liquidated damages are those agreed upon by the parties to
a contract, to be paid in case of breach thereof.65 The amount of the
liquidated damages is purely contractual between the parties; and the
courts will intervene only to equitably reduce the liquidated damages,
whether intended as an indemnity or a penalty, if they are iniquitous or
unconscionable, pursuant to Articles 2227 and 122966 of the Civil Code.
Also, proof of actual damages suffered by the creditor is not necessary
in order that the penalty may be demanded.67
Item 8(m) seeks to insure or guarantee the completion of the lease
period since its non-compliance shall be met with a penalty. The degree
of the coercive effect or impact of the penalty to insure or guarantee the
performance of the principal obligation depends largely on the stipulated
amount of the liquidated damages. If the amount is substantial, then the
compulsion to perform may be greater. The obligor may not, however,
be willing to accept a very stiff penalty. As expressed earlier, the amount
is purely discretionary on the parties provided that it will pass the test of
unconscionability or excessiveness. Since the herein parties have
agreed on a specific amount of penalty, P367,821.00 or the full deposit,
the Court will not even second guess whether it is substantial enough to
insure the compliance of the lease period. The Court will simply rule that
it is reasonable.
As to the effect of the penal clause, Article 1226 of the Civil Code
provides:
Art. 1226. In obligations with a penal clause, the penalty shall substitute
the indemnity for damages and the payment of interests in case of
noncompliance, if there is no stipulation to the contrary. Nevertheless,
damages shall be paid if the obligor refuses to pay the penalty or is guilty
of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance
with the provisions of this Code.
From the first paragraph of Article 1226, it is evident that, as a rule, the
penalty is fixed by the contracting parties as a compensation or
substitute for damages in case of breach of the obligation; and it is,
therefore, clear that the penalty in its compensatory aspect is the
general rule, while the penalty in its strictly penal aspect is the
exception.68
It is also clear from paragraph 1 of Article 1226 that when an obligation
or a contract contains a penal clause, the penalty shall substitute the
indemnity for damages and the payment of interests in case of
noncompliance with or breach of the principal obligation. This general
rule, however, admits three exceptions, namely: (1) when there is a
stipulation to the contrary; (2) when the obligor or debtor is sued for
refusal to pay the agreed penalty; and (3) when the obligor or debtor is
guilty of fraud. In these exceptions, it is evident that the purpose of the
penalty is to punish since the obligee or creditor can recover from the
obligor or debtor not only the penalty, but also the damages or interests
resulting from the breach of the principal obligation.69
Is item 8(m) intended by the parties for a strictly penal purpose or a
punishment on the guilty party? If it is, then item 8(m) is both
complementary and cumulative. If it is not, then it is subsidiary and
reparatory.
As earlier observed, the third purpose of a penal clause, which is strictly
penal, must be expressly agreed upon. This is in consonance with the
first sentence of Article 1226 � "the penalty shall substitute the
indemnity for damages and interests in case of noncompliance, if there
is no stipulation to the contrary." Thus, the contract must expressly
provide that in addition to the penalty, the guilty party shall be liable for
damages or interests resulting from the breach of the principal
obligation.
Item 8(m) does not expressly make a reservation for an additional claim
for damages and interests occasioned by the breach of the lease period.
There is, however, another provision of the Lease Contract that is
triggered by a default in item 8(m), to wit:
10. In the event that a Court Litigation has been resorted to by the
LESSOR or LESSEE, due to non-compliance of any of the foregoing
provisions, the aggrieved party shall be paid by the other party, no less
than fifteen thousand (P15,000) pesos, Philippine Currency, for
Attorney's fees, and other damages that the honorable court may allow;
49
the cost of litigations shall be born[e] or paid by the party in fault, or in
default. All unpaid accounts and obligations of the TENANT shall earn
interest or bear interest at the rate of 14% per annum or at the allowable
rate of interest from the date of default. The legal suits shall be brought
in the town of Quezon City.70 (Underscoring supplied)
Being provisions on default, item 8(m) and item 10 must be applied
jointly and simultaneously. Thus, aside from the forfeiture of the full
deposit, the party at fault or in default is liable, pursuant to item 10 of the
Lease Contract, for the payment of attorney's fees in an amount which
is not less than P15,000.00, other damages that the court may allow,
cost of litigation, and 14% interest per annum on unpaid accounts and
obligations.
Can item 10 pass as the "stipulation to the contrary" or the express
agreement required in Article 1226? A careful reading of all the pertinent
provisions leads the Court to believe that when item 10 provides that
"other damages that the court may allow" are recoverable in case of
noncompliance of any provision of the Lease Contract, this only means
what it says, that the aggrieved party can be awarded damages in
addition to the forfeiture of the deposit that is provided in item 8(m). In
fine, item 8(m) and item 10, construed together, form a complementary
and cumulative penal clause; and it is a punishment or strictly penal.
From the foregoing, the Court accordingly rules that the bank is liable
for the forfeiture of the deposit and attorney's fees in the amount of
P15,000.00 and such other damages which Ragasa suffered by reason
of the breach of the lease period by the bank.
Clearly, the requisites for the demandability of the penal clause are
present in this case. These are: (1) that the total non-fulfillment of the
obligation or the defective fulfillment is chargeable to the fault of the
debtor; and (2) that the penalty may be enforced in accordance with the
provisions of law. As to the second requisite, the penalty is demandable
when the debtor is in mora in regard to obligations that are positive (to
give and to do) where demand may be necessary unless it is excused;
and with regard to negative obligations, when an act is done contrary to
that which is prohibited.71
In the present case, the bank pre-terminated the Lease Contract which
is not expressly allowed therein. For not complying with its Term or
period, the bank did an act contrary to what is not allowed in the Lease
Contract.
Additionally, the bank cannot insist on paying only the penalty. This is
proscribed under Article 1227, to wit:
Art. 1227. The debtor cannot exempt himself from the performance of
the obligation by paying the penalty, save in the case where this right
has been expressly reserved for him. Neither can the creditor demand
the fulfillment of the obligation and the satisfaction of the penalty at the
same time, unless this right has been clearly granted him. However, if
after the creditor has decided to require the fulfillment of the obligation,
the performance thereof should become impossible without his fault, the
penalty may be enforced.
There is nothing in the Lease Contract which provides that the bank can
exempt itself from the performance of any provision therein, including
the Term or period, by simply paying the penalty. Items 8(m) and 10 do
not contain any such exemption.
As discussed above, Ragasa cannot insist on the performance of the
lease, i.e., for the lease to continue until expiration of its term, because
the lease has been automatically terminated when the bank breached it
by pre-terminating its terms. Thus, Ragasa is only entitled to damages.
That said, that is, even as items 8(m) and 10 are considered strictly
penal or punishment, Ragasa, as the injured party, is nonetheless
required to prove the "other damages" that it actually suffered before it
can be entitled thereto. However, a review of the records shows that
Ragasa presented nothing. Ragasa simply insisted that the bank should
be liable for the amount representing the monthly rentals from July 1,
2001 up to January 31, 2003 or the unexpired term of the Lease
Contract, equivalent to P3,146,596.42. Ragasa did not adduce any
evidence to support its claim that it actually suffered damages of such
amount in terms of lost income. In this regard, it must be emphasized
that Ragasa could have leased the Leased Premises as early as July 1,
2001 because the bank had completely vacated the same as of June
30, 2001. That Ragasa chose not to lease the Leased Premises and not
earn any rental therefrom in the meantime that its complaint for
damages against the bank was being litigated was its own decision and
doing.
Article 2203 of the Civil Code provides that "[t]he party suffering loss or
injury must exercise the diligence of a good father of a family to minimize
50
the damages resulting from the act or omission." Ragasa likewise failed
in this respect.

In conclusion, the Court rules that Ragasa is not entitled to the rental for
the unexpired period of the Lease Contract, and it is only entitled to the
forfeiture of the full deposit pursuant to item 8(m) and P15,000.00 as
attorney's fees pursuant to item 10.

WHEREFORE, premises considered, the instant petition for review is

hereby partly GRANTED. The Decision dated March 27, 2009 and the
Resolution dated November 25, 2009 of the CA are AFFIRMED WITH
MODIFICATION, awarding attorney's fees in the amount of P15,000.00
in favor of petitioner D.M. Ragasa Enterprises, Inc.

SO ORDERED.

51
 Aclado v. Government Service Insurance System, G.R. No.
260428, March 1, 2023
LAZARO-JAVIER, J.:
The Case
This Petition for Review on Certiorari1 assails the following
dispositions of the Court of Appeals in CA-G.R. SP No. 163904,
entitled Clarita D. Aclado v. Government Service Insurance
System, viz.:
1) Decision2 dated June 3, 2021, upholding Resolution No.
100 dated July 9, 2019 and Resolution No. 169 dated
November 12 2019 of the Board of Trustees of the
Government Service Insurance System (GSIS) in
GSIS Case No. 007-19, which dismissed petitioner
Clarita D. Aclado's appeal from the Decision dated
January 15, 2019 of the GSIS Committee on Claims in
COC Case No. 23-08-2018; and
2) Resolution3 dated April 5, 2022, denying petitioner's
motion for reconsideration.
Antecedents
Petitioner was a public school teacher in Em's Signal Village
Elementary School. She applied for and was granted several loans on
various dates.4 On August 19, 2015, the GSIS National Capital Region
(NCR) Department II sent her a collection letter, informing her that she
was among the active members verified with past due accounts.5
On August 5, 2016, she retired from the service, albeit her loan
accounts remained unpaid. Consequently, the same were subjected to
interest on arrears at the rate of 12% per annum compounded monthly
and a penalty of 6% per annum compounded monthly.6 She also did not
avail of the Consolidated Loan Program prior retirement in order to
waive penalties incurred despite advice from GSIS. When her retirement
claim was consequently processed, her cash surrender value (CSV)
resulted in zero proceeds.7 Her retirement benefits under Option 1
pursuant to Republic Act No. 82918 nonetheless had net proceeds
amounting to PHP 163,322.96.9
On December 5, 2016, she submitted a member's request form
(MRF), denying that she ever availed of the Emergency Loan Assistance
(ELA) and Summer One Month Salary Loan (SOS) for which she was
being charged by GSIS. Too, she requested scanned copies of the loan
applications and physical checks.10 On December 13, 2016, she even
filed a complaint via GSIS Hotline 8888 to reiterate that she never
availed of the said loans.11
On December 12, 2016, she filed another MRF, this time,
requesting for a refund of her loan overpayments. In several letters sent
to her by GSIS NCR Department II, she was informed of the favorable
action on her request for refund, including the action of GSIS crediting
to her account the corresponding amount. As for her ELA and SOS
accounts, she was furnished copies of the negotiated checks
representing her receipt thereof.12 On January 3, 2017, she also
received letters from the GSIS informing her that her loan accounts were
considered to have been fully paid after the unpaid loans and interests
had been deducted from her retirement benefits and CSV claim.13
From January 2017 to April 2018, she exchanged correspondence
with the GSIS NCR Department III reiterating her request to lower the
interest on arrears and penalties. This, however, was denied on the
following grounds: first,there were no recorded monthly payments
remitted for her SOS, Enhanced Salary Loan (ESL), ELA, and
Educational Assistance Loan (EAL) accounts; and second, Board
Resolution No. 97 was already used to reduce the interest on arrears
imposable on her loan accounts, resulting in the refund of excess
payment for her E-card Cash Advance (ECP) and ESL accounts
amounting to PHP 139,075.28.14
On July 24, 2018, the GSIS NCR Department II Acting Vice
President Leah Melisa De Leon reiterated the denial of petitioner's
request.15 Hence, petitioner appealed to the GSIS Committee on
Claims (COC).16
Ruling of the GSIS COC
By Decision17 dated January 15, 2019, the GSIS COC denied
petitioner's request, viz.:
52
 WHEREFORE, premises considered, the request
of Clarita D. Aclado (Claimant) to lower the interest on
arrears and penalties imposed on her various loan
accounts, i.e., Enhanced Salary Loan (ESL),
Emergency Loan (EML), Summer One Month Salary
Loan (SOS), Emergency Loan Assistance (ELA),
ECARD Cash Advance (ECP) and Educational
Assistance Loan (EAL) is
hereby DENIED.18 (Emphasis in the original)
The GSIS COC explained that there was no basis to further reduce
the interest on arrears and penalties on petitioner's loan accounts
considering the condonation made on the additional surcharges and
portion of the interest thereon up to December 31, 2007 per Board
Resolution No. 97. In any case, her excess loan payments in the total
amount of PHP 139,075.28 had already been refunded to her account
after due reconciliation.19
Petitioner thus further appealed to the Office of the Corporate
Secretary (OCS) of the GSIS Board of Trustees.20
Ruling of the GSIS Board of Trustees
Under Board Resolution No. 10021 dated July 9, 2019, the GSIS
Board of Trustees denied petitioner's appeal for having been filed out of
time. Under Section 5, Rule 3 of Policy and Procedural Guidelines No.
300-1522 and Section 26.2 of Rule V of the Revised Implementing
Rules and Regulations of Republic Act No. 8291, she had 60 calendar
days from receipt of the COC Decision to file her
appeal.1aшphi1 Records showed that she received a copy thereof on
January 17, 2019, giving her until March 18, 2019 to file her
petition.23 But she only filed the appeal more than one month after the
deadline. In any event, the COC had already decided on the merits of
her petition.24
Under Resolution No. 16925 dated November 12, 2019, the GSIS
Board of Trustees denied petitioner's motion for reconsideration.
Ruling of the Court of Appeals
By its assailed Decision26 dated June 3, 2021, the Court of Appeals
denied petitioner's appeal and affirmed the assailed resolutions of the
GSIS Board of Trustees.27 It agreed that petitioner's appeal was filed
only 38 days after the deadline. Thus, the COC Decision had already
attained finality, hence, had become immutable.28 By
Resolution29 dated April 5, 2022, the Court of Appeals denied
petitioner's motion for reconsideration.
The Present Petition
Petitioner now seeks affirmative relief from the Court and prays that
the assailed dispositions of the Court of Appeals be set aside and a new
one rendered, granting her request to reduce the interest and arrears
imposed on her various loan accounts.30
Petitioner posits that a copy of the COC Decision was sent to her
Taguig address though her actual residence is in Mariveles, Bataan. As
a result, she only knew of the Decision on March 13, 2019 when she
visited her home in Taguig and received the copy from her daughter. At
the time, she was not yet assisted by counsel,31 so she filed her petition
within 60 days from her actual receipt of the COC Decision as she
understood the notice in lay terms. She is entitled to a reduction of the
interest on arrears and penalties imposed on her various loan
applications since the interests imposed by GSIS are unreasonable and
unconscionable.32
The GSIS riposted that petitioner's case is not exceptionally
meritorious so as to warrant exception to procedural rules. Without
justifiable cause, she thus already lost her right to appeal and the COC
Decision already attained finality on March 18, 2019.33
Issues
1) Has the COC Decision dated January 15, 2019 attained
finality?
2) Is petitioner entitled to the reduction of interest and
penalties on her loan accounts with GSIS?
Our Ruling
53
 We grant the petition.
Petitioner's case merits relaxation of the doctrine of immutability
of judgment and rules of procedure
The GSIS asserts that the COC Decision dated January 15, 2019
had become final in view of petitioner's failure to perfect her appeal
within the 60-day reglementary period. Consequently, the doctrine of
finality of judgment or immutability of judgment allegedly controls.
On this score, it is basic that judgments or orders become final and
executory by operation of law and not by judicial declaration. Thus,
finality of a judgment becomes a fact upon the lapse of the reglementary
period of appeal if no appeal is perfected or a motion for reconsideration
or new trial is filed.34
Under the doctrine of immutability of judgment, a decision that has
acquired finality becomes immutable and unalterable, and may no
longer be modified in any respect, even if the modification is meant to
correct erroneous conclusions of fact and law, and whether it be made
by the court that rendered it or by the Highest Court of the land. Any act
which violates this principle must immediately be struck down.35
But this rule is not absolute. For the Court has the power and
prerogative to relax the same in order to serve the demands of
substantial justice considering: (a) matters of life, liberty, honor, or
property; (b) the existence of special or compelling
circumstances; (c) the merits of the case; (d) a cause not entirely
attributable to the fault or negligence of the party favored by the
suspension of the rules; (e) the lack of any showing that the review
sought is merely frivolous and dilatory; and (f) that the other party will
not be unjustly prejudiced thereby.36
What is at stake here are petitioner's hard-earned retirement
benefits painstakingly earned throughout her years of service as a public
school teacher. We thus cannot allow the case to be disposed of on
mere procedural grounds. A relaxation of the doctrine of immutability of
judgment is therefore apropos to further the higher interest of substantial
justice.
On this score, the GSIS Board of Trustees should have reckoned
with the Revised Implementing Rules and Regulations of Republic Act
No. 8291 under Section 33, Rule V, ordaining it to dispose of cases
based on the merits in order to promote justice and equity rather than
dismiss the same altogether based on procedural grounds, viz.:
Section 33. General Principles in Hearing and Determination of
Cases. – The proceedings before the hearing officer shall be summary
and non-litigious in nature and the technicalities of law and procedure
and the rules obtaining in the courts shall not strictly apply.
In the hearing, investigation and determination of any question
or controversy, and in exercising any duty or power under the law
and this Rule, the Board or Hearing Officer shall act on the merits of
the case with the end in view of promoting justice and
equity. (Emphasis and underscoring supplied.)
Verily, the GSIS Board of Trustees gravely erred when it mainly
based its decision against petitioner on mere procedural
technicality, i.e., petitioner's belated appeal. Worse, it brushed aside its
duty to render an independent ruling on the merits of petitioner's request
by reasoning that the COC had anyway already passed upon the issue.
Admittedly, petitioner filed her appeal only 38 days after the
reglementary period had already lapsed. Nonetheless, we have held
that liberality in the application of procedural rules is warranted where
the erring party: (a) shows reasonable cause justifying his/her non-
compliance with the rules; (b) convinces the Court that the outright
dismissal of the petition would defeat the administration of substantive
justice; and (c) offer proof of at least a reasonable attempt at compliance
therewith.37
A relaxation of procedural rules must be allowed in this case.
First. Petitioner convincingly justified her failure to comply with the
rules. She cannot be faulted for the delay since her sister-in-law and her
daughter did not tell her that they received the COC Decision on January
17, 2019. Sans such notice, she could not have known that the Decision
was already available since she resides in Mariveles, Bataan while a
copy thereof was sent to Taguig.38
54
 Too, she was unassisted by counsel. As a lay person, she would
not have understood that the reglementary period to appeal is reckoned
from the date of receipt of the decision and not the date of actual
knowledge thereof. Notably, the assistance of legal counsel is not
required in proceedings before the GSIS.39 Accordingly, technicalities
of law and procedure and the rules obtaining in courts do not strictly
apply thereto.40
Second. To reiterate, the outright dismissal of the petition based
merely on a procedural infirmity defeats the administration of substantial
justice. For petitioner will be deprived of a substantial portion of her
retirement benefits without even considering the merits of her request.
Lastly. Petitioner reasonably complied with the rules since she
strived – and in fact, did – file her appeal within 60 days from receipt of
the COC Decision, though her understanding thereof may have been
incorrect.
In fine, the GSIS should have entertained her appeal and looked
into the propriety of reducing the interest on arrears and penalties on
petitioner's loan accounts notwithstanding her belated appeal.
Petitioner is entitled to reduction of interest on arrears and
penalties on her loan accounts
The power of courts to reduce iniquitous and unconscionable
interests and penalties is well-settled. Articles 1229 and 2227 of the Civil
Code are clear on this wise, viz.:
Article 1229. The judge shall equitably reduce the
penalty when the principal obligation has been partly
or irregularly complied with by the debtor. Even if
there has been no performance, the penalty may
also be reduced by the courts if it is iniquitous or
unconscionable.
Article 2227. Liquidated damages, whether
intended as an indemnity or penalty, shall
be equitably reduced if they are iniquitous or
unconscionable. (Emphases supplied.)
The question of whether a penalty is reasonable or iniquitous is
subject to the sound discretion of the courts. In arriving at such
determination, the courts may consider factors such as, but not limited
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.41
Under the circumstances, the Court is constrained to declare the
interest on arrears equivalent to 12% per annum compounded
monthly and penalty equivalent to 6% per annum compounded
monthly imposed by the GSIS on petitioner's loans as unreasonable,
iniquitous, and unconscionable.
In Lo v. Court of Appeals,42 the Court found the penalty of PHP
5,000.00 per day of delay or PHP 150,000.00 per month, i.e., five times
the monthly rent, as exorbitant and unconscionable, especially
considering that the delay in surrendering the leased premises was due
to the lessee's mistaken yet well-founded belief that its right to pre-
emption to purchase the subject property had been violated. More
important, considering that the lessee is an agricultural cooperative
collectively owned by farmers with limited resources, ordering it to
pay a penalty of PHP 150,000.00 per month on top of the monthly
rent would deplete its income and drive it to bankruptcy.
We draw analogy from the circumstances in Lo here.
First. There is an enormous disparity between the gross loan
amount and the total amount due for each of petitioner's loan accounts
due to the accumulated interests and penalties imposed and
compounded thereto each month, viz.:43
Loan Account Gross Loan Total
Amount Amount Due
Emergency Loan PHP 7,500.00 PHP
(EML) (granted on 23,232.33
01/05/1996) - with
partial payment
Summer One PHP 10,971.00 PHP
Month Salary Loan (granted on 62,898.69
(SOS)
55
 principal obligation would not have ballooned to the horrendous
03/26/2004) - no amount of PHP 4.8 million if not for the iniquitous and
payments made unconscionable penalty charge of 3% per month or 36% per
Enhanced Salary PHP 81,552.00 PHP annum.
Loan (ESL) (granted on 443,432.04
12/22/2000) - no Similarly, in this case, petitioner's principal loan obligations would
payments made not have ballooned to the staggering amount of PHP 638,172.59 if not
Emergency Loan PHP 10,000.00 PHP for the exponential effect of the compounded interest on arrears
Assistance (ELA) (granted on 58,958.95 added each month on top of the compounded penalty added each
10/30/2003) - no month. In other words, interest on interest on interest was added to
payments made petitioner's unpaid balance per month.
Educational PHP 4,000.00 PHP
Assistance Loan (granted on 4,980.00 Worse, GSIS did so without prior notice or demands to pay.
(EAL) 05/31/2012) - no
payments made Second. Petitioner mistakenly believed that she already settled
Regular Policy PHP 23,655.83 PHP some of her accounts,47 and, in fact, overpaid her
Loan (PRG) (granted on 24,986.55 loans48 because GSIS did not notify her of her delinquencies and of
12/14/2015) - no the fact that it had begun imposing compounded interest on arrears,
payments made surcharges, and penalties on her unpaid balances.
E-Card Cash PHP 10,000.00 PHP
Advance Loan (granted on 19,684.03 On this score, GSIS claims that petitioners' loans were due and
(ECP) 05/02/2007) - with demandable at the time her CSV claim and retirement benefits were
partial payment processed because the same remained unpaid at the end of their
TOTAL PHP 147,678.83 PHP respective loan terms.49 In fact, there were no recorded monthly
638,172.59 payments remitted for her SOS, ESL, ELA, and EAL
accounts.50 Interest on arrears and penalties were thus allegedly
correctly imposed.
To say however that the difference is enormous is an absolute
understatement. For petitioner's total gross loan amount ballooned As aptly raised by Justice Mario V. Lopez during the deliberation,
from PHP 147,678.83 to the shocking amount of PHP petitioner's loans with GSIS are obligations with periods or "obligations
638,172.59. Framed differently, GSIS collected 432.135% more than for whose fulfillment a day certain has been fixed."51 GSIS thus
the amount petitioner actually received as loan – this, despite several correctly surmised that petitioner's loans have become due and
partial payments on some of the accounts. demandable at the end of their respective terms. This, however, did not
automatically entitle GSIS to impose interest on arrears and penalties
In Mondragon International v. Union Bank,44 we declared as on the unpaid balances.1âшphi1
iniquitous and unconscionable the stipulated penalty charge of 2% per
month or 24% per annum in addition to the regular interests. Too, Article 2209 of the Civil Code52 indeed allows creditors like GSIS
in Palmares v. Court of Appeals,45 we pronounced as iniquitous and to collect interest by way of damages, such as interest on arrears and
unconscionable the 3% penalty charge on the PHP 30,000.00 loan on penalties, whenever the debtor defaults or incurs in delay in the
top of the 6% interest per annum compounded monthly. Finally, in State payment of his or her debt. However, before a debtor may be declared
Investment House, Inc. v. Court of Appeals,46 the Court disallowed the in default, it is necessary that all the following requisites must be
payment of the deficiency amount altogether because it found that the present: (1) that the obligation be demandable and already liquidated;

56
(2) that the debtor delays performance; and (3) the creditor requires the
performance judicially or extrajudicially. Default only begins from the
moment the creditor demands the performance of the obligation.53
Thus, in SSS v. Moonwalk Development,54 the Court declared that
respondent was never in default because petitioner never compelled
performance of its loan obligation but immediately yet wrongfully
enforced payment by foreclosing respondent's real estate mortgage
without prior notice and demand to pay. Consequently, petitioner therein
was not entitled to recover any penalty without such prior demand.
Here, there is no showing that GSIS sent prior demands to pay, in
whatever form, to petitioner each time any of her accounts remained
unpaid at the end of each loan term. Petitioner was not even aware
that no payments were remitted to some of her accounts. Therefore,
she cannot be considered in default. Plain and simple, GSIS
consequently had no right to impose interest on arrears and
penalties on petitioner's unsettled balances notwithstanding the
expiration of the respective loan terms thereof. While there are
exceptions to the requirement of prior demand,55 none was established
to apply here.
Petitioner may only be considered in default upon her receipt of
GSIS' collection letter dated August 19, 2015 notifying her of her past
due accounts.56 For it was only then that her attention was called on
her delinquencies and was given a fair opportunity to contest or remedy
the same.1âшphi1
Third. If the Court upholds the 12% interest on arrears per
annum compounded monthly and 6% penalty per annum compounded
monthly on top of the principal loan amount and stipulated monetary
interest collected from petitioner, we will not only turn a blind eye to the
patent unfairness, nay, injustice, by which GSIS treated her request but
also rob her of decades-worth of benefits. This we cannot allow.
Petitioner was a public school teacher who had been in service for
several decades. It is unfortunate that she was left with only the meager
amount of PHP 163,322.9657 in exchange for several decades of long
and difficult service. Worse, when she finally contested the same, she
was shunned by GSIS based on mere procedural grounds. As of this
date, it has been more than six years since petitioner retired. It is high
time that GSIS returns to her what is due.
All told, in furtherance of the higher interests of justice, fairness, and
equity, GSIS shall waive the 12% interest on arrears per annum on the
unpaid balances of petitioner's loans. It shall impose only the penalty of
6% interest per annum, which shall not be compounded and which shall
be due only from the date petitioner was considered in
default, i.e., date the collection letter dated August 19, 2015 was
received until the outstanding balances were deducted from her CSV
claims and retirement benefits.
After computation, GSIS shall immediately return to petitioner the
excess amounts deducted from her benefits, subject to 6% interest per
annum from the date of finality of this Decision until full payment, in
accordance with prevailing jurisprudence.58
We find no reasons which may preclude GSIS from granting such
waiver as it can, and has in fact, on previous occasions, waived
penalties and surcharges on due accounts, e.g., in cited Resolution No.
48 per COC Decision dated January 15, 2019. Too, our pronouncement
in SSS v. Moonwalk Development,59 is apropos, viz.:
It is admitted that when a government created
corporation enters into a contract with a private
party concerning a loan, it descends to the level of
a private person. Hence, the rules on contract
applicable to private parties are applicable to
it. The argument therefore that the Social Security
Commission cannot waive or condone the penalties
which was applied in the United Christian Missionary
Society cannot apply in this case. First, because what
was not paid were installments on a loan but premiums
required by law to be paid by the parties covered by
the Social Security Act. Secondly, what is sought to
be condoned or waived are penalties not imposed
by law for failure to remit premiums required by
law, but a penalty for non-payment provided for by
the agreement of the parties in the contract
between them . . ." (Emphases supplied).
So must it be.
57
 ACCORDINGLY, the Petition is GRANTED. The Decision dated
June 3, 2021 and Resolution dated April 5, 2022 of the Court of Appeals
in CA-G.R. SP No. 163904 are REVERSED.

Respondent Government Service Insurance System

is ORDERED to:

1. WAIVE the interest on arrears equivalent to 12% per annum on

petitioner's unpaid loan balance;

2. CHARGE on petitioner Clarita D. Aclado's unpaid loan balances

the penalty equivalent to 6% per annum,which shall not be
compounded, only from the date petitioner was considered in
default, i.e., date of receipt of the collection letter dated August
19, 2015; and

3. RETURN to petitioner Clarita D. Aclado, upon computation, the

excess payments on her loan accounts subject to 6%
interest per annum from finality of this Decision until full
payment.

SO ORDERED.

58
 ibrahi1231-1232 – PAYMENT
MULTI-INTERNATIONAL v. MARTINEZ 774 S 574
Before us is a petition for review on certiorari1 (petition) under Rule 45
filed by Multi-International Business Data System, Inc. (petitioner) to
annul and set aside the Decision2 dated October 18, 2006 rendered by
the Appeals (CA) Sixteenth Division in CA G.R. CV No. 82686.
The Facts
Respondent Ruel Martinez (respondent) was the Operations Manager3
of petitioner from the last quarter of 1990 to January 22, 1999.4
Sometime in June 4, 1994, respondent applied for and was granted a
car loan amounting to P648,288.00.5 Both parties agreed that the loan
was payable through deductions from respondent's bonuses or
commissions, if any.6 Further, if respondent would be terminated for any
cause before the end of the term of the loan obligation, the unpaid
balance would be immediately due and demandable without need of
demand.7 On November 11, 1998, petitioner sent respondent a letter
informing him of the breakdown of his outstanding obligation with
petitioner amounting to P418,012.78, detailing every bonus, loan or
advance obtained and deducted.8 The subject vehicle remains with
respondent.9
In a letter dated November 24, 1998, respondent requested for a
breakdown of his benefits from petitioner as director/operations
manager in case he will resign from his position. In said letter,
respondent stated that the computation "is only for the assumed amount
on my end to deduct whatever I owe the Company."10
In a letter dated January 22, 1999 which respondent received the next
day, petitioner terminated respondent for cause effective immediately
and demanded that respondent pay his outstanding loan of P418,012.78
and surrender the car to petitioner within three days from receipt.11
Despite this, respondent failed to pay the outstanding balance.
In a letter dated June 23, 1999, petitioner demanded respondent to pay
his loan within three days from receipt thereof at petitioner's office.12
Again, despite demand, respondent failed to pay his outstanding
obligation.
On July 12, 1999, petitioner filed a complaint13 with the Regional Trial
Court of Makati City, Branch 148 (trial court) against respondent praying
that respondent be ordered to pay his outstanding obligation of
P418,012.78 plus interest, and that respondent be held liable for
exemplary damages, attorney's fees and costs of the suit.14
In his answer15 dated August 28, 1999, respondent alleged that he
already paid his loan through deductions made from his
compensation/salaries, bonuses and commissions.16 During trial,
respondent presented a certification dated September 10, 1996 issued
by petitioner's president, Helen Dy (Dy), stating that respondent already
paid the amount of P337,650.00 as of the said date.17 Respondent
alleged that a simple accounting would show that the he already paid
the loan considering that it is payable within four years from 1994.18
The Ruling of the Regional Trial Court
In its Decision19 dated November 22, 2002, the trial court ruled in favor
of petitioner. It decreed, thus:chanRoblesvirtualLawlibrary
WHEREFORE, judgment i[s] hereby rendered in favor of plaintiff as
against the defendant[ ] as follows:
Ordering defendant to pay plaintiff the balance of his car loan in the
amount of Four Hundred Eighteen Thousand Twelve and 78/100 Pesos
([P]418,012.78) plus interest at the rate of twelve percent (12%) [per
annum] from [June 23,] 1999 until full payment;
Ordering defendant Martinez to pay plaintiff the amount of Ten Thousand
Pesos ([P]10,000.00), by way of exemplary damages;
Ordering defendant to pay plaintiff the amount of Twenty Thousand
Pesos ([P]20,000.00) by way of attorney's fees;
Dismissing the counterclaims interposed by defendant;
Ordering defendant to pay the costs of the suit.
SO ORDERED.20ChanRoblesVirtualawlibrary
cralawlawlibrary
In arriving at the above pronouncement, the trial court held that the
respondent failed to present evidence to prove payment. The trial court
also held that the due execution and authenticity of the certification
59
dated September 10, 1996 were not established. In respondent's direct Thus, the CA reversed the trial court's ruling and
examination, he merely testified that he knows Dy and her spouse but held:chanRoblesvirtualLawlibrary
did not state that the document was actually executed by Dy.21
WHEREFORE, premises considered, the November 22, 2002 Decision
On December 16, 2002, respondent filed a motion seeking the of the Regional Trial Court of Makati City, Branch 148, in Civil Case No.
reconsideration of the trial court's decision dated November 22, 2002. 99-1295, is hereby REVERSED and SET ASIDE and a new one is
The trial court denied this motion in its Order22 dated March 22, 2004. entered DISMISSING the complaint for lack of merit.

The Ruling of the Court of Appeals SO ORDERED.32 (Emphasis in the original)

Respondent appealed the trial court's decision with the CA. Docketed
as CA G.R. CV No. 82686, the appeal alleged that the parties agreed
that the car loan would be payable within four years from the time
respondent secured the loan in June 1994.23 Respondent alleged that
he already completed his payment in June 1998 and that the payment
was done through salary deductions because if it were otherwise,
petitioner would be seeking full payment in the amount of P648,288.00
and not only the balance of P418,012.78.24 Respondent also assailed
the finding that the due execution of the certification dated September
10, 1996 was not proven. Respondent alleged that by mere comparison,
one can safely say that the signatures appearing in the certification and
in Dy's affidavit submitted before the National Labor Relations
Commission are signatures by one and the same person, Dy.
Respondent claims that he is very much familiar with the signature of
Dy, his former boss for ten years and even petitioner's witness, who is
also its administrative manager, Aida Valle (Valle), also identified the
signature of Dy in the certification.25cralawred
The CA in its Decision26 dated October 18, 2006 reversed the trial court
and ruled in favor of respondent in holding that the latter already fulfilled
his loan obligation with petitioner. The CA found credence in the
following pieces of evidence: (1) certification dated September 10, 1996
signed by Dy; (2) deduction of the monthly installments from
respondent's salary pursuant to the agreement between him and
petitioner; and (3) petitioner's admission of respondent's installment
payments made in the amount of P230,275.22.27 The CA held that Dy
never denied nor confirmed in open court the authenticity of her
signature in the certification dated September 10, 1996.28 Citing
Permanent Savings and Loan Bank v. Velarde29 and Consolidated
Bank and Trust Corporation (SOLIDBANK) v. Del Monte Motor Works,
Inc.,30 the CA held that Dy must declare under oath that she did not sign
the document or that it is otherwise false or fabricated.31
cralawlawlibrary
Hence, this petition.
The Issues
The issues for resolution are:chanRoblesvirtualLawlibrary
Whether respondent has fulfilled his obligation with petitioner; and
Whether the certification dated September 10, 1996 should be admitted
as basis for respondent's payment of his loan with petitioner.33
cralawlawlibrary
Our Ruling
The petition is partly meritorious.
Verification/Certification on Non-Forum Shopping
Before going into the substantive merits of the case, we shall first
resolve the technical issue raised by respondent in his Comment34
dated February 8, 2007 and Memorandum35 dated November 6, 2007.
Respondent alleged that the petition should be dismissed for failing to
comply with Section 4, Rule 45 of the Rules of Court in relation to
Sections 4 and 5, Rule 7 of the Rules of Court.36 Respondent alleged
that the signature of Dy in the Verification/Certification in the petition
differs from her signature in the letter dated November 11, 1998, thus,
inferred that someone not authorized signed the
Verification/Certification.37
Upon a review of the records, however, we found Dy's signature in the
petition to be the same with Dy's signature in the Ex-Parte Manifestation

60
of Compliance38 dated February 22, 2005 which petitioner filed with the
CA. Respondent never objected to Dy's signature in petitioner's Ex-
Parte Manifestation of Compliance. Further, Dy did not refute that the
signature in the petition is hers. Thus, we find no reason to dismiss the
petition outright based on respondent's allegation.
Review of factual findings
Before going into the merits of the petition, we stress the well-settled
rule that only questions of law may be raised in a petition for review on
certiorari under Rule 45 of the Rules of Court, since "the Supreme Court
is not a trier of facts."39 It is not our function to review, examine and
evaluate or weigh the probative value of the evidence presented.
When supported by substantial evidence, the findings of fact of the CA
are conclusive and binding on the parties and are not reviewable by this
Court, unless the case falls under any of the recognized exceptions in
jurisprudence.40
In the present case, the factual findings of the trial court and the CA on
whether respondent has fully paid his car loan are conflicting. The trial
court found that no deductions were made from respondent's salary to
establish full payment of the car loan while the CA found otherwise. The
trial court held, thus:chanRoblesvirtualLawlibrary
Culled from the evidence adduced and the testimony of the witnesses,
it appears that the defendant himself admitted on cross-examination that
no deductions were made in his monthly salary. Thus, it was a mere
presumption of fact on his part that he had been able to fully pay off his
car loan. The testimony of the defendant creating merely an inference
of payment will not be regarded as conclusive on that issue. Thus,
payment cannot be presumed by a mere inference from surrounding
circumstances. At most, the agreement that the payments for the car
loan shall be deducted from the defendant's salary and bonus is only
affirmative of the capacity or ability of the defendant to fulfill his part of
the bargain.
But whether or not there was actual payment through deductions from
the defendant's salary and bonus remains to be proven by independent
and credible evidence. As the saying goes: "a proof that an act could
have been done is no proof that it was actually done." Hence for failure
to present evidence to prove payment, defendant miserably failed in his
defense and in effect admitted the allegations of
plaintiff.41cralawlawlibrary
The CA, on the other hand, found that respondent sufficiently
established that deductions were made from his
salary:chanRoblesvirtualLawlibrary
x x x Moreover, it had been sufficiently established by witness Aida Valle
(VALLE), Administrative manager of plaintiff-appellee MULTI-
INTERNATIONAL, that defendant-appellant MARTINEZ had been the
only employee granted by plaintiff-appellee MULTI-INTERNATIONAL a
car loan as such [sic]. With that, it can fairly be inferred that plaintiff-
appellee MULT1-INTERNATlONAL's asseveration that the deductions
from the salary of defendant-appellant MARTINEZ had not been
reflected in his payslips is for naught, since indeed, no such "item" in the
payslip is provided, considering that it is only defendant-appellant
MARTINEZ who had been granted such car loan x x
x.42cralawlawlibrary
Thus, the conflicting factual findings of the trial court and CA compel us
to re-evaluate the facts of this case, an exception to the rule that only
questions of law may be dealt with in a petition for certiorari under Rule
45.
Admissibility of the
certification dated
September 10, 1996
Respondent relies on the certification43 dated September 10, 1996 to
bolster his defense that he already fully paid his car loan to petitioner.
We affirm the findings of the CA that the certification is admissible in
evidence.
Section 22,44 Rule 132 of the Rules of Court explicitly authorizes the
court to compare the handwriting in issue with writings admitted or
treated as genuine by the party against whom the evidence is offered or
proved to be genuine to the satisfaction of the judge. In Jimenez v.
Commission on Ecumenical Mission and Relations of the United
Presbyterian Church in the USA,45 we held:
It is also hornbook doctrine that the opinions of handwriting experts,
even those from the NBI and the PC, are not binding upon courts. This
principle holds true especially when the question involved is mere
61
handwriting similarity or dissimilarity, which can be determined by a
visual comparison of specimens of the questioned signatures with those
of the currently existing ones.
Handwriting experts are usually helpful in the examination of forged
documents because of the technical procedure involved in analyzing
them. But resort to these experts is not mandatory or indispensable to
the examination or the comparison of handwriting. A finding of forgery
does not depend entirely on the testimonies of handwriting experts,
because the judge must conduct an independent examination of the
questioned signature in order to arrive at a reasonable conclusion as to
its authenticity, x x x46 (Citations omitted)
The documents containing the signature of Dy which have been
submitted by petitioner as authentic are the following: (1) letter dated
November 11, 1998;47 (2) termination letter dated January 22, 1999;48
(3) promissory note dated June 17, 1994;49 and (4) chattel mortgage
signed on June 27, 1994.50 Examining and analyzing the signatures in
these documents with Dy's signature in the certification, we find no
substantial reason to doubt the latter's authenticity. In fact, the
testimonies of Dy herself and Valle support our finding.
Dy testified on cross-examination as follows:
Q: Now, ms witness [sic], sometime in December 10, 1996, do you recall
having executed a certification to Mr. Martinez?
A: No.
Q: Just to refresh your memory, would you please identify if this is the
signature you signed given [sic] to Mr. Martinez?
A: Yeah. If looks like my signature, but...
Q: Is that your signature?
A: But I said it looks like my signature. I want you to notice something
because everytime...
Q: Just answer the question please. Is that your signature?
A: I said it looks like my signature.
xxx
Q: Just answer the question please.
A: I said it looks like my signature.51 (Emphasis supplied)c
On the other hand, Valle, on cross-examination testified as follows:
Q: If I show you Certification dated September 10, 1996 will you be able
to confirm if this is a Certification signed by the president?
A: It looked like the signature of the president but I think she will be the
one to testify because she was the one who signed.52 (Emphasis
supplied)
Aside from supporting our finding that the signature in the certification is
genuine, the foregoing testimonies of Dy and Valle substantially comply
with the other modes of authenticating a private document under Section
20,53 Rule 132 of the Rules of Court.
Dy never testified that any forgery or fraud attended the certification.54
In fact, she did not deny the authenticity of her signature but actually
admitted that the signature therein looks like hers. Additionally, Valle,
who is familiar with the signature of Dy because of the requirements of
her job, also positively testified that the signature in the certification
looks like that of Dy's.55
The defenses of Dy that she does not have a copy or record of the
certification in her file and that the letterhead shows an old address are
weak and do not prove that the certification was not duly executed.
For having established the due execution and authentication of the
certification dated September 10, 1996, the certification should be
admitted in evidence to prove that respondent partially paid the car loan
in the amount ofP337,650.00.
Insufficient evidence to prove
full payment of loan
It is established that the one who pleads payment has the burden of
proving it. Even where the creditor alleges non-payment, the general
rule is that the debtor has the burden to prove payment, rather than the
creditor. The debtor has the burden of showing with legal certainty that
the obligation has been discharged by payment. Where the debtor
introduces some evidence of payment, the burden of going forward with
the evidence�as distinct from the general burden of proof�shifts to
the creditor, who is then under a duty of producing some evidence to
show non-payment.56
62

It must be emphasized that both parties have not presented any written
agreement or contract governing respondent's obligation. Nevertheless,
it has been established that respondent obtained a car loan amounting
to P648,288.00 from petitioner. Thus, the burden is now on respondent
to prove that the obligation has already been extinguished by payment.
Although not exclusive, a receipt of payment is the best evidence of the
fact of payment.57 We held that the fact of payment may be established
not only by documentary evidence but also by parol evidence.58
Except for respondent's bare allegations that he has fully paid the
P648,288.00 car loan, there is nothing in the records which shows that
full payment has indeed been made. Respondent did not present any
receipt other than the certification dated September 10, 1996 which only
proves that respondent has already paid P337,650.00 of the car loan. A
balance of P310,638.00 still remained.
Even respondent's testimony lacks credence. He alleged that the
amortization of the car loan was deducted from his salaries, bonuses
and commissions. However, he could not even answer nor give an
estimate of how much bonuses and commissions he receives from
petitioner.59
Respondent also alleged that although deductions were made from his
salaries, bonuses and commissions, his payslips do not reflect such
deductions because "there is no such car loan field" in the accounting
program for the payroll.60 Respondent admitted in his testimony that he
only presumed that the deductions were being made from his salaries,
bonuses and commissions, to wit:
Q: So my question was that, whether or not your regular salary which
was received twice a month, the monthly amortization| s] are being
deducted from that? [sic]
A: There is no reflection in the payslip.
Q: But do you know it was ever deducted from your monthly salary? [sic]
A: It must be deducted from my salary, [sic]
Q: You are assuming?
A: That is the agreement.
Q: That is the agreement but you don't know if it was indeed deducted?
A: Yes.61cralawlawlibrary
If indeed deductions were made on his salaries, bonuses and
commissions, respondent should have been confident in answering the
questions propounded on him during trial. Me should have presented
his payslips and shown that even if his payslips did not reflect any
deductions for his car loan, deductions were indeed made, by comparing
the amount of compensation he could have gotten based on his
employment contract and the amount he actually received. Respondent
merely made calculations on what he presumed he already paid.
Further, respondent could have presented testimonies of persons other
than himself to prove payment of the loans. The letter dated November
24, 1998 showed that respondent was aware that he still had
outstanding obligations with petitioner.
In Royal Cargo Corporation v. DFS Sports Unlimited, Inc., we held that
the defense of payment was not proven by the respondent's failure to
present any supporting evidence such as official receipts or the
testimony of the person who made payment or who had direct
knowledge of the payment, among others.62 Respondent's witness
therein also assumed that payment was made even in the absence of
any receipt "once the accounting department of respondent forwarded
to her the original invoice which was stamped PAID". We held in this
case that such testimony and the invoices which were stamped paid,
are all self-serving and do not, by themselves, prove respondent's claim
of payment.63
Nevertheless, even if the parties agreed to make deductions from
respondent's salary, bonuses and commissions, we agree with the trial
court that this is "only affirmative of the capacity or ability of the
[respondent] to fulfill his part of the bargain. But whether or not there
was actual payment through deductions from [respondent]'s salary and
bonus remains to be proven by independent and credible evidence."64
Finally, we find it questionable why respondent would agree on a setup
where petitioner would not give him any written acknowledgment receipt
of his payments or accounting of his loan.65 Respondent should have
insisted that receipts be issued in his favor in the first place if it were true
that the program for issuing the payslips could not reflect the deductions
from his salaries, bonuses and commissions. Since he was the only
employee who was given a car loan, it would not have been an
inconvenience for the petitioner. His actions go against the legal
presumption that a person takes ordinary care of his concerns.66
63
Statement of account is
self-serving

Similarly, we find that the statement of account, showing the amount of

P418,012.78 as respondent's outstanding loan obligation to petitioner,
is self-serving. Dy admitted that she prepared the statement of
account.67 However, she neither explained clearly, during her
testimony, the breakdown nor supported the amounts stated therein with
documentary evidence.68

Although petitioner refers to the amount of P418,012.78 in the statement

to represent only the car loan obligation, the statement itself shows that
the amount also includes the cash advances of respondent from the
company. The trial court has already ruled that judgment cannot be
rendered on the issue regarding cash advances because this was not
made subject of petitioner's complaint and the same was not
amended.69 Such issue was also not raised with us on appeal. Further,
it was not explained why Valle was not the one who prepared the
statement or was not asked to testify on the document when her duties
include supervising the accounting department and assisting in the
preparation of the employees' payroll.70

Thus, having only proven payment to the extent of P337,650.00,

respondent is obligated to pay petitioner the balance of P310,638.00
with interest.

WHEREFORE, the instant petition is PARTIALLY GRANTED.� The

Court of Appeals' Decision dated October 18, 2006 in CA G.R. CV No.
82686 is SET ASIDE. The respondent is ORDERED to pay petitioner
the balance of the car loan in the amount of P310,638.00 plus interest
at the rate of six percent (6%) per annum computed from January 23,
199971 until the date of finality of this judgment. The total amount shall
thereafter earn interest at the rate of six percent (6%) per annum72 until
fully paid. The trial court's Decision dated November 22, 2002 is
AFFIRMED in all other respects.

SO ORDERED

64
 CINCO v. CA 603 S 108
Before the Court is a petition for review on certiorari1 filed by petitioners,
spouses Manuel and Araceli Go Cinco (collectively, the spouses Go
Cinco), assailing the decision2 dated June 22, 2001 of the Court of
Appeals (CA) in CA-G.R. CV No. 47578, as well as the resolution3 dated
January 25, 2002 denying the spouses Go Cinco’s motion for
reconsideration.
THE FACTUAL ANTECEDENTS
In December 1987, petitioner Manuel Cinco (Manuel) obtained a
commercial loan in the amount of ₱700,000.00 from respondent Maasin
Traders Lending Corporation (MTLC). The loan was evidenced by a
promissory note dated December 11, 1987,4 and secured by a real
estate mortgage executed on December 15, 1987 over the spouses Go
Cinco’s land and 4-storey building located in Maasin, Southern Leyte.
Under the terms of the promissory note, the ₱700,000.00 loan was
subject to a monthly interest rate of 3% or 36% per annum and was
payable within a term of 180 days or 6 months, renewable for another
180 days. As of July 16, 1989, Manuel’s outstanding obligation with
MTLC amounted to ₱1,071,256.66, which amount included the
principal, interest, and penalties.5
To be able to pay the loan in favor of MTLC, the spouses Go Cinco
applied for a loan with the Philippine National Bank, Maasin Branch
(PNB or the bank) and offered as collateral the same properties they
previously mortgaged to MTLC. The PNB approved the loan application
for ₱1.3 Million6 through a letter dated July 8, 1989; the release of the
amount, however, was conditioned on the cancellation of the mortgage
in favor of MTLC.
On July 16, 1989, Manuel went to the house of respondent Ester
Servacio (Ester), MTLC’s President, to inform her that there was money
with the PNB for the payment of his loan with MTLC. Ester then
proceeded to the PNB to verify the information, but she claimed that the
bank’s officers informed her that Manuel had no pending loan
application with them. When she told Manuel of the bank’s response,
Manuel assured her there was money with the PNB and promised to
execute a document that would allow her to collect the proceeds of the
PNB loan.
On July 20, 1989, Manuel executed a Special Power of Attorney7 (SPA)
authorizing Ester to collect the proceeds of his PNB loan. Ester again
went to the bank to inquire about the proceeds of the loan. This time,
the bank’s officers confirmed the existence of the ₱1.3 Million loan, but
they required Ester to first sign a deed of release/cancellation of
mortgage before they could release the proceeds of the loan to her.
Outraged that the spouses Go Cinco used the same properties
mortgaged to MTLC as collateral for the PNB loan, Ester refused to sign
the deed and did not collect the ₱1.3 Million loan proceeds.
As the MTLC loan was already due, Ester instituted foreclosure
proceedings against the spouses Go Cinco on July 24, 1989.
To prevent the foreclosure of their properties, the spouses Go Cinco
filed an action for specific performance, damages, and preliminary
injunction8 before the Regional Trial Court (RTC), Branch 25, Maasin,
Southern Leyte. The spouses Go Cinco alleged that foreclosure of the
mortgage was no longer proper as there had already been settlement of
Manuel’s obligation in favor of MTLC. They claimed that the assignment
of the proceeds of the PNB loan amounted to the payment of the MTLC
loan. Ester’s refusal to sign the deed of release/cancellation of mortgage
and to collect the proceeds of the PNB loan were, to the spouses Go
Cinco, completely unjustified and entitled them to the payment of
damages.
Ester countered these allegations by claiming that she had not been
previously informed of the spouses Go Cinco’s plan to obtain a loan from
the PNB and to use the loan proceeds to settle Manuel’s loan with
MTLC. She claimed that she had no explicit agreement with Manuel
authorizing her to apply the proceeds of the PNB loan to Manuel’s loan
with MTLC; the SPA merely authorized her to collect the proceeds of the
loan. She thus averred that it was unfair for the spouses Go Cinco to
require the release of the mortgage to MTLC when no actual payment
of the loan had been made.
In a decision dated August 16, 1994,9 the RTC ruled in favor of the
spouses Go Cinco. The trial court found that the evidence sufficiently
established the existence of the PNB loan whose proceeds were
available to satisfy Manuel’s obligation with MTLC, and that Ester
unjustifiably refused to collect the amount. Creditors, it ruled, cannot
unreasonably prevent payment or performance of obligation to the
damage and prejudice of debtors who may stand liable for payment of
65
higher interest rates.10 After finding MTLC and Ester liable for abuse of
rights, the RTC ordered the award of the following amounts to the
spouses Go Cinco:
(a) P1,044,475.15 plus 535.63 per day hereafter, representing
loss of savings on interest, by way of actual or compensatory
damages, if defendant corporation insists on the original 3%
monthly interest rate;
(b) P100,000.00 as unrealized profit;
(c) P1,000,000.00 as moral damages;
(d) P20,000.00 as exemplary damages;
(e) P22,000.00 as litigation expenses; and
(f) 10% of the total amount as attorney’s fees plus costs.11
Through an appeal with the CA, MTLC and Ester successfully secured
a reversal of the RTC’s decision. Unlike the trial court, the appellate
court found it significant that there was no explicit agreement between
Ester and the spouses Go Cinco for the cancellation of the MTLC
mortgage in favor of PNB to facilitate the release and collection by Ester
of the proceeds of the PNB loan. The CA read the SPA as merely
authorizing Ester to withdraw the proceeds of the loan. As Manuel’s loan
obligation with MTLC remained unpaid, the CA ruled that no valid
objection could be made to the institution of the foreclosure proceedings.
Accordingly, it dismissed the spouses Go Cinco’ complaint. From this
dismissal, the spouses Go Cinco filed the present appeal by certiorari.
THE PETITION
The spouses Go Cinco impute error on the part of the CA for its failure
to consider their acts as equivalent to payment that extinguished the
MTLC loan; their act of applying for a loan with the PNB was indicative
of their good faith and honest intention to settle the loan with MTLC.
They contend that the creditors have the correlative duty to accept the
payment.
The spouses Go Cinco charge MTLC and Ester with bad faith and ill-
motive for unjustly refusing to collect the proceeds of the loan and to
execute the deed of release of mortgage. They assert that Ester’s
justifications for refusing the payment were flimsy excuses so she could
proceed with the foreclosure of the mortgaged properties that were
worth more than the amount due to MTLC. Thus, they conclude that the
acts of MTLC and of Ester amount to abuse of rights that warrants the
award of damages in their (spouses Go Cinco’s) favor.
In refuting the claims of the spouses Go Cinco, MTLC and Ester raise
the same arguments they raised before the RTC and the CA. They claim
that they were not aware of the loan and the mortgage to PNB, and that
there was no agreement that the proceeds of the PNB loan were to be
used to settle Manuel’s obligation with MTLC. Since the MTLC loan
remained unpaid, they insist that the institution of the foreclosure
proceedings was proper. Additionally, MTLC and Ester contend that the
present petition raised questions of fact that cannot be addressed in a
Rule 45 petition.
THE COURT’S RULING
The Court finds the petition meritorious.
Preliminary Considerations
Our review of the records shows that there are no factual questions
involved in this case; the ultimate facts necessary for the resolution of
the case already appear in the records. The RTC and the CA decisions
differed not so much on the findings of fact, but on the conclusions
derived from these factual findings. The correctness of the conclusions
derived from factual findings raises legal questions when the
conclusions are so linked to, or are inextricably intertwined with, the
appreciation of the applicable law that the case requires, as in the
present case.12The petition raises the issue of whether the loan due the
MTLC had been extinguished; this is a question of law that this Court
can fully address and settle in an appeal by certiorari.
Payment as Mode of Extinguishing Obligations
Obligations are extinguished, among others, by payment or
performance,13 the mode most relevant to the factual situation in the
66
present case. Under Article 1232 of the Civil Code, payment means not
only the delivery of money but also the performance, in any other
manner, of an obligation. Article 1233 of the Civil Code states that "a
debt shall not be understood to have been paid unless the thing or
service in which the obligation consists has been completely delivered
or rendered, as the case may be." In contracts of loan, the debtor is
expected to deliver the sum of money due the creditor. These provisions
must be read in relation with the other rules on payment under the Civil
Code,14 which rules impliedly require acceptance by the creditor of the
payment in order to extinguish an obligation.
In the present case, Manuel sought to pay Ester by authorizing her,
through an SPA, to collect the proceeds of the PNB loan – an act that
would have led to payment if Ester had collected the loan proceeds as
authorized. Admittedly, the delivery of the SPA was not, strictly
speaking, a delivery of the sum of money due to MTLC, and Ester could
not be compelled to accept it as payment based on Article 1233.
Nonetheless, the SPA stood as an authority to collect the proceeds of
the already-approved PNB loan that, upon receipt by Ester, would have
constituted as payment of the MTLC loan.15 Had Ester presented the
SPA to the bank and signed the deed of release/cancellation of
mortgage, the delivery of the sum of money would have been effected
and the obligation extinguished.16 As the records show, Ester refused to
collect and allow the cancellation of the mortgage.
Under these facts, Manuel posits two things: first, that Ester’s refusal
was based on completely unjustifiable grounds; and second, that the
refusal was equivalent to payment that led to the extinguishment of the
obligation.
a. Unjust Refusal to Accept Payment
After considering Ester’s arguments, we agree with Manuel that Ester’s
refusal of the payment was without basis.
Ester refused to accept the payment because the bank required her to
first sign a deed of release/cancellation of the mortgage before the
proceeds of the PNB loan could be released. As a prior mortgagee, she
claimed that the spouses Go Cinco should have obtained her consent
before offering the properties already mortgaged to her as security for
the PNB loan. Moreover, Ester alleged that the SPA merely authorized
her to collect the proceeds of the loan; there was no explicit agreement
that the MTLC loan would be paid out of the proceeds of the PNB loan.
There is nothing legally objectionable in a mortgagor’s act of taking a
second or subsequent mortgage on a property already mortgaged; a
subsequent mortgage is recognized as valid by law and by commercial
practice, subject to the prior rights of previous mortgages. Section 4,
Rule 68 of the 1997 Rules of Civil Procedure on the disposition of the
proceeds of sale after foreclosure actually requires the payment of the
proceeds to, among others, the junior encumbrancers in the order of
their priority.17 Under Article 2130 of the Civil Code, a stipulation
forbidding the owner from alienating the immovable mortgaged is
considered void. If the mortgagor-owner is allowed to convey the entirety
of his interests in the mortgaged property, reason dictates that the lesser
right to encumber his property with other liens must also be recognized.
Ester, therefore, could not validly require the spouses Go Cinco to first
obtain her consent to the PNB loan and mortgage. Besides, with the
payment of the MTLC loan using the proceeds of the PNB loan, the
mortgage in favor of the MTLC would have naturally been cancelled.
We find it improbable for Ester to claim that there was no agreement to
apply the proceeds of the PNB loan to the MTLC loan. Beginning July
16, 1989, Manuel had already expressed intent to pay his loan with
MTLC and thus requested for an updated statement of account. Given
Manuel’s express intent of fully settling the MTLC loan and of paying
through the PNB loan he would secure (and in fact secured), we also
cannot give credit to the claim that the SPA only allowed Ester to collect
the proceeds of the PNB loan, without giving her the accompanying
authority, although verbal, to apply these proceeds to the MTLC loan.
Even Ester’s actions belie her claim as she in fact even went to the PNB
to collect the proceeds. In sum, the surrounding circumstances of the
case simply do not support Ester’s position.
b. Unjust Refusal Cannot be Equated to Payment
While Ester’s refusal was unjustified and unreasonable, we cannot
agree with Manuel’s position that this refusal had the effect of payment
that extinguished his obligation to MTLC. Article 1256 is clear and
unequivocal on this point when it provides that –
ARTICLE 1256. If the creditor to whom tender of payment has been
made refuses without just cause to accept it, the debtor shall be
67
released from responsibility by the consignation of the thing or sum due.
[Emphasis supplied.]
In short, a refusal without just cause is not equivalent to payment; to
have the effect of payment and the consequent extinguishment of the
obligation to pay, the law requires the companion acts of tender of
payment and consignation.
Tender of payment, as defined in Far East Bank and Trust Company v.
Diaz Realty, Inc.,18 is the definitive act of offering the creditor what is due
him or her, together with the demand that the creditor accept the same.
When a creditor refuses the debtor’s tender of payment, the law allows
the consignation of the thing or the sum due. Tender and consignation
have the effect of payment, as by consignation, the thing due is
deposited and placed at the disposal of the judicial authorities for the
creditor to collect.19
A sad twist in this case for Manuel was that he could not avail of
consignation to extinguish his obligation to MTLC, as PNB would not
release the proceeds of the loan unless and until Ester had signed the
deed of release/cancellation of mortgage, which she unjustly refused to
do. Hence, to compel Ester to accept the loan proceeds and to prevent
their mortgaged properties from being foreclosed, the spouses Go Cinco
found it necessary to institute the present case for specific performance
and damages.
c. Effects of Unjust Refusal
Under these circumstances, we hold that while no completed tender of
payment and consignation took place sufficient to constitute payment,
the spouses Go Cinco duly established that they have legitimately
secured a means of paying off their loan with MTLC; they were only
prevented from doing so by the unjust refusal of Ester to accept the
proceeds of the PNB loan through her refusal to execute the release of
the mortgage on the properties mortgaged to MTLC. In other words,
MTLC and Ester in fact prevented the spouses Go Cinco from the
exercise of their right to secure payment of their loan. No reason exists
under this legal situation why we cannot compel MTLC and Ester: (1) to
release the mortgage to MTLC as a condition to the release of the
proceeds of the PNB loan, upon PNB’s acknowledgment that the
proceeds of the loan are ready and shall forthwith be released; and (2)
to accept the proceeds, sufficient to cover the total amount of the loan
to MTLC, as payment for Manuel’s loan with MTLC.
We also find that under the circumstances, the spouses Go Cinco have
undertaken, at the very least, the equivalent of a tender of payment that
cannot but have legal effect. Since payment was available and was
unjustifiably refused, justice and equity demand that the spouses Go
Cinco be freed from the obligation to pay interest on the outstanding
amount from the time the unjust refusal took place;20 they would not
have been liable for any interest from the time tender of payment was
made if the payment had only been accepted. Under Article 19 of the
Civil Code, they should likewise be entitled to damages, as the unjust
refusal was effectively an abusive act contrary to the duty to act with
honesty and good faith in the exercise of rights and the fulfillment of
duty.
For these reasons, we delete the amounts awarded by the RTC to the
spouses Go Cinco (₱1,044,475.15, plus ₱563.63 per month)
representing loss of savings on interests for lack of legal basis. These
amounts were computed based on the difference in the interest rates
charged by the MTLC (36% per annum) and the PNB (17% to 18% per
annum), from the date of tender of payment up to the time of the
promulgation of the RTC decision. The trial court failed to consider the
effects of a tender of payment and erroneously declared that MTLC can
charge interest at the rate of only 18% per annum – the same rate that
PNB charged, not the 36% interest rate that MTLC charged; the RTC
awarded the difference in the interest rates as actual damages.
As part of the actual and compensatory damages, the RTC also
awarded ₱100,000.00 to the spouses Go Cinco representing unrealized
profits. Apparently, if the proceeds of the PNB loan (₱1,203,685.17) had
been applied to the MTLC loan (₱1,071,256.55), there would have been
a balance of ₱132,428.62 left, which amount the spouses Go Cinco
could have invested in their businesses that would have earned them a
profit of at least ₱100,000.00.1avvphi1
We find no factual basis for this award. The spouses Go Cinco were
unable to substantiate the amount they claimed as unrealized profits;
there was only their bare claim that the excess could have been invested
in their other businesses. Without more, this claim of expected profits is
at best speculative and cannot be the basis for a claim for damages. In
Lucas v. Spouses Royo,21 we declared that:
68
In determining actual damages, the Court cannot rely on speculation, (2) The award for loss of savings and unrealized profit is
conjecture or guesswork as to the amount. Actual and compensatory deleted;
damages are those recoverable because of pecuniary loss in business,
trade, property, profession, job or occupation and the same must be (3) The award for moral damages is reduced to ₱100,000.00;
sufficiently proved, otherwise, if the proof is flimsy and and
unsubstantiated, no damages will be given. [Emphasis supplied.]
(4) The awards for exemplary damages, attorney’s fees, and
We agree, however, that there was basis for the award of moral and expenses of litigation are retained.
exemplary damages and attorney’s fees.
The awards under (3) and (4) above shall be deducted from the amount
Ester’s act of refusing payment was motivated by bad faith as evidenced of the outstanding loan due the respondents as of June 20, 1989. Costs
by the utter lack of substantial reasons to support it. Her unjust refusal, against the respondents.
in her behalf and for the MTLC which she represents, amounted to an
abuse of rights; they acted in an oppressive manner and, thus, are liable
SO ORDERED.
for moral and exemplary damages.22 We nevertheless reduce the
₱1,000,000.00 to ₱100,000.00 as the originally awarded amount for
moral damages is plainly excessive.

We affirm the grant of exemplary damages by way of example or

correction for the public good in light of the same reasons that justified
the grant of moral damages.

As the spouses Go Cinco were compelled to litigate to protect their

interests, they are entitled to payment of 10% of the total amount of
awarded damages as attorney’s fees and expenses of litigation.

WHEREFORE, we GRANT the petitioners’ petition for review on

certiorari, and REVERSE the decision of June 22, 2001 of the Court of
Appeals in CA-G.R. CV No. 47578, as well as the resolution of January
25, 2002 that followed. We REINSTATE the decision dated August 16,
1994 of the Regional Trial Court, Branch 25, Maasin, Southern Leyte,
with the following MODIFICATIONS:

(1) The respondents are hereby directed to accept the proceeds

of the spouses Go Cinco’s PNB loan, if still available, and to
consent to the release of the mortgage on the property given as
security for the loan upon PNB’s acknowledgment that the
proceeds of the loan, sufficient to cover the total indebtedness
to respondent Maasin Traders Lending Corporation computed
as of June 20, 1989, shall forthwith be released;

69
 ONG BUN v. BPI 859 S 80 (PERALTA)
This is to resolve the Petition for Review on Certiorari under Rule 45 of
the Rules of Court, dated May 22,2014, of petitioner Jose T. Ong Bun,
that seeks to reverse and set aside the Decision[1] dated September 25,
2012 and Resolution[2] dated March 19, 2014 of the Court of Appeals
(CA) in CA-G.R. CV No. 02715 dismissing petitioner's complaint for
collection of sum of money and damages against respondent Bank of
the Philippine Islands (BPI).
The facts follow:
In 1989, Ma. Lourdes Ong, the wife of petitioner, purchased the following
three (3) silver custodian certificates (CC) in the Spouses' name from
the Far East Bank & Trust Company (FEBTC):
a) CC No. 131157 dated June 9, 1989 in the name of Jose Ong Bun or
Ma. Lourdes Ong for One Hundred Thousand Pesos;
b) CC No. 131200 dated July 25, 1989 in the name of Jose Ong Bun or
Ma. Lourdes Ong for Five Hundred Thousand Pesos; and
c) CC No. 224826 dated November 8, 1989 in the name of Jose or Ma.
Lourdes Ong Bun for One Hundred Fifty Thousand Pesos.
The three CCs have the following common provisions:
This instrument is transferable only in the books of the Custodian by the
holder, or in the event of transfer, by the transferee or buyer thereof in
person or by a duly authorized attorney-in-fact upon surrender of this
instrument together with an acceptable deed of assignment.
The Holder hereof or transferee can withdraw at anytime during office
hours his/her Silver Certificate of Deposit herein held in custody.
This instrument shall not be valid unless duly signed by the authorized
signatories of the Bank, and shall cease to have force and effect upon
payment under the terms hereof.
Thereafter, FEBTC merged with BPI after about eleven years since the
said CCs were purchased. After the death of Ma. Lourdes Ong in
December 2002, petitioner discovered that the three CCs bought from
FEBTC were still in the safety vault of his deceased wife and were not
surrendered to FEBTC. As such, petitioner sent a letter dated August
12, 2003 to BPI, through the manager of its Trust Department Asset
Management, to advise him on the procedure for the claim of the said
certificates. BPI replied to petitioner and informed the latter that upon its
merger with FEBTC in 2000, there were no Silver Certificates of Deposit
outstanding, which meant that the certificates were fully paid on their
respective participation's maturity dates which did not go beyond 1991.
There were further exchanges of written communications between
petitioner and BPI, but the latter still refused to pay petitioner's claim
because his certificates were no longer outstanding in its records. Thus,
petitioner, with the assistance of counsel, made a final demand in writing
for the payment of the certificates, to no avail.
After about.three years from his discovery of the certificates, petitioner
filed a complaint for collection of sum of money and damages against
BPI on March 7, 2006 with the Regional Trial Court (RTC), Branch 33,
Iloilo City (Civil Case No. 06-28822) praying that BPI be ordered to pay
him P750,000.00 for the three CCs, legal interest, 1!75,000.00 for
attorney's fees, P100,000.00 for moral damages, and an unspecified
amount for exemplary damages as well as cost of suit.
BPI, in its Answer, insists that as early as 1991, all the Silver Certificates
of Deposits, including those issued to petitioner and his wife, were
already paid. It claimed that the CCs had terms of only 25 months and
that by the year 2000, when it merged with FEBTC and when the Trust
and Investments Group of FEBTC was no longer in existence, there
were .no longer any outstanding CCs in its books. It had checked and
double-checked its records as well as those of FEBTC. It also claimed
that FEBTC had funy paid all of its silver certificates of time deposit on
their maturity dates. According to BPI, contrary to petitioner's assertion,
the presentation or surrender of the certificates is not a condition
precedent for its payment by FEBTC. It also argued that petitioner filed
his claim for the first time only on August 12, 2003, or 12 years after the
maturity of the CCs and under Article 1144 of the Civil Code, actions
based on a written contract must be brought within 10 years from the
time the right accrues. In this case, according to BPI, petitioner's right
accrued upon the maturity of the CCs in 1991, and the same has
prescribed by the time he filed his claim. As a counterclaim, BPI prayed
that petitioner be ordered to pay it P75,000.00 as attorney's fees,
P2,000.00 per court appearance, at least P20,000.00 for litigation
expenses, and P1,000,000.00 for exemplary damages. It further prayed
that the complaint be dismissed and that petitioner be ordered to pay for
the cost of the suit.
After trial on the merits, the RTC found in favor of petitioner and
disposed of the case as follows:
70
WHEREFORE, judgment is hereby rendered:
(a) Ordering defendant to pay plaintiff the sum of One Hundred
Thousand Pesos (P100,000.00) for the Custodian Certificate dated
June 9, 1989 bearing Serial CC No. 13115; the sum of Five Hundred
Thousand Pesos (P500,000.00) for the Custodian Certificate dated July
25, 1989 bearing Serial CC No. 131200; and the sum of One Hundred
Fifty Thousand Pesos (P150,000.00) for the Custodian Certificate dated
November 8, 1989 bearing Serial CC No. 224826, including their
respective interests for twenty-five (25) months under the terms and
conditions of the Silver Certificate of Deposit - entrusted for custody to
defendant by plaintiff - that the said Custodian Certificates represent;
plus legal interest thereon as regular savings deposit of the investments
and their accrued interests from .the time of their respective maturity up
to the time of payment.
(b) Ordering defendant to pay the plaintiff P100,000.00 for moral
damages and another P100,000.00 as exemplary damages; and
(c) Ordering the defendant to pay P75,000.00 as attorney's fees, plus
costs of the suit.
SO ORDERED.[3]
As a consequence, BPI elevated the case to the CA wherein the latter
granted the appeal of the former. The dispositive portion of the CA's
decision reads as follows:
WHEREFORE, the appeal is hereby GRANTED. The 5 JUNE 2008
Decision rendered in Civil Case No. 06-28822 by Branch 33 of the
Regional Trial Court in Iloilo City is hereby REVERSED and SET ASIDE
and the complaint filed in the said case is hereby DISMISSED.
SO ORDERED.[4]
The CA ruled that petitioner failed to prove that the deposits, which he
claims to be unpaid, are still outstanding. According to the appellate
court, the custodian certificates, standing alone, do not prove an
outstanding deposit with the bank, but merely certify that FEBTC had in
its custody for and in behalf of either petitioner or his late wife the
corresponding Silver Certificates of Deposit and nothing more. The CA
further ruled that the surrender of the custodian certificates is not
required for the withdrawal of the certificates of deposits themselves or
for the payment of the Silver Certificates of Deposit, hence, even if the
holder has in his possession the said custodian certificates, this does
not ipso facto mean that he is an unpaid depositor of the bank.
Hence, the present petition.
Petitioner insists that the CCs are evidence that the Silver Certificates
of Deposit in his name in varying amounts are in the possession of the
Trust Investments Group of FEBTC and constitute an outstanding
obligation of respondent with whom FEBTC merged. He adds that since
it has been proved that the CCs remained in the possession o.f the
petitioner and has not been contn verted or shown to be non-existing,
the said CCs remain incontrovertible and unrebutted evidence of
indebtedness of the respond nt because said CCs all openly admit that
the Silver Certificates of Deposit in varying amounts owned by the
petitioner are in its possession and has not been discharged by
payment. Hence, according to petitioner, the CA erred in its conclusion
that the CCs in his possession do not prove an outstanding deposit with
the respondent simply because the CCs are not the Certificates of
Deposit themselves.
The Rules of Court require that only questions of law should be raised
in petitions filed under Rule 45.[5] This court is not a trier of facts. It will
not entertain questions of fact as the factual findings of the appellate
courts are "final, binding[,] or conclusive on the parties and upon this
[c]ourt"[6] when supported by substantial evidence.[7] Factual findings
of the appellate courts will not be reviewed nor disturbed on appeal to
this court.[8]
In Chessman v. Intermediate Appellate Court,[9] this Court distinguished
questions oflaw from questions of fact, thus:
As distinguished from a question of law which exists "when the doubt or
difference arises as to what the law is on a certain state of facts" - "there
is a question of fact when the doubt or difference arises as to the truth
or the falsehood of alleged facts;" or when the "query necessarily invites
calibration of the whole evidence considering mainly the credibility of
witnesses, existence and relevancy of specific surrounding
circumstances, their relation to each other and to the whole and the
probabilities of the situation."[10]
However, these rules do admit of exceptions.[11] Over time, the
exceptions to these rules have expanded. At present, there are 10
recognized exceptions that were first listed in Medina v. Mayor Assistor,
Jr.:[12]
(1) When the conclusion is a finding grounded entirely on speculation,
surmises or conjectures; (2) When the inference made is manifestly
mistaken, absurd or impossible; (3) Where there is a grave abuse of
71
discretion; (4) When the judgment is based. on a misapprehension of
facts; (5) When the findings of fact are conflicting; (6) When the Court of
Appeals, in making its findings, went beyond the issues of the case and
the same is contrary to the admissions of both appellant and appellate;
(7) The findings of the Court of Appeals are contrary to those of the trial
court; (8) When the findings of fact 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 respondents; and (10) The finding of fact of the Court of
Appeals is premised on the supposed absence of evidence and is
contradicted by the evidence on record.[13]
In the present case, the findings of facts of the RTC and the CA are
apparently in contrast, hence, this Court deems it proper to rule on the
issues raised in the petition.
After careful consideration, this Court finds the petition to be meritorious.
It is undisputed that petitioner is in possession of three (3) CCs from
FEBTC in the following amounts: (a) Custodian Certificate of Silver
Certificate of Deposit No. 131157 issued on June 9, 1989 in the amount
of One Hundred Thousand Pesos (P100,000.00); (b) Custodian
Certificate of Silver Certificate of .Oeposit No. 131200 issued on July 25,
1989, in the amount of Five Hundred Thousand Pesos (P500,000.00);
(c) Custodian Certificate of Silver Certificate of Deposit No. 224826
issued on November 8, 1989 in the amount of One Hundred Fifty
Thousand Pesos (P150,000.00).
Simply put, the said CCs are proof that Silver Certificates of Deposits
are in the custody of a custodian, which is, in this case, FEBTC. The CA
therefore, erred in suggesting that the possession of petitioner of the
same CCs does not prove an outstanding deposit because the latter are
not the certificates of deposit themselves. What proves the deposits of
the petitioner are the Silver Certificates of Deposits that have been
admitted by the Trust Investments Group of the FEBTC to be in its
custody as clearly shown by the wordings used in the subject CCs.
Custodian Certificate of Silver Certificate of Deposit No. 131200 reads,
in part:
This is to certify that the TRUSTS INVESTMENTS GROUP of FAR
EAST BANK AND TRUST COMPANY (Custodian) has in its custody for
and in behalf of ***** JOSE ONG BUN OR MA. LOURDES ONG *****
(Holder) the Silver Certificate of Deposit in the amount of PESOS:
Php500,000.00.
This instrument is transferable only in the books of the Custodian by the
holder, or in the event of transfer, by the transferee or buyer thereof in
person or by a duly authorized attorney-in-fact upon surrender of this
instrument together with an acceptable deed of assignment.
The Holder hereof or transferee can withdraw at anytime during office
hours his/her Silver Certificate of Deposit herein held in custody.
This instrument shall not be valid unless duly signed by the authorized
signa;ories of the Bank, and shall c ase to have force and effect upon
payment under the terms hereof.[14]
The other two custodian certificates are of the same tenor.
In its Comment, respondent argued that upon its merger with FEBTC,
there were no longer any outstanding Silver Certificates of Deposits,
thus:
As previously discussed, the nature of the Silver Custodian Certificates
of Time Deposit was issued by then FEBTC on the occasion of its 25th
year anniversary in the year 1989. Consequently, these certificates had
a term/maturity of twenty-five (25) months from its issuance or in the
year 1991. Further, these certificates should be accompanied by a
Confirmation of Participation which provides for the details of each
participant would have. Upon the merger of FEBTC and BPI sometime
in the year 2000, there were no outstanding Silver Certificates of Deposit
in its books of accounts; neither did the petitioner present the
Confirmation of Participation which should have been attached to his
Custodian Certificates.[15]
Such an argument does not prove that petitioner has already been paid
or that his deposits have already been returned. Likewise, there was no
proof .or evidence that petitioner or his late wife withdrew the said Silver
Certificates of Deposit. When the existence of a debt is fully established
by the evidence contained in the record, the burden of proving that it has
been extinguished by payment devolves upon the debtor who offers
such defense to the claim of the creditor.[16] Even where it is the plaintiff
([petitioner] herein) who alleges non-payment, the general rule is that
the burden rests on the defendant ([respondent] herein) to prove
payment, rather than on the plaintiff to prove non-payment.[17] Verily,
an obligation may be extinguished by payment.[18] However, two
requisites must concur: (1) identity of the prestation, and (2) its integrjty.
The first means that the very thing due must be delivered or released;
and the second, that the prestation be fulfilled completely.[19] In t.his
case, no acknowledgment nor proof of full payment was presented by
respondent but merely a pronouncement that there are no longer ap.y
72
outstanding Silver Certificates of Deposits in its books of accounts.
Thus, the RTC did not err in.the following findings:
A promise had been obtained by plaintiff from defendant bank that the
custodian certificates would be paid upon maturity. Hence, the latter
reneged on its promise when it refused payment thereof after demands
were made by plaintiff for such payment considering that in 1989, his
wife Ma. Lourdes Ong Bun acquired in their names three (3) certificates
of deposits from FEBTC in various amounts, to wit: (a) Custodian
Certificate of Silver Certificate of Deposit No. 131157 issued on June 9,
1989 in the amount of One Hundred Thousand Pesos (P100,000.00),
(Exhibit "A"); (b) Custodian Certificate of Silver Certificate of Deposit No.
131200 issued on July 25, 1989 in the amount of Five Hundred
Thousand Pesos (P500,000.00) (Exhibit "B"); (c) Custodian Certificate
of Silver Certificate ofDeposit No. 224826 issued on November 8, 1989
in the amount of One Hundred Fifty Thousand Pesos (P150,000.00),
(Exhibit "C"). His wife kept these certificates of deposits. The claim of
defendant bank, through the Manager of its Trust Department Asset
Management, that the aforementioned certificates had been paid, is not
supported by credible evidence and, therefore, unsubstantiated. Its
position that the Silver
Certificates of Time Deposits in question and in the names of Jose Ong
Bun or Ma. Lourdes Ong had been paid by the Far East Bank and Trust
Company as early as the year 1991, when the same matured
considering that at the time of the merger between Far East Bank and
Trust Company and the Bank of Philippine Islands, no such Silver
Certificates of Time Deposits were outstanding on the books of Far East
Bank and Trust Company, is simply unconvincing.
The fact that the plaintiff still has [a] copy of the Custodian Certificate of
the Silver Certificates of Time Deposit is material, contrary to the stance
of defendant, as it is inconceivable that the bank would make payment
without requiring the surrender thereof.[20]
Hence, the conclusion that the Silver Certificates of Deposit may have
been withdrawn by the petitioner or his wife although they failed to
surrender the custodian certificates is speculative and replete of any
proof or evidence.
The CA further ruled that the surrender of the CCs is not required for the
withdrawal of he certificates of deposit themselves or for the payment of
the Silver Certificates of Deposit, hence, even if the holder has in his
possession the said custodian certificates, this does not ipso facto mean
that he is an unpaid depositor of the bank. Such conclusion is illogical
because the very wordings contained in the CCs would suggest
otherwise, thus:
This instrument is transferable only in the books of the Custodian by the
holder, or in the event of transfer, by the transferee or buyer thereof in
person or by a duly authorized attorney-in-fact upon surrender of this
instrument together with an acceptable deed of assignment.
The Holder hereof or transferee can withdraw at anytime during office
hours his/her Silver Certificate of Deposit herein held in custody.
This instrument shall not be valid unless duly signed by the authorized
signatories of the Bank, and shall cease to have force and effect upon
payment under the terms hereof.[21]
Furthermore, the surrender of such certificates would have promoted
the protection of the bank and would have been more in line with the
high standards expected of any banking institution. Banks, their
business being impressed with public interest, are expected to exercise
more care and prudence than private individuals in their dealings.[22]
The Court is not unmindful of the fact that a bank owes great fidelity to
the public it deals with, its operation being essentially imbued with public
interest x x x.[23]
As to the issues of prescription and laches raised by the respondent in
its Comment, the same were not passed upon by the CA and cannot be
raised before this Court unless an appeal was filed by the same
respondent raising such issues.
The award of moral and exemplary damages, however, must be deleted
for failure of petitioner to show that respondent was in bad faith or acted
in any wanton, fraudulent, reckless, oppressive or malevolent manner in
its dealings with petitioner. "The person claiming moral damages must
prove the existence of bad faith by clear and convincing evidence for the
law always presumes good faith. It is not enough that one merely
suffered sleepless nights, mental anguish, serious anxiety as the result
of the actuations of the other party. Invariably such action must be shown
to have been willfully done in bad faith or with ill motive."[24] Also, in
contracts and quasi-contracts, the Court has the discretion to award
exemplary damages if the defendant acted in a wanton, fraudulent,
reckless, oppressive, or malevolent manner.[25] In this case, it appears
that respondent had an honest belief that before its merger with FEBTC,
the subject CCs were already paid and cleared from its books, hence,
belying any claim that it acted in any manner that would warrant the
grant of moral and exemplary damages to the petitioner.
73
The award of attorney's fees must also be omitted. We have consistently
held that an award of attorney's fees under Article 2208[26] demands
factual, legal, and equitable justification to avoid speculation and
conjecture surrounding the grant thereof.[27] Due to the special nature
of the award of attorney's fees, a rigid standard is imposed on the courts
before these fees could be granted. Hence, it is imperative that they
clearly and distinctly set forth in their decisions the basis for the award
thereof. It is not enough that they merely state the amount of the grant
in the dispositive portion of their decisions.[28] It bears reiteration that
the award of attorney's fees is an exception rather than the general rule;
thus, there must be compelling legal reason to bring the case within the
exceptions provided under Article 2208 of the Civil Code to justify the
award.[29] In this case, the RTC merely justified the grant of attorney's
fees on the reasoning that petitioner was forced to litigate. Thus, the
present case does not fall within the exception provided under Article
2208 of the Civil Code.

WHEREFORE, the Petition for Review on Certiorari under Rule 45 of

the Rules of Court, dated May 22, 2014, of petitioner Jose T. Ong Bun,
is GRANTED. Consequently, the Decision dated September 25, 2012
and Resolution dated March 19,2014 of the Court of Appeals in CA-G.R.
CV No. 02715 are REVERSED and SET ASIDE, and the Decision dated
June 5, 2008 of the Regional Trial Court, Branch 33, Iloilo City is
AFFIRMED and REINSTATED, with the MODIFICATION that the award
of moral damages, exemplary damages and attorney's fees be
OMITTED.

SO ORDERED.

74
 Bulatao v. Estonactoc, G.R. No. 235020, [December 10, 2019]
Before the Court is the Appeal1 under Rule 45 of the Rules of Court filed
by petitioner Atty. Leonard Florent O. Bulatao (Atty. Bulatao) assailing
the Decision2 dated October 19, 2017 (Decision) of the Court of
Appeals3 (CA) in CA-G.R. CV No. 105581. CA Decision partly granted
the appeal of respondent Zenaida Estonactoc (Zenaida) resulting in the
reversal and setting aside of the Decision4 dated May 4, 2015 rendered
by the Regional Trial Court, Branch 31, Agoo, La Union (RTC) in Civil
Case No. A-2715.
The Facts and Antecedent Proceedings
The CA Decision narrates the factual antecedents as follows:
On June 3, 2008, [Zenaida] executed a Deed of Mortgage of Real
Property [(DMRP)] in favor of [Atty. Bulatao] covering a parcel of land
located in Pongpong, Sto. Tomas, La Union, with an area of 42,727
square meters (subject property), as security for a loan in the amount of
P200,000.00.
The [DMRP] contained the following stipulation:
PROVIDED HOWEVER, that if I, shall pay or cause to be paid to the
said MORTGAGEE the aforementioned amount of TWO HUNDRED
THOUSAND PESOS (Php200,000.00), Philippine currency together
with the interest at the rate of five percent (5%) per month, within a
period of twelve (12) months or one (1) year or before June 4, 2009,
then this MORTGAGE shall thereby be discharged and of no effect.
OTHERWISE, it shall remain in full force and effect and shall be
enforceable in the manner provided for by law.
When [Zenaida] defaulted in her obligation, [Atty. Bulatao] foreclosed
the mortgage and petitioned the court for the sale of the subject property
in a public auction. The Notice of Sale on Extra Judicial Foreclosure of
Property/ies was issued by the Office of the Clerk of Court of the trial
court in Agoo, La Union on July 15, 2011.
By reason of the impending sale of the subject property, [Zenaida] filed
[a Complaint for Injunction, Annulment of Deed of Real Estate Mortgage
and Damages against Atty. Bulatao, Atty. Diosdado L. Doctolero as
Clerk of Court and Ex-Officio Sheriff of the RTC of Agoo, La Union, and
Melchor A. Mabutas, as Sheriff of the Office of the Clerk of Court of the
same court]5 seeking to declare the [DMRP] as illegal, inexistent and
null and void, and to make the contract unenforceable. She asserted
that [Atty. Bulatao], in grave abuse of her rights, took advantage of her
financial distress and urgent financial needs by imposing in the [DMRP]
an interest of five percent (5%) per month which is excessive, iniquitous,
unconscionable, exorbitant and contrary to public policy, rendering the
contract null and void. She also alleged that she only received
P80,000.00 from [Atty.] Bulatao, contrary to the P200,000.00 contracted
loan amount. In addition, she sought the award of moral and exemplary
damages, attorney's fees, and litigation expenses.
[Zenaida] likewise raised in the complaint that the agreement is invalid
because of the following: (a) it failed to mention that the subject property
is registered under Transfer Certificate of Title No. T-6288-part as
indicated in the Real Property Field Appraisal and Assessment Sheet
and Tax Declaration No. 020-00304; (b) the mortgage is not registered
and therefore not annotated in the title of the subject property; (c) it
falsely indicated that [Zenaida] is the registered owner of the subject
property despite the fact that it is co-owned by [Zenaida] with her late
husband, Adolfo T. Estonactoc; and that it has not yet been settled and
transferred in favor of their son, Jose Rafael C. Estonactoc; and (d)
[Zenaida] did not appear before the notary public who notarized the
[DMRP].
xxxx
In response thereto, [Atty. Bulatao] filed an Answer wherein he denied
all the allegations made against him by [Zenaida] and contended the
following:
[Zenaida was] guilty of misrepresentation, misdeclaration, false
pretenses, and bad faith. The P200,000.00 loan which he extended to
[Zenaida] was from the proceeds of the loan which he contracted with
FRB Credit and Financial Services. [Zenaida] represented to be the sole
owner of the subject property and that the title thereof was lost,
destroyed and/or cannot be recovered although the transfer of the title
in her name is already being processed. It was [Zenaida] who
encouraged him to secure a loan with the FRB Credit and Financial
Services in the amount of P200,000.00 and that she even told him that
she [was] willing to pay a monthly interest of 20%-30%. [Zenaida]
75
agreed to a 5% monthly interest, with the 2.5% to be paid directly to FRB
Credit and Financial Services and the other half as his own profit.
[Zenaida] even represented that she could pay the loan in a month or
two.
[Atty. Bulatao] denied that the interest is usurious on account of Central
Bank Circular No. 905-82, which expressly removed the interest ceilings
prescribed under the Usury Law, leaving [the] parties with the liberty to
mutually agree on an interest rate. Moreover, he denied that [Zenaida]
only received P80,000.00 considering that it was [Zenaida] herself who
encashed Allied Bank Check No. 0024551400 in the amount of
P200,000.00, which represent[ed] the proceeds of the loan incurred by
[Atty. Bulatao] from FRB Credit and Financial Services.
As counterclaim, [Atty. Bulatao] sought the recovery of actual, moral and
exemplary damages as well as attorney's fees, and costs of suit.
xxxx
On March 19, 2012, the complaint was amended to include the
declaration of nullity of the foreclosure sale of the subject property as a
cause of action by reason of the subsequent sale thereof in a public
auction and the consequent issuance of a certificate of sale of real
property in favor of [Atty. Bulatao] on October 10, 2011.
Trial on the merits of the case ensued whereby both parties presented
their respective documentary and testimonial pieces of evidence in
support of their claims.
On May 4, 2015, the trial court rendered [its] Decision[, the] dispositive
portion of which is cited herein, to wit:
WHEREFORE, premises considered, this Court finds in favor of the
defendants and accordingly, DISMISSES the instant complaint against
them for utter lack of merit. Moreover, the plaintiff is hereby order[ed] to
pay the defendants, to wit:
(i) Moral damages in the amount of Thirty Thousand Pesos
(P30,000.00);
(ii) Exemplary damages in the amount of Fifteen Thousand
Pesos (P15,000.00);
(iii) Nominal damages in the amount of Five Thousand Pesos
(P5,000.00);
(iv) Attorney's fees in the amount of Thirty Thousand Pesos
(P30,000.00), plus Two Thousand Five Hundred Pesos
(P2,500.00) per court appearance of Attys. Gines and Ulpindo;
and
(v) Costs of suit.
SO ORDERED.
The trial court ruled that [Zenaida] is bound by the terms and stipulations
in the contract of loan and real estate mortgage which she executed in
favor of [Atty. Bulatao]; that the evidence on hand shows that the interest
of 5% per month on the loan is not exorbitant considering that the
borrower, [Zenaida], appears to be an educated businesswoman, from
a well-to-do family as demonstrated by her having a son who studies in
a prestigious school (Ateneo), and her late husband being the former
town mayor of Sto. Tomas, La Union; that [Zenaida] is in a position to
pay not only the principal loan amount but also the stipulated interest;
and that [Zenaida] even expressed her capacity to pay interest of even
up to 20%, to entice [Atty. Bulatao] to extend the loan to her. Hence, the
trial court declared that she is now estopped from claiming otherwise.
Moreover, the trial court declared that [Atty. Bulatao] is an innocent
mortgagee for value, who merely relied on the alleged sole ownership
of [Zenaida] over the subject property as demonstrated in the tax
declaration; and that in fine, the mortgage of the co-owned property by
one of the co-owners, [Zenaida] in this case, sans any participation on
the part of her son, as co-owner, did not invalidate the mortgage.
The trial court concluded that considering the validity of the loan and real
estate mortgage, the subsequent foreclosure of the mortgage on the
subject property and the issuance of certificate of sale as a
consequence thereof are likewise valid considering that the foreclosure
was made by proper authorities, who enjoy the presumption of regularity
of performance of their official duties.
76
Lastly, the trial court granted moral, exemplary and nominal damages,
and attorney's fees in favor of defendants.
[Zenaida] moved to reconsider the [trial court's] Decision but the trial
court denied it in an Order dated July 13, 2015. On July 30, 2015,
[Zenaida] filed a Notice of Appeal which was given due course by the
trial court on August 13, 2015.6
Ruling of the CA
The CA in its Decision7 dated October 19, 2017 found Zenaida's appeal
partly meritorious.8
Regarding the real estate mortgage, the CA ruled that Zenaida, being a
co-owner of the subject property, could validly convey through sale or
mortgage the portion belonging to her and, thus, the real estate
mortgage in favor of Atty. Bulatao is not entirely void.9
On the interest rate, the CA ruled that the 5% monthly interest imposed
upon by Atty. Bulatao in the Deed of Mortgage of Real Property (DMRP)
is excessive, unconscionable and exorbitant, which renders the
stipulation on interest void for being contrary to morals, if not against the
law.10 After the CA observed, on on hand, that the stipulation on interest
being void, it is as if there was no express contract on said interest rate,
thus, the interest rate may be reduced as reason and equity demand,
and on the other hand, that a legal interest of 12% per annum will be
added in place of the excessive interest formerly imposed, the CA, then,
equitably reduced the stipulated 5% monthly interest to 1% per month
or 12% per annum reckoned from the execution of the DMRP on June
3, 2008.11
The CA further observed that while the nullity of the stipulation on the
usurious interest did not affect the lender's right to recover the principal
obligation or the terms of the real estate mortgage, the foreclosure
proceedings held on September 8 an 15, 2011 in this case could not be
given effect.12 The CA reasoned that since the debt due is limited to the
principal of P200,000.00 with 12% per annum as legal interest, the
previous demand for payment of the amount of P540,000.00 reflected
on the demand letter dated April 15, 2011 could not be considered as a
valid demand for payment, and without a valid demand the obligations
is not due.13 The foreclosure could not be considered valid because it
would result in an inequitable situation wherein Zenaida would have her
land foreclosed for failure to pay an over-inflated loan only a small part
of which she was obligated to pay, and she was not given an opportunity
to settle her debt at the correct amount without the iniquitous interest
imposed.14
As to the award of damages against Zenaida, the CA found no
justification for their imposition.15
The dispositive portion of the CA Decision states:
WHEREFORE, the appeal is PARTLY GRANTED.
The Decision dated May 4, 2015 rendered by Branch 31 of the Regional
Trial Court (RTC), Agoo, La Union in Civil Case No. A-2715 is
hereby REVERSED and SET ASIDE. Accordingly, a new judgment is
RENDERED as follows:
1. The Deed of Mortgage of Real Property dated June 4, 2008 is
DECLARED as VOID only with respect to the share of deceased Adolfo
T. Estonactoc;
2. The monthly interest as stipulated in the Deed of Mortgage of Real
Property is REDUCED to 1% per month or 12% per annum; and
3. The Foreclosure Sale and the Certificate of Sale issued in favor of
defendant-appellee Leonard Florent O. Bulatao are DECLARED null
and void. SO ORDERED.16
Dissatisfied, Atty. Bulatao filed the instant Appeal. Zenaida filed her
Comment17 dated May 15, 2018. Atty. Bulatao filed a Reply18 on
March 18, 2019.
The Issue
Whether the CA erred when it set aside and reversed the RTC Decision.
The Court's Ruling
In his appeal, Atty. Bulatao argues that the payment of the 5% monthly
interest was voluntarily agreed upon by him and Zenaida and absent
77
fraud committed upon Zenaida, the stipulated interest rate should
stand.19 On the assumption that the 5% monthly interest is invalid, the
ruling of the CA reducing it to 1% per month or 12% per annum is not
just and right.20 Atty. Bulatao takes the position that the 5% per month
should be applied to the borrowed amount of P200,000.00 for one year
(the term of the loan) and thereafter, the 12% yearly interest should
apply.21 Atty. Bulatao cites Prisma Construction & Development Corp.
v. Menchavez22 (Prisma v. Menchavez) in support of his position
because said case is a contract for a specific period.23
Regarding the DMRP, Atty. Bulatao argues that since Zenaida is a co-
owner to the extent of 3/4 (1/2 portion representing her share in the
conjugal property and 1/4 portion as her legitime in the estate of her
husband Adolfo Estonactoc) of the subject property and the remaining
1/4 portion being co-owned by her son Jose Rafael Estonactoc, Atty.
Bulatao has the right to foreclose Zenaida's 3/4 share.24
For her part, Zenaida seeks the dismissal of Atty. Bulatao's appeal for
his failure to comply with formal and procedural requirements of a Rule
45 petition for certiorari.25 Assuming that the Court takes cognizance of
the appeal, Zenaida argues that the CA did not err in reversing the RTC
Decision.26
Despite the formal objections interposed by Zenaida, the Court will
proceed to rule on the merits of the Petition. Except as regards the
applicable rate of interest and the effect of the DMRP are concerned,
the appeal is bereft of merit.
Atty. Bulatao's argument of voluntariness in his and Zenaida's
agreement on the 5% monthly interest cannot be sustained. The Court
has repudiated this argument in Sps. Abella v. Sps. Abella,27 viz.:
Even if it can be shown that the parties have agreed to monthly interest
at the rate of 2.5%, this is unconscionable. As emphasized in Castro v.
Tan,28 the willingness of the parties to enter into a relation involving an
unconscionable interest rate is inconsequential to the validity of the
stipulated rate:
The imposition of an unconscionable rate of interest on a money debt,
even if knowingly and voluntarily assumed, is immoral and unjust. It is
tantamount to a repugnant spoliation and an iniquitous deprivation of
property, repulsive to the common sense of man. It has no support in
law, in principles of justice, or in the human conscience nor is there any
reason whatsoever which may justify such imposition as righteous and
as one that may be sustained within the sphere of public or private
morals.
The imposition of an unconscionable interest rate is void ab initio for
being "contrary to morals, and the law."
In determining whether the rate of interest is unconscionable, the
mechanical application of pre-established floors would be wanting. The
lowest rates that have previously been considered unconscionable need
not be an impenetrable minimum. What is more crucial is a
consideration of the parties' contexts. Moreover, interest rates must be
appreciated in light of the fundamental nature of interest as
compensation to the creditor for money lent to another, which he or she
could otherwise have used for his or her own purposes at the time it was
lent. It is not the default vehicle for predatory gain. As such, interest need
only be reasonable. It ought not be a supine mechanism for the creditor's
unjust enrichment at the expense of another.
Petitioners here insist upon the imposition of 2.5% monthly or 30%
annual interest. Compounded at this rate, respondents' obligation would
have more than doubled-increased to 219.7% of the principal-by the end
of the third year after which the loan was contracted if the entire principal
remained unpaid. By the end of the ninth year, it would have multiplied
more than tenfold (or increased to 1,060.45%). In 2015, this would have
multiplied by more than 66 times (or increased by 6,654.17%). Thus,
from an initial loan of P500,000.00, respondents would be obliged to pay
more than P33 million. This is grossly unfair, especially since up to the
fourth year from when the loan was obtained, respondents had been
assiduously delivering payment. This reduces their best efforts to satisfy
their obligation into a protracted servicing of a rapacious
loan.29 (Underscoring supplied)
In the consolidated cases of Rivera v. Sps. Chua30 and Sps. Chua v.
Rivera,31 the Court affirmed the finding of the CA that 5% per month or
60% per annum interest rate is highly iniquitous and unreasonable; and
since the interest rate agreed upon is void, the rate of interest should be
12% per annum (the then prevailing interest rate prescribed by the
Central Bank of the Philippines for loans or forbearances of money) from
the date of judicial or extrajudicial demand.
78
Given that the agreement on the 5% monthly interest is void for being
unconscionable, the interest rate prescribed by the Bangko Sentral ng
Pilipinas (BSP) for loans or forbearances of money, credits or goods will
be the surrogate or substitute rate not only for the one-year interest
period agreed upon but for the entire period that the loan of Zenaida
remains unpaid.
The distinction that Atty. Bulatao makes between "open-ended
contracts" or contracts with indefinite period and "term contracts" or
contracts for a specific period32 is misguided as the distinction has no
legal basis as far as a loan, whether commodatum or mutuum, is
concerned. As provided in Article 1933 of the Civil Code, "[b]y the
contract of loan, one of the parties delivers to another, either something
not consumable so that the latter may use the same for a certain
time and return it, in which case the contract is called a commodatum;
or money or other consumable thing, upon the condition that the same
amount of the same kind and quality shall be paid, in which case the
contract is simply called a loan or mutuum."33 Thus, a period is
contemplated in a contract of loan and it cannot be an "open-ended
contract" or a contract with an indefinite period.
Atty. Bulatao misreads Prisma v. Menchavez. The facts show therein
that the parties agreed to the payment of a specific sum of money of
P40,000.00 per month for six months, not a 4% rate of interest, payable
within a six-month period;34 and no issue on the excessiveness of the
stipulated amount of P40,000.00 per month was ever put in issue by the
petitioners therein since they only assailed the application of a 4%
interest rate to the unpaid amount, since it was not agreed upon.35 As
aptly observed by the CA:
We also could not fathom how the case of [Prisma v. Menchavez] could
apply in this case, as defendant-appellee would want to convince Us,
because the afore-mentioned case involves an agreed sum as monthly
interest and no rate of interest was stipulated in the promissory note,
contrary to the factual antecedents in his case.36
As to the validity of the foreclosure, jurisprudence on the effect of the
nullity of the loan's interest rate on the foreclosure of the mortgage
securing the loan abounds. In the consolidated cases of Vasquez v.
Philippine National Bank37 and Philippine National Bank v.
Vasquez,38 the Court has reiterated that:
In a situation wherein null and void interest rates are imposed under a
contract of loan, the non-payment of the principal loan obligation does
not place the debtor in a stat of default, considering that under Article
1252 of the Civil Code, if a debt produces interest, payment of the
principal shall not be deemed to have been made until the interests have
been covered. Necessarily, since the obligation of making interest
payments in the instant case is illegal and thus non-demandable, the
payment of the principal loan obligation was likewise not yet
demandable on the part of PNB. With Vasquez not being in a state of
default, the foreclosure of the subject properties should not have
proceeded.
In Heirs of Zoilo Espiritu v. Sps. Landrito,39 the loan obligation involved,
which was secured by a mortgage, was marred by an iniquitous
imposition of monetary interest because the creditors omitted to
specifically identify the imposable interest rate, just as in the instant
case. Because of the failure of the debtors to pay back the loan, the
mortgaged property was foreclosed. The debtors failed to redeem the
foreclosed property. The Court in that case held that the foreclosure
proceedings should not be given effect, viz.:
x x x If the foreclosure proceedings were considered valid, this would
result in an inequitable situation wherein the Spouses Landrito will have
their land foreclosed for failure to pay an over-inflated loan only a small
part of which they were obligated to pay.
xxxx
Since the Spouses Landrito, the debtors in this case, were not given an
opportunity to settle their debt, at the correct amount and without the
iniquitous interest imposed, no foreclosure proceedings may be
instituted. A judgment ordering a foreclosure sale is conditioned upon a
finding on the correct amount of the unpaid obligation and the failure of
the debtor to pay the said amount. In this case, it has not yet been shown
that the Spouses Landrito had already failed to pay the correct amount
of the debt and, therefore, a foreclosure sale cannot be conducted in
order to answer for the unpaid debt. x x x
xxxx
Similarly, in Sps. Albos v. Sps. Embisan,40 the extra-judicial foreclosure
sale of a mortgaged property, which was foreclosed due to the non-
79
payment of a loan, was invalidated because the interest rates imposed
on the loan were found to be null and void due to their unconscionability.
In Sps. Castro v. Tan,41 on the basis of the nullity of the imposed
interest rates due to their iniquity, the Court nullified the foreclosure
proceedings "since the amount demanded as the outstanding loan was
overstated. Consequently, it has not been shown that the respondents
have failed to pay the correct amount of their outstanding obligation. x x
x"
Also, in Sps. Andal v. PNB,42 the Court upheld the nullification of the
foreclosure sale, affirming the appellate court's holding that "since the
interest rates are null and void, [respondent] bank has no right to
foreclose [petitioners-spouses'] properties and any foreclosure thereof
is illegal. x x x. Since there was no default yet, it is premature for
[respondent] bank to foreclose the properties subject of the real estate
mortgage contract."43
In Menchavez v. Bermudez,44 Arthur Menchavez and Marlyn
Bermudez entered on November 17, 1993 into a loan agreement,
covering the amount of P500,000.00, and the Promissory Note provided
that the loan was to be paid "on or before Dec[ember] 17, 1993 with
interest at 5% per month."45 The Court, reiterating Castro v.
Tan,46 tagged the 5% monthly interest rate as "excessive, iniquitous,
unconscionable and exorbitant, contrary to morals, and the law."47
The invalidity of the 5% per month interest rate does not affect the
obligation of Zenaida to repay her loan of P200,000.00 from Atty.
Bulatao. Based on the recent en banc case of Lara's Gifts & Decors, Inc.
v. Midtown Industrial Sales, Inc.,48 the applicable interest is the BSP-
prescribed rate of 12% per annum from the execution of the DMRP on
June 3, 2008, wherein the parties agreed to the payment of interest, to
June 30, 2013 and at the rate of 6% per annum from July 1, 2013 until
full payment. Also, taking into account Article 2212 of the Civil Code,
which provides that "[i]nterest due shall earn legal interest from the time
it is judicially demanded, although the obligation may be silent upon this
point," the interest due on the principal amount (computed as mentioned
above) accruing as of judicial demand (the filing of the counterclaim, in
this case) shall separately earn interest at the rate prescribed by the
BSP from time of judicial demand up to full payment. Thus, the CA
Decision has to be modified in this respect.
For there to be a valid payment, the three characteristics of payment
must be present. These are: (1) integrity of payment, which is provided
for in Article 1233 of the Civil Code: "A debt shall not be understood to
have been paid unless the thing or service in which the obligation
consists has been completely delivered or rendered, as the case
maybe;" (2) identity of payment, which is provided for in Article 1244:
"The debtor of a thing cannot compel the creditor to receive different
one, although the latter may be of the same value as, or more valuable
than that which is due. In obligations to do or not to do, an act or
forbearance cannot be substituted by another act or forbearance against
the obligee's will;" and (3) indivisibility of payment, which is provided for
in Article 1248: "Unless there is an express stipulation to that effect, the
creditor cannot be compelled partially to receive the prestations in which
the obligation consists. Neither may the debtor be required to make
partial payments. However, when the debt is in part liquidated and in
part unliquidated, the creditor may demand and the debtor may effect
the payment of the former without waiting for the liquidation of the
latter."49 Since integrity of payment requires that the thing or service in
which the obligation consists has been completely delivered or rendered
as the case may be, the debtor must comply in its entirety with the
prestation and that the creditor is satisfied with the same.50
These characteristics of payment should mirror the demand made by
the creditor in order for the debtor to incur in delay under Article
116951 of the Civil Code. The demand must comply with the integrity,
identity and indivisibility characteristics as well. Since the debtor cannot
compel the creditor to accept an incomplete delivery or an amount less
than what is due, it follows that the creditor cannot compel the debtor to
pay more than what is due. Thus, the characteristics of integrity and
identity will be violated if the creditor demands more than what is due.
As correctly observed by the CA:
However, while the terms of the Real Estate Mortgage remain effective,
the foreclosure proceedings held on September 8 and 15, 2011, cannot
be given effect.ᇈWᑭHIL In the Notice of Extra-Judicial Sale dated July
15, 2011, and in the Certificate of Sale dated October 10, 2011, the
amount designated as mortgage indebtedness amounted to
P560,000.00. Likewise, in the demand letter dated April 15, 2011,
defendant-appellee demanded from plaintiff-appellant the amount of
P540,000.00 for the unpaid loan. Since the debt due is limited to the
principal of P200,000.00 with 12% per annum as legal interest, the
80
previous demand for payment of the amount of P540,000.00 cannot be
considered as a valid demand for payment. For an obligation to become
due, there must be a valid demand. Nor can the foreclosure proceedings
be considered valid since the total amount of the indebtedness during
the foreclosure proceedings was pegged at P560,000.00 which included
interest and which this Court now nullifies for being excessive,
iniquitous, and exorbitant. If the foreclosure proceedings were
considered valid, it would result in an inequitable situation wherein
plaintiff-appellant will have her land foreclosed for failure to pay an over-
inflated loan only a small part of which she was obligated to pay.52
As to the DMRP, the CA recognized Zenaida as a co-owner of the
mortgaged property and as such, she could validly convey through sale
or mortgage the portion belonging to her.53 Thus, the CA ruled that "the
Real Estate Mortgage in favor of [Atty. Bulatao] is not entirely rendered
void as its validity is limited only to the portion belonging to [Zenaida]."54
In Bailon-Casilao v. Court of Appeals,55 the Court observed:
The rights of a co-owner of a certain property are clearly specified in
Article 493 of the Civil Code. Thus:
Art. 493. Each co-owner shall have the full ownership of his part and of
the fruits and benefits pertaining thereto, and he may therefore alienate,
assign or mortgage it and even substitute another person in its
enjoyment, except when personal rights are involved. But the effect of
the alienation or mortgage, with respect to the co-owners, shall be
limited to the portion which may be allotted to him in the division upon
the termination of the co-ownership. x x x
As early as 1923, this Court has ruled that even if a co-owner sells the
whole property as his, the sale will affect only his own share but not
those of the other co-owners who did not consent to the sale [Punsalan
v. Boon Liat, 44 Phil. 320 (1923)]. This is because under the
aforementioned codal provision, the sale or other disposition affects only
his undivided share and the transferee gets only what would correspond
to his grantor in the partition of the thing owned in common. [Ramirez v.
Bautista, 14 Phil. 528 (1909)]. Consequently, by virtue of the sales made
by Rosalia and Gaudencio Bailon which are valid with respect to their
proportionate shares, and the subsequent transfers which culminated in
the sale to private respondent Celestino Afable, the said Afable thereby
became a co-owner of the disputed parcel of land as correctly held by
the lower court since the sales produced the effect of substituting the
buyers in the enjoyment thereof [Mainit v. Bandoy 14 Phil. 730 (1910)].
From the foregoing, it may be deduced that since a co-owner is entitled
to sell his undivided share, a sale of the entire property by one co-owner
without the consent of the other co-owners is not null and void. However,
only the rights of the co-owner-seller are transferred, thereby making the
buyer a co-owner of the property.56 (Emphasis supplied; italics in the
original)
This ruling was reiterated in Paulmitan v. Court of Appeals,57 where the
Court therein ruled that the sale of the property owned in common by
one co-owner without the consent of the others did not give to the buyer
ownership over the entire land but merely transferred to the buyer the
undivided share of the seller, making the buyer the co-owner of the land
in question.58
The Court's reliance on Article 493 of the Civil Code to justify the validity
of the sale of the property owned in common by a co-owner without the
consent of the other co-owners insofar as the undivided share of the co-
owner seller is concerned has to be reconciled with the ruling of the
Court en banc through Justice J.B.L. Reyes the case of Estoque v.
Pajimula59 (Estoque) which has not been overturned. In Estoque, the
Court pronounced:
x x x The deed of sale to Estoque x x x clearly specifies the object sold
as the southeastern third portion of Lot 802 of the Rosario Cadastre,
with an area of 840 square meters, more or less. Granting that the seller,
Crispina Perez Vda. de Aquitania could not have sold this particular
portion of the lot owned in common by her and her two brothers, Lorenzo
and Ricardo Perez, by no means does it follow that she intended to sell
to x x x Estoque her 1/3 undivided interest in the lot aforementioned.
There is nothing in the deed of sale to justify such inference. That the
seller could have validly sold her one-third undivided interest to
[Estoque] is no proof that she did choose to sell the same. Ab posse ad
actu non valet illatio.60
While in Estoque a specific portion of a co-owned property was sold,
that situation is no different from a situation wherein a co-owner has sold
the entire co-owned property, i.e., a specific parcel of land of which the
seller has only an undivided interest therein, because the rationale for
not recognizing the effectivity of the disposition by a co-owner without
81
the consent of the other co-owners over a specific portion equally
applies to the disposition of the entire co-owned property, which is more
than the undivided interest or share rightfully pertaining to the disposing
co-owner.61
Estoque characterizes the contract entered into by the disposing co-
owner as "ineffective, for lack of power in the vendor to sell the specific
portion described in the deed" and makes room for a subsequent
ratification of the contract by the other co-owners or validation in case
the disposing co-owner subsequently acquires the undivided or pro-
indiviso interests of the other co-owners.62 Thus, the subsequent
ratification or acquisition will validate and make the contract fully
effective63 as of the date the contract was entered into pursuant to
Article 1396 of the Civil Code, which provides that "[r]atification cleanses
the contract from all its defects from the moment it was constituted" and
Article 1434 of the Civil Code, which provides: "[w]hen a person who is
not the owner of a thing sells or alienates and delivers it, and later the
seller or grantor acquires title thereto, such title passes by operation of
law to the buyer or grantee."
While Article 493 of the Civil Code may not squarely cover the situations
wherein a co-owner, without the consent of the other co-owners,
alienate, assign or mortgage: (1) the entire co-owned property; (2) a
specific portion of the co-owned property; (3) an undivided portion less
than the part pertaining to the disposing co-owner; and (4) an undivided
portion more than the part pertaining to the disposing co-owner, the
principle of estoppel bars the disposing co-owner from disavowing the
sale to the full extent of his undivided or pro-indiviso share or part in the
co-ownership, subject to the outcome of the partition, which, using the
terminology of Article 493, limits the effect of the alienation or mortgage
to the portion that may be allotted to him in the division upon termination
of the co-ownership. Under Article 1431 of the Civil Code, "[t]hrough
estoppel an admission or representation is rendered conclusive upon
the person making it, and cannot be denied or disproved as against the
person relying thereon."64
Given the foregoing, the CA was correct when it limited the validity of
the DMRP only to the portion belonging to Zenaida. Unfortunately, the
dispositive portion reflected differently: "The Deed of Mortgage of Real
Property dated June 4, 2008 is DECLARED as VOID only with respect
to the share of deceased Adolfo T. Estonactoc."65 Accordingly, a
modification thereof is warranted to reflect that it is valid only to the share
pertaining to Zenaida.
As to the share of Zenaida, Atty. Bulatao is correct that Zenaida is a co-
owner to the extent of 3/4 undivided portion (1/2 portion representing
her share in the conjugal property and 1/4 portion as her legitime in the
estate of her husband Adolfo Estonactoc) of the subject property, with
the remaining 1/4 undivided portion being co-owned by her son Jose
Rafael Estonactoc. However, Atty. Bulatao has yet no right to foreclose
Zenaida's 3/4 undivided share inasmuch as the foreclosure proceedings
that he initiated have been declared void in the present proceedings.
WHEREFORE, the Petition is hereby PARTLY GRANTED.
Accordingly, the Decision dated October 19, 2017 of the Court of
Appeals in CA-G.R. CV No. 105581
is AFFIRMED with MODIFICATION:
1. The Deed of Mortgage of Real Property dated June 3, 2008
is DECLARED VALID only with respect to the share of Zenaida C.
Estonactoc;
2. The monthly interest rate stipulated in the Deed of Mortgage of Real
Property is DECLARED VOID;
3. The Foreclosure Sale and the Certificate of Sale issued in favor of
Atty. Leonard Florent O. Bulatao are DECLARED VOID;
4. Zenaida C. Estonactoc is ORDERED to pay Atty. Leonard Florent O.
Bulatao the amount of P200,000.00 that the former borrowed from the
latter with interest at the rate of 12% per annum from June 3, 2008 to
June 30, 2013 and at the rate of 6 % per annum from July 1, 2013 until
full payment; and,
5. Interest due on the principal amount of P200,000.00 accruing as of
judicial demand (i.e., filing of the counterclaim of Atty. Leonard Florent
O. Bulatao) shall separately earn legal interest at the rate of 12% per
annum until June 30, 2013 and at the rate of 6% per annum from July
1, 2013 until full payment.
SO ORDERED.
82
 Sioland Development Corporation, as represented by CEO
Elizabeth Sio v. Fair Distribution Center Corporation, represented
by Esteban L. Alba, Jr., G.R. No. 199539. August 9, 2023
GESMUNDO, C.J.:
This is a Partial Appeal by way of Petition for Review
on Certiorari1 under Rule 45 of the Rules of Court, filed by Sioland
Development Corporation (petitioner), assailing the May 31, 2011
Decision2 and the November 24, 2011 Resolution3 of the Court of
Appeals (CA) in CA-G.R. CV No. 94331. The CA set aside the April 14,
2009 Decision4 of the Regional Trial Court of San Pablo City, Branch
29 (RTC), for failing to comply with Section 14,5 Article VIII of the 1987
Constitution by stating the facts and law on which the decision is based.
The Antecedents
Fair Distribution Center Corporation (respondent) is a duly
registered corporation engaged in the distribution and sale of Universal
Food Corporation (UFC) products, while petitioner was one of its
customers.6
Respondent delivered various types of merchandise to petitioner on
several occasions during the months of November and December 2007
as evidenced by charge and sales invoices.7
On September 8, 2008, respondent sent petitioner a Demand
Letter8 for the immediate payment of ₱800,894.27 representing its
unpaid accounts. Despite the demand, petitioner failed to pay.
Respondent was thus prompted to file a Complaint9 for Collection of
Sum of Money before the RTC. Petitioner received the Summons10 on
September 29, 2008 through personal service.11
On October 14, 2008, petitioner filed a Formal Entry of Appearance
with Motion for Extension of Time to File Responsive Pleading,12 and
prayed for an additional 15 days or until October 29, 2008 to file its
Answer. Counsel for petitioner reasoned that his recent hiring by
petitioner as counsel, as well as his "heavy pressure of work, daily court
appearances, research and preparation of pleadings, memorandum and
other documents for other cases," necessitate his request for additional
time. The RTC granted petitioner's motion in its Order13 dated October
29, 2008.
On even date, petitioner filed a Second Motion for Extension of Time
to File Responsive Pleading,14 praying for an additional period of 10
days or until November 8, 2008. Petitioner's counsel explained that he
was "still collating the voluminous documents x x x in addition to the
heavy pressure of work, daily court appearances, research and
preparation of pleadings, memorandum and other documents for other
cases."15 On November 5, 2008, the RTC granted the motion and gave
petitioner an inextendible period of 10 days or until November 8, 2008
to file its Answer.16
Despite the second extension, petitioner still did not file an Answer
and instead, filed on November 10, 2008, through registered mail, its
Last Motion for Extension of Time to File Respon[siv]e
Pleading,17 again citing the collation of "voluminous documents, x x x
heavy pressure of work, daily court appearances, research and
preparation of pleadings, memorandum and other documents for other
cases" as reason for its inability. Petitioner again asked for an additional
10 days from November 8, 2008 or until November 18, 2008 to file its
Answer. This time, the RTC issued an Order18 requiring herein
respondent to file its comment/opposition to petitioner's third motion.
Finally on November 19, 2008, petitioner filed its Answer with
Counterclaim19 through registered mail, admitting its purchases from
respondent but claiming that it had already paid the same in full.
Petitioner averred that under the delivery agreement it entered with
respondent, all outstanding obligations must be paid within twenty-one
(21) days from delivery, otherwise, no further deliveries will be made. It
declared having settled all its monetary obligations with respondent, as
shown by the additional and subsequent deliveries made by the latter.20
Noting that petitioner's Answer was filed only on November 19,
2008, respondent moved to declare petitioner in default.21 On January
8, 2009, the RTC granted the motion22 and declared petitioner in
default.23
In its Order24 dated January 14, 2009, the RTC scheduled the ex
parte reception of evidence on January 30, 2009. During the
presentation of evidence ex parte, respondent submitted its sales and
charge invoices, demand letter, counter receipts, and inventory
83
transmittals. Respondent also presented three witnesses, namely:
Esteban Alba, Jr. (Alba), Annie Magsino (Magsino) and Alquin Calabia
(Calabia) who testified on the authenticity and veracity of the
documents. Thereafter, respondent formally offered its
evidence,25 which the court admitted pursuant to its March 23, 2009
Order.26
Ruling of the RTC
On April 14, 2009, the RTC rendered a Decision27 holding
petitioner liable for the principal amount of P800,894.27 plus legal
interest, attorney's fees, and costs of suit. The RTC ruled:
From the evidence adduced by the plaintiff consisting of
documentary exhibits presented and marked in evidence as well as the
testimony of plaintiff which remains uncontroverted, the Court is
convinced that plaintiff is entitled to the relief prayed for in the Complaint.
WHEREFORE, judgment is hereby rendered in favor of the plaintiff
Fair Distribution Center Corporation and against defendant Sioland
Development Corporation, ordering the latter to pay the former the sum
of [P]800,894.27 as principal obligation plus legal interest from the date
of demand on September 8, 2008 until fully paid; [P]80,000.00 as
attorney's fees; and costs of suit.
SO ORDERED.28
Petitioner filed a Motion for New Trial/Motion for
Reconsideration,29 citing excusable negligence of its counsel for having
belatedly filed its Answer. The RTC denied the motion in its
Order30 dated October 6, 2009.
Petitioner appealed31 to the CA and argued that: the trial court
failed to cite any law or jurisprudence upon which its decision was
based; petitioner was declared in default despite the filing of an Answer;
and the awards of attorney's fees and costs of suit were improper.32
Ruling of the CA
In the now assailed Decision, the CA agreed with petitioner that the
RTC failed to clearly state the facts and the law upon which its decision
was based.33 Instead of remanding the case, the CA proceeded with
resolving the same to prevent further delay in its disposition.
After reviewing the records, the CA made the following ruling on
petitioner's liability:
As plaintiff in the case at bar, plaintiff-appellee had the burden of
proof to establish its case by preponderance of evidence. To prove its
claim, plaintiff-appellee presented Esteban Alba, Jr., its liaison and legal
officer. Alba testified to the numerous transactions between plaintiff-
appellee and defendant-appellant, and in connection therewith, he also
identified the sales and charge invoices issued by plaintiff-appellee, as
well as the signature of defendant-appellant's employee on the sales
and charge invoices, attesting to the receipt of the merchandise.
The next witness presented for plaintiff-appellee was Annie
Magsino, who was employed by plaintiff-appellee as a biller-
encoder.1aшphi1 Magsino testified that as a biller-encoder, it was her
duty to prepare the sales and charge invoices presented to plaintiff-
appellee's customers. Magsino further testified that she personally
prepared the sales and charge invoices delivered to defendant-
appellant. Thereafter, Magsino identified the sales and charge invoices
she prepared for delivery to defendant-appellant from October 2007 to
December 2007, as well as the statement of account presented to
defendant-appellant.
Plaintiff-appellee's last witness, Alquin Bustamante Calabia, was
employed as plaintiff-appellee's salesman and he testified that he
personally received the orders from defendant-appellant and then tried
to collect the outstanding amounts from defendant-appellant, but to no
avail.
In light of the overwhelming evidence, both testimonial and
documentary, presented by plaintiff-appellee, which sufficiently prove
the existence of defendant-appellant's obligation, as well as the non-
payment thereof, we hold that plaintiff-appellee's complaint for collection
of sum of money is meritorious and should therefore be upheld.34
With respect to the issue on default, the CA found that petitioner's
Answer was indeed filed beyond the reglementary period. It stressed
that petitioner was granted two extensions of time within which to file its
Answer, and yet, still sought a third extension which was rightly denied
84
by the RTC. Clearly, the extended period to file an Answer had already
lapsed thereby rendering immaterial the RTC's denial of petitioner's third
motion for extension.35
The CA further reasoned that the RTC cannot be faulted for
dismissing petitioner's motion for new trial or reconsideration as it failed
to establish, fraud, accident, mistake or excusable negligence, and that
its motion palpably lacked a meritorious defense.36
Nonetheless, the CA agreed with petitioner that the RTC erred in
awarding attorney's fees since it is not to be awarded every time a party
wins a suit. The CA observed that respondent did not present the written
contract it entered into with its lawyer, and also failed to satisfactorily
justify its claim for attorney's fees.37
The dispositive portion of the CA Decision reads:
WHEREFORE, the Decision dated April 14, 2009 rendered by the
RTC, Branch 29, of San Pablo City, in Civil Case No. SP-6522(08)
is SET ASIDE. In lieu thereof, a new judgment is entered, to read, thus:
WHEREFORE, judgment is
hereby rendered in favor of the plaintiff
Fair Distribution Center Corporation
and against defendant Sioland
Development Corporation, ordering
the latter to pay the former the sum of
[₱]800,894.27 as principal obligation
plus legal interest from the date of
demand on September 8, 2008 until
fully paid.
SO ORDERED. 38
Aggrieved, petitioner partially moved for reconsideration,39 but its
motion was denied.40 Hence, the present petition on the ground that the
CA erred and gravely abused its discretion:
(A)
IN DENYING THE MOTION FOR PARTIAL RECONSIDERATION OF
PETITIONER AND IN NOT SETTING ASIDE ITS PREVIOUS RULING
TO ENTER A NEW JUDGMENT IN LIEU OF THE DECISION DATED
APRIL 14, 2009, RENDERED BY RTC BRANCH 29, SAN PABLO CITY
IN CIVIL CASE NO SP-6522(08);
(B)
IN RENDERING ITS NEW JUDGMENT BY NOT COMPLYING WITH
SECTION 14, ARTICLE VIII OF THE CONSTITUTION AND SECTION
1, RULE 36 OF THE 1997 RULES OF CIVIL PROCEDURE;
(C)
WHEN IT DID NOT REMAND THE INSTANT CASE TO THE COURT
OF ORIGIN FOR FURTHER. PROCEEDINGS AND FOR RECEPTION
OF DEFENDANT'S EVIDENCE.41
Petitioner argues in its Memorandum42 that the CA cannot validate
the decision of the RTC which it declared as void for violating Sec. 14,
Art. VIII of the 1987 Constitution and Sec. 1,43 Rule 36 of the 1997
Rules of Civil Procedure. It further insists that there was no decision at
all to be cured or validated, and what ought to be done under the
circumstances was to declare the nullity of the RTC decision and
remand the case to the court of origin to rectify its error.44
Furthermore, assuming that the CA properly made its factual
findings and entered a new judgment, petitioner opines that the CA
Decision is also null and void. The CA did not cite a single jurisprudence
nor provision of law on unpaid indebtedness or obligation, in violation of
the clear mandate of the 1987 Constitution and the Rules of Civil
Procedure.45
Finally, petitioner maintains that it should not have been declared in
default, and that the case should have been remanded to the RTC. Even
if there was a mistake or inadvertence on the part of its former counsel
in belatedly filing its Answer, petitioner's valid and meritorious defense
must not in any manner be prejudiced. Albeit negligence or oversight of
petitioner's previous counsel de parte, procedural, technicality should
be relaxed where lapses of lawyers deprived clients of their day in
court.46
85
 For its part, respondent argues that the CA acted within its power
when it made the necessary factual findings based on records,
testimonies of witnesses, and documentary evidence presented and
submitted by respondent, in order to avoid further delay in the
disposition of the case.47
Respondent likewise maintains that the May 31, 2011 Decision of
the CA complied with the requirements of Sec. 14, Art. VIII of the 1987
Constitution and of Sec. 1, Rule 36 of the Rules of Civil Procedure
because it contained findings of facts and law.48
Lastly, respondent stresses that the appeal was filed under Rule
41,49 of the Rules of Court, where questions of fact or mixed questions
of fact and law are tackled.50 As the finding of facts were already made
by the CA, there was no need to remand the case to the lower court for
further reception of evidence.51
Issues
The main issues for resolution are: 1) whether or not the declaration
of default against petitioner was proper; 2) whether or not remand of the
case to the trial court was necessary; and 3) whether or not the CA
decision complied with Sec. 14, Art. VIII of the 1987 Constitution and
Sec. 1, Rule 36 of 1997 Rules of Civil Procedure.
Ruling of the Court
The Court denies the petition.
Declaration of default was proper
Sec. 3, Rule 9 of the 1997 Rules of Civil Procedure provides:
Section 3. Default; declaration of. – If the
defending party fails to answer within the time allowed
therefor, the court shall, upon motion of the claiming
party with notice to the defending party, and proof of
such failure, declare the defending party in default.
Thereupon, the court shall proceed to render judgment
granting the claimant such relief as his pleading may
warrant, unless the court in its discretion requires the
claimant to submit evidence. Such reception of
evidence may be delegated to the clerk of court.
Petitioner insists that it should not have been declared in default.
However, the Court is not convinced.
The Court is not unmindful of the settled rule that an Answer that
was belatedly filed, but before a declaration of default was made, may
still be admitted provided that the defendant has no intention to delay
the proceedings. In Sablas v. Sablas,52 the Court enunciated that it is
within the sound discretion of the trial court to permit the defendant not
only to extend the time to file an Answer, but also to allow the filing of
an Answer and to be heard on the merits even after the reglementary
period.53 Further, in Vitarich Corporation v.
Dagmil,54 reiterating Hernandez v. Agoncillo,55 the Court emphasized
that the trial court may permit the filing of an Answer even beyond the
reglementary period, provided that there is justification for the belated
action and there is no showing that the defendant intended to delay the
proceedings.56
In here, the records clearly show that petitioner failed to timely file
an Answer despite the grant of its two motions for extension. Notable
that in granting petitioner's second motion for extension, the RTC gave
petitioner an "unextendible period of another ten (10) days."57 Despite
this clear Order from the RTC, petitioner still filed its third motion for
extension praying for an additional period of 10 days which fell on
November 8, 2008. However, petitioner belatedly filed its Answer with
Counterclaim only on November 19, 2008 through registered mail,58 or
more than 10 days from November 8, 2008.
Furthermore, petitioner did not only fail to sufficiently justify its
belated filing of an Answer, but it also successively filed three motions
for extension by using the trite justification of "heavy workload." It bears
emphasizing that heavy workload, standing alone, is hardly a compelling
or meritorious reason to allow extensions of time to file
pleadings.59 Personal obligations and heavy workload do not excuse a
lawyer from complying with his obligations particularly in timely filing the
pleadings required by the Court. Indeed, if the failure of the petitioner's
counsel to cope with his heavy workload should be considered a valid
justification to sidestep the reglementary period, there would be no end
to litigations so long as counsel had not been sufficiently diligent or
experienced.60
86
 Hence, the RTC acted well within its discretionary authority when it
declared petitioner in default. Verily, the presentation of evidence ex
parte by respondent can solely be attributed to petitioner's own
omission.
In justifying the plea to relax the rules, petitioner argues that the
negligence of its lawyer should not prejudice it and that it has a valid and
meritorious defense. These unsubstantiated claims, however, do not
suffice. The general rule is that the negligence of counsel binds the
client, even mistakes in the application of procedural rules.61 An
exception to this doctrine is when the negligence of counsel is so gross
that the due process rights of the client were violated,62 which is not
present in this case. There was even no showing that petitioner itself
exercised due diligence in monitoring the status of its case. Petitioner
cannot now seek refuge in whatever shortcomings its counsel
purportedly had.
It bears emphasizing that despite being declared in default,
petitioner was not left without any remedy. In Otero v. Tan,63 the Court
enumerated the remedies available to a party who has been declared in
default, to wit:
a) The defendant in default may, at any time after discovery thereof
and before judgment, file a motion, under oath, to set aside the order of
default on the ground that his failure to answer was due to fraud,
accident, mistake or excusable neglect, and that he has meritorious
defenses; (Sec 3, Rule 18)
b) If the judgment has already been rendered when the defendant
discovered the default, but before the same has become final and
executory, he may file a motion for new trial under Section 1(a) of Rule
37;
c) If the defendant discovered the default after the judgment has
become final and executory, he may file a petition for relief under
Section 2 of Rule 38; and
d) He may also appeal from the judgment rendered against him as
contrary to the evidence or to the law, even if no petition to set aside the
order of default has been presented by him. (Sec. 2, Rule 41).64
Additionally, the Court, in Gochangco v. The Court of First Instance
of Negros Occidental, Br. IV65 (Gochangco), listed the special civil
action for certiorari impugning the court's jurisdiction, as another remedy
available to a party declared in default.66
These remedies are mutually exclusive and cannot be availed of
alternatively or cumulatively. In Lui Enterprises, Inc. v. Zuellig Pharma
Corporation,67 the Court explained that:
The remedies of the motion to set aside order of
default, motion for new trial, and petition for relief from
judgment are mutually exclusive, not alternative or
cumulative. This is to compel defendants to
remedy their default at the earliest possible
opportunity. Depending on when the default was
discovered and whether a default judgment was
already rendered, a defendant declared in default
may avail of only one of the three remedies.
Thus, if a defendant discovers his or her default
before the trial court renders judgment, he or she shall
file a motion to set aside order of default. If this motion
to set aside order of default is denied, the defendant
declared in default cannot await the rendition of
judgment, and he or she cannot file a motion for new
trial before the judgment becomes final and executory,
or a petition for relief from judgment after the judgment
becomes final and executory.68 (Emphases supplied;
citations omitted)
In this case, petitioner waited until the RTC rendered its judgment
on the case and thereafter opted to file a motion for new
trial/reconsideration. Although it insisted in the said motion that the RTC
had improperly issued the order of default, petitioner nonetheless failed
to offer a suitable explanation for its failure to file an Answer within the
required period. The Court's ruling in Gochangco69 instructs that:
The underlying philosophy of the doctrine of
default is that the defendant's failure to answer the
complaint despite receiving copy thereof together with
summons, is attributable to one of two causes: either
(a) to his realization that he has no defenses to the
87
 plaintiffs cause and hence resolves not to oppose the
complaint, or, (b) having good defenses to the suit, to
fraud, accident, mistake or excusable negligence
which prevented him from seasonably filing an answer
setting forth those defenses. x x x if he did have good
defenses, it would be unnatural for him not to set
them up properly and timely, and if he did not in
fact set them up, it must be presumed that some
insuperable cause prevented him from doing so:
fraud, accident, mistake, excusable negligence. In
this event, the law will grant him relief; and the law is in
truth quite liberal in the reliefs made available to him: a
motion to set aside the order of default prior to
judgment; a motion for new trial to set aside the default
judgment; an appeal from the judgment by default even
if no motion to set aside the order of default or motion
for new trial had been previously presented; a special
civil action for certiorari impugning the court's
jurisdiction.70 (Emphasis supplied; citations omitted)
Petitioner could have complied with Sec. 3(b), Rule 971 of the Rules
of Court by alleging a suitable explanation for its delay in filing the
Answer through a motion to lift order of default before the default
judgment is rendered. This duty to explain is called for by the philosophy
underlying the doctrine of default in civil procedure, which Justice
Andres R. Narvasa eruditely discoursed on
in Gochangco.72 Inauspiciously, as mentioned, petitioner failed to do
so. The Court has observed that in its motion for new
trial/reconsideration, petitioner failed to substantiate its arguments on
why it should not have been declared in default and be given the chance
to be heard. Neither did it attach supporting documents nor specify the
circumstances of fraud, accident, mistake, or excusable negligence that
could have warranted the setting aside of the default judgment to give
way to a new trial.
To reiterate, procedural rules ensure an orderly and speedy
administration of justice and thus, resort to a liberal application, or
suspension of the application of such rules, must remain as the
exception.73 The Court is well aware of the judicial mandate that rules
prescribing the time which certain acts must be done, or certain
proceedings taken, are absolutely indispensable to the prevention of
needless delays and the orderly and speedy discharge of judicial
business.74 Although courts are granted the prerogative to relax
compliance with procedural rules of even the most mandatory character
in order to fulfill its duty of reconciling both the need to put an end to
litigation speedily and the parties' right to an opportunity to be
heard,75 the relaxation of rules must be justified by reasons, such as:
(a) matters of life, liberty, honor or property; (b) the existence of special
or compelling circumstances; (c) the merits of the case; (d) a cause not
entirely attributable to the fault or negligence of the party favored by the
suspension of the rules; (e) a lack of any showing that the review sought
is merely frivolous and dilatory; and (f) the fact that the other party will
not be unjustly prejudiced thereby.76 Unfortunately, none of the above
reasons exist in the instant case.
The CA properly proceeded with the resolution of the case.
While, concededly, a defending party declared in default loses his
standing in the trial court, as well as his right to adduce evidence and to
present his defense, this, however, does not impliedly suggest a loss of
all of his/her rights in the stages of the case after the default judgment.77
In Gajudo v. Traders Royal Bank78 (Gajudo), the Court
emphasized that:
The mere fact that a defendant is declared in
default does not automatically result in the grant of the
prayers of the plaintiff. To win, the latter must still
present the same quantum of evidence that would be
required if the defendant were still present. A party
that defaults is not deprived of its rights, except the
right to be heard and to present evidence to the
trial court. If the evidence presented does not
support a judgment for the plaintiff, the complaint
should be dismissed, even if the defendant may
not have been heard or allowed to present any
countervailing evidence.79 (Emphasis supplied)
Also, it was explained in Gajudo that:
[A] defaulted defendant is not actually thrown
out of court. While in a sense it may be said that by
defaulting he leaves himself at the mercy of the
court, the rules see to it that any judgment against
88
 him must be in accordance with law. The evidence
to support the plaintiffs cause is, of course, presented
in his absence, but the court is not supposed to admit
that which is basically incompetent. Although the
defendant would not be in a position to object,
elementary justice requires that only legal evidence
should be considered against him. If the evidence
presented should not be sufficient to justify a
judgment for the plaintiff, the complaint must be
dismissed. And if an unfavorable judgment should
be justifiable, it cannot exceed in amount or be
different in kind from what is prayed for in the
complaint.80 (Emphases supplied)
Thus, even with the declaration of default, the trial court is not given
unbridled discretion to automatically resolve the matter in favor of the
non-defaulting party. Although petitioner, as the party in default, lost its
right to present evidence, the trial court remains duty-bound to squarely
render judgment based on respondent's ex parte evidence, such as in
this case.
In rendering a default judgment, trial courts are still bound by Sec.
14, Art. VIII of the 1987 Constitution which mandates that no decision
shall be rendered by any court without expressing therein clearly and
distinctly the facts and the law on which it is based. A similar
mandate is also provided under Sec. 1, Rule 36 of the Rules of Court
which states that a judgment or final order determining the merits of the
case shall be in writing personally and directly prepared by the judge,
stating clearly and distinctly the facts and the law on which it is based,
signed by him, and filed with the clerk of the court. Clearly, Sec. 14, Art.
VIII of the Constitution, Sec. 1, Rule 36 of the Rules on Civil Procedure
and Sec. 1,81 Rule 120 of the Rules on Criminal Procedure, and a
plethora of cases82 provide that court decisions shall clearly and
distinctly state its factual and legal bases.
The rationale for the said constitutional mandate was explained by
the Court in Villongco v. Yabut,83 in this wise:
Faithful adherence to the requirements of Section
14, Article VIII of the Constitution is indisputably a
paramount component of due process and fair play. A
decision that does not clearly and distinctly state the
facts and the law on which it is based leaves the parties
in the dark as to how it was reached and is precisely
prejudicial to the losing party, who is unable to pinpoint
the possible errors of the court for review by a higher
tribunal. More than that, the requirement is an
assurance to the parties that, in arriving at a judgment,
the judge did so through the processes of legal
reasoning. It is, thus, a safeguard against the
impetuosity of the judge, preventing him from
deciding ipse dixit.84
The Constitution and the Rules of Court apparently delineate two
main essential parts of a judgment, namely: the body and the decretal
portion. Although the latter is the controlling part, the importance of the
former is not to be lightly regarded because it is there where the court
clearly and distinctly states its findings of fact and of law on which the
decision is based. To state it differently, one without the other is
ineffectual and useless. The omission of either inevitably results in a
judgment that violates the letter and the spirit of the Constitution and the
Rules of Court.85
A fortiori, the mandate to clearly state the facts and law upon which
the decision is based shall be observed in cases where a defendant
loses its opportunity to present its evidence by reason of default. The
mere fact that the defendant was not able to file an Answer does not
automatically mean that the trial court will render a judgment in favor of
the plaintiff. The trial court must still determine whether the plaintiff is
entitled to the reliefs prayed for. Thus, it is incumbent upon the RTC to
clearly and distinctly state the facts and the legal basis on which it based
its decision.86
In here, the Court agrees with the observation by the CA that the
RTC "merely made a conclusion in one paragraph, without stating the
facts and the law upon which its ruling was based."87 Indeed, the RTC
Decision fell short of the constitutional requirement of stating clearly and
distinctly the factual and legal basis of the decision. Although the trial
court had painstakingly stated the numerous documentary evidence as
well as testimonial evidence, the RTC, regrettably, made a general and
sweeping conclusion regarding petitioner's liability. The RTC decision
did not cite any provision of law or jurisprudence to support its
conclusion that respondent was indeed entitled to the reliefs it prayed
89
for. The CA, thus, correctly set aside the RTC decision for failure to
comply with the fundamental requirements of a valid judicial decision.
However, petitioner strongly argues that in view of the null and void
decision of the RTC, the CA should have remanded the case for further
proceedings and reception of its evidence.
Petitioner is mistaken.
Indeed, remand is necessary only when there has been no trial on
the merits.88 Black's Law Dictionary defines trial on merits as a trial on
the substantive issues of a case, as opposed to a motion hearing or
interlocutory matter.89 It is a trial where the parties had the opportunity
to present their evidence, which was duly examined and considered by
the court in resolving the issues presented before it.
As a rule, remand is avoided in the following instances: (a) where
the ends of justice would not be subserved by a remand; or (b) where
public interest demands an early disposition of the case; or (c) where
the trial court had already received all the evidence presented by both
parties, and the Supreme Court is in a position, based upon said
evidence, to decide the case on its merits.90 Under these
circumstances, remand of the case to the lower court for further
reception of evidence is no longer necessary.
Admittedly, there was no full presentation of evidence by reason of
the default of petitioner. This, however, will not necessarily justify a
remand of the case to give petitioner an opportunity to present its
evidence. To do so would certainly defeat the purpose of the default
order. It would amount to indirectly seeking the lifting of the default order
without the appropriate motion being filed. In effect, petitioner would be
rewarded for belatedly filing its Answer.
In Momarco Import Company, Inc. v. Villamena91 (Momarco), the
Court affirmed the CA's observation that Momarco, the defendant-
appellant, had forsaken its "expeditious remedy" of moving soonest for
the lifting of the order of default. Instead, defendant-appellant chose to
wager on obtaining a favorable judgment by waiting on the trial court's
decision, which it would not have done unless it intended to unduly
cause delay.92 Hence, the Court held that to remand the case upon the
invocation that the courts must be liberal in setting aside orders of
default, would be to reward defendant-appellant with more delay.
Applying the ruling in Momarco and based on the circumstances
obtaining in this case, the Court denies petitioner's plea of remand.
To reiterate, petitioner's failure to present its own evidence was due
to its own omissions. Remanding the present case would not promote
the ends of justice, and is thus, not necessary. Furthermore, the CA
correctly took it upon itself to make the necessary factual findings,
considering that the appeal was filed under Rule 41 of the Rules of Court
where it has the authority to resolve questions of fact or mixed questions
of fact and of law, to prevent further delay in the expeditious resolution
of the case. Hence, contrary to petitioner's submission, the CA was not
obligated to remand the case to the RTC. Relatedly, petitioner cannot
also claim that the CA "cured" or "validated" the void RTC Decision as
the CA embarked on its own determination of the merits of respondent's
claims, albeit arriving at the same conclusion as the RTC.
Moreover, petitioner opted to wait for the default judgment and
decided to appeal therefrom. Petitioner can appeal the judgment by
default on the ground that respondent failed to prove the material
allegations of the complaint, or that the decision is contrary to law, even
without need of the prior filing of a motion to set aside the order of
default.93 Being the party in default, petitioner is proscribed from
seeking a modification or reversal of the assailed decision on the basis
of the evidence it submitted in the CA. Otherwise, it would be permitted
to regain its right to adduce evidence which it already lost in the trial
court in view of the order of default, and which it failed to have
vacated.94 Hence, there is no merit in petitioner's insistence of
remanding the case to the RTC.
However, petitioner maintains that the CA seriously erred in
rendering the assailed decision for noncompliance with Sec. 14, Art. VIII
of the Constitution, as well as Sec. 1, Rule 36 of the 1997 Rules of Civil
Procedure.
We find partial merit in petitioner's argument as the CA likewise
failed to state the legal basis for holding petitioner liable for respondent's
monetary claims. Lamentably, the CA repeated the RTC's oversight by
ruling in the same manner as the RTC did. The assailed CA Decision
failed to provide sufficient factual and legal basis in arriving at its
conclusion. Given these circumstances, the assailed CA Decision is
partly void insofar as declaring petitioner's liability is concerned. As
regards other issues resolved by the CA, the same are hereby
90
sustained. In order not to delay the resolution of this case, the Court will On the other hand, it is settled that commercial documents or
proceed in resolving the matter instead of ordering its remand. papers are used by merchants to promote or facilitate trade or credit
transactions.100 Business forms such as sales or charge invoices, are
Sales invoices and charge invoices were competent proof of evidence of commercial transactions101 and serve as proof that a
sale transactions and not of payment. business transaction has been concluded.102 Sales and charge
invoices substantiate the existence of sales transactions between buyer
By defaulting, herein petitioner left itself at the mercy of the court. and seller because "sales or commercial invoice" is a written account of
Nevertheless, the rules see to it that any judgment against it must be in goods sold or services rendered indicating the prices charged therefor
or a list by whatever name it is known which is used in the ordinary
accordance with the evidence required by law. The evidence of the
plaintiff, presented in the absence of the defaulting party, cannot be course of business evidencing sale and transfer or agreement to sell or
admitted if it is basically incompetent and irrelevant to the issue at hand. transfer goods and services.103 As such, sales invoices are the best
Although the defendant would not be in a position to object, elementary evidence of a business transaction;104 they are not evidence of
justice requires that only legal evidence should be considered against it. payment, but only evidence of receipt of the goods. The best evidence
of payment of the goods delivered is the official receipt.105
If the same should prove insufficient to justify a judgment for the plaintiff,
the complaint must be dismissed. And if a favorable judgment is
justifiable, it cannot exceed the' amount or be different in kind from what In here, respondent's documentary evidence consisted of sales and
is prayed for in the complaint.95 charge invoices, invoice transmittals, and counter receipts, among
others, which were identified and corroborated by testimonial evidence.
Respondent presented as witness its Biller Encoder Magsino, who was
In Dra. Dela Llana v. Biong,96 the Court explained admissibility and
in-charge of the invoices of its customers and testified that she prepared
weight of evidence:
in her own handwriting, several invoices covering the merchandise
delivered to petitioner for the months of November and December
[A]dmissibility of evidence should not be equated with 2007.106 She likewise explained that she personally computed the
weight of evidence. The admissibility of evidence following outstanding obligation as contained in the Demand
depends on its relevance and competence, while the Letter107 sent to petitioner:
weight of evidence pertains to evidence already
admitted and its tendency to convince and persuade.
Thus, a particular item of evidence may be admissible, DATE INVOICE NO. AMOUNT
but its evidentiary weight depends on judicial December 03, 2007 576972 [₱] 20,627.04
evaluation within the guidelines provided by the Rules 576973 21,222.00
of Court.97 576974 18,750.00
68940 3,135.25
Evidence, to be admissible, must comply with two qualifications: (a) 68941 840.00
relevance and (b) competence. Evidence is relevant if it has a relation 68942 9,012.61
to the fact in issue as to induce a belief in its existence or nonexistence.
68944 5,805.78
On the other hand, evidence is competent if it is not excluded by the law
or by the Rules of Court.98 Relatedly, the best evidence rule (now 68945 52,468.78
original document rule) under Sec. 3,99 Rule 130 of the Rules of Court, 68948 19,690.67
is one of the means in determining the competence of evidence. This 68949 42,904.61
rule finds more importance in cases where a defendant is declared in December 05, 2007 68994 82,152.44
default and can no longer object to the plaintiff’s presentation of 68995 42,632.50
evidence. 68996 1,680.00

91
 68997 16,597,75 petitioner.111 He also testified that he was in-charge of collecting
68998 17,923.20 payments from petitioner, and that the latter had unpaid accounts
68999 31,450.88 amounting to ₱800,894.27.112 To further prove the unpaid obligations,
he identified the original Counter Receipts113 which contained the
69000 34,360.80
lists/summary of the invoices that remained unpaid by petitioner.
69001 16,497.04
December 18, 2007 69816 1,496.56
Respondent likewise submitted the September 8, 2008 letter sent
69817 5,853.38 to petitioner, demanding payment for the unpaid accounts in the sum of
69818 22,521.38 P800,894.27. Alba, respondent's Liaison and Legal Officer, identified
69819 21,893.05 the said demand letter and testified that the same has been delivered to
69820 37,112.63 and received by petitioner. He also confirmed that despite receipt of said
69821 10,202.41 demand letter, petitioner failed to pay any sum.114
69822 1,680.00
69823 13,690.51 Evidently, the sales invoices, counter receipts, and invoice
December 22, 2007 70041 26,268.53 transmittals established the transactions between petitioner and
respondent, and proved that goods were indeed delivered to and
70042 1,680.00
received by the former. On the other hand, respondent's demand letter
70043 9,530.09 established that petitioner was informed of its unpaid accounts. Taken
70044 52,000.18 altogether, these pieces of evidence preponderantly established
70047 11,441.48 petitioner's outstanding obligation in the amount of ₱800,894.27, which
70048 11,040.55 was exactly the amount prayed for by respondent in its complaint.115
70040 45,982.93
70045 13,473.98 Despite the preponderance of evidence showing its liability for the
70046 14,547.02 above stated amount, petitioner denies being obligated to pay the said
December 22, 2007 581784 31,005.24 sum. In its motion for new trial/reconsideration filed before the RTC, as
581785 31,723.00 well as in its appeal before the CA and even in the instant petition,
petitioner claims that the subject amount had already been paid in full.
GRAND TOTAL - - - - [₱] 800,894.27
Under the rules of evidence, since petitioner pleads payment, it has
-----------------
the burden of proving it. Even where the plaintiff must allege non-
-----------------
payment, the general rule is that the burden rests on the defendant to
--
prove payment, rather than on the plaintiff to prove non-
payment.116 The Court has consistently held that the party alleging
She also prepared the Invoice Transmittals108 which summarized payment must necessarily prove his or her claim of payment.117
the sales invoices and charge invoices that she used as basis in arriving
at petitioner's total unpaid obligation.109
In claiming full payment, petitioner makes reference to the alleged
agreement with respondent that all outstanding obligations must be paid
Respondent also presented its sales agent, Calabia, who narrated within 21 days, otherwise, no subsequent deliveries will be
that he personally obtained from petitioner its product orders in the year made.118 Thus, petitioner insists that the deliveries it received in
2007.110 During his testimony, he identified the sales, invoices December 2007 were duly paid because respondent continued to
prepared by Magsino, which were received and signed by petitioner's deliver goods for the months of January, February, March, and April
employee, thereby indicating receipt of the merchandise delivered to 2008. To further prove payment, petitioner avers that respondent paid

92
them the 1% Target Achievement Incentive for having achieved the
target sales and having duly paid such sales. The payment of incentive
was made by check, covered by a check voucher issued in petitioner's
favor.119
Petitioner's claims are empty.
Although petitioner, as the defaulting party, did not have the chance
to present its evidence, it however did not mention any receipt, other
than the check voucher for the Target Achievement Incentive to show
payment of the merchandise it purchased from respondent. The alleged
succeeding deliveries made to petitioner do not equate to payment of
previous deliveries. To reiterate, the best evidence to prove payment of
the goods is an official receipt.120 In Towne & City Development
Corporation v. Court of Appeals,121 the Court explained that:
In the case at bar, petitioner has relied on vouchers to prove its
defense of payment. However, as correctly pointed out by the trial court
which the appellate court upheld, vouchers are not receipts.
It should be noted that a voucher is not necessarily an evidence of
payment. It is merely a way or method of recording or keeping track of
payments made. A procedure adopted by companies for the orderly and
proper accounting of funds disbursed. Unless it is supported by an
actual payment like the issuance of a check which is subsequently
encashed or negotiated, or an actual payment of cash duly receipted for
as is customary among businessmen, a voucher remains a piece of
paper having no evidentiary weight.
A receipt is a written and signed acknowledgment that money
has been or goods have been delivered, while a voucher is
documentary record of a business transaction.122 (Emphases
supplied)
Consequently, allegations of payment, without any concrete proof
thereof in the form of receipts, remain to be unsubstantiated claims. It
must be emphasized that a voucher is not necessarily evidence of
payment. It is merely a way or method of recording or keeping track of
payments made. It must be supported by an actual payment of cash
duly receipted for as is customary among businessmen or the
issuance of a check subsequently encashed.123 A "receipt" remains to
be the written acknowledgment of the fact of payment in money or other
settlement between seller and buyer of goods, debtor or creditor, or
person rendering services and client or customer.124
Indeed, an obligation may be extinguished by payment, however,
two requisites must concur: (1) identity of the prestation, and (2) its
integrity. The first means that the very thing due must be delivered or
released; and the second, that the prestation be fulfilled completely.
Here, respondent must "receive and acknowledge full payment" from
the petitioner. No such acknowledgment nor proof of full payment was
shown to the satisfaction of the court. For this reason, claim of payment
made by the petitioners must fail.125
The Court, thus, sustains the finding that petitioner is liable for the
unpaid obligation in the sum of ₱800,894.27, plus legal interest from the
date of demand on September 8, 2008. Based on the recent ruling
in Lara's Gifts & Decors, Inc. v. Midtown Industrial Sales, Inc.,126 and
in view of the absence of any stipulation by the parties on the penalty
that may be imposed for nonpayment, the interest shall be fixed at six
percent (6%) per annum from September 8, 2008, the date of
extrajudicial demand, until full payment. Since respondent did not
appeal the judgment award, the Court shall withhold imposing legal
interest ("interest on interest") pursuant to Art. 2212127 of the Civil
Code.128 However, the total monetary award shall be subject to 6%
interest per annum from finality of this Resolution until full payment.129
Procedures and legal remedies that could have been beneficial
to the parties and the trial court
As a final note, the Court observes that respondent and even the
trial court may have also contributed to the peculiar complexity of the
present case. Under the 1997 Rules of Civil Procedure (1997 Rules),
which is applicable in the present case, the law usually imposes upon
the plaintiff the duty to file the appropriate pleadings or motions that will
help dispose the case in the most efficient way. Relevant here is the
matter on declaring the defendant in default. Sec. 3, Rule 9 of the 1997
Rules provides that the court shall, upon motion of the claiming
party, declare the defendant in default in case of failure to answer within
the allowed time.
Respondent was aware that the RTC granted petitioner's second
motion for extension for an unextendible period of 10 days or until
November 8, 2008 within which to file its Answer. Since no responsive
93
pleading was filed after the said extension, respondent should have
been vigilant and promptly moved to declare defendant in default.
However, respondent only filed its Motion to Declare Defendant in
Default on November 25, 2008, after petitioner had filed its third motion
for extension, and eventually, the requisite responsive pleading.
The promptness in moving to declare defendant in default became
crucial because when the RTC declared petitioner in default in its
January 8, 2009 Order, petitioner had already filed its Answer albeit
belatedly. If We were to strictly follow the policy of affording every party-
litigant the amplest, opportunity for the proper and just determination of
his cause, free from the constraints of technicalities,130 the belated
Answer should have been admitted. Nonetheless, and as earlier
explained, the trial court in this case, cannot be faulted for exercising its
judicial discretion in not admitting the Answer. Petitioner's inexcusable
neglect, if not tendency to delay the proceedings, was apparent in its
consistent filing of motions for extension despite the clear directive of
the trial court that the period is unextendible.
Assuming that the circumstances obtaining in this case favored the
admission of petitioner's belatedly filed Answer, respondent should have
been guided by Sec. 1, Rule 34 of the 1997 Rules. Accordingly, if the
Answer fails to tender an issue, or otherwise admits the material
allegations of the adverse party's pleading, the court may, on motion of
that party, direct judgment on such pleading. This is referred to as
"judgment on the pleadings" – a lawful procedural technique that is
activated only upon motion of the plaintiff. The Answer would fail to
tender an issue if it does not comply with the requirements for a specific
denial set out in Sec. 8 or Sec. 10, Rule 8 of the 1997 Rules. It would
admit the material allegations of the adverse party's pleadings not only
where it expressly confesses the truthfulness thereof but also if it omits
to deal with them at all.131
Notable that petitioner averred in its Answer with
Counterclaim132 that:
xxxx
3. That the above-named defendant admits the allegations in
paragraphs three (3) and four (4), with a [qualification] that said
obligations have been already paid and settled;
xxxx
7. That under the terms and conditions of the agreement entered
into by the defendant with the plaintiff, it is crystal clear that all
outstanding obligations of the defendant with the plaintiff must be settled
or paid within a period of twenty[-]one (21) days. Otherwise, no further
deliveries shall be made. However, even after the lapse of the said
period, the plaintiff still made additional deliveries to the defendant[.]133
Apparently, petitioner did not only deny the fact of complete
deliveries of merchandise for the months of November and December
2007, but it effectively admitted the sum being claimed by respondent.
As such, petitioner's Answer failed to tender an issue and admitted the
material allegations of respondent's complaint. If only respondent had
been more vigilant, it could have, filed a motion to render judgment on
the pleadings instead of insisting on petitioner's declaration of default.
Even if respondent failed to promptly move for a judgment on the
pleadings, and the last pleading had been served and filed, the 1997
Rules imposes upon respondent, being the plaintiff in this case, the duty
to promptly move ex parte to set the case for pre-trial. As pre-trial is
mandatory, it is at this stage where the court may consider the propriety
of rendering a judgment on the pleadings, or summary judgment, or of
dismissing the action on valid grounds. Secs. 1 and 2, Rule 18 of the
1997 Rules state:
Section 1. When conducted. — After the last pleading has been
served and filed, it shall be the duty of the plaintiff to promptly move ex
parte that the case be set for pre-trial. (5a, R20)
Section 2. Nature and purpose. — The pre-trial is mandatory. The
court shall consider:
xxxx
(g) The propriety of rendering judgment
on the pleadings, or summary
judgment, or of dismissing the
action should a valid ground
therefor be found to exist[.]
94
 In Spouses Pascual v. First Consolidated Rural Bank (Bohol),
Inc.,134 the Court had the opportunity to explain that the above rule
spells out that unless the motion for such judgment has earlier been
filed, the pre-trial may be the occasion in which the court considers the
propriety of rendering judgment on the pleadings or summary judgment.
If no such motion was earlier filed, the pre-trial judge may then
indicate to the proper party to initiate the rendition of such
judgment by filing the necessary motion.135 It bears emphasis that
a motion must be filed. The pre-trial judge cannot motu proprio render
the judgment on the pleadings or summary judgment.136 This also
means that a motion for judgment on the pleadings may be filed even
prior to pre-trial. Judgment on the pleadings becomes a legal option as
long as an Answer was filed. Otherwise, the rule on default would
become proper.
In stark contrast, the 2019 Amendments to the 1997 Rules on Civil
Procedure137 (New Rules) introduced several provisions authorizing
the trial courts to motu proprio render judgment based on the pleadings.
Specifically, Sec. 2 of Rule 34 on judgment on the pleadings now reads:
Section 2. Action on Motion for Judgment on the
Pleadings. — The court may motu proprio or on
motion render judgment on the pleadings if it is
apparent that the answer fails to tender an issue,
or otherwise admits the material allegations of the
adverse party's pleadings. Otherwise, the motion
shall be subject to the provisions of Rule 15 of these
Rules.
judgment shall be rendered within ninety (90) calendar
days from termination of the pre-trial.
The order of the court to submit the case for
judgment pursuant to this Rule shall not be the subject
to appeal or certiorari. (n)
Unmistakably, these amendments to procedural rules were
intended to aid the courts and the parties in resolving cases based on
merits in a prompt, effective, and efficient manner.
All told, regardless of whether petitioner should or should not have
been declared in default, the Court is convinced that: (1) respondent had
adduced preponderant evidence to show that petitioner is obligated to
pay the sum of ₱800,897.27; and (2) petitioner admitted the amount
being claimed by respondent, but failed to prove full payment thereof.
WHEREFORE, the petition is DENIED. The May 31, 2011 Decision
and the November 24, 2011 Resolution of the Court of Appeals in CA-
G.R. CV No. 94331 are AFFIRMED WITH MODIFICATION. Petitioner
Sioland Development Corporation is hereby ORDERED to PAY Fair
Distribution Center Corporation the amount of P800,894.27 with interest
at the rate of six percent (6%) per annum from date of extrajudicial
demand on September 8, 2008 until full payment. The total monetary
awards shall bear legal interest at the rate of 6% per annum from finality
of this Resolution until full payment. SO ORDERED.

A parallel proviso is likewise found in Sec. 10, Rule 18 of the New

Rules which states that:

Section 10. Judgment after Pre-Trial. — Should

there be no more controverted facts, or no more
genuine issue as to any material fact, or an absence of
any issue, or should the answer fail to tender an issue,
the court shall, without prejudice to a party moving for
judgment on the pleadings under Rule 34 or summary
judgment under Rule 35, motu proprio include in the
pre-trial order that the case be submitted for summary
judgment or judgment on the pleadings, without need
of position papers or memoranda. In such cases,

95

EFFECT OF DEATH
STRONGHOLD INSURANCE v. REPUBLIC-ASAHI 492 S 179
Asurety company’s liability under the performance bond it issues is
solidary. The death of the principal obligor does not, as a rule, extinguish
the obligation and the solidary nature of that liability.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court,
seeking to reverse the March 13, 2001 Decision2 of the Court of Appeals
(CA) in CA-GR CV No. 41630. The assailed Decision disposed as
follows:
"WHEREFORE, the Order dated January 28, 1993 issued by the lower
court is REVERSED and SET ASIDE. Let the records of the instant case
be REMANDED to the lower court for the reception of evidence of all
parties."3
The Facts
The facts of the case are narrated by the CA in this wise:
"On May 24, 1989, [respondent] Republic-Asahi Glass Corporation
(Republic-Asahi) entered into a contract with x x x Jose D. Santos, Jr.,
the proprietor of JDS Construction (JDS), for the construction of
roadways and a drainage system in Republic-Asahi’s compound in
Barrio Pinagbuhatan, Pasig City, where [respondent] was to pay x x x
JDS five million three hundred thousand pesos (P5,300,000.00)
inclusive of value added tax for said construction, which was supposed
to be completed within a period of two hundred forty (240) days
beginning May 8, 1989. In order ‘to guarantee the faithful and
satisfactory performance of its undertakings’ x x x JDS, shall post a
performance bond of seven hundred ninety five thousand pesos
(P795,000.00). x x x JDS executed, jointly and severally with [petitioner]
Stronghold Insurance Co., Inc. (SICI) Performance Bond No. SICI-
25849/g(13)9769.
"On May 23, 1989, [respondent] paid to x x x JDS seven hundred ninety
five thousand pesos (P795,000.00) by way of downpayment.
"Two progress billings dated August 14, 1989 and September 15, 1989,
for the total amount of two hundred seventy four thousand six hundred
twenty one pesos and one centavo (P274,621.01) were submitted by x
x x JDS to [respondent], which the latter paid. According to [respondent],
these two progress billings accounted for only 7.301% of the work
supposed to be undertaken by x x x JDS under the terms of the contract.
"Several times prior to November of 1989, [respondent’s] engineers
called the attention of x x x JDS to the alleged alarmingly slow pace of
the construction, which resulted in the fear that the construction will not
be finished within the stipulated 240-day period. However, said
reminders went unheeded by x x x JDS.
"On November 24, 1989, dissatisfied with the progress of the work
undertaken by x x x JDS, [respondent] Republic-Asahi extrajudicially
rescinded the contract pursuant to Article XIII of said contract, and wrote
a letter to x x x JDS informing the latter of such rescission. Such
rescission, according to Article XV of the contract shall not be construed
as a waiver of [respondent’s] right to recover damages from x x x JDS
and the latter’s sureties.
"[Respondent] alleged that, as a result of x x x JDS’s failure to comply
with the provisions of the contract, which resulted in the said contract’s
rescission, it had to hire another contractor to finish the project, for which
it incurred an additional expense of three million two hundred fifty six
thousand, eight hundred seventy four pesos (P3,256,874.00).
"On January 6, 1990, [respondent] sent a letter to [petitioner] SICI filing
its claim under the bond for not less than P795,000.00. On March 22,
1991, [respondent] again sent another letter reiterating its demand for
payment under the aforementioned bond. Both letters allegedly went
unheeded.
"[Respondent] then filed [a] complaint against x x x JDS and SICI. It
sought from x x x JDS payment of P3,256,874.00 representing the
additional expenses incurred by [respondent] for the completion of the
project using another contractor, and from x x x JDS and SICI, jointly
and severally, payment of P750,000.00 as damages in accordance with
the performance bond; exemplary damages in the amount
96
of P100,000.00 and attorney’s fees in the amount of at
least P100,000.00.
"According to the Sheriff’s Return dated June 14, 1991, submitted to the
lower court by Deputy Sheriff Rene R. Salvador, summons were duly
served on defendant-appellee SICI. However, x x x Jose D. Santos, Jr.
died the previous year (1990), and x x x JDS Construction was no longer
at its address at 2nd Floor, Room 208-A, San Buena Bldg. Cor. Pioneer
St., Pasig, Metro Manila, and its whereabouts were unknown.
"On July 10, 1991, [petitioner] SICI filed its answer, alleging that the
[respondent’s] money claims against [petitioner and JDS] have been
extinguished by the death of Jose D. Santos, Jr. Even if this were not
the case, [petitioner] SICI had been released from its liability under the
performance bond because there was no liquidation, with the active
participation and/or involvement, pursuant to procedural due process, of
herein surety and contractor Jose D. Santos, Jr., hence, there was no
ascertainment of the corresponding liabilities of Santos and SICI under
the performance bond. At this point in time, said liquidation was
impossible because of the death of Santos, who as such can no longer
participate in any liquidation. The unilateral liquidation on the party (sic)
of [respondent] of the work accomplishments did not bind SICI for being
violative of procedural due process. The claim of [respondent] for the
forfeiture of the performance bond in the amount of P795,000.00 had no
factual and legal basis, as payment of said bond was conditioned on the
payment of damages which [respondent] may sustain in the event x x x
JDS failed to complete the contracted works. [Respondent] can no
longer prove its claim for damages in view of the death of Santos. SICI
was not informed by [respondent] of the death of Santos. SICI was not
informed by [respondent] of the unilateral rescission of its contract with
JDS, thus SICI was deprived of its right to protect its interests as surety
under the performance bond, and therefore it was released from all
liability. SICI was likewise denied due process when it was not notified
of plaintiff-appellant’s process of determining and fixing the amount to
be spent in the completion of the unfinished project. The procedure
contained in Article XV of the contract is against public policy in that it
denies SICI the right to procedural due process. Finally, SICI alleged
that [respondent] deviated from the terms and conditions of the contract
without the written consent of SICI, thus the latter was released from all
liability. SICI also prayed for the award of P59,750.00 as attorney’s fees,
and P5,000.00 as litigation expenses.
"On August 16, 1991, the lower court issued an order dismissing the
complaint of [respondent] against x x x JDS and SICI, on the ground that
the claim against JDS did not survive the death of its sole proprietor,
Jose D. Santos, Jr. The dispositive portion of the [O]rder reads as
follows:
‘ACCORDINGLY, the complaint against the defendants Jose D. Santos,
Jr., doing business under trade and style, ‘JDS Construction’ and
Stronghold Insurance Company, Inc. is ordered DISMISSED.
‘SO ORDERED.’
"On September 4, 1991, [respondent] filed a Motion for Reconsideration
seeking reconsideration of the lower court’s August 16, 1991 order
dismissing its complaint. [Petitioner] SICI field its ‘Comment and/or
Opposition to the Motion for Reconsideration.’ On October 15, 1991, the
lower court issued an Order, the dispositive portion of which reads as
follows:
‘WHEREFORE, premises considered, the Motion for Reconsideration is
hereby given due course. The Order dated 16 August 1991 for the
dismissal of the case against Stronghold Insurance Company, Inc., is
reconsidered and hereby reinstated (sic). However, the case against
defendant Jose D. Santos, Jr. (deceased) remains undisturbed.
‘Motion for Preliminary hearing and Manifestation with Motion filed by
[Stronghold] Insurance Company Inc., are set for hearing on November
7, 1991 at 2:00 o’clock in the afternoon.
‘SO ORDERED.’
"On June 4, 1992, [petitioner] SICI filed its ‘Memorandum for
Bondsman/Defendant SICI (Re: Effect of Death of defendant Jose D.
Santos, Jr.)’ reiterating its prayer for the dismissal of [respondent’s]
complaint.
"On January 28, 1993, the lower court issued the assailed Order
reconsidering its Order dated October 15, 1991, and ordered the case,
insofar as SICI is concerned, dismissed. [Respondent] filed its motion
for reconsideration which was opposed by [petitioner] SICI. On April 16,
97
1993, the lower court denied [respondent’s] motion for reconsideration.
x x x."4
Ruling of the Court of Appeals
The CA ruled that SICI’s obligation under the surety agreement was not
extinguished by the death of Jose D. Santos, Jr. Consequently,
Republic-Asahi could still go after SICI for the bond.
The appellate court also found that the lower court had erred in
pronouncing that the performance of the Contract in question had
become impossible by respondent’s act of rescission. The Contract was
rescinded because of the dissatisfaction of respondent with the slow
pace of work and pursuant to Article XIII of its Contract with JDS.
The CA ruled that "[p]erformance of the [C]ontract was impossible, not
because of [respondent’s] fault, but because of the fault of JDS
Construction and Jose D. Santos, Jr. for failure on their part to make
satisfactory progress on the project, which amounted to non-
performance of the same. x x x [P]ursuant to the [S]urety [C]ontract, SICI
is liable for the non-performance of said [C]ontract on the part of JDS
Construction."5 Hence, this Petition.6
Issue
Petitioner states the issue for the Court’s consideration in the following
manner:
"Death is a defense of Santos’ heirs which Stronghold could also adopt
as its defense against obligee’s claim."7
More precisely, the issue is whether petitioner’s liability under the
performance bond was automatically extinguished by the death of
Santos, the principal.
The Court’s Ruling
The Petition has no merit.
Sole Issue:
Effect of Death on the Surety’s Liability
Petitioner contends that the death of Santos, the bond principal,
extinguished his liability under the surety bond. Consequently, it says, it
is automatically released from any liability under the bond.
As a general rule, the death of either the creditor or the debtor does not
extinguish the obligation.8 Obligations are transmissible to the heirs,
except when the transmission is prevented by the law, the stipulations
of the parties, or the nature of the obligation.9 Only obligations that are
personal10 or are identified with the persons themselves are
extinguished by death.11
Section 5 of Rule 8612 of the Rules of Court expressly allows the
prosecution of money claims arising from a contract against the estate
of a deceased debtor. Evidently, those claims are not actually
extinguished.13 What is extinguished is only the obligee’s action or suit
filed before the court, which is not then acting as a probate court.14
In the present case, whatever monetary liabilities or obligations Santos
had under his contracts with respondent were not intransmissible by
their nature, by stipulation, or by provision of law. Hence, his death did
not result in the extinguishment of those obligations or liabilities, which
merely passed on to his estate.15 Death is not a defense that he or his
estate can set up to wipe out the obligations under the performance
bond. Consequently, petitioner as surety cannot use his death to escape
its monetary obligation under its performance bond.
The liability of petitioner is contractual in nature, because it executed a
performance bond worded as follows:
"KNOW ALL MEN BY THESE PRESENTS:
"That we, JDS CONSTRUCTION of 208-A San Buena Building,
contractor, of Shaw Blvd., Pasig, MM Philippines, as principal and the
STRONGHOLD INSURANCE COMPANY, INC. a corporation duly
organized and existing under and by virtue of the laws of the Philippines
with head office at Makati, as Surety, are held and firmly bound unto the
REPUBLIC ASAHI GLASS CORPORATION and to any individual, firm,
partnership, corporation or association supplying the principal with labor
or materials in the penal sum of SEVEN HUNDRED NINETY FIVE
98
THOUSAND (P795,000.00), Philippine Currency, for the payment of
which sum, well and truly to be made, we bind ourselves, our heirs,
executors, administrators, successors and assigns, jointly and severally,
firmly by these presents.
"The CONDITIONS OF THIS OBLIGATION are as follows;
"WHEREAS the above bounden principal on the ___ day of
__________, 19__ entered into a contract with the REPUBLIC ASAHI
GLASS CORPORATION represented by _________________, to fully
and faithfully. Comply with the site preparation works road and drainage
system of Philippine Float Plant at Pinagbuhatan, Pasig, Metro Manila.
"WHEREAS, the liability of the Surety Company under this bond shall in
no case exceed the sum of PESOS SEVEN HUNDRED NINETY FIVE
THOUSAND (P795,000.00) Philippine Currency, inclusive of interest,
attorney’s fee, and other damages, and shall not be liable for any
advances of the obligee to the principal.
"WHEREAS, said contract requires the said principal to give a good and
sufficient bond in the above-stated sum to secure the full and faithfull
performance on its part of said contract, and the satisfaction of
obligations for materials used and labor employed upon the work;
"NOW THEREFORE, if the principal shall perform well and truly and
fulfill all the undertakings, covenants, terms, conditions, and agreements
of said contract during the original term of said contract and any
extension thereof that may be granted by the obligee, with notice to the
surety and during the life of any guaranty required under the contract,
and shall also perform well and truly and fulfill all the undertakings,
covenants, terms, conditions, and agreements of any and all duly
authorized modifications of said contract that may hereinafter be made,
without notice to the surety except when such modifications increase the
contract price; and such principal contractor or his or its sub-contractors
shall promptly make payment to any individual, firm, partnership,
corporation or association supplying the principal of its sub-contractors
with labor and materials in the prosecution of the work provided for in
the said contract, then, this obligation shall be null and void; otherwise
it shall remain in full force and effect. Any extension of the period of time
which may be granted by the obligee to the contractor shall be
considered as given, and any modifications of said contract shall be
considered as authorized, with the express consent of the Surety.
"The right of any individual, firm, partnership, corporation or association
supplying the contractor with labor or materials for the prosecution of the
work hereinbefore stated, to institute action on the penal bond, pursuant
to the provision of Act No. 3688, is hereby acknowledge and
confirmed."16
As a surety, petitioner is solidarily liable with Santos in accordance with
the Civil Code, which provides as follows:
"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 4,17 Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship."
xxxxxxxxx
"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."
Elucidating on these provisions, the Court in Garcia v. Court of
Appeals18 stated thus:
"x x x. The surety’s obligation is not an original and direct one for the
performance of his own act, but merely accessory or collateral to the
obligation contracted by the principal. Nevertheless, although the
contract of a surety is in essence secondary only to a valid principal
obligation, his liability to the creditor or promisee of the principal is said
to be direct, primary and absolute; in other words, he is directly and
equally bound with the principal. x x x."19
Under the law and jurisprudence, respondent may sue, separately or
together, the principal debtor and the petitioner herein, in view of the
solidary nature of their liability. The death of the principal debtor will not
work to convert, decrease or nullify the substantive right of the solidary
creditor. Evidently, despite the death of the principal debtor, respondent
99
may still sue petitioner alone, in accordance with the solidary nature of
the latter’s liability under the performance bond.

WHEREFORE, the Petition is DENIED and the Decision of the Court of

Appeals AFFIRMED. Costs against petitioner.

SO ORDERED.

