G.R. No.

L-16449

August 31, 1962

PAUL SCHENKER, plaintiff-appellant,

vs.
WILLIAM F. GEMPERLE, defendant-appellee.
Campos, Mendoza & Hernandez, Jose C. Zulueta and A.
R. Narvasa for plaintiff-appellant.
Angel S. Gamboa for defendant-appellee.
PAREDES, J.:
The amended complaint, in a nutshell, avers that
sometime in the summer of 1953, at Zurich,
Switzerland, plaintiff Paul Schenker and defendant
William F. Gemperle agreed to organize a Philippine
Corporation, later named as "The Philippine Swiss
Trading Co., Inc.", and to divide the capital stock equally
between themselves and/or their associates. This verbal
agreement was acknowledged and confirmed in writing
by defendant in his letter of September 14, 1953 (Annex
A, amended complaint). Defendant caused articles of
incorporation to be drafted and sent to plaintiff at
Zurich. In a moment of indiscretion and mistaken trust,
according to him, the plaintiff signed and remitted to
the defendant at Manila, the said articles which placed
in the name of plaintiff only 24% of the total
subscription and the balance of 76% being in the name
of defendant and his relatives. Explaining the
discrepancy between the articles and their verbal
covenant, the defendant stated in said letter Annex A,
that "Temporarily, I had to place in my name 75% of the
shares because there is a local law which provides that

when one intends to make contracts with the

government, 75% of the subscribed capital has to be
Filipino as otherwise the Flag Law will be applied." In the
same letter, how ever defendant assured the plaintiff
that he would give the latter "exactly the same share
holding as I have". The plaintiff paid to the defendant
the sum of P7,000. for his subscription. In view of the
consistent refusal of the defendant to live up to their
agreement, notwithstanding repeated demands, the
plaintiff filed the present complaint, praying that
defendant be condemned:
(a) upon the first cause of action, to transfer or
cause to be transferred or assigned to the plaintiff
26% of the entire capital stock issued and
subscribed, as of the date he obeys said
judgment, of Philippine Swiss Trading Co., Inc., or
enough thereof to make the plaintiff's interest and
participation in said corporation total 50% of said
entire capital stock issued an subscribed, which
ever may be more;
(b) upon the second cause of action, to return to
the plaintiff or properly account to him for the
unexpended balance, in the sum of P2,000.00,
Philippine Currency, of the remittance alleged in
paragraph 18(a) of the complaint;
(c) Upon the third cause of action, to pay the
plaintiff the sum of P25,000.00, Philippine
Currency, by way of recompense for business lost,
profits unrealized and goodwill impaired or
destroyed; and

(d) upon all three causes of actions, to pay the

plaintiff the additional sum of P100,000.00,
Philippine Currency, .... The plaintiff also prays for
costs, and for such other an further relief as to the
Court may appear just and equitable.
An Answer was filed, with the customary
admissions an denials and with affirmative
defenses and counterclaims.
On November 21, 1958, the defendant filed a pleading
styled "manifestation and motion to dismiss" (Section
10 Rule 9) alleging that "With reference to the first
cause of action, the amended complaint states no cause
of action".
In support of the motion to dismiss, defendant claimed
that
There is no allegation in the amended complaint
that the alleged obligation of the defendant to
have the plaintiff's share holding in the capital
stock subscribed in Articles of Incorporation in the
proportion of 50% thereof is already
due.1wph1.t
Such being the situation, the demands allegedly
made upon the defendant for his compliance with
the obligation sued upon have been futile,
because legally the alleged obligation is not yet
due. It not having fixed a period for its
compliance, there has been no default thereof.
xxx

xxx

xxx

In his opposition to the motion to dismiss, filed on

November 3, 1958, plaintiff contended that the oral
agreement was the actual as well as the expressed
basis of plaintiff's cause of action; the letter Annex A,
was not the agreement but only an evidence of it and if
the references of Annex A were deleted from the
amended complaint, the latter would not, for that
reason alone, cease to state a cause of action; the
obligation being pure, it is demandable immediately
(Art. 1179, Civil Code); the filing of the complaint itself
constituted a judicial demand for performance, thereby
making the defendant's obligation to become due; even
if Annex A is considered as the basis of the action, it is
still a pure obligation, because it says "will give you,
however, exactly the same share holding as I have"
which imparts an unconditional promise; and supposing
that from the allegations of the complaint, it may
reasonably be inferred that it was intended to give the
defendant time to fulfill his obligation, the present
action can be considered one for the fixing of such time
(Art. 1197, Civil Code).
On September 30, 1959; the trial court granted the
motion to dismiss in so far as the first cause of action is
concerned, predicating its ruling upon the following
considerations: that the agreement did not fix the time
within which the defendant sought to perform its
alleged promise and, therefore, the obligation was not
due and the action for its compliance was premature
(Barreto v. City of Manila, 7 Phil. 416-420); that the
obligation is not pure, because its compliance is
dependent upon a future or uncertain event; that the
alleged oral agreement had been novated, after the

execution of the articles of incorporation, and that the

action being for specific performance and there being a
need to fix the period for compliance of the agreement
and the present complaint does not allege facts or lacks
the characteristics for an action to fix the period, a
separate action to that effect should have been filed,
because the action to that effect be brought in order to
have a term fixed is different from the action to enforce
the obligation; thus conveying the notion that the fixing
of the period is incompatible with an action for specific
performance. Plaintiff appealed questions of law.
Article 1197 of the Civil Code, provides
If the obligation does not fix a period, but from its
nature and the circumstances it can be inferred
that a period was intended, the courts may fix the
duration thereof.
The courts shall also fix the duration of the period
when it depends upon the will of the debtor.
In every case, the courts shall determine such
period may under the circumstances have been
probably contemplate by the parties. Once fixed
by the courts, the period cannot be changed by
them.
The ultimate facts to be alleged in a complaint to
properly and adequately plead the right of action
granted the above quoted provision of law are (1) Facts
showing that a contract was entered into, imposing on
one the parties an obligation or obligations in favor of
the other; (2) Facts showing that the performance of the

obligation was left to the will of the obligor or clean

showing or from which an inference may reasonably
drawn, that a period was intended by the parties. The
first cause of action, under consideration, sets out fact
describing an obligation with an indefinite period, there
by bringing the case within the pale of the article above
quoted, albeit it fails to specifically and categorically
demand that the court fix the duration of the period.
Under the circumstances, the court could render
judgment granting the remedy indicated in said article
1197, notwithstanding standing the fact that the
complaint does not positive and by explicit expression
ask for such relief. What determines the nature and
character of an action is not the prayer but the essential
basic allegations of fact set forth in the pertinent
pleading. A judgment may grant the relief to which a
party in whose favor it is entered is entitled, even if the
party has not demanded such relief in his pleadings
(Sec. 9, Rule 35; Baguioro v. Barrios, 77 Phil. 120). The
amended complaint in question moreover, "prays for . . .
such other and further relief as the Court may appear
just and equitable" which is broad and comprehensive
enough, to justify the extension of a remedy different
from or together with, the right to be declared owner or
to recover the ownership or the possession of Twenty-six
(26%) percent of the capital stock of the Philippine
Swiss Trading Co., Inc. presently in the name of the
defendant. The case of Barrette v. City of Manila, supra,
cited by the trial court, is of little help to the defendantappellee. It strengthens rather the plaintiff-appellant's
position. In the Barreto case as in the present, the
essential allegations of the pleadings made out an
obligation subject to an indefinite period. In the Barretto

case, like the one at bar, the complaint did not risk for
the fixing of the period, but for immediate and more
positive relief, yet this Court remanded the said case to
the court of origin "for determination of the time within
which the contiguous property must be acquired by the
city in order to comply with the condition of the
donation" all of which go to show that the fixing of
the period in the case at bar, may and/or could be
properly undertaken by the trial court.
Even discarding the above considerations, still there is
no gainsaying the fact that the obligation in question, is
pure, because "its performance does not depend upon a
future or uncertain event or upon a past event unknown
to the parties" and as such, "is demandable at once"
(Art. 1179, New York Code). It was so understood and
treated by the defendant-appellee himself. The
immediate payment by the plaintiff-appellant of his
subscriptions, after the organization of the corporation,
can only mean that the obligation should be
immediately fulfilled. giving the defendant only such
time as might reasonably be necessary for its actual
fulfillment. The contract was to organize the corporation
and to divide equally, after its organization, its capital
stock.
IN VIEW HEREOF, the order appealed from is reversed
and the case remanded to the court of origin, for further
and appropriate proceedings. No costs.
Bengzon, C.J., Bautista Angelo, Labrador, Concepcion,
Reyes, J.B.L., Barrera, Dizon, Regala and Makalintal,
JJ.,concur.

MILA A. REYES ,

G.R. No. 188064

Petitioner,
Present:

CARPIO, J., Chairperson,

NACHURA,
- versus -

PERALTA,
ABAD, and
MENDOZA, JJ.

Promulgated:
VICTORIA T. TUPARAN,

June 1, 2011

Respondent.

X
----------------------------------------------------------------------------------------------------X

DECISION

MENDOZA, J.:

Subject of this petition for review is the February

13, 2009 Decision[1] of the Court of Appeals (CA) which
affirmed with modification the February 22, 2006
Decision[2] of the Regional Trial Court, Branch 172,
Valenzuela City (RTC), in Civil Case No. 3945-V-92, an
action for Rescission of Contract with Damages.

On September
10,
1992,
Mila
A.
Reyes (petitioner) filed a complaint for Rescission of
Contract
with
Damages
against
Victoria
T.
Tuparan (respondent) before the RTC. In her Complaint,
petitioner alleged, among others, that she was the
registered owner of a 1,274 square meter residential
and
commercial
lot
located
in
Karuhatan, Valenzuela City, and covered by TCT No. V4130; that on that property, she put up a three-storey
commercial building known as RBJ Building and a
residential apartment building; that since 1990, she had
been operating a drugstore and cosmetics store on the
ground floor of RBJ Building where she also had been
residing while the other areas of the buildings including
the sidewalks were being leased and occupied by
tenants and street vendors.

In December 1989, respondent leased from

petitioner a space on the ground floor of
the RBJ Building for her pawnshop business for a
monthly rental of 4,000.00. A close friendship
developed between the two which led to the respondent
investing
thousands
of
pesos
in
petitioners
financing/lending business fromFebruary 7, 1990 to May
27, 1990, with interest at the rate of 6% a month.

On June 20, 1988, petitioner mortgaged the

subject real properties to the Farmers Savings Bank and
Loan Bank, Inc. (FSL Bank) to secure a loan of
2,000,000.00 payable in installments. On November
15, 1990, petitioners outstanding account on the
mortgage reached 2,278,078.13. Petitioner then
decided to sell her real properties for at least
6,500,000.00 so she could liquidate her bank loan and
finance her businesses. As a gesture of friendship,
respondent verbally offered to conditionally buy
petitioners real properties for 4,200,000.00 payable on
installment basis without interest and to assume the
bank loan. To induce the petitioner to accept her offer,
respondent
offered
the
following
conditions/concessions:

1. That the conditional sale will be

cancelled if the plaintiff (petitioner) can find
a buyer of said properties for the amount of
6,500,000.00 within the next three (3)
months provided all amounts received by
the
plaintiff
from
the
defendant
(respondent) including payments actually
made by defendant to Farmers Savings and
Loan Bank would be refunded to the
defendant with additional interest of six
(6%) monthly;

2. That the plaintiff would continue

using the space occupied by her and
drugstore and cosmetics store without any
rentals for the duration of the installment
payments;

3. That there will be a lease for fifteen

(15) years in favor of the plaintiff over the
space for drugstore and cosmetics store at a
monthly rental of only 8,000.00 after full
payment of the stipulated installment
payments are made by the defendant;

4. That the defendant will undertake

the renewal and payment of the fire
insurance policies on the two (2) subject
buildings following the expiration of the then
existing fire insurance policy of the plaintiff
up to the time that plaintiff is fully paid of
the total purchase price of 4,200,000.00.[3]

After petitioners verbal acceptance of all the

conditions/concessions, both parties worked together to
obtain FSL Banks approval for respondent to assume her
(petitioners) outstanding bank account. The assumption
would be part of respondents purchase price for
petitioners mortgaged real properties. FSL Bank
approved their proposal on the condition that petitioner
would sign or remain as co-maker for the mortgage
obligation assumed by respondent.

On November 26, 1990, the parties and FSL Bank

executed the corresponding Deed of Conditional Sale of
Real Properties with Assumption of Mortgage. Due to
their
close
personal
friendship
and
business
relationship, both parties chose not to reduce into
writing the other terms of their agreement mentioned in
paragraph 11 of the complaint. Besides, FSL Bank did

not want to incorporate in the Deed of Conditional Sale

of Real Properties with Assumption of Mortgage any
other side agreement between petitioner and
respondent.

Under the Deed of Conditional Sale of Real

Properties with Assumption of Mortgage, respondent
was bound to pay the petitioner a lump sum of 1.2
million pesos without interest as part of the purchase
price in three (3) fixed installments as follows:

a)

200,000.00 due January 31, 1991

b)

200,000.00 due June 30, 1991

c)

800,000.00 due December 31, 1991

Respondent, however, defaulted in the payment

of her obligations on their due dates. Instead of paying
the amounts due in lump sum on their respective
maturity dates, respondent paid petitioner in small
amounts from time to time. To compensate for her
delayed payments, respondent agreed to pay petitioner
an interest of 6% a month. As of August 31, 1992,
respondent had only paid 395,000.00, leaving a
balance of 805,000.00 as principal on the unpaid
installments and 466,893.25 as unpaid accumulated
interest.

Petitioner further averred that despite her success

in finding a prospective buyer for the subject real
properties within the 3-month period agreed upon,
respondent reneged on her promise to allow the

cancellation of their deed of conditional sale. Instead,

respondent became interested in owning the subject
real properties and even wanted to convert the entire
property into a modern commercial complex.
Nonetheless, she consented because respondent
repeatedly professed friendship and assured her that all
their verbal side agreement would be honored as shown
by the fact that since December 1990, she (respondent)
had not collected any rentals from the petitioner for the
space occupied by her drugstore and cosmetics store.

On March 19, 1992, the residential building was

gutted by fire which caused the petitioner to lose rental
income in the amount of 8,000.00 a month since April
1992. Respondent neglected to renew the fire insurance
policy on the subject buildings.

Since December 1990, respondent had taken

possession of the subject real properties and had been
continuously collecting and receiving monthly rental
income from the tenants of the buildings and vendors of
the sidewalk fronting the RBJ building without sharing it
with petitioner.

On September 2, 1992, respondent offered the

amount of 751,000.00 only payable on September 7,
1992, as full payment of the purchase price of the
subject real properties and demanded the simultaneous
execution of the corresponding deed of absolute sale.

Respondents Answer

Respondent countered, among others, that the

tripartite agreement erroneously designated by the
petitioner as a Deed of Conditional Sale of Real Property
with Assumption of Mortgage was actually a pure and
absolute contract of sale with a term period. It could not
be considered a conditional sale because the acquisition
of contractual rights and the performance of the
obligation therein did not depend upon a future and
uncertain event. Moreover, the capital gains and
documentary stamps and other miscellaneous expenses
and real estate taxes up to 1990 were supposed to be
paid by petitioner but she failed to do so.

Respondent further averred that she successfully

rescued the properties from a definite foreclosure by
paying the assumed mortgage in the amount of
2,278,078.13 plus interest and other finance charges.
Because of her payment, she was able to obtain a deed
of cancellation of mortgage and secure a release of
mortgage on the subject real properties including
petitioners ancestral residential property in Sta. Maria,
Bulacan.

Petitioners claim for the balance of the purchase

price of the subject real properties was baseless and
unwarranted because the full amount of the purchase
price had already been paid, as she did pay more than
4,200,000.00, the agreed purchase price of the subject
real properties, and she had even introduced
improvements thereon worth more than 4,800,000.00.
As the parties could no longer be restored to their
original positions, rescission could not be resorted to.

Respondent added that as a result of their

business relationship, petitioner was able to obtain from
her a loan in the amount of 400,000.00 with interest
and took several pieces of jewelry worth 120,000.00.
Petitioner also failed and refused to pay the monthly
rental of 20,000.00 since November 16, 1990 up to the
present for the use and occupancy of the ground floor of
the building on the subject real property, thus,
accumulating arrearages in the amount of 470,000.00
as of October 1992.

Ruling of the RTC

On February 22, 2006, the RTC handed down its decision

finding that respondent failed to pay in full the 4.2
million total purchase price of the subject real properties
leaving a balance of 805,000.00. It stated that the
checks and receipts presented by respondent refer to
her payments of the mortgage obligation with FSL Bank
and not the payment of the balance of 1,200,000.00.
The RTC also considered the Deed of Conditional Sale of
Real Property with Assumption of Mortgage executed by
and among the two parties and FSL Bank a contract to
sell, and not a contract of sale. It was of the opinion that
although the petitioner was entitled to a rescission of
the contract, it could not be permitted because her nonpayment in full of the purchase price may not be
considered as substantial and fundamental breach of
the contract as to defeat the object of the parties in
entering into the contract.[4] The RTC believed that the
respondents offer stated in her counsels letter
datedSeptember 2, 1992 to settle what she thought was
her unpaid balance of 751,000.00 showed her sincerity
and willingness to settle her obligation. Hence, it would

be more equitable to give respondent a chance to pay

the balance plus interest within a given period of time.

Finally, the RTC stated that there was no factual or legal

basis to award damages and attorneys fees because
there was no proof that either party acted fraudulently
or in bad faith.

Thus, the dispositive portion of the RTC Decision

reads:

WHEREFORE, judgment
rendered as follows:

is

hereby

1. Allowing the defendant to pay the

plaintiff within thirty (30) days from the
finality hereof the amount of 805,000.00,
representing the unpaid purchase price of
the subject property, with interest thereon
at 2% a month from January 1, 1992 until
fully paid. Failure of the defendant to pay
said amount within the said period shall
cause the automatic rescission of the
contract (Deed of Conditional Sale of Real
Property with Assumption of Mortgage) and
the plaintiff and the defendant shall be
restored to their former positions relative to
the subject property with each returning to
the other whatever benefits each derived
from the transaction;

2. Directing the defendant to allow the

plaintiff to continue using the space
occupied by her for drugstore and cosmetic
store without any rental pending payment of
the aforesaid balance of the purchase price.

3. Ordering the defendant, upon her

full payment of the purchase price together
with interest, to execute a contract of lease
for fifteen (15) years in favor of the plaintiff
over the space for the drugstore and
cosmetic store at a fixed monthly rental
of 8,000.00; and

4. Directing the plaintiff, upon full

payment to her by the defendant of the
purchase price together with interest, to
execute the necessary deed of sale, as well
as to pay the Capital Gains Tax,
documentary
stamps
and
other
miscellaneous expenses necessary for
securing the BIR Clearance, and to pay the
real estate taxes due on the subject
property up to 1990, all necessary to
transfer ownership of the subject property
to the defendant.

No pronouncement as to damages,
attorneys fees and costs.

SO ORDERED.[5]

Ruling of the CA

On February 13, 2009, the CA rendered its decision

affirming with modification the RTC Decision. The CA
agreed with the RTC that the contract entered into by
the parties is a contract to sell but ruled that the
remedy of rescission could not apply because the
respondents failure to pay the petitioner the balance of
the purchase price in the total amount of 805,000.00
was not a breach of contract, but merely an event that
prevented the seller (petitioner) from conveying title to
the purchaser (respondent). It reasoned that out of the
total purchase price of the subject property in the
amount of 4,200,000.00, respondents remaining
unpaid balance was only 805,000.00. Since respondent
had already paid a substantial amount of the purchase
price, it was but right and just to allow her to pay the
unpaid balance of the purchase price plus interest.
Thus, the decretal portion of the CA Decision reads:

WHEREFORE, premises considered,

the Decision dated 22 February 2006 and
Order dated 22 December 2006 of the
Regional Trial Court of Valenzuela City,
Branch 172 in Civil Case No. 3945-V-92 are
AFFIRMED with MODIFICATION in that
defendant-appellant Victoria T. Tuparan is
hereby
ORDERED
to
pay
plaintiffappellee/appellant Mila A. Reyes, within 30
days from finality of this Decision, the
amount of 805,000.00 representing the
unpaid balance of the purchase price of the
subject property, plus interest thereon at
the rate of 6% per annum from 11
September 1992 up to finality of this

Decision and, thereafter, at the rate of 12%

per annum until full payment. The ruling of
the trial court on the automatic rescission of
the Deed of Conditional Sale with
Assumption of Mortgage is hereby DELETED.
Subject to the foregoing, the dispositive
portion of the trial courts decision is
AFFIRMED in all other respects.

SO ORDERED.[6]

After the denial of petitioners motion for

reconsideration and respondents motion for partial
reconsideration, petitioner filed the subject petition for
review praying for the reversal and setting aside of the
CA Decision anchored on the following
ASSIGNMENT OF ERRORS

A. THE
COURT
OF
APPEALS
SERIOUSLY ERRED AND ABUSED ITS
DISCRETION IN DISALLOWING THE
OUTRIGHT RESCISSION OF THE SUBJECT
DEED OF CONDITIONAL SALE OF REAL
PROPERTIES WITH ASSUMPTION OF
MORTGAGE ON THE GROUND THAT
RESPONDENT TUPARANS FAILURE TO
PAY PETITIONER REYES THE BALANCE
OF
THE
PURCHASE
PRICE
OF
805,000.00 IS NOT A BREACH OF
CONTRACT DESPITE ITS OWN FINDINGS
THAT
PETITIONER
STILL
RETAINS
OWNERSHIP AND TITLE OVER THE
SUBJECT REAL PROPERTIES DUE TO
RESPONDENTS REFUSAL TO PAY THE
BALANCE OF THE TOTAL PURCHASE
PRICE OF 805,000.00 WHICH IS EQUAL
TO 20% OF THE TOTAL PURCHASE
PRICE OF 4,200,000.00 OR 66% OF
THE STIPULATED LAST INSTALLMENT
OF 1,200,000.00 PLUS THE INTEREST
THEREON. IN EFFECT, THE COURT OF
APPEALS AFFIRMED AND ADOPTED THE
TRIAL COURTS CONCLUSION THAT THE
RESPONDENTS NON-PAYMENT OF THE
805,000.00 IS ONLY A SLIGHT OR
CASUAL BREACH OF CONTRACT.

B. THE COURT OF APPEALS SERIOUSLY

ERRED AND ABUSED ITS DISCRETION IN
DISREGARDING AS GROUND FOR THE
RESCISSION OF THE SUBJECT CONTRACT THE
OTHER FRAUDULENT AND MALICIOUS ACTS
COMMITTED BY THE RESPONDENT AGAINST
THE PETITIONER WHICH BY THEMSELVES
SUFFICIENTLY JUSTIFY A DENIAL OF A GRACE

PERIOD OF THIRTY (30) DAYS TO THE

RESPONDENT WITHIN WHICH TO PAY TO THE
PETITIONER THE 805,000.00 PLUS
INTEREST THEREON.

C. EVEN ASSUMING ARGUENDO

THAT PETITIONER IS NOT ENTITLED TO
THE RESCISSION OF THE SUBJECT
CONTRACT, THE COURT OF APPEALS
STILL SERIOUSLY ERRED AND ABUSED
ITS DISCRETION IN REDUCING THE
INTEREST ON THE 805,000.00 TO
ONLY 6% PER ANNUM STARTING FROM
THE
DATE
OF
FILING
OF
THE
COMPLAINT ON SEPTEMBER 11, 1992
DESPITE THE PERSONAL COMMITMENT
OF THE RESPONDENT AND AGREEMENT
BETWEEN
THE
PARTIES
THAT
RESPONDENT WILL PAY INTEREST ON
THE 805,000.00 AT THE RATE OF 6%
MONTHLY STARTING THE DATE OF
DELINQUENCY ON DECEMBER 31, 1991.

D. THE
COURT
OF
APPEALS
SERIOUSLY ERRED AND ABUSED ITS
DISCRETION IN THE APPRECIATION
AND/OR MISAPPRECIATION OF FACTS
RESULTING INTO THE DENIAL OF THE
CLAIM OF PETITIONER REYES FOR
ACTUAL
DAMAGES
WHICH
CORRESPOND TO THE MILLIONS OF
PESOS OF RENTALS/FRUITS OF THE
SUBJECT REAL PROPERTIES WHICH
RESPONDENT
TUPARAN
COLLECTED
CONTINUOUSLY SINCE DECEMBER 1990,

EVEN WITH THE UNPAID BALANCE OF

805,000.00 AND DESPITE THE FACT
THAT
RESPONDENT
DID
NOT
CONTROVERT SUCH CLAIM OF THE
PETITIONER AS CONTAINED IN HER
AMENDED COMPLAINT DATED APRIL 22,
2006.

E. THE
COURT
OF
APPEALS
SERIOUSLY ERRED AND ABUSED ITS
DISCRETION IN THE APPRECIATION OF
FACTS RESULTING INTO THE DENIAL OF
THE CLAIM OF PETITIONER REYES FOR
THE 29,609.00 BACK RENTALS THAT
WERE COLLECTED BY RESPONDENT
TUPARAN FROM THE OLD TENANTS OF
THE PETITIONER.

F. THE
COURT
OF
APPEALS
SERIOUSLY ERRED AND ABUSED ITS
DISCRETION
IN
DENYING
THE
PETITIONERS EARLIER URGENT MOTION
FOR ISSUANCE OF A PRELIMINARY
MANDATORY
AND
PROHIBITORY
INJUNCTION DATED JULY 7, 2008 AND
THE SUPPLEMENT THERETO DATED
AUGUST 4, 2008 THEREBY CONDONING
THE UNJUSTIFIABLE FAILURE/REFUSAL
OF JUDGE FLORO ALEJO TO RESOLVE
WITHIN ELEVEN (11) YEARS THE
PETITIONERS THREE (3) SEPARATE
MOTIONS
FOR
PRELIMINARY
INJUNCTION/ TEMPORARY RESTRAINING
ORDER, ACCOUNTING AND DEPOSIT OF
RENTAL INCOME DATED MARCH 17,

1995, AUGUST 19, 1996 AND JANUARY

7, 2006 THEREBY PERMITTING THE
RESPONDENT TO UNJUSTLY ENRICH
HERSELF
BY
CONTINUOUSLY
COLLECTING ALL THE RENTALS/FRUITS
OF THE SUBJECT REAL PROPERTIES
WITHOUT
ANY
ACCOUNTING
AND
COURT DEPOSIT OF THE COLLECTED
RENTALS/FRUITS
AND
THE
PETITIONERS URGENT MOTION TO
DIRECT
DEFENDANT
VICTORIA
TUPARAN TO PAY THE ACCUMULATED
UNPAID REAL ESTATE TAXES AND SEF
TAXES
ON
THE
SUBJECT
REAL
PROPERTIES
DATEDJANUARY
13,
2007 THEREBY EXPOSING THE SUBJECT
REAL
PROPERTIES
TO
IMMINENT
AUCTION SALE BY THE CITY TREASURER
OFVALENZUELA CITY.

G. THE
COURT
OF
APPEALS
SERIOUSLY ERRED AND ABUSED ITS
DISCRETION
IN
DENYING
THE
PETITIONERS CLAIM FOR MORAL AND
EXEMPLARY DAMAGES AND ATTORNEYS
FEES AGAINST THE RESPONDENT.

In sum, the crucial issue that needs to be resolved

is whether or not the CA was correct in ruling that there
was no legal basis for the rescission of the Deed of
Conditional Sale with Assumption of Mortgage.

Position of the Petitioner

The petitioner basically argues that the CA should have

granted the rescission of the subject Deed of
Conditional Sale of Real Properties with Assumption of
Mortgage for the following reasons:

1. The subject deed of conditional sale

is a reciprocal obligation whose outstanding
characteristic is reciprocity arising from
identity of cause by virtue of which one
obligation is correlative of the other.

2. The petitioner was rescinding not

enforcing the subject Deed of Conditional
Sale pursuant to Article 1191 of the Civil
Code
because
of
the
respondents
failure/refusal to pay the 805,000.00
balance of the total purchase price of the
petitioners properties within the stipulated
period ending December 31, 1991.

3. There was no slight or casual

breach on the part of the respondent
because she (respondent) deliberately failed
to comply with her contractual obligations
with the petitioner by violating the terms or
manner of payment of the 1,200,000.00
balance and unjustly enriched herself at the
expense of the petitioner by collecting all
rental payments for her personal benefit
and enjoyment.

Furthermore, the petitioner claims that the

respondent is liable to pay interest at the rate of 6% per
month on her unpaid installment of 805,000.00 from
the date of the delinquency, December 31, 1991,
because she obligated herself to do so.

Finally, respondent states that the subject deed of

conditional sale explicitly provides that the installment
payments shall not bear any interest. Moreover,
petitioner failed to prove that she was entitled to back
rentals.

Finally, the petitioner asserts that her claim for

damages or lost income as well as for the back rentals
in the amount of 29,609.00 has been fully
substantiated and, therefore, should have been granted
by the CA. Her claim for moral and exemplary damages
and attorneys fees has been likewise substantiated.

The Courts Ruling

Position of the Respondent

The Court agrees with the ruling of the courts

below that the subject Deed of Conditional Sale with
Assumption of Mortgage entered into by and among the
two parties and FSL Bank on November 26, 1990 is a
contract to sell and not a contract of sale. The subject
contract was correctly classified as a contract to sell
based on the following pertinent stipulations:

The respondent counters that the subject Deed of

Conditional Sale with Assumption of Mortgage entered
into between the parties is a contract to sell and not a
contract of sale because the title of the subject
properties still remains with the petitioner as she failed
to pay the installment payments in accordance with
their agreement.

Respondent echoes the RTC position that her inability to

pay the full balance on the purchase price may not be
considered as a substantial and fundamental breach of
the subject contract and it would be more equitable if
she would be allowed to pay the balance including
interest within a certain period of time. She claims that
as early as 1992, she has shown her sincerity by
offering to pay a certain amount which was, however,
rejected by the petitioner.

The petition lacks merit.

8. That the title and ownership of the

subject real properties shall remain with the
First Party until the full payment of the
Second Party of the balance of the purchase
price and liquidation of the mortgage
obligation
of 2,000,000.00.
Pending
payment of the balance of the purchase
price and liquidation of the mortgage
obligation that was assumed by the Second
Party, the Second Party shall not sell,
transfer
and
convey
and
otherwise
encumber the subject real properties
without the written consent of the First and
Third Party.

9. That upon full payment by the

Second Party of the full balance of the
purchase price and the assumed mortgage
obligation herein mentioned the Third Party
shall issue the corresponding Deed of
Cancellation of Mortgage and the First Party
shall execute the corresponding Deed of
Absolute Sale in favor of the Second Party.[7]

Based on the above provisions, the title and

ownership of the subject properties remains with the
petitioner until the respondent fully pays the balance of
the purchase price and the assumed mortgage
obligation. Thereafter, FSL Bank shall then issue the
corresponding deed of cancellation of mortgage and the
petitioner shall execute the corresponding deed of
absolute sale in favor of the respondent.

Accordingly, the petitioners obligation to sell the

subject properties becomes demandable only upon the
happening of the positive suspensive condition, which is
the respondents full payment of the purchase price.
Without respondents full payment, there can be no
breach of contract to speak of because petitioner has no
obligation yet to turn over the title. Respondents failure
to pay in full the purchase price is not the breach of
contract contemplated under Article 1191 of the New
Civil Code but rather just an event that prevents the
petitioner from being bound to convey title to the
respondent. The 2009 case of Nabus v. Joaquin & Julia
Pacson[8] is enlightening:

The Court holds that the contract

entered into by the Spouses Nabus and
respondents was a contract to sell, not a
contract of sale.

A contract of sale is defined in Article

1458 of the Civil Code, thus:

Art. 1458. By the contract of sale, one

of the contracting parties obligates himself
to transfer the ownership of and to deliver a
determinate thing, and the other to pay
therefor a price certain in money or its
equivalent.

xxx

Sale, by its very nature, is a

consensual contract because it is perfected
by mere consent. The essential elements of
a contract of sale are the following:

a) Consent or meeting of the

minds, that is, consent to
transfer
ownership
in
exchange for the price;
b) Determinate subject matter;
and
c) Price certain in money or its
equivalent.

Under this definition, a Contract to

Sell may not be considered as a Contract of
Sale because the first essential element is
lacking. In a contract to sell, the prospective
seller explicitly reserves the transfer of title
to the prospective buyer, meaning, the
prospective seller does not as yet agree or
consent to transfer ownership of the
property subject of the contract to sell until
the happening of an event, which for
present purposes we shall take as the full
payment of the purchase price. What the
seller agrees or obliges himself to do is to
fulfill his promise to sell the subject property
when the entire amount of the purchase
price is delivered to him. In other words, the
full payment of the purchase price partakes
of a suspensive condition, the nonfulfillment of which prevents the obligation
to sell from arising and, thus, ownership is
retained by the prospective seller without
further remedies by the prospective buyer.

xxx xxx xxx

Stated positively, upon the fulfillment
of the suspensive condition which is the full
payment of the purchase price, the
prospective sellers obligation to sell the
subject property by entering into a contract
of sale with the prospective buyer becomes
demandable as provided in Article 1479 of
the Civil Code which states:

Art. 1479. A promise to buy and sell a

determinate thing for a price certain is
reciprocally demandable.

An accepted unilateral promise to buy

or to sell a determinate thing for a price
certain is binding upon the promissor if the
promise is supported by a consideration
distinct from the price.

A contract to sell may thus be defined

as a bilateral contract whereby the
prospective seller, while expressly reserving
the ownership of the subject property
despite delivery thereof to the prospective
buyer, binds himself to sell the said property
exclusively to the prospective buyer upon
fulfillment of the condition agreed upon,
that is, full payment of the purchase price.

A contract to sell as defined

hereinabove, may not even be considered
as a conditional contract of sale where the
seller may likewise reserve title to the
property subject of the sale until the
fulfillment of a suspensive condition,
because in a conditional contract of sale,
the first element of consent is present,
although it is conditioned upon the
happening of a contingent event which may
or may not occur. If the suspensive
condition is not fulfilled, the perfection of
the contract of sale is completely abated.
However, if the suspensive condition is

fulfilled, the contract of sale is thereby

perfected, such that if there had already
been previous delivery of the property
subject of the sale to the buyer, ownership
thereto automatically transfers to the buyer
by operation of law without any further act
having to be performed by the seller.

In a contract to sell, upon the

fulfillment of the suspensive condition which
is the full payment of the purchase price,
ownership will not automatically transfer to
the buyer although the property may have
been previously delivered to him. The
prospective seller still has to convey title to
the prospective buyer by entering into a
contract of absolute sale.

Further, Chua v. Court of Appeals,

cited this distinction between a contract of
sale and a contract to sell:

In a contract of sale, the

title to the property passes to
the vendee upon the delivery of
the thing sold; in a contract to
sell,
ownership
is,
by
agreement, reserved in the
vendor and is not to pass to the
vendee until full payment of the
purchase
price.
Otherwise
stated, in a contract of sale, the
vendor loses ownership over the
property and cannot recover it

until and unless the contract is

resolved or rescinded; whereas,
in a contract to sell, title is
retained by the vendor until full
payment of the price. In the
latter contract, payment of the
price is a positive suspensive
condition, failure of which is not
a breach but an event that
prevents the obligation of the
vendor to convey title from
becoming effective.

It is not the title of the contract, but

its express terms or stipulations that
determine the kind of contract entered into
by the parties. In this case, the contract
entitled Deed of Conditional Sale is actually
a contract to sell. The contract stipulated
that as soon as the full consideration of the
sale has been paid by the vendee, the
corresponding transfer documents shall be
executed by the vendor to the vendee for
the portion sold. Where the vendor promises
to execute a deed of absolute sale upon the
completion by the vendee of the payment of
the price, the contract is only a contract to
sell. The aforecited stipulation shows that
the vendors reserved title to the subject
property until full payment of the purchase
price.

xxx

Unfortunately for the Spouses Pacson,

since the Deed of Conditional Sale executed
in their favor was merely a contract to sell,
the obligation of the seller to sell becomes
demandable only upon the happening of the
suspensive condition. The full payment of
the purchase price is the positive
suspensive condition, the failure of which
is not a breach of contract, but simply an
event that prevented the obligation of
the vendor to convey title from
acquiring binding force. Thus, for its nonfulfilment, there is no contract to speak of,
the obligor having failed to perform the
suspensive condition which enforces a
juridical relation. With this circumstance,
there can be no rescission or fulfillment of
an obligation that is still non-existent, the
suspensive condition not having occurred as
yet. Emphasis should be made that the
breach contemplated in Article 1191 of
the New Civil Code is the obligors
failure to comply with an obligation
already extant, not a failure of a
condition to render binding that
obligation. [Emphases and underscoring
supplied]

Consistently, the Court handed down a similar

ruling in the 2010 case of Heirs of Atienza v.
Espidol, [9] where it was written:

Regarding the right to cancel the

contract
for
non-payment
of
an

installment, there is need to initially

determine if what the parties had was
a contract of sale or a contract to
sell. In a contract of sale, the title to the
property passes to the buyer upon the
delivery of the thing sold. In a contract to
sell, on the other hand, the ownership is, by
agreement, retained by the seller and is not
to pass to the vendee until full payment of
the purchase price. In the contract of sale,
the buyers non-payment of the price is a
negative resolutory condition; in the
contract to sell, the buyers full payment of
the price is a positive suspensive condition
to the coming into effect of the
agreement. In the first case, the seller has
lost and cannot recover the ownership of
the property unless he takes action to set
aside the contract of sale. In the second
case, the title simply remains in the seller if
the buyer does not comply with the
condition precedent of making payment at
the time specified in the contract. Here, it is
quite evident that the contract involved was
one of a contract to sell since the Atienzas,
as sellers, were to retain title of ownership
to the land until respondent Espidol, the
buyer, has paid the agreed price. Indeed,
there seems no question that the parties
understood this to be the case.

Admittedly, Espidol was unable to pay

the second installment of P1,750,000.00
that fell due in December 2002. That
payment, said both the RTC and the CA, was
a positive suspensive condition failure of
which was not regarded a breach in the

sense that there can be no rescission of

an obligation (to turn over title) that
did not yet exist since the suspensive
condition had not taken place . x x x.
[Emphases and underscoring supplied]

Thus, the Court fully agrees with the CA when it

resolved: Considering, however, that the Deed of
Conditional Sale was not cancelled by Vendor Reyes
(petitioner) and that out of the total purchase price of
the subject property in the amount of 4,200,000.00,
the remaining unpaid balance of Tuparan (respondent)
is only 805,000.00, a substantial amount of the
purchase price has already been paid. It is only right
and just to allow Tuparan to pay the said unpaid balance
of the purchase price to Reyes.[10]

Granting that a rescission can be permitted under

Article 1191, the Court still cannot allow it for the reason
that, considering the circumstances, there was only a
slight or casual breach in the fulfillment of the
obligation.

Unless the parties stipulated it, rescission is

allowed only when the breach of the contract is
substantial and fundamental to the fulfillment of the
obligation. Whether the breach is slight or substantial is
largely determined by the attendant circumstances.
[11]
In the case at bench, the subject contract stipulated
the following important provisions:

2. That the purchase price

4,200,000.00 shall be paid as follows:

of

a) 278,078.13 received in cash by

the First Party but directly paid to the Third
Party as partial payment of the mortgage
obligation of the First Party in order to
reduce the amount to 2,000,000.00 only as
of November 15, 1990;

b) 721,921.87 received in cash by

the First Party as additional payment of the
Second Party;

c)
1,200,000.00 to be paid
in installments as follows:

1.

200,000.00 payable on
or before January 31, 1991;

2.

200,000.00 payable on
or before June 30, 1991;

3.

800,000.00 payable on
or before December 31,
1991;

Note: All the installments shall not

bear any interest.

d)
2,000,000.00
outstanding balance of the mortgage
obligation as of November 15, 1990 which is
hereby assumed by the Second Party.

xxx
3.
That the Third Party hereby
acknowledges receipts from the Second
Party P278,078.13 as partial payment of the
loan obligation of First Party in order to
reduce the account to only 2,000,000.00
as of November 15, 1990 to be assumed by
the Second Party effective November 15,
1990.[12]

From the records, it cannot be denied that

respondent paid to FSL Bank petitioners mortgage
obligation in the amount of 2,278,078.13, which
formed part of the purchase price of the subject
property. Likewise, it is not disputed that respondent
paid directly to petitioner the amount of 721,921.87
representing the additional payment for the purchase of
the subject property. Clearly, out of the total price of
4,200,000.00, respondent was able to pay the total
amount of 3,000,000.00, leaving a balance of
1,200,000.00 payable in three (3) installments.

Out of the 1,200,000.00 remaining balance,

respondent paid on several dates the first and second
installments of 200,000.00 each. She, however, failed
to pay the third and last installment of 800,000.00 due
on December 31, 1991. Nevertheless, on August 31,
1992, respondent, through counsel, offered to pay the

amount of 751,000.00, which was rejected by

petitioner for the reason that the actual balance was
805,000.00 excluding the interest charges.

Considering that out of the total purchase price of

4,200,000.00, respondent has already paid the
substantial amount of 3,400,000.00, more or less,
leaving an unpaid balance of only 805,000.00, it is
right and just to allow her to settle, within a reasonable
period of time, the balance of the unpaid purchase
price. The Court agrees with the courts below that the
respondent showed her sincerity and willingness to
comply with her obligation when she offered to pay the
petitioner the amount of 751,000.00.

On the issue of interest, petitioner failed to

substantiate her claim that respondent made a personal
commitment to pay a 6% monthly interest on the
805,000.00 from the date of delinquency, December
31, 1991. As can be gleaned from the contract, there
was a stipulation stating that: All the installments shall
not bear interest. The CA was, however, correct in
imposing interest at the rate of 6% per annum starting
from the filing of the complaint on September 11, 1992.

Finally, the Court upholds the ruling of the courts

below regarding the non-imposition of damages and
attorneys fees. Aside from petitioners self-serving
statements, there is not enough evidence on record to
prove that respondent acted fraudulently and
maliciously against the petitioner. In the case of Heirs of
Atienza v. Espidol,[13] it was stated:

Respondents are not entitled to moral

damages because contracts are not referred
to in Article 2219 of the Civil Code, which
enumerates the cases when moral damages
may be recovered. Article 2220 of the Civil
Code allows the recovery of moral damages
in breaches of contract where the defendant
acted fraudulently or in bad faith. However,
this case involves a contract to sell,
wherein full payment of the purchase price
is a positive suspensive condition, the nonfulfillment of which is not a breach of
contract, but merely an event that prevents
the seller from conveying title to the
purchaser. Since there is no breach of
contract in this case, respondents are not
entitled to moral damages.

In the absence of moral, temperate,

liquidated or compensatory damages,
exemplary damages cannot be granted for
they are allowed only in addition to any of
the four kinds of damages mentioned.

WHEREFORE, the petition is DENIED.

G.R. No. 179965

February 20, 2013

NICOLAS P. DIEGO, Petitioner,

vs.

RODOLFO P. DIEGO and EDUARDO P.

DIEGO, Respondents.
DECISION
DEL CASTILLO, J.:
It is settled jurisprudence, to the point of being
elementary, that an agreement which stipulates that
the seller shall execute a deed of sale only upon or after
tl1ll payment of the purchase price is a contract to
sell, not a contract of sale. In Reyes v. Tuparan, 1 this
Court declared in categorical terms that "[w]here the
vendor promises to execute a deed of absolute
sale upon the completion by the vendee of the
payment of the price, the contract is only a
contract to sell. The aforecited stipulation shows
that the vendors reserved title to the subject
property until full payment of the purchase
price."
In this case, it is not disputed as in tact both parties
agreed that the deed of sale shall only be executed
upon payment of the remaining balance of the purchase
price. Thus, pursuant to the above stated jurisprudence,
we similarly declare that the transaction entered into by
the parties is a contract to sell.
Before us is a Petition for Review
on Certiorari2 questioning the June 29, 2007
Decision3 and the October 3, 2007 Resolution4 of the
Court of Appeals (CA) in CA-G.R. CV No. 86512, which
affirmed the April 19, 2005 Decision5 of the Regional

Trial Court (RTC), Branch 40, of Dagupan City in Civil

Case No. 99-02971-D.
Factual Antecedents
In 1993, petitioner Nicolas P. Diego (Nicolas) and his
brother Rodolfo, respondent herein, entered into an oral
contract to sell covering Nicolass share, fixed
at P500,000.00, as co-owner of the familys Diego
Building situated in Dagupan City. Rodolfo made a
downpayment of P250,000.00. It was agreed that the
deed of sale shall be executed upon payment of the
remaining balance of P250,000.00. However, Rodolfo
failed to pay the remaining balance.
Meanwhile, the building was leased out to third parties,
but Nicolass share in the rents were not remitted to him
by herein respondent Eduardo, another brother of
Nicolas and designated administrator of the Diego
Building. Instead, Eduardo gave Nicolass monthly share
in the rents to Rodolfo. Despite demands and
protestations by Nicolas, Rodolfo and Eduardo failed to
render an accounting and remit his share in the rents
and fruits of the building, and Eduardo continued to
hand them over to Rodolfo.
Thus, on May 17, 1999, Nicolas filed a
Complaint6 against Rodolfo and Eduardo before the RTC
of Dagupan City and docketed as Civil Case No. 9902971-D. Nicolas prayed that Eduardo be ordered to
render an accounting of all the transactions over the
Diego Building; that Eduardo and Rodolfo be ordered to
deliver to Nicolas his share in the rents; and that

Eduardo and Rodolfo be held solidarily liable for

attorneys fees and litigation expenses.
Rodolfo and Eduardo filed their Answer with
Counterclaim7 for damages and attorneys fees. They
argued that Nicolas had no more claim in the rents in
the Diego Building since he had already sold his share
to Rodolfo. Rodolfo admitted having remitted
only P250,000.00 to Nicolas. He asserted that he would
pay the balance of the purchase price to Nicolas only
after the latter shall have executed a deed of absolute
sale.
Ruling of the Regional Trial Court
After trial on the merits, or on April 19, 2005, the trial
court rendered its Decision8 dismissing Civil Case No.
99-02971-D for lack of merit and ordering Nicolas to
execute a deed of absolute sale in favor of Rodolfo upon
payment by the latter of the P250,000.00 balance of the
agreed purchase price. It made the following interesting
pronouncement:
It is undisputed that plaintiff (Nicolas) is one of the coowners of the Diego Building, x x x. As a co-owner, he is
entitled to [his] share in the rentals of the said building.
However, plaintiff [had] already sold his share to
defendant Rodolfo Diego in the amount of P500,000.00
and in fact, [had] already received a partial payment in
the purchase price in the amount
of P250,000.00. Defendant Eduardo Diego testified
that as per agreement, verbal, of the plaintiff and
defendant Rodolfo Diego, the remaining balance
of P250,000.00 will be paid upon the execution of

the Deed of Absolute Sale. It was in the year 1997

when plaintiff was being required by defendant Eduardo
Diego to sign the Deed of Absolute Sale. Clearly,
defendant Rodolfo Diego was not yet in default as the
plaintiff claims which cause [sic] him to refuse to sign
[sic] document. The contract of sale was already
perfected as early as the year 1993 when plaintiff
received the partial payment, hence, he cannot
unilaterally revoke or rescind the same. From then on,
plaintiff has, therefore, ceased to be a co-owner of the
building and is no longer entitled to the fruits of the
Diego Building.

Nicolas appealed to the CA which sustained the trial

courts Decision in toto. The CA held that since there
was a perfected contract of sale between Nicolas and
Rodolfo, the latter may compel the former to execute
the proper sale document. Besides, Nicolass insistence
that he has since rescinded their agreement in 1997
proved the existence of a perfected sale. It added that
Nicolas could not validly rescind the contract because:
"1) Rodolfo ha[d] already made a partial payment; 2)
Nicolas ha[d] already partially performed his part
regarding the contract; and 3) Rodolfo opposes the
rescission."10

Equity and fairness dictate that defendant [sic] has to

execute the necessary document regarding the sale of
his share to defendant Rodolfo Diego. Correspondingly,
defendant Rodolfo Diego has to perform his obligation
as per their verbal agreement by paying the remaining
balance of P250,000.00.9

The CA then proceeded to rule that since no period was

stipulated within which Rodolfo shall deliver the balance
of the purchase price, it was incumbent upon Nicolas to
have filed a civil case to fix the same. But because he
failed to do so, Rodolfo cannot be considered to be in
delay or default.

To summarize, the trial court ruled that as early as

1993, Nicolas was no longer entitled to the fruits of his
aliquot share in the Diego Building because he had
"ceased to be a co-owner" thereof. The trial court held
that when Nicolas received the P250,000.00
downpayment, a "contract of sale" was perfected.
Consequently, Nicolas is obligated to convey such share
to Rodolfo, without right of rescission. Finally, the trial
court held that theP250,000.00 balance from Rodolfo
will only be due and demandable when Nicolas executes
an absolute deed of sale.

Finally, the CA made another interesting

pronouncement, that by virtue of the agreement Nicolas
entered into with Rodolfo, he had already transferred his
ownership over the subject property and as a
consequence, Rodolfo is legally entitled to collect the
fruits thereof in the form of rentals. Nicolas remaining
right is to demand payment of the balance of the
purchase price, provided that he first executes a deed of
absolute sale in favor of Rodolfo.

Ruling of the Court of Appeals

Nicolas moved for reconsideration but the same was

denied by the CA in its Resolution dated October 3,
2007.

Hence, this Petition.

RODOLFOS MATERIAL, SUBSTANTIAL BREACH OF THE

CONTRACT.
Issues
IV

The Petition raises the following errors that must be

rectified:
I
THE HONORABLE COURT OF APPEALS ERRED IN NOT
HOLDING THAT THERE WAS NO PERFECTED CONTRACT
OF SALE BETWEEN PETITIONER NICOLAS DIEGO AND
RESPONDENT RODOLFO DIEGO OVER NICOLASS SHARE
OF THE BUILDING BECAUSE THE SUSPENSIVE
CONDITION HAS NOT YET BEEN FULFILLED.
II
THE HONORABLE COURT OF APPEALS ERRED IN
HOLDING THAT THE CONTRACT OF SALE BETWEEN
PETITIONER AND RESPONDENT RODOLFO DIEGO
REMAINS LEGALLY BINDING AND IS NOT RESCINDED
GIVING MISPLACED RELIANCE ON PETITIONER NICOLAS
STATEMENT THAT THE SALE HAS NOT YET BEEN
REVOKED.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT
HOLDING THAT PETITIONER NICOLAS DIEGO ACTED
LEGALLY AND CORRECTLY WHEN HE UNILATERALLY
RESCINDED AND REVOKED HIS AGREEMENT OF SALE
WITH RESPONDENT RODOLFO DIEGO CONSIDERING

THE HONORABLE COURT OF APPEALS ERRED IN

HOLDING THAT PETITIONER HAS NO MORE RIGHTS
OVER HIS SHARE IN THE BUILDING, DESPITE THE FACT
THAT THERE WAS AS YET NO PERFECTED CONTRACT OF
SALE BETWEEN PETITIONER NICOLAS DIEGO AND
RODOLFO DIEGO AND THERE WAS YET NO TRANSFER
OF OWNERSHIP OF PETITIONERS SHARE TO RODOLFO
DUE TO THE NON-FULFILLMENT BY RODOLFO OF THE
SUSPENSIVE CONDITION UNDER THE CONTRACT.
V
THE HONORABLE COURT OF APPEALS ERRED IN NOT
HOLDING THAT RESPONDENT RODOLFO HAS UNJUSTLY
ENRICHED HIMSELF AT THE EXPENSE OF PETITIONER
BECAUSE DESPITE NOT HAVING PAID THE BALANCE OF
THE PURCHASE PRICE OF THE SALE, THAT RODOLFO
HAS NOT YET ACQUIRED OWNERSHIP OVER THE SHARE
OF PETITIONER NICOLAS, HE HAS ALREADY BEEN
APPROPRIATING FOR HIMSELF AND FOR HIS PERSONAL
BENEFIT THE SHARE OF THE INCOME OF THE BUILDING
AND THE PORTION OF THE BUILDING ITSELF WHICH WAS
DUE TO AND OWNED BY PETITIONER NICOLAS.
VI
THE HONORABLE COURT OF APPEALS ERRED IN NOT
AWARDING ACTUAL DAMAGES, ATTORNEYS FEES AND
LITIGATION EXPENSES TO THE PETITIONER DESPITE THE

FACT THAT PETITIONERS RIGHTS HAD BEEN WANTONLY

VIOLATED BY THE RESPONDENTS.11
Petitioners Arguments
In his Petition, the Supplement12 thereon, and
Reply,13 Nicolas argues that, contrary to what the CA
found, there was no perfected contract of sale even
though Rodolfo had partially paid the price; that in the
absence of the third element in a sale contract the
price there could be no perfected sale; that failing to
pay the required price in full, Nicolas had the right to
rescind the agreement as an unpaid seller.
Nicolas likewise takes exception to the CA finding that
Rodolfo was not in default or delay in the payment of
the agreed balance for his (Nicolass) failure to file a
case to fix the period within which payment of the
balance should be made. He believes that Rodolfos
failure to pay within a reasonable time was a substantial
and material breach of the agreement which gave him
the right to unilaterally and extrajudicially rescind the
agreement and be discharged of his obligations as
seller; and that his repeated written demands upon
Rodolfo to pay the balance granted him such rights.
Nicolas further claims that based on his agreement with
Rodolfo, there was to be no transfer of title over his
share in the building until Rodolfo has effected full
payment of the purchase price, thus, giving no right to
the latter to collect his share in the rentals.
Finally, Nicolas bewails the CAs failure to award
damages, attorneys fees and litigation expenses for

what he believes is a case of unjust enrichment at his

expense.
Respondents Arguments
Apart from echoing the RTC and CA pronouncements,
respondents accuse the petitioner of "cheating" them,
claiming that after the latter received the P250,000.00
downpayment, he "vanished like thin air and hibernated
in the USA, he being an American citizen,"14 only to
come back claiming that the said amount was a mere
loan.
They add that the Petition is a mere rehash and
reiteration of the petitioners arguments below, which
are deemed to have been sufficiently passed upon and
debunked by the appellate court.
Our Ruling
The Court finds merit in the Petition.
The contract entered into by Nicolas and Rodolfo
was a contract to sell.
a) The stipulation to execute a deed of sale upon
full payment of the purchase price is a unique and
distinguishing characteristic of a contract to sell.
It also shows that the vendor reserved title to the
property until full payment.
There is no dispute that in 1993, Rodolfo agreed to buy
Nicolass share in the Diego Building for the price
ofP500,000.00. There is also no dispute that of the total

purchase price, Rodolfo paid, and Nicolas

received,P250,000.00. Significantly, it is also not
disputed that the parties agreed that the remaining
amount of P250,000.00 would be paid after Nicolas shall
have executed a deed of sale.

The Court further held that "[j]urisprudence has

established that where the seller promises to
execute a deed of absolute sale upon the
completion by the buyer of the payment of the
price, the contract is only a contract to sell."19

This stipulation, i.e., to execute a deed of absolute sale

upon full payment of the purchase price, is a unique and
distinguishing characteristic of a contract to sell.
In Reyes v. Tuparan,15 this Court ruled that a
stipulation in the contract, "[w]here the vendor
promises to execute a deed of absolute sale upon
the completion by the vendee of the payment of
the price," indicates that the parties entered into
a contract to sell. According to this Court, this
particular provision is tantamount to a reservation of
ownership on the part of the vendor. Explicitly stated,
the Court ruled that the agreement to execute a deed of
sale upon full payment of the purchase price"shows
that the vendors reserved title to the subject
property until full payment of the purchase
price."16

b) The acknowledgement receipt signed by

Nicolas as well as the contemporaneous acts of
the parties show that they agreed on a contract
to sell, not of sale. The absence of a formal deed
of conveyance is indicative of a contract to sell.

In Tan v. Benolirao,17 this Court, speaking

through Justice Brion, ruled that the parties entered
into a contract to sell as revealed by the following
stipulation:

However, when the case reached this Court, it was ruled

that the transaction entered into by Pablo and Lu was
only a contract to sell, not a contract of sale. The
Court held thus:

d) That in case, BUYER has complied with the terms and

conditions of this contract, then the SELLERS shall
execute and deliver to the BUYER the appropriate Deed
of Absolute Sale;18

The receipt signed by Pacita Lu merely states that she

accepted the sum of fifty thousand pesos (P50,000.00)
from Babasanta as partial payment of 3.6 hectares of
farm lot situated in Sta. Rosa, Laguna. While there is no
stipulation that the seller reserves the ownership of the
property until full payment of the price which is a

In San Lorenzo Development Corporation v. Court of

Appeals,20 the facts show that spouses Miguel and
Pacita Lu (Lu) sold a certain parcel of land to Pablo
Babasanta (Pablo). After several payments, Pablo wrote
Lu demanding "the execution of a final deed of sale in
his favor so that he could effect full payment of the
purchase price."21 To prove his allegation that there was
a perfected contract of sale between him and Lu, Pablo
presented a receipt signed by Lu acknowledging receipt
of P50,000.00 as partial payment.22

distinguishing feature of a contract to sell, the

subsequent acts of the parties convince us that the
Spouses Lu never intended to transfer ownership
to Babasanta except upon full payment of the
purchase price.
Babasantas letter dated 22 May 1989 was quite telling.
He stated therein that despite his repeated requests for
the execution of the final deed of sale in his favor so
that he could effect full payment of the price, Pacita Lu
allegedly refused to do so. In effect, Babasanta
himself recognized that ownership of the
property would not be transferred to him until
such time as he shall have effected full payment
of the price. Moreover, had the sellers intended to
transfer title, they could have easily executed the
document of sale in its required form
simultaneously with their acceptance of the
partial payment, but they did not. Doubtlessly,
the receipt signed by Pacita Lu should legally be
considered as a perfected contract to sell.23
In the instant case, records show that Nicolas signed a
mere receipt24 acknowledging partial payment
ofP250,000.00 from Rodolfo. It states:
July 8, 1993
Received the amount of [P250,000.00] for 1 share of
Diego Building as partial payment for Nicolas Diego.
(signed)
Nicolas Diego25

As we ruled in San Lorenzo Development Corporation v.

Court of Appeals,26 the parties could have executed a
document of sale upon receipt of the partial payment
but they did not. This is thus an indication that Nicolas
did not intend to immediately transfer title over his
share but only upon full payment of the purchase price.
Having thus reserved title over the property, the
contract entered into by Nicolas is a contract to sell. In
addition, Eduardo admitted that he and Rodolfo
repeatedly asked Nicolas to sign the deed of sale27 but
the latter refused because he was not yet paid the full
amount. As we have ruled in San Lorenzo Development
Corporation v. Court of Appeals,28the fact that Eduardo
and Rodolfo asked Nicolas to execute a deed of sale is a
clear recognition on their part that the ownership over
the property still remains with Nicolas. In fine, the
totality of the parties acts convinces us that Nicolas
never intended to transfer the ownership over his share
in the Diego Building until the full payment of the
purchase price. Without doubt, the transaction agreed
upon by the parties was a contract to sell, not of sale.
In Chua v. Court of Appeals,29 the parties reached an
impasse when the seller wanted to be first paid the
consideration before a new transfer certificate of title
(TCT) is issued in the name of the buyer. Contrarily, the
buyer wanted to secure a new TCT in his name before
paying the full amount. Their agreement was embodied
in a receipt containing the following terms: "(1) the
balance of P10,215,000.00 is payable on or before 15
July 1989; (2) the capital gains tax is for the account of
x x x; and (3) if [the buyer] fails to pay the balance x x x
the [seller] has the right to forfeit the earnest money x x

x."30 The case eventually reached this Court. In resolving

the impasse, the Court, speaking through Justice
Carpio, held that "[a] perusal of the Receipt shows that
the true agreement between the parties was a contract
to sell."31 The Court noted that "the agreement x x x
was embodied in a receipt rather than in a deed of sale,
ownership not having passed between them."32 The
Court thus concluded that "[t]he absence of a formal
deed of conveyance is a strong indication that the
parties did not intend immediate transfer of
ownership, but only a transfer after full payment
of the purchase price."33 Thus, the "true agreement
between the parties was a contract to sell."34
In the instant case, the parties were similarly embroiled
in an impasse. The parties agreement was likewise
embodied only in a receipt. Also, Nicolas did not want to
sign the deed of sale unless he is fully paid. On the
other hand, Rodolfo did not want to pay unless a deed
of sale is duly executed in his favor. We thus say,
pursuant to our ruling in Chua v. Court of Appeals35 that
the agreement between Nicolas and Rodolfo is a
contract to sell.
This Court cannot subscribe to the appellate courts
view that Nicolas should first execute a deed of absolute
sale in favor of Rodolfo, before the latter can be
compelled to pay the balance of the price. This is
patently ridiculous, and goes against every rule in the
book. This pronouncement virtually places the
prospective seller in a contract to sell at the mercy of
the prospective buyer, and sustaining this point of view
would place all contracts to sell in jeopardy of being

rendered ineffective by the act of the prospective

buyers, who naturally would demand that the deeds of
absolute sale be first executed before they pay the
balance of the price. Surely, no prospective seller would
accommodate.
In fine, "the need to execute a deed of absolute
sale upon completion of payment of the price
generally indicates that it is a contract to sell, as
it implies the reservation of title in the vendor
until the vendee has completed the payment of
the price."36 In addition, "[a] stipulation reserving
ownership in the vendor until full payment of the price is
x x x typical in a contract to sell."37 Thus, contrary to the
pronouncements of the trial and appellate courts, the
parties to this case only entered into a contract to sell;
as such title cannot legally pass to Rodolfo until he
makes full payment of the agreed purchase price.
c) Nicolas did not surrender or deliver title or
possession to Rodolfo.
Moreover, there could not even be a surrender or
delivery of title or possession to the prospective buyer
Rodolfo. This was made clear by the nature of the
agreement, by Nicolass repeated demands for the
return of all rents unlawfully and unjustly remitted to
Rodolfo by Eduardo, and by Rodolfo and Eduardos
repeated demands for Nicolas to execute a deed of sale
which, as we said before, is a recognition on their part
that ownership over the subject property still remains
with Nicolas.

Significantly, when Eduardo testified, he claimed to be

knowledgeable about the terms and conditions of the
transaction between Nicolas and Rodolfo. However,
aside from stating that out of the total consideration
ofP500,000.00, the amount of P250,000.00 had already
been paid while the remaining P250,000.00 would be
paid after the execution of the Deed of Sale, he never
testified that there was a stipulation as regards delivery
of title or possession.38
It is also quite understandable why Nicolas belatedly
demanded the payment of the rentals. Records show
that the structural integrity of the Diego Building was
severely compromised when an earthquake struck
Dagupan City in 1990.39 In order to rehabilitate the
building, the co-owners obtained a loan from a
bank.40 Starting May 1994, the property was leased to
third parties and the rentals received were used to pay
off the loan.41 It was only in 1996, or after payment of
the loan that the co-owners started receiving their share
in the rentals.42 During this time, Nicolas was in the USA
but immediately upon his return, he demanded for the
payment of his share in the rentals which Eduardo
remitted to Rodolfo. Failing which, he filed the instant
Complaint. To us, this bolsters our findings that Nicolas
did not intend to immediately transfer title over the
property.
It must be stressed that it is anathema in a contract to
sell that the prospective seller should deliver title to the
property to the prospective buyer pending the latters
payment of the price in full. It certainly is absurd to
assume that in the absence of stipulation, a buyer under

a contract to sell is granted ownership of the property

even when he has not paid the seller in full. If this were
the case, then prospective sellers in a contract to sell
would in all likelihood not be paid the balance of the
price.
This ponente has had occasion to rule that "[a] contract
to sell is one where the prospective seller reserves the
transfer of title to the prospective buyer until the
happening of an event, such as full payment of the
purchase price. What the seller obliges himself to do is
to sell the subject property only when the entire amount
of the purchase price has already been delivered to him.
In other words, the full payment of the purchase price
partakes of a suspensive condition, the nonfulfillment of
which prevents the obligation to sell from arising and
thus, ownership is retained by the prospective seller
without further remedies by the prospective buyer. It
does not, by itself, transfer ownership to the buyer."43
The contract to sell is terminated or cancelled.
Having established that the transaction was a contract
to sell, what happens now to the parties agreement?
The remedy of rescission is not available in contracts to
sell.44 As explained in Spouses Santos v. Court of
Appeals:45
In view of our finding in the present case that the
agreement between the parties is a contract to sell, it
follows that the appellate court erred when it decreed
that a judicial rescission of said agreement was
necessary. This is because there was no rescission to

speak of in the first place. As we earlier pointed out, in a

contract to sell, title remains with the vendor and does
not pass on to the vendee until the purchase price is
paid in full. Thus, in a contract to sell, the payment of
the purchase price is a positive suspensive condition.
Failure to pay the price agreed upon is not a mere
breach, casual or serious, but a situation that prevents
the obligation of the vendor to convey title from
acquiring an obligatory force. This is entirely different
from the situation in a contract of sale, where nonpayment of the price is a negative resolutory condition.
The effects in law are not identical. In a contract of sale,
the vendor has lost ownership of the thing sold and
cannot recover it, unless the contract of sale is
rescinded and set aside. In a contract to sell, however,
the vendor remains the owner for as long as the vendee
has not complied fully with the condition of paying the
purchase price. If the vendor should eject the vendee
for failure to meet the condition precedent, he
is enforcing the contract and not rescinding it. When the
petitioners in the instant case repossessed the disputed
house and lot for failure of private respondents to pay
the purchase price in full, they were merely enforcing
the contract and not rescinding it. As petitioners
correctly point out, the Court of Appeals erred when it
ruled that petitioners should have judicially rescinded
the contract pursuant to Articles 1592 and 1191 of the
Civil Code. Article 1592 speaks of non-payment of the
purchase price as a resolutory condition. It does not
apply to a contract to sell. As to Article 1191, it is
subordinated to the provisions of Article 1592 when
applied to sales of immovable property. Neither
provision is applicable in the present case.46

Similarly, we held in Chua v. Court of Appeals47 that

"Article 1592 of the Civil Code permits the buyer to pay,
even after the expiration of the period, as long as no
demand for rescission of the contract has been made
upon him either judicially or by notarial act. However,
Article 1592 does not apply to a contract to sell where
the seller reserves the ownership until full payment of
the price,"48 as in this case.1wphi1
Applying the above jurisprudence, we hold that when
Rodolfo failed to fully pay the purchase price, the
contract to sell was deemed terminated or
cancelled.49 As we have held in Chua v. Court of
Appeals,50 "[s]ince the agreement x x x is a mere
contract to sell, the full payment of the purchase price
partakes of a suspensive condition. The nonfulfillment of the condition prevents the
obligation to sell from arising and ownership is
retained by the seller without further remedies
by the buyer." Similarly, we held in Reyes v.
Tuparan51 that "petitioners obligation to sell the subject
properties becomes demandable only upon the
happening of the positive suspensive condition, which is
the respondents full payment of the purchase
price. Without respondents full payment, there
can be no breach of contract to speak of because
petitioner has no obligation yet to turn over the
title.Respondents failure to pay in full the purchase
price in full is not the breach of contract contemplated
under Article 1191 of the New Civil Code but rather just
an event that prevents the petitioner from being bound
to convey title to respondent." Otherwise stated,
Rodolfo has no right to compel Nicolas to transfer

ownership to him because he failed to pay in full the

purchase price. Correlatively, Nicolas has no obligation
to transfer his ownership over his share in the Diego
Building to Rodolfo.52
Thus, it was erroneous for the CA to rule that Nicolas
should have filed a case to fix the period for Rodolfos
payment of the balance of the purchase price. It was not
Nicolass obligation to compel Rodolfo to pay the
balance; it was Rodolfos duty to remit it.
It would appear that after Nicolas refused to sign the
deed as there was yet no full payment, Rodolfo and
Eduardo hired the services of the Daroya Accounting
Office "for the purpose of estimating the amount to
which [Nicolas] still owes [Rodolfo] as a consequence of
the unconsummated verbal agreement regarding the
formers share in the co-ownership of [Diego Building] in
favor of the latter."53 According to the accountants
report, after Nicolas revoked his agreement with Rodolfo
due to non-payment, the downpayment of P250,000.00
was considered a loan of Nicolas from Rodolfo.54 The
accountant opined that the P250,000.00 should earn
interest at 18%.55 Nicolas however objected as regards
the imposition of interest as it was not previously
agreed upon. Notably, the contents of the accountants
report were not disputed or rebutted by the
respondents. In fact, it was stated therein that "[a]ll the
bases and assumptions made particularly in the fixing of
the applicable rate of interest have been discussed with
[Eduardo]."56
We find it irrelevant and immaterial that Nicolas
described the termination or cancellation of his

agreement with Rodolfo as one of rescission. Being a

layman, he is understandably not adept in legal terms
and their implications. Besides, this Court should not be
held captive or bound by the conclusion reached by the
parties. The proper characterization of an action should
be based on what the law says it to be, not by what a
party believed it to be. "A contract is what the law
defines it to be x x x and not what the contracting
parties call it."57
On the other hand, the respondents additional
submission that Nicolas cheated them by "vanishing
and hibernating" in the USA after receiving
Rodolfos P250,000.00 downpayment, only to come
back later and claim that the amount he received was a
mere loan cannot be believed. How the respondents
could have been cheated or disadvantaged by Nicolass
leaving is beyond comprehension. If there was anybody
who benefited from Nicolass perceived "hibernation", it
was the respondents, for they certainly had free rein
over Nicolass interest in the Diego Building. Rodolfo put
off payment of the balance of the price, yet, with the aid
of Eduardo, collected and appropriated for himself the
rents which belonged to Nicolas.
Eduardo is solidarily liable with Rodolfo as
regards the share of Nicolas in the rents.
For his complicity, bad faith and abuse of authority as
the Diego Building administrator, Eduardo must be held
solidarily liable with Rodolfo for all that Nicolas should
be entitled to from 1993 up to the present, or in respect
of actual damages suffered in relation to his interest in
the Diego Building. Eduardo was the primary cause of

Nicolass loss, being directly responsible for making and

causing the wrongful payments to Rodolfo, who received
them under obligation to return them to Nicolas, the
true recipient.1wphi1 As such, Eduardo should be
principally responsible to Nicolas as well. Suffice it to
state that every person must, in the exercise of his
rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and
good faith; and every person who, contrary to law,
wilfully or negligently causes damage to another, shall
indemnify the latter for the same.58
Attorneys fees and other costs.
"Although attorneys fees are not allowed in the
absence of stipulation, the court can award the same
when the defendants act or omission has compelled the
plaintiff to incur expenses to protect his interest or
where the defendant acted in gross and evident bad
faith in refusing to satisfy the plaintiffs plainly valid, just
and demandable claim."59 In the instant case, it is
beyond cavil that petitioner was constrained to file the
instant case to protect his interest because of
respondents unreasonable and unjustified refusal to
render an accounting and to remit to the petitioner his
rightful share in rents and fruits in the Diego Building.
Thus, we deem it proper to award to petitioner
attorneys fees in the amount of P50,000.00,60 as well as
litigation expenses in the amount of P20,000.00 and the
sum of P1,000.00 for each court appearance by his
lawyer or lawyers, as prayed for.
WHEREFORE, premises considered, the Petition
is GRANTED. The June 29, 2007 Decision and October

3, 2007 Resolution of the Court of Appeals in CA-G.R. CV

No. 86512, and the April 19, 2005 Decision of the
Dagupan City Regional Trial Court, Branch 40 in Civil
Case No. 99-02971-D, are hereby ANNULLED and SET
ASIDE.
The Court further decrees the following:
1. The oral contract to sell between petitioner
Nicolas P. Diego and respondent Rodolfo P. Diego
isDECLARED terminated/cancelled;
2. Respondents Rodolfo P. Diego and Eduardo P.
Diego are ORDERED to surrender possession and
control, as the case may be, of Nicolas P. Diegos
share in the Diego Building. Respondents are
further commanded to return or surrender to the
petitioner the documents of title, receipts, papers,
contracts, and all other documents in any form or
manner pertaining to the latters share in the
building, which are deemed to be in their
unauthorized and illegal possession;
3. Respondents Rodolfo P. Diego and Eduardo P.
Diego are ORDERED to immediately render an
accounting of all the transactions, from the period
beginning 1993 up to the present, pertaining to
Nicolas P. Diegos share in the Diego Building, and
thereafter commanded to jointly and severally
remit to the petitioner all rents, monies, payments
and benefits of whatever kind or nature pertaining
thereto, which are hereby deemed received by
them during the said period, and made to them or
are due, demandable and forthcoming during the

said period and from the date of this Decision,

with legal interest from the filing of the Complaint;
4. Respondents Rodolfo P. Diego and Eduardo P.
Diego are ORDERED, immediately and without
further delay upon receipt of this Decision, to
solidarily pay the petitioner attorneys fees in the
amount ofP50,000.00; litigation expenses in the
amount of P20,000.00 and the sum of P1,000.00
per counsel for each court appearance by his
lawyer or lawyers;
5. The payment of P250,000.00 made by
respondent Rodolfo P. Diego, with legal interest
from the filing of the Complaint, shall
be APPLIED, by way of compensation, to his
liabilities to the petitioner and to answer for all
damages and other awards and interests which
are owing to the latter under this Decision; and
6. Respondents counterclaim is DISMISSED.

IGNAO, petitioners,
vs.
HON. COURT OF APPEALS, THE ESTATE OF
DECEASED SPOUSES EUSEBIO DE CASTRO and
MARTINA RIETA, represented by MARINA RIETA
GRANADOS and THERESA RIETA
TOLENTINO, respondents.
G.R. No. 77450

June 19, 1991

THE ROMAN CATHOLIC ARCHBISHOP OF MANILA,

THE ROMAN CATHOLIC BISHOP OF IMUS, and the
SPOUSES FLORENCIO IGNAO and SOLEDAD C.
IGNAO, petitioners,
vs.
HON. COURT OF APPEALS, THE ESTATE OF
DECEASED SPOUSES EUSEBIO DE CASTRO and
MARTINA RIETA, represented by MARINA RIETA
GRANADOS and THERESA RIETA
TOLENTINO, respondents.
Severino C. Dominguez for petitioner Roman Catholic
Bishop of Imus, Cavite.
Dolorfino and Dominguez Law Offices for Sps. Ignao.
Joselito R. Enriquez for private respondents.

SO ORDERED.
REGALADO, J.:

G.R. No. 77425

June 19, 1991

THE ROMAN CATHOLIC ARCHBISHOP OF MANILA,

THE ROMAN CATHOLIC BISHOP OF IMUS, and the
SPOUSES FLORENCIO IGNAO and SOLEDAD C.

These two petitions for review on certiorari1 seek to

overturn the decision of the Court of Appeals in CA-G.R.
CV No. 054562 which reversed and set aside the order of
the Regional Trial Court of Imus, Cavite dismissing Civil
Case No. 095-84, as well as the order of said respondent
court denying petitioner's motions for the
reconsideration of its aforesaid decision.
On November 29, 1984, private respondents as
plaintiffs, filed a complaint for nullification of deed of

donation, rescission of contract and reconveyance of

real property with damages against petitioners Florencio
and Soledad C. Ignao and the Roman Catholic Bishop of
Imus, Cavite, together with the Roman Catholic
Archbishop of Manila, before the Regional Trial Court,
Branch XX, Imus, Cavite and which was docketed as
Civil Case No. 095-84 therein.3
In their complaint, private respondents alleged that on
August 23, 1930, the spouses Eusebio de Castro and
Martina Rieta, now both deceased, executed a deed of
donation in favor of therein defendant Roman Catholic
Archbishop of Manila covering a parcel of land (Lot No.
626, Cadastral Survey of Kawit), located at Kawit,
Cavite, containing an area of 964 square meters, more
or less. The deed of donation allegedly provides that the
donee shall not dispose or sell the property within a
period of one hundred (100) years from the execution of
the deed of donation, otherwise a violation of such
condition would render ipso facto null and void the deed
of donation and the property would revert to the estate
of the donors.
It is further alleged that on or about June 30, 1980, and
while still within the prohibitive period to dispose of the
property, petitioner Roman Catholic Bishop of Imus, in
whose administration all properties within the province
of Cavite owned by the Archdiocese of Manila was
allegedly transferred on April 26, 1962, executed a deed
of absolute sale of the property subject of the donation
in favor of petitioners Florencio and Soledad C. Ignao in
consideration of the sum of P114,000. 00. As a
consequence of the sale, Transfer Certificate of Title No.
115990 was issued by the Register of Deeds of Cavite
on November 15, 1980 in the name of said petitioner
spouses.
What transpired thereafter is narrated by respondent
court in its assailed decision.4

On December 17, 1984, petitioners Florencio Ignao and

Soledad C. Ignao filed a motion to dismiss based on the
grounds that (1) herein private respondents, as plaintiffs
therein, have no legal capacity to sue; and (2) the
complaint states no cause of action.
On December 19, 1984, petitioner Roman Catholic
Bishop of Imus also filed a motion to dismiss on three
(3) grounds, the first two (2) grounds of which were
identical to that of the motion to dismiss filed by the
Ignao spouses, and the third ground being that the
cause of action has prescribed.
On January 9, 1985, the Roman Catholic Archbishop of
Manila likewise filed a motion to dismiss on the ground
that he is not a real party in interest and, therefore, the
complaint does not state a cause of action against him.
After private respondents had filed their oppositions to
the said motions to dismiss and the petitioners had
countered with their respective replies, with rejoinders
thereto by private respondents, the trial court issued an
order dated January 31, 1985, dismissing the complaint
on the ground that the cause of action has prescribed.5
Private respondents thereafter appealed to the Court of
Appeals raising the issues on (a) whether or not the
action for rescission of contracts (deed of donation and
deed of sale) has prescribed; and (b) whether or not the
dismissal of the action for rescission of contracts (deed
of donation and deed of sale) on the ground of
prescription carries with it the dismissal of the main
action for reconveyance of real property.6
On December 23, 1986, respondent Court of Appeals,
holding that the action has not yet prescibed, rendered
a decision in favor of private respondents, with the
following dispositive portion:

WHEREFORE, the Order of January 31, 1985

dismissing appellants' complaint is SET ASIDE and
Civil Case No. 095-84 is hereby ordered
REINSTATED and REMANDED to the lower court for
further proceedings. No Costs.7
Petitioners Ignao and the Roman Catholic Bishop of Imus
then filed their separate motions for reconsideration
which were denied by respondent Court of Appeals in its
resolution dated February 6, 1987,8 hence, the filing of
these appeals by certiorari.
It is the contention of petitioners that the cause of
action of herein private respondents has already
prescribed, invoking Article 764 of the Civil Code which
provides that "(t)he donation shall be revoked at the
instance of the donor, when the donee fails to comply
with any of the conditions which the former imposed
upon the latter," and that "(t)his action shall prescribe
after four years from the non-compliance with the
condition, may be transmitted to the heirs of the donor,
and may be exercised against the donee's heirs.
We do not agree.
Although it is true that under Article 764 of the Civil
Code an action for the revocation of a donation must be
brought within four (4) years from the non-compliance
of the conditions of the donation, the same is not
applicable in the case at bar. The deed of donation
involved herein expressly provides for automatic
reversion of the property donated in case of violation of
the condition therein, hence a judicial declaration
revoking the same is not necessary, As aptly stated by
the Court of Appeals:
By the very express provision in the deed of
donation itself that the violation of the condition
thereof would render ipso facto null and void the
deed of donation, WE are of the opinion that there

would be no legal necessity anymore to have the

donation judicially declared null and void for the
reason that the very deed of donation itself
declares it so. For where (sic) it otherwise and that
the donors and the donee contemplated a court
action during the execution of the deed of
donation to have the donation judicially rescinded
or declared null and void should the condition be
violated, then the phrase reading "would render
ipso facto null and void"would not appear in the
deed of donation.9
In support of its aforesaid position, respondent court
relied on the rule that a judicial action for rescission of a
contract is not necessary where the contract provides
that it may be revoked and cancelled for violation of any
of its terms and conditions.10 It called attention to the
holding that there is nothing in the law that prohibits the
parties from entering into an agreement that a violation
of the terms of the contract would cause its cancellation
even without court intervention, and that it is not
always necessary for the injured party to resort to court
for rescission of the contract.11 It reiterated the doctrine
that a judicial action is proper only when there is
absence of a special provision granting the power of
cancellation.12
It is true that the aforesaid rules were applied to the
contracts involved therein, but we see no reason why
the same should not apply to the donation in the
present case. Article 732 of the Civil Code provides that
donations inter vivosshall be governed by the general
provisions on contracts and obligations in all that is not
determined in Title III, Book III on donations. Now, said
Title III does not have an explicit provision on the matter
of a donation with a resolutory condition and which is
subject to an express provision that the same shall be
considered ipso facto revoked upon the breach of said
resolutory condition imposed in the deed therefor, as is

the case of the deed presently in question. The

suppletory application of the foregoing doctrinal rulings
to the present controversy is consequently justified.
The validity of such a stipulation in the deed of donation
providing for the automatic reversion of the donated
property to the donor upon non-compliance of the
condition was upheld in the recent case of De Luna, et
al. vs. Abrigo, et al.13 It was held therein that said
stipulation is in the nature of an agreement granting a
party the right to rescind a contract unilaterally in case
of breach, without need of going to court, and that,
upon the happening of the resolutory condition or noncompliance with the conditions of the contract, the
donation is automatically revoked without need of a
judicial declaration to that effect. While what was the
subject of that case was an onerous donation which,
under Article 733 of the Civil Code is governed by the
rules on contracts, since the donation in the case at bar
is also subject to the same rules because of its provision
on automatic revocation upon the violation of a
resolutory condition, from parity of reasons said
pronouncements in De Luna pertinently apply.
The rationale for the foregoing is that in contracts
providing for automatic revocation, judicial intervention
is necessary not for purposes of obtaining a judicial
declaration rescinding a contract already deemed
rescinded by virtue of an agreement providing for
rescission even without judicial intervention, but in
order to determine whether or not the rescission was
proper.14
When a deed of donation, as in this case, expressly
provides for automatic revocation and reversion of the
property donated, the rules on contract and the general
rules on prescription should apply, and not Article 764 of
the Civil Code. Since Article 1306 of said Code
authorizes the parties to a contract to establish such

stipulations, clauses, terms and conditions not contrary

to law, morals, good customs, public order or public
policy, we are of the opinion that, at the very least, that
stipulation of the parties providing for automatic
revocation of the deed of donation, without prior judicial
action for that purpose, is valid subject to the
determination of the propriety of the rescission sought.
Where such propriety is sustained, the decision of the
court will be merely declaratory of the revocation, but it
is not in itself the revocatory act.
On the foregoing ratiocinations, the Court of Appeals
committed no error in holding that the cause of action of
herein private respondents has not yet prescribed since
an action to enforce a written contract prescribes in ten
(10) years.15 It is our view that Article 764 was intended
to provide a judicial remedy in case of non-fulfillment or
contravention of conditions specified in the deed of
donation if and when the parties have not agreed on the
automatic revocation of such donation upon the
occurrence of the contingency contemplated therein.
That is not the situation in the case at bar.
Nonetheless, we find that although the action filed by
private respondents may not be dismissed by reason of
prescription, the same should be dismissed on the
ground that private respondents have no cause of
action against petitioners.
The cause of action of private respondents is based on
the alleged breach by petitioners of the resolutory
condition in the deed of donation that the property
donated should not be sold within a period of one
hundred (100) years from the date of execution of the
deed of donation. Said condition, in our opinion,
constitutes an undue restriction on the rights arising
from ownership of petitioners and is, therefore, contrary
to public policy.

Donation, as a mode of acquiring ownership, results in

an effective transfer of title over the property from the
donor to the donee. Once a donation is accepted, the
donee becomes the absolute owner of the property
donated. Although the donor may impose certain
conditions in the deed of donation, the same must not
be contrary to law, morals, good customs, public order
and public policy. The condition imposed in the deed of
donation in the case before us constitutes a patently
unreasonable and undue restriction on the right of the
donee to dispose of the property donated, which right is
an indispensable attribute of ownership. Such a
prohibition against alienation, in order to be valid, must
not be perpetual or for an unreasonable period of time.

for an entire century, being an unreasonable

emasculation and denial of an integral attribute of
ownership, should be declared as an illegal or
impossible condition within the contemplation of Article
727 of the Civil Code. Consequently, as specifically
stated in said statutory provision, such condition shall
be considered as not imposed. No reliance may
accordingly be placed on said prohibitory paragraph in
the deed of donation. The net result is that, absent said
proscription, the deed of sale supposedly constitutive of
the cause of action for the nullification of the deed of
donation is not in truth violative of the latter hence, for
lack of cause of action, the case for private respondents
must fail.

Certain provisions of the Civil Code illustrative of the

aforesaid policy may be considered applicable by
analogy.1wphi1Under the third paragraph of Article
494, a donor or testator may prohibit partition for a
period which shall not exceed twenty (20) years. Article
870, on its part, declares that the dispositions of the
testator declaring all or part of the estate inalienable for
more than twenty (20) years are void.

It may be argued that the validity of such prohibitory

provision in the deed of donation was not specifically
put in issue in the pleadings of the parties. That may be
true, but such oversight or inaction does not prevent
this Court from passing upon and resolving the same.

It is significant that the provisions therein regarding a

testator also necessarily involve, in the main, the
devolution of property by gratuitous title hence, as is
generally the case of donations, being an act of
liberality, the imposition of an unreasonable period of
prohibition to alienate the property should be deemed
anathema to the basic and actual intent of either the
donor or testator. For that reason, the regulatory arm of
the law is or must be interposed to prevent an
unreasonable departure from the normative policy
expressed in the aforesaid Articles 494 and 870 of the
Code.
In the case at bar, we hold that the prohibition in the
deed of donation against the alienation of the property

It will readily be noted that the provision in the deed of

donation against alienation of the land for one hundred
(100) years was the very basis for the action to nullify
the deed of d donation. At the same time, it was
likewise the controverted fundament of the motion to
dismiss the case a quo, which motion was sustained by
the trial court and set aside by respondent court, both
on the issue of prescription. That ruling of respondent
court interpreting said provision was assigned as an
error in the present petition. While the issue of the
validity of the same provision was not squarely raised, it
is ineluctably related to petitioner's aforesaid
assignment of error since both issues are grounded on
and refer to the very same provision.
This Court is clothed with ample authority to review
matters, even if they are not assigned as errors on
appeal, if it finds that their consideration is necessary in

arriving at a just decision of the case:16 Thus, we have

held that an unassigned error closely related to an error
properly assigned,17 or upon which the determination of
the question properly assigned is dependent, will be
considered by the appellate court notwithstanding the
failure to assign it as error.18
Additionally, we have laid down the rule that the
remand of the case to the lower court for further
reception of evidence is not necessary where the Court
is in a position to resolve the dispute based on the
records before it. On many occasions, the Court, in the
public interest and for the expeditious administration of
justice, has resolved actions on the merits instead of
remanding them to the trial court for further
proceedings, such as where the ends of justice, would
not be subserved by the remand of the case.19 The
aforestated considerations obtain in and apply to the
present case with respect to the matter of the validity of
the resolutory condition in question.
WHEREFORE, the judgment of respondent court is SET
ASIDE and another judgment is hereby rendered
DISMISSING Civil Case No. 095-84 of the Regional Trial
Court, Branch XX, Imus, Cavite.
SO ORDERED.

DORIE ABESA NICOLAS, G.R. No. 158026

Petitioner,
Present:
PUNO, C.J., Chairperson,
CARPIO,
- versus - *CORONA,
AZCUNA, and
LEONARDO-DE CASTRO, JJ.

DEL-NACIA CORPORATION, Promulgated:

Respondent. April 23, 2008

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

DECISION

PUNO, C.J.:

This case arose from a complaint for unfair business

practice[1] filed by petitioner Dorie Abesa Nicolas (Mrs.

Nicolas) against respondent Del-Nacia Corporation (DelNacia) before the Housing and Land Use Regulatory
Board (HLURB).
On February 20, 1988, the spouses Armando
Nicolas and Dorie Abesa Nicolas (Spouses Nicolas) and
Del-Nacia entered into a Land Purchase Agreement [2]
(Agreement) for the sale by the latter to the former of a
parcel of land, covered by Transfer Certificate of Title
No. 233702, consisting of 10,000 square meters,
situated at Lot No. 3-B-4, Del Nacia Ville No. 5, San Jose
del Monte, Bulacan.
The relevant parts of the Agreement are:
(1) The PURCHASER agrees to pay to the
OWNER upon execution of this Contract the
sum of FORTY THOUSAND PESOS (P40,000)
as first payment on account of the purchase
price and agrees to pay the balance of FIVE
HUNDRED
TEN
THOUSAND
PESOS
(P510,000) at the office of the OWNER in the
City of Quezon, Philippines, or such other
office as the OWNER may designate in 120
equal
monthly
installment
of
NINE
THOUSAND ONE HUNDRED EIGHTY NINE
AND 45/100 PESOS (P9,189.45) interest
being included on successive monthly
balance at 18% per annum, and payments
to be made on the _____ day of each month
thereafter beginning April 20, 1988.

xxxx

(5) In the event that any of the

payments as stipulated be not paid when,

where, and as the same become due; it is

agreed that sums in arrears shall bear
interest at the rate of EIGHTEEN (18%) per
centum per annum payable monthly from
the date on which said sums is due and
payable.

(6) If any such payment or payments shall

continue in arrears for more than sixty-days,
or if the PURCHASER shall violate any of the
conditions herein set forth then the entire
unpaid balance due under this contract,
with any interest which may have attached
shall at once become due and payable and
shall bear interest at the rate of TWELVE
(12%) per centum per annum until paid, and
in such case, the PURCHASER further agrees
to pay to the OWNER a sum equal to ten
(10%) per centum of the amount due as
attorneys fees.[3]

Under the Agreement, the ownership of the land

remains with Del-Nacia until full payment of the
stipulated purchase price under the following terms and
conditions:
(3) Title to said parcel of land shall remain in
the name of the OWNER until complete
payment by the PURCHASER of all
obligations herein stipulated, at which time
the OWNER agree to execute a final deed of
sale in favor of the PURCHASER and cause
the issuance of a certificate of title in the
name of the latter, free from liens and
encumbrances except those provided in the
Land Registration Act, those imposed by the

authorities, and those contained in Clauses

(10)
and
(16)
of
this
agreement. Registration
fees
and
documentary stamps of the deed of sale
shall be paid by the PURCHASER.

(4) Only the PURCHASER shall be deemed

for all legal purposes to take possession of
the parcel of land upon payment of the
down payment provided, however, that
his/her possession under this section shall
be only that of a tenant or lessee, and
subject to ejectment proceedings during all
the period of this agreement.
xxxx
(7) In case the PURCHASER fails to
comply with any conditions of this contract
and/or to pay any payments herein agreed
upon, the PURCHASER shall be granted a
period or periods of grace which in no case
shall exceed (60) days to be counted from
the condition breached ought to be
complied with or the said payments ought
have been made, during which period of
grace the PURCHASER must comply with the
said condition or satisfy all due monetary
obligations
including
those
which
correspond
to
the
period
of
grace. OTHERWISE, the Contract shall be
automatically cancelled and rescinded and
of no force and effect, and as a
consequence therefore, the OWNER may
dispose of the parcels of land covered by
this Contract in favor of other persons, as if
this Contract had never been entered

into. In case of such cancellation of this

Contract all amounts paid in accordance
with this agreement, together with all the
improvements introduced in the premises,
shall be considered as rents for the use and
occupation of the abovementioned premises
and as payments for the damages suffered
on the OWNER on account of the failure of
the PURCHASER to fulfill his part of this
Contract and the PURCHASER hereby
renounces all his rights to demand or
reclaim the return of the same and further
obligates himself to peacefully vacate the
premises and deliver the same to the
OWNER; PROVIDED, HOWEVER, that any
consideration, concession, tolerance or
relaxation of provisions shall not be
interpreted as a renunciation on the part of
OWNER of any rights granted in this
Contract.[4]

Upon signing of the Agreement, the Spouses Nicolas

paid the down payment of P40,000. Thereupon, the
Spouses Nicolas took possession of the land, and for
several months thereafter, paid on or before the 20 th of
each month, the monthly amortizations.[5]
Unfortunately, however, Armando Nicolas died shortly
after the signing of the Agreement and Mrs. Nicolas
began to falter in her payments. As found by Arbiter
Jose A. Atencio, Jr. (HLURB Arbiter) of the Office of
Appeals, Adjudication and Legal Affairs (OAAL), HLURB
Region III, the records of Del-Nacia indicate that Mrs.
Nicolas is delinquent in her monthly amortization for the
following months: November 1988; March 1989; May
1989; June 1989-July 1989; September 1989; October
1989; November 1989-December 1989; February 1990-

September 1990; October 1990-November 1990;

December 1990-April 1991. The last payment of Mrs.
Nicolas was made on July 19, 1991.[6]
Del-Nacia sent Mrs. Nicolas notice to pay her arrearages
with a grace period of sixty (60) days within which to
make payment but to no avail. Del-Nacia then caused
the notarial cancellation of the Agreement on December
3, 1991.[7]
Subsequently, Del-Nacia verbally informed Mrs.
Nicolas to get the cash surrender value of her payment
at its office. However, Mrs. Nicolas did not claim the
same. Del-Nacia prepared a check in the amount
of P270,651.88 representing the cash surrender value of
Mrs. Nicolass payment and sent it to her by registered
mail.The check was received by Mrs. Nicolas and until
now it remains in her possession.[8]
On February
23,
1993,
Mrs.
Nicolas
filed
a
Complaint[9] against
Del-Nacia
before
the
HLURB. On December 15, 1994, the HLURB Arbiter
rendered a Decision[10](Arbiter Decision) with the
following disposition:
PREMISES considered, judgment is hereby
rendered as follows:
a. Declaring the notarial cancellation
of the contract on December 3, 1991 as null
and void.
b. Ordering respondent to fortwith
furnish complainant accounting of the paid
and unpaid amortizations including interests
and penalty interests and other stipulated
fees or charges covering the period or
delinquent payments, as a consequence of
the latters default stating clearly and
specifically the bases as stated in the

contract and for the complainant to pay her

unpaid obligations within forty five (45) days
from
receipt
of
the
said
computation/accounting.
c. Ordering the same respondent to
execute the pertinent deed in favor of the
complainant within fifteen (15) days from
receipt of complainants full payment under
paragraph b aforementioned and thereafter
to deliver to the latter the Transfer
Certificate of Title of the lot in question.
d. Remedies provided under R.A. 6552
and other legal remedies may be resorted
to, at the option of the respondent, if
complainant fails or refuses to pay within
the period provided under paragraph b.
So Ordered.[11]

Mrs. Nicolas sought review of the Arbiter Decision by the

HLURB Board of Commissions (HLURB Board) on the
following assignment of errors:
FIRST ASSIGNMENT OF ERROR
THE HON. ARBITER ERRED IN ORDERING
THE INCLUSION OF INTERESTS, PENALTY
INTERESTS AND OTHER STIPULATED FEES
OR
CHARGES
IN
THE
UNILATERAL
COMPUTATION TO BE MADE BY THE
RESPONDENT-APPELLEE AS THE UNPAID
OBLIGATION OF COMPLAINANT-APPELLANT.

SECOND ASSIGNMENT OF ERROR

THE HON. ARBITER ERRED IN ORDERING

THE COMPLAINANT-APPELLANT TO PAY HER
SUPPOSED UNPAID OBLIGATION BASED
UPON THE UNILATERAL COMPUTATION OF
RESPONDENT-APPELLEE WITHIN FORTY FIVE
(45) DAYS FROM RECEIPT OF SAID
COMPUTATION/ACCOUNTING.

WHEREFORE, in light of the foregoing

premises, we hereby MODIFY the Decision
dated 15 December 1994 of the Office a
Quo, insofar as paragraph (b) of the
dispositive portion is concerned and an
additional paragraph e, to wit:

(b)

Ordering complainant to pay

respondent within sixty (60) days from
receipt hereof the amount of one
hundred seventy three thousand nine
hundred fifty seven pesos and
29/1000 (P173,957.29) representing
the
remaining
balance
of
the
installment purchase price of the land
inclusive of legal interests at the rate
of twelve percent (12%) per annum.

(e)

Ordering respondent to pay this

Board the amount of ten thousand
(P10,000) as an administrative fine for
violation of Section 5 of P.D. 957
within thirty (30) days from finality
hereof.

THIRD ASSIGNMENT OF ERROR

THE HON. ARBITER ERRED IN GIVING
RESPONDENT-APPELLEE THE RIGHT TO
RESORT TO REMEDIES PROVIDED UNDER
R.A. 6552 AND OTHER LEGAL REMEDIES.

FOURTH ASSIGNMENT OF ERROR

THE HON. ARBITER ERRED IN NOT
AWARDING ATTORNEYS FEES IN THE SUM
OF P50,000.00
TO
COMPLAINANTAPPELLANT.

FIFTH ASSIGNMENT OF ERROR

THE HON. ARBITER ERRED IN NOT
GRANTING THE PRAYER OF COMPLAINANTAPPELLANT IN HER COMPLAINT.[12]

The HLURB Board was partly receptive of the appeal

and, on December 1, 1995, it handed down a
Decision[13] (HLURB Board Decision) adjudging that:

SO ORDERED. Quezon City.[14]

Del-Nacia filed a Motion for Reconsideration [15] and a

Supplement
to
Motion
for
Reconsideration.
[16]
Meanwhile, Mrs. Nicolas filed a motion for the
consignment of P173,957.29, representing the balance

of the purchase price of the land as found by the HLURB

Board.
On June 21, 1996, the HLURB Board resolved to deny
Del-Nacias motion for reconsideration and ordered Mrs.
Nicolas to deposit with it for safekeeping the amount
indicated in its Decision until Del-Nacia is willing to
accept the same.[17]
Consequently, Del-Nacia appealed to the Office of the
President which, however, was dismissed by its Decision
dated March 4, 1998 (O.P. Original Decision).[18]Upon
motion for reconsideration, however, the Office of the
President, in a Resolution dated January 5, 2001[19] (O.P.
Resolution), set aside the O.P. Original Decision and
affirmed the Arbiter Decision in toto.
Unsuccessful in her bid at overturning the O.P.
Resolution,
Mrs.
Nicolas
filed
a
Petition
for
[20]
Review
with the Court of Appeals (CA) docketed as
CA-G.R. SP No. 68407. The CA initially dismissed her
petition for failing to comply with the procedural
requirements of Section 6(c) of Rule 43 of the Revised
Rules of Court.[21]Mrs. Nicolas filed an omnibus motion
praying that the CA reconsider and set aside the
dismissal of her petition and to admit her amended
petition.[22] The CA then required Del-Nacia to submit its
comment to the petition.[23]
On January 23, 2003, the CA rendered its Decision,
[24]
affirming the O.P. Resolution, to wit:
WHEREFORE, finding no flaw in the
appealed O.P. Resolution, the same is
hereby AFFIRMED in toto, with costs against
Mrs. Nicolas.

SO ORDERED.

The Motion for Reconsideration [25] filed by Mrs. Nicolas

was denied by the CA in its Resolution dated April 29,
2003.[26]
Hence, this Petition for Review on Certiorari[27],
raising the lone issue of:
WHETHER OR NOT complainant (now
petitioner) is bound to pay the interests,
penalty interests and other stipulated
charges based on the unilateral accounting
or computation made by respondent.[28]

The instant petition prays that the O.P. Original

Decision, which affirmed the HLURB Board Decision, be
reinstated by this Court.
In its Comment, Del-Nacia argues that the instant
petition be denied for the following reasons: (1) failure
to comply with section 4, Rule 45, and (2) failure to
advance any special reason that would warrant the
exercise by this Court of its discretionary power of
review.
Before discussing the merits of the case, we shall first
discuss its procedural aspect.
Del-Nacia urges this Court to dismiss the instant
petition for failing to attach material portions of the
records of the case that will support the same as
required under Section 6 of Rule 46 of the Revised Rules
of Court, such as, for instance, copies of her own
pleadings filed before the proceedings below.[29] It
appears that the Agreement of the parties, subject of
the
dispute,
was
not
attached
to
the
petition. Nevertheless, since the Agreement and the

other documents that were not attached to the petition

are already part of the records of this case, and could
easily be referred to by this Court if necessary, a
dismissal of the instant petition purely on technical
grounds is not warranted. Indeed, the Court has, in past
cases, granted relief in favor of the petitioner despite
this procedural infirmity.[30] Thus, we explained the
rationale behind the Courts liberal stance as follows:
We must stress that cases should be
determined on the merits, after all parties
have been given full opportunity to ventilate
their causes and defenses, rather than on
technicalities or procedural imperfections. In
that way, the ends of justice would be
served better. Rules of procedure are mere
tools designed to expedite the decision or
resolution of cases and other matters
pending in court. A strict and rigid
application
of
rules,
resulting
in
technicalities that tend to frustrate rather
than promote substantial justice, must be
avoided. In fact, Section 6 of Rule 1 states
that the Rules shall be liberally construed in
order to promote their objective of ensuring
the just, speedy and inexpensive disposition
of every action and proceeding.[31]
Now on the merits of the case. The issue is
whether Mrs. Nicolas is liable to pay interests, penalty
interests and other stipulated charges to Del-Nacia.
We rule in the affirmative.
Mrs. Nicolas contends that based on the payments she
already made, she has overpaid the purchase price due
under the Agreement.[32] She assails the application of
her payments made by Del-Nacia since the latter
applied the bulk of her payments to interest rather than

the principal.[33] According to her, therefore, the

penalties, interests and surcharges being collected by
Del-Nacia have no basis in fact or in law.[34] In this
regard, she urges this Court to affirm the HLURB Board
Decision[35] which reads:
Cursory reading of the abovementioned
document reveal that there is indeed no
specific date indicated, as to when
complainant should pay her monthly
installments. It is clear that that the space
provided for in Paragraph 1 of said
document for the date or day of the month
on which payment is to be made has been
left blank.

Considering that the Land Purchase

Agreement is a pro-forma document
prepared by respondent, any ambiguity
therein should be interpreted in favor of the
complainant.

On the basis of the foregoing, we find that

complainant did not incur any delay, hence,
the imposition of surcharges and penalty
interests are unjustified.[36]

According to Del-Nacia, however, Mrs. Nicolas

disregarded paying the regular rate of interest, overdue
interest and penalty interest which were voluntarily
agreed upon under paragraphs (1), (5) and (6),
respectively, of their Agreement.[37] Del-Nacia contends
that the records clearly establish that Mrs. Nicolas was

in delay in her payments of the monthly amortizations

and she has not disputed the same.[38]
As found by the HLURB Arbiter, the records of DelNacia shows that Mrs. Nicolas incurred delay in the
payment of her monthly amortizations.[39] It is a wellsettled rule that factual findings of administrative
agencies are conclusive and binding on the Court when
supported by substantial evidence. We agree with the
O.P.
Resolution,[40] which
was
adopted
and
affirmed by the CA, to wit:
Appellants [Del-Nacia] submission, however,
that appellee [Mrs. Nicolas] incurred delay in
the manner of payment of her monthly
installment obligations is impressed with
merit.The Housing Arbiter, in his evaluation
as trier of facts of appellees records of
payment, was of the same view. Under #1
of the basic purchase agreement, supra,
appellee undertook to pay 120 equal
monthly
installments of
P9,189.45, payments to be made on the __
day
of each
month
thereafter
beginning April
20,
1988. A
fair
understanding of this provision would simply
mean that payment should be made
effected every 20th day of each month
following April 20, 1988. Based on the
records, one can safely presume that the
same was fully understood by appellee, as
she had repeatedly paid her monthly
amortization on the 20th day of each, or a
few days thereafter. Neither did she
question the interest imposed by appellant
for her payments made after the 20 th. Be
that as it may, this Office is at a loss to
understand the HLURBs conclusion about
appellee not having defaulted in her

installment
payments. The
explanation
given by the HLURB Proper why it
considered appellee not to have been in
delay, i. e., because no specific date [ is]
indicated [in the purchase agreement] as to
when complainant should pay her monthly
installments adding that the space provided
for . . . the date or day of the month which
payment is to be made has been left
blank, strikes this Office as too simplistic to
be accorded cogency. The adverted fact of a
space in blank is of no moment for, to
reiterate, the agreement was for appellee to
[the] pay the balance (P510,000.00) of the
purchase price in 120 equal monthly
installments, the installment period to start
from April 20, 1988. The use of the
phrase120
equal
monthly
installments and thereafter beginning April
20, 1988 can mean only one thing that after
April 20, 1988, the monthly installment is to
fall due and be payable on the 20th day of
the succeeding months. The explanation
adverted to above of the HLURB, if pursued
to its logical conclusion, would virtually
allow appellee to perpetually withhold
installment payment without risk of being
considered in default. The absurdity of this
explanation needs no belaboring.[41]

Clearly, under paragraphs (1), (5) and (6) of the

Agreement, supra, Mrs. Nicolas was bound to pay
regular interest, and in case of delay, overdue interest
and penalty. It cannot be overemphasized that a
contract is the law between the parties, [42] and courts
have no choice but to enforce such contract so long as

they are not contrary to law, morals, good customs or

public policy.[43]
In this connection, a stipulation for the payment of
interest and penalty apart from interest in case of delay
is not contrary to law, moral, good customs or public
policy. To be sure, the same is sanctioned by the
following provisions of the Civil Code:
Article 1956. No interest shall be due unless
it has been expressly stipulated in writing.
Article 1226. In obligations with a penal
clause, the penalty shall substitute the
indemnity for damages and the payment of
interests in case of non-compliance, if there
is no stipulation to the contrary.

Article 2209. If the obligation consists in the

payment of a sum of money, and the debtor
incurs in delay, the indemnity for damages,
there being no stipulation to the contrary,
shall be the payment of the interest agreed
upon x x x.

In Bachrach Motor Company v. Espiritu,[44] the

Court ruled that the Civil Code permits the agreement
upon a penalty apart from the interest. Should there be
such an agreement, the penalty does not include the
interest, and as such the two are different and distinct
things which may be demanded separately. The same
principle was reiterated in Equitable Banking Corp. v.
Liwanag et al.,[45] where this Court held that the
stipulation about payment of such additional rate
partakes of the nature of a penalty clause, which is
sanctioned by law.

On Mrs. Nicolas contention that she should not

pay interest and the other charges based on the
unilateral accounting or computation made by DelNacia, a perusal of the formula [46] for the computation of
regular interest, overdue interest and penalty interest
used by Del-Nacia reveal that the same is in accord with
the provisions of the Agreement and cannot be said to
have been unilaterally imposed by Del-Nacia.
Moreover,
the
case
of Relucio
v.
BrillanteGarfin (Relucio),[47] involves similar facts to the case at
bar where we ruled as follows:
Examination of the record shows that
the questioned Contract to Buy and Sell the
subdivision lots provided for payment by
private respondent of the sum of P200.00 as
downpayment, and that "the balance [of
P10,600.00] shall be paid in 180 monthly
installments at P89.45 per month, including
interest rate at six percent (6%) per annum,
until the purchase price is fully paid." This
stipulation clearly specified that an interest
charge of six percent (6%) per annum was
included in the monthly installment price:
private respondent could not have helped
noticing that P89.45 multiplied by 180
monthly installments equals P16,101.00,
and not P10,600.00. The contract price of
P10,800.00 may thus be seen to be the cash
price of the subdivision lots, that is, the
amount payable if the price of the lots were
to be paid in cash and in full at the
execution of the contract; it is not the
amount that the vendor will have received
in the aggregate after fifteen (15) years if
the vendee shall have religiously paid the

monthly installments. The installment price,

upon the other hand, of the subdivision lots
the sum total of the monthly installments
(i.e., P16,101.00) typically, as in the instant
case, has an interest component which
compensates the vendor for waiting fifteen
(15) years before receiving the total
principal
amount
of
P10,600.00.
Economically or financially, P10,600.00
delivered in full today is simply worth much
more than a long series of small payments
totalling,
after
fifteen
(15)
years,
P10,600.00. For the vendor, upon receiving
the full cash price, could have deposited
that amount in a bank, for instance, and
earned interest income which at six percent
(6%) per year and for fifteen (15) years,
would precisely total P5,501.00 (the
difference between the installment price of
P16,101.00 and the
cash price
of
P10,600.00 ) To suppose, as private
respondent argues, that mere prompt
payment of the monthly installments as
they fell due would obviate application of
the interest charge of six percent (6%) per
annum, is to ignore that simple economic
fact. That economic fact is, of course,
recognized by law, which authorizes the
payment of interest when contractually
stipulated for by the parties or when implied
in recognized commercial custom or usage.

Vendor and vendee are legally

free to stipulate for the payment of
either the cash price of a subdivision
lot or its installment price. Should the
vendee opt to purchase a subdivision

lot
via
the
installment
payment
system, he is in effect paying interest
on the cash price, whether the fact and
rate of such interest payment is
disclosed in the contract or not. The
contract for the purchase and sale of a
piece of land on the installment
payment system in the case at bar is
not only quite lawful; it also reflects a
very wide spread usage or custom in
our present day commercial life.[48]
In Relucio, the Court also sustained the sellers theory
of declining balance whereby the seller credited a
bigger sum of the monthly amortization to interest
rather than the principal, such that in [During] the
succeeding monthly payments, however, as the
outstanding balance on the principal gradually declined,
the
interest
component
(in
absolute
terms)
correspondingly fell while the component credited to the
principal increased proportionately, thus amortizing the
balance of the principal purchase price as that balance
gradually declined.[49]
In the same vein, an examination of the application of
Mrs. Nicolas payments by Del-Nacia in the table [50] the
latter prepared as reflected in the records of the case,
shows that the same is in accord with the theory of
declining balance which was affirmed by this Court
in Relucio.
Given the foregoing, it appears that the only
dilemma which Mrs. Nicolas currently finds herself in is
that the obligations which she voluntary undertook
under the Agreement turned out to be more onerous
than what she expected. Doctrinal is the rule that courts
may not extricate parties from the necessary
consequences of their acts.[51] That the terms of a

contract turn out to be financially disadvantageous to

them will not relieve them of their obligations therein.[52]
IN
VIEW
WHEREOF, the
petition
is
DISMISSED. The decision of the Court of Appeals is
affirmed. Costs against the petitioner.

September 12, 200

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

DECISION
CHICO-NAZARIO, J.:
ERMINDA F. FLORENTINO,
Petitioner,

- versus -

G.R. No. 172384

Before
this
Court
is
a
Petition
for
Review
Present:
on Certiorari under Rule 45 of the Revised Rules of
Court, filed by petitioner Erminda F. Florentino, seeking
YNARES-SANTIAGO,
to reverse and set aside the Decision,[1] dated 10
October 2003 and the Resolution,[2] dated 19 April
2006 of the Court of Appeals in CA-G.R. CV No.
Chairperson,
73853. The appellate court, in its assailed Decision and
Resolution, modified the Decision dated 30 April 2001 of
AUSTRIA-MARTINEZ,
the Regional Trial Court (RTC) of Makati, Branch 57, in
Case
No.
00-1015,
finding
the
CHICO-NAZARIO, Civil
respondent Supervalue, Inc., liable for the sum
NACHURA, and
of P192,000.00, representing the security deposits
made by the petitioner upon the commencement of
REYES, JJ.
their Contract of Lease. The dispositive portion of the
assailed appellate courts Decision thus reads:

SUPERVALUE, INC.,
Respondent.

Promulgated:

WHEREFORE, premises considered,

the appeal is PARTLY GRANTED. The April 30,
2001 Decision of the Regional Trial Court
of Makati, Branch 57 is therefore MODIFIED
to wit: (a) the portion ordering the [herein
respondent]
to
pay
the
amount
of P192,000.00 representing the security

deposits and P50,000.00 as attorneys fees

in favor of the [herein petitioner] as well as
giving [respondent] the option to reimburse
[petitioner]
of
the
value
of
the
improvements introduced by the [petitioner]
on
the
leased
[premises]
should
[respondent] choose to appropriate itself or
require the [petitioner] to remove the
improvements, is hereby REVERSED and
SET ASIDE; and (b) the portion ordering the
return to [petitioner] the properties seized
by [respondent] after the former settled her
obligation with the latter is however
MAINTAINED.[3]

SM Megamall. The term of each contract is for a period

of four months and may be renewed upon agreement of
the parties.[6]

Upon the expiration of the original Contracts of Lease,

the parties agreed to renew the same by extending their
terms until 31 March 2000.[7]
Before the expiration of said Contracts of Lease, or on 4
February 2000, petitioner received two letters from the
respondent, both dated 14 January 2000, transmitted
through facsimile transmissions.[8]

The factual and procedural antecedents of the

instant petition are as follows:

In the first letter, petitioner was charged with violating

Section 8 of the Contracts of Lease by not opening
on 16 December 1999 and 26 December 1999.[9]

Petitioner is doing business under the business

name Empanada Royale, a sole proprietorship engaged
in the retail of empanada with outlets in different malls
and business establishments within Metro Manila.[4]

Respondent also charged petitioner with selling a

new variety of empanada called mini-embutido and of
increasing the price of her merchandise from P20.00
toP22.00, without the prior approval of the respondent.
[10]

Respondent, on the other hand, is a domestic

corporation engaged in the business of leasing stalls
and commercial store spaces located inside SM Malls
found all throughout the country.[5]

On 8 March 1999, petitioner and respondent executed

three Contracts of Lease containing similar terms and
conditions
over
the
cart-type
stalls
at
SM
North Edsa and SM Southmall and a store space at

Respondent
observed
that
petitioner
was
frequently closing earlier than the usual mall hours,
either because of non-delivery or delay in the delivery of
stocks to her outlets, again in violation of the terms of
the contract. A stern warning was thus given to
petitioner to refrain from committing similar infractions
in the future in order to avoid the termination of the
lease contract.[11]

In the second letter, respondent informed the petitioner

that it will no longer renew the Contracts of Lease for
the three outlets, upon their expiration on 31 March
2000.[12]

In a letter-reply dated 11 February 2000, petitioner

explained that the mini-embutido is not a new variety
of empanada but had similar fillings, taste and
ingredients as those of pork empanada; only, its size
was reduced in order to make it more affordable to the
buyers.[13]

Such explanation notwithstanding, respondent still

refused to renew its Contracts of Lease with the
petitioner. To the contrary, respondent took possession
of the store space in SM Megamall and confiscated the
equipment and personal belongings of the petitioner
found therein after the expiration of the lease contract.
[14]

In a letter dated 8 May 2000, petitioner demanded that

the respondent release the equipment and personal
belongings it seized from the SM Megamall store space
and return the security deposits, in the sum
of P192,000.00, turned over by the petitioner upon
signing of the Contracts of Lease. On 15 June 2000,
petitioner sent respondent another letter reiterating her
previous demands, but the latter failed or refused to
comply therewith. [15]

On 17 August 2000, an action for Specific Performance,

Sum of Money and Damages was filed by the petitioner

against the respondent before the RTC of Makati, Branch

57.[16]

In her Complaint docketed as Civil Case No. 001015, petitioner alleged that the respondent made
verbal representations that the Contracts of Lease will
be renewed from time to time and, through the said
representations, the petitioner was induced to introduce
improvements upon the store space at SM Megamall in
the sum of P200,000.00, only to find out a year later
that the respondent will no longer renew her lease
contracts for all three outlets.[17]

In addition, petitioner alleged that the respondent,

without justifiable cause and without previous demand,
refused to return the security deposits in the amount
ofP192,000.00.[18]
Further, petitioner claimed that the respondent seized
her equipment and personal belongings found inside the
store space in SM Megamall after the lease contract for
the said outlet expired and despite repeated written
demands from the petitioner, respondent continuously
refused to return the seized items.[19]

Petitioner thus prayed for the award of actual damages

in the sum of P472,000.00, representing the sum of
security deposits, cost of improvements and the value
of the personal properties seized. Petitioner also asked
for
the
award
of P300,000.00 as
moral
damages; P50,000.00
as
exemplary
damages;
and P80,000.00 as attorneys fees and expenses of
litigation.[20]

For its part, respondent countered that petitioner

committed several violations of the terms of their
Contracts of Lease by not opening from 16 December
1999 to 26 December 1999, and by introducing a new
variety of empanada without the prior consent of the
respondent, as mandated by the provision of Section 2
of the Contract of Lease. Respondent also alleged that
petitioner infringed the lease contract by frequently
closing
earlier
than
the
agreed
closing
hours. Respondent finally averred that petitioner is
liable for the amount P106,474.09, representing the
penalty for selling a new variety of empanada,
electricity and water bills, and rental adjustment, among
other
charges
incidental
to
the
lease
agreements. Respondent claimed that the seizure of
petitioners personal belongings and equipment was in
the exercise of its retaining lien, considering that the
petitioner failed to settle the said obligations up to the
time the complaint was filed.[21]

Considering that petitioner already committed several

breaches of contract, the respondent thus opted not to
renew its Contracts of Lease with her anymore. The
security deposits were made in order to ensure faithful
compliance with the terms of their lease agreements;
and since petitioner committed several infractions
thereof, respondent was justified in forfeiting the
security deposits in the latters favor.

On 30 April 2001, the RTC rendered a Judgment [22] in

favor of the petitioner and found that the physical
takeover by the respondent of the leased premises and
the seizure of petitioners equipment and personal

belongings
without
prior
notice
were
illegal. The decretal part of the RTC Judgment reads:

WHEREFORE,
premises
duly
considered, judgment is hereby rendered
ordering the [herein respondent] to pay
[herein
petitioner]
the
amount
of P192,000.00 representing the security
deposits
made
by
the [petitioner]
and P50,000.00 as and for attorneys fees.

The [respondent] is likewise ordered

to return to the [petitioner] the various
properties seized by the former after
settling her account with the [respondent].

Lastly, the [respondent] may choose

either to reimburse the [petitioner] one half
(1/2) of the value of the improvements
introduced
by
the
plaintiff
at
SM Megamall should [respondent] choose to
appropriate the improvements to itself or
require the [petitioner] to remove the
improvements, even though the principal
thing
may
suffer
damage
thereby.
[Petitioner] shall not, however, cause
anymore impairment upon the said leased
premises than is necessary.

The other damages claimed by the

plaintiff are denied for lack of merit.

Aggrieved, the respondent appealed the adverse RTC

Judgment to the Court of Appeals.

In a Decision[23] dated 10 October 2003, the Court of

Appeals modified the RTC Judgment and found that the
respondent was justified in forfeiting the security
deposits and was not liable to reimburse the petitioner
for the value of the improvements introduced in the
leased premises and to pay for attorneys fees. In
modifying the findings of the lower court, the appellate
court declared that in view of the breaches of contract
committed by the petitioner, the respondent is justified
in forfeiting the security deposits. Moreover, since the
petitioner did not obtain the consent of the respondent
before
she
introduced
improvements
on
the
SM Megamall store space, the respondent has therefore
no obligation to reimburse the petitioner for the amount
expended in connection with the said improvements.
[24]
The Court of Appeals, however, maintained the order
of the trial court for respondent to return to petitioner
her properties after she has settled her obligations to
the respondent. The appellate court denied petitioners
Motion for Reconsideration in a Resolution [25] dated 19
April 2006.

Hence,
this
instant
Petition
for
Review
on Certiorari[26] filed by the petitioner assailing the Court
of Appeals Decision. For the resolution of this Court are
the following issues:

I. Whether or not the respondent is liable to return the

security deposits to the petitions.

II. Whether or not the respondent is liable to reimburse

the petitioner for the sum of the improvements she
introduced in the leased premises.

III. Whether or not the respondent is liable for attorneys

fees.[27]

The appellate court, in finding that the respondent is

authorized to forfeit the security deposits, relied on the
provisions of Sections 5 and 18 of the Contract of Lease,
to wit:

Section 5. DEPOSIT. The LESSEE shall

make a cash deposit in the sum of
SIXTY THOUSAND PESOS (P60,000.00)
equivalent to three (3) months rent as
security for the full and faithful
performance to each and every term,
provision, covenant and condition of
this lease and not as a pre-payment of
rent. If at any time during the term of this
lease the rent is increased[,] the LESSEE on
demand shall make an additional deposit
equal to the increase in rent. The LESSOR
shall not be required to keep the deposit
separate from its general funds and the
deposit shall not be entitled to interest. The
deposit shall remain intact during the entire
term and shall not be applied as payment
for any monetary obligations of the LESSEE
under this contract. If the LESSEE shall
faithfully perform every provision of
this lease[,] the deposit shall be refunded to
the LESSEE upon the expiration of this Lease

and upon satisfaction of

obligation to the LESSOR.

all

monetary

xxxx

Section 18. TERMINATION. Any

breach,
non-performance or non-observance of
the terms and conditions herein
provided shall constitute default which
shall be sufficient ground to terminate
this lease, its extension or renewal. In
which event, the LESSOR shall demand that
LESSEE immediately vacate the premises,
and LESSOR shall forfeit in its favor the
deposit tendered without prejudice to
any such other appropriate action as
may be legally authorized.[28]
Since it was already established by the trial court
that the petitioner was guilty of committing several
breaches of contract, the Court of Appeals decreed that
she cannot therefore rightfully demand the return of the
security deposits for the same are deemed forfeited by
reason of evident contractual violations.

It is undisputed that the above-quoted provision found

in all Contracts of Lease is in the nature of a penal
clause to ensure petitioners faithful compliance with the
terms and conditions of the said contracts.

A penal clause is an accessory undertaking to assume

greater liability in case of breach. It is attached to an
obligation in order to insure performance and has a

double function: (1) to provide for liquidated damages,

and (2) to strengthen the coercive force of the
obligation by the threat of greater responsibility in the
event of breach.[29] The obligor would then be bound to
pay the stipulated indemnity without the necessity of
proof of the existence and the measure of damages
caused by the breach.[30] Article 1226 of the Civil Code
states:

Art. 1226. In obligations with a penal

clause, the penalty shall substitute the
indemnity for damages and the payment of
interests in case of noncompliance, if there
is
no
stipulation
to
the
contrary. Nevertheless, damages shall be
paid if the obligor refuses to pay the penalty
or is guilty of fraud in the fulfillment of the
obligation.

The penalty may be enforced only

when it is demandable in accordance with
the provisions of this Code.

As a general rule, courts are not at liberty to ignore the

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

Art. 1229. The judge shall equitably

reduce the penalty when the principal
obligation
has
been
partly
or
irregularly complied with by the debtor.
Even if there has been no performance, the
penalty may also be reduced by the courts if
it is iniquitous or unconscionable.[31]

In ascertaining whether the penalty is unconscionable or

not, this court set out the following standard
in Ligutan v. Court of Appeals,[32] to wit:

The question of whether a penalty is

reasonable or iniquitous can be partly
subjective
and
partly
objective. Its
resolution would depend on such factor as,
but not necessarily confined to, the type,
extent and purpose of the penalty, the
nature of the obligation, the mode of breach
and its consequences, the supervening
realities, the standing and relationship of
the parties, and the like, the application of
which, by and large, is addressed to the
sound discretion of the court. xxx.

In the instant case, the forfeiture of the entire

amount of the security deposits in the sum
of P192,000.00 was excessive and unconscionable
considering that the gravity of the breaches committed
by the petitioner is not of such degree that the
respondent was unduly prejudiced thereby. It is but
equitable therefore to reduce the penalty of the

petitioner to 50% of the total amount of security

deposits.

It is in the exercise of its sound discretion that this

court tempered the penalty for the breaches committed
by the petitioner to 50% of the amount of the security
deposits. The
forfeiture
of
the
entire
sum
of P192,000.00 is clearly a usurious and iniquitous
penalty for the transgressions committed by the
petitioner. The respondent is therefore under the
obligation to return the 50% of P192,000.00 to the
petitioner.

Turning now to the liability of the respondent to

reimburse the petitioner for one-half of the expenses
incurred for the improvements on the leased store
space at SMMegamall, the following provision in the
Contracts of Lease will enlighten us in resolving this
issue:

Section
11. ALTERATIONS,
ADDITIONS,
IMPROVEMENTS, ETC. The LESSEE shall not
make
any
alterations,
additions,
or
improvements without the prior written
consent of LESSOR; and all alterations,
additions or improvements made on the
leased premises, except movable or fixtures
put in at LESSEEs expense and which are
removable, without defacing the buildings or
damaging
its
floorings,
shall
become LESSORs property
without
compensation/reimbursement
but
the
LESSOR reserves the right to require the

removal of the said alterations, additions or

improvements upon expiration of the lease.

The foregoing provision in the Contract of Lease

mandates that before the petitioner can introduce any
improvement on the leased premises, she should first
obtain respondents consent. In the case at bar, it was
not shown that petitioner previously secured the
consent of the respondent before she made the
improvements on the leased space in SM Megamall. It
was not even alleged by the petitioner that she
obtained such consent or she at least attempted to
secure the same. On the other hand, the petitioner
asserted that respondent allegedly misrepresented to
her that it would renew the terms of the contracts from
time to time after their expirations, and that the
petitioner was so induced thereby that she expended
the sum of P200,000.00 for the improvement of the
store space leased.

This argument was squarely addressed by this court

in Fernandez v. Court of Appeals,[33] thus:
The Court ruled that the stipulation of the
parties in their lease contract to be
renewable at the option of both parties
stresses that the faculty to renew was given
not to the lessee alone nor to the lessor by
himself but to the two simultaneously;
hence, both must agree to renew if a new
contract is to come about.

Petitioners
contention
that
respondents had verbally agreed to extend

the lease indefinitely is inadmissible to

qualify the terms of the written contract
under the parole evidence rule, and
unenforceable under the statute of frauds.
[34]

Moreover, it is consonant with human experience that

lessees, before occupying the leased premises,
especially store spaces located inside malls and big
commercial establishments, would renovate the place
and introduce improvements thereon according to the
needs and nature of their business and in harmony with
their trademark designs as part of their marketing ploy
to attract customers. Certainly, no inducement or
misrepresentation from the lessor is necessary for this
purpose, for it is not only a matter of necessity that a
lessee should re-design its place of business but a
business strategy as well.

In ruling that the respondent is liable to reimburse

petitioner one half of the amount of improvements
made on the leased store space should it choose to
appropriate the same, the RTC relied on the provision of
Article 1678 of the Civil Code which provides:
Art. 1678. If the lessee makes, in good
faith, useful improvements which are
suitable to the use for which the lease is
intended, without altering the form or
substance
of
the
property
leased,
the lessor upon the termination of the lease
shall pay the lessee one-half of the value of
the improvements at that time. Should
the lessor refuse to reimburse said amount,
the lessee may remove the improvements,
even though the principal thing may suffer

damage
thereby. He
shall
not,
however, cause any more impairment upon
the property leased than is necessary.
While it is true that under the above-quoted provision of
the Civil Code, the lessor is under the obligation to pay
the lessee one-half of the value of the improvements
made should the lessor choose to appropriate the
improvements, Article 1678 however should be read
together with Article 448 and Article 546 of the same
statute, which provide:

Art. 448. The owner of the land on

which anything has been built, sown or
planted in good faith, shall have the right to
appropriate as his own the works, sowing or
planting, after payment of the indemnity
provided for in articles 546 and 548, or to
oblige the one who built or planted to pay
the price of the land, and the one who
sowed, the proper rent. However, the
builder or planter cannot be obliged to buy
the land if its value is considerably more
than that of the building or trees. In such
case, he shall pay reasonable rent, if the
owner of the land does not choose to
appropriate the building or trees after
proper indemnity. The parties shall agree
upon the terms of the lease and in case of
disagreement, the court shall fix the terms
thereof.

xxxx

Art. 546. Necessary expenses shall be

refunded to every possessor; but only
possessor in good faith may retain the thing
until he has been reimbursed therefor.

Useful expenses shall be refunded only to

the possessor in good faith with the same
right of retention, the person who has
defeated him in the possession having the
option of refunding the amount of the
expenses or of paying the increase in value
which the thing may have acquired by
reason thereof.
Thus, to be entitled to reimbursement for
improvements introduced on the property, the
petitioner must be considered a builder in good
faith. Further, Articles 448 and 546 of the Civil Code,
which allow full reimbursement of useful improvements
and retention of the premises until reimbursement is
made, apply only to a possessor in good faith, i.e., one
who builds on land with the belief that he is the owner
thereof. A builder in good faith is one who is unaware of
any flaw in his title to the land at the time he builds on
it.[35] In this case, the petitioner cannot claim that she
was not aware of any flaw in her title or was under the
belief that she is the owner of the subject premises for it
is a settled fact that she is merely a lessee thereof.

In Geminiano v. Court of Appeals,[36] this Court

was emphatic in declaring that lessees are not
possessors or builders in good faith, thus:

Being mere lessees, the private

respondents
knew
that
their
occupation of the premises would
continue only for the life of the
lease. Plainly,
they
cannot
be
considered as possessors nor builders
in good faith.

In a plethora of cases, this Court has

held that Article 448 of the Civil Code, in
relation to Article 546 of the same Code,
which allows full reimbursement of useful
improvements and retention of the premises
until reimbursement is made, applies only to
a possessor in good faith, i.e., one who
builds on land with the belief that he is the
owner thereof. It does not apply where
one's only interest is that of a lessee
under a rental contract; otherwise, it
would always be in the power of the
tenant to "improve" his landlord out of
his property.

Since petitioners interest in the store space is merely

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

Anent the claim for attorneys fees, we resolve to

likewise deny the award of the same. Attorneys fees
may be awarded when a party is compelled to litigate or

to incur expenses to protect its interest by reason of

unjustified act of the other.[37]

In the instant petition, it was not shown that the

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

WHEREFORE, premises considered, the instant Petition

is PARTLY GRANTED. The Court of Appeals Decision
dated 10 October 2003 in CA-G.R. CV No. 73853 is
hereby AFFIRMED with the MODIFICATION that the
respondent may forfeit only 50% of the total amount of
the security deposits in the sum ofP192,000.00, and
must return the remaining 50% to the petitioner. No
costs.

G.R. No. 197861

June 5, 2013

SPOUSES FLORENTINO T. MALLARI and AUREA V.

MALLARI, Petitioners,
vs.
PRUDENTIAL BANK (now BANK OF THE PHILIPPINE
ISLANDS), Respondent.
DECISION

PERALTA, J.:
Before us is a Petition for Review on Certiorari under
Rule 45, assailing the Decision1 dated June 17, 2010 and
the Resolution2 dated July 20, 2011 of the Court of
Appeals (CA) in CA-G.R. CV No. 65993.
The antecedent facts are as follows:
On December 11, 1984, petitioner Florentino T. Mallari
(Florentino) obtained from respondent Prudential BankTarlac Branch (respondent bank), a loan in the amount
of P300,000.00 as evidenced by Promissory Note (PN)
No. BD 84-055.3 Under the promissory note, the loan
was subject to an interest rate of 21% per annum (p.a.),
attorney's fees equivalent to 15% of the total amount
due but not less than P200.00 and, in case of default, a
penalty and collection charges of 12% p.a. of the total
amount due. The loan had a maturity date of January
10, 1985, but was renewed up to February 17, 1985.
Petitioner Florentino executed a Deed of
Assignment4 wherein he authorized the respondent
bank to pay his loan with his time deposit with the latter
in the amount of P300,000.00.
On December 22, 1989, petitioners spouses Florentino
and Aurea Mallari (petitioners) obtained again from
respondent bank another loan of P1.7 million as
evidenced by PN No. BDS 606-895 with a maturity date
of March 22, 1990. They stipulated that the loan will
bear 23% interest p.a., attorney's fees equivalent to
15% p.a. of the total amount due, but not less
than P200.00, and penalty and collection charges of
12% p.a. Petitioners executed a Deed of Real Estate

Mortgage6 in favor of respondent bank covering

petitioners' property under Transfer Certificate of Title
(TCT) No. T-215175 of the Register of Deeds of Tarlac to
answer for the said loan.
Petitioners failed to settle their loan obligations with
respondent bank, thus, the latter, through its lawyer,
sent a demand letter to the former for them to pay their
obligations, which when computed up to January 31,
1992, amounted to P571,218.54 for PN No. BD 84-055
and P2,991,294.82 for PN No. BDS 606-89.
On February 25, 1992, respondent bank filed with the
Regional Trial Court (RTC) of Tarlac, a petition for the
extrajudicial foreclosure of petitioners' mortgaged
property for the satisfaction of the latter's obligation
ofP1,700,000.00 secured by such mortgage, thus, the
auction sale was set by the Provincial Sheriff on April 23,
1992.7
On April 10, 1992, respondent bank's Assistant Manager
sent petitioners two (2) separate Statements of Account
as of April 23, 1992, i.e., the loan of P300,000.00 was
increased to P594,043.54, while the P1,700,000.00 loan
was already P3,171,836.18.
On April 20, 1992, petitioners filed a complaint for
annulment of mortgage, deeds, injunction, preliminary
injunction, temporary restraining order and damages
claiming, among others, that: (1) the P300,000.00 loan
obligation should have been considered paid, because
the time deposit with the same amount under
Certificate of Time Deposit No. 284051 had already
been assigned to respondent bank; (2) respondent bank

still added the P300,000.00 loan to theP1.7 million loan

obligation for purposes of applying the proceeds of the
auction sale; and (3) they realized that there were
onerous terms and conditions imposed by respondent
bank when it tried to unilaterally increase the charges
and interest over and above those stipulated.
Petitioners asked the court to restrain respondent bank
from proceeding with the scheduled foreclosure sale.
Respondent bank filed its Answer with counterclaim
arguing that: (1) the interest rates were clearly provided
in the promissory notes, which were used in computing
for interest charges; (2) as early as January 1986,
petitioners' time deposit was made to apply for the
payment of interest of their P300,000.00 loan; and (3)
the statement of account as of April 10, 1992 provided
for a computation of interest and penalty charges only
from May 26, 1989, since the proceeds of petitioners'
time deposit was applied to the payment of interest and
penalty charges for the preceding period. Respondent
bank also claimed that petitioners were fully apprised of
the bank's terms and conditions; and that the
extrajudicial foreclosure was sought for the satisfaction
of the second loan in the amount of P1.7 million covered
by PN No. BDS 606-89 and the real estate mortgage,
and not the P300,000.00 loan covered by another PN
No. 84-055.
In an Order8 dated November 10, 1992, the RTC denied
the Application for a Writ of Preliminary Injunction.
However, in petitioners' Supplemental Motion for
Issuance of a Restraining Order and/or Preliminary
Injunction to enjoin respondent bank and the Provincial

Sheriff from effecting or conducting the auction sale, the

RTC reversed itself and issued the restraining order in its
Order9 dated January 14, 1993.
Respondent bank filed its Motion to Lift Restraining
Order, which the RTC granted in its Order10 dated March
9, 1993. Respondent bank then proceeded with the
extrajudicial foreclosure of the mortgaged property. On
July 7, 1993, a Certificate of Sale was issued to
respondent bank being the highest bidder in the amount
of P3,500,000.00.
Subsequently, respondent bank filed a Motion to
Dismiss Complaint11 for failure to prosecute action for
unreasonable length of time to which petitioners filed
their Opposition.12 On November 19, 1998, the RTC
issued its Order13 denying respondent bank's Motion to
Dismiss Complaint.
Trial thereafter ensued. Petitioner Florentino was
presented as the lone witness for the plaintiffs.
Subsequently, respondent bank filed a Demurrer to
Evidence.
On November 15, 1999, the RTC issued its
Order14 granting respondent's demurrer to evidence, the
dispositive portion of which reads:
WHEREFORE, this case is hereby ordered DISMISSED.
Considering there is no evidence of bad faith, the Court
need not order the plaintiffs to pay damages under the
general concept that there should be no premium on
the right to litigate.

NO COSTS.
SO ORDERED.15
The RTC found that as to the P300,000.00 loan,
petitioners had assigned petitioner Florentino's time
deposit in the amount of P300,000.00 in favor of
respondent bank, which maturity coincided with
petitioners' loan maturity. Thus, if the loan was unpaid,
which was later extended to February 17, 1985,
respondent bank should had just applied the time
deposit to the loan. However, respondent bank did not,
and allowed the loan interest to accumulate reaching
the amount of P594,043.54 as of April 10, 1992, hence,
the amount of P292,600.00 as penalty charges was
unjust and without basis.
As to the P1.7 million loan which petitioners obtained
from respondent bank after the P300,000.00 loan, it had
reached the amount of P3,171,836.18 per Statement of
Account dated April 27, 1993, which was computed
based on the 23% interest rate and 12% penalty charge
agreed upon by the parties; and that contrary to
petitioners' claim, respondent bank did not add
the P300,000.00 loan to the P1.7 million loan obligation
for purposes of applying the proceeds of the auction
sale.
The RTC found no legal basis for petitioners' claim that
since the total obligation was P1.7 million and
respondent bank's bid price was P3.5 million, the latter
should return to petitioners the difference of P1.8
million. It found that since petitioners' obligation had
reached P2,991,294.82 as of January 31, 1992, but the

certificate of sale was executed by the sheriff only on

July 7, 1993, after the restraining order was lifted, the
stipulated interest and penalty charges from January 31,
1992 to July 7, 1993 added to the loan already
amounted to P3.5 million as of the auction sale.
The RTC found that the 23% interest rate p.a., which
was then the prevailing loan rate of interest could not
be considered unconscionable, since banks are not
hospitable or equitable institutions but are entities
formed primarily for profit. It also found that Article
1229 of the Civil Code invoked by petitioners for the
reduction of the interest was not applicable, since
petitioners had not paid any single centavo of the P1.7
million loan which showed they had not complied with
any part of the obligation.
Petitioners appealed the RTC decision to the CA. A
Comment was filed by respondent bank and petitioners
filed their Reply thereto.
On June 17, 2010, the CA issued its assailed Decision,
the dispositive portion of which reads:
WHEREFORE, the instant appeal is hereby DENIED. The
Order dated November 15, 1999 issued by the Regional
Trial Court (RTC), Branch 64, Tarlac City, in Civil Case No.
7550 is hereby AFFIRMED.16
The CA found that the time deposit of P300,000.00 was
equivalent only to the principal amount of the loan
ofP300,000.00 and would not be sufficient to cover the
interest, penalty, collection charges and attorney's fees
agreed upon, thus, in the Statement of Account dated

April 10, 1992, the outstanding balance of petitioners'

loan wasP594,043.54. It also found not persuasive
petitioners' claim that the P300,000.00 loan was added
to the P1.7 million loan. The CA, likewise, found that the
interest rates and penalty charges imposed were not
unconscionable and adopted in toto the findings of the
RTC on the matter.
Petitioners filed their Motion for Reconsideration, which
the CA denied in a Resolution dated July 20, 2011.

valid, the parties thereto are bound to comply with

them, since such contract is the law between the
parties. In this case, petitioners and respondent bank
agreed upon on a 23% p.a. interest rate on the P1.7
million loan. However, petitioners now contend that the
interest rate of 23% p.a. imposed by respondent bank is
excessive or unconscionable, invoking our ruling in
Medel v. Court of Appeals,18 Toring v. Spouses GanzonOlan,19 and Chua v. Timan.20
We are not persuaded.

Hence, petitioners filed this petition for review arguing

that:
THE HON. COURT OF APPEALS ERRED IN AFFIRMING THE
ORDER OF THE RTC-BRANCH 64, TARLAC CITY, DATED
NOVEMBER 15, 1999, DESPITE THE FACT THAT THE
SAME IS CONTRARY TO SETTLED JURISPRUDENCE ON
THE MATTER.17
The issue for resolution is whether the 23% p.a. interest
rate and the 12% p.a. penalty charge on
petitioners'P1,700,000.00 loan to which they agreed
upon is excessive or unconscionable under the
circumstances.
Parties are free to enter into agreements and stipulate
as to the terms and conditions of their contract, but
such freedom is not absolute. As Article 1306 of the Civil
Code provides, "The contracting parties may establish
such stipulations, clauses, terms and conditions as they
may deem convenient, provided they are not contrary
to law, morals, good customs, public order, or public
policy." Hence, if the stipulations in the contract are

In Medel v. Court of Appeals,21 we found the stipulated

interest rate of 66% p.a. or a 5.5% per month on
aP500,000.00 loan excessive, unconscionable and
exorbitant, hence, contrary to morals if not against the
law and declared such stipulation void. In Toring v.
Spouses Ganzon-Olan,22 the stipulated interest rates
involved were 3% and 3.81% per month on a P10 million
loan, which we find under the circumstances excessive
and reduced the same to 1% per month. While in Chua
v. Timan,23 where the stipulated interest rates were 7%
and 5% a month, which are equivalent to 84% and 60%
p.a., respectively, we had reduced the same to 1% per
month or 12% p.a. We said that we need not unsettle
the principle we had affirmed in a plethora of cases that
stipulated interest rates of 3% per month and higher are
excessive, unconscionable and exorbitant, hence, the
stipulation was void for being contrary to morals.24
In this case, the interest rate agreed upon by the parties
was only 23% p.a., or less than 2% per month, which
are much lower than those interest rates agreed upon
by the parties in the above-mentioned cases. Thus,

there is no similarity of factual milieu for the application

of those cases.
We do not consider the interest rate of 23% p.a. agreed
upon by petitioners and respondent bank to be
unconscionable.
In Villanueva v. Court of Appeals,25 where the issue
raised was whether the 24% p.a. stipulated interest rate
is unreasonable under the circumstances, we answered
in the negative and held:
In Spouses Zacarias Bacolor and Catherine Bacolor v.
Banco Filipino Savings and Mortgage Bank, Dagupan
City Branch, this Court held that the interest rate of 24%
per annum on a loan of P244,000.00, agreed upon by
the parties, may not be considered as unconscionable
and excessive. As such, the Court ruled that the
borrowers cannot renege on their obligation to comply
with what is incumbent upon them under the contract of
loan as the said contract is the law between the parties
and they are bound by its stipulations.
Also, in Garcia v. Court of Appeals, this Court sustained
the agreement of the parties to a 24% per annum
interest on an P8,649,250.00 loan finding the same to
be reasonable and clearly evidenced by the amended
credit line agreement entered into by the parties as well
as two promissory notes executed by the borrower in
favor of the lender.
Based on the above jurisprudence, the Court finds that
the 24% per annum interest rate, provided for in the
subject mortgage contracts for a loan of P225,000.00,

may not be considered unconscionable. Moreover,

considering that the mortgage agreement was freely
entered into by both parties, the same is the law
between them and they are bound to comply with the
provisions contained therein.26
Clearly, jurisprudence establish that the 24% p.a.
stipulated interest rate was not considered
unconscionable, thus, the 23% p.a. interest rate
imposed on petitioners' loan in this case can by no
means be considered excessive or unconscionable.
We also do not find the stipulated 12% p.a. penalty
charge excessive or unconscionable.
In Ruiz v. CA,27 we held:
The 1% surcharge on the principal loan for every month
of default is valid.1wphi1 This surcharge or penalty
stipulated in a loan agreement in case of default
partakes of the nature of liquidated damages under Art.
2227 of the New Civil Code, and is separate and distinct
from interest payment. Also referred to as a penalty
clause, it is expressly recognized by law. It is an
accessory undertaking to assume greater liability on the
part of an obligor in case of breach of an obligation. The
obligor would then be bound to pay the stipulated
amount of indemnity without the necessity of proof on
the existence and on the measure of damages caused
by the breach. x x x28 And in Development Bank of the
Philippines v. Family Foods Manufacturing Co., Ltd.,29 we
held that:

x x x The enforcement of the penalty can be demanded

by the creditor only when the non-performance is due to
the fault or fraud of the debtor. The non-performance
gives rise to the presumption of fault; in order to avoid
the payment of the penalty, the debtor has the burden
of proving an excuse - the failure of the performance
was due to either force majeure or the acts of the
creditor himself.30
Here, petitioners defaulted in the payment of their loan
obligation with respondent bank and their contract
provided for the payment of 12% p.a. penalty charge,
and since there was no showing that petitioners' failure
to perform their obligation was due to force majeure or
to respondent bank's acts, petitioners cannot now back
out on their obligation to pay the penalty charge. A
contract is the law between the parties and they are
bound by the stipulations therein.
WHEREFORE, the petition for review is DENIED. The
Decision dated June 17, 2010 and the Resolution dated
July 20, 2011 of the Court of Appeals are hereby
AFFIRMED.
SO ORDERED.

G.R. No. L-6220

May 7, 1954

MARTINA QUIZANA, plaintiff-appellee,

vs.

GAUDENCIO REDUGERIO and JOSEFA

POSTRADO, defendants-appellants.
Samson and Amante for appellants.
Sabino Palomares for appellee.
LABRADOR, J.:
This is an appeal to this Court from a decision rendered
by the Court of First Instance of Marinduque, wherein
the defendants-appellants are ordered to pay the
plaintiff-appellee the sum of P550, with interest from the
time of the filing of the complaint, and from an order of
the same court denying a motion of the defendantsappellants for the reconsideration of the judgment on
the ground that they were deprived of their day in court.
The action was originally instituted in the justice of the
peace court of Sta. Cruz, Marinduque, and the same is
based on an actionable document attached to the
complaint, signed by the defendants-appellants on
October 4, 1948, and containing the following pertinent
provisions:
Na alang-alang sa aming mahigpit na
pangangailangan ay kaming magasawa ay
lumapit kay Ginang Martina Quizana, balo, at
naninirahan sa Hupi, Sta. Cruz, Marinduque, at
kami ay umutang sa kanya ng halagang Limang
Daan at Limang Pung Piso (P550.00), Salaping
umiiral dito sa Filipinas na aming tinanggap na
husto at walang kulang sa kanya sa condicion na
ang halagang aming inutang ay ibabalik o

babayaran namin sa kanya sa katapusan ng

buwan ng Enero, taong 1949.
Pinagkasunduan din naming magasawa sa
sakaling hindi kami makabayad sa taning na
panahon ay aming ipifrenda o isasangla sa kanya
ang isa naming palagay na niogan sa lugar nang
Cororocho, barrio ng Balogo, municipio ng Santa
Cruz, lalawigang Marinduque, Kapuluang Filipinas
at ito ay nalilibot ng mga kahanganang
sumusunod:
Sa Norte, Dalmacio Constantino; sa este, Catalina
Reforma; sa sur, Dionisio Ariola; at sa Oeste,
Reodoro Ricamora, no natatala sa gobierno sa
ilalim ng Declaracion No. ______ na nasa pangalan
ko, Josefa Postrado.
The defendants-appellants admit the execution of the
document, but claim, as special defense, that since the
31st of January, 1949, they offered to pledge the land
specified in the agreement and transfer possession
thereof to the plaintiff-appellee, but that the latter
refused said offer. Judgement having been rendered by
the justice of the peace court of Sta. Cruz, the
defendants-appellants appealed to the Court of First
Instance. In that court they reiterated the defenses that
they presented in the justice of the peace court. The
case was set for hearing in the Court of First Instance on
August 16, 1951. As early as July 30 counsel for the
defendants-appellants presented an "Urgent Motion for
Continuance," alleging that on the day set for the
hearing (August 16, 1951), they would appear in the
hearing of two criminal cases previously set for trial

before they received notice of the hearing on the

aforesaid date. The motion was submitted on August 2,
and was set for hearing on August 4. This motion was
not acted upon until the day of the trial. On the date of
the trial the court denied the defendants-appellants'
motion for continuance, and after hearing the evidence
for the plaintiff, in the absence of the defendantsappellants and their counsel, rendered the decision
appealed from. Defendants-appellants upon receiving
copy of the decision, filed a motion for reconsideration,
praying that the decision be set aside on the ground
that sufficient time in advance was given to the court to
pass upon their motion for continuance, but that the
same was not passed upon. This motion for
reconsideration was denied.
The main question raised in this appeal is the nature
and effect of the actionable document mentioned
above. The trial court evidently ignored the second part
of defendants-appellants' written obligation, and
enforced its last first part, which fixed payment on
January 31, 1949. The plaintiff-appellee, for his part,
claims that this part of the written obligation is not
binding upon him for the reason that he did not sign the
agreement, and that even if it were so, the defendantsappellants did not execute the document as agreed
upon, but, according to their answer, demanded the
plaintiff-appellee to do so. This last contention of the
plaintiff-appellee is due to a loose language in the
answer filed with the Court of First Instance. But upon
careful scrutiny, it will be seen that what the
defendants-appellants wanted to allege is that they
themselves had offered to execute the document of

mortgage and deliver the same to the plaintiff-appellee,

but that the latter refused to have it executed unless, an
additional security was furnished. Thus the answer
reads:
5. That immediately after the due date of the loan
Annex "A" of the complaint, the defendants made
efforts to execute the necessary documents of
mortgage and to deliver the same to the plaintiff,
in compliance with the terms and conditions
thereof, but the plaintiff refused to execute the
proper documents and insisted on another portion
of defendants' as additional security for the said
loan; (emphasis ours.)
In our opinion it is not true that defendants-appellants
had not offered to execute the deed of mortgage.
The other reasons adduced by the plaintiff-appellee for
claiming that the agreement was not binding upon him
also deserves scant consideration. When plaintiffappellee received the document, without any objection
on his part to the paragraph thereof in which the
obligors offered to deliver a mortgage on a property of
theirs in case they failed to pay the debt on the day
stipulated, he thereby accepted the said condition of the
agreement. The acceptance by him of the written
obligation without objection and protest, and the fact
that he kept it and based his action thereon, are
concrete and positive proof that he agreed and
contested to all its terms, including the paragraph on
the constitution of the mortgage.

The decisive question at issue, therefore, is whether the

second part of the written obligation, in which the
obligors agreed and promised to deliver a mortgage
over the parcel of land described therein, upon their
failure to pay the debt on a date specified in the
proceeding paragraph, is valid and binding and effective
upon the plaintiff-appellee, the creditor. This second
part of the obligation in question is what is known in law
as a facultative obligation, defined in article 1206 of
Civil Code of the Philippines, which provides:
ART. 1206. When only one prestation has been
agreed upon, but the obligor may render another
in substitution, the obligation is called facultative.
xxx

xxx

xxx

This is a new provision and is not found in the old

Spanish Civil Code, which was the one in force at the
time of the execution of the agreement.
There is nothing in the agreement which would argue
against its enforcement. it is not contrary to law or
public morals or public policy, and notwithstanding the
absence of any legal provision at the time it was
entered into government it, as the parties had freely
and voluntarily entered into it, there is no ground or
reason why it should not be given effect. It is a new
right which should be declared effective at once, in
consonance with the provisions of article 2253 of the
Civil Code of the Philippines, thus:
ART. 2253. . . . But if a right should be declared for
the first time in this Code, it shall be effective at

once, even though the act or event which gives

rise thereto may have been done or may have
occurred under the prior legislation, provided said
new right does not prejudice or impair any vested
or acquired right, of the same origin.
In view of our favorable resolution on the important
question raised by the defendants-appellants on this
appeal, it becomes unnecessary to consider the other
question of procedure raised by them.
For the foregoing considerations, the judgment
appealed from is hereby reversed, and in accordance
with the provisions of the written obligation, the case is
hereby remanded to the Court of First Instance, in which
court the defendants-appellants shall present a duly
executed deed of mortgage over the property described
in the written obligation, with a period of payment to be
agreed upon by the parties with the approval of the
court. Without costs.
Paras, C.J., Pablo, Bengzon, Montemayor, Jugo, Bautista
Angelo, and Concepcion, JJ., concur.

G.R. No. 206806

June 25, 2014

ARCO PULP AND PAPER CO., INC. and CANDIDA A.

SANTOS, Petitioners,
vs.
DAN T. LIM, doing business under the name and

style of QUALITY PAPERS & PLASTIC PRODUCTS

ENTERPRISES, Respondent.
DECISION
LEONEN, J.:
Novation must be stated in clear and unequivocal terms
to extinguish an obligation. It cannot be presumed and
may be implied only if the old and new contracts are
incompatible on every point.
Before us is a petition for review on certiorari1 assailing
the Court of Appeals decision2 in CA-G.R. CV No. 95709,
which stemmed from a complaint3 filed in the Regional
Trial Court of Valenzuela City, Branch 171, for collection
of sum of money.
The facts are as follows:
Dan T. Lim works in the business of supplying scrap
papers, cartons, and other raw materials, under the
name Quality Paper and Plastic Products, Enterprises, to
factories engaged in the paper mill business.4 From
February 2007 to March 2007, he delivered scrap papers
worth 7,220,968.31 to Arco Pulp and Paper Company,
Inc. (Arco Pulp and Paper) through its Chief Executive
Officer and President, Candida A. Santos.5 The parties
allegedly agreed that Arco Pulp and Paper would either
pay Dan T. Lim the value of the raw materials or deliver
to him their finished products of equivalent value.6
Dan T. Lim alleged that when he delivered the raw
materials, Arco Pulp and Paper issued a post-dated

check dated April 18, 20077 in the amount of

1,487,766.68 as partial payment, with the assurance
that the check would not bounce.8 When he deposited
the check on April 18, 2007, it was dishonored for being
drawn against a closed account.9
On the same day, Arco Pulp and Paper and a certain Eric
Sy executed a memorandum of agreement10 where Arco
Pulp and Paper bound themselves to deliver their
finished products to Megapack Container Corporation,
owned by Eric Sy, for his account. According to the
memorandum, the raw materials would be supplied by
Dan T. Lim, through his company, Quality Paper and
Plastic Products. The memorandum of agreement reads
as follows:
Per meeting held at ARCO, April 18, 2007, it has been
mutually agreed between Mrs. Candida A. Santos and
Mr. Eric Sy that ARCO will deliver 600 tons Test Liner
150/175 GSM, full width 76 inches at the price of P18.50
per kg. to Megapack Container for Mr. Eric Sys account.
Schedule of deliveries are as follows:
....
It has been agreed further that the Local OCC materials
to be used for the production of the above Test Liners
will be supplied by Quality Paper & Plastic Products Ent.,
total of 600 Metric Tons at P6.50 per kg. (price subject
to change per advance notice). Quantity of Local OCC
delivery will be based on the quantity of Test Liner
delivered to Megapack Container Corp. based on the
above production schedule.11

On May 5, 2007, Dan T.Lim sent a letter12 to Arco Pulp

and Paper demanding payment of the amount of
7,220,968.31, but no payment was made to him.13
Dan T. Lim filed a complaint14 for collection of sum of
money with prayer for attachment with the Regional
Trial Court, Branch 171, Valenzuela City, on May 28,
2007. Arco Pulp and Paper filed its answer15 but failed to
have its representatives attend the pre-trial hearing.
Hence, the trial court allowed Dan T. Lim to present his
evidence ex parte.16
On September 19, 2008, the trial court rendered a
judgment in favor of Arco Pulp and Paper and dismissed
the complaint, holding that when Arco Pulp and Paper
and Eric Sy entered into the memorandum of
agreement, novation took place, which extinguished
Arco Pulp and Papers obligation to Dan T. Lim.17
Dan T. Lim appealed18 the judgment with the Court of
Appeals. According to him, novation did not take place
since the memorandum of agreement between Arco
Pulp and Paper and Eric Sy was an exclusive and private
agreement between them. He argued that if his name
was mentioned in the contract, it was only for supplying
the parties their required scrap papers, where his
conformity through a separate contract was
indispensable.19
On January 11, 2013, the Court of Appeals20 rendered a
decision21 reversing and setting aside the judgment
dated September 19, 2008 and ordering Arco Pulp and
Paper to jointly and severally pay Dan T. Lim the amount
ofP7,220,968.31 with interest at 12% per annum from

the time of demand; P50,000.00 moral

damages; P50,000.00 exemplary damages;
and P50,000.00 attorneys fees.22
The appellate court ruled that the facts and
circumstances in this case clearly showed the existence
of an alternative obligation.23 It also ruled that Dan T.
Lim was entitled to damages and attorneys fees due to
the bad faith exhibited by Arco Pulp and Paper in not
honoring its undertaking.24
25

Its motion for reconsideration having been

denied,26 Arco Pulp and Paper and its President and
Chief Executive Officer, Candida A. Santos, bring this
petition for review on certiorari.
On one hand, petitioners argue that the execution of the
memorandum of agreement constituted a novation of
the original obligation since Eric Sy became the new
debtor of respondent. They also argue that there is no
legal basis to hold petitioner Candida A. Santos
personally liable for the transaction that petitioner
corporation entered into with respondent. The Court of
Appeals, they allege, also erred in awarding moral and
exemplary damages and attorneys fees to respondent
who did not show proof that he was entitled to
damages.27
Respondent, on the other hand, argues that the Court of
Appeals was correct in ruling that there was no proper
novation in this case. He argues that the Court of
Appeals was correct in ordering the payment of
7,220,968.31 with damages since the debt of petitioners
remains unpaid.28 He also argues that the Court of

Appeals was correct in holding petitioners solidarily

liable since petitioner Candida A. Santos was "the prime
mover for such outstanding corporate liability."29 In their
reply, petitioners reiterate that novation took place
since there was nothing in the memorandum of
agreement showing that the obligation was alternative.
They also argue that when respondent allowed them to
deliver the finished products to Eric Sy, the original
obligation was novated.30
A rejoinder was submitted by respondent, but it was
noted without action in view of A.M. No. 99-2-04-SC
dated November 21, 2000.31
The issues to be resolved by this court are as follows:
1. Whether the obligation between the parties was
extinguished by novation
2. Whether Candida A. Santos was solidarily liable
with Arco Pulp and Paper Co., Inc.
3. Whether moral damages, exemplary damages,
and attorneys fees can be awarded
The petition is denied.
The obligation between the
parties was an alternative
obligation
The rule on alternative obligations is governed by Article
1199 of the Civil Code, which states:

Article 1199. A person alternatively bound by different

prestations shall completely perform one of them.
The creditor cannot be compelled to receive part of one
and part of the other undertaking.
"In an alternative obligation, there is more than one
object, and the fulfillment of one is sufficient,
determined by the choice of the debtor who generally
has the right of election."32 The right of election is
extinguished when the party who may exercise that
option categorically and unequivocally makes his or her
choice known.33
The choice of the debtor must also be communicated to
the creditor who must receive notice of it since: The
object of this notice is to give the creditor . . .
opportunity to express his consent, or to impugn the
election made by the debtor, and only after said notice
shall the election take legal effect when consented by
the creditor, or if impugned by the latter, when declared
proper by a competent court.34
According to the factual findings of the trial court and
the appellate court, the original contract between the
parties was for respondent to deliver scrap papers
worth P7,220,968.31 to petitioner Arco Pulp and Paper.
The payment for this delivery became petitioner Arco
Pulp and Papers obligation. By agreement, petitioner
Arco Pulp and Paper, as the debtor, had the option to
either (1) pay the price or(2) deliver the finished
products of equivalent value to respondent.35

The appellate court, therefore, correctly identified the

obligation between the parties as an alternative
obligation, whereby petitioner Arco Pulp and Paper, after
receiving the raw materials from respondent, would
either pay him the price of the raw materials or, in the
alternative, deliver to him the finished products of
equivalent value.
When petitioner Arco Pulp and Paper tendered a check
to respondent in partial payment for the scrap papers,
they exercised their option to pay the price.
Respondents receipt of the check and his subsequent
act of depositing it constituted his notice of petitioner
Arco Pulp and Papers option to pay.
This choice was also shown by the terms of the
memorandum of agreement, which was executed on the
same day. The memorandum declared in clear terms
that the delivery of petitioner Arco Pulp and Papers
finished products would be to a third person, thereby
extinguishing the option to deliver the finished products
of equivalent value to respondent.
The memorandum of
agreement did not constitute
a novation of the original
contract
The trial court erroneously ruled that the execution of
the memorandum of agreement constituted a novation
of the contract between the parties. When petitioner
Arco Pulp and Paper opted instead to deliver the
finished products to a third person, it did not novate the
original obligation between the parties.

The rules on novation are outlined in the Civil Code,

thus:
Article 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the
creditor. (1203)
Article 1292. In order that an obligation may be
extinguished by another which substitute the same, it is
imperative that it be so declared in unequivocal terms,
or that the old and the new obligations be on every
point incompatible with each other. (1204)
Article 1293. Novation which consists in substituting a
new debtor in the place of the original one, may be
made even without the knowledge or against the will of
the latter, but not without the consent of the creditor.
Payment by the new debtor gives him the rights
mentioned in Articles 1236 and 1237. (1205a)
Novation extinguishes an obligation between two
parties when there is a substitution of objects or debtors
or when there is subrogation of the creditor. It occurs
only when the new contract declares so "in unequivocal
terms" or that "the old and the new obligations be on
every point incompatible with each other."36
Novation was extensively discussed by this court in
Garcia v. Llamas:37

Novation is a mode of extinguishing an obligation by

changing its objects or principal obligations, by
substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor.
Article 1293 of the Civil Code defines novation as
follows:
"Art. 1293. Novation which consists in substituting a
new debtor in the place of the original one, may be
made even without the knowledge or against the will of
the latter, but not without the consent of the creditor.
Payment by the new debtor gives him rights mentioned
in articles 1236 and 1237."
In general, there are two modes of substituting the
person of the debtor: (1) expromision and (2)
delegacion. In expromision, the initiative for the change
does not come from and may even be made without
the knowledge of the debtor, since it consists of a
third 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. Both
modes of substitution by the debtor require the consent
of the creditor.
Novation may also be extinctive or modificatory. It is
extinctive when an old obligation is terminated by the
creation of a new one that takes the place of the former.
It is merely modificatory when the old obligation
subsists to the extent that it remains compatible with
the amendatory agreement. Whether extinctive or

1) There must be a previous valid obligation.

the old obligation for the new one.39 (Emphasis supplied)

There is nothing in the memorandum of agreement that
states that with its execution, the obligation of
petitioner Arco Pulp and Paper to respondent would be
extinguished. It also does not state that Eric Sy
somehow substituted petitioner Arco Pulp and Paper as
respondents debtor. It merely shows that petitioner
Arco Pulp and Paper opted to deliver the finished
products to a third person instead.

2) The parties concerned must agree to a new

contract.

The consent of the creditor must also be secured for the

novation to be valid:

3) The old contract must be extinguished.

Novation must be expressly consented to. Moreover, the

conflicting intention and acts of the parties underscore
the absence of any express disclosure or circumstances
with which to deduce a clear and unequivocal intent by
the parties to novate the old agreement.40 (Emphasis
supplied)

modificatory, novation is made either by changing the

object or the principal conditions, referred to as
objective or real novation; or by substituting the person
of the debtor or subrogating a third person to the rights
of the creditor, an act known as subjective or personal
novation. For novation to take place, the following
requisites must concur:

4) There must be a valid new contract.

Novation may also be express or implied. It is express
when the new obligation declares in unequivocal terms
that the old obligation is extinguished. It is implied when
the new obligation is incompatible with the old one on
every point. The test of incompatibility is whether the
two obligations can stand together, each one with its
own independent existence.38 (Emphasis supplied)
Because novation requires that it be clear and
unequivocal, it is never presumed, thus:
In the civil law setting, novatio is literally construed as
to make new. So it is deeply rooted in the Roman Law
jurisprudence, the principle novatio non praesumitur
that novation is never presumed.At bottom, for
novation tobe a jural reality, its animus must be ever
present, debitum pro debito basically extinguishing

In this case, respondent was not privy to the

memorandum of agreement, thus, his conformity to the
contract need not be secured. This is clear from the first
line of the memorandum, which states:
Per meeting held at ARCO, April 18, 2007, it has been
mutually agreed between Mrs. Candida A. Santos and
Mr. Eric Sy. . . .41
If the memorandum of agreement was intended to
novate the original agreement between the parties,
respondent must have first agreed to the substitution of
Eric Sy as his new debtor. The memorandum of
agreement must also state in clear and unequivocal

terms that it has replaced the original obligation of

petitioner Arco Pulp and Paper to respondent. Neither of
these circumstances is present in this case.
Petitioner Arco Pulp and Papers act of tendering partial
payment to respondent also conflicts with their alleged
intent to pass on their obligation to Eric Sy. When
respondent sent his letter of demand to petitioner Arco
Pulp and Paper, and not to Eric Sy, it showed that the
former neither acknowledged nor consented to the
latter as his new debtor. These acts, when taken
together, clearly show that novation did not take place.
Since there was no novation, petitioner Arco Pulp and
Papers obligation to respondent remains valid and
existing. Petitioner Arco Pulp and Paper, therefore, must
still pay respondent the full amount of P7,220,968.31.
Petitioners are liable for
damages
Under Article 2220 of the Civil Code, moral damages
may be awarded in case of breach of contract where the
breach is due to fraud or bad faith:
Art. 2220. Willfull injury to property may be a legal
ground for awarding moral damages if the court should
find that, under the circumstances, such damages are
justly due. The same rule applies to breaches of
contract where the defendant acted fraudulently or in
bad faith. (Emphasis supplied)
Moral damages are not awarded as a matter of right but
only after the party claiming it proved that the breach
was due to fraud or bad faith. As this court stated:

Moral damages are not recoverable simply because a

contract has been breached. They are recoverable only
if the party from whom it is claimed acted fraudulently
or in bad faith or in wanton disregard of his contractual
obligations. The breach must be wanton, reckless,
malicious or in bad faith, and oppressive or abusive.42
Further, the following requisites must be proven for the
recovery of moral damages:
An award of moral damages would require certain
conditions to be met, to wit: (1)first, there must be an
injury, whether physical, mental or psychological,
clearly sustained by the claimant; (2) second, there
must be culpable act or omission factually established;
(3) third, the wrongful act or omission of the defendant
is the proximate cause of the injury sustained by the
claimant; and (4) fourth, the award of damages is
predicated on any of the cases stated in Article 2219 of
the Civil Code.43
Here, the injury suffered by respondent is the loss
of P7,220,968.31 from his business. This has remained
unpaid since 2007. This injury undoubtedly was caused
by petitioner Arco Pulp and Papers act of refusing to
pay its obligations.
When the obligation became due and demandable,
petitioner Arco Pulp and Paper not only issued an
unfunded check but also entered into a contract with a
third person in an effort to evade its liability. This proves
the third requirement.

As to the fourth requisite, Article 2219 of the Civil Code

provides that moral damages may be awarded in the
following instances:
Article 2219. Moral damages may be recovered in the
following and analogous cases:
(1) A criminal offense resulting in physical injuries;
(2) Quasi-delicts causing physical injuries;
(3) Seduction, abduction, rape, or other lascivious
acts;
(4) Adultery or concubinage;
(5) Illegal or arbitrary detention or arrest;
(6) Illegal search;
(7) Libel, slander or any other form of defamation;
(8) Malicious prosecution;
(9) Acts mentioned in Article 309;
(10) Acts and actions referred to in Articles 21, 26,
27, 28, 29, 30, 32, 34, and 35.
Breaches of contract done in bad faith, however, are not
specified within this enumeration. When a party
breaches a contract, he or she goes against Article 19 of
the Civil Code, which states: Article 19. Every person
must, in the exercise of his rights and in the

performance of his duties, act with justice, give

everyone his due, and observe honesty and good faith.
Persons who have the right to enter into contractual
relations must exercise that right with honesty and good
faith. Failure to do so results in an abuse of that right,
which may become the basis of an action for damages.
Article 19, however, cannot be its sole basis:
Article 19 is the general rule which governs the conduct
of human relations. By itself, it is not the basis of an
actionable tort. Article 19 describes the degree of care
required so that an actionable tort may arise when it is
alleged together with Article 20 or Article 21.44
Article 20 and 21 of the Civil Code are as follows:
Article 20. Every person who, contrary to law, wilfully or
negligently causes damage to another, shall indemnify
the latter for the same.
Article 21.Any person who wilfully causes loss or injury
to another in a manner that is contrary to morals, good
customs or public policy shall compensate the latter for
the damage.
To be actionable, Article 20 requires a violation of law,
while Article 21 only concerns with lawful acts that are
contrary to morals, good customs, and public policy:
Article 20 concerns violations of existing law as basis for
an injury. It allows recovery should the act have been
willful or negligent. Willful may refer to the intention to
do the act and the desire to achieve the outcome which

is considered by the plaintiff in tort action as injurious.

Negligence may refer to a situation where the act was
consciously done but without intending the result which
the plaintiff considers as injurious.

Moral damages, however, are not recoverable on the

mere breach of the contract. Article 2220 requires that
the breach be done fraudulently or in bad faith. In
Adriano v. Lasala:46

Article 21, on the other hand, concerns injuries that may

be caused by acts which are not necessarily proscribed
by law. This article requires that the act be willful, that
is, that there was an intention to do the act and a desire
to achieve the outcome. In cases under Article 21, the
legal issues revolve around whether such outcome
should be considered a legal injury on the part of the
plaintiff or whether the commission of the act was done
in violation of the standards of care required in Article
19.45

To recover moral damages in an action for breach of

contract, the breach must be palpably wanton, reckless
and malicious, in bad faith, oppressive, or abusive.
Hence, the person claiming bad faith must prove its
existence by clear and convincing evidence for the law
always presumes good faith.

When parties act in bad faith and do not faithfully

comply with their obligations under contract, they run
the risk of violating Article 1159 of the Civil Code:
Article 1159. Obligations arising from contracts have the
force of law between the contracting parties and should
be complied with in good faith.
Article 2219, therefore, is not an exhaustive list of the
instances where moral damages may be recovered
since it only specifies, among others, Article 21. When a
party reneges on his or her obligations arising from
contracts in bad faith, the act is not only contrary to
morals, good customs, and public policy; it is also a
violation of Article 1159. Breaches of contract become
the basis of moral damages, not only under Article
2220, but also under Articles 19 and 20 in relation to
Article 1159.

Bad faith does not simply connote bad judgment or

negligence. It imports a dishonest purpose or some
moral obliquity and conscious doing of a wrong, a
breach of known duty through some motive or interest
or ill will that partakes of the nature of fraud. It is,
therefore, a question of intention, which can be inferred
from ones conduct and/or contemporaneous
statements.47 (Emphasis supplied)
Since a finding of bad faith is generally premised on the
intent of the doer, it requires an examination of the
circumstances in each case.
When petitioner Arco Pulp and Paper issued a check in
partial payment of its obligation to respondent, it was
presumably with the knowledge that it was being drawn
against a closed account. Worse, it attempted to shift
their obligations to a third person without the consent of
respondent.
Petitioner Arco Pulp and Papers actions clearly show "a
dishonest purpose or some moral obliquity and

conscious doing of a wrong, a breach of known duty

through some motive or interest or ill will that partakes
of the nature of fraud."48 Moral damages may, therefore,
be awarded.
Exemplary damages may also be awarded. Under the
Civil Code, exemplary damages are due in the following
circumstances:
Article 2232. In contracts and quasi-contracts, the court
may award exemplary damages if the defendant acted
in a wanton, fraudulent, reckless, oppressive, or
malevolent manner.
Article 2233. Exemplary damages cannot be recovered
as a matter of right; the court will decide whether or not
they should be adjudicated.
Article 2234. While the amount of the exemplary
damages need not be proven, the plaintiff must show
that he is entitled to moral, temperate or compensatory
damages before the court may consider the question of
whether or not exemplary damages should be awarded.
In Tankeh v. Development Bank of the Philippines,49 we
stated that:
The purpose of exemplary damages is to serve as a
deterrent to future and subsequent parties from the
commission of a similar offense. The case of People v.
Ranteciting People v. Dalisay held that:
Also known as punitive or vindictive damages,
exemplary or corrective damages are intended to serve

as a deterrent to serious wrong doings, and as a

vindication of undue sufferings and wanton invasion of
the rights of an injured or a punishment for those guilty
of outrageous conduct. These terms are generally, but
not always, used interchangeably. In common law, there
is preference in the use of exemplary damages when
the award is to account for injury to feelings and for the
sense of indignity and humiliation suffered by a person
as a result of an injury that has been maliciously and
wantonly inflicted, the theory being that there should be
compensation for the hurt caused by the highly
reprehensible conduct of the defendantassociated
with such circumstances as willfulness, wantonness,
malice, gross negligence or recklessness, oppression,
insult or fraud or gross fraudthat intensifies the injury.
The terms punitive or vindictive damages are often used
to refer to those species of damages that may be
awarded against a person to punish him for his
outrageous conduct. In either case, these damages are
intended in good measure to deter the wrongdoer and
others like him from similar conduct in the
future.50 (Emphasis supplied; citations omitted)
The requisites for the award of exemplary damages are
as follows:
(1) they may be imposed by way of example in
addition to compensatory damages, and only after
the claimant's right to them has been established;
(2) that they cannot be recovered as a matter of
right, their determination depending upon the
amount of compensatory damages that may be
awarded to the claimant; and

(3) the act must be accompanied by bad faith or

done in a wanton, fraudulent, oppressive or
malevolent manner.51
Business owners must always be forthright in their
dealings. They cannot be allowed to renege on their
obligations, considering that these obligations were
freely entered into by them. Exemplary damages may
also be awarded in this case to serve as a deterrent to
those who use fraudulent means to evade their
liabilities.
Since the award of exemplary damages is proper,
attorneys fees and cost of the suit may also be
recovered.
Article 2208 of the Civil Code states:
Article 2208. In the absence of stipulation, attorney's
fees and expenses of litigation, other than judicial costs,
cannot be recovered, except:
(1) When exemplary damages are awarded[.]
Petitioner Candida A. Santos
is solidarily liable with
petitioner corporation
Petitioners argue that the finding of solidary liability was
erroneous since no evidence was adduced to prove that
the transaction was also a personal undertaking of
petitioner Santos. We disagree.
In Heirs of Fe Tan Uy v. International Exchange
Bank,52 we stated that:

Basic is the rule in corporation law that a corporation is

a juridical entity which is vested with a legal personality
separate and distinct from those acting for and in its
behalf and, in general, from the people comprising it.
Following this principle, obligations incurred by the
corporation, acting through its directors, officers and
employees, are its sole liabilities. A director, officer or
employee of a corporation is generally not held
personally liable for obligations incurred by the
corporation. Nevertheless, this legal fiction may be
disregarded if it is used as a means to perpetrate fraud
or an illegal act, or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, or to
confuse legitimate issues.
....
Before a director or officer of a corporation can be held
personally liable for corporate obligations, however, the
following requisites must concur: (1) the complainant
must allege in the complaint that the director or officer
assented to patently unlawful acts of the corporation, or
that the officer was guilty of gross negligence or bad
faith; and (2) the complainant must clearly and
convincingly prove such unlawful acts, negligence or
bad faith.
While it is true that the determination of the existence
of any of the circumstances that would warrant the
piercing of the veil of corporate fiction is a question of
fact which cannot be the subject of a petition for review
on certiorari under Rule 45, this Court can take
cognizance of factual issues if the findings of the lower
court are not supported by the evidence on record or

are based on a misapprehension of facts.53 (Emphasis

supplied)
As a general rule, directors, officers, or employees of a
corporation cannot be held personally liable for
obligations incurred by the corporation. However, this
veil of corporate fiction may be pierced if complainant is
able to prove, as in this case, that (1) the officer is guilty
of negligence or bad faith, and (2) such negligence or
bad faith was clearly and convincingly proven.
Here, petitioner Santos entered into a contract with
respondent in her capacity as the President and Chief
Executive Officer of Arco Pulp and Paper. She also issued
the check in partial payment of petitioner corporations
obligations to respondent on behalf of petitioner Arco
Pulp and Paper. This is clear on the face of the check
bearing the account name, "Arco Pulp & Paper, Co.,
Inc."54 Any obligation arising from these acts would not,
ordinarily, be petitioner Santos personal undertaking
for which she would be solidarily liable with petitioner
Arco Pulp and Paper.
We find, however, that the corporate veil must be
pierced. In Livesey v. Binswanger Philippines:55
Piercing the veil of corporate fiction is an equitable
doctrine developed to address situations where the
separate corporate personality of a corporation is
abused or used for wrongful purposes. Under the
doctrine, the corporate existence may be disregarded
where the entity is formed or used for non-legitimate
purposes, such as to evade a just and due obligation, or
to justify a wrong, to shield or perpetrate fraud or to

carry out similar or inequitable considerations, other

unjustifiable aims or intentions, in which case, the
fiction will be disregarded and the individuals
composing it and the two corporations will be treated as
identical.56 (Emphasis supplied)
According to the Court of Appeals, petitioner Santos was
solidarily liable with petitioner Arco Pulp and Paper,
stating that:
In the present case, We find bad faith on the part of the
[petitioners] when they unjustifiably refused to honor
their undertaking in favor of the [respondent]. After the
check in the amount of 1,487,766.68 issued by
[petitioner] Santos was dishonored for being drawn
against a closed account, [petitioner] corporation
denied any privity with [respondent]. These acts
prompted the [respondent] to avail of the remedies
provided by law in order to protect his rights.57
We agree with the Court of Appeals. Petitioner Santos
cannot be allowed to hide behind the corporate
veil.1wphi1 When petitioner Arco Pulp and Papers
obligation to respondent became due and demandable,
she not only issued an unfunded check but also
contracted with a third party in an effort to shift
petitioner Arco Pulp and Papers liability. She
unjustifiably refused to honor petitioner corporations
obligations to respondent. These acts clearly amount to
bad faith. In this instance, the corporate veil may be
pierced, and petitioner Santos may be held solidarily
liable with petitioner Arco Pulp and Paper.

The rate of interest due on

the obligation must be
reduced in view of Nacar v.
Gallery Frames58
In view, however, of the promulgation by this court of
the decision dated August 13, 2013 in Nacar v. Gallery
Frames,59 the rate of interest due on the obligation must
be modified from 12% per annum to 6% per annum
from the time of demand.
Nacar effectively amended the guidelines stated in
Eastern Shipping v. Court of Appeals,60 and we have laid
down the following guidelines with regard to the rate of
legal interest:
To recapitulate and for future guidance, the guidelines
laid down in the case of Eastern Shipping Linesare
accordingly modified to embody BSP-MB Circular No.
799, as follows:
I. When an obligation, regardless of its source, i.e., law,
contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for
damages. The provisions under Title XVIII on "Damages"
of the Civil Code govern in determining the measure of
recoverable damages.
II. With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate
of interest, as well as the accrual thereof, is imposed, as
follows:

1. When the obligation is breached, and it consists

in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be
that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn
legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate
of interest shall be 6% per annum to be computed
from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions of
Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on
the amount of damages awarded may be imposed
at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged
on unliquidated claims or damages, except when
or until the demand can be established with
reasonable certainty. Accordingly, where the
demand is established with reasonable certainty,
the interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art.
1169, Civil Code), but when such certainty cannot
be so reasonably established at the time the
demand is made, the interest shall begin to run
only from the date the judgment of the court is
made (at which time the quantification of
damages may be deemed to have been
reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be
on the amount finally adjudged.

3. When the judgment of the court awarding a

sum of money becomes final and executory, the
rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 6%
per annum from such finality until its satisfaction,
this interim period being deemed to be by then an
equivalent to a forbearance of credit.
And, in addition to the above, judgments that have
become final and executory prior to July 1, 2013, shall
not be disturbed and shall continue to be implemented
applying the rate of interest fixed therein.61 (Emphasis
supplied; citations omitted.)
According to these guidelines, the interest due on the
obligation of P7,220,968.31 should now be at 6% per
annum, computed from May 5, 2007, when respondent
sent his letter of demand to petitioners. This interest
shall continue to be due from the finality of this decision
until its full satisfaction.
WHEREFORE, the petition is DENIED in part. The
decision in CA-G.R. CV No. 95709 is AFFIRMED.
Petitioners Arco Pulp & Paper Co., Inc. and Candida A.
Santos are hereby ordered solidarily to pay respondent
Dan T. Lim the amount of P7,220,968.31 with interest of
6% per annum at the time of demand until finality of
judgment and its full satisfaction, with moral damages
in the amount of P50,000.00, exemplary damages in the
amount ofP50,000.00, and attorney's fees in the amount
of P50,000.00.

G.R. No. 147902

March 17, 2006

SPOUSES VICENTE YU AND DEMETRIA LEEYU, Petitioners,

vs.
PHILIPPINE COMMERCIAL INTERNATIONAL
BANK, Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
Before the Court is a Petition for Review on Certiorari of
the Decision1 dated November 14, 2000 of the Court of
Appeals (CA) in CA-G.R. SP No. 58982 and the CA
Resolution dated April 26, 2001, which denied
petitioners Motion for Reconsideration.
The factual background of the case is as follows:
Under a Real Estate Mortgage dated August 15,
19942 and Amendments of Real Estate Mortgage dated
April 4, 19953 and December 4, 1995,4 spouses Vicente
Yu and Demetria Lee-Yu (petitioners) and spouses
Ramon T. Yu and Virginia A. Tiu, or Yu Tian Hock aka
Victorino/Vicente Yu, mortgaged their title, interest, and
participation over several parcels of land located in
Dagupan City and Quezon City, in favor of the Philippine
Commercial International Bank (respondent) as security
for the payment of a loan in the amount
of P9,000,000.00.5

As the petitioners failed to pay the loan, the interest,

and the penalties due thereon, respondent filed on July
21, 1998 with the Office of the Clerk of Court and ExOfficio Sheriff of the Regional Trial Court of Dagupan City
a Petition for Extra-Judicial Foreclosure of Real Estate
Mortgage on the Dagupan City properties.6 On August 3,
1998, the City Sheriff issued a Notice of Extra-Judicial
Sale scheduling the auction sale on September 10, 1998
at 10:00 oclock in the morning or soon thereafter in
front of the Justice Hall, Bonuan, Tondaligan, Dagupan
City.7

by conducting two separate foreclosure proceedings on

the mortgage properties in Dagupan City and Quezon
City and indicating in the two notices of extra-judicial
sale that petitioners obligation is P10,437,015.2012 as
of March 31, 1998, when petitioners are not indebted for
the total amount of P20,874,031.56.13

At the auction sale on September 10, 1998, respondent

emerged as the highest bidder.8 On September 14,
1998, a Certificate of Sale was issued in favor of
respondent.9 On October 1, 1998, the sale was
registered with the Registry of Deeds of Dagupan City.

On February 14, 2000, RTC Branch 43 denied

petitioners Motion to Dismiss and to Strike Out
Testimony of Rodante Manuel, ruling that the filing of a
motion to dismiss is not allowed in petitions for issuance
of writ of possession under Section 7 of Act No. 3135.14

About two months before the expiration of the

redemption period, or on August 20, 1999, respondent
filed an Ex-Parte Petition for Writ of Possession before
the Regional Trial Court of Dagupan City, docketed as
Special Proceeding No. 99-00988-D and raffled to
Branch 43 (RTC Branch 43).10 Hearing was conducted on
September 14, 1999 and respondent presented its
evidence ex-parte.11 The testimony of Rodante Manuel
was admitted ex-parte and thereafter the petition was
deemed submitted for resolution.

On February 24, 2000, petitioners filed a Motion for

Reconsideration, further arguing that the pendency of
Civil Case No. 99-03169-D in RTC Branch 44 is a
prejudicial issue to Spec. Proc. No. 99-00988-D in RTC
Branch 43, the resolution of which is determinative on
the propriety of the issuance of a writ of possession.15

On September 30, 1999, petitioners filed a Motion to

Dismiss and to Strike Out Testimony of Rodante Manuel
stating that the Certificate of Sale dated September 14,
1998 is void because respondent violated Article 2089
of the Civil Code on the indivisibility of the mortgaged

In the meantime, petitioners filed a complaint for

Annulment of Certificate of Sale before the Regional
Trial Court of Dagupan City, docketed as Civil Case No.
99-03169-D and raffled to Branch 44 (RTC Branch 44).

On May 8, 2000, RTC Branch 43 denied petitioners

Motion for Reconsideration, holding that the principle of
prejudicial question is not applicable because the case
pending before RTC Branch 44 is also a civil case and
not a criminal case.16
On June 1, 2000, petitioners filed a Petition for Certiorari
with the CA.17 On November 14, 2000, the CA dismissed
petitioners Petition for Certiorari on the grounds that

petitioners violated Section 8 of Act No. 3135 and

disregarded the rule against multiplicity of suits in filing
Civil Case No. 99-03169-D in RTC Branch 44 despite full
knowledge of the pendency of Spec. Proc. No. 99-00988D in RTC Branch 43; that since the one-year period of
redemption has already lapsed, the issuance of a writ of
possession in favor of respondent becomes a ministerial
duty of the trial court; that the issues in Civil Case No.
99-03169-D are not prejudicial questions to Spec. Proc.
No. 99-00988-D because: (a) the special proceeding is
already fait accompli, (b) Civil Case No. 99-03169-D is
deemed not filed for being contrary to Section 8 of Act
No. 3135, (c) the filing of Civil Case No. 99-03169-D is
an afterthought and dilatory in nature, and (d) legally
speaking what seems to exist is litis pendentia and not
prejudicial question.18
Petitioners filed a Motion for Reconsideration19 but it was
denied by the CA on April 26, 2001.20
Hence, the present Petition for Review on Certiorari.
Petitioners pose two issues for resolution, to wit:
A. Whether or not a real estate mortgage over
several properties located in different locality [sic]
can be separately foreclosed in different places.
B. Whether or not the pendency of a prejudicial
issue renders the issues in Special Proceedings
No. 99-00988-D as [sic] moot and academic.21
Anent the first issue, petitioners contend that since a
real estate mortgage is indivisible, the mortgaged

properties in Dagupan City and Quezon City cannot be

separately foreclosed. Petitioners further point out that
two notices of extra-judicial sale indicated that
petitioners obligation is P10,437,015.2022 each as of
March 31, 1998 or a total ofP20,874,030.40,23 yet their
own computation yields only P9,957,508.90 as of
February 27, 1998.
As to the second issue, petitioners posit that the
pendency of Civil Case No. 99-03169-D is a prejudicial
issue, the resolution of which will render the issues in
Spec. Proc. No. 99-00988-D moot and academic.
Petitioners further aver that they did not violate Section
8 of Act No. 3135 in filing a separate case to annul the
certificate of sale since the use of the word "may" in
said provision indicates that they have the option to
seek relief of filing a petition to annul the certificate of
sale in the proceeding involving the application for a
writ of possession or in a separate proceeding.
Respondent contends24 that, with respect to the first
issue, the filing of two separate foreclosure proceedings
did not violate Article 2089 of the Civil Code on the
indivisibility of a real estate mortgage since Section 2 of
Act No. 3135 expressly provides that extra-judicial
foreclosure may only be made in the province or
municipality where the property is situated. Respondent
further submits that the filing of separate applications
for extra-judicial foreclosure of mortgage involving
several properties in different locations is allowed by
A.M. No. 99-10-05-0, the Procedure on Extra-Judicial
Foreclosure of Mortgage, as further amended on August
7, 2001.

As to the second issue, respondent maintains that there

is no prejudicial question between Civil Case No. 9903169-D and Spec. Proc. No. 99-00988-D since the
pendency of a civil action questioning the validity of the
mortgage and the extra-judicial foreclosure thereof does
not bar the issuance of a writ of possession. Respondent
also insists that petitioners should have filed their
Petition to Annul the Certificate of Sale in the same case
where possession is being sought, that is, in Spec. Proc.
No. 99-00988-D, and not in a separate proceeding (Civil
Case No. 99-01369-D) because the venue of the action
to question the validity of the foreclosure is not
discretionary since the use of the word "may" in Section
8 of Act No. 3135 refers to the filing of the petition or
action itself and not to the venue. Respondent further
argues that even if petitioners filed the Petition to Annul
the Certificate of Sale in Spec. Proc. No. 99-00988-D, the
writ of possession must still be issued because issuance
of the writ in favor of the purchaser is a ministerial act
of the trial court and the one-year period of redemption
has already lapsed.
Anent the first issue, the Court finds that petitioners
have a mistaken notion that the indivisibility of a real
estate mortgage relates to the venue of extra-judicial
foreclosure proceedings. The rule on indivisibility of a
real estate mortgage is provided for in Article 2089 of
the Civil Code, which provides:
Art. 2089. A pledge or mortgage is indivisible, even
though the debt may be divided among the successors
in interest of the debtor or of the creditor.

Therefore, the debtors heir who has paid a part of the

debt cannot ask for the proportionate extinguishment of
the pledge or mortgage as the debt is not completely
satisfied.
Neither can the creditors heir who received his share of
the debt return the pledge or cancel the mortgage, to
the prejudice of the other heirs who have not been paid.
From these provisions is excepted the case in which,
there being several things given in mortgage or pledge,
each one of them guarantees only a determinate
portion of the credit.
The debtor, in this case, shall have a right to the
extinguishment of the pledge or mortgage as the
portion of the debt for which each thing is specially
answerable is satisfied.
This rule presupposes several heirs of the debtor or
creditor25 and therefore not applicable to the present
case. Furthermore, what the law proscribes is the
foreclosure of only a portion of the property or a number
of the several properties mortgaged corresponding to
the unpaid portion of the debt where, before foreclosure
proceedings, partial payment was made by the debtor
on his total outstanding loan or obligation. This also
means that the debtor cannot ask for the release of any
portion of the mortgaged property or of one or some of
the several lots mortgaged unless and until the loan
thus secured has been fully paid, notwithstanding the
fact that there has been partial fulfillment of the
obligation. Hence, it is provided that the debtor who has
paid a part of the debt cannot ask for the proportionate

extinguishment of the mortgage as long as the debt is

not completely satisfied.26 In essence, indivisibility
means that the mortgage obligation cannot be divided
among the different lots,27 that is, each and every parcel
under mortgage answers for the totality of the debt.28
On the other hand, the venue of the extra-judicial
foreclosure proceedings is the place where each of the
mortgaged property is located, as prescribed by Section
2 of Act No. 3135,29 to wit:
SECTION 2. Said sale cannot be made legally outside of
the province in which the property sold is situated; and
in case the place within said province in which the sale
is to be made is subject to stipulation, such sale shall be
made in said place or in the municipal building of the
municipality in which the property or part thereof is
situated.
A.M. No. 99-10-05-0,30 the Procedure on Extra-Judicial
Foreclosure of Mortgage, lays down the guidelines for
extra-judicial foreclosure proceedings on mortgaged
properties located in different provinces. It provides that
the venue of the extra-judicial foreclosure proceedings
is the place where each of the mortgaged property is
located. Relevant portion thereof provides:
Where the application concerns the extrajudicial
foreclosure of mortgages of real estates and/or chattels
in different locations covering one indebtedness, only
one filing fee corresponding to such indebtedness shall
be collected. The collecting Clerk of Court shall, apart
from the official receipt of the fees, issue a certificate of
payment indicating the amount of indebtedness, the

filing fees collected, the mortgages sought to be

foreclosed, the real estates and/or chattels mortgaged
and their respective locations, which certificate shall
serve the purpose of having the application
docketed with the Clerks of Court of the places
where the other properties are located and of
allowing the extrajudicial foreclosures to proceed
thereat. (Emphasis supplied)
The indivisibility of the real estate mortgage is not
violated by conducting two separate foreclosure
proceedings on mortgaged properties located in
different provinces as long as each parcel of land is
answerable for the entire debt. Petitioners assumption
that their total obligation is P20,874,030.40 because the
two notices of extra-judicial sale indicated that
petitioners obligation is P10,437,015.2031 each, is
therefore flawed. Considering the indivisibility of a real
estate mortgage, the mortgaged properties in Dagupan
City and Quezon City are made to answer for the entire
debt of P10,437,015.29.32
As to the second issue, that is, whether a civil case for
annulment of a certificate of sale is a prejudicial
question to a petition for issuance of a writ of
possession, this issue is far from novel and, in fact, not
without precedence. In Pahang v. Vestil,33 the Court said:
A prejudicial question is one that arises in a case the
resolution of which is a logical antecedent of the issue
involved therein, and the cognizance of which pertains
to another tribunal. It generally comes into play in a
situation where a civil action and a criminal action are
both pending and there exists in the former an issue

that must be preemptively resolved before the criminal

action may proceed, because howsoever the issue
raised in the civil action is resolved would be
determinative juris et de jure of the guilt or innocence of
the accused in the criminal case. The rationale behind
the principle of prejudicial question is to avoid two
conflicting decisions. 1avvph!l.net
In the present case, the complaint of the petitioners for
Annulment of Extrajudicial Sale is a civil action and the
respondents petition for the issuance of a writ of
possession of Lot No. 3-A, Block 1, Psd-07-021410, TCT
No. 44668 is but an incident in the land registration
case and, therefore, no prejudicial question can arise
from the existence of the two actions. A similar issue
was raised in Manalo v. Court of Appeals, where we held
that:
At any rate, it taxes our imagination why the questions
raised in Case No. 98-0868 must be considered
determinative of Case No. 9011. The basic issue in the
former is whether the respondent, as the purchaser in
the extrajudicial foreclosure proceedings, may be
compelled to have the property repurchased or resold to
a mortgagors successor-in-interest (petitioner); while
that in the latter is merely whether the respondent, as
the purchaser in the extrajudicial foreclosure
proceedings, is entitled to a writ of possession after the
statutory period for redemption has expired. The two
cases, assuming both are pending, can proceed
separately and take their own direction independent of
each other.34

In the present case, Civil Case No. 99-01369-D and

Spec. Proc. No. 99-00988-D are both civil in nature. The
issue in Civil Case No. 99-01369-D is whether the extrajudicial foreclosure of the real estate mortgage executed
by the petitioners in favor of the respondent and the
sale of their properties at public auction are null and
void, whereas, the issue in Spec. Proc. No. 99-00988-D
is whether the respondent is entitled to a writ of
possession of the foreclosed properties. Clearly, no
prejudicial question can arise from the existence of the
two actions. The two cases can proceed separately and
take their own direction independently of each other.
Nevertheless, there is a need to correct the CAs view
that petitioners violated Section 8 of Act No. 3135 and
disregarded the proscription on multiplicity of suits by
instituting a separate civil suit for annulment of the
certificate of sale while there is a pending petition for
issuance of the writ of possession in a special
proceeding.
Section 8 of Act No. 3135 provides:
Sec. 8. Setting aside of sale and writ of possession.
The debtor may, in the proceedings in which possession
was requested, but not later than thirty days after the
purchaser was given possession, petition that the sale
be set aside and the writ of possession cancelled,
specifying the damages suffered by him, because the
mortgage was not violated or the sale was not made in
accordance with the provisions hereof, and the court
shall take cognizance of this petition in accordance with
the summary procedure provided for in section one
hundred and twelve of Act Numbered Four hundred and

ninety-six; and if it finds the complaint of the debtor

justified, it shall dispose in his favor of all or part of the
bond furnished by the person who obtained possession.
Either of the parties may appeal from the order of the
judge in accordance with section fourteen of Act
Numbered Four hundred and ninety-six; but the order of
possession shall continue in effect during the pendency
of the appeal. (Emphasis supplied)
Under the provision above cited, the mortgagor may file
a petition to set aside the sale and for the cancellation
of a writ of possession with the trial court which issued
the writ of possession within 30 days after the
purchaser mortgagee was given possession. It provides
the plain, speedy, and adequate remedy in opposing the
issuance of a writ of possession.35 Thus, this provision
presupposes that the trial court already issued a writ of
possession. In Sps. Ong v. Court of Appeals,36 the Court
elucidated:
The law is clear that the purchaser must first be placed
in possession of the mortgaged property pending
proceedings assailing the issuance of the writ of
possession. If the trial court later finds merit in the
petition to set aside the writ of possession, it shall
dispose in favor of the mortgagor the bond furnished by
the purchaser. Thereafter, either party may appeal from
the order of the judge in accordance with Section 14 of
Act 496, which provides that "every order, decision, and
decree of the Court of Land Registration may be
reviewedin the same manner as an order, decision,
decree or judgment of a Court of First Instance (RTC)
might be reviewed." The rationale for the mandate is to

allow the purchaser to have possession of the foreclosed

property without delay, such possession being founded
on his right of ownership.37
Accordingly, Section 8 of Act No. 3135 is not applicable
to the present case since at the time of the filing of the
separate civil suit for annulment of the certificate of
sale in RTC Branch 44, no writ of possession was yet
issued by RTC Branch 43.
Similarly, the Court rejects the CAs application of the
principle of litis pendentia to Civil Case No. 99-03169-D
in relation to Spec. Proc. No. 99-00988-D. Litis
pendentia refers to that situation wherein another
action is pending between the same parties for the
same cause of actions and that the second action
becomes unnecessary and vexatious. For litis
pendentia to be invoked, the concurrence of the
following requisites is necessary: (a) identity of parties
or at least such as represent the same interest in both
actions; (b) identity of rights asserted and reliefs prayed
for, the reliefs being founded on the same facts; and, (c)
the identity in the two cases should be such that the
judgment that may be rendered in one would,
regardless of which party is successful, amount to res
judicata in the other.38
Applying the foregoing criteria in the instant case, litis
pendentia does not obtain in this case because of the
absence of the second and third requisites. The
issuance of the writ of possession being
a ministerial function, andsummary in nature, it cannot
be said to be a judgment on the merits, but simply an
incident in the transfer of title. Hence, a separate case

for annulment of mortgage and foreclosure sale cannot

be barred by litis pendentia or res judicata.39 Thus,
insofar as Spec. Proc. No. 99-00988-D and Civil Case No.
99-03169-D pending before different branches of RTC
Dagupan City are concerned, there is no litis pendentia.
To sum up, the Court holds that the rule on indivisibility
of the real estate mortgage cannot be equated with the
venue of foreclosure proceedings on mortgaged
properties located in different provinces since these are
two unrelated concepts. Also, no prejudicial question
can arise from the existence of a civil case for
annulment of a certificate of sale and a petition for the
issuance of a writ of possession in a special proceeding
since the two cases are both civil in nature which can
proceed separately and take their own direction
independently of each other.
Furthermore, since the one-year period to redeem the
foreclosed properties lapsed on October 1, 1999, title to
the foreclosed properties had already been consolidated
under the name of the respondent. As the owner of the
properties, respondent is entitled to its possession as a
matter of right.40 The issuance of a writ of possession
over the properties by the trial court is merely a
ministerial function. As such, the trial court neither
exercises its official discretion nor judgment.41 Any
question regarding the validity of the mortgage or its
foreclosure cannot be a legal ground for refusing the
issuance of a writ of possession.42 Regardless of the
pending suit for annulment of the certificate of sale,
respondent is entitled to a writ of possession, without

prejudice of course to the eventual outcome of said

case.43
WHEREFORE, the petition is DENIED.

G.R. No. 151953

June 29, 2007

SALVADOR P. ESCAO and MARIO M.

SILOS, petitioner,
vs.
RAFAEL ORTIGAS, JR., respondent.
DECISION
TINGA, J.:
The main contention raised in this petition is that
petitioners are not under obligation to reimburse
respondent, a claim that can be easily debunked. The
more perplexing question is whether this obligation to
repay is solidary, as contended by respondent and the
lower courts, or merely joint as argued by petitioners.
On 28 April 1980, Private Development Corporation of
the Philippines (PDCP)1 entered into a loan agreement
with Falcon Minerals, Inc. (Falcon) whereby PDCP agreed
to make available and lend to Falcon the amount of
US$320,000.00, for specific purposes and subject to
certain terms and conditions.2 On the same day, three
stockholders-officers of Falcon, namely: respondent
Rafael Ortigas, Jr. (Ortigas), George A. Scholey and

George T. Scholey executed an Assumption of Solidary

Liability whereby they agreed "to assume in [their]
individual capacity, solidary liability with [Falcon] for the
due and punctual payment" of the loan contracted by
Falcon with PDCP.3 In the meantime, two separate
guaranties were executed to guarantee the payment of
the same loan by other stockholders and officers of
Falcon, acting in their personal and individual capacities.
One Guaranty4 was executed by petitioner Salvador
Escao (Escao), while the other5 by petitioner Mario M.
Silos (Silos), Ricardo C. Silverio (Silverio), Carlos L.
Inductivo (Inductivo) and Joaquin J. Rodriguez
(Rodriguez).
Two years later, an agreement developed to cede
control of Falcon to Escao, Silos and Joseph M. Matti
(Matti). Thus, contracts were executed whereby Ortigas,
George A. Scholey, Inductivo and the heirs of then
already deceased George T. Scholey assigned their
shares of stock in Falcon to Escao, Silos and Matti.6 Part
of the consideration that induced the sale of stock was a
desire by Ortigas, et al., to relieve themselves of all
liability arising from their previous joint and several
undertakings with Falcon, including those related to the
loan with PDCP. Thus, an Undertaking dated 11 June
1982 was executed by the concerned parties,7 namely:
with Escao, Silos and Matti identified in the document
as "SURETIES," on one hand, and Ortigas, Inductivo and
the Scholeys as "OBLIGORS," on the other. The
Undertaking reads in part:
3. That whether or not SURETIES are able to
immediately cause PDCP and PAIC to release OBLIGORS

from their said guarantees [sic], SURETIES hereby

irrevocably agree and undertake to assume all of
OBLIGORs said guarantees [sic] to PDCP and PAIC
under the following terms and conditions:
a. Upon receipt by any of [the] OBLIGORS of any
demand from PDCP and/or PAIC for the payment of
FALCONs obligations with it, any of [the] OBLIGORS
shall immediately inform SURETIES thereof so that the
latter can timely take appropriate measures;
b. Should suit be impleaded by PDCP and/or PAIC
against any and/or all of OBLIGORS for collection of said
loans and/or credit facilities, SURETIES agree to defend
OBLIGORS at their own expense, without prejudice to
any and/or all of OBLIGORS impleading SURETIES
therein for contribution, indemnity, subrogation or other
relief in respect to any of the claims of PDCP and/or
PAIC; and
c. In the event that any of [the] OBLIGORS is for any
reason made to pay any amount to PDCP and/or PAIC,
SURETIES shall reimburse OBLIGORS for said amount/s
within seven (7) calendar days from such payment;
4. OBLIGORS hereby waive in favor of SURETIES any and
all fees which may be due from FALCON arising out of,
or in connection with, their said guarantees[sic].8
Falcon eventually availed of the sum of US$178,655.59
from the credit line extended by PDCP. It would also
execute a Deed of Chattel Mortgage over its personal
properties to further secure the loan. However, Falcon
subsequently defaulted in its payments. After PDCP

foreclosed on the chattel mortgage, there remained a

subsisting deficiency of P5,031,004.07, which Falcon did
not satisfy despite demand.9
On 28 April 1989, in order to recover the indebtedness,
PDCP filed a complaint for sum of money with the
Regional Trial Court of Makati (RTC) against Falcon,
Ortigas, Escao, Silos, Silverio and Inductivo. The case
was docketed as Civil Case No. 89-5128. For his part,
Ortigas filed together with his answer a cross-claim
against his co-defendants Falcon, Escao and Silos, and
also manifested his intent to file a third-party complaint
against the Scholeys and Matti.10 The cross-claim lodged
against Escao and Silos was predicated on the 1982
Undertaking, wherein they agreed to assume the
liabilities of Ortigas with respect to the PDCP loan.
Escao, Ortigas and Silos each sought to seek a
settlement with PDCP. The first to come to terms with
PDCP was Escao, who in December of 1993, entered
into a compromise agreement whereby he agreed to
pay the bankP1,000,000.00. In exchange, PDCP waived
or assigned in favor of Escao one-third (1/3) of its
entire claim in the complaint against all of the other
defendants in the case.11 The compromise agreement
was approved by the RTC in a Judgment12 dated 6
January 1994.
Then on 24 February 1994, Ortigas entered into his own
compromise agreement13 with PDCP, allegedly without
the knowledge of Escao, Matti and Silos. Thereby,
Ortigas agreed to pay PDCP P1,300,000.00 as "full
satisfaction of the PDCPs claim against Ortigas,"14 in
exchange for PDCPs release of Ortigas from any liability

or claim arising from the Falcon loan agreement, and a

renunciation of its claims against Ortigas.
In 1995, Silos and PDCP entered into a Partial
Compromise Agreement whereby he agreed to
pay P500,000.00 in exchange for PDCPs waiver of its
claims against him.15
In the meantime, after having settled with PDCP, Ortigas
pursued his claims against Escao, Silos and Matti, on
the basis of the 1982 Undertaking. He initiated a thirdparty complaint against Matti and Silos,16 while he
maintained his cross-claim against Escao. In 1995,
Ortigas filed a motion for Summary Judgment in his
favor against Escao, Silos and Matti. On 5 October
1995, the RTC issued the Summary Judgment, ordering
Escao, Silos and Matti to pay Ortigas, jointly and
severally, the amount of P1,300,000.00, as well
as P20,000.00 in attorneys fees.17 The trial court
ratiocinated that none of the third-party defendants
disputed the 1982 Undertaking, and that "the mere
denials of defendants with respect to non-compliance of
Ortigas of the terms and conditions of the Undertaking,
unaccompanied by any substantial fact which would be
admissible in evidence at a hearing, are not sufficient to
raise genuine issues of fact necessary to defeat a
motion for summary judgment, even if such facts were
raised in the pleadings."18 In an Order dated 7 March
1996, the trial court denied the motion for
reconsideration of the Summary Judgment and awarded
Ortigas legal interest of 12% per annum to be computed
from 28 February 1994.19

From the Summary Judgment, recourse was had by way

of appeal to the Court of Appeals. Escao and Silos
appealed jointly while Matti appealed by his lonesome.
In a Decision20 dated 23 January 2002, the Court of
Appeals dismissed the appeals and affirmed the
Summary Judgment. The appellate court found that the
RTC did not err in rendering the summary judgment
since the three appellants did not effectively deny their
execution of the 1982 Undertaking. The special
defenses that were raised, "payment and excussion,"
were characterized by the Court of Appeals as
"appear[ing] to be merely sham in the light of the
pleadings and supporting documents and
affidavits."21Thus, it was concluded that there was no
genuine issue that would still require the rigors of trial,
and that the appealed judgment was decided on the
bases of the undisputed and established facts of the
case.
Hence, the present petition for review filed by Escao
and Silos.22 Two main issues are raised. First, petitioners
dispute that they are liable to Ortigas on the basis of the
1982 Undertaking, a document which they do not
disavow and have in fact annexed to their petition.
Second, on the assumption that they are liable to
Ortigas under the 1982 Undertaking, petitioners argue
that they are jointly liable only, and not solidarily.
Further assuming that they are liable, petitioners also
submit that they are not liable for interest and if at all,
the proper interest rate is 6% and not 12%.
Interestingly, petitioners do not challenge, whether in
their petition or their memorandum before the Court,

the appropriateness of the summary judgment as a

relief favorable to Ortigas. Under Section 3, Rule 35 of
the 1997 Rules of Civil Procedure, summary judgment
may avail if the pleadings, supporting affidavits,
depositions and admissions on file show that, except as
to the amount of damages, there is no genuine issue as
to any material fact and that the moving party is
entitled to a judgment as a matter of law. Petitioner
have not attempted to demonstrate before us that there
existed a genuine issue as to any material fact that
would preclude summary judgment. Thus, we affirm
with ease the common rulings of the lower courts that
summary judgment is an appropriate recourse in this
case.
The vital issue actually raised before us is whether
petitioners were correctly held liable to Ortigas on the
basis of the 1982 Undertaking in this Summary
Judgment. An examination of the document reveals
several clauses that make it clear that the agreement
was brought forth by the desire of Ortigas, Inductivo and
the Scholeys to be released from their liability under the
loan agreement which release was, in turn, part of the
consideration for the assignment of their shares in
Falcon to petitioners and Matti. The whereas clauses
manifest that Ortigas had bound himself with Falcon for
the payment of the loan with PDCP, and that "amongst
the consideration for OBLIGORS and/or their principals
aforesaid selling is SURETIES relieving OBLIGORS of any
and all liability arising from their said joint and several
undertakings with FALCON."23 Most crucial is the clause
in Paragraph 3 of the Undertaking wherein petitioners
"irrevocably agree and undertake to assume all of

OBLIGORs said guarantees [sic] to PDCP x x x under the

following terms and conditions."24
At the same time, it is clear that the assumption by
petitioners of Ortigass "guarantees" [sic] to PDCP is
governed by stipulated terms and conditions as set forth
in sub-paragraphs (a) to (c) of Paragraph 3. First, upon
receipt by "any of OBLIGORS" of any demand from PDCP
for the payment of Falcons obligations with it, "any of
OBLIGORS" was to immediately inform "SURETIES"
thereof so that the latter can timely take appropriate
measures. Second, should "any and/or all of OBLIGORS"
be impleaded by PDCP in a suit for collection of its loan,
"SURETIES agree[d] to defend OBLIGORS at their own
expense, without prejudice to any and/or all of
OBLIGORS impleading SURETIES therein for
contribution, indemnity, subrogation or other relief"25 in
respect to any of the claims of PDCP. Third, if any of the
"OBLIGORS is for any reason made to pay any amount
to [PDCP], SURETIES [were to] reimburse OBLIGORS for
said amount/s within seven (7) calendar days from such
payment."26
Petitioners claim that, contrary to paragraph 3(c) of the
Undertaking, Ortigas was not "made to pay" PDCP the
amount now sought to be reimbursed, as Ortigas
voluntarily paid PDCP the amount of P1.3 Million as an
amicable settlement of the claims posed by the bank
against him. However, the subject clause in paragraph
3(c) actually reads "[i]n the event that any of OBLIGORS
is for any reason made to pay any amount to PDCP x x
x"27 As pointed out by Ortigas, the phrase "for any
reason" reasonably includes any extra-judicial

settlement of obligation such as what Ortigas had

undertaken to pay to PDCP, as it is indeed obvious that
the phrase was incorporated in the clause to render the
eventual payment adverted to therein unlimited and
unqualified.
The interpretation posed by petitioners would have held
water had the Undertaking made clear that the right of
Ortigas to seek reimbursement accrued only after he
had delivered payment to PDCP as a consequence of a
final and executory judgment. On the contrary, the clear
intent of the Undertaking was for petitioners and Matti
to relieve the burden on Ortigas and his fellow
"OBLIGORS" as soon as possible, and not only after
Ortigas had been subjected to a final and executory
adverse judgment.
Paragraph 1 of the Undertaking enjoins petitioners to
"exert all efforts to cause PDCP x x x to within a
reasonable time release all the OBLIGORS x x x from
their guarantees [sic] to PDCP x x x"28 In the event that
Ortigas and his fellow "OBLIGORS" could not be released
from their guaranties, paragraph 2 commits petitioners
and Matti to cause the Board of Directors of Falcon to
make a call on its stockholders for the payment of their
unpaid subscriptions and to pledge or assign such
payments to Ortigas, et al., as security for whatever
amounts the latter may be held liable under their
guaranties. In addition, paragraph 1 also makes clear
that nothing in the Undertaking "shall prevent
OBLIGORS, or any one of them, from themselves
negotiating with PDCP x x x for the release of their said
guarantees [sic]."29

There is no argument to support petitioners position on

the import of the phrase "made to pay" in the
Undertaking, other than an unduly literalist reading that
is clearly inconsistent with the thrust of the document.
Under the Civil Code, the various stipulations of a
contract shall be interpreted together, attributing to the
doubtful ones that sense which may result from all of
them taken jointly.30 Likewise applicable is the provision
that if some stipulation of any contract should admit of
several meanings, it shall be understood as bearing
that import which is most adequate to render it
effectual.31 As a means to effect the general intent of
the document to relieve Ortigas from liability to PDCP, it
is his interpretation, not that of petitioners, that holds
sway with this Court.
Neither do petitioners impress us of the non-fulfillment
of any of the other conditions set in paragraph 3, as
they claim. Following the general assertion in the
petition that Ortigas violated the terms of the
Undertaking, petitioners add that Ortigas "paid PDCP
BANK the amount of P1.3 million without petitioners
ESCANO and SILOSs knowledge and
consent."32 Paragraph 3(a) of the Undertaking does
impose a requirement that any of the "OBLIGORS" shall
immediately inform "SURETIES" if they received any
demand for payment of FALCONs obligations to PDCP,
but that requirement is reasoned "so that the
[SURETIES] can timely take appropriate
measures"33 presumably to settle the obligation without
having to burden the "OBLIGORS." This notice
requirement in paragraph 3(a) is markedly way off from

the suggestion of petitioners that Ortigas, after already

having been impleaded as a defendant in the collection
suit, was obliged under the 1982 Undertaking to notify
them before settling with PDCP.
The other arguments petitioners have offered to escape
liability to Ortigas are similarly weak.
Petitioners impugn Ortigas for having settled with PDCP
in the first place. They note that Ortigas had, in his
answer, denied any liability to PDCP and had alleged
that he signed the Assumption of Solidary Liability not in
his personal capacity, but as an officer of Falcon.
However, such position, according to petitioners, could
not be justified since Ortigas later voluntarily paid PDCP
the amount of P1.3 Million. Such circumstances,
according to petitioners, amounted to estoppel on the
part of Ortigas.
Even as we entertain this argument at depth, its
premises are still erroneous. The Partial Compromise
Agreement between PDCP and Ortigas expressly
stipulated that Ortigass offer to pay PDCP was
conditioned "without [Ortigass] admitting liability to
plaintiff PDCP Banks complaint, and to terminate and
dismiss the said case as against Ortigas
solely."34 Petitioners profess it is "unthinkable" for
Ortigas to have voluntarily paid PDCP without admitting
his liability,35 yet such contention based on assumption
cannot supersede the literal terms of the Partial
Compromise Agreement.
Petitioners further observe that Ortigas made the
payment to PDCP after he had already assigned his

obligation to petitioners through the 1982 Undertaking.

Yet the fact is PDCP did pursue a judicial claim against
Ortigas notwithstanding the Undertaking he executed
with petitioners. Not being a party to such Undertaking,
PDCP was not precluded by a contract from pursuing its
claim against Ortigas based on the original Assumption
of Solidary Liability.
At the same time, the Undertaking did not preclude
Ortigas from relieving his distress through a settlement
with the creditor bank. Indeed, paragraph 1 of the
Undertaking expressly states that "nothing herein shall
prevent OBLIGORS, or any one of them, from
themselves negotiating with PDCP x x x for the release
of their said guarantees [sic]."36 Simply put, the
Undertaking did not bar Ortigas from pursuing his own
settlement with PDCP. Neither did the Undertaking bar
Ortigas from recovering from petitioners whatever
amount he may have paid PDCP through his own
settlement. The stipulation that if Ortigas was "for any
reason made to pay any amount to PDCP[,] x x x
SURETIES shall reimburse OBLIGORS for said amount/s
within seven (7) calendar days from such
payment"37makes it clear that petitioners remain liable
to reimburse Ortigas for the sums he paid PDCP.

part that "[t]here is a solidary liability only when the

obligation expressly so states, or when the law or the
nature of the obligation requires solidarity."
Ortigas in turn argues that petitioners, as well as Matti,
are jointly and severally liable for the Undertaking, as
the language used in the agreement "clearly shows that
it is a surety agreement"38 between the obligors (Ortigas
group) and the sureties (Escao group). Ortigas points
out that the Undertaking uses the word "SURETIES"
although the document, in describing the parties. It is
further contended that the principal objective of the
parties in executing the Undertaking cannot be attained
unless petitioners are solidarily liable "because the total
loan obligation can not be paid or settled to free or
release the OBLIGORS if one or any of the SURETIES
default from their obligation in the Undertaking."39

We now turn to the set of arguments posed by

petitioners, in the alternative, that is, on the assumption
that they are indeed liable.

In case, there is a concurrence of two or more creditors

or of two or more debtors in one and the same
obligation, Article 1207 of the Civil Code states that
among them, "[t]here is a solidary liability only when
the obligation expressly so states, or when the law or
the nature of the obligation requires solidarity." Article
1210 supplies further caution against the broad
interpretation of solidarity by providing: "The
indivisibility of an obligation does not necessarily give
rise to solidarity. Nor does solidarity of itself imply
indivisibility."

Petitioners submit that they could only be held jointly,

not solidarily, liable to Ortigas, claiming that the
Undertaking did not provide for express solidarity. They
cite Article 1207 of the New Civil Code, which states in

These Civil Code provisions establish that in case of

concurrence of two or more creditors or of two or more
debtors in one and the same obligation, and in the
absence of express and indubitable terms characterizing

the obligation as solidary, the presumption is that the

obligation is only joint. It thus becomes incumbent upon
the party alleging that the obligation is indeed solidary
in character to prove such fact with a preponderance of
evidence.
The Undertaking does not contain any express
stipulation that the petitioners agreed "to bind
themselves jointly and severally" in their obligations to
the Ortigas group, or any such terms to that effect.
Hence, such obligation established in the Undertaking is
presumed only to be joint. Ortigas, as the party alleging
that the obligation is in fact solidary, bears the burden
to overcome the presumption of jointness of obligations.
We rule and so hold that he failed to discharge such
burden.
Ortigas places primary reliance on the fact that the
petitioners and Matti identified themselves in the
Undertaking as "SURETIES", a term repeated no less
than thirteen (13) times in the document. Ortigas claims
that such manner of identification sufficiently
establishes that the obligation of petitioners to him was
joint and solidary in nature.
The term "surety" has a specific meaning under our Civil
Code. Article 2047 provides the statutory definition of a
surety agreement, thus:
Art. 2047. By guaranty a person, called the guarantor,
binds himself to the creditor to fulfill the obligation of
the principal debtor in case the latter should fail to do
so.

If a person binds himself solidarily with the principal

debtor, the provisions of Section 4, Chapter 3, Title I of
this Book shall be observed. In such case the contract is
called a suretyship. [Emphasis supplied]40
As provided in Article 2047 in a surety agreement the
surety undertakes to be bound solidarily with the
principal debtor. Thus, a surety agreement is an
ancillary contract as it presupposes the existence of a
principal contract. It appears that Ortigass argument
rests solely on the solidary nature of the obligation of
the surety under Article 2047. In tandem with the
nomenclature "SURETIES" accorded to petitioners and
Matti in the Undertaking, however, this argument can
only be viable if the obligations established in the
Undertaking do partake of the nature of a suretyship as
defined under Article 2047 in the first place. That clearly
is not the case here, notwithstanding the use of the
nomenclature "SURETIES" in the Undertaking.
Again, as indicated by Article 2047, a suretyship
requires a principal debtor to whom the surety is
solidarily bound by way of an ancillary obligation of
segregate identity from the obligation between the
principal debtor and the creditor. The suretyship does
bind the surety to the creditor, inasmuch as the latter is
vested with the right to proceed against the former to
collect the credit in lieu of proceeding against the
principal debtor for the same obligation.41 At the same
time, there is also a legal tie created between the surety
and the principal debtor to which the creditor is not
privy or party to. The moment the surety fully answers
to the creditor for the obligation created by the principal

debtor, such obligation is extinguished.42 At the same

time, the surety may seek reimbursement from the
principal debtor for the amount paid, for the surety does
in fact "become subrogated to all the rights and
remedies of the creditor."43
Note that Article 2047 itself specifically calls for the
application of the provisions on joint and solidary
obligations to suretyship contracts.44 Article 1217 of the
Civil Code thus comes into play, recognizing the right of
reimbursement from a co-debtor (the principal debtor,
in case of suretyship) in favor of the one who paid (i.e.,
the surety).45However, a significant distinction still lies
between a joint and several debtor, on one hand, and a
surety on the other. Solidarity signifies that the creditor
can compel any one of the joint and several debtors or
the surety alone to answer for the entirety of the
principal debt. The difference lies in the respective
faculties of the joint and several debtor and the surety
to seek reimbursement for the sums they paid out to
the creditor.
Dr. Tolentino explains the differences between a solidary
co-debtor and a surety:
A guarantor who binds himself in solidum with the
principal debtor under the provisions of the second
paragraph does not become a solidary co-debtor to all
intents and purposes. There is a difference between a
solidary co-debtor and a fiador in solidum (surety). The
latter, outside of the liability he assumes to pay the
debt before the property of the principal debtor has
been exhausted, retains all the other rights, actions and
benefits which pertain to him by reason of the fiansa;

while a solidary co-debtor has no other rights than those

bestowed upon him in Section 4, Chapter 3, Title I, Book
IV of the Civil Code.
The second paragraph of [Article 2047] is practically
equivalent to the contract of suretyship. The civil law
suretyship is, accordingly, nearly synonymous with the
common law guaranty; and the civil law relationship
existing between the co-debtors liable in solidum is
similar to the common law suretyship.46
In the case of joint and several debtors, Article 1217
makes plain that the solidary debtor who effected the
payment to the creditor "may claim from his co-debtors
only the share which corresponds to each, with the
interest for the payment already made." Such solidary
debtor will not be able to recover from the co-debtors
the full amount already paid to the creditor, because the
right to recovery extends only to the proportional share
of the other co-debtors, and not as to the particular
proportional share of the solidary debtor who already
paid. In contrast, even as the surety is solidarily bound
with the principal debtor to the creditor, the surety who
does pay the creditor has the right to recover the full
amount paid, and not just any proportional share, from
the principal debtor or debtors. Such right to full
reimbursement falls within the other rights, actions and
benefits which pertain to the surety by reason of the
subsidiary obligation assumed by the surety.
What is the source of this right to full reimbursement by
the surety? We find the right under Article 2066 of the
Civil Code, which assures that "[t]he guarantor who
pays for a debtor must be indemnified by the latter,"

such indemnity comprising of, among others, "the total

amount of the debt."47 Further, Article 2067 of the Civil
Code likewise establishes that "[t]he guarantor who
pays is subrogated by virtue thereof to all the rights
which the creditor had against the debtor."48

Articles 2066 and 2067 explicitly pertain to guarantors,

and one might argue that the provisions should not
extend to sureties, especially in light of the qualifier in
Article 2047 that the provisions on joint and several
obligations should apply to sureties. We reject that
argument, and instead adopt Dr. Tolentinos observation
that "[t]he reference in the second paragraph of [Article
2047] to the provisions of Section 4, Chapter 3, Title I,
Book IV, on solidary or several obligations, however,
does not mean that suretyship is withdrawn from the
applicable provisions governing guaranty."49 For if that
were not the implication, there would be no material
difference between the surety as defined under Article
2047 and the joint and several debtors, for both classes
of obligors would be governed by exactly the same rules
and limitations.
Accordingly, the rights to indemnification and
subrogation as established and granted to the guarantor
by Articles 2066 and 2067 extend as well to sureties as
defined under Article 2047. These rights granted to the
surety who pays materially differ from those granted
under Article 1217 to the solidary debtor who pays,
since the "indemnification" that pertains to the latter
extends "only [to] the share which corresponds to each
[co-debtor]." It is for this reason that the Court cannot

accord the conclusion that because petitioners are

identified in the Undertaking as "SURETIES," they are
consequently joint and severally liable to Ortigas.
In order for the conclusion espoused by Ortigas to hold,
in light of the general presumption favoring joint
liability, the Court would have to be satisfied that
among the petitioners and Matti, there is one or some of
them who stand as the principal debtor to Ortigas and
another as surety who has the right to full
reimbursement from the principal debtor or debtors. No
suggestion is made by the parties that such is the case,
and certainly the Undertaking is not revelatory of such
intention. If the Court were to give full fruition to the use
of the term "sureties" as conclusive indication of the
existence of a surety agreement that in turn gives rise
to a solidary obligation to pay Ortigas, the necessary
implication would be to lay down a corresponding set of
rights and obligations as between the "SURETIES" which
petitioners and Matti did not clearly intend.
It is not impossible that as between Escao, Silos and
Matti, there was an agreement whereby in the event
that Ortigas were to seek reimbursement from them per
the terms of the Undertaking, one of them was to act as
surety and to pay Ortigas in full, subject to his right to
full reimbursement from the other two obligors. In such
case, there would have been, in fact, a surety
agreement which evinces a solidary obligation in favor
of Ortigas. Yet if there was indeed such an agreement, it
does not appear on the record. More consequentially, no
such intention is reflected in the Undertaking itself, the
very document that creates the conditional obligation

that petitioners and Matti reimburse Ortigas should he

be made to pay PDCP. The mere utilization of the term
"SURETIES" could not work to such effect, especially as
it does not appear who exactly is the principal debtor
whose obligation is "assured" or "guaranteed" by the
surety.
Ortigas further argues that the nature of the
Undertaking requires "solidary obligation of the
Sureties," since the Undertaking expressly seeks to
"reliev[e] obligors of any and all liability arising from
their said joint and several undertaking with [F]alcon,"
and for the "sureties" to "irrevocably agree and
undertake to assume all of obligors said guarantees to
PDCP."50 We do not doubt that a finding of solidary
liability among the petitioners works to the benefit of
Ortigas in the facilitation of these goals, yet the
Undertaking itself contains no stipulation or clause that
establishes petitioners obligation to Ortigas as solidary.
Moreover, the aims adverted to by Ortigas do not by
themselves establish that the nature of the obligation
requires solidarity. Even if the liability of petitioners and
Matti were adjudged as merely joint, the full relief and
reimbursement of Ortigas arising from his payment to
PDCP would still be accomplished through the complete
execution of such a judgment.
Petitioners further claim that they are not liable for
attorneys fees since the Undertaking contained no such
stipulation for attorneys fees, and that the situation did
not fall under the instances under Article 2208 of the
Civil Code where attorneys fees are recoverable in the
absence of stipulation.

We disagree. As Ortigas points out, the acts or

omissions of the petitioners led to his being impleaded
in the suit filed by PDCP. The Undertaking was precisely
executed as a means to obtain the release of Ortigas
and the Scholeys from their previous obligations as
sureties of Falcon, especially considering that they were
already divesting their shares in the corporation.
Specific provisions in the Undertaking obligate
petitioners to work for the release of Ortigas from his
surety agreements with Falcon. Specific provisions
likewise mandate the immediate repayment of Ortigas
should he still be made to pay PDCP by reason of the
guaranty agreements from which he was ostensibly to
be released through the efforts of petitioners. None of
these provisions were complied with by petitioners, and
Article 2208(2) precisely allows for the recovery of
attorneys fees "[w]hen the defendants act or omission
has compelled the plaintiff to litigate with third persons
or to incur expenses to protect his interest."
Finally, petitioners claim that they should not be liable
for interest since the Undertaking does not contain any
stipulation for interest, and assuming that they are
liable, that the rate of interest should not be 12% per
annum, as adjudged by the RTC.
The seminal ruling in Eastern Shipping Lines, Inc. v.
Court of Appeals51 set forth the rules with respect to the
manner of computing legal interest:
I. When an obligation, regardless of its source, i.e., law,
contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for
damages. The provisions under Title XVIII on "Damages"

of the Civil Code govern in determining the measure of

recoverable damages.
II. With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate
of interest, as well as the accrual thereof, is imposed, as
follows:
1. When the obligation is breached, and it consists in
the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that
which may have been stipulated in writing. Furthermore,
the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of
stipulation, the rate of interest shall be 12% per annum
to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the
discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated
claims or damages except when or until the demand
can be established with reasonable certainty.
Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from
the time the claim is made judicially or extrajudicially
(Art. 1169, Civil Code) but when such certainty cannot
be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date
the judgment of the court is made (at which time
quantification of damages may be deemed to have been

reasonably ascertained). The actual base for the

computation of legal interest shall, in any case, be on
the amount finally adjudged.
3. When the judgment of the court awarding a sum of
money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of
credit.52
Since what was the constituted in the Undertaking
consisted of a payment in a sum of money, the rate of
interest thereon shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial
demand. The interest rate imposed by the RTC is thus
proper. However, the computation should be reckoned
from judicial or extrajudicial demand. Per records, there
is no indication that Ortigas made any extrajudicial
demand to petitioners and Matti after he paid PDCP, but
on 14 March 1994, Ortigas made a judicial demand
when he filed a Third-Party Complaint praying that
petitioners and Matti be made to reimburse him for the
payments made to PDCP. It is the filing of this Third
Party Complaint on 14 March 1994 that should be
considered as the date of judicial demand from which
the computation of interest should be reckoned.53 Since
the RTC held that interest should be computed from 28
February 1994, the appropriate redefinition should be
made.
WHEREFORE, the Petition is GRANTED in PART. The
Order of the Regional Trial Court dated 5 October 1995

is modified by declaring that petitioners and Joseph M.

Matti are only jointly liable, not jointly and severally, to
respondent Rafael Ortigas, Jr. in the amount
of P1,300,000.00. The Order of the Regional Trial Court
dated 7 March 1996 is MODIFIED in that the legal
interest of 12% per annum on the amount
of P1,300,000.00 is to be computed from 14 March
1994, the date of judicial demand, and not from 28
February 1994 as directed in the Order of the lower
court. The assailed rulings are affirmed in all other
respects. Costs against petitioners.

HEIRS OF SERVANDO
FRANCO,
Petitioners,

G.R. No. 159709

Present:

Respondents.

June 27, 2012

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

DECISION

BERSAMIN, J.:
There is novation when there is an irreconcilable
incompatibility between the old and the new
obligations. There is no novation in case of only slight
modifications; hence, the old obligation prevails.

The petitioners challenge the decision promulgated on

March 19, 2003,[1] whereby the Court of Appeals (CA)
upheld the issuance of a writ of execution by the
Regional Trial Court (RTC), Branch 16, in Malolos,
Bulacan.

LEONARDO-DE CASTRO,
Acting Chairperson,
- versus -

BERSAMIN,
DEL CASTILLO,
VILLARAMA, JR, and
PERLAS-BERNABE, JJ.
Promulgated:

SPOUSES VERONICA AND

DANILO GONZALES,

Antecedents
The Court adopts the following summary of the
antecedents rendered by the Court in Medel v. Court of
Appeals,[2] the case from which this case originated, to
wit:

On November 7, 1985, Servando Franco

and Leticia Medel (hereafter Servando and
Leticia) obtained a loan from Veronica R.
Gonzales (hereafter Veronica), who was
engaged in the money lending business
under
the
name
Gonzales
Credit
Enterprises, in the amount of P50,000.00,
payable in two months. Veronica gave only
the amount ofP47,000.00, to the borrowers,
as she retained P3,000.00, as advance
interest for one month at 6% per month.
Servado and Leticia executed a promissory
note for P50,000.00, to evidence the loan,
payable on January 7, 1986.

On November 19, 1985, Servando and

Leticia obtained from Veronica another loan
in the amount of P90,000.00, payable in two
months, at 6% interest per month. They
executed a promissory note to evidence the
loan, maturing on January 19, 1986. They
received only P84,000.00, out of the
proceeds of the loan.

On maturity of the two promissory

notes, the borrowers failed to pay the
indebtedness.

over a property belonging to Leticia

Makalintal Yaptinchay, who issued a special
power of attorney in favor of Leticia Medel,
authorizing her to execute the mortgage.
Servando and Leticia executed a promissory
note in favor of Veronica to pay the sum
of P300,000.00, after a month, or on July 11,
1986.
However,
only
the
sum
of P275,000.00, was given to them out of
the proceeds of the loan.

Like the previous loans, Servando and

Medel failed to pay the third loan on
maturity.

On July 23, 1986, Servando and Leticia

with the latter's husband, Dr. Rafael Medel,
consolidated all their previous unpaid loans
totaling P440,000.00, and sought from
Veronica another loan in the amount
of P60,000.00, bringing their indebtedness
to a total of P500,000.00, payable on August
23, 1986. They executed a promissory note,
reading as follows:

Baliwag, Bulacan July 23, 1986

Maturity Date August 23, 1986

On June 11, 1986, Servando and Leticia
secured from Veronica still another loan in
the amount of P300,000.00, maturing in one
month, secured by a real estate mortgage

P500,000.00

FOR VALUE RECEIVED, I/WE jointly

and severally promise to pay to the
order of VERONICA R. GONZALES
doing business in the business style
of GONZALES CREDIT ENTERPRISES,
Filipino, of legal age, married to
Danilo G. Gonzales, Jr., of Baliwag
Bulacan, the sum of PESOS ........
FIVE HUNDRED THOUSAND .....
(P500,000.00)
Philippine
Currency with interest thereon at the
rate of 5.5 PER CENT per month plus
2% service charge per annum from d
ate hereofuntil fully paid according
to
the
amortization
schedule
contained herein.
(Underscoring
supplied)

Payment will be made in full at

the maturity date.

Should I/WE fail to pay any amorti

zation or portion hereof when due,
all the other installments together
with all interest accrued shall
immediately be due and payable and
I/WE
hereby
agree
to
pay
an additional amount equivalent to o
ne per cent (1%) per month of the a
mount due and demandable as penal
ty charges in the formof liquidated d
amages until fully paid; and the
further sum of TWENTY FIVE PER CE
NT (25%) thereof in full,
without

deductions as Attorney's Fee whethe

r actually incurred or not, of the total
amount
due
and
demandable,
exclusive of costs and judicial or
extra
judicial
expenses.
(Underscoring supplied)

I, WE further agree that in the

event the present rate of interest on
loan is increased by law or the
Central Bank of the Philippines, the
holder shall have the option to apply
and collect the increased interest
charges without notice although the
original interest have already been
collected wholly or partially unless
the contrary is required by law.

It is also a special condition of this

contract that the parties herein
agree that the amount of pesoobligation under this agreement is
based on the present value of peso,
and if there be any change in the
value thereof, due to extraordinary
inflation or deflation, or any other
cause or reason, then the pesoobligation herein contracted shall be
adjusted in accordance with the
value of the peso then prevailing at
the time of the complete fulfillment
of obligation.

Demand and notice of dishonor

waived. Holder may accept partial
payments and grant renewals of this
note or extension of payments,
reserving rights against each and all
indorsers and all parties to this note.

IN CASE OF JUDICIAL Execution of

this obligation, or any part of it, the
debtors waive all his/their rights
under the provisions of Section 12,
Rule 39, of the Revised Rules of
Court.

On maturity of the loan, the borrowers

failed
to
pay
the
indebtedness
of P500,000.00, plus interests and penalties,
evidenced by the above-quoted promissory
note.

On February 20, 1990, Veronica R.

Gonzales, joined by her husband Danilo G.
Gonzales, filed with the Regional Trial Court
of Bulacan, Branch 16, at Malolos, Bulacan,
a complaint for collection of the full amount
of the loan including interests and other
charges.

In his answer to the complaint filed with

the trial court on April 5, 1990, defendant
Servando alleged that he did not obtain any
loan from the plaintiffs; that it was

defendants Leticia and Dr. Rafael Medel who

borrowed from the plaintiffs the sum
of P500,000.00, and actually received the
amount and benefited therefrom; that the
loan was secured by a real estate mortgage
executed in favor of the plaintiffs, and that
he (Servando Franco) signed the promissory
note only as a witness.

In their separate answer filed on April

10,1990, defendants Leticia and Rafael
Medel alleged that the loan was the
transaction of Leticia Yaptinchay, who
executed a mortgage in favor of the
plaintiffs over a parcel of real estate
situated in San Juan, Batangas; that the
interest rate is excessive at 5.5% per month
with additional service charge of 2% per
annum, and penalty charge of 1% per
month; that the stipulation for attorney's
fees of 25% of the amount due is
unconscionable, illegal and excessive, and
that substantial payments made were
applied to interest, penalties and other
charges.

After due trial, the lower court declared

that the due execution and genuineness of
the four promissory notes had been duly
proved, and ruled that although the Usury
Law had been repealed, the interest
charged by the plaintiffs on the loans was
unconscionable and "revolting to the
conscience". Hence, the trial court applied
"the provision of the New [Civil] Code" that

the "legal rate of interest for loan or

forbearance of money, goods or credit is
12% per annum."

Accordingly, on December 9, 1991, the

trial
court
rendered
judgment,
the
dispositive portion of which reads as follows:

WHEREFORE, premises
considered, judgment is
rendered, as follows:

hereby

1. Ordering
the
defendants
Servando Franco and Leticia Medel,
jointly and severally, to pay plaintiffs
the amount of P47,000.00 plus 12%
interest per annum from November
7, 1985 and 1% per month as
penalty, until the entire amount is
paid in full.

2. Ordering
the
defendants
Servando Franco and Leticia Y. Medel
to plaintiffs, jointly and severally the
amount of P84,000.00 with 12%
interest per annum and 1% per cent
per
month
as
penalty
from
November 19,1985 until the whole
amount is fully paid;

3. Ordering the defendants to pay

the plaintiffs, jointly and severally,
the amount of P285,000.00 plus 12%
interest per annum and 1% per
month as penalty from July 11, 1986,
until the whole amount is fully paid;

4. Ordering the defendants to pay

plaintiffs, jointly and severally, the
amount of P50,000.00 as attorney's
fees;

5. All counterclaims are hereby

dismissed.

With
costs
defendants.

against

In due time, both

defendants appealed to
Appeals.

the

plaintiffs and
the Court of

In their appeal, plaintiffs-appellants

argued that the promissory note, which
consolidated all the unpaid loans of the
defendants, is the law that governs the
parties. They further argued that Circular
No. 416 of the Central Bank prescribing the
rate of interest for loans or forbearance of
money, goods or credit at 12% per annum,
applies only in the absence of a stipulation

on interest rate, but not when the parties

agreed thereon.

The Court of Appeals sustained the

plaintiffs-appellants' contention. It ruled
that the Usury Law having become legally
inexistent with the promulgation by the
Central Bank in 1982 of Circular No. 905, the
lender and borrower could agree on any
interest that may be charged on the loan.
The Court of Appeals further held that "the
imposition
of
an
additional
amount
equivalent to 1% per month of the amount
due and demandable as penalty charges in
the form of liquidated damages until fully
paid was allowed by law.

Accordingly, on March 21, 1997, the

Court of Appeals promulgated it decision
reversing that of the Regional Trial Court,
disposing as follows:

WHEREFORE,
the
appealed
judgment is hereby MODIFIED such
that defendants are hereby ordered
to pay the plaintiffs the sum
of P500,000.00, plus 5.5% per month
interest and 2% service charge per
annum effective July 23, 1986, plus
1% per month of the total amount
due and demandable as penalty
charges effective August 24, 1986,
until the entire amount is fully paid.

The award to the plaintiffs

of P50,000.00 as attorney's fees is
affirmed. And so is the imposition of
costs against the defendants.

SO ORDERED.

On
April
15,
1997,
defendantsappellants filed a motion for reconsideration
of the said decision. By resolution dated
November 25, 1997, the Court of Appeals
denied the motion.[3]
On review, the Court in Medel v. Court of
Appeals struck down as void the stipulation on the
interest for being iniquitous or unconscionable, and
revived the judgment of the RTC rendered on December
9, 1991, viz:

WHEREFORE,
the
Court
hereby
REVERSES and SETS ASIDE the decision of
the Court of Appeals promulgated on March
21, 1997, and its resolution dated November
25, 1997. Instead, we render judgment
REVIVING and AFFIRMING the decision dated
December 9, 1991, of the Regional Trial
Court of Bulacan, Branch 16, Malolos,
Bulacan, in Civil Case No. 134-M-90,
involving the same parties.

No pronouncement as to costs in this

instance.

SO ORDERED.[4]

Upon the finality of the decision in Medel v. Court

of Appeals, the respondents moved for execution.
[5]
Servando Franco opposed,[6] claiming that he and the
respondents had agreed to fix the entire obligation
at P775,000.00.[7] According
to
Servando,
their
agreement, which was allegedly embodied in a receipt
dated February 5, 1992,[8] whereby he made an initial
payment of P400,000.00 and promised to pay the
balance of P375,000.00 on February 29, 1992,
superseded the July 23, 1986 promissory note.

The RTC granted the motion for execution over

Servandos opposition, thus:

There is no doubt that the decision

dated December 9, 1991 had already been
affirmed and had already become final and
executory. Thus, in accordance with Sec. 1
of Rule 39 of the 1997 Rules of Civil
Procedure, execution shall issue as a matter
of right. It has likewise been ruled that a
judgment which has acquired finality
becomes immutable and unalterable and
hence may no longer be modified at any
respect except only to correct clerical errors
or mistakes (Korean Airlines Co. Ltd. vs.

C.A., 247 SCRA 599). In this respect, the

decision deserves to be respected.

The argument about the modification of

the
contract
or
non-participation
of
defendant
Servando
Franco
in
the
proceedings on appeal on the alleged belief
that the payment he made had already
absolved him from liability is of no moment.
Primarily, the decision was for him and
Leticia Medel to pay the plaintiffs jointly and
severally the amounts stated in the
Decision. In other words, the liability of the
defendants thereunder is solidary. Based on
this aspect alone, the new defense raised by
defendant Franco is unavailing.

WHEREFORE, in the light of all the

foregoing, the Court hereby grants the
Motion for Execution of Judgment.

Accordingly, let a writ of execution be

issued for implementation by the Deputy
Sheriff of this Court.

SO ORDERED.[9]

On March 8, 2001, the RTC issued the writ of execution.

[10]

Servando moved for reconsideration,[11] but the

RTC denied his motion.[12]

On March 19, 2003, the CA affirmed the RTC through its

assailed decision, ruling that the execution was proper
because of Servandos failure to comply with the terms
of the compromise agreement, stating:[13]

the aggrieved party must move for

its execution, not its invalidation.

It is clear from the aforementioned

jurisprudence that even if there is a
compromise agreement and the terms have
been violated, the aggrieved party, such as
the private respondents, has the right to
move for the issuance of a writ of execution
of the final judgment subject of the
compromise agreement.

Petitioner cannot deny the fact that

there was no full compliance with the tenor
of the compromise agreement. Private
respondents on their part did not disregard
the payments made by the petitioner. They
even offered that whatever payments made
by petitioner, it can be deducted from the
principal
obligation
including
interest.
However, private respondents posit that the
payments made cannot alter, modify or
revoke the decision of the Supreme Court in
the instant case.

Moreover, under the circumstances of

this case, petitioner does not stand to suffer
any harm or prejudice for the simple reason
that what has been asked by private
respondents to be the subject of a writ of
execution is only the balance of petitioners
obligation after deducting the payments
made on the basis of the compromise
agreement.

In the case of Prudence Realty and

Development Corporation vs. Court of
Appeals, the Supreme Court ruled that:

WHEREFORE, premises considered, the

instant petition is hereby DENIED DUE
COURSE and consequently DISMISSED for
lack of merit.

When
the
terms
of
the
compromise judgment is violated,

SO ORDERED.

His motion for reconsideration having been denied,

[14]
Servando appealed. He was eventually substituted
by his heirs, now the petitioners herein, on account of
his intervening death. The substitution was pursuant to
the resolution dated June 15, 2005.[15]

Issue

The petitioners submit that the CA erred in ruling that:

been impliedly novated when the principal obligation

of P500,000.00 had been fixed at P750,000.00, and the
maturity date had been extended from August 23, 1986
to February 29, 1992.

In contrast, the respondents aver that the petitioners

seek to alter, modify or revoke the final and executory
decision of the Court; that novation did not take place
because there was no complete incompatibility between
the promissory note and the memorandum receipt; that
Servandos previous payment would be deducted from
the total liability of the debtors based on the RTCs
decision.

THE 9 DECEMBER 1991 DECISION OF

BRANCH 16 OF THE REGIONAL TRIAL COURT
OF MALOLOS, BULACAN WAS NOT NOVATED
BY
THE
COMPROMISE
AGREEMENT
BETWEEN THE PARTIES ON 5 FEBRUARY
1992.

Was there a novation of the August 23, 1986

promissory note when respondent Veronica Gonzales
issued the February 5, 1992 receipt?

II

Ruling

THE LIABILITY OF THE PETITIONER TO

RESPONDENTS SHOULD BE BASED ON THE
DECEMBER 1991 DECISION OF BRANCH 16
OF THE REGIONAL TRIAL COURT OF
MALOLOS, BULACAN AND NOT ON THE
COMPROMISE AGREEMENT EXECUTED IN
1992.

Issue

The petition lacks merits.

I
Novation did not transpire because no
irreconcilable incompatibility existed

The petitioners insist that the RTC could not validly

enforce a judgment based on a promissory note that
had been already novated; that the promissory note had

between the promissory note and the receipt

February 5, 1992
To buttress their claim of novation, the petitioners rely
on the receipt issued on February 5, 1992 by
respondent Veronica whereby Servandos obligation was
fixed atP750,000.00. They insist that even the maturity
date was extended until February 29, 1992. Such
changes, they assert, were incompatible with those of
the original agreement under the promissory note.

The petitioners assertion is wrong.

A novation arises when there is a substitution of an

obligation by a subsequent one that extinguishes the
first, either by changing the object or the principal
conditions, or by substituting the person of the debtor,
or by subrogating a third person in the rights of the
creditor.[16] For a valid novation to take place, there must
be, therefore: (a) a previous valid obligation; (b) an
agreement of the parties to make a new contract; (c) an
extinguishment of the old contract; and (d) a valid new
contract.[17] In short, the new obligation extinguishes the
prior agreement only when the substitution is
unequivocally declared, or the old and the new
obligations are incompatible on every point. A
compromise of a final judgment operates as a novation
of the judgment obligation upon compliance with either
of these two conditions.[18]

The receipt dated February 5, 1992, excerpted below,

did not create a new obligation incompatible with the
old one under the promissory note, viz:

Received from SERVANDO FRANCO BPI

Managers Check No. 001700 in the amount
of P400,00.00 as partial payment of loan.
Balance of P375,000.00 to be paid on or
before FEBRUARY 29, 1992. In case of
default an interest will be charged as
stipulated in the promissory note subject of
this case.

(Sgd)
V. Gonzalez[19]

To be clear, novation is not presumed. This means that

the parties to a contract should expressly agree to
abrogate the old contract in favor of a new one. In the
absence of the express agreement, the old and the new
obligations must be incompatible on every point.
[20]
According to California Bus Lines, Inc. v. State
Investment House, Inc.:[21]

The extinguishment of the old obligation by

the new one is a necessary element of
novation which may be effected either
expressly or impliedly. The term expressly
means
that
the
contracting
parties
incontrovertibly disclose that their object in
executing the new contract is to extinguish
the old one. Upon the other hand, no
specific form is required for an implied
novation, and all that is prescribed by law

would be an incompatibility between the

two contracts. While there is really no hard
and fast rule to determine what might
constitute to be a sufficient change that can
bring about novation, the touchstone for
contrariety,
however,
would
be
an
irreconcilable incompatibility between the
old and the new obligations.
There is incompatibility when the two obligations cannot
stand together, each one having its independent
existence. If the two obligations cannot stand together,
the latter obligation novates the first.[22] Changes that
breed incompatibility must be essential in nature and
not merely accidental. The incompatibility must affect
any of the essential elements of the obligation, such as
its object, cause or principal conditions thereof;
otherwise, the change is merely modificatory in nature
and insufficient to extinguish the original obligation.[23]

In light of the foregoing, the issuance of the receipt

created no new obligation. Instead, the respondents
only thereby recognized the original obligation by
stating in the receipt that the P400,000.00 was partial
payment of loan and by referring to the promissory note
subject of the case in imposing the interest.
The loan mentioned in the receipt was still the same
loan
involving
the P500,000.00
extended
to
Servando. Advertence to the interest stipulated in the
promissory note indicated that the contract still
subsisted, not replaced and extinguished, as the
petitioners claim.

The receipt dated February 5, 1992 was only the proof

of Servandos payment of his obligation as confirmed by
the decision of the RTC. It did not establish the novation

of his agreement with the respondents. Indeed, the

Court has ruled that an obligation to pay a sum of
money is not novated by an instrument that expressly
recognizes the old, or changes only the terms of
payment, or adds other obligations not incompatible
with the old ones, or the new contract merely
supplements the old one.[24] A new contract that is a
mere reiteration, acknowledgment or ratification of the
old contract with slight modifications or alterations as to
the cause or object or principal conditions can stand
together with the former one, and there can be no
incompatibility between them.[25] Moreover, a creditors
acceptance of payment after demand does not operate
as a modification of the original contract.[26]

Worth noting is that Servandos liability was joint and

solidary with his co-debtors. In a solidary obligation, the
creditor may proceed against any one of the solidary
debtors or some or all of them simultaneously. [27] The
choice to determine against whom the collection is
enforced belongs to the creditor until the obligation is
fully satisfied.[28] Thus, the obligation was being
enforced against Servando, who, in order to escape
liability, should have presented evidence to prove that
his obligation had already been cancelled by the new
obligation or that another debtor had assumed his
place. In case of change in the person of the debtor, the
substitution must be clear and express, [29] and made
with the consent of the creditor.[30] Yet, these
circumstances did not obtain herein, proving precisely
that Servando remained a solidary debtor against whom
the entire or part of the obligation might be enforced.

Lastly, the extension of the maturity date did not

constitute a novation of the previous agreement. It is

settled that an extension of the term or period of the

maturity date does not result in novation.[31]
II
Total liability to be reduced by P400,000.00

The petitioners argue that Servandos remaining liability

amounted to only P375,000.00, the balance indicated in
the February 5, 1992 receipt. Accordingly, the balance
was not yet due because the respondents did not yet
make a demand for payment.

G.R. No. 172428

November 28, 2008

HERMAN C. CRYSTAL, LAMBERTO C. CRYSTAL, ANN

GEORGIA C. SOLANTE, and DORIS C. MAGLASANG,
as Heirs of Deceased SPOUSES RAYMUNDO I.
CRYSTAL and DESAMPARADOS C.
CRYSTAL, petitioners,
vs.
BANK OF THE PHILIPPINE ISLANDS, respondent.
DECISION
TINGA, J.:

The petitioners cannot be upheld.

The balance of P375,000.00 was premised on the taking

place of a novation. However, as found now, novation
did not take place. Accordingly, Servandos obligation,
being solidary, remained to be that decreed in the
December 9, 1991 decision of the RTC, inclusive of
interests, less the amount of P400,000.00 that was
meanwhile paid by him.
WHEREFORE, the Court AFFIRMS the decision of
the Court of Appeals promulgated on March 19,
2003; ORDERS the Regional Trial Court, Branch 16, in
Malolos, Bulacan to proceed with the execution based
on its decision rendered on December 9, 1991,
deducting the amount of P400,000.00 already paid by
the late Servando Franco; and DIRECTS the petitioners
to pay the costs of suit.

Before us is a Petition for Review1 of the Decision2 and

Resolution3 of the Court of Appeals dated 24 October
2005 and 31 March 2006, respectively, in CA G.R. CV
No. 72886, which affirmed the 8 June 2001 decision of
the Regional Trial Court, Branch 5, of Cebu City.4
The facts, as culled from the records, follow.
On 28 March 1978, spouses Raymundo and
Desamparados Crystal obtained a P300,000.00 loan in
behalf of the Cebu Contractors Consortium Co. (CCCC)
from the Bank of the Philippine Islands-Butuan branch
(BPI-Butuan). The loan was secured by a chattel
mortgage on heavy equipment and machinery of CCCC.
On the same date, the spouses executed in favor of BPIButuan a Continuing Suretyship5 where they bound
themselves as surety of CCCC in the aggregate principal
sum of not exceeding P300,000.00. Thereafter, or on 29
March 1979, Raymundo Crystal executed a promissory

note6 for the amount of P300,000.00, also in favor of

BPI-Butuan.
Sometime in August 1979, CCCC renewed a previous
loan, this time from BPI, Cebu City branch (BPI-Cebu
City). The renewal was evidenced by a promissory
note7 dated 13 August 1979, signed by the spouses in
their personal capacities and as managing partners of
CCCC. The promissory note states that the spouses are
jointly and severally liable with CCCC. It appears that
before the original loan could be granted, BPI-Cebu City
required CCCC to put up a security.
However, CCCC had no real property to offer as security
for the loan; hence, the spouses executed a real estate
mortgage8 over their own real property on 22
September 1977.9 On 3 October 1977, they executed
another real estate mortgage over the same lot in favor
of BPI-Cebu City, to secure an additional loan
of P20,000.00 of CCCC.10
CCCC failed to pay its loans to both BPI-Butuan and BPICebu City when they became due. CCCC, as well as the
spouses, failed to pay their obligations despite
demands. Thus, BPI resorted to the foreclosure of the
chattel mortgage and the real estate mortgage. The
foreclosure sale on the chattel mortgage was initially
stalled with the issuance of a restraining order against
BPI.11 However, following BPIs compliance with the
necessary requisites of extrajudicial foreclosure, the
foreclosure sale on the chattel mortgage was
consummated on 28 February 1988, with the proceeds
amounting to P240,000.00 applied to the loan from BPIButuan which had then

reached P707,393.90.12Meanwhile, on 7 July 1981,

Insular Bank of Asia and America (IBAA), through its
Vice-President for Legal and Corporate Affairs, offered to
buy the lot subject of the two (2) real
estate mortgages and to pay directly the spouses
indebtedness in exchange for the release of the
mortgages. BPI rejected IBAAs offer to pay.13
BPI filed a complaint for sum of money against CCCC
and the spouses before the Regional Trial Court of
Butuan City (RTC Butuan), seeking to recover the
deficiency of the loan of CCCC and the spouses with BPIButuan. The trial court ruled in favor of BPI. Pursuant to
the decision, BPI instituted extrajudicial foreclosure of
the spouses mortgaged property.14
On 10 April 1985, the spouses filed an action
for Injunction With Damages, With A Prayer For A
Restraining Order and/ or Writ of Preliminary
Injunction.15 The spouses claimed that the foreclosure of
the real estate mortgages is illegal because BPI should
have exhausted CCCCs properties first, stressing that
they are mere guarantors of the renewed loans. They
also prayed that they be awarded moral and exemplary
damages, attorneys fees, litigation expenses and cost
of suit. Subsequently, the spouses filed an amended
complaint,16 additionally alleging that CCCC had opened
and maintained a foreign currency savings account
(FCSA-197) with bpi, Makati branch (BPI-Makati), and
that said FCSA was used as security for a P450,000.00
loan also extended by BPI-Makati. TheP450,000.00 loan
was allegedly paid, and thereafter the spouses
demanded the return of the FCSA passbook. BPI

rejected the demand; thus, the spouses were unable to

withdraw from the said account to pay for their other
obligations to BPI.
The trial court dismissed the spouses complaint and
ordered them to pay moral and exemplary damages and
attorneys fees to BPI.17 It ruled that since the spouses
agreed to bind themselves jointly and severally, they
are solidarily liable for the loans; hence, BPI can validly
foreclose the two real estate mortgages. Moreover,
being guarantors-mortgagors, the spouses are not
entitled to the benefit of exhaustion. Anent the FCSA,
the trial court found that CCCC originally had FCDU SA
No. 197 with BPI, Dewey Boulevard branch, which was
transferred to BPI-Makati as FCDU SA 76/0035, at the
request of Desamparados Crystal. FCDU SA 76/0035
was thus closed, but Desamparados Crystal failed to
surrender the passbook because it was lost. The
transferred FCSA in BPI-Makati was the one used as
security for CCCCs P450,000.00 loan from BPI-Makati.
CCCC was no longer allowed to withdraw from FCDU SA
No. 197 because it was already closed.
The spouses appealed the decision of the trial court to
the Court of Appeals, but their appeal was
dismissed.18 The spouses moved for the reconsideration
of the decision, but the Court of Appeals also denied
their motion for reconsideration.19 Hence, the present
petition.
Before the Court, petitioners who are the heirs of the
spouses argue that the failure of the spouses to pay the
BPI-Cebu City loan of P120,000.00 was due to BPIs
illegal refusal to accept payment for the loan unless

the P300,000.00 loan from BPI-Butuan would also be

paid. Consequently, in view of BPIs unjust refusal to
accept payment of the BPI-Cebu City loan, the loan
obligation of the spouses was extinguished, petitioners
contend.
The contention has no merit. Petitioners rely on IBAAs
offer to purchase the mortgaged lot from them and to
directly pay BPI out of the proceeds thereof to settle the
loan.20 BPIs refusal to agree to such payment scheme
cannot extinguish the spouses loan obligation. In the
first place, IBAA is not privy to the loan agreement or
the promissory note between the spouses and BPI.
Contracts, after all, take effect only between the parties,
their successors in interest, heirs
and assigns.21 Besides, under Art. 1236 of the Civil
Code, the creditor is not bound to accept payment or
performance by a third person who has no interest in
the fulfillment of the obligation, unless there is a
stipulation to the contrary. We see no stipulation in the
promissory note which states that a third person may
fulfill the spouses obligation. Thus, it is clear that the
spouses alone bear responsibility for the same.
In any event, the promissory note is the controlling
repository of the obligation of the spouses. Under the
promissory note, the spouses defined the parameters of
their obligation as follows:
On or before June 29, 1980 on demand, for value
received, I/we promise to pay, jointly and
severally, to the BANK OF THE PHILIPPINE
ISLANDS, at its office in the city of Cebu

Philippines, the sum of ONE HUNDRED TWENTY

THOUSAND PESOS (P120,0000.00), Philippine
Currency, subject to periodic installments on the
principal as follows: P30,000.00 quarterly
amortization starting September 28, 1979. x x x 22
A solidary obligation is one in which each of the debtors
is liable for the entire obligation, and each of the
creditors is entitled to demand the satisfaction of the
whole obligation from any or all of the debtors. 23 A
liability is solidary "only when the obligation expressly
so states, when the law so provides or when the nature
of the
obligation so requires."24 Thus, when the obligor
undertakes to be "jointly and severally" liable, it means
that the obligation is solidary,25 such as in this case. By
stating "I/we promise to pay, jointly and severally, to the
BANK OF THE PHILIPPINE ISLANDS," the spouses agreed
to be sought out and be demanded payment from, by
BPI. BPI did demand payment from them, but they failed
to comply with their obligation, prompting BPIs valid
resort to the foreclosure of the chattel mortgage and
the real estate mortgages.
More importantly, the promissory note, wherein the
spouses undertook to be solidarily liable for the principal
loan, partakes the nature of a suretyship and therefore
is an additional security for the loan. Thus we held in
one case that if solidary liability was instituted to
"guarantee" a principal obligation, the law deems the
contract to be one of suretyship.26 And while a contract
of a surety is in essence secondary only to a valid
principal obligation, the suretys liability to the creditor

or promisee of the principal is said to be direct, primary,

and absolute; in other words, the surety is directly and
equally bound with the principal. The surety therefore
becomes liable for the debt or duty of another even if he
possesses no direct or personal interest over the
obligations nor does he receive any benefit therefrom.27
Petitioners contend that the Court of Appeals erred in
not granting their counterclaims, considering that they
suffered moral damages in view of the unjust refusal of
BPI to accept the payment scheme proposed by IBAA
and the allegedly unjust and illegal foreclosure of the
real estate mortgages on their property.28 Conversely,
they argue that the Court of Appeals erred in awarding
moral damages to BPI, which is a corporation, as well as
exemplary damages, attorneys fees and expenses of
litigation.29
We do not agree. Moral damages are meant to
compensate the claimant for any physical suffering,
mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social
humiliation and similar injuries unjustly caused.30 Such
damages, to be recoverable, must be the proximate
result of a wrongful act or omission the factual basis for
which is satisfactorily established by the aggrieved
party.31 There being no wrongful or unjust act on the
part of BPI in demanding payment from them and in
seeking the foreclosure of the chattel and real estate
mortgages, there is no lawful basis for award of
damages in favor of the spouses.
Neither is BPI entitled to moral damages. A juridical
person is generally not entitled to moral damages

because, unlike a natural person, it cannot experience

physical suffering or such sentiments as wounded
feelings, serious anxiety, mental anguish or moral
shock.32 The Court of Appeals found BPI as "being
famous and having gained its familiarity and respect not
only in the Philippines but also in the whole world
because of its good will and good reputation must
protect and defend the same against any unwarranted
suit such as the case at bench."33 In holding that BPI is
entitled to moral damages, the Court of Appeals relied
on the case of People v. Manero,34 wherein the Court
ruled that "[i]t is only when a juridical person has a good
reputation that is debased, resulting in social
humiliation, that moral damages may be awarded."35
We do not agree with the Court of Appeals. A statement
similar to that made by the Court in Manerocan be
found in the case of Mambulao Lumber Co. v. PNB, et
al.,36 thus:
x x x Obviously, an artificial person like herein
appellant corporation cannot experience physical
sufferings, mental anguish, fright, serious anxiety,
wounded feelings, moral shock or social
humiliation which are basis of moral damages. A
corporation may have good reputation
which, if besmirched may also be a ground
for the award of moral damages. x x x
(Emphasis supplied)
Nevertheless, in the more recent cases of ABS-CBN
Corp. v. Court of Appeals, et al.,37 and Filipinas
Broadcasting Network, Inc. v. Ago Medical and
Educational Center-Bicol Christian College of Medicine

(AMEC-BCCM),38 the Court held that the statements in

Manero and Mambulao were mere obiter dicta, implying
that the award of moral damages to corporations is not
a hard and fast rule. Indeed, while the Court may allow
the grant of moral damages to corporations, it is not
automatically granted; there must still be proof of the
existence of the factual basis of the damage and its
causal relation to the defendants acts. This is so
because moral damages, though incapable of pecuniary
estimation, are in the category of an award designed to
compensate the claimant for actual injurysuffered and
not to impose a penalty on the wrongdoer.39
The spouses complaint against BPI proved to be
unfounded, but it does not automatically entitle BPI to
moral damages. Although the institution of a clearly
unfounded civil suit can at times be a legal
justification for an award of attorney's fees, such filing,
however, has almost invariably been held not to be a
ground for an award of moral damages. The rationale
for the rule is that the law could not have meant to
impose a penalty on the right to litigate. Otherwise,
moral damages must every time be awarded in favor of
the prevailing defendant against an unsuccessful
plaintiff.40 BPI may have been inconvenienced by the
suit, but we do not see how it could have possibly
suffered besmirched reputation on account of the single
suit alone. Hence, the award of moral damages should
be deleted.
The awards of exemplary damages and attorneys fees,
however, are proper. Exemplary damages, on the other
hand, are imposed by way of example or correction for

the public good, when the party to a contract acts in a

wanton, fraudulent, oppressive or malevolent manner,
while attorneys fees are allowed when exemplary
damages are awarded and when the party to a suit is
compelled to incur expenses to protect his
interest.41 The spouses instituted their complaint against
BPI notwithstanding the fact that they were the ones
who failed to pay their obligations. Consequently, BPI
was forced to litigate and defend its interest. For these
reasons, BPI is entitled to the awards of exemplary
damages and attorneys fees.
WHEREFORE, the petition is DENIED. The Decision and
Resolution of the Court of Appeals dated 24 October
2005 and 31 March 2006, respectively, are hereby
AFFIRMED, with the MODIFICATION that the award of
moral damages to Bank of the Philippine Islands is
DELETED.

This is a petition for review on certiorari of the decision

of the Court of Appeals affirming that of the Regional
Trial Court of Misamis Oriental, Branch 18, 1 which
disposed of Civil Case No. 10507 for collection of a sum
of money and damages, as follows:
WHEREFORE, defendant BALDOMERO L.
INCIONG, JR. is adjudged solidarily liable and
ordered to pay to the plaintiff Philippine
Bank of Communications, Cagayan de Oro
City, the amount of FIFTY THOUSAND PESOS
(P50,000.00), with interest thereon from
May 5, 1983 at 16% per annum until fully
paid; and 6% per annum on the total
amount due, as liquidated damages or
penalty from May 5, 1983 until fully paid;
plus 10% of the total amount due for
expenses of litigation and attorney's fees;
and to pay the costs.

Costs against the petitioners.

The counterclaim, as well as the cross claim,
are dismissed for lack of merit.
G.R. No. 96405 June 26, 1996
BALDOMERO INCIONG, JR., petitioner,
vs.
COURT OF APPEALS and PHILIPPINE BANK OF
COMMUNICATIONS, respondents.

ROMERO, J.:p

SO ORDERED.
Petitioner's liability resulted from the promissory note in
the amount of P50,000.00 which he signed with Rene C.
Naybe and Gregorio D. Pantanosas on February 3, 1983,
holding themselves jointly and severally liable to private
respondent Philippine Bank of Communications,
Cagayan de Oro City branch. The promissory note was
due on May 5, 1983.

Said due date expired without the promissors having

paid their obligation. Consequently, on November 14,
1983 and on June 8, 1984, private respondent sent
petitioner telegrams demanding payment thereof. 2 On
December 11, 1984 private respondent also sent by
registered mail a final letter of demand to Rene C.
Naybe. Since both obligors did not respond to the
demands made, private respondent filed on January 24,
1986 a complaint for collection of the sum of
P50,000.00 against the three obligors.
On November 25, 1986, the complaint was dismissed
for failure of the plaintiff to prosecute the case.
However, on January 9, 1987, the lower court
reconsidered the dismissal order and required the sheriff
to serve the summonses. On January 27, 1987, the
lower court dismissed the case against defendant
Pantanosas as prayed for by the private respondent
herein. Meanwhile, only the summons addressed to
petitioner was served as the sheriff learned that
defendant Naybe had gone to Saudi Arabia.
In his answer, petitioner alleged that sometime in
January 1983, he was approached by his friend, Rudy
Campos, who told him that he was a partner of Pio Tio,
the branch manager of private respondent in Cagayan
de Oro City, in the falcata logs operation business.
Campos also intimated to him that Rene C. Naybe was
interested in the business and would contribute a
chainsaw to the venture. He added that, although
Naybe had no money to buy the equipment, Pio Tio had
assured Naybe of the approval of a loan he would make
with private respondent. Campos then persuaded

petitioner to act as a "co-maker" in the said loan.

Petitioner allegedly acceded but with the understanding
that he would only be a co-maker for the loan of
P50,000.00.
Petitioner alleged further that five (5) copies of a blank
promissory note were brought to him by Campos at his
office. He affixed his signature thereto but in one copy,
he indicated that he bound himself only for the amount
of P5,000.00. Thus, it was by trickery, fraud and
misrepresentation that he was made liable for the
amount of P50,000.00.
In the aforementioned decision of the lower court, it
noted that the typewritten figure "-- 50,000 --" clearly
appears directly below the admitted signature of the
petitioner in the promissory note. 3 Hence, the latter's
uncorroborated testimony on his limited liability cannot
prevail over the presumed regularity and fairness of the
transaction, under Sec. 5 (q) of Rule 131. The lower
court added that it was "rather odd" for petitioner to
have indicated in a copy and not in the original, of the
promissory note, his supposed obligation in the amount
of P5,000.00 only. Finally, the lower court held that,
even granting that said limited amount had actually
been agreed upon, the same would have been merely
collateral between him and Naybe and, therefore, not
binding upon the private respondent as creditor-bank.
The lower court also noted that petitioner was a holder
of a Bachelor of Laws degree and a labor consultant who
was supposed to take due care of his concerns, and
that, on the witness stand, Pio Tio denied having
participated in the alleged business venture although he

knew for a fact that the falcata logs operation was

encouraged by the bank for its export potential.
Petitioner appealed the said decision to the Court of
Appeals which, in its decision of August 31, 1990,
affirmed that of the lower court. His motion for
reconsideration of the said decision having been denied,
he filed the instant petition for review on certiorari.
On February 6, 1991, the Court denied the petition for
failure of petitioner to comply with the Rules of Court
and paragraph 2 of Circular
No. 1-88, and to sufficiently show that respondent court
had committed any reversible error in its questioned
decision. 4 His motion for the reconsideration of the
denial of his petition was likewise denied with finality in
the Resolution of April 24, 1991. 5 Thereafter, petitioner
filed a motion for leave to file a second motion for
reconsideration which, in the Resolution of May 27,
1991, the Court denied. In the same Resolution, the
Court ordered the entry of judgment in this case. 6
Unfazed, petitioner filed a notion for leave to file a
motion for clarification. In the latter motion, he asserted
that he had attached Registry Receipt No. 3268 to page
14 of the petition in compliance with Circular No. 1-88.
Thus, on August 7, 1991, the Court granted his prayer
that his petition be given due course and reinstated the
same. 7
Nonetheless, we find the petition unmeritorious.
Annexed to the petition is a copy of an affidavit
executed on May 3, 1988, or after the rendition of the

decision of the lower court, by Gregorio Pantanosas, Jr.,

an MTCC judge and petitioner's co-maker in the
promissory note. It supports petitioner's allegation that
they were induced to sign the promissory note on the
belief that it was only for P5,000.00, adding that it was
Campos who caused the amount of the loan to be
increased to P50,000.00.
The affidavit is clearly intended to buttress petitioner's
contention in the instant petition that the Court of
Appeals should have declared the promissory note null
and void on the following grounds: (a) the promissory
note was signed in the office of Judge Pantanosas,
outside the premises of the bank; (b) the loan was
incurred for the purpose of buying a second-hand
chainsaw which cost only P5,000.00; (c) even a new
chainsaw would cost only P27,500.00; (d) the loan was
not approved by the board or credit committee which
was the practice, as it exceeded P5,000.00; (e) the loan
had no collateral; (f) petitioner and Judge Pantanosas
were not present at the time the loan was released in
contravention of the bank practice, and (g) notices of
default are sent simultaneously and separately but no
notice was validly sent to him. 8 Finally, petitioner
contends that in signing the promissory note, his
consent was vitiated by fraud as, contrary to their
agreement that the loan was only for the amount of
P5,000.00, the promissory note stated the amount of
P50,000.00.
The above-stated points are clearly factual. Petitioner is
to be reminded of the basic rule that this Court is not a
trier of facts. Having lost the chance to fully ventilate

his factual claims below, petitioner may no longer be

accorded the same opportunity in the absence of grave
abuse of discretion on the part of the court below. Had
he presented Judge Pantanosas affidavit before the
lower court, it would have strengthened his claim that
the promissory note did not reflect the correct amount
of the loan.
Nor is there merit in petitioner's assertion that since the
promissory note "is not a public deed with the
formalities prescribed by law but . . . a mere commercial
paper which does not bear the signature of . . . attesting
witnesses," parol evidence may "overcome" the
contents of the promissory note. 9 The first paragraph of
the parol evidence rule 10states:
When the terms of an agreement have been
reduced to writing, it is considered as
containing all the terms agreed upon and
there can be, between the parties and their
successors in interest, no evidence of such
terms other than the contents of the written
agreement.
Clearly, the rule does not specify that the written
agreement be a public document.
What is required is that the agreement be in writing as
the rule is in fact founded on "long experience that
written evidence is so much more certain and accurate
than that which rests in fleeting memory only, that it
would be unsafe, when parties have expressed the
terms of their contract in writing, to admit weaker
evidence to control and vary the stronger and to show

that the
parties intended a different contract from that
expressed in the writing signed by them." 11 Thus, for
the parol evidence rule to apply, a written contract need
not be in any particular form, or be signed by both
parties. 12 As a general rule, bills, notes and other
instruments of a similar nature are not subject to be
varied or contradicted by parol or extrinsic evidence. 13
By alleging fraud in his answer, 14 petitioner was
actually in the right direction towards proving that he
and his co-makers agreed to a loan of P5,000.00 only
considering that, where a parol contemporaneous
agreement was the inducing and moving cause of the
written contract, it may be shown by parol
evidence. 15 However, fraud must be established by
clear and convincing evidence, mere preponderance of
evidence, not even being adequate. 16 Petitioner's
attempt to prove fraud must, therefore, fail as it was
evidenced only by his own uncorroborated and,
expectedly, self-serving testimony.
Petitioner also argues that the dismissal of the
complaint against Naybe, the principal debtor, and
against Pantanosas, his co-maker, constituted a release
of his obligation, especially because the dismissal of the
case against Pantanosas was upon the motion of private
respondent itself. He cites as basis for his argument,
Article 2080 of the Civil Code which provides that:
The guarantors, even though they be
solidary, are released from their obligation
whenever by some act of the creditor, they

cannot be subrogated to the rights,

mortgages, and preferences of the latter.
It is to be noted, however, that petitioner signed the
promissory note as a solidary co-maker and not as a
guarantor. This is patent even from the first sentence of
the promissory note which states as follows:
Ninety one (91) days after date, for value
received, I/we, JOINTLY and SEVERALLY
promise to pay to the PHILIPPINE BANK OF
COMMUNICATIONS at its office in the City of
Cagayan de Oro, Philippines the sum of
FIFTY THOUSAND ONLY (P50,000.00) Pesos,
Philippine Currency, together with interest . .
. at the rate of SIXTEEN (16) per cent per
annum until fully paid.
A solidary or joint and several obligation is one in which
each debtor is liable for the entire obligation, and each
creditor is entitled to demand the whole
obligation. 17 on the other hand, Article 2047 of the Civil
Code states:
By guaranty a person, called the guarantor,
binds himself to the creditor to fulfill the
obligation of the principal debtor in case the
latter should fail to do so.
If a person binds himself solidarily with the
principal debtor, the provisions of Section 4,
Chapter 3, Title I of this Book shall be
observed. In such a case the contract is
called a suretyship. (Emphasis supplied.)

While a guarantor may bind himself solidarily with

the principal debtor, the liability of a guarantor is
different from that of a solidary debtor. Thus,
Tolentino explains:
A guarantor who binds himself in
solidum with the principal debtor under the
provisions of the second paragraph does not
become a solidary co-debtor to all intents
and purposes. There is a difference between
a solidary co-debtor and a fiador in
solidum (surety). The latter, outside of the
liability he assumes to pay the debt before
the property of the principal debtor has
been exhausted, retains all the other rights,
actions and benefits which pertain to him by
reason of the fiansa; while a solidary codebtor has no other rights than those
bestowed upon him in Section 4, Chapter 3,
Title I, Book IV of the Civil Code. 18
Section 4, Chapter 3, Title I, Book IV of the Civil Code
states the law on joint and several obligations. Under
Art. 1207 thereof, when there are two or more debtors
in one and the same obligation, the presumption is that
the obligation is joint so that each of the debtors is
liable only for a proportionate part of the debt. There is
a solidary liability only when the obligation expressly so
states, when the law so provides or when the nature of
the obligation so requires. 19
Because the promissory note involved in this case
expressly states that the three signatories therein
are jointly and severally liable, any one, some or all of

them may be proceeded against for the entire

obligation. 20 The choice is left to the solidary creditor to
determine against whom he will enforce
collection. 21 Consequently, the dismissal of the case
against Judge Pontanosas may not be deemed as having
discharged petitioner from liability as well. As regards
Naybe, suffice it to say that the court never acquired
jurisdiction over him. Petitioner, therefore, may only
have recourse against his co-makers, as provided by
law.
WHEREFORE, the instant petition for review
on certiorari is hereby DENIED and the questioned
decision of the Court of Appeals is AFFIRMED. Costs
against petitioner.

[G.R. No. 101723. May 11, 2000]

INDUSTRIAL MANAGEMENT INTERNATIONAL
DEVELOPMENT CORP. (INIMACO), petitioner,
vs. NATIONAL LABOR RELATIONS COMMISSION,
(Fourth Division) Cebu City, and ENRIQUE SULIT,
SOCORRO MAHINAY, ESMERALDO PEGARIDO, TITA
BACUSMO, GINO NIERE, VIRGINIA BACUS,
ROBERTO NEMENZO, DARIO GO, and ROBERTO
ALEGARBES, respondents.
DECISION
BUENA, J.:

This is a petition for certiorari assailing the Resolution

dated September 4, 1991 issued by the National Labor
Relations Commission in RAB-VII-0711-84 on the alleged
ground that it committed a grave abuse of discretion
amounting to lack of jurisdiction in upholding the Alias
Writ of Execution issued by the Labor Arbiter which
deviated from the dispositive portion of the Decision
dated March 10, 1987, thereby holding that the liability
of the six respondents in the case below is solidary
despite the absence of the word "solidary" in the
dispositive portion of the Decision, when their liability
should merely be joint. S-jcj
The factual antecedents are undisputed: Supr-eme
In September 1984, private respondent Enrique Sulit,
Socorro Mahinay, Esmeraldo Pegarido, Tita Bacusmo,
Gino Niere, Virginia Bacus, Roberto Nemenzo, Dariogo,
and Roberto Alegarbes filed a complaint with the
Department of Labor and Employment, Regional
Arbitration Branch No. VII in Cebu City against Filipinas
Carbon Mining Corporation, Gerardo Sicat, Antonio
Gonzales, Chiu Chin Gin, Lo Kuan Chin, and petitioner
Industrial Management Development Corporation
(INIMACO), for payment of separation pay and unpaid
wages. Sc-jj
In a Decision dated March 10, 1987, Labor Arbiter
Bonifacio B. Tumamak held that:
"RESPONSIVE, to all the foregoing, judgment
is hereby entered, ordering respondents
Filipinas Carbon and Mining Corp. Gerardo
Sicat, Antonio Gonzales/Industrial

Management Development Corp. (INIMACO),

Chiu Chin Gin and Lo Kuan Chin, to pay
complainants Enrique Sulit, the total award
of P82,800.00; ESMERALDO PEGARIDO the
full award of P19,565.00; Roberto Nemenzo
the total sum of P29,623.60 and DARIO GO
the total award of P6,599.71, or the total
aggregate award of ONE HUNDRED THIRTYEIGHT THOUSAND FIVE HUNDRED EIGHTYEIGHT PESOS AND 31/100 (P138,588.31) to
be deposited with this Commission within
ten (10) days from receipt of this Decision
for appropriate disposition. All other claims
are hereby Dismiss (sic) for lack of merit. Jjsc
"SO ORDERED.
"Cebu City, Philippines.
"10 March 1987."0[1]
No appeal was filed within the reglementary period
thus, the above Decision became final and executory.
On June 16, 1987, the Labor Arbiter issued a writ of
execution but it was returned unsatisfied. On August 26,
1987, the Labor Arbiter issued an Alias Writ of Execution
which ordered thus: Ed-pm-is
"NOW THEREFORE, by virtue of the powers
vested in me by law, you are hereby
commanded to proceed to the premises of
respondents Antonio Gonzales/Industrial
Management Development Corporation

(INIMACO) situated at Barangay Lahug,

Cebu City, in front of La Curacha
Restaurant, and/or to Filipinas Carbon and
Mining corporation and Gerardo Sicat at 4th
Floor Universal RE-Bldg. 106 Paseo de
Roxas, Legaspi Village, Makati Metro Manila
and at Philippine National Bank, Escolta,
Manila respectively, and collect the
aggregate award of ONE HUNDRED THIRTYEIGHT THOUSAND FIVE HUNDRED EIGHTYEIGHT PESOS AND THIRTY ONE CENTAVOS
(P138,588.31) and thereafter turn over said
amount to complainants ENRIQUE SULIT,
ESMERALDO PEGARIDO, ROBERTO
NEMENZO AND DARIO GO or to this Office
for appropriate disposition. Should you fail
to collect the said sum in cash, you are
hereby authorized to cause the satisfaction
of the same on the movable or immovable
property(s) of respondents not exempt from
execution. You are to return this writ sixty
(6) (sic) days from your receipt hereof,
together with your corresponding report.
"You may collect your legal expenses from
the respondents as provided for by law.
"SO ORDERED."[2]
On September 3, 1987, petitioner filed a "Motion to
Quash Alias Writ of Execution and Set Aside
Decision,"[3] alleging among others that the alias writ of
execution altered and changed the tenor of the decision
by changing the liability of therein respondents from

joint to solidary, by the insertion of the words "AND/OR"

between "Antonio Gonzales/Industrial Management
Development Corporation and Filipinas Carbon and
Mining Corporation, et al." However, in an order dated
September 14, 1987, the Labor Arbiter denied the
motion. Mis-oedp
On October 2, 1987, petitioner appealed[4] the Labor
Arbiters Order dated September 14, 1987 to the
respondent NLRC. Mis-edp
The respondent NLRC dismissed the appeal in a
Decision[5] dated August 31, 1988, the pertinent portions
of which read:
"In matters affecting labor rights and labor
justice, we have always adopted the liberal
approach which favors the exercise of labor
rights and which is beneficial to labor as a
means to give full meaning and import to
the constitutional mandate to afford
protection to labor. Considering the factual
circumstances in this case, there is no doubt
in our mind that the respondents herein are
called upon to pay, jointly and severally, the
claims of the complainants as was the
latters prayers. Inasmuch as respondents
herein never controverted the claims of the
complainants below, there is no reason why
complainants prayer should not be granted.
Further, in line with the powers granted to
the Commission under Article 218 (c) of the
Labor code, to waive any error, defect or
irregularity whether in substance or in form

in a proceeding before Us, We hold that the

Writ of Execution be given due course in all
respects." Ed-p
On July 31, 1989, petitioner filed a "Motion To Compel
Sheriff To Accept Payment Of P23,198.05 Representing
One Sixth Pro Rata Share of Respondent INIMACO As Full
and Final Satisfaction of Judgment As to Said
Respondent."[6] The private respondents opposed the
motion. In an Order[7] dated August 15, 1989, the Labor
Arbiter denied the motion ruling thus:
"WHEREFORE, responsive to the foregoing
respondent INIMACOs Motions are hereby
DENIED. The Sheriff of this Office is order
(sic) to accept INIMACOs tender payment
(sic) of the sum of P23,198.05, as partial
satisfaction of the judgment and to proceed
with the enforcement of the Alias Writ of
Execution of the levied properties, now
issued by this Office, for the full and final
satisfaction of the monetary award granted
in the instant case.
"SO ORDERED." Ed-psc
Petitioner appealed the above Order of the Labor Arbiter
but this was again dismissed by the respondent NLRC in
its Resolution[8] dated September 4, 1991 which held
that:
"The arguments of respondent on the
finality of the dispositive portion of the
decision in this case is beside the point.

What is important is that the Commission

has ruled that the Writ of Execution issued
by the Labor Arbiter in this case is proper. It
is not really correct to say that said Writ of
Execution varied the terms of the judgment.
At most, considering the nature of labor
proceedings there was, an ambiguity in said
dispositive portion which was subsequently
clarified by the Labor Arbiter and the
Commission in the incidents which were
initiated by INIMACO itself. By sheer
technicality and unfounded assertions,
INIMACO would now reopen the issue which
was already resolved against it. It is not in
keeping with the established rules of
practice and procedure to allow this attempt
of INIMACO to delay the final disposition of
this case.
"WHEREFORE, in view of all the foregoing,
this appeal is DISMISSED and the Order
appealed from is hereby AFFIRMED. Sce-dp
"With double costs against appellant."
Dissatisfied with the foregoing, petitioner filed the
instant case, alleging that the respondent NLRC
committed grave abuse of discretion in affirming the
Order of the Labor Arbiter dated August 15, 1989, which
declared the liability of petitioner to be solidary.
The only issue in this petition is whether petitioners
liability pursuant to the Decision of the Labor Arbiter
dated March 10, 1987, is solidary or not. Calrs-pped

Upon careful examination of the pleadings filed by the

parties, the Court finds that petitioner INIMACOs liability
is not solidary but merely joint and that the respondent
NLRC acted with grave abuse of discretion in upholding
the Labor Arbiters Alias Writ of Execution and
subsequent Orders to the effect that petitioners liability
is solidary.
A solidary or joint and several obligation is one in which
each debtor is liable for the entire obligation, and each
creditor is entitled to demand the whole obligation.[9] In
a joint obligation each obligor answers only for a part of
the whole liability and to each obligee belongs only a
part of the correlative rights.[10]
Well-entrenched is the rule that solidary obligation
cannot lightly be inferred.[11] There is a solidary liability
only when the obligation expressly so states, when the
law so provides or when the nature of the obligation so
requires.[12]
In the dispositive portion of the Labor Arbiter, the word
"solidary" does not appear. The said fallo expressly
states the following respondents therein as liable,
namely: Filipinas Carbon and Mining Corporation,
Gerardo Sicat, Antonio Gonzales, Industrial Management
Development Corporation (petitioner INIMACO), Chiu
Chin Gin, and Lo Kuan Chin. Nor can it be inferred
therefrom that the liability of the six (6) respondents in
the case below is solidary, thus their liability should
merely be joint.
Moreover, it is already a well-settled doctrine in this
jurisdiction that, when it is not provided in a judgment

that the defendants are liable to pay jointly and

severally a certain sum of money, none of them may be
compelled to satisfy in full said judgment. In Oriental
Commercial Co. vs. Abeto and Mabanag[13] this
Court held:
"It is of no consequence that, under the
contract of suretyship executed by the
parties, the obligation contracted by the
sureties was joint and several in character.
The final judgment, which superseded the
action for the enforcement of said contract,
declared the obligation to be merely joint,
and the same cannot be executed
otherwise."[14]
Granting that the Labor Arbiter has committed a
mistake in failing to indicate in the dispositive portion
that the liability of respondents therein is solidary, the
correction -- which is substantial -- can no longer be
allowed in this case because the judgment has already
become final and executory. Scc-alr
It is an elementary principle of procedure that the
resolution of the court in a given issue as embodied in
the dispositive part of a decision or order is the
controlling factor as to settlement of rights of the
parties.[15] Once a decision or order becomes final and
executory, it is removed from the power or jurisdiction
of the court which rendered it to further alter or amend
it.[16] It thereby becomes immutable and unalterable and
any amendment or alteration which substantially affects
a final and executory judgment is null and void for lack
of jurisdiction, including the entire proceedings held for

that purpose.[17] An order of execution which varies the

tenor of the judgment or exceeds the terms thereof is a
nullity.[18]
None of the parties in the case before the Labor Arbiter
appealed the Decision dated March 10, 1987, hence the
same became final and executory. It was, therefore,
removed from the jurisdiction of the Labor Arbiter or the
NLRC to further alter or amend it. Thus, the proceedings
held for the purpose of amending or altering the
dispositive portion of the said decision are null and void
for lack of jurisdiction. Also, the Alias Writ of Execution is
null and void because it varied the tenor of the
judgment in that it sought to enforce the final judgment
against "Antonio Gonzales/Industrial Management
Development Corp. (INIMACO) and/or Filipinas Carbon
and Mining Corp. and Gerardo Sicat," which makes the
liability solidary. Ca-lrsc
WHEREFORE, the petition is hereby GRANTED. The
Resolution dated September 4, 1991 of the respondent
National Labor Relations is hereby declared NULL and
VOID. The liability of the respondents in RAB-VII-0711-84
pursuant to the Decision of the Labor Arbiter dated
March 10, 1987 should be, as it is hereby, considered
joint and petitioners payment which has been accepted
considered as full satisfaction of its liability, without
prejudice to the enforcement of the award, against the
other five (5) respondents in the said case.

G.R. No. 80645 August 3, 1993

MARCELINO GALANG, GUADALUPE

GALANG, petitioners,
vs.
COURT OF APPEALS, RAMON R. BUENAVENTURA,
ANGELES BUENAVENTURA, CORAZON
BUENAVENTURA, and MA. LUISA
BUENAVENTURA, respondents.
Mariano V. Ampl, Jr. for petitioners.
Ramon R. Buenaventura for private-respondents.

ROMERO, J.:
This is a petition for review on certiorari of the
decision 1 of the Court of Appeals affirming in toto the
judgment rendered by the then Court of First Instance in
Civil Case No. R-82-7186 (107585). The dispositive
portion of the assailed decision reads as follows:
WHEREFORE, finding no reversible error in
the judgment appealed from, the same is
herebyAFFIRMED IN TOTO without any
pronouncement as to costs at this
instance. 2
From the records, we find the following facts.
On July 16, 1976, Ramon Buenaventura on his own
behalf and as attorney-in-fact of Angeles, Corazon,
Amparo, and Maria Luisa, all surnamed Buenaventura,
sold to Guadalupe Galang and Marcelino Galang two (2)

parcels of land situated in Tagaytay City. The agreement

was embodied in a Deed of Sale which stated the
following:
I, RAMON R. BUENAVENTURA, Filipino, of
legal age, married, and residing at 2111 M.
Adriatico, Malate, Manila, in his own behalf
and as attorney in fact of Angeles, Corazon,
Amparo and Maria Luisa, all surnamed
Buenaventura as per the special powers of
attorney already registered and annotated
at the back of the certificate of title, for and
in consideration of the sum of One Hundred
Ninety Two Thousand Seven Hundred Ninety
Five (P192,795.00) Pesos, Philippine
Currency, hereby SELL, TRANSFER AND
CONVEY UNTO MARCELINO GALANG and
GUADALUPE GALANG, Filipino, of legal age,
spouses and residents of 72 4th St., New
Manila, Quezon City those parcels of land
situated at Tagaytay City, inherited by us
from our parents and our exclusive
paraphernal property, of which we are the
absolute owners, our title thereto being
evidenced by TCT No. T-3603 of Tagaytay
City Register of Deeds, more particularly
desccribed as follows:
xxx xxx xxx
Under the following terms:
(a) 25% of the purchase price upon signing
of this instrument;

(b) 25% within three months, or upon

removal of the "encargado" from the
premises, with the delivery of the owner's
duplicate certificate of title;
(c) 50% balance within one (1) year from
date hereof upon which the title will be
transferred to the buyers but 12% interest
per annum will be charged after said one
year in the event full payment is not made. 3
Marcelino and Guadalupe Galang, herein petitioners
ppaid to the sellers the first 25% of the purchase
ppprice as stated in the deed. Thereafter, they allegedly
demanded from private respondents failed to do so
despite the willingness of petitioners to pay the second
25% of the purchase price. Consequently, Marcelino and
Guadalupe Galang filed on March 18, 1977 a complaint
for specific performance with damages where they
alleged among others, that:
5. The period fixed within the defendants
should remove the "encargado' from the
premises and to deliver the owner's
duplicate certificate of title had lapsed
without the defendants complying with their
obligations thus preventing the plaintiffs
from taking ppossession of the property sold
and from developing and improving the
same.

"encargado" from the premises sold and for

them to deliver the owner's duplicate
certificate of title to the plaintiffs but said
defendants failed and refused and still fail
and refuse to do so, the demands
notwithstanding. 4
Defendants, herein private respondents, denied the
allegations and stated that the contract did not state
the true intention of the parties and that it was not their
fault that the "encargado" refused to leave.
Furthermore, they filed on July 21, 1978, a third-party
complaint against the "encargado" for subrogation and
reimbursement in case of an adverse judgment against
third-party plaintiff. Upon the "encargado's" motion, the
complaint was dismissed on the ground that it did not
state a cause of action for the ejectment of the tenant
the "encargado."
After trial, the lower court rendered a decision, the
dispositive portion of which is hereby quoted, to wit:
PREMISES CONSIDERED, the Court hereby
orders the defendants to pay jointly and
severally, the plaintiffs P50,000.00 with
interest at 12% per annum from July 16,
1976; P5,000.00 by way of nominal
damages; and P3,000.00 as attorney fees
and the costs. 5
In rendering the decision, the trial court reasoned that:

6. On several occasions, the plaintiffs

demanded from the defendants, both orally
and in writing, the removal of the latter's

There is no question that, because the

defendants had not complied with their

obligation to remove the "encargado," the

plaintiffs, as injured parties, may choose
between the fulfillment of the contract of
sale and its rescission, in accordance and
(sic) Article 1191 of the Civil Code. They
chose enforcement of the contract which,
however is legally impossible. The lands
sold to the plaintiff are agricultural, planted
to coffee, among other plants, not only by
the "encargado" but also by his deceased
parents. The law prohibits, under pain of
damages, fine and imprisonment, and
landlord from dispossessing his agricultural
tenant without the court's approval and on
grounds fixed by the law, not one of which is
shown to exist in respect defendants'
"encargado." (Section 31 and 36, The
Agricultural Land Reform Code, RA 3844 as
amended).
Impossible conditions, those contrary to
good customs or public policy and those
prohibited by law shall annul the obligation
which depends upon them. (Article 1183,
Civil Code). Since the consummation of the
sale between the parties is dependent upon
the ouster of an agricultural lessee, which
cannot be done because it is against good
custom, public policy and the law, the sale
is a nullity. . . . 6

Agreeing that the "encargado" was an agricultural

tenant who could not be ejected without cause, the
Court of Appeals affirmed the decision.
Hence, this petition.
In their petition, Marcelino and Guadalupe Galang
argued that respondent Court erred in ordering; the
rescission instead of specific performance of the
contract of sale on the ground that the ejectment of the
"encargado" -tenant was a legally impossible condition
that prevented the fulfillment of the contract. Contrary
to the reason advanced by the Court of Appeals and the
trial court, petitioners averred that the removal of the
"encargado" was not a condition precedent to the
fulfillment of the contract as paragraph two (2) thereof
provides for an alternative period within which
petitioners would have to pay the second 25% of the
purchase price and concomitantly, private respondents
would deliver the owner's duplicate certificate of title.
Thus, whether or not the "encargado" was removed, the
amount would still be due and private respondents
would still have to deliver the duplicate title.
We are now confronted with the question: Was the
removal of the "encargado" a condition precedent to the
fulfillment of the contract of sale such that finding that
it was a legally impossible condition would entitle the
buyers to the rescission of the contract?
We answer in the negative.

The trial court and the Court of Appeals based their

decision on Art. 1183 of the Civil Code which provides,
thus:
Art. 1183. Impossible conditions, those
contrary to good customs or public policy
and those prohibited by law shall annul the
obligation which depends upon them. . . .
Both courts declared the "encargado" a tenant. This
being the case, it follows that he may not be removed
from the subject land without just cause, as provided by
Presidential Decree No. 1038. Since the Galangs, then
plaintiffs demanded the removal of the "encargado"
which, being legally impossible, could not be met, the
contract of sale was rescinded by the courts.
We disagree with the conclusion arrived at by the
respondent court. Reviewing the terms of the Deed of
Sale quoted earlier, it is clear that the parties had
reached the stage of perfection of the contract of sale,
there being already "a meeting of the minds upon the
thing which is the object of the contract and upon the
price," 7 and on the basis of which both parties had the
personal right to reciprocally demand from the other the
fulfillment of their respective obligations. But contracts
of sale may either be absolute or conditional. 8 One form
of conditional sales, is what is now popularly termed as
a "Contract to Sell," where ownership or title is retained
until the fulfillment of a positive condition, normally the
payment of the purchase price in the manner agreed
upon. The breach of that condition can prevent the
obligation to convey title from acquiring a binding
force. 9 Where the condition is imposed, instead, upon

the perfection of the contract, the failure of such

condition would prevent such perfection. 10 What we
have here is a contract to sell for it is the transfer of
ownership, not the perfection of the contract that was
subjected to a condition. Ownership was not to vest in
the buyers until full payment of the purchase price and
the transfer of the title to the buyers. Apart from full
payment of the purchase price, we find no other
condition which would affect the obligations of the
parties, i.e., to pay, on the part of the buyer and to
convey ownership, on the part of the seller.
The alleged condition precedent, the removal of the
"encargado," was simply an alternative period for
payment of the second 25% of the purchase price given
by the seller to the buyer. Assuming that the removal of
the "encargado" could not be brought about, the
buyers, petitioners herein, could have nonetheless
demanded the delivery of the owner's duplicate
certificate of title by paying the second 25% of the sale
price within three months. In this case, the filing of the
complaint for specific performance of the seller's
obligation was the root of the errors committed first, by
the trial court and later, by the Court of Appeals. Both
courts overlooked the obvious fact that only the time for
paying the second 25% of the purchase price was
qualified and that the entire paragraph reads: "25%
within three months or upon removal of the "encargado"
from the premises . . ." and not simply 25% upon
removal of the "encargado."
The case before us could have been resolved by the
lower courts without ruling on whether the "encargado"

was a tenant or not. Granting that it was necessary to

rule on the legal status of the "encargado," we find that
the courts had been quite precipitate in holding that the
"encargado" was a tenant. There was no sufficient
evidence to support that conclusion apart from the
affidavits of the "encargado" and his neighbor. The
conclusion of the Court of Appeals regarding this matter
rested on surmises. It held:
We discern no reversible error in the finding
and conclusion of the trial court that the
unnamed "encargado" on the lands in
question is actually a tenant or agricultural
lessee. The bases of this ineluctable
conclusion are not hard to see. As succinctly
pointed out by the court a quo, the
"encargado" is staying in his own existing
house thereon, and subject agricultural land
is planted to coffee and other plants not
only by the "encargado" but also his
deceased parents. Indeed, if the
"encargado's" parents were not tenants or
agricultural lessees, the present
"encargado" could not have continued
occupying and working thereon, without
facing ejectment proceedings; considering
that one of the landowners, defendantsappellees here, is a lawyer himself. In fact,
as can be gleaned from the decision under
scrutiny, defendants-appellees filed a thirdparty complaint against the "encargado" but
they did not pursue such a course of action
because they did not have a clearance from

the then Ministry, now the Department of

Agrarian Reform, to proceed against such
"encargado." Then, too, if the said
"encargado" did not have the status of a
tenant or agricultural lessee entitled to
protection under the agrarian reform laws,
he would not have been given the attention
and importance as to be brought before the
court a quo twice, just for a possible
amicable settlement, and he would not have
had the firmness to reject an offer for him to
continue working half the area under
controversy.
Equally supportive of the foregoing opinion
are the following ratiocinations in Cruz v.
Court of Appeals, L-50350, May 15, 1984,
129 SCRA 222:
. . . it is also undisputed that respondent
lives on a hut erected on the landholding.
This fully supports the appellate court's
conclusion, since only tenants are entitled
to a homelot where he can build his house
thereon as an incident to this right as a
tenant.
xxx xxx xxx
Also, the Court is aware of the practice of
landowners, by way of evading the
provisions of tenancy laws, to have their
tenants sign contracts or agreements

intended to camouflage the real import of

their relationship.
All things duly considered, let alone the
better rule that all doubts vis-a-vis the
status of a tiller of the soil should be
resolved in favor of tenancy relationship. We
cannot help but conclude here that the
"encargado" on the landholding deeded out
in the deed of sale (Exhibit "A") is a tenant
or agricultural lessees within the purview
and under the mantle of protection of the
Code of Agrarian Reforms. 11
To summarize, we hold that there was no basis for
rescinding the contract because the removal of the
"encargado" was not a condition precedent to the
contract of sale. Rather, it was one of the alternative
periods for the payment of the second installment given
by the seller himself to the buyers. Secondly, even
granting that it was indeed a condition precedent
rendering necessary the determination of the legal
status of the "encargado," the lower courts were rash in
holding that the "encargado" was a tenant of the land in
question.
In view of the foregoing circumstances, we are
convinced that specific performance by the parties of
their respective obligations is proper. Accordingly,
petitioners Marcelino and Guadalupe Galang are ordered
to pay private respondents the second 25% of the
purchase price. Considering, however, the time that has
lapsed since the parties entered into the contract,
payment of the full balance, that is, 75% of the

purchase price, P192,795.00 is in order. However, the

12% interest per annum that was stipulated in
paragraph 3 of the contract of sale should not be
assessed against petitioners. On the other hand, private
respondents Ramon Buenaventura, Angeles
Buenaventura, Corazon Buenaventura, and Maria Luisa
Buenaventura are obliged to deliver the owner's
duplicate certificate of title and to transfer the title to
the land in question upon payment of the purchase
price by petitioners.
Under the Civil Code, private respondents are liable for
damages to the injured party, the petitioners in this
case. However, in lieu of actual payment of damages,
and considering the fact that private respondents were
in possession of the land during the entire period that
this case was pending, private respondents are no
longer entitled to the interest payments which would
have been due from petitioners. 12
WHEREFORE, in view of the foregoing, the petition is
hereby GRANTED and the decision of the Court of
Appeals is REVERSED and SET ASIDE. Petitioners
Marcelino and Guadalupe Galang are hereby ordered to
pay the full 75% balance of the purchase price
(P144,596.25) within thirty (30) days from notice, with
interest upon default. Private respondents Ramon
Buenaventura, Corazon Buenaventura and Maria Luisa
Buenaventura are hereby ordered to transfer the title to
petitioners upon full payment of the purchase price.

G.R. No. 107112 February 24, 1994

NAGA TELEPHONE CO., INC. (NATELCO) AND

LUCIANO M. MAGGAY, petitioners,
vs.
THE COURT OF APPEALS AND CAMARINES SUR II
ELECTRIC COOPERATIVE, INC. (CASURECO
II),respondents.
Ernesto P. Pangalangan for petitioners.
Luis General, Jr. for private respondent.

NOCON, J.:
The case of Reyes v. Caltex (Philippines),
Inc. 1 enunciated the doctrine that where a person by his
contract charges himself with an obligation possible to
be performed, he must perform it, unless its
performance is rendered impossible by the act of God,
by the law, or by the other party, it being the rule that
in case the party desires to be excused from
performance in the event of contingencies arising
thereto, it is his duty to provide the basis therefor in his
contract.
With the enactment of the New Civil Code, a new
provision was included therein, namely, Article 1267
which provides:
When the service has become so difficult as
to be manifestly beyond the contemplation
of the parties, the obligor may also be
released therefrom, in whole or in part.

In the report of the Code Commission, the rationale

behind this innovation was explained, thus:
The general rule is that impossibility of
performance releases the obligor. However,
it is submitted that when the service has
become so difficult as to be manifestly
beyond the contemplation of the parties,
the court should be authorized to release
the obligor in whole or in part. The intention
of the parties should govern and if it
appears that the service turns out to be so
difficult as to have been beyond their
contemplation, it would be doing violence to
that intention to hold their contemplation, it
would be doing violence to that intention to
hold the obligor still responsible. 2
In other words, fair and square consideration
underscores the legal precept therein.
Naga Telephone Co., Inc. remonstrates mainly against
the application by the Court of Appeals of Article 1267
in favor of Camarines Sur II Electric Cooperative, Inc. in
the case before us. Stated differently, the former insists
that the complaint should have been dismissed for
failure to state a cause of action.
The antecedent facts, as narrated by respondent Court
of Appeals are, as follows:
Petitioner Naga Telephone Co., Inc. (NATELCO) is a
telephone company rendering local as well as long
distance telephone service in Naga City while private

respondent Camarines Sur II Electric Cooperative, Inc.

(CASURECO II) is a private corporation established for
the purpose of operating an electric power service in
the same city.
On November 1, 1977, the parties entered into a
contract (Exh. "A") for the use by petitioners in the
operation of its telephone service the electric light posts
of private respondent in Naga City. In consideration
therefor, petitioners agreed to install, free of charge, ten
(10) telephone connections for the use by private
respondent in the following places:
(a) 3 units The Main Office of (private
respondent);
(b) 2 Units The Warehouse of (private
respondent);
(c) 1 Unit The Sub-Station of (private
respondent) at Concepcion Pequea;
(d) 1 Unit The Residence of (private
respondent's) President;
(e) 1 Unit The Residence of (private
respondent's) Acting General Manager; &
(f) 2 Units To be determined by the
General Manager. 3
Said contract also provided:

(a) That the term or period of this contract

shall be as long as the party of the first part
has need for the electric light posts of the
party of the second part it being understood
that this contract shall terminate when for
any reason whatsoever, the party of the
second part is forced to stop, abandoned
[sic] its operation as a public service and it
becomes necessary to remove the electric
lightpost; (sic) 4
It was prepared by or with the assistance of the other
petitioner, Atty. Luciano M. Maggay, then a member of
the Board of Directors of private respondent and at the
same time the legal counsel of petitioner.
After the contract had been enforced for over ten (10)
years, private respondent filed on January 2, 1989 with
the Regional Trial Court of Naga City (Br. 28) C.C. No. 891642 against petitioners for reformation of the contract
with damages, on the ground that it is too one-sided in
favor of petitioners; that it is not in conformity with the
guidelines of the National Electrification Administration
(NEA) which direct that the reasonable compensation for
the use of the posts is P10.00 per post, per month; that
after eleven (11) years of petitioners' use of the posts,
the telephone cables strung by them thereon have
become much heavier with the increase in the volume
of their subscribers, worsened by the fact that their
linemen bore holes through the posts at which points
those posts were broken during typhoons; that a post
now costs as much as P2,630.00; so that justice and

equity demand that the contract be reformed to abolish

the inequities thereon.

the use of the posts, so that if there was any inequity, it

was suffered by them.

As second cause of action, private respondent alleged

that starting with the year 1981, petitioners have used
319 posts in the towns of Pili, Canaman, Magarao and
Milaor, Camarines Sur, all outside Naga City, without
any contract with it; that at the rate of P10.00 per post,
petitioners should pay private respondent for the use
thereof the total amount of P267,960.00 from 1981 up
to the filing of its complaint; and that petitioners had
refused to pay private respondent said amount despite
demands.

Regarding the second cause of action, petitioners

claimed that private respondent had asked for
telephone lines in areas outside Naga City for which its
posts were used by them; and that if petitioners had
refused to comply with private respondent's demands
for payment for the use of the posts outside Naga City,
it was probably because what is due to them from
private respondent is more than its claim against them.

And as third cause of action, private respondent

complained about the poor servicing by petitioners of
the ten (10) telephone units which had caused it great
inconvenience and damages to the tune of not less than
P100,000.00
In petitioners' answer to the first cause of action, they
averred that it should be dismissed because (1) it does
not sufficiently state a cause of action for reformation of
contract; (2) it is barred by prescription, the same
having been filed more than ten (10) years after the
execution of the contract; and (3) it is barred by
estoppel, since private respondent seeks to enforce the
contract in the same action. Petitioners further alleged
that their utilization of private respondent's posts could
not have caused their deterioration because they have
already been in use for eleven (11) years; and that the
value of their expenses for the ten (10) telephone lines
long enjoyed by private respondent free of charge are
far in excess of the amounts claimed by the latter for

And with respect to the third cause of action, petitioners

claimed, inter alia, that their telephone service had
been categorized by the National Telecommunication
Corporation (NTC) as "very high" and of "superior
quality."
During the trial, private respondent presented the
following witnesses:
(1) Dioscoro Ragragio, one of the two officials who
signed the contract in its behalf, declared that it was
petitioner Maggay who prepared the contract; that the
understanding between private respondent and
petitioners was that the latter would only use the posts
in Naga City because at that time, petitioners' capability
was very limited and they had no expectation of
expansion because of legal squabbles within the
company; that private respondent agreed to allow
petitioners to use its posts in Naga City because there
were many subscribers therein who could not be served
by them because of lack of facilities; and that while the

telephone lines strung to the posts were very light in

1977, said posts have become heavily loaded in 1989.
(2) Engr. Antonio Borja, Chief of private respondent's
Line Operation and Maintenance Department, declared
that the posts being used by petitioners totalled 1,403
as of April 17, 1989, 192 of which were in the towns of
Pili, Canaman, and Magarao, all outside Naga City (Exhs.
"B" and "B-1"); that petitioners' cables strung to the
posts in 1989 are much bigger than those in November,
1977; that in 1987, almost 100 posts were destroyed by
typhoon Sisang: around 20 posts were located between
Naga City and the town of Pili while the posts in
barangay Concepcion, Naga City were broken at the
middle which had been bored by petitioner's linemen to
enable them to string bigger telephone lines; that while
the cost per post in 1977 was only from P700.00 to
P1,000.00, their costs in 1989 went up from P1,500.00
to P2,000.00, depending on the size; that some lines
that were strung to the posts did not follow the
minimum vertical clearance required by the National
Building Code, so that there were cases in 1988 where,
because of the low clearance of the cables, passing
trucks would accidentally touch said cables causing the
posts to fall and resulting in brown-outs until the electric
lines were repaired.
(3) Dario Bernardez, Project Supervisor and Acting
General Manager of private respondent and Manager of
Region V of NEA, declared that according to NEA
guidelines in 1985 (Exh. "C"), for the use by private
telephone systems of electric cooperatives' posts, they
should pay a minimum monthly rental of P4.00 per post,

and considering the escalation of prices since 1985,

electric cooperatives have been charging from P10.00 to
P15.00 per post, which is what petitioners should pay
for the use of the posts.
(4) Engineer Antonio Macandog, Department Head of
the Office of Services of private respondent, testified on
the poor service rendered by petitioner's telephone
lines, like the telephone in their Complaints Section
which was usually out of order such that they could not
respond to the calls of their customers. In case of
disruption of their telephone lines, it would take two to
three hours for petitioners to reactivate them
notwithstanding their calls on the emergency line.
(5) Finally, Atty. Luis General, Jr., private respondent's
counsel, testified that the Board of Directors asked him
to study the contract sometime during the latter part of
1982 or in 1983, as it had appeared very
disadvantageous to private respondent.
Notwithstanding his recommendation for the filing of a
court action to reform the contract, the former general
managers of private respondent wanted to adopt a soft
approach with petitioners about the matter until the
term of General Manager Henry Pascual who, after
failing to settle the matter amicably with petitioners,
finally agreed for him to file the present action for
reformation of contract.
On the other hand, petitioner Maggay testified to the
following effect:
(1) It is true that he was a member of the Board of
Directors of private respondent and at the same time

the lawyer of petitioner when the contract was

executed, but Atty. Gaudioso Tena, who was also a
member of the Board of Directors of private respondent,
was the one who saw to it that the contract was fair to
both parties.
(2) With regard to the first cause of action:
(a) Private respondent has the right under the contract
to use ten (10) telephone units of petitioners for as long
as it wishes without paying anything therefor except for
long distance calls through PLDT out of which the latter
get only 10% of the charges.
(b) In most cases, only drop wires and not telephone
cables have been strung to the posts, which posts have
remained erect up to the present;
(c) Petitioner's linemen have strung only small
messenger wires to many of the posts and they need
only small holes to pass through; and
(d) Documents existing in the NTC show that the
stringing of petitioners' cables in Naga City are
according to standard and comparable to those of PLDT.
The accidents mentioned by private respondent
involved trucks that were either overloaded or had loads
that protruded upwards, causing them to hit the cables.
(3) Concerning the second cause of action, the intention
of the parties when they entered into the contract was
that the coverage thereof would include the whole area
serviced by petitioners because at that time, they
already had subscribers outside Naga City. Private

respondent, in fact, had asked for telephone

connections outside Naga City for its officers and
employees residing there in addition to the ten (10)
telephone units mentioned in the contract. Petitioners
have not been charging private respondent for the
installation, transfers and re-connections of said
telephones so that naturally, they use the posts for
those telephone lines.
(4) With respect to the third cause of action, the NTC
has found petitioners' cable installations to be in
accordance with engineering standards and practice
and comparable to the best in the country.
On the basis of the foregoing countervailing evidence of
the parties, the trial court found, as regards private
respondent's first cause of action, that while the
contract appeared to be fair to both parties when it was
entered into by them during the first year of private
respondent's operation and when its Board of Directors
did not yet have any experience in that business, it had
become disadvantageous and unfair to private
respondent because of subsequent events and
conditions, particularly the increase in the volume of the
subscribers of petitioners for more than ten (10) years
without the corresponding increase in the number of
telephone connections to private respondent free of
charge. The trial court concluded that while in an action
for reformation of contract, it cannot make another
contract for the parties, it can, however, for reasons of
justice and equity, order that the contract be reformed
to abolish the inequities therein. Thus, said court ruled
that the contract should be reformed by ordering

petitioners to pay private respondent compensation for

the use of their posts in Naga City, while private
respondent should also be ordered to pay the monthly
bills for the use of the telephones also in Naga City. And
taking into consideration the guidelines of the NEA on
the rental of posts by telephone companies and the
increase in the costs of such posts, the trial court opined
that a monthly rental of P10.00 for each post of private
respondent used by petitioners is reasonable, which
rental it should pay from the filing of the complaint in
this case on January 2, 1989. And in like manner, private
respondent should pay petitioners from the same date
its monthly bills for the use and transfers of its
telephones in Naga City at the same rate that the public
are paying.
On private respondent's second cause of action, the trial
court found that the contract does not mention anything
about the use by petitioners of private respondent's
posts outside Naga City. Therefore, the trial court held
that for reason of equity, the contract should be
reformed by including therein the provision that for the
use of private respondent's posts outside Naga City,
petitioners should pay a monthly rental of P10.00 per
post, the payment to start on the date this case was
filed, or on January 2, 1989, and private respondent
should also pay petitioners the monthly dues on its
telephone connections located outside Naga City
beginning January, 1989.
And with respect to private respondent's third cause of
action, the trial court found the claim not sufficiently
proved.

Thus, the following decretal portion of the trial court's

decision dated July 20, 1990:
WHEREFORE, in view of all the foregoing,
decision is hereby rendered ordering the
reformation of the agreement (Exh. A);
ordering the defendants to pay plaintiff's
electric poles in Naga City and in the towns
of Milaor, Canaman, Magarao and Pili,
Camarines Sur and in other places where
defendant NATELCO uses plaintiff's electric
poles, the sum of TEN (P10.00) PESOS per
plaintiff's pole, per month beginning
January, 1989 and ordering also the plaintiff
to pay defendant NATELCO the monthly
dues of all its telephones including those
installed at the residence of its officers,
namely; Engr. Joventino Cruz, Engr. Antonio
Borja, Engr. Antonio Macandog, Mr. Jesus
Opiana and Atty. Luis General, Jr. beginning
January, 1989. Plaintiff's claim for attorney's
fees and expenses of litigation and
defendants' counterclaim are both hereby
ordered dismissed. Without pronouncement
as to costs.
Disagreeing with the foregoing judgment, petitioners
appealed to respondent Court of Appeals. In the
decision dated May 28, 1992, respondent court affirmed
the decision of the trial court, 5 but based on different
grounds to wit: (1) that Article 1267 of the New Civil
Code is applicable and (2) that the contract was subject
to a potestative condition which rendered said condition

void. The motion for reconsideration was denied in the

resolution dated September 10, 1992. 6Hence, the
present petition.
Petitioners assign the following pertinent errors
committed by respondent court:
1) in making a contract for the parties by
invoking Article 1267 of the New Civil Code;
2) in ruling that prescription of the action for
reformation of the contract in this case
commenced from the time it became
disadvantageous to private respondent; and
3) in ruling that the contract was subject to
a potestative condition in favor of
petitioners.
Petitioners assert earnestly that Article 1267 of the New
Civil Code is not applicable primarily because the
contract does not involve the rendition of service or a
personal prestation and it is not for future service with
future unusual change. Instead, the ruling in the case
of Occea, et al. v. Jabson, etc., et al., 7 which
interpreted the article, should be followed in resolving
this case. Besides, said article was never raised by the
parties in their pleadings and was never the subject of
trial and evidence.
In applying Article 1267, respondent court rationalized:
We agree with appellant that in order that
an action for reformation of contract would

lie and may prosper, there must be

sufficient allegations as well as proof that
the contract in question failed to express
the true intention of the parties due to error
or mistake, accident, or fraud. Indeed, in
embodying the equitable remedy of
reformation of instruments in the New Civil
Code, the Code Commission gave its
reasons as follows:
Equity dictates the reformation
of an instrument in order that
the true intention of the
contracting parties may be
expressed. The courts by the
reformation do not attempt to
make a new contract for the
parties, but to make the
instrument express their real
agreement. The rationale of the
doctrine is that it would be
unjust and inequitable to allow
the enforcement of a written
instrument which does not
reflect or disclose the real
meeting of the minds of the
parties. The rigor of the
legalistic rule that a written
instrument should be the final
and inflexible criterion and
measure of the rights and
obligations of the contracting
parties is thus tempered to

forestall the effects of mistake,

fraud, inequitable conduct, or
accident. (pp. 55-56, Report of
Code Commission)
Thus, Articles 1359, 1361, 1362, 1363 and
1364 of the New Civil Code provide in
essence that where through mistake or
accident on the part of either or both of the
parties or mistake or fraud on the part of the
clerk or typist who prepared the instrument,
the true intention of the parties is not
expressed therein, then the instrument may
be reformed at the instance of either party if
there was mutual mistake on their part, or
by the injured party if only he was mistaken.

aforesaid agreement, Atty. Maggay must

have considered the same fair and equitable
to both sides, and this was affirmed by the
lower court when it found said contract to
have been fair to both parties at the time of
its execution. In fact, there were no
complaints on the part of both sides at the
time of and after the execution of said
contract, and according to 73-year old
Justino de Jesus, Vice President and General
manager of appellant at the time who
signed the agreement Exh. "A" in its behalf
and who was one of the witnesses for the
plaintiff (sic), both parties complied with
said contract "from the very beginning" (p.
5, tsn, April 17, 1989).

Here, plaintiff-appellee did not allege in its

complaint, nor does its evidence prove, that
there was a mistake on its part or mutual
mistake on the part of both parties when
they entered into the agreement Exh. "A",
and that because of this mistake, said
agreement failed to express their true
intention. Rather, plaintiff's evidence shows
that said agreement was prepared by Atty.
Luciano Maggay, then a member of
plaintiff's Board of Directors and its legal
counsel at that time, who was also the legal
counsel for defendant-appellant, so that as
legal counsel for both companies and
presumably with the interests of both
companies in mind when he prepared the

That the aforesaid contract has become

inequitous or unfavorable or
disadvantageous to the plaintiff with the
expansion of the business of appellant and
the increase in the volume of its subscribers
in Naga City and environs through the
years, necessitating the stringing of more
and bigger telephone cable wires by
appellant to plaintiff's electric posts without
a corresponding increase in the ten (10)
telephone connections given by appellant to
plaintiff free of charge in the agreement
Exh. "A" as consideration for its use of the
latter's electric posts in Naga City, appear,
however, undisputed from the totality of the
evidence on record and the lower court so

found. And it was for this reason that in the

later (sic) part of 1982 or 1983 (or five or six
years after the subject agreement was
entered into by the parties), plaintiff's Board
of Directors already asked Atty. Luis General
who had become their legal counsel in
1982, to study said agreement which they
believed had become disadvantageous to
their company and to make the proper
recommendation, which study Atty. General
did, and thereafter, he already
recommended to the Board the filing of a
court action to reform said contract, but no
action was taken on Atty. General's
recommendation because the former
general managers of plaintiff wanted to
adopt a soft approach in discussing the
matter with appellant, until, during the term
of General Manager Henry Pascual, the
latter, after failing to settle the problem with
Atty. Luciano Maggay who had become the
president and general manager of appellant,
already agreed for Atty. General's filing of
the present action. The fact that said
contract has become inequitous or
disadvantageous to plaintiff as the years
went by did not, however, give plaintiff a
cause of action for reformation of said
contract, for the reasons already pointed out
earlier. But this does not mean that plaintiff
is completely without a remedy, for we
believe that the allegations of its complaint
herein and the evidence it has presented

sufficiently make out a cause of action

under Art. 1267 of the New Civil Code for its
release from the agreement in question.
xxx xxx xxx
The understanding of the parties when they
entered into the Agreement Exh. "A" on
November 1, 1977 and the prevailing
circumstances and conditions at the time,
were described by Dioscoro Ragragio, the
President of plaintiff in 1977 and one of its
two officials who signed said agreement in
its behalf, as follows:
Our understanding at that time
is that we will allow NATELCO to
utilize the posts of CASURECO II
only in the City of Naga because
at that time the capability of
NATELCO was very limited, as a
matter of fact we do [sic] not
expect to be able to expand
because of the legal squabbles
going on in the NATELCO. So,
even at that time there were so
many subscribers in Naga City
that cannot be served by the
NATELCO, so as a mater of
public service we allowed them
to sue (sic) our posts within the
Naga City. (p. 8, tsn April 3,
1989)

Ragragio also declared that while the

telephone wires strung to the electric posts
of plaintiff were very light and that very few
telephone lines were attached to the posts
of CASURECO II in 1977, said posts have
become "heavily loaded" in 1989 (tsn, id.).
In truth, as also correctly found by the lower
court, despite the increase in the volume of
appellant's subscribers and the
corresponding increase in the telephone
cables and wires strung by it to plaintiff's
electric posts in Naga City for the more 10
years that the agreement Exh. "A" of the
parties has been in effect, there has been
no corresponding increase in the ten (10)
telephone units connected by appellant free
of charge to plaintiff's offices and other
places chosen by plaintiff's general manager
which was the only consideration provided
for in said agreement for appellant's use of
plaintiffs electric posts. Not only that,
appellant even started using plaintiff's
electric posts outside Naga City although
this was not provided for in the agreement
Exh. "A" as it extended and expanded its
telephone services to towns outside said
city. Hence, while very few of plaintiff's
electric posts were being used by appellant
in 1977 and they were all in the City of
Naga, the number of plaintiff's electric posts
that appellant was using in 1989 had
jumped to 1,403,192 of which are outside

Naga City (Exh. "B"). Add to this the

destruction of some of plaintiff's poles
during typhoons like the strong typhoon
Sisang in 1987 because of the heavy
telephone cables attached thereto, and the
escalation of the costs of electric poles from
1977 to 1989, and the conclusion is indeed
ineluctable that the agreement Exh. "A" has
already become too one-sided in favor of
appellant to the great disadvantage of
plaintiff, in short, the continued
enforcement of said contract has manifestly
gone far beyond the contemplation of
plaintiff, so much so that it should now be
released therefrom under Art. 1267 of the
New Civil Code to avoid appellant's unjust
enrichment at its (plaintiff's) expense. As
stated by Tolentino in his commentaries on
the Civil Code citing foreign civilist
Ruggiero, "equity demands a certain
economic equilibrium between the
prestation and the counter-prestation, and
does not permit the unlimited
impoverishment of one party for the benefit
of the other by the excessive rigidity of the
principle of the obligatory force of
contracts (IV Tolentino, Civil Code of the
Philippines, 1986 ed.,
pp. 247-248).
We therefore, find nothing wrong with the
ruling of the trial court, although based on a
different and wrong premise (i.e.,

reformation of contract), that from the date

of the filing of this case, appellant must pay
for the use of plaintiff's electric posts in
Naga City at the reasonable monthly rental
of P10.00 per post, while plaintiff should pay
appellant for the telephones in the same
City that it was formerly using free of charge
under the terms of the agreement Exh. "A"
at the same rate being paid by the general
public. In affirming said ruling, we are not
making a new contract for the parties
herein, but we find it necessary to do so in
order not to disrupt the basic and essential
services being rendered by both parties
herein to the public and to avoid unjust
enrichment by appellant at the expense of
plaintiff, said arrangement to continue only
until such time as said parties can renegotiate another agreement over the same
subject-matter covered by the agreement
Exh. "A". Once said agreement is reached
and executed by the parties, the aforesaid
ruling of the lower court and affirmed by us
shall cease to exist and shall be substituted
and superseded by their new
agreement. . . .. 8
Article 1267 speaks of "service" which has become so
difficult. Taking into consideration the rationale behind
this provision, 9 the term "service" should be understood
as referring to the "performance" of the obligation. In
the present case, the obligation of private respondent
consists in allowing petitioners to use its posts in Naga

City, which is the service contemplated in said article.

Furthermore, a bare reading of this article reveals that it
is not a requirement thereunder that the contract be for
future service with future unusual change. According to
Senator Arturo M. Tolentino, 10 Article 1267 states in our
law the doctrine of unforseen events. This is said to be
based on the discredited theory of rebus sic stantibus in
public international law; under this theory, the parties
stipulate in the light of certain prevailing conditions, and
once these conditions cease to exist the contract also
ceases to exist. Considering practical needs and the
demands of equity and good faith, the disappearance of
the basis of a contract gives rise to a right to relief in
favor of the party prejudiced.
In a nutshell, private respondent in the Occea case
filed a complaint against petitioner before the trial court
praying for modification of the terms and conditions of
the contract that they entered into by fixing the proper
shares that should pertain to them out of the gross
proceeds from the sales of subdivided lots. We ordered
the dismissal of the complaint therein for failure to state
a sufficient cause of action. We rationalized that the
Court of Appeals misapplied Article 1267 because:
. . . respondent's complaint
seeks not release from the subdivision
contract but that the court "render
judgment modifying the terms and
conditions of the contract . . .
by fixing the proper shares that
shouldpertain to the herein parties out of
the gross proceeds from the sales of

subdivided lots of subject subdivision". The

cited article (Article 1267) does not grant
the courts (the) authority to remake, modify
or revise the contract or to fix the division of
shares between the parties as contractually
stipulated with the force of law between the
parties, so as to substitute its own terms for
those covenanted by the parties
themselves. Respondent's complaint for
modification of contract manifestly has no
basis in law and therefore states no cause of
action. Under the particular allegations of
respondent's complaint and the
circumstances therein averred, the courts
cannot even in equity grant the relief
sought. 11
The ruling in the Occea case is not applicable because
we agree with respondent court that the allegations in
private respondent's complaint and the evidence it has
presented sufficiently made out a cause of action under
Article 1267. We, therefore, release the parties from
their correlative obligations under the contract.
However, our disposition of the present controversy
does not end here. We have to take into account the
possible consequences of merely releasing the parties
therefrom: petitioners will remove the telephone
wires/cables in the posts of private respondent,
resulting in disruption of their service to the public;
while private respondent, in consonance with the
contract 12 will return all the telephone units to
petitioners, causing prejudice to its business. We shall
not allow such eventuality. Rather, we require, as

ordered by the trial court: 1) petitioners to pay private

respondent for the use of its posts in Naga City and in
the towns of Milaor, Canaman, Magarao and Pili,
Camarines Sur and in other places where petitioners use
private respondent's posts, the sum of ten (P10.00)
pesos per post, per month, beginning January, 1989;
and 2) private respondent to pay petitioner the monthly
dues of all its telephones at the same rate being paid by
the public beginning January, 1989. The peculiar
circumstances of the present case, as distinguished
further from the Occea case, necessitates exercise of
our equity jurisdiction. 13 By way of emphasis, we
reiterate the rationalization of respondent court that:
. . . In affirming said ruling, we are not
making a new contract for the parties
herein, but we find it necessary to do so in
order not to disrupt the basic and essential
services being rendered by both parties
herein to the public and to avoid unjust
enrichment by appellant at the expense of
plaintiff . . . .14
Petitioners' assertion that Article 1267 was never raised
by the parties in their pleadings and was never the
subject of trial and evidence has been passed upon by
respondent court in its well reasoned resolution, which
we hereunder quote as our own:
First, we do not agree with defendantappellant that in applying Art. 1267 of the
New Civil Code to this case, we have
changed its theory and decided the same on
an issue not invoked by plaintiff in the lower

court. For basically, the main and pivotal

issue in this case is whether the continued
enforcement of the contract Exh. "A"
between the parties has, through the years
(since 1977), become too inequitous or
disadvantageous to the plaintiff and too
one-sided in favor of defendant-appellant,
so that a solution must be found to relieve
plaintiff from the continued operation of said
agreement and to prevent defendantappellant from further unjustly enriching
itself at plaintiff's expense. It is indeed
unfortunate that defendant had turned deaf
ears to plaintiffs requests for renegotiation,
constraining the latter to go to court. But
although plaintiff cannot, as we have held,
correctly invoke reformation of contract as a
proper remedy (there having been no
showing of a mistake or error in said
contract on the part of any of the parties so
as to result in its failure to express their true
intent), this does not mean that plaintiff is
absolutely without a remedy in order to
relieve itself from a contract that has gone
far beyond its contemplation and has
become so highly inequitous and
disadvantageous to it through the years
because of the expansion of defendantappellant's business and the increase in the
volume of its subscribers. And as it is the
duty of the Court to administer justice, it
must do so in this case in the best way and

manner it can in the light of the proven facts

and the law or laws applicable thereto.
It is settled that when the trial court decides
a case in favor of a party on a certain
ground, the appellant court may uphold the
decision below upon some other point which
was ignored or erroneously decided by the
trial court (Garcia Valdez v. Tuazon, 40 Phil.
943; Relativo v. Castro, 76 Phil. 563; Carillo
v. Salak de Paz, 18 SCRA 467). Furthermore,
the appellate court has the discretion to
consider an unassigned error that is closely
related to an error properly assigned
(Paterno v. Jao Yan, 1 SCRA 631; Hernandez
v. Andal, 78 Phil. 196). It has also been held
that the Supreme Court (and this Court as
well) has the authority to review matters,
even if they are not assigned as errors in
the appeal, if it is found that their
consideration is necessary in arriving at a
just decision of the case (Saura Import &
Export Co., Inc. v. Phil. International Surety
Co. and PNB, 8 SCRA 143). For it is the
material allegations of fact in the complaint,
not the legal conclusion made therein or the
prayer, that determines the relief to which
the plaintiff is entitled, and the plaintiff is
entitled to as much relief as the facts
warrant although that relief is not
specifically prayed for in the complaint
(Rosales v. Reyes and Ordoveza, 25 Phil.
495; Cabigao v. Lim, 50 Phil. 844; Baguioro

v. Barrios, 77 Phil. 120). To quote an old but

very illuminating decision of our Supreme
Court through the pen of American jurist
Adam C. Carson:
"Under our system of pleading it
is the duty of the courts to grant
the relief to which the parties
are shown to be entitled by the
allegations in their pleadings
and the facts proven at the trial,
and the mere fact that they
themselves misconstrue the
legal effect of the facts thus
alleged and proven will not
prevent the court from placing
the just construction thereon
and adjudicating the issues
accordingly." (Alzua v. Johnson,
21 Phil. 308)
And in the fairly recent case of Caltex Phil.,
Inc. v IAC, 176 SCRA 741, the Honorable
Supreme Court also held:
We rule that the respondent
court did not commit any error
in taking cognizance of the
aforesaid issues, although not
raised before the trial court. The
presence of strong consideration
of substantial justice has led this
Court to relax the wellentrenched rule that, except

questions on jurisdiction, no
question will be entertained on
appeal unless it has been raised
in the court below and it is
within the issues made by the
parties in their pleadings
(Cordero v. Cabral, L-36789, July
25, 1983, 123 SCRA 532). . . .
We believe that the above authorities suffice
to show that this Court did not err in
applying Art. 1267 of the New Civil Code to
this case. Defendant-appellant stresses that
the applicability of said provision is
a question of fact, and that it should have
been given the opportunity to present
evidence on said question. But defendantappellant cannot honestly and truthfully
claim that it (did) not (have) the opportunity
to present evidence on the issue of whether
the continued operation of the contract Exh.
"A" has now become too one-sided in its
favor and too inequitous, unfair, and
disadvantageous to plaintiff. As held in our
decision, the abundant and copious
evidence presented by both parties in this
case and summarized in said decision
established the following essential and vital
facts which led us to apply Art. 1267 of the
New Civil Code to this case:
xxx xxx xxx

15

On the issue of prescription of private respondent's

action for reformation of contract, petitioners allege that
respondent court's ruling that the right of action "arose
only after said contract had already become
disadvantageous and unfair to it due to subsequent
events and conditions, which must be sometime during
the latter part of 1982 or in 1983 . . ." 16 is erroneous. In
reformation of contracts, what is reformed is not the
contract itself, but the instrument embodying the
contract. It follows that whether the contract is
disadvantageous or not is irrelevant to reformation and
therefore, cannot be an element in the determination of
the period for prescription of the action to reform.
Article 1144 of the New Civil Code provides, inter alia,
that an action upon a written contract must be brought
within ten (10) years from the time the right of action
accrues. Clearly, the ten (10) year period is to be
reckoned from the time the right of action
accrues which is not necessarily the date of execution of
the contract. As correctly ruled by respondent court,
private respondent's right of action arose "sometime
during the latter part of 1982 or in 1983 when according
to Atty. Luis General, Jr. . . ., he was asked by (private
respondent's) Board of Directors to study said contract
as it already appeared disadvantageous to (private
respondent) (p. 31, tsn, May 8, 1989). (Private
respondent's) cause of action to ask for reformation of
said contract should thus be considered to have arisen
only in 1982 or 1983, and from 1982 to January 2, 1989
when the complaint in this case was filed, ten (10) years
had not yet elapsed." 17

Regarding the last issue, petitioners allege that there is

nothing purely potestative about the prestations of
either party because petitioner's permission for free use
of telephones is not made to depend purely on their will,
neither is private respondent's permission for free use of
its posts dependent purely on its will.
Apart from applying Article 1267, respondent court cited
another legal remedy available to private respondent
under the allegations of its complaint and the
preponderant evidence presented by it:
. . . we believe that the provision
in said agreement
(a) That the term or period of
this contract shall be as long as
the party of the first part[herein
appellant] has need for the
electric light posts of the party
of the second part [herein
plaintiff] it being understood
that this contract shall
terminate when for any reason
whatsoever, the party of the
second part is forced to stop,
abandoned [sic] its operation as
a public service and it becomes
necessary to remove the electric
light post [sic]"; (Emphasis
supplied)
is invalid for being purely potestative on the
part of appellant as it leaves the continued

effectivity of the aforesaid agreement to the

latter's sole and exclusive will as long as
plaintiff is in operation. A similar provision in
a contract of lease wherein the parties
agreed that the lessee could stay on the
leased premises "for as long as the
defendant needed the premises and can
meet and pay said increases" was recently
held by the Supreme Court in Lim v. C.A.,
191 SCRA 150, citing the much earlier case
of Encarnacion v. Baldomar, 77 Phil. 470, as
invalid for being "a purely potestative
condition because it leaves the effectivity
and enjoyment of leasehold rights to the
sole and exclusive will of the lessee."
Further held the High Court in the Lim case:
The continuance, effectivity and
fulfillment of a contract of lease
cannot be made to depend
exclusively upon the free and
uncontrolled choice of the
lessee between continuing the
payment of the rentals or not,
completely depriving the owner
of any say in the matter.
Mutuality does not obtain in
such a contract of lease of no
equality exists between the
lessor and the lessee since the
life of the contract is dictated
solely by the lessee.

The above can also be said of the

agreement Exh. "A" between the parties in
this case. There is no mutuality and equality
between them under the afore-quoted
provision thereof since the life and
continuity of said agreement is made to
depend as long as appellant needs plaintiff's
electric posts. And this is precisely why,
since 1977 when said agreement was
executed and up to 1989 when this case
was finally filed by plaintiff, it could do
nothing to be released from or terminate
said agreement notwithstanding that its
continued effectivity has become very
disadvantageous and inequitous to it due to
the expansion and increase of appellant's
telephone services within Naga City and
even outside the same, without a
corresponding increase in the ten (10)
telephone units being used by plaintiff free
of charge, as well as the bad and inefficient
service of said telephones to the prejudice
and inconvenience of plaintiff and its
customers. . . . 18
Petitioners' allegations must be upheld in this regard. A
potestative condition is a condition, the fulfillment of
which depends upon the sole will of the debtor, in which
case, the conditional obligation is void. 19 Based on this
definition, respondent court's finding that the provision
in the contract, to wit:

(a) That the term or period of this contract

shall be as long as the party of the first part
(petitioner) has need for the electric light
posts of the party of the second part
(private respondent) . . ..

MANILA
INTERNATIONAL
AIRPORT AUTHORITY,
Petitioner,

Present:

is a potestative condition, is correct. However, it must

have overlooked the other conditions in the same
provision, to wit:
. . . it being understood that this contract
shall terminate when for any reason
whatsoever, the party of the second part
(private respondent) is forced to stop,
abandoned (sic) its operation as a public
service and it becomes necessary to remove
the electric light post (sic);
which are casual conditions since they depend on
chance, hazard, or the will of a third person. 20 In sum,
the contract is subject to mixed conditions, that is, they
depend partly on the will of the debtor and partly on
chance, hazard or the will of a third person, which do
not invalidate the aforementioned
provision. 21 Nevertheless, in view of our discussions
under the first and second issues raised by petitioners,
there is no reason to set aside the questioned decision
and resolution of respondent court.
WHEREFORE, the petition is hereby DENIED. The
decision of the Court of Appeals dated May 28, 1992
and its resolution dated September 10, 1992 are
AFFIRMED.

G.R. No. 161718

CORONA, C.J.,
Chairperson,

LEONARDO-DE CASTR
- versus -

BERSAMIN,
DEL CASTILLO, and
VILLARAMA, JR., JJ.

Promulgated:
DING
VELAYO
CENTER, INC.,

SPORTS
December 14, 2011

Respondent.

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

DECISION

LEONARDO-DE CASTRO, J.:

Before Us is a Petition for Review under Rule 45 of

the Rules of Court of the Decision[1] dated January 8,
2004 of the Court Appeals in CA-G.R. CV No. 68787,
affirming the Decision[2] dated October 29, 1999 of
Branch 111 of the Regional Trial Court (RTC) of Pasay
City in Civil Case No. 8847, which granted the Complaint
for Injunction, Consignation, and Damages with prayer
for a Temporary Restraining Order filed by respondent
Ding Velayo Sports Center, Inc. against petitioner Manila
International Airport Authority (MIAA), and essentially
compelled petitioner to renew the lease of respondent
over a parcel of land within the airport premises.

Below are the facts as culled from the records of

the case:

On February 15, 1967, petitioner (then still called

the Civil Aeronautics Administration or CAA) and Salem
Investment Corporation (Salem) entered into a Contract
of Lease whereby petitioner leased in favor of Salem a
parcel of land known as Lot 2-A, with an area of 76,328
square meters, located in front of the Manila
International Airport (MIA) in Pasay City, and registered
under Transfer Certificate of Title (TCT) No. 6735 in the
name
of
the
Republic
(Lot
2-A). Petitioner
andSalem entered into said Contract of Lease for the
following reasons:

WHEREAS, this particular portion of

land is presently an eyesore to the airport

premises due to the fact that a major

portion of it consists of swampy and talahib
infested silt and abandoned fishponds and
occupied
by
squatters
and
some
[petitioners] employees with ungainly
makeshift dwellings;

WHEREAS, the LESSOR, in accordance

with its general plan to improve and
beautify the airport premises, is interested
in developing this particular area by
providing such facilities and conveniences
as may be necessary for the comfort,
convenience and relaxation of transients,
tourists and the general public;

WHEREAS, the LESSEE, a corporation

engaged in hostelry and other allied
business, is ready, willing and able to
cooperate with the LESSOR in the
implementation of this general development
plan for the airport premises;

xxxx

WHEREAS, the LESSEEs main interest

is to have a sufficient land area within which
to construct a modern hotel with such
facilities as would ordinarily go with modern
hostelry, including recreation halls, facilities
for banks, tourist agencies, travel bureaus,
laundry shops, postal stations, curio and

native shops and other allied business

calculated to make the hotel and its
facilities
comfortable,
convenient
and
attractive, and for this purpose, an initial
land area of some Thirty[-]Five Thousand
Ten (35,010) square meters would be first
utilized.[3]

The term of the lease and renewal thereof as stipulated

upon by petitioner and Salem are as follows:

3. That the term of the lease shall be for a

period
of
Twenty-Five
(25)
years,
commencing from the date of receipt of
approval of this Contract by the Secretary of
Public Works and Communications, and at
the option of the LESSEE, renewable for
another Twenty-Five (25) years. It is
understood, that after the first 25 years
lease, the ownership of, and full title to, all
the buildings and permanent improvements
introduced by the LESSEE on the leased
premises including those introduced on
the Golf Driving Range shall
automatically
vest in the LESSOR, without cost.

Upon the termination of the lease or should

the LESSEE not exercise this option for
renewal, the LESSEE shall deliver the
peaceful possession of all the building and
other permanent improvements herein
above referred to, with the understanding

that the LESSEE shall have the right to

remove from the premises such equipment,
furnitures, accessories and other articles as
would ordinarily be classified as movable
property under pertinent provisions of law.

4. That the renewal of this lease contract

shall be for another period of Twenty-Five
(25) years, under the same terms and
conditions herein stipulated; provided,
however that, since the ownership of the
hotel building and permanent improvement
have passed on the LESSOR, the LESSEE
shall pay as rental, in addition to the rentals
herein agreed upon, an amount equivalent
to One percent (1%) of the appraised value
of the hotel building and permanent
improvements at the time of expiration of
Twenty-Five (25) years lease period, payable
annually.[4]

Subsequently, in a Transfer of Lease Rights and

Existing Improvements dated September 30, 1974,
Salem conveyed in favor of Ding Velayo Export
Corporation (Velayo Export), for the consideration
of P1,050,000.00, its leasehold rights over a portion of
Lot 2-A, measuring about 15,534 square meters, with
the improvements thereon, consisting of an unfinished
cinema-theater. Accordingly, petitioner and Velayo
Export executed a Contract of Lease dated November
26, 1974pertaining to the aforementioned leased
portion of Lot 2-A.

In turn, Velayo Export executed a Transfer of

Lease Rights dated April 27, 1976 by which it conveyed
to respondent, for the consideration of P500,000.00, its
leasehold rights over an 8,481-square meter area
(subject property) out of the 15,534-square meter
portion it was leasing from petitioner. As a result,
petitioner and respondent executed another Contract of
Lease[5] dated May 14, 1976 covering the subject
property.

The
Contract
of
Lease
dated May
14,
1976 between petitioner (as lessor) and respondent (as
lessee) specified how respondent shall develop and use
the subject property:
2. That the LESSEE shall utilize the
premises as the site for the construction of a
Sports Complex facilities and shopping
centers in line with the Presidential Decree
for Sports Development and Physical
Fitness, including the beautification of the
premises and providing cemented parking
areas.

3. That the LESSEE shall construct at

its expense on the leased premises a
parking area parallel to and fronting the
Domestic Airport Terminal to be open to the
traveling public free of charge to ease the
problem of parking congestion at the
Domestic Airport.[6]

Pursuant
to
the
aforequoted
respondent agreed to the following:

objectives,

9. Physical improvements on building

spaces and areas subject of this agreement
may be undertaken by and at the expenses
of the LESSEE. However, no improvements
may be commenced without prior approval
of the plans by the LESSOR and, whenever
deemed necessary a cash deposit shall be
made in favor of the LESSOR which shall be
equivalent to the cost of restoration of any
portion affected by such alteration or
improvements;

10. The LESSEE agrees and binds

himself
to
complete
the
physical
improvements or contemplated structures
within the leased premises for a period of
one (1) year.Failure on the part of the
LESSEE to do so within said period shall
automatically revoke the Contract of Lease
without necessity of judicial process.[7]

The lease rental shall be computed as follows:

5. That the LESSEE shall pay to the

LESSOR as monthly rentals for the leased
premises the rate of P0.45 per square meter
for the first 300 square meters, P0.30 per
square meter for the next 500 square

meters, and P0.25 per square meter for the

remaining area pursuant to Part VIII, Section
4 of Administrative Order No. 4, Series of
1970, which in the case of the 8,481 square
meters
herein
leased
shall
amount
to P2,205.25 per month, or a royalty
equivalent to one percent (1%) of the
monthly gross income of the LESSEE,
whichever is higher.

6. That for the purpose of accurately

determining the monthly gross income, the
LESSEE hereby gives its consent for the
examination of the books by authorized
representatives of the LESSOR or the
Commission on Audit;

In the event of relocation of the LESSEE to

other areas, the cost of relocation shall be
shouldered by the LESSEE.[8]

Nonpayment of lease rentals shall have the

following consequence:

8. Failure on the part of the LESSEE TO PAY

ANY fees, charges, rentals or the royalty of
one percent (1%) within thirty (30) days
after receipt of written demand, the LESSOR
shall deny the LESSEE of the further use of
the leased premises and /or any of its
facilities, utilities and services. x x x.[9]

xxxx

13. If, during the lifetime of this agreement

and upon approval by the LESSOR, the
leased area is increased or diminished, or
the LESSEE is relocated to another area,
rentals, fees, and charges imposed shall be
amended
accordingly. Subsequent
amendments to the Administrative Order
which will affect an increase of the rates of
fees, charges and rentals agreed upon in
this contract shall automatically amend this
contract to the extent that the rates of fees,
rentals, and charges are increased.

The Contract of Lease prohibits respondent from

transferring its leasehold rights, engaging in any other
business outside those mentioned in said Contract, and
subletting the premises whether in whole or in part,
thus:

16. The LESSEE agrees not to assign, sell,

transfer or mortgage his rights under this
agreement or sublet the whole or part of
premises covered by it to a third party or
parties nor engage in any other business
outside of those mentioned in this

contract. Violation of this provision shall also

be a ground for revocation of the lease
contract without need of judicial process.[10]

Period of the lease and renewal thereof are

governed by paragraphs 4 and 17 of the Contract of
Lease that read:

4. That the period of this lease shall take

effect from June 1, 1976 up to February 15,
1992 which is equivalent to the unexpired
portion of the lease contract executed
between [petitioner] and Ding Velayo Export
Corporation.

xxxx

17. The LESSEE, if desirous of continuing his

lease, should notify the LESSOR sixty (60)
days prior to expiration of the period agreed
upon for the renewal of the Contract of
Lease.[11]

The lease may be revoked/terminated under the

following conditions:

15. This contract of lease may be

terminated by other party upon thirty (30)
days notice in writing. Failure on the part of
the LESSEE to comply with any of the
provisions of this lease contract or any
violation of any rule or regulations of the
Airport shall give the LESSOR the right to
revoke this contract effective thirty (30)
days after notice of revocation without need
of judicial demand. However, the LESSEE
shall remain liable and obligated to pay
rentals and other fees and charges due and
in arrears with interest at the rate of twelve
percent (12%) per annum;

xxxx

18. Upon termination or revocation of this

contract of lease as herein provided, the
LESSEE shall deliver possession of the
premises to the LESSOR in the same
condition that they were received giving
allowance to normal wear and tear and to
damage or destruction caused by act of
God. All
permanent
improvements,
however, which the LESSEE might have
constructed in the premises by virtue hereof
shall upon the termination of this lease
automatically become the absolute property
of the LESSOR without cost;

19. In the event that the LESSOR shall need

the
leased
premises
in
its
airport
development program, the LESSEE agrees

to vacate the premises within thirty (30)

days
from
receipt
of
notice. All
improvements not removed by the LESSEE
within the thirty (30) day period shall
become the property of the LESSOR without
cost.[12]

Respondent began occupying the subject property

and paying petitioner the amount of P2,205.25 per
month as rental fee. Respondent then constructed a
multi-million plaza with a three-storey building on said
property. Respondent leased spaces in the building to
various business proprietors.

In a Letter[13] dated April 11, 1979, petitioner

requested respondent for a copy of the latters Gross
Income Statement from December 1977 to December
1978, duly certified by a certified public accountant, for
the purpose of computing the royalty equivalent to 1%
of the monthly gross income of respondent. Acceding to
this
request,
respondent
sent
petitioner
a
[14]
Letter
dated May 31, 1979 and appended therewith
the requested income statements which disclosed that
the total gross income of respondent for the period in
question amounted to P1,972,968.11. Respondent also
submitted to petitioner and the Commission on Audit
(COA) its duly audited financial statements [15] for the
years 1984 to 1988. Meanwhile, petitioner had
continued billing respondent the amount of P2,205.25
as monthly rental fee, which the latter obediently paid.

Petitioner eventually issued Administrative Order

(AO) No. 4, series of 1982, [16] and AO No. 1, series of
1984, fixing various rates for the lease rentals of its
properties. AO No. 4, series of 1982, and AO No. 1,
series of 1984, allegedly effected an increase in the
lease rental of respondent for the subject property, as
provided for in paragraph 13 of the Contract of Lease
dated May
14,
1976 between
petitioner
and
respondent. However, said issuances were subjected to
review for revision purposes and their implementation
was suspended. Still, petitioner, through a letter
dated September 23, 1986, required respondent to pay
a moratorium rental at the rate of P5.00 per square
meter rate per month or a total of P42,405.00 every
month.

In a Letter[17] dated October 18, 1986, respondent

opposed the implementation of any increase in its lease
rental for the subject property. Respondent wrote:

We believe that an increase in rental

of a property which does not form part of
the Airport or its immediate premises, like
the premises leased to DVSC, although
owned by MIAA is not covered by Batas
Pambansa Blg. 325 or Finance Ministry
Order No. 6-83. Furthermore, the language
of B.P. No. 325 and Ministry Order No. 6-83
authorizes the fixing or revision of fees and
charges only for services and functions.

xxxx

Assuming that the increase in rental of

MIAA property is authorized by B.P. No. 325
and Ministry Order No. 6-83, such increase
as ordered in your moratorium rental rate
insofar as it is made applicable to DVSC is
not valid.

The increase which is around 2,000

percent or 20 times above present rental
rate is unreasonably high. Both B.P. No. 325
and Ministry Order No. 6-83 prescribed only
just and reasonable rates sufficient to cover
administrative costs.

Such increase in rental is uncalled for

considering that:

Upon termination of the lease, all the

improvements on the property shall belong
to MIAA without costs. The original cost of
the buildings and other improvements on
the
land
we
have
leased
is P10,600,000.00. Said
improvements
would now cost over P30,000,000.00. In
effect the Government would be collecting
another P2.0 million a year.

We, therefore, request that

moratorium rate be not applied to us.

the

Following the foregoing exchange, petitioner had

kept on charging respondent the original monthly rental
of P2,205.25.

More than 60 days prior to the expiration of the

lease between petitioner and respondent, the latter,
through its President, Conrado M. Velayo (Velayo), sent
the former a Letter[18] dated December 2, 1991 stating
that respondent was interested in renewing the lease for
another 25 years.

Petitioner, through its General Manager, Eduardo

O. Carrascoso, in a Letter[19] dated February 24, 1992,
declined to renew the lease, ordered respondent to
vacate the subject property within five days, and
demanded respondent to pay arrears in lease rentals as
of January 1992 in the sum of P15,671,173.75.
Velayo, on behalf of respondent, replied to
petitioner through a Letter[20] dated March 3, 1992 that
reads:

This refers to your letters which we

received
on 26
February
1992 and 27
February 1992, respectively, the first as a
response to our letter of 2 December
1991 where we informed you of our
intention to renew our lease contract, and
the second wherein you asked us to vacate
within five (5) days the leased premises.

Your second letter surprised us

inasmuch as we have been negotiating with

you for the renewal of our lease. In addition,

your sudden decision gave us no time to
discuss your terms and conditions with our
Board considering that the issues involved
major decision.

For a smoother transition and for the

mutual interest of the government, the
tenants and ourselves, may we request for a
reconsideration of your decision, and we be
given up to the end of March 1992 to
peacefully turn-over to you the leased
premises. This will enable you to create a
committee that will take-over the leased
property and its operations.

Likewise, consistent with our previous

stand as communicated to you by our legal
counsel, copy of which is hereto attached,
we deny any liability on rental increases.

In Letters[21] all dated March 10, 1992, Velayo informed

petitioner that he already sent individual letters to
Manila Electric Company, Philippine Long Distance
Telephone Company, and Manila Waterworks and
Sewerage System, instructing the said utility companies
that succeeding billings for electric, telephone, and
water consumptions should already be transferred to
the account of petitioner in light of the expected turnover of the subject property and improvements thereon
from respondent to petitioner.

However, around the same time, Samuel

Alomesen (Alomesen) became the new President and
General
Manager
of
respondent,
replacing
Velayo. Alomesen, acting on behalf of respondent, sent
petitioner a Letter[22] dated March 25, 1992, revoking
the aforementioned Letters dated March 3 and 10, 1992
since these were purportedly sent by Velayo without
authority
from
respondents
Board
of
Directors. Respondent
expressed
its
interest
in
continuing the lease of the subject property for another
25 years and tendered to petitioner a managers check
in the amount of P8,821.00 as payment for the lease
rentals for the subject property from December 1991
until March 1992.

Petitioner entirely disregarded the claims of

respondent and threatened to take-over the subject
property.

On March 30, 1992, respondent filed against

petitioner before the RTC a Complaint for Injunction,
Consignation, and Damages with a Prayer for a
Temporary Restraining Order.[23] Respondent essentially
prayed for the RTC to order the renewal of the Contract
of Lease between the parties for another 25-year term
counted from February 15, 1992. On even date, the RTC
issued a Temporary Restraining Order[24] preventing
petitioner and all persons acting on its behalf from
taking possession of the entire or any portion of the
subject property, from administering the said property,
from collecting rental payments from sub-lessees, and
from taking any action against respondent for the
collection of alleged arrears in rental payments until
further orders from the trial court.

In its Answer,[25] petitioner contended that its

Contract of Lease with respondent was already
terminated on February 15, 1992, the expiration date
explicitly stated under paragraph 4 of the same
Contract. Petitioner was not bound to renew the
Contract of Lease with respondent. The renewal
provision under paragraph 17 of the Contract was not
automatic but merely directory and procedural and that,
in any event, Velayo, the former President of
respondent, already conceded to the non-renewal of the
Contract.
Petitioner likewise invoked paragraph 15 of the
Contract of Lease, i.e., its right to revoke the said
Contract in case of violation of any of the provisions
thereof
by
respondent. Petitioner
averred
that
respondent committed the following violations: (1)
respondent failed to fulfill the conditions set forth under
paragraphs 2 and 3 of the Contract as it did not
establish a shopping center on the subject property and
did not help ease the problems of parking congestion at
the Domestic Airport; (2) respondent sub-leased the
subject property in defiance of the prohibition under
paragraph 16 of the Contract; and (3) respondent did
not pay the lease rentals in accordance with paragraphs
5 and 13 of the Contract, thus, incurring a total
outstanding balance of P15,671,173.75 as of February
1992.

By way of counter-claim, petitioner demanded

that respondent pay the total outstanding balance of its
lease rentals for the subject property and turn-over
lease rentals it had collected from sub-lessees
beginning February 15, 1992.

After the preliminary hearing, the RTC issued a

Writ of Preliminary Injunction[26] against petitioner
on April 30, 1992 upon the posting by respondent of a
bond in the amount of P100,000.00.

In an Order[27] dated June 11, 1996, the RTC

denied the Omnibus Motion of petitioner for the
dissolution of the writ of injunction and appointment of
a receiver for the fruits of the subject property; and at
the same time, granted the motion of respondent for
the consignment of their monthly lease rentals for the
subject property with the RTC.

The RTC terminated the pre-trial proceedings in an

Order[28] dated October 23, 1997 for failure of the
parties to amicably settle the dispute. Thereafter, trial
on the merits ensued.

Respondent presented the testimonies of Mariano

Nocom, Jr.,[29] Gladioluz Segundo,[30] Mariano Nocom, Sr.,
[31]
and Rosila Mabanag.[32] The RTC admitted all the
documentary
evidence
of
respondent
in
an
Order[33] dated December 14, 1998.

Petitioner, on the other hand, presented the lone

testimony of their accounting manager, Arlene
Britanico.[34] Among the numerous documents submitted
by petitioner as evidence were its own issuances
imposing various rates for the lease of its properties,
which allegedly effected an increase in the lease rentals
of respondent for the subject property, specifically, AO

No. 4, series of 1982;[35] AO No. 1, series of 1984;[36] AO

No. 1, series of 1990;[37] AO No. 1, series of 1993;
[38]
Resolution No. 94-74,[39] Resolution No. 96-32,[40] and
Resolution No. 97-51,[41] all amending AO No. 1, series of
1993; and AO No. 1, series of 1998. [42]All of the
documentary evidence of petitioner were admitted by
the RTC in an Order[43] dated May 28, 1999.

In its Decision dated October 29, 1999, the RTC

ruled in favor of respondent, disposing thus:

3.

To
accept
the
rental payment consigned
by the [respondent] to the
court beginning December
1991 onward until and
after a renewal has been
duly executed by both
parties;

4.

To
pay
[respondent] as and by
way of attorneys fees the
sum of P500,000.00; and

5.

To pay the cost of

WHEREFORE, judgment is hereby

rendered in favor of [respondent] and
against [petitioner].
suit.
Accordingly,
ordered to:

1.

2.

[petitioner]

is

[44]

hereby

Grant renewal of
the lease contract for the
same term as stipulated in
the old contract and the
rental to be based on the
applicable rate of the time
or renewal;

To
respect
and
maintain
[respondents]
peaceful possession of the
premises;

Petitioner appealed the RTC judgment before the

Court of Appeals and assigned these errors:

I.

The trial court gravely erred in

declaring that [respondent] is entitled
to a renewal of the contract of lease.

II.

The trial court gravely erred in

ordering the renewal of the contract of
lease despite of the fact that it has no
legal authority to do so.

III.

IV.

V.

The trial court gravely erred in

declaring that [respondent] did not
violate the terms and conditions of the
contract.

The trial court gravely erred in

declaring that [petitioners] act of
effecting the increase in the rental
during the stipulated lifetime of the
contract has no valid basis.

The trial court gravely erred in

not finding that [petitioner] is entitled
to its counterclaim.[45]

The Court of Appeals promulgated its Decision

on January 8, 2004, finding no reversible error in the
appealed judgment of the RTC and decreeing as follows:

WHEREFORE, finding no reversible

error committed by the trial court, the
instant appeal is hereby DISMISSED, and the
assailed decision is hereby AFFIRMED.[46]

Hence, the instant Petition for Review, wherein

petitioner basically attributed to the Court of Appeals
the very same errors it assigned to the RTC.

Petitioner argues that the renewal of the Contract

of Lease cannot be made to depend on the sole will of
respondent for the same would then be void for being a
potestative condition.

We do not agree. As we have already explained

in Allied Banking Corporation v. Court of Appeals [47]:

Article 1308 of the Civil Code expresses

what is known in law as the principle of
mutuality of contracts. It provides that "the
contract must bind both the contracting
parties; its validity or compliance cannot be
left to the will of one of them." This binding
effect of a contract on both parties is based
on the principle that the obligations arising
from contracts have the force of law
between the contracting parties, and there
must be mutuality between them based
essentially on their equality under which it is
repugnant to have one party bound by the
contract while leaving the other free
therefrom. The ultimate purpose is to render
void a contract containing a condition which
makes its fulfillment dependent solely upon
the uncontrolled will of one of the
contracting parties.

An express agreement which

gives the lessee the sole option to
renew the lease is frequent and subject
to statutory restrictions, valid and

binding on the parties.This option, which

is provided in the same lease agreement, is
fundamentally part of the consideration in
the contract and is no different from any
other provision of the lease carrying an
undertaking on the part of the lessor to act
conditioned on the performance by the
lessee. It is a purely executory contract and
at most confers a right to obtain a renewal if
there is compliance with the conditions on
which the right is made to depend. The right
of renewal constitutes a part of the lessee's
interest in the land and forms a substantial
and integral part of the agreement.

The fact that such option is

binding only on the lessor and can be
exercised only by the lessee does not
render
it
void
for
lack
of
mutuality. After all, the lessor is free to
give or not to give the option to the
lessee. And while the lessee has a right to
elect whether to continue with the lease or
not, once he exercises his option to continue
and the lessor accepts, both parties are
thereafter bound by the new lease
agreement. Their rights and obligations
become mutually fixed, and the lessee is
entitled to retain possession of the property
for the duration of the new lease, and the
lessor may hold him liable for the rent
therefor. The lessee cannot thereafter
escape
liability
even
if
he
should
subsequently decide to abandon the
premises. Mutuality obtains in such a

contract and equality exists between the

lessor and the lessee since they remain with
the same faculties in respect to fulfillment.
[48]

Paragraph 17 of the Contract of Lease dated May

14, 1976 between petitioner and respondent solely
granted to respondent the option of renewing the lease
of the subject property, the only express requirement
was for respondent to notify petitioner of its decision to
renew the lease within 60 days prior to the expiration of
the original lease term. It has not been disputed that
said Contract of Lease was willingly and knowingly
entered into by petitioner and respondent. Thus,
petitioner freely consented to giving respondent the
exclusive right to choose whether or not to renew the
lease. As we stated in Allied Banking, the right of
renewal constitutes a part of the interest of respondent,
as lessee, in the subject property, and forms a
substantial and integral part of the lease agreement
with petitioner. Records show that respondent had duly
complied with the only condition for renewal under
Section 17 of the Contract of Lease by notifying
petitioner 60 days prior to the expiration of said
Contract that it chooses to renew the lease. We cannot
now allow petitioner to arbitrarily deny respondent of
said right after having previously agreed to the grant of
the same.

Equally unmeritorious is the assertion of petitioner

that paragraph 17 of the Contract of Lease dated May
14, 1976 merely provides a procedural basis for a
negotiation for renewal of the lease and the terms
thereof. The exercise by respondent of its option to

renew the lease need no longer be subject to

negotiations. We reiterate the point we made in Allied
Banking that:

[I]f we were to adopt the contrary theory

that the terms and conditions to be
embodied in the renewed contract were still
subject to mutual agreement by and
between the parties, then the option - which
is an integral part of the consideration for
the
contract
would
be
rendered
worthless. For then, the lessor could easily
defeat the lessee's right of renewal by
simply imposing unreasonable and onerous
conditions to prevent the parties from
reaching an agreement, as in the case at
bar. As in a statute, no word, clause,
sentence, provision or part of a contract
shall
be
considered
surplusage
or
superfluous, meaningless, void, insignificant
or nugatory, if that can be reasonably
avoided. To this end, a construction which
will render every word operative is to be
preferred over that which would make some
words idle and nugatory.[49]

In case the lessee chooses to renew the lease but

there are no specified terms and conditions for the new
contract of lease, the same terms and conditions as the
original contract of lease shall continue to govern, as
the following survey of cases in Allied Banking would
show:

In Ledesma v. Javellana this Court was

confronted with a similar problem. In that
case the lessee was given the sole option to
renew the lease, but the contract failed to
specify the terms and conditions that would
govern the new contract. When the lease
expired, the lessee demanded an extension
under the same terms and conditions. The
lessor expressed conformity to the renewal
of the contract but refused to accede to the
claim of the lessee that the renewal should
be under the same terms and conditions as
the original contract. In sustaining the
lessee, this Court made the following
pronouncement:

x x x [i]n the case of Hicks

v. Manila Hotel Company, a
similar issue was resolved by
this
Court. It
was
held
that 'such a clause relates to
the very contract in which it
is placed, and does not
permit the defendant upon
the renewal of the contract
in which the clause is found,
to
insist
upon
different
terms than those embraced
in
the
contract
to
be
renewed'; and
that 'a
stipulation to renew always
relates to the contract in
which it is found and the
rights granted thereunder,
unless it expressly provides
for variations in the terms of
the contract to be renewed.'

The same principle is upheld in

American Law regarding the renewal of
lease contracts. In 50 Am. Jur. 2d, Sec. 1159,
at
p.
45, we
find
the
following
citations: 'The rule is well-established
that a general covenant to renew or
extend
a lease
which
makes
no
provision as to the terms of a
renewal or extension
implies
a renewal or extension upon the same
terms as provided in the original
lease.'

In
the
lease
contract
under
consideration, there is no provision to
indicate that the renewal will be subject to
new terms and conditions that the parties
may yet agree upon. It is to renewal
provisions of lease contracts of the kind
presently considered that the principles
stated above squarely apply. We do not
agree with the contention of the appellants
that if it was intended by the parties to
renew
the contract under
the same
terms and
conditions
stipulated
in
the contract of lease, such should have
expressly so stated in thecontract itself. The
same argument could easily be interposed
by the appellee who could likewise contend
that if the intention was to renew the
contract of lease under such new terms and
conditions that the parties may agree upon,
the
contract
should
have
so
specified. Between the two assertions, there
is more logic in the latter.

The settled rule is that in case of

uncertainty as to the meaning of a
provision granting extension to a
contract of lease, the tenant is the one
favored and not the landlord. 'As a
general
rule,
in
construing provisions relating to renewals or
extensions, where there is any uncertainty,
the tenant is favored, and not the landlord,
because the latter, having the power of
stipulating in his own favor, has neglected
to
do so; and
also upon the
principle that every man's grant is to be
taken most strongly against himself (50 Am
Jur. 2d, Sec. 1162, p. 48; see also 51 C.J.S.
599).'[50] (Emphases supplied.)

Being consistent with the foregoing principles, we

sustain the interpretation of the RTC of paragraph 17 of
the Contract of Lease dated May 14, 1976 between
petitioner and respondent, to wit:

[Paragraph 17 of the Contract of Lease

dated May 14, 1976] admits several
meanings. In
simpler
terms,
the
phrase, i.e., if desirous of continuing
his lease, may be simply restated, i.e.,
if he wants to go on with his lease,
considering the word `CONTINUE in its
verb form ordinarily means to go on in
present state, or even restated in
another way if desirous of extending

his lease, because the word `continue

in its verb form also means extend
uniformly. Thus, if we are to adopt the
interpretation of [petitioner] that the
stipulation
merely
established
the
procedural basis for a negotiation for
renewal then the aforequoted phrase would
be
rendered
a
mere
surplusage,
meaningless and insignificant. But if we are
to prod deeper to the very context of the
entire stipulations setforth in the contract
and from what is obvious with respect to the
intentions of the contracting parties based
on their contemporaneous and subsequent
acts including but not limited to the
historical antecedents of the agreement
then an interpretation invariably different
from that of [petitioner] becomes inevitable.

Specifically, the extraneous source of

the lease contract in question could be
the original and renewed contract of lease
by
and
between Salem
Investment
Corporation and CAA the predecessor-ininterest
of
[petitioner]
executed
on February 10, 1967 (Exh. M). Under the
said lease contract between CAA and Salem,
the term is for a period of twenty-five (25)
years renewable for another 25 years at the
option of the lessee Salem (Exh. Y-1). Later,
with the approval of CAA, Salem transferred
its leasehold rights over a portion of the
land leased to Ding Velayo Export
Corporation on September
30,
1974 (Exh. N) and in turn Velayo Export
transferred its leasehold rights over a
portion of the leased land transferred to it

by Salem to Velayo Sports Complex,

Inc. [respondent] herein on April
29,
1976 (Exh. O). Thus, on May 14, 1976,
[respondent] and CAA, predecessor-ininterest of [petitioner], concluded the
lease agreement in question with a
term equivalent to the unexpired
portion of the lease between Velayo
Export and CAA.

As culled from the transfers effected

prior to the May 14, 1976 agreement of
[respondent] and [petitioner]s predecessorin-interest, the renewal of the contract was
clearly
at
the
option
of
the
lessee. Considering that there was no
evidence
positively
showing
that
[respondent] and CAA expressly intended
the removal of the option for the renewal of
the lease contract from the lessee, it is but
logical to conclude, although the stipulation
setforth in paragraph 17 appears to have
been worded or couched in somewhat
uncertain terms, that the parties agreed
that the option should remain with the
lessee. This must be so because based
on the context of their agreements and
bolstered by the testimony of Mr.
Mariano Nocom of Salem Investment
and particularly Rosila Mabanag, one
of the signatory witness to the contract
and a retired employee of CAAs Legal
Division the parties really intended a
renewal for the same term as it was
then the usual practice of CAA to have
the term of leases on lands where
substantial amount will be involved in

the construction of the improvements

to be undertaken by the lessee to give
a renewal. In fact, it clearly appears that
the right of renewal constitutes a part of the
lessees interest in the land considering the
multimillion investments it made relative to
the construction of the building and facilities
thereon and forms a substantial and integral
part
of
the
agreement.[51] (Emphases
supplied.)

In sum, the renewed contract of lease of the

subject property between petitioner and respondent
shall be based on the same terms and conditions as the
original contract of lease. The original contract of lease
does not pertain to the Contract of Lease dated May 14,
1976 between petitioner and respondent alone, but also
to the Contract of Lease dated February 15, 1967
between petitioner (then still called CAA) and Salem, as
well as the Contract of Lease dated November 26, 1974
between petitioner and Velayo Export all three contracts
being inextricably connected. Since the Contract of
Lease between petitioner and Salem was for a term of
25 years, then the renewed contract of lease of between
petitioner and respondent shall be for another term of
25 years. This construction of the renewal clause under
paragraph 17 of the Contract of Lease dated May 14,
1976 between petitioner and respondent is most
consistent with the intent of the parties at the time of
the execution of said Contract and most effectual in
implementing the same.

In addition to challenging the exclusive right of

respondent to renew the Contract of Lease over the

subject property, petitioner insists on its right to refuse

the renewal because of purported violations of the said
Contract by respondent, particularly: (1) subleasing of
the premises; (2) failure to ease the problems of parking
congestion at the Domestic Airport and to provide a
shopping center and sports facilities, such as an oval
track and a swimming pool; and (3) failure to pay
monthly lease rentals in the form of royalties equivalent
to 1% of the gross income of respondent or
in accordance with the rates fixed in the administrative
orders of petitioner.

We find no violations by the respondent of the

Contract of Lease dated May 14, 1976 as to justify the
revocation or refusal to renew of said Contract by
petitioner.

The RTC is once again correct in its construal that

paragraph 16 of the Contract of Lease, prohibiting the
subleasing of the premises, refers only to the subject
property. We stress that when the said Contract was
executed on May 14, 1976, the premises leased by
petitioner to respondent, and which respondent was not
allowed to sublease, is the subject property, i.e., an idle
piece of land with an area of 8,481 square meters. More
importantly, being the builder of the improvements on
the subject property, said improvements are owned by
respondent until their turn-over to petitioner at the end
of the 25-year lease in 1992. As respondent is not
leasing the improvements from petitioner, then it is not
subleasing the same to third parties.

While the Contract of Lease expressly obligated

respondent to build certain improvements, such as

parking, shopping mall, and sports facilities, the belated

insistence by petitioner on compliance with the same
appears to be a mere afterthought.

Article 1235 of the Civil Code states that [w]hen

the obligee accepts the performance, knowing its
incompleteness or irregularity, and without expressing
any protest or objection, the obligation is deemed fully
complied with.

As aptly observed by the RTC, paragraphs 9 and

10 of the Contract of Lease likewise expressly require
respondent to submit, for prior approval by petitioner,
all construction plans on the subject property; and to
complete
the
contemplated
improvements
thereon within a year. The Contract of Lease was
executed on May 14, 1976, and the one-year period
expired on May 14, 1977. Yet, petitioner did not register
any protest or objection to the alleged incompleteness
of or irregularity in the performance by respondent of its
obligation to build and develop improvements on the
subject property. In fact, upon the expiration of the
original 25-year lease period in February 1992,
petitioner was already ready and willing to accept and
appropriate as its own the improvements built on the
subject property in 1992.Petitioner only raised the issue
of the purported incompleteness/irregularity of the said
improvements when it was brought to court by
respondent for refusing to renew the lease.

Just as the RTC adjudged, no fault could be

attributed to respondent for deficient payment of lease
rentals. Lease rentals were based on either the rates
fixed by AO No. 4, series of 1970, or 1% of the monthly

gross income of respondent, whichever is higher. At the

very beginning of the lease, respondent had been
paying monthly lease rentals based on the rates fixed
by AO No. 4, series of 1970, which amounted
to P2,205.25 per month. When requested, respondent
submitted to petitioner its gross income statements, so
petitioner
could
very
well
compute
the
1%
royalty. However, petitioner continued to charge
respondent only P2,205.25 monthly lease rental, which
the latter faithfully paid.

Petitioner later demanded an increase in lease

rentals based on subsequent administrative issuances
raising the rates for the rental of its properties. But the
RTC found that the adverted administrative orders were
not published in full, thus, the same were legally invalid
within the context of Article 2 of the Civil Code which
provides that [l]aws shall take effect after fifteen days
following the completion of their publication in the
Official Gazette, unless it is otherwise provided. x x
x InTaada v. Tuvera,[52] we enunciated that publication is
indispensable in order that all statutes, including
administrative rules that are intended to enforce or
implement existing laws, attain binding force and effect,
to wit:

We hold therefore that all statutes,

including those of local application and
private laws, shall be published as a
condition for their effectivity, which shall
begin fifteen days after publication unless a
different effectivity date is fixed by the
legislature.

Covered by this rule are presidential

decrees and executive orders promulgated by
the President in the exercise of legislative
powers whenever the same are validly
delegated by the legislature or, at present,
directly
conferred
by
the
Constitution. Administrative
rules
and
regulations must also be published if their
purpose is to enforce or implement existing
law pursuant also to a valid delegation.[53]

There is no basis for the argument of petitioner

that the validity of its administrative orders cannot be
collaterally attacked. To the contrary, we have
previously declared that a party may raise the
unconstitutionality or invalidity of an administrative
regulation on every occasion that said regulation is
being enforced.[54] Since it is petitioner which first
invoked its administrative orders to justify the increase
in lease rentals of respondent, then respondent may
raise before the court the invalidity of said
administrative orders on the ground of non-publication
thereof.

Finally, petitioner cannot oppose the renewal of

the lease because of estoppel. Our following disquisition
in Kalalo v. Luz[55] is relevant herein:

Under Article 1431 of the Civil Code, in

order that estoppel may apply the person,
to whom representations have been made
and who claims the estoppel in his

favor must have relied or acted on such

representations. Said article provides:

Art.
1431.
Through
estoppel
an
admission
or
representation
is
rendered
conclusive upon the person
making it, and cannot be denied
or disproved as against the
person relying thereon.

An essential element of estoppel is

that the person invoking it has been
influenced and has relied on the
representations or conduct of the
person sought to be estopped, and this
element is wanting in the instant case.
In Cristobal vs. Gomez, this Court held that
no estoppel based on a document can be
invoked by one who has not been misled by
the false statements contained therein. And
in Republic of the Philippines vs. Garcia, et
al., this Court ruled that there is no estoppel
when the statement or action invoked as its
basis did not mislead the adverse
party. Estoppel has been characterized as
harsh or odious, and not favored in
law. When misapplied, estoppel becomes a
most effective weapon to accomplish an
injustice, inasmuch as it shuts a man's
mouth from speaking the truth and debars
the truth in a particular case. Estoppel
cannot be sustained by mere argument or
doubtful inference; it must be clearly
proved in all its essential elements by

clear,
convincing
and
satisfactory
evidence. No party should be precluded
from making out his case according to its
truth unless by force of some positive
principle of law, and, consequently, estoppel
in pais must be applied strictly and should
not be enforced unless substantiated in
every particular.

The essential elements of estoppel in

pais may be considered in relation to the
party sought to be estopped, and in relation
to the party invoking the estoppel in his
favor. As related to the party to be
estopped, the essential elements are: (1)
conduct amounting to false representation
or concealment of material facts; or at least
calculated to convey the impression that the
facts are otherwise than, and inconsistent
with, those which the party subsequently
attempts to assert; (2) intent, or at least
expectation that his conduct shall be acted
upon by, or at least influence, the other
party; and (3) knowledge, actual or
constructive, of the real facts. As related
to the party claiming the estoppel, the
essential elements are (1) lack of
knowledge and of the means of
knowledge of the truth as the facts in
questions; (2) reliance, in good faith,
upon the conduct or statements of the
party to be estopped; (3) action or
inaction
based
thereon
of
such
character as to change the position or
status of the party claiming the
estoppel, to his injury, detriment or
prejudice.[56] (Emphases ours.)

Indeed, Velayos Letters dated March 3 and 10,

1992 to petitioner may have already expressed
acquiescence to the non-renewal of the lease and turnover of the improvements on the subject property to
petitioner. But not long thereafter, Alomesen, the new
President of respondent, already wrote another Letter
dated March 25, 1992, which revoked Velayos earlier
Letters for having been sent without authority of the
Board of Directors of respondent, insisted on the
renewal of the lease, and tendered payment of past due
lease rentals. Respondent, through Alomesen, timely
acted to correct Velayos mistakes. In the 15-day interval
between Velayos Letter dated March 10, 1992 and
Alomesens Letter dated March 25, 1992, there is no
showing that petitioner, relying in good faith on Velayos
Letters, acted or did not act as to have caused it injury,
detriment, or prejudice. There is an utter lack of clear,
convincing, and satisfactory evidence on the part of
petitioner, as the party claiming estoppel, of the second
and third elements for the application of said principle
against respondent.

WHEREFORE,
the
instant
Petition
is
hereby DENIED for
lack
of
merit. The
Decision
dated January 8, 2004 of the Court Appeals in CA-G.R.
CV No. 68787, which affirmed the Decision
dated October 29, 1999 of Branch 111 of the RTC of
Pasay City in Civil Case No. 8847, is hereby AFFIRMED.

G.R. No. 206806

June 25, 2014

ARCO PULP AND PAPER CO., INC. and CANDIDA A.

SANTOS, Petitioners,
vs.
DAN T. LIM, doing business under the name and
style of QUALITY PAPERS & PLASTIC PRODUCTS
ENTERPRISES, Respondent.
DECISION
LEONEN, J.:
Novation must be stated in clear and unequivocal terms
to extinguish an obligation. It cannot be presumed and
may be implied only if the old and new contracts are
incompatible on every point.
Before us is a petition for review on certiorari1 assailing
the Court of Appeals decision2 in CA-G.R. CV No. 95709,
which stemmed from a complaint3 filed in the Regional
Trial Court of Valenzuela City, Branch 171, for collection
of sum of money.
The facts are as follows:

Dan T. Lim works in the business of supplying scrap

papers, cartons, and other raw materials, under the
name Quality Paper and Plastic Products, Enterprises, to
factories engaged in the paper mill business.4 From
February 2007 to March 2007, he delivered scrap papers
worth 7,220,968.31 to Arco Pulp and Paper Company,
Inc. (Arco Pulp and Paper) through its Chief Executive
Officer and President, Candida A. Santos.5 The parties
allegedly agreed that Arco Pulp and Paper would either
pay Dan T. Lim the value of the raw materials or deliver
to him their finished products of equivalent value.6
Dan T. Lim alleged that when he delivered the raw
materials, Arco Pulp and Paper issued a post-dated
check dated April 18, 20077 in the amount of
1,487,766.68 as partial payment, with the assurance
that the check would not bounce.8 When he deposited
the check on April 18, 2007, it was dishonored for being
drawn against a closed account.9
On the same day, Arco Pulp and Paper and a certain Eric
Sy executed a memorandum of agreement10 where Arco
Pulp and Paper bound themselves to deliver their
finished products to Megapack Container Corporation,
owned by Eric Sy, for his account. According to the
memorandum, the raw materials would be supplied by
Dan T. Lim, through his company, Quality Paper and
Plastic Products. The memorandum of agreement reads
as follows:
Per meeting held at ARCO, April 18, 2007, it has been
mutually agreed between Mrs. Candida A. Santos and
Mr. Eric Sy that ARCO will deliver 600 tons Test Liner
150/175 GSM, full width 76 inches at the price of P18.50

per kg. to Megapack Container for Mr. Eric Sys account.

Schedule of deliveries are as follows:
....
It has been agreed further that the Local OCC materials
to be used for the production of the above Test Liners
will be supplied by Quality Paper & Plastic Products Ent.,
total of 600 Metric Tons at P6.50 per kg. (price subject
to change per advance notice). Quantity of Local OCC
delivery will be based on the quantity of Test Liner
delivered to Megapack Container Corp. based on the
above production schedule.11
On May 5, 2007, Dan T.Lim sent a letter12 to Arco Pulp
and Paper demanding payment of the amount of
7,220,968.31, but no payment was made to him.13
Dan T. Lim filed a complaint14 for collection of sum of
money with prayer for attachment with the Regional
Trial Court, Branch 171, Valenzuela City, on May 28,
2007. Arco Pulp and Paper filed its answer15 but failed to
have its representatives attend the pre-trial hearing.
Hence, the trial court allowed Dan T. Lim to present his
evidence ex parte.16
On September 19, 2008, the trial court rendered a
judgment in favor of Arco Pulp and Paper and dismissed
the complaint, holding that when Arco Pulp and Paper
and Eric Sy entered into the memorandum of
agreement, novation took place, which extinguished
Arco Pulp and Papers obligation to Dan T. Lim.17

Dan T. Lim appealed18 the judgment with the Court of

Appeals. According to him, novation did not take place
since the memorandum of agreement between Arco
Pulp and Paper and Eric Sy was an exclusive and private
agreement between them. He argued that if his name
was mentioned in the contract, it was only for supplying
the parties their required scrap papers, where his
conformity through a separate contract was
indispensable.19
On January 11, 2013, the Court of Appeals20 rendered a
decision21 reversing and setting aside the judgment
dated September 19, 2008 and ordering Arco Pulp and
Paper to jointly and severally pay Dan T. Lim the amount
ofP7,220,968.31 with interest at 12% per annum from
the time of demand; P50,000.00 moral
damages; P50,000.00 exemplary damages;
and P50,000.00 attorneys fees.22
The appellate court ruled that the facts and
circumstances in this case clearly showed the existence
of an alternative obligation.23 It also ruled that Dan T.
Lim was entitled to damages and attorneys fees due to
the bad faith exhibited by Arco Pulp and Paper in not
honoring its undertaking.24
Its motion for reconsideration25 having been
denied,26 Arco Pulp and Paper and its President and
Chief Executive Officer, Candida A. Santos, bring this
petition for review on certiorari.
On one hand, petitioners argue that the execution of the
memorandum of agreement constituted a novation of
the original obligation since Eric Sy became the new

debtor of respondent. They also argue that there is no

legal basis to hold petitioner Candida A. Santos
personally liable for the transaction that petitioner
corporation entered into with respondent. The Court of
Appeals, they allege, also erred in awarding moral and
exemplary damages and attorneys fees to respondent
who did not show proof that he was entitled to
damages.27
Respondent, on the other hand, argues that the Court of
Appeals was correct in ruling that there was no proper
novation in this case. He argues that the Court of
Appeals was correct in ordering the payment of
7,220,968.31 with damages since the debt of petitioners
remains unpaid.28 He also argues that the Court of
Appeals was correct in holding petitioners solidarily
liable since petitioner Candida A. Santos was "the prime
mover for such outstanding corporate liability."29 In their
reply, petitioners reiterate that novation took place
since there was nothing in the memorandum of
agreement showing that the obligation was alternative.
They also argue that when respondent allowed them to
deliver the finished products to Eric Sy, the original
obligation was novated.30
A rejoinder was submitted by respondent, but it was
noted without action in view of A.M. No. 99-2-04-SC
dated November 21, 2000.31
The issues to be resolved by this court are as follows:
1. Whether the obligation between the parties was
extinguished by novation

2. Whether Candida A. Santos was solidarily liable

with Arco Pulp and Paper Co., Inc.
3. Whether moral damages, exemplary damages,
and attorneys fees can be awarded
The petition is denied.
The obligation between the
parties was an alternative
obligation
The rule on alternative obligations is governed by Article
1199 of the Civil Code, which states:
Article 1199. A person alternatively bound by different
prestations shall completely perform one of them.
The creditor cannot be compelled to receive part of one
and part of the other undertaking.
"In an alternative obligation, there is more than one
object, and the fulfillment of one is sufficient,
determined by the choice of the debtor who generally
has the right of election."32 The right of election is
extinguished when the party who may exercise that
option categorically and unequivocally makes his or her
choice known.33
The choice of the debtor must also be communicated to
the creditor who must receive notice of it since: The
object of this notice is to give the creditor . . .
opportunity to express his consent, or to impugn the
election made by the debtor, and only after said notice

shall the election take legal effect when consented by

the creditor, or if impugned by the latter, when declared
proper by a competent court.34
According to the factual findings of the trial court and
the appellate court, the original contract between the
parties was for respondent to deliver scrap papers
worth P7,220,968.31 to petitioner Arco Pulp and Paper.
The payment for this delivery became petitioner Arco
Pulp and Papers obligation. By agreement, petitioner
Arco Pulp and Paper, as the debtor, had the option to
either (1) pay the price or(2) deliver the finished
products of equivalent value to respondent.35
The appellate court, therefore, correctly identified the
obligation between the parties as an alternative
obligation, whereby petitioner Arco Pulp and Paper, after
receiving the raw materials from respondent, would
either pay him the price of the raw materials or, in the
alternative, deliver to him the finished products of
equivalent value.
When petitioner Arco Pulp and Paper tendered a check
to respondent in partial payment for the scrap papers,
they exercised their option to pay the price.
Respondents receipt of the check and his subsequent
act of depositing it constituted his notice of petitioner
Arco Pulp and Papers option to pay.
This choice was also shown by the terms of the
memorandum of agreement, which was executed on the
same day. The memorandum declared in clear terms
that the delivery of petitioner Arco Pulp and Papers
finished products would be to a third person, thereby

extinguishing the option to deliver the finished products

of equivalent value to respondent.
The memorandum of
agreement did not constitute
a novation of the original
contract
The trial court erroneously ruled that the execution of
the memorandum of agreement constituted a novation
of the contract between the parties. When petitioner
Arco Pulp and Paper opted instead to deliver the
finished products to a third person, it did not novate the
original obligation between the parties.
The rules on novation are outlined in the Civil Code,
thus:
Article 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the
creditor. (1203)
Article 1292. In order that an obligation may be
extinguished by another which substitute the same, it is
imperative that it be so declared in unequivocal terms,
or that the old and the new obligations be on every
point incompatible with each other. (1204)

Article 1293. Novation which consists in substituting a

new debtor in the place of the original one, may be
made even without the knowledge or against the will of
the latter, but not without the consent of the creditor.
Payment by the new debtor gives him the rights
mentioned in Articles 1236 and 1237. (1205a)
Novation extinguishes an obligation between two
parties when there is a substitution of objects or debtors
or when there is subrogation of the creditor. It occurs
only when the new contract declares so "in unequivocal
terms" or that "the old and the new obligations be on
every point incompatible with each other."36
Novation was extensively discussed by this court in
Garcia v. Llamas:37
Novation is a mode of extinguishing an obligation by
changing its objects or principal obligations, by
substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor.
Article 1293 of the Civil Code defines novation as
follows:
"Art. 1293. Novation which consists in substituting a
new debtor in the place of the original one, may be
made even without the knowledge or against the will of
the latter, but not without the consent of the creditor.
Payment by the new debtor gives him rights mentioned
in articles 1236 and 1237."

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. Both
modes of substitution by the debtor require the consent
of the creditor.
Novation may also be extinctive or modificatory. It is
extinctive when an old obligation is terminated by the
creation of a new one that takes the place of the former.
It is merely modificatory when the old obligation
subsists to the extent that it remains compatible with
the amendatory agreement. Whether extinctive or
modificatory, novation is made either by changing the
object or the principal conditions, referred to as
objective or real novation; or by substituting the person
of the debtor or subrogating a third person to the rights
of the creditor, an act known as subjective or personal
novation. For novation to take place, the following
requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new
contract.
3) The old contract must be extinguished.

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

4) There must be a valid new contract.

Novation may also be express or implied. It is express

when the new obligation declares in unequivocal terms
that the old obligation is extinguished. It is implied when
the new obligation is incompatible with the old one on
every point. The test of incompatibility is whether the
two obligations can stand together, each one with its
own independent existence.38 (Emphasis supplied)

the parties to novate the old agreement.40 (Emphasis

supplied)

Because novation requires that it be clear and

unequivocal, it is never presumed, thus:

Per meeting held at ARCO, April 18, 2007, it has been

mutually agreed between Mrs. Candida A. Santos and
Mr. Eric Sy. . . .41

In the civil law setting, novatio is literally construed as

to make new. So it is deeply rooted in the Roman Law
jurisprudence, the principle novatio non praesumitur
that novation is never presumed.At bottom, for
novation tobe a jural reality, its animus must be ever
present, debitum pro debito basically extinguishing
the old obligation for the new one.39 (Emphasis supplied)
There is nothing in the memorandum of agreement that
states that with its execution, the obligation of
petitioner Arco Pulp and Paper to respondent would be
extinguished. It also does not state that Eric Sy
somehow substituted petitioner Arco Pulp and Paper as
respondents debtor. It merely shows that petitioner
Arco Pulp and Paper opted to deliver the finished
products to a third person instead.
The consent of the creditor must also be secured for the
novation to be valid:
Novation must be expressly consented to. Moreover, the
conflicting intention and acts of the parties underscore
the absence of any express disclosure or circumstances
with which to deduce a clear and unequivocal intent by

In this case, respondent was not privy to the

memorandum of agreement, thus, his conformity to the
contract need not be secured. This is clear from the first
line of the memorandum, which states:

If the memorandum of agreement was intended to

novate the original agreement between the parties,
respondent must have first agreed to the substitution of
Eric Sy as his new debtor. The memorandum of
agreement must also state in clear and unequivocal
terms that it has replaced the original obligation of
petitioner Arco Pulp and Paper to respondent. Neither of
these circumstances is present in this case.
Petitioner Arco Pulp and Papers act of tendering partial
payment to respondent also conflicts with their alleged
intent to pass on their obligation to Eric Sy. When
respondent sent his letter of demand to petitioner Arco
Pulp and Paper, and not to Eric Sy, it showed that the
former neither acknowledged nor consented to the
latter as his new debtor. These acts, when taken
together, clearly show that novation did not take place.
Since there was no novation, petitioner Arco Pulp and
Papers obligation to respondent remains valid and
existing. Petitioner Arco Pulp and Paper, therefore, must
still pay respondent the full amount of P7,220,968.31.

Petitioners are liable for

damages
Under Article 2220 of the Civil Code, moral damages
may be awarded in case of breach of contract where the
breach is due to fraud or bad faith:
Art. 2220. Willfull injury to property may be a legal
ground for awarding moral damages if the court should
find that, under the circumstances, such damages are
justly due. The same rule applies to breaches of
contract where the defendant acted fraudulently or in
bad faith. (Emphasis supplied)
Moral damages are not awarded as a matter of right but
only after the party claiming it proved that the breach
was due to fraud or bad faith. As this court stated:
Moral damages are not recoverable simply because a
contract has been breached. They are recoverable only
if the party from whom it is claimed acted fraudulently
or in bad faith or in wanton disregard of his contractual
obligations. The breach must be wanton, reckless,
malicious or in bad faith, and oppressive or abusive.42

is the proximate cause of the injury sustained by the

claimant; and (4) fourth, the award of damages is
predicated on any of the cases stated in Article 2219 of
the Civil Code.43
Here, the injury suffered by respondent is the loss
of P7,220,968.31 from his business. This has remained
unpaid since 2007. This injury undoubtedly was caused
by petitioner Arco Pulp and Papers act of refusing to
pay its obligations.
When the obligation became due and demandable,
petitioner Arco Pulp and Paper not only issued an
unfunded check but also entered into a contract with a
third person in an effort to evade its liability. This proves
the third requirement.
As to the fourth requisite, Article 2219 of the Civil Code
provides that moral damages may be awarded in the
following instances:
Article 2219. Moral damages may be recovered in the
following and analogous cases:
(1) A criminal offense resulting in physical injuries;

Further, the following requisites must be proven for the

recovery of moral damages:
An award of moral damages would require certain
conditions to be met, to wit: (1)first, there must be an
injury, whether physical, mental or psychological,
clearly sustained by the claimant; (2) second, there
must be culpable act or omission factually established;
(3) third, the wrongful act or omission of the defendant

(2) Quasi-delicts causing physical injuries;

(3) Seduction, abduction, rape, or other lascivious
acts;
(4) Adultery or concubinage;
(5) Illegal or arbitrary detention or arrest;

(6) Illegal search;

(7) Libel, slander or any other form of defamation;
(8) Malicious prosecution;
(9) Acts mentioned in Article 309;
(10) Acts and actions referred to in Articles 21, 26,
27, 28, 29, 30, 32, 34, and 35.
Breaches of contract done in bad faith, however, are not
specified within this enumeration. When a party
breaches a contract, he or she goes against Article 19 of
the Civil Code, which states: Article 19. Every person
must, in the exercise of his rights and in the
performance of his duties, act with justice, give
everyone his due, and observe honesty and good faith.
Persons who have the right to enter into contractual
relations must exercise that right with honesty and good
faith. Failure to do so results in an abuse of that right,
which may become the basis of an action for damages.
Article 19, however, cannot be its sole basis:
Article 19 is the general rule which governs the conduct
of human relations. By itself, it is not the basis of an
actionable tort. Article 19 describes the degree of care
required so that an actionable tort may arise when it is
alleged together with Article 20 or Article 21.44
Article 20 and 21 of the Civil Code are as follows:

Article 20. Every person who, contrary to law, wilfully or

negligently causes damage to another, shall indemnify
the latter for the same.
Article 21.Any person who wilfully causes loss or injury
to another in a manner that is contrary to morals, good
customs or public policy shall compensate the latter for
the damage.
To be actionable, Article 20 requires a violation of law,
while Article 21 only concerns with lawful acts that are
contrary to morals, good customs, and public policy:
Article 20 concerns violations of existing law as basis for
an injury. It allows recovery should the act have been
willful or negligent. Willful may refer to the intention to
do the act and the desire to achieve the outcome which
is considered by the plaintiff in tort action as injurious.
Negligence may refer to a situation where the act was
consciously done but without intending the result which
the plaintiff considers as injurious.
Article 21, on the other hand, concerns injuries that may
be caused by acts which are not necessarily proscribed
by law. This article requires that the act be willful, that
is, that there was an intention to do the act and a desire
to achieve the outcome. In cases under Article 21, the
legal issues revolve around whether such outcome
should be considered a legal injury on the part of the
plaintiff or whether the commission of the act was done
in violation of the standards of care required in Article
19.45

When parties act in bad faith and do not faithfully

comply with their obligations under contract, they run
the risk of violating Article 1159 of the Civil Code:
Article 1159. Obligations arising from contracts have the
force of law between the contracting parties and should
be complied with in good faith.
Article 2219, therefore, is not an exhaustive list of the
instances where moral damages may be recovered
since it only specifies, among others, Article 21. When a
party reneges on his or her obligations arising from
contracts in bad faith, the act is not only contrary to
morals, good customs, and public policy; it is also a
violation of Article 1159. Breaches of contract become
the basis of moral damages, not only under Article
2220, but also under Articles 19 and 20 in relation to
Article 1159.
Moral damages, however, are not recoverable on the
mere breach of the contract. Article 2220 requires that
the breach be done fraudulently or in bad faith. In
Adriano v. Lasala:46
To recover moral damages in an action for breach of
contract, the breach must be palpably wanton, reckless
and malicious, in bad faith, oppressive, or abusive.
Hence, the person claiming bad faith must prove its
existence by clear and convincing evidence for the law
always presumes good faith.
Bad faith does not simply connote bad judgment or
negligence. It imports a dishonest purpose or some
moral obliquity and conscious doing of a wrong, a

breach of known duty through some motive or interest

or ill will that partakes of the nature of fraud. It is,
therefore, a question of intention, which can be inferred
from ones conduct and/or contemporaneous
statements.47 (Emphasis supplied)
Since a finding of bad faith is generally premised on the
intent of the doer, it requires an examination of the
circumstances in each case.
When petitioner Arco Pulp and Paper issued a check in
partial payment of its obligation to respondent, it was
presumably with the knowledge that it was being drawn
against a closed account. Worse, it attempted to shift
their obligations to a third person without the consent of
respondent.
Petitioner Arco Pulp and Papers actions clearly show "a
dishonest purpose or some moral obliquity and
conscious doing of a wrong, a breach of known duty
through some motive or interest or ill will that partakes
of the nature of fraud."48 Moral damages may, therefore,
be awarded.
Exemplary damages may also be awarded. Under the
Civil Code, exemplary damages are due in the following
circumstances:
Article 2232. In contracts and quasi-contracts, the court
may award exemplary damages if the defendant acted
in a wanton, fraudulent, reckless, oppressive, or
malevolent manner.

Article 2233. Exemplary damages cannot be recovered

as a matter of right; the court will decide whether or not
they should be adjudicated.
Article 2234. While the amount of the exemplary
damages need not be proven, the plaintiff must show
that he is entitled to moral, temperate or compensatory
damages before the court may consider the question of
whether or not exemplary damages should be awarded.
In Tankeh v. Development Bank of the Philippines,
stated that:

49

we

The purpose of exemplary damages is to serve as a

deterrent to future and subsequent parties from the
commission of a similar offense. The case of People v.
Ranteciting People v. Dalisay held that:
Also known as punitive or vindictive damages,
exemplary or corrective damages are intended to serve
as a deterrent to serious wrong doings, and as a
vindication of undue sufferings and wanton invasion of
the rights of an injured or a punishment for those guilty
of outrageous conduct. These terms are generally, but
not always, used interchangeably. In common law, there
is preference in the use of exemplary damages when
the award is to account for injury to feelings and for the
sense of indignity and humiliation suffered by a person
as a result of an injury that has been maliciously and
wantonly inflicted, the theory being that there should be
compensation for the hurt caused by the highly
reprehensible conduct of the defendantassociated
with such circumstances as willfulness, wantonness,
malice, gross negligence or recklessness, oppression,

insult or fraud or gross fraudthat intensifies the injury.

The terms punitive or vindictive damages are often used
to refer to those species of damages that may be
awarded against a person to punish him for his
outrageous conduct. In either case, these damages are
intended in good measure to deter the wrongdoer and
others like him from similar conduct in the
future.50 (Emphasis supplied; citations omitted)
The requisites for the award of exemplary damages are
as follows:
(1) they may be imposed by way of example in
addition to compensatory damages, and only after
the claimant's right to them has been established;
(2) that they cannot be recovered as a matter of
right, their determination depending upon the
amount of compensatory damages that may be
awarded to the claimant; and
(3) the act must be accompanied by bad faith or
done in a wanton, fraudulent, oppressive or
malevolent manner.51
Business owners must always be forthright in their
dealings. They cannot be allowed to renege on their
obligations, considering that these obligations were
freely entered into by them. Exemplary damages may
also be awarded in this case to serve as a deterrent to
those who use fraudulent means to evade their
liabilities.

Since the award of exemplary damages is proper,

attorneys fees and cost of the suit may also be
recovered.
Article 2208 of the Civil Code states:
Article 2208. In the absence of stipulation, attorney's
fees and expenses of litigation, other than judicial costs,
cannot be recovered, except:
(1) When exemplary damages are awarded[.]
Petitioner Candida A. Santos
is solidarily liable with
petitioner corporation
Petitioners argue that the finding of solidary liability was
erroneous since no evidence was adduced to prove that
the transaction was also a personal undertaking of
petitioner Santos. We disagree.
In Heirs of Fe Tan Uy v. International Exchange
Bank,52 we stated that:
Basic is the rule in corporation law that a corporation is
a juridical entity which is vested with a legal personality
separate and distinct from those acting for and in its
behalf and, in general, from the people comprising it.
Following this principle, obligations incurred by the
corporation, acting through its directors, officers and
employees, are its sole liabilities. A director, officer or
employee of a corporation is generally not held
personally liable for obligations incurred by the
corporation. Nevertheless, this legal fiction may be
disregarded if it is used as a means to perpetrate fraud

or an illegal act, or as a vehicle for the evasion of an

existing obligation, the circumvention of statutes, or to
confuse legitimate issues.
....
Before a director or officer of a corporation can be held
personally liable for corporate obligations, however, the
following requisites must concur: (1) the complainant
must allege in the complaint that the director or officer
assented to patently unlawful acts of the corporation, or
that the officer was guilty of gross negligence or bad
faith; and (2) the complainant must clearly and
convincingly prove such unlawful acts, negligence or
bad faith.
While it is true that the determination of the existence
of any of the circumstances that would warrant the
piercing of the veil of corporate fiction is a question of
fact which cannot be the subject of a petition for review
on certiorari under Rule 45, this Court can take
cognizance of factual issues if the findings of the lower
court are not supported by the evidence on record or
are based on a misapprehension of facts.53 (Emphasis
supplied)
As a general rule, directors, officers, or employees of a
corporation cannot be held personally liable for
obligations incurred by the corporation. However, this
veil of corporate fiction may be pierced if complainant is
able to prove, as in this case, that (1) the officer is guilty
of negligence or bad faith, and (2) such negligence or
bad faith was clearly and convincingly proven.

Here, petitioner Santos entered into a contract with

respondent in her capacity as the President and Chief
Executive Officer of Arco Pulp and Paper. She also issued
the check in partial payment of petitioner corporations
obligations to respondent on behalf of petitioner Arco
Pulp and Paper. This is clear on the face of the check
bearing the account name, "Arco Pulp & Paper, Co.,
Inc."54 Any obligation arising from these acts would not,
ordinarily, be petitioner Santos personal undertaking
for which she would be solidarily liable with petitioner
Arco Pulp and Paper.
We find, however, that the corporate veil must be
pierced. In Livesey v. Binswanger Philippines:55
Piercing the veil of corporate fiction is an equitable
doctrine developed to address situations where the
separate corporate personality of a corporation is
abused or used for wrongful purposes. Under the
doctrine, the corporate existence may be disregarded
where the entity is formed or used for non-legitimate
purposes, such as to evade a just and due obligation, or
to justify a wrong, to shield or perpetrate fraud or to
carry out similar or inequitable considerations, other
unjustifiable aims or intentions, in which case, the
fiction will be disregarded and the individuals
composing it and the two corporations will be treated as
identical.56 (Emphasis supplied)
According to the Court of Appeals, petitioner Santos was
solidarily liable with petitioner Arco Pulp and Paper,
stating that:

In the present case, We find bad faith on the part of the

[petitioners] when they unjustifiably refused to honor
their undertaking in favor of the [respondent]. After the
check in the amount of 1,487,766.68 issued by
[petitioner] Santos was dishonored for being drawn
against a closed account, [petitioner] corporation
denied any privity with [respondent]. These acts
prompted the [respondent] to avail of the remedies
provided by law in order to protect his rights.57
We agree with the Court of Appeals. Petitioner Santos
cannot be allowed to hide behind the corporate
veil.1wphi1 When petitioner Arco Pulp and Papers
obligation to respondent became due and demandable,
she not only issued an unfunded check but also
contracted with a third party in an effort to shift
petitioner Arco Pulp and Papers liability. She
unjustifiably refused to honor petitioner corporations
obligations to respondent. These acts clearly amount to
bad faith. In this instance, the corporate veil may be
pierced, and petitioner Santos may be held solidarily
liable with petitioner Arco Pulp and Paper.
The rate of interest due on
the obligation must be
reduced in view of Nacar v.
Gallery Frames58
In view, however, of the promulgation by this court of
the decision dated August 13, 2013 in Nacar v. Gallery
Frames,59 the rate of interest due on the obligation must
be modified from 12% per annum to 6% per annum
from the time of demand.

Nacar effectively amended the guidelines stated in

Eastern Shipping v. Court of Appeals,60 and we have laid
down the following guidelines with regard to the rate of
legal interest:
To recapitulate and for future guidance, the guidelines
laid down in the case of Eastern Shipping Linesare
accordingly modified to embody BSP-MB Circular No.
799, as follows:
I. When an obligation, regardless of its source, i.e., law,
contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for
damages. The provisions under Title XVIII on "Damages"
of the Civil Code govern in determining the measure of
recoverable damages.
II. With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate
of interest, as well as the accrual thereof, is imposed, as
follows:
1. When the obligation is breached, and it consists
in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be
that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn
legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate
of interest shall be 6% per annum to be computed
from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions of
Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or

forbearance of money, is breached, an interest on
the amount of damages awarded may be imposed
at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged
on unliquidated claims or damages, except when
or until the demand can be established with
reasonable certainty. Accordingly, where the
demand is established with reasonable certainty,
the interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art.
1169, Civil Code), but when such certainty cannot
be so reasonably established at the time the
demand is made, the interest shall begin to run
only from the date the judgment of the court is
made (at which time the quantification of
damages may be deemed to have been
reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be
on the amount finally adjudged.
3. When the judgment of the court awarding a
sum of money becomes final and executory, the
rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 6%
per annum from such finality until its satisfaction,
this interim period being deemed to be by then an
equivalent to a forbearance of credit.
And, in addition to the above, judgments that have
become final and executory prior to July 1, 2013, shall
not be disturbed and shall continue to be implemented

applying the rate of interest fixed therein.61 (Emphasis

supplied; citations omitted.)
According to these guidelines, the interest due on the
obligation of P7,220,968.31 should now be at 6% per
annum, computed from May 5, 2007, when respondent
sent his letter of demand to petitioners. This interest
shall continue to be due from the finality of this decision
until its full satisfaction.

CARPIO MORALES, and

GARCIA, JJ.
- versus -

Promulgated:

WHEREFORE, the petition is DENIED in part. The

decision in CA-G.R. CV No. 95709 is AFFIRMED.
Petitioners Arco Pulp & Paper Co., Inc. and Candida A.
Santos are hereby ordered solidarily to pay respondent
Dan T. Lim the amount of P7,220,968.31 with interest of
6% per annum at the time of demand until finality of
judgment and its full satisfaction, with moral damages
in the amount of P50,000.00, exemplary damages in the
amount ofP50,000.00, and attorney's fees in the amount
of P50,000.00.

MAVEST (U.S.A.) INC., and

MAVEST
Manila
Liaison
Office,

G.R. No. 127454

Petitioners,

Present:

SAMPAGUITA
CORPORATION,

GARMENT

September 21, 2005

Respondent.
x---------------------------------------------------------------------------------x

DECISION

GARCIA, J.:

Assailed and sought to be set aside in this petition for

review on certiorari under Rule 45 of the Rules of Court
is the Decision[1] dated 10 December 1996 of the
PANGANIBAN, J., Chairman
Court of Appeals in CA-G.R. No. 48232-CV, affirming,
SANDOVAL-GUTIERREZ,with modifications, an earlier decision of the Regional
Trial Court at Makati City in Civil Case No. 90-1131, an
CORONA,
action for a sum of money thereat commenced by the

herein respondent Sampaguita Garment Corporation

against the herein petitioners MAVEST (U.S.A), Inc. and
MAVEST Manila Liaison Office and two (2) others.

Petitioner MAVEST (U.S.A.), Inc. (MAVEST, U.S.A., for

short) is a corporation duly organized and existing under
the laws of the United States of America but registered
with the Philippine Board of Investments, while copetitioner MAVEST Manila Liaison Office is MAVEST
U.S.A.s representative in the Philippines. On the other
hand,
respondent Sampaguita
Garment
Corporation is a domestic corporation engaged in the
business of manufacturing and exporting garments.

2.

Each
transaction
was
embodied in a purchase order
[PO] specifying the style and
description, as follows;

a. Style 33303 (SZ-217), 100%

Cotton Pigment Twill
Shorts, [PO] dated August 9,
1989 . . . . ;

b.

Style 45712 (S/44759),

Nylon Swim Trunks, [PO]
dated July 24, 1989 . . . . ;

As found by the appellate court in the decision under

review, the factual antecedents are:

1.

Sometime in July and August

1989, [petitioners Mavest U.S.A.
and Mavest Manila Liaison Office]
entered
into
a
series
of
transactions with [respondent]
Sampaguita
Garment
Corporation, whereby the former
would furnish from abroad raw
materials to be manufactured by
the latter into finished products,
for shipment to [petitioners]
foreign
buyers, Sears
Roebuck and JC Penney.

c. Style 45714 (S/SZ-218), Nylon

Swim Trunks, [PO] dated July
24, 1989 . . . . ;

d. Style 45715 (S/SZ219), Nylon

Swim Trunks, [PO] dated July
24, 1989 . . . . ;

e.

Style 7511, Solid Woven

Hooded Jacket, (PO] dated
July 12, 1989 . . . . ;

f. Style Nos. DJ-1 BR and DJ-1 XT,

Cotton Woven Pants [PO]
dated August 10, 1989 . . . . ;

Makati City against the herein

petitioners and two (2) others,
namely, MAVEST International
Co., LTD and Patrick Wang, former
General Manager of MLO].

as well as the quantity, mode

and date of delivery.

3.

Styles (33303, 45712, 45714,

45715) were upon the orders
of Sears Roebuck ,while Styles
(7511, DJ-1 BR and DJ-1 XT) were
upon the orders of JC Penney.

4.

The
orders
of Sears
Roebuck were duly paid in full by
way of letter of credit. The JC
Penney orders consisting of 8,000
pcs. Cotton Woven Pants (Styles
DJ-1 BR and DJ-1 XT x x x at $3.65
per piece or a total of $29,200.00
were not covered by a letter of
credit.

5.

Despite shipment and receipt

by JC Penney of said orders, no
payment
was
made,
thus
prompting [respondent] to send
demand letters which remained
unheeded.

6.

On April 27, 1990, [respondent]

filed a complaint for collection of
a sum of money amounting to
US$29,200.00
with
damages
[before the Regional Trial Court at

7.

In
their
Answer
with
Counterclaim filed on June 21,
1990, [petitioners and their two
co-defendants] countered that
plaintiff [Sampaguita Garment
Corporation] has already been
paid
by
virtue
of
legal
compensation, and that it is
plaintiff which owes defendants
US5, 799.57 due to the damages
and losses it (sic) incurred as a
result of the breaches committed
in
the
previous
shipments
to Sears Roebuck. The damages
and losses refer to: i) failure to
observe
specifications
and
quantity requirements; ii) delay in
shipping out the garments; iii)
over declaration of value in Style
No. 33303; iv) shortshipment of
garments; v) failure to return raw
materials for the unshipped
garments,
amounting
to
US$34,999.57.
Moreover,
[petitioners
and
their
codefendants] alleged that they
also suffered losses on account of
delays
in
the JC
Penney shipments.

8.

During the pre-trial, the parties

came up with the following
stipulation of facts:

xxx xxx xxx

1. That the defendant(s)

ordered
from
plaintiff
an
aggregate volume of 8,000
pieces
Youngmens
Cotton
Woven Pants at US$29,200.00
and which were delivered to JC
Penney Corporation
of
California, the consignee;

2. That the total costs of

the goods remained unpaid,
subject to the defense of
compensation.

However,
as
further
proposed by the plaintiff, the
defendant(s) denied that the
goods were accepted by the
consignee and that it was
properly inspected by them.
9.

On September 9, 1991, a
partial stipulation of facts duly
signed by counsels of both parties
was submitted, with the following
statements:

22. That all the foregoing garments

Style Nos. 45712, 45714, 45715,
7511
and
SZ-217
were
airshipped after inspection and
acceptance
and
upon
the
instruction of defendant Mavest
Intl. Corp, as evidenced by the
following documents to be
marked as plaintiffs exhibits
xxx.

10. On August 6, 1993, [petitioners

and their co-defendants] filed an
Amended Answer (To Conform To
Evidence) with counterclaim . . . .

11. In said Amended Answer with

Counterclaim,
[defendants]
alleged that by virtue of legal
compensation,
plaintiff
has
already been paid as, in fact, it
still
owes
defendants
US$101,259.47, more or less.
(Words in bracket, underscoring
and italicization ours).

After a protracted trial that lasted for four (4) years, the
trial court rendered judgment in favor of herein
respondent, as plaintiff and against the petitioners and
their co-defendants, thus:

WHEREFORE, judgment is hereby

rendered in favor of plaintiff and against the
defendants ordering the defendants jointly
and severally to pay plaintiff, as follows:
1)
the
amount of US$29,200.00 or its equivalent in
Philippine Pesos at the time of payment plus
interest at the rate of six percent (6%) per
annum from the time of filing of this
complaint until fully paid as actual
damages;
2)

WHEREFORE, the appealed decision in

Civil Case No. 90-1131 is AFFIRMED with the
following MODIFICATIONS:
1.

The
complaint against defendants
Mavest International Co., Ltd.
and Patrick Wang is DISMISSED;

2.

{Petitione
r] Mavest-U.S.A., Inc./Mavest
Manila Liaison Office is ordered
to pay [respondent] the amount
of
US$29,200.00
or
its
equivalent in Philippine Pesos at
the time of payment plus
interest at the rate of six
percent (6%) per annum from
the time of filing of this
complaint until fully paid as
actual damages;

3.

The
attorneys fees and costs of suit
are deleted.

the
amount of P300,000.00 as and
for attorneys fees; and

3)

costs

of

suit.
SO ORDERED.

Therefrom, petitioners and their co-defendants a

quo appealed to the Court of Appeals (CA) whereat their
recourse was docketed as CA-G.R. No. 48232-CV. And,
in a decision[2] dated 10 December 1996, the appellate
court modified that of the trial court in the sense that
petitioners co-defendants were in effect released from
any liability and the award of attorneys fees and costs
of suit deleted. Dispositively, the appellate courts
decision reads:

No costs.
SO ORDERED. (Words in bracket ours).

Undaunted, petitioners are now with us via the instant

recourse, contending that the appellate court erred

I
IN AFFIRMING THE TRIAL COURTS
DECISION
THAT
LEGAL
COMPENSATION DOES NOT APPLY IN
THIS CASE;

II
IN APPLYING ARTICLE 1719 OF THE
NEW CIVIL CODE AS SUPPORT TO THE
TRIAL
COURTS
FINDING
THAT
PETITIONERS
ACCEPTED
THE
FINISHED
GARMENTS
WITHOUT
PROTEST AND IN NOT CONSIDERING
THE SAME AS AN EXERCISE TO
MITIGATE DAMAGE;
III
IN NOT ACCORDING PROBATIVE VALUE
TO
THE
EVIDENCE
SUPPORTING
PETITIONERS DAMAGE;
IV
IN HOLDING THAT MAVEST LIAISON
OFFICE IS SOLIDARILY LIABLE WITH
MAVEST USA, INC.;
V
IN RULING THAT PETITIONERS ARE
LIABLE TO PAY RESPONDENT ACTUAL
DAMAGES IN THE AMOUNT OF
US$29,200.00 OR ITS EQUIVALENT IN
PHILIPPINES PESOS AT THE TIME OF
PAYMENT PLUS INTEREST AT THE RATE
OF SIX PERCENT (6%) PER ANNUM

FROM THE TIME OF FILING OF THE

COMPLAINT UNTIL FULLY PAID AND IN
NOT HOLDING RESPONDENT LIABLE
TO PAY PETITIONERS.

The interrelated first, second and fifth assigned errors

converged on petitioners main submission that the
amount of US$29,200.00 claimed by respondent for
garments delivered to J.C. Penney is compensable and
has in fact been compensated by the damages/losses
petitioners suffered from previous transactions involving
deliveries to Sears Roebuck. Expounding, petitioners
assert that respondent, with respect to the Sears
Roebuckshipment, inter alia failed to observe the
specifications and quantity requirements, missed
delivery dates and incurred delay in the shipment of
certain goods. Upon this postulate, petitioners argue
that the unpaid amount due respondent has thereby
been extinguished by reason of legal compensation.
We are not persuaded.
Concededly, the Civil Code lists compensation as one of
the modes of extinguishing the obligations of persons
who, in their own right, are creditors and debtors of
each
other.[3] Compensation
may
be
legal
or
conventional. Legal compensation takes place ipso
jure when all the requisites of law are present, [4] as
opposed to conventional or voluntary compensation
which occurs when the parties agree to the mutual
extinguishment of their credits or to compensate their
mutual obligations even in the absence of some of the
legal requisites.[5]

For compensation to validly take place, the governing

Civil Code provisions[6] require the concurrence of welldefined conditions. At its minimum, compensation
presupposes two persons who, in their own right and as
principals, are mutually indebted to each other
respecting
equally
demandable
and
liquidated
obligations over any of which no retention or
controversy commenced and communicated in due time
to the debtor exists. But while compensation, be it legal
or conventional, requires the confluence in the parties
of the characters of mutual debtors and creditors, their
rights as such creditors, or their obligations as such
debtors, need not spring from one and the same
contract or transaction.[7]
With the view we take of this controversy, legal
compensation could not have occurred in this case. The
appellate court delved on the reason why legal
compensation does not obtain herein. It pointed to the
fact that petitioners, on one hand, and respondent, on
the other, are not mutually bound as creditors and
debtors. As correctly found by the Court of Appeals, it
was only the petitioners debt to the respondent that had
been rightfully established. The same court added the
observation that petitioners even acknowledged their
obligation
to
respondent
in
the
amount
of
US$29,200.00. Said the appellate court, quoting with
approval the trial courts decision:
It
is
likewise
observed
that
[petitioners]
had
acknowledged
their
obligation to [respondent] in the amount of
US$29,200.00. On February 15, 1990,
defendant Patrick Wang, general manager of
Mavest
Manila
Liaison
Office,
wrote
[respondent] stating that they would not

want to give the impression that we are

holding the payment for DJ-1 Twill Pants. x x
x We honor our word that we will issue
corresponding
check
valued
at
US$29,200.00. (Words in bracket ours).
Not to be overlooked on the acknowledgment-ofdebt angle is what the parties stipulated during the pretrial conference before the trial court, to wit:
1.

That the defendant ordered from

plaintiff an aggregate volume of
8,000 pieces of young mens cotton
woven pants at US$3.65 per piece
or a total amount of US$29,200.00
and which were delivered to JC
Penney Corporation of California,
the consignee;

2. That the total cost of the goods

remains unpaid, subject to the
defense of compensation.[8]
In contrast, petitioners failed to establish respondents
purported liability to them which would have then set
the automatic operation of legal compensation in
motion. As may be recalled, petitioners unyielding
stance is that respondent is indebted to them to the
liquidated tune of US$34,999.57, the money value of
the damages/losses they incurred respecting the
previous
shipments
to Sears
Roebuck.
These
damages/losses, they add, arose out of respondents
alleged failure to observe specifications and quantity
requirements; short shipment and delay in shipment;

and other breaches of contract. It cannot be

overemphasized, however, that, as found by the
appellate court, petitioners appeared not to have
objected to the quality or quantity of the work done by
respondent or to the production or delivery schedule it
observed. In fact, their actuations relative to theSears
Roebuck shipments, particularly their having paid in full
for such shipments, argue against the notion of
respondent reneging on its faithful part of the bargain.
Aptly wrote the Court of Appeals in this regard:

Defendants [petitioners] base

their defense of compensation, as in
set-off, on previously delivered goods
covered
by
different
[POs].
However, these
[POs]
had
been
completely settled and paid before
this case was instituted. It was also
established that defendants accepted
those deliveries made without any
qualification, protest or challenge. All
goods were properly inspected by the
defendants and/or the defendants
buyers. The acceptance of the goods
by defendants buyers . . . is an
indication that they were satisfied
with the goods delivered, thus, the
consummation of the contract with
respect to the goods accepted. The
defendants never informed plaintiff
[respondent] that they had suffered
any loss with respect to the previous
shipments sent to their buyers.
Therefore, the defendants cannot now
claim compensation for the damages
they allegedly incurred for the

plaintiffs
allegedly
incurred
(Underscoring and words in bracket
added]
It may be that petitioners acceptance of the goods
delivered does not preclude them from subsequently
raising objections about the existence of hidden defects
in the finished and delivered products of respondent. In
fact, Article 1719 of the Civil Code admits of two (2)
exceptions to the rule that acceptance relieves the
contractor of liability for any defect in the work, to wit:
(1) the defect is hidden and the employer is not, by his
special knowledge, expected to recognize the same;
and (2) the employer expressly reserves his right
against the contractor by reason of hidden defects.
Sadly, however, petitioners, with respect to
defects, if any, in the manufactured clothes which were
not discoverable upon a casual examination thereof,
appeared to have kept silent. Neither did they, upon
acceptance of the garments, expressly reserve the right
to take such action as may be appropriate against
respondent. Quite the contrary, in the stipulation of
facts signed by counsels of both parties, it is even
acknowledged

22. That all the foregoing garments

Style Nos. 45712, 45714, 45715,
7511
and
SZ
217
were
airshipped after inspection and
acceptance
and
upon
the
instruction
of
defendant
Mavest Intl Corp., as evidenced
by the following documents to be
marked as plaintiffs exhibits, xxx..
[9]
(Emphasis supplied)

Given the foregoing perspective, we rule without

hesitancy that what petitioners take as losses and
damages incurred while transacting with respondent
cannot plausibly be categorized as respondents
compensable debt to them. And since the parties are
not mutually creditors and debtors of each other, there
can be no valid set-off. In short, petitioners still owe
respondent the amount of US$29,200.00.
On their third assigned error, petitioners fault the
appellate court for not giving probative value to their
evidence in support of their claim for damages.
Section 1, Rule 131 of the Rules of Court,
assigns the burden of proof upon the party who
alleges the truth of his claim or defense, or any fact in
issue. And this, he must discharge by the amount of
evidence required by law. In civil cases, the burden of
proof is on the defendant if he alleges, in his answer, an
affirmative defense, which is not a denial of an essential
ingredient in the plaintiffs cause of action, but is one
which, if established, will be a good defense i.e., an
avoidance of the claim, which prima facie, the plaintiff
already has because of the defendants own admissions
in the pleadings.[11]
[10]

Petitioners defense in this case is doubtless

affirmative in character. As it were, they did not deny
owing respondent the amount of US$29,200.00. What
they averred was that their obligation to pay was
deemed extinguished because of legal compensation.
They also maintained having incurred losses and
damages due to respondents actions or inaction, as the
case may be. Because these are allegations in

petitioners pleadings, the burden is on them to prove

their averments by the quantum of proof required in
civil cases, namely, preponderance of evidence,
[12]
i.e., evidence which is of greater weight, or more
convincing than that which is offered in opposition to it.
[13]

The categorical conclusion of the Court of

Appeals, confirmatory of that of the trial court, is that
that petitioners evidence, albeit numerous, failed to
sufficiently establish, by the required quantum of
evidence, the underlying causes of their losses/
damages which they alleged to be respondents doing.
As earlier mentioned, these causes stemmed from
respondents failure to meet specifications and quantity
standards, delay in shipment, under - shipment, over
declaration of value in Style 33303 and its failure to
return raw materials from unshipped garments. To the
appellate court, what petitioners adduced could not
support a solid inference that respondent should be held
liable for the damages and losses they allegedly
sustained that would justify the application, under the
premises, of legal compensation.
It is evident that the issue tendered under
petitioners third assignment of error relates to the
correctness
of the Court of Appeals
factual
determination as to whether or not they incurred
losses/damages as a result of what they regard as
contractual breaches committed by respondent in the
shipment of garments to meet Sears Roebuck job
orders. Such issue, however, is contextually beyond the
purview of the Courts reviewing power. For, it is not the
function of this Court to analyze or weigh all over again
the evidence or premises supportive of such factual
determination,[14] except for the most compelling and
well-defined cogent reasons.[15] As nothing in the record
indicates any of such exceptions, the factual conclusion

of the appellate court that petitioners evidence did not

adequately support their claim for damages must be
affirmed.
In their fourth assigned error, petitioners submits
that Mavest Manila Liaison Office (MLO), being merely
an agent of Mavest U.S.A, should not be held solidarily
liable with the principal.
Petitioners were two (2) of the original four (4)
defendants impleaded in the basic complaint, the other
two (2) being Mavest International Co., Ltd. (MICL), a
firm organized under the laws of Taiwan, and Mr. Patrick
Wang, a former manager of MICL and MLO. Both MICL
and Mr. Wang, while adjudged liable in solidum with the
petitioners by the trial court, were eventually absolved
from any liability by the Court of Appeals.
In holding MLO solidarily liable with Mavest U.S.A.,
the appellate court proceeded on the postulate that
MLO is the liaison office of Mavest U.S.A and the
extension office of both Mavest U.S.A. and MILC.
The Court of Appeals holding commends itself for
concurrence.
As it were, Mavest U.S.A. appears to have
constituted MLO as its representative and its fully
subsidized extension office in the Philippines. As such,
MLO can be charged for the liabilities incurred by
Mavest U.S.A. in the country. And if MLO can be so
charged, there is no rhyme nor reason why it cannot be
adjudged, as did the appellate court, as solidarily liable
with head office, Mavest U.S.A.

WHEREFORE, the instant petition is DENIED and

the
assailed
decision
of
the
Court
of
Appeals AFFIRMED in toto.

G.R. No. 168251

July 27, 2011

JESUS M. MONTEMAYOR, Petitioner,

vs.
VICENTE D. MILLORA, Respondent.
DECISION
DEL CASTILLO, J.:
When the dispositive portion of a judgment is clear and
unequivocal, it must be executed strictly according to its
tenor.
This Petition for Review on Certiorari1 assails the
Decision2 dated May 19, 2005 of the Court of Appeals
(CA) in CA-G.R. SP No. 81075, which dismissed the
petition for certiorari seeking to annul and set aside the
Orders dated September 6, 20023 and October 2,
20034 of the Regional Trial Court (RTC) of Quezon City,
Branch 98 in Civil Case No. Q-93-17255.
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

note5executed by Vicente. On August 10, 1990, the

parties executed a loan contract6 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
demands7 for Vicente to settle his obligation but to no
avail.
Thus, on August 17, 1993, Jesus filed before the RTC of
Quezon City a Complaint8 for Sum of Money against
Vicente which was docketed as Civil Case No. Q-9317255. On October 19, 1993, Vicente filed his
Answer9interposing 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 Decision10 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
Reconsideration12 to which Jesus filed an
Opposition.13 On March 15, 2000, Vicente filed a Motion
for the Issuance of a Writ of Execution14 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 Execution15 dated May 31, 2000.
In an Order16 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.

Jesus went to the CA via a Petition for Certiorari27 under

Rule 65 of the Rules of Court.

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 Order18 dated July 10, 2000 on the ground
that the Decision has already become final and
executory on July 1, 2000.19

On May 19, 2005, the CA issued its Decision the

dispositive portion of which provides:

Meanwhile, Jesus filed on July 12, 2000 a Motion for

Reconsideration and Clarification20 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 Order22dated 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 Reconsideration25 thereto on
October 10, 2002 but this was eventually denied by the
trial court through its Order26 dated October 2, 2003.
Ruling of the Court of Appeals

WHEREFORE, the foregoing considered, the petition for

certiorari is DENIED and the assailed Orders
areAFFIRMED 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.
Our Ruling
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 tuncentries 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

(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;

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;

(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 Rosario35 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 xP2,000.00 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 SETOFF 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.

Present:

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.

November 25, 2005

ISAIAS F. FABRIGAS and G.R. No. 152346

MARCELINA R. FABRIGAS,
Petitioners,

PUNO, J.,
Chairman,
- versus - AUSTRIA-MARTINEZ,
CALLEJO, SR.,
TINGA, and
CHICO-NAZARIO, JJ.
SAN FRANCISCO DEL
MONTE, INC.,
Respondent. Promulgated:

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

DECISION

TINGA, J.:

Before the Court is a petition for review on certiorari

under Rule 45 of the 1997 Rules of Civil Procedure,
which assails the Decision of the Court of Appeals in CAG.R. CV No. 45203 and its Resolution therein denying
petitioners
motion
for
reconsideration.
Said Decisionaffirmed the Decision dated January 3,
1994 of the Regional Trial Court (RTC), Branch 63,
Makati City in Civil Case No. 90-2711 entitled San
Francisco Del Monte, Inc. v. Isaias F. Fabrigas and
Marcelina R. Fabrigas.

The
dispositive
courts Decision reads:

portion

of

the

possession or occupation from

defendants are ordered to vacate
and leave the premises, described
as Lot No. 9 Block No. 3 of
Subdivision Plan (LRC) Psd-50064
covered by Transfer Certificate of
Title No. 4980 (161653) T-1083 of
the Registry of Deeds of Rizal, and
to surrender possession thereof to
plaintiff or any of its authorized
representatives;

trial
2.

That in the event that defendants

chose to surrender possession of
the property, they are further
ordered
to
pay
plaintiff P206,223.80 as
unpaid
installments on the land inclusive
of interests;

3.

Ordering defendants to jointly

and severally pay plaintiff the
amount of P10,000.00 as and for
attorneys fees; and

4.

Ordering defendants to pay the

costs of suit.

In the light of the foregoing, the Court is

convinced that plaintiff has proven by
preponderance of evidence, the allegation
appearing in its complaint and is therefore,
entitled to the reliefs prayed for.
Considering, however, that defendants had
already
paid P78,152.00,
the
Court
exercising its discretion, hereby renders
judgment as follows:

1.

Ordering defendant to make

complete payment under the
conditions of Contract to Sell No.
2491-V dated January 21, 1985,
within twenty days from receipt of
this Decision, and in the event that
defendant fail or refuse to observe
the latter, defendants and all
persons
claiming
right
of

SO ORDERED.[1]
The following factual antecedents are matters of record.

On April 23, 1983, herein petitioner spouses Isaias

and Marcelina Fabrigas (Spouses Fabrigas or petitioners)
and respondent San Francisco Del Monte, Inc. (Del
Monte) entered into an agreement, denominated
as Contract to Sell No. 2482-V, whereby the latter
agreed to sell to Spouses Fabrigas a parcel of residential
land situated in Barrio Almanza, Las Pias, Manila for and
in consideration of the amount of P109,200.00. Said
property, which is known as Lot No. 9, Block No. 3 of
Subdivision Plan (LRC) Psd-50064, is covered by Transfer
Certificate of Title No. 4980 (161653) T-1083 registered
in the name of respondent Del Monte. The agreement
stipulated that Spouses Fabrigas shall pay P30,000.00
as downpayment and the balance within ten (10) years
in monthly successive installments ofP1,285.69.
[2]
Among the clauses in the contract is an automatic
cancellation clause in case of default, which states as
follows:

7. Should the PURCHASER fail to make

any of the payments including interest as
herein provided, within 30 days after the
due date, this contract will be deemed and
considered as forfeited and annulled without
necessity of notice to the PURCHASER, and
said SELLER shall be at liberty to dispose of
the said parcel of land to any other person
in the same manner as if this contract had
never been executed. In the event of such
forfeiture, all sums of money paid under this
contract will be considered and treated as
rentals for the use of said parcel of land,
and the PURCHASER hereby waives all right
to ask or demand the return thereof and

agrees to
premises.[3]

peaceably

vacate

the

said

After paying P30,000.00, Spouses Fabrigas took

possession of the property but failed to make any
installment payments on the balance of the purchase
price. Del Monte sent demand letters on four occasions
to remind Spouses Fabrigas to satisfy their contractual
obligation.[4] In particular, Del Montes third letter dated
November 9, 1983 demanded the payment of arrears in
the amount ofP8,999.00. Said notice granted Spouses
Fabrigas a fifteen-day grace period within which to
settle their accounts. Petitioners failure to heed Del
Montes demands prompted the latter to send a final
demand letter dated December 7, 1983, granting
Spouses Fabrigas another grace period of fifteen days
within which to pay the overdue amount and warned
them that their failure to satisfy their obligation would
cause the rescission of the contract and the forfeiture of
the sums of money already paid. Petitioners received
Del Montes final demand letter on December 23, 1983.
Del Monte considered Contract to Sell No. 2482V cancelled fifteen days thereafter, but did not furnish
petitioners any notice regarding its cancellation.[5]

On November 6, 1984, petitioner Marcelina

Fabrigas (petitioner Marcelina) remitted the amount
of P13,000.00 to Del Monte.[6] On January 12, 1985,
petitioner Marcelina again remitted the amount
of P12,000.00.[7] A few days thereafter, or on January 21,
1985, petitioner Marcelina and Del Monte entered into
another agreement denominated as Contract to Sell No.
2491-V, covering the same property but under
restructured terms of payment. Under the second
contract, the parties agreed on a new purchase price

ofP131,642.58,
the
amount
of P26,328.52
as
downpayment and the balance to be paid in monthly
installments of P2,984.60 each.[8]

Between March 1985 and January 1986, Spouses

Fabrigas made irregular payments under Contract to
Sell No. 2491-V, to wit:

March 19, 1985 P1, 328.52

July 2, 1985 P2, 600.00
September 30, 1985 P2, 600.00
November 27, 1985 P2, 600.00
January 20, 1986 P2, 000.00[9]

Del Monte sent a demand letter dated February 3,

1986, informing petitioners of their overdue account
equivalent to nine (9) installments or a total amount
of P26,861.40. Del Monte required petitioners to satisfy
said amount immediately in two subsequent letters
dated March 5 and April 2, 1986. [10] This prompted
petitioners to pay the following amounts:

February 3, 1986 P2, 000.00

March 10, 1986 P2, 000.00
April 9, 1986 P2, 000.00
May 13, 1986 P2, 000.00

June 6, 1986 P2, 000.00

July 14, 1986 P2, 000.00[11]

No other payments were made by petitioners except the

amount of P10,000.00 which petitioners tendered
sometime in October 1987 but which Del Monte refused
to accept, the latter claiming that the payment was
intended for the satisfaction of Contract to Sell No.
2482-V which had already been previously cancelled. On
March 24, 1988, Del Monte sent a letter demanding the
payment of accrued installments under Contract to Sell
No.
2491-V in
the
amount
of P165,759.60
less P48,128.52, representing the payments made
under the restructured contract, or the net amount
of P117,631.08. Del Monte allowed petitioners a grace
period of thirty (30) days within which to pay the
amount asked to avoid rescission of the contract. For
failure to pay, Del Monte notified petitioners on March
30, 1989 that Contract to Sell No. 2482-V had been
cancelled and demanded that petitioners vacate the
property.[12]

On September 28, 1990, Del Monte instituted an

action for Recovery of Possession with Damages against
Spouses Fabrigas before the RTC, Branch 63 of Makati
City. The complaint alleged that Spouses Fabrigas owed
Del Monte the principal amount of P206,223.80 plus
interest of 24% per annum. In their answer, Spouses
Fabrigas claimed, among others, that Del Monte
unilaterally cancelled the first contract and forced
petitioner Marcelina to execute the second contract,
which materially and unjustly altered the terms and
conditions of the original contract.[13]

After trial on the merits, the trial court rendered

a Decision on January 3, 1994, upholding the validity
of Contract to Sell No. 2491-V and ordering Spouses
Fabrigas either to complete payments thereunder or to
vacate the property.

Aggrieved, Spouses Fabrigas elevated the matter

to the Court of Appeals, arguing that the trial court
should have upheld the validity and existence
of Contract
to
Sell
No.
2482-V instead
and
nullified Contract to Sell No. 2491-V. The Court of
Appeals rejected this argument on the ground
that Contract to Sell No. 2482-V had been rescinded
pursuant to the automatic rescission clause therein.
While the Court of Appeals declared Contract to Sell No.
2491-V as merely unenforceable for having been
executed without petitioner Marcelinas signature, it
upheld its validity upon finding that the contract was
subsequently ratified.

Hence, the instant petition attributing

following errors to the Court of Appeals:

A. THE COURT OF APPEALS GRAVELY

ERRED WHEN IT IGNORED THE PROVISIONS
OF R.A. NO. 6552 (THE MACEDA LAW) AND
RULED THAT CONTRACT TO SELL NO. 2482-V
WAS VALIDLY CANCELLED BY SENDING A
MERE NOTICE TO THE PETITIONERS.

B. THE COURT OF APPEALS GRAVELY

ERRED IN RULING THAT THERE WAS AN
IMPLIED RATIFICATION OF CONTRACT TO
SELL NO. 2491-V.

C. THE COURT OF APPEALS ERRED IN

ITS APPLICATION OF THE RULES OF
NOVATION TO THE INSTANT CASE.[14]

As reframed for better understanding, the

questions are the following: Was Contract to Sell No.
2482-V extinguished through rescission or was it
novated by the subsequent Contract to Sell No. 2491-V?
If Contract to Sell No. 2482-V was rescinded, should the
manner of rescission comply with the requirements of
Republic Act No. (R.A.) 6552? If Contract to Sell No.
2482-V was subsequently novated by Contract to Sell
No. 2491-V, are petitioners liable for breach under the
subsequent agreement?

the
Petitioners theorize that Contract to Sell No. 2482V should remain valid and subsisting because the notice
of cancellation sent by Del Monte did not observe the
requisites under Section 3 of R.A. 6552. [15] According to
petitioners, since respondent did not send a notarial
notice informing them of the cancellation or rescission
of Contract to Sell No. 2482-V and also did not pay them
the cash surrender value of the payments on the
property, the Court of Appeals erred in concluding that
respondent correctly applied the automatic rescission
clause of Contract to Sell No. 2482-V. Petitioners also
cite Section 7[16] of said law to bolster their theory that

the automatic rescission clause in Contract to Sell No.

2482-V is invalid for being contrary to law and public
policy.

The Court of Appeals erred in ruling that Del

Monte was well within its right to cancel the contract by
express grant of paragraph 7 without the need of
notifying [petitioners],[17] instead of applying the
pertinent provisions of R.A. 6552. Petitioners contention
that none of Del Montes demand letters constituted a
valid rescission of Contract to Sell No. 2482-V is correct.

Petitioners defaulted in all monthly installments.

They may be credited only with the amount
of P30,000.00 paid upon the execution of Contract to
Sell No. 2482-V, which should be deemed equivalent to
less than two (2) years installments. Given the nature of
the contract between petitioners and Del Monte, the
applicable legal provision on the mode of cancellation
of Contract to Sell No. 2482-Vis Section 4 and not
Section 3 of R.A. 6552. Section 4 is applicable to
instances where less than two years installments were
paid. It reads:

SECTION 4. In case where less than

two years of installments were paid, the
seller shall give the buyer a grace period of
not less than sixty days from the date the
installment became due.

If the buyer fails to pay the

installments due at the expiration of the

grace period, the seller may cancel the

contract after thirty days from receipt by the
buyer of the notice of cancellation or the
demand for rescission of the contract by a
notarial act.

Thus, the cancellation of the contract under

Section 4 is a two-step process. First, the seller
should extend the buyer a grace period of at least
sixty (60) days from the due date of the installment.
Second, at the end of the grace period, the seller
shall furnish the buyer with a notice of cancellation
or demand for rescission through a notarial act,
effective thirty (30) days from the buyers receipt
thereof. It is worth mentioning, of course, that a mere
notice or letter, short of a notarial act, would not
suffice.
While the Court concedes that Del Monte had
allowed petitioners a grace period longer than the
minimum sixty (60)-day requirement under Section
4, it did not comply, however, with the requirement
of notice of cancellation or a demand for rescission.
Instead, Del Monte applied the automatic rescission
clause of the contract. Contrary, however, to Del
Montes position which the appellate court sustained,
the automatic cancellation clause is void under
Section 7[18] in relation to Section 4 of R.A. 6552.[19]

Rescission, of course, is not the only mode of

extinguishing obligations. Ordinarily, obligations are also
extinguished by payment or performance, by the loss of
the thing due, by the condonation or remission of the
debt, by the confusion or merger of the rights of the
creditor and debtor, by compensation, or by novation.[20]

Novation, in its broad concept, may either be

extinctive or modificatory. It is extinctive when an old
obligation is terminated by the creation of a new
obligation that takes the place of the former; it is merely
modificatory when the old obligation subsists to the
extent it remains compatible with the amendatory
agreement. An extinctive novation results either by
changing the object or principal conditions (objective or
real), or by substituting the person of the debtor or
subrogating a third person in the rights of the creditor
(subjective or personal). Under this mode, novation
would have dual functionsone to extinguish an existing
obligation, the other to substitute a new one in its
placerequiring a conflux of four essential requisites: (1)
a previous valid obligation; (2) an agreement of all
parties concerned to a new contract; (3) the
extinguishment of the old obligation; and (4) the birth of
a valid new obligation.[21]

Notwithstanding the improper rescission, the facts

of the case show that Contract to Sell No. 2482-V was
subsequently novated byContract to Sell No. 2491-V.
The execution of Contract to Sell No. 2491V accompanied an upward change in the contract price,
which constitutes a change in the object or principal
conditions of the contract. In entering into Contract to
Sell No. 2491-V, the parties were impelled by causes
different from those obtaining under Contract to Sell No.
2482-V. On the part of petitioners, they agreed to the
terms and conditions of Contract to Sell No. 2491-V not
only to acquire ownership over the subject property but
also to avoid the consequences of their default
under Contract No. 2482-V. On Del Montes end, the
upward change in price was the consideration for
entering intoContract to Sell No. 2491-V.

In order that an obligation may be extinguished by

another which substitutes the same, it is imperative that
it be so declared in unequivocal terms, or that the old
and the new obligations be on every point incompatible
with each other.[22] The test of incompatibility is whether
or not the two obligations can stand together, each one
having its independent existence. If they cannot, they
are incompatible and the latter obligation novates the
first.[23] The execution of Contract to Sell No. 2491V created
new
obligations
in
lieu
of
those
under Contract to Sell No. 2482-V, which are already
considered extinguished upon the execution of the
second contract. The two contracts do not have
independent existence for to hold otherwise would
present an absurd situation where the parties would be
liable under each contract having only one subject
matter.

To dispel the novation of Contract to Sell No.

2482-V by Contract to Sell No. 2491-V, petitioners
contend that the subsequent contract is void for two
reasons: first, petitioner Isaias Fabrigas did not give his
consent thereto, and second, the subsequent contract is
a contract of adhesion.

Petitioner rely on Article 172 of the Civil Code

governing their property relations as spouses. Said
article states that the wife cannot bind the conjugal
partnership without the husbands consent except in
cases provided by law. Since only petitioner Marcelina
executedContract to Sell No. 2491-V, the same is
allegedly void, petitioners conclude.

Under the Civil Code, the husband is the

administrator of the conjugal partnership. [24] Unless the
wife has been declared a non compos mentis or a
spendthrift, or is under civil interdiction or is confined in
a leprosarium, the husband cannot alienate or
encumber any real property of the conjugal partnership
without the wife's consent.[25] Conversely, the wife
cannot bind the conjugal partnership without the
husbands consent except in cases provided by law.[26]

capacity to give consent belonged not even to the

husband alone but to both

Thus, if a contract entered into by one spouse

involving a conjugal property lacks the consent of the
other spouse, as in the case at bar, is it automatically
void for that reason alone?

The factual milieu of the instant case, however,

differs from that in Felipe. The defect which Contract to
Sell No. 2491-V suffers from is lack of consent of the
husband, who was out of the country at the time of the
execution of the contract. There is no express provision
in the Civil Code governing a situation where the
husband is absent and his absence incapacitates him
from administering the conjugal partnership property.
The following Civil Code provisions, however, are
illuminating:

Article 173[27] of the Civil Code expressly classifies

a contract executed by the husband without the consent
of the wife as merely annullable at the instance of the
wife. However, there is no comparable provision
covering an instance where the wife alone has
consented to a contract involving conjugal property.
Article 172 of the Civil Code, though, does not expressly
declare as void a contract entered by the wife without
the husbands consent. It is also not one of the contracts
considered as void under Article 1409[28] of the Civil
Code.

In Felipe v. Heirs of Maximo Aldon,[29] the Court

had the occasion to rule on the validity of a sale of lands
belonging to the conjugal partnership made by the wife
without the consent of the husband. Speaking through
Mr. Justice Abad Santos, the Court declared such a
contract as voidable because one of the parties is
incapable of giving consent to the contract. The

spouses.[30] In that case, the Court anchored its ruling on

Article 173 of the Civil Code which states that contracts
entered by the husband without the consent of the wife
when such consent is required, are annullable at her
instance during the marriage and within ten years from
the transaction mentioned.[31]

ARTICLE 167. In case of abuse of

powers of administration of the conjugal
partnership property by the husband, the
courts, on petition of the wife, may provide
for receivership, or administration by the
wife, or separation of property.

ARTICLE 168. The wife may, by

express authority of the husband embodied
in a public instrument, administer the
conjugal partnership property.

ARTICLE 169. The wife may also, by

express authority of the husband appearing
in a public instrument, administer the
latter's estate.

While the husband is the recognized administrator

of the conjugal property under the Civil Code, there are
instances when the wife may assume administrative
powers or ask for the separation of property. In the
abovementioned instances, the wife must be authorized
either by the court or by the husband. Where the
husband is absent and incapable of administering the
conjugal property, the wife must be expressly
authorized by the husband or seek judicial authority to
assume powers of administration. Thus, any transaction
entered by the wife without the court or the husbands
authority is unenforceable in accordance with Article
1317[32] of the Civil Code. That is the status to be
accorded Contract to Sell No. 2491-V, it having been
executed by petitioner Marcelina without her husbands
conformity.

Being an unenforceable contract, Contract to Sell

No. 2491-V is susceptible to ratification. As found by the
courts below, after being informed of the execution of
the contract, the husband, petitioner Isaias Fabrigas,
continued remitting payments for the satisfaction of the
obligation under Contract to Sell No. 2491-V. These acts
constitute ratification of the contract. Such ratification
cleanses the contract from all its defects from the
moment it was constituted. The factual findings of the
courts below are beyond review at this stage.

Anent Del Montes claim that Contract to Sell No.

2491-V is a contract of adhesion, suffice it to say that
assuming for the nonce that the contract is such the
characterization does not automatically render it void. A
contract of adhesion is so-called because its terms are
prepared by only one party while the other party merely
affixes his signature signifying his adhesion thereto.
Such contracts are not void in themselves. They are as
binding as ordinary contracts. Parties who enter into
such contracts are free to reject the stipulations entirely.
[33]

The Court quotes with approval the following

factual observations of the trial court, which cannot be
disturbed in this case, to wit:

The Court notes that defendant, Marcelina

Fabrigas, although she had to sign contract
No. 2491-V, to avoid forfeiture of her
downpayment, and her other monthly
amortizations, was entirely free to refuse to
accept the new contract. There was no clear
case of intimidation or threat on the part of
plaintiff in offering the new contract to her.
At most, since she was of sufficient
intelligence to discern the agreement she is
entering into, her signing of Contract No.
2491-V is taken to be valid and binding. The
fact
that
she
has
paid
monthly
amortizations subsequent to the execution
of Contract to Sell No. 2491-V, is an
indication that she had recognized the
validity of such contract. . . .[34]

The Case
In sum, Contract to Sell No. 2491-V is valid and
binding. There is nothing to prevent respondent Del
Monte from enforcing its contractual stipulations and
pursuing the proper court action to hold petitioners
liable for their breach thereof.

WHEREFORE, the instant Petition for Review is

DENIED and the September 28, 2001 Decision of the
Court of Appeals in CA-G.R. CV No. 45203 is AFFIRMED.
Costs against petitioners.

ROMEO C. GARCIA, petitioner,

LLAMAS, respondent.

vs. DIONISIO

V.

DECISION
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.

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
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 abovementioned 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

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.

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
whether novation took place.

the

main

issue

of

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:

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

following requisites must concur:

take

place,

the

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
[19]
the formers place in the relation.
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
andsolidary 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 novationimplies 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
[25]
the solidary debtors.
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
[40]
Answer
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.
SO ORDERED.

Davide, Jr., C.J., (Chairman),

Carpio, and Azcuna, JJ., concur.

G.R. No. 180144

Ynares-Santiago,

September 24, 2014

LEONARDO BOGNOT, Petitioner,

vs.
RRI LENDING CORPORATION, represented by its
General Manager, DARIO J.
BERNARDEZ, Respondent.
DECISION
BRION, J.:
Before the Court is the petition for review on
certiorari1 filed by Leonardo Bognot (petitioner) assailing
the March 28, 2007 decision2 and the October 15, 2007
resolution3 of the Court of Appeals (CA) in CA-G.R. CV
No. 66915.
Background Facts
RRI Lending Corporation (respondent) is an entity
engaged in the business of lending money to its
borrowers within Metro Manila. It is duly represented by
its General Manager, Mr. Dario J. Bernardez (Bernardez).
Sometime in September 1996, the petitioner and his
younger brother, Rolando A. Bognot (collectively
referred to as the "Bognot siblings"), applied for and
obtained a loan of Five Hundred Thousand Pesos

(P500,000.00) from the respondent, payable on

November 30, 1996.4 The loan was evidenced by a
promissory note and was secured by a post dated
check5 dated November 30, 1996.
Evidence on record shows that the petitioner renewed
the loan several times on a monthly basis. He paid a
renewal fee of P54,600.00 for each renewal, issued a
new post-dated checkas security, and executed and/or
renewed the promissory note previouslyissued. The
respondent on the other hand, cancelled and returned
to the petitioner the post-dated checks issued prior to
their renewal.
Sometime in March 1997, the petitioner applied for
another loan renewal. He again executed as principal
and signed Promissory Note No. 97-0356 payable on
April 1, 1997; his co-maker was again Rolando. As
security for the loan, the petitioner also issued BPI
Check No. 0595236,7 post dated to April 1, 1997.8
Subsequently, the loan was again renewed on a monthly
basis (until June 30, 1997), as shown by the Official
Receipt No. 7979 dated May 5, 1997, and the Disclosure
Statement dated May 30, 1997 duly signed by
Bernardez. The petitioner purportedly paid the renewal
fees and issued a post-dated check dated June 30, 1997
as security. As had been done in the past, the
respondent superimposed the date "June 30, 1997" on
the upper right portion of Promissory Note No. 97-035 to
make it appear that it would mature on the said date.
Several days before the loans maturity, Rolandos wife,
Julieta Bognot (Mrs. Bognot), went to the respondents

office and applied for another renewal of the loan. She

issued in favor of the respondent Promissory Note No.
97-051, and International Bank Exchange (IBE) Check
No. 00012522, dated July 30, 1997, in the amount
ofP54,600.00 as renewal fee.
On the excuse that she needs to bring home the loan
documents for the Bognot siblings signatures and
replacement, Mrs. Bognot asked the respondents clerk
to release to her the promissory note, the disclosure
statement, and the check dated July 30, 1997. Mrs.
Bognot, however, never returned these documents nor
issued a new post-dated check. Consequently, the
respondent sent the petitioner follow-up letters
demanding payment of the loan, plus interest and
penalty charges. These demands went unheeded.
On November 27, 1997, the respondent, through
Bernardez, filed a complaint for sum of money before
the Regional Trial Court (RTC) against the Bognot
siblings. The respondent mainly alleged that the loan
renewal payable on June 30, 1997 which the Bognot
siblings applied for remained unpaid; that before
June30, 1997, Mrs. Bognot applied for another loan
extension and issued IBE Check No. 00012522 as
payment for the renewal fee; that Mrs. Bognot
convinced the respondents clerk to release to her the
promissory note and the other loan documents; that
since Mrs. Bognot never issued any replacement check,
no loanextension took place and the loan, originally
payable on June 30, 1997, became due on this date; and
despite repeated demands, the Bognot siblings failed to
pay their joint and solidary obligation.

Summons were served on the Bognotsiblings. However,

only the petitioner filed his answer.
In his Answer,10 the petitioner claimed that the
complaint states no cause of action because the
respondents claim had been paid, waived, abandoned
or otherwise extinguished. He denied being a party to
any loan application and/or renewal in May 1997. He
also denied having issued the BPI check post-dated to
June 30, 1997, as well as the promissory note dated
June 30, 1997, claiming that this note had been
tampered. He claimed that the one (1) month loan
contracted by Rolando and his wife in November 1996
which was lastly renewed in March 1997 had already
been fully paid and extinguished in April 1997.11
Trial on the merits thereafter ensued.

Records likewise reveal that while he claims that the

obligation had been fully paid in his Answer, he did not,
in order to protect his right filed (sic) a cross-claim
against his co-defendant Rolando Bognot despite the
fact that the latter did not file any responsive pleading.
In fine, defendants are liable solidarily to plaintiff and
must pay the loan of P500,000.00 plus 5% interest
monthly as well as 10% monthly penalty charges from
the filing of the complaint on December 3, 1997 until
fully paid. As plaintiff was constrained to engage the
services of counsel in order to protect his
right,defendants are directed to pay the former jointly
and severally the amount of P50,000.00 as and by way
of attorneys fee.
The petitioner appealed the decision to the Court of
Appeals.

The Regional Trial Court Ruling

12

In a decision dated January 17, 2000,the RTC ruled in

the respondents favor and ordered the Bognot siblings
to pay the amount of the loan, plus interest and penalty
charges. It considered the wordings of the promissory
note and found that the loan they contracted was joint
and solidary. It also noted that the petitioner signed the
promissory note as a principal (and not merely as a
guarantor), while Rolando was the co-maker. It brushed
the petitioners defense of full payment aside, ruling
that the respondent had successfully proven, by
preponderance of evidence, the nonpayment of the
loan. The trial court said:

The Court of Appeals Ruling

In its decision dated March 28, 2007, the CA affirmed
the RTCs findings. It found the petitioners defense of
payment untenable and unsupported by clear and
convincing evidence. It observed that the petitioner did
not present any evidence showing that the check dated
June 30, 1997 had, in fact, been encashed by the
respondent and the proceeds applied to the loan, or any
official receipt evidencing the payment of the loan. It
further stated that the only document relied uponby the
petitioner to substantiate his defense was the April 1,
1997 checkhe issued which was cancelled and returned
to him by the respondent.

The CA, however, noted the respondents established

policy of cancelling and returning the post-dated checks
previously issued, as well as the subsequent loan
renewals applied for by the petitioner, as manifested by
the official receipts under his name. The CA thus ruled
that the petitioner failed to discharge the burden of
proving payment.
The petitioner moved for the reconsideration of the
decision, but the CA denied his motion in its resolution
of October 15, 2007, hence, the present recourse to us
pursuant toRule 45 of the Rules of Court.
The Petition
The petitioner submits that the CA erred in holding him
solidarily liable with Rolando and his wife. Heclaimed
that based on the legal presumption provided by Article
1271 of the Civil Code,13 his obligation had been
discharged by virtue of his possession of the post-dated
check (stamped "CANCELLED") that evidenced his
indebtedness. He argued that it was Mrs. Bognot who
subsequently assumed the obligation by renewing the
loan, paying the fees and charges, and issuing a check.
Thus, there is an entirely new obligation whose payment
is her sole responsibility.
The petitioner also argued that as a result of the
alteration of the promissory note without his consent
(e.g., the superimposition of the date "June 30, 1997" on
the upper right portion of Promissory Note No. 97-035 to
make it appear that it would mature on this date), the
respondent can no longer collect on the tampered note,
let alone, hold him solidarily liable with Rolando for the

payment of the loan. He maintained that even without

the proof of payment, the material alteration of the
promissory note is sufficient to extinguish his liability.
Lastly, he claimed that he had been released from his
indebtedness by novation when Mrs. Bognot renewed
the loan and assumed the indebtedness.
The Case for the Respondents
The respondent submits that the issues the petitioner
raised hinge on the appreciation of the adduced
evidence and of the factual lower courts findings that,
as a rule, are notreviewable by this Court.
The Issues
The case presents to us the following issues:
1. Whether the CA committed a reversible error in
holding the petitioner solidarily liable with
Rolando;
2. Whether the petitioner is relieved from liability
by reason of the material alteration in the
promissory note; and
3. Whether the parties obligation was
extinguished by: (i) payment; and (ii) novation by
substitution of debtors.
Our Ruling
We find the petition partly meritorious.

As a rule, the Courts jurisdiction in a Rule 45 petition is

limited to the review of pure questions of
law.14 Appreciation of evidence and inquiry on the
correctness of the appellate court's factual findings are
not the functions of this Court; we are not a trier of
facts.15
A question of law exists when the doubt or dispute
relates to the application of the law on given facts. On
the other hand, a question of fact exists when the doubt
or dispute relates to the truth or falsity of the parties
factual allegations.16
As the respondent correctly pointedout, the petitioners
allegations are factual issuesthat are not proper for the
petition he filed. In the absence of compelling reasons,
the Court cannot re-examine, review or re-evaluate the
evidence and the lower courts factual conclusions. This
is especially true when the CA affirmed the lower courts
findings, as in this case. Since the CAs findings of facts
affirmed those of the trial court, they are binding on this
Court, rendering any further factual review unnecessary.
If only to lay the issues raised - both factual and legal
to rest, we shall proceed to discuss their merits and
demerits.
No Evidence Was Presented to Establish the Fact of
Payment
Jurisprudence tells us that one who pleads payment has
the burden of proving it;17 the burden rests on the
defendant to prove payment, rather than on the plaintiff
to prove non-payment.18 Indeed, once the existence of

an indebtedness is duly established by evidence, the

burden of showing with legal certainty that the
obligation has been discharged by payment rests on the
debtor.19
In the present case, the petitioner failed to satisfactorily
prove that his obligation had already been extinguished
by payment. As the CA correctly noted, the petitioner
failed to present any evidence that the respondent had
in fact encashed his check and applied the proceeds to
the payment of the loan. Neither did he present official
receipts evidencing payment, nor any proof that the
check had been dishonored.
We note that the petitioner merely relied on the
respondents cancellation and return to him of the check
dated April 1, 1997. The evidence shows that this check
was issued to secure the indebtedness. The acts
imputed on the respondent, standing alone, do not
constitute sufficient evidence of payment.
Article 1249, paragraph 2 of the Civil Code provides:
xxxx
The delivery of promissory notes payable to order, or
bills of exchange or other mercantile documents shall
produce the effect of payment only when they have
been cashed, or when through the fault of the creditor
they have been impaired. (Emphasis supplied)
Also, we held in Bank of the Philippine Islands v.
Spouses Royeca:20

Settled is the rule that payment must be made in legal

tender. A check is not legal tender and, therefore,
cannot constitute a valid tender of payment. Since a
negotiable instrument is only a substitute for money
and not money, the delivery of such an instrument does
not, by itself, operate as payment. Mere delivery of
checks does not discharge the obligation under a
judgment. The obligation is not extinguished and
remains suspended until the payment by commercial
document is actually realized.(Emphasis supplied)
Although Article 1271 of the Civil Code provides for a
legal presumption of renunciation of action (in cases
where a private document evidencing a credit was
voluntarily returned by the creditor to the debtor), this
presumption is merely prima facieand is not conclusive;
the presumption loses efficacy when faced with
evidence to the contrary.
Moreover, the cited provision merely raises a
presumption, not of payment, but of the renunciation of
the credit where more convincing evidence would be
required than what normally would be called for to
prove payment.21Thus, reliance by the petitioner on the
legal presumption to prove payment is misplaced.
To reiterate, no cash payment was proven by the
petitioner. The cancellation and return of the check
dated April 1, 1997, simply established his renewal of
the loan not the fact of payment. Furthermore, it has
been established during trial, through repeated acts,
that the respondent cancelled and surrendered the postdated check previously issued whenever the loan is
renewed. We trace whatwould amount to a practice

under the facts of this case, to the following testimonial

exchanges:
Civil Case No. 97-0572
TSN December 14, 1998, Page 13.
Atty. Almeda:
Q: In the case of the renewal of the loan you admitted
that a renewal fee is charged to the debtor which he or
she must pay before a renewal is allowed. I show you
Exhibit "3" official receipt of plaintiff dated July 3, 1997,
would this be your official receipt which you issued to
your client which they make renewal of the loan?
A: Yes, sir.
xxx

xxx

xxx

Q: And naturally when a loan has been renewed, the old

one which is replaced by the renewal has already been
cancelled, is that correct?
A: Yes, sir.
Q: It is also true to say that all promissory notes and all
postdated checks covered by the old loan which have
been the subject of the renewal are deemed cancelled
and replaced is that correct?
A: Yes, sir. xxx22
Civil Case No. 97-0572

TSN November 27, 1998, Page 27.

Q: What happened to the check that Mr. Bognot issued?
Court: There are two Bognots. Who in particular?
Q: Leonardo Bognot, Your Honor.
A: Every month, they were renewed, he issued a new
check, sir.
Q: Do you have a copy of the checks?
A: We returned the check upon renewing the loan.23
In light of these exchanges, wefind that the petitioner
failed to discharge his burden ofproving payment.
The Alteration of the Promissory Note
Did Not Relieve the Petitioner From Liability
We now come to the issue of material alteration. The
petitioner raised as defense the alleged material
alteration of Promissory Note No. 97-035 as basis to
claim release from his loan. He alleged that the
respondents superimposition of the due date "June 30,
1997" on the promissory note without his consent
effectively relieved him of liability.
We find this defense untenable.

Although the respondent did not dispute the fact of

alteration, he nevertheless denied that the alteration
was done without the petitioners consent. The parties
Pre-Trial Order dated November 3, 199824 states that:
xxx There being no possibility of a possible compromise
agreement, stipulations, admissions, and denials were
made, to wit:
FOR DEFENDANT LEONARDO BOGNOT
13. That the promissory note subject of this case
marked as Annex "A" of the complaint was originally
dated April 1, 1997 with a superimposed rubber stamp
mark "June 30, 1997" to which the plaintiff admitted the
superimposition.
14. The superimposition was done without the
knowledge, consent or prior consultation with Leonardo
Bognot which was denied by plaintiff."25 (Emphasis
supplied)
Significantly, the respondent also admitted in the PreTrial Order that part of its company practice is to rubber
stamp, or make a superimposition through a rubber
stamp, the old promissory note which has been renewed
to make it appear that there is a new loan obligation.
The petitioner did not rebut this statement. To our mind,
the failure to rebut is tantamount to an admission of the
respondents allegations:
"22. That it is the practice of plaintiff to just rubber
stamp or make superimposition through a rubber stamp
on old promissory note which has been renewed to

make it appear that there is a new loan obligation to

which the plaintiff admitted." (Emphasis Supplied).26
Even assuming that the note had indeed been tampered
without the petitioners consent, the latter cannot
totally avoid payment of his obligation to the
respondent based on the contract of loan.
Based on the records, the Bognot Siblings had applied
for and were granted a loan of P500,000.00 by the
respondent. The loan was evidenced by a promissory
note and secured by a post-dated check27 dated
November 30, 1996. In fact, the petitioner himself
admitted his loan application was evidenced by the
Promissory Note dated April 1, 1997.28 This loan was
renewed several times by the petitioner, after paying
the renewal fees, as shown by the Official Receipt Nos.
79729 and 58730 dated May 5 and July 3, 1997,
respectively. These official receipts were issued in the
name of the petitioner. Although the petitioner had
insisted that the loan had been extinguished, no other
evidence was presented to prove payment other than
the cancelled and returnedpost-dated check.
Under this evidentiary situation, the petitioner cannot
validly deny his obligation and liability to the
respondent solely on the ground that the Promissory
Note in question was tampered. Notably, the existence
of the obligation, as well as its subsequent renewals,
have been duly established by: first, the petitioners
application for the loan; second, his admission that the
loan had been obtained from the respondent; third, the
post-dated checks issued by the petitioner to secure the
loan; fourth, the testimony of Mr. Bernardez on the

grant, renewal and non-payment of the loan; fifth, proof

of non-payment of the loan; sixth, the loan renewals;
and seventh, the approval and receipt of the loan
renewals.
In Guinsatao v. Court of Appeals,31 this Court pointed out
that while a promissory note is evidence of an
indebtedness, it is not the only evidence, for the
existence of the obligation can be proven by other
documentary evidence such as a written memorandum
signed by the parties. In Pacheco v. Court of
Appeals,32 this Court likewise expressly recognized that
a check constitutes anevidence of indebtedness and is a
veritable proof of an obligation. It canbe used in lieu of
and for the same purpose as a promissory note and can
therefore be presented to establish the existence of
indebtedness.33
In the present petition, we find that the totality of the
evidence on record sufficiently established the
existence of the petitioners indebtedness (and liability)
based on the contract ofloan. Even with the tampered
promissory note, we hold that the petitioner can still be
held liable for the unpaid loan.
The Petitioners BelatedClaim of Novation by
Substitution May no Longer be Entertained
It has not escaped the Courts attention that the
petitioner raised the argument that the obligation had
been extinguished by novation. The petitioner never
raised this issue before the lower courts.

It is a settled principle of law thatno issue may be raised

on appeal unless it has been brought before the lower
tribunal for its consideration.34 Matters neither alleged in
the pleadingsnor raised during the proceedings below
cannot be ventilated for the first time on appeal before
the Supreme Court.35
In any event, we find no merit in the defense of
novation as we discuss at length below. Novation cannot
be presumed and must be clearly and unequivocably
proven.
Novation is a mode of extinguishing an obligation by
changing its objects or principal obligations, by
substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor.36
Article 1293 of the Civil Code defines novation as
follows:
"Art. 1293. Novation which consists insubstituting a new
debtor in the place of the originalone, may be made
even without the knowledge or against the will of the
latter, but not without the consent of the creditor.
Payment by the new debtor gives him rights mentioned
in Articles 1236 and 1237."

To give novation legal effect, the original debtor must be

expressly released from the obligation, and the new
debtor must assume the original debtors place in the
contractual relationship. Depending on who took the
initiative, novation by substitution of debtor has two
forms substitution by expromision and substitution by
delegacion. The difference between these two was
explained in Garcia v. Llamas:37
"In expromision, the initiative for the change does not
come from -- and may even be made without the
knowledge of -- the debtor, since it consists of a third
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."
In both cases, the original debtor must be released from
the obligation; otherwise, there can be no valid
novation.38Furthermore, novation by substitution of
debtor must alwaysbe made with the consent of the
creditor.39
The petitioner contends thatnovation took place through
a substitution of debtors when Mrs. Bognot renewed the
loan and assumed the debt. He alleged that Mrs. Bognot
assumed the obligation by paying the renewal fees and
charges, and by executing a new promissory note. He
further claimed that she issued her own check40 to cover
the renewal fees, which fact, according to the petitioner,
was done with the respondents consent.

Contrary to the petitioners contention, Mrs. Bognot did

not substitute the petitioner as debtor. She merely
attempted to renew the original loan by executing a
new promissory note41 and check. The purported one
month renewal of the loan, however, did not push
through, as Mrs. Bognot did not return the documents or
issue a new post dated check. Since the loan was not
renewed for another month, the originaldue date, June
30,1997, continued to stand.
More importantly, the respondent never agreed to
release the petitioner from his obligation. That the
respondent initially allowed Mrs. Bognot to bring home
the promissory note, disclosure statement and the
petitioners previous check dated June 30, 1997, does
not ipso factoresult in novation. Neither will this
acquiescence constitute an implied acceptance of the
substitution of the debtor.
In order to give novation legal effect, the creditor should
consent to the substitution of a new debtor. Novation
must be clearly and unequivocally shown, and cannot
be presumed.
Since the petitioner failed to show thatthe respondent
assented to the substitution, no valid novation took
place with the effect of releasing the petitioner from his
obligation to the respondent.
Moreover, in the absence of showing that Mrs. Bognot
and the respondent had agreed to release the
petitioner, the respondent can still enforce the payment
of the obligation against the original debtor. Mere
acquiescence to the renewal of the loan, when there is

clearly no agreement to release the petitioner from his

responsibility, does not constitute novation.
The Nature of the Petitioners Liability
On the nature of the petitioners liability, we rule
however, that the CA erred in holding the petitioner
solidarily liable with Rolando.
A solidary obligation is one in which each of the debtors
is liable for the entire obligation, and each of the
creditors is entitled to demand the satisfaction of the
whole obligation from any or all of the debtors.42 There
is solidary liability when the obligation expressly so
states, when the law so provides, or when the nature of
the obligation so requires.43 Thus, when the obligor
undertakes to be "jointly and severally" liable, the
obligation is solidary,
In this case, both the RTC and the CA found the
petitioner solidarily liable with Rolando based on
Promissory Note No. 97-035 dated June 30, 1997. Under
the promissory note, the Bognot Siblings defined the
parameters of their obligation as follows:
"FOR VALUE RECEIVED, I/WE, jointly and severally,
promise to pay to READY RESOURCES INVESTORS RRI
LENDING CORPO. or Order, its office at Paranaque, M.M.
the principal sum of Five Hundred Thousand PESOS
(P500,000.00), PhilippineCurrency, with interest thereon
at the rate of Five percent (5%) per month/annum,
payable in One Installment (01) equal
daily/weekly/semi-monthly/monthly of PESOS Five
Hundred Thousand Pesos (P500,000.00), first

installment to become due on June 30, 1997.

xxx"44 (Emphasis Ours).
Although the phrase "jointly and severally" in the
promissory note clearly and unmistakably provided for
the solidary liability of the parties, we note and stress
that the promissory note is merely a photocopyof the
original, which was never produced.
Under the best evidence rule, whenthe subject of
inquiry is the contents of a document, no evidence
isadmissible other than the original document itself
except in the instances mentioned in Section 3, Rule
130 of the Revised Rules of Court.45
The records show that the respondenthad the custody of
the original promissory note dated April 1, 1997, with a
superimposed rubber stamp mark "June 30, 1997", and
that it had been given every opportunity to present it.
The respondent even admitted during pre-trial that it
could not present the original promissory note because
it is in the custody of its cashier who is stranded in
Bicol.46 Since the respondent never produced the
original of the promissory note, much less offered to
produce it, the photocopy of the promissory note cannot
be admitted as evidence. Other than the promissory
note in question, the respondent has not presented any
other evidence to support a finding of solidary liability.
As we earlier noted, both lower courts completely relied
on the note when they found the Bognot
siblingssolidarily liable.

The well-entrenched rule is that solidary obligation

cannot be inferred lightly. It must be positively and
clearly expressed and cannot be presumed.47
In view of the inadmissibility of the promissory note, and
in the absence of evidence showing that the petitioner
had bound himself solidarily with Rolando for the
payment of the loan, we cannot but conclude that the
obligation to pay is only joint.48
The 5% Monthly Interest Stipulated in the Promissory
Note is Unconscionable and Should be Equitably
Reduced
Finally, on the issue of interest, while we agree with the
CA that the petitioner is liable to the respondentfor the
unpaid loan, we find the imposition of the 5% monthly
interest to be excessive, iniquitous, unconscionable and
exorbitant, and hence, contrary to morals and
jurisprudence. Although parties to a loan agreement
have wide latitude to stipulate on the applicable interest
rate under Central Bank Circular No. 905 s. 1982 (which
suspended the Usury Law ceiling on interest effective
January 1, 1983), we stress that unconscionable interest
rates may still be declared illegal.49
In several cases, we haveruled that stipulations
authorizing iniquitous or unconscionable interests are
contrary to morals and are illegal. In Medel v. Court of
Appeals,50 we annulled a stipulated 5.5% per month or
66% per annum interest on a P500,000.00 loan, and a
6% per month or 72% per annum interest on
a P60,000.00 loan, respectively, for being excessive,
iniquitous, unconscionableand exorbitant.1wphi1

We reiterated this ruling in Chua v. Timan,51 where we

held that the stipulated interest rates of 3% per month
and higher are excessive, iniquitous, unconscionable
and exorbitant, and must therefore be reduced to 12%
per annum.

MANUEL GO CINCO and

ARACELI S. GO CINCO,
Petitioners,

G.R. No. 151903

Present:

Applying these cited rulings, we now accordingly hold

that the stipulated interest rate of 5% per month, (or
60% per annum) in the promissory note is excessive,
unconscionable, contrary to morals and is thus illegal. It
is void ab initiofor violating Article 130652 of the Civil
Code.1wphi1 We accordingly find it equitable to reduce
the interest rate from 5% per month to 1% per month or
12% per annum in line with the prevailing
jurisprudence.
WHEREFORE, premises considered, the Decision dated
March 28, 2007 of the Court of Appeals in CA-G.R. CV
No. 66915 is hereby AFFIRMED with MODIFICATION, as
follows:
1. The petitioner Leonardo A. Bognotand his
brother, Rolando A. Bognot are JOINTLY LIABLE to
pay the sum of P500,000.00 plus 12% interest per
annum from December 3, 1997 until fully paid.

CORONA, J.,

**

CARPIO-MORALES,

Acting Chairperson,
***

NACHURA,

BRION, and
ABAD, JJ.
COURT OF APPEALS, ESTER
SERVACIO and MAASIN
TRADERS LENDING
CORPORATION,

Promulgated:

Respondents.
October 9, 2009

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

2. The rest of the Court of Appeals' dispositions

are hereby AFFIRMED.
Costs against petitioner Leonardo A. Bognot.

versus -

DECISION

BRION, J.:

Before the Court is a petition for review

on certiorari[1] filed by petitioners, spouses Manuel and
Araceli Go Cinco (collectively, the spouses Go Cinco),
assailing the decision[2] dated June 22, 2001 of the Court
of Appeals (CA) in CA-G.R. CV No. 47578, as well as the
resolution[3] dated January 25, 2002 denying the
spouses Go Cincos motion for reconsideration.

THE FACTUAL ANTECEDENTS

In December 1987, petitioner Manuel Cinco (Manuel)

obtained
a
commercial
loan
in
the
amount
of P700,000.00 from respondent Maasin Traders Lending
Corporation (MTLC). The loan was evidenced by a
promissory note dated December 11, 1987,[4] and
secured by a real estate mortgage executed
on December 15, 1987 over the spouses Go Cincos land
and 4-storey building located in Maasin, Southern Leyte.
Under
the
terms
of
the
promissory
note,
the P700,000.00 loan was subject to a monthly interest
rate of 3% or 36% per annum and was payable within a
term of 180 days or 6 months, renewable for another
180 days. As of July 16, 1989, Manuels outstanding
obligation with MTLC amounted to P1,071,256.66, which
amount included the principal, interest, and penalties.[5]

To be able to pay the loan in favor of MTLC, the spouses

Go Cinco applied for a loan with the Philippine National
Bank, Maasin Branch (PNB or the bank) and offered as
collateral the same properties they previously

mortgaged to MTLC. The PNB approved the loan

application for P1.3 Million[6] through a letter dated July
8, 1989; the release of the amount, however, was
conditioned on the cancellation of the mortgage in favor
of MTLC.

On July 16, 1989, Manuel went to the house of

respondent Ester Servacio (Ester), MTLCs President, to
inform her that there was money with the PNB for the
payment of his loan with MTLC. Ester then proceeded to
the PNB to verify the information, but she claimed that
the banks officers informed her that Manuel had no
pending loan application with them. When she told
Manuel of the banks response, Manuel assured her there
was money with the PNB and promised to execute a
document that would allow her to collect the proceeds
of the PNB loan.

On July 20, 1989, Manuel executed a Special

Power of Attorney[7] (SPA) authorizing Ester to collect the
proceeds of his PNB loan. Ester again went to the bank
to inquire about the proceeds of the loan. This time, the
banks officers confirmed the existence of the P1.3
Million loan, but they required Ester to first sign a deed
of release/cancellation of mortgage before they could
release the proceeds of the loan to her. Outraged that
the spouses Go Cinco used the same properties
mortgaged to MTLC as collateral for the PNB loan, Ester
refused to sign the deed and did not collect the P1.3
Million loan proceeds.

As the MTLC loan was already due, Ester instituted

foreclosure proceedings against the spouses Go Cinco
on July 24, 1989.

To prevent the foreclosure of their properties, the

spouses Go Cinco filed an action for specific
performance,
damages,
and
preliminary
[8]
injunction before the Regional Trial Court (RTC),
Branch 25, Maasin, Southern Leyte. The spouses Go
Cinco alleged that foreclosure of the mortgage was no
longer proper as there had already been settlement of
Manuels obligation in favor of MTLC. They claimed that
the assignment of the proceeds of the PNB loan
amounted to the payment of the MTLC loan. Esters
refusal to sign the deed of release/cancellation of
mortgage and to collect the proceeds of the PNB loan
were, to the spouses Go Cinco, completely unjustified
and entitled them to the payment of damages.

payment or performance of obligation to the damage

and prejudice of debtors who may stand liable for
payment of higher interest rates.[10] After finding MTLC
and Ester liable for abuse of rights, the RTC ordered the
award of the following amounts to the spouses Go
Cinco:

(a)

(b) P100,000.00 as unrealized profit;

(c)

Ester countered these allegations by claiming that

she had not been previously informed of the spouses Go
Cincos plan to obtain a loan from the PNB and to use the
loan proceeds to settle Manuels loan with MTLC. She
claimed that she had no explicit agreement with Manuel
authorizing her to apply the proceeds of the PNB loan to
Manuels loan with MTLC; the SPA merely authorized her
to collect the proceeds of the loan. She thus averred
that it was unfair for the spouses Go Cinco to require
the release of the mortgage to MTLC when no actual
payment of the loan had been made.

In a decision dated August 16, 1994,[9] the RTC

ruled in favor of the spouses Go Cinco. The trial court
found that the evidence sufficiently established the
existence of the PNB loan whose proceeds were
available to satisfy Manuels obligation with MTLC, and
that Ester unjustifiably refused to collect the
amount.Creditors, it ruled, cannot unreasonably prevent

P1,044,475.15 plus 535.63 per day

hereafter, representing loss of savings
on interest, by way of actual or
compensatory damages, if defendant
corporation insists on the original 3%
monthly interest rate;

P1,000,000.00 as moral damages;

(d) P20,000.00 as exemplary damages;

(e)

P22,000.00 as litigation expenses;

and

(f) 10% of the total amount as attorneys

fees plus costs.[11]

Through an appeal with the CA, MTLC and Ester

successfully secured a reversal of the RTCs
decision. Unlike the trial court, the appellate court found
it significant that there was no explicit agreement
between Ester and the spouses Go Cinco for the
cancellation of the MTLC mortgage in favor of PNB to
facilitate the release and collection by Ester of the
proceeds of the PNB loan. The CA read the SPA as
merely authorizing Ester to withdraw the proceeds of

the loan. As Manuels loan obligation with MTLC

remained unpaid, the CA ruled that no valid objection
could be made to the institution of the foreclosure
proceedings. Accordingly, it dismissed the spouses Go
Cinco complaint. From this dismissal, the spouses Go
Cinco filed the present appeal by certiorari.

not aware of the loan and the mortgage to PNB, and

that there was no agreement that the proceeds of the
PNB loan were to be used to settle Manuels obligation
with MTLC. Since the MTLC loan remained unpaid, they
insist that the institution of the foreclosure proceedings
was proper. Additionally, MTLC and Ester contend that
the present petition raised questions of fact that cannot
be addressed in a Rule 45 petition.

THE PETITION

The spouses Go Cinco impute error on the part of

the CA for its failure to consider their acts as equivalent
to payment that extinguished the MTLC loan; their act of
applying for a loan with the PNB was indicative of their
good faith and honest intention to settle the loan with
MTLC. They contend that the creditors have the
correlative duty to accept the payment.

The spouses Go Cinco charge MTLC and Ester with

bad faith and ill-motive for unjustly refusing to collect
the proceeds of the loan and to execute the deed of
release
of
mortgage. They
assert
that
Esters
justifications for refusing the payment were flimsy
excuses so she could proceed with the foreclosure of the
mortgaged properties that were worth more than the
amount due to MTLC. Thus, they conclude that the acts
of MTLC and of Ester amount to abuse of rights that
warrants the award of damages in their (spouses Go
Cincos) favor.

In refuting the claims of the spouses Go Cinco,

MTLC and Ester raise the same arguments they raised
before the RTC and the CA. They claim that they were

THE COURTS RULING

The Court finds the petition meritorious.

Preliminary Considerations

Our review of the records shows that there are no

factual questions involved in this case; the ultimate
facts necessary for the resolution of the case already
appear in the records. The RTC and the CA decisions
differed not so much on the findings of fact, but on the
conclusions derived from these factual findings. The
correctness of the conclusions derived from factual
findings raises legal questions when the conclusions
are so linked to, or are inextricably intertwined with, the
appreciation of the applicable law that the case
requires, as in the present case. [12] The petition raises
the issue of whether the loan due the MTLC had been
extinguished; this is a question of law that this Court
can fully address and settle in an appeal by certiorari.

Payment as Mode of

Extinguishing Obligations
Obligations are extinguished, among others, by
payment or performance,[13] the mode most relevant to
the factual situation in the present case. Under Article
1232 of the Civil Code, payment means not only the
delivery of money but also the performance, in any
other manner, of an obligation. Article 1233 of the Civil
Code states that a debt shall not be understood to have
been paid unless the thing or service in which the
obligation consists has been completely delivered or
rendered, as the case may be. In contracts of loan, the
debtor is expected to deliver the sum of money due the
creditor. These provisions must be read in relation with
the other rules on payment under the Civil Code,
[14]
which rules impliedly require acceptance by the
creditor of the payment in order to extinguish an
obligation.

In the present case, Manuel sought to pay Ester

by authorizing her, through an SPA, to collect the
proceeds of the PNB loan an act that would have led to
payment if Ester had collected the loan proceeds as
authorized. Admittedly, the delivery of the SPA was not,
strictly speaking, a delivery of the sum of money due to
MTLC, and Ester could not be compelled to accept it as
payment based on Article 1233. Nonetheless, the SPA
stood as an authority to collect the proceeds of the
already-approved PNB loan that, upon receipt by Ester,
would have constituted as payment of the MTLC loan.
[15]
Had Ester presented the SPA to the bank and signed
the deed of release/cancellation of mortgage, the
delivery of the sum of money would have been effected
and the obligation extinguished.[16] As the records show,
Ester refused to collect and allow the cancellation of the
mortgage.

Under these facts, Manuel posits two things: first,

that Esters refusal was based on completely
unjustifiable grounds; and second, that the refusal was
equivalent to payment that led to the extinguishment of
the obligation.

a. Unjust Refusal to Accept Payment

After considering Esters arguments, we agree with

Manuel that Esters refusal of the payment was without
basis.

Ester refused to accept the payment because the

bank required her to first sign a deed of
release/cancellation of the mortgage before the
proceeds of the PNB loan could be released. As a prior
mortgagee, she claimed that the spouses Go Cinco
should have obtained her consent before offering the
properties already mortgaged to her as security for the
PNB loan. Moreover, Ester alleged that the SPA merely
authorized her to collect the proceeds of the loan; there
was no explicit agreement that the MTLC loan would be
paid out of the proceeds of the PNB loan.

There is nothing legally objectionable in a

mortgagors act of taking a second or subsequent
mortgage on a property already mortgaged; a
subsequent mortgage is recognized as valid by law and
by commercial practice, subject to the prior rights of
previous mortgages. Section 4, Rule 68 of the 1997
Rules of Civil Procedure on the disposition of the

proceeds of sale after foreclosure actually requires the

payment of the proceeds to, among others, the junior
encumbrancers in the order of their priority. [17] Under
Article 2130 of the Civil Code, a stipulation forbidding
the owner from alienating the immovable mortgaged is
considered void. If the mortgagor-owner is allowed to
convey the entirety of his interests in the mortgaged
property, reason dictates that the lesser right to
encumber his property with other liens must also be
recognized. Ester, therefore, could not validly require
the spouses Go Cinco to first obtain her consent to the
PNB loan and mortgage. Besides, with the payment of
the MTLC loan using the proceeds of the PNB loan, the
mortgage in favor of the MTLC would have naturally
been cancelled.

We find it improbable for Ester to claim that there

was no agreement to apply the proceeds of the PNB
loan to the MTLC loan. Beginning July 16, 1989, Manuel
had already expressed intent to pay his loan with MTLC
and thus requested for an updated statement of
account. Given Manuels express intent of fully settling
the MTLC loan and of paying through the PNB loan he
would secure (and in fact secured), we also cannot give
credit to the claim that the SPA only allowed Ester to
collect the proceeds of the PNB loan, without giving her
the accompanying authority, although verbal, to apply
these proceeds to the MTLC loan. Even Esters actions
belie her claim as she in fact even went to the PNB to
collect the proceeds. In sum, the surrounding
circumstances of the case simply do not support Esters
position.

b. Unjust Refusal Cannot be Equated to

Payment

While Esters refusal was unjustified and

unreasonable, we cannot agree with Manuels position
that this refusal had the effect of payment that
extinguished his obligation to MTLC. Article 1256 is clear
and unequivocal on this point when it provides that

ARTICLE 1256. If the creditor to whom

tender of payment has been made refuses
without just cause to accept it, the
debtor shall be released from responsibility
by the consignation of the thing or sum due.
[Emphasis supplied.]

In short, a refusal without just cause is not equivalent to

payment; to have the effect of payment and the
consequent extinguishment of the obligation to pay, the
law requires the companion acts of tender of payment
and consignation.

Tender of payment, as defined in Far East Bank

and Trust Company v. Diaz Realty, Inc.,[18] is the
definitive act of offering the creditor what is due him or
her, together with the demand that the creditor accept
the same. When a creditor refuses the debtors tender of
payment, the law allows the consignation of the thing or
the sum due. Tender and consignation have the effect of
payment, as by consignation, the thing due is deposited
and placed at the disposal of the judicial authorities for
the creditor to collect.[19]

A sad twist in this case for Manuel was that he

could not avail of consignation to extinguish his
obligation to MTLC, as PNB would not release the
proceeds of the loan unless and until Ester had signed
the deed of release/cancellation of mortgage, which she
unjustly refused to do. Hence, to compel Ester to accept
the loan proceeds and to prevent their mortgaged
properties from being foreclosed, the spouses Go Cinco
found it necessary to institute the present case for
specific performance and damages.

c. Effects of Unjust Refusal

Under these circumstances, we hold that while no

completed tender of payment and consignation took
place sufficient to constitute payment, the spouses Go
Cinco duly established that they have legitimately
secured a means of paying off their loan with MTLC;
they were only prevented from doing so by the unjust
refusal of Ester to accept the proceeds of the PNB loan
through her refusal to execute the release of the
mortgage on the properties mortgaged to MTLC. In
other words, MTLC and Ester in fact prevented the
spouses Go Cinco from the exercise of their right to
secure payment of their loan. No reason exists under
this legal situation why we cannot compel MTLC and
Ester: (1) to release the mortgage to MTLC as a
condition to the release of the proceeds of the PNB loan,
upon PNBs acknowledgment that the proceeds of the
loan are ready and shall forthwith be released; and (2)
to accept the proceeds, sufficient to cover the total
amount of the loan to MTLC, as payment for Manuels
loan with MTLC.

We also find that under the circumstances, the

spouses Go Cinco have undertaken, at the very
least, the equivalent of a tender of payment that cannot
but have legal effect. Since payment was available and
was unjustifiably refused, justice and equity demand
that the spouses Go Cinco be freed from the
obligation to pay interest on the outstanding
amount from the time the unjust refusal took
place;[20] they would not have been liable for any
interest from the time tender of payment was made if
the payment had only been accepted. Under Article 19
of the Civil Code, they should likewise be entitled to
damages, as the unjust refusal was effectively an
abusive act contrary to the duty to act with honesty and
good faith in the exercise of rights and the fulfillment of
duty.

For these reasons, we delete the amounts

awarded by the RTC to the spouses Go Cinco
(P1,044,475.15,
plus P563.63
per
month)
representing loss of savings on interests for lack of legal
basis. These amounts were computed based on the
difference in the interest rates charged by the MTLC
(36% per annum) and the PNB (17% to 18% per
annum), from the date of tender of payment up to the
time of the promulgation of the RTC decision. The trial
court failed to consider the effects of a tender of
payment and erroneously declared that MTLC can
charge interest at the rate of only 18% per annum the
same rate that PNB charged, not the 36% interest rate
that MTLC charged; the RTC awarded the difference in
the interest rates as actual damages.

As part of the actual and compensatory damages, the

RTC also awarded P100,000.00 to the spouses Go Cinco

representing unrealized
profits. Apparently,
if
the
proceeds of the PNB loan (P1,203,685.17) had been
applied to the MTLC loan (P1,071,256.55), there would
have been a balance of P132,428.62 left, which amount
the spouses Go Cinco could have invested in their
businesses that would have earned them a profit of at
least P100,000.00.

We find no factual basis for this award. The

spouses Go Cinco were unable to substantiate the
amount they claimed as unrealized profits; there was
only their bare claim that the excess could have been
invested in their other businesses. Without more, this
claim of expected profits is at best speculative and
cannot be the basis for a claim for damages. In Lucas v.
Spouses Royo,[21] we declared that:

In determining actual damages, the Court

cannot rely on speculation, conjecture or
guesswork as to the amount. Actual and
compensatory
damages
are
those
recoverable because of pecuniary loss in
business, trade, property, profession, job or
occupation
and
the
same must
be
sufficiently proved, otherwise, if the
proof is flimsy and unsubstantiated, no
damages will be given. [Emphasis
supplied.]

Esters act of refusing payment was motivated by bad

faith as evidenced by the utter lack of substantial
reasons to support it. Her unjust refusal, in her behalf
and for the MTLC which she represents, amounted to an
abuse of rights; they acted in an oppressive manner
and, thus, are liable for moral and exemplary damages.
[22]
We
nevertheless
reduce
the P1,000,000.00 to P100,000.00 as the originally
awarded amount for moral damages is plainly
excessive.

We affirm the grant of exemplary damages by way

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

As the spouses Go Cinco were compelled to

litigate to protect their interests, they are entitled to
payment of 10% of the total amount of awarded
damages as attorneys fees and expenses of litigation.

WHEREFORE, we GRANT the petitioners petition

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

We agree, however, that there was basis for the award

of moral and exemplary damages and attorneys fees.
(1)

The respondents are hereby

directed to accept the proceeds of the

spouses Go Cincos PNB loan, if still

available, and to consent to the release
of the mortgage on the property given
as security for the loan upon PNBs
acknowledgment that the proceeds of
the loan, sufficient to cover the total
indebtedness to respondent Maasin
Traders Lending Corporation computed
as of June 20, 1989, shall forthwith be
released;
(2)

The award for loss of

savings and unrealized profit is deleted;

(3)

The
award
for
moral
damages is reduced to P100,000.00;
and

(4)

The awards for exemplary

damages, attorneys fees, and expenses
of litigation are retained.

The awards under (3) and (4) above shall be deducted

from the amount of the outstanding loan due the
respondents as of June 20, 1989. Costs against the
respondents.

BERSAMIN, J.:
To avoid unjust enrichment to a party from resulting out
of a substantially performed contract, the principle of
quantum meruit may be used to determine his
compensation in the absence of a written agreement for
that purpose. The principle of quantum meruit justifies
the payment of the reasonable value of the services
rendered by him.
The Case
Under review is the decision the Court of Appeals (CA)
promulgated on November 8, 2002,1 disposing:
WHEREFORE, premises considered, the decision dated
August 26, 1993 of the Regional Trial Court, Branch 13,
Manila in Civil Case No. R-82-2434 is AFFIRMED with
Modification as to the amounts awarded as follows:
defendant-appellant IHC is ordered to pay plaintiffappellant Joaquin P700,000.00 and plaintiff-appellant
SuarezP200,000.00, both to be paid in cash.
SO ORDERED.
Antecedents

G.R. No. 158361

April 10, 2013

INTERNATIONAL HOTEL CORPORATION, Petitioner,

vs.
FRANCISCO B. JOAQUIN, JR. and RAFAEL
SUAREZ, Respondents.
DECISION

On February 1, 1969, respondent Francisco B. Joaquin,

Jr. submitted a proposal to the Board of Directors of the
International Hotel Corporation (IHC) for him to render
technical assistance in securing a foreign loan for the
construction of a hotel, to be guaranteed by the
Development Bank of the Philippines (DBP).2 The
proposal encompassed nine phases, namely: (1) the

preparation of a new project study; (2) the settlement of

the unregistered mortgage prior to the submission of
the application for guaranty for processing by DBP; (3)
the preparation of papers necessary to the application
for guaranty; (4) the securing of a foreign financier for
the project; (5) the securing of the approval of the DBP
Board of Governors; (6) the actual follow up of the
application with DBP3; (7) the overall coordination in
implementing the projections of the project study; (8)
the preparation of the staff for actual hotel operations;
and (9) the actual hotel operations.4
The IHC Board of Directors approved phase one to
phase six of the proposal during the special board
meeting on February 11, 1969, and
earmarked P2,000,000.00 for the project.5 Anent the
financing, IHC applied with DBP for a foreign loan
guaranty. DBP processed the application,6 and approved
it on October 24, 1969 subject to several conditions.7
On July 11, 1969, shortly after submitting the
application to DBP, Joaquin wrote to IHC to request the
payment of his fees in the amount of P500,000.00 for
the services that he had provided and would be
providing to IHC in relation to the hotel project that were
outside the scope of the technical proposal. Joaquin
intimated his amenability to receive shares of stock
instead of cash in view of IHCs financial situation.8
On July 11, 1969, the stockholders of IHC met and
granted Joaquins request, allowing the payment for
both Joaquin and Rafael Suarez for their services in
implementing the proposal.9

On June 20, 1970, Joaquin presented to the IHC Board of

Directors the results of his negotiations with potential
foreign financiers. He narrowed the financiers to Roger
Dunn & Company and Materials Handling Corporation.
He recommended that the Board of Directors consider
Materials Handling Corporation based on the more
beneficial terms it had offered. His recommendation was
accepted.10
Negotiations with Materials Handling Corporation and,
later on, with its principal, Barnes International (Barnes),
ensued. While the negotiations with Barnes were
ongoing, Joaquin and Jose Valero, the Executive Director
of IHC, met with another financier, the Weston
International Corporation (Weston), to explore possible
financing.11 When Barnes failed to deliver the needed
loan, IHC informed DBP that it would submit Weston for
DBPs consideration.12As a result, DBP cancelled its
previous guaranty through a letter dated December 6,
1971.13
On December 13, 1971, IHC entered into an agreement
with Weston, and communicated this development to
DBP on June 26, 1972. However, DBP denied the
application for guaranty for failure to comply with the
conditions contained in its November 12, 1971 letter.14
Due to Joaquins failure to secure the needed loan, IHC,
through its President Bautista, canceled the 17,000
shares of stock previously issued to Joaquin and Suarez
as payment for their services. The latter requested a
reconsideration of the cancellation, but their request
was rejected.

Consequently, Joaquin and Suarez commenced this

action for specific performance, annulment, damages
and injunction by a complaint dated December 6, 1973
in the Regional Trial Court in Manila (RTC), impleading
IHC and the members of its Board of Directors, namely,
Felix Angelo Bautista, Sergio O. Rustia, Ephraim G.
Gochangco, Mario B. Julian, Benjamin J. Bautista, Basilio
L. Lirag, Danilo R. Lacerna and Hermenegildo R.
Reyes.15 The complaint alleged that the cancellation of
the shares had been illegal, and had deprived them of
their right to participate in the meetings and elections
held by IHC; that Barnes had been recommended by IHC
President Bautista, not by Joaquin; that they had failed
to meet their obligation because President Bautista and
his son had intervened and negotiated with Barnes
instead of Weston; that DBP had canceled the guaranty
because Barnes had failed to release the loan; and that
IHC had agreed to compensate their services with
17,000 shares of the common stock plus cash
of P1,000,000.00.16
IHC, together with Felix Angelo Bautista, Sergio O.
Rustia, Mario B. Julian and Benjamin J. Bautista, filed an
answer claiming that the shares issued to Joaquin and
Suarez as compensation for their "past and future
services" had been issued in violation of Section 16 of
the Corporation Code; that Joaquin and Suarez had not
provided a foreign financier acceptable to DBP; and that
they had already received P96,350.00 as payment for
their services.17
On their part, Lirag and Lacerna denied any knowledge
of or participation in the cancellation of the shares.18

Similarly, Gochangco and Reyes denied any knowledge

of or participation in the cancellation of the shares, and
clarified that they were not directors of IHC.19 In the
course of the proceedings, Reyes died and was
substituted by Consorcia P. Reyes, the administratrix of
his estate.20
Ruling of the RTC
Under its decision rendered on August 26, 1993, the RTC
held IHC liable pursuant to the second paragraph of
Article 1284 of the Civil Code, disposing thusly:
WHEREFORE, in the light of the above facts, law and
jurisprudence, the Court hereby orders the defendant
International Hotel Corporation to pay plaintiff Francisco
B. Joaquin, the amount of Two Hundred Thousand Pesos
(P200,000.00) and to pay plaintiff Rafael Suarez the
amount of Fifty Thousand Pesos (P50,000.00); that the
said defendant IHC likewise pay the co-plaintiffs,
attorneys fees of P20,000.00, and costs of suit.
IT IS SO ORDERED.21
The RTC found that Joaquin and Suarez had failed to
meet their obligations when IHC had chosen to
negotiate with Barnes rather than with Weston, the
financier that Joaquin had recommended; and that the
cancellation of the shares of stock had been proper
under Section 68 of the Corporation Code, which
allowed such transfer of shares to compensate only past
services, not future ones.
Ruling of the CA

Both parties appealed.22

THE LOWER COURT ERRED IN AWARDING PLAINTIFFSAPPELLANTS ATTORNEYS FEES AND COSTS OF SUIT. 24

Joaquin and Suarez assigned the following errors, to wit:

DESPITE HAVING CORRECTLY ACKNOWLEDGED THAT
PLAINTIFFS-APPELLANTS FULLY PERFORMED ALL THAT
WAS INCUMBENT UPON THEM, THE HONORABLE JUDGE
ERRED IN NOT ORDERING THAT:
A. DEFENDANTS WERE UNJUSTIFIED IN
CANCELLING THE SHARES OF STOCK PREVIOUSLY
ISSUED TO PLAINTIFFS-APPELLANTS; AND
B. DEFENDANTS PAY PLAINTIFFS-APPELLANTS TWO
MILLION SEVEN HUNDRED PESOS (sic)
(P2,700,000.00), INCLUDING INTEREST THEREON
FROM 1973, REPRESENTING THE TOTAL
OBLIGATION DUE PLAINTIFFS-APPELLANTS.23
On the other hand, IHC attributed errors to the RTC, as
follows:
I.
THE LOWER COURT ERRED IN HOLDING THAT
PLAINTIFFS-APPELLANTS HAVE NOTBEEN COMPLETELY
PAID FOR THEIR SERVICES, AND IN ORDERING THE
DEFENDANT-APPELLANT TO PAY TWO HUNDRED
THOUSAND PESOS (P200,000.00) AND FIFTY THOUSAND
PESOS (P50,000.00) TO PLAINTIFFS-APPELLANTS
FRANCISCO B. JOAQUIN AND RAFAEL SUAREZ,
RESPECTIVELY.
II.

In its questioned decision promulgated on November 8,

2002, the CA concurred with the RTC, upholding IHCs
liability under Article 1186 of the Civil Code. It ruled that
in the context of Article 1234 of the Civil Code, Joaquin
had substantially performed his obligations and had
become entitled to be paid for his services; and that the
issuance of the shares of stock was ultra vires for having
been issued as consideration for future services.
Anent how much was due to Joaquin and Suarez, the CA
explained thusly:
This Court does not subscribe to plaintiffs-appellants
view that defendant-appellant IHC agreed to pay
themP2,000,000.00. Plaintiff-appellant Joaquins letter
to defendant-appellee F.A. Bautista, quoting defendantappellant IHCs board resolutions which supposedly
authorized the payment of such amount cannot be
sustained. The resolutions are quite clear and when
taken together show that said amount was only the
"estimated maximum expenses" which defendantappellant IHC expected to incur in accomplishing phases
1 to 6, not exclusively to plaintiffs-appellants
compensation.This conclusion finds support in an
unnumbered board resolution of defendant-appellant
IHC dated July 11, 1969:
"Incidentally, it was also taken up the necessity of
giving the Technical Group a portion of the
compensation that was authorized by this corporation in
its Resolution of February 11, 1969 considering that the

assistance so far given the corporation by said Technical

Group in continuing our project with the DBP and its
request for guaranty for a foreign loan is 70%
completed leaving only some details which are now
being processed. It is estimated thatP400,000.00 worth
of Common Stock would be reasonable for the present
accomplishments and to this effect, the President is
authorized to issue the same in the name of the
Technical Group, as follows:
P200,000.00 in common stock to Rafael Suarez, as
associate in the Technical Group, and P200,000.00 in
common stock to Francisco G. Joaquin, Jr., also a
member of the Technical Group.
It is apparent that not all of the P2,000,000.00 was
allocated exclusively to compensate plaintiffsappellants. Rather, it was intended to fund the whole
undertaking including their compensation. On the same
date, defendant-appellant IHC also authorized its
president to pay-appellant Joaquin P500,000.00 either in
cash or in stock or both.
The amount awarded by the lower court was therefore
less than what defendant-appellant IHC agreed to pay
plaintiffs-appellants. While this Court cannot decree that
the cancelled shares be restored, for they are without a
doubt null and void, still and all, defendant-appellant
IHC cannot now put up its own ultra vires act as an
excuse to escape obligation to plaintiffs-appellants.
Instead of shares of stock, defendant-appellant IHC is
ordered to pay plaintiff-appellant Joaquin a total
of P700,000.00 and plaintiff-appellant
Suarez P200,000.00, both to be paid in cash.

Although the lower court failed to explain why it was

granting the attorneys fees, this Court nonetheless
finds its award proper given defendant-appellant IHCs
actions.25
Issues
In this appeal, the IHC raises as issues for our
consideration and resolution the following:
I
WHETHER OR NOT THE COURT OF APPEALS IS CORRECT
IN AWARDING COMPENSATION AND EVEN MODIFYING
THE PAYMENT TO HEREIN RESPONDENTS DESPITE NONFULFILLMENT OF THEIR OBLIGATION TO HEREIN
PETITIONER
II
WHETHER OR NOT THE COURT OF APPEALS IS CORRECT
IN AWARDING ATTORNEYS FEES TO RESPONDENTS26
IHC maintains that Article 1186 of the Civil Code was
erroneously applied; that it had no intention of
preventing Joaquin from complying with his obligations
when it adopted his recommendation to negotiate with
Barnes; that Article 1234 of the Civil Code applied only if
there was a merely slight deviation from the obligation,
and the omission or defect was technical and
unimportant; that substantial compliance was
unacceptable because the foreign loan was material and
was, in fact, the ultimate goal of its contract with
Joaquin and Suarez; that because the obligation was

indivisible and subject to a suspensive condition, Article

1181 of the Civil Code27 applied, under which a partial
performance was equivalent to non-performance; and
that the award of attorneys fees should be deleted for
lack of legal and factual bases.
On the part of respondents, only Joaquin filed a
comment,28 arguing that the petition was fatally
defective for raising questions of fact; that the
obligation was divisible and capable of partial
performance; and that the suspensive condition was
deemed fulfilled through IHCs own actions.29
Ruling
We deny the petition for review on certiorari subject to
the ensuing disquisitions.

facts, the question of whether or not the conclusion

drawn from the facts is correct is a question of law.31
Considering that what IHC seeks to review is the CAs
application of the law on the facts presented therein,
there is no doubt that IHC raises questions of law. The
basic issue posed here is whether the conclusions drawn
by the CA were correct under the pertinent laws.
2.
Article 1186 and Article 1234 of the Civil Code cannot
be the source of IHCs obligation to pay respondents IHC
argues that it should not be held liable because: (a) it
was Joaquin who had recommended Barnes; and (b)
IHCs negotiation with Barnes had been neither
intentional nor willfully intended to prevent Joaquin from
complying with his obligations.

1.
IHCs argument is meritorious.
IHC raises questions of law
Article 1186 of the Civil Code reads:
We first consider and resolve whether IHCs petition
improperly raised questions of fact.
A question of law exists when there is doubt as to what
the law is on a certain state of facts, but, in contrast, a
question of fact exists when the doubt arises as to the
truth or falsity of the facts alleged. A question of law
does not involve an examination of the probative value
of the evidence presented by the litigants or by any of
them; the resolution of the issue must rest solely on
what the law provides on the given set of
circumstances.30 When there is no dispute as to the

Article 1186. The condition shall be deemed fulfilled

when the obligor voluntarily prevents its fulfillment.
This provision refers to the constructive fulfillment of a
suspensive condition,32 whose application calls for two
requisites, namely: (a) the intent of the obligor to
prevent the fulfillment of the condition, and (b) the
actual prevention of the fulfillment. Mere intention of
the debtor to prevent the happening of the condition, or
to place ineffective obstacles to its compliance, without
actually preventing the fulfillment, is insufficient.33

The error lies in the CAs failure to determine IHCs

intent to pre-empt Joaquin from meeting his obligations.
The June 20, 1970 minutes of IHCs special board
meeting discloses that Joaquin impressed upon the
members of the Board that Materials Handling was
offering more favorable terms for IHC, to wit:
xxxx
At the meeting all the members of the Board of
Directors of the International Hotel Corporation were
present with the exception of Directors Benjamin J.
Bautista and Sergio O. Rustia who asked to be excused
because of previous engagements. In that meeting, the
President called on Mr. Francisco G. Joaquin, Jr. to
explain the different negotiations he had conducted
relative to obtaining the needed financing for the hotel
project in keeping with the authority given to him in a
resolution approved by the Board of Directors.
Mr. Joaquin presently explained that he contacted
several local and foreign financiers through different
brokers and after examining the different offers he
narrowed down his choice to two (2), to wit: the foreign
financier recommended by George Wright of the Roger
Dunn & Company and the offer made by the Materials
Handling Corporation.
After explaining the advantages and disadvantages to
our corporation of the two (2) offers specifically with
regard to the terms and repayment of the loan and the
rate of interest requested by them, he concluded that
the offer made by the Materials Handling Corporation is
much more advantageous because the terms and

conditions of payment as well as the rate of interest are

much more reasonable and would be much less onerous
to our corporation. However, he explained that the
corporation accepted, in principle, the offer of Roger
Dunn, per the corporations telegrams to Mr. Rudolph
Meir of the Private Bank of Zurich, Switzerland, and until
such time as the corporations negotiations with Roger
Dunn is terminated, we are committed, on one way or
the other, to their financing.
It was decided by the Directors that, should the
negotiations with Roger Dunn materialize, at the same
time as the offer of Materials Handling Corporation, that
the funds committed by Roger Dunn may be diverted to
other borrowers of the Development Bank of the
Philippines. With this condition, Director Joaquin showed
the advantages of the offer of Materials Handling
Corporation. Mr. Joaquin also informed the corporation
that, as of this date, the bank confirmation of Roger
Dunn & Company has not been received. In view of the
fact that the corporation is racing against time in
securing its financing, he recommended that the
corporation entertain other offers.
After a brief exchange of views on the part of the
Directors present and after hearing the clarification and
explanation made by Mr. C. M. Javier who was present
and who represented the Materials Handling
Corporation, the Directors present approved
unanimously the recommendation of Mr. Joaquin to
entertain the offer of Materials Handling Corporation.34
Evidently, IHC only relied on the opinion of its consultant
in deciding to transact with Materials Handling and,

later on, with Barnes. In negotiating with Barnes, IHC

had no intention, willful or otherwise, to prevent Joaquin
and Suarez from meeting their undertaking. Such
absence of any intention negated the basis for the CAs
reliance on Article 1186 of the Civil Code.

whole or be so material that the object which the parties

intended to accomplish in a particular manner is not
attained. The non-performance of a material part of a
contract will prevent the performance from amounting
to a substantial compliance.

Nor do we agree with the CAs upholding of IHCs

liability by virtue of Joaquin and Suarezs substantial
performance. In so ruling, the CA applied Article 1234 of
the Civil Code, which states:

The party claiming substantial performance must show

that he has attempted in good faith to perform his
contract, but has through oversight, misunderstanding
or any excusable neglect failed to completely perform in
certain negligible respects, for which the other party
may be adequately indemnified by an allowance and
deduction from the contract price or by an award of
damages. But a party who knowingly and wilfully fails to
perform his contract in any respect, or omits to perform
a material part of it, cannot be permitted, under the
protection of this rule, to compel the other party, and
the trend of the more recent decisions is to hold that the
percentage of omitted or irregular performance may in
and of itself be sufficient to show that there had not
been a substantial performance.37

Article 1234. If the obligation has been substantially

performed in good faith, the obligor may recover as
though there had been a strict and complete fulfillment,
less damages suffered by the obligee.
It is well to note that Article 1234 applies only when an
obligor admits breaching the contract35 after honestly
and faithfully performing all the material elements
thereof except for some technical aspects that cause no
serious harm to the obligee.36 IHC correctly submits that
the provision refers to an omission or deviation that is
slight, or technical and unimportant, and does not affect
the real purpose of the contract.
Tolentino explains the character of the obligors breach
under Article 1234 in the following manner, to wit:
In order that there may be substantial performance of
an obligation, there must have been an attempt in good
faith to perform, without any willful or intentional
departure therefrom. The deviation from the obligation
must be slight, and the omission or defect must be
technical and unimportant, and must not pervade the

By reason of the inconsequential nature of the breach or

omission, the law deems the performance as
substantial, making it the obligees duty to pay.38 The
compulsion of payment is predicated on the substantial
benefit derived by the obligee from the partial
performance. Although compelled to pay, the obligee is
nonetheless entitled to an allowance for the sum
required to remedy omissions or defects and to
complete the work agreed upon.39
Conversely, the principle of substantial performance is
inappropriate when the incomplete performance

constitutes a material breach of the contract. A

contractual breach is material if it will adversely affect
the nature of the obligation that the obligor promised to
deliver, the benefits that the obligee expects to receive
after full compliance, and the extent that the nonperformance defeated the purposes of the
contract.40 Accordingly, for the principle embodied in
Article 1234 to apply, the failure of Joaquin and Suarez
to comply with their commitment should not defeat the
ultimate purpose of the contract.
The primary objective of the parties in entering into the
services agreement was to obtain a foreign loan to
finance the construction of IHCs hotel project. This
objective could be inferred from IHCs approval of phase
1 to phase 6 of the proposal. Phase 1 and phase 2,
respectively the preparation of a new project study and
the settlement of the unregistered mortgage, would
pave the way for Joaquin and Suarez to render
assistance to IHC in applying for the DBP guaranty and
thereafter to look for an able and willing foreign
financial institution acceptable to DBP. All the steps that
Joaquin and Suarez undertook to accomplish had a
single objective to secure a loan to fund the
construction and eventual operations of the hotel of
IHC. In that regard, Joaquin himself admitted that his
assistance was specifically sought to seek financing for
IHCs hotel project.41
Needless to say, finding the foreign financier that DBP
would guarantee was the essence of the parties
contract, so that the failure to completely satisfy such
obligation could not be characterized as slight and

unimportant as to have resulted in Joaquin and Suarezs

substantial performance that consequentially benefitted
IHC. Whatever benefits IHC gained from their services
could only be minimal, and were even probably
outweighed by whatever losses IHC suffered from the
delayed construction of its hotel. Consequently, Article
1234 did not apply.
3.
IHC is nonetheless liable to pay under the rule on
constructive fulfillment of a mixed conditional
obligation
Notwithstanding the inapplicability of Article 1186 and
Article 1234 of the Civil Code, IHC was liable based on
the nature of the obligation.
Considering that the agreement between the parties
was not circumscribed by a definite period, its
termination was subject to a condition the happening
of a future and uncertain event.42 The prevailing rule in
conditional obligations is that the acquisition of rights,
as well as the extinguishment or loss of those already
acquired, shall depend upon the happening of the event
that constitutes the condition.43
To recall, both the RTC and the CA held that Joaquin and
Suarezs obligation was subject to the suspensive
condition of successfully securing a foreign loan
guaranteed by DBP. IHC agrees with both lower courts,
and even argues that the obligation with a suspensive
condition did not arise when the event or occurrence did
not happen. In that instance, partial performance of the

contract subject to the suspensive condition was

tantamount to no performance at all. As such, the
respondents were not entitled to any compensation.
We have to disagree with IHCs argument.
To secure a DBP-guaranteed foreign loan did not solely
depend on the diligence or the sole will of the
respondents because it required the action and
discretion of third persons an able and willing foreign
financial institution to provide the needed funds, and
the DBP Board of Governors to guarantee the loan. Such
third persons could not be legally compelled to act in a
manner favorable to IHC. There is no question that when
the fulfillment of a condition is dependent partly on the
will of one of the contracting parties,44 or of the obligor,
and partly on chance, hazard or the will of a third
person, the obligation is mixed.45 The existing rule in a
mixed conditional obligation is that when the condition
was not fulfilled but the obligor did all in his power to
comply with the obligation, the condition should be
deemed satisfied.46
Considering that the respondents were able to secure
an agreement with Weston, and subsequently tried to
reverse the prior cancellation of the guaranty by DBP,
we rule that they thereby constructively fulfilled their
obligation.
4.
Quantum meruit should apply in the absence of an
express agreement on the fees

The next issue to resolve is the amount of the fees that

IHC should pay to Joaquin and Suarez.
Joaquin claimed that aside from the
approved P2,000,000.00 fee to implement phase 1 to
phase 6, the IHC Board of Directors had approved an
additional P500,000.00 as payment for his services. The
RTC declared that he and Suarez were entitled
to P200,000.00 each, but the CA revised the amounts
to P700,000.00 for Joaquin andP200,000.00 for Suarez.
Anent the P2,000,000.00, the CA rightly concluded that
the full amount of P2,000,000.00 could not be awarded
to respondents because such amount was not allocated
exclusively to compensate respondents, but was
intended to be the estimated maximum to fund the
expenses in undertaking phase 6 of the scope of
services. Its conclusion was unquestionably borne out
by the minutes of the February 11, 1969 meeting, viz:
xxxx
II
The preparation of the necessary papers for the DBP
including the preparation of the application, the
presentation of the mechanics of financing, the actual
follow up with the different departments of the DBP
which includes the explanation of the feasibility studies
up to the approval of the loan, conditioned on the DBPs
acceptance of the project as feasible. The estimated
expenses for this particular phase would be contingent,
i.e. upon DBPs approval of the plan now being studied
and prepared, is somewhere around P2,000,000.00.

After a brief discussion on the matter, the Board on

motion duly made and seconded, unanimously adopted
a resolution of the following tenor:
RESOLUTION NO. ______
(Series of 1969)
"RESOLVED, as it is hereby RESOLVED, that if the
Reparations allocation and the plan being negotiated
with the DBP is realized the estimated maximum
expenses of P2,000,000.00 for this phase is hereby
authorized subject to the sound discretion of the
committee composed of Justice Felix Angelo Bautista,
Jose N. Valero and Ephraim G. Gochangco."47 (Emphasis
supplied)
Joaquins claim for the additional sum of P500,000.00
was similarly without factual and legal bases. He had
requested the payment of that amount to cover services
rendered and still to be rendered to IHC separately from
those covered by the first six phases of the scope of
work. However, there is no reason to hold IHC liable for
that amount due to his failure to present sufficient proof
of the services rendered towards that end. Furthermore,
his July 11, 1969 letter revealed that the additional
services that he had supposedly rendered were identical
to those enumerated in the technical proposal, thus:
The Board of Directors
International Hotel Corporation
Thru: Justice Felix Angelo Bautista
President & Chairman of the Board

Gentlemen:
I have the honor to request this Body for its deliberation
and action on the fees for my services rendered and to
be rendered to the hotel project and to the corporation.
These fees are separate from the fees you have
approved in your previous Board Resolution, since my
fees are separate. I realize the position of the
corporation at present, in that it is not in a financial
position to pay my services in cash, therefore, I am
requesting this Body to consider payment of my fees
even in the form of shares of stock, as you have done to
the other technical men and for other services rendered
to the corporation by other people.
Inasmuch as my fees are contingent on the successful
implementation of this project, I request that my fees be
based on a percentage of the total project cost. The fees
which I consider reasonable for the services that I have
rendered to the project up to the completion of its
construction is P500,000.00. I believe said amount is
reasonable since this is approximately only of 1% of
the total project cost.
So far, I have accomplished Phases 1-5 of my report
dated February 1, 1969 and which you authorized us to
do under Board Resolution of February 11, 1969. It is
only Phase 6 which now remains to be implemented. For
my appointment as Consultant dated May 12, 1969 and
the Board Resolution dated June 23, 1969 wherein I was
appointed to the Technical Committee, it now follows
that I have been also authorized to implement part of
Phases 7 & 8.

A brief summary of my accomplished work has been as

follows:
1. I have revised and made the new Project Study
of your hotel project, making it bankable and
feasible.
2. I have reduced the total cost of your project by
approximately P24,735,000.00.
3. I have seen to it that a registered mortgage
with the Reparations Commission did not affect
the application with the IBP for approval to
processing.
4. I have prepared the application papers
acceptable to the DBP by means of an advance
analysis and the presentation of the financial
mechanics, which was accepted by the DBP.
5. I have presented the financial mechanics of the
loan wherein the requirement of the DBP for an
additional P19,000,000.00 in equity from the
corporation became unnecessary.
6. The explanation of the financial mechanics and
the justification of this project was instrumental in
changing the original recommendation of the
Investment Banking Department of the DBP,
which recommended disapproval of this
application, to the present recommendation of the
Real Estate Department which is for the approval
of this project for proceeding.

7. I have submitted to you several offers already

of foreign financiers which are in your files. We are
presently arranging the said financiers to confirm
their funds to the DBP for our project,
8. We have secured the approval of the DBP to
process the loan application of this corporation as
per its letter July 2, 1969.
9. We have performed other services for the
corporation which led to the cooperation and
understanding of the different factions of this
corporation.
I have rendered services to your corporation for the past
6 months with no clear understanding as to the
compensation of my services. All I have drawn from the
corporation is the amount of P500.00 dated May 12,
1969 and personal payment advanced by Justice Felix
Angelo Bautista in the amount ofP1,000.00.
I am, therefore, requesting this Body for their approval
of my fees. I have shown my good faith and willingness
to render services to your corporation which is
evidenced by my continued services in the past 6
months as well as the accomplishments above
mentioned. I believe that the final completion of this
hotel, at least for the processing of the DBP up to the
completion of the construction, will take approximately
another 2 years. In view of the above, I again
reiterate my request for your approval of my fees. When
the corporation is in a better financial position, I will
request for a withdrawal of a monthly allowance, said
amount to be determined by this Body.

Very truly yours,

Project.1wphi1 The President is given full discretion to

discuss with Mr. Joaquin the manner of payment of said
compensation, authorizing him to pay part in stock and
part in cash."

(Sgd.)
Francisco G., Joaquin, Jr.48
(Emphasis supplied)
Joaquin could not even rest his claim on the approval by
IHCs Board of Directors. The approval apparently arose
from the confusion between the supposedly separate
services that Joaquin had rendered and those to be
done under the technical proposal. The minutes of the
July 11, 1969 board meeting (when the Board of
Directors allowed the payment for Joaquins past
services and for the 70% project completion by the
technical group) showed as follows:
III
The Third order of business is the compensation of Mr.
Francisco G. Joaquin, Jr. for his services in the
corporation.
After a brief discussion that ensued, upon motion duly
made and seconded, the stockholders unanimously
approved a resolution of the following tenor:
RESOLUTION NO. ___
(Series of 1969)
"RESOLVED that Mr. Francisco G. Joaquin, Jr. be granted
a compensation in the amount of Five Hundred
Thousand (P500,000.00) Pesos for his past services and
services still to be rendered in the future to the
corporation up to the completion of the

Incidentally, it was also taken up the necessity of giving

the Technical Group a portion of the compensation that
was authorized by this corporation in its Resolution of
February 11, 1969 considering that the assistance so far
given the corporation by said Technical Group in
continuing our project with the DBP and its request for
guaranty for a foreign loan is 70% completed leaving
only some details which are now being processed. It is
estimated that P400,000.00 worth of Common Stock
would be reasonable for the present accomplishments
and to this effect, the President is authorized to issue
the same in the name of the Technical Group, as follows:
P200,000.00 in Common Stock to Rafael Suarez, an
associate in the Technical Group, and P200,000.00 in
Common stock to Francisco G. Joaquin, Jr., also a
member of the Technical Group.49
Lastly, the amount purportedly included services still to
be rendered that supposedly extended until the
completion of the construction of the hotel. It is basic,
however, that in obligations to do, there can be no
payment unless the obligation has been completely
rendered.50
It is notable that the confusion on the amounts of
compensation arose from the parties inability to agree
on the fees that respondents should receive.
Considering the absence of an agreement, and in view

of respondents constructive fulfillment of their

obligation, the Court has to apply the principle of
quantum meruit in determining how much was still due
and owing to respondents. Under the principle of
quantum meruit, a contractor is allowed to recover the
reasonable value of the services rendered despite the
lack of a written contract.51 The measure of recovery
under the principle should relate to the reasonable
value of the services performed.52 The principle
prevents undue enrichment based on the equitable
postulate that it is unjust for a person to retain any
benefit without paying for it. Being predicated on equity,
the principle should only be applied if no express
contract was entered into, and no specific statutory
provision was applicable.53
Under the established circumstances, we deem the total
amount of P200,000.00 to be reasonable compensation
for respondents services under the principle of
quantum meruit.
Finally, we sustain IHCs position that the grant of
attorneys fees lacked factual or legal basis. Attorneys
fees are not awarded every time a party prevails in a
suit because of the policy that no premium should be
placed on the right to litigate. There should be factual or
legal support in the records before the award of such
fees is sustained. It is not enough justification for the
award simply because respondents were compelled to
protect their rights.54
ACCORDINGLY, the Court DENIES the petition for review
on certiorari; and AFFIRMS the decision of the Court of
Appeals promulgated on November 8, 2002 in C.A.-G.R.

No. 47094 subject to the MODIFICATIONS that: (a)

International Hotel Corporation is ordered to. pay
Francisco G. Joaquin, Jr. and Rafael Suarez P100,000.00
each as compensation for their services, and (b) the
award of P20,000.00 as attorney's fees is deleted.
No costs of suit.

PREMIERE DEVELOPMENT BANK,

G.R. No. 176246

Petitioner,
Present:

YNARES-SANTIAGO,
Chairperson,
- versus -

AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and

LEONARDO-DE CASTRO

CENTRAL SURETY & INSURANCE

COMPANY, INC.,
Respondent.

Promulgated:

February 13, 2009

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

the loan. In all, should Central Surety fail to pay, it

would be liable to Premiere Bank for: (1) unpaid interest
up to maturity date; (2) unpaid penalties up to maturity
date; and (3) unpaid balance of the principal.

DECISION

NACHURA, J.:

Before us is a petition for review on certiorari assailing

the Court of Appeals (CA) Decision [1] in CA-G.R. CV No.
85930, which reversed and set aside the decision of the
Regional Trial Court (RTC), Branch 132, Makati City in
Civil Case No. 0051306.[2]

On August 20, 1999, respondent Central Surety &

Insurance Company (Central Surety) obtained an
industrial loan of P6,000,000.00 from petitioner
Premiere Development Bank (Premiere Bank) with a
maturity date of August 14, 2000. This P6,000,000.00
loan, evidenced by Promissory Note (PN) No. 714-Y,
[3]
stipulates
payment
of
17%
interest per annum payable monthly in arrears and the
principal payable on due date. In addition, PN No. 714-Y
provides
for
a
penalty
charge
of
24%
interest per annum based
on
the
unpaid
amortization/installment or the entire unpaid balance of

To secure payment of the P6,000,000.00 loan, Central

Surety executed in favor of Premiere Bank a Deed of
Assignment with Pledge[4] covering Central Suretys
Membership Fee Certificate No. 217 representing its
proprietary share in Wack Wack Golf and Country Club
Incorporated (Wack Wack Membership). In both PN No.
714-Y and Deed of Assignment, Constancio T. Castaeda,
Jr. and Engracio T. Castaeda, president and vicepresident of Central Surety, respectively, represented
Central Surety and solidarily bound themselves to the
payment of the obligation.

Parenthetically, Central Surety had another commercial

loan
with
Premiere
Bank
in
the
amount
of P40,898,000.00 maturing on October 10, 2001. This
loan was, likewise, evidenced by a PN numbered 376X[5] and secured by a real estate mortgage over
Condominium Certificate of Title No. 8804, Makati City.
PN No. 376-X was availed of through a renewal of
Central Suretys prior loan, then covered by PN No. 367Z.[6] As with the P6,000,000.00 loan and the constituted
pledge
over
the
Wack
Wack
Membership,
the P40,898,000.00 loan with real estate mortgage was
transacted by Constancio and Engracio Castaeda on
behalf of Central Surety.

It appears that on August 22, 2000, Premiere Bank sent

a letter to Central Surety demanding payment of
the P6,000,000.00 loan, to wit:

August 22, 2000

CENTRAL SURETY AND INSURANCE CO.
2nd Floor Universalre Bldg.
No. 106 Paseo de Roxas, Legaspi Village
Makati City

In view thereof, we regret that unless the

above loan is settled on or before five (5)
days from the date hereof, we shall exercise
our option to have the Stock Certificate No.
217 with Serial No. 1793 duly issued by
Wack Wack Golf and Country Club, Inc.
transferred in the name of Premiere
Development Bank in accordance with the
terms and conditions of the Deed of
Assignment with Pledge executed in favor of
Premiere Development Bank.

Attention: Mr. Constancio T. Castaneda, Jr.

President

Mr. Engracio T. Castaneda

We
shall
compliance.

appreciate

your

prompt

Very truly yours,

Vice President
------------------------------------------------(sgd.)
Gentlemen:

IGNACIO R. NEBRIDA, JR.

Senior Asst. Vice President/

This has reference to your overdue loan

of P6.0 Million.

We regret to inform you that despite efforts

to restructure the same, you have failed up
to this time, to submit the required
documents and come up with equity
necessary to implement the restructuring
scheme.

Business Development Group - Head[7]

Posthaste, Central Surety responded and sent the

following letter dated August 24, 2000:

24 August 2000
Very truly yours,
Mr. Ignacio R. Nebrida, Jr.
Senior Asst. Vice President/

(sgd.)

Business Development Group Head

ENGRACIO T. CASTANEDA

Premiere Bank

Vice-President[8]

EDSA cor. Magallanes Avenue

Makati City

Sir:

With reference to this 6.0 Million loan

account, we have informed Ms. Evangeline
Veloira that we are intending to settle the
account by the end of September. As of 14
August 2000 we made payment to your
bank as per receipt attached.

As you may know, present conditions have

been difficult for the insurance industry
whose performance is so closely linked to
the nations economic prosperity; and we are
now asking for some consideration and
leeway on your very stiff and immediate
demands.

Kindly extend to us your favorable approval.

Accordingly, by September 20, 2000, Central Surety

issued Bank of Commerce (BC) Check No. 08114 [9] dated
September 22, 2000 in the amount of P6,000,000.00
and payable to Premiere Bank. The check was received
by Premiere Banks Senior Account Manager, Evangeline
Veloira, with the notation full payment of loan-Wack
Wack, as reflected in Central Suretys Disbursement
Voucher.[10] However, for undisclosed reasons, Premiere
Bank returned BC Check No. 08114 to Central Surety,
and in its letter dated September 28, 2000, demanded
from the latter, not just payment of the P6,000,000.00
loan, but also the P40,898,000.00 loan which was
originally covered by PN No. 367-Z.[11] In the same letter,
Premiere Bank threatened foreclosure of the loans
respective securities, the pledge and real estate
mortgage, should Central Surety fail to pay these within
ten days from date, thus:

28
Septem
ber
2000

CENTRAL SURETY & INSURANCE CO.

By: Constancio T. Castaeda Jr. President
Engracio T. Castaeda Vice President
2nd Floor Universalre Bldg. No. 106
Paseo de Roxas, Legaspi Village, Makati City

RE: YOUR
COMMERCIAL
OF P40,898,000.00 &
P6,000,000.00
WITH
DEVELOPMENT BANK

LOAN
PREMIERE

UNDER ACCOUNT NOS. COM-367-Z AND

COM 714-Y
*********************************************
*****

Dear Sirs:

We write on behalf of our client, Premiere

Development Bank, in connection with your
above-captioned loan account.

While our client has given you all the

concessions, facilities and opportunities to
service your loans, we regret to inform you
that you have failed to settle the same
despite their past due status.

In view of the foregoing and to protect the

interest of our client, please be advised
that unless the outstanding balances of
your loan accounts as of date plus interest,
penalties and other fees and charges are
paid in full or necessary arrangements
acceptable to our client is made by you
within ten (10) days from date hereof, we
shall be constrained much to our regret, to
file foreclosure proceedings against the
collateral of the loan mortgaged to the Bank
or pursue such action necessary in the
premises.

We trust, therefore, that you will give this

matter your preferential attention.

Business Development Group Head

Re : Promissory Note No. 714-Y

Very truly yours,
Sir:
(sgd.)
PACITA M. ARAOS[12]

This is further to our clients letter to you

dated 24 August 2000, informing you that it
would settle its account by the end of
September 2000.

(italics supplied)

The very next day, on September 29, 2000, Central

Surety, through its counsel, wrote Premiere Bank and retendered payment of the check:

29
September
2000

PREMIERE BANK
EDSA cor. Magallanes Avenue
Makati City

Attention: Mr. Ignacio R. Nebrida, Jr.

Senior Asst. Vice President/

Please be advised that on 20 September

2000 our client delivered to your bank BC
cheque no. 08114 payable to Premiere Bank
in the amount of SIX MILLION PESOS
(P6,000,000.00), which was received by
your
Senior
Account
Manager,
Ms.
Evangeline
Veloira. However,
for
unexplained reasons the cheque was
returned to us.

We are again tendering to you the said

cheque
of SIX
MILLION
PESOS
(P6,000,000.00), in payment of PN#714Y. Please accept the cheque and issue the
corresponding receipt thereof. Should you
again refuse to accept this cheque, then I
shall advise my client to deposit it in court
for proper disposition.

Thank you.

2/F Universalre Condominium

106 Paseo de Roxas

Very truly yours,

Legaspi Village, Makati City

(sgd.)

Dear Atty. Cua:

EPIFANIO E. CUA
Counsel for Central Surety & Insurance
Company[13]
(italics supplied)

On even date, a separate letter with another BC Check

No. 08115 in the amount of P2,600,000.00 was also
tendered to Premiere Bank as payment for the Spouses
Engracio and Lourdes Castaedas (Spouses Castaedas)
personal loan covered by PN No. 717-X and secured by
Manila Polo Club, Inc. membership shares.

On October 13, 2000, Premiere Bank responded and

signified acceptance of Central Suretys checks under
the following application of payments:

13
October 2000

Thank you for your two (2) letters

dated 29 September 2000 on behalf of
clients with the enclosed check
0008114 and 0008115 for the
of P8,600,000.00.

both
your
nos.
total

As previously relayed to your client,

Premiere Bank cannot accept the two (2)
checks as full settlement of the obligation
under Account Nos. PN #714-Y and PN #
717-X, as the amount is insufficient.

In accordance with the terms and conditions

of the Promissory Notes executed by your
clients in favor of Premiere Development
Bank, we have applied the two (2) checks to
the due obligations of your clients as
follows:

1) Account No.: COM 235-Z[14] P1,044,939.45

2) Account No.: IND 717-X P1,459,693.15

ATTY. EPIFANIO E. CUA

3) Account No.: COM 367-Z[15] P4,476,200.18

4) Account No.: COM 714-Y P1,619,187.22

TOTAL P8,600,000.00

We are enclosing Xerox copy each of four (4)

official
receipts
covering
the
above
payments. The originals are with us which
your clients or their duly authorized
representative may pick-up anytime during
office hours.

We shall appreciate the settlement in full of

the accounts of your client or necessary
arrangements for settlement thereof be
made as soon as possible to put the
accounts on up to-date status.

Thank you.

Significantly, the P8,600,000.00 check payments were

not applied in full to Central Suretys P6,000,000.00 loan
under PN No. 714-Y and the Spouses Castaedas personal
loan of P2,600,000.00 under PN No. 717-X. Premiere
Bank also applied proceeds thereof to a commercial
loan under PN No. 235-Z taken out by Casent Realty and
Development Corporation (Casent Realty),[17] and to
Central Suretys loan originally covered by PN No. 367-Z,
renewed under PN No. 376-X, maturing on October 20,
2001.

Strongly objecting to Premiere Banks application of

payments, Central Suretys counsel wrote Premiere Bank
and reiterated Central Suretys demand for the
application of the check payments to the loans covered
by PN Nos. 714-X and 714-Y. Additionally, Central Surety
asked that the Wack Wack Membership pledge, the
security for the P6,000,000.00 loan, should be released.

In the final exchange of correspondence, Premiere

Bank, through its SAVP/Acting Head-LGC, Atty. Pacita
Araos, responded and refused to accede to Central
Suretys demand. Premiere Bank insisted that the PN
covering the P6,000,000.00 loan granted Premiere Bank
sole discretion respecting: (1) debts to which payments
should be applied in cases of several obligations by an
obligor and/or debtor; and (2) the initial application of
payments to other costs, advances, expenses, and past
due interest stipulated thereunder.

Very truly yours,

(sgd.)
MS. ELSA M. SAPAPO
Manager
Loans Accounting and
Control
Department[16]

As a result, Central Surety filed a complaint for

damages and release of security collateral, specifically
praying that the court render judgment: (1) declaring
Central Suretys P6,000,000.00 loan covered by PN No.
714-Y as fully paid; (2) ordering Premiere Bank to
release to Central Surety its membership certificate of
shares in Wack Wack; (3) ordering Premiere Bank to pay
Central Surety compensatory and actual damages,
exemplary damages, attorneys fees, and expenses of
litigation; and (4) directing Premiere Bank to pay the
cost of suit.

connection with one another. Therefore,

[Premiere Bank] cannot apply the payment
tendered by Central Surety to the other two
entities capriciously and expressly violating
the law and pertinent Central Bank rules
and regulations. Hence, the application
of the payment to the loan of Casent
Realty (Account No. COM 236-Z) and to
the loan of Mr. Engracio Castaeda
(Account No. IND 717-X) is void and
must be annulled.

On July 12, 2005, the RTC rendered a decision

dismissing Central Suretys complaint and ordering it to
pay Premiere Bank P100,000.00 as attorneys fees. The
RTC ruled that the stipulation in the PN granting
Premiere Bank sole discretion in the application of
payments, although it partook of a contract of adhesion,
was valid. It disposed of the case, to wit:

As to the issue of whether or not [Central

Surety] is entitled to the release of
Membership Fee Certificate in the Wack
Wack Golf and Country Club, considering
now that [Central Surety] cannot compel
[Premiere Bank] to release the subject
collateral.

Now that the issue as to the validity of the

stipulation is settled, [Premiere Bank] was
right in contending that it had the right to
apply [Central Suretys] payment to the most
onerous obligation or to the one it sees fit to
be paid first from among the several
obligations. The application of the payment
to the other two loans of Central Surety
namely,
account
nos.
COM
367-Z
and IND 714-Y was within [Premiere Banks]
valid exercise of its right according the
stipulation. However, [Premiere Bank] erred
in applying the payment to the loan of
Casent Realty and to the personal obligation
of Mr. Engracio Castaeda despite their

With regard to the issue of damages and

attorneys fees, the court finds no basis to
grant [Premiere Banks] prayer for moral and
exemplary damages but deems it just and
equitable to award in its favor attorneys
fees in the sum of Php 100,000.00.

WHEREFORE,
judgment
is
hereby
rendered dismissing the complaint and
ordering [Central Surety] to pay [Premiere
Bank] Php 100,000.00 as attorneys fees.
[18]
(emphasis supplied)

On appeal by Central Surety, the CA reversed and set

aside the trial courts ruling. The appellate court held
that with Premiere Banks letter dated August 22, 2000
specifically
demanding
payment
of
Central
Suretys P6,000,000.00 loan, it was deemed to have
waived the stipulation in PN No. 714-Y granting it the
right to solely determine application of payments, and
was, consequently, estopped from enforcing the
same. In this regard, with the holding of full settlement
of Central SuretysP6,000,000.00 loan under PN No. 714Y, the CA ordered the release of the Wack Wack
Membership pledged to Premiere Bank.

Hence, this recourse by Premiere Bank positing the

following issues:

WHETHER OR NOT THE HONORABLE COURT

OF APPEALS COMMITTED REVERSIBLE AND
PALPABLE ERROR WHEN IT APPLIED THE
PRINCIPLE OF WAIVER AND ESTOPPEL IN
THE PRESENT CASE INSOFAR AS THE
DEMAND LETTER SENT TO [CENTRAL
SURETY] IS CONCERNED NULLIFYING THE
APPLICATION OF PAYMENTS EXERCISED BY
[PREMIERE BANK]

WHETHER OR NOT THERE IS A VALID

TENDER OF PAYMENT AND CONSIGNATION
OF THE SUBJECT TWO CHECK PAYMENTS BY
[CENTRAL SURETY].

WHETHER OR NOT, AS CORRECTLY FOUND

BY THE COURT A QUO [CENTRAL SURETY] IS
ESTOPPED
FROM
CONTESTING
THE
STIPULATIONS OR PROVISIONS OF THE
PROMISSORY
NOTES
AUTHORIZING
[PREMIERE
BANK]
TO
MAKE
SUCH
APPLICATION OF PAYMENTS

WHETHER OR NOT THE FINDING OF WAIVER

AND ESTOPPEL BY THE HONORABLE COURT
OF APPEALS COULD PREVAIL OVER THE
CLEAR AND UNMISTAKABLE STATUTORY AND
CONTRACTUAL RIGHT OF [PREMIERE BANK]
TO EXERCISE APPLICATION OF PAYMENT AS
WARRANTED BY THE PROMISSORY NOTE

WHETHER OR NOT AS CORRECTLY FOUND

BY THE LOWER COURT [PREMIERE BANK] IS
ENTITLED TO AN AWARD OF DAMAGES AS
OCCASIONED BY THE MALICIOUS FILING OF
THIS SUIT.[19]

EVEN ASSUMING EX GRATIA THAT THE 6

MILLION SHOULD BE APPLIED TO THE
SUBJECT LOAN OF RESPONDENT, WHETHER
OR NOT THE SUBJECT WACK-WACK SHARES
COULD BE RELEASE[D] DESPITE THE CROSS
DEFAULT
AND
CROSS
GUARANTEE
PROVISIONS OF THE DEED OF ASSIGNMENT
WITH PLEDGE AND RELEVANT REAL ESTATE
MORTGAGE CONTRACTS EXECUTED BY
[CENTRAL SURETY], CASENT REALTY AND
SPS. CASTAEDA.

At the outset, we qualify that this case deals only with

the extinguishment of Central Suretys P6,000,000.00
loan secured by the Wack Wack Membership pledge. We
do not dispose herein the matter of the P2,600,000.00
loan covered by PN No. 717-X subject of BC Check No.
08115.
We note that both lower courts were one in annulling
Premiere Banks application of payments to the loans of
Casent Realty and the Spouses Castaeda under PN Nos.
235-Z and 717-X, respectively, thus:

It bears stressing that the parties to PN No.

714-Y secured by Wack Wack membership
certificate are only Central Surety, as debtor
and [Premiere Bank], as creditor. Thus,
when the questioned stipulation speaks of
several obligations, it only refers to the
obligations of [Central Surety] and nobody
else.

[I]t is plain that [Central Surety] has only

two loan obligations, namely: 1.) Account
No.
714-Y secured
by Wack
Wack
membership certificate; and 2.) Account
No.
367-Zsecured
by Condominium
Certificate of Title. The two loans are
secured
by
separate
and
different
collaterals. The collateral for Account No.
714-Y, which is the Wack Wack membership
certificate answers only for that account and
nothing else. The collateral for Account No.
367-Z, which is the Condominium Certificate
of Title, is answerable only for the said
account.

The fact that the loan obligations of [Central

Surety] are secured by separate and distinct
collateral simply shows that each collateral
secures only a particular loan obligation and
does not cover loans including future loans
or advancements.

As regards the loan covered by Account No.

235-Z, this was obtained by Casent Realty,
not by [Central Surety]. Although Mr.

Engracio Castaeda is the vice-president of

[Central Surety], and president of Casent
Realty, it does not follow that the two
corporations are one and the same. Both are
invested by law with a personality separate
and distinct from each other.

Thus, [Central Surety] cannot be held liable

for the obligation of Casent Realty, absent
evidence showing that the latter is being
used to defeat public convenience, justify
wrong, protect fraud or defend crime; or
used as a shield to confuse the legitimate
issues, or when it is merely an adjunct, a
business conduit or an alter ego of [Central
Surety] or of another corporation; or used as
a cloak to cover for fraud or illegality, or to
work injustice, or where necessary to
achieve equity or for the protection of
creditors.

Likewise, [Central Surety] cannot be held

accountable for the loan obligation of
spouses
Castaeda
under
Account
No. IND 717-X. Settled is the rule that a
corporation is invested by law with a
personality separate and distinct from those
of the persons composing it. The corporate
debt or credit is not the debt or credit of the
stockholder nor is the stockholders debt or
credit that of the corporation.

The mere fact that a person is a president of

the corporation does not render the

property he owns or possesses the property

of the corporation, since that president, as
an individual, and the corporation are
separate entities.[20]

In fact, Premiere Bank did not appeal or question the

RTCs ruling specifically annulling the application of
the P6,000,000.00 check payment to the respective
loans of Casent Realty and the Spouses Castaeda.
Undoubtedly, Premiere Bank cannot be allowed, through
this petition, to surreptitiously include the validity of its
application of payments concerning the loans to Casent
Realty and the Spouses Castaeda.
Thus, we sift through the issues posited by Premiere
Bank and restate the same, to wit:

1. Whether Premiere Bank waived its right of

application of payments on the loans of
Central Surety.

2. In
the
alternative,
whether
the P6,000,000.00
loan
of
Central
Surety was extinguished by the encashment
of BC Check No. 08114.

3. Corollarily, whether the release of the

Wack Wack Membership pledge is in order.

The Petition is meritorious.

We shall take the first and the second issues in tandem.

Creditor given right

to apply payments

At the hub of the controversy is the statutory provision

on application of payments, specifically Article 1252 of
the Civil Code, viz.:

Article 1252. He who has various

debts of the same kind in favor of one and
the same creditor, may declare at the time
of making the payment, to which of them
the same must be applied. Unless the
parties so stipulate, or when the application
of payment is made by the party for whose
benefit the term has been constituted,
application shall not be made as to debts
which are not yet due.

If the debtor accepts from the creditor

a receipt in which an application of the
payment is made, the former cannot
complain of the same, unless there is a
cause for invalidating the contract.

The debtors right to apply payment is not

mandatory. This is clear from the use of the word may
rather than the word shall in the provision which
reads: He who has various debts of the same kind in

favor of one and the same creditor, may declare at the

time of making the payment, to which of the same must
be applied.

Indeed, the debtors right to apply payment has

been considered merely directory, and not mandatory,
[21]
following this Courts earlier pronouncement that the
ordinary acceptation of the terms may and shall may be
resorted to as guides in ascertaining the mandatory or
directory character of statutory provisions.[22]

Article 1252 gives the right to the debtor to choose to

which of several obligations to apply a particular
payment that he tenders to the creditor. But likewise
granted in the same provision is the right of the creditor
to apply such payment in case the debtor fails to direct
its application. This is obvious in Art. 1252, par. 2, viz.: If
the debtor accepts from the creditor a receipt in which
an application of payment is made, the former cannot
complain of the same. It is the directory nature of this
right and the subsidiary right of the creditor to apply
payments when the debtor does not elect to do so that
make this right, like any other right, waivable.

Rights may be waived, unless the waiver is contrary

to law, public order, public policy, morals or good
customs, or prejudicial to a third person with a right
recognized by law.[23]
A debtor, in making a voluntary payment, may at
the time of payment direct an application of it to
whatever account he chooses, unless he has assigned
or waived that right. If the debtor does not do so, the
right passes to the creditor, who may make such

application as he chooses. But if neither party has

exercised its option, the court will apply the payment
according to the justice and equity of the case, taking
into consideration all its circumstances.[24]

Verily, the debtors right to apply payment can be

waived and even granted to the creditor if the debtor so
agrees.[25] This was explained by former Senator Arturo
M.Tolentino, an acknowledged expert on the Civil Code,
thus:

The following are some limitations on the

right of the debtor to apply his payment:

xxxx
5) when there is an agreement as to the
debts which are to be paid first, the debtor
cannot vary this agreement.[26]

Relevantly, in a Decision of the Supreme Court of

Kansas in a case with parallel facts, it was held that:

The debtor requested Planters apply the

payments to the 1981 loan rather than to
the 1978 loan. Planters refused. Planters
notes it was expressly provided in the
security agreement on the 1981 loan that
Planters had a legal right to direct
application of payments in its sole

discretion. Appellees
do
not
refute
this. Hence, the debtors had no right by
agreement to direct the payments. This
also precludes the application of the U.S.
Rule, which applies only in absence of a
statute or specific agreement. Thus the
trial court erred. Planters was entitled to
apply the Hi-Plains payments as it saw fit.[27]

In the case at bench, the records show that

Premiere Bank and Central Surety entered into several
contracts of loan, securities by way of pledges, and
suretyship agreements. In at least two (2) promissory
notes between the parties, Promissory Note No. 714-Y
and Promissory Note No. 376-X, Central Surety expressly
agreed to grant Premiere Bank the authority to apply
any and all of Central Suretys payments, thus:

In case I/We have several obligations with

[Premiere Bank], I/We hereby empower
[Premiere Bank] to apply without notice and
in any manner it sees fit, any or all of
my/our deposits and payments to any of
my/our obligations whether due or not. Any
such application of deposits or payments
shall be conclusive and binding upon us.

This proviso is representative of all the other Promissory

Notes involved in this case. It is in the exercise of this
express authority under the Promissory Notes, and

following Bangko Sentral ng Pilipinas Regulations, that

Premiere Bank applied payments made by Central
Surety, as it deemed fit, to the several debts of the
latter.

All debts were due; There was no

waiver on the part of petitioner

Undoubtedly, at the time of conflict between the

parties material to this case, Promissory Note No. 714-Y
dated August 20, 1999, in the amount ofP6,000,000.00
and secured by the pledge of the Wack Wack
Membership, was past the due and demand stage. By
its terms, Premiere Bank was entitled to declare said
Note and all sums payable thereunder immediately due
and payable, without need of presentment, demand,
protest or notice of any kind. The subsequent demand
made by Premiere Bank was, therefore, merely a
superfluity, which cannot be equated with a waiver of
the right to demand payment of all the matured
obligations of Central Surety to Premiere Bank.

Moreover, this Court may take judicial notice that

the standard practice in commercial transactions to
send demand letters has become part and parcel of
every collection effort, especially in light of the legal
requirement that demand is a prerequisite before
default may set in, subject to certain well-known
exceptions, including the situation where the law or the
obligations expressly declare it unnecessary.[28]

Neither can it be said that Premiere Bank waived

its right to apply payments when it specifically
demanded payment of the P6,000,000.00 loan under
Promissory Note No. 714-Y. It is an elementary rule that
the existence of a waiver must be positively
demonstrated since a waiver by implication is not
normally countenanced. The norm is that a waiver must
not only be voluntary, but must have been made
knowingly, intelligently, and with sufficient awareness of
the
relevant
circumstances
and
likely
consequences. There must be persuasive evidence to
show an actual intention to relinquish the right. Mere
silence on the part of the holder of the right should not
be construed as a surrender thereof; the courts must
indulge every reasonable presumption against the
existence and validity of such waiver.[29]

Besides, in this case, any inference of a waiver of

Premiere Banks, as creditor, right to apply payments is
eschewed by the express provision of the Promissory
Note that: no failure on the part of [Premiere Bank] to
exercise, and no delay in exercising any right
hereunder, shall operate as a waiver thereof.

Thus, we find it unnecessary to rule on the

applicability of the equitable principle of waiver that the
Court of Appeals ascribed to the demand made by
Premiere Bank upon Central Surety to pay the amount
of P6,000,000.00, in the face of both the express
provisions of the law and the agreements entered into
by the parties.After all, a diligent creditor should not
needlessly be interfered with in the prosecution of his
legal remedies.[30]

When Central Surety directed the application of its

payment to a specific debt, it knew it had another debt
with Premiere Bank, that covered by Promissory Note
367-Z, which had been renewed under Promissory Note
376-X, in the amount of P40.898 Million. Central Surety
is aware that Promissory Note 367-Z (or 376-X) contains
the same provision as in Promissory Note No 714-Y
which grants the Premiere Bank authority to apply
payments made by Central Surety, viz.:

In case I/We have several obligations with

[Premiere Bank], I/We hereby empower
[Premiere Bank] to apply without notice and
in any manner it sees fit, any or all of
my/our deposits and payments to any of
my/our obligations whether due or
not. Any such application of deposits or
payments shall be conclusive and binding
upon us.[31]

Obviously, Central Surety is also cognizant

Promissory Note 367-Z contains the proviso that:

the bank shall be entitled to declare this

Note and all sums payable hereunder to be
immediately due and payable, without need
of presentment, demand, protest or notice
of nay kind, all of which I/We hereby
expressly waive, upon occurrence of any of
the following events: x x x (ii) My/Our failure
to pay any amortization or installment
due hereunder; (iii) My/Our failure to pay

money due under any other document or

agreement evidencing obligations for
borrowed money x x x.[32]

by virtue of which, it follows that the obligation under

Promissory Note 367-Z had become past due and
demandable, with further notice expressly waived, when
Central Surety defaulted on its obligations under
Promissory Note No. 714-Y.

Mendoza v. Court of Appeals[33] forecloses any

doubt that an acceleration clause is valid and produces
legal effects. In fact, in Selegna Management and
Development Corporation v. United Coconut Planters
Bank,[34] we held that:

that

Considering that the contract is the law

between the parties, respondent is justified
in invoking the acceleration clause declaring
the entire obligation immediately due and
payable.That clause obliged petitioners to
pay the entire loan on January 29, 1999, the
date fixed by respondent.

It is worth noting that after the delayed payment

of P6,000,000.00 was tendered by Central Surety,
Premiere Bank returned the amount as insufficient,
ostensibly because there was, at least, another account
that was likewise due. Obviously, in its demand of 28

September 2000, petitioner sought payment, not just of

the P6,000,000.00, but of all these past due
accounts. There is extant testimony to support this
claim, as the transcript of stenographic notes on the
testimony of Atty. Araos reveals:

Atty. Opinion: Q. Were these accounts due

already when you made this application,
distribution of payments?

Witness: A. Yes sir.[35]

Atty. Opinion: Q. But you accepted this
payment of Six Million (P6,000,000.00) later
on when together with this was paid another
check for 1.8 Million?

Witness: A. We accepted.

Atty. Opinion: Q. And you applied this to four

(4) other accounts three (3) other accounts
or to four (4) accounts mentioned in Exhibit
J. Is that correct?

Atty. Tagalog: We can stipulate on that. Your

Honor.

Court: This was stipulated?

Atty. Tagalog: Yes, Your Honor. In fact, there

is already stipulation that we confirm that
those are the applications of payments
made by the defendant Bank on those loan
accounts.

Conversely, in its evidence-in-chief, Central Surety did

not present any witness to testify on the payment of its
obligations. In fact, the record shows that after marking
its evidence, Central Surety proceeded to offer its
evidence immediately. Only on the rebuttal stage did
Central Surety present a witness; but even then, no
evidence was adduced of payment of any other
obligation. In this light, the Court is constrained to rule
that all obligations of Central Surety to Premiere Bank
were due; and thus, the application of payments was
warranted.

Being in receipt of amounts tendered by Central

Surety, which were insufficient to cover its more
onerous obligations, Premiere Bank cannot be faulted
for exercising the authority granted to it under the
Promissory Notes, and applying payment to the
obligations as it deemed fit. Subject to the caveat that
our ruling herein shall be limited only to the
transactions entered into by the parties to this case, the
Court will not disturb the finding of the lower court that
Premiere Bank rightly applied the payments that Central
Surety had tendered. Corollary thereto, and upon the
second
issue,
the
tender
of
the
amount
of P6,000,000.00
by
Central
Surety,
and
the

encashment of BC Check No. 08114 did not totally

extinguish the debt covered by PN No. 714-Y.

dependence, ignorance, indigence, mental

weakness, tender age or other handicap,
the courts must be vigilant for his
protection.

Release of the pledged

Wack Wack Membership
But in this case, Central Surety does not appear so weak
as to be placed at a distinct disadvantage vis--vis the
bank. As found by the lower court:
Contract of Adhesion

To the extent that the subject promissory notes

were prepared by the Premiere Bank and presented to
Central Surety for signature, these agreements were,
indeed, contracts of adhesion. But contracts of adhesion
are not invalid per se. Contracts of adhesion, where one
party imposes a ready-made form of contract on the
other, are not entirely prohibited. The one who adheres
to the contract is, in reality, free to reject it entirely; if
he adheres, he gives his consent.

In interpreting such contracts, however, courts are

expected to observe greater vigilance in order to shield
the unwary or weaker party from deceptive schemes
contained in ready-made covenants.[36] Thus, Article 24
of the Civil Code pertinently states:

In all contractual, property or other

relations, when one of the parties is at a
disadvantage on account of his moral

Considering that [Central Surety] is a known

business entity, the [Premiere Bank] was
right in assuming that the [Central Surety]
could not have been cheated or misled in
agreeing thereto, it could have negotiated
with the bank on a more favorable term
considering that it has already established a
certain reputation with the [Premiere Bank]
as
evidenced
by
its
numerous
transactions. It is therefore absurd that an
established company such as the [Central
Surety] has no knowledge of the law
regarding bank practice in loan transactions.

The Dragnet Clause.

The factual circumstances of this case showing

the chain of transactions and long-standing relationship

between Premiere Bank and Central Surety militate

against the latters prayer in its complaint for the release
of the Wack Wack Membership, the security attached to
Promissory Note 714-Y.

A tally of the facts shows the following

transactions between Premiere Bank and Central Surety:

Date

Instrume
nt

Amoun
t
covere
d

August
1999

20, PN 714-Y

August
1999

29, Deed
of P 15 M
Assignme
nt
with
Pledge

Stipulation

P6M

As security for PN
714-Y and/or such
Promissory
Note/s
which the ASSIGNOR
/
PLEDGOR
shall
hereafter execute in
favor
of
the
ASSIGNEE/PLEDGEE

From these transactions and the proviso in the

Deed of Assignment with Pledge, it is clear that the
security, which peculiarly specified an amount
atP15,000,000.00 (notably greater than the amount of
the promissory note it secured), was intended to
guarantee not just the obligation under PN 714-Y, but
also future advances. Thus, the said deed is explicit:

As security for the payment of loan

obtained by the ASSIGNOR/PLEDGOR from
the ASSIGNEE/PLEDGEE in the amount of
FIFTEEN MILLION PESOS (15,000,000.00)

Philippine Currency in accordance with the

Promissory Note attached hereto and made
an integral part hereof as Annex A and/or
such
Promissory
Note/s
which
the
ASSIGNOR/PLEDGOR shall hereafter execute
in favor of the ASSIGNEE/PLEDGEE, the
ASSIGNOR/PLEDGOR
hereby
transfers,
assigns, conveys, endorses, encumbers and
delivers by way of first pledge unto the
ASSIGNEE/PLEDGEE, its successors and
assigns, that certain Membership fee
Certificate Share in Wack Wack Golf and
Country Club Incorporate covered by Stock
Certificate No. 217 with Serial No. 1793 duly
issue by Wack Wack Golf and Country Club
Incorporated on August 27, 1996 in the
name of the ASSIGNOR. (Emphasis made in
the Petition.)

Then, a Continuing Guaranty/Comprehensive

Surety Agreement was later executed by Central Surety
as follows:

Date

Instrument

Amount

Notarized,
Continuing
P40,898,000
Sept.
22, Guaranty/Comprehe .00
1999
nsive
Surety
Agreement

Stipulation
August 29, Deed of Assignment P 15 M
1999
with Pledge
In
consideration
of the loan
and/or
any
credit
accommodatio
n which you
(petitioner)
have extended
and/or
Notarized,
will
extend
to
Sept.
22,
Central Surety
1999
and Insurance
Co.

And on October 10, 2000, Promissory Note 376-X

was entered into, a renewal of the prior Promissory Note
367-Z, in the amount of P40,898,000.00. In all, the
transactions that transpired between Premiere Bank and
Central Surety manifest themselves, thusly:

Date

Instrument

August 20, PN 714-Y

1999

Amount
covered

P6M

October
10, 2000

Continuing
P40,898,000
Guaranty/Comprehe .00
nsive
Surety
Agreement

As secur
714-Y
such Pr
Note/s w
ASSIGNO
PLEDGO
hereafte
in favor
ASSIGNE
EE

In cons
of
th
and/or a
accomm
which
(petition
extende
will ex
Central
and
I
Co.

Promissory
Note P40,898,000
376-X (PN 367-Z)
.00

Stipulation
From the foregoing, it is more than apparent that
when, on August 29, 1999, the parties executed the
Deed of Assignment with Pledge (of the Wack Wack
Membership), to serve as security for an obligation in

the amount of P15,000,000.00 (when the actual loan

covered by PN No. 714-Y was only P6,000,000.00), the
intent of the parties was for the Wack Wack Membership
to serve as security also for future advancements. The
subsequent loan was nothing more than a fulfillment of
the intention of the parties. Of course, because the
subsequent loan was for a much greater amount
(P40,898,000.00), it became necessary to put up
another security, in addition to the Wack Wack
Membership. Thus, the subsequent surety agreement
and the specific security for PN No. 367-X were, like the
Wack Wack Membership, meant to secure the ballooning
debt of the Central Surety.

The above-quoted provision in the Deed of

Assignment, also known as the dragnet clause in
American jurisprudence, would subsume all debts of
respondent of past and future origins. It is a valid and
legal undertaking, and the amounts specified as
consideration in the contracts do not limit the amount
for which the pledge or mortgage stands as security, if
from the four corners of the instrument, the intent to
secure future and other indebtedness can be
gathered. A pledge or mortgage given to secure future
advancements is a continuing security and is not
discharged by the repayment of the amount named in
the mortgage until the full amount of all advancements
shall have been paid.[37]

Our ruling
instructive:

in Prudential

Bank

v.

is one which is specifically phrased to

subsume all debts of past or future origins.
Such clauses are carefully scrutinized and
strictly construed. Mortgages of this
character enable the parties to provide
continuous dealings, the nature or extent of
which may not be known or anticipated at
the time, and they avoid the expense and
inconvenience of executing a new security
on each new transaction. A dragnet clause
operates
as
a
convenience
and
accommodation to the borrowers as it
makes available additional funds without
their having to execute additional security
documents, thereby saving time, travel,
loan closing costs, costs of extra legal
services, recording fees, et cetera. Indeed,
it has been settled in a long line of decisions
that mortgages given to secure future
advancements are valid and legal contracts,
and the amounts named as consideration in
said contracts do not limit the amount for
which the mortgage may stand as security if
from the four corners of the instrument the
intent
to
secure
future
and
other
indebtedness can be gathered.

The blanket mortgage clause in the instant

case states:

Alviar[38] is

A blanket mortgage clause, also known as

a dragnet clause in American jurisprudence,

That for and in consideration of

certain loans, overdraft and
other credit accommodations
obtained from the Mortgagee by
the
Mortgagor
and/or

________________
hereinafter
referred to, irrespective of
number, as DEBTOR, and to
secure the payment of the same
and those that may hereafter be
obtained,the principal or all of
which is hereby fixed at Two
Hundred
Fifty
Thousand
(P250,000.00) Pesos, Philippine
Currency, as well as those that
the Mortgagee may extend to
the Mortgagor and/or DEBTOR,
including interest and expenses
or any other obligation owing to
the Mortgagee, whether direct
or
indirect,
principal
or
secondary as appears in the
accounts, books and records of
the Mortgagee, the Mortgagor
does
hereby transfer
and
convey by way of mortgage
unto
the
Mortgagee,
its
successors or assigns, the
parcels of land which are
described in the list inserted on
the back of this document,
and/or
appended
hereto,
together with all the buildings
and improvements now existing
or which may hereafter be
erected or constructed thereon,
of which the Mortgagor declares
that he/it is the absolute owner
free
from
all
liens
and
incumbrances. . . .

xxxx

In the case at bar, the subsequent

loans obtained by respondents
were
secured by other securities, thus: PN
BD#76/C-345, executed by Don Alviar was
secured by a hold-out on his foreign
currency
savings
account,
while
PN
BD#76/C-430, executed by respondents for
Donalco Trading, Inc., was secured by
Clean-Phase out TOD CA 3923 and
eventually by a deed of assignment on two
promissory notes executed by Bancom
Realty Corporation with Deed of Guarantee
in favor of A.U. Valencia and Co., and by a
chattel mortgage on various heavy and
transportation equipment. The matter of PN
BD#76/C-430 has already been discussed.
Thus, the critical issue is whether the
blanket mortgage clause applies even to
subsequent advancements for which other
securities were intended, or particularly, to
PN BD#76/C-345.

Under American jurisprudence, two

schools of thought have emerged on this
question.
One school advocates that
a dragnet clause so worded as to be broad
enough to cover all other debts in addition
to the one specifically secured will be
construed to cover a different debt,
although such other debt is secured by
another mortgage. The contrary thinking
maintains that a mortgage with such a
clause will not secure a note that expresses
on its face that it is otherwise secured as to
its entirety, at least to anything other than a

deficiency after exhausting the security

specified therein, such deficiency being an
indebtedness within the meaning of the
mortgage, in the absence of a special
contract excluding it from the arrangement.

The latter school represents the better

position. The parties having conformed to
the blanket mortgage clause or dragnet
clause, it is reasonable to conclude that
they
also
agreed
to
an
implied
understanding that subsequent loans need
not be secured by other securities, as the
subsequent loans will be secured by the first
mortgage. In other words, the sufficiency of
the first security is a corollary component of
the dragnet clause. But of course, there is
no prohibition, as in the mortgage contract
in issue, against contractually requiring
other securities for the subsequent loans.
Thus, when the mortgagor takes another
loan for which another security was given it
could not be inferred that such loan was
made in reliance solely on the original
security with the dragnet clause, but rather,
on the new security given. This is the
reliance on the security test.

Hence, based on the reliance on the

security test, the California court in the cited
case made an inquiry whether the second
loan was made in reliance on the original
security
containing
a dragnet
clause.
Accordingly, finding a different security was
taken for the second loan no intent that the

parties relied on the security of the first loan

could be inferred, so it was held. The
rationale involved, the court said, was that
the dragnet clause in the first security
instrument constituted a continuing offer by
the borrower to secure further loans under
the security of the first security instrument,
and that when the lender accepted a
different security he did not accept the offer.

In another case, it was held that a

mortgage with a dragnet clause is an offer
by the mortgagor to the bank to provide the
security of the mortgage for advances of
and when they were made. Thus, it was
concluded that the offer was not accepted
by the bank when a subsequent advance
was made because (1) the second note was
secured by a chattel mortgage on certain
vehicles, and the clause therein stated that
the note was secured by such chattel
mortgage; (2) there was no reference in the
second note or chattel mortgage indicating
a connection between the real estate
mortgage
and the advance; (3) the
mortgagor signed the real estate mortgage
by her name alone, whereas the second
note and chattel mortgage were signed by
the mortgagor doing business under an
assumed name; and (4) there was no
allegation by the bank, and apparently no
proof, that it relied on the security of the
real estate mortgage in making the
advance.

Indeed, in some instances, it has been

held that in the absence of clear, supportive
evidence of a contrary intention, a
mortgage containing a dragnet clause will
not be extended to cover future advances
unless the document evidencing the
subsequent advance refers to the mortgage
as providing security therefor.

It
was
therefore
improper
for
petitioner in this case to seek foreclosure of
the mortgaged property because of nonpayment of all the three promissory notes.
While the existence and validity of
the dragnet clause cannot be denied, there
is a need to respect the existence of the
other security given for PN BD#76/C-345.
The foreclosure of the mortgaged property
should only be for the P250,000.00 loan
covered by PN BD#75/C-252, and for any
amount not covered by the security for the
second promissory note. As held in one
case, where deeds absolute in form were
executed to secure any and all kinds of
indebtedness that might subsequently
become due, a balance due on a note, after
exhausting the special security given for the
payment of such note, was in the absence
of a special agreement to the contrary,
within the protection of the mortgage,
notwithstanding the giving of the special
security.
This is recognition that while
the dragnet clause subsists, the security
specifically executed for subsequent loans
must first be exhausted before the
mortgaged property can be resorted to.

The security clause involved in the case at bar

shows that, by its terms:

As security for the payment of loan obtained

by the ASSIGNOR/PLEDGOR from the
ASSIGNEE/PLEDGEE in the amount of
FIFTEEN MILLION PESOS (15,000,000.00)
Philippine Currency in accordance with the
Promissory Note attached hereto and made
an integral part hereof as Annex A and/or
such
Promissory
Note/s
which
the
ASSIGNOR/PLEDGOR shall hereafter execute
in favor of the ASSIGNEE/PLEDGEE, the
ASSIGNOR/ PLEDGOR hereby transfers,
assigns, conveys, endorses, encumbers and
delivers by way of first pledge unto the
ASSIGNEE/PLEDGEE, its successors and
assigns, that certain Membership fee
Certificate Share in Wack Wack Golf and
Country Club Incorporated covered by Stock
Certificate No. 217 with Serial No. 1793 duly
issue by Wack Wack Golf and Country Club
Incorporated on August 27, 1996 in the
name of the ASSIGNOR.

it is comparable with the security clause in the case

of Prudential, viz.:

That for and in consideration of certain

loans,
overdraft
and
other
credit
accommodations
obtained
from
the
Mortgagee by the Mortgagor and/or
________________ hereinafter referred to,
irrespective of number, as DEBTOR, and to
secure the payment of the same and those
that may hereafter be obtained, the
principal or all of which is hereby fixed at
Two Hundred Fifty Thousand (P250,000.00)
Pesos, Philippine Currency, as well as those
that the Mortgagee may extend to the
Mortgagor
and/or
DEBTOR,
including
interest and expenses or any other
obligation owing to the
Mortgagee,
whether direct or indirect, principal or
secondary as appears in the accounts,
books and records of the Mortgagee, the
Mortgagor does hereby transfer and convey
by way of mortgage unto the Mortgagee, its
successors or assigns, the parcels of land
which are described in the list inserted on
the back of this document, and/or appended
hereto, together with all the buildings and
improvements now existing or which may
hereafter be erected or constructed thereon,
of which the Mortgagor declares that he/it
is the absolute owner free from all liens and
incumbrances. . . .

and there is no substantive difference between the

terms utilized in both clauses securing future advances.

To
recall,
the
critical
issue
resolved
in Prudential was whether the blanket mortgage clause
applies even to subsequent advancements for which
other securities were intended. We then declared that
the special security for subsequent loans must first be
exhausted in a situation where the creditor desires to
foreclose on the subsequent loans that are
due. However, the dragnet clause allows the creditor to
hold on to the first security in case of deficiency after
foreclosure on the special security for the subsequent
loans.

In Prudential, we
disallowed
the
petitioners
attempt at multiple foreclosures, as it foreclosed on all
of the mortgaged properties serving as individual
securities for each of the three loans. This Court then
laid down the rule, thus:

where deeds absolute in form were

executed to secure any and all kinds of
indebtedness that might subsequently
become due, a balance due on a note, after
exhausting the special security given for the
payment of such note, was, in the absence
of a special agreement to the contrary,
within the protection of the mortgage,
notwithstanding the giving of the special
security. This is recognition that while the
dragnet clause subsists, the security
specifically executed for subsequent loans
must first be exhausted before the
mortgaged property can be resorted to.

However, this does not prevent the creditor from

foreclosing on the security for the first loan if that loan
is past due, because there is nothing in law that
prohibits the exercise of that right. Hence, in the case at
bench, Premiere Bank has the right to foreclose on the
Wack Wack Membership, the security corresponding to
the first promissory note, with the deed of assignment
that originated the dragnet clause. This conforms to the
doctrine in Prudential, as, in fact, acknowledged in the
decisions penultimate paragraph, viz.:

Petitioner, however, is not without

recourse. Both the Court of Appeals and the
trial court found that respondents have not
yet paid the P250,000.00 and gave no
credence to their claim that they paid the
said
amount
when
they
paid
petitioner P2,000,000.00. Thus,
the
mortgaged property could still be properly
subjected to foreclosure proceedings for the
unpaid P250,000.00 loan, and as mentioned
earlier, for any deficiency after D/A
SFDX#129, security for PN BD#76/c-345,
has been exhausted, subject of course to
defenses
which
are
available
to
respondents.

In any event, even without this Courts prescription

in Prudential, the release of the Wack Wack Membership
as the pledged security for Promissory Note 714-Y
cannot yet be done as sought by Central Surety. The
chain of contracts concluded between Premiere Bank
and Central Surety reveals that the Wack Wack
Membership, which stood as security for Promissory

Note 714-Y, and which also stands as security

subsequent debts of Central Surety, is a security in
form of a pledge. Its return to Central Surety upon
pretext that Central Surety is entitled to pay only
obligation in Promissory Note No. 714-Y, will result in
extinguishment of the pledge, even with respect to
subsequent obligations, because Article 2110 of
Civil Code provides:

for
the
the
the
the
the
the

(I)f the thing pledged is returned by the

pledgor
or
owner,
the pledge
is
extinguished. Any stipulation to the contrary
is void.

This is contrary to the express agreement of the parties,

something which Central Surety wants this Court to
undo. We reiterate that, as a rule, courts cannot
intervene to save parties from disadvantageous
provisions of their contracts if they consented to the
same freely and voluntarily.[39]

Attorneys Fees

The final issue is the propriety of attorneys

fees. The trial court based its award on the supposed
malice of Central Surety in instituting this case against
Premiere Bank. We find no malice on the part of Central
Surety; indeed, we are convinced that Central Surety
filed the case in the lower court in good faith, upon the
honest belief that it had the prerogative to choose to
which loan its payments should be applied.

Malicious prosecution, both in criminal and civil

cases, requires the presence of two elements, to wit: (a)
malice and (b) absence of probable cause. Moreover,
there must be proof that the prosecution was prompted
by a sinister design to vex and humiliate a person; and
that it was initiated deliberately, knowing that the
charge was false and baseless. Hence, the mere filing of
what turns out to be an unsuccessful suit does not
render a person liable for malicious prosecution, for the
law could not have meant to impose a penalty on the
right to litigate.[40] Malice must be proved with clear and
convincing evidence, which we find wanting in this case.

CARPIO, J.,
Chairperson,
NACHURA,
- versus - PERALTA,
ABAD, and
MENDOZA, JJ.

FGR REALTY AND DEVELOPMENT

WHEREFORE,
the
instant
petition
is PARTIALLY GRANTED. The assailed Decision of the
Court of Appeals in CA-G.R. CV No. 85930 dated July 31,
2006, as well as its Resolution dated January 4, 2007,
are REVERSED and SET ASIDE. The Decision of the
Regional Trial Court of Makati City, Branch 132, in Civil
Case
No.
00-1536,
dated
July
12,
2005,
is REINSTATED with
the MODIFICATION that
the
award of attorneys fees to petitioner is DELETED. No
pronouncement as to costs.

CORPORATION, FELIX NG,

NENITA NG, and FLORA R. DAYRIT Promulgated:
or FLORA REGNER,
Respondents. January 19, 2011
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ---------------x

SOLEDAD DALTON, G.R. No. 172577

RESOLUTION

Petitioner,
Present:
CARPIO, J.:

The Case

This is a petition1 for review on certiorari under Rule 45

of the Rules of Court. The petition challenges the 9
November 2005 Decision2 and 10 April 2006
Resolution3 of the Court of Appeals in CA-G.R. CV No.
76536. The Court of Appeals affirmed the 26 February
2002 Decision4 of the Regional Trial Court (RTC), Judicial
Region 7, Branch 13, Cebu City, in Civil Case No. CEB
4218.

In June 1985, Dayrit sold the property to respondent

FGR Realty and Development Corporation (FGR). In
August 1985, Dayrit and FGR stopped accepting rental
payments because they wanted to terminate the lease
agreements with Dalton and Sasam, et al.

In a complaint5 dated 11 September 1985, Dalton

and Sasam, et al. consigned the rental payments with
the RTC. They failed to notify Dayrit and FGR about the
consignation. In motions dated 27 March 1987,6 10
November 1987,7 8 July 1988,8 and 28 November
1994,9 Dayrit and FGR withdrew the rental payments. In
their motions, Dayrit and FGR reserved the right to
question the validity of the consignation.

The Facts

Flora R. Dayrit (Dayrit) owned a 1,811-square meter

parcel of land located at the corner of Rama Avenue and
Velez Street in Cebu City. Petitioner Soledad Dalton
(Dalton), Clemente Sasam,
Romulo Villalonga, Miguela Villarente, Aniceta Fuentes, P
erla Pormento, Bonifacio Cabajar, Carmencita Yuson,
Angel Ponce, Pedro Regudo, PedroQuebedo,
Mary Cabanlit, Marciana Encabo and Dolores Lim
(Sasam, et al.) leased portions of the property.

Dayrit, FGR and Sasam, et al. entered into compromise

agreements dated 25 March 199710 and 20 June
1997.11 In the compromise agreements, they agreed to
abandon all claims against each other. Dalton did not
enter into a compromise agreement with Dayrit and
FGR.

The RTCs Ruling

In its 26 February 2002 Decision, the RTC dismissed the

11 September 1985 complaint and ordered Dalton to
vacate the property. The RTC held that:

Soledad Dalton built a house which she initially

used as a dwelling and store space. She vacated
the premises when her children got married. She
transferred her residence near F. Ramos Public
Market, Cebu City.

She constructed the 20 feet by 20 feet floor area

house sometime in 1973. The last monthly rental
was P69.00. When defendants refused to accept
rental and demanded vacation of the premises,
she consignated [sic] her monthly rentals in court.

xxxx

It is very clear from the facts that there was no

valid consignation made.

The requisites of consignation are as follows:

1.

The existence of a valid debt.

2.

Valid prior tender, unless tender is excuse [sic];

3.

Prior notice of consignation (before deposit)

4.

Actual consignation (deposit);

5.

Subsequent notice of consignation;

Requisite Nos. 3 and 5 are absent or were not

complied with. It is very clear that there were no
prior notices of consignation (before deposit) and
subsequent notices of consignation (after deposit)

Besides, the last deposit was made on December

21, 1988. At the time Dalton testified on
December 22, 1999, she did not present evidence
of payment in 1999. She had not, therefore,
religiously paid her monthly obligation.

By clear preponderance of evidence, defendants

have established that plaintiff was no longer
residing at Eskina Banawa at the time she
testified in court. She vacated her house and
converted it into a store or business
establishment. This is buttressed by the testimony
of Rogelio Capacio, the courts appointed

commissioner, who submitted a report, the full

text of which reads as follows:

Soledad Dalton did not take exception to the said

report.

Two witnesses who were former sub-lessees

testified and clearly established that Mrs. Dalton
use the house for business purposes and not for
dwelling.12
REPORT AND/OR OBSERVATION
Dalton appealed to the Court of Appeals.
The store and/or dwelling subject to ocular
inspection is stuated [sic] on the left portion of the
road which is about fifty-five (55) meters from the
corner of Banawa-Guadalupe Streets, when
turning right heading towards the direction of
Guadalupe Church, if travelling from the Capitol
Building.

I observed that when we arrived at the ocular

inspection site, Mrs. Soledad Dalton with the use
of a key opened the lock of a closed door. She
claimed that it was a part of the dwelling which
she occupies and was utilized as a store. There
were few saleable items inside said space.

The Court of Appeals Ruling

In its 9 November 2005 Decision, the Court of Appeals

affirmed the RTCs 26 February 2002 Decision. The Court
of Appeals held that:

After a careful review of the facts and evidence in

this case, we find no basis for overturning the
decision of the lower court dismissing plaintiffsappellants complaint, as we find that no valid
consignation was made by the plaintiff-appellant.

Consignation is the act of depositing the thing due

with the court or judicial authorities whenever the
creditor cannot accept or refuses to accept
payment and generally requires a prior tender of
payment. In order that consignation may be
effective, the debtor must show that: (1) there
was a debt due; (2) the consignation of the
obligation had been made because the creditor to
whom tender of payment was made refused to
accept it, or because he was absent or
incapacitated, or because several persons claimed
to be entitled to receive the amount due or
because the title to the obligation has been lost;
(3) previous notice of the consignation had been
given to the person interested in the performance
of the obligation; (4) the amount due was placed
at the disposal of the court; and (5) after the
consignation had been made the person
interested was notified thereof. Failure in any of
these requirements is enough ground to render a
consignation ineffective.

the plaintiff-appellant was invalid for failure to

meet requisites 3 and 5 of a valid consignation
(i.e., previous notice of the consignation given to
the person interested in the performance of the
obligation and, after the consignation had been
made, the person interested was notified thereof).

Consignation is made by depositing the proper

amount to the judicial authority, before whom the
tender of payment and the announcement of the
consignation shall be proved. All interested parties
are to be notified of the consignation. It had been
consistently held that compliance with these
requisites is mandatory.

The prevailing rule is that substantial compliance

with the requisites of a valid consignation is not
enough. In Licuanan vs. Diaz, reiterating the ruling
in Soco vs. Militante, the Supreme Court had the
occasion to rule thus:

No error, therefore, can be attributed to the lower

court when it held that the consignation made by

Plaintiff-appellant failed to notify defendantsappellees of her intention to consign the amount

due to them as rentals. She, however, justifies
such failure by claiming that there had been
substantial compliance with the said requirement
of notice upon the service of the complaint on the
defendants-appellees together with the summons.

We do not agree with such contention.

In addition, it must be stated that in the case

of Soco v. Militante (123 SCRA 160, 166-167
[1983]), this Court ruled that the codal provisions

of the Civil Code dealing with consignation

(Articles 1252-1261) should be accorded
mandatory construction

We do not agree with the questioned decision. We

hold that the essential requisites of a valid
consignation must be complied with fully and
strictly in accordance with the law. Articles 12561261, New Civil Code. That these Articles must be
accorded a mandatory construction is clearly
evident and plain from the very language of
the codal provisions themselves which require
absolute compliance with the essential requisites
therein provided. Substantial compliance is not
enough for that would render only directory
construction of the law. The use of the words shall
and must [sic] which are imperative, operating to
impose a duty which may be enforced, positively
indicated that all the essential requisites of a valid
consignation must be complied with. The Civil
Code Articles expressly and explicitly direct what
must be essentially done in order that
consignation shall be valid and effectual...

Clearly then, no valid consignation was made by

the plaintiff-appellant for she did not give notice
to the defendants-appellees of her intention to so
consign her rental payments. Without any
announcement of the intention to resort to
consignation first having been made to persons

interested in the fulfillment of the obligation, the

consignation as a means of payment is void.

As to the other issues raised by the plaintiffappellant in her second and third assigned errors,
we hold that the ruling of the lower court on such
issues is supported by the evidence adduced in
this case.

That plaintiff-appellant is not residing at the

leased premises in Eskina Banawa and that she is
using the same for business purposes, not as
dwelling place, is amply supported by the
testimony of two of plaintiff-appellants sublessees. The Commissioners Report submitted by
Rogelio Capacio, who was commissioned by the
lower court to conduct an ocular inspection of the
leased premises, further lends support to the
lower courts findings. On the other hand, plaintiffappellant only has her self-serving claims that she
is residing at the leased premises
in Eskina Banawa to prove her continued use of
the leased premises as dwelling place.

There is thus no merit to plaintiff-appellants fourth

assigned error. The lower court acted within its
authority in ordering the plaintiff-appellant to
vacate the leased premises. The evidence shows

that plaintiff-appellant had failed to continuously

pay the rentals due to the defendants-appellees. It
was therefore within the powers of the lower court
to grant such other relief and remedies equitable
under the circumstances.

In sum, there having been no valid consignation

and with the plaintiff-appellant having failed to
pay the rentals due to the defendants-appellees,
no error can be attributed to the lower court in
rendering its assailed decision.13

Hence, the present petition. Dalton raises as issues that

the Court of Appeals erred in ruling that (1) the
consignation was void, and (2) Dalton failed to pay rent.

The Courts Ruling

The petition is unmeritorious.

Dalton claims that, the issue as to whether the

consignation made by the petitioner is valid or not for
lack of notice has already been rendered moot and
academic with the withdrawal by the private

respondents of the amounts consigned and deposited

by the petitioner as rental of the subject premises.14
The Court is not impressed. First, in withdrawing the
amounts consigned, Dayrit and FGR expressly reserved
the right to question the validity of the consignation.
InRiesenbeck v. Court of Appeals,15 the Court held that:

A sensu contrario, when the creditors

acceptance of the money consigned is
conditional and with reservations, he is not
deemed to have waived the claims he
reserved against his debtor. Thus, when the
amount consigned does not cover the entire
obligation, the creditor may accept it, reserving
his right to the balance (Tolentino, Civil Code of
the Phil., Vol. IV, 1973 Ed., p. 317, citing
3 Llerena 263). The same factual milieu obtains
here because the respondent creditor
accepted with reservation the amount
consigned in court by the petitioner-debtor.
Therefore, the creditor is not barred from
raising his other claims, as he did in his answer
with special defenses and counterclaim against
petitioner-debtor.

As respondent-creditors acceptance of the amount

consigned was with reservations, it did not
completely extinguish the entire indebtedness of
the petitioner-debtor. It is apposite to note here

that consignation is completed at the time

the creditor accepts the same without
objections, or, if he objects, at the time the
court declares that it has been validly made
in accordance with law.16 (Emphasis supplied)

Second, compliance with the requisites of a valid

consignation is mandatory. Failure to comply strictly
with any of the requisites will render the consignation
void. Substantial compliance is not enough.

In Insular Life Assurance Company, Ltd. v. Toyota BelAir, Inc.,17 the Court enumerated the requisites of a valid
consignation: (1) a debt due; (2) the creditor to whom
tender of payment was made refused without just cause
to accept the payment, or the creditor was absent,
unknown or incapacitated, or several persons claimed
the same right to collect, or the title of the obligation
was lost; (3) the person interested in the
performance of the obligation was given notice
before consignation was made; (4) the amount was
placed at the disposal of the court; and (5) the person
interested in the performance of the obligation
was given notice after the consignation was
made.

Articles 1257 and 1258 of the Civil Code state,

respectively:

Art. 1257. In order that the consignation of

the thing due may release the obligor, it
must first be announced to the persons
interested in the fulfillment of the
obligation.

The consignation shall be ineffectual if it is

not made strictly in consonance with the
provisions which regulate payment.

Art. 1258. Consignation shall be made by

depositing the things due at the disposal of
judicial authority, before whom the tender of
payment shall be proved, in a proper case, and
the announcement of the consignation in other
cases.

The consignation having been made, the

interested parties shall also be notified
thereof. (Emphasis supplied)

The giving of notice to the persons interested in the

performance of the obligation is mandatory. Failure to
notify the persons interested in the performance of the

obligation will render the consignation void. In Ramos v.

Sarao,18 the Court held that, All interested parties
are to be notified of the consignation. Compliance
with [this requisite] is mandatory.19 In Valdellon v.
Tengco,20 the Court held that:

Under Art. 1257 of our Civil Code, in order that

consignation of the thing due may release
the obligor, it must first be announced to the
persons interested in the fulfillment of the
obligation. The consignation shall be
ineffectual if it is not made strictly in
consonance with the provisions which
regulate payment. In said Article 1258, it is
further stated that the consignation having
been made, the interested party shall also
be notified thereof.21 (Emphasis supplied)

essential requisites therein provided. Substantial

compliance is not enough for that would
render only a directory construction to the
law. The use of the words shall and must which
are imperative, operating to impose a duty which
may be enforced, positively indicate that all the
essential requisites of a valid consignation must
be complied with. The Civil Code Articles
expressly and explicitly direct what must be
essentially done in order that consignation
shall be valid and effectual.23 (Emphasis
supplied)

Dalton claims that the Court of Appeals erred in ruling

that she failed to pay rent. The Court is not impressed.
Section 1, Rule 45 of the Rules of Court states that
petitions for review on certiorari shall raise only
questions of law which must be distinctly set
forth. In Pagsibigan v. People,24 the Court held that:

In Soco v. Militante, et al.,22 the Court held that:

We hold that the essential requisites of a

valid consignation must be complied with
fully and strictly in accordance with the law,
Articles 1256 to 1261, New Civil Code. That these
Articles must be accorded a mandatory
construction is clearly evident and plain from the
very language of the codal provisions themselves
which require absolute compliance with the

A petition for review under Rule 45 of the Rules of

Court should cover only questions of law.
Questions of fact are not reviewable. A question of
law exists when the doubt centers on what the
law is on a certain set of facts. A question of fact
exists when the doubt centers on the truth or
falsity of the alleged facts.

There is a question of law if the issue raised is

capable of being resolved without need of
reviewing the probative value of the evidence.
The issue to be resolved must be limited to
determining what the law is on a certain set of
facts. Once the issue invites a review of the
evidence, the question posed is one of fact.25

WHEREFORE, the Court DENIES the petition. The

Court AFFIRMS the 9 November 2005 Decision and 10
April 2006 Resolution of the Court of Appeals in CA-G.R.
CV No. 76536.

B.E. SAN DIEGO, INC., G.R. No. 169501

Petitioner,

Whether Dalton failed to pay rent is a question of fact. It

is not reviewable.

Present:
QUISUMBING, J., Chairperson,
- versus - CARPIO,

The factual findings of the lower courts are binding on

the Court. The exceptions to this rule are (1) when there
is grave abuse of discretion; (2) when the findings are
grounded on speculation; (3) when the inference made
is manifestly mistaken; (4) when the judgment of the
Court of Appeals is based on a misapprehension of
facts; (5) when the factual findings are conflicting; (6)
when the Court of Appeals went beyond the issues of
the case and its findings are contrary to the admissions
of the parties; (7) when the Court of Appeals overlooked
undisputed facts which, if properly considered, would
justify a different conclusion; (8) when the facts set
forth by the petitioner are not disputed by the
respondent; and (9) when the findings of the Court of
Appeals are premised on the absence of evidence and
are contradicted by the evidence on record.26Dalton did
not show that any of these circumstances is present.

CARPIO MORALES,
TINGA, and
VELASCO, JR., JJ.
Promulgated:
ROSARIO T. ALZUL,
Respondent. June 8, 2007
x----------------------------------------------------------------------------------------x

DECISION

VELASCO, JR., J.:

The Case

This Petition for Review on Certiorari[1] under Rule

45 questions the February 18, 2005 Decision [2] of the
Court of Appeals (CA) in CA-G.R. SP No. 81341, which
granted respondent Alzul the right to pay the balance of
the purchase price within five (5) days from receipt of
the CA Decision despite the lapse of the original period
given to said party through the final Resolution of this
Court in an earlier case. The CA ruling reversed the
September 18, 2003 Resolution[3] and December 2, 2003
Order[4] of the Office of the President (OP) in O.P. Case
No. 01-1-097, which upheld the dismissal of respondent
Alzuls complaint for consignation and specific
performance before the Housing and Land Use
Regulatory Board (HLURB) in HLURB Case No. REM-A99097-0167. Likewise challenged is the August 31,
2005CA Resolution[5] rejecting petitioners Motion for
Reconsideration.

The Facts

The facts culled by the CA are as follows:

On February 10, 1975, [respondent]

Rosario T. Alzul purchased from
[petitioner] B.E. San Diego, Inc. four (4)
subdivision lots with an aggregate area
of 1,275 square meters located at
Aurora
Subdivision,
Maysilo,
Malabon. These lots, which are now
subject of this petition, were bought
through installment under Contract to
Sell No. 867 at One Hundred Pesos
(100.00) per square meter, with a
downpayment [sic] of Twelve Thousand

Seven
Hundred
Fifty
Pesos
(12,750.00),
and
monthly
installments of One Thousand Two
Hundred
Forty-Nine
Pesos
(1,249.50). The interest agreed upon
was 12 percent (12%) per annum until
fully paid, thus, the total purchase price
was
Two Hundred Thirty Seven
Thousand Six Hundred Sixty Pesos
(237,660.00).

[Respondent]
took
immediate
possession of the subject property,
setting up a perimeter fence and
constructing a house thereon.

On July 25, 1977, [respondent] signed a

Conditional Deed of Assignment and
Transfer of Rights which assigned to a
certain Wilson P. Yu her rights under the
Contract
to
Sell. [Petitioner]
was
notified of the execution of such
deed. Later on, the Contract to Sell in
[respondents] name was cancelled, and
[petitioner] issued a new one in favor of
Yu although it was also denominated as
Contract to Sell No. 867.

On July 4, 1979, [respondent] informed

[petitioner] about Yus failure and
refusal to pay the amounts due under
the
conditional
deed. She
also
manifested that she would be the one

to pay the installments due to

respondent on account of Yus default.

On August 25, 1980, [respondent]

commenced an action for rescission of
the conditional deed of assignment
against
Yu
before
the Regional Trial Court of Caloocan City
. Subsequently, on September 30,
1985,
[respondent]
caused
the
annotation of notices of lis pendens on
the titles covering the subject lots.

The
trial
court
ruled
in
[respondents] favor in the rescission
case. The decision was even affirmed
by this [appellate] Court. Yu brought his
cause before the Supreme Court in a
Petition for Review, but this was
likewise denied.
On February 17, 1989, [petitioner]
notified [respondent] that Contract to
Sell No. 867 was declared rescinded
and cancelled. On April 28, 1989, the
subject lots were sold to spouses Carlos
and Sandra Ventura who were allegedly
surprised to find the annotation of lis
pendens in their owners duplicate title.

On May 8, 1990, the Ventura spouses

filed an action for Quieting of Title with
Prayer for Cancellation of Annotation
and Damages before the Regional Trial

Court of Malabon. The trial court ruled

in favor of the Ventura spouses. On
appeal before this [appellate] Court,
however, the decision was reversed
on November 27, 1992, as follows:

WHEREFORE, the appealed

decision is hereby REVERSED
and SET ASIDE, and the
complaint therein is ordered
dismissed. Transfer Certificates
of Title Nos. N-1922, N-1923, N1924, and N-1925, all of the
Register of Deeds of Metro
Manila, District III, Malabon
Branch, in the names of
plaintiffs-appellees Carlos N.
Ventura and Sandra L. Ventura
are hereby declared null and
void, and the titles of ownership
reinstated in the name of B.E.
San Diego, Inc. with the
corresponding notices of lis
pendens therein annotated in
favor of defendant-appellant
until such time that ownership
of the subject parcels of land is
transferred to herein defendantappellant Rosario Alzul. Costs
against plaintiff-appellees.

SO ORDERED.

Upon filing of an appeal to the Supreme

Court docketed as GR No. 109078, the
above
decision
was
affirmed
on December 26, 1995. A motion for
reconsideration was filed, but this was
denied
by
the
Highest
Tribunal
on February 5, 1996.

herein [respondent] tried to serve

payment upon [petitioner] on August
29,
1996, August
30,
1996 and September 28, 1996. On all
these dates, however, [petitioner]
allegedly refused to accept payment
from [respondent].

On June 17, 1996, a resolution was

issued by the Supreme Court, ordering,
as follows:

On November 11, 1996, [respondent]

filed a Manifestation in GR No. 109078
informing the Supreme Court that
[petitioner], on three (3) occasions,
refused to accept [her] payment of the
balance
in
the
amount
of 187,380.00. On January 29, 1997,
a Resolution was issued by the
Supreme Court referring the case to the
court of origin for appropriate action,
on
account
of
[respondents]
manifestation.

We, however, agree with the

observation made by movants
that no time limit was set by the
respondent Court of Appeals in
its assailed Decision for the
private
respondent
herein,
Rosario Alzul, to pay B.E. San
Diego, Inc. the original owner of
the properties in litigation. To
rectify
such
oversight,
private respondent Rosario
T. Alzul is hereby given a
non-extendible
period
of
thirty (30) days from entry
of judgment, within which to
make full payment for the
properties
in
question.
xxx (Emphasis supplied.)

On July 12, 1996, an Entry of Judgment

was issued. In an attempt to comply
with the Supreme Courts directive,

On October 21, 1997, [respondents]

counsel wrote a letter to [petitioner]
citing the latters refusal to accept her
payment on several occasions. It was
also mentioned therein that due to its
refusal,
[respondent]
would
just
consign the balance due to [petitioner]
before the proper judicial authority.

On January 14, 1998, a reply was sent

by [petitioner] through a certain Flora
San Diego. [Respondents] request was
rejected on account of the following:

1.

We have long legally rescinded the

sale in her favor in view of her failure
to pay the monthly amortization as
per contract.

2.

She sold her rights to Mr. Wilson Yu

who failed to pay his monthly
amortizations, too.

3.

We are not and have never been a

part of the case you are alluding to
hence we cannot be bound by the
same.

4.

The property in question is now

under process to be reconveyed to us
as ordered by the court by virtue of a
compromised (sic) agreement entered
into in Civil Case No. 2655 MN of the
Malabon RTC Branch entitled Spouses
Carlos Ventura and Sandra Ventura vs.
B.E. San Diego, Inc. xxx

Thinking that an action for consignation

alone would not be sufficient to allow
for the execution of a final judgment in
her favor, [respondent] decided to file
an action for consignation and specific
performance against [petitioner] before
the Housing and Land Use Regulatory
Board
on March
12,
1998. The

complaint, docketed as REM-03129810039, prayed that a) [respondent] be

considered to have fully paid the total
purchase
price
of
the
subject
properties; b) TCT Nos. N-155545 to 48
which were declared void in CA GR No.
L-109078
be
cancelled;
c) new
certificates of title over the subject
properties be issued in the name of
[respondent]; and d) [petitioner] be
ordered to reimburse [respondent] the
sum
of
Fifty
Thousand
Pesos
(50,000.00) as attorneys fees and
litigation expenses.

On July 12, 1999, a decision was

rendered by the HLURB through
Housing and Land Use Arbiter Dunstan
T. San Vicente. It was held, thus:

The purported consignation in

this case is thus of no moment,
inasmuch
as
the
amount
allegedly due was not even
deposited or placed at the
disposal of this Office by the
complainant.

In any event, we agree with

[petitioner] that even if the
complainant had actually made
the consignation of the amount,
such
consignation
is
still
ineffective and void for having

been done long after the

expiration of the non-extendible
period set forth in the 17 June
1996 Supreme Court Resolution
that expired on 20 September
1996.

WHEREFORE,
Premises
Considered, a judgment is
hereby rendered DISMISSING
the
complaint. Cost
against
complainant.

IT (sic) SO ORDERED.

Aggrieved by the above decision,

[respondent] filed a Petition for Review
before
the
HLURBs
First
Division. On March 17, 2000, a decision
was rendered dismissing the petition
for lack of merit, and affirming the
decision
dated July
12,
1999. [Respondent] filed a Motion for
Reconsideration, but this was denied
on July 31, 2001.

[Respondent] then filed an appeal to

the Office of the President. This was,
however, dismissed on June 2, 2003 for
having been filed out of time. Again,
[respondent]
moved
for
its
reconsideration. On September
18,

2003, the Office of the President gave

due course to [respondents] motion,
and resolved the motion according to
its merits. The single question resolved
was whether or not [respondents] offer
of consignation was correctly denied by
the HLURB. Said office ruled in the
affirmative, and We quote:

From the foregoing, it is

evident that there was no valid
consignation of the balance of
the purchase price. The 30-day
non-extendible period set forth
in the 17 June 1996 resolution
had already expired on 20
September 1996. The HLURB is
therefore justified in refusing the
consignation, otherwise it would
be accused of extending the
period beyond that provided by
the Supreme Court. A valid
consignation is effected when
there is an actual consignation
of the amount due within the
prescribed period (St. Dominic
Corporation vs. Intermediate
Appellate Court, 138 SCRA 242).
xxx

WHEREFORE,
premises
considered, the appeal is hereby
DISMISSED for lack of merit. x x
x

[Respondent] filed a Motion for

Reconsideration
[of]
the
above
Resolution, but this was denied with
finality on December 2, 2003.[6]

The Ruling of the Court of Appeals

Respondent Alzul brought before the CA a petition

for certiorari docketed as CA-G.R. SP No. 67637,
ascribing grave abuse of discretion to the OP in
dismissing her appeal in O.P. Case No. 01-1-097 and
affirming the March 17, 2000 Decision [7] and July 31,
2001 Resolution[8] of the HLURB First Division in HLURB
Case No. REM-A-990907-0167.

On February 18, 2005, the CA rendered its

assailed
Decision
reversing
the September
18,
2003 Resolution and December 2, 2003 Order of the OP,
the fallo of which reads:

WHEREFORE, in the higher interest

of justice, the assailed Decision,
Resolution and Order dated March 17,
2000, September 18, 2003 and
December 2, 2003, respectively, are
hereby REVERSED and SET
ASIDE. Accordingly, [respondent Alzul]
is hereby ordered to pay [petitioner
B.E. San Diego, Inc.] the balance due
for the sale of the subject four parcels
of land within five (5) days from receipt
of this decision. [Petitioner B.E. San

Diego, Inc.], on the other hand, is

ordered to accept such payment from
[respondent Alzul], after which, the
corresponding Deed of Sale must be
issued.

SO ORDERED.[9]

The CA agreed with the HLURB that no valid

consignation was made by respondent but found that
justice would be better served by allowing respondent
Alzul to effect the consignation, albeit belatedly. It cited
the respondents right over the disputed lots as
confirmed by this Court in G.R. No. 109078, which, if
taken away on account of the delay in completing the
payment, would amount to a grave injustice.

Moreover, the CA pointed out that respondents

counsel
concededly
lacked
the
vigilance
and
competence in defending his clients right when he failed
to consign the balance on time; nonetheless, such may
be disregarded in the interest of justice. It considered
the failure of respondents counsel to avail of the remedy
of consignation as a procedural lapse, citing the
principle that where a rigid application of the rules will
result in a manifest failure or miscarriage of justice,
technicalities can be ignored.

A copy of the February 18, 2005 CA Decision was

received by respondent Alzul through her counsel
on February 24, 2005.

The Issues
On March 4, 2005, respondent filed a Compliance
and Motion for Extension of Time to Comply with the
Decision of the [CA][10] praying that she be given an
extension of ten (10) days or from March 2 to 11,
2005 to comply with the CA Decision. On the other
hand, on March 8, 2005, petitioner filed its Motion for
Reconsideration with Opposition to Petitioners Motion
for Extension of Time to Comply with the Decision of the
[CA].[11]

Through its assailed August 31, 2005 Resolution,

the CA denied petitioners Motion for Reconsideration,
and finding that respondent duly exerted efforts to
comply with its Decision and a valid consignation was
made by respondent, it granted the requested 10-day
extension of time to comply with the February 18, 2005
Decision and her motion for consignation. The fallo of
said Resolution reads:

IN VIEW OF THE FOREGOING, the

motion for extension to comply with the
Decision is hereby GRANTED, the
motion
for
reconsideration
is DENIED and
the
motion
for
consignation is GRANTED. [Petitioner]
B.E. San Diego, Inc. is hereby ordered
to receive the payment of [respondent]
Rosario T. Alzul and to issue, in her
favor, the corresponding Deed of Sale.
[12]

Hence, before us is the instant petition with the

following issues:

1. Whether or not the Court of

Appeals, in issuing the assailed 18
February 2005 Decision and 31 August
2005 Resolution in CA-G.R. SP No.
81341, has decided questions of law in
a way not in accord with law and with
the
applicable
decisions
of
the
Honorable Court;

2. Whether or not the Court of

Appeals committed patent grave abuse
of discretion and/or acted without or in
excess of jurisdiction in granting
respondent Alzuls subsequent motion
for extension of time to comply with
the 18 February 2005 decision and
motion for consignation; and

3. Whether or not the 18 February

2005 Decision
and 31
August
2005 Resolution of the Court of Appeals
in CA-G.R. SP No. 81341 ought to be
annulled and set aside, for being
contrary to law and jurisprudence.[13]

The Courts Ruling

On the procedural issue, petitioner B.E. San Diego, Inc.

assails the sufficiency of respondent Alzuls CA petition
as the latter, in violation of the rules, allegedly lacked
the essential and relevant pleadings filed with the
HLURB and the OP.

Section 6 of Rule 43, 1997 Rules of Civil Procedure

pertinently provides:

SEC. 6. Contents of the petition.The

petition for review shall x x x (c) be
accompanied by a clearly legible
duplicate original or a certified true
copy of the award, judgment, final
order or resolution appealed from,
together with certified true copies of
such material portions of the
record referred to therein and
other supporting papers; x x x
(Emphasis supplied.)

The above proviso explicitly requires the following to be

appended to a petition: 1) clearly legible duplicate
original or a certified true copy of the award, judgment,
final order, or resolution appealed from; 2) certified true
copies of such material portions of the record referred to
in the petition; and 3) other supporting papers.

Obviously, the main reason for the prescribed

attachments is to facilitate the review and evaluation of
the petition by making readily available to the CA all the
orders, resolutions, decisions, pleadings, transcripts,
documents, and pieces of evidence that are material
and relevant to the issues presented in the petition
without relying on the case records of the lower
court. The rule is the reviewing court can determine the
merits of the petition solely on the basis of the
submissions by the parties[14] without the use of the
records of the court a quo. It is a fact that it takes
several months before the records are elevated to the
higher court, thus the resulting delay in the review of
the petition. The attachment of all essential and
necessary papers and documents is mandatory;
otherwise, the petition can be rejected outright under
Sec. 7 of Rule 43 of the Rules of Court, which provides:

Effect of failure to comply with

requirements.The failure
of
the
petitioner to comply with any of the
foregoing requirements regarding the
payment of the docket and other lawful
fees, the deposit for costs, proof of
service of the petition, and the
contents of and the documents which
should accompany the petition shall
be sufficient ground for the dismissal
thereof.

To
prevent
premature
dismissals,
the
requirements under Sec. 6 on the contents of the
petition have to be elucidated.

First, there can be no question that only the

award, judgment, or final order or resolution issued by
the lower court or agency and appealed from has to be
certified as true.

The second set of attachments refers to the

certified true copies of such material portions of the
record referred to therein.

Material is defined as important; more or less

necessary; having influence or effect; going to the
merits; having to do with matter, as distinguished from
form.[15]Thus, material portions of the records are those
parts of the records that are relevant and directly bear
on the issues and arguments raised and discussed in
the petition.They may include any of the pleadings that
are subject of any issue, documentary evidence,
transcripts of testimonial evidence, and parts of the
records pertinent and relevant to the grounds
supporting the petition. The attachment of the material
portions is subject to the qualification that these are
referred to or cited in the petition.Thus, only the
material parts specified in the petition have to be
appended and that would be sufficient compliance with
the rule as to form.

It would be prudent however for the petitioner to attach

all parts of the records which are relevant, necessary, or
important in whatever way to be able to reach the
resolution of the issues of the petition. The availability
of such documents to the ponente and members of a
Division can easily provide the substance and support to

the merits of the grounds put forward by the petitioner.

Moreover, the processing time for the review and
resolution of the petition is greatly abbreviated, thereby
obviating intolerable delays.

Lastly, it has to be explained whether the material

portions of the records have to be certified as true by
the clerk of court or his/her duly authorized
representative as provided in Sec. 6 of Rule 43. If strictly
required, the rule to require attachment of certified true
copies of the material portions will surely make the
preparation of the petition more tedious, cumbersome,
and expensive. It should therefore be construed that
merely clear and legible copies of the material portions
will suffice. The rules on the different modes of appeal
from the lower courts or quasi-judicial agencies to the
CA reveal that it is only Rule 43 that specifically states
that the material portions to be appended to the
petition should be certified true copies. Rule 41 of
course does not require attachment of the pertinent
records since the entire records are elevated to the
CA. Rule 42 on petition for review from the trial court in
aid of its appellate jurisdiction to the CA speaks of plain
copies of the material portions of the record as would
support the allegations of the petition.[16] Even Rule 45
on appeal by certiorari from the CA to this Court simply
speaks of material portions of the records without
indicating that these should be certified true
copies. Rule 46 on original cases to this Court only
requires plain copies of the material portions of the
records. Finally, Rule 65 on special civil actions requires
only copies of relevant and pertinent pleadings and
documents.

From the foregoing premises, the inescapable

conclusion is that only plain and clear copies of the
material portions of the records are required under Sec.
3 of Rule 43.This finding is buttressed by our ruling
in Cadayona v. CA, where it was held that only
judgments or final orders of the lower courts are needed
to be certified true copies or duplicate originals.[17] There
is no plausible reason why a different treatment or
stricter requirement should be applied to petitions
under Rule 43.

The last requirement is the attachment of other

supporting papers. Again, it is only in Rule 43 that we
encounter the requirement of annexing supporting
papers to the petition. This can be interpreted to mean
other documents, pictures, and pieces of evidence not
forming parts of the records of the lower court or
agency that can bolster and shore up the petition. While
not so specified in Sec. 3 of Rule 43, it is inarguable that
said papers must also be relevant and material to the
petition; otherwise, the attachments would be mere
surplusages and devoid of use and value.

Petitioner claims respondents petition in CA-G.R. SP No.

81341 failed to attach material documents of the
records of the HLURB and the OP. They cry foul that
none of the pleadings filed with the HLURB and the OP
found their way into the CA petition. It prays that the CA
petition should have been dismissed under Sec. 7 of
Rule 43 due to the lack of needed attachments.

Petitioners postulation must fail.

Sec. 7 of Rule 43 does not prescribe outright rejection of

the petition if it is not accompanied by the required
documents but simply gives the discretion to the CA to
determine whether such breach constitutes a sufficient
ground for dismissal. Apparently, petitioner was not able
to convince the CA that the alleged missing
attachments deprived said court of the full opportunity
and facility in examining and resolving the petition. It
has not been satisfactorily shown that the pleadings
filed by petitioner with the quasi-judicial agencies have
material bearing or importance to the CA petition. Such
pleadings could have been attached to the comment of
respondent and hence, no prejudice would be
suffered. Thus, the CA did not exercise its discretion in
an arbitrary or oppressive manner by giving due course
to the petition.

In addition, it was noted in Cusi-Hernandez v. Diaz that

the CA Revised Internal Rules provide certain flexibility
in the submission of additional documents:
When a petition does not have the
complete annexes or the required
number of copies, the Chief of the
Judicial Records Division shall require
the petitioner to complete the annexes
or file the necessary number of copies
of the petition before docketing the
case. Pleadings improperly filed in
court shall be returned to the sender by
the Chief of the Judicial Records
Division.[18]

In Rosa Yap Paras, et al. v. Judge Ismael O.

Baldado, et al., the Court preferred the determination of
cases on the merits over technicality or procedural
imperfections so that the ends of justice would be
served better, thus:

At the same time, the Rules of Court

encourage a reading of the procedural
requirements in a manner that will help
secure and not defeat justice. Thus:

Section
6. Construction.These
Rules
shall
be
liberally
construed in order to promote
their objective of securing a just,
speedy
and
inexpensive
disposition of every action and
proceeding.

As expressed in Alberto vs. Court of

Appeals, (w)hat should guide judicial
action is the principle that a partylitigant is to be given the fullest
opportunity to establish the merits of
his complaint or defense rather than for
him to lose life, liberty, honor or
property on technicalities. x x x (T)he
rules of procedure should be viewed as
mere tools designed to facilitate the
attainment of justice. Their strict and
rigid application, which would result in
technicalities that tend to frustrate
rather than promote substantial justice,
must always be eschewed.[19]

Now we will address the main issuewhether respondent

Alzul is still entitled to consignation despite the lapse of
the period provided by the Court in G.R. No. 109078
entitled Yu v. Court of Appeals.

Petitioner stresses the fact that respondent Alzul did not

comply
with
this
Courts June
17,
[20]
1996 Resolution
which gave a non-extendible period
of thirty (30) days from entry of judgment within which
to make full payment for the subject properties. The
entry of judgment shows that the December 26, 1995
Resolution[21] in G.R. No. 109078 became final and
executory on July 2, 1996. Respondent Alzul received
through counsel a copy of the entry of judgment
on August
21,
1996. Thus,
respondent
had
until September 20, 1996 within which to make the full
payment.

After three (3) unsuccessful tenders of payment,

respondent Alzul made no consignation of the amount
to the court of origin. It was only on March 12, 1998 or
about a year and a half later that respondent offered to
consign said amount in an action for consignment
before the HLURB. Relying on the case of St. Dominic
Corporation
v.
Intermediate
Appellate
Court,
[22]
petitioner strongly asserts that upon its refusal to
accept the tendered payment, respondent ought to
have consigned it with the court of origin also within the
30-day
period
or
within
a
reasonable
time
thereafter. Respondent failed to do this as she waited
for a year and a half before instituting the instant action

for specific performance and consignment before the

HLURB.
Moreover, petitioner argues that respondents delay of a
year and a half to pursue full payment must be
regarded as a waiver on her part to claim whatever
residual remedies she might still have for the
enforcement of the June 17, 1996 Resolution in G.R. No.
109078.

Petitioner further contends that even if the action

before the HLURB was made on time, that is, within the
30-day period, still it is fatally defective as respondent
did not deposit any amount with the HLURB which
violated the rules for consignment which require actual
deposit of the amount allegedly due with the proper
judicial authority.

Premised upon these considerations, petitioner faults

the appellate court for its grant of respondents petition
for review which nullified the denial by the HLURB
Arbiter, HLURB First Division, and the OP of respondents
action.

On the other hand, respondent contends that the June

17, 1996 Resolution of this Court should not be
construed against her inability to effect payment due to
the obstinate and unjust refusal by petitionera
supervening
circumstance
beyond
her
control. Respondent underscores that within the 30-day
period, she repeatedly attempted to effect the payment
to no avail. Moreover, the much delayed response of
petitioner
embodied
in
its January
14,
[23]
1998 letter
confirming its refusal was based on
untenable, baseless, and contrived grounds.

Moreover, she argues that the December 26, 1995

Resolution in G.R. No. 109078 granting her proprietary
rights over the subject lots has long become final and
executory.

Anent the issue of laches and estoppel, respondent

strongly contends that such do not apply in the instant
case as incontrovertible circumstances show that she
has
relentlessly
pursued
the
protection
and
enforcement of her rights over the disputed lots for over
a quarter of a century.

After a careful study of the factual milieu, applicable

laws, and jurisprudence, we find the petition
meritorious.

In our June 17, 1996 Resolution, we clearly specified

thirty (30) days from entry of judgment for respondent
to promptly effect the full payment of the balance of the
purchase price for the subject properties, thus:
Respondent Alzul was accorded legal rights over
subject properties

In G.R. No. 109078, finding no reversible error on the

part of the CA, we denied Wilson P. Yus petition and
affirmed the appellate courts ruling that as between
Wilson P. Yu, the Ventura spouses, petitioner B.E. San
Diego, Inc., and respondent Alzul, respondent has
inchoate proprietary rights over the disputed lots. We
upheld the CA ruling declaring as null and void
the titles issued in the name of the Ventura
spouses and reinstating them in the name of B.E.
San Diego, Inc., with the corresponding notices
of lis pendens annotated on them in favor of
respondent until such time that ownership of the
subject parcels of land is transferred to
respondent Rosario Alzul.

It is thus clear that we accorded respondent Alzul

expectant rights over the disputed lots, but such
is conditioned on the payment of the balance of
the purchase price. Having been conceded such
rights, respondent had the obligation to pay the
remaining balance to vest absolute title and rights of
ownership in his name over the subject properties.

We however agree with the observation

made by movants that no time limit
was set by the respondent Court of
Appeals in its assailed Decision for the
private respondent herein, Rosario
Alzul, to pay B.E. San Diego, Inc., the
original owner of the properties in
litigation. To rectify such oversight,
private respondent Rosario T. Alzul
is hereby given a non-extendible
period of thirty (30) days from
entry of judgment, within which to
make
full
payment
for
the
properties in question.[24] (Emphasis
supplied.)

The non-compliance with our June 17, 1996

Resolution is fatal to respondent Alzuls action for
consignation and specific performance

Unfortunately, respondent failed to effect such full

payment of the balance of the purchase price for the
subject properties.

No consignation within the 30-day period or at a

reasonable time thereafter

It is clear as day that respondent did not attempt nor

pursue consignation within the 30-day period given to
her in accordance with the prescribed legal
procedure. She received a copy of the entry of judgment
on August 21, 1996 and had 30 days or until September
20, 1996 to pay the balance of the purchase price to
petitioner. She made a tender of payment on August 29,
1996, August 30, 1996, and September 28, 1996, all of
which were refused by petitioner possibly because the
latter is of the view that it is not bound by the
November 27, 1992 Decision in CA-G.R. CV No. 33619
nor the December 26, 1995 Resolution in G.R. No.
109078, and the fact that respondent has forfeited her
rights to the lots because of her failure to pay the
monthly amortizations.

It must be borne in mind however that a mere tender of

payment
is
not
enough
to
extinguish
an
obligation. In Meat
Packing
Corporation
of
the Philippines v. Sandiganbayan, we distinguished
consignation from tender of payment and reiterated the
rule that both must be validly done in order to effect the
extinguishment of the obligation, thus:

Consignation is the act of depositing

the thing due with the court or judicial
authorities whenever the creditor
cannot accept or refuses to accept
payment, and it generally requires a

prior tender of payment. It should be

distinguished
from
tender
of
payment. Tender is the antecedent of
consignation,
that
is,
an
act
preparatory to the consignation, which
is the principal, and from which are
derived the immediate consequences
which the debtor desires or seeks to
obtain. Tender of payment may be
extrajudicial, while consignation is
necessarily judicial, and the priority of
the first is the attempt to make a
private settlement before proceeding to
the
solemnities
of
consignation. Tender
and
consignation, where validly made,
produces the effect of payment
and extinguishes the obligation.
[25]
(Emphasis supplied.)

There is no dispute that a valid tender of payment had

been made by respondent. Absent however a valid
consignation, mere tender will not suffice to extinguish
her obligation and consummate the acquisition of the
subject properties.

In St. Dominic Corporation involving the payment of the

installment balance for the purchase of a lot similar to
the case at bar, where a period has been judicially
directed to effect the payment, the Court held that a
valid consignation is made when the amount is
consigned with the court within the required period or
within a reasonable time thereafter. We ruled as follows:

First of all, the decision of the then

Court
of
Appeals
which
was
promulgated on October 21, 1981, is
quite clear when it ordered the
payment of the balance of the
purchase price for the disputed lot
within
60
days
from
receipt hereof meaning
from
the
receipt of the decision by the
respondents. It is an admitted fact that
the respondents received a copy of the
decision on October 30, 1981. Hence,
they had up to December 29, 1981 to
make the payment. Upon refusal by
the petitioner to receive such
payment, the proper procedure
was for the respondent to consign
the same with the court also within
the 60-day period or within a
reasonable
time
thereafter.
[26]
(Emphasis supplied.)

The records also reveal that respondent failed to effect

consignation within a reasonable time after the 30-day
period which expired on September 20, 1996. Instead of
consigning the amount with the court of origin,
respondent filed her November 11, 1996 Manifestation
informing this Court of petitioners unjust refusal of the
tender of payment. We acted favorably to it by issuing
our January 28, 1997 Resolution which ordered, thus:

Considering the manifestation, dated

November 11, 1996, filed by counsel
for private respondent Rosario T. Alzul,
stating
that
private
respondent
tendered to B.E. San Diego, Inc. the
payment of the sum of P187,380.00
representing the balance of the
purchase price of the properties which
are the subject of this litigation, but
B.E. San Diego, Inc., refused to accept
the
same,
the Court
resolved
to REFER the case to the court of
origin, for appropriate action.[27]

Respondent still failed to take the cue by her inaction to

consign
the
amount
with
the
court
of
origin. Undoubtedly,
pursuing
the
action
for
consignation on March 12, 1998 or over a year after the
Court issued its January 28, 1997 Resolution is way
beyond a reasonable time thereafter. Indeed, we have
accorded respondent, through said Resolution, all the
opportunity to pursue consignation with the court of
origin and yet, respondent failed to make a valid
consignation. This is already inexcusable neglect on the
part of respondent.

No valid consignation made

We agree with petitioners assertion that even

granting arguendo that the instant case for consignation
was instituted within the 30-day period or within a
reasonable time thereafter, it would still not accord

respondent relief as no valid consignation was

made. Certainly, the records show that there was no
valid consignation made by respondent before the
HLURB as she did not deposit the amount with the
quasi-judicial body as required by law and the rules.

Pertinently, the first paragraph of Article 1258 of the

Civil Code provides that [c]onsignation shall be
made by depositing the things due at the disposal
of judicial authority, before whom the tender of
payment shall be proved, in a proper case, and the
announcement of the consignation in other cases
(emphasis supplied).

It is true enough that respondent tendered payment to

petitioner three (3) times through a Solidbank Managers
Check No. 1146 in the amount of PhP 187,380 [28] on
August 29 and 30, 1996 and September 28, 1996. It is
true likewise that petitioner refused to accept it but not
without good reasons. Petitioner was not impleaded as a
party by the Ventura spouses in the Malabon City RTC
case for quieting of title against Wilson Yu nor in the
appealed case to the CA nor in G.R. No. 109078.

Petitioner is of the view that there was no jurisdiction

acquired over its person and hence, it is not bound by
the final judgment and June 17, 1996 Resolution in G.R.
No. 109078. Secondly, petitioner believed that
respondent Alzul has lost her rights over the subject lot
by the rescission of the sale in her favor due to the
latters failure to pay the installments and also as a
result of her transferees failure to pay the agreed
amortizations. And even in the face of the refusal by
petitioner to accept tender of payment, respondent is

not left without a remedy. It is basic that consignation is

an available remedy, and respondent, with the aid of
her counsel, could have easily availed of such course of
action sanctioned under the Civil Code.

Considering the tenor of our June 17, 1996 Resolution,

respondent ought to have consigned the amount with
the court of origin within the non-extendible period of
30 days that was accorded her or within a reasonable
time thereafter.

As cited earlier, consignation is the act of

depositing the thing due with the court or judicial
authorities whenever the creditor cannot accept or
refuses to accept payment and it generally requires a
prior tender of payment.[29] It is of no moment if the
refusal to accept payment be reasonable or not. Indeed,
consignation is the remedy for an unjust refusal to
accept payment. The first paragraph of Art. 1256 of the
Civil Code precisely provides that [i]f the creditor to
whom tender of payment has been made refuses
without just cause to accept it, the debtor shall
be
released
from
responsibility
by
the
consignation of the thing or sum due (emphasis
supplied).

The proper and valid consignation of the amount

due with the court of origin, which shall judicially
pronounce the validity of the consignation and declare
the debtor to be released from his/her responsibility,
shall extinguish the corresponding obligation.

Moreover, in order that consignation may be

effective, the debtor must show that: (1) there was a
debt due; (2) the consignation of the obligation had
been made because the creditor to whom tender of
payment was made refused to accept it, or because
s/he was absent or incapacitated, or because several
persons claimed to be entitled to receive the amount
due or because the title to the obligation had been lost;
(3) previous notice of the consignation had been given
to the person interested in the performance of the
obligation; (4) the amount due was placed at the
disposal of the court; and (5) after the consignation had
been made, the person interested was notified of the
action.[30]

Respondent did not comply with the provisions of

law particularly with the fourth and fifth requirements
specified above for a valid consignation. In her
complaint for consignation and specific performance,
respondent only prayed that she be allowed to make the
consignation without placing or depositing the amount
due at the disposal of the court of origin. Verily,
respondent made no valid consignation.

The rights of petitioner and respondent over the 1,275

square meter lot subject of this petition will be
determined by the significance and effects of the
December 26, 1995 Resolution rendered in G.R. No.
109078 entitled Yu v. Court of Appeals.[31]

The subject matter of G.R. No. 109078 is the November

27, 1992 Decision rendered in CA-G.R. CV No. 33619
entitled Carlos N. Ventura and Sandra L. Ventura v.
Rosario T. Alzul, et al., the fallo of which reads:

WHEREFORE, the appealed decision is

hereby REVERSED AND SET ASIDE, and
the complaint therein is ordered
dismissed. Transfer Certificates of Title
Nos. N-1922, N-1923, N-1924, and N1925, all of the Register of Deeds of
Metro Manila, District III, Malabon
Branch, in the names of plaintiffsappellees Carlos N. Ventura and Sandra
L. Ventura are hereby declared null and
void, and the titles of ownership
reinstated in the name of B.E. San
Diego, Inc., with the corresponding
notices
of
lis
pendens
therein
annotated in favor of defendantappellant
until
such
time
that
ownership of the subject parcels of land
is transferred to herein defendantappellant Rosario Alzul. Costs against
plaintiff-appellees.

SO ORDERED.[32]

On December 26, 1995, this Court issued the Resolution

in G.R. No. 109078 wherein it found no reversible error
in the actions of the CA in its aforequoted disposition in
CA-G.R. CV No. 33619, and resolved to deny the petition
for lack of merit. On February 5, 1996, this Court denied
with finality the Motion for Reconsideration filed by
petitioner Wilson Yu.

However, on June 17, 1996, this Court, in resolving the

Motion for Reconsideration of private respondents
Spouses Carlos and Sandra Ventura, granted respondent
Alzul a non-extendible period of thirty (30) days from
entry of judgment, within which to make full payment
for the properties in question.[33]

The question iscan the Court, the CA, or the Malabon

City RTC order petitioner B.E. San Diego, Inc. to accept
the tender of payment made by respondent Alzul?

Definitely, they cannot. The reason is that petitioner

was not impleaded as a party in the Malabon City RTC
civil case, CA-G.R. CV No. 33619, nor in G.R. No. 109078
and hence is not under the jurisdiction of said
courts. What were determined and decided in the CA
Decision in CA-G.R. CV No. 33619 were the annulment
of the titles of spouses Carlos and Sandra Ventura, the
reinstatement of said titles to the name of petitioner,
and the declaration that the ownership of the lots
subject of said titles will be transferred to
respondent. There is no directive to respondent granting
her the right to pay the balance of the price to
petitioner and, more importantly, there is no order for
petitioner to accept the payment. The dispositive
or fallo of the decision is what actually constitutes the
judgment or resolution of the court that can be the
subject of execution. Where there is a conflict between
the dispositive portion of the decision and its body, the
dispositive portion controls irrespective of what appears
in the body of the decision.[34] Such being the case,
petitioner is not duty bound to accept any tender of
payment from respondent precisely because such diktat
is absent in the fallo of the CA Decision which was
affirmed by this Court in its December 26, 1995
Resolution in G.R. No. 109078.

The lacuna in the CA Decision was sought to be

corrected in its June 17, 1996 Resolution in G.R. No.
109078 where respondent was given a non-extendible
period of thirty (30) days from entry of judgment, within
which to make full payment for the properties in
question. Pursuant to this Resolution, what was
established was the right of respondent to pay the
balance of the purchase price within 30 days. Again, the
query iscan this Court, the CA, or the trial court compel
petitioner to accept the tender of payment from
respondent?

The answer is no. The reason is obvious as jurisdiction

was never acquired over the person of petitioner. The
action for quieting of title is characterized as quasi in
rem. In Realty Sales Enterprise, Inc. v. Intermediate
Appellate Court, it was held that:

Suits to quiet title are not technically

suits in rem, nor are they, strictly
speaking, in personam, but being
against the person in respect of the res,
these proceedings are characterized
as quasi in rem. (McDaniel v. McElvy,
108 So. 820 [1926].) The judgment in
such proceedings is conclusive
only between the parties. (Emphasis
supplied.)[35]

Not being impleaded as a necessary or indispensable

party, petitioner is not bound by the dispositions in the
CA Decision in CA-G.R. CV No. 33619 and the
Resolutions of this Court in G.R. No. 109078. Moreover,
there is no explicit and clear directive for petitioner to
accept the payment of the balance of the price.

It is for this reason that respondent cannot ask for a writ

of execution from the trial court where the complaint
was originally instituted as said court has no jurisdiction
over the person of petitioner. Even if a writ is issued, it
should conform to the judgment, and the fallo of the CA
Decision does not impose the duty or obligation on the

part of petitioner to accept the payment from

respondent. It is the settled doctrine that a writ of
execution must conform to the judgment and if it is
different from or exceeds the terms of the judgment,
then it is a nullity.[36]

In addition, Sec. 10, Rule 39 provides the procedure for

execution of judgments for specific acts, thus:

Sec. 10. Execution of judgments for

specific act.(a) Conveyance, delivery of
deeds, or other specific acts; vesting
title.If a judgment directs a party to
execute a conveyance of land or
personal property, or to deliver deeds
or other documents, or to perform any
other specific act in connection
therewith, and the party fails to comply
within the time specified, the court may
direct the act to be done at the cost of
the disobedient party by some other
person appointed by the court and the
act when so done shall have like effect
as if done by the party. If real or
personal property is situated within the
Philippines, the court in lieu of directing
a conveyance thereof may by an order
divest the title of any party and vest it
in others, which shall have the force
and effect of a conveyance executed in
due form of law.

The rule mentions the directive to a party. It is therefore

essential that the person tasked to perform the specific
act is impleaded as a party to the case. Otherwise, the
judgment cannot be executed. In the case at bar,
petitioner should have been impleaded as a party so as
to compel it to accept payment and execute the deed of
sale over the disputed lots in favor of respondent. As
petitioner was not impleaded as a party, then the CA
Decision in CA-G.R. CV No. 33619 as affirmed in G.R. No.
109078 cannot be enforced against it.

The cause of action available to respondent is to file an

action for consignation against petitioner which she did
by registering a complaint for consignation before the
HLURB on March 12, 1998. Unfortunately, it was filed
way beyond the 30-day period which lapsed
on September 20, 1996 or immediately thereafter.
Because of the failure of respondent to effect payment
to petitioner within the 30-day period or soon thereafter,
her rights to buy the disputed lots have been forfeited,
lost, and extinguished.

In St. Dominic Corporation, which is substantially similar

to the case at bar, we explained the procedure when a
party is directed to pay the balance of the purchase
price based on a court decision, thus:

First of all, the decision of the then

Court
of
Appeals
which
was
promulgated on October 21, 1981, is
quite clear when it ordered the
payment of the balance of the
purchase price for the disputed lot
within 60 days from receipt hereof,

meaning from the receipt of the

decision by the respondents. It is an
admitted fact that the respondents
received a copy of the decision
on October 30, 1981. Hence, they had
up to December 29, 1981 to make the
payment. Upon
refusal
by
the
petitioner to receive such payment, the
proper
procedure
was
for
the
respondent to consign the same with
the court also within the 60-day period
or
within
a
reasonable
time
thereafter. The fact that efforts were
made by the petitioner to reach an
agreement with the respondents after
the promulgation of the decision did
not in anyway affect the finality of the
judgment. This was clearly emphasized
in the order of the appellate court
on May 6, 1982.

Secondly, even if we reckon the 60-day

period from the date of the finality of
the decision as interpreted by the
appellate court, such finality should be
counted from March 5, 1982, which was
the date the decision became final as
indicated in the entry of judgment and
not from August 26, 1982 which is the
date the entry was made. The date of a
finality of a decision is entirely distinct
from the date of its entry and the delay
in the latter does not affect the
effectivity of the former as such is
counted from the expiration of the
period to appeal.[37] x x x

In the aforecited case, the lot owner was made a

party to the case and the judgment of the court was for
the plaintiff to pay to the lot owner the balance of the
purchase price within 60 days from receipt of the
Decision. Even assuming arguendo that petitioner B.E.
San Diego, Inc., though not a party in the complaint for
quieting of title, can be compelled to receive the
purchase price, still, the refusal to receive the money
requires respondent Alzul to follow the procedure in St.
Dominic Corporation and consign the money with the
court of origin. Having failed in this respect,
respondents rights to the property have been forfeited
as a result of non-payment within the prescribed time
frame.

The CA relied on justice and equity in granting an

additional period of five (5) days from receipt of the
February 18, 2005 Decision in CA-G.R. SP No. 81341 to
pay the balance due for the sale of the four lots.
[38]
While we commiserate with the plight of respondent,
the CA ruling will not prevail over the established axiom
that equity is applied only in the absence of and never
against statutory law or judicial rules of procedure.
[39]
For all its conceded merits, equity is available only in
the absence of law and not as its replacement. [40] Equity
as an exceptional extenuating circumstance does not
favor, nor may it be used to reward, the indolent. This
Court will not allow a party, in guise of equity, to benefit
from respondents own negligence.[41]

In the light of the foregoing considerations, we find that

the grant of respondents petition in CA-G.R. SP No.
81341 and the recognition of the belated consignation
of the amount find no support nor basis in law, rule, or

jurisprudence. The
CAs
holding
that
the
nonconsignation of the amount due is merely a procedural
lapse on the part of respondents counsel is misplaced
and is contrary to settled jurisprudence. Plainly,
respondents rights over the subject property are now
lost and forfeited.

Having resolved the core issue on the validity of the

consignation, the Court sees no further need to discuss
the remaining issues raised in the petition.

Petitioner to reimburse payments

However, respondent had made payments over the

subject properties based on her agreement with
petitioner. So as not to enrich itself at the expense of
respondent, petitioner is obliged to reimburse
respondent whatever amount was paid by her in form of
monthly amortizations. On the other hand, if respondent
is in possession of the subject properties, she and all
persons claiming under her should surrender the
possession to petitioner.

WHEREFORE, the petition is GRANTED, the February

18, 2005 Decision and August 31, 2005 Resolution of
the CA are REVERSED and SET ASIDE, and the
September 18, 2003 Resolution and December 2, 2003
Order of the OP are hereby REINSTATED. Petitioner
is ORDERED to reimburse respondent whatever amount
the latter has paid for the subject properties per the
Contract to Sell No. 867. Petitioner is DECLARED to be

the true and legal owner of Lots Nos. 5, 6, 7, and 8,

Block 18, Aurora Subdivision, Maysilo, Malabon City. The
Register of Deeds of Manila, District III, Malabon City
Branch is ORDERED to cancel Transfer Certificates of
Title Nos. N-1922, N-1923, N-1924, and N-1925 in the
names of spouses Carlos N. Ventura and Sandra L.
Ventura and register the same in the name of
petitioner. The lis pendens in favor of respondent
annotated on the Transfer Certificates of Title over the
subject properties is hereby LIFTED, and the Register of
Deeds
for
Metro
Manila,
District
III
is DIRECTED to CANCEL said lis pendens. Respondent
and all persons claiming under her are ORDERED to
vacate the subject properties and surrender them to
petitioner within sixty (60) days from finality of this
judgment. No pronouncement as to costs.

G.R. No. L-58961 June 28, 1983

SOLEDAD SOCO, petitioner,
vs.
HON. FRANCIS MILITANTE, Incumbent Presiding
Judge of the Court of First Instance of Cebu,
Branch XII, Cebu City and REGINO FRANCISCO,
JR., respondents.
Chua & Associates Law Office (collaborating counsel)
and Andales, Andales & Associates Law Office for
petitioner.
Francis M. Zosa for private respondent.

GUERRERO, J.:
The decision subject of the present petition for review
holds the view that there was substantial compliance
with the requisites of consignation and so ruled in favor
of private respondent, Regino Francisco, Jr., lessee of the
building owned by petitioner lessor, Soledad Soco in the
case for illegal detainer originally filed in the City Court
of Cebu City, declaring the payments of the rentals valid
and effective, dismissed the complaint and ordered the
lessor to pay the lessee moral and exemplary damages
in the amount of P10,000.00 and the further sum of
P3,000.00 as attorney's fees.
We do not agree with the questioned decision. We hold
that the essential requisites of a valid consignation must
be complied with fully and strictly in accordance with
the law, Articles 1256 to 1261, New Civil Code. That
these Articles must be accorded a mandatory
construction is clearly evident and plain from the very
language of the codal provisions themselves which
require absolute compliance with the essential
requisites therein provided. Substantial compliance is
not enough for that would render only a directory
construction to the law. The use of the words "shall" and
"must" which are imperative, operating to impose a
duty which may be enforced, positively indicate that all
the essential requisites of a valid consignation must be
complied with. The Civil Code Articles expressly and
explicitly direct what must be essentially done in order
that consignation shall be valid and effectual. Thus, the
law provides:

1257. In order that the consignation of the

thing due may release the obligor, it must
first be announcedto the persons interested
in the fulfillment of the obligation.
The consignation shall be ineffectual if it is
not made strictly in consonance with the
provisions which regulate payment.
Art. 1258. Consignation shall be made by
depositing the things due at the disposal of
judicial authority, before whom the tender of
payment shall be proved, in a proper case,
and the announcement of the consignation
in other cases.
The consignation having been made, the
interested parties shall also be
notified thereof.
Art. 1249. The payment of debts in
money shall be made in the currency
stipulated, and if it is not possible to deliver
such currency, then in the currency which is
legal tender in the Philippines.
The delivery of promissory notes payable to
order, or bills of exchange or other
mercantile documentsshall produce the
effect of payment only when they have
been cashed, or when through the fault of
the creditor they have been impaired.

In the meantime, the action derived from

the original obligation shall be held in
abeyance.
We have a long line of established precedents and
doctrines that sustain the mandatory nature of the
above provisions. The decision appealed from must,
therefore, be reversed.
The antecedent facts are substantially recited in the
decision under review, as follows:
It appears from the evidence that the
plaintiff-appellee-Soco, for short-and the
'defendant-appellant-Francisco, for brevityentered into a contract of lease on January
17, 1973, whereby Soco leased her
commercial building and lot situated at
Manalili Street, Cebu City, to Francisco for a
monthly rental of P 800.00 for a period of 10
years renewable for another 10 years at the
option of the lessee. The terms of the
contract are embodied in the Contract of
Lease (Exhibit "A" for Soco and Exhibit "2"
for Francisco). It can readily be discerned
from Exhibit "A" that paragraphs 10 and 11
appear to have been cancelled while in
Exhibit "2" only paragraph 10 has been
cancelled. Claiming that paragraph 11 of the
Contract of Lease was in fact not part of the
contract because it was cancelled, Soco
filed Civil Case No. R-16261 in the Court of
First Instance of Cebu seeking the

annulment and/or reformation of the

Contract of Lease. ...
Sometime before the filing of Civil Case No.
R-16261 Francisco noticed that Soco did not
anymore send her collector for the payment
of rentals and at times there were payments
made but no receipts were issued. This
situation prompted Francisco to write Soco
the letter dated February 7, 1975 (Exhibit
"3") which the latter received as shown in
Exhibit "3-A". After writing this letter,
Francisco sent his payment for rentals by
checks issued by the Commercial Bank and
Trust Company. Obviously, these payments
in checks were received because Soco
admitted that prior to May, 1977, defendant
had been religiously paying the rental. ....
1. The factual background setting of this
case clearly indicates that soon after Soco
learned that Francisco sub-leased a portion
of the building to NACIDA, at a monthly
rental of more than P3,000.00 which is
definitely very much higher than what
Francisco was paying to Soco under the
Contract of Lease, the latter felt that she
was on the losing end of the lease
agreement so she tried to look for ways and
means to terminate the contract. ...
In view of this alleged non-payment of rental
of the leased premises beginning May,
1977, Soco through her lawyer sent a letter

dated November 23, 1978 (Exhibit "B") to

Francisco serving notice to the latter 'to
vacate the premises leased.' In answer to
this letter, Francisco through his lawyer
informed Soco and her lawyer that all
payments of rental due her were in fact paid
by Commercial Bank and Trust Company
through the Clerk of Court of the City Court
of Cebu (Exhibit " 1 "). Despite this
explanation, Soco filed this instant case of
Illegal Detainer on January 8, 1979. ...
2. Pursuant to his letter dated February 7,
1975(Exhibit"3") and for reasons stated
therein, Francisco paid his monthly rentals
to Soco by issuing checks of the Commercial
Bank and Trust Company where he had a
checking account. On May 13, 1975,
Francisco wrote the Vice-President of
Comtrust, Cebu Branch (Exhibit "4")
requesting the latter to issue checks to Soco
in the amount of P 840.00 every 10th of the
month, obviously for payment of his
monthly rentals. This request of Francisco
was complied with by Comtrust in its letter
dated June 4, 1975 (Exhibit "5"). Obviously,
these payments by checks through
Comtrust were received by Soco from June,
1975 to April, 1977 because Soco admitted
that an rentals due her were paid except the
rentals beginning May, 1977. While Soco
alleged in her direct examination that 'since
May, 1977 he (meaning Francisco) stopped

paying the monthly rentals' (TSN, Palicte, p.

6, Hearing of October 24, 1979), yet on
cross examination she admitted that before
the filing of her complaint in the instant
case, she knew that payments for monthly
rentals were deposited with the Clerk of
Court except rentals for the months of May,
June, July and August, 1977. ...
Pressing her point, Soco alleged that 'we
personally demanded from Engr. Francisco
for the months of May, June, July and
August, but Engr. Francisco did not pay for
the reason that he had no funds available at
that time.' (TSN-Palicte, p. 28, Hearing
October 24, 1979). This allegation of Soco is
denied by Francisco because per his
instructions, the Commercial Bank and Trust
Company, Cebu Branch, in fact, issued
checks in favor of Soco representing
payments for monthly rentals for the
months of May, June, July and August, 1977
as shown in Debit Memorandum issued by
Comtrust as follows:
(a) Exhibit "6"-Debit Memo dated May 11,
1977 for P926.10 as payment for May, 1977;
(b) Exhibit"7"-Debit Memo dated June l5,
197 7for P926.10 as payment for June,
1977;

(c) Exhibit "8"-Debit Memo dated July 11,

1977 for P1926.10 as payment for July,
1977;
(d) Exhibit "9"-Debit Memo dated August 10,
1977 for P926. 10 as payment for August,
1977.
These payments are further bolstered by
the certification issued by Comtrust dated
October 29, 1979 (Exhibit "13"). Indeed the
Court is convinced that payments for rentals
for the months of May, June, July and
August, 1977 were made by Francisco to
Soco thru Comtrust and deposited with the
Clerk of Court of the City Court of Cebu.
There is no need to determine whether
payments by consignation were made from
September, 1977 up to the filing of the
complaint in January, 1979 because as
earlier stated Soco admitted that the rentals
for these months were deposited with the
Clerk of Court. ...
Taking into account the factual background
setting of this case, the Court holds that
there was in fact a tender of payment of the
rentals made by Francisco to Soco through
Comtrust and since these payments were
not accepted by Soco evidently because of
her intention to evict Francisco, by all
means, culminating in the filing of Civil Case
R-16261, Francisco was impelled to deposit
the rentals with the Clerk of Court of the

City Court of Cebu. Soco was notified of this

deposit by virtue of the letter of Atty.
Pampio Abarientos dated June 9, 1977
(Exhibit "10") and the letter of Atty. Pampio
Abarientos dated July 6. 1977 (Exhibit " 12")
as well as in the answer of Francisco in Civil
Case R-16261 (Exhibit "14") particularly
paragraph 7 of the Special and Affirmative
Defenses. She was further notified of these
payments by consignation in the letter of
Atty. Menchavez dated November 28, 1978
(Exhibit " 1 "). There was therefore
substantial compliance of the requisites of
consignation, hence his payments were
valid and effective. Consequently, Francisco
cannot be ejected from the leased premises
for non-payment of rentals. ...
As indicated earlier, the above decision of
the Court of First Instance reversed the
judgment of the City Court of Cebu, Branch
11, the dispositive portion of the latter
reading as follows:
WHEREFORE, judgment is hereby rendered
in favor of the plaintiff, ordering the
defendant, Regino Francisco, Jr.:
(1) To vacate immediately the premises in
question, consisting of a building located at
Manalili St., Cebu City;
(2) To pay to the plaintiff the sum of
P40,490.46 for the rentals, covering the

period from May, 1977 to August, 1980, and

starting with the month of September, 1980,
to pay to the plaintiff for one (1) year a
monthly rental of P l,072.076 and an
additional amount of 5 per cent of said
amount, and for so much amount every
month thereafter equivalent to the rental of
the month of every preceding year plus 5
percent of same monthly rental until the
defendant shall finally vacate said premises
and possession thereof wholly restored to
the plaintiff-all plus legal interest from date
of filing of the complaint;
(3) To pay to the plaintiff the sum of
P9,000.00 for attorney's fee;
(4) To pay to the plaintiff the sum of
P5,000.00 for damages and incidental
litigation expenses; and
(5) To pay the Costs.
SOORDERED.
Cebu City, Philippines, November 21, 1980.

(SGD.)
MONTE
Acting
According to the findings of fact made by the City Court,
the defendant Francisco had religiously paid to the
plaintiff Soco the corresponding rentals according to the

terms of the Least Contract while enjoying the leased

premises until one day the plaintiff had to demand upon
the defendant for the payment of the rentals for the
month of May, 1977 and of the succeeding months. The
plaintiff also demanded upon the defendant to vacate
the premises and from that time he failed or refused to
vacate his possession thereof; that beginning with the
month of May, 1977 until at present, the defendant has
not made valid payments of rentals to the plaintiff who,
as a consequence, has not received any rental payment
from the defendant or anybody else; that for the months
of May to August, 1977, evidence shows that the
plaintiff through her daughter, Teolita Soco and salesgirl,
Vilma Arong, went to the office or residence of
defendant at Sanciangko St., Cebu City, on various
occasions to effect payment of rentals but were unable
to collect on account of the defendant's refusal to pay;
that defendant contended that payments of rental thru
checks for said four months were made to the plaintiff
but the latter refused to accept them; that in 1975,
defendant authorized the Commercial Bank and Trust
Company to issue checks to the plaintiff chargeable
against his bank account, for the payment of said
rentals, and the delivery of said checks was coursed by
the bank thru the messengerial services of the FAR
Corporation, but the plaintiff refused to accept them and
because of such refusal, defendant instructed said bank
to make consignation with the Clerk of Court of the City
Court of Cebu as regard said rentals for May to August,
1977 and for subsequent months.
The City Court further found that there is no showing
that the letter allegedly delivered to the plaintiff in May,

1977 by Filomeno Soon, messenger of the FAR

Corporation contained cash money, check, money order,
or any other form of note of value, hence there could
never be any tender of payment, and even granting that
there was, but plaintiff refused to accept it without any
reason, still no consignation for May, 1977 rental could
be considered in favor of the defendant unless evidence
is presented to establish that he actually made rental
deposit with the court in cash money and prior and
subsequent to such deposit, he notified the plaintiff
thereof.
Notwithstanding the contradictory findings of fact and
the resulting opposite conclusions of law by the City
Court and the Court of First Instance, both are agreed,
however, that the case presents the issue of whether
the lessee failed to pay the monthly rentals beginning
May, 1977 up to the time the complaint for eviction was
filed on January 8, 1979. This issue in turn revolves on
whether the consignation of the rentals was valid or not
to discharge effectively the lessee's obligation to pay
the same. The City Court ruled that the consignation
was not valid. The Court of First Instance, on the other
hand, held that there was substantial compliance with
the requisites of the law on consignation.
Let us examine the law and consider Our jurisprudence
on the matter, aside from the codal provisions already
cited herein.
According to Article 1256, New Civil Code, if the creditor
to whom tender of payment has been made refuses
without just cause to accept it, the debtor shall be
released from responsibility by the consignation of the

thing or sum due. Consignation alone shall produce the

same effect in the following cases: (1) When the creditor
is absent or unknown, or does not appear at the place of
payment; (2) When he is incapacitated to receive the
payment at the time it is due; (3) When, without just
cause, he refuses to give a receipt; (4) When two or
more persons claim the same right to collect; (5) When
the title of the obligation has been lost.
Consignation is the act of depositing the thing due with
the court or judicial authorities whenever the creditor
cannot accept or refuses to accept payment and it
generally requires a prior tender of payment. (Limkako
vs. Teodoro, 74 Phil. 313).
In order that consignation may be effective, the debtor
must first comply with certain requirements prescribed
by law. The debtor must show (1) that there was a debt
due; (2) that the consignation of the obligation had
been made because the creditor to whom tender of
payment was made refused to accept it, or because he
was absent or incapacitated, or because several
persons claimed to be entitled to receive the amount
due (Art. 1176, Civil Code); (3) that previous notice of
the consignation had been given to the person
interested in the performance of the obligation (Art.
1177, Civil Code); (4) that the amount due was placed
at the disposal of the court (Art. 1178, Civil Code); and
(5) that after the consignation had been made the
person interested was notified thereof (Art. 1178, Civil
Code). Failure in any of these requirements is enough
ground to render a consignation ineffective. (Jose Ponce
de Leon vs. Santiago Syjuco, Inc., 90 Phil. 311).

Without the notice first announced to the persons

interested in the fulfillment of the obligation, the
consignation as a payment is void. (Limkako vs.
Teodoro, 74 Phil. 313),
In order to be valid, the tender of payment must be
made in lawful currency. While payment in check by the
debtor may be acceptable as valid, if no prompt
objection to said payment is made (Desbarats vs. Vda.
de Mortera, L-4915, May 25, 1956) the fact that in
previous years payment in check was accepted does not
place its creditor in estoppel from requiring the debtor
to pay his obligation in cash (Sy vs. Eufemio, L-10572,
Sept. 30, 1958). Thus, the tender of a check to pay for
an obligation is not a valid tender of payment thereof
(Desbarats vs. Vda. de Mortera, supra). See Annotation,
The Mechanics of Consignation by Atty. S. Tabios, 104
SCRA 174-179.
Tender of payment must be distinguished from
consignation. Tender is the antecedent of consignation,
that is, an act preparatory to the consignation, which is
the principal, and from which are derived the immediate
consequences which the debtor desires or seeks to
obtain. Tender of payment may be extrajudicial, while
consignation is necessarily judicial, and the priority of
the first is the attempt to make a private settlement
before proceeding to the solemnities of consignation. (8
Manresa 325).
Reviewing carefully the evidence presented by
respondent lessee at the trial of the case to prove his
compliance with all the requirements of a valid tender of
payment and consignation and from which the

respondent Judge based his conclusion that there was

substantial compliance with the law on consignation, We
note from the assailed decision hereinbefore quoted
that these evidences are: Exhibit 10, the letter of Atty.
Pampio Abarintos dated June 9, 1977: Exhibit 12, letter
of Atty. Pampio Abarintos dated July 6, 1977; Exhibit 14,
the Answer of respondent Francisco in Civil Case R16261, particularly paragraph 7 of the Special and
Affirmative Defenses; and Exhibit 1, letter of Atty. Eric
Menchavez dated November 28, 1978. All these
evidences, according to respondent Judge, proved that
petitioner lessor was notified of the deposit of the
monthly rentals.
We have analyzed and scrutinized closely the above
exhibits and We find that the respondent Judge's
conclusion is manifestly wrong and based on
misapprehension of facts. Thus-

It appears that twice you refused

acceptance of the said payment made by
my client.
It appears further that my client had called
your office several times and left a message
for you to get this payment of rental but
until the present you have not sent
somebody to get it.
In this connection, therefore, in behalf of my
client, you are hereby requested to please
get and claim the rental payment
aforestated from the Office of my client at
Tagalog Hotel and Restaurant, Sanciangko
St., Cebu City. within three (3) days from
receipt hereof otherwise we would be
constrained to make a consignation of the
same with the Court in accordance with law.

(1) Exhibit 10 reads: (see p. 17, Records)

June 9, 1977
Miss Soledad Soco
Soledad Soco Retazo
P. Gullas St., Cebu City
Dear Miss Soco:
This is in connection with the payment of
rental of my client, Engr. Regino Francisco,
Jr., of your building situated at Manalili St.,
Cebu City.

Hoping for your cooperation on this matter,

we remain.
Ver
y
tru
ly
yo
urs
,
(S
GD
.)

PA
MP
IO
A.
AB
ARI
NT
OS
Co
un
sel
for
En
gr.
RE
GI
NO
FR
AN
CIS
CO
, Jr.
We may agree that the above exhibit proves tender of
payment of the particular monthly rental referred to (the
letter does not, however, indicate for what month and
also the intention to deposit the rental with the court,
which is the first notice. But certainly, it is no proof of
tender of payment of other or subsequent monthly
rentals. Neither is it proof that notice of the actual
deposit or consignation was given to the lessor, which is
the second notice required by law.

(2) Exhibit 12 (see p. 237, Records) states:

July 6,
Miss Soledad Soco
Soledad Soco Reta
P. Gullas St., Cebu City
Dear Miss Soco:
This is to advise and inform you that my
client, Engr. Regino Francisco, Jr., has
consigned to you, through the Clerk of
Court, City Court of Cebu, Cebu City, the
total amount of Pl,852.20, as evidenced by
cashier's checks No. 478439 and 47907
issued by the Commercial Bank and Trust
Company (CBTC) Cebu City Branch, dated
May 11, 1977 and June 15, 1977
respectively and payable to your order,
under Official Receipt No. 0436936 dated
July 6,1977.
This amount represents payment of the
rental of your building situated at Manalili
St., Cebu City which my client, Engr. Regino
Francisco, Jr., is renting. You can withdraw
the said amount from the Clerk of Court,
City Court of Cebu, Cebu City at any time.
Please be further notified that all
subsequent monthly rentals will be
deposited to the Clerk of Court, City Court of
Cebu, Cebu City.

Ver
y
tru
ly
yo
urs
,
(S
GD
.)
PA
MP
IO
A.
AB
ARI
NT
OS
Co
un
sel
for
EN
GR
.
RE
GI
NO
FR
AN
CIS

CO
,
JR.
The above evidence is, of course, proof of notice to the
lessor of the deposit or consignation of only the two
payments by cashier's checks indicated therein. But
surely, it does not prove any other deposit nor the
notice thereof to the lessor. It is not even proof of the
tender of payment that would have preceded the
consignation.
(3) Exhibit 14, paragraph 7 of the Answer (see p. 246,
Records) alleges:
7. That ever since, defendant had been
religiously paying his rentals without any
delay which, however, the plaintiff had in so
many occasions refused to accept obviously
in the hope that she may declare nonpayment of rentals and claim it as a ground
for the cancellation of the contract of lease.
This, after seeing the improvements in the
area which were effected, at no small
expense by the defendant. To preserve
defendant's rights and to show good faith in
up to date payment of rentals, defendant
had authorized his bank to issue regularly
cashier's check in favor of the plaintiff as
payment of rentals which the plaintiff had
been accepting during the past years and
even for the months of January up to May of
this year, 1977 way past plaintiff's claim of
lease expiration. For the months of June and

July, however, plaintiff again started

refusing to accept the payments in going
back to her previous strategy which forced
the defendant to consign his monthly rental
with the City Clerk of Court and which is
now the present state of affairs in so far as
payment of rentals is concerned. These
events only goes to show that the wily
plaintiff had thought of this mischievous
scheme only very recently and filed herein
malicious and unfounded complaint.

It is not true that my client has not paid the

rentals as claimed in your letter. As a matter
of fact, he has been religiously paying the
rentals in advance. Payment was made by
Commercial Bank and Trust Company to the
Clerk of Court, Cebu City. Attached herewith
is the receipt of payment made by him for
the month of November, 1978 which is
dated November 16, 1978.
You can check this up with the City Clerk of
Court for satisfaction.

The above exhibit which is lifted from Civil Case No. R16261 between the parties for annulment of the lease
contract, is self-serving. The statements therein are
mere allegations of conclusions which are not
evidentiary.

Regards.

(4) Exhibit 1 (see p. 15, Records) is quoted thus:

November 28,
1978
Atty. Luis V. Diores
Suite 504, SSS Bldg.
Jones Avenue, Cebu City
Dear Compaero:
Your letter dated November 23, 1978 which
was addressed to my client, Engr. Regino
Francisco, Jr. has been referred to me for
reply.

Again, Exhibit 1 merely proves rental deposit for the

particular month of November, 1978 and no other. It is
no proof of tender of payment to the lessor, not even
proof of notice to consign. We hold that the best
evidence of the rental deposits with the Clerk of Court
are the official receipts issued by the Clerk of Court.
These the respondent lessee utterly failed to present
and produce during the trial of the case. As pointed out
in petitioner's Memorandum, no single official receipt

(SGD.)
MENCH
Couns
Regino
Francis
377-B
Junque
Cebu C
(new a

was presented in the trial court as nowhere in the

formal offer of exhibits for lessee Francisco can a single
official receipt of any deposit made be found (pp. 8-9,
Memorandum for Petitioner; pp. 163-164, Records).
Summing up Our review of the above four (4) exhibits,
We hold that the respondent lessee has utterly failed to
prove the following requisites of a valid consignation:
First, tender of payment of the monthly rentals to the
lessor except that indicated in the June 9, l977 Letter,
Exhibit 10. In the original records of the case, We note
that the certification, Exhibit 11 of Filemon Soon,
messenger of the FAR Corporation, certifying that the
letter of Soledad Soco sent last May 10 by Commercial
Bank and Trust Co. was marked RTS (return to sender)
for the reason that the addressee refused to receive it,
was rejected by the court for being immaterial,
irrelevant and impertinent per its Order dated
November 20, 1980. (See p. 117, CFI Records).
Second, respondent lessee also failed to prove the first
notice to the lessor prior to consignation, except the
payment referred to in Exhibit 10.
In this connection, the purpose of the notice is in order
to give the creditor an opportunity to reconsider his
unjustified refusal and to accept payment thereby
avoiding consignation and the subsequent litigation.
This previous notice is essential to the validity of the
consignation and its lack invalidates the same.
(Cabanos vs. Calo, 104 Phil. 1058; Limkako vs. Teodoro,
74 Phil. 313).

There is no factual basis for the lower court's finding

that the lessee had tendered payment of the monthly
rentals, thru his bank, citing the lessee's letter (Exh. 4)
requesting the bank to issue checks in favor of Soco in
the amount of P840.00 every 10th of each month and to
deduct the full amount and service fee from his current
account, as well as Exhibit 5, letter of the Vice President
agreeing with the request. But scrutinizing carefully
Exhibit 4, this is what the lessee also wrote: "Please
immediately notify us everytime you have the check
ready so we may send somebody over to get it. " And
this is exactly what the bank agreed: "Please be advised
that we are in conformity to the above arrangement
with the understanding that you shall send somebody
over to pick up the cashier's check from us." (Exhibit 4,
see p. 230, Original Records; Exhibit 5, p. 231, Original
Records)
Evidently, from this arrangement, it was the lessee's
duty to send someone to get the cashier's check from
the bank and logically, the lessee has the obligation to
make and tender the check to the lessor. This the lessee
failed to do, which is fatal to his defense.
Third, respondent lessee likewise failed to prove the
second notice, that is after consignation has been
made, to the lessor except the consignation referred to
in Exhibit 12 which are the cashier's check Nos. 478439
and 47907 CBTC dated May 11, 1977 and June 15, 1977
under Official Receipt No. 04369 dated July 6, 1977.
Respondent lessee, attempting to prove compliance
with the requisites of valid consignation, presented the
representative of the Commercial Bank and Trust Co.,

Edgar Ocaada, Bank Comptroller, who unfortunately

belied respondent's claim. We quote below excerpts
from his testimony, as follows:

A Yes.
Q You were issued the receipts
of those checks?

ATTY. LUIS DIORES:

Q What month did you say you
made ,you started making the
deposit? When you first
deposited the check to the Clerk
of Court?
A The payment of cashier's
check in favor of Miss Soledad
Soco was coursed thru the City
Clerk of Court from the letter of
request by our client Regino
Francisco, Jr., dated September
8, 1977. From that time on,
based on his request, we
delivered the check direct to the
City Clerk of Court.
Q What date, what month was
that, you first delivered the
check to the Clerk of Court.?
A We started September 12,
1977.
Q September 1977 up to the
present time, you delivered the
cashier's check to the City Clerk
of Court?

A Well, we have an
acknowledgment letter to be
signed by the one who received
the check.
Q You mean you were issued, or
you were not issued any official
receipt? My question is whether
you were issued any official
receipt? So, were you issued, or
you were not issued?
A We were not issued.
Q On September, 1977, after
you deposited the manager's
check for that month with the
Clerk of Court, did you serve
notice upon Soledad Soco that
the deposit was made on such
amount for the month of
September, 1977 and now to
the Clerk of Court? Did you or
did you not?
A Well, we only act on
something upon the request of
our client.

Q Please answer my question. I

know that you are acting upon
instruction of your client. My
question was-after you made
the deposit of the manager's
check whether or not you
notified Soledad Soco that such
manager's check was deposited
in the Clerk of Court from the
month of September, 1977?
A We are not bound to.
Q I am not asking whether you
are bound to or not. I'masking
whether you did or you did not?
A I did not.
Q Alright, for October, 1977,
after having made a deposit for
that particular month, did you
notify Miss Soledad Soco that
the deposit was in the Clerk of
Court?
A No, we did not.
Q Now, on November, 1977, did
you notify Soledad Soco that
you deposited the manager's
check to the City Clerk of Court
for that month?

A I did not.
Q You did not also notify Soledad
Soco for the month December,
1977, so also from January,
February, March, April, May,
June, July until December, 1978,
you did not also notify Miss
Soledad Soco all the deposits of
the manager's check which you
said you deposited with the
Clerk of Court in every end of
the month? So also from each
and every month from January
1979 up to December 1979, you
did not also serve notice upon
Soledad Socco of the deposit in
the Clerk of Court, is that
correct?
A Yes.
Q So also in January 1980 up to
this month 1980, you did not
instructed by your client Mr. and
Mrs. Regino Francisco, jr. to
make also serve notice upon
Soledad Soco of the Manager's
check which you said you
deposited to the Clerk of Court?
A I did not.

Q Now, you did not make such

notices because you were not
such notices after the deposits
you made, is that correct?

that such notification should be

made before the deposit and
after the deposit was made, is
that correct?

A Yes, sir.

A No, I did not. (Testimony of

Ocanada pp. 32-41, Hearing on
June 3, 1980).

Q Now, from 1977, September

up to the present time, before
the deposit was made with the
Clerk of Court, did you serve
notice to Soledad Soco that a
deposit was going to be made in
each and every month?
A Not.
Q In other words, from
September 1977 up to the
present time, you did not notify
Soledad Soco that you were
going to make the deposit with
the Clerk of Court, and you did
not also notify Soledad Soco
after the deposit was made, that
a deposit has been made in
each and every month during
that period, is that correct?
A Yes
Q And the reason was because
you were not instructed by Mr.
and Mrs. Regino Francisco, Jr.

Recapitulating the above testimony of the Bank

Comptroller, it is clear that the bank did not send notice
to Soco that the checks will be deposited in
consignation with the Clerk of Court (the first notice)
and also, the bank did not send notice to Soco that the
checks were in fact deposited (the second notice)
because no instructions were given by its depositor, the
lessee, to this effect, and this lack of notices started
from September, 1977 to the time of the trial, that is
June 3, 1980.
The reason for the notification to the persons interested
in the fulfillment of the obligation after consignation had
been made, which is separate and distinct from the
notification which is made prior to the consignation, is
stated in Cabanos vs. Calo, G.R. No. L-10927, October
30, 1958, 104 Phil. 1058. thus: "There should be notice
to the creditor prior and after consignation as required
by the Civil Code. The reason for this is obvious,
namely, to enable the creditor to withdraw the goods or
money deposited. Indeed, it would be unjust to make
him suffer the risk for any deterioration, depreciation or
loss of such goods or money by reason of lack of
knowledge of the consignation."

And the fourth requisite that respondent lessee failed to

prove is the actual deposit or consignation of the
monthly rentals except the two cashier's checks referred
to in Exhibit 12. As indicated earlier, not a single copy of
the official receipts issued by the Clerk of Court was
presented at the trial of the case to prove the actual
deposit or consignation. We find, however, reference to
some 45 copies of official receipts issued by the Clerk of
Court marked Annexes "B-1 " to "B-40" to the Motion for
Reconsideration of the Order granting execution
pending appeal filed by defendant Francisco in the City
Court of Cebu (pp, 150-194, CFI Original Records) as
well as in the Motion for Reconsideration of the CFI
decision, filed by plaintiff lessor (pp. 39-50, Records,
marked Annex "E ") the allegation that "there was no
receipt at all showing that defendant Francisco has
deposited with the Clerk of Court the monthly rentals
corresponding to the months of May and June, 1977.
And for the months of July and August, 1977, the rentals
were only deposited with the Clerk of Court on 20
November 1979 (or more than two years later)."... The
deposits of these monthly rentals for July and August,
1977 on 20 November 1979, is very significant because
on 24 October 1979, plaintiff Soco had testified before
the trial court that defendant had not paid the monthly
rentals for these months. Thus, defendant had to make
a hurried deposit on the following month to repair his
failure. " (pp. 43-44, Records).
We have verified the truth of the above claim or
allegation and We find that indeed, under Official
Receipt No. 1697161Z, the rental deposit for August,
1977 in cashier's check No. 502782 dated 8-10-77 was

deposited on November 20, 1979 (Annex "B-15", p. 169,

Original CFI Records) and under Official Receipt No.
1697159Z, the rental deposit for July under Check No.
479647 was deposited on November 20, 1979 (Annex
"B-16", p. 170, Original CFI Records). Indeed, these two
rental deposits were made on November 20, 1979, two
years late and after the filing of the complaint for illegal
detainer.
The decision under review cites Exhibits 6, 7, 8 and 9,
the Debit Memorandum issued by Comtrust Bank
deducting the amounts of the checks therein indicated
from the account of the lessee, to prove payment of the
monthly rentals. But these Debit Memorandums are
merely internal banking practices or office procedures
involving the bank and its depositor which is not binding
upon a third person such as the lessor. What is
important is whether the checks were picked up by the
lessee as per the arrangement indicated in Exhibits 4
and 5 wherein the lessee had to pick up the checks
issued by CBTC or to send somebody to pick them up,
and logically, for the lessee to tender the same to the
lessor. On this vital point, the lessee miserably failed to
present any proof that he complied with the
arrangement.
We, therefore, find and rule that the lessee has failed to
prove tender of payment except that in Exh. 10; he has
failed to prove the first notice to the lessor prior to
consignation except that given in Exh. 10; he has failed
to prove the second notice after consignation except the
two made in Exh. 12; and he has failed to pay the
rentals for the months of July and August, 1977 as of the

time the complaint was filed for the eviction of the

lessee. We hold that the evidence is clear, competent
and convincing showing that the lessee has violated the
terms of the lease contract and he may, therefore, be
judicially ejected.
The other matters raised in the appeal are of no
moment. The motion to dismiss filed by respondent on
the ground of "want of specific assignment of errors in
the appellant's brief, or of page references to the
records as required in Section 16(d) of Rule 46," is
without merit. The petition itself has attached the
decision sought to be reviewed. Both Petition and
Memorandum of the petitioner contain the summary
statement of facts; they discuss the essential requisites
of a valid consignation; the erroneous conclusion of the
respondent Judge in reversing the decision of the City
Court, his grave abuse of discretion which, the
petitioner argues, "has so far departed from the
accepted and usual course of judicial proceeding in the
matter of applying the law and jurisprudence on the
matter." The Memorandum further cites other basis for
petitioner's plea.
In Our mind, the errors in the appealed decision are
sufficiently stated and assigned. Moreover, under Our
rulings, We have stated that:
This Court is clothed with ample authority to
review matters, even if they are not
assigned as errors in the appeal, if it finds
that their consideration is necessary in
arriving at a just decision of the case. Also,
an unassigned error closely related to an

error properly assigned or upon which the

determination of the questioned raised by
the error properly assigned is dependent,
will be considered by the appellate court
notwithstanding the failure to assign it as an
error." (Ortigas, Jr. vs. Lufthansa German
Airlines, L-28773, June 30, 1975, 64 SCRA
610)
Under Section 5 of Rule 53, the appellate
court is authorized to consider a plain error,
although it was not specifically assigned by
appellants." (Dilag vs. Heirs of Resurreccion,
76 Phil. 649)
Appellants need not make specific
assignment of errors provided they discuss
at length and assail in their brief the
correctness of the trial court's findings
regarding the matter. Said discussion
warrants the appellate court to rule upon
the point because it substantially complies
with Section 7, Rule 51 of the Revised Rules
of Court, intended merely to compel the
appellant to specify the questions which he
wants to raise and be disposed of in his
appeal. A clear discussion regarding an error
allegedly committed by the trial court
accomplishes the purpose of a particular
assignment of error." (Cabrera vs. Belen, 95
Phil. 54; Miguel vs Court of Appeals, L20274, Oct. 30, 1969, 29 SCRA 760-773,

cited in Moran, Comments on the Rules of

Court, Vol. 11, 1970 ed., p. 534).
Pleadings as well as remedial laws should be
construed liberally in order that the litigants
may have ample opportunity to prove their
respective claims, and that a possible denial
of substantial justice, due to legal
technicalities, may be avoided."
(Concepcion, et al. vs. The Payatas Estate
Improvement Co., Inc., 103 Phil. 10 17).
WHEREFORE, IN VIEW OF ALL THE FOREGOING, the
decision of the Court of First Instance of Cebu, 14th
Judicial District, Branch XII is hereby REVERSED and SET
ASIDE, and the derision of the City Court of Cebu,
Branch II is hereby reinstated, with costs in favor of the
petitioner.

[G.R. No. 124922. June 22, 1998]

JIMMY CO, doing business under the name & style
DRAGON METAL
MANUFACTURING,
Petitioner,
vs.
COURT OF APPEALS
and
BROADWAY MOTOR SALES CORPORATION,
Respondents.
DECISION
MARTINEZ, J.:
On July 18, 1990, petitioner entrusted his Nissan
pick-up car 1988 model[1] to private respondent - which

is engaged in the sale, distribution and repair of motor

vehicles - for the following job repair services and
supply of parts:
- Bleed injection pump and all nozzles;
- Adjust valve tappet;
- Change oil and filter;
- Open up and service four wheel brakes, clean and
adjust;
- Lubricate accelerator linkages;
- Replace aircon belt; and
- Replace battery[2]
Private respondent undertook to return the vehicle
on July 21, 1990 fully serviced and supplied in
accordance with the job contract. After petitioner paid in
full the repair bill in the amount of P1,397.00,[3] private
respondent issued to him a gate pass for the release of
the vehicle on said date. But came July 21, 1990, the
latter could not release the vehicle as its battery was
weak and was not yet replaced. Left with no option,
petitioner himself bought a new battery nearby and
delivered it to private respondent for installation on the
same day. However, the battery was not installed and
the delivery of the car was rescheduled to July 24, 1990
or three (3) days later. When petitioner sought to
reclaim his car in the afternoon of July 24, 1990, he was
told that it was carnapped earlier that morning while

being road-tested by private respondents employee

along Pedro Gil and Perez Streets in Paco, Manila.
Private respondent said that the incident was reported
to the police.
Having failed to recover his car and its accessories
or the value thereof, petitioner filed a suit for damages
against private respondent anchoring his claim on the
latters alleged negligence. For its part, private
respondent contended that it has no liability because
the car was lost as a result of a fortuitous event - the
carnapping. During pre-trial, the parties agreed that:
(T)he cost of the Nissan Pick-up four (4) door when the
plaintiff purchased it from the defendant is P332,500.00
excluding accessories which were installed in the
vehicle by the plaintiff consisting of four (4) brand new
tires, magwheels, stereo speaker, amplifier which
amount all in all to P20,000.00. It is agreed that the
vehicle was lost on July 24, 1990 `approximately two (2)
years and five (5) months from the date of the
purchase. It was agreed that the plaintiff paid the
defendant the cost of service and repairs as early as July
21, 1990 in the amount of P1,397.00 which amount was
received and duly receipted by the defendant
company. It was also agreed that the present value of a
brand new vehicle of the same type at this time
is P425,000.00 without accessories.[4]
They likewise agreed that the sole issue for trial was
who between the parties shall bear the loss of the
vehicle which necessitates the resolution of whether
private respondent was indeed negligent. [5] After trial,
the court a quo found private respondent guilty of delay

in the performance of its obligation and held it liable to

petitioner for the value of the lost vehicle and its
accessories plus interest and attorneys fees. [6] On
appeal, the Court of Appeals (CA) reversed the ruling of
the lower court and ordered the dismissal of petitioners
damage suit.[7] The CA ruled that: (1) the trial court was
limited to resolving the issue of negligence as agreed
during pre-trial; hence it cannot pass on the issue of
delay; and (2) the vehicle was lost due to a fortuitous
event.
In a petition for review to this Court, the principal
query raised is whether a repair shop can be held liable
for the loss of a customers vehicle while the same is in
its custody for repair or other job services?
The Court resolves the query in favor of the
customer. First, on the technical aspect involved.
Contrary to the CAs pronouncement, the rule that the
determination of issues at a pre-trial conference bars
the
consideration of other
issues on
appeal, except those that may involve privilege or
impeaching matter,[8] is inapplicable to this case. The
question of delay, though not specifically mentioned as
an issue at the pre-trial may be tackled by the court
considering that it is necessarily intertwined and
intimately connected with the principal issue agreed
upon by the parties, i.e. who will bear the loss and
whether there was negligence. Petitioners imputation of
negligence to private respondent is premised on delay
which is the very basis of the formers complaint. Thus, it
was unavoidable for the court to resolve the case,
particularly the question of negligence without

considering whether private respondent was guilty of

delay in the performance of its obligation.
On the merits. It is a not a defense for a repair shop
of motor vehicles to escape liability simply because the
damage or loss of a thing lawfully placed in its
possession was due to carnapping. Carnapping per
se cannot be considered as a fortuitous event. The fact
that a thing was unlawfully and forcefully taken from
anothers rightful possession, as in cases of carnapping,
does not automatically give rise to a fortuitous event. To
be considered as such, carnapping entails more than
the mere forceful taking of anothers property. It must be
proved and established that the event was an act of
God or was done solely by third parties and that neither
the claimant nor the person alleged to be negligent has
any participation.[9] In accordance with the Rules of
evidence, the burden of proving that the loss was due to
a fortuitous event rests on him who invokes it [10]- which
in this case is the private respondent. However, other
than the police report of the alleged carnapping
incident, no other evidence was presented by private
respondent to the effect that the incident was not due
to its fault. A police report of an alleged crime, to which
only private respondent is privy, does not suffice to
established the carnapping. Neither does it prove that
there was no fault on the part of private respondent
notwithstanding the parties agreement at the pre-trial
that the car was carnapped. Carnapping does not
foreclose the possibility of fault or negligence on the
part of private respondent.

Even assuming arguendo that carnapping was duly

established as a fortuitous event, still private
respondent cannot escape liability. Article 1165 [11] of the
New Civil Code makes an obligor who is guilty of delay
responsible even for a fortuitous event until he has
effected the delivery. In this case, private respondent
was already in delay as it was supposed to deliver
petitioners car three (3) days before it was lost.
Petitioners agreement to the rescheduled delivery does
not defeat his claim as private respondent had already
breached its obligation. Moreover, such accession
cannot be construed as waiver of petitioners right to
hold private respondent liable because the car was
unusable and thus, petitioner had no option but to leave
it.
Assuming further that there was no delay, still
working against private respondent is the legal
presumption under Article 1265 that its possession of
the thing at the time it was lost was due to its fault.
[12]
This presumption is reasonable since he who has the
custody and care of the thing can easily explain the
circumstances of the loss. The vehicle owner has no
duty to show that the repair shop was at fault. All that
petitioner needs to prove, as claimant, is the simple fact
that private respondent was in possession of the vehicle
at the time it was lost. In this case, private respondents
possession at the time of the loss is undisputed.
Consequently, the burden shifts to the possessor who
needs to present controverting evidence sufficient
enough to overcome that presumption. Moreover, the
exempting circumstances - earthquake, flood, storm or
other natural calamity - when the presumption of fault is

not applicable[13] do not concur in this case. Accordingly,

having failed to rebut the presumption and since the
case does not fall under the exceptions, private
respondent is answerable for the loss.
It must likewise be emphasized that pursuant to
Articles 1174 and 1262 of the New Civil Code, liability
attaches even if the loss was due to a fortuitous event if
the nature of the obligation requires the assumption of
risk.[14] Carnapping is a normal business risk for those
engaged in the repair of motor vehicles. For just as the
owner is exposed to that risk so is the repair shop since
the car was entrusted to it. That is why, repair shops are
required to first register with the Department of Trade
and Industry (DTI)[15] and to secure an insurance policy
for the shop covering the property entrusted by its
customer
for repair, service or maintenance as a prerequisite for such registration/accreditation.[16] Violation
of this statutory duty constitutes negligence per se.
[17]
Having taken custody of the vehicle, private
respondent is obliged not only to repair the vehicle but
must also provide the customer with some form of
security for his property over which he loses immediate
control. An owner who cannot exercise the seven
(7) juses or attributes of ownership the right to possess,
to use and enjoy, to abuse or consume, to accessories,
to dispose or alienate, to recover or vindicate and to the
fruits -[18] is a crippled owner. Failure of the repair shop

to provide security to a motor vehicle owner would

leave the latter at the mercy of the former. Moreover, on
the assumption that private respondents repair business
is duly registered, it presupposes that its shop is
covered by insurance from which it may recover the
loss. If private respondent can recover from its insurer,
then it would be unjustly enriched if it will not
compensate petitioner to whom no fault can be
attributed. Otherwise, if the shop is not registered, then
the presumption of negligence applies.
One last thing. With respect to the value of the lost
vehicle and its accessories for which the repair shop is
liable, it should be based on the fair market value that
the property would command at the time it was
entrusted to it or such other value as agreed upon by
the parties subsequent to the loss. Such recoverable
value is fair and reasonable considering that the value
of the vehicle depreciates. This value may be recovered
without prejudice to such other damages that a
claimant is entitled under applicable laws.
WHEREFORE, premises considered, the decision of
the Court Appeals is REVERSED and SET ASIDE and the
decision of the court a quo is REINSTATED.