G.R. No.

L-45710 October 3, 1985

CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T. CASTRO, JR. OF THE DEPARTMENT OF
COMMERCIAL AND SAVINGS BANK, in his capacity as statutory receiver of Island Savings Bank, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and SULPICIO M. TOLENTINO, respondents.

I.B. Regalado, Jr., Fabian S. Lombos and Marino E. Eslao for petitioners.

Antonio R. Tupaz for private respondent.

MAKASIAR, CJ.:

This is a petition for review on certiorari to set aside as null and void the decision of the Court of Appeals, in C.A.-G.R. No. 52253-
R dated February 11, 1977, modifying the decision dated February 15, 1972 of the Court of First Instance of Agusan, which
dismissed the petition of respondent Sulpicio M. Tolentino for injunction, specific performance or rescission, and damages with
preliminary injunction.

On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal department, approved the loan application
for P80,000.00 of Sulpicio M. Tolentino, who, as a security for the loan, executed on the same day a real estate mortgage over
his 100-hectare land located in Cubo, Las Nieves, Agusan, and covered by TCT No. T-305, and which mortgage was annotated
on the said title the next day. The approved loan application called for a lump sum P80,000.00 loan, repayable in semi-annual
installments for a period of 3 years, with 12% annual interest. It was required that Sulpicio M. Tolentino shall use the loan proceeds
solely as an additional capital to develop his other property into a subdivision.

On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made by the Bank; and Sulpicio M. Tolentino
and his wife Edita Tolentino signed a promissory note for P17,000.00 at 12% annual interest, payable within 3 years from the date
of execution of the contract at semi-annual installments of P3,459.00 (p. 64, rec.). An advance interest for the P80,000.00 loan
covering a 6-month period amounting to P4,800.00 was deducted from the partial release of P17,000.00. But this pre-deducted
interest was refunded to Sulpicio M. Tolentino on July 23, 1965, after being informed by the Bank that there was no fund yet
available for the release of the P63,000.00 balance (p. 47, rec.). The Bank, thru its vice-president and treasurer, promised
repeatedly the release of the P63,000.00 balance (p. 113, rec.).

On August 13, 1965, the Monetary Board of the Central Bank, after finding Island Savings Bank was suffering liquidity problems,
issued Resolution No. 1049, which provides:

In view of the chronic reserve deficiencies of the Island Savings Bank against its deposit liabilities, the Board, by
unanimous vote, decided as follows:

1) To prohibit the bank from making new loans and investments [except investments in government securities]
excluding extensions or renewals of already approved loans, provided that such extensions or renewals shall be
subject to review by the Superintendent of Banks, who may impose such limitations as may be necessary to
insure correction of the bank's deficiency as soon as possible;

xxx xxx xxx

(p. 46, rec.).

On June 14, 1968, the Monetary Board, after finding thatIsland Savings Bank failed to put up the required capital to restore its
solvency, issued Resolution No. 967 which prohibited Island Savings Bank from doing business in the Philippines and instructed
the Acting Superintendent of Banks to take charge of the assets of Island Savings Bank (pp. 48-49, rec).

On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00 covered by the promissory note, filed an
application for the extra-judicial foreclosure of the real estate mortgage covering the 100-hectare land of Sulpicio M. Tolentino;
and the sheriff scheduled the auction for January 22, 1969.

On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First Instance of Agusan for injunction, specific
performance or rescission and damages with preliminary injunction, alleging that since Island Savings Bank failed to deliver the
P63,000.00 balance of the P80,000.00 loan, he is entitled to specific performance by ordering Island Savings Bank to deliver the
P63,000.00 with interest of 12% per annum from April 28, 1965, and if said balance cannot be delivered, to rescind the real estate
mortgage (pp. 32-43, rec.).

On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond, issued a temporary restraining order enjoining the
Island Savings Bank from continuing with the foreclosure of the mortgage (pp. 86-87, rec.).

On January 29, 1969, the trial court admitted the answer in intervention praying for the dismissal of the petition of Sulpicio M.
Tolentino and the setting aside of the restraining order, filed by the Central Bank and by the Acting Superintendent of Banks (pp.
65-76, rec.).

On February 15, 1972, the trial court, after trial on the merits rendered its decision, finding unmeritorious the petition of Sulpicio
M. Tolentino, ordering him to pay Island Savings Bank the amount of PI 7 000.00 plus legal interest and legal charges due thereon,
and lifting the restraining order so that the sheriff may proceed with the foreclosure (pp. 135-136. rec.
On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino, modified the Court of First Instance decision by
affirming the dismissal of Sulpicio M. Tolentino's petition for specific performance, but it ruled that Island Savings Bank can neither
foreclose the real estate mortgage nor collect the P17,000.00 loan pp. 30-:31. rec.).

Hence, this instant petition by the central Bank.

The issues are:

1. Can the action of Sulpicio M. Tolentino for specific performance prosper?

2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by the promissory note?

3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his real estate mortgage be foreclosed
to satisfy said amount?

When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on April 28, 1965, they undertook
reciprocal obligations. In reciprocal obligations, the obligation or promise of each party is the consideration for that of the other
(Penaco vs. Ruaya, 110 SCRA 46 [1981]; Vda. de Quirino vs, Pelarca 29 SCRA 1 [1969]); and when one party has performed or
is ready and willing to perform his part of the contract, the other party who has not performed or is not ready and willing to perform
incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio M. Tolentino to pay was the consideration for the obligation
of Island Savings Bank to furnish the P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate mortgage on April 28,
1965, he signified his willingness to pay the P80,000.00 loan. From such date, the obligation of Island Savings Bank to furnish the
P80,000.00 loan accrued. Thus, the Bank's delay in furnishing the entire loan started on April 28, 1965, and lasted for a period of
3 years or when the Monetary Board of the Central Bank issued Resolution No. 967 on June 14, 1968, which prohibited Island
Savings Bank from doing further business. Such prohibition made it legally impossible for Island Savings Bank to furnish the
P63,000.00 balance of the P80,000.00 loan. The power of the Monetary Board to take over insolvent banks for the protection of
the public is recognized by Section 29 of R.A. No. 265, which took effect on June 15, 1948, the validity of which is not in question.

The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt the default of Island Savings Bank in complying with
its obligation of releasing the P63,000.00 balance because said resolution merely prohibited the Bank from making new loans and
investments, and nowhere did it prohibit island Savings Bank from releasing the balance of loan agreements previously contracted.
Besides, the mere pecuniary inability to fulfill an engagement does not discharge the obligation of the contract, nor does it
constitute any defense to a decree of specific performance (Gutierrez Repide vs. Afzelius and Afzelius, 39 Phil. 190 [1918]). And,
the mere fact of insolvency of a debtor is never an excuse for the non-fulfillment of an obligation but 'instead it is taken as a breach
of the contract by him (vol. 17A, 1974 ed., CJS p. 650)

The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-deducted interest amounting to P4,800.00 for
the supposed P80,000.00 loan covering a 6-month period cannot be taken as a waiver of his right to collect the P63,000.00
balance. The act of Island Savings Bank, in asking the advance interest for 6 months on the supposed P80,000.00 loan, was
improper considering that only P17,000.00 out of the P80,000.00 loan was released. A person cannot be legally charged interest
for a non-existing debt. Thus, the receipt by Sulpicio M. 'Tolentino of the pre-deducted interest was an exercise of his right to it,
which right exist independently of his right to demand the completion of the P80,000.00 loan. The exercise of one right does not
affect, much less neutralize, the exercise of the other.

The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral cannot exempt it from complying with its
reciprocal obligation to furnish the entire P80,000.00 loan. 'This Court previously ruled that bank officials and employees are
expected to exercise caution and prudence in the discharge of their functions (Rural Bank of Caloocan, Inc. vs. C.A., 104 SCRA
151 [1981]). It is the obligation of the bank's officials and employees that before they approve the loan application of their
customers, they must investigate the existence and evaluation of the properties being offered as a loan security. The recent rush
of events where collaterals for bank loans turn out to be non-existent or grossly over-valued underscore the importance of this
responsibility. The mere reliance by bank officials and employees on their customer's representation regarding the loan collateral
being offered as loan security is a patent non-performance of this responsibility. If ever bank officials and employees totally reIy
on the representation of their customers as to the valuation of the loan collateral, the bank shall bear the risk in case the collateral
turn out to be over-valued. The representation made by the customer is immaterial to the bank's responsibility to conduct its own
investigation. Furthermore, the lower court, on objections of' Sulpicio M. Tolentino, had enjoined petitioners from presenting proof
on the alleged over-valuation because of their failure to raise the same in their pleadings (pp. 198-199, t.s.n. Sept. 15. 1971). The
lower court's action is sanctioned by the Rules of Court, Section 2, Rule 9, which states that "defenses and objections not pleaded
either in a motion to dismiss or in the answer are deemed waived." Petitioners, thus, cannot raise the same issue before the
Supreme Court.

Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their loan agreement, Sulpicio M. Tolentino,
under Article 1191 of the Civil Code, may choose between specific performance or rescission with damages in either case. But
since Island Savings Bank is now prohibited from doing further business by Monetary Board Resolution No. 967, WE cannot grant
specific performance in favor of Sulpicio M, Tolentino.

Rescission is the only alternative remedy left. WE rule, however, that rescission is only for the P63,000.00 balance of the
P80,000.00 loan, because the bank is in default only insofar as such amount is concerned, as there is no doubt that the bank
failed to give the P63,000.00. As far as the partial release of P17,000.00, which Sulpicio M. Tolentino accepted and executed a
promissory note to cover it, the bank was deemed to have complied with its reciprocal obligation to furnish a P17,000.00 loan. The
promissory note gave rise to Sulpicio M. Tolentino's reciprocal obligation to pay the P17,000.00 loan when it falls due. His failure
to pay the overdue amortizations under the promissory note made him a party in default, hence not entitled to rescission (Article
1191 of the Civil Code). If there is a right to rescind the promissory note, it shall belong to the aggrieved party, that is, Island
Savings Bank. If Tolentino had not signed a promissory note setting the date for payment of P17,000.00 within 3 years, he would
be entitled to ask for rescission of the entire loan because he cannot possibly be in default as there was no date for him to perform
his reciprocal obligation to pay.
Since both parties were in default in the performance of their respective reciprocal obligations, that is, Island Savings Bank failed
to comply with its obligation to furnish the entire loan and Sulpicio M. Tolentino failed to comply with his obligation to pay his
P17,000.00 debt within 3 years as stipulated, they are both liable for damages.

Article 1192 of the Civil Code provides that in case both parties have committed a breach of their reciprocal obligations, the liability
of the first infractor shall be equitably tempered by the courts. WE rule that the liability of Island Savings Bank for damages in not
furnishing the entire loan is offset by the liability of Sulpicio M. Tolentino for damages, in the form of penalties and surcharges, for
not paying his overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his PI 7,000.00 debt shall not be
included in offsetting the liabilities of both parties. Since Sulpicio M. Tolentino derived some benefit for his use of the P17,000.00,
it is just that he should account for the interest thereon.

WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be entirely foreclosed to satisfy his P 17,000.00
debt.

The consideration of the accessory contract of real estate mortgage is the same as that of the principal contract (Banco de Oro
vs. Bayuga, 93 SCRA 443 [1979]). For the debtor, the consideration of his obligation to pay is the existence of a debt. Thus, in the
accessory contract of real estate mortgage, the consideration of the debtor in furnishing the mortgage is the existence of a valid,
voidable, or unenforceable debt (Art. 2086, in relation to Art, 2052, of the Civil Code).

The fact that when Sulpicio M. 'Tolentino executed his real estate mortgage, no consideration was then in existence, as there was
no debt yet because Island Savings Bank had not made any release on the loan, does not make the real estate mortgage void for
lack of consideration. It is not necessary that any consideration should pass at the time of the execution of the contract of real
mortgage (Bonnevie vs. C.A., 125 SCRA 122 [1983]). lt may either be a prior or subsequent matter. But when the consideration
is subsequent to the mortgage, the mortgage can take effect only when the debt secured by it is created as a binding contract to
pay (Parks vs, Sherman, Vol. 176 N.W. p. 583, cited in the 8th ed., Jones on Mortgage, Vol. 2, pp. 5-6). And, when there is partial
failure of consideration, the mortgage becomes unenforceable to the extent of such failure (Dow. et al. vs. Poore, Vol. 172 N.E. p.
82, cited in Vol. 59, 1974 ed. CJS, p. 138). Where the indebtedness actually owing to the holder of the mortgage is less than the
sum named in the mortgage, the mortgage cannot be enforced for more than the actual sum due (Metropolitan Life Ins. Co. vs.
Peterson, Vol. 19, F(2d) p. 88, cited in 5th ed., Wiltsie on Mortgage, Vol. 1, P. 180).

Since Island Savings Bank failed to furnish the P63,000.00 balance of the P8O,000.00 loan, the real estate mortgage of Sulpicio
M. Tolentino became unenforceable to such extent. P63,000.00 is 78.75% of P80,000.00, hence the real estate mortgage covering
100 hectares is unenforceable to the extent of 78.75 hectares. The mortgage covering the remainder of 21.25 hectares subsists
as a security for the P17,000.00 debt. 21.25 hectares is more than sufficient to secure a P17,000.00 debt.

The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil Code is inapplicable to the facts of this
case.

Article 2089 provides:

A pledge or mortgage is indivisible even though the debt may be divided among the successors in interest of the
debtor or creditor.

Therefore, the debtor's heirs who has paid a part of the debt can not ask for the proportionate extinguishment of
the pledge or mortgage as long as the debt is not completely satisfied.

Neither can the creditor's heir who have received his share of the debt return the pledge or cancel the mortgage,
to the prejudice of other heirs who have not been paid.

The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes several heirs of the debtor or
creditor which does not obtain in this case. Hence, the rule of indivisibility of a mortgage cannot apply

WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY 11, 1977 IS HEREBY MODIFIED, AND

1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN PETITIONERS THE SUM OF P17.000.00,
PLUS P41,210.00 REPRESENTING 12% INTEREST PER ANNUM COVERING THE PERIOD FROM MAY 22, 1965 TO
AUGUST 22, 1985, AND 12% INTEREST ON THE TOTAL AMOUNT COUNTED FROM AUGUST 22, 1985 UNTIL PAID;

2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE MORTGAGE COVERING 21.25 HECTARES SHALL
BE FORECLOSED TO SATISFY HIS TOTAL INDEBTEDNESS; AND

3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY DECLARED UNEN FORCEABLE AND IS
HEREBY ORDERED RELEASED IN FAVOR OF SULPICIO M. TOLENTINO.

NO COSTS. SO ORDERED.
[G.R. NO. 171312 : February 4, 2008]

SPS. LINO FRANCISCO & GUIA FRANCISCO, Petitioners, v. DEAC CONSTRUCTION, INC. and GEOMAR A.
DADULA, Respondents.

DECISION

TINGA, J.:

The Spouses Lino and Guia Francisco (Spouses Francisco) assail the Decision1 of the Court of Appeals dated 28 July 2005,
rendered in favor of respondents DEAC Construction, Inc. (DEAC) and Geomar Dadula (Dadula), upholding the latter's monetary
claims against the Spouses Francisco. The appellate court's decision reversed and set aside the Decision 2 of the Regional Trial
Court of Manila, Branch 28, dated 2 February 1998 which ordered the partial rescission of the 13 September 1994 Construction
Contract between the parties and awarded moral and exemplary damages and attorney's fees to the Spouses Francisco.

The findings of fact of the trial court and the Court of Appeals are in conflict on the question of whether the Spouses Francisco
authorized the deviations on the building plan, particularly with regard to the closing of the open space and the reduction of the
setback from the property line. They are, however, in agreement as to the following antecedents quoted from the appellate court's
decision:

Plaintiffs-appellees Lino Francisco and Guia Francisco obtained the services of defendant-appellant DEAC Construction, Inc.
(DEAC) to construct a 3-storey residential building with mezzanine and roof deck on their lot located at 118 Pampanga Street,
Gagalangin, Tondo, Manila for a contract price of P3,500,000.00. As agreed upon, a downpayment of P2,000,000.00 should be
paid upon signing of the contract of construction, and the remaining balance of P1,500,000.00 was to be paid in two equal
installments: the first installment of P750,000.00 should be paid upon completion of the foundation structure and the ground floor,
which amount would be used primarily for the construction of the second floor to the roof deck while the final amount
of P750,000.00 should be paid upon completion of the second floor up to the roof deck structure to defray the expenses necessary
for finishing and completion of the building. To undertake the said project, DEAC engaged the services of a sub-contractor, Vigor
Construction and Development Corporation, but allegedly without the plaintiffs-appellees' knowledge and consent.

On September 12, 1994, even prior to the execution of the contract, the plaintiffs-appellees had paid the downpayment
of P2,000,000.00. The amount of P200,000.00 was again paid to DEAC on February 27, 1995 followed by the payment
of P550,000.00 on April 2, 1995. Plaintiff-appellant Guia Francisco likewise paid the amount of P80,000.00 on June 5, 1995 for
the requested "additional works" on the project.

The construction of the residential building commenced in October 1994 although DEAC, upon which the obligation pertained,
had not yet obtained the necessary building permit for the proposed construction. It was on this basis that the owner Lino Francisco
was charged with violation of Section 301, Chapter 3 (Illegal Construction) of [P.D. No.] 1096 otherwise known as the National
Building Code of the Philippines with the Metropolitan Trial Court of Manila, Branch 12.

On March 7, 1995, the Office of the Building Official of the City of Manila finally issued the requisite Building Permit. Thus, the
complaint against owner Lino Francisco was accordingly dismissed. As admitted by DEAC, the release of the said permit was
withheld because of the erroneous designation of the location of the lot in one of the building plans. Thus, DEAC had to make the
necessary adjustment. However, before the Office of the Building Official finally approved the amended building plan, it made
some necessary corrections therein. And to facilitate the said approval and the subsequent release of the building permit, the
signatures of plaintiff-appellee Guia Francisco in the said amended and corrected building plans were forged by DEAC's
representative.

But aside from [the] lack of building permit, the building inspector also observed, after periodic inspections of the construction site,
that the contractor deviated, on some specifications, from the approved plans. Thus, on April 7, 1995, the Office of the Building
Official of Manila issued another Notice of Violation against owner Lino Francisco, while at the same time calling the attention of
the contractor, on account of the following deviations and violations, to wit:

1. The 1.00 mt. setback from the property line instead of 1.45 mts. as per approved plan was not followed in violation [of] Sec.
306, Chapter 3 [PD 1096, otherwise known as the National Building Code (NBC)];
2. The [excessive] projection of 0.50 mt. from 3 rd floor level to [roof] deck in violation [of] Sec. 306, Chapter 3 of the NBC (PD
1096);

3. The required open patio was covered in pursuant (sic) to Sec. 306[,] Chapter 3 [of PD 1096];

4. Provision of window opening along the right-side firewall in pursuant (sic) to Sec. 1007 Chapter 10 of [PD 1096];

5. Stockpiling of [construction materials] along the street/sidewalk area in violation [of] Sec. 5[,] Rule VI of the IRR;

6. Please provide minimum safety and protection in pursuant (sic) 2.3, 2.4, and 2.5 of Rule XX of the IRR.

The said notice was received on April 11, 1995 by Engr. Mike Marquez of DEAC Construction, Inc. The plaintiffs-appellees,
however, denied having received any notice from the Office of the Building Official of Manila regarding the on-going construction.

In a letter dated July 1, 1995, the plaintiffs-appellees, through their counsel, suddenly complained of several infractions emanating
from the construction of the project allegedly committed by DEAC, to wit:

a. Implementation of the project was started immediately after signing of the contract on 15 September 1994 without any building
permit and approved plans.

b. Building permit was released only on (sic) March 1995 together with the approved plans with necessary corrections made by
the Office of the Building Official. You did not inform the owners about the corrections. The signatures of Mrs. Guia Francisco
appearing on the building plans were forgeries.

c. [The] Approved [C]onstruction [P]lans were not strictly followed during the actual implementation of the project. Open
space/patio which is 20% of lot area (based on National Building Code) for inside lot was deleted.

d. No written formal approval from the owners for the alteration of plans.

e. Poor workmanship.

i. Marble slabs installed were not approved by the owner.

ii. Beam below the 1st landing at the ground floor is too low.

iii. Ground floor Finish floor line is below the ordinary flood level in the area. The contractor has been repeatedly instructed to raise
the ground floor finish elevation but insisted on their decision.

f. Poor supervision of the construction works.

The plaintiffs-appellees demanded that DEAC must comply with the approved plan, construction contract, National Building Code,
and the Revised Penal Code, otherwise, they would be compelled to invoke legal remedies. In the meantime that the necessary
works and construction were demanded to be undertaken, the last and final installment was withheld. DEAC responded, also
through a letter prepared by its counsel, that it had faithfully complied with its obligation under the contract, thus, to demand for
further compliance would be improper. It said that if somebody had breached the contract, it was the plaintiffs-appellees, because
the last installment of P750,000.00 which was supposed to have been paid after the second floor and the roof deck structure was
completed, which allegedly had long been accomplished, was not yet paid. To settle their differences, DEAC had given the
plaintiffs-appellees the option to either pay the full amount of P750,000.00, so that the finishing stage of the project would be
completed, or just pay the worth of the work already done, which was assessed at P250,000.00.

On July 21, 1995, a Work Stoppage Order was issued against the plaintiff-appellee Lino Francisco pursuant to the previous April
7, 1995 Notice of Violations. Having learned of such order, the plaintiffs-appellees allegedly immediately proceeded to the Office
of the Building Official of Manila to explain that DEAC was the one responsible for such violations, and that the deviations of the
approved plan being imputed against Lino Francisco were unilateral acts of DEAC. They also filed a complaint for "Non-
Compliance of the Building Plan, Illegal Construction, abandonment and other violations of the Building Code" against DEAC with
the said Office. The said complaint was endorsed to the City Prosecutor of Manila which culminated in the filing of a criminal case
against Geomar A. Dadula and DEAC project engineer Leoncio C. Alambra for deviation and violation of specification plan.

The plaintiffs-appellees also filed this civil case for Rescission of Contract and Damages on September 21, 1995 with the Regional
Trial Court of Manila, Branch 28, against DEAC and its President Geomar A. Dadula.

After due proceedings, the defendants-appellants were found to have breached their contractual obligation with the plaintiffs-
appellees. Among their violations were: (1) the construction of the building without the necessary building permit, which violated
Section 3, Article IV of the Construction Contract; and (2) the deviation or revision of the approved building plan in the actual
construction. On the other hand, the trial court said that the refusal of the plaintiffs-appellees to pay the final installment of
P750,000.00 was only justified because of the defendants-appellants' violations of the contract. Thus, on account of such
violations, rescission of the contract was warranted. However, since the subject building was already 70% to 75% completed, only
partial rescission was ordered. Pursuant thereto, DEAC was ordered to refund the sum of P205,000.00 to the plaintiffs-appellees
after considering the following computations:

Contract price - P3.5 Million

% of work completed - 75%
Contract Price x % of work - P3.5 Million x 75%
completed
= P2,625,000.[00]
Actual Payment - 2,830,000.00
Less cost of work completed - 2,625,000.00
Difference - 205,000.00

In addition, damages was awarded based on par. 2, Article 1191 of the New Civil Code which provides for the award of damages
in case of rescission of contract. Geomar Dadula, being the President of DEAC, was likewise held solidarily liable with the latter.3

Ruling that the Spouses Francisco were the ones who initiated and requested the deviations, the appellate court held that
respondents fully complied with their obligation under the contract and ordered the Spouses Francisco to pay the balance of the
contract price. It also ordered them to pay moral damages, attorney's fees and costs of suit.

Before this Court, the Spouses Francisco question the appellate court's finding that they were the ones who requested the
deviations in the building plan, particularly with regard to the closing of the open space and the reduction of the setback from the
property line. They maintain that they did not waive their right to demand rescission as a result of the disputed deviations and
because of the fact that DEAC commenced construction without first securing a building permit as was incumbent upon it under
their contract. In fact, apart from the present case, the Spouses Francisco filed a criminal suit against respondent Dadula taking
him to task for these violations, of which the latter was found guilty.

Respondents, in their Comment4 dated 8 June 2006, assert that the deviations in the building plan were done upon the request of
the Spouses Francisco. Respondent Dadula had even warned them that building the structure close to the property line could
violate the required setback. They also claim that the belated issuance of the building permit was due to neglect in the supervision
of a subordinate and does not indicate any bad faith on their part.5 At any rate, the fact that this issue was raised only after several
months had passed from the time construction started allegedly suggests waiver on the part of the Spouses Francisco.

A Reply,6 dated 30 September 2006 was filed by the Spouses Francisco reiterating their argument that respondent Dadula's
conviction in the criminal case should be taken into account in the present case.

As earlier adverted to, the trial court held that respondents deviated from the specifications and terms of the contract, particularly
with regard to the open space closing and the setback reduction, without securing the approval of the Spouses Francisco. On the
other hand, the appellate court held that the Spouses Francisco were the ones who initiated and requested the deviations. The
conflict in these findings warrants a departure from the general rule that this Court shall not entertain petitions for review which
substantially raisequestions of fact.7 The conflict accounts for the divergence of the decisions of the courts below. 8

The records reveal that respondents admitted having failed to secure a building permit before construction of the residential
building subject of this case commenced. This blunder exposed petitioner Lino Francisco to criminal prosecution as, in fact, an
Information9 dated 5 December 1995 was filed against him with the Metropolitan Trial Court of Manila, Branch 12, for violation of
Section 301, Chapter 3 (Illegal Construction) of the National Building Code of the Philippines. 10 It appears that this Information
was preceded by several Notices of Illegal Construction sent by the Office of the Building Official of Manila supposedly addressed
to petitioner Lino Francisco, but which the latter would not have gotten wind of had he not inquired with the said office about certain
documents relative to the construction.

Respondents DEAC and Dadula, to whom the obligation of securing the building permit pertained, should obviously have ensured
compliance with the requirements set forth by law. At the very least, good faith and fair dealing ordain that they inform the Spouses
Francisco that the building permit had not yet been issued especially that they had already received a substantial amount of money
from the latter and had already started the construction of the building.11

Parenthetically, the Spouses Francisco disclose that the Metropolitan Trial Court of Manila, Branch 23, found respondent Dadula
guilty of violating the National Building Code for his failure to follow the required setback from the property line; the excessive
projection of the roof deck of the structure; the deviation in the covering of the required patio; the illegal stockpiling of construction
materials; the lack of safety standards in the construction; and his failure to secure a building permit for the construction. 12 This
conviction was consistently affirmed by the Regional Trial Court,13 the Court of Appeals14 and ultimately this Court.15 The RTC
even noted that "defendants admitted that there were deviations from the plans and that they forged the signature of Mrs. Guia
Francisco to ensure early approval of the permit."16

The foregoing matters are essential to the propriety of the trial court's ruling that partial rescission is warranted in view of the failure
of respondents to comply with what was incumbent upon them under the construction contract and the consequent prejudice and
damage caused to petitioners by respondents' actions. Of equal importance, of course, is the correctness of its finding that the
deviations from the building plan were not authorized by the Spouses Francisco.

Our own review of the records reveals that the open space was closed by respondents without the approval of the Spouses
Francisco and in violation of the National Building Code. During the 27 May 1995 meeting between the parties in which they were
called to thresh out their differences, respondents stated that the open space indicated on the plan was omitted in the actual
construction "in order to give extra space for the building,"17 and not because the Spouses Francisco requested such closure, if
such was really the case. Respondents also mentioned that the contractor forged petitioner Guia Francisco's signature "in the City
Hall in order to process the early approval of plans. Also, alterations were done in the City Hall." 18

Curiously, the Court of Appeals relied on the same exhibit in arriving at its conclusion that the Spouses Francisco authorized, even
requested, the changes in the building plan. Apparently, the appellate court interpreted the agreement between the parties
regarding the extension of the second floor balcony as the Spouses Francisco's approval of the closure of the open space and
reduction in the required setback from the property line. As pointed out by petitioners, however, the extension of the second floor
balcony was entirely distinct from the closure of the open space and reduction of the setback from the property line.
Respondents' mistake in identifying the exact location of the property which led to the delay in the issuance of a building permit
and forgery of petitioner Guia Francisco's signature on the building plan exhibits a proclivity for error and taking the easy way out.
This aspect does not sit well with the Court. The Spouses Francisco should be allowed to rescind the contract to the extent that
this is possible under the circumstances.

Article 1191 of the Civil Code provides that 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 rescission referred to in this article, more appropriately referred to as
resolution, is not predicated on injury to economic interests on the part of the party plaintiff, but of breach of faith by the defendant
which is violative of the reciprocity between the parties.19 The right to rescind may be waived, expressly or impliedly.

