(i)G.R. No. 97753 August 10, 1992 6. Sometime in November, 1982, Mr.

Aranas,
Credit Manager of plaintiff Caltex (Phils.) Inc.,
went to the defendant bank's Sucat branch and
CALTEX (PHILIPPINES), INC., petitioner,
presented for verification the CTDs declared lost
vs.
by Angel dela Cruz alleging that the same were
COURT OF APPEALS and SECURITY BANK AND TRUST
delivered to herein plaintiff "as security for
COMPANY, respondents.
purchases made with Caltex Philippines, Inc." by
said depositor (TSN, February 9, 1987, pp. 54-68).
Bito, Lozada, Ortega & Castillo for petitioners.
7. On November 26, 1982, defendant received a
Nepomuceno, Hofilea & Guingona for private. letter (Defendant's Exhibit 563) from herein plaintiff
formally informing it of its possession of the CTDs
in question and of its decision to pre-terminate the
REGALADO, J.:
same.

This petition for review on certiorari impugns and seeks the reversal of
the decision promulgated by respondent court on March 8, 1991 in CA-
G.R. CV No. 23615 1 affirming with modifications, the earlier decision
of the Regional Trial Court of Manila, Branch XLII, 2 which dismissed
the complaint filed therein by herein petitioner against respondent
bank.
The undisputed background of this case, as found by the court a quo
and adopted by respondent court, appears of record:
1. On various dates, defendant, a commercial
banking institution, through its Sucat Branch
issued 280 certificates of time deposit (CTDs) in
favor of one Angel dela Cruz who deposited with
herein defendant the aggregate amount of
P1,120,000.00, as follows: (Joint Partial
Stipulation of Facts and Statement of Issues,
Original Records, p. 207; Defendant's Exhibits 1 to
280);
CTD CTD
Dates Serial Nos. Quantity Amount
8. On December 8, 1982, plaintiff was requested
by herein defendant to furnish the former "a copy
of the document evidencing the guarantee
agreement with Mr. Angel dela Cruz" as well as
"the details of Mr. Angel dela Cruz" obligation
against which plaintiff proposed to apply the time
deposits (Defendant's Exhibit 564).
9. No copy of the requested documents was
furnished herein defendant.
10. Accordingly, defendant bank rejected the
plaintiff's demand and claim for payment of the
value of the CTDs in a letter dated February 7,
1983 (Defendant's Exhibit 566).
11. In April 1983, the loan of Angel dela Cruz with
the defendant bank matured and fell due and on
August 5, 1983, the latter set-off and applied the
time deposits in question to the payment of the
matured loan (TSN, February 9, 1987, pp. 130-
131).

22 Feb. 82 90101 to 90120 20 P80,000 12. In view of the foregoing, plaintiff filed the
26 Feb. 82 74602 to 74691 90 360,000
instant complaint, praying that defendant bank be
2 Mar. 82 74701 to 74740 40 160,000 ordered to pay it the aggregate value of the
4 Mar. 82 90127 to 90146 20 80,000 certificates of time deposit of P1,120,000.00 plus
5 Mar. 82 74797 to 94800 4 16,000
accrued interest and compounded interest therein
5 Mar. 82 89965 to 89986 22 88,000 at 16% per annum, moral and exemplary damages
5 Mar. 82 70147 to 90150 4 16,000 as well as attorney's fees.
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000 After trial, the court a quo rendered its decision
9 Mar. 82 90251 to 90272 22 88,000 dismissing the instant complaint. 3