100
 1234-1235 – EXCEPTIONS TO COMPLETE DELIVERY OR
SERVICE TO EXTINGUISH AN OBLIGATION THRU
PAYMENT/PERFORMANCE
Selegna Management and Development Corp. v. United Coconut
Planters Bank, G.R. No. 165662, [May 3, 2006]
A writ of preliminary injunction is issued to prevent an extrajudicial
foreclosure, only upon a clear showing of a violation of the mortgagor’s
unmistakable right. Unsubstantiated allegations of denial of due process
and prematurity of a loan are not sufficient to defeat the mortgagee’s
unmistakable right to an extrajudicial foreclosure.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court,
assailing the May 4, 2004 Amended Decision2 and the October 12, 2004
Resolution3 of the Court of Appeals (CA) in CA-GR SP No. 70966. The
challenged Amended Decision disposed thus:
"WHEREFORE, the Motion for Reconsideration is GRANTED. The July
18, 2003 Decision is hereby REVERSED and SET ASIDE and another
one entered GRANTING the petition and REVERSING and SETTING
ASIDE the March 15, 2002 Order of the Regional Trial Court, Branch
58, Makati City in Civil Case No. 99-1061."4
The assailed Resolution denied reconsideration.
The Facts
On September 19, 1995, Petitioners Selegna Management and
Development Corporation and Spouses Edgardo and Zenaida Angeles
were granted a credit facility in the amount of P70 million by Respondent
United Coconut Planters Bank (UCPB). As security for this credit facility,
petitioners executed real estate mortgages over several parcels of land
located in the cities of Muntinlupa, Las Piñas, Antipolo and Quezon; and
over several condominium units in Makati. Petitioners were likewise
required to execute a promissory note in favor of respondent every time
they availed of the credit facility. As required in these notes, they paid
the interest in monthly amortizations.
The parties stipulated in their Credit Agreement dated September 19,
1995,5 that failure to pay "any availment of the accommodation or
interest, or any sum due" shall constitute an event of default,6 which
shall consequently allow respondent bank to "declare [as immediately
due and payable] all outstanding availments
of the accommodation together with accrued interest and any other sum
payable." 7
In need of further business capital, petitioners obtained from UCPB an
increase in their credit facility.8 For this purpose, they executed a
Promissory Note for P103,909,710.82, which was to mature on March
26, 1999.9 In the same note, they agreed to an interest rate of 21.75
percent per annum, payable by monthly amortizations.
On December 21, 1998, respondent sent petitioners a demand letter,
worded as follows:
"Gentlemen:
"With reference to your loan with principal outstanding balance of
[P103,909,710.82], it appears from the records of United Coconut
Planters Bank that you failed to pay interest amortizations amounting to
[P14,959,525.10] on the Promissory Note on its due date, 30 May 1998.
"x x x xxx xxx
"Accordingly, formal demand is hereby made upon you to pay your
outstanding obligations in the total amount of P14,959,525.10, which
includes unpaid interest and penalties as of 21 December 1998 due on
the promissory note, eight (8) days from date hereof."10
Respondent decided to invoke the acceleration provision in their Credit
Agreement. Accordingly, through counsel, it relayed its move to
petitioners on January 25, 1999 in a letter, which we quote:
"Gentlemen:
"x x x xxx xxx
101
"It appears from the record of [UCPB] that you failed to pay the monthly
interest due on said obligation since May 30, 1998 as well as the penalty
charges due thereon. Despite repeated demands, you refused and
continue to refuse to pay the same. Under the Credit Agreements/Letter
Agreements you executed, failure to pay when due any installments of
the loan or interest or any sum due thereunder, is an event of default.
"Consequently, we hereby inform you that our client has declared your
principal obligation in the amount of [P103,909,710.82], interest and
sums payable under the Credit Agreement/Letter
Agreement/Promissory Note to be immediately due and payable.
"Accordingly, formal demand is hereby made upon you to please pay
within five (5) days from date hereof or up to January 29, 1999 the
principal amount of [P103,909,710.82], with the interest, penalty and
other charges due thereon, which as of January 25, 1999 amounts to
[P17,351,478.55]."11
Respondent sent another letter of demand on March 4, 1999. It
contained a final demand on petitioners "to settle in full [petitioners’] said
past due obligation to [UCPB] within five (5) days from [petitioners’]
receipt of [the] letter."12
In response, petitioners paid respondent the amount of P10,199,473.96
as partial payment of the accrued interests.13 Apparently unsatisfied,
UCPB applied for extrajudicial foreclosure of petitioners’ mortgaged
properties.
When petitioners received the Notice of Extra Judicial Foreclosure Sale
on May 18, 1999, they requested UCPB to give them a period of sixty
(60) days to update their accrued interest charges; and to restructure or,
in the alternative, to negotiate for a takeout of their account.14
On May 25, 1999, the Bank denied petitioners’ request in these words:
"This is to reply to your letter dated May 20, 1999, which confirms the
request you made the previous day when you paid us a visit.
"As earlier advised, your account has been referred to external counsel
for appropriate legal action. Demand has also been made for the full
settlement of your account.
"We regret that the Bank is unable to grant your request unless a definite
offer is made for settlement."15
In order to forestall the extrajudicial foreclosure scheduled for May 31,
1999, petitioners filed a Complaint16(docketed as Civil Case No. 99-
1061) for "Damages, Annulment of Interest, Penalty Increase and
Accounting with Prayer for Temporary Restraining Order/Preliminary
Injunction." All subsequent proceedings in the trial court and in the CA
involved only the propriety of issuing a TRO and a writ of preliminary
injunction.
Judge Josefina G. Salonga,17 then executive judge of the Regional Trial
Court (RTC) of Makati City, denied the Urgent Ex-parte Motion for
Immediate Issuance of a Temporary Restraining Order (TRO), filed by
petitioners. Judge Salonga denied their motion on the ground that no
great or irreparable injury would be inflicted on them if the parties would
first be heard.18 Unsatisfied, petitioners filed an Ex-Parte Motion for
Reconsideration, by reason of which the case was eventually raffled to
Branch 148, presided by Judge Oscar B. Pimentel.19
After due hearing, Judge Pimentel issued an Order dated May 31, 1999,
granting a 20-day TRO on the scheduled foreclosure of the Antipolo
properties, on the ground that the Notice of Foreclosure had indicated
an inexistent auction venue.20 To resolve that issue, respondent filed a
Manifestation21 that it would withdraw all its notices relative to the
foreclosure of the mortgaged properties, and that it would re-post or re-
publish a new set of notices. Accordingly, in an Order dated September
6, 1999,22 Judge Pimentel denied petitioners’ application for a TRO for
having been rendered moot by respondent’s Manifestation.23
Subsequently, respondent filed new applications for foreclosure in the
cities where the mortgaged properties were located. Undaunted,
petitioners filed another Motion for the Issuance of a TRO/Injunction and
a Supplementary Motion for the Issuance of TRO/Injunction with Motion
to Clarify Order of September 6, 1999.24
On October 27, 1999, Judge Pimentel issued an Order25 granting a 20-
day TRO in favor of petitioners. After several hearings, he issued his
November 26, 1999 Order,26 granting their prayer for a writ of
preliminary injunction on the foreclosures, but only for a period of twenty
(20) days. The Order states:
102
"Admitted by defendant witness is the fact that in all the notices of
foreclosure sale of the properties of the plaintiffs x x x it is stated in each
notice that the property will be sold at public auction to satisfy the
mortgage indebtedness of plaintiffs which as of August 31, 1999
amounts to P131,854,773.98.
"x x x xxx xxx
"As the court sees it, this is the problem that should be addressed by
the defendant in this case and in the meantime, the notice of foreclosure
sale should be held in abeyance until such time as these matters are
clarified and cleared by the defendants x x x Should the defendant be
able to remedy the situation this court will have no more alternative but
to allow the defendant to proceed to its intended action.
"x x x xxx xxx
"WHEREFORE, premises considered, and finding compelling reason at
this point in time to grant the application for preliminary injunction, the
same is hereby granted upon posting of a preliminary injunction bond in
the amount of P3,500,000.00 duly approved by the court, let a writ of
preliminary injunction be issued."27
The corresponding Writ of Preliminary Injunction28 was issued on
November 29, 1999.
Respondent moved for reconsideration. On the other hand, petitioners
filed a Motion to Clarify Order of November 26, 1999. Conceding that
the November 26 Order had granted an injunction during the pendency
of the case, respondent contended that the injunctive writ merely
restrained it for a period of 20 (twenty) days.
On December 29, 2000, Judge Pimentel issued an Order29 granting
respondent’s Motion for Reconsideration and clarifying his November
26, 1999 Order in this manner:
"There may have been an error in the Writ of Preliminary Injunction
issued dated November 29, 1999 as the same [appeared to be actually]
an extension of the TRO issued by this Court dated 27 October 1999 for
another 20 days period. Plaintiff’s seeks to enjoin defendants for an
indefinite period pending trial of the case.
"Be that as it may, the Court actually did not have any intention of
restraining the defendants from foreclosing plaintiff[s’] property for an
indefinite period and during the entire proceeding of the case x x x.
"x x x xxx xxx
"What the [c]ourt wanted the defendants to do was to merely modify the
notice of [the] auction sale in order that the amount of P131,854,773.98
x x x would not appear to be the value of each property being sold on
auction. x x x.30
"WHEREFORE, premises considered and after finding merit on the
arguments raised by herein defendants to be impressed with merit, and
having stated in the Order dated 26 November 1999 that no other
alternative recourse is available than to allow the defendants to proceed
with their intended action, the Court hereby rules:
"1.] To give due course to defendant[‘]s motion for reconsideration, as
the same is hereby GRANTED, however, with reservation that this Order
shall take effect upon after its[] finality[.]"31
Consequently, respondent proceeded with the foreclosure sale of some
of the mortgaged properties. On the other hand, petitioners filed an
"[O]mnibus [M]otion [for Reconsideration] and to [S]pecify the
[A]pplication of the P92 [M]illion [R]ealized from the [F]oreclosure [S]ale
x x x."32 Before this Omnibus Motion could be resolved, Judge Pimentel
inhibited himself from hearing the case.33
The case was then re-raffled to Branch 58 of the RTC of Makati City,
presided by Judge Escolastico U. Cruz.34 The proceedings before him
were, however, all nullified by the Supreme Court in its En Banc
Resolution dated September 18, 2001.35 He was eventually dismissed
from service.36
The case was re-raffled to the pairing judge of Branch 58, Winlove M.
Dumayas. On March 15, 2002, Judge Dumayas granted petitioners’
Omnibus Motion for Reconsideration and Specification of the
Foreclosure Proceeds, as follows:
"WHEREFORE, premises considered, the Motion to Reconsider the
Order dated December 29, 2000 is hereby granted and the Order of
103
November 26, 1999 granting the preliminary injunction is reinstated
subject however to the condition that all properties of plaintiffs which
were extrajudicially foreclosed though public bidding are subject to an
accounting. [A]nd for this purpose defendant bank is hereby given fifteen
(15) days from notice hereof to render an accounting on the proceeds
realized from the foreclosure of plaintiffs’ mortgaged properties located
in Antipolo, Makati, Muntinlupa and Las Piñas."37
The aggrieved respondent filed before the Court of Appeals a Petition
for Certiorari, seeking the nullification of the RTC Order dated March 15,
2002, on the ground that it was issued with grave abuse of discretion.38
The Special Fifteenth Division, speaking through Justice Rebecca de
Guia-Salvador, affirmed the ruling of Judge Dumayas. It held that
petitioners had a clear right to an injunction, based on the fact that
respondent had kept them in the dark as to how and why their principal
obligation had ballooned to almost P132 million. The CA held that
respondent’s refusal to give them a detailed accounting had prevented
the determination of the maturity of the obligation and precluded the
possibility of a foreclosure of the mortgaged properties. Moreover, their
payment of P10 million had the effect of updating, and thereby averting
the maturity of, the outstanding obligation.39
Respondent filed a Motion for Reconsideration, which was granted by a
Special Division of Five of the Former Special Fifteenth Division.
Ruling of the Court of Appeals
40
Citing China Banking Corporation v. Court of Appeals, the appellate
court held in its Amended Decision41 that the foreclosure proceedings
should not be enjoined in the light of the clear failure of petitioners to
meet their obligations upon maturity.42
Also citing Zulueta v. Reyes,43 the CA, through Justice Jose Catral
Mendoza, went on to say that a pending question on accounting did not
warrant an injunction on the foreclosure.
Parenthetically, the CA added that petitioners were not without recourse
or protection. Further, it noted their pending action for annulment of
interest, damages and accounting. It likewise said that they could protect
themselves by causing the annotation of lis pendens on the titles of the
mortgaged or foreclosed properties.
In his Separate Concurring Opinion,44 Justice Magdangal M. de Leon
added that a prior accounting was not essential to extrajudicial
foreclosure. He cited Abaca Corporation v. Garcia,45 which had ruled
that Act No. 3135 did not require mortgaged properties to be sold by lot
or by only as much as would cover just the obligation. Thus, he
concluded that a request for accounting -- for the purpose of determining
whether the proceeds of the auction would suffice to cover the
indebtedness -- would not justify an injunction on the foreclosure.
Petitioners filed a Motion for Reconsideration dated May 31, 2004, which
the appellate court denied.46
Hence, this Petition.47
Issues
Petitioners raise the following issues for our consideration:
"Whether or not the Honorable Court of Appeals denied the petitioners
of due process.
"II
"Whether or not the Honorable Court of Appeals supported its Amended
Decision by invoking jurisprudence not applicable and completely
identical with the instant case.
"III
"Whether or not the Honorable Court of Appeals failed to establish its
finding that RTC Judge Winlove Dumayas has acted with grave abuse
of discretion."48
The resolution of this case hinges on two issues: 1) whether petitioners
are in default; and 2) whether there is basis for preliminarily enjoining
the extrajudicial foreclosure. The other issues raised will be dealt with in
the resolution of these two main questions.
104
The Court’s Ruling
The Petition has no merit.
First Issue:
Default
The resolution of the present controversy necessarily begins with a
determination of respondent’s right to foreclose the mortgaged
properties extrajudicially.
It is a settled rule of law that foreclosure is proper when the debtors are
in default of the payment of their obligation. In fact, the parties stipulated
in their credit agreements, mortgage contracts and promissory notes
that respondent was authorized to foreclose on the mortgages, in case
of a default by petitioners. That this authority was granted is not
disputed.
Mora solvendi, or debtor’s default, is defined as a delay in the 49
fulfillment of an obligation, by reason of a cause imputable to the
debtor.50 There are three requisites necessary for a finding of default.
First, the obligation is demandable and liquidated; second, the debtor
delays performance; third, the creditor judicially or extrajudicially
requires the debtor’s performance.51
Mortgagors’ Default of Monthly Interest Amortizations
In the present case, the Promissory Note executed on March 29, 1998,
expressly states that petitioners had an obligation to pay monthly
interest on the principal obligation. From respondent’s demand letter,52 it
is clear and undisputed by petitioners that they failed to meet those
monthly payments since May 30, 1998. Their nonpayment is defined as
an "event of default" in the parties’ Credit Agreement, which we quote:
"Section 8.01. Events of Default. Each of the following events and
occurrences shall constitute an Event of Default of this AGREEMENT:
"1. The CLIENT shall fail to pay, when due, any availment of the
Accommodation or interest, or any other sum due thereunder in
accordance with the terms thereof;1avvphil.net
"x x x xxx x x x"
"Section 8.02. Consequences of Default. (a) If an Event of Default shall
occur and be continuing, the Bank may:
"1. By written notice to the CLIENT, declare all outstanding availments
of the Accommodation together with accrued interest and any other sum
payable hereunder to be immediately due and payable without
presentment, demand or notice of any kind, other than the notice
specifically required by this Section, all of which are expressly waived
by the CLIENT[.]"53
Considering that the contract is the law between the
parties,54 respondent is justified in invoking the acceleration clause
declaring the entire obligation immediately due and payable.55 That
clause obliged petitioners to pay the entire loan on January 29, 1999,
the date fixed by respondent.56
Petitioners’ failure to pay on that date set into effect Article IX of the Real
Estate Mortgage,57 worded thus:
"If, at any time, an event of default as defined in the credit agreements,
promissory notes and other related loan documents referred to in
paragraph 5 of ARTICLE I hereof (sic), or the MORTGAGOR and/or
DEBTOR shall fail or refuse to pay the SECURED OBLIGATIONS, or
any of the amortization of such indebtedness when due, or to comply
any (sic) of the conditions and stipulations herein agreed, x x x then all
the obligations of the MORTGAGOR secured by this MORTGAGE and
all the amortizations thereof shall immediately become due, payable and
defaulted and the MORTGAGEE may immediately foreclose this
MORTGAGE judicially in accordance with the Rules of Court, or
extrajudicially in accordance with Act No. 3135, as amended, and
Presidential Decree No. 385. For the purpose of extrajudicial
foreclosure, the MORTGAGOR hereby appoints the MORTGAGEE
his/her/its attorney-in-fact to sell the property mortgaged under Act No.
3135, as amended, to sign all documents and perform any act requisite
and necessary to accomplish said purpose and to appoint its substitutes
as such attorney-in-fact with the same powers as above specified. x x
x[.]"58
105
The foregoing discussion satisfactorily shows that UCPB had every right
to apply for extrajudicial foreclosure on the basis of petitioners’
undisputed and continuing default.
Petitioners’ Debt Considered Liquidated Despite the Alleged
Lack of Accounting
Petitioners do not even attempt to deny the aforementioned matters.
They assert, though, that they have a right to a detailed accounting
before they can be declared in default. As regards the three requisites
of default, they say that the first requisite -- liquidated debt -- is absent.
Continuing with foreclosure on the basis of an unliquidated obligation
allegedly violates their right to due process. They also maintain that their
partial payment of P10 million averted the maturity of their obligation.59
On the other hand, respondent asserts that questions regarding the
running balance of the obligation of petitioners are not valid reasons for
restraining the foreclosure. Nevertheless, it maintains that it has
furnished them a detailed monthly statement of account.
A debt is liquidated when the amount is known or is determinable by
inspection of the terms and conditions of the relevant promissory notes
and related documentation.60 Failure to furnish a debtor a detailed
statement of account does not ipso facto result in an unliquidated
obligation.
Petitioners executed a Promissory Note, in which they stated that their
principal obligation was in the amount of P103,909,710.82, subject to an
interest rate of 21.75 percent per annum.61 Pursuant to the parties’
Credit Agreement, petitioners likewise know that any delay in the
payment of the principal obligation will subject them to a penalty charge
of one percent per month, computed from the due date until the
obligation is paid in full.62
It is in fact clear from the agreement of the parties that when the payment
is accelerated due to an event of default, the penalty charge shall be
based on the total principal amount outstanding, to be computed from
the date of acceleration until the obligation is paid in full.63 Their Credit
Agreement even provides for the application of payments.64 It appears
from the agreements that the amount of total obligation is known or, at
the very least, determinable.
Moreover, when they made their partial payment, petitioners did not
question the principal, interest or penalties demanded from them. They
only sought additional time to update their interest payments or to
negotiate a possible restructuring of their account.65 Hence, there is no
basis for their allegation that a statement of account was necessary for
them to know their obligation. We cannot impair respondent’s right to
foreclose the properties on the basis of their unsubstantiated allegation
of a violation of due process.
In Spouses Estares v. CA,66 we did not find any justification to grant a
preliminary injunction, even when the mortgagors were disputing the
amount being sought from them. We held in that case that "[u]pon the
nonpayment of the loan, which was secured by the mortgage, the
mortgaged property is properly subject to a foreclosure sale."67
Compared with Estares, the denial of injunctive relief in this case is even
more imperative, because the present petitioners do not even assail the
amounts due from them. Neither do they contend that a detailed
accounting would show that they are not in default. A pending question
regarding the due amount was not a sufficient reason to enjoin the
foreclosure in Estares. Hence, with more reason should injunction be
denied in the instant case, in which there is no dispute as to the
outstanding obligation of petitioners.
At any rate, whether respondent furnished them a detailed statement of
account is a question of fact that this Court need not and will not resolve
in this instance. As held in Zulueta v. Reyes,68 in which there was no
genuine controversy as to the amounts due and demandable, the
foreclosure should not be restrained by the unnecessary question of
accounting.
Maturity of the Loan Not Averted by Partial Compliance with
Respondent’s Demand
Petitioners allege that their partial payment of P10 million on March 25,
1999, had the effect of forestalling the maturity of the loan;69 hence the
foreclosure proceedings are premature. 70 We disagree.
106
To be sure, their partial payment did not extinguish the obligation. The
Civil Code states that a debt is not paid "unless the thing x x x in which
the obligation consists has been completely delivered x x x."71 Besides,
a late partial payment could not have possibly forestalled a long-expired
maturity date.
The only possible legal relevance of the partial payment was to evidence
the mortgagee’s amenability to granting the mortgagor a grace period.
Because the partial payment would constitute a waiver of the
mortgagee’s vested right to foreclose, the grant of a grace period cannot
be casually assumed;72 the bank’s agreement must be clearly shown.
Without a doubt, no express agreement was entered into by the parties.
Petitioners only assumed that their partial payment had satisfied
respondent’s demand and obtained for them more time to update their
account.73
Petitioners are mistaken. When creditors receive partial payment, they
are not ipso facto deemed to have abandoned their prior demand for full
payment. Article 1235 of the Civil Code provides:
"When the obligee accepts the performance, knowing its
incompleteness or irregularity, and without expressing any protest or
objection, the obligation is deemed fully complied with."
Thus, to imply that creditors accept partial payment as complete
performance of their obligation, their acceptance must be made under
circumstances that indicate their intention to consider the performance
complete and to renounce their claim arising from the defect.74
There are no circumstances that would indicate a renunciation of the
right of respondent to foreclose the mortgaged properties extrajudicially,
on the basis of petitioners’ continuing default. On the contrary, it
asserted its right by filing an application for extrajudicial foreclosure after
receiving the partial payment. Clearly, it did not intend to give petitioners
more time to meet their obligation.
Parenthetically, respondent cannot be reproved for accepting their
partial payment. While Article 1248 of the Civil Code states that creditors
cannot be compelled to accept partial payments, it does not prohibit
them from accepting such payments.
Second Issue:
Enjoining the Extrajudicial Foreclosure
A writ of preliminary injunction is a provisional remedy that may be
resorted to by litigants, only to protect or preserve their rights or interests
during the pendency of the principal action. To authorize a temporary
injunction, the plaintiff must show, at least prima facie, a right to the final
relief.75 Moreover, it must show that the invasion of the right sought to
be protected is material and substantial, and that there is an urgent and
paramount necessity for the writ to prevent serious damage.76
In the absence of a clear legal right, the issuance of the injunctive writ
constitutes grave abuse of discretion. Injunction is not designed to
protect contingent or future rights. It is not proper when the
complainant’s right is doubtful or disputed.77
As a general rule, courts should avoid issuing this writ, which in effect
disposes of the main case without trial.78 In Manila International Airport
Authority v. CA,79 we urged courts to exercise caution in issuing the writ,
as follows:
"x x x. We remind trial courts that while generally the grant of a writ of
preliminary injunction rests on the sound discretion of the court taking
cognizance of the case, extreme caution must be observed in the
exercise of such discretion. The discretion of the court a quo to grant an
injunctive writ must be exercised based on the grounds and in the
manner provided by law. Thus, the Court declared in Garcia v. Burgos:
‘It has been consistently held that there is no power the exercise of which
is more delicate, which requires greater caution, deliberation and sound
discretion, or more dangerous in a doubtful case, than the issuance of
an injunction. It is the strong arm of equity that should never be extended
unless to cases of great injury, where courts of law cannot afford an
adequate or commensurate remedy in damages.
‘Every court should remember that an injunction is a limitation upon the
freedom of action of the defendant and should not be granted lightly or
precipitately. It should be granted only when the court is fully satisfied
that the law permits it and the emergency demands it.’"80 (Citations
omitted)
107
Petitioners do not have any clear right to be protected. As shown in our
earlier findings, they failed to substantiate their allegations that their right
to due process had been violated and the maturity of their obligation
forestalled. Since they indisputably failed to meet their obligations in
spite of repeated demands, we hold that there is no legal justification to
enjoin respondent from enforcing its undeniable right to foreclose the
mortgaged properties.

In any case, petitioners will not be deprived outrightly of their property.

Pursuant to Section 47 of the General Banking Law of
2000,81 mortgagors who have judicially or extrajudicially sold their real
property for the full or partial payment of their obligation have the right
to redeem the property within one year after the sale. They can redeem
their real estate by paying the amount due, with interest rate specified,
under the mortgage deed; as well as all the costs and expenses incurred
by the bank.82

Moreover, in extrajudicial foreclosures, petitioners have the right to

receive any surplus in the selling price. This right was recognized in Sulit
v. CA,83 in which the Court held that "if the mortgagee is retaining more
of the proceeds of the sale than he is entitled to, this fact alone will not
affect the validity of the sale but simply gives the mortgagor a cause of
action to recover such surplus."84

Petitioners failed to demonstrate the prejudice they would probably

suffer by reason of the foreclosure. Also, it is clear that they would be
adequately protected by law. Hence, we find no legal basis to reverse
the assailed Amended Decision of the CA dated May 4, 2004.

WHEREFORE, the Petition is DENIED and the assailed Amended

Decision and Resolution AFFIRMED. Costs against petitioners.

SO ORDERED.

108
 International Hotel Corp. v. Joaquin, Jr., G.R. No. 158361, [April
10, 2013]
To avoid unjust enrichment to a party from resulting out of a substantially
performed contract, the principle of quantum meruit may be used to
determine his compensation in the absence of a written agreement for
that purpose. The principle of quantum meruit justifies the payment of
the reasonable value of the services rendered by him.
The Case
Under review is the decision the Court of Appeals (CA) promulgated on
November 8, 2002,1 disposing:
WHEREFORE, premises considered, the decision dated August 26,
1993 of the Regional Trial Court, Branch 13, Manila in Civil Case No. R-
82-2434 is AFFIRMED with Modification as to the amounts awarded as
follows: defendant-appellant IHC is ordered to pay plaintiff-appellant
Joaquin ₱700,000.00 and plaintiff-appellant Suarez ₱200,000.00, both
to be paid in cash.
SO ORDERED.
Antecedents
On February 1, 1969, respondent Francisco B. Joaquin, Jr. submitted a
proposal to the Board of Directors of the International Hotel Corporation
(IHC) for him to render technical assistance in securing a foreign loan
for the construction of a hotel, to be guaranteed by the Development
Bank of the Philippines (DBP).2 The proposal encompassed nine
phases, namely: (1) the preparation of a new project study; (2) the
settlement of the unregistered mortgage prior to the submission of the
application for guaranty for processing by DBP; (3) the preparation of
papers necessary to the application for guaranty; (4) the securing of a
foreign financier for the project; (5) the securing of the approval of the
DBP Board of Governors; (6) the actual follow up of the application with
DBP3; (7) the overall coordination in implementing the projections of the
project study; (8) the preparation of the staff for actual hotel operations;
and (9) the actual hotel operations.4
The IHC Board of Directors approved phase one to phase six of the
proposal during the special board meeting on February 11, 1969, and
earmarked ₱2,000,000.00 for the project.5 Anent the financing, IHC
applied with DBP for a foreign loan guaranty. DBP processed the
application,6 and approved it on October 24, 1969 subject to several
conditions.7
On July 11, 1969, shortly after submitting the application to DBP,
Joaquin wrote to IHC to request the payment of his fees in the amount
of ₱500,000.00 for the services that he had provided and would be
providing to IHC in relation to the hotel project that were outside the
scope of the technical proposal. Joaquin intimated his amenability to
receive shares of stock instead of cash in view of IHC’s financial
situation.8
On July 11, 1969, the stockholders of IHC met and granted Joaquin’s
request, allowing the payment for both Joaquin and Rafael Suarez for
their services in implementing the proposal.9
On June 20, 1970, Joaquin presented to the IHC Board of Directors the
results of his negotiations with potential foreign financiers. He narrowed
the financiers to Roger Dunn & Company and Materials Handling
Corporation. He recommended that the Board of Directors consider
Materials Handling Corporation based on the more beneficial terms it
had offered. His recommendation was accepted.10
Negotiations with Materials Handling Corporation and, later on, with its
principal, Barnes International (Barnes), ensued. While the negotiations
with Barnes were ongoing, Joaquin and Jose Valero, the Executive
Director of IHC, met with another financier, the Weston International
Corporation (Weston), to explore possible financing.11 When Barnes
failed to deliver the needed loan, IHC informed DBP that it would submit
Weston for DBP’s consideration.12As a result, DBP cancelled its
previous guaranty through a letter dated December 6, 1971.13
On December 13, 1971, IHC entered into an agreement with Weston,
and communicated this development to DBP on June 26, 1972.
However, DBP denied the application for guaranty for failure to comply
with the conditions contained in its November 12, 1971 letter.14
Due to Joaquin’s failure to secure the needed loan, IHC, through its
President Bautista, canceled the 17,000 shares of stock previously
109
issued to Joaquin and Suarez as payment for their services. The latter
requested a reconsideration of the cancellation, but their request was
rejected.
Consequently, Joaquin and Suarez commenced this action for specific
performance, annulment, damages and injunction by a complaint dated
December 6, 1973 in the Regional Trial Court in Manila (RTC),
impleading IHC and the members of its Board of Directors, namely, Felix
Angelo Bautista, Sergio O. Rustia, Ephraim G. Gochangco, Mario B.
Julian, Benjamin J. Bautista, Basilio L. Lirag, Danilo R. Lacerna and
Hermenegildo R. Reyes.15 The complaint alleged that the cancellation
of the shares had been illegal, and had deprived them of their right to
participate in the meetings and elections held by IHC; that Barnes had
been recommended by IHC President Bautista, not by Joaquin; that they
had failed to meet their obligation because President Bautista and his
son had intervened and negotiated with Barnes instead of Weston; that
DBP had canceled the guaranty because Barnes had failed to release
the loan; and that IHC had agreed to compensate their services with
17,000 shares of the common stock plus cash of ₱1,000,000.00.16
IHC, together with Felix Angelo Bautista, Sergio O. Rustia, Mario B.
Julian and Benjamin J. Bautista, filed an answer claiming that the shares
issued to Joaquin and Suarez as compensation for their "past and future
services" had been issued in violation of Section 16 of the Corporation
Code; that Joaquin and Suarez had not provided a foreign financier
acceptable to DBP; and that they had already received ₱96,350.00 as
payment for their services.17
On their part, Lirag and Lacerna denied any knowledge of or
participation in the cancellation of the shares.18
Similarly, Gochangco and Reyes denied any knowledge of or
participation in the cancellation of the shares, and clarified that they
were not directors of IHC.19 In the course of the proceedings, Reyes died
and was substituted by Consorcia P. Reyes, the administratrix of his
estate.20
Ruling of the RTC
Under its decision rendered on August 26, 1993, the RTC held IHC liable
pursuant to the second paragraph of Article 1284 of the Civil Code,
disposing thusly:
WHEREFORE, in the light of the above facts, law and jurisprudence, the
Court hereby orders the defendant International Hotel Corporation to
pay plaintiff Francisco B. Joaquin, the amount of Two Hundred
Thousand Pesos (₱200,000.00) and to pay plaintiff Rafael Suarez the
amount of Fifty Thousand Pesos (₱50,000.00); that the said defendant
IHC likewise pay the co-plaintiffs, attorney’s fees of ₱20,000.00, and
costs of suit.
IT IS SO ORDERED.21
The RTC found that Joaquin and Suarez had failed to meet their
obligations when IHC had chosen to negotiate with Barnes rather than
with Weston, the financier that Joaquin had recommended; and that the
cancellation of the shares of stock had been proper under Section 68 of
the Corporation Code, which allowed such transfer of shares to
compensate only past services, not future ones.
Ruling of the CA
Both parties appealed.22
Joaquin and Suarez assigned the following errors, to wit:
DESPITE HAVING CORRECTLY ACKNOWLEDGED THAT
PLAINTIFFS-APPELLANTS FULLY PERFORMED ALL THAT WAS
INCUMBENT UPON THEM, THE HONORABLE JUDGE ERRED IN
NOT ORDERING THAT:
A. DEFENDANTS WERE UNJUSTIFIED IN CANCELLING
THE SHARES OF STOCK PREVIOUSLY ISSUED TO
PLAINTIFFS-APPELLANTS; AND
B. DEFENDANTS PAY PLAINTIFFS-APPELLANTS TWO
MILLION SEVEN HUNDRED PESOS (sic) (₱2,700,000.00),
INCLUDING INTEREST THEREON FROM 1973,
REPRESENTING THE TOTAL OBLIGATION DUE
PLAINTIFFS-APPELLANTS.23
On the other hand, IHC attributed errors to the RTC, as follows:
I.
110
THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFFS-
APPELLANTS HAVE NOTBEEN COMPLETELY PAID FOR THEIR
SERVICES, AND IN ORDERING THE DEFENDANT-APPELLANT TO
PAY TWO HUNDRED THOUSAND PESOS (₱200,000.00) AND FIFTY
THOUSAND PESOS (₱50,000.00) TO PLAINTIFFS-APPELLANTS
FRANCISCO B. JOAQUIN AND RAFAEL SUAREZ, RESPECTIVELY.
II.
THE LOWER COURT ERRED IN AWARDING PLAINTIFFS-
APPELLANTS ATTORNEY’S FEES AND COSTS OF SUIT.24
In its questioned decision promulgated on November 8, 2002, the CA
concurred with the RTC, upholding IHC’s liability under Article 1186 of
the Civil Code. It ruled that in the context of Article 1234 of the Civil
Code, Joaquin had substantially performed his obligations and had
become entitled to be paid for his services; and that the issuance of the
shares of stock was ultra vires for having been issued as consideration
for future services.
Anent how much was due to Joaquin and Suarez, the CA explained
thusly:
This Court does not subscribe to plaintiffs-appellants’ view that
defendant-appellant IHC agreed to pay them ₱2,000,000.00. Plaintiff-
appellant Joaquin’s letter to defendant-appellee F.A. Bautista, quoting
defendant-appellant IHC’s board resolutions which supposedly
authorized the payment of such amount cannot be sustained. The
resolutions are quite clear and when taken together show that said
amount was only the "estimated maximum expenses" which defendant-
appellant IHC expected to incur in accomplishing phases 1 to 6, not
exclusively to plaintiffs-appellants’ compensation.This conclusion finds
support in an unnumbered board resolution of defendant-appellant IHC
dated July 11, 1969:
"Incidentally, it was also taken up the necessity of giving the Technical
Group a portion of the compensation that was authorized by this
corporation in its Resolution of February 11, 1969 considering that the
assistance so far given the corporation by said Technical Group in
continuing our project with the DBP and its request for guaranty for a
foreign loan is 70% completed leaving only some details which are now
being processed. It is estimated that ₱400,000.00 worth of Common
Stock would be reasonable for the present accomplishments and to this
effect, the President is authorized to issue the same in the name of the
Technical Group, as follows:
₱200,000.00 in common stock to Rafael Suarez, as associate in the
Technical Group, and ₱200,000.00 in common stock to Francisco G.
Joaquin, Jr., also a member of the Technical Group.
It is apparent that not all of the ₱2,000,000.00 was allocated exclusively
to compensate plaintiffs-appellants. Rather, it was intended to fund the
whole undertaking including their compensation. On the same date,
defendant-appellant IHC also authorized its president to pay-appellant
Joaquin ₱500,000.00 either in cash or in stock or both.
The amount awarded by the lower court was therefore less than what
defendant-appellant IHC agreed to pay plaintiffs-appellants. While this
Court cannot decree that the cancelled shares be restored, for they are
without a doubt null and void, still and all, defendant-appellant IHC
cannot now put up its own ultra vires act as an excuse to escape
obligation to plaintiffs-appellants. Instead of shares of stock, defendant-
appellant IHC is ordered to pay plaintiff-appellant Joaquin a total of
₱700,000.00 and plaintiff-appellant Suarez ₱200,000.00, both to be
paid in cash.
Although the lower court failed to explain why it was granting the
attorney’s fees, this Court nonetheless finds its award proper given
defendant-appellant IHC’s actions.25
Issues
In this appeal, the IHC raises as issues for our consideration and
resolution the following:
I
WHETHER OR NOT THE COURT OF APPEALS IS CORRECT IN
AWARDING COMPENSATION AND EVEN MODIFYING THE
PAYMENT TO HEREIN RESPONDENTS DESPITE NON-
FULFILLMENT OF THEIR OBLIGATION TO HEREIN PETITIONER
II
111
WHETHER OR NOT THE COURT OF APPEALS IS CORRECT IN
AWARDING ATTORNEY’S FEES TO RESPONDENTS26
IHC maintains that Article 1186 of the Civil Code was erroneously
applied; that it had no intention of preventing Joaquin from complying
with his obligations when it adopted his recommendation to negotiate
with Barnes; that Article 1234 of the Civil Code applied only if there was
a merely slight deviation from the obligation, and the omission or defect
was technical and unimportant; that substantial compliance was
unacceptable because the foreign loan was material and was, in fact,
the ultimate goal of its contract with Joaquin and Suarez; that because
the obligation was indivisible and subject to a suspensive condition,
Article 1181 of the Civil Code27 applied, under which a partial
performance was equivalent to non-performance; and that the award of
attorney’s fees should be deleted for lack of legal and factual bases.
On the part of respondents, only Joaquin filed a comment,28 arguing that
the petition was fatally defective for raising questions of fact; that the
obligation was divisible and capable of partial performance; and that the
suspensive condition was deemed fulfilled through IHC’s own actions.29
Ruling
We deny the petition for review on certiorari subject to the ensuing
disquisitions.
1.
IHC raises questions of law
We first consider and resolve whether IHC’s petition improperly raised
questions of fact.
A question of law exists when there is doubt as to what the law is on a
certain state of facts, but, in contrast, a question of fact exists when the
doubt arises as to the truth or falsity of the facts alleged. A question of
law does not involve an examination of the probative value of the
evidence presented by the litigants or by any of them; the resolution of
the issue must rest solely on what the law provides on the given set of
circumstances.30 When there is no dispute as to the facts, the question
of whether or not the conclusion drawn from the facts is correct is a
question of law.31
Considering that what IHC seeks to review is the CA’s application of the
law on the facts presented therein, there is no doubt that IHC raises
questions of law. The basic issue posed here is whether the conclusions
drawn by the CA were correct under the pertinent laws.
2.
Article 1186 and Article 1234 of the Civil Code cannot be the source of
IHC’s obligation to pay respondents IHC argues that it should not be
held liable because: (a) it was Joaquin who had recommended Barnes;
and (b) IHC’s negotiation with Barnes had been neither intentional nor
willfully intended to prevent Joaquin from complying with his obligations.
IHC’s argument is meritorious.
Article 1186 of the Civil Code reads:
Article 1186. The condition shall be deemed fulfilled when the obligor
voluntarily prevents its fulfillment.
This provision refers to the constructive fulfillment of a suspensive
condition,32 whose application calls for two requisites, namely: (a) the
intent of the obligor to prevent the fulfillment of the condition, and (b) the
actual prevention of the fulfillment. Mere intention of the debtor to
prevent the happening of the condition, or to place ineffective obstacles
to its compliance, without actually preventing the fulfillment, is
insufficient.33
The error lies in the CA’s failure to determine IHC’s intent to pre-empt
Joaquin from meeting his obligations. The June 20, 1970 minutes of
IHC’s special board meeting discloses that Joaquin impressed upon the
members of the Board that Materials Handling was offering more
favorable terms for IHC, to wit:
xxxx
At the meeting all the members of the Board of Directors of the
International Hotel Corporation were present with the exception of
112
Directors Benjamin J. Bautista and Sergio O. Rustia who asked to be
excused because of previous engagements. In that meeting, the
President called on Mr. Francisco G. Joaquin, Jr. to explain the different
negotiations he had conducted relative to obtaining the needed
financing for the hotel project in keeping with the authority given to him
in a resolution approved by the Board of Directors.
Mr. Joaquin presently explained that he contacted several local and
foreign financiers through different brokers and after examining the
different offers he narrowed down his choice to two (2), to wit: the foreign
financier recommended by George Wright of the Roger Dunn &
Company and the offer made by the Materials Handling Corporation.
After explaining the advantages and disadvantages to our corporation
of the two (2) offers specifically with regard to the terms and repayment
of the loan and the rate of interest requested by them, he concluded that
the offer made by the Materials Handling Corporation is much more
advantageous because the terms and conditions of payment as well as
the rate of interest are much more reasonable and would be much less
onerous to our corporation. However, he explained that the corporation
accepted, in principle, the offer of Roger Dunn, per the corporation’s
telegrams to Mr. Rudolph Meir of the Private Bank of Zurich,
Switzerland, and until such time as the corporation’s negotiations with
Roger Dunn is terminated, we are committed, on one way or the other,
to their financing.
It was decided by the Directors that, should the negotiations with Roger
Dunn materialize, at the same time as the offer of Materials Handling
Corporation, that the funds committed by Roger Dunn may be diverted
to other borrowers of the Development Bank of the Philippines. With this
condition, Director Joaquin showed the advantages of the offer of
Materials Handling Corporation. Mr. Joaquin also informed the
corporation that, as of this date, the bank confirmation of Roger Dunn &
Company has not been received. In view of the fact that the corporation
is racing against time in securing its financing, he recommended that the
corporation entertain other offers.
After a brief exchange of views on the part of the Directors present and
after hearing the clarification and explanation made by Mr. C. M. Javier
who was present and who represented the Materials Handling
Corporation, the Directors present approved unanimously the
recommendation of Mr. Joaquin to entertain the offer of Materials
Handling Corporation.34
Evidently, IHC only relied on the opinion of its consultant in deciding to
transact with Materials Handling and, later on, with Barnes. In
negotiating with Barnes, IHC had no intention, willful or otherwise, to
prevent Joaquin and Suarez from meeting their undertaking. Such
absence of any intention negated the basis for the CA’s reliance on
Article 1186 of the Civil Code.
Nor do we agree with the CA’s upholding of IHC’s liability by virtue of
Joaquin and Suarez’s substantial performance. In so ruling, the CA
applied Article 1234 of the Civil Code, which states:
Article 1234. If the obligation has been substantially performed in good
faith, the obligor may recover as though there had been a strict and
complete fulfillment, less damages suffered by the obligee.
It is well to note that Article 1234 applies only when an obligor admits
breaching the contract35 after honestly and faithfully performing all the
material elements thereof except for some technical aspects that cause
no serious harm to the obligee.36 IHC correctly submits that the provision
refers to an omission or deviation that is slight, or technical and
unimportant, and does not affect the real purpose of the contract.
Tolentino explains the character of the obligor’s breach under Article
1234 in the following manner, to wit:
In order that there may be substantial performance of an obligation,
there must have been an attempt in good faith to perform, without any
willful or intentional departure therefrom. The deviation from the
obligation must be slight, and the omission or defect must be technical
and unimportant, and must not pervade the whole or be so material that
the object which the parties intended to accomplish in a particular
manner is not attained. The non-performance of a material part of a
contract will prevent the performance from amounting to a substantial
compliance.
The party claiming substantial performance must show that he has
attempted in good faith to perform his contract, but has through
oversight, misunderstanding or any excusable neglect failed to
113
completely perform in certain negligible respects, for which the other
party may be adequately indemnified by an allowance and deduction
from the contract price or by an award of damages. But a party who
knowingly and wilfully fails to perform his contract in any respect, or
omits to perform a material part of it, cannot be permitted, under the
protection of this rule, to compel the other party, and the trend of the
more recent decisions is to hold that the percentage of omitted or
irregular performance may in and of itself be sufficient to show that there
had not been a substantial performance.37
By reason of the inconsequential nature of the breach or omission, the
law deems the performance as substantial, making it the obligee’s duty
to pay.38 The compulsion of payment is predicated on the substantial
benefit derived by the obligee from the partial performance. Although
compelled to pay, the obligee is nonetheless entitled to an allowance for
the sum required to remedy omissions or defects and to complete the
work agreed upon.39
Conversely, the principle of substantial performance is inappropriate
when the incomplete performance constitutes a material breach of the
contract. A contractual breach is material if it will adversely affect the
nature of the obligation that the obligor promised to deliver, the benefits
that the obligee expects to receive after full compliance, and the extent
that the non-performance defeated the purposes of the
contract.40 Accordingly, for the principle embodied in Article 1234 to
apply, the failure of Joaquin and Suarez to comply with their commitment
should not defeat the ultimate purpose of the contract.
The primary objective of the parties in entering into the services
agreement was to obtain a foreign loan to finance the construction of
IHC’s hotel project. This objective could be inferred from IHC’s approval
of phase 1 to phase 6 of the proposal. Phase 1 and phase 2, respectively
the preparation of a new project study and the settlement of the
unregistered mortgage, would pave the way for Joaquin and Suarez to
render assistance to IHC in applying for the DBP guaranty and thereafter
to look for an able and willing foreign financial institution acceptable to
DBP. All the steps that Joaquin and Suarez undertook to accomplish
had a single objective – to secure a loan to fund the construction and
eventual operations of the hotel of IHC. In that regard, Joaquin himself
admitted that his assistance was specifically sought to seek financing
for IHC’s hotel project.41
Needless to say, finding the foreign financier that DBP would guarantee
was the essence of the parties’ contract, so that the failure to completely
satisfy such obligation could not be characterized as slight and
unimportant as to have resulted in Joaquin and Suarez’s substantial
performance that consequentially benefitted IHC. Whatever benefits
IHC gained from their services could only be minimal, and were even
probably outweighed by whatever losses IHC suffered from the delayed
construction of its hotel. Consequently, Article 1234 did not apply.
3.
IHC is nonetheless liable to pay under the rule on constructive
fulfillment of a mixed conditional obligation
Notwithstanding the inapplicability of Article 1186 and Article 1234 of the
Civil Code, IHC was liable based on the nature of the obligation.
Considering that the agreement between the parties was not
circumscribed by a definite period, its termination was subject to a
condition – the happening of a future and uncertain event.42 The
prevailing rule in conditional obligations is that the acquisition of rights,
as well as the extinguishment or loss of those already acquired, shall
depend upon the happening of the event that constitutes the condition.43
To recall, both the RTC and the CA held that Joaquin and Suarez’s
obligation was subject to the suspensive condition of successfully
securing a foreign loan guaranteed by DBP. IHC agrees with both lower
courts, and even argues that the obligation with a suspensive condition
did not arise when the event or occurrence did not happen. In that
instance, partial performance of the contract subject to the suspensive
condition was tantamount to no performance at all. As such, the
respondents were not entitled to any compensation.
We have to disagree with IHC’s argument.
To secure a DBP-guaranteed foreign loan did not solely depend on the
diligence or the sole will of the respondents because it required the
action and discretion of third persons – an able and willing foreign
financial institution to provide the needed funds, and the DBP Board of
Governors to guarantee the loan. Such third persons could not be legally
compelled to act in a manner favorable to IHC. There is no question that
114
when the fulfillment of a condition is dependent partly on the will of one
of the contracting parties,44 or of the obligor, and partly on chance,
hazard or the will of a third person, the obligation is mixed.45 The existing
rule in a mixed conditional obligation is that when the condition was not
fulfilled but the obligor did all in his power to comply with the obligation,
the condition should be deemed satisfied.46
Considering that the respondents were able to secure an agreement
with Weston, and subsequently tried to reverse the prior cancellation of
the guaranty by DBP, we rule that they thereby constructively fulfilled
their obligation.
4.
Quantum meruit should apply in the absence of an express agreement
on the fees
The next issue to resolve is the amount of the fees that IHC should pay
to Joaquin and Suarez.
Joaquin claimed that aside from the approved ₱2,000,000.00 fee to
implement phase 1 to phase 6, the IHC Board of Directors had approved
an additional ₱500,000.00 as payment for his services. The RTC
declared that he and Suarez were entitled to ₱200,000.00 each, but the
CA revised the amounts to ₱700,000.00 for Joaquin and ₱200,000.00
for Suarez.
Anent the ₱2,000,000.00, the CA rightly concluded that the full amount
of ₱2,000,000.00 could not be awarded to respondents because such
amount was not allocated exclusively to compensate respondents, but
was intended to be the estimated maximum to fund the expenses in
undertaking phase 6 of the scope of services. Its conclusion was
unquestionably borne out by the minutes of the February 11, 1969
meeting, viz:
xxxx
II
The preparation of the necessary papers for the DBP including the
preparation of the application, the presentation of the mechanics of
financing, the actual follow up with the different departments of the DBP
which includes the explanation of the feasibility studies up to the
approval of the loan, conditioned on the DBP’s acceptance of the project
as feasible. The estimated expenses for this particular phase would be
contingent, i.e. upon DBP’s approval of the plan now being studied and
prepared, is somewhere around ₱2,000,000.00.
After a brief discussion on the matter, the Board on motion duly made
and seconded, unanimously adopted a resolution of the following tenor:
RESOLUTION NO. ______
(Series of 1969)
"RESOLVED, as it is hereby RESOLVED, that if the Reparations
allocation and the plan being negotiated with the DBP is realized the
estimated maximum expenses of ₱2,000,000.00 for this phase is hereby
authorized subject to the sound discretion of the committee composed
of Justice Felix Angelo Bautista, Jose N. Valero and Ephraim G.
Gochangco."47 (Emphasis supplied)
Joaquin’s claim for the additional sum of ₱500,000.00 was similarly
without factual and legal bases. He had requested the payment of that
amount to cover services rendered and still to be rendered to IHC
separately from those covered by the first six phases of the scope of
work. However, there is no reason to hold IHC liable for that amount due
to his failure to present sufficient proof of the services rendered towards
that end. Furthermore, his July 11, 1969 letter revealed that the
additional services that he had supposedly rendered were identical to
those enumerated in the technical proposal, thus:
The Board of Directors
International Hotel Corporation
Thru: Justice Felix Angelo Bautista President & Chairman of the Board
Gentlemen:
I have the honor to request this Body for its deliberation and action on
the fees for my services rendered and to be rendered to the hotel project
and to the corporation. These fees are separate from the fees you have
115
approved in your previous Board Resolution, since my fees are
separate. I realize the position of the corporation at present, in that it is
not in a financial position to pay my services in cash, therefore, I am
requesting this Body to consider payment of my fees even in the form of
shares of stock, as you have done to the other technical men and for
other services rendered to the corporation by other people.
Inasmuch as my fees are contingent on the successful implementation
of this project, I request that my fees be based on a percentage of the
total project cost. The fees which I consider reasonable for the services
that I have rendered to the project up to the completion of its construction
is ₱500,000.00. I believe said amount is reasonable since this is
approximately only ¾ of 1% of the total project cost.
So far, I have accomplished Phases 1-5 of my report dated February 1,
1969 and which you authorized us to do under Board Resolution of
February 11, 1969. It is only Phase 6 which now remains to be
implemented. For my appointment as Consultant dated May 12, 1969
and the Board Resolution dated June 23, 1969 wherein I was appointed
to the Technical Committee, it now follows that I have been also
authorized to implement part of Phases 7 & 8.
A brief summary of my accomplished work has been as follows:
1. I have revised and made the new Project Study of your hotel
project, making it bankable and feasible.
2. I have reduced the total cost of your project by approximately
₱24,735,000.00.
3. I have seen to it that a registered mortgage with the
Reparations Commission did not affect the application with the
IBP for approval to processing.
4. I have prepared the application papers acceptable to the DBP
by means of an advance analysis and the presentation of the
financial mechanics, which was accepted by the DBP.
5. I have presented the financial mechanics of the loan wherein
the requirement of the DBP for an additional ₱19,000,000.00 in
equity from the corporation became unnecessary.
6. The explanation of the financial mechanics and the
justification of this project was instrumental in changing the
original recommendation of the Investment Banking
Department of the DBP, which recommended disapproval of
this application, to the present recommendation of the Real
Estate Department which is for the approval of this project for
proceeding.
7. I have submitted to you several offers already of foreign
financiers which are in your files. We are presently arranging
the said financiers to confirm their funds to the DBP for our
project,
8. We have secured the approval of the DBP to process the loan
application of this corporation as per its letter July 2, 1969.
9. We have performed other services for the corporation which
led to the cooperation and understanding of the different
factions of this corporation.
I have rendered services to your corporation for the past 6 months with
no clear understanding as to the compensation of my services. All I have
drawn from the corporation is the amount of ₱500.00 dated May 12,
1969 and personal payment advanced by Justice Felix Angelo Bautista
in the amount of ₱1,000.00.
I am, therefore, requesting this Body for their approval of my fees. I have
shown my good faith and willingness to render services to your
corporation which is evidenced by my continued services in the past 6
months as well as the accomplishments above mentioned. I believe that
the final completion of this hotel, at least for the processing of the DBP
up to the completion of the construction, will take approximately another
2 ½ years. In view of the above, I again reiterate my request for your
approval of my fees. When the corporation is in a better financial
position, I will request for a withdrawal of a monthly allowance, said
amount to be determined by this Body.
Very truly yours,
(Sgd.)
Francisco G., Joaquin, Jr.48 (Emphasis supplied)
116
Joaquin could not even rest his claim on the approval by IHC’s Board of
Directors. The approval apparently arose from the confusion between
the supposedly separate services that Joaquin had rendered and those
to be done under the technical proposal. The minutes of the July 11,
1969 board meeting (when the Board of Directors allowed the payment
for Joaquin’s past services and for the 70% project completion by the
technical group) showed as follows:
III
The Third order of business is the compensation of Mr. Francisco G.
Joaquin, Jr. for his services in the corporation.
After a brief discussion that ensued, upon motion duly made and
seconded, the stockholders unanimously approved a resolution of the
following tenor:
RESOLUTION NO. ___(Series of 1969)
"RESOLVED that Mr. Francisco G. Joaquin, Jr. be granted a
compensation in the amount of Five Hundred Thousand (₱500,000.00)
Pesos for his past services and services still to be rendered in the future
to the corporation up to the completion of the Project.1âwphi1 The
President is given full discretion to discuss with Mr. Joaquin the manner
of payment of said compensation, authorizing him to pay part in stock
and part in cash."
Incidentally, it was also taken up the necessity of giving the Technical
Group a portion of the compensation that was authorized by this
corporation in its Resolution of February 11, 1969 considering that the
assistance so far given the corporation by said Technical Group in
continuing our project with the DBP and its request for guaranty for a
foreign loan is 70% completed leaving only some details which are now
being processed. It is estimated that ₱400,000.00 worth of Common
Stock would be reasonable for the present accomplishments and to this
effect, the President is authorized to issue the same in the name of the
Technical Group, as follows:
₱200,000.00 in Common Stock to Rafael Suarez, an associate in the
Technical Group, and ₱200,000.00 in Common stock to Francisco G.
Joaquin, Jr., also a member of the Technical Group.49
Lastly, the amount purportedly included services still to be rendered that
supposedly extended until the completion of the construction of the
hotel. It is basic, however, that in obligations to do, there can be no
payment unless the obligation has been completely rendered.50
It is notable that the confusion on the amounts of compensation arose
from the parties’ inability to agree on the fees that respondents should
receive. Considering the absence of an agreement, and in view of
respondents’ constructive fulfillment of their obligation, the Court has to
apply the principle of quantum meruit in determining how much was still
due and owing to respondents. Under the principle of quantum meruit,
a contractor is allowed to recover the reasonable value of the services
rendered despite the lack of a written contract.51 The measure of
recovery under the principle should relate to the reasonable value of the
services performed.52 The principle prevents undue enrichment based
on the equitable postulate that it is unjust for a person to retain any
benefit without paying for it. Being predicated on equity, the principle
should only be applied if no express contract was entered into, and no
specific statutory provision was applicable.53
Under the established circumstances, we deem the total amount of
₱200,000.00 to be reasonable compensation for respondents’ services
under the principle of quantum meruit.
Finally, we sustain IHC’s position that the grant of attorney’s fees lacked
factual or legal basis. Attorney’s fees are not awarded every time a party
prevails in a suit because of the policy that no premium should be placed
on the right to litigate. There should be factual or legal support in the
records before the award of such fees is sustained. It is not enough
justification for the award simply because respondents were compelled
to protect their rights.54
ACCORDINGLY, the Court DENIES the petition for review on certiorari;
and AFFIRMS the decision of the Court of Appeals promulgated on
November 8, 2002 in C.A.-G.R. No. 47094 subject to the
MODIFICATIONS that: (a) International Hotel Corporation is ordered to.
pay Francisco G. Joaquin, Jr. and Rafael Suarez ₱100,000.00 each as
compensation for their services, and (b) the award of ₱20,000.00 as
attorney's fees is deleted.
No costs of suit. SO ORDERED.
117
 WERR CORPORATION v. HIGHLANDS PRIME 817 S 145
(JARDELEZA)
These are consolidated petitions[1] seeking to nullify the Court of
Appeals' (CA) February 9, 2009 Decision[2] and April 16, 2009
Resolution[3] in CA-G.R. SP No. 105013. The CA modified the August
11, 2008 Decision[4] of the Construction Industry Arbitration Commission
(CIAC) in CIAC Case No. 09-2008, viz.:
WHEREFORE, premises considered, the instant petition for review
is PARTLY GRANTED. The assailed Decision dated August 11, 2008
of the Construction Industry Arbitration Commission in CIAC Case No.
09-2008 is hereby MODIFIED as follows:
1) Respondent Werr Corporation International shall pay petitioner
Highlands Prime, Inc. liquidated damages in the amount of
P8,969,330.70;
2) Petitioner Highlands Prime, Inc. shall return to respondent Werr
Corporation International the balance of its retention money in the
amount of P10,955,899.80 with the right to offset the award for
liquidated damages in the aforesaid amount of P8,969,330.70; and
3) The cost of arbitration shall be shared equally by the parties.
The rest of the decision stands.
SO ORDERED.[5]
Facts
Highlands Prime, Inc. (HPI) and Werr Corporation International (Werr)
are domestic corporations engaged in property development and
construction, respectively. For the construction of 54 residential units
contained in three clusters of five-storey condominium structures,
known as "The Horizon-Westridge Project," in Tagaytay Midlands
Complex, Talisay, Batangas, the project owner, HPI, issued a Notice of
Award/Notice to Proceed[6] to its chosen contractor, Werr, on July 22,
2005. Thereafter, the parties executed a General Building
Agreement[7] (Agreement) on November 17, 2005.[8]
Under the Agreement, Werr had the obligation to complete the project
within 210 calendar days from receipt of the Notice of Award/Notice to
Proceed on July 22, 2005, or until February 19, 2006.[9] For the
completion of the project, HPI undertook to pay Werr a lump sum
contract price of P271,797,900.00 inclusive of applicable taxes, supply
and transportation of materials, and labor.[10] It was agreed that this
contract price shall be subject to the following payment scheme: (1) HPI
shall pay 20% of the contract price upon the execution of the agreement
and the presentation of the necessary bonds and insurance required
under the contract, and shall pay the balance on installments progress
billing subject to recoupment of downpayment and retention
money;[11] (2) HPI shall retain 10% of the contract price in the form of
retention bond provided by Werr;[12] (3) HPI may deduct or set off any
sum against monies due Werr, including expenses for the rectification
of defects in the construction project;[13] and (4) HPI has the right to
liquidated damages in the event of delay in the construction of the
project equivalent to 1/10 of 1% of the contract price for every day of
delay.[14]
Upon HPI's payment of the stipulated 20% downpayment in the amount
of P54,359,580.00, Werr commenced with the construction of the
project. The contract price was paid and the retention money was
deducted, both in the progress billings. The project, however, was not
completed on the initial completion date of February 19, 2006, which led
HPI to grant several extensions and a final extension until October 15,
2006. On May 8, 2006, Werr sought the assistance of HPI to pay its
obligations with its suppliers under a "Direct Payment Scheme" totaling
P24,503,500.08, which the latter approved only up to the amount of
P18,762,541.67. The amount is to be charged against the accumulated
retention money. As of the last billing on October 25, 2006, HPI had
already paid the amount of P232,940,265.85 corresponding to 93.18%
accomplishment rate of the project and retained the amount of
P25,738,258.01 as retention bond.[15]
The project was not completed on the last extension given. Thus, HPI
terminated its contract with Werr on November 28, 2006, which the latter
accepted on November 30, 2006.[16] No progress billing was adduced
for the period October 28, 2006 until the termination of the contract.[17]
On October 3, 2007, Werr demanded from HPI payment of the balance
of the contract price as reflected in its financial status report which
showed a conditional net payable amount of P36,078,652.90.[18] On
January 24, 2007, HPI informed Werr that based on their records, the
amount due to the latter as of December 31, 2006 is
P14,834,926.71.[19] This amount was confirmed by Werr.[20] Not having
received any payment, Werr filed a Complaint[21] for arbitration against
118
HPI before the CIAC to recover the P14,834,926.71 representing the
balance of its retention money.
In its Answer,[22] HPI countered that it does not owe Werr because the
balance of the retention money answered for the payments made to
suppliers and for the additional costs and expenses incurred after
termination of the contract. From the retention money of
P25,738,258.01, it deducted (1) P18,762,541.67 as payment to the
suppliers under the Direct Payment Scheme, and (2) P7,548,729.15 as
additional costs and expenses further broken down as follows: (a)
P3,336,526.91 representing the unrecouped portion of the 20%
downpayment; (b) P542,500.00 representing the remainder of Werr's
unpaid advances; (c) P629,702.24 for the waterproofing works done by
Dubbel Philippines; and (d) P3,040,000.00 for the rectification works
performed by A.A. Manahan Construction after the termination of the
contract. Deducting the foregoing from the accumulated retention
money resulted in a deficiency of P573,012.81 in its favor.[23] By way of
counterclaim, HPI prayed for the payment of liquidated damages in the
amount of P11,959,107.60 for the 44-day delay in the completion of the
project reckoned from October 15, 2006 up to the termination of the
Agreement on November 28, 2006; for actual damages in the sum of
P573,012.81; and for attorney's fees of P500,000.00 and litigation
expenses of P100,000.00.[24]
CIAC's Ruling
After due proceedings, the CIAC rendered its Decision[25] on August 11,
2008 where it granted Werr's claim for the balance of the retention
money in the amount of P10,955,899.79 and arbitration costs. It also
granted BPI's claim for liquidated damages in the amount of
P2,535,059.01 equivalent to 9.327 days of delay,[26] but denied its
counterclaim for damages, attorney's fees, and litigation expenses.
From the claims of HPI, the CIAC only deducted the amounts of (1)
P10,903,331.30 representing the direct payments made from
September 26, 2006 until December 31, 2006,[27] (2) P3,336,526.91
representing the unrecouped retention money, and (3) P542,500.00
representing the unpaid cash advances from the P25,738,258.01
retention money. It disallowed the direct payments charged by HPI in
2007 and 2008 for having been supplied after the termination of the
project, for not corresponding to the list of suppliers submitted, and for
HPI failing to show that Werr requested it to continue payments even
after termination of the Agreement. It also disallowed the amount of
P629,702.24 for the waterproofing works done by Dubbel Philippines for
being works done after the termination of the contract. The
P3,040,000.00 for the rectification works performed after the termination
of the contract was also disallowed because while HPI presented its
contract with A.A. Manahan Construction for rectification and completion
works, it failed to present proof of how much was specifically paid for
rectification works only, as well as the proof of its payment. Moreover,
prior notice of such defective works was not shown to have been given
to Werr as required under the Agreement, and even noted that HPI's
project manager approved of the quality of the works up to almost
94%.[28]
The CIAC further ruled that Werr incurred only 9.327 days of delay.
Citing Article 1376[29] of the Civil Code and considering the failure of the
Agreement to state otherwise, it applied the industry practice in the
construction industry that liquidated damages do not accrue after
achieving substantial compliance. It held that delay should be counted
from October 27, 2006 until the projected date of substantial completion.
Since the last admitted accomplishment is 93.18% on October 27, 2006,
the period it will take Werr to perform the remaining 1.82% is the period
of delay. Based on the past billings, since it took Werr 5.128 days[30] to
achieve 1% accomplishment, it will therefore take it 9.327 days to
achieve substantial completion. Thus, the CIAC concluded that the
period of delay until substantial completion of the project is 9.327 days.
The liquidated damages under the Agreement being 1/10 of 1% of the
P271,797,900.00 or P271,797.90 per day of delay, Werr is liable for
liquidated damages in the amount of P2,535,048.95.[31]
Since the liquidated damages did not exhaust the balance of the
retention money, the CIAC likewise denied the claim for actual
damages.[32]
Thereafter, HPI filed its petition for review[33] under Rule 43 with the CA
on August 28, 2008.
CA's Ruling
The CA rendered the assailed decision, affirming the CIAC's findings on
the allowable charges against the retention money, and on the
attorney's fees and litigation expenses. It, however, disagreed with the
CIAC decision as to the amount of liquidated damages and arbitration
costs. According to the CA, delay should be computed from October 27,
2006 until termination of the contract on November 28, 2006, or 33 days,
119
since the contract prevails over the industry practice. Thus, the total
liquidated damages is P8,969,330.70. As to the arbitration costs, it ruled
that it is more equitable that it be borne equally by the parties since the
claims of both were considered and partially granted.[34]
Hence, these consolidated petitions.
Arguments
Werr argues that the CA erred in modifying the CIAC decision on the
amount of liquidated damages and arbitration costs. It insists that the
appellate court disregarded Articles 1234, 1235, and 1376 of the Civil
Code and the industry practice (as evidenced by Clause 52.1 of the
Construction Industry Authority of the Philippines [CIAP] Document No.
101 or the "General Conditions of Contract for Government
Construction" and Article 20.11 of CIAP Document No. 102 or the
"Uniform General Conditions of Contract for Private Construction") when
it did not apply the construction industry practice in computing liquidated
damages only until substantial completion of the project, and not until
the termination of the contract.[35] Werr further emphasizes that the
CIAC, being an administrative agency, has expertise on the subject
matter, and thus, its findings prevail over the appellate court's
findings.[36]
On the other hand, HPI argues that Werr was unjustly enriched when
the CA disallowed HPI's recovery of the amounts it paid to suppliers.
HPI claims that: (1) payments made to suppliers identified in the Direct
Payment Scheme even after the termination of the contract should be
charged against the balance of the retention money, the same having
been made pursuant to Werr's express instructions; (2) the payments to
Dubbel Philippines and the cost of the contract with A.A. Manahan
Construction are chargeable to the retention money, pursuant to the
terms of the Agreement; and (3) the expenses incurred in excess of the
retention money should be paid by Werr as actual damages. These
payments, while made after the termination of the contract, were for prior
incurred obligations.[37]HPI also argues that it is not liable for arbitration
costs, and reiterates its claims for actual damages, and payment of
attorney's fees and litigation expenses.[38]
Issues
I. Whether the payments made to suppliers and contractors after
the termination of the contract are chargeable against the
retention money.
II. Whether the industry practice of computing liquidated damages
only up to substantial completion of the project applies in
the computation of liquidated damages. Consequently,
whether delay should be computed until termination of the
contract or until substantial completion of the project.
III. Whether the cost of arbitration should be shouldered by both
parties.
IV. Whether HPI is entitled to attorney's fees and litigation
expenses.
Our Ruling
We deny the consolidated petitions.
I. Charges against the Retention Money
Anent the first issue, we emphasize that what is before us is a petition
for review under Rule 45 where only questions of law may be
raised.[39] Factual issues, which involve a review of the probative value
of the evidence presented, such as the credibility of witnesses, or the
existence or relevance of surrounding circumstances and their relation
to each other, may not be raised unless it is shown that the case falls
under recognized exceptions.[40]
In cases of arbitral awards rendered by the CIAC, adherence to this rule
is all the more compelling.[41] Executive Order No. 1008,[42] which vests
upon the CIAC original and exclusive jurisdiction over disputes arising
from, or connected with, contracts entered into by parties involved in
construction in the Philippines, clearly provides that the arbitral award
shall be binding upon the parties and that it shall be final and
inappealable except on questions of law which shall be appealable to
the Supreme Court.[43] This rule on the finality of an arbitral award is
anchored on the premise that an impartial body, freely chosen by the
parties and to which they have confidence, has settled the dispute after
due proceedings:
Voluntary arbitration involves the reference of a dispute to an impartial
body, the members of which are chosen by the parties themselves,
which parties freely consent in advance to abide by the arbitral award
issued after proceedings where both parties had the opportunity to be
heard. The basic objective is to provide a speedy and inexpensive
method of settling disputes by allowing the parties to avoid the
120
formalities, delay, expense and aggravation which commonly
accompany ordinary litigation, especially litigation which goes through
the entire hierarchy of courts. Executive Order No. 1008 created an
arbitration facility to which the construction industry in the Philippines
can have recourse. The Executive Order was enacted to encourage the
early and expeditious settlement of disputes in the construction industry,
a public policy the implementation of which is necessary and important
for the realization of national development goals.
Aware of the objective of voluntary arbitration in the labor field, in the
construction industry, and in any other area for that matter, the Court will
not assist one or the other or even both parties in any effort to subvert
or defeat that objective for their private purposes. The Court will not
review the factual findings of an arbitral tribunal upon the artful allegation
that such body had "misapprehended the facts" and will not pass upon
issues which are, at bottom, issues of fact, no matter how cleverly
disguised they might be as "legal questions." The parties here had
recourse to arbitration and chose the arbitrators themselves; they must
have had confidence in such arbitrators. The Court will not, therefore,
permit the parties to relitigate before it the issues of facts previously
presented and argued before the Arbitral Tribunal, save only where a
very clear showing is made that, in reaching its factual conclusions, the
Arbitral Tribunal committed an error so egregious and hurtful to one
party as to constitute a grave abuse of discretion resulting in lack or loss
of jurisdiction. Prototypical examples would be factual conclusions of the
Tribunal which resulted in deprivation of one or the other party of a fair
opportunity to present its position before the Arbitral Tribunal, and an
award obtained through fraud or the corruption of arbitrators. Any other,
more relaxed, rule would result in setting at naught the basic objective
of a voluntary arbitration and would reduce arbitration to a largely inutile
institution.[44]
In this case, the issues of whether HPI was able to prove that payments
made to suppliers and to third party contractors are prior incurred
obligations that should be charged against the retention money, and
whether HPI incurred expenses above the retention money that
warrants actual damages, are issues of facts beyond the review of the
Court under Rule 45.
Moreover, even if we consider such factual issues, we are bound by the
findings of fact of the CIAC especially when affirmed by the
CA.[45] Factual findings by a quasi-judicial body like the CIAC, which has
acquired expertise because its jurisdiction is confined to specific
matters, are accorded not only with respect but even finality if they are
supported by substantial evidence.[46] We recognize that certain cases
require the expertise, specialized skills, and knowledge of the proper
administrative bodies because technical matters or intricate questions
of facts are involved.[47]
We nevertheless note that factual findings of the construction arbitrators
are not beyond review, such as when the petitioner affirmatively proves
the following: (1) the award was procured by corruption, fraud, or other
undue means; (2) there was evident partiality or corruption of the
arbitrators or any of them; (3) the arbitrators were guilty of misconduct
in refusing to hear evidence pertinent and material to the controversy;
(4) one or more of the arbitrators were disqualified to act as such under
Section 10[48] of Republic Act No. 876[49] and willfully refrained from
disclosing such disqualifications or of any other misbehavior by which
the rights of any party have been materially prejudiced; (5) the
arbitrators exceeded their powers, or so imperfectly executed them, that
a mutual, final, and definite award upon the subject matter submitted to
them was not made; (6) when there is a very clear showing of grave
abuse of discretion resulting in lack or loss of jurisdiction as when a party
was deprived of a fair opportunity to present its position before the
arbitral tribunal or when an award is obtained through fraud or the
corruption of arbitrators; (7) when the findings of the CA are contrary to
those of the CIAC; or (8) when a party is deprived of administrative due
process.[50] However, we do not find that HPI was able to show any of
the exceptions that should warrant a review and reversal of the findings
made by the CIAC and the CA.
Thus, we affirm the CIAC and CA's findings that direct payments
charged by HPI in 2007 and 2008 were for materials supplied after the
termination of the project and did not correspond to the list of suppliers
submitted; that the waterproofing works done by Dubbel Philippines in
the amount of P629,702.24 were for works done after the termination of
the contract that were for the account of the new contractor; and that the
rectification works performed after the termination of the contract worth
P3,040,000.00 were not proven to have been paid, that it was for
rectification works only, and that prior notice of such defective works as
required under the Agreement was not proven. Accordingly, we affirm
that the balance of the retention money is P10,955,899.79.
II. Delay in computing Liquidated Damages
On the other hand, the question on how liquidated damages should be
121
computed based on the Agreement and prevailing jurisprudence is a
question of law that we may review.
The pertinent provision on liquidated damages is found in clause 41.5
of the Agreement, viz.:
41.5. Considering the importance of the timely completion of the
WORKS on the OWNER'S commitments to its clients,
the CONTRACTOR agrees to pay the OWNER liquidated damages in
the amount of 1/10th of 1% of the amount of the Contract price for every
day of delay (inclusive of Sundays and holidays).[51]
Werr, as contractor, urges us to apply the construction industry practice
that liquidated damages do not accrue after the date of substantial
completion of the project, as evidenced in CIAP Document No. 102,
which provides that:
20.11 SUBSTANTIAL COMPLETION AND ITS EFFECT:
A. [a] There is substantial completion when the Contractor completes
95% of the Work, provided that the remaining work and the performance
of the work necessary to complete the Work shall not prevent the normal
use of the completed portion.
xxx
D. [a] No liquidated damages for delay beyond the Completion Time
shall accrue after the date of substantial completion of the Work.
We reject this claim of Werr and find that while this industry practice may
supplement the Agreement, Werr cannot benefit from it.
At the outset, we do not agree with the CA that industry practice be
rejected because liquidated damages is provided in the Agreement,
autonomy of contracts prevails, and industry practice is completely set
aside. Contracting parties are free to stipulate as to the terms and
conditions of the contract for as long as they are not contrary to law,
morals, good customs, public order or public policy.[52] Corollary to this
rule is that laws are deemed written in every contract.[53]
Deemed incorporated into every contract are the general provisions on
obligations and interpretation of contracts found in the Civil Code. The
Civil Code provides:
Art. 1234. If the obligation has been substantially performed in good
faith, the obligor may recover as though there had been a strict and
complete fulfillment, less damages suffered by the obligee.
Art. 1376. The usage or custom of the place shall be borne in mind in
the interpretation of the ambiguities of a contract, and shall fill the
omission of stipulations which are ordinarily established.
In previous cases, we applied these provisions in construction
agreements to determine whether the project owner is entitled to
liquidated damages. We held that substantial completion of the project
equates to achievement of 95% project completion which excuses the
contractor from the payment of liquidated damages.
In Diesel Construction Co., Inc. v. UPSI Property Holdings, Inc.,[54] we
applied Article 1234 of the Civil Code. In determining what is considered
substantial compliance, we used the CIAP Document No. 102 as
evidence of the construction industry practice that substantial
compliance is equivalent to 95% accomplishment rate. In that case, the
construction agreement requires the contractor "to pay the owner
liquidated damages in the amount equivalent to one-fifth (1/5) of one (1)
percent of the total Project cost for each calendar day of delay."[55] We
declared that the contractor cannot be liable for liquidated damages
because it already accomplished 97.56% of the project.[56] We reiterated
this in Transcept Construction and Management Professionals, Inc. v.
Aguilar[57] where we ruled that since the contractor accomplished
98.16% of the project, the project owner is not entitled to the 10%
liquidated damages.[58]
Considering the foregoing, it was error for the CA to immediately dismiss
the application of industry practice on the sole ground that there is an
existing agreement as to liquidated damages. As expressly stated under
Articles 1234 and 1376, and in jurisprudence, the construction industry's
prevailing practice may supplement any ambiguities or omissions in the
stipulations of the contract.
Notably, CIAP Document No. 102, by itself, was intended to have
suppletory effect on private construction contracts. This is evident in
CIAP Board Resolution No. 1-98,[59] which states:
Sec. 9. Policy-Making Body. - The [CIAP], through the CIAP Executive
Office and its various Implementing Agencies, shall continuously
monitor and study the operations of the construction industry, both
domestic and overseas operations, to identify its needs, problems and
122
opportunities, in order to provide for the pertinent policies and/or
executive action and/or legislative agenda necessary to implement
plans, programs and measures required to support the sustainable
development of the construction industry, such as but not limited to the
following:
xxx
9.05 The promulgation and adoption of Standard Conditions of Contract
for the public construction and private construction sector which shall
have suppletory effect in cases where there is a conflict in the internal
documents of a constmction contract or in the absence of the general
conditions of a construction agreement[.]
As the standard conditions for contract for private construction adopted
and promulgated by the CIAP, CIAP Document No. 102 applies
suppletorily to private construction contracts to remedy the conflict in the
internal documents of, or to fill in the omissions in, the construction
agreement.
In this case, clause 41.5 of the Agreement is undoubtedly a valid
stipulation. However, while clause 41.5 requires payment of liquidated
damages if there is delay, it is silent as to the period until when liquidated
damages shall run. The Agreement does not state that liquidated
damages is due until termination of the project; neither does it
completely reject that it is only due until substantial completion of the
project. This omission in the Agreement may be supplemented by the
provisions of the Civil Code, industry practice, and the CIAP Document
No. 102. Hence, the industry practice that substantial compliance
excuses the contractor from payment of liquidated damages applies to
the Agreement.
Nonetheless, we find that Werr cannot benefit from the effects of
substantial compliance.
Paragraph A.[a.], Article 20.11 of CIAP Document No. 102 requires that
the contractor completes 95% of the work for there to be substantial
completion of the project. Also, in those cases where we applied the
industry practice to supplement the contracts and excused payment
from liquidated damages under Article 1234, the contractors there
actually achieved 95% completion of the project. Neither the CIAC nor
the courts assumed as to when substantial compliance will be achieved
by the contractor, but the contractors offered substantial evidence that
they actually achieved at least 95% completion of the project. Thus, the
effects of substantial completion only operate to relieve the contractor
from the burden of paying liquidated damages when it has, in reality,
achieved substantial completion of the project.
While the case before us presents a different scenario, as the contractor
here does not demand total release from payment of liquidated
damages, we find that in order to benefit from the effects of the
substantial completion of a project, the condition precedent must first be
met-the contractor must successfully prove by substantial evidence that
it actually achieved 95% completion rate of the project. As such, it is
incumbent upon Werr to show that it had achieved an accomplishment
rate of 95% before or at the time of the termination of the contract.
Here, there is no dispute that Werr failed to prove that it completed 95%
of the project before or at the time of the termination of the contract. As
found by CIAC, it failed to present evidence as to what accomplishment
it achieved from the time of the last billing until the termination of the
contract.[60] What was admitted as accomplishment at the last billing is
93.18%. For this reason, even if we adopt the rule that no liquidated
damages shall run after the date of substantial completion of the project,
Werr cannot claim benefit for it failed to meet the condition
precedent, i.e., the contractor has successfully proven that it actually
achieved 95% completion rate.
More importantly, Werr failed to show that it is the construction industry's
practice to project the date of substantial completion of a project, and to
compute the period of delay based on the rate in past progress billings
just as what the CIAC has done. Consequently, the CIAC erred when it
assumed that Werr continued to perform works, and if it did, that it
performed them at the rate of accomplishment of the previous works in
the absence of evidence.
That the effects of substantial completion will only apply
when actual substantial completion is reached is apparent when we
consider the reason behind the rules on substantial completion of the
project found in Section 20.11[E] of the CIAP Document No. 102, viz.:
E. The purpose of this Article [ART. 20, WORK; 20.11: SUBSTANTIAL
COMPLETION AND ITS EFFECT] is to ensure that the Contractor is
paid for Work completed and for the Owner to retain such portion of the
Contract Price which, together with the Performance Bond, is sufficient
to complete the Work without additional cost to the Owner.
123
The rules are intended to balance the allocation and burden of costs
between the contractor and the project owner so that the contractor still
achieves a return for its completed work, and the project owner will not
incur further costs. To compute the period of delay when substantial
compliance is not yet achieved but merely on the assumption that it will
eventually be achieved would result in an iniquitous situation where the
project owner will bear the risks and additional costs for the period
excused from liquidated damages.

From the foregoing, we affirm the CA's conclusion that the period of
delay in computing liquidated damages should be reckoned from
October 27, 2006 until the termination of the contract or for 33 days, and
not only until the projected substantial completion date. Consistent with
the CA's ruling that liquidated damages did not exceed the retention
money, we therefore affirm that HPI did not suffer actual damages in the
amount of P573,012.81.

III. Arbitration Costs, Attorney's Fees, and Litigation Costs

Courts are allowed to adjudge which party may bear the cost of the suit
depending on the circumstances of the case.[61] Considering the CA's
findings that both parties were able to recover their claims, and neither
was guilty of bad faith, we do not find that the CA erred in dividing the
arbitration costs between the parties.

We also do not find the need to disturb the findings as to attorney's fees
and expenses of litigation, both the CIAC and the CA having found that
there is no basis for the award of attorney's fees and litigation
expenses.[62]

WHEREFORE, the petitions are DENIED. The Court of Appeals'

February 9, 2009 Decision and April 16, 2009 Resolution
are AFFIRMED. The net award in favor of Werr Corporation
International shall earn interest at the rate of 6% per annum from date
of demand on October 3, 2007 until finality of this Decision. Thereafter,
the total amount shall earn interest from finality of this Decision until fully
paid.

SO ORDERED.

124
1236-1237 – EFFECTS OF PAYMENT MADE BY A THIRD PERSON

JALANDONI v. ENCOMIENDA 819 S 43 (PERALTA)

This is an appeal from the Decision1 of the Court of Appeals, Cebu

City (CA) dated March 29, 2012 and its Resolution2 dated December 19,
2012 in CA-G.R. CV No. 01339 which set aside the Decision3 of the
Cebu Regional Trial Court (RTC), Branch 57, dated January 9, 2006,
dismissing respondent Carmen Encomienda's claim for sum of money.

The facts, as shown by the records of the case, are as follows:

Encomienda narrated that she met petitioner Georgia Osmeña-

Jalandoni in Cebu on October 24, 1995, when the former was
purchasing a condominium unit and the latter was the real estate broker.
Thereafter, Encomienda and Jalandoni became close friends. On March
2, 1997, Jalandoni called Encomienda to ask if she could borrow money
for the search and rescue operation of her children in Manila, who were
allegedly taken by their father, Luis Jalandoni. Encomienda then went
to Jalandoni's house and handed ₱l00,000.00 in a sealed envelope to
the latter's security guard. While in Manila, Jalandoni again borrowed
money for the following errands:4

125
126

On April 1, 1997, Jalandoni borrowed ₱l Million from Encomienda and
promised that she would pay the same when her money in the bank
matured. Thereafter, Encomienda went to Manila to attend the hearing
of Jalandoni's habeas corpus case before the CA where ₱100,000.00
more was requested. On May 26, 1997, now crying, Jalandoni asked if
Encomienda could lend her an additional ₱900,000.00. Encomienda still
acceded, albeit already feeling annoyed. All in all, Encomienda spent
around ₱3,245,836.02 and $6,638.20 for Jalandoni.
When Jalandoni came back to Cebu on July 14, 1997, she never
informed Encomienda. Encomienda then later gave Jalandoni six (6)
weeks to settle her debts. Despite several demands, no payment was
made. Jalandoni insisted that the amounts given were not in the form of
loans. When they had to appear before the Barangay for conciliation, no
settlement was reached. But a member of the Lupong
Tagapamayapa of Barangay Kasambagan, Laureano Rogero, attested
that J alandoni admitted having borrowed money from Encomienda and
that she was willing to return it. Jalandoni said she would talk to her
lawyer first, but she never came back. Hence, Encomienda filed a
complaint. She impleaded Luis as a necessary party, being Georgia's
husband.
For her defense, Jalandoni claimed that there was never a discussion
or even just an allusion about a loan. She confirmed that Encomienda
would indeed deposit money in her bank account and pay her bills in
Cebu. But when asked, Encomienda would tell her that she just wanted
to extend some help and that it was not a loan. When Jalandoni returned
to Cebu, Encomienda wanted to fetch her at the airport but the former
refused. This allegedly made Encomienda upset, causing her to
eventually demand payment for the amounts originally intended to be
gratuitous.
On January 9, 2006, the RTC of Cebu City dismissed Encomienda's
complaint, the dispositive portion of which states:
WHEREFORE, in view of the foregoing, this case is hereby dismissed.
SO ORDERED.5
Therefore, Encomienda brought the case to the CA. On March 29, 2012,
the appellate court granted the appeal and reversed the RTC Decision,
to wit:
WHEREFORE, the defendant-appellant's appeal is GRANTED. The
decision of the trial court dated January 9, 2006 is hereby REVERSED
and SET ASIDE and in its stead render judgment against defendant-
appellee Georgia Osmefia-Jalandoni ordering the latter to pay plaintiff-
appellant Carmen A. Encomienda the following:
1. The sum of Three Million Two Hundred Forty-Five Thousand Eight
Hundred Thirty-Six (₱3,245,836.02) Pesos and 02/100 and Six
Thousand Six Hundred Thirty-Eight (US$6,638.20) US Dollars and
20/100;
2. Legal interest of Twelve (12%) Percent from August 14, 1997 the date
of extrajudicial demand.
127
3. Attorney's fees and expenses of litigation in the amount of One
Hundred Thousand (₱l 00,000.00) Pesos.
Let a copy of this Decision be served upon defendants-appellees
through their respective counsels. The Division Clerk of Court is directed
to furnish a copy of this Decision to plaintiff-appellant who, to date, has
yet to submit the name of her new counsel following the death of
appellant's original counsel ofrecord, Atty. Richard W. Sison.
SO ORDERED.6
Jalandoni filed a motion for reconsideration, but the same was
denied.7 Hence, the instant petition.
The sole issue in this case is whether or not Encomienda is entitled to
be reimbursed for the amounts she defrayed for Jalandoni.
Jalandoni insists that she never borrowed any amount of money from
Encomienda. During the entire time that Encomienda was sending
hermoney and paying her bills, there was not one reference to a loan.
In other words, Jalandoni would have the Court believe that Encomienda
volunteeredto spend about ₱3,245,836.02 and $6,638.20 of her hard-
earned money in a span of eight (8) months for her and her family simply
out of pure generosity and the kindness of her heart, without expecting
anything in return. Suchpresupposition is incredible, highly unusual, and
contrary to common experience, unless the benefactor is a billionaire
philanthropist who usuallyspends his days distributing his fortune to the
needy. It is a notable fact that Jalandoni was married to one of the
richest hacienderos of Iloilo and belongto the privileged and affluent
Osmeña family, being the daughter of the late Senator Sergio Osmeña,
Jr. Clearly then, Jalandoni is not one to be aconvincing object of
anyone's charitable acts, especially not from someone like Encomienda
who has not been endowed with such wealth and powerful pedigree.
The appellate court aptly pointed out that when Encomienda gave a
Barbie doll to Jalandoni's daughter, she was quick to send a letter
acknowledging receipt and thanking Encomienda for the simple gift.
However, not once did Jalandoni ever send a simple note or letter, let
alone a card, expressing her gratitude towards Encomienda for the
countless instances she received various amounts of money
supposedly given to her as gifts.
Jalandoni also contends that the amounts she received from
Encomienda were mostly provided and paid without her prior knowledge
and thus she could not have consented to any loan agreement. She
relies on the trial court's finding that Encomienda's claims were not
supported by any documentary evidence. It must be stressed, however,
that the trial court merely found that no documentary evidence was
offered showing Jalandoni's authorization or undertaking to pay the
expenses. But the second paragraph of Article 1236 of the Civil Code
provides:
xxxx
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.8
Clearly, Jalandoni greatly benefited from the purportedly unauthorized
payments. Thus, even if she asseverates that Encomienda's payment
of her household bills was without her knowledge or against her will, she
cannot deny the fact that the same still inured to her benefit and
Encomienda must therefore be consequently reimbursed for it. Also,
when Jalandoni learned about the payments, she did nothing to express
her objection to or repudiation of the same, within a reasonable time.
Even when she claimed that she was prepared with her own
money,9 she still accepted the financial assistance and actually made
use of it. While she asserts to have been upset because of
Encomienda's supposedly intrusive actions, she failed to protest and, in
fact, repeatedly accepted money from her and further allowed her to pay
her driver, security guard, househelp, and bills for her cellular phone,
cable television, pager, gasoline, food, and other utilities. She cannot,
therefore, deny the benefits she reaped from said acts now that the time
for restitution has come. The debtor who knows that another has paid
his obligation for him and who does not repudiate it at any time, must
corollarily pay the amount advanced by such third person.10
The RTC likewise harped on the fact that if Encomienda really intended
the amounts to be a loan, nonnal human behavior would have prompted
at least a handwritten acknowledgment or a promissory note the
moment she parted with her money for the purpose of granting a loan.
This would be particularly true if the loan obtained was part of a business
dealing and not one extended to a close friend who suddenly needed
128
monetary aid. In fact, in case of loans between friends and relatives, the enrichment essentially contemplates payment when there is no duty to
absence of acknowledgment receipts or promissory notes is more pay, and the person who receives the payment has no right to receive
natural and real. In a similar case,11 the Court upheld the CA' s it.12 The CA is then correct when it ruled that allowing Jalandoni to keep
pronouncement that the existence of a contract of loan cannot be denied the amounts received from Encomienda will certainly cause an unjust
merely because it was not reduced in writing. Surely, there can be a enrichment on Jalandoni' s part and to Encomienda's damage and
verbal loan. Contracts are binding between the parties, whether oral or prejudice.
written. The law is explicit that contracts shall be obligatory in whatever
form they may have been entered into, provided all the essential WHEREFORE, PREMISES CONSIDERED, the Court DISMISSES the
requisites for their validity are present. A simple loan or mutuum exists petition for lack of merit and AFFIRMS the Decision of the Court of
when a person receives a loan of money or any other fungible thing and Appeals, Cebu City dated March 29, 2012 and its Resolution dated
acquires its ownership. He is bound to pay to the creditor the equal December 19, 2012 in CA-G.R. CV No. 01339, with MODIFICATION as
amount of the same kind and quality. Jalandoni posits that the more to the interest which must be twelve percent (12%) per annum of the
logical reason behind the disbursements would be what amount awarded from the time of demand on August 14, 1997 to June
Encomiendacandidly told the trial court, that her acts were plainly an 30, 2013, and six percent (6%)13 per annum from July 1, 2013 until its
"unselfish display of Christian help" and done out of "genuine concern full satisfaction.
for Georgia's children." However, the "display of Christian help" is not
inconsistent with theexistence of a loan. Encomienda immediately
SO ORDERED.
offered a helping hand when a friend asked for it. But this does not mean
that she had already waived herright to collect in the future. Indeed,
when Encomienda felt that Jalandoni was beginning to avoid her, that
was when she realized that she had to protect her right to demand
payment. The fact that Encomienda kept the receipts even for the
smallest amounts she had advanced, repeatedly sent demand letters,
and immediately filed the instant case when Jalandoni stubbornly
refused to heed her demands sufficiently disproves the latter’s belief that
all the sums of money she received were merely given out of charity.

Truly, Jalandoni herself admitted that she received the aforementioned

amounts from Encomienda and is merely using her lack of authorization
over the payments as her defence. In fact, Lupong
Tagapamayapa member Rogero, a disinterested third party, confirmed
this, saying that during the barangay conciliation, Jalandoni indeed
admitted having borrowed money from Encomienda and that she would
return it. Jalandoni, however, reneged on said promise.

The principle of unjust enrichment finds application in this case. Unjust

enrichment exists when a person unfairly retains a benefit to the loss of
another, or when a person retains money or property of another against
the fundamental principles of justice, equity, and good conscience.
There is unjust enrichment under Article 22 of the Civil Code when (1) a
person is unjustly benefited, and (2) such benefit is derived at the
expense of or with damages to another. The principle of unjust

129
 1240 - TO WHOM SHALL PAYMENT BE MADE
PNB v TAN
Petitioner Philippine National Bank (PNB) questions the decision1 of the
Court of Appeals partially affirming the judgment of the Regional Trial
Court, Branch 44, Bacolod City. The dispositive portion of the trial court's
decision states:
WHEREFORE, premises considered, the Court hereby renders
judgment in favor of the plaintiff and against the defendants as follows:
1) Ordering defendants to pay plaintiff jointly and severally the sum of
P32,480.00, with legal rate of interest to be computed from May 2, 1979,
date of filing of this complaint until fully paid;
2) Ordering defendants to pay plaintiff jointly and severally the sum of
P5,000.00 as exemplary damages;
3) Ordering defendants to pay plaintiff jointly and severally the sum of
P5,000.00 as attorney's fees; and
4) To pay the costs of this suit.
SO ORDERED.2
The facts are the following:
Private respondent Loreto Tan (Tan) is the owner of a parcel of land
abutting the national highway in Mandalagan, Bacolod City.
Expropriation proceedings were instituted by the government against
private respondent Tan and other property owners before the then Court
of First Instance of Negros Occidental, Branch IV, docketed as Civil
Case No. 12924.
Tan filed a motion dated May 10, 1978 requesting issuance of an order
for the release to him of the expropriation price of P32,480.00.
On May 22, 1978, petitioner PNB (Bacolod Branch) was required by the
trial court to release to Tan the amount of P32,480.00 deposited with it
by the government.
On May 24, 1978, petitioner, through its Assistant Branch Manager Juan
Tagamolila, issued a manager's check for P32,480.00 and delivered the
same to one Sonia Gonzaga without Tan's knowledge, consent or
authority. Sonia Gonzaga deposited it in her account with Far East Bank
and Trust Co. (FEBTC) and later on withdrew the said amount.
Private respondent Tan subsequently demanded payment in the amount
of P32,480.00 from petitioner, but the same was refused on the ground
that petitioner had already paid and delivered the amount to Sonia
Gonzaga on the strength of a Special Power of Attorney (SPA) allegedly
executed in her favor by Tan.
On June 8, 1978, Tan executed an affidavit before petitioner's lawyer,
Alejandro S. Some, stating that:
1) he had never executed any Special Power of Attorney in favor of
Sonia S. Gonzaga;
2) he had never authorized Sonia Gonzaga to receive the sum of
P32,480.00 from petitioner;
3) he signed a motion for the court to issue an Order to release the said
sum of money to him and gave the same to Mr. Nilo Gonzaga (husband
of Sonia) to be filed in court. However, after the Order was subsequently
issued by the court, a certain Engineer Decena of the Highway
Engineer's Office issued the authority to release the funds not to him but
to Mr. Gonzaga.
When he failed to recover the amount from PNB, private respondent
filed a motion with the court to require PNB to pay the same to him.
Petitioner filed an opposition contending that Sonia Gonzaga presented
to it a copy of the May 22, 1978 order and a special power of attorney
by virtue of which petitioner delivered the check to her.
The matter was set for hearing on July 21, 1978 and petitioner was
directed by the court to produce the said special power of attorney
thereat. However, petitioner failed to do so.
The court decided that there was need for the matter to be ventilated in
a separate civil action and thus private respondent filed a complaint with
the Regional Trial Court in Bacolod City (Branch 44) against petitioner
130
and Juan Tagamolila, PNB's Assistant Branch Manager, to recover the
said amount.
In its defense, petitioner contended that private respondent had duly
authorized Sonia Gonzaga to act as his agent.
On September 28, 1979, petitioner filed a third-party complaint against
the spouses Nilo and Sonia Gonzaga praying that they be ordered to
pay private respondent the amount of P32,480.00. However, for failure
of petitioner to have the summons served on the Gonzagas despite
opportunities given to it, the third-party complaint was dismissed.
Tagamolila, in his answer, stated that Sonia Gonzaga presented a
Special Power of Attorney to him but borrowed it later with the promise
to return it, claiming that she needed it to encash the check.
On June 7, 1989, the trial court rendered judgment ordering petitioner
and Tagamolila to pay private respondent jointly and severally the
amount of P32,480.00 with legal interest, damages and attorney's fees.
Both petitioner and Tagamolila appealed the case to the Court of
Appeals.
In a resolution dated April 8, 1991, the appellate court dismissed
Tagamolila's appeal for failure to pay the docket fee within the
reglementary period.
On August 31, 1992, the Court of Appeals affirmed the decision of the
trial court against petitioner, with the modification that the award of
P5,000.00 for exemplary damages and P5,000.00 for attorney's fees by
the trial court was deleted.
Hence, this petition.
Petitioner PNB states that the issue in this case is whether or not the
SPA ever existed. It argues that the existence of the SPA need not be
proved by it under the "best evidence rule" because it already proved
the existence of the SPA from the testimonies of its witnesses and by
the certification issued by the Far East Bank and Trust Company that it
allowed Sonia Gonzaga to encash Tan's check on the basis of the SPA.
We find the petition unmeritorious.
There is no question that no payment had ever been made to private
respondent as the check was never delivered to him. When the court
ordered petitioner to pay private respondent the amount of P32,480.00,
it had the obligation to deliver the same to him. Under Art. 1233 of the
Civil Code, a debt shall not be understood to have been paid unless the
thing or service in which the obligation consists has been completely
delivered or rendered, as the case may be.
The burden of proof of such payment lies with the debtor.3 In the instant
case, neither the SPA nor the check issued by petitioner was ever
presented in court.
The testimonies of petitioner's own witnesses regarding the check were
conflicting. Tagamolila testified that the check was issued to the order of
"Sonia Gonzaga as attorney-in-fact of Loreto Tan,"4 while Elvira Tibon,
assistant cashier of PNB (Bacolod Branch), stated that the check was
issued to the order of "Loreto Tan."5
Furthermore, contrary to petitioner's contention that all that is needed to
be proved is the existence of the SPA, it is also necessary for evidence
to be presented regarding the nature and extent of the alleged powers
and authority granted to Sonia Gonzaga; more specifically, to determine
whether the document indeed authorized her to receive payment
intended for private respondent. However, no such evidence was ever
presented.
Section 2, Rule 130 of the Rules of Court states that:
Sec. 2. Original writing must produced; exceptions. — There can be no
evidence of a writing the contents of which is the subject of inquiry, other
than the original writing itself, except in the following cases:
(a) When the original has been lost, destroyed, or cannot be produced
in court;
(b) When the original is in the possession of the party against whom the
evidence is offered, and the latter fails to produce it after reasonable
notice;
(c) When the original is a record or other document in the custody of a
public officer;
131
(d) When the original has been recorded in an existing record a certified Jurisprudence has set down the requirements for exemplary damages
copy of which is made evidence by law; to be awarded:

(e) When the original consists of numerous accounts or other
documents which cannot be examined in court without great loss of time
and the fact sought to be established from them is only the general result
of the whole.
Section 4, Rule 130 of the Rules of Court allows the presentation of
secondary evidence when the original is lost or destroyed, thus:
1. they may be imposed by way of example in addition to compensatory
damages, and only after the claimant's right to them has been
established;
2. they cannot be recovered as a matter of right, their determination
depending upon the amount of compensatory damages that may be
awarded to the claimant;

Sec. 4. Secondary evidence when original is lost or destroyed. — When
the original writing has been lost or destroyed, or cannot be produced in
court, upon proof of its execution and loss or destruction, or
unavailability, its contents may be proved by a copy, or by a recital of its
contents in some authentic document, or by the recollection of
witnesses.
Considering that the contents of the SPA are also in issue here, the best
evidence rule applies. Hence, only the original document (which has not
been presented at all) is the best evidence of the fact as to whether or
not private respondent indeed authorized Sonia Gonzaga to receive the
check from petitioner. In the absence of such document, petitioner's
arguments regarding due payment must fail.
3. the act must be accompanied by bad faith or done in a wanton,
fraudulent, oppressive or malevolent manner.9
In the case at bench, while there is a clear breach of petitioner's
obligation to pay private respondents, there is no evidence that it acted
in a fraudulent, wanton, reckless or oppressive manner. Furthermore,
there is no award of compensatory damages which is a prerequisite
before exemplary damages may be awarded. Therefore, the award by
the trial court of P5,000.00 as exemplary damages is baseless.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED with
the modification that the award by the Regional Trial Court of P5,000.00
as attorney's fees is REINSTATED.

Regarding the award of attorney's fees, we hold that private respondent SO ORDERED.
Tan is entitled to the same. Art. 2208 of the Civil Code allows attorney's
fees to be awarded if the claimant is compelled to litigate with third
persons or to incur expenses to protect his interest by reason of an
unjustified act or omission of the party from whom it is sought.6

In Rasonable v. NLRC, et al.,7 we held that when a party is forced to

litigate to protect his rights, he is entitled to an award of attorney's fees.

As for the award of exemplary damages, we agree with the appellate

court that the same should be deleted.

Under Art. 2232 of the Civil Code, exemplary damages may be awarded
if a party acted in a wanton, fraudulent, reckless, oppressive, or
malevolent manner. However, they cannot be recovered as a matter of
right; the court has yet to decide whether or not they should be
adjudicated.8

132
 CULABA v CA 427 S 721
CALLEJO, SR., J.:
This is a petition for review under Rule 45 of the Revised Rules of Civil
Procedure of the Decision1 of the Court of Appeals in CA-G.R. CV No.
19836 affirming in toto the Decision2 of the Regional Trial Court of
Makati, Branch 138, in Civil Case No. 1033 for collection of sum of
money, and the Resolution3 denying the motion for reconsideration of
the said decision.
The Undisputed Facts
The spouses Francisco and Demetria Culaba were the owners and
proprietors of the Culaba Store and were engaged in the sale and
distribution of San Miguel Corporation’s (SMC) beer products. SMC sold
beer products on credit to the Culaba spouses in the amount of
P28,650.00, as evidenced by Temporary Credit Invoice No. 42943.4
Thereafter, the Culaba spouses made a partial payment of P3,740.00,
leaving an unpaid balance of P24,910.00. As they failed to pay despite
repeated demands, SMC filed an action for collection of a sum of money
against them before the RTC of Makati, Branch 138.
The defendant-spouses denied any liability, claiming that they had
already paid the plaintiff in full on four separate occasions. To
substantiate this claim, the defendants presented four (4) Temporary
Charge Sales (TCS) Liquidation Receipts, as follows:
April 19, 1983 Receipt No. 27331 for P8,0005
April 22, 1983 Receipt No. 27318 for P9,0006
April 27, 1983 Receipt No. 27339 for P4,5007
April 30, 1983 Receipt No. 27346 for P3,4108
Defendant Francisco Culaba testified that he made the foregoing
payments to an SMC supervisor who came in an SMC van. He was then
showed a list of customers’ accountabilities which included his account.
The defendant, in good faith, then paid to the said supervisor, and he
was, in turn, issued genuine SMC liquidation receipts.
For its part, SMC submitted a publisher’s affidavit9 to prove that the
entire booklet of TCSL Receipts bearing Nos. 27301-27350 were
reported lost by it, and that it caused the publication of the notice of loss
in the July 9, 1983 issue of the Daily Express, as follows:
NOTICE OF LOSS
OUR CUSTOMERS ARE HEREBY INFORMED THAT TEMPORARY
CHARGE SALES LIQUIDATION RECEIPTS WITH SERIAL NOS.
27301-27350 HAVE BEEN LOST.
ANY TRANSACTION, THEREFORE, ENTERED INTO WITH THE USE
OF THE ABOVE RECEIPTS WILL NOT BE HONORED.
SAN MIGUEL CORPORATION
BEER DIVISION
Makati Beer Region10
The Trial Court’s Ruling
After trial on the merits, the trial court rendered judgment in favor of
SMC, and held the Culaba spouses liable on the balance of its
obligation, thus:
Wherefore, judgment is hereby rendered in favor of the plaintiff, as
follows:
1. Ordering defendants to pay the amount of P24,910.00 plus legal
interest of 6% per annum from April 12, 1983 until the whole amount is
fully paid;
2. Ordering defendants to pay 20% of the amount due to plaintiff as and
for attorney’s fees plus costs.
SO ORDERED.11
133
According to the trial court, it was unusual that defendant Francisco
Culaba forgot the name of the collector to whom he made the payments
and that he did not require the said collector to print his name on the
receipts. The court also noted that although they were part of a single
booklet, the TCS Liquidation Receipts submitted by the defendants did
not appear to have been issued in their natural sequence. Furthermore,
they were part of the lost booklet receipts, which the public was duly
warned of through the Notice of Loss the plaintiff caused to be published
in a daily newspaper. This confirmed the plaintiff’s claim that the receipts
presented by the defendants were spurious ones.
The Case on Appeal
On appeal, the appellants interposed the following assignment of errors:
I It was incumbent upon the defendants-appellants to exercise ordinary
THE TRIAL COURT ERRED IN FINDING THAT THE RECEIPTS
PRESENTED BY DEFENDANTS EVIDENCING HIS PAYMENTS TO
PLAINTIFF SAN MIGUEL CORPORATION, ARE SPURIOUS.
II
THE TRIAL COURT ERRED IN CONCLUDING THAT PLAINTIFF-
APPELLEE HAS SUFFICIENTLY PROVED ITS CAUSE OF ACTION
AGAINST THE DEFENDANTS.
III
THE TRIAL COURT ERRED IN ORDERING DEFENDANTS TO PAY
20% OF THE AMOUNT DUE TO PLAINTIFF AS ATTORNEY’S FEES.12
The appellants asserted that while the trial court’s observations were
true, it was the usual business practice in previous transactions between
them and SMC. The SMC previously honored receipts not bearing the
salesman’s name. According to appellant Francisco Culaba, he even
lost some of the receipts, but did not encounter any problems.
According to appellant Francisco, he could not be faulted for paying the
SMC collector who came in a van and was in uniform, and that any
regular customer would, without any apprehension, transact with such
an SMC employee. Furthermore, the respective receipts issued to him
at the time he paid on the four occasions mentioned had not yet then
been declared lost. Thus, the subsequent publication in a daily
newspaper declaring the booklets lost did not affect the validity and
legality of the payments made. Accordingly, by its actuations, the SMC
was estopped from questioning the legality of the payments and had no
cause of action against the appellants.
Anent the issue of attorney’s fees, the order of the trial court for payment
thereof is without basis. According to the appellant, the provision for
attorney’s fees is a contingent fee, already provided for in the SMC’s
contract with the law firm. To further order them to pay 20% of the
amount due as attorney’s fees is double payment, tantamount to undue
enrichment and therefore improper.13
The appellee, for its part, contended that the primary issue in the case
at bar revolved around the basic and fundamental principles of agency.14
prudence and reasonable diligence to verify and identify the extent of
the alleged agent’s authority. It was their burden to establish the true
identity of the assumed agent, and this could not be established by mere
representation, rumor or general reputation. As they utterly failed in this
regard, the appellants must suffer the consequences.
The Court of Appeals affirmed the decision of the trial court, thus:
In the face of the somewhat tenuous evidence presented by the
appellants, we cannot fault the lower court for giving more weight to
appellee’s testimonial and documentary evidence, all of which establish
with some degree of preponderance the existence of the account sued
upon.
ALL CONSIDERED, we cannot find any justification to reject the factual
findings of the lower court to which we must accord respect, for which
reason, the judgment appealed from is hereby AFFIRMED in all
respects.
SO ORDERED.15
Hence, the instant petition.
The petitioners pose the following issues for the Court’s resolution:
134
I. WHETHER OR NOT THE RESPONDENT HAD PROVEN BY
PREPONDERANT EVIDENCE THAT IT HAD PROPERLY AND TIMELY
NOTIFIED PETITIONER OF LOST BOOKLET OF RECEIPTS
II. WHETHER OR NOT RESPONDENT HAD PROVEN BY
PREPONDERANT EVIDENCE THAT PETITIONER WAS REMISS IN
THE PAYMENT OF HIS ACCOUNTS TO ITS AGENT.16
According to the petitioners, receiving receipts from the private
respondent’s agents instead of its salesmen was a usual occurrence, as
they had been operating the store since 1979. Thus, on four occasions
in April 1983, when an agent of the respondent came to the store
wearing an SMC uniform and driving an SMC van, petitioner Francisco
Culaba, without question, paid his accounts. He received the receipts
without fear, as they were similar to what he used to receive before.
Furthermore, the petitioners assert that, common experience will attest
that unless the attention of the customers is called for, they would not
take note of the serial number of the receipts.
The petitioners contend that the private respondent advertised its
warning to the public only after the damage was done, or on July 9,
1993. Its belated notice showed its glaring lack of interest or concern for
its customers’ welfare, and, in sum, its negligence.
Anent the second issue, petitioner Francisco Culaba avers that the
agent to whom the accounts were paid had all the physical and material
attributes or indications of a representative of the private respondent,
leaving no doubt that he was duly authorized by the latter. Petitioner
Francisco Culaba’s testimony that "he does not necessarily check the
contents of the receipts issued to him except for the amount indicated if
[the] same accurately reflects his actual payment" is a common attitude
of customers. He could, thus, not be faulted for paying the private
respondent’s agent on four occasions. Petitioner Francisco Culaba
asserts that he made the payment in good faith, to an agent who issued
SMC receipts which appeared to be genuine. Thus, according to the
petitioners, they had duly paid their obligation in accordance with Articles
1240 and 1242 of the New Civil Code.
The private respondent, for its part, avers that the burden of proving
payment is with the debtor, in consonance with the express provision of
Article 1233 of the New Civil Code. The petitioners miserably failed to
prove the self-serving allegation that they already paid their liability to
the private respondent. Furthermore, under normal circumstances, an
obligor would not just pay a substantial amount to someone whom he
saw for the first time, without even asking for the latter’s name.
The Ruling of the Court
The petition is dismissed.
The petitioners question the findings of the Court of Appeals as to
whether the payment of the petitioners’ obligation to the private
respondent was properly made, thus, extinguishing the same. This is
clearly a factual issue, and beyond the purview of the Court to delve into.
This is in consonance with the well-settled rule that findings of fact of the
trial court, especially when affirmed by the Court of Appeals, are
accorded the highest degree of respect, and generally will not be
disturbed on appeal. Such findings are binding and conclusive on the
Court.17 Furthermore, it is not the Court’s function under Rule 45 of the
Rules of Court, as amended, to review, examine and evaluate or weigh
the probative value of the evidence presented.18
To reiterate, the issue being raised by the petitioners does not involve a
question of law, but a question of fact, not cognizable by this Court in a
petition for review under Rule 45. The jurisdiction of the Court in such a
case is limited to reviewing only errors of law, unless the factual findings
being assailed are not supported by evidence on record or the impugned
judgment is based on a misapprehension of facts.19
A careful study of the records of the case reveal that the appellate court
affirmed the trial court’s factual findings as follows:
First. Receipts Nos. 27331, 27318, 27339 and 27346 were included in
the private respondent’s lost booklet, which loss was duly advertised in
a newspaper of general circulation; thus, the private respondent could
not have officially issued them to the petitioners to cover the alleged
payments on the dates appearing thereon.
Second. There was something amiss in the way the receipts were
issued to the petitioners, as one receipt bearing a higher serial number
was issued ahead of another receipt bearing a lower serial number,
supposedly covering a later payment. The petitioners failed to explain
the apparent mix-up in these receipts, and no attempt was made in this
regard.
135
Third. The fact that the salesman’s name was invariably left blank in the human affairs, would do, or the doing of something, which a prudent and
four receipts and that the petitioners could not even remember the name reasonable man would not do.25 In the case at bar, the most prudent
of the supposed impostor who received the said payments strongly thing the petitioners should have done was to ascertain the identity and
argue against the veracity of the petitioners’ claim. authority of the person who collected their payments. Failing this, the
petitioners cannot claim that they acted in good faith when they made
We find no cogent reason to reverse the said findings. such payments. Their claim therefor is negated by their negligence, and
they are bound by its consequences. Being negligent in this regard, the
The dismissal of the petition is inevitable even upon close perusal of the petitioners cannot seek relief on the basis of a supposed agency.26
merits of the case.
WHEREFORE, the instant petition is hereby DENIED. The assailed
Payment is a mode of extinguishing an obligation.20 Article 1240 of the Decision dated April 16, 1996, and the Resolution dated July 19, 1996
Civil Code provides that payment shall be made to the person in whose of the Court of Appeals are AFFIRMED. Costs against the petitioners.
favor the obligation has been constituted, or his successor-in-interest,
or any person authorized to receive it.21 In this case, the payments were SO ORDERED.
purportedly made to a "supervisor" of the private respondent, who was
clad in an SMC uniform and drove an SMC van. He appeared to be
authorized to accept payments as he showed a list of customers’
accountabilities and even issued SMC liquidation receipts which looked
genuine. Unfortunately for petitioner Francisco Culaba, he did not
ascertain the identity and authority of the said supervisor, nor did he ask
to be shown any identification to prove that the latter was, indeed, an
SMC supervisor. The petitioners relied solely on the man’s
representation that he was collecting payments for SMC. Thus, the
payments the petitioners claimed they made were not the payments that
discharged their obligation to the private respondent.

The basis of agency is representation.22 A person dealing with an agent

is put upon inquiry and must discover upon his peril the authority of the
agent.23 In the instant case, the petitioners’ loss could have been
avoided if they had simply exercised due diligence in ascertaining the
identity of the person to whom they allegedly made the payments. The
fact that they were parting with valuable consideration should have
made them more circumspect in handling their business transactions.
Persons dealing with an assumed agent are bound at their peril to
ascertain not only the fact of agency but also the nature and extent of
authority, and in case either is controverted, the burden of proof is upon
them to establish it.24 The petitioners in this case failed to discharge this
burden, considering that the private respondent vehemently denied that
the payments were accepted by it and were made to its authorized
representative.

Negligence is the omission to do something which a reasonable man,

guided by those considerations which ordinarily regulate the conduct of

136
 ALLIED BANKING v. LIM SIO WAN 549 S 504
VELASCO, JR., J.:
To ingratiate themselves to their valued depositors, some banks at times
bend over backwards that they unwittingly expose themselves to great
risks.
The Case
This Petition for Review on Certiorari under Rule 45 seeks to reverse
the Court of Appeals’ (CA’s) Decision promulgated on March 18, 19981
in CA-G.R. CV No. 46290 entitled Lim Sio Wan v. Allied Banking
Corporation, et al. The CA Decision modified the Decision dated
November 15, 19932 of the Regional Trial Court (RTC), Branch 63 in
Makati City rendered in Civil Case No. 6757.
The Facts
The facts as found by the RTC and affirmed by the CA are as follows:
On November 14, 1983, respondent Lim Sio Wan deposited with
petitioner Allied Banking Corporation (Allied) at its Quintin Paredes
Branch in Manila a money market placement of PhP 1,152,597.35 for a
term of 31 days to mature on December 15, 1983,3 as evidenced by
Provisional Receipt No. 1356 dated November 14, 1983.4
On December 5, 1983, a person claiming to be Lim Sio Wan called up
Cristina So, an officer of Allied, and instructed the latter to pre-terminate
Lim Sio Wan’s money market placement, to issue a manager’s check
representing the proceeds of the placement, and to give the check to
one Deborah Dee Santos who would pick up the check.5 Lim Sio Wan
described the appearance of Santos so that So could easily identify her.6
Later, Santos arrived at the bank and signed the application form for a
manager’s check to be issued.7 The bank issued Manager’s Check No.
035669 for PhP 1,158,648.49, representing the proceeds of Lim Sio
Wan’s money market placement in the name of Lim Sio Wan, as payee.8
The check was cross-checked "For Payee’s Account Only" and given to
Santos.9
Thereafter, the manager’s check was deposited in the account of
Filipinas Cement Corporation (FCC) at respondent Metropolitan Bank
and Trust Co. (Metrobank),10 with the forged signature of Lim Sio Wan
as indorser.11
Earlier, on September 21, 1983, FCC had deposited a money market
placement for PhP 2 million with respondent Producers Bank. Santos
was the money market trader assigned to handle FCC’s account.12 Such
deposit is evidenced by Official Receipt No. 31756813 and a Letter dated
September 21, 1983 of Santos addressed to Angie Lazo of FCC,
acknowledging receipt of the placement.14 The placement matured on
October 25, 1983 and was rolled-over until December 5, 1983 as
evidenced by a Letter dated October 25, 1983.15 When the placement
matured, FCC demanded the payment of the proceeds of the
placement.16 On December 5, 1983, the same date that So received the
phone call instructing her to pre-terminate Lim Sio Wan’s placement, the
manager’s check in the name of Lim Sio Wan was deposited in the
account of FCC, purportedly representing the proceeds of FCC’s money
market placement with Producers Bank.17 In other words, the Allied
check was deposited with Metrobank in the account of FCC as
Producers Bank’s payment of its obligation to FCC.
To clear the check and in compliance with the requirements of the
Philippine Clearing House Corporation (PCHC) Rules and Regulations,
Metrobank stamped a guaranty on the check, which reads: "All prior
endorsements and/or lack of endorsement guaranteed."18
The check was sent to Allied through the PCHC. Upon the presentment
of the check, Allied funded the check even without checking the
authenticity of Lim Sio Wan’s purported indorsement. Thus, the amount
on the face of the check was credited to the account of FCC.19
On December 9, 1983, Lim Sio Wan deposited with Allied a second
money market placement to mature on January 9, 1984.20
On December 14, 1983, upon the maturity date of the first money market
placement, Lim Sio Wan went to Allied to withdraw it.21 She was then
informed that the placement had been pre-terminated upon her
instructions. She denied giving any instructions and receiving the
proceeds thereof. She desisted from further complaints when she was
assured by the bank’s manager that her money would be recovered.22
When Lim Sio Wan’s second placement matured on January 9, 1984,
So called Lim Sio Wan to ask for the latter’s instructions on the second
placement. Lim Sio Wan instructed So to roll-over the placement for
137
another 30 days.23On January 24, 1984, Lim Sio Wan, realizing that the
promise that her money would be recovered would not materialize, sent
a demand letter to Allied asking for the payment of the first placement.24
Allied refused to pay Lim Sio Wan, claiming that the latter had authorized
the pre-termination of the placement and its subsequent release to
Santos.25
Consequently, Lim Sio Wan filed with the RTC a Complaint dated
February 13, 198426 docketed as Civil Case No. 6757 against Allied to
recover the proceeds of her first money market placement. Sometime in
February 1984, she withdrew her second placement from Allied.
Allied filed a third party complaint27 against Metrobank and Santos. In
turn, Metrobank filed a fourth party complaint28 against FCC. FCC for its
part filed a fifth party complaint29 against Producers Bank. Summonses
were duly served upon all the parties except for Santos, who was no
longer connected with Producers Bank.30
On May 15, 1984, or more than six (6) months after funding the check,
Allied informed Metrobank that the signature on the check was forged.31
Thus, Metrobank withheld the amount represented by the check from
FCC. Later on, Metrobank agreed to release the amount to FCC after
the latter executed an Undertaking, promising to indemnify Metrobank
in case it was made to reimburse the amount.32
Lim Sio Wan thereafter filed an amended complaint to include
Metrobank as a party-defendant, along with Allied.33The RTC admitted
the amended complaint despite the opposition of Metrobank.34
Consequently, Allied’s third party complaint against Metrobank was
converted into a cross-claim and the latter’s fourth party complaint
against FCC was converted into a third party complaint.35
After trial, the RTC issued its Decision, holding as follows:
WHEREFORE, judgment is hereby rendered as follows:
1. Ordering defendant Allied Banking Corporation to pay plaintiff the
amount of P1,158,648.49 plus 12% interest per annum from March 16,
1984 until fully paid;
2. Ordering defendant Allied Bank to pay plaintiff the amount of
P100,000.00 by way of moral damages;
3. Ordering defendant Allied Bank to pay plaintiff the amount of
P173,792.20 by way of attorney’s fees; and,
4. Ordering defendant Allied Bank to pay the costs of suit.
Defendant Allied Bank’s cross-claim against defendant Metrobank is
DISMISSED.
Likewise defendant Metrobank’s third-party complaint as against
Filipinas Cement Corporation is DISMISSED.
Filipinas Cement Corporation’s fourth-party complaint against
Producer’s Bank is also DISMISSED.
SO ORDERED.36
The Decision of the Court of Appeals
Allied appealed to the CA, which in turn issued the assailed Decision on
March 18, 1998, modifying the RTC Decision, as follows:
WHEREFORE, premises considered, the decision appealed from is
MODIFIED. Judgment is rendered ordering and sentencing defendant-
appellant Allied Banking Corporation to pay sixty (60%) percent and
defendant-appellee Metropolitan Bank and Trust Company forty (40%)
of the amount of P1,158,648.49 plus 12% interest per annum from
March 16, 1984 until fully paid. The moral damages, attorney’s fees and
costs of suit adjudged shall likewise be paid by defendant-appellant
Allied Banking Corporation and defendant-appellee Metropolitan Bank
and Trust Company in the same proportion of 60-40. Except as thus
modified, the decision appealed from is AFFIRMED.
SO ORDERED.37
Hence, Allied filed the instant petition.
The Issues
Allied raises the following issues for our consideration:
The Honorable Court of Appeals erred in holding that Lim Sio Wan did
not authorize [Allied] to pre-terminate the initial placement and to deliver
the check to Deborah Santos.
138
The Honorable Court of Appeals erred in absolving Producers Bank of
any liability for the reimbursement of amount adjudged demandable.
The Honorable Court of Appeals erred in holding [Allied] liable to the
extent of 60% of amount adjudged demandable in clear disregard to the
ultimate liability of Metrobank as guarantor of all endorsement on the
check, it being the collecting bank.38
The petition is partly meritorious.
A Question of Fact
Allied questions the finding of both the trial and appellate courts that
Allied was not authorized to release the proceeds of Lim Sio Wan’s
money market placement to Santos. Allied clearly raises a question of
fact. When the CA affirms the findings of fact of the RTC, the factual
findings of both courts are binding on this Court.39
We also agree with the CA when it said that it could not disturb the trial
court’s findings on the credibility of witness So inasmuch as it was the
trial court that heard the witness and had the opportunity to observe
closely her deportment and manner of testifying. Unless the trial court
had plainly overlooked facts of substance or value, which, if considered,
might affect the result of the case,40 we find it best to defer to the trial
court on matters pertaining to credibility of witnesses.
Additionally, this Court has held that the matter of negligence is also a
factual question.41 Thus, the finding of the RTC, affirmed by the CA, that
the respective parties were negligent in the exercise of their obligations
is also conclusive upon this Court.
The Liability of the Parties
As to the liability of the parties, we find that Allied is liable to Lim Sio
Wan. Fundamental and familiar is the doctrine that the relationship
between a bank and a client is one of debtor-creditor.
Articles 1953 and 1980 of the Civil Code provide:
Art. 1953. A person who receives a loan of money or any other fungible
thing acquires the ownership thereof, and is bound to pay to the creditor
an equal amount of the same kind and quality.
Art. 1980. Fixed, savings, and current deposits of money in banks and
similar institutions shall be governed by the provisions concerning
simple loan.
Thus, we have ruled in a line of cases that a bank deposit is in the nature
of a simple loan or mutuum.42 More succinctly, in Citibank, N.A.
(Formerly First National City Bank) v. Sabeniano, this Court ruled that a
money market placement is a simple loan or mutuum.43 Further, we
defined a money market in Cebu International Finance Corporation v.
Court of Appeals, as follows:
[A] money market is a market dealing in standardized short-term credit
instruments (involving large amounts) where lenders and borrowers do
not deal directly with each other but through a middle man or dealer in
open market. In a money market transaction, the investor is a lender
who loans his money to a borrower through a middleman or dealer.
In the case at bar, the money market transaction between the petitioner
and the private respondent is in the nature of a loan.44
Lim Sio Wan, as creditor of the bank for her money market placement,
is entitled to payment upon her request, or upon maturity of the
placement, or until the bank is released from its obligation as debtor.
Until any such event, the obligation of Allied to Lim Sio Wan remains
unextinguished.
Art. 1231 of the Civil Code enumerates the instances when obligations
are considered extinguished, thus:
Art. 1231. Obligations are 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;
(6) By novation.
139
Other causes of extinguishment of obligations, such as annulment,
rescission, fulfillment of a resolutory condition, and prescription, are
governed elsewhere in this Code. (Emphasis supplied.)
From the factual findings of the trial and appellate courts that Lim Sio
Wan did not authorize the release of her money market placement to
Santos and the bank had been negligent in so doing, there is no
question that the obligation of Allied to pay Lim Sio Wan had not been
extinguished. Art. 1240 of the Code states that "payment shall be made
to the person in whose favor the obligation has been constituted, or his
successor in interest, or any person authorized to receive it." As
commented by Arturo Tolentino:
Payment made by the debtor to a wrong party does not extinguish the
obligation as to the creditor, if there is no fault or negligence which can
be imputed to the latter. Even when the debtor acted in utmost good faith
and by mistake as to the person of his creditor, or through error induced
by the fraud of a third person, the payment to one who is not in fact his
creditor, or authorized to receive such payment, is void, except as
provided in Article 1241. Such payment does not prejudice the creditor,
and accrual of interest is not suspended by it.45 (Emphasis supplied.)
Since there was no effective payment of Lim Sio Wan’s money market
placement, the bank still has an obligation to pay her at six percent (6%)
interest from March 16, 1984 until the payment thereof.
We cannot, however, say outright that Allied is solely liable to Lim Sio
Wan.
Allied claims that Metrobank is the proximate cause of the loss of Lim
Sio Wan’s money. It points out that Metrobank guaranteed all prior
indorsements inscribed on the manager’s check, and without
Metrobank’s guarantee, the present controversy would never have
occurred. According to Allied:
Failure on the part of the collecting bank to ensure that the proceeds of
the check is paid to the proper party is, aside from being an efficient
intervening cause, also the last negligent act, x x x contributory to the
injury caused in the present case, which thereby leads to the conclusion
that it is the collecting bank, Metrobank that is the proximate cause of
the alleged loss of the plaintiff in the instant case.46
We are not persuaded.
Proximate cause is "that cause, which, in natural and continuous
sequence, unbroken by any efficient intervening cause, produces the
injury and without which the result would not have occurred."47 Thus,
there is an efficient supervening event if the event breaks the sequence
leading from the cause to the ultimate result. To determine the proximate
cause of a controversy, the question that needs to be asked is: If the
event did not happen, would the injury have resulted? If the answer is
NO, then the event is the proximate cause.
In the instant case, Allied avers that even if it had not issued the check
payment, the money represented by the check would still be lost
because of Metrobank’s negligence in indorsing the check without
verifying the genuineness of the indorsement thereon.
Section 66 in relation to Sec. 65 of the Negotiable Instruments Law
provides:
Section 66. Liability of general indorser.—Every indorser who indorses
without qualification, warrants to all subsequent holders in due course;
a) The matters and things mentioned in subdivisions (a), (b) and (c) of
the next preceding section; and
b) That the instrument is at the time of his indorsement valid and
subsisting;
And in addition, he engages that on due presentment, it shall be
accepted or paid, or both, as the case may be according to its tenor, and
that if it be dishonored, and the necessary proceedings on dishonor be
duly taken, he will pay the amount thereof to the holder, or to any
subsequent indorser who may be compelled to pay it.
Section 65. Warranty where negotiation by delivery, so forth.—Every
person negotiating an instrument by delivery or by a qualified
indorsement, warrants:
a) That the instrument is genuine and in all respects what it purports to
be;
b) That he has a good title of it;
c) That all prior parties had capacity to contract;
140
d) That he has no knowledge of any fact which would impair the validity
of the instrument or render it valueless.
But when the negotiation is by delivery only, the warranty extends in
favor of no holder other than the immediate transferee.
The provisions of subdivision (c) of this section do not apply to persons
negotiating public or corporation securities, other than bills and notes.
(Emphasis supplied.)
The warranty "that the instrument is genuine and in all respects what it
purports to be" covers all the defects in the instrument affecting the
validity thereof, including a forged indorsement. Thus, the last indorser
will be liable for the amount indicated in the negotiable instrument even
if a previous indorsement was forged. We held in a line of cases that "a
collecting bank which indorses a check bearing a forged indorsement
and presents it to the drawee bank guarantees all prior indorsements,
including the forged indorsement itself, and ultimately should be held
liable therefor."48
However, this general rule is subject to exceptions. One such exception
is when the issuance of the check itself was attended with negligence.
Thus, in the cases cited above where the collecting bank is generally
held liable, in two of the cases where the checks were negligently
issued, this Court held the institution issuing the check just as liable as
or more liable than the collecting bank.
In isolated cases where the checks were deposited in an account other
than that of the payees on the strength of forged indorsements, we held
the collecting bank solely liable for the whole amount of the checks
involved for having indorsed the same. In Republic Bank v. Ebrada,49
the check was properly issued by the Bureau of Treasury. While in
Banco de Oro Savings and Mortgage Bank (Banco de Oro) v. Equitable
Banking Corporation,50 Banco de Oro admittedly issued the checks in
the name of the correct payees. And in Traders Royal Bank v. Radio
Philippines Network, Inc.,51 the checks were issued at the request of
Radio Philippines Network, Inc. from Traders Royal Bank.1avvphi1
However, in Bank of the Philippine Islands v. Court of Appeals, we said
that the drawee bank is liable for 60% of the amount on the face of the
negotiable instrument and the collecting bank is liable for 40%. We also
noted the relative negligence exhibited by two banks, to wit:
Both banks were negligent in the selection and supervision of their
employees resulting in the encashment of the forged checks by an
impostor. Both banks were not able to overcome the presumption of
negligence in the selection and supervision of their employees. It was
the gross negligence of the employees of both banks which resulted in
the fraud and the subsequent loss. While it is true that petitioner BPI’s
negligence may have been the proximate cause of the loss, respondent
CBC’s negligence contributed equally to the success of the impostor in
encashing the proceeds of the forged checks. Under these
circumstances, we apply Article 2179 of the Civil Code to the effect that
while respondent CBC may recover its losses, such losses are subject
to mitigation by the courts. (See Phoenix Construction Inc. v.
Intermediate Appellate Courts, 148 SCRA 353 [1987]).
Considering the comparative negligence of the two (2) banks, we rule
that the demands of substantial justice are satisfied by allocating the
loss of P2,413,215.16 and the costs of the arbitration proceeding in the
amount of P7,250.00 and the cost of litigation on a 60-40 ratio.52
Similarly, we ruled in Associated Bank v. Court of Appeals that the
issuing institution and the collecting bank should equally share the
liability for the loss of amount represented by the checks concerned due
to the negligence of both parties:
The Court finds as reasonable, the proportionate sharing of fifty percent-
fifty percent (50%-50%). Due to the negligence of the Province of Tarlac
in releasing the checks to an unauthorized person (Fausto Pangilinan),
in allowing the retired hospital cashier to receive the checks for the
payee hospital for a period close to three years and in not properly
ascertaining why the retired hospital cashier was collecting checks for
the payee hospital in addition to the hospital’s real cashier, respondent
Province contributed to the loss amounting to P203,300.00 and shall be
liable to the PNB for fifty (50%) percent thereof. In effect, the Province
of Tarlac can only recover fifty percent (50%) of P203,300.00 from PNB.
The collecting bank, Associated Bank, shall be liable to PNB for fifty
(50%) percent of P203,300.00. It is liable on its warranties as indorser
of the checks which were deposited by Fausto Pangilinan, having
guaranteed the genuineness of all prior indorsements, including that of
the chief of the payee hospital, Dr. Adena Canlas. Associated Bank was
also remiss in its duty to ascertain the genuineness of the payee’s
indorsement.53
141
A reading of the facts of the two immediately preceding cases would
reveal that the reason why the bank or institution which issued the check
was held partially liable for the amount of the check was because of the
negligence of these parties which resulted in the issuance of the checks.
In the instant case, the trial court correctly found Allied negligent in
issuing the manager’s check and in transmitting it to Santos without
even a written authorization.54 In fact, Allied did not even ask for the
certificate evidencing the money market placement or call up Lim Sio
Wan at her residence or office to confirm her instructions. Both actions
could have prevented the whole fraudulent transaction from unfolding.
Allied’s negligence must be considered as the proximate cause of the
resulting loss.
To reiterate, had Allied exercised the diligence due from a financial
institution, the check would not have been issued and no loss of funds
would have resulted. In fact, there would have been no issuance of
indorsement had there been no check in the first place.
The liability of Allied, however, is concurrent with that of Metrobank as
the last indorser of the check. When Metrobank indorsed the check in
compliance with the PCHC Rules and Regulations55 without verifying
the authenticity of Lim Sio Wan’s indorsement and when it accepted the
check despite the fact that it was cross-checked payable to payee’s
account only,56 its negligent and cavalier indorsement contributed to the
easier release of Lim Sio Wan’s money and perpetuation of the fraud.
Given the relative participation of Allied and Metrobank to the instant
case, both banks cannot be adjudged as equally liable. Hence, the 60:40
ratio of the liabilities of Allied and Metrobank, as ruled by the CA, must
be upheld.
FCC, having no participation in the negotiation of the check and in the
forgery of Lim Sio Wan’s indorsement, can raise the real defense of
forgery as against both banks.57
As to Producers Bank, Allied Bank’s argument that Producers Bank
must be held liable as employer of Santos under Art. 2180 of the Civil
Code is erroneous. Art. 2180 pertains to the vicarious liability of an
employer for quasi-delicts that an employee has committed. Such
provision of law does not apply to civil liability arising from delict.
One also cannot apply the principle of subsidiary liability in Art. 103 of
the Revised Penal Code in the instant case. Such liability on the part of
the employer for the civil aspect of the criminal act of the employee is
based on the conviction of the employee for a crime. Here, there has
been no conviction for any crime.
As to the claim that there was unjust enrichment on the part of Producers
Bank, the same is correct. Allied correctly claims in its petition that
Producers Bank should reimburse Allied for whatever judgment that may
be rendered against it pursuant to Art. 22 of the Civil Code, which
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 cause or legal ground, shall return
the same to him."1avvphi1
The above provision of law was clarified in Reyes v. Lim, where we ruled
that "[t]here is unjust enrichment when a person unjustly retains a benefit
to the loss of another, or when a person retains money or property of
another against the fundamental principles of justice, equity and good
conscience."58
In Tamio v. Ticson, we further clarified the principle of unjust enrichment,
thus: "Under Article 22 of the Civil Code, there is unjust enrichment when
(1) a person is unjustly benefited, and (2) such benefit is derived at the
expense of or with damages to another."59
In the instant case, Lim Sio Wan’s money market placement in Allied
Bank was pre-terminated and withdrawn without her consent. Moreover,
the proceeds of the placement were deposited in Producers Bank’s
account in Metrobank without any justification. In other words, there is
no reason that the proceeds of Lim Sio Wans’ placement should be
deposited in FCC’s account purportedly as payment for FCC’s money
market placement and interest in Producers Bank.lavvphil With such
payment, Producers Bank’s indebtedness to FCC was extinguished,
thereby benefitting the former. Clearly, Producers Bank was unjustly
enriched at the expense of Lim Sio Wan. Based on the facts and
circumstances of the case, Producers Bank should reimburse Allied and
Metrobank for the amounts the two latter banks are ordered to pay Lim
Sio Wan.
It cannot be validly claimed that FCC, and not Producers Bank, should
be considered as having been unjustly enriched. It must be remembered
that FCC’s money market placement with Producers Bank was already
due and demandable; thus, Producers Bank’s payment thereof was
justified. FCC was entitled to such payment. As earlier stated, the fact
142
that the endorsement on the check was forged cannot be raised against
FCC which was not a part in any stage of the negotiation of the check.
FCC was not unjustly enriched.

From the facts of the instant case, we see that Santos could be the
architect of the entire controversy. Unfortunately, since summons had
not been served on Santos, the courts have not acquired jurisdiction
over her.60 We, therefore, cannot ascribe to her liability in the instant
case.

Clearly, Producers Bank must be held liable to Allied and Metrobank for
the amount of the check plus 12% interest per annum, moral damages,
attorney’s fees, and costs of suit which Allied and Metrobank are
adjudged to pay Lim Sio Wan based on a proportion of 60:40.

WHEREFORE, the petition is PARTLY GRANTED. The March 18, 1998

CA Decision in CA-G.R. CV No. 46290 and the November 15, 1993 RTC
Decision in Civil Case No. 6757 are AFFIRMED with MODIFICATION.

Thus, the CA Decision is AFFIRMED, the fallo of which is reproduced,

as follows:

WHEREFORE, premises considered, the decision appealed from is

MODIFIED. Judgment is rendered ordering and sentencing defendant-
appellant Allied Banking Corporation to pay sixty (60%) percent and
defendant-appellee Metropolitan Bank and Trust Company forty (40%)
of the amount of P1,158,648.49 plus 12% interest per annum from
March 16, 1984 until fully paid. The moral damages, attorney’s fees and
costs of suit adjudged shall likewise be paid by defendant-appellant
Allied Banking Corporation and defendant-appellee Metropolitan Bank
and Trust Company in the same proportion of 60-40. Except as thus
modified, the decision appealed from is AFFIRMED.

SO ORDERED.

Additionally and by way of MODIFICATION, Producers Bank is hereby

ordered to pay Allied and Metrobank the aforementioned amounts. The
liabilities of the parties are concurrent and independent of each other.

SO ORDERED.

143
 DELA CRUZ v. CONCEPCION 684 S 74
PERALTA, J.:
Assailed in this petition for review on certiorari under Rule 45 of the
Rules of Court filed by petitioners spouses Miniano B. Dela Cruz and
Leta L. Dela Cruz against respondent Ana Marie Concepcion are the
Court of Appeals (CA) Decision1 dated March 31, 2005 and Resolution2
dated May 24, 2006 in CA-G.R. CV No. 83030.
The facts of the case are as follows:
On March 25, 1996, petitioners (as vendors) entered into a Contract to
Sell3 with respondent (as vendee) involving a house and lot in Cypress
St., Phase I, Town and Country Executive Village, Antipolo City for a
consideration of P2,000,000.00 subject to the following terms and
conditions:
a) That an earnest money of P100,000.00 shall be paid immediately;
b) That a full down payment of Four Hundred Thousand Pesos
(P400,000.00) shall be paid on February 29, 1996;
c) That Five Hundred Thousand Pesos (P500,000.00) shall be paid on
or before May 5, 1996; and
d) That the balance of One Million Pesos (P1,000,000.00) shall be paid
on installment with interest of Eighteen Percent (18%) per annum or One
and a half percent (1-1/2 %) interest per month, based on the
diminishing balance, compounded monthly, effective May 6, 1996. The
interest shall continue to run until the whole obligation shall have been
fully paid. The whole One Million Pesos shall be paid within three years
from May 6, 1996;
e) That the agreed monthly amortization of Fifty Thousand Pesos
(P50,000.00), principal and interest included, must be paid to the
Vendors, without need of prior demand, on or before May 6, 1996, and
every month thereafter. Failure to pay the monthly amortization on time,
a penalty equal to Five Percent (5%) of the amount due shall be
imposed, until the account is updated. In addition, a penalty of One
Hundred Pesos per day shall be imposed until the account is updated;
f) That after receipt of the full payment, the Vendors shall execute the
necessary Absolute Deed of Sale covering the house and lot mentioned
above x x x4
Respondent made the following payments, to wit: (1) P500,000.00 by
way of downpayment; (2) P500,000.00 on May 30, 1996; (3)
P500,000.00 paid on January 22, 1997; and (4) P500,000.00 bounced
check dated June 30, 1997 which was subsequently replaced by
another check of the same amount, dated July 7, 1997. Respondent
was, therefore, able to pay a total of P2,000,000.00.5
Before respondent issued the P500,000.00 replacement check, she told
petitioners that based on the computation of her accountant as of July
6, 1997, her unpaid obligation which includes interests and penalties
was only P200,000.00.6 Petitioners agreed with respondent and said "if
P200,000.00 is the correct balance, it is okay with us."7
Meanwhile, the title to the property was transferred to respondent.
Petitioners later reminded respondent to pay P209,000.00 within three
months.8 They claimed that the said amount remained unpaid, despite
the transfer of the title to the property to respondent. Several months
later, petitioners made further demands stating the supposed correct
computation of respondent’s liabilities.9 Despite repeated demands,
petitioners failed to collect the amounts they claimed from respondent.
Hence, the Complaint for Sum of Money With Damages10 filed with the
Regional Trial Court (RTC)11 of Antipolo, Rizal. The case was docketed
as Civil Case No. 98-4716.
In her Answer with Compulsory Counterclaim,12 respondent claimed that
her unpaid obligation to petitioners is only P200,000.00 as earlier
confirmed by petitioners and not P487,384.15 as later alleged in the
complaint. Respondent thus prayed for the dismissal of the complaint.
By way of counterclaim, respondent prayed for the payment of moral
damages and attorney’s fees. During the presentation of the parties’
evidence, in addition to documents showing the statement of her paid
obligations, respondent presented a receipt purportedly indicating
payment of the remaining balance of P200,000.00 to Adoracion Losloso
(Losloso) who allegedly received the same on behalf of petitioners.13
On March 8, 2004, the RTC rendered a Decision14 in favor of
respondent, the dispositive portion of which reads:
144
WHEREFORE, premises considered, this case is hereby DISMISSED.
The plaintiff is hereby ordered to pay the defendant’s counterclaim,
amounting to wit:
a) P300,000 as moral damages; and
b) P100,000 plus P2,000 per court appearance as attorney’s fees.
SO ORDERED.15
The RTC noted that the evidence formally offered by petitioners have
not actually been marked as none of the markings were recorded. Thus,
it found no basis to grant their claims, especially since the amount
claimed in the complaint is different from that testified to. The court, on
the other hand, granted respondent’s counterclaim.16
On appeal, the CA affirmed the decision with modification by deleting
the award of moral damages and attorney’s fees in favor of
respondent.17 It agreed with the RTC that the evidence presented by
petitioners cannot be given credence in determining the correct liability
of respondent.18 Considering that the purchase price had been fully paid
by respondent ahead of the scheduled date agreed upon by the parties,
petitioners were not awarded the excessive penalties and interests.19
The CA thus maintained that respondent’s liability is limited to
P200,000.00 as claimed by respondent and originally admitted by
petitioners.20 This amount, however, had already been paid by
respondent and received by petitioners’ representative.21 Finally, the CA
pointed out that the RTC did not explain in its decision why moral
damages and attorney’s fees were awarded. Considering also that bad
faith cannot be attributed to petitioners when they instituted the
collection suit, the CA deleted the grant of their counterclaims.22
Aggrieved, petitioners come before the Court in this petition for review
on certiorari under Rule 45 of the Rules of Court raising the following
errors:
I.
"THE TRIAL COURT ERRED IN DISMISSING THE COMPLAINT ON
THE GROUND THAT PLAINTIFF FAILED TO FORMALLY OFFER
THEIR EVIDENCE AS DEFENDANT JUDICIALLY ADMITTED IN HER
ANSWER WITH COMPULS[O]RY COUNTERCLAIM HER
OUTSTANDING OBLIGATION STILL DUE TO PLAINTIFFS AND NEED
NO PROOF.
II.
THE TRIAL COURT ERRED IN DISMISSING THE COMPLAINT FOR
ALLEGED FAILURE OF PLAINTIFFS TO PRESENT COMPUTATION
OF THE AMOUNT BEING CLAIMED AS DEFENDANT JUDICIALLY
ADMITTED HAVING RECEIVED THE DEMAND LETTER DATED
OCTOBER 22, 1997 WITH COMPUTATION OF THE BALANCE DUE.
III.
THE TRIAL COURT ERRED IN DISMISSING THE COMPLAINT ON
THE GROUND THAT THE DEFENDANT FULLY PAID THE CLAIMS OF
PLAINTIFFS BASED ON THE ALLEGED RECEIPT OF PAYMENT BY
ADORACION LOSLOSO FROM ANA MARIE CONCEPCION
MAGLASANG WHICH HAS NOTHING TO DO WITH THE JUDICIALLY
ADMITTED OBLIGATION OF APPELLEE."23
Invoking the rule on judicial admission, petitioners insist that respondent
admitted in her Answer with Compulsory Counterclaim that she had paid
only a total amount of P2 million and that her unpaid obligation amounts
to P200,000.00.24 They thus maintain that the RTC and the CA erred in
concluding that said amount had already been paid by respondent.
Petitioners add that respondent’s total liability as shown in the latter’s
statement of account was erroneously computed for failure to compound
the monthly interest agreed upon.25 Petitioners also claim that the RTC
and the CA erred in giving credence to the receipt presented by
respondent to show that her unpaid obligation had already been paid
having been allegedly given to a person who was not armed with
authority to receive payment.26
The petition is without merit.
It is undisputed that the parties entered into a contract to sell a house
and lot for a total consideration of P2 million. Considering that the
property was payable in installment, they likewise agreed on the
payment of interest as well as penalty in case of default. It is likewise
settled that respondent was able to pay the total purchase price of P2
million ahead of the agreed term. Afterwhich, they agreed on the
remaining balance by way of interest and penalties which is
P200,000.00. Considering that the term of payment was not strictly
145
followed and the purchase price had already been fully paid by
respondent, the latter presented to petitioners her computation of her
liabilities for interests and penalties which was agreed to by petitioners.
Petitioners also manifested their conformity to the statement of account
prepared by respondent.
In paragraph (9) of petitioners’ Complaint, they stated that:
9) That the Plaintiffs answered the Defendant as follows: "if P200,000 is
the correct balance, it is okay with us." x x x.27
But in paragraph (17) thereof, petitioners claimed that defendant’s
outstanding liability as of November 6, 1997 was P487,384.15.28
Different amounts, however, were claimed in their demand letter and in
their testimony in court.
With the foregoing factual antecedents, petitioners cannot be permitted
to assert a different computation of the correct amount of respondent’s
liability.
It is noteworthy that in answer to petitioners’ claim of her purported
unpaid obligation, respondent admitted in her Answer with Compulsory
Counterclaim that she paid a total amount of P2 million representing the
purchase price of the subject house and lot. She then manifested to
petitioners and conformed to by respondent that her only balance was
P200,000.00. Nowhere in her Answer did she allege the defense of
payment. However, during the presentation of her evidence, respondent
submitted a receipt to prove that she had already paid the remaining
balance. Both the RTC and the CA concluded that respondent had
already paid the remaining balance of P200,000.00. Petitioners now
assail this, insisting that the court should have maintained the judicial
admissions of respondent in her Answer with Compulsory Counterclaim,
especially as to their agreed stipulations on interests and penalties as
well as the existence of outstanding obligations.
It is, thus, necessary to discuss the effect of failure of respondent to
plead payment of its obligations.
Section 1, Rule 9 of the Rules of Court states that "defenses and
objections not pleaded either in a motion to dismiss or in the answer are
deemed waived." Hence, respondent should have been barred from
raising the defense of payment of the unpaid P200,000.00. However,
Section 5, Rule 10 of the Rules of Court allows the amendment to
conform to or authorize presentation of evidence, to wit:
Section 5. Amendment to conform to or authorize presentation of
evidence. – When issues not raised by the pleadings are tried with the
express or implied consent of the parties, they shall be treated in all
respects as if they had been raised in the pleadings. Such amendment
of the pleadings as may be necessary to cause them to conform to the
evidence and to raise these issues may be made upon motion of any
party at any time, even after judgment; but failure to amend does not
affect the result of the trial of these issues. If evidence is objected to at
the trial on the ground that it is not within the issues made by the
pleadings, the court may allow the pleadings to be amended and shall
do so with liberality if the presentation of the merits of the action and the
ends of substantial justice will be subserved thereby. The court may
grant a continuance to enable the amendment to be made.
The foregoing provision envisions two scenarios, namely, when
evidence is introduced in an issue not alleged in the pleadings and no
objection was interjected; and when evidence is offered on an issue not
alleged in the pleadings but this time an objection was raised.29 When
the issue is tried without the objection of the parties, it should be treated
in all respects as if it had been raised in the pleadings.30 On the other
hand, when there is an objection, the evidence may be admitted where
its admission will not prejudice him.31
Thus, while respondent judicially admitted in her Answer that she only
paid P2 million and that she still owed petitioners P200,000.00,
respondent claimed later and, in fact, submitted an evidence to show
that she already paid the whole amount of her unpaid obligation. It is
noteworthy that when respondent presented the evidence of payment,
petitioners did not object thereto. When the receipt was formally offered
as evidence, petitioners did not manifest their objection to the
admissibility of said document on the ground that payment was not an
issue. Apparently, petitioners only denied receipt of said payment and
assailed the authority of Losloso to receive payment. Since there was
an implied consent on the part of petitioners to try the issue of payment,
even if no motion was filed and no amendment of the pleading has been
ordered,32 the RTC cannot be faulted for admitting respondent’s
testimonial and documentary evidence to prove payment.33
As stressed by the Court in Royal Cargo Corporation v. DFS Sports
Unlimited, Inc.,34
146
The failure of a party to amend a pleading to conform to the evidence
adduced during trial does not preclude adjudication by the court on the
basis of such evidence which may embody new issues not raised in the
pleadings. x x x Although, the pleading may not have been amended to
conform to the evidence submitted during trial, judgment may
nonetheless be rendered, not simply on the basis of the issues alleged
but also on the issues discussed and the assertions of fact proved in the
course of the trial. The court may treat the pleading as if it had been
amended to conform to the evidence, although it had not been actually
amended. x x x Clearly, a court may rule and render judgment on the
basis of the evidence before it even though the relevant pleading had
not been previously amended, so long as no surprise or prejudice is
thereby caused to the adverse party. Put a little differently, so long as
the basic requirements of fair play had been met, as where the litigants
were given full opportunity to support their respective contentions and
to object to or refute each other's evidence, the court may validly treat
the pleadings as if they had been amended to conform to the evidence
and proceed to adjudicate on the basis of all the evidence before it.
(Emphasis supplied)35
To be sure, petitioners were given ample opportunity to refute the fact of
and present evidence to prove payment.
With the evidence presented by the contending parties, the more
important question to resolve is whether or not respondent’s obligation
had already been extinguished by payment.
We rule in the affirmative as aptly held by the RTC and the CA.
Respondent’s obligation consists of payment of a sum of money. In order
to extinguish said obligation, payment should be made to the proper
person as set forth in Article 1240 of the Civil Code, to wit:
Article 1240. Payment shall be made to the person in whose favor the
obligation has been constituted, or his successor in interest, or any
person authorized to receive it. (Emphasis supplied)
The Court explained in Cambroon v. City of Butuan,36 cited in Republic
v. De Guzman,37 to whom payment should be made in order to
extinguish an obligation:
Payment made by the debtor to the person of the creditor or to one
authorized by him or by the law to receive it extinguishes the obligation.
When payment is made to the wrong party, however, the obligation is
not extinguished as to the creditor who is without fault or negligence
even if the debtor acted in utmost good faith and by mistake as to the
person of the creditor or through error induced by fraud of a third person.
In general, a payment in order to be effective to discharge an obligation,
must be made to the proper person. Thus, payment must be made to
the obligee himself or to an agent having authority, express or implied,
to receive the particular payment. Payment made to one having
apparent authority to receive the money will, as a rule, be treated as
though actual authority had been given for its receipt. Likewise, if
payment is made to one who by law is authorized to act for the creditor,
it will work a discharge. The receipt of money due on a judgment by an
officer authorized by law to accept it will, therefore, satisfy the debt.38
Admittedly, payment of the remaining balance of P200,000.00 was not
made to the creditors themselves. Rather, it was allegedly made to a
certain Losloso. Respondent claims that Losloso was the authorized
agent of petitioners, but the latter dispute it.
Losloso’s authority to receive payment was embodied in petitioners’
Letter39 addressed to respondent, dated August 7, 1997, where they
informed respondent of the amounts they advanced for the payment of
the 1997 real estate taxes. In said letter, petitioners reminded
respondent of her remaining balance, together with the amount of taxes
paid. Taking into consideration the busy schedule of respondent,
petitioners advised the latter to leave the payment to a certain "Dori"
who admittedly is Losloso, or to her trusted helper. This is an express
authority given to Losloso to receive payment.
Moreover, as correctly held by the CA:
Furthermore, that Adoracion Losloso was indeed an agent of the
appellant spouses is borne out by the following admissions of plaintiff-
appellant Atty. Miniano dela Cruz, to wit:
Q: You would agree with me that you have authorized this Doiry Losloso
to receive payment of whatever balance is due you coming from Ana
Marie Concepcion, that is correct?
A: In one or two times but not total authority, sir.
Q: Yes, but you have authorized her to receive payment?
147
A: One or two times, yes x x x. (TSN, June 28, 1999, pp. 16-17)40

Thus, as shown in the receipt signed by petitioners’ agent and pursuant

to the authority granted by petitioners to Losloso, payment made to the
latter is deemed payment to petitioners. We find no reason to depart
from the RTC and the CA conclusion that payment had already been
made and that it extinguished respondent's obligations.

WHEREFORE, premises considered, the petition is DENIED for lack of

merit. The Court of Appeals Decision dated March 31, 2005 and
Resolution dated May 24, 2006 in CA-G.R. CV No. 83030, are
AFFIRMED.

SO ORDERED.

148
 1242 -PAYMENT MADE IN GOOD FAITH
NATIONAL POWER CORP. v. IBRAHIM 750 S 711
PEREZ, J.:
At bench is a petition for review on certiorari1 assailing the Decision2
dated 24 June 2005 and Resolution3 dated 5 December 2006 of the
Court of Appeals in CA-G.R. CV No. 68061. The facts:
The Subject Land
In 1978, petitioner took possession of a 21,995 square meter parcel of
land in Marawi City (subject land) for the purpose of building thereon a
hydroelectric power plant pursuant to its Agus 1 project. The subject
land, while in truth a portion of a private estate registered under Transfer
Certificate of Title (TCT) No. 378-A4 in the name of herein respondent
Macapanton K. Mangondato (Mangondato),5 was occupied by
petitioner under the mistaken belief that such land is part of the vast tract
of public land reserved for its use by the government under Proclamation
No. 1354, s. 1974.6
Mangondato first discovered petitioner’s occupation of the subject land
in 1979—the year that petitioner started its construction of the Agus
1plant. Shortly after such discovery, Mangondato began demanding
compensation for the subject land from petitioner.
In support of his demand for compensation, Mangondato sent to
petitioner a letter7 dated 28 September 1981 wherein the former
detailed the origins of his ownership over the lands covered by TCT No.
378-A, including the subject land. The relevant portions of the letter
read:
Now let me trace the basis of the title to the land adverted to for
particularity. The land titled in my name was originally consisting of
seven (7) hectares. This piece of land was particularly set aside by the
Patriarch Maruhom, a fact recognized by all royal datus of Guimba, to
belong to his eldest son, Datu Magayo-ong Maruhom. This is the very
foundation of the right and ownership over the land in question which
was titled in my name because as the son-in-law of Hadji Ali Maruhom
the eldest son of, and only lawyer among the descendants of Datu
Magayo-ong Maruhom, the authority and right to apply for the title to the
land was given to me by said heirs after mutual agreement among
themselves besides the fact that I have already bought a substantial
portion of the original seven (7) hectares.
The original title of this seven (7) hectares has been subdivided into
several TCTs for the other children of Datu Magayo-ong Maruhom with
whom I have executed a quit claim. Presently, only three (3) hectares is
left to me out of the original seven (7) hectares representing those
portion [sic] belonging to my wife and those I have bought previously
from other heirs. This is now the subject of this case.8
Petitioner, at first, rejected Mangondato’s claim of ownership over the
subject land; the former then adamant in its belief that the said land is
public land covered by Proclamation No. 1354, s. 1974. But, after more
than a decade, petitioner finally acquiesced to the fact that the subject
land is private land covered by TCT No. 378-A and consequently
acknowledged Mangondato’s right, as registered owner, to receive
compensation therefor.
Thus, during the early 1990s, petitioner and Mangondato partook in a
series of communications aimed at settling the amount of compensation
that the former ought to pay the latter in exchange for the subject land.
Ultimately, however, the communications failed to yield a genuine
consensus between petitioner and Mangondato as to the fair market
value of the subject land. Civil Case No. 605-92 and Civil Case No. 610-
92
With an agreement basically out of reach, Mangondato filed a complaint
for reconveyance against petitioner before the Regional Trial Court
(RTC) of Marawi City in July 1992. In his complaint, Mangondato asked
for, among others, the recovery of the subject land and the payment by
petitioner of a monthly rental from 1978 until the return of such land.
Mangondato’s complaint was docketed as Civil Case No. 605-92.
For its part, petitioner filed an expropriation complaint9 before the RTC
on 27 July 1992. Petitioner’s complaint was docketed as Civil Case No.
610-92.
Later, Civil Case No. 605-92 and Civil Case No. 610-92 were
consolidated before Branch 8 of the Marawi City RTC.
On 21 August 1992, Branch 8 of the Marawi City RTC rendered a
Decision10 in Civil Case No. 605-92 and Civil Case No. 610-92. The
decision upheld petitioner’s right to expropriate the subject land: it
149
denied Mangondato’s claim for reconveyance and decreed the subject
land condemned in favor of the petitioner, effective July of 1992, subject
to payment by the latter of just compensation in the amount of
₱21,995,000.00. Anent petitioner’s occupation of the subject land from
1978to July of 1992, on the other hand, the decision required the former
to pay rentals therefor at the rate of ₱15,000.00 per month with12%
interest per annum. The decision’s fallo reads:
WHEREFORE, the prayer in the recovery case for [petitioner’s]
surrender of the property is denied but[petitioner] is ordered to pay
monthly rentals in the amount of ₱15,000.00 from 1978 up to July 1992
with 12% interest per annum xxx and the property is condemned in favor
of [petitioner] effective July 1992 upon payment of the fair market value
of the property at One Thousand (₱1,000.00) Pesos per square meter
or a total of Twenty-One Million Nine Hundred Ninety-Five Thousand
(₱21,995,000.00) [P]esos.11
Disagreeing with the amount of just compensation that it was adjudged
to pay under the said decision, petitioner filed an appeal with the Court
of Appeals. This appeal was docketed in the Court of Appeals as CA-
G.R. CV No. 39353.
Respondents Ibrahims and Maruhoms and Civil Case No. 967-93
During the pendency of CA-G.R. CV No. 39353, or on 29 March 1993,
herein respondents the Ibrahims and Maruhoms12 filed before the RTC
of Marawi City a complaint13 against Mangondato and petitioner. This
complaint was docketed as Civil Case No. 967-93and was raffled to
Branch 10of the Marawi City RTC.
In their complaint, the Ibrahims and Maruhoms disputed Mangondato’s
ownership of the lands covered by TCT No. 378-A, including the subject
land. The Ibrahims and Maruhoms asseverate that they are the real
owners of the lands covered by TCT No. 378-A; they being the lawful
heirs of the late Datu Magayo-ong Maruhom, who was the original
proprietor of the said lands.14 They also claimed that Mangondato
actually holds no claim or right over the lands covered by TCT No. 378-
A except that of a trustee who merely holds the said lands in trust for
them.15 The Ibrahims and Maruhoms submit that since they are the real
owners of the lands covered by TCT No. 378-A, they should be the ones
entitled to any rental fees or expropriation indemnity that may be found
due for the subject land.
Hence, the Ibrahims and Maruhoms prayed for the following reliefs in
their complaint:16
1. That Mangondato be ordered to execute a Deed of Conveyance
transferring to them the ownership of the lands covered by TCT No. 378-
A;
2. That petitioner be ordered to pay to them whatever indemnity for the
subject land it is later on adjudged to pay in Civil Case No. 605-92 and
Civil Case No. 610-92;
3. That Mangondato be ordered to pay to them any amount that the
former may have received from the petitioner by way of indemnity for
the subject land;
4. That petitioner and Mangondatobe ordered jointly and severally liable
to pay attorney’s fees in the sum of ₱200,000.00.
In the same complaint, the Ibrahims and Maruhoms also prayed for the
issuance of a temporary restraining order (TRO) and a writ of preliminary
injunction to enjoin petitioner, during the pendency of the suit, from
making any payments to Mangondato concerning expropriation
indemnity for the subject land.17
On 30 March 1993, Branch 10 of the Marawi City RTC granted the
prayer of the Ibrahims and Maruhoms for the issuance of a TRO.18 On
29 May 1993, after conducting an appropriate hearing for the purpose,
the same court likewise granted the prayer for the issuance of a writ of
preliminary injunction.19
In due course, trial then ensued in Civil Case No. 967-93.
The Decision of the Court of Appeals in CA-G.R. CV No. 39353 and the
Decision of this Court in G.R. No. 113194
On 21 December 1993, the Court of Appeals rendered a Decision in CA-
G.R. CV No. 39353 denying the appeal of petitioner and affirming in toto
the 21 August 1992 Decision in Civil Case No. 605-92 and Civil Case
No. 610-92. Undeterred, petitioner next filed a petition for review on
certiorari with this Court that was docketed herein as G.R. No.
113194.20
150
On 11 March 1996, we rendered our Decision in G.R. No. 113194
wherein we upheld the Court of Appeals’ denial of petitioner’s appeal.21
In the same decision, we likewise sustained the appellate court’s
affirmance of the decision in Civil Case No. 605-92 and Civil Case No.
610-92 subject only to a reduction of the rate of interest on the monthly
rental fees from 12% to 6% per annum.22
Our decision in G.R. No. 113194 eventually became final and executory
on 13 May 1996.23
Execution of the 21 August 1992 Decision in Civil Case No. 605-92 and
Civil Case No. 610-92, as Modified
In view of the finality of this Court’s decision in G.R. No. 113194,
Mangondato filed a motion for execution of the decision in Civil Case
No. 605-92 and Civil Case No. 610-92.24 Against this motion, however,
petitioner filed an opposition.25
In its opposition, petitioner adverted to the existence of the writ of
preliminary injunction earlier issued in Civil Case No. 967-93 that enjoins
it from making any payment of expropriation indemnity over the subject
land in favor of Mangondato.26 Petitioner, in sum, posits that such writ
of preliminary injunction constitutes a legal impediment that effectively
bars any meaningful execution of the decision in Civil Case No. 605-92
and Civil Case No. 610-92.
Finding no merit in petitioner’s opposition, however, Branch 8 of the
Marawi City RTC rendered a Resolution27 dated 4 June 1996 ordering
the issuance of a writ of execution in favor of Mangondato in Civil Case
No. 605-92 and Civil Case No. 610-92. Likewise, in the same resolution,
the trial court ordered the issuance of a notice of garnishment against
several of petitioner’s bank accounts28 for the amount of
₱21,801,951.00—the figure representing the total amount of judgment
debt due from petitioner in Civil Case No. 605-92 and Civil Case No.
610-92 less the amount then already settled by the latter. The dispositive
portion of the resolution reads:
WHEREFORE, let a Writ of Execution and the corresponding order or
notice of garnishment be immediately issued against [petitioner] and in
favor of [Mangondato] for the amount of Twenty One Million Eight
Hundred One Thousand and Nine Hundred Fifty One (₱21,801,951.00)
Pesos.
x x x.29
Pursuant to the above resolution, a notice of garnishment30 dated 5
June 1996 for the amount of ₱21,801,951.00 was promptly served upon
the Philippine National Bank (PNB)—the authorized depositary of
petitioner. Consequently, the amount thereby garnished was paid to
Mangondato in full satisfaction of petitioner’s judgment debt in Civil
Case No. 605-92 and Civil Case No. 610-92.
Decision in Civil Case No. 967-93
Upon the other hand, on 16 April 1998, Branch 10 of the Marawi City
RTC decided Civil Case No. 967-93.31 In its decision, Branch 10 of the
Marawi City RTC made the following relevant findings:32
1. The Ibrahims and Maruhoms—not Mangondato—are the true owners
of the lands covered by TCT No. 378-A, which includes the subject land.
2. The subject land, however, could no longer be reconveyed to the
Ibrahims and Maruhoms since the same was already expropriated and
paid for by the petitioner under Civil Case No. 605-92 and Civil Case
No. 610-92.
3. Be that as it may, the Ibrahims and Maruhoms, as true owners of the
subject land, are the rightful recipients of whatever rental fees and
indemnity that may be due for the subject land as a result of its
expropriation.
Consistent with the foregoing findings, Branch 10 of the Marawi City
RTC thus required payment of all the rental fees and expropriation
indemnity due for the subject land, as previously adjudged in Civil Case
No. 605-92 and Civil Case No. 610-92, to the Ibrahims and Maruhoms.
Notable in the trial court’s decision, however, was that it held both
Mangondato and the petitioner solidarily liable to the Ibrahims and
Maruhoms for the rental fees and expropriation indemnity adjudged in
Civil Case No. 605-92 and Civil Case No. 610-92.33
In addition, Mangondato and petitioner were also decreed solidarily
liable to the Ibrahims and Maruhoms for attorney’s fees in the amount of
₱200,000.00.34
The pertinent dispositions in the decision read:
151
WHEREFORE, premises considered, judgment is hereby rendered in
favor of [the Ibrahims and Maruhoms] and against [Mangondato and
petitioner] as follows:
1. x x x
2. Ordering [Mangondato and petitioner] to pay jointly and severally [the
Ibrahims and Maruhoms] all forms of expropriation indemnity as
adjudged for [the subject land] consisting of 21,995 square meters in the
amount of ₱21,801,051.00 plus other forms of indemnity such as rentals
and interests;
3. Ordering [Mangondato and petitioner] to pay [the Ibrahims and
Maruhoms] jointly and severally the sum of ₱200,000.00 as attorney’s
fees; SO ORDERED.35
Petitioner’s Appeal to the Court of Appeals and the Execution
Pending Appeal of the Decision in Civil Case No. 967-93
Petitioner appealed the decision in Civil Case No. 967-93 with the Court
of Appeals: contesting mainly the holding in the said decision that it
ought to be solidarily liable with Mangondato to pay to the Ibrahims and
Maruhoms the rental fees and expropriation indemnity adjudged due for
the subject land. This appeal was docketed as CA-G.R. CV No. 68061.
While the foregoing appeal was still pending decision by the Court of
Appeals, however, the Ibrahims and Maruhoms were able to secure with
the court a quo a writ of execution pending appeal36 of the decision in
Civil Case No. 967-93. The enforcement of such writ led to the
garnishment of Mangondato’s moneys in the possession of the Social
Security System (SSS) in the amount of ₱2,700,000.00 on 18
September 1998.37 Eventually, the amount thereby garnished was paid
to the Ibrahims and Mangondato in partial satisfaction of the decision in
Civil Case No. 967-93.
On 24 June 2005, the Court of Appeals rendered its Decision38 in CA-
G.R. CV No. 68061 denying petitioner’s appeal. The appellate court
denied petitioner’s appeal and affirmed the decision in Civil Case No.
967-93, subject to the right of petitioner to deduct the amount of
₱2,700,000.00 from its liability as a consequence of the partial execution
of the decision in Civil Case No. 967-93.39
Hence, the present appeal by petitioner.
The Present Appeal
The present appeal poses the question of whether it is correct, in view
of the facts and circumstances in this case, to hold petitioner liable in
favor of the Ibrahims and Maruhoms for the rental fees and expropriation
indemnity adjudged due for the subject land.
In their respective decisions, both Branch 10 of the Marawi City RTC
and the Court of Appeals had answered the foregoing question in the
affirmative. The two tribunals postulated that, notwithstanding
petitioner’s previous payment to Mangondato of the rental fees and
expropriation indemnity as a consequence of the execution of the
decision in Civil Case No. 605-92 and 610-92, petitioner may still be held
liable to the Ibrahims and Maruhoms for such fees and indemnity
because its previous payment to Mangondato was tainted with "bad
faith."40 As proof of such bad faith, both courts cite the following
considerations:41
1. Petitioner "allowed" payment to Mangondato despite its prior
knowledge, which dates back as early as 28 September 1981, by virtue
of Mangondato’s letter of even date, that the subject land was owned by
a certain Datu Magayo-ong Maruhom and not by Mangondato; and
2. Petitioner "allowed" such payment despite the issuance of a TRO and
a writ of preliminary injunction in Civil Case No. 967-93 that precisely
enjoins it from doing so.
For the two tribunals, the bad faith on the part of petitioner rendered its
previous payment to Mangondato invalid insofar as the Ibrahims and
Maruhoms are concerned. Hence, both courts concluded that petitioner
may still be held liable to the Ibrahims and Maruhoms for the rental fees
and expropriation indemnity previously paid to Mangondato.42
Petitioner, however, argues otherwise. It submits that a finding of bad
faith against it would have no basis in fact and law, given that it merely
complied with the final and executory decision in Civil Case No. 605-92
and Civil Case No. 610-92 when it paid the rental fees and expropriation
indemnity due the subject to Mangondato.43 Petitioner thus insists that
it should be absolved from any liability to pay the rental fees and
expropriation indemnity to the Ibrahims and Maruhoms and prays for the
dismissal of Civil Case No. 967-93 against it.
152
OUR RULING
We grant the appeal.
No Bad Faith On The Part of Petitioner
Petitioner is correct. No "bad faith" may be taken against it in paying
Mangondato the rental fees and expropriation indemnity due the subject
land.
Our case law is not new to the concept of bad faith. Decisions of this
Court, both old and new, had been teeming with various
pronouncements that illuminate the concept amidst differing legal
contexts. In any attempt to understand the basics of bad faith, it is
mandatory to take a look at some of these pronouncements:
In Lopez, et al. v. Pan American World Airways,44 a 1966 landmark tort
case, we defined the concept of bad faith as:
"…a breach of a known duty through some motive of interest or ill will."45
Just months after the promulgation of Lopez, however, came the case
of Air France v. Carrascoso, et al.,46 In Air France, we expounded on
Lopez’s definition by describing bad faith as:
"xxx a state of mind affirmatively operating with furtive design or with
some motive of self-interest or will or for ulterior purpose."47
Air France’s articulation of the meaning of bad faith was, in turn, echoed
in a number subsequent cases,48 one of which, is the 2009 case of
Balbuena, et al. v. Sabay, et al.49
In the 1967 case of Board of Liquidators v. Heirs of M. Kalaw,50 on the
other hand, we enunciated one of the more oft-repeated formulations of
bad faith in our case law:
"xxx bad faith does not simply connote bad judgment or negligence; it
imports a dishonest purpose or some moral obliquity and conscious
doing of wrong. It means breach of a known duty thru some motive or
interest of ill will; it partakes of the nature of fraud."51
As a testament to its enduring quality, the foregoing pronouncement in
Board of Liquidators had been reiterated in a slew of later cases,52 more
recently, in the 2009 case of Nazareno, et al. v. City of Dumaguete53
and the 2012 case of Aliling v. Feliciano.54
Still, in 1995, the case of Far East Bank and Trust Company v. Court of
Appeals55 contributed the following description of bad faith in our
jurisprudence:
"Malice or bad faith implies a conscious and intentional design to do a
wrongful act for a dishonest purpose or moral obliquity;xxx."56
The description of bad faith in Far East Bank and Trust Companythen
went on to be repeated in subsequent cases such as 1995’s Ortega v.
Court of Appeals,57 1997’s Laureano Investment and Development
Corporation v. Court of Appeals,58 2010’s Lambert Pawnbrokers v.
Binamira59 and 2013’s California Clothing, Inc., v. Quiñones,60 to name
a few.
Verily, the clear denominator in all of the foregoing judicial
pronouncements is that the essence of bad faith consists in the
deliberate commission of a wrong. Indeed, the concept has often been
equated with malicious or fraudulent motives, yet distinguished from the
mere unintentional wrongs resulting from mere simple negligence or
oversight.61
A finding of bad faith, thus, usually assumes the presence of two (2)
elements: first, that the actor knew or should have known that a
particular course of action is wrong or illegal, and second, that despite
such actual or imputable knowledge, the actor, voluntarily, consciously
and out of his own free will, proceeds with such course of action. Only
with the concurrence of these two elements can we begin to consider
that the wrong committed had been done deliberately and, thus, in bad
faith.
In this case, both Branch 10 of the Marawi City RTC and the Court of
Appeals held that petitioner was in bad faith when it paid to Mangondato
the rental fees and expropriation indemnity due the subject land. The
two tribunals, in substance, fault petitioner when it "allowed" such
payment to take place despite the latter’s alleged knowledge of the
existing claim of the Ibrahims and Maruhoms upon the subject land and
the issuance ofa TRO in Civil Case No. 967-93. Hence, the two tribunals
claim that petitioner’s payment to Mangondato is ineffective as to the
Ibrahims and Maruhoms, whom they found to be the real owners of the
subject land.
153
We do not agree.
Branch 10 of the Marawi City RTC and the Court of Appeals erred in
their finding of bad faith because they have overlooked the utter
significance of one important fact: that petitioner’s payment to
Mangondato of the rental fees and expropriation indemnity adjudged
due for the subject land in Civil Case No. 605-92 and Civil Case No.
610-92, was required by the final and executory decision in the said two
cases and was compelled thru a writ of garnishment issued by the court
that rendered such decision. In other words, the payment to
Mangondato was not a product of a deliberate choice on the part of the
petitioner but was made only in compliance to the lawful orders of a court
with jurisdiction.
Contrary then to the view of Branch 10 of the Marawi City RTC and of
the Court of Appeals, it was not the petitioner that "allowed" the payment
of the rental fees and expropriation indemnity to Mangondato. Indeed,
given the circumstances, the more accurate rumination would be that it
was the trial court in Civil Case No. 605-92 and Civil Case No. 610-92
that ordered or allowed the payment to Mangondato and that petitioner
merely complied with the order or allowance by the trial court. Since
petitioner was only acting under the lawful orders of a court in paying
Mangondato, we find that no bad faith can be taken against it, even
assuming that petitioner may have had prior knowledge about the claims
of the Ibrahims and Maruhoms upon the subject land and the TRO
issued in Civil Case No. 967-93.
Sans Bad Faith, Petitioner
Cannot Be Held Liable to the
Ibrahims and Maruhoms
Without the existence of bad faith, the ruling of the RTC and of the Court
of Appeals apropos petitioner’s remaining liability to the Ibrahims and
Maruhoms becomes devoid of legal basis. In fact, petitioner’s previous
payment to Mangondato of the rental fees and expropriation indemnity
due the subject land pursuant to the final judgment in Civil Case No.
605-92 and Civil Case No. 610-92 may be considered to have
extinguished the former’s obligation regardless of who between
Mangondato, on one hand, and the Ibrahims and Maruhoms, on the
other, turns out to be the real owner of the subject land.62 Either way,
petitioner cannot be made liable to the Ibrahims and Maruhoms:
First. If Mangondato is the real owner of the subject land, then the
obligation by petitioner to pay for the rental fees and expropriation
indemnity due the subject land is already deemed extinguished by the
latter’s previous payment under the final judgment in Civil Case No. 605-
92 and Civil Case No. 610-92. This would be a simple case of an
obligation being extinguished through payment by the debtor to its
creditor.63 Under this scenario, the Ibrahims and Maruhoms would not
even be entitled to receive anything from anyone for the subject land.
Hence, petitioner cannot be held liable to the Ibrahims and Maruhoms.
Second. We, however, can reach the same conclusion even if the
Ibrahims and Maruhoms turn out to be the real owners of the subject
land.
Should the Ibrahims and Maruhoms turn out to be the real owners of the
subject land, petitioner’s previous payment to Mangondato pursuant to
Civil Case No. 605-92 and Civil Case No. 610-92—given the absence
of bad faith on petitioner’s part as previously discussed—may
nonetheless be considered as akin to a payment made in "good faith "to
a person in "possession of credit" per Article 1242 of the Civil Code that,
just the same, extinguishes its obligation to pay for the rental fees and
expropriation indemnity due for the subject land. Article 1242 of the Civil
Code reads:
"Payment made in good faith to any person in possession of the credit
shall release the debtor." Article 1242 of the Civil Code is an exception
to the rule that a valid payment of an obligation can only be made to the
person to whom such obligation is rightfully owed.64 It contemplates a
situation where a debtor pays a "possessor of credit" i.e., someone who
is not the real creditor but appears, under the circumstances, to be the
real creditor.65 In such scenario, the law considers the payment to the
"possessor of credit" as valid even as against the real creditor taking into
account the good faith of the debtor.
Borrowing the principles behind Article 1242 of the Civil Code, we find
that Mangondato—being the judgment creditor in Civil Case No. 605-92
and Civil Case No. 610-92 as well as the registered owner of the subject
land at the time66 —may be considered as a "possessor of credit" with
respect to the rental fees and expropriation indemnity adjudged due for
the subject land in the two cases, if the Ibrahims and Maruhoms turn out
to be the real owners of the subject land. Hence, petitioner’s payment to
Mangondato of the fees and indemnity due for the subject land as a
consequence of the execution of Civil Case No. 605-92 and Civil Case
154
No. 610-92 could still validly extinguish its obligation to pay for the same
even as against the Ibrahims and Maruhoms.
Effect of Extinguishment of
Petitioner’s Obligation
The extinguishment of petitioner’s obligation to pay for the rental fees
and expropriation indemnity due the subject land carries with it certain
legal effects:
First. If Mangondato turns out to be the real owner of the subject land,
the Ibrahims and Maruhoms would not be entitled to recover anything
from anyone for the subject land.1âwphi1 Consequently, the partial
execution of the decision in Civil Case No. 967-93 that had led to the
garnishment of Mangondato’s moneys in the possession of the Social
Security System (SSS) in the amount of ₱2,700,000.00 in favor of the
Ibrahims and Maruhoms, becomes improper and unjustified. In this
event, therefore, the Ibrahims and Maruhoms may be ordered to return
the amount so garnished to Mangondato.
WHEREFORE, premises considered, the instant petition is GRANTED.
The Decision dated 24 June2005 and Resolution dated 5 December
2006 of the Court of Appeals in CA-G.R. CV No. 68061 is hereby SET
ASIDE. The Decision dated 16 April 1998 of the Regional Trial Court in
Civil Case No. 967-93 is MODIFIED in that petitioner is absolved from
any liability in that case in favor of the respondents Lucman M. Ibrahim,
Atty. Omar G. Maruhom, Elias G. Maruhom, Bucay G. Maruhom,
Mamod G. Maruhom, Farouk G. Maruhom, Hidjara G. Maruhom,
Rocania G. Maruhom, Potrisam G. Maruhom, Lumba G. Maruhom,
Sinab G. Maruhom, Acmad G. Maruhom, Solayman G. Maruhom,
Mohamad M. Ibrahim and Caironesa M. Ibrahim. Civil Case No. 967-93
is DISMISSED as against petitioner.
No costs.
SO ORDERED.

Otherwise, i.e. if the Ibrahims and Maruhoms really are the true owners
of the subject land, they may only recover the rental fees and
expropriation indemnity due the subject land against Mangondato but
only up to whatever payments the latter had previously received from
petitioner pursuant to Civil Case No. 605-92 and Civil Case No. 610-92.

Second. At any rate, the extinguishment of petitioner’s obligation to pay

for the rental fees and expropriation indemnity due the subject land
negates whatever cause of action the Ibrahims and Maruhoms might
have had against the former in Civil Case No. 967-93. Hence, regardless
of who between Mangondato, on one hand, and the Ibrahims and
Maruhoms, on the other, turns out to be the real owner of the subject
land, the dismissal of Civil Case No. 967-93 insofar as petitioner
isconcerned is called for.

Re: Attorney’s Fees

The dismissal of Civil Case No. 967-93 as against petitioner necessarily

absolves the latter from paying attorney’s fees to the Ibrahims and
Maruhoms arising from that case.

155
 TAN SHUY v. MAULAWIN
SERENO, J.:
Before the Court is a Petition for Review on Certiorari filed under Rule
45 of the Rules of Court, assailing the 31 July 2009 Decision and 13
November 2009 Resolution of the Court of Appeals (CA).1
Facts
Petitioner Tan Shuy is engaged in the business of buying copra and corn
in the Fourth District of Quezon Province. According to Vicente Tan
(Vicente), son of petitioner, whenever they would buy copra or corn from
crop sellers, they would prepare and issue a pesada in their favor. A
pesada is a document containing details of the transaction, including the
date of sale, the weight of the crop delivered, the trucking cost, and the
net price of the crop. He then explained that when a pesada contained
the annotation "pd" on the total amount of the purchase price, it meant
that the crop delivered had already been paid for by petitioner.2
Guillermo Maulawin (Guillermo), respondent in this case, is a farmer-
businessman engaged in the buying and selling of copra and corn. On
10 July 1997, Tan Shuy extended a loan to Guillermo in the amount of
₱ 420,000. In consideration thereof, Guillermo obligated himself to pay
the loan and to sell lucad or copra to petitioner. Below is a reproduction
of the contract:3
No2567 Lopez, Quezon July 10, 1997
Tinanggap ko kay G. TAN SHUY ang halagang ………………………
(P420,000.00) salaping Filipino. Inaako ko na isusulit sa kanya ang
aking LUCAD at babayaran ko ang nasabing halaga. Kung hindi ako
makasulit ng LUCAD o makabayad bago sumapit ang ……., 19 ……
maaari niya akong ibigay sa may kapangyarihan. Kung ang
pagsisingilan ay makakarating sa Juzgado ay sinasagutan ko ang lahat
ng kaniyang gugol.
P………………………................ [Sgd. by respondent]
…………………………………….
Lagda
Most of the transactions involving Tan Shuy and Guillermo were coursed
through Elena Tan, daughter of petitioner. She served as cashier in the
business of Tan Shuy, who primarily prepared and issued the pesada.
In case of her absence, Vicente would issue the pesada. He also helped
his father in buying copra and granting loans to customers (copra
sellers). According to Vicente, part of their agreement with Guillermo
was that they would put the annotation "sulong" on the pesada when
partial payment for the loan was made.
Petitioner alleged that despite repeated demands, Guillermo remitted
only ₱ 23,000 in August 1998 and ₱ 5,500 in October 1998, or a total of
₱ 28,500.4 He claimed that respondent had an outstanding balance of ₱
391,500. Thus, convinced that Guillermo no longer had the intention to
pay the loan, petitioner brought the controversy to the Lupon
Tagapamayapa. When no settlement was reached, petitioner filed a
Complaint before the Regional Trial Court (RTC).
Respondent Guillermo countered that he had already paid the subject
loan in full. According to him, he continuously delivered and sold copra
to petitioner from April 1998 to April 1999. Respondent said they had an
oral arrangement that the net proceeds thereof shall be applied as
installment payments for the loan. He alleged that his deliveries
amounted to ₱ 420,537.68 worth of copra. To bolster his claim, he
presented copies of pesadas issued by Elena and Vicente. He pointed
out that the pesadas did not contain the notation "pd," which meant that
actual payment of the net proceeds from copra deliveries was not given
to him, but was instead applied as loan payment. He averred that Tan
Shuy filed a case against him, because petitioner got mad at him for
selling copra to other copra buyers.
On 27 July 2007, the trial court issued a Decision, ruling that the net
proceeds from Guillermo’s copra deliveries – represented in the
pesadas, which did not bear the notation "pd" – should be applied as
installment payments for the loan. It gave weight and credence to the
156
pesadas, as their due execution and authenticity was established by
Elena and Vicente, children of petitioner.5 However, the court did not
credit the net proceeds from 12 pesadas, as they were deliveries for
corn and not copra. According to the RTC, Guillermo himself testified
that it was the net proceeds from the copra deliveries that were to be
applied as installment payments for the loan. Thus, it ruled that the total
amount of ₱ 41,585.25, which corresponded to the net proceeds from
corn deliveries, should be deducted from the amount of ₱ 420,537.68
claimed by Guillermo to be the total value of his copra deliveries.
Accordingly, the trial court found that respondent had not made a full
payment for the loan, as the total creditable copra deliveries merely
amounted to ₱ 378,952.43, leaving a balance of ₱ 41,047.57 in his
loan.6
On 31 July 2009, the CA issued its assailed Decision, which affirmed the
finding of the trial court. According to the appellate court, petitioner could
have easily belied the existence of the pesadas and the purpose for
which they were offered in evidence by presenting his daughter Elena
as witness; however, he failed to do so. Thus, it gave credence to the
testimony of respondent Guillermo in that the net proceeds from the
copra deliveries were applied as installment payments for the loan.7 On
13 November 2009, the CA issued its assailed Resolution, which denied
the Motion for Reconsideration of petitioner.
Petitioner now assails before this Court the aforementioned Decision
and Resolution of the CA and presents the following issues:
Issues
1. Whether the pesadas require authentication before they can be
admitted in evidence, and
2. Whether the delivery of copra amounted to installment payments for
the loan obtained by respondents from petitioner.
Discussion
As regards the first issue, petitioner asserts that the pesadas should not
have been admitted in evidence, since they were private documents that
were not duly authenticated.8 He further contends that the pesadas were
fabricated in order to show that the goods delivered were copra and not
corn. Finally, he argues that five of the pesadas mentioned in the Formal
Offer of Evidence of respondent were not actually offered.9
With regard to the second issue, petitioner argues that respondent
undertook two separate obligations – (1) to pay for the loan in cash and
(2) to sell the latter’s lucad or copra. Since their written agreement did
not specifically provide for the application of the net proceeds from the
deliveries of copra for the loan, petitioner contends that he cannot be
compelled to accept copra as payment for the loan. He emphasizes that
the pesadas did not specifically indicate that the net proceeds from the
copra deliveries were to be used as installment payments for the loan.
He also claims that respondent’s copra deliveries were duly paid for in
cash, and that the pesadas were in fact documentary receipts for those
payments.
We reiterate our ruling in a line of cases that the jurisdiction of this Court,
in cases brought before it from the CA, is limited to reviewing or revising
errors of law.10 Factual findings of courts, when adopted and confirmed
by the CA, are final and conclusive on this Court except if unsupported
by the evidence on record.11 There is a question of fact when doubt
arises as to the truth or falsehood of facts; or when there is a need to
calibrate the whole evidence, considering mainly the credibility of the
witnesses and the probative weight thereof, the existence and relevancy
of specific surrounding circumstances, as well as their relation to one
another and to the whole, and the probability of the situation.12
Here, a finding of fact is required in the ascertainment of the due
execution and authenticity of the pesadas, as well as the determination
of the true intention behind the parties’ oral agreement on the application
of the net proceeds from the copra deliveries as installment payments
for the loan.13 This function was already exercised by the trial court and
affirmed by the CA. Below is a reproduction of the relevant portion of the
trial court’s Decision:
x x x The defendant further averred that if in the receipts or "pesadas"
issued by the plaintiff to those who delivered copras to them there is a
notation "pd" on the total amount of purchase price of the copras, it
means that said amount was actually paid or given by the plaintiff or his
daughter Elena Tan Shuy to the seller of the copras. To prove his
averments the defendant presented as evidence two (2) receipts or
pesadas issued by the plaintiff to a certain "Cariño" (Exhibits "1" and "2"
– defendant) showing the notation "pd" on the total amount of the
purchase price for the copras. Such claim of the defendant was further
bolstered by the testimony of Apolinario Cariño which affirmed that he
also sell copras to the plaintiff Tan Shuy. He also added that he incurred
indebtedness to the plaintiff and whenever he delivered copras the
157
amount of the copras sold were applied as payments to his loan. The
witness also pointed out that the plaintiff did not give any official receipts
to those who transact business with him (plaintiff). This Court gave
weight and credence to the documents receipts (pesadas) (Exhibits "3"
to "64") offered as evidence by the defendant which does not bear the
notation "pd" or paid on the total amount of the purchase price of copras
appearing therein. Although said "pesadas" were private instrument
their execution and authenticity were established by the plaintiff’s
daughter Elena Tan and sometimes by plaintiff’s son Vicente Tan. x x
x.14 (Emphasis supplied)
In affirming the finding of the RTC, the CA reasoned thus:
-- In his last assigned error, plaintiff-appellant herein impugns the
conclusion arrived at by the trial court, particularly with respect to the
giving of evidentiary value to Exhs. "3" to "64" by the latter in order to
prove the claim of defendant-appellee Guillermo that he had fully paid
the subject loan already.
The foregoing deserves scant consideration.
Here, plaintiff-appellant could have easily belied the existence of Exhs.
"3" to "64", the pesadas or receipts, and the purposes for which they
were offered in evidence by simply presenting his daughter, Elena Tan
Shuy, but no effort to do so was actually done by the former given that
scenario.15 (Emphasis supplied)
We found no clear showing that the trial court and the CA committed
reversible errors of law in giving credence and according weight to the
pesadas presented by respondents. According to Rule 132, Section 20
of the Rules of Court, there are two ways of proving the due execution
and authenticity of a private document, to wit:
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. (21a)
As reproduced above, the trial court found that the due execution and
authenticity of the pesadas were "established by the plaintiff’s daughter
Elena Tan and sometimes by plaintiff’s son Vicente Tan."16 The RTC
said:
On cross-examination, [Vicente] reiterated that he and her [sic] sister
Elena Tan who acted as their cashier are helping their father in their
business of buying copras and mais. That witness agreed that in the
business of buying copra and mais of their father, if a seller is selling
copra, a pesada is being issued by his sister. The pesada that she is
preparing consists of the date when the copra is being sold to the seller.
Being familiar with the penmanship of Elena Tan, the witness was shown
a sample of the pesada issued by his sister Elena Tan. x x x
xxx xxx xxx
x x x. He clarified that in the "pesada" (Exh. "1") prepared by Elena and
also in Exh "2", there appears on the lower right hand portion of the said
pesadas the letter "pd", the meaning of which is to the effect that the
seller of the copra has already been paid during that day. He also
confirmed the penmanship and handwriting of his sister Ate Elena who
acted as a cashier in the pesada being shown to him. He was even made
to compare the xerox copies of the pesadas with the original copies
presented to him and affirmed that they are faithful reproduction of the
originals.17 (Emphasis supplied)
In any event, petitioner is already estopped from questioning the due
execution and authenticity of the pesadas.1âwphi1 As found by the CA,
Tan Shuy "could have easily belied the existence of x x x the pesadas
or receipts, and the purposes for which they were offered in evidence by
simply presenting his daughter, Elena Tan Shuy, but no effort to do so
was actually done by the former given that scenario." The pesadas
having been admitted in evidence, with petitioner failing to timely object
thereto, these documents are already deemed sufficient proof of the
facts contained therein.18 We hereby uphold the factual findings of the
RTC, as affirmed by the CA, in that the pesadas served as proof that the
net proceeds from the copra deliveries were used as installment
payments for the debts of respondents.19
158
Indeed, pursuant to Article 1232 of the Civil Code, an obligation is
extinguished by payment or performance. There is payment when there
is delivery of money or performance of an obligation.20 Article 1245 of
the Civil Code provides for a special mode of payment called dation in
payment (dación en pago). There is dation in payment when property is
alienated to the creditor in satisfaction of a debt in money.21 Here, the
debtor delivers and transmits to the creditor the former’s ownership over
a thing as an accepted equivalent of the payment or performance of an
outstanding debt.22 In such cases, Article 1245 provides that the law on
sales shall apply, since the undertaking really partakes – in one sense –
of the nature of sale; that is, the creditor is really buying the thing or
property of the debtor, the payment for which is to be charged against
the debtor’s obligation.23 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.24
The trial court found thus:
x x x [T]he preponderance of evidence is on the side of the defendant.
x x x The defendant explained that for the receipts (pesadas) from April
1998 to April 1999 he only gets the payments for trucking while the total
amount which represent the total purchase price for the copras that he
delivered to the plaintiff were all given to Elena Tan Shuy as installments
for the loan he owed to plaintiff. The defendant further averred that if in
the receipts or "pesadas" issued by the plaintiff to those who delivered
copras to them there is a notation "pd" on the total amount of purchase
price of the copras, it means that said amount was actually paid or given
by the plaintiff or his daughter Elena Tan Shuy to the seller of the copras.
To prove his averments the defendant presented as evidence two (2)
receipts or pesadas issued by the plaintiff to a certain "Cariño" (Exhibits
"1" and "2" – defendant) showing the notation "pd" on the total amount
of the purchase price for the copras. Such claim of the defendant was
further bolstered by the testimony of Apolinario Cariño which affirmed
that he also sell [sic] copras to the plaintiff Tan Shuy. He also added that
he incurred indebtedness to the plaintiff and whenever he delivered
copras the amount of the copras sold were applied as payments to his
loan. The witness also pointed out that the plaintiff did not give any
official receipts to those who transact business with him (plaintiff). x x x
Be that it may, this Court cannot however subscribe to the averments of
the defendant that he has fully paid the amount of his loan to the plaintiff
from the proceeds of the copras he delivered to the plaintiff as shown in
the "pesadas" (Exhibits "3" to "64"). Defendant claimed that based on
the said "pesadas" he has paid the total amount of P420,537.68 to the
plaintiff. However, this Court keenly noted that some of the "pesadas"
offered in evidence by the defendant were not for copras that he
delivered to the plaintiff but for "mais" (corn). The said pesadas for mais
or corn were the following, to wit:
xxx xxx xxx
To the mind of this Court the aforestated amount (P41,585.25) which the
above listed pesadas show as payment for mais or corn delivered by the
defendant to the plaintiff cannot be claimed by the defendant to have
been applied also as payment to his loan with the plaintiff because he
does not testify on such fact. He even stressed during his testimony that
it was the proceeds from the copras that he delivered to the plaintiff
which will be applied as payments to his loan. x x x Thus, equity dictates
that the total amount of P41,585.25 which corresponds to the payment
for "mais" (corn) delivered by the plaintiff shall be deducted from the total
amount of P420,537.68 which according to the defendant based on the
pesadas (Exhibits "3" to "64") that he presented as evidence, is the total
amount of the payment that he made for his loan to the plaintiff. x x x
xxx xxx xxx
Clearly from the foregoing, since the total amount of defendant’s loan to
the plaintiff is P420,000.00 and the evidence on record shows that the
actual amount of payment made by the defendant from the proceeds of
the copras he delivered to the plaintiff is P378,952.43, the defendant is
still indebted to the plaintiff in the amount of P41,047.53 (sic)
(P420,000.00-P378,952.43).25 (Emphasis supplied)
In affirming this finding of fact by the trial court, the CA cited the above-
quoted portion of the RTC’s Decision and stated the following:
In fact, as borne by the records on hand, herein defendant-appellee
Guillermo was able to describe and spell out the contents of Exhs. "3"
to "64" which were then prepared by Elena Tan Shuy or sometimes by
witness Vicente Tan. Herein defendant-appellee Guillermo professed
that since the release of the subject loan was subject to the condition
that he shall sell his copras to the plaintiff-appellant, the former did not
already receive any money for the copras he delivered to the latter
159
starting April 1998 to April 1999. Hence, this Court can only express its
approval to the apt observation of the trial court on this matter[.]

xxx xxx xxx

Notwithstanding the above, however, this Court fully agrees with the
pronouncement of the trial court that not all amounts indicated in Exhs.
"3" to "64" should be applied as payments to the subject loan since
several of which clearly indicated "mais" deliveries on the part of
defendant-appellee Guillermo instead of "copras"[.]26 (Emphasis
supplied)

The subsequent arrangement between Tan Shuy and Guillermo can

thus be considered as one in the nature of dation in payment. There was
partial payment every time Guillermo delivered copra to petitioner, chose
not to collect the net proceeds of his copra deliveries, and instead
applied the collectible as installment payments for his loan from Tan
Shuy. We therefore uphold the findings of the trial court, as affirmed by
the CA, that the net proceeds from Guillermo’s copra deliveries
amounted to ₱ 378,952.43. With this partial payment, respondent
remains liable for the balance totaling ₱ 41,047.57.27

WHEREFORE the Petition is DENIED. The 31 July 2009 Decision and

13 November 2009 Resolution of the Court of Appeals in CA-G.R. CV
No. 90070 are hereby AFFIRMED.

SO ORDERED.

160
 VILLARTA v. TALAVERA, JR.
CARPIO, J.:
The Case
G.R. No. 208021 is a petition for review[1] assailing the Decision[2]
promulgated on 22 November 2012 as well as the Resolution[3]
promulgated on 18 June 2013 by the Court of Appeals (CA) in CA-G.R.
CV No. 96732. The CA affirmed the Decision dated 26 October 2010[4]
and the Resolution dated 8 February 2011[5] of Branch 35 of the
Regional Trial Court of Santiago City (RTC) in Civil Case No. 35-3306.
In its 26 October 2010 Decision, the RTC rendered judgment in favor of
respondent Gaudioso Talavera, Jr. (respondent) and against petitioner
Oscar S. Villarta (petitioner). The RTC dismissed petitioner's action for
reformation of two deeds of absolute sale to that of equitable mortgage
due to want of evidence, and ordered petitioner and all other persons
acting for and in his behalf to vacate the land subject of the complaint
and peacefully surrender it to respondent. The 8 February 2011
Resolution denied petitioner's motion for reconsideration.
The Facts
The CA recited the facts as follows:
Appellant Oscar Villarta filed the complaint a quo for reformation of
contracts, moral damages, and attorney's fees against appellee
Gaudioso Talavera, Jr. He alleged: he owned four parcels of land, all
situated in Santiago City viz: a) 1,243 square meters under TCT No. T-
130095, b) 25,000 square meters under TCT No. T-12142, c) 296
square meters [under] TCT No. T-53252, and d) 1,475 square meters
under TCT No. T-214950; sometime in 1993, he ventured into treasure
hunting activites; in order to infuse his much needed capital, he obtained
several loans from appellee who was a distant relative; as of 1996, his
loan already reached P800,000.00, inclusive of 3% interest per month;
he religiously paid the interest, but when the 1997 financial crisis struck,
appellee raised the interest to a rate between 7% and 10%; in 1995,
appellee employed insidious words and machinations in convincing him
to execute a deed of absolute sale over TCT No. T-130095; however,
the real agreement was that the lot would only serve as security for the
several loans he obtained; in 1997, he was again convinced to execute
two more deeds of conveyance over the two lots under TCTs T-12142
and T-53252, respectively; in 2001, he was informed that his loan had
already reached P2,000,000.00 and since the 3 parcels of land were no
longer sufficient to cover the loan, he was further convinced to mortgage
to Maybank additional real properties, on top of the 3 parcels of land, to
secure a P50 million loan; when appellee realized that his loan was
going to be approved, the former demanded that he execute a deed of
absolute sale over the lot under TCT T-214950, yet, the real agreement
was that the lot would only serve as collateral; TCT T-53252 and T-
12142 were returned to him; when he requested appellee to remove the
encumbrance on TCTs T-130095 and T-214950 so that the bank could
process the loan, appellee suddenly demanded P5,000,000.00; when
the bank learned of it, he was advised not to pursue the loan because
he would no longer have the means to pay it; appellee took advantage
of the situation and caused the cancellation of TCT T-214950, by utilizing
the deed of absolute sale, contrary to their real agreement that the
property should only serve as collateral; the Deeds of Absolute Sale
dated March 1995 and May 18, 2001 were in reality an equitable
mortgage; the P500,000.00 consideration for the Deed of Absolute Sale
dated May 18, 2001 was grossly inadequate because the actual market
value of the subject land was P5,900,000.00; despite the execution of
the two deeds of absolute sale, he still had possession of the subject
lots and and even leased them to Wellmade Manufacturing Corp.;
because of appellee's fraudulent act of transferring titles of the two lots
to his name, he suffered sleepless nights and serious anxiety; and, he
also prayed for attorney's fees and costs of suit.
In his Answer dated April 15, 2005, appellee Gaudioso Talavera, Jr.
averred: even before 1996, appellant had been obtaining loans from
him; during their early transactions, appellant paid his obligations;
sometime in 1996, appellant obtained a loan from him totaling
P826,552.00, duly covered by two Metrobank Check Nos. 521917
(P300,000.00) and 521916 (P526,552.00) both dated February 3, 1997;
the amount of P300,000.00 was subsequently secured by the lot
covered by TCT T-130095, and, the amount of P526.552.00, by
appellant's two lots covered by TCT T-12142 and TCT T-53252; when
the two checks were presented for payment, they were dishonored due
to account closed [sic]; despite repeated demands, appellant failed to
settle his obligations and the agreed interest of 5% per month continued
to run, which eventually amounted to P4,882,960.33 as of June 30,
2000; appellant asked that his obligation be pegged at P4,826,552.00
and tendered partial payment of P4,000,000.00 through RCBC Check
No. 0001055; when the RCBC check was presented for payment,
however, the same was dishonored due to account closed [sic]; he, once
again, made demands for appellant to pay his loan, but, the latter asked
161
for more time to produce the money; sometime in May 2001, appellant
told him that he could no longer raise the sum to pay off his loans, and,
instead offered his properties, i.e., TCTs T-130095 and T-214950, to
satisfy his obligation; appellant offered to transfer these titles to his
name and proposed that the properties covered by TCTs T-53252 and
T-12142 be returned to him; the properties covered by TCTs T-130095
and T-214950 were delivered to him via appellant's two deeds of
absolute sale; the consideration for both lots was set at P500,000.00
each, on appellant's own request, in order to reduce his capital gains tax
liability and other expenses; the true consideration for both lots was
P4,826,552.00, the amount of appellant's total obligation; he had
constantly demanded that appellant vacate the lots, but the latter
refused; there could be no equitable mortgage over TCT T-214950 for
the same was never made a collateral for the loan; there could also be
no equitable mortgage over TCT T-130095 for though it was true that
the same initially served as security, the arrangement was novated when
appellant offered the lot as payment; appellant's complaint failed to state
a cause of action; the transfer of the properties to him was by virtue of
dacion en pago; he justly acted within his rights and in the performance
of his duties, gave appellant his due, and observed honesty and good
faith; appellant's claim for moral damages, attorney's fees, and litigation
expenses had no legal or factual basis; and, as counterclaim, appellee
claimed moral damages, exemplary damages and attorney's fees.[6]
The RTC's Ruling
The RTC rendered a Decision dated 26 October 2010 and ruled in favor
of respondent. The RTC ruled:
It is the claim of the [petitioner] that the two (2) subject deeds of absolute
sale both dated May 18, 2001 in favor of the [respondent] were intended
to merely secure his loan obligation. But the Court is not convinced. It
should be stressed that the subject deeds of absolute sale were
executed by the [petitioner] when his loan obligation was already
overdue. As a matter of fact, the two (2) checks he issued in 1997 were
already dishonored [because the] account [was] closed, as well as the
last check in the amount of P4 Million he issued as collateral on June
30, 2000 (Exhibit "4"), reason for which, and after almost a year from
June 30, 2000 to May 18, 20001, his loan was overdue, thus [petitioner]
had to offer [respondent] his two (2) properties covered by TCT No. T-
21495 and TCT No. T-130095 as full payment of his overdue loan which
already amounted to Php4,826,552.00; thus, by way of a contract of
sale, his unpaid loan was the agreed sufficient price or consideration
thereof, hence, the two (2) subject deeds of absolute sale. In other
words, the subject deeds of absolute sale, being public documents,
speak for themselves, res ipsa loquit[u]r, that [petitioner] sold the two (2)
covered properties for and in consideration of his overdue loan account
with [respondent], and this fact is unrefuted. On their faces, the Court
finds no other intention, nor ambiguity in them, hence, no cogent reason
to reform them nor to consider them as equitable mortgages, obviously,
for want of evidence.
Considering the absolute ownership of [respondent] now over the
properties covered by his new certificate of title and the other deed of
absolute sale, [respondent] is entitled under the law to possess and
occupy the premises, including the exercise by him of the other
attributes of ownership to the exclusion of others, including the [petition].
Indeed, possession follows ownership.[7]
The dispositive portion of the RTC's decision reads:
WHEREFORE, in view of the foregoing considerations, the Court hereby
renders judgment in favor of [respondent], DISMISSING the complaint
for want of evidence, and ORDERING [petitioner] and all other persons
acting for and in his behalf to vacate the subject premises and peacefully
surrender the same to [respondent] and/or his duly authorized
representatives.
No other pronouncements.
SO ORDERED.[8]
Petitioner filed a Motion for Reconsideration on 16 December 2010. The
RTC denied petitioner's motion for reconsideration in its Resolution
dated 8 February 2011.
Petitioner received the notice from the CA to file his Appellant's Brief by
24 October 2011. His motion for extension of time to file his brief was
granted, and he was granted an extension until 22 January 2012.[9]
Petitioner filed his Appellant's Brief on 24 January 2012,[10] while
respondent failed to file his Appellee's Brief. The CA considered the
appeal submitted for decision without Appellee's Brief.[11]
The CA's Ruling
In its Decision promulgated on 22 November 2012, the CA dismissed
petitioner's appeal and affirmed the RTC's 26 October 2010 Decision
and 8 February 2011 Resolution. The CA rejected petitioner's argument
that the real transaction is an equitable mortgage and consequently
denied the request to recompute the obligation.
162
The CA found that there was nothing ambiguous in the language of the
deeds of absolute sale dated March 1995 and 18 May 2001. The CA
also found that the essential requisites of a contract were all present.
Petitioner never argued that his consent was vitiated when he executed
the deeds of sale. The objects of the contracts were also certain in
referring to TCT Nos. T-130095 and T-214950. Both parties have also
admitted that the cause of both contracts was to completely satisfy
petitioner's loan obligations.
The CA also failed to find in the deeds of sale an intent to secure an
existing debt by way of a mortgage. Respondent was able to prove, by
preponderance of evidence, that the Metrobank checks originally used
to secure petitioner's loans were dishonored, the RCBC check intended
for payment was also dishonored, and the TCTs were subsequently
offered as payment. Further, respondent did not tolerate petitioner's
occupancy of the lots. Respondent sent petitioner a final demand letter
to vacate, consolidated ownership over the lots, and paid the real estate
taxes on the lots. The CA found that the records show that the parties
entered into a series of arrangements and schemes where petitioner
offered varying modes of payment for his loans. There were no
extensions of the period to pay, but a series of modifications of the mode
of payment. The totality of the evidence shows that the parties never
intended to make TCT Nos. T-130095 and T-214950 as mere collateral
for petitioner's loans.
Petitioner filed a Motion for Reconsideration[12] dated 20 December
2012. The CA denied the motion in a Resolution[13] dated 18 June 2013.
The Issues
Petitioner enumerated the following grounds warranting allowance of his
petition:
1. The Honorable Court of Appeals gravely erred and has in
fact decided the instant case in a manner contrary to law
and established jurisprudence when it held that while some
of the circumstances mentioned under Article 1602 of the
Civil Code are present in the case at bar, the totality of
evidence shows that the parties never intended to make
TCTs T-130095 and T-214950 as mere collateral for
[petitioner's] loans; and
2. As a consequence, the Honorable Court of Appeals likewise
erred in holding that the petitioner's request for
recomputation to determine his correct obligation must fail in
view of said Honorable Court's findings that there is no
equitable mortgage despite the clear presence of the
circumstances mentioned under Article 1602 of the Civil
Code.[14]
The Court's Ruling
The petition has no merit. We affirm the decision of the Court of Appeals.
Not an Equitable Mortgage
The relevant provisions of the Civil Code read:
Art. 1602. The contract shall be presumed to be an equitable mortgage,
in any of the following cases:
1. When the price of a sale with a right to repurchase is unusually
inadequate;
2. When the vendor remains in possession as lessee or otherwise;
3. When upon or after the expiration of the right to repurchase another
instrument extending the period of redemption or granting a new period
is executed;
4. When the purchaser retains for himself a part of the purchase price;
5. When the vendor binds himself to pay the taxes on the thing sold;
6. In any other case where it may be fairly inferred that the real intention
of the parties is that the transaction shall secure the payment of a debt
or the performance of any other obligation.
In any of the foregoing cases, any money, fruits or other benefit to be
received by the vendee as rent or otherwise shall be considered as
interest which shall be subject to the usury laws.
Art. 1604. The provisions of article 1602 shall also apply to a contract
purporting to be an absolute sale.
A deed of absolute sale dated March 1995 and referred to TCT No. T-
130095 was attached to the complaint. It reads:
DEED OF ABSOLUTE SALE
KNOW ALL MEN BY THESE PRESENTS:
163

I, OSCAR S. VILLARTA, Filipino, of legal age, married to Lucila J.
Santiago, and a resident of Santiago, Isabela, am the registered owner
of that certain parcel of land, particularly described as follows:
". . . A PARCEL OF LAND x x x containing an area of ONE THOUSAND
TWO HUNDRED FORTY THREE (1,243) SQUARE METERS, more or
less. It is covered by TRANSFER CERT. OF TITLE NO. T-130095,
Isabela Registry."
That for and in consideration of the sum of THREE HUNDRED
THOUSAND (P300,000.00) PESOS, Philippine currency, to me in hand
paid by GAUDIOSO TALAVERA, JR., of legal age, Filipino, married to
Emilia Dy, and a resident of Cauayan, Isabela, I do hereby SELL,
TRANSFER and CONVEY, absolutely and unconditionally, unto the said
GAUDIOSO TALAVERA, JR., his heirs and or assigns the above-
described real property.
That I further declare that the above-described real property sold is free
from liens and encumbrances; that it is a residential lot; that the
provisions of Art. 1623 of the Civil Code had been complied with prior to
the execution of this sale and that I agree to the registration of this deed
in the Office of the Register of Deeds of Isabela.[15]
Respondent denied the existence of the March 1995 Deed of Sale. He
alleged that he did not sign it, and that the March 1995 Deed of Sale
was not notarized.[16] He instead stated that there were two deeds of
absolute sale dated 18 May 2001. The first deed of absolute sale dated
18 May 2001 also referred to TCT No. T-130095, and reads:
DEED OF ABSOLUTE SALE
KNOW ALL MEN BY THESE PRESENTS:
That I, OSCAR SANTOS VILLARTA[,] of legal age, Filipino, married to
Lucila Santiago and a resident of Dubinam West, City of Santiago,
Philippines, for and in consideration of the sum of FIVE HUNDRED
THOUSAND PESOS (P500,000.00), Philippine Currency, to me in hand
paid by GAUDIOSO TAL[A]VERA, JR., likewise of legal age, married,
Filipino and a resident of Cauayan, Isabela
Do:
hereby SELL, TRANSFER and CONVEY unto the said GAUDIOSO
TALAVERA, JR., his heirs and or assigns ONE THOUSAND TWO
HUNDRED FORTY THREE (1,243) SQUARE METER[S] of a parcel of
land with its improvements with Transfer Certificate of Title No. T-130095
located at Municipality of Santiago, Isabela, Philippines now City of
Santiago, Philippines belonging to me and more particularly described
as follows:
xxxx
That I hereby warrant exclusive possession and ownership of the above
described property including its improvements[.][17]
The second deed of absolute sale dated 18 May 2001 referred to TCT
No. T-214950, and reads:
DEED OF ABSOLUTE SALE
KNOW ALL MEN BY THESE PRESENTS:
That I, OSCAR SANTOS VILLARTA[,] of legal age, Filipino, married to
Lucila Santiago and a resident of Dubinam West, City of Santiago,
Philippines, for and in consideration of the sum of FIVE HUNDRED
THOUSAND PESOS (P500,000.00), Philippine Currency, to me in hand
paid by GAUDIOSO TAL[A]VERA, JR., likewise of legal age, married,
Filipino and a resident of Cauayan, Isabela
Do:
hereby SELL, TRANSFER and CONVEY unto the said GAUDIOSO
TALAVERA JR., his heirs and or assigns ONE THOUSAND FOUR
HUNDRED SEVENTY FIVE (1,475) SQUARE METER[S] of a parcel of
land with its improvements with Transfer Certificate of Title No. T-214950
located at Municipality of Santiago, Isabela, Philippines now City of
Santiago, Philippines belonging to me and more particularly described
as follows:
xxxx
That I hereby warrant exclusive possession and ownership of the above
described property including its improvements[.][18]
An affidavit of true consideration of the absolute sale of property, also
dated 18 May 2001, reads:
AFFIDAVIT OF TRUE CONSIDERATION OF THE ABSOLUTE SALE
OF PROPERTY
I, OSCAR SANTOS VILLARTA[,] of legal age, married to Lucila J.
Santiago, Filipino and a resident of Dubinam West, City of Santiago,
164
Philippines after having been sworn to in accordance with law hereby
[sic] depose and say:
1. That I am the same person executing this captioned affidavit;
2. That I am the true and registered owner of two (2) parcels of land
located at City of Santiago, Philippines with Transfer Certificate No. T-
214950 and T-130095;
3. That I sold the two (2) above described property to Gaudioso
Talavera, Jr., for and in consideration of the amount of FOUR MILLION
EIGHT HUNDRED TWENTY SIX THOUSAND AND FIVE HUNDRED
FIFTY TWO (P4,826,552.00) PESOS in Philippine Currency.
4. That I acknowledge to have received the said amount from Mr.
Gaudioso Talavera, Jr. in its fullness;
5. That I am waiving any claim and whatsoever rights I have to the said
property against the vendee Gaudioso Talavera Jr.[;]
6. That I am executing this affidavit to attest to the truth of the foregoing
and that it is my true act and deed without any coercion and or
intimidation on my person.[19]
The trial court recognized that TCT No. T-130095 was covered by two
Deeds of Absolute Sale. However, the trial court was unconvinced that
the 2001 Deeds of Absolute Sale were intended merely to secure
petitioner's loan obligations because both were executed when the
loans were already overdue. The CA affirmed the findings of the trial
court. The CA conceded that although "some of the circumstances
mentioned under Art. 1602 are present in the case at bar, the totality of
the evidence shows that the parties never intended to make TCT Nos.
T-130095 and T-214950 as mere collateral for [petitioner's] loans. The
twin deeds of sale speak for themselves."
We agree with the lower courts' assessment of the facts. The conduct of
the parties prior to, during, and after the execution of the deeds of sale
adequately shows that petitioner sold to respondent the lots in question
to satisfy his debts.
Respondent was able to sufficiently explain why the presumption of an
equitable mortgage does not apply in the present case. The inadequacy
of the purchase price in the two deeds of sale dated 18 May 2001 was
supported by an Affidavit of True Consideration of the Absolute Sale of
the Property. Respondent did not tolerate petitioner's possession of the
lots. Respondent caused the registration and subsequent transfer of
TCT No. T-214950 to TCT No. T-333921 under his name, and paid taxes
thereon. There were no extensions of time for the payment of petitioner's
loans; rather, petitioner offered different modes of payment for his loans.
It was only after three instances of bounced checks that petitioner
offered TCT Nos. T-130095 and T-214950 as payment for his loans and
executed deeds of sale in respondent's favor.
The transaction between petitioner and respondent is thus not an
equitable mortgage, but is instead a dacion en pago.
Dacion en pago is the delivery and transmission of ownership of a thing
by the debtor to the creditor as an accepted equivalent of the
performance of an existing obligation. It is a special mode of payment
where the debtor offers another thing to the creditor who accepts
it as equivalent to the payment of an outstanding debt. For dacion
en pago to exist, the following elements must concur: (a) existence of a
money obligation; (b) the alienation to the creditor of a property by the
debtor with the consent of the former; and (c) satisfaction of the money
obligation of the debtor.[20]
In view of the foregoing, we see no reason to depart from the findings of
fact and conclusions of the lower courts.
WHEREFORE, we DENY the petition and AFFIRM the assailed
Decision promulgated on 22 November 2012 as well as the Resolution
promulgated on 18 June 2013 by the Court of Appeals in CA-G.R. CV
No. 96732. Costs against petitioner.
SO ORDERED.
165
 DALISAY INVESTMENTS v. SOCIAL SECURITY SYSTEM
(VELASCO)
VELASCO JR., J.:
The Case
This Petition for Review on Certiorari under Rule 45 of the Rules of Court
seeks the reversal and setting aside of the August 12, 2016 Decision[1]
and March 10, 2017 Resolution of the Court of Appeals (CA) in CA-G.R.
CV No. 03233-MIN.
The Facts
Involved is a parcel of land covered by Transfer Certificate of Title (TCT)
Nos. T-18203, T-18204, T-255986, and T-255985, with an aggregate
area of 2,450 sq.m., including the building erected thereon, situated in
Agdao, Davao City.
Sometime in the year 1976, respondent Social Security System (SSS)
filed a case before the Social Security Commission (SSC) against the
Dalisay Group of Companies (DGC) for the collection of unremitted SSS
premium contributions of the latter's employees. The said cases are: (1)
SSS v. Desiderio Dalisay Investments, Inc. (SSC Case No. 6414); (2)
SSS v. Desidal Fruits Corporation (SSC Case No. 6415); and (3) SSS
v. Davao Stevedore Terminal Co., Inc. (SSC Case No. 6416).[2]
On March 11, 1977, Desiderio Dalisay, then President of petitioner
Desiderio Dalisay Investments, Inc. (DDII), sent a Letter to SSS offering
the subject land and building to offset DGC's liabilities subject of the
aforementioned cases at P3,500,000.[3] The parties, however, failed to
arrive at an agreement as to the appraised value thereof. Thus, no
negotiation took place.
Later, or on December 15, 1981, Desiderio Dalisay sent another Letter
seeking further negotiation with SSS by recommending that the
appraisal be done by Asian Appraisal, Co. Inc.[4] SSC agreed, but it later
turned out that Asian Appraisal, Inc. did not respond to Dalisay's request.
Thus, Atty. Honesto Cabarroguis, DGC's lawyer, suggested that the
appraisal be done by Joson, Capili and Associates instead. The
suggestion was later approved.[5]
On July 24, 1982, DDII's Special Board of Directors issued a Resolution
stating that the properties covered by TCT Nos. T-18204 and T-8227[6]
together with all improvements thereon be sold to SSS in order to settle
the unremitted premiums and penalty obligations of DDII, Davao
Stevedore Terminal Co., and Desidal Fruits, Inc. In the same Board
Resolution, Desiderio Dalisay, or in his absence, Veronica Dalisay-Tirol
(Dalisay-Tirol), was authorized to sign in behalf of the corporation any
and all papers pertinent to effect full and absolute transfer of said
properties to the SSS.[7]
On May 21, 1982, the real estate appraisers Joson, Capili and
Associates, whose services Dalisay engaged for the purpose of
appraising the value of the properties being offered to SSS, sent a
letter[8] to him informing him that the total value of the lots is One Million
Nine Hundred Fifty Four Thousand Seven Hundred Seventy-Seven &
78/100 (P1,954,777.78), rounded to P1,955,000.[9] This Appraisal
Report was then indorsed to the SSC.[10]
On May 27, 1982, during a meeting (1982 Meeting) of the SSS'
Committee on Buildings, Supplies and Equipment (Committee) attended
by Atty. Cabarroguis, the latter, representing DGC, explained that the
DGC is in financial distress and is in no way capable of settling its
obligation in cash.[11] When asked what the DGC's offer is, he stated that
he has "the authority to offer [the properties] in the amount of 2 million
pesos."[12] He also assured them that that they will turn the properties
over to SSS free of liens and encumbrances.[13] The offer for dacion was
accepted at the appraised value of P2,000,000. As regards the
implementation of the dacion, Atty. Cabarroguis stated that "[t)]he Legal
Department of the SSS can prepare the Deed of Sale or whatever
documents that have to be prepared. My clients are ready to vacate the
premises and you can have it occupied anytime."[14] During the same
Meeting, Atty. Cabarroguis likewise relayed to SSS that they are
requesting that the P2,000,000 amount be applied first to the unpaid
premiums and the excess be used to settle part of the penalties due.[15]
On May 28, 1982, DDII's total liabilities with SSS covering unpaid
premium contributions, inclusive of penalties and salary/calamity loan
amortizations, amounted to P4,421,321.62.[16]
On June 9, 1982, the SSC issued Resolution No. 849 - s. 82.[17] In said
Resolution, it accepted DDII's proposed dacion en pago pegged at the
appraised value of P2,000,000. Said Resolution reads:
On motion duly seconded,
166

RESOLVED, that the acceptance of the offer of the Dalisay Group of
Companies to offset their outstanding liabilities with the SSS with their
lot and building at Davao City valued at 2M, as recommended by the
SSC Committee on Building, Supplies and Equipment, be, as it is
hereby, approved and confirmed, subject to the terms and conditions
contained in the Memorandum, dated June 8, 1982, of the Executive
Officer of the said Committee.
RESOLVED FURTHER, That the following additional conditions be, as
they are hereby, imposed:
1. That part of tge (sic) 2M is to be applied to its outstanding
educational/salary loans obligations;
2. That the criminal cases against the Dalisay Group of
companies shall not be withdrawn as the penalties are not
being paid in full and it is up to them to make the necessary
representations with the Fiscal's Office.[18]
The SSC then informed DDII of its acceptance of the proposed dacion
in payment, including its specified terms and conditions, via a Letter
dated June 17, 1982.[19] Said Letter[20] reads:
We are pleased to inform you that pursuant to Resolution No. 849 dated
June 9, 1982, the Social Security Commission approved and confirmed
the acceptance of the offer of your client, the Dalisay Group of
Companies, that they be allowed to offset their outstanding liabilities with
the SSS with their property (lot and building), as described in the offer,
at Davao City valued at P2 million, subject to the following terms and
conditions:
1. The P2 million consideration in this transaction shall be
applied first to the premium contribution in arrears which
amounts to P1.5 million, more or less, and whatever amount
in excess of the P2 million after premium contribution shall
then be applied to the payment of penalties.
2. Part of the P2 million shall also be applied to its outstanding
education/salary loan obligations.
3. The criminal cases against the Dalisay Group of Companies
shall not be withdrawn as the penalties have not as yet been
valid (sic) in full and it is up to them to make the necessary
representations with the Fiscal's Office.
May we invite you, therefore, to sit down with us for the preparation of
the documents preparatory to the final transfer of the titles of the
properties to the SSS.
On July 8, 1982, Dalisay-Tirol, then Acting President and General
Manager of Dalisay Investment, informed SSS that the company is
preparing the subject property, especially the building, for its turnover on
August 15, 1982.[21] Said Letter reads:
We are pleased to advise you that by August 15, 1982, we will already
transfer to the next building. Desidal Building will already be available
for you to prepare for you own transfer. The delay is caused by the
preparation we have to make for the transfer of our office equipment and
records.
Kindly, send somebody on August 15th, so we can effect the proper
turnover of the building to you.[22]
Later, or on July 31, 1982, An Affidavit of Consent for the Sale of Real
Property was executed by the surviving heirs of the late Regina L.
Dalisay, stating that in order to settle the companies' obligations to SSS,
they expressly agree to the sale thereof to the SSS for its partial
settlement.[23]
On September 18, 1989, Desiderio Dalisay passed away.
As of November 30, 1995, the company's total obligations allegedly
amounted to P15,689,684.93.[24]
Later, or on December 29, 1995, the Philippine National Bank (PNB)
executed a Deed of Confirmatory Sale in favor of DDII for properties that
it reacquired, including the property subject of the present dispute.
On March 20, 1998, Eddie A. Jara (Jara), Assistant Vice-President of
the SSS - Davao I Branch, executed an Affidavit of Adverse Claim[25]
over the properties subject of the instant case because of the
companies' failure to turn over the certificates of title to SSS.
Then, on April 2, 1998, Jara sent a letter to Dalisay-Tirol, formally
demanding the certificates of title over the properties subject of the
dacion.[26] In said letter, Jara stated that "[t]he mortgage with PNB has
already been settled by Desiderio Dalisay Investments, Inc. last January
20, 1994, but the titles were not delivered to the SSS in violation of the
express terms in the dacion in payment that the Dalisay group should
deliver the titles after the release of the mortgage with the PNB."[27]
167
In her reply dated May 5, 1998 to the April 2, 1998 Letter, Dalisay-Tirol,
who was then the President of DDII, stated that the corporation could
not at that time give due course to and act on the matter because of
several issues that need to be resolved first, including two cases
involving the subject properties, to wit: (1) the properties are being
claimed by the estate of Desiderio F. Dalisay, Sr. and included in the
inventory already filed by the executrix, where the corporation's
stockholders are contesting said inclusion; and (2) the SSS' pending
petition covering the properties where the accuracy and propriety of the
amount of PI5,605,079.25 contained therein has yet to be substantiated
and verified.[28] She likewise pointed out that the "Board Resolution
covers only two (2) parcels of land which were proposed and submitted
for the purpose of a negotiated sale to settle unremitted premiums and
penalties."[29]
On November 18, 1999, DDII, through its Managing Director Edith L.
Dalisay-Valenzuela (Dalisay-Valenzuela), wrote a letter addressed to
SSS President and Chief Executive Officer Carlos A. Arellano,
requesting the reevaluation and reconsideration of their problem.[30] In
said Letter, DDII requested the following:
1) Condonation of penalties and interest or accrual of rentals for
off-setting against the penalties, interest and principal;
2) Payment of original liabilities for unpaid premiums of
P4,421,321.62;
3) Return of the property to DDII; and
4) Withdrawal of claim against the Estate of Desiderio F. Dalisay,
Sr.[31]
On January 18, 2000, DDII issued a Letter to SSS proposing the "offset
of SSS obligations with back rentals on occupied land and building of
the obligor." It alleged that SSS is bound to pay back rentals totaling
P34,217,988.19[32] for its use of the subject property from July 1982 up
to the present. It likewise demanded for the return of the said property.[33]
Meanwhile, despite repeated written and verbal demands made by SSS
for DDII to deliver the titles of the subject property, free from all liens and
encumbrances, DDII still failed to comply.
On October 8, 2002, DDII filed a complaint for Quieting of Title,
Recovery of Possession and Damages against SSS with the Regional
Trial Court (RTC), Branch 14, in Davao City, docketed as Civil Case No.
29, 353-02.
In said complaint, DDII asserted that it is the owner of the subject
property. It averred that when SSS filed the abovementioned cases, the
late Desiderio Dalisay, during his lifetime and as president of the
company, offered the property appraised at P3,500,000 to SSS for the
offsetting of said amount against DGC's total liability to SSS. SSS
accepted such but only in the amount of P2,000,000 and subject to
certain conditions. It also insists that while negotiations with SSS were
still ongoing, it decided to vacate the subject property in favor of SSS to
show goodwill on its part. Unfortunately, the negotiations were not fruitful
as they failed to agree on the terms and conditions set forth by SSS.
Furthermore, DDII insists that Atty. Cabarroguis' alleged acceptance of
the proposals of SSS was not covered by any Board Resolution or
Affidavit of Consent by the corporate and individual owners of the
properties. Thus, according to DDII, there was no meeting of the minds
between the parties. Consequently, there was no dation in payment to
speak of, contrary to the claim of SSS. With these, DDII asserted that
SSS owes it P43,208,270.99 as back rentals for its use of the property
from 1982 onwards. It also prayed for attorney's fees and costs of
litigation.[34]
In its Answer, SSS argued that the offer for dacion was categorically
accepted by SSS, thereby perfecting such.[35]
RTC Judgment
On July 22, 2010, the RTC resolved the case in favor of DDII, holding
that there was no perfected dacion in payment between the parties.
Consequently, SSS has no legal personality to own, possess, and
occupy the property. The dispositive portion thereof reads:
WHEREFORE, judgment is hereby rendered as follows:
a) Declaring [DDII] as the true and absolute owner of the properties
covered by TCT Nos. T-18203, T-18204, T-255986 and T-255985,
free from all liens and encumbrances, and that [SSS] has no right
or interest over the same whatsoever;
b) Ordering the Registrar, Registry of Deeds, Davao City, to cancel
the adverse claims caused by [SSS] to be annotated on the
foregoing [TCTs];
168
c) Ordering [SSS] to pay [DDII] the reasonable amount of P50,000.00
a month for the use and continued occupation by [SSS] of the
subject properties reckoned from the date of [DDII's] demand to
vacate on June 6, 2002 until [SSS] vacates the subject properties;
d) Ordering [SSS] to turn over the possession and occupation of the
properties to [DDII] in peace, there being no perfected dacion in
payment or dacion en pago;
e) Ordering [SSS] to reimburse [DDII] the sum of P100,000.00 as
attorney's fees; and
f) To pay the cost.
SO ORDERED.[36]
Ruling in favor of DDII, the RTC found that the June 8, 1982
Memorandum is not an acceptance of DDII's offer for the reason that it
contained terms and conditions—a qualified acceptance which amounts
to a counter-offer.[37] The RTC further noted that there is no iota of proof
that said counter-offer was accepted by DDII.[38]
As to the contention of SSS that the turnover of the properties in its favor
shows that there was, indeed, a perfected dacion in payment, the RTC
ruled that said transfer of possession was not tantamount to delivery as
an element of a contract of sale which transmits ownership of the thing
from the vendor to the vendee. The RTC likewise noted that the June 8,
1982 Memorandum included a provision on automatic cancellation of its
supposed acceptance of Dalisay's offer if, for any reason, the offsetting
cannot be implemented. Correlating this with SSS' non-receipt of the
certificates of title to the property, the RTC ruled that SSS' supposed
acceptance was thereby automatically cancelled effective June 8,
1982—the date of the Memorandum containing the provision on
automatic cancellation. This being the case, the trial court held, SSS'
occupation of the property on July 24, 1982, a month after its
acceptance was automatically cancelled, has no leg to stand on.[39] It
was, therefore, only by mere tolerance which tolerance ended when
DDII made a demand for SSS to vacate the premises on June 6,
2002.[40]
Its motion for reconsideration having been denied by the RTC in its
September 20, 2010 Order,[41] SSS appealed the case to the CA.
CA Ruling
Finding merit in the appeal, the CA reversed the RTC's ruling, disposing
of the appeal in this wise:
WHEREFORE, the appealed Decision of the [RTC], Branch 14, Davao
City, in Civil Case No. 29,353-02 is REVERSED and SET ASIDE insofar
as it granted the complaint for quieting of title, recovery of possession
and damages in favor of [DDII], and the said complaint is hereby
DISMISSED for lack of merit. No pronouncement as to costs.
SO ORDERED.[42]
According to the CA, the pivotal issue in the appeal is whether there was
a perfected dation in payment, in which it ruled in the affirmative.
The CA held that the records establish that DGC has an outstanding
obligation in favor of SSS that it proposed to pay the amount via dacion
en pago, said offer was categorically accepted by SSS, and the
agreement was consummated by DDII's delivery of the property to
SSS.[43]
As to DDII's argument that the acceptance by SSS included certain
conditions, this, according to the appellate court, is inconsequential
because its acceptance was unequivocal and absolute. In this respect,
it held that dacion in payment being in the nature of a contract of sale,
the principle that a deed of sale is considered absolute where there is
neither a stipulation in the deed that title to the property sold is reserved
in the seller until full payment thereof, nor one giving the vendor the right
to unilaterally resolve the contract the moment the buyer fails to pay
within a fixed period, applies to the instant dispute. The CA, thus,
concluded that applying said principle, the contract of sale or dacion
between the parties is absolute, not conditional. To be sure, the CA said,
there is no reservation of ownership of the subject property or a
stipulation providing for unilateral rescission by either party. In fact,
according to the CA, the sale was consummated upon the delivery of
the subject property to SSS.[44]
Anent the stipulations in the June 17, 1982 letter of the SSS according
to the CA, the conditions were not of a nature that would affect the
efficacy of the contract of sale. It, the CA said, merely provided the
manner by which the full consideration is to be applied to DDII's liability
and the implication of the payment vis-a-vis the pending criminal cases
filed against DDII.[45]
169
The CA, thus, ruled that all the requisites for a valid dation are present.
The sale and transfer of the subject property in favor of SSS are valid
and binding against DDII.
The CA went on to state that even assuming that the dation is defective,
said defect is immaterial due to DDII's inaction which lasted for 20,
years.[46] Applying the principle of laches, DDII's failure to assert its rights
over the property against SSS for 20 years since its consummation bars
it from recovering the subject property.[47]
With respect to the award of attorney's fees, the CA held that such is
improper,[48] there being no factual, legal, or equitable justification for the
award of attorney's fees in favor of DDII. As regards the award of
litigation expenses, the CA likewise deleted such for lack of factual or
legal justification therefor.[49]
Its Motion for Reconsideration having been denied by the CA in its
March 10,2017 Resolution,[50] DDII now comes before this Court for
relief.
The Issues
1. Whether or not there was a perfected "Dacion en Pago"
2. Whether or not the fact that the Transfer Certificates of Title
over the subject properties remained in the name of the
petitioner is a strong indicium that the parties remained in
the preparatory stage of contract-making
3. Whether or not the prescriptive period to file the action had
already prescribed
4. Whether or not petitioner slept on its rights that would
warrant the imposition of laches.
The pivotal issue in the instant case is whether or not there was a
perfected dacion en pago; and if answered in the affirmative, whether or
not SSS validly acquired title or interest over the subject properties. This
is so since if there was a perfected dacion and if title or interest over the
property was transferred to SSS, then an action for quieting of title filed
by DDII would not prosper since SSS has a legitimate interest and claim
over the properties subject of the case.
In the present petition, DDII argues that its offer to SSS contained in the
December 15, 1981 letter was never categorically accepted by the
latter.[51] For DDII, the seemingly unambiguous language of the SSS'
Memorandum is, in truth, a rejection of its offer, it being a qualified
acceptance thereof. It maintains that for there to be an acceptance of
the offer, it should be identical in all respects and must not contain any
modification or variation from the terms of the offer.[52]
Furthermore, petitioner claims, no document or instrument proving that
it accepted SSS' counter-offer exists, as it, in fact, remains
unaddressed.[53]
Moreover, DDII points out that in SSS' Brief, it admitted that it indeed
made a counter-offer to DDII, although it insists that DDII accepted said
counter-offer.[54] In this respect, DDII maintains that contrary to SSS'
position that it impliedly accepted the counter-offer by turning over to
SSS the possession and occupation of the property, said turnover was
done not because it is accepting the counter-offer but to show goodwill
in the negotiations.[55]
To further bolster its claim, DDII argues that the fact that the TCTs over
the property remain in the name of the original owner clearly indicates
that no dation in payment ever occurred.[56]
As to the CA's ruling that DDII's claim is barred by laches, it posits that
the cause of action did not arise when the possession of the property
was transferred to SSS.[57] According to it, the transfer being a show of
goodwill, there was, at that time, no threat against its title over the
property that would prompt DDII to seek redress from the courts and
commence the running of the prescriptive period. DDII maintains that
the reason why it took a long time before it sought the removal of a cloud
in its title is because it was under the impression that no offsetting took
place and that SSS was merely in physical possession thereof.[58]
In our January 31, 2018 Resolution, We required SSS to file its
Comment on the petition within a non-extendible period of 10 days. But
as of this date, the SSS has yet to file said Comment. In view of the fact
that the previous pleadings of the SSS sufficiently allow Us to decide the
instant dispute, We resolve to dispense with the SSS' Comment and
decide the case based on the records.
Our Ruling
170
We resolve to deny the petition.
Article 476 of the Civil Code provides:
Art. 476. Whenever there is a cloud on title to real property or any
interest therein, by reason of any instrument, record, claim,
encumbrance or proceeding which is apparently valid or effective but is
in truth and in fact invalid, ineffective, voidable, or unenforceable, and
may be prejudicial to said title, an action may be brought to remove such
cloud or to quiet the title.
An action may also be brought to prevent a cloud from being cast upon
title to real property or any interest therein.
For an action to quiet title to prosper, two indispensable requisites must
concur, namely: (1) the plaintiff or complainant has a legal or an
equitable title to or interest in the real property subject of the action; and
(2) the deed, claim, encumbrance, or proceeding claimed to be casting
cloud on his title must be shown to be in fact invalid or inoperative
despite its prima facie appearance of validity or legal efficacy.[59]
Here, the presence or absence of these two requisites is hinged on the
question of whether or not the proposed dacion en pago was indeed
perfected, thereby vesting unto SSS a legitimate title and interest over
the properties in question. In other words, if it can be proved that the
proposed dacion was perfected, or even consummated, then SSS' claim
which allegedly casts a cloud on DDII's title is valid and operative, and
consequently, the action for quieting of title filed by DDII will not prosper.
Dacion en pago
Among other modes, an obligation is extinguished by payment or
performance.[60] There is payment when there is delivery of money or
performance of an obligation.[61] Corollary thereto, Article 1245 of the
Civil Code provides for a special mode of payment called dacion in
payment (dacion en pago).
In dacion en pago, property is alienated to the creditor in satisfaction of
a debt in money.[62] The debtor delivers and transmits to the creditor the
former's ownership over a thing as an accepted equivalent of the
payment or performance of an outstanding debt.[63] In such cases, Article
1245 provides that the law on sales shall apply, since the undertaking
really partakes—in one sense—of the nature of sale; that is, the creditor
is really buying the thing or property of the debtor, the payment for which
is to be charged against the debtor's obligation.[64]
As a mode of payment, dacion en pago 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.[65]
It requires delivery and transmission of ownership of a thing owned by
the debtor to the creditor as an accepted equivalent of the performance
of the obligation. There is no dacion in payment when there is no transfer
of ownership in the creditor's favor, as when the possession of the thing
is merely given to the creditor by way of security.[66]
In the case at hand, in order to determine whether or not there was
indeed a perfected, or even consummated, dacion in payment, it is
necessary to review and assess the evidence and events that transpired
and see whether these correspond to the three stages of a contract of
sale. This is so since, as previously mentioned, dacion en
pagoagreements are governed, among others, by the law on sales.
Stages of a contract of sale
Briefly, the stages of a contract of sale are: (1) negotiation, covering the
period from the time the prospective contracting parties indicate interest
in the contract to the time the contract is perfected; (2) perfection, which
takes place upon the concurrence of the essential elements of the sale,
which is the meeting of the minds of the parties as to the object of the
contract and upon the price; and (3) consummation, which begins when
the parties perform their respective undertakings under the contract of
sale, culminating in the extinguishment thereof.[67] Each shall hereinafter
be discussed in seriatim.
First Stage: Negotiation Offer validly reduced
To recall, the negotiation stage covers the period from the time the
prospective contracting parties indicate interest in the contract to the
time the contract is perfected. This then includes the making of an offer
by one party to another and ends when both parties agree on the object
and the price.
In the instant case, the late Desiderio Dalisay, on March 11, 1977,
offered to SSS that they partially settle their obligations to the latter via
dacion. Dalisay offered several properties for P3,500,000 in favor of
171
SSS to partially extinguish petitioner's obligation which amounted to
P4,421,321.62.[68]
Then, years later or on May 27, 1982, the SSS' Committee met with the
corporation, represented by Atty. Cabarroguis. During said meeting,
Atty. Cabarroguis explained that he has "the authority to offer [the
properties] in the amount of 2 million pesos."[69] He also gave them an
assurance that that they will turn the properties over to SSS free of liens
and encumbrances,[70] and that his clients are ready to vacate the
premises and you can have it occupied anytime.[71]
In this respect, petitioner argues that Atty. Cabarroguis did not have the
requisite authority to make said representations and thereby bind the
corporation. DDII thus maintains that the offer to SSS remained at
P3,500,000. We beg to disagree.
While petitioner is correct that there is no evidence of Atty. Cabarroguis'
authority to represent the company in said meeting, this however is
outweighed by the fact that no one questioned Atty. Cabarroguis'
representations and authority after the conclusion of the negotiations;
and that a few days after the said meeting, the company immediately
arranged for the property's turnover through Dalisay-Tirol, Acting
President and General Manager, and eventually delivered possession
thereof to SSS.
What makes matters worse for petitioner is that it was well aware of what
transpired during the meeting and the agreements reached. In fact, after
the SSC issued Resolution No. 849 - s. 82 where it accepted DDII's
proposed dacion en pago at P2,000,000,[72] it sent a Letter dated June
17, 1982, communicating that:
We are pleased to inform you that pursuant to Resolution No. 849 dated
June 9, 1982, the Social Security Commission approved and confirmed
the acceptance of the offer of your client, the Dalisay Group of
Companies, that they be allowed to offset their outstanding liabilities with
the SSS with their property (lot and building), as described in the offer,
at Davao City valued at P2 million, subject to the following terms and
conditions:
1. The P2 million consideration in this transaction shall be
applied first to the premium contribution in arrears which
amounts to P1.5 million, more or less, and whatever amount
in excess of the P2 million after premium contribution shall
then be applied to the payment of penalties.
2. Part of the P2 million shall also be applied to its outstanding
education/salary loan obligations.
3. The criminal cases against the Dalisay Group of Companies
shall not be withdrawn as the penalties have not as yet been
valid (sic) in full and it is up to them to make the necessary
representations with the Fiscal's Office.
May we invite you, therefore, to sit down with us for the preparation of
the documents preparatory to the final transfer of the titles of the
properties to the SSS.[73]
We emphasize that it is only now, in this action for quieting of title filed
decades after the conclusion of the 1982 Meeting, that DDII questioned
Atty. Cabarroguis' authority to represent the corporation. If it were true
that Atty. Cabarroguis did not possess the requisite authority to
represent the company in said Meeting, then it could have opposed
such, contested his presence thereat, or even deny that the corporation
is reducing its offer to P2,000,000. Unfortunately for petitioner, despite
knowledge thereof, there is no evidence manifesting any opposition
thereto.
This acquiescence to Atty. Cabarroguis' representations and authority to
do so is strengthened by the fact that a few days after the conclusion of
the meeting, the company's Vice-President at that time, Dalisay-Tirol,
sent a Letter dated July 8, 1982, informing the SSS that they will be
vacating the premises offered and will turn over the possession thereof
to SSS, consistent with what was agreed upon during said meeting.
Thus:
We are pleased to advise you that by August 15, 1982, we will already
transfer to the next building. Desidal Building will already be available
for you to prepare for your own transfer. The delay is caused by the
preparation we have to make for the transfer of our office equipment and
records.
Kindly, send somebody on August 15th, so we can effect the proper
turnover of the building to you.[74]
Without an iota of evidence of any opposition to the offered P2,000,000
price coming from the company when it could have communicated such
to the SSS after the conclusion of the 1982 Meeting, plus the fact that
its Vice-President even informed SSS that they will be turning over the
property to the latter, We are sufficiently convinced that, contrary to
petitioner's claim, Atty. Cabarroguis acted within the scope of the
172
authority given him, which includes offering the properties at
P2,000,000.
It may be argued that the absence of the written document embodying
Atty. Cabarroguis' authority prevents the courts from unearthing what
indeed the extent of said authority is. Nevertheless, We are of the view
that the aforementioned events that transpired thereafter and the
absence of opposition coming from the company are sufficient proof that
they tacitly ratified Atty. Cabarroguis' acts during the meeting, assuming
he went beyond his authority in so doing. Thus, Article 1910 of the Civil
Code provides:
Art. 1910. The principal must comply with all the obligations which the
agent may have contracted within the scope of his authority.
As for any obligation wherein the agent has exceeded his power,
the principal is not bound except when he ratifies it expressly or
tacitly. (emphasis ours)
These, plus the absence of any allegation or proof that the SSS relied
upon Atty. Cabarroguis' actions in bad faith, convince Us that the
corporation bound itself to said representations and agreements
reached during the meeting via implied ratification.[75]
Accordingly, We conclude that DDII's offer was validly reduced from
P3,500,000 to P2,000,000.
We shall now discuss whether SSS' acceptance of the new offer
perfects the agreement on dation.
Second Stage: Perfection Acceptance absolute and unqualified
As regards the question whether the parties were able to perfect the
agreement on dacion en pago, the RTC ruled that they did not.
According to the trial court, SSS' "acceptance" was qualified which is
tantamount to a counter-offer, and not an absolute acceptance which
perfects the contract. Thus, said the RTC, there being no evidence to
show that petitioner accepted SSS' counter-offer, there was no dation to
speak of.
The CA was of a different view. According to the CA, SSC Resolution
No. 849 — s. 82 constitutes an absolute and unequivocal acceptance
which perfected the offered dacion. Thus, when possession of the
subject property was delivered to SSS, this signified a transfer of
ownership thereon, consistent with the supposedly perfected
agreement.
We agree with the CA that there was perfected dation in payment.
Article 1319 of the New Civil Code reads:
Art. 1319. Consent is manifested by the meeting of the offer and the
acceptance upon the tiling and the cause which are to constitute the
contract. The offer must be certain and the acceptance absolute. A
qualified acceptance constitutes a counter-offer.
Acceptance made by letter or telegram does not bind the offerer except
from the time it came to his knowledge. The contract, in such a case, is
presumed to have been entered into in the place where the offer was
made.
Relevant thereto are the following principles, as summarized by the
Court in Traders Royal Bank v. Cuison Lumber Co., Inc.,[76] thus:
Under the law, a contract is perfected by mere consent, that is, from the
moment that there is a meeting of the offer and the acceptance upon the
thing and the cause that constitutes the contract. The law requires that
the offer must be certain and the acceptance absolute and unqualified.
An acceptance of an offer may be express and implied; a qualified offer
(sic) constitutes a counter-offer. Case law holds that an offer, to be
considered certain, must be definite, while an acceptance is considered
absolute and unqualified when it is identical in all respects with that of
the offer so as to produce consent or a meeting of the minds. We have
also previously held that the ascertainment of whether there is a meeting
of minds on the offer and acceptance depends on the circumstances
surrounding the case.
The offer must be certain and definite with respect to the cause or
consideration and object of the proposed contract, while the acceptance
of this offer - express or implied - must be unmistakable, unqualified,
and identical in all respects to the offer. x x x (Italics supplied)
Also, in Manila Metal Container Corporation v. Philippine National
Bank,[77] the Court ruled:
A qualified acceptance or one that involves a new proposal constitutes
a counter-offer and a rejection of the original offer. A counter-offer is
considered in law, a rejection of the original offer and an attempt to end
the negotiation between the parties on a different basis. Consequently,
when something is desired which is not exactly what is proposed in the
offer, such acceptance is not sufficient to guarantee consent because
any modification or variation from the terms of the offer annuls the offer.
173
The acceptance must be identical in all respects with that of the offer so
as to produce consent or meeting of the minds. (Italics supplied)
Within the purview of the law on sales, a contract of sale is perfected by
mere consent, upon a meeting of the minds on the offer and the
acceptance thereof based on subject matter, price and terms of
payment.[78] It is perfected at the moment there is a meeting of the minds
uponi the thing which is the object of the contract and upon the price.[79]
Applying said principles to the case at bar convinces us that SSS'
acceptance of the offer at P2,000,000 resulted in a perfected dation. As
discussed earlier, the offer was validly reduced from P3,500,000 to
P2,000,000. Consequently, SSS' agreement to the P2,000,000 offer
was not a counter-offer as petitioner would have it, but an acceptance
of the new reduced offer communicated by the company's
representative, Atty. Cabarroguis, which acceptance perfected the
proposed dation in payment. DDII has the onus of proving that the
P2,000,000 offer made to SSS was invalid which would result in SSS'
acceptance at said amount to be different from the price offered.
Petitioner, however, failed to discharge said burden.
As regards petitioner's contention that the following conditions set forth
in the SSS' Letter dated June 17, 1982[80]make its acceptance a qualified
one, We find otherwise. To recall, said conditions are as follows:
We are pleased to inform you that pursuant to Resolution No. 849 dated
June 9, 1982, the Social Security Commission approved and confirmed
the acceptance of the offer of your client, the Dalisay Group of
Companies, that they be allowed to offset their outstanding liabilities with
the SSS with their property (lot and building), as described in the offer,
at Davao City valued at P2 million, subject to the following terms and
conditions:
1. The P2 million consideration in this transaction shall be
applied first to the premium contribution in arrears which
amounts to P1.5 million, more or less, and whatever amount
in excess of the P2 million after premium contribution shall
then be applied to the payment of penalties.
2. Part of the P2 million shall also be applied to its outstanding
education/salary loan obligations.
3. The criminal cases against the Dalisay Group of Companies
shall not be withdrawn as the penalties have not as yet been
valid (sic) in full and it is up to them to make the necessary
representations with the Fiscal's Office.
May we invite you, therefore, to sit down with us for the preparation of
the documents preparatory to the final transfer of the titles of the
properties to the SSS.[81]
A reading of the transcript of the 1982 Meeting reveals that the
procedure in applying the proceeds of the dacion en pago actually came
from the company, through Atty. Cabarroguis, and not from SSS. Thus:
Atty. Cabarroguis: We only pray that in order that the penalties will not
continue to run, on the unpaid remittance premiums, we only request
tha the amount of 2 million be applied first to the premiums, unremitted
premiums, the excess would be part of the penalty so that what will
remain will be the penalties themselves.[82]
This to Us clearly shows that the SSS simply agreed to saicl proposal
when it included such in its Resolution. It is not a new condition imposed
by the SSS as petitioner argues.
Having settled that the parties were in agreement as to the price and
that the acceptance by SSS was, in fact, unqualified, We are convinced
that the parties indeed have a perfected contract. We shall now
determine whether said contract was consummated, thereby solidifying
SSS' title, interest, and claim over the properties.
Third Stage: Consummation Transfer of possession to SSS
tantamount to "delivery"
Agreeing with SSS, the CA held that the agreement on dacion en pago
was consummated by DDII's delivery of the property to SSS.[83] We
agree.
The third stage of a contract of sale is consummation which begins when
the parties perform their respective undertakings under the contract of
sale, culminating in the extinguishment thereof.[84]
While a contract of sale is perfected by mere consent, ownership of the
thing sold is acquired only upon its delivery to the buyer. Upon the
perfection of the sale, the seller assumes the obligation to transfer
ownership and to deliver the thing sold, but the real right of ownership is
transferred only "by tradition" or delivery thereof to the buyer.[85]
In this regard, reference must be made to Article 1496 of the Civil Code,
which reads:
ARTICLE 1496. The ownership of the thing sold is acquired by the
vendee from the moment it is delivered to him in any of the ways
specified in Articles 1497 to 1501, or in any other manner signifying an
174
agreement that the possession is transferred from the vendor to the
vendee. (n)
Material to the case at bar is tradition by real or actual delivery
contemplated Article 1497 of the same Code. Thus:
ARTICLE 1497. The thing sold shall be understood as delivered, when
it is placed in the control and possession of the vendee. (1462a)
In Cebu Winland Development Corporation v. Ong Siao Hua, We
explained that:
Under the Civil Code, ownership does not pass by mere stipulation but
only by delivery. Manresa explains, "the delivery of the thing . . .
signifies that title has passed from the seller to the buyer."
According to Tolentino, the purpose of delivery is not only for the
enjoyment of the thing but also a mode of acquiring dominion and
determines the transmission of ownership, the birth of the real right. The
delivery under any of the forms provided by Articles 1497 to 1505 of the
Civil Code signifies that the transmission of ownership from vendor
to vendee has taken place.[86] (Citations omitted)
Here, petitioner DDII insists that its delivery of the property to SSS was
only to show its goodwill in the negotiations. The records, however,
reveal otherwise.
It is well to emphasize that nowhere in their communications or
during the discussions at the meeting is it stated that the company
will turn over possession of the property to SSS to show its
goodwill while the negotiations were pending.
Too, consider the following turn of events:
1. During the 1982 Meeting, the following discussions took
place:
Atty. Cabarroguis: Yes. Now it is the earnest desire of Mr.
Dalisay somehow, to be able to compensate for the benefits
of the employees, that's why he is offering this. And if this
would be considered seriously by the System, Mrs. Tirol
made arrangements with the Philippine National Bank that
this property be released because x x x if a portion of the
obligation will be paid to the PNB, then it will release this
particular property, so we will be turning this over to you clear
of any liens or encumbrances. Thank you very much.[87]
xxxx
Atty. Cabarroguis: The Legal Department of the SSS can
prepare the Deed of Sale or whatever documents that have
to be prepared. My clients are ready to vacate the premises
and you can have it occupied anytime.[88] x x x
2. Thereafter, or on July 8, 1982, DDII, through Dalisay-Tirol,
informed SSS that the company is preparing the subject
property, especially the building, for its turnover on August
15, 1982.[89] Guilty of reiteration, the said Letter reads,
thusly:
We are pleased to advise you that by August 15, 1982, we
will already transfer to the next building. Desidal Building will
already be available for you to prepare for your own transfer.
The delay is caused by the preparation we have to make for
the transfer of our office equipment and records.
Kindly, send somebody on August 15th, so we can effect the
proper turnover of the building to you.[90]
3. Then, on January 4, 1983, the corporation arranged for the
release or replacement of the properties subject of the dacion
from its mortgage with the PNB. Thus:
DESIDERIO DALISAY INVESTMENTS, INC.
Desidal Building, Agdao, Davao City January 4, 1983 Mr. Julius
L. Campo Asst. Vice-President & Manager Philippine National
Bank Davao Branch, Davao City
RE: DESIDAL INVESTMENTS COLLATERAL
Dear Mr. Campo:
This is to formally inform your good office that Desidal
Investments, Inc. and the Estate of Regina L. Dalisay would like
to request for substitution of collaterals or properties
encumbered with your bank.
xxxx
This request for substitution of collaterals had been made
primarily because Social Security System, Regional Office
of Davao, is very much interested to purchase our Desidal
175
 office building. (emphasis ours)
xxxx
Truly yours,
(SGD)
DESIDERIO DALISAY
President Desidal Investments, Inc.[91]
4. As regards the obligation to deliver to SSS the certificates of
title over the properties, DDII failed to do so even after the
PNB has already executed a Deed of Confirmatory Sale in
favor of DDII for properties that it reacquired, including the
property subject of the present dispute. This prompted Jara
to execute an Affidavit of Adverse Claim[92] over the
properties.
5. Jara then sent a letter to Dalisay-Tirol, formally demanding
the certificates of title over the properties subject of the
dacion, stating that "[t]he mortgage with PNB has already
been settled by Desiderio Dalisay Investments, Inc. last
January 20, 1994, but the titles were not delivered to the
SSS in violation of the express terms in the dacionin
payment that the Dalisay group should deliver the titles after
the release of the mortgage with the PNB."[93]
6. In her reply, Dalisay-Tirol, now President of DDII, stated that
the corporation could not at that time give due course and
act on the matter because of several issues that need to be
resolved first.
The aforementioned events that transpired convince Us that contrary to
petitioner's claim, the turnover of the properties to SSS was tantamount
to delivery or "tradition" which effectively transferred the real right of
ownership over the properties from DDII to SSS.[94] Even after a review
of the records of the case, this Court is unable to find any
indication that when they turned over the properties to SSS, the
company reserved its ownership over the property and only
transferred the jus possidendi thereon to SSS.
Too, if it indeed turned over the possession of the property to simply
show goodwill in the negotiations, then there would be no need for it to
give SSS possession of the subject property free from all liens and
encumbrances.
Thus, contrary to petitioner's arguments, We are of the view that the
turnover was in fact tantamount to tradition and was not done simply to
show goodwill on the part of the company. What was only left to be done
was for the corporation to surrender the certificates of title over the
properties, free from all liens and encumbrances as promised during the
1982 meeting, so as to facilitate its transfer in SSS' name.
Indeed, as expounded by this Court in Equatorial Realty Development,
Inc. v. Mayfair Theater, Inc.:[95]
Delivery has been described as a composite act, a thing in which both
parties must join and the minds of both parties concur. It is an act by
which one party parts with the title to and the possession of the
property, and the other acquires the right to and the possession of
the same. In its natural sense, delivery means something in addition to
the delivery of property or title; it means transfer of possession. In the
Law on Sales, delivery may be either actual or constructive, but
both forms of delivery contemplate "the absolute giving up of the
control and custody of the property on the part of the vendor, and
the assumption of the same by the vendee."
This being the case, We find that SSS has validly and in good faith
acquired title to the property subject of the dispute, making the action to
quiet title filed by DDII improper.
Additionally, it is well to emphasize that in order that an action for
quieting of title may prosper, it is essential that the plaintiff must have
legal or equitable title to, or interest in, the property which is the subject-
matter of the action.[96]Legal title denotes registered ownership, while
equitable title means beneficial ownership. In the absence of such legal
or equitable title, or interest, there is no cloud to be prevented or
removed.[97]
Here, DDII having divested itself of any claim over the property in favor
of SSS by means of sale via dacion en pago, petitioner has lost its title
over the property which would give it legal personality to file said action.
176
Thus, the CA did not err in dismissing the complaint for lack of merit.
A necessary consequence of this ruling is the recomputation of DDII's
obligations to SSS as a result of the application of the P2,000,000
amount agreed upon in the dacion. Thus, SSS shall recompute said
outstanding obligations by deducting from the total obligations as of
June 17, 1982 the amount of P2,000,000, following the terms and
conditions agreed upon. Said date refers to SSS communication of its
acceptance of the offer, resulting in the perfection of the contract.[98]
At this point, it is well to remind DDII that it cannot escape its liability
from SSS by giving the latter possession over the property with the
representation that it is doing so as partial settlement of its unremitted
SSS premiums and penalties due only to take the property back
decades thereafter, seek condonation of its obligations, and to make
matters worse, claim payment of back rentals from SSS. While it is true
that the value of the property has definitely significantly increased over
the years compared to the P2,000,000 amount for which it was offered
to SSS, still, such is not sufficient justification for DDII to turn its back on
its obligations under the dacion en pago agreement. In fact, the turn of
events convinces Us that DDII's actions are tainted with bad faith.
2. Surrender the Owner's Duplicate of Transfer Certificate of
Title Nos. T-18203, T-18204, T-255986, and T-255985, as
well as the Tax Declarations over said properties to
respondent Social Security System within ten (10) days from
finality of this Decision.
Should petitioner Desiderio Dalisay Investments, Inc. refuse to execute
said Deed of Sale, the Clerk of Court shall execute such in favor of
respondent Social Security System.
The Register of Deeds of Davao City is directed to cancel the subject
titles and issue new ones in the name of respondent Social Security
System.
Respondent Social Security System is ordered to re-compute
petitioner's obligations accordingly, reckoned from June 17, 1982, the
date when respondent communicated its acceptance of the offer.
SO ORDERED.

If We were to grant the reliefs prayed for by DDII, an injustice will

definitely be caused to SSS, which in good faith relied upon the
company's representations. Too, We find it proper to remind DDII that it
would not have lost ownership over the property if, in the first place, it
diligently paid the SSS premiums due.

With these, We need not belabor the other assigned errors.

WHEREFORE, the instant petition is DENIED. The assailed August 12,

2016 Decision and March 10, 2017 Resolution of the Court of Appeals
in CA-G.R. CV No. 03233-MIN are hereby AFFIRMED. The complaint
for quieting of title, recovery of possession and damages, docketed as
Civil Case No. 29,353-02, is DISMISSED for lack of merit.

Petitioner Desiderio Dalisay Investments, Inc. is hereby ordered to:

1. Execute the Deed of Sale over the properties in favor of
respondent Social Security System, consistent with the
terms and conditions of the dacion en pago agreed upon by
the parties as embodied in SSC Resolution No. 849 - s. 82
within ten (10) days from finality of this Decision; and

177
 1249 - PAYMENT BY DELIVERY OF PROMISSORY NOTES/BILLS
OF EXCHANGE/ MERCANTILE DOCUMENTS: EXCEPTIONS
EVANGELISTA v. SCREENEX, INC (SERENO)
SERENO, C.J.:
This is a Petition[2] for Review on Certiorari seeking to set aside the
Decision[3] and Resolution[4] rendered by the Court of Appeals (CA)
Manila, Fifth Division, in CA-G.R. SP No. 110680.
ANTECEDENT FACTS
The facts as summarized by the CA are as follows:
Sometime in 1991, [Evangelista] obtained a loan from respondent
Screenex, Inc. which issued two (2) checks to [Evangelista]. The first
check was UCPB Check No. 275345 for P1,000,000 and the other one
is China Banking Corporation Check No. BDO 8159110 for P500,000.
There were also vouchers of Screenex that were signed by the accused
evidencing that he received the 2 checks in acceptance of the loan
granted to him.
As security for the payment of the loan, [Evangelista] gave two (2) open
dated checks: UCPB Check Nos. 616656 and 616657, both pay to the
order of Screenex, Inc. From the time the checks were issued by
[Evangelista], they were held in safe keeping together with the other
documents and papers of the company by Philip Gotuaco, Sr., father-
in--law of respondent Alexander Yu, until the former's death on 19
November 2004.
Before the checks were deposited, there was a personal demand from
the family for [Evangelista] to settle the loan and likewise a demand
letter sent by the family lawyer.[5]
On 25 August 2005, petitioner was charged with violation of Batas
Pambansa (BP) Blg. 22 in Criminal Case Nos. 343615-16 filed with the
Metropolitan Trial Court (MeTC) of Makati City, Branch 61.[6] The
Information reads:
That sometime in 1991, in the City of Makati, Metro Manila, Philippines,
a place within the jurisdiction of this Honorable Court, the above-named
accused, did then and there, willfully, unlawfully and feloniously make
out, draw, and issue to SCREENEX INC., herein represented by
ALEXANDER G. YU, to apply on account or for value the checks
described below:
Check No. Date Amount
United Coconut AGR 616656 12-22-04 P1,000,000.00
Planters Bank AGR 616657 12-22-04 500,000.00
said accused well knowing that at the time of issue thereof, said accused
did not have sufficient funds in or credit with the drawee bank for the
payment in full of the face amount of such check upon its presentment
which check when presented for payment within ninety (90) days from
the date thereof, was subsequently dishonored by the drawee bank for
the reason "ACCOUNT CLOSED" and despite receipt of notice of such
dishonor, the said accused failed to pay said payee the face amount of
said checks or to make arrangement for full payment thereof within five
(5) banking days after receiving notice.
CONTRARY TO LAW.[7]
Petitioner pleaded not guilty when arraigned, and trial proceeded.[8]
THE RULING OF THE MeTC
The MeTC found that the prosecution had indeed proved the first two
elements of cases involving violation of BP 22: i.e. the accused makes,
draws or issues any check to apply to account or for value, and the
check is subsequently dishonored by the drawee bank for insufficiency
of funds or credit; or the check would have been dishonored for the same
reason had not the drawer, without any valid reason, ordered the bank
to stop payment. The trial court pointed out, though, that the prosecution
failed to prove the third element; i.e. at the time of the issuance of the
check to the payee, the latter did not have sufficient funds in, or credit
with, the drawee bank for payment of the check in full upon its
presentment.[9] In the instant case, the court held that while prosecution
witness Alexander G. Yu declared that the lawyer had sent a demand
letter to Evangelista, Yu failed to prove that the letter had actually been
received by addressee. Because there was no way to determine when
the five-day period should start to toll, there was a failure to establish
178
prima facie evidence of knowledge of the insufficiency of funds on the
part of Evangelista.[10] Hence, the court acquitted him of the criminal
charges.
Ruling on the civil aspect of the cases, the court held that while
Evangelista admitted to having issued and delivered the checks to
Gotuaco and to having fully paid the amounts indicated therein, no
evidence of payment was presented.[11] It further held that the creditor's
possession of the instrument of credit was sufficient evidence that the
debt claimed had not yet been paid.[12] In the end, Evangelista was
declared liable for the corresponding civil obligation.[13]
The dispositive portion of the Decision[14] reads:
WHEREFORE, judgment is rendered acquitting the accused
BENJAMIN EVANGELISTA for failure of the prosecution to establish all
the elements constituting the offense of Violation of B.P. 22 for two (2)
counts. However, accused is hereby ordered to pay his civil obligation
to the private complainant in the total amount of ONE MILLION FIVE
HUNDRED THOUSAND PESOS (P1,500,000) plus twelve (12%)
percent interest per annum from the date of the filing of the two sets of
Information until fully paid and to pay the costs of suit.
SO ORDERED.[15]
THE RULING OF THE RTC
Evangelista filed a timely Notice of Appeal[16] and raised two errors of
the MeTC before the Regional Trial Court (RTC) of Makati City, Branch
147. Docketed therein as Criminal Case Nos. 08-1723 and 08-1724, the
appeal posed the following issues: (1) the lower court erred in not
appreciating the fact that the prosecution failed to prove the civil liability
of Evangelista to private complainant; and (2) any civil liability
attributable to Evangelista had been extinguished and/or was barred by
prescription.[17]
After the parties submitted their respective Memoranda,[18] the RTC
ruled that the checks should be taken as evidence of Evangelista's
indebtedness to Gotuaco, such that even if the criminal aspect of the
charge had not been established, the obligation subsisted.[19] Also, the
alleged payment by Evangelista was an affirmative defense that he had
the burden of proving, but that he failed to discharge.[20] With respect to
the defense of prescription, the RTC ruled in this wise:
As to the defense of prescription, the same cannot be successfully
invoked in this appeal. The 10-year prescriptive period of the action
under Art. 1144 of the New Civil Code is computed from the time the
right of action accrues. The terms and conditions of the loan obligation
have not been shown, as only the checks evidence the same. It has not
been shown when the loan obligation was to mature such that there is
no basis to show or from which to infer, when the cause of action (non-
payment of the loan) which would give the obligee the right to seek
redress for the non-payment of the obligation, accrued. In other words,
the reckoning point of prescription has not been established.
Prosecution witness Alexander G. Yu was not competent to state that
the loan was contracted in 1991 as in fact, Yu admitted that it was a few
months before his father-in-law (Philip Gotuaco) died when the latter told
him about accused's failure to pay his obligation. That was a few months
before November 19, 2004, date of death of his father-in-law.
At any rate, the right of action in this case is not upon a written contract,
for which reason, Art. 1144, New Civil Code, on prescription does not
apply.[21]
In a Decision[22] dated 18 December 2008, the RTC dismissed the
appeal and affirmed the MeTC decision in toto.[23] The Motion for
Reconsideration[24] was likewise denied in an Order[25] dated 19 August
2009.
THE RULING OF THE CA
Evangelista filed a petition for review[26] before the CA insisting that the
lower court erred in finding him liable to pay the sum with interest at 12%
per annum from the date of filing until full payment. He further alleged
that witness Yu was not competent to testify on the loan transaction; that
the insertion of the date on the checks without the knowledge of the
accused was an alteration that avoided the checks; and that the
obligation had been extinguished by prescription.[27]
Screenex, Inc., represented by Yu, filed its Comment.[28] Yu claimed that
he had testified on the basis of his personal dealings with his father-in-
179
law, whom Evangelista dealt with in obtaining the loan. He further
claimed that during the trial, petitioner never raised the competence of
the witness as an issue.[29] Moreover, Yu argued that prescription set in
from the accrual of the obligation; hence, while the loan was transacted
in 1991, the demand was made in February 2005, which was within the
10-year prescriptive period.[30] Yu also argued that while Evangelista
claimed under oath that the loan had been paid in 1992, he was not able
to present any proof of payment.[31] Meanwhile, Yu insisted that the
material alteration invoked by Evangelista was unavailing, since the
checks were undated; hence, nothing had been altered.[32] Finally, Yu
argued that Evangelista should not be allowed to invoke prescription,
which he was raising for the first time on appeal, and for which no
evidence was adduced in the court of origin.[33]
The CA denied the petition.[34] It held that (1) the reckoning time for the
prescriptive period began when the instrument was issued and the
corresponding check returned by the bank to its depositor;[35] (2) the
issue of prescription was raised for the first time on appeal with the
RTC;[36] (3) the writing of the date on the check cannot be considered as
an alteration, as the checks were undated, so there was nothing to
change to begin with;[37] (4) the loan obligation was never denied by
petitioner, who claimed that it was settled in 1992, but failed to show any
proof of payment.[38] Quoting the MeTC Decision, the CA declared:
[t]he mere possession of a document evidencing an obligation by the
person in whose favor it was executed, merely raises a presumption of
nonpayment which may be overcome by proof of payment, or by
satisfactory explanation of the fact that the instrument is found in the
hands of the original creditor not inconsistent with the fact of payment.[39]
The dispositive portion reads:
WHEREFORE, premises considered, the petition is DENIED. The
assailed August 19, 2009 Order of the Regional Trial Court, Branch 147,
Makati City, denying petitioner's Motion for Reconsideration of the
Court's December 18, 2008 Decision in Crim. Case Nos. 08-1723 and
08-1724 are AFFIRMED.
SO ORDERED.[40]
Petitioner filed a Motion for Reconsideration,[41] which was similarly
denied in a Resolution[42] dated 27 February 2014.
Hence, this Petition,[43] in which petitioner contends that the lower court
erred in ordering the accused to pay his alleged civil obligation to private
complainant. In particular, he argues that the court did not consider the
prosecution's failure to prove his civil liability to respondent, and that any
civil liability there might have been was already extinguished and/or
barred by prescription.[44]
Meanwhile, respondent filed its Comment,[45] arguing that the date of
prescription was reckoned from the date of the check, 22 December
2004. So when the complaint was filed on 25 August 2005, it was
supposedly well within the prescriptive period of ten (10) years under
Article 1144 of the New Civil Code.[46]
OUR RULING
With petitioner's acquittal of the criminal charges for violation of BP 22,
the only issue to be resolved in this petition is whether the CA committed
a reversible error in holding that petitioner is still liable for the total
amount of P1.5 million indicated in the two checks.
We rule in favor of petitioner.
A check is discharged by any other act which
will discharge a simple contract for the
payment of money.
In BP 22 cases, the action for the corresponding civil obligation is
deemed instituted with the criminal action.[47] The criminal action for
violation of BP 22 necessarily includes the corresponding civil action,
and no reservation to file such civil action separately shall be allowed or
recognized.[48]
The rationale for this rule has been elucidated in this wise:
Generally, no filing fees are required for criminal cases, but because of
the inclusion of the civil action in complaints for violation of B.P. 22, the
Rules require the payment of docket fees upon the filing of the
complaint. This rule was enacted to help declog court dockets which are
180
filled with B.P. 22 cases as creditors actually use the courts as collectors. (c) By the intentional cancellation thereof by the holder;
Because ordinarily no filing fee is charged in criminal cases for actual
damages, the payee uses the intimidating effect of a criminal charge to (d) By any other act which will discharge a simple contract for the
collect his credit gratis and sometimes, upon being paid, the trial court payment of money;
is not even informed thereof. The inclusion of the civil action in the
criminal case is expected to significantly lower the number of cases filed
before the courts for collection based on dishonored checks. It is also (e) When the principal debtor becomes the holder of the instrument at
expected to expedite the disposition of these cases. Instead of instituting or after maturity in his own right. (Emphasis supplied)
two separate cases, one for criminal and another for civil, only a single
suit shall be filed and tried. It should be stressed that the policy laid down A check therefore is subject to prescription of actions upon a written
by the Rules is to discourage the separate filing of the civil action. The contract. Article 1144 of the Civil Code provides:
Rules even prohibit the reservation of a separate civil action, which
means that one can no longer file a separate civil case after the criminal Article 1144. The following actions must be brought within ten years from
complaint is filed in court. The only instance when separate proceedings the time the right of action accrues:
are allowed is when the civil action is filed ahead of the criminal case.
Even then, the Rules encourage the consolidation of the civil and
1) Upon a written contract;
criminal cases. We have previously observed that a separate civil action
2) Upon an obligation created by law;
for the purpose of recovering the amount of the dishonored checks
3) Upon a judgment. (Emphasis supplied)
would only prove to be costly, burdensome and time-consuming for both
parties and would further delay the final disposition of the case. This
multiplicity of suits must be avoided.[49] (Citations omitted) Barring any extrajudicial or judicial demand that may toll the 10-year
prescription period and any evidence which may indicate any other time
when the obligation to pay is due, the cause of action based on a check
This notwithstanding, the civil action deemed instituted with the criminal
is reckoned from the date indicated on the check.
action is treated as an "independent civil liability based on contract."[50]

If the check is undated, however, as in the present petition, the cause of

By definition, a check is a bill of exchange drawn on a bank 'payable on
demand.[51] It is a negotiable instrument - written and signed by a drawer
containing an unconditional order to pay on demand a sum certain in
money.[52] It is an undertaking that the drawer will pay the amount
indicated thereon. Section 119 of the NIL, however, states that a
negotiable instrument like a check may be discharged by any other act
which will discharge a simple contract for the payment of money, to wit:
Sec. 119. Instrument; how discharged. - A negotiable instrument is
discharged:
(a) By payment in due course by or on behalf of the principal debtor;
(b) By payment in due course by the party accommodated, where the
instrument is made or accepted for his accommodation;
action is reckoned from the date of the issuance of the check. This is so
because regardless of the omission of the date indicated on the check,
Section 17[53] of the Negotiable Instruments Law instructs that an
undated check is presumed dated as of the time of its issuance.
While the space for the date on a check may also be filled, it must,
however, be filled up strictly in accordance with the authority given and
within a reasonable time.[54] Assuming that Yu had authority to insert the
dates in the checks, the fact that he did so after a lapse of more than 10
years from their issuance certainly cannot qualify as changes made
within a reasonable time.
Given the foregoing, the cause of action on the checks has become
stale, hence, time-barred. No written extrajudicial or judicial demand
was shown to have been made within 10 years which could have tolled
the period. Prescription has indeed set in.

181
Prescription allows the court to dismiss the
casemotu proprio.
We therefore have no other recourse but to grant the instant petition on
the ground of prescription. Even if that defense was belatedly raised
before the RTC for the first time on appeal from the ruling of the MeTC,
we nonetheless dismiss the complaint, seeking to enforce the civil
liability of Evangelista based on the undated checks, by applying Section
1 of Rule 9 of the Rules of Court, to wit:
Section 1. Defenses and objections not pleaded. - Defenses and
objections not pleaded either in a motion to dismiss or in the answer are
deemed waived. However, when it appears from the pleadings or the
evidence on record that the court has no jurisdiction over the subject
matter, that there is another action pending between the same parties
for the same cause, or that the action is barred by a prior judgment or
by statute of limitations, the court shall dismiss the claim.
While it was on appeal before the RTC that petitioner invoked the
defense of prescription, we find that the pleadings and the evidence on
record indubitably establish that the action to hold petitioner liable for
the two checks has already prescribed.
The delivery of the check produces the effect
of payment when through the fault of the
creditor they have been impaired
It is a settled rule that the creditor's possession of the evidence of debt
is proof that the debt has not been discharged by payment.[55] It is
likewise an established tenet that a negotiable instrument is only a
substitute for money and not money, and the delivery of such an
instrument does not, by itself, operate as payment.[56] Thus, in BPI v.
Spouses Royeca,[57] we ruled that despite the lapse of three years from
the time the checks were issued, the obligation still subsisted and was
merely suspended until the payment by commercial document could
actually be realized.[58]
However, payment is deemed effected and the obligation for which the
check was given as conditional payment is treated discharged, if a
period of 10 years or more has elapsed from the date indicated on the
check until the date of encashment or presentment for payment. The
failure to encash the checks within a reasonable time after issue, or
more than 1 0 years in this instance, not only results in the checks
becoming stale but also in the obligation to pay being deemed fulfilled
by operation of law.
Art. 1249 of the Civil Code specifically provides that checks should be
presented for payment within a reasonable period after their issuance,
to wit:
Art. 1249. The payment of debts in money shall be made in the currency
stipulated, and if it is not possible to deliver such currency, then in the
currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of
exchange or other mercantile documents shall produce the effect
of payment only when they have been cashed, or when through the
fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be
held in the abeyance. (Emphasis supplied)
This rule is similarly stated in the Negotiable Instruments Law as follows:
Sec. 186. Within what time a check must be presented. — A check must
be presented for payment within a reasonable time after its issue or
the drawer will be discharged from liability thereon to the extent of
the loss caused by the delay. (Emphasis supplied)
These provisions were the very same ones we cited when we
discharged a check by reason of the creditor's unreasonable or
unexplained delay in encashing it. In Papa v. Valencia,[59] the
respondents supposedly paid the petitioner the purchase price of the
lots in cash and in check. The latter disputed this claim and argued that
he had never encashed the checks, and that he could no longer recall
the transaction that happened 10 years earlier. This Court ruled:
Granting that petitioner had never encashed the check, his failure to do
so for more than ten (10) years undoubtedly resulted in the impairment
of the check through his unreasonable and unexplained delay.
182
While it is true that the delivery of a check produces the effect of
payment only when it is cashed, pursuant to Art. 1249 of the Civil Code,
the rule is otherwise if the debtor is prejudiced by the creditor's
unreasonable delay in presentment. The acceptance of a check
implies an undertaking of due diligence in presenting it for
payment, and if he from whom it is received sustains loss by want
of such diligence, it will be held to operate as actual payment of the
debt or obligation for which it was given. It has, likewise, been held
that if no presentment is made at all, the drawer cannot be held liable
irrespective of loss or injury unless presentment is otherwise excused.
This is in harmony with Article 1249 of the Civil Code under which
payment by way of check or other negotiable instrument is conditioned
on its being cashed, except when through the fault of the creditor, the
instrument is impaired. The payee of a check would be a creditor under
this provision and if its no-payment is caused by his negligence,
payment will be deemed effected and the obligation for which the check
was given as conditional payment will be discharged.[60] (Citations
omitted and emphasis supplied)

Similarly in this case, we find that the delivery of the checks, despite the
subsequent failure to encash them within a period of 10 years or more,
had the effect of payment. Petitioner is considered discharged from his
obligation to pay and can no longer be pronounced civilly liable for the
amounts indicated thereon.

WHEREFORE, the instant Petition is GRANTED. The Decision dated 1

October 2013 and Resolution dated 27 February 2014 in CA-G.R. SP
No. 110680 are SET ASIDE. The Complaint against petitioner is hereby
DISMISSED.

SO ORDERED.

183
1250 - EXTRAORDINARY INFLATION/DEFLATION
A) Ordering [Equitable] to reinstate and return the amount of
EQUITABLE PCI v. NG SHUENG NGOR [respondents'] deposit placed on hold status;

CORONA, J.:
B) Ordering [Equitable] to pay [respondents] the sum of P12
This petition for review on certiorari[1] seeks to set aside the decision[2] [m]illion [p]esos as moral damages;
of the Court of Appeals (CA) in CA-G.R. SP No. 83112 and its
resolution[3] denying reconsideration.
C) Ordering [Equitable] to pay [respondents] the sum of P10
On October 7, 2001, respondents Ng Sheung Ngor,[4] Ken Appliance [m]illion [p]esos as exemplary damages;
Division, Inc. and Benjamin E. Go filed an action for annulment and/or
reformation of documents and contracts[5] against petitioner Equitable
PCI Bank (Equitable) and its employees, Aimee Yu and Bejan Lionel
Apas, in the Regional Trial Court (RTC), Branch 16 of Cebu City.[6] They D) Ordering defendants Aimee Yu and Bejan [Lionel] Apas to pay
claimed that Equitable induced them to avail of its peso and dollar credit [respondents], jointly and severally, the sum of [t]wo [m]illion
facilities by offering low interest rates[7] so they accepted Equitable's [p]esos as moral and exemplary damages;
proposal and signed the bank's pre-printed promissory notes on various
dates beginning 1996. They, however, were unaware that the
documents contained identical escalation clauses granting Equitable E) Ordering [Equitable, Aimee Yu and Bejan Lionel Apas], jointly
authority to increase interest rates without their consent.[8] and severally, to pay [respondents'] attorney's fees in the sum
of P300,000; litigation expenses in the sum of P50,000 and the
Equitable, in its answer, asserted that respondents knowingly accepted cost of suit;
all the terms and conditions contained in the promissory notes.[9] In fact,
they continuously availed of and benefited from Equitable's credit
facilities for five years.[10] F) Directing plaintiffs Ng Sheung Ngor and Ken Marketing to pay
[Equitable] the unpaid principal obligation for the peso loan as
After trial, the RTC upheld the validity of the promissory notes. It found well as the unpaid obligation for the dollar denominated loan;
that, in 2001 alone, Equitable restructured respondents' loans
amounting to US$228,200 and P1,000,000.[11] The trial court, however,
invalidated the escalation clause contained therein because it violated
the principle of mutuality of contracts.[12] Nevertheless, it took judicial G) Directing plaintiff Ng Sheung Ngor and Ken Marketing to pay
notice of the steep depreciation of the peso during the intervening [Equitable] interest as follows:
period[13] and declared the existence of extraordinary deflation.[14]
Consequently, the RTC ordered the use of the 1996 dollar exchange
rate in computing respondents' dollar-denominated loans.[15] Lastly, 1) 12% per annum for the peso loans;
because the business reputation of respondents was (allegedly)
severely damaged when Equitable froze their accounts,[16] the trial court
awarded moral and exemplary damages to them.[17]

The dispositive portion of the February 5, 2004 RTC decision[18]

provided:
WHEREFORE, premises considered, judgment is hereby rendered:

184
 2) 8% per annum for the dollar loans. The basis for the
payment of the dollar obligation is the conversion rate of
P26.50 per dollar availed of at the time of incurring of the
obligation in accordance with Article 1250 of the Civil Code
of the Philippines;
H) Dismissing [Equitable's] counterclaim except the payment of
the aforestated unpaid principal loan obligations and interest.
SO ORDERED.[19]
Equitable and respondents filed their respective notices of appeal.[20]
In the March 1, 2004 order of the RTC, both notices were denied due
course because Equitable and respondents "failed to submit proof that
they paid their respective appeal fees."[21]
WHEREFORE, premises considered, the appeal interposed by
defendants from the Decision in the above-entitled case is DENIED due
course. As of February 27, 2004, the Decision dated February 5,
2004, is considered final and executory in so far as [Equitable,
Aimee Yu and Bejan Lionel Apas] are concerned.[22](emphasis
supplied)
Equitable moved for the reconsideration of the March 1, 2004 order of
the RTC[23] on the ground that it did in fact pay the appeal fees.
Respondents, on the other hand, prayed for the issuance of a writ of
execution.[24]
On March 24, 2004, the RTC issued an omnibus order denying
Equitable's motion for reconsideration for lack of merit[25] and ordered
the issuance of a writ of execution in favor of respondents.[26] According
to the RTC, because respondents did not move for the reconsideration
of the previous order (denying due course to the parties' notices of
appeal),[27] the February 5, 2004 decision became final and executory
as to both parties and a writ of execution against Equitable was in
order.[28]
A writ of execution was thereafter issued[29] and three real properties of
Equitable were levied upon.[30]
On March 26, 2004, Equitable filed a petition for relief in the RTC from
the March 1, 2004 order.[31] It, however, withdrew that petition on March
30, 2004[32] and instead filed a petition for certiorari with an application
for an injunction in the CA to enjoin the implementation and execution of
the March 24, 2004 omnibus order.[33]
On June 16, 2004, the CA granted Equitable's application for injunction.
A writ of preliminary injunction was correspondingly issued.[34]
Notwithstanding the writ of injunction, the properties of Equitable
previously levied upon were sold in a public auction on July 1, 2004.
Respondents were the highest bidders and certificates of sale were
issued to them.[35]
On August 10, 2004, Equitable moved to annul the July 1, 2004 auction
sale and to cite the sheriffs who conducted the sale in contempt for
proceeding with the auction despite the injunction order of the CA.[36]
On October 28, 2005, the CA dismissed the petition for certiorari.[37] It
found Equitable guilty of forum shopping because the bank filed its
petition for certiorari in the CA several hours before withdrawing its
petition for relief in the RTC.[38] Moreover, Equitable failed to disclose,
both in the statement of material dates and certificate of non-forum
shopping (attached to its petition for certiorari in the CA), that it had a
pending petition for relief in the RTC.[39]
Equitable moved for reconsideration[40] but it was denied.[41] Thus, this
petition.
Equitable asserts that it was not guilty of forum shopping because the
petition for relief was withdrawn on the same day the petition for
certiorari was filed.[42] It likewise avers that its petition for certiorari was
meritorious because the RTC committed grave abuse of discretion in
issuing the March 24, 2004 omnibus order which was based on an
erroneous assumption. The March 1, 2004 order denying its notice of
appeal for non payment of appeal fees was erroneous because it had in
fact paid the required fees.[43] Thus, the RTC, by issuing its March 24,
2004 omnibus order, effectively prevented Equitable from appealing the
patently wrong February 5, 2004 decision.[44]
This petition is meritorious.
EQUITABLE WAS NOT GUILTY
OF FORUM SHOPPING
185
Forum shopping exists when two or more actions involving the same
transactions, essential facts and circumstances are filed and those
actions raise identical issues, subject matter and causes of action.[45]
The test is whether, in two or more pending cases, there is identity of
parties, rights or causes of actions and reliefs.[46]
Equitable's petition for relief in the RTC and its petition for certiorari in
the CA did not have identical causes of action. The petition for relief from
the denial of its notice of appeal was based on the RTC's judgment or
final order preventing it from taking an appeal by "fraud, accident,
mistake or excusable negligence."[47] On the other hand, its petition for
certiorari in the CA, a special civil action, sought to correct the grave
abuse of discretion amounting to lack of jurisdiction committed by the
RTC.[48]
In a petition for relief, the judgment or final order is rendered by a court
with competent jurisdiction. In a petition for certiorari, the order is
rendered by a court without or in excess of its jurisdiction.
Moreover, Equitable substantially complied with the rule on non-forum
shopping when it moved to withdraw its petition for relief in the RTC on
the same day (in fact just four hours and forty minutes after) it filed the
petition for certiorari in the CA. Even if Equitable failed to disclose that it
had a pending petition for relief in the RTC, it rectified what was
doubtlessly a careless oversight by withdrawing the petition for relief just
a few hours after it filed its petition for certiorari in the CA — a clear
indication that it had no intention of maintaining the two actions at the
same time.
THE TRIAL COURT
COMMITTED GRAVE ABUSE
OF DISCRETION IN ISSUING
ITS MARCH 1, 2004 AND
MARCH 24, 2004 ORDERS
Section 1, Rule 65 of the Rules of Court provides:
Section 1. Petition for Certiorari. When any tribunal, board or officer
exercising judicial or quasi-judicial function has acted without or
in excess of its or his jurisdiction, or with grave abuse of discretion
amounting to lack or excess of jurisdiction, and there is no appeal,
nor any plain, speedy or adequate remedy in the ordinary course
of law, a person aggrieved thereby may file a verified petition in the
proper court, alleging the facts with certainty and praying that judgment
be rendered annulling or modifying the proceedings of such tribunal,
board or officer, and granting such incidental reliefs as law and justice
may require.
The petition shall be accompanied by a certified true copy of the
judgment, order or resolution subject thereof, copies of all pleadings and
documents relevant and pertinent thereto, and a sworn certificate of
non-forum shopping as provided in the third paragraph of Section 3,
Rule 46
There are two substantial requirements in a petition for certiorari. These
are:
1. that the tribunal, board or officer exercising judicial or quasi-
judicial functions acted without or in excess of his or its
jurisdiction or with grave abuse of discretion amounting to
lack or excess of jurisdiction; and
2. that there is no appeal or any plain, speedy and adequate
remedy in the ordinary course of law.
For a petition for certiorari premised on grave abuse of discretion to
prosper, petitioner must show that the public respondent patently and
grossly abused his discretion and that abuse amounted to an evasion of
positive duty or a virtual refusal to perform a duty enjoined by law or to
act at all in contemplation of law, as where the power was exercised in
an arbitrary and despotic manner by reason of passion or hostility.[49]
The March 1, 2004 order denied due course to the notices of appeal of
both Equitable and respondents. However, it declared that the February
5, 2004 decision was final and executory only with respect to
Equitable.[50] As expected, the March 24, 2004 omnibus order denied
Equitable's motion for reconsideration and granted respondents' motion
for the issuance of a writ of execution.[51]
The March 1, 2004 and March 24, 2004 orders of the RTC were
obviously intended to prevent Equitable, et al. from appealing the
February 5, 2004 decision. Not only that. The execution of the decision
was undertaken with indecent haste, effectively obviating or defeating
Equitable's right to avail of possible legal remedies. No matter how we
look at it, the RTC committed grave abuse of discretion in rendering
those orders.
With regard to whether Equitable had a plain, speedy and adequate
remedy in the ordinary course of law, we hold that there was none. The
186
RTC denied due course to its notice of appeal in the March 1, 2004
order. It affirmed that denial in the March 24, 2004 omnibus order.
Hence, there was no way Equitable could have possibly appealed the
February 5, 2004 decision.[52]
Although Equitable filed a petition for relief from the March 24, 2004
order, that petition was not a plain, speedy and adequate remedy in the
ordinary course of law.[53] A petition for relief under Rule 38 is an
equitable remedy allowed only in exceptional circumstances or where
there is no other available or adequate remedy.[54]
Thus, we grant Equitable's petition for certiorari and consequently give
due course to its appeal.
EQUITABLE RAISED PURE
QUESTIONS OF LAW IN ITS
PETITION FOR REVIEW
The jurisdiction of this Court in Rule 45 petitions is limited to questions
of law.[55] There is a question of law "when the doubt or controversy
concerns the correct application of law or jurisprudence to a certain set
of facts; or when the issue does not call for the probative value of the
evidence presented, the truth or falsehood of facts being admitted."[56]
Equitable does not assail the factual findings of the trial court. Its
arguments essentially focus on the nullity of the RTC's February 5, 2004
decision. Equitable points out that that decision was patently erroneous,
specially the exorbitant award of damages, as it was inconsistent
with existing law and jurisprudence.[57]
THE PROMISSORY NOTES
WERE VALID
The RTC upheld the validity of the promissory notes despite
respondents' assertion that those documents were contracts of
adhesion.
A contract of adhesion is a contract whereby almost all of its provisions
are drafted by one party.[58] The participation of the other party is limited
to affixing his signature or his "adhesion" to the contract.[59] For this
reason, contracts of adhesion are strictly construed against the party
who drafted it.[60]
It is erroneous, however, to conclude that contracts of adhesion are
invalid per se. They are, on the contrary, as binding as ordinary
contracts. A party is in reality free to accept or reject it. A contract of
adhesion becomes void only when the dominant party takes advantage
of the weakness of the other party, completely depriving the latter of the
opportunity to bargain on equal footing.[61]
That was not the case here. As the trial court noted, if the terms and
conditions offered by Equitable had been truly prejudicial to
respondents, they would have walked out and negotiated with another
bank at the first available instance. But they did not. Instead, they
continuously availed of Equitable's credit facilities for five long years.
While the RTC categorically found that respondents had outstanding
dollar- and peso-denominated loans with Equitable, it, however, failed
to ascertain the total amount due (principal, interest and penalties, if
any) as of July 9, 2001. The trial court did not explain how it arrived at
the amounts of US$228,200 and P1,000,000.[62] In Metro Manila Transit
Corporation v. D.M. Consunji,[63] we reiterated that this Court is not a
trier of facts and it shall pass upon them only for compelling reasons
which unfortunately are not present in this case.[64] Hence, we ordered
the partial remand of the case for the sole purpose of determining the
amount of actual damages.[65]
ESCALATION CLAUSE
VIOLATED THE PRINCIPLE OF
MUTUALITY OF CONTRACTS
Escalation clauses are not void per se. However, one "which grants the
creditor an unbridled right to adjust the interest independently and
upwardly, completely depriving the debtor of the right to assent to an
important modification in the agreement" is void. Clauses of that nature
violate the principle of mutuality of contracts.[66] Article 1308[67] of the
Civil Code holds that a contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of them.[68]
For this reason, we have consistently held that a valid escalation clause
provides:
1. that the rate of interest will only be increased if the applicable
maximum rate of interest is increased by law or by the
Monetary Board; and
187
 2. that the stipulated rate of interest will be reduced if the
applicable maximum rate of interest is reduced by law or by
the Monetary Board (de-escalation clause).[69]
The RTC found that Equitable's promissory notes uniformly stated:
If subject promissory note is extended, the interest for subsequent
extensions shall be at such rate as shall be determined by the bank.[70]
Equitable dictated the interest rates if the term (or period for repayment)
of the loan was extended. Respondents had no choice but to accept
them. This was a violation of Article 1308 of the Civil Code. Furthermore,
the assailed escalation clause did not contain the necessary provisions
for validity, that is, it neither provided that the rate of interest would be
increased only if allowed by law or the Monetary Board, nor allowed de-
escalation. For these reasons, the escalation clause was void.
With regard to the proper rate of interest, in New Sampaguita Builders
v. Philippine National Bank[71]we held that, because the escalation
clause was annulled, the principal amount of the loan was subject to the
original or stipulated rate of interest. Upon maturity, the amount due was
subject to legal interest at the rate of 12% per annum.[72]
Consequently, respondents should pay Equitable the interest rates of
12.66% p.a. for their dollar-denominated loans and 20% p.a. for their
peso-denominated loans from January 10, 2001 to July 9, 2001.
Thereafter, Equitable was entitled to legal interest of 12% p.a. on all
amounts due.
THERE WAS NO
EXTRAORDINARY DEFLATION
Extraordinary inflation exists when there is an unusual decrease in the
purchasing power of currency (that is, beyond the common fluctuation
in the value of currency) and such decrease could not be reasonably
foreseen or was manifestly beyond the contemplation of the parties at
the time of the obligation. Extraordinary deflation, on the other hand,
involves an inverse situation.[73]
Article 1250 of the Civil Code provides:
Article 1250. In case an extraordinary inflation or deflation of the
currency stipulated should intervene, the value of the currency at the
time of the establishment of the obligation shall be the basis of payment,
unless there is an agreement to the contrary.
For extraordinary inflation (or deflation) to affect an obligation, the
following requisites must be proven:
1. that there was an official declaration of extraordinary inflation
or deflation from the Bangko Sentral ng Pilipinas (BSP);[74]
2. that the obligation was contractual in nature;[75] and
3. that the parties expressly agreed to consider the effects of
the extraordinary inflation or deflation.[76]
Despite the devaluation of the peso, the BSP never declared a situation
of extraordinary inflation. Moreover, although the obligation in this
instance arose out of a contract, the parties did not agree to recognize
the effects of extraordinary inflation (or deflation).[77] The RTC never
mentioned that there was a such stipulation either in the promissory note
or loan agreement. Therefore, respondents should pay their dollar-
denominated loans at the exchange rate fixed by the BSP on the date
of maturity.[78]
THE AWARD OF MORAL AND
EXEMPLARY DAMAGES LACKED
BASIS
Moral damages are in the category of an award designed to compensate
the claimant for actual injury suffered, not to impose a penalty to the
wrongdoer.[79] To be entitled to moral damages, a claimant must prove:
1. That he or she suffered besmirched reputation, or physical,
mental or psychological suffering sustained by the claimant;
2. That the defendant committed a wrongful act or omission;
3. That the wrongful act or omission was the proximate cause
of the damages the claimant sustained;
4. The case is predicated on any of the instances expressed or
envisioned by Article 2219[80] and 2220[81]. [82]
In culpa contractual or breach of contract, moral damages are
recoverable only if the defendant acted fraudulently or in bad faith or in
wanton disregard of his contractual obligations.[83] The breach must be
wanton, reckless, malicious or in bad faith, and oppressive or abusive.[84]
188
The RTC found that respondents did not pay Equitable the interest due
on February 9, 2001 (or any month thereafter prior to the maturity of the
loan)[85] or the amount due (principal plus interest) due on July 9,
2001.[86] Consequently, Equitable applied respondents' deposits to their
loans upon maturity.
The relationship between a bank and its depositor is that of creditor and
debtor.[87] For this reason, a bank has the right to set-off the deposits in
its hands for the payment of a depositor's indebtedness.[88]
Respondents indeed defaulted on their obligation. For this reason,
Equitable had the option to exercise its legal right to set-off or
compensation. However, the RTC mistakenly (or, as it now appears,
deliberately) concluded that Equitable acted "fraudulently or in bad faith
or in wanton disregard" of its contractual obligations despite the absence
of proof. The undeniable fact was that, whatever damage respondents
sustained was purely the consequence of their failure to pay their
loans. There was therefore absolutely no basis for the award of moral
damages to them.
The February 5, 2004 decision of the Regional Trial Court, Branch 16 of
Cebu City in Civil Case No. CEB-26983 is accordingly SET ASIDE. New
judgment is hereby entered:
1. ordering respondents Ng Sheung Ngor, doing business
under the name and style of "Ken Marketing," Ken Appliance
Division, Inc. and Benjamin E. Go to pay petitioner Equitable
PCI Bank the principal amount of their dollar- and peso-
denominated loans;
2. ordering respondents Ng Sheung Ngor, doing business under
the name and style of "Ken Marketing," Ken Appliance Division,
Inc. and Benjamin E. Go to pay petitioner Equitable PCI Bank
interest at:
a 12.66% p.a. with respect to their dollar-denominated loans
) from January 10, 2001 to July 9, 2001;

Neither was there reason to award exemplary damages. Since

respondents were not entitled to moral damages, neither should they be
b 20% p.a. with respect to their peso-denominated loans
awarded exemplary damages.[89] And if respondents were not entitled to
) from January 10, 2001 to July 9, 2001;[91]
moral and exemplary damages, neither could they be awarded
attorney's fees and litigation expenses.[90]

ACCORDINGLY, the petition is hereby GRANTED.

c pursuant to our ruling in Eastern Shipping Lines v. Court of
The October 28, 2005 decision and February 3, 2006 resolution of the ) Appeals,[92] the total amount due on July 9, 2001 shall
Court of Appeals in CA-G.R. SP No. 83112 are hereby REVERSED and earn legal interest at 12% p.a. from the time petitioner
SET ASIDE. Equitable PCI Bank demanded payment, whether
judicially or extra-judicially; and
The March 24, 2004 omnibus order of the Regional Trial Court, Branch
16, Cebu City in Civil Case No. CEB-26983 is hereby ANNULLED for
being rendered with grave abuse of discretion amounting to lack or
excess of jurisdiction. All proceedings undertaken pursuant thereto are
likewise declared null and void. d after this Decision becomes final and executory, the
) applicable rate shall be 12% p.a. until full satisfaction;
The March 1, 2004 order of the Regional Trial Court, Branch 16 of Cebu
City in Civil Case No. CEB-26983 is hereby SET ASIDE. The appeal of 3. all other claims and counterclaims are dismissed.
petitioners Equitable PCI Bank, Aimee Yu and Bejan Lionel Apas is
therefore given due course.

189
As a starting point, the Regional Trial Court, Branch 16 of Cebu City
shall compute the exact amounts due on the respective dollar-
denominated and peso-denominated loans, as of July 9, 2001, of
respondents Ng Sheung Ngor, doing business under the name and style
of "Ken Marketing," Ken Appliance Division and Benjamin E. Go.

SO ORDERED.

190
 ALMEDA v. BATHALA MKTG.
NACHURA, J.:
This is a Petition for Review on Certiorari under Rule 45 of the Rules of
Court, of the Decision1 of the Court of Appeals (CA), dated September
3, 2001, in CA-G.R. CV No. 67784, and its Resolution2dated November
19, 2001. The assailed Decision affirmed with modification the Decision3
of the Regional Trial Court (RTC), Makati City, Branch 136, dated May
9, 2000 in Civil Case No. 98-411.
Sometime in May 1997, respondent Bathala Marketing Industries, Inc.,
as lessee, represented by its president Ramon H. Garcia, renewed its
Contract of Lease4 with Ponciano L. Almeda (Ponciano), as lessor,
husband of petitioner Eufemia and father of petitioner Romel Almeda.
Under the said contract, Ponciano agreed to lease a portion of the
Almeda Compound, located at 2208 Pasong Tamo Street, Makati City,
consisting of 7,348.25 square meters, for a monthly rental of
P1,107,348.69, for a term of four (4) years from May 1, 1997 unless
sooner terminated as provided in the contract.5 The contract of lease
contained the following pertinent provisions which gave rise to the
instant case:
SIXTH - It is expressly understood by the parties hereto
that the rental rate stipulated is based on the present rate
of assessment on the property, and that in case the
assessment should hereafter be increased or any new tax,
charge or burden be imposed by authorities on the lot and
building where the leased premises are located, LESSEE
shall pay, when the rental herein provided becomes due,
the additional rental or charge corresponding to the portion
hereby leased; provided, however, that in the event that
the present assessment or tax on said property should be
reduced, LESSEE shall be entitled to reduction in the
stipulated rental, likewise in proportion to the portion
leased by him;
SEVENTH - In case an extraordinary inflation or
devaluation of Philippine Currency should supervene, the
value of Philippine peso at the time of the establishment
of the obligation shall be the basis of payment;6
During the effectivity of the contract, Ponciano died. Thereafter,
respondent dealt with petitioners. In a letter7 dated December 29, 1997,
petitioners advised respondent that the former shall assess and collect
Value Added Tax (VAT) on its monthly rentals. In response, respondent
contended that VAT may not be imposed as the rentals fixed in the
contract of lease were supposed to include the VAT therein, considering
that their contract was executed on May 1, 1997 when the VAT law had
long been in effect.8
On January 26, 1998, respondent received another letter from
petitioners informing the former that its monthly rental should be
increased by 73% pursuant to condition No. 7 of the contract and Article
1250 of the Civil Code. Respondent opposed petitioners' demand and
insisted that there was no extraordinary inflation to warrant the
application of Article 1250 in light of the pronouncement of this Court in
various cases.9
Respondent refused to pay the VAT and adjusted rentals as demanded
by petitioners but continued to pay the stipulated amount set forth in
their contract.
On February 18, 1998, respondent instituted an action for declaratory
relief for purposes of determining the correct interpretation of condition
Nos. 6 and 7 of the lease contract to prevent damage and prejudice.10
The case was docketed as Civil Case No. 98-411 before the RTC of
Makati.
On March 10, 1998, petitioners in turn filed an action for ejectment,
rescission and damages against respondent for failure of the latter to
vacate the premises after the demand made by the former.11 Before
respondent could file an answer, petitioners filed a Notice of Dismissal.12
They subsequently refiled the complaint before the Metropolitan Trial
Court of Makati; the case was raffled to Branch 139 and was docketed
as Civil Case No. 53596.
Petitioners later moved for the dismissal of the declaratory relief case
for being an improper remedy considering that respondent was already
in breach of the obligation and that the case would not end the litigation
and settle the rights of the parties. The trial court, however, was not
persuaded, and consequently, denied the motion.
191
After trial on the merits, on May 9, 2000, the RTC ruled in favor of
respondent and against petitioners. The pertinent portion of the decision
reads:
WHEREFORE, premises considered, this Court renders
judgment on the case as follows:
1) declaring that plaintiff is not liable for the payment of
Value-Added Tax (VAT) of 10% of the rent for [the] use of
the leased premises;
2) declaring that plaintiff is not liable for the payment of any
rental adjustment, there being no [extraordinary] inflation
or devaluation, as provided in the Seventh Condition of the
lease contract, to justify the same;
3) holding defendants liable to plaintiff for the total amount
of P1,119,102.19, said amount representing payments
erroneously made by plaintiff as VAT charges and rental
adjustment for the months of January, February and
March, 1999; andcralawlibrary
4) holding defendants liable to plaintiff for the amount of
P1,107,348.69, said amount representing the balance of
plaintiff's rental deposit still with defendants.
SO ORDERED.13
The trial court denied petitioners their right to pass on to respondent the
burden of paying the VAT since it was not a new tax that would call for
the application of the sixth clause of the contract. The court, likewise,
denied their right to collect the demanded increase in rental, there being
no extraordinary inflation or devaluation as provided for in the seventh
clause of the contract. Because of the payment made by respondent of
the rental adjustment demanded by petitioners, the court ordered the
restitution by the latter to the former of the amounts paid,
notwithstanding the well-established rule that in an action for declaratory
relief, other than a declaration of rights and obligations, affirmative
reliefs are not sought by or awarded to the parties.
Petitioners elevated the aforesaid case to the Court of Appeals which
affirmed with modification the RTC decision. The fallo reads:
WHEREFORE, premises considered, the present appeal
is DISMISSED and the appealed decision in Civil Case
No. 98-411 is hereby AFFIRMED with MODIFICATION in
that the order for the return of the balance of the rental
deposits and of the amounts representing the 10% VAT
and rental adjustment, is hereby DELETED.
No pronouncement as to costs.
SO ORDERED.14
The appellate court agreed with the conclusions of law and the
application of the decisional rules on the matter made by the RTC.
However, it found that the trial court exceeded its jurisdiction in granting
affirmative relief to the respondent, particularly the restitution of its
excess payment.
Petitioners now come before this Court raising the following issues:
I.
WHETHER OR NOT ARTICLE 1250 OF THE NEW CIVIL
CODE IS APPLICABLE TO THE CASE AT BAR.
II.
WHETHER OR NOT THE DOCTRINE ENUNCIATED IN
FILIPINO PIPE AND FOUNDRY CORP. v. NAWASA
CASE, 161 SCRA 32 AND COMPANION CASES ARE
(sic) APPLICABLE IN THE CASE AT BAR.
III.
WHETHER OR NOT IN NOT APPLYING THE DOCTRINE
IN THE CASE OF DEL ROSARIO v. THE SHELL
COMPANY OF THE PHILIPPINES, 164 SCRA 562, THE
HONORABLE COURT OF APPEALS SERIOUSLY
ERRED ON A QUESTION OF LAW.
IV.
WHETHER OR NOT THE FINDING OF THE
HONORABLE COURT OF APPEALS THAT
192
 RESPONDENT IS NOT LIABLE TO PAY THE 10% VALUE
ADDED TAX IS IN ACCORDANCE WITH THE MANDATE
OF RA 7716.
V.
WHETHER OR NOT DECLARATORY RELIEF IS
PROPER SINCE PLAINTIFF-APPELLEE WAS IN
BREACH WHEN THE PETITION FOR DECLARATORY
RELIEF WAS FILED BEFORE THE TRIAL COURT.
In fine, the issues for our resolution are as follows: 1) whether the action
for declaratory relief is proper; 2) whether respondent is liable to pay
10% VAT pursuant to Republic Act (RA) 7716; and 3) whether the
amount of rentals due the petitioners should be adjusted by reason of
extraordinary inflation or devaluation.
Declaratory relief is defined as an action by any person interested in a
deed, will, contract or other written instrument, executive order or
resolution, to determine any question of construction or validity arising
from the instrument, executive order or regulation, or statute, and for a
declaration of his rights and duties thereunder. The only issue that may
be raised in such a petition is the question of construction or validity of
provisions in an instrument or statute. Corollary is the general rule that
such an action must be justified, as no other adequate relief or remedy
is available under the circumstances.15
Decisional law enumerates the requisites of an action for declaratory
relief, as follows: 1) the subject matter of the controversy must be a
deed, will, contract or other written instrument, statute, executive order
or regulation, or ordinance; 2) the terms of said documents and the
validity thereof are doubtful and require judicial construction; 3) there
must have been no breach of the documents in question; 4) there must
be an actual justiciable controversy or the "ripening seeds" of one
between persons whose interests are adverse; 5) the issue must be ripe
for judicial determination; and 6) adequate relief is not available through
other means or other forms of action or proceeding.16
It is beyond cavil that the foregoing requisites are present in the instant
case, except that petitioners insist that respondent was already in
breach of the contract when the petition was filed.
We do not agree.
After petitioners demanded payment of adjusted rentals and in the
months that followed, respondent complied with the terms and
conditions set forth in their contract of lease by paying the rentals
stipulated therein. Respondent religiously fulfilled its obligations to
petitioners even during the pendency of the present suit. There is no
showing that respondent committed an act constituting a breach of the
subject contract of lease. Thus, respondent is not barred from instituting
before the trial court the petition for declaratory relief.
Petitioners claim that the instant petition is not proper because a
separate action for rescission, ejectment and damages had been
commenced before another court; thus, the construction of the subject
contractual provisions should be ventilated in the same forum.
We are not convinced.
It is true that in Panganiban v. Pilipinas Shell Petroleum Corporation17
we held that the petition for declaratory relief should be dismissed in
view of the pendency of a separate action for unlawful detainer.
However, we cannot apply the same ruling to the instant case. In
Panganiban, the unlawful detainer case had already been resolved by
the trial court before the dismissal of the declaratory relief case; and it
was petitioner in that case who insisted that the action for declaratory
relief be preferred over the action for unlawful detainer. Conversely, in
the case at bench, the trial court had not yet resolved the
rescission/ejectment case during the pendency of the declaratory relief
petition. In fact, the trial court, where the rescission case was on appeal,
itself initiated the suspension of the proceedings pending the resolution
of the action for declaratory relief.
We are not unmindful of the doctrine enunciated in Teodoro, Jr. v.
Mirasol18 where the declaratory relief action was dismissed because the
issue therein could be threshed out in the unlawful detainer suit. Yet,
again, in that case, there was already a breach of contract at the time of
the filing of the declaratory relief petition. This dissimilar factual milieu
proscribes the Court from applying Teodoro to the instant case.
Given all these attendant circumstances, the Court is disposed to
entertain the instant declaratory relief action instead of dismissing it,
notwithstanding the pendency of the ejectment/rescission case before
the trial court. The resolution of the present petition would write finis to
the parties' dispute, as it would settle once and for all the question of the
193
proper interpretation of the two contractual stipulations subject of this
controversy.
Now, on the substantive law issues.
Petitioners repeatedly made a demand on respondent for the payment
of VAT and for rental adjustment allegedly brought about by
extraordinary inflation or devaluation. Both the trial court and the
appellate court found no merit in petitioners' claim. We see no reason to
depart from such findings.
As to the liability of respondent for the payment of VAT, we cite with
approval the ratiocination of the appellate court, viz.:
Clearly, the person primarily liable for the payment of VAT
is the lessor who may choose to pass it on to the lessee
or absorb the same. Beginning January 1, 1996, the lease
of real property in the ordinary course of business, whether
for commercial or residential use, when the gross annual
receipts exceed P500,000.00, is subject to 10% VAT.
Notwithstanding the mandatory payment of the 10% VAT
by the lessor, the actual shifting of the said tax burden
upon the lessee is clearly optional on the part of the lessor,
under the terms of the statute. The word "may" in the
statute, generally speaking, denotes that it is directory in
nature. It is generally permissive only and operates to
confer discretion. In this case, despite the applicability of
the rule under Sec. 99 of the NIRC, as amended by R.A.
7716, granting the lessor the option to pass on to the
lessee the 10% VAT, to existing contracts of lease as of
January 1, 1996, the original lessor, Ponciano L. Almeda
did not charge the lessee-appellee the 10% VAT nor
provided for its additional imposition when they renewed
the contract of lease in May 1997. More significantly, said
lessor did not actually collect a 10% VAT on the monthly
rental due from the lessee-appellee after the execution of
the May 1997 contract of lease. The inevitable implication
is that the lessor intended not to avail of the option granted
him by law to shift the 10% VAT upon the lessee-appellee.
x x x.19
In short, petitioners are estopped from shifting to respondent the burden
of paying the VAT.
Petitioners' reliance on the sixth condition of the contract is, likewise,
unavailing. This provision clearly states that respondent can only be held
liable for new taxes imposed after the effectivity of the contract of lease,
that is, after May 1997, and only if they pertain to the lot and the building
where the leased premises are located. Considering that RA 7716 took
effect in 1994, the VAT cannot be considered as a "new tax" in May
1997, as to fall within the coverage of the sixth stipulation.
Neither can petitioners legitimately demand rental adjustment because
of extraordinary inflation or devaluation.
Petitioners contend that Article 1250 of the Civil Code does not apply to
this case because the contract stipulation speaks of extraordinary
inflation or devaluation while the Code speaks of extraordinary inflation
or deflation. They insist that the doctrine pronounced in Del Rosario v.
The Shell Company, Phils. Limited20 should apply.
Essential to contract construction is the ascertainment of the intention
of the contracting parties, and such determination must take into
account the contemporaneous and subsequent acts of the parties. This
intention, once ascertained, is deemed an integral part of the contract.21
While, indeed, condition No. 7 of the contract speaks of "extraordinary
inflation or devaluation" as compared to Article 1250's "extraordinary
inflation or deflation," we find that when the parties used the term
"devaluation," they really did not intend to depart from Article 1250 of the
Civil Code. Condition No. 7 of the contract should, thus, be read in
harmony with the Civil Code provision.
That this is the intention of the parties is evident from petitioners' letter22
dated January 26, 1998, where, in demanding rental adjustment
ostensibly based on condition No. 7, petitioners made explicit reference
to Article 1250 of the Civil Code, even quoting the law verbatim. Thus,
the application of Del Rosario is not warranted. Rather, jurisprudential
rules on the application of Article 1250 should be considered.
Article 1250 of the Civil Code states:
In case an extraordinary inflation or deflation of the
currency stipulated should supervene, the value of the
currency at the time of the establishment of the obligation
shall be the basis of payment, unless there is an
agreement to the contrary.
194
Inflation has been defined as the sharp increase of money or credit, or
both, without a corresponding increase in business transaction. There is
inflation when there is an increase in the volume of money and credit
relative to available goods, resulting in a substantial and continuing rise
in the general price level.23 In a number of cases, this Court had provided
a discourse on what constitutes extraordinary inflation, thus:

[E]xtraordinary inflation exists when there is a decrease or

increase in the purchasing power of the Philippine
currency which is unusual or beyond the common
fluctuation in the value of said currency, and such increase
or decrease could not have been reasonably foreseen or
was manifestly beyond the contemplation of the parties at
the time of the establishment of the obligation.24

The factual circumstances obtaining in the present case do not make

out a case of extraordinary inflation or devaluation as would justify the
application of Article 1250 of the Civil Code. We would like to stress that
the erosion of the value of the Philippine peso in the past three or four
decades, starting in the mid-sixties, is characteristic of most currencies.
And while the Court may take judicial notice of the decline in the
purchasing power of the Philippine currency in that span of time, such
downward trend of the peso cannot be considered as the extraordinary
phenomenon contemplated by Article 1250 of the Civil Code.
Furthermore, absent an official pronouncement or declaration by
competent authorities of the existence of extraordinary inflation during a
given period, the effects of extraordinary inflation are not to be applied.25

WHEREFORE, premises considered, the petition is DENIED. The

Decision of the Court of Appeals in CA-G.R. CV No. 67784, dated
September 3, 2001, and its Resolution dated November 19, 2001, are
AFFIRMED.

SO ORDERED.

195
 1252 – APPLICATION OF PAYMENT
PREMIERE DEV. BANK v. CENTRAL SURETY 579 S 359
NACHURA, J.:
Before us is a petition for review on certiorari assailing the Court of
Appeals (CA) Decision[1] 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 P6,000,000.00 from
petitioner Premiere Development Bank (Premiere Bank) with a maturity
date of August 14, 2000. This P6,000,000.00 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 P6,000,000.00 loan, Central Surety executed
in favor of Premiere Bank a Deed of Assignment with Pledge[4] 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 P40,898,000.00 maturing on October
10, 2001. This loan was, likewise, evidenced by a PN numbered 376-
X[5] 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 P6,000,000.00 loan and the constituted pledge over
the Wack Wack Membership, the P40,898,000.00 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 P6,000,000.00 loan, to wit:
August 22, 2000
CENTRAL SURETY AND INSURANCE CO. 2nd Floor Universalre Bldg.
No. 106 Paseo de Roxas, Legaspi Village Makati City
Attention: Mr. Constancio T. Castaneda, Jr.
President
Mr. Engracio T. Castaneda
Vice President
-------------------------------------------------
Gentlemen:
This has reference to your overdue loan of P6.0 Million.
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 restructuring scheme.
In view thereof, we regret that unless the above loan is settled on or
before five (5) days from the date hereof, we shall exercise our option
to have the Stock Certificate No. 217 with Serial No. 1793 duly issued
by Wack Wack Golf and Country Club, Inc. transferred in the name of
Premiere Development Bank in accordance with the terms and
conditions of the Deed of Assignment with Pledge executed in favor of
Premiere Development Bank.
We shall appreciate your prompt compliance.
Very truly yours,
(sgd.)
IGNACIO R. NEBRIDA, JR.
Senior Asst. Vice President/
Business Development Group - Head[7]
Posthaste, Central Surety responded and sent the following letter dated
August 24, 2000:
196
24 August 2000
Mr. Ignacio R. Nebrida, Jr. Senior Asst. Vice President/Business
Development Group – Head Premiere BankEDSA cor. Magallanes
Avenue Makati City
Sir:
With reference to this 6.0 Million loan account, we have informed Ms.
Evangeline Veloira 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.
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 for some
consideration and leeway on your very stiff and immediate demands.
Kindly extend to us your favorable approval.
Very truly yours,
(sgd.)
ENGRACIO T. CASTANEDA
Vice-President[8
]
Accordingly, by September 20, 2000, Central Surety issued Bank of
Commerce (BC) Check No. 08114[9] dated September 22, 2000 in the
amount of P6,000,000.00 and payable to Premiere Bank. The check
was received by Premiere Bank's Senior Account Manager, Evangeline
Veloira, with the notation "full payment of loan-Wack Wack," as reflected
in Central Surety's Disbursement Voucher.[10] However, for undisclosed
reasons, Premiere Bank returned BC Check No. 08114 to Central
Surety, and in its letter dated September 28, 2000, demanded from the
latter, not just payment of the P6,000,000.00 loan, but also the
P40,898,000.00 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:
28 September 2000
CENTRAL SURETY & INSURANCE CO.
By: Constancio T. Castañeda Jr. – President Engracio T. Castañeda -
Vice President 2nd Floor Universalre Bldg. No. 106 Paseo de Roxas,
Legaspi Village, Makati City
RE: YOUR COMMERCIAL LOAN OF P40,898,000.00 &
P6,000,000.00 WITH PREMIERE DEVELOPMENT BANK
UNDER ACCOUNT NOS. COM-367-Z AND COM 714-Y
**************************************************
Dear Sirs:
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 loans, we regret to inform you that you have
failed to settle the same despite their past due status.
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 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 such action necessary in the
premises.
We trust, therefore, that you will give this matter your preferential
attention.
Very truly yours,
(sgd.)
PACITA M. ARAOS[12]
(italics supplied)
The very next day, on September 29, 2000, Central Surety, through its
counsel, wrote Premiere Bank and re-tendered payment of the check:
29 September 2000
PREMIERE BANK EDSA cor. Magallanes Avenue Makati City
197
Attention: Mr. Ignacio R. Nebrida, Jr. 13 October 2000

Senior Asst. Vice President/ Business Development Group - Head ATTY. EPIFANIO E. CUA

Re : Promissory Note No. 714-Y
Sir:
This is further to our client's letter to you dated 24 August 2000,
informing you that it would settle its account by the end of September
2000.
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 (P6,000,000.00), which was received
by your Senior Account Manager, Ms. Evangeline Veloira. However, for
unexplained reasons the cheque was returned to us.
We are again tendering to you the said cheque of SIX MILLION PESOS
(P6,000,000.00), in payment of PN#714-Y. Please accept the cheque
and issue the corresponding receipt thereof. Should you again refuse to
accept this cheque, then I shall advise my client to deposit it in court for
proper disposition.
Thank you.
Very truly yours,
(sgd.)
EPIFANIO E. CUA
Counsel for Central Surety & Insurance Company[13]
(italics supplied)
On even date, a separate letter with another BC Check No. 08115 in the
amount of P2,600,000.00 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 secured by
Manila Polo Club, Inc. membership shares.
On October 13, 2000, Premiere Bank responded and signified
acceptance of Central Surety's checks under the following application of
payments:
2/F Universalre Condominium 106 Paseo de Roxas Legaspi Village,
Makati City
Dear Atty. Cua:
Thank you for your two (2) letters both dated 29 September 2000 on
behalf of your clients with the enclosed check nos. 0008114 and
0008115 for the total of P8,600,000.00.
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 insufficient.
In accordance with the terms and conditions of the Promissory Notes
executed by your clients in favor of Premiere Development Bank, we
have applied the two (2) checks to the due obligations of your clients as
follows:
1) Account No.: COM 235-Z[14] P1,044,939.45
2) Account No.: IND 717-X P1,459,693.15
[15]
3) Account No.: COM 367-Z P4,476,200.18
4) Account No.: COM 714-Y P1,619,187.22
TOTAL P8,600,000.00
==========
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.

198
Very truly yours,
(sgd.)
MS. ELSA M. SAPAPO
Manager
Loans Accounting and Control Department[16]
Significantly, the P8,600,000.00 check payments were not applied in full
to Central Surety's P6,000,000.00 loan under PN No. 714-Y and the
Spouses Castañeda's personal loan of P2,600,000.00 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 P6,000,000.00
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 P6,000,000.00 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 P6,000,000.00 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 P100,000.00
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. 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 P6,000,000.00 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 P6,000,000.00 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:
199
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 P6,000,000.00 loan secured by the
Wack Wack Membership pledge. We do not dispose herein the matter
of the P2,600,000.00 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.
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 P6,000,000.00 check
payment to the respective loans of Casent Realty and the Spouses
Castañeda. Undoubtedly, Premiere Bank cannot be allowed, through
200
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 P6,000,000.00 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.[25] This 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:
x x x x
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
201
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 courterred. 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 P6,000,000.00 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 P6,000,000.00
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
P6,000,000.00, 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 P40.898 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
202
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 Appeals[33] 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 P6,000,000.00 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 P6,000,000.00, 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
(P6,000,000.00) 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 that Premiere Bank rightly applied
the payments that Central Surety had tendered. Corollary thereto, and
upon the second issue, the tender of the amount of P6,000,000.00 by
Central Surety, and the encashment of BC Check No. 08114 did not
totally extinguish the debt covered by PN No. 714-Y
Release of the pledged Wack Wack Membership
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.
But in this case, Central Surety does not appear so weak as to be placed
at a distinct disadvantage vis-à-vis the bank. As found by the lower
court:
Considering that [Central Surety] is a known business entity, the
[Premiere Bank] was right in 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 established a certain reputation with the [Premiere Bank] as
evidenced by its numerous transactions. It is therefore absurd that an
203
established company such as the [Central Surety] has no knowledge of
the law regarding bank practice in loan transactions.
The Dragnet Clause.
The factual circumstances of this case showing the chain of transactions
and long-standing relationship between Premiere Bank and Central
Surety militate against the latter's prayer in its complaint for the release
of the Wack Wack Membership, the security attached to Promissory
Note 714-Y.
A tally of the facts shows the following transactions between Premiere
Bank and Central Surety:
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 P15,000,000.00 (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.)
Then, a Continuing Guaranty/Comprehensive Surety Agreement was
later executed by Central Surety as follows:
And on October 10, 2000, Promissory Note 376-X was entered into, a
renewal of the prior Promissory Note 367-Z, in the amount of
P40,898,000.00. In all, the transactions that transpired between
Premiere Bank and Central Surety manifest themselves, thusly:
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 P15,000,000.00 (when the actual loan covered by PN No.
714-Y was only P6,000,000.00), the intent of the parties was for the
Wack Wack Membership to serve as security also for future
advancements. The subsequent loan was nothing more than a
fulfillment of the intention of the parties. Of course, because the
subsequent loan was for a much greater amount (P40,898,000.00), it
became necessary to put up another security, in addition to the Wack
Wack Membership. Thus, the subsequent surety agreement and the
specific security for PN No. 367-X were, like the Wack Wack
Membership, meant to secure the ballooning debt of the Central Surety.
The above-quoted provision in the Deed of Assignment, also known as
the "dragnet clause" in American jurisprudence, would subsume all
debts of respondent of past and future origins. It is a valid and legal
undertaking, and the amounts specified as consideration in the
contracts do 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 pledge or
mortgage given to secure future advancements is a continuing security
and is not discharged by the repayment of the amount named in the
mortgage until the full amount of all advancements shall have been
paid.[37]
Our ruling in Prudential Bank v. Alviar[38] is instructive:
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 parties to
provide continuous dealings, the nature or extent of which may not be
known or anticipated at the time, and they avoid the expense and
inconvenience of executing a new security on each new transaction. A
"dragnet clause" operates as a convenience and accommodation to the
borrowers as it makes available additional funds without their having to
execute additional security documents, thereby saving time, travel, loan
closing costs, costs of extra legal services, recording fees, et cetera.
Indeed, it has been settled in a long line of decisions that mortgages
given to secure future advancements are valid and legal contracts, and
the amounts named as consideration in said contracts do not limit the
amount for which the mortgage may stand as security if from the four
corners of the instrument the intent to secure future and other
indebtedness can be gathered.
The "blanket mortgage clause" in the instant case states:
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
204
hereafter be obtained, the principal or all of which is hereby fixed at Two
Hundred Fifty Thousand (P250,000.00) 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 isthe absolute owner free from
all liens and incumbrances. . . .
xxxx
In the case at bar, the subsequent loans obtained by respondents were
secured by other securities, thus: PN BD#76/C-345, executed by Don
Alviar was secured by a "hold-out" on his foreign currency savings
account, while PN BD#76/C-430, executed by respondents for Donalco
Trading, Inc., was secured by "Clean-Phase out TOD CA 3923" and
eventually by a deed of assignment on two promissory notes executed
by Bancom Realty Corporation with 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 discussed. Thus, the critical issue is whether the "blanket
mortgage" clause applies even to subsequent advancements for which
other securities were intended, or particularly, to PN BD#76/C-345.
Under American jurisprudence, two schools of thought have emerged
on this question. One school advocates that a "dragnet clause" so
worded as to be broad enough to cover all other debts in addition to the
one specifically secured will be construed to cover a different debt,
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 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.
The latter school represents the better position. The parties having
conformed to the "blanket mortgage clause" or "dragnet clause," it is
reasonable to conclude that they also agreed to an implied
understanding that subsequent loans need not be secured by other
securities, as the subsequent loans will be secured by the first mortgage.
In other words, the sufficiency of the first security is a corollary
component of the "dragnet clause." But of course,there is no prohibition,
as in the mortgage contract in issue, against contractually requiring
other securities for the subsequent loans. Thus, when the mortgagor
takes another loan for which another security was given it could not be
inferred that such loan was made in reliance solely on the original
security with the "dragnet clause," but rather, on the new security given.
This is the "reliance on the security test."
Hence, based on the "reliance on the security test," the California court
in the cited case made 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
205
mortgaged property should only be for the P250,000.00 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 th
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 (P250,000.00) 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 isthe 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
P250,000.00 and gave no credence to their claim that they paid the said
amount when they paid petitioner P2,000,000.00. Thus, the mortgaged
property could still be properly subjected to foreclosure proceedings for
the unpaid P250,000.00 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
206
Promissory Note 714-Y cannot yet be done as sought by Central Surety. costs.
The chain of contracts concluded between Premiere Bank and Central
Surety reveals that the Wack Wack Membership, which stood as SO ORDERED.
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

207
 ESPINA v. CA, G.R. No. 116805. June 22, 2000
PARDO, J.:
The case before the Court is an appeal from a decision of the Court of
Appeals 1 reversing that of the Regional Trial Court, Antipolo,
Rizal, 2 affirming in all respects the decision of the Municipal Trial Court,
Antipolo, Rizal, 3 ordering respondent Rene G. Diaz to vacate the
condominium unit owned by petitioner and to pay back current rentals,
attorney's fees and costs.1âwphi1.nêt
The facts, as found by the Court of Appeals, are as follows:
Mario S. Espina is the registered owner of a Condominium Unit
No. 403, Victoria Valley Condominium, Valley Golf Subdivision,
Antipolo, Rizal. Such ownership is evidenced by Condominium
Certificate of Title No. N-10 (p. 31, Rollo).
On November 29, 1991, Mario S. Espina, the private
respondent as seller, and Rene G. Diaz, the petitioner as buyer,
executed a Provisional Deed of Sale, whereby the former sold
to the latter the aforesaid condominium unit for the amount of
P100,000.00 to be paid upon the execution of the contract and
the balance to be paid through PCI Bank postdated checks as
follows:
1. P400,000.00
Check No. 301245
January 15, 1992
2. P200,000.00
Check No. 301246
February 1, 1992
3. P200,000.00
Check No. 301247
February 22, 1992
4. P200,000.00
Check No. 301248
March 14, 1992
5. P200,000.00
Check No. 301249
April 4, 1992
6. P200,000.00
Check No. 301250
April 25, 1992
(pp. 59-61, Rollo).
Subsequently, in a letter dated January 22, 1992, petitioner
informed private respondent that his checking account with PCI
Bank has been closed and a new checking account with the
same drawee bank is opened for practical purposes. The letter
further stated that the postdated checks issued will be replaced
with new ones in the same drawee bank (p. 63, Rollo).
On January 25, 1992, petitioner through Ms. Socorro Diaz, wife
of petitioner, paid private respondent Mario Espina
P200,000.00, acknowledged by him as partial payment for the
condominium unit subject of this controversy (p. 64, Rollo).
On July 26, 1992, private respondent sent petitioner a "Notice
of Cancellation" of the Provisional Deed of Sale (p. 48, Rollo).
However, despite the Notice of Cancellation from private
respondent, the latter accepted payment from petitioner per
Metrobank Check No. 395694 dated and encashed on October
28, 1992 in the amount of P100,000.00 (p. 64, Rollo).
On February 24, 1993, private respondent filed a complaint
docketed as Civil Case No. 2104 for Unlawful Detainer against
petitioner before the Municipal Trial Court of Antipolo, Branch 1.
208
 On November 12, 1993, the trial court rendered its decision, the
dispositive portion of which reads:
WHEREFORE, in view of the foregoing consideration,
judgment is hereby rendered ordering the defendant
and all persons claiming rights under him to vacate unit
403 of the Victoria Golf Valley Condominium, Valley
Golf Subdivision, Antipolo, Rizal; to pay the total arrears
of P126,000.00, covering the period July 1991 up to the
filing (sic) complaint, and to pay P7,000.00 every month
thereafter as rentals unit (sic) he vacates the premises;
to pay the amount of P5,000.00 as and attorney's fees;
the amount of P300.00 per appearance, and costs of
suit.
However, the plaintiff may refund to the defendant the
balance from (sic) P400,000.00 after deducting all the
total obligations of the defendant as specified in the
decision from receipt of said decision.
SO ORDERED. (Decision, Annex "B"; p. 27, Rollo).
From the said decision, petitioner appealed to the Regional Trial
Court Branch 71, Antipolo, Rizal. On April 29, 1994, said
appellate court affirmed in all respects the decision of the trial
court. 4
On June 14, 1994, petitioner filed with the Court of Appeals a petition
for review.
On July 20, 1994, the Court of Appeals promulgated its decision
reversing the appealed decision and dismissing the complaint for
unlawful detainer with costs against petitioner Espina.
On August 8, 1994, petitioner filed a motion for reconsideration of the
decision of the Court of Appeals. 5
On August 19, 1994, the Court of Appeals denied the motion. 6
Hence, this appeal via petition for review on certiorari. 7
The basic issue raised is whether the Court of Appeals erred in ruling
that the provisional deed of sale novated the existing contract of lease
and that petitioner had no cause of action for ejectment against
respondent Diaz.
We resolve the issue in favor of petitioner.
According to respondent Diaz, the provisional deed of sale that was
subsequently executed by the parties novated the original existing
contract of lease. The contention cannot be sustained. Respondent
originally occupied the condominium unit in question in 1987 as a
lessee. 8 While he occupied the premises as lessee, petitioner agreed to
sell the condominium unit to respondent by installments. 9 The
agreement to sell was provisional as the consideration was payable in
installments.
The question is, did the provisional deed of sale novate the existing
lease contract? The answer is no. The novation must be clearly proved
since its existence is not presumed. 10 "In this light, novation is never
presumed; it must be proven as a fact either by express stipulation of
the parties or by implication derived from an irreconcilable
incompatibility between old and new obligations or
contracts." 11 Novation takes place only if the parties expressly so
provide, otherwise, the original contract remains in force. In other words,
the parties to a contract must expressly agree that they are abrogating
their old contract in favor of a new one. 12 Where there is no clear
agreement to create a new contract in place of the existing one, novation
cannot be presumed to take place, unless the terms of the new contract
are fully incompatible with the former agreement on every point. 13 Thus,
a deed of cession of the right to repurchase a piece of land does not
supersede a contract of lease over the same property. 14 In the
provisional deed of sale in this case, after the initial down payment,
respondent's checks in payment of six installments all bounced and
were dishonored upon presentment for the reason that the bank account
was closed. 15 Consequently, on July 26, 1992, petitioner terminated the
provisional deed of sale by a notarial notice of
cancellation. 16 Nonetheless, respondent Diaz continued to occupy the
premises, as lessee, but failed to pay the rentals due. On October 28,
1992, respondent made a payment of P100,000.00 that may be applied
either to the back rentals or for the purchase of the condominium unit.
On February 13, 1993, petitioner gave respondent a notice to vacate the
premises and to pay his back rentals. 17 Failing to do so, respondent's
209
possession became unlawful and his eviction was proper. Hence, on
February 24, 1993, petitioner filed with the Municipal Trial Court,
Antipolo, Rizal, Branch 01 an action for unlawful detainer against
respondent Diaz. 18

Now respondent contends that the petitioner's subsequent acceptance

of such payment effectively withdrew the cancellation of the provisional
sale. We do not agree. Unless the application of payment is expressly
indicated, the payment shall be applied to the obligation most onerous
to the debtor. 19 In this case, the unpaid rentals constituted the more
onerous obligation of the respondent to petitioner. As the payment did
not fully settle the unpaid rentals, petitioner's cause of action for
ejectment survives. Thus, the Court of Appeals erred in ruling that the
payment was "additional payment" for the purchase of the property.

WHEREFORE, the Court GRANTS the petition for review on certiorari,

and REVERSES the decision of the Court of Appeals. 20 Consequently,
the Court REVIVES the decision of the Regional Trial Court, Antipolo,
Rizal, Branch 71, 21 affirming in toto the decision of the Municipal Trial
Court, Antipolo, Rizal, Branch 01. 22

No costs.

SO ORDERED.

210
 TAN v. CHINA BANKING 800 S 635 1 October 1997 BDC-0506 1,700,000.00

PEREZ, J.: 20 November 1997 DLS-0316 2,800,000.00

For resolution of the Court is the instant Petition for Review on
18 June 1997 DLS-0324 5,500,000.00
Certiorari[1]filed by petitioner Spouses Juan Chuy Tan and Mary Tan
(deceased) substituted by the surviving heirs, Joel Tan and Eric Tan, 18 June 1997 DLS-0325 2,675,000.00
seeking to reverse and set aside the Decision[2] dated 14 October 2011
and Resolution[3] dated 24 January 2012 of the Court of Appeals (CA) in 04 July 1997 DLS-0360 7,000,000.00
CA-G.R. CV. No. 87450. The assailed decision and resolution affirmed
24 July 1997 DLS-0403 4,000,000.00
with modification the 29 December 2003 Decision[4] of the Regional Trial
Court (RTC) of Makati City, Branch 142 by ordering that the penalty 28 August 1997 BDC-0449 1,550,000.00
surcharge of 24% per annum as stipulated in the contract of loan is
reduced to 12% per annum. 20 November 1997 BDC-0340 1,550,000.00
8 September 1997 BDC-0466 1,262,500.00
The Facts
31 September BDC-0479 662,500.00
Petitioner Lorenze Realty and Development Corporation (Lorenze 1997
Realty) is a domestic corporation duly authorized by Philippine laws to 10 July 1997 DLS 0379 33,000,000.00
engage in real estate business. It is represented in this action by
petitioners Joel Tan and Eric Tan as substitutes for their deceased TOTAL P71,050,000.00
parents, Spouses Juan Chuy Tan and Mary Tan (Spouses Tan).
It is expressly stipulated in the Promissory Notes that Lorenze Realty
Respondent China Banking Corporation (China Bank), on the other
hand, is a universal banking corporation duly authorized by Bangko agreed to pay the additional amount of 1/10 of 1% per day of the total
amount of obligation due as penalty to be computed from the day that
Sentral ng Pilipinas (BSP) to engage in banking business.
the default was incurred up to the time that the loan obligations are fully
paid. The debtor also undertook pay an additional 10% of the total
On several occasions in 1997, Lorenze Realty obtained from China
amount due including interests, surcharges and penalties as
Bank various amounts of loans and credit accommodations in the
attorney's fees.
following amounts:
As a security for the said obligations, Lorenze Realty executed Real
DATE PROMISSORY NOTE PRINCIPAL Estate Mortgages (REM) over 11 parcels of land covered by Transfer
NOS. AMOUNT Certificates of Title (TCT) Nos. B-44428, B-44451, B-44452, V-4J275:
V-44276, V-44277, V-44278, V-44280, V-44281, V-44283 and V-44284
27 June 1997 BDC-0345 P1,600,000.00
registered by the Registry of Deeds of Valenzuela City.
30 July 1997 BDC-0408 1,000,000.00
Subsequently, Lorenze Realty incurred in default in the payment of its
13 August 1997 BDC-0422 1,100,000.00 amortization prompting China Bank to cause the extra-judicial
foreclosure of the REM constituted on the securities after the latter failed
18 August 1997 BDC-0432 1,960.000.00
to heed to its demand to settle the entire obligation.
21 August 1997 BDC-0438 1,490.000.00
After the notice and publication requirements were complied with, the
2 September 1997 BDC-0455 2,200,000.00 mortgaged properties were sold at a public auction wherein China

211
emerged as the highest bidder for the amount of P85,000,000.0u as
evidenced by a certificate of sale.
As shown by the Statement of Account dated 10 August 1998, the
indebtedness of Lorenze Realty already reached the amount
P114,258,179.81, broken down as follows:
Principal Amount P71,050,000.00
Interest 13,521,939.31
Penalties 19,763,257.50
Registration Expenses 9,542,013.00
Filing Fee 351,300.00
Publication Fee 25,970.00
Sheriffs Fee 2,000.00
Posting Fee 700.00
After deducting from the total amount of loan obligation the
P85,000,000.00 proceeds of the public sale, there remains a balance in
the amount of P29,258,179.81. In its effort to collect the deficiency
obligation, China Bank demanded from Lorenze Realty for the payment
of the remaining loan but such demand just went to naught.
Consequently, China Bank initiated an action for the collection of sum
of money against the Lorenze Realty and its officers, namely, Lawrence
Ong, Victoria Ong, Juan Chuy Tan and Mary Tan before the RTC of
Makati City, Branch 142. In its Complaint docketed as Civil Case No.
98-3069, China Bank alleged that it is entitled to deficiency judgment
because the purchase price of the securities pledged by the debtor is
not sufficient to settle the entire obligation incurred by the latter including
the interest, penalties and surcharges that had accrued from the time of
default. China Bank thus prayed that defendants be ordered to pay the
amount of P29,25 8,179.81, representing the deficiency in its obligation
in accordance with the express terms of the promissory notes.
While conceding that they have voluntarily signed the promissory notes,
defendants, for their part, disclaim liability by alleging that the surety
agreements did not express the true intention of the parties. The officers
of the corporation who represented Lorenze Realty below claimed that
they just signed the surety contracts without reading the fine terms
stipulated therein because they were macle to believe by the bank
manager that the collaterals they offered to obtain the loans were
already sufficient to cover the entire obligation should they incur in
default. The collection suit for the deficiency obligation came as a
surprise to them after China Bank managed to successfully foreclose
the securities of the obligation and purchased for itself the mortgaged
properties at the public sale. In addition, defendants averred that the
penalty in the amount of 1/10 of 1% per day of the total amount due is
usurious and shocking to the conscience and should be nullified by the
court. Finally, they prayed that the RTC declare Lorenze Realty's
obligation fully settled on account of the sale of the securities.
On 29 December 2003, the RTC found in favor of China Bank declaring
the defendants jointly and severally liable for the amount of
P29,258,179.81 representing the deficiency judgment. It was held by the
trial court that Lorenze Realty, "[a]fter having voluntarily signed the
surety agreements, cannot be discharged from the consequences of the
undertaking because the terms and conditions contained therein is
considered to be the law between the parties as long as it is not contrary
to law, morals, good customs and public policy. The mistake,
misapprehension and ignorance of the defendants as to the legal effects
of the obligations are no reason for relieving them of their liabilities." The
RTC disposed in this wise:
WHEREFORE, premises considered, judgment is rendered ordering the
defendants to pay [China Bank], jointly and severally, the following:
1. [T]he amount of £29,258,179.81 representing the
deficiency claim as of August 10, 1998 plus
penalties accruing thereafter at the rate of 2% per
month until fully paid;
2. 5% of the total amount due as Attorney's [F]ees;
3. Expenses of litigation and cost of suit.
SO ORDERED.[5]
On appeal, the CA affirmed with modification the judgment of the RTC
by reducing the rate of the penalty surcharge from 24% per annum to
12% per annum, and, likewise the award of attorney's fees was reduced
from 5% to 2% of the total amount due. The appellate court deemed that
the rate of penalty agreed by the parties is unconscionable under the
circumstances considering that the obligation was already partially
satisfied by the sale of the securities constituted for the loan and
212
resolved to fairly and equitably reduce it to 12% per annum. The decretal
portion of the appellate court's decision reads:
WHEREFORE, premises considered, the assailed Decision dated
December 29, 2003 of the Regional Trial Court of Makati City, Branch
142 is AFFIRMED with MODIFICATION in that the penalty surcharge
of 2% per month or 24% per annum is reduced to 12% per annum and,
likewise, the award of attorney's fees is reduced from 5% to 2% of the
total amount due.
No pronouncement as to costs.
SO ORDERED.
In a Resolution dated 24 January 2012, the CA refused to reconsider its
earlier decision by denying the Motion for Reconsideration interposed
by Lorenze Realty.
The Issue
Dissatisfied with the disquisition of the Court of Appeals, Lorenze Realty
elevated the matter before the Court by filing a Petition for Review on
Certiorari. For the resolution of the Court is the sole issue of:
WHETHER LORENZE REALTY'S OBLIGATION IS FULLY SETTLED
WHEN THE REAL PROPERTIES CONSTITUTED AS
SECURITIES FOR THE LOAN WERE SOLD AT THE PUBLIC
AUCTION FOR P85,000,000.00.
The Court's Ruling
In assailing the CA Decision, Lorenze Realty argues that it is no longer
liable to pay the deficiency obligation because the proceeds of the sale
of the foreclosed properties in the amount of P85,000,000.00 is more
than enough to cover the principal amount of the loan which is just
P71,050,000.00. In fact, it further asserted that after applying the
proceeds of the public sale to the principal amount of loan, there remains
a balance of P13,950,000.00 which should more than enough to cover
the penalties, interests and surcharges.
For its part, China Bank maintains that the obligation of Lorenze Realty
is not extinguished by the foreclosure and sale of real properties
constituted as securities citing Article 1253 of the New Civil Code which
explicitly states that "If the debt produces interest, payment of the
principal shall not be deemed to have been made until the interests have
been covered." By first applying the proceeds of the sale to the interest,
penalties and expenses of the sale, there yields a balance in the
principal obligation in the amount of P29,258,179.81.
We resolve to deny the petition.
Obligations are extinguished, among others, by payment or
performance, the mode most relevant to the factual situation in the
present case.[6] Under Article 1232 of the Civil Code, payment means
not only the delivery of money but also the performance, in any other
manner, of an obligation.[7] Article 1233 of the Civil Code states that a
debt shall not be understood to have been paid unless the thing or
service in which the obligation consists has been completely delivered
or rendered, as the case may be.[8] In contracts of loan, the debtor is
expected to deliver the sum of money due the creditor.[9] These
provisions must be read in relation with the other rules on payment
under the Civil Code, such as the application of payment, to wit:
Art. 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.
In interpreting the foregoing provision of the statute, the Court in
Premiere Development Bank v. Central Surety & Insurance Company
Inc.[10] held that the right of the debtor to apply payment is merely
directory in nature and must be promptly exercised, lest, such right
passes to the creditor, viz:
"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, 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. [']
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.
213
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.
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." [Emphasis supplied, citations
omitted.]
In the event that the debtor failed to exercise the right to elect the creditor
may choose to which among the debts the payment is applied as in the
case at bar. It is noteworthy that after the sale of the foreclosed
properties at the public auction, Lorenze Realty failed to manifes": its
preference as to which among the obligations that were all due the
proceeds of the sale should be applied. Its silence can be construed as
acquiescence to China Bank's application of the payment first to the
interest and penalties and the remainder to the principal which is
sanctioned by Article 1253 of the New Civil Code which provides that:,
Art. 1253. If the debt produces interest, payment of the principal shall
not be deemed to have been made until the interests have been
covered.
That they assume that the obligation is fully satisfied by the sale of the
securities does not hold any water. Nowhere in our statutes and
jurisprudence do they provide that the sale of the collaterals constituted
as security of the obligation results in the extinguishment of the
obligation. The rights and obligations of parties are governed by the
terms and conditions of the contract and not by assumptions and
presuppositions of the parties. The amount of their entire liability should
be computed on the basis of the rate of interest as imposed by the CA
minus the proceeds of the sale of the foreclosed properties in public
auction.
It is worth mentioning that the appellate court aptly reduced the interest
rate to 12%' per annum which is in consonance to existing
jurisprudence. in Albos v. Embisan, [11] MCMP Construction Corp. v.
Monark Equipment Corp.,[12] Bognot v. RRI Lending
Corporation, [13]
and Menchavez v. Bermudez,[14] the Court struck down
the stipulated rates of interest for being excessive, iniquitous,
unconscionable and exorbitant and uniformly reduced the rates to 12%
per annum.
Lorenze Realty's plea to further reduce the interest to 3% per annum
has no leg to stand on and could not be adopted by this Court. On the
other hand, the appellate court, consistent with the ruling of this Court in
a number of cases, correctly pegged the rate of interest at 1% per month
or 12% per annum. We need not unsettle the principle we had affirmed
in a plethora of cases that 12% per annum is the legal rate of interest
imposed by this Court on occasions that we nullified the rates stipulated
by parties. While the Court has the power to nullify excessive interest
rates and impose new rates for the parties, such reduction, however,
must always be guided by reason and equity.
WHEREFORE, premises considered, the petition is DENIED. The
assailed Decision and Resolution of the Court of Appeals are hereby
AFFIRMED. SO ORDERED.
SINAMBAN v. CHINA BANKING 752 S 621
REYES, J.:
Before this Court is a Petition for Review on Certiorari1 of the
Decision2 dated May 19, 2010 of the Court of Appeals (CA) in CA-G.R.
CV. No. 66274 modifying the Decision3 dated July 30, 1999 of the
Regional Trial Court (RTC) of San Fernando City, Pampanga, Branch
45 for Sum of Money in Civil Case No. 11708.
Factual Antecedents
On February 19, 1990, the spouses Danilo and Magdalena Manalastas
(spouses Manalastas) executed a Real Estate Mortgage (REM)4 in favor
of respondent China Banking Corporation (Chinabank) over two real
estate properties covered by Transfer Certificate of Title Nos. 173532-R
and 173533-R, Registry of Deeds of Pampanga, to secure a loan from
Chinabank of ₱700,000.00 intended as working capital in their rice
milling business. During the next few years, they executed several
amendments to the mortgage contract progressively increasing their
credit line secured by the aforesaid mortgage. Thus, from ₱700,000.00
in 1990, their loan limit was increased to ₱1,140,000.00 on October 31,
1990, then to ₱1,300,000.00 on March 4, 1991, and then to2,450,000.00
on March 23, 1994.5 The spouses Manalastas executed several
promissory notes (PNs) in favor of Chinabank. In two of the PNs,
214
petitioners Estanislao and Africa Sinamban (spouses Sinamban) signed ₱1,035,787.50, and cumulative penalties of 1,429,200.00, or a
as co-makers. total amount due of 4,264,987.50; and

On November 18, 1998, Chinabank filed a Complaint6 for sum of money,
docketed as Civil Case No. 11708, against the spouses Manalastas and
the spouses Sinamban (collectively called the defendants) before the
RTC. The complaint alleged that they reneged on their loan obligations
under the PNs which the spouses Manalastas executed in favor of
Chinabank on different dates, namely:
(c) PN No. CLF 5-93 has an outstanding principal of
₱148,255.08, cumulative interest of ₱64,461.84, and
cumulative penalties of ₱156,541.58, or a total amount due of
₱369,258.50. Note that from the original amount of
₱1,300,000.00, the loan principal had been reduced to only
₱148,255.08 as of May 18, 1998.

1. PN No. OACL 634-95, dated April 24, 1995, for a loan CHINA BANKING CORPORATION
principal of ₱1,800,000.00, with interest at 23% per annum; the San Fernando, Pampanga
spouses Manalastas signed alone as makers.7 SPS. DANILO & MAGDALENA MANALASTAS
STATEMENT OF ACCOUNT
2. PN No. OACL 636-95, dated May 23, 1995, for a loan As of May 18, 1998
principal of 325,000.00, with interest at 21% per annum; the
spouses Sinamban signed as solidary co-makers;8

3. PN No. CLF 5-93, dated February 26, 1991, for a loan

principal of ₱1,300,000.00, with interest at 22.5% per annum;
only Estanislao Sinamban signed as solidary co-maker.9

All of the three promissory notes carried an acceleration clause stating

that if the borrowers failed to pay any stipulated interest, installment or
loan amortization as they accrued, the notes shall, at the option of
Chinabank and without need of notice, immediately become due and
demandable. A penalty clause also provides that an additional amount
shall be paid equivalent to 1/10 of 1% per day of the total amount due
from date of default until fully paid, and the further sum of 10% of the
total amount due, inclusive of interests, charges and penalties, as and
for attorney’s fees and costs.10

In Chinabank’s Statement of Account11 dated May 18, 1998, reproduced

below, the outstanding balances of the three loans are broken down, as
follows:

(a) PN No. OACL 636-95 has an outstanding principal of

₱325,000.00, cumulative interest of ₱184,679.00, and
cumulative penalties of ₱258,050.00, or a total amount due of
₱767,729.00; (b) PN No. OACL 634-95 has an outstanding
principal of ₱1,800,000.00, cumulative interest of

215

On the basis of the above statement of account, and pursuant to the
promissory notes, Chinabank instituted extrajudicial foreclosure
proceedings against the mortgage security. The foreclosure sale was
held on May 18, 1998, with Chinabank offering the highest bid of
₱4,600,000.00, but by then the defendants’ total obligations on the three
promissory notes had risen to ₱5,401,975.00, before attorney’s fees of
10% and auction expenses, leaving a loan deficiency of
₱1,758,427.87.14 Thus, in the complaint before the RTC, Chinabank
prayed to direct the defendants to jointly and severally settle the said
deficiency, plus 12% interest per annum after May 18, 1998,15 the date
of the auction sale.16
The spouses Sinamban, in their Answer17 dated February 26, 1999,
averred that they do not recall having executed PN No. OACL 636-95
for ₱325,000.00 on May 23, 1995, or PN No. CLF 5-93 for
₱1,300,000.00 on February 26, 1991, and had no participation in the
execution of PN No. OACL 634-95 for ₱1,800,000.00 on April 24, 1995.
They however admitted that they signed some PN forms as co-makers
upon the request of the spouses Manalastas who are their relatives;
although they insisted that they derived no money or other benefits from
the loans. They denied knowing about the mortgage security provided
by the spouses Manalastas, or that the latter defaulted on their loans.
They also refused to acknowledge the loan deficiency of ₱1,758,427.87
on the PNs, insisting that the mortgage collateral was worth more than
₱10,000,000.00, enough to answer for all the loans, interests and
penalties. They also claimed that they were not notified of the auction
sale, and denied that they knew about the Certificate of Sale18 and the
Statement of Account dated May 18, 1998, and insisted that Chinabank
manipulated the foreclosure sale to exclude them therefrom. By way of
counterclaim, the Spouses Sinamban prayed for damages and
attorney’s fees of 25%, plus litigation expenses and costs of suit.
The spouses Manalastas were declared in default in the RTC
Order19 dated April 6, 1999, and Chinabank was allowed to present
evidence ex parte as against them, but at the pre-trial conference held
on July 5, 1999, the spouses Sinamban and their counsel also did not
appear;20 hence, in the Order21 dated July 5, 1999, the RTC allowed
Chinabank to present evidence ex parte against the defendants before
the Branch Clerk of Court. During the testimony of Rosario D. Yabut,
Branch Manager of Chinabank-San Fernando Branch, all the foregoing
facts were adduced and confirmed, particularly the identity of the
pertinent loan documents and the signatures of the defendants. On July
21, 1999, the court admitted the exhibits of Chinabank and declared the
case submitted for decision.22
Ruling of the RTC
On July 30, 1999, the RTC rendered its Decision23 with the following
dispositive portion: WHEREFORE, premises considered, judgment is
hereby rendered in favor of plaintiff China Banking Corporation and
against defendant Sps. Danilo and Magdalena Manalastas and
216
defendant Sps. Estanislao and Africa Sinamban to jointly and severally
pay [Chinabank] the amount of ₱1,758,427.87, representing the
deficiency between the acquisition cost of the foreclosed real estate
properties and the outstanding obligation of defendants at the time of
the foreclosure sale; interest at the legal rate of 12% per annum from
and after May 18, 1998; attorney’s fees equivalent to 10% of the
aforesaid deficiency amount and the litigation and costs of suit.
SO ORDERED.24
On Motion for Reconsideration25 of the spouses Sinamban dated
August 27, 1999, to which Chinabank filed an Opposition26 dated
September 14, 1999, the RTC in its Order27 dated October 22, 1999 set
aside the Decision dated July 30, 1999 with respect to the spouses
Sinamban, in this wise:
As it is undisputed that Exhibit "B" (Promissory Note dated April 24, 1995
in the amount of ₱1,800,000.00), was not signed by the Spouses
Sinamban it would not be equitable that the said defendants be made
solidarily liable for the payment of the said note as co-makers of their
co-defendants Spouses Manalastas who are the one[s] principally liable
thereto. Prescinding from this premise, the movant spouses could only
be held liable for the two (2) promissory notes they have signed,
Promissory Notes dated May 23, 1995 in the amount of ₱325,000.00
and February 26, 1991 in the amount of ₱1,300,000.00, Exhibits "A" and
"C", respectively. As the total amount of the said notes is only
₱1,625,000.00, so even if we would add the interests due thereon, there
is no way that the said outstanding loan exceed[s] the acquisition cost
of the foreclosed real estate properties subject hereof in the amount of
₱4,600,000.00.It would appear then that the Spouses Sinamban could
not be held liable for the deficiency in the amount of ₱1,758,427.87
which should justly be borne alone by the defendant Spouses
Manalastas. Guided by law and equity on the matter, the court will not
hesitate to amend a portion of its assailed decision to serve the interest
of justice.
WHEREFORE, premises considered, the decision dated July 30, 1999
is hereby Reconsidered and Set Aside with respect to the Spouses
Estanislao and Africa Sinamban hereby Relieving them from any liability
arising from the said Decision which is affirmed in toto with respect to
Spouses Manalastas.
SO ORDERED.28 (Emphases ours)
The RTC ruled that the proceeds of the auction were sufficient to answer
for the two PNs co-signed by the spouses Sinamban, including interest
and penalties thereon, and therefore the spouses Manalastas should
solely assume the deficiency of ₱1,758,427.87. Chinabank moved for
reconsideration on November 11, 1999,29 to which the spouses
Sinamban filed their comment/opposition on November 23, 1999.30
On December 8, 1999, the RTC set aside its Order dated October 22,
1999 and reinstated its Decision dated July 30, 1999, with modification,
as follows:31
WHEREFORE, premises considered, the instant Motion for
Reconsideration of plaintiff is Granted.
Order dated October 22, 1999 is hereby Set Aside.
Accordingly, the dispositive portion of the Decision dated July 30, 1999
is hereby Modified to read as follows:
WHEREFORE, premises considered, judgment [is] hereby rendered in
favor of plaintiff China Banking Corporation and against the defendant
Sps. Danilo and Magdalena Manalastas and defendant Sps. Estanislao
and Africa Sinamban, ordering them to pay as follows:
1. For defendant Sps. Danilo and Magdalena Manalastas, the
amount of ₱1,758,427.87, the deficiency between the
acquisition cost of the foreclosed real properties and their
outstanding obligation;
2. For defendant Sps. Sinamban a percentage of
₱1,758,427.87, jointly and severally with the defendant Sps.
[Manalastas] only on two (2) promissory notes;
3. The corresponding interests thereon at legal rate;
4. Attorney’s fees; and
5. Costs of suit.
217
SO ORDERED.32
This time the RTC held that the spouses Sinamban must, solidarily with
the spouses Manalastas, proportionately answer for the loan deficiency
pertaining to the two PNs they co-signed, since the mortgage security
provided by the spouses Manalastas secured all three PNs and thus
also benefited them as co-makers. But since they did not co-sign PN
No. OACL 634-95, the deficiency judgment pertaining thereto will be the
sole liability of the spouses Manalastas.
Ruling of the CA
From the Order dated December 8, 1999 of the RTC, the spouses
Sinamban appealed to the CA on January 4, 2000, docketed as CA-
G.R. CV. No. 66274, interposing the following errors of the RTC, viz:
I Promissory Note No. CLF 5-93 dated 26 February 1991; and
THE LOWER COURT ERRED WHENIT HELD
DEFENDANTSAPPELLANTS SPS. SINAMBAN LIABLE TO PAY A
PERCENTAGE OF ₱1,758,427.87, JOINTLY AND SEVERALLY WITH
THE DEFENDANTS SPS. MANALASTAS ON THE TWO
PROMISSORY NOTES (EXHIBITS ‘C’ AND ‘A’).
II
THE LOWER COURT ERRED WHEN IT RECONSIDERED AND SET
ASIDE ITS PREVIOUS ORDER DATED 22 OCTOBER 1999
RELIEVING DEFENDANTS-APPELLANTS SPS. SINAMBAN FROM
ANY LIABILITY ARISING FROM THE DECISION DATED 30 JULY
1999.
III
THE LOWER COURT ERRED WHEN IT RENDERED THE VAGUE
ORDER OF 8 DECEMBER 1999 (ANNEX ‘B’ HEREOF).33
On May 19, 2010, the CA rendered judgment denying the appeal, the
fallo of which reads: WHEREFORE, considering the foregoing
disquisition, the appeal is DENIED. The Decision dated 30 July 1999
and the Order dated 08 December 1999 of the Regional Trial Court of
San Fernando, Pampanga, Branch 45 in Civil Case No. 11708are
hereby AFFIRMED with MODIFICATION in that:
1. Sps. Danilo and Magdalena Manalastas are solidarily liable
for the deficiency amount of Php507,741.62 (inclusive of 10%
attorney’s fees) on Promissory Note No. OACL 634-95 dated 24
April 1995;
2. Sps. Estanislao and Africa Sinamban are solidarily liable with
Sps. Danilo and Magdalena Manalastas for the amount of
Php844,501.90 (inclusive of 10% attorney’s fees) on
Promissory Note No. OACL00636-95 dated 23 May 1995;
3. Estanislao Sinamban and Sps. Danilo and Magdalena
Manalastas are solidarily liable for the amount of
Php406,184.35 (inclusive of 10% attorney’s fees) on
4. The foregoing amounts shall bear interest at the rate of 12%
per annum from 18 November 1998 until fully paid.
SO ORDERED.34 (Some emphasis ours)
Petition for Review to the Supreme Court
In this petition for review, the spouses Sinamban seek to be completely
relieved of any liability on the PNs, solidary or otherwise, by interposing
the following issues:
5.1 Whether or not the Honorable Court of Appeals erred in not
considering that the Sps. Sinamban’s obligations under PN#
OACL 636-95 dated May 23, 1995 in the principal sum of
Php325,000.00 and PN# CLF 5-93 dated February 26, 1991 in
the principal sum of Php1,300,000.00 are more onerous and
burdensome on their part as mere sureties (co-makers) of their
co-defendants-spouses Danilo and Magdalena Manalastas’
(hereinafter referred to as the "Sps. Manalastas") obligations
over the same, compared to the Sps. Manalastas’ sole
obligation under PN# OACL 634-95 dated 24 April 1995 in the
principal amount of Php1,800,000.00, such that the proceeds of
the auction sale of the properties securing all the three (3)
218
 promissory notes should first be applied to satisfy the
promissory notes signed by the Sps. Sinamban; and
5.2 Whether or not the Honorable Court of Appeals erred in not
considering the facts indubitably showing that it is the Sps.
Sinamban, as the debtors, and not the respondent bank, who
are given the choice under Article 1252 of the Civil Code to have
the proceeds of the auction sale applied as payments to their
obligations under PN# OACL 636-95 dated 23 May 1995 and
PN# CLF 5-93 dated 26 February 1991.35
Ruling of the Court
The Court modifies the CA decision.
A co-maker of a PN who binds
himself with the maker "jointly and
severally" renders himself directly
and primarily liable with the maker
on the debt, without reference to his
solvency.
"A promissory note is a solemn acknowledgment of a debt and a formal
commitment to repay it on the date and under the conditions agreed
upon by the borrower and the lender. A person who signs such an
instrument is bound to honor it as a legitimate obligation duly assumed
by him through the signature he affixes thereto as a token of his good
faith. If he reneges on his promise without cause, he forfeits the
sympathy and assistance of this Court and deserves instead its sharp
repudiation."36
Employing words of common commercial usage and well-accepted legal
significance, the three subject PNs uniformly describe the solidary
nature and extent of the obligation assumed by each of the defendants
in Civil Case No. 11708, to wit:
"FOR VALUE RECEIVED, I/We jointly and severally promise to pay to
the CHINA BANKING CORPORATION or its order the sum of PESOS
x x x[.]"37 (Emphasis ours)
According to Article 2047 of the Civil Code,38 if a person binds himself
solidarily with the principal debtor, the provisions of Articles 1207 to
1222 of the Civil Code (Section 4, Chapter 3,Title I, Book IV) 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." It is
settled that when the obligor or obligors undertake to be "jointly and
severally" liable, it means that the obligation is solidary.39 In this case,
the spouses Sinamban expressly bound themselves to be jointly and
severally, or solidarily, liable with the principal makers of the PNs, the
spouses Manalastas.
Moreover, as the CA pointed out, in Paragraph 5 of the PNs, the
borrowers and their co-makers expressly authorized Chinabank, as
follows:
[T]o apply to the payment of this note and/or any other particular
obligation or obligations of all or any one of us to the CHINA BANKING
CORPORATION as the said Corporation may select, irrespective of the
dates of maturity, whether or not said obligations are then due, any or
all moneys, securities and things of value which are now or which may
hereafter be in its hands on deposit or otherwise to the credit of, or
belonging to, all or any one of us, and the CHINA BANKING
CORPORATION is hereby authorized to sell at public or private sale
such securities or things of value for the purpose of applying their
proceeds to such payments.40
Pursuant to Article 1216 of the Civil
Code, as well as Paragraph 5 of the
PNs, Chinabank opted to proceed
against the co-debtors
simultaneously, as implied in its
May 18, 1998 statement of
account when it applied the entire
amount of its auction bid to the
aggregate amount of the loan
obligations.
The PNs were executed to acknowledge each loan obtained from the
credit line extended by Chinabank, which the principal makers and true
219
beneficiaries, the spouses Manalastas, secured with a REM they
executed over their properties. As the RTC noted in its Order dated
December 8, 1999, "the real estate mortgage was constituted to secure
all the three (3) promissory notes," concluding that "[j]ust as the liability
of the [spouses] Sinamban was lessened by the foreclosure
proceedings, so must they also share in the deficiency judgment, in
proportion to the PNs they co-signed with the [spouses] Manalastas, but
notthe entire deficiency judgment of ₱1,758,427.87."41
Significantly, in modifying the RTC’s second amended decision, which
provides for the pro rata distribution of the loan deficiency of
₱1,758,427.87, the CA first applied the entire net proceeds of the
auction sale of ₱4,183,744.63 (after auction expenses of ₱416,255.37),
to PN No. OACL 634-95, which on May 18, 1998 had an outstanding
balance of ₱4,264,987.50, inclusive of interest and penalties, plus 10%
attorney’s fees, or a total of ₱4,691,486.25. Thus, ₱4,691,486.25 less
₱4,183,744.63 leaves a deficiency on PN No. OACL 634-95 of
₱507,741.62, which is due solely from the spouses Manalastas.
As for PN No. OACL 636-95, the CA ordered the spouses Sinamban to
pay, solidarily with the spouses Manalastas, the entire amount due
thereon, ₱844,501.90, consisting of the loan principal of ₱767,729.00
plus accrued interest, penalties and 10% attorney’s fees; concerning PN
No. CLF 5-93, the CA ordered the spouses Sinamban to pay, solidarily
with the spouses Manalastas, the amount of ₱406,184.35, consisting of
the balance of the loan principal of ₱369,258.50 plus accrued interest,
penalties and 10% attorney’s fees. The CA further ordered the payment
of 12% interest per annum from November 18, 1998, the date of judicial
demand, until fully paid, on the above deficiencies.
Article 1216 of the Civil Code provides that "[t]he 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." Article 125242 of
the Civil Code does not apply, as urged by the petitioners, because in
the said article the situation contemplated is that of a debtor with several
debts due, whereas the reverse is true, with each solidary debt
imputable to several debtors.
While the CA correctly noted that the choice is given to the solidary
creditor to determine against whom he wishes to enforce payment, the
CA stated that Chinabank, in the exercise of the aforesaid option, chose
to apply the net proceeds of the extrajudicial foreclosure sale first to the
PN solely signed by spouses Manalastas.43 Thus, the net proceeds
were applied first to PN No. OACL 634-95 in the principal amount of
₱1,800,000.00, instead of pro rata to all three PNs due.
The Court finds this factual conclusion of the CA not supported by any
evidence or any previous arrangement.1âwphi1 To the contrary, as
clearly shown in its Statement of Account dated May 18, 1998,
Chinabank opted to apply the entire auction proceeds to the aggregate
amount of the three PNs due, ₱5,401,975.00 (before attorney’s fees and
auction expenses). Had it chosen to enforce the debts as ruled by the
CA, the Statement of Account would have shown that the loan due on
PN No. OACL 634-95 which is ₱4,691,486.25, should have been
deducted first from the net auction proceeds of ₱4,183,744.63, arriving
at a deficiency of ₱507,741.62on PN No. OACL 634-95 alone; thereby,
leaving no remainder of the proceeds available to partially settle the
other two PNs. As it appears, the auction proceeds are not even
sufficient to cover just PN No. OACL 634-95 alone.
But as the Court has noted, by deducting the auction proceeds from the
aggregate amount of the three loans due, Chinabank in effect opted to
apply the entire proceeds of the auction simultaneously to all the three
loans. This implies that each PN will assume a pro rata portion of the
resulting deficiency on the total indebtedness as bears upon each PN’s
outstanding balance. Contrary to the spouses Sinamban’s insistence,
none of the three PNs is more onerous than the others to justify applying
the proceeds according to Article 1254 of the Civil Code, in relation to
Articles 1252 and 1253.44 Since each loan, represented by each PN,
was obtained under a single credit line extended by Chinabank for the
working capital requirements of the spouses Manalastas’ rice milling
business, which credit line was secured also by a single REM over their
properties, then each PN is simultaneously covered by the same
mortgage security, the foreclosure of which will also benefit them
proportionately. No PN enjoys any priority or preference in payment over
the others, with the only difference being that the spouses Sinamban
are solidarily liable for the deficiency on two of them.
Pursuant, then, to the order or manner of application of the auction
proceeds chosen by Chinabank, the solidary liability of the defendants
pertaining to each PN shall be as follows:
220
 a) PN No. OACL 634-95, with a balance as of May 18, 1998 of
₱4,264,987.50: its share in the total deficiency is computed as
the ratio of ₱4,264,987.50 to ₱5,401,975.00, multiplied by
₱1,758,427.87, or ₱1,388,320.55, (not ₱507,741.62 as found
by the CA);
b) PN No. OACL 636-95, with a balance of ₱767,729.00 as of
May 18, 1998: its share in the deficiency is computed as the
ratio of ₱767,729.00 to ₱5,401,975.00, multiplied by
₱1,758,427.87, or ₱249,907.87, (not ₱844,501.90 as computed
by the CA);
c) PN No. CLF 5-93, with an outstanding balance of
₱369,258.50 as of May 18, 1998: its share in the deficiency is
computed as the ratio of ₱369,258.50 to ₱5,401,975.00,
multiplied by ₱1,758,427.87, or ₱120,199.45, (not ₱406,184.35
as found by the CA).
In short, in the CA decision, the spouses Manalastas would be solely
liable on PN No. OACL 634-95 for only ₱507,741.62(instead of the much
bigger amount of ₱1,388,320.55which this Court found), whereas the
spouses Sinamban would be solidarily liable with the spouses
Manalastas for a total deficiency of ₱1,250,686.25 on PN No. OACL
636-95 and PN No. CLF 5-93. But under the Court’s interpretation, the
spouses Sinamban are solidarily liable with the spouses Manalastas for
only ₱370,107.32on the said two PNs, for a significant difference of
₱880,578.93.
Pursuant to Monetary Board
Circular No. 799, effective July 1,
2013, the rate of interest for the
loan or forbearance of any money,
goods or credits and the rate
allowed in judgments, in the
absence of an express contract as to
such rate of interest, has been
reduced to six percent (6%) per
annum.
The subject three PNs bear interests ranging from 21% to 23% per
annum, exclusive of penalty of 1% on the overdue amount per month of
delay, whereas in its complaint, Chinabank prayed to recover only the
legal rate of 12% on whatever judgment it could obtain. Meanwhile, the
Monetary Board of the Bangko Sentral ng Pilipinas in its Resolution No.
796 dated May 16, 2013, and now embodied in Monetary Board Circular
No. 799, has effective July 1, 2013 reduced to 6%, from 12%, the legal
rate of interest for the loan or forbearance of any money, goods or
credits and the rate allowed in judgments, in the absence of
stipulation.45 Since Chinabank demanded only the legal, not the
stipulated, interest rate on the deficiency and attorney’s fees due, the
defendants will solidarily pay interest on their shares in the deficiency at
the rate of 12% from November 18, 1998 to June 30, 2013, and 6% from
July 1, 2013 until fully paid. WHEREFORE, the Decision of the Court of
Appeals dated May 19, 2010 in CA-G.R. CV No. 66274 is MODIFIED.
The Decision dated July 30, 1999 and the Order dated December 8,
1999 of the Regional Trial Court of San Fernando City, Pampanga,
Branch 45 in Civil Case No. 11708 are hereby AFFIRMED with
MODIFICATIONS as follows:
1. Spouses Danilo and Magdalena Manalastas are solidarily
liable for the deficiency amount of 1,388,320.55 (inclusive of
10% attorney’s fees) on Promissory Note No. OACL 634-95
dated April 24, 1995;
2. Spouses Estanislao and Africa Sinamban are solidarily
liable with spouses Danilo and Magdalena Manalastas for the
deficiency amount of ₱249,907.87(inclusive of 10% attorney’s
fees) on Promissory Note No. OACL 636-95 dated May 23,
1995;
3. Estanislao Sinamban and spouses Danilo and Magdalena
Manalastas are solidarily liable for the deficiency amount of
₱120,199.45 (inclusive of 10% attorney’s fees) on Promissory
Note No. CLF 5-93 dated February 26, 1991; and
4. The foregoing amounts shall bear interest at the rate of
twelve percent (12%) per annum from November 18, 1998 to
June 30, 2013, and six percent (6%) per annum from July 1,
2013 until fully paid.SO ORDERED.
221
 1253-1254 – ABSENCE OF STIPULATION WHERE PAYMENT BE
APPLIED
MARQUEZ v. ELISAN CREDIT 755 S 31
BRION, J.:
We resolve the present petition for review on certiorari[1] assailing the
May 17, 2010 decision[2] and the November 25, 2010 resolution[3] of the
Court of Appeals (CA) in CA-G.R. SP No. 102144.[4]
The Factual Antecedents
On December 16, 1991, Nunelon R. Marquez (petitioner) obtained a
(first loan) from Elisan Credit Corporation (respondent) for fifty-three
thousand pesos (Php 53,000.00) payable in one-hundred eighty (180)
days.[5]
The petitioner signed a promissory note which provided that it is payable
in weekly installments and subject to twenty-six percent (26%) annual
interest. In case of non-payment, the petitioner agreed to pay ten
percent (10%) monthly penalty based on the total amount unpaid and
another twenty-five percent (25%) of such amount for attorney's fees
exclusive of costs, and judicial and extrajudicial expenses.[6]
To further secure payment of the loan, the petitioner executed a chattel
provided among others, that the motor vehicle shall stand as a security
for the first loan and "all other obligations of every kind already incurred
or which may hereafter be incurred."[8]
Both the petitioner and respondent acknowledged the full payment of
the first loan.[9]
Subsequently, the petitioner obtained another loan (second loan) from
the respondent for fifty-five thousand pesos (P55,000.00) evidenced by
a promissory note[10] and a cash voucher[11] both dated June 15, 1992.
The promissory note covering the second loan contained exactly the
sameterms and conditions as the first promissory note.
When the second loan matured on December 15, 1992, the petitioner
had onlypaid twenty-nine thousand nine hundred sixty pesos
(P29,960.00), leaving an unpaid balance of twenty five thousand forty
pesos (P25,040.00).[12]
Due to liquidity problems, the petitioner asked the respondent if he could
pay in daily installments (daily payments) until the second loan is paid.
The respondent granted the petitioner's request. Thus, as of September
1994 or twenty-one (21) months after the second loan's maturity, the
petitioner had already paid a total of fifty-six thousand four-hundred forty
pesos (P56,440.00), an amount greater than the principal.[13]
Despite the receipt of more than the amount of the principal, the
respondent filed a complaint for judicial foreclosure of the chattel
mortgage because the petitioner allegedly failed to settle the balance of
the second loan despite demand.[14]
The respondent further alleged that pursuant to the terms of the
promissory note, the petitioner's failure to fully pay upon maturity
triggered the imposition of the ten percent (10%) monthly penalty and
twenty-five percent (25%) attorney's fees.
The respondent prayed that the petitioner be ordered to pay the balance
of the second loan plus accrued penalties and interest.[15]
Before the petitioner could file an answer, the respondent applied for the
issuance of a writ of replevin. The MTC issued the writ and by virtue of
which, the motor vehicle covered by the chattel mortgage was seized
from the petitioner and delivered to the respondent.[16]
Trial on the merits thereafter ensued.
The MTC Ruling[17]
The MTC found for the petitioner and held that the second loan was fully
extinguished as of September 1994.
It held that when an obligee accepts the performance or payment of an
obligation, knowing its incompleteness or irregularity and without
expressing any protest or objection, the obligation is deemed fully
complied with.[18] The MTC noted that the respondent accepted the daily
payments made by the petitioner without protest. The second loan
having been fully extinguished, the MTC ruled that respondent's claim
for interests and penalties plus the alleged unpaid portion of the principal
is without legal basis.
222
The MTC ordered:
1. "the plaintiff Elisan Credit Corporation to return/deliver
the seized motor vehicle with Plate No. UV-TDF-193 to
the possession of the defendant and in the event its
delivery is no longer possible, to pay the defendant the
amount of P30,000.00 corresponding to the value of the
said vehicle;"
2. "the bonding company People's Trans-East Asia
Insurance Corporation to pay the defendant the
amounts of P20,000.00 and P5,000.00 representing the
damages and attorney's fees under P.T.E.A.LC Bond
No. JCL (13)-00984;"
3. "the plaintiff is likewise directed to surrender to the
defendant the originals of the documents evidencing
indebtedness in this case so as to prevent further use
of the same in another proceeding."
The RTC Ruling[19]
Except for the MTC's order directed to the bonding company, the RTC
initially affirmed the ruling of the MTC.
Acting on the respondent's motion for reconsideration, the RTC
reversed itself. Citing Article 1253 of the Civil Code, it held that "if the
debt produces interest, payment of the principal shall not be deemed to
have been made until the interests have been covered." It also sustained
the contention of the respondent that the chattel mortgage was revived
when the petitioner executed the promissory note covering the second
loan.
The RTC ordered:
1. "the defendant to pay the plaintiff the following: a)
P25,040.00, plus interest thereon at the rate of 26% per
annum and penalties of 10% per month thereon from
due date of the second promissory note until fully paid,
b) 25% of the defendant's outstanding obligation as and
for attorney's fees, c) costs of this suit;"
2. "the foreclosure of the chattel mortgage dated
December 16, 1991 and the sale of the mortgaged
property at a public auction, with the proceeds thereof
to be applied as and in payment of the amounts
awarded in a and b above."
The CA Ruling[20]
The CA affirmed the RTC's ruling with modification.
The CA observed that the disparity in the amount loaned and the amount
paid by the petitioner supports the respondent's view that the daily
payments were properly applied first for the payment of interests and
not for the principal.
According to the CA, if the respondent truly condoned the payment of
interests as claimed by the petitioner, the latter did not have to pay an
amount in excess of the principal. The CA believed the petitioner knew
his payments were first applied to the interests due.
The CA held that Article 1253 of the Civil Code is clear that if debt
produces interest, payment of the principal shall not be deemed made
until the interests have been covered. It ruled that even if the official
receipts issued by the respondent did not mention that the payments
were for the interests, the omission is irrelevant as it is deemed by law
to be for the payment of interests first, if any, and then for the payment
of the principal amount.
The CA, however, reduced the monthly penalty from ten percent (10%)
to two percent (2%) pursuant to Article 1229 of the Civil Code which
gives the courts the power to decrease the penalty when the principal
obligation has been partly or irregularly complied with by the debtor.
The dispositive portion of the CA decision provides:
"WHEREFORE, premises considered, the Petition is hereby DENIED
for lack of merit. The Order dated 07 May 2007 of the Regional Trial
Court, Branch 222, Quezon City is hereby AFFIRMED with
MODIFICATION that the penalty charge should only be two (2%) per
month until fully paid."
The CA denied the petitioner's Motion for Reconsideration dated May
17, 2010 on November 25, 2010 for failing to raise new matters. Hence,
this present petition.
The Petition
The petitioner seeks the reversal of the CA's decision and resolution. He
argues that he has fully paid his obligation. Thus, the respondent has no
right to foreclose the chattel mortgage.
The petitioner insists that his daily payments should be deemed to have
been credited against the principal, as the official receipts issued by the
223
respondent were silent with respect to the payment of interest and
penalties. He cites Article 1176 of the Civil Code which ordains that [t]he
receipt of the principal by the creditor without reservation with respect to
the interest, shall give rise to the presumption that the interest has been
paid. The petitioner invokes Article 1235 of the Civil Code which states
that "[w]hen the obligee accepts the performance of an obligation,
knowing its incompleteness or irregularity, and without expressing any
protest or objection, the obligation is deemed fully complied with."
The petitioner denies having stipulated upon and consented to the
twenty-six per cent (26%) per annum interest charge, ten percent (10%)
monthly penalty and twenty-five percent (25%) attorney's fees.
According to the petitioner, he signed the promissory note in blank.
The petitioner likewise disclaims receiving any demand letter from the
respondent for the alleged balance of the second loan after he had paid
fifty-six thousand four-hundred forty pesos (Php56,440.00) as of
September 1994, and further argues that the chattel mortgage could not
cover the second loan as it was annulled and voided upon full payment
of the first loan.
The Respondent's Case[21]
The respondent claims that the daily payments were properly credited
against the interest and not against the principal because the petitioner
incurred delay in the full payment of the second loan.
It argues that pursuant to the terms and conditions of the promissory
note, the interest and penalties became due and demandable when the
petitioner failed to pay in full upon maturity. The respondent relies on
Article 1253 of the Civil Code which provides that if the debt produces
interest, payment of the principal shall not be deemed to have been
made until the interests have been covered.The respondent likewise
maintains that the chattel mortgage could validly secure the second loan
invoking its provision which provided that it covers "obligations...which
may hereafter be incurred."
Issues
The petitioner raises the following issues for our resolution:
I. "WHETHER THE HONORABLE COURT OF
APPEALS ERRED IN AFFIRMING THE DECISION OF
THE REGIONAL TRIAL COURT ORDERING THE
PETITIONER TO PAY THE RESPONDENT THE
AMOUNT OF PHP24,040.00 PLUS INTEREST AND
PENALTY FROM DUE DATE UNTIL FULLY PAID;
AND
II. "WHETHER THE HONORABLE COURT OF
APPEALS ERRED IN AFFIRMING THE DECISION OF
THE REGIONAL TRIAL COURT ORDERING THE
FORECLOSURE AND SALE OF THE MORTGAGED
PROPERTY."[22]
In simpler terms, did the respondent act lawfully when it credited the
daily payments against the interest instead of the principal? Could the
chattel mortgage cover the second loan?
The Court's Ruling
We find the petition partly meritorious.
We rule that: (1) the respondent acted pursuant to law and jurisprudence
when it credited the daily payments against the interest instead of the
principal; and (2) the chattel mortgage could not cover the second loan.
Rebuttable presumptions; Article 1176 vis-a-vis Article 1253
There is a need to analyze and harmonize Article 1176 and Article 1253
of the Civil Code to determine whether the daily payments made after
the second loan's maturity should be credited against the interest or
against the principal.
Article 1176 provides that:
"The receipt of the principal by the creditor, without reservation
with respect to the interest, shall give rise to the presumption that
said interest has been paid.
xxx xxx x x x."
On the other hand, Article 1253 states:
"If the debt produces interest, payment of the principal shall not be
deemed to have been made until the interests have been covered."
The above provisions appear to be contradictory but they in fact support,
and are in conformity with, each other. Both provisions are also
presumptions and, as such, lose their legal efficacy in the face of proof
or evidence to the contrary.

224
Thus, the settlement of the first issue depends on which of these
presumptions prevails under the given facts of the case.
There are two undisputed facts crucial in resolving the first issue: (1) the
petitioner failed to pay the full amount of the second loan upon maturity;
and (2) the second loan was subject to interest, and in case of default,
to penalty and attorney's fees.
But before proceeding any further, we first tackle the petitioner's denial
of the genuineness and due execution of the second promissory note.
He denies that he stipulated upon and consented to the interest, penalty
and attorney's fees because he purportedly signed the promissory note
in blank.[23]
This allegation deserves scant consideration. It is self-serving and
unsupported by evidence.
As aptly observed by the RTC and the CA, the promissory notes
securing the first and second loan contained exactly the same terms and
conditions. They were mirror-image of each other except for the date
and amount of principal Thus, we see sufficient basis to believe that the
petitioner knew or was aware of such terms and conditions even
assuming that the entries on the interest and penalty charges were in
blank when he signed the promissory note.
Moreover, we find it significant that the petitioner does not deny the
genuineness and due execution of the first promissory note. Only when
he failed to pay the second loan did he impugn the validity of the interest,
penalty and attorney's fees. The CA and the RTC also noted that the
petitioner is a schooled individual, an engineer by profession, who,
because of these credentials, will not just sign a document in blank
without appreciating the import of his action.[24]
These considerations strongly militate against the petitioner's claim that
he did not consent to and stipulated on the interest and penalty charges
of the second loan. Thus, he did not only fail to fully pay the second loan
upon maturity; the loan was also subject to interest, penalty and
attorney's fees.
Article 1176 in relation to Article 1253
Article 1176 falls under Chapter I (Nature and Effect of Obligations)
while Article 1253 falls under Subsection I (Application of Payments),
Chapter IV (Extinguishment of Obligations) of Book IV (Obligations
and Contracts) of the Civil Code.
The structuring of these provisions, properly taken into account, means
that Article 1176 should be treated as a general presumption subject to
the more specific presumption under Article 1253. Article 1176 is
relevant on questions pertaining to the effects and nature of obligations
in general, while Article 1253 is specifically pertinent on questions
involving application of payments and extinguishment of obligations.
A textual analysis of the above provisions yields the results we discuss
at length below:
The presumption under Article 1176 does not resolve the question of
whether the amount received by the creditor is a payment for the
principal or interest. Under this article the amount received by the
creditor is the payment for the principal, but a doubt arises on whether
or not the interest is waived because the creditor accepts the payment
for the principal without reservation with respect to the interest. Article
1176 resolves this doubt by presuming that the creditor waives the
payment of interest because he accepts payment for the principal
without any reservation.
On the other hand, the presumption under Article 1253 resolves doubts
involving payment of interest-bearing debts. It is a given under this
Article that the debt produces interest. The doubt pertains to the
application of payment; the uncertainty is on whether the amount
received by the creditor is payment for the principal or the interest.
Article 1253 resolves this doubt by providing a hierarchy: payments shall
first be applied to the interest; payment shall then be applied to the
principal only after the interest has been fully-paid.
Correlating the two provisions, the rule under Article 1253 that payments
shall first be applied to the interest and not to the principal shall govern
if two facts exist: (1) the debt produces interest (e.g., the payment of
interest is expressly stipulated) and (2) the principal remains unpaid.
The exception is a situation covered under Article 1176, i.e., when the
creditor waives payment of the interest despite the presence of (1) and
(2) above. In such case, the payments shall obviously be credited to the
principal.
Since the doubt in the present case pertains to the application of the
daily payments, Article 1253 shall apply. Only when there is a waiver of
interest shall Article 1176 become relevant.
Under this analysis, we rule that the respondent properly credited the
daily payments to the interest and not to the principal because: (1) the
debt produces interest, i.e., the promissory note securing the second
loan provided for payment of interest; (2) a portion of the second loan
remained unpaid upon maturity; and (3) the respondent did not waive
the payment of interest.
There was no waiver of interest
225
The fact that the official receipts did not indicate whether the payments
were made for the principal or the interest does not prove that the
respondent waived the interest.
We reiterate that the petitioner made the daily payments after the
second loan had already matured and a portion of the principal remained
unpaid. As stipulated, the principal is subject to 26% annual interest.
All these show that the petitioner was already in default of the principal
when he started making the daily payments. The stipulations providing
for the 10% monthly penalty and the additional 25% attorney's fees on
the unpaid amount also became effective as a result of the petitioner's
failure to pay in full upon maturity.
In other words, the so-called interest for default[25] (as distinguished from
the stipulated monetary interest of 26% per annum) in the form of the
10% monthly penalty accrued and became due and demandable. Thus,
when the petitioner started making the daily payments, two types of
interest were at the same time accruing, the 26% stipulated monetary
interest and the interest for default in the form of the 10% monthly
penalty.
Article 1253 covers both types of interest. As noted by learned civilist,
Arturo M. Tolentino, no distinction should be made because the law
makes no such distinction. He explained:
"Furthermore, the interest for default arises because of non-
performance by the debtor, and to allow him to apply payment to the
capital without first satisfying such interest, would be to place him
in a better position than a debtor who has not incurred in delay.
The delay should worsen, not improve, the position of a debtor."[26]
[Emphasis supplied.]
The petitioner failed to specify which of the two types of interest the
respondent allegedly waived. The respondent waived neither.
In Swagman Hotels and Travel Inc. v. Court of Appeals,[27] we applied
Article 1253 of the Civil Code in resolving whether the debtor has waived
the payments of interest when he issued receipts describing the
payments as "capital repayment." We held that,
"Under Article 1253 of the Civil Code, if the debt produces interest,
payment of the principal shall not be deemed to have been made until
the interest has been covered. In this case, the private respondent
would not have signed the receipts describing the payments made
by the petitioner as "capital repayment" if the obligation to pay the
interest was still subsisting.
"There was therefore a novation of the terms of the three promissory
notes in that the interest was waived..."[28] [Emphasis supplied.]
The same ruling was made in an older case[29] where the creditor issued
a receipt which specifically identified the payment as referring to the
principal. We held that the interest allegedly due cannot be recovered,
in conformity with Article 1110 of the Old Civil Code, a receipt from the
creditor for the principal, that contains no stipulation regarding interest,
extinguishes the obligation of the debtor with regard thereto when the
receipt issued by the creditor showed that no reservation whatever was
made with respect to the interest.
In both of these cases, it was clearly established that the creditors
accepted the payment of the principal. The creditors were deemed to
have waived the payment of interest because they issued receipts
expressly referring to the payment of the principal without any
reservation with respect to the interest. As a result, the interests due
were deemed waived. It was immaterial whether the creditors intended
to waive the interest or not. The law presumed such waiver because the
creditors accepted the payment of the principal without reservation with
respect to the interest.
In the present case, it was not proven that the respondent accepted the
payment of the principal. The silence of the receipts on whether the daily
payments were credited against the unpaid balance of the principal or
the accrued interest does not mean that the respondent waived the
payment of interest. There is no presumption of waiver of interest
without any evidence showing that the respondent accepted the daily
installments as payments for the principal.
Ideally, the respondent could have been more specific by indicating on
the receipts that the daily payments were being credited against the
interest. Its failure to do so, however, should not be taken against it. The
respondent had the right to credit the daily payments against the interest
applying Article 1253.
It bears stressing that the petitioner was already in default. Under the
promissory note, the petitioner waived demand in case of non-payment
upon due date.[30] The stipulated interest and interest for default have
both accrued. The only logical result, following Article 1253 of the Civil
Code, is that the daily payments were first applied against either or both
the stipulated interest and interest for default.
Moreover, Article 1253 is viewed as having an obligatory character and
not merely suppletory. It cannot be dispensed with except by mutual
agreement. The creditor may oppose an application of payment made
by the debtor contrary to this rule.[31]
In any case, the promissory note provided that "interest not paid when
due shall be added to, and become part of the principal and shall
likewise bear interest at the same rate, compounded monthly."[32]
226
Hence, even if we assume that the daily payments were applied against
the principal, the principal had also increased by the amount of unpaid
interest and the interest on such unpaid interest. Even under this
assumption, it is doubtful whether the petitioner had indeed fully paid the
second loan.
Excessive interest, penalty and attorney's fees
Notwithstanding the foregoing, we find the stipulated rates of interest,
penalty and attorney's fees to be exorbitant, iniquitous, unconscionable
and excessive. The courts can and should reduce such astronomical
rates as reason and equity demand.
Article 1229 of the Civil Code provides:
"The judge shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor.
Even if there has been no performance, the penalty may also be
reduced by the courts if it is iniquitous or unconscionable."
Article 2227 of the Civil Code ordains:
"Liquidated damages, whether intended as an indemnity or a penalty,
shall be equitably reduced if they are iniquitous or unconscionable.
More importantly, Article 1306 of the Civil Code is emphatic:
"The contracting parties may establish such stipulations, clauses, terms
and conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order, or public policy."
Thus, stipulations imposing excessive rates of interest and penalty are
void for being contrary to morals, if not against the law.[33]
Further, we have repeatedly held that while Central Bank Circular No.
905-82, which took effect on January 1, 1983, effectively removed the
ceiling on interest rates for both secured and unsecured loans,
regardless of maturity, nothing in the said circular could possibly be read
as granting carte blancheauthority to lenders to raise interest rates to
levels that would be unduly burdensome, to the point of oppression on
their borrowers.[34
In exercising this power to determine what is iniquitous and
unconscionable, courts must consider the circumstances of each case
since what may be iniquitous and unconscionable in one may be totally
just and equitable in another.[35
In the recent case of MCMP Construction Corp. v. Monark Equipment
Corp.,[36] we reduced the interest rate of twenty-four percent (24%) per
annum to twelve percent (12%) per annum; the penalty and collection
charge of three percent (3%) per month, or thirty-six percent (36%) per
annum, to six percent (6%) per annum; and the amount of attorney's
fees from twenty-five percent (25%) of the total amount due to five
percent (5%).
Applying the foregoing principles, we hereby reduce the stipulated rates
as follows: the interest of twenty-six percent (26%) per annum is
reduced to two percent (2%) per annum; the penalty charge of ten
percent (10%) per month, or one-hundred twenty percent (120%) per
annum is reduced to two percent (2%) per annum; and the amount of
attorney's fees from twenty-five percent (25%) of the total amount due
to two percent (2%) of the total amount due.
We believe the markedly reduced rates are reasonable, equitable and
just under the circumstances.
It is not entirely the petitioner's fault that he honestly, albeit wrongly,
believed that the second loan had been fully paid. The respondent is
partly to blame for issuing receipts not indicating that the daily payments
were being applied against the interest.
Moreover, the reduction of the rates is justified in the context of its
computation period. In Trade & Investment Dev't Corp. of the Phil. v.
Roblett Industrial Construction Corp.,[37] we equitably reduced the
interest rate because the case was decided with finality sixteen years
after the filing of the complaint. We noted that the amount of the loan
swelled to a considerably disproportionate sum, far exceeding the
principal debt.
It is the same in the present case where the complaint was filed almost
twenty-years ago.[38]
The Chattel Mortgage could not cover the second loan.
The chattel mortgage could not validly cover the second loan. The order
for foreclosure was without legal and factual basis.
In Acme Shoe, Rubber and Plastic Corp. v. Court of Appeals,[39] the
debtor executed a chattel mortgage, which had a provision to this effect:
"In case the MORTGAGOR executes subsequent promissory note or
notes either as a renewal of the former note, as an extension thereof, or
as a new loan, or is given any other kind of accommodations such as
overdrafts, letters of credit, acceptances and bills of exchange, releases
of import shipments on Trust Receipts, etc., this mortgage shall also
stand as security for the payment of the said promissory note or notes
and/or accommodations without the necessity of executing a new
contract and this mortgage shall have the same force and effect as
if the said promissory note or notes and/or accommodations were
existing on the date thereof."[40] [Emphasis supplied.]
In due time, the debtor settled the loan covered by the chattel mortgage.
Subsequently, the debtor again borrowed from the creditor. Due to
financial constraints, the subsequent loan was not settled at maturity.
On the issue whether the chattel mortgage could be foreclosed due to
the debtor's failure to settle the subsequent loan, we held that,
227
"[c]ontracts of security are either personal or real, x x x In contracts of
real security, such as a pledge, a mortgage or an antichresis, that
fulfillment is secured by an encumbrance of property — in pledge, the
placing of movable property in the possession of the creditor; in chattel
mortgage, by the execution of the corresponding deed substantially in
the form prescribed by law; x x x — upon the essential condition that if
the principal obligation becomes due and the debtor defaults, then the
property encumbered can be alienated for the payment of the obligation,
but that should the obligation be duly paid, then the contract is
automatically extinguished proceeding from the accessory
character of the agreement. As the law so puts it, once the
obligation is complied with, then the contract of security becomes,
ipso facto, null and void."[41]
While a pledge, real estate mortgage, or antichresis may exceptionally
secure after-incurred obligations so long as these future debts are
accurately described, a chattel mortgage, however, can only cover
obligations existing at the time the mortgage is constituted. Although
a promise expressed in a chattel mortgage to include debts that
are yet to be contracted can be a binding commitment that can be
compelled upon, the security itself, however, does not come into
existence or arise until after a chattel mortgage agreement
covering the newly contracted debt is executed either by
concluding a fresh chattel mortgage or by amending the old
contract conformably with the form prescribed by the Chattel
Mortgage Law. Refusal on the part of the borrower to execute the
agreement so as to cover the after-incurred obligation can constitute an
act of default on the part of the borrower of the financing agreement
whereon the promise is written but, of course, the remedy of foreclosure
can only cover the debts extant at the time of constitution and during the
life of the chattel mortgage sought to be foreclosed."[42] [Emphasis
supplied.]
We noted that the Chattel Mortgage Law[43] requires the parties to the
contract to attach an affidavit of good faith and execute an oath that -
" x x x (the) mortgage is made for the purpose of securing the obligation
specified in the conditions thereof, and for no other purposes, and
that the same is a just and valid obligation, and one not entered into for
the purposes of fraud."[44]
It is obvious therefore that the debt referred in the law is a current, not
an obligation that is yet merely contemplated.[45]
"x x x in consideration of the credit accommodation granted by the
MORTGAGEE to the MORTGAGOR(S) in the amount of FIFTY-THREE
THOUSAND ONLY PESOS (P53,000.00) xxx and all other obligations
of every kind already incurred or which may hereafter be incurred, for
or accommodation of the MORTGAGOR(S), as well as the faithful
performance of the terms and conditions of this mortgage x x x."[46]
[Emphasis supplied.]
The only obligation specified in the chattel mortgage contract was the
first loan which the petitioner later fully paid. By virtue of Section 3 of the
Chattel Mortgage Law,[47] the payment of the obligation automatically
rendered the chattel mortgage terminated; the chattel mortgage had
ceased to exist upon full payment of the first loan. Being merely an
accessory in nature, it cannot exist independently of the principal
obligation.
The parties did not execute a fresh chattel mortgage nor did they amend
the chattel mortgage to comply with the Chattel Mortgage Law which
requires that the obligation must be specified in the affidavit of good
faith. Simply put, there no longer was any chattel mortgage that could
cover the second loan upon full payment of the first loan. The order to
foreclose the motor vehicle therefore had no legal basis.
WHEREFORE, in view of the foregoing findings and legal premises, we
PARTIALLY GRANT the petition. We MODIFY the May 17, 2010
Decision and the November 25, 2010 Resolution of the Court of Appeals
in CA G.R. SP No. 102144.
ACCORDINGLY, petitioner Nunelon R. Marquez is ORDERED to pay:
1. Twenty-five thousand forty pesos (P25,040.00) representing the
amount of the unpaid balance of the second loan;
2. Interest of two percent (2%) per annum on the unpaid balance
to be computed from December 15, 1992[48] until full payment;
3. Penalty of two percent (2%) per annum on the unpaid balance
to be computed from December 15, 1992;
4. Attorney's Fees of two percent (2%) of the total amount to be
recovered.
The total amount to be recovered shall further be subject to the legal
interest rate of six percent (6 %) per annum from the finality of this
Decision until fully paid.[49]
Respondent Elisan Credit Corporation, on the other hand, is ORDERED
to return/deliver the seized motor vehicle with Plate No. UV-TDF-193,
subject of the chattel mortgage, to the possession of the petitioner; in
the event its delivery is no longer possible, to pay the petitioner the
amount of P30,000.00 corresponding to the value of the said vehicle.
No pronouncement as to costs.
SO ORDERED.
228
229
 David v. Bank of the Philippine Islands, G.R. NO. 251157, Sep 29
2021
LAZARO-JAVIER, J.:
The Case
This petition for review on certiorari[1] seeks to reverse and set aside the
following dispositions of the Court of Appeals in CA-G.R. SP No. 144469
entitled Spouses Danilo A. David and Jane Doe v. Bank of the Philippine
Islands:
1. Decision[2] dated November 29, 2018, fixing the base amount of
petitioner's credit card obligation at P278,649.87 per Statement of
Account dated January 14, 2007 and holding that he still has an unpaid
obligation of P63,074.89; and
2. Resolution[3] dated January 2, 2020, denying petitioner's motion for
reconsideration.
Antecedents
Respondent Bank of the Philippine Islands (BPI) issued petitioner Danilo
A. David a pre-approved credit card under Customer No.
0201005001208180. Per its terms and conditions, the cardholder
agrees to pay all charges incurred within twenty (20) calendar days from
the assigned cut-off date without need for demand. Any unpaid amount
thereafter is subject to monthly 3.25% interest and 6% late payment
charge (penalty charge).[4] Petitioner availed of the credit
accommodation and made his payments on time. But by 2007, he
started delaying in his payments. Per Statement of Account dated
August 12, 2008, he had a total credit card charge of P404,733.03.
Demands for payment went unheeded. Thus, on February 26, 2009, the
bank sued petitioner and his wife for sum of money.[5]
The case was docketed Civil Case No. 97505 and raffled to Metropolitan
Trial Court (MeTC), Branch 67, Makati City presided by Judge Jackie
Crisologo Saguisag.
In his answer, petitioner admitted using the credit card but denied that
he had agreed to the terms and conditions, specifically the payment of
interest and penalty charges. He claimed that his outstanding balance
was only P30,000.00.[6]
During the hearing, the bank's Account Specialist Michael Alvin Gianan
(Gianan) testified that per the bank's internal record, the reference
amount of P223,000.00 should be used in computing petitioner's
obligation. Starting from this amount onward, he no longer paid his
obligation on time.
The aforesaid internal record, however, reflected a slightly higher
amount of P223,749.48. Petitioner himself had this internal record
marked as "Exhibit 1."[7] Neither party, however, formally offered this
document.
For his part, petitioner submitted in evidence the various Statements of
Account (Exhibits "1" to "11") sent him by the bank. Prior to the January
14, 2007 Statement of Account the parties agreed that petitioner paid
on time. At any rate, the January 14, 2007 Statement of Account
contained a balance of P278,649.87,[8] a sum more than what was
reflected in the bank's internal record.
Ruling of the MeTC
By Decision[9] dated October 7, 2014, the MeTC ruled that petitioner's
unpaid obligation is Pl94,682.99 including interests and charges. It used
as starting reference the amount of P278,649.87. It nonetheless
reduced the interest and penalty charges to 1% per month or 12% legal
interest per annum until June 30, 2013, and 6% per annum thereafter.
Through Resolution[10] dated May 25, 2015, it partially granted
petitioner's motion for reconsideration and reduced his obligation to
P97,428.51. First, it held that the starting reference should be
P223,749.48, the amount reflected in the bank's "internal record;" and
second, it deleted the penalty charges for lack of proof that petitioner
applied for the credit card and agreed to its terms and conditions
including penalty charges. It, however, retained petitioner's liability of
12% interest per annum.
Ruling of the Regional Trial Court (RTC)
On petitioner's appeal, RTC-Branch 145, Makati City affirmed under
Judgment[11] dated December 7, 2015. It held that the MeTC correctly
considered the amount reflected in the bank's internal record as the
reckoning point of petitioner's obligation. According to the RTC, while
the rules state that no evidence shall be considered unless formally
230
offered, the same admits of an exception, i.e., when the evidence had
been properly identified through testimony duly recorded and the same
had been incorporated in the case records, as what happened in this
case. It pointed out that the bank's own witness presented the aforesaid
internal record and testified that the amount borne therein represented
the starting point of petitioner's indebtedness. Since the document was
attached to the original case records, the same may be considered in
evidence, albeit it was not formally offered.
In his motion for reconsideration, petitioner asserted that the amount of
P223,000.00 per testimony of Account Specialist Gianan should prevail
over the amount of P223,749.48 appearing on the bank's internal
record. In any case, he already made a total payment of P211,100.00.
Thus, his remaining balance should only be P11,900.00.
Under Resolution[12] dated February 11, 2016, the RTC denied
petitioner's motion for reconsideration.[13]
Ruling of the Court of Appeals
Undaunted, petitioner further appealed to the Court of Appeals. His first
assigned error hinged on the slight discrepancy between the amount of
P223,749.48 as borne in the internal record and the amount of
P223,000.00 per testimony of the bank representative. According to
petitioner, the lesser amount should prevail and serve as the reference
point. His second assigned error hinged on the computation of his
indebtedness which he claimed should only be P11,900.00.
Under its assailed Decision[14] dated November 29, 2018, the Court of
Appeals modified. It did not focus on the two (2) reference amounts in
issue, instead, it brought to fore as reference point the amount of
P278,649.87 reflected in the Statement of Account dated January 14,
2007. Thus, it computed anew petitioner's obligation and came out with
the final amount of P63,074.89 as of August 12, 2008.[15]
The Court of Appeals rejected the testimony of Account Specialist
Gianan as well as the bank's internal record bearing the amount of
P223,000.00 or 223,749.48 on the ground that this document was not
formally offered in evidence.
By its assailed Resolution[16] dated January 2, 2020, the Court of
Appeals denied petitioner's motion for reconsideration.[17]
The Present Petition
Petitioner now seeks affirmative relief and prays that the dispositions of
the Court of Appeals be reversed and set aside. He maintains that the
internal record is admissible in evidence and should have been used to
establish the reckoning amount of his obligation, notwithstanding that it
was not formally offered in evidence. Too, the testimony of Account
Specialist Gianan is a compelling evidence of this amount. He insists
though that since he already paid a total of P211,100.00, his remaining
outstanding balance should only be P11,900.00. Finally, he should not
be made to pay attorney's fees.
The bank, on the other hand, argues that petitioner failed to establish
that his remaining balance is P11,900.00 only.
Issues
1. Which of the following amounts, i.e., P223,000.00, P223,749.48, and
P278,649.87, should be the reckoning point of petitioner's obligation?
2. How much is the unpaid obligation of petitioner?
Our Ruling
For perspective, starting with his obligation under the Statement of
Account dated January 14, 2007, petitioner had delayed in his payments
and settled his obligation only partially each time. This resulted in the
imposition of interest and finance charges. And since he also made
additional purchases (some of which were payable in installment) his
unpaid obligations accumulated and ultimately resulted in the filing of
the present collection case against him.
During the hearing, two (2) pieces of documents came to fore: first, the
Statement of Account dated January 14, 2007 bearing the balance of
P278,649.87; and second, the internal record of the bank, bearing the
balance of P223,749.48 only. The Statement of Account dated January
14, 2007 was offered in evidence by petitioner, while the internal record
was introduced into the record per testimony of the bank's Account
Specialist Gianan. In the course of petitioner's cross-examination of this
witness, petitioner had the internal record marked as Exhibit "1," the
same marking he used for the Statement of Account dated January 14,
2007.
231
In the end, however, neither petitioner nor the bank formally offered the amount of P278,649.87 and P223,749.48, the latter amount (which is
internal record in evidence. lower) is the correct and accurate one, is a declaration against interest
As it was, both the MeTC and RTC applied the amount of P223,749.48 which assumes the highest probative weight.[20]
borne in the internal record as reference point. But the Court of Appeals Notably, even though petitioner went up on appeal to the RTC, and later
differed and applied instead the amount of P278,649.87 borne in the to the Court of Appeals, he was simply fighting for the difference
Statement of Account dated January 14, 2007. between P223,749.48 and P223,000.00. He asked that the latter be
As stated, we have on record the testimony of Account Specialist made to prevail as reference point of his indebtedness, the final amount
Gianan that per the bank's internal record, the reckoning amount is of which he claims should only be P11,900.00.
P223,000.00, albeit, the internal record actually bears the amount of Clearly, the amount reflected in the Statement of Account is not relevant
P223,749.48. As between these two (2) amounts, the one indicated in at all. It had never been an issue between the parties since way back
the document should prevail. Obviously, the witness may have simply when the MeTC proceedings got commenced up to the RTC and then
rounded off the figure when he omitted to mention the fraction of the Court of Appeals. Verily, the approach adopted by the Court of
P749.48. Besides, between a document and a testimony, the document Appeals in resolving the case was flawed.[21]
is the best evidence. What is on track, accurate, and correct are the concurrent findings of the
True, the document was not formally offered in evidence but Sabay v. MeTC and RTC that the reference point is P223,749.48 per the internal
People[18] teaches that the trial court may consider evidence not formally record of the bank.
offered provided these twin requisites are present: (1) the evidence must In any event, we reproduce here how the Court of Appeals computed
have been duly identified by testimony duly recorded; and (2) the same petitioner's obligations using P278,649.87 as reference point, viz.:[22]
must have been incorporated in the records of the case. These
requisites are both present here. In any event, the existence of the
document and its contents were part of the testimony of Account
Specialist Gianan, hence, their evidentiary value was correctly
considered by the MeTC and RTC.
We now address the pronouncement of the Court of Appeals that the
correct reckoning amount is P278,649.87 per Statement of Account
dated January 14, 2007, rather than the amount of P223,749.48 per the
bank's internal record.
We cannot agree.
First. The issuer of the Statement of Account, the bank itself, was
deemed to have corrected the amount indicated therein: (a) when
Account Specialist Gianan testified that per the bank's internal record,
the reference amount is only P223,749.48; and (b) when the bank itself
did not appeal the rulings of the MeTC and RTC adopting this reference
amount.[19]
Second. The bank representative affirmed the existence and veracity of
its internal record. This means that the bank itself was saying that the
amount borne therein is the correct and accurate one and not what is
reflected in its Statement of Account dated January 14, 2007. As issuer
of these twin documents and as creditor of petitioner, the bank is the
most competent, if not the only competent witness to determine which
of the two (2) documents it issued is the correct and accurate one.

Third. The testimony of Account Specialist Gianan that as between the

232
To be sure, since the computation of the Court of Appeals started with
the erroneous amount of P278,649.87, the end result is also incorrect.
Can we use instead the following uniform computation by the MeTC and
RTC?[23]
amount, unmindful of the interests. As a result, the interest simply
started from January 2007 onward.[25] Consequently, since the
application of payments by the MeTC, RTC, and Court of Appeals, was
erroneous, the end result was also erroneous.
We now turn to petitioner's own computation. He posits that since he
already paid a total amount of P211,100.00 out of his starting obligation
of P223,000.00, then his total unpaid obligation is only P11,900.00. This
computation is likewise wrong. First, he erroneously used as reference
point P223,000.00 instead of P223,749.48; second, he totally omitted to
include interests.
So what is the correct computation? The following table shows it, viz.:[26]

The last row shows the unpaid obligation of petitioner as of August 12,
2008, i.e., P90,392.12, representing the principal amount, and
P8,135.28, representing the total accrued interests as of August 2008.
The total is P98,527.40, thus:
The answer is NO. Principal Amount : P90,392.12
Under Article 1253 of the New Civil Code, "if the debt produces interest,
Accrued Interest : P 8,135.28
payment of the principal shall not be deemed to have been made until
the interests have been covered."[24] But this is not what the trial courts TOTAL : P 98,527.40
did. For they applied all the payments exclusively to the principal

233
The transactions here occurred between 2007 and 2008, hence, the
twelve percent (12%) interest per annum under Eastern Shipping
Lines, Inc. v. Court of Appeals[27] applies from the time petitioner failed
to fully pay his obligation until August 2008. The unpaid obligation of
P98,527.40, continued to earn one percent (1%) interest per month or
twelve percent (12%) interest per annumfrom September 2008 until
June 30, 2013 pursuant to Eastern Shipping Lines, and six percent
(6%) interest per annum from July 1, 2013 until finality of this Decision
in accordance with Nacar v. Gallery Frames.[28] Thereafter, the total
amount due shall earn six percent (6%) interest per annum from finality
of this Decision until full payment similarly in accordance with Nacar and
Article 2212 of the New Civil Code.[29]

Lastly, in accordance with Article 2208 of the Civil Code,[30] the MeTC,
RTC, and the Court of Appeals all correctly awarded the bank with ten
percent (10%) of the total monetary award as attorney's fees because it
was compelled to engage the services of a lawyer to protect its
interest.[31]

WHEREFORE, the Decision dated November 29, 2018 and Resolution

dated January 2, 2020 of the Court of Appeals in CA-G.R. SP No.
144469 are AFFIRMED with MODIFICATION. Petitioner Danilo A.
David is ordered to PAY respondent Bank of the Philippine Islands the
following amounts:

1. Ninety-Eight Thousand Five Hundred Twenty-Seven Pesos and

40/100 (P98,527.40) representing the principal obligation plus twelve
percent (12%) interest per annum from September 2008 until June 30,
2013, and six percent (6%) interest per annum from July 1, 2013 until
finality of this Decision. The total amount due shall in turn earn six
percent (6%) interest per annum from finality of this Decision until fully
paid; and

2. Ten percent (10%) of the total monetary award as attorney's fees.

SO ORDERED.

234
 1255 – PAYMENT BY CESION OR ASSIGNMENT
DINSTINGUISHED FROM DATION IN PAYMENT
VILLALUZ v. LAND BANK 814 s 466 (JARDELEZA)
The Civil Code sets the default rule that an agent may appoint a
substitute if the principal has not prohibited him from doing so. The issue
in this petition for review on certiorari,[1] which seeks to set aside the
Decision[2] dated September 22, 2009 and Resolution[3] dated May 26,
2010 of the Court of Appeals (CA) in CA-G.R. CV No. 01307, is whether
the mortgage contract executed by the substitute is valid and binding
upon the principal.
I validly delegated her authority as attorney-in-fact to Milflores
Sometime in 1996, Paula Agbisit (Agbisit), mother of petitioner May S.
Villaluz (May), requested the latter to provide her with collateral for a
loan. At the time, Agbisit was the chairperson of Milflores Cooperative
and she needed P600,000 to P650,000 for the expansion of her
backyard cut flowers business.[4] May convinced her husband, Johnny
Villaluz (collectively, the Spouses Villaluz), to allow Agbisit to use their
land, located in Calinan, Davao City and covered by Transfer Certificate
of Title (TCT) No. T-202276, as collateral.[5] On March 25, 1996, the
Spouses Villaluz executed a Special Power of Attorney[6] in favor of
Agbisit authorizing her to, among others, "negotiate for the sale,
mortgage, or other forms of disposition a parcel of land covered by
Transfer Certificate of Title No. T-202276" and "sign in our behalf all
documents relating to the sale, loan or mortgage, or other disposition of
the aforementioned property."[7] The one-page power of attorney neither
specified the conditions under which the special powers may be
exercised nor stated the amounts for which the subject land may be sold
or mortgaged.
On June 19, 1996, Agbisit executed her own Special Power of
Attorney,[8]appointing Milflores Cooperative as attorney-in-fact in
obtaining a loan from and executing a real mortgage in favor of Land
Bank of the Philippines (Land Bank). On June 21, 1996, Milflores
Cooperative, in a representative capacity, executed a Real Estate
Mortgage[9] in favor of Land Bank in consideration of the P3,000,000
loan to be extended by the latter. On June 24, 1996, Milflores
Cooperative also executed a Deed of Assignment of the
Produce/Inventory[10] as additional collateral for the loan. Land Bank
partially released one-third of the total loan amount, or P995,500, to
Milflores Cooperative on June 25, 1996. On the same day, Agbisit
borrowed the amount of P604,750 from Milflores Cooperative. Land
Bank released the remaining loan amount of P2,000,500 to Milflores
Cooperative on October 4, 1996.[11]
Unfortunately, Milflores Cooperative was unable to pay its obligations to
Land Bank. Thus, Land Bank filed a petition for extra-judicial foreclosure
sale with the Office of the Clerk of Court of Davao City. Sometime in
August, 2003, the Spouses Villaluz learned that an auction sale covering
their land had been set tor October 2, 2003. Land Bank won the auction
sale as the sole bidder.[12]
The Spouses Villaluz filed a complaint with the Regional Trial Court
(RTC) of Davao City seeking the annulment of the foreclosure sale. The
sole question presented before the RTC was whether Agbisit could have
Cooperative. Citing Article 1892 of the Civil Code, the RTC held that the
delegation was valid since the Special Power of Attorney executed by
the Spouses Villaluz had no specific prohibition against Agbisit
appointing a substitute. Accordingly, the RTC dismissed the
complaint.[13]
On appeal, the CA affirmed the RTC Decision. In its Decision[14] dated
September 22, 2009, the CA similarly found Article 1892 to be squarely
applicable. According to the CA, the rule is that an agent is allowed to
appoint a sub-agent in the absence of an express agreement to the
contrary and that "a scrutiny of the Special Power of Attorney dated
March 25, 1996 executed by appellants in favor of [Agbisit] contained
no prohibition for the latter to appoint a sub-agent."[15] Therefore, Agbisit
was allowed to appoint Milflores Cooperative as her sub-agent.
After the CA denied their motion for reconsideration, the Spouses
Villaluz filed this petition for review. They argue that the Real Estate
Mortgage was void because there was no loan yet when the mortgage
contract was executed and that the Special Power of Attorney was
extinguished when Milflores Cooperative assigned its produce and
inventory to Land Bank as additional collateral.[16] In response, Land
Bank maintains that the CA and RTC did not err in applying Article 1892,
that the Real Estate Mortgage can only be extinguished after the amount
of the secured loan has been paid, and that the additional collateral was
executed because the deed of assignment was meant to cover any
deficiency in the Real Estate Mortgage.[17]
235
II
Articles 1892 and 1893 of the Civil Code provide the rules regarding the
appointment of a substitute by an agent:
Art. 1892. The agent may appoint a substitute if the principal has not
prohibited him from doing so; but he shall be responsible for the acts of
the substitute:
(1) When he was not given the power to appoint one;
(2) When he was given such power, but without designating the
person, and the person appointed was notoriously incompetent
or insolvent.
All acts of the substitute appointed against the prohibition of the principal
shall be void.
Art. 1893. Tn the cases mentioned in Nos. 1 and 2 of the preceding
article, the principal may furthermore bring an action against the
substitute with respect to the obligations which the latter has contracted
under the substitution.
The law creates a presumption that an agent has the power to appoint
a substitute. The consequence of the presumption is that, upon valid
appointment of a substitute by the agent, there ipso jure arises an
agency relationship between the principal and the substitute, i.e., the
substitute becomes the agent of the principal. As a result, the principal
is bound by the acts of the substitute as if these acts had been
performed by the principal's appointed agent. Concomitantly, the
substitute assumes an agent's ob1igations to act within the scope of
authority,[18] to act in accordance with the principal's instructions,[19] and
to carry out the agency,[20]among others. In order to make the
presumption inoperative and relieve himself from its effects, it is
incumbent upon the principal to prohibit the agent from appointing a
substitute.
Although the law presumes that the agent is authorized to appoint a
substitute, it also imposes an obligation upon the agent to exercise this
power conscientiously. To protect the principal, Article 1892 allocates
responsibility to the agent for the acts of the substitute when the agent
was not expressly authorized by the principal to appoint a substitute;
and, if so authorized but a specific person is not designated, the agent
appoints a substitute who is notoriously incompetent or insolvent. In
these instances, the principal has a right of action against both the agent
and the substitute if the latter commits acts prejudicial to the principal.
The case of Escueta v. Lim[21] illustrates the prevailing rule. In that case,
the father, through a special power of attorney, appointed his daughter
as his attorney-in-fact for the purpose of selling real properties. The
daughter then appointed a substitute or sub-agent to sell the properties.
After the properties were sold, the father sought to nullify the sale
effected by the sub-agent on the ground that he did not authorize his
daughter to appoint a sub-agent. We refused to nullify the sale because
it is clear from the special power of attorney executed by the father that
the daughter is not prohibited from appointing a substitute. Applying
Article 1892, we held that the daughter "merely acted within the limits of
the authority given by her father, but she will have to be 'responsible for
the acts of the sub-agent,' among which is precisely the sale of the
subject properties in favor of respondent."[22]
In the present case, the Special Power of Attorney executed by the
Spouses Villaluz contains no restrictive language indicative of an
intention to prohibit Agbisit from appointing a substitute or sub-agent.
Thus, we agree with the findings of the CA and the RTC that Agbisit's
appointment of Milflores Cooperative was valid.
III
Perhaps recognizing the correctness of the CA and the RTC's legal
position, the Spouses Villaluz float a new theory in their petition before
us. They now seek to invalidate the Real Estate Mortgage for want of
consideration. Citing Article 1409(3), which provides that obligations
"whose cause or object did not exist at the time of the transaction" are
void ab initio, the Spouses Villaluz posit that the mortgage was void
because the loan was not yet existent when the mortgage was executed
on June 21, 1996. Since the loan was released only on June 25, 1996,
the mortgage executed four days earlier was without valuable
consideration.
Article 1347 provides that "[a]ll things which are not outside the
commerce of men, including future things, may be the object of a
contract." Under Articles 1461 and 1462, things having a potential
existence and "future goods," i.e., those that are yet to be manufactured,
raised, or acquired, may be the objects of contracts of sale. The narrow
interpretation advocated by the Spouses Villaluz would create a
dissonance between Articles 1347, 1461, and 1462, on the one hand,
and Article 1 409(3), on the other. A literal interpretation of the phrase
"did not exist at the time of the transaction" in Article 1409(3) would
essentially defeat the clear intent and purpose of Articles 1347, 1461,
and 1462 to allow future things to be the objects of contracts. To resolve
this apparent conflict, Justice J.B.L. Reyes commented that the phrase
236
"did not exist" should be interpreted as "could not come into existence"
because the object may legally be a future thing.[23]
We adopt this interpretation.
One of the basic rules in statutory interpretation is that all parts of a
statute are to be harmonized and reconciled so that effect may be given
to each and every part thereof, and that conflicting intentions in the same
statute are never to be supposed or so regarded.[24] Thus, in order to
give effect to Articles 1347, 1461, and 1462, Article 1409(3) must be
interpreted as referring to contracts whose cause or object is impossible
of existing at the time of the transaction.[25]
The cause of the disputed Real Estate Mortgage is the loan to be
obtained by Milflores Cooperative. This is clear from the terms of the
mortgage document, which expressly provides that it is being executed
in "consideration of certain loans, advances, credit lines, and other credit
facilities or accommodations obtained from [Land Bank by Milflores
Cooperative] x x x in the principal amount of [P3,000,000]."[26] The
consideration is certainly not an impossible one because Land Bank was
capable of granting the P3,000,000 loan, as it in fact released one-third
of the loan a couple of days later.
Although the validity of the Real Estate Mortgage is dependent upon the
validity of the loan,[27] what is essential is that the loan contract intended
to be secured is actually perfected,[28] not at the time of the execution of
the mortgage contract vis-a-vis the loan contract. In loan transactions, it
is customary for the lender to require the borrower to execute the
security contracts prior to initial drawdown. This is understandable since
a prudent lender would not want to release its funds without the security
agreements in place. On the other hand, the borrower would not be
prejudiced by mere execution of the security contract, because unless
the loan proceeds are delivered, the obligations under the security
contract will not arise.[29] In other words, the security contract-in this
case, the Real Estate Mortgage-is conditioned upon the release of the
loan amount. This suspensive condition was satisfied when Land Bank
released the first tranche of the P3,000,000 loan to Milflores Cooperative
on June 25, 1996, which consequently gave rise to the Spouses
Villaluz's obligations under the Real Estate Mortgage.
IV
The Spouses Villaluz claim that the Special Power of Attorney they
issued was mooted by the execution of the Deed of Assignment of the
Produce/Inventory by Milflores Cooperative in favor of Land Bank. Their
theory is that the additional security on the same loan extinguished the
agency because the Deed of Assignment "served as payment of the
loan of the [Milflores] Cooperative."[30]
The assignment was for the express purpose of "securing the payment
of the Line/Loan, interest and charges thereon."[31] Nowhere in the deed
can it be reasonably deduced that the collaterals assigned by Milflores
Cooperative were intended to substitute the payment of sum of money
under the loan. It was an accessory obligation to secure the principal
loan obligation.
The assignment, being intended to be a mere security rather than a
satisfaction of indebtedness, is not a dation in payment under Article
1245[32] and did not extinguish the loan obligation.[33] "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."[34] As stated in the second condition
of the Deed of Assignment, the "Assignment shall in no way release the
ASSIGNOR from liability to pay the Line/Loan and other obligations,
except only up to the extent of any amount actually collected and paid
to ASSIGNEE by virtue of or under this Assignment."[35] Clearly, the
assignment was not intended to substitute the payment of sums of
money. It is the delivery of cash proceeds, not the execution of the Deed
of Assignment, that is considered as payment. Absent any proof of
delivery of such proceeds to Land Bank, the Spouses Villaluz's claim of
payment is without basis.
Neither could the assignment have constituted payment by cession
under Article 1255[36] for the plain and simple reason that there was only
one creditor, Land Bank. A1iicle 1255 contemplates the existence of two
or more creditors and involves the assignment of all the debtor's
property.[37]
The Spouses Villaluz understandably feel shorthanded because their
property was foreclosed by reason of another person's inability to pay.
However, they were not coerced to grant a special power of attorney in
favor of Agbisit. Nor were they prohibited from prescribing conditions on
how such power may be exercised. Absent such express limitations, the
law recognizes Land Bank's right to rely on the terms of the power of
attorney as written.[38] "Courts cannot follow one every step of his life
and extricate him from bad bargains, protect him from unwise
investments, relieve him from one-sided contracts, or annul the effects
of [unwise] acts."[39] The remedy afforded by the Civil Code to the
Spouses Villaluz is to proceed against the agent and the substitute in
accordance with Articles 1892 and 1893.
237
WHEREFORE, the petition is DENIED. The Decision dated September
22, 2009 and Resolution dated May 26, 2010 of the Court of Appeals in
CA-G.R. CV No. 01307 are AFFIRMED.
SO ORDERED.

238
 1256-261 TENDER OF PAYMENT AND CONSIGNATION
PABUGAIS v. SAHIJWANI 423 S 509
YNARES-SANTIAGO, J.:
Assailed in this petition for review on certiorari is the January 16, 2003
Amended Decision[1] of the Court of Appeals[2] in CA-G.R. CV No. 55740
which set aside the November 29, 1996 Decision[3] 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]
Respondent’s counsel, on the other hand, admitted that his office
received petitioner’s letter 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
239
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
240
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.

241
 BENOS v. LAWILAO 509 S 549
YNARES-SANTIAGO, J.:
This petition for review under Rule 45 of the Rules of Court assails the
December 5, 2005 Decision[1] of the Court of Appeals in CA-G.R. SP
No. 78845, affirming the Judgment[2] dated July 1, 2003 of the Regional
Trial Court of Bontoc, Mountain Province, Branch 35, in Civil Case No.
1091. The Regional Trial Court reversed the Decision[3] dated November
14, 2002 of the Municipal Circuit Trial Court of Bauko, Mountain
Province in Civil Case No. 314, and ordered the consolidation of
ownership of subject property in the name of respondent-spouses
Gregorio and Janice Gail Lawilao. Also assailed is the March 17, 2006
Resolution[4] denying petitioners' motion for reconsideration.
The antecedent facts are as follows:
On February 11, 1999, petitioner-spouses Jaime and Marina Benos
("the Benos spouses") and respondent-spouses Gregorio and Janice
Gail Lawilao ("the Lawilao spouses") executed a Pacto de Retro Sale[5]
where the Benos spouses sold their lot covered by Tax Declaration No.
25300 and the building erected thereon for P300,000.00, one half of
which was to be paid in cash to the Benos spouses and the other half to
be paid to the bank to pay off the loan of the Benos spouses which was
secured by the same lot and building. Under the contract, the Benos
spouses could redeem the property within 18 months from date of
execution by returning the contract price, otherwise, the sale would
become irrevocable without necessity of a final deed to consolidate
ownership over the property in the name of the Lawilao spouses.
After paying the P150,000.00, the Lawilao spouses immediately took
possession of the property and leased out the building thereon.
However, instead of paying the loan to the bank, Janice Lawilao
restructured it twice. Eventually, the loan became due and demandable.
On August 14, 2000, a son of the Benos spouses paid the bank
P159,000.00 representing the principal and interest. On the same day,
the Lawilao spouses also went to the bank and offered to pay the loan,
but the bank refused to accept the payment. The Lawilao spouses then
filed with the Municipal Circuit Trial Court a petition[6] docketed as Civil
Case No. 310 for consignation against the bank and simultaneously
deposited the amount of P159,000.00. Upon the bank's motion, the
court dismissed the petition for lack of cause of action.
Subsequently, the Lawilao spouses filed with the Municipal Circuit Trial
Court a complaint docketed as Civil Case No. 314, for consolidation of
ownership. This complaint is the precursor of the instant petition. The
Benos spouses moved to dismiss on grounds of lack of jurisdiction and
lack of cause of action but it was denied and the parties went to trial.
On November 14, 2002, the Municipal Circuit Trial Court rendered
judgment in favor of the Benos spouses, the dispositive portion of which
states:
IN THE LIGHT of all the foregoing considerations, for lack of legal and
factual basis to demand consolidation of ownership over the subject
property, the above-entitled case is hereby ordered dismissed.
No pronouncement as to damages on the ground that no premium
should be assessed on the right to litigate. No costs.
SO ORDERED.[7]
The Lawilao spouses appealed before the Regional Trial Court which
reversed the Municipal Circuit Trial Court and declared the ownership of
the subject property consolidated in favor of the Lawilao spouses.[8]
The Benos spouses appealed to the Court of Appeals which affirmed
the Regional Trial Court on December 5, 2005. The dispositive portion
of the Decision reads:
WHEREFORE, the petition for review is DISMISSED for lack of
sufficient merit. The decision rendered by the Regional Trial Court,
Branch 35, Bontoc, Mountain Province in Civil Case No. 1091 on 1 July
2003, reversing the decision of the Municipal Circuit Trial Court of
Bauko-Sabangan, Mountain Province in (Civil Case No.) 314, is
AFFIRMED.
SO ORDERED.[9]
The appellate court denied petitioners' motion for reconsideration,
hence, the instant petition on the following assignment of errors:
4.0.It was error for the Regional Trial Court and, subsequently, the Court
of Appeals to rule that respondents can consolidate ownership over the
subject property.
4.1.It was likewise error for said lower courts not to have ruled that the
contract between the parties is actually an equitable mortgage.[10]
The Benos spouses argue that consolidation is not proper because the
Lawilao spouses violated the terms of the contract by not paying the
bank loan; that having breached the terms of the contract, the Lawilao
spouses cannot insist on the performance thereof by the Benos
spouses; that the contract was actually an equitable mortgage as shown
242
by the inadequacy of the consideration for the subject property; and that
respondent-spouses' remedy should have been for recovery of the loan
or foreclosure of mortgage.
The Lawilao spouses, on the other hand, assert that the Pacto de Retro
Sale reflected the parties' true agreement; that the Benos spouses
cannot vary its terms and conditions because they did not put in issue
in their pleadings its ambiguity, mistake or imperfection as well as its
failure to express the parties' true intention; that the Benos spouses
admitted its genuineness and due execution; and that the delivery of the
property to the Lawilao spouses after the execution of the contract
shows that the agreement was a sale with a right of repurchase and not
an equitable mortgage.
The Lawilao spouses also claim that they complied with their obligation
when they offered to pay the loan to the bank and filed a petition for
consignation; and that because of the failure of the Benos spouses to
redeem the property, the title and ownership thereof immediately vested
in them (Lawilao spouses).
The issue for resolution is whether the Lawilao spouses can consolidate
ownership over the subject property.
The petition is impressed with merit.
In ruling for respondents, the Court of Appeals held that: (1) the pacto
de retrosale was perfected because the parties voluntarily agreed upon
the object thereof and the price; (2) the Lawilao spouses acquired
possession over the property immediately after execution of the pacto
de retro sale; (3) the pacto de retro sale does not provide for automatic
rescission in case the Lawilao spouses fail to pay the full price; (4) the
Benos spouses did not rescind the contract after the Lawilao spouses
failed to pay the P150,000.00 loan; (5) Janice Lawilao offered to pay the
loan and deposited P150,000.00 to the bank although the period for
payment had expired thus, complying with Article 1592 of the Civil Code
allowing payment even after expiration of the period as long as no
demand for rescission of the contract had been made either judicially or
by a notarial act; (6) the title and ownership of the Lawilao spouses
became absolute when the Benos spouses failed to repurchase the lot
within the redemption period; and (7) the payment by the Benos
spouses' son of P159,000.00 to the bank does not amount to a
repurchase as it violates Article 1616 of the Civil Code requiring the
vendor to return to the vendee the price of the sale, the expenses of the
contract and other necessary and useful expenses.[11]
Contrary to the aforesaid findings, the evidence shows that the Lawilao
spouses did not make a valid tender of payment and consignation of the
balance of the contract price. As correctly found by the Regional Trial
Court:
As matters stand, no valid tender of payment and/or consignation of the
P150,000.00 which the Appellant (Lawilaos) still owes the Appellee
(Benos) has been effected by the former. The amount of P159,000.00
deposited with the MCTC is in relation to Civil Case No. 310 earlier
dismissed by said court, and not to the instant action. Hence, this
Court cannot automatically apply such sum in satisfaction of the
aforesaid debt of the Appellant and order the Appellee creditor to accept
the same.[12] (Emphasis supplied)
The Lawilao spouses did not appeal said finding, and it has become final
and binding on them. Although they had repeatedly alleged in their
pleadings that the amount of P159,000.00 was still with the trial court
which the Benos spouses could withdraw anytime, they never made any
step to withdraw the amount and thereafter consign it. Compliance with
the requirements of tender and consignation to have the effect of
payment are mandatory. Thus –
Tender of payment is the manifestation by debtors of their desire to
comply with or to pay their obligation. If the creditor refuses the tender
of payment without just cause, the debtors are discharged from the
obligation by the consignation of the sum due. Consignation is made by
depositing the proper amount to the judicial authority, before whom the
tender of payment and the announcement of the consignation shall be
proved. All interested parties are to be notified of the consignation.
Compliance with these requisites is mandatory.[13] (Emphasis supplied)
In the instant case, records show that the Lawilao spouses filed the
petition for consignation against the bank in Civil Case No. 310 without
notifying the Benos spouses. The petition was dismissed for lack of
cause of action against the bank. Hence, the Lawilao spouses failed to
prove their offer to pay the balance of the purchase price and
consignation. In fact, even before the filing of the consignation case, the
Lawilao spouses never notified the Benos spouses of their offer to pay.
Thus, as far as the Benos are concerned, there was no full and complete
payment of the contract price, which gives them the right to rescind the
contract pursuant to Articles 1191 in relation to Article 1592 of the Civil
Code, which provide:
Art. 1191. The power to rescind obligations is implied in reciprocal ones,
in case one of the obligors should not comply with what is incumbent
upon him.
The injured party may choose between the fulfillment and the rescission
of the obligation, with the payment of damages in either case. He may
also seek rescission, even after he has chosen fulfillment, if the latter
should become impossible.
243
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons
who have acquired the thing, in accordance with Articles 1385 and 1388
of the Mortgage Law.
Art. 1592. In the sale of immovable property, even though it may have
been stipulated that upon failure to pay the price at the time agreed upon
the rescission of the contract shall of right take place, the vendee may
pay, even after the expiration of the period, as long as no demand for
rescission of the contract has been made upon him either judicially or
by a notarial act. After the demand, the court may not grant him a new
term.
In the instant case, while the Benos spouses did not rescind the Pacto
de Retro Sale through a notarial act, they nevertheless rescinded the
same in their Answer with Counterclaim where they stated that:
14. Plaintiffs did not perform their obligation as spelled out
in the Pacto de Retro Sale (ANNEX "A"), particularly the
assumption of the obligation of defendants to the Rural
Bank of Bontoc. Defendants were the ones who paid
their loan through their son, ZALDY BENOS. As a
result, ANNEX "A" is rendered null and of no effect.
Therefore, the VENDEE a retro who is one of plaintiffs
herein cannot consolidate her ownership over the
property subject of the null and ineffective instrument.
15. Since plaintiffs did not perform their corresponding
obligation under ANNEX "A", defendants have been all
too willing to return the amount of ON[E] HUNDRED
FIFTY THOUSAND PESOS (P150,000.00) and
reasonable interest thereon to plaintiffs. But plaintiffs
refused to accept the same.
With the filing of this answer, defendants pray that this serves as a notice
of tender of payment, and they shall consign the amount with the proper
court as soon as it is legally feasible.[14]
They also prayed that the Municipal Circuit Trial Court render judgment
"[d]eclaring the Pacto de Retro Sale rescinded or ineffective or void for
lack of, or insufficient consideration."[15]
In Iringan v. Court of Appeals,[16] we ruled that "even a crossclaim found
in the Answer could constitute a judicial demand for rescission that
satisfies the requirement of the law." Similarly, the counterclaim of the
Benos spouses in their answer satisfied the requisites for the judicial
rescission of the subject Pacto de Retro Sale.
The Municipal Circuit Trial Court thus correctly dismissed the complaint
for consolidation of ownership filed by the Lawilao spouses for their
failure to comply with the conditions of the Pacto de Retro Sale.
Nevertheless, it refused to declare the rescission of the Pacto de Retro
Sale as prayed for in the counterclaim of the Benos spouses, stating
that:
How about the other obligations and/or rights owing to either party by
virtue of the Pacto de Retro Sale? This, the court opines that it can not
delve into without overstepping the limits of his functions there being
appropriate remedies. It is hornbook in our jurisprudence that a right in
law may be enforced and a wrong way be remedied but always through
the appropriate action.[17]
The issue of rescission having been put in issue in the answer and the
same having been litigated upon without objections by the Lawilao
spouses on grounds of jurisdiction, the Municipal Circuit Trial Court
should have ruled on the same and wrote finis to the controversy.
Thus, as a necessary consequence of its ruling that the Lawilao spouses
breached the terms of the Pacto de Retro Sale, the Municipal Circuit
Trial Court should have rescinded the Pacto de Retro Sale and directed
the Benos spouses to return P150,000.00 to the Lawilao spouses,
pursuant to our ruling in Cannu v. Galang,[18] to wit:
Petitioners maintain that inasmuch as respondents-spouses Galang
were not granted the right to unilaterally rescind the sale under the Deed
of Sale with Assumption of Mortgage, they should have first asked the
court for the rescission thereof before they fully paid the outstanding
balance of the mortgage loan with the NHMFC. They claim that such
payment is a unilateral act of rescission which violates existing
jurisprudence.
In Tan v. Court of Appeals, this court said:
. . . [T]he power to rescind obligations is implied in reciprocal ones in
case one of the obligors should not comply with what is incumbent upon
him is clear from a reading of the Civil Code provisions. However, it is
equally settled that, in the absence of a stipulation to the contrary, this
power must be invoked judicially; it cannot be exercised solely on a
party's own judgment that the other has committed a breach of the
obligation. Where there is nothing in the contract empowering the
petitioner to rescind it without resort to the courts, the petitioner's action
in unilaterally terminating the contract in this case is unjustified.
It is evident that the contract under consideration does not contain a
provision authorizing its extrajudicial rescission in case one of the
parties fails to comply with what is incumbent upon him. This being the
case, respondents-spouses should have asked for judicial intervention
244
to obtain a judicial declaration of rescission. Be that as it may, and
considering that respondents-spouses' Answer (with affirmative
defenses) with Counterclaim seeks for the rescission of the Deed of Sale
with Assumption of Mortgage, it behooves the court to settle the matter
once and for all than to have the case re-litigated again on an issue
already heard on the merits and which this court has already taken
cognizance of. Having found that petitioners seriously breached the
contract, we, therefore, declare the same is rescinded in favor of
respondents-spouses.

As a consequence of the rescission or, more accurately, resolution of

the Deed of Sale with Assumption of Mortgage, it is the duty of the court
to require the parties to surrender whatever they may have received
from the other. The parties should be restored to their original situation.

The record shows petitioners paid respondents-spouses the amount of

P75,000.00 out of the P120,000.00 agreed upon. They also made
payments to NHMFC amounting to P55,312.47. As to the petitioners'
alleged payment to CERF Realty of P46,616.70, except for petitioner
Leticia Cannu's bare allegation, we find the same not to be supported
by competent evidence. As a general rule, one who pleads payment has
the burden of proving it. However, since it has been admitted in
respondents-spouses' Answer that petitioners shall assume the second
mortgage with CERF Realty in the amount of P35,000.00, and that
Adelina Timbang, respondents-spouses' very own witness, testified that
same has been paid, it is but proper to return this amount to petitioners.
The three amounts total P165,312.47 -- the sum to be returned to
petitioners.
WHEREFORE, the petition is GRANTED. The Decision dated
December 5, 2005 and Resolution dated March 17, 2006 of the Court of
Appeals in CA-G.R. SP No. 78845, affirming the Judgment dated July
1, 2003 of the Regional Trial Court of Bontoc, Mountain Province,
Branch 35, in Civil Case No. 1091, are REVERSED and SET ASIDE.
The Decision dated November 14, 2002 of the Municipal Circuit Trial
Court of Bauko, Mountain Province in Civil Case No. No. 314 dismissing
respondents' complaint for consolidation of ownership and damages is
REINSTATED WITH THE MODIFICATION that the Pacto de Retro Sale
dated February 11, 1999 is declared rescinded and petitioners are
ordered to return the amount of P150,000.00 to respondents. No costs.

SO ORDERED.

245
 CACAYORIN v. ARMED FORCES AND POLICE 696 S 311
DEL CASTILLO, J.:
Consignation is necessarily judicial. Article 1258 of the Civil Code
specifically provides that consignation shall be made by depositing the
thing or things due at the disposal of judicial authority. The said provision
clearly precludes consignation in venues other than the courts.
Assailed in this Petition for Review on Certiorari[1] are the September 29,
2005 Decision[2] of the Court of Appeals (CA) which granted the Petition
for Certiorari in CA-G.R. SP No. 84446 and its January 12, 2006
Resolution[3]denying petitioners’ Motion for Reconsideration.[4]
Factual Antecedents
Petitioner Oscar Cacayorin (Oscar) is a member of respondent Armed
Forces and Police Mutual Benefit Association, Inc. (AFPMBAI), a mutual
benefit association duly organized and existing under Philippine laws
and engaged in the business of developing low-cost housing projects for
personnel of the Armed Forces of the Philippines, Philippine National
Police, Bureau of Fire Protection, Bureau of Jail Management and
Penology, and Philippine Coast Guard. He filed an application with
AFPMBAI to purchase a piece of property which the latter owned,
specifically Lot 5, Block 8, Phase I, Kalikasan Mutual Homes, San
Pedro, Puerto Princesa City (the property), through a loan facility.
On July 4, 1994, Oscar and his wife and co-petitioner herein, Thelma,
on one hand, and the Rural Bank of San Teodoro (the Rural Bank) on
the other, executed a Loan and Mortgage Agreement[5] with the former
as borrowers and the Rural Bank as lender, under the auspices of Pag-
IBIG or Home Development Mutual Fund’s Home Financing Program.
The Rural Bank issued an August 22, 1994 letter of guaranty[6] informing
AFPMBAI that the proceeds of petitioners’ approved loan in the amount
of P77,418.00 shall be released to AFPMBAI after title to the property is
transferred in petitioners’ name and after the registration and annotation
of the parties’ mortgage agreement.
On the basis of the Rural Bank’s letter of guaranty, AFPMBAI executed
in petitioners’ favor a Deed of Absolute Sale,[7] and a new title – Transfer
Certificate of Title No. 37017[8] (TCT No. 37017) – was issued in their
name, with the corresponding annotation of their mortgage agreement
with the Rural Bank, under Entry No. 3364.[9]
Unfortunately, the Pag-IBIG loan facility did not push through and the
Rural Bank closed and was placed under receivership by the Philippine
Deposit Insurance Corporation (PDIC). Meanwhile, AFPMBAI somehow
was able to take possession of petitioners’ loan documents and TCT No.
37017, while petitioners were unable to pay the loan/consideration for
the property.
AFPMBAI made oral and written demands for petitioners to pay the loan/
consideration for the property.[10]
In July 2003, petitioners filed a Complaint[11] for consignation of loan
payment, recovery of title and cancellation of mortgage annotation
against AFPMBAI, PDIC and the Register of Deeds of Puerto Princesa
City. The case was docketed as Civil Case No. 3812 and raffled to
Branch 47 of the Regional Trial Court (RTC) of Puerto Princesa City
(Puerto Princesa RTC). Petitioners alleged in their Complaint that as a
result of the Rural Bank’s closure and PDIC’s claim that their loan
papers could not be located, they were left in a quandary as to where
they should tender full payment of the loan and how to secure
cancellation of the mortgage annotation on TCT No. 37017. Petitioners
prayed, thus:
a. That after the filing of this complaint an order be made allowing
the consignation x x x of Php77,418.00.
b. For the court to compute and declare the amount of interest to
be paid by the plaintiffs and thereafter to allow the consignation
of the interest payments in order to give way for the full
discharge of the loan.
c. To order the AFPMBAI to turn over to the custody of the court
the loan records and title (T.C.T. No. 37017) of the plaintiffs if
the same are in their possession.
d. To declare the full payment of the principal loan and interest and
ordering the full discharge from mortgage of the property
covered by T.C.T. No. 37017.
e. To order the Register of Deeds of Puerto Princesa City to cancel
the annotation of real estate mortgage under Entry No. 3364 at
the back of T.C.T. No. 37017.
f. Thereafter, to turn over to the plaintiffs their title free from the
aforesaid mortgage loan.[12]
AFPMBAI filed a Motion to Dismiss[13] claiming that petitioners’
246
Complaint falls within the jurisdiction of the Housing and Land Use
Regulatory Board (HLURB) and not the Puerto Princesa RTC, as it was
filed by petitioners in their capacity as buyers of a subdivision lot and it
prays for specific performance of contractual and legal obligations
decreed under Presidential Decree No. 957[14](PD 957). It added that
since no prior valid tender of payment was made by petitioners, the
consignation case was fatally defective and susceptible to dismissal.
Ruling of the Regional Trial Court
In an October 16, 2003 Order,[15] the trial court denied AFPMBAI’s
Motion to Dismiss, declaring that since title has been transferred in the
name of petitioners and the action involves consignation of loan
payments, it possessed jurisdiction to continue with the case. It further
held that the only remaining unsettled transaction is between petitioners
and PDIC as the appointed receiver of the Rural Bank.
AFPMBAI filed a Motion for Reconsideration,[16] which the trial court
denied in its March 19, 2004 Order.
Ruling of the Court of Appeals
AFPMBAI thus instituted CA-G.R. SP No. 84446, which is a Petition for
Certiorari[18] raising the issue of jurisdiction. On September 29, 2005, the
CA rendered the assailed Decision decreeing as follows:
WHEREFORE, premises considered, this Petition is GRANTED. The
Assailed 16 October 2003 and 19 March 2004 Orders of the public
respondent judge are hereby ordered VACATED and SET ASIDE.
SO ORDERED.[19]
The CA held that Civil Case No. 3812 is a case for specific performance
of AFPMBAI’s contractual and statutory obligations as owner/developer
of Kalikasan Mutual Homes, which makes PD 957 applicable and thus
places the case within the jurisdiction of the HLURB. It said that since
one of the remedies prayed for is the delivery to petitioners of TCT No.
37017, the case is cognizable exclusively by the HLURB.
Petitioners moved for reconsideration which was denied by the CA in its
January 12, 2006 Resolution.
Hence, the instant Petition.
Issue
The sole issue that must be resolved in this Petition is: Does the
Complaint in Civil Case No. 3812 fall within the exclusive jurisdiction of
the HLURB?
Petitioners’ Arguments
Petitioners assert that the elements which make up a valid case for
consignation are present in their Complaint. They add that since a deed
of absolute sale has been issued in their favor, and possession of the
property has been surrendered to them, not to mention that title has
been placed in their name, the HLURB lost jurisdiction over their case.
And for this same reason, petitioners argue that their case may not be
said to be one for specific performance of contractual and legal
obligations under PD 957 as nothing more was left to be done in order
to perfect or consolidate their title.
Petitioners thus pray that the herein assailed Decision and Resolution
of the CA be set aside, and that the trial court be ordered to continue
with the proceedings in Civil Case No. 3812.
Respondent's Arguments
Respondent, on the other hand, insists in its Comment[20] that jurisdiction
over petitioners’ case lies with the HLURB, as it springs from their
contractual relation as seller and buyer, respectively, of a subdivision
lot. The prayer in petitioners’ Complaint involves the surrender or
delivery of the title after full payment of the purchase price, which
respondent claims are reciprocal obligations in a sale transaction
covered by PD 957. Respondent adds that in effect, petitioners are
exacting specific performance from it, which places their case within the
jurisdiction of the HLURB.
Our Ruling
The Court grants the Petition.
The Complaint makes out a case for consignation.
The settled principle is that “the allegations of the [C]omplaint determine
the nature of the action and consequently the jurisdiction of the courts.
This rule applies whether or not the plaintiff is entitled to recover upon
all or some of the claims asserted therein as this is a matter that can be
resolved only after and as a result of the trial.”[21
Does the Complaint in Civil Case No. 3812 make out a case for
consignation? It alleges that:
6.0 – Not long after however, RBST[22] closed shop and defendant
Philippine Deposit Insurance Corporation (PDIC) was appointed as its
receiver. The plaintiffs, through a representative, made a verbal inquiry
to the PDIC regarding the payment of their loan but were told that it has
247
no information or record of the said loan. This made [sic] the plaintiffs in
quandary as to where or whom they will pay their loan, which they intend
to pay in full, so as to cancel the annotation of mortgage in their title.
7.0 – It was discovered that the loan papers of the plaintiffs, including
the duplicate original of their title, were in the possession of defendant
AFPMBAI. It was unclear though why the said documents including the
title were in the possession of AFPMBAI. These papers should have
been in RBST’s possession and given to PDIC after its closure in the
latter’s capacity as receiver.
8.0 – Plaintiffs are now intending to pay in full their real estate loan but
could not decide where to pay the same because of RBST [sic] closure
and PDIC’s failure to locate the loan records and title. This court’s
intervention is now needed in order to determine to [sic] where or whom
the loan should be paid.
9.0 – Plaintiffs hereby respectfully prays [sic] for this court to allow the
deposit of the amount of Php77,418.00 as full payment of their principal
loan, excluding interest, pursuant to the Loan and Mortgage Agreement
on 4 July 1994.[23]
From the above allegations, it appears that the petitioners’ debt is
outstanding; that the Rural Bank’s receiver, PDIC, informed petitioners
that it has no record of their loan even as it took over the affairs of the
Rural Bank, which on record is the petitioners’ creditor as per the July
4, 1994 Loan and Mortgage Agreement; that one way or another,
AFPMBAI came into possession of the loan documents as well as TCT
No. 37017; that petitioners are ready to pay the loan in full; however,
under the circumstances, they do not know which of the two – the Rural
Bank or AFPMBAI – should receive full payment of the purchase price,
or to whom tender of payment must validly be made.
Under Article 1256 of the Civil Code,[24] the debtor shall be released from
responsibility by the consignation of the thing or sum due, without need
of prior tender of payment, when the creditor is absent or unknown, or
when he is incapacitated to receive the payment at the time it is due, or
when two or more persons claim the same right to collect, or when the
title to the obligation has been lost. Applying Article 1256 to the
petitioners’ case as shaped by the allegations in their Complaint, the
Court finds that a case for consignation has been made out, as it now
appears that there are two entities which petitioners must deal with in
order to fully secure their title to the property: 1) the Rural Bank (through
PDIC), which is the apparent creditor under the July 4, 1994 Loan and
Mortgage Agreement; and 2) AFPMBAI, which is currently in possession
of the loan documents and the certificate of title, and the one making
demands upon petitioners to pay. Clearly, the allegations in the
Complaint present a situation where the creditor is unknown, or that two
or more entities appear to possess the same right to collect from
petitioners. Whatever transpired between the Rural Bank or PDIC and
AFPMBAI in respect of petitioners’ loan account, if any, such that
AFPMBAI came into possession of the loan documents and TCT No.
37017, it appears that petitioners were not informed thereof, nor made
privy thereto.
Indeed, the instant case presents a unique situation where the buyer,
through no fault of his own, was able to obtain title to real property in his
name even before he could pay the purchase price in full. There appears
to be no vitiated consent, nor is there any other impediment to the
consummation of their agreement, just as it appears that it would be to
the best interests of all parties to the sale that it be once and for all
completed and terminated. For this reason, Civil Case No. 3812 should
at this juncture be allowed to proceed.
Moreover, petitioners’ position is buttressed by AFPMBAI’s own
admission in its Comment[25] that it made oral and written demands upon
the former, which naturally aggravated their confusion as to who was
their rightful creditor to whom payment should be made – the Rural Bank
or AFPMBAI. Its subsequent filing of the Motion to Dismiss runs counter
to its demands to pay. If it wanted to be paid with alacrity, then it should
not have moved to dismiss Civil Case No. 3812, which was brought
precisely by the petitioners in order to be able to finally settle their
obligation in full.
Finally, the lack of prior tender of payment by the petitioners is not fatal
to their consignation case. They filed the case for the exact reason that
they were at a loss as to which between the two – the Rural Bank or
AFPMBAI – was entitled to such a tender of payment. Besides, as earlier
stated, Article 1256 authorizes consignation alone, without need of prior
tender of payment, where the ground for consignation is that the creditor
is unknown, or does not appear at the place of payment; or is
incapacitated to receive the payment at the time it is due; or when,
without just cause, he refuses to give a receipt; or when two or more
persons claim the same right to collect; or when the title of the obligation
has been lost.
Consignation is necessarily judicial;
hence, jurisdiction lies with the RTC,
not with the HLURB.
On the question of jurisdiction, petitioners’ case should be tried in the
Puerto Princesa RTC, and not the HLURB. Consignation is necessarily
judicial,[26] as the Civil Code itself provides that consignation shall be
248
made by depositing the thing or things due at the disposal of judicial
authority, thus:
Art. 1258. Consignation shall be made by depositing the things due
at the disposal of judicial authority, before whom the tender of
payment shall be proved, in a proper case, and the announcement
of the consignation in other cases.

The consignation having been made, the interested parties shall also be
notified thereof. (Emphasis and underscoring supplied)

The above provision clearly precludes consignation in venues other than

the courts. Elsewhere, what may be made is a valid tender of payment,
but not consignation. The two, however, are to be distinguished.

Tender of payment must be distinguished from consignation. Tender is

the antecedent of consignation, that is, an act preparatory to the
consignation, which is the principal, and from which are derived the
immediate consequences which the debtor desires or seeks to obtain.
Tender of payment may be extrajudicial, while consignation is
necessarily judicial, and the priority of the first is the attempt to make a
private settlement before proceeding to the solemnities of consignation.
(8 Manresa 325).[27]
While it may be true that petitioners’ claim relates to the terms and
conditions of the sale of AFPMBAI’s subdivision lot, this is
overshadowed by the fact that since the Complaint in Civil Case No.
3812 pleads a case for consignation, the HLURB is without jurisdiction
to try it, as such case may only be tried by the regular courts.

WHEREFORE, premises considered, the Petition is GRANTED. The

September 29, 2005 Decision and January 12, 2006 Resolution of the
Court of Appeals in CA-G.R. SP No. 84446 are ANNULLED and SET
ASIDE. The October 16, 2003 and March 19, 2004 Orders of the
Regional Trial Court of Puerto Princesa City, Branch 47, are
REINSTATED, and the case is REMANDED to the said court for
continuation of the proceedings. SO ORDERED.

249
 PHILIPPINE NATIONAL BANK v. CHAN 820 S 161 (DEL
CASTILLO)
DEL CASTILLO, J.:
We resolve the Petition for Review on Certiorari under Rule 45 of the
Rules of Court, assailing the May 28, 2012 Decision[1] and the February
21, 2013 Resolution[2] of the Court of Appeals (CA) in CA-G.R. SP No.
98112.
The Antecedent Facts
Respondent Lilibeth S. Chan owns a three-story commercial building
located along A. Linao Street, Paco, Manila: covered by Transfer
Certificate of Title (TCT) No. 208782[3] On May 10, 2000, she leased
said commercial building to petitioner Philippine National Bank (PNB)
for a period of five years from December 15, 1999 to December 14,
2004, with a monthly rental of P76,160.00.[4] When the lease expired,
PNB continued to occupy the property on a month-to month basis with
a monthly rental of P116,788.44. PNB vacated the premises on March
23, 2006.[5]
Meanwhile, on January 22, 2002, respondent obtained a P1,500,000.00
Joan from PNB which was secured by a Real Estate Mortgage
constituted over the leased property.[6] In addition, respondent
executed a Deed of Assignment[7] over the rental payments in favor of
PNB.
The amount of the respondent's loan was subsequently increased to
P7,500,000.00. Consequently, PNB and the respondent executed an
"Amendment to the Real Estate Mortgage by Substitution of Collateral"
on March 31, 2004, where the mortgage over the leased property was
released and substituted by a mortgage over a parcel of land located in
Paco, Manila, covered by TCT No. 209631.[8]
On August 26, 2005, respondent filed a Complaint for Unlawful Detainer
before the Metropolitan Trial Court (MeTC), Branch 7, Manila against
PNB, alleging that the latter failed to pay its monthly rentals from
October 2004 until August 2005.[9]
In its defense, PNB claimed that it applied the rental proceeds from
October 2004 to January 15, 2005 as payment for respondent's
outstanding Joan which became due and demandable in October 2004.
[10]
As for the monthly rentals from January 16, 2005 to February 2006,
PNB explained that it received a demand letter[11] from a certain
Lamberto Chua (Chua) who claimed to be the new owner of the leased
property and requested that the rentals be paid directly to him, reckoned
from January 15, 2005 until PNB decides to vacate the premises or a
new lease contract with Chua is executed. PNB thus deposited the
rentals in a separate non drawing savings account for the benefit of the
rightful party.[12]
The MeTC held a hearing on April 25, 2006 where the parties agreed to
apply the rental proceeds from October 2004 to January 15, 2005 to
the respondent's outstanding loan".[13] PNB, too, consigned the amount
of P1,348,643.92, representing the rentals due from January 16, 2005
to February 2006, with the court on May 31, 2006.[14]
Ruling of the Metropolitan Trial Court
In its August 9, 2006 Decision,[15] the MeTC ordered PNB to pay
respondent accrued rentals in the amount of P1,348,643.92[16] with
interest at 6% per annum from January 16, 2005 up to March 23, 2006,
when PNB finally vacated the leased property.[17] The MeTC likewise
directed PNB to pay attorney's fees in the amount of P20,000.00 and
the cost of suit.
PNB appealed the August 9, 2006 MeTC Decision to the Regional Trial
Court (RTC), Branch 14, Manila, insisting that respondent is not entitled
to the disputed rental proceeds amounting to P1,348,643.92. According
to PNB, the money should be applied to offset respondent's outstanding
loan pursuant to the Deed of Assignment the latter executed in its
favor. PNB also argued that it is not liable to pay any interest on the
lease rentals since it did not incur any delay in the payment of rent.[18]
While the appeal was pending before the RTC, PNB initiated foreclosure
proceedings on the mortgaged property covered by TCT No.
209631.[19] The property was sold on October 31, 2006 for
P15,311,000.00 to PNB as the highest bidder. Notably, the Certificate
of Sale provides that respondent's indebtedness amounted to
P11,211,283.53 as of May 15, 2005, "exclusive of penalties, expenses,
charges and the ten (10) percent attorney's fees, plus sheriff fees and
other lawful expenses of foreclosure and sale."[20]
In light of this development, respondent tiled a Memorandum[21] before
the RTC, claiming that PNB had no right to retain the P1,348,643.92
consigned with the court. She insisted that her loan was fully paid when
PNB bought the mortgaged property at P15,311,000.00[22]
PNB filed a Rejoinder[23] and argued that respondent's outstanding
obligation as of October 31, 2006 was P18,016,300.71 while the bid
price was only P15,311,000.00. Thus, PNB claimed that it is entitled to
a deficiency claim amounting to 2,705,300.71 to which the rental
proceeds of P1,348,643.92 can be applied.[24]
250
Ruling of the Regional Trial Court
The RTC affirmed the MeTC ruling in its December 7, 2006
Decision.[25] It found that respondent's obligation to PNB "has already
been paid, notwithstanding the belated claim of [the latter] that there
remains a deficiency."[26] The RTC noted that the P11,211,283.53
amount of indebtedness stated in the Notice of Extra-Judicial
Sale[27] dated August 9, 2006 as of May 15, 2006 plus penalties,
expenses, charges, attorney's fees and expenses could have been
easily covered by the P15,311,000.00 bid price.[28]
In addition, the RTC held that PNB incurred delay "when despite
demand, it refused to pay and vacate the premises.[29] " As such, the
RTC ruled that the respondent is entitled to legal interest at 6% per
annum and attorney's fees for having been compelled to litigate to
protect her interests.[30]
The respondent then moved for tie issuance of a Writ of Execution which
was granted by the RTC in its December 18, 2006 Order?[31] According
to the Sheriff's Report of Execution[32] dated January 2, 2007, the
amount of P1,348,643.92, representing the monthly rentals from
January 16, 2005 up to March 23, 2006 was turned over to the
respondent on December 20, 2006.[33]
PNB filed a motion for reconsideration of the December 7, 2006
Decision and for the quashal of the Writ of Execution, but the RTC
denied the motion in its Order dated February 6, 2007.[34] Following the
denial, PNB filed a Petition for Review under Rule 42 of the Rules of
Court before the CA, challenging the RTC's December 7, 2006 Decision
and February 6, 2007 Order.
Ruling of the CourT of Appeals
Title CA pointed out that PNB's entitlement to the rental proceeds in the
amount of P1,348,643.92 is dependent on whether there is a deficiency
in payment after the foreclosure sale.[35] It, however, found no sufficient
evidence on record that the amount of respondent's liability as of
October 31, 2006 is indeed P18,016,300.71, PNB claims.[36]
Consequently, the CA remanded the case the MeTC for the proper
reception of evidence and determination, if any, of the deficiency on the
foreclosure sale with the following guidelines:[37]
(1) From October 2004 to January 15, 2005: Principal+ Interest+
Penalties Monthly Rentals (from October 2004 to January 15,
2005 by virtue of the Deed of Assignment) New Principal
(2) From January 16, 2005 to October 31, 2006: New Principal +
Interest + Penalties - Interest Earned by PNB from the Savings
Account Outstanding Obligation as of October 31, 2006
(3) Outstanding Obligation as of October 31, 2006 -
P15,311,000.00 = Deficiency[38]
As regards the payment of legal interest, the CA noted that PNB merely
opened a non-drawing savings acc01mt wherein it deposited the
monthly rentals from January 16, 2005 to February 2006. Such deposit
of the rentals in a savings account, however, is not the consignation
contemplated by law. Thus, the CA found PNB liable to pay the 6% legal
interest rate prescribed under Article 2209 of the Civil Code tor having
defaulted in the payment of its monthly rentals to the respondent.[39]
Finally, the CA deleted the award of attorney's fees, pursuant to the
general rule that attorney's fees cannot be recovered as part of damages
because of the public policy that no premium should be placed on the
right to litigate.[40]
PNB filed a partial Motion for Reconsideration, but the CA denied the
motion in its Resolution dated February 21, 2013. As a consequence,
PNB filed the present Petition for Review on Certiorari before the Court,
assailing the CA's May 28,2012 Decision and February 21, 2013
Resolution.
Issues
In the present Petition, PNB raises the following issues for the Court's
resolution: first, whether PNB properly consigned the disputed rental
payments in the amount of P1,348,643.92 with the Office of the Clerk of
Court of the MeTC of Manila;[41] second, whether PNB incurred delay in
the payment of rentals to the respondent, making it liable to pay legal
interest to the latter;[42] and third, whether PNB is entitled to t11e
disputed rental proceeds in order to cover the alleged deficiency in
payment of the respondent's liability after the foreclosure proceedings.
The Court's Ruling
We DENY the Petition for Review on Certiorari as we find no reversible
error committed by the CA in issuing its assailed Decision and
Resolution.
"Consignation is the act of depositing the thing due with the court or
judicial authorities whenever the creditor cannot accept or refuses
accept payment. [I]t generally requires a prior tender of payment."[44]
Under Article 1256 of the Civil Code, consignation alone is sufficient
even without a prior tender of payment a) when the creditor is absent or
251
unknown or does not appear at the place of payment; b) when be is
incapacitated to receive the payment at the time it is due; c) when,
without just cause, he refuses to give a receipt; d) when two or more
persons claim the same right to collect; and e) when the title of the
obligation has been lost.
For consignation to be valid, the debtor must comply with the following
requirements under 1he law:
1) there was a debt due;
2) valid prior tender of payment, unless the consignation was made
because of some legal cause provided in Article 1256;
3) previous notice of the consignation has been given to the persons
interested in the performance of the obligation;
4) the amount or thing due was placed at the disposal of the court; and,
5) at1er the consignation had been made, the persons interested were
notified thereof:[45]
"Failure in any of these requirements Is enough ground to render a
consignation ineffective."[46]
In the present case, the records show that: first, PNB had the obligation
to pay respondent a monthly rental of P116,788.44, amounting to
P1,348,643.92, from January 16, 2005 to March 23, 2006;[47] second,
PNB had the option to pay the monthly rentals to respondent or to apply
the same as payment for respondent's loan with the bank, but PNB did
neither;[48] third, PNB instead opened a non-drawing savings account at
its Paco Branch under Account No. 202- 565327-3, where it deposited
the subject monthly rentals, due to the claim of Chua of the same right
to collect the rent;[49] and fourth, PNB consigned the amount of
P1,348,643.92 with the Office of the Clerk of Court of the MeTC of
Manila on May 31, 2006.[50]
Note that PNB's deposit of the subject monthly rentals in a non-
drawing savings account is not the consignation contemplated by
law, precisely because it does not place the same at the disposal of the
court.[51] Consignation is necessarily judicial; it is not allowed in venues
other than the courts.[52]Consequently, PNB's obligation to pay rent for
the period of January 16, 2005 up to March 23, 2006 remained
subsisting, as the deposit of the rentals cannot be considered to have
the effect of payment.
It is important to point out that PNB's obligation to pay the subject
monthly rentals had already fallen due and demandable before PNB
consigned the rental proceeds with the MeTC on May 31, 2006.
Although it is true that consignment has a retroactive effect, such
payment is deemed to have been made only at the time of the deposit
of the thing in court or when it was placed at the disposal of the judicial
authority.[53] Based on these premises, PNB's payment of the monthly
rentals can only be considered to have been made not earlier than May
31, 2006.
Given its belated consignment of the rental proceeds in court, PNB
clearly defaulted in the payment of monthly rentals to the
respondent for the period January 16, 2005 up to March 23, 2006,
when it finally vacated the leased property. As such, it is liable to pay
interest in accordance with Article 2209 of the Civil Code.
Article 2209 provides that if the debtor incurs delay in the performance
of an obligation consisting of the payment of a sum of money, he shall
be liable to pay the interest agreed upon and in the absence of
stipulation, the legal interest at 6% per annum. There being no stipulated
interest in this case, PNB is liable to pay legal interest at 6% per annum,
from January 16, 2005 up to May 30, 2006.
As for the issue on PNB's entitlement to the subject rental proceeds to
cover the deficiency in payment after the foreclosure sale of the
mortgaged property, we agree with the CA's finding that there is no
sufficient evidence on record to show that such a deficiency
exists.[54] Unfortunately, the Statement of Account [55]submitted by PNB
is not enough to prove this claim, considering that it is unsupported by
any corroborating evidence. Besides, the copy of the document in our
records, both in the CA rollo and the Supreme Court rollo,[56] consists
of illegible pages.
We likewise agree with the CA's conclusion that the RTC seriously erred
when it categorically stated that the loan was fully paid by virtue of the
foreclosure sale without determining the extent of the respondent's
liability as of October 31, 2006, the date of the foreclosure
sale.[57] Specifically, the RTC held that:
x x x In this regard, the amount of the indebtedness, was clearly stated
in the Notice of Extra-Judicial Sale dated August 9, 2006 as
P11,211,283.53, as of May 15, [2006], exclusive of penalties,
expenses, charges, attorney's fees and expenses. And since the
property was sold to the bank as the winning bidder at P15,311,000.00,
obviously, the difference could have easily covered the said
penalties, etc.[58]
This is clearly an error. It is settled that a mortgagee has the right to
recover the deficiency resulting from the difference between the amount
obtained in the sale at public auction and the outstanding obligation of
the mortgagor at the time of the foreclosure proceedings.[59] The RTC
252
failed to consider that the amount of indebtedness indicated in the
Notice ofEx1ra-Judicial Sale[60] dated August 9, 2006 was computed by
PNB as of May 15, 2006. Surely, the respondent's liability would have
significantly increased by the time the foreclosure sale was held on
October 31, 2006.
It also appears that the RTC merely assumed that the bid price would
cover the deficiency in payment, without actually making a determination
of whether such a deficiency exists and how much it really is.

In these lights, we uphold the CA's ruling remanding the case to the
MeTC for the proper reception of evidence and computation of
respondent's total indebtedness a of October 31, 2006, in order to
determine whether there exists a deficiency in payment as PNB insist.

WHEREFORE, we DENY the Petition for Review on Certiorari and

AFFIRMthe Decision dated May 28, 2012 and the Resolution dated
February 21, 2013 of the Court of Appeals in CA-G.R. SP No. 98112.

SO ORDERED.

253
 1266-1267 – DOCTRINE OF UNFORESEEN EVENTS IN
OBLIGATIONS TO DO
PHILIPPINE NATIONAL CONSTRUCTION v. CA
DAVIDE, JR., J.:
This petition for review on certiorari has its roots in Civil Case No. 53444,
which was sparked by petitioner's refusal to pay the rentals as stipulated
in the contract of lease 1 on an undivided portion of 30,000 square
meters of a parcel of land owned by private respondents.
The lease contract, executed on 18 November 1985, reads in part as
follows:
1. TERM OF LEASE — This lease shall be for a period of five
(5) years, commencing on the date of issuance of the industrial
clearance by the Ministry of Human Settlements, renewable for
a like or other period at the option of the LESSEE under the
same terms and conditions.
2. RATE OF RENT — LESSEE shall pay to the LESSOR rent
at the monthly rate of TWENTY THOUSAND PESOS
(P20,000.00), Philippine Currency, in the manner set forth in
Paragraph 3 below. This rate shall be increased yearly by Five
Percent (5%) based on the agreed monthly rate of P20,000.00
as follows:
Monthly Rate Period Applicable
P21,000.00 Starting on the 2nd year
P22,000.00 Starting on the 3rd year
P23,000.00 Starting on the 4th year
P24,000.00 Starting on the 5th year
3. TERMS OF PAYMENT — The rent stipulated in Paragraph 2
above shall be paid yearly in advance by the LESSEE. The first
annual rent in the amount of TWO HUNDRED FORTY
THOUSAND PESOS (P240,000.00), Philippine currency, shall
be due and payable upon the execution of this Agreement and
the succeeding annual rents shall be payable every twelve (12)
months thereafter during the effectivity of this Agreement.
4. USE OF LEASED PROPERTY — It is understood that the
Property shall be used by the LESSEE as the site, grounds and
premises of a rock crushing plant and field office, sleeping
quarters and canteen/mess hall. The LESSORS hereby grant to
the LESSEE the right to erect on the Leased Property such
structure(s) and/or improvement(s) necessary for or incidental
to the LESSEE's purposes.
xxx xxx xxx
11. TERMINATION OF LEASE — This Agreement may be
terminated by mutual agreement of the parties. Upon the
termination or expiration of the period of lease without the same
being renewed, the LESSEE shall vacate the Leased Property
at its expense.
On 7 January 1986, petitioner obtained from the Ministry of Human
Settlements a Temporary Use Permit 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
254
 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
255
 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
256
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.
257
 MAGAT, JR. v. CA 337 S 298
PARDO, J.:
The case is an appeal1 from the decision of the Court of Appeals2
reversing the decision of the Regional Trial Court of Makati, Metro
Manila,3 ruling in favor of respondent Santiago A. Guerrero and
dismissing petitioners' complaint.
First, the facts.
Private respondent Santiago A. Guerrero (hereinafter referred to as
"Guerrero") was President and Chairman of4 "Guerrero Transport
Services", a single proprietorship.5
Sometime in 1972, Guerrero Transport Services won a bid for the
operation of a fleet of taxicabs within the Subic Naval Base, in Olongapo.
As highest bidder, Guerrero was to "provide radio-controlled taxi service
within the U.S. Naval Base, Subic Bay, utilizing as demand requires . . .
160 operational taxis consisting of four wheel, four-door, four passenger,
radio controlled, meter controlled, sedans, not more than one year . . .
"6
On September 22, 1972, with the advent of martial law, President
Ferdinand E. Marcos issued Letter of Instruction No. 1 (hereinafter
referred to as "the LOI"). We reproduce the text, as follows:
"Letter of Instruction No. 1
"SUBJECT: SEIZURE AND CONTROL OF ALL PRIVATELY
OWNED NEWSPAPERS, MAGAZINES, RADIO AND
TELEVISION FACILITIES AND ALL OTHER MEDIA OF
COMMUNICATION.
"To: 1. The Press Secretary Office of the President
Manila
"2. The Secretary Department of National
Defense
Camp E. Aguinaldo, Q.C.
"In view of the present national emergency which has been
brought about by the activities of those who are actively
engaged in a criminal conspiracy to seize political and state
power in the Philippines and to take over the Government by
force and violence the extent of which has now assumed the
proportion of an actual war against our people and their
legitimate Government, and pursuant to Proclamation No. 1081
dated September 21, 1972, and in my capacity as commander
in chief of all the armed forces of the Philippines and in order to
prevent the use of privately owned newspapers, magazines,
radio and television facilities and all other media of
communications, for propaganda purposes against the
government and its duly constituted authorities or for any
purpose that tend to undermine the faith and confidence of the
people in our government and aggravate the present national
emergency, you are hereby ordered forthwith to take over and
control or cause the taking over and control of all such
newspapers, magazines, radio and television facilities and all
other media of communications, wherever they are, for the
duration of the present national emergency, or until otherwise
ordered by me or by my duly designated
representative.1âwphi1.nêt
"In carrying out the foregoing order you are hereby also directed
to see to it that reasonable means are employed by you and
your men and that injury to persons and property must be
carefully avoided."
On September 25, 1972, pursuant to the aforequoted Letter of
Instruction, the Radio Control Office issued Administrative Circular No.
4 (hereinafter referred to as "the Admin. Circular"), herein quoted in full:
"SUBJECT: SUSPENDING THE ACCEPTANCE AND
PROCESSING OF APPLICATIONS FOR RADIO STATION
CONSTRUCTION PERMITS AND FOR PERMITS TO OWN
AND/OR POSSESS RADIO TRANSMITTERS OR
TRANSCEIVERS.
"In view of the existence of a state of emergency and the
declaration by the President of martial law in the entire country
under Proclamation No. 1081 dated September 21, 1972,
258
 effective immediately the acceptance and processing by the
radio control office of applications for radio stations
constructions permits and for permits to possess, own, transfer,
purchase and sale of radio transmitters and transreceivers as
well as manufacturers and dealer's permits of said equipment is
hereby suspended.
"Exempted from this circular are applications for radio station
construction permits and for permits to possess, own, transfer,
purchase and sell radio transmitters and transceivers for the
following radio stations:
"1. Aeronautical Stations;
"2. Aeronautical Fixed Stations;
"3. Aircraft Stations;
"4. Coastal Stations; and
"5. Ship Stations.
"This circular shall be strictly observed until lifted upon proper
instructions from higher authorities."
On September 25, 1972, Guerrero and Victorino D. Magat (hereinafter
referred to as Victorino), as General Manager of Spectrum Electronic
Laboratories, a single proprietorship, executed a letter-contract for the
purchase of transceivers at a quoted price of US$77,620.59, FOB
Yokohoma. Victorino was to deliver the transceivers within 60 to 90 days
after receiving notice from Guerrero of the assigned radio frequency,7
"taking note of Government Regulations."8
The contract was signed and Victorino contacted his Japanese supplier,
Koide & Co., Ltd. and placed an order for the transceivers.
On September 29, 1972, Navy Exchange Officer, A. G. Mason
confirmed that Guerrero won the bid for the commercial transportation
contract.9
On October 4, 1972, middle man and broker10 Isidro Q. Aligada of
Reliance Group Engineers, Inc. (hereinafter referred to as "Aligada"),
wrote Victorino, informing him that a radio frequency was not yet
assigned to Guerrero and that government regulations might complicate
the importation of the transceivers. However, in the same letter,
Victorino was advised to advise his supplier "to proceed (with)
production pending frequency information." Victorino was also assured
of Guerrero's financial capability to comply with the contract.11
On October 6, 1972, Guerrero informed Aligada of the frequency
number12 assigned by Subic Naval Base authorities. Aligada was
instructed to "proceed with the order thru Spectrum Electronics
Laboratories."13
On October 7, 1972, Aligada informed Magat of the assigned frequency
number. Aligada also advised Victorino to "proceed with the order upon
receipt of letter of credit."14
On January 10, 1973, Guerrero applied for a letter of credit with the
Metropolitan Bank and Trust Company.15 This application was not
pursued.16
On March 27, 1973, Victorino, represented by his lawyer, Atty. Sinesio
S. Vergara, informed Guererro that the order with the Japanese supplier
has not been canceled. Should the contract be canceled, the Japanese
firm would forfeit 30% of the deposit and charge a cancellation fee in an
amount not yet known, Guerrero to bear the loss. Further, should the
contract be canceled, Victorino would demand an additional amount
equivalent to 10% of the contract price.17
Unable to get a letter of credit from the Central Bank due to the refusal
of the Philippine government18 to issue a permit to import the
transceivers,19 Guerrero commenced operation of the taxi cabs within
Subic Naval Base, using radio units borrowed from the U.S. government
(through the Subic Naval Base authorities).20 Victorino thus canceled his
order with his Japanese supplier.
On May 22, 1973, Victorino filed with the Regional Trial Court, Makati a
complaint for damages arising from breach of contract against
Guerrero.21
On June 7, 1973, Guerrero moved to dismiss the complaint on the
ground that it did not state a cause of action.22
259
On June 16, 1973, the trial court23 granted the motion and dismissed the
complaint.24
On July 11, 1973, Victorino filed a petition for review on certiorari with
this Court assailing the dismissal of the complaint.25
On April 20, 1983, this Court2 6 ruled that the complaint sufficiently
averred a cause of action. We set aside the order of dismissal and
remanded the case to the trial court for further proceedings, to wit:27
"ACCORDINGLY, the questioned order of dismissal is hereby
set aside and the case ordered remanded to the court of origin
for further proceedings. No costs.
"SO ORDERED."
On November 27, 1984, the trial court28 ordered that the case be
archived for failure of Victorino to prosecute.29
On March 11, 1985, petitioners, Olivia, Dulce, Ma. Magnolia, Ronald and
Dennis Magat (hereinafter referred to as "heirs of Victorino"), moved to
reinstate the case and to substitute Victorino in its prosecution.
Apparently, Victorino died on February 18, 1985.30
On April 29, 1985, the trial court granted the motion.31
On July 12, 1991, the trial court decided in favor of the heirs of Victorino
and ordered Guerrero to pay temperate, moral and exemplary damages,
and attorney's fees, disposing of the case in this wise:32
"WHEREFORE, judgment is rendered for the substituted
plaintiffs and against the defendant
"1. Ordering defendant to pay substituted plaintiffs the sum of
P25,000.00 for temperate damages for injury to plaintiff's
business dealings with foreign and local businessmen;
"2. P50,000.00 as moral damages;
"3. P25,000.00 as exemplary
damages; and
"4. P20,000.00 as attorney's fees.
"SO ORDERED."
On August 21, 1991, Guerrero appealed to the Court of Appeals.33
On October 4, 1995, the Court of Appeals rendered the decision
appealed from, disposing as follows:34
"WHEREFORE, judgment is hereby rendered DISMISSING the
complaint.
"No pronouncements as to costs.
" SO ORDERED."
On October 26, 1995, the heirs of Victorino filed with the Court of
Appeals a motion for reconsideration.35
On March 12, 1996, the Court of Appeals denied the motion for
reconsideration.36
Hence, this appeal.37
The issue is whether the contract between Victorino and Guerrero for
the purchase of radio transceivers was void. Stated differently, whether
the transceivers subject of the contract were banned contraband items
prohibited by the LOI and the Administrative Circular to import.
The contract was valid; the radio transceivers were not contraband.
"Contraband" generally refers to "any property which is unlawful to
produce or possess." It refers to goods which are exported and imported
into a country against its laws.38
In declaring the contract void ab initio, the Court of Appeals ruled that
the importation of the transceivers meant the inevitable passing of such
goods through Philippine Ports, where the LOI and the Administrative
Circular have to be observed and applied with full force and effect.39 The
Court of Appeals declared that the proposed importation of such goods
was contrary to law, hence, the nullity of the contract.40
260
We do not agree. The contract was not void ab initio. Nowhere in the
LOI and Admin. Circular is there an express ban on the importation of
transceivers.
The LOI and Administrative Circular did not render "radios and
transceivers" illegal per se. The Administrative Circular merely ordered
the Radio Control Office to suspend the "acceptance and processing . .
. . of applications . . . for permits to possess, own, transfer, purchase
and sell radio transmitters and transceivers . . . "41 Therefore, possession
and importation of the radio transmitters and transceivers was legal
provided one had the necessary license for it.42 Transceivers were not
prohibited but merely regulated goods. The LOI and Administrative
Circular did not render the transceivers outside the commerce of man.
They were valid objects of the contract.43
Affirming the validity of the contract, we next discuss whether the
contract was breached.
Guerrero testified that a permit to import the transceivers from Japan
was denied by the Radio Control Board. He stated that he, together with
Aligada, Victorino and a certain John Dauden personally went to the
Radio Control Office, and were denied a permit to import. They also
went to the Office of the President, where Secretary Ronaldo B. Zamora
explained that radios were "banned like guns because of martial law."44
Guerrero testified that this prevented him from securing a letter of credit
from the Central Bank.45 This testimony was not rebutted.
The law provides that "[w]hen the service (required by the contract) has
become so manifestly beyond the contemplation of the parties, the
obligor may also be released therefrom, in whole or in part."46 Here,
Guerrero's inability to secure a letter of credit and to comply with his
obligation was a direct consequence of the denial of the permit to import.
For this, he cannot be faulted.
Even if we assume that there was a breach of contract, damages cannot
be awarded. Damnum absque injuria.
There was no bad faith.47 Bad faith does not simply connote bad
judgment or negligence. It imports a dishonest purpose or some moral
obliquity and conscious doing of wrong. It means a breach of a known
duty through some motive or interest or ill will that partakes of the nature
of fraud.48 Guerrero honestly relied on the representations of the Radio
Control Office and the Office of the President.
True, Guerrero borrowed equipment from the Subic Naval Base
authorities at zero cost.49 This does not automatically translate to bad
faith. Guerrero was faced with the danger of the cancellation of his
contract with Subic Naval Base. He borrowed equipment as a prudent
and swift alternative. There was no proof that he resorted to this option
with a deliberate and malicious intent to dishonor his contract with
Victorino. An award of damages surely cannot be based on mere
hypotheses, conjectures and surmises. Good faith is presumed, the
burden of proving bad faith rests on the one alleging it.50 Petitioners did
not effectively discharge the burden in this case.
To recover moral damages in an action for breach of contract, the
breach must be palpably wanton, reckless, malicious, in bad faith,
oppressive or abusive.51 This is not the case here.
Exemplary damages also cannot be awarded. Guerrero did not act in a
wanton, fraudulent, reckless, oppressive or malevolent manner.52
Neither can actual damages be awarded. True, indemnification for
damages contemplates not only actual loss suffered (damnum
emergens) but unrealized profits (lucrum cessans) as well.53 However,
to be entitled to adequate compensation for pecuniary loss, the loss
must be actually suffered and duly proved.54 To recover actual damages,
the amount of loss must not only be capable of proof, but must be proven
with a reasonable degree of certainty. The claim must be premised upon
competent proof or upon the best evidence obtainable,55 such as
receipts56 or other documentary proof.
Only the testimony of Aligada was presented to substantiate petitioners'
claim for unrealized profits.57 Aligada testified that as a result of the
cancellation of the contract, Victorino had to suspend transactions with
his Japanese supplier for six (6) months. Aligada stated that the volume
of Victorino's business with Subic Naval Base also diminished
significantly. Aligada approximated that Victorino's unrealized business
opportunities amounted to P400,000.00.58 Being a witness for
Victorino's heirs and standing to gain from the contract's fulfillment,
Aligada's testimony is self-serving. It is also hearsay. We fail to see how
this "evidence" proves actual damages with a "reasonable degree of
certainty."59 If proof is "flimsy", we cannot award actual damages.60
WHEREFORE, we AFFIRM the decision of the Court of Appeals
promulgated on October 11, 1995, in CA-G. R. CV No. 34952,
dismissing the complaint.1âwphi1.nêt No costs. SO ORDERED.
261
 TAGAYTAY REALTY v. FACUTAN 761 S 87
BERSAMIN, J.:
The Court reiterates the right of the installment buyer of a subdivision lot
to withhold payment of his amortizations for the duration that the
subdivision developer has not complied with its contractual undertaking
to build the promised amenities in the subdivision.
The Case
On appeal by the subdivision developer is the decision promulgated on
May 29, 2003,[1] whereby the Court of Appeals (CA) upheld the ruling in
favor of the installment buyer issued on December 6, 2001 by the Office
of the President (OP).[2] By such ruling, the OP affirmed the July 14,
1997 decision[3] rendered by the Housing and Land Use Regulatory
Board (HLURB) Board of Commissioners adopting the HLURB Arbiter's
decision dated March 22, 1995.[4]
Antecedents
On September 6, 1976, the respondent entered into a contract to sell
with the petitioner for the purchase on installment of a residential lot with
an area of 308 square meters situated in the Foggy Heights Subdivision
then being developed by the petitioner.[5] Earlier, on June 30, 1976, the
petitioner executed an express undertaking in favor of the respondent,
as follows:[6]
We hereby undertake to complete the development of the roads, curbs,
gutters, drainage system, water and electrical systems, as well as all the
amenities to be introduced in FOGGY HEIGHTS SUBDIVISION, such
as, swimming pool, pelota court, tennis and/or basketball court, bath
house, children's playground and a clubhouse within a period of two
years from 15 July 1976, on the understanding that failure on their part
to complete such development within the stipulated period shall give the
VENDEE the option to suspend payment of the monthly amortization on
the lot/s he/she purchased until completion of such development without
incurring penalty interest.
It is clearly understood, however, that the period or periods during which
we cannot pursue said development by reason of any act of God, any
act or event constituting force majeure or fortuitous event, or any
restriction, regulation, or prohibition by the government or any of its
branches or instrumentalities, shall suspend the running of said 2-year
period and the running thereof shall resume upon the cessation of the
cause of the stoppage or suspension of said development.
In his letter dated November 12, 1979,[7] the respondent notified the
petitioner that he was suspending his amortizations because the
amenities had not been constructed in accordance with the undertaking.
Despite receipt of the respondent's other communications requesting
updates on the progress of the construction of the amenities so that he
could resume his amortization,[8] the petitioner did not reply. Instead, on
June 10, 1985, the petitioner sent to him a statement of account
demanding the balance of the price, plus interest and penalty.[9] He
refused to pay the interest and penalty.
On October 4, 1990, the respondent sued the petitioner for specific
performance in the HLURB, praying that the petitioner be ordered to
accept his payment of the balance of the contract without interest and
penalty, and to deliver to him the title of the property.[10]
In its answer,[11] the petitioner sought to be excused from performing its
obligations under the contract, invoking Article 1267 of the Civil Code as
its basis. It contended that the depreciation of the Philippine Peso since
the time of the execution of the contract, the increase in the cost of labor
and construction materials, and the increase in the value of the lot in
question were valid justifications for its release from the obligation to
construct the amenities.
In its position paper,[12] the petitioner stated that it had purposely
suspended the construction of the amenities which would have
deteriorated at any rate because its lot buyers had not constructed their
houses in the subdivision.
On March 22, 1995, the HLURB Arbiter ruled m favor of the
respondent,[13] to wit:
WHEREFORE, premises considered, respondents are hereby ordered
to accept the payment of the balance of the contract price in the amount
of Eight Thousand Five Hundred Eighty Seven and 80/100 Pesos
(P8,587.80) without regular and penalty interest and, thereafter, to
execute and deliver to complainant the absolute deed of sale covering
the sale of property subj,ct of this complaint, together with the valid title
over the said lot.[14]
The petitioner appealed, but the HLURB Board of Commissioners
affirmed the ruling of the HLURB Arbiter on July 14, 1997.[15] Upon the
denial of its motion for reconsideration, the petitioner appealed to the
OP.[16]
On December 6, 2001, the OP upheld the decision of the HLURB Board
of Commissioners.[17] The OP later denied the petitioner's motion for
reconsideration.[18]
262
On appeal, the CA affirmed the OP through the assailed decision
promulgated on May 29, 2003,[19] disposing:
WHEREFORE, premises considered and finding no reversible error in
the challenged Decision and Order dated December 6, 2001, and July
1, 2002, respectively, of the Office of the President in OP Case No. 98-
C-8261 said Decision and Order are AFFIRMED and UPHELD, and the
petition is DISMISSED for lack of merit. SO ORDERED.[20]
The CA denied the petitioner's motion for reconsideration.[21]
Issues
In this appeal by petition for review on certiorari, the petitioner contends
that the CA erred in affirming the incorrect findings of the OP in a way
probably not in accord with law; and in declaring that the respondent
was not guilty of laches.
The petitioner submits that the CA, by observing that the petitioner did
not fulfill its obligation to finish the subdivision project and that it had
itself admitted not having finished the project, did not consider that it
must be discharged because extraordinary and unforeseeable
circumstances had rendered its duty to perform its obligation so onerous
that to insist on the performance would have resulted in its economic
ruin; that the Court should consider the practical circumstances
surrounding the construction of the luxurious amenities of the project;
that the luxurious amenities of the project would only be exposed to the
elements, resulting in wastage and loss of resources, because none of
the lot buyers had constructed any house in the subdivision; that
delaying the construction for that reason was reasonable on its part
considering that no one would have benefited from the amenities
anyway, and was also a sound business practice because the
construction would be at great cost to it as the developer; that another
justification for the non-construction was its having suffered extreme
economic hardships during the political and economic turmoil of the
1980s that the parties did not foresee at the time they entered into their
contract; that under Article 1267 of the Civil Code, equity demanded a
certain economic equilibrium between the prestation and the counter-
prestation, and did not permit the unlimited impoverishment of one party
for the benefit of the other by the excessive rigidity of the principle of the
obligatory force of contracts; that as the debtor, it should be partially
excused or altogether released from its obligations due to the
extraordinary obstacles to the prestation, which could be overcome only
by a sacrifice that would be absolutely disproportionate, or with very
grave risks, or by violating some important duties; and that the CA
thereby erred in closing its eyes to the realities, and in opting not to apply
the principles of equity in favor of applying the terms of the agreement
even if doing so would cause the economic ruin of one of the parties.
The petitioner further submits that the CA erred in declaring that it was
apparent that there was no "unreasonable failure" on the part of the
respondent because he had made timely written demands on November
12, 1979, February 11, 1983, March 20, 1984, June 24, 1985 and
November 16, 1988. It urges that the CA's error consisted in its
confusing laches as the failure to assert a right, notwithstanding that
jurisprudence has considered laches to be the unreasonable failure to
assert a claim that, by exercising due diligence, could or should be done
earlier; that laches was not, in legal significance, mere delay, but a delay
that worked a disadvantage to another; that the letters of the respondent
could hardly be construed as motivated by prudence and good faith; that
the economy had worsened between 1979 and 1988, and such
worsening became a factor that raised the cost of real estate
development by leaps and bounds; and that the respondent, whose
actuations smacked of bad faith and opportunism at its expense, had
then appeared out of nowhere to seize the opportunity presented by the
real estate boom of the early 1990s, despite having been silent and
having failed to act for a long time, evincing his belief of not having any
right at all.
In his comment, the respondent asserts that the submissions of the
petitioner did not warrant the non-construction of the amemt1es; that
Article 1159 of the Civil Code provides that obligations arising from
contracts have the force of law between the contracting parties and
should be complied with in good faith; that neither party could unilaterally
and upon his own exclusive volition escape his obligations under the
contract unless for causes sufficient in law and pronounced adequate
by a competent tribunal; that correlative to Article 1159 is Article 1308
of the Civil Code which holds that the validity or compliance of a contract
cannot be left to the will of one party; that a party could not revoke or
renounce a contract without the consent of the other, nor could a party
have a contract set aside on the ground that he had made a bad bargain;
that he was not liable for the interest because it was not expressly
stipulated in the contract pursuant to Article 1956 of the Civil Code; that
no penalty should be imposed on him by virtue of the undertaking clearly
stating that the two-year period for the completion of the amenities would
be suspended only if the development could not be pursued "by reason
of any act God, any act or event constituting force majeure or fortuitous
event; or any restriction, regulation, or prohibition by the government or
263
any of its branches or instrumentalities;" that the reason given by the
petitioner that "the contemplated amenities could not be constructed as
they would have only been left exposed to the elements and would have
come to naught on account of the fact that there are no persons residing
thereat" did not justify or excuse the non construction of the amenities;
that the petitioner could not seek refuge in Article 1267 of the Civil Code
by merely alleging inflation without laying down the legal and factual
basis to justify the release from its obligation; that his written extrajudicial
demands negated the defense of laches; that he did not fail to assert his
right, or abandon it; and that his written extrajudicial demands wiped out
the period that had already lapsed and started the prescriptive period
anew.
In short, was the petitioner released from its obligation to construct the
amenities in the Foggy Heights Subdivision?
Ruling of the Court
The appeal is partly meritorious.
1. Petitioner was not relieved from its statutory and
contractual obligations to complete the amenities
The arguments of the petitioner to be released from its obligation to
construct the amenities lack persuasion.
To start with, the law is not on the side of the petitioner.
Under Section 20 of Presidential Decree No. 957, all developers,
including the petitioner, are mandated to complete their subdivision
projects, including the amenities, within one year from the issuance of
their licenses. The provision reads:
Section 20. Time of Completion. - Every owner or developer shall
construct and provide the facilities, improvements, infrastructures and
other forms of development, including water supply and lighting facilities,
which are offered and indicated in the approved subdivision or
condominium plans, brochures, prospectus, printed matters, letters or in
any form of advertisement, within one year from the date of the issuance
of the license for the subdivision or condominium project or such other
period of time as maybe fixed by the Authority.
Pursuant to Section 30 of Presidential Decree No. 957,[22] the amenities,
once constructed, are to be maintained by the developer like the
petitioner until a homeowners' association has been organized to
manage the amenities.
There is no question that the petitioner did not comply with its legal
obligation to complete the construction of the subdivision project,
including the amenities, within one year from the issuance of the license.
Instead, it unilaterally opted to suspend the construction of the amenities
to avoid incurring maintenance expenses. In so opting, it was not driven
by any extremely difficult situation that would place it at any
disadvantage, but by its desire to benefit from cost savings. Such cost-
saving strategy dissuaded the lot buyers from constructing their houses
in the subdivision, and from residing therein.
Considering that the petitioner's unilateral suspension of the
construction of the amenities was intended to save itself from costs, its
plea for relief from its contractual obligations was properly rejected
because it would thereby gain a position of advantage at the expense of
the lot owners like the respondent. Its invocation of Article 1267 of the
Civil Code, which provides that "(w)hen 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," was factually
unfounded. For Article 1267 to apply, the following conditions should
concur, namely: (a) the event or change in circumstances could not have
been foreseen at the time of the execution of the contract; (b) it makes
the performance of the contract extremely difficult but not impossible; (c)
it must not be due to the act of any of the parties; and (d) the contract is
for a future prestation.[23] The requisites did not concur herein because
the difficulty of performance under Article 1267 of the Civil Code should
be such that one party would be placed at a disadvantage by the
unforeseen event.[24] Mere inconvenience, or unexepected
impediments, or increased expenses did not suffice to relieve the debtor
from a bad bargain.[25]
And, secondly, the unilateral suspension of the construction had
preceded the worsening of economic conditions in 1983; hence, the
latter could not reasonably justify the petitioner's plea for release from
its statutory and contractual obligations to its lot buyers, particularly the
respondent. Besides, the petitioner had the legal obligation to complete
the amenities within one year from the issuance of the license (under
Section 20 of Presidential Decree No. 957), or within two years from July
15, 1976 (under the express undertaking of the petitioner). Hence, it
should have complied with its obligation by July 15, 1978 at the latest,
long before the worsening of the economy in 1983.
264
 2. Respondent as instalment buyer should pay
the annual interest but not the penalty
The respondent insists that his unpaid obligation was only the balance
of the contract price amounting to P8,587.80.[26] He declines to pay the
interest and the penalty on the ground that the petitioner had not
constructed the amenities as promised under the undertaking.
The Court holds that the respondent was liable for the stipulated annual
interest of 12% but not the penalty.
Paragraph 2.b, first sentence, of the contract to sell stipulated the 12%
annual interest, as follows:
xxx xxx xxx
2.) The VENDEE/S hereby agree/s to pay the purchase price of
TWENTY SEVEN THOUSAND SEVEN HUNDRED TWENTY ONLY
PESOS (P27,720.00), Philippine Currency, at the office of the VENDOR
at Makati, Rizal, without necessity of demand or the services of a
collector in the following manner:
a.) As downpayment, the amount of FOUR THOUSAND ONE
HUNDRED FIFTY EIGHT ONLY PESOS (P4,158.00) upon the
execution of the contract.
b.) The balance of TWENTY THREE THOUSAND FIVE
HUNDRED SIXTY TWO ONLY PESOS (P23,562.00) in eighty
four (84) consecutive monthly installments of FOUR
HUNDRED FIFTEEN & 95/100 PESOS (P415.95) each
installment, including interest at the rate of twelve (12%)
percent per annum on all outstanding balances, the first of
such monthly installment to be paid on or before the 6th
day of each month, beginning October, 1976. It is
understood that unpaid installments or installments in arrears
shall earn a penalty interest of one (1%) percent per month until
fully paid.[27] (Bold underscoring supplied for emphasis of the
relevant portion)
xxx xxx xxx
Accordingly, the parties agreed to an 84-month or seven-year term of
installment on the net contract price of P23,562.00 at the monthly rate
of P415.95, the monthly rate being inclusive of the 12% interest per
annum. Such monthly installment of P415.95 included the principal and
the annual interest, the latter being legally termed the amortization
interest. The annual interest was designed to compensate the petitioner
for waiting seven years before receiving the total principal amount. As
such, the total cost of the lot purchased by the respondent for the seven-
year term would be P39,097.80, which amount would be inclusive of the
contract price of the lot and the amortization interest.[28]
The imposition of the annual or amortization interest on the price for the
purchase of a lot on installment was valid and enforceable. As the Court
has explained in Relucio v. Brillante-Garfin:[29]
x x x The contract price of P10,800.00 may thus be seen to be the cash
price of the subdivision lots, that is, the amount payable if the price of
the lots were to be paid in cash and in full at the execution of the
contract; it is not the amount that the vendor will have received in the
aggregate after fifteen (15) years if the vendee shall have religiously
paid the monthly installments. The installment price, upon the other
hand, of the subdivision lots-the sum total of the monthly installments
(i.e., P16,101.00) typically, as in the instant case, has an interest
component which compensates the vendor for waiting fifteen (15) years
before receiving the total principal amount of P10,600.00. Economically
or financially, P10,600.00 delivered in full today is simply worth much
more than a long series of small payments totalling, after fifteen (15)
years, P10,600.00. For the vendor, upon receiving the full cash price,
could have deposited that amount in a bank, for instance, and earned
interest income which at six percent (6%) per year and for fifteen (15)
years, would precisely total P5,501.00 (the difference between the
installment price of P16,101.00 and the cash price of P10,600.00) To
suppose, as private respondent argues, that mere prompt payment of
the monthly installments as they fell due would obviate application of the
interest charge of six percent (6%) per annum, is to ignore that simple
economic fact. That economic fact is, of course, recognized by law,
which authorizes the payment of interest when contractually stipulated
for by the parties or when implied in recognized commercial custom or
usage.
Vendor and vendee are legally free to stipulate for the payment of either
the cash price of a subdivision lot or its installment price. Should the
vendee opt to purchase a subdivision lot via the installment payment
system, he is in effect paying interest on the cash price, whether the fact
and rate of such interest payment is disclosed in the contract or not. The
contract for the purchase and sale of a piece of land on the installment
payment system in the case at bar is not only quite lawful; it also reflects
a very wide spread usage or custom in our present day commercial
life.[30]
265
In view of the foregoing, the respondent's insistence on condoning his
liability for the contractually-stipulated 12% annual amortization interest
is unwarranted. The condonation will impose a harsh burden upon the
petitioner, even as it will result in the unjust enrichment of the
respondent. We cannot ignore that the former has waited for a very long
period of time before it would be able to use the proceeds of the lot sold
to the respondent.
The 1% monthly penalty sought to be charged on the arrears for failure
to pay the amortizations on time until the arrears would be fully paid was
also stipulated in paragraph 2.b, second sentence, of the contract to sell,
supra. But such stipulation could not be enforced against the respondent
because the petitioner waived the penalty should the subdivision
development not be completed by July 15, 1978. The waiver should
stand considering that the suspension of the amortization payment in
1979 was excusable on account of the failure to construct the amenities
by July 15, 1978, and considering further that the petitioner did not
contest the suspension of payment of the monthly amortization.[31]
Under Tamayo v. Huang,[32] the buyer has the option to demand the
reimbursement of the total amounts paid, or to await the further
development of the subdivision; when the buyer opts for the latter
alternative, he may suspend the payment of his installments until the
time when the developer has fulfilled its obligation to him; should the
developer persist in refusing to complete the facilities, the National
Housing Authority may take over or cause the development and
completion of the subdivision at the expense of the developer.[33]
The CA correctly declared that laches did not set in to bar the claim of
the respondent because he had made periodic written demands upon
the petitioner that indicated that he had not abandoned or declined to
assert the claim. In 1979, he manifested the intention to avail himself of
his right to suspend the payment of his amortizations pursuant to the
undertaking. Since then until 1984, he had continuously requested the
petitioner for updates on the progress of the construction of the
amenities so that he could resume his amortizations. The petitioner did
not respond to his requests. His efforts to have the petitioner construct
the amenities so that he would already pay for the lot demonstrated his
prudence and alacrity in insisting on his rights, negating any hint of bad
faith or of lack of diligence on his part.
WHEREFORE, the Court AFFIRMS the judgment promulgated on May
29, 2003 subject to the MODIFICATIONS, as follows: (1) the respondent
shall pay to the petitioner the amount of P19,965.60; (2) the petitioner
shall execute the deed of absolute sale covering the property, and shall
deliver the property to the respondent together with the pertinent
certificate of title in accordance with the terms of their contract; and (3)
the petitioner shall pay the costs of suit.
SO ORDERED.

In this case, the respondent initially opted to suspend the payment of his
amortizations, but then offered to complete the payment upon realizing
that the petitioner did not anymore intend to build the amenities. His
payments from October 6, 1976 to October 6, 1979 corresponded to 36
monthly amortizations totaling P14,974.20, leaving 48 installments
unpaid totaling P19,965.60.[34]

3. Claim of respondent was not barred by laches

Laches is the failure of 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, or to assert a right within a reasonable
time. It warrants a presumption that the party entitled thereto has either
abandoned it or declined to assert it.[35]

266
 COMGLASCO CORP. v. SANTOS CAR CHECK CENTER CORP.
745 S 481 (REYES)
REYES, J.:
On August 16, 2000, respondent Santos Car Check Center Corporation
(Santos), owner of a showroom located at 75 Delgado Street, in Iloilo
City, leased out the said space to petitioner Comglasco Corporation
(Comglasco), an entity engaged in the sale, replacement and repair of
automobile windshields, for a period of five years at a monthly rental of
P60,000.00 for the first year, P66,000.00 on the second year, and
P72,600.00 on the third through fifth years.[1]
On October 4, 2001, Comglasco advised Santos through a letter[2] that
it was pre-terminating their lease contract effective December 1,
2001. Santos refused to accede to the pre-termination, reminding
Comglasco that their contract was for five years. On January 15, 2002,
Comglasco vacated the leased premises and stopped paying any further
rentals. Santos sent several demand letters, which Comglasco
completely ignored. On September 15, 2003, Santos sent its final
demand letter,[3] which Comglasco again ignored. On October 20, 2003,
Santos filed suit for breach of contract.[4]
Summons and a copy of the complaint, along with the annexes, were
served on Comglasco on January 21, 2004, but it moved to dismiss the
complaint for improper service. The Regional Trial Court (RTC) of Iloilo
City, Branch 37, dismissed the motion and ordered the summons served
anew. On June 28, 2004, Comglasco filed its Answer.[5] Santos moved
for a judgment on the pleadings, which the RTC granted. On August 18,
2004, the trial court rendered its judgment,[6] the dispositive portion of
which reads:
WHEREFORE, judgment is hereby rendered in favor of [Santos] and
against [Comglasco]:
1. Ordering [Comglasco] to faithfully comply with [its] obligation
under the Contract of Lease and pay its unpaid rentals starting
January 16, 2002 to August 15, 2003 in the total amount of
Php1,333,200.00, plus 12% interest per annum until fully paid;
2. To pay [Santos]:
a) Php200,000.00 as attorney’s fees;
b) [Php]50,000.00 as litigation expenses;
c) Php]400,000.00 as exemplary damages.
3. Costs of the suit.
SO ORDERED.[7]
On February 14, 2005, Santos moved for execution pending
Comglasco’s appeal, which the trial court granted on May 12, 2005. In
its appeal, Comglasco interposed the following issues for resolution:
1. Whether or not judgment on the pleadings was properly invoked by
the trial court as basis for rendering its decision;
2. Whether or not material issues were raised in [Comglasco’s] Answer;
3. Whether or not damages may be granted by the trial court without
proof and legal basis.[8]
In its Decision[9] dated August 10, 2011, the Court of Appeals (CA)
affirmed the judgment of the RTC but reduced the award of attorney’s
fees to P100,000.00 and deleted the award of litigation expenses and
exemplary damages.
Petition for Review to the Supreme Court
In this petition, Comglasco raises the following issues:
1. Whether or not judgment on the pleadings was properly invoked by
the trial court as basis for rendering its decision?
2. Whether or not material issues were raised in [Comglasco’s] answer?
3. Whether or not summary judgment or judgment on the pleadings is
the proper remedy for [Santos] under the circumstances of the present
case?
4. Whether or not the amount deposited for advance rental and deposit
should be credited to [Comglasco’s] account?
5. Whether or not attorney’s fees may be granted by the trial court
without proof and legal basis?[10]
Paragraph 15 of the parties’ lease contract[11] permits pre-termination
with cause in the first three years and without cause after the third year.
Citing business reverses which it ascribed to the 1997 Asian financial
crisis, Comglasco insists that under Article 1267 of the Civil Code it is
exempted from its obligation under the contract, because its business
setback is the “cause” contemplated in their lease which authorized it to
pre-terminate the same. Article 1267 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.
267
Comglasco argues that it cannot be said to have admitted in its Answer
the material allegations of the complaint precisely because it invoked
therein a valid cause for its decision to pre-terminate the lease before
the lapse of three years; that therefore, in view of its pleaded “cause” for
reneging on its rentals (the 1997 Asian financial crisis), the RTC should
have ordered the reception of evidence for this purpose, after which a
summary judgment would then have been proper, not a judgment on the
pleadings. After all, Santos has claimed in its Motion for Summary
Judgment that Comglasco’s cited “cause” for pre-termination was
fictitious or a sham, whereas in truth the prevailing business climate
which ensued after the 1997 currency crisis resulted in great difficulty
on its part to comply with the terms of the lease “as to be manifestly
beyond the contemplation of the parties”; thus, Comglasco should be
deemed released from the lease.
Next, Comglasco insists that its advance rentals and deposit totaling
P309,000.00 should be deducted from any sum awarded to Santos
while it also insists that there is no factual and legal basis for the award
of damages.
Ruling of the Court
The petition is denied.
The first three issues being related will be discussed together.
Comglasco maintains that the RTC was wrong to rule that its answer to
Santos’ complaint tendered no issue, or admitted the material
allegations therein; that the court should have heard it out on the reason
it invoked to justify its action to pre-terminate the parties’ lease; that
therefore a summary judgment would have been the proper recourse,
after a hearing.
In Philippine National Construction Corporation v. CA[12] (PNCC), which
also involves the termination of a lease of property by the lessee “due
to financial, as well as technical, difficulties,”[13] the Court ruled:
The obligation to pay rentals or deliver the thing in a contract of lease
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 said article. Besides, petitioner failed to state
specifically the circumstances brought about by “the abrupt change in
the political climate in the country” except the alleged prevailing
uncertainties in government policies on infrastructure projects.
The principle of rebus sic stantibus neither fits in with the facts of the
case. Under this theory, the parties stipulate in the light of certain
prevailing conditions, and once these conditions cease to exist, the
contract also ceases to exist. This theory is said to be the basis of Article
1267 of the Civil Code, which provides:
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.
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:
xxx xxx xxx
Anent petitioner’s alleged poor financial condition, the same will neither
release petitioner from the binding effect of the contract of lease. As held
in Central Bank v. Court of Appeals, cited by private respondents, mere
pecuniary inability to fulfill an engagement does not discharge a
contractual obligation, nor does it constitute a defense to an action for
specific performance.[14]
Relying on Article 1267 of the Civil Code to justify its decision to
pre-terminate its lease with Santos, Comglasco invokes the 1997 Asian
currency crisis as causing it much difficulty in meeting its
obligations. But in PNCC,[15]the Court held that the payment of lease
rentals does not involve a prestation “to do” envisaged in Articles 1266
and 1267 which has bee
rendered legally or physically impossible without the fault of the
obligor-lessor. Article 1267 speaks of a prestation involving service
which has been rendered so difficult by unforeseen subsequent events
268
as to be manifestly beyond the contemplation of the parties. To be sure,
the Asian currency crisis befell the region from July 1997 and for
sometime thereafter, but Comglasco cannot be permitted to blame its
difficulties on the said regional economic phenomenon because it
entered into the subject lease only on August 16, 2000, more than three
years after it began, and by then Comglasco had known what business
risks it assumed when it opened a new shop in Iloilo City.
This situation is no different from the Court’s finding in PNCC wherein
PNCC cited the assassination of Senator Benigno Aquino Jr. (Senator
Aquino) on August 21, 1983 and the ensuing national political and
economic crises as putting it in such a difficult business climate that it
should be deemed released from its lease contract. The Court held that
the political upheavals, turmoils, almost daily mass demonstrations,
unprecedented inflation, and peace and order deterioration which
followed Senator Aquino’s death were a matter of judicial notice, yet
despite this business climate, PNCC knowingly entered into a lease with
therein respondents on November 18, 1985, doing so with open eyes of
the deteriorating conditions of the country. The Court rules now, as in
PNCC, that there are no “absolutely exceptional changes of
circumstances that equity demands assistance for the debtor.”[16]
As found by the CA, Comglasco’s Answer admitted the material
allegations in the complaint, to wit: a) that Santos holds absolute title to
a showroom space; b) that Comglasco leased the said showroom from
Santos; c) that after a little over a year, Comglasco pre-terminated the
lease; d) that, disregarding Santos’ rejection of the pre-termination of
their lease, Comglasco vacated the leased premises on January 15,
2002; e) that Comglasco never denied the existence and validity of the
parties’ lease contract. Specifically, the CA noted that Paragraph 2 of
the Answer admitted the allegations in Paragraphs 2, 3 and 4 of the
complaint that the lease was for five years, starting on August 16, 2000
and to expire on August 15, 2005, at a monthly rental of P60,000.00 on
the first year, P66,000.00 on the second year, and P72,600.00 on the
third up to the fifth year.
The RTC acted correctly in resorting to Section 1 of Rule 34, on
Judgment on the Pleadings, to cut short a needless trial. This Court
agrees with the CA that Comglasco cannot cite Article 1267 of the Civil
Code, and that it must be deemed to have admitted the material
allegations in the complaint. Section 1, Rule 34 reads:
Sec. 1. Judgment on the pleadings. - Where an answer fails to tender
an issue, or otherwise admits the material allegations of the adverse
party’s pleading, the court may, on motion of that party, direct judgment
on such pleading. However, in actions for declaration of nullity or
annulment of marriage or for legal separation, the material facts alleged
in the complaint shall always be proved.
A judgment on the pleadings is a judgment on the facts as pleaded,[17]
and is based exclusively upon the allegations appearing in the pleadings
of the parties and the accompanying annexes.[18] It is settled that the
trial court has the discretion to grant a motion for judgment on the
pleadings filed by a party if there is no controverted matter in the case
after the answer is filed.[19] A genuine issue of fact is that which requires
the presentation of evidence, as distinguished from a sham, fictitious,
contrived or false issue.[20] Come to think of it, under Rule 35, on
Summary Judgments, Comglasco had recourse to move for summary
judgment, wherein it could have adduced supporting evidence to justify
its action on the parties’ lease, but it did not do so. Section 2 of Rule 35
provides:
Sec. 2. Summary judgment for defending party. - A party against whom
a claim, counterclaim, or cross-claim is asserted or a declaratory relief
is sought may, at any time, move with supporting affidavits, depositions
or admissions for a summary judgment in his favor as to all or any part
thereof.
Concerning, now, whether Comglasco’s alleged rental deposit and
advance rentals of P309,000.00 should be credited to Comglasco’s
account, let it suffice to state that it never raised this matter in its answer
to the complaint, nor in its appeal to the CA. Certainly, it cannot do so
now.
Finally, as to whether attorney’s fees may be recovered by Santos,
Article 2208(2) of the Civil Code justifies the award thereof, in the
absence of stipulation, where the defendant’s act or omission has
compelled the plaintiff to incur expenses to protect his interest. The pre-
termination of the lease by Comglasco was not due to any fault of
Santos, and Comglasco completely ignored all four demands of Santos
to pay the rentals due from January 16, 2002 to August 15, 2003,
thereby compelling Santos to sue to obtain relief. It is true that the policy
of the Court is that no premium should be placed on the right to
litigate,[21] but it is also true that attorney’s fees are in the nature of actual
damages, the reason being that litigation costs money.[22] But the Court
agrees with the CA that the lesser amount of P100,000.00 it awarded to
Santos instead of P200,000.00 adjudged by the RTC, is more
reasonable.
WHEREFORE, premises considered, the petition is DENIED for lack of
merit. SO ORDERED.
269
 POON v. PRIME SAVINGS BANK 793 S 141 (SERENO)
SERENO, C.J.:
Before this Court is a Petition for Review on Certiorari[1] assailing the
Court of Appeals (CA) Decision[2] which affirmed the Decision[3] issued
by Branch 21, Regional Trial Court (RTC) of Naga City.
The RTC ordered the partial rescission of the penal clause in the lease
contract over the commercial building of Spouses Jaime and Matilde
Poon (petitioners). It directed petitioners to return to Prime Savings Bank
(respondent) the sum of P1,740,000, representing one-half of the
unused portion of its advance rentals, in view of the closure of
respondent's business upon order by the Bangko Sentral ng Pilipinas
(BSP).
Antecedent Facts
The facts are undisputed.
Petitioners owned a commercial building in Naga City, which they used
for their bakery business. On 3 November 2006, Matilde Poon and
respondent executed a 10-year Contract of Lease[4] (Contract) over the
building for the latter's use as its branch office in Naga City. They agreed
to a fixed monthly rental of P60,000, with an advance payment of the
rentals for the first 100 months in the amount of P6,000,000. As agreed,
the advance payment was to be applied immediately, while the rentals
for the remaining period of the Contract were to be paid on a monthly
basis.[5]
In addition, paragraph 24 of the Contract provides:
24. Should the lease[d] premises be closed, deserted or vacated by the
LESSEE, the LESSOR shall have the right to terminate the lease without
the necessity of serving a court order and to immediately repossess the
leased premises. Thereafter the LESSOR shall open and enter the
leased premises in the presence of a representative of the LESSEE (or
of the proper authorities) for the purpose of taking a complete inventory
of all furniture, fixtures, equipment and/or other materials or property
found within the leased premises.
The LESSOR shall thereupon have the right to enter into a new contract
with another party. All advanced rentals shall be forfeited in favor of the
LESSOR.[6]
Barely three years later, however, the BSP placed respondent under the
receivership of the Philippine Deposit Insurance Corporation (PDIC) by
virtue of BSP Monetary Board Resolution No. 22,[7] which reads:
On the basis of the report of Mr. Candon B. Guerrero, Director of Thrift
Banks and Non-Bank Financial Institutions (DTBNBF1), in his
memorandum dated January 3, 2000, which report showed that the
Prime Savings Bank, Inc. (a) is unable to pay its liabilities as they
became due in the ordinary course of business; (b) has insufficient
realizable assets as determined by the Bangko Sentral ng Pilipinas to
meet its liabilities; (c) cannot continue in business without involving
probable losses to its depositors and creditors; and (d) has wilfully
violated cease and desist orders under Section 37 that has become
final, involving acts or transactions which amount to fraud or a
dissipation of the assets of the institution; x x x.[8] (Emphasis
supplied)
The BSP eventually ordered respondent's liquidation under Monetary
Board Resolution No. 664.[9]
On 12 May 2000, respondent vacated the leased premises and
surrendered them to petitioners.[10] Subsequently, the PDIC issued
petitioners a demand letter[11]asking for the return of the unused
advance rental amounting to P3,480,000 on the ground that paragraph
24 of the lease agreement had become inoperative, because
respondent's closure constituted force majeure. The PDIC likewise
invoked the principle of rebus sic stantibus under Article 1267 of
Republic Act No. 386 (Civil Code) as alternative legal basis for
demanding the refund.
Petitioners, however, refused the PDIC's demand.[12] They maintained
that they were entitled to retain the remainder of the advance rentals
following paragraph 24 of their Contract.
Consequently, respondent sued petitioners before the RTC of Naga City
for a partial rescission of contract and/or recovery of a sum of money.
The RTC Ruling
After trial, the RTC ordered the partial rescission of the lease agreement,
disposing as follows:
WHEREFORE, judgment is hereby entered ordering the partial
rescission of the Contract of Lease dated November 3, 1996 particularly
the second paragraph of Par. 24 thereof and directing the defendant-
spouses Jaime and Matilde Poon to return or refund to the Plaintiff the
sum of One Million Seven Hundred Forty Thousand Pesos (P1,740,000)
representing one-half of the unused portion of the advance rentals.
270
Parties' respective claims for damages and attorney's fees are
dismissed.
No costs.[13]
The trial court ruled that the second clause in paragraph 24 of the
Contract was penal in nature, and that the clause was a valid contractual
agreement.[14] Citing Provident Savings Bank v. CA[15] as legal
precedent, it ruled that the premature termination of the lease due to the
BSP's closure of respondent's business was actually involuntary.
Consequently, it would be iniquitous for petitioners to forfeit the entire
amount of P 3,480,000.[16] Invoking its equity jurisdiction under Article
1229 of the Civil Code,[17] the trial court limited the forfeiture to only one-
half of that amount to answer for respondent's unpaid utility bills and E-
VAT, as well as petitioner's lost business opportunity from its former
bakery business.[18]
The CA Ruling
On appeal, the CA affirmed the RTC Decision,[19] but had a different
rationale for applying Article 1229. The appellate court ruled that the
closure of respondent's business was not a fortuitous event. Unlike
Provident Savings Bank,[20] the instant case was one in which
respondent was found to have committed fraudulent acts and
transactions. Lacking, therefore, was the first requisite of a fortuitous
event, i.e, that the cause of the breach of obligation must be
independent of the will of the debtor.[21]
Still, the CA sustained the trial court's interpretation of the proviso on the
forfeiture of advance rentals as a penal clause and the consequent
application of Article 1229. The appellate court found that the forfeiture
clause in the Contract was intended to prevent respondent from
defaulting on the latter's obligation to finish the term of the lease. It
further found that respondent had partially performed that obligation
and, therefore, the reduction of the penalty was only proper. Similarly, it
ruled that the RTC had properly denied petitioners' claims for actual and
moral damages for lack of basis.[22]
On 10 July 2008,[23] the CA denied petitioners' Motion for
Reconsideration. Hence, this Petition.
Issues
The issues to be resolved are whether (1) respondent may be released
from its contractual obligations to petitioners on grounds of fortuitous
event under Article 1174 of the Civil Code and unforeseen event under
Article 1267 of the Civil Code; (2) the proviso in the parties' Contract
allowing the forfeiture of advance rentals was a penal clause; and (3)
the penalty agreed upon by the parties may be equitably reduced under
Article 1229 of the Civil Code.
COURT RULING
We DENY the Petition.
Preliminarily, we address petitioners' claim that respondent had no
cause of action for rescission, because this case does not fall under any
of the circumstances enumerated in Articles 1381[24] and 1382[25] of the
Civil Code.
The legal remedy of rescission, however, is by no means limited to the
situations covered by the above provisions. The Civil Code uses
rescission in two different contexts, namely: (1) rescission on account of
breach of contract under Article 1191; and (2) rescission by reason of
lesion or economic prejudice under Article 1381.[26] While the term
"rescission" is used in Article 1191, "resolution" was the original term
used in the old Civil Code, on which the article was based. Resolution is
a principal action based on a breach by a party, while rescission under
Article 1383 is a subsidiary action limited to cases of rescission for lesion
under Article 1381 of the New Civil Code.[27]
It is clear from the allegations in paragraphs 12 and 13 of the
Complaint[28] that respondent's right of action rested on the alleged
abuse by petitioners of their right under paragraph 24 of the Contract.
Respondent's theory before the trial court was that the tenacious
enforcement by petitioners of their right to forfeit the advance rentals
was tainted with bad faith, because they knew that respondent was
already insolvent. In other words, the action instituted by respondent
was for the rescission of reciprocal obligations under Article 1191. The
lower courts, therefore, correctly ruled that Articles 1381 and 1382 were
inapposite.
We now resolve the main issues.
The closure of respondent's business was neither a fortuitous nor
an unforeseen event that rendered the lease agreement functus
officio.
Respondent posits that it should be released from its contract with
petitioners, because the closure of its business upon the BSP's order
constituted a fortuitous event as the Court held in Provident Savings
Bank.[29]
The cited case, however, must always be read in the context of the
earlier Decision in Central Bank v. Court of Appeals.[30] The Court ruled
271
in that case that the Monetary Board had acted arbitrarily and in bad
faith in ordering the closure of Provident Savings Bank. Accordingly, in
the subsequent case of Provident Savings Bank it was held that fuerza
mayor had interrupted the prescriptive period to file an action for the
foreclosure of the subject mortgage.[31]
In contrast, there is no indication or allegation that the BSP's action in
this case was tainted with arbitrariness or bad faith. Instead, its decision
to place respondent under receivership and liquidation proceedings was
pursuant to Section 30 of Republic Act No. 7653.[32] Moreover,
respondent was partly accountable for the closure of its banking
business. It cannot be said, then, that the closure of its business was
independent of its will as in the case of Provident Savings Bank. The
legal effect is analogous to that created by contributory negligence in
quasi-delict actions.
The period during which the bank cannot do business due to insolvency
is not a fortuitous event,[33] unless it is shown that the government's
action to place a bank under receivership or liquidation proceedings is
tainted with arbitrariness, or that the regulatory body has acted without
jurisdiction.[34]
As an alternative justification for its premature termination of the
Contract, respondent lessee invokes the doctrine of unforeseen event
under 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.
The theory of rebus sic stantibus in public international law is often cited
as the basis of the above article. Under this theory, the parties stipulate
in light of certain prevailing conditions, and the theory can be made to
apply when these conditions cease to exist.[35] The Court, however, has
once cautioned that Article 1267 is not an absolute application of the
principle of rebus sic stantibus, otherwise, it would endanger the security
of contractual relations. After all, parties to a contract are presumed to
have assumed the risks of unfavorable developments. It is only in
absolutely exceptional changes of circumstance, therefore, that equity
demands assistance for the debtor.[36]
Tagaytay Realty Co., Inc. v. Gacutan[37] lays down the requisites for the
application of Article 1267, as follows:
1. The event or change in circumstance could not have been
foreseen at the time of the execution of the contract.
2. It makes the performance of the contract extremely difficult but
not impossible.
3. It must not be due to the act of any of the parties.
4. The contract is for a future prestation.[38]
The difficulty of performance should be such that the party seeking to
be released from a contractual obligation would be placed at a
disadvantage by the unforeseen event. Mere inconvenience,
unexpected impediments, increased expenses,[39] or even pecuniary
inability to fulfil an engagement,[40] will not relieve the obligor from an
undertaking that it has knowingly and freely contracted.
The law speaks of "service." This term should be understood as referring
to the performance of an obligation or a prestation.[41] A prestation is the
object of the contract; i.e., it is the conduct (to give, to do or not to do)
required of the parties.[42] In a reciprocal contract such as the lease in
this case, one obligation of respondent as the lessee was to pay the
agreed rents for the whole contract period.[43] It would be hard-pressed
to complete the lease term since it was already out of business only
three and a half years into the 10-year contract period. Without a doubt,
the second and the fourth requisites mentioned above are present in this
case.
The first and the third requisites, however, are lacking. It must be noted
that the lease agreement was for 10 years. As shown by the unrebutted
testimony of Jaime Poon during trial, the parties had actually considered
the possibility of a deterioration or loss of respondent's business within
that period:
ATTY. SALES
Q. Now to the offer of that real estate broker for possible lease of your
property at No. 38 General Luna Street, Naga City which was then
the Madam Poon Bakery, what did you tell your real estate broker?
WITNESS (JAIME POON)
A. When Mrs. Lauang approached me, she told me that she has a client
who wants to lease a property in Naga City.
Q. Did she disclose to you the identity of her client?
A. Yes, Sir.
Q. What was the name of her client?
A. That is the Prime Savings Bank.
272
Q. After you have known that it was the Prime Savings Bank that
[wanted] to lease your property located at No. 38 General Luna St.,
Naga City, what did you tell Mrs. Lauang[?]
A. I told her that if the price is good, I am willing to give up the place
where this bakery of mine is situated.
Q. So, did Mrs. Lauang give you the quotation as to the price?
A. Yes, Sir.
Q. What was the amount?
A. She asked first if how much I demand for the price.
Q. What did you tell her?
A. I told her, if they can give me P100,000.00 for the rental, I will give
up the place.
Q. What do you mean P100,000.00 rental?
A. That is only for the establishment [concerned].
Q. What was the period to be covered by the P100,000.00 rental?
A. That is monthly basis.
Q. So after telling Mrs. Lauang that you can be amenable to lease the
place for P100,000.00 monthly, what if any, did Mrs. Lauang tell
you?
A. She told me it is very high. And then she asked me if it is still
negotiable, I answered, yes.
Q. So, what happened after your clarified to her that [it is] still
negotiable?
A. She asked me if there is other condition, and I answered her, yes, if
your client can give me advances I can lease my property.
xxxx
Q. So what is your answer when you were asked for the amount of the
advances?
A. I told her I need 7 million pesos because I need to pay my debts.
xxx
Q. Who was with her when she came over?
A. A certain guy name Ricci and said that he is the assistant manager
of the Prime Savings Bank.
Q. What did you and Mr. Ricci talk about?
A. I told him the same story as I talked with Mrs. Lauang.
Q. Was the agreement finally reached between you and Mr. Ricci?
A. Not yet, Sir.
Q. What happened after that?
A. He said that he [will discuss] the matter with his higher officer, the
branch manager in the person of Henry Lee.
Q. Were you able to meet this Henry Lee?
A. After a week later.
Q. Who was with Henry Lee?
A. Mrs. Lauang.
Q. Was there a final agreement on the day when you and Henry Lee
met?
A. Not yet, he offered to reduce the rental and also the advances.
Finally I gave way after 2 or 3 negotiations.
Q. What happened after 2 or 3 negotiations?
A. We arrived at P60,000.00 for monthly rentals and P6,000,000.00
advances for 100 months.
Q. Was the agreement between you and the representative of the
Prime Savings Bank reduced into writing?
A. Yes Sir.
xxx
Q. Now, Mr. Poon, I would like to direct your attention to paragraphs 4
and 5 of the contract of lease which I read: Inasmuch as the leased
property is presently mortgaged with the PCI Bank, the Lessor and
the Lessee hereby agree that another property with a clean title shall
serve as security for herein Lessee; Provided that the mortgaged
property with PCI Bank is cancelled, the Lessee agrees that the
above-mentioned property shall be released to herein Lessor;
paragraph 5 says: It is hereby stipulated that should the leased
property be foreclosed by the PCI Bank or any other banking or
financial institution, all unused rentals shall be returned by the
Lessor to the Lessee. Now, my question is: Who asked or requested
that paragraphs 4 and 5 be incorporated in the contract of lease?
A. Mr. Lee himself.
Q. The representative of the plaintiff?
273
A. Yes, Sir.
Q. Q. For what purpose did Mr. Lee ask these matters to be
incorporated?
A. Because they are worried that my building might be foreclosed
because it is under [mortgage] with the PCI Bank, that is why I
gave them protection of a clean title. But I also asked them,
what will happen to me, in case your bank will be closed?
Q. When you asked that question, what did Mr. Lee tell you?
A. He told me that I don't have to worry I will have P6,000,000
advances.
Q. What was your protection as to the 6 million payment made by the
plaintiff?
A. That is the protection for me because during that time I have my
bakery and I myself [spent] 2 million for the improvement of that
bakery and I have sacrificed that for the sake of the offer of lease.
Q. In what manner that you are being protected for that 6 million
pesos?
A. They said that if in case the bank will be closed that advance of
6 million pesos will be forfeited in my favor.
Q. And that is what is found in paragraph 24 of the Contract of
Lease which I asked you to read?
A. That is true.[44]
Clearly, the closure of respondent's business was not an unforeseen
event. As the lease was long-term, it was not lost on the parties that
such an eventuality might occur, as it was in fact covered by the terms
of their Contract. Besides, as We have previously discussed, the event
was not independent of respondent's will.
The forfeiture clause in the Contract is penal in nature.
Petitioners claim that paragraph 24 was not intended as a penal clause.
They add that respondent has not even presented any proof of that
intent. It was, therefore, a reversible error on the part of the CA to
construe its forfeiture provision of the Contract as penal in nature.
It is settled that a provision is a penal clause if it calls for the forfeiture
of any remaining deposit still in the possession of the lessor, without
prejudice to any other obligation still owing, in the event of the
termination or cancellation of the agreement by reason of the lessee's
violation of any of the terms and conditions thereof. This kind of
agreement may be validly entered into by the parties. The clause is an
accessory obligation meant to ensure the performance of the principal
obligation by imposing on the debtor a special prestation in case of
nonperformance or inadequate performance of the principal
obligation.[45]
It is evident from the above-quoted testimony of Jaime Poon that the
stipulation on the forfeiture of advance rentals under paragraph 24 is a
penal clause in the sense that it provides for liquidated damages.
Notably, paragraph 5 of the Contract also provides:
5. It is hereby stipulated that should the leased property be foreclosed
by PCI Bank or any other banking or financial institution, all unused
rentals shall be returned by the LESSOR to the LESSEE; x x x.[46]
In effect, the penalty for the premature termination of the Contract works
both ways. As the CA correctly found, the penalty was to compel
respondent to complete the 10-year term of the lease. Petitioners, too,
were similarly obliged to ensure the peaceful use of their building by
respondent for the entire duration of the lease under pain of losing the
remaining advance rentals paid by the latter.
The forfeiture clauses of the Contract, therefore, served the two
functions of a penal clause, i.e., (1) to provide for liquidated damages
and (2) to strengthen the coercive force of the obligation by the threat of
greater responsibility in case of breach.[47] As the CA correctly found,
the prestation secured by those clauses was the parties' mutual
obligation to observe the fixed term of the lease. For this reason, We
sustain the lower courts' finding that the forfeiture clause in paragraph
24 is a penal clause, even if it is not expressly labelled as such.
A reduction of the penalty agreed upon by the parties is warranted
under Article 1129 of the Civil Code.
We have no reason to doubt that the forfeiture provisions of the Contract
were deliberately and intelligently crafted. Under Article 1196 of the Civil
Code,[48]the period of the lease contract is deemed to have been set for
the benefit of both parties. Its continuance, effectivity or fulfillment
cannot be made to depend exclusively upon the free and uncontrolled
choice of just one party.[49] Petitioners and respondent freely and
knowingly committed themselves to respecting the lease period, such
that a breach by either party would result in the forfeiture of the
remaining advance rentals in favor of the aggrieved party.
If this were an ordinary contest of rights of private contracting parties,
respondent lessee would be obligated to abide by its commitment to
petitioners. The general rule is that courts have no power to ease the
burden of obligations voluntarily assumed by parties, just because
274
things did not turn out as expected at the inception of the contract.[50] found in the records. Actual and compensatory damages must be duly
proven with a reasonable degree of certainty.[57]
It must be noted, however, that this case was initiated by the PDIC in To recover moral and exemplary damages where there is a breach of
furtherance of its statutory role as the fiduciary of Prime Savings contract, the breach must be palpably wanton, reckless, malicious, in
Bank.[51] As the state-appointed receiver and liquidator, the PDIC is bad faith, oppressive, or abusive. Attorney's fees are not awarded even
mandated to recover and conserve the assets of the foreclosed bank on if a claimant is compelled to litigate or to incur expenses where no
behalf of the latter's depositors and creditors.[52] In other words, at stake sufficient showing of bad faith exists.[58]None of these circumstances
in this case are not just the rights of petitioners and the correlative have been shown in this case.
liabilities of respondent lessee. Over and above those rights and Finally, in line with prevailing jurisprudence,[59] legal interest at the rate
liabilities is the interest of innocent debtors and creditors of a delinquent of 6% per annum is imposed on the monetary award computed from the
bank establishment. These overriding considerations justify the 50% finality of this Decision until full payment.
reduction of the penalty agreed upon by petitioners and respondent WHEREFORE, premises considered, the Petition for Review on
lessee in keeping with Article 1229 of the Civil Code, which provides: Certiorari is DENIED. The Court of Appeals Decision dated 29
Art. 1229. The judge shall equitably reduce the penalty when the November 2007 and its Resolution dated 10 July 2008 in CA-G.R. CV
principal obligation has been partly or irregularly complied with by the No. 75349 are hereby MODIFIED in that legal interest at the rate of 6%
debtor. Even if there has been no performance, the penalty may also be per annum is imposed on the monetary award computed from the finality
reduced by the courts if it is iniquitous or unconscionable. of this Decision until full payment.
The reasonableness of a penalty depends on the circumstances in each No costs.SO ORDERED.
case, because what is iniquitous and unconscionable in one may be
totally just and equitable in another.[53] In resolving this issue, courts may
consider factors including but not limited to the type, extent and purpose
of the penalty; the nature of the obligation; the mode of the breach and
its consequences; the supervening realities; and the standing and
relationship of the parties.[54]
Under the circumstances, it is neither fair nor reasonable to deprive
depositors and creditors of what could be their last chance to recoup
whatever bank assets or receivables the PDIC can still legally recover.
Besides, nothing has prevented petitioners from putting their building to
other profitable uses, since respondent surrendered the premises
immediately after the closure of its business. Strict adherence to the
doctrine of freedom of contracts, at the expense of the rights of innocent
creditors and investors, will only work injustice rather than promote
justice in this case.[55] Such adherence may even be misconstrued as
condoning profligate bank operations. We cannot allow this to happen.
We are a Court of both law and equity; We cannot sanction grossly unfair
results without doing violence to Our solemn obligation to administer
justice fairly and equally to all who might be affected by our decisions.[56]

Neither do We find any error in the trial court's denial of the damages
and attorney's fees claimed by petitioners. No proof of the supposed
expenses they have incurred for the improvement of the leased
premises and the payment of respondent's unpaid utility bills can be

275
 ILOILO JAR v. COMGLASCO 815 S 1 (MENDOZA)
MENDOZA, J.:
This petition for review on certiorari seeks to reverse and set aside the
January 30,2015 Decision[1] and June 17,2015 Resolution[2] of the Court
of Appeals (CA) in CA-G.R. CV No. 01475, which overturned the
February 17, 2005 Amended Order[3] of the Regional Trial Court, Branch
37, Iloilo City (RTC).
The Antecedents:
On August 16, 2000, petitioner Iloilo Jar Corporation (Iloilo Jar), as
lessor, and respondent Comglasco Corporation/Aguila Glass
(Comglasco), as lessee, entered into a lease contract over a portion of
a warehouse building, with an estimated floor area of 450 square
meters, located on a parcel of land identified as Lot 2-G-1-E-2 in
Barangay Lapuz, La Paz District, Iloilo City. The term of the lease was
for a period of three (3) years or until August 15, 2003.[4]
On December 1, 2001, Comglasco requested for the pre-termination of
the lease effective on the same date. Iloilo Jar, however, rejected the
request on the ground that the pre-termination of the lease contract was
not stipulated therein. Despite the denial of the request for pre-
termination, Comglasco still removed all its stock, merchandise and
equipment from the leased premises on January 15, 2002. From the
time of the withdrawal of the equipment, and notwithstanding several
demand letters, Comglasco no longer paid all rentals accruing from the
said date.[5]
On September 14, 2003, Iloilo Jar sent a final demand letter to
Comglasco, but it was again ignored. Consequently, Iloilo Jar filed a civil
action for breach of contract and damages before the RTC on October
10, 2003.[6]
On June 28, 2004, Comglasco filed its Answer[7] and raised an
affirmative defense, arguing that by virtue of Article 1267 of the Civil
Code (Article 1267),[8]it was released from its obligation from the lease
contract. It explained that the consideration thereof had become so
difficult due to the global and regional economic crisis that had plagued
the economy. Likewise, Comglasco admitted that it had removed its
stocks and merchandise but it did not refuse to pay the rentals because
the lease contract was already deemed terminated. Further, it averred
that though it received the demand letters, it did not amount to a refusal
to pay the rent because the lease contract had been pre-terminated in
the first place.
On July 15, 2004, Iloilo Jar filed its Motion for Judgment on the
Pleadings[9]arguing that Comglasco admitted all the material allegations
in the complaint. It insisted that Comglasco's answer failed to tender an
issue because its affirmative defense was unavailing.
The RTC Order
In its August 18, 2004 Order,[10] the RTC granted the motion for
judgment on the pleadings. It opined that Comglasco's answer admitted
the material allegations of the complaint and that its affirmative defense
was unavailing because Article 1267 was inapplicable to lease
contracts.
Comglasco moved for reconsideration but its motion was denied by the
RTC in its January 24, 2005 Order.[11] After formal defects in the original
order were raised, the RTC issued the assailed February 17, 2005
Amended Order wherein the total amount of unpaid rentals to be paid
was modified from P1,333,200.00 to P333,300.00. Further, it changed
the following: (a) award of attorney's fees from P200,000.00 to
P75,000.00; (b) litigation expenses from P50,000.00 to P30,000.00; and
(c) exemplary damages from P400,000.00 to P200,000.00.
Aggrieved, Comglasco appealed before the CA.
The CA Ruling
In its January 30, 2015 decision, the CA reversed the amended order of
the RTC. The appellate court was of the view that judgment on the
pleadings was improper as Comglasco's answer tendered an issue
considering that Iloilo Jar's material allegations were specifically denied
therein. Further, the CA opined that even if the same were not
specifically denied, the answer raised an affirmative issue which was
factual in nature. It disposed:
IN LIGHT OF ALL THE FOREGOING, the instant appeal is GRANTED.
The Order dated August 18, 2004; the Order dated January 24, 2005;
and the Order dated February 17, 2005 of the Regional Trial Court,
Branch 37, Iloilo City, in Civil Case No. 03- 27960, are REVERSED.
Let the records be REMANDED to the RTC for the conduct of further
proceedings.
SO ORDERED.[12]
Iloilo Jar moved for reconsideration, but its motion was denied by the
CA in its assailed June 17, 2015 resolution.
Hence, this petition.
ISSUES
I
WHETHER OR NOT A DEFENSE RAISED IN THE ANSWER THAT IS
NOT APPLICABLE TO THE CASE AT BAR CAN BE CONSIDERED
AS APPROPRIATELY TENDERING AN ISSUE THAT NEED TO BE
TRIED BY THE TRIAL COURT; AND
276
II
WHETHER OR NOT A JUDGMENT ON THE PLEADINGS IS
APPROPRIATE AND VALID WHEN THE DEFENSE INTERPOSED
BY THE DEFENDANT IN THE ANSWER IS NOT APPLICABLE AS A
DEFENSE TO THE CAUSE OF ACTION AS STATED IN THE
COMPLAINT.[13]
Iloilo Jar argues that Comglasco's answer materially admitted the
allegations of the former's complaint, particularly, that the latter had
removed its merchandise from the lease premises and failed to pay
subsequent rentals, after it had received the demand letters sent. It
points out that Comglasco brushed aside its obligation by merely
claiming that it was no longer bound by the lease contract because it
was terminated due to the financial difficulties it was experiencing in light
of the economic crisis. Iloilo Jar insisted that Comglasco cannot rely on
Article 1267 because it does not apply to lease contracts, which involves
an obligation to give, and not an obligation to do.
In its Comment,[14] dated February 11, 2016, Comglasco countered that
its answer raised material defenses which rendered judgment on the
pleadings improper. It asserted that judgment on the pleadings may be
had only when the answer fails to tender an issue or otherwise admits
the material allegations of the adverse party's pleading. Comglasco
argued that even if the allegations in the complaint were deemed
admitted, the affirmative defenses it raised may give rise to factual
controversies or issues which should be subject to a trial.
In its Reply,[15] dated September 28, 2016, Iloilo Jar reiterated that
judgment on the pleadings was warranted because Comglasco's
answer failed to specifically deny the allegation in the complaint, and
that the affirmative defense alleged therein was improper because
Article 1267 is inapplicable to a lease contract. As such, it stressed that
Comglasco's answer failed to tender an issue.
The Court's Ruling
The Court finds merit in the petition.
Rules of Procedure
strictly complied with;
Exceptions
It must be remembered that the right to appeal is not a natural right but
merely a statutory privilege; a party appealing is, thus, expected to
comply with the requirements of relevant rules otherwise he would lose
the statutory right to appeal.[16]
A review of the records reveals that Iloilo Jar received the Notice of
Resolution of the assailed CA resolution on July 9, 2015. Pursuant to
Section 2 Rule 45 of the Rules of Court,[17] it had fifteen (15) days from
receipt of the resolution or until July 24, 2015 to file its petition for review
on certiorari before the Court.
On the said date, however, Iloilo Jar filed a motion for extension to file
the said petition. In its September 2, 2015 Resolution,[18] the Court
granted that same and extended for thirty (30) days reckoned from the
expiration of the reglementary period within which to file the petition, with
a warning that it would be the last extension to be given. In other words,
Iloilo Jar had until August 23, 2015 to file its petition for review on
certiorari.
On August 24, 2015, Iloilo Jar again filed another motion for
extension[19]requesting an additional thirty (30) days. In its November
25, 2015 Resolution,[20] the Court again granted the same and gave
another 30- day extension reckoned from August 24, 2015. Thus, it had
until September 23, 2015 to file its petition.
Iloilo Jar, unfortunately, filed its petition for review only on September
24, 2015,[21] one day past the twice extended filing period. Again,
procedural rules are not lightly brushed aside as its strict compliance is
necessary for the orderly administration of justice. Thus, even if the filing
of the petition was merely late for a day, it is still a violation of the rules
on appeal, which generally leads to its outright denial.
The tardy filing, notwithstanding, the Court may still entertain the present
appeal. Procedural rules may be disregarded by the Court to serve the
ends of substantial justice. When a petition for review is filed a few days
late, application of procedural rules may be relaxed, where strong
considerations of substantial justice are manifest in the petition, in the
exercise of the Court's equity jurisdiction.[22] In CMTC International
Marketing Corporation v. Bhagis International Trading Corporation,[23]
the Court did not strictly apply procedural rules as it would serve the
interest of justice, elucidating:
Time and again, this Court has emphasized that procedural rules should
be treated with utmost respect and due regard, since they are designed
to facilitate the adjudication of cases to remedy the worsening problem
of delay in the resolution of rival claims and in the administration of
justice. From time to time, however, we have recognized exceptions
to the Rules, but only for the most compelling reasons where
stubborn obedience to the Rules would defeat rather than serve
the ends of justice.
xxx xxx xxx
Ergo, where strong considerations of substantive justice are
manifest in the petition, the strict application of the rules of
procedure may be relaxed, in the exercise of its equity
jurisdiction.Thus, a rigid application of the rules of procedure will not
be entertained if it will obstruct rather than serve the broader interests
277
of justice in the light of the prevailing circumstances in the case under
consideration.[24] [Emphases supplied]
The merits of Iloilo Jar's petition for review warrant a relaxation of the
strict rules of procedure if only to attain justice swiftly. A denial of its
petition will cause the remand of the case, which based on the
circumstances, will unnecessarily delay the proceedings. Thus, the
Court deems it wise to let Iloilo Jar's procedural lapse pass.
Judgment on the
pleadings vis-a-vis
Summary Judgment
Section 1, Rule 34 of the Revised Rules of Court governs motions for
judgment on the pleadings. It reads:
SECTION 1. Judgment on the pleadings. - Where an answers fails to
tender an issue, or otherwise admits the material allegations of the
adverse party's pleading, the court may, on motion of that party,
direct judgment on such pleading. However, in actions for declaration
of nullity or annulment of marriage or for legal separation, the material
facts alleged in the complaint shall always be proved. [Emphasis
supplied]
On the other hand, under Rule 35 of the Rules of Court, a party may
move for summary judgment if there are no genuine issues raised.
In Basbas v. Sayson,[25] the Court differentiated judgment on the
pleadings from summary judgment in that the former is appropriate if the
answer failed to tender an issue and the latter may be resorted to if there
are no genuine issues raised, to wit:
Simply stated, what distinguishes a judgment on the pleadings
from a summary judgment is the presence of issues in the Answer
to the Complaint. When the Answer fails to tender any issue, that is, if
it does not deny the material allegations in the complaint or admits said
material allegations of the adverse party's pleadings by admitting the
truthfulness thereof and/or omitting to deal with them at all, a judgment
on the pleadings is appropriate. On the other hand, when the Answer
specifically denies the material averments of the complaint or
asserts affirmative defenses, or in other words raises an issue, a
summary judgment is proper provided that the issue raised is not
genuine. "A 'genuine issue' means an issue of fact which calls for the
presentation of evidence, as distinguished from an issue which is
fictitious or contrived or which does not constitute a genuine issue for
trial."
xxx xxx xxx
In this case, we note that while petitioners' Answer to respondents'
Complaint practically admitted all the material allegations therein, it
nevertheless asserts the affirmative defences that the action for revival
of judgment is not the proper action and that petitioners are not the
proper parties. As issues obviously arise from these affirmative
defenses, a judgment on the pleadings is clearly improper in this
case.[26] [Emphases supplied]
In the case at bench, Comglasco interposed an affirmative defense in
its answer. While it admitted that it had removed its stocks from the
leased premises and had received the demand letter for rental
payments, it argued that the lease contract had been pre-terminated
because the consideration thereof had become so difficult to comply in
light of the economic crisis then existing. Thus, judgment on the
pleadings was improper considering that Comglasco's Answer raised an
affirmative defense.
Although resort to judgment on the pleadings might have been improper,
there was still no need to remand the case to the RTC for further
proceedings. In Wood Technology Corporation v. Equitable Banking
Corporation (Wood Technology),[27] the Court ruled that summary
judgment may be availed if no genuine issue for trial is raised, viz:
Summary judgment is a procedure aimed at weeding out sham claims
or defenses at an early stage of the litigation. The proper inquiry in this
regard would be whether the affirmative defenses offered by petitioners
constitute genuine issues of fact requiring a full-blown trial. In a
summary judgment, the crucial question is: are the issues raised by
petitioners not genuine so as to justify a summary judgment? A
"genuine issue" means an issue of fact which calls for the
presentation of evidence, as distinguished from an issue which is
fictitious or contrived, an issue that does not constitute a genuine
issue for trial.[28] [Emphasis supplied]
It bears noting that in Wood Technology, the RTC originally rendered a
judgment on the pleadings but was corrected by the Court to be a
summary judgment because of the issue presented by the affirmative
defense raised therein. In the said case, the Court, nonetheless, ruled
in favor of the complainant therein because there was no genuine issue
raised.
Similar to Wood Technology, the judgment rendered by the RTC in this
case was a summary judgment, not a judgment on the pleadings,
because Comglasco's answer raised an affirmative defense.
Nevertheless, no genuine issue was raised because there is no issue of
fact which needs presentation of evidence, and the affirmative defense
Comglasco invoked is inapplicable in the case at bench.
A full blown trial would needlessly prolong the proceedings where a
summary judgment would suffice. It is undisputed that Comglasco
removed its merchandise from the leased premises and stopped paying
rentals thereafter. Thus, there remains no question of fact which must
278
be resolved in trial. What is to be resolved is whether Comglasco was
justified in treating the lease contract terminated due to the economic
circumstances then prevalent.
To evade responsibility, Comglasco explained that by virtue of Article
1267, it was released from the lease contract. It cited the existing global
and regional economic crisis for its inability to comply with its obligation.
Comglasco's position fails to impress because Article 1267 applies only
to obligations to do and not to obligations to give. Thus, in Philippine
National Construction Corporation v. Court of Appeals,[29] the Court
expounded:
Petitioner cannot, however, successfully take refuge in the said
article, since it is applicable only to obligations "to do," and not to
obligations "to give." An obligation "to do" includes all kinds of work or
service; while an obligation "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.
The obligation to pay rentals or deliver the thing in a contract of
lease falls within the prestation "to give"; xxx
The principle of rebus sic stantibus 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. xxx
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.[30] [Emphases and Underscoring supplied]
Considering that Comglasco's obligation of paying rent is not an
obligation to do, it could not rightfully invoke Article 1267 of the Civil
Code. Even so, its position is still without merit as financial struggles due
to an economic crisis is not enough reason for the courts to grant
reprieve from contractual obligations.
In COMGLASCO Corporation/Aguila Glass v. Santos Car Check Center
Corporation,[31] the Court ruled that the economic crisis which may have
caused therein petitioner's financial problems is not an absolute
exceptional change of circumstances that equity demands assistance
for the debtor. It is noteworthy that Comglasco was also the petitioner in
the above-mentioned case, where it also involved Article 1267 to pre-
terminate the lease contract.
Thus, the RTC was correct in ordering Comglasco to pay the unpaid
rentals because the affirmative defense raised by it was insufficient to
free it from its obligations under the lease contract. In addition, Iloilo Jar
is entitled to attorney's fees because it incurred expenses to protect its
interest. The trial court, however, erred in awarding exemplary damages
and litigation expenses.
Exemplary damages may be recovered in contractual obligations if the
defendant acted in wanton or fraudulent, reckless, oppressive or
malevolent manner.[32] As discussed, Comglasco defaulted in its
obligation to pay the rentals by reason of its erroneous belief that the
lease contract was pre-terminated because of the economic crisis. The
same, however, does not prove that Comglasco acted in wanton or
fraudulent, reckless, oppressive or malevolent manner.[33] On the other
hand, attorney's fees may be recovered in case the plaintiff was
compelled to incur expenses to protect his interest because of the
defendant's acts or omissions.
Further, the interest rate should be modified pursuant to recent
jurisprudence.[34]The monetary awards shall be subject to 12% interest
per annum until June 30, 2013 and 6% per annum from July 1, 2013
until fully satisfied.
A Final Note
A lawyer, as an officer of the court, is expected to observe utmost
respect and deference to the Court. As such, he must ensure that he
faithfully complies with rules of procedure especially since they are in
place to aid in the administration of justice. This duty to be subservient
to the rules of procedure is manifested in numerous provisions[35] of the
Code of Professional Responsibility.
The Court admonishes Iloilo Jar' counsel for repeatedly failing to comply
with the rules of procedure and court processes. First, he belatedly filed
the petition for review. Second, Iloilo Jar's counsel failed to file its Reply
within the time originally allotted prompting the Court to require him to
show cause why he should not be held in contempt.[36] Personal
obligations, heavy workload does not excuse a lawyer from complying
with his obligations particularly in timely filing the pleadings required by
the Court.
WHEREFORE, the January 30, 2015 Decision and June 17, 2015
Resolution of the Court of Appeals are REVERSED and SET ASIDE.
The February 17, 2005 Amended Order of the Regional Trial Court,
Branch 37, Iloilo City, is AFFIRMED WITH MODIFCATION in that the
award of exemplary damages and litigation expenses is DELETED. The
monetary award shall be subject to 12% per annum until June 30, 2013
and 6% per annum from July 1, 2013 until fully satisfied.
279
Atty. Raleigh Silvino L. Manikan is ADMONISHED for his repeated
failure to observe the rules of procedure, with a WARNING that a
repetition to strictly comply with procedural rules shall be dealt with more
severely.
SO ORDERED.

280
 1279-1290 – COMPENSATION
BPI v. CA 255 S 571
PUNO, J.:p
Petitioners seek a review of the Decision1 of respondent Court of
Appeals in CA-G.R. CV No. 41543 reversing the Decision2 of the
Regional Trial Court of Quezon City, Branch 79, and ordering petitioners
to credit private respondent's Savings Account No. 3185-0172-56 with
P10,556,00 plus interest.
The facts reveal that on September 25, 1985, private respondent Edvin
F. Reyes opened Savings Account No. 3185-0172-56 at petitioner Bank
of the Philippine Islands (BPI) Cubao, Shopping Center Branch. It is a
joint "AND/OR" account with his wife, Sonia S. Reyes.
Private respondent also held a joint "AND/OR" Savings Account No.
3185-0128-82 with his grandmother, Emeteria M. Fernandez, opened
on February 11, 1986 at the same BPI branch. He regularly deposited
in this account the U.S. Treasury Warrants payable to the order of
Emeteria M. Fernandez as her monthly pension.
Emeteria M. Fernandez died on December 28, 1989 without the
knowledge of the U.S. Treasury Department. She was still sent U.S.
Treasury Warrant No. 21667302 dated January 1, 1990 in the amount
of U.S. $377.003 or P10,556.00. On January 4, 1990, private respondent
deposited the said U.S. treasury check of Fernandez in Savings Account
No. 3185-0128-82. The U.S. Veterans Administration Office in Manila
conditionally cleared the check.4 The check was then sent to the United
States for further clearing.5
Two months after or on March 8, 1990, private respondent closed
Savings Account No. 3185-0128-82 and transferred its funds amounting
to P13,112.91 to Savings Account No. 3185-0172-56, the joint account
with his wife.
On January 16, 1991, U.S. Treasury Warrant No. 21667302 was
dishonored as it was discovered that Fernandez died three (3) days prior
to its issuance. The U.S. Department of Treasury requested petitioner
bank for a refund.6For the first time petitioner bank came to know of the
death of Fernandez.
On February 19, 1991, private-respondent received a PT&T urgent
telegram from petitioner bank requesting him to contact Manager Grace
S. Romero or Assistant Manager Carmen Bernardo. When he called up
the bank, he was informed that the treasury check was the subject of a
claim by Citibank NA, correspondent of petitioner bank. He assured
petitioners that he would drop by the bank to look into the matter. He
also verbally authorized them to debit from his other joint account the
amount stated in the dishonored U.S. Treasury Warrant.7 On the same
day, petitioner bank debited the amount of P10,556.00 from private
respondent's Savings Account No. 3185-0172-56.
On February 21, 1991, private respondent with his lawyer Humphrey
Tumaneng visited the petitioner bank and the refund documents were
shown to them. Surprisingly, private respondent demanded from
petitioner bank restitution of the debited amount. He claimed that
because of the debit, he failed to withdraw his money when he needed
them. He then filed a suit for Damages8 against petitioners before the
Regional Trial Court of Quezon City, Branch 79.
Petitioners contested the complaint and counter claimed, for moral and
exemplary damages. By way of Special and Affirmative Defense, they
averred that private respondent gave them his express verbal
authorization to debit the questioned amount. They claimed that private
respondent later refused to execute a written authority.9
In a Decision dated January 20, 1993, the trial court dismissed the
complaint of private respondent for lack of cause of action.10
Private respondent appealed to the respondent Court of Appeals. On
August 16, 1994, the Sixteenth Division of respondent court in AC-G.R.
CV No. 41543 reversed the impugned decision, viz:
WHEREFORE, the judgement appealed from is set aside, and
another one entered ordering defendant (petitioner) to credit
plaintiff's (private respondent's) S.A. No. 3185-0172-56 with
P10,556.00 plus interest at the applicable rates for express
teller savings accounts from February 19, 1991, until
compliance herewith. The claim and counterclaim for damages
are dismissed for lack of merit. SO ORDERED.11
Petitioners now contend that respondent Court of Appeals erred:
281
I xxx xxx xxx

RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT
HOLDING THAT RESPONDENT REYES GAVE EXPRESS
AUTHORITY TO PETITIONER BANK TO DEBIT HIS JOINT ACCOUNT
WITH HIS WIFE FOR THE VALUE OF THE RETURNED U.S.
TREASURY WARRANT.
Q After that, what happened?
A . . . Dr. Reyes Called me up and I informed him about the
return of the U.S. Treasury Warrant and we are requested to
reimburse for the amount.

II Q What was his response if any?

RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT A Don't you worry about it, there is no personal problem.
HOLDING THAT PETITIONER BANK HAS LEGAL RIGHT TO APPLY
THE DEPOSIT OF RESPONDENT REYES TO HIS OUTSTANDING xxx xxx xxx
OBLIGATION TO PETITIONER BANK BROUGHT ABOUT BY THE
RETURN OF THE U.S. TREASURY WARRANT HE EARLIER Q And so what was his response?
DEPOSITED UNDER THE PRINCIPLE OF "LEGAL
COMPENSATION." A He said that don' t you worry about.

III xxx xxx xxx

RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT
APPLYING CORRECTLY THE PRINCIPLES ENUNCIATED BY THE
SUPREME COURT IN THE CASE OF GULLAS V. PNB, 62 PHIL. 519.
IV.
Q You said that you asked him the advice and he did not
answer, what advice are you referring to?
A In our conversation, he promised me that he will give me
written confirmation or authorization.13

RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT
APPRECIATING THE FACT THAT THE MONEY DEBITED BY
PETITIONER BANK WAS THE SAME MONEY TRANSFERRED BY
RESPONDENT REYES FROM HIS JOINT "AND/OR" ACCOUNT WITH
HIS GRANDMOTHER TO HIS JOINT "AND/OR" ACCOUNT WITH HIS
WIFE.12
We find merit in the petition.
The first issue for resolution is whether private respondent verbally
authorized petitioner bank to debit his joint account with his wife for the
amount of the returned U.S. Treasury Warrant. We find that petitioners
were able to prove this verbal authority by preponderance of evidence.
The testimonies of Bernardo and Romero deserve credence. Bernardo
testified:
The conversation was promptly relayed to Romero who
testified:
xxx xxx xxx
Q . . . Was there any opportunity where in said Mrs. Bernardo
was able to convey to you the contents of their conversation?
A This was immediately relayed to me as manager of the Bank
of the Philippine Islands, sir.
Q What, any was the content of her conversation, if you know?
A Mr. Reyes instructed Mrs. Bernardo to debit his account with
the bank. His account was maintained jointly with his wife then
he promised to drop by to give us a written confirmation, sir.

282
xxx xxx xxx
Q You said that you authorized the debiting of the account on
February 19, 1991, is that correct?
A I did not authorize, we merely followed the instruction of Mr.
Reyes, sir.14
We are not disposed to believe private respondent's allegation that he
did not give any verbal authorization. His testimony is uncorroborated.
Nor does he inspire credence. His past and fraudulent conduct is an
evidence against him.15 He concealed from petitioner bank the death of
Fernandez on December 28, 1989. 16As of that date, he knew that
Fernandez was no longer entitled to receive any pension. Nonetheless,
he-still received the U.S. Treasury Warrant of Fernandez, and on
January 4, 1990 deposited the same in Savings Account No. 3185-
0128-82. To pre-empt a refund, private respondent closed his joint
account with Fernandez (Savings Account No. 31-85-0128-82) on
March 8, 1990 and transferred its balance to his joint account with his
wife (Savings Account No. 3185-0172-56). Worse, private respondent
declared under the penalties of perjury in the withdrawal slip 17 dated
March 8, 1990 that his co-depositor, Fernandez, is still living. By his acts,
private respondent has stripped himself of credibility.
More importantly, the respondent court erred when it failed to rule that
legal compensation is proper. Compensation shall take place when two
persons, in their own right, are creditors and debtors of each other.18
Article 1290 of the Civil Code provides that "when all the requisites
mentioned in Article 1279 are present, compensation takes effect by
operation of law, and extinguishes both debts to the concurrent amount,
even though the creditors and debtors are not aware of the
compensation." Legal compensation operates even against the will of
the interested parties and even without the consent of them. 19 Since
this compensation takes place ipso jure, its effects arise on the very day
on which all its requisites concur. 20 When used as a defense, it retroacts
to the date when its requisites are fulfilled.21
Article 1279 states that in order that compensation may be proper, it is
necessary:
(1) That each one of the obligors be bound principally, and that he be at
the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if
the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the
debtor.
The elements of legal compensation are all present in the case
at bar. The obligors bound principally are at the same time
creditors of each other. Petitioner bank stands as a debtor of
the private respondent, a depositor. At the same time, said bank
is the creditor of the private respondent with respect to the
dishonored U.S. Treasury Warrant which the latter illegally
transferred to his joint account. The debts involved consist of a
sum of money. They are due, liquidated, and demandable. They
are not claimed by a third person.
It is true that the joint account of private respondent and his wife was
debited in the case at bar. We hold that the presence of private
respondent's wife does not negate the element of mutuality of parties,
i.e., that they must be creditors and debtors of each other in their own
right. The wife of private respondent is not a party in the case at bar.
She never asserted any right to the debited U.S. Treasury Warrant.
Indeed, the right of the petitioner bank to make the debit is clear and
cannot be doubted. To frustrate the application of legal compensation
on the ground that the parties are not all mutually obligated would result
in unjust enrichment on the part of the private respondent and his wife
who herself out of honesty has not objected to the debit. The rule as to
mutuality is strictly applied at law. But not in equity, where to allow the
same would defeat a clear right or permit irremediable injustice.22
In VIEW HEREOF, the Decision of respondent Court of Appeals in CA-
G.R. CV No. 41543 dated August 16, 1994 is ANNULLED and SET
ASIDE and the Decision of the trial court in Civil Case No. Q-91-8451
dated January 20, 1993 is REINSTATED. Costs against private
respondent. SO ORDERED.
283
 PNB v. CA 259 S 174
PANGANIBAN, J.:p
Does a local bank, while acting as local correspondent bank,
have the right to intercept funds being coursed through it by its
foreign counterpart for transmittal and deposit to the account of
an individual with another local bank, and apply the said funds
to certain obligations owed to it by the said individual?
Assailed in this petition is the Decision of respondent Court of
Appeals2 in CA-G.R. CV No. 27926 rendered on June 16, 1992
affirming the decision of the Regional Trial Court, Branch 107 of
Quezon City, the dispositive portion of which read:3
WHEREFORE, judgment is hereby rendered:
1) In the main complaint, ordering the defendant (herein petitioner PNB)
to pay the plaintiff (private respondent herein) the sum of US$2,627.11
or its equivalent in Philippine currency with interest at the legal rate from
January 13, 1987, the date of judicial demand;
2) The plaintiff's supplemental complaint is hereby dismissed (sic);
3) The defendant's counterclaims are likewise dismissed.
The Facts
The factual antecedents as quoted by the respondent Court are
reproduced hereinbelow, the same being undisputed by the parties:4
The body of the decision reads:
After a close scrutiny and analysis of the pleadings as well as
the evidence of both parties, the Court makes the following
conclusions:
(a) The defendant applied/appropriated the amounts of
$2,627.11 and P34,340.38 from remittances of the plaintiff's
principals (sic) abroad. These were admitted by the defendant,
subject to the affirmative defense of compensation for what is
owing to it on the principle of solution (sic) indebiti.
(b) The first remittance was made by the NCB of Jeddah for the
benefit of the plaintiff, to the credited to his account at Citibank,
Greenhills Branch; the second was from Libya, and was
intended to be deposited at the plaintiff's account with the
defendant, No. 830-2410;
(c) The plaintiff made a written demand upon the defendant for
remittance of the equivalent of $2,627.11 by means of a letter
dated December 4, 1986 (Exh. D). This was answered by the
defendant on December 22, 1986 (Exh. 13), inviting the plaintiff
to come for a conference;
(d) There were indeed two instances in the past, one in
November 1980 and the other in January 1981 when the
plaintiff's account No. 830-2410 was doubly credited with the
equivalents of $5,679.23 and $5,885.38, respectively, which
amounted to an aggregate amount of P87,380.44. The
defendant's evidence on this point (Exhs. 1 thru 11, 14 and 15;
see also Annexes C and E to defendant's Answer), were never
refuted nor impugned by the plaintiff. He claims, however, that
plaintiff's claim has prescribed.
(e) Defendant PNB made a demand upon the plaintiff for refund
of the double or duplicated credits erroneously made on
plaintiff's account, by means of a letter (Exh. 12) dated October
23, 1986 or 5 years and 11 months from November 1980, and
5 years and 9 months from January 1981. Such letter was
answered by the plaintiff on December 2, 1986 (Annex C,
Complaint). This plaintiff's letter was likewise replied to by the
defendant through Exh. 13;
(f) The deduction of P34,340.58 was made by the defendant not
without the knowledge and consent of the plaintiff, who was
issued a receipt No. 857576 dated February 18, 1987 (Exh. E)
by the defendant.
There is no question that the two erroneous double payments made to
plaintiff's accounts in 1980 and 1981 created an extra-contractual
obligation on the part of the plaintiff in favor of the defendant, under the
principle of solutio indebiti, as follows:
284
If something is received when there is no right to demand it, and it was
unduly delivered through (sic) mistake, the obligation to return it arises.
(Article 2154, Civil Code of the Phil.)
Two issues were raised before the trial court, namely, first, whether the
herein petitioner was legally justified in making the compensation or set-
off against the two remittances coursed through it in favor of private
respondent to recover on the double credits it erroneously made in 1980
and 1981, based on the principle solutio indebiti, and second, whether
or not petitioner's claim is barred by the statute of limitations. The trial
court's ratiocination, as quoted by the appellate Court, follows:5
Article 1279 of the Civil Code provides:
In order that compensation may prosper, 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 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 by any retention or
controversy, commenced by third persons and communicated
in due time to the debtor.
In the case of the $2,627.11, requisites Nos. 2 through 5 are apparently
present, for both debts consist in a sum of money, are both due,
liquidated and demandable, and over neither of them is there a retention
or controversy commenced by third persons and communicated in due
time to the debtor. The question, however, is, where both of the obligors
bound principally, and was each one of them a debtor and creditor of
the other at the same time?
Analyzing now the relationship between the parties, it appears that:
(a) With respect to the plaintiff's being a depositor of the
defendant bank, they are creditor and debtor respectively
(Guingona, et.al. vs. City Fiscal, et. al., 128 SCRA 577);
(b) As to the relationship created by the telexed fund transfers
from abroad: A contract between a foreign bank and local bank
asking the latter to pay an amount to a beneficiary is a
stipulation pourautrui. (Bank of America NT & SA vs. IAC, 145
SCRA 419).
A stipulation pour autrui is a stipulation in favor of a third person
(Florentino vs. Encarnacion, 79 SCRA 193; Bonifacio Brothers vs. Mora,
20 SCRA 261; Uy Tam vs. Leonard, 30 Phils. 475).
Thus between the defendant bank (as the local correspondent of the
National Commercial Bank of Jeddah) and the plaintiff as beneficiary,
there is created an implied trust pursuant to Art. 1453 of the Civil Code,
quoted as follows:
When the property is conveyed to a person in reliance upon his declared
intention to hold it for, or transfer it to another or the grantor, there is an
implied trust in favor of the person whose benefit is contemplated (sic).
(c) By the principle of solutio indebiti (Art. 2154, Civil Code), the
plaintiff who unduly, received something (sic) by mistake (i.e.,
the 2 double credits, although he had no right to demand it),
became obligated to the defendant to return what he unduly
received. Thus, there was created between them a relationship
of obligor and obligee, or of debtor and creditor under a quasi-
contract.
In view of the foregoing, the Court is of the opinion that the parties are
not both principally bound with respect to the $2,627.11 from Jeddah;
neither are they at the same time principal creditor of the other.
Therefore, as matters stand, the parties' obligations are not subject to
compensation or set off under Art. 1279 of the Civil Code, for the reason
that the defendant is not a principal debtor nor is the plaintiff a principal
creditor insofar as the amount of $2,627.11 is concerned. They are
debtor and creditor only with respect to the double payments; but are
trustee-beneficiary as to the fund transfer of $2,627.11.
Only the plaintiff is principally bound as a debtor of the defendant to the
extent of the double credits. On the other hand, the defendant was an
285
implied trustee, who was obliged to deliver to the Citibank for the benefit
of the plaintiff the sum of $2,627.11.
Thus while it may be concluded that the plaintiff owes the defendant the
equivalent of the sums of $5,179.23 and $5,885.38 erroneously doubly
credited to his account, the defendant's actuation in intercepting the
amount of $2,627.11 supposed to be remitted to another bank is not only
improper; it will also erode the trust and confidence of the international
banking community in the banking system of the country, something we
can ill afford at this time when we need to attract and invite deposits of
foreign currencies.
It would have been different has the telex advice from NCB of Jeddah
been for deposit of $2,627.11 to plaintiff's account No. 830-2410 with
the defendant bank. However, the defendant alleged this for the first
time in its Memorandum (Pls. see par. 16, p. 6 of defendant's
Memorandum). There was neither any allegation thereof in its pleadings,
nor was there any evidence to prove such fact. On the contrary, the
defendant admitted that the telex advice was for credit of the amount of
$2,627.11 to plaintiff's account with Citibank, Greenhills, San Juan,
Metro-Manila (Pls. see par. of defendant's Answer with Compulsary
Counterclaim, in relation to plaintiff's Complaint). Hence, it is submitted
that the set-off or compensation of $2,627.11 against the double
payments to plaintiff's account is not in accordance with law.
On this point, the Court finds the plaintiff's theory of agency to be
untenable. For one thing, there was no express contract of agency. On
the other hand, were we to infer that there was an implied agency, the
same would not be between the plaintiff and defendant, but rather,
between the National Commercial Bank of Jeddah as principal on the
one hand, and the defendant as agent on the other. Thus, in case of
violation of the agency, the cause of action would accrue to the NCB
and not to the plaintiff.
The P34,340.38 subject of the supplemental complaint is quite another
thing. The plaintiff's Exh. "E", which is a receipt issued to the plaintiff by
the defendant for the amount of P34,340.00 in "full settlement of
accounts receivables with RICB Fund Transfer Department, PNB-
Escolta base on Legal Department Memo dated February 28, 1987"
seems to uphold the defendant's theory that the said amount was
voluntarily delivered by the plaintiff to the defendant as alleged in the
last paragraph of defendant's memorandum. The same is in accordance
with the defendant's answer, as follows:
The retention and application of the amount of P34,340.58 was done in
a manner consonant with basic due process considering that plaintiff
was not only furnished documented proof of the cause but was also
given the opportunity to con(tro)vert such proof .
Moreover, plaintiff, through counsel, communicated his unequivocal and
unconditional consent to the retention and application of the amount in
question. (Pls. see paragraphs 8-9, defendant's Answer with
Compulsary Counterclaim to Plaintiff's Supplemental Complaint).
This conclusion is borne by the fact that the receipt is in the hands of the
plaintiff, indicating that such receipt was handed over to the plaintiff
when he "paid" or allowed the deduction from the amount of $28,392.38
from Libya.
At any rate, the plaintiff in his Memorandum, stated that the subsequent
fund transfer from Brega Petroleum Marketing Company of Libya (from
where the P34,340.38 was deducted) was intended for credit and
deposit in plaintiff's account at the defendant's Bank CA No. 830-2410
(per par. 1, page 2, Memorandum for the plaintiff). Such being the case,
the Court believes that insofar as the amount of P34,340.38 is
concerned, all the requirements of Art. 1279 of the Civil Code are
present, and the said amount may properly be the subject of
compensation or set-off. And since all the requisites of Art. 1279 of the
Civil Code are present (insofar as the amount of P34,392.38 is
concerned), compensation takes place by operation of law (Art. 1286,
Ibid.), albeit only partial with respect to plaintiff's indebtedness of
P7,380.44.
Now, on the question of prescription, the Court believes that Art. 1149
as cited by the plaintiff is not applicable in this case. Rather, the
applicable law is Art. 1145, which fixes the prescriptive period for actions
upon a quasi contract (such as solution indebiti) at six years.
In the dispositive portion of its decision, the trial court ruled that the
herein petitioner was obligated to pay private respondent the amount of
US$2,627.11 or its peso equivalent, with interest at the legal rate. The
court dismissed all other claims and counterclaims.
On appeal to the respondent Court, petitioner bank continued to insist
that it validly retained the US$2,627.11 in payment of the private
respondent's indebtedness by way of compensation or set-off, as
provided under Art. 1279 of the Civil Code.
286
The respondent Court of Appeals rejected such argument, saying:
The telegraphic money transfer was sent by the IBN, plaintiff's
principal in Jeddah, Saudi Arabia, thru the National Commercial
Bank of Jeddah, Saudi Arabia (NCB, for short), for the
credit/account of plaintiff with the Citibank, Greenhills Branch,
San Juan, Metro Manila, coursed thru the PNB's head office,
the NCB's corresponden(t) bank in the Philippines.
The credit account, or simply account means that the amount
stated in the telegraphic money transfer is to be credited in the
account of plaintiff with the Citibank, and, in that sense,
presupposes a creditor-debtor relationship between the plaintiff,
as creditor and the Citibank, as debtor. Withal the telegraphic
money transfer, no such creditor-debtor relationship could have
been created between the plaintiff and defendant.
The telegraphic money transfer, or simply telegraphic transfer(,)
was purchased by the IBN from the NCB in Saudi Arabia, and
since the PNB is the NCB's corresponden(t) bank in the
Philippines, there is created between the two banks a sort of
communication exchange for the corresponden(t) bank to
transmit and/or remit and/or pay the value of the telegraphic
transfer in accordance with the dictate of the correspondence
exchange. Some such responsibility of the corresponden(t)
bank is akin to section 7 of the Rules and Regulations
Implementing E.O. 857, as amended by E.O. 925, ". . . to take
charge of the prompt payment" of the telegraphic transfer, that
is, by transmitting the telegraphic money transfer to the Citibank
so that the amount can be promptly credited to the account of
the plaintiff with the said bank. That is all that the PNB can do
under the remittance arrangement that it has with the NCB. With
its responsibility as defined as well as by the nature of its
banking business and the responsibility attached to it, and
through which the industry, trade and commerce of all countries
and communities are carried on, the PNB's liability as
corresponden(t) bank continues until it has completely (sic)
performed and discharged it(s) obligation thereunder."
(emphasis ours)
Hence, the respondent Court affirmed the trial court's holding in
toto.
Dissatisfied, petitioner bank comes before this Court seeking a
review of the assailed Decision.
The Issue
Petitioner's arguments revolve around one single issue:6
WHILE THE RESPONDENT COURT CORRECTLY FOUND PRIVATE
RESPONDENT LEGALLY BOUND (UNDER THE PRINCIPLE OF
SOLUTIO INDEBITI) TO RETURN TO PNB THE SUM OF
US$2,627.11, IT ERRED IN NOT RULING THAT LEGAL
COMPENSATION HAS TAKEN PLACE WHEN PNB WAS ORDERED
BY THE TRIAL COURT TO RETURN TO PRIVATE RESPONDENT
THE SAME AMOUNT. SUCH COURSE OF ACTION IS IN
CONSONANCE WITH SPEEDY AND SUBSTANTIAL JUSTICE, AND
WOULD PREVENT THE UNNECESSARY FILING OF A
SUBSEQUENT SUIT BY PNB FOR THE COLLECTION OF THE SAME
AMOUNT FROM PRIVATE RESPONDENT.
The Court's Ruling
We note that in framing the issue in the manner aforecited, the petitioner
implicity admits the correctness of the respondent Court's affirmance of
the trial court's ruling finding herein petitioner liable to private
respondent for the sum of US$2,627.11 or its peso equivalent. And it
could not have done otherwise. After a careful scrutiny of both the
decision of the trial court and that of the appellate court, we find no
reversible error whatsoever in either ruling, and see no need to add to
the extensive discussions already made regarding the non-existence of
all the requisites for legal compensation to take place.
But petitioner has adopted a novel theory, contending that since
respondent Court found that private respondent is "an obligor of PNB
and the latter, as aforesaid, has become an obligor of private respondent
(resulting in legal compensation), the (h)onorable respondent court
should have ordered private respondent to pay PNB what the latter is
bound by the trial court's decision to return the former."7
By this simplistic approach, petitioner in effect seeks to render nugatory
the decisions of the trial court and the appellate Court, and have this
Court validate its original misdeed, thereby making a mockery of the
entire judicial process of this country. What the petitioner bank is
effectively saying is that since the respondent Court of Appeals ruled
287
that petitioner bank could not do a shortcut and simply intercept funds
being coursed through it, for transmittal to another bank, and eventually
to be deposited to the account of an individual who happens to owe
some amount of money to the petitioner, and because respondent Court
order petitioner bank to return intercepted amount to said individual, who
in turn was found by the appellate Court to be indebted to petitioner
bank, THEREFORE, there must now be legal compensation of the
amounts each owes the other, and hence, there is no need for petitioner
bank to actually return the amount, and finally, that petitioner bank ends
up in exactly the same position as when it first took the improper and
unwarranted shortcut by intercepting the said money transfer,
notwithstanding the assailed Decision saying that this could not be done!

We see in this petition a clever ploy to use this Court to validate or

legalize an improper act of the petitioner bank, with the not impossible
intention of using this case as a precedent for similar acts of interception
in the future. This piratical attitude of the nation's premier bank deserves
a warning that it should not abuse the justice system in its collection
efforts, particularly since we are aware that if the petitioner bank had
been in good faith, it could have easily disposed of this controversy in
ten minutes flat by means of an exchange of checks with private
respondent for the same amount. The litigation could have ended there,
but it did not. Instead, this plainly unmeritorious case had to clog our
docket and take up the valuable time of this Court.

WHEREFORE, the instant petition is herewith DENIED for being plainly

unmeritorious, and the assailed Decision is AFFIRMED in toto. Costs
against petitioner.

SO ORDERED.

288
 EGV REALTY v. CA 310 S 657
KAPUNAN, J.:
This petition for review on certiorari seeks to set aside the decision and
resolution of the Court of Appeals rendered on February 17, 1995 and
on May 15, 1995, respectively, in CA-G.R. SP No. 22735 reversing the
order of the Securities and Exchange Commission (SEC) in SEC-AC
No. 271 issued on August 21, 1990.
The following facts are not disputed:
Petitioner E.G.V. Realty Development Corporation (hereinafter referred
to as E.G.V. Realty) is the owner/developer of a seven-storey
condominium building known as Cristina Condominium. Cristina
Condominium Corporation (hereinafter referred to as CCC) holds title to
all common areas of Cristina Condominium and is in charge of
managing, maintaining and administering the condominium's common
areas and providing for the building's security.
Respondent Unisphere International, Inc. (hereinafter referred to as
Unisphere) is the owner/occupant of Unit 301 of said condominium.
On November 28, 1981, respondent Unisphere's Unit 301 was allegedly
robbed of various items valued at P6,165.00. The incident was reported
to petitioner CCC.
On July 25, 1982, another robbery allegedly occurred at Unit 301 where
the items carted away were valued at P6,130.00, bringing the total value
of items lost to P12,295.00. This incident was likewise reported to
petitioner CCC.
On October 5, 1982, respondent Unisphere demanded compensation
and reimbursement from petitioner CCC for the losses incurred as a
result of the robbery.
Petitioner CCC denied any liability for the losses claimed to have been
incurred by respondent Unisphere, stating that the goods lost belonged
to Amtrade, a third party.
As a consequence of the denial, respondent Unisphere withhelpayment
of its monthly dues starting November 1982.
On September 13, 1983, respondent Unisphere received a letter from
petitioner CCC demanding payment of past dues.
On December 5, 1984, petitioner E.G.V. Realty executed a Deed of
Absolute Sale over Unit 301 in favor of respondent Unisphere.
Thereafter, Condominium Certificate of Title No. 7010 was issued in
respondent Unisphere's name bearing the annotation of a lien in favor
of petitioner E.G.V. Realty for the unpaid condominium dues in the
amount of P13,142.67.
On January 28, 1987, petitioners E.G.V. Realty and CCC jointly filed a
petition with the Securities and Exchange Commission (SEC) for the
collection of the unpaid monthly dues in the amount of P13,142.67
against respondent Unisphere.
In its answer, respondent Unisphere alleged that it could not be deemed
in default in the payment of said unpaid dues because its tardiness was
occasioned by the petitioners' failure to comply with what was incumbent
upon them, that is, to provide security for the building premises in order
to prevent, if not to stop, the robberies taking place therein. It asserted
as counterclaim that the amount of P12,295.00 representing the total
value of its loss due to the two robberies be awarded to it by way of
damages for the latter's failure to secure the premises.
On January 11, 1989, SEC Hearing Officer Antero F.L. Villaflor, Jr.
rendered a decision which dispositively read as follows:
WHEREFORE, respondent is hereby ordered to pay petitioner the sum
of P13,142.67 within fifteen (15) days from receipt of this Decision.
Further, petitioner is hereby ordered to pay respondent within fifteen (15)
days from receipt of this Decision, the sum of P12,295.00.
Let copy of this Decision be furnished the Register of Deeds of Makati,
Metro Manila for the purpose of cancellation of the lien in favor of
Cristina Condominium found at the back of Title for unpaid monthly dues
in the sum of P13,142.67, upon full payment of respondent of said
amount unto petitioner.
SO ORDERED.[1]
Both parties filed their respective motions for reconsideration.
On July 17, 1989, the decision of Hearing Officer Villaflor was modified
and amended by Hearing Officer Enrique L. Flores, Jr. to read as
follows:
WHEREFORE, respondent's motion for reconsideration should be, as it
is, hereby DENIED and the petitioners' motion for reconsideration is
hereby GRANTED.
Accordingly, the decision dated January 11, 1989, is partially
reconsidered to the effect that petitioners are not made liable for the
value of the items/articles burglarized from respondent's condominium
unit.
SO ORDERED.[2]
On July 18, 1989, respondent Unisphere filed a notice of appeal with the
SEC en banc questioning the above-mentioned decision.
289
On August 15, 1989, it filed a motion for an extension of thirty (30) days
to file its memorandum on appeal thirty (30) days from the stated
deadline of August 18, 1989.
Said motion was granted on August 17, 1989.
On September 18, 1989, respondent Unisphere filed a second motionfor
extension of time to file its memorandum on appeal for another twenty
(20) days.
The motion was likewise granted on September 26, 1989.
On October 9, 1989, respondent Unisphere filed its memorandum on
appeal.
After the petitioners filed their reply thereto, the SEC en banc issued the
Order dated February 23, 1990 which is quoted hereunder:
Before this Commission en banc is an appeal from the Order dated July
17, 1989 of the Hearing Officer in SEC Case No. 3119 entitled `E.G.V.
Realty Development Corporation and Cristina Condominium
Corporation vs. Unisphere International , Inc.'
The records of the case show that respondent-appellant received a copy
of the above order on July 18, 1989 and filed its Notice of Appeal on July
21, 1989. On August 15, 1989, respondent asked for an extension of
thirty (30) days to file its Memorandum on Appeal which was granted on
August 17, 1989.
On September 18, 1989, respondent asked for an additional period of
twenty (20) days until October 8, 1989 to file his Appeal which was also
granted.
Respondent filed his Memorandum on October 13, 1989, five days after
the due date.
The penultimate paragraph of Section 6 of Presidential Decree no. 902-
A (as amended) clearly provides:
x x x The decision, ruling or order of any such Commissioner, bodies,
boards, committees, and/or officer as may be appealed to the
Commission sitting en banc within thirty (30) days after receipt by the
appellant of notice of such decision, ruling or order. The Commission
shall promulgate rules or procedure to govern the proceedings, hearings
and appeals of cases falling within its jurisdiction.
Pursuant to the above provision, the Commission promulgated the
Revised Rules of Procedure of the Securities and Exchange
Commisison, Section 3, Rule XVI of said Rules reiterates the thirty (30)-
day period provided for under the above provision:
Appeal may be taken by filing with the Hearing Officer who promulgated
the decision, order or ruling within thirty (30) days from notice thereof,
and serving upon the adverse party, a notice of appeal and a
memorandum on appeal and paying the corresponding docket fee
therefor. The appeal shall be considered perfected upon the filing of the
memorandum on appeal and payment of the docket fee within the period
hereinabove fixed.
The Commission en banc notes that respondent had, extensions
included, a total of eighty (80) days to file its Appeal memorandum but
failed to do so.
WHEREFORE, premises considered, the instant appeal is hereby
dismissed for having been filed out of time.
SO ORDERED.[3]
Respondent Unisphere moved for a reconsideration of the above-
quoted order but the same was denied, and so was it its second motion
for reconsideration.
On September 6, 1990, respondent Unisphere filed a notice of appeal
to the SEC en banc in order to question the latter's ruling to the Court of
Appeals pursuant to Rule 43 of the Rules of Court, as amended by
Republic Act No. 5434.
On September 10, 1990, it filed a notice of appeal to the Court of
Appeals.
The Court of Appeals reversed the SEC en banc's Order of August 21,
1990 in its Decision dated February 17, 1995 which dispositively reads
as follows:
WHEREFORE, the instant petition is GRANTED and the assailed Order
dated August 21, 1989 is hereby REVERSED and SET ASIDE. Another
judgment is entered declaring that the appeal memorandum before the
SEC (en banc) of appellant Unisphere was filed on time and that the
amount of P13,142.67, the unpaid monthly dues of Unisphere to the
Corporation should be offset by the losses suffered by the Unisphere in
the amount of P12,295.00. Unisphere is hereby ordered to pay the
Cristina Condominium Corporation the amount of P847.67 representing
the balance after offsetting the amount of P12,295.00 against the said
P13,142.67, with 12% interest per annum from January 28, 1987 when
the Joint Petition of the petitioners-appellees was filed before the SEC
(for collection and damages) until fully paid.
No pronouncement as to costs. SO ORDERED.[4]
Petitioners moved for reconsideration of the said decision but the same
was denied by the appellate court on May 15, 1995.
Hence, the instant petition for review interposed by petitioners E.G.V.
Realty and CCC challenging the decision of the Court of Appeals on the
following grounds: (a) the Court of Appeals did not acquire jurisdiction
over respondent Unisphere's appeal because the latter failed to comply
with the prescribed mode of appeal; (b) even if the jurisdictional infirmity
is brushed aside, the SEC en banc Order dated February 23, 1990 has
290
already attained finality; and (c) the ruling of the Court of Appeals on the
offsetting of the parties' claims is unfounded.
A perusal of the foregoing issues readily reveals that petitioners raise
two (2) aspects of the case for consideration, that is, the procedural
aspect and the substantive aspect.
We will discuss the procedural aspect first. Petitioners contend that (a)
the Court of Appeals did not acquire jurisdiction over the appeal because
respondent failed to comply with the prescribed mode of appeal; and (b)
assuming that the Court of Appeals has jurisdiction, the assailed SEC
en banc Order of February 23, 1990 had already become final and
executory.
Anent the first contention, petitioners claim that respondent Unisphere
erred in merely filing a notice of appeal as in ordinary civil cases from
the regular courts instead of a petition for review with the Court of
Appeals.
Contrary to petitioners' contention, respondent Unisphere complied with
the prescribed mode of appeal. At the time the appeal was elevated to
the Court of Appeals in 1990, the rule governing recourse to the Court
of Appeals from the decision, resolution or final order of a quasi-judicial
body was Rule 43 of the Revised Rules of Court, as amended by
Republic Act No. 5434 as embodied in Batas Pambansa Blg. 129 and
its Interim Rules and Guidelines.[5] The rule provided for a uniform
procedure for appeals from the specified administrative tribunals, SEC
included, to the Court of Appeals by filing a notice of appeal with the
appellate court and with the court, officer, board, commission or agency
that made or rendered the assailed ruling within fifteen (15) days from
notice thereof. Records bear out that respondent Unisphere complied
with the foregoing rules when it filed a notice of appeal with the SEC en
banc on September 6, 1990 and with the Court of Appeals on
September 10, 1990. Clearly therefore, respondent Unisphere complied
with the proper mode of appeal as mandated by the rules.
With respect to the second contention, petitioners asseverate that the
February 23, 1990 order of the SEC en banc has already become final
and unappealable, therefore can no longer be reversed, amended or
modified. They maintain that respondent Unisphere received a copy of
said order on February 26, 1990 and that ten (10) days thereafter, it filed
its motion for reconsideration. Said motion was denied by the SEC on
May 14, 1990 which was received by respondent Unisphere on May 15,
1990. Consequently, they assert that respondent Unisphere had only
the remaining five (5) days or on May 20, 1990 within which to file a
notice of appeal. However, instead of appealing therefrom, respondent
Unisphere filed a second motion for reconsideration on May 25, 1990
with the SEC en banc. Petitioners contend that no second motion for
reconsideration is allowed by SEC Rules unless with express prior to
leave of the hearing officer. Said second motion for reconsideration was
likewise denied on August 21, 1990. Fifteen (15) days later or on
September 5, 1990, respondent Unisphere filed its notice of appeal.
Section 8, Rule XII of the Revised Rules of Procedure of the SEC
provides that:
SEC. 8. Reconsideration.-- Within thirty (30) days from receipt of the
order or decision of the Hearing Officer, the aggrieved party may file a
motion for reconsideration of such order or decision together with proof
of service thereof upon the adverse party. No more than one motion for
reconsideration shall be allowed unless with the express prior leave of
the Hearing Officer.
Respondent Unisphere's non-observance of the foregoing rule rendered
the February 23, 1990 and the May 14, 1990 orders of the SEC en banc
final and unappealable. Its failure to perfect its appeal in the manner and
within the period fixed by law rendered the decision sought to be
appealed final, with the result that no court can exercise appellate
jurisdiction to review the decision.[6] Contrary to petitioners' view, the
appeal to the Court of Appeals in this case should have been perfected
within fifteen (15) days from receipt of the order denying the motion for
reconsideration on May 15, 1990. But instead of appealing, respondent
Unisphere filed a prohibited second motion for reconsideration without
express prior leave of the hearing officer. Consequently, when it
subsequently filed its notice of appeal on September 6, 1990, it was
already eighty-two (82) days late. Therefore, the appeal before the Court
of Appeals could have been dismissed outright for being time-barred.
Rules of procedure are intended to ensure the proper administration of
justice and the protection of substantive rights in judicial and quasi-
judicial proceedings. Blatant violation of such rules smacks of a dilatory
tactic which we simply cannot countenance.
Now, we go to the substantive aspect.
It is petitioners' assertion that the ruling of the Court of Appeals to offset
the alleged losses as a result of the robberies in the amount of
P12,295.00 from the unpaid monthly dues of P13,142.67 is unfounded
because respondent Unisphere is not the owner of the goods lost but a
third party, Amtrade. Respondent Unisphere, on its part, claims that this
issue is factual, hence, not a proper issue to raise before this Court.
Actually, the issue for our consideration is whether or not set-off or
compensation has taken place in the instant case. The Court of Appeals'
291
dissertation on the matter is commendably instructive, but, lamentably,
it reached a different conclusion. We quote pertinent portions of the
assailed decision:
Compensation or offset under the New Civil Code takes place only when
two persons or entities in their own rights, are creditors and debtors of
each other. (Art. 1278). Xxx
A distinction must be made between a debt and a mere claim. A debt is
an amount actually ascertained. It is a claim which has been formally
passed upon by the courts or quasi-judicial bodies to which it can in law
be submitted and has been declared to be a debt. A claim, on the other
hand, is a debt in embryo. It is mere evidence of a debt and must pass
thru the process prescribed by law before it develops into what is
properly called a debt. (Vallarta vs. CA, 163 SCRA 587). Absent,
however, any such categorical admission by an obligor or final
adjudication, no compensation or off-set can take place. Unless
admitted by a debtor himself, the conclusion that he is in truth indebted
to another cannot be definitely and finally pronounced, no matter how
convinced he may be from the examination of the pertinent records of
the validity of that conclusion the indebtedness must be one that is
admitted by the alleged debtor or pronounced by final judgment of a
competent court or in this case by the Commission (Villanueva vs.
Tantuico, 182 SCRA 263).
There can be no doubt that Unisphere is indebted to the Corporation for
its unpaid monthly dues in the amount of P13,142.67. This is admitted.
But whether the Corporation is indebted to Unisphere is vigorously
disputed by the former.
It appears quite clear that the offsetting of debts does not extend to
unliquidated, disputed claims arising from tort or breach of contract.
(Compania General de Tobacos vs. French and Unson, 39 Phil. 34;
Lorenzo and Martinez vs. herrero, 17 Phil. 29).
It must be noted that Unisphere just stopped paying its monthly dues to
the Corporation on September 23, 1983 without notifying the latter. It
was only on February 24, 1984, or five months after, that it informed the
corporation of its suspension of payment of the condominium dues to
offset the losses it suffered because of the robberies.
In resisting the finding which underscores their negligence, E.G.V.
Realty and Cristina condominium corporation, would have this Court
appreciate in their favor the admission of Mr. Alfonso Zamora of
Unisphere that there was no such agreement among the unit owners
that any member who incurred losses will be indemnified from the
common contribution. (TSN, July 7, 1987, p. 60).
The herein appellees further argue that the cause of action for
reimbursement of the value of the items lost because of the robberies
should be against the security agency and not the Corporation.
On the other hand, Unisphere invokes ART. 1170 of the Civil Code
which provides:
ART. 1170.- Those who in the performance of their obligations are guilty
of fraud, negligence, or delay and those who in any manner contravene
the tenor thereof, are liable for damages.
There is weight in the initial factual findings of the SEC Hearing Officer
with respect to the losses suffered by Unisphere in the amount of
P12,295.00:
Plaintiff likewise does not dispute the fact of robbery that occurred on
November 28, 1981 and July 26, 1982 inside 301 Cristina
Condominium.
Plaintiff admits that it had secured the services of Jimenez Protective
and Security Agency to safeguard the Condominium premises under its
instructions and supervision, but which failed to detect the robbery
incidents that occurred twice at Unit 301 of respondent, canting (sic)
away bulk items.
xxx xxx xxx
From the undisputed facts, plaintiff was remissed (sic) within its
obligation to provide safety to respondent inside its unit. This was
demonstrated by the fact that two robbery incidents befell respondents
under the negligent eye of plaintiff's hired security guards. It can be
safely pronounced that plaintiff has not complied with what was
incumbent upon it to do in a proper manner.
Since it has been determined and proven by the evidence presented
before the hearing office of respondent SEC that Unisphere indeed
suffered losses because of the robbery incidents and since it
(Unisphere) did not refute its liability to the corporation for the unpaid
monthly dues in the amount of P13,142. 67, this amount should be set-
off against the aforestated losses of Unisphere.[7]
We fully agree with the appellate court's dissertation on the nature and
character of a set-off or compensation. However, we cannot subscribe
to its conclusion that a set-off or compensation took place in this case.
In Article 1278 of the Civil Code, compensation is said to take place
when two persons, in their own right, are creditors and debtors of each
other. Compensation is "a mode of extinguishing to the concurrent
amount, the obligations of those persons who in their own right are
reciprocally debtors an creditors of each other" and "the offsetting of two
292
obligations which are reciprocally extinguished if they are of equal value,
or extinguished to the concurrent amount if of different values."[8] Article WHEREFORE, for all the foregoing , the instant petition is hereby
1279 of the same Code provides: GRANTED.The Decision of the Court of Appeals dated February 17,
Article 1279. In order that compensation may be proper, it is necessary: 1995 is REVERSEDand SET ASIDE. The Order of the Securities and
Exchange Commission dated August 21, 1990 reiterating the Hearing
(1) That each one of the obligors be bound principally, and that he be at Officer's Decision dated January 11, 1989, as amended by the Order of
the same time a principal creditor of the other; July 17, 1989, is hereby REINSTATED. SO ORDERED.
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if
the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the
debtor.
Absent any showing that all of these requisites exist, compensation may
not take place.
While respondent Unisphere does not deny its liability for its unpaid dues
to petitioners, the latter do not admit any responsibility for the loss
suffered by the former occasioned by the burglary. At best, what
respondent Unisphere has against petitioners is just a claim, not a debt.
Such being the case, it is not enforceable in court. It is only the debts
that are enforceable in court, there being no apparent defenses inherent
in them.[9] Respondent Unisphere's claim for its loss has not been
passed upon by any legal authority so as to elevate it to the level of a
debt. So we held in Alfonso Vallarta v. Court of Appeals, et al.,[10] that:
Compensation or offset takes place by operation of law when two (2)
persons, in their own right, are creditor and debtor of each other. For
compensation to take place, a distinction must be made between a debt
and a mere claim. A debt is a claim which has been formally passed
upon by the highest authority to which it can in law be submitted and
has been declared to be a debt. A claim, on the other hand, is a debt in
embryo. It is mere evidence of a debt and must pass thru the process
prescribed by law before it develops into what is properly called a
debt.[11]
Tested by the foregoing yardstick, it has not been sufficiently established
that compensation or set-off is proper here as there is lack of evidence
to show that petitioners E.G.V. Realty and CCC and respondent
Unisphere are mutually debtors and creditors to each other.

Considering the foregoing disquisition, therefore, we find that

respondent Court of Appeals committed reversible error in ruling that
compensation or set-off is proper in the instant case.

293
 METROPOLITAN BANK v. TONDA 338 S 254
GONZAGA REYES, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of
Court seeking to set aside the Decision1 of the Court of Appeals2 dated
June 29, 1998 in CA-G.R. SP No. 38113 which: (1) reversed Resolution
No. 417, s. 1994,3 dated June 1, 1994 of the Department of Justice4
directing to file the appropriate Information against herein respondents
Joaquin P. Tonda and Ma. Cristina V. Tonda for violation of P.D. 115 in
relation to Article 315 (1) (b) of the Revised Penal Code; and (2)
effectively set aside the Resolutions dated April 7, 19955 and July 12
19956 of the Department of Justice denying the motions for
reconsideration.
Spouses Joaquin G. Tonda and Ma. Cristina U. Tonda, hereinafter
referred to as the TONDAS, applied for and were granted commercial
letters of credit by petitioner Metropolitan Bank and Trust Company,
hereinafter referred to as METROBANK for a period of eight (8) months
beginning June 14, 1990 to February 1, 1991 in connection with the
importation of raw textile materials to be used in the manufacturing of
garments. The TONDAS acting both in their capacity as officers of
Honey Tree Apparel Corporation (HTAC) and in their personal
capacities, executed eleven (11) trust receipts to secure the release of
the raw materials to HTAC. The imported fabrics with a principal value
of P2,803,000.00 were withdrawn by HTAC under the 11 trust receipts
executed by the TONDAS. Due to their failure to settle their obligations
under the trust receipts upon maturity, METROBANK through counsel,
sent a letter dated August 10, 1992, making its final demand upon the
TONDAS to settle their past due TR/LC accounts on or before August
15, 1992. They were informed that by said date, the obligations would
amount to P4,870,499.13. Despite repeated demands therefor, the
TONDAS failed to comply with their obligations stated in the trust
receipts agreements, i.e. the TONDAS failed to account to
METROBANK the goods and/or proceeds of sale of the merchandise,
subject of the trust receipts.
Consequently, on November 9, 1992, Metrobank, through its account
officer Eligio Labog, Jr., filed with the Provincial Prosecutor of Rizal a
complaint/affidavit against the TONDAS for violation of P.D. No. 115
(Trust Receipts Law) in relation to Article 315 (1) (b) of the Revised
Penal Code. On February 12, 1993, the assigned Assistant Prosecutor
of Rizal submitted a Memorandum to the Provincial Prosecutor
recommending that the complaint in I.S. No. 92-8703 be dismissed on
the ground that the complainants had failed to establish "the existence
of the essential elements of Estafa as charged." The recommendation
was approved by Rizal Provincial Prosecutor Mauro Castro on May 18,
1993.
METROBANK then appealed to the Department of Justice (DOJ). On
June 1, 1994, Undersecretary Ramon. S. Esguerra reversed the findings
of the Provincial Prosecutor of Rizal and ordered the latter to file the
appropriate information against the TONDAS as charged in the
complaint.
The TONDAS immediately sought a reconsideration of the DOJ
Resolution but their motion was denied by the then acting Justice
Secretary Demetrio G. Demetria in a Letter-Resolution dated April 7,
1995. A second motion for reconsideration by the TONDAS was likewise
denied by then Justice Secretary Teofisto Guingona on July 12, 1995.
Subsequently, the TONDAS filed with the Court of Appeals a special
civil action for certiorari and prohibition with application for a temporary
restraining order or a writ of preliminary injunction,7 which was docketed
as CA-G.R. SP No. 38113. They contended therein that the Secretary
of Justice acted without or in excess of jurisdiction in issuing the
aforementioned Resolution dated July 12, 1995 denying with finality
their motion for the reconsideration of the Resolution dated April 7, 1995
of the Acting Secretary of Justice, which in turn denied their motion for
the reconsideration of Resolution No. 417, s. 94, dated June 1, 1994,
directing to file the appropriate Information against the TONDAS.
The Court of Appeals granted the TONDAS' petition and ordered the
criminal complaint against them dismissed. The Court of Appeals held
that METROBANK had failed to show a prima facie case that the
TONDAS violated the Trust Receipts Law in relation to Art. 315 (1) (b)
of the Revised Penal Code in the face of convincing proof that "that the
amount of P2.8 Million representing the outstanding obligation of the
TONDAS under the trust receipts account had already been settled by
them in compliance with the loan restructuring proposal; and that in the
absence of a loan restructuring agreement, METROBANK could still
validly apply the amount as payment thereof." The relevant portions of
the Court of Appeals decision are quoted as follows:
"Petitioners admitted that in 1991 their company, the Honey Tree
Apparel Corporation (HTAC), had some financial reversals making it
294
difficult for them to comply with their loan obligations with Metrobank.
They were then constrained to propose a loan restructuring agreement
with the private respondent to enable them to finally settle all
outstanding obligations with the latter. In a letter dated 23 September
1991, petitioner Joaquin Tonda submitted a proposed Loan
Restructuring Scheme to Metrobank. In said letter, petitioner Tonda
proposed to immediately pay in full the outstanding principal charges
under the trust receipts account and the remaining obligations under a
separate schedule of payment. Petitioners attached with said letter an
itemized proposal (Attachment "A"), part of which reads:
1. Trust Receipts - The new management and. Mr. Joaquin G. Tonda
will pay immediately the entire principal of the outstanding Trust
Receipts amounting to ₱2,803,097.14. While the interest accrued up to
September 13, 1991 amounting to ₱409,601.57 plus the additional
interest shall be re-structured together with item no. 2 below. A joint
sharing account in the name of Joaquin G. Tonda and Wang Tien En
equal to Trust Receipt amount of 1.8 Million will be opened at Metrobank
Makati. (emphasis supplied)
It would appear that the aforestated amount of 1.8 Million was
erroneously written since the intention of the petitioners was to open an
account of ₱2.8 Million to pay the entire principal of the outstanding trust
receipts account. In fact, also on 23 September 1991, petitioner Joaquin
Tonda and Wang Tien En deposited four different checks with a total
amount of P2,800,000.00 with Metrobank. The checks were received by
a certain Flor C. Naanep. Notably, the petitioners had obtained a written
acknowledgement of receipt of the checks totaling P2.8 Million from the
Metrobank officer in order to show proof of compliance with the loan
restructuring proposal. If the petitioners had intended it to be a simple
deposit, then a deposit slip with a machine validation by the private
respondent bank would have otherwise been sufficient.
In a letter dated 22 October 1991, Metrobank wrote to the petitioners
informing them that the bank had accepted their proposal subject to
certain conditions, the first of which referred to the immediate payment
of the amount of P2.8 Million, representing the outstanding trust receipts
account. The petitioners appeared to have offered a counter proposal
such that no final agreement had yet been reached.
However, the succeeding negotiations between petitioners and
Metrobank, after the initial offer of 23 September 1991 was made, dealt
with the other outstanding obligations while the matter regarding the
trust receipts account remained unchanged; therefore, it was settled
between the parties that the amount of P2.8 Million should be paid to
cover all outstanding obligations under the trust receipts account.
Despite the inability of both parties to reach a mutually agreeable loan
restructured agreement, the amount of P2.8 Million which was deposited
on 23 September 1991 by the petitioners appears to remain intact and
untouched as Metrobank had failed to show evidence that the money
has been withdrawn from the savings account of the petitioners.
Moreover, the deposit made by the petitioners was made known to
Metrobank clearly as a compliance with the proposed loan restructuring
agreement. As shown in the correspondence made by the petitioners on
28 February 1992 to Metrobank, after the latter had made a formal
demand for payment of all outstanding obligations, the deposit was
mentioned, to wit:
"May we emphasize that to show sincerity and financial capability, soon
after we received your letter dated October 22, 1991 informing us of your
approval of the restructuring and consolidation of our firm's obligations,
a personal account was opened by two (2) of our stockholders in the
amount equivalent to the TR/LC, Account of about P2.8 Million which
deposit is still maintained with your bank, free from any lien or
encumbrance, and may be applied anytime to the payment of the TR/LC
Account upon the implementation by the parties of the terms of
restructuring.""(emphasis supplied)
The contention of Metrobank that the money had not been actually
applied as payment for petitioners' outstanding obligation under the trust
receipts account is absolutely devoid of merit, considering that the
petitioners were still in the process of negotiating for a reasonable loan
restructuring arrangement with Metrobank when the latter abruptly
abandoned all efforts to negotiate and instantly demanded from the
petitioners the fulfillment of all their outstanding obligations.
In the case of Tan Tiong Tick vs. American Apothecaries, 65 Phil. 414,
the Supreme Court had held that:
"When a depositor is indebted to a bank, and the debts are mutual - that
is, between the same parties and in the, same right - the bank may apply
the deposit, or such portion thereof as may be necessary, to the
payment of the debt due it by the depositor, provided there is no express
agreement to the contrary and the deposit is not specifically applicable
to some other particular purpose."
295
Applying the above-mentioned ruling in this case, if the parties therefore
fail to reach an agreement regarding the restructuring of HTAC's loan,
Metrobank can validly apply the amount deposited by the petitioners as
payment of the principal obligation under the trust receipts account.
On the basis of all the evidence before Us, this Court is convinced that
the amount of P2.8 Million representing the outstanding obligation of the
petitioners under the trust receipts account had already been settled by
the petitioners. The money remains deposited under the savings
account of the petitioners awaiting a final agreement with Metrobank
regarding the loan restructuring arrangement. Meanwhile, Metrobank
has the right to use the deposited amount in connection with any of its
banking business.
With convincing proof that the amount of P2.8 Million deposited under
petitioners' savings account with Metrobank was indeed intended to be
applied as payment for the outstanding obligations of HTAC under the
trust receipts, Metrobank, therefore, had failed to show a prima facie
case that the petitioners had violated the Trust Receipts Law (P.D. No.
115) in relation to Art. 315 of the Revised Penal Code. Besides, there is
absolutely no evidence suggesting that Metrobank has been damaged
by the proposal and the deposit made by the petitioners. As noted by
the prosecutor:
"It is clear from the evidence that complainant bank had, all the while,
been informed of the steps undertaken by the respondents relative to
the trust receipts and other financial obligations vis-a-vis HTAC's
financial difficulties. Hardly therefore, could it be said that respondents
were unfaithfully, deceptively, deceitfully and fraudulently dealing with
complainant bank to warrant an indictment for Estafa."8
Hence, this recourse to this Court where petitioner submits for the
consideration of this Court the following issues:
I.
WHETHER METROBANK HAS SHOWN A PRIMA FACIE VIOLATION
OF THE TRUST RECEIPTS LAW IN RELATION TO ART. 315 OF THE
REVISED PENAL CODE
II.
WHETHER AN AGREEMENT WAS FORGED BETWEEN THE
PARTIES THAT THE 2.8 MILLION DEPOSITED IN THE JOINT
ACCOUNT OF JOAGUIN G. TONDA AND WANG TIEN EN WOULD
BE CONSIDERED AS PAYMENT FOR THE OUTSTANDING
OBLIGATIONS OF THE SPOUSES TONDA UNDER THE TRUST
RECEIPTS
III.
WHETHER INSPITE OF THE FAILURE OF THE PARTIES TO AGREE
UPON A RESTRUCTURING AGREEMENT, METROBANK CAN STILL
APPLY THE P2.8 MILLION DEPOSIT AS PAYMENT TO THE
PRINCIPAL AMOUNT COVERED BY THE TRUST RECEIPTS
IV.
WHETHER DAMAGE HAS BEEN CAUSED TO METROBANK
BECAUSE OF THE PROPOSAL AND OF THE DEPOSIT
V.
WHETHER METROBANK HAS THE STANDING TO PROSECUTE
THE CASE A QUO
VI.
WHETHER THE ASSIGNED ERRORS IN THE PETITION FOR
CERTIORARI FILED WITH THIS HONORABLE COURT RAISES
PURELY QUESTIONS OF FACTS9
In response to the foregoing, the TONDAS maintain that METROBANK
has no legal standing to file the present petition without the conformity
or authority of the prosecutor as it deals solely with the criminal aspect
of the case, a separate action to recover civil liability having already
been instituted; that the issues raised in the present petition are purely
factual; and that the subject trust receipts obligations have been
extinguished by payment or legal compensation.
We find for petitioner bank.
296
Preliminarily, we shall resolve the issues raised by the TONDAS
regarding the standing of METROBANK to file the instant petition and
whether the same raises questions of law.
The general rule is that it is only the Solicitor General who is authorized
to bring or defend actions on behalf of the People or the Republic of the
Philippines once the case is brought before this Court or the Court of
Appeals. However, an exception has been made that "if there appears
to be grave error committed by the judge or lack of due process, the
petition will be deemed filed by the private complainants therein as if it
were filed by the Solicitor General."10 In that case, the Court gave due
course to the petition and allowed the petitioners to argue their case in
lieu of the Solicitor General. We accord the same treatment to the instant
petition on account of the grave errors committed by the Court of
Appeals. We add that no information having been filed yet in court, there
is, strictly speaking, no case yet for the People or the Republic of the
Philippines. In answer to the second issue raised by the TONDAS, while
the jurisdiction of the Supreme Court in a petition for review on certiorari
under Rule 45 of the Revised Rules of Court is limited to reviewing only
errors of law, not of fact, one exception to the rule is when the factual
findings complained of are devoid of support by the evidence on record
or the assailed judgment is based on misappreciation of facts11 , as will
be shown to have happened in the instant case.
In the main, the issue is whether or not the dismissal by the Court of
Appeals of the charge for violation of the Trust Receipts Law in relation
to Art. 315(1) (b) of the Revised Penal Code against the TONDAS is
warranted by the evidence at hand and by law.
The Court of Appeals gravely erred in reversing the Department of
Justice on the finding of probable cause to hold the TONDAS for trial.
The documentary evidence presented during the preliminary
investigation clearly show that there was probable cause to warrant a
criminal prosecution for violation of the Trust Receipts Law.
The relevant penal provision of P.D. 115 provides:
SEC. 13. Penalty Clause. - The failure of an entrustee to turn over the
proceeds of the sale of the goods, documents or instruments covered
by a trust receipt to the extent of the amount owing to the entruster or
as appears in the trust receipt or to return said goods, documents or
instruments if they were not sold or disposed of in accordance with the
terms of the trust receipt shall constitute the crime of estafa, punishable
under the provisions of Article Three Hundred and Fifteen, Paragraph
One (b), of Act Numbered Three Thousand Eight Hundred and Fifteen,
as amended, otherwise known as the Revised Penal Code. If the
violation or offense is committed by a corporation, partnership,
association or other judicial entities, the penalty provided for in this
Decree shall be imposed upon the directors, officers, employees or
other officials or persons therein responsible for the offense, without
prejudice to the civil liabilities arising from the criminal offense.
Section 1 (b), Article 315 of the Revised Penal Code under which the
violation is made to fall, states:
"x x x Swindling (estafa). - Any person who shall defraud another by any
of the mans mentioned herein below x x x:
xxx xxx xxx
b. By misappropriating or converting, to the prejudice of another, money,
goods, or any other personal property received by the offender in trust
or on commission, or for administration, or under any other obligation
involving the duty to make delivery of or to return the same, even though
such obligation be totally or partially guaranteed by a bond; or by
denying having received such money, goods, or other property."
Based on the foregoing, it is plain to see that the Trust Receipts Law
declares the failure to turn over the goods or the proceeds realized from
the sale thereof, as a criminal offense punishable under Article 315 (1)
(b) of the Revised Penal Code. The law is violated whenever the
entrustee or the person to whom the trust receipts were issued in favor
of fails to: (1) return the goods covered by the trust receipts; or (2) return
the proceeds of the sale of the said goods. The foregoing acts constitute
estafa punishable under Article 315 (1) (b) of the Revised Penal Code.
Given that various trust receipts were executed by the TONDAS and
that as entrustees, they did not return the proceeds from the goods sold
nor the goods themselves to METROBANK, there is no dispute that that
the TONDAS failed to comply with the obligations under the trust
receipts despite several demands from METROBANK.
Finding favorably for the TONDAS, however, and ordering the dismissal
of the complaint against them, the Court of Appeals held that: (1) the
TONDAS opened a savings account of P2.8 Million to pay the entire
principal of the outstanding trust receipts account; (2) the TONDAS
obtained from a METROBANK officer12 a written acknowledgement of
297
receipt of checks totaling P2.8 Million in order to show proof of
compliance with the loan restructuring proposal; (3) it was settled
between the parties that the amount of 2.8 Million should be paid to
cover all outstanding obligations under the trust receipts account; (4) the
money remains deposited under the savings account of petitioners
awaiting a final agreement with METROBANK regarding the loan
restructuring arrangement; and that (5) there is no evidence suggesting
that METROBANK has been damaged by the proposal and the deposit
or that the TONDAS employed fraud and deceit in their dealings with the
bank.
The foregoing findings and conclusions are palpably erroneous.
First, the amount of P2.8 million was not directly paid to METROBANK
to settle the trust receipt accounts, but deposited in a joint account of
Joaquin G. Tonda and a certain Wang Tien En. In a letter dated
February 28, 1992, signed by HTAC's Vice President for Finance,
METROBANK was informed that the amount "may be applied anytime
to the payment of the trust receipts account upon implementation of the
parties of the terms of the restructuring."13 The parties failed to agree on
the terms of the loan restructuring agreement as the offer by the
TONDAS to restructure the loan was followed by a series of counter-
offers which yielded nothing. It is axiomatic that acceptance of an offer
must be unqualified and absolute14 to perfect a contract. The alleged
payment of the trust receipts accounts never became effectual on
account of the failure of the parties to finalize a loan restructuring
arrangement.
Second, the handwritten note by the METROBANK officer
acknowledging receipt of the checks amounting to P2.8 Million made no
reference to the TONDAS' trust receipt obligations, and we cannot
presume that it was anything more than an ordinary bank deposit. The
Court of Appeals citing the case of Tan Tiong Tick vs. American
Apothecories15 implied that in making the deposit, the TONDAS are
entitled to set off, by way of compensation, their obligations to
METROBANK. However, Article 1288 of the Civil Code provides that
"compensation shall not be proper when one of the debts consists in
civil liability arising from a penal offense" as in the case at bar. The
raison d'etre for this is that, "if one of the debts consists in civil liability
arising from a penal offense, compensation would be improper and
inadvisable because the satisfaction of such obligation is imperative."16
Third, reliance on the negotiations for the settlement of the trust receipts
obligations between the TONDAS and METROBANK is simply
misplaced. The negotiations pertain and affect only the civil aspect of
the case but does not preclude prosecution for the offense already
committed. It has been held that "[a]ny compromise relating to the civil
liability arising from an offense does not automatically terminate the
criminal proceeding against or extinguish the criminal liability of the
malefactor."17 All told, the P2.8 Million deposit could not be considered
as having settled the trust receipts obligations of the TONDAS to the
end of extinguishing any incipient criminal culpability arising therefrom.
Hence, it has been held in Office of the Court Administrator vs. Soriano18
that:
"xxx it is too well-settled for any serious argument that whether in
malversation of public funds or estafa, payment, indemnification, or
reimbursement of, or compromise as to, the amounts or funds
malversed or misappropriated, after the commission of the crime, affects
only the civil liability of the offender but does not extinguish his criminal
liability or relieve him from the penalty prescribed by law for the offense
committed, because both crimes are public offenses against the people
that must be prosecuted and penalized by the Government on its own
motion, though complete reparation should have been made of the
damage suffered by the offended parties. xxx."
As to the statement of the Court of Appeals that there is no evidence
that METROBANK has been damaged by the proposal and the deposit,
it must be clarified that the damage can be traced from the non-
fulfillment of an entrustee's obligation under the trust receipts. The
nature of trust receipt agreements and the damage caused to trade
circles and the banking community in case of violation thereof was
explained in Vintola vs. IBAA19 and echoed in People vs. Nitafan20 , as
follows:
"[t]rust receipt arrangements do not involve a simple loan transaction
between a creditor and a debtor-importer. Apart from a loan feature, the
trust receipt arrangement has a security feature that is covered by the
trust receipt itself. The second feature is what provides the much needed
financial assistance to traders in the importation or purchase of goods
or merchandise through the use of those goods or merchandise as
collateral for the advancements made by the bank. The title of the bank
to the security is the one sought to be protected and not the loan which
is a separate and distinct agreement."
298
xxx xxx xxx
"Trust receipts are indispensable contracts in international and domestic
business transactions.1âwphi1 The prevalent use of trust receipts, the
danger of their misuse and/or misappropriation of the goods or proceeds
realized from the sale of goods, documents or instruments held in trust
for entruster-banks, and the need for regulation of trust receipt
transactions to safeguard the rights and enforce the obligations of the
parties involved are the main thrusts of P.D. 115. As correctly observed
by the Solicitor General, P.D. 115, like Bata Pambansa Blg. 22,
punishes the act "not as an offense against property, but as an offense
against public order. x x x The misuse of trust receipts therefore should
be deterred to prevent any possible havoc in trade circles and the
banking community. (citing Lozano vs. Martinez, 146 SCRA 323 [1986];
Rollo, p. 57) It is in the context of upholding public interest that the law
now specifically designates a breach of a trust receipt agreement to be
an act that "shall" make one liable foe estafa."
The finding that there was no fraud and deceit is likewise misplaced
Considering that the offense is punished as a malum prohibitum
regardless of the existence of intent or malice. A mere failure to deliver
the proceeds of the sale or the goods if not sold, constitutes a criminal
offense that causes prejudice not only to another, but more to the public
interest.21
the determination of probable cause during a preliminary investigation.
Courts are not empowered to substitute their judgment for that of the
executive branch; it may, however, look into the question of whether
such exercise has been made in grave abuse of discretion.26
Verily, there was no grave abuse of discretion on the part of the
Secretary of Justice in directing the filing of the Information against the
TONDAS, end the Court of Appeals overstepped its boundaries in
reversing the same without basis in law and in evidence. We emphasize
that for purposes of preliminary investigation, it is enough that there is
evidence showing that a crime has been committed and that the
accused is probably guilty thereof.27 By reason of the abbreviated nature
of preliminary investigations, a dismissal of the charges as a result
thereof is not equivalent to a judicial pronouncement of acquittal,28 a
converso, the finding of a prima facie case to hold the accused for trial
is not equivalent to a finding of guilt.
WHEREFORE, the petition is hereby GRANTED. The assailed Decision
is REVERSED and SET ASIDE.
SO ORDERED.

Finally, it is worthy of mention that a preliminary investigation proper -

whether or not there is reasonable ground to believe that the accused is
guilty of the offense and therefore, whether or not he should be
subjected to the expense, rigors and embarrassment of trial - is the
function of the prosecutor.22 Preliminary investigation is an executive,
not a judicial function.23 Such investigation is not part of the trial, hence,
a full and exhaustive presentation of the parties' evidence is not
required, but only such as may engender a well-grounded belief that an
offense has been committed and that the accused is probably guilty
thereof.24

Section 4, Rule 112 of the Rules of Court recognizes the authority of the
Secretary of Justice to reverse the resolution of the provincial or city
prosecutor or chief state prosecutor upon petition by a proper party.25
Judicial review of the resolution of the Secretary of Justice is limited to
a determination of whether there has been a grave abuse of discretion
amounting to lack or excess of jurisdiction considering that the full
discretionary authority has been delegated to the executive branch in

299
 PHILTRUST v. ROXAS 772 S 323
JARDELEZA, J.:
We consider whether the principle of legal compensation may be applied
to offset the judgment debt of petitioner Philippine Trust Company
("PTC") and the loan obligation of private respondents Floro and
Eufemia Roxas ("Spouses Roxas").
I they included a cross-claim against PTC.8 In response, PTC filed a
The Spouses Roxas procured loans from PTC in the amount of Php
2,523,200 to finance their real estate business.1These loans were
secured by real estate mortgages on the Spouses Roxas' real
properties.
On April 10, 1979, the Spouses Roxas, PTC, and Roben Construction
and Furnishing Group, Inc. entered into "a contract of building
construction," under which PTC granted an additional loan of Php
900,000 to the Spouses Roxas to enable them to finish their ongoing
housing projects located at Cabcaben, Mariveles, Bataan. This was
superseded by a new "contract of building construction" executed by
and among PTC, Spouses Roxas, and Rosendo P. Dominguez, Jr.
("Dominguez"). Dominguez substituted Rohen Construction as the
contractor under the same terms and conditions of the contract dated
April 10, 1979. The new contract stipulated that the money loaned from
PTC shall be devoted to the funding of the housing projects, the rentals
of which when finished, would then be used to liquidate the loan. It also
provided that PTC may only release the proceeds of the loan for the
purchase of materials and supplies when requested by Dominguez and
with the conformity of the Spouses Roxas.2 Invoices covering materials
previously purchased with the funds should also be submitted to PTC
before any subsequent release of funds is made.3 PTC, however,
released to Dominguez the sum of Php 870,000 out of the Php 900,000
although the Spouses Roxas had agreed only to the release of not more
than Php 450,000, as evidenced by a promissory note dated April 11,
1979.4
Due to financial difficulties, however, the Spouses Roxas did not finish
the housing project. As a result, they did not receive monthly rentals
from prospective lessees of the houses, which led to missed
amortization payments in their loans from PTC.5
On March 28, 1980, Dominguez filed a complaint against PTC and the
Spouses Roxas with the Court of First Instance (CFI) ofManila,6 Branch
XL for breach of the contract of building construction. This was docketed
as Civil Case No. 130783. The Spouses Roxas in tum filed Civil Case
No. 130892 with the CFI of Manila against Dominguez and the insurance
company that issued his performance bond. These two cases were later
consolidated.7
When the Spouses Roxas filed their answer in Civil Case No. 130783,
counterclaim against the Spouses Roxas on their unpaid loan obligation
amounting to Php 3,053,738.509 plus interest and the amount of Php
245,720 as attorney's fees; and, in default of such payments, the
foreclosure of the real estate mortgages executed by the Spouses
Roxas in favor of PTC. After trial on the merits, the trial court rendered
a decision in favor of Dominguez. It denied PTC's counterclaim for lack
of sufficient proof, without prejudice to the filing of a collection suit
against the Spouses Roxas. Both PTC and the Spouses Roxas
appealed to the Court of Appeals, docketed as CA-G.R. CV No. 30340.
To this date, the same remains pending.10
In a parallel development, while Civil Case No. 130783 was still pending
in the trial court, PTC, on August 31, 1981, filed with the provincial sheriff
of Bataan a petition for extra judicial foreclosure of the same real estate
mortgages. The Spouses Roxas opposed the petition and filed a verified
complaint against PTC for damages with preliminary injunction in the
Regional Trial Court of Bataan docketed as Civil Case No. 4809 ("Main
Case"). The complaint sought to restrain and enjoin the sheriff from
proceeding with the foreclosure sale while Civil Case No. 130783 is still
pending.11 On December 26, 1988, the Bataan R TC rendered a
Decision in favor of the Spouses Roxas, the dispositive portion of which
reads as follows:
WHEREFORE, the Court hereby renders judgment (a) Ordering the
issuance of a writ of permanent injunction perpetually enjoining
defendant Philippine Trust Company and defendant provincial sheriff of
Bataan or any of his deputies from foreclosing extrajudicially the real
estate mortgage(s) executed in its favor by plaintiffs covering the real
properties subject of this action; (b) Condemning said defendant bank
to pay to plaintiffs: (1) Ordinary damages for breach of the provisions of
the contract of building constrnction (Exhs. "B" & "26"), in the sum of
One Hundred Thousand Pesos (Pl00,000.00); (2) Moral damages for
the improvident extrajudicial foreclosure of plaintiffs' mortgage(s) after it
300
had elected judicial foreclosure thereof, in the amount of Three Hundred
Thousand Pesos (P300,000.00) for both plaintiffs; (3) Exemplary
damages by way of example or correction for the public good in the sum
of Fifty Thousand Pesos (P50,000.00); (4) Attorney's fees in the amount
of Fifty Thousand Pesos (P50,000.00); and (5) Double costs of suit [ ].
SO ORDERED.12
The Court of Appeals affirmed the decision of the Bataan RTC. The
decision became final and executory, prompting the Spouses Roxas to
file a Motion for Execution. PTC responded by filing an Opposition to the
Motion for Execution, where it raised for the first time legal
compensation to offset the judgment debt due to the Spouses Roxas.
On January 25, 1994, the trial court denied PTC's Opposition and issued
a writ of execution, holding that PTC is deemed to have waived legal
compensation as a defense because it failed to invoke the same as an
affirmative defense in its answer. PTC filed a motion for reconsideration
of the order, which was denied by the trial court on April 19, 1994.13 PTC
filed another motion for reconsideration, which was again denied by the
trial court on June 7, 1994.14
PTC filed a Petition for Certiorari15 under Rule 65 with the Court of
Appeals seeking the annulment of the trial court's order issuing the writ
of execution and its subsequent orders denying PTC's motions for
reconsideration. On November 17, 2005, the Court of Appeals
dismissed the petition for lack of merit. It found that not al 1 requisites of
legal compensation under Article 1279 of the Civil Code were present
and that the defense of legal compensation was belatedly raised by
PTC, considering that it was raised for the first time at the execution
stage.16 The Court of Appeals denied PTC's motion for reconsideration
on March 9, 2006.17 PTC then filed this Petition for Review on
Certiorari18 under Rule 45, arguing that the Court of Appeals erred in not
finding that all the requisites of legal compensation were present and in
ruling that the defense of compensation was belatedly raised. PTC
claims it did not raise legal compensation as a defense before the
Bataan RTC because the judgment debt was not yet due at the time it
filed its answer. Furthermore, it had already set up as a compulsory
counterclaim the loan obligation of the Spouses Roxas in Civil Case No.
130783, which was pending with the former CFI of Manila.
But because the Manila court denied PTC's counterclaims, PTC argues
there is a change in the situation of the parties that makes execution
inequitable.In response, the Spouses Roxas assert that the execution
of the Bataan RTC decision is proper because the prevailing party is
entitled to a writ of execution as a matter of right once a judgment
becomes final.19 Moreover, the decision in Civil Case No. 130873 is not
a supervening event that warrants the stay of execution.20 The Spouses
Roxas also dispute the applicability of legal compensation because both
the demandability of the loan as well as the exact amount due had been
put in issue in Civil Case No. 130873, which is now pending appeal with
the Court of Appeals as CA-G.R. CV No. 30340.21 The Spouses Roxas
maintain that PTC is deemed to have waived compensation as a
defense because it did not raise compensation either in a motion to
dismiss or as an affirmative defense in its answer to the Main Case.22
Finally, the Spouses Roxas point out that the orders of the Bataan RTC
were challenged by PTC through a Rule 65 petition. Thus, it was
incumbent upon PTC to prove lack or grave abuse of discretion on the
part of the Bataan RTC,which PTC ultimately failed to do.23
The petition has no merit.
II
A
We agree with the Court of Appeals that it was too late for PTC to set
up legal compensation as a defense because the Main Case had
already reached the execution stage. The rule is that once a decision
becomes final and executory, execution shall issue as a matter of right,24
and the issuance of a writ of execution is the court's ministerial duty,
compellable by mandamus.25 This is in accordance with the doctrine of
immutability of final judgments, which states that a judgment that has
become final and executory is immutable and unalterable, and may no
longer be modified in any respect, even if the modification is meant to
correct what is perceived to be an erroneous conclusion of fact or law,
and regardless of whether the modification is attempted to be made by
the court rendering it or by the highest Court of the land.26 Although there
are recognized exceptions to this doctrine, one of which is where there
is a supervening event that renders execution inequitable or unjust,27
none obtains in this case.
First, there is nothing unjust or inequitable in the issuance of the writ of
execution in this case because execution will have no effect on the
unpaid loan obligation of the Spouses Roxas to PTC. The Spouses
Roxas' unpaid loan obligation to PTC is the subject of a separate case
301
now pending before the Court of Appeals, CA-G.R. CV No. 30340. Thus,
there exists a proper forum where PTC may be allowed to recover
whatever is due from the Spouses Roxas. What is inequitable is to allow
PTC to recover its credit in full in CA-G.R. CV No. 30340 while
concurrently being allowed to offset its judgment debt in this case. In
such instance, there would effectively be double recovery on the part of
PTC-which we cannot sanction because of the fundamental proscription
against unjust enrichment.28
Second, it would be more unjust to stay the execution of a decision that
had become final and executory twenty three (23) years ago. There
should be an end to litigation, for public policy dictates that once a
judgment becomes final, executory, and unappealable, the prevailing
party should not be denied the fruits of his victory by some subterfuge
devised by the losing party.29 Unjustified delay in the enforccme'nt of a
judgment sets at naught the role and purpose of the courts to resolve
justiciable controversies with finality.30 To accept PTC's contentions
would not only be unfair to private respondents but, more importantly,
would defeat a vital policy consideration behind the doctrine of
immutability of final judgments.
B in its motion for reconsideration of the Bataan RTC decision and in its
The Bataan RTC and the Court of Appeals also correctly ruled that PTC
should have raised the argument on legal compensation at the trial
stage. The 1964 Rules of Court, which was then in effect at the time the
Main Case was filed by the Spouses Roxas in 1980, provides that:
RULE 9. Effect of Pleadings
Sec. 2. Defenses and objections not pleaded deemed waived.-
Defenses and objections not pleaded either in a motion to dismiss
or in the answer are deemed waived; except the failure to state a
cause of action which may be alleged in a later pleading, if one is
permitted, or by motion for judgment on the pleadings, or at the trial on
the merits; but in the last instance, the motion shall be disposed of as
provided in section 5 of Rule 10 in the light of any evidence which may
have been received. Whenever it appears that the court has no
jurisdiction over the subject-matter, it shall dismiss the action.31
(Emphasis added)
Although legal compensation takes place by operation of law, it must be
alleged and proved as a defense by the debtor who claims its
benefits.1âwphi1 Only after it is proved will its effects retroact to the
moment when all the requisites under Article 1279 of the Civil Code have
concurred.32
PTC's contention that it could not have raised legal compensation as a
defense because it was not yet a debtor of the Spouses Roxas when it
filed its answer is unconvincing. Under Rule 8, Section 2 of the 1964
Rules of Court, "[a] party may set forth two or more statements of a claim
or defense alternatively or hypothetically, either in one cause of action
or defense or in separate causes of action or defenses."33 Thus, the
defense of compensation would have been proper and allowed under
the rules even if PTC disclaimed any liability at the time it filed its answer.
In Marquez v. Valencia,34 we held that when a defendant failed to set up
such alternative defenses and chosen or elected to rely on one only, the
overruling thereof was a complete determination of the controversy
between the parties, which bars a subsequent action based upon an
unpleaded defense. Unmistakably, the rationale behind this is the
proscription against the splitting of causes of action.
In any case, even if PTC were excused from pleading compensation as
a defense in its answer, we note that PTC still failed to raise this defense
subsequent appeal. Hence, there can be no other conclusion than that
PTC is already estopped from raising the issue of legal compensation.
It is fairly clear to us that the reason why PTC did not raise legal
compensation as a defense in the Main Case is because it was banking
on a favorable ruling on its counterclaim in the other case, Civil Case
No. 130873.
It was presumably an informed choice arrived at by PTC and its counsel,
with full knowledge of the consequences of its failure to plead this
specific claim/defense in the Main Case. Unfortunately for PTC, its
counterclaim in the other case was disallowed. Having adopted the
wrong legal strategy, PTC cannot now expediently change its theory of
the case or its defense at the execution stage of the Main Case.
Following the doctrine of election of remedies,35PTC's choice of setting
up the Spouses Roxas' unpaid loan obligation as a counterclaim in Civil
Case No. 130873, which has gone to judgment on the merits but is
pending appeal, precludes it from raising compensation of the same
loan obligation for the purpose of opposing the writ of execution in the
Main Case. Equitable in nature, the doctrine of election of remedies is
designed to mitigate possible unfairness to both parties. It rests on the
302
moral premise that it is fair to hold people responsible for their choices.
The purpose of the doctrine is not to prevent any recourse to any
remedy, but to prevent a double redress for a single wrong.36
III
Even if we assume that legal compensation was not waived and was
otherwise timely raised, we find that not all requisites of legal
compensation are present in this case. Under Article 1279, in order for
legal compensation to take place, the following requisites must concur:
(a) that each one of the obligors be bound principally, and that he be at
the same time a principal creditor of the other; (b) 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; (c)
that the two debts be due; (d) that they be liquidated and demandable;
and (e) that over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the
debtor.
Here, the fourth requisite is absent. A debt is liquidated when its
existence and amount are determined.37Compensation can only take
place between certain and liquidated debts; it cannot extend to
unliquidated, disputed claims.38 Since the loan obligation, including its
amount and demandability, is still being disputed in CA-G.R. CV No.
30340, PTC's credit cannot be considered liquidated as of yet.
Consequently, no legal compensation could have taken place between
PTC's loan credit and the Spouses Roxas' judgment credit.
IV
Finally, we observe that PTC appears to have willfully engaged in forum
shopping. PTC, in its own words, opposed the execution of the Bataan
RTC decision because ''the Decision promulgated on September 4,
1990 by the RTC of Manila, Branch 40 [in Civil Case No. 130783] denied
Petitioner's counterclaims."39 Forum shopping is committed by a party
who, having received an adverse judgment in one forum, seeks another
opinion in another court, other than by appeal or the special civil action
of certiorari. More accurately, forum shopping is the institution of two or
more suits in different courts, either simultaneously or successively, in
order to ask the courts to rule on the same or related causes and/or to
grant the same or substantially the same reliefs.40
The relief PTC now seeks is compensation of its judgment debt with the
Spouses Roxas' loan obligation. Tn the other case, Civil Case No.
130783 (now CA-G.R. CV No. 30340), PTC asks for the payment of the
same loan obligation of the Spouses Roxas. Essentially, PTC is seeking
the same relief in both cases: the extinguishment qf" the Spouses
Roxas' loan obligation. Under Article 1231 of the Civil Code, payment
and compensation are modes of extinguishing an obligation. Although
legally distinct, both must be pleaded in the same case if the obligation
sought to be extinguished and the parties thereto arc identical;
otherwise, it would constitute splitting of causes of action.
Forum shopping exists when the elements of litis pendentia are present,
viz.: (a) identity of parties, or at least such parties as those representing
the same interests in both actions; (b) identity of rights asserted and
relief prayed for, the relief being founded on the same facts; and (c) the
identity of the two preceding particulars is such that any judgment
rendered in the other action, will, regardless of which party is successful,
amount to res judicata in the action under consideration.41
We find that the elements of litis pendentia-and, as a consequence,
forum shopping-exist in this case. PTC's claim for legal compensation is
founded on the same unpaid loan obligation now being litigated in CA-
G.R. CV No. 30340. Although that case originated from a complaint filed
by Dominguez for breach of contract, PTC counterclaimed the entire
unpaid loan obligation, plus interest, owed to it by the Spouses Roxas.
In other words, PTC had squarely put in issue the matter of the Spouses
Roxas' indebtedness arising from the loans the latter obtained from
PTC. It is immaterial that PTC's cause of action in the other case was
set forth by way of a counterclaim, since the latter partakes of the nature
of a complaint by the defendant against the plaintiff.42 On the other hand,
while the Main Case originally involved a different subject matter and
cause of action (i.e., the injunction against PTC's extra judicial
foreclosure and the Spouses Roxas' claim for damages) as that
embraced in CA-G.R. CV No. 30340, the primary issue raised by PTC
in its Opposition to the Motion for Execution, and subsequently in the
petition for certiorari with the Court of Appeals and the present petition,
pertained to the same loan obtained by the Spouses Roxas. Thus, with
respect to the Spouses Roxas' indebtedness to PTC, there is a clear
identity of parties, of subject matter, and of cause of action.
Consequently, once a final decision in CA-G.R. CV No. 30340 is
rendered, it will constitute res judicata and bar further litigation on the
same loan obligation, including any dispute on the applicability or non-
applicability of legal compensation.
303
Forum shopping is an act of malpractice that is prohibited and
condemned because it trifles with the courts and abuses their
processes, and degrades the administration of justice and adds to the
already congested court dockets.43 Under Section 5 of Rule 8, willful and
deliberate forum shopping is a ground for summary dismissal of the case
and constitutes direct contempt of court, as well as a cause for
administrative sanctions. The litigation could have ended promptly if
PTC had simply paid its judgment debt and awaited the final decision in
the other case to recover whatever is due from the Spouses Roxas.
Instead, this plainly unmeritorious case had to clog our docket and take
up the valuable time of this Court.

WHEREFORE, the petition for review is DENIED for lack of merit. The
Decision dated November 17, 2005 and Resolution dated March 9, 2006
of the Court of Appeals in CA-G.R. SP No. 35203 are hereby
AFFIRMED.

Costs against petitioner.

SO ORDERED.

304
 MARPHIL EXPORT CORPORATION AND IRENEO LIM,
PETITIONERS, VS. ALLIED BANKING CORPORATION,
SUBSTITUTED BY PHILIPPINE NATIONAL BANK, RESPONDENT
JARDELEZA, J.:
This is a petition[1] seeking to nullify the Court of Appeals' (CA) January
12, 2009 Decision[2] and May 12, 2009 Resolution[3] in CA-G.R. CV No.
89481. The CA modified[4] the April 23, 2007 Omnibus Decision[5] of
Branch 61 of the Regional Trial Court (RTC), Makati City in the
consolidated cases of petition for declaratory relief filed by petitioner
Marphil Export Corporation (Marphil) against Allied Banking Corporation
(Allied Bank), and the complaint for collection of sum of money with
application for writ of attachment filed by Allied Bank against Marphil's
surety, petitioner Ireneo Lim (Lim).
Facts
Marphil is a domestic company engaged in the exportation of cuttlefish,
cashew nuts and similar agricultural products.[6] To finance its purchase
and export of these products, Allied Bank granted Marphil a credit line
from which Marphil availed of several loans evidenced by promissory
notes (PN).[7] These loans were in the nature of advances to finance the
exporter's working capital requirements and export bills.[8] The loans
were secured by three (3) Continuing Guaranty or Continuing Surety
(CG/CS) Agreements[9] executed by Lim, Lim Shiao Tong and Enrique
Ching.[10] Apart from the CG/CS Agreements, irrevocable letters of
credits also served as collaterals for the loans obtained to pay export
bills.[11] In turn, Allied Bank required Marphil, through its authorized
signatories Lim and Rebecca Lim So, to execute a Letter of
Agreement[12] where they undertake to reimburse Allied Bank in the
event the export bills/drafts covering the letters of credit are refused by
the drawee. Upon negotiations of export bills/drafts that Allied Bank
purchases from Marphil, the amount of the face value of the letters of
credit is credited in favor of the latter.[13]
The transaction involved in this petition is the export of cashew nuts to
Intan Trading Ltd. Hongkong (Intan) in Llong Kong. Upon application of
Intan, Nanyang Commercial Bank (Nanyang Bank), a bank based in
China, issued irrevocable letters of credit. These were Letter of Credit
(L/C) No. 22518 and L/C No. 21970, with Marphil as beneficiary and
Allied Bank as correspondent bank.[14] These covered two (2) separate
purchase contracts/orders for cashew nuts made by Intan. The first
order of cashew nuts was covered by L/C No. 22518. After the first
shipment was made, Marphil presented export documents including
drafts to Allied Bank. The latter credited Marphil's: credit line the peso
equivalent of the face value of L/C No. 22518 (in the amount of
P1,986,702.70 and this amount was deducted from the existing loans of
Marphil.[15] There were no problems encountered for the shipment
covered by L/C No. 22518. It was the second order covered by L/C No.
21970 that encountered problems.
When Intan placed a second order for cashew nuts, Marphil availed
additional loans in their credit line evidenced by PN No. 0100-88-
02463[16] (PN No. 2463) for P500,000.00 and PN No. 0100-88-02730[17]
(PNNo. 2730) for P500,000.00. Similar to the previous transaction, Intan
applied for and opened L/C No. 21970 with Nanyang Bank in the amount
of US$185,000.00, with Marphil as the beneficiary and Allied Bank as
correspondent bank.[18] After receiving the export; documents including
the draft issued by Marphil, Allied Bank credited Marphil in the amount
of P1,913,763.45, the peso value of the amount in the letter of credit.[19]
However, on July 2, 1988, Allied Bank informed Marphil that it received
a cable from Nanyang Bank noting some discrepancies in the shipping
documents.[20] On July 16, 1988, Allied Bank again informed Marphil that
it received another cable from Nanyang Bank still noting the
discrepancies and that Intan refused to accept the discrepancies.[21]
Consequently, Nanyang Bank refused to reimburse Allied Bank the
amount the latter had credited in Marphil's credit line. In its debit memo,
Allied Bank informed Marphil of the dishonor of L/C No. 21970 and that
it was reversing the earlier credit entry of P1,913,763.45.[22] Lim was
made to sign a blank promissory note, PN No. 0100-88-04202,[23] (PN
No. 4202) on September 9, 1988 to cover for the amount.[24] This was
later filled up by Allied Bank in the amount of P1,505,391.36.
On March 6, 1990, Marphil filed a Complaint[25] for declaratory relief and
damages against Allied Bank (Declaratory' Relief Case) raffled to
Branch 61 of RTC Makati.[26] In its Complaint, Marphil asked the court to
declare PN No. 4202 void, to declare as fully paid its other obligations
to Allied Bank, and to award it actual, moral and exemplary damages,
and attorney's fees.[27] Marphil maintained that it had fully paid its
account with Allied Bank, and that PN No. 4202, which Lim executed on
September 9, 1988, was void for lack of consideration. Marphil alleged
that it was constrained to send back the shipment to the Philippines
thereby incurring expenses and tremendous business losses. It
attributed bad faith to Allied Bank because the latter did nothing to
protect its interest; Allied Bank merely accepted Nanyang Bank's
position despite L/C No. 21970 being irrevocable, and Allied Bank
allegedly confirmed Nanyang Bank's revocation.
On May 7, 1990, Allied Bank filed its Answer with Compulsory
Counterclaim and Petition for Writ of Preliminary Attachment.[28] Allied
305
Bank maintained that PN No. 4202 was supported by consideration, and
denied that Marphil has fully paid its obligation to it. As counterclaim,
Allied bank sought to collect on three (3) promissory notes, PN Nos.
2463, 2730 and 4202.[29]
On September 14, 1990, Allied Bank filed a Complaint with Petition for
Writ of Preliminary Attachment[30] (Collection Case) against Lim and Lim
Shao Tong which was raffled to Branch 145 of RTC Makati. Allied Bank
sued them as sureties under the CG/CS Agreements for the loan
obligations of Marphil under three (3) promissory notes, PN Nos. 2463,
2730 and 4202, in the total amount of P2,505,391.36. It also prayed for
the issuance of a writ of preliminary attachment on the ground that Lim
was guilty of fraud in contracting his obligations.
On February 7, 1992, Lim filed his Answer[31] in the Collection Case. He
raised as defense that Marphil had fully paid the loans covered by PN
Nos. 2463, 2730, while PN No. 4202 is null and void.[32] He likewise
maintained he could not be held personally liable for the CG/CS
Agreements because he could not remember signing them. Lim claimed
that the issuance of the writ of preliminary attachment was improper
because he never had any preconceived intention not to pay his
obligations with the bank. He had been transacting with the bank for six
(6) years arid the gross value of the thirty-two (32) transactions between
them amounted to US$640,188.51.[33]
On March 15, 1994, Branch 145 of RTC Makati granted ex parte the
prayer for preliminary attachment in the Collection Case.[34]
On May 7, 1991, Allied Bank filed a Motion to Consolidate/Be
Accepted[35] with Branch 61 of RTC Makati, which was granted by Order
dated June 25, 1991.[36] The two civil cases were jointly heard before
Branch 61 of RTC Makati.
On April 23, 2007, the RTC rendered the Omnibus Decision.[37] The RTC
granted Marphil's complaint for declaratory relief, and declared PN No.
4202 void. However, it held Marphil and/or Ireneo Lim jointly and
severally liable for any balance due on their obligation under PN Nos.
2463 and 2730, and additionally for the amount of P1,913,763.45 with
interest rate fixed at 12% per annum until fully paid.[38]
On May 9, 2007, petitioners filed a Notice of Appeal[39] with the RTC.
Allied Bank did not appeal the RTC decision. Records were then
forwarded to the CA, which began proceedings.[40]
The CA rendered its Decision[41] on January 12, 2009 modifying the RTC
decision. The CA declared PN Nos. 2463 and 2730 fully paid, but held
petitioners liable for the amount of P1,913,763.45, the amount equal to
the face value of L/C No. 21970.[42]
The CA found that Allied Bank is not directly liable for the P1,913,763.45
under L/C No. 21970 because it was not a confirming bank and did not
undertake to assume the obligation of Nanyang Bank to Marphil as its
own. At most, it could only be a discounting bank which bought drafts
under the letter of credit. Following the ruling in Bank of America, NT &
SA v. Court of Appeals,[43] it held that Allied Bank, as the negotiating
bank, has the ordinary right of recourse against the exporter in the event
of dishonor by the issuing bank. A negotiating bank has a right of
recourse against the issuing bank, and until reimbursement is obtained,
the drawer of the draft continues to assume a contingent liability on the
draft. That there is no assumption of direct obligation is further affirmed
by the terms of the Letter Agreement. The CA also declared PN Nos.
2463 and 2730 as fully paid. The CA held that with these payments, the
only obligation left of Marphil was the amount of the reversed credit of
P1,913,763.45. On the writ of preliminary attachment, the CA noted that
petitioners did not file any motion to discharge it on the ground of
irregular issue. The CA found that no forum shopping existed because
the causes of actions for declaratory relief and collection suit are
different.[44]
In a Resolution[45] dated May 12, 2009, the CA denied petitioners Motion
for Partial Reconsideration[46] dated January 22, 2009.
Hence, this petition.
Meanwhile, Allied Bank and Philippine National Bank (PNB) jointly filed
a Motion for Substitution of Party with Notice of Change of Address[47]
on October 22, 2013 informing this Court that the Securities and
Exchange Commission approved a merger between Allied Bank and
PNB, with the latter as the surviving corporation. They prayed that Allied
Bank be dropped and substituted by PNB as party respondent in this
petition. This was granted by this Court in a Resolution[48] dated
December 4, 2013.
Issues
The issues are as follows:
1. Whether Allied Bank's debit memo on Maprhil's credit line in
the amount of P1,913,763.45 is valid.
2. Whether the RTC and CA created a new obligation when it
held Marphil liable for the amount of P1,913,763.45.
3. Whether Allied Bank committed forum shopping in filing the
Collection Case.
4. Whether the writ of preliminary attachment should be
dissolved.
Ruling
We partly grant the petition.
306
At the outset, Allied Bank did not appeal from the decisions of the RTC
and CA respecting the nullification of PN No. 4202, and the
extinguishment by payment of PN Nos. 2730 and 2463. Allied Bank
(now PNB) can thus no longer seek their modification or reversal, but
may only oppose the arguments of petitioners on grounds consistent
with the judgment of the RTC and CA.[49] Bearing this in mind, we
proceed to dispose of the issues.
I. Validity of the debit memo
a. Allied Bank as correspondent bank in L/C No. 21970
Both the RTC and CA found that Allied Bank is not a confirming bank
which undertakes Nanyang Bank's obligation as issuing bank, but at
most, buys the drafts drawn by Marphil as exporter at a discount.
Marphil, however, argues that the RTC and CA erred in ruling that Allied
Bank is not a confirming bank. It insists that Allied Bank as
correspondent bank assumed the risk when it confirmed L/C No. 21970.
It invokes the ruling in Feati Bank & Trust Company v. Court of
Appeals[50] on the rule of strict compliance in letters of credit stating that
"[a] correspondent bank which departs from what has been stipulated
under the letter of credit, as when it accepts a faulty tender, acts on its
own risks and it may not thereafter be able to recover from the buyer or
the issuing bank x x x."[51] Thus, Marphil claims that Allied Bank had no
authority to debit the amount equivalent to the face value of L/C No.
21970 since the latter is directly liable for it.
We affirm the RTC and CA's findings that Allied Bank did not act as
confirming bank in L/C No. 21970.
As noted by the CA, Feati is not in all fours with this case. The
correspondent bank in that case refused to negotiate the letter of credit
precisely because of the beneficiary's non-compliance with its terms.
Here, it is Nanyang Bank, the issuing bank, which refused to make
payment on L/C No. 21970 because there was no strict compliance by
Marphil.[52]
Further, while we said in Feati that a correspondent bank may be held
liable for accepting a faulty tender under the rule of strict compliance, its
liability is necessarily defined by the role it assumed under the terms of
the letter of credit. In order to consider a correspondent bank as a
confirming bank, it must have assumed a direct obligation to the seller
as if it had issued the letter of credit itself.[53] We said that "[i]f the
[correspondent bank] was a confirming bank, then a categorical
declaration should have been stated in the letter of credit that the
[correspondent bank] is to honor all drafts drawn in conformity with the
letter of credit."[54] Thus, if we were to hold Allied Bank liable to Marphil
(which would result in a finding that the former's debit from the latter's
account is wrong) based on the rule of strict compliance, it must be
because Allied Bank acted as confirming bank under the language of
L/C No. 21970.
In finding that Allied Bank, as correspondent bank, did not act as
confirming bank; the CA reviewed the instructions of Nanyang Bank to
Allied Bank in L/C No. 21970. It found that based on the instructions,
there is nothing to support Marphil's argument that Allied Bank
undertook, as its own, Nanyang Bank's obligations in the letter of credit:
In the case of [Bank of America], the functions assumed by a
correspondent bank are classified according to the obligations taken up
by it. In the case of a notifying bank, the correspondent bank assumes
no liability except to notify and/or transmit to the beneficiary the
existence of the L/C. A negotiating bank is a correspondent bank which
buys or discounts a draft under the L/C. Its liability.is dependent upon
the stage of the negotiation. If before negotiation, it has no liability with
respect to the seller but after negotiation, a contractual relationship will
then prevail between the negotiating bank and the seller. A confirming
bank is a correspondent bank which assumes a direct obligation to the
seller and its liability is a primary one as if the correspondent bank itself
had issued the L/C.
In the instant case, the letter of Nanyang to Allied provided the following
instructions: 1) the negotiating bank is kindly requested to forward all
documents to Nanyang in one lot; 2) in reimbursement for the
negotiation(s), Nanyang shall remit cover to Allied upon receipt of
documents in compliance with the terms and conditions of the credit; 3)
the drafts drawn must be marked "drawn under Nanyang Commercial
Bank"; and 4) to advise beneficiary.
From the above-instructions, it is clear that Allied did not undertake to
assume the obligation of Nanyang to Marphil as its own, as if it had itself
issued the L/C. At most, it can only be a discounting bank which bought
the drafts under the L/C. Following then the rules laid down in the case
of Bank of America, a negotiating bank has a right of recourse against
the issuing bank, and until reimbursement is obtained, the drawer of the
draft continues to assume a contingent liability thereon. x x x[55]
In this regard, this issue of whether Allied Bank confirmed L/C No. 21970
and assumed direct obligation on it is a question of fact that was
resolved by both RTC and CA in the negative. This Court is not a trier
of facts and does not normally undertake the re-examination of the
evidence.[56] This is especially true where the trial court's factual findings
are adopted and affirmed by the CA.[57] Factual findings of the trial court
affirmed by the CA are final and conclusive and may not be reviewed on
appeal.[58] Here, there is no reason to deviate from these findings of the
RTC and CA.
307
In any event, we find that Allied Bank may seek reimbursement of the
amount credited to Marphil's account on an independent obligation it
undertook under the Letter Agreement.
b. Allied Bank's right to reimbursement under the Letter Agreement
To recall, Marphil and Allied Bank executed the Letter Agreement dated
June 24, 1988 the subject of which is the draft equivalent to the face
value of L/C No. 21970.
In the Letter Agreement, Marphil expressly bound itself to refund the
amount paid by Allied Bank in purchasing the export bill or draft, in case
of its dishonor by the drawee bank:
Purchase of the Draft shall be with recourse to me/us in the event of
non-payment for any reason whatsoever. Notice of dishonor, non-
acceptance, non-payment, protest and presentment for payment are
hereby waived.
xxx
If, for any reason, my/our Draft is not finally honored or retired by the
drawee, I/we hereby further undertake and bind myself/ourselves to
refund to you, on demand, the full amount of this negotiation, together
with the corresponding interest thereon as well as your or your
correspondent's charges and expenses thereon, if any; and to
compensate you fully for any damages that you might incur arising out
of any suit, action or proceedings, whether judicial or extra-judicial that
might be instituted by the buyer or importer on the ground of lack of
faithful performance of the contract between said buyer or importer and
myself/ourselves. Likewise, should my/our Draft be dishonored for any
cause whatsoever, I/we hereby authorize you, at your discretion and
without any responsibility on your part to sell, or cause to be sold, either
publicly or privately, the underlying goods, wherever they may be found,
and, from the proceeds thereof, I/we hereby empower you to collect all
expenses incident thereto, together with your commission, interest and
other charges, as well as to reimburse yourself therefrom x x x the full
amount of this negotiation, interest, charges and other expenses
thereon, returning to me/us only whatever amount that may remain
thereafter; and, should there be any deficiency still in your favor,
notwithstanding the sale made as herein authorized, I/we likewise bind
myself/ourselves to pay the said deficiency to you upon demand.[59]
The case of Velasquez v. Solidbank Corporation[60] is instructive as to
the nature of obligations arising from this form of undertaking. In that
case, we ruled that the obligation under a letter of undertaking, where
the drawer undertakes to pay the full amount of the draft in case of
dishonor, is independent from the liability under the sight draft.[61] The
letter of undertaking of this tenor is a separate contract the consideration
for which is the promise to pay the bank the value of the sight draft if it
was dishonored for any reason.[62] The liability provided is direct and
primary, without need to establish collateral facts such as the violation
of the letter of credit connected to it.[63]
Similarly, the Letter of Agreement is a contract between Marphil and
Allied Bank where the latter agreed to purchase the draft and credit the
former its value on the undertaking that Allied Bank will be reimbursed
in case the draft is dishonored. This obligation is direct, and is
independent, not only from the obligation under the draft, but also from
the obligation under L/C No. 21970. In this connection, the CA is
incorrect to say that the Letter Agreement bolsters the bank's claim that
it did not undertake direct obligation under the letter of credit. The Letter
Agreement simply creates a separate obligation on Marphil's part to
refund the amount of the proceeds, in case of dishonor.[64] As an
independent obligation, Marphil is bound to fulfill this obligation to
reimburse Allied Bank.
However, a conflict arose because instead of waiting for Marphil's own
initiative to return the amount, Allied Bank on its own debited from the
former's credit line.
c. Allied Banti 's right to debit Marphil's account
We now proceed to determine whether Allied Bank may unilaterally debit
the amount it credited to Marphil's account.
In the case of Associated Bank v. Tan,[65] we upheld the right of a
collecting bank to debit a client's account for; the value of a dishonored
check it previously credited by virtue of the principle of legal
compensation. Since the relationship between banks and depositors
has been held to be that of creditor and debtor in a simple loan, legal
compensation may take place when the conditions in Article 1279 of the
Civil Code are present: (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; and (5) that over neither of them there
be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.[66]
In this case, when Allied Bank credited the amount of P1,913,763.45 to
Marphil's account, it became the debtor of Marphil. However, once
Nanyang Bank dishonored the export documents and draft for L/C No.
21970, Marphil became the debtor of Allied Bank for the amount by
virtue of its obligation to reimburse the bank under the Letter Agreement.
This obligation consisting of sum of money became demandable upon
notice of the dishonor by Nanyang Bank. Thus, legal compensation may
take place between the two debts.
308
In Associated Bank, we nevertheless emphasized that while the bank
has the right to set off, the exercise of such right must be consistent with
the required degree of diligence from banks, i.e., highest degree of care.
Thus, the question that needs to be resolved now is whether Allied Bank
properly exercised its right to set off.[67]
We rule that Allied Bank properly exercised its right to set off. Firstly,
having signed the Letter Agreement, Marphil expressly undertook that
in case of dishonor of the draft for the letter of the credit, it will refund to
Allied Bank whatever the latter has credited in its favor. This places
Marphil on its guard that the dishonor will create an obligation to refund
the amount credited. Secondly, prior to debiting the amount, Allied Bank
informed Marphil twice of Nanyang Bank's refusal to honor the tender of
documents on L/C No. 21970. Thirdly, it immediately informed Marphil
that it was debiting the amount of the dishonored draft from the credit
line.
Most importantly, the debiting of the account was not the proximate
cause of the loss to Marphil brought about by the reshipment of goods
back to Manila. The proximate cause of the loss is the subsequent
dishonor of the documents by Nanyang Bank, which came before the
debiting of the account. The P1,913,763.45 subject of the debit memo
was already the costs incurred in relation to the financing and shipping
of the goods to Hong Kong, and do not refer to the loss incurred when
the goods were shipped back to Manila. Thus, the debiting of Marphil's
account did not result in additional losses for Marphil.
In sum, we affirm that Allied Bank is not a confirming bank under L/C
No. 21970. In any case, whether Allied Bank is directly liable as
confirming bank will not affect Marphil's obligation to reimburse Allied
Bank the amount;of P1,913,763.45 because its liability to refund the
amount arose under an independent contract, i.e. the Letter Agreement.
And while Allied Bank is the debtor of Marphil for the amount it credited
under the draft, the obligation under the Letter Agreement made Allied
Bank the creditor of Marphil for the same amount. Being debtor and
creditor of each other, Allied Bank was entitled to legal compensation by
debiting the amount, which did not result in any loss to Marphil.
II. Obligation of P1,913,763.45 to Allied Bank
Marphil next argues that the RTC and CA erroneously held it liable
to Allied for P1,913,763.45 as a new obligation.
We rule that there is no new obligation created when1 both the RTC and
CA held petitioners liable for the P1,913,763.45. This was a prior and
existing obligation of Marphil separate from the amount covered by the
draft under L/C No. 21970. In filing the Declaratory Relief Case, Marphil
asked the court not only to determine the status of its obligations
evidenced by PN Nos. 2463, 2730 and 4202, but also to determine the
status of its existing loans with Allied Bank, regardless of the
counterclaim of the latter.
To recall, the arrangement between Marphil and Allied Bank is that
advances were made by the bank in the form of loans to finance the
exportation busiriess of Marphil. When Allied Bank purchases the drafts
for the letters of credit from Marphil, it credits the amount to the latter's
credit line and deducts; from the total amount of Marphil's existing loans
from Allied Bank. This is what Allied Bank did in this case; it credited to
Marphil's account the amount of P1,913,763.45 upon purchase of the
draft. However, when L/C No. 21970 was dishonored by Nanyang Bank,
it reversed the credit memo thereby leaving the parties in their situation
prior to the credit memo — that Marphil has existing loan obligations
arising from the advances made by Allied Bank. Simply put, Marphil is
liable for the amount of P1,913,763.45 because this is the only amount
not proven to be paid in the many loans obtained by Marphil in the credit
line.
The CA imposed the legal interest rate of twelve percent (12%) on this
loan obligation. Notably, the CA made no factual determination that the
amount of P1,913,763.45 was subject to any stipulated interest between
the parties. Likewise, Allied Bank neither claimed for the application of
a stipulated interest nor questioned the imposition of legal interest on
the loan, as it no longer appealed the decision. Considering this, we are
constrained to uphold that the amount of P1,913,763.45, as a loan
obligation, is only subject to the legal interest applicable as of the time
of this decision. This is in line with our ruling in Nacar v. Gallery
Frames[68] that in the absence of a stipulated interest, a loan obligation
shall earn legal interest from the time of default, i.e., from judicial or
extrajudicial demand.[69]
We, however, modify the rate of legal interest imposed by the CA also
in conformity with Nacar. The amount of P1,913,763.45 shall earn legal
interest at the rate of six percent (6%) per annum computed from the
time of judicial demand, i.e. from the date of the filing of the counterclaim
in the Declaratory Relief Case on May 7, 1990, until the date of finality
of this judgment. The total amount shall thereafter earn interest at the
rate of six percent (6%) per annum from such finality of judgment until
its satisfaction.[70]
III. Forum Shopping
Marphil argues that in determining that Allied Bank committed forum
shopping upon filing the Collection Case, the RTC and CA should have
considered the counterclaim filed in the Declaratory Relief Case, and
not the main petition itself. Marphil contends that Allied Bank is collecting
on the same three promissory notes in its counterclaim in the two cases.
309
Forum shopping exists "when a party repetitively avails of several
judicial remedies in different courts, simultaneously or successively, all
substantially founded on the same transactions and the same essential
facts and circumstances, and all raising substantially the same issues
either pending in or already resolved adversely by some other court."[71]
Forum shopping is proscribed by the rules because of the vexation
caused to the courts and parties-litigants by the filing of similar cases to
claim the same reliefs.[72] The rule against forum shopping aims to avoid
the grave evil that may result in the rendition by two competent tribunals
of two separate and contradictory decisions.[73]Thus, any violation of the
rule against forum shopping results in the dismissal of a case, or can
result in holding of direct contempt against the actor.[74]
There is forum shopping when the elements of litis pendentia are
present, or when a final judgment in one case amounts to res judicata
in the other.[75] It must be shown that the following elements are present:
(a) identity of parties, or at least such parties representing the same
interests in both actions; (b) identity of rights asserted and reliefs prayed
for, the relief being founded on the, same facts; and (c) the identity of
the two preceding particulars, such that any judgment rendered in the
other action will, regardless of which party is successful, amounts to res
judicata in the action under consideration.[76]
We rule that there is no forum shopping, albeit for a reason different from
that explained by the CA.
The CA concluded that there is no forum shopping because the cases
involve different causes of action: the first case is a petition for
declaratory relief while the second case is one of collection of sum of
money. We find this analysis too sweeping and erroneous. The CA failed
to take into account that it was Allied Bank who is being charged with
violating the rule on forum shopping. As such, the cause of action that
should have been considered is the counterclaim of Allied Bank in the
Declaratory Relief Case, which is essentially a collection suit against the
principal debtor Marphil. Subsequently, it also filed another Collection
Case seeking to collect also on the surety Lim under the same three (3)
promissory notes. These cases are the actions that the CA should have
considered in deciding whether Allied Bank committed forum shopping.
We rule that Allied Bank did not commit forum shopping when it initiated
the Collection Case against Lim despite the pendency of the
counterclaim in the Declaratory Relief Case, because there is no identity
of parties and cause1 of action.
In Gilat Satellite Networks, Ltd. v. United Coconut Planters Bank
General Insurance Co., Inc.,[77] we explained that while a surety contract
is merely ancillary to a principal obligation, the surety's liability is direct,
primary and absolute. The surety's obligation is joint and solidary with
that of the principal, and he becomes liable for the debt and duty of the
principal, even without possessing a direct or personal interest in the
principal obligation. As such, a surety may be sued separately or
together with principal.[78] We emphasized this in Ong v. Philippine
Commercial International Bank[79] where we held that the right to collect
payment from the surety exists independently of its right to proceed
directly against the principal debtor.[80] In fact, the creditor bank may go
against the surety alone without prior demand for payment on the
principal debtor.[81]
Here, the parties in the counterclaim in the Declaratory Relief Case are
Allied Bank, as creditor, and Marphil, as principal debtor. On the other
hand, the parties in the Collection Case are Allied Bank, as creditor, and
Lim, as surety. There is no identity of parties. Also, the causes of action
pleaded are different because the counterclaim in the Declaratory Relief
Case involves collection on the loan obligations, while Allied Bank in its
complaint in the Collection Case seeks to collect on the surety obligation
of Lim under the CG/CS Agreements. Another reason why forum
shopping does not obtain here is the circumstance that the two cases
were subsequently consolidated, jointly heard, and a single decision
was rendered. Thus, the evil that the rule against forum shopping
avoids, and the vexation on the court and parties-litigant, are wanting.
IV. Validity of the writ of preliminary attachment
In its application for a writ of preliminary attachment in the Collection
Case against the surety Lim, Allied Bank alleged:
25. Defendants in conspiracy with Marphil and with one another,
committed fraud in contracting the obligations upon which the
first, second and third causes of action are brought (Sec. 1, par.
(d) Rule 57, Rules of Court) when:
a.) There is a preconceived intention not to pay their obligations as
further manifested by the premature and unjust filing of a
complaint by Marphil against the plaintiff in Civil Case No. 90-
640 before RTC, Makati, Branch 61;
b.) To induce plaintiff to grant the credit accommodation,
defendants and Marphil represented to the plaintiff that they
would present the proper and sufficient documents to the
issuing bank when in truth and in fact, there were discrepancies
noted in the documents presented to the issuing bank by
Marphil.
c.) Further, defendants and Marphil committed misrepresentation
in shipping the cashew nuts at a volume less than that which
was required by the foreign buyer.[82] (Emphasis supplied.)
310
Subsequently, Branch 145 of RTC Makati issued the writ of preliminary
attachment ex parte. When the case reached it, the CA summarily
disposed of the issue of the propriety of the writ by stating that petitioners
did not file any motion to discharge. However, the records show that Lim
filed his Motion to Discharge Attachment[83] dated May 20, 1994 before
Branch 61 of RTC Makati where Lim raised that no ground exists for the
writ of attachment, making it irregularly and improperly issued.
We grant the petition as to the dissolution of the writ of preliminary
attachment.
A writ of preliminary attachment is "a provisional remedy issued upon
order of the court where an action is pending to be levied upon the
property or properties of the defendant therein, the same to be held
thereafter by the sheriff as security for the satisfaction of whatever
judgment might be secured in said action by the attaching creditor
against the defendant."[84] Section 1, Rule 57 of the Revised Rules of
Court provides for the grounds upon which the writ may issue. For this
case, it is grounded under Section 1 (d) of Rule 57 of the Revised Rules
of Court:
Sec. 1. Grounds upon which attachment may issue. — At the
commencement of the action or at any time before entry of judgment, a
plaintiff or any proper party may have the property of the adverse party
attached as security for the satisfaction of any judgment that may be
recovered in the following cases:
xxx
(d) In an action against a party who has been guilty of a fraud in
contracting the debt or incurring the obligation upon which the action
is brought, or in the performance thereof;
xxx
Once issued, a writ of attachment may be dissolved or discharged on
the following grounds: (a) the debtor has posted, a counter-bond or has
made the requisite cash deposit; (b) the attachment was improperly or
irregularly issued as where there is no ground for attachment, or the
affidavit and/or bond filed therefor are defective or insufficient; (c) the
attachment is excessive, but the discharge shall be limited to the excess;
(d) the property attachment is exempt from preliminary attachment; or
(e) the judgment is rendered against the attaching creditor.[85]
In Ng Wee v. Tankiansee,[86] we explained that to justify the attachment
of the debtor's property under Section 1(d) of Rule 57 of the Rules of
Court, the applicant must show that in incurring the obligation sued
upon, fraud must be the reason which induced the other party into giving
its consent. In addition, the particular acts constituting the fraud imputed
to the defendant must be alleged with specificity. We held:
In the case at bench, the basis of petitioner" s application for the
issuance of the writ of preliminary attachment against the properties of
respondent is Section 1(d) of Rule 57 of the Rules of Court which
pertinently reads:
xxx
For a writ of attachment to issue under this rule, the applicant must
sufficiently show the factual circumstances of the alleged fraud because
fraudulent intent cannot be inferred from the debtor's mere non-payment
of the debt or failure to comply with his obligation. The applicant must
then be able to demonstrate that the debtor has intended to defraud the
creditor. In Liberty Insurance Corporation v. Court of Appeals, we
explained as follows:
"To sustain an attachment on triis ground, it must be shown that the
debtor in contracting the debt or incurring the obligation intended to
defraud the creditor. The fraud must relate to the execution of the
agreement and must have been the reason which induced the other
party into giving consent which he would not have otherwise given. To
constitute a ground for attachment in Section 1 (d), Rule 57 of the Rules
of Court, fraud should be committed upon contracting the obligation
sued upon. A debt is fraudulently contracted if at the time of contracting
it the debtor has a preconceived plan or intention not to pay, as it is in
this case. Fraud is a state of mind and need not be proved by direct
evidence but may be inferred1 from the circumstances attendant in each
case."
In the instant case, petitioner's October 12, 2000 Affidavit is bereft of
any factual statement that respondent committed a fraud. The affidavit
narrated only the alleged fraudulent transaction between Wincorp and
Virata and/or Power Merge, which, by the way, explains why this Court,
in G.R. No. 162928, affirmed the writ of attachment issued against the
latter. As to the participation of respondent in the said transaction, the
affidavit merely states that respondent, an officer and director of
Wincorp, connived with the other defendants in the civil case to defraud
petitioner of his money placements. No other factual averment or
circumstance details how respondent committed a fraud or how he
connived with the other defendants to commit a fraud in the transaction
sued upon. In other words, petitioner has not shown any specific act or
deed to support the allegation that respondent is guilty of fraud.
The affidavit, being the foundation of the writ, must contain such
particulars as to how the fraud imputed to respondent was committed
for the court to decide whether or not to issue the writ. Absent any
statement of other factual circumstances to show that respondent, at the
time of contracting the obligation, had a preconceived plan or intention
not to pay, or without any showing of how respondent committed the
311
alleged fraud, the general averment in the affidavit that respondent is an
officer and director of Wincorp who allegedly connived with the other
defendants to commit a fraud, is insufficient to support the issuance of
a writ of preliminary attachment. In the application for the writ under the
said ground, compelling is the need to give a hint about what constituted
the fraud and how it was perpetrated because established is the rule
that fraud is never presumed. Verily, the mere fact that respondent is an
officer and director of the company does not necessarily give rise to the
inference that he committed a fraud or that he connived with the other
defendants to commit a fraud. While under certain circumstances, courts
may treat a corporation as a mere aggroupment of persons, to whom
liability will directly attach, this is only done when the wrongdoing has
been clearly and convincingly established.[87] (Citations omitted.)
We also reiterated in Ng Wee that the rules on the issuance of the writ
of preliminary attachment as a provisional remedy are strictly construed
against the applicant because it exposes the debtor to humiliation and
annoyance.[88]The applicant must show that all requisites are present.[89]
Otherwise, if issued on false or insufficient allegations, the court acts in
excess of its jurisdiction which must be corrected.[90]
In this case, the writ of preliminary attachment was improperly or
irregularly issued because there is no ground for the attachment.
To begin with, Allied Bank filed the application for the writ of preliminary
attachment in the Collection Case against Lim as surety. However, the
allegations of fraud refer to the execution of the promissory notes, and
not on the surety agreement. The application was bereft of any
allegation as to Lim's participation in the alleged conspiracy of fraud.
Also, the writ of preliminary attachment was granted in the Collection
Case against Lim as . surety, yet there was no allegation on Lim's
fraudulent intention in incurring its obligation under the CG/CS
Agreements. It cannot be inferred that Lim had, at the time of contracting
the obligation, the preconceived intention to renege on his obligation
under the CG/CS Agreements. Continuing guaranty and surety
agreements are normally required by a bank or financing company
anticipating to enter into a series of credit transactions with a particular
principal debtor.[91] This avoids a need to execute a separate surety
contract or bond for each financing or credit accommodation extended
to the principal debtor.[92] Here, the CG/CS Agreements were executed
prior to the issuance of L/C No. 21970, and were in force during other
transactions including the one involving L/C No. 22518 which
encountered no problem. Thus, this transaction cannot be singled out to
justify that the surety agreement has been contracted through fraud.
Moreover, the filing of the Declaratory Relief Case cannot be evidence
of a preconceived intention not to pay the surety's obligation because it
was filed by Marphil, and not Lim. In any case, the filing of the case is a
legitimate means resorted to by Marphil in, seeking to clarify its existing
obligations with Allied Bank. If its intention was to renege on its
obligations, it would not have submitted itself to the jurisdiction of the
court where it can be ordered to pay any existing obligations. The
allegation that petitioners made representations to induce it to grant
them a credit line is belied by the fact that it is only in the transaction
involving L/C No. 21970 where Allied Bank encountered problems,
because of Nanyang Bank's dishonor of the draft and documents. Also,
the allegation that petitioners committed misrepresentation in shipping
the cashew nuts at a volume less than that which was required by the
foreign buyer, relates to the sale between Marphil and Intan, and not to
the loan between Marphil and Allied Bank.
From the foregoing, Allied Bank was not able to sufficiently establish the
factual circumstances of the alleged fraud in contracting the obligation.
Thus, there being no ground for its issuance, the writ of preliminary
attachment should be dissolved.
WHEREFORE, the petition for review on certiorari is PARTLY
GRANTED. The January 12, 2009 Decision and May 12, 2009
Resolution of the Court of Appeals are MODIFIED. Marphil Export
Corporation and Ireneo Lim are ordered to pay jointly and severally
Allied Banking Corporation (now Philippine National Bank) the principal
amount of P1,913,763.45, with interest at the rate of six percent (6%)
per annum computed from May 7, 1990, until the date of finality of this
judgment. The total amount shall thereafter earn interest at the rate of
six percent (6%) per annumfrom the finality of judgment until its
satisfaction. Let the writ of preliminary attachment issued against Ireneo
Lim's property be DISSOLVED.
SO ORDERED.
312
 CALIFORNIA MANUFACTURING COMPANY, INC., Petitioner,
vs.
ADVANCED TECHNOLOGY SYSTEM, INC., Respondent.
G.R. No. 202454
SERENO, J.:
Before us is a Petition for Review on Certiorari assailing the Decision 1
of the Court of Appeals (CA) in CA-G.R. CV No. 94409, which denied
the appeal filed by California Manufacturing Company, Inc. (CMCI) from
the Decision2 of Regional Trial Court (RTC) of Pasig City, Branch 268,
in the Complaint for Sum of Money3 filed by Advanced Technology
Systems, Inc. (ATSI) against the former.
The RTC ordered CMCI to pay ATSI the amount of ₱443,729.39 for the
unpaid rentals for a Prodopak machine, plus legal interest from the date
of extra-judicial demand until full payment; 30% of the judgment award
as attorney's fees; and the costs of litigation. The CA affirmed the trial
court's decision, but it deleted the award of attorney's fees for lack of
factual and legal basis and ordered CMCI to pay the costs of litigation.
THE ANTECEDENT FACTS
Petitioner CMCI is a domestic corporation engaged in the food and
beverage manufacturing business. Respondent ATSI is also a domestic
corporation that fabricates and distributes food processing machinery
and equipment, spare parts, and its allied products.4
In August 200 I, CMCI leased from ATSI a Prodopak machine which
was used to pack products in 20-ml. pouches.5The parties agreed to a
monthly rental of ₱98,000 exclusive of tax. Upon receipt of an open
purchase order on 6 August 2001, ATSI delivered the machine to
CMCI's plant at Gateway Industrial Park, General Trias, Cavite on 8
August 2001.
In November 2003, ATSI filed a Complaint for Sum of Money against
CMCI to collect unpaid rentals for the months of June, July, August, and
September 2003. ATSI alleged that CMCI was consistently paying the
rents until June 2003 when the latter defaulted on its obligation without
just cause. ATSI also claimed that CMCI ignored all the billing
statements and its demand letter. Hence, in addition to the unpaid rents
A TSI sought payment for the contingent attorney's fee equivalent to
30% of the judgment award.
CMCI moved for the dismissal of the complaint on the ground of
extinguishment of obligation through legal compensation. The RTC,
however, ruled that the conflicting claims of the parties required trial on
the merits. It therefore dismissed the motion to dismiss and directed
CMCI to file an Answer.7
In its Answer,8 CMCI averred that ATSI was one and the same with
Processing Partners and Packaging Corporation (PPPC), which was a
toll packer of CMCI products. To support its allegation, CMCI submitted
copies of the Articles of Incorporation and General Information Sheets
(GIS)9 of the two corporations. CMCI pointed out that ATSI was even a
stockholder of PPPC as shown in the latter's GIS. 10
CMCI alleged that in 2000, PPPC agreed to transfer the processing of
CMCI's product line from its factory in Meycauayan to Malolos, Bulacan.
Upon the request of PPPC, through its Executive Vice President
Felicisima Celones, CMCI advanced ₱4 million as mobilization fund.
PPPC President and Chief Executive Officer Francis Celones allegedly
committed to pay the amount in 12 equal instalments deductible from
PPPC's monthly invoice to CMCI beginning in October 2000. 11 CMCI
likewise claims that in a letter dated 30 July 2001, 12 Felicisima proposed
to set off PPPC's obligation to pay the mobilization fund with the rentals
for the Prodopak machine.
CMCI argued that the proposal was binding on both PPPC and A TSI
because Felicisima was an officer and a majority stockholder of the two
corporations. Moreover, in a letter dated 16 September 2003, 13 she
allegedly represented to the new management of CMCI that she was
authorized to request the offsetting of PPPC's obligation with ATSI's
receivable from CMCI. When ATSI filed suit in November 2003, PPPC's
debt arising from the mobilization fund allegedly amounted to
₱10,766.272.24.
Based on the above, CMCl argued that legal compensation had set in
and that ATSI was even liable for the balance of PPPC's unpaid
obligation after deducting the rentals for the Prodopak machine.
After trial, the RTC rendered a Decision in favor of ATSI with the
following dispositive portion:
313
 WHEREFORE, foregoing premises considered, judgment
is hereby rendered in favor of plaintiff and against the
defendant, ordering the latter to pay the former, the
following sums:
1. Php443,729.39 representing the unpaid rental for the
prodopak machine plus legal interest from the date of extra
judicial demand (October 13, 2003 - Exh. "E") until
satisfaction of this judgment;
2. 30% of the judgment award as and by way of attorney's
fees; and
3. Cost of litigation.14
The trial court ruled that legal compensation did not apply because
PPPC had a separate legal personality from its individual stockholders,
the Spouses Celones, and ATSI. Moreover, there was no board
resolution or any other proof showing that Felicisima's proposal to set-
off the unpaid mobilization fund with CMCI 's rentals to A TSI for the
Prodopak Machine had been authorized by the two corporations.
Consequently, the RTC ruled that CMCI's financial obligation to pay the
rentals for the Prodopak machine stood and that its claim against PPPC
could be properly ventilated in the proper proceeding upon payment of
the required docket fees. 15
On appeal by CMCI, the CA affirmed the trial court's ruling that legal
compensation had not set in because the element of mutuality of parties
was lacking. Likewise, the appellate court sustained the trial court's
refusal to pierce the corporate veil. It ruled that there must be clear and
convincing proof that the Spouses Celones had used the separate
personalities of ATSI or PPPC as a shield to commit fraud or any wrong
against CMCI, which was not existing in this case. 16
Aside from the absence of a board resolution issued by ATSI, the CA
observed that the letter dated 30 July 2001 clearly showed that
Felicisima's proposal to effect the offsetting of debts was limited to the
obligation of PPPC. 17The appellate court thus sustained the trial court's
finding that ATSI was not bound by Felicisima's conduct.
Moreover, the CA rejected CMCI's argument that ATSI is barred by
estoppel as it found no indication that ATSI had created any appearance
of false fact. 18 CA also held that estoppel did not apply to PPPC
because the latter was not even a party to this case.
The CA, however, deleted the trial court's award of attorney's fees and
costs of litigation in favor of ATSI as it found no discussion in the body
of the decision of the factual and legal justification for the award.
CMCI filed a Motion for Reconsideration of the CA Decision, but the
appellate court denied the motion for lack of merit. 19 Hence, this
petition.20
THE ISSUE
The assignment of errors raised by CMCI all boil down to the question
of whether the CA erred in affirming the ruling of the RTC that legal
compensation between ATSI's claim against CMCI on the one hand,
and the latter's claim against PPPC on the other hand, has not set in.
OUR RULING
We affirm the CA Decision in toto.
CMCI argues that both the RTC and the CA overlooked the
circumstances that it has proven to justify the piercing of corporate veil
in this case, i.e., (1) the interlocking board of directors, incorporators,
and majority stockholder of PPPC and ATSI; (2) control of the two
corporations by the Spouses Celones; and (3) the two corporations were
mere alter egos or business conduits of each other. CMCI now asks us
to disregard the separate corporate personalities of A TSI and PPPC
based on those circumstances and to enter judgment in favor of the
application of legal compensation.
Whether one corporation is merely an alter ego of another, a sham or
subterfuge, and whether the requisite quantum of evidence has been
adduced to warrant the puncturing of the corporate veil are questions of
fact. 21Relevant to this point is the settled rule that in a petition for review
on certiorari like this case, this Court's jurisdiction is limited to reviewing
errors of law in the absence of any showing that the factual findings
complained of are devoid of support in the records or are glaringly
erroneous. 22 This rule alone wan-ants the denial of the petition, which
essentially asks us to reevaluate the evidence adduced by the pm1ies
and the credibility of the witnesses presented.
314
We have reviewed the evidence on record and have found no cogent
reason to disturb the findings of the co mis a quo that A TSI is distinct
and separate from PPPC, or from the Spouses Celones.
Any piercing of the corporate veil must be done with caution.23 As the
CA had correctly observed, it must be ce11ain that the corporate fiction
was misused to such an extent that injustice, fraud, or crime was
committed against another, in disregard of rights. Moreover, the
wrongdoing must be clearly and convincingly established. Sarona v.
NLRC24 instructs, thus:
Whether the separate personality of the corporation
should be pierced hinges on obtaining facts appropriately
pleaded or proved. However, any piercing of the corporate
veil has to be done with caution, albeit the Court will not
hesitate to disregard the corporate veil when it is misused
or when necessary in the interest of justice. After all, the
concept of corporate entity was not meant to promote
unfair objectives.
The doctrine of piercing the corporate veil applies only in
three (3) basic areas, namely: 1) defeat of public
convenience as when the corporate fiction is used as a
vehicle for the evasion of an existing obligation; 2) fraud
cases or when the corporate entity is used to justify a
wrong, protect fraud, or defend a crime; or 3) alter ego
cases, where a corporation is merely a farce since it is a
mere alter ego or business conduit of a person, or where
the corporation is so organized and controlled and its
affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another
corporation.25
CMCI 's alter ego theory rests on the alleged interlocking boards of
directors and stock ownership of the two corporations. The CA,
however, rejected this theory based on the settled rule that mere
ownership by a single stockholder of even all or nearly all of the capital
stocks of a corporation, by itself, is not sufficient ground to disregard the
corporate veil. We can only sustain the CA's ruling. The instrumentality
or control test of the alter ego doctrine requires not mere majority or
complete stock control, but complete domination of finances, policy and
business practice with respect to the transaction in question. The
corporate entity must be shown to have no separate mind, will, or
existence of its own at the time of the transaction.26
Without question, the Spouses Celones are incorporators, directors, and
majority stockholders of the ATSI and PPPC. But that is all that CMCI
has proven. There is no proof that PPPC controlled the financial policies
and business practices of ATSI either in July 2001 when Felicisima
proposed to set off the unpaid ₱3.2 million mobilization fund with CMCI's
rental of Prodopak machines; or in August 2001 when the lease
agreement between CMCI and ATSI commenced. Assuming arguendo
that Felicisima was sufficiently clothed with authority to propose the
offsetting of obligations, her proposal cannot bind ATSI because at that
time the latter had no transaction yet with CMCI. Besides, CMCI had
leased only one Prodopak machine. Felicisima's reference to the
Prodopak machines in its letter in July 2001 could only mean that those
were different from the Prodopak machine that CMCI had leased from
A TSI.
Contrary to the claim of CMCI, none of the letters from the Spouses
Celones tend to show that ATSI was even remotely involved in the
proposed offsetting of the outstanding debts of CMCI and PPPC. Even
Felicisima's letter to the new management of CMCI in 2003 contains
nothing to support CMCI's argument that Felicisima represented herself
to be clothed with authority to propose the offsetting. For clarity, we
quote below the relevant portions of her letter:
Gentlemen:
I apologize for writing this letter. But kindly spare me your
time and allow to ventilate my grievances against
California Manufacturing Corporation x x x. I had formally
lodged my grievances with the management of CMC, but
until now, no action has been done yet. It is on this spirit
and time tested principle of diplomacy that I write this
letter.
I am the Executive Vice President of Processing Partners
& Packaging Corporation (PPPC), a duly organized
domestic corporation, engaged in the toll packing
business.
Sometime in November of 1996, CMC availed of the toll
packing services of PPPC. At the outset, business
315
relationship between the two was going smoothly. In due the amount of P443,729.37, but despite various demands,
time, PPPC proved its name to CMC in delivering quality CMC refused to pay Advanced Tech.
toll packing services. As a matter of fact, after the
expiration of the toll packing contract, CMC still retained
the services of PPPC. Thus, sometime in the year 2000,
CMC executed another toll packing contract with PPC. We have already formally lodged our grievances
concerning the foregoing with the management of CMC.
However, the business relationship unexpectedly turned However, until now, no action has been done. We believe
sour when CMC changed its Management in the latter part that before we take coercive actions available under the
of 2002. Since then CMC's new management has been law, it is wise to bring said grievances first to your attention
committing unsound business practices prejudicial to the to exhaust available venues for amicable settlement.
interests of PPPC.
Though PPPC's grievances are ripe for judicial action, we
xxxx still hope that we can settle [the] same amicably. However,
if we run out of choices, we will [be] constrained to invoke
Failure of CMC to honor its the aid of the appropriate court. (Emphases supplied)27
agreement with PPC anent
the pickling machinery Nothing in the narration above supports CMCI's claim that it had been
led to believe that ATSI and PPPC were one and the same; or, that
xxxx ATSI's collectible was intertwined with the business transaction of PPPC
with CMCI.
Leapfrog Plant/Jasmine al)d
Rose Plant In all its pleadings, CMCI averred that the P4 million mobilization fund
was in furtherance of its agreement with PPPC in 2000.1awp++i1 Prior
xxxx thereto, PPPC had been a toll packer of its products as early as 1996.
Clearly, CMCI had been dealing with PPPC as a distinct juridical person
Pre-termination of toll acting through its own corporate officers from 1996 to 2003.
[p]acking [a]greement for
KLS Spaghetti Sauce without CMCI's dealing with ATSI began only in August 2001. It appears,
just cause however, that CMCI now wants the Court to gloss over the separate
corporate existence ATSI and PPPC notwithstanding the dearth of
evidence showing that either PPPC or ATSI had used their corporate
xxxx cover to commit fraud or evade their respective obligations to CMCI. It
even appears that CMCI faithfully discharged its obligation to ATSI for a
Unpaid rentals for the lease good two years without raising any concern about its relationship to
of machinery from Advanced PPPC.
Technology Systems, Inc.
The fraud test, which is the second of the three-prong test to determine
CMC has been leasing a machinery of Advanced the application of the alter ego doctrine, requires that the parent
Technology Systems, Inc. (Advanced Tech), a domestic corporation's conduct in using the subsidiary corporation be unjust,
corporation of which I am also the majority stockholder. fraudulent or wrongful. Under the third prong, or the harm test, a causal
CMC owes Advanced Tech. unpaid rentals in connection between the fraudulent conduct committed through the
instrumentality of the subsidiary and the injury suffered or the damage

316
incurred by the plaintiff has to be established.28 None of these elements
have been demonstrated in this case. Hence, we can only agree with
the CA and RTC in ruling out mutuality of parties to justify the application
of legal compensation in this case.
WHEREFORE, the Decision dated 25 August 2011 and Resolution
dated 21 June 2012 issued by the Court of Appeals in CA-G.R. CV No.
94409 are AFFIRMED. The instant Petition is DENIED for lack of merit.
SO ORDERED.

Article 1279 of the Civil Code provides:

ARTICLE 1279. In order that compensation may be proper, it is

necessary:

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

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

(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy,

commenced by third persons and communicated in due time to the
debtor.

The law, therefore, requires that the debts be liquidated and

demandable. Liquidated debts are those whose exact amounts have
already been determined. 29

CMCI has not presented any credible proof, or even just an exact
computation, of the supposed debt of PPPC. It claims that the
mobilization fund that it had advanced to PPPC was in the amount of ₱4
million. Yet, Felicisima's proposal to conduct offsetting in her letter dated
30 July 2001 pertained to a ₱3.2 million debt of PPPC to CMCI.
Meanwhile, in its Answer to ATSI's complaint, CMCI sought to set off its
unpaid rentals against the alleged ₱10 million debt of PPPC. The
uncertainty in the supposed debt of PPPC to CMCI negates the latter's
invocation of legal compensation as justification for its non-payment of
the rentals for the subject Prodopak machine.

317
 BANCO DE ORO UNIBANK, INC. (NOW BDO UNIBANK, INC.),
PETITIONER, VS. EDGARDO C. YPIL, SR., CEBU SUREWAY
TRADING CORPORATION, AND LEOPOLDO KHO,
RESPONDENTS.
HERNANDO, J.:
This is a Petition for Review on Certiorari1 under Rule 45 of the Rules
of Court challenging the January 15, 2014 Decision2 and the March 26,
2014 Resolution3 of the Court of Appeals (CA) in CA-G.R. SP No.
06217, affirming the August 11, 20084 and May 20, 20115 Orders of the
Regional Trial Court (RTC) of Cebu City, Branch 16, in Civil Case No.
CEB-29462 which directed the petitioner, BDO Unibank, Inc. (Bank), to
guarantee the availability of the garnished amount of P300,000.00 from
the account of respondent Cebu Sureway Trading Corporation (CSTC),
represented by its Executive Vice-President, respondent Leopoldo Kho
(Kho).
The Antecedents
On August 20, 2002, Kho, representing CSTC, offered a proposal to
respondent Edgardo C. Ypil, Sr. (Ypil) to invest in the Prudentialife Plan
- Millionaires in Business scheme. Ypil acquiesced and Kho was able to
solicit the total amount of P300,000.00 from him. Eventually, though,
Ypil opted to get a refund of the amounts he paid and manifested such
intent through a letter dated February 11, 2003. However, CSTC or Kho
did not answer. Ypil likewise made several oral demands but to no avail.
Subsequently, Ypil 's lawyer sent a demand letter dated May 19, 2003
to Kho but it was never answered.6
Ypil thus filed a Complaint7 for Specific Performance with Attachment,
Damages and Attorney's fees against CSTC and Kho before the RTC of
Cebu City which was docketed as Civil Case No. CEB-29462.8 Ypil
asked for the sum of P300,000.00 as principal payment plus interest of
two percent (2%) per month and two percent (2%) collection fee
compounded monthly, as well as damages and attorney's fees.9
In an Order10 dated October 15, 2003, the RTC granted Ypil's prayer for
the ex-parte issuance of an attachment order. Afterwards, the trial court
issued a Writ of Preliminary Attachment11 on October 29, 2003.
Relevantly, on February 4, 2004, Pascual M. Guaren, Sheriff IV (Sheriff
Guaren) of the RTC ofCebu City, Branch 7, issued a Notice of
Garnishment12 of the amount of P300,000.00 plus lawful expenses from
the accounts of CSTC and/or Kho addressed to the Manager and/or
Cashier of the Bank's North Mandaue Branch. The Bank received the
said notice on the same day. Yet, on February 10, 2004, the Bank,
through its North Mandaue Branch Head Cyrus M. Polloso (Polloso),
sent its Reply13 to Sheriff Guaren informing him that CSTC and/or Kho
have no available garnishable funds.
On March 5, 2004, Kho filed his Answer14 to Ypil's Complaint.
During the scheduled pre-trial conference, the trial court noted that
Polloso failed to appear. Consequently, the pre-trial conference was
deferred to October 24, 2007. Additionally, in an Order15 dated
September 19, 2007, the RTC directed the issuance of subpoenas
duces tecum and ad testificandum for Polloso to appear in court and to
bring the documents related to the bank accounts of CSTC and Kho.
Nonetheless, Polloso still failed to appear on October 24, 2007. Hence,
the trial court issued another Order16 dated October 24, 2007 directing
Polloso to show cause why he should not be cited for contempt. The trial
court again directed the issuance of the subpoenas to Polloso for him to
testify on November 28, 2007 and to bring the pertinent documents. On
February 1, 2008, Polloso was finally called to testify.17
Notably, the RTC discovered that the Bank already debited from CSTC's
savings and current accounts some amounts to offset its (CSTC's)
outstanding obligation with the Bank under a loan agreement. In view of
this, the trial court issued an Order18 dated May 9, 2008 directing the
Bank, through Polloso, to show cause why it should not be held guilty of
indirect contempt for debiting the money from the accounts of CSTC and
Kho which was under custodia legis.
The Bank filed its Compliance/Explanation19 on June 16, 2008 as a
forced intervenor to the trial court's May 9, 2008 Order. Essentially, it
averred that since CSTC defaulted in its obligations to the Bank as
embodied in a Credit Agreement20 and Promissory Note No.
366019510321 dated October 13, 2003, its entire obligation immediately
became due and demandable without need of demand or notice. In
other words, it asserted that since the Bank and CSTC were creditors
and debtors of each other, legal compensation already took effect.
CSTC and Kho then filed their Comment22 stating that the provisions of
the Promissory Note should not affect third parties and court processes
318
such as garnishment. They alleged that the Bank resorted to legal
compensation to frustrate the order of garnishment. Moreover, they
averred that legal compensation cannot take effect because CSTC's
loan was not yet due and demandable.23 Subsequently, Ypil filed his
Memorandum24 insisting that the trial court acquired jurisdiction over the
Bank which in turn became a forced intervenor upon receipt of the
Notice of Garnishment. Withal, he posited that the subject deposit was
brought into custodia legis which the Bank cannot debit in its favor.25
Ruling of the Regional Trial Court:
The RTC issued an Order26 dated August 11, 2008 absolving Polloso
from the charge of indirect contempt but ordering the Bank's North
Mandaue Branch to make available the garnished deposits of CSTC and
Kho pursuant to the Notice of Garnishment. It ruled that "[t]he bank,
cannot, however, unilaterally debit the defendants' [CSTC and Kho]
accounts which are already in custodia legis, even assuming for
argument[']s sake that legal compensation ensued ipso jure. If the bank
has any claims against the defendants [CSTC and Kho], it must file the
proper pleading for intervention to protect whatever it claims to be its
rights to include the right of legal compensation."27 The dispositive
portion of the said Order reads:
WHEREFORE, in view of the foregoing, this court absolves, as he is
hereby absolved, Mr. Polloso from the charge of indirect contempt
against this Court, but orders, as it is hereby ordered, Banco de Oro,
North Mandaue Branch to make available the garnished amount in
Exhibit "N" to be held by it for the court by virtue of the writ of
garnishment to secure whatever amounts that this Cow1may award
against herein defendants [CSTC and Kho].
xxxx
SO ORDERED.28
The Bank filed a Partial Motion for Reconsideration29 insisting that legal
compensation took place ipso jure and retroacted to the date when all
the requisites were fulfilled. Kho also filed a Comment.30 However, the
trial court denied the Bank's motion for consideration in its Order31 dated
May 20, 2011. Thus, the Bank filed a Petition for Certiorari32 with
application for issuance of Temporary Restraining Order (TRO) and/or
Writ of Preliminary Injunction before the CA.
Meanwhile, the RTC rendered a Judgment Based on Compromise
Agreement33 dated November 23, 2012. Apparently, Ypil and Kho
submitted a Compromise Agreement34 wherein Kho, in behalf of CSTC,
agreed to pay the garnished amount of P300,000.00 as full and final
settlement of CSTC's obligation, given that the said amount is more or
less the same amount it owes Ypil. Moreover, Ypil and Kho agreed to
waive any other claims and counterclaims in the specific performance
case. Withal, the trial court, after finding that the Compromise
Agreement did not appear to be contrary to any law, morals, good
customs, public policy or public order, ordered the Bank to tender the
garnished amount of P300,000.00 to Ypil.
Aggrieved, the Bank filed a Manifestation35 dated January 30, 2013
before the RTC stating that the garnished amount is the subject of its
pending certiorari petition with the CA. As such, it requested the trial
court to suspend any attempt to implement the Judgment Based on
Compromise Agreement insofar as the garnished amount is concerned,
at least until the CA resolves its certiorari petition.
Nevertheless, considering that the CA did not issue any injunctive order,
the RTC issued an Order36 dated March 12, 2013 denying the Bank's
prayer for the suspension of the execution of the assailed Order dated
August 11, 2008 which directed the Bank to make available the
garnished amount of P300,000.00.
Subsequently, in a Resolution37 dated May 6, 2013, the CA denied the
Bank's application for a writ of injunction.
In its certiorari petition, the Bank contended that when the Notice of
Garnishment was served upon it on February 4, 2004, CSTC had
existing obligations with the Bank amounting to P3,823,000.00 which
was in excess of its (CSTC's) deposit balance in. the amount of
P294,436.68. It argued that since CSTC 's obligation with the Bank
became due and demandable even before the Notice of Garnishment
was served upon it, there could not have been any amount which could
be garnished from CSTC's accounts.38 This is because legal
compensation took place by operation of law in accordance with Article
1279 of the Civil Code as apparently, CSTC defaulted in its monthly
amortizations. As a consequence, CSTC's entire obligation with the
Bank immediately became due and demandable even without demand
pursuant to the stipulations in the Promissory Note.39 Withal, the Bank
claimed that the RTC committed grave abuse of discretion because it
failed to affirm that the Bank correctly applied legal compensation.40
319
Conversely, Ypil contended that the RTC did not commit grave abuse of
discretion. He maintained that when the Complaint was filed and when
the Notice of Garnishment was served, CSTC and Kho had sufficient
funds in their existing accounts with the Bank. He posited that the
amounts in the savings and checking accounts of CSTC were
immediately put under custodia legis and that the Bank cannot
automatically and unilaterally debit the money in its favor especially after
service of the Notice of Garnishment. He opined that according to
Section 7(d), Rule 57 of the Rules of Court, the trial court which issued
the Notice of Garnishment already acquired jurisdiction over the Bank,
which in turn became a forced intervenor immediately upon service and
receipt of the said notice.41
The Ruling of the Court of Appeals:
The CA, in its assailed January 15, 2014 Decision,42 declared that the
RTC did not commit grave abuse of discretion when it issued the
assailed Orders as it correctly held that the service of the Notice of
Garnishment upon the Bank on February 4, 2004 effectively placed
CSTC's deposits under custodia legis, notwithstanding the debiting of
CSTC's accounts by the Bank on February 10, 2004.43
Moreover, the CA ruled that legal compensation takes place when two
persons, in their own right, are debtors and creditors of each other. On
one hand, CSTC is a depositor of the Bank in the amount of
P301,838.27. On the other hand, CSTC owes the Bank purportedly in
the amount of P3,823,000.00. Simply put, CSTC and the Bank are, in
their own right, creditors and debtors of each other.44 However, the
appellate court found that not all the elements of legal compensation
pursuant to Article 1279 of the Civil Code are present in this case. This
is because notwithstanding CSTC's indebtedness to the Bank, there is
no proof as to when the obligation became due, liquidated and
demandable. While the Bank relied on the Promissory Note executed by
CSTC in its favor, it (Bank) however failed to prove the exact date of the
default which supposedly rendered CSTC's obligations due and
demandable.45 The CA additionally noted the following:
1. That the writ of garnishment was duly served on the petitioner bank
on February 4, 2004;
2. That the bank debited the respondent corporation's [CSTC's] account
as a legal set-off and compensation against their outstanding obligations
with the bank on February 10, 2004;
3. That the petitioner bank, through its branch manager, Cyrus Polloso,
sent a reply letter dated February 10, 2003 [2004] to Sheriff Pascual M.
Guaren informing the latter that respondent corporation [CSTC] had no
garnishable funds with petitioner bank.46
Significantly, the CA found that the Bank debited CSTC's account only
on February 10, 2004 or six days after the Notice of Garnishment.47 It
added that the Bank conveniently failed to mention that there was a
stipulation in the Promissory Note giving it the option to offset or not to
offset the deposits of CSTC. The fact that CSTC had P301,838.27 in its
savings and checking accounts when the Notice of Garnishment was
served showed that the Bank had not yet opted to offset CSTC's
deposits to pay for its obligations.48 The appellate court explained that:
[b]y the time the petitioner [Bank] received the Notice of Garnishment
on February 4, 2004, the petitioner bank's belated reliance on the
retroactive effect of legal compensation necessarily failed because the
service of said Notice of Garnishment had effectively put petitioner
[Bank] on notice regarding the existing controversy commenced by
respondent Edgardo C. Ypil, Sr., a third person, against the respondent
corporation [CSTC]. Consequently, legal compensation could no longer
take place since the fifth requisite49 under Article 1279 of the Civil Code
could no longer be complied with xxx.50
Hence, the CA declared that the Bank became a forced intervenor in
Civil Case No. CEB-29462 (the specific performance case) after the
service of the Notice of Garnishment upon it on February 4, 2004.51 The
dispositive portion of the CA's assailed Decision reads:
WHEREFORE, foregoing premises considered, and after finding no
grave abuse of discretion amounting to lack or excess of jurisdiction in
the issuance of the Orders dated August 11, 2008 and May 20, 2011 in
Civil Case No. CEB-29462 pending before the Regional Trial Court of
Cebu City Branch 16, the petition is hereby DISMISSED for lack of merit.
Let the records of this case be removed from the docket of this Court.
SO ORDERED.52
The Bank filed a motion for reconsideration53 which the CA denied in a
Resolution54 dated March 26, 2014. Discontented, the Bank filed a
Petition for Review on Certiorari55 before the Court and raised the
following issues:
320
Issues:
A. THE COURT OF APPEALS COMMITTED SERIOUS AND
REVERSIBLE ERROR IN NOT HOLDING THAT THE DISPUTED
DEPOSIT IN THIS CASE HAD BEEN THE SUBJECT OF LEGAL
COMPENSATION PRIOR TO THE SERVICE OF THE NOTICE OF
GARNISHMENT TO PETITIONER [BANK] AND THAT SUCH
SERVICE OF THE NOTICE, THEREFORE, DID NOT PUT THE SAID
DEPOSIT IN CUSTODIA LEGIS.
B. THE COURT OF APPEALS COMMITTED SERIOUS AND
REVERSIBLE ERROR IN NOT HOLDING THAT RESPONDENTS
ARE IN BAD FAITH IN MAKING THE SUBJECT DEPOSIT A PART
OF THEIR COMPROMISE AGREEMENT, THUS LEADING TO ITS
ERRONEOUS INCLUSION IN THE TRIAL COURT'S JUDGMENT
BASED ON COMPROMISE AGREEMENT.56
Thus, the pivotal issue in this case is whether or not legal compensation
took place ipso jure as between the Bank and CSTC when CSTC
defaulted in its obligations to the Bank.
Our Ruling
The Petition is unmeritorious.
The Bank insists that all the requisites of legal compensation under
Article 1279 of the Civil Code are present in this case. It highlights that
the Promissory Note stipulated that in the event of default, CSTC's
remaining obligations with the Bank will immediately become due and
payable even without a demand notice. It points out that CSTC had
already defaulted on its obligations under the Promissory when the
Notice of Garnishment was served to the Bank.57 Hence, the Bank
asserts that it acted correctly when it formally debited CSTC's deposit to
reflect the legal compensation which automatically took place even prior
to the service of the Notice of Garnishment on February 4, 2004.58
Moreover, the Bank contends that since legal compensation occurs by
operation of law, the deposits could not have been the proper subject of
the Notice of Garnishment and could not be placed in custodia legis.59
Additionally, the Bank argues that the respondents acted in bad faith
when they included the subject deposit a part of their Compromise
Agreement which in turn became the trial court's basis in issuing the
Judgment Based on Compromise Agreement. Respondents knew that
the Bank has a valid claim on the deposit in view of the automatic
application of legal compensation and that the ownership of the said
deposit was under dispute.60
Ypil counters that the Bank unilaterally withdrew P301,838.27 from
CSTC's account six days after the Notice of Garnishment was served
upon it61 and that it (Bank) failed to provide the exact date when CSTC
allegedly defaulted on its obligation to pay the Bank.62
For its part, CSTC avers that when the Notice of Garnislunent was
served upon the Bank on February 4, 2004, it has an existing deposit
since its checking account has not yet been closed by the Bank. It
alleges that on February 10, 2004, the Bank belatedly informed the trial
court that there was no available garnishable amount. Thus, it can be
inferred that on or before February 4, 2004, the Bank did not initiate the
application of legal compensation and only invoked this option after
receipt of the Notice of Garnishment. CSTC additionally asserts that the
Bank did not present any document to prove the date when CSTC's loan
obligation became due and demandable. Furthermore, when the Notice
of Garnishment was served, it placed the Bank on notice regarding the
case filed by Ypil against CSTC. Lastly, it contends that the Compromise
Agreement was valid and approved by the trial court and that there was
no bad faith in entering into the said contract.63
The Bank reiterates that prior to the service of the Notice of Garnishment
upon it, CSTC had already defaulted on its obligation pursuant to the
provisions of the Promissory Note. Withal, it properly debited CSTC's
deposit to reflect the legal compensation that took place by operation of
law.64 Moreover, it maintains that even without notice or any positive act
on its part, legal compensation occurred anyway. It likewise insists that
the respondents were in bad faith when they made the subject deposit
a part of their Compromise Agreement.65
It is settled that "[c]ompensation 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.66 The object of compensation is the
prevention of unnecessary suits and payments thru the mutual extinction
by operation of law of concurring debts."67 The said mode of payment is
encapsulated in Article 1279 of the Civil Code, viz.:
ARTICLE 1279. In order that compensation may be proper, it is
necessary:
321
(1)That each one of the obligors be bound principally, and that he be at
the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if
the latter has been stated;
(3)That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the
debtor.
In relation to this, Article 1290 of the Civil Code states that "[w]hen all
the requisites mentioned in Article 1279 are present, compensation
takes effect by operation of law, and extinguishes both debts to the
concurrent amount, even though the creditors and debtors are not aware
of the compensation." Relevantly, this is the Bank's main contention.
Before proceeding to a further discussion on the main issue, the Court
affirms the findings and conclusions of the CA which are supported by
the evidence on record. Accordingly, We need not interfere with the
same. To stress, "[f]actual findings of the CA, especially if they coincide
with those of the RTC, as in the instant case, is generally binding on us.
In a petition for review on certiorari under Rule 45 of the 1997 Rules of
Civil Procedure, as amended, this Court, may not review the findings of
facts all over again. It must be stressed that this Court is not a trier of
facts, and it is not its function to re-examine and weigh anew the
respective evidence of the parties. The jurisprudential doctrine that
findings of the Court of Appeals are conclusive on the parties and carry
even more weight when these coincide with the factual findings of the
trial court, must remain undisturbed, unless the factual findings are not
supported by the evidence on record."68
In any case, guided by the conditions stated in Article 1279 of the Civil
Code and to supplement the findings of the CA, We reiterate that there
is no dispute that the Bank and CSTC are both creditors and debtors of
each other. Moreover, the debts consist in or involve a sum of money,
particularly CSTC's loan and its deposit with the Bank. Notably, the Bank
argues that CSTC's debts became due given that it defaulted in its loan
obligations even without need of demand pursuant to the Promissory
Note. Neither CSTC nor Kho categorically refuted that CSTC indeed
defaulted.
However, similar to the CA's ruling, the flaw in the Bank's argument is
its failure to specify the date when CSTC actually defaulted in its
obligation or particularly pinpoint which installment it failed to pay. The
Bank merely revealed that CSTC owed it the amount of P3,823,000.00
without presenting a detailed computation or proof thereof except for the
Promissory Note. Although CSTC and Kho did not question the
computation made by the Bank, the fact remains that the actual date of
default was not disclosed and verified with corroborating preponderant
proof.69 The Bank only stated that CSTC has not been paying its monthly
obligations prior to February 4, 2004 which is not particular enough,
even if the Promissory Note indicates that CSTC's obligation will
immediately become due after default and without need of notice.70
Thus, CSTC's indebtedness cannot be considered as due and
liquidated. It should be emphasized that "[a] claim is liquidated when the
amount and time of payment is fixed. If acknowledged by the debtor,
although not in writing, the claim must be treated as liquidated."71 In this
case, the time of default and the amount due were not specific and
particular. Without this information, a simple arithmetic computation
cannot possibly be done without risking errors especially with regard to
the application of interest and penalties. Similarly, despite CSTC's
failure to contest the Bank's computation, its debt still cannot be
considered as liquidated. Further confirmation is necessary in order to
treat CSTC's debt as due, demandable and liquidated, which the Bank
unfortunately did not bother to elaborate on.
As regards respondents' claim that there exists a controversy
commenced by a third person thereby negating legal compensation from
taking place, the Bank insists that this did not bar the legal compensation
from taking place by operation of law since CSTC's default happened
even before it was served the Notice of Garnishment. Again, CSTC and
Kho did not challenge this allegation. Nonetheless, given our finding that
CSTC's debt cannot be considered as due and liquidated, thereby legal
compensation did not take place by operation of law, it follows that the
Notice of Garnishment served as proof of an existing controversy
commenced by a third person, particularly Ypil, which likewise negated
the application of legal compensation.
It is the Bank's position that "[l]egal compensation operates even against
the will of the interested parties and even without the consent of them.
322
Since this compensation takes place ipso jure, its effects arise on the
very day on which all its requisites concur. When used as a defense, it
retroacts to the date when its requisites are fulfilled."72 There is no
debate about the effects of legal compensation when applicable.
However, as already discussed, the Court finds that CSTC's debt was
not due and liquidated properly, and that there is an existing controversy
involving CSTC's funds with the Bank. Stated differently, the subject of
the Notice of Garnishment is likewise the object of the existing
controversy.
The Bank should take note that "[g]arnishment has been defined as a
specie of attachment for reaching credits belonging to the judgment
debtor and owing to him from a stranger to the litigation. A writ of
attachment is substantially a writ of execution except that it emanates at
the beginning, instead of at the termination, of a suit. It places the
attached properties in custodia legis, obtaining pendente lite a lien until
the judgment of the proper tribunal on the plaintiff's claim is established,
when the lien becomes effective as of the date of the levy."73
Hence, after service and receipt of the Notice of Garnishment, contrary
to the Bank's view, the deposits of CSTC were placed under custodia
legis, under the sole control of the trial court and remained subject to its
orders "until such time that the garnishment is discharged, or the
judgment in favor of [Ypil] is satisfied or the credit or deposit is delivered
to the proper officer of the court."74 In the case at bench, the RTC
already issued a Judgment Based on Compromise Agreement which
ordered the Bank to tender the garnished amount of P300,000.00 to
Ypil, effectively discharging the said amount from the effects of
garnishment.
Garnishment was served upon the Bank, CSTC had a deposit of more
than P300,000.00 (based on bank records marked as exhibits) which
was more than enough to cover the subject amount of the
garnishment.76
As a final reminder, jurisprudence states that "the diligence required of
banks is more than that of a good father of a family.77 Banks are required
to exercise the highest degree of diligence in its banking transactions."78
In view of this, BDO Unibank, Inc. should recognize that it should be
diligent and circumspect in its dealings with its clients, especially with
regard to transactions that involve loans and credits. If only it had
properly monitored the accounts of its clients, BDO Unibank, Inc. would
not have been remiss in assuring that CSTC fulfills its end of the loan or
even in exercising its option to offset the company's deposits with that
of its outstanding obligations in order to protect the Bank's interests.
Unfortunately, it has to face the consequences of its inattention to detail.
WHEREFORE, the Petition for Review is DENIED. The assailed
January 15, 2014 Decision and the March 26, 2014 Resolution of the
Court of Appeals in CA-G.R. SP No. 06217 are AFFIRMED.
SO ORDERED.

On a related note, there is no dispute that Kho, in behalf of CSTC, and

Ypil entered into a Compromise Agreement which the trial court
approved through a Judgment Based on Compromise Agreement. The
Bank claims that the agreement was tainted with bad faith due to the
existing contest regarding the garnished funds. We do not agree. The
funds were validly garnished through an order of the trial court with
competent jurisdiction. More importantly, no legal compensation took
place which could have rendered CSTC's deposits unavailable for
garnishment. If, as the Bank claims, CSTC's deposits amounted to only
P294,436.68 and not P300,000.0075 as provided in the Compromise
Agreement, then such is a matter which Ypil has to settle with CSTC
and Kho, and necessarily, the Bank. Nonetheless, this should likewise
be considered in view of Ypil's assertion that on the day the Notice of

323
 LINEAR CONSTRUCTION CORPORATION, PETITIONER, VS.
DOLMAR PROPERTY VENTURES, INC., RESPONDENT.
ZALAMEDA, J.:
This resolves the Petition for Review on Certiorari (Petition)[1] seeking to
reverse and set aside the Decision[2] dated 29 April 2014 of the Court of
Appeals (CA) in CA-G.R. CV No. 101201. The CA reversed the
Decision[3] dated 22 January 2013 of Branch 213, Regional Trial Court
(RTC) of Mandaluyong City in Civil Case No. MC07-3385.
Antecedents
In 1998, respondent Dolmar Property Ventures, Inc.[4] (Dolmar)
contracted petitioner Linear Construction Corporation (Linear) to
construct the drainage system of Dolmar Golden Hills Subdivision at
Brgy. Loma De Gato, Marilao, Bulacan (Marilao Project). The Marilao
Project was covered by several contracts, including separate
agreements for its Phases 1 and 2 (collectively, the Marilao Contracts).[5]
Subsequently, in 2003, Linear and Dolinar entered into a contract for the
construction of the Dolmar Golden Hills Subdivision at San Vicente, Sta.
Maria, Bulacan (Sta. Maria Project). The engagement was covered by a
service contract, as well as two (2) supplemental agreements
(collectively, the Sta. Maria Contracts).[6] Under the Sta. Maria
Contracts, Dolmar would pay Linear Php40,820,000.00 for construction
works to be undertaken by the latter.[7]Payments were to be made on a
progress billing basis, as determined and accepted by Dolmar, less eight
percent (8%) retention.[8]
Articles 6 and 8 of the Sta. Maria Contracts specified the conditions for
the final payment of the retention money. It shall be paid within forty-five
(45) days from Dolmar's final written acceptance of the Sta. Maria
Project. The final certificate of acceptance shall be issued after
submission of proof of payment of all project-related debts and the as-
built plans of the completed work.[9]
Meanwhile, Dolmar engaged the services of R.S. Caparros and
Associates (R.S. Caparros) to manage the construction of the Marilao
Project, among others.[10] R.S. Caparros invited Linear to attend a joint
inspection of the construction works at the Marilao Project, preparatory
to the issuance of the certificate of acceptance in Linear's favor.[11]
Linear did not send a representative to the inspection. Nonetheless,
Dolmar proceeded with the inspection and inventory.[12] In the course of
inspection and inventory conducted on several dates, R.S. Caparros
allegedly discovered numerous defects and irregularities in the
construction of the drainage system, such as missing drainage pipes
and discrepancies between existing layouts and as-built drawings.[13]
These were duly communicated to Linear in separate letters.[14]
Thus, Linear conducted some rectification works, but Dolmar claimed
that these were insufficient.[15] R.S. Caparros then prepared reports,
specifying that the works necessary to correct the defects and
irregularities cost Php6,379,935.00.[16] Dolmar engaged the services of
Mr. Elpidio D. Agapito for the Marilao Project's drainage rehabilitation
and repair.[17]
In the interim, Linear completed the Sta. Maria Project and demanded
in writing the payment of the retention money in the amount of
Php3,766,292.12.[18] In a letter dated 7 June 2007, Dolmar required the
submission of the requisite proof of non-indebtedness and as-built
plans,[19] which Linear submitted.[20]
In a separate letter likewise dated 07 June 2007, Dolmar demanded
from Linear Php6,379,875.00, corresponding to the claimed rectification
cost for the alleged defective works in the Marilao Project.[21] This led to
an exchange of correspondence between the parties. Linear maintained
its demand for the retention money which, after a review of its records,
was increased to Php3,823,997.96.[22] Meanwhile, Dolmar
acknowledged Linear's entitlement to the final certification of completion
and acceptance but withheld the release of the retention money,
asserting that the parties' respective liabilities for the Marilao and Sta.
Maria Projects had been offset through legal compensation.[23] The
offset supposedly left Linear owing Dolmar Php2,613,642.88.[24] Linear
denied liability.[25]
Impasse in the negotiations prompted Linear to file a complaint for
collection of a sum of money with damages against Dolmar.[26]
Ruling of the RTC
In a Decision dated 22 January 2013, the RTC ruled in favor of Linear
and denied Dolmar's counterclaims, to wit:
WHEREFORE, premises considered, judgment is hereby rendered in
favor of plaintiff, Linear Construction Corporation, and against
defendant, Dolmar Property Ventures, Inc.
In view thereof, defendant, Dolmar Property Ventures, Inc., is order [sic]
to pay plaintiff, Linear Construction Corporation[,] the following:
1. the amount of THREE MILLION EIGHT HUNDRED TWENTY THREE
THOUSAND NINE HUNDRED NINETY SEVEN PESOS AND 96/100
(P3,823,997.96) covering plaintiff's unpaid retention money with 12%
interest per annum commencing from the date of filing the complaint;
2. the amount of FOUR HUNDRED THOUSAND PESOS (P418,000.00)
[sic] covering the acceptance fee and appearance fees;
324
3. the amount of NINE HUNDRED FIFTY SIX THOUSAND PESOS
(P956,000.00) as by way of [sic] attorney's fee[s];
4. the amount of TWENTY THOUSAND PESOS (P20,000.00) as and
by way of exemplary damages; and
5. to pay the costs of suit.
SO ORDERED.[27]
The RTC held that the elements of legal compensation were not present
since Dolmar had yet to establish that Linear was legally indebted to the
former.[28] Dolmar failed to squarely meet Linear's cause of action
because the former presented evidence on the latter's liabilities for the
Marilao Project, when Linear's cause of action was based on the Sta.
Maria Project.[29] All of Dolmar's witnesses testified on the Marilao
Project.[30]
The lower court also found that Dolmar acted in bad faith when it refused
to issue a certificate of acceptance for the Sta. Maria project.[31]
According to the RTC, Dolmar neither acted with justice nor observed
honesty and good faith in the performance of its duties under the
construction contract.[32]
Dolmar moved for reconsideration, but it was denied by the RTC in an
Order dated 24 June 2013.[33]
Ruling of the CA
On appeal, the CA reversed the RTC Decision and ruled in favor of
Dolmar. The dispositive portion of the Decision dated 29 April 2014
reads:
WHEREFORE, in view of the foregoing premises, the instant appeal is
hereby GRANTED. The assailed Decision dated January 22, 2013
issued by the Regional Trial Court (RTC), Branch 213, Mandaluyong
City, in Civil Case No. MC07-3385, is REVERSED and SET ASIDE.
Instead, plaintiff-appellee Linear is ordered to pay defendant-appellant
Dolmar the following:
a) the amount of TWO MILLION FIVE HUNDRED FIFTY-FIVE
THOUSAND NINE HUNDRED THIRTY SEVEN PESOS AND 4/100
PESOS (Php2,555,937.04), representing the balance after deducting
the retention money in the amount of Three Million Eight Hundred
Twenty Three Thousand Nine Hundred Ninety-Seven PESOS and
96/100 (Php3,823,997.96), being claimed by plaintiff-appellee Linear in
the Sta. Maria Project from the cost of rectification works in the amount
of Six Million Three Hundred Seventy-Nine Thousand Nine Hundred
Thirty Five Pesos (Php6,379,935.00) incurred by defendant-appellant
Dolmar in the Marilao Project with 6% interest per annumcommencing
from the date of the filing of the complaint until fully paid;
b) the amount of ONE HUNDRED THOUSAND PESOS
(Php100,000.00) as exemplary damages;
c) the amount of ONE MILLION TWO HUNDRED THOUSAND PESOS
(Php1,200,000.00) as and by way of attorney's fees and litigation
expenses; and
d) cost[s] of suit.
SO ORDERED.[34]
The CA found that Dolmar sufficiently proved Linear's obligation to pay
Php6,379,935.00 for the defective works in the Marilao Project.[35] On
the other hand, Linear did not present any countervailing evidence
negating its liability for the reconstruction cost.[36]
Moreover, according to the CA, all the elements of legal compensation
were present. Linear and Dolmar became mutual creditors and debtors
of each other due to their respective obligations in the Marilao and Sta.
Maria Projects.[37] By operation of law, Dolmar's obligation was
extinguished to the concurrent amount.[38] That the obligations did not
spring from the same contract or transaction was deemed immaterial,
contrary to the ruling of the RTC.[39]
The CA further held that Linear acted in bad faith because it tried to
conceal from the trial court the circumstances surrounding the Marilao
Project, and failed to finish or pay for the requisite rectification works.[40]
Hence, the CA adjudged Linear liable for exemplary damages,
attorney's fees, and litigation expenses.[41] The CA refused to award
moral damages, citing the doctrine that a juridical person is generally
not entitled to the same.[42]
Hence, this Petition.
Issues
The issues for this Court's resolution are: (1) whether or not the petition
should be dismissed for Linear's failure to strictly comply with procedural
requirements; and (2) whether or not Linear's claim over the retention
money has already been extinguished ipso jure through legal
compensation.
Ruling of the Court
Notwithstanding Linear's procedural lapses, the merits of the
petition call for the resolution of the substantive issue presented
The Court recognizes that the petition did not strictly conform to certain
procedural requirements, such as the attachment of a certified true copy
of the assailed decision and material portions of the record,[43] a duly
dated affidavit of service,[44] and proof of authority of Linear's corporation
to sign the verification for and on behalf of the corporation. No soft copy
of the petition was also submitted.[45] Dolmar claims that these
procedural errors warrant the outright denial of the petition.[46]
Nonetheless, Linear submitted the relevant records and soft copy of the
petition two (2) days after the filing of the petition.[47] Following Our 17
July 2014 Resolution, Linear also complied with all the other procedural
325
requirements, except the duly dated affidavit of service.[48] Due to
Linear's failure to comply with our subsequent Resolution requiring
submission of the affidavit of service,[49] Dolmar filed a Motion to
Dismiss,[50] which We noted without action in a Resolution dated 08 April
2019.[51]
Subsequently, Linear's counsel withdrew his appearance due to ill
health, and shortly after, passed away during the pendency of this
case.[52] He has since been substituted by another counsel.
While it is true that rules of procedure are intended to promote rather
than frustrate the ends of justice, and while the swift unclogging of the
dockets of the courts is a laudable objective, these rules nevertheless
must not be met at the expense of substantial justice. The Court has
allowed some meritorious cases to proceed despite inherent procedural
defects and lapses. This is in keeping with the principle that rules of
procedure are mere tools designed to facilitate the attainment of justice,
and that strict and rigid application of rules which should result in
technicalities that tend to frustrate rather than promote substantial
justice must always be avoided.[53]
The merits of this petition move Us to resolve the substantive issue
elevated before the Court. After an exhaustive review of the records, We
are convinced that dismissing the petition on a mere technicality would
amount to a miscarriage of justice. Besides, Linear has already complied
with the requirements and, in lieu of the affidavit of service, submitted
proof of service and the original registry return card.[54] Both the CA and
Dolmar received the petition, and Dolmar was able to fully ventilate its
position before the Court. The rationale behind the rules, i.e., to ensure
receipt by the concerned parties, has been served.
Notably, Linear's petition raises a question of fact, specifically, the
factual basis of the CA's conclusion that Linear owed Dolmar
Php6,379,935.00 as reconstruction costs.[55] An appeal under Rule 45
must raise only questions of law, unless the factual findings are not
supported by evidence or the judgment is based on a misapprehension
of facts.[56] We find these exceptions present in this case. Hence, We
will rule on the factual issue presented.
Legal compensation is inapplicable
Dolmar's obligation to pay the retention money for the Marilao project is
no longer at issue. Dolmar did not contest the CA Decision finding it
liable for the retention money in the amount of Php3,823,997.96.[57]
Based on the records, it even wrote to Linear that a certificate of
completion for the Marilao project would be issued, only that it is refusing
to release the retention money based on its claim of legal compensation.
Indeed, by insisting on the application of legal compensation, Dolmar
necessarily conceded and admitted that it is Linear's debtor. The record
is replete with Dolmar's judicial admissions on its indebtedness to
Linear.[58] The remaining issue is whether Dolmar validly withheld the
retention money through the invocation of legal compensation.
Compensation is a mode of extinguishing obligations of two persons
who, in their own right, are creditors and debtors of each other.[59] Legal
compensation requires the concurrence of several conditions: (1) each
one of the obligors is bound principally and a principal creditor of the
other; (2) both debts consist in a sum of money, or if the things due are
consumable, they are of the same kind, and also of the same quality if
the latter has been stated; (3) the two debts are due; (4) the debts are
liquidated and demandable; and (5) over neither of them is there any
retention or controversy, commenced by third persons and
communicated in due time to the debtor.[60]
Linear denies its alleged indebtedness to Dolmar. It claims that the
Marilao Project has long been completed and fully paid.[61] Linear further
maintains that the warranty for the Marilao Project and the period to
raise defects in its construction had already expired.[62] These
arguments mainly bear on the fourth requisite of legal compensation -
that the debts are liquidated and demandable.
A debt is considered liquidated when the amount and time of payment
is fixed,[63] and its exact amount is known.[64]The exact amount of the
debt may be expressed already in definite figures or determinable
through a simple arithmetical operation.[65] Compensation cannot extend
to unliquidated, disputed claims arising from breach of contract.[66]
Meanwhile, a debt is demandable when it is enforceable in court, there
being no apparent defenses inherent in it. For instance, debts which are
subject to suspensive conditions or those barred by prescription are not
considered demandable.[67
In this case, Dolmar's claim is neither liquidated nor demandable
because, first, it is disputed by Linear. From the parties' early
correspondence[68] all the way to this Court, Linear has consistently
maintained that it has no liability for the amount being demanded by
Dolmar. That Dolmar had to present several witnesses to establish the
alleged defects highlights the contentious nature of its claim.
Second, the amount of Php6,379,935.00 was self-determined by
Dolmar and not binding on Linear. This amount was based solely on
cost estimates prepared by R.S. Caparros for Dolmar,[69] and not on
actual expenses incurred. The claimed amount is not supported by
receipts or other evidence of expense. The testimony of Dolmar's own
witness, Ms. Teodorica S. Perida, confirms the foregoing:
Q: In connection with the rectification works undertaken by Dolmar, how
much was paid to the contractor for such works?
326
A: As of date, defendant Dolmar paid the other contractors
approximately over Seven Hundred Thousand Pesos (P700,000.00).
Q: Where did Dolmar source the cost of initial rectification works?
A: From the retention money of Linear.
Q: You said that the retention money of Linear for Sta. Maria Project is
approximately Three Million Eight Hundred Thousand Pesos
(P3,800,000.00) and the cost of initial rectification works is over
Seven Hundred Thousand Pesos already (P700,000.00). Why does
Dolmar continue to withhold the balance from the retention money?
A: Because the rectification works in Marilao Project is still ongoing.
Based on the estimate prepared by R.S. Caparros, the cost of the
rectification works in Marilao would amount to around Six Million Five
Hundred Thousand Pesos (P6,500,000.00).[70]
The cash vouchers presented in evidence merely reflect an amount of
over Php700,000.00 supposedly paid by Dolmar to Mr. Elpidio D.
Agapito.[71] Even then, it has yet to be conclusively established whether
these payments pertain to the allegedly defective works of Linear, and
whether Linear should reimburse these amounts. Linear asserts
apparent defenses inherent in Dolmar's claim, that it has completed the
Marilao Project, and the period to question defects in the construction
has already prescribed.[72] These defenses, if proved, would bar
recovery by Dolmar.
Moreover, since the vouchers only evince payments of around
Php700,000.00, the records do not show that Dolmar has already spent
Php6,379,935.00 at the time it withheld the retention money. Hence,
assuming that there was indeed a debt, the same was not yet due. This
negates the third requisite of legal compensation.
Dolmar's insistence that Linear is "deemed to have admitted" the defects
in the Marilao Project, as well as the costs of rectification,[73] has no
factual, contractual, or legal basis. As mentioned, the records bear
Linear's consistent disavowal of its alleged liability. Linear did not also
signify its conformity with the reports and cost estimates prepared by
R.S. Caparros.
Clearly, the amount of Php6,379,935.00 is merely a claim and not a
demandable debt that may be the subject of legal compensation. Dolmar
cannot take the law into its own hands and withhold the retention money
based on a unilateral declaration and determination of damages.
Dolmar's entitlement to and the amount of recoverable rectification costs
must be judicially ascertained and proved. At most, the amount of
Php6,379,935.00 represents an unliquidated claim that Dolmar may
attempt to collect from Linear through the appropriate action.
On this score, We have ruled that when the defendant, who has an
unliquidated claim, sets it up by way of counterclaim, and a judgment is
rendered liquidating such claim, it can be compensated against the
plaintiff's claim from the moment it is liquidated by judgment.[74] This is
pursuant to the principle of judicial compensation, as articulated in
Article 1283 of the Civil Code: "If one of the parties to a suit over an
obligation has a claim for damages against the other, the former may
set it off by proving his right to said damages and the amount thereof."
While legal compensation takes effect ipso jure upon the concurrence
of all its requisites, judicial compensation only takes place upon final
judgment.[75]
Here, Dolmar pleaded the rectification costs as a compulsory
counterclaim.[76] If We were to rule on Dolmar's unliquidated claim, the
same may be liquidated by final judgment, and judicial compensation
may ensue. However, several factors proscribe Us from ruling on the
merits of Dolmar's claim.
First, the main issue brought before Us is the applicability of legal
compensation, and not judicial compensation. Second, the claim for
rectification costs was merely pleaded by way of compulsory
counterclaim in the context of the theorized legal compensation. Ruling
on the merits of Dolmar's claim, as an independent cause of action,
would be akin to resolving a permissive counterclaim; the Marilao
Project is an entirely different transaction from the Sta. Maria Project
and gives rise to issues that are unrelated to Linear's principal claim.[77]
Doing so would ignore the varying procedural rules governing
compulsory vis-a-vis permissive counterclaims, including those on the
requirements for an initiatory pleading,[78] payment of docket fees,[79]
necessity for an answer, and order of trial.[80]In fact, several issues on
the Marilao Project have yet to be fully threshed out due to the position
of Linear and the RTC that the Marilao Project is irrelevant to this case.
Third, and of equal importance, to rule on Dolmar's claim would be to
validate or legalize Dolmar's improper act of unilaterally withholding the
retention money. We have refused to countenance such unwarranted
shortcuts, as they amount to a mockery of Our judicial processes.[81]
Monetary awards and damages
In view of the foregoing, We reinstate the RTC Decision with
modifications. Linear is entitled to actual damages in the amount of
Php3,823,997.96, representing its unpaid retention money. The award
of interest should be modified to 12% per annum from the date of judicial
demand,[82] or on 06 December 2007,[83] until 30 June 2013, and 6% per
annum from 01 July 2013 until fully paid.[84]
327
We likewise affirm the award of exemplary damages because Dolmar
acted in an oppressive or malevolent manner.[85] It withheld the retention
money lawfully due to Linear based on its self-proclaimed entitlement to
reimbursement of expenses not yet incurred. It sought to secure its
unliquidated claim for the Marilao Project by taking the law into its own
hands. In light of the scheme employed by Dolmar and the considerable
period that Linear was deprived of its lawful claim, We find that the award
of Php50,000.00 as exemplary damages is justified.
Since exemplary damages are awarded and because Linear was
compelled to litigate to protect its interests, the award of attorney's fees
is also proper.[86] Considering the protracted litigation of this dispute,
rendered more complex by the inclusion of Dolmar's unliquidated claim
in a relatively straightforward collection suit, the award of
Php100,000.00 as attorney's fees is proper. The award representing
acceptance and appearance fees of counsel is deleted, since these are
already encompassed by the award for attorney's fees.
WHEREFORE, premises considered, the Petition for Review on
Certiorari is GRANTED. The Decision dated 29 April 2014 of the Court
of Appeals in CA-G.R. CV No. 101201 is REVERSED and SET ASIDE.
The Decision dated 22 January 2013 of Branch 213, Regional Trial
Court of Mandaluyong City in Civil Case No. MC07-3385 is AFFIRMED
with MODIFICATIONS. Respondent Dolmar Property Ventures, Inc.
(also known as Dolmar Property Ventures, Incorporated) is ORDERED
to pay petitioner Linear Construction Corporation:
(1) Php3,823,997.96 representing petitioner's unpaid retention money,
with legal interest at twelve percent (12%) per annum from judicial
demand, or on 06 December 2007, until 30 June 2013, and six percent
(6%) per annum from 01 July 2013 until fully paid;
(2) Php50,000.00 as exemplary damages;
(3) Php100,000.00 as attorney's fees; and
(4) Costs of suit.The total judgment award shall earn legal interest at six
percent (6%) per annum from the finality of this Decision until fully paid.
SO ORDERED.
1291 - NOVATION
ABELARDO B. LICAROS, petitioner, vs. ANTONIO P. GATMAITAN,
respondent.
G.R. No. 142838 August 9, 2001
GONZAGA-REYES, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of
Court. The petition seeks to reverse and set aside the Decision1 dated
February 10, 2000 of the Court of Appeals and its Resolution2 dated April
7, 2000 denying petitioner's Motion for Reconsideration thereto. The
appellate court decision reversed the Decision3 dated November 11,
1997 of the Regional Trial Court of Makati, Branch 145 in Civil Case No.
96-1211.
The facts of the case, as stated in the Decision of the Court o Appeals
dated February 10, 2000, are as follows:
"The Anglo-Asean Bank and Trust Limited (Anglo-Asean, for brevity), is
a private bank registered and organized to do business under the laws
of the Republic of Vanuatu but not in the Philippines. Its business
consists primarily in receiving fund placements by way of deposits from
institutions and individuals investors from different parts of the world and
thereafter investing such deposits in money market placements and
potentially profitable capital ventures in Hongkong, Europe and the
United States for the purpose of maximizing the returns on those
investments.
Enticed by the lucrative prospects of doing business with Anglo-Asean,
Abelardo Licaros, a Filipino businessman, decided to make a fund
placement with said bank sometime in the 1980's. As it turned out, the
grim outcome of Licaros' foray in overseas fund investment was not
exactly what he envisioned it to be. More particularly, Licaros, after
having invested in Anglo-Asean, encountered tremendous and
unexplained difficulties in retrieving, not only the interest or profits, but
even the very investments he had put in Anglo-Asean.1âwphi1.nêt
Confronted with the dire prospect of not getting back any of his
investments, Licaros then decide to seek the counsel of Antonio P.
Gatmaitan, a reputable banker and investment manager who had been
extending managerial, financial and investment consultancy services to
various firms and corporations both here and abroad. To Licaros' relief,
Gatmaitan was only too willing enough to help. Gatmaitan voluntarily
offered to assume the payment of Anglo-Asean's indebtedness to
Licaros subject to certain terms and conditions. In order to effectuate
and formalize the parties' respective commitments, the two executed a
notarized MEMORANDUM OF AGREEMENT on July 29, 1988 (Exh.
"B"); also Exhibit "1"), the full text of which reads:
Memorandum of Agreement
328
KNOW ALL MEN BY THESE PRESENTS:
This MEMORANDUM OF AGREEMENT made and executed this 29th
day of July 1988, at Makati by and between:
ABELARDO B. LICAROS, Filipino, of legal age and holding office at
Concepcion Building, Intramuros, Manila hereinafter referred to as THE
PARTY OF THE FIRST PART,
and
ANTONIO P. GATMAITAN, Filipino, of legal age and residing at 7
Mangyan St., La vista, hereinafter referred to as the PARTY OF THE
SECOND PART,
WITNESSETH THAT:
WHEREAS, ANGLO-ASEAN BANK & TRUST, a company incorporated
by the Republic of Vanuatu, hereinafter referred to as the OFFSHORE
BANK, is indebted to the PARTY OF THE FIRST PART in the amount
of US dollars; ONE HUNDRED FIFTY THOUSAND ONLY
(US$150,000) which debt is now due and demandable.
WHEREAS, the PARTY OF THE FIRST PART has encountered
difficulties in securing full settlement of the said indebtedness from the
OFFSHORE BANK and has sought a business arrangement with the
PARTY OF THE SECOND PART regarding his claims;
WHEREAS, the PARTY OF THE SECOND PART, with his own
resources and due to his association with the OFFSHORE BANK, has
offered to the PARTY OF THE FIRST PART to assume the payment of
the aforesaid indebtedness, upon certain terms and conditions, which
offer, the PARTY OF THE FIRST PART has accepted;
WHREAS, the parties herein have come to an agreement on the nature,
form and extent of their mutual prestations which they now record herein
with the express conformity of the third parties concerned;
NOW, THEREFORE, for and in consideration of the foregoing and the
mutual covenants stipulated herein, the PARTY OF THE FIRST PART
and the PARTY OF THE SECOND PART have agreed, as they do
hereby agree, as follows:
1. The PARTY OF THE SECOND PART hereby undertakes to pay the
PARTY OF THE FIRST PART the amount of US DOLLARS ONE
HOUNDRED FIFTY THOUSAND (US$150,000) payable in Philippine
Currency at the fixed exchange rate of Philippine Pesos 21 to US$1
without interest on or before July 15, 1993.
For this purpose, the PARTY OF THE SECOND PART shall execute
and deliver a non negotiable promissory note, bearing the aforesaid
material consideration in favor of the PARTY OF THE FIRST PART
upon execution of this MEMORANDUM OF AGREEMENT, which
promissory note shall form part as ANNEX A hereof.
2. For and in consideration of the obligation of the PARTY OF THE
SECOND PART, the PARTY OF THE FIRST does hereby;
a. Sell, assign, transfer and set over unto the PARTY OF THE SECOND
PART that certain debt now due and owing to the PARTY OF THE
FIRST PART by the OFFSHORE BANK, to the amount of US Dollars
One Hundred Fifty Thousand plus interest due and accruing thereon;
b. Grant the PART OF THE SECOND PART the full power and authority,
for his own use and benefit, but at his own cost and expense, to demand,
collect, receive, compound, compromise and give acquittance for the
same or any part thereof, and in the name of the PARTY OF THE FIRST
PART, to prosecute, and withdraw any suit or proceedings therefor;
c. Agree and stipulate that the debt assigned herein is justly owing and
due to the PARTY OF THE FIRST PART from the said OFFSHORE
BANK, and that the PARTY OF THE FIRST PART has not done and will
not cause anything to be done to diminish or discharge said debt, or to
delay or prevent the PARTY OF THE SECOND PART from collecting
the same; and;
d. At the request of the PARTY OF SECOND PART and the latter's own
cost and expense, to execute and do all such further acts and deeds as
shall be reasonably necessary for proving said debt and to more
effectually enable the PARTY OF THE SECOND PART to recover the
same in accordance with the true intent and meaning of the
arrangements herein.
IN WITNESS WHEREOF, the parties have caused this
MEMORANDUM OF AGREEMENT to be signed on the date and place
first written above.
329
 Conformably with his undertaking under paragraph 1 of the aforequoted
Sgd. Sgd. agreement, Gatmaitan executed in favor of Licaros a NON-
NEGOTIABLE PROMISSORY NOTE WITH ASSIGNMENT OF CASH
DIVIDENDS (Exhs. "A"; Also Exh. "2"), which promissory note,
appended as Annex "A" to the same Memorandum of Agreement, states
ABELARDO B. LICAROS ANTONIO P. GATMAITAN in full, thus

"NON-NEGOTIABLE PROMISSORY NOTE WITH ASSIGNMENT OF

CASH DIVIDENDS
PARTY OF THE FIRST PART PARTY OF THE FIRST ART
This promissory note is Annex A of the Memorandum of Agreement
executed between Abelardo B. Licaros and Antonio P. Gatmaitan, on
______ 1988 at Makati, Philippines and is an integral part of said
Memorandum of Agreement.
WITH OUR CONFORME:
P3,150.00.

On or before July 15, 1993, I promise to pay to Abelardo B. Licaros the

ANGLO-ASEAN BANK & sum of Philippine Pesos 3,150,000 (P3,150,000) without interest as
TRUST material consideration for the full settlement of his money claims from
ANGLO-ASEAN BANK, referred to in the Memorandum of Agreement
as the 'OFFSHORE BANK".

BY: (Unsigned) As security for the payment of this of Promissory Note. I hereby
ASSIGN, CEDE and TRANSFER, Seventy Percent (70%) of ALL CASH
DIVIDENDS, that may be due or owing to me as the registered owner
of __________________ (______________) shares of stock in the
Prudential Life Realty, Inc.
SIGNED IN THE PRESENCE
This assignment shall likewise include SEVENTY PERCENT (70%) of
OF:
cash dividends that may be declared by Prudential Life Realty, Inc. and
due or owing to Prudential Life Plan, Inc., of which I am a stockholder,
to the extent of or in proportion to my aforesaid shareholding in
Sgd. (Illegible) Prudential Life Plan, Inc, the latter being the holding company of
Prudential Life Realty, Inc.

In the event that I decide to sell or transfer my aforesaid shares in either

or both the Prudential Life Plan, Inc. or Prudential Life Realty, Inc. and
the Promissory Note remains unpaid or outstanding, I hereby give Mr.
__________________________ __________________________ Abelardo B. Licaros the first option to buy the said shares.
______ ______
Manila, Philippines

330
July ______, 1988 a) Principal Obligation in the amount of Three Million Five
Hundred Thousand Pesos (P3,500,000.00);
(SGD.)
b) Legal interest thereon at the rate of six (6%) percent per
annum from July 16, 1993 when the amount became due until
the obligation is fully paid;
ANTONIO P. GATMAITAN
7 Mangyan St., La Vista QC b) Twenty percent (20%) of the amount due as reasonable
attorney's fees;

d) Costs of the suit.'"4

SIGNED IN THE PRESENCE OF:
(SGD.) After trial on the merits, the court a quo rendered judgment in favor of
petitioner Licaros and found respondent Gatmaitan liable under the
______________________________ ____________________ Memorandum of Agreement and Promissory Note for P3,150,000.00
__________ plus 12% interest per annum from July 16, 1993 until the amount is fully
Francisco A. Alba paid. Respondent was likewise ordered to pay attorney's fees of
President, Prudential Life Plan, Inc." P200,000.00.5

Thereafter, Gatmaitan presented to Anglo-Asean the Memorandum of
Agreement earlier executed by him and Licaros for the purpose of
collecting the latter's placement thereat of U.S. $150,000.00. Albeit the
officers of Anglo-Asean allegedly committed themselves to "look into
[this matter]", no formal response was ever made by said bank to either
Licaros or Gatmaitan. To date, Anglo-Asean has not acted on
Gatmaitan's monetary claims.
Respondent Gatmaitan appealed the trial court's decision to the Court
of Appeals. In a decision promulgated on February 10, 2000, the
appellate court reversed the decision of the trial court and held that
respondent Gatmaitan did not at any point become obligated to pay to
petitioner Licaros the amount stated in the promissory note. In a
Resolution dated April 7, 2000 the Court of Appeals denied petitioner's
Motion for Reconsideration of its February 10, 2000 Decision.

Evidently, because of his inability to collect from Anglo-Asean,
Gatmaitan did not bother anymore to make good his promise to pay
Licaros the amount stated in his promissory note (Exh. "A"; also Exh.
2"). Licaros, however, thought differently. He felt that he had a right to
collect on the basis of the promissory note regardless of the outcome of
Gatmaitan's recovery efforts. Thus, in July, 1996, Licaros, thru counsel,
addressed successive demand letters to Gatmaitan (Exhs. "C" and "D"),
demanding payment of the later's obligations under the promissory note.
Gatmaitan, however, did not accede to these demands.
Hence, on August 1, 1996, in the Regional Trial Court at Makati, Licaros
filed the complaint in this case. In his complaint, docketed in the court
below as Civil case No. 96-1211, Licaros prayed for a judgment ordering
Gatmaitan to pay him the following:
Hence this petition for review on certiorari where petitioner prays for the
reversal of the February 10, 2000 Decision of the Court of Appeals and
the reinstatement of the November 11, 1997 decision of the Regional
Trial Court.
The threshold issue for the determination of this Court is whether the
Memorandum of Agreement between petitioner and respondent is one
of assignment of credit or one of conventional subrogation. This matter
is determinative of whether or not respondent became liable to petitioner
under the promissory note considering that its efficacy is dependent on
the Memorandum of Agreement, the note being merely an annex to the
said memorandum.6
An assignment of credit has been defined as the process of transferring
the right of the assignor to the assignee who would then have the right
to proceed against the debtor. The assignment may be done gratuitously

331
or onerously, in which case, the assignment has an effect similar to that
of a sale.7
On the other hand, subrogation has been defined as the transfer of all
the rights of the creditor to a third person, who substitutes him in all his
rights. It may either be legal or convention. Legal subrogation is that
which takes place without agreement but by operation of law because
of certain acts. Conventional subrogation is that which takes place by
agreement of parties.8
The general tenor of the foregoing definitions of the terms "subrogation"
and "assignment of credit" may make it seem that they are one and the
same which they are not. A noted expert in civil law notes their
distinctions thus:
"Under our Code, however, conventional subrogation is not identical to
assignment of credit. In the former, the debtor's consent is necessary;
in the latter it is not required. Subrogation extinguishes the obligation
and gives rise to a new one; assignment refers to the same right which
passes from one person to another. The nullity of an old obligation may
be cured by subrogation, such that a new obligation will be perfectly
valid; but the nullity of an obligation is not remedied by the assignment
of the creditor's right to another."9
For our purposes, the crucial distinction deals with the necessity of the
consent of the debtor in the original transaction. In an assignment of
credit, the consent of the debtor is not necessary in order that the
assignment may fully produce legal effects.10 What the law requires in
an assignment of credit is not the consent of the debtor but merely notice
to him as the assignments takes effect only from the time he has
knowledge thereof.11 A creditor may, therefore, validly assign his credit
and its accessories without the debtor's consent.12 On the other hand,
conventional subrogation requires an agreement among the three
parties concerned – the original creditor, the debtor, and the new
creditor. It is a new contractual relation based on the mutual agreement
among all the necessary parties. Thus, Article 1301 of the Civil Code
explicitly states that "(C)onventional subrogation of a third person
requires the consent of the original parties and of the third person."
The trial court, in finding for the petitioner, ruled that the Memorandum
of Agreement was in the nature of an assignment of credit. As such, the
court a quo held respondent liable for the amount stated in the said
agreement even if the parties thereto failed to obtain the consent of
Anglo-Asean Bank. On the other hand, the appellate court held that the
agreement was one of conventional subrogation which necessarily
requires the agreement of all the parties concerned. The Court of
Appeals thus ruled that the Memorandum of Agreement never came into
effect due to the failure of the parties to get the consent of Anglo-Asean
Bank to the agreement and, as such, respondent never became liable
for the amount stipulated.
We agree with the finding of the Court of Appeals that the Memorandum
of Agreement dated July 29, 1988 was in the nature of a conventional
subrogation which requires the consent of the debtor, Anglo-Asean
Bank, for its validity. We note with approval the following pronouncement
of the Court of Appeals:
"Immediately discernible from above is the common feature of contracts
involving conventional subrogation, namely, the approval of the debtor
to the subrogation of a third person in place of the creditor. That
Gatmaitan and Licaros had intended to treat their agreement as one of
conventional subrogation is plainly borne by a stipulation in their
Memorandum of Agreement, to wit:
"WHEREAS, the parties herein have come to an agreement on the
nature, form and extent of their mutual prestations which hey now record
herein with the express conformity of the third parties concerned"
(emphasis supplied), which third party is admittedly Anglo-Asean Bank.
Had the intention been merely to confer on appellant the status of a
mere "assignee" of appellee's credit, there is simply no sense for them
to have stipulated in their agreement that the same is conditioned on the
"express conformity" thereto of Anglo-Asean Bank. That they did so only
accentuates their intention to treat the agreement as one of conventional
subrogation. And it is basic in the interpretation of contracts that the
intention of the parties must be the one pursued (Rule 130, Section 12,
Rules of Court).
Given our finding that the Memorandum of Agreement (Exh. "B"; also
Exh. "1"), is not one of "assignment of credit" but is actually a
"conventional subrogation", the next question that comes to mind is
whether such agreement was ever perfected at all. Needless to state,
the perfection – or non-perfection – of the subject agreement is of utmost
relevance at this point. For, if the same Memorandum of Agreement was
actually perfected, then it cannot be denied that Gatmaitan still has a
332
subsisting commitment to pay Licaros on the basis of his promissory
note. If not, Licaros' suit for collection must necessarily fail.
Here, it bears stressing that the subject Memorandum of Agreement
expressly requires the consent of Anglo-Asean to the subrogation. Upon
whom the task of securing such consent devolves, be it on Licaros or
Gatmaitan, is of no significance. What counts most is the hard reality
that there has been an abject failure to get Anglo-Asean's nod of
approval over Gatmaitan's being subrogated in the place of Licaros.
Doubtless, the absence of such conformity on the part of Anglo-Asean,
which is thereby made a party to the same Memorandum of Agreement,
prevented the agreement from becoming effective, much less from
being a source of any cause of action for the signatories thereto"13
Aside for the "whereas clause" cited by the appellate court in its
decision, we likewise note that on the signature page, right under the
place reserve for the signatures of petitioner and respondent, there is,
typewritten, the words "WITH OUR CONFORME." Under this notation,
the words "ANGLO-ASEAN BANK AND TRUST" were written by hand.14
To our mind, this provision which contemplates the signed conformity of
Anglo-Asean Bank, taken together with the aforementioned
preambulatory clause leads to the conclusion that both parties intended
that Anglo-Asean Bank should signify its agreement and conformity to
the contractual arrangement between petitioner and respondent. The
fact that Anglo-Asean Bank did not give such consent rendered the
agreement inoperative considering that, as previously discussed, the
consent of the debtor is needed in the subrogation of a third person to
the rights of a creditor.
In this petition, petitioner assails the ruling of the Court of Appeals that
what was entered into by the parties was a conventional subrogation of
petitioner's rights as creditor of the Anglo-Asean Bank which necessary
requires the consent of the latter. In support, petitioner alleges that: (1)
the Memorandum of Agreement did not create a new obligation and, as
such, the same cannot be a conventional subrogation; (2) the consent
of Anglo-Asean Bank was not necessary for the validity of the
Memorandum of Agreement; (3) assuming that such consent was
necessary, respondent failed to secure the same as was incumbent
upon him; and (4) respondent himself admitted that the transaction was
one of assignment of credit.
Petitioner argues that the parties to the Memorandum of Agreement
could not have intended the same to be a conventional subrogation
considering that no new obligation was created. According to petitioner,
the obligation of Anglo-Asean Bank to pay under Contract No. 00193
was not extinguished and in fact, it was the basic intention of the parties
to the Memorandum of Agreement to enforce the same obligation of
Anglo-Asean Bank under its contract with petitioner. Considering that
the old obligation of Anglo-Asean Bank under Contract No. 00193 was
never extinguished under the Memorandum of Agreement, it is
contended that the same could not be considered as a conventional
subrogation.
We are not persuaded.
It is true that conventional subrogation has the effect of extinguishing
the old obligation and giving rise to a new one. However, the
extinguishment of the old obligation is the effect of the establishment of
a contract for conventional subrogation. It is not a requisite without which
a contract for conventional subrogation may not be created. As such, it
is not determinative of whether or not a contract of conventional
subrogation was constituted.
Moreover, it is of no moment that the subject of the Memorandum of
Agreement was the collection of the obligation of Anglo-Asean Bank to
petitioner Licaros under Contract No. 00193. Precisely, if conventional
subrogation had taken place with the consent of Anglo-Asian Bank to
effect a change in the person of its creditor, there is necessarily created
a new obligation whereby Anglo-Asean Bank must now give payment to
its new creditor, herein respondent.
Petitioner next argues that the consent or conformity of Anglo-Asean
Bank is not necessary to the validity of the Memorandum of Agreement
as the evidence on record allegedly shows that it was never the intention
of the parties thereto to treat the same as one of conventional
subrogation. He claims that the preambulatory clause requiring the
express conformity of third parties, which admittedly was Anglo-Asean
Bank, is a mere surplusage which is not necessary to the validity of the
agreement.
As previously discussed, the intention of the parties to treat the
Memorandum of Agreement as embodying a conventional subrogation
is shown not only by the "whereas clause" but also by the signature
space captioned "WITH OUR CONFORME" reserved for the signature
of a representative of Anglo-Asean Bank. These provisions in the
333
aforementioned Memorandum of Agreement may not simply be
disregarded or dismissed as superfluous.
It is a basic rule in the interpretation of contracts that "(t)he various
stipulations of a contract shall be interpreted together, attributing to the
doubtful ones that sense which may result from all of them taken
jointly."15 Moreover, under our Rules of Court, it is mandated that "(I)n
the construction of an instrument where there are several provisions or
particulars, such a construction is, if possible, to be adopted as will give
effect to all."16 Further, jurisprudence has laid down the rule that
contracts should be so construed as to harmonize and give effect to the
different provisions thereof.17
In the case at bench, the Memorandum of Agreement embodies certain
provisions that are consistent with either a conventional subrogation or
assignment of credit. It has not been shown that any clause or provision
in the Memorandum of Agreement is inconsistent or incompatible with a
conventional subrogation. On the other hand, the two cited provisions
requiring consent of the debtor to the memorandum is inconsistent with
a contract of assignment of credit. Thus, if we were to interpret the same
as one of assignment of credit, then the aforementioned stipulations
regarding the consent of Anglo-Asean Bank would be rendered inutile
and useless considering that, as previously discussed, the consent of
the debtor is not necessary in an assignment of credit.
lawyer and as such, he is no so well versed in law that he would be able
to distinguish between the concepts of conventional subrogation and of
assignment of credit. Moreover, even assuming that there was an
admission on his part, such admission is not conclusive on this court as
the nature and interpretation of the Memorandum of Agreement is a
question of law which may not be the subject of stipulations and
admission.18
Considering the foregoing, it cannot then be said that the consent of the
debtor Anglo-Asean Bank is not necessary to the validity of the
Memorandum of Agreement. As above stated, the Memorandum of
Agreement embodies a contract for conventional subrogation and in
such a case, the consent of the original parties and the third person is
required.19 The absence of such conformity by Anglo-Asean Bank
prevented the Memorandum of Agreement from becoming valid and
effective. Accordingly, the Court of Appeals did not err when it ruled that
the Memorandum of Agreement was never perfected.
Having arrived at the above conclusion, the Court finds no need to
discuss the other issues raised by petitioner.
WHEREFORE, the instant petition is DENIED and the Decision of the
Court of Appeals dated February 10, 2000 and its Resolution dated April
7, 2000 are hereby AFFIRMED.

Petitioner next argues that assuming that the conformity of Anglo-Asean

was necessary to the validity of the Memorandum of Agreement,
respondently only had himself to blame for the failure to secure such
conformity as was, allegedly, incumbent upon him under the
memorandum.

As to this argument regarding the party responsible for securing the

conformity of Anglo-Asean Bank, we fail to see how this question would
have any relevance on the outcome of this case. Having ruled that the
consent of Anglo-Asean was necessary for the validity of the
Memorandum of Agreement, the determinative fact is that such consent
was not secured by either petitioner or respondent which consequently
resulted in the invalidity of the said memorandum.

With respect to the argument of petitioner that respondent himself

allegedly admitted in open court that an assignment of credit was
intended, it is enough to say that respondent apparently used the word
"assignment" in his testimony in the general sense. Respondent is not a

334
335
 ROMEO C. GARCIA, petitioner, vs. DIONISIO V. LLAMAS,
respondent.
G.R. No. 154127 December 8, 2003
PANGANIBAN, J.:
Novation cannot be presumed. It must be clearly shown either by the
express assent of the parties or by the complete incompatibility between
the old and the new agreements. Petitioner herein fails to show either
requirement convincingly; hence, the summary judgment holding him
liable as a joint and solidary debtor stands.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court,
seeking to nullify the November 26, 2001 Decision2 and the June 26,
2002 Resolution3 of the Court of Appeals (CA) in CA-GR CV No. 60521.
The appellate court disposed as follows:
"UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment
appealed from, insofar as it pertains to [Petitioner] Romeo Garcia, must
be, as it hereby is, AFFIRMED, subject to the modification that the award
for attorney’s fees and cost of suit is DELETED. The portion of the
judgment that pertains to x x x Eduardo de Jesus is SET ASIDE and
VACATED. Accordingly, the case against x x x Eduardo de Jesus is
REMANDED to the court of origin for purposes of receiving ex parte
[Respondent] Dionisio Llamas’ evidence against x x x Eduardo de
Jesus."4
The challenged Resolution, on the other hand, denied petitioner’s
Motion for Reconsideration.
The Antecedents
The antecedents of the case are narrated by the CA as follows:
"This case started out as a complaint for sum of money and damages
by x x x [Respondent] Dionisio Llamas against x x x [Petitioner] Romeo
Garcia and Eduardo de Jesus. Docketed as Civil Case No. Q97-32-873,
the complaint alleged that on 23 December 1996[,] [petitioner and de
Jesus] borrowed ₱400,000.00 from [respondent]; that, on the same day,
[they] executed a promissory note wherein they bound themselves
jointly and severally to pay the loan on or before 23 January 1997 with
a 5% interest per month; that the loan has long been overdue and,
despite repeated demands, [petitioner and de Jesus] have failed and
refused to pay it; and that, by reason of the[ir] unjustified refusal,
[respondent] was compelled to engage the services of counsel to whom
he agreed to pay 25% of the sum to be recovered from [petitioner and
de Jesus], plus ₱2,000.00 for every appearance in court. Annexed to
the complaint were the promissory note above-mentioned and a
demand letter, dated 02 May 1997, by [respondent] addressed to
[petitioner and de Jesus].
"Resisting the complaint, [Petitioner Garcia,] in his [Answer,] averred
that he assumed no liability under the promissory note because he
signed it merely as an accommodation party for x x x de Jesus; and,
alternatively, that he is relieved from any liability arising from the note
inasmuch as the loan had been paid by x x x de Jesus by means of a
check dated 17 April 1997; and that, in any event, the issuance of the
check and [respondent’s] acceptance thereof novated or superseded
the note.
"[Respondent] tendered a reply to [Petitioner] Garcia’s answer,
thereunder asserting that the loan remained unpaid for the reason that
the check issued by x x x de Jesus bounced, and that [Petitioner]
Garcia’s answer was not even accompanied by a certificate of non-
forum shopping. Annexed to the reply were the face of the check and
the reverse side thereof.
"For his part, x x x de Jesus asserted in his [A]nswer with [C]ounterclaim
that out of the supposed ₱400,000.00 loan, he received only
₱360,000.00, the P40,000.00 having been advance interest thereon for
two months, that is, for January and February 1997; that[,] in fact[,] he
paid the sum of ₱120,000.00 by way of interests; that this was made
when [respondent’s] daughter, one Nits Llamas-Quijencio, received
from the Central Police District Command at Bicutan, Taguig, Metro
Manila (where x x x de Jesus worked), the sum of ₱40,000.00,
representing the peso equivalent of his accumulated leave credits,
another ₱40,000.00 as advance interest, and still another ₱40,000.00
as interest for the months of March and April 1997; that he had difficulty
in paying the loan and had asked [respondent] for an extension of time;
that [respondent] acted in bad faith in instituting the case, [respondent]
having agreed to accept the benefits he (de Jesus) would receive for his
retirement, but [respondent] nonetheless filed the instant case while his
retirement was being processed; and that, in defense of his rights, he
336
agreed to pay his counsel ₱20,000.00 [as] attorney’s fees, plus
₱1,000.00 for every court appearance.
"During the pre-trial conference, x x x de Jesus and his lawyer did not
appear, nor did they file any pre-trial brief. Neither did [Petitioner] Garcia
file a pre-trial brief, and his counsel even manifested that he would no
[longer] present evidence. Given this development, the trial court gave
[respondent] permission to present his evidence ex parte against x x x
de Jesus; and, as regards [Petitioner] Garcia, the trial court directed
[respondent] to file a motion for judgment on the pleadings, and for
[Petitioner] Garcia to file his comment or opposition thereto.
"Instead, [respondent] filed a [M]otion to declare [Petitioner] Garcia in
default and to allow him to present his evidence ex parte. Meanwhile,
[Petitioner] Garcia filed a [M]anifestation submitting his defense to a
judgment on the pleadings. Subsequently, [respondent] filed a
[M]anifestation/[M]otion to submit the case for judgement on the
pleadings, withdrawing in the process his previous motion. Thereunder,
he asserted that [petitioner’s and de Jesus’] solidary liability under the
promissory note cannot be any clearer, and that the check issued by de
Jesus did not discharge the loan since the check bounced."5
On July 7, 1998, the Regional Trial Court (RTC) of Quezon City (Branch
222) disposed of the case as follows:
"WHEREFORE, premises considered, judgment on the pleadings is
hereby rendered in favor of [respondent] and against [petitioner and De
Jesus], who are hereby ordered to pay, jointly and severally, the
[respondent] the following sums, to wit:
‘1) ₱400,000.00 representing the principal amount plus 5% interest
thereon per month from January 23, 1997 until the same shall have been
fully paid, less the amount of ₱120,000.00 representing interests
already paid by x x x de Jesus;
‘2) ₱100,000.00 as attorney’s fees plus appearance fee of ₱2,000.00 for
each day of [c]ourt appearance, and;
‘3) Cost of this suit.’"6
Ruling of the Court of Appeals
The CA ruled that the trial court had erred when it rendered a judgment
on the pleadings against De Jesus. According to the appellate court, his
Answer raised genuinely contentious issues. Moreover, he was still
required to present his evidence ex parte. Thus, respondent was not
ipso facto entitled to the RTC judgment, even though De Jesus had been
declared in default. The case against the latter was therefore remanded
by the CA to the trial court for the ex parte reception of the former’s
evidence.
As to petitioner, the CA treated his case as a summary judgment,
because his Answer had failed to raise even a single genuine issue
regarding any material fact.
The appellate court ruled that no novation -- express or implied -- had
taken place when respondent accepted the check from De Jesus.
According to the CA, the check was issued precisely to pay for the loan
that was covered by the promissory note jointly and severally
undertaken by petitioner and De Jesus. Respondent’s acceptance of the
check did not serve to make De Jesus the sole debtor because, first, the
obligation incurred by him and petitioner was joint and several; and,
second, the check -- which had been intended to extinguish the
obligation -- bounced upon its presentment.
Hence, this Petition.7
Issues
Petitioner submits the following issues for our consideration:
"I
Whether or not the Honorable Court of Appeals gravely erred in not
holding that novation applies in the instant case as x x x Eduardo de
Jesus had expressly assumed sole and exclusive liability for the loan
obligation he obtained from x x x Respondent Dionisio Llamas, as clearly
evidenced by:
a) Issuance by x x x de Jesus of a check in payment of the full amount
of the loan of ₱400,000.00 in favor of Respondent Llamas, although the
check subsequently bounced[;]
337
b) Acceptance of the check by the x x x respondent x x x which resulted
in [the] substitution by x x x de Jesus or [the superseding of] the
promissory note;
c) x x x de Jesus having paid interests on the loan in the total amount of
₱120,000.00;
d) The fact that Respondent Llamas agreed to the proposal of x x x de
Jesus that due to financial difficulties, he be given an extension of time
to pay his loan obligation and that his retirement benefits from the
Philippine National Police will answer for said obligation.
"II
Whether or not the Honorable Court of Appeals seriously erred in not
holding that the defense of petitioner that he was merely an
accommodation party, despite the fact that the promissory note provided
for a joint and solidary liability, should have been given weight and
credence considering that subsequent events showed that the principal
obligor was in truth and in fact x x x de Jesus, as evidenced by the
foregoing circumstances showing his assumption of sole liability over
the loan obligation.
"III
Whether or not judgment on the pleadings or summary judgment was
properly availed of by Respondent Llamas, despite the fact that there
are genuine issues of fact, which the Honorable Court of Appeals itself
admitted in its Decision, which call for the presentation of evidence in a
full-blown trial."8
Simply put, the issues are the following: 1) whether there was novation
of the obligation; 2) whether the defense that petitioner was only an
accommodation party had any basis; and 3) whether the judgment
against him -- be it a judgment on the pleadings or a summary judgment
-- was proper.
The Court’s Ruling
The Petition has no merit.
First Issue:
Novation
Petitioner seeks to extricate himself from his obligation as joint and
solidary debtor by insisting that novation took place, either through the
substitution of De Jesus as sole debtor or the replacement of the
promissory note by the check. Alternatively, the former argues that the
original obligation was extinguished when the latter, who was his co-
obligor, "paid" the loan with the check.
The fallacy of the second (alternative) argument is all too apparent. The
check could not have extinguished the obligation, because it bounced
upon presentment. By law,9 the delivery of a check produces the effect
of payment only when it is encashed.
We now come to the main issue of whether novation took place.
Novation is a mode of extinguishing an obligation by changing its objects
or principal obligations, by substituting a new debtor in place of the old
one, or by subrogating a third person to the rights of the creditor.10 Article
1293 of the Civil Code defines novation as follows:
"Art. 1293. Novation which consists in substituting a new debtor in the
place of the original one, may be made even without the knowledge or
against the will of the latter, but not without the consent of the creditor.
Payment by the new debtor gives him rights mentioned in articles 1236
and 1237."
In general, there are two modes of substituting the person of the debtor:
(1) expromision and (2) delegacion. In expromision, the initiative for the
change does not come from -- and may even be made without the
knowledge of -- the debtor, since it consists of a third person’s
assumption of the obligation. As such, it logically requires the consent
of the third person and the creditor. In delegacion, the debtor offers, and
the creditor accepts, a third person who consents to the substitution and
assumes the obligation; thus, the consent of these three persons are
necessary.11 Both modes of substitution by the debtor require the
consent of the creditor.12
Novation may also be extinctive or modificatory. It is extinctive when an
old obligation is terminated by the creation of a new one that takes the
place of the former. It is merely modificatory when the old obligation
subsists to the extent that it remains compatible with the amendatory
agreement.13 Whether extinctive or modificatory, novation is made either
338
by changing the object or the principal conditions, referred to as
objective or real novation; or by substituting the person of the debtor or
subrogating a third person to the rights of the creditor, an act known as
subjective or personal novation.14 For novation to take place, the
following requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.15
Novation may also be express or implied. It is express when the new
obligation declares in unequivocal terms that the old obligation is
extinguished. It is implied when the new obligation is incompatible with
the old one on every point.16 The test of incompatibility is whether the
two obligations can stand together, each one with its own independent
existence.17
Applying the foregoing to the instant case, we hold that no novation took
place.
The parties did not unequivocally declare that the old obligation had
been extinguished by the issuance and the acceptance of the check, or
that the check would take the place of the note. There is no
incompatibility between the promissory note and the check. As the CA
correctly observed, the check had been issued precisely to answer for
the obligation. On the one hand, the note evidences the loan obligation;
and on the other, the check answers for it. Verily, the two can stand
together.
Neither could the payment of interests -- which, in petitioner’s view, also
constitutes novation18 -- change the terms and conditions of the
obligation. Such payment was already provided for in the promissory
note and, like the check, was totally in accord with the terms thereof.
Also unmeritorious is petitioner’s argument that the obligation was
novated by the substitution of debtors. In order to change the person of
the debtor, the old one must be expressly released from the obligation,
and the third person or new debtor must assume the former’s place in
the relation.19 Well-settled is the rule that novation is never presumed.20
Consequently, that which arises from a purported change in the person
of the debtor must be clear and express.21 It is thus incumbent on
petitioner to show clearly and unequivocally that novation has indeed
taken place.
In the present case, petitioner has not shown that he was expressly
released from the obligation, that a third person was substituted in his
place, or that the joint and solidary obligation was cancelled and
substituted by the solitary undertaking of De Jesus. The CA aptly held:
"x x x. Plaintiff’s acceptance of the bum check did not result in
substitution by de Jesus either, the nature of the obligation being
solidary due to the fact that the promissory note expressly declared that
the liability of appellants thereunder is joint and [solidary.] Reason:
under the law, a creditor may demand payment or performance from
one of the solidary debtors or some or all of them simultaneously, and
payment made by one of them extinguishes the obligation. It therefore
follows that in case the creditor fails to collect from one of the solidary
debtors, he may still proceed against the other or others. x x x "22
Moreover, it must be noted that for novation to be valid and legal, the
law requires that the creditor expressly consent to the substitution of a
new debtor.23 Since novation implies a waiver of the right the creditor
had before the novation, such waiver must be express.24 It cannot be
supposed, without clear proof, that the present respondent has done
away with his right to exact fulfillment from either of the solidary
debtors.25
More important, De Jesus was not a third person to the obligation. From
the beginning, he was a joint and solidary obligor of the ₱400,000 loan;
thus, he can be released from it only upon its extinguishment.
Respondent’s acceptance of his check did not change the person of the
debtor, because a joint and solidary obligor is required to pay the entirety
of the obligation.
It must be noted that in a solidary obligation, the creditor is entitled to
demand the satisfaction of the whole obligation from any or all of the
debtors.26 It is up to the former to determine against whom to enforce
collection.27 Having made himself jointly and severally liable with De
Jesus, petitioner is therefore liable28 for the entire obligation.29
Second Issue:
339
Accommodation Party
Petitioner avers that he signed the promissory note merely as an
accommodation party; and that, as such, he was released as obligor
when respondent agreed to extend the term of the obligation.
This reasoning is misplaced, because the note herein is not a negotiable
instrument. The note reads:
"PROMISSORY NOTE
"₱400,000.00
"RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the
sum of FOUR HUNDRED THOUSAND PESOS,
Philippine Currency payable on or before January 23,
1997 at No. 144 K-10 St. Kamias, Quezon City, with
interest at the rate of 5% per month or fraction thereof.
"It is understood that our liability under this loan is jointly
and severally [sic].
"Done at Quezon City, Metro Manila this 23rd day of
December, 1996."30
By its terms, the note was made payable to a specific person rather than
to bearer or to order31 -- a requisite for negotiability under Act 2031, the
Negotiable Instruments Law (NIL). Hence, petitioner cannot avail
himself of the NIL’s provisions on the liabilities and defenses of an
accommodation party. Besides, a non-negotiable note is merely a
simple contract in writing and is evidence of such intangible rights as
may have been created by the assent of the parties.32 The promissory
note is thus covered by the general provisions of the Civil Code, not by
the NIL.
Even granting arguendo that the NIL was applicable, still, petitioner
would be liable for the promissory note. Under Article 29 of Act 2031, an
accommodation party is liable for the instrument to a holder for value
even if, at the time of its taking, the latter knew the former to be only an
accommodation party. The relation between an accommodation party
and the party accommodated is, in effect, one of principal and surety --
the accommodation party being the surety.33 It is a settled rule that a
surety is bound equally and absolutely with the principal and is deemed
an original promissor and debtor from the beginning. The liability is
immediate and direct.34
Third Issue:
Propriety of Summary Judgment
or Judgment on the Pleadings
The next issue illustrates the usual confusion between a judgment on
the pleadings and a summary judgment. Under Section 3 of Rule 35 of
the Rules of Court, a summary judgment may be rendered after a
summary hearing if the pleadings, supporting affidavits, depositions and
admissions on file show that (1) except as to the amount of damages,
there is no genuine issue regarding any material fact; and (2) the moving
party is entitled to a judgment as a matter of law.
A summary judgment is a procedural device designed for the prompt
disposition of actions in which the pleadings raise only a legal, not a
genuine, issue regarding any material fact.35 Consequently, facts are
asserted in the complaint regarding which there is yet no admission,
disavowal or qualification; or specific denials or affirmative defenses are
set forth in the answer, but the issues are fictitious as shown by the
pleadings, depositions or admissions.36 A summary judgment may be
applied for by either a claimant or a defending party.37
On the other hand, under Section 1 of Rule 34 of the Rules of Court, a
judgment on the pleadings is proper when an answer fails to render an
issue or otherwise admits the material allegations of the adverse party’s
pleading. The essential question is whether there are issues generated
by the pleadings.38 A judgment on the pleadings may be sought only by
a claimant, who is the party seeking to recover upon a claim,
counterclaim or cross-claim; or to obtain a declaratory relief. 39
Apropos thereto, it must be stressed that the trial court’s judgment
against petitioner was correctly treated by the appellate court as a
summary judgment, rather than as a judgment on the pleadings. His
Answer40 apparently raised several issues -- that he signed the
promissory note allegedly as a mere accommodation party, and that the
obligation was extinguished by either payment or novation. However,
these are not factual issues requiring trial. We quote with approval the
CA’s observations:
340
"Although Garcia’s [A]nswer tendered some issues, by way of
affirmative defenses, the documents submitted by [respondent]
nevertheless clearly showed that the issues so tendered were not valid
issues. Firstly, Garcia’s claim that he was merely an accommodation
party is belied by the promissory note that he signed. Nothing in the note
indicates that he was only an accommodation party as he claimed to be.
Quite the contrary, the promissory note bears the statement: ‘It is
understood that our liability under this loan is jointly and severally [sic].’
Secondly, his claim that his co-defendant de Jesus already paid the loan
by means of a check collapses in view of the dishonor thereof as shown
at the dorsal side of said check."41

From the records, it also appears that petitioner himself moved to submit
the case for judgment on the basis of the pleadings and
documents.1âwphi1 In a written Manifestation,42 he stated that
"judgment on the pleadings may now be rendered without further
evidence, considering the allegations and admissions of the parties."43

In view of the foregoing, the CA correctly considered as a summary

judgment that which the trial court had issued against petitioner.

WHEREFORE, this Petition is hereby DENIED and the assailed

Decision AFFIRMED. Costs against petitioner.

SO ORDERED.

341
 EDUARDO G. RICARZE, Petitioner, vs. COURT OF APPEALS,
PEOPLE OF THE PHILIPPINES, CALTEX PHILIPPINES, INC.,
PHILIPPINE COMMERCIAL AND INDUSTRIAL BANK (PCIBANK),
Respondents.
G.R. No. 160451 February 9, 2007
CALLEJO, SR., J.:
Before the Court is a petition for review on certiorari of the Decision1 of
the Court of Appeals in CA-G.R. SP No. 68492, and its Resolution2
which denied the Motion for Reconsideration and the Supplemental
Motion for Reconsideration thereof.
The Antecedents
Petitioner Eduardo G. Ricarze was employed as a collector-messenger
by City Service Corporation, a domestic corporation engaged in
messengerial services. He was assigned to the main office of Caltex
Philippines, Inc. (Caltex) in Makati City. His primary task was to collect
checks payable to Caltex and deliver them to the cashier. He also
delivered invoices to Caltex’s customers.3
On November 6, 1997, Caltex, through its Banking and Insurance
Department Manager Ramon Romano, filed a criminal complaint
against petitioner before the Office of the City Prosecutor of Makati City
for estafa through falsification of commercial documents. Romano
alleged that, on October 16, 1997, while his department was conducting
a daily electronic report from Philippine Commercial & Industrial Bank
(PCIB) Dela Rosa, Makati Branch, one of its depositary banks, it was
discovered that unknown to the department, a company check, Check
No. 74001 dated October 13, 1997 in the amount of ₱5,790,570.25
payable to Dante R. Gutierrez, had been cleared through PCIB on
October 15, 1997. An investigation also revealed that two other checks
(Check Nos. 73999 and 74000) were also missing and that in Check No.
74001, his signature and that of another signatory, Victor S. Goquinco,
were forgeries. Another check, Check No. 72922 dated September 15,
1997 in the amount of ₱1,790,757.25 likewise payable to Dante R.
Gutierrez, was also cleared through the same bank on September 24,
1997; this check was likewise not issued by Caltex, and the signatures
appearing thereon had also been forged. Upon verification, it was
uncovered that Check Nos. 74001 and 72922 were deposited at the
Banco de Oro’s SM Makati Branch under Savings Account No. S/A
2004-0047245-7, in the name of a regular customer of Caltex, Dante R.
Gutierrez.
Gutierrez, however, disowned the savings account as well as his
signatures on the dorsal portions thereof. He also denied having
withdrawn any amount from said savings account. Further investigation
revealed that said savings account had actually been opened by
petitioner; the forged checks were deposited and endorsed by him under
Gutierrez’s name. A bank teller from the Banco de Oro, Winnie P.
Donable Dela Cruz, positively identified petitioner as the person who
opened the savings account using Gutierrez’s name.4
In the meantime, the PCIB credited the amount of ₱581,229.00 to Caltex
on March 29, 1998. However, the City Prosecutor of Makati City was not
informed of this development. After the requisite preliminary
investigation, the City Prosecutor filed two (2) Informations for estafa
through falsification of commercial documents on June 29, 1998 against
petitioner before the Regional Trial Court (RTC) of Makati City, Branch
63. The Informations are worded as follows:
Criminal Case No. 98-1611
That on or about the 24th day of September 1997 in the City of Makati,
Metro Manila, Philippines, a place within the jurisdiction of this
Honorable Court, the above-named accused, a private individual, with
intent to defraud and intent to gain, without the knowledge and consent
of Caltex Philippines, Inc. through its duly authorized
officers/representatives, and by means of falsification of commercial
document, did then and there willfully, unlawfully and feloniously defraud
Caltex Phils., Inc., in the following manner, to wit: said accused, having
obtained possession of PCIBank check no. 72922 dated September 15,
1997 payable to Dante R. Gutierrez, in the amount of Php1,790,757.50
with intent to defraud or cause damage to complainant Caltex Phils.,
Inc., willfully, unlawfully and feloniously affixed or caused to be affixed
signatures purporting to be those of Ramon Romano and Victor
Goquingco, Caltex authorized officers/signatories, and of payee Dante
R. Gutierrez, causing it to appear that Ramon Romano and Victor
Goquingco have participated in the issuance of PCIBank check no.
72922 and that Dante R. Gutierrez had endorsed it, when in truth and in
fact, as said accused well knew, such was not the case, since said check
previously stolen from Payables Section of CALTEX, was neither duly
signed by Ramon Romano and Victor Goquingco nor endorsed by
Dante R. Gutierrez, after the check, a commercial document, was
342
falsified in the manner above set forth, the said accused purporting
himself to be the payee, Dante R. Gutierrez, deposited the check with
Banco De Oro under Account No. 2004-0047245-7, thereby
appropriating the proceeds of the falsified but cleared check, to the
damage and prejudice of complainant herein represented by Ramon
Romano, in the amount of Php1,790,757.50.
Criminal Case No. 98-1612
That on or about the 15th day of October 1997 in the City of Makati,
Metro Manila, Philippines, a place within the jurisdiction of this
Honorable Court, the above-named accused, a private individual, with
intent to defraud and intent to gain, without the knowledge and consent
of Caltex Philippines, Inc. through its duly authorized
officers/representatives, and by means of falsification of commercial
document, did then and there willfully, unlawfully and feloniously defraud
Caltex Phils., Inc., in the following manner, to wit: said accused, having
obtained possession of PCIBank check no. 74001 dated October 13,
1997 payable to Dante R. Gutierrez, in the amount of Php5,790,570.25
with intent to defraud or cause damage to complainant Caltex Phils.,
Inc., willfully, unlawfully and feloniously affixed or caused to be affixed
signatures purporting to be those of Ramon Romano and Victor
Goquingco, Caltex authorized officers/signatories, and of payee Dante
R. Gutierrez, causing it to appear that Ramon Romano and Victor
Goquingco have participated in the issuance of PCIBank check no.
74001 and that Dante R. Gutierrez had endorsed it, when in truth and in
fact, as said accused well knew, such was not the case, since said check
previously stolen from Payables Section of CALTEX, was neither duly
signed by Ramon Romano and Victor Goquingco nor endorsed by
Dante R. Gutierrez, after the check, a commercial document, was
falsified in the manner above set forth, the said accused purporting
himself to be the payee, Dante R. Gutierrez, deposited the check with
Banco De Oro under Account No. 2004-0047245-7, thereby
appropriating the proceeds of the falsified but cleared check, to the
damage and prejudice of complainant herein represented by Ramon
Romano, in the amount of Php5,790,570.25.5
Petitioner was arraigned on August 18, 1998, and pleaded not guilty to
both charges.6 Pre-trial ensued and the cases were jointly tried. The
prosecution presented its witnesses, after which the Siguion Reyna,
Montecillio and Ongsiako Law Offices (SRMO) as private prosecutor
filed a Formal Offer of Evidence.7 Petitioner opposed the pleading,
contending that the private complainant was represented by the ACCRA
Law Offices and the Balgos and Perez Law Office during trial, and it was
only after the prosecution had rested its case that SRMO entered its
appearance as private prosecutor representing the PCIB. Since the
ACCRA and Balgos and Perez Law Offices had not withdrawn their
appearance, SRMO had no personality to appear as private prosecutor.
Under the Informations, the private complainant is Caltex and not PCIB;
hence, the Formal Offer of Evidence filed by SRMO should be stricken
from the records.
Petitioner further averred that unless the Informations were amended to
change the private complainant to PCIB, his right as accused would be
prejudiced. He pointed out, however, that the Informations can no longer
be amended because he had already been arraigned under the original
Informations.8 He insisted that the amendments of the Informations to
substitute PCIB as the offended party for Caltex would place him in
double jeopardy.
PCIB, through SRMO, opposed the motion. It contended that the PCIB
had re-credited the amount to Caltex to the extent of the indemnity;
hence, the PCIB had been subrogated to the rights and interests of
Caltex as private complainant. Consequently, the PCIB is entitled to
receive any civil indemnity which the trial court would adjudge against
the accused. Moreover, the re-credited amount was brought out on
cross-examination by Ramon Romano who testified for the Prosecution.
PCIB pointed out that petitioner had marked in evidence the letter of the
ACCRA Law Office to PCIBank dated October 10, 1997 and the credit
memo sent by PCIB to Caltex.9
Petitioner filed a Motion to Expunge the Opposition of SRMO.10 In his
Rejoinder, he averred that the substitution of PCIB as private
complainant cannot be made by mere oral motion; the Information must
be amended to allege that the private complainant was PCIB and not
Caltex after the preliminary investigation of the appropriate complaint of
PCIB before the Makati City Prosecutor.
In response, the PCIB, through SRMO, averred that as provided in
Section 2, Rule 110 of the Revised Rules of Criminal Procedure, the
erroneous designation of the name of the offended party is a mere
formal defect which can be cured by inserting the name of the offended
party in the Information. To support its claim, PCIB cited the ruling of this
Court in Sayson v. People.11
343
On July 18, 2001, the RTC issued an Order granting the motion of the
private prosecutor for the substitution of PCIB as private complainant for
Caltex. It however denied petitioner’s motion to have the formal offer of
evidence of SRMO expunged from the record.12 Petitioner filed a motion
for reconsideration which the RTC denied on November 14, 2001.13
Petitioner filed a Petition for Certiorari under Rule 65 of the Rules of
Court with Urgent Application for Temporary Restraining Order with the
Court of Appeals (CA,) praying for the annulment of the RTC’s Orders
of July 18, 2001 and November 14, 2001. The petitioner averred that:
I checks to Caltex, it was subrogated to the latter’s right against petitioner.
RESPONDENT JUDGE GRIEVEOUSLY (SIC) ERRED IN
RENDERING ITS ORDER ISSUED WITH GRAVE
ABUSE OF DISCRETION TANTAMOUNT TO LACK OF
OR IN EXCESS OF JURISDICTION BY ALLOWING THE
SUBSTITUTION OF PRIVATE COMPLAINANT, AFTER
THE ACUSED WAS ALREADY ARRAIGNED AND
PROSECUTION HAS ALREADY TERMINATED
PRESENTING ITS EVIDENCE THEREBY PATENTLY
VIOLATING THE STRICT CONDITION IMPOSED UPON
BY RULE 110 SEC. 14 RULES ON CRIMINAL
ROCEDURE.
II
AND AS A COROLLARY GROUND RESPONDENT
JUDGE COMMITTED GRAVE ABUSE OF DISCRETION
IN EXCESS OF JURISDICTION IN RENDERING AN
ORDER RECOGNIZING THE APPEARANCE OF A NEW
PROSECUTOR WITHOUT WRITTEN OR EVEN ORAL
WITHDRAWAL OF THE COUNSEL ON RECORD.14
According to petitioner, damage or injury to the offended party is an
essential element of estafa. The amendment of the Informations
substituting the PCIBank for Caltex as the offended party would
prejudice his rights since he is deprived of a defense available before
the amendment, and which would be unavailable if the Informations are
amended. Petitioner further insisted that the ruling in the Sayson case
did not apply to this case.
On November 5, 2002, the appellate court rendered judgment
dismissing the petition. The fallo reads:
WHEREFORE, premises considered, the petition to annul the orders
dated July 18, 2001 and November 14, 2001 of the Regional Trial Court,
Branch 63, Makati City in Criminal Case Nos. 98-1611 and 98-1612 is
hereby DENIED and consequently DISMISSED.
SO ORDERED.15
The appellate court declared that when PCIB restored the amount of the
It further declared that in offenses against property, the designation of
the name of the offended party is not absolutely indispensable for as
long as the criminal act charged in the complaint or information can be
properly identified. The appellate court cited the rulings of this Court in
People v. Ho16 and People v. Reyes.17
On October 17, 2003, the CA issued a Resolution denying petitioner’s
Motion for Reconsideration and Supplemental Motion for
Reconsideration.18
Hence, petitioner filed the instant petition which is anchored on the
following grounds:
I. THE PEOPLE V. YU CHAI HO 53 PHILIPPINES 874 IS
INAPPLICABLE TO THE CASE AT BAR CONSIDERING THE PACTS
ARE SUBSTANTIALLY DIFFERENT.
II. LIKEWISE, THE CASE OF PEOPLE VS. REYES CA, 50 (2) OG 665,
NOVEMBER 11, 1953 HAS NO MATERIAL BEARING TO THE
PRESENT CASE.
III. THE SUBSTITUTION OF PCIBANK WILL SUBSTANTIALLY
PREJUDICE THE RIGHTS OF THE PETITIONER HENCE, IT IS
PROHIBITED BY SEC. 14 OF RULE 110.
IV. THERE IS NO VALID SUBROGATION BETWEEN CALTEX AND
PCIBANK. ASSUMING THERE IS, THE CIVIL CASE SHOULD BE
DISMISSED TO PROSECUTE.
V. THE TWIN INFORMATIONS UPON WHICH PETITIONER WAS
INDICTED, ARRAIGNED, PRE-TRIAL HELD AND PUBLIC
344
PROSECUTOR TERMINATED THE PRESENTATION OF ITS
EVIDENCE IN CHIEF ARE DEFECTIVE AND VOID, HENCE THE
DISMISSAL IS IN ORDER.
VI. PETITIONER TIMELY OBJECTED TO THE APPEARANCE OF
PRIVATE PROSECUTOR FOR PCIBANK.
VII. THE FINDINGS OF MATERIAL FACTS ARE NOT SUPORTED BY
THE RECORD NOR EVIDENCE AND BASED ON MISAPPRECIATION
OF FACTS.
VIII. PETITIONER’S SUPPLEMENTAL MOTION FOR
RECONSIDERATION DID NOT VIOLATE THE OMNIBUS MOTION
RULE UNDER SEC. 8, RULE 15 OF THE 1997 RULES OF CIVIL
PROCEDURE.19
The Court’s Ruling
Petitioner argues that the substitution of Caltex by PCIB as private
complainant at this late stage of the trial is prejudicial to his defense. He
argues that the substitution is tantamount to a substantial amendment
of the Informations which is prohibited under Section 14, Rule 110 of the
Rules of Court.
Under Section 5, Rule 11020 of the Revised Rules of Rules, all criminal
actions covered by a complaint or information shall be prosecuted under
the direct supervision and control of the public prosecutor. Thus, even if
the felonies or delictual acts of the accused result in damage or injury to
another, the civil action for the recovery of civil liability based on the said
criminal acts is impliedly instituted, and the offended party has not
waived the civil action, reserved the right to institute it separately or
instituted the civil action prior to the criminal action, the prosecution of
the action (including the civil) remains under the control and supervision
of the public prosecutor. The prosecution of offenses is a public function.
Under Section 16, Rule 110 of the Rules of Criminal Procedure, the
offended party may intervene in the criminal action personally or by
counsel, who will act as private prosecutor for the protection of his
interests and in the interest of the speedy and inexpensive
administration of justice. A separate action for the purpose would only
prove to be costly, burdensome and time-consuming for both parties and
further delay the final disposition of the case. The multiplicity of suits
must be avoided. With the implied institution of the civil action in the
criminal action, the two actions are merged into one composite
proceeding, with the criminal action predominating the civil. The prime
purpose of the criminal action is to punish the offender in order to deter
him and others from committing the same or similar offense, to isolate
him from society, reform and rehabilitate him or, in general, to maintain
social order.21
On the other hand, the sole purpose of the civil action is for the
resolution, reparation or indemnification of the private offended party for
the damage or injury he sustained by reason of the delictual or felonious
act of the accused.22 Under Article 104 of the Revised Penal Code, the
following are the civil liabilities of the accused:
ART. 104. What is included in civil liability. – The civil liability established
in Articles 100, 101, 102 and 103 of this Code includes:
1. Restitution;
2. Reparation of the damage caused;
3. Indemnification for consequential damages.
On the other hand, Section 14, Rule 110 of the Revised Rules of
Criminal Procedure states:
Section 14. Amendment or substitution. – A complaint or information
may be amended, in form or in substance, without leave of court, at any
time before the accused enters his plea. After the plea and during the
trial, a formal amendment may only be made with leave of court and
when it can be done without causing prejudice to the rights of the
accused.
However, any amendment before plea, which downgrades the nature of
the offense charged in or excludes any accused from the complaint or
information, can be made only upon motion by the prosecutor, with
notice to the offended party and with leave of court. The court shall state
its reasons in resolving the motion and copies of its order shall be
furnished all parties, especially the offended party.
Thus, before the accused enters his plea, a formal or substantial
amendment of the complaint or information may be made without leave
of court. After the entry of a plea, only a formal amendment may be
made but with leave of court and if it does not prejudice the rights of the
345
accused. After arraignment, a substantial amendment is proscribed
except if the same is beneficial to the accused.23
A substantial amendment consists of the recital of facts constituting the
offense charged and determinative of the jurisdiction of the court. All
other matters are merely of form.24 The following have been held to be
mere formal amendments: (1) new allegations which relate only to the
range of the penalty that the court might impose in the event of
conviction; (2) an amendment which does not charge another offense
different or distinct from that charged in the original one; (3) additional
allegations which do not alter the prosecution’s theory of the case so as
to cause surprise to the accused and affect the form of defense he has
or will assume; (4) an amendment which does not adversely affect any
substantial right of the accused; and (5) an amendment that merely adds
specifications to eliminate vagueness in the information and not to
introduce new and material facts, and merely states with additional
precision something which is already contained in the original
information and which adds nothing essential for conviction for the crime
charged.25
The test as to whether a defendant is prejudiced by the amendment is
whether a defense under the information as it originally stood would be
available after the amendment is made, and whether any evidence
defendant might have would be equally applicable to the information in
the one form as in the other. An amendment to an information which
does not change the nature of the crime alleged therein does not affect
the essence of the offense or cause surprise or deprive the accused of
an opportunity to meet the new averment had each been held to be one
of form and not of substance.26
In the case at bar, the substitution of Caltex by PCIB as private complaint
is not a substantial amendment. The substitution did not alter the basis
of the charge in both Informations, nor did it result in any prejudice to
petitioner. The documentary evidence in the form of the forged checks
remained the same, and all such evidence was available to petitioner
well before the trial. Thus, he cannot claim any surprise by virtue of the
substitution.
Petitioner next argues that in no way was PCIB subrogated to the rights
of Caltex, considering that he has no knowledge of the subrogation
much less gave his consent to it. Alternatively, he posits that if
subrogation was proper, then the charges against him should be
dismissed, the two Informations being "defective and void due to false
allegations."
Petitioner was charged of the crime of estafa complex with falsification
document. In estafa one of the essential elements "to prejudice of
another" as mandated by article 315 of the Revise Penal Code.
The element of "to the prejudice of another" being as essential element
of the felony should be clearly indicated and charged in the information
with TRUTH AND LEGAL PRECISION.
This is not so in the case of petitioner, the twin information filed against
him alleged the felony committed " to the damage and prejudice of
Caltex." This allegation is UNTRUE and FALSE for there is no question
that as early as March 24, 1998 or THREE (3) LONG MONTHS before
the twin information were filed on June 29, 1998, the prejudice party is
already PCIBank since the latter Re-Credit the value of the checks to
Caltex as early as March 24, 1998. In effect, assuming there is valid
subrogation as the subject decision concluded, the subrogation took
place an occurred on March 24, 1998 THREE (3) MONTHS before the
twin information were filed.
The phrase "to the prejudice to another" as element of the felony is
limited to the person DEFRAUDED in the very act of embezzlement. It
should not be expanded to other persons which the loss may ultimately
fall as a result of a contract which contract herein petitioner is total
stranger.
In this case, there is no question that the very act of commission of the
offense of September 24, 1997 and October 15, 1997 respectively,
Caltex was the one defrauded by the act of the felony.
In the light of these facts, petitioner submits that the twin information are
DEFECTIVE AND VOID due to the FALSE ALLEGATIONS that the
offense was committed to the prejudice of Caltex when it truth and in
fact the one prejudiced here was PCIBank.
The twin information being DEFECTIVE AND VOID, the same should
be dismissed without prejudice to the filing of another information which
should state the offense was committed to the prejudice of PCIBank if it
still legally possible without prejudicing substantial and statutory rights
of the petitioner.27
346
Petitioner’s argument on subrogation is misplaced. The Court agrees
with respondent PCIB’s comment that petitioner failed to make a
distinction between legal and conventional subrogation. Subrogation is
the transfer of all the rights of the creditor to a third person, who
substitutes him in all his rights.28 It may either be legal or conventional.
Legal subrogation is that which takes place without agreement but by
operation of law because of certain acts.29 Instances of legal
subrogation are those provided in Article 130230 of the Civil Code.
Conventional subrogation, on the other hand, is that which takes place
by agreement of the parties.31 Thus, petitioner’s acquiescence is not
necessary for subrogation to take place because the instant case is one
of legal subrogation that occurs by operation of law, and without need
of the debtor’s knowledge.
Contrary to petitioner’s asseverations, the case of People v. Yu Chai
Ho32 relied upon by the appellate court is in point. The Court declared –
We do not however, think that the fiscal erred in alleging that the
commission of the crime resulted to the prejudice of Wm. H. Anderson
& Co. It is true that originally the International Banking Corporation was
the prejudiced party, but Wm. H. Anderson & Co. compensated it for its
loss and thus became subrogated to all its rights against the defendant
(article 1839, Civil Code). Wm. H. Anderson & Co., therefore, stood
exactly in the shoes of the International Banking Corporation in relation
to the defendant's acts, and the commission of the crime resulted to the
prejudice of the firm previously to the filing of the information in the case.
The loss suffered by the firm was the ultimate result of the defendant's
unlawful acts, and we see no valid reason why this fact should not be
stated in the information; it stands to reason that, in the crime of estafa,
the damage resulting therefrom need not necessarily occur
simultaneously with the acts constituting the other essential elements of
the crime.
Thus, being subrogated to the right of Caltex, PCIB, through counsel,
has the right to intervene in the proceedings, and under substantive laws
is entitled to restitution of its properties or funds, reparation, or
indemnification.
Petitioner’s gripe that the charges against him should be dismissed
because the allegations in both Informations failed to name PCIB as true
offended party does not hold water.
Section 6, Rule 110 of the Rules on Criminal Procedure states:
Sec. 6. Sufficiency of complaint or information. – A complaint or
information is sufficient if it states the name of the accused; the
designation of the offense by the statute; the acts or omissions
complained of as constituting the offense; the name of the offended
party; the approximate time of the commission of the offense; and the
place wherein the offense was committed.
When the offense is committed by more than one person, all of them
shall be included in the complaint or information.
On the other hand, Section 12 of the same Rule provides:
Section. 12. Name of the offended party. –The complaint or information
must state the name and surname of the person against whom or
against whose property the offense was committed, or any appellation
or nickname by which such person has been or is known. If there is no
better way of identifying him, he must be described under a fictitious
name.
(a) In offenses against property, if the name of the offended party is
unknown, the property must be described with such particularity as to
properly identify the offense charged.
(b) If the true name of the person against whom or against whose
property the offense was committed is thereafter disclosed or
ascertained, the court must cause such true name to be inserted in the
complaint or information and the record.
(c) If the offended party is a juridical person, it is sufficient to state its
name, or any name or designation by which it is known or by which it
may be identified, without need of averring that it is a juridical person or
that it is organized in accordance with law. (12a)
In Sayson v. People,33 the Court held that in case of offenses against
property, the designation of the name of the offended party is not
absolutely indispensable for as long as the criminal act charged in the
complaint or information can be properly identified:
The rules on criminal procedure require the complaint or information to
state the name and surname of the person against whom or against
whose property the offense was committed or any appellation or
nickname by which such person has been or is known and if there is no
better way of Identifying him, he must be described under a fictitious
347
name (Rule 110, Section 11, Revised Rules of Court; now Rule 110,
Section 12 of the 1985 Rules on Criminal Procedure.] In case of
offenses against property, the designation of the name of the offended
party is not absolutely indispensable for as long as the criminal act
charged in the complaint or information can be properly identified. Thus,
Rule 110, Section 11 of the Rules of Court provides that:
Section 11. Name of the offended party-
… failure to make a timely objection thereto."36
trial that the offended party was actually Mever Films and not Ernesto
Rufino, Sr. nor Bank of America as alleged in the information.
Lastly, on petitioner’s claim that he timely objected to the appearance of
SRMO34 as private prosecutor for PCIB, the Court agrees with the
observation of the CA that contrary to his claim, petitioner did not
question the said entry of appearance even as the RTC acknowledged
the same on October 8, 1999.35 Thus, petitioner cannot feign ignorance
or surprise of the incident, which are "all water under the bridge for [his]

(a) In cases of offenses against property, if the name of the offended WHEREFORE, the petition is DENIED. The assailed decision and
party is unknown, the property, subject matter of the offense, must be resolution of the Court of Appeals are AFFIRMED. This case is
described with such particularity as to properly Identify the particular REMANDED to the Regional Trial Court of Makati City, Branch 63, for
offense charged. further proceedings. SO ORDERED.

(b) If in the course of the trial, the true name of the person against whom
or against whose property the offense was committed is disclosed or
ascertained, the court must cause the true name to be inserted in the
complaint or information or record.

In U.S. v. Kepner [1 Phil. 519 (1902)], this Court laid down the rule that
when an offense shall have been described in the complaint with
sufficient certainty as to Identify the act, an erroneous allegation as to
the person injured shall be deemed immaterial as the same is a mere
formal defect which did not tend to prejudice any substantial right of the
defendant. Accordingly, in the aforementioned case, which had a factual
backdrop similar to the instant case, where the defendant was charged
with estafa for the misappropriation of the proceeds of a warrant which
he had cashed without authority, the erroneous allegation in the
complaint to the effect that the unlawful act was to the prejudice of the
owner of the cheque, when in reality the bank which cashed it was the
one which suffered a loss, was held to be immaterial on the ground that
the subject matter of the estafa, the warrant, was described in the
complaint with such particularity as to properly Identify the particular
offense charged. In the instant suit for estafa which is a crime against
property under the Revised Penal Code, since the check, which was the
subject-matter of the offense, was described with such particularity as
to properly identify the offense charged, it becomes immaterial, for
purposes of convicting the accused, that it was established during the

348
 EDGAR LEDONIO, petitioner, vs. CAPITOL DEVELOPMENT
CORPORATION, respondent.
G.R. No. 149040 July 4, 2007
CHICO-NAZARIO, J.:
Before this Court is a Petition for Review on Certiorari1 under Rule 45 of
the Revised Rules of Court praying that (1) the Decision,2 dated 20
March 2001, of the Court of Appeals in CA-G.R. CV No. 43604, affirming
in toto the Decision,3 dated 6 August 1993, of the Quezon City Regional
Trial Court (RTC), Branch 91, in Civil Case No. Q-90-5247, be set aside;
and (2) the Complaint4 in Civil Case No. Q-90-5247 be dismissed.
Herein respondent Capitol Development Corporation instituted Civil
Case No. Q-90-5247 by filing a Complaint for the collection of a sum of
money against herein petitioner Edgar Ledonio.
In its Complaint, respondent alleged that petitioner obtained from a Ms.
Patrocinio S. Picache two loans, with the aggregate principal amount of
P60,000.00, and covered by promissory notes duly signed by petitioner.
In the first promissory note,5 dated 9 November 1988, petitioner
promised to pay to the order of Ms. Picache the principal amount of
P30,000.00, in monthly installments of P3,000.00, with the first monthly
installment due on 9 January 1989. In the second promissory note,6
dated 10 November 1988, petitioner again promised to pay to the order
of Ms. Picache the principal amount of P30,000.00, with 36% interest
per annum, on 1 December 1988. In case of default in payment, both
promissory notes provide that (a) petitioner shall be liable for a penalty
equivalent to 20% of the total outstanding balance; (b) unpaid interest
shall be compounded or added to the balance of the principal amount
and shall bear the same rate of interest as the latter; and (c) in case the
creditor, Ms. Picache, shall engage the services of counsel to enforce
her rights and powers under the promissory notes, petitioner shall pay
as attorney's fees and liquidated damages the sum equivalent to 20%
of the total amount sought to be recovered, but in no case shall the said
sum be less that P10,000.00, exclusive of costs of suit.
On 1 April 1989, Ms. Picache executed an Assignment of Credit7 in favor
of respondent, which reads –
KNOW ALL MEN BY THESE PRESENTS:
That I, PAT S. PICACHE of legal age and with postal address at 373
Quezon Avenue, Quezon City for and in consideration of SIXTY
THOUSAND PESOS (P60,000.00) Philippine Currency, to me paid by
[herein respondent] CAPITOL DEVELOPMENT CORPORATION, a
corporation organized and existing under the laws of the Republic of the
Philippines with principal office at 373 Quezon Avenue, Quezon City
receipt whereof is hereby acknowledged have sold, transferred,
assigned and conveyed and (sic) by me these presents do hereby sell,
assign, transfer and convey unto the said [respondent] CAPITOL
DEVELOPMENT CORPORATION, a certain debt due me from [herein
petitioner] EDGAR A. LEDONIO in the principal sum of SIXTY
THOUSAND PESOS (P60,000.00) Philippine Currency, under two (2)
Promissory Notes dated November 9, 1988 and November 10, 1988,
respectively, photocopies of which are attached to as annexes A & B to
form integral parts hereof with full power to sue for, collect and
discharge, or sell and assign the same.
That I hereby declare that the principal sum of SIXTY THOUSAND
PESOS (P60,000.00) with interest thereon at THIRTY SIX (36%) PER
CENT per annum is justly due and owing to me as aforesaid.
IN WITNESS WHEREOF, I have hereunto set my hand this 1st day of
April, 1989 at Quezon City.
(SGD)PAT S. PICACHE
The foregoing document was signed by two witnesses and duly
acknowledged by Ms. Picache before a Notary Public also on 1 April
1989.
Since petitioner did not pay any of the loans covered by the promissory
notes when they became due, respondent -- through its Vice President
Nina P. King and its counsel King, Capuchino, Banico & Associates --
sent petitioner several demand letters.8 Despite receiving the said
demand letters, petitioner still failed and refused to settle his
indebtedness, thus, prompting respondent to file the Complaint with the
RTC, docketed as Civil Case No. Q-90-5247.
In his Answer filed with the RTC, petitioner sought the dismissal of the
Complaint averring that respondent had no cause of action against him.
He denied obtaining any loan from Ms. Picache and questioned the
genuineness and due execution of the promissory notes, for they were
the result of intimidation and fraud; hence, void. He asserted that there
349
had been no transaction or privity of contract between him, on one hand,
and Ms. Picache and respondent, on the other. The assignment by Ms.
Picache of the promissory notes to respondent was a mere ploy and
simulation to effect the unjust enforcement of the invalid promissory
notes and to insulate Ms. Picache from any direct counterclaims, and he
never consented or agreed to the said assignment.
Petitioner then presented his own narration of events leading to the filing
of Civil Case No. Q-90-5247. According to him, on 24 February 1988,
he entered into a Contract of Lease9 of real property located in Quezon
City with Mission Realty & Management Corporation (MRMC), of which
Ms. Picache is an incorporator and member of the Board of Directors.10
Petitioner relocated the plant and machines used in his garments
business to the leased property. After a month or two, a foreign investor
was interested in doing business with him and sent a representative to
conduct an ocular inspection of petitioner's plant at the leased property.
During the inspection, a group of Meralco employees entered the leased
property to cut off the electric power connections of the plant. The event
gave an unfavorable impression to the foreign investor who desisted
from further transacting with petitioner. Upon verification with Meralco,
petitioner discovered that there were unpaid electric bills on the leased
property amounting to hundreds of thousands of pesos. These electric
bills were supposedly due to the surreptitious electrical connections to
the leased property. Petitioner claimed that he was never informed or
advised by MRMC of the existence of said unpaid electric bills. It took
Meralco considerable time to restore electric power to the leased
property and only after petitioner pleaded that he was not responsible
for the illegal electrical connections and/or the unpaid electric bills, for
he was only a recent lessee of the leased property. Because of the work
stoppage and loss of business opportunities resulting from the foregoing
incident, petitioner purportedly suffered damages amounting to United
States $60,000.00, for which petitioner verbally attempted to recover
compensation from MRMC.
Having failed to obtain compensation from MRMC, petitioner decided to
vacate and pull out his machines from the leased property but he can
only do so, unhampered and uninterrupted by MRMC security
personnel, if he signed, as he did, blank promissory note forms.
Petitioner alleged that when he signed the promissory note forms, the
allotted spaces for the principal amount of the loans, interest rates, and
names of the promisee/s were in blank; and that Ms. Picache took
advantage of petitioner's signatures on the blank promissory note forms
by filling up the blanks.
To raise even more suspicions of fraud and spuriousness of the
promissory notes and their subsequent assignment to respondent,
petitioner called attention to the fact that Ms. Picache is an incorporator
and member of the Board of Directors of both MRMC and respondent.11
After the pre-trial conference and the trial proper, the RTC rendered a
Decision12 on 6 August 1993, ruling in favor of respondent. The RTC
gave more credence to respondent's version of the facts, finding that –
[Herein petitioner]'s disclaimer of the promissory note[s] does not inspire
belief. He is a holder of a degree in Bachelor of Science in Chemical
Engineering and has been a manufacturer of garments since 1979. As
a matter of fact, [petitioner]'s testimony that he was made to sign blank
sheets of paper is contrary to his admission in paragraphs 12 and 13 of
his Answer that as a condition to his removal of his machines [from] the
leased premises, he was made to sign blank promissory note forms with
respect to the amount, interest and promisee. It thus appears
incredulous that a businessman like [petitioner] would simply sign blank
sheets of paper or blank promissory notes just [to] be able to vacate the
leased premises.
Moreover, the credibility of [petitioner]'s testimony leaves much to be
desired. He contradicted his earlier testimony that he only met Patrocinio
Picache once, which took place in the office of Mission Realty and
Management Corporation, by stating that he saw Patrocinio Picache a
second time when she went to his house. Likewise, his claim that the
electric power in the leased premises was cut off only two months after
he occupied the same is belied by his own evidence. The contract of
lease submitted by [petitioner] is dated February 24, 1988 and took
effect on March 1, 1988. His letter to Mission Realty and Management
Corporation dated September 21, 1988, complained of the electric
power disconnection that took place on September 6, 1988, that is, six
(6) months after he had occupied the leased premises, and did not even
give a hint of his intention to vacate the premises because of said
incident. It appears that [petitioner] was already advised to pay his rental
arrearages in a letter dated August 9, 1988 (Exh. "2") and was notified
of the termination of the lease contract in a letter dated September 19,
1988 (Exh. "4"). However, in a letter dated September 26, 1988,
[petitioner] requested for time to look for a place to transfer.
The RTC also sustained the validity and enforceability of the Assignment
of Credit executed by Ms. Picache in favor of respondent, even in the
350
absence of petitioner's consent to the said assignment, based on the
following reasoning –
The promissory notes (Exhs. "A" and "B") were assigned by Ms.
Patrocinio Picache to [herein respondent] by virtue of a notarized
Assignment of Credit dated April 1, 1989 for a consideration of
P60,000.00 (Exh. "C"). The fact that the assignment of credit does not
bear the conformity of [herein petitioner] is of no moment. In C & C
Commercial Corporation vs. Philippine National Bank, 175 SCRA 1, 11,
the Supreme Court held thus:
"x x x Article 1624 of the Civil Code provides that 'an assignment of
credits and other incorporeal rights shall be perfected in accordance with
the provisions of Article 1475' which in turn states that 'the contract of
sale is perfected at the moment there is a meeting of the minds upon
the thing which is the object of the contract and upon the price.' The
meeting of the minds contemplated here is that between the assignor of
the credit and his assignee, there being no necessity for the consent of
the debtor, contrary to petitioner's claim. It is sufficient that the
assignment be brought to his knowledge in order to be binding upon
him. This may be inferred from Article 1626 of the Civil Code which
declares that 'the debtor who, before having knowledge of the
assignment, pays his creditor shall be released from the obligation.'"
[Petitioner] does not deny having been notified of the assignment of
credit by Patrocinio Picache to the [respondent]. Thus, [respondent] sent
several demand letters to the [petitioner] in connection with the loan[s]
(Exhs. "D", "E", "F" and "G"). [Petitioner] acknowledged receipt of
[respondent]'s letter of demand dated June 13, 1989 (Exh. "F") and
assured [respondent] that he would settle his account, as per their
telephone conversation (Exhs. "H" and "9"). Such communications
between [respondent] and [petitioner] show that the latter had been duly
notified of the said assignment of credit. x x x.
Given its aforequoted findings, the RTC proceeded to a determination
of petitioner's liabilities to respondent, taking into account the provisions
of the promissory notes, thus –
x x x Consequently, [herein respondent] is entitled to recover from
[herein petitioner] the principal amount of P30,000.00 for the promissory
note dated November 9, 1988. As said note did not provide for any
interest, [respondent] may only recover interest at the legal rate of 12%
per annum from April 18, 1990, the date of the filing of the complaint.
With respect to the promissory note dated November 10, 1988, the
same provided for interest at 36% per annum and that interest not paid
when due shall be added to and shall become part of the principal and
shall bear the same rate of interest as the principal. Likewise, both
promissory notes provided for a penalty of 20% of the total outstanding
balance thereon and attorney's fees equivalent to 20% of the sum
sought to be recovered in case of litigation.
In Garcia vs. Court of Appeals, 167 SCRA 815, it was held that penalty
interests are in the nature of liquidated damages and may be equitably
reduced by the courts if they are iniquitous or unconscionable, pursuant
to Articles 1229 and 2227 of the Civil Code. Considering that the
promissory note dated November 10, 1988 already provided for interest
at 36% per annum on the principal obligation, as well as for the
capitalization of the unpaid interest, the penalty charge of 20% of the
total outstanding balance of the obligation thus appears to be excessive
and unconscionable. The interest charges are enough punishment for
[petitioner]'s failure to comply with his obligation under the promissory
note dated November 10, 1988.
With respect to the attorney's fees, the court is likewise empowered to
reduce the same if they are unreasonable or unconscionable,
notwithstanding the express contract therefor. (Insular Bank of Asia and
America vs. Spouses Salazar, 159 SCRA 133, 139). Thus, an award of
P10,000.00 as and for attorney's fees appears to be enough.
Consequently, the fallo of the RTC Decision reads –
WHEREFORE, in view of the foregoing, judgment is hereby rendered in
favor of the [herein respondent] and against [herein petitioner] ordering
the latter as follows:
1. To pay [respondent], on the promissory note dated November 9,
1988, the amount of P30,000.00 with interest thereon at the legal rate
of 12% per annum from April 18, 1990 until fully paid and a penalty of
20% on the total amount;
2. To pay [respondent], on the promissory note dated November 10,
1988, the amount of P30,000.00 with interest thereon at 36% per annum
compounded at the same rate until fully paid;
3. To pay [respondent] the amount of P10,000.00, as and for attorney's
fees; and
351
4. To pay the costs of the suit.13
Aggrieved by the RTC Decision, dated 6 August 1993, petitioner filed an
appeal with the Court of Appeals, which was docketed as CA-G.R. CV
No. 43604. The appellate court, in a Decision,14 dated 20 March 2001,
found no cogent reason to depart from the conclusions arrived at by the
RTC in its appealed Decision, dated 6 August 1993, and affirmed the
latter Decision in toto. The Court of Appeals likewise denied petitioner's
Motion for Reconsideration in a Resolution,15 dated 16 July 2001, stating
that the grounds relied upon by petitioner in his Motion were mere
reiterations of the issues and matters already considered, weighed and
passed upon; and that no new matter or substantial argument was
adduced by petitioner to warrant a modification, much less a reversal,
of the Court of Appeals Decision, dated 20 March 2001.
Comes now petitioner to this Court, via a Petition for Review on
Certiorari under Rule 45 of the Revised Rules of Court, raising the sole
issue16 of whether or not the Court of Appeals committed grave abuse
of discretion in affirming in toto the RTC Decision, dated 6 August 1993.
Petitioner's main argument is that the Court of Appeals erred when it
ruled that there was an assignment of credit and that there was no
novation/subrogation in the case at bar. Petitioner asserts the position
that consent of the debtor to the assignment of credit is a basic/essential
element in order for the assignee to have a cause of action against the
debtor. Without the debtor's consent, the recourse of the assignee in
case of non-payment of the assigned credit, is to recover from the
assignor. Petitioner further argues that even if there was indeed an
assignment of credit, as alleged by the respondent, then there had been
a novation of the original loan contracts when the respondent was
subrogated in the rights of Ms. Picache, the original creditor. In support
of said argument, petitioner invokes the following provisions of the Civil
Code –
ART. 1300. Subrogation of a third person in the rights of the creditor is
either legal or conventional. The former is not presumed, except in
cases expressly mentioned in this Code; the latter must be clearly
established in order that it may take effect.
ART. 1301. Conventional subrogation of a third person requires the
consent of the original parties and the third person.
According to petitioner, the assignment of credit constitutes
conventional subrogation which requires the consent of the original
parties to the loan contract, namely, Ms. Picache (the creditor) and
petitioner (the debtor); and the third person, the respondent (the
assignee). Since petitioner never gave his consent to the assignment of
credit, then the subrogation of respondent in the rights of Ms. Picache
as creditor by virtue of said assignment is without force and effect.
This Court finds no merit in the present Petition.
Before proceeding to a discussion of the points raised by petitioner, this
Court deems it appropriate to emphasize that the findings of fact of the
Court of Appeals and the RTC in this case shall no longer be disturbed.
It is axiomatic that this Court will not review, much less reverse, the
factual findings of the Court of Appeals, especially where, as in this
case, such findings coincide with those of the trial court, since this Court
is not a trier of facts.17
The jurisdiction of this Court in a Petition for Review on Certiorari under
Rule 45 of the Revised Rules of Court is limited to reviewing only errors
of law, not of fact, unless it is shown, inter alia, that: (a) the conclusion
is grounded entirely on speculations, surmises and conjectures; (b) the
inference is manifestly mistaken, absurd and impossible; (c) there is
grave abuse of discretion; (d) the judgment is based on a misapplication
of facts; (e) the findings of fact of the trial court and the appellate court
are contradicted by the evidence on record and (f) the Court of Appeals
went beyond the issues of the case and its findings are contrary to the
admissions of both parties.18 None of these circumstances are present
in the case at bar. After a perusal of the records, this Court can only
conclude that the factual findings of the Court of Appeals, affirming those
of the RTC, are amply supported by evidence and are, resultantly,
conclusive on this Court.19
Therefore, the following facts are already beyond cavil: (1) petitioner
obtained two loans totaling P60,000.00 from Ms. Picache, for which he
executed promissory notes, dated 9 November 1988 and 10 November
1988; (2) he failed to pay any of the said loans; (3) Ms. Picache executed
on 1 April 1989 an Assignment of Credit covering petitioner's loans in
favor of respondent for the consideration of P60,000.00; (4) petitioner
had knowledge of the assignment of credit; and (5) petitioner still failed
to pay his indebtedness despite repeated demands by respondent and
its counsel. Petitioner's persistent assertions that he never acquired any
loan from Ms. Picache, or that he signed the promissory notes in blank
and under duress, deserve scant consideration. They were already
352
found by both the Court of Appeals and the RTC to be implausible and
inconsistent with petitioner's own evidence.
Now this Court turns to the questions of law raised by petitioner, all of
which hinges on the contention that a conventional subrogation
occurred when Ms. Picache assigned the debt, due her from the
petitioner, to the respondent; and without petitioner's consent as debtor,
the said conventional subrogation should be deemed to be without force
and effect.
This Court cannot sustain petitioner's contention and hereby declares
that the transaction between Ms. Picache and respondent was an
assignment of credit, not conventional subrogation, and does not require
petitioner's consent as debtor for its validity and enforceability.
An assignment of credit has been defined as an agreement by virtue of
which the owner of a credit (known as the assignor), by a legal cause -
such as sale, dation in payment or exchange or donation - and without
need of the debtor's consent, transfers that credit and its accessory
rights to another (known as the assignee), who acquires the power to
enforce it, to the same extent as the assignor could have enforced it
against the debtor.20
On the other hand, subrogation, by definition, is the transfer of all the
rights of the creditor to a third person, who substitutes him in all his
rights. It may either be legal or conventional. Legal subrogation is that
which takes place without agreement but by operation of law because
of certain acts. Conventional subrogation is that which takes place by
agreement of parties.21
Although it may be said that the effect of the assignment of credit is to
subrogate the assignee in the rights of the original creditor, this Court
still cannot definitively rule that assignment of credit and conventional
subrogation are one and the same.
A noted authority on civil law provided a discourse22 on the difference
between these two transactions, to wit –
Conventional Subrogation and Assignment of Credits. – In the Argentine
Civil Code, there is essentially no difference between conventional
subrogation and assignment of credit. The subrogation is merely the
effect of the assignment. In fact it is expressly provided (article 769) that
conventional redemption shall be governed by the provisions on
assignment of credit.
Under our Code, however, conventional subrogation is not identical to
assignment of credit. In the former, the debtor's consent is necessary;
in the latter, it is not required. Subrogation extinguishes an obligation
and gives rise to a new one; assignment refers to the same right which
passes from one person to another. The nullity of an old obligation may
be cured by subrogation, such that the new obligation will be perfectly
valid; but the nullity of an obligation is not remedied by the assignment
of the creditor's right to another. (Emphasis supplied.)
This Court has consistently adhered to the foregoing distinction between
an assignment of credit and a conventional subrogation.23 Such
distinction is crucial because it would determine the necessity of the
debtor's consent. In an assignment of credit, the consent of the debtor
is not necessary in order that the assignment may fully produce the legal
effects. What the law requires in an assignment of credit is not the
consent of the debtor, but merely notice to him as the assignment takes
effect only from the time he has knowledge thereof. A creditor may,
therefore, validly assign his credit and its accessories without the
debtor's consent. On the other hand, conventional subrogation requires
an agreement among the parties concerned – the original creditor, the
debtor, and the new creditor. It is a new contractual relation based on
the mutual agreement among all the necessary parties.24
Article 1300 of the Civil Code provides that conventional subrogation
must be clearly established in order that it may take effect. Since it is
petitioner who claims that there is conventional subrogation in this case,
the burden of proof rests upon him to establish the same25 by a
preponderance of evidence.26
In Licaros v. Gatmaitan,27 this Court ruled that there was conventional
subrogation, not just an assignment of credit; thus, consent of the debtor
is required for the effectivity of the subrogation. This Court arrived at
such a conclusion in said case based on its following findings –
We agree with the finding of the Court of Appeals that the Memorandum
of Agreement dated July 29, 1988 was in the nature of a conventional
subrogation which requires the consent of the debtor, Anglo-Asean
Bank, for its validity. We note with approval the following pronouncement
of the Court of Appeals:
353
"Immediately discernible from above is the common feature of contracts
involving conventional subrogation, namely, the approval of the debtor
to the subrogation of a third person in place of the creditor. That
Gatmaitan and Licaros had intended to treat their agreement as one of
conventional subrogation is plainly borne by a stipulation in their
Memorandum of Agreement, to wit:
"WHEREAS, the parties herein have come to an agreement on the
nature, form and extent of their mutual prestations which they now
record herein with the express conformity of the third parties concerned"
(emphasis supplied),
which third party is admittedly Anglo-Asean Bank.
Had the intention been merely to confer on appellant the status of a
mere "assignee" of appellee's credit, there is simply no sense for them
to have stipulated in their agreement that the same is conditioned on the
"express conformity" thereto of Anglo-Asean Bank. That they did so only
accentuates their intention to treat the agreement as one of conventional
subrogation. And it is basic in the interpretation of contracts that the
intention of the parties must be the one pursued (Rule 130, Section 12,
Rules of Court).
xxxx
Aside for the 'whereas clause" cited by the appellate court in its decision,
we likewise note that on the signature page, right under the place
reserved for the signatures of petitioner and respondent, there is,
typewritten, the words "WITH OUR CONFORME." Under this notation,
the words "ANGLO-ASEAN BANK AND TRUST" were written by hand.
To our mind, this provision which contemplates the signed conformity of
Anglo-Asean Bank, taken together with the aforementioned
preambulatory clause leads to the conclusion that both parties intended
that Anglo-Asean Bank should signify its agreement and conformity to
the contractual arrangement between petitioner and respondent. The
fact that Anglo-Asean Bank did not give such consent rendered the
agreement inoperative considering that, as previously discussed, the
consent of the debtor is needed in the subrogation of a third person to
the rights of a creditor.
None of the foregoing circumstances are attendant in the present case.
The Assignment of Credit, dated 1 April 1989, executed by Ms. Picache
in favor of respondent, was a simple deed of assignment. There is
nothing in the said Assignment of Credit which imparts to this Court,
whether literally or deductively, that a conventional subrogation was
intended by the parties thereto. The terms of the Assignment of Credit
only convey the straightforward intention of Ms. Picache to "sell, assign,
transfer, and convey" to respondent the debt due her from petitioner, as
evidenced by the two promissory notes of the latter, dated 9 November
1988 and 10 November 1988, for the consideration of P60,000.00. By
virtue of the same document, Ms. Picache gave respondent full power
"to sue for, collect and discharge, or sell and assign" the very same debt.
The Assignment of Credit was signed solely by Ms. Picache, witnessed
by two other persons. No reference was made to securing the conforme
of petitioner to the transaction, nor any space provided for his signature
on the said document.
Perhaps more in point to the case at bar is Rodriguez v. Court of
Appeals, 28 in which this Court found that –
The basis of the complaint is not a deed of subrogation but an
assignment of credit whereby the private respondent became the owner,
not the subrogee of the credit since the assignment was supported by
HK $1.00 and other valuable considerations.
xxxx
The petitioner further contends that the consent of the debtor is essential
to the subrogation. Since there was no consent on his part, then he
allegedly is not bound.
Again, we find for the respondent. The questioned deed of assignment
is neither one of subrogation nor a power of attorney as the petitioner
alleges. The deed of assignment clearly states that the private
respondent became an assignee and, therefore, he became the only
party entitled to collect the indebtedness. As a result of the Deed of
Assignment, the plaintiff acquired all rights of the assignor including the
right to sue in his own name as the legal assignee. Moreover, in
assignment, the debtor's consent is not essential for the validity of the
assignment (Art. 1624 in relation to Art. 1475, Civil Code), his knowledge
thereof affecting only the validity of the payment he might make (Article
1626, Civil Code).
Since the Assignment of Credit, dated 1 April 1989, is just as its title
suggests, then petitioner's consent as debtor is not necessary in order
that the assignment may fully produce legal effects. The duty to pay
354
does not depend on the consent of the debtor; otherwise, all creditors
would be prevented from assigning their credits because of the
possibility of the debtors' refusal to give consent.29 Moreover, this Court
had already noted previously that there does not appear to be anything
in Philippine statutes or jurisprudence which prohibits a creditor, without
the consent of the debtor, from making an assignment of his credit and
the rights accessory thereto; and, certainly, an assignment of credit and
its accessory rights does not at all obliterate the obligation of the debtor
to pay, but merely puts the assignee in the place of the assignor.30
Hence, the obligation of petitioner to pay his debt subsists despite the
assignment thereof; only, his obligation after he came to know of the
said assignment would be to pay the debt to the respondent (the
assignee), instead of Ms. Picache (the original creditor).
It bears to emphasize that even if the consent of petitioner as debtor is
unnecessary for the validity and enforceability of the assignment of
credit, nonetheless, the petitioner must have knowledge, acquired either
by formal notice or some other means, of the assignment so that he may
pay the debt to the proper party, which shall now be the assignee. This
much can be gathered from a reading of Article 1626 of the Civil Code
providing that, "The debtor who, before having knowledge of the
assignment, pays his creditor shall be released from the obligation."
This Court, in Sison v. Yap Tico,31 presented and adopted Manresa's
analysis of Article 1626 of the Civil Code (then Article 1527 of the old
Civil Code) –
Manresa, in commenting upon the provisions of article 1527 of the Civil
Code, after discussing the articles of the Mortgage Law, says:
"We have said that article 1527 deals with the individual phase or aspect
which presupposes the existence of a relationship with third parties, that
is, with the person of the debtor. Let us see in what way.
"The above-mentioned article states that a debtor who, before having
knowledge of the assignment, should pay the creditor shall be released
from the obligation.
"In the first place, the necessity for the notice to the debtor in order that
the assignment may fully produce its legal effects may be inferred from
the above. It refers to a notice and not to a petition for the consent which
is not necessary. We say that the notice is not necessary in order that
the legal effects may be fully produced, because if it should be omitted,
such omission will not imply that the assignment will not exist legally, but
that its effects will be limited to the parties thereto; at least, they will not
reach the debtor.
"* * * * * * * *
"Let us go to the legal effects produced by the failure to give the notice.
In the beginning, we have said that the contract does not lose its efficacy
with respect to the parties who made it; but article 1527 determines
specifically one of the consequences arising from the failure to give
notice, for it evidently takes for granted that the debtor who, before
having knowledge of the assignment, should pay the creditor shall be
released from the obligation. So that if the creditor assigned his credit,
acting in bad faith and taking advantage of the fact that the debtor does
not know anything about the assignment because the latter has not been
notified, and collects its amount, the debtor shall be free from the
obligation, inasmuch as it has been legally extinguished by a payment
which fully redounds to his benefit. The assignee can take advantage of
all civil and criminal actions against the assignor, but he can ask nothing
from the debtor, because the latter did not know of the assignment, nor
was he bound to know it; the assignor should blame himself for his
failure to have the notice made.
"* * * * * * * *
"Hence, there not having been any notice to the debtor, the existence of
his knowledge of the assignment should be proved by him who is
interested therein; and the debtor is not bound to prove his ignorance."
In a more recent case, Aquintey v. Spouses Tibong,32 this Court stated:
"The law does not require any formal notice to bind the debtor to the
assignee, all that the law requires is knowledge of the assignment. Even
if the debtor had not been notified, but came to know of the assignment
by whatever means, the debtor is bound by it."
Since his consent is immaterial, the only other matter which this Court
must determine is whether petitioner had knowledge of the Assignment
of Credit, dated 1 April 1989, between Ms. Picache and respondent.
Both the Court of Appeals and the RTC ruled in the affirmative, and so
must this Court. Petitioner does not deny having knowledge of the
assignment of credit by Ms. Picache to the respondent. In 1989, when
petitioner's loans became overdue, it was respondent and its counsel
who sent several demand letters to him. It can be reasonably presumed
355
that petitioner received said letters for they were sent by registered mail,
and the return cards were signed by petitioner's agent. Petitioner
expressly acknowledged receipt of respondent's demand letter, dated
13 June 1989, to which he replied with another letter, dated 21 June
1989, stating that he would settle his account with respondent but also
requesting consideration of the losses he suffered from the electric
power disconnection at the property he leased from MRMC. It further
appears that petitioner had never questioned why it was respondent
seeking payment of the loans and not the original creditor, Ms. Picache.
All these circumstances tend to establish that respondent already knew
of the assignment of credit made by Ms. Picache in favor of respondent
and explains his acceptance of all the demands for payment of the loans
made upon him by the respondent.

Finally, assuming arguendo that this Court considers petitioner a third

person to the Assignment of Credit, dated 1 April 1989, the fact that the
said document was duly notarized makes it legally enforceable even as
to him. According to Article 1625 of the Civil Code –

ART. 1625. An assignment of credit, right or action shall produce no

effect as against third persons, unless it appears in a public instrument,
or the instrument is recorded in the Registry of Property in case the
assignment involves real property.

Notarization converted the Assignment of Credit, dated 1 April 1989, a

private document, into a public document,33thus, complying with the
mandate of the afore-quoted provision and making it enforceable even
as against third persons.

WHEREFORE, premises considered, the instant Petition for Review is

hereby DENIED, and the Decision, dated 20 March 2001, of the Court
of Appeals in CA-G.R. CV No. 43604, affirming in toto the Decision,
dated 6 August 1993, of the Quezon City Regional Trial Court, Branch
91, in Civil Case No. Q-90-5247, is hereby AFFIRMED. Costs against
the petitioner.

SO ORDERED.

356
 BANK OF THE PHILIPPINE ISLANDS, Petitioner, vs. AMADOR
DOMINGO, Respondent.
G.R. No. 169407
LEONARDO-DE CASTRO, J.:
Before the Court is a Petition for Review on Certiorari under Rule 45 of
the Rules of Court, filed by petitioner Bank of the Philippine Islands
(BPI), seeking the reversal and setting aside of the Decision1 dated July
11, 2005 and Resolution2 dated August 19, 2005 of the Court of Appeals
in CAG.R. SP No. 88836.
The Petition arose from the following facts:
On September 27, 1993, respondent Amador Domingo (Amador) and
his wife, the late Mercy Maryden Domingo (Mercy),3 (collectively
referred to as the spouses Domingo) executed a Promissory Note4 in
favor of Makati Auto Center, Inc. in the sum of ₱629,856.00, payable in
48 successive monthly installments in the amount of ₱13,122.00 each.
They simultaneously executed a Deed of Chattel Mortgage5 over a 1993
Mazda 323 (subject vehicle) to secure the payment of their Promissory
Note. Makati Auto Center, Inc. then assigned, ceded, and transferred all
its rights and interests over the said Promissory Note and chattel
mortgage to Far East Bank and Trust Company (FEBTC).
On April 7, 2000, the Securities and Exchange Commission (SEC)
approved and issued the Certificate of Filing of the Articles of Merger
and Plan-· of Merger executed on January 20, 2000 by and between
BPI, the surviving corporation, and FEBTC, the absorbed corporation.
By virtue of said merger, all the assets and liabilities of FEBTC were
transferred to and absorbed by BPI.6
The spouses Domingo defaulted when they failed to pay 21 monthly
installments that had fallen due consecutively from January 15, 1996 to
September 15, 1997. BPI, being the surviving corporation after the
merger, demanded that the spouses Domingo pay the balance of the
Promissory Note including accrued late payment charges/interests or to
return the possession of the subject vehicle for the purpose of
foreclosure in accordance with the undertaking stated in the chattel
mortgage. When the spouses Domingo still failed to comply with its
demands, BPI filed on November 14, 2000 a Complaint7 for Replevin
and Damages (or in the alternative, for the collection of sum of money,
interest and other charges, and attorney's fees) which was raffled to the
Metropolitan Trial Court (MeTC) of Manila, Branch 9, and docketed as
Civil Case No. 168949-CV. BPI included a John Doe as defendant
because at the time of filing of the Complaint, BPI was already aware
that the subject vehicle was in the possession of a third person but did
not yet know the identity of said person.
In their Answer,8 the spouses Domingo raised the following affirmative
defenses:
4. [BPI] has no cause of action against the [spouses Domingo].
5. The Honorable Court has no jurisdiction over this case,
6. As per the allegations in the complaint, JOHN DOE is an
indispensable party to this case so with his whereabouts unknown,
service by publication should first be made before proceeding with the
trial of this case;
7. Defendant Maryden Domingo once obtained a car loan from Far East
Bank and Trust Company but the car was later sold to Carmelita S.
Gonzales with the bank's conformity and the buyer subsequently
assumed payment of the balance of the mortgaged loan.
During trial, the prosecution presented as witness Vicente Magpusao, a
former employee of FEBTC and now an Account Analyst of BPI. His
testimony was summed up by the MeTC as follows:
Vicente Magpusao, [BPI's] Account Analyst and formerly connected with
Far East Bank and Trust Company testified that on September 27, 1993,
[the spouses Domingo] for consideration executed and delivered to
Makati Auto Center, Inc. a Promissory Note in the sum of ₱629,856.00
payable in monthly installments in accordance with the schedule of
payment indicated in said Promissory Note. In order to secure the
payment of the obligation, the [spouses Domingo] executed in favor of
said Makati Auto Center, Inc. on the same date a Chattel Mortgage over
one (1) unit of 1993 Mazda (323) with Motor No. B6-270146 and with
Serial No. BG1062M9100287. With notice to [the spouses Domingo],
said Makati Auto Center, Inc. assigned to Far East Bank and Trust Co.
the Chattel Mortgage as shown by the Deed of Assignment executed by
[Makati Auto Center, Inc.]. Far East Bank and Trust Co. on the other
hand, has been merged with and/or absorbed by herein plaintiff [BPI].
The [spouses Domingo] defaulted in complying with the terms and
357
conditions of the Promissory Note with Chattel Mortgage by failing to
pay twenty[-one] (21) successive installments which fell due on January
15, 1996 up to September 15, 1997. [BPI] sent a demand letter [to]
defendant Mercy Domingo thru registered mail demanding payment of
the whole balance of the Promissory Note plus the stipulated interest
and other charges or return to [BPI] the possession of the above-
described motor vehicle. There were some negotiations made by the
[spouses Domingo] to their In-House Legal Assistant but the same did
not materialize. Based on the Statement of Account dated October 31,
2000, [the spouses Domingo have] an outstanding balance of
₱275,562.00 exclusive of interest and other charges.
On cross-examination, the witness explained that the first time he came
to handle [the spouses Domingo's] account was in 1997. Despite the
fact that he was not yet employed with the bank in 1993, he knew exactly
what happened in this particular transaction because of his experience
in auto financing. He also has an access [to] the Promissory Note,
Chattel Mortgage and other records of payment made by the bank.
Based on the records, the [spouses Domingo] issued several postdated
checks but not for the entire term. There were payments made from
October 30, 199[3] up to September 14, 1994. He was not the one who
received payments for the auto finance. If there were receipts issued,
they will only ride for the account of Mrs. Domingo. He was not sure if
these receipts are kept in the warehouse or probably disposed of by the
bank since the transaction was made in 1997. They already have a
computer records of all payments made by their client. Based on the
subsidiary ledger, there were three (3) checks that bounced and these
are payments from the new buyer. They only have one (1) photocopy of
these checks in the amount of ₱325,431.60 while the other two (2) are
missing. He was not aware who owns Cargo and Hardware Corporation
but the check was issued by a certain Miss Gonzales. The witness
further testified that anyone can pay the monthly amortization as long as
the payment is for the account of Maryden Domingo. They cannot
include Carmelita Gonzales as one of the defendants in this case
because they don't have a document executed by the latter in behalf of
Far East Bank and Trust Co. The bank did not approve the Deed of Sale
with Assumption of Mortgage.
Witness further testified that he found the photocopy of the Deed of Sale
in the records of Maryden Domingo. The Promissory Note and Chattel
Mortgage were executed by the defendants Maryden and Amador
Domingo. There was no assumption of obligation of the [spouses
Domingo]. Witness however admitted that Far East Bank did not tum
over to [BPI] all the records pertaining to the account of the [spouses
Domingo ].9 (Citations omitted.) Amador himself testified for the defense.
The MeTC provided the following summary of Amador's testimony:
For his defense, defendant Amador Domingo testified that his wife and
co-defendant Mercy Maryden Domingo died on November 27, 2003. He
admitted that his wife bought a car and was mortgaged to Far East Bank
and Trust Company. He identified the Chattel Mortgage and the
Promissory Note he executed together with his wife. In connection with
the execution of this Promissory Note, he recalled that his wife issued
forty-eight (48) checks. The twelve (12) checks were cleared by the bank
and his wife was able to obtain a discount for prompt payments up to
October 1994. While they were still paying for the car, Carmelita
Gonzales got interested to buy the car and is willing to assume the
mortgage. After furnishing the bank [with] the Deed of Sale duly
notarized, Carmelita Gonzales subsequently issued a check payable to
Far East Bank and Trust Company and the remaining postdated checks
were returned to them. Based on the application of payment prepared
by [BPI's] witness, Carmelita Gonzales made payments from November
14, 1995 to December 1995. Aside from these payments on May 19,
1997, Carmelita Gonzales issued a check to Far East Bank in the
amount of ₱385,431.60. In 1996, he received a phone call from a certain
Marvin Orence asking for their assistance to locate the car which
Carmelita Gonzales bought from them. His lawyer went to Land
Transportation Office for assistance. From the time Ms. Gonzales
started to pay, they never received any demand letter from Far East
Bank. Thereafter, on February 29, 1997, they received a demand letter
from Espino Law Office [on] behalf of [FEBTC]. His lawyer made a reply
on March 31, 1997 stating therein that the motor vehicle for which the
loan was obtained had been sold to Carmelita Gonzales as of July 5,
1994 with the knowledge and approval of their client. After three years,
they received another demand letter dated October 31, 2000 from
Labaguis Law Office. His lawyer made the same reply on March 7, 2000
and another letter on November 24, 2000. Witness further testified that
this malicious complaint probably triggered the early demise of his wife
who has a high blood pressure. His wife died of aneurism. As damages,
he is asking for the amount of ₱200,000.00 as moral damages,
₱75,000.00 as attorney's fees and ₱5,000.00 appearance fee.
On cross-examination, witness elaborates that when his wife presented
to Far East Bank the Deed of Sale with Assumption of Mortgage, the
bank made no objection and returned all their postdated checks. His
wife was the one who deal[t] with Carmelita Gonzales but he always
358
provide[d] assistance with respect to paper works. Aside from the
aforesaid Deed of Sale, there is no other document which shows the
conformity of the bank. They were only verbally assured by Mr. Orence
that their papers are in order.10
On June 10, 2004, the Me TC rendered a Decision in favor of BPI as the
bank was able to establish by preponderance of evidence a valid cause
of action against the spouses Domingo. According to the MeTC,
novation is never presumed and must be clearly shown by express
agreement or by acts of equal import. To effect a subjective novation by
a change in the person of the debtor, it is necessary that the old debtor
be released expressly from the obligation and the third person or new
debtor assumes his place. Without such release, there is no novation
and the third person who assumes the debtor's obligation merely
becomes a co-debtor or surety. The MeTC found Amador' s bare
testimony as insufficient evidence to prove that he and his wife Mercy
had been expressly released from their obligations and that Carmelita
Gonzales (Carmelita) assumed their place as the new debtor within the
context of subjective novation; and if at all, Carmelita only became the
spouses Domingo's co-debtor or surety. While finding that BPI was
entitled to the reliefs prayed for, the MeTC made no adjudication as to
the entitlement of the bank to the Writ of Replevin, and instead awarded
monetary reliefs as were just and equitable. The dispositive portion of
the MeTC decision reads:
WHEREFORE, premises considered, judgment is hereby rendered in
favor of [BPI], ordering defendant Amador Domingo:
1. To pay [BPI] the sum of ₱275,562.00 plus interest thereon at the rate
of 36% per annum from November 15, 2000 until fully paid;
2. To pay [BPI] the sum equivalent to 25% of the total amount due as
attorney's fees; and
3. To pay the costs of suit.11
Acting on Amador's Motion for Reconsideration, the MeTC issued an
Order12 dated September 6, 2004 affirming its earlier judgment but
reducing the attorney's fees awarded, thus: WHEREFORE, premises
considered the Decision of this Court dated June 10, 2014 stands,
subject to the modification that the attorney's fees of twenty-five percent
(25%) is ordered reduced to ten percent (10%) of the total amount due.13
Dissatisfied, Amador appealed his case before the Regional Trial Court
(RTC) of Manila, Branch 26, wherein it was docketed as Civil Case No.
04-111100. In its Decision dated February 10, 2005, the RTC held that
in novation, consent of the creditor to the substitution of the debtor need
not be by express agreement, it can be merely implied. The consent is
not required to be in any specific or particular form; the only requirement
being that it must be given by the creditor in one way or another. To the
RTC, the following circumstances demonstrated the implied consent of
BPI to the novation: ( 1) BPI had knowledge of the Deed of Sale and
Assumption of Mortgage executed between Mercy and Carmelita, but
did not interpose any objection to the same; and (2) BPI (through
FEBTC) returned the personal checks of the spouses Domingo and
accepted the payments made by Carmelita. The R TC also noted that
BPI made a demand for payment upon the spouses Domingo only after
30 months from the time Carmelita assumed payments for the
installments due. The R TC reasoned that if the spouses Domingo truly
remained as debtors, BPI would not have wasted time m demanding
payments from them. Ultimately, the RTC decreed:
WHEREFORE, premises considered, the judgment appealed from is
hereby reversed. The complaint filed by [BPI] before [MeTC] Branch 9,
Manila, is hereby DISMISSED and ordering [BPI] to pay
defendant/appellant Amador Domingo the following, to wit:
a) One Hundred Thousand (₱100,000.00) Pesos as moral damages;
b) Fifty Thousand (₱50,000.00) Pesos as exemplary damages;
c) Fifty Thousand (₱50,000.00) Pesos as attorney's fees;
d) Twenty-Five Thousand (₱25,000.00) [Pesos] as litigation expenses;
e) Costs of this suit.14
Aggrieved by the foregoing RTC judgment, BPI filed a Petition for
Review with the Court of Appeals, docketed as CA-G.R. SP No. 88836.
The Court of Appeals promulgated its Decision on July 11, 2005,
affirming the finding of the R TC that novation took place. The Court of
Appeals, relying on the declaration in Babst v. Court of Appeals15 that
consent of the creditor to the substitution of debtors need not always be
express and may be inferred from the acts of the creditor, ruled that:
359
In this case, there is no doubt that FEBTC had the intention to release
private respondent [Amador] and his wife from the obligation when the
latter sold the subject vehicle to [Carmelita]. This intention can be
inferred from the following acts of FEBTC: 1) it returned the postdated
checks issued by private respondent [Amador's] wife in favor of FEBTC;
2) it accepted the payments made by [Carmelita]; 3) it did not interpose
any objection despite knowledge of the existence of the Deed of Sale
with Assumption of Mortgage; and 4) it did not demand payment from
private respondent [Amador] and his wife for thirty (30) long months.
xxxx
As correctly found by the R TC, the testimony of private respondent
[Amador] as regards the return of the said checks to them by FEBTC
was not rebutted by petitioner BPI.
If indeed the said checks were not returned to private respondent
[Amador' s] wife, the least thing that petitioner BPI or FEB TC could have
done was to deposit them. Should the checks thereafter bounce, then
petitioner BPI or FEBTC could have filed a separate case against private
respondent [Amador's] wife. This was never done by petitioner BPI or
FEBTC. Hence, it is safe to conclude that the said checks were indeed
returned to private respondent [Amador's] wife.16
The Court of Appeals rejected the other arguments of BPI:
Petitioner BPI further argues that as regards the payment made by the
alleged new debtor, Carmelita Gonzales, it appears that the only
payment made by her was a PNB Check No. 00190322 dated May 19,
1997 which was dishonored due to Account Closed.
Careful scrutiny of the records of the case reveals otherwise. As found
by the Me TC in its decision dated June 10, 2004, Carmelita Gonzales
made several payments on the said loan obligation, as testified to by
witness Vicente Magpusao, petitioner BPI's Account Analyst, thus:
x x x. Based on the subsidiary leger, (Exhibit "2"), there were three (3)
checks that bounced and these are payments from the new buyer. They
only have one (1) photocopy of these checks in the amount of
P.325,431.60 (Exhibit 4) while the other two are missing. He was not
aware who owns Cargo and Hardware Corporation but the check was
issued by a certain Miss Gonzales. x x x.
xxxx
Petitioner BPI further argues that it was not its obligation to interpose
any objection to the Deed of Sale with Assumption of Mortgage. Rather
it should be the vendee, [Carmelita], who should secure the approval
and consent of petitioner BPI to the Deed of Sale.
This argument is untenable.
The Deed of Sale with Assumption of Mortgage between private
respondent [Amador's] wife and [Carmelita] was executed way back on
July 5, 1994. The check that was issued by [Carmelita] was dated May
19, 1997. The position of petitioner BPI is not possible because when
the Deed of Sale with Assumption of Mortgage was executed and the
said check was issued, private respondent [Amador's] wife and
[Carmelita] were still dealing with FEBTC, considering the fact that the
merger of petitioner BPI and FEBTC was formalized on April 10, 2000.
Nevertheless, FEBTC interposed no objection to the Deed of Sale with
Assumption of Mortgage, hence, it consented to it.
From the foregoing, it is clear that novation took place so that private
respondent Domingo is no longer the debtor of petitioner BPI.17
(Citations omitted.)
The Court of Appeals, however, deleted the damages awarded to
Amador for the following reasons:
As to the second issue, petitioner BPI argues that the RTC awarded
moral and exemplary damages and attorney's fees to respondent
[Amador] only in the dispositive portion of the assailed decision without
any basis in fact and in law.
This Court finds the argument tenable.
In the case of Solid Homes, Inc. vs. Court of Appeals, it was held that:
"It is basic that the claim for actual, moral and punitive damages as well
as exemplary damages and attorney's fees must each be independently
identified and justified."
Furthermore, Section 14, paragraph 1 of Article VIII, of the 1987
Constitution lays down the standard in rendering decisions, to wit: it
360
must be express therein clearly and distinctly the facts and law on which
it is based.
Perusal of the assailed decision reveals that the award of moral and
exemplary damages as well as attorney's fees and litigation expenses
were only touched in the dispositive portion, which is in clear disregard
of the established rules laid down by the Constitution and existing
jurisprudence. Therefore, their deletion is in order.
As regards the award of litigation expenses and costs of the suit, the
same should also be deleted considering that "no premium should be
placed on the right to litigate."18 (Citations omitted.)
The Court of Appeals ultimately adjudged:
WHEREFORE, premises considered, the assailed decision dated
February 10, 2005 of the Regional Trial Court, Branch 26, Manila in Civil
Case No. 04-111100 is hereby AFFIRMED with MODIFICATION in that
the award of moral and exemplary damages as well as attorney's fees,
litigation expenses and costs of suit, is hereby deleted.19
In its Resolution dated August 19, 2005, the Court of Appeals denied
the Motion for Partial Reconsideration of BPI.
BPI comes to this Court via the present Petition for Review/ Appeal by
Certiorari raising the sole issue of whether or not there had been a
novation of the loan obligation with chattel mortgage of the spouses
Domingo to BPI so that the spouses Domingo were released from said
obligation and Carmelita was substituted as debtor.
The Court answers in the negative and grants the Petition.
In De Cortes v. Venturanza,20 the Court discussed some principles and
jurisprudence underlying the concept and nature of novation as a mode
of extinguishing obligations:
According to Manresa, novation is the extinguishment of an obligation
by the substitution or change of the obligation by a subsequent one
which extinguishes or modifies the first, either by changing the object or
principal conditions, or by substituting the person of the debtor, or by
subrogating a third person to the rights of the creditor (8 Manresa 428,
cited in IV Civil Code of the Philippines by Tolentino 1962 ed., p. 352).
Unlike other modes of extinction of obligations, novation is a juridical act
with a dual function - it extinguishes an obligation and creates a new one
in lieu of the old.
Article 1293 of the New Civil Code provides:
"N ovation which consists in substituting a new debtor in the place of the
original one, may be made even without the knowledge or against the
will of the latter, but not without the consent of the creditor." (emphasis
supplied)
Under this provision, there are two forms of novation by substituting the
person of the debtor, and they are: (1) expromision and (2) delegacion.
In the former, the initiative for the change does not come from the debtor
and may even be made without his knowledge, since it consists in a third
person assuming the obligation. As such, it logically requires the
consent of the third person and the creditor. In the latter, the debtor
offers and the creditor accepts a third person who consents to the
substitution and assumes the obligation, so that the intervention and the
consent of these three persons are necessary (8 Manresa 436-437,
cited in IV Civil Code of the Philippines by Tolentino, 1962 ed., p. 360).
In these two modes of substitution, the consent of the creditor is an
indispensable requirement (Garcia vs. Khu Yek Chiong, 65 Phil. 466,
468). (Emphases supplied.)
The Court also emphasized in De Cortes the indispensability of the
creditor's consent to the novation, whether expromision or delegacion,
given that the "[s]ubstitution of one debtor for another may delay or
prevent the fulfillment of the obligation by reason of the financial inability
or insolvency of the new debtor; hence, the creditor should agree to
accept the substitution in order that it may be binding on him."21
Both the R TC and the Court of Appeals found that there was novation
by delegacion in the case at bar. The Deed of Sale with Assumption of
Mortgage was executed between Mercy (representing herself and her
husband Amador) and Carmelita, thus, their consent to the substitution
as debtors and third person, respectively, are deemed undisputed. It is
the existence of the consent of BPI (or its absorbed corporation FEB TC)
as creditor that is being challenged herein.
As a general rule, since novation implies a waiver of the right the creditor
had before the novation, such waiver must be express.22 The Court
explained the rationale for the rule in Testate Estate of Lazaro Mota v.
Serra23:
361
It should be noted that in order to give novation its legal effect, the law
requires that the creditor should consent to the substitution of a new
debtor. This consent must be given expressly for the reason that, since
novation extinguishes the personality of the first debtor who is to be
substituted by a new one, it implies on the part of the creditor a waiver
of the right that he had before the novation, which waiver must be
express under the principle that renuntiatio non praesumitor, recognized
by the law in declaring that a waiver of right may not be performed unless
the will to waive is indisputably shown by him who holds the right.
However, in Asia Banking Corporation v. Elser,24 the Court qualified
thus:
The aforecited article 1205 [now 1293] of the Civil Code does not state
that the creditor's consent to the substitution of the new debtor for the
old be express, or given at the time of the substitution, and the Supreme
Court of Spain, in its judgment of June 16, 1908, construing said article,
laid down the doctrine that "article 1205 of the Civil Code does not mean
or require that the creditor's consent to the change of debtors must be
given simultaneously with the debtor's consent to the substitution; its
evident purpose being to preserve the creditor's full right, it is sufficient
that the latter's consent be given at any time and in any form whatever,
while the agreement of the debtors subsists." The same rule is stated in
the Enciclopedia Juridica Espanola, volume 23, page 503, which reads:
"The rule that this kind of novation, like all others, must be express, is
not absolute; for the existence of the consent may well be inferred from
the acts of the creditor, since volition may as well be expressed by deeds
as by words." The understanding between Henry W. Elser and the
principal director of Yangco, Rosenstock & Co., Inc., with respect to Luis
R. Y angco' s stock in said corporation, and the acts of the board of
directors after Henry W. Elser had acquired said shares, in substituting
the latter for Luis R. Y angco, are a clear and unmistakable expression
of its consent. When this court said in the case of Estate of Mota vs.
Serra (47 Phil., 464), that the creditor's express consent is necessary in
order that there may be a novation of a contract by the substitution of
debtors, it did not wish to convey the impression that the word "express"
was to be given an unqualified meaning, as indicated in the authorities
or cases, both Spanish and American, cited in said decision.
Hence, based on the aforequoted ruling in Asia Banking, the existence
of the creditor's consent may also be inferred from the creditor's acts,
but such acts still need to be "a clear and unmistakable expression of
[the creditor's] consent. "25
In Ajax Marketing and Development Corporation v. Court of Appeals,26
the Court further clarified that:
The well settled rule is that novation is never presumed. Novation will
not be allowed unless it is clearly shown by express agreement, or by
acts of equal import. Thus, to effect an objective novation it is imperative
that the new obligation expressly declare that the old obligation is
thereby extinguished, or that the new obligation be on every point
incompatible with the new one. In the same vein, to effect a subjective
novation by a change in the person of the debtor it is necessary that the
old debtor be released expressly from the obligation, and the third
person or new debtor assumes his place in the relation. There is no
novation without such release as the third person who has assumed the
debtor's obligation becomes merely a co-debtor or surety. (Citations
omitted.)
The determination of the existence of the consent of BPI to the
substitution of debtors, in accordance with the standards set in the
preceding jurisprudence, is a question of fact because it requires the
Court to review the evidence on record. It is an established rule that the
jurisdiction of the Court in cases brought before it from the Court of
Appeals via a petition for review on certiorari under Rule 45 of the Rules
of Court is generally limited to reviewing errors of law as the former is
not a trier of facts. Thus, the findings of fact of the Court of Appeals are
conclusive and binding upon the Court in the latter's exercise of its
power to review for it is not the function of the Court to analyze or weigh
evidence all over again.27 However, several of the recognized
exceptions28 to this rule are present in the instant case that justify a
factual review, i.e., the inference is manifestly mistaken, the judgment is
based on misapprehension of facts, and the findings of the Court of
Appeals and the RTC are contrary to those of the MeTC.
The burden of establishing a novation is on the party who asserts its
existence.29 Contrary to the findings of the Court of Appeals and the
RTC, Amador failed to discharge such burden as he was unable to
present proof of the clear and unmistakable consent of BPI to the
substitution of debtors.
Irrefragably, there is no express consent of BPI to the substitution of
debtors. The Court of Appeals and the RTC inferred the consent of BPI
from the following facts: (1) BPI had a copy of the Deed of Sale and
Assumption of Mortgage executed between Mercy and Carmelita in its
file, indicating its knowledge of said agreement, and still it did not
362
interpose any objection to the same; (2) BPI (through FEBTC) returned
the spouses Domingo's checks and accepted Carmelita's payments;
and (3) BPI did not demand any payment from the spouses Domingo
not until 3 0 months after Carmelita assumed the payment of balance
on the Promissory Note.
The Court disagrees with the inferences made by the Court of Appeals
and the RTC.
First, that BPI (or FEB TC) had a copy of the Deed of Sale and
Assumption of Mortgage executed between Mercy and Carmelita in its
file does not mean that it had consented to the same. The very Deed
itself states:
That the VENDEE [Carmelita] assumes as he/she had assumed to pay
the aforecited mortgage in accordance with the original terms and
conditions of said mortgage, and the parties hereto [Mercy and
Carmelita] have agreed to seek the conformity of the MORTGAGEE
[FEBTC].30 This brings the Court back to the original question of whether
there is proof of the conformity of BPI.
The Court notes that the documents of BPI concerning the car loan and
chattel mortgage are still in the name of the spouses Domingo. No new
promissory note or chattel mortgage had been executed between BPI
(or FEBTC) and Carmelita. Even the account itself is still in the names
of the spouses Domingo.
The absence of objection on the part of BPI (or FEB TC) cannot be
presumed as consent. Jurisprudence requires presentation of proof of
consent, not mere absence of objection. Amador cannot rely on Babst
which involved a different factual milieu. Relevant portions of the Court's
ruling in Babst are reproduced below:
In the case at bar, Babst, MULTI and ELISCON all maintain that due to
the failure of BPI to register its objection to the take-over by DBP of
ELISCON's assets, at the creditors' meeting held in June 1981 and
thereafter, it is deemed to have consented to the substitution of DBP for
ELISCON as debtor.
We find merit in the argument. Indeed, there exist clear indications that
BPI was aware of the assumption by DBP of the obligations of
ELISCON. In fact, BPI admits that –
"[T]he Development Bank of the Philippines (DBP), for a time, had
proposed a formula for the settlement of Eliscon's past obligations to its
creditors, including the plaintiff [BPI], but the formula was expressly
rejected by the plaintiff as not acceptable (long before the filing of the
complaint at bar)."
The Court of Appeals held that even if the account officer who attended
the June 1981 creditors' meeting had expressed consent to the
assumption by DBP of ELISCON's debts, such consent would not bind
BPI for lack of a specific authority therefor. In its petition, ELISCON
counters that the mere presence of the account officer at the meeting
necessarily meant that he was authorized to represent BPI in that
creditors' meeting. Moreover, BPI did not object to the substitution of
debtors, although it objected to the payment formula submitted by DBP.
Indeed, the authority granted by BPI to its account officer to attend the
creditors' meeting was an authority to represent the bank, such that
when he failed to object to the substitution of debtors, he did so on behalf
of and for the bank. Even granting arguendo that the said account officer
was not so empowered, BPI could have subsequently registered its
objection to the substitution, especially after it had already learned that
DBP had taken over the assets and assumed the liabilities of ELISCON.
Its failure to do so can only mean an acquiescence in the assumption by
DBP of ELISCON's obligations. As repeatedly pointed out by ELISCON
and MULTI, BPI's objection was to the proposed payment formula, not
to the substitution itself.31 In Babst, there was a clear opportunity for BPI,
as creditor therein, to object to the substitution of debtors given that its
representative attended a creditor's meeting, during which, said
representative already objected to the proposed payment formula made
by DBP, as the new debtor. Hence, the silence of BPI during the same
meeting as to the matter of substitution of debtors could already be
interpreted as its acquiescence to the same. In contrast, there was no
clear opportunity for BPI (or FEB TC) to have expressed its objection to
the substitution of debtors in the case at bar.
Second, the consent of BPI to the substitution of debtors cannot be
deduced from its acceptance of payments from Carmelita, absent proof
of its clear and unmistakable consent to release the spouses Domingo
from their obligation. Since the spouses Domingo remained as debtors
of BPI, together with Carmelita, the fact that BPI demanded payment
from the spouses Domingo 30 months after accepting payment from
Carmelita is insignificant.
363
The acceptance by a creditor of payments from a third person, who has
assumed the obligation, will result merely to the addition of debtors and
not novation. The creditor may therefore enforce the obligation against
both debtors.32As the Court pronounced in Magdalena Estates, Inc. v.
Rodriguez,33 "[t]he mere fact that the creditor receives a guaranty or
accepts payments from a third person who has agreed to assume the
obligation, when there is no agreement that the first debtor shall be
released from responsibility, does not constitute a novation, and the
creditor can still enforce the obligation against the original debtor." The
Court reiterated in Quinto v. People34 that "[n]ot too uncommon is when
a stranger to a contract agrees to assume an obligation; and while this
may have the effect of adding to the number of persons liable, it does
not necessarily imply the extinguishment of the liability of the first debtor.
Neither would the fact alone that the creditor receives guaranty or
accepts payments from a third person who has agreed to assume the
obligation, constitute an extinctive novation absent an agreement that
the first debtor shall be released from responsibility."
Absent proof that BPI gave its clear and unmistakable consent to
release the spouses Domingo from the obligation to pay the car loan,
Carmelita is simply considered an additional debtor. Consequently, BPI
can still enforce the obligation against the spouses Domingo even 30
months after it had started accepting payments from Carmelita.
And third, there is no sufficient or competent evidence to establish the
return of the checks to the spouses Domingo and the assurance made
by FEBTC that the spouses Domingo were already released from their
obligation.
During his direct examination, Amador testified as follows:
Atty. Rivera:
1. Q. Do you remember who was this person who became interested to
buy this car?
A. Carmelita S. Gonzales, Sir.
2. Q. What did you tell Mrs. Gonzales when she expressed interest in
buying this car, this Mazda vehicle?
A. We told her that the car was mortgaged and she told us that she is
willing to assume the mortgage, Sir.
3. Q. With that willingness, what happened next on the part of Mrs.
Gonzales to assume the mortgage?
A. My wife and Mrs. Gonzales went to Far East Bank and Trust
Company and she informed the bank that somebody is interested in
buying the car and assume the mortgage and the bank informed her that
the bank is agreeable and with no objection.
Atty. Ganitano: Objection, your Honor. May we object to the answer of
the witness, it would be hearsay. The witness testified that it was his
wife and the would be buyer who went to the bank.
Atty. Rivera: Then, we are just offering it as part of the narration not
necessarily to prove the truth of the statement, your Honor.
Court: The witness may continue.
Atty. Rivera: So, after that meeting with the bank occurred, what
happened next in connection with this intention of Mrs. Gonzales to
purchase the car?
Witness: After furnishing the bank with the Deed of Absolute Sale duly
notarized, [Ms.] Carmelita Gonzales subsequently issued a check
payable to Far East Bank and Trust Company, Sir.
Atty. Rivera:
1. Q. How about the postdated checks that your wife issued to Far East
Bank and Trust Company?
A. The remaining postdated checks were returned to us, Sir.
2. Q. Do you remember what were those postdated checks that were
returned by the bank?
A. Those were the checks we issued in advance, Sir.
3. Q. What were the dates of these checks?
A. October 30, 1994 to 1997, Sir.
xxxx
Atty. Rivera:
364
1. Q. Aside from this evidence that you have enumerated, were you able
to talk to any representative from Far East Bank relative to the approval
of the change in the personality of the debtor from your wife to ...
A. As I remember, sometime in 1996, I received a call from a certain
Marvin Orence asking for our assistance to locate the car that Mrs.
Carmelita Gonzales bought from us and informed us that we have
nothing to worry except that we provide them assistance to locate the
car and I informed our lawyer, Atty. Rivera, about this and Atty. Rivera
went to the Land Transportation Office for assistance.35
Amador continued to testify on cross-examination, thus:
CROSS EXAMINATION BY ATTY. GANITANO
1. Q. You testified that out of the 48 checks you paid to Far East Bank
& Trust Company, only 12 checks were made good. What happened to
the 3 6 checks?
A. When my wife brought the transaction to Far East Bank and
presented the Deed of Absolute Sale, the bank have no objection to the
sale of the car and afterwards, the bank returned all the postdated
checks prepared by my wife that was in the possession of the bank, Sir.
1. Q. Do you have with you those 36 checks that were allegedly returned
by Far East Bank?
A. These checks have already been discarded, Sir.
2. Q. So, you cannot present those 36 checks anymore?
A. No, Sir.
3. Q. Who was the alleged buyer of the mortgaged car again?
Witness: Carmelita S. Gonzales, Sir.
Atty. Ganitano:
1. Q. To whom did this Carmelita Gonzales transacted with respect to
the sale of mortgaged vehicle?
A. To my wife, Mercy Maryden Domingo, Sir.
2. Q. Not with you, Mr. Witness?
A. Well, I always provide assistance to my wife with regards to paper
works, Sir.
3. Q. When was this Deed of Sale executed, was it before when your
wife and the buyer went to the bank or after they went to the bank?
A. I think it was simultaneous, Sir.
4. Q. When you say "simultaneous", Mr. Witness, I'm showing to you
this Deed of Sale with Assumption of Mortgage and you said it was with
the conformity of the bank. Will you please tell us in this Deed of Sale
with Assumption of Mortgage if you could find any entry which indicate
that the bank agreed to the sale with assumption of mortgage?
Witness: None, Sir.
Atty. Ganitano: Aside from this Deed of Sale with Assumption of
Mortgage, do you have any document which shows that the bank indeed
conformed to the sale of the mortgaged vehicle with assumption of
mortgage?
Witness: We were verbally assured that our papers are in order, Sir.
Atty. Ganitano: So, there is no document, Mr. Witness, it was only made
orally?
Witness: Yes, Sir, we were verbally assured that our papers are in order.
Atty. Ganitano:
1. Q. Were you present when your wife and the would-be buyer went to
the bank?
A. No, Sir.
2. Q. How did you know that there was an assurance from the bank?
A. I received a phone call from Mr. Oronce. I asked about the transaction
and he told me that there is nothing to worry because our documents or
papers were in order, Sir.
365
3. Q. Do I get you right, Mr. Witness, that the confirmation was only
through phone call?
A. It was Mr. Oronce who called me, Sir.
4. Q. I'm just asking what was the means of communication, was it only
thru phone call?
A. Yes, Sir, thru phone call. I think twice or three times.
Atty. Rivera: We would like to manifest, your Honor, as early as 1997,
just to stress this point, as early as March 1997, the name of Marvin
Oronce ...
Atty. Ganitano: The witness is under cross, your Honor.
Court: You just ask that in re-direct, counsel.
Atty. Rivera: Yes, you Honor.36
Amador admitted that it was his wife Mercy, together with Carmelita,
who directly transacted with FEBTC regarding the sale of the subject
vehicle to and assumption of mortgage by Carmelita. Amador had no
personal knowledge of what had happened when Mercy and Carmelita
went to the bank so his testimony on the matter was hearsay, which, if
not excluded, deserves no credence.
The Court explained in Da Jose v. Angeles37 that:
Evidence is hearsay when its probative force depends on the
competency and credibility of some persons other than the witness by
whom it is sought to be produced. The exclusion of hearsay evidence is
anchored on three reasons: (1) absence of cross-examination; (2)
absence of demeanor evidence; and (3) absence of oath. Basic under
the rules of evidence is that a witness can only testify on facts within his
or her personal knowledge. This personal knowledge is a substantive
prerequisite in accepting testimonial evidence establishing the truth of a
disputed fact. xx x. (Citations omitted.)
The Court of Appeals and the RTC substantively based their finding that
BPI (or FEB TC) consented to the substitution of debtors on the return
of the checks to the spouses Domingo, but the proof of the issuance of
the checks, their delivery to the bank, and the return of the checks
flimsily consists of Amador's unsubstantiated testimony. Amador
recounted that the postdated checks which he and Mercy executed in
favor of FEBTC were returned to them, however, he failed to provide the
details surrounding the return. Amador only stated that when Mercy
provided FEBTC with a copy of the Deed of Sale and Assumption of
Mortgage, the bank returned the checks to them "subsequently" or
"afterwards." Amador did not say how the checks were returned and to
whom. The checks were not presented during the trial since according
to Amador, they were already "discarded," although once more, any
other detail surrounding the discarding of the checks is sorely lacking.
Aside from Amador's bare testimony, no other supporting evidence of
the return of the checks to the spouses Domingo was submitted during
trial. For the foregoing reasons, the Court accords little weight and
credence to Amador' s testimony on the return of the checks.
It is worthy to stress that Amador, as the party asserting novation, bears
the burden of proving its existence.1âwphi1Amador cannot simply rely
on the failure of BPI to produce the checks if these were not actually
returned to the spouses Domingo. There is simply not enough evidence
to establish the prima facie existence of novation to shift the burden of
evidence to BPI to controvert the same.
The verbal assurances purportedly given by a Mr. Marvin Orence or
Oronce (Orence/Oronce) of FEBTC to Amador over the telephone that
the spouses Domingo's documents were in order do not constitute the
clear and unmistakable consent of the bank to the substitution of
debtors. Once again, except for Amador's bare testimony, there is no
other evidence of such telephone conversations taking place and the
subject of such telephone conversations. In addition, Mr.
Orence/Oronce's identity, position at FEBTC, and authority to represent
and bind the bank, were not even clearly established.
The letter dated March 31, 1997 of Atty. Ricardo J.M. Rivera (Rivera),
counsel for the spouses Domingo, addressed to Atty. Cresenciano L.
Espino, counsel for FEBTC, does not serve as supporting evidence for
Amador' s testimony regarding the return of the checks and the verbal
assurances given by Mr. Orence/Oronce. The contents of such letter are
mere hearsay because the events stated therein did not personally
happen to Atty. Rivera or in his presence, and he merely relied on what
his clients, the spouses Domingo, told him.
The Court is therefore convinced that there is no novation by delegacion
in this case and Amador remains a debtor of BPI. The Court reinstates
366
the MeTC judgment ordering Amador to pay for the ₱275,562.00
balance on the Promissory Note, 10% attorney's fees, and costs of suit;
but modifies the rate of interest imposed and the date when such interest
began to run.
In Ruiz v. Court of Appeals,38 the Court equitably reduced the interest
rate of 3% per month or 36% per annum stipulated in the promissory
notes therein to 1% per month or 12% per annum, based on the
following ratiocination:
We affirm the ruling of the appellate court, striking down as invalid the
10% compounded monthly interest, the 10% surcharge per month
stipulated in the promissory notes dated May 23, 1995 and December
1, 1995, and the 1% compounded monthly interest stipulated in the
promissory note dated April 21, 1995. The legal rate of interest of 12%
per annum shall apply after the maturity dates of the notes until full
payment of the entire amount due. Also, the only permissible rate of
surcharge is 1% per month, without compounding. We also uphold the
award of the appellate court of attorney's fees, the amount of which
having been reasonably reduced from the stipulated 25% (in the March
22, 1995 promissory note) and 10% (in the other three promissory
notes) of the entire amount due, to a fixed amount of ₱50,000.00.
However, we equitably reduce the 3% per month or 36% per annum
interest present in all four (4) promissory notes to 1 % per month or 12%
per annum interest.
The foregoing rates of interests and surcharges are in accord with Medel
vs. Court of Appeals, Garcia vs. Court of Appeals, Bautista vs. Pilar
Development Corporation, and the recent case of Spouses Solangon
vs. Salazar. This Court invalidated a stipulated 5.5% per month or 66%
per annum interest on a ₱500,000.00 loan in Medel and a 6% per month
or 72% per annum interest on a ₱60,000.00 loan in Solangon for being
excessive, iniquitous, unconscionable and exorbitant. In both cases, we
reduced the interest rate to 12% per annum. We held that while the
Usury Law has been suspended by Central Bank Circular No. 905, s.
1982, effective on January 1, 1983, and parties to a loan agreement
have been given wide latitude to agree on any interest rate, still
stipulated interest rates are illegal if they are unconscionable. Nothing
in the said circular grants lenders carte blanche authority to raise interest
rates to levels which will either enslave their borrowers or lead to a
hemorrhaging of their assets. On the other hand, in Bautista vs. Pilar
Development Corp., this Court upheld the validity of a 21% per annum
interest on a ₱142,326.43 loan, and in Garcia vs. Court of Appeals,
sustained the agreement of the parties to a 24% per annum interest on
an ₱8,649,250.00 loan. It is on the basis of these cases that we reduce
the 36% per annum interest to 12%. An interest of 12% per annum is
deemed fair and reasonable. While it is true that this Court invalidated a
much higher interest rate of 66% per annum in Medel and 72% in
Solangon it has sustained the validity of a much lower interest rate of 21
% in Bautista and 24% in Garcia. We still find the 36% per annum
interest rate in the case at bar to be substantially greater than those
upheld by this Court in the two (2) aforecited cases. (Citations omitted.)
On the strength of the foregoing jurisprudence, the Court likewise finds
the interest rate of 3% per month or 36% per annum stipulated in the
Promissory Note herein for the balance of ₱275,562.00 as excessive,
iniquitous, unconscionable, and exorbitant. Following the guidelines set
forth in Eastern Shipping Lines, Inc. v. Court of Appeals39 and Nacar v.
Gallery Frames,40 the Court imposes instead legal interest in the
following rates: (1) legal interest of 12% per annum from date of
extrajudicial demand on January 29, 1997 until June 30, 2013; and (2)
legal interest of 6o/o per annum from July 1, 2013 until fully paid.
Incidentally, Amador passed away on June 5, 2010 during the pendency
of the instant petition, and is survived by his children, namely: Joann D.
Moya, Annabelle G. Domingo, Cristina G. Domingo, Amador G.
Domingo, Jr., Gloria Maryden D. Macatangay, Dante Amador G.
Domingo, Gregory Amador A. Domingo, and Ina Joy A. Domingo.41 To
prevent future litigation in the enforcement of the award, the Court
clarifies that Amador's heirs are not personally responsible for the debts
of their predecessor. The extent of liability of Amador's heirs to BPI is
limited to the value of the estate which they inherited from Amador. In
this jurisdiction, "it is the estate or mass of the property left by the
decedent, instead of the heirs directly, that becomes vested and
charged with his rights and obligations which survive after his death."42
To rule otherwise would unduly deprive Amador' s heirs of their
properties.
WHEREFORE, in view of the foregoing, the Petition is GRANTED. The
Decision dated July 11, 2005 and Resolution dated August 19, 2005 of
the Court of Appeals in CA-G.R. SP No. 88836, affirming with
modification the Decision dated February 10, 2005 of the RTC of Manila,
Branch 26 in Civil Case No. 04-111100, is REVERSED and SET ASIDE.
The Decision dated June 10, 2004 and Order dated September 6, 2004
of the Me TC of Manila, Branch 9 in Civil Case No. 168949-CV, is
REINSTATED with MODIFICATIONS. The heirs of respondent Amador
367
Domingo are ORDERED to pay petitioner Bank of the Philippine Islands
the following:

(1) the ₱275,562.00 balance on the Promissory Note, plus legal interest
of 12% from January 29, 1997 to June 30, 2013 and 6% from July 1,
2013 until fully paid; (2) attorney's fees of 10%; and (3) costs of suit.
However, the liability of Amador Domingo's heirs is limited to the value
of the inheritance they received from the deceased.

SO ORDERED.

368
 INTERPORT RESOURCES CORPORATION, PETITIONER, VS.
SECURITIES SPECIALIST, INC., AND R.C. LEE SECURITIES INC.,
RESPONDENTS.
BERSAMIN, J.:
This appeal assails the decision promulgated on February 11, 2002,[1]
whereby the Court of Appeals (CA), in C.A.-G.R. SP No. 66600, affirmed
the decision the Securities and Exchange Commission (SEC) rendered
in SEC AC No. 501-502[2] ordering Interport Resources Corporation
(Interport) to deliver 25% of the shares of stocks under Subscription
Agreements Nos. 1805 and 1808-1811, or the value thereof, and to pay
to respondent Securities Specialist, Inc. (SSI), jointly and severally with
R.C. Lee Securities, Inc. (R.C. Lee), exemplary damages and litigation
expenses.
Antecedents
In January 1977, Oceanic Oil & Mineral Resources, Inc. (Oceanic)
entered into a subscription agreement with R.C. Lee, a domestic
corporation engaged in the trading of stocks and other securities,
covering 5,000,000 of its shares with par value of P0.01 per share, for a
total of P50,000.00. Thereupon, R.C. Lee paid 25% of the subscription,
leaving 75% unpaid. Consequently, Oceanic issued Subscription
Agreements Nos. 1805, 1808, 1809, 1810, and 1811 to R.C. Lee.[3]
On July 28, 1978, Oceanic merged with Interport, with the latter as the
surviving corporation. Interport was a publicly-listed domestic
corporation whose shares of stocks were traded in the stock exchange.
Under the terms of the merger, each share of Oceanic was exchanged
for a share of Interport.[4]
On April 16, 1979 and April 18, 1979, SSI, a domestic corporation
registered as a dealer in securities, received in the ordinary course of
business Oceanic Subscription Agreements Nos. 1805, 1808 to 1811,
all outstanding in the name of R.C. Lee, and Oceanic official receipts
showing that 25% of the subscriptions had been paid.[5] The Oceanic
subscription agreements were duly delivered to SSI through stock
assignments indorsed in blank by R.C. Lee.[6]
Later on, R.C. Lee requested Interport for a list of subscription
agreements and stock certificates issued in the name of R.C. Lee and
other individuals named in the request. In response, Atty. Rhodora B.
Morales, Interport1 s Corporate Secretary, provided the requested list of
all subscription agreements of Interport and Oceanic, as well as the
requested stock certificates of Interport.[7] Upon finding no record
showing any transfer or assignment of the Oceanic subscription
agreements and stock certificates of Interport as contained in the list,
R.C. Lee paid its unpaid subscriptions and was accordingly issued stock
certificates corresponding thereto.[8]
On February 8, 1989, Interport issued a call for the full payment of
subscription receivables, setting March 15, 1989 as the deadline. SSI
tendered payment prior to the deadline through two stockbrokers of the
Manila Stock Exchange. However, the stockbrokers reported to SSI that
Interport refused to honor the Oceanic subscriptions.[9]
Still on the date of the deadline, SSI directly tendered payment to
Interport for the balance of the 5,000,000 shares covered by the Oceanic
subscription agreements, some of which were in the name of R.C. Lee
and indorsed in blank. Interport originally rejected the tender of payment
for all unpaid subscriptions on the ground that the Oceanic subscription
agreements should have been previously converted to shares in
Interport.[10]
SSI then required Interport to furnish it with a copy of any notice requiring
the conversion of Oceanic shares to Interport shares. However, Interport
failed to show any proof of the notice. Thus, through a letter dated March
30, 1989, SSI asked the SEC for a copy of Interport's board resolution
requiring said conversion. The SEC, through Atty. Fe Eloisa C. Gloria,
Director of Brokers and Exchange Department, informed SSI that the
SEC had no record of any such resolution.[11]
Having confirmed the non-existence of the resolution, Francisco
Villaroman, President of SSI, met with Pablo Roman, President and
Chairman of the Board of Interport, and Atty. Pineda, Interport's
Corporate Secretary, at which meeting Villaroman formally requested a
copy of the resolution. However, Interport did not produce a copy of the
resolution.[12]
Despite that meeting, Interport still rejected SSI's tender of payment for
the 5,000,000 shares covered by the Oceanic Subscription Agreements
Nos. 1805, and 1808 to 1811.[13]
On March 31, 1989, or 16 days after its tender of payment, SSI learned
that Interport had issued the 5,000,000 shares to R.C. Lee, relying on
the latter's registration as the owner of the subscription agreements in
the books of the former, and on the affidavit executed by the President
of R.C. Lee stating that no transfers or encumbrances of the shares had
ever been made.[14]
Thus, on April 27, 1989, SSI wrote R.C. Lee demanding the delivery of
the 5,000,000 Interport shares on the basis of a purported assignment
of the subscription agreements covering the shares made in 1979. R.C.
Lee failed to return the subject shares inasmuch as it had already sold
the same to other parties. SSI thus demanded that R.C. Lee pay not
369
only the equivalent of the 25% it had paid on the subscription but the
whole 5,000,000 shares at current market value.[15]
SSI also made demands upon Interport and R.C. Lee for the
cancellation of the shares issued to R.C. Lee and for the delivery of the
shares to SSI.[16]
On October 6, 1989, after its demands were not met, SSI commenced
this case in the SEC to compel the respondents to deliver the 5,000,000
shares and to pay damages.[17] It alleged fraud and collusion between
Interport and R.C. Lee in rejecting the tendered payment and the
transfer of the shares covered by the subscription agreements.
On October 25, 1994, after due hearing, the Hearing Officer of the SEC's
Securities Investigation and Clearing Department (SICD) rendered a
decision,[18] disposing thusly:
WHEREFORE, judgment is hereby rendered ordering respondent
Interport to deliver the five (5) million shares covered by Oceanic Oil and
Mineral Resources, Inc. subscription agreement Nos. 1805, 1808-1811
to petitioner SSI; and if the same not be possible to deliver the value
thereof, at the market price as of the date of this judgment; and ordering
both respondents, jointly and severally, to indemnify the complainant in
the sum of FIVE HUNDRED THOUSAND PESOS (P500,000.00) by way
of temperate or moderate damages, to indemnify complainant in the
sum of FIVE HUNDRED THOUSAND PESOS (P500,000.00) by way of
exemplary damages; to pay for complainant's litigation expenses,
including attorney's fees, reasonably in the sum of THREE HUNDRED
THOUSAND pesos (P300,000.00) and to pay the costs of suit.[19]
Both Interport and R.C. Lee appealed to the SEC En Banc, which
ultimately ruled as follows:
After a careful review of the records of this case, we find basis in partially
reversing the decision dated October 25, 1994.
It is undisputed from the facts presented and evidence adduced that the
subject matter of this case pertains to the subscription agreements for
which complainant paid only twenty five percent and the remaining
balance of seventy five percent paid for by respondent RCL.
Accordingly, to order the return of the five million shares or the payment
of the entire value thereof to the complainant, without requiring the latter
to pay the balance of seventy five percent will be inequitable.
Accordingly, the pertinent portion of the decision is hereby revised to
reflect this.
As regards the portion awarding temperate damages, the same may not
be awarded. All evidence presented by Securities Specialist, Inc.
pertaining to its "lost opportunity" seeking for damages for its supposed
failure to sell Interport's shares, when the market was allegedly good, is
merely speculative. Moreover, even if the alleged pecuniary loss of SSI
would be considered, the same is again purely speculative and deserves
scant consideration by the Commission. Hence, temperate damages
may not be justly awarded along with the other damages prayed for.
WHEREFORE, premises considered, judgment is hereby rendered,
ordering respondent Interport to deliver the corresponding shares
previously covered by Oceanic Oil Mineral Resources Inc. subscription
agreements Nos. 1805-1811 to petitioner SSI, to the extent only of 25%
thereof, as duly paid by petitioner SSI; and if the same will not be
possible, to deliver the value thereof at the market price as of the date
of this judgment and ordering both respondents jointly and severally, to
indemnify the complainant in the sum of five hundred thousand pesos
(P500,000.00) by way of exemplary damages, to pay for complainant's
litigation expenses, including attorney's fees, reasonably in the sum of
three hundred thousand pesos (P300,000.00) and to pay the costs of
the suit.[20]
Interport appealed to the CA,[21] which on February 11, 2002 affirmed
the SEC's decision,[22] viz.:
WHEREFORE, premises considered the Petition is hereby DENIED
DUE COURSE and ordered DISMISSED and the challenged decision
of the Securities and Exchange Commission AFFIRMED, with costs to
Petitioner. SO ORDERED.
On June 25, 2002, the CA denied Interport's motion for
reconsideration.[23]
Issues
Interport assigns the following errors to the CA, namely:
I THE COURT OF APPEALS ERRED AND COMMITTED GRAVE
ABUSE OF DISCRETION IN THE APPRECIATION OF THE FACTS IN
HOLDING PETITIONER LIABLE TO DELIVER THE 25% OF THE
SUBJECT 5 MILLION SHARES OR IF THE SAME NOT BE POSSIBLE
TO DELIVER THE VALUE THEREOF DESPITE THE EVIDENCE TO
THE CONTRARY.
II THE COURT OF APPEALS ERRED IN RULING THAT PETITIONER
IS LIABLE FOR EXEMPLARY DAMAGES IN THE AMOUNT OF
P500,000.00 WITHOUT LEGAL BASIS, WHICH IS NOT IN ACCORD
WITH LAW AND APPLICABLE DECISIONS OF THE SUPREME
COURT.
III THE COURT OF APPEALS ERRED IN RULING THAT PETITIONER
IS LIABLE FOR ATTORNEY'S FEES IN THE AMOUNT OF
P300,000.00 AND COSTS THERE BEING NO FACTUAL AND LEGAL
BASIS, WHICH IS NOT IN ACCORD WITH LAW AND APPLICABLE
DECISIONS OF THE SUPREME COURT.[24]
370
The issues are: (a) whether or not Interport was liable to deliver to SSI
the Oceanic shares of stock, or the value thereof, under Subscriptions
Agreement No. 1805, and Nos. 1808 to 1811 to SSI; and (b) whether or
not SSI was entitled to exemplary damages and attorney's fees.
Ruling
The appeal is partly meritorious.
1. Interport was liable to deliver the Oceanic shares of stock, or
the value thereof, under Subscription Agreements Nos. 1805,
and 1808 to 1811 to SSI
Interport argues that R.C. Lee should be held liable for the delivery of
25% of the shares under the subject subscription agreements inasmuch
as R.C. Lee had already received all the 5,000,000 shares upon its
payment of the 75% balance on the subscription price to Interport; that
it was only proper for R.C. Lee to deliver 25% of the shares under the
Oceanic subscription agreements because it had already received the
corresponding payment therefor from SSI for the assignment of the
shares; that R.C. Lee would be unjustly enriched if it retained the
5,000,000 shares and the 25% payment of the subscription price made
by SSI in favor of R.C. Lee as a result of the assignment; and that it
merely relied on its records, in accordance with Section 74 of the
Corporation Code, when it issued the stock certificates to R.C. Lee upon
its full payment of the subscription price.
Interport's arguments must fail.
In holding Interport liable for the delivery of the Oceanic shares, the SEC
explained:
x x x [T]he Oceanic subscriptions agreements were duly delivered to the
Complainant SSI supported by stock assignments of respondent R.C.
Lee (Exhibits "B" to "B-4" of the petitioner) and by official receipts of
Oceanic showing that twenty five percent of the subscription had been
paid (Exhibits "C" to "C-4"). To this date, respondent R.C. Lee does not
deny having subscribed and delivered such stock assignments to the
Oceanic subscription agreements. Therefore, having negotiated them
by allowing to be in street certificates, respondent R.C. Lee, as a broker,
cannot now legally and morally claim any further interests over such
subscriptions or the shares of stock they represent.
xxxx
Both respondents seek to be absolved of liability for their machinations
by invoking both the rule on novation of the debtor without the creditor's
consent; as well as the Corporation Code rule of non-registration of
transfers in the corporation's stock and transfer book. Neither will avail
in the case at bar. Art. 1293 of the New Civil Code states:
"Art. 1293. Novation which consists in substituting a new debtor in the
place of the original one may be made even without the knowledge or
against the will of the latter but not without the consent of the creditor" x
x x.
More importantly, the allusion by the respondents likening the
subscription contracts to the situation of debtor-creditor finds no basis in
law. Indeed, as held by the Supreme Court, shareholders are not
creditors of the corporation with respect to the shareholdings (Garcia vs.
Lim Chu Sing, 59 Phil. 562).
The Memorandum of R.C. Lee, likewise cites the Opinion of the SEC
dated November 12, 1976, which states "that since an assignment will
involve a substitution of debtor or novation of contract, as such the
consent of the creditor must be obtained" has the same effect. The
opinion, however, merely restated the general rule already embodied in
the Codal provision quoted above; it does not preclude previously
authorized transfers. According to Tolentino -
"When the original contract authorizes the debtor to transfer his
obligations to a third person, the novation by substitution of debtor is
effected when the creditor is notified that such transfer has been made"
(IV Tolentino 392, 1991 ed, emphasis supplied)
But even following the argument of the respondents, when complainant
SSI tendered the balance of the unpaid subscription on the subject five
(5) million shares on the basis of the existing subscription agreements
covering the same, respondents Interport was bound to accept payment
even as the same were being tendered in the name of the registered
subscriber, respondent R.C. Lee and once the payment is fully accepted
in the name of respondent R.C. Lee, respondent Interport was then
bound to recognize the stock assignment also tendered duly executed
by respondent R.C. Lee in favor of complainant SSI.[25] (bold emphasis
supplied.)
The SEC correctly categorized the assignment of the subscription
agreements as a form of novation by substitution of a new debtor and
which required the consent of or notice to the creditor. We agree. Under
the Civil Code, obligations may be modified by: (1) changing their object
or principal conditions; or (2) substituting the person of the debtor; or (3)
subrogating a third person in the rights of the creditor.[26] Novation, which
consists in substituting a new debtor in the place of the original one, may
be made even without the knowledge or against the will of the latter, but
not without the consent of the creditor.[27] In this case, the change of
debtor took place when R.C. Lee assigned the Oceanic shares under
Subscription Agreement Nos. 1805, and 1808 to 1811 to SSI so that the
latter became obliged to settle the 75% unpaid balance on the
subscription.
371
The SEC likewise did not err in appreciating the fact that Interport was
duly notified of the assignment when SSI tendered its payment for the
75% unpaid balance, and that it could not anymore refuse to recognize
the transfer of the subscription that SSI sufficiently established by
documentary evidence.
Yet, Interport claims that SSI waived its rights over the 5,000,000 shares
due to its failure to register the assignment in the books of Interport; and
that SSI was estopped from claiming the assigned shares, inasmuch as
the assignor, R.C. Lee, had already transferred the same to third parties.
Interport's claim cannot be upheld. It should be stressed that novation
extinguished an obligation between two parties.[28] We have stated in
that respect that:
x x x Novation may:
[E]ither be extinctive or modificatory, much being dependent on the
nature of the change and the intention of the parties. Extinctive novation
is never presumed; there must be an express intention to novate; in
cases where it is implied, the acts of the parties must clearly
demonstrate their intent to dissolve the old obligation as the moving
consideration for the emergence of the new one. Implied novation
necessitates that the incompatibility between the old and new obligation
be total on every point such that the old obligation is completely
superseded by the new one. The test of incompatibility is whether they
can stand together, each one having an independent existence; if they
cannot and are irreconcilable, the subsequent obligation would also
extinguish the first.
An extinctive novation would thus have the twin effects of, first,
extinguishing an existing obligation and, second, creating a new one in
its stead. This kind of novation presupposes a confluence of four
essential requisites: (1) a previous valid obligation, (2) an agreement of
all parties concerned to a new contract, (3) the extinguishment of the old
obligation, and (4) the birth of a valid new obligation. Novation is merely
modificatory where the change brought about by any subsequent
agreement is merely incidental to the main obligation (e.g., a change in
interest rates or an extension of time to pay; in this instance, the new
agreement will not have the effect of extinguishing the first but would
merely supplement it or supplant some but not all of its provisions.[29]
Clearly, the effect of the assignment of the subscription agreements to
SSI was to extinguish the obligation of R.C. Lee to Oceanic, now
Interport, to settle the unpaid balance on the subscription. As a result of
the assignment, Interport was no longer obliged to accept any payment
from R.C. Lee because the latter had ceased to be privy to Subscription
Agreements Nos. 1805, and 1808 to 1811 for having been extinguished
insofar as it was concerned. On the other hand, Interport was legally
bound to accept SSI's tender of payment for the 75% balance on the
subscription price because SSI had become the new debtor under
Subscription Agreements Nos. 1805, and 1808 to 1811. As such, the
issuance of the stock certificates in the name of R.C. Lee had no legal
basis in the absence of a contractual agreement between R.C. Lee and
Interport.
Under Section 63 of the Corporation Code, no transfer of shares of stock
shall be valid, except as between the parties, until the transfer is
recorded in the books of the corporation so as to show the names of the
parties to the transaction, the date of the transfer, the number of the
certificate or certificates and the number of shares transferred. Hence:
[A] transfer of shares of stock not recorded in the stock and transfer book
of the corporation is non-existent as far as the corporation is concerned.
As between the corporation on the one hand, and its shareholders and
third persons on the other, the corporation looks only to its books for the
purpose of determining who its shareholders are. It is only when the
transfer has been recorded in the stock and transfer book that a
corporation may rightfully regard the transferee as one of its
stockholders. From this time, the consequent obligation on the part of
the corporation to recognize such rights as it is mandated by law to
recognize arises.[30]
This statutory rule cannot be strictly applied herein, however, because
Interport had unduly refused to recognize the assignment of the shares
between R.C. Lee and SSI. Accordingly, we adopt with approval the
SEC's following conclusion that -
x x x To say that the ten years since the assignment had been made are
a sufficient lapse of time in order for respondent SSI to be considered to
have abandoned its rights under the subscription agreements, is to
ignore the rule -
"The right to have the transfer registered exists from the time of the
transfers and it is to the transferee's benefit that the right be exercised
early. However, since the law does not prescribed (sic) any period within
which the registration should be effected the action to be enforced the
right does not accrue until here has been a demand and a refusal to
record the transfer." (11 Campus 310, 1990 ed., citing Won v. Wack
Wack Golf, 104 Phil. 466, Emphasis Supplied).
Petitioner SSI was denied recognition of its subscription agreement on
March 15, 1989; the complaint against the respondents was filed before
the SEC on October 6 of that same year. This is the period of time that
is to be taken into account, not the period between 1979 and 1989. The
Commission thus finds that petitioner acted with sufficient dispatch in
372
seeking to enforce its rights under the subscription agreements, and
sought the intervention of this Commission within a reasonable period.
In the affidavit of respondent R.C. Lee's president, Ramon C. Lee, dated
February 22, 1989, there are several averments that need to be
examined, in the light of respondent R.C. Lee's claim of having acted in
good faith.
The first is the statement made in paragraph 3 thereof:
"That R.C. Lee Securities, Inc. has delivered to Interport its subscription
Agreements for Twenty Five Million (25,000,000) shares of Oceanic for
conversion into Interport shares however, as of date, only twenty million
(20,000,000) shares have been duly covered by Interport Subscription
Agreements and the Five million (5,000,000) shares still remains without
Subscription Agreements".
No explanation is given for the failure of respondent Interport to convert
the five (5) million shares. As can be seen from the letter of Interport to
counsel of R.C. Lee, dated January 27, 1989, already mentioned above,
these five (5) million shares purportedly belonging to respondent R.C.
Lee do not seem to be covered by any properly identified subscription
agreements. Yet respondent Interport issued the shares without
respondent R.C. Lee having anything to show for the same. On the other
hand, respondent Interport refused to recognize complainant SSI's claim
to five (5) millions (sic) shares inspite of the fact that its claim was fully
supported by duly issued subscription agreements, stock assignment
and receipts of payment of the initial subscription. x x x[31]
Subscription Agreements Nos. 1805, and 1808 to 1811 were now
binding between Interport and SSI only, and only such parties were
expected to comply with the terms thereof. Hence, the CA did not err in
relying on the findings of the SEC, which was in a better position to pass
judgment on whether or not Interport was liable to deliver to SSI the
Oceanic shares under Subscription Agreements Nos. 1805, and 1808
to 1811.
2. Interport and R.C. Lee were not liable to pay exemplary
damages and attorney's fees
Article 2229 of the Civil Code provides that exemplary damages may be
imposed by way of example or correction for the public good. While
exemplary damages cannot be recovered as a matter of right, they need
not be proved, although the plaintiff must show that he is entitled to
moral, temperate, or compensatory damages before the court may
consider the question of whether or not exemplary damages should be
awarded. Exemplary damages are imposed not to enrich one party or
impoverish another, but to serve as a deterrent against or as a negative
incentive to curb socially deleterious actions.[32]
SSI was not able to show that it was entitled to moral, temperate, or
compensatory damages. In fact, the SEC pointed out that the award of
temperate damages was not proper because SSI's alleged pecuniary
loss was merely speculative in nature. Neither could SSI recover
exemplary damages considering that there was no award of moral
damages. Indeed, exemplary damages are to be allowed only in addition
to moral damages, and should not be awarded unless the claimant first
establishes a clear right to moral damages.[33]
Nonetheless, the Court observes that exemplary damages were
awarded in the past despite the award of moral damages being deleted
because the defendant party to a contract acted in a wanton, fraudulent,
oppressive or malevolent manner.[34]
In this case, the Court finds that Interport's act of refusing to accept SSI's
tender of payment for the 75% balance of the subscription price was not
performed in a wanton, fraudulent, oppressive or malevolent manner. In
doing so, Interport merely relied on its records which did not show that
an assignment of the shares had already been made between R.C. Lee
and SSI as early as 1979. R.C. Lee, on the other hand, persisted in
paying the 75% balance on the subscription price simply on the basis of
Interport's representation that no transfer has yet been made in
connection with Subscription Agreement Nos. 1805, and 1808 to 1811.
Although Interport and R.C. Lee might have acted in bad faith[35] in
refusing to recognize the assignment of the subscription agreements in
favor of SSI, their acts certainly did not fall within the ambit of being
performed in a wanton, fraudulent, oppressive or malevolent manner as
to entitle SSI to an award for exemplary damages.
We delete the attorney's fees for lack of legal basis.[36]
WHEREFORE, the Court PARTIALLY GRANTS the petition for review
on certiorari; and AFFIRMS the decision promulgated on February 11,
2002 subject to the following MODIFICATIONS, namely:
1. ORDERING Interport Resources Corporation: (a) To accept the
tender of payment of Securities Specialist, Inc. corresponding to the
75% unpaid balance of the total subscription price under Subscription
Agreements Nos. 1805, 1808, 1809, 1810 and 1811; (b) To deliver
5,000,000 shares of stock and to issue the corresponding stock
certificates to Securities Specialist, Inc. upon receipt of the payment of
the latter under Item No. (a); (c) To cancel the stock certificates issued
to R.C. Lee Securities, Inc. corresponding to the 5,000,000 shares of
stock covered by Subscription Agreements Nos. 1805, 1808, 1809,
1810 and 1811; (d) To reimburse R.C. Lee Securities, Inc. the amounts
it paid representing the 75% unpaid balance of the total subscription
price of Subscription Agreements Nos. 1805, 1808, 1809, 1810 and
1811; and (e) In the alternative, if the foregoing is no longer possible,
373
Interport Resources Corporation shall pay Securities Specialist, Inc. the
market value of the 5,000,000 shares of stock covered by Subscription
Agreements Nos. 1805, 1808, 1809, 1810 and 1811 at the time of the
promulgation of this decision; and
2. DELETING the award for exemplary damages and attorney's fees for
lack of merit.
No pronouncement on costs of suit.

374
 JENNEFER FIGUERA, as substituted by ENHANCE VISA
SERVICES, INC., represented by MA. EDEN R. DUMONT,
Petitioner, vs. MARIA REMEDIOS ANG, Respondent.
G.R. No. 204264
BRION, J.:
We resolve the petition for review on certiorari1under Rule 45 of the
Rules of Court filed by petitioner Jennefer Figuera2 (Figuera) assailing
the June 29, 2012 decision3 and the September 28, 2012 resolution4 of
the Court of Appeals (CA) of Cebu City in CA-G.R. CV. No. 02480.
The Facts
Maria Remedios A.ng (Ang) is the registered owner of a single
proprietorship business named "Enhance Immigration and
Documentation Consultants" (EIDC).
On December 16, 2004, Ang executed a "Deed of Assignment of
Business Rights" (Deed) transferring all of her business rights over the
EIDC to Figuera for One Hundred Fifty Thousand Pesos (₱150,000.00).
In addition to the assignment of rights, the parties also agreed that Ang
shall pay the bills for electricity, telephone, office rentals, and the
employees’ salaries up to the month of December 2004.5
Without Ang’s consent, Figuera paid all the utility bills amounting to
₱107,903.21 as of December 2004. On January 17, 2005, Figuera
tendered only the amount of ₱42,096.79 to Ang, after deducting the
amount paid for the utility bills from the ₱150,000.00 consideration of
the Deed.
Ang refused to accept Figuera’s payment. Figuera mailed the Formal
Tender of Payment and gave Ang five (5) days to accept the amount.
Despite the lapse of the 5-day period, however, Ang still refused to
accept the payment.
Thus, Figuera filed a complaint for specific performance before the
Regional Trial Court (RTC), Branch 9 of Cebu City against Ang. Figuera
consigned the amount of ₱42,096.79 to the RTC.
In her answer, Ang maintained that the amount due pursuant to the
Deed is ₱150,000.00 and not just ₱42,096.79. She argued that she
cannot be compelled to accept the amount because it is not what was
agreed upon.
On May 19, 2005, Figuera conveyed all her rights, assets, interests,
liabilities, and causes of action over EIDC in favor of the Enhance Visa
Services, Inc. (EVSI) through a "Deed of Assignment Coupled with
Interest." Thus, on June 14, 2005, EVSI substituted Figuera, on motion,
as plaintiff.
The RTC Ruling
The RTC ruled in Ang’s favor in its decision dated December 28, 2007.
The RTC held that the unambiguous language of the Deed mandates
Ang, as the Assignor, to pay the December 2004 utility bills. Figuera,
however, paid the utility bills without Ang’s consent.
The RTC explained that for the tender of payment and consignation to
be valid, Figuera must tender the full amount of ₱150,000.00 rather than
just ₱42,096.79. Ang is not obliged to accept an amount less than what
is agreed upon in the Deed.
Figuera appealed the RTC decision to the CA and argued that by
operation of law, legal subrogation and compensation had taken place.
Consequently, Figuera’s obligation to the extent of the amount of
₱107,903.21 is extinguished.
The CA Ruling
In its June 29, 2012 decision, the CA affirmed the RTC’s ruling.
The CA held that there is nothing in the Deed that grants Figuera the
option to pay the utility bills and to deduct the payment from the agreed
consideration in the Deed; thus, the amount of ₱150,000.00 remains as
the due consideration from Figuera. Moreover, Figuera failed to prove
that Ang consented to the payment of the bills.
The CA added that Figuera’s payment of ₱42,096.79 cannot be
considered as a valid tender of payment or a valid consignation because
it is insufficient to cover the consideration due to Ang.
375
As for the other issues and arguments which Figuera failed to raise
before the RTC, the CA held that these issues cannot be raised for the
first time on appeal.
Figuera sought reconsideration of the CA’s decision which the CA
denied for lack of merit in its September 28, 2012 resolution.
The Parties’ Arguments
In the present petition for review, Figuera challenges the CA’s decision
and resolution affirming the RTC ruling.
Figuera argues that the CA committed errors of law based on the
following grounds: First, Figuera was eager to pay the utility bills being
the EIDC’s new owner.
Second, Figuera had been subrogated to the rights of Ang’s creditor’s
(i.e., the Telephone Company, electric company, office space lessor,
and company employees) upon payment of the utility bills even if the
payment was made without Ang’s knowledge. Consequently, Ang
became Figuera’s debtor.
Third, Figuera and Ang became debtors and creditors of one another for
a sum of money that is liquidated, due, demandable, and without
controversy.
Fourth, Figuera and Ang’s obligations amounting to ₱107,903.21 were
compensated against each other by operation of law.
Fifth, Figuera’s tender of the amount of ₱42,096.79 to Ang is a valid
tender of payment.
Sixth, Figuera validly consigned the amount of ₱42,096.79.
Finally, Figuera presented the foregoing issues before the RTC and did
not raise them for the first time on appeal.
In her comment,6Ang argued that: first, a petition for review under Rule
45 of the Rules of Court only allows questions of law. Figuera’s
contention that legal subrogation and compensation took place requires
proof that should have been established during the trial.
Second, Figuera admitted that the RTC was correct in ruling that there
was nothing in the Deed that grants her the option to pay the utilities nor
allows any deduction from the agreed consideration upon her payment
of the utility bills.
Third, legal subrogation cannot take place because the situation of the
parties under the Deed is not among the instances provided by law for
subrogation to take place.
Fourth and last, Figuera should not be allowed to raise issues regarding
legal subrogation and compensation because these were raised for the
first time on appeal.
The Issue
The main issue to be resolved in this case is whether or not there
was a valid tender of payment and consignation.
Our Ruling
We grant the petition and reverse the CA’s ruling.
The questions raised in this petition are
one of law which the Court can properly
review.
It is a settled rule that the Court cannot review questions of fact on a
petition for review under Rule 45 of the Rules of Court. A question of
fact exists when the truth or falsity of the parties’ factual allegations is in
dispute. A question of law, on the other hand, exists when the
application of the law on the stated facts is in controversy.7
The parties’ description of the questions raised does not determine
whether these questions are of fact or of law. The true test is whether
the appellate court can resolve the issue without reviewing or evaluating
the evidence, in which case, it is a question of law; otherwise, it is a
question of fact.8
Contrary to Ang’s allegation, the question involved in the present case
is a question of law which the Court can properly pass upon. There is
no dispute regarding the existence of the Deed and its consideration,
376
and the provision that mandates Ang to pay the EIDC’s bills until
December 2004. Ang also did not refute Figuera’s payment amounting
to ₱107,903.21 to Ang’s creditors and Figuera’s tender of payment to
Ang amounting to ₱42,096.79.
The CA can assess Figuera’s contention that legal subrogation and
compensation had taken place even without requiring Figuera to present
further evidence. The issue on the validity of Figuera’s tender of
payment and consignation can be resolved through the application of
the relevant laws.
The Court may properly address the questions raised even though
they are raised for the first time on appeal.
Ang contends that the CA correctly dismissed Figuera’s argument that
her debt amounting to ₱107,903.21 is extinguished through legal
subrogation and compensation. Figuera’s argument, Ang insists, was
not raised before the trial court and cannot be raised for the first time on
appeal.
We disagree. The Court grants to consider and resolve the issues on
the application of legal subrogation and compensation, even though it
was raised for the first time on appeal.
As a general rule, points of law, theories, and arguments not brought
before the trial court cannot be raised for the first time on appeal and will
not be considered by this Court; otherwise, a denial of the respondent’s
right to due process will result.9
In the interest of justice, however, the Court may consider and resolve
issues not raised before the trial court if it is necessary for the complete
adjudication of the rights and obligations of the parties, and it falls within
the issues found by the parties.10
Thus, an appellate court is clothed with authority to review rulings even
if they are not assigned as errors in the appeal in the following instances:
(a) grounds not assigned as errors but affecting jurisdiction over the
subject matter;
(b) matters not assigned as errors on appeal but are evidently plain or
clerical errors within contemplation of law;
(c) matters not assigned as errors on appeal but consideration of which
is necessary in arriving at a just decision and complete resolution of the
case or to serve the interests of justice or to avoid dispensing piecemeal
justice;
(d) matters not specifically assigned as errors on appeal but raised in
the trial court and are matters of record having some bearing on the
issue submitted which the parties failed to raise or which the lower court
ignored;
(e) matters not assigned as errors on appeal but closely related to an
error assigned; and
(f) matters not assigned as errors on appeal but upon which the
determination of a question properly assigned, is dependent.11
Figuera’s position falls under two of these exceptions, namely – that the
determination of the question newly raised is necessary in arriving at a
just decision and complete resolution of the case, and that the resolution
of a question properly assigned is dependent on those which were not
assigned as errors on appeal.
For the CA to rule on whether there was a valid tender of payment and
consignation, it must first determine the amount that Figuera should
have tendered. To do so, the appellate court must examine whether the
principles of legal subrogation and compensation, as Figuera argued,
should be applied.
To recall, Figuera claims that the consideration for the assignment worth
₱150,000.00 should be reduced by ₱107,903.21, representing the
amount that she paid for the EIDC’s utility bills. Figuera argues that her
payment of the utility bills subrogated her to the rights of Ang’s creditors
against Ang.
Article 1291 of the New Civil Code12 provides that the subrogation of a
third person to the rights of the creditor is one of the means to modify
obligations. Subrogation, sometimes referred to as substitution, is "an
arm of equity that may guide or even force one to pay a debt for which
an obligation was incurred but which was in whole or in part paid by
another."13 It transfers to the person subrogated the credit, with all the
rights appertaining thereto, either against the debtor or against third
persons.14
377
Subrogation of a third person in the rights of a creditor may either be
legal or conventional.15 There is legal subrogation when: (a) a creditor
pays another preferred creditor, even without the debtor’s knowledge;
(b) a third person who is not interested in the obligation pays with the
express or tacit approval of the debtor; and (c) a person interested in the
fulfilment of the obligation pays, even without the knowledge of the
debtor.16
In the present case, Figuera based her claim on the third type of
subrogation. She claims that as the EIDC’s new owner, she is interested
in fulfilling Ang's obligation to pay the utility bills. Since the payment of
the bills was long overdue prior to the assignment of business rights to
Figuera, the failure to settle the bills would eventually result in "the
disconnection of the electricity and telephone services, ejectment from
the office premises, and resignation by some, if not all, of the company’s
employees with the possibility of subsequent labor claims for sums of
money."17These utilities are obviously necessary for the continuation of
Figuera’s business transactions.
A person interested in the fulfilment of the obligation is one who stands
to be benefited or injured in the enforcement of the obligation. The Court
agrees with Figuera that it became absolutely necessary for her to pay
the bills since Ang did not do so when the obligation became due.
We note that both the RTC and the CA held that Figuera failed to prove
that Ang had consented to the payment of the EIDC bills; therefore,
Figuera cannot deduct the amount she paid for the utility bills from the
₱150,000.00 consideration.
A clear reading, however, of Article 1302 of the New Civil Code would
lead to a different conclusion. The consent or approval of the debtor is
required only if a third person who is not interested in the fulfilment of
the obligation pays such. On the other hand, no such requirement exists
in cases of payment by a creditor to another creditor who is preferred,
and by a person interested in the fulfilment of the obligation. Notably,
Article 1302 (1) and (3) does not require the debtor’s knowledge.
Therefore, legal subrogation took place despite the absence of Ang’s
consent to Figuera’s payment of the EIDC bills. Figuera is now deemed
as Ang’s creditor by operation of law.
On Figuera’s argument that legal compensation took place, and in
effect, extinguished her obligation to Ang to the extent of the amount
Figuera paid for the EIDC bills, Article 1278 of the New Civil Code is
instructive.
Article 1278 of the New Civil Code states that there is compensation
when two persons, in their own right, are creditors and debtors of one
another.1âwphi1 These elements must concur for legal compensation
to apply: (1) each one of the debtors is bound principally, and that the
debtor is at the same time a principal creditor of the other; (2) both debts
consist of a sum of money, or if the things due be consumable, they be
of the same kind and also of the same quality if the latter has been
stated; (3) both debts are due; (4) both debts are liquidated and
demandable; and (5) there be no retention or controversy over both
debts commenced by third persons and communicated in due time to
the debtor.18 When all these elements are present, compensation takes
effect by operation of law and extinguishes both debts to the
corresponding amount, even though both parties are without knowledge
of the compensation.19 It operates even against the will of the interested
parties and even without their consent.20
We find that all the elements of legal compensation are present in this
case.
First, in the assignment of business rights, Figuera stood as Ang’s
debtor for the consideration amounting to ₱150,000.00. Figuera, on the
other hand, became Ang’s creditor for the amount of ₱107, 903.21
through Figuera’s subrogation to the rights of Ang’s creditors against the
latter.
Second, both debts consist of a sum of money, which are both due,
liquidated, and demandable.
Finally, neither party alleged that there was any claim raised by third
persons against said obligation.
In effect, even without the knowledge and consent of Ang or Figuera,
their obligation as to the amount of ₱107,903.21 had already been
extinguished. Consequently, Figuera owes Ang the remaining due
amount of ₱42,096.79.
While the RTC and the CA correctly held that there was nothing in the
Deed that grants Figuera an option to pay the utility bills and to deduct
the amount from the consideration, we stress that although not
expressly written, laws are deemed incorporated in every contract
378
entered within our territories. Thus, the Court reads into the Deed the
provisions of law on subrogation and compensation.

With the determination of the amount of Figuera's obligation to Ang, the

question left to be resolved is: Was there a valid tender of payment and
consignation?

Tender of payment is the act of offering to the creditor what is due him,
together with the demand for the creditor to accept it. To be valid, the
tender of payment must be a "fusion of intent, ability, and capability to
make good such offer, which must be absolute and must cover the
amount due."21

As earlier discussed, the remaining amount due in Figuera's obligation

is P42,096.79. Thus, Figuera's tender of the remaining amount to Ang
is valid and Ang offered no valid justification in refusing to accept the
tender of payment. Due to the creditor's refusal, without any just cause,
to the valid tender of payment, the debtor is released from her obligation
by the consignation of the thing or sum due. 22

WHEREFORE, the Court GRANTS the petition for review on certiorari.

The decision dated June 29, 2012 and resolution dated September 28,
2012 of the Court of Appeals in CA-G.R. CV. No. 02480 are hereby
REVERSED.

SO ORDERED.

379
 PARADIGM DEVELOPMENT CORPORATION OF THE
PHILIPPINES, PETITIONER, V. BANK OF THE PHILIPPINES
ISLANDS, RESPONDENT.
REYES, J.:
This is a Petition for Review on Certiorari[1] filed under Rule 45 of the
Rules of Court assailing the Decision[2] dated November 25, 2009 and
Resolution[3] dated February 2, 2010 of the Court of Appeals (CA) in CA-
G.R. CV No. 89755, which granted respondent Bank of the Philippine
Islands' (BPI) appeal and accordingly dismissed the complaint filed by
petitioner Paradigm Development Corporation of the Philippines
(PDCP).
The Facts
Sometime in February 1996, Sengkon Trading (Sengkon), a sole
proprietorship owned by Anita Go, obtained a loan from Far East Bank
and Trust Company (FEBTC) under a credit facility denominated as
Omnibus Line in the amount of P100 Million on several sub-facilities with
their particular sub-limits denominated as follows: (i) Discounting Line
for P20 Million; (ii) Letter of Credit/Trust Receipt (LC-TR) Line for P60
Million; and (iii) Bills Purchased Line for P8 Million. This was embodied
in the document denominated as "Agreement for Renewal of Omnibus
Line."[4]
On April 19, 1996, FEBTC again granted Sengkon another credit facility,
denominated as Credit Line, in the amount of P60 Million as contained
in the "Agreement for Credit Line." Two real estate mortgage (REM)
contracts were executed by PDCP President Anthony L. Go (Go) to
partially secure Sengkon's obligations under this Credit Line. One REM,
acknowledged on April 22, 1996, was constituted over Transfer
Certificate of Title (TCT) No. RT-55259 (354583) and secured the
amount of P8 Million. The other REM, acknowledged on December 19,
1997, was constituted over TCT Nos. RT-58281, RT-54993 (348989)
and RT-55260 (352956) and secured the amount of P42,400,000.00.[5]
In a letter dated September 18, 1997, FEBTC informed Sengkon
regarding the renewal, increase and conversion of its P100 Million
Omnibus Line to P150 Million LC-TR Line and P20 Million Discounting
Line, the renewal of the P60 Million Credit Line and P8 Million Bills
Purchased Line.[6]
In the same letter, FEBTC also approved the request of Sengkon to
change the account name from SENGKON TRADING to SENGKON
TRADING, INC. (STI).[7]
Eventually, Sengkon defaulted in the payment of its loan obligations.[8]
Thus, in a letter dated September 8, 1999, FEBTC demanded payment
from PDCP of alleged Credit Line and Trust Receipt availments with a
principal balance of P244,277,199.68 plus interest and other charges
which Sengkon failed to pay. PDCP responded by requesting for
segregation of Sengkon's obligations under the Credit Line and for the
pertinent statement of account and supporting documents.[9]
Negotiations were then held and PDCP proposed to pay approximately
P50 Million, allegedly corresponding to the obligations secured by its
property, for the release of its properties but FEBTC pressed for a
comprehensive repayment scheme for the entirety of Sengkon's
obligations.[10]
Meanwhile, the negotiations were put on hold because BPI acquired
FEBTC and assumed the rights and obligations of the latter.[11]
When negotiations for the payment of Sengkon's outstanding
obligations, however, fell, FEBTC, on April 5, 2000, initiated foreclosure
proceedings against the mortgaged properties of PDCP before the
Regional Trial Court (RTC) of Quezon City.[12] In its Bid for the
mortgaged properties, FEBTC's counsel stated that:
On behalf of our client, [FEBTC], we hereby submit its Bid for the Real
Properties including all improvements existing thereon covered by [TCT]
Nos. RT - 55259 (354583), 58281, RT - 54993 (348989) and RT- 55260
(352956) which are the subject of the Auction Sale scheduled on June,
20, 2000 in the amount of:
SEVENTY[-]SIX MILLION FIVE HUNDRED THOUSAND PESOS ONLY
(P76,500,000.00), Philippine Currency.
Please note that the aforesaid Bid is only in PARTIAL SETTLEMENT of
the obligation of [PDCP], x x x.[13]
380
Upon verification with the Registry of Deeds, PDCP discovered that
FEBTC extra-judicially foreclosed on June 20, 2000 the first and second
mortgage without notice to it as mortgagor and sold the mortgaged
properties to FEBTC as the lone bidder.[14] Thereafter, on August 8,
2000, the corresponding Certificate of Sale was registered.[15]
Consequently, on July 19, 2001, PDCP filed a Complaint for Annulment
of Mortgage, Foreclosure, Certificate of Sale and Damages[16] with the
RTC of Quezon City, against BPI, successor-in-interest of FEBTC,
alleging that the REMs and their foreclosure were null and void.[17]
In its Amended Complaint,[18] PDCP alleged that FEBTC assured it that
the mortgaged properties will only secure the Credit Line sub-facility of
the Omnibus Line. With this understanding, PDCP President Go
allegedly agreed to sign on two separate dates a pro-forma and blank
REM, securing the amount ofP42.4 Million and P8 Million, respectively.
PDCP, however, claimed that it had no intent to be bound under the
second REM, which was not intended to be a separate contract, but only
a means to reduce registration expenses.[19]
Moreover, PDCP averred that sometime in September 1997, FEBTC
allegedly requested it to sign a document which would effectively extend
the liability of the properties covered by the mortgage beyond the Credit
Line. Because of its refusal to sign said document, it surmised that this
must have been the reason why, as it later discovered, FEBTC
registered not only the first but also the second REM, contrary to the
parties' agreement.[20]
In asking for the nullity of the REMs and the foreclosure proceeding,
PDCP alleged:
a.) THAT although the [REM] of April 22, 1996 for Php 8.0 Million was
not a separate security but was merely intended to reduce registration
expenses, FEBTC, [BPI's] predecessor-in-interest, fraudulently and in
violation of the original intent and agreement of the parties, made it
appear that said [REM] of April 22, 1996 was separate and distinct from
that of December 18, 1997 and caused the registration of both
mortgages with separate considerations totaling Php 50.4 Million;
b.) THAT the subject [REMs] were foreclosed to answer not only for
obligations incurred under SENGKON's Credit Line but also for other
obligations of SENGKON and other companies which were not secured
by said mortgages;
c.) THAT no notice was given to or received by [PDCP] of the projected
foreclosure x x x since the notice of said foreclosure was sent by
defendant SHERIFF to an address (333 EDSA, Quezon City) other than
[PDCP's] known address as stated in the [REMs] themselves (333
EDSA Caloocan City) x x x;
d.) THAT, contrary to the then prevailing Supreme Court Circular AM
99-10-05-0 x x x, only one (1) bidder was present and participated at the
foreclosure sale[; and]
e.) THAT, without the knowledge and consent of [PDCP], obligation of
SENGKON has been transferred to STI[,] a juridical personality separate
and distinct from SENGKON, a single proprietorship. This substitution
of SENGKON as debtor by STI x x x effectively novated the obligation
of [PDCP] to FEBTC. x x x.[21] (Underlining ours)
Ruling of the RTC
On April 16, 2007, the RTC rendered its Decision[22] nullifying the REMs
and the foreclosure proceedings. It also awarded damages to PDCP.
The dispositive portion of the decision reads:
WHEREFORE, premises considered the Court renders judgment in
favor of [PDCP] and against defendants [BPI], Sheriff and the Register
of Deeds of Quezon City in the following manner:
1) Declaring null and void and of no further force and effect the
following:
(a) the [REMs] (Annexes "F" and "F-1" hereof);
(b) the foreclosure thereof;
(c) the Certificate of Sale; and
381
(d) the entries relating to said [REMs] and Certificate of Sale annotated
on TCT Nos. 58281, RT-54993 (348989), RT-55260 (352956) and RT-
55259 (354583) covering the mortgaged properties;
2) Ordering defendant Registrar of Deeds to cancel all the annotations
of the [REMs] and the Certificate of Sale on the above stated TCTs
covering the mortgaged properties and otherwise to clear said TCTs of
any liens and encumbrances annotated thereon relating to the invalid
[REMs] aforesaid;
3) Ordering defendant [BPI] to return to [PDCP] the owner's duplicate
copies of the TCTs covering the mortgaged properties free from any and
all liens and encumbrances; and,
4) Ordering the defendant BPI to pay [PDCP] the following sums:
(a) Php 150,000.00 as attorney's fees; and,
(b) Php 50,000.00 as litigation expenses.
The Writ of Preliminary Injunction is hereby made FINAL and
PERMANENT.
Costs against defendant [BPI].
SO ORDERED.[23]
The RTC observed that the availments under the Credit Line, secured
by PDCP's properties, may be made only within one year, or from April
19, 1996 to April 30, 1997. While BPI claimed that the period of said
credit line was extended up to July 31, 1997, PDCP was not notified of
the extension and thus could not have consented to the extension.
Anyhow, said the RTC, "no evidence had been adduced to show that
Sengkon availed of any loan under the credit line up to July 31, 1997."
Thus, in the absence of any monetary obligation that needed to be
secured, the REM cannot be said to subsist.[24]
Further, the RTC agreed with PDCP that novation took place in this
case, which resulted in discharging the latter from its obligations as third-
party mortgagor. In addition, it also nullified the foreclosure proceedings
because the original copies of the promissory notes (PNs), which were
the basis of FEBTC's Petition for Extrajudicial Foreclosure of Mortgage,
were not presented in court and no notice of the extrajudicial foreclosure
sale was given to PDCP.[25]
Lastly, the RTC ruled that the shorter period of redemption under
Republic Act No. 8791[26] cannot apply to PDCP considering that the
REMs were executed prior to the effectivity of said law. As such, the
longer period of redemption under Act No. 3135[27] applies.[28]
Aggrieved, BPI appealed to the CA.[29]
Ruling of the CA
In its Decision[30] dated November 25, 2009, the CA reversed the RTC's
ruling on all points. The CA found PDCP's contentions incredible for the
following reasons: (i) the fact that PDCP surrendered the titles to the
mortgaged properties to FEBTC only shows that PDCP intended to
mortgage all of these properties; (ii) if it were true that FEBTC assured
PDCP that it would be registering only one of the two REMs in order to
reduce registration expenses, then each of the two REMs should have
covered the four properties but it was not. On the contrary, the four
properties were spread out with one REM covering one of the four
properties and the other REMs covering the remaining three properties;
and (iii) PDCP never complained to FEBTC regarding the registration of
the two REMs even after it discovered the same.[31]
Also, the CA ruled that novation could not have taken place from
FEBTC's mere act of approving Sengkon's request to change account
name from Sengkon to STI.[32]
Moreover, it held that the fact that FEBTC failed to submit the original
copies of the PNs that formed the basis of its Petition for Extrajudicial
Foreclosure of Mortgage cannot affect the validity of foreclosure
because the validity of the obligations represented in those PNs was
never denied by Sengkon nor by PDCP.[33]
The CA added that even if the obligations of Sengkon in credit facilities
(other than the Credit Line) were included, since the REMs contain a
dragnet clause, these other obligations were still covered by PDCP's
REMs.[34] Lastly, the CA ruled that the failure to send a notice of
382
extrajudicial foreclosure sale to PDCP did not affect the validity of the
foreclosure sale because personal notice to the mortgagor is not even
generally required.[35]
Hence, this present petition, where PDCP presented the following
arguments:
1. THE FINDINGS IN THE CA DECISION WHICH DEVIATED ON
ALMOST ALL POINTS FROM THOSE OF THE RTC ARE NOT
IN ACCORD WITH THE RULES ON THE ASSESSMENT OF
THE CREDIBILITY AND WEIGHT OF THE EVIDENCE;
2. HE VALIDITY OF THE REMs, AS UPHELD BY THE CA, IS
VITIATED BY THE FACT THAT BPI'S PREDECESSOR-IN-
INTEREST VIOLATED THE TRUE INTENT AND
AGREEMENT OF THE PARTIES THERETO;
3. THE CA DECISION'S REJECTION OF PDCP'S NOVATION
THEORY BASED ON THE ABSENCE OF AN EXPRESS
RELEASE OF THE OLD DEBTOR AND THE SUBSTITUTION
IN ITS PLACE OF A NEW DEBTOR IS MISPLACED AND
ERRONEOUS;
4. THE FORECLOSURE OF THE REMs WAS VITIATED NOT
ONLY BY THE INADMISSIBILITY OF THE PNs UPON WHICH
IT IS BASED BUT ALSO BECAUSE IT VIOLATED THE
THERETO APPLICABLE RULES; and
5. THE APPLICATION BY THE CA OF THE SHORTENED
PERIOD OF REDEMPTION IN THIS CASE VIOLATED THE
NON-IMPAIRMENT AND EQUAL PROTECTION CLAUSES
OF THE CONSTITUTION.[36]
Ruling of the Court
The Court finds the petition meritorious.
The registration of the REMs, even if
contrary to the supposed intent of the
parties, did not affect the validity of
the mortgage contracts
According to PDCP, when FEBTC registered both REMs, even if the
intent was only to register one, the validity of both REMs was vitiated by
lack of consent. PDCP claims that said intent is supported by the fact
that the REMs were constituted merely as "partial security" for
Sengkon's obligations and therefore there was really no intent to be
bound under both - but only in one - REM.
The Court cannot see its way clear through PDCP's argument. To begin
with, the registration of the REM contract is not essential to its validity.
Article 2085 of the Civil Code provides:
Art. 2085. The following requisites are essential to the contracts of
pledge and mortgage:
(1) That they be constituted to secure the fulfillment of a principal
obligation;
(2) That the pledgor or mortgagor be the absolute owner of the thing
pledged or mortgaged;
(3) That the persons constituting the pledge or mortgage have the free
disposal of their property, and in the absence thereof, that they be legally
authorized for the purpose.
Third persons who are not parties to the principal obligation may secure
the latter by pledging or mortgaging their own property.
In relation thereto, Article 2125 of the Civil Code reads:
Article 2125. In addition to the requisites stated in Article 2085, it is
indispensable, in order that a mortgage may be validly constituted, that
the document in which it appears be recorded in the Registry of
Property. If the instrument is not recorded, the mortgage is nevertheless
binding between the parties.
x x x x (Emphasis ours)
In Mobil Oil Philippines, Inc. v. Diocares, et al., [37] the trial court refused
to order the foreclosure of the mortgaged properties on the ground that
while an unregistered REM contract created a personal obligation
between the parties, the same did not validly establish a REM. In
reversing the trial court, the Court said:
383
The lower court predicated its inability to order the foreclosure in view of
the categorical nature of the opening sentence of [Article 2125] that it is
indispensable, "in order that a mortgage may be validly constituted, that
the document in which it appears be recorded in the Registry of
Property." Not[e] that it ignored the succeeding sentence: "If the
instrument is not recorded, the mortgage is nevertheless binding
between the parties." Its conclusion, however, is that what was thus
created was merely "a personal obligation but did not establish a
[REM]."
Such a conclusion does not commend itself for approval. The codal
provision is clear and explicit. Even if the instrument were not recorded,
"the mortgage is nevertheless binding between the parties." The law
cannot be any clearer. Effect must be given to it as written. The
mortgage subsists; the parties are bound. As between them, the mere
fact that there is as yet no compliance with the requirement that it be
recorded cannot be a bar to foreclosure.
xxxx
Moreover to rule as the lower court did would be to show less than fealty
to the purpose that animated the legislators in giving expression to their
will that the failure of the instrument to be recorded does not result in the
mortgage being any the less "binding between the parties." In the
language of the Report of the Code Commission: "In Article [2125] an
additional provision is made that if the instrument of mortgage is not
recorded, the mortgage, is nevertheless binding between the parties."
We are not free to adopt then an interpretation, even assuming that the
codal provision lacks the forthrightness and clarity that this particular
norm does and therefore requires construction, that would frustrate or
nullify such legislative objective.[38] (Citation omitted and emphasis and
underlining ours)
Hence, even assuming that the parties indeed agreed to register only
one of the two REMs, the subsequent registration of both REMs did not
affect an already validly executed REM if there was no other basis for
the declaration of its nullity. That the REMs were intended merely as
"partial security" does not make PDCP's argument more plausible
because as aptly observed by the CA, the PDCP's act of surrendering
all the titles to the properties to FEBTC clearly establishes PDCP's intent
to mortgage all of the four properties in favor of FEBTC to secure
Sengkon's obligation under the Credit Line. The Court notes that the
principal debtor, Sengkon, has several obligations under its Omnibus
Line corresponding to the several credit sub-facilities made available to
it by FEBTC. As found by the trial court, PDCP intended to be bound
only for Sengkon's availments under the Credit Line sub-facility and not
for just any of Sengkon's availments. Hence, it is in this sense that the
phrase "partial security" should be logically understood.
In this regard, PDCP argued that what its President signed is a pro-
forma REM whose important details were still left in blank at the time of
its execution. But notably, nowhere in PDCP's Amended Complaint did
it anchor its cause of action for the nullity of the REMs on this ground.
While it indeed alleged this circumstance, PDCP's Amended Complaint
is essentially premised on the supposed fraud employed on it by FEBTC
consisting of the latter's assurances that the REMs it already signed
would not be registered. In Solidbank Corporation v. Mindanao
Ferroalloy Corporation,[39] the Court discussed the nature of fraud that
would annul or avoid a contract, thus:
Fraud refers to all kinds of deception - whether through insidious
machination, manipulation, concealment or misrepresentation that
would lead an ordinarily prudent person into error after taking the
circumstances into account. In contracts, a fraud known as dolo
causante or causal fraud is basically a deception used by one party prior
to or simultaneous with the contract, in order to secure the consent of
the other. Needless to say, the deceit employed must be serious. In
contradistinction, only some particular or accident of the obligation is
referred to by incidental fraud or dolo incidente, or that which is not
serious in character and without which the other party would have
entered into the contract anyway.[40] (Citations omitted)
Under Article 1344 of the Civil Code, the fraud must be serious to annul
or avoid a contract and render it voidable. This fraud or deception must
be so material that had it not been present, the defrauded party would
not have entered into the contract.
In the present case, even if FEBTC represented that it will not register
one of the REMs, PDCP cannot disown the REMs it executed after
FEBTC reneged on its alleged promise. As earlier stated, with or without
the registration of the REMs, as between the parties thereto, the same
is valid and PDCP is already bound thereby. The signature of PDCP's
President coupled with its act of surrendering the titles to the four
properties to FEBTC is proof that no fraud existed in the execution of
384
the contract. Arguably at most, FEBTC's act of registering the mortgage
only amounted to dolo incidente which is not the kind of fraud that avoids
a contract.
No novation took place
The Court likewise agrees with the CA that no novation took place in the
present case. Novation is a mode of extinguishing an obligation by
changing its objects or principal obligations, by substituting a new debtor
in place of the old one, or by subrogating a third person to the rights of
the creditor. Article 1293 of the Civil Code defines novation as "consists
in substituting a new debtor in the place of the original one, [which] may
be made even without the knowledge or against the will of the latter, but
not without the consent of the creditor." However, while the consent of
the creditor need not be expressed but may be inferred from the
creditor's clear and unmistakable acts,[41] to change the person of the
debtor, the former debtor must be expressly released from the
obligation, and the third person or new debtor must assume the former's
place in the contractual relation.[42]
Thus, in Ajax Marketing and Development Corporation v. CA,[43] the
Court had already ruled that:
The well-settled rule is that novation is never presumed. Novation will
not be allowed unless it is clearly shown by express agreement, or by
acts of equal import. Thus, to effect an objective novation it is imperative
that the new obligation expressly declare that the old obligation is
thereby extinguished, or that the new obligation be on every point
incompatible with the new one. In the same vein, to effect a subjective
novation by a change in the person of the debtor it is necessary that the
old debtor be released expressly from the obligation, and the third
person or new debtor assumes his place in the relation. There is no
novation without such release as the third person who has assumed the
debtor's obligation becomes merely a co-debtor or surety.[44] (Emphasis
ours)
In the present case, PDCP failed to prove by preponderance of evidence
that Sengkon was already expressly released from the obligation and
that STI assumed the former's obligation. Again, as correctly pointed out
by the CA, the Deed of Assumption of Line/Loan with Mortgage (Deed
of Assumption) which was supposed to embody STI's assumption of all
the obligations of Sengkon under the line, including but not necessarily
limited to the repayment of all the outstanding availments thereon, as
well as all applicable interests and other charges, was not signed by the
parties.
Contrary to PDCP's claim, the CA's rejection of its claim of novation is
not based on the absence of the mortgagor's conformity to the Deed of
Assumption. The CA's rejection is based on the fact that the non-
execution of the Deed of Assumption by Sengkon, STI and FEBTC
rendered the existence of novation doubtful because of lack of clear
proof that Sengkon is being expressly released from its obligation; that
STI was already assuming Sengkon's former place in the contractual
relation; and that FEBTC is giving its conformity to this arrangement.
While FEBTC indeed approved Sengkon's request for the "change in
account name" from Sengkon to STI, such mere change in account
name alone does not meet the required degree of certainty to establish
novation absent any other circumstance to bolster said conclusion.
The trial court's finding that
Sengkon did not avail under the
Credit Line taints the foreclosure of
the mortgage
PDCP also claims that the foreclosure of the mortgage was invalid
because the PNs that formed the basis of FEBTC's Petition for
Extrajudicial Foreclosure of Mortgage were inadmissible in evidence.
Rejecting this argument, the CA ruled that the admissibility of the PNs
is a non-issue in this case because in questioning the validity of the
REMs and the foreclosure proceedings, PDCP did not actually assail
the validity or existence of said PNs; what it raised as an issue was
whether the foreclosure covered obligations other than Sengkon's
availment under the Credit Line. As the CA puts it:
[W]hat should have been the focal and critical question to be answered
on the issue of whether the subject [REMs] were validly foreclosed
should have been whether the [REMs] executed by [PDCP] covered the
obligations of [Sengkon] as represented in those [PNs] or, stated in
another way, were the [PNs] used by defendant BPI in its foreclosure
proceedings over [PDCP's] mortgages availments by [Sengkon] under
its Credit Line?
385
An examination of the subject [PNs] vis-a-vis the Agreement for Credit
Line would yield an affirmative answer.
In the case at bar, a close look at the Agreement for Credit Line would
reveal that the said credit facility for Php60 Million was granted in favor
of [Sengkon] for the purpose of "Additional Working Capital" and that it
would be "available by way of short term [PN]." In the same manner, an
examination of [PNs] PN Nos. 2-002-028618, 2-002-029436 and 2-002-
029437 would reveal that the said [PNs] were availed of by [Sengkon]
for the purpose of "Additional Working Capital."[45] (Citations omitted and
emphasis in the original)
The Court cannot agree with the CA. In order to determine whether the
obligations sought to be satisfied by the foreclosure proceedings were
only Sengkon's availments under the Credit Line, the court necessarily
needs to refer to the PNs themselves, as what the CA in fact did. Thus,
it is actually the contents of these PNs that are in issue and the trial court
did not err in applying the best evidence rule.
But even if the Court disregards the best evidence rule, the
circumstances in this case militate against the CA's conclusion. The trial
court made a factual finding that Sengkon's availment under the Credit
Line, which is the one secured by PDCP's properties, may be made only
within one year, or from April 19, 1996 to April 30, 1997. While FEBTC
claimed that the period of said credit line was extended up to July 31,
1997, PDCP was not notified of the extension. At any rate, the RTC
found that "no evidence had been adduced to show that Sengkon
availed of any loan under the credit line up to July 31, 1997," which was
the period of the extension.
Notably, while PDCP demanded from FEBTC for the segregation of
Sengkon's availments under the Credit Line, FEBTC failed to heed
PDCP's valid request and instead demanded for a comprehensive
payment of Sengkon's entire obligation, unmindful of the fact of PDCP's
status as a mere third-party mortgagor and not a principal debtor. As a
third-party mortgagor, the limitation on its liability pertains not only to the
properties it mortgaged but also to the obligations specifically secured
thereby. It is well settled that while a REM may exceptionally secure
future loans or advancements, these future debts must be specifically
described in the mortgage contract. An obligation is not secured by a
mortgage unless it comes fairly within the terms of the mortgage
contract.[46]
In this case, there was simply no evidence to support the conclusion that
the PNs were in fact availments under the Credit Line secured by
PDCP's properties. The PNs that were used by FEBTC in its Petition for
Extrajudicial Foreclosure of Mortgage were all executed beyond the
extended duration of Sengkon's Credit Line (or until July 1997). While
FEBTC wrote a letter[47] dated September 18, 1997, which is a few days
short of the date of the earliest PN (September 23, 1997), addressed to
STI, approving the renewal of the debtor's Credit Line subject to the
condition that the Line "shall be partially secured" by the PDCP's
mortgaged properties, it is worthy to note that this letter did not bear the
conforme of the debtor, lending credence to the trial court's observation.
In this light, FEBTC's failure to heed PDCP's request for the segregation
of the amounts secured by its properties assumes critical significance.
The lack of proof that the availments subject of the foreclosure
proceedings were within the coverage of PDCP's REMs explains
FEBTC's omission.
Despite the foregoing, however, particularly the variance between the
duration of Sengkon's Credit Line and the dates appearing on the face
of the PNs, the CA upheld the validity of the foreclosure based merely
on the similarity in the purpose for which the Credit Line was granted
and the purpose for which the PNs were executed.
On the implied premise that what is material is only the identity of the
debtor whose obligation the mortgagor secures, the CA cited Prudential
Bank v. Alviar[48] and applied the dragnet clause in PDCP's REMs.
According to the CA, since the REMs contain a dragnet clause, then
PDCP's properties can be made to answer even if the PNs supporting
the Petition for Extrajudicial Foreclosure of Mortgage refer to Sengkon's
obligations in its other credit facilities.[49]
The CA unfortunately misapplied the ruling in Prudential Bank. In that
case, the Court's discussion on the application of the blanket mortgage
clause or dragnet clause was not as much as critically important as the
Court's novel application of the doctrine of reliance on security test.
A dragnet clause is a stipulation in a REM contract that extends the
coverage of a mortgage to advances or loans other than those already
obtained or specified in the contract. Where there are several advances,
however, 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
386
therefor or unless there are clear and supportive evidence to the
contrary.[50] This is especially true in this case where the advances were
not only several but were covered by different sub-facilities. Thus, in
Prudential Bank, the Court stated:
In the case at bar, the subsequent loans obtained by respondents were
secured by other securities, thus: PN BD#76/C-345, executed by Don
Alviar was secured by a "hold-out" on his foreign currency savings
account, while PN BD#76/C-430, executed by respondents for Donalco
Trading, Inc., was secured by "Clean-Phase out TOD CA 3923" and
eventually by a deed of assignment on two [PNs] executed by Bancom
Realty Corporation with 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
discussed. Thus, the critical issue is whether the "blanket mortgage"
clause applies even to subsequent advancements for which other
securities were intended, or particularly, to PN BD#76/C-345.
Under American jurisprudence, two schools of thought have emerged
on this question. One school advocates that a "dragnet clause" so
worded as to be broad enough to cover all other debts in addition to the
one specifically secured will be construed to cover a different debt,
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 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.
The latter school represents the better position. The parties having
conformed to the "blanket mortgage clause" or "dragnet clause," it is
reasonable to conclude that they also agreed to an implied
understanding that subsequent loans need not be secured by other
securities, as the subsequent loans will be secured by the first mortgage.
In other words, the sufficiency of the first security is a corollary
component of the "dragnet clause." But of course, there is no prohibition,
as in the mortgage contract in issue, against contractually requiring
other securities for the subsequent loans. Thus, when the mortgagor
takes another loan for which another security was given it could not be
inferred that such loan was made in reliance solely on the original
security with the "dragnet clause," but rather, on the new security given.
This is the "reliance on the security test."
Hence, based on the "reliance on the security test," the California court
in the cited case made 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.
xxxx
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.[51](Citations omitted and
emphasis and underlining ours)
In the present case, PDCP's REMs indeed contain a blanket mortgage
clause in the following language:
That, for and in consideration of credit accommodations obtained from
the [FEBTC], and to secure the payment of the same and those that may
hereafter be obtained, the principal of all of which is hereby fixed at x x
x PESOS x x x, Philippine Currency, as well as those that the [FEBTC]
may extend to the [PDCP], including interest and expenses or any other
obligation owing to the [FEBTC], whether direct or indirect, principal or
secondary, as appears in the accounts, books and records of the
[FEBTC] x x x.[52]
Nonetheless, the parties do not dispute that what the REMs secured
were only Sengkon's availments under the Credit Line and not all of
Sengkon's availments under other sub-facilities which are also secured
by other collaterals.[53] Since the liability of PDCP's properties was not
unqualified, the PNs, used as basis of the Petition for Extrajudicial
Foreclosure of Mortgage should sufficiently indicate that it is within the
387
terms of PDCP's limited liability. In this case, the PNs failed to make any
reference to PDCP's availments, if any, under its Credit Line. In fact, it
did not even mention Sengkon's securities under the Credit Line.
Notably, the Disclosure Statements, which were "certified correct" by
FEBTC's authorized representative, Ma. Luisa C. Ellescas, and which
accompanied the PNs, failed to disclose whether the loan secured
thereby was actually secured or not.
Thus, even if the Court brushes aside the Best Evidence Rule, the
foregoing observations clearly support the trial court's observation that
FEBTC's foreclosure did not actually cover the specific obligations
secured by PDCP's properties.
FEBTC's failure to send personal
notice to the mortgagor is fatal to the
validity of the foreclosure proceedings
Indeed, FEBTC's failure to comply with its contractual obligation to send
notice to PDCP of the foreclosure sale is fatal to the validity of the
foreclosure proceedings. In Metropolitan Bank v. Wong,[54] the Court
ruled that while as a rule, personal notice to the mortgagor is not
required, such notice may be subject of a contractual stipulation, the
breach of which is sufficient to nullify the foreclosure sale, thus:
In resolving the first query, we resort to the fundamental principle that a
contract is the law between the parties and, that absent any showing
that its provisions are wholly or in part contrary to law, morals, good
customs, public order, or public policy, it shall be enforced to the letter
by the courts. Section 3, Act No. 3135 reads:
xxxx
The Act only requires (1) the posting of notices of sale in three public
places, and (2) the publication of the same in a newspaper of general
circulation. Personal notice to the mortgagor is not necessary.
Nevertheless, the parties to the mortgage contract are not precluded
from exacting additional requirements. In this case, petitioner and
respondent in entering into a contract of [REM], agreed inter alia:
"all correspondence relative to this mortgage, including demand letters,
summonses, subpoenas, or notifications of any judicial or extra-judicial
action shall be sent to the MORTGAGOR at 40-42 Aldeguer St. Iloilo
City, or at the address that may hereafter be given in writing by the
MORTGAGOR to the MORTGAGEE."
Precisely, the purpose of the foregoing stipulation is to apprise
respondent of any action which petitioner might take on the subject
property, thus according him the opportunity to safeguard his rights.
When petitioner failed to send the notice of foreclosure sale to
respondent, he committed a contractual breach sufficient to render the
foreclosure sale on November 23, 1981 null and void.[55] (Citation
omitted and italics in the original)
In trivializing FEBTC's failure to send personal notice to PDCP however,
the CA, citing Philippine National Bank v. Nepomuceno Productions,
Inc.,[56] ruled that since the principal object of a notice of sale is not so
much to notify the mortgagor but to inform the public in general of the
particularities of the foreclosure, then personal notice to the mortgagor
may be disregarded.[57] The cited case, however, is inapplicable
because that case did not in fact involve stipulations on personal notice
to mortgagor nor the sending of notice to a wrong address. The issue
involved in that case is whether the parties to the mortgage can validly
waive the statutory requirements of posting and publication and not
whether the bank can ignore a contractual stipulation for personal
notice. Neither is PNB v. Spouses Rabat[58] likewise cited by the CA
applicable because the trial court therein found that the mortgage
contract did not in fact require that personal service of notice of
foreclosure sale be given to the mortgagors. The CA's cavalier disregard
of the mortgagor's contractual right to notice of the foreclosure sale runs
contrary to jurisprudence. In Wong,[59] the Court already had the
occasion to observe:
It is bad enough that the mortgagor has no choice but to yield his
property in a foreclosure proceeding. It is infinitely worse, if prior thereto,
he was denied of his basic right to be informed of the impending loss of
his property. x x x.[60]
While the CA acknowledged that there was indeed a contractual
stipulation for notice to PDCP as mortgagor, it considered the absence
of a particular address in the space provided therefor in the mortgage
contract as merely evincing an expression of "general intent" between
the parties and that this cannot prevail against their "specific intent" that
388
Act No. 3135 be the controlling law between them, citing Cortes v.
Intermediate Appellate Court.[61]
The Court cannot agree with the CA. To begin with, the value of the
doctrine enunciated in Cortes has long been considered questionable
by this Court. Thus, in Global Holiday Ownership Corporation v.
Metropolitan Bank and Trust Company,[62] the Court held:
But what is stated in Cortes no longer applies in light of the Court's
rulings in Wong and all the subsequent cases, which have been
consistent. Cortes has never been cited in subsequent rulings of the
Court, nor has the doctrine therein ever been reiterated. Its doctrinal
value has been diminished by the policy enunciated in Wong and the
subsequent cases; that is, that in addition to Section 3 of Act 3135, the
parties may stipulate that personal notice of foreclosure proceedings
may be required. Act 3135 remains the controlling law, but the parties
may agree, in addition to posting and publication, to include personal
notice to the mortgagor, the non-observance of which renders the
foreclosure proceedings null and void, since the foreclosure
proceedings become an illegal attempt by the mortgagee to appropriate
the property for itself.
Thus, we restate: the general rule is that personal notice to the
mortgagor in extrajudicial foreclosure proceedings is not necessary, and
posting and publication will suffice. Sec. 3 of Act 3135 governing extra-
judicial foreclosure of [REMs], as amended by Act 4118, requires only
posting of the notice of sale in three public places and the publication of
that notice in a newspaper of general circulation. The exception is when
the parties stipulate that personal notice is additionally required to be
given the mortgagor. Failure to abide by the general rule, or its
exception, renders the foreclosure proceedings null and void.[63]
(Citation omitted, italics ours, and emphasis and underlining in the
original deleted)
In fact, the 2002 case of Nepomuceno Productions,[64] cited by the CA,
already made it clear that while personal notice to the mortgagor in
extrajudicial foreclosure proceedings is not necessary, this holds true
only if the parties did not stipulate therefor. Stated differently, personal
notice is necessary if the parties so agreed in their mortgage contract.
In the present case, the parties provided in their REMs that:
12. All correspondence relative to this mortgage, including demand
letters, summonses, subpoenas, or notifications of any judicial or
extrajudicial action shall be sent to the [PDCP] at _______________ or
at the address that may hereafter be given in writing by the [PDCP] to
the [FEBTC]. x x x.[65]
This provision clearly establishes the agreement between the parties
that personal notice is required before FEBTC may proceed with the
foreclosure of the property and thus, FEBTC's act of proceeding with the
foreclosure despite the absence of personal notice to the mortgagor was
its own lookout.
That the portion on the mortgagor's address was left in blank cannot be
simply swept under the rug as "an expression of general intent" that
cannot prevail of the parties' specific intent not to require personal
notice. Apart from the fact that this reasoning is based on a questionable
doctrine, the CA's ruling completely ignored the fact that the mortgage
contract containing said stipulation was a standard contract prepared by
FEBTC itself. If the latter did not intend to require personal notice, on
top of the statutory requirements of posting and publication, then said
provision should not have at all been included in the mortgage contract.
In other words, the REMs in this case are contracts of adhesion, and in
case of doubt, the doubt should be resolved against the party who
prepared it.[66]
Accordingly, the CA should have considered the "doubt" created by the
blank space in the mortgage contract against FEBTC and not in its favor.
Nonetheless, even if the Court ignores this particular rule of
interpretation, the fact that FEBTC caused the sending of a notice, albeit
at a wrong address, to PDCP is itself a clear proof that the parties did
intend to impose a contractual requirement of personal notice, FEBTC's
undisputed breach of which sufficiently nullifies the foreclosure
proceeding.
With the foregoing, the Court finds it unnecessary to discuss PDCP's
argument based on the alleged violation of its constitutional right against
impairment of obligations and contract.
WHEREFORE, premises considered, the petition is GRANTED. The
Decision dated November 25, 2009 and Resolution dated February 2,
2010 of the Court of Appeals in CA-G.R. CV No. 89755 are hereby
389
ANNULLED and SET ASIDE. The Decision dated April 16, 2007 of the
Regional Trial Court of Quezon City, Branch 222, in Civil Case No. Q01-
44630 is REINSTATED and AFFIRMED.

SO ORDERED.

390
 SPOUSES FRANCIS N. CELONES AND FELICISIMA CELONES,
PETITIONERS, VS. METROPOLITAN BANK AND TRUST
COMPANY AND ATTY. CRISOLITO O. DIONIDO, RESPONDENTS.
TIJAM, J.:
Before Us is a petition for review on certiorari[1] filed by petitioners
Spouses Francis N. Celones and Felicisima Celones (Spouses
Celones), against respondents Metropolitan Bank and Trust Company
(Metrobank) and Atty. Crisolito O. Dionido (Atty. Dionido), assailing the
Decision[2] dated April 14, 2014 and the Resolution[3] dated December
11, 2014 of the Court of Appeals (CA) in CA-G.R. CV No. 96236,
reversing the Order[4] dated September 1, 2010 of the Regional Trial
Court (RTC) of Pasig City, Branch 154, declaring the Memorandum of
Agreement[5](MOA) without force and effect and declaring that Spouses
Celones were the ones who redeemed the mortgaged properties.
Antecedent Facts
The Spouses Celones together with their company, Processing Partners
and Packaging Corporation (PPPC), obtained various loans from
Metrobank and for which they mortgaged various properties.[6] The total
obligation of Spouses Celones with Metrobank was P64,474,058.73.[7]
The Spouses Celones defaulted in paying their loan, as such,
Metrobank foreclosed all the mortgaged properties. During the
foreclosure sale, Metrobank was declared as the winning bidder. The
certificates of sale were issued on July 2007. Prior to the expiration of
the one year redemption period, Metrobank filed petitions for issuance
of writs of possession before several courts to take possession of the
foreclosed properties.[8]
Sometime in 2007, the spouses Celones offered to redeem the
properties from Metrobank. The latter issued a Conditional Notice of
Approval for Redemption[9] (CNAR) dated December 13, 2007 stating
that the offer of Spouses Celones to redeem the property in the amount
of P55 Million has been approved to be paid on or before December 20,
2007.[10] Pressed for time, Spouses Celones sought the help of banking
and financing institutions who are willing to extend them a loan. Finally,
they found Atty. Dionido who agreed to loan them the said amount.[11]
Atty. Dionido then issued two (2) manager's check, one amounting to
P35 Million and another amounting to P20 Million.[12]
In lieu of executing a loan agreement, Spouses Celones, PPPC,
Metrobank and Atty. Dionido executed a MOA, wherein the parties
agreed for the subrogation of Atty. Dionido to all the rights, interests of
Metrobank over the loan obligation of Spouses Celones and the
foreclosed properties.[13]
Upon receipt of the two manager's checks, Metrobank issued Payment
Slips in favor of Spouses Celones.[14] It likewise caused the dismissal of
the petitions for issuance of writs of possession on the ground that
Spouses Celones had already redeemed the properties.[15]
On the belief that they have redeemed the foreclosed properties, the
Spouses Celones demanded from Metrobank the issuance of a
Certificate of Redemption. However, the latter refused to issue the same
on the ground that all its rights and interests over the foreclosed
properties had been transferred to Atty. Dionido, as such, he should be
the one to issue the said certificate.[16]
Meanwhile, Atty. Dionido sent several demand letters to Spouses
Celones to vacate the foreclosed properties in view of the expiration of
the redemption period without Spouses Celones redeeming the
same.[17]
Aggrieved, Spouses Celones filed before the trial court a case for
Declaratory Relief and Injunction to compel Metrobank to issue the
certificates of redemption and to deliver to them the certificates of title
over the foreclosed properties.[18]
On September 1, 2010, the RTC issued an Order[19] in favor of Spouses
Celones, thus:
WHEREFORE, judgment is hereby rendered declaring the questioned
[MOA] without force and effect as the same has not been fully executed.
The Court further declares the [Spouses Celones] to be the
redemptioners of their foreclosed properties and directs defendant
Metrobank to execute and deliver the corresponding certificates of
redemption over the said properties and turn-over all the Transfer
Certificates of Titles covering the same to [Spouses Celones] so that
they could be registered in accordance with Section 29, Rule 39 of the
Revised Rules of Court.
On the other second transaction, the Court hereby finds that the
transaction between the [Spouses Celones] and defendant [Atty.]
Dionido is one of a simple loan.
Lastly, the writ of preliminary injunction is hereby made permanent. SO
ORDERED.[20]
Upon appeal to the CA, the latter reversed the RTC Order and rendered
a Decision[21] dated April 14, 2014, thus:
WHEREFORE, premises considered, the instant appeal is hereby
GRANTED. The Order dated September 1, 2010 issued by the [RTC] of
Pasig City, Branch 154, in the case for Declaratory Relief and Injunction,
391
docketed as SCA No. 3270-PSG is hereby REVERSED and SET
ASIDE.
Accordingly, the [MOA] dated December 20, 2007 entered into by
[Metrobank], [PPPC], [Spouses Celones] and [Atty. Dionido], is declared
a Contract of Subrogation which entitles Atty. Dionido to be subrogated
to the rights of Metrobank as a foreclosure buyer. And having failed to
redeem the property within the redemption period, the [Spouses]
Celones are hereby DIRECTED to immediately and voluntarily
surrender the possession of the foreclosed properties to Atty. Dionido in
accordance with the provisions of the said [MOA].
The [Spouses] Celones are ORDERED to pay Atty. Dionido the loan
amount of Two Million Five Hundred Thousand (P2,500,000.00) Pesos
as payment for the loan they contracted from the latter with legal interest
thereon at the rate of six (6%) percent per annum from the time of its
availment, December 20, 2007, until fully paid.
Additionally, the [Spouses] Celones are ordered to pay Atty. Dionido
moral damages in the amount of Five Hundred Thousand (P500,000.00)
Pesos, the amount of Three Hundred Thousand (P300,000.00) Pesos,
as exemplary damages, and Fifty Thousand (P50,000.00) Pesos by way
of attorney's fees. The [Spouses] Celones are likewise ORDERED to
pay Metrobank the amount of Three Hundred Thousand (P300,000.00)
Pesos as exemplary damages and Fifty Thousand (P50,000.00) Pesos
as attorney's fees. With Costs. SO ORDERED.[22]
The Motion for Reconsideration[23] filed by the spouses Celones was
likewise denied by the CA in its Resolution[24]dated December 11, 2014.
Hence, this petition.
Issue
Whether or not Spouses Celones were able to redeem the
foreclosed properties from Metrobank using the loan acquired
from Atty. Dionido.
Petitioners' Arguments
Spouses Celones claimed that the transaction between them and Atty.
Dionido was that of a loan.[25] Further, Metrobank's subsequent acts
shows that spouses Celones has redeemed the property, such as the
issuance of payment slips in the name of Spouses Celones and the filing
of several motions to dismiss in the civil cases for issuance of a writ of
possession pending before different courts due to the Spouses Celones'
redemption of the foreclosed properties.
Respondents' Arguments
On the other hand, Metrobank and Atty. Dionido both argued that the
Spouses Celones were not able to redeem the property because the
CNAR has been novated by the MOA executed by the parties on
December 20, 2007. Under the MOA, the P55 Million paid by Atty.
Dionido to Metrobank was in consideration of the transfer and
assignment of rights of Metrobank to Atty. Dionido over the foreclosed
properties. Metrobank claimed that if there was indeed a redemption that
occurred, it should be Atty. Dionido who should issue a Certificate of
Redemption in view of the transfer and assignment of its rights to the
latter.
Ruling of the Court
The petition is impressed with merit.
It is undisputed that the amount of P55 Million paid to Metrobank came
from Atty. Dionido. The controversy lies as to what transaction occurred
between spouses Celones and Atty. Dionido. Spouses Celones claimed
that it was a loan transaction while Atty. Dionido claimed that it was in
consideration of his subrogation to the rights and interests of Metrobank
over the foreclosed properties.
Under the CNAR dated December 13, 2007, Metrobank approved the
offer of Spouses Celones to redeem the property in the amount of P55
Million and that the same should be paid on or before December 20,
2007.[26]
In order to finance the said amount, Spouses Celones sought the help
of banking and financing institutions to pay off the said amount. Their
search led them to Atty. Dionido who agreed to loan them the amount
of P55 Million. On December 20, 2007, to finalize their transaction and
with the participation of Metrobank, the parties executed a MOA. Under
the MOA, the following terms are stipulated:
1. DIONIDO shall pay Metrobank the amount of FIFTY-FIVE MILLION
PESOS (P55,000,000.00) upon execution of this Agreement. The said
amount shall be exclusive of all taxes, fees and charges, which shall
likewise be exclusively assumed by DIONIDO that may be incurred
arising from the execution and subsequent consummation of this
Agreement, including friction costs and expenses associated with the
redemption transaction; and all realty taxes, dues and other
assessments on the Subject Properties from date of foreclosure. The
payment shall be made in the form of Manager's Check in the name of
METROBANK and shall be deposited via METROBANK's bills payment
facility.
2. For and in consideration of the said payment by DIONIDO,
METROBANK, PPPC, and SPS. CELONES agree to fully and
absolutely assign and transfer all of METROBANK's rights, interests,
and authorities over the Assumed Obligation and the Subject Properties
to DIONIDO, including those arising from the foreclosure proceedings
and foreclosure sale made by METROBANK over the Subject
Properties, and the authority to sign the Deed of Redemption over the
392
Subject Properties. METROBANK agree to the full subrogation of its
rights in favor of DIONIDO, and to free PPPC and SPS. CELONES from
the Assumed Obligation.[27]
Metrobank and Atty. Dionido claimed that the MOA being of a later date,
superseded and novated the CNAR. As such, the redemption agreed
upon by Metrobank and Spouses Celones was no longer controlling.
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.[28] In
order that an obligation may be extinguished by another which substitute
the same, it is imperative that it be so declared in unequivocal terms, or
that the old and the new obligations be on every point incompatible with
each other.[29] Thus, "[n]ovation must be stated in clear and unequivocal
terms to extinguish an obligation. It cannot be presumed and may be
implied only if the old and new contracts are incompatible on every
point."[30]
As held in the case of Salazar v. J.Y. Brothers Marketing Corp.:[31]
x x x Novation is done by the substitution or change of the obligation by
a subsequent one which extinguishes the first, either by changing the
object or principal conditions, or by substituting the person of the debtor,
or by subrogating a third person in the rights of the creditor. Novation
may:
[E]ither be extinctive or modificatory, much being dependent on the
nature of the change and the intention of the parties. Extinctive novation
is never presumed; there must be an express intention to novate; in
cases where it is implied, the acts of the parties must clearly
demonstrate their intent to dissolve the old obligation as the moving
consideration for the emergence of the new one. Implied novation
necessitates that the incompatibility between the old and new obligation
be total on every point such that the old obligation is completely
superceded by the new one. The test of incompatibility is whether they
can stand together, each one having an independent existence; if they
cannot and are irreconcilable, the subsequent obligation would also
extinguish the first.
An extinctive novation would thus have the twin effects of, first,
extinguishing an existing obligation and, second, creating a new one in
its stead. This kind of novation presupposes a confluence of four
essential requisites: (1) a previous valid obligation, (2) an agreement of
all parties concerned to a new contract, (3) the extinguishment of the old
obligation, and (4) the birth of a valid new obligation. Novation is merely
modificatory where the change brought about by any subsequent
agreement is merely incidental to the main obligation (e.g., a change in
interest rates or an extension of time to pay; in this instance, the new
agreement will not have the effect of extinguishing the first but would
merely supplement it or supplant some but not all of its provisions.)[32]
(Emphasis ours)
Examination of the MOA showed no express stipulation as to the
novation or extinction of the CNAR. Thus, for implied novation to exist,
it is necessary to determine whether the CNAR and the MOA are
incompatible on every point such that they cannot be reconciled and
stand together.
Under the CNAR, it is provided that Metrobank approved the offer of
Spouses Celones to redeem the property in the amount of P55 Million.
While under the MOA, Metrobank assigned all its rights and interests to
Atty. Dionido over the foreclosed properties including the issuance of a
certificate of redemption.
After careful scrutiny of the records, we find that the CNAR only deals
with the redemption right of Spouses Celones while the MOA deals with
the assignment of credit of Metrobank to Atty. Dionido. As such, the
CNAR and the MOA can be reconciled and can both stand together.
Under the MOA, Metrobank assigned all its rights and interests over the
foreclosed properties to Atty. Dionido. "An assignment of credit has
been defined as the process of transferring the right of the assignor to
the assignee who would then have the right to proceed against the
debtor."[33] Atty. Dionido being an assignee of Metrobank, he merely
steps into the shoes of the assignor, Metrobank. Atty. Dionido can
acquire no greater right than that pertaining to his assignor. Thus, when
Atty. Dionido agreed to the assignment of Metrobank's rights and
interests over the foreclosed properties under the MOA, he acquires
exactly the rights and interests over the foreclosed properties as of the
date of the signing of the MOA.
Unfortunately for Atty. Dionido, he merely acquired what right Metrobank
has, as of the date of the signing of the MOA, which was the issuance
of a Certificate of Redemption, because as of that date, the foreclosed
properties have already been redeemed by Spouses Celones from
Metrobank. The fact that Spouses Celones had already redeemed the
foreclosed properties was evidenced by the fact that as soon as
Metrobank was paid the redemption amount, the latter issued payment
slips in the name of Spouses Celones. Further, after the payment of the
P55 Million, Metrobank caused the dismissal of the civil cases it filed for
issuance of writ of possession due to the fact that the foreclosed
properties had already been redeemed by the Spouses Celones. Had
the P55 Million been paid by Atty. Dionido to Metrobank as a
consideration for the assigment of credit, the receipt should have been
under the name of Atty. Dionido and not under the name of Spouses
Celones.
393
Finding that the foreclosed properties had already been redeemed by
Spouses Celones, the Certificate of Redemption should naturally be
issued by the assignee, Atty. Dionido. To accept his contention that the
redemption period of the foreclosed properties had already lapsed and
that Spouses Celones has lost their right over the foreclosed properties
is to go against the basic principle of assigment of credit that the
assignee cannot acquire no greater right than the assignor.
Atty. Dionido however is not left without any remedy or recourse against
Spouses Celones. Under Article 1236 of the Civil Code, it is provided
that:
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. (Emphasis ours)
Thus, Atty. Dionido has the right to demand payment of the amount of
P55 Million from Spouses Celones since it is undisputed that such
amount came from Atty. Dionido. It is unjust enrichment on the part of
Spouses Celones to acquire the amount ofP55 Million and not be
required to pay the same. To save on the time and resources of this
Court and because of the possibility that this case will once again reach
this Court, although this case is not an action to recover a sum of money,
we deem it proper to rule on the propriety of Atty. Dionido's right to
recover the said sum from Spouses Celones. Thus, Spouses Celones
should pay the amount of P55 Million to Atty. Dionido with legal interest
counted from the date of finality of this Decision.
WHEREFORE, premises considered, the petition is GRANTED. The
Decision dated April 14, 2014 and the Resolution dated December 11,
2014 of the Court of Appeals in CA-G.R. CV No. 96236 are hereby
REVERSED and SET ASIDE.

Accordingly, a new one is entered ORDERING Atty. Crisolito O. Dionido

to issue a Certificate of Redemption in favor of Spouses Francis N.
Celones and Felicisima Celones.
The Spouses Francis N. Celones and Felicisima Celones are hereby
ORDERED to pay the amount of P55 Million plus legal interest of six
percent (6%) per annum to Atty. Crisolito O. Dionido counted from
finality of this Decision until full payment thereof.
SO ORDERED.

394
 FOOD FEST LAND, INC. AND JOYFOODS CORPORATION,
PETITIONERS, VS. ROMUALDO C. SIAPNO, TEODORO C.
SIAPNO, JR. AND FELIPE C. SIAPNO, RESPONDENTS.
PERALTA, J.:
At bench is an appeal[1]from the Decision[2] dated January 6, 2016 and
the Resolution[3] dated July 22, 2016 of the Court of Appeals (CA) in CA
G.R. CV No. 101302, affirming the Decision and Resolution, dated
February 20, 2013 and July 5, 2013, respectively, of the Regional Trial
Court (RTC), Branch 41, Dagupan City in Civil Case No. 2009-0084-D.
THE FACTS
The Contract of Lease
Respondents Romualdo C. Siapno, Teodoro C. Siapno and Felipe C.
Siapno are the registered owners[4] of a 521-square-meter parcel of land
(subject land) in Dagupan City.
On April 14, 1997, respondents entered into a Contract of Lease[5]
involving the subject land with petitioner Food Fest Land, Inc. (Food
Fest), a local corporation who wanted to use such land as the site of a
fastfood restaurant.[6]The contract has the following particulars —
1. The term of the lease shall be fifteen (15) years.[7] On the
third (3rd) year of the lease, however, Food Fest shall have
the right to pre-terminate the lease.[8]
2. During the subsistence of the lease, Food Fest shall have
the right to use the subject land for such lawful purposes,
including but not limited to the operation of a restaurant
business therein.[9]
3. In consideration therefor, Food Fest shall pay respondents
rent in the following amounts:[10]
1. For the first year, the rate of rent shall be
P43,901.00 per month.[11]
2. For the succeeding years, however, the rate of
monthly rent shall escalate by 10% annually.
They are payable within the first ten (10) days of
the following month.
In addition to the foregoing, the Contract of Lease also featured a non-
waiver clause:[12]
16. NON-WAIVER- The failure of the parties to insist upon a strict
performance of any of the terms, conditions and covenants hereof shall
not be deemed a relinquishment or waiver of any rights or remedy that
said party may have, nor shall it be construed as a waiver of any
subsequent breach or default of the terms, conditions and covenants
hereof which shall continue to be in full force and effect. No waiver by
the parties of any of their rights under this Contract of Lease shall be
deemed to have been made unless expressed in writing and signed by
the party concerned. [13]
Pursuant to the Contract of Lease, Food Fest proceeded to build and
operate its restaurant within the subject land.
In October 1998, Food Fest assigned all its rights and obligations under
the Contract of Lease unto one Tuck:y Foods, Inc. (Tucky Foods).[14] In
September 2001, Tucky Foods assigned all the said rights and
obligations under such contract to petitioner Joyfoods Corporation
(Joyfoods).[15]
Payment of Rentals and Pre-Termination of the Lease
From the first up to the fifth year of the lease,[16] Food Fest and its
assignees paid rent at the monthly rate prescribed for under the Contract
of Lease.[17] The rental escalation clause in the said contract, which -
requires the annual escalation of monthly rent by 10%, was consistently
observed on the second to the fifth year.
Thus, by the fifth year of the lease,[18] Joyfoods was paying the
respondents a monthly rent of P64,275.45.
The rental escalation clause, however, was not observed during the
sixth up to the tenth year of the lease. For the sixth up to ninth year of
the lease,[19] respondents continued to receive rent at the rate of
P64,275.45 per month.[20]On the tenth year of the lease,[21] on the other
hand, respondents were paid rent at the rate of P68,774.71 per
month.[22]
At the start of the eleventh year of the lease,[23] however, respondents
called the attention of Food Fest and Joyfoods regarding its intent to
enforce the rental escalation clause of the Contract of Lease for the said
year.[24]Accordingly, respondents informed Food Fest and Joyfoods that
the rent for the eleventh year of the lease shall be P113,867.89 per
month, unless such amount is renegotiated.
In reply, Food Fest and Joyfoods, on June 27, 2007, sent to respondents
a letter[25] wherein they acknowledged that the applicable rate of rent
following the Contract of Lease would indeed be P113,867.89 per
month, but proposed that the same be reduced to only P80,000.00 per
month. The proposal was rejected by the respondents.
On July 4, 2007, Joyfoods sent to respondents another letter[26] wherein
it proposed the amount of P85,000.00 as monthly rental for the eleventh
and twelfth years of the lease. But this too was met with rejection by the
respondents.
395
On October 27, 2008, during the lease's twelfth year, Joyfoods sent to
respondents a letter[27] conveying its intent to pre-terminate the lease. In
the letter, Joyfoods stated that "due to severe and irreversible business
losses" it will cease its operations on the 29th of November 2008 and
will turnover the subject land to the respondents on the 131h of
December 2008.[28]
The Complaint and the Rulings of the RTC and the CA
On April 20, 2009, respondents lodged before the RTC of Dagupan City
a Complaint[29] for sum of money against Food Fest and Joyfoods. In it,
respondents mainly seek payment of the sum of P988,907.74 from Food
Fest and Joyfoods - which sum respondents refer to as the "escalation
for the years 2007 and 2008."[30] In essence, the sum P988,907.74 was
supposed to represent the balance between the amount of rent due
under the Contract of Lease for the period beginning from the lease's
eleventh year of up to its pre-termination, on one hand, and the amount
of rent that was actually paid by Food Fest and Joyfoods during the said
period, on the other (unpaid balance).
On February 20, 2013, the RTC rendered a Decision[31] in favor of
respondents, ordering Food Fest and Joyfoods to, among others, pay
respondents the unpaid balance in the amount of P988,907.74. Food
Fest and Joyfoods filed a Motion for Reconsideration, but such motion
was denied by the RTC via a Resolution[32] dated July 5, 2013.
Food Fest and Joyfoods appealed to the CA.
On January 6, 2016, the CA rendered a Decision[33] dismissing such
appeal and affirming the decision of the RTC. Food Fest and Joyfoods
moved for a reconsideration, but the CA was steadfast.[34]
Hence, this appeal.
The Present Appeal[35]
In substance, Food Fest and Joyfoods admit the existence of an unpaid
balance under the Contract of Lease. They, however, deviate from the
decisions of the RTC and the CA on two (2) points:
First. Food Fest and Joyfoods challenge with the amount of the unpaid
balance awarded by the RTC and the CA. Instead of the sum of
P988,907.74 claimed by the respondents, Food Fest and Joyfoods
assert that the proper award should have been just for P382,055.22.
Food Fest and Joyfoods allege that the rental escalation clause of the
Contract of Lease — by reason of an unwritten agreement between
Joyfoods and the respondents — was actually suspended indefinitely
beginning from the sixth year of the lease. Hence, according to Food
Fest and Joyfoods, the monthly rent payable from the sixth year of the
lease onwards is no longer determined by the stipulations of the
Contract of Lease, but by negotiation between Joyfoods and
respondents.
For the eleventh and twelfth year of the lease, Food Fest and Joyfoods
aver that respondents and Joyfoods had actually come to an agreement
fixing the monthly rentals thereon at P90,000.00 per month. Such
agreement was precipitated, say Food Fest and Joyfoods, by Joyfoods'
letter dated July 4, 2007 to respondents. To recall, it is in such letter that
Joyfoods proposed the amount of P85,000.00 as monthly rental for the
eleventh and twelfth year of the lease.
Food Fest and Joyfoods assert that the respondents replied to the July
4, 2007 letter and .made a counter-proposal of P90,000.00 monthly rent
for the eleventh and twelfth years of the lease. The counter-proposal
was supposedly handwritten by the respondents in the July 4, 2007
letter, which they then sent back via facsimile to Joyfoods. And
Joyfoods, apparently, agreed to this counter-proposal.
Food Fest and Joyfoods point out that when the rate of monthly rent for
the eleventh and twelfth year is reckoned at P90,000.00, the unpaid
balance would have amounted only to P382,055.22, to wit:
A. Amount of rent rightfully due under for the
period beginning from the lease's eleventh year of
up to its pre-termination (18 months) P90,000.00 x 18
months =
P1,620,000.00
B. Amount of rent actually paid by Food Fest and
Joyfoods during the same period P 68,774.71 x 18
months=
P1,237,944.78
UNPAID BALANCE (A-B) P1,620,000.00-
P1,237,944.78 =
P382,055.22
Second. Food Fest and Joyfoods also disagree with their respective
liabilities for the unpaid balance as held by the RTC and the CA. Food
Fest and Joyfoods submit that both of them cannot be held liable for the
said balance, in light of Food Fest's assigmnent of its rights and
obligations under the Contract of Lease to Tucky Foods in 1998 and of
Tucky Foods' assignment of the same rights and obligations to Joyfoods
in 2001. Under such circumstances, it is postulated that the liability for
the unpaid balance now solely rests with Joyfoods.
Our Ruling
We deny the appeal. We affirm the decision of the CA.
I- We reject the challenge against the amount of the unpaid balance
awarded by the RTC and the CA.
Food Fest and Joyfoods' position pegging the unpaid balance at
P382,055.22 is problematic. It proceeds from a factual assumption that
contradicts the actual factual findings of the RTC and the CA. As is
396
apparent from their arguments, Food Fest and Joyfoods' position is
hinged on the existence of two purported (2) agreements between the
respondents and Joyfoods, to wit:
1. An agreement suspending indefinitely the rental escalation
clause of the Contract of Lease (first agreement); and
2. An agreement fixing the rate of rent for the lease's eleventh
and twelfth year at P 90,000 per month (second agreement).
Such an assumption, however, was already rebuffed by the RTC and
the CA. Both courts did not consider the first and second agreements as
established facts, mainly because they found that the existence of such
agreements is not supported by any credible evidence on record.[36]
Accordingly, the RTC and the CA found nothing that could bar the
respondents from enforcing and applying the rental escalation clause for
the eleventh and twelfth years of the lease.[37]
We are not inclined to review - much less disturb -the foregoing factual
findings of the RTC and the CA, knowing fully well our limitations as an
appellate court and the proper office of appeals by certiorari.[38] This
Court, as has often been said, is not a trier of facts.[39] In an appeal by
certiorari, such as the instant case, We generally defer to the factual
findings of lower courts and confine our review exclusively to the
assigned errors of law. Though this norm is by no means absolute, it
bears to stress that any deviation therefrom is only ever taken under
defined circumstances — such as when the factual finding of the trial
court is reversed by the CA on appeal, or when such finding is
"manifestly mistaken, absurd, or impossible" or the same is otherwise
"grounded entirely on speculation, surmises, or conjectures" or in
instances where there has been grave abuse of discretion.[40] None of
such circumstances, however, affect the factual determinations in
discussion.
All in all, We find no cogent reason to overturn the RTC and the CA's
determination negating the existence of the first and second agreements
due to lack of credible proof. Without such agreements, Food Fest and
Joyfoods' challenge against the amount of the unpaid balance inevitably
loses its potency. We, therefore, cannot accept such challenge and must
instead sustain the amount of unpaid balance awarded by the RTC and
the CA.
II- We also reject the plea to limit liability for the unpaid balance
solely with Joyfoods.
Food Fest and Joyfoods' plea is, in substance, an invocation of the
concept of novation - particularly, novation of an obligation by the
substitution of the person of the debtor. Their basic assertion is that the
assignment by Food Fest of its rights and obligations under the Contract
of Lease to Tucky Foods, and the assignment by Tucky Foods of the
same rights and obligations to Joyfoods, ought to have resulted in Food
Fest's release from its obligations under the Contract of Lease and its
substitution therein by Joyfoods.
We do not agree.
Novation is the extinguishment of an obligation by its modification and
replacement by a subsequent one. It takes place when an obligation is
modified in any of the following ways: (a) by changing its object or
principal conditions, (b) by substituting the person of the debtor, or (c)
by subrogating a third person in the rights of the creditor.[41] In such
instances, the obligation ceases to exist as a new one — bearing the
modifications agreed upon — takes its place. Novation is, thus, a
juridical act of dual function— for as it extinguishes an obligation, it also
creates a new one in lieu of the old.[42]
Novation of an obligation by substituting the person of the debtor, as the
term suggests, entails the replacement of the debtor by a third person.
When validly made, it releases the debtor from the obligation which is
then assumed by the third person as the new debtor. To validly effect
such kind of novation, however, it is not enough for the debtor to merely
assign his debt to a third person, or for the latter to assume the debt of
the former; the consent of the creditor to the substitution of the debtor is
essential and must be had. As Article 1293 of the Civil Code provides:
ARTICLE 1293. Novation which consists in substituting a new debtor in
the place of the original one, may be made even without the knowledge
or against the will of the latter, but not without the consent of the creditor.
Payment by the new debtor gives him the rights mentioned in articles
1236 and 1237.[43]
In De Cortes v. Venturanza,[44] We explained the rationale of this
requirement:
x x x A personal novation by substitution of another in place of the debtor
may be effected with or without the knowledge of the debtor but not
without the consent of the creditor (Art. 1205, Civil Code [now Art. 1293,
New Civil Code]). This is the legal provision applicable to the case at
bar. The reason for the requirement that the creditor give his consent to
the substitution is obvious. The substitution of another in place of the
debtor may prevent or delay the fulfillment or performance of the
obligation by reason of the inability or insolvency of the new debtor;
hence, the consent of the creditor is necessary. This kind of substitution
may take place without the knowledge of the debtor when a third party
assumes the obligation of the debtor with the consent of the creditor.
The novation effected in this way is called expromision. Substitution may
also take place when the debtor offers and the creditor accepts a third
397
party who assumes the obligation of the debtor. The novation made in
this manner is called delegacion. (Ali. 1206, Civil Code [now Art. 1295,
New Civil Code]). In these two modes of substitution, the consent of the
creditor is always required. x x x."[45]
The consent of the creditor to the substitution of a debtor, as a rule, may
be given expressly or impliedly.[46] As can be observed, the law does not
require that the creditor's consent to the substitution to come at a
particular time or in a particular form.[47] What it only demands is that the
consent of the creditor be given one way or another.[48] This
notwithstanding, there is also nothing that precludes the parties in an
obligation, pursuant to their freedom to contract,[49] to agree to a specific
form by which the creditor's consent to any potential novation should be
expressed. Once an agreement is reached that subjects the creditor's
consent to certain formal requirements, such requirements naturally
become binding upon the parties.[50]
Going back to the instant case, We find that the established facts do not
permit the conclusion that novation had taken place.
First. The settled facts do not show that respondents had expressly
consented in writing to the substitution of Food Fest by Joyfoods. The
consent of respondents to such substitution has to be in writing, in . light
of the non-waiver clause of the Contract of Lease. As can be recalled,
the non waiver clause of the Contract of Lease required the parties
thereto to express any waiver of their rights under said contract in writing
lest their waiver be considered null, viz.:
16. NON-WAIVER - The failure of the parties to insist upon a strict
performance of any of the terms, conditions and covenants hereof shall
not be deemed a relinquishment or waiver of any rights or remedy that
said party may have, nor shall it be construed as a waiver of any
subsequent breach or default of the terms, conditions and covenants
hereof which shall continue to be in full force and effect. No waiver by
the parties of any of their rights under this Contract of Lease shall be
deemed to have been made unless expressed in writing and signed by
the party concerned.[51]
Respondents' consent to the substitution of Food Fest falls within the
ambit of the foregoing clause, because a novation by the substitution of
the person of the debtor implies a waiver on the part of the creditor of
his right to enforce the obligation as against the original debtor.[52] This
correlation has been made in the case of Testate Estate of Lazaro Mota
v. Serra:[53]
It should be noted that in order to give novation its legal effect, the law
requires that the creditor should consent to the substitution of a new
debtor. This consent must be given expressly for the reason that, since
novation extinguishes the personality of the first debtor who is to be
substituted by a new one, it implies on the part of the creditor a waiver
of the right that he had before the novation which waiver must be
express under the principle that renuntiatio non praesumitor, recognized
by the law in declaring that a waiver of right may not be performed unless
the will to waive is indisputably shown by him who holds the right.[54]
Verily, without the consent of the respondents — conveyed in the form
required under the Contract of Lease — there can be no substitution of
Food Fest by Joyfoods. On this score alone, Food Fest and Joyfoods'
plea is dismissible.
Second. Yet, even if we are to set aside the non-waiver clause of the
Contract of Lease, Food Fest and Joyfoods' claim of novation is still
doomed to fail. This is so because the consent of respondents to the
substitution of Food Fest, just the same, cannot be deduced or implied
from any of the established acts of the former. Indeed, under the settled
facts, the respondents did nothing in the way of releasing Food Fest
from its obligations other than, perhaps, its acceptance of rental
payments from Joyfoods.
The consent of respondents to the substitution of Food Fest by
Joyfoods, however, cannot be presumed from the sole fact that they
accepted payments from Joyfoods. It is well settled that mere
acceptance by a creditor of payments from a third person for the benefit
of the debtor, sans any agreement that the original debtor will also be
released from his obligation, does not result in novation but merely the
addition of debtors. As Ajax Marketing Development Corporation v.
Court of Appeals[55] instructs:
The well-settled rule is that novation is never presumed. Novation will
not be allowed unless it is clearly shown by express agreement, or by
acts of equal import. Thus, to effect an objective novation, it is imperative
that the new obligation expressly declare that the old obligation is
thereby extinguished, or that the new obligation be on every point
incompatible with the new one. In the same vein, to effect a subjective
novation by a change in the person of the debtor it is necessary that the
old debtor be released expressly from the obligation, and the third
person or new debtor assumes his place in the relation. There is no
novation without such release as the third person who has assumed the
debtor's obligation becomes merely a co-debtor or surety.[56]
All things considered, We find no valid reason to overturn the RTC and
the CA's ruling holding both Food Fest and Joyfoods liable for the unpaid
balance. Under the limited facts of the instant ease, no novation by the
substitution of the person of debtor can be appreciated. Accordingly, ·
Food Fest cannot be considered as released from its obligations under
the Contract of Lease. And Joyfoods' assumption of the debt of Food
Fest only made the former a co-debtor of the latter.[57]
398
WHEREFORE, premises considered, the instant: appeal is DENIED.
the Decision dated January 6, 2016 and the Resolution dated July 22,
2016 of the Court of Appeals in CA-G.R. CV No. 101302 are
AFFIRMED.
SO ORDERED.

399
 RIZAL COMMERCIAL BANKING CORPORATION, PETITIONER, [January 11, 153- 4,490,000.00 [January 11, 15
VS. PLAST-PRINT*INDUSTRIES INC., AND REYNALDO** C. 1995] 95 2000]
DEQUITO, RESPONDENTS.
[January 16, 185- 3,000,000.00 on demand 15
CAGUIOA, J:
1995] 95

The Case [February 9, 465- 1,000,000.00 on demand 15.5

This is a Petition for Review on Certiorari[1] (Petition) filed under Rule 45
of the Rules of Court against the Decision[2]dated May 31, 2011
(assailed Decision) and Resolution[3] dated November 9, 2011 (assailed
Resolution) in CA-G.R. CV No. 89431 rendered by the Court of Appeals
(CA).
The assailed Decision and Resolution stem from an appeal assailing the
Decision[4] dated May 17, 2006 rendered by the Regional Trial Court
(RTC) of Antipolo City, Branch 74 in Civil Case No. 00-5875:
1. Ordering the Register of Deeds of Rizal Province (RD) to cancel
the Certificate of Sale annotated on Transfer Certificate of Title
(TCT) Nos. 499643, 617967, 597336, 597337 and 621037; and
2. Directing petitioner Rizal Commercial Banking Corporation
(RCBC) to (i) make an accounting and re-computation of all
previous payments made by respondent Plast-Print Industries,
Inc. (Plast-Print) in connection with its financial
accommodations with RCBC; and (ii) pay Plast-Print and its
Vice-President for Operations, Reynaldo Dequito (Dequito)
P200,000.00 as attorney's fees and the costs of suit.
The Facts
The undisputed facts, as narrated by the CA, are as follows:
[Plast-Print] applied for credit facilities with [RCBC] in order to have a
bigger working capital and for expansion. The following credit facilities
were provided to Plast-Print: a.) Secured (A) Term Loan for [P]6.65
Million; b.) Secured (C) Loan Line for [P]4.49 Million; and c.)
Import/Domestic [Letters of Credit with Trust Receipts (LC/TR)] Line for
[P]2 Million. The foregoing credit facilities were secured by, among
others, a real estate mortgage over properties covered by TCT Nos.
499643, 617967, 597336, 597337, 621037, 59286 and PT-91458. Plast-
Print availed of the said credit facilities by way of promissory notes [PN]
with the following details:
Date [PN] Amount (in Due Date Interest %
No. Philippine Pesos) (month/day/year) (Per
annum)
1995] 95
[February 13, 514- 4,490,000.00 [February 13, 13.25
1995] 95 2000]
[March 27, 951- 2,000,000.00 [March 27, 2000] 13.51
1995] 95
[April 5, 1058- 490,000.00 on demand 25
1995] 95
Plast-Print also obtained an additional loan by availing of the LC/TR Line
x x x amounting to [P2 Million]. Plast-Print, thus, had a total principal
loan obligation in the amount of [P] 12,980,000.00.
Plast-Print failed to pay its past due obligations and interest under [PN]
Nos. 514-95, 951-95, 185-95, 465-95 and the LC/TR. RCBC, therefore,
sent a letter dated July 31,1997 to Plast-Print, demanding that the latter
settle its account with a warning that the former will be constrained to
proceed with the appropriate legal action if the latter fails to fully settle
its account. Statements of [account] were sent to Plast-Print, reflecting
the outstanding obligations it had.
Plast-Print acknowledged its obligation in a letter dated August 7, 1997,
but stated that based on its records, its outstanding balance was
[P]661,564.45 and as such, it was "not certain if there were any previous
applications to [its] loans that were not transmitted to [its] office x x x
[and would] appreciate any reconciliation to rectify the matter of x x x its
payments."
Plast-Print and RCBC met on October 9, 1997 to reconcile all of the
former's payments. The parties reconciled their accounts and records
and they confirmed that all statements of [account] sent to Plast-Print
were correct, except for three applications of payments for: a.) RCBC
Check No. 21412 for [P843.177.78]; b.) RCBC Check No. 21413 for
P835.733.33]; and c.) OR No. 107556 for [P335.782.22]. Later, RCBC
wrote to Plast-Print, explaining the applications of payment of RCBC
Check Nos. 21412 and 21413 and the cash payment evidenced by OR
No. 107556. RCBC Check Nos. 21412 and 21413 were returned
checks[,] while OR No. 107556 was determined to be a replacement for
returned UCPB Check No. 127374. Plast-Print, however, still failed to
settle its obligations.

400
Plast-Print offered to restructure its obligations and RCBC agreed on the
condition that the former [immediately] pay [P]4,000,000.00. Two post-
dated checks for [P]2,000,000.00 each was issued by Plast-Print, of
which one was dishonored. A [written] demand[5] was, hence, made to
Plast-Print for the payment of its obligations which amounted to [P]
13,452,372.85 as of October 10, 1997 [within five days from receipt
thereof],[6] but no payment was made.[7] (Emphasis supplied)
RCBC's petitions for extra-judicial foreclosure
On May 4, 1998, RCBC filed with the RTC separate petitions for extra-
judicial foreclosure of properties mortgaged in its favor.[8]
On November 12, 1998, some properties covered by Plast-Print's real
estate mortgage (REM) were sold in a public auction,[9] where RCBC
emerged as highest bidder. It appears that a second public auction for
the remaining properties covered by said REM[10] was subsequently
scheduled on November 30, 1998.[11]
Plast-Print's petition for suspension of payments
Unknown to RCBC, Plast-Print had filed before the Securities and
Exchange Commission (SEC) a petition for suspension of payments
(SEC Petition) on October 5, 1998.[12]
Thus, on November 16, 1998, the SEC ordered a 30-day suspension of
all payments due Plast-Print's creditors. Consequently, the second
public auction scheduled on November 30, 1998 did not push
through.[13]
Following the filing of the SEC Petition, negotiations between and
among Plast-Print and its creditors ensued. These negotiations led to
the execution of a Restructuring Agreement[14] dated June 25, 1999
(Restructuring Agreement), which was subsequently approved by the
SEC in its Order dated July 22, 1999 (SEC Order).[15]
Under the Restructuring Agreement, Plast-Print acknowledged its
indebtedness to RCBC in the amount of P11,216,178.22 as of
December 31, 1998. In this regard, Plast-Print bound itself to pay said
obligation within a term of six years, with grace periods of one year and
two years for interest and principal payments, respectively.[16] For this
purpose, Plast-Print executed in favor of RCBC a non-negotiable
promissory note in the amount of P11,216,178.22, due on December
31, 2004. It appears, however, that Plast-Print still failed to settle its
obligations with RCBC as agreed. Thus, on August 21, 2000, Plast-Print
negotiated for yet another moratorium on its overdue payments, but
RCBC no longer acceded.[17]
Plast-Print's RTC Complaint
A day after RCBC denied its plea for another moratorium, Plast-Print
and Dequito filed before the RTC a Complaint[18] for accounting,
cancellation of bid price and sheriffs Certificate of Sale, injunction and
damages (RTC Complaint) against RCBC.
In sum, the RTC Complaint alleged that Plast-Print made several
payments in favor of RCBC amounting to P5,506,152.00 which were not
applied to its Statement of Account, thus prompting it to request for a
reconciliation and re-accounting of its outstanding obligations.[19] On this
score, Plast-Print claims that it was alarmed when it received a Notice
of Sheriffs Sale on May 5, 1998 indicating that its total outstanding
obligations with RCBC already reached the sum of P9,021,161.24 as of
October 10, 1997.[20]
In response, RCBC filed a Motion to Dismiss[21] alleging that: (i) the RTC
lacks jurisdiction in view of the pending SEC Petition; (ii) the RTC
Complaint had been supported by a defective certification against forum
shopping (iii) Plast-Print and Dequito are guilty of forum shopping; and
(iv) the RTC Complaint is barred by a prior judgment, in view of the SEC
Order approving the Restructuring Agreement.[22]
The RTC denied said motion in its Order[23] dated April 16, 2001 (RTC
Order). RCBC's subsequent motion for reconsideration was also denied.
Aggrieved, RCBC filed a petition for certiorari (RCBC's petition for
certiorari) before the CA praying for the annulment of the RTC Order.
This petition, however, was dismissed for lack of merit. RCBC no longer
sought reconsideration, rendering the dismissal final.[24]
Meanwhile, in RCBC's Answer Ad Cautelam[25] to the RTC Complaint,
RCBC reiterated the grounds raised in its Motion to Dismiss, and in
addition, argued that the RTC Complaint is barred not only by prior
judgment, but also by estoppel and laches.[26]
On May 17, 2006, the RTC issued a Decision in favor of Plast-Print and
Dequito. The dispositive portion of said Decision reads:
WHEREFORE, premises considered, the injunction issued in this case
is made permanent and judgment is hereby rendered in favor of [Plast-
Print and Dequito] and against [RCBC] ordering x x x:
1) the Register of Deeds of Rizal Province to cancel the Certificate of
Sale annotated [on TCT] Nos. 499643, 617967, 597336, 597337 and
621037 as said sale is hereby declared null and void and of no further
force and effect;
2) [RCBC] to:
a) make an accounting and re-computation of the payments made by
[Plast-Print] applying the same on the date and notes applied for[;]
b) to pay [Plast-Print and Dequito] the sum of TWO HUNDRED
THOUSAND PESOS ([P]200,000.00) as for (sic) attorney's fees; and
[c)] [to pay] the cost (sic) of suit. SO ORDERED.[27]
In essence, the RTC found that RCBC failed to establish how Plast-
Print's previous payments were applied to its outstanding obligations.
401
Since Plast-Print was "kept in the dark", the RTC directed RCBC to
render an accounting and re-computation of Plast-Print's outstanding
obligations. In this connection, the RTC ruled that the foreclosure of
Plast-Print's mortgaged properties should be "deemed premature."[28]
RCBC's Appeal
Aggrieved, RCBC filed its Notice of Appeal before the RTC and paid the
required fees.[29] The RTC gave due course to RCBC's appeal, which,
in turn, assigned the following errors:
(1) THE [RTC] ERRED IN FINDING THAT [PLAST-PRINT AND
DEQUITO] WERE KEPT IN THE DARK AS TO THE
APPLICATION OF PAYMENTS.
(2) THE [RTC] ERRED IN RULING THAT [PLAST-PRINT AND
DEQUITO] ARE NOT GUILTY OF FORUM SHOPPING, NOT
BARRED BY PRIOR JUDGMENT AND THAT IT [HAD]
JURISDICTION OVER THE SUBJECT-MATTER OF THE
CASE.
(3) THE [RTC] ERRED IN DISMISSING THE COUNTERCLAIMS
AND IN ORDERING [RCBC] TO PAY [PLAST-PRINT AND
DEQUITO] ATTORNEY'S FEES AND THE COST OF SUIT.[30]
On May 31, 2011, the CA issued the assailed Decision, the dispositive
portion of which reads:
WHEREFORE, premises considered, the Decision of the [RTC] of
Antipolo City, Branch 74, in Civil Case No. 00-5875 is AFFIRMED. SO
ORDERED.[31]
With regard to RCBC's first assigned error, the CA held that while
RCBC's account officer Ramon Doblado's testimony revealed that Plast-
Print was indeed notified of the total amount of its indebtedness, such
testimony failed to establish that RCBC had also apprised Plast-Print of
how its initial payments had been applied against its outstanding
obligations.[32]
Further, the CA held that RCBC is precluded from raising its second
assigned error, as it had already been resolved by the CA with finality
when it denied RCBC's petition for certiorari. In any case, the CA
emphasized that the SEC Petition does not preclude the RTC from
taking cognizance of the RTC Complaint, since the latter involves an
action for annulment of real estate mortgage and foreclosure sale — an
ordinary civil suit beyond the jurisdiction of the SEC.[33]
Proceeding therefrom, the CA held that RCBC's claims for damages,
attorney's fees and litigation expenses lack basis.[34]
RCBC filed a motion for reconsideration, which was denied by the CA
through the assailed Resolution.[35]
Based on the records, RCBC received the assailed Resolution on
November 17, 2011.[36]
On December 2, 2011, RCBC filed a motion for extension, seeking an
additional period of thirty (30) days from December 2, 2011, or until
January 1, 2012, within which to file its petition for review on certiorari.[37]
RCBC filed the present Petition on January 2, 2012,[38] January 1, 2012
being concurrently a Sunday and a holiday.
Here, RCBC argues that Plast-Print and Dequito are barred from
proceeding with the RTC Complaint on the basis of res judicata. Owing
to the doctrine of judicial stability, RCBC claims that the SEC Order
approving the Restructuring Agreement constitutes a prior judgment
which cannot be opened, modified or vacated by the RTC, as it assumes
the nature of a valid judgment rendered by a co-equal body.[39]
In this connection, RCBC further claims that the CA disregarded the
obligatory force of the Restructuring Agreement when it affirmed the
RTC Decision ordering it "to make an accounting and re[-]computation
of the payments made by [Plast-Print]".[40
In the Resolution[41] dated January 30, 2012, the Court directed Plast-
Print and Dequito to file a comment on the Petition within ten (10) days
from notice. Plast-Print and Dequito filed their Comment[42] on April 10,
2012.
RCBC filed its Reply[43] to said Comment on October 9, 2012.
The Issues
The following issues are submitted for the Court's resolution:
1. Whether the CA erred when it held that the RTC had
jurisdiction to act on the RTC Complaint;
2. Whether the CA erred when it directed RCBC to make an
accounting and re-computation of Plast-Print's payments;
and
3. Whether the CA erred when it affirmed the nullification of
the foreclosure sale and the Certificate of Sale arising
therefrom.
The Court's Ruling
The Petition is meritorious.
The RTC did not have jurisdiction to act on the RTC Complaint.
Presidential Decree No. (P.D.) 902-A[44] defines the jurisdiction of the
SEC. Section 5[45] thereof, as amended by P.D. 1758,[46] provides:
SEC. 5. In addition to the regulatory and adjudicative functions of the
[SEC] over corporations, partnerships and other forms of associations
402
registered with it as expressly granted under existing laws and decrees,
it shall have original and exclusive jurisdiction to hear and decide cases
involving[:]
a) Devices or schemes employed by or any acts, of the board of
directors, business associates, its officers or partners, amounting to
fraud and misrepresentation which may be detrimental to the interest of
the public and/or of the stockholder, partners, members of associations
or organizations registered with the Commission[;]
b) Controversies arising out of intra-corporate or partnership
relations, between and among stockholders, members, or associates;
between any or all of them and the corporation, partnership or
association of which they are stockholders, members or associates,
respectively; and between such corporation, partnership or association
and the state insofar as it concerns their individual franchise or right to
exist as such entity;
c) Controversies in the election or appointments of directors,
trustees, officers or managers of such corporations, partnerships or
associations^]
d) Petitions of corporations, partnerships or associations to be declared
in the state of suspension of payments in cases where the corporation,
partnership or association possesses sufficient property to cover all its
debts but foresees the impossibility of meeting them when they
respectively fall due or in cases where the corporation, partnership or
association has no sufficient assets to cover its liabilities, but is under
the management of a Rehabilitation Receiver or Management
Committee created pursuant to this Decree. (Emphasis supplied)
Pursuant to the exercise of its quasi-judicial jurisdiction, the SEC stands
as a co-equal body of the RTC.[47] Hence, all orders and issuances
issued by the SEC in the exercise of such jurisdiction may not be
interfered with, let alone overturned, by the RTC.
The Court's ruling in Philippine Pacific Fishing Co., Inc. v. Luna[48] is
clear:
If any or all of said orders are erroneous, the organic act creating the
Commission, Presidential Decree 902-A, provides the appropriate
remedy, first within the Commission itself, and ultimately in this Court.
Nowhere does the law empower any Court of First Instance [(now RTC)]
to interfere with the orders of the Commission. Not even on grounds of
due process or jurisdiction. The Commission is, conceding arguendo a
possible claim of respondents, at the very least a co-equal body with the
Courts of First Instance. Even as such co-equal, one would have no
power to control the other. But the truth of the matter is that only the
Supreme Court can enjoin and correct any actuation of the Commission,
x x x[49] (Emphasis supplied; citation omitted)
As courts of general jurisdiction, the RTC ordinarily exercise exclusive
original jurisdiction over civil actions incapable of pecuniary estimation,
such as that of accounting, cancellation of certificates of sale issued in
foreclosure proceedings and injunction.[50] Nevertheless, the scope of
such general jurisdiction cannot be extended over matters falling under
the special jurisdiction of another court or quasi-judicial body.
Plast-Print invoked the special jurisdiction of the SEC when it elected to
file the SEC Petition. It cannot be gainsaid that it was Plast-Print who
sought the suspension of payments in connection with its outstanding
financial accommodations with RCBC. By doing so, Plast-Print
necessarily placed the assets securing these financial accommodations
under the SEC's special jurisdiction. Considering that the SEC already
acquired jurisdiction over the financial accommodations and securities
subject of Plast-Print's subsequent RTC Complaint, the RTC erred when
it proceeded to act on it while the SEC Petition remained pending.
To stress, jurisdiction, once acquired is not lost, and continues until the
case is terminated.[51] Thus, in cases where, as here, a petition for
suspension of payments is filed before the SEC, it acquires jurisdiction
over the action and all matters relating thereto to the exclusion of the
RTC.
Seemingly cognizant of the RTC's lack of jurisdiction, Plast-Print and
Dequito alternatively claim that the issue of the RTC's jurisdiction had
been settled by the CA with finality when it resolved RCBC's petition for
certiorari in this wise:
"[The RTC] correctly ruled that [it] had jurisdiction over the questioned
case since the principal action before [it] was not the suspension of
payments] under the jurisdiction of the [SEC], but that of the annulment
and cancellation of the [S]heriff s certificate in the foreclosure
proceedings over which [the RTC] had jurisdiction.
xxxx
In Macapalan v. Katalbas-Moscardon, the High Court ruled that the
complaint for annulment of the real estate and foreclosure sale with
preliminary injunction is an ordinary civil suit, beyond the jurisdiction of
the SEC. It stressed that while it is true that the trend is towards vesting
administrative bodies like the SEC with the power to adjudicate matters
coming under their particular specialization, x x x it should not deprive
courts of justice of their power to decide ordinary [actions] x x x
[otherwise, the creeping takeover by the administrative agencies of the
judicial power vested in the regular courts of justice would render the
judiciary virtually impotent x x x.
xxxx
It goes without saying, thus, that private respondent was not guilty of
forum shopping when it filed the foreclosure case with the RTC x x x.[52]
403
According to Plast-Print and Dequito, the CA's Decision resolving It is well-established that jurisdiction over subject matter, like that over
RCBC's petition for certiorari serves as the law of the case between the the nature of the action, is "conferred by law and not by the consent or
parties,[53] and precludes RCBC from assailing the RTC's jurisdiction acquiescence of any or all of the parties, or by erroneous belief of the
before the Court. court that it exists."[57] Hence, the doctrine of the law of the case cannot
This assertion is erroneous. be applied to serve as a bar against jurisdictional challenges involving
At the outset, it is necessary to stress that what is at issue is the RTC's the subject matter or nature of the case; it cannot be applied so as to
jurisdiction over the nature of the actioninvolved (i.e., the RTC Name of Outstanding Loan Balance Total Percenta
Complaint). The Court's unanimous ruling in La Naval Drug Corporation Creditors ge (%)
v. Court of Appeals[54] is instructive: Over
Jurisdiction over the nature of the action, in concept, differs from Principal Capitalized Other
Aggregat
jurisdiction over the subject matter. Illustrated, lack of jurisdiction over Interest Charges
e
the nature of the action is the situation that arises when a court, which Principal
ordinarily would have the authority and competence to take a case, is Loan
rendered without it either because a special law has limited the exercise
of its normal jurisdiction on a particular matter or because the type of
action has been reposed by law in certain other courts or quasi-judicial WESTMON 31,046,859. 9,433,711.9 - 40,480,571. 48.006%
agencies for determination. Nevertheless, it can hardly be questioned T BANK 90 5 85
that the rules relating to the effects of want of jurisdiction over the subject
matter should apply with equal vigor to cases where the court is similarly METROBA 16,931,101. 3,742,188.7 - 20,673,290. 26.179%
bereft of jurisdiction over the nature of the action. NK 37 4 11
xxxx
x x x Where the court itself clearly has no jurisdiction over the subject RCBC 8,628,188.3 1,439,293.1 1,148,696. 11,216,178. 13.341%
matter or the nature of the action, the invocation of this defense may be 7 8 67 22
done at any time. It is neither for the courts nor the parties to violate or MERCATO 4,802,756.3 368,876.22 1,724,515. 6,896,147.6 7.426%
disregard that rule, let alone to confer that jurisdiction, this matter being R 0 13 5
legislative in character. Barring highly meritorious and exceptional FINANCE
circumstances xxx neither estoppel nor waiver shall apply.[55] (Emphasis
FIRST 3,264,469.0 - - 3,264,469.0 5.048%
and underscoring supplied)
MALAYAN 0 0
Simply stated, there is lack of jurisdiction over the nature of the action
where the type of action is reposed by law in certain other courts,[56] or
in the present case, in a quasi-judicial body — even as there may be TOTAL 64,673,374. 14,984,070. 2,873,211. 82,530,656. 100.000
subject matter jurisdiction. 94 09 80 83 %
grant jurisdiction which the law itself does not confer.
That RCBC no longer sought reconsideration of the CA's Decision
dismissing its petition for certiorari is of no moment. To recall, RCBC
reiterated its objection against RTC's exercise of jurisdiction by
asserting the same as an affirmative defense in its Answer Ad Cautelam
to the RTC Complaint, the relevant portions of which read:
x x x With all due respect, this Honorable Court has not acquired
jurisdiction over the subject matter of [Plast-Print's and Dequito's]
causes of action.
x x x Essentially, the [RTC Complaint] would want [the RTC] to restrain
[RCBC] from consolidating its titles over certain properties after [RCBC]

404
had foreclosed said properties on account of alleged overpayments
made to [RCBC].
x x x Whether there was an overpayment is a matter within the exclusive
jurisdiction of the SEC that already issued an Order approving the
Restructuring Agreement.
x x x When Plast-Print filed a petition for suspension of payment with the
SEC on [October 5, 1998], the SEC acquired original and exclusive
jurisdiction over the case x x x.[58]
Similar to lack of jurisdiction over the subject matter, lack of jurisdiction
over the nature of the case may be raised, as an affirmative defense at
any time.[59] By asserting the RTC's lack of jurisdiction as an affirmative
defense in its Answer, RCBC in no way abandoned or waived its
objection thereto, but in fact, maintained and pursued said objection in
the main case.
Plast-Print is bound to pay its indebtedness to RCBC in
accordance with the computation detailed in the Restructuring
Agreement.
The opening clause of the Restructuring Agreement provides:
WHEREAS, [Plast-Print is] indebted to the CREDITORS individually in
the aggregate principal amount as set forth in the schedule hereto
attached as Annex "A."[60]
In turn, Annex "A"[61] details the outstanding acknowledged by Plast-
Print:
The provisions of the Restructuring Agreement are clear as they are
absolute — Plast-Print acknowledged and bound itself to pay its
indebtedness to RCBC in the amount of P11,216,178.22. Hence, it is
precluded from insisting on yet another re-computation of its
indebtedness to RCBC to avert the consequences of its default. To be
sure, the Restructuring Agreement does not only stand as a binding
contract between the parties;[62] it also serves as a compromise duly
approved by the SEC which has the force and effect of a judgment.
Speaking on the effect of a judicially approved compromise agreement,
the Court, in Spouses Martir v. Spouses Verano,[63] held:
A compromise agreement is a contract whereby the parties make
reciprocal concessions in order to resolve their differences and thus
avoid litigation or to put an end to one already commenced. Once
stamped with judicial imprimatur, it becomes more than a mere contract
binding upon the parties; having the sanction of the court and entered
as its determination of the controversy, it has the force and effect of any
other judgment. It has the effect and authority of res judicata, although
no execution may issue until it would have received the corresponding
approval of the court where the litigation pends and its compliance with
the terms of the agreement is thereupon decreed.
xxxx
A compromise agreement once approved by final order of the court has
the force of res judicata between the parties and should not be disturbed
except for vices of consent or forgery. Hence, a decision on a
compromise agreement is final and executory; it has the force of law and
is conclusive between the parties. It transcends its identity as a mere
contract binding only upon the parties thereto, as it becomes a judgment
that is subject to execution in accordance with the Rules, x x x[64]
(Emphasis supplied)
The foregoing principles apply with equal force to agreements approved
by the SEC in the exercise of its quasi-judicial powers, inasmuch as it
stands on equal footing with the RTC with respect to matters over which
it has jurisdiction.
By taking cognizance of the RTC Complaint and granting Plast-Print's
prayer for accounting, the RTC not only permitted the latter to renege
on its obligation to pay the outstanding balance explicitly recognized
under the Restructuring Agreement, worse, the RTC effectively
interfered with the jurisdiction of the SEC by completely negating the
SEC Order, contrary to applicable law and jurisprudence.
The Restructuring Agreement did not have the effect of
extinguishing the REM constituted in RCBC's favor through
extinctive novation.
Articles 1291 and 1292 of the Civil Code govern novation. These
provisions state:
ART. 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor.
ART. 1292. In order that an obligation may be extinguished by another
which substitute the same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new obligations be on every
point incompatible with each other.
Novation may be total or extinctive,[65] when there is an absolute
extinguishment of the old obligation, or partial, when there is merely a
modification of the old obligation.[66] Noted civilist Justice Eduardo P.
Caguioa elucidates:
x x x Novation has been defined as the substitution or alteration of an
obligation by a subsequent one that cancels or modifies the preceding
one.[67] Unlike other modes of extinction of obligations, novation is a
juridical act of dual function, in that at the time it extinguishes an
405
obligation, it creates a new one in lieu of the old.[68] x x x This is not to
say however, that in every case of novation the old obligation is
necessarily extinguished. Our Civil Code now admits of the so-called
imperfect or modificatory novation where the original obligation is not
extinguished but modified or changed in some of the principal conditions
of the obligation. Thus, [A]rticle 1291 provides that obligations may be
modified.[69] (Emphasis and underscoring supplied)
While the provisions of the Restructuring Agreement had the effect of
"superseding" the "existing agreements" as to Plast-Print's outstanding
loans, the changes contemplated in said agreement merely modified
certain terms relating to these loans, particularly, those pertaining to the
waiver of penalties, reduction of interest rates, renewal of payment
periods, and fixing of principal amounts payable as of the date of the
execution of the Restructuring Agreement. These modifications, while
significant, do not amount to a total novation of Plast-Print's outstanding
loans so as to extinguish the REM constituted to secure such loans, or
nullify the foreclosure of properties conducted before these
modifications had taken effect.
In fact, by the very terms of the Restructuring Agreement, Plast-Print
and its creditors agreed to (i) maintain the status quo vis-a-vis the
subsisting "mortgages constituted in favor of its creditors, including
RCBC; and (ii) proceed to foreclosure and/or the consolidation of title in
case of default.[70] Reference to Sections 2, 15 and 20 of the
Restructuring Agreement is accordingly proper:
Section 2. Restructuring commitment/Consequence of Restructuring.
The DEBTORS commit to fully pay the Restructured Loans including
interests accrued thereon subject to the terms and conditions hereinafter
set forth. This [Restructuring] Agreement, once effective as of the
Restructuring Date, shall exclusively control and govern the mutual
rights and obligations of the DEBTORS and each CREDITOR with
respect to the debts owing to the latter.The [e]xisting [a]greement[s] as
to such debts shall be deemed superseded by this [Restructuring]
Agreement.
xxxx
Section 15. Security for the Restructured Loans. To secure the prompt
and full repayment of the Restructured Loans and the compliance by the
DEBTORS with any and all of its obligations under the Credit
Documents, the CREDITORS agree to maintain the status quo vis-avis
each of the collaterals of whatever nature presently mortgaged in their
favor without any arrangement for consolidation or sharing of such
collaterals. Should the DEBTORS, with the conformity of all the
CREDITORS pursuant to Section 18 (e) herein be able to sell any of the
mortgaged properties, the proceeds thereof shall first be applied to the
payment of the total debt to the [CREDITOR] in whose favor the property
was mortgaged. The remaining balance in the proceeds of the sale,
should there be any, shall be distributed among the rest of the
CREDITORS in proportion to the outstanding debts due them x x x.
xxxx
SECTION 20. Consequences of an Event of Default x x x xxxx
(b) The failure of the DEBTORS to pay for three payment dates in any
of the scheduled dates of payment shall cause the foreclosure and/or
consolidation of title for properties already foreclosed and execution of
each CREDITOR'S respective security and the commencement of all
necessary actions to collect from the DEBTORS all amounts due under
the Credit Documents.[71] (Emphasis supplied)
Absent a total or extinctive novation, the effects of the foreclosure
conducted prior to the execution of the Restructuring Agreement must
be respected. Hence, the reinstatement of the annotation of the
Certificate of Sale on Plast-Print's TCTs of the foreclosed properties is
proper.
WHEREFORE, premises considered, the Petition is GRANTED. The
Decision and Resolution respectively dated May 31, 2011 and
November 9, 2011 rendered by the Court of Appeals in CA-G.R. CV No.
89431 and the Decision dated May 17, 2006 of the Regional Trial Court
of Antipolo City, Branch 74, in Civil Case No. 00-5875 are REVERSED
and SET ASIDE.
The Complaint in Civil Case No. 00-5875 is hereby DISMISSED for lack
of jurisdiction.
The Register of Deeds of Rizal Province is hereby DIRECTED to
reinstate the annotation of the Certificate of Sale on Transfer Certificate
of Title Nos. 499643, 617967, 597336, 597337 and 621037. SO
ORDERED.
406
 VICENTE G. HENSON, JR., PETITIONER, VS. UCPB GENERAL
INSURANCE CO., INC., RESPONDENT.
[ G.R. No. 223134. August 14, 2019 ]
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari1 are the Decision2
dated November 13, 2015 and the Resolution3 dated February 26, 2016
of the Court of Appeals (CA) in CA-G.R. SP. No. 138147, which affirmed
the Orders dated June 10, 20144 and September 22, 20145 of the
Regional Trial Court of Makati City, Branch 138 (RTC) in Civil Case No.
10-885, ruling that the suit filed by respondent UCPB General Insurance
Co., Inc. (respondent) has yet to prescribe, and resultantly, allowing the
inclusion of petitioner Vicente G. Henson, Jr. (petitioner) as party-
defendant to the same.
The Facts
From 1989 to 1999, National Arts Studio and Color Lab6 (NASCL)
leased the front portion of the ground floor of a two (2)-storey building
located in Sto. Rosario Street, Angeles City, Pampanga, then owned by
petitioner.7 In 1999, NASCL gave up its initial lease and instead, leased
the right front portion of the ground floor and the entire second floor of
the said building, and made renovations with the building's piping
assembly.8 Meanwhile, Copylandia Office Systems Corp. (Copylandia)
moved in to the ground floor.9 On May 9, 2006, a water leak occurred in
the building and damaged Copylandia's various equipment, causing
injury to it in the amount of P2,062,640.00.10 As the said equipment were
insured with respondent,11 Copylandia filed a claim with the former.
Eventually, the two parties settled on November 2, 2006 for the amount
of P1,326,342.76.12 This resulted in respondent's subrogation to the
rights of Copylandia over all claims and demands arising from the said
incident.13 On May 20, 2010, respondent, as subrogee to Copylandia's
rights, demanded from, inter alia, NASCL for the payment of the
aforesaid claim, but to no avail.14 Thus, it filed a complaint for damages15
against NASCL, among others, before the RTC, docketed as Civil Case
No. 10-885.16
Meanwhile, sometime in 2010, petitioner transferred the ownership
of the building to Citrinne Holdings, Inc. (CHI), where he is a stockholder
and the President.17
On October 6, 2011, respondent filed an Amended Complaint
(Second Amendment),18 impleading CHI as a party-defendant to the
case, as the new owner of the building. However, on April 21, 2014,
respondent filed a Motion to Admit Attached Amended Complaint and
Pre-Trial Brief (Third [A]mendment),19 praying that petitioner, instead of
CHI, be impleaded as a party-defendant to the case, considering that
petitioner was then the owner of the building when the water leak
damage incident happened.20
In the said complaints, respondent faults: (a) NASCL for its
negligence in not properly maintaining in good order the comfort room
facilities where the renovated building's piping assembly was utilized;
and (b) CHI/petitioner, as the owner of the building, for neglecting to
maintain the building's drainage system in good order and in tenantable
condition. According to respondent, such negligence on their part
directly resulted in substantial damage to Copylandia's various
equipment amounting to ₱2,062,640.00.21
CHI opposed22 the motion principally on the ground of prescription,
arguing that since respondent's cause of action is based on quasi-delict,
it must be brought within four (4) years from its accrual on May 9, 2006.
As such, respondent is already barred from proceeding against
CHI/petitioner, especially since the latter never received any prior
demand from the former.23
The RTC Ruling
In an Order24 dated June 10, 2014, the RTC ruled in respondent's
favor and accordingly, ordered the: (a) dropping of CHI as party-
defendant; and (b) joining of petitioner as one of the party-defendants in
the case.25
The RTC pointed out that respondent's cause of action against the
party-defendants, including petitioner, arose when it paid Copylandia's
insurance claim and became subrogated to the rights and claims of the
latter in connection with the water leak damage incident. Since
respondent was merely enforcing its right of subrogation, the
prescriptive period is ten (10) years based on an obligation created by
law reckoned from the date of Copylandia's indemnification, or on
November 2, 2006. As such, respondent's claim against petitioner has
yet to prescribe when it sought to include the latter as party-defendant
on April 21, 2014.26
407
 CHI moved for reconsideration,27 which was, however, denied in an
Order28 dated September 22, 2014. Aggrieved with his inclusion as
party-defendant to the case, petitioner filed a petition for certiorari29
under Rule 65 of the Rules of Court before the CA, docketed as CA-
G.R. SP. No. 138147.
The CA Ruling
In a Decision30 dated November 13, 2015, the CA affirmed the RTC
ruling. It held that respondent's cause of action has not yet prescribed
since it was not based on quasi-delict, which must be brought within four
(4) years from the date of the occurrence of the negligent act. Rather, it
is based on an obligation created by law, which has a longer prescriptive
period of ten (10) years reckoned from its accrual.31
Undaunted, petitioner moved for reconsideration,32 but the same
was denied in a Resolution33 dated February 26, 2016; hence, this
petition.
The Issue Before the Court
The issue for the Court's Resolution is whether or not
respondent's claim has yet to prescribe.
The Court's Ruling
In ruling that respondent's claim against petitioner has yet to
prescribe, the courts a quo cited Vector Shipping Corporation v.
American Home Assurance Company (Vector).34 In that case, therein
petitioner Vector Shipping Corporation (Vector) entered into a contract
of affreightment with Caltex Philippines, Inc. (Caltex) for the transport of
the latter's goods. In connection therewith, Caltex insured its goods with
therein respondent American Home Assurance Company (American
Home). During transport on December 20, 1987, Vector's ship collided
with another vessel and sank, resulting in the total loss of Caltex's
goods. On July 12, 1988, American Home fully indemnified Caltex for its
loss in the amount of P7,455,421.08, and thereafter, filed a suit against,
inter alia, Vector for the recovery of such amount on March 5, 1992.
Initially, the RTC ruled that American Home's claim against Vector has
prescribed as it was based on a quasi-delict which should have been
filed within four (4) years from the time Caltex suffered a total loss of its
goods. However, the CA reversed the ruling, holding that the claim has
yet to prescribe as it is based on a breach of Vector's contract of
affreightment with Caltex, which has a longer prescriptive period often
(10) years, again reckoned from the time of the loss.35 The Court, in
Vector, agreed with the CA that the claim has yet to prescribe, but
qualified that "the present action was not upon a written contract, but
upon an obligation created by law,"36 viz.:
We concur with the CA's ruling that respondent's action did
not yet prescribe. The legal provision governing this case
was not Article 1146 of the Civil Code, but Article 1144 of the
Civil Code, which states:
Article 1144. The following actions must be brought
within ten years from the time the cause of action
accrues:
(1) Upon a written contract;
(2) Upon an obligation created by law;
(3) Upon a judgment.
We need to clarify, however, that we cannot adopt the CA's
characterization of the cause of action as based on the contract
of affreightment between Caltex and Vector, with the breach of
contract being the failure of Vector to make the M/T Vector
seaworthy, so as to make this action come under Article 1144 (1),
supra. Instead, we find and hold that the present action was not
upon a written contract, but upon an obligation created by law.
Hence, it came under Article 1144 (2) of the Civil Code. This is
because the subrogation of respondent to the rights of x x x the
insured was by virtue of the express provision of law embodied
in Article 2207 of the Civil Code, to wit:
Article 2207. If the plaintiffs 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. If the amount
paid by the insurance company does not fully cover
the injury or loss, the aggrieved party shall be
408
 entitled to recover the deficiency from the person
causing the loss or injury.
The juridical situation arising under Article 2207 of the Civil Code
is well explained in Pan Malayan Insurance Corporation v. [CA,37]
as follows:
Article 2207 of the Civil Code is founded on the well-settled
principle of subrogation. If the insured property is
destroyed or damaged through the fault or negligence of a
party other than the assured, then the insurer, upon
payment to the assured, will be subrogated to the rights of
the assured to recover from the wrongdoer to the extent
that the insurer has been obligated to pay. Payment by the
insurer to the assured operates as an equitable
assignment to the former of all remedies which the latter
may have against the third party whose negligence or
wrongful act caused the loss. The right of subrogation is
not dependent upon, nor does it grow out of, any privity of
contract or upon written assignment of claim. It accrues
simply upon payment of the insurance claim by the insurer
[Compañia Maritima v. Insurance Company of North
America, 120 Phil. 998 (1964); Fireman's Fund Insurance
Company v. Jamila & Company, Inc., 162 Phil. 421
(1976)].
Verily, the contract of affreightment that Caltex and Vector
entered into did not give rise to the legal obligation of Vector and
Soriano to pay the demand for reimbursement by respondent
because it concerned only the agreement for the transport of
Caltex's petroleum cargo. As the Court has aptly put it in Pan
Malayan Insurance Corporation v. [CA], supra, respondent's right
of subrogation pursuant to Article 2207, supra, was "not
dependent upon, nor d[id] it grow out of, any privity of contract or
upon written assignment of claim [but] accrue[d] simply upon
payment of the insurance claim by the insurer."
Considering that the cause of action accrued as of the
time respondent actually indemnified Caltex in the amount
of P7,455,421.08 on July 12, 1988, the action was not yet
barred by the time of the filing of its complaint on March 5,
1992, which was well within the 10-year period prescribed
by Article 1144 of the Civil Code.38 (Emphases and
underscoring supplied)
In Vector, the Court held that the insured's (i.e., American Home's)
claim against the debtor (i.e., Vector) was premised on the right of
subrogation pursuant to Article 2207 of the Civil Code and hence, an
obligation created by law. While indeed American Home was entitled to
claim against Vector by virtue of its subrogation to the rights of the
insured (i.e., Caltex), the Court failed to discern that no new obligation
was created between American Home and Vector for the reason that a
subrogee only steps into the shoes of the subrogor; hence, the
subrogee-insurer only assumes the rights of the subrogor-insured based
on the latter's original obligation with the debtor.
To expound, subrogation's legal effects under Article 2207 of the
Civil Code are primarily between the subrogee-insurer and the subrogor-
insured: by virtue of the former's payment of indemnity to the latter, it is
able to acquire, by operation of law, all rights of the subrogor-insured
against the debtor. The debtor is a stranger to this juridical tie because
it only remains bound by its original obligation to its creditor whose
rights, however, have already been assumed by the subrogee. In
Vector's case, American Home was able to acquire ipso jure all the
rights Caltex had against Vector under their contract of affreightment by
virtue of its payment of indemnity. If at all, subrogation had the effect of
obliging Caltex to respect this assumption of rights in that it must now
recognize that its rights against the debtor, i.e., Vector, had already been
transferred to American Home as the subrogee-insurer. In other words,
by operation of Article 2207 of the Civil Code, Caltex cannot deny
American Home of its right to claim against Vector. However, the
subrogation of American Home to Caltex's rights did not alter the original
obligation between Caltex and Vector.
Accordingly, the Court, in Vector, erroneously concluded that "the
cause of action [against Vector] accrued as of the time [American Home]
actually indemnified Caltex in the amount of ₱7,455,421.08 on July 12,
1988."39 Instead, it is the subrogation of rights between Caltex and
American Home which arose from the time the latter paid the indemnity
therefor. Meanwhile, the accrual of the cause of action that Caltex had
against Vector did not change because, as mentioned, no new
obligation was created as between them by reason of the subrogation
of American Home. The cause of action against Vector therefore
accrued at the time it breached its original obligation with Caltex whose
right of action just so happened to have been assumed in the interim by
409
American Home by virtue of subrogation. "[A] right of action is the right
to presently enforce a cause of action, while a cause of action consists
of the operative facts which give rise to such right of action."40
The foregoing application hews more with the fundamental
principles of civil law, especially on the well-established doctrines on
subrogation. Article 1303 of the Civil Code states that "[s]ubrogation
transfers to the person subrogated the credit with all the rights thereto
appertaining, either against the debtor or against third persons x x x." In
Loadstar Shipping Company, Inc. v. Malayan Insurance Company,
Inc.,41 the Court had clearly explained that because of the nature of
subrogation as a mode of "creditor-substitution," the rights of a subrogee
cannot be superior to the rights possessed by a subrogor, viz.:
The rights of a subrogee cannot be superior to the
rights possessed by a subrogor. "Subrogation is the
substitution of one person in the place of another with
reference to a lawful claim or right, so that he who is
substituted succeeds to the rights of the other in relation
to a debt or claim, including its remedies or securities. The
rights to which the subrogee succeeds are the same as,
but not greater than, those of the person for whom he is
substituted, that is, he cannot acquire any claim, security
or remedy the subrogor did not have. In other words, a
subrogee cannot succeed to a right not possessed by the
subrogor. A subrogee in effect steps into the shoes of the
insured and can recover only if the insured likewise could
have recovered."
Consequently, an insurer indemnifies the insured
based on the loss or injury the latter actually suffered from.
If there is no loss or injury, then there is no obligation on
the part of the insurer to indemnify the insured. Should the
insurer pay the insured and it turns out that indemnification
is not due, or if due, the amount paid is excessive, the
insurer takes the risk of not being able to seek
recompense from the alleged wrongdoer. This is because
the supposed subrogor did not possess the right to be
indemnified and therefore, no right to collect is passed on
to the subrogee.42 (Emphases and underscoring supplied)
Despite its error, Vector had aptly cited the case of Pan Malayan
Insurance Corporation v. CA (Pan Malayan),43 wherein it was explained
that subrogation, under Article 2207 of the Civil Code, operates as a
form of "equitable assignment"44 whereby "the insurer, upon payment to
the assured, will be subrogated to the rights of the assured to recover
from the wrongdoer to the extent that the insurer has been obligated to
pay."45 It is characterized as an "equitable assignment" since it is an
assignment of credit without the need of consent - as it was, in fact,
mentioned in Pan Malayan, "[t]he right of subrogation is not dependent
upon, nor does it grow out of, any privity of contract or upon written
assignment of claim. It accrues simply upon payment of the insurance
claim by the insurer."46 It is only to this extent that the equity aspect of
subrogation must be understood. Indeed, subrogation under Article
2207 of the Civil Code allows the insurer, as the new creditor who
assumes ipso jure the old creditor's rights without the need of any
contract, to go after the debtor, but it does not mean that a new
obligation is created between the debtor and the insurer. Properly
speaking, the insurer, as the new creditor, remains bound by the
limitations of the old creditor's claims against the debtor, which includes,
among others, the aspect of prescription. Hence, the debtor's right to
invoke the defense of prescription cannot be circumvented by the mere
expedient of successive payments of certain insurers that purport to
create new obligations when, in fact, what remains subsisting is only the
original obligation. Verily, equity should not be stretched to the prejudice
of another.
To better understand the concept of legal subrogation under Article
2207 of the Civil Code as a form of "equitable assignment," it deserves
mentioning that there exist intricate differences between assignment
and subrogation, both in their legal and conventional senses. In Ledonio
v. Capitol Development Corporation:47
An assignment of credit has been defined as an
agreement by virtue of which the owner of a credit (known
as the assignor), by a legal cause - such as sale, dation in
payment or exchange or donation - and without need of
the debtor's consent, transfers that credit and its
accessory rights to another (known as the assignee), who
acquires the power to enforce it, to the same extent as the
assignor could have enforced it against the debtor.
On the other hand, subrogation, by definition, is the
transfer of all the rights of the creditor to a third person,
who substitutes him in all his rights. It may either be legal
or conventional. Legal subrogation is that which takes
410
place without agreement but by operation of law because
of certain acts. Conventional subrogation is that which
takes place by agreement of parties.
Although it may be said that the effect of the
assignment of credit is to subrogate the assignee in the
rights of the original creditor, this Court still cannot
definitively rule that assignment of credit and conventional
subrogation are one and the same.
A noted authority on civil law provided a discourse on
the difference between these two transactions, to wit -
Conventional Subrogation and
Assignment of Credits. - In the Argentine
Civil Code, there is essentially no
difference between conventional
subrogation and assignment of credit.
The subrogation is merely the effect of
the assignment. In fact[,] it is expressly
provided (Article 769) that conventional
redemption shall be governed by the
provisions on assignment of credit.
Under our Code, however,
conventional subrogation is not identical
to assignment of credit. In the former, the
debtor's consent is necessary; in the
latter, it is not required. Subrogation
extinguishes an obligation and gives rise
to a new one; assignment refers to the
same right which passes from one
person to another. The nullity of an old
obligation may be cured by subrogation,
such that the new obligation will be
perfectly valid; but the nullity of an
obligation is not remedied by the
assignment of the creditor's right to
another. x x x
This Court has consistently adhered to the foregoing
distinction between an assignment of credit and a
conventional subrogation. Such distinction is crucial
because it would determine the necessity of the debtor's
consent. In an assignment of credit, the consent of the
debtor is not necessary in order that the assignment may
fully produce the legal effects. What the law requires in an
assignment of credit is not the consent of the debtor, but
merely notice to him as the assignment takes effect only
from the time he has knowledge thereof. A creditor may,
therefore, validly assign his credit and its accessories
without the debtor's consent. On the other hand,
conventional subrogation requires an agreement among
the parties concerned - the original creditor, the debtor,
and the new creditor. It is a new contractual relation based
on the mutual agreement among all the necessary
parties.48 (Emphases and underscoring supplied)
As discussed above, in an assignment of credit, the consent of the
debtor is not necessary in order that the assignment may fully produce
legal effects (as notice to the debtor suffices); also, in assignment, no
new contractual relation between the assignee/new creditor and debtor
is created. On the other hand, in conventional subrogation, an
agreement between all the parties concerning the substitution of the new
creditor is necessary. Meanwhile, legal subrogation produces the same
effects as assignment and also, no new obligation is created between
the subrogee/new creditor and debtor. As observed in commentaries on
the subject:
The effect of legal subrogation is to transfer to the
new creditor the credit and all the rights and actions
that could have been exercised by the former creditor
either against the debtor or against third persons, be
they guarantors or mortgagors. Simply stated, except
only for the change in the person of the creditor, the
obligation subsists in all respects as before the
novation.49 (Emphasis supplied)
Unlike assignment, however, legal subrogation, to produce effects,
does not need to be agreed upon by the subrogee and subrogor, unlike
the need of an agreement between the assignee and assignor. As
mentioned, "[l]egal subrogation is that which takes place without
agreement but by operation of law because of certain acts,"50 as in the
case of payment of the insurer under Article 2207 of the Civil Code.
411
 In sum, as legal subrogation is not equivalent to conventional
subrogation, no new obligation is created by virtue of the insurer's
payment under Article 2207 of the Civil Code; also, as legal subrogation
is not the same as an assignment of credit (as the former is in fact, called
an "equitable assignment"), no privity of contract is needed to produce
its legal effects. Accordingly, "the insurer can take nothing by
subrogation but the rights of the insured, and is subrogated only to such
rights as the insured possesses. This principle has been frequently
expressed in the form that the rights of the insurer against the wrongdoer
cannot rise higher than the rights of the insured against such wrongdoer,
since the insurer as subrogee, in contemplation of law, stands in the
place of the insured and succeeds to whatever rights he may have in
the matter. Therefore, any defense which a wrongdoer has against the
insured is good against the insurer subrogated to the rights of the
insured,"51 and this would clearly include the defense of prescription.
Based on the above-discussed considerations, the Court must
heretofore abandon the ruling in Vector that an insurer may file an action
against the tortfeasor within ten (10) years from the time the insurer
indemnifies the insured. Following the principles of subrogation, the
insurer only steps into the shoes of the insured and therefore, for
purposes of prescription, inherits only the remaining period within which
the insured may file an action against the wrongdoer. To be sure, the
prescriptive period of the action that the insured may file against the
wrongdoer begins at the time that the tort was committed and the
loss/injury occurred against the insured. The indemnification of the
insured by the insurer only allows it to be subrogated to the former's
rights, and does not create a new reckoning point for the cause of action
that the insured originally has against the wrongdoer.
Be that as it may, it should, however, be clarified that this Court's
abandonment of the Vector doctrine should be prospective in application
for the reason that judicial decisions applying or interpreting the laws or
the Constitution, until reversed, shall form part of the legal system of the
Philippines.52 Unto this Court devolves the sole authority to interpret
what the law means, and all persons are bound to follow its
interpretation. As explained in De Castro v. Judicial and Bar Council:53
Judicial decisions assume the same authority as a
statute itself and, until authoritatively abandoned,
necessarily become, to the extent that they are
applicable, the criteria that must control the actuations,
not only of those called upon to abide by them, but also
of those duty-bound to enforce obedience to them.54
Hence, while the future may ultimately uncover a doctrine's error, it
should be, as a general rule, recognized as a "good law" prior to its
abandonment.55 In Philippine International Trading Corporation
Commission on Audit,56 it was elucidated that:
It is consequently clear that a judicial interpretation
becomes a part of the law as of the date that law was
originally passed, subject only to the qualification that
when a doctrine of this Court is overruled and a
different view is adopted, and more so when there is a
reversal thereof, the new doctrine should be applied
prospectivelv and should not apply to parties who
relied on the old doctrine and acted in good faith. To
hold otherwise would be to deprive the law of its quality
of fairness and justice then, if there is no recognition of
what had transpired prior to such adjudication.57
(Emphasis and underscoring supplied)
In Pesca v. Pesca58 the Court further elaborated:
The "doctrine of stare decisis," ordained in Article
8 of the Civil Code, expresses that judicial decisions
applying or interpreting the law shall form part of the
legal system of the Philippines. The rule follows the
settled legal maxim - "legis interpretado legis vim
obtinet" - that the interpretation placed upon the written
law by a competent court has the force of law. The
interpretation or construction placed by the courts
establishes the contemporaneous legislative intent of
the law. The [said interpretation or construction] would
thus constitute a part of that law as of the date the
statute is enacted. It is only when a prior ruling of this
Court finds itself later overruled, and a different view is
adopted, that the new doctrine may have to be applied
prospectively in favor of parties who have relied on the
old doctrine and have acted in good faith in
accordance therewith under the familiar rule of "lex
prospicit, non respicit."59 (Emphasis and underscoring
supplied)
412
 With these in mind, the Court therefore sets the following guidelines
relative to the application of Vector and this Decision vis-a-vis the
prescriptive period in cases where the insurer is subrogated to the rights
of the insured against the wrongdoer based on a quasi-delict:
1. For actions of such nature that have already been filed and are currently
pending before the courts at the time of the finality of this Decision, the
rules on prescription prevailing at the time the action is filed would apply.
Particularly:
(a) For cases that were filed by the subrogee-insurer
during the applicability of the Vector ruling (i.e.,from
Vector's finality on August 15, 201360 up until the finality of
this Decision), the prescriptive period is ten (10) years
from the time of payment by the insurer to the insured,
which gave rise to an obligation created by law.
Rationale: Since the Vector doctrine was the prevailing
rule at this time, issues of prescription must be resolved
under Vector's parameters.
(b) For cases that were filed by the subrogee-insurer prior
to the applicability of the Vector ruling (i.e.,before August
15, 2013), the prescriptive period is four (4) years from the
time the tort is committed against the insured by the
wrongdoer.1âшphi1
Rationale: The Vector doctrine, which espoused unique
rules on legal subrogation and prescription as
aforedescribed, was not yet a binding precedent at this
time; hence, issues of prescription must be resolved under
the rules prevailing before Vector, which, incidentally, are
the basic principles of legal subrogation vis-a-vis
prescription of actions based on quasi-delicts.
2. For actions of such nature that have not yet been filed at the time
of the finality of this Decision:
(a) For cases where the tort was committed and the
consequent loss/injury against the insured occurred prior
to the finality of this Decision, the subrogee-insurer is
given a period not exceeding four (4) years from the time
of the finality of this Decision to file the action against the
wrongdoer; provided, that in all instances, the total period
to file such case shall not exceed ten (10) years from the
time the insurer is subrogated to the rights of the insured.
Rationale: The erroneous reckoning and running of the
period of prescription pursuant to the Vector doctrine
should not be taken against any and all persons relying
thereon because the same were based on the then-
prevailing interpretation and construction of the Court.
Hence, subrogees-insurers, who are, effectively, only now
notified of the abandonment of Vector, must be given the
benefit of the present doctrine on subrogation as ruled in
this Decision.
However, the benefit of the additional period (i.e., not
exceeding four 4 years) under this Decision must not result
in the insured being given a total of more than ten (10)
years from the time the insurer is subrogated to the rights
of the insured (i.e., the old prescriptive period in Vector);
otherwise, the insurer would be able to unduly propagate
its right to file the case beyond the ten (10)-year period
accorded by Vector to the prejudice of the wrongdoer.
(b) For cases where the tort was committed and the
consequent loss/injury against the insured occurred only
upon or after the finality of this Decision, the Vector
doctrine would hold no application. The prescriptive period
is four (4) years from the time the tort is committed against
the insured by the wrongdoer.
Rationale: Since the cause of action for quasi-delict and
the consequent subrogation of the insurer would arise
after due notice of Vector's abandonment, all persons
would now be bound by the present doctrine on
subrogation as ruled in this Decision.
Application to the Case at Bar
In this case, it is undisputed that the water leak damage incident,
which gave rise to Copylandia's cause of action against any possible
defendants, including NASCL and petitioner, happened on May 9, 2006.
As this incident gave rise to an obligation classified as a quasi-delict,
Copylandia would have only had four (4) years, or until May 9, 2010,
413
within which to file a suit to recover damages.61 When Copylandia's
rights were transferred to respondent by virtue of the latter's payment of
the former's insurance claim on November 2, 2006, as evidenced by the
Loss and Subrogation Receipt,62 respondent was likewise bound by the
same prescriptive period. Since it was only on: (a) May 20, 2010 when
respondent made an extrajudicial demand to NASCL, and thereafter,
filed its complaint; (b) October 6, 2011 when respondent amended its
complaint to implead CHI as party-defendant; and (c) April 21, 2014
when respondent moved to further amend the complaint in order to
implead petitioner as party-defendant in lieu of CHI, prescription - if
adjudged under the present parameters of legal subrogation under this
Decision - should have already set in.

However, it must be recognized that the prevailing rule applicable

to the pertinent events of this case is Vector. Pursuant to the guidelines
stated above, specifically under guideline 1 (a), the Vector doctrine -
which was even relied upon by the courts a quo - would then apply.
Hence, as the amended complaint63 impleading petitioner was filed on
April 21, 2014, which is within ten (10) years from the time respondent
indemnified Copylandia for its injury/loss, i.e., on November 2, 2006, the
case cannot be said to have prescribed under Vector. As such, the Court
is constrained to deny the instant petition.

WHEREFORE, the petition is DENIED. The Decision dated

November 13, 2015 and the Resolution dated February 26, 2016 of the
Court of Appeals in CA-G.R. SP No. 138147 are hereby AFFIRMED with
MODIFICATION based on the guidelines stated in this Decision.

SO ORDERED

414
JOCELYN MODOMO AND DR. ROMY MODOMO, PETITIONERS, v.
SPOUSES MOISES P. LAYUG, JR. AND FELISARIN* E. LAYUG;
MOISES P. LAYUG, JR., SUBSTITUTED BY HIS HEIRS, NAMELY:
HIS WIFE, FELISARIN E. LAYUG, AND CHILDREN, MA. CELESTE
LAYUG CO, EUGENE ESPINOSA LAYUG, FRANCIS ESPINOSA
LAYUG AND SHERYL ESPINOSA LAYUG, RESPONDENTS
G.R. No. 197722, August 14, 2019
CAGUIOA, J.:**
The Case
This is a petition for review on certiorari1 (Petition) filed under Rule 45 of
the Rules of Court against the Decision2 dated March 22, 2011 (assailed
Decision) and Resolution3 dated July 20, 2011 (assailed Resolution) in
CA-G.R. SP No. 113807 rendered by the Court of Appeals (CA).
The assailed Decision and Resolution affirm the lower courts' uniform
rulings which ordered petitioners Dr. Romy Modomo and Jocelyn
Modomo (collectively, Spouses Modomo) to immediately surrender
possession of a certain parcel of land covered by Transfer Certificate of
Title (TCT) No. 208683 registered in the name of respondents Moises
P. Layug, Jr. and Felisarin E. Layug (collectively, Spouses Layug).4
The Facts
The facts, as narrated by the Metropolitan Trial Court (MeTC) of Makati
City, Branch 64, and subsequently adopted by the CA, are as follows:
[Spouses Layug filed] a complaint for [e]jectment x x x
before the [MeTC], Branch 65 of Makati on July 23, 2008
which was raffled off to [Branch 64] after a failed Mediation
and Judicial Dispute Resolution (JDR) x x x.
xxxx
[Spouses Layug] alleged among others that[:] they are the
registered owner[s] and legal possessors of a parcel of
land located at No. 1038 A.P. Reyes Street corner
Cristobal Street, Barangay Tejeros, Makati City covered
by [Transfer Certificate of Title (TCT)] No. 208683.
Aforesaid property was leased to [Spouses Modomo] for a
period of seven (7) years. Pursuant to the [Contract of
Lease5 dated February 11, 2005 (Contract of Lease),
Spouses Modomo agreed to] pay the amount of
Php170,000.00 as monthly rentals subject to an escalation
of 10% for the second and third year, 15% on the fourth
and fifth year and 20% on the sixth and seventh year. It
was also agreed by the parties that real estate taxes on
the property shall be paid by [Spouses Modomo]. In view
of [these] stipulation[s], an Addendum to the Contract was
executed by the parties [also] on February 11, 2005
regarding the terms and conditions of payment of rentals.
Subsequently, [Spouses Modomo] defaulted in the
payment of the escalation of [rental fees] commencing
from the year 2006 up to [the filing of the complaint for
ejectment on Jury 23, 2008]. [Spouses Modomo] also
failed to pay their rentals for the year 2008 which would
have been paid in advance. [Spouses Layug] also alleged,
that [Spouses Modomo] failed to pay the real estate taxes
due on the property x x x which [Spouses Layug] paid in
[Spouses Modomo's] behalf. [Spouses Layug sent a] letter
x x x to [Spouses Modomo] [demanding that they] settle
their unpaid monthly rentals x x x but to no avail.
Ultimately, [a] letter dated March 24, 2008 was sent to
[Spouses Modomo] terminating the [C]ontract [of Lease]
and containing therein a demand for [Spouses Modomo]
to vacate the premises. To thresh out the matter, the case
was referred to the Barangay of Tejeros for conciliation but
to no avail. Hence, a certification to file action was issued.
To protect [their] interest, [Spouses Layug] instituted the
present suit claiming that [Spouses Modomo] should
vacate the premises, x x x pay [Spouses Layug] rental
arrearages, attorney's fees and costs of suit.
On the contrary[, Spouses Modomo] argued that[: the]
parties originally agreed that [Spouses Modomo w]ould
pay the amount of Php170,000.00 subject to an escalation
of 10% for the second and third year, 15% on the fourth
and fifth year and 20% on the sixth and seventh year.
However, considering that [Jocelyn] Modomo [had]
introduce [d] improvements thereon[,] she [asked]
[Spouses Layug] to change certain provisions in the
Contract of Lease. Based on their conversation[,]
[Spouses Layug] agreed to reduce the monthly rentals to
Php150,000.00 and the non-imposition of the escalation
clause and the real estate tax provision. [Spouses
Modomo] religiously paid the rentals strictly in accordance
with their subsequent agreements. [Spouses Layug], on
the second year of the [C]ontract [of Lease], imposed the
10% escalation x x x. [Spouses Modomo] however,
reminded [Spouses Layug] of their previous agreement
regarding the non-imposition of the escalation clause and
the real estate tax provision. Thereafter, [Spouses
415
 Modomo] alleged that [Spouses Layug agreed not to]
impose the escalation clause [in] the [C]ontract of [L]ease
in view of the introduction of the improvements in the
premises amounting to approximately Two Million pesos
[Php2,000,000.00]. Again [i]n 2008[, Spouses Layug]
[purportedly] reneged on their agreements by imposing
the escalation clause. Therefore, [Spouses Modomo]
pray[ed] that the case be dismissed because the
[C]ontract of [L]ease dated February 11, 2005 ha[d] been
amended by the subsequent oral agreements between the
parties. [Spouses Modomo further claimed that Spouses
Layug] are in estoppel in pais, [due to] their unconditional
acceptance of the reduced x x x monthly [rental] x x x of
Php150,000.00 instead of Php170,000.00. [Spouses
Modomo] also alleged that the [C]ontract of [L]ease has
been novated in view of the subsequent oral agreements
of the parties. Hence, [Spouses Modomo] pray[ed] for the
dismissal of the case and [that] they be [declared] entitled
to their counterclaim.6(Emphasis supplied)
MeTC Ruling
On July 20, 2009, the MeTC issued a Decision7 in favor of Spouses
Layug, the dispositive portion of which reads:
WHEREFORE, the [MeTC] renders judgment ordering
[Spouses Modomo] to immediately surrender the peaceful
possession of the leased property with improvements
thereon located at No. 1038 A.P. Reyes Street corner
Cristobal Street, Barangay Tejeros, Makati City.
[Spouses Modomo] are likewise ordered to pay [Spouses
Layug] the amount of Php3,119,200.00 as rental
arrearages. The amount of Php208,725.00 per month as
payment for the reasonable use and occupation of the
property [is also imposed], computed from July 23, 2008
until [Spouses Modomo] actually [vacate] the premises.
[Spouses Modomo] are also ordered to pay [Spouses
Layug] Php10,000.00 as attorney's fees. Costs against
[Spouses Modomo].
The [MeTC] DISMISSES the counterclaim filed by
[Spouses Modomo].
So Ordered.8 (Emphasis supplied)
RTC Proceedings
Spouses Modomo filed an appeal before the RTC9via Rule 40 of the
Rules of Court.
Therein, Spouses Modomo insisted that Spouses Layug failed to refute
the existence of their subsequent oral agreement which caused the
novation of the Contract of Lease, particularly the provisions: (i) fixing
the rental fee at Php 170,000.00; (ii) imposing annual escalation on
rental fees; and (iii) requiring Spouses Layug to pay real estate tax
during the lease term.10 Spouses Modomo further argued that Spouses
Layug are estopped from denying the existence of such oral agreement,
considering that they accepted their monthly rental payments at the
reduced amount of Php 150,000.00 without protest.11
In its Decision12 dated January 28, 2010, the RTC affirmed the findings
of the MeTC in toto, disposing the case in these words:
After a careful consideration of the pleadings and the
evidence on record, this Court finds that the court-a-quo
did not commit an error in rendering judgment in favor of
[Spouses Layug].
WHEREFORE, premises considered, the appealed
decision is hereby AFFIRMED with costs against
[Spouses Modomo].
SO ORDERED.13
Like the MeTC, the RTC also harped on the Parole Evidence Rule set
forth in Rule 130 of the Rules of Court14 and held that if the parties' real
intention was to "cancel" the original Contract of Lease, they should
have executed a new Contract of Lease expressing "their intention to
eliminate the stipulation[s] regarding the escalation clause and the
provision on real estate tax."15
The RTC also noted that while Spouses Layug accepted Spouses
Modomo's monthly rental payments in the reduced amount of
Php150,000.00 without escalation, they did not do so unconditionally.
As basis, the RTC cited Spouses Layug's letters dated December 7,
2006, February 6, 2007 and January 9, 2008 objecting to Spouses
Modomo's deficient payments.16
Spouses Modomo filed a motion for reconsideration, which the RTC
denied on April 6, 2010.17
CA Proceedings
Aggrieved, Spouses Modomo filed a petition for review before the CA,
reiterating the arguments they raised before the RTC.
The CA denied said petition through the assailed Decision,18 the
dispositive portion of which reads:
416
 WHEREFORE, premises considered, the instant Petition
for Review is hereby DENIED DUE COURSE and
accordingly, DISMISSED for lack of merit. The assailed
Decision dated January 28, 2010 and Order dated April 6,
2010, issued by the RTC, Branch 59, Makati, in Civil Case
No. 09-981 are hereby AFFIRMED with MODIFICATION
that petitioners are further ORDERED to pay [Spouses
Layug] legal interest of twelve percent (12%) per annum
on the back rentals [amounting to Php3,119,200.00] from
the date of judicial demand on July 23, 2008 until fully
paid.
SO ORDERED.19
The CA held that Spouses Modomo failed to establish the concurrence
of the requisites necessary to extinguish or modify the Contract of Lease
by way of novation.20 As well, the CA affirmed the lower courts' findings
regarding the inapplicability of the principle of estoppel.21
Finally, considering that Spouses Modomo vacated the leased premises
on November 2009, the CA clarified that the monetary award of
Php208,725.00 per month as payment for reasonable use and
occupation of the leased premises shall run from the filing of the
complaint for ejectment in July 2008, but only until the surrender of the
leased premises in November 2009.22
Spouses Modomo's subsequent motion for reconsideration was also
denied through the CA's assailed Resolution,23 which the former
received on July 26, 2011.24
On August 5, 2011, Spouses Modomo filed a Motion for Extension of
Time to File Petition for Review on Certiorari25 (Motion for Extension),
praying for an additional period of thirty (30) days, or until September 9,
2011, to file their Petition.
Finally, this Petition was filed on September 9, 2011, the last day of the
additional period prayed for.
On October 3, 2011, the Court issued a Resolution26 granting Spouses
Modomo's Motion for Extension, and directing Spouses Layug to file
their comment to the Petition.
It appears, however, that the RTC issued a Writ of Execution against
Spouses Modomo for the satisfaction of the monetary award granted in
Spouses Layug's favor. Hence, Spouses Modomo's real property
covered by TCT No. T-130972 was made subject of a Notice of Sheriffs
Sale on Execution of Real Property27 scheduled on March 5 and 9 of the
following year.28 This prompted Spouses Modomo to file an Urgent
Motion for the Issuance of a Temporary Restraining Order/Status Quo
Order29 (Urgent Motion) on February 21, 2012.
The Urgent Motion was opposed by Spouses Layug through their
Comment (To Petitioners' Urgent Motion)30 filed on June 25, 2012.
Appended to this Comment is a copy of the RTC's Order31 dated March
2, 2012 granting the Urgent Motion to Defer Sale on Execution filed
therein by Spouses Modomo. The Order states, in part:
In this case, considering that there is a pending Urgent
Motion for the Issuance of a Temporary Restraining
Order/Status Quo and Petition for Review on Certiorari
under Rule 45 before the Honorable Supreme Court x x x
[the RTC], which is a mere lower [c]ourt, deems it wise and
appropriate to defer the scheduled auction sale on March
5 and 9, 2012, so as not to render the issues pending
before the High Court moot and moribund. Moreover, the
Court believes that the deferment of the auction sale will
not prejudice nor cause irreparable damage against
[Spouses Layug] considering that should the High Court
rule on the pending issues therein, [the RTC] can promptly
act accordingly.
WHEREFORE, in view of the foregoing, [Spouses
Modomo's] Urgent Motion to Defer Sale on Execution is
hereby GRANTED. Accordingly, the auction sale
scheduled on March 5 and 9, 2012 is hereby deferred until
further ordered.32 (Italics supplied)
According to Spouses Layug, the foregoing Order rendered Spouses
Modomo's Urgent Motion before this Court moot and academic.33
Spouses Layug's Comment on the Urgent Motion was noted by the
Court through its Resolution34dated September 3, 2012.
Meanwhile, Spouses Layug filed their Comment35 to the Petition on
January 4, 2012, to which Spouses Modomo filed their Reply.36
In this Petition, Spouses Modomo fault the CA for ruling that no novation
of the Contract of Lease had taken place.37 In this connection, Spouses
Modomo also claim that the CA erred when it failed to apply the principle
of estoppel in pais in the present case.38
Finally, Spouses Modomo argue that the CA erred in failing to rule upon
their claim for reimbursement for useful improvements under Article
1678 of the Civil Code.39
The Issues
The issues submitted for the Court's resolution are:
1. Whether the provisions of the Contract of Lease governing
rental fees, escalation and real estate tax payment have been
417
 partially novated by the parties' alleged subsequent verbal
agreement;
2. Whether the principle of estoppel in pais applies so as to
preclude Spouses Layug from denying the partial novation of
the Contract of Lease; and
3. Whether Spouses Modomo are entitled to reimbursement for
useful improvements made upon the leased property.
The Court's Decision
The Petition is granted in part.
Partial Novation
Spouses Modomo adamantly insist that the terms of the Contract of
Lease governing rental fees, escalation and real estate tax payments
have been modified through a subsequent verbal agreement.
Spouses Modomo alludes to the existence of a partial novation,
governed by Article 1291 of the Civil Code which states:
ART. 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor.
(Emphasis supplied)
Noted civilist Justice Eduardo P. Caguioa elucidated on the concept of
modificatory novation as follows:
x x x Novation has been defined as the substitution or
alteration of an obligation by a subsequent one that
cancels or modifies the preceding one. Unlike other
modes of extinction of obligations, novation is a juridical
act of dual function, in that at the time it extinguishes an
obligation, it creates a new one in lieu of the old. x x x This
is not to say however, that in every case of novation the
old obligation is necessarily extinguished. Our Civil Code
now admits of the so-called imperfect or modificatory
novation where the original obligation is not extinguished
but modified or changed in some of the principal conditions
of the obligation. Thus, article 1291 provides that
obligations may be modified.40 (Emphasis supplied)
While the Civil Code permits the subsequent modification of existing
obligations, these obligations cannot be deemed modified in the
absence of clear evidence to this effect. Novation is never presumed,
and the animus novandi, whether total or partial, must appear by
express agreement of the parties, or by their acts that are too clear and
unequivocal to be mistaken.41
Accordingly, the burden to show the existence of novation lies on the
party alleging the same.
Applying the foregoing principles, the Court finds that while there has
been a modificatory novation of the Contract of Lease through the
parties' subsequent verbal agreement, such novation relates solely to
the lowering of the monthly rental fee from Php170,000.00 to
Php150,000.00.
The provisions governing escalation and real estate tax payment, as set
forth under the Contract of Lease and modified by the subsequent
written Addenda, stand.
The modification of the monthly rental fee through the parties'
subsequent verbal agreement is confirmed by the evidence on record,
and Spouses Layug's own submissions.
The records are replete with evidence confirming the modification of the
monthly rental fee through the subsequent verbal agreement of the
parties.
Foremost, the Spouses Layug served upon Spouses Modomo several
Statements of Account42reflecting the latter's unpaid balance. These
statements show that Spouses Layug consistently computed Spouses
Modomo's unpaid balance on the basis of the lowered monthly rental
fee of Php150,000.00, instead of Php170,000.00.
In addition, Spouses Layug's Letter43 dated March 24, 2008 (Final
Demand) also reflects a computation of Spouses Modomo's unpaid
balance on the basis of the lowered monthly rental fee.
Finally, any doubt as to the modification of the monthly rental fee is
dispelled by the statements in Spouses Layug's Comment to the Petition
which unequivocally confirm such modification:
x x x The alleged novation on the monthly rental rate of
[Php]150,000.00 from [Php]170,000.00 would not in
anyway novate an existing and valid contract whereby all
418
 its valid and enforceable stipulations would be put to
naught.
xxxx
In fine, it may be true that the rental rate of
[Php]170,000.00 was modified by the parties and a
novation of the principal condition of the [C]ontract of
[L]ease was thereby effected, nevertheless, such a
modification did not render the [C]ontract of [L]ease as
totally extinguished but rather[,] merely modified. In fine,
all other conditions of the contract[,] including the
escalation clause on the monthly rental rate and the
proportional payment of real property taxes and
assessments by [Spouses Modomo] remain valid and
subsisting.44 (Emphasis supplied)
These statements, coupled with the computation in the Statements of
Account and Final Demand, confirm the parties' subsequent verbal
agreement to lower the monthly rental fee from Php170,000.00 to
Php150,000.00. Notably, even the MeTC, RTC and CA appear to have
computed Spouses Layug's award for rental arrearages based on the
lowered rental fee,45 despite the absence of an explicit recognition of the
rental fee's modification in their respective judgments.
Spouses Modomo failed to establish that the provisions governing
escalation and proportional payment of real estate tax payment have
been similarly modified.
While the records bear sufficient evidence to show the subsequent
modification of the monthly rental fee, no similar evidence exists on
record to warrant the non-imposition of the provisions on annual
escalation and proportional payment of real estate tax.
To note, the parties took pains to execute two written Addenda for the
purpose of modifying the terms and conditions of the parties' Contract
of Lease.
The first Addendum46 dated February 11, 2005 sets forth a detailed
schedule of payment of rentals for the entire seven (7)-year term of the
lease.
The second Addendum47 dated February 15, 2005 reflects the following
modifications in relation to taxes and assessments, among others:
WHEREAS, the LESSORS and LESSEE thereat mutually
further agree to incorporate the following corrections to
and additional stipulations to form part of the Contract of
Lease, to wit:
xxxx
TAXES AND ASSESSMENTS
For the entire duration of this contract, including any
extension and renewal thereof, the parties agreed that the
LESSEE shall pay all taxes and assessments due the
government for the portion of the above-mentioned
parcels of land occupied by the building constructed
thereon by the LESSEE which is the subject of this lease.
The parties agree to share whatever assessment of taxes
for every year during the term of this Contract on the
following sharing basis, to wit:
Lessors Lessee
Lot 40% 60%
Building 25% 75%
To be sure, neither the first nor second Addendum has the effect of: (i)
waiving the imposition of escalation; or (ii) completely absolving
Spouses Modomo from real estate tax liability. On the contrary, these
Addenda reinforce the parties' intention to: (i) impose annual escalation
at the rates set forth under the Contract of Lease; and (ii) impose
proportional payment of real estate tax during the subsistence of the
lease.
If the parties truly intended to further modify the Contract of Lease by
deleting the provisions on escalation and proportional payment of real
estate tax, they would have done so through anotherwritten document,
as they have consistently done with all modifications relating to such
matters. It must be stressed that unlike the modification of the monthly
rental fee which is supported by several pieces of documentary
evidence and confirmed by Spouses Layug's own submissions, the
modification of the provisions on annual escalation and proportional
payment of real estate tax is supported solely by Spouses Modomo's
own self-serving statements.
Estoppel does not apply.
419
Spouses Modomo also insist that Spouses Layug should be precluded
from denying the partial novation of the Contract of Lease since they
accepted Spouses Modomo's monthly rental payments without
escalation and proportional share in the real estate tax for three (3)
years, starting on the second year of the lease term. As basis, Spouses
Modomo harp on the principle of estoppel in pais.
Estoppel in pais arises when one, by his acts, representations or
admissions, or by his own silence when he ought to speak out,
intentionally or through culpable negligence, induces another to believe
certain facts to exist and such other rightfully relies and acts on such
belief, so that he will be prejudiced if the former is permitted to deny the
existence of such facts.49
For the principle of estoppel in pais to apply, there must be: (i) conduct
amounting to false representation or concealment of material facts or at
least calculated to convey the impression that the facts are otherwise
than, and inconsistent with, those which the party subsequently attempts
to assert; (ii) intent, or at least expectation that this conduct shall be
acted upon, or at least influenced by the other party; and (iii) knowledge,
actual or constructive, of the actual facts.50
Based on the records, Spouses Layug served upon Spouses Modomo
several letters dated December 7, 2006,51 February 6, 200752 and
January 9, 200853 expressing their objection to the latter's deficient
payments.54 These letters belie Spouses Modomo's imputation of
silence and acquiescence on the part of Spouses Layug. It can hardly
be said that Spouses Layug falsely conveyed their acquiescence to
Spouses Modomo's deficient payments through silence, there being no
"silence" to speak of.
Spouses Modomo are not entitled to reimbursement for the cost
of improvements made on the leased property.
Finally, Spouses Modomo maintain that they are entitled to
reimbursement under Article 1678 of the Civil Code, which reads:
ART. 1678. If the lessee makes, in good faith, useful
improvements which are suitable to the use for which the
lease is intended, without altering the form or substance of
the property leased, the lessor upon the termination of the
lease shall pay the lessee one-half of the value of the
improvements at that time. Should the lessor refuse to
reimburse said amount, the lessee may remove the
improvements, even though the principal thing may suffer
damage thereby. He shall not, however, cause any more
impairment upon the property leased than is necessary.
Suffice it to state that Spouses Modomo have, by their own acts,
deprived the Spouses Layug of the option to appropriate the
improvements made upon the leased premises by causing their
demolition. Notably, Spouses Modomo did not dispute that they had
"vacated the leased premises [and] left no single piece of wood or
materials on the premises [and] demolished everything."55Hence, they
are precluded from seeking reimbursement for improvements that are
now inexistent.
The computation of rental arrearages and compensation for
reasonable use of the leased premises, together with applicable
interest, must be corrected.
The assailed Decision awards the following amounts in Spouses
Layug's favor:
1. Rental arrearages amounting to Php3,119,200.00, with 12%
interest computed from the date of judicial demand (i.e., filing of
the complaint for ejectment on July 23, 2008);
2. Payment for reasonable use and occupation of the leased
premises amounting to Php208,725.00 per month from the filing
of the complaint for ejectment in July 2008to November 2009,
when Spouses Modomo finally vacated the leased premises;
and
3. Attorney's fees amounting to Php10,000.00.
The Court notes that the value of rental arrearages was arrived at by
applying the escalation rates stipulated under the Contract of Lease,
thus:
Unpaid rental on the second floor Php 56,500.00
during construction
420
 Unpaid rental on the 10%
increase for the year 2006
(Php165,000.0056 - the date of judicial demand (i.e., filing of the complaint for
Php150,000.00 - Php15,000.00 x
12 months)
Unpaid rental on the 10%
increase for the year 2007
(Php181,500.0057 - Php
150,000.00 = Php31,500 x 12
months)
Unpaid rental for the entire year
of 2008 payable at the beginning
of the year per first Addendum,
plus 15% escalation
(Php208,725.0058 x 12 months)
Total
180,000.00 1. Rental arrearages and unpaid real estate taxes amounting to
Php3,146,739.80, with 6% interest per annum computed from
ejectment on July 23, 2008) until finality of this Decision;
2. Payment for reasonable use and occupation of the leased
premises at the rate of Php208,725.00 per month from January
378,000.00 2009 until November 2009, when respondents surrendered
possession of the leased premises in November 2009,
amounting to a total of Php2,295,975.00, with 6% interest per
annum from December 1, 2009 until finality of this Decision;
3. Attorney's fees amounting to Php10,000.00; and
2,504,700.00 4. The sum of the amounts in paragraphs 1, 2 and 3 herein, with
6% interest per annum from finality of this Decision until full
satisfaction.
SO ORDERED.
59
Php3,119,200.00

Considering that the provision on the proportional sharing of real estate

tax liability remains effective, the Court deems it proper to award, in
addition to rental arrearages, Spouses Modomo's unpaid share in real
estate taxes amounting to Php27,539.80.60
As well, the Court finds that the additional award for monthly payment
for reasonable use and occupation of the leased premises should start
to run not from the filing of the complaint for ejectment on July 23, 2008,
but rather in January 2009, considering that the award for rental
arrearages already includes unpaid rental fees for the entire year of
2008, that is, until December 2008.
Finally, inasmuch as the rental arrearages and unpaid real estate taxes
do not constitute a loan or forbearance of money,61 the proper interest
applicable thereon is not 12%, but 6% per annum.
WHEREFORE, premises considered, the Petition is GRANTED IN
PART. The Decision dated March 22, 2011 rendered by the Court of
Appeals in CA-G.R. SP No. 113807 is AFFIRMED WITH
MODIFICATION.
Petitioners Dr. Romy Modomo and Jocelyn Modomo are ORDERED TO
PAY respondents Spouses Moises P. Layug, Jr. and Felisarin E. Layug
the following amounts:

421
 CARLOS J. VALDES, GABRIEL A.S. VALDES, FATIMA DELA
CONCEPTION AND ASUNCION V. MERCADO,* PETITIONERS, VS.
LA COLINA DEVELOPMENT CORPORATION (LCDC), PHILIPPINE
COMMUNICATION SATELLITE, INC. (PHILCOMSAT), LA COLINA
RESORTS CORPORATION (LCRC), MONTEMAR RESORTS AND
DEVELOPMENT CORPORATION (MRDC), JOSE MARI CACHO,
HONORIO A. POBLADOR III, AND ALFREDO L. AFRICA,
RESPONDENTS.
HERNANDO, J.:
This Petition for Review on Certiorari[1] seeks to reverse and set aside
the October 31, 2012 Decision[2] and July 16, 2013 Resolution[3] of the
Court of Appeals (CA) in CA-G.R. CV No. 94713 that reversed and set
aside the October 26, 2009 Decision[4] of the Regional Trial Court (RTC),
Branch 2, Balanga City, Bataan in Civil Case No. 6134.
The RTC declared as null and void the Memorandum of Agreement[5]
dated September 3, 1992 involving respondents La Colina Resorts
Corporation (LCRC), La Colina Development Corporation (LCDC),
Montemar Beach Club, Inc. (MBCI), and Philippine Communication
Satellite, Inc. (Philcomsat), and the Consolidated Deed of Sale[6]dated
August 31, 1992 executed by LCRC and LCDC in favor of Montemar
Resort and Development Corporation (MRDC).
The July 16, 2013 Resolution of the CA denied petitioners' Motion for
Reconsideration.[7]
Factual Antecedents:
The facts, culled from the records and Decision of the CA, are as follows:
Carlos Valdes (Carlos, Sr.)[8] and his children, herein petitioners Gabriel
A. S. Valdes (Gabriel), Carlos J. Valdes, Antonio A.S. Valdes, Fatima
de la Concepcion, Asuncion Mercado, and Virginia A.S. Valdes
(Valdeses), are the stockholders of Bataan Resorts Corporation
(BARECO), which owned a large tract of land in Bagac, Bataan under
Transfer Certificates of Title Numbers 45864, 45865, 45867, 45868, and
45869 of the Registry of Deeds of Bataan.[9]
Sometime in 1974, Carlos, Sr. invited Francisco Cacho (Francisco) and
his son, individual respondent Jose Mari Cacho (Jose Mari), to visit and
assess the property's suitability for a beach resort project (Montemar
Project). Having received a favorable response from Francisco, both
Carlos, Sr. and Francisco proceeded to carry out the Montemar Project,
which included the development and improvement of the beach basin
as a beach resort (Montemar Beach Club), and the conversion of the
remaining land area into a residential subdivision (Montemar Villas).[10]
To implement the project, the Valdeses transferred and conveyed their
shares of stock in BARECO in favor of LCDC, a fully-owned corporation
of the Cacho family, through a Deed of Sale[11] dated May 24, 1975, for
a consideration of P20 Million. LCDC then made a partial payment
thereof in the amount of P2.5 Million from February 1975 to December
1979,[12] while the remaining balance amounting to P17.5 Million was
covered by promissory notes.[13]
The P17.5 Million was to be paid by way of an Assignment of Rights[14]
dated October 30, 1975, wherein LCDC: (1) assigned to the Valdeses
three million worth of shares in LCRC, the corporation established by
LCDC to market and sell the shares of the beach resort; and (2)
undertook to pay the Valdeses (50%) of the net proceeds (later reduced
40%) from the sale of the Montemar Villas lots inside BARECO, as
previously acquired by LCDC.
Since Carlos, Sr. did not intend to use all BARECO real properties for
the Montemar Project, he prepared a Deed of Partition,[15] whereby only
the real properties intended to be part of the project were transferred to
LCDC. These properties, now owned by LCDC through its purchase of
the BARECO shares were, in turn, transferred by LCDC to LCRC in
exchange for fifty thousand LCRC shares issued in favor of LCDC.
By virtue of the aforementioned Assignment of Rights, LCDC and
Carlos, Sr. became seventy percent (70%) and thirty (30%)
shareholders of LCRC, respectively.[16]
Meanwhile, LCDC, as sole shareholder of BARECO, amended
BARECO's Articles of Incorporation and dissolved BARECO by
shortening its term of existence up to June 30, 1975.[17] Thereafter,
MBCI, a non-stock, non-profit club, was organized to develop the
Montemar Project. Proprietary shares in MBCI were later sold by LCRC
to the general public. Meanwhile, LCDC obtained loans to finance the
construction and development of the Montemar Villas, including the
building and facilities in the Montemar Beach Club. The loans were
422
obtained from the Development Bank of the Philippines (DBP) –
subsequently the Asset Privatization Trust (APT), Metrobank, and
General Credit Corporation (GCC), formerly the Commercial Credit
Corporation.[18]
Sales of the MBCI proprietary shares and the lots in the Montemar
Villas, including the patronage in the Montemar Beach Club were
bringing adequate income for some time. The loans obtained by LCDC
were serviced and the remittances of the agreed share of the Valdeses
in the sale of the Montemar Villas lots were made on a regular basis.
The Montemar Beach Club, on the other hand, was able to sustain
regular operations. However, during the years 1981 up to 1985, there
was a delay in the remittances of the shares to the Valdeses in the net
proceeds from the sale of the Montemar Villas lots. The records,
however, would bear that a portion of the purchase price of P20 Million,
or P16,125,717.31, was eventually paid to the Valdeses.[19]
The foregoing notwithstanding, Carlos, Sr. filed a Complaint[20] dated
July 13, 1987 for Annulment or Rescission of Contract or Specific
Performance and Damages with Prayers for Receivership Pendente Lite
and Preliminary Injunction against LCDC before the RTC of Balanga,
Bataan, docketed as Civil Case No. 5558. The case was settled on a
Joint Motion to Dismiss[21] dated April 26, 1990 filed by both parties
pursuant to a letter agreement[22]dated February 21, 1990.
In the said letter agreement, LCDC vowed to continue to undertake the
marketing of the Montemar Villas lots for the purpose of remitting to the
Valdeses their 40% share in the sale of the said lots until full payment
of the purchase price of BARECO shares amounting to P20 Million. The
RTC thus dismissed the case with prejudice in its Order[23]dated April
27, 1990.
Meanwhile, as the loans obtained by LCDC from DBP/APT remained
unpaid, the mortgaged properties of LCDC, LCRC, and MBCI were
eventually foreclosed by DBP/ATP.[24]
Sometime in 1992, LCDC and LCRC initiated negotiations with
Philcomsat, a prospective investor of the Montemar Project. In this
regard, Philcomsat presented a Memorandum of Intent[25] dated August
18, 1992, which embodied the terms and conditions agreed upon by
LCDC, LCRC, MBCI, and Philcomsat. This was with a view toward the
latter investing on the project, and, concurrently, bailing out LCDC,
LCRC and MBCI from their loan obligations with APT, GCC, and
Philcomsat. The Memorandum of Intent was presented in the board and
stockholders' meeting of MBCI. A project profile was also furnished to
the board members of MBCI, wherein MRDC, a proposed new
corporation, would transform and develop the unsold Montemar Villas
lots into a golf course and sports complex.[26]
Under the said agreement, Philcomsat vowed to settle the outstanding
loans of LCDC, LCRC, and MBCI with APT, GCC, and Philcomsat. In
consideration thereof, the ownership over the properties of LCDC and
LCRC, including their shares in MBCI, would be transferred to MRDC.
MRDC would then proceed with the improvement of the facilities and
services of MBCI and development of the properties conveyed to it by
LCDC and LCRC into a sports or recreation complex, which includes a
golf course and a country club.
Meanwhile, to obtain from APT an extension of the period to pay the
outstanding obligation of LCDC and LCRC, Philcomsat paid APT the
amount of P4 Million. During the extension period, Philcomsat eventually
decided to invest in the new project, subject to conditions, particularly,
that the Valdeses: (1) give their conformity to the new project; and (2)
forego their claim to the proceeds of the sale of the Montemar Villas
lots.[27]
To convince Gabriel, acting attorney-in-fact of Carlos, Sr. to conform to
the conditions set by Philcomsat, Rafael Cacho (Rafael), the brother of
Francisco, presented orally and in writing to petitioner two (2)
scenarios:[28]
Scenario A - Philcomsat will not come in as an investor and all the
properties will be sold at public auction and all the parties will be left with
nothing.
Scenario B - Philcomsat will invest and bail out LCDC, MBCI, and the
Valdeses and the Cachos from their indebtedness to their creditors.
They will incorporate Montemar Resorts Development Corporation
("MRDC"), which will develop the beach project under a new concept
that includes a gold course, with Philcomsat owning (70%) of MRDC.
The balance of thirty percent (30%) will be distributed among the
423
Valdeses (owning 7.5% out of the 30%) and the Cachos and creditors
GCC (the remaining 22.5% of the 30%).[29]
In response Gabriel approached Honorio Poblador III (Poblador),
president of Philcomsat, and presented an unsigned draft letter,[30] which
contained, among others, the following statement:
We understand that while the sale of the above is not consummated, the
existing contract between La Colina Development Corp. and Amb.
Carlos J. Valdes per Assignment of Rights dated October 30, 1975 is
still in force and effect.[31]
Poblador did not agree to the draft letter and the same was rejected by
LCDC, LCRC, and Cacho. After further discussion between Rafael and
Gabriel, and after the aforementioned portion of the letter was deleted,
a letter-conformity[32] dated August 27, 1992 was eventually finalized.
Pertinent portions of the letter-conformity dated August 27, 1992 reads
as follows:
Dear Gabby,
This is to confirm your support to the new concept of the Montemar
Project which will involve the entry of Philcomsat as an investor.
However you have indicated to us your preference to sell all your holding
in:
a) All your shareholdings in La Colina Resorts Corporation
b) All your rights as an unpaid seller of the Montemar Villas (which is
now conceived to be a future golf course consisting of approximately
over 60 hectares)
xxxx
Your indicative price you have set for the above is P35M (negotiable).
Kindly issue the necessary authority.
Very truly yours,
(signed)
RAFAEL M. CACHO
(signed)
JOSE MARI CACHO
CONFORME:
(signed)
GABRIEL A.S. VALDES
Attorney-in-fact of Carlos J. Valdes
Thereafter, pursuant to the Memorandum of Intent dated August 18,
1992 and the letter-conformity dated August 27, 1992, Philcomsat,
together with LCDC, LCRC, and MBCI executed a Memorandum of
Agreement[33] dated September 3, 1992 essentially identical to the
Memorandum of Intent dated August 18, 1992 executed by and between
LCDC, LCRC, MBCI, and Philcomsat. Meanwhile, on August 31, 1992,
LCRC and LCDC, through a Consolidated Deed of Absolute Sale,[34]
conveyed and sold to MRDC all their real and personal properties
situated in Bagac, Bataan.
Notably, after executing the letter-conformity dated August 27, 1992,
Gabriel appointed Jose Mari and Rafael on August 28, 1992 to sell the
shareholdings of Carlo, Sr. in LCRC and other real properties of the
Valdeses.[35]Thereafter, on November 18, 1992, Rafael informed Gabriel
that Philcomsat offered to purchase Carlo, Sr.'s shareholdings in LCRC
and the Valdeses' other real properties for a consideration of
P24,771,800.00,[36] which petitioners rebuffed. Gabriel then visited
Poblador to request for a higher offer, but nothing materialized from their
negotiations.
Proceedings before the Regional Trial Court:
On April 6, 1993, the Valdeses filed before the RTC a Complaint for
Reconveyance, Annulment and/or Rescission of Contract, Specific
Performance and Damages with Prayer for Temporary Restraining
Order and Writ of Preliminary Injunction against LCDC, LCRC,
Philcomsat, MRDC, Jose Mari, including Poblador and Alfredo L. Africa
(Africa), in their capacities as officers for Philcomsat and MRDC (herein
collectively referred to as respondents).[37]
424
MRDC, Poblador, and Africa filed their Joint Answer on May 19, 1993
and an Omnibus Motion for Issuance of Amended Order and to Admit
Joint Answer on May 21, 1993. Meanwhile Philcomsat filed its Answer
on May 21, 1993. LCDC, LCRC, and Cacho filed their Answer on June
3, 1993.[38]
Meanwhile, trial on the application for preliminary injunction ensued. On
May 2, 1995, the RTC issued an Order, directing the issuance of a writ
of injunction against respondents. The dispositive potion of the Order
reads:
WHEREFORE, in view of all the foregoing, the application of plaintiffs
for the issuance of a writ of preliminary injunction is hereby granted and
defendants and all those claiming rights under them are enjoined from:
1) Alienating, disposing, or otherwise encumbering the properties
subject matter of this case, that is, the parcels of land registered under
the name of Montemar Resorts and Development Corporation listed in
Exhibit "PP-Inj." To PP-3-Inj.";
2) Implementing the provisions of the Memorandum of Agreement
(Exhibit "Q-Inj.") sought to be nullified; and
3) Introducing improvements or otherwise transforming the aforesaid
properties into a golf course or a commercial or industrial complex upon
posting of a bond by plaintiffs in the amount of PhP100,000.00 SO
ORDERED.[39]
The RTC then resumed pre-trial proceedings and, thereafter, conducted
trial on the main case. On October 26, 2009, the trial court rendered a
Decision[40] declaring the Memorandum of Agreement dated September
3, 1992 and the Consolidated Deed of Absolute Sale dated August 31,
1992 null and void. The dispositive portion of the said Decision states:
WHEREFORE, foregoing considered, judgment is hereby rendered:
1. Declaring null and void the Memorandum of Agreement dated
September 3, 1992 between LCRC, LCDC and MBCI and
PHILCOMSAT being contrary to the spirit, intent and obligation of the
original joint venture agreement and without consent and approval by
the plaintiffs;
2. Declaring null and void the Consolidated Deed of Sale dated August
31, 1992 executed by LCRC, LCDC thru its President Jose Mari Cacho
as vendor in favor of MRDC as vendee, represented by defendant
Alfredo Africa for lack of consent of the plaintiffs and for having been
entered into in bad faith by herein defendants. All the properties involved
in the transaction should, therefore, revert back to LCDC;
3. Denying plaintiffs' prayer for damages for lack of factual basis;
4. Ordering the defendants, to pay attorney's fees amounting to 10% of
any recovery and as well as the expenses of litigation and costs of suit,
jointly and severally. SO ORDERED.[41]
The RTC found that the Valdeses and LCDC entered into a joint venture
agreement, whereby the former would contribute to the joint venture the
BARECO properties in Bagac, Bataan, and in return, LCDC would
develop and improve them into a residential subdivision or the
Montemar Villas. The proceeds of the sale of the Montemar Villas lots
would then be divided between them in the following manner: 60% to
LCDC, and 40% to the Valdeses.[42]
The trial court further found that despite the Valdeses' refusal to allow
Philcomsat to take part in the joint venture agreement, LCDC, LCRC,
MBCI, and Philcomsat, unknowingly to the Valdeses, executed the
September 3, 1992 Memorandum of Agreement, an agreement that
effectively disregarded the rights and interests of the Valdeses,
particularly, their forty percent (40%) share in the proceeds of the sale
of the Montemar Villas lots. Moreover, the agreement, without the
conformity of the Valdeses, set aside the original intent of the joint
venture agreement only to be replaced by respondents' plan to convert
the Montemar Villas lots into a golf course and sports complex.[43]
Considering the foregoing, the RTC held that the two (2) agreements
are null and void. It considered the lack of consent on the part of the
Valdeses to the said contracts and the evident bad faith, which attended
their execution, thus:
425
These transactions in so far as they involve the properties of the
plaintiffs are null and void for lack of consent of the plaintiffs and for
having been entered into bad faith because the parties were all aware
of the rights of plaintiffs and the need to obtain from them their consent
which was already evident from the beginning. This Court must strike
down these transactions and restore the properties to where they were
when the rights of plaintiffs and the obligations of the co-joint venturers
[sic] were clear and unmolested.
There was indeed a joint venture agreement between plaintiffs and the
Cachos and this was expressly admitted by defendant LCDC (Exhibit V)
which would bind PHILCOMSAT and MRDC being the successor of
LCDC. This being the case, fiduciary relationship exists among the joint
ventures [sic]. Utmost good faith is demanded of the party in possession
of the property or profits and he should not be allowed to obtain any
unfair advantage of the other co-adventurers. In this light alone, LCDC
did not have any right to execute the [Memorandum of Agreement] and
the Consolidated Deed of Sale in derogation of the rights of the plaintiffs
under their covenant with LCDC so that the execution of said
[Memorandum of Agreement] and Consolidated Deed of Sale
constituted a gross breach of trust and of the contracts with the plaintiffs
which at the time obtained for the violators unfair advantage over the
plaintiffs. LCDC should not be allowed to breach with impunity its
covenants with plaintiffs and when it did in conspiracy with the rest of
the defendants the plaintiffs are entitled to obtain from the Court the
reliefs they demanded.
The defendants were at all times aware of the obligation regarding the
BARECO properties and the restrictions on their use and still they
cooperated in disregarding them and in instituting moves which
undeniably deprived the plaintiffs of their rights. This systematic
divestment of rights took several steps, all without the consent of or
knowledge of the plaintiffs, and even against their manifest will.
xxxx
The Court, in view of the foregoing disquisitions, holds that plaintiffs'
rights to the Bagac properties have been violated when LCRC and the
rest of the defendants in a series of maneuvers deprived them their right
of ownership and their rights to possession, use and benefits therefrom.
All transactions executed and entered into by defendants who violated
plaintiffs' rights and deprived them of the same by means of fraud and
violations of trust are hereby declared null and void. All properties should
revert to LCDC.[44]
Philcomsat, MRDC, and Poblador filed a Motion for Reconsideration of
the RTC Decision on November 11, 2009. They later filed a
Supplemental Motion for Reconsideration on December 18, 2009.
However, the trial court denied the Motion for Reconsideration and the
Supplemental Motion for Reconsideration on January 4, 2010.[45]
Proceedings before the Court of Appeals:
On October 31, 2012, the CA rendered its assailed Decision, which
reversed and set aside the aforesaid RTC ruling. The dispositive portion
of the Decision reads:
WHEREFORE, premises considered, the appeal is GRANTED. The
Decision dated October 26, 2009 rendered by the Regional Trial Court
of Balanga City, Bataan, Branch 2, declaring null and void the
Memorandum of Agreement dated September 3, 1992 between LCRC,
LCDC, and MBCI and Philcomsat and the Consolidated Deed of Sale
dated August 31, 1992 executed by LCRC, LCDC as vendor in favor of
MRDC as vendee is REVERSED and SET ASIDE. The Writ of
Preliminary Injunction issued by the RTC dated May 2, 1995 is LIFTED
and SET ASIDE. The Complaint in Civil Case No. 6134 is DISMISSED.
SO ORDERED.[46]
The CA found that the Deed of Sale dated May 24, 1975, promissory
notes executed by LCDC, and the Assignment of Rights dated October
30, 1975, negated the existence of a joint venture agreement between
the Valdeses and LCDC.[47] In this regard, the CA held that the
relationship between the Valdeses and LCDC was, instead, one of
vendor-vendee. As explained by the appellate court, "there was no
contract to contribute properties to a common fund so as to share the
profits between themselves. There is even no common fund to speak of
LCDC's obligation to pay persists as long as it is able to sell the
subdivision lots even if the corporation itself is experiencing losses."[48]
The CA also found that Gabriel was well aware of the new concept of
the Montemar Project and consented to the entry of Philcomsat as a
new investor. Considering Gabriel's express conformity to the new
426
concept of the Montemar Project, as embodied in the August 27, 1992
letter, the appellate court thus ruled that the obligation of LCDC to sell
the Montemar Villas lots and remit the proceeds thereof to the Valdeses
has been extinguished. It then held that the August 31, 1992
Consolidated Deed of Absolute Sale and the September 3, 1992
Memorandum of Agreement are valid contracts. The CA explained the
foregoing in this wise:
To dispose all or substantial all or a substantial amount of its properties
and assets, a corporation, through a majority vote of its board of
directors, is required to be authorized by the vote of at least two-thirds
(2/3) of the outstanding capital stock of the members in a stockholder's
meeting duly called for the purpose.
xxxx
The requirement before LCRC can dispose of all or a substantial amount
of its properties has been complied with when the stockholders of LCRC
approved the new concept of the Montemar project, as shown by the
Certification of the Corporate Secretary of LCRC dated August 27, 1992
x x x x[49]
xxxx
As we have previously mentioned, this new concept of the Montemar
Project has been discussed extensively in MBCI meetings which
[petitioner] attended or which minutes he signed. Carlos Valdes, 30%
owner of LCRC, therefore assented to the transfer.[50]
According to the CA, neither bad faith nor fraud attended the execution
of the August 31, 1992 Consolidated Deed of Sale and September 3,
1992 Memorandum of Agreement. As such, ordering their rescission or
cancellation would be improper considering that the Valdeses have
already been substantially paid in cash and properties.[51]
Petitioners sought reconsideration of the October 31, 2012 Decision of
the CA, which was, however, denied by the appellate court in its July,
16 2013 Resolution.[52]
Issues
Hence, this instant petition, raising the following assignment of errors:
The [ca] seriously erred when it granted the appeal and set aside the
decision dated october 26, 2009 rendered by the regional trial court of
bataan, which declared the memorandum of agreement dated 3
september 1992 null and void between lcrc, lcdc, mbci and philcomsat;
and the consolidated deed of sale dated 31 august 1992 executed by
lcrc, lcdc as vendors in favor of mrdc as vendee, based on the following
grounds:
I. THE [CA] SERIOUSLY ERRED WHEN IT RULED THAT THERE IS
NO JOINT VENTURE AGREEMENT TO BEGIN WITH AND THAT THE
CONTRACT ENTERED INTO BY THE VALDESES AND CACHOS
WAS THAT OF A SIMPLE SALE. CONTRARY TO ITS FINDINGS AND
AS APTLY POINTED OUT BY THE LOWER COURT, THE
ASSIGNMENT OF RIGHTS DATED 30 OCTOBER 1975 CLEARLY
STATES THE TERMS AND CONDITIONS OF THE PARTIES WHICH
MUST BE FAITHFULLY COMPLIED WITH, IN SUPPORT OF THE
ORIGINAL DEED OF SALE.
II. THE [CA] SERIOUSLY ERRED WHEN IT RULED THAT THE
RESPONDENT LCDC, LCRC AND CACHOS, TO THE EXCLUSION
OF THE PETITIONERS, HAVE THE RIGHT TO MORTGAGE THE
SUBJECT PROPERTIES, BEING THE OWNERS THEREOF.
III. THE [CA] SERIOUSLY ERRED WHEN IT RULED THAT THE
PETITIONERS CONSENTED TO THE MONTEMAR PROJECT,
WHICH AS A RESULT, EXTINGUISHED/NOVATED THE
OBLIGATION OF LCDC TO SELL MONTEMAR VILLAS LOTS AND
REMIT THE PROCEEDS.
IV. THE [CA] SERIOUSLY ERRED WHEN IT RULED THAT THE
CONSOLIDATED DEED OF SALE DATED 31 AUGUST 1992 AND
DEED OF ABSOLUTE SALE AND MEMORANDUM OF AGREEMENT
DATED 3 SEPTEMBER 1992 ARE VALID IN SPITE OF LACK OF
KNOWLEDGE ON THE PART OF THE PETITIONERS.
V. THE [CA] SERIOUSLY ERRED IN APPLYING THE PRINCIPLE OF
INNOCENT PURCHASER FOR VALUE AND IN GOOD FAITH.
EVIDENTLY, RESPONDENTS PHILCOMSAT AND MRDC KNEW OF
THE IMPENDING RIGHTS AND INTEREST OF THE ORIGINAL
427
OWNERS WHEN THE CONSOLIDATED DEED OF SALE AND THE
MEMORANDUM OF AGREEMENT FOR THE ENTRY OF
PHILCOMSAT, WERE CONSUMMATED.[53]
In sum, the issues are whether: (1) there was a joint venture between
LCDC and the Valdeses; (2) there was a novation of the May 24, 1975
Deed of Sale between LCDC and the Valdeses that would result in the
extinguishment of LCDC's liability to the Valdeses; (3) Philcomsat and
MRDC are purchasers in good faith and for value of the subject
properties in Bataan; and (4) petitioner can avail of the remedy of
rescission of the September 3, 1992 Memorandum of Agreement and
the August 31, 1992 Consolidated Deed of Sale.
Petitioners' Arguments:
Petitioners contend that the original agreement between the Valdeses
and LCDC required the Valdeses to contribute the BARECO properties
to the Montemar Project. In consideration thereof, LCDC shall form
LCRC to develop and improve the said properties. Meanwhile, both the
Valdeses and LCRC shall sell the properties and share proportionately
in the profits realized. This scenario, petitioners insist, is the very joint
venture agreement executed by and between the Valdeses and LCRC,
which is supposedly reflected in the Deed of Sale dated May 24, 1975,
the promissory notes issued to the Valdeses, including the Assignment
of Rights dated October 30, 1975 and a Memorandum of Agreement.[54]
Taking all these documents together, petitioners emphasize that the
joint venture agreement between the Valdeses and LCDC is not a one-
time transaction, but a recurring promise to share in the proceeds of the
sale of the Montemar Villas lots.[55]
From the foregoing, petitioners argue that LCDC cannot, without
violating the existing fiduciary relationship between it and the Valdeses,
encumber or mortgage the properties subject of the joint venture
agreement without their consent and approval. They further claim that
any act committed by LCDC, as co-venturer, without the express
authority of the Valdeses, is not binding upon the latter.[56]
In this connection, the entrance of Philcomsat as a new investor in the
Montemar Project and the execution of the September 3, 1992
Memorandum of Agreement between LCRC, LCDC, MBCI and
Philcomsat, including the execution of the August 31, 1992
Consolidated Deed of Sale by LCRC and LCDC in favor MRDC, are acts
in violation of the true intent and purpose of the joint venture i.e., that
LCDC and the Valdeses shall share in the proceeds of the sale of the
Montemar Villas lots, in proportion of sixty percent (60%) and forty
percent (40%), respectively. Petitioners insist that these acts cannot
bind the Valdeses since they are in violation of their rights under the joint
venture agreement, and in disregard of their forty percent (40%) share
in the sale of the Montemar Villas lots.[57]
Petitioners further point out that the CA committed serious error of fact
and law when it concluded that there was novation, which produced the
effect of extinguishing the contract of sale between the Valdeses and
LCDC given that the supposed substitution of creditors i.e., the entry of
Philcomsat, was never declared in clear and unequivocal terms.[58] Also,
Philcomsat and MRDC could not be considered as innocent purchasers
for value considering that they had knowledge of the impending rights
and interest of the Valdeses over the subject properties when the
September 3, 1992 Memorandum of Agreement and the August 31,
1992 Consolidated Deed of Sale were consummated.[59]
Considering the foregoing recitals, petitioners thus maintain that the
Valdeses are entitled to the: (1) rescission of the September 3, 1992
Memorandum of Agreement and August 31, 1992 Consolidated Deed
of Sale; (2) reconveyance of the subject properties from LCDC; and (3)
payment of their forty percent (40%) share in the income derived from
sale of the Montemar Villas lots.
Respondents' Arguments:
For their part, respondents LCDC, LCRC, and Cacho argue that being
a lawyer and accountant, nothing should have prevented Carlos, Sr.
from manifesting in unequivocal terms in any of the documents
presented by petitioners that he intended to form a joint venture between
the Valdeses and LCDC. Respondents, in this regard, maintain that the
contract executed by and between the Valdeses and LCDC was a
contract of sale, whereby the Valdeses, for a consideration of P20
Million, conveyed to LCDC, and later, to LCRC, the BARECO properties
in Bataan. As owner in fee simple of the said BARECO properties by
virtue of a Deed of Sale dated May 24, 1975, LCDC had full disposal of
the said properties, which necessarily included the right to convey, sell,
encumber, or mortgage the same.[60]
428
Respondents also agreed with the CA that the August 27, 1994 letter-
conformity of Gabriel, who signed the said document for himself and on
behalf of the other Valdeses, manifested his unqualified recognition that
the rights of the Valdeses as unpaid sellers have been novated into
participation and sharing in the new concept of the Montemar Project.
Notably, such fact was supposedly confirmed when Gabriel authorized
the Cacho family to sell Carlos, Sr.'s shareholdings in LCRC and other
real properties of the Valdeses. Furthermore, Gabriel was a member of
the MBCI board to whom the entry of Philcomsat as a new investor was
extensively discussed during a board meeting called for such purpose,
and that the fact Gabriel himself signed the minutes of the meeting
ultimately signifies his knowledge of the proposed new concept of the
Montemar Project.[61]
Meanwhile, respondents Philcomsat and MRDC essentially raise the
same arguments as respondents LCDC, LCRC, and Jose Mari, and
further argue that Gabriel cannot avail of the remedy of rescission of the
September 3, 1992 Memorandum of Agreement and the August 31,
1992 Consolidated Deed of Sale, as he failed to satisfactorily prove that
the Valdeses cannot, in any manner, collect the unpaid obligation of
LCDC.[62]
Our Ruling
Factual findings of the CA are generally not subject to this Court's review
under a Rule 45 petition. However, the general rule on the
conclusiveness of the factual findings of the CA is also subject to well
recognized exceptions such as where the CA's findings of facts
contradict those of the RTC, as in this case.[63] All these considered, we
are compelled to review factual questions thus presented.
After a judicious review of the records of the case, this Court finds that
the CA committed no error in setting aside the October 26, 2009
Decision of the RTC. The Court, therefore, denies the instant Petition.
The Valdeses and LCDC did not enter into a joint venture
agreement. The agreement entered into by the parties is a contract
of sale.
As discussed above, petitioners contend that while Carlos, Sr. and
LCDC appeared to have entered into a contract of sale i.e., Deed of Sale
dated May 24, 1975, the parties intended to enter into a joint venture
agreement to develop the BARECO properties into a beach resort and
residential subdivision. In particular, the determination of whether both
parties entered into such agreement is necessary to address the side of
issue of whether LCDC wrongfully mortgaged the subject properties to
various financial institutions without the authority and consent of its co-
venturers or partners, and the main issue of whether the September 3,
1992 Memorandum of Agreement and the August 31, 1992
Consolidated Deed of Sale were entered into in violation of the terms of
the joint venture agreement.
Article 1370 of the Civil Code sets forth the first rule m the interpretation
of contracts. The article reads:
Art. 1370. If 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.
If the words appear to be contrary to the evident intention of the parties,
the latter shall prevail over the former.
As embodied in Article 1370 of the Civil Code, the cardinal rule in the
interpretation of contracts is that when the terms of the contract are
clear, its literal meaning shall control. Thus, in Norton Resources and
Development Corporation v. All Asia Bank Corporation,[64] this Court
held that:
x x x A court's purpose in examining a contract is to interpret the intent
of the contracting patties, 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.[65] (Emphasis
supplied)
Thus, in interpreting the agreement between the Valdeses and LCDC,
the inquiry is not what contract the partiesintended to enter into, but what
429
contract did they enter into. Notably, the Deed of Sale, if read in
conjunction with the promissory notes issued to the Valdeses and the
Assignment of Rights dated October 30, 1975, leaves no room for
interpretation as to the exact intention of the parties – they entered into
a contract of sale.
A contract of sale is defined under Article 1458 of the Civil Code:
By the contract of sale one of the contracting patties obligates himself
to transfer the ownership of and to deliver a determinate thing, and the
other to pay therefore a price certain in money or its equivalent.
"The elements of a contract of sale are: (a) consent or meeting of the
minds, that is, consent to transfer ownership in exchange for the price;
(b) determinate subject matter; and (c) price certain in money or its
equivalent."[66]
The Deed of Sale executed by Carlos, Sr. and LCDC resulted in a
perfected contract of sale, all its elements being present. There was a
mutual agreement between them, wherein 4,000 shares of stock of the
Valdeses in BARECO were sold to LCDC for a consideration of P20
Million. To be clear, the foregoing amount was paid in cash and the
balance covered by promissory notes to be paid by way of an
Assignment of Rights. Specifically, P2.5 Million of the P20 Million
purchase price was paid in cash, while the balance of P17.5 Million was
covered by promissory notes and settled through the Assignment of
Rights.
Notably, a perusal of the Assignment of Rights would show that the
same constituted full payment of the BARECO shares of stock, thus:
"That the ASSIGNEE hereby accepts this assignment in full payment of
the aforementioned promissory note."[67] There is, therefore, in this case,
an absolute transfer of ownership of the BARECO shares to LCDC for a
consideration of P20 Million.
Significantly, there is nothing in the abovementioned documents, nor in
any of the subsequent contracts between the parties that indicates that
the transaction entered by and between them was a joint venture. The
transaction between the parties was clearly a sale of property.
In contrast, a joint venture has been defined by this Court as follows:
The legal concept of a joint venture is of common law origin. It has no
precise legal definition, but it has been generally understood to mean an
organization formed for some temporary purpose. x x x It is in fact hardly
distinguishable from the partnership, since their elements are similar –
community of interest in the business, sharing of profits and losses, and
a mutual right of control. x x x The main distinction cited by most opinions
in common law jurisdictions is that the partnership contemplates a
general business with some degree of continuity, while the joint venture
is formed for the execution of a single transaction, and is thus of a
temporary nature. x x x This observation is not entirely accurate in this
jurisdiction, since under the Civil Code, a partnership may be particular
or universal, and a particular partnership may have for its object a
specific undertaking. x x x It would seem therefore that under Philippine
law, a joint venture is a form of partnership and should be governed by
the law of partnerships. The Supreme Court has however recognized a
distinction between these two business forms, and has held that
although a corporation cannot enter into a partnership contract, it may
however engage in a joint venture with others. x x x[68]
A joint venture, therefore, is akin to a partnership, the essential elements
of which are as follows: (1) an agreement to contribute money, property,
or industry to a common fund; and (2) an intent to divide the profits
among the contracting parties. On account thereof, petitioners insist that
the parties had all along entered into a joint venture agreement. This
can be gleaned from fact that LCDC undertook to divide the net
proceeds from the sale of the Montemar Villas lots between LCDC and
the Valdeses, in proportion to 60% and 40%, respectively. This fact was
later affirmed by the February 21, 1990 letter agreement between the
parties.
We disagree. A perusal of the Assignment of Rights and the February
21, 1990 letter agreement clearly shows that the Valdeses' share in the
sale of the subdivision lots was the manner of paying, or mode of
payment of the P20 Million consideration for the 4,000 BARECO shares.
While we understand that this type of provision may be peculiar to a
contract of sale, this profit-sharing scheme, as explained by LCDC, was
a means for the latter to acquire the necessary funds to develop and
improve the said lots.
Notably, LCDC was contractually obliged to remit to the Valdeses' their
40% share in the sale of the Montemar Villas lots despite the fact that
LCDC may be experiencing losses. This runs counter to a partnership
430
or joint venture relationship. The essence of a true partnership is that
the partners share in the profits and losses of the business. This is
clearly not the case here. As correctly found by the CA:
There was no contract to contribute properties to a common fund so as
to share the profits between themselves, There is even no common fund
to speak of. LCDC's obligation to pay persists as long as it is able to sell
subdivision lots even if the corporation itself is experiencing losses, as
what happened. x x x x Hence, there is nothing here that may be said to
be akin to a joint venture in its legal definition.[69]
Thus, as the sole stockholder of BARECO pursuant to the Deed of Sale
dated May 24, 1975, LCDC, had full disposal of the BARECO properties
in Bataan, including the right to encumber and mortgage the same as
attributes of ownership. Along the same lines, considering that some of
properties of LCDC were transferred and conveyed to LCRC, the latter
likewise had every right to mortgage these properties. The rights and
interests of the Valdeses, lie only on the proceeds of the sale of the
Montemar Villas lots. They could not also question the mortgages
constituted on the properties after the titles have already passed to
LCDC and LCRC.
Given the foregoing recitals, this Court cannot nullify the September 3,
1992 Memorandum of Agreement and the August 31, 1992
Consolidated Deed of Sale on the sole ground that they were
supposedly entered into in violation of the joint venture between the
Valdeses and LCDC, where, from the outset, such relationship is clearly
non-existent between the parties. Failing to substantiate their claim of a
joint venture or partnership, petitioners' argument has no leg to stand
on.
There was a valid novation of the initial agreement between LCDC and
the Valdeses to develop and sell the Montemar Villas lots which thereby
extinguished LCDC's original obligation to the Valdeses.
It is undisputed that LCDC, by virtue of the May 24, 1975 Deed of
Absolute Sale and October 30, 1975 Assignment of Rights, was
obligated to sell the Montemar Villas lots and remit a portion of the
proceeds thereof to the Valdeses. On the basis of this finding, the next
question is whether the implementation of the new Montemar Project,
through the execution of the September 3, 1992 Memorandum of
Agreement and the August 31, 1992 Consolidated Deed of Sale,
resulted in the novation of the terms and conditions contained in the
initial agreements between the parties.
Relevantly, novation is defined "as the extinguishment of an obligation
by the substitution or change of the obligation by a subsequent one
which terminates the first, either by changing the object or principal
conditions, or by substituting the person of the debtor, or subrogating a
third person in the rights of the creditor."[70] In this regard, Article 1292
of the Civil Code provides:
Article 1292. In order that an obligation may be extinguished by another
which substitute the same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new obligations be on every
point incompatible with each other.
It is well settled that "[t]he cancellation of the old obligation by the new
one is a necessary element of novation which may be effected either
expressly or impliedly. While there is really no hard and fast rule to
determine what might constitute sufficient change resulting in novation,
the touchstone, however, is irreconcilable incompatibility between the
old and the new obligations."[71] Notably, "[i]n the absence of an express
provision to this effect, a contract may still be considered as novated if
it passes the test of incompatibility, that is, whether the contracts can
stand together, each one having an independent existence."[72]
On this point, it must be stressed that the new concept of the Montemar
Project would entail the development of a golf course or sports complex
on the unsold lots of the Montemar Villas. Necessarily, the
implementation of this new concept is incompatible with the old
obligation of LCDC under their previous agreement. The construction of
these new sports facilities will effectively halt the development and
eventual sale of the Montemar Villas lots and render unavailing LCDC's
original obligation to remit to the Valdeses' their 40% share in the
proceeds derived from the sale of the said lots.
Was there a valid novation in this case?
For a valid novation to take place, the following requisites must concur:
"(1) a previous valid obligation; (2) the agreement of all the parties to the
new contract; (3) the extinguishment of the old contract; and (4) validity
431
of the new one. There must be consent of all the parties to the
substitution, resulting in the extinction of the old obligation and the
creation of a valid new one."[73]
There is no question that the new concept of the Montemar Project, as
intimated in the September 3, 1992 Memorandum of Agreement and the
August 31, 1992 Consolidated Deed of Sale, was wholly incompatible
with its original concept earlier agreed upon by the Valdeses and LCDC.
At that point, what was required for the validity of the new concept was
Valdeses' express conformity thereto, with full knowledge that its
implementation will denote that their rights to the 40% share of the
proceeds derived from the sale of the Montemar Villa lots will be novated
and converted into a 7.5% equity in MRDC.
In light of the foregoing facts, this Court finds that Gabriel, as the
representative of the Valdeses, had knowledge of the new concept of
the Montemar Project, and consented to the entry of Philcomsat as a
new investor, this finding is based on the following established facts: (1)
the August 27, 1992 letter-conformity which bore Gabriel's signature on
the conforme portion thereof; (2) several minutes of the board meetings
of MBCI, where MBCI directors, including Gabriel, discussed the entry
of Philcomsat as a possible investor of the Montemar Project; and (3)
the notices sent to the LCRC stockholders and directors of scheduled
meetings for the purpose of discussing the proposed new concept of the
said project. We agree with the findings of the CA that the wordings in
the notices sent to Gabriel sufficiently apprised him of the changes in
the Montemar Project.[74]
It cannot be overemphasized that Gabriel, being a director of the MBCI
board, never questioned the proposed new concept of the Montemar
Project and the entry of Philcomsat as a new investor. More importantly,
his signature in the conforme portion of the August 27, 1992 letter shows
his explicit acknowledgment and recognition of the novation by the
parties (Valdeses and LCDC) of their earlier agreement of selling the
Montemar Villas lots to the public. His authorization to the Cachos to sell
their shareholdings in LCDC also confirms this recognition. Notably, it
was only after Philcomsat failed to offer an agreeable purchase price for
Carlos, Sr.'s shareholdings in LCRC and the Valdeses' other real
properties that the Valdeses filed the instant complaint against
respondents.[75]
With the express conformity of Gabriel to the new concept of the
Montemar Project, the obligation of LCDC to sell the Montemar Villas
lots, and remit the proceeds to the Valdeses has been extinguished.
Respondents Philcomsat and MRDC were not in bad faith in
executing the the September 3, 1992 Memorandum of Agreement
and the August 31, 1992 Consolidated Deed of Sale.
As discussed above, petitioners insist th.at the September 3, 1992
Memorandum of Agreement and the August 31, 1992 Consolidated
Deed of Sale are null and void for having been executed in bad faith and
for the purpose of defrauding the Valdeses.
We disagree. Jurisprudence has shown that in order to constitute :fraud
that provides basis to annul contracts, it must fulfill two conditions: "First,
the fraud must be dolo causante or it must be fraud in obtaining the
consent of the party," and "[s]econd, the fraud must be proven by clear
and convincing evidence and not merely by a preponderance
thereof."[76]
It bears noting that prior to its entry as investor of the Montemar Project,
Philcomsat required the: (1) written approval of the stockholders and
board members of LCDC, LCRC and MBCI of all the provisions in the
September 3, 1992 Memorandum of Agreement; and (2) consent of the
Valdeses to the new Montemar Project as embodied in the August 27,
1992 letter-conformity signed by Carlos, Sr. himself.[77]
Clearly, Philcomsat had to make sure that LCDC and LCRC are able to
procure the assent of the Valdeses to the new concept of the Montemar
Project. It was for this reason that Gabriel executed and signed the
August 27, 1992 letter-conformity, which bore his written approval to the
entry of Philcomsat as an investor.[78] Moreover, the Memorandum of
Intent dated August 18, 1992 stated that:
x x x 1. MBCI, LCRC and LCDC shall first secure the explicit approval
by their respective stockholders and/or members (owning at least 2/3 of
the outstanding shares) of all the provisions hereinafter enumerated on
or before the middle of August 1992; x x x[79]
Clearly, the above-quoted provision also proves that Philcomsat would
not have agreed to invest in the Montemar Project without first securing
432
the consent and written approval of LCRC, LCDC, and MBCI
stockholders, which included the Valdeses.
In all the foregoing circumstances, it must be stressed that petitioners
have not presented to this Court how respondent Philcomsat employed
fraudulent acts to deceive the Valdeses, or any of the stockholders of
LCRC, LCDC, and MBCI to consent to the implementation and
execution of the September 3, 1992 Memorandum of Agreement and
the August 31, 1992 Consolidated Deed of Sale.
On the other hand, Philcomsat was able to state the steps it undertook
to ensure utmost consideration of the Valdeses' rights before it decided
to invest in the Monetemar Project, and, pursuant thereto, execute the
September 3, 1992 Memorandum of Agreement and the August 31,
1992 Consolidated Deed of Sale. There is simply no fraud or bad faith
to speak of.
Petitioners cannot avail of the remedy of rescission under the Civil
Code.
Petitioners ask this Court to have the September 3, 1992 Memorandum
of Agreement and August 31, 1992 Consolidated Deed of Sale
rescinded as both these contracts caused damage to the interests and
participation of the Valdeses of their 40% share in the proceeds of the
sale of the Montemar Villas lots.
"Rescission is a remedy granted by law to the contracting parties, and
even to third persons, to secure the reparation of damages caused to
them by a contract, even if it should be valid" by reason of external
causes resulting in a pecuniary prejudice to one of the contracting
parties or their creditors, the result of which, is the "restoration of things
to their condition at the moment prior to celebration of said contract."[80]
"The kinds of rescissible contracts are the following: first, those
rescissible because of lesion or prejudice;[81] second, those rescissible
on account of fraud or bad faith;[82] and third, those which, by special
provisions of law,[83] are susceptible to rescission."[84]
None of the above circumstances are present in this case. As discussed
above, the records of the case are replete with evidence that the
Valdeses, through Gabriel, gave their express conformity to the new
concept of the Montemar Project and the entrance of Philcomsat as new
investor for the said project. Having expressed their consent to the
changes brought about by these new contracts, and having been made
aware of the effects thereof, the Valdeses cannot now feign ignorance
and assert that they were prejudiced in their rights and interests. While
they feel shorthanded as they will cease receiving their 40% income
share from the sale of the Montemar Villas lots, the fact of the matter is
that they would have maintained a share or interest in the new
Montemar Project, which, however, the Valdeses opted to sell to
respondent Philcomsat. Notably, it appears that nothing has
materialized from their negotiations.
In this regard, we have held that "[c]ourts cannot follow one every step
of his life and extricate him from bad bargains, protect him from unwise
investments, relieve him from one-sided contracts, or annul the effects
of foolish acts. Courts cannot constitute themselves guardians of
persons who are not legally incompetent. Courts operate not because
one person has been defeated or overcome by another, but because he
has been defeated or overcomeillegally. Men may do foolish things,
make ridiculous contracts, use miserable judgment, and lose money by
them – indeed, all they have in the world; but not for that alone can the
law intervene and restore. There must be, in addition, a violation of the
law, the commission of what the law knows as an actionable wrong,
before the courts are authorized to lay hold of the situation and remedy
it."[85]
As there was a valid consent on the part of petitioners and good faith on
the part of respondents, no reversible error was committed by the CA in
reversing the RTC's Decision that declared as null and void the
September 3, 1992 Memorandum of Agreement and August 31, 1992
Consolidated Deed of Sale.
WHEREFORE, the petition for review on certiorari is DENIED for lack of
merit. The October 31, 2012 Decision and July 16, 2013 Resolution of
the Court of Appeals in CA-G.R. CV No. 94713 are hereby AFFIRMED.
Costs on petitioners. SO ORDERED.
433
434
 ASIAN CONSTRUCTION AND DEVELOPMENT CORPORATION,
PETITIONER, VS. MERO STRUCTURES, INC., SUBSTITUTED BY
NOVUM STRUCTURES LLC, INC., FIRST CENTENNIAL CLARK
CORP., AND NATIONAL DEVELOPMENT COMPANY,
RESPONDENTS.
[ G.R. No. 221147. September 29, 2021 ]
HERNANDO, J.:
This Petition for Review on Certiorari1 seeks to set aside the
February 18, 2015 Decision2 and October 21, 2015 Resolution3 of the
Court of Appeals (CA/appellate court) in CA-G.R. CV No. 98844.
The facts of the case are as follows:
In line with the 100th anniversary celebration of the Philippine
independence from Spanish colonial rule in 1998,4 First Centennial
Clark Corporation.(FCCC) was created for the purpose of designing,
constructing, operating, and managing the Philippines' National
Centennial Exposition to be held in the Clark Special Economic Zone
(CSEZ) located in Clark Field, Pampanga.5
On March 16, 1998, FCCC entered into a Construction Agreement6
with petitioner Asian Construction and Development Corporation
(Asiakonstrukt) for the finalization of the architectural concept, design,
and storyline approved by the National Centennial Commission and to
undertake all the necessary construction works for the Exposition
Theme Park.7 On even date, respondent MERO Structures, Inc.
(MERO), an American corporation, submitted a Materials Only
Proposal8 to Asiakonstrukt for the supply of materials in constructing a
special Philippine flag structure in the Expo Filipino, the grand opening
of which is on July 19, 1998. The proposal provides, among others, that:
(a) MERO would manufacture and supply the MERO KK System
Spaceframe (spaceframe) for the flag structure for US$570,000.00; (b)
20% of the contract price would be paid upon award of the supply
contract and the remainder payable via letter of credit; and (c) the
materials would be shipped on April 4, 1998 if the transaction were
confirmed by March 18, 1998.9 On March 17, 1998, Asiakonstrukt
accepted the Materials Only Proposal.10
In a bill of lading dated April 5, 1998,11 MERO shipped the
spaceframe to "Philippine Centennial Exposition c/o Asiakonstrukt."12
On June 16, 1998, Asiakonstrukt submitted to FCCC a proposal13
for the design, supply, and installation of the flag structure using MERO's
spaceframe subject to the following terms and conditions: (a) full
payment of the imported MERO spaceframe structures upon its delivery
on-site; (b) 50% payment of installation and lighting of spaceframe
structures upon receipt of the notice to proceed while the remaining 50%
shall be paid on progress billing; and (c) completion of the project on
June 28, 1998.14 On the same day, the FCCC held a board meeting and
approved Asiakonstrukt's proposal, subject to the applicable rules and
regulations of the Commission on Audit, the reimbursement of the costs
out of the sponsorships, and the submission of a certificate from MERO
that Asiakonsrukt is the only certified installer of spaceframe structures
in the Philippines.15 Also, in a Memorandum16 for the Board of Directors,
the President of FCCC, Mr. Benjie L. Lopez, requested board approval
to secure advances from respondent National Development Corporation
(NDC) to finance the design, supply, and installation of the flag
structure.17 NDC would in turn source the advances from a loan provided
by certain government financial institutions to FCCC.18
In a letter19 dated June 17, 1998, FCCC approved Asiakonstrukt's
proposal, subject to the pricing, terms, and conditions in the latter's
proposal dated June 16, 1998, and in accordance with MERO's
Materials Only Proposal dated March 16, 1998.20
On June 18, 1998, Asiakonstrukt informed MERO that FCCC
awarded to Asiakonstrukt the contract for the design supply, and
installation of the flag structure and the latter would pay MERO after
FCCC's payment of the materials not later than June 26, 1998.21
On August 10, 1998, Asiakonstrukt requested from FCCC the full
payment for the spaceframe, which had been delivered to the intended
site, and the 50% downpayment for its installation and lighting, both due
since June 17, 1998.22
In a series of letters dated as early as March 19, 1998, MERO
sought payment of the spaceframe from Asiakonstrukt.23
In a letter24 to Asiakonstrukt dated October 13, 1999, MERO
requested that it be paid directly by the FCCC and that Asiakonstrukt
notify FCCC that the work is complete and satisfactory and that full
payment should be made.25 By way of a response, Asiakonstrukt, in a
letter26 dated November 8, 1999, stated that it interposed no objection
to MERO's request to collect payment directly from the FCCC.
435
 In another series of letters,27 MERO attempted to seek assistance
from the Department of Trade and Industry (DTI) and Department of
Finance (DOF). However, these attempts proved futile.
In a letter28 dated May 3, 2000, the newly appointed FCCC
President at the time, Mr. Manuel R. Pamaran, wrote to MERO that he
was not yet acquainted with the previous transactions of FCCC but
noted that he had yet to see a contract between FCCC and MERO.29 In
the same letter,30 he also requested a conference with MERO's
representative on May 12, 2000. The meeting eventually happened on
May 22, 2000, but yielded nothing for MERO in terms of the payment
demanded.31
In a letter32 dated September 21, 2000, MERO, through counsel,
made a final demand on Asiakonstrukt for its US$570,000.00 principal
obligation plus 1.5% interest per month or 18% annually.
Despite this, Asiakonstrukt still failed to pay, prompting MERO to
institute before the Regional Trial Court (RTC) a Complaint33 for sum of
money on February 21, 2002. NIERO prayed that Asiakonstrukt or
FCCC be ordered to pay US$1,033,990.00 including interest, plus
litigation expenses, and moral and exemplary damages, and NDC be
directed to furnish FCCC with advances for this purpose.34
In its Answer with Counterclaim,35 NDC challenged MERO's
personality to sue in the Philippines as well as the validity of the
complaint's verification and certification against forum shopping.36 It
argued that MERO has no cause of action against NDC because it was
only a member of the Oversight Committee tasked to oversee the
release and utilization of the P1.4 billion budget for the Philippine
Centennial Exposition Project, and FCCC failed to comply with the
required terms for the approval of the loan drawdowns.37 It interposed
counterclaims for attorney's fees and exemplary damages.38
FCCC filed an Answer with Counterclaim and Crossclaim,39 arguing
that no privity of contract exists between it and MERO because the
transaction subject of the complaint involved only MERO and
Asiakonstrukt, thus, MERO has no cause of action against FCCC.40 It
further averred that FCCC's approval of Asiakonstrukt's proposal for the
design, supply, and installation of the flag structure was subject to
certain conditions which were never met, hence the approval did not
take effect; in fact, the MERO flag was not utilized.41 It interposed a
cross-claim against Asiakonstrukt for reimbursement of any possible
award made in favor of MERO, and prayed for attorney's fees and
exemplary damages as compulsory counterclaims.42
Asiakonstrukt likewise filed an Answer with Cross-claim,43 wherein
it admitted the validity of MERO's claim for the value of the spaceframe
but objected on the imposition of 18% annual interest, which was
allegedly not stipulated in writing.44 It professed willingness to pay and
explained that the delay was due to FCCC and NDC's refusal to pay
their obligations to MERO.45 It claimed that as a mere contractor of the
project, it has no liability for the amount collected, instead, FCCC and
NDC, the project owners, should be held accountable.46 By way of
cross-claim, it contended that FCCC and NDC should be jointly and
severally liable to pay Asiakonstrukt P1,000,000.00 in attorney's fees.47
During the RTC proceedings, MERO filed a Manifestation and
Motion alleging that while MERO's composition remains the same, it
was converted from a Delaware Corporation to a Delaware Limited
Liability Company, and in the process, changed its name to from "MERO
Structures, Inc." to "Novum Structures LLC" on March 31, 2006.48
Accordingly, after due hearing, the RTC granted the said
Manifestation and Motion in an Order49 dated October 20, 2006.
Ruling of the Regional Trial Court:
On July 19, 2011, the trial court rendered a Decision50 upholding
MERO's right to collect from Asiakonstrukt and FCCC, the former by
virtue of a contract and the latter for having benefited from MERO's
fulfillment of its obligation to supply the spaceframe. However, the RTC
dismissed the complaint against NDC for lack of evidence.51 The
dispositive portion of the said Decision reads:52
WHEREFORE, in view of the foregoing
considerations, the Court hereby finds in favor of the
plaintiff and against defendants Asiakonstrukt and
FCCC. Thus, this court hereby orders Asiakonstrukt to
pay plaintiff in the sum of Philippine Pesos: TWENTY-
FIVE MILLION SIX HUNDRED FIFTY THOUSAND
(P25,650,000.00) ($570,000XP45.00) with interest at
6% per annum from date hereof and 12% per annum
from date of finality of this decision until fully paid, with
right to be reimbursed from FCCC without
pronouncement as to cost.
436
 However, the complaint against NDC is hereby
DISMISSED for insufficiency of evidence and the
counterclaim of NDC is also DISMISSED [for]
insufficiency of evidence. SO ORDERED.53
Both MERO and Asiakonstrukt sought reconsideration but the RTC
denied the same through its Order54 dated December 19, 2011.
Pertinently, the RTC held that the documentary evidence presented by
MERO, wherein a 1.5% monthly interest was stated, does not bear the
signatures of any of the defendants; therefore, it is not the written
agreement contemplated by law as a basis for the imposition of
stipulated interest.55 Accordingly, it stood firm with the imposition of the
legal rate of interest.56
Ruling of the Court of Appeals:
Dissatisfied, MERO and Asiakonstrukt filed separate appeals57 with
the CA. In a Decision58 dated February 18, 2015, the CA denied both
appeals and affirmed the RTC Decision with modification, to wit:
WHEREFORE, these separate appeals are
hereby DENIED. The July 19, 2011 Decision and
December 19, 2011 Order of the Regional Trial Court,
Branch 145, Makati City in Civil Case No. 02-206 are
AFFIRMED with MODIFICATION that the 12% interest
per annum shall be applied from the date of default on
March 31, 1998 until June 30, 2013 only, after which
date and until fully paid, the outstanding obligation of
Asian Construction and Development Corporation
shall earn interest at 6% per annum.SO ORDERED.59
The appellate court ruled that while there was indeed a written
stipulation between MERO and Asiakonstrukt as to the 18% interest,
contrary to the RTC's findings, the said interest may nevertheless be
tempered by the courts in the interest of justice and equity.60 Thus, the
CA still agreed with the RTC that legal interest shall apply subject to the
modification of the interest rate in accordance with this Court's ruling in
the Nacar v. Gallery Frames61 case.62
Aggrieved, Asiakonstrukt filed a Motion for Reconsideration63 with
the CA, but was denied in a Resolution64 dated October 21, 2015.
Hence, the instant Petition for Review on Certiorari65 filed by
Asiakonstrukt, which essentially raises the following assignment of
errors:
1. [Whether or not the CA] seriously erred when it
failed and refused to consider the letter of MERO dated
October 13, 1999 and the response letter of
Asiakonstrukt dated November 8, 1999 as a new
written contract, wherein both parties agreed that
MERO collects directly the unpaid obligation of
US$570,000.00 or its equivalent against the FCCC;
and
2. [Whether or not the CA] seriously erred when it
affirmed with modification the RTC decision without
excluding the newly included foreign respondent
Novum from being a party to this case.66
Our Ruling
We deny the Petition for Review on Certiorari.
No new contract was borne of the letters exchanged by MERO and
Asiakonstrukt. At most, the said exchanges merely show Asiakonstrukt's
approval of MERO's extraordinary efforts in helping the former fulfill its
obligation to the latter. In any event, Asiakonstrukt's approval of MERO's
request to collect directly from the FCCC did not extinguish
Asiakonstrukt's obligation to pay MERO.
In its Petition for Review on Certiorari, which is merely a rehash of
its arguments before the lower courts, Asiakonstrukt would want to
impress upon this Court that a new contract was entered into by it and
MERO, wherein MERO waives its rights to collect from Asiakonstrukt
and is subrogated to Asiakonstrukt's place to collect directly from FCCC
and NDC.
This argument has utterly no factual or legal basis.
There are two (2) relevant contracts in this case, namely: 1) The
Construction Agreement67 between the FCCC and Asiakonstrukt dated
March 16, 1998, and 2) MERO's Materials Only Proposal68 dated March
16, 1998 that was accepted by Asiakonstrukt on March 17, 1998. While
437
Asiakonstrukt is a common party in these contracts, MERO and FCCC
have no contractual relationship with each other.
A cursory perusal of the instant petition would reveal that
Asiakonstrukt's argument is essentially hinged on the theory that its
obligation to pay MERO was extinguished by novation of either or both
of the aforementioned contracts, as evidenced by the letters exchanged
between it and MERO.
Article 1231 of the Civil Code provides for the different modes of
extinguishing obligations, to wit:
Article 1231. Obligations are 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;
(6) By novation. (Underscoring supplied)
Other causes of extinguishment of obligations such as annulment,
rescission, fulfillment of a resolutory condition, and prescription, are
governed elsewhere in this Code.
The rules on novation are outlined in the Civil Code as follows:
Article 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor. (1203)
xxxx
Article 1292. In order that an obligation may be extinguished by
another which substitute the same, it is imperative that it be so declared
in unequivocal terms, or that the old and the new obligations be on every
point incompatible with each other.
xxxx
Article 1293. Novation which consists in substituting a new debtor
in the place of the original one, may be made even without the
knowledge or against the will of the latter, but not without the consent of
the creditor. Payment by the new debtor gives him the rights mentioned
in Articles 1236 and 1237.
Novation extinguishes an obligation between two parties when
there is a substitution of objects or debtors or when there is subrogation
of the creditor.69 It occurs only when the new contract declares so "in
unequivocal terms" or that "the old and the new obligations be on every
point incompatible with each other."70
In Garcia v. Llamas,71 We discussed the concept of novation as
follows:
Novation is a mode of extinguishing an obligation
by changing its objects or principal obligations, by
substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor.
Article 1293 of the Civil Code defines novation as
follows:
Art. 1293. Novation which consists in
substituting a new debtor in the place of the
original one, may be made even without the
knowledge or against the will of the latter, but
not without the consent of the creditor.
Payment by the new debtor gives him rights
mentioned in articles 1236 and 1237.
In general, there are two modes of substituting the
person of the debtor: (1) expromision and (2)
delegacion. In expromision, the initiative for the change
does not come from — and may even be made without
the knowledge of — the debtor, since it consists of a
third person's assumption of the obligation. As such, it
logically requires the consent of the third person and
the creditor. In delegacion, the debtor offers, and the
438
 creditor accepts, a third person who consents to the
substitution and assumes the obligation; thus, the
consent of these three persons are necessary. Both
modes of substitution by the debtor require the consent
of the creditor.
Novation may also be extinctive or modificatory. It is
extinctive when an old obligation is terminated by the
creation of a new one that takes the place of the former.
It is merely modificatory when the old obligation
subsists to the extent that it remains compatible with
the amendatory agreement. Whether extinctive or
modificatory, novation is made either by changing the
object or the principal conditions, referred to as
objective or real novation; or by substituting the person
of the debtor or subrogating a third person to the rights
of the creditor, an act known as subjective or personal
novation. For novation to take place, the following
requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new
contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.
Novation may also be express or implied. It is express
when the new obligation declares in unequivocal terms
that the old obligation is extinguished. It is implied when
the new obligation is incompatible with the old one on
every point. The test of incompatibility is whether the
two obligations can stand together, each on with its
own independent existence.72 (Underscoring supplied)
Applying the foregoing to the instant case, it is evident that there
was neither an express nor implied novation through the letters
exchanged between MERO and Asiakonstrukt.
First, there is nothing in the letters that unequivocally states that the
obligation of Asiakonstrukt to pay MERO would be extinguished.
Second, there is also no mention that MERO would substitute or
subrogate Asiakonstrukt as FCCC's payee/obligee as the letters merely
show that MERO was allowed by Asiakonstrukt to try collecting from
FCCC directly.
Lastly, using the test of incompatibility, Asiakonstrukt's non-
objection to MERO's request to collect from FCCC directly is not
incompatible with the obligation of Asiakonstrukt to pay MERO. It merely
provided an alternative mode in collecting payment to MERO, which is
not even valid as far as FCCC is concerned since the latter did not even
consent to the same, not to mention there is no existing contractual
relationship between MERO and FCCC.
With regard to the last point, it must be stressed that the consent of
the third party, which is FCCC in this case, must also be secured for the
novation to be valid. Again, FCCC was never a part of the letters
exchanged between MERO and Asiakonstrukt. Thus, FCCC clearly
could have not consented to any substitution or subrogation of the
parties.
If the exchange of letters between MERO and Asiakonstrukt was
intended to novate the original agreement between the parties, FCCC
must have first agreed to the substitution of MERO as the new
payee/creditor, at least to the extent of the US$570,000.00 representing
the payment for the flag. The exchange of letters must have also stated
in clear and unequivocal terms that it has replaced the original obligation
of Asiakonstrukt to MERO. Neither of these circumstances is present in
this case.
Since there was clearly no novation, Asiakonstrukt's obligation to
MERO remains valid and existing. Asiakonstrukt, therefore, must still
pay respondent the full amount of US$570,000.00 with the applicable
interest.
Moreover, the records show that the fulfillment of FCCC's obligation
to Asiakonstrukt was never a condition to the fulfillment of
Asiakonstrukt's obligation to MERO. Absent this condition,
Asiakonstrukt, as the primary contractor for the Philippine Centennial
project, assumed the risk of FCCC's nonpayment when it essentially
subcontracted a part of the said project to MERO. To emphasize,
Asiakonstrukt is the only party obligated to pay MERO, not FCCC and
definitely not NDC.
439
 MERO, being the original party to the case, may indeed continue to
litigate the present action despite any transfer of interest. In any event,
it seems that there was no actual transfer of interest but a mere change
of name by MERO to Novum Structures LLC.

MERO, being the original party to the case, may indeed continue to
litigate the present action despite any transfer of interest. In any event,
it seems that there was no actual transfer of interest but a mere change
of name by MERO to Novum Structures LLC.

The records would show that MERO filed a Manifestation and

Motion, alleging that while MERO's composition remains the same, it
was converted from a Delaware Corporation to a Delaware Limited
Liability Company, and in the process, changed its name from "MERO
Structures, Inc." to "Novum Structures LLC" on March 31, 2006.73

Accordingly, after due hearing, the RTC granted the said

Manifestation and Motion in an Order74 dated October 20, 2006.

Given this, Asiakonstrukt's argument as to its second assignment of

error patently holds no water as there was no transfer of interest that
happened. MERO, the composition of which remained unchanged,
merely changed its name to Novum Structures LLC to reflect its new
status as a limited liability company. Thus, the appellate court did not
commit any serious error when it affirmed the trial court's Decision in this
regard, given that no new party was impleaded since MERO and Novum
Structures LLC are essentially one and the same entity.

WHEREFORE, the Petition for Review on Certiorari is DENIED.

The February 18, 2015 Decision and October 21, 2015
Resolution of the Court of Appeals in CA-G.R. CV No. 98844
are hereby AFFIRMED. SO ORDERED.

440
 MA. JULIETA* B. BENDECIO AND MERLYN MASCARIÑAS,
PETITIONERS, VS. VIRGINIA B. BAUTISTA, RESPONDENT.
[ G.R. No. 242087. December 07, 2021 ]
LOPEZ, J., J.:
Before this Court is a Petition for Review on Certiorari1 under Rule 45 of
the Rules of Court assailing the Decision2 dated September 14, 2018
rendered by the Court of Appeals (CA) in CA-GR CV No. 109378, which
affirmed the Decision3 dated May 4, 2017 of the Regional Trial Court
(RTC), Branch 59, Makati City in Civil Case No. 13-1126, granting the
complaint for collection of sum of money and damages filed by
respondent Virginia B. Bautista (Bautista) against petitioners Ma. Julieta
B. Bendecio (Bendecio) and Merlyn Mascariñas (Mascariñas).
The Antecedents
In her complaint, Bautista alleged that on the 5th, 7th and 15th of
February 2013, she lent Bendecio, her niece, P400,000.00,
P200,000.00, and P500,000.00, respectively. The loan, totaling
P1,100,000.00, was payable in May 2013 with monthly interest at 8%.4
According to Bautista, Bendecio informed her in May 2013 that
Mascariñas, Bendecio's friend and business partner, would be paying
the loans by depositing a manager's check in her Banco De Oro (BDO)
account. But the same never materialized. Instead, Mascariñas
executed a promissory note in her favor promising to pay her the total
amount of the loan on August 23, 2013, with the same interest rate. Still,
neither Bendecio nor Mascariñas paid despite her oral demands and the
demand letter she sent to them on September 5, 2013.5 This led her to
file a complaint before the RTC on September 25, 2013.6
On the one hand, Bendecio countered that on May 22, 2013, she
informed Bautista that Mascariñas would pay the loan by depositing the
total amount to Bautista's BDO account. But Bautista persuaded
Mascariñas to pay her in cash, instead, and make it appear that
Mascariñas already assumed the loan obligation. Bautista further
required Mascariñas to execute a promissory note. As such, Bendecio
insisted that she was no longer obligated to pay Bautista as she was
already substituted by Mascariñas. Bendecio further maintained that
payment can be presumed because the checks she issued in Bautista's
favor as payment for the loan were already returned to her.7
On the other hand, Mascariñas claimed that she was the business
partner of Bendecio who asked her to deposit P1,100,000.00 into
Bautista's BDO account in the morning of May 22, 2013. Bautista first
requested that she pay in cash but later turned down the offer to pay as
such. Instead, Bautista proposed that the loan be assumed by
Mascariñas thereby relieving Bendecio from her obligation and
promising to return Bendecio's checks. According to Mascariñas, she
agreed to the arrangement on the condition that the loan be less than
three months. To show her good faith, she issued checks and executed
a promissory note indicating that her loan will mature on August 23,
2013.8
Mascariñas further claimed that she stopped payment because Bautista
was calling her banks to ask about her financial status. She then called
Bautista to set up a meeting at her house on August 3, 2013 so she
could pay the loan. At the meeting, Mascariñas recalled that Bautista
promised to return all her checks and to issue a receipt for the payment
she made but failed to comply with said promise.9
On May 4, 2017, the RTC ruled in favor of Bautista and disposed of the
case as follows:
WHEREFORE, in view of the foregoing evidence and in
the lights (sic) of the provisions of law and jurisprudence
on the matter, judgment is hereby rendered in favour of
the plaintiff and against the defendants as follows:
1. Ordering defendants Ma. Julieta Bendecio and Merlyn
Mascariñas jointly and solidarily to pay plaintiff the amount
of One Million One Hundred Thousand Pesos
(Php1,100,000.00) corresponding to the loan obtained
plus interest of 12% per annum computed from the date of
demand until fully paid;
2. Ordering defendants Ma. Julieta Bendecio and Merlyn
Mascariñas jointly and solidarily to pay plaintiff the amount
of One Hundred Thousand Pesos (Php100,000.00) as
moral damages;
3. Ordering defendants Ma. Julieta Bendecio and Merlyn
Mascariñas jointly and solidarily to pay plaintiff the amount
of One Hundred Thousand Pesos (Php100,000.00) as and
for attorney's fees;
441
 4. To pay the costs of suit. SO ORDERED.10
In its Decision dated September 14, 2018, the CA affirmed the RTC
ruling. According to the appellate court, the alleged payment made by
Bendecio and Mascariñas was not proven by preponderance of
evidence. Moreover, their solidary liability is justified as evidence which
shows that the loan was actually obtained not by Bendecio alone, but by
both parties in furtherance of their business partnership.11
Aggrieved, petitioners Bendecio and Mascariñas filed the present
petition on November 8, 2018, seeking a reversal of the CA's Decision.
They reiterated their claim that Bendecio's obligation was already
extinguished when Mascariñas offered to pay Bautista P1,100,000.00
on behalf of Bendecio. This offer, however, was rejected by Bautista.
Instead, the loan was assumed by Mascariñas who issued a promissory
note in Bautista's favor. Since Bendecio was not privy to the promissory
note, Bautista has no cause of action against Bendecio.12
Issue
Whether the CA erred in finding Bendecio and Mascariñas liable to
pay Bautista the loan amounting to P1,100,000.00.
Our Ruling
Bendecio and Mascariñas essentially insist that Bautista can no longer
claim from Bendecio since she was already released from liability when
Mascariñas assumed the same. In effect, Bendecio's obligation was
extinguished by novation when Mascariñas substituted her as debtor in
the loan agreement.
The contention is devoid of merit.
At the outset, it must be noted that the determination of the existence of
novation13 and consent of a creditor to the substitution of debtors is a
question of fact as it requires this Court to examine the evidence on
record.14 But questions of fact are not proper subjects of the present
petition. Indeed, this Court is not a trier of facts, Our jurisdiction being
limited to reviewing errors of law. As such, the trial court's findings of
fact are binding upon this Court especially when they are affirmed by the
appellate court. While there are recognized exceptions,15 We find that
none of the same obtain herein.
Novation is one of the means to extinguish an obligation where a
subsequent obligation extinguishes or modifies the first.16 It is a relative
extinguishment whereby a new obligation is created in lieu of the old.17
But 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.18
Under Article 1291 of the Civil Code, novation is done by: (1) changing
the object or principal conditions; (2) substituting the person of the
debtor; or (3) subrogating a third person in the rights of the creditor.19
On the second type of novation, by substituting the person of the
debtor,20 law and jurisprudence recognize two forms: (1) expromision
and (2) delegacion.21 In expromision, the initiative for the change does
not come from the debtor and may even be made without his knowledge,
since it consists in a third person assuming the obligation. As such, it
only 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. Hence, the
intervention and the consent of these three persons are necessary.22
But in either mode of substitution, the consent of the creditor is
indispensable. After all, substitution of one debtor for another may delay
or prevent the fulfillment of the obligation by reason of the financial
inability or insolvency of the new debtor.23 It is only just, therefore, that
the creditor expressly accepts the novation that extinguishes the
obligation of the original debtor.
In the present case, Bendecio and Mascariñas insist that Bendecio, the
first debtor, was already released from responsibility because she was
substituted by Mascariñas, the new debtor, who assumed the loan and
executed a promissory note therefor. The claim is untenable. The
burden of establishing a novation is on the party who asserts its
existence,24 or in this case, Bendecio and Mascariñas. But apart from
their bare allegation, nowhere in the records was it even remotely
suggested that Bautista, the creditor, consented to the alleged novation.
It bears stressing that novation is never presumed. The mere fact that
the creditor receives a guaranty or accepts payments from a third person
who has agreed to assume the obligation, when there is no agreement
that the first debtor shall be released from responsibility, does not
constitute novation.25 This will, at best, result merely in the addition of
442
debtors,26 with the creditor still being able to enforce the obligation
against the original debtor. Indeed, just because Bautista accepted
Mascariñas' promissory note does not necessarily mean that Bendecio's
obligation was already extinguished. In the absence of clear and
unmistakable consent on the part of Bautista, her acceptance of
Mascariñas' note does equate to the release of Bendecio from her
obligation.
Still, Bendecio and Mascariñas insist on extinguishment, this time by
payment, relying merely on the fact that the checks Bendecio issued
were already returned to her. The argument is bereft of merit. Settled is
the rule that 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.27 As such, Article 1249 of the Civil Code expressly provides
that "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."
As duly found by the RTC and CA, there was nothing in the records to
show receipt by Bautista of cash in exchange for the checks she
returned. On the contrary, Mascariñas merely issued a promissory note
in favor of Bautista effectively extending the maturity date of the loan.
Certainly, this cannot result in the extinguishment of Bendecio's
obligation. 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.28
We find that Bendecio and Mascariñas failed in this regard.
In view of the foregoing, there is no cogent reason to deviate from the
rulings of the courts below rejecting Bendecio and Mascariñas' claims
of extinguishment by payment and novation. To repeat, the mere fact
that Bautista accepted Mascariñas' note does not automatically result in
novation in the absence of an express agreement to release Bendecio
from liability. Neither was there any proof of payment herein. Since there
was neither novation nor payment, case law dictates that Bautista may
still proceed to collect from Bendecio, the original debtor of the loan
agreement.29
Besides, it bears emphasis that Bendecio and Mascariñas cannot deny
the fact that they were business partners who used the proceeds of the
loan in furtherance of their business. They expressly admitted to this in
their judicial affidavits and testimonies given during their respective
cross examinations.
Mascariñas revealed that she was partners with Bendecio, that she
encashed the checks from Bautista representing the loan, that she was
tasked to pay back Bautista using the funds of the partnership, and that
as partners, she and Bendecio equally share the profits and losses of
the partnership, to wit:
Q-2: What is your relationship with your co-defendant Ma.
Julieta B. Bendecio?
A-2: She and I are business partners, for over ten years
now, who offer, among others, to our client's appliances,
gadgets and other things they need by paying the
purchases in advance, while payments to us are on
installment basis with interests. I use my credit card to
purchase the goods or items. When payment is due, we
pay the whole amount.
xxxx
Q-6: Aside from being a niece to plaintiff, do you know of
other relations with Mary and her aunt?
A-6: Yes, sir, because I learned later in February 2013 that
Mary borrowed some money from the plaintiff. I knew
about this because Mary requested me to encash the BDO
check x x x.
Q-7: Were able to encash the said BDO check?
A-7: Yes, sir, only after the bank teller had verified from
plaintiff that said check can be encashed by me.
xxxx
A-17: Sir, in the morning of May 22, 2013, Mary called me
and instructed me to deposit the amount of P1,100,000.00
to the account of plaintiff at BDO to fully pay her loan with
her aunt. The money will be withdrawn from my account.
Q-18: Is amount your personal money?
443
 A-18: No, sir. Those amounts were my collections from the
various clients who had dealing with us. My collections are
being deposited to my account to facilitate other
transactions. If May will need money, then I will transfer or
deposit the amount so requested to her account.
Q-19: Was there a request from Mary regarding the
amount of P1,100,00.00?
A-19: Yes, sir. But instead of depositing the said amount
to her account, she requested me to deposit the same to
the account of plaintiff at BDO. x x x.30
Q: Is your partnership registered before the concern
government agency or not?
A: No sir.
Q: Okay. Based on this answer when payment is due
according to you, you both pay the whole amount,
meaning to say both of you with co-defendant Ma. Julieta
B. Bendecio will shoulder whatever is due for payment as
stated in your Judicial Affidavit, correct?
A: Yes, sir.
Q: Am I also correct Ms. Witness since you were business
partners with co-defendant Ma. Julieta B. Bendecio you
are also sharing the profit out of entering into any
transaction equally?
A: Yes sir.31
In a similar manner, Bendecio disclosed that Mascariñas was her
business partner, that they used the proceeds of the loan as capital for
their business, and that Mascariñas was tasked to repay the amount of
the loan to Bautista on the date the same falls due. Bendecio recounted
as follows:
Q-2: What is your relationship with your co-defendant
Merlyn Mascariñas?
A-2: She and I are business partners, for over ten years
now.
xxxx
Q-4: Did you have any business dealings with your aunt,
the plaintiff in the present case?
A-4: Yes, sir. I borrowed money from her to use as capital
in the business of my co-defendant and I.
xxxx
Q-14: Do you have an agreement how payment to the loan
should be made?
A-14: Plaintiff and I agreed that I will pay my loan fully in
cash. After payment, all the checks I issued to her to
secure my loan will be returned to me.
xxxx
A-25: Considering that plaintiff might really wanted to have
the payment, I instructed Merlyn Mascariñas to make the
cash deposit to the account of the plaintiff at BDO. x x x.32
Hence, Bendecio and Mascariñas may insist on denying their liability,
but they can no longer renounce their admissions that they were,
indeed, business partners who obtained a loan for their business. Article
182533 of the Civil Code provides that when a person represents himself
to anyone as a partner in a partnership, he is liable to such person who
has given credit to the partnership. As such, both Bendecio and
Mascariñas must be held liable to Bautista. As to the extent of their
liability, again, this Court finds that the RTC and the CA correctly held
Bendecio and Mascariñas solidarily liable to pay the loan.
In Guy v. Gacott,34 (Gacott) this Court explained that pursuant to Article
181635 of the Civil Code, the general rule is that a partner's obligation to
third persons with respect to the partnership liability is pro rata or joint.
This means that a debtor is liable for the payment only of a proportionate
part of the debt. The exception to this is found in Article 1207,36 which
states that there is solidary liability when the obligation expressly so
states, or when the law or the nature of the obligation requires solidarity.
444
Accordingly, a partner shall be solidarily liable to third persons for the
entire debt in the cases under Articles 1822, 1823 and 1824 of the Civil
Code, which state:
Article 1822. Where, by any wrongful act or omission of
any partner acting in the ordinary course of the business
of the partnership or with the authority of his co-partners,
loss or injury is caused to any person, not being a partner
in the partnership, or any penalty is incurred, the
partnership is liable therefor to the same extent as the
partner so acting or omitting to act.
Article 1823. The partnership is bound to make good the
loss:
(1) Where one partner acting within the scope of his
apparent authority receives money or property of a third
person and misapplies it; and
(2) Where the partnership in the course of its business
receives money or property of a third person and the
money or property so received is misapplied by any
partner while it is in the custody of the partnership.
Article 1824. All partners are liable solidarily with the
partnership for everything chargeable to the partnership
under Articles 1822 and 1823.37
Gacott elucidates that in essence, it is the act of a partner which caused
loss or injury to a third person that makes all other partners solidarily
liable with the partnership. The obligation is solidary because the law
protects the third person, who in good faith relied upon the authority of
a partner, whether such authority is real or apparent.38
In this case, records show that the loss or injury endured by Bautista
was not only due to Bendecio's non-payment of the loan on the initial
due date, but also Mascariñas' failure to pay the same loan on the
extended due date despite several demands from Bautista. In fact,
because of these omissions committed by Bendecio and Mascariñas,
Bautista is still experiencing the consequences of said inactions by
having to enforce her claim before the courts. As such, both Bendecio
and Mascariñas should be held solidarily liable for the loan, the
proceeds of which were used as capital for their lending business.39
With respect to the interest imposed by the RTC and CA, however, this
Court deems it necessary to adjust the rates thereof in accordance with
prevailing jurisprudence. In this case, the monthly interest rate of 8%
agreed to by the parties was excessive, iniquitous, and unconscionable,
and must be equitably tempered. While the courts below correctly
imposed a 12% per annum instead of 8% a month, case law dictates the
imposition of additional interest charges.
In Nacar v. Gallery Frames,40 (Nacar) this Court enunciated the following
guidelines governing obligations and their corresponding interest rate:
To recapitulate and for future guidance, the guidelines laid
down in the case of Eastern Shipping Lines are
accordingly modified to embody BSP-MB Circular No.
799, as follows:
I. When an obligation, regardless of its source, i.e., law,
contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for damages.
The provisions under Title XVIII on "Damages" of the Civil
Code govern in determining the measure of recoverable
damages.
II. With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as
follows:
1. When the obligation is breached, and it
consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the
interest due should be that which may have
been stipulated in writing. Furthermore, the
interest due shall itself earn legal interest
from the time it is judicially demanded. In the
absence of stipulation, the rate of interest
shall be 6% per annum to be computed from
default, i.e., from judicial or extrajudicial
demand under and subject to the provisions
of Article 1169 of the Civil Code.
2. When an obligation, not constituting a
loan or forbearance of money, is breached,
445
 an interest on the amount of damages
awarded may be imposed at the discretion
of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on
unliquidated claims or damages, except
when or until the demand can be established
with reasonable certainty. Accordingly,
where the demand is established with
reasonable certainty, the interest shall begin
to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil
Code), but when such certainty cannot be so
reasonably established at the time the
demand is made, the interest shall begin to
nm only from the date the judgment of the
court is made (at which time the
quantification of damages may be deemed
to have been reasonably ascertained). The
actual base for the computation of legal
interest shall, in any case, be on the amount
finally adjudged.
3. When the judgment of the court awarding
a sum of money becomes final and
executory, the rate of legal interest, whether
the case falls under paragraph 1 or
paragraph 2, above, shall be 6% per annum
from such finality until its satisfaction, this
interim period being deemed to be by then
an equivalent to a forbearance of credit.
And, in addition to the above, judgments that
have become final and executory prior to
July 1, 2013, shall not be disturbed and shall
continue to be implemented applying the
rate of interest fixed therein.41
Accordingly, jurisprudence identifies two types of interest: (1) monetary
interest; and (2) compensatory interest. This springs from the fact that
"the right to recover interest arises only either by virtue of a contract
(monetary interest) or as damages for delay or failure to pay the principal
loan on which the interest is demanded (compensatory interest)."42
On the one hand, monetary interest is the compensation fixed by the
parties for the use or forbearance of money. While parties are free to
stipulate their preferred rate of interest, courts are allowed to equitably
temper those that are found to be excessive, iniquitous, unconscionable,
and/or exorbitant.43
In such instances, however, only the unconscionable interest rate is
nullified and deemed not written in the contract. But the parties'
agreement on the payment of interest on the principal loan obligation
subsists, except only if they failed to specify the interest rate. Settled is
the rule, moreover, that in this scenario, this Court shall apply the legal
rate of interest prevailing at the time the agreement was entered into,
being the presumptive reasonable compensation for borrowed money.44
This rate at the time of the contract's execution shall persist regardless
of shifts in the legal rate.45 As explained in Spouses Abella v. Spouses
Abella:46
Thus, it remains that where interest was stipulated in
writing by the debtor and creditor in a simple loan or
mutuum, but no exact interest rate was mentioned, the
legal rate of interest shall apply. At present, this is 6% per
annum, subject to Nacar's qualification on prospective
application.
Applying this, the loan obtained by respondents from
petitioners is deemed subjected to conventional interest at
the rate of 12% per annum, the legal rate of interest at the
time the parties executed their agreement. Moreover,
should conventional interest still be due as of July 1, 2013,
the rate of 12% per annum shall persist as the rate of
conventional interest.
This is so because interest in this respect is used as a
surrogate for the parties' intent, as expressed as of the
time of the execution of their contract. In this sense, the
legal rate of interest is an affirmation of the contracting
parties' intent; that is, by their contract's silence on a
specific rate, the then prevailing legal rate of interest shall
be the cost of borrowing money. This rate, which by their
contract the parties have settled on, is deemed to persist
regardless of shifts in the legal rate of interest. Stated
otherwise, the legal rate of interest, when applied as
conventional interest, shall always be the legal rate at the
446
 time the agreement was executed and shall not be
susceptible to shifts in rate.47
Monetary or conventional interest evinces the intention of the parties to
impose interest on account of the unavailability of the money owned by
the creditor, as it is being used by the debtor. During the execution of
the agreement, the intention to impose interest is already present
considering that at this time, the creditor already parts with his own
money, and from then, will not be able to use the same. The interest
rate, insofar as monetary interest is concerned, must thus be that rate
which has been agreed upon, or if declared void, the rate of legal interest
prevailing at the time of the execution of the agreement. Moreover, when
an extrajudicial demand is made, the creditor merely seeks the
enforcement of the agreement, as approved by the parties, and not to
seek for damages. It is therefore the rate at the time of the agreement,
which is sought to be enforced, that should prevail.
On the other hand, compensatory interest is that imposed by law or by
the courts as a penalty or indemnity for damages. This is an interest
imposed on the monetary or conventional interest mentioned above.
This is imposed as a penalty to the debtor, who is not able to pay the
interest agreed upon with the creditor, and contemplates a situation
where the creditor still has to resort to court action to collect the interest
on the debt despite the agreement of the parties. As such, this is
reckoned from the date of judicial demand. It has its legal underpinning
under Article 2212 of the Civil Code, which provides that "[i]nterest due
shall earn legal interest from the time it is judicially demanded, although
the obligation may be silent upon this point."48
In this case, the parties intended and agreed on a stipulated monthly
interest at 8% on the P1,100,000.00 loan.49 This translates to 96%
interest per annum on the loan. In a long line of cases, however, this
Court did not hesitate to reduce interest rates similar to the rate agreed
to by the parties herein for being excessive, iniquitous, and
unconscionable.50 A stipulated interest rate of 3% per month or higher
is generally considered by this Court as excessive and unconscionable.
In such instances, it is well to clarify that only the unconscionable
interest rate is nullified and deemed not written in the contract; whereas
the parties' agreement on the payment of interest on the principal loan
obligation subsists. It is as if the parties failed to specify the interest rate
to be imposed on the principal amount, in which case the legal rate of
interest prevailing at the time the agreement was entered into would
have to be applied by the Court.51
Note that at the time the loan was contracted on February 5, 7, and 15,
2013,52 the prevailing rate of interest then was 12% per annum under
Central Bank Circular No. 41653 and not the reduced rate of 6% per
annum under Bangko Sentral ng Pilipinas Monetary Board (BSP-MB)
Circular No. 799, Series of 2013. This 12% rate shall apply pursuant to
Our ruling in Nacar,54 which provides that the BSP-MB Circular No. 799,
Series of 2013 shall only be prospectively applied from its effectivity on
July 1, 2013.
Thus, the principal amount of P1,100,000.00 shall earn a
monetary/conventional interest of 12% per annum reckoned from the
date of default or from extrajudicial demand on September 5, 201355
until finality of this Decision.56
As for the compensatory interest, Nacar provides that the accrued
monetary interest shall itself earn compensatory interest at the legal rate
from the date of judicial demand until finality of the Decision.57 Thus, the
rate of this interest, imposed on the amount corresponding to 12%
interest of P1,100,000.00, shall be the prevailing rate at the time of the
filing of the complaint on September 25, 2013,58 which is 6% per annum
as provided under BSP-MB Circular No. 799, Series of 2013.
Finally, all monetary awards shall earn interest at the rate of 6% per
annum from finality of this Decision until full payment.59
With respect to the award of moral damages, however, this Court finds
the same improper for lack of sufficient basis. In Arco Pulp and Paper
Co., Inc. v. Lim,60 this Court ruled that an award of moral damages
requires the claimant to satisfactorily prove the following conditions: (1)
an injury, whether physical, mental, or psychological, clearly sustained
by the claimant; (2) a culpable act or omission committed by the
defendant; (3) the wrongful act or omission of the defendant is the
proximate cause of the injury sustained by the claimant; and (4) the
award of damages is predicated on any of the cases stated in Article
221961 of the Civil Code.62 Apart from Article 2219, moral damages may
also be awarded for breaches of contract under Articles 2220,63 as well
as Articles 1964 and 2065 in relation to Article 115966 of the Civil Code.67
It bears stressing, however, that moral damages are neither recoverable
on a mere breach of contract nor awarded as a matter of right, but only
after the party claiming it proves that the party from whom it is claimed
acted fraudulently or in bad faith or in wanton disregard of his contractual
obligations.68 To recover moral damages in an action for breach of
447
contract, the breach must be palpably wanton, reckless and malicious,
in bad faith, oppressive, or abusive.69 On this matter, We held that:
Bad faith does not simply connote bad judgment or
negligence. It imports a dishonest purpose or some moral
obliquity and conscious doing of a wrong, a breach of
known duty through some motive or interest or ill will that
partakes of the nature of fraud. It is, therefore, a question
of intention, which can be inferred from one's conduct
and/or contemporaneous statements.70
Thus, a person claiming bad faith must prove its existence by clear and
convincing evidence for the law always presumes good faith.71 Since a
finding of bad faith is generally premised on the intent of the doer, the
court is then tasked to examine the circumstances of each case.72
In this case, this Court finds no clear and convincing evidence of fraud
or bad faith on the part of Bendecio and Mascariñas. The trial court
awarded moral damages on the sole basis of Bautista's testimony
saying that she was sad, lost weight, and could not sleep because
Bendecio and Mascariñas did not pay her despite the fact that their
obligation was already due and demandable.73 But as discussed above,
mere breach of contract, without bad faith, cannot be the basis for an
award of moral damages.
Recall that upon maturity of the loan in May 2013, Bendecio's partner,
Mascariñas met with Bautista and executed a promissory note that
extended the maturity date of the loan to August 2013. Bautista signed
said note, consenting to the extension.74 When Bendecio and
Mascariñas failed to pay in August, Bautista filed the collection case,
without, however, proving that fraud or bad faith attended said failure.
To this Court, just because Bautista experienced sleepless nights and
lost her appetite does not necessarily mean that Bendecio and
Mascariñas acted fraudulently or in bad faith. The award of moral
damages, therefore, cannot be sustained.
As regards the award of attorney's fees, however, this Court affirms the
RTC's grant thereof in the amount of P100,000.00. Settled is the rule
that parties are free to stipulate in their agreement the recovery of
attorney's fees, subject however to the court's discretion to temper the
amount thereof if found unreasonable.75 In this case, the parties agreed
that Bautista shall be entitled to attorney's fees in the event of judicial or
extra-judicial enforcement of obligation in the amount equivalent to 20%
of the total amount due which in no case shall be less than P20,000.00.76
Nevertheless, in view of the absence of bad faith, this Court affirms the
RTC's reduction of the amount thereof from P220,000.0077 to
P100,000.00. Still, this award of attorney's fees shall earn legal interest
at the rate of 6% per annum from the finality of this Decision until full
payment in line with prevailing jurisprudence.78
WHEREFORE, premises considered, the instant petition
is DENIED. The Decision dated September 14, 2018 of
the Court of Appeals in CA-GR CV No. 109378, which
affirmed the Decision dated May 4, 2017 of the Regional
Trial Court, Branch 59, Makati City in Civil Case No. 13-
1126, is AFFIRMED with MODIFICATION. Accordingly,
petitioners Ma. Julieta B. Bendecio and Merlyn
Mascariñas are ORDERED TO PAY respondent Virginia
B. Bautista the following amounts:
1. The principal obligation in the amount of
P1,100,000.00 plus monetary interest at the
rate of twelve percent (12%) per annum from
extrajudicial demand or on September 5,
2013, until finality of this Decision;
2. Compensatory interest on the accrued
monetary interest at the rate of six percent
(6%) per annum from the date of judicial
demand or the filing of the complaint on
September 25, 2013, until finality of this
Decision;
3. Attorney's fees in the amount of
P100,000.00;
4. Legal interest at the rate of six, percent
(6%) per annum imposed on all the
monetary awards herein determined, from
the finality of this Decision until full payment;
and
5. Costs of suit.
SO ORDERED.
448
 SYSTEMS ENERGIZER CORPORATION (SECOR), PETITIONER,
VS. BELLVILLE DEVELOPMENT INCORPORATED (BDI),
RESPONDENT.
[ G.R. No. 205737. September 21, 2022 ]
GAERLAN, J.:
Before the Court is a Petition for Review on Certiorari1 under Rule
45 of the Rules of Court, which seeks to set aside the Decision2 dated
January 31, 2013 of the Court of Appeals (CA) 10th Division in CA-G.R.
SP No. 125889, and to reinstate the Final Award3 dated July 16, 2012
of the Construction Industry Arbitration Commission (CIAC) in CIAC
Case No. 25-2011.
The Factual Antecedents
Systems Energizer Corporation (petitioner) and Bellville
Development, Incorporated (respondent) entered into an Owner-
Contractor Agreement4 (First Agreement) on May 21, 2009 whereby the
former was to undertake the construction of the electrical works for the
latter's proposed Molito 3—Puregold Building located inside the El
Malito Commercial Complex located on the corner of Madrigal Avenue
and the Alabang-Zapote Road in Barangay Alabang, Muntinlupa City.5
The contract price agreed upon was a fixed lump sum of
P15,250,000.00,6 and the First Agreement had two crucial stipulations:
the first being Article 2.02 which states the following:
2.02. The other documents, which hereafter may be
mutually agreed upon between the OWNER and
CONTRACTOR and duly signed by both of them, whether
prepared before or after signing of the Contract
Documents, shall likewise form part of the Contract
Documents.7
The second crucial stipulation is Article 5.05, which states the
following:
5.05. Should the OWNER require the CONTRACTOR to
perform additional work or extra work or to reduce any
work, the costs of such additional and/or reduced work
shall be added to or deducted from, as the case may be, to
[sic] the Contract Price stated in Article 5.01.8
Petitioner began work on the project but the same was suspended
after only a few months, allegedly due to some issues with respondent's
original contractor for the structural works, and the untimely demise of
respondent's two vice presidents, who were signatories to the First
Agreement.9 However, respondent issued a new Notice of Award/Notice
to Proceed10 dated March 25, 2010 to petitioner with the following
particulars:
Gentlemen:
This is to confirmed [sic] that your proposal for the supply
of materials, manpower, tools, equipment and supervision
for the construction works of the Architectural & Structural
Vault Sub-station, Vault Sub-station System, CCTV
System and Changes/Revisions of Electrical Building
Plans dated 17 October 2009 of the project; Molito-
3/Puregold Commercial Building located along Alabang-
Zapote Road corner Madrigal Avenue, Alabang,
Muntinlupa City in accordance with your offer and further
negotiated by Bellville Development, Inc. stipulated as
follows:
and to the following terms and conditions:
1. That the total contract amount shall be PESOS: Fifty One
Million Five Hundred Fifty Thousand (Php. 51,550,000.00)
Pesos inclusive of VAT and other applicable government
taxes.
2. That the down payment equivalent to PESOS: Fifteen Million
Two Hundred Sixty Five Thousand (Php. 15,265,000.00)
Pesos shall be paid upon your submission of the
corresponding Surety Bond acceptable to the owner and
signing of the Construction Agreement.
3. That the construction period will commence, 90 calendar
days from March 15, 2010.
Should you agree with the above terms and conditions and
that your scope of work will be completed on June 14,
2010[, p]lease submit your construction schedule as well
[as] the revised cost breakdown totaling to your contract
amount.11 (Emphases and underscoring supplied)
449
 Eventually, the Parties entered into a Second Agreement12 dated
April 5, 2010, in order to reflect the new specifications indicated in the
Notice of Award/Notice to Proceed dated March 25, 2010. The Second
Agreement provided that petitioner was to undertake the construction
and completion of electrical works at the same location/project, i.e., the
Molito 3—Puregold Commercial Building. The scope of work covered
the entirety of petitioner's undertaking in much more detail and
additional major structures (i.e., the vault substation and the closed
circuit television system [CCTV] for the project), and crucially, Article 2.4
called for an abandonment of the previous First Agreement, viz.:
2.4. The Contract Documents contain the entire
agreement and understanding between the OWNER
and CONTRACTOR as to the subject matter hereof,
and the same supersedes all prior agreements,
commitments, representations, writing, and
discussions between them. All other documents
relating to the subject matter executed by the
parties prior to this Construction Contract but not
forming part of the Contract Documents above
enumerated are deemed waived an/or
abandoned.13 (Emphasis and underscoring supplied)
Said Second Agreement had a contract price of P51,550,000.00,
with payment to be made on monthly billings based on percentage of
actual accomplishment, the evidence of which would be summaries of
accomplishment prepared by the construction manager and accepted
by respondent.14
Over the course of the project's completion, additional Work
Authorization Orders15 (WAOs) were entered into between the Parties
for further electrical installations. The actual final cost of respondent for
petitioner's services vis-à-vis the construction of electrical works for the
building amounted to P80,711,308.05, as stated in the Statement of
Actual Cost Accounting & Summary of Expenses16 prepared by
respondent's accountant/finance manager. There are, however, no
attached summaries of accomplishment that form petitioner's basis for
its progress billings. Instead, attached to the record are two Certificates
of Final Inspection and Acceptance: 1) the first is dated September 1,
2010 and covers petitioner's completion of the installation of the project's
CCTV system;17 and the second is dated September 7, 2010 and covers
petitioner's completion of electrical works, fire protection/fire detection
and suppression (FDAS) system, and the project's power substation
vault.18
It appears from the records that respondent did pay petitioner for
the full contract price of the First and Second Agreements, minus
however the retention fees of 10% under both contracts. But no relevant
receipts or billings are present in the record. These retention fees (i.e.,
₱1,525,000.00 for the First Agreement and ₱5,155,000.00 for the
Second Agreement), plus the unpaid balance of WAO No. 2019
(₱1,350,000.00), amounted to a total of P8,030,000.00, and were the
subject of a demand letter addressed to respondent from petitioner's
counsel and dated July 12, 2011.20 Respondent's reply dated July 15,
2011,21 however, simply requested that petitioner provide all necessary
documentation to support the allegedly "tremendous increase of the
project cost from the original contract price of [P]15,250,000.00 to a total
price of [₱]80,711,308.00."22
With no settlement as to their issues, and with no action on the part
of respondent to pay the total remaining balance, petitioner filed its
Complaint before the CIAC on September 13, 2011,23 which started
arbitration proceedings under both the First and Second Agreements.
Respondent filed its Answer with Counterclaim to recover the alleged
excess of what it paid to petitioner under the terms of the First
Agreement (alleging novation by the Second Agreement),24 and
petitioner duly filed its Reply with Answer to Counterclaim.25 After
conducting the preliminary conference and a series of evidentiary
hearings, and after receiving the Parties' memoranda, the CIAC
promulgated its Final Award26 on July 16, 2012 with the following
dispositive portion:
IX. Final Award (Dispositive Part)
25.0. WHEREFORE, we, Atty. Eduardo R. Ceniza, Engr.
Salvador P. Castro, Jr., and Arch. Armando N. Alli, hereby
decide and award in full and final disposition of this
arbitration, as follows:
(1) Respondent is ordered to pay Claimant the sums of (i)
Php1,525,000.00, representing the 10% retention fee
under the first contract, (ii) Php5,155,000.00, representing
the 10% retention fee under the second contract, and (iii)
Php1,350,000.00, representing the value of WAO No. 20
– or a total of Php8,030,000.00, with legal interest thereon
450
 at the rate of 12% per annum computed from date of
finality of this Final Award until the principal amount is fully
paid;
(2) Claimant's claim for exemplary damages and attorney's
fee[s] are hereby denied;
(3) Respondent's claim for reimbursement of various items in
the total amount of Php32,044,090.32 are hereby denied;
(4) Respondent's claim for exemplary damages, [and]
attorney['s] fees are hereby denied;
(5) Each party shall bear its own attorney's fees;
(6) The arbitration cost which includes the filing fee,
administrative fee, arbitrator['s] fee, and Arbitration
Development Fund charges, including all incidental
expenses, shall be borne by both parties on a pro rata
basis;
(7) All other requests for relief not granted or disposed of here
are hereby denied.27
The CIAC made the following findings vis-à-vis petitioner's claim
and respondent's counter-claim for a refund of its inadvertent payment
for the full price under the First Contract:
1) The additional cost for the changes of the revised plan on
the original plan amounting to P28,250,000.00 (reduced
from P34,254,288.32 as initially stated in the Bill of
Quantities28) partly covered the scope of work of the First
Agreement, and the Second Agreement did not contain
any provision that specifically stipulates the abandonment
of the First Agreement.
2) The issue of whether or not the Second Agreement
superseded the First Agreement was not the real issue,
since the case all boiled down to petitioner's proper
compensation for actual services rendered and as billed to
respondent.
3) There was no justification present for CIAC to undo the
contractual terms entered into and agreed upon by the
Parties, much less concerning their performance, since
there was no showing of any fraud or vitiation of consent
on the part of either petitioner or respondent. Moreover,
the evaluation of the professionals hired by respondent to
oversee the implementation of the Agreements (i.e., the
project manager, the quantity surveyor, and its own
accountant) do not show any irregularities in petitioner's
accomplished works, and respondent was bound by their
actions and evaluation.
4) Petitioner was entitled to the release of the retention fees
under both contracts, since respondent did not raise any
of its objections to the same in its reply to petitioner's
demand letter, and only belatedly raised them before the
CIAC.
Aggrieved, respondent filed a Petition for Review under Rule 43 of
the Rules of Court (in relation to Section 18.2 of the CIAC's Revised
Rules of Procedure Governing Construction Arbitration), and sought the
CA's reversal and setting aside of CIAC's Final Award. On January 31,
2013, the CA 10th Division promulgated its Decision29 with the following
dispositive portion:
WHEREFORE, premises considered, the questioned
Final Award dated 9 July 2012 is hereby MODIFIED as
follows:
"(1) Respondent Systems Energizer
Corporation (SECOR) is hereby
ORDERED to reimburse petitioner
BELLVILLE DEVELOPMENT
INCORPORATED (BDI) the amount of
Thirteen Million Five Hundred Ninety[-
]Three Thousand Two Hundred Seventy[-
]Three [Pesos] (P13,593,273.00),
representing the excess amount paid by
the petitioner to the respondent;
(2) Respondent's claim for exemplary damages
and attorney's fees are hereby denied;
451
 (3) Petitioner's claim for exemplary damages and
attorney's fees are hereby denied;
(4) The arbitration cost[,] which includes the filing
fee, administrative fee, arbitrator's fee, and
Arbitration Development Fund charges,
including all incidental expenses, shall be
borne by both parties on a pro rata basis;
(5) All other requests for relief not granted or
disposed of here are hereby denied."
SO ORDERED.30 (Emphases in the original)
The CA reasoned that the monetary awards stated in the CIAC's
Final Award lacked evidentiary basis, since there was no proof attached
at all of petitioner's completion of work under the First Agreement. The
CIAC's ruling was merely based on presumptions, surmises, and
conjectures not based on factual details of the controversy that the CIAC
failed to seriously look into.
Moreover, the CA found that petitioner failed to discharge the
burden of proving that the First Agreement was not superseded. This is
because the "as-built" plan of the final completed project reflects the
implementation of the revised plan under the Second Agreement,
meaning the original and revised plans could never have been executed
simultaneously. This is bolstered by the unsigned report31 dated
November 21, 2009 of Jarhaus Options & Trends (respondent's quality
surveyor), which states that the electrical works completed under the
First Agreement (but before resumption of work) only amounted to
6.774% of the original plan.
With the First Agreement found to have been superseded, the CA
ruled that petitioner was only entitled to one retention fee: that of the
Second Agreement in the amount of P5,155,000.00. Petitioner,
however, was still also entitled to 6.774% of the contract price under the
First Agreement (i.e., P1,033,035.00) and payment for WAO No. 20 (i.e.,
P1,350,000.00). Offsetting these obligations with the amount due
respondent (i.e., the full price it paid under the terms of the First
Agreement amounting to P15,250,000.00), the CA determined that
petitioner owes respondent P13,593,273.00, computed as follows:
Total Amount Paid to Petitioner: P72,681,308.0032[minus
the following:]
Contract Price (Second Agreement): P51,550,000.00
Accomplished Works (6.744% of First Agreement):
P1,033,035.00
Retention Fee (Second Agreement): P5,155,000.00
Accomplished Works (WAO No. 20): P1,350,000.00
[Subtotal of Minuend: P59,088,035.00
___________________________________________
Excess Paid to Petitioner: P13,593,273.0033
Without filing a motion for reconsideration, Petitioner instituted the
present action for the Court's review of both the CIAC's and CA's rulings.
The Parties' Arguments
Petitioner posits the following errors on the part of the CA:
1. The CA erred in not finding respondent in delay when it
purposely did not pay its outstanding balance on time;
2. The CA erred in relying on the unsigned report of Jarhouse
Options and Trends (respondent's quality surveyor) for the
determination of its accomplished works under the terms
of the First Agreement;
3. The CA erred in not finding that petitioner fully accomplished
the works under the terms of both the First and Second
Agreements, and in ordering the refund of the excess paid
by respondent;
4. The CA erred in its determination that the First Agreement
had been superseded, despite petitioner's position that the
Second Agreement was merely constitutive of additional
costs for revision/changes to the original plan for the
project's electrical works; and
5. The CA erred in its determination that only one "as-built"
plan submitted by petitioner means that there was only
one contract implemented, i.e., in accordance with the
revised plans for electrical works under the Second
Agreement.
452
 In its Opposition,34 respondent reiterates its position that the
Second Agreement had specifically superseded all prior agreements
between the Parties, and that the incompatibility between the original
and revised plan for the project's electrical works were proof enough of
the incompatibility of implementing both First and Second Agreements.
Respondent asserts that the only "as-built" plan (prepared by petitioner
itself) indisputably proved that only the revised plan under the Second
Agreement was implemented, and that the Certificates of Final
Inspection only referred to the revised (not the original) plan. Finally,
respondent avers that it was justified in delaying payment of the
retention fees and remaining balance to petitioner due to the need to
investigate the escalated cost of the entire project—specifically the
electrical works.
The Issues
For the Court's consideration are the following matters:
1. Whether or not there is doubt in the interpretation of the
terms of the Second Agreement in the context of the
effectivity of the previous First Agreement.
2. Whether or not there is enough evidence to conclude that
the First Agreement between the Parties was novated by
the Second Agreement; and
3. Whether or not there is enough evidence to show the actual
percentage of accomplished work done by respondent vis-
à-vis the First Agreement.
The Court's Ruling
The Petition is lacking merit, and must be denied.
At this stage, the Court notes that petitioner did indeed fail to file a
motion for reconsideration vis-à-vis the CA 10th Division's Decision
dated January 31, 2013. While it is true that Rule 45, Section 135 of the
1997 Rules of Court (since the present Petition was filed prior to the
2019 Amendments under A.M. No. 19-10-20-SC) does not strictly
require the filing of such motion before instituting a petition for review on
certiorari with the Court, petitioner nonetheless should have given the
CA an opportunity to review its own ruling. But despite petitioner's
procedural misstep, the Court finds special and important reasons to
take cognizance of the present case: the first being the opportunity to
clarify standing jurisprudence on the civil law concepts of novation of
obligations, the judicial interpretation of contracts between private
parties, solutio indebitii, unjust enrichment, and even compensation
between debtors and creditors. The second is to finally settle the present
controversy, which has been unresolved for nearly 11 years since the
Complaint was filed before the CIAC.
Proceeding now to the substantive issues, the Court first tackles the
alleged doubt in the interpretation of the terms of Article 2.4 of the
Second Agreement—the crux of the present controversy. To accurately
paraphrase the same, it states that the contract documents (i.e., the
Second Agreement itself, its general conditions, the engineering design,
plans, drawings and specifications, respondent's Notice to Proceed, the
master construction schedule, petitioner's revised proposal and bill of
quantities, the performance bond, the surety bond, the guaranty bond,
the project organizational chart, the manpower and equipment utilization
schedule, the site layout of temporary facilities, and the standard United
Architects of the Philippines 301 general conditions) contain the entire
agreement between the Parties, that all prior agreements are
superseded, and that all documents executed before the Second
Agreement that are not forming part of the contract documents are
deemed waived/abandoned. Had this provision not been put in issue,
the first paragraph of Article 1370 of Republic Act No. 386, otherwise
known as the Civil Code of the Philippines, would have applied: "[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."1âшphi1
However, petitioner has exactly put Article 2.4 of the Second
Agreement in issue before the CIAC, the CA, and the Court. The second
paragraph of Article 1370 of the Civil Code thus applies: "[i]f the words
appear to be contrary to the evident intention of the parties, the latter
shall prevail over the former." In order for the Court to determine the true
intent of the present Parties, Article 1371 of the Civil Code provides a
judicial guide: "[i]n order to judge the intention of the contracting parties,
their contemporaneous and subsequent acts shall be principally
considered."
Civil law commentators in this jurisdiction have much to say about
the great care needed in straying away from the text of a contract in
order to adhere to the actual intent of the parties. Arturo M. Tolentino
opined that—
453
 In order that the intention of the contracting parties
may prevail against the terms of the contract, such
intention must be clear or, in other words, besides the
fact that such intention should be proved by competent
evidence, the latter must be of such character as to
carry in the mind of the judge an inequivocal [sic]
conviction. The evident intention which prevails
against the defective wording of the contract, is not that
of one of the parties, but the general intent, which,
being so, is to a certain extent equivalent to mutual
consent, inasmuch as it was the result desired and
intended by the contracting parties.36
Ruben F. Balane, in his more recent treatise, noted the significance
of "[c]ontemporaneous and subsequent acts as guides to
interpretation"37 of the true intent of the parties. Thus, the Court is
obliged to pore over the evidence on record for any and all indications
as to the intent of the Parties to either sustain and keep alive the First
Agreement along with the Second, or to do away with the First
altogether. This is despite the straightforward language of Article 2.4 of
the First Agreement, since again, the said provision was put in issue by
petitioner.
Before examining parts of the record in detail, a discussion on the
basics of novation in civil law is in order. The legal basis for the concept
can be found in Article 1291 of the Civil Code, which states that
obligations can be modified by: "(1) [c]hanging their object or principal
obligations; (2) [s]ubstituting the person of the debtor; (3) [s]ubrogating
a third person in the rights of the creditor." Obviously, what is purportedly
involved in the present controversy is an objective novation, i.e., "the
change of the obligation by substituting the object with another or
changing the principal conditions."38
According to Balane, the determination of whether or not a contract
was subjected to objective novation would necessitate a determination
of "whether the conditions to be changed are principal (in which case
there would be a novation) or incidental (in which case there would be
no novation)."39 For the general requisites of novation, Tolentino
identifies four: "first, a previous valid obligation; second, the agreement
of all the parties to the new contract; third, the extinguishment of the old
contract; and fourth, the validity of the new one."40
Article 1292 of the Civil Code further provides that "[i]n 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." This is the basis for the important concept that novation is never
presumed. Tolentino elucidates vis-à-vis the concept of express
novation thus:
Novation takes place only when the contracting
parties expressly disclose that their object in making
the new contract is to extinguish the old contract,
otherwise the old contract remains in force and the
new contract is added to it, and each gives rise to an
obligation still in force. Thus, where it appears that
there was no clear agreement of the parties to the
creation of a new contract in substitution of the existing
one, no novation can be held to have been made.41
To be clear, what is involved in the present controversy is an
allegedly express novation, i.e., Article 2.4 of the Second Agreement.
While the Court recognizes that the Parties have indeed made
arguments and presented evidence below to show how the First and
Second Agreements are incompatible with each other, the main issue
of the present controversy relates only to the Parties' intention vis-à-vis
an express and objective novation, and not in relation to an implied
novation of the contract. Thus, the Court will only check the record for
the Parties' actions and admissions relating to circumstances
immediately before and right after the execution of the Second
Agreement to see whether they expressly agreed to either an essential
or accidental change to the principal conditions and obligations of their
mutual understanding. If the Court determines that the change to the
terms of the First Agreement was essential, then there was a novation.
If the change was merely accidental, then there is no novation to speak
of despite the express terms of Article 2.4 of the Second Agreement.
Incidentally, Tolentino cites the case of Tiu Siuco v. Habana42 as a
helpful and apt illustration to guide the Court's determination of the
question:
In a building contract, although numerous and
expensive changes and alterations were made, where
it appears that the original plans were followed in the
construction of the main body of the building, the
454
 contractor, without the consent of the owner, cannot
treat the original contract as abandoned and recover
upon a quantum meruit for the cost of the entire
building.43
Said in another way, if the final result of a construction work were to
be materially different from what was intended in the original plan—
which is the basis for the previous contract—then there would be a
totally new agreement that had effectively been implemented. This
would either be an express and subsequent contract embodying the new
or revised designs/plans, or an implied contract that can be the subject
of the contractor's compensation on a quantum meruit basis (which is
not the case at present).
True enough, the fact that the Parties entered into the Second
Agreement that points to a new or revised plan for the necessary
electrical works for the Molito 3—Puregold Building is already telling.
The contract price is significantly greater, and this alone should be
sufficient to declare a new object of the contract. But the fact that the
new Notice of Award/Notice to Proceed specified "Changes/Revisions
of Building Plans dated 17 October 2009"44 means that there was indeed
a new plan for the project's electrical works altogether. The adjustments
of the variance between the costing of the original and revised plans
were thus not mere "additional" or "additive" costs upon the First
Agreement. Since there was a new and revised plan based on new
needs of the planned structure, and for works not found in the
specifications under the First Agreement, such as the CCTV and FDAS
systems and the power substation vault, the revised plan indeed
constituted a new subject matter of the mutual understanding between
the Parties. This is not merely an accidental change in the object of
petitioner's obligations to respondent, but an essential one.
Even if the Court considers the affidavits of the numerous experts
fielded by the Parties before the CIAC, the conclusion that the revised
plan constituted an essential change in the principal object of the
contract between the Parties cannot be avoided. The main Affidavit45 of
Petitioner's president in the CIAC proceedings belies the substantial
change in the contractual terms despite his insistence that the First
Agreement still subsisted:
Q42: As you mentioned above, this Revised Plan modifies the
First Agreement. In the First Agreement the contract
amount is P15,250,000.00 and in the Revised Plan
Amount[,] it is P28,250,000.00. Did this Revised Plan
supersede the first agreement?
A: No sir. The First Agreement remained and the Revised Plan
co-exist [sic] with the First Agreement.
Q43: Can you show us why you said the First Agreement was
not superseded?
A: Sir, kindly refer to Exhibit "C-15" to "C-20" – Bill of Quantities
(Original and Revised Plan). There you will see the
columns for [the] Original Plan amount, Revised Plan
amount, Variance amount and remarks. The amount for
the original in the total amount of [P]15,250,000.00 was
deducted to the Revised Plan total [a]mount of
P49,504,288.32 to come up with the Variance Amount of
P34,254,288.32 (reduced to the final contract amount of
P28,250,000.00) which is the contract amount for this
Revised Plan and remarked as additive. This shows that
the Original was retained and the contract amount for the
revised plan was also treated separately.
Q44: Can you enumerate some of the differences in the
Revised Plan compared to the First Agreement (Original)?
A: In the revised plan, there was increase in electrical
requirements and demands (electrical power) as there
was increase in the number of tenants and varying
demand of tenants depending on the kind of business; the
further subdivision of the existing subdivisions of the
spaces for rent. The increase in electrical power demand
was also caused by the Introduction of Air-conditioning
system, Parking exhaust and Ventilating System requiring
higher Power Supply, especially their tenant puregold
[sic]. Thus almost all the [n]umber of [u]nits/pcs [sic],
length or sets for materials needed in the Original Contract
was greatly increased in the Revised Plan. To meet this
demand for larger electrical power supply, the other
Additions, namely: Construction of Vault Sub-Station
System and the electrical works relative to this Vault Sub-
station System, CCTV system (electrical works) needed to
be implemented. These among other revisions, enlarged
455
 the original work and requirements in the Original
Contract.46
The comparison between the original and revised designs—and the
confirmation that the as-built plan conforms to the latter—is evident in
the first Affidavit47 of respondent's project engineer, shows no doubt that
there was indeed a substantial difference:
The second Affidavit49 of respondent's project engineer further
noted that his comparison and analysis between the two designs
"showed that they could not have been implemented simultaneously.
That is to say, either of them could have been implemented, but not
both."50 He further stated that "almost all items indicated in the 1st
Contract Agreement or the Original Design have not been installed
except those items that are already existing and the owner[-]supplied
materials such as the generator and manual transfer switch."51
From the records, the CIAC seems to not have made an express
ruling on either the admissibility or weight of these affidavits of
respondent's project engineer. In actuality, it merely brushed aside the
issue of the alleged novation of the First Agreement by the Second, and
merely concluded that "the second contract does not contain any
provision that specifically stipulates that the first contract is deemed
superseded and set aside by the second contract."52 The CIAC even
doubted the matter as being the central issue of the present controversy,
since in its view, "[t]he real issue as to liability is whether Claimant has
actually performed the works it claims it has performed and for which it
has billed the Respondent."53 Overall, the CIAC found that since the
Parties entered into their mutual understanding/s freely and voluntarily,
and since the implementation of the contracts were observed and
certified by competent professionals, respondent has no choice but to
simply pay up for all services rendered by petitioner—under both
contracts.1âшphi1
To the Court's mind, the CIAC gravely erred in its disposition of the
case when it abandoned its duty to make the necessary evidentiary
rulings that would have settled the issues between the Parties. Had the
CIAC made a categorical ruling on the issue of whether or not the
revised plan was substantially different from the original plan for the
project's electrical works, the issue of novation would have been put to
rest. Instead, the present controversy has dragged on for years simply
because an administrative agency with presumed competence and
technical expertise over the subject matter of the case did not properly
appreciate the facts and apply the law accordingly.
Further, the Court finds no substantial objection on the part of
petitioner as to the Affidavits of respondent's project engineer, other
than simply asserting that said witness was unfamiliar with the project,
and was not involved in its implementation.54 While it is true that the said
witness may not have been intimately familiar with the actual
implementation of the project, his sworn statements (i.e., his First and
Second Affidavits) still have weight as an expert witness. Petitioner
forgets that Section 13.5, Rule 13 of the CIAC's Revised Rules of
Procedure Governing Construction Arbitration states that the CIAC is
mandated to perform its functions "without regard to technicalities or
legal forms and need not be bound by any technical rule on evidence."
This is in keeping with the oft-repeated rule of thumb in administrative
proceedings that the "strict enforcement of the rules on evidence x x x
does not hold true for administrative bodies."55 So long as the ruling of
an administrative body is supported by substantial evidence, i.e., "that
amount of relevant evidence which a reasonable mind might accept as
adequate to justify a conclusion,"56 the courts shall not disturb the same.
But in the present controversy, the CIAC, as mentioned, failed to
make such a ruling vis-à-vis the First and Second Affidavits of
respondent's project engineer. The Court finds that the CIAC's Final
Award lacks the mention of any substantial evidence to support its
findings in favor of petitioner, despite the presence of enough evidence
to make the conclusion that there was a substantial difference between
the original and revised plans for the project's electrical works. The
statements of respondent's project engineer are still competent in terms
of his professional opinion as a licensed electrical engineer, and his
points are not directly addressed or refuted by any expert witness
presented by petitioner. In fact, petitioner's president (who is also a
licensed electrical engineer) was its sole witness57 during the CIAC
proceedings; and as discussed above, his admission as to the
substantial difference between the original and revised plans also
constitute substantial evidence that the CIAC failed to consider.
In short, with enough evidence to conclude that the revised plan
differed substantially from the original plan for the project's electrical
works, the Court also concludes in turn that the revised plans constituted
a different subject matter for the Second Agreement between the
Parties. Put simply, there was an express novation in the terms of the
456
Second Agreement concerning an essential change in the subject
matter of the First Agreement.
Thus, there was no doubt at all to be found in the interpretation of
Article 2.4 of the Second Agreement, since the actions and admissions
of the Parties conformed to their intentions at the time. Petitioner only
has a different interpretation as to the nature of the change to the
contract's subject matter, i.e., that the same was merely accidental
because it characterized the same as just additional or additive work
within the contemplation of Article 5.0558 of the Second Agreement. The
Court, as explained, however, sees otherwise.
Common sense would also dictate that it was indeed impossible for
petitioner to perform and collect on both contracts, since there was only
one resulting output of finished electrical works for the project that
conformed to the specifications of the revised plan under the Second
Agreement. For petitioner to collect the full amount for work that was
never finished would go against any notion of justice and equity as
embodied in either the Civil Code or in the law between the Parties, i.e.,
their contractual stipulations. This is something the Court will never
allow.
Overall, the CA was thus correct in finding that petitioner had
unjustly enriched itself at respondent's expense; and in ordering that the
Final Award be modified to allow respondent to recover its wrong
payment under the full terms of the First Agreement. Solutio indebiti was
correctly applied to the case, as was the compensation between the
Parties as mutual creditors and debtors.
A final word on the actual percentage of petitioner's accomplished
work vis-à-vis the First Agreement is in order. It is undisputed that
petitioner's president admitted to work stoppage some time in November
2009 due to notice relayed by respondent's construction manager that
there was "an internal problem that they need[ed] to fix before work can
continue."59 The run date of the unsigned report of Jarhaus Options and
Trends is November 21, 2009, which roughly corresponds to the work
stoppage. Petitioner asserts its objections to the admissibility of the said
report, pointing out that it was not authenticated, that the author of the
report was never cross-examined, and that the contents were mere
hearsay prepared by an accountant with no personal knowledge of the
relevant events and facts. Notably, the CIAC also failed to make a
categorical ruling on this evidentiary matter.
The Court, however, is inclined to sustain the CA's utilization of the
contents of the said report in determining (on a quantum meruit basis)
petitioner's work accomplishment and billing under the superseded First
Agreement. The CA correctly noted that the CIAC did not dispute the
competence and professionalism of Jarhaus Options and Trends as
respondent's quality surveyor, and that the CIAC found no fraud to justify
going into a deeper investigation and examination of all of petitioner's
billings under both contracts. The Court similarly finds no such fraud to
sanction a relitigation of petitioner's compensation under the First
Agreement. To sustain the CA's ruling that petitioner was entitled to
compensation under the 6.774% as determined by Jarhaus Options and
Trends would be better than remanding the entire case back to the CIAC
for the reception of evidence to prove something that would be nearly
impossible: the completion of preparatory works for an original design
that was abandoned in favor of the revised plan under the Second
Agreement. Such would also likely be a relatively small amount. For
reasons of equity similar to the ruling of the Court in Naga Development
Corp. v. Court of Appeals,60 should there be any inaccuracy in the
Court's presumption that the electrical works undertaken by petitioner
for the First Agreement was only 6.774%, "the difference involves a
trifling amount which, in law, may be overlooked. De minimis non curat
lex."61
WHEREFORE, the present Petition for Review on Certiorari is
hereby DENIED for lack of merit, and the Decision dated January 31,
2013 of the Court of Appeals (10th Division) in CA-G.R. SP No. 125889
is hereby AFFIRMED.
SO ORDERED.
457
ROMAGO, INC. AND FRANCISCO GONZALEZ, PETITIONERS, VS.
ASSOCIATED BANK (NOW UNITED OVERSEAS BANK PHILS.)
AND METALLOR TRADING CORPORATION, RESPONDENTS.
[ G.R. No. 223450. February 22, 2023 ]
LEONEN, SAJ.:
Novation must be clear and express. While the creditor's consent to
a change in debtor may be derived from clear and unequivocal acts of
acceptance, such act must be wholly consistent with the release of the
original debtor. Thus, acceptance of payment from a third person will not
necessarily release the original debtor from their obligation.1
Moreover, when the contracts are part of a commercial transaction
and reduced to writing, novation cannot be implied simply from a
creditor's inaction. Silence is, at best, ambiguous in the presumption that
both parties are diligent agents in a commercial transaction.
Romago, Incorporated2 (Romago), and its president, Francisco C.
Gonzalez3 (Gonzalez) filed a Petition for Review on Certiorari4 before
this Court. The Petition assails the Court of Appeals Decision5 and
Resolution6 which both affirmed the Regional Trial Court's finding that
Romago was liable to pay Associated Bank (now United Overseas
Bank, or the Bank) the amount of the loan indicated in Promissory Notes
Nos. 9660 and 9661, including accrued interests.7
On April 7, 1993, the Bank filed a Complaint for Sum of Money
against Romago for loan obligations contracted by Romago sometime
in August 1978. Romago allegedly took out three loans, supported by
Promissory Notes Nos. BD-3728 for PHP 300,000.00, BD-3750 for PHP
700,000.00, and BD-3714 for PHP 700,000.00.8
According to the Bank, Romago fully paid its obligations under
Promissory Note Nos. BD-3728 and BD-3750 but was unable to pay the
PHP 700,000.00 corresponding to Promissory Note No. BD-3714. Thus,
on April 30, 1983, Romago sought and was given a restructuring of its
obligations under Promissory Note No. BD-3714, converting the latter
into two separate instruments: Promissory Note No. 9660 for PHP
700,000.00, and Promissory Note No. 9661 for PHP 629,572.00
(collectively, the "restructured notes"). The Bank alleged that on October
5, 1983, Romago was able to pay PHP 64,652.17 for the amounts due
under Promissory Note No. 9660, and PHP 103,632.09 for Promissory
Note No. 9661. However, no further payments were made.9
Instead, Romago contended that Promissory Note No. BD-3714,
which was eventually restructured, was a "conduit loan" for Metallor
Trading Corporation (Metallor). Romago denied having made any
payments on the restructured notes, and instead cited several letters
from Metallor indicating the latter's supposed admission of liability under
Promissory Note No. BD-3714. Among these were letters which
allegedly declared Metallor's intent to "update all unpaid interest" of the
loan covered by Promissory Note No. BD-3714 and to "submit
collaterals . . . to secure this obligation."10 Romago also presented letters
from Metallor, showing that the latter was procuring proofs of titles to
properties that it would be offering for the obligation under Promissory
Note No. BD-3714.11 The other letters allegedly show that Metallor
recognized a "conduit obligation of Mr. Lorenzo Sarmiento, Jr.,
amounting to Seven Hundred Thousand Pesos (PHP 700,000.00),"12
and that it undertook "to pay the account of [Romago] relative to P.N.
No. 9660."13 Romago also argued that it consistently maintained its role
as a conduit in procuring the loan covered by the restructured notes. It
also presented its own letters, which cite the supposed arrangement
between Romago and Metallor, where the latter had assumed to pay for
the outstanding loan.14
For its part, Metallor argued that Romago as third-party complainant
had no cause of action. In any event, Metallor insisted that its alleged
liability on the loan had already prescribed.15 It thus moved for leave to
file a demurrer to evidence, but eventually manifested that it was instead
adopting parts of the Bank's documentary evidence.16
The Regional Trial Court ruled in favor of the Bank,17 holding that
Romago remained obligated to pay, since there was no indication that
Metallor expressly bound itself together with Romago, or that it assumed
Romago's entire obligation under the promissory notes.18 Rather, the
evidence showed only Romago's liability for the loans because only
Romago's president signed the promissory note. Neither was there a
novation of the obligation, absent express consent from the creditor that
it assented to a change in debtor. According to the trial court, "novation
cannot be inferred unless it is so declared in unequivocal terms, or that
the old and the new obligations are incompatible on every point with
each other."19 The Bank's acceptance of Metallor's partial payments did
not release Romago from its obligation under the promissory notes.20
458
Thus, the trial court dismissed the third-party complaint against
Metallor.21
The trial court also awarded the Bank attorney's fees equal to 20%
of the total outstanding obligation, as agreed between Romago and the
Bank under the promissory notes.22
Romago filed a Notice of Appeal before the Court of Appeals and
subsequently filed its Appellant's Brief on July 3 1, 2014. There, Romago
maintained that it obtained the loan covered by Promissory Note No.
BD-3714 as mere conduit for Metallor, whose president, Lorenzo
Sarmiento, Jr. (Sarmiento) was also
"Director/Officer/Stockholder/Related Interest" of the Bank.23 According
to Romago, Metallor overextended its credit line with the Bank when
Sarmiento took out a prior loan as an accommodation for Leonardo Ty,
yet another of the Bank's stockholders.24 The prior accommodation loan
was allegedly used to ransom Leonardo Ty's kidnapped child.25 Since
Metallor could no longer take out loans on its own account, the Bank's
stockholders, led by Marcelino Marcy Ty, convinced Romago and
Gonzalez to act as a conduit for the loan that became Promissory Note
No. BD-3714. Gonzalez claimed to be friends with the Bank's
stockholders, and thus agreed to the latter's request.26
Metallor since the latter was not even privy to the contract between
Romago and the Bank.32 The Bank also reiterated that the letters cited
by Romago were insufficient to establish Metallor's sole liability under
the promissory notes.33 Rather, it agreed with the trial court's finding that
novation in the person of the debtor did not take place. The Bank argued
that while express consent to the change in debtor was not required, this
Court still requires acts by the creditor amounting to "clear and
unmistakable consent."34 Taken together with the absence of evidence
indicating that the loan covered by Promissory Note No. BD-3714 was
a mere "conduit loan" or that Romago and Metallor expressly agreed to
the latter's assumption of the former's loan obligation, the Bank
a maintained that Romago should be held liable to pay.35
On October 26, 2015, the Court of Appeals affirmed the Regional
Trial Court's Decision finding Romago liable to pay the loan covered by
the restructured notes.36 The court held that while Metallor "had
knowledge of Romago's outstanding loan and offered to pay the latter's
indebtedness," this did not amount to Metallor being solely liable for the
loan obligation taken out by Metallor.37 While this acknowledgment and
endeavor to pay may have resulted in Metallor being liable to pay
together with Romago, this "does not constitute a novation, and the
creditor can still enforce the obligation against the original debtor."38

Romago again referred to the letters exchanged by the parties,
which supposedly contained Metallor's admission of its direct liability for
the loan obtained by Romago.27 Romago also argued that the Bank's
acceptance of Metallor's partial payments implied the creditor's consent
to a change in debtor.28 In line with this argument, Romago also
asserted that the creditor's inaction and the new debtor's overt acts
assuming the obligation was implied creditor consent to a change in
debtor.29 Thus, Romago alleged that since the Bank did not object to
Metallor's letters assuming Romago's liability under Promissory Note
No. BD-3714, and since Metallor did, in fact, make partial payments on
the obligation, Metallor should be deemed to have replaced Romago as
debtor.30
Finally, Romago contested its liability for attorney's fees, arguing
that Metallor, as the true beneficiary of the loan, should be the one liable
for the costs of the suit.31
The Bank filed its Appellee's Brief on October 29, 2014, arguing that
the trial court correctly upheld Romago's liability for the loan covered by
Promissory Note No. BD-3714. Romago cannot offload its liability to
Further, the Court of Appeals ruled that novation requires either an
explicit statement of novation in unequivocal terms, or an incompatibility
on every point between the old and new obligations. Thus, even if
Metallor's letters offered to pay for and secure Romago's outstanding
obligation, this offer could not be considered an express novation of
Romago's obligation under the promissory notes.39 According to the
Court of Appeals, the Bank did not express unequivocal consent to
Metallor's propositions even after accepting the partial payment on the
restructured notes because a creditor's acceptance of payment from a
third person does not imply acceptance of a change in debtor. The
restructuring of the loan did not clear Romago of liability either.
According to the Court of Appeals, "novation is never presumed," and
"[w]ithout such release, there is no novation."40
The Court of Appeals also disregarded the supposed admissions
against interest made by Metallor's president in a previous case, holding
the same irrelevant to the issue at hand. As to the grant of attorney's
fees, the court upheld the award of 20% of the outstanding obligation,
consistent with the stipulations in the promissory note.41

459
 On November 23, 2015, Romago moved for reconsideration of the
Court of Appeals' October 26, 2015 Decision. It argued that the letters
exchanged between Romago, Metallor, and the Bank clearly indicated
that Metallor assumed sole liability for the loan covered by Promissory
Note No. 9660, formerly BD-3714, as restructured by the Bank. Metallor
then wrote a letter undertaking to pay the account of Romago relative to
the restructured notes. Moreover, Metallor submitted a list of its
properties offered as collateral for the obligations covered by the
restructured notes.42
Romago further discussed how all parties consented to Metallor's
substitution of Romago as debtor. Romago drew comparisons between
the present case and that of Babst v. Court of Appeals,43 where this
Court upheld the substitution of the debtor because the creditor failed to
object when it was informed of the substitution. According to Romago,
the Bank "was duly informed of the arrangement between appellant
ROMAGO, INC. and . . . party defendant METALLOR not once but on
at least three different occasions."44 Despite these opportunities to
object, the Bank failed to do so. Thus, Romago argued that the Bank's
failure to object amounted to "clear and unmistakable expression of
consent to the substitution of the debtor."45
On February 29, 2016, the Court of Appeals denied the Motion for
Reconsideration, adopting the Bank's comment that the arguments
presented in the Motion were reiterations of the position Romago took
on appeal.46
On April 25, 2016, Romago and Gonzalez filed this Petition for
Review on Certiorari under the Rules of Court. Petitioners argue that
while the issues raised in their Petition pertain to questions of fact, the
Court of Appeals' judgment was "manifestly mistaken" and was "based
on a misapprehension of facts."47 According to petitioners, these
circumstances exempt their Petition from the rule limiting Rule 45
petitions to questions of law.48
Petitioners also insist that Romago was a mere conduit for
respondent Metallor in obtaining the loan from the Bank.49 According to
petitioners, the lower courts failed to consider "the totality of the facts
and circumstances" which indicated respondent Bank's acquiescence to
its substitution as debtor.50 The circumstances allegedly establishing the
Bank's acquiescence included: (1) respondent's failure to object to
petitioners' letter expressing "gratitude to the Respondent Bank" for
separating respondent Metallor's PHP 700,000.00 conduit obligation
from Romago's own loan obligations; (2) Metallor's letter dated October
29, 1984 assuming "sole liability for the loan obligation"; and (3)
respondent Bank's acceptance of partial payment on the conduit loan,
"notwithstanding the absence of proof that the payment was made by
the petitioner."51
These circumstances allegedly gave respondent Bank "knowledge
of the arrangement" between itself, Metallor, and petitioner Romago.
According to petitioners, respondent Bank's failure to object to this
arrangement amounted to the Bank's consent to a change in debtor.52
Moreover, Metallor allegedly wrote a letter expressly stating that it "shall
undertake the payment of the account of Romago Electric Company as
restructured by the [B]ank" without objection from the respondent
Bank.53
Petitioners also allege that the Court of Appeals and the trial court
should have at least held respondent Metallor liable "to reimburse
petitioner whatever amount petitioner is ordered to pay respondent
bank,"54 in view of respondent Metallor's inclusion as third-party
defendant, and its failure to rebut any of petitioners' evidence
establishing Metallor's liability under the loan. Despite this, petitioners
note that the Court of Appeals merely affirmed the dismissal of the third-
party complaint against Metallor.55 In any event, petitioners argue that
its payment of the obligation covered by the restructured notes would
amount to unjust enrichment on respondent Metallor's behalf.
Respondent Metallor would essentially have received the proceeds of
the loan without having to pay any of it back to the lender.56 Finally,
petitioners insist that respondent Metallor should be solely liable for
attorney's fees since it was "the real obligor of the Respondent Bank."57
This Court ordered respondent Metallor to Comment on the Petition
on November 9, 2016.58 In its Comment, respondent Metallor argues
that the issue of novation was a question of fact, which cannot be
resolved in a petition for review on certiorari.59 In any event, respondent
Metallor reiterates that the Bank did not consent to any change in debtor.
That a third person may have paid for the loan did not necessarily mean
that respondent Bank consented to a change in debtor, absent an
''express release of the old debtor."60 Rather, respondent Bank
continued to demand petitioners' overdue accounts, and never
expressly consented to respondent Metallor's supposed assumption of
petitioners' loan obligation.61 Thus, respondent Metallor cannot be
deemed to have substituted petitioner in its obligation to respondent
Bank.62
460
 Respondents Metallor and the Bank further argue that "[t]here was
no evidence presented that the loan was a conduit loan for the account
of Metallor."63 Other than its own allegations, petitioners do not adduce
any evidence indicating that respondent Metallor is the sole beneficiary
of the supposed conduit loan, or that there is an agreement that
petitioners will act as a mere conduit for respondent Metallor. Therefore,
respondent Metallor insists that petitioners had no cause of action
against it, and that the lower courts properly dismissed the third-party
complaint.64
Thus, respondents Metallor and the Bank conclude that the Court
of Appeals correctly affirmed the trial court's decision finding petitioner
Romago liable to pay the outstanding loan obligation covered by the
restructured notes, and that petitioner Romago is liable to pay attorney's
fees at the rate stipulated in the same notes.65
On May 8, 2017, petitioners filed a Motion to Admit Attached Reply,
together with their Reply,66 which this Court respectively granted and
noted on September 27, 2017.67 In their Reply, petitioners continue to
insist that "consent may well be inferred from the acts of the creditor,
since volition may as well be expressed by deeds as by words."68 Thus,
respondent Bank allegedly consented to novation when it received
notice of the arrangement between petitioner Romago and respondent
Metallor, but failed to object and instead accepted partial payment from
the latter.69
The issues for this Court's resolution are as follows:
(1) Whether the Petition raises questions appropriate for
review in a petition for review on certiorari;
(2) Whether petitioner Romago is liable under the loan
obligation, which requires a finding on whether novation
took place; and
(3) Whether the lower courts properly awarded attorney's
fees.
We deny the Petition.
The Petition raises questions of fact, which fall beyond the scope of
a Rule 45 petition and fails to establish an exception to this rule. In any
event, the lower courts correctly maintained petitioner's liability under
the outstanding loan. Likewise, the lower courts correctly awarded
attorney's fees to respondents.
I
Pascual v. Burgos70 adequately explains the scope of review that this
Court may undertake pursuant to a petition for review on certiorari.
The Rules of Court require that only questions of
law should be raised in petitions filed under Rule 45.
This court is not a trier of facts. It will not entertain
questions of fact as the factual findings of the appellate
courts are "final, binding[,] or conclusive on the parties
and upon this [C]ourt" when supported by substantial
evidence. Factual findings of the appellate courts will
not be reviewed nor disturbed on appeal to this court.71
(Emphasis supplied; citations omitted)
Concurrently, Miro v. Vda. De Erederos72 discusses the distinctions
between a question of fact and a question of law.
There is a question of law when the doubt or
difference arises as to what the law is on a certain set
of facts; a question of fact, on the other hand, exists
when the doubt or difference arises as to the truth or
falsehood of the alleged facts. Unless the case falls
under any of the recognized exceptions, we are limited
solely to the review of legal questions.73 (Emphasis
supplied; citations omitted)
The Petition raises a question of fact, as it explicitly states that "[t]he
Court of Appeals and the RTC failed to consider the following facts."74
The Petition then proceeds to refer to several letters between the
parties, which allegedly indicate respondent Metallor's intent to assume
petitioner Romago's liability under the loan and respondents consent to
the assumption. Further, the parties dispute whether the law on novation
recognizes such circumstances as having sufficiently hurdled the legal
standard for a change of debtor.
Far Eastern Surety and Insurance Co. Inc. v. People75 exemplifies
that this Court determines the nature of the issues in a petition based on
the extent of review required to resolve them.
461
 The test, therefore, is not the appellation given to a
question by the party raising it, but whether the
appellate court can resolve the issue without
examining or evaluating the evidence, in which case, it
is a question of law; otherwise, it is a question of fact.76
(Emphasis supplied; citations omitted)
Further, Domingo77 provides that determining the existence of
consent in novation is a factual question "because it requires the Court
to review the evidence on record."78 Thus, the Petition raises questions
of fact that cannot be reviewed under a petition for review on certiorari.
As to petitioners' claim of exception, Pascual v. Burgos79 provides
that any such claim "must be alleged, substantiated, and proved" before
this Court proceeds to evaluate factual questions. However, other than
insisting on a re-evaluation of their evidence's probative value,
petitioners do not allege any valid exemption to the rule that a Rule 45
Petition may raise only questions of law.
In any event, any review undertaken by this Court pursuant to a
Rule 45 petition remains subject to this Court's sound judicial
discretion.80
SECTION 6. Review discretionary. — A review is not
a matter of right, but of sound judicial discretion, and will
be granted only when there are special and important
reasons thereof. The following, while neither controlling
nor fully measuring the court's discretion, indicate the
character of the reasons which will be considered:
(a) When the court a quo has
decided a question of substance, not
theretofore determined by the Supreme
Court, or has decided it in a way probably
not in accord with law or with the
applicable decisions of the Supreme
Court; or
(b) When the court a quo has so far
departed from the accepted and usual
course of judicial proceedings, or so far
sanctioned such departure by a lower
court, as to call for an exercise of the
power of supervision. (Emphasis
supplied)
Even if this Court were to undertake a review of the Petition's merits,
the Petition would still fail.
II
Petitioners insist that they are not liable for the loan covered by
Promissory Note No. BD-3714, because they acted as a mere "conduit"
for Metallor.81 Petitioners deny having received any of the loan
proceeds, alleging that they remitted all of it to respondent Metallor.
They then cite several letters and statements given in open court in an
attempt to establish Metallor as the "true debtor" under the outstanding
loan.82 On the other hand, respondents argue that petitioners have not
presented any evidence that would prove their alleged status as a mere
"conduit" for respondent Metallor. Respondents thus insist that Romago
should be solely liable for the loan.83
The dispute centers on the extent of petitioner Romago's liability for
the loan covered by the outstanding promissory notes. From the
petitioners' allegations, it appears that despite admitting to signing the
instrument, they claim to have received no value from the instrument
and to have signed solely to lend their name to Metallor. These are all
badges of an accommodation party arrangement,84 as laid out in Section
29 of the Negotiable Instruments Law:
SECTION 29. Liability of accommodation party. – An
accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose of
lending his name to some other person. Such a person is
liable on the instrument to a holder for value,
notwithstanding such holder, at the time of taking the
instrument, knew him to be only an accommodation party.
(Emphasis supplied)
However, petitioners failed to prove that they did not receive any of
the loan proceeds secured by the promissory note, and that such
proceeds were entirely remitted to respondent Metallor. If the parties did
contract the loan as an accommodation for respondent Metallor, and if
petitioners remitted all proceeds of the loan to the latter, such
circumstances should have at least been reflected in the contract's
462
supporting documents. Respondent Metallor's letters allegedly
admitting its own liability to the Bank do not preclude petitioner
Romago's liability for their own obligation. This Court must render
judgment based on the evidence on record, which presently shows
petitioner Romago's primary liability on the promissory notes. Since
allegations are not proof,85 there is no evidence on record to support
petitioners' claim that respondent Metallor was the sole beneficiary of
the loan.
Even if petitioners were able to prove that they did not receive any
value from lending their name to respondent Metallor's "conduit loan,"
their status as accommodation party would still entail primary liability on
the instrument:
The relation between an accommodation party
and the party accommodated is, in effect, one of
principal and surety — the accommodation party being
the surety. It is a settled rule that a surety is bound
equally and absolutely with the principal and is
deemed an original promisor and debtor from the
beginning. The liability is immediate and direct. It is not
a valid defense that the accommodation party did not
receive any valuable consideration when he executed
the instrument; nor is it correct to say that the holder
for value is not a holder in due course merely because
at the time he acquired the instrument, he knew that
the indorser [sic] was only an accommodation party.86
(Emphasis supplied, citations omitted)
In view of petitioners' failure to establish their claim as being a mere
"conduit" for respondent Metallor, the lower courts' findings on their
direct liability as signatory to the promissory note must be upheld.
As to the issue of novation, Arco Pulp and Paper Co., Inc.87
discusses how novation extinguishes an obligation, and when novation
takes place.
Novation extinguishes an obligation between two
parties when there is a substitution of objects or debtors
or when there is subrogation of the creditor. It occurs only
when the new contract declares so "in unequivocal terms"
or that "the old and the new obligations be on every point
incompatible with each other."
....
Because novation requires that it be clear and
unequivocal, it is never presumed, thus:
In the civil law setting, novation is
literally construed as to make new. So it
is deeply rooted in the Roman Law
jurisprudence, the principle — novatio
non praesumitur — that novation is
never presumed. At bottom, for novation
to be a jural reality, its animus must be
ever present, debitum pro debito —
basically extinguishing the old obligation
for the new one.88 (Emphasis supplied;
citations omitted)
Arco Pulp further provides that the creditor's consent "must be
secured" in novation through a change of debtor.89 Domingo then
discusses the applicable principles in determining whether a creditor's
acts amount to consent to a change of debtor.
As a general rule, since novation implies a waiver of
the right the creditor had before the novation, such waiver
must be express. The Court explained the rationale for the
rule in Testate Estate of Lazaro Mota v. Serra:
It should be noted that in order to
give novation its legal effect, the law
requires that the creditor should consent
to the substitution of a new debtor. This
consent must be given expressly for the
reason that, since novation extinguishes
the personality of the first debtor who is
to be substituted by a new one, it implies
on the part of the creditor a waiver of the
right that he had before the novation,
which waiver must be express under the
principle that renuntiatio non
praesumitor, recognized by the law in
declaring that a waiver of right may not
be performed unless the will to waive is
463
 indisputably shown by him who holds the
right.
However, in Asia Banking Corporation v. Elser, the
Court qualified thus:
The aforecited article 1205 [now
1293 of the Civil Code does not state that
the creditor's consent to the substitution
of the new debtor for the old be express,
or given at the time of the substitution,
and the Supreme Court of Spain, in its
judgment of June 16, 1908, construing
said article, laid down the doctrine that
"article 1205 of the Civil Code does not
mean or require that the creditor's
consent to the change of debtors must
be given simultaneously with the
debtor's consent to the substitution; its
evident purpose being to preserve the
creditor's full right, it is sufficient that the
latter's consent be given at any time and
in any form whatever, while the
agreement of the debtors subsists." The
same rule is stated in the Enciclopedia
Juridica Española, volume 23, page 503,
which reads: "The rule that this kind of
novation, like all others, must be
express, is not absolute; for the
existence of the consent may well be
inferred from the acts of the creditor,
since volition may as well be expressed
by deeds as by words."The
understanding between Henry W. Elser
and the principal director of Yangco,
Rosenstock & Co., Inc., with respect to
Luis R. Yangco's stock in said
corporation, and the acts of the board of
directors after Henry W. Elser had
acquired said shares, in substituting the
latter for Luis R. Yangco, are a clear and
unmistakable expression of its consent.
When this court said in the case of Estate
of Mota vs. Serra (47 Phil., 464), that the
creditor's express consent is necessary
in order that there may be a novation of
a contract by the substitution of debtors,
it did not wish to convey the impression
that the "express" was to be given an
unqualified meaning, as indicated in the
authorities or cases, both Spanish and
American, cited in said decision.
Hence, based on the aforequoted ruling in Asia
Banking, the existence of the creditor's consent may also
be inferred from the creditor's acts, but such acts still need
to be 'a clear and unmistakable expression of [the
creditor's] consent.'90 (Emphasis supplied; citations
omitted).
Here, petitioners contend that, consistent with Babst, the creditor
bank's failure to object to respondent Metallor's assumption of petitioner
Romago's debt establishes clear and unmistakable consent to a change
in debtor.
We do not agree.
Domingo91 clarified when a creditor's silence or inaction may
amount to clear and unmistakable consent in the context of Babst.
The absence of objection on the part of BPI (or
FEBTC) cannot be presumed as consent. Jurisprudence
requires presentation of proof of consent, not mere
absence of objection. Amador cannot rely on Babst which
involved a different factual milieu.
....
In Babst, there was a clear opportunity for BPI, as
creditor therein, to object to the substitution of debtors
given that its representative attended a creditor's meeting,
during which, said representative already objected to the
proposed payment formula made by DBP, as the new
debtor. Hence, the silence of BPI during the same meeting
as to the matter of substitution of debtors could already be
interpreted as its acquiescence to the same. In contrast,
464
 there was no clear opportunity for BPI (or FEBTC) to have
expressed its objection to the substitution of debtors in the
case at bar.92 (Emphasis supplied; citations omitted)
In Babst, a creditor bank failed to object to a new entity's take-over
of the old debtor's assets, which included the old debtor's monetary
liability to the creditor bank. Instead, the creditor bank participated in a
meeting called by the new debtor to resolve or satisfy the same
obligation. Thus, the creditor's conduct in Babst "evinced a clear and
unmistakable consent to the substitution" of debtors.93
The circumstances in Babst are markedly different from the
exchange of correspondence relied upon by petitioners. In the letters
cited by petitioners, respondent Metallor continuously referred to
"arrearages of Romago Electric Co. under P.N. No. 3714,"94 "the loan
account of Romago Electric Co., Inc.,"95 and "the account of Romago
Electric Company as restructured by the Bank."96 Thus, while
respondent Metallor manifested its intention to pay for such accounts,
the letters clearly state that the obligation sought to be assumed had
always Romago's. Likewise, despite respondent Metallor's
manifestations, the respondent Bank continued to demand payment of
the loan from petitioners and not from respondent Metallor.97
Petitioners also failed to prove that the partial payments made on
the promissory notes came from respondent Metallor. While respondent
Bank admitted to receiving partial payments on the promissory notes,98
petitioners' insistence that respondent Metallor made these payments99
were not sufficiently established by their evidence. In any event,
payment by a third person does not necessarily result in the third
person's substitution of the original debtor. Domingo teaches that
novation cannot be presumed from a creditor's acceptance of payment
from a third person "absent proof of [the creditor's] clear and
unmistakable consent to release" the original debtor.100
The acceptance by a creditor of payments from a
third person, who has assumed the obligation, will
result merely to the addition of debtors and not
novation. The creditor may therefore enforce the
obligation against both debtors. As the Court
pronounced in Magdalena Estates, Inc. v. Rodriguez,
"[t]he mere fact that the creditor receives a guaranty or
accepts payments from a third person who has agreed
to assume the obligation, when there is no agreement
that the first debtor shall be released from
responsibility, does not constitute a novation, and the
creditor can still enforce the obligation against the
original debtor." The Court reiterated in Quinto v.
People that "[n]ot too uncommon is when a stranger to
a contract agrees to assume an obligation; and while
this may have the effect of adding to the number of
persons liable, it does not necessarily imply the
extinguishment of the liability of the first debtor. Neither
would the fact alone that the creditor receives guaranty
or accepts payments from a third person who has
agreed to assume the obligation, constitute an
extinctive novation absent an agreement that the first
debtor shall be released from responsibility."101
(Emphasis supplied; citations omitted)
The present circumstances refute the respondent's alleged consent
to release petitioner Romago from its obligation. Landbank v. Ong102
highlights the importance of the need for consistency in the creditor's
acts that stand to prove unequivocal consent to a change in debtor.
Novation must be expressly consented to. Moreover,
the conflicting intention and acts of the parties
underscore the absence of any express disclosure or
circumstances with which to deduce a clear and
unequivocal intent by the parties to novate the old
agreement.103 (Emphasis supplied; citations omitted)
Moreover, the contract here forms part of a series of commercial
transactions and was reduced to writing, leaving no room for implication
in its terms. While petitioners attempted to prove a substitution in
debtors, the creditor's acceptance of such a substitution cannot be
implied from the creditor's silence or inaction. Even Babst requires that
implied consent must be derived from the creditor's unequivocal acts of
acceptance.
Here, the creditor's supposed silence is, at best, ambiguous and
cannot be used to presume acceptance of a change in debtor when the
terms of the contract and the creditor's subsequent actions show
otherwise. However, it may be presumed that both parties to the
commercial transaction are diligent agents who agreed to be bound by
the terms of their contract. These terms, as written, must be upheld.
465
III
We find no reason to overturn the lower courts' findings regarding
petitioner Romago's liability. Concurrently, the award of attorney's fees
at the rate stipulated in the instrument is proper. However, viewing the
stipulated conventional and compensatory interest rates in context
reveals the need to nullify the stipulated rates for being unconscionable.
On the other hand, "interest on interest" may apply, as prescribed by
law.
III (A)
Article 2208 of the Civil Code recognizes that parties to a contract
may stipulate on attorney's fees.104 But while petitioners agreed to
stipulate on the payment of "20% of [petitioner Romago's] outstanding
obligation on the promissory note," Gorospe and Sebastian v.
Gochangco105 provides that such stipulations are not to be literally
enforced "no matter how injurious or oppressive it may be."
From Bachrach vs. Golingco, 39 Phil., 138
(rendered in 1918) to Sison vs. Suntay, 102 Phil., 769,
December 28, 1957, this Court has repeatedly fixed
counsel fees on a quantum meruit basis whenever the
fees stipulated appear excessive, unconscionable, or
unreasonable, because a lawyer is primarily a court
officer charged with the duty of assisting the court in
administering impartial justice between the parties,
and hence, his fees should be subject to judicial
control. Nor should it be ignored that sound public
policy demands that courts disregard stipulations for
counsel fees whenever they appear to be a source of
speculative profit at the expense of the debtor or
mortgagor.106 (Emphasis supplied; citations omitted)
Vda. De Santiago v. Suing107 clarified when a stipulation for
attorney's fees may be deemed unconscionable, and thus, reduced by
this Court.
In Roxas v. De Zuzuarregui, Jr., the Court stressed
that attorney's fees are unconscionable if the amount
constituting the same affront one's sense of justice,
decency or reasonableness. Verily, the power to
determine the reasonableness or the unconscionable
character of attorney's fees stipulated by the parties is a
matter falling within the regulatory prerogative of the
courts. On this note, the principle of quantum meruit (as
much as he deserves) may serve as a basis for
determining the reasonable amount of attorney's fees.
Quantum meruit is a device to prevent undue enrichment
based on the equitable postulate that it is unjust for a
person to retain benefit without paying for it. The same is
applicable even if there is a formal written contract for
attorney's fees as long as the agreed fee was found by the
court to be unconscionable.
In determining the reasonableness of the attorney's
fees, Rule 138, Section 24 of the Rules of Court expressly
mandates that:
SECTION 24. Compensation of
attorney's; agreement as to fees. — An
attorney shall be entitled to have and
recover from his client no more than a
reasonable compensation for his
services, with a view to the importance of
the subject matter of the controversy, the
extent of the services rendered, and the
professional standing of the attorney. No
court shall be bound by the opinion of
attorneys as expert witnesses as to the
proper compensation, but may disregard
such testimony and base its conclusion
on its own professional knowledge. A
written contract for services shall control
the amount to be paid therefor unless
found by the court to be unconscionable
or unreasonable.
Canon 20 of the Code of Professional Responsibility
likewise imposes upon a lawyer the obligation to "charge
only fair and reasonable fees." Rule 20.1 of the same
Code lays down the following factors that shall serve to
guide a lawyer in determining his attorney's fees:
a) The time spent and the extent of the
services rendered or required;
466
 b) The novelty and difficulty of the
questions involved;
c) The importance of the subject matter;
d) The skill demanded;
e) The probability of losing other
employment as a result of acceptance of
the proffered case;
f) The customary charges for similar
services and the schedule of fees of the
IBP Chapter to which he belongs;
g) The amount involved in the
controversy and the benefits resulting to
the client from the service;
h) The contingency or certainty of
compensation;
i) The character of the employment,
whether occasional or established; and
j) The professional standing of the
lawyer.108 (Emphasis supplied; citations
omitted)
We find no reason to modify the parties' stipulation on attorney's
fees. However, this Court takes this opportunity to examine the propriety
of the stipulated interest rates on the promissory notes, given this
Court's recent Resolution on the Motion for Reconsideration in Lara’s
Gifts & Decors, Inc. v. Midtown Industrial Corp.109
III (B)
The Resolution to the Motion for Reconsideration in Lara’s Gifts &
Decors, Inc. v. Midtown Industrial Sales, Inc.discussed the different
types of interest that may apply to obligations, the purposes served by
each type of interest, and when the courts may examine the propriety
and the extent of their application.
Interest is of two major kinds—conventional interest,
on one hand, and compensatory interest on the other.
These two kinds of interest are conceptually different,
subsume the other types and kinds of interest, and are
governed by different rules that must be consistently
applied, otherwise the computation of interest "present[s]
intricate situations."
....
A simple loan, whether the object is money or other
consumable thing, may be gratuitous or onerous. If it is
onerous, the compensation to be paid by the borrower is
referred to as conventional interest, as it is the interest
agreed to by the parties themselves as distinguished from
that prescribed by law.
Conventional interest is therefore paid not as a
consequence of default, nor is it compensatory or a result
of a provision of law. It is "'rigorously lucrative,” and the
result of the express will of the parties in a contract. In
onerous simple loans, the payment of conventional
interest is a principal condition, if not the most important
condition, of the loan. In that case, any modification must
be mutually agreed upon otherwise, it has no binding
effect.'' As it is a stipulation covenanted in a valid and
effective contract, conventional interest continues to run
from the date stipulated, with no break in the continuity of
the obligation to pay it.
....
Compensatory interest, also referred to as penalty
interest, indemnity, or moratory interest, is the indemnity
for damages arising from delay on the part of the debtor in
an obligation consisting in the payment of a sum of money.
It is interest allowed by law in the absence of a promise to
pay interest as compensation for delay in paying a fixed
sum or a delay in assessing and paying damages.
Since a simple loan or money is necessarily an
obligation consisting in the payment of a sum of money,
then compensatory interest is always demandable in case
467
 the borrower in a simple loan or money incurs delay.
However, a simple loan of money is not the only obligation
that consists in the payment of a sum of money. Moreover,
not every obligation consists in the payment or a sum of
money.
....
In distinguishing between conventional interest and
compensatory interest, this Court has explained that if the
debtor is not in delay, it is properly liable only for the
principal of the loan and conventional interest. Even if the
debtor is not liable for compensatory interest, this does not
mean that it is, as a matter of law, relieved from the
payment of conventional interest. The conventional
interest continues to accrue under the terms or the loan
until actual payment is effected. The payment of
conventional interest, specifically monetary interest,
constitutes the price or cost of the use of money and thus,
continues to accrue until the principal sum due is returned
to the creditor. Corollary to this, if the debtor were in delay,
then compensatory interest, as a matter of law, will accrue
in addition to conventional interest.110 (Emphasis in the
original; citations omitted)
Here, the restructured notes impose a stipulated conventional
interest at the rate of 24% per annum, payable monthly,111 and a
stipulated compensatory interest rate of "[one percent] (1%) per month
in [the] form of liquidated damages from due date until fully paid."112 The
promissory notes also provide for the monthly compounding of all
accruing interest.
Interest not paid when due shall be computed
every 30 days, added to and become part of the
principal, and shall likewise bear interest at the same
rate or interest indicated hereon and /or from maturity
of this note.113
According to the Resolution in Lara’s Gifts & Decors, all stipulated
interest, "whether conventional or compensatory" may be reviewed
under the same standard for unconscionability, which is based on "the
context in which [the stipulated interest rates] were applied."114
Stipulated interest rates, whether conventional or
compensatory, are subject to the "unconscionability"
standard. The concept of unconscionability is a matter of
law and equity. Jurisprudence empowers courts to
equitably reduce interest rates; and the law empowers
them to reduce penalty charges. Eastern Shipping Lines
recognized that "factual circumstances [of a case] may
[call] for different applications, guided by the rule that the
courts are vested with discretion, depending on the
equities of each case, on the award of interest."
....
The reduction of interest rates is not limited to
monetary interest. It is not dependent on the type of
interest imposed on the party, but on whether the interest
rate was unconscionable or not. Thus, compensatory
interest, when found to be unconscionable, may also be
reduced.
....
"Interest rates become unconscionable in light of the
context in which they were imposed or applied." Thus, the
determination of whether an interest rate or penalty charge
is reasonable or iniquitous rests on the sound discretion of
the courts based on the established facts of a particular
case.115 (Emphasis in the original; citations omitted)
The Resolution in Lara’s Gifts & Decors further clarified the standard
for unconscionability of conventional interest by reiterating the ruling in
Spouses Abella v. Spouses Abella:
In determining whether the rate of
interest is unconscionable, the
mechanical application of pre-
established floors would be wanting. The
lowest rates that have previously been
considered unconscionable need not be
an impenetrable minimum. What is more
crucial is a consideration of the parties'
contexts. Moreover, interest rates must
be appreciated in light of the
468
 fundamental nature of interest as
compensation to the creditor for money
lent to another, which he or she could
otherwise have used for his or her own
purposes at the time it was lent. It is not
the default vehicle for predatory gain. As
such, interest need only be reasonable.
It ought not be a supine mechanism for
the creditor's unjust enrichment at the
expense of another.
Hence, this guiding parameter:
The legal rate of interest is the
presumptive reasonable compensation
for borrowed money. While parties are
free to deviate from this, any deviation
must be reasonable and fair. Any
deviation that is far-removed is suspect.
Thus, in cases where stipulated interest
is more than twice the prevailing legal
rate of interest, it is for the creditor to
prove that this rate is required by
prevailing market conditions.
Conformable to the foregoing pronouncements, "[t]he
maximum interest rate that will not cross the line of
unconscionability is 'not more than twice the prevailing
legal rule of interest.' If the stipulated interest exceeds this
standard, the creditor must show that the rate is necessary
under current market conditions." The creditor must also
show that the parties were on an equal footing when they
stipulated on the interest rate.
Furthermore, where the monetary interest rate is
found to be unconscionable, only the rate is nullified and
deemed not written into the contract; the parties’
agreement on the payment of interest remains. In such
instance, "the legal rate of interest prevailing at the time
the agreement was entered into" is applied by the
courts.116 (Emphasis in the original; citations omitted)
Likewise, this Court's pronouncement in Palmares v. Court of
Appeals117 provides that stipulated compensatory interest may become
unconscionable when other stipulations accomplish a similar purpose.
It must be remembered that from the principal loan of
P30,000.00, the amount of P16,300.00 had already been
paid even before the filing of the present case. Article 1229
of the Civil Code provides that the court shall equitably
reduce the penalty when the principal obligation has been
partly or irregularly complied with by the debtor. And, even
if there has been no performance, the penalty may also be
reduced if it is iniquitous or leonine.
In a case previously decided by this Court which
likewise involved private respondent M.B. Lending
Corporation, and which is substantially on all fours with the
one at bar, we decided to eliminate altogether the penalty
interest for being excessive and unwarranted under the
following rationalization:
Upon the matter of penalty interest, we agree with the
Court of Appeals that the economic impact of the penalty
interest or three percent (3%) per month on total amount
due but unpaid should be equitably reduced. The purpose
for which the penalty interest is intended — that is, to
punish the obligor — will have been sufficiently served by
the effects of compounded interest. Under the exceptional
circumstances in the case at bar, e.g., the original amount
loaned was only P 15,000.00; partial payment of
P8,600.00 was made on due date; and the heavy (albeit
still lawful) regular compensatory interest, the penalty
interest stipulated in the parties' promissory note is
iniquitous and unconscionable and may be equitably
reduced further by eliminating such penalty interest
altogether.118 (Emphasis supplied; citations omitted)
Here, the total stipulated interest in the restructured notes
effectively amounts to 3% per month,119 or 36% per year, compounded
monthly. Thus, not only does the stipulated rate effectively exceed the
general standard of "twice the prevailing legal rate," but the records also
show that if left to operate as stipulated, petitioners' liability for interest
alone would become exponentially higher than the principal amounts of
PHP 700,000.00 and PHP 629,572.90 that they originally promised to
469
pay. Moreover, as in Palmares, the parties' stipulation on compounding
interest sufficiently serves the purpose sought by the stipulated
compensatory interest rate.1âшphi1
To illustrate, Romago's failure to pay the PHP 700,000.00 due
under Promissory Note No. BD-3714 caused the accumulation of
interest and penalties totaling PHP 629,572.90. This total amount was
later covered by the parties' restructuring agreement on April 30, 1983,
resulting in the execution of Promissory Note Nos. 9660 and 9661.120
Thus, from the time the loan was executed on August 21, 1978,121 and
until the note's restructuring on April 30, 1983,122 or in the span of less
than five years, the loan of PHP 700,000.00 incurred a nearly equal
amount of PHP 629,572.90 in conventional and compensatory interest.
That a simple loan of money, which required no active input or value
added from respondent bank, could net the lender a return nearly
equaling the amount of the principal in such a short span of time reveals
the predatory nature of the stipulated rates. As discussed in a Separate
Opinion in Lara’s Gifts, interest is meant to replace a lender's loss of
profit from choosing to lend their money rather than investing it
elsewhere. It is neither a "necessary consequence of the use of
money[,]"123 nor a "vehicle for predatory gain."124
In the context of the present circumstances, the stipulated monetary
interest rate of 24% per annum and the penalty interest rate of 1% per
month, taken together with the stipulation for the monthly compounding
of all interest, are unconscionable and should be invalidated.
When a stipulation imposing interest is found unconscionable, ''only
the unconscionable rate is nullified and deemed not written into the
contract[.]"125 In place of the stipulated rate, the legal interest rate will
suffice to compensate respondents' opportunity cost. However, all other
terms of the parties' agreement upon the accrual of "interest on the
principal loan obligation"126 shall be maintained. Spouses Abella v.
Spouses Abella provides further clarity in this regard:
Applying this, the loan obtained by respondents from
petitioners is deemed subjected to conventional interest at
the rate of 12% per annum, the legal rate of interest at the
time the parties executed their agreement. Moreover,
should conventional interest still be due us on July 1, 2013,
the rate of 12% per annum shall persist as the rate of
conventional interest.
This is so because interest in this respect is used as
a surrogate for the parties' intent, as expressed as of the
time of the execution of their contract. In this sense, the
legal rate of interest is an affirmation of the contracting
parties' intent; that is, by their contract's silence on a
specific rate, the then prevailing legal rate of interest shall
be the cost of borrowing money. This rate, which by their
contract the parties have settled on, is deemed to persist
regardless of shifts in the legal rate of interest. Stated
otherwise, the legal rate of interest, when applied as
conventional interest, shall always be the legal rate at the
time the agreement was executed and shall not be
susceptible to shifts in rate.127 (Emphasis in the original;
citations omitted)
Thus, the principal amounts clue under Promissory Notes Nos.
9660 and 9661 shall earn interest under the conditions originally
stipulated by the parties in their contract, except for the rate of
conventional and compensatory interest, which shall now be subject to
the legal rate of 12% per annum, from the time of demand until June 30,
2013. The remaining amounts due shall then be subject to the legal rate
of interest at 6% per annum from July 1, 2013 until fully paid.
III (C)
As to the "interest on interest" imposed by Civil Code Article 2212,128
the Resolution in Lara’s Gifts & Decors teaches that such interest is a
"penalty or indemnity for delay in the payment of stipulated interest."129
Article 2212's interest on interest is penalty or
indemnity for delay in the payment of stipulated
interest. It is expressly prescribed by law, and deemed
written into every contract. This, all contracting parties
should be aware of when they stipulate on the payment
of interest.130 (Citations omitted)
Further, Article 2212 is "expressly prescribed by law" and, thus, it is
not subject to the courts' determination of unconscionability, unlike
conventional and compensatory interest.
As Justice Alfredo Benjamin S. Caguioa elucidated, ''interest on
interest" is fixed by law. In the absence of a contractual stipulation
between the parties on the rate of interest on accrued interest, the legal
470
rate shall apply by operation of law. Its imposition is not subject to the
court's discretionary power.131
Petitioner Romago's obligation is a simple loan of money with
stipulated rates for conventional and compensatory interest. Thus,
Article 2212's imposition of "interest on interest" will apply to the
amounts it owes respondent Bank, consistent with the guidelines on the
applicable interest rates on obligations, as updated in the Lara’s Gifts &
Decors Resolution:
With regard to an award of interest in the concept of
actual and compensatory damages, the rate or interest, as
well as the accrual thereof, is imposed, as follows:
A. In obligations consisting of loans or forbearances of
money, goods or credit:
1. The compensatory interest due shall
be that which is stipulated by the parties
in writing as the penalty or compensatory
interest rate, provided it is not
unconscionable. In the absence of a
stipulated penalty or compensatory
interest rate, the compensatory interest
due shall be that which is stipulated by
the parties in writing as the conventional
interest rate, provided it is not
unconscionable. In the absence of a
stipulated penalty or a stipulated
conventional interest rate, or if these
rates are unconscionable, the
compensatory interest shall be the
prevailing legal interest rate prescribed
by the Bangko Sentral ng Pilipinas.
Compensatory interest, in the absence
of a stipulated reckoning date, shall be
computed from default, i.e., from
extrajudicial or judicial demand, until full
payment.
2. Interest on conventional/monetary
interest and stipulated compensatory
interest shall accrue at the stipulated
interest rate (compounded interest) from
the stipulated reckoning point or, in the
absence thereof, from extrajudicial or
judicial demand until full payment,
provided it is not unconscionable. In the
absence of a stipulated compounded
interest rate or if this rate is
unconscionable, the prevailing legal
interest rate prescribed by the Bangko
Sentral ng Pilipinas shall apply from the
time of judicial demand until full
payment.
B. In obligations not consisting of loans or forbearances of
money, goods or credit:
1. For liquidated claims:
The compensatory interest due shall be
that which is stipulated by the parties in
writing as the penalty or compensatory
interest rate, provided it is not
unconscionable. In the absence of a
stipulated penalty or compensatory
interest rate, or if these rates are
unconscionable, the compensatory
interest shall be at the rate of 6%.
Compensatory interest, in the absence
of a stipulated reckoning date, shall be
computed from default,i.e., from
extrajudicial or judicial demand, until full
payment.
a. Interest on stipulated
compensatory interest
shall accrue at the
stipulated interest rate
(compounded interest)
from the stipulated
reckoning point or in the
absence thereof, from
extrajudicial or judicial
demand until full
471
 payment, provided it is
not unconscionable. In
the absence of a
stipulated compounded
interest rate or if this
rate is unconscionable,
legal interest at the rate
of 6% shall apply from
the time of judicial
demand until full
payment.
2. For unliquidated claims:
Compensatory interest on the amount of
damages awarded may be imposed in
the discretion of the court at the rate of
6% per annum. No compensatory
interest, however, shall be adjudged on
unliquidated claims or damages until the
demand can be established with
reasonable certainty. Thus, when such
certainty cannot be so reasonably
established at the time the demand is
made, the interest shall begin to run only
from the date of the judgment of the trial
court (at which time the quantification of
damages may be deemed to have been
reasonably ascertained) until full
payment.The actual base for the
computation of the interest shall, in any
case, be on the principal amount finally
adjudged.132
Thus, the stipulated conventional and compensatory interest rates
in Promissory Notes Nos. 9660 and 9661, having been declared
unconscionable, shall be replaced with the legal interest rate of 12% per
annum, applied from the date of respondents' demand on the
promissory notes on August 30, 1983 until June 30, 2013. The legal
interest of six percent (6%) per annum shall apply to any unpaid amount
of the principal from July 1, 2013 until full payment of the obligation, in
view of Bangko Sentral ng Pilipinas Circular No. 799, series of 2013,
effective July 1, 2013.133
Likewise, legal interest at the rate of 12% per annum shall apply on
the unpaid interest from the time of judicial demand until June 30, 2013.
Legal interest at the rate of 6% per annum shall apply of any unpaid
interest from July 1, 2013, until fully paid.134
ACCORDINGLY, the Petition for Review on Certiorari
is DENIED, there being no reversible error on the part of
the Court of Appeals.£A⩊phi£ The Court of Appeals'
October 26, 2015 Decision and its February 29, 2016
Resolution affirming the Regional Trial Court's Decision
dated October 20, 2006, are AFFIRMED with
MODIFICATION.
The parties' stipulated conventional interest rate of
24% per annum, and their stipulated compensatory
interest rate of 1% per month as liquidated damages, as
contained in Promissory Notes Nos. 9660 and 9661, are
DELETED for being unconscionable.
Petitioner Romago, Incorporated is hereby
ORDERED to pay the following amounts to respondent
Associated Bank, now United Overseas Bank:
(a) SIX HUNDRED THIRTY-FIVE
THOUSAND THREE HUNDRED
FORTY-SEVEN PESOS and 83/100
(PHP 635,347.83) as the remaining
balance of the amount due under
Promissory Note No. 9660, plus interest
thereon at the rate of 12% per annum
from August 30, 1983 until June 30,
2013. From July 1, 2013 until full
payment, the outstanding obligation on
Promissory Note No. 9660 shall earn
interest at the rate of 6% per annum, until
fully paid;
(b) FIVE HUNDRED TWENTY-FIVE
THOUSAND NINE HUNDRED THIRTY
NINE and 91/100 (PHP 525,939.91) as
the remaining balance of the amount due
under Promissory Note No. 9661, plus
interest thereon at the rate of 12% per
472
 annumfrom August 30, 1983 until June
30, 2013. From July 1, 2013 until full
payment, the outstanding obligation on
Promissory Note No. 9661 shall earn
interest at the rate of 6% per annum, until
fully paid;

(c) Legal interest at the rate of 12% per

annum applied to any unpaid interest
from the time of respondent Associated
Bank's judicial demand until June 30,
2013. From July 1, 2013 until full
payment, any unpaid interest shall earn
legal interest at the rate of 6% per
annum; and

(d) The sum equivalent to 20% of the total

outstanding obligation as attorney's fees
and costs of the suit.

SO ORDERED.

473