The Spouses Francisco, in their 1 July 1995 letter to respondents, complained, among others, about the belated release of the
building permit, the unauthorized corrections in the building plan, the forgery of petitioner Guia Francisco's signature on the building
plan, and the deletion of the open space/patio in the actual construction of the project. The filing of a criminal case against
respondent Dadula and the subsequent filing of this civil case for rescission and damages within a reasonable time after the
Spouses Francisco had learned that construction of their building commenced without the necessary building permit and
discovered that there were deviations from the building plan demonstrate the vigilance with which they guarded their rights. The
appellate court's conclusion that the Spouses Francisco should be deemed to have waived their right to seek rescission is clearly
unfounded.

Finally, given the fact that the construction in this case is already 75% complete, the trial court was correct in ordering partial
rescission only of the undelivered or unfinished portion of the construction. 20 Equitable considerations justify rescission of the
portion of the obligation which had not been delivered.

WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals, dated 28 July 2005 and its Resolution, dated 31
January 2006 are REVERSED and SET ASIDE. The Decision of the Regional Trial Court of Manila, Branch 28 in Civil Case No.
95-75430 is hereby REINSTATED.

SO ORDERED.

G.R. No. L-57455 January 18, 1990

EVELYN DE LUNA, ROSALINA DE LUNA, PRUDENCIO DE LUNA, JR., WILLARD DE LUNA, ANTONIO DE LUNA, and
JOSELITO DE LUNA, petitioners,
vs.
HON. SOFRONIO F. ABRIGO, Presiding Judge of the Court of First Instance of Quezon, Branch IX, and LUZONIAN
UNIVERSITY FOUNDATION, INC., respondents.
Milberto B. Zurbano for petitioners.
Joselito E. Talabong for private respondent.

MEDIALDEA, J.:

This is a petition for review on certiorari of the Order dated July 7, 1981 of respondent judge Sofronio F. Abrigo of the Court of
First Instance of Quezon, Branch IX in Civil Case No. 8624 dismissing the complaint of petitioners on the ground of prescription
of action.

The antecedent facts are as follows:

On January 24, 1965, Prudencio de Luna donated a portion of 7,500 square meters of Lot No. 3707 of the Cadastral Survey of
Lucena covered by Transfer Certificate of Title No. 1-5775 to the Luzonian Colleges, Inc., (now Luzonian University Foundation,
Inc., herein referred to as the foundation). The donation, embodied in a Deed of Donation Intervivos (Annex "A" of Petition) was
subject to certain terms and conditions and provided for the automatic reversion to the donor of the donated property in case of
violation or non-compliance (pars. 7 and 10 of Annex "A", p. 20, Rollo). The foundation failed to comply with the conditions of the
donation. On April 9, 1971, Prudencio de Luna "revived" the said donation in favor of the foundation, in a document entitled
"Revival of Donation Intervivos" (Annex "B" of Petition) subject to terms and conditions which among others, required:

xxx xxx xxx

3. That the DONEE shall construct at its own expense a Chapel, a Nursery and Kindergarten School, to be named after
St. Veronica, and other constructions and Accessories shall be constructed on the land herein being donated strictly in
accordance with the plans and specifications prepared by the O.R. Quinto & Associates and made part of this donation;
provided that the flooring of the Altar and parts of the Chapel shall be of granoletic marble.

4. That the construction of the Chapel, Nursery and Kindergarten School shall start immediately and must be at least
SEVENTY (70) PER CENTUM finished by the end of THREE (3) YEARS from the date hereof, however, the whole project
as drawn in the plans and specifications made parts of this donation must be completed within FIVE (5) YEARS from the
date hereon, unless extensions are granted by the DONOR in writing;

. . . . (p. 23, Rollo)

As in the original deed of donation, the "Revival of Donation Intenrivos" also provided for the automatic reversion to the donor of
the donated area in case of violation of the conditions thereof, couched in the following terms:

xxx xxx xxx.

11. That violation of any of the conditions herein provided shall cause the automatic reversion of the donated area to the
donor, his heirs, assigns and representatives, without the need of executing any other document for that purpose and
without obligation whatever on the part of the DONOR. (p. 24, Rollo).

The foundation, through its president, accepted the donation in the same document, subject to all the terms and conditions stated
in the donation (p. 24, Rollo). The donation was registered and annotated on April 15, 1971 in the memorandum of encumbrances
as Entry No. 17939 of Transfer Certificate of Title No. T-5775 (p. 15, Rollo).

On August 3, 1971, Prudencio de Luna and the foundation executed a 'Deed of Segregation" (Annex "C" of Petition) whereby the
area donated which is now known as Lot No. 3707-B of Subdivision Plan Psd-40392 was adjudicated to the foundation. As a
result, transfer certificate of title No. T-16152 was issued in the name of the foundation. The remaining portion known as Lot No.
3707-A was retained by the donor. (p. 16, Rollo).

On September 23, 1980, herein petitioners, Evelyn, Rosalina, Prudencio, Jr., Willard, Antonio and Joselito, all surnamed de Luna,
who claim to be the children and only heirs of the late Prudencio de Luna who died on August 18, 1980, filed a complaint (pp. 14-
17, Rollo) with the Regional Trial Court of Quezon alleging that the terms and conditions of the donation were not complied with
by the foundation. Among others, it prayed for the cancellation of the donation and the reversion of the donated land to the heirs.
The complaint was docketed as Civil Case No. 8624.

In its answer (pp. 29-36, Rollo), respondent foundation claimed that it had partially and substantially complied with the conditions
of the donation and that the donor has granted the foundation an indefinite extension of time to complete the construction of the
chapel. It also invoked the affirmative defense of prescription of action and prayed for the dismissal of the complaint.

During the pre-trial of the case, the foundation moved for a preliminary hearing of its affirmative defense of prescription of action
which was opposed by the plaintiffs. After the parties have filed their respective written motions, oppositions and memoranda, an
Order (pp., 40-43, Rollo) dated July 7, 1981 was issued dismissing the complaint. The dispositive portion of the Order states:

In view of the foregoing considerations, this Court finds the motion to dismiss deemed filed by the defendant on the ground
of prescription to be well-taken and the same is hereby GRANTED.

WHEREFORE, the instant complaint is hereby ordered DISMISSED.

No pronouncement as to costs.

SO ORDERED. (pp. 42-43, Rollo)

No motion for reconsideration was filed by petitioners.

On July 22, 1981, petitioners brought the instant petition for review with the following assignments of error:

I. THE LOWER COURT ERRED IN HOLDING THAT THE DONEE'S CONSENT TO THE REVOCATION OF A
DONATION TO BE VALID MUST BE GIVEN SUBSEQUENT TO THE EFFECTIVITY OF THE DONATION OR
VIOLATION OF (THE) ANY OF THE CONDITIONS IMPOSED THEREIN.

II. THE LOWER COURT ERRED IN TREATING THE COMPLAINT AS ONE FOR JUDICIAL DECREE OF REVOCATION
OF THE DONATION IN QUESTION AS CONTEMPLATED IN ARTICLE 764 OF THE CIVIL CODE OF THE PHILIPPINES
AND WHICH PRESCRIBES IN FOUR (4) YEARS AND IN NOT CONSIDERING IT AS AN ACTION TO ENFORCE A
WRITTEN CONTRACT WHICH PRESCRIBES IN TEN (10) YEARS AS PROVIDED IN ARTICLE 1144, HENCE, THE
LOWER COURT ERRED IN DISMISSING THE COMPLAINT.

III. THE LOWER COURT ERRED IN NOT RENDERING JUDGMENT ON THE MERITS BY WAY OF JUDGMENT ON
THE PLEADINGS. (pp. 1-2, Petitioner's Brief)

We gave due course to the petition on August 3, 1981 (p. 45, Rollo). After the parties' submission of their respective briefs, the
Court resolved to consider the petition submitted for decision on January 27, 1982 (p. 62, Rollo).

The assailed order of the trial court stated that revocation (of a donation) will be effective only either upon court judgment or upon
consent of the donee as held in the case of Parks v. Province of Tarlac, No. 24190, July 13, 1926, 49 Phil. 143. The trial court
dismissed the claim of petitioners that the stipulation in the donation providing for revocation in case of non-compliance of
conditions in the donation is tantamount to the consent of the donee, opining that the consent contemplated by law should be such
consent given by the donee subsequent to the effectivity of the donation or violation of the conditions imposed therein. The trial
court further held that, far from consenting to the revocation, the donee claimed that it had already substantially complied with the
conditions of the donation by introducing improvements in the property donated valued at more than the amount of the donated
land. In view thereof, a judicial decree revoking the subject donation is necessary. Accordingly, under Article 764 of the New Civil
Code, actions to revoke a donation on the ground of non-compliance with any of the conditions of the donation shall prescribe in
four years counted from such non-compliance. In the instant case, the four-year period for filing the complaint for revocation
commenced on April 9, 1976 and expired on April 9, 1980. Since the complaint was brought on September 23, 1980 or more than
five (5) months beyond the prescriptive period, it was already barred by prescription.
On the other hand, petitioners argue that Article 764 of the New Civil Code was adopted to provide a judicial remedy in case of
non-fulfillment of conditions when revocation of the donation has not been agreed upon by the parties. By way of contrast, when
there is a stipulation agreed upon by the parties providing for revocation in case of non-compliance, no judicial action is necessary.
It is then petitioners' claim that the action filed before the Court of First Instance of Quezon is not one for revocation of the donation
under Article 764 of the New Civil Code which prescribes in four (4) years, but one to enforce a written contract which prescribes
in ten (10) years.

The petition is impressed with merit.

From the viewpoint of motive, purpose or cause, donations may be 1) simple, 2) remuneratory or 3) onerous. A simple donation
is one the cause of which is pure liberality (no strings attached). A remuneratory donation is one where the donee gives something
to reward past or future services or because of future charges or burdens, when the value of said services, burdens or charges is
less than the value of the donation. An onerous donation is one which is subject to burdens, charges or future services equal (or
more) in value than that of the thing donated (Edgardo L. Paras, Civil Code of the Philippines Annotated, 11 ed., Vol. 11, p. 726).

It is the finding of the trial court, which is not disputed by the parties, that the donation subject of this case is one with an onerous
cause. It was made subject to the burden requiring the donee to construct a chapel, a nursery and a kindergarten school in the
donated property within five years from execution of the deed of donation.

Under the old Civil Code, it is a settled rule that donations with an onerous cause are governed not by the law on donations but
by the rules on contracts, as held in the cases of Carlos v. Ramil, L-6736, September 5, 1911, 20 Phil. 183, Manalo vs. de Mesa,
L-9449, February 12, 1915, 29 Phil. 495. On the matter of prescription of actions for the revocation of onerous donation, it was
held that the general rules on prescription applies. (Parks v. Province of Tarlac, supra.). The same rules apply under the New Civil
Code as provided in Article 733 thereof which provides:

Art. 733. Donations with an onerous cause shall be governed by the rules on contracts, and remuneratory donations by
the provisions of the present Title as regards that portion which exceeds the value of the burden imposed.

It is true that under Article 764 of the New Civil Code, actions for the revocation of a donation must be brought within four (4) years
from the non-compliance of the conditions of the donation. However, it is Our opinion that said article does not apply to onerous
donations in view of the specific provision of Article 733 providing that onerous donations are governed by the rules on contracts.

In the light of the above, the rules on contracts and the general rules on prescription and not the rules on donations are applicable
in the case at bar.

Under Article 1306 of the New Civil Code, the parties to a contract have the right "to establish such stipulations, clauses, terms
and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order or public
policy." Paragraph 11 of the "Revival of Donation Intervivos, has provided that "violation of any of the conditions (herein) shall
cause the automatic reversion of the donated area to the donor, his heirs, . . ., without the need of executing any other document
for that purpose and without obligation on the part of the DONOR". Said stipulation not being contrary to law, morals, good customs,
public order or public policy, is valid and binding upon the foundation who voluntarily consented thereto.

The validity of the stipulation in the contract providing for the automatic reversion of the donated property to the donor upon non-
compliance cannot be doubted. It is in the nature of an agreement granting a party the right to rescind a contract unilaterally in
case of breach, without need of going to court. Upon the happening of the resolutory condition of non-compliance with the
conditions of the contract, the donation is automatically revoked without need of a judicial declaration to that effect. In the case
of University of the Philippines v. de los Angeles, L-28602, September 29, 1970, 35 SCRA 102-107, it was held:

. . . There is nothing in the law that prohibits the parties from entering into agreement that violation of the terms of the
contract would cause cancellation thereof. even without court intervention. In other words, it is not always necessary for
the injured party to resort to court for rescission of the contract (Froilan v. Pan Oriental Shipping Co., et al., L-11897, 31
October 1964, 12 SCRA 276).

This was reiterated in the case of Angeles v. Calasanz, L-42283, March 18, 1985:

Well settled is, however, the rule that a judicial action for the rescission of a contract is not necessary where the contract
provides that it may be revoked and cancelled for violation of any of its terms and conditions (Lopez v. Commissioner of
Customs, 37 SCRA 327, 334, and cases cited therein).

Resort to judicial action for rescission is obviously not contemplated. The validity of the stipulation can not be seriously
disputed. It is in the nature of a facultative resolutory condition which in many cases has been upheld, by this court.
(Ponce Enrile v. Court of Appeals, 29 SCRA 504)

However, in the University of the Philippines v. Angeles case, (supra), it was held that in cases where one of the parties contests
or denies the rescission, "only the final award of the court of competent jurisdiction can conclusively settle whether the resolution
is proper or not." It was held, thus:

. . . since in every case, where the extrajudicial resolution is contested, only the final award of the court of competent
jurisdiction can conclusively settle whether the resolution was proper or not. It is in this sense that judicial action will be
necessary as without it, the extrajudicial resolution will remain contestable and subject to judicial invalidation, unless
attack thereon should become barred by acquiescence, estoppel or prescription.
It is clear, however, that judicial intervention is necessary not for purposes of obtaining a judicial declaration rescinding a contract
already deemed rescinded by virtue of an agreement providing for rescission even without judicial intervention, but in order to
determine whether or not the recession was proper.

The case of Parks v. Province of Tarlac, supra, relied upon by the trial court, is not applicable in the case at bar. While the donation
involved therein was also onerous, there was no agreement in the donation providing for automatic rescission, thus, the need for
a judicial declaration revoking said donation.

The trial court was therefore not correct in holding that the complaint in the case at bar is barred by prescription under Article 764
of the New Civil Code because Article 764 does not apply to onerous donations.

As provided in the donation executed on April 9, 1971, complaince with the terms and conditions of the contract of donation, shall
be made within five (5) years from its execution. The complaint which was filed on September 23, 1980 was then well within the
ten (10) year prescriptive period to enforce a written contract (Article 1144[1], New Civil Code), counted from April 9, 1976.

Finally, considering that the allegations in the complaint on the matter of the donee's non-compliance with the conditions of the
donation have been contested by private respondents who claimed that improvements more valuable than the donated property
had been introduced, a judgment on the pleadings is not proper. Moreover, in the absence of a motion for judgment on the
pleadings, the court cannot motu proprio render such judgment. Section 1 of Rule 19 provides: "Where an answer fails to tender
an issue, or otherwise admits the material allegations of the adverse party's pleading, the court may, on motion of that party, direct
judgment on such pleading." (Emphasis supplied)

ACCORDINGLY, the petition is GRANTED. Civil Case No. 8624 is hereby ordered reinstated. Respondent judge is ordered to
conduct a trial on the merits to determine the propriety of the revocation of the subject donation.

SO ORDERED.

UNLAD RESOURCES DEVELOPMENT CORPORATION, G.R. No. 149338

UNLAD RURAL BANK OF NOVELETA, INC., UNLAD
COMMODITIES, INC., HELENA Z. BENITEZ, and
CONRADO L. BENITEZ II,

Petitioners,

- versus - Present:

RENATO P. DRAGON, TARCISIUS R. RODRIGUEZ, YNARES-SANTIAGO, J.,

VICENTE D. CASAS, ROMULO M. VIRATA, FLAVIANO
Chairperson,
PERDITO, TEOTIMO BENITEZ, ELENA BENITEZ, and
ROLANDO SUAREZ,
AUSTRIA-MARTINEZ,
Respondents.
CHICO-NAZARIO,

NACHURA, and

REYES, JJ.

Promulgated:

July 28, 2008

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

DECISION

NACHURA, J.:

Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Civil Procedure seeking the reversal
of the November 29, 2000 Decision[1] and August 2, 2001 Resolution[2] of the Court of Appeals (CA) in CA-G.R. CV No. 54226.

The facts, as found by the CA, are as follows:

 On December 29, 1981, the Plaintiffs (herein respondents) and defendant (herein petitioner) Unlad
Resources, through its Chairman[,] Helena Z. Benitez[,] entered into a Memorandum of Agreement wherein it is
provided that [respondents], as controlling stockholders of the Rural Bank [of Noveleta] shall allow Unlad
Resources to invest four million eight hundred thousand pesos (P4,800,000.00) in the Rural Bank in the form of
additional equity. On the other hand, [petitioner] Unlad Resources bound itself to invest the said amount of 4.8
million pesos in the Rural Bank; upon signing, it was, likewise, agreed that [petitioner] Unlad Resources shall
subscribe to a minimum of four hundred eighty thousand pesos (P480,000.00) (sic) common or preferred non-
voting shares of stock with a total par value of four million eight hundred thousand pesos (P4,800,000.00) and
pay up immediately one million two hundred thousand pesos (P1,200,000.00) for said subscription; that the
[respondents], upon the signing of the said agreement shall transfer control and management over the Rural
Bank to Unlad Resources. According to the [respondents], immediately after the signing of the agreement, they
complied with their obligation and transferred control of the Rural Bank to Unlad Resources and its nominees
and the Bank was renamed the Unlad Rural Bank of Noveleta, Inc. However, [respondents] claim that despite
repeated demands, Unlad Resources has failed and refused to comply with their obligation under the said
Memorandum of Agreement when it did not invest four million eight hundred thousand pesos (P4,800,000.00) in
the Rural Bank in the form of additional equity and, likewise, it failed to immediately infuse one million two hundred
thousand pesos (P1,200,000.00) as paid in capital upon signing of the Memorandum of Agreement.

On August 10, 1984, the Board of Directors of [petitioner] Unlad Resources passed Resolution No. 84-
041 authorizing the President and the General Manager to lease a mango plantation situated in
Naic, Cavite. Pursuant to this Resolution, the Bank as [lessee] entered into a Contract of Lease with the
[petitioner] Helena Z. Benitez as [lessor]. The management of the mango plantation was undertaken by Unlad
Commodities, Inc., a subsidiary of Unlad Resources[,] under a Management Contract Agreement. The
Management Contract provides that Unlad Commodities, Inc. would receive eighty percent (80%) of the net
profits generated by the operation of the mango plantation while the Banks share is twenty percent (20%). It was
further agreed that at the end of the lease period, the Rural Bank shall turn over to the lessor all permanent
improvements introduced by it on the plantation.

xxxx

On May 20, 1987, [petitioner] Unlad Rural Bank wrote [respondents] regarding [the] Central Banks
approval to retire its [Development Bank of the Philippines] preferred shares in the amount of P219,000.00 and
giving notice for subscription to proportionate shares. The [respondents] objected on the grounds that there is
already a sinking fund for the retirement of the said DBP-held preferred shares provided for annually and that it
could deprive the Rural Bank of a cheap source of fund. (sic)

[Respondents] alleged compliance with all of their obligations under the Memorandum of Agreement in
that they have transferred control and management over the Rural bank to the [petitioners] and are ready, willing
and able to allow [petitioners] to subscribe to a minimum of four hundred eighty thousand (P480,000.00) (sic)
common or preferred non-voting shares of stocks with a total par value of four million eight hundred thousand
pesos (P4,800,000.00) in the Rural Bank. However, [petitioners] have failed and refused to subscribe to the said
shares of stock and to pay the initial amount of one million two hundred thousand pesos (P1,200,000.00) for said
subscription.[3]

On July 3, 1987, herein respondents filed before the Regional Trial Court (RTC) of Makati City, Branch 61 a
Complaint[4] for rescission of the agreement and the return of control and management of the Rural Bank from petitioners to
respondents, plus damages. After trial, the RTC rendered a Decision,[5] the dispositive portion of which provides:

WHEREFORE, Premises Considered, judgment is hereby rendered, as follows:

1. The Memorandum of Agreement dated 29 December 1991 (sic) is hereby declared

rescinded and:

(a) Defendant Unlad Resources Development Corporation is hereby ordered to

immediately return control and management over the Rural Bank of Noveleta, Inc. to Plaintiffs;
and

(b) Unlad Rural Bank of Noveleta, Inc. is hereby ordered to return to Defendants the
sum of One Million Three Thousand Seventy Pesos (P1,003,070.00)

2. The Director for Rural Banks of the Bangko Sentral ng Pilipinas is hereby appointed as
Receiver of the Rural Bank;

3. Unlad Rural Bank of Noveleta, Inc. is hereby enjoined from placing the retired DBP-held
preferred shares available for subscription and the same is hereby ordered to be placed under a sinking fund;
 4. Defendant Unlad Resources Development Corporation is hereby ordered to pay plaintiffs
the following:

(a) actual compensatory damages amounting to Four Million Six Hundred One
Thousand Seven Hundred Sixty- Five and 38/100 Pesos (P4,601,765.38);

(b) moral damages in the amount of Five Hundred Thousand Pesos (P500,000.00);

(c) exemplary and corrective damages in the amount of One Hundred Thousand
Pesos (P100,000.00); and

(d) attorneys fees in the sum of (P100,000.00), plus cost of suit.

SO ORDERED.[6]

Herein petitioners appealed the ruling to the CA. Respondents filed a Motion to Dismiss and, subsequently, a
Supplemental Motion to Dismiss, which were both denied. Later, however, the CA, in a Decision dated November 29, 2000,
dismissed the appeal for lack of merit and affirmed the RTC Decision in all respects. Petitioners motion for reconsideration was
denied in CA Resolution dated August 2, 2001.

Petitioners are now before this Court alleging that the CA committed a grave and serious reversible error in issuing the
assailed Decision. Petitioners question the jurisdiction of the trial court, something they have done from the beginning of the
controversy, contending that the issues that respondents raised before the trial court are intra-corporate in nature and are,
therefore, beyond the jurisdiction of the trial court. They point out that respondents complaint charged them with mismanagement
and alleged dissipation of the assets of the Rural Bank. Since the complaint challenges corporate actions and decisions of the
Board of Directors and prays for the recovery of the control and management of the Rural Bank, these matters fall outside the
jurisdiction of the trial court. Thus, they posit that the judgment of the trial court, as affirmed by the CA, is null and void and may
be impugned at any time.

Petitioners further argue that the action instituted by respondents had already prescribed, because Article 1389 of the
Civil Code provides that an action for rescission must be commenced within four years. They claim that the trial court and the CA
mistakenly applied Article 1144 of the Civil Code which treats of prescription of actions in general. They submit that Article 1389,
which deals specifically with actions for rescission, is the applicable law.

Moreover, petitioners assert that they have fully complied with their undertaking under the subject Memorandum of
Agreement, but that the undertaking has become a legal and factual impossibility because the authorized capital stock of the Rural
Bank was increased from P1.7 million to only P5 million, and could not accommodate the subscription by petitioners of P4.8 million
worth of shares. Such deficiency, petitioners contend, is with the knowledge and approval of respondent Renato P. Dragon and
his nominees to the Board of Directors.

Petitioners, without conceding the propriety of the judgment of rescission, also argue that the subject Memorandum of
Agreement could not just be ordered rescinded without the corresponding order for the restitution of the parties total contributions
and/or investments in the Rural Bank. Finally, they assail the award for moral and exemplary damages, as well as the award for
attorneys fees, as bereft of factual and legal bases given that, in the body of the Decision, it was merely stated that respondents
suffered moral damages without any discussion or explanation of, nor any justification for such award. Likewise, the matter of
attorneys fees was not at all discussed in the body of the Decision. Petitioners claim that pursuant to the prevailing rule, attorneys
fees cannot be recovered in the absence of stipulation.

On the other hand, respondents declare that immediately after the signing of the Memorandum of Agreement, they
complied with their obligation and transferred control of the Rural Bank to petitioner Unlad Resources and its nominees, but that,
despite repeated demands, petitioners have failed and refused to comply with their concomitant obligations under the Agreement.

Respondents narrate that shortly after taking over the Rural Bank, petitioners Conrado L. Benitez II and Jorge C. Cerbo,
as President and General Manager, respectively, entered into a Contract of Lease over the Naic, Cavite mango plantation, and
that, as a consequence of this venture, the bank incurred expenses amounting to P475,371.57, equivalent to 25.76% of its capital
and surplus. The respondents further assert that the Central Bank found this undertaking not inherently connected with bona fide
rural banking operations, nor does it fall within the allied undertakings permitted under Section 26 of Central Bank Circular No.
741 and Section 3379 of the Manual of Regulations of the Central Bank.Thus, respondents contend that this circumstance, coupled
with the fact that petitioners Helena Z. Benitez and Conrado L. Benitez II were also stockholders and members of the Board of
Directors of Unlad Resources, Unlad Rural Bank, and Unlad Commodities at that time, is adequate proof that the Rural Banks
management had every intention of diverting, dissipating, and/or wasting the banks assets for petitioners own gain.
 They likewise allege that because of the failure of petitioners to comply with their obligations under the Memorandum of
Agreement, respondents, with the exception of Tarcisius Rodriguez, lodged a complaint with the Securities and Exchange
Commission (SEC), seeking rescission of the Agreement, damages, and the appointment of a management committee, but the
SEC dismissed the complaint for lack of jurisdiction.

Furthermore, when the Rural Bank informed respondents of the Central Banks approval of its plan to retire its DBP-held
preferred shares, giving notices for subscription to proportionate shares, respondents objected on the ground that there was
already a sinking fund for the retirement of said shares provided for annually, and that the retirement would deprive the petitioner
Rural Bank of a cheap source of fund. It was at that point, respondents claim, that they instituted the aforementioned Complaint
against petitioners before the RTC of Makati.

The respondents also seek the outright dismissal of this Petition for lack of verification as to petitioners Helena Z. Benitez
and Conrado L. Benitez II; lack of proper verification as to petitioners Unlad Resources Development Corporation, Unlad Rural
Bank of Noveleta, Inc., and Unlad Commodities, Inc.; lack of proper verified statement of material dates; and lack of proper sworn
certification of non-forum shopping.

They support the proposition that Tijam v. Sibonghanoy[7] applies, and that petitioners are indeed estopped from
questioning the jurisdiction of the trial court. They also share the lower courts view that it is Article 1144 of the Civil Code, and not
Article 1389, that is applicable to this case. Finally, respondents allege that the failure of petitioner Unlad Resources to comply
with its undertaking under the Agreement, as uniformly found by the trial court and the CA, may no longer be assailed in the instant
Petition, and that the award of moral and exemplary damages and attorneys fees is justified.

The Petition is bereft of merit. We uphold the Decision of the CA affirming that of the RTC.

First, the subject of jurisdiction. The main issue in this case is the rescission of the Memorandum of Agreement. This is
to be distinguished from respondents allegation of the alleged mismanagement and dissipation of corporate assets by the
petitioners which is based on the prayer for receivership over the bank. The two issues, albeit related, are obviously separate, as
they pertain to different acts of the parties involved. The issue of receivership does not arise from the parties obligations under the
Memorandum of Agreement, but rather from specific acts attributed to petitioners as members of the Board of Directors of the
Bank. Clearly, the rescission of the Memorandum of Agreement is a cause of action within the jurisdiction of the trial courts,
notwithstanding the fact that the parties involved are all directors of the same corporation.

Still, the petitioners insist that the trial court had no jurisdiction over the complaint because the issues involved are intra-
corporate in nature.

This argument miserably fails to persuade. The law in force at the time of the filing of the case was Presidential Decree
(P.D.) 902-A, Section 5(b) of which vested the Securities and Exchange Commission with original and exclusive jurisdiction to
hear and decide cases involving controversies arising out of intra-corporate relations.[8] Interpreting this statutorily conferred
jurisdiction on the SEC, this Court had occasion to state:

Nowhere in said decree do we find even so much as an [intimation] that absolute jurisdiction and control is vested
in the Securities and Exchange Commission in all matters affecting corporations. To uphold the respondents
arguments would remove without legal imprimatur from the regular courts all conflicts over matters involving or
affecting corporations, regardless of the nature of the transactions which give rise to such disputes. The courts
would then be divested of jurisdiction not by reason of the nature of the dispute submitted to them for adjudication,
but solely for the reason that the dispute involves a corporation. This cannot be done.[9]

It is well to remember that the respondents had actually filed with the SEC a case against the petitioners which, however,
was dismissed for lack of jurisdiction due to the pendency of the case before the RTC. [10] The SECs Order dismissing the
respondents complaint is instructive:

From the foregoing allegations, it is apparent that the present action involves two separate causes of
action which are interrelated, and the resolution of which hinges on the very document sought to be rescinded.
The assertion that the defendants failed to comply with their contractual undertaking and the claim for rescission
of the contract by the plaintiffs has, in effect, put in issue the very status of the herein defendants as stockholders
of the Rural Bank. The issue as to whether or not the defendants are stockholders of the Rural Bank is a pivotal
issue to be determined on the basis of the Memorandum of Agreement. It is a prejudicial question and a logical
antecedent to confer jurisdiction to this Commission.

