Oblicon Original Cases

COMPENSATION:

[G.R. No. L-22490. May 21, 1969.]

GAN TION, Petitioner, v. HON. COURT OF APPEALS, HON. JUDGE AGUSTIN P. MONTESA, as
Judge of the Court of First Instance of Manila, ONG WAN SIENG and THE SHERIFF OF
MANILA, Respondents.



SYLLABUS

1. CIVIL LAW; DAMAGES; AWARD OF ATTORNEYS FEES; NATURE OF AWARD. The award for
attorneys fees is made in favor of the litigant, not of his counsel, and is justified by way of indemnity for
damages recoverable by the former in the cases enumerated in Art. 2208 of the Civil Code.

2. ID.; ID.; ID.; PROPER SUBJECT OF LEGAL COMPENSATION. Where attorneys fees are
awarded, it is the litigant, not his counsel, who is the judgment creditor and who may enforce the
judgment by execution. Such credit, therefore, may properly be the subject of legal compensation.


D E C I S I O N

MAKALINTAL, J.:


The sole issue here is whether or not there has been legal compensation between petitioner Gan Tion
and respondent Ong Wan Sieng.

Ong Wan Sieng was a tenant in certain premises owned by Gan Tion. In 1961 the latter filed an
ejectment case against the former, alleging non-payment of rents for August and September of that year,
at P180 a month, or P360 altogether. The defendant denied the allegation and said that the agreed
monthly rental was only P160, which he had offered to but was refused by the plaintiff. The plaintiff
obtained a favorable judgment in the municipal court (of Manila), but upon appeal the Court of First
Instance, on July 2, 1962, reversed the judgment and dismissed the complaint, and ordered the plaintiff to
pay the defendant the sum of P500 as attorneys fees. That judgment became final.

On October 10, 1963 Gan Tion served notice on Ong Wan Sieng that he was increasing the rent to P180
a month, effective November 1st, and at the same time demanded the rents in arrears at the old rate in
the aggregate amount of P4,320.00, corresponding to a period from August 1961 to October 1963.

In the meantime, over Gan Tions opposition, Ong Wan Sieng was able to obtain a writ of execution of the
judgment for attorneys fees in his favor. Gan Tion went on certiorari to the Court of Appeals, where he
pleaded legal compensation, claiming that Ong Wan Sieng was indebted to him in the sum of P4,320 for
unpaid rents. The appellate court accepted the petition but eventually decided for the respondent, holding
that although "respondent Ong is indebted to the petitioner for unpaid rentals in an amount of more than
P4,000.00," the sum of P500 could not be the subject of legal compensation, it being a "trust fund for the
benefit of the lawyer, which would have to be turned over by the client to his counsel." In the opinion of
said Court, the requisites of legal compensation, namely, that the parties must be creditors and debtors of
each other in their own right (Art. 1278, Civil Code) and that each one of them must be bound principally
and at the same time be a principal creditor of the other (Art. 1279), are not present in the instant case,
since the real creditor with respect to the sum of P500 was the defendants counsel.

This is not an accurate statement of the nature of an award for attorneys fees. The award is made in
favor of the litigant, not of his counsel, and is justified by way of indemnity for damages recoverable by
the former in the cases enumerated in Article 2208 of the Civil Code. 1 It is the litigant, not his counsel,
who is the judgment creditor and who may enforce the judgment by execution. Such credit, therefore,
may properly be the subject of legal compensation. Quite obviously it would be unjust to compel petitioner
to pay his debt for P500 when admittedly his creditor is indebted to him for more than P4,000.

WHEREFORE, the judgment of the Court of Appeals is reversed, and the writ of execution issued by the
Court of First Instance of Manila in its Civil Case No. 49535 is set aside. Costs against Respondent.

[G.R. No. 74027. December 7, 1989.]

SILAHIS MARKETING CORPORATION, Petitioner, v. INTERMEDIATE APPELLATE COURT and
GREGORIO DE LEON, doing business under the name and style of "MARK INDUSTRIAL SALES",
Respondents.

SYLLABUS

1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; COMPENSATION; REQUISITES. It must be
remembered that compensation takes place when two persons, in their own right, are creditors and
debtors to each other. Article 1279 of the Civil Code provides 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."

2. ID.; ID.; ID.; TAKES EFFECT BY OPERATION OF LAW. When all the requisites mentioned in
Art. 1279 of the Civil Code are present, compensation takes effect by operation of law, even without the
consent or knowledge of the creditors and debtors.

3. ID.; ID.; ID.; CANNOT EXTEND TO UNLIQUIDATED CLAIMS. Article 1279 requires, among
others, that in order that legal compensation shall take place, "the two debts be due" and "they be
liquidated and demandable." Compensation is not proper where the claim of the person asserting the set-
off against the other is not clear nor liquidated; compensation cannot extend to unliquidated, disputed
claim existing from breach of contract.


D E C I S I O N
FERNAN, C.J.
Petitioner Silahis Marketing Corporation seeks in this petition for review on certiorari a reversal of the
decision of the then Intermediate Appellate Court (IAC) in AC-G.R. CV No. 67162 entitled "De Leon, etc.
v. Silahis Marketing Corporation", disallowing petitioners counterclaim for commission to partially offset
the claim against it of private respondent Gregorio de Leon for the purchase price of certain
merchandise.chanrobles lawlibrary : rednad
A review of the record shows that on various dates in October, November and December, 1975, Gregorio
de Leon (De Leon for short) doing business under the name and style of Mark Industrial Sales sold and
delivered to Silahis Marketing Corporation (Silahis for short) various items of merchandise covered by
several invoices in the aggregate amount of P22,213.75 payable within thirty (30) days from date of the
covering invoices.
Allegedly due to Silahis failure to pay its account upon maturity despite repeated demands, de Leon filed
before the then Court of First Instance of Manila a complaint for the collection of the said accounts
including accrued interest thereon in the amount of P661.03 and attorneys fees of P5,000.00 plus costs
of litigation.
The answer admitted the allegations of the complaint insofar as the invoices were concerned but
presented as affirmative defenses; [a] a debit memo for P22,200.00 as unrealized profit for a supposed
commission that Silahis should have received from de Leon for the sale of sprockets in the amount of
P111,000.00 made directly to Dole Philippines, Incorporated by the latter sometime in August 1975
without coursing the same through the former allegedly in violation of the usual practice concerning sale
of merchandise to Dole Philippines, Inc.; and [b] Silahis claim that it is entitled to return the stainless steel
screen covered by Exhibits 6-Amanda 6-B which was found defective by its client, Borden International,
Davao City, and to have the corresponding amount cancelled from its account with de Leon.
In a decision dated August 25, 1978, 1 the lower court confirmed the liability of Silahis for the claim of de
Leon but at the same time ordered that it be partially offset by Silahis counterclaim as contained in the
debit memo for unrealized profit and commission. Judge Bienvenido C. Ejercito of said court held:
"There is no question that the defendant received from the plaintiff the items contained in Exhs.A to F.
The only question is whether or not the defendant is entitled h set off against the claim of the plaintiff the
amount contained in the debit memo of the defendant, Exh.1, and whether or not the defendant is
entitled to return the steel wire mesh which was returned to them by Borden Philippines, as shown by
Exhs, 6-A and 6-B. The Court believes that the defendant is properly chargeable for the amounts of the
unpaid invoices set forth in the complaint. However, the Court also believes that the plaintiff is also
properly chargeable for the debit memo of P22,200.00, Exh.1. This is because it was proven by the
defendant from the testimonies of Isaias Fernando, Jr. and Jose Joel Tamon that contrary to the
agreement between plaintiff and defendant that the latter was to serve the account of Dole Philippines in
Davao, the plaintiff made a direct sale of sprockets for P111,000.00 which thereby deprives the defendant
of its corresponding commission for P22,200.00 which the defendant would have otherwise made if the
plaintiff had followed its previous arrangement with the defendant. However, as to the counterclaim of the
defendant for a cancellation of the amount of P6,000.00 for defective stainless screen wire purchased
and intended for Borden International, Davao City, the Court believes that it is much too late now to
present said claim because the purchase was made and delivered as early as December 22, 1975 and
the proposed return to the defendant by Borden was made on April 1, 1976 only. The Court is not ready
to award damages to any of the parties. After deducting the amount of P22,200.00, which is the unpaid
commission of the defendant from the principal total amount of the unpaid invoices of the plaintiff of
P22,213.75, the unpaid balance in favor of the plaintiff is P13.75. The claim for interest and attorneys
fees of the plaintiff may be offset against the interest and attorneys fees of the defendant.
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant ordering
the defendant to pay to the plaintiff the amount of P13.75, with interest at 12% per annum from the date
of the filing of the action on July 1, 1976 until fully paid, without pronouncement as to costs.
"SO ORDERED." 2
De Leon appealed from the said decision insofar as it directed partial compensation and its failure to
award interest on his principal claim as well as attorneys fees in his favor. In a decision dated March 17,
1986, 3 respondent Intermediate Appellate Court 4 set aside the decision of the lower court and
dismissed herein petitioners (therein defendant-appellees) counterclaim for lack of factual or legal basis.
The appellate court found that there was no agreement, verbal or otherwise, nor was there any
contractual obligation between De Leon and Silahis prohibiting any direct sales to Dole Philippines, Inc.
by de Leon; nor was there anything in the debit memo obligating de Leon to pay a commission to Silahis
for the sale of P111,000.00 worth of sprockets to Dole Philippines although in the past, the former did
supply certain items to the latter for delivery to Dole Philippines, Incorporated.
Hence, in this petition for review on certiorari, the central issue is whether or not private respondent is
liable to the petitioner for the commission or margin for the direct sale which the former concluded and
consummated with Dole Philippines, Incorporated without coursing the same through herein petitioner.
We have carefully gone over the record of this case particularly the debit memo upon which petitioners
counterclaim rests and found nothing contained therein to show that private respondent obligated himself
to set-off or compensate petitioners outstanding accounts with the alleged unrealized commission from
the assailed sale of sprockets in the amount of P111,000.00 to Dole Philippines, Inc.
It must be remembered that compensation takes place when two persons, in their own right, are creditors
and debtors to each other. Article 1279 of the Civil Code provides 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."
When all the requisites mentioned in Art. 1279 of the Civil Code are present, compensation takes effect
by operation of law, even without the consent or knowledge of the creditors and debtors. 5 Article 1279
requires, among others, that in order that legal compensation shall take place, "the two debts be due" and
"they be liquidated and demandable." Compensation is not proper where the claim of the person
asserting the set-off against the other is not clear nor liquidated; compensation cannot extend to
unliquidated, disputed claim existing from breach of contract.
Undoubtedly, petitioner admits the validity of its outstanding accounts with private respondent in the
amount of P22,213.75 as contained in its answer. But whether private respondent is liable to pay the
petitioner a 20% margin or commission on the subject sale to Dole Philippines, Inc. is vigorously disputed.
This circumstance prevents legal compensation from taking place.
The Court agrees with respondent appellate court that there is no evidence on record from which it can
be inferred that there was any agreement between the petitioner and private respondent prohibiting the
latter from selling directly to Dole Philippines, Incorporated. Definitely, it cannot be asserted that the debit
memo was a contract binding between the parties considering that the same, as correctly found by the
appellate court, was not signed by private respondent nor was there any mention therein of any
commitment by the latter to pay any commission to the former involving the sale of sprockets to Dole
Philippines, Inc. in the amount of P111,000.00. Indeed, such document can be taken as self-serving with
no probative value absent a showing or at the very least an inference, that the party sought to be bound
assented to its contents or showed conformity thereto.
In fact the letter written by private respondents lawyer dated March 5, 1975 7 in reply to petitioners letter
dated February 19, 1976 transmitting its Debit Memo No. 1695 further strengthens private respondents
stand that it never agreed to give petitioner any commission on the direct sale to Dole Philippines, Inc. by
its company because said letter denied any utilization of petitioners personnel and facilities at its
Davao Branch in the transaction with Dole Philippines, Inc. which would otherwise lend a basis for
petitioners monetary claim.
WHEREFORE, in view of the foregoing, the questioned decision of respondent appellate court is hereby
AFFIRMED.

G.R. No. 128448. February 1, 2001

SPOUSES ALEJANDRO MIRASOL and LILIA E. MIRASOL, petitioners, vs. THE COURT OF
APPEALS, PHILIPPINE NATIONAL BANK, and PHILIPPINE EXCHANGE CO., INC., Respondents.

D E C I S I O N
QUISUMBING, J.:

This is a petition for review on certiorari of the decision of the Court of Appeals dated July 22, 1996, in
CA-G.R. CV No. 38607, as well as of its resolution of January 23, 1997, denying petitioners motion for
reconsideration. The challenged decision reversed the judgment of the Regional Trial Court of Bacolod
City, Branch 42 in Civil Case No. 14725.
The factual background of this case, as gleaned from the records, is as follows:
The Mirasols are sugarland owners and planters. In 1973-1974, they produced 70,501.08 piculs 1 of
sugar, 25,662.36 of which were assigned for export. The following crop year, their acreage planted to the
same crop was lower, yielding 65,100 piculs of sugar, with 23,696.40 piculs marked for export.

Private respondent Philippine National Bank (PNB) financed the Mirasols sugar production venture for
crop years, 1973-1974 and 1974-1975 under a crop loan financing scheme. Under said scheme, the
Mirasols signed Credit Agreements, a Chattel Mortgage on Standing Crops, and a Real Estate Mortgage
in favor of PNB. The Chattel Mortgage empowered PNB as the petitioners attorney-in-fact to negotiate
and to sell the latters sugar in both domestic and export markets and to apply the proceeds to the
payment of their obligations to it.

Exercising his law-making powers under Martial Law, then President Ferdinand Marcos issued
Presidential Decree (P.D.) No. 579 2 in November, 1974. The decree authorized private respondent
Philippine Exchange Co., Inc. (PHILEX) to purchase sugar allocated for export to the United States and to
other foreign markets. The price and quantity was determined by the Sugar Quota Administration, PNB,
the Department of Trade and Industry, and finally, by the Office of the President. The decree further
authorized PNB to finance PHILEXs purchases. Finally, the decree directed that whatever profit PHILEX
might realize from sales of sugar abroad was to be remitted to a special fund of the national government,
after commissions, overhead expenses and liabilities had been deducted. The government offices and
entities tasked by existing laws and administrative regulations to oversee the sugar export pegged the
purchase price of export sugar in crop years 1973-1974 and 1974-1975 at P 180.00 per picul.

PNB continued to finance the sugar production of the Mirasols for crop years 1975-1976 and 1976-1977.
These crop loans and similar obligations were secured by real estate mortgages over several properties
of the Mirasols and chattel mortgages over standing crops. Believing that the proceeds of their sugar
sales to PNB, if properly accounted for, were more than enough to pay their obligations, petitioners asked
PNB for an accounting of the proceeds of the sale of their export sugar. PNB ignored the request.
Meanwhile, petitioners continued to avail of other loans from PNB and to make unfunded withdrawals
from their current accounts with said bank. PNB then asked petitioners to settle their due and
demandable accounts. As a result of these demands for payment, petitioners on August 4, 1977,
conveyed to PNB real properties valued at P1,410,466.00 by way of dacion en pago, leaving an unpaid
overdrawn account of P1,513,347.78.

On August 10, 1982, the balance of outstanding sugar crop and other loans owed by petitioners to PNB
stood at P15,964,252.93. Despite demands, the Mirasols failed to settle said due and demandable
accounts. PNB then proceeded to extrajudicially foreclose the mortgaged properties. After applying the
proceeds of the auction sale of the mortgaged realties, PNB still had a deficiency claim of
P12,551,252.93.

Petitioners continued to ask PNB to account for the proceeds of the sale of their export sugar for crop
years 1973-1974 and 1974-1975, insisting that said proceeds, if properly liquidated, could offset their
outstanding obligations with the bank. PNB remained adamant in its stance that under P.D. No. 579,
there was nothing to account since under said law, all earnings from the export sales of sugar pertained
to the National Government and were subject to the disposition of the President of the Philippines for
public purposes.

On August 9, 1979, the Mirasols filed a suit for accounting, specific performance, and damages against
PNB with the Regional Trial Court of Bacolod City, docketed as Civil Case No. 14725.

On June 16, 1987, the complaint was amended to implead PHILEX as party-defendant.

The parties agreed at pre-trial to limit the issues to the following:

1. The constitutionality and/or legality of Presidential Decrees numbered 338, 579, and 1192;

2. The determination of the total amount allegedly due the plaintiffs from the defendants corresponding to
the allege(d) unliquidated cost price of export sugar during crop years 1973-1974 and 1974-
1975.3crlwvirtualibrry

After trial on the merits, the trial court decided as follows:

WHEREFORE, the foregoing premises considered, judgment is hereby rendered in favor of the plaintiffs
and against the defendants Philippine National Bank (PNB) and Philippine Exchange Co., Inc. (PHILEX):

(1)Declaring Presidential Decree 579 enacted on November 12, 1974 and all circulars, as well as policies,
orders and other issuances issued in furtherance thereof, unconstitutional and therefore, NULL and VOID
being in gross violation of the Bill of Rights;

(2) Ordering defendants PNB and PHILEX to pay, jointly and severally, plaintiffs the whole amount
corresponding to the residue of the unliquidated actual cost price of 25,662 piculs in export sugar for crop
year 1973-1974 at an average price of P300.00 per picul, deducting therefrom however, the amount of
P180.00 already paid in advance plus the allowable deductions in service fees and other charges;

(3) And also, for the same defendants to pay, jointly and severally, same plaintiffs the whole amount
corresponding to the unpaid actual price of 14,596 piculs of export sugar for crop year 1974-1975 at an
average rate of P214.14 per picul minus however, the sum of P180.00 per picul already paid by the
defendants in advance and the allowable deducting (sic) in service fees and other charges.

The unliquidated amount of money due the plaintiffs but withheld by the defendants, shall earn the legal
rate of interest at 12% per annum computed from the date this action was instituted until fully paid; and,
finally

(4) Directing the defendants PNB and PHILEX to pay, jointly and severally, plaintiffs the sum of
P50,000.00 in moral damages and the amount of P50,000.00 as attorneys fees, plus the costs of this
litigation.

SO ORDERED.

The same was, however, modified by a Resolution of the trial court dated May 14, 1992, which added the
following paragraph:

This decision should however, be interpreted without prejudice to whatever benefits that may have
accrued in favor of the plaintiffs with the passage and approval of Republic Act 7202 otherwise known as
the Sugar Restitution Law, authorizing the restitution of losses suffered by the plaintiffs from Crop year
1974-1975 to Crop year 1984-1985 occasioned by the actuations of government-owned and controlled
agencies. (Underscoring in the original).

SO ORDERED.

The Mirasols then filed an appeal with the respondent court, docketed as CA-G.R. CV No. 38607, faulting
the trial court for not nullifying the dacion en pago and the mortgage contracts, as well as the foreclosure
of their mortgaged properties. Also faulted was the trial courts failure to award them the full money claims
and damages sought from both PNB and PHILEX.

On July 22, 1996, the Court of Appeals reversed the trial court as follows:

WHEREFORE, this Court renders judgment REVERSING the appealed Decision and entering the
following verdict:

1. Declaring the dacion en pago and the foreclosure of the mortgaged properties valid;

2. Ordering the PNB to render an accounting of the sugar account of the Mirasol[s] specifically stating the
indebtedness of the latter to the former and the proceeds of Mirasols 1973-1974 and 1974-1975 sugar
production sold pursuant to and in accordance with P.D. 579 and the issuances therefrom;

3. Ordering the PNB to recompute in accordance with RA 7202 Mirasols indebtedness to it crediting to
the latter payments already made as well as the auction price of their foreclosed real estate and
stipulated value of their properties ceded to PNB in the dacon (sic) en pago;

4. Whatever the result of the recomputation of Mirasols account, the outstanding balance or the excess
payment shall be governed by the pertinent provisions of RA 7202.

SO ORDERED.6

On August 28, 1996, petitioners moved for reconsideration, which the appellate court denied on January
23, 1997.

Hence, the instant petition, with petitioners submitting the following issues for our resolution:

1. Whether the Trial Court has jurisdiction to declare a statute unconstitutional without notice to the
Solicitor General where the parties have agreed to submit such issue for the resolution of the Trial Court.

2. Whether PD 579 and subsequent issuances7 thereof are unconstitutional.

3. Whether the Honorable Court of Appeals committed manifest error in not applying the doctrine of
piercing the corporate veil between respondents PNB and PHILEX.

4. Whether the Honorable Court of Appeals committed manifest error in upholding the validity of the
foreclosure on petitioners property and in upholding the validity of the dacion en pago in this case.

5. Whether the Honorable Court of Appeals committed manifest error in not awarding damages to
petitioners grounds relied upon the allowance of the petition. (Underscored in the original)

On the first issue. It is settled that Regional Trial Courts have the authority and jurisdiction to consider the
constitutionality of a statute, presidential decree, or executive order. 9 The Constitution vests the power of
judicial review or the power to declare a law, treaty, international or executive agreement, presidential
decree, order, instruction, ordinance, or regulation not only in this Court, but in all Regional Trial Courts.
10 In J.M. Tuason and Co. v. Court of Appeals, 3 SCRA 696 (1961) we held:

Plainly, the Constitution contemplates that the inferior courts should have jurisdiction in cases involving
constitutionality of any treaty or law, for it speaks of appellate review of final judgments of inferior courts in
cases where such constitutionality happens to be in issue.

Furthermore, B.P. Blg. 129 grants Regional Trial Courts the authority to rule on the conformity of laws or
treaties with the Constitution, thus:

SECTION 19. Jurisdiction in civil cases. Regional Trial Courts shall exercise exclusive original jurisdiction:

(1) In all civil actions in which the subject of the litigations is incapable of pecuniary estimation;

The pivotal issue, which we must address, is whether it was proper for the trial court to have exercised
judicial review.

Petitioners argue that the Court of Appeals erred in finding that it was improper for the trial court to have
declared P.D. No. 579 12 unconstitutional, since petitioners had not complied with Rule 64, Section 3, of
the Rules of Court. Petitioners contend that said Rule specifically refers only to actions for declaratory
relief and not to an ordinary action for accounting, specific performance, and damages.

Petitioners contentions are bereft of merit. Rule 64, Section 3 of the Rules of Court provides:

SEC. 3. Notice to Solicitor General. In any action which involves the validity of a statute, or executive
order or regulation, the Solicitor General shall be notified by the party attacking the statute, executive
order, or regulation, and shall be entitled to be heard upon such question.

This should be read in relation to Section 1 [c] of P.D. No. 478, 13 which states in part:

SECTION 1. Functions and Organizations (1) The Office of the Solicitor General shallhave the following
specific powers and functions:

xxx

[c] Appear in any court in any action involving the validity of any treaty, law, executive order or
proclamation, rule or regulation when in his judgment his intervention is necessary or when requested by
the court.

It is basic legal construction that where words of command such as shall, must, or ought are employed,
they are generally and ordinarily regarded as mandatory. 14 Thus, where, as in Rule 64, Section 3 of the
Rules of Court, the word shall is used, a mandatory duty is imposed, which the courts ought to enforce.
The purpose of the mandatory notice in Rule 64, Section 3 is to enable the Solicitor General to decide
whether or not his intervention in the action assailing the validity of a law or treaty is necessary. To deny
the Solicitor General such notice would be tantamount to depriving him of his day in court. We must
stress that, contrary to petitioners stand, the mandatory notice requirement is not limited to actions
involving declaratory relief and similar remedies. The rule itself provides that such notice is required in
any action and not just actions involving declaratory relief. Where there is no ambiguity in the words used
in the rule, there is no room for construction. 15 In all actions assailing the validity of a statute, treaty,
presidential decree, order, or proclamation, notice to the Solicitor General is mandatory.
In this case, the Solicitor General was never notified about Civil Case No. 14725. Nor did the trial court
ever require him to appear in person or by a representative or to file any pleading or memorandum on the
constitutionality of the assailed decree. Hence, the Court of Appeals did not err in holding that lack of the
required notice made it improper for the trial court to pass upon the constitutional validity of the
questioned presidential decrees.

As regards the second issue, petitioners contend that P.D. No. 579 and its implementing issuances are
void for violating the due process clause and the prohibition against the taking of private property without
just compensation. Petitioners now ask this Court to exercise its power of judicial review.
Jurisprudence has laid down the following requisites for the exercise of this power: First, there must be
before the Court an actual case calling for the exercise of judicial review. Second, the question before the
Court must be ripe for adjudication. Third, the person challenging the validity of the act must have
standing to challenge. Fourth, the question of constitutionality must have been raised at the earliest
opportunity, and lastly, the issue of constitutionality must be the very lis mota of the case.
16crlwvirtualibrry
As a rule, the courts will not resolve the constitutionality of a law, if the controversy can be settled on
other grounds. 17 The policy of the courts is to avoid ruling on constitutional questions and to presume
that the acts of the political departments are valid, absent a clear and unmistakable showing to the
contrary. To doubt is to sustain. This presumption is based on the doctrine of separation of powers. This
means that the measure had first been carefully studied by the legislative and executive departments and
found to be in accord with the Constitution before it was finally enacted and approved.

The present case was instituted primarily for accounting and specific performance. The Court of Appeals
correctly ruled that PNBs obligation to render an accounting is an issue, which can be determined,
without having to rule on the constitutionality of P.D. No. 579. In fact there is nothing in P.D. No. 579,
which is applicable to PNBs intransigence in refusing to give an accounting. The governing law should be
the law on agency, it being undisputed that PNB acted as petitioners agent. In other words, the requisite
that the constitutionality of the law in question be the very lis mota of the case is absent. Thus we cannot
rule on the constitutionality of P.D. No. 579.
Petitioners further contend that the passage of R.A. No. 7202 19 rendered P.D. No. 579 unconstitutional,
since R.A. No. 7202 affirms that under P.D. 579, the due process clause of the Constitution and the right
of the sugar planters not to be deprived of their property without just compensation were violated.

A perusal of the text of R.A. No. 7202 shows that the repealing clause of said law merely reads:
SEC. 10. All laws, acts, executive orders and circulars in conflict herewith are hereby repealed or
modified accordingly.

The settled rule of statutory construction is that repeals by implication are not favored. 20 R.A. No. 7202
cannot be deemed to have repealed P.D. No. 579. In addition, the power to declare a law unconstitutional
does not lie with the legislature, but with the courts. 21 Assuming arguendo that R.A. No. 7202 did indeed
repeal P.D. No. 579, said repeal is not a legislative declaration finding the earlier law unconstitutional.
To resolve the third issue, petitioners ask us to apply the doctrine of piercing the veil of corporate fiction
with respect to PNB and PHILEX. Petitioners submit that PHILEX was a wholly-owned subsidiary of PNB
prior to the latters privatization.
We note, however, that the appellate court made the following finding of fact:

1. PNB and PHILEX are separate juridical persons and there is no reason to pierce the veil of corporate
personality. Both existed by virtue of separate organic acts. They had separate operations and different
purposes and powers.22crlwvirtualibrry
Findings of fact by the Court of Appeals are conclusive and binding upon this Court unless said findings
are not supported by the evidence. 23 Our jurisdiction in a petition for review under Rule 45 of the Rules
of Court is limited only to reviewing questions of law and factual issues are not within its province. 24 In
view of the aforequoted finding of fact, no manifest error is chargeable to the respondent court for
refusing to pierce the veil of corporate fiction.

On the fourth issue, the appellate court found that there were two sets of accounts between petitioners
and PNB, namely:
1. The accounts relative to the loan financing scheme entered into by the Mirasols with PNB (PNBs Brief,
p. 16) On the question of how much the PNB lent the Mirasols for crop years 1973-1974 and 1974-1975,
the evidence recited by the lower court in its decision was deficient. We are offered (sic) PNB the amount
of FIFTEEN MILLION NINE HUNDRED SIXTY FOUR THOUSAND TWO HUNDRED FIFTY TWO
PESOS and NINETY THREE Centavos (Ps15,964,252.93) but this is the alleged balance the Mirasols
owe PNB covering the years 1975 to 1982.
2. The account relative to the Mirasols current account Numbers 5186 and 5177 involving the amount of
THREE MILLION FOUR HUNDRED THOUSAND Pesos (P3,400,000.00) PNB claims against the
Mirasols. (PNBs Brief, p. 17)

In regard to the first set of accounts, besides the proceeds from PNBs sale of sugar (involving the
defendant PHILEX in relation to the export portion of the stock), the PNB foreclosed the Mirasols
mortgaged properties realizing therefrom in 1982 THREE MILLION FOUR HUNDRED THIRTEEN
THOUSAND Pesos (P3,413,000.00), the PNB itself having acquired the properties as the highest bidder.
As to the second set of accounts, PNB proposed, and the Mirasols accepted, a dacion en pago scheme
by which the Mirasols conveyed to PNB pieces of property valued at ONE MILLION FOUR HUNDRED
TEN THOUSAND FOUR HUNDRED SIXTY-SIX Pesos (Ps1,410,466.00) (PNBs Brief, pp. 16-17).25
Petitioners now claim that the dacion en pago and the foreclosure of their mortgaged properties were void
for want of consideration. Petitioners insist that the loans granted them by PNB from 1975 to 1982 had
been fully paid by virtue of legal compensation. Hence, the foreclosure was invalid and of no effect, since
the mortgages were already fully discharged. It is also averred that they agreed to the dacion only by
virtue of a martial law Arrest, Search, and Seizure Order (ASSO).
We find petitioners arguments unpersuasive. Both the lower court and the appellate court found that the
Mirasols admitted that they were indebted to PNB in the sum stated in the latters counterclaim. 26
Petitioners nonetheless insist that the same can be offset by the unliquidated amounts owed them by
PNB for crop years 1973-74 and 1974-75. Petitioners argument has no basis in law. For legal
compensation to take place, the requirements set forth in Articles 1278 and 1279 of the Civil Code must
be present. Said articles read as follows:

Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors
of each other.
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor
of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same
kind, and also of the same quality if the latter has been stated;
(3) That the two debts are due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.

In the present case, set-off or compensation cannot take place between the parties because:
First, neither of the parties are mutually creditors and debtors of each other. Under P.D. No. 579, neither
PNB nor PHILEX could retain any difference claimed by the Mirasols in the price of sugar sold by the two
firms. P.D. No. 579 prescribed where the profits from the sales are to be paid, to wit:
SECTION 7. x x x After deducting its commission of two and one-half (2-1/2%) percent of gross sales, the
balance of the proceeds of sugar trading operations for every crop year shall be set aside by the
Philippine Exchange Company, Inc,. as profits which shall be paid to a special fund of the National
Government subject to the disposition of the President for public purposes.
Thus, as correctly found by the Court of Appeals, there was nothing with which PNB was supposed to
have off-set Mirasols admitted indebtedness.
Second, compensation cannot take place where one claim, as in the instant case, is still the subject of
litigation, as the same cannot be deemed liquidated.
With respect to the duress allegedly employed by PNB, which impugned petitioners consent to the dacion
en pago, both the trial court and the Court of Appeals found that there was no evidence to support said
claim. Factual findings of the trial court, affirmed by the appellate court, are conclusive upon this Court.

On the fifth issue, the trial court awarded petitioners P50,000.00 in moral damages and P50,000.00 in
attorneys fees. Petitioners now theorize that it was error for the Court of Appeals to have deleted these
awards, considering that the appellate court found PNB breached its duty as an agent to render an
accounting to petitioners.
An agents failure to render an accounting to his principal is contrary to Article 1891 of the Civil Code. 30
The erring agent is liable for damages under Article 1170 of the Civil Code, which states:
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.
Article 1170 of the Civil Code, however, must be construed in relation to Article 2217 of said Code which
reads:
Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation,
wounded feelings, moral shock, social humiliation, and similar injury. Though incapable of pecuniary
computation, moral damages may be recovered if they are the proximate result of the defendants
wrongful act or omission.
Moral damages are explicitly authorized in breaches of contract where the defendant acted fraudulently or
in bad faith. 31 Good faith, however, is always presumed and any person who seeks to be awarded
damages due to the acts of another has the burden of proving that the latter acted in bad faith, with
malice, or with ill motive. In the instant case, petitioners have failed to show malice or bad faith 32 on the
part of PNB in failing to render an accounting. Absent such showing, moral damages cannot be awarded.
Nor can we restore the award of attorneys fees and costs of suit in favor of petitioners. Under Article 2208
(5) of the Civil Code, attorneys fees are allowed in the absence of stipulation only if the defendant acted
in gross and evident bad faith in refusing to satisfy the plaintiffs plainly valid, just, and demandable claim.
As earlier stated, petitioners have not proven bad faith on the part of PNB and PHILEX.
WHEREFORE , the instant petition is DENIED and the assailed decision of the respondent court in CA-
G.R. CV 38607 AFFIRMED. Costs against petitioners.

JESUS M. MONTEMAYOR v VICENTE D. MILLORA,
G.R. No. 168251
D E C I S I O N
DEL CASTILLO, J.:

When the dispositive portion of a judgment is clear and unequivocal, it must be executed strictly
according to its tenor.
Factual Antecedents
On July 24, 1990, respondent Atty. Vicente D. Millora (Vicente) obtained a loan of P400,000.00
from petitioner Dr. Jesus M. Montemayor (Jesus) as evidenced by a promissory note[5] executed by
Vicente. On August 10, 1990, the parties executed a loan contract[6] wherein it was provided that the
loan has a stipulated monthly interest of 2% and that Vicente had already paid the amount of
P100,000.00 as well as the P8,000.00 representing the interest for the period July 24 to August 23, 1990.

Subsequently and with Vicentes consent, the interest rate was increased to 3.5% or P10,500.00 a
month. From March 24, 1991 to July 23, 1991, or for a period of four months, Vicente was supposed to
pay P42,000.00 as interest but was able to pay only P24,000.00. This was the last payment Vicente
made. Jesus made several demands[7] for Vicente to settle his obligation but to no avail.

Thus, on August 17, 1993, Jesus filed before the RTC of Quezon City a Complaint[8] for Sum of
Money against Vicente which was docketed as Civil Case No. Q-93-17255. On October 19, 1993,
Vicente filed his Answer[9] interposing a counterclaim for attorneys fees of not less than P500,000.00.
Vicente claimed that he handled several cases for Jesus but he was summarily dismissed from handling
them when the instant complaint for sum of money was filed.


Ruling of the Regional Trial Court:
In its Decision[10] dated October 27, 1999, the RTC ordered Vicente to pay Jesus his monetary obligation
amounting to P300,000.00 plus interest of 12% from the time of the filing of the complaint on August 17,
1993 until fully paid. At the same time, the trial court found merit in Vicentes counterclaim and thus
ordered Jesus to pay Vicente his attorneys fees which is equivalent to the amount of Vicentes monetary
liability, and which shall be set-off with the amount Vicente is adjudged to pay Jesus, viz:

WHEREFORE, premises above-considered [sic], JUDGMENT is hereby rendered ordering
defendant Vicente D. Millora to pay plaintiff Jesus M. Montemayor the sum of P300,000.00 with interest at
the rate of 12% per annum counted from the filing of the instant complaint on August 17, 1993 until fully
paid and whatever amount recoverable from defendant shall be set off by an equivalent amount awarded
by the court on the counterclaim representing attorneys fees of defendant on the basis of quantum
meruit for legal services previously rendered to plaintiff.
No pronouncement as to attorneys fees and costs of suit.

SO ORDERED.[11]
On December 8, 1999, Vicente filed a Motion for Reconsideration[12] to which Jesus filed an
Opposition.[13] On March 15, 2000, Vicente filed a Motion for the Issuance of a Writ of Execution[14]
with respect to the portion of the RTC Decision which awarded him attorneys fees under his
counterclaim. Jesus filed his Urgent Opposition to Defendants Motion for the Issuance of a Writ of
Execution[15] dated May 31, 2000.
In an Order[16] dated June 23, 2000, the RTC denied Vicentes Motion for Reconsideration but
granted his Motion for Issuance of a Writ of Execution of the portion of the decision concerning the award
of attorneys fees.
Intending to appeal the portion of the RTC Decision which declared him liable to Jesus for the
sum of P300,000.00 with interest at the rate of 12% per annum counted from the filing of the complaint on
August 17, 1993 until fully paid, Vicente filed on July 6, 2000 a Notice of Appeal.[17] This was however
denied by the RTC in an Order[18] dated July 10, 2000 on the ground that the Decision has already
become final and executory on July 1, 2000.[19]
Meanwhile, Jesus filed on July 12, 2000 a Motion for Reconsideration and Clarification[20] of the
June 23, 2000 Order granting Vicentes Motion for the Issuance of a Writ of Execution. Thereafter, Jesus
filed on September 22, 2000 his Motion for the Issuance of a Writ of Execution.[21] After the hearing on
the said motions, the RTC issued an Order[22] dated September 6, 2002 denying both motions for lack of
merit. The Motion for Reconsideration and Clarification was denied for violating Section 5,[23] Rule 15 of
the Rules of Court and likewise the Motion for the Issuance of a Writ of Execution, for violating Section
6,[24] Rule 15 of the same Rules.

Jesus filed his Motion for Reconsideration[25] thereto on October 10, 2002 but this was eventually
denied by the trial court through its Order[26] dated October 2, 2003.

Ruling of the Court of Appeals:
Jesus went to the CA via a Petition for Certiorari[27] under Rule 65 of the Rules of Court.

On May 19, 2005, the CA issued its Decision the dispositive portion of which provides:
WHEREFORE, the foregoing considered, the petition for certiorari is DENIED and the assailed Orders are
AFFIRMED in toto. No costs.

SO ORDERED.[28]
Not satisfied, Jesus is now before this Court via a Petition for Review on Certiorari under Rule 45
of the Rules of Court.

Issue:
NOTWITHSTANDING THE FINALITY OF THE TRIAL COURTS DECISION OF OCTOBER 27, 1999, AS
WELL AS THE ORDERS OF SEPTEMBER 6, 2002 AND OCTOBER 2, 2003, THE LEGAL ISSUE TO BE
RESOLVED IN THIS CASE IS WHETHER X X X [DESPITE] THE ABSENCE OF A SPECIFIC AMOUNT
IN THE DECISION REPRESENTING RESPONDENTS COUNTERCLAIM, THE SAME COULD BE
VALIDLY [OFFSET] AGAINST THE SPECIFIC AMOUNT OF AWARD MENTIONED IN THE DECISION
IN FAVOR OF THE PETITIONER.[29]

Petitioners Arguments:
Jesus contends that the trial court grievously erred in ordering the implementation of the RTCs
October 27, 1999 Decision considering that same does fix the amount of attorneys fees. According to
Jesus, such disposition leaves the matter of computation of the attorneys fees uncertain and, hence, the
writ of execution cannot be implemented. In this regard, Jesus points out that not even the Sheriff who
will implement said Decision can compute the judgment awards. Besides, a sheriff is not clothed with the
authority to render judicial functions such as the computation of specific amounts of judgment awards.

Respondents Arguments:
Vicente counter-argues that the October 27, 1999 RTC Decision can no longer be made subject of
review, either by way of an appeal or by way of a special civil action for certiorari because it had already
attained finality when after its promulgation, Jesus did not even file a motion for reconsideration thereof or
interpose an appeal thereto. In fact, it was Vicente who actually filed a motion for reconsideration and a
notice of appeal, which was eventually denied and disapproved by the trial court.

HELD: The petition lacks merit.
The October 27, 1999 Decision of the RTC is already final and executory, hence, immutable.
At the outset, it should be stressed that the October 27, 1999 Decision of the RTC is already final and
executory. Hence, it can no longer be the subject of an appeal. Consequently, Jesus is bound by the
decision and can no longer impugn the same. Indeed, well-settled is the rule that a decision that has
attained finality can no longer be modified even if the modification is meant to correct erroneous
conclusions of fact or law. The doctrine of finality of judgment is explained in Gallardo-Corro v.
Gallardo:[30]
Nothing is more settled in law than that once a judgment attains finality it thereby becomes immutable
and unalterable. It 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. Just as the losing
party has the right to file an appeal within the prescribed period, the winning party also has the correlative
right to enjoy the finality of the resolution of his case. The doctrine of finality of judgment is grounded on
fundamental considerations of public policy and sound practice, and that, at the risk of occasional errors,
the judgments or orders of courts must become final at some definite time fixed by law; otherwise, there
would be no end to litigations, thus setting to naught the main role of courts of justice which is to assist in
the enforcement of the rule of law and the maintenance of peace and order by settling justiciable
controversies with finality.[31]
To stress, the October 27, 1999 Decision of the RTC has already attained finality. Such definitive
judgment is no longer subject to change, revision, amendment or reversal. Upon finality of the judgment,
the Court loses its jurisdiction to amend, modify or alter the same. Except for correction of clerical errors
or the making of nunc pro tunc entries which cause no prejudice to any party, or where the judgment is
void, the judgment can neither be amended nor altered after it has become final and executory. This is
the principle of immutability of final judgment.[32]
The amount of attorneys fees is ascertainable from the RTC Decision. Thus, compensation is possible.

Jesus contends that offsetting cannot be made because the October 27, 1999 judgment of the
RTC failed to specify the amount of attorneys fees. He maintains that for offsetting to apply, the two
debts must be liquidated or ascertainable. However, the trial court merely awarded to Vicente attorneys
fees based on quantum meruit without specifying the exact amount thereof.

We do not agree.
For legal compensation to take place, the requirements set forth in Articles 1278 and 1279 of the
Civil Code, quoted below, must be present.

ARTICLE 1278. Compensation shall take place when two persons, in their own right, are creditors and
debtors of each other.
ARTICLE 1279. In order that compensation may be proper, it is necessary:

(1) That each 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.

A debt is liquidated when its existence and amount are determined. It is not necessary that it be
admitted by the debtor. Nor is it necessary that the credit appear in a final judgment in order that it can
be considered as liquidated; it is enough that its exact amount is known. And a debt is considered
liquidated, not only when it is expressed already in definite figures which do not require verification, but
also when the determination of the exact amount depends only on a simple arithmetical operation x x
x.[33]
In Lao v. Special Plans, Inc.,[34] we 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 plaintiffs claim from the moment it is
liquidated by judgment. We have restated this in Solinap v. Hon. Del Rosario[35] where we held that
compensation takes place only if both obligations are liquidated.

In the instant case, both obligations are liquidated. Vicente has the obligation to pay his debt due to Jesus
in the amount of P300,000.00 with interest at the rate of 12% per annum counted from the filing of the
instant complaint on August 17, 1993 until fully paid. Jesus, on the other hand, has the obligation to pay
attorneys fees which the RTC had already determined to be equivalent to whatever amount recoverable
from Vicente. The said attorneys fees were awarded by the RTC on the counterclaim of Vicente on the
basis of quantum meruit for the legal services he previously rendered to Jesus.

In its Decision, the trial court elucidated on how Vicente had established his entitlement for
attorneys fees based on his counterclaim in this manner:
Defendant, on his counterclaim, has established the existence of a lawyer-client
relationship between him and plaintiff and this was admitted by the latter. Defendant had represented
plaintiff in several court cases which include the Laguna property case, the various cases filed by Atty.
Romulo Reyes against plaintiff such as the falsification and libel cases and the disbarment case filed by
plaintiff against Atty. Romulo Reyes before the Commission on Bar Integration. Aside from these cases,
plaintiff had made defendant his consultant on almost everything that involved legal opinions.

More particularly in the Calamba, Laguna land case alone, plaintiff had agreed to pay
defendant a contingent fee of 25% of the value of the property for the latters legal services as embodied
in the Amended Complaint signed and verified by plaintiff (Exh. 5). Aside from this contingent fee,
defendant had likewise told plaintiff that his usual acceptance fee for a case like the Laguna land case is
P200,000.00 and his appearance fee at that time was x x x P2,000.00 per appearance but still plaintiff
paid nothing.
The lawyer-client relationship between the parties was severed because of the instant case. The
court is however fully aware of defendants stature in life a UP law graduate, Bar topnotcher in 1957 bar
examination, former Senior Provincial Board Member, Vice-Governor and Governor of the province of
Pangasinan, later as Assemblyman of the Batasang Pambansa and is considered a prominent trial lawyer
since 1958. For all his legal services rendered to plaintiff, defendant deserves to be compensated at least
on a quantum meruit basis.[36]


The above discussion in the RTC Decision was then immediately followed by the dispositive
portion, viz:
WHEREFORE, premises above-considered, JUDGMENT is hereby rendered ordering defendant
Vicente D. Millora to pay plaintiff Jesus M. Montemayor the sum of P300.000.00 with interest at the rate
of 12% per annum counted from the filing of the instant complaint on August 17, 1993 until fully paid and
whatever amount recoverable from defendant shall be set off by an equivalent amount awarded by the
court on the counterclaim representing attorneys fees of defendant on the basis of quantum meruit for
legal services previously rendered to plaintiff.
No pronouncement as to attorneys fees and costs of suit.

SO ORDERED.[37] (Emphasis supplied.)

It is therefore clear that in the execution of the RTC Decision, there are two parts to be executed.
The first part is the computation of the amount due to Jesus. This is achieved by doing a simple
arithmetical operation at the time of execution. The principal amount of P300,000.00 is to be multiplied by
the interest rate of 12%. The product is then multiplied by the number of years that had lapsed from the
filing of the complaint on August 17, 1993 up to the date when the judgment is to be executed. The result
thereof plus the principal of P300,000.00 is the total amount that Vicente must pay Jesus.
The second part is the payment of attorneys fees to Vicente. This is achieved by following the clear
wordings of the above fallo of the RTC Decision which provides that Vicente is entitled to attorneys fees
which is equivalent to whatever amount recoverable from him by Jesus. Therefore, whatever amount due
to Jesus as payment of Vicentes debt is equivalent to the amount awarded to the latter as his attorneys
fees. Legal compensation or set-off then takes place between Jesus and Vicente and both parties are on
even terms such that there is actually nothing left to execute and satisfy in favor of either party.

In fact, the RTC, in addressing Jesus Motion for Reconsideration and Clarification dated July 12,
2000 had already succinctly explained this matter in its Order dated September 6, 2002, viz:

Notwithstanding the tenor of the said portion of the judgment, still, there is nothing to execute and satisfy
in favor of either of the herein protagonists because the said decision also states clearly that whatever
amount recoverable from defendant shall be SET-OFF by an equivalent amount awarded by the Court on
the counterclaim representing attorneys fees of defendant on the basis of quantum meruit for legal
services previously rendered to plaintiff x x x.

Said dispositive portion of the decision is free from any ambiguity. It unequivocably ordered that any
amount due in favor of plaintiff and against defendant is set off by an equivalent amount awarded to
defendant in the form of counterclaims representing attorneys fees for past legal services he rendered to
plaintiff.

It will be an exercise in futility and a waste of so precious time and unnecessary effort to enforce
satisfaction of the plaintiffs claims against defendant, and vice versa because there is in fact a setting off
of each others claims and liabilities under the said judgment which has long become final.[38] (Emphasis
in the original.)
A reading of the dispositive portion of the RTC Decision would clearly show that no ambiguity of
any kind exists. Furthermore, if indeed there is any ambiguity in the dispositive portion as claimed by
Jesus, the RTC had already clarified it through its Order dated September 6, 2002 by categorically stating
that the attorneys fees awarded in the counterclaim of Vicente is of an amount equivalent to whatever
amount recoverable from him by Jesus. This clarification is not an amendment, modification, correction
or alteration to an already final decision as it is conceded that such cannot be done anymore. What the
RTC simply did was to state in categorical terms what it obviously meant in its decision. Suffice it to say
that the dispositive portion of the decision is clear and unequivocal such that a reading of it can lead to no
other conclusion, that is, any amount due in favor of Jesus and against Vicente is set off by an equivalent
amount in the form of Vicentes attorneys fees for past legal services he rendered for Jesus.
WHEREFORE, the instant Petition for Review on Certiorari is DENIED. The assailed Decision of
the Court of Appeals dated May 19, 2005 in CA-G.R. SP No. 81075 which dismissed the petition for
certiorari seeking to annul and set aside the Orders dated September 6, 2002 and October 2, 2003 of the
Regional Trial Court of Quezon City, Branch 98 in Civil Case No. Q-93-17255, is hereby AFFIRMED.

NOVATION

G.R. No. L-29981 April 30, 1971

EUSEBIO S. MILLAR, petitioner, vs. THE HON. COURT OF APPEALS and ANTONIO P. GABRIEL,
respondents.
CASTRO, J.:

On February 11, 1956, Eusebio S. Millar (hereinafter referred to as the petitioner) obtained a favorable
judgment from the Court of First Instance of Manila, in civil case 27116, condemning Antonio P. Gabriel
(hereinafter referred to as the respondent) to pay him the sum of P1,746.98 with interest at 12% per
annum from the date of the filing of the complaint, the sum of P400 as attorney's fees, and the costs of
suit. From the said judgment, the respondent appealed to the Court of Appeals which, however,
dismissed the appeal on January 11, 1957.

Subsequently, on February 15, 1957, after remand by the Court of Appeals of the case, the petitioner
moved ex parte in the court of origin for the issuance of the corresponding writ of execution to enforce the
judgment. Acting upon the motion, the lower court issued the writ of execution applied for, on the basis of
which the sheriff of Manila seized the respondent's Willy's Ford jeep (with motor no. B-192297 and plate
no. 7225, Manila, 1956).

The respondent, however, pleaded with the petitioner to release the jeep under an arrangement whereby
the respondent, to secure the payment of the judgement debt, agreed to mortgage the vehicle in favor of
the petitioner. The petitioner agreed to the arrangement; thus, the parties, on February 22, 1957,
executed a chattel mortgage on the jeep, stipulating, inter alia, that

This mortgage is given as security for the payment to the said EUSEBIO S. MILLAR, mortgagee, of the
judgment and other incidental expenses in Civil Case No. 27116 of the Court of First Instance of Manila
against Antonio P. Gabriel, MORTGAGOR, in the amount of ONE THOUSAND SEVEN HUNDRED
(P1,700.00) PESOS, Philippine currency, which MORTGAGOR agrees to pay as follows:

March 31, 1957 EIGHT HUNDRED FIFTY (P850) PESOS;

April 30, 1957 EIGHT HUNDRED FIFTY (P850.00) PESOS.

Upon failure of the respondent to pay the first installment due on March 31, 1957, the petitioner obtained
an alias writ of execution. This writ which the sheriff served on the respondent only on May 30, 1957
after the lapse of the entire period stipulated in the chattel mortgage for the respondent to comply with his
obligation was returned unsatisfied.
So on July 17, 1957 and on various dates thereafter, the lower court, at the instance of the petitioner,
issued several alias writs, which writs the sheriff also returned unsatisfied. On September 20, 1961, the
petitioner obtained a fifth alias writ of execution. Pursuant to this last writ, the sheriff levied on certain
personal properties belonging to the respondent, and then scheduled them for execution sale.
However, on November 10, 1961, the respondent filed an urgent motion for the suspension of the
execution sale on the ground of payment of the judgment obligation. The lower court, on November 11,
1961, ordered the suspension of the execution sole to afford the respondent the opportunity to prove his
allegation of payment of the judgment debt, and set the matter for hearing on November 25, 1961. After
hearing, the lower court, on January 25, 1962, issued an order the dispositive portion of which reads:

IN VIEW WHEREOF, execution reiterated for P1,700.00 plus costs of execution.
The lower court ruled that novation had taken place, and that the parties had executed the chattel
mortgage only "to secure or get better security for the judgment.
The respondent duly appealed the aforesaid order to the Court of Appeals, which set aside the order of
execution in a decision rendered on October 17, 1968, holding that the subsequent agreement of the
parties impliedly novated the judgment obligation in civil case 27116.
The appellate court stated that the following circumstances sufficiently demonstrate the incompatibility
between the judgment debt and the obligation embodied in the deed of chattel mortgage, warranting a
conclusion of implied novation:

1. Whereas the judgment orders the respondent to pay the petitioner the sum of P1,746.98 with
interest at 12% per annum from the filing of the complaint, plus the amount of P400 and the costs of suit,
the deed of chattel mortgage limits the principal obligation of the respondent to P1,700;
2. Whereas the judgment mentions no specific mode of payment of the amount due to the petitioner,
the deed of chattel mortgage stipulates payment of the sum of P1,700 in two equal installments;
3. Whereas the judgment makes no mention of damages, the deed of chattel mortgage obligates
the respondent to pay liquidated damages in the amount of P300 in case of default on his part; and
4. Whereas the judgment debt was unsecured, the chattel mortgage, which may be foreclosed
extrajudicially in case of default, secured the obligation.

On November 26, 1968, the petitioner moved for reconsideration of the appellate court's decision, which
motion the Court of Appeals denied in its resolution of December 7, 1968. Hence, the present petition for
certiorari to review the decision of the Court of Appeals, seeking reversal of the appellate court's decision
and affirmance of the order of the lower court.
Resolution of the controversy posed by the petition at bar hinges entirely on a determination of whether or
not the subsequent agreement of the parties as embodied in the deed of chattel mortgage impliedly
novated the judgment obligation in civil case 27116. The Court of Appeals, in arriving at the conclusion
that implied novation has taken place, took into account the four circumstances heretofore already
adverted to as indicative of the incompatibility between the judgment debt and the principal obligation
under the deed of chattel mortgage.

1. Anent the first circumstance, the petitioner argues that this does not constitute a circumstance in
implying novation of the judgment debt, stating that in the interim from the time of the rendition of the
judgment in civil case 27116 to the time of the execution of the deed of chattel mortgage the
respondent made partial payments, necessarily resulting in the lesser sum stated in the deed of chattel
mortgage. He adds that on record appears the admission by both parties of the partial payments made
before the execution of the deed of chattel mortgage. The erroneous conclusion arrived at by the Court of
Appeals, the petitioner argues, creates the wrong impression that the execution of the deed of chattel
mortgage provided the consideration or the reason for the reduced judgment indebtedness.
Where the new obligation merely reiterates or ratifies the old obligation, although the former effects but
minor alterations or slight modifications with respect to the cause or object or conditions of he latter, such
changes do not effectuate any substantial incompatibility between the two obligations Only those
essential and principal changes introduced by the new obligation producing an alteration or modification
of the essence of the old obligation result in implied novation. In the case at bar, the mere reduction of the
amount due in no sense constitutes a sufficient indictum of incompatibility, especially in the light of (a) the
explanation by the petitioner that the reduced indebtedness was the result of the partial payments made
by the respondent before the execution of the chattel mortgage agreement and (b) the latter's admissions
bearing thereon.
At best, the deed of chattel mortgage simply specified exactly how much the respondent still owed the
petitioner by virtue of the judgment in civil case 27116. The parties apparently in their desire to avoid any
future confusion as to the amounts already paid and as to the sum still due, decoded to state with
specificity in the deed of chattel mortgage only the balance of the judgment debt properly collectible from
the respondent. All told, therefore, the first circumstance fails to satisfy the test of substantial and
complete incompatibility between the judgment debt an the pecuniary liability of the respondent under the
chattel mortgage agreement.
2. The petitioner also alleges that the third circumstance, considered by the Court of Appeals as
indicative of incompatibility, is directly contrary to the admissions of the respondent and is without any
factual basis. The appellate court pointed out that while the judgment made no mention of payment of
damages, the deed of chattel mortgage stipulated the payment of liquidated damages in the amount of
P300 in case of default on the part of the respondent.
However, the petitioner contends that the respondent himself in his brief filed with the Court of Appeals
admitted his obligation, under the deed of chattel mortgage, to pay the amount of P300 by way of
attorney's fees and not as liquidated damages. Similarly, the judgment makes mention of the payment of
the sum of P400 as attorney's fees and omits any reference to liquidated damages.
The discrepancy between the amount of P400 and tile sum of P300 fixed as attorney's fees in the
judgment and the deed of chattel mortgage, respectively, is explained by the petitioner, thus: the partial
payments made by the respondent before the execution of the chattel mortgage agreement were applied
in satisfaction of part of the judgment debt and of part of the attorney's fee fixed in the judgment, thereby
reducing both amounts.
At all events, in the absence of clear and convincing proof showing that the parties, in stipulating the
payment of P300 as attorney's fees in the deed of chattel mortgage, intended the same as an obligation
for the payment of liquidated damages in case of default on the part of the respondent, we find it difficult
to agree with the conclusion reached by the Court of Appeals.

3. As to the second and fourth circumstances relied upon by the Court of Appeals in holding that the
montage obligation superseded, through implied novation, the judgment debt, the petitioner points out
that the appellate court considered said circumstances in a way not in accordance with law or accepted
jurisprudence. The appellate court stated that while the judgment specified no mode for the payment of
the judgment debt, the deed of chattel mortgage provided for the payment of the amount fixed therein in
two equal installments.
On this point, we see no substantial incompatibility between the mortgage obligation and the judgment
liability of the respondent sufficient to justify a conclusion of implied novation. The stipulation for the
payment of the obligation under the terms of the deed of chattel mortgage serves only to provide an
express and specific method for its extinguishment payment in two equal installments. The chattel
mortgage simply gave the respondent a method and more time to enable him to fully satisfy the judgment
indebtedness. 1 The chattel mortgage agreement in no manner introduced any substantial modification or
alteration of the judgment. Instead of extinguishing the obligation of the respondent arising from the
judgment, the deed of chattel mortgage expressly ratified and confirmed the existence of the same,
amplifying only the mode and period for compliance by the respondent.
The Court of Appeals also considered the terms of the deed of chattel mortgage incompatible with the
judgment because the chattel mortgage secured the obligation under the deed, whereas the obligation
under the judgment was unsecured. The petitioner argues that the deed of chattel agreement clearly
shows that the parties agreed upon the chattel mortgage solely to secure, not the payment of the reduced
amount as fixed in the aforesaid deed, but the payment of the judgment obligation and other incidental
expenses in civil case 27116.
The unmistakable terms of the deed of chattel mortgage reveal that the parties constituted the chattel
mortgage purposely to secure the satisfaction of the then existing liability of the respondent arising from
the judgment against him in civil case 27116. As a security for the payment of the judgment obligation,
the chattel mortgage agreement effectuated no substantial alteration in the liability of the respondent.
The defense of implied novation requires clear and convincing proof of complete incompatibility between
the two obligations. 2 The law requires no specific form for an effective novation by implication. The test is
whether the two obligations can stand together. If they cannot, incompatibility arises, and the second
obligation novates the first. If they can stand together, no incompatibility results and novation does not
take place.
We do not see any substantial incompatibility between the two obligations as to warrant a finding of an
implied novation. Nor do we find satisfactory proof showing that the parties, by explicit terms, intended the
full discharge of the respondent's liability under the judgment by the obligation assumed under the terms
of the deed of chattel mortgage so as to justify a finding of express novation.
ACCORDINGLY, the decision of the Court of Appeals of October 17, 1968 is set aside, and the order of
the Court of First Instance of Manila of January 25, 1962 is affirmed, at respondent Antonio Gabriel's cost.

G.R. No. L-18411 December 17, 1966
MAGDALENA ESTATES, INC., plaintiff-appellee, vs. ANTONIO A. RODRIGUEZ and HERMINIA C.
RODRIGUEZ, defendants-appellants.
REGALA, J.:

Appeal from the decision of the Court of First Instance of Manila ordering the defendants-appellants to
pay jointly and severally to the plaintiff-appellee the sum of P655.89, plus legal interest thereon from date
of the judicial demand, the sum of P100.00 as attorney's fees, and to pay the costs.
The appellants bought from the appellee a parcel of land in Quezon City known as Lot 7-K-2-G, Psd-
26193. In view of an unpaid balance of P5,000.00 on account of the purchase price of the lot, the
appellants executed on January 4, 1957, the following promissory note representing the said account:

PROMISSORY NOTE
P5,000.00
Manila, January 4, 1957

We, the Spouses ANTONIO A. RODRIGUEZ and HERMINIA C. RODRIGUEZ, jointly and severally
promise to pay the Magdalena Estates, Inc., or order, at its offices in the City of Manila, without any
demand the sum of FIVE THOUSAND PESOS (P5,000.00), Philippine currency, with interest at the rate
of Nine Per Cent 9% per annum, within sixty (60) days from January 7, 1957. The sum of P5,000.00
represents the balance of the purchase price of the parcel of land known as Lot 7-K-2-G, Psd. 26193,
containing an area of 2,191 square meters, Quezon City.

(Sgd.) Antonio A. Rodriguez
( T ) ANTONIO A. RODRIGUEZ
(Sgd.) Herminia C. Rodriguez
( T ) HERMINIA C. RODRIGUEZ

Signed in the Presence of:

(Sgd.) ILLEGIBLE
(Sgd.) ILLEGIBLE

On the same date, the appellants and the Luzon Surety Co., Inc. executed a bond in favor of the
appellee, the undertaking thereof being embodied therein as follows:

. . . comply with the obligation to pay the amount of P5,000.00 representing balance of the purchase price
of a parcel of land known as Lot 7-K-2-G, Psd-26193, with an area of 2191 square meters, Quezon City,
covered by Transfer Certificate of Title No. 13 (6947), Quezon City, within a period of sixty (60) days from
January 7, 1957; That the Surety shall be notified in writing within Ten (10) days from moment of default
otherwise, this undertaking is automatically null and void.
On June 20, 1958, when the obligation of the appellants became due and demandable, the Luzon Surety
Co., Inc. paid to the appellee the sum of P5,000.00. Subsequently, the appellee demanded from the
appellants the payment of P655.89 corresponding to the alleged accumulated interests on the principal of
P5,000.00. Due to the refusal of the appellants to pay the said interest, the appellee started this suit in the
Municipal Court of Manila to enforce the collection thereof. The said court, on February 5, 1959, rendered
judgment in favor of the appellee and against the appellants, ordering the latter to pay jointly and
severally the appellee the sum of P655.89 with interest thereon at the legal rate from November 10, 1958,
the date of the filing of the complaint, until the whole amount is fully paid. Not satisfied with that judgment,
appellants appealed to the Court of First Instance of Manila, where the case was submitted for decision
on the pleadings. The Court of First Instance of Manila rendered the judgment stated at the outset of this
decision.

On appeal directly to this Court, the following errors are assigned:
I. The lower court erred in concluding as a fact from the pleadings that the plaintiff-appellee demanded,
and the Luzon Surety Co., Inc. refused, the payment of interest in the amount of P655.89, and in not
finding and declaring that said plaintiff-appellee waived or condoned the said interests.
II. The lower court erred in not finding and declaring that the obligation of the defendants-appellants in
favor of the plaintiff-appellee was totally extinguished by payment and/or condonation.
III. The lower court erred in not finding and declaring that the promissory note executed by the
defendants-appellants in favor of the plaintiff-appellee was, insofar as the said document provided for the
payment of interests, novated when the plaintiff-appellee unqualifiedly accepted the surety bond which
merely guaranteed payment of the principal in the sum of P5,000.00.
Appellants claim that the pleadings do not show that there was demand made by the appellee for the
payment of accrued interest and what could be deduced therefrom was merely that the appellee
demanded from the Luzon Surety Co., Inc., in the capacity of the latter as surety, the payment of the
obligation of the appellants, and said appellee accepted unqualifiedly the amount of P5,000.00 as
performance by the obligor and/or obligors of the obligation in its favor. It is further claimed that the
unqualified acceptance of payment made by the Luzon Surety Co., Inc. of P5,000.00 or only the amount
of the principal obligation and without exercising its (appellee's) right to apply a portion of P655.89 thereof
to the payment of the alleged interest due despite its presumed knowledge of its right to do so, the
appellee showed that it waived or condoned the interests due, because Articles 1235 and 1253 of the
Civil Code provide:

ART. 1235. 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.
ART. 1253. If the debt produces interest, payment of the principal shall not be deemed to have been
made until the interests have been recovered.

We do not agree with the contention of the appellants. It is very clear in the promissory note that the
principal obligation is the balance of the purchase price of the parcel of land known as Lot 7-K-2-G, Psd-
26193, which is the sum of P5,000.00, and in the surety bond, the Luzon Surety Co., Inc. undertook "to
pay the amount of P5,000.00 representing balance of the purchase price of a parcel of land known as Lot
7-K-2-G, Psd-26193, . . . ." The appellee did not protest nor object when it accepted the payment of
P5,000.00 because it knew that that was the complete amount undertaken by the surety as appearing in
the contract. The liability of a surety is not extended, by implication, beyond the terms of his contract.1 It
is for the same reason that the appellee cannot apply a part of the P5,000.00 as payment for the accrued
interest. Appellants are relying on Article 1253 of the Civil Code, but the rules contained in Articles 1252
to 1254 of the Civil Code apply to a person owing several debts of the same kind of a single creditor.
They cannot be made applicable to a person whose obligation as a mere surety is both contingent and
singular; his liability is confined to such obligation, and he is entitled to have all payments made applied
exclusively to said application and to no other.2 Besides, Article 1253 of the Civil Code is merely
directory, and not mandatory.3 Inasmuch as the appellee cannot protest for non-payment of the interest
when it accepted the amount of P5,000.00 from the Luzon Surety Co., Inc., nor apply a part of that
amount as payment for the interest, we cannot now say that there was a waiver or condonation on the
interest due.

It is claimed that there was a novation and/or modification of the obligation of the appellants in favor of the
appellee because the appellee accepted without reservation the subsequent agreement set forth in the
surety bond despite its failure to provide that it also guaranteed payment of accruing interest.
The rule is settled that novation by presumption has never been favored. To be sustained, it needs to be
established that the old and new contracts are incompatible in all points, or that the will to novate appears
by express agreement of the parties or in acts of similar import.4
An obligation to pay a sum of money is not novated, in a new instrument wherein the old is ratified, by
changing only the terms of payment and adding other obligations not incompatible with the old one,5 or
wherein the old contract is merely supplemented by the new one.6 The mere fact that the creditor
receives a guaranty or accepts payments from a third person who has agreed to assume the obligation,
when there is no agreement that the first debtor shall be released from responsibility does not constitute a
novation, and the creditor can still enforce the obligation against the original debtor. (Straight v. Haskel,
49 Phil. 614; Pacific Commercial Co. v. Sotto, 34 Phil. 237; Estate of Mota v. Serra, 47 Phil. 464; Dugo
v. Lopena, supra ). In the instant case, the surety bond is not a new and separate contract but an
accessory of the promissory note.

WHEREFORE, the judgment appealed from should be, as it is hereby, affirmed, with costs against the
appellants.

G.R. No. 79642 July 5, 1993
BROADWAY CENTRUM CONDOMINIUM CORPORATION, petitioner, vs. TROPICAL HUT FOOD
MARKET, INC. and THE HONORABLE COURT OF APPEALS, respondents.
FELICIANO, J.:

Petitioner Broadway Centrum Condominium Corporation ("Broadway") and private respondent Tropical
Hut Food Market. Inc. ("Tropical") executed an 28 November 1980 a contract of lease. Broadway, as
lessor, agreed to lease a 3,042.19 square meter portion of the Broadway Centrum Commercial Complex
for a period of ten (10) years, commencing from 1 February 1981 and expiring on 1 February 1991,
"renewable for a like period upon the mutual agreement of both parties." The rental provision of this
contract reads as follows:
3. BASIC RENTAL ON LEASED PREMISES LESSEE agrees to pay LESSOR a basic monthly
rental on the leased promises in the amount of ONE HUNDRED TWENTY THOUSAND PESOS
(P120,000.00) Philippine Currency, during the first three (3) years of this lease contract from February 1,
1981 to February 1, 1984, allowing two (2) months grace period on rental for renovation/improvements on
the leased promises from December 1, 1980 to January 31. 1961. The basic rental shall be increased to
ONE HUNDRED FORTY THOUSAND PESOS (P140,000.00) per month during the next three (3) years
from February 1, 1984 to February 1, 1987, and ONE HUNDRED SIXTY FIVE THOUSAND PESOS
(P165,000.00) per month during the last four (4) years from February 1, 1967 to February 1, 1991.

The first basic monthly rental shall be paid in advance to the LESSOR on or before December 1, 1980.
Succeeding basic monthly rentals starting March, 1981 be paid by LESSEE to LESSOR, without the
necessity of a previous demand or the services of a collector, within the first five (5) days of the month to
which said rental shall correspond, at the Office of the LESSOR at Broadway Centrum.
During the first year of the lessor-lessee relationship between Broadway and Tropical, no problems were
apparently experienced by either of them. On 5 February 1982, however, Tropical wrote to Broadway
stating that Tropical's rental payments to Broadway were equivalent to 7.31% of Tropical's actual sales of
P17,246,103.00 in 1981, while "[Tropical's] gross profit, rate [was] only 10%." Tropical went on to say that
the rental specified in that contract had been "based merely on [Tropical's) projections that [Tropical]
could reach an average sale of P120,000.00 a day;" however, Tropical's total sales projection for 1982
was only P23,000,000.00. This would mean again a rental rate of 6.08% of sales "which is too high for
Tropical Hut-Broadway considering that the present rental rates of other Tropical branches are even
below the normal rate of 1.5% on sales." Accordingly. Tropical made the following proposal to Broadway:

[Tropical] would therefore propose to reduce the present monthly rental to P50,000.00 or 2.0% of their
monthly sales whichever is higher, up to the end of the third year after which it shall again be subject to
renegotiations. (Emphasis supplied)
On 4 March 1962, Broadway responded to Tropical's latter by stating that it (Broadway) believed that the
problems of Tropical's supermarket in the Broadway Centrum were within the control of Tropical's
management. Broadway offered six (6) suggestions which, if implemented, should result in increased
sales for Tropical of at least 15% in the succeeding months. In the meantime, Broadway made the
following counter-proposal consisting of conditional reduction of the stipulated rental by P20,000.00 for a
limited period of four (4) months:

. . . Meantime, we are agreeable to a conditional reduction of your rental by P20,000.00 per month for
four months starting this month on a trial basis; that is, the P20,000.00 per month reduction in rental will
be paid back to us and spread over the last six months of the years should the target of 15% increase in
sales be achieved by the fourth month. However, should your sales not increased by 5% in spite of the
improvements you have introduced, the reduction in rental of P20,000.00 per month of P80,000.00 for
four months will not have to be paid anymore. In other words, the monthly reduction in rental is
conditioned upon your not achieving the desired 15% increased in sales volume by the fourth month
assuming you implement all of the above changes.
It is understood, however, that any reduction in rental extended is merely a temporary suspension of the
original rate of rental stipulated in our contract of lease and not an amendment thereto. 2 (Emphases
supplied)

Officers of Tropical met with the President of Broadway and during this conference, Tropical's officers
recounted the "low sales volume" that the Tropical Supermarket in the Broadway Centrum was
experiencing, apparently as a result of the temporary closure of Doa Juana Rodriguez Avenue. 3 This
Avenue is a major thoroughfare adjacent to the Broadway Centrum and was then closed to vehicular
traffic because of the road expansion project of the Government. Broadway's President, Mrs. Cita
Fernandez Orosa, was aware that the temporary closure of the Doa Juana Rodriguez Avenue had
affected the business of all the Broadway's tenants, including Tropical. She, therefore, agreed on 20 April
1982 to a "provisional and temporary agreement" which agreement needs to be quoted in full:
Further to our letter dated April 6, 1982, we hereby make formal our provisional and temporary agreement
to a reduction of your monthly rental on the basis of 2% of gross receipts or P60,000.00 whichever is
higher. Gross receipts should be construed as the total sales and receipts from sublessees of your area
and from whatever source arising from the area leased by you. This Provisional arrangement should not
be interpreted as amendment to the lease contract entered into between us.
We invite your attention to the fact that, as agreed upon, you have committed to return by the end of April
a certain portion of your leased premises totalling 466.56 square meters and presently occupied by your
drug store and coffee shop outlets and half of the hallway.
Finally we wish to remind you that the temporary alteration in rental is conditioned on your good faith
implementation an the suggestions we conveyed to you in our letter of March 4, 1982 regarding the
operations of the supermarket and shall not commence until the area mentioned above to be surrendered
is actually surrendered.

Should you find the foregoing in accordance with our previous verbal agreement, please signify your
acceptance by signing above the word "conforme."

Thank you for your, continued patronage.

C o n f o r m e: Very, truly yours,

Tropical Hut Food Broadway Centrum
Market, Inc. Condominium Corp.

By: (Signed) By: (Signed) 4
___________________ _____________________
(Emphasis supplied).

Months later, the road expansion project at the Doa Juana Rodriguez Avenue was completed. By a
letter dated 15 December 1982, addressed to Tropical, Broadway referred to the rental which "as of last,
April 20, 1982, was provisionally reduced" to P60,000.00 a month or 2% of gross receipts whichever is
higher "without waving any of [Broadway's] rights under our rental agreement." Broadway then went on to
say that:
After careful deliberation, we regret that this concession can no longer be extended in its present form.
We, therefore, advising that we shall increase the monthly rental to P100,000.00.
This increase, however, shall be implemented gradually as follows: P80,000.00 effective January, 1983
and P100,000.00 effective April, 1993 until further notice.

Considering the fact that you collect a monthly gross rental of P24,600.00 from your concessionaires
(other forms of income not considered), the previous temporary arrangement afforded you mare than
sufficient respite from whatever business constraints you may have had then. The consequent effect of
said temporary arrangement is your payment of a monthly rental of P35,400.00 or an effective rate of
P14.32 only per square mater. We are sure that you will agree with us that this rate is very low and
cannot therefore be sustained indefinitely. 5 (Emphases supplied).

While the rental rate above fixed by Broadway was higher than that set out in the provisional and
temporary agreement of the parties of 20 April 1982, the rates so fixed were nonetheless lower than that
stipulated in their contract of 28 November 1980. Tropical, however, was not satisfied with the adjusted
rates fixed by Broadway. In a letter dated 4 January 1983, Mr. Luis Que of Tropical wrote to Broadway's
President appealing to Broadway "to fix our monthly rental at P60,000.00 or 2% of our gross receipts
whichever is higher." In this letter, Mr. Que expressly hoped that

[Broadway would] understand our position, and may we reiterate our appeal to maintain our present
provisional rates until such time that more sales are achieved. (Emphasis supplied)
Mr. Luis Que's appeal was, however, found unsatisfactory by Broadway. In a letter dated 13 January
1983, Broadway said:
We are replying to your letter of January 4, 1983. While it may be admitted that you are incurring losses in
your operations, the same is not a monopoly experienced solely by your corporation. Broadway Centrum
itself has had its share of business setbacks but we have nevertheless decided to absorb part of your
losses last year by agreeing to a temporary reduction of your monthly rental. However, as we have stated
in our December 15, 1982 letter, this concession can no longer be extended in its present form which
continues to be a considerable reduction on the provisions of our existing long term contract.
Consequently, we have to reiterate our advise on you regarding your rental increased. 6 (Emphasis
supplied).
Tropical continued its renegotiation efforts. In another letter dated 29 March 1983, Broadway's President
wrote to Mr. Luis Que turning down his request for reconsideration. Broadway, however, was evidently
desirous of keeping Tropical as a tenant if possible and so stated that the P100,000.00 monthly rental
would begin, not on April 1983 as stated in its letter of 15 December 1982 but rather on July 1983. By a
letter, dated 9 April 1983, the Credit and Collection Officer of Broadway sent Mr. Luis Que a bill for
P81,320.00 representing the accrued differential of P20,000.00 per month between the rental which
Broadway was willing to grant to Tropical (P80,000.00 per month starting 1 January, 1983) and up to 30
June 1983)and the P60,000.00 per month or 2% of gross receipts whichever is higher, under the
temporary and provisional letter-agreement of 20 April 1982.

Tropical responded to the statement of account sent by Broadway by pleading, once more, in a letter
dated 15 April 1983, that Tropical's present rentals of P60,000.00 monthly or 2% of gross receipts,
whichever is higher, "would at least stay until we have somehow recovered," to which Tropical proposed,
however, to add 20% of its income from concessionaires (i.e., concessionaires at Tropical-Broadway
Supermarket). 7
Tropical's last counter-offer was not acceptable to Broadway. In a letter dated 22 April 1983, Broadway's
President wrote to Mr. Luis Que stating that "the matter was no longer negotiable":
We are responding to your letter of April 15, 1983 proposing a counter offer to the payment of your
rentals. You will remember that in our last meeting our position on the matter has been unequivocably
stated. The temporary arrangement of reducing your monthly rentals was extended as an assistance.
This had caused us to lose P620,000.00 on rental income.
You will agree that this is a sizeable amount which had tremendous adverse effects on our financial
position. This can no longer be sustained.
We reiterate, therefore, that the matter is no longer negotiable and we strongly urge you to settle your
obligation to minimize the 2% penalty on delayed payments provided for in our contract.

We trust that you will see the merits of the foregoing. 8 (Emphasis supplied).
On 5 May 1983, Mr. Mariano Gue, adopting a new and much harder posture than Mr. Luis Que had,
wrote to Broadway as follows:
. . . I could only confirm what I told you in our conference that we cannot afford any increase in rentals in
the space occupied by us at Broadway Centrum. And I could only repeat what is contained in the letter
sent you by our Mr. Luis Que dated April 15, 1983. We cannot agree to an increase in rentals at this time.
To do so would put us in a financial situation worse then we were in before we agreed to reduce the
leased premises and adjust the rentals. Our position is that you cannot arbitrarily and unilaterally increase
the rentals. This is a matter which should be mutually agreed upon by us and as stated, we are not in a
financial position to agree to such an increase. 9 (Emphasis supplied).

On the same day, 5 May 1983, Mrs. Orosa wrote to Mr. Mariano Que expressing shock and dismay at the
posture suddenly adopted by the latter. Mrs. Orosa wrote:
We are replying to your letter of May 5, 1983 categorically stating that your position is that we cannot
arbitrarily and unilaterally increase the rentals. We are appealed by the apparent attempt to distort the
very crystal clear arrangement we reached last April 20, 1982 anent the temporary alteration of your
rentals. We hereby attached a xerox copy of said agreement with our underscores to refresh your
memory.
We have exhaustively, repeatedly but patiently labored to explain to you the temporary and provisional
arrangement to reduce your monthly rentals is not amendment to the lease contract and this was done
merely as an assistance. There is, therefore, absolutely no basis to your claim that we cannot arbitrarily
and unilaterally increase the rentals. We strongly feel that we should have instead been the recipient an
act of gratitude from you.
In view therefore of your obstinate decision to blur your view and continue refusing to heed our demands,
we are hereby formally serving you notice that if you still fail to pay your back accounts amounting to
P100,000.00 exclusive of penalty charges by Monday, May 9, 1983, paragraph five (5) of our lease
contract will be implemented. 10 (Emphasis supplied).
A week later, on 12 May 1983, Tropical filed a Complaint before the Regional Trial Court, Quezon City,
seeking a restraining order or preliminary injunction to prevent Broadway from invoking and implementing
Section 5 of their Lease Contract and asking the court to decree that the, rental provided for in the letter-
agreement of 20 April 1982 "should subsist while the low volume of sales [of Tropical] still continues." A
restraining order was issued by the trial court ex parte the next day and a preliminary injunction was
granted on 2 June 1983, upon Tropical's filing of a bond in the amount of P100,000.00.

On 6 January 1984, while trial before the Regional Trial Court was pending, Broadway informed Tropical
that the basic rental would be increased to P140,000.00 per month during the next three (3) years from 1
February 1984 to 1 February 1987 in accordance with paragraph (3) of the Lease Contract dated 28
November 1980.
Tropical reacted by filing a supplemental complaint with the trial court raising for the first time the issue of
whether or not the letter-agreement dated 20 April 1982 had novated the Lease Contract of 28 November
1980. Tropical alleged that the original Contract. of Lease had been novated in its principal conditions
i.e., the area subject to the lease and the lease rentals by the letter-agreement dated 20 April 1982
and that the reduced lease rates set out in the letter-agreement are to subsist while Tropical's sales
volume "remains low."

Petitioner, upon the other hand, vehemently denied that the original Lease Contract had been novated by
the letter-agreement of 20 April 1982.
In time, the trial court rendered its decision dated 14 March 1985, the dispositive portion of which reads
as follows:

WHEREFORE, judgment, is hereby rendered in favor of the plaintiff and against the defendant as follows:

1. The writ of preliminary injunction previously issued is made permanent;
2. The reduced rental provided for in the letter-agreement of April 20, 1982 (Exh. "G" or "5") shall
subsist or be effective during the period that a plaintiff cannot achieve its Projected daily sales average as
envisioned in its feasibility study;
3. The contract of leased dated November 28, 1980 (Exh. "A" or "1") is declared as partially novated
or modified by the letter-agreement;
4. The amount of monthly rentals payable by plaintiff for the reduced area of the leased promises
after plaintiff has achieved its projected daily sales average is fixed as follows:

February 1, 1981 to February 1, 1984
P39.45 per square meter or P101,609.00;

February 1, 1984 to February 1, 1987
P46.02 per square meter or P118.530.00;

February 1, 1987 to February 1, 1991
P54.24 per square mater or P139,702.00.

Correspondingly, defendant's counterclaim is dismissed.

Costs against the defendant.
So Ordered. 11 (Emphasis supplied).

On appeal, the Court of Appeals affirmed the decision of the trial court. The Court of Appeals held that the
letter-agreement dated 20 April 1982 had novated the principal conditions of the Lease Contract. The
Court of Appeals also hold that the reduction in the rentals was not entirely a gratuitous accommodation
on the part of Broadway since the reduction of the leased space by 466.56 square meters, possession of
which was returned by Tropical to Broadway, constituted valuable consideration for the reduction of
rentals while the "low sales volume" of Tropical continued. The Court of Appeals corrected a microscopic
arithmetical error committed by the trial court and in effect directed Tropical to pay, when its "low sales
volume" shall hove been overcome, the following rental rates:

From 1 February 1984 up to 1 February 1987 P118.529.15 per month;
From 1 February 1987 up to 1 February 1991 P139,695.07 per month.
Petitioner Broadway now asks us to review and set aside the Decision of the Court of Appeals.
The sole issue confronting us here is Whether or not the latter-agreement dated 20 April 1982 had
novated the Contract of Lease of 28 November 1980.

We start with the basic conception that novation is the extinguishment of an obligation by the substitution
of that obligation with a subsequent one, which terminates it, either by changing its object or principal
conditions or by substituting a now debtor in place of the old one, or by subrogating a third person to the
rights of the creditor. 12 Novation through a change of the object or principal conditions of an existing
obligation is referred to as objective (or real) novation. Novation by the change of either the person of the
debtor or of the creditor is described as subjective (or personal) novation. Novation may also be objective
and subjective (mixed) at the same time. In both objective and subjective novation, a dual purpose is
achieved an obligation in extinguished and a news one is created In lieu thereof. 13
If objective novation is to take place, it is essential that the new obligation expressly declare that the old
obligation to be extinguished, or that now obligation be on every point incompatible with the old one. 14
Novation is never presumed; it must be established either by the discharge of use old debt by the express
terms of the new agreement, or by the acts of the parties whose intention to dissolve the old obligation as
a consideration of the emergence of the new one must be clearly manifested. 15 It is hardly necessary to
add that the role that novation is never presumed, is not avoided by merely referring to partial novation.
The will to novate, whether totally or partially, must appear by express agreement of the parties, by their
acts which are too clear and unequivocal to be mistaken.

Applying the above principles to the case at bar, it is entirely clear to the court that the letter-agreement of
20 April 1992 did not extinguish or alter the obligations of respondent Tropical and the rights of petitioner
Broadway under their lease contract dated 28 November 1980.

In the first place, the letter-agreement of 20 April 1982 was, by its own terms, a " provisional and
temporary agreement to a reduction of [Tropical's] monthly rental ." The letter-agreement, as noted
earlier, also contained the following sentence:
This provisional agreement should not be interpreted as amendment to the contract entered into by us.
The same letter also referred to the reduction of rental as a "temporary alteration in rental" which was
"conditioned" upon good faith implementation by Tropical of the six (6) principal suggestions Broadway
had conveyed to Tropical concerning improvement of the operations of Tropical's supermarket at the
Broadway Centrum. The non-specification by Broadway (who had prepared the letter-agreement an
which Tropical placed its conforme) of the period of time during which the reduced rentals would remain
in effect, only meant that Broadway retained for itself the discretionary right to return to the original
contractual rates of rental whenever Broadway felt it appropriate to do so. There is nothing in the text of
the 20 April 1982 letter-agreement to suggest that the reduced concessional rental rates could not be
terminated Broadway without the consent of Tropical.

In the second place, the formal notarized Lease Contract of 28 November 1980 made it clear that a
temporary and provisional concessional reduction of rentals which Broadway might grant to Tropical was
not to be construed as alteration or waiver of any; of the terms of the Lease Contract itself. That Lease
Contract provided, among other things, as follows:
32. NON-WAIVER OF CONDITIONS & COVENANTS The failure of the LESSOR to insist upon
strict performance of any of the terms, conditions and stipulation hereof shall not be deemed a
relinquishment or waiver of any right or remedy that said LESSOR may have, nor shall it be construed as
a waiver of any subsequent breach of, or default in the terms, conditions and covenants hereof, which
terms, conditions and covenants shall continue under this Contract and shall be deemed to have been
made unless express in writing and signed by the LESSOR. 16 (Emphasis supplied).
In the third place, the course of negotiations between Broadway and Tropical before the execution of their
letter-agreement of 20 April 1982, quite clearly indicated that what they were negotiating was a temporary
and provisional reduction of rentals. Thus, Tropical itself, in its letter to Broadway dated 5 February 1982,
quoted earlier, had proposed reduction of rentals from the stipulated contractual rates to P50,000.00 per
month or 2% of monthly sales, whichever is higher, "up to the end of the third year after which it shall
again subject, to renegotiation."

Any reduction in rental extended is merely a temporary suspension of the original rate of rental stipulated
in our contract of lease and not an amendment thereto.
In the fourth place, the course of discussions between Broadway and Tropical, as disclosed in their
correspondence, after execution of the 20 April 1982 letter-agreement, shows that the reduction of rentals
agreed upon in the letter-agreement was not to persist, for the rest of the life of the ten (10)-year Contract
of Lease. That correspondence is bereft of any, sign of mutual agreement or recognition that the reduced
rentals had so permanently replaced the contract stipulations on rentals as to have become immune to
change save by common consent of Tropical and Broadway. Quite the contrary. In Broadway's letter to
Tropical dated 15 December 1982, Mrs. Orosa referred to the letter-agreement of 20 April 1982 which
"provisionally reduced to P60,000.00 a month or 2% of [Tropical's] gross receipts, whichever is higher,
without waiving any of our right under our rental agreement." This 15 December 1982 letter, quoted
earlier, in an obvious effort to be conciliatory, did not try to go back immediately to the contract stipulation
of P120,000.00 monthly rental, from 1 February 1981 to 1 February 1984. Instead, Broadway proposed
P80,000.00 per month effective January 1983 and P100 000.00 per month effective April 1983 "until
further notice." In its reply letter of 4 January 1983, Tropical appealed to Broadway to maintain "our
present provisional rates until such time that more sales are achieved." In its rejoinder of 13 January
1983, Broadway stressed that though it had its own share of business set backs, it had "nevertheless
decided to absorb part of [Tropical-Broadway Centrum's] losses last year by agreeing to a temporary
reduction of the monthly rental." At the same time, Broadway stressed that "this concession" could no
longer be extended "in its present form which continues to be a considerable reduction on the provisions
of our existing long-term contract." Finally, in his last letter of 15 April 1983, Mr. Luis Que of Tropical
appealed once more to Broadway to continue the reduction in rental under the 20 April 1982 letter-
agreement "until we have somehow recovered" and then, at the same time, offered to increase that
reduced rental by adding to it 20% of Tropical's income from concessionaires at its Broadway Centrum
Supermarket. Turning down Mr. Que's last counter-officer, Mrs. Orosa of Broadway on 22 April 1983 once
again stressed that:

The temporary arrangement of reducing your monthly rentals was extended as an assistance. This had
caused us to lose P620,000.00 on rental income. (Emphasis supplied).
It is thus clear to the Court that Tropical was attempting to modify its formal Lease Contract with
Broadway by implying or inserting terms into the 20 April 1982 letter-agreement which are not found in
that letter-agreement. Under both the Civil Code and our case law on novation and as well the express
terms of the 28 November 1980 Contract of Lease, only evidence of the clearest and most explicit kind
will suffice for that purpose. Tropical's theory that Broadway had agreed in the 20 April 1982 letter-
agreement to maintain the reduced rental so long as Tropical was suffering from a "low volume of sales"
appears to us as an afterthought, imaginative and original no doubt, but still an afterthought. Tropical did
not pretend to have reached agreement with Broadway on what level of sales would constitute the critical
"low volume of sales." And so, the trial court ended up with the truly extraordinary recourse of referring to
the feasibility study that Tropical had made on it's own, before Tropical and Broadway executed their 28
November 1980 Contract of Lease. That feasibility study was no mare than an expression of Tropical's
own expectations when it entered into the 1980 Contract of Lease; yet the trial court held that the reduced
rentals were to remain in effect until Tropical achieved its own expectations concerning its sales at the
Broadway Centrum, which presumably were not "low."
Tropical, in its Memorandum, stressed that Broadway had supplied the number of customers which
Tropical had inputted in its feasibility study. Whatever number Broadway may have submitted to Tropical
in their pre-contract negotiations was no more than an estimate or speculation as to the number of
customers that might be coming into the then proposed Tropical Supermarket at the Broadway Centrum.
We do not understand Tropical to have suggested that that number constituted a representation on the
part of Broadway which turned out to be false and which vitiated Tropical's consent to the original 1980
Contract, of Lease. Neither do we understand Tropical to be suggesting that Broadway had warranted to
Tropical that a certain number of customers would in fact be visiting the then proposed Tropical
Supermarket at Broadway Centrum. The 1980 Contract of Lease itself was totally silent as to any such
estimated or expected number of customers either as a representation or as a warranty on the part, of
Broadway. That silence rendered any estimate which Broadway may have conveyed to Tropical, quite
immaterial. 17
We turn to the holding of the Court of Appeals that the surrender of 466.56 square meters of leased
space by Tropical to Broadway constituted valuable consideration, acceptance of which disabled
Broadway from insisting on the original terms of their Contract of Lease. Under the view we have taken
above of the legal effects of the 20 April 1982 letter-agreement, this supposed valuable consideration
appears quite immaterial. We must, nonetheless, note that comparison of the lease rentals reduced and
the floor space surrendered yields a strong presumption that Broadway could not have agreed to the
supposed partial novation. The rentals were reduced by Broadway by 50% (from P120,000.00 to
P60,000.00 per month). The floor space was reduced by slightly over 15% only. No substantial
relationship existed between the amount of the reduction of rental and the area of the space returned by
Tropical. Hence, no reasonable presumption can be indulged that that, return of part of the leased space
constituted consideration for the reduction of rental rates. In that Contract of Lease, moreover, the rentals
were stipulated for a specified portion of the Broadway Centrum having a total floor area of 3,042.19
square meters; the rental rate was not specified on a per square meter basis.
We conclude that the Court, of Appeals fell into reversible error when it affirmed the decision of the trial
court. We believe and so hold that the letter-agreement of 20 April 1982 did not constitute a novation,
Whether partial or total, of the 28 November 1980 Contract of Lease between Broadway and Tropical.

WHEREFORE, for all the foregoing, the Petition for Review on Certiorari is hereby GIVEN DUE
COURSE, and the Comment filed by private respondent Tropical is hereby TREATED as its ANSWER
and the Decision dated 30 January 1987 of the Court, of Appeals and the Decision dated 14 March 1985
of the trial court are hereby REVERSED and SET ASIDE. A new judgment is hereby entered dismissing
the complaint filed by private respondent Tropical, and requiring private respondent Tropical to pay to
petitioner Broadway the following rental rates:

1. P80,000.00 per month from 1 January 1983 up to 30 June 1983;
2. P100,000.00 per, month from 1 July 1983 up to 31 January 1984;
3. P140,000.00 per month from 1 February 1984 to 1 February 1987; and
4. P160,000.00 per month from 1 February 1987 to 31 January 1991.

The penalty of 2% per month on unpaid rentals specified in Section 5 of the 28 November 1980 Contract
of Lease is, in the exercise of the Court's discretion, hereby equitably REDUCED to ten percent (10%) per
annum computed from accrual of such rentals as above specified until fully paid. In addition, private
respondent Tropical shall pay to petitioner Broadway attorney's fees in the amount of ten percent (10%)
(and not twenty percent [20%] as specified in Section 33 of the Contract of lease) of the total amount due
and payable to petitioner Broadway under this Decision. Costs against, private respondent.
[G.R. No. 147950. December 11, 2003]

CALIFORNIA BUS LINES, INC., petitioner, vs. STATE INVESTMENT HOUSE, INC., respondent.
D E C I S I O N
QUISUMBING, J.:

In this petition for review, California Bus Lines, Inc., assails the decision,[1] dated April 17, 2001, of the
Court of Appeals in CA-G.R. CV No. 52667, reversing the judgment[2], dated June 3, 1993, of the
Regional Trial Court of Manila, Branch 13, in Civil Case No. 84-28505 entitled State Investment House,
Inc. v. California Bus Lines, Inc., for collection of a sum of money. The Court of Appeals held petitioner
California Bus Lines, Inc., liable for the value of five promissory notes assigned to respondent State
Investment House, Inc.

The facts, as culled from the records, are as follows:

Sometime in 1979, Delta Motors CorporationM.A.N. Division (Delta) applied for financial assistance
from respondent State Investment House, Inc. (hereafter SIHI), a domestic corporation engaged in the
business of quasi-banking. SIHI agreed to extend a credit line to Delta for P25,000,000.00 in three
separate credit agreements dated May 11, June 19, and August 22, 1979.[3] On several occasions, Delta
availed of the credit line by discounting with SIHI some of its receivables, which evidence actual sales of
Deltas vehicles. Delta eventually became indebted to SIHI to the tune of P24,010,269.32.[4]

Meanwhile, from April 1979 to May 1980, petitioner California Bus Lines, Inc. (hereafter CBLI), purchased
on installment basis 35 units of M.A.N. Diesel Buses and two (2) units of M.A.N. Diesel Conversion
Engines from Delta. To secure the payment of the purchase price of the 35 buses, CBLI and its
president, Mr. Dionisio O. Llamas, executed sixteen (16) promissory notes in favor of Delta on January 23
and April 25, 1980.[5] In each promissory note, CBLI promised to pay Delta or order, P2,314,000 payable
in 60 monthly installments starting August 31, 1980, with interest at 14% per annum. CBLI further
promised to pay the holder of the said notes 25% of the amount due on the same as attorneys fees and
expenses of collection, whether actually incurred or not, in case of judicial proceedings to enforce
collection. In addition to the notes, CBLI executed chattel mortgages over the 35 buses in Deltas favor.

When CBLI defaulted on all payments due, it entered into a restructuring agreement with Delta on
October 7, 1981, to cover its overdue obligations under the promissory notes.[6] The restructuring
agreement provided for a new schedule of payments of CBLIs past due installments, extending the
period to pay, and stipulating daily remittance instead of the previously agreed monthly remittance of
payments. In case of default, Delta would have the authority to take over the management and
operations of CBLI until CBLI and/or its president, Mr. Dionisio Llamas, remitted and/or updated CBLIs
past due account. CBLI and Delta also increased the interest rate to 16% p.a. and added a
documentation fee of 2% p.a. and a 4% p.a. restructuring fee.

On December 23, 1981, Delta executed a Continuing Deed of Assignment of Receivables[7] in favor of
SIHI as security for the payment of its obligations to SIHI per the credit agreements. In view of Deltas
failure to pay, the loan agreements were restructured under a Memorandum of Agreement dated March
31, 1982.[8] Delta obligated itself to pay a fixed monthly amortization of P400,000 to SIHI and to discount
with SIHI P8,000,000 worth of receivables with the understanding that SIHI shall apply the proceeds
against Deltas overdue accounts.

CBLI continued having trouble meeting its obligations to Delta. This prompted Delta to threaten CBLI with
the enforcement of the management takeover clause. To pre-empt the take-over, CBLI filed on May 3,
1982, a complaint for injunction[9], docketed as Civil Case No. 0023-P, with the Court of First Instance of
Rizal, Pasay City, (now Regional Trial Court of Pasay City). In due time, Delta filed its amended answer
with applications for the issuance of a writ of preliminary mandatory injunction to enforce the management
takeover clause and a writ of preliminary attachment over the buses it sold to CBLI.[10] On December
27, 1982,[11] the trial court granted Deltas prayer for issuance of a writ of preliminary mandatory
injunction and preliminary attachment on account of the fraudulent disposition by CBLI of its assets.

On September 15, 1983, pursuant to the Memorandum of Agreement, Delta executed a Deed of Sale[12]
assigning to SIHI five (5) of the sixteen (16) promissory notes[13] from California Bus Lines, Inc. At the
time of assignment, these five promissory notes, identified and numbered as 80-53, 80-54, 80-55, 80-56,
and 80-57, had a total value of P16,152,819.80 inclusive of interest at 14% per annum.

SIHI subsequently sent a demand letter dated December 13, 1983,[14] to CBLI requiring CBLI to remit
the payments due on the five promissory notes directly to it. CBLI replied informing SIHI of Civil Case No.
0023-P and of the fact that Delta had taken over its management and operations.[15]

As regards Deltas remaining obligation to SIHI, Delta offered its available bus units, valued at
P27,067,162.22, as payment in kind.[16] On December 29, 1983, SIHI accepted Deltas offer, and Delta
transferred the ownership of its available buses to SIHI, which in turn acknowledged full payment of
Deltas remaining obligation.[17] When SIHI was unable to take possession of the buses, SIHI filed a
petition for recovery of possession with prayer for issuance of a writ of replevin before the RTC of Manila,
Branch 6, docketed as Civil Case No. 84-23019. The Manila RTC issued a writ of replevin and SIHI was
able to take possession of 17 bus units belonging to Delta. SIHI applied the proceeds from the sale of the
said 17 buses amounting to P12,870,526.98 to Deltas outstanding obligation. Deltas obligation to SIHI
was thus reduced to P20,061,898.97. On December 5, 1984, Branch 6 of the RTC of Manila rendered
judgment in Civil Case No. 84-23019 ordering Delta to pay SIHI this amount.

Thereafter, Delta and CBLI entered into a compromise agreement on July 24, 1984,[18] in Civil Case No.
0023-P, the injunction case before the RTC of Pasay. CBLI agreed that Delta would exercise its right to
extrajudicially foreclose on the chattel mortgages over the 35 bus units. The RTC of Pasay approved this
compromise agreement the following day, July 25, 1984.[19] Following this, CBLI vehemently refused to
pay SIHI the value of the five promissory notes, contending that the compromise agreement was in full
settlement of all its obligations to Delta including its obligations under the promissory notes.

On December 26, 1984, SIHI filed a complaint, docketed as Civil Case No. 84-28505, against CBLI in the
Regional Trial Court of Manila, Branch 34, to collect on the five (5) promissory notes with interest at 14%
p.a. SIHI also prayed for the issuance of a writ of preliminary attachment against the properties of
CBLI.[20]

On December 28, 1984, Delta filed a petition for extrajudicial foreclosure of chattel mortgages pursuant to
its compromise agreement with CBLI. On January 2, 1985, Delta filed in the RTC of Pasay a motion for
execution of the judgment based on the compromise agreement.[21] The RTC of Pasay granted this
motion the following day.[22]

In view of Deltas petition and motion for execution per the judgment of compromise, the RTC of Manila
granted in Civil Case No. 84-28505 SIHIs application for preliminary attachment on January 4, 1985.[23]
Consequently, SIHI was able to attach and physically take possession of thirty-two (32) buses belonging
to CBLI.[24] However, acting on CBLIs motion to quash the writ of preliminary attachment, the same
court resolved on January 15, 1986,[25] to discharge the writ of preliminary attachment. SIHI assailed the
discharge of the writ before the Intermediate Appellate Court (now Court of Appeals) in a petition for
certiorari and prohibition, docketed as CA-G.R. SP No. 08378. On July 31, 1987, the Court of Appeals
granted SIHIs petition in CA-GR SP No. 08378 and ruled that the writ of preliminary attachment issued
by Branch 34 of the RTC Manila in Civil Case No. 84-28505 should stay.[26] The decision of the Court of
Appeals attained finality on August 22, 1987.[27]

Meanwhile, pursuant to the January 3, 1985 Order of the RTC of Pasay, the sheriff of Pasay City
conducted a public auction and issued a certificate of sheriffs sale to Delta on April 2, 1987, attesting to
the fact that Delta bought 14 of the 35 buses for P3,920,000.[28] On April 7, 1987, the sheriff of Manila,
by virtue of the writ of execution dated March 27, 1987, issued by Branch 6 of the RTC of Manila in Civil
Case No. 84-23019, sold the same 14 buses at public auction in partial satisfaction of the judgment SIHI
obtained against Delta in Civil Case No. 84-23019.

Sometime in May 1987, Civil Case No. 84-28505 was raffled to Branch 13 of the RTC of Manila in view of
the retirement of the presiding judge of Branch 34. Subsequently, SIHI moved to sell the sixteen (16)
buses of CBLI which had previously been attached by the sheriff in Civil Case No. 84-28505 pursuant to
the January 4, 1985, Order of the RTC of Manila.[29] SIHIs motion was granted on December 16,
1987.[30] On November 29, 1988, however, SIHI filed an urgent ex-parte motion to amend this order
claiming that through inadvertence and excusable negligence of its new counsel, it made a mistake in the
list of buses in the Motion to Sell Attached Properties it had earlier filed.[31] SIHI explained that 14 of the
buses listed had already been sold to Delta on April 2, 1987, by virtue of the January 3, 1985 Order of the
RTC of Pasay, and that two of the buses listed had been released to third party, claimant Pilipinas Bank,
by Order dated September 16, 1987[32] of Branch 13 of the RTC of Manila.

CBLI opposed SIHIs motion to allow the sale of the 16 buses. On May 3, 1989,[33] Branch 13 of the
RTC of Manila denied SIHIs urgent motion to allow the sale of the 16 buses listed in its motion to amend.
The trial court ruled that the best interest of the parties might be better served by denying further sales of
the buses and to go direct to the trial of the case on the merits.[34]

After trial, judgment was rendered in Civil Case No. 84-28505 on June 3, 1993, discharging CBLI from
liability on the five promissory notes. The trial court likewise favorably ruled on CBLIs compulsory
counterclaim. The trial court directed SIHI to return the 16 buses or to pay CBLI P4,000,000 representing
the value of the seized buses, with interest at 12% p.a. to begin from January 11, 1985, the date SIHI
seized the buses, until payment is made. In ruling against SIHI, the trial court held that the restructuring
agreement dated October 7, 1981, between Delta and CBLI novated the five promissory notes; hence, at
the time Delta assigned the five promissory notes to SIHI, the notes were already merged in the
restructuring agreement and cannot be enforced against CBLI.

SIHI appealed the decision to the Court of Appeals. The case was docketed as CA-G.R. CV No. 52667.
On April 17, 2001, the Court of Appeals decided CA-G.R. CV No. 52667 in this manner:

WHEREFORE, based on the foregoing premises and finding the appeal to be meritorious, We find
defendant-appellee CBLI liable for the value of the five (5) promissory notes subject of the complaint a
quo less the proceeds from the attached sixteen (16) buses. The award of attorneys fees and costs is
eliminated. The appealed decision is hereby REVERSED. No costs.

SO ORDERED.[35]

Hence, this appeal where CBLI contends that

I. THE COURT OF APPEALS ERRED IN DECLARING THAT THE RESTRUCTURING AGREEMENT
BETWEEN DELTA AND THE PETITIONER DID NOT SUBSTANTIALLY NOVATE THE TERMS OF THE
FIVE PROMISSORY NOTES.

II. THE COURT OF APPEALS ERRED IN HOLDING THAT THE COMPROMISE AGREEMENT
BETWEEN DELTA AND THE PETITIONER IN THE PASAY CITY CASE DID NOT SUPERSEDE AND
DISCHARGE THE PROMISSORY NOTES.

III. THE COURT OF APPEALS ERRED IN UPHOLDING THE CONTINUING VALIDITY OF THE
PRELIMINARY ATTACHMENT AND EXONERATING THE RESPONDENT OF MALEFACTIONS IN
PRESERVING AND ASSERTING ITS RIGHTS THEREUNDER.[36]

Essentially, the issues are (1) whether the Restructuring Agreement dated October 7, 1981, between
petitioner CBLI and Delta Motors, Corp. novated the five promissory notes Delta Motors, Corp. assigned
to respondent SIHI, and (2) whether the compromise agreement in Civil Case No. 0023-P superseded
and/or discharged the subject five promissory notes. The issues being interrelated, they shall be jointly
discussed.

CBLI first contends that the Restructuring Agreement did not merely change the incidental elements of
the obligation under all sixteen (16) promissory notes, but it also increased the obligations of CBLI with
the addition of new obligations that were incompatible with the old obligations in the said notes.[37] CBLI
adds that even if the restructuring agreement did not totally extinguish the obligations under the sixteen
(16) promissory notes, the July 24, 1984, compromise agreement executed in Civil Case No. 0023-P
did.[38] CBLI cites paragraph 5 of the compromise agreement which states that the agreement between
it and CBLI was in full and final settlement, adjudication and termination of all their rights and obligations
as of the date of (the) agreement, and of the issues in (the) case. According to CBLI, inasmuch as the
five promissory notes were subject matters of the Civil Case No. 0023-P, the decision approving the
compromise agreement operated as res judicata in the present case.[39]

Novation has been 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.[40]

Novation, in its broad concept, may either be extinctive or modificatory.[41] It is extinctive when an old
obligation is terminated by the creation of a new obligation that takes the place of the former; it is merely
modificatory when the old obligation subsists to the extent it remains compatible with the amendatory
agreement.[42] An extinctive novation results either by changing the object or principal conditions
(objective or real), or by substituting the person of the debtor or subrogating a third person in the rights of
the creditor (subjective or personal).[43] Novation has two functions: one to extinguish an existing
obligation, the other to substitute a new one in its place.[44] For novation to take place, four essential
requisites have to be met, namely, (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.[45]

Novation is never presumed,[46] and the animus novandi, whether totally or partially, must appear by
express agreement of the parties, or by their acts that are too clear and unequivocal to be mistaken.[47]

The extinguishment of the old obligation by the new one is a necessary element of novation which may
be effected either expressly or impliedly.[48] The term "expressly" means that the contracting parties
incontrovertibly disclose that their object in executing the new contract is to extinguish the old one.[49]
Upon the other hand, no specific form is required for an implied novation, and all that is prescribed by law
would be an incompatibility between the two contracts.[50] While there is really no hard and fast rule to
determine what might constitute to be a sufficient change that can bring about novation, the touchstone
for contrariety, however, would be an irreconcilable incompatibility between the old and the new
obligations.

There are two ways which could indicate, in fine, the presence of novation and thereby produce the effect
of extinguishing an obligation by another which substitutes the same. The first is when novation has been
explicitly stated and declared in unequivocal terms. The second is when the old and the new obligations
are incompatible on every point. The test of incompatibility is whether the two obligations can stand
together, each one having its independent existence.[51] If they cannot, they are incompatible and the
latter obligation novates the first.[52] Corollarily, changes that breed incompatibility must be essential in
nature and not merely accidental. The incompatibility must take place in any of the essential elements of
the obligation, such as its object, cause or principal conditions thereof; otherwise, the change would be
merely modificatory in nature and insufficient to extinguish the original obligation.[53]

The necessity to prove the foregoing by clear and convincing evidence is accentuated where the
obligation of the debtor invoking the defense of novation has already matured.[54]

With respect to obligations to pay a sum of money, this Court has consistently applied the well-settled rule
that the obligation is not novated by an instrument that expressly recognizes the old, changes only the
terms of payment, and adds other obligations not incompatible with the old ones, or where the new
contract merely supplements the old one.[55]

In Inchausti & Co. v. Yulo[56] this Court held that an obligation to pay a sum of money is not novated in a
new instrument wherein the old is ratified, by changing only the term of payment and adding other
obligations not incompatible with the old one. In Tible v. Aquino[57] and Pascual v. Lacsamana[58] this
Court declared that it is well settled that a mere extension of payment and the addition of another
obligation not incompatible with the old one is not a novation thereof.

In this case, the attendant facts do not make out a case of novation. The restructuring agreement
between Delta and CBLI executed on October 7, 1981, shows that the parties did not expressly stipulate
that the restructuring agreement novated the promissory notes. Absent an unequivocal declaration of
extinguishment of the pre-existing obligation, only a showing of complete incompatibility between the old
and the new obligation would sustain a finding of novation by implication.[59] However, our review of its
terms yields no incompatibility between the promissory notes and the restructuring agreement.

The five promissory notes, which Delta assigned to SIHI on September 13, 1983, contained the following
common stipulations:

1. They were payable in 60 monthly installments up to July 31, 1985;

2. Interest: 14% per annum;

3. Failure to pay any of the installments would render the entire remaining balance due and payable
at the option of the holder of the notes;

4. In case of judicial collection on the notes, the maker (CBLI) and co-maker (its president, Mr.
Dionisio O. Llamas, Jr) were solidarily liable of attorneys fees and expenses of 25% of the amount due in
addition to the costs of suit.

The restructuring agreement, for its part, had the following provisions:

WHEREAS, CBL and LLAMAS admit their past due installment on the following promissory notes:

a. PN Nos. 16 to 26 (11 units)

Past Due as of September 30, 1981 P1,411,434.00

b. PN Nos. 52 to 57 (24 units)

Past Due as of September 30, 1981 P1,105,353.00

WHEREAS, the parties agreed to restructure the above-mentioned past due installments under the
following terms and conditions:

a. PN Nos. 16 to 26 (11 units) 37 months

PN Nos. 52 to 57 (24 units) 46 months

b. Interest Rate: 16% per annum

c. Documentation Fee: 2% per annum

d. Penalty previously incurred and Restructuring fee: 4% p.a.

e. Mode of Payment: Daily Remittance

NOW, THEREFORE, for and in consideration of the foregoing premises, the parties hereby agree and
covenant as follows:

1. That the past due installment referred to above plus the current and/or falling due amortization as of
October 1, 1981 for Promissory Notes Nos. 16 to 26 and 52 to 57 shall be paid by CBL and/or LLAMAS in
accordance with the following schedule of payments:

Daily payments of P11,000.00 from
October 1 to December 31, 1981

Daily payments of P12,000.00 from
January 1, 1982 to March 31, 1982

Daily payments of P13,000.00 from
April 1, 1982 to June 30, 1982

Daily payments of P14,000.00 from
July 1, 1982 to September 30, 1982

Daily payments of P15,000.00 from
October 1, 1982 to December 31, 1982

Daily payments of P16,000.00 from
January 1, 1983 to June 30, 1983

Daily payments of P17,000.00 from
July 1, 1983

2. CBL or LLAMAS shall remit to DMC on or before 11:00 a.m. everyday the daily cash payments due to
DMC in accordance with the schedule in paragraph 1. DMC may send a collector to receive the amount
due at CBLs premises. All delayed remittances shall be charged additional 2% penalty interest per
month.

3. All payments shall be applied to amortizations and penalties due in accordance with paragraph of the
restructured past due installments above mentioned and PN Nos. 16 to 26 and 52 to 57.

4. DMC may at anytime assign and/or send its representatives to monitor the operations of CBL
pertaining to the financial and field operations and service and maintenance matters of M.A.N. units.
Records needed by the DMC representatives in monitoring said operations shall be made available by
CBL and LLAMAS.

5. Within thirty (30) days after the end of the terms of the PN Nos. 16 to 26 and 52 to 57, CBL or
LLAMAS shall remit in lump sum whatever balance is left after deducting all payments made from what is
due and payable to DMC in accordance with paragraph 1 of this agreement and PN Nos. 16 to 26 and 52
to 57.

6. In the event that CBL and LLAMAS fail to remit the daily remittance agreed upon and the total
accumulated unremitted amount has reached and (sic) equivalent of Sixty (60) days, DMC and Silverio
shall exercise any or all of the following options:

(a) The whole sum remaining then unpaid plus 2% penalty per month and 16% interest per annum on
total past due installments will immediately become due and payable. In the event of judicial proceedings
to enforce collection, CBL and LLAMAS will pay to DMC an additional sum equivalent to 25% of the
amount due for attorneys fees and expenses of collection, whether actually incurred or not, in addition to
the cost of suit;

(b) To enforce in accordance with law, their rights under the Chattel Mortgage over various M.A.N.
Diesel bus with Nos. CU 80-39, 80-40, 80-41, 80-42, 80-43, 80-44 and 80-15, and/or

(c) To take over management and operations of CBL until such time that CBL and/or LLAMAS have
remitted and/or updated their past due account with DMC.

7. DMC and SILVERIO shall insure to CBL continuous supply of spare parts for the M.A.N. Diesel Buses
and shall make available to CBL at the price prevailing at the time of purchase, an inventory of spare
parts consisting of at least ninety (90%) percent of the needs of CBL based on a moving 6-month
requirement to be prepared and submitted by CBL, and acceptable to DMC, within the first week of each
month.

8. Except as otherwise modified in this Agreement, the terms and conditions stipulated in PN Nos. 16 to
26 and 52 to 57 shall continue to govern the relationship between the parties and that the Chattel
Mortgage over various M.A.N. Diesel Buses with Nos. CM No. 80-39, 80-40, 80-41, 80-42, 80-43, 80-44
and CM No. 80-15 as well as the Deed of Pledge executed by Mr. Llamas shall continue to secure the
obligation until full payment.

9. DMC and SILVERIO undertake to recall or withdraw its previous request to Notary Public Alberto G.
Doller and to instruct him not to proceed with the public auction sale of the shares of stock of CBL
subject-matter of the Deed of Pledge of Shares. LLAMAS, on the other hand, undertakes to move for the
immediate dismissal of Civil Case No. 9460-P entitled Dionisio O. Llamas vs. Alberto G. Doller, et al.,
Court of First Instance of Pasay, Branch XXIX.[60]

It is clear from the foregoing that the restructuring agreement, instead of containing provisions absolutely
incompatible with the obligations of the judgment, expressly ratifies such obligations in paragraph 8 and
contains provisions for satisfying them. There was no change in the object of the prior obligations. The
restructuring agreement merely provided for a new schedule of payments and additional security in
paragraph 6 (c) giving Delta authority to take over the management and operations of CBLI in case CBLI
fails to pay installments equivalent to 60 days. Where the parties to the new obligation expressly
recognize the continuing existence and validity of the old one, there can be no novation.[61] Moreover,
this Court has ruled that an agreement subsequently executed between a seller and a buyer that provided
for a different schedule and manner of payment, to restructure the mode of payments by the buyer so that
it could settle its outstanding obligation in spite of its delinquency in payment, is not tantamount to
novation. [62]

The addition of other obligations likewise did not extinguish the promissory notes. In Young v. CA[63],
this Court ruled that a change in the incidental elements of, or an addition of such element to, an
obligation, unless otherwise expressed by the parties will not result in its extinguishment.

In fine, the restructuring agreement can stand together with the promissory notes.

Neither is there merit in CBLIs argument that the compromise agreement dated July 24, 1984, in Civil
Case No. 0023-P superseded and/or discharged the five promissory notes. Both Delta and CBLI cannot
deny that the five promissory notes were no longer subject of Civil Case No. 0023-P when they entered
into the compromise agreement on July 24, 1984.

Having previously assigned the five promissory notes to SIHI, Delta had no more right to compromise the
same. Deltas limited authority to collect for SIHI stipulated in the September 13, 1985, Deed of Sale
cannot be construed to include the power to compromise CBLIs obligations in the said promissory notes.
An authority to compromise, by express provision of Article 1878[64] of the Civil Code, requires a special
power of attorney, which is not present in this case. Incidentally, Deltas authority to collect in behalf of
SIHI was, by express provision of the Continuing Deed of Assignment,[65] automatically revoked when
SIHI opted to collect directly from CBLI.

As regards CBLI, SIHIs demand letter dated December 13, 1983, requiring CBLI to remit the payments
directly to SIHI effectively revoked Deltas limited right to collect in behalf of SIHI. This should have
dispelled CBLIs erroneous notion that Delta was acting in behalf of SIHI, with authority to compromise
the five promissory notes.

But more importantly, the compromise agreement itself provided that it covered the rights and obligations
only of Delta and CBLI and that it did not refer to, nor cover the rights of, SIHI as the new creditor of CBLI
in the subject promissory notes. CBLI and Delta stipulated in paragraph 5 of the agreement that:

5. This COMPROMISE AGREEMENT constitutes the entire understanding by and between the plaintiffs
and the defendants as well as their lawyers, and operates as full and final settlement, adjudication and
termination of all their rights and obligations as of the date of this agreement, and of the issues in this
case.[66]

Even in the absence of such a provision, the compromise agreement still cannot bind SIHI under the
settled rule that a compromise agreement determines the rights and obligations of only the parties to
it.[67] Therefore, we hold that the compromise agreement covered the rights and obligations only of Delta
and CBLI and only with respect to the eleven (11) other promissory notes that remained with Delta.

CBLI next maintains that SIHI is estopped from questioning the compromise agreement because SIHI
failed to intervene in Civil Case No. 0023-P after CBLI informed it of the takeover by Delta of CBLIs
management and operations and the resultant impossibility for CBLI to comply with its obligations in the
subject promissory notes. CBLI also adds that SIHIs failure to intervene in Civil Case No. 0023-P is proof
that Delta continued to act in SIHIs behalf in effecting collection under the notes.

The contention is untenable. As a result of the assignment, Delta relinquished all its rights to the subject
promissory notes in favor of SIHI. This had the effect of separating the five promissory notes from the 16
promissory notes subject of Civil Case No. 0023-P. From that time, CBLIs obligations to SIHI embodied
in the five promissory notes became separate and distinct from CBLIs obligations in eleven (11) other
promissory notes that remained with Delta. Thus, any breach of these independent obligations gives rise
to a separate cause of action in favor of SIHI against CBLI. Considering that Deltas assignment to SIHI
of these five promissory notes had the effect of removing the said notes from Civil Case No. 0023-P,
there was no reason for SIHI to intervene in the said case. SIHI did not have any interest to protect in
Civil Case No. 0023-P.

Moreover, intervention is not mandatory, but only optional and permissive.[68] Notably, Section 2,[69]
Rule 12 of the then 1988 Revised Rules of Procedure uses the word may in defining the right to
intervene. The present rules maintain the permissive nature of intervention in Section 1, Rule 19 of the
1997 Rules of Civil Procedure, which provides as follows:

SEC. 1. Who may intervene.A person who has a legal interest in the matter in litigation, or in the
success of either of the parties, or an interest against both, or is so situated as to be adversely affected
by a distribution or other disposition of property in the custody of the court or of an officer thereof may,
with leave of court, be allowed to intervene in the action. The court shall consider whether or not the
intervention will unduly delay or prejudice the adjudication of the rights of the original parties, and whether
or not the intervenor's rights may be fully protected in a separate proceeding.[70]

Also, recall that Delta transferred the five promissory notes to SIHI on September 13, 1983 while Civil
Case No. 0023-P was pending. Then as now, the rule in case of transfer of interest pendente lite is that
the action may be continued by or against the original party unless the court, upon motion, directs the
person to whom the interest is transferred to be substituted in the action or joined with the original
party.[71] The non-inclusion of a necessary party does not prevent the court from proceeding in the
action, and the judgment rendered therein shall be without prejudice to the rights of such necessary
party.[72]

In light of the foregoing, SIHIs refusal to intervene in Civil Case No. 0023-P in another court does not
amount to an estoppel that may prevent SIHI from instituting a separate and independent action of its
own.[73] This is especially so since it does not appear that a separate proceeding would be inadequate to
protect fully SIHIs rights.[74] Indeed, SIHIs refusal to intervene is precisely because it considered that its
rights would be better protected in a separate and independent suit.

The judgment on compromise in Civil Case No. 0023-P did not operate as res judicata to prevent SIHI
from prosecuting its claims in the present case. As previously discussed, the compromise agreement and
the judgment on compromise in Civil Case No. 0023-P covered only Delta and CBLI and their respective
rights under the 11 promissory notes not assigned to SIHI. In contrast, the instant case involves SIHI and
CBLI and the five promissory notes. There being no identity of parties and subject matter, there is no res
judicata.

CBLI maintains, however, that in any event, recovery under the subject promissory notes is no longer
allowed by Article 1484(3)[75] of the Civil Code, which prohibits a creditor from suing for the deficiency
after it has foreclosed on the chattel mortgages. SIHI, being the successor-in-interest of Delta, is no
longer allowed to recover on the promissory notes given as security for the purchase price of the 35
buses because Delta had already extrajudicially foreclosed on the chattel mortgages over the said buses
on April 2, 1987.

This claim is likewise untenable.

Article 1484(3) finds no application in the present case. The extrajudicial foreclosure of the chattel
mortgages Delta effected cannot prejudice SIHIs rights. As stated earlier, the assignment of the five
notes operated to create a separate and independent obligation on the part of CBLI to SIHI, distinct and
separate from CBLIs obligations to Delta. And since there was a previous revocation of Deltas authority
to collect for SIHI, Delta was no longer SIHIs collecting agent. CBLI, in turn, knew of the assignment and
Deltas lack of authority to compromise the subject notes, yet it readily agreed to the foreclosure. To
sanction CBLIs argument and to apply Article 1484 (3) to this case would work injustice to SIHI by
depriving it of its right to collect against CBLI who has not paid its obligations.

That SIHI later on levied on execution and acquired in the ensuing public sale in Civil Case No. 84-23019
the buses Delta earlier extrajudicially foreclosed on April 2, 1987, in Civil Case No. 0023-P, did not
operate to render the compromise agreement and the foreclosure binding on SIHI. At the time SIHI
effected the levy on execution to satisfy its judgment credit against Delta in Civil Case No. 84-23019, the
said buses already pertained to Delta by virtue of the April 2, 1987 auction sale. CBLI no longer had any
interest in the said buses. Under the circumstances, we cannot see how SIHIs belated acquisition of the
foreclosed buses operates to hold the compromise agreementand consequently Article 1484(3)
applicable to SIHI as CBLI contends. CBLIs last contention must, therefore, fail. We hold that the writ of
execution to enforce the judgment of compromise in Civil Case No. 0023-P and the foreclosure sale of
April 2, 1987, done pursuant to the said writ of execution affected only the eleven (11) other promissory
notes covered by the compromise agreement and the judgment on compromise in Civil Case No. 0023-P.

In support of its third assignment of error, CBLI maintains that there was no basis for SIHIs application for
a writ of preliminary attachment.[76] According to CBLI, it committed no fraud in contracting its obligation
under the five promissory notes because it was financially sound when it issued the said notes on April
25, 1980.[77] CBLI also asserts that at no time did it falsely represent to SIHI that it would be able to pay
its obligations under the five promissory notes.[78] According to CBLI, it was not guilty of fraudulent
concealment, removal, or disposal, or of fraudulent intent to conceal, remove, or dispose of its properties
to defraud its creditors;[79] and that SIHIs bare allegations on this matter were insufficient for the
preliminary attachment of CBLIs properties.[80]

The question whether the attachment of the sixteen (16) buses was valid and in accordance with law,
however, has already been resolved with finality by the Court of Appeals in CA-G.R. SP No. 08376. In its
July 31, 1987, decision, the Court of Appeals upheld the legality of the writ of preliminary attachment SIHI
obtained and ruled that the trial court judge acted with grave abuse of discretion in discharging the writ of
attachment despite the clear presence of a determined scheme on the part of CBLI to dispose of its
property. Considering that the said Court of Appeals decision has already attained finality on August 22,
1987, there exists no reason to resolve this question anew. Reasons of public policy, judicial orderliness,
economy and judicial time and the interests of litigants as well as the peace and order of society, all
require that stability be accorded the solemn and final judgments of courts or tribunals of competent
jurisdiction.[81]

Finally, in the light of the justness of SIHIs claim against CBLI, we cannot sustain CBLIs contention that
the Court of Appeals erred in dismissing its counterclaim for lost income and the value of the 16 buses
over which SIHI obtained a writ of preliminary attachment. Where the party who requested the
attachment acted in good faith and without malice, the claim for damages resulting from the attachment of
property cannot be sustained.[82]

WHEREFORE, the decision dated April 17, 2001, of the Court of Appeals in CA-G.R. CV No. 52667 is
AFFIRMED. Petitioner California Bus Lines, Inc., is ORDERED to pay respondent State Investment
House, Inc., the value of the five (5) promissory notes subject of the complaint in Civil Case No. 84-28505
less the proceeds from the sale of the attached sixteen (16) buses. No pronouncement as to costs.



[G.R. No. 154127. December 8, 2003]
ROMEO C. GARCIA, petitioner, vs. DIONISIO V. LLAMAS, respondent.
D E C I S I O N
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 Review[1] under Rule 45 of the Rules of Court, seeking to nullify the November
26, 2001 Decision[2] and the June 26, 2002 Resolution[3] 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 attorneys 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 petitioners Motion for Reconsideration.
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
P400,000.00 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 P2,000.00 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 [respondents] acceptance thereof novated or superseded the note.
[Respondent] tendered a reply to [Petitioner] Garcias 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]
Garcias 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
P400,000.00 loan, he received only P360,000.00, 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 P120,000.00 by
way of interests; that this was made when [respondents] 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 P40,000.00, representing the peso equivalent of his accumulated leave credits,
another P40,000.00 as advance interest, and still another P40,000.00 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 agreed to pay his
counsel P20,000.00 [as] attorneys fees, plus P1,000.00 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 [petitioners 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) P400,000.00 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 P120,000.00 representing
interests already paid by x x x de Jesus;
2) P100,000.00 as attorneys fees plus appearance fee of P2,000.00 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 formers 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. Respondents 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 P400,000.00
in favor of Respondent Llamas, although the check subsequently bounced[;]
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 P120,000.00;
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 Courts 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 persons 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 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 petitioners view, also constitutes novation[18] --
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 petitioners 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 formers 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. Plaintiffs 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 P400,000 loan; thus, he can be released from it only upon its extinguishment.
Respondents 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 liable[28] for the entire obligation.[29]

Second Issue:
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

P400,000.00

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 order[31] -- a
requisite for negotiability under Act 2031, the Negotiable Instruments Law (NIL). Hence, petitioner cannot
avail himself of the NILs 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 partys 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 courts judgment against petitioner was correctly treated
by the appellate court as a summary judgment, rather than as a judgment on the pleadings. His
Answer[40] 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 CAs observations:

Although Garcias [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, Garcias 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. 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.

G.R. No. 142838 August 9, 2001
ABELARDO B. LICAROS, petitioner, vs. ANTONIO P. GATMAITAN, respondent.

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.1wphi1.nt

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

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.

Sgd.

Sgd.

ABELARDO B. LICAROS

ANTONIO P. GATMAITAN

PARTY OF THE FIRST PART

PARTY OF THE FIRST ART

WITH OUR CONFORME:

ANGLO-ASEAN BANK & TRUST

BY: (Unsigned)

SIGNED IN THE PRESENCE OF:

Sgd. (Illegible)

________________________________

________________________________


Conformably with his undertaking under paragraph 1 of the aforequoted 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 in full, thus

"NON-NEGOTIABLE PROMISSORY NOTE WITH ASSIGNMENT OF CASH DIVIDENDS

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.

P3,150.00.

On or before July 15, 1993, I promise to pay to Abelardo B. Licaros the sum of Philippine Pesos
3,150,000 (P3,150,000) without interest as 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".

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.

This assignment shall likewise include SEVENTY PERCENT (70%) 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 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

July ______, 1988

(SGD.)


ANTONIO P. GATMAITAN
7 Mangyan St., La Vista QC


SIGNED IN THE PRESENCE OF:
(SGD.)

______________________________ ______________________________
Francisco A. Alba
President, Prudential Life Plan, Inc."

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.

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:

'a) Principal Obligation in the amount of Three Million Five Hundred Thousand Pesos (P3,500,000.00);

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;

b) Twenty percent (20%) of the amount due as reasonable attorney's fees;

d) Costs of the suit.'"4

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 paid. Respondent
was likewise ordered to pay attorney's fees of P200,000.00.5

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.

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 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 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 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.
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 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.

[G.R. No. 136729. September 23 ,2003]
ASTRO ELECTRONICS CORP. and PETER ROXAS, petitioner, vs. PHILIPPINE EXPORT AND
FOREIGN LOAN GUARANTEE CORPORATION, respondent.
D E C I S I O N
AUSTRIA-MARTINEZ, J.:
Assailed in this petition for review on certiorari under Rule 45 of the Rules of Court is the decision of the
Court of Appeals in CA-G.R. CV No. 41274,[1] affirming the decision of the Regional Trial Court (Branch
147) of Makati, then Metro Manila, whereby petitioners Peter Roxas and Astro Electronics Corp. (Astro for
brevity) were ordered to pay respondent Philippine Export and Foreign Loan Guarantee Corporation
(Philguarantee), jointly and severally, the amount of P3,621,187.52 with interests and costs.

The antecedent facts are undisputed.
Astro was granted several loans by the Philippine Trust Company (Philtrust) amounting to P3,000,000.00
with interest and secured by three promissory notes: PN NO. PFX-254 dated December 14, 1981 for
P600,000.00, PN No. PFX-258 also dated December 14, 1981 for P400,000.00 and PN No. 15477 dated
August 27, 1981 for P2,000,000.00. In each of these promissory notes, it appears that petitioner Roxas
signed twice, as President of Astro and in his personal capacity.[2] Roxas also signed a Continuing
Surety ship Agreement in favor of Philtrust Bank, as President of Astro and as surety.[3]

Thereafter, Philguarantee, with the consent of Astro, guaranteed in favor of Philtrust the payment of 70%
of Astros loan,[4] subject to the condition that upon payment by Philguanrantee of said amount, it shall be
proportionally subrogated to the rights of Philtrust against Astro.[5]
As a result of Astros failure to pay its loan obligations, despite demands, Philguarantee paid 70% of the
guaranteed loan to Philtrust. Subsequently, Philguarantee filed against Astro and Roxas a complaint for
sum of money with the RTC of Makati.
In his Answer, Roxas disclaims any liability on the instruments, alleging, inter alia, that he merely signed
the same in blank and the phrases in his personal capacity and in his official capacity were
fraudulently inserted without his knowledge.[6]

After trial, the RTC rendered its decision in favor of Philguarantee with the following dispositive portion:
WHEREFORE, in view of all the foregoing, the Court hereby renders judgment in favor or (sic) the plaintiff
and against the defendants Astro Electronics Corporation and Peter T. Roxas, ordering the then (sic) to
pay, jointly and severally, the plaintiff the sum of P3,621.187.52 representing the total obligation of
defendants in favor of plaintiff Philguarantee as of December 31, 1984 with interest at the stipulated rate
of 16% per annum and stipulated penalty charges of 16% per annum computed from January 1, 1985
until the amount is fully paid. With costs.

SO ORDERED.[7]

The trial court observed that if Roxas really intended to sign the instruments merely in his capacity as
President of Astro, then he should have signed only once in the promissory note.[8]
On appeal, the Court of Appeals affirmed the RTC decision agreeing with the trial court that Roxas failed
to explain satisfactorily why he had to sign twice in the contract and therefore the presumption that private
transactions have been fair and regular must be sustained.[9]
In the present petition, the principal issue to be resolved is whether or not Roxas should be jointly and
severally liable (solidary) with Astro for the sum awarded by the RTC.

The answer is in the affirmative.
Astros loan with Philtrust Bank is secured by three promissory notes. These promissory notes are valid
and binding against Astro and Roxas. As it appears on the notes, Roxas signed twice: first, as president
of Astro and second, in his personal capacity. In signing his name aside from being the President of
Asro, Roxas became a co-maker of the promissory notes and cannot escape any liability arising from it.
Under the Negotiable Instruments Law, persons who write their names on the face of promissory notes
are makers,[10] promising that they will pay to the order of the payee or any holder according to its
tenor.[11] Thus, even without the phrase personal capacity, Roxas will still be primarily liable as a joint
and several debtor under the notes considering that his intention to be liable as such is manifested by the
fact that he affixed his signature on each of the promissory notes twice which necessarily would imply that
he is undertaking the obligation in two different capacities, official and personal.

Unnoticed by both the trial court and the Court of Appeals, a closer examination of the signatures affixed
by Roxas on the promissory notes, Exhibits A-4 and 3-A and B-4 and 4-A readily reveals that
portions of his signatures covered portions of the typewritten words personal capacity indicating with
certainty that the typewritten words were already existing at the time Roxas affixed his signatures thus
demolishing his claim that the typewritten words were just inserted after he signed the promissory notes.
If what he claims is true, then portions of the typewritten words would have covered portions of his
signatures, and not vice versa.

As to the third promissory note, Exhibit C-4 and 5-A, the copy submitted is not clear so that this Court
could not discern the same observations on the notes, Exhibits A-4 and 3-A and B-4 and 4-A.

Nevertheless, the following discussions equally apply to all three promissory notes.
The three promissory notes uniformly provide: FOR VALUE RECEIVED, I/We jointly, severally and
solidarily, promise to pay to PHILTRUST BANK or order...[12] An instrument which begins with I, We,
or Either of us promise to pay, when signed by two or more persons, makes them solidarily liable.[13]
Also, the phrase joint and several binds the makers jointly and individually to the payee so that all may
be sued together for its enforcement, or the creditor may select one or more as the object of the suit.[14]
Having signed under such terms, Roxas assumed the solidary liability of a debtor and Philtrust Bank may
choose to enforce the notes against him alone or jointly with Astro.
Roxas claim that the phrases in his personal capacity and in his official capacity were inserted on the
notes without his knowledge was correctly disregarded by the RTC and the Court of Appeals. It is not
disputed that Roxas does not deny that he signed the notes twice. As aptly found by both the trial and
appellate court, Roxas did not offer any explanation why he did so. It devolves upon him to overcome the
presumptions that private transactions are presumed to be fair and regular[15] and that a person takes
ordinary care of his concerns.[16] Aside from his self-serving allegations, Roxas failed to prove the truth
of such allegations. Thus, said presumptions prevail over his claims. Bare allegations, when
unsubstantiated by evidence, documentary or otherwise, are not equivalent to proof under our Rules of
Court.[17]
Roxas is the President of Astro and reasonably, a businessman who is presumed to take ordinary care of
his concerns. Absent any countervailing evidence, it cannot be gainsaid that he will not sign document
without first informing himself of its contents and consequences. Clearly, he knew the nature of the
transactions and documents involved as he not only executed these notes on two different dates but he
also executed, and again, signed twice, a continuing Surety ship Agreement notarized on July 31, 1981,
wherein he guaranteed, jointly and severally with Astro the repayment of P3,000,000.00 due to Philtrust.
Such continuing suretyship agreement even re-enforced his solidary liability Philtrust because as a
surety, he bound himself jointly and severally with Astros obligation.[18] Roxas cannot now avoid liability
by hiding under the convenient excuse that he merely signed the notes in blank and the phrases in
personal capacity and in his official capacity were fraudulently inserted without his knowledge.

Lastly, Philguarantee has all the right to proceed against petitioner, it is subrogated to the rights of
Philtrust to demand for and collect payment from both Roxas and Astro since it already paid the value of
70% of roxas and Astro Electronics Corp.s loan obligation. In compliance with its contract of Guarantee
in favor of Philtrust.
Subrogation is the transfer of all the rights of the creditor to a third person, who substitutes him in all his
rights.[19] 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.[20] Instances of legal subrogation are those
provided in Article 1302 of the Civil Code. Conventional subrogation, on the other hand, is that which
takes place by agreement of the parties.[21]
Roxas acquiescence is not necessary for subrogation to take place because the instant case is one of
the legal subrogation that occurs by operation of law, and without need of the debtors knowledge.[22]
Further, Philguarantee, as guarantor, became the transferee of all the rights of Philtrust as against Roxas
and Astro because the guarantor who pays is subrogated by virtue thereof to all the rights which the
creditor had against the debtor.[23]

WHEREFORE, finding no error with the decision of the Court of Appeals dated December 10, 1998, the
same is hereby AFFIRMED in toto.