Total 280 P1,120,000
On appeal, as earlier stated, respondent court affirmed the lower
===== ========
court's dismissal of the complaint, hence this petition wherein petitioner
faults respondent court in ruling (1) that the subject certificates of
2. Angel dela Cruz delivered the said certificates deposit are non-negotiable despite being clearly negotiable
of time (CTDs) to herein plaintiff in connection with instruments; (2) that petitioner did not become a holder in due course
his purchased of fuel products from the latter of the said certificates of deposit; and (3) in disregarding the pertinent
(Original Record, p. 208). provisions of the Code of Commerce relating to lost instruments
payable to bearer. 4
3. Sometime in March 1982, Angel dela Cruz
informed Mr. Timoteo Tiangco, the Sucat Branch The instant petition is bereft of merit.
Manger, that he lost all the certificates of time
deposit in dispute. Mr. Tiangco advised said
A sample text of the certificates of time deposit is reproduced below to
depositor to execute and submit a notarized
provide a better understanding of the issues involved in this recourse.
Affidavit of Loss, as required by defendant bank's
procedure, if he desired replacement of said lost
CTDs (TSN, February 9, 1987, pp. 48-50). SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
4. On March 18, 1982, Angel dela Cruz executed
Metro Manila, Philippines
and delivered to defendant bank the required
SUCAT OFFICEP 4,000.00
Affidavit of Loss (Defendant's Exhibit 281). On the
CERTIFICATE OF DEPOSIT
basis of said affidavit of loss, 280 replacement
Rate 16%
CTDs were issued in favor of said depositor
(Defendant's Exhibits 282-561).
Date of Maturity FEB. 23, 1984 FEB 22,
1982, 19____
5. On March 25, 1982, Angel dela Cruz negotiated
and obtained a loan from defendant bank in the
amount of Eight Hundred Seventy Five Thousand This is to Certify that B E A R
Pesos (P875,000.00). On the same date, said E R has deposited in this
depositor executed a notarized Deed of Bank the sum of PESOS:
Assignment of Time Deposit (Exhibit 562) which FOUR THOUSAND ONLY,
stated, among others, that he (de la Cruz) SECURITY BANK SUCAT
surrenders to defendant bank "full control of the OFFICE P4,000 & 00 CTS
indicated time deposits from and after date" of the Pesos, Philippine Currency,
assignment and further authorizes said bank to repayable to said depositor
pre-terminate, set-off and "apply the said time 731 days. after date, upon
deposits to the payment of whatever amount or presentation and surrender of
amounts may be due" on the loan upon its this certificate, with interest at
maturity (TSN, February 9, 1987, pp. 60-62). the rate of 16% per cent per
annum.
 (Sgd. Illegible) (Sgd. Illegible)
AUTHORIZED SIGNATURES 5
Respondent court ruled that the CTDs in question are non-negotiable
instruments, nationalizing as follows:
. . . While it may be true that the word "bearer"
appears rather boldly in the CTDs issued, it is
important to note that after the word "BEARER"
stamped on the space provided supposedly for the
name of the depositor, the words "has deposited"
a certain amount follows. The document further
provides that the amount deposited shall be
"repayable to said depositor" on the period
indicated. Therefore, the text of the instrument(s)
themselves manifest with clarity that they are
payable, not to whoever purports to be the
"bearer" but only to the specified person indicated
therein, the depositor. In effect, the appellee bank
acknowledges its depositor Angel dela Cruz as the
person who made the deposit and further engages
itself to pay said depositor the amount indicated
thereon at the stipulated date. 6
We disagree with these findings and conclusions, and hereby hold that
the CTDs in question are negotiable instruments. Section 1 Act No.
2031, otherwise known as the Negotiable Instruments Law,
enumerates the requisites for an instrument to become negotiable, viz:
(a) It must be in writing and signed by the maker
or drawer;
(b) Must contain an unconditional promise or order
to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or
determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a
drawee, he must be named or otherwise indicated
therein with reasonable certainty.
The CTDs in question undoubtedly meet the requirements of the law
for negotiability. The parties' bone of contention is with regard to
requisite (d) set forth above. It is noted that Mr. Timoteo P. Tiangco,
Security Bank's Branch Manager way back in 1982, testified in open
court that the depositor reffered to in the CTDs is no other than Mr.
Angel de la Cruz.
xxx xxx xxx
Atty. Calida:
q In other words Mr. Witness,
you are saying that per books
of the bank, the depositor
referred (sic) in these
certificates states that it was
Angel dela Cruz?
witness:
a Yes, your Honor, and we
have the record to show that
Angel dela Cruz was the one
who cause (sic) the amount.
Atty. Calida:
q And no other person or
entity or company, Mr.
Witness?
witness:
a None, your Honor. 7
xxx xxx xxx
Atty. Calida:
q Mr. Witness, who is the
depositor identified in all of
these certificates of time
deposit insofar as the bank is
concerned?
witness:
a Angel dela Cruz is the
depositor. 8
xxx xxx xxx
On this score, the accepted rule is that the negotiability or non-
negotiability of an instrument is determined from the writing, that is,
from the face of the instrument itself.9 In the construction of a bill or
note, the intention of the parties is to control, if it can be legally
ascertained. 10 While the writing may be read in the light of
surrounding circumstances in order to more perfectly understand the
intent and meaning of the parties, yet as they have constituted the
writing to be the only outward and visible expression of their meaning,
no other words are to be added to it or substituted in its stead. The
duty of the court in such case is to ascertain, not what the parties may
have secretly intended as contradistinguished from what their words
express, but what is the meaning of the words they have used. What
the parties meant must be determined by what they said. 11
Contrary to what respondent court held, the CTDs are negotiable
instruments. The documents provide that the amounts deposited shall
be repayable to the depositor. And who, according to the document, is
the depositor? It is the "bearer." The documents do not say that the
depositor is Angel de la Cruz and that the amounts deposited are
repayable specifically to him. Rather, the amounts are to be repayable
to the bearer of the documents or, for that matter, whosoever may be
the bearer at the time of presentment.
If it was really the intention of respondent bank to pay the amount to
Angel de la Cruz only, it could have with facility so expressed that fact
in clear and categorical terms in the documents, instead of having the
word "BEARER" stamped on the space provided for the name of the
depositor in each CTD. On the wordings of the documents, therefore,
the amounts deposited are repayable to whoever may be the bearer
thereof. Thus, petitioner's aforesaid witness merely declared that Angel
de la Cruz is the depositor "insofar as the bank is concerned," but
obviously other parties not privy to the transaction between them would
not be in a position to know that the depositor is not the bearer stated
in the CTDs. Hence, the situation would require any party dealing with
the CTDs to go behind the plain import of what is written thereon to
unravel the agreement of the parties thereto through facts aliunde. This
need for resort to extrinsic evidence is what is sought to be avoided by
the Negotiable Instruments Law and calls for the application of the
elementary rule that the interpretation of obscure words or stipulations
in a contract shall not favor the party who caused the obscurity. 12
The next query is whether petitioner can rightfully recover on the
CTDs. This time, the answer is in the negative. The records reveal that
Angel de la Cruz, whom petitioner chose not to implead in this suit for
reasons of its own, delivered the CTDs amounting to P1,120,000.00 to
petitioner without informing respondent bank thereof at any time.
Unfortunately for petitioner, although the CTDs are bearer instruments,
a valid negotiation thereof for the true purpose and agreement
between it and De la Cruz, as ultimately ascertained, requires both
delivery and indorsement. For, although petitioner seeks to deflect this
fact, the CTDs were in reality delivered to it as a security for De la
Cruz' purchases of its fuel products. Any doubt as to whether the CTDs
were delivered as payment for the fuel products or as a security has
been dissipated and resolved in favor of the latter by petitioner's own
authorized and responsible representative himself.
In a letter dated November 26, 1982 addressed to respondent Security
Bank, J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ". . . These
certificates of deposit were negotiated to us by Mr. Angel dela Cruz to
guarantee his purchases of fuel products" (Emphasis ours.) 13 This
admission is conclusive upon petitioner, its protestations
notwithstanding. Under the doctrine of 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.
14 A party may not go back on his own acts and representations to the
prejudice of the other party who relied upon them. 15 In the law of
evidence, whenever a party has, by his own declaration, act, or
omission, intentionally and deliberately led another to believe a
particular thing true, and to act upon such belief, he cannot, in any
litigation arising out of such declaration, act, or omission, be permitted
to falsify it. 16
If it were true that the CTDs were delivered as payment and not as
security, petitioner's credit manager could have easily said so, instead
of using the words "to guarantee" in the letter aforequoted. Besides,
when respondent bank, as defendant in the court below, moved for a
bill of particularity therein 17 praying, among others, that petitioner, as
plaintiff, be required to aver with sufficient definiteness or particularity
(a) the due date or dates of payment of the alleged indebtedness of
Angel de la Cruz to plaintiff and (b) whether or not it issued a receipt
showing that the CTDs were delivered to it by De la Cruz as payment
of the latter's alleged indebtedness to it, plaintiff corporation opposed
the motion. 18 Had it produced the receipt prayed for, it could have
proved, if such truly was the fact, that the CTDs were delivered as
payment and not as security. Having opposed the motion, petitioner
now labors under the presumption that evidence willfully suppressed
would be adverse if produced. 19
Under the foregoing circumstances, this disquisition in Intergrated
Realty Corporation, et al. vs. Philippine National Bank, et al. 20 is
apropos:
. . . Adverting again to the Court's
pronouncements in Lopez, supra, we quote
therefrom:
The character of the
transaction between the
parties is to be determined by
their intention, regardless of
what language was used or
what the form of the transfer
was. If it was intended to
secure the payment of money,
it must be construed as a
pledge; but if there was some
other intention, it is not a
pledge. However, even
though a transfer, if regarded
by itself, appears to have
been absolute, its object and
character might still be
qualified and explained by
contemporaneous writing
declaring it to have been a
deposit of the property as
collateral security. It has been
said that a transfer of property
by the debtor to a creditor,
even if sufficient on its face to
make an absolute
conveyance, should be
treated as a pledge if the debt
continues in inexistence and
is not discharged by the
transfer, and that accordingly
the use of the terms ordinarily
importing conveyance of
absolute ownership will not be
given that effect in such a
transaction if they are also
commonly used in pledges
and mortgages and therefore
do not unqualifiedly indicate a
transfer of absolute
ownership, in the absence of
clear and unambiguous
language or other
circumstances excluding an
intent to pledge.
Petitioner's insistence that the CTDs were negotiated to it begs the
question. Under the Negotiable Instruments Law, an instrument is
negotiated when it is transferred from one person to another in such a
manner as to constitute the transferee the holder thereof, 21 and a
holder may be the payee or indorsee of a bill or note, who is in
possession of it, or the bearer thereof. 22 In the present case,
however, there was no negotiation in the sense of a transfer of the
legal title to the CTDs in favor of petitioner in which situation, for
obvious reasons, mere delivery of the bearer CTDs would have
sufficed. Here, the delivery thereof only as security for the purchases
of Angel de la Cruz (and we even disregard the fact that the amount
involved was not disclosed) could at the most constitute petitioner only
as a holder for value by reason of his lien. Accordingly, a negotiation
for such purpose cannot be effected by mere delivery of the instrument
since, necessarily, the terms thereof and the subsequent disposition of
such security, in the event of non-payment of the principal obligation,
must be contractually provided for.
The pertinent law on this point is that where the holder has a lien on
the instrument arising from contract, he is deemed a holder for value to
the extent of his lien. 23 As such holder of collateral security, he would
be a pledgee but the requirements therefor and the effects thereof, not
being provided for by the Negotiable Instruments Law, shall be
governed by the Civil Code provisions on pledge of incorporeal rights,
24 which inceptively provide:
Art. 2095. Incorporeal rights, evidenced by
negotiable instruments, . . . may also be pledged.
The instrument proving the right pledged shall be
delivered to the creditor, and if negotiable, must be
indorsed.
Art. 2096. A pledge shall not take effect against
third persons if a description of the thing pledged
and the date of the pledge do not appear in a
public instrument.
Aside from the fact that the CTDs were only delivered but not indorsed,
the factual findings of respondent court quoted at the start of this
opinion show that petitioner failed to produce any document evidencing
any contract of pledge or guarantee agreement between it and Angel
de la Cruz. 25 Consequently, the mere delivery of the CTDs did not
legally vest in petitioner any right effective against and binding upon
respondent bank. The requirement under Article 2096 aforementioned
is not a mere rule of adjective law prescribing the mode whereby proof
may be made of the date of a pledge contract, but a rule of substantive
law prescribing a condition without which the execution of a pledge
contract cannot affect third persons adversely. 26
On the other hand, the assignment of the CTDs made by Angel de la
Cruz in favor of respondent bank was embodied in a public instrument.
27 With regard to this other mode of transfer, the Civil Code
specifically declares:
Art. 1625. An assignment of credit, right or action
shall produce no effect as against third persons,
unless it appears in a public instrument, or the
instrument is recorded in the Registry of Property
in case the assignment involves real property.
Respondent bank duly complied with this statutory requirement.
Contrarily, petitioner, whether as purchaser, assignee or lien holder of
the CTDs, neither proved the amount of its credit or the extent of its
lien nor the execution of any public instrument which could affect or
bind private respondent. Necessarily, therefore, as between petitioner
and respondent bank, the latter has definitely the better right over the
CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the
question of whether or not private respondent observed the
requirements of the law in the case of lost negotiable instruments and
the issuance of replacement certificates therefor, on the ground that
petitioner failed to raised that issue in the lower court. 28
On this matter, we uphold respondent court's finding that the aspect of
alleged negligence of private respondent was not included in the
stipulation of the parties and in the statement of issues submitted by
them to the trial court. 29 The issues agreed upon by them for
resolution in this case are:
1. Whether or not the CTDs as worded are
negotiable instruments.
2. Whether or not defendant could legally apply
the amount covered by the CTDs against the
depositor's loan by virtue of the assignment
(Annex "C").
3. Whether or not there was legal compensation or
set off involving the amount covered by the CTDs
and the depositor's outstanding account with
defendant, if any.
4. Whether or not plaintiff could compel defendant
to preterminate the CTDs before the maturity date
provided therein.
5. Whether or not plaintiff is entitled to the
proceeds of the CTDs.
6. Whether or not the parties can recover
damages, attorney's fees and litigation expenses
from each other.
As respondent court correctly observed, with appropriate citation of
some doctrinal authorities, the foregoing enumeration does not include
the issue of negligence on the part of respondent bank. An issue
raised for the first time on appeal and not raised timely in the
proceedings in the lower court is barred by estoppel. 30 Questions Appellate Court in AC-G.R. CV No. 68609 dated July 17, 1985, as well
raised on appeal must be within the issues framed by the parties and, as its resolution dated October 17, 1985, denying the motion for
consequently, issues not raised in the trial court cannot be raised for reconsideration.
the first time on appeal. 31
The antecedent facts culled from the petition are as follows:
Pre-trial is primarily intended to make certain that all issues necessary
to the disposition of a case are properly raised. Thus, to obviate the
The petitioner is a corporation engaged in the logging business. It had
element of surprise, parties are expected to disclose at a pre-trial
for its program of logging activities for the year 1978 the opening of
conference all issues of law and fact which they intend to raise at the
additional roads, and simultaneous logging operations along the route
trial, except such as may involve privileged or impeaching matters. The
of said roads, in its logging concession area at Baganga, Manay, and
determination of issues at a pre-trial conference bars the consideration
Caraga, Davao Oriental. For this purpose, it needed two (2) additional
of other questions on appeal. 32
units of tractors.

To accept petitioner's suggestion that respondent bank's supposed

Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf &
negligence may be considered encompassed by the issues on its right
Pacific Company of Manila, through its sister company and marketing
to preterminate and receive the proceeds of the CTDs would be
arm, Industrial Products Marketing (the "seller-assignor"), a corporation
tantamount to saying that petitioner could raise on appeal any issue.
dealing in tractors and other heavy equipment business, offered to sell
We agree with private respondent that the broad ultimate issue of
to petitioner-corporation two (2) "Used" Allis Crawler Tractors, one (1)
petitioner's entitlement to the proceeds of the questioned certificates
an HDD-21-B and the other an HDD-16-B.
can be premised on a multitude of other legal reasons and causes of
action, of which respondent bank's supposed negligence is only one.
Hence, petitioner's submission, if accepted, would render a pre-trial In order to ascertain the extent of work to which the tractors were to be
delimitation of issues a useless exercise. 33 exposed, (t.s.n., May 28, 1980, p. 44) and to determine the capability
of the "Used" tractors being offered, petitioner-corporation requested
the seller-assignor to inspect the job site. After conducting said
Still, even assuming arguendo that said issue of negligence was raised
inspection, the seller-assignor assured petitioner-corporation that the
in the court below, petitioner still cannot have the odds in its favor. A
"Used" Allis Crawler Tractors which were being offered were fit for the
close scrutiny of the provisions of the Code of Commerce laying down
job, and gave the corresponding warranty of ninety (90) days
the rules to be followed in case of lost instruments payable to bearer,
performance of the machines and availability of parts. (t.s.n., May 28,
which it invokes, will reveal that said provisions, even assuming their
1980, pp. 59-66).
applicability to the CTDs in the case at bar, are merely permissive and
not mandatory. The very first article cited by petitioner speaks for itself.
With said assurance and warranty, and relying on the seller-assignor's
skill and judgment, petitioner-corporation through petitioners Wee and
Art 548. The dispossessed owner, no matter for
Vergara, president and vice- president, respectively, agreed to
what cause it may be, may apply to the judge or
purchase on installment said two (2) units of "Used" Allis Crawler
court of competent jurisdiction, asking that the
Tractors. It also paid the down payment of Two Hundred Ten
principal, interest or dividends due or about to
Thousand Pesos (P210,000.00).
become due, be not paid a third person, as well as
in order to prevent the ownership of the instrument
that a duplicate be issued him. (Emphasis ours.) On April 5, 1978, the seller-assignor issued the sales invoice for the
two 2) units of tractors (Exh. "3-A"). At the same time, the deed of sale
with chattel mortgage with promissory note was executed (Exh. "2").
xxx xxx xxx

Simultaneously with the execution of the deed of sale with chattel

The use of the word "may" in said provision shows that it is not
mandatory but discretionary on the part of the "dispossessed owner" to
apply to the judge or court of competent jurisdiction for the issuance of
a duplicate of the lost instrument. Where the provision reads "may,"
this word shows that it is not mandatory but discretional. 34 The word
"may" is usually permissive, not mandatory. 35 It is an auxiliary verb
indicating liberty, opportunity, permission and possibility. 36
Moreover, as correctly analyzed by private respondent, 37 Articles 548
to 558 of the Code of Commerce, on which petitioner seeks to anchor
respondent bank's supposed negligence, merely established, on the
one hand, a right of recourse in favor of a dispossessed owner or
holder of a bearer instrument so that he may obtain a duplicate of the
same, and, on the other, an option in favor of the party liable thereon
who, for some valid ground, may elect to refuse to issue a replacement
of the instrument. Significantly, none of the provisions cited by
petitioner categorically restricts or prohibits the issuance a duplicate or
replacement instrument sans compliance with the procedure outlined
therein, and none establishes a mandatory precedent requirement
therefor.
WHEREFORE, on the modified premises above set forth, the petition
is DENIED and the appealed decision is hereby AFFIRMED.
SO ORDERED.
mortgage with promissory note, the seller-assignor, by means of a
deed of assignment (E exh. " 1 "), assigned its rights and interest in the
chattel mortgage in favor of the respondent.
Immediately thereafter, the seller-assignor delivered said two (2) units
of "Used" tractors to the petitioner-corporation's job site and as agreed,
the seller-assignor stationed its own mechanics to supervise the
operations of the machines.
Barely fourteen (14) days had elapsed after their delivery when one of
the tractors broke down and after another nine (9) days, the other
tractor likewise broke down (t.s.n., May 28, 1980, pp. 68-69).
On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the
seller-assignor of the fact that the tractors broke down and requested
for the seller-assignor's usual prompt attention under the warranty (E
exh. " 5 ").
In response to the formal advice by petitioner Rodolfo T. Vergara,
Exhibit "5," the seller-assignor sent to the job site its mechanics to
conduct the necessary repairs (Exhs. "6," "6-A," "6-B," 16 C," "16-C-1,"
"6-D," and "6-E"), but the tractors did not come out to be what they
should be after the repairs were undertaken because the units were no
longer serviceable (t. s. n., May 28, 1980, p. 78).

Narvasa, C.J., Padilla and Nocon, JJ., concur. Because of the breaking down of the tractors, the road building and
simultaneous logging operations of petitioner-corporation were delayed
and petitioner Vergara advised the seller-assignor that the payments of
(ii) G.R. No. 72593 April 30, 1987
the installments as listed in the promissory note would likewise be
delayed until the seller-assignor completely fulfills its obligation under
CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and its warranty (t.s.n, May 28, 1980, p. 79).
RODOLFO T. VERGARA, petitioners,
vs.
Since the tractors were no longer serviceable, on April 7, 1979,
IFC LEASING AND ACCEPTANCE CORPORATION, respondent.
petitioner Wee asked the seller-assignor to pull out the units and have
them reconditioned, and thereafter to offer them for sale. The proceeds
Carpio, Villaraza & Cruz Law Offices for petitioners. were to be given to the respondent and the excess, if any, to be
divided between the seller-assignor and petitioner-corporation which
offered to bear one-half (1/2) of the reconditioning cost (E exh. " 7 ").
Europa, Dacanay & Tolentino for respondent.

No response to this letter, Exhibit "7," was received by the petitioner-

GUTIERREZ, JR., J.:
This is a petition for certiorari under Rule 45 of the Rules of Court
which assails on questions of law a decision of the Intermediate
corporation and despite several follow-up calls, the seller-assignor did
nothing with regard to the request, until the complaint in this case was
filed by the respondent against the petitioners, the corporation, Wee,
and Vergara.
The complaint was filed by the respondent against the petitioners for
the recovery of the principal sum of One Million Ninety Three
Thousand Seven Hundred Eighty Nine Pesos & 71/100
(P1,093,789.71), accrued interest of One Hundred Fifty One Thousand
Six Hundred Eighteen Pesos & 86/100 (P151,618.86) as of August 15,
1979, accruing interest thereafter at the rate of twelve (12%) percent
per annum, attorney's fees of Two Hundred Forty Nine Thousand
Eighty One Pesos & 71/100 (P249,081.7 1) and costs of suit.
The petitioners filed their amended answer praying for the dismissal of
the complaint and asking the trial court to order the respondent to pay
the petitioners damages in an amount at the sound discretion of the
court, Twenty Thousand Pesos (P20,000.00) as and for attorney's
fees, and Five Thousand Pesos (P5,000.00) for expenses of litigation.
The petitioners likewise prayed for such other and further relief as
would be just under the premises.
In a decision dated April 20, 1981, the trial court rendered the following
judgment:
WHEREFORE, judgment is hereby rendered:
1. ordering defendants to pay jointly and severally
in their official and personal capacities the
principal sum of ONE MILLION NINETY THREE
THOUSAND SEVEN HUNDRED NINETY EIGHT
PESOS & 71/100 (P1,093,798.71) with accrued
interest of ONE HUNDRED FIFTY ONE
THOUSAND SIX HUNDRED EIGHTEEN PESOS
& 86/100 (P151,618.,86) as of August 15, 1979
and accruing interest thereafter at the rate of 12%
per annum;
2. ordering defendants to pay jointly and severally
attorney's fees equivalent to ten percent (10%) of
the principal and to pay the costs of the suit.
Defendants' counterclaim is disallowed. (pp. 45-
46, Rollo)
On June 8, 1981, the trial court issued an order denying the motion for
reconsideration filed by the petitioners.
Thus, the petitioners appealed to the Intermediate Appellate Court and
assigned therein the following errors:
I against the defendants-appellants.
THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER
ATLANTIC GULF AND PACIFIC COMPANY OF MANILA DID NOT
APPROVE DEFENDANTS-APPELLANTS CLAIM OF WARRANTY.
II
THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF-
APPELLEE IS A HOLDER IN DUE COURSE OF THE PROMISSORY
NOTE AND SUED UNDER SAID NOTE AS HOLDER THEREOF IN
DUE COURSE.
On July 17, 1985, the Intermediate Appellate Court issued the
challenged decision affirming in toto the decision of the trial court. The
pertinent portions of the decision are as follows:
xxx xxx xxx
From the evidence presented by the parties on the
issue of warranty, We are of the considered
opinion that aside from the fact that no provision of
warranty appears or is provided in the Deed of
Sale of the tractors and even admitting that in a
contract of sale unless a contrary intention
appears, there is an implied warranty, the defense
of breach of warranty, if there is any, as in this
case, does not lie in favor of the appellants and
against the plaintiff-appellee who is the assignee
of the promissory note and a holder of the same in
due course. Warranty lies in this case only
between Industrial Products Marketing and
Consolidated Plywood Industries, Inc. The plaintiff-
appellant herein upon application by appellant
corporation granted financing for the purchase of
the questioned units of Fiat-Allis Crawler,Tractors.
xxx xxx xxx
Holding that breach of warranty if any, is not a
defense available to appellants either to withdraw
from the contract and/or demand a proportionate
reduction of the price with damages in either case
(Art. 1567, New Civil Code). We now come to the
issue as to whether the plaintiff-appellee is a
holder in due course of the promissory note.
To begin with, it is beyond arguments that the
plaintiff-appellee is a financing corporation
engaged in financing and receivable discounting
extending credit facilities to consumers and
industrial, commercial or agricultural enterprises
by discounting or factoring commercial papers or
accounts receivable duly authorized pursuant to
R.A. 5980 otherwise known as the Financing Act.
A study of the questioned promissory note reveals
that it is a negotiable instrument which was
discounted or sold to the IFC Leasing and
Acceptance Corporation for P800,000.00 (Exh.
"A") considering the following. it is in writing and
signed by the maker; it contains an unconditional
promise to pay a certain sum of money payable at
a fixed or determinable future time; it is payable to
order (Sec. 1, NIL); the promissory note was
negotiated when it was transferred and delivered
by IPM to the appellee and duly endorsed to the
latter (Sec. 30, NIL); it was taken in the conditions
that the note was complete and regular upon its
face before the same was overdue and without
notice, that it had been previously dishonored and
that the note is in good faith and for value without
notice of any infirmity or defect in the title of IPM
(Sec. 52, NIL); that IFC Leasing and Acceptance
Corporation held the instrument free from any
defect of title of prior parties and free from
defenses available to prior parties among
themselves and may enforce payment of the
instrument for the full amount thereof against all
parties liable thereon (Sec. 57, NIL); the
appellants engaged that they would pay the note
according to its tenor, and admit the existence of
the payee IPM and its capacity to endorse (Sec.
60, NIL).
In view of the essential elements found in the
questioned promissory note, We opine that the
same is legally and conclusively enforceable
WHEREFORE, finding the decision appealed from
according to law and evidence, We find the appeal
without merit and thus affirm the decision in toto.
With costs against the appellants. (pp. 50-55,
Rollo)
The petitioners' motion for reconsideration of the decision of July 17,
1985 was denied by the Intermediate Appellate Court in its resolution
dated October 17, 1985, a copy of which was received by the
petitioners on October 21, 1985.
Hence, this petition was filed on the following grounds:
I.
ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A
NEGOTIABLE INSTRUMENT AS DEFINED UNDER THE LAW SINCE
IT IS NEITHER PAYABLE TO ORDER NOR TO BEARER.
II
THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST,
IT IS A MERE ASSIGNEE OF THE SUBJECT PROMISSORY NOTE.
III.
SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE
INSTRUMENT AND THE TRANSFER OF RIGHTS WAS THROUGH A
MERE ASSIGNMENT, THE PETITIONERS MAY RAISE AGAINST
THE RESPONDENT ALL DEFENSES THAT ARE AVAILABLE TO IT
AS AGAINST THE SELLER- ASSIGNOR, INDUSTRIAL PRODUCTS
MARKETING.
IV.
THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE
PROMISSORY NOTE BECAUSE:
A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF
WARRANTY UNDER THE LAW;
B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM
THE SELLER-ASSIGNOR OF THE PROMISSORY NOTE.
V.
THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE
SELLER- ASSIGNOR IN FAVOR OF THE RESPONDENT DOES NOT
CHANGE THE NATURE OF THE TRANSACTION FROM BEING A
SALE ON INSTALLMENTS TO A PURE LOAN.
VI.
THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN
EVIDENCE IN ANY COURT BECAUSE THE REQUISITE
DOCUMENTARY STAMPS HAVE NOT BEEN AFFIXED THEREON
OR CANCELLED.
The petitioners prayed that judgment be rendered setting aside the
decision dated July 17, 1985, as well as the resolution dated October
17, 1985 and dismissing the complaint but granting petitioners'
counterclaims before the court of origin.
On the other hand, the respondent corporation in its comment to the
petition filed on February 20, 1986, contended that the petition was
filed out of time; that the promissory note is a negotiable instrument
and respondent a holder in due course; that respondent is not liable for
any breach of warranty; and finally, that the promissory note is
admissible in evidence.
The core issue herein is whether or not the promissory note in question
is a negotiable instrument so as to bar completely all the available
defenses of the petitioner against the respondent-assignee.
Preliminarily, it must be established at the outset that we consider the
instant petition to have been filed on time because the petitioners'
motion for reconsideration actually raised new issues. It cannot,
therefore, be considered pro- formal.
The petition is impressed with merit.
First, there is no question that the seller-assignor breached its express
90-day warranty because the findings of the trial court, adopted by the
respondent appellate court, that "14 days after delivery, the first tractor
broke down and 9 days, thereafter, the second tractor became
inoperable" are sustained by the records. The petitioner was clearly a
victim of a warranty not honored by the maker.
The Civil Code provides that:
ART. 1561. The vendor shall be responsible for
warranty against the hidden defects which the
thing sold may have, should they render it unfit for
the use for which it is intended, or should they
diminish its fitness for such use to such an extent
that, had the vendee been aware thereof, he
would not have acquired it or would have given a
lower price for it; but said vendor shall not be
answerable for patent defects or those which may
be visible, or for those which are not visible if the
vendee is an expert who, by reason of his trade or
profession, should have known them.
ART. 1562. In a sale of goods, there is an implied
warranty or condition as to the quality or fitness of
the goods, as follows:
(1) Where the buyer, expressly or by implication
makes known to the seller the particular purpose
for which the goods are acquired, and it appears
that the buyer relies on the sellers skill or judge
judgment (whether he be the grower or
manufacturer or not), there is an implied warranty
that the goods shall be reasonably fit for such
purpose;
xxx xxx xxx
ART. 1564. An implied warranty or condition as to
the quality or fitness for a particular purpose may
be annexed by the usage of trade.
xxx xxx xxx
ART. 1566. The vendor is responsible to the
vendee for any hidden faults or defects in the thing
sold even though he was not aware thereof.
This provision shall not apply if the contrary has
been stipulated, and the vendor was not aware of
the hidden faults or defects in the thing sold.
(Emphasis supplied).
It is patent then, that the seller-assignor is liable for its breach of
warranty against the petitioner. This liability as a general rule, extends
to the corporation to whom it assigned its rights and interests unless
the assignee is a holder in due course of the promissory note in
question, assuming the note is negotiable, in which case the latter's
rights are based on the negotiable instrument and assuming further
that the petitioner's defenses may not prevail against it.
Secondly, it likewise cannot be denied that as soon as the tractors
broke down, the petitioner-corporation notified the seller-assignor's
sister company, AG & P, about the breakdown based on the seller-
assignor's express 90-day warranty, with which the latter complied by
sending its mechanics. However, due to the seller-assignor's delay and
its failure to comply with its warranty, the tractors became totally
unserviceable and useless for the purpose for which they were
purchased.
Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its
contract with the seller-assignor.
Articles 1191 and 1567 of the Civil Code provide that:
ART. 1191. The power to rescind obligations is
implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent
upon him.
The injured party may choose between the
fulfillment and the rescission of the obligation with
the payment of damages in either case. He may
also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.
xxx xxx xxx
ART. 1567. In the cases of articles 1561, 1562,
1564, 1565 and 1566, the vendee may elect
between withdrawing from the contract and
demanding a proportionate reduction of the price,
with damages in either case. (Emphasis supplied)
Petitioner, having unilaterally and extrajudicially rescinded its contract
with the seller-assignor, necessarily can no longer sue the seller-
assignor except by way of counterclaim if the seller-assignor sues it
because of the rescission.
In the case of the University of the Philippines v. De los Angeles (35
SCRA 102) we held:
In other words, the party who deems the contract
violated may consider it resolved or rescinded,
and act accordingly, without previous court action,
but it proceeds at its own risk. For it is only the
final judgment of the corresponding court that will
conclusively and finally settle whether the action
taken was or was not correct in law. But the law
definitely does not require that the contracting
party who believes itself injured must first file suit
and wait for adjudgement before taking
extrajudicial steps to protect its interest.
Otherwise, the party injured by the other's breach
will have to passively sit and watch its damages
accumulate during the pendency of the suit until
the final judgment of rescission is rendered when
the law itself requires that he should exercise due
diligence to minimize its own damages (Civil
Code, Article 2203). (Emphasis supplied)
Going back to the core issue, we rule that the promissory note in
question is not a negotiable instrument.
The pertinent portion of the note is as follows:
FOR VALUE RECEIVED, I/we jointly and severally
promise to pay to the INDUSTRIAL PRODUCTS
MARKETING, the sum of ONE MILLION NINETY
THREE THOUSAND SEVEN HUNDRED EIGHTY
NINE PESOS & 71/100 only (P 1,093,789.71),
Philippine Currency, the said principal sum, to be
payable in 24 monthly installments starting July
15, 1978 and every 15th of the month thereafter
until fully paid. ...
Considering that paragraph (d), Section 1 of the Negotiable
Instruments Law requires that a promissory note "must be payable to
order or bearer, " it cannot be denied that the promissory note in
question is not a negotiable instrument.
The instrument in order to be considered
negotiablility-i.e. must contain the so-called 'words
of negotiable, must be payable to 'order' or
'bearer'. These words serve as an expression of
consent that the instrument may be transferred.
This consent is indispensable since a maker
assumes greater risk under a negotiable
instrument than under a non-negotiable one. ...
xxx xxx xxx
When instrument is payable to order.
SEC. 8. WHEN PAYABLE TO ORDER. The
instrument is payable to order where it is drawn
payable to the order of a specified person or to
him or his order. . . .
xxx xxx xxx
These are the only two ways by which an
instrument may be made payable to order. There
must always be a specified person named in the
instrument. It means that the bill or note is to be
paid to the person designated in the instrument or
to any person to whom he has indorsed and
delivered the same. Without the words "or order"
or"to the order of, "the instrument is payable only
to the person designated therein and is therefore
non-negotiable. Any subsequent purchaser thereof
will not enjoy the advantages of being a holder of
a negotiable instrument but will merely "step into
the shoes" of the person designated in the
instrument and will thus be open to all defenses
available against the latter." (Campos and
Campos, Notes and Selected Cases on
Negotiable Instruments Law, Third Edition, page
38). (Emphasis supplied)
Therefore, considering that the subject promissory note is not a
negotiable instrument, it follows that the respondent can never be a
holder in due course but remains a mere assignee of the note in
question. Thus, the petitioner may raise against the respondent all
defenses available to it as against the seller-assignor Industrial
Products Marketing.
This being so, there was no need for the petitioner to implied the seller-
assignor when it was sued by the respondent-assignee because the
petitioner's defenses apply to both or either of either of them. Actually,
the records show that even the respondent itself admitted to being a
mere assignee of the promissory note in question, to wit:
ATTY. PALACA:
Did we get it right from the
counsel that what is being
assigned is the Deed of Sale
with Chattel Mortgage with the
promissory note which is as
testified to by the witness was
indorsed? (Counsel for
Plaintiff nodding his head.)
Then we have no further
questions on cross,
COURT:
You confirm his
manifestation? You are
nodding your head? Do you
confirm that?
ATTY. ILAGAN:
The Deed of Sale cannot be
assigned. A deed of sale is a
transaction between two
persons; what is assigned are
rights, the rights of the
mortgagee were assigned to
the IFC Leasing &
Acceptance Corporation.
COURT:
He puts it in a simple way as
one-deed of sale and chattel
mortgage were assigned; . . .
you want to make a
distinction, one is an
assignment of mortgage right
and the other one is
indorsement of the promissory
note. What counsel for
defendants wants is that you
stipulate that it is contained in
one single transaction?
ATTY. ILAGAN:
We stipulate it is one single
transaction. (pp. 27-29, TSN.,
February 13, 1980).
Secondly, even conceding for purposes of discussion that the
promissory note in question is a negotiable instrument, the respondent
cannot be a holder in due course for a more significant reason.
The evidence presented in the instant case shows that prior to the sale
on installment of the tractors, there was an arrangement between the
seller-assignor, Industrial Products Marketing, and the respondent
whereby the latter would pay the seller-assignor the entire purchase
price and the seller-assignor, in turn, would assign its rights to the
respondent which acquired the right to collect the price from the buyer,
herein petitioner Consolidated Plywood Industries, Inc.
A mere perusal of the Deed of Sale with Chattel Mortgage with
Promissory Note, the Deed of Assignment and the Disclosure of
Loan/Credit Transaction shows that said documents evidencing the
sale on installment of the tractors were all executed on the same day
by and among the buyer, which is herein petitioner Consolidated
Plywood Industries, Inc.; the seller-assignor which is the Industrial
Products Marketing; and the assignee-financing company, which is the
respondent. Therefore, the respondent had actual knowledge of the
fact that the seller-assignor's right to collect the purchase price was not
unconditional, and that it was subject to the condition that the tractors -
sold were not defective. The respondent knew that when the tractors
turned out to be defective, it would be subject to the defense of failure
of consideration and cannot recover the purchase price from the
petitioners. Even assuming for the sake of argument that the
promissory note is negotiable, the respondent, which took the same
with actual knowledge of the foregoing facts so that its action in taking
the instrument amounted to bad faith, is not a holder in due course. As
such, the respondent is subject to all defenses which the petitioners
may raise against the seller-assignor. Any other interpretation would
be most inequitous to the unfortunate buyer who is not only saddled
with two useless tractors but must also face a lawsuit from the
assignee for the entire purchase price and all its incidents without
being able to raise valid defenses available as against the assignor.
Lastly, the respondent failed to present any evidence to prove that it
had no knowledge of any fact, which would justify its act of taking the
promissory note as not amounting to bad faith.
Sections 52 and 56 of the Negotiable Instruments Law provide that:
negotiating it.
xxx xxx xxx
SEC. 52. WHAT CONSTITUTES A HOLDER IN
DUE COURSE. A holder in due course is a
holder who has taken the instrument under the
following conditions:
xxx xxx xxx
 xxx xxx xxx
(c) That he took it in good faith and for value
(d) That the time it was negotiated by him he had
no notice of any infirmity in the instrument of
deffect in the title of the person negotiating it
xxx xxx xxx
SEC. 56. WHAT CONSTITUTES NOTICE OF
DEFFECT. To constitute notice of an infirmity in
the instrument or defect in the title of the person
negotiating the same, the person to whom it is
negotiated must have had actual knowledge of the
infirmity or defect, or knowledge of such facts that
his action in taking the instrument amounts to bad
faith. (Emphasis supplied)
We subscribe to the view of Campos and Campos that a financing
company is not a holder in good faith as to the buyer, to wit:
in this case are subject to all defenses that the petitioners have against
the seller-assignor, Industrial Products Marketing. For Section 58 of
the Negotiable Instruments Law provides that "in the hands of any
holder other than a holder in due course, a negotiable instrument is
subject to the same defenses as if it were non-negotiable. ... "
Prescinding from the foregoing and setting aside other peripheral
issues, we find that both the trial and respondent appellate court erred
in holding the promissory note in question to be negotiable. Such a
ruling does not only violate the law and applicable jurisprudence, but
would result in unjust enrichment on the part of both the assigner-
assignor and respondent assignee at the expense of the petitioner-
corporation which rightfully rescinded an inequitable contract. We note,
however, that since the seller-assignor has not been impleaded herein,
there is no obstacle for the respondent to file a civil Suit and litigate its
claims against the seller- assignor in the rather unlikely possibility that
it so desires,
WHEREFORE, in view of the foregoing, the decision of the respondent
appellate court dated July 17, 1985, as well as its resolution dated
October 17, 1986, are hereby ANNULLED and SET ASIDE. The
complaint against the petitioner before the trial court is DISMISSED.

SO ORDERED.
In installment sales, the buyer usually issues a
note payable to the seller to cover the purchase
price. Many times, in pursuance of a previous Fernan, Paras, Padilla, Bidin and Cortes, JJ., concur.
arrangement with the seller, a finance company
pays the full price and the note is indorsed to it,
(iii) [G.R. No. 154127. December 8, 2003]
subrogating it to the right to collect the price from
the buyer, with interest. With the increasing
frequency of installment buying in this country, it is ROMEO C. GARCIA, petitioner, vs. DIONISIO V. LLAMAS,
most probable that the tendency of the courts in respondent.
the United States to protect the buyer against the
finance company will , the finance company will be
DECISION
subject to the defense of failure of consideration
and cannot recover the purchase price from the
buyer. As against the argument that such a rule PANGANIBAN, J.:
would seriously affect "a certain mode of
transacting business adopted throughout the
State," a court in one case stated: 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
It may be that our holding show either requirement convincingly; hence, the summary judgment
here will require some holding him liable as a joint and solidary debtor stands.
changes in business methods
and will impose a greater
burden on the finance The Case
companies. We think the
buyer-Mr. & Mrs. General Before us is a Petition for Review1[1] under Rule 45 of the Rules of
Public-should have some Court, seeking to nullify the November 26, 2001 Decision2[2] and the
protection somewhere along June 26, 2002 Resolution3[3] of the Court of Appeals (CA) in CA-GR
the line. We believe the CV No. 60521. The appellate court disposed as follows:
finance company is better
able to bear the risk of the
dealer's insolvency than the UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment
buyer and in a far better appealed from, insofar as it pertains to [Petitioner] Romeo Garcia,
position to protect his must be, as it hereby is, AFFIRMED, subject to the modification that
interests against the award for attorneys fees and cost of suit is DELETED. The portion
unscrupulous and insolvent of the judgment that pertains to x x x Eduardo de Jesus is SET ASIDE
dealers. . . . 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
If this opinion imposes great Jesus.4[4]
burdens on finance
companies it is a potent
argument in favor of a rule The challenged Resolution, on the other hand, denied petitioners
which win afford public Motion for Reconsideration.
protection to the general
buying public against The Antecedents
unscrupulous dealers in
personal property. . . . (Mutual
Finance Co. v. Martin, 63 So.
2d 649, 44 ALR 2d 1 [1953])
(Campos and Campos, Notes
and Selected Cases on
Negotiable Instruments Law,
Third Edition, p. 128).

In the case of Commercial Credit Corporation v. Orange Country

Machine Works (34 Cal. 2d 766) involving similar facts, it was held that
in a very real sense, the finance company was a moving force in the
transaction from its very inception and acted as a party to it. When a
finance company actively participates in a transaction of this type from
its inception, it cannot be regarded as a holder in due course of the
note given in the transaction.

In like manner, therefore, even assuming that the subject promissory

note is negotiable, the respondent, a financing company which actively
participated in the sale on installment of the subject two Allis Crawler
tractors, cannot be regarded as a holder in due course of said note. It
follows that the respondent's rights under the promissory note involved
The antecedents of the case are narrated by the CA as follows:
This case started out as a complaint for sum of money and damages
by x x x [Respondent] Dionisio Llamas against x x x [Petitioner] Romeo
Garcia and Eduardo de Jesus. Docketed as Civil Case No. Q97-32-
873, the complaint alleged that on 23 December 1996[,] [petitioner and
de Jesus] borrowed P400,000.00 from [respondent]; that, on the same
day, [they] executed a promissory note wherein they bound
themselves jointly and severally to pay the loan on or before 23
January 1997 with a 5% interest per month; that the loan has long
been overdue and, despite repeated demands, [petitioner and de
Jesus] have failed and refused to pay it; and that, by reason of the[ir]
unjustified refusal, [respondent] was compelled to engage the services
of counsel to whom he agreed to pay 25% of the sum to be recovered
from [petitioner and de Jesus], plus P2,000.00 for every appearance in
court. Annexed to the complaint were the promissory note above-
mentioned and a demand letter, dated 02 May 1997, by [respondent]
addressed to [petitioner and de Jesus].
Resisting the complaint, [Petitioner Garcia,] in his [Answer,] averred
that he assumed no liability under the promissory note because he
signed it merely as an accommodation party for x x x de Jesus; and,
alternatively, that he is relieved from any liability arising from the note
inasmuch as the loan had been paid by x x x de Jesus by means of a
check dated 17 April 1997; and that, in any event, the issuance of the
check and [respondents] acceptance thereof novated or superseded
the note.
[Respondent] tendered a reply to [Petitioner] Garcias answer,
thereunder asserting that the loan remained unpaid for the reason that
the check issued by x x x de Jesus bounced, and that [Petitioner]
Garcias answer was not even accompanied by a certificate of non-
forum shopping. Annexed to the reply were the face of the check and
the reverse side thereof.
For his part, x x x de Jesus asserted in his [A]nswer with
[C]ounterclaim that out of the supposed P400,000.00 loan, he received
only P360,000.00, the P40,000.00 having been advance interest
thereon for two months, that is, for January and February 1997; that[,]
in fact[,] he paid the sum of P120,000.00 by way of interests; that this
was made when [respondents] daughter, one Nits Llamas-Quijencio,
received from the Central Police District Command at Bicutan, Taguig,
Metro Manila (where x x x de Jesus worked), the sum of P40,000.00,
representing the peso equivalent of his accumulated leave credits,
another P40,000.00 as advance interest, and still another P40,000.00
as interest for the months of March and April 1997; that he had
difficulty in paying the loan and had asked [respondent] for an
extension of time; that [respondent] acted in bad faith in instituting the
case, [respondent] having agreed to accept the benefits he (de Jesus)
would receive for his retirement, but [respondent] nonetheless filed the
instant case while his retirement was being processed; and that, in
defense of his rights, he agreed to pay his counsel P20,000.00 [as]
attorneys fees, plus P1,000.00 for every court appearance.
During the pre-trial conference, x x x de Jesus and his lawyer did not
appear, nor did they file any pre-trial brief. Neither did [Petitioner]
Garcia file a pre-trial brief, and his counsel even manifested that he
would no [longer] present evidence. Given this development, the trial
court gave [respondent] permission to present his evidence ex parte
against x x x de Jesus; and, as regards [Petitioner] Garcia, the trial
court directed [respondent] to file a motion for judgment on the
pleadings, and for [Petitioner] Garcia to file his comment or opposition
thereto.
Instead, [respondent] filed a [M]otion to declare [Petitioner] Garcia in
default and to allow him to present his evidence ex parte. Meanwhile,
[Petitioner] Garcia filed a [M]anifestation submitting his defense to a
judgment on the pleadings. Subsequently, [respondent] filed a
[M]anifestation/[M]otion to submit the case for judgement on the
pleadings, withdrawing in the process his previous motion.
Thereunder, he asserted that [petitioners and de Jesus] solidary
liability under the promissory note cannot be any clearer, and that the
check issued by de Jesus did not discharge the loan since the check
bounced.5[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[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[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
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[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[14]
For novation to take place, the following requisites must concur:

1) There must be a previous valid obligation.

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 2) The parties concerned must agree to a new contract.
admitted in its Decision, which call for the presentation of evidence in a
full-blown trial.8[8]
3) The old contract must be extinguished.

Simply put, the issues are the following: 1) whether there was novation
of the obligation; 2) whether the defense that petitioner was only an
accommodation party had any basis; and 3) whether the judgment
against him -- be it a judgment on the pleadings or a summary
judgment -- was proper.
The Courts Ruling
The Petition has no merit.
First Issue:
Novation
Petitioner seeks to extricate himself from his obligation as joint and
solidary debtor by insisting that novation took place, either through the
substitution of De Jesus as sole debtor or the replacement of the
promissory note by the check. Alternatively, the former argues that the
original obligation was extinguished when the latter, who was his co-
obligor, paid the loan with the check.
The fallacy of the second (alternative) argument is all too apparent.
The check could not have extinguished the obligation, because it
bounced upon presentment. By law,9[9] the delivery of a check
produces the effect of payment only when it is encashed.
We now come to the main issue of whether novation took place.
4) There must be a valid new contract.15[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[16] The test of incompatibility is whether
the two obligations can stand together, each one with its own
independent existence.17[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 novation18[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

Novation is a mode of extinguishing an obligation by changing its
novated by the substitution of debtors. In order to change the person of
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[10] Article 1293 of the Civil Code defines novation as
follows:

Art. 1293. Novation which consists in substituting a new debtor in the

place of the original one, may be made even without the knowledge or
against the will of the latter, but not without the consent of the creditor.
Payment by the new debtor gives him rights mentioned in articles 1236
and 1237.

In general, there are two modes of substituting the person of the

debtor: (1) expromision and (2) delegacion. In expromision, the
initiative for the change does not come from -- and may even be made
without the knowledge of -- the debtor, since it consists of a third
persons assumption of the obligation. As such, it logically requires the
consent of the third person and the creditor. In delegacion, the debtor
offers, and the creditor accepts, a third person who consents to the
substitution and assumes the obligation; thus, the consent of these
three persons are necessary.11[11] Both modes of substitution by the
debtor require the consent of the creditor.12[12]
the debtor, the old one must be expressly released from the obligation,
and the third person or new debtor must assume the formers place in
the relation.19[19] Well-settled is the rule that novation is never
presumed.20[20] Consequently, that which arises from a purported
change in the person of the debtor must be clear and express.21[21] It
is thus incumbent on petitioner to show clearly and unequivocally that
novation has indeed taken place.
In the present case, petitioner has not shown that he was expressly
released from the obligation, that a third person was substituted in his
place, or that the joint and solidary obligation was cancelled and
substituted by the solitary undertaking of De Jesus. The CA aptly held:
x x x. Plaintiffs acceptance of the bum check did not result in
substitution by de Jesus either, the nature of the obligation being
solidary due to the fact that the promissory note expressly declared
that the liability of appellants thereunder is joint and [solidary.] Reason:
under the law, a creditor may demand payment or performance from
one of the solidary debtors or some or all of them simultaneously, and
payment made by one of them extinguishes the obligation. It therefore
follows that in case the creditor fails to collect from one of the solidary
debtors, he may still proceed against the other or others. x x x 22[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[23] Since novation implies a waiver of the right the
creditor had before the novation, such waiver must be express.24[24] It
cannot be supposed, without clear proof, that the present respondent
has done away with his right to exact fulfillment from either of the
solidary debtors.25[25]
More important, De Jesus was not a third person to the obligation.
From the beginning, he was a joint and solidary obligor of the
P400,000 loan; thus, he can be released from it only upon its
extinguishment. Respondents acceptance of his check did not change
the person of the debtor, because a joint and solidary obligor is
required to pay the entirety of the obligation.
It must be noted that in a solidary obligation, the creditor is entitled to
demand the satisfaction of the whole obligation from any or all of the
debtors.26[26] It is up to the former to determine against whom to
enforce collection.27[27] Having made himself jointly and severally
liable with De Jesus, petitioner is therefore liable28[28] for the entire
obligation.29[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[30]
By its terms, the note was made payable to a specific person rather
than to bearer or to order31[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[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[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[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[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[36] A summary
judgment may be applied for by either a claimant or a defending
party.37[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[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[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
Answer40[40] apparently raised several issues -- that he signed the
promissory note allegedly as a mere accommodation party, and that
the obligation was extinguished by either payment or novation.
However, these are not factual issues requiring trial. We quote with
approval the CAs observations:
Although Garcias [A]nswer tendered some issues, by way of
affirmative defenses, the documents submitted by [respondent]
nevertheless clearly showed that the issues so tendered were not valid
issues. Firstly, Garcias claim that he was merely an accommodation
party is belied by the promissory note that he signed. Nothing in the
note indicates that he was only an accommodation party as he claimed
to be. Quite the contrary, the promissory note bears the statement: It is
understood that our liability under this loan is jointly and severally [sic].
Secondly, his claim that his co-defendant de Jesus already paid the
loan by means of a check collapses in view of the dishonor thereof as
shown at the dorsal side of said check.41[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[42] he stated that judgment
on the pleadings may now be rendered without further evidence,
considering the allegations and admissions of the parties.43[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), Ynares-Santiago, Carpio, and Azcuna,
JJ., concur.
(iv)G.R. No. 166018 June 4, 2014
THE HONGKONG AND SHANGHAI BANKING CORPORATION
LIMITED-PHILIPPINE BRANCHES, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent;
x-----------------------x
G.R. No. 167728
THE HONGKONG AND SHANGHAI BANKING CORPORATION
LIMITED-PHILIPPINE BRANCHES, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
These petitions for review on certiorari1 assail the Decision2 and
Resolution dated July 8, 2004 and October 25, 2004, respectively, of
the Court of Appeals in CA-G.R. SP No. 77580, as well as the
Decision3 and Resolution dated September 2, 2004 and April 4, 2005,
respectively, of the Court of Appeals in CA-G.R. SP No. 70814. The
respective Decisions in the said cases similarly reversed and set aside
the decisions of the Court of Tax Appeals (CTA) in CTA Case Nos.
59514 and 6009,5 respectively, and dismissed the petitions of
petitioner Hongkong and Shanghai Banking Corporation Limited-
Philippine Branches (HSBC). The corresponding Resolutions, on the
other hand, denied the respective motions for reconsideration of the
said Decisions.
HSBC performs, among others, custodial services on behalf of its
investor-clients, corporate and individual, resident or non-resident of
the Philippines, with respect to their passive investments in the
Philippines, particularly investments in shares of stocks in domestic
corporations. As a custodian bank, HSBC serves as the
collection/payment agent with respect to dividends and other income
derived from its investor-clients passive investments.6
HSBCs investor-clients maintain Philippine peso and/or foreign
currency accounts, which are managed by HSBC through instructions
given through electronic messages. The said instructions are standard
forms known in the banking industry as SWIFT, or "Society for
Worldwide Interbank Financial Telecommunication." In purchasing
shares of stock and other investment in securities, the investor-clients
would send electronic messages from abroad instructing HSBC to
debit their local or foreign currency accounts and to pay the purchase
price therefor upon receipt of the securities.7
Pursuant to the electronic messages of its investor-clients, HSBC
purchased and paid Documentary Stamp Tax (DST) from September
 to December 1997 and also from January to December 1998
amounting to 19,572,992.10 and 32,904,437.30, respectively,
broken down as follows:
A. September to December 1997
both cases, the payment is against the delivery of investments
purchased. The purchase of investments and the payment comprise
one single transaction. DST has already been paid under Section 176
for the investment purchase.
B. Other transactions:

mber 1997 P 6,981,447.90

An overseas client sends an instruction to its bank in the Philippines to
er 1997 6,209,316.60 either:

mber 1997 3,978,510.30

(i) debit its local or foreign currency account and to
mber 1997 2,403,717.30 pay a named recipient, who may be another bank,
a corporate entity or an individual in the
19,572,992.10 Philippines; or

(ii) receive funds from another bank in the

B. January to December 1998
Philippines for deposit to its account and to pay a
named recipient, who may be another bank, a
corporate entity or an individual in the Philippines."
ary 1998 P 3,328,305.60

ary 1998 4,566,924.90 The above instruction is in the form of an electronic message (i.e.,
SWIFT MT 100 or MT 202) or tested cable, and may not refer to any
h 1998 5,371,797.30 particular transaction.
1998 4,197,235.50
The opening and maintenance by a non-resident of local or foreign
1998 2,519,587.20 currency accounts with a bank in the Philippines is permitted by the
Bangko Sentral ng Pilipinas, subject to certain conditions.
1998 2,301,333.00

998 1,586,404.50 In reply, please be informed that pursuant to Section 181 of the 1997
Tax Code, which provides that
st 1998 1,787,359.50

mber 1998 1,231,828.20 SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and
Others. Upon any acceptance or payment of any bill of exchange or
er 1998 1,303,184.40 order for the payment of money purporting to be drawn in a foreign
country but payable in the Philippines, there shall be collected a
mber 1998 2,026,379.70
documentary stamp tax of Thirty centavos (P0.30) on each Two
mber 1998 2,684,097.50 hundred pesos (200), or fractional part thereof, of the face value of
any such bill of exchange, or order, or Philippine equivalent of such
32,904,437.30 value, if expressed in foreign currency. (Underscoring supplied.)

a documentary stamp tax shall be imposed on any bill of exchange or

On August 23, 1999, the Bureau of Internal Revenue (BIR), thru its order for payment purporting to be drawn in a foreign country but
then Commissioner, Beethoven Rualo, issued BIR Ruling No. 132-99 payable in the Philippines.
to the effect that instructions or advises from abroad on the
management of funds located in the Philippines which do not involve
transfer of funds from abroad are not subject to DST. BIR Ruling No. Under the foregoing provision, the documentary stamp tax shall be
132-99 reads: levied on the instrument, i.e., a bill of exchange or order for the
payment of money, which purports to draw money from a foreign
country but payable in the Philippines. In the instant case, however,
Date: August 23, 1999 while the payor is residing outside the Philippines, he maintains a local
and foreign currency account in the Philippines from where he will
FERRY TOLEDO VICTORINO GONZAGA draw the money intended to pay a named recipient. The instruction or
& ASSOCIATES order to pay shall be made through an electronic message, i.e., SWIFT
G/F AFC Building, Alfaro St. MT 100 or MT 202 and/or MT 521. Consequently, there is no
Salcedo Village, Makati negotiable instrument to be made, signed or issued by the payee. In
Metro Manila the meantime, such electronic instructions by the non-resident payor
cannot be considered as a transaction per se considering that the
same do not involve any transfer of funds from abroad or from the
Attn: Atty. Tomas C. Toledo place where the instruction originates. Insofar as the local bank is
Tax Counsel concerned, such instruction could be considered only as a
memorandum and shall be entered as such in its books of accounts.
Gentlemen: The actual debiting of the payors account, local or foreign currency
account in the Philippines, is the actual transaction that should be
properly entered as such.
This refers to your letter dated July 26, 1999 requesting on behalf of
your clients, the CITIBANK & STANDARD CHARTERED BANK, for a
ruling as to whether or not the electronic instructions involving the Under the Documentary Stamp Tax Law, the mere withdrawal of
following transactions of residents and non-residents of the Philippines money from a bank deposit, local or foreign currency account, is not
with respect to their local or foreign currency accounts are subject to subject to DST, unless the account so maintained is a current or
documentary stamp tax under Section 181 of the 1997 Tax Code, viz: checking account, in which case, the issuance of the check or bank
drafts is subject to the documentary stamp tax imposed under Section
179 of the 1997 Tax Code. In the instant case, and subject to the
A. Investment purchase transactions: physical impossibility on the part of the payor to be present and
prepare and sign an instrument purporting to pay a certain obligation,
An overseas client sends instruction to its bank in the Philippines to the withdrawal and payment shall be made in cash. In this light, the
either: withdrawal shall not be subject to documentary stamp tax. The case is
parallel to an automatic bank transfer of local funds from a savings
account to a checking account maintained by a depositor in one bank.
(i) debit its local or foreign currency account and to
pay a named recipient in the Philippines; or
Likewise, the receipt of funds from another bank in the Philippines for
deposit to the payees account and thereafter upon instruction of the
(ii) receive funds from another bank in the non-resident depositor-payor, through an electronic message, the
Philippines for deposit into its account and to pay depository bank to debit his account and pay a named recipient shall
a named recipient in the Philippines." not be subject to documentary stamp tax.

The foregoing transactions are carried out under instruction from It should be noted that the receipt of funds from another local bank in
abroad and [do] not involve actual fund transfer since the funds are the Philippines by a local depository bank for the account of its client
already in the Philippine accounts. The instructions are in the form of residing abroad is part of its regular banking transaction which is not
electronic messages (i.e., SWIFT MT100 or MT 202 and/or MT 521). In subject to documentary stamp tax. Neither does the receipt of funds
makes the recipient subject to the documentary stamp tax. The funds
are deemed to be part of the deposits of the client once credited to his
account, and which, thereafter can be disposed in the manner he
wants. The payor-clients further instruction to debit his account and
pay a named recipient in the Philippines does not involve transfer of
funds from abroad. Likewise, as stated earlier, such debit of local or
foreign currency account in the Philippines is not subject to the
documentary stamp tax under the aforementioned Section 181 of the
Tax Code.
In the light of the foregoing, this Office hereby holds that the instruction
made through an electronic message by non-resident payor-client to
debit his local or foreign currency account maintained in the Philippines
and to pay a certain named recipient also residing in the Philippines is
not the transaction contemplated under Section 181 of the 1997 Tax
Code. Such being the case, such electronic instruction purporting to
draw funds from a local account intended to be paid to a named
recipient in the Philippines is not subject to documentary stamp tax
imposed under the foregoing Section.
This ruling is being issued on the basis of the foregoing facts as
represented. However, if upon investigation it shall be disclosed that
the facts are different, this ruling shall be considered null and void.
Very truly yours,
(Sgd.) BEETHOVEN L. RUALO
Commissioner of Internal Revenue8
With the above BIR Ruling as its basis, HSBC filed on October 8, 1999
an administrative claim for the refund of the amount of 19,572,992.10
allegedly representing erroneously paid DST to the BIR for the period
covering September to December 1997.
Subsequently, on January 31, 2000, HSBC filed another administrative
claim for the refund of the amount of 32,904,437.30 allegedly
representing erroneously paid DST to the BIR for the period covering
January to December 1998.
As its claims for refund were not acted upon by the BIR, HSBC
subsequently brought the matter to the CTA as CTA Case Nos. 5951
and 6009, respectively, in order to suspend the running of the two-year
prescriptive period.
The CTA Decisions dated May 2, 2002 in CTA Case No. 6009 and
dated December 18, 2002 in CTA Case No. 5951 favored HSBC.
Respondent Commissioner of Internal Revenue was ordered to refund
or issue a tax credit certificate in favor of HSBC in the reduced
amounts of 30,360,570.75 in CTA Case No. 6009 and
16,436,395.83 in CTA Case No. 5951, representing erroneously paid
DST that have been sufficiently substantiated with documentary
evidence. The CTA ruled that HSBC is entitled to a tax refund or tax
credit because Sections 180 and 181 of the 1997 Tax Code do not
apply to electronic message instructions transmitted by HSBCs non-
resident investor-clients:
The instruction made through an electronic message by a nonresident
investor-client, which is to debit his local or foreign currency account in
the Philippines and pay a certain named recipient also residing in the
Philippines is not the transaction contemplated in Section 181 of the
Code. In this case, the withdrawal and payment shall be made in cash.
It is parallel to an automatic bank transfer of local funds from a savings
account to a checking account maintained by a depositor in one bank.
The act of debiting the account is not subject to the documentary
stamp tax under Section 181. Neither is the transaction subject to the
documentary stamp tax under Section 180 of the same Code. These
electronic message instructions cannot be considered negotiable
instruments as they lack the feature of negotiability, which, is the ability
to be transferred (Words and Phrases).
These instructions are considered as mere memoranda and entered as
such in the books of account of the local bank, and the actual debiting
of the payors local or foreign currency account in the Philippines is the
actual transaction that should be properly entered as such.9
The respective dispositive portions of the Decisions dated May 2, 2002
in CTA Case No. 6009 and dated December 18, 2002 in CTA Case
No. 5951 read:
II. CTA Case No. 6009
WHEREFORE, in the light of all the foregoing, the instant Petition for
Review is PARTIALLY GRANTED. Respondent is hereby ORDERED
to REFUND or ISSUE A TAX CREDIT CERTIFICATE in favor of
Petitioner the amount of 30,360,570.75 representing erroneous
payment of documentary stamp tax for the taxable year 1998.10
II. CTA Case No. 5951
WHEREFORE, in the light of the foregoing, the instant petition is
hereby partially granted. Accordingly, respondent is hereby ORDERED
to REFUND, or in the alternative, ISSUE A TAX CREDIT
CERTIFICATE in favor of the petitioner in the reduced amount of
16,436,395.83 representing erroneously paid documentary stamp tax
for the months of September 1997 to December 1997.11
However, the Court of Appeals reversed both decisions of the CTA and
ruled that the electronic messages of HSBCs investor-clients are
subject to DST. The Court of Appeals explained:
At bar, [HSBC] performs custodial services in behalf of its investor-
clients as regards their passive investments in the Philippines mainly
involving shares of stocks in domestic corporations. These investor-
clients maintain Philippine peso and/or foreign currency accounts with
[HSBC]. Should they desire to purchase shares of stock and other
investments securities in the Philippines, the investor-clients send their
instructions and advises via electronic messages from abroad to
[HSBC] in the form of SWIFT MT 100, MT 202, or MT 521 directing the
latter to debit their local or foreign currency account and to pay the
purchase price upon receipt of the securities (CTA Decision, pp. 1-2;
Rollo, pp. 41-42). Pursuant to Section 181 of the NIRC, [HSBC] was
thus required to pay [DST] based on its acceptance of these electronic
messages which, as [HSBC] readily admits in its petition filed before
the [CTA], were essentially orders to pay the purchases of securities
made by its client-investors (Rollo, p. 60).
Appositely, the BIR correctly and legally assessed and collected the
[DST] from [HSBC] considering that the said tax was levied against the
acceptances and payments by [HSBC] of the subject electronic
messages/orders for payment. The issue of whether such electronic
messages may be equated as a written document and thus be subject
to tax is beside the point. As We have already stressed, Section 181 of
the law cited earlier imposes the [DST] not on the bill of exchange or
order for payment of money but on the acceptance or payment of the
said bill or order. The acceptance of a bill or order is the signification
by the drawee of its assent to the order of the drawer to pay a given
sum of money while payment implies not only the assent to the said
order of the drawer and a recognition of the drawers obligation to pay
such aforesaid sum, but also a compliance with such obligation
(Philippine National Bank vs. Court of Appeals, 25 SCRA 693 [1968];
Prudential Bank vs. Intermediate Appellate Court, 216 SCRA 257
[1992]). What is vital to the valid imposition of the [DST] under Section
181 is the existence of the requirement of acceptance or payment by
the drawee (in this case, [HSBC]) of the order for payment of money
from its investor-clients and that the said order was drawn from a
foreign country and payable in the Philippines. These requisites are
surely present here.
It would serve the parties well to understand the nature of the tax being
imposed in the case at bar. In Philippine Home Assurance Corporation
vs. Court of Appeals (301 SCRA 443 [1999]), the Supreme Court ruled
that [DST is] levied on the exercise by persons of certain privileges
conferred by law for the creation, revision, or termination of specific
legal relationships through the execution of specific instruments,
independently of the legal status of the transactions giving rise thereto.
In the same case, the High Court also declared citing Du Pont vs.
United States (300 U.S. 150, 153 [1936])
The tax is not upon the business transacted but is an excise upon the
privilege, opportunity, or facility offered at exchanges for the
transaction of the business. It is an excise upon the facilities used in
the transaction of the business separate and apart from the business
itself. x x x.
To reiterate, the subject [DST] was levied on the acceptance and
payment made by [HSBC] pursuant to the order made by its client-
investors as embodied in the cited electronic messages, through which
the herein parties privilege and opportunity to transact business
respectively as drawee and drawers was exercised, separate and
apart from the circumstances and conditions related to such
acceptance and subsequent payment of the sum of money authorized
by the concerned drawers. Stated another way, the [DST] was exacted
on [HSBCs] exercise of its privilege under its drawee-drawer
relationship with its client-investor through the execution of a specific
instrument which, in the case at bar, is the acceptance of the order for
payment of money. The acceptance of a bill or order for payment may
be done in writing by the drawee in the bill or order itself, or in a
separate instrument (Prudential Bank vs. Intermediate Appellate Court,
supra.)Here, [HSBC]s acceptance of the orders for the payment of
money was veritably done in writing in a separate instrument each
time it debited the local or foreign currency accounts of its client-
investors pursuant to the latters instructions and advises sent by
electronic messages to [HSBC]. The [DST] therefore must be paid
upon the execution of the specified instruments or facilities covered by
the tax in this case, the acceptance by [HSBC] of the order for
payment of money sent by the client-investors through electronic
messages. x x x.12
Hence, these petitions.
HSBC asserts that the Court of Appeals committed grave error when it
disregarded the factual and legal conclusions of the CTA. According to
HSBC, in the absence of abuse or improvident exercise of authority,
the CTAs ruling should not have been disturbed as the CTA is a highly
specialized court which performs judicial functions, particularly for the
review of tax cases. HSBC further argues that the Commissioner of
Internal Revenue had already settled the issue on the taxability of
electronic messages involved in these cases in BIR Ruling No. 132-99
and reiterated in BIR Ruling No. DA-280-2004.13
The Commissioner of Internal Revenue, on the other hand, claims that
Section 181 of the 1997 Tax Code imposes DST on the acceptance or
payment of a bill of exchange or order for the payment of money. The
DST under Section 18 of the 1997 Tax Code is levied on HSBCs
exercise of a privilege which is specifically taxed by law. BIR Ruling
No. 132-99 is inconsistent with prevailing law and long standing
administrative practice, respondent is not barred from questioning his
own revenue ruling. Tax refunds like tax exemptions are strictly
construed against the taxpayer.14
The Court finds for HSBC.
The Court agrees with the CTA that the DST under Section 181 of the
Tax Code is levied on the acceptance or payment of "a bill of exchange
purporting to be drawn in a foreign country but payable in the
Philippines" and that "a bill of exchange is an unconditional order in
writing addressed by one person to another, signed by the person
giving it, requiring the person to whom it is addressed to pay on
demand or at a fixed or determinable future time a sum certain in
money to order or to bearer." A bill of exchange is one of two general
forms of negotiable instruments under the Negotiable Instruments
Law.15
The Court further agrees with the CTA that the electronic messages of
HSBCs investor-clients containing instructions to debit their respective
local or foreign currency accounts in the Philippines and pay a certain
named recipient also residing in the Philippines is not the transaction
contemplated under Section 181 of the Tax Code as such instructions
are "parallel to an automatic bank transfer of local funds from a savings
account to a checking account maintained by a depositor in one bank."
The Court favorably adopts the finding of the CTA that the electronic
messages "cannot be considered negotiable instruments as they lack
the feature of negotiability, which, is the ability to be transferred" and
that the said electronic messages are "mere memoranda" of the
transaction consisting of the "actual debiting of the [investor-client-
payors] local or foreign currency account in the Philippines" and
"entered as such in the books of account of the local bank," HSBC.16
More fundamentally, the instructions given through electronic
messages that are subjected to DST in these cases are not negotiable
instruments as they do not comply with the requisites of negotiability
under Section 1 of the Negotiable Instruments Law, which provides:
Sec. 1. Form of negotiable instruments. An instrument to be
negotiable must conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a
sum certain in money;
(c) Must be payable on demand, or at a fixed or
determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must
be named or otherwise indicated therein with reasonable
certainty.
The electronic messages are not signed by the investor-clients as
supposed drawers of a bill of exchange; they do not contain an
unconditional order to pay a sum certain in money as the payment is
supposed to come from a specific fund or account of the investor-
clients; and, they are not payable to order or bearer but to a specifically
designated third party. Thus, the electronic messages are not bills of
exchange. As there was no bill of exchange or order for the payment
drawn abroad and made payable here in the Philippines, there could
have been no acceptance or payment that will trigger the imposition of
the DST under Section 181 of the Tax Code.
Section 181 of the 1997 Tax Code, which governs HSBCs claim for
tax refund for taxable year 1998 subject of G.R. No. 167728, provides:
SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and
Others. Upon any acceptance or payment of any bill of exchange or
order for the payment of money purporting to be drawn in a foreign
country but payable in the Philippines, there shall be collected a
documentary stamp tax of Thirty centavos (P0.30) on each Two
hundred pesos (200), or fractional part thereof, of the face value of
any such bill of exchange, or order, or the Philippine equivalent of such
value, if expressed in foreign currency. (Emphasis supplied.)
Section 230 of the 1977 Tax Code, as amended, which governs
HSBCs claim for tax refund for DST paid during the period September
to December 1997 and subject of G.R. No. 166018, is worded exactly
the same as its counterpart provision in the 1997 Tax Code quoted
above.
The origin of the above provision is Section 117 of the Tax Code of
1904,17 which provided: SECTION 117. The acceptor or acceptors of
any bill of exchange or order for the payment of any sum of money
drawn or purporting to be drawn in any foreign country but payable in
the Philippine Islands, shall, before paying or accepting the same,
place thereupon a stamp in payment of the tax upon such document in
the same manner as is required in this Act for the stamping of inland
bills of exchange or promissory notes, and no bill of exchange shall be
paid nor negotiated until such stamp shall have been affixed thereto.18
(Emphasis supplied.)
It then became Section 30(h) of the 1914 Tax Code19:
SEC. 30. Stamp tax upon documents and papers. Upon documents,
instruments, and papers, and upon acceptances, assignments, sales,
and transfers of the obligation, right, or property incident thereto
documentary taxes for and in respect of the transaction so had or
accomplished shall be paid as hereinafter prescribed, by the persons
making, signing, issuing, accepting, or transferring the same, and at
the time such act is done or transaction had:
xxxx
(h) Upon any acceptance or payment upon acceptance of any bill of
exchange or order for the payment of money purporting to be drawn in
a foreign country but payable in the Philippine Islands, on each two
hundred pesos, or fractional part thereof, of the face value of any such
bill of exchange or order, or the Philippine equivalent of such value, if
expressed in foreign currency, two centavos[.] (Emphasis supplied.)
It was implemented by Section 46 in relation to Section 39 of Revenue
Regulations No. 26,20 as amended:
SEC. 39. A Bill of Exchange is one that "denotes checks, drafts, and all
other kinds of orders for the payment of money, payable at sight or on
demand, or after a specific period after sight or from a stated date."
SEC. 46. Bill of Exchange, etc. When any bill of exchange or order
for the payment of money drawn in a foreign country but payable in this
country whether at sight or on demand or after a specified period after
sight or from a stated date, is presented for acceptance or payment,
there must be affixed upon acceptance or payment of documentary
stamp equal to P0.02 for each 200 or fractional part thereof.
(Emphasis supplied.)
It took its present form in Section 218 of the Tax Code of 1939,21
which provided:
SEC. 218. Stamp Tax Upon Acceptance of Bills of Exchange and
Others. Upon any acceptance or payment of any bill of exchange or
order for the payment of money purporting to be drawn in a foreign
country but payable in the Philippines, there shall be collected a
documentary stamp tax of four centavos on each two hundred pesos,
or fractional part thereof, of the face value of any such bill of exchange
or order, or the Philippine equivalent of such value, if expressed in
foreign currency. (Emphasis supplied.)
It then became Section 230 of the 1977 Tax Code,22 as amended by
Presidential Decree Nos. 1457 and 1959,which, as stated earlier, was
worded exactly as Section 181 of the current Tax Code:
SEC. 230. Stamp tax upon acceptance of bills of exchange and others.
Upon any acceptance or payment of any bill of exchange or order for
the payment of money purporting to be drawn in a foreign country but
payable in the Philippines, there shall be collected a documentary
stamp tax of thirty centavos on each two hundred pesos, or fractional
part thereof, of the face value of any such bill of exchange, or order, or
the Philippine equivalent of such value, if expressed in foreign
currency. (Emphasis supplied.)
The pertinent provision of the present Tax Code has therefore stock or investment in securities do not properly qualify as either
remained substantially the same for the past one hundred presentment for acceptance or presentment for payment. There being
years.1wphi1 The identical text and common history of Section 230 of neither presentment for acceptance nor presentment for payment, then
the 1977 Tax Code, as amended, and the 1997 Tax Code, as there was no acceptance or payment that could have been subjected
amended, show that the law imposes DST on either (a) the acceptance to DST to speak of.
or (b) the payment of a foreign bill of exchange or order for the
payment of money that was drawn abroad but payable in the
Indeed, there had been no acceptance of a bill of exchange or order
Philippines.
for the payment of money on the part of HSBC. To reiterate, there was
no bill of exchange or order for the payment drawn abroad and made
DST is an excise tax on the exercise of a right or privilege to transfer payable here in the Philippines. Thus, there was no acceptance as the
obligations, rights or properties incident thereto.23 Under Section 173 electronic messages did not constitute the written and signed
of the 1997 Tax Code, the persons primarily liable for the payment of manifestation of HSBC to a drawer's order to pay money. As HSBC
the DST are those (1) making, (2) signing, (3) issuing, (4) accepting, or could not have been an acceptor, then it could not have made any
(5) transferring the taxable documents, instruments or papers.24 payment of a bill of exchange or order for the payment of money drawn
abroad but payable here in the Philippines. In other words, HSBC
could not have been held liable for DST under Section 230 of the 1977
In general, DST is levied on the exercise by persons of certain
Tax Code, as amended, and Section 181 of the 1997 Tax Code as it is
privileges conferred by law for the creation, revision, or termination of
not "a person making, signing, issuing, accepting, or, transferring" the
specific legal relationships through the execution of specific
taxable instruments under the said provision. Thus, HSBC erroneously
instruments. Examples of such privileges, the exercise of which, as
paid DST on the said electronic messages for which it is entitled to a
effected through the issuance of particular documents, are subject to
tax refund.
the payment of DST are leases of lands, mortgages, pledges and
trusts, and conveyances of real property.25
WHEREFORE, the petitions are hereby GRANTED and the Decisions
dated May 2, 2002 in CTA Case No. 6009 and dated December 18,
As stated above, Section 230 of the 1977 Tax Code, as amended, now
2002 in CT A Case No. 5951 of the Court of Tax Appeals are
Section 181 of the 1997 Tax Code, levies DST on either (a) the
REINSTATED.
acceptance or (b) the payment of a foreign bill of exchange or order for
the payment of money that was drawn abroad but payable in the
Philippines. In other words, it levies DST as an excise tax on the SO ORDERED.
privilege of the drawee to accept or pay a bill of exchange or order for
the payment of money, which has been drawn abroad but payable in
TERESITA J. LEONARDO-DE CASTRO
the Philippines, and on the corresponding privilege of the drawer to
Associate Justice
have acceptance of or payment for the bill of exchange or order for the
payment of money which it has drawn abroad but payable in the
Philippines. WE CONCUR:

Acceptance applies only to bills of exchange.26 Acceptance of a bill of MARIA LOURDES P. A. SERENO
exchange has a very definite meaning in law.27 In particular, Section Chief Justice
132 of the Negotiable Instruments Law provides: Chairperson

Sec. 132. Acceptance; how made, by and so forth. The acceptance LUCAS P. BERSAMIN MARTIN S. VILLARAMA, JR.
of a bill [of exchange28] is the signification by the drawee of his assent Associate Justice Associate Justice
to the order of the drawer. The acceptance must be in writing and
signed by the drawee. It must not express that the drawee will perform
his promise by any other means than the payment of money. BIENVENIDO L. REYES
Associate Justice
Under the law, therefore, what is accepted is a bill of exchange, and
the acceptance of a bill of exchange is both the manifestation of the CERTIFICATION
drawees consent to the drawers order to pay money and the
expression of the drawees promise to pay. It is "the act by which the
drawee manifests his consent to comply with the request contained in Pursuant to Section 13, Article VIII of the Constitution, I certify that the
the bill of exchange directed to him and it contemplates an conclusions in the above Decision had been reached in consultation
engagement or promise to pay."29 Once the drawee accepts, he before the case was assigned to the writer of the opinion of the Court's
becomes an acceptor.30 As acceptor, he engages to pay the bill of Division.
exchange according to the tenor of his acceptance.31
MARIA LOURDES P. A. SERENO
Acceptance is made upon presentment of the bill of exchange, or Chief Justice
within 24 hours after such presentment.32 Presentment for acceptance
is the production or exhibition of the bill of exchange to the drawee for
the purpose of obtaining his acceptance.33

Presentment for acceptance is necessary only in the instances where

the law requires it.34 In the instances where presentment for
acceptance is not necessary, the holder of the bill of exchange can
proceed directly to presentment for payment.

Presentment for payment is the presentation of the instrument to the

person primarily liable for the purpose of demanding and obtaining
payment thereof.35

Thus, whether it be presentment for acceptance or presentment for

payment, the negotiable instrument has to be produced and shown to
the drawee for acceptance or to the acceptor for payment.

Revenue Regulations No. 26 recognizes that the acceptance or

payment (of bills of exchange or orders for the payment of money that
have been drawn abroad but payable in the Philippines) that is
subjected to DST under Section 181 of the 1997 Tax Code is done
after presentment for acceptance or presentment for payment,
respectively. In other words, the acceptance or payment of the subject
bill of exchange or order for the payment of money is done when there
is presentment either for acceptance or for payment of the bill of
exchange or order for the payment of money.

Applying the above concepts to the matter subjected to DST in these

cases, the electronic messages received by HSBC from its investor-
clients abroad instructing the former to debit the latter's local and
foreign currency accounts and to pay the purchase price of shares of