It is to be noted, however, that determination of the contractual undertaking of the parties under a
contract lies with the Regional Trial Courts and not with this Commission. x x x
 [11]

Be that as it may, this point has been rendered moot by Republic Act (R.A.) No. 8799, also known as the Securities
Regulation Code. This law, which took effect in 2000, has transferred jurisdiction over such disputes to the RTC. Specifically, R.A.
8799 provides:

Sec. 5. Powers and Functions of the Commission

xxxx

5.2. The Commissions jurisdiction over all cases enumerated under Section 5 of Presidential Decree No. 902-A
is hereby transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court: Provided, That
the Supreme Court in the exercise of its authority may designate the Regional Trial Court branches that shall
exercise jurisdiction over these cases. The Commission shall retain jurisdiction over pending cases involving
intra-corporate disputes submitted for final resolution which should be resolved within one (1) year from the
enactment of this Code. The Commission shall retain jurisdiction over pending suspension of
payments/rehabilitation cases filed as of 30 June 2000 until finally disposed.

Section 5 of P.D. No. 902-A reads, thus:

Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange
Commission over corporations, partnerships and other forms of associations registered with it as expressly
granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases
involving:

a) Devices and schemes employed by or any acts of the board of directors, business
associates, its officers or partnership, amounting to fraud and misrepresentation which may be detrimental to the
interest of the public and/or of the stockholder, partners, members of associations or organizations registered
with the Commission;

b) Controversies arising out of intra-corporate or partnership relations, between and among

stockholders, members, or associates; between any or all of them and the corporation, partnership or association
of which they are stockholders, members or associates, respectively; and between such corporation, partnership
or association and the state insofar as it concerns their individual franchise or right to exist as such entity.

c) Controversies in the election or appointment of directors, trustees, officers or managers of

such corporations, partnerships or associations.

Consequently, whether the cause of action stems from a contractual dispute or one that involves intra-corporate matters,
the RTC already has jurisdiction over this case. In this light, the question of whether the doctrine of estoppel by laches applies, as
enunciated by this Court in Tijam v. Sibonghanoy, no longer finds relevance.

Second, the issue of prescription. Petitioners further contend that the action for rescission has prescribed under Article
1398 of the Civil Code, which provides:

Article 1389. The action to claim rescission must be commenced within four years x x x.

This is an erroneous proposition. Article 1389 specifically refers to rescissible contracts as, clearly, this provision is under
the chapter entitled Rescissible Contracts.

In a previous case,[12] this Court has held that Article 1389:

applies to rescissible contracts, as enumerated and defined in Articles 1380 and 1381. We must stress however,
that the rescission in Article 1381 is not akin to the term rescission in Article 1191 and Article 1592. In Articles
1191 and 1592, the rescission is a principal action which seeks the resolution or cancellation of the contract while
in Article 1381, the action is a subsidiary one limited to cases of rescission for lesion as enumerated in said
article.

The prescriptive period applicable to rescission under Articles 1191 and 1592, is found in Article 1144,
which provides that the action upon a written contract should be brought within ten years from the time the right
of action accrues.

Article 1381 sets out what are rescissible contracts, to wit:

Article 1381. The following contracts are rescissible:

 (1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion
by more than one-fourth of the value of the things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the
preceding number;
(3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims
due them;
(4) Those which refer to things under litigation if they have been entered into by the defendant without
the knowledge and approval of the litigants or of competent judicial authority;
(5) All other contracts specially declared by law to be subject to rescission.

The Memorandum of Agreement subject of this controversy does not fall under the above enumeration. Accordingly, the
prescriptive period that should apply to this case is that provided for in Article 1144, to wit:

Article 1144. The following actions must be brought within ten years from the time the right of action accrues:

(1) Upon a written contract;

xxxx

Based on the records of this case, the action was commenced on July 3, 1987, while the Memorandum of Agreement
was entered into on December 29, 1981. Article 1144 specifically provides that the 10-year period is counted from the time the
right of action accrues. The right of action accrues from the moment the breach of right or duty occurs. [13] Thus, the original
Complaint was filed well within the prescriptive period.

We now proceed to determine if the trial court, as affirmed by the CA, correctly ruled for the rescission of the subject
Agreement.

Petitioners contend that they have fully complied with their obligation under the Memorandum of Agreement. They allege
that due to respondents failure to increase the capital stock of the corporation to an amount that will accommodate their
undertaking, it had become impossible for them to perform their end of the Agreement.

Again, petitioners contention is untenable. There is no question that petitioners herein failed to fulfill their obligation under
the Memorandum of Agreement. Even they admit the same, albeit laying the blame on respondents.

It is true that respondents increased the Rural Banks authorized capital stock to only P5 million, which was not enough to
accommodate the P4.8 million worth of stocks that petitioners were to subscribe to and pay for. However, respondents failure to
fulfill their undertaking in the agreement would have given rise to the scenario contemplated by Article 1191 of the Civil Code,
which reads:

Article 1191. The power to rescind reciprocal 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.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with Articles 1385 and 1388 and the Mortgage Law.

Thus, petitioners should have exacted fulfillment from the respondents or asked for the rescission of the contract instead
of simply not performing their part of the Agreement. But in the course of things, it was the respondents who availed of the remedy
under Article 1191, opting for the rescission of the Agreement in order to regain control of the Rural Bank.

Having determined that the rescission of the subject Memorandum of Agreement was in order, the trial court ordered
petitioner Unlad Resources to return to respondents the management and control of the Rural Bank and for the latter to return the
sum of P1,003,070.00 to petitioners.

Mutual restitution is required in cases involving rescission under Article 1191. This means bringing the parties back to
their original status prior to the inception of the contract.[14] Article 1385 of the Civil Code provides, thus:
 ART. 1385. Rescission creates the obligation to return the things which were the object of the contract,
together with their fruits, and the price with its interest; consequently, it can be carried out only when he who
demands rescission can return whatever he may be obligated to restore.

Neither shall rescission take place when the things which are the object of the contract are legally in the
possession of third persons who did not act in bad faith.

In this case, indemnity for damages may be demanded from the person causing the loss.

This Court has consistently ruled that this provision applies to rescission under Article 1191:

[S]ince Article 1385 of the Civil Code expressly and clearly states that rescission creates the obligation to return
the things which were the object of the contract, together with their fruits, and the price with its interest, the Court
finds no justification to sustain petitioners position that said Article 1385 does not apply to rescission under Article
1191.[15]

Rescission has the effect of unmaking a contract, or its undoing from the beginning, and not merely its
termination.[16] Hence, rescission creates the obligation to return the object of the contract. It can be carried out only when the one
who demands rescission can return whatever he may be obliged to restore. To rescind is to declare a contract void at its inception
and to put an end to it as though it never was. It is not merely to terminate it and release the parties from further obligations to
each other, but to abrogate it from the beginning and restore the parties to their relative positions as if no contract has been
made.[17]

Accordingly, when a decree for rescission is handed down, it is the duty of the court to require both parties to surrender
that which they have respectively received and to place each other as far as practicable in his original situation.The rescission has
the effect of abrogating the contract in all parts.[18]

Clearly, the petitioners failed to fulfill their end of the agreement, and thus, there was just cause for rescission. With the
contract thus rescinded, the parties must be restored to the status quo ante, that is, before they entered into the Memorandum of
Agreement.

Finally, we must resolve the question of the propriety of the award for damages and attorneys fees.

The trial courts Decision mentioned that the evidence is clear and convincing that Plaintiffs (herein respondents) suffered
actual compensatory damages amounting to Four Million Six Hundred One Thousand Seven Hundred Sixty-Five and 38/100
Pesos (P4,601,765.38) moral damages and attorneys fees.

Though not discussed in the body of the Decision, the records show that the amount of P4,601,765.38 pertains to actual losses
incurred by respondents as a result of petitioners non-compliance with their undertaking under the Memorandum of Agreement.
On this point, respondent Dragon presented testimonial and documentary evidence to prove the actual amount of damages, thus:

Atty. Cruz

Q: Was there any consequence to you Mr. Dragon due to any breach of the agreement marked as Exhibit A?

A: Yes sir I could have earned thru the shares of stock that I have, or we have or we had by this time amounting
to several millions pesos (sic). They have only put in the whole amount that we have agreed upon (sic).

Q: In this connection did you cause computation of these losses that you incured (sic)?

A: Yes sir

xxxx

Q: Will you please kindly go through this computation and explain the same to the Honorable Court?

A: Number 1 is an Organ (sic) income from the sale of 60% (sic) at only Three Hundred Ninety Nine Thousand
Two hundred for Nineteen Thousand Nine Hundred Sixty shares which should have been sold if it were
sold to others for P50.00 each for a total of Nine Hundred Ninety Eight Thousand but sold to them for
Three Hundred Ninety nine (sic) Thousand two (sic) Hundred only and of which only Three Hundred
Twenty Four Thousand Six Hundred was paid to me. Therefore, there was a difference of Six Hundred
Seven Three (sic) Thousand Four Hundred (P673,400.00). On the basis of the commulative (sic) lost
income every year from March 1982 from the amount of Seven Six Hundred (sic) Seventy Three
 Thousand four (sic) Hundred (P673,400.) (sic) there would be a discommulative (sic) lost (sic) of One
Million Ninety Three Thousand Nine Hundred Fifty Two Pesos and forty two (sic) centavos
(P1,093,952.42). Please note that the interest imputed is only at 12% per annum but it should had (sic)
been much higher. In 1984 to 1986 (sic) alone rates went as higher (sic) as 40% per annum from the so
called (sic) Jobo Bills and yet we only computed the imputed income or lost income at 12% per annum
and then there is a 40% participation on the unrealized earnings due to their failure to put in an stabilized
(sic) earnings. You will note that if they put in 4.8 million Pesos and it would be earning money, 40% of
that will go to us because 40% of the bank would be ours and 60% would be there (sic). But because
they did put in the 4.8 million our 40% did not earn up to that extent and computed again on the basis of
12% the amount (sic) on the commulative (sic) basis up to September 1990 is 2 million three hundred
fifty two thousand sixty five pesos and four centavos (sic). (P2,352,065.04). You will note again that the
average return of investment of any Cavite based (sic) Rural Bank has been no less than 20% or about
30% per annum. And we computed only the earnings at 12%.

xxxx

There were loans granted fraudulently to members of the board and some borrowers which were not all
charged interest for several years and on this basis we computed a 40% shares (sic) on the foregone
income interest income (sic) on all these fraudulently granted loans, without interest being collected and
none a project (sic) among a plantation project (sic), which was funded by the bank but nothing was
given back to the bank for several hundred thousand of pesos (sic). And we arrived an (sic) estimate of
the foregone interest income a total of One Million Two Hundred Five Thousand Eight Hundred Sixty
None Pesos and eighty one (sic) centavos and 40 percent share of this (sic) would be Four Hundred
Eighty Two Thousand Three Hundred Forty Seven Pesos and Ninety Two Centavos. All in all our
estimate of the damages we have suffered is Four Million Six Hundred one (sic) Thousand Seven
Hundred Sixty Five Pesos and thirty eight (sic) centavos (P4,601,765.38).[19]

More importantly, petitioners never raised in issue before the CA this award of actual compensatory damages. They did not raise
the matter of damages in their Appellants Brief, while in their Motion for Reconsideration, they questioned only the award of moral
and exemplary damages, not the award of actual damages. Even in the present Petition for Review, what petitioners raised was
the propriety of the award of moral and exemplary damages and attorneys fees.

On the grant of moral and exemplary damages and attorneys fees, we note that the trial courts Decision did not discuss
the basis for the award. No mention of these damages awarded or their factual basis is made in the body of the Decision, only in
the dispositive portion. Be that as it may, we have examined the records of the case and found that the award must be sustained.

It should be remembered that there are two separate causes of action in this case: one for rescission of the Memorandum
of Agreement and the other for receivership based on alleged mismanagement of the company by the plaintiffs. While the award
of actual compensatory damages was based on the breach of duty under the Memorandum of Agreement, the award of moral
damages appears to be based on petitioners mismanagement of the company when they became members of the Board of
Directors of the Rural Bank.

Thus, the trial court said:

Under the Rural Banks management, a systematic diversion of the banks assets was conceived
whereby: (a) The Rural Banks funds would be funneled in the development and improvements of the Benitez
Mango Plantation in the guise of an investment in said plantation; (b) Of the net profits earned from the plantations
operations, the Rural Banks share therein, although it shoulders all of the financial risks, would be a measly
twenty percent (20%) thereof while UCI, without investing a single centavo, would earn eighty percent (80%) of
the said profits. Thus, the bulk of the profits of the mango plantation was also sought to be diverted to an entity
wherein Helena Z. Benitez and Conrado L. Benitez II are not only principal stockholders but also the Chairman
of the Board of Directors and President, respectively. Moreover, Defendant Helena Z. Benitez would be entitled
to receive, under the lease contract, rentals in the total amount of Three Hundred Thousand Pesos (P300,000.00)
or ten percent (10%) of gross profits, whichever is higher. (c) Finally, at the end of the lease period, the Rural
Bank was obliged to turn over to the lessor (Helena Z. Benitez) all permanent improvements introduced by it on
the plantation at no cost to Ms. Benitez.

Further, in its report dated March 13, 1985, the [Central Bank] after conducting its general examination
upon the Rural Bank ordered the latter to explain satisfactorily why the bank engage (sic) in an undertaking not
inherently connected with [bona fide] rural banking operations nor within the allowed allied undertakings, contrary
to the provisions of Section 3379 of the CB Manual of Regulations and Section 26 of CB Circular No. 741,
otherwise known as the Circular on Rural Banks[.]

The aforestated CB report states that total exposure to this project now amounts to P475,371.57 or
25.76% of its capital and surplus[.] Notwithstanding a finding by the CB of the undertakings illegality, the
 defendants nevertheless persisted in pursuing the Mango Plantation Project and never acceded to the call of
[the] CB for it to desist from further implementing the said project. It was only after another letter from the CB was
received when defendant finally shelved the mango plantation project.

The result of the aforestated report, as well as the actuations of the Defendants in not yielding to the
order of the CB, adequately establishes not only a violation of CB Rules (specifically Section 26, Circular 741
and Section 3379 of the CB Manual of Regulations, but also, that it has caused undue damage both to the Rural
bank as well as its stockholders.

The initial CB report should have sufficiently apprised Defendants of the illegality of the undertaking.
Defendants, therefore have the duty to terminate the Mango Plantation Project. They, however, [chose] to
continue it, apparently to further their [own] interest in the scheme for their own personal benefit and gain, an act
which is clearly contrary to the fiduciary nature of their relationship with the corporation in which they are officers.
Such persistence proves evident bad faith, or a breach of a known duty through some motive or ill-will, which
resulted in the further dissipation and wastage of the Rural Banks assets, unjustly depriving Plaintiffs of their fair
share in the assets of the bank.

All the foregoing satisfactorily affirms the allegations of Plaintiffs to the effect that these contracts were
but part of a device employed by Defendants to siphon [off] the Rural bank for their personal gain. [20]

Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded
feelings, moral shock, social humiliation, and similar injury. Though incapable of precise pecuniary computation, moral damages
may be recovered if they are the proximate result of the defendants wrongful act or omission. [21] Article 2220 of the Civil Code
further provides that moral damages may be recovered in case of a breach of contract where the defendant acted in bad faith. [22]

To award moral damages, a court must be satisfied with proof of the following requisites: (1) an injury whether physical,
mental, or psychological clearly sustained by the claimant; (2) a culpable act or omission factually established; (3) a wrongful act
or omission of the defendant as the proximate cause of the injury sustained by the claimant; and (4) the award of damages
predicated on any of the cases stated in Article 2219.[23]

Accordingly, based upon the findings of the trial court, it is clear that respondents are entitled to moral damages. The acts
attributed to the petitioners as directors of the Rural Bank manifestly prejudiced the respondents causing detriment to their standing
as directors and stockholders of the Rural Bank.

Exemplary damages cannot be recovered as a matter of right.[24] While these need not be proved, respondents must
show that they are entitled to moral, temperate or compensatory damages before the court may consider the question of awarding
exemplary damages.[25] We find that respondents are indeed entitled to moral damages; thus, the award for exemplary damages
is in order.

Anent the award for attorneys fees, Article 2208 of the Civil Code states:

In the absence of stipulation, attorneys fees and expenses of litigation, other than judicial costs, cannot
be recovered, except:

(1) When exemplary damages are awarded.

Hence, the award of exemplary damages is in itself sufficient justification for the award of attorneys fees. [26]

WHEREFORE, the foregoing premises considered, the petition is hereby DENIED. The assailed Decision and Resolution
of the Court of Appeals in CA-G.R. CV No. 54226 are AFFIRMED.

SO ORDERED.
G.R. No. L-45349 August 15, 1988
NEWTON JISON and SALVACION I. JOSUE petitioners,
vs.
COURT OF APPEALS and ROBERT 0. PHILLIPS & SONS, INC., respondents.

CORTES, J.:

The instant petition for review of the decision of the Court of Appeals poses the issue of the validity of the rescission of a contract to sell a subdivision lot due to the
failure of the lot buyer to pay monthly installments on their due dates and the forfeiture of the amounts already paid.

The case is not one of first impression, and neither is it exceptional. On the contrary, it unambiguous. the common
plight of countless subdivision lot buyers.

Petitioners, the spouses Newton and Salvacion Jison, entered into a Contract to Sell with private respondent,
Robert O. Phillips & Sons, Inc., whereby the latter agreed to sell to the former a lot at the Victoria Valley Subdivision
in Antipolo, Rizal for the agreed price of P55,000.00, with interest at 8,1965 per annum, payable on an installment
basis.

Pursuant to the contract, petitioners paid private respondents a down payment of P11,000.00 on October 20, 1961
and from October 27, 1961; to May 8, 1965 a monthly installment of P533.85.

Thereafter, due to the failure of petitioners to build a house as provided in the contract, the stipulated penalty of
P5.00 per square meter was imposed to the effect that the monthly amortization was increased to P707.24.

On January 1, 1966, February 1, 1966 and March 1, 1966, petitioners failed to pay the monthly installments due on
said dates although petitioners subsequently paid the amounts due and these were accepted by private respondent.

Again on October 1, 1966, November 1, 1966, December 1, 1966 and January 1, 1967, petitioners failed to pay. On
January 11, 1967, private respondent sent a letter (Exh. "3") to petitioners calling their attention to the fact that their
account was four months overdue. This letter was followed up by another letter dated February 27, 1967 (Exh. "3")
where private respondent reminded petitioner of the automatic rescission clause of the contract. Petitioners
eventually paid on March 1, 1967.

Petitioners again failed to pay the monthly installments due on February 1, 1967, March 1, 1967 and April 1, 1967.
Thus, in a letter dated April 6, 1967 (Exh. "D"), private respondent returned petitioners' check and informed them
that the contract was cancelled when on April 1, 1987 petitioners failed to pay the monthly installment due, thereby
making their account delinquent for three months.

On April 19, 1967, petitioners tendered payment for all the installments already due but the tender was refused.
Thus, petitioners countered by filing a complaint for specific performance with the Court of First Instance of Rizal on
May 4, 1967 and consigning the monthly installments due with the court.

Following the hearing of the case, wherein the parties entered into a stipulation of facts, the trial court on January 9,
1969 rendered judgment in favor of private respondent, dismissing the complaint and declaring the contract
cancelled and all payments already made by petitioner franchise. ordering petitioners to pay P1,000.00 as and for
attorney's fees; and declaring the consignation and tender of payment made by petitioners as not amounting to
payment of the corresponding monthly installments.

Not satisfied with the decision of the trial court, petitioners appealed to the Court of Appeals. Agreeing with the
findings and conclusions of the trial court, the Court of Appeals on November 4, 1976 affirmed the former's decision.

Thus, the instant petition for review.

In assailing the decision of the Court of Appeals, petitioners attributed the following errors:

THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT PETITIONERS HAVE
SUBSTANTIALLY, COMPLIED WITH THE TERMS OF THEIR AGREEMENT WITH PRIVATE RESPONDENTS.

II

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE CONTRACT TO SELL MAY BE
AUTOMATICALLY RESCINDED AND PRIVATE RESPONDENT MAY UNILATERALLY RESCINDED SAID
CONTRACT AND REJECT THE CONSIGNATION OF PAYMENTS MADE BY PETITIONERS, WHICH ACTIONS
OF PRIVATE RESPONDENT ARE HIGHLY INIQUITOUS AND UNCONSCIONABLE.

III
THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT PRIVATE RESPONDENT'S ACT OF
FORFEITING ALL PREVIOUS PAYMENTS MADE BY PETITIONERS IS CONTRARY TO LAW, HIGHLY
INIQUITOUS AND UNCONSCIONABLE. [Petitioners' Brief, pp. 13-27.]

As stated at the outset, the principal issue in this case is the legality of the rescission of the contract and the
forfeiture of the payments already made by petitioners.

To support the rescission and forfeiture private respondent falls back on paragraph 3 of the contract which reads:

This contract shall be considered automatically rescinded and cancelled and of no further force and
effect, upon the failure of the Vendee to pay when due Three (3) or more consecutive monthly
installments mentioned in Paragraph 2 of this Contract, or to comply with any of the terms and
conditions hereof, in which case the Vendor shall have the right to resell the said parcel of land to
any Vendee and any amount derived from the sale on account hereof shall be forfeited in favor of
the Vendor as liquidated damages for the breach of the Contract by the Vendee, the latter hereby
renouncing and reconveying absolutely and forever in favor of the Vendor all rights and claims to
and for all the amount paid by the Vendee on account of the Contract, as well as to and for all
compensation of any kind, hereby also agreeing in this connection, to forthwith vacate the said
property or properties peacefully without further advise of any kind.

Since the contract was executed and cancelled prior to the effectivity of Republic Act No. 65856, (the Realty
Installment Buyers', Protection Act) and Presidential Decree No. 957 (the Subdivision and Condominium Buyers'
Protective Decree), it becomes necessary to resort to jurisprudence and the general provisions of law to resolve the
controversy.

The decision in the recent case of Palay, Inc. v. Clave [G.R. No. L-56076, September 21, 1983, 124 SCRA 7,1969,
factions the resolution of the controversy. In deciding whether the rescission of the contract to sell a subdivision lot
after the lot buyer has failed to pay several installments was valid, the Court said:

Well settled is the rule, as held in previous k.- [Torralba v. De los Angeles, 96 SCRA 69, Luzon
Brokerage Co., Inc. v. Maritime Building Co., 43 SCRA 93 and 86 SCRA 305; Lopez v.
Commissioner of Customs, 37 SCRA 327; U.P. v. De los Angeles, 35 SCRA 102; Ponce Enrile v.
CA, 29 SCRA 504; Froilan v. Pan Oriental Shipping Co., 12 SCRA 276; Taylor v. Uy Tieng Piao; 43
Phil. 896, that judicial action for the rescission of a contract is not necessary where the contract
provides that it may be cancelled for violation of any of its terms and conditions. However, even in
the cited cases, there was at least a written notice sent to the degeneration, informing him of the
rescission. As stressed in University of the Philippines v. Walfrido de los Angeles [35 SCRA 102] the
act of a party in treating a contract as cancelled should be made known to the other....

xxx xxx xxx

In other words, resolution of reciprocal contracts may be made extrajudicially unless successfully
impugned in Court. If the debtor impugns the declaration it shall be subject to judicial determination.

In this case, private respondent has denied that rescission is justified and has resorted to judicial
action. It is now for the Court to determine whether resolution of the contract by petitioner was
warranted.

We hold that resolution by petitioners of the contract was ineffective and inoperative against private
respondent for lack of notice of resolution, as held in the U.P. v. Angeles case, supra.

xxx xxx xxx

The indispensability of notice of cancellation to the buyer was to be later underscored in Republic
Act No. 65856, entitled "An Act to Provide Protection to Buyers of Real Estate on Installment
Payments." which took effect on September 14-15). when it specifically provided:

Sec. 3 (b) ... the actual cataract, of the contract shall take place thirty days from receipt by the buyer
of the notice of cancellation or the demand for rescission of the contract by a notarial act and upon
full payment of the cash surrender value to the buyer.

There is no denying that in the instant case the resolution or rescission of the Contract to Sell was valid. Neither can
it be said that the cancellation of the contract was ineffective for failure of private respondents to give petitioners
notice thereof as petitioners were informed cancelled private respondent that the contract was cancelled in the letter
dated April 6, 1967 (Exh. "D"). As R.A. No. 65856, was not yet effective, the notice of cancellation need not be by
notarial act, private respondent's letter being sufficient compliance with the legal requirement.

The facts of 'fee instant case should be distinguished from those in the Palay Inc. case, as such distinction will
explain why the Court in said case invalidated the resolution of the contract. In said case, the subdivision developer,
without informing the buyer of the cancellation of the contract, resold the lot to another person. The lot buyer in said
case was only informed of the resolution of the contract some six years later after the developer, rejected his
request for authority to assign his rights under the contract. Such a situation does not obtain illness: the instant
case. In fact, petitioners were informed of the cancellation of their contract in April 1967, when private respondent
wrote them the letter dated April 6, 1967 (Exh. "D"), and within a month they were able to file a complaint against
Private respondent.

While the resolution of the contract and the forfeiture of the amounts already paid are valid and binding upon
petitioners, the Court is convinced that the forfeiture of the amount of P5.00 although it includes the accumulated
fines for petitioners' failure to construct a house as required by the contract, is clearly iniquitous considering that the
contract price is only P6,173.15 The forfeiture of fifty percent (50%) of the amount already paid, or P3,283.75
appears to be a fair settlement. In arriving at this amount the Court gives weight to the fact that although petitioners
have been delinquent in paying their amortizations several times to the prejudice of private respondent, with the
cancellation of the contract the possession of the lot review.... to private respondent who is free to resell it to another
party. Also, had R.A. No. 65856, been applicable to the instant case, the same percentage of the amount already
paid would have been forfeited [Torralba 3(b).]

The Court's decision to reduce the amount forfeited finds support in the Civil Code. As stated in paragraph 3 of the
contract, in case the contract is cancelled, the amounts already paid shall be forfeited in favor of the vendor as
liquidated damages. The Code provides that liquidated damages, whether intended as an indemnity or a penalty,
shall be equitably reduced if they are iniquitous or unconscionable [Art. 2227.]

Further, in obligations with a penal clause, the judge shall equitably reduce the penalty when the principal obligation
has been partly or irregularly complied with by the debtor [Art. 1229; Hodges v. Javellana, G.R. No. L-17247, April
28, 1962, 4 SCRA 1228]. In this connection, the Court said:

It follows that, in any case wherein there has been a partial or irregular compliance with the
provisions in a contract for special indemnification in the event of failure to comply with its terms,
courts will rigidly apply the doctrine of strict construction and against the enforcement in its entirety
of the industry.' where it is clear from the terms of the contract that the amount or character of the
indemnity is fixed without regard to the probable damages which might be anticipated as a result of a
breach of the terms of the contract; or, in other words, where the indemnity provided for is essentially
a mere penalty having for its principal object the enforcement of compliance with the corporations;
(Laureano v. Kilayco, 32 Phil. 194 (1943).

This principle was reiterated in Makati Development Corp. v. Empire Insurance Co. [G.R. No. L-21780, June 30,
1967, 20 SCRA 557] where the Court affirmed the judgment of the Court of First Instance reducing the subdivision
lot buyer's liability from the stipulated P12,000.00 to Plaintiffs after finding that he had partially performed his
obligation to complete at least fifty percent (50%) of his house within two (2) years from March 31, 1961, fifty percent
(50%) of the house having been completed by the end of April 1961.

WHEREFORE, the Decision of the Court of Appeals is hereby MODIFIED as to the amount forfeited which is
reduced to fifty percent (50%) of the amount already paid or P23,656.32 and AFFIRMED as to all other respects.

Private respondent is ordered to refund to petitioners the excess of P23,656.32 within thirty (30) days from the date
of finality of this judgment.

[G.R. No. 2391. April 28, 1906. ]

ANASTASIO MATEOS, Plaintiff-Appellee, v. FELIX LOPEZ, Defendant-Appellant.
L. D. Hargis, for Appellant.
Del-Pan, Ortigas & Fisher, for Appellee.

SYLLABUS
1. CONTRACT, BREACH OF; DAMAGES. — Where the evidence in the case shows that the plaintiff did not perform the
undertakings to which he was entitled to insist upon its performance by the defendant or to recover damages by reason of its
breach. The right to rescind is implied in reciprocal obligations in case one of the parties thereto fails to perform his undertaking.
(Article 1124, Civil Code.)
DECISION
MAPA, J. :

The complaint prays for judgment in the sum of 15,000 pesos as damages for the breach of a contract. The contract which it is
alleged the defendant has broken was for the sale of 1,000 head of horned cattle which, according to the plaintiff, the defendant
sold to him at the rate of 31.50 pesos per head, upon the condition that they were to be taken by the plaintiff from the
defendant’s stock farm in the town of Mangarin, on the Island of Mindoro. The removal of the cattle was to be effected from time
to time, but the entire 1,000 head of cattle sold were to be withdrawn within six months from January 1, 1904. The plaintiff was to
be entitled to make a selection from among the entire number of cattle on defendant’s stock farm and was to pay the amount
due for the cattle so taken at the time of each delivery. The defendant furthermore undertook, as alleged by the plaintiff, not to
sell to any other person or permit the withdrawal of cattle from his stock farm until the entire 1,000 head sold to the plaintiff had
been withdrawn within the time specified in the contract. The plaintiff furthermore states that he has delivered to the defendant
the sum of 200 pesos on account of the total consideration for the sale.

It is alleged in the complaint that the defendant, violating the terms of the contract, has sold 1,000 head of cattle from his stock
farm at Mangarin to Jose Fernandez & Co., and has refused and continues to refuse to permit the plaintiff to take possession of
the cattle which the have been sold to him.

The court below rendered judgment against the defendant and in favor of the plaintiff in the sum of 10,000 pesos, Mexican
currency, as damages and for the return of the 200 pesos paid on account of the consideration for the sale; these sums,
according to the decision, being equivalent to P9,272.72, Philippine currency.

The defendant denied the allegations of the complaint, and set up as a defense that, although he had certain dealings with the
plaintiff concerning a sale to the latter of 1,000 head of cattle at 31.50 pesos a head, it was agreed between them that the
contract was to be reduced to writing, to be executed on or before the 1st of February, 1904, and that at the time of its execution
the plaintiff was to deliver to him the sum of 5,000 pesos as an advance on account of the 31,500 pesos, which was the total
consideration for the sale of the 1,000 head of cattle contracted for; that the plaintiff did not comply with this condition and was
not seen again by the defendant, although he made frequent attempts to find him from the of December, 1903, at which time the
agreement referred to was entered into, until about a month after January 1, 1904. In short, the defendant contends that the
contract was not broken by him but by the plaintiff.

Sufficient proof was introduced at the time of the trial to support the allegations of the defendant. It is unquestionably true that
the first time plaintiff and defendant entered into negotiations concerning the business, which was on the 13th of December,
1903, it was agreed between them that the contract was to be reduced to writing before the delivery of the first lot of cattle sold.
The plaintiff himself was constrained to admit this in his testimony, as did also his witness, Sixto Francisco, the only other person
who was present at the time. On this occasion the defendant asked the plaintiff to advance him 200 pesos, to which the latter
replied that he could not pay it just at that time but that if the defendant would come to the office of one Montes in nine or ten
days that he would pay the money there. The defendant says that the plaintiff said to him. "It will give it to you," and adds, "then
we expressly closed our agreement," and that then they separated, it being the defendant’s understanding - to use his own
words - that he "though all the negotiations were to be closed when the 200 pesos were paid."cralaw virtua1aw library

On December 24 the defendant went to the office of Montes, where he was paid the 200 pesos promised. In this office,
according to the defendant, the contract was closed with the condition that it was to be reduced to writing before some notary
public within five or six days, and that when the written contract was signed the plaintiff was to pay the defendant 4,000 or 5,000
pesos as an advance on account of the price of the cattle sold. The defendant says that this advance was to be security for the
performance of the contract, as he was not acquainted with the plaintiff. The evidence shows, as a matter of fact, that the parties
were not fact, that the parties were not acquainted prior to the 13th of December, when they first entered into negotiations
concerning this matter. The testimony of the defendant concerning the execution of the written contract and the advance of
4,000 or 5,000 pesos as a condition to the making of the contract has not been disproved at the trial. It is true that Emigdio
Montes states that he saw the 200 pesos delivered to the defendant in his office and that no conversation took place between
the latter and the plaintiff, but this witness, in making this statement, merely relates what took place at the precise moment of the
delivery of the money. The conversation between the defendant and plaintiff as to these matters might have taken place before
or after the delivery of the money. Montes, himself, testifies that they were in his office about a quarter of an hour, and it is not to
be supposed that they were there during that time without saying a word, especially when it is considered that they had met
there for the express purpose of closing up a business transaction of great importance; nor is it to be delivered that the
defendant would have acted in such an unbusiness-like way in a matter of such importance, as the plaintiff would have it
understood. The latter was entirely unknown to the former; they saw each other for the first time on the 13th of December and
on the second time on the 24th of that month, when the 200 pesos were delivered. From the very first the defendant was in a
position to reach a conclusion as to the financial standing of the plaintiff from the fact that in order to pay such a small sum he
needed ten days’ time and the intervention of a third party (Montes). Under these conditions it is highly improbable that the
defendant would have sold him property worth over 30,000 pesos without requiring any security for it, for the insignificant sum of
200 pesos cannot be considered as such, more especially in view of the fact that he was not to be paid in cash even the value of
the first lot of cattle which was to be taken from the farm, but only two-thirds of their value. This is the testimony of the plaintiff
himself. This view is further strengthened when it is considered that the defendant, according to the plaintiff’s own testimony,
had assumed the onerous obligation of refraining from selling to any other persons any of the cattle on his ranch during the
period of six months until the entire 1,000 head sold to the plaintiff had been removed.

This conclusion is corroborated by the documents presented by the plaintiff himself at the trial. They consist of two public
instruments concerning the sale of 1,000 and 2,000 head of cattle by the defendant to Sergio Osmeña and Ramon Lontoc,
respectively. When making these sales the defendant demanded large advances from the purchasers, 10,000 pesos from
Osmeña and 5,000 pesos from Lontoc. It would appears, judging form this, that the defendant was in the habit of asking large
advances upon sales of cattle from his farm, and it would indeed be very strange if he had acted otherwise in the present case
and had left everything, without any security whatever, to the good faith of the purchaser, who was an entire stranger to him.

There is another fact, also, which confirms the testimony of the defendant. It appears from the testimony of Sixto Franciso —
who is, by the way, the plaintiff’s witness — that during the first fortnight in January, 1904, the defendant was looking for the
plaintiff and tried to discover his whereabouts in order to have him carry out the agreement. Other than the execution of the
public instrument and the advance of the 5,000 pesos, no agreement had been made between the parties which the defendant
was entitled to have performed at that time; consequently, if there had not really been an agreement consisting of these two
points, it is hard to understand why the defendant should have been looking for the plaintiff in order to have him carry out the
agreement. If the plaintiff’s statements are true, then there would have been entitled to have performed at that time. This
conduct on the defendant’s part is entirely in harmony with his testimony on the subject.

In our judgment the receipt, in which was stated that the 200 pesos had been received by the defendant on account of the
selling price, is devoid of importance in this case. The receipt of this sum of money for this purpose is not inconsistent with the
existence of an agreement consisting of the execution of the public instrument and the payment of the advance of 5,000 pesos.
These two facts are entirely compatible with one another.

According to the opinion which we have formed of the case we believe that the plaintiff did not perform the undertaking to which
he was bound by virtue of the agreements contained in the contract, consequently he is not entitled to insist upon its
performance by the defendant or to recover damages by reason of its breach. The right to rescind is implied in reciprocal
obligations in case one of the parties bound fails to perform his undertaking. (Article 1124, Civil Code.)

The judgment of the lower court if reversed and the complaint dismissed. No judgment for costs will be given in either instance.
In view of the offer made by the defendant in his answer, he is ordered to return to the plaintiff the 200 pesos received by him on
account of the selling price of the cattle contracted for. Twenty days from the date of this decision judgment will be entered in
accordance herewith, and ten days after the entry of judgment the case will be remanded to the trial court for proceedings in
accordance with law. So ordered.

G.R. No. L-29155 May 13, 1970

UNIVERSAL FOOD CORPORATION, petitioner,
vs.
THE COURT OF APPEALS, MAGDALO V. FRANCISCO, SR., and VICTORIANO N. FRANCISCO, respondents.
Wigberto E. Tañada for petitioner.
Teofilo Mendoza for respondents.

CASTRO, J.:

Petition for certiorari by the Universal Food Corporation against the decision of the Court of Appeals of February 13, 1968 in CA-
G.R. 31430-R (Magdalo V. Francisco, Sr. and Victoriano V. Francisco, plaintiffs-appellants vs. Universal Food Corporation,
defendant-appellee), the dispositive portion of which reads as follows: "WHEREFORE the appealed decision is hereby reversed;
the BILL OF ASSIGNMENT marked Exhibit A is hereby rescinded, and defendant is hereby ordered to return to plaintiff Magdalo
V. Francisco, Sr., his Mafran sauce trademark and formula subject-matter of Exhibit A, and to pay him his monthly salary of
P300.00 from December 1, 1960, until the return to him of said trademark and formula, plus attorney's fees in the amount of
P500.00, with costs against defendant."1

On February 14, 1961 Magdalo V. Francisco, Sr. and Victoriano V. Francisco filed with the Court of First Instance of Manila,
against, the Universal Food Corporation, an action for rescission of a contract entitled "Bill of Assignment." The plaintiffs prayed
the court to adjudge the defendant as without any right to the use of the Mafran trademark and formula, and order the latter to
restore to them the said right of user; to order the defendant to pay Magdalo V. Francisco, Sr. his unpaid salary from December
1, 1960, as well as damages in the sum of P40,000, and to pay the costs of suit.1

On February 28, the defendant filed its answer containing admissions and denials. Paragraph 3 thereof "admits the allegations
contained in paragraph 3 of plaintiffs' complaint." The answer further alleged that the defendant had complied with all the terms
and conditions of the Bill of Assignment and, consequently, the plaintiffs are not entitled to rescission thereof; that the plaintiff
Magdalo V. Francisco, Sr. was not dismissed from the service as permanent chief chemist of the corporation as he is still its chief
chemist; and, by way of special defenses, that the aforesaid plaintiff is estopped from questioning 1) the contents and due
execution of the Bill of Assignment, 2) the corporate acts of the petitioner, particularly the resolution adopted by its board of
directors at the special meeting held on October 14, 1960, to suspend operations to avoid further losses due to increase in the
prices of raw materials, since the same plaintiff was present when that resolution was adopted and even took part in the
consideration thereof, 3) the actuations of its president and general manager in enforcing and implementing the said resolution,
4) the fact that the same plaintiff was negligent in the performance of his duties as chief chemist of the corporation, and 5) the
further fact that the said plaintiff was delinquent in the payment of his subscribed shares of stock with the corporation. The
defendant corporation prayed for the dismissal of the complaint, and asked for P750 as attorney's fees and P5,000 in exemplary
or corrective damages.

On June 25, 1962 the lower court dismissed the plaintiffs' complaint as well as the defendant's claim for damages and attorney's
fees, with costs against the former, who promptly appealed to the Court of Appeals. On February 13, 1969 the appellate court
rendered the judgment now the subject of the present recourse.

The Court of Appeals arrived at the following "uncontroverted" findings of fact:

That as far back as 1938, plaintiff Magdalo V. Francisco, Sr. discovered or invented a formula for the manufacture
of a food seasoning (sauce) derived from banana fruits popularly known as MAFRAN sauce; that the manufacture
of this product was used in commercial scale in 1942, and in the same year plaintiff registered his trademark in
his name as owner and inventor with the Bureau of Patents; that due to lack of sufficient capital to finance the
expansion of the business, in 1960, said plaintiff secured the financial assistance of Tirso T. Reyes who, after a
series of negotiations, formed with others defendant Universal Food Corporation eventually leading to the
execution on May 11, 1960 of the aforequoted "Bill of Assignment" (Exhibit A or 1).

Conformably with the terms and conditions of Exh. A, plaintiff Magdalo V. Francisco, Sr. was appointed Chief
Chemist with a salary of P300.00 a month, and plaintiff Victoriano V. Francisco was appointed auditor and
superintendent with a salary of P250.00 a month. Since the start of the operation of defendant corporation,
plaintiff Magdalo V. Francisco, Sr., when preparing the secret materials inside the laboratory, never allowed
anyone, not even his own son, or the President and General Manager Tirso T. Reyes, of defendant, to enter the
laboratory in order to keep the formula secret to himself. However, said plaintiff expressed a willingness to give
the formula to defendant provided that the same should be placed or kept inside a safe to be opened only when
he is already incapacitated to perform his duties as Chief Chemist, but defendant never acquired a safe for that
purpose. On July 26, 1960, President and General Manager Tirso T. Reyes wrote plaintiff requesting him to
permit one or two members of his family to observe the preparation of the 'Mafran Sauce' (Exhibit C), but said
request was denied by plaintiff. In spite of such denial, Tirso T. Reyes did not compel or force plaintiff to accede
to said request. Thereafter, however, due to the alleged scarcity and high prices of raw materials, on November
28, 1960, Secretary-Treasurer Ciriaco L. de Guzman of defendant issued a Memorandum (Exhibit B), duly
approved by the President and General Manager Tirso T. Reyes that only Supervisor Ricardo Francisco should
be retained in the factory and that the salary of plaintiff Magdalo V. Francisco, Sr., should be stopped for the time
being until the corporation should resume its operation. Some five (5) days later, that is, on December 3, 1960,
President and General Manager Tirso T. Reyes, issued a memorandom to Victoriano Francisco ordering him to
report to the factory and produce "Mafran Sauce" at the rate of not less than 100 cases a day so as to cope with
the orders of the corporation's various distributors and dealers, and with instructions to take only the necessary
daily employees without employing permanent employees (Exhibit B). Again, on December 6, 1961, another
memorandum was issued by the same President and General Manager instructing the Assistant Chief Chemist
Ricardo Francisco, to recall all daily employees who are connected in the production of Mafran Sauce and also
some additional daily employees for the production of Porky Pops (Exhibit B-1). On December 29, 1960, another
memorandum was issued by the President and General Manager instructing Ricardo Francisco, as Chief
Chemist, and Porfirio Zarraga, as Acting Superintendent, to produce Mafran Sauce and Porky Pops in full swing
starting January 2, 1961 with further instructions to hire daily laborers in order to cope with the full blast protection
(Exhibit S-2). Plaintiff Magdalo V. Francisco, Sr. received his salary as Chief Chemist in the amount of P300.00
a month only until his services were terminated on November 30, 1960. On January 9 and 16, 1961, defendant,
acting thru its President and General Manager, authorized Porfirio Zarraga and Paula de Bacula to look for a
buyer of the corporation including its trademarks, formula and assets at a price of not less than P300,000.00
(Exhibits D and D-1). Due to these successive memoranda, without plaintiff Magdalo V. Francisco, Sr. being
 recalled back to work, the latter filed the present action on February 14, 1961. About a month afterwards, in a
letter dated March 20, 1961, defendant, thru its President and General Manager, requested said plaintiff to report
for duty (Exhibit 3), but the latter declined the request because the present action was already filed in court
(Exhibit J).

1. The petitioner's first contention is that the respondents are not entitled to rescission. It is argued that under article 1191 of the
new Civil Code, the right to rescind a reciprocal obligation is not absolute and can be demanded only if one is ready, willing and
able to comply with his own obligation and the other is not; that under article 1169 of the same Code, in reciprocal obligations,
neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon
him; that in this case the trial court found that the respondents not only have failed to show that the petitioner has been guilty of
default in performing its contractual obligations, "but the record sufficiently reveals the fact that it was the plaintiff Magdalo V.
Francisco who had been remiss in the compliance of his contractual obligation to cede and transfer to the defendant the formula
for Mafran sauce;" that even the respondent Court of Appeals found that as "observed by the lower court, 'the record is replete
with the various attempt made by the defendant (herein petitioner) to secure the said formula from Magdalo V. Francisco to no
avail; and that upon the foregoing findings, the respondent Court of Appeals unjustly concluded that the private respondents are
entitled to rescind the Bill of Assignment.

The threshold question is whether by virtue of the terms of the Bill of Assignment the respondent Magdalo V. Francisco, Sr. ceded
and transferred to the petitioner corporation the formula for Mafran sauce.2

The Bill of Assignment sets forth the following terms and conditions:

THAT the Party of the First Part [Magdalo V. Francisco, Sr.] is the sole and exclusive owner of the MAFRAN
trade-mark and the formula for MAFRAN SAUCE;

THAT for and in consideration of the royalty of TWO (2%) PER CENTUM of the net annual profit which the
PARTY OF THE Second Part [Universal Food Corporation] may realize by and/or out of its production of
MAFRAN SAUCE and other food products and from other business which the Party of the Second Part may
engage in as defined in its Articles of Incorporation, and which its Board of Directors shall determine and declare,
said Party of the First Part hereby assign, transfer, and convey all its property rights and interest over said Mafran
trademark and formula for MAFRAN SAUCE unto the Party of the Second Part;

THAT the payment for the royalty of TWO (2%) PER CENTUM of the annual net profit which the Party of the
Second Part obligates itself to pay unto the Party of the First Part as founder and as owner of the MAFRAN
trademark and formula for MAFRAN SAUCE, shall be paid at every end of the Fiscal Year after the proper
accounting and inventories has been undertaken by the Party of the Second Part and after a competent auditor
designated by the Board of Directors shall have duly examined and audited its books of accounts and shall have
certified as to the correctness of its Financial Statement;

THAT it is hereby understood that the Party of the First Part, to improve the quality of the products of the Party
of the First Part and to increase its production, shall endeavor or undertake such research, study, experiments
and testing, to invent or cause to invent additional formula or formulas, the property rights and interest thereon
shall likewise be assigned, transferred, and conveyed unto the Party of the Second Part in consideration of the
foregoing premises, covenants and stipulations:

THAT in the operation and management of the Party of the First Part, the Party of the First Part shall be entitled
to the following Participation:

(a) THAT Dr. MAGDALO V. FRANCISCO shall be appointed Second Vice-President and Chief Chemist of the
Party of the Second Part, which appointments are permanent in character and Mr. VICTORIANO V. FRANCISCO
shall be appointed Auditor thereof and in the event that the Treasurer or any officer who may have the custody
of the funds, assets and other properties of the Party of the Second Part comes from the Party of the First Part,
then the Auditor shall not be appointed from the latter; furthermore should the Auditor be appointed from the
Party representing the majority shares of the Party of the Second Part, then the Treasurer shall be appointed
from the Party of the First Part;

(b) THAT in case of death or other disabilities they should become incapacitated to discharge the duties of their
respective position, then, their shares or assigns and who may have necessary qualifications shall be preferred
to succeed them;

(c) That the Party of the First Part shall always be entitled to at least two (2) membership in the Board of Directors
of the Party of the Second Part;

(d) THAT in the manufacture of MAFRAN SAUCE and other food products by the Party of the Second Part, the
Chief Chemist shall have and shall exercise absolute control and supervision over the laboratory assistants and
personnel and in the purchase and safekeeping of the Chemicals and other mixtures used in the preparation of
said products;

THAT this assignment, transfer and conveyance is absolute and irrevocable in no case shall the PARTY OF THE
First Part ask, demand or sue for the surrender of its rights and interest over said MAFRAN trademark and mafran
formula, except when a dissolution of the Party of the Second Part, voluntary or otherwise, eventually arises, in
which case then the property rights and interests over said trademark and formula shall automatically revert the
Party of the First Part.
Certain provisions of the Bill of Assignment would seem to support the petitioner's position that the respondent patentee, Magdalo
V. Francisco, Sr. ceded and transferred to the petitioner corporation the formula for Mafran sauce. Thus, the last part of the second
paragraph recites that the respondent patentee "assign, transfer and convey all its property rights and interest over said Mafran
trademark and formula for MAFRAN SAUCE unto the Party of the Second Part," and the last paragraph states that such
"assignment, transfer and conveyance is absolute and irrevocable (and) in no case shall the PARTY OF THE First Part ask,
demand or sue for the surrender of its rights and interest over said MAFRAN trademark and mafran formula."

However, a perceptive analysis of the entire instrument and the language employed therein3 would lead one to the conclusion that
what was actually ceded and transferred was only the use of the Mafran sauce formula. This was the precise intention of the
parties,4 as we shall presently show.

Firstly, one of the principal considerations of the Bill of Assignment is the payment of "royalty of TWO (2%) PER CENTUM of the
net annual profit" which the petitioner corporation may realize by and/or out of its production of Mafran sauce and other food
products, etc. The word "royalty," when employed in connection with a license under a patent, means the compensation paid for
the use of a patented invention.

'Royalty,' when used in connection with a license under a patent, means the compensation paid by the licensee
to the licensor for the use of the licensor's patented invention." (Hazeltine Corporation vs. Zenith Radio
Corporation, 100 F. 2d 10, 16.)5

Secondly, in order to preserve the secrecy of the Mafran formula and to prevent its unauthorized proliferation, it is provided in
paragraph 5-(a) of the Bill that the respondent patentee was to be appointed "chief chemist ... permanent in character," and that
in case of his "death or other disabilities," then his "heirs or assigns who may have necessary qualifications shall be preferred to
succeed" him as such chief chemist. It is further provided in paragraph 5-(d) that the same respondent shall have and shall exercise
absolute control and supervision over the laboratory assistants and personnel and over the purchase and safekeeping of the
chemicals and other mixtures used in the preparation of the said product. All these provisions of the Bill of Assignment clearly
show that the intention of the respondent patentee at the time of its execution was to part, not with the formula for Mafran sauce,
but only its use, to preserve the monopoly and to effectively prohibit anyone from availing of the invention. 6

Thirdly, pursuant to the last paragraph of the Bill, should dissolution of the Petitioner corporation eventually take place, "the
property rights and interests over said trademark and formula shall automatically revert to the respondent patentee. This must be
so, because there could be no reversion of the trademark and formula in this case, if, as contended by the petitioner, the
respondent patentee assigned, ceded and transferred the trademark and formula — and not merely the right to use it — for then
such assignment passes the property in such patent right to the petitioner corporation to which it is ceded, which, on the corporation
becoming insolvent, will become part of the property in the hands of the receiver thereof.7

Fourthly, it is alleged in paragraph 3 of the respondents' complaint that what was ceded and transferred by virtue of the Bill of
Assignment is the "use of the formula" (and not the formula itself). This incontrovertible fact is admitted without equivocation in
paragraph 3 of the petitioner's answer. Hence, it does "not require proof and cannot be contradicted." 8 The last part of paragraph
3 of the complaint and paragraph 3 of the answer are reproduced below for ready reference:

3. — ... and due to these privileges, the plaintiff in return assigned to said corporation his interest and rights over
the said trademark and formula so that the defendant corporation could use the formula in the preparation and
manufacture of the mafran sauce, and the trade name for the marketing of said project, as appearing in said
contract ....

3. — Defendant admits the allegations contained in paragraph 3 of plaintiff's complaint.

Fifthly, the facts of the case compellingly demonstrate continued possession of the Mafran sauce formula by the respondent
patentee.

Finally, our conclusion is fortified by the admonition of the Civil Code that a conveyance should be interpreted to effect "the least
transmission of right,"9 and is there a better example of least transmission of rights than allowing or permitting only the use, without
transfer of ownership, of the formula for Mafran sauce.

The foregoing reasons support the conclusion of the Court of Appeals 10 that what was actually ceded and transferred by the
respondent patentee Magdalo V. Francisco, Sr. in favor of the petitioner corporation was only the use of the formula. Properly
speaking, the Bill of Assignment vested in the petitioner corporation no title to the formula. Without basis, therefore, is the
observation of the lower court that the respondent patentee "had been remiss in the compliance of his contractual obligation to
cede and transfer to the defendant the formula for Mafran sauce."

2. The next fundamental question for resolution is whether the respondent Magdalo V. Francisco, Sr. was dismissed from his
position as chief chemist of the corporation without justifiable cause, and in violation of paragraph 5-(a) of the Bill of Assignment
which in part provides that his appointment is "permanent in character."

The petitioner submits that there is nothing in the successive memoranda issued by the corporate officers of the petitioner, marked
exhibits B, B-1 and B-2, from which can be implied that the respondent patentee was being dismissed from his position as chief
chemist of the corporation. The fact, continues the petitioner, is that at a special meeting of the board of directors of the corporation
held on October 14, 1960, when the board decided to suspend operations of the factory for two to four months and to retain only
a skeletal force to avoid further losses, the two private respondents were present, and the respondent patentee was even
designated as the acting superintendent, and assigned the mission of explaining to the personnel of the factory why the corporation
was stopping operations temporarily and laying off personnel. The petitioner further submits that exhibit B indicates that the salary
of the respondent patentee would not be paid only during the time that the petitioner corporation was idle, and that he could draw
his salary as soon as the corporation resumed operations. The clear import of this exhibit was allegedly entirely disregarded by
the respondent Court of Appeals, which concluded that since the petitioner resumed partial production of Mafran sauce without
notifying the said respondent formally, the latter had been dismissed as chief chemist, without considering that the petitioner had
to resume partial operations only to fill its pending orders, and that the respondents were duly notified of that decision, that is, that
exhibit B-1 was addressed to Ricardo Francisco, and this was made known to the respondent Victoriano V. Francisco. Besides,
the records will show that the respondent patentee had knowledge of the resumption of production by the corporation, but in spite
of such knowledge he did not report for work.

The petitioner further submits that if the respondent patentee really had unqualified interest in propagating the product he claimed
he so dearly loved, certainly he would not have waited for a formal notification but would have immediately reported for work,
considering that he was then and still is a member of the corporation's board of directors, and insofar as the petitioner is concerned,
he is still its chief chemist; and because Ricardo Francisco is a son of the respondent patentee to whom had been entrusted the
performance of the duties of chief chemist, while the respondent Victoriano V. Francisco is his brother, the respondent patentee
could not feign ignorance of the resumption of operations.

The petitioner finally submits that although exhibit B-2 is addressed to Ricardo Francisco, and is dated December 29, 1960, the
records will show that the petitioner was set to resume full capacity production only sometime in March or April, 1961, and the
respondent patentee cannot deny that in the very same month when the petitioner was set to resume full production, he received
a copy of the resolution of its board of directors, directing him to report immediately for duty; that exhibit H, of a later vintage as it
is dated February 1, 1961, clearly shows that Ricardo Francisco was merely the acting chemist, and this was the situation on
February 1, 1961, thirteen days before the filing of the present action for rescission. The designation of Ricardo Francisco as the
chief chemist carried no weight because the president and general manager of the corporation had no power to make the
designation without the consent of the corporation's board of directors. The fact of the matter is that although the respondent
Magdalo V. Francisco, Sr. was not mentioned in exhibit H as chief chemist, this same exhibit clearly indicates that Ricardo
Francisco was merely the acting chemist as he was the one assisting his father.

In our view, the foregoing submissions cannot outweigh the uncontroverted facts. On November 28, 1960 the secretary-treasurer
of the corporation issued a memorandum (exh. B), duly approved by its president and general manager, directing that only Ricardo
Francisco be retained in the factory and that the salary of respondent patentee, as chief chemist, be stopped for the time being
until the corporation resumed operations. This measure was taken allegedly because of the scarcity and high prices of raw
materials. Five days later, however, or on December 3, the president and general manager issued a memorandum (exh. B-1)
ordering the respondent Victoria V. Francisco to report to the factory and to produce Mafran sauce at the rate of no less than 100
cases a day to cope with the orders of the various distributors and dealers of the corporation, and instructing him to take only the
necessary daily employees without employing permanent ones. Then on December 6, the same president and general manager
issued yet another memorandum (exh. B-2), instructing Ricardo Francisco, as assistant chief chemist, to recall all daily employees
connected with the production of Mafran sauce and to hire additional daily employees for the production of Porky Pops. Twenty-
three days afterwards, or on December 29, the same president and general manager issued still another memorandum (exh. S-
2), directing "Ricardo Francisco, as Chief Chemist" and Porfirio Zarraga, as acting superintendent, to produce Mafran sauce and,
Porky Pops in full swing, starting January 2, 1961, with the further instruction to hire daily laborers in order to cope with the full
blast production. And finally, at the hearing held on October 24, 1961, the same president and general manager admitted that "I
consider that the two months we paid him (referring to respondent Magdalo V. Francisco, Sr.) is the separation pay."

The facts narrated in the preceding paragraph were the prevailing milieu on February 14, 1961 when the complaint for rescission
of the Bill of Assignment was filed. They clearly prove that the petitioner, acting through its corporate officers, 11 schemed and
maneuvered to ease out, separate and dismiss the said respondent from the service as permanent chief chemist, in flagrant
violation of paragraph 5-(a) and (b) of the Bill of Assignment. The fact that a month after the institution of the action for rescission,
the petitioner corporation, thru its president and general manager, requested the respondent patentee to report for duty (exh. 3),
is of no consequence. As the Court of Appeals correctly observed, such request was a "recall to placate said plaintiff."

3. We now come to the question of rescission of the Bill of Assignment. In this connection, we quote for ready reference the
following articles of the new Civil Code governing rescission of contracts:

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.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with articles 1385 and 1388 of the Mortgage Law.

ART. 1383. The action for rescission is subsidiary; it cannot be instituted except when the party suffering damage
has no other legal means to obtain reparation for the same.

ART. 1384. Rescission shall be only to the extent necessary to cover the damages caused.

At the moment, we shall concern ourselves with the first two paragraphs of article 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 fulfillment and rescission of the obligation, with payment of damages in either case.

In this case before us, there is no controversy that the provisions of the Bill of Assignment are reciprocal in nature. The petitioner
corporation violated the Bill of Assignment, specifically paragraph 5-(a) and (b), by terminating the services of the respondent
patentee Magdalo V. Francisco, Sr., without lawful and justifiable cause.
Upon the factual milieu, is rescission of the Bill of Assignment proper?

The general rule is that rescission of a contract will not be permitted for a slight or casual breach, but only for such substantial and
fundamental breach as would defeat the very object of the parties in making the agreement. 12 The question of whether a breach
of a contract is substantial depends upon the attendant circumstances. 13 The petitioner contends that rescission of the Bill of
Assignment should be denied, because under article 1383, rescission is a subsidiary remedy which cannot be instituted except
when the party suffering damage has no other legal means to obtain reparation for the same. However, in this case the dismissal
of the respondent patentee Magdalo V. Francisco, Sr. as the permanent chief chemist of the corporation is a fundamental and
substantial breach of the Bill of Assignment. He was dismissed without any fault or negligence on his part. Thus, apart from the
legal principle that the option — to demand performance or ask for rescission of a contract — belongs to the injured party, 14 the
fact remains that the respondents-appellees had no alternative but to file the present action for rescission and damages. It is to
be emphasized that the respondent patentee would not have agreed to the other terms of the Bill of Assignment were it not for the
basic commitment of the petitioner corporation to appoint him as its Second Vice-President and Chief Chemist on a permanent
basis; that in the manufacture of Mafran sauce and other food products he would have "absolute control and supervision over the
laboratory assistants and personnel and in the purchase and safeguarding of said products;" and that only by all these measures
could the respondent patentee preserve effectively the secrecy of the formula, prevent its proliferation, enjoy its monopoly, and,
in the process afford and secure for himself a lifetime job and steady income. The salient provisions of the Bill of Assignment,
namely, the transfer to the corporation of only the use of the formula; the appointment of the respondent patentee as Second Vice-
President and chief chemist on a permanent status; the obligation of the said respondent patentee to continue research on the
patent to improve the quality of the products of the corporation; the need of absolute control and supervision over the laboratory
assistants and personnel and in the purchase and safekeeping of the chemicals and other mixtures used in the preparation of said
product — all these provisions of the Bill of Assignment are so interdependent that violation of one would result in virtual nullification
of the rest.

4. The petitioner further contends that it was error for the Court of Appeals to hold that the respondent patentee is entitled to
payment of his monthly salary of P300 from December 1, 1960, until the return to him of the Mafran trademark and formula, arguing
that under articles 1191, the right to specific performance is not conjunctive with the right to rescind a reciprocal contract; that a
plaintiff cannot ask for both remedies; that the appellate court awarded the respondents both remedies as it held that the
respondents are entitled to rescind the Bill of Assignment and also that the respondent patentee is entitled to his salary aforesaid;
that this is a gross error of law, when it is considered that such holding would make the petitioner liable to pay respondent
patentee's salary from December 1, 1960 to "kingdom come," as the said holding requires the petitioner to make payment until it
returns the formula which, the appellate court itself found, the corporation never had; that, moreover, the fact is that the said
respondent patentee refused to go back to work, notwithstanding the call for him to return — which negates his right to be paid
his back salaries for services which he had not rendered; and that if the said respondent is entitled to be paid any back salary, the
same should be computed only from December 1, 1960 to March 31, 1961, for on March 20, 1961 the petitioner had already
formally called him back to work.

The above contention is without merit. Reading once more the Bill of Assignment in its entirety and the particular provisions in
their proper setting, we hold that the contract placed the use of the formula for Mafran sauce with the petitioner, subject to defined
limitations. One of the considerations for the transfer of the use thereof was the undertaking on the part of the petitioner corporation
to employ the respondent patentee as the Second Vice-President and Chief Chemist on a permanent status, at a monthly salary
of P300, unless "death or other disabilities supervened. Under these circumstances, the petitioner corporation could not escape
liability to pay the private respondent patentee his agreed monthly salary, as long as the use, as well as the right to use, the
formula for Mafran sauce remained with the corporation.

5. The petitioner finally contends that the Court of Appeals erred in ordering the corporation to return to the respondents the
trademark and formula for Mafran sauce, when both the decision of the appellate court and that of the lower court state that the
corporation is not aware nor is in possession of the formula for Mafran sauce, and the respondent patentee admittedly never gave
the same to the corporation. According to the petitioner these findings would render it impossible to carry out the order to return
the formula to the respondent patentee. The petitioner's predicament is understandable. Article 1385 of the new Civil Code
provides that rescission creates the obligation to return the things which were the object of the contract. But that as it may, it is a
logical inference from the appellate court's decision that what was meant to be returned to the respondent patentee is not the
formula itself, but only its use and the right to such use. Thus, the respondents in their complaint for rescission specifically and
particularly pray, among others, that the petitioner corporation be adjudged as "without any right to use said trademark and
formula."

ACCORDINGLY, conformably with the observations we have above made, the judgment of the Court of Appeals is modified to
read as follows: "Wherefore the appealed decision is reversed. The Bill of Assignment (Exhibit A) is hereby rescinded, and the
defendant corporation is ordered to return and restore to the plaintiff Magdalo V. Francisco, Sr. the right to the use of his Mafran
sauce trademark and formula, subject-matter of the Bill of Assignment, and to this end the defendant corporation and all its assigns
and successors are hereby permanently enjoined, effective immediately, from using in any manner the said Mafran sauce
trademark and formula. The defendant corporation shall also pay to Magdalo V. Francisco, Sr. his monthly salary of P300 from
December 1, 1960, until the date of finality of this judgment, inclusive, the total amount due to him to earn legal interest from the
date of the finality of this judgment until it shall have been fully paid, plus attorney's fees in the amount of P500, with costs against
the defendant corporation." As thus modified, the said judgment is affirmed, with costs against the petitioner corporation.

cede
G.R. No. L-24321 January 11, 1926
AGUSTIN P. SEVA, plaintiff-appellee,
vs.
ALFRED BERWIN AND CO., INC., and EUSEBIA MEDEL, defendants.
ALFRED BERWIN AND CO., INC., appellant.
Powell and Hill for appellant.
R. Nolan for appellee.

STATEMENT

October 23, 1921, the municipal council of Bacolod granted a franchise to the defendant Alfred Berwin and Company, which is a
corporation, to operate an electric light plant within the limits of that municipality.

November 12, 1921, the franchise was approved by the provincial board of Occidental Negros, and later, it was approved by the
Public Utility Commission. After such approval corporation entered into a written contract, known in the record as Exhibit O, in and
by which, upon the terms and conditions therein stated, the plaintiff agreed to purchase and the defendant corporation agreed to
sell its complete electric light plant, as described in the complaint. The contract was prepared and signed in Iloilo, where the
corporation had its main office and kept its books and record and accounts, and a portion of its supplies. There was no stipulated
price for the sale and purchase of the property. That point was covered by paragraph 2 of the contract, which is as follows:

The price of everything herein specified, including the franchise of the company for the installation of electric lighting,
heating and motive power for the purpose of exploiting which the setting and installation of everything specified in the
foregoing paragraph is carried into effect, shall be fixed on the day when the same is finished and in perfect operation;
and this price shall be the cost price after the installation in Bacolod of everything enumerated in the preceding first
paragraph, plus reasonable profit in favor of the company.

The terms and conditions of the purchase are covered by paragraph 3, which is as follows:

The purchaser agrees to pay for the aforesaid plant in three installments. The first payment, which must be 50 per cent
of the total value, 12 months from the satisfactory and uninterrupted operation of the plant. The second payment, which
shall be 25 per cent of the total value, 15 months from the due operation; and the third and last payment, which shall be
the remaining 25 per cent, 18 months from due operation. Provided that the installments herein stipulated shall not be
extended unless the operation is interrupted for a total period longer than 15 days, and the cause is deficiency or defects
in the machinery.

Under paragraph 7, the purchaser was to execute a first mortgage on all of the property conveyed to him as a security for the
fulfillment of his obligations. It was further agreed that he should appoint the corporation as administrator "(manager) of the plant
so long as he shall have not satisfied in full the total value,' and that "the net profits that may be obtained from the exploitation of
the plant shall be credited monthly to the purchaser, the total amount thereof to be deducted from the entire value of the plant,
and to draw reciprocal interest from the dates of their respective receipts.

The remaining provision of the contract are not material to this opinion.

For an alleged failure of the corporation to convey the property to the plaintiff, under the terms and provisions of the contract, the
plaintiff brought this action, alleging a breach by the corporation, and for a specific performance of the contract.
The defendant corporation demurred to the complaint on the ground that it does not state a cause of action. The demurrer was
overruled, an exception was taken, and the corporation filed an answer, in which it admits all of the allegations of fact made in the
complaint, except those which may hereafter be specifically denied or qualified, and as an affirmative defense, alleges that the
contract, known in the record as Exhibit O, is null and void, for the reason that it was not approved by the Public Utility Commission,
as provided in section 16 of subsection (h) of Act No. 3108. That, notwithstanding the fact that the contract was null and void, the
defendant corporation has complied with all of its terms and provisions. The allegations of fact made in paragraphs 5, 6, and 7 are
denied, and as an affirmative defense, the corporation alleges that it has furnished the plaintiff with a statement of the cost of the
electric light plant, and has notified him of the amount which he is to pay for the property, and that it also notified him that all of the
necessary documents to verify the actual costs of the electric light plant are and have been at his disposal for his inspection and
verification, and that it has furnished him with a report showing, and that such accounts are correct. That, notwithstanding that fact
"the plaintiff has failed and refused to comply with his obligations set out in said contract." The corporation admits that it has
obtained lot upon which the electric light plant is situated but denies that it has done so for the purpose of preventing the plaintiff
from complying with his contract. Defendant also admits that the plaintiff has constructed the camarin on lot 300, cadastral survey
of Bacolod, as alleged in the complaint. It is then alleged that as a result of plaintiff's failure to comply with the contract, the
corporation has been unable to comply with the demand made upon it by the Public Utility Commission, to install additional
equipment, and has been unable to extend the electric light service throughout the municipality of Bacolod to meet the
requirements of its inhabitants, and as a result, its franchise is in imminent danger of being annulled, it has been damaged to the
extent of P50,000. That the Public Utility Commission has refused to approve the contract unless the additional required equipment
shall be installed, and that the conduct of the plaintiff has made it impossible for the corporation to meet that requirement. That
the corporation tendered to its codefendant Eusebia Medel the full amount of the purchase price of the lot mentioned in the
complaint in full accord with the terms of the option to purchase, but that she refused to accept it or to convey the property to the
corporation. As a result of such failure, the corporation has been further damaged in the sum of P5,000. Wherefore, the corporation
prays that the contract be declared null and void, and for corresponding damages.

Upon such issues, the lower court rendered judgment for the specific performance of the contract, and directed the corporation to
render an accounting to the plaintiff at Bacolod as to the true cost of the plant, and to furnish plaintiff with certified copies of all the
invoices and vouchers regarding the equipment and materials used, and enjoined the defendant Eusebia Medel from carrying out
her contract with the corporation duly excepted, and appealed to this court, assigning the following errors:

I. The lower court erred in overruling the demurrer of appellant.

II. The lower court erred in not declaring the contract of plaintiff and appellant void for the reason that the approval of the
Public Utility Commission was not first had as provided for in section 16, subsection (h) of Act No. 3108.

III. The lower court erred in not finding that the appellant has complied with all of its obligations as set out in the void
contract between the plaintiff and appellant.

IV. The lower court erred in not finding that the appellant has no obligation under its void contract with plaintiff to deliver
to plaintiff at Bacolod any comprobantes or other documents regarding the cost price of the electric light plant installed by
appellant at Bacolod.

V. The lower court erred in not finding that plaintiff has failed and refused to comply with his obligations under the void
contract.

VI. The lower court erred in not finding that the appellant has been, and is still being, damaged by the acts of plaintiff.

VII. The lower court erred in not finding that the defendant, Eusebia Medel, is bound by the option contract which she
made with appellant.

VIII. The lower court erred in not ordering the defendant, Eusebia Medel, to comply with her obligations under the option
contract which she made with appellant.

IX. The lower court erred in not finding that the appellant has been, and is still being, damaged by the acts of the defendant,
Eusebia Medel.

X. The lower court erred in issuing an injunction forbidding the defendant, Eusebia Medel, from carrying out her contract
of sale in favor of Alfred Berwin and Co., Inc.

JOHNS, J.:

This is equitable proceeding for the specific performance of a contract.

The property involved is an electric light plant owned and operated by the defendant corporation under a franchise in its name
granted by the municipality of Bacolod, and approved by the provincial board of Occidental Negros and the Public Utility
Commission. The contract is for the sale and purchase of the plant operated under that franchise.

Section 16 of Act No. 3108, among other things, provides:

No public utility as herein define shall:

 (h) Without the approval of the Public Utility Commission first had, sell, alienate, mortgage, encumber, or lease its property
franchises, privileges or rights, or any part thereof. . . . Any sale, alienation, mortgage or encumbrance, lease, fusion or
consolidation made without the approval herein required shall be null and void . . .

There is no claim or pretense that the contract was ever approved by the Public Utility Commission, or that any application was
ever made to have it approved. The language of the Act is plain, clear, and explicit, and it means what it says. That is to say, that
without the approval of the Public Utility Commission, no public utility has the power to sell alienate, mortgage, encumber or lease
its property, franchise, privileges or rights or any part thereof. That language is definite and certain, and within itself might be
construed as an express prohibition against the sale or transfer of a public utility without the permission of the Public Utility
Commission having been first had and obtained. But the section further provides that any such sale, alienation, mortgage, etc.,
without the approval of the Public Utility Commission, shall be null and void. There is no claim that the section is unconstitutional,
and the courts by construction ought not to nullify its plain and express provisions. Even though the plaintiff was the owner of the
property in question, he could not operate it without a franchise, and he cannot secure a franchise without the express approval
of the Public Utility Commission.

It is very apparent that the Legislature intended to prohibit, without the approval of the Public Utility Commission, the doing of the
very thing which plaintiff now seeks to have done.

We are clearly of the opinion that the statute is valid and means what it says, and that in legal effect no sale or transfer of Public
Utility Commission being first had and obtained, and that for want thereof, the contract, which the plaintiff seeks to enforce, is null
and void.

Again it will be noted that no price for the property was agreed upon by the parties, and that the second clause of the contract
provides how and in what manner the price shall be obtained. That is a condition precedent which involves an invoice of the cost
price of the property after its installation, together with "a reasonable profit in favor of the company." There is no definition in the
contract as to what is a reasonable profit. That could only be ascertained by an agreement between the parties, or, for failure to
agree, by a decree of the court, and there is no claim that anything of that kind has ever been done.

As stated, the contract was signed in Iloilo where the company kept its books and vouchers and some of its supplies.

November 14, 1922, the defendant corporation wrote the plaintiff the following letter:

We take pleasure in advising you that the franchise granted by the municipality of Bacolod has been approved by the
Public Utility Commission and confirmed by the Governor-General.

We request you to kindly let us know by what date you wish to receive the plant.

We deem it advisable that a conference be held in this office about fortnight prior to the date set by you.

December 29, 1922, it wrote him as follows:

We hereby requests you to kindly call at this office for the purpose of arranging the price of the plant and to prepare the
necessary documents as provided for by our agreement.

The plant will then be immediately transferred to you and the scale considered as having taken place on January 1, 1923,
from which day on we shall act as administrator of the plant.

It is not denied by the plaintiff that he was in the store of the company in Iloilo, and that while there, he was requested to go into
the company's office to see and inspect the vouchers, books, statements and records of the company, with the end in view of
trying to arrive at the cost of the electric light plant, and that he refused to do so. It also appears that the corporation employed a
competent accountant to render a statement from the corporate books, and that such a statement was furnished and delivered to
the plaintiff. But it was his duty to meet the corporation at least halfway and to make an amicable effort to arrive at the costs of the
plant, and to be fair and reasonable with the company. The record shows that the conduct of the plaintiff was arbitrary and more
or less autocratic, and it is very apparent that if he had been a little more fair and reasonable, that the parties would have arrived
at an amicable agreement as to the costs, and that the contract would have been consummated.

Although the electric light plant itself was in Bacolod, yet all of the corporate records, account books and vouchers, from which the
cost price of the property could be ascertained, were in Iloilo, and the contract was executed there, and it was only from such
records made and kept in Iloilo, that the cost price could be obtained the required information. Under the contract, all that the
defendant was required to do was to give the plaintiff free access to all of its original records, and with that as basis, the parties
could then make a reasonable effort to arrive at an amicable agreement as to the price of the property.

Plaintiff now invokes the equitable of this court for the special performance of a contract where it appears that the failure to perform
is more of his own fault than it is that of the appellant.

We are clearly of the opinion that the contract in question is null and void for want of the approval of the Public Utility Commission.
We are also of the opinion that by his own actions and conduct, the plaintiff is not entitled to a specific performance of the contract.

The judgment of the lower court is reversed, and the complaint dismissed and the injunction issued against the defendant, Eusebia
Medel, is dissolved, with costs in favor of the appellant. So ordered.
G.R. No. 112182 December 12, 1994
BRICKTOWN DEVELOPMENT CORP. (its new corporate name MULTINATIONAL REALTY DEVELOPMENT
CORPORATION) and MARIANO Z. VERALDE, petitioners,
vs.
AMOR TIERRA DEVELOPMENT CORPORATION and the HON. COURT OF APPEALS, respondents.
Tabaquero, Dela Torre, Simando & Associates for petitioners.
Robles, Ricafrente & Aguirre Law Firm for private respondent.

VITUG, J.:

A contract, once perfected, has the force of law between the parties with which they are bound to comply in good faith and from
which neither one may renege without the consent of the other. The autonomy of contracts allows the parties to establish such
stipulations, clauses, terms and conditions as they may deem appropriate provided only that they are not contrary to law, morals,
good customs, public order or public policy. The standard norm in the performance of their respective covenants in the contract,
as well as in the exercise of their rights thereunder, is expressed in the cardinal principle that the parties in that juridical relation
must act with justice, honesty and good faith.

These basic tenets, once again, take the lead in the instant controversy.

Private respondent reminds us that the factual findings of the trial court, sustained by the Court of Appeals, should be considered
binding on this Court in this petition. We concede to this reminder since, indeed, there appears to be no valid justification in the
case at bench for us to take an exception from the rule. We shall, therefore, momentarily paraphrase these findings.

On 31 March 1981, Bricktown Development Corporation (herein petitioner corporation), represented by its President and co-
petitioner Mariano Z. Velarde, executed two Contracts to Sell (Exhs. "A" and "B") in favor of Amor Tierra Development Corporation
(herein private respondent), represented in these acts by its Vice-President, Moises G. Petilla, covering a total of 96 residential
lots, situated at the Multinational Village Subdivision, La Huerta, Parañaque, Metro Manila, with an aggregate area of 82,888
square meters. The total price of P21,639,875.00 was stipulated to be paid by private respondent in such amounts and maturity
dates, as follows: P2,200,000.00 on 31 March 1981; P3,209,968.75 on 30 June 1981; P4,729,906.25 on 31 December 1981; and
the balance of P11,500,000.00 to be paid by means of an assumption by private respondent of petitioner corporation's mortgage
liability to the Philippine Savings Bank or, alternatively, to be made payable in cash. On even date, 31 March 1981, the parties
executed a Supplemental Agreement (Exh. "C"), providing that private respondent would additionally pay to petitioner corporation
the amounts of P55,364.68, or 21% interest on the balance of downpayment for the period from 31 March to 30 June 1981, and
of P390,369.37 representing interest paid by petitioner corporation to the Philippine Savings Bank in updating the bank loan for
the period from 01 February to 31 March 1981.

Private respondent was only able to pay petitioner corporation the sum of P1,334,443.21 (Exhs. "A" to "K"). In the meanwhile,
however, the parties continued to negotiate for a possible modification of their agreement, although nothing conclusive would
appear to have ultimately been arrived at.

Finally, on 12 October 1981, petitioner corporation, through its legal counsel, sent private respondent a "Notice of Cancellation of
Contract" (Exh. "D") on account of the latter's continued failure to pay the installment due 30 June 1981 and the interest on the
unpaid balance of the stipulated initial payment. Petitioner corporation advised private respondent, however, that it (private
respondent) still had the right to pay its arrearages within 30 days from receipt of the notice "otherwise the actual cancellation of
the contract (would) take place."

Several months later, or on 26 September 1983, private respondent, through counsel, demanded (Exh. "E") the refund of private
respondent's various payments to petitioner corporation, allegedly "amounting to P2,455,497.71," with interest within fifteen days
from receipt of said letter, or, in lieu of a cash payment, to assign to private respondent an equivalent number of unencumbered
lots at the same price fixed in the contracts. The demand, not having been heeded, private respondent commenced, on 18
November 1983, its action with the court a quo.1

Following the reception of evidence, the trial court rendered its decision, the dispositive portion of which read:

In view of all the foregoing, judgment is hereby rendered as follows:

1. Declaring the Contracts to Sell and the Supplemental Agreement (Exhibits "A", "B" and "C") rescinded;

2. Ordering the [petitioner] corporation, Bricktown Development Corporation, also known as Multinational Realty
Development Corporation, to return to the [private respondent] the amount of One Million Three Hundred Thirty
Four Thousand Four Hundred Forty-Three Pesos and Twenty-One Centavos (P1,334,443.21) with interest at the
rate of Twelve (12%) percent per annum, starting November 18, 1983, the date when the complaint was filed,
until the amount is fully paid;

3. Ordering the [petitioner] corporation to pay the [private respondent] the amount of Twenty-five Thousand
(P25,000.00) Pesos, representing attorney's fees;

4. Dismissing [petitioner's] counterclaim for lack of merit; and

5. With costs against the [petitioner] corporation.

SO ORDERED.2

On appeal, the appellate court affirmed in toto the trial court's findings and judgment.

In their instant petition, petitioners contend that the Court of Appeals has erred in ruling that —

(1) By petitioners' acts, conduct and representation, they themselves delayed or prevented the performance of
the contracts to sell and the supplemental agreement and were thus estopped from cancelling the same.

(2) Petitioners were no justified in resolving the contracts to sell and the supplemental agreement.

(3) The cancellation of the contract required a positive act on the part of petitioners giving private respondent the
sixty (60) day grace period provided in the contracts to sell; and

(4) In not holding that the forfeiture of the P1,378,197.48 was warranted under the liquidated damages provisions
of the contracts to sell and the supplemental agreement and was not iniquitous nor unconscionable.

The core issues would really come down to (a) whether or not the contracts to sell were validly rescinded or cancelled by petitioner
corporation and, in the affirmative, (b) whether or not the amounts already remitted by private respondent under said contracts
were rightly forfeited by petitioner corporation.

Admittedly, the terms of payment agreed upon by the parties were not met by private respondent. Of a total selling price of
P21,639,875.00, private respondent was only able to remit the sum of P1,334,443.21 which was even short of the stipulated initial
payment of P2,200,000.00. No additional payments, it would seem, were made. A notice of cancellation was ultimately made
months after the lapse of the contracted grace period. Paragraph 15 of the Contracts to Sell provided thusly:

15. Should the PURCHASER fail to pay when due any of the installments mentioned in stipulation No. 1 above,
the OWNER shall grant the purchaser a sixty (60)-day grace period within which to pay the amount/s due, and
should the PURCHASER still fail to pay the due amount/s within the 60-day grace period, the PURCHASER shall
have the right to ex-parte cancel or rescind this contract, provided, however, that the actual cancellation or
rescission shall take effect only after the lapse of thirty (30) days from the date of receipt by the PURCHASER of
the notice of cancellation of this contract or the demand for its rescission by a notarial act, and thereafter, the
 OWNER shall have the right to resell the lot/s subject hereof to another buyer and all payments made, together
with all improvements introduced on the aforementioned lot/s shall be forfeited in favor of the OWNER as
liquidated damages, and in this connection, the PURCHASER obligates itself to peacefully vacate the aforesaid
lot/s without necessity of notice or demand by the OWNER.3

A grace period is a right, not an obligation, of the debtor. When unconditionally conferred, such as in this case, the grace period
is effective without further need of demand either calling for the payment of the obligation or for honoring the right. The grace
period must not be likened to an obligation, the non-payment of which, under Article 1169 of the Civil Code, would generally still
require judicial or extrajudicial demand before "default" can be said to arise.4

Verily, in the case at bench, the sixty-day grace period under the terms of the contracts to sell became ipso factooperative from
the moment the due payments were not met at their stated maturities. On this score, the provisions of Article 1169 of the Civil
Code would find no relevance whatsoever.

The cancellation of the contracts to sell by petitioner corporation accords with the contractual covenants of the parties, and such
cancellation must be respected. It may be noteworthy to add that in a contract to sell, the
non-payment of the purchase price (which is normally the condition for the final sale) can prevent the obligation to convey title
from acquiring any obligatory force (Roque vs. Lapuz, 96 SCRA 741; Agustin vs. Court of Appeals, 186 SCRA 375).

The forfeiture of the payments thus far remitted under the cancelled contracts in question, given the factual findings of both the
trial court and the appellate court, must be viewed differently. While clearly insufficient to justify a foreclosure of the right of
petitioner corporation to rescind or cancel its contracts with private respondent, the series of events and circumstances described
by said courts to have prevailed in the interim between the parties, however, warrant some favorable consideration by this Court.

Petitioners do not deny the fact that there has indeed been a constant dialogue between the parties during the period of their
juridical relation. Concededly, the negotiations that they have pursued strictly did not result in the novation, either extinctive or
modificatory, of the contracts to sell; nevertheless, this Court is unable to completely disregard the following findings of both the
trial court and the appellate court. Said the trial court:

It has been duly established through the testimony of plaintiff's witnesses Marcosa Sanchez and Vicente Casas
that there were negotiations to enter into another agreement between the parties, after March 31, 1981. The first
negotiation took place before June 30, 1981, when Moises Petilla and Renato Dragon, Vice-President and
president, respectively, of the plaintiff corporation, together with Marcosa Sanchez, went to the office of the
defendant corporation and made some proposals to the latter, thru its president, the defendant Mariano Velarde.
They told the defendant Velarde of the plaintiff's request for the division of the lots to be purchased into smaller
lots and the building of town houses or smaller houses therein as these kinds of houses can be sold easily than
big ones. Velarde replied that subdivision owners would not consent to the building of small houses. He, however,
made two counter-proposals, to wit: that the defendant corporation would assign to the plaintiff a number of lots
corresponding to the amounts the latter had already paid, or that the defendant corporation may sell the
corporation itself, together with the Multinational Village Subdivision, and its other properties, to the plaintiff and
the latter's sister companies engaged in the real estate business. The negotiations between the parties went on
for sometime but nothing definite was accomplished.5

For its part, the Court of Appeals observed:

We agree with the court a quo that there is, therefore, reasonable ground to believe that because of the
negotiations between the parties, coupled with the fact that the plaintiff never took actual possession of the
properties and the defendants did not also dispose of the same during the pendency of said negotiations, the
plaintiff was led to believe that the parties may ultimately enter into another agreement in place of the "contracts
to sell." There was, evidently, no malice or bad faith on the part of the plaintiff in suspending payments. On the
contrary, the defendants not only contributed, but had consented to the delay or suspension of payments. They
did not give the plaintiff a categorical answer that their counter-proposals will not materialize.6

In fine, while we must conclude that petitioner corporation still acted within its legal right to declare the contracts to sell rescinded
or cancelled, considering, nevertheless, the peculiar circumstances found to be extant by the trial court, confirmed by the Court of
Appeals, it would be unconscionable, in our view, to likewise sanction the forfeiture by petitioner corporation of payments made to
it by private respondent. Indeed, in the opening statement of this ponencia, we have intimated that the relationship between parties
in any contract must always be characterized and punctuated by good faith and fair dealing. Judging from what the courts below
have said, petitioners did fall well behind that standard. We do not find it equitable, however, to adjudge any interest payment by
petitioners on the amount to be thus refunded, computed from judicial demand, for, indeed, private respondent should not be
allowed to totally free itself from its own breach.

WHEREFORE, the appealed decision is AFFIRMED insofar as it declares valid the cancellation of the contracts in question but
MODIFIED by ordering the refund by petitioner corporation of P1,334,443.21 with 12% interest per annum to commence only,
however, from the date of finality of this decision until such refund is effected. No costs.

SO ORDERED.
G.R. No. 73345. April 7, 1993.
SOCIAL SECURITY SYSTEM, petitioner,
vs.
MOONWALK DEVELOPMENT & HOUSING CORPORATION, ROSITA U. ALBERTO, ROSITA U. ALBERTO, JMA HOUSE,
INC., MILAGROS SANCHEZ SANTIAGO, in her capacity as Register of Deeds for the Province of Cavite, ARTURO SOLITO, in
his capacity as Register of Deeds for Metro Manila District IV, Makati, Metro Manila and the INTERMEDIATE APPELLATE
COURT, respondents.
The Solicitor General for petitioner.
K.V. Faylona & Associates for private respondents.

DECISION

CAMPOS, JR., J p:

Before Us is a petition for review on certiorari of decision 1 of the then Intermediate Appellate Court affirming in toto the decision
of the former Court of First Instance of Rizal, Seventh Judicial District, Branch XXIX, Pasay City.

The facts as found by the Appellate Court are as follows:

"On February 20, 1980, the Social Security System, SSS for brevity, filed a complaint in the Court of First Instance of Rizal against
Moonwalk Development & Housing Corporation, Moonwalk for short, alleging that the former had committed an error in failing to
compute the 12% interest due on delayed payments on the loan of Moonwalk — resulting in a chain of errors in the application of
payments made by Moonwalk and, in an unpaid balance on the principal loan agreement in the amount of P7,053.77 and, also in
not reflecting in its statement or account an unpaid balance on the said penalties for delayed payments in the amount of
P7,517,178.21 as of October 10, 1979.

Moonwalk answered denying SSS' claims and asserting that SSS had the opportunity to ascertain the truth but failed to do so.

The trial court set the case for pre-trial at which pre-trial conference, the court issued an order giving both parties thirty (30) days
within which to submit a stipulation of facts.

The Order of October 6, 1980 dismissing the complaint followed the submission by the parties on September 19, 1980 of the
following stipulation of Facts:

"1. On October 6, 1971, plaintiff approved the application of defendant Moonwalk for an interim loan in the amount of THIRTY
MILLION PESOS (P30,000,000.00) for the purpose of developing and constructing a housing project in the provinces of Rizal and
Cavite;

"2. Out of the approved loan of THIRTY MILLION PESOS (P30,000,000.00), the sum of P9,595,000.00 was released to defendant
Moonwalk as of November 28, 1973;
"3. A third Amended Deed of First Mortgage was executed on December 18, 1973 Annex `D' providing for restructuring of the
payment of the released amount of P9,595,000.00.

"4. Defendants Rosita U. Alberto and Rosita U. Alberto, mother and daughter respectively, under paragraph 5 of the aforesaid
Third Amended Deed of First Mortgage substituted Associated Construction and Surveys Corporation, Philippine Model Homes
Development Corporation, Mariano Z. Velarde and Eusebio T. Ramos, as solidary obligors;

"5. On July 23, 1974, after considering additional releases in the amount of P2,659,700.00, made to defendant Moonwalk,
defendant Moonwalk delivered to the plaintiff a promissory note for TWELVE MILLION TWO HUNDRED FIFTY FOUR
THOUSAND SEVEN HUNDRED PESOS (P12,254,700.00) Annex `E', signed by Eusebio T. Ramos, and the said Rosita U.
Alberto and Rosita U. Alberto;

"6. Moonwalk made a total payment of P23,657,901.84 to SSS for the loan principal of P12,254,700.00 released to it. The last
payment made by Moonwalk in the amount of P15,004,905.74 were based on the Statement of Account, Annex "F" prepared by
plaintiff SSS for defendant;

"7. After settlement of the account stated in Annex 'F' plaintiff issued to defendant Moonwalk the Release of Mortgage for
Moonwalk's mortgaged properties in Cavite and Rizal, Annexes 'G' and 'H' on October 9, 1979 and October 11, 1979 respectively.

"8. In letters to defendant Moonwalk, dated November 28, 1979 and followed up by another letter dated December 17, 1979,
plaintiff alleged that it committed an honest mistake in releasing defendant.

"9. In a letter dated December 21, 1979, defendant's counsel told plaintiff that it had completely paid its obligations to SSS;

"10. The genuineness and due execution of the documents marked as Annex (sic) 'A' to 'O' inclusive, of the Complaint and the
letter dated December 21, 1979 of the defendant's counsel to the plaintiff are admitted.

"Manila for Pasay City, September 2, 1980." 2

On October 6, 1990, the trial court issued an order dismissing the complaint on the ground that the obligation was already
extinguished by the payment by Moonwalk of its indebtedness to SSS and by the latter's act of cancelling the real estate mortgages
executed in its favor by defendant Moonwalk. The Motion for Reconsideration filed by SSS with the trial court was likewise
dismissed by the latter.

These orders were appealed to the Intermediate Appellate Court. Respondent Court reduced the errors assigned by the SSS into
this issue: ". . . are defendants-appellees, namely, Moonwalk Development and Housing Corporation, Rosita U. Alberto, Rosita U.
Alberto, JMA House, Inc. still liable for the unpaid penalties as claimed by plaintiff-appellant or is their obligation extinguished?" 3
As We have stated earlier, the respondent Court held that Moonwalk's obligation was extinguished and affirmed the trial court.

Hence, this Petition wherein SSS raises the following grounds for review:

"First, in concluding that the penalties due from Moonwalk are "deemed waived and/or barred," the appellate court disregarded
the basic tenet that waiver of a right must be express, made in a clear and unequivocal manner. There is no evidence in the case
at bar to show that SSS made a clear, positive waiver of the penalties, made with full knowledge of the circumstances.

Second, it misconstrued the ruling that SSS funds are trust funds, and SSS, being a mere trustee, cannot perform acts affecting
the same, including condonation of penalties, that would diminish property rights of the owners and beneficiaries thereof. (United
Christian Missionary Society v. Social Security Commission, 30 SCRA 982, 988 [1969]).

Third, it ignored the fact that penalty at the rate of 12% p.a. is not inequitable.

Fourth, it ignored the principle that equity will cancel a release on the ground of mistake of fact." 4

The same problem which confronted the respondent court is presented before Us: Is the penalty demandable even after the
extinguishment of the principal obligation?

The former Intermediate Appellate Court, through Justice Eduard P. Caguioa, held in the negative. It reasoned, thus:

"2. As we have explained under No. 1, contrary to what the plaintiff-appellant states in its Brief, what is sought to be recovered in
this case is not the 12% interest on the loan but the 12% penalty for failure to pay on time the amortization. What is sought to be
enforced therefore is the penal clause of the contract entered into between the parties.

Now, what is a penal clause. A penal clause has been defined as

"an accessory obligation which the parties attach to a principal obligation for the purpose of insuring the performance thereof by
imposing on the debtor a special presentation (generally consisting in the payment of a sum of money) in case the obligation is
not fulfilled or is irregularly or inadequately fulfilled" (3 Castan 8th Ed. p. 118).

Now an accessory obligation has been defined as that attached to a principal obligation in order to complete the same or take its
place in the case of breach (4 Puig Peña Part 1 p. 76). Note therefore that an accessory obligation is dependent for its existence
on the existence of a principal obligation. A principal obligation may exist without an accessory obligation but an accessory
obligation cannot exist without a principal obligation. For example, the contract of mortgage is an accessory obligation to enforce
the performance of the main obligation of indebtedness. An indebtedness can exist without the mortgage but a mortgage cannot
exist without the indebtedness, which is the principal obligation. In the present case, the principal obligation is the loan between
the parties. The accessory obligation of a penal clause is to enforce the main obligation of payment of the loan. If therefore the
principal obligation does not exist the penalty being accessory cannot exist.

Now then when is the penalty demandable? A penalty is demandable in case of non performance or late performance of the main
obligation. In other words in order that the penalty may arise there must be a breach of the obligation either by total or partial non
fulfillment or there is non fulfillment in point of time which is called mora or delay. The debtor therefore violates the obligation in
point of time if there is mora or delay. Now, there is no mora or delay unless there is a demand. It is noteworthy that in the present
case during all the period when the principal obligation was still subsisting, although there were late amortizations there was no
demand made by the creditor, plaintiff-appellant for the payment of the penalty. Therefore up to the time of the letter of plaintiff-
appellant there was no demand for the payment of the penalty, hence the debtor was no in mora in the payment of the penalty.

However, on October 1, 1979, plaintiff-appellant issued its statement of account (Exhibit F) showing the total obligation of
Moonwalk as P15,004,905.74, and forthwith demanded payment from defendant-appellee. Because of the demand for payment,
Moonwalk made several payments on September 29, October 9 and 19, 1979 respectively, all in all totalling P15,004,905.74 which
was a complete payment of its obligation as stated in Exhibit F. Because of this payment the obligation of Moonwalk was
considered extinguished, and pursuant to said extinguishment, the real estate mortgages given by Moonwalk were released on
October 9, 1979 and October 10, 1979 (Exhibits G and H). For all purposes therefore the principal obligation of defendant-appellee
was deemed extinguished as well as the accessory obligation of real estate mortgage; and that is the reason for the release of all
the Real Estate Mortgages on October 9 and 10, 1979 respectively.

Now, besides the Real Estate Mortgages, the penal clause which is also an accessory obligation must also be deemed
extinguished considering that the principal obligation was considered extinguished, and the penal clause being an accessory
obligation. That being the case, the demand for payment of the penal clause made by plaintiff-appellant in its demand letter dated
November 28, 1979 and its follow up letter dated December 17, 1979 (which parenthetically are the only demands for payment of
the penalties) are therefore ineffective as there was nothing to demand. It would be otherwise, if the demand for the payment of
the penalty was made prior to the extinguishment of the obligation because then the obligation of Moonwalk would consist of: 1)
the principal obligation 2) the interest of 12% on the principal obligation and 3) the penalty of 12% for late payment for after
demand, Moonwalk would be in mora and therefore liable for the penalty.

Let it be emphasized that at the time of the demand made in the letters of November 28, 1979 and December 17, 1979 as far as
the penalty is concerned, the defendant-appellee was not in default since there was no mora prior to the demand. That being the
case, therefore, the demand made after the extinguishment of the principal obligation which carried with it the extinguishment of
the penal clause being merely an accessory obligation, was an exercise in futility.

3. At the time of the payment made of the full obligation on October 10, 1979 together with the 12% interest by defendant-appellee
Moonwalk, its obligation was extinguished. It being extinguished, there was no more need for the penal clause. Now, it is to be
noted that penalty at anytime can be modified by the Court. Even substantial performance under Art. 1234 authorizes the Court
to consider it as complete performance minus damages. Now, Art, 1229 Civil Code of the Philippines provides:

"ART. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with
by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or
unconscionable."

If the penalty can be reduced after the principal obligation has been partly or irregularly complied with by the debtor, which is
nonetheless a breach of the obligation, with more reason the penal clause is not demandable when full obligation has been
complied with since in that case there is no breach of the obligation. In the present case, there has been as yet no demand for
payment of the penalty at the time of the extinguishment of the obligation, hence there was likewise an extinguishment of the
penalty.

Let Us emphasize that the obligation of defendant-appellee was fully complied with by the debtor, that is, the amount loaned
together with the 12% interest has been fully paid by the appellee. That being so, there is no basis for demanding the penal clause
since the obligation has been extinguished. Here there has been a waiver of the penal clause as it was not demanded before the
full obligation was fully paid and extinguished. Again, emphasis must be made on the fact that plaintiff-appellant has not lost
anything under the contract since in got back in full the amount loan (sic) as well as the interest thereof. The same thing would
have happened if the obligation was paid on time, for then the penal clause, under the terms of the contract would not apply.
Payment of the penalty does not mean gain or loss of plaintiff-appellant since it is merely for the purpose of enforcing the
performance of the main obligation has been fully complied with and extinguished, the penal clause has lost its raison d' entre." 5

We find no reason to depart from the appellate court's decision. We, however, advance the following reasons for the denial of this
petition.

Article 1226 of the Civil Code provides:

"Art. 1226. In obligations with a penal clause, he penalty shall substitute the indemnity for damages and the payment of interests
in case of noncompliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to
pay the penalty or is guilty of fraud in the fulfillment of the obligation.

The penalty may be enforced only when it is demandable in accordance with the provisions of this Code." (Emphasis Ours.)

A penal clause is an accessory undertaking to assume greater liability in case of breach. 6 It has a double function: (1) to provide
for liquidated damages, and (2) to strengthen the coercive force of the obligation by the threat of greater responsibility in the event
of breach. 7 From the foregoing, it is clear that a penal clause is intended to prevent the obligor from defaulting in the performance
of his obligation. Thus, if there should be default, the penalty may be enforced. One commentator of the Civil Code wrote:
"Now when is the penalty deemed demandable in accordance with the provisions of the Civil Code? We must make a distinction
between a positive and a negative obligation. With regard to obligations which are positive (to give and to do), the penalty is
demandable when the debtor is in mora; hence, the necessity of demand by the debtor unless the same is excused . . ." 8

When does delay arise? Under the Civil Code, delay begins from the time the obligee judicially or extrajudicially demands from
the obligor the performance of the obligation.

"Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands
from them the fulfillment of their obligation."

There are only three instances when demand is not necessary to render the obligor in default. These are the following:

"(1) When the obligation or the law expressly so declares;

(2) When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is to
be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or

(3) When the demand would be useless, as when the obligor has rendered it beyond his power to perform." 9

This case does not fall within any of the established exceptions. Hence, despite the provision in the promissory note that "(a)ll
amortization payments shall be made every first five (5) days of the calendar month until the principal and interest on the loan or
any portion thereof actually released has been fully paid," 10 petitioner is not excused from making a demand. It has been
established that at the time of payment of the full obligation, private respondent Moonwalk has long been delinquent in meeting
its monthly arrears and in paying the full amount of the loan itself as the obligation matured sometime in January, 1977. But mere
delinquency in payment does not necessarily mean delay in the legal concept. To be in default ". . . is different from mere delay in
the grammatical sense, because it involves the beginning of a special condition or status which has its own peculiar effects or
results." 11 In order that the debtor may be in default it is necessary that the following requisites be present: (1) that the obligation
be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the performance
judicially and extrajudicially. 12 Default generally begins from the moment the creditor demands the performance of the obligation.
13

Nowhere in this case did it appear that SSS demanded from Moonwalk the payment of its monthly amortizations. Neither did it
show that petitioner demanded the payment of the stipulated penalty upon the failure of Moonwalk to meet its monthly amortization.
What the complaint itself showed was that SSS tried to enforce the obligation sometime in September, 1977 by foreclosing the
real estate mortgages executed by Moonwalk in favor of SSS. But this foreclosure did not push through upon Moonwalk's requests
and promises to pay in full. The next demand for payment happened on October 1, 1979 when SSS issued a Statement of Account
to Moonwalk. And in accordance with said statement, Moonwalk paid its loan in full. What is clear, therefore, is that Moonwalk was
never in default because SSS never compelled performance. Though it tried to foreclose the mortgages, SSS itself desisted from
doing so upon the entreaties of Moonwalk. If the Statement of Account could properly be considered as demand for payment, the
demand was complied with on time. Hence, no delay occurred and there was, therefore, no occasion when the penalty became
demandable and enforceable. Since there was no default in the performance of the main obligation — payment of the loan — SSS
was never entitled to recover any penalty, not at the time it made the Statement of Account and certainly, not after the
extinguishment of the principal obligation because then, all the more that SSS had no reason to ask for the penalties. Thus, there
could never be any occasion for waiver or even mistake in the application for payment because there was nothing for SSS to
waive as its right to enforce the penalty did not arise.

SSS, however, in buttressing its claim that it never waived the penalties, argued that the funds it held were trust funds and as
trustee, the petitioner could not perform acts affecting the funds that would diminish property rights of the owners and beneficiaries
thereof. To support its claim, SSS cited the case of United Christian Missionary Society v. Social Security Commission. 14

We looked into the case and found out that it is not applicable to the present case as it dealt not with the right of the SSS to collect
penalties which were provided for in contracts which it entered into but with its right to collect premiums and its duty to collect the
penalty for delayed payment or non-payment of premiums. The Supreme Court, in that case, stated:

"No discretion or alternative is granted respondent Commission in the enforcement of the law's mandate that the employer who
fails to comply with his legal obligation to remit the premiums to the System within the prescribed period shall pay a penalty of
three (3%) per month. The prescribed penalty is evidently of a punitive character, provided by the legislature to assure that
employers do not take lightly the State's exercise of the police power in the implementation of the Republic's declared policy "to
develop, establish gradually and perfect a social security system which shall be suitable to the needs of the people throughout the
Philippines and (to) provide protection to employers against the hazards of disability, sickness, old age and death . . ."

Thus, We agree with the decision of the respondent court on the matter which We quote, to wit:

"Note that the above case refers to the condonation of the penalty for the non remittance of the premium which is provided for by
Section 22(a) of the Social Security Act . . . In other words, what was sought to be condoned was the penalty provided for by law
for non remittance of premium for coverage under the Social Security Act.

The case at bar does not refer to any penalty provided for by law nor does it refer to the non remittance of premium. The case at
bar refers to a contract of loan entered into between plaintiff and defendant Moonwalk Development and Housing Corporation.
Note, therefore, that no provision of law is involved in this case, nor is there any penalty imposed by law nor a case about non-
remittance of premium required by law. The present case refers to a contract of loan payable in installments not provided for by
law but by agreement of the parties. Therefore, the ratio decidendi of the case of United Christian Missionary Society vs. Social
Security Commission which plaintiff-appellant relies is not applicable in this case; clearly, the Social Security Commission, which
is a creature of the Social Security Act cannot condone a mandatory provision of law providing for the payment of premiums and
for penalties for non remittance. The life of the Social Security Act is in the premiums because these are the funds from which the
Social Security Act gets the money for its purposes and the non-remittance of the premiums is penalized not by the Social Security
Commission but by law.

xxx xxx xxx

It is admitted that when a government created corporation enters into a contract with private party concerning a loan, it descends
to the level of a private person. Hence, the rules on contract applicable to private parties are applicable to it. The argument
therefore that the Social Security Commission cannot waive or condone the penalties which was applied in the United Christian
Missionary Society cannot apply in this case. First, because what was not paid were installments on a loan but premiums required
by law to be paid by the parties covered by the Social Security Act. Secondly, what is sought to be condoned or waived are
penalties not imposed by law for failure to remit premiums required by law, but a penalty for non payment provided for by the
agreement of the parties in the contract between them . . ." 15

WHEREFORE, in view of the foregoing, the petition is DISMISSED and the decision of the respondent court is AFFIRMED. LLpr

SO ORDERED.

G.R. No. 126490 March 31, 1998

ESTRELLA PALMARES, petitioner,
vs.
COURT OF APPEALS and M.B. LENDING CORPORATION, respondents.

REGALADO, J.:

Where a party signs a promissory note as a co-maker and binds herself to be jointly and severally liable with the principal debtor
in case the latter defaults in the payment of the loan, is such undertaking of the former deemed to be that of a surety as an insurer
of the debt, or of a guarantor who warrants the solvency of the debtor?

Pursuant to a promissory note dated March 13, 1990, private respondent M.B. Lending Corporation extended a loan to the spouses
Osmeña and Merlyn Azarraga, together with petitioner Estrella Palmares, in the amount of P30,000.00 payable on or before May
12, 1990, with compounded interest at the rate of 6% per annum to be computed every 30 days from the date thereof.1 On four
occasions after the execution of the promissory note and even after the loan matured, petitioner and the Azarraga spouses were
able to pay a total of P16,300.00, thereby leaving a balance of P13,700.00. No payments were made after the last payment on
September 26, 1991.2
Consequently, on the basis of petitioner's solidary liability under the promissory note, respondent corporation filed a
complaint3 against petitioner Palmares as the lone party-defendant, to the exclusion of the principal debtors, allegedly by reason
of the insolvency of the latter.

In her Amended Answer with Counterclaim,4 petitioner alleged that sometime in August 1990, immediately after the loan matured,
she offered to settle the obligation with respondent corporation but the latter informed her that they would try to collect from the
spouses Azarraga and that she need not worry about it; that there has already been a partial payment in the amount of P17,010.00;
that the interest of 6% per month compounded at the same rate per month, as well as the penalty charges of 3% per month, are
usurious and unconscionable; and that while she agrees to be liable on the note but only upon default of the principal debtor,
respondent corporation acted in bad faith in suing her alone without including the Azarragas when they were the only ones who
benefited from the proceeds of the loan.

During the pre-trial conference, the parties submitted the following issues for the resolution of the trial court: (1) what the rate of
interest, penalty and damages should be; (2) whether the liability of the defendant (herein petitioner) is primary or subsidiary; and
(3) whether the defendant Estrella Palmares is only a guarantor with a subsidiary liability and not a co-maker with primary liability.5

Thereafter, the parties agreed to submit the case for decision based on the pleadings filed and the memoranda to be submitted
by them. On November 26, 1992, the Regional Trial Court of Iloilo City, Branch 23, rendered judgment dismissing the complaint
without prejudice to the filing of a separate action for a sum of money against the spouses Osmeña and Merlyn Azarraga who are
primarily liable on the instrument.6 This was based on the findings of the court a quo that the filing of the complaint against herein
petitioner Estrella Palmares, to the exclusion of the Azarraga spouses, amounted to a discharge of a prior party; that the offer
made by petitioner to pay the obligation is considered a valid tender of payment sufficient to discharge a person's secondary
liability on the instrument; as co-maker, is only secondarily liable on the instrument; and that the promissory note is a contract of
adhesion.

Respondent Court of Appeals, however, reversed the decision of the trial court, and rendered judgment declaring herein petitioner
Palmares liable to pay respondent corporation:

1. The sum of P13,700.00 representing the outstanding balance still due and owing with interest at six percent (6%) per
month computed from the date the loan was contracted until fully paid;

2. The sum equivalent to the stipulated penalty of three percent (3%) per month, of the outstanding balance;

3. Attorney's fees at 25% of the total amount due per stipulations;

4. Plus costs of suit.7

Contrary to the findings of the trial court, respondent appellate court declared that petitioner Palmares is a surety since she bound
herself to be jointly and severally or solidarily liable with the principal debtors, the Azarraga spouses, when she signed as a co-
maker. As such, petitioner is primarily liable on the note and hence may be sued by the creditor corporation for the entire obligation.
It also adverted to the fact that petitioner admitted her liability in her Answer although she claims that the Azarraga spouses should
have been impleaded. Respondent court ordered the imposition of the stipulated 6% interest and 3% penalty charges on the
ground that the Usury Law is no longer enforceable pursuant to Central Bank Circular No. 905. Finally, it rationalized that even if
the promissory note were to be considered as a contract of adhesion, the same is not entirely prohibited because the one who
adheres to the contract is free to reject it entirely; if he adheres, he gives his consent.

Hence this petition for review on certiorari wherein it is asserted that:

A. The Court of Appeals erred in ruling that Palmares acted as surety and is therefore solidarily liable to pay the promissory
note.

1. The terms of the promissory note are vague. Its conflicting provisions do not establish Palmares' solidary liability.

2. The promissory note contains provisions which establish the co-maker's liability as that of a guarantor.

3. There is no sufficient basis for concluding that Palmares' liability is solidary.

4. The promissory note is a contract of adhesion and should be construed against M. B. Lending Corporation.

5. Palmares cannot be compelled to pay the loan at this point.

B. Assuming that Palmares' liability is solidary, the Court of Appeals erred in strictly imposing the interests and penalty
charges on the outstanding balance of the promissory note.

The foregoing contentions of petitioner are denied and contradicted in their material points by respondent corporation. They are
further refuted by accepted doctrines in the American jurisdiction after which we patterned our statutory law on surety and guaranty.
This case then affords us the opportunity to make an extended exposition on the ramifications of these two specialized contracts,
for such guidance as may be taken therefrom in similar local controversies in the future.

The basis of petitioner Palmares' liability under the promissory note is expressed in this wise:

ATTENTION TO CO-MAKERS: PLEASE READ WELL

 I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan, have fully understood the contents of this
Promissory Note for Short-Term Loan:

That as Co-maker, I am fully aware that I shall be jointly and severally or solidarily liable with the above principal maker
of this note;

That in fact, I hereby agree that M.B. LENDING CORPORATION may demand payment of the above loan from me in
case the principal maker, Mrs. Merlyn Azarraga defaults in the payment of the note subject to the same conditions above-
contained.8

Petitioner contends that the provisions of the second and third paragraph are conflicting in that while the second paragraph seems
to define her liability as that of a surety which is joint and solidary with the principal maker, on the other hand, under the third
paragraph her liability is actually that of a mere guarantor because she bound herself to fulfill the obligation only in case the
principal debtor should fail to do so, which is the essence of a contract of guaranty. More simply stated, although the second
paragraph says that she is liable as a surety, the third paragraph defines the nature of her liability as that of a guarantor. According
to petitioner, these are two conflicting provisions in the promissory note and the rule is that clauses in the contract should be
interpreted in relation to one another and not by parts. In other words, the second paragraph should not be taken in isolation, but
should be read in relation to the third paragraph.

In an attempt to reconcile the supposed conflict between the two provisions, petitioner avers that she could be held liable only as
a guarantor for several reasons. First, the words "jointly and severally or solidarily liable" used in the second paragraph are
technical and legal terms which are not fully appreciated by an ordinary layman like herein petitioner, a 65-year old housewife who
is likely to enter into such transactions without fully realizing the nature and extent of her liability. On the contrary, the wordings
used in the third paragraph are easier to comprehend. Second, the law looks upon the contract of suretyship with a jealous eye
and the rule is that the obligation of the surety cannot be extended by implication beyond specified limits, taking into consideration
the peculiar nature of a surety agreement which holds the surety liable despite the absence of any direct consideration received
from either the principal obligor or the creditor. Third, the promissory note is a contract of adhesion since it was prepared by
respondent M.B. Lending Corporation. The note was brought to petitioner partially filled up, the contents thereof were never
explained to her, and her only participation was to sign thereon. Thus, any apparent ambiguity in the contract should be strictly
construed against private respondent pursuant to Art. 1377 of the Civil Code. 9

Petitioner accordingly concludes that her liability should be deemed restricted by the clause in the third paragraph of the promissory
note to be that of a guarantor.

Moreover, petitioner submits that she cannot as yet be compelled to pay the loan because the principal debtors cannot be
considered in default in the absence of a judicial or extrajudicial demand. It is true that the complaint alleges the fact of demand,
but the purported demand letters were never attached to the pleadings filed by private respondent before the trial court. And, while
petitioner may have admitted in her Amended Answer that she received a demand letter from respondent corporation sometime
in 1990, the same did not effectively put her or the principal debtors in default for the simple reason that the latter subsequently
made a partial payment on the loan in September, 1991, a fact which was never controverted by herein private respondent.

Finally, it is argued that the Court of Appeals gravely erred in awarding the amount of P2,745,483.39 in favor of private respondent
when, in truth and in fact, the outstanding balance of the loan is only P13,700.00. Where the interest charged on the loan is
exorbitant, iniquitous or unconscionable, and the obligation has been partially complied with, the court may equitably reduce the
penalty10 on grounds of substantial justice. More importantly, respondent corporation never refuted petitioner's allegation that
immediately after the loan matured, she informed said respondent of her desire to settle the obligation. The court should, therefore,
mitigate the damages to be paid since petitioner has shown a sincere desire for a compromise.11

After a judicious evaluation of the arguments of the parties, we are constrained to dismiss the petition for lack of merit, but to
except therefrom the issue anent the propriety of the monetary award adjudged to herein respondent corporation.

At the outset, let it here be stressed that even assuming arguendo that the promissory note executed between the parties is a
contract of adhesion, it has been the consistent holding of the Court that contracts of adhesion are not invalid per se and that on
numerous occasions the binding effects thereof have been upheld. The peculiar nature of such contracts necessitate a close
scrutiny of the factual milieu to which the provisions are intended to apply. Hence, just as consistently and unhesitatingly, but
without categorically invalidating such contracts, the Court has construed obscurities and ambiguities in the restrictive provisions
of contracts of adhesion strictly albeit not unreasonably against the drafter thereof when justified in light of the operative facts and
surrounding circumstances.12 The factual scenario obtaining in the case before us warrants a liberal application of the rule in favor
of respondent corporation.

The Civil Code pertinently provides:

Art. 2047. By guaranty, a person called the guarantor binds himself to the creditor to fulfill the obligation of the principal
debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book
shall be observed. In such case the contract is called a suretyship.

It is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear and leave no doubt upon the intention
of the contracting parties, the literal meaning of its stipulation shall control.13 In the case at bar, petitioner expressly bound herself
to be jointly and severally or solidarily liable with the principal maker of the note. The terms of the contract are clear, explicit and
unequivocal that petitioner's liability is that of a surety.

Her pretension that the terms "jointly and severally or solidarily liable" contained in the second paragraph of her contract are
technical and legal terms which could not be easily understood by an ordinary layman like her is diametrically opposed to her
manifestation in the contract that she "fully understood the contents" of the promissory note and that she is "fully aware" of her
solidary liability with the principal maker. Petitioner admits that she voluntarily affixed her signature thereto; ergo, she cannot now
be heard to claim otherwise. Any reference to the existence of fraud is unavailing. Fraud must be established by clear and
convincing evidence, mere preponderance of evidence not even being adequate. Petitioner's attempt to prove fraud must,
therefore, fail as it was evidenced only by her own uncorroborated and, expectedly, self-serving allegations.14

Having entered into the contract with full knowledge of its terms and conditions, petitioner is estopped to assert that she did so
under a misapprehension or in ignorance of their legal effect, or as to the legal effect of the undertaking.15 The rule that ignorance
of the contents of an instrument does not ordinarily affect the liability of one who signs it also applies to contracts of suretyship.
And the mistake of a surety as to the legal effect of her obligation is ordinarily no reason for relieving her of liability. 16

Petitioner would like to make capital of the fact that although she obligated herself to be jointly and severally liable with the principal
maker, her liability is deemed restricted by the provisions of the third paragraph of her contract wherein she agreed "that M.B.
Lending Corporation may demand payment of the above loan from me in case the principal maker, Mrs. Merlyn Azarraga defaults
in the payment of the note," which makes her contract one of guaranty and not suretyship. The purported discordance is more
apparent than real.

A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor.17 A suretyship is an undertaking
that the debt shall be paid; a guaranty, an undertaking that the debtor shall pay.18 Stated differently, a surety promises to pay the
principal's debt if the principal will not pay, while a guarantor agrees that the creditor, after proceeding against the principal, may
proceed against the guarantor if the principal is unable to pay.19 A surety binds himself to perform if the principal does not, without
regard to his ability to do so. A guarantor, on the other hand, does not contract that the principal will pay, but simply that he is able
to do so.20 In other words, a surety undertakes directly for the payment and is so responsible at once if the principal debtor makes
default, while a guarantor contracts to pay if, by the use of due diligence, the debt cannot be made out of the principal debtor.21

Quintessentially, the undertaking to pay upon default of the principal debtor does not automatically remove it from the ambit of a
contract of suretyship. The second and third paragraphs of the aforequoted portion of the promissory note do not contain any other
condition for the enforcement of respondent corporation's right against petitioner. It has not been shown, either in the contract or
the pleadings, that respondent corporation agreed to proceed against herein petitioner only if and when the defaulting principal
has become insolvent. A contract of suretyship, to repeat, is that wherein one lends his credit by joining in the principal debtor's
obligation, so as to render himself directly and primarily responsible with him, and without reference to the solvency of the
principal.22

In a desperate effort to exonerate herself from liability, petitioner erroneously invokes the rule on strictissimi juris, which holds that
when the meaning of a contract of indemnity or guaranty has once been judicially determined under the rule of reasonable
construction applicable to all written contracts, then the liability of the surety, under his contract, as thus interpreted and construed,
is not to be extended beyond its strict meaning.23 The rule, however, will apply only after it has been definitely ascertained that the
contract is one of suretyship and not a contract of guaranty. It cannot be used as an aid in determining whether a party's
undertaking is that of a surety or a guarantor.

Prescinding from these jurisprudential authorities, there can be no doubt that the stipulation contained in the third paragraph of
the controverted suretyship contract merely elucidated on and made more specific the obligation of petitioner as generally defined
in the second paragraph thereof. Resultantly, the theory advanced by petitioner, that she is merely a guarantor because her liability
attaches only upon default of the principal debtor, must necessarily fail for being incongruent with the judicial pronouncements
adverted to above.

It is a well-entrenched rule that in order to judge the intention of the contracting parties, their contemporaneous and subsequent
acts shall also be principally considered.24 Several attendant factors in that genre lend support to our finding that petitioner is a
surety. For one, when petitioner was informed about the failure of the principal debtor to pay the loan, she immediately offered to
settle the account with respondent corporation. Obviously, in her mind, she knew that she was directly and primarily liable upon
default of her principal. For another, and this is most revealing, petitioner presented the receipts of the payments already made,
from the time of initial payment up to the last, which were all issued in her name and of the Azarraga spouses.25 This can only be
construed to mean that the payments made by the principal debtors were considered by respondent corporation as creditable
directly upon the account and inuring to the benefit of petitioner. The concomitant and simultaneous compliance of petitioner's
obligation with that of her principals only goes to show that, from the very start, petitioner considered herself equally bound by the
contract of the principal makers.

In this regard, we need only to reiterate the rule that a surety is bound equally and absolutely with the principal, 26 and as such is
deemed an original promisor and debtor from the beginning. 27 This is because in suretyship there is but one contract, and the
surety is bound by the same agreement which binds the principal.28 In essence, the contract of a surety starts with the
agreement,29 which is precisely the situation obtaining in this case before the Court.

It will further be observed that petitioner's undertaking as co-maker immediately follows the terms and conditions stipulated
between respondent corporation, as creditor, and the principal obligors. A surety is usually bound with his principal by the same
instrument, executed at the same time and upon the same consideration; he is an original debtor, and his liability is immediate
and direct.30 Thus, it has been held that where a written agreement on the same sheet of paper with and immediately following
the principal contract between the buyer and seller is executed simultaneously therewith, providing that the signers of the
agreement agreed to the terms of the principal contract, the signers were "sureties" jointly liable with the buyer. 31 A surety usually
enters into the same obligation as that of his principal, and the signatures of both usually appear upon the same instrument, and
the same consideration usually supports the obligation for both the principal and the surety.32

There is no merit in petitioner's contention that the complaint was prematurely filed because the principal debtors cannot as yet
be considered in default, there having been no judicial or extrajudicial demand made by respondent corporation. Petitioner has
agreed that respondent corporation may demand payment of the loan from her in case the principal maker defaults, subject to the
same conditions expressed in the promissory note. Significantly, paragraph (G) of the note states that "should I fail to pay in
accordance with the above schedule of payment, I hereby waive my right to notice and demand." Hence, demand by the creditor
is no longer necessary in order that delay may exist since the contract itself already expressly so declares. 33 As a surety, petitioner
is equally bound by such waiver.

Even if it were otherwise, demand on the sureties is not necessary before bringing suit against them, since the commencement of
the suit is a sufficient demand.34 On this point, it may be worth mentioning that a surety is not even entitled, as a matter of right,
to be given notice of the principal's default. Inasmuch as the creditor owes no duty of active diligence to take care of the interest
of the surety, his mere failure to voluntarily give information to the surety of the default of the principal cannot have the effect of
discharging the surety. The surety is bound to take notice of the principal's default and to perform the obligation. He cannot
complain that the creditor has not notified
him in the absence of a special agreement to that effect in the contract of suretyship. 35

The alleged failure of respondent corporation to prove the fact of demand on the principal debtors, by not attaching copies thereof
to its pleadings, is likewise immaterial. In the absence of a statutory or contractual requirement, it is not necessary that payment
or performance of his obligation be first demanded of the principal, especially where demand would have been useless; nor is it a
requisite, before proceeding against the sureties, that the principal be called on to account. 36 The underlying principle therefor is
that a suretyship is a direct contract to pay the debt of another. A surety is liable as much as his principal is liable, and absolutely
liable as soon as default is made, without any demand upon the principal whatsoever or any notice of default. 37 As an original
promisor and debtor from the beginning, he is held ordinarily to know every default of his principal. 38

Petitioner questions the propriety of the filing of a complaint solely against her to the exclusion of the principal debtors who allegedly
were the only ones who benefited from the proceeds of the loan. What petitioner is trying to imply is that the creditor, herein
respondent corporation, should have proceeded first against the principal before suing on her obligation as surety. We disagree.

A creditor's right to proceed against the surety exists independently of his right to proceed against the principal.39 Under Article
1216 of the Civil Code, the creditor may proceed against any one of the solidary debtors or some or all of them simultaneously.
The rule, therefore, is that if the obligation is joint and several, the creditor has the right to proceed even against the surety
alone.40 Since, generally, it is not necessary for the creditor to proceed against a principal in order to hold the surety liable, where,
by the terms of the contract, the obligation of the surety is the same that of the principal, then soon as the principal is in default,
the surety is likewise in default, and may be sued immediately and before any proceedings are had against the
principal.41 Perforce, in accordance with the rule that, in the absence of statute or agreement otherwise, a surety is primarily liable,
and with the rule that his proper remedy is to pay the debt and pursue the principal for reimbursement, the surety cannot at law,
unless permitted by statute and in the absence of any agreement limiting the application of the security, require the creditor or
obligee, before proceeding against the surety, to resort to and exhaust his remedies against the principal, particularly where both
principal and surety are equally bound.42

We agree with respondent corporation that its mere failure to immediately sue petitioner on her obligation does not release her
from liability. Where a creditor refrains from proceeding against the principal, the surety is not exonerated. In other words, mere
want of diligence or forbearance does not affect the creditor's rights vis-a-vis the surety, unless the surety requires him by
appropriate notice to sue on the obligation. Such gratuitous indulgence of the principal does not discharge the surety whether
given at the principal's request or without it, and whether it is yielded by the creditor through sympathy or from an inclination to
favor the principal, or is only the result of passiveness. The neglect of the creditor to sue the principal at the time the debt falls due
does not discharge the surety, even if such delay continues until the principal becomes insolvent. 43 And, in the absence of proof
of resultant injury, a surety is not discharged by the creditor's mere statement that the creditor will not look to the surety,44 or that
he need not trouble himself.45 The consequences of the delay, such as the subsequent insolvency of the principal,46 or the fact
that the remedies against the principal may be lost by lapse of time, are immaterial.47

The raison d'être for the rule is that there is nothing to prevent the creditor from proceeding against the principal at any time. 48 At
any rate, if the surety is dissatisfied with the degree of activity displayed by the creditor in the pursuit of his principal, he may pay
the debt himself and become subrogated to all the rights and remedies of the creditor.49

It may not be amiss to add that leniency shown to a debtor in default, by delay permitted by the creditor without change in the time
when the debt might be demanded, does not constitute an extension of the time of payment, which would release the surety. 50 In
order to constitute an extension discharging the surety, it should appear that the extension was for a definite period, pursuant to
an enforceable agreement between the principal and the creditor, and that it was made without the consent of the surety or with
a reservation of rights with respect to him. The contract must be one which precludes the creditor from, or at least hinders him in,
enforcing the principal contract within the period during which he could otherwise have enforced it, and which precludes the surety
from paying the debt.51

None of these elements are present in the instant case. Verily, the mere fact that respondent corporation gave the principal debtors
an extended period of time within which to comply with their obligation did not effectively absolve here in petitioner from the
consequences of her undertaking. Besides, the burden is on the surety, herein petitioner, to show that she has been discharged
by some act of the creditor,52 herein respondent corporation, failing in which we cannot grant the relief prayed for.

As a final issue, petitioner claims that assuming that her liability is solidary, the interests and penalty charges on the outstanding
balance of the loan cannot be imposed for being illegal and unconscionable. Petitioner additionally theorizes that respondent
corporation intentionally delayed the collection of the loan in order that the interests and penalty charges would accumulate. The
statement, likewise traversed by said respondent, is misleading.

In an affidavit53 executed by petitioner, which was attached to her petition, she stated, among others, that:

8. During the latter part of 1990, I was surprised to learn that Merlyn Azarraga's loan has been released and that she has
not paid the same upon its maturity. I received a telephone call from Mr. Augusto Banusing of MB Lending informing me
of this fact and of my liability arising from the promissory note which I signed.
 9. I requested Mr. Banusing to try to collect first from Merlyn and Osmeña Azarraga. At the same time, I offered to pay
MB Lending the outstanding balance of the principal obligation should he fail to collect from Merlyn and Osmeña Azarraga.
Mr. Banusing advised me not to worry because he will try to collect first from Merlyn and Osmeña Azarraga.

10. A year thereafter, I received a telephone call from the secretary of Mr. Banusing who reminded that the loan of Merlyn
and Osmeña Azarraga, together with interest and penalties thereon, has not been paid. Since I had no available funds at
that time, I offered to pay MB Lending by delivering to them a parcel of land which I own. Mr. Banusing's secretary,
however, refused my offer for the reason that they are not interested in real estate.

11. In March 1992, I received a copy of the summons and of the complaint filed against me by MB Lending before the
RTC-Iloilo. After learning that a complaint was filed against me, I instructed Sheila Gatia to go to MB Lending and reiterate
my first offer to pay the outstanding balance of the principal obligation of Merlyn Azarraga in the amount of P30,000.00.

12. Ms. Gatia talked to the secretary of Mr. Banusing who referred her to Atty. Venus, counsel of MB Lending.

13. Atty. Venus informed Ms. Gatia that he will consult Mr. Banusing if my offer to pay the outstanding balance of the
principal obligation loan (sic) of Merlyn and Osmeña Azarraga is acceptable. Later, Atty. Venus informed Ms. Gatia that
my offer is not acceptable to Mr. Banusing.

The purported offer to pay made by petitioner can not be deemed sufficient and substantial in order to effectively discharge her
from liability. There are a number of circumstances which conjointly inveigh against her aforesaid theory.

1. Respondent corporation cannot be faulted for not immediately demanding payment from petitioner. It was petitioner who initially
requested that the creditor try to collect from her principal first, and she offered to pay only in case the creditor fails to collect. The
delay, if any, was occasioned by the fact that respondent corporation merely acquiesced to the request of petitioner. At any rate,
there was here no actual offer of payment to speak of but only a commitment to pay if the principal does not pay.

2. Petitioner made a second attempt to settle the obligation by offering a parcel of land which she owned. Respondent corporation
was acting well within its rights when it refused to accept the offer. The debtor of a thing cannot compel the creditor to receive a
different one, although the latter may be of the same value, or more valuable than that which is due. 54 The obligee is entitled to
demand fulfillment of the obligation or performance as stipulated. A change of the object of the obligation would constitute novation
requiring the express consent of the parties.55

3. After the complaint was filed against her, petitioner reiterated her offer to pay the outstanding balance of the obligation in the
amount of P30,000.00 but the same was likewise rejected. Again, respondent corporation cannot be blamed for refusing the
amount being offered because it fell way below the amount it had computed, based on the stipulated interests and penalty charges,
as owing and due from herein petitioner. A debt shall not be understood to have been paid unless the thing or service in which the
obligation consists has been completely delivered or rendered, as the case may be. 56 In other words, the prestation must be
fulfilled completely. A person entering into a contract has a right to insist on its performance in all particulars. 57

Petitioner cannot compel respondent corporation to accept the amount she is willing to pay because the moment the latter accepts
the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, then the obligation
shall be deemed fully complied with.58 Precisely, this is what respondent corporation wanted to avoid when it continually refused
to settle with petitioner at less than what was actually due under their contract.

This notwithstanding, however, we find and so hold that the penalty charge of 3% per month and attorney's fees equivalent to 25%
of the total amount due are highly inequitable and unreasonable.

It must be remembered that from the principal loan of P30,000.00, the amount of P16,300.00 had already been paid even before
the filing of the present case. Article 1229 of the Civil Code provides that the court shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by the debtor. And, even if there has been no performance, the
penalty may also be reduced if it is iniquitous or leonine.

In a case previously decided by this Court which likewise involved private respondent M.B. Lending Corporation, and which is
substantially on all fours with the one at bar, we decided to eliminate altogether the penalty interest for being excessive and
unwarranted under the following rationalization:

Upon the matter of penalty interest, we agree with the Court of Appeals that the economic impact of the penalty interest
of three percent (3 %) per month on total amount due but unpaid should be equitably reduced. The purpose for which the
penalty interest is intended — that is, to punish the obligor — will have been sufficiently served by the effects of
compounded interest. Under the exceptional circumstances in the case at bar, e.g., the original amount loaned was only
P15,000.00; partial payment of P8,600.00 was made on due date; and the heavy (albeit still lawful) regular compensatory
interest, the penalty interest stipulated in the parties' promissory note is iniquitous and unconscionable and may be
equitably reduced further by eliminating such penalty interest altogether.59

Accordingly, the penalty interest of 3% per month being imposed on petitioner should similarly be eliminated.

Finally, with respect to the award of attorney's fees, this Court has previously ruled that even with an agreement thereon between
the parties, the court may nevertheless reduce such attorney's fees fixed in the contract when the amount thereof appears to be
unconscionable or unreasonable.60 To that end, it is not even necessary to show, as in other contracts, that it is contrary to morals
or public policy.61 The grant of attorney's fees equivalent to 25% of the total amount due is, in our opinion, unreasonable and
immoderate, considering the minimal unpaid amount involved and the extent of the work involved in this simple action for collection
of a sum of money. We, therefore, hold that the amount of P10,000.00 as and for attorney's fee would be sufficient in this case.62
WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the MODIFICATION that the penalty interest of 3%
per month is hereby deleted and the award of attorney's fees is reduced to P10,000.00.

SO ORDERED.

[G.R. Nos. 128833. April 20, 1998]

RIZAL COMMERCIAL BANKING CORPORATION, UY CHUN BING AND ELI D. LAO, petitioners, vs. COURT OF APPEALS
and GOYU & SONS, INC., respondents.

[G.R. No. 128834. April 20, 1998]

RIZAL COMMERCIAL BANKING CORPORATION, petitioners, vs. COURT OF APPEALS, ALFREDO C. SEBASTIAN, GOYU
& SONS, INC., GO SONG HIAP, SPOUSES GO TENG KOK and BETTY CHIU SUK YING alias BETTY
GO, respondents.

[G.R. No. 128866. April 20, 1998]

MALAYAN INSURANCE INC., petitioner, vs. GOYU & SONS, INC. respondent.

D EC I S I O N
MELO, J.:

The issues relevant to the herein three consolidated petitions revolve around the fire loss claims of respondent Goyu & Sons,
Inc. (GOYU) with petitioner Malayan Insurance Company, Inc. (MICO) in connection with the mortgage contracts entered into by
and between Rizal Commercial Banking Corporation (RCBC) and GOYU.
The Court of Appeals ordered MICO to pay GOYU its claims in the total amount of P74,040,518.58, plus 37% interest per
annum commencing July 27, 1992. RCBC was ordered to pay actual and compensatory damages in the amount of
P5,000,000.00. MICO and RCBC were held solidarily liable to pay GOYU P1,500,000.00 as exemplary damages and
P1,500,000.00 for attorneys fees. GOYUs obligation to RCBC was fixed at P68,785,069.04 as of April 1992, without any interest,
surcharges, and penalties. RCBC and MICO appealed separately but, in view of the common facts and issues involved, their
individual petitions were consolidated.
The undisputed facts may be summarized as follows:
GOYU applied for credit facilities and accommodations with RCBC at its Binondo Branch. After due evaluation, RCBC
Binondo Branch, through its key officers, petitioners Uy Chun Bing and Eli D. Lao, recommended GOYUs application for approval
by RCBCs executive committee. A credit facility in the amount of P30 million was initially granted. Upon GOYUs application and
Uys and Laos recommendation, RCBCs executive committee increased GOYUs credit facility to P50 million, then to P90 million,
and finally to P117 million.
As security for its credit facilities with RCBC, GOYU executed two real estate mortgages and two chattel mortgages in favor
of RCBC, which were registered with the Registry of Deeds at Valenzuela, Metro Manila. Under each of these four mortgage
contracts, GOYU committed itself to insure the mortgaged property with an insurance company approved by RCBC, and
subsequently, to endorse and deliver the insurance policies to RCBC.
GOYU obtained in its name a total of ten insurance policies from MICO. In February 1992, Alchester Insurance Agency, Inc.,
the insurance agent where GOYU obtained the Malayan insurance policies, issued nine endorsements in favor of RCBC seemingly
upon instructions of GOYU (Exhibits 1-Malayan to 9-Malayan).
On April 27, 1992, one of GOYUs factory buildings in Valenzuela was gutted by fire. Consequently, GOYU submitted its claim
for indemnity on account of the loss insured against. MICO denied the claim on the ground that the insurance policies were either
attached pursuant to writs of attachments/garnishments issued by various courts or that the insurance proceeds were also claimed
by other creditors of GOYU alleging better rights to the proceeds than the insured. GOYU filed a complaint for specific performance
and damages which was docketed at the Regional Trial Court of the National Capital Judicial Region (Manila, Branch 3) as Civil
Case No. 93-65442, now subject of the present G.R. No. 128833 and 128866.
RCBC, one of GOYUs creditors, also filed with MICO its formal claim over the proceeds of the insurance policies, but said
claims were also denied for the same reasons that MICO denied GOYUs claims.
In an interlocutory order dated October 12, 1993 (Record, pp. 311-312), the Regional Trial Court of Manila (Branch 3),
confirmed that GOYUs other creditors, namely, Urban Bank, Alfredo Sebastian, and Philippine Trust Company obtained their
respective writs of attachments from various courts, covering an aggregate amount of P14,938,080.23, and ordered that the
proceeds of the ten insurance policies be deposited with the said court minus the aforementioned P14,938,080.23. Accordingly,
on January 7, 1994, MICO deposited the amount of P50,505,594.60 with Branch 3 of the Manila RTC.
In the meantime, another notice of garnishment was handed down by another Manila RTC sala (Branch 28) for the amount
of P8,696,838.75 (Exhibit 22-Malayan).
After trial, Branch 3 of the Manila RTC rendered judgment in favor of GOYU, disposing:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant, Malayan Insurance Company, Inc.
and Rizal Commercial Banking Corporation, ordering the latter as follows:
1. For defendant Malayan Insurance Co., Inc.:

a. To pay the plaintiff its fire loss claims in the total amount of P74,040,518.58 less the amount of P50,000,000.00 which
is deposited with this Court;

b. To pay the plaintiff damages by way of interest for the duration of the delay since July 27, 1992 (ninety days after
defendant insurers receipt of the required proof of loss and notice of loss) at the rate of twice the ceiling prescribed
by the Monetary Board, on the following amounts:

1) P50,000,000.00 from July 27, 1992 up to the time said amount was deposited with this Court on January 7,
1994;

2) P24,040,518.58 from July 27, 1992 up to the time when the writs of attachments were received by defendant
Malayan;

2. For defendant Rizal Commercial Banking Corporation:

a. To pay the plaintiff actual and compensatory damages in the amount of P2,000,000.00;

3. For both defendants Malayan and RCBC:

a. To pay the plaintiff, jointly and severally, the following amounts:

1) P1,000,000.00 as exemplary damages;

2) P1,000,000.00 as, and for, attorneys fees;

3) Costs of suit.

and on the Counterclaim of defendant RCBC, ordering the plaintiff to pay its loan obligations with defendant RCBC in
the amount of P68,785,069.04, as of April 27, 1992, with interest thereon at the rate stipulated in the respective
promissory notes (without surcharges and penalties) per computation, pp. 14-A, 14-B & 14-C.

FURTHER, the Clerk of Court of the Regional Trial Court of Manila is hereby ordered to release immediately to the plaintiff the
amount of P50,000,000.00 deposited with the Court by defendant Malayan, together with all the interests earned thereon.

(Record, pp. 478-479.)

From this judgment, all parties interposed their respective appeals. GOYU was unsatisfied with the amounts awarded in its
favor. MICO and RCBC disputed the trial courts findings of liability on their part. The Court of Appeals partly granted GOYUs
appeal, but sustained the findings of the trial court with respect to MICO and RCBCs liabilities, thusly:

WHEREFORE, the decision of the lower court dated June 29, 1994 is hereby modified as follows:

1. FOR DEFENDANT MALAYAN INSURANCE CO., INC:

a) To pay the plaintiff its fire loss claim in the total amount of P74,040,518.58 less the amount of P50,505,594.60 (per O.R. No.
3649285) plus deposited in court and damages by way of interest commencing July 27, 1992 until the time Goyu receives the said
amount at the rate of thirty-seven (37%) percent per annum which is twice the ceiling prescribed by the Monetary Board.

2. FOR DEFENDANT RIZAL COMMERCIAL BANKING CORPORATION:

a) To pay the plaintiff actual and compensatory damages in the amount of P5,000,000.00.

3. FOR DEFENDANTS MALAYAN INSURANCE CO., INC., RIZAL COMMERCIAL BANKING CORPORATION, UY CHUN BING
AND ELI D. LAO:

a) To pay the plaintiff jointly and severally the following amounts:

1. P1,500,000.00 as exemplary damages;

2. P1,500,000.00 as and for attorneys fees.

4. And on RCBCs Counterclaim, ordering the plaintiff Goyu & Sons, Inc. to pay its loan obligation with RCBC in the amount of
P68,785,069.04 as of April 27, 1992 without any interest, surcharges and penalties.

The Clerk of the Court of the Regional Trial Court of Manila is hereby ordered to immediately release to Goyu & Sons, Inc. the
amount of P50,505,594.60 (per O.R. No. 3649285) deposited with it by Malayan Insurance Co., Inc., together with all the interests
thereon.

(Rollo, p. 200.)
 RCBC and MICO are now before us in G.R. No. 128833 and 128866, respectively, seeking review and consequent reversal
of the above dispositions of the Court of Appeals.
In G.R. No. 128834, RCBC likewise appeals from the decision in C.A. G.R. No. CV-48376, which case, by virtue of the Court
of Appeals resolution dated August 7, 1996, was consolidated with C.A. G.R. No. CV-46162 (subject of herein G.R. No. 128833). At
issue in said petition is RCBCs right to intervene in the action between Alfredo C. Sebastian (the creditor) and GOYU (the debtor),
where the subject insurance policies were attached in favor of Sebastian.
After a careful review of the material facts as found by the two courts below in relation to the pertinent and applicable laws,
we find merit in the submissions of RCBC and MICO.
The several causes of action pursued below by GOYU gave rise to several related issues which are now submitted in the
petitions before us. This Court, however, discerns one primary and central issue, and this is, whether or not RCBC, as mortgagee,
has any right over the insurance policies taken by GOYU, the mortgagor, in case of the occurrence of loss.
As earlier mentioned, accordant with the credit facilities extended by RCBC to GOYU, the latter executed several mortgage
contracts in favor of RCBC. It was expressly stipulated in these mortgage contracts that GOYU shall insure the mortgaged property
with any of the insurance companies acceptable to RCBC. GOYU indeed insured the mortgaged property with MICO, an insurance
company acceptable to RCBC. Based on their stipulations in the mortgage contracts, GOYU was supposed to endorse these
insurance policies in favor of, and deliver them, to RCBC. Alchester Insurance Agency, Inc., MICOs underwriter from whom GOYU
obtained the subject insurance policies, prepared the nine endorsements (see Exh. 1-Malayan to 9-Malayan; also Exh. 51-RCBC
to 59-RCBC), copies of which were delivered to GOYU, RCBC, and MICO. However, because these endorsements do not bear
the signature of any officer of GOYU, the trial court, as well as the Court of Appeals, concluded that the endorsements are
defective.
We do not quite agree.
It is settled that a mortgagor and a mortgagee have separate and distinct insurable interests in the same mortgaged property,
such that each one of them may insure the same property for his own sole benefit. There is no question that GOYU could insure
the mortgaged property for its own exclusive benefit. In the present case, although it appears that GOYU obtained the subject
insurance policies naming itself as the sole payee, the intentions of the parties as shown by their contemporaneous acts, must be
given due consideration in order to better serve the interest of justice and equity.
It is to be noted that nine endorsement documents were prepared by Alchester in favor of RCBC. The Court is in a quandary
how Alchester could arrive at the idea of endorsing any specific insurance policy in favor of any particular beneficiary or payee
other than the insured had not such named payee or beneficiary been specifically disclosed by the insured itself. It is also
significant that GOYU voluntarily and purposely took the insurance policies from MICO, a sister company of RCBC, and not just
from any other insurance company. Alchester would not have found out that the subject pieces of property were mortgaged to
RCBC had not such information been voluntarily disclosed by GOYU itself. Had it not been for GOYU, Alchester would not have
known of GOYUs intention of obtaining insurance coverage in compliance with its undertaking in the mortgage contracts with
RCBC, and verily, Alchester would not have endorsed the policies to RCBC had it not been so directed by GOYU.
On equitable principles, particularly on the ground of estoppel, the Court is constrained to rule in favor of mortgagor
RCBC.The basis and purpose of the doctrine was explained in Philippine National Bank vs. Court of Appeals (94 SCRA 357
[1979]), to wit:

The doctrine of estoppel is based upon the grounds of public policy, fair dealing, good faith and justice, and its purpose is to forbid
one to speak against his own act, representations, or commitments to the injury of one to whom they were directed and who
reasonably relied thereon. The doctrine of estoppel springs from equitable principles and the equities in the case. It is designed to
aid the law in the administration of justice where without its aid injustice might result. It has been applied by this Court wherever
and whenever special circumstances of a case so demand.

(p. 368.)

Evelyn Lozada of Alchester testified that upon instructions of Mr. Go, through a certain Mr. Yam, she prepared in
quadruplicate on February 11, 1992 the nine endorsement documents for GOYUs nine insurance policies in favor of RCBC. The
original copies of each of these nine endorsement documents were sent to GOYU, and the others were sent to RCBC and MICO,
while the fourth copies were retained for Alchesters file (tsn, February 23, pp. 7-8). GOYU has not denied having received from
Alchester the originals of these endorsements.
RCBC, in good faith, relied upon the endorsement documents sent to it as this was only pursuant to the stipulation in the
mortgage contracts. We find such reliance to be justified under the circumstances of the case. GOYU failed to seasonably
repudiate the authority of the person or persons who prepared such endorsements. Over and above this, GOYU continued, in the
meantime, to enjoy the benefits of the credit facilities extended to it by RCBC. After the occurrence of the loss insured against, it
was too late for GOYU to disown the endorsements for any imagined or contrived lack of authority of Alchester to prepare and
issue said endorsements. If there had not been actually an implied ratification of said endorsements by virtue of GOYUs inaction
in this case, GOYU is at the very least estopped from assailing their operative effects. To permit GOYU to capitalize on its non-
confirmation of these endorsements while it continued to enjoy the benefits of the credit facilities of RCBC which believed in good
faith that there was due endorsement pursuant to their mortgage contracts, is to countenance grave contravention of public policy,
fair dealing, good faith, and justice. Such an unjust situation, the Court cannot sanction. Under the peculiar circumstances
obtaining in this case, the Court is bound to recognize RCBCs right to the proceeds of the insurance policies if not for the actual
endorsement of the policies, at least on the basis of the equitable principle of estoppel.
GOYU cannot seek relief under Section 53 of the Insurance Code which provides that the proceeds of insurance shall
exclusively apply to the interest of the person in whose name or for whose benefit it is made. The peculiarity of the circumstances
obtaining in the instant case presents a justification to take exception to the strict application of said provision, it having been
sufficiently established that it was the intention of the parties to designate RCBC as the party for whose benefit the insurance
policies were taken out. Consider thus the following:

1. It is undisputed that the insured pieces of property were the subject of mortgage contracts entered into between RCBC and
GOYU in consideration of and for securing GOYUs credit facilities from RCBC. The mortgage contracts contained common
provisions whereby GOYU, as mortgagor, undertook to have the mortgaged property properly covered against any loss by an
insurance company acceptable to RCBC.

2. GOYU voluntarily procured insurance policies to cover the mortgaged property from MICO, no less than a sister company of
RCBC and definitely an acceptable insurance company to RCBC.

3. Endorsement documents were prepared by MICOs underwriter, Alchester Insurance Agency, Inc., and copies thereof were sent
to GOYU, MICO, and RCBC. GOYU did not assail, until of late, the validity of said endorsements.

4. GOYU continued until the occurrence of the fire, to enjoy the benefits of the credit facilities extended by RCBC which was
conditioned upon the endorsement of the insurance policies to be taken by GOYU to cover the mortgaged properties.

This Court can not over stress the fact that upon receiving its copies of the endorsement documents prepared by Alchester,
GOYU, despite the absence of its written conformity thereto, obviously considered said endorsement to be sufficient compliance
with its obligation under the mortgage contracts since RCBC accordingly continued to extend the benefits of its credit facilities and
GOYU continued to benefit therefrom. Just as plain too is the intention of the parties to constitute RCBC as the beneficiary of the
various insurance policies obtained by GOYU. The intention of the parties will have to be given full force and effect in this particular
case. The insurance proceeds may, therefore, be exclusively applied to RCBC, which under the factual circumstances of the case,
is truly the person or entity for whose benefit the policies were clearly intended.
Moreover, the laws evident intention to protect the interests of the mortgagee upon the mortgaged property is expressed in
Article 2127 of the Civil Code which states:

ART. 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, and the rents or income not yet
received when the obligation becomes due, and to the amount of the indemnity granted or owing to the proprietor from the insurers
of the property mortgaged, or in virtue of expropriation for public use, with the declarations, amplifications and limitations
established by law, whether the estate remains in the possession of the mortgagor, or it passes into the hands of a third person.

Significantly, the Court notes that out of the 10 insurance policies subject of this case, only 8 of them appear to have been
subject of the endorsements prepared and delivered by Alchester for and upon instructions of GOYU as shown below:

INSURANCE POLICY PARTICULARS ENDORSEMENT

a. Policy Number : F-114-07795 None

Issue Date : March 18, 1992

Expiry Date : April 5, 1993

Amount : P9,646,224.92

b. Policy Number : ACIA/F-174-07660 Exhibit 1-Malayan

Issue Date : January 18, 1992

Expiry Date : February 9, 1993

Amount : P4,307,217.54

c. Policy Number : ACIA/F-114-07661 Exhibit 2-Malayan

Issue Date : January 18, 1992

Expiry Date : February 15, 1993

Amount : P6,603,586.43

d. Policy Number : ACIA/F-114-07662 Exhibit 3-Malayan

Issue Date : January 18, 1992

Expiry Date : (not legible)

Amount : P6,603,586.43

e. Policy Number : ACIA/F-114-07663 Exhibit 4-Malayan

Issue Date : January 18, 1992

Expiry Date : February 9, 1993

Amount : P9,457,972.76

f. Policy Number : ACIA/F-114-07623 Exhibit 7-Malayan

Issue Date : January 13, 1992

Expiry Date : January 13, 1993

Amount : P24,750,000.00

g. Policy Number : ACIA/F-174-07223 Exhibit 6-Malayan

Issue Date : May 29, 1991

Expiry Date : June 27, 1992

Amount : P6,000,000.00

h. Policy Number : CI/F-128-03341 None

Issue Date : May 3, 1991

Expiry Date : May 3, 1992

Amount : P10,000,000.00

i. Policy Number : F-114-07402 Exhibit 8-Malayan

Issue Date : September 16, 1991

Expiry Date : October 19, 1992

Amount : P32,252,125.20

j. Policy Number : F-114-07525 Exhibit 9-Malayan

Issue Date : November 20, 1991

Expiry Date : December 5, 1992

Amount : P6,603,586.43

(pp. 456-457, Record; Folder of Exhibits for MICO.)

Policy Number F-114-07795 [(a) above] has not been endorsed. This fact was admitted by MICOs witness, Atty. Farolan
(tsn, February 16, 1994, p. 25). Likewise, the record shows no endorsement for Policy Number CI/F-128-03341 [(h) above].Also,
one of the endorsement documents, Exhibit 5-Malayan, refers to a certain insurance policy number ACIA-F-07066, which is not
among the insurance policies involved in the complaint.
 The proceeds of the 8 insurance policies endorsed to RCBC aggregate to P89,974,488.36. Being exclusively payable to
RCBC by reason of the endorsement by Alchester to RCBC, which we already ruled to have the force and effect of an endorsement
by GOYU itself, these 8 policies can not be attached by GOYUs other creditors up to the extent of the GOYUs outstanding
obligation in RCBCs favor. Section 53 of the Insurance Code ordains that the insurance proceeds of the endorsed policies shall
be applied exclusively to the proper interest of the person for whose benefit it was made. In this case, to the extent of GOYUs
obligation with RCBC, the interest of GOYU in the subject policies had been transferred to RCBC effective as of the time of the
endorsement. These policies may no longer be attached by the other creditors of GOYU, like Alfredo Sebastian in the present
G.R. No. 128834, which may nonetheless forthwith be dismissed for being moot and academic in view of the results reached
herein. Only the two other policies amounting to P19,646,224.92 may be validly attached, garnished, and levied upon by GOYUs
other creditors. To the extent of GOYUs outstanding obligation with RCBC, all the rest of the other insurance policies above-listed
which were endorsed to RCBC, are, therefore, to be released from attachment, garnishment, and levy by the other creditors of
GOYU.
This brings us to the next relevant issue to be resolved, which is, the extent of GOYUs outstanding obligation with RCBC
which the proceeds of the 8 insurance policies will discharge and liquidate, or put differently, the actual amount of GOYUs liability
to RCBC.
The Court of Appeals simply echoed the declaration of the trial court finding that GOYUS total obligation to RCBC was only
P68,785,060.04 as of April 27, 1992, thus sanctioning the trial courts exclusion of Promissory Note No. 421-92 (renewal of
Promissory Note No. 908-91) and Promissory Note No. 420-92 (renewal of Promissory Note No. 952-91) on the ground that their
execution is highly questionable for not only are these dated after the fire, but also because the signatures of either GOYU or any
its representative are conspicuously absent. Accordingly, the Court of Appeals speculated thusly:

Hence, this Court is inclined to conclude that said promissory notes were pre-signed by plaintiff in blank terms, as averred by
plaintiff, in contemplation of the speedy grant of future loans, for the same practice of procedure has always been adopted in its
previous dealings with the bank.

(Rollo, pp. 181-182.)

The fact that the promissory notes bear dates posterior to the fire does not necessarily mean that the documents are spurious,
for it is presumed that the ordinary course of business had been followed (Metropolitan Bank and Trust Company vs. Quilts and
All, Inc., 222 SCRA 486 [1993]). The obligor and not the holder of the negotiable instrument has the burden of proof of showing
that he no longer owes the obligee any amount (Travel-On, Inc. vs. Court of Appeals, 210 SCRA 351 [1992]).
Even casting aside the presumption of regularity of private transactions, receipt of the loan amounting to P121,966,058.67
(Exhibits 1-29, RCBC) was admitted by GOYU as indicated in the testimony of Go Song Hiap when he answered the queries of
the trial court:
ATTY. NATIVIDAD
Q: But insofar as the amount stated in Exhibits 1 to 29-RCBC, you received all the amounts stated therein?
A: Yes, sir, I received the amount.
COURT
He is asking if he received all the amounts stated in Exhibits 1 to 29-RCBC?
WITNESS:
Yes, Your Honor, I received all the amounts.
COURT
Indicated in the Promissory Notes?
WITNESS
A. The promissory Notes they did not give to me but the amount I asked which is correct, Your Honor.
COURT
Q: You mean to say the amounts indicated in Exhibits 1 to 29-RCBC is correct?
A: Yes, Your Honor.
(tsn, Jan. 14, 1994, p. 26.)
Furthermore, aside from its judicial admission of having received all the proceeds of the 29 promissory notes as hereinabove
quoted, GOYU also offered and admitted to RCBC that its obligation be fixed at P116,301,992.60 as shown in its letter dated
March 9, 1993, which pertinently reads:

We wish to inform you, therefore that we are ready and willing to pay the current past due account of this company in the amount
of P116,301,992.60 as of 21 January 1993, specified in pars. 15, p. 10, and 18, p. 13 of your affidavits of Third Party Claims in
the Urban case at Makati, Metro Manila and in the Zamboanga case at Zamboanga city, respectively, less the total of
P8,851,519.71 paid from the Seaboard and Equitable insurance companies and other legitimate deductions. We accept and
confirm this amount of P116,301,992.60 as stated as true and correct.

(Exhibit BB.)

The Court of Appeals erred in placing much significance on the fact that the excluded promissory notes are dated after the
fire. It failed to consider that said notes had for their origin transactions consummated prior to the fire. Thus, careful attention must
be paid to the fact that Promissory Notes No. 420-92 and 421-92 are mere renewals of Promissory Notes No. 908-91 and 952-
91, loans already availed of by GOYU.
The two courts below erred in failing to see that the promissory notes which they ruled should be excluded for bearing dates
which are after that of the fire, are mere renewals of previous ones. The proceeds of the loan represented by these promissory
notes were admittedly received by GOYU. There is ample factual and legal basis for giving GOYUs judicial admission of liability
in the amount of P116,301,992.60 full force and effect
It should, however, be quickly added that whatever amount RCBC may have recovered from the other insurers of the
mortgaged property will, nonetheless, have to be applied as payment against GOYUs obligation. But, contrary to the lower courts
findings, payments effected by GOYU prior to January 21, 1993 should no longer be deducted. Such payments had obviously
been duly considered by GOYU, in its aforequoted letter dated March 9, 1993, wherein it admitted that its past due account totaled
P116,301,992.60 as of January 21, 1993.
The net obligation of GOYU, after deductions, is thus reduced to P107,246,887.90 as of January 21, 1993, to wit:

Total Obligation as admitted by GOYU as of January 21, 1993: P116,301,992.60

Broken down as follows

Principal[1] Interest

Regular 80,535,946.32

FDU 7,548,025.17

____________ _____________

Total: 108,083,971.49 8,218,021.11[2]

LESS:

1) Proceeds from

Seaboard Eastern

Insurance Company: 6,095,145.81

2) Proceeds from

Equitable Insurance

Company: 2,756,373.00

3) Payment from

foreign department

negotiation: 203,584.89

9,055,104.70[3]

NET AMOUNT as of January 21, 1993: P 107,246,887.90

The need for the payment of interest due upon the principal amount of the obligation, which is the cost of money to RCBC,
the primary end and the ultimate reason for RCBCs existence and being, was duly recognized by the trial court when it ruled
favorably on RCBCs counterclaim, ordering GOYU to pay its loan obligation with RCBC in the amount of P68,785,069.04, as of
April 27,1992, with interest thereon at the rate stipulated in the respective promissory notes (without surcharges and penalties)
per computation, pp. 14-A, 14-B, 14-C (Record, p. 479). Inexplicably, the Court of Appeals, without even laying down the factual
or legal justification for its ruling, modified the trial courts ruling and ordered GOYU to pay the principal amount of
P68,785,069.04 without any interest, surcharges and penalties (Rollo, p. 200).
It is to be noted in this regard that even the trial court hedgingly and with much uncertainty deleted the payment of additional
interest, penalties, and charges, in this manner:

Regarding defendant RCBCs commitment not to charge additional interest, penalties and surcharges, the same does not require
that it be embodied in a document or some form of writing to be binding and enforceable. The principle is well known that generally
a verbal agreement or contract is no less binding and effective than a written one. And the existence of such a verbal agreement
has been amply established by the evidence in this case. In any event, regardless of the existence of such verbal agreement, it
would still be unjust and inequitable for defendant RCBC to charge the plaintiff with surcharges and penalties considering the
latters pitiful situation. (Emphasis supplied.)

(Record, p. 476)
 The essence or rationale for the payment of interest or cost of money is separate and distinct from that of surcharges and
penalties. What may justify a court in not allowing the creditor to charge surcharges and penalties despite express stipulation
therefor in a valid agreement, may not equally justify non-payment of interest. The charging of interest for loans forms a very
essential and fundamental element of the banking business, which may truly be considered to be at the very core of its existence
or being. It is inconceivable for a bank to grant loans for which it will not charge any interest at all. We fail to find justification for
the Court of Appeals outright deletion of the payment of interest as agreed upon in the respective promissory notes. This
constitutes gross error.
For the computation of the interest due to be paid to RCBC, the following rules of thumb laid down by this Court in Eastern
Shipping Lines, Inc. vs. Court of Appeals (234 SCRA 78 [1994]), shall apply, to wit:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the
contravenor can be held liable for damages. The provisions under Title XVIII on Damages of the Civil Code govern in determining
the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well
as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the
interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed
from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where
the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date of the judgment of the court is made (at which time the quantification of
damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in
any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the
case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a forbearance of credit.

(pp. 95-97.)

There being written stipulations as to the rate of interest owing on each specific promissory note as summarized and tabulated
by the trial court in its decision (pp.470 and 471, Record) such agreed interest rates must be followed. This is very clear from
paragraph II, sub-paragraph 1 quoted above.
On the issue of payment of surcharges and penalties, we partly agree that GOYUs pitiful situation must be taken into
account. We do not agree, however, that payment of any amount as surcharges and penalties should altogether be deleted. Even
assuming that RCBC, through its responsible officers, herein petitioners Eli Lao and Uy Chun Bing, may have relayed its assurance
for assistance to GOYU immediately after the occurrence of the fire, we cannot accept the lower courts finding that RCBC had
thereby ipso facto effectively waived collection of any additional interests, surcharges, and penalties from GOYU.Assurances of
assistance are one thing, but waiver of additional interests, surcharges, and penalties is another.
Surcharges and penalties agreed to be paid by the debtor in case of default partake of the nature of liquidated damages,
covered by Section 4, Chapter 3, Title XVIII of the Civil Code. Article 2227 thereof provides:

ART. 2227. Liquidated damages, whether intended as a indemnity or penalty, shall be equitably reduced if they are iniquitous and
unconscionable.

In exercising this vested power to determine what is iniquitous and unconscionable, the Court must consider the
circumstances of each case. It should be stressed that the Court will not make any sweeping ruling that surcharges and penalties
imposed by banks for non-payment of the loans extended by them are generally iniquitous and unconscionable. What may be
iniquitous and unconscionable in one case, may be totally just and equitable in another. This provision of law will have to be
applied to the established facts of any given case. Given the circumstances under which GOYU found itself after the occurrence
of the fire, the Court rules the surcharges rates ranging anywhere from 9% to 27%, plus the penalty charges of 36%, to be definitely
iniquitous and unconscionable. The Court tempers these rates to 2% and 3%, respectively. Furthermore, in the light of GOYUs
offer to pay the amount of P116,301,992.60 to RCBC as March 1993 (See: Exhibit BB), which RCBC refused, we find it more in
keeping with justice and equity for RCBC not to charge additional interest, surcharges, and penalties from that time onward.
Given the factual milieu spread hereover, we rule that it was error to hold MICO liable in damages for denying or withholding
the proceeds of the insurance claim to GOYU.
Firstly, by virtue of the mortgage contracts as well as the endorsements of the insurance policies, RCBC has the right to
claim the insurance proceeds, in substitution of the property lost in the fire. Having assigned its rights, GOYU lost its standing as
the beneficiary of the said insurance policies.
Secondly, for an insurance company to be held liable for unreasonably delaying and withholding payment of insurance
proceeds, the delay must be wanton, oppressive, or malevolent (Zenith Insurance Corporation vs. CA, 185 SCRA 403 [1990]). It
is generally agreed, however, that an insurer may in good faith and honesty entertain a difference of opinion as to its
liability.Accordingly, the statutory penalty for vexatious refusal of an insurer to pay a claim should not be inflicted unless the
evidence and circumstances show that such refusal was willful and without reasonable cause as the facts appear to a reasonable
and prudent man (Buffalo Ins. Co. vs. Bommarito [CCA 8th] 42 F [2d] 53, 70 ALR 1211; Phoenix Ins. Co. vs. Clay, 101 Ga. 331,
28 SE 853, 65 Am St Rep 307; Kusnetsky vs. Security Ins. Co., 313 Mo. 143, 281 SW 47, 45 ALR 189). The case at bar does not
show that MICO wantonly and in bad faith delayed the release of the proceeds. The problem in the determination of who is the
actual beneficiary of the insurance policies, aggravated by the claim of various creditors who wanted to partake of the insurance
proceeds, not to mention the importance of the endorsement to RCBC, to our mind, and as now borne out by the outcome herein,
justified MICO in withholding payment to GOYU.
In adjudging RCBC liable in damages to GOYU, the Court of Appeals said that RCBC cannot avail itself of two simultaneous
remedies in enforcing the claim of an unpaid creditor, one for specific performance and the other for foreclosure.In doing so, said
the appellate court, the second action is deemed barred, RCBC having split a single cause of action (Rollo, pp. 195-199). The
Court of Appeals was too accommodating in giving due consideration to this argument of GOYU, for the foreclosure suit is still
pending appeal before the same Court of Appeals in CA G.R CV No. 46247, the case having been elevated by RCBC.
In finding that the foreclosure suit cannot prosper, the Fifteenth Division of the Court of Appeals pre-empted the resolution of
said foreclosure case which is not before it. This is plain reversible error if not grave abuse of discretion.
As held in Pea vs. Court of Appeals (245 SCRA 691[1995]):

It should have been enough, nonetheless, for the appellate court to merely set aside the questioned orders of the trial court for
having been issued by the latter with grave abuse of discretion. In likewise enjoining permanently herein petitioner from entering
in and interfering with the use or occupation and enjoyment of petitioners (now private respondent) residential house and
compound, the appellate court in effect, precipitately resolved with finality the case for injunction that was yet to be heard on the
merits by the lower court. Elevated to the appellate court, it might be stressed, were mere incidents of the principal case still
pending with the trial court. In Municipality of Bian, Laguna vs. Court of Appeals, 219 SCRA 69, we ruled that the Court of Appeals
would have no jurisdiction in a certiorari proceeding involving an incident in a case to rule on the merits of the main case itself
which was not on appeal before it.

(pp. 701-702.)
Anent the right of RCBC to intervene in Civil Case No. 1073, before the Zamboanga Regional Trial Court, since it has been
determined that RCBC has the right to the insurance proceeds, the subject matter of intervention is rendered moot and
academic. Respondent Sebastian must, however, yield to the preferential right of RCBC over the MICO insurance policies. It is
basic and fundamental that the first mortgagee has superior rights over junior mortgagees or attaching creditors (Alpha Insurance
& Surety Co. vs. Reyes, 106 SCRA 274 [1981]; Sun Life Assurance Co. of Canada vs. Gonzales Diaz, 52 Phil. 271 [1928]).
WHEREFORE, the petitions are hereby GRANTED and the decision and resolution of December 16, 1996 and April 3, 1997
in CA-G.R. CV No. 46162 are hereby REVERSED and SET ASIDE, and a new one entered:

1. Dismissing the Complaint of private respondent GOYU in Civil Case No. 93-65442 before Branch 3 of the Manila Regional Trial
Court for lack of merit;

2. Ordering Malayan Insurance Company, Inc. to deliver to Rizal Commercial Banking Corporation the proceeds of the insurance
policies in the amount of P51,862,390.94 (per report of adjuster Toplis & Harding (Far East), Inc., Exhibits 2 and 2-1), less the
amount of P50,505,594.60 (per O.R. No. 3649285);

3. Ordering the Clerk of Court to release the amount of P50,505,594.60 including the interests earned to Rizal Commercial Banking
Corporation;

4. Ordering Goyu & Sons, Inc. to pay its loan obligation with Rizal Commercial Banking Corporation in the principal amount of
P107,246,887.90, with interest at the respective rates stipulated in each promissory note from January 21, 1993 until finality of
this judgment, and surcharges at 2% and penalties at 3% from January 21, 1993 to March 9, 1993, minus payments made by
Malayan Insurance Company, Inc. and the proceeds of the amount deposited with the trial court and its earned interest. The total
amount due RCBC at the time of the finality of this judgment shall earn interest at the legal rate of 12% in lieu of all other stipulated
interests and charges until fully paid.

The petition of Rizal Commercial Banking Corporation against the respondent Court in CA-GR CV 48376 is DISMISSED for
being moot and academic in view of the results herein arrived at. Respondent Sebastians right as attaching creditor must yield to
the preferential rights of Rizal Commercial Banking Corporation over the Malayan insurance policies as first mortgagee.
SO ORDERED.

ROBERTO C. SICAM and AGENCIA G.R. NO. 159617

de R.C. SICAM, INC.,
Petitioners,
Present:

YNARES-SANTIAGO, J.,
Chairperson,
- versus - AUSTRIA-MARTINEZ,
CHICO-NAZARIO, and
NACHURA, JJ.

LULU V. JORGE and CESAR

JORGE, Promulgated:
Respondents. August 8, 2007
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

DECISION

AUSTRIA-MARTINEZ, J.:
Before us is a Petition for Review on Certiorari filed by Roberto C. Sicam, Jr. (petitioner Sicam) and Agencia de R.C. Sicam, Inc.
(petitioner corporation) seeking to annul the Decision[1] of the Court of Appeals dated March 31, 2003, and its Resolution[2] dated
August 8, 2003, in CA G.R. CV No. 56633.

It appears that on different dates from September to October 1987, Lulu V. Jorge (respondent Lulu) pawned several pieces of
jewelry with Agencia de R. C. Sicam located at No. 17 Aguirre Ave., BF Homes Paraaque, Metro Manila, to secure a loan in the
total amount of P59,500.00.

On October 19, 1987, two armed men entered the pawnshop and took away whatever cash and jewelry were found inside the
pawnshop vault. The incident was entered in the police blotter of the Southern Police District, Paraaque Police Station as follows:

Investigation shows that at above TDPO, while victims were inside the office, two (2) male unidentified persons
entered into the said office with guns drawn. Suspects(sic) (1) went straight inside and poked his gun toward
Romeo Sicam and thereby tied him with an electric wire while suspects (sic) (2) poked his gun toward Divina Mata
and Isabelita Rodriguez and ordered them to lay (sic) face flat on the floor. Suspects asked forcibly the case and
assorted pawned jewelries items mentioned above.

Suspects after taking the money and jewelries fled on board a Marson Toyota unidentified plate number.[3]

Petitioner Sicam sent respondent Lulu a letter dated October 19, 1987 informing her of the loss of her jewelry due to the robbery
incident in the pawnshop. On November 2, 1987, respondent Lulu then wrote a letter [4] to petitioner Sicamexpressing disbelief
stating that when the robbery happened, all jewelry pawned were deposited with Far East Bank near the pawnshop since it had
been the practice that before they could withdraw, advance notice must be given to the pawnshop so it could withdraw the jewelry
from the bank. Respondent Lulu then requested petitioner Sicam to prepare the pawned jewelry for withdrawal on November
6, 1987 but petitioner Sicam failed to return the jewelry.

On September 28, 1988, respondent Lulu joined by her husband, Cesar Jorge, filed a complaint against petitioner Sicamwith the
Regional Trial Court of Makati seeking indemnification for the loss of pawned jewelry and payment of actual, moral and exemplary
damages as well as attorney's fees. The case was docketed as Civil Case No. 88-2035.

Petitioner Sicam filed his Answer contending that he is not the real party-in-interest as the pawnshop was incorporated on April
20, 1987 and known as Agencia de R.C. Sicam, Inc; that petitioner corporation had exercised due care and diligence in the
safekeeping of the articles pledged with it and could not be made liable for an event that is fortuitous.

Respondents subsequently filed an Amended Complaint to include petitioner corporation.

Thereafter, petitioner Sicam filed a Motion to Dismiss as far as he is concerned considering that he is not the real party-in-interest.
Respondents opposed the same. The RTC denied the motion in an Order dated November 8, 1989.[5]
After trial on the merits, the RTC rendered its Decision[6] dated January 12, 1993, dismissing respondents complaint as well as
petitioners counterclaim. The RTC held that petitioner Sicam could not be made personally liable for a claim arising out of a
corporate transaction; that in the Amended Complaint of respondents, they asserted that plaintiff pawned assorted jewelries in
defendants' pawnshop; and that as a consequence of the separate juridical personality of a corporation, the corporate debt or
credit is not the debt or credit of a stockholder.

The RTC further ruled that petitioner corporation could not be held liable for the loss of the pawned jewelry since it had not been
rebutted by respondents that the loss of the pledged pieces of jewelry in the possession of the corporation was occasioned by
armed robbery; that robbery is a fortuitous event which exempts the victim from liability for the loss, citing the case of Austria v.
Court of Appeals;[7] and that the parties transaction was that of a pledgor and pledgee andunder Art. 1174 of the Civil Code, the
pawnshop as a pledgee is not responsible for those events which could not be foreseen.

Respondents appealed the RTC Decision to the CA. In a Decision dated March 31, 2003, the CA reversed the RTC,
the dispositive portion of which reads as follows:
 WHEREFORE, premises considered, the instant Appeal is GRANTED, and the Decision dated January 12,
1993,of the Regional Trial Court of Makati, Branch 62, is hereby REVERSED and SET ASIDE, ordering
the appellees to pay appellants the actual value of the lost jewelry amounting to P272,000.00, and attorney' fees
of P27,200.00.[8]

In finding petitioner Sicam liable together with petitioner corporation, the CA applied the doctrine of piercing the veil of corporate
entity reasoning that respondents were misled into thinking that they were dealing with the pawnshop owned by petitioner Sicam as
all the pawnshop tickets issued to them bear the words Agencia de R.C. Sicam; and that there was no indication on the pawnshop
tickets that it was the petitioner corporation that owned the pawnshop which explained why respondents had to amend their
complaint impleading petitioner corporation.

The CA further held that the corresponding diligence required of a pawnshop is that it should take steps to secure and protect the
pledged items and should take steps to insure itself against the loss of articles which are entrusted to its custody as it derives
earnings from the pawnshop trade which petitioners failed to do; that Austria is not applicable to this case since the robbery
incident happened in 1961 when the criminality had not as yet reached the levels attained in the present day; that they are at least
guilty of contributory negligence and should be held liable for the loss of jewelries; and that robberies and hold-ups are foreseeable
risks in that those engaged in the pawnshop business are expected to foresee.

The CA concluded that both petitioners should be jointly and severally held liable to respondents for the loss of the pawned jewelry.

Petitioners motion for reconsideration was denied in a Resolution dated August 8, 2003.

Hence, the instant petition for review with the following assignment of errors:

THE COURT OF APPEALS ERRED AND WHEN IT DID, IT OPENED ITSELF TO REVERSAL, WHEN IT
ADOPTED UNCRITICALLY (IN FACT IT REPRODUCED AS ITS OWN WITHOUT IN THE MEANTIME
ACKNOWLEDGING IT) WHAT THE RESPONDENTS ARGUED IN THEIR BRIEF, WHICH ARGUMENT WAS
PALPABLY UNSUSTAINABLE.

THE COURT OF APPEALS ERRED, AND WHEN IT DID, IT OPENED ITSELF TO REVERSAL BY THIS
HONORABLE COURT, WHEN IT AGAIN ADOPTED UNCRITICALLY (BUT WITHOUT ACKNOWLEDGING IT)
THE SUBMISSIONS OF THE RESPONDENTS IN THEIR BRIEF WITHOUT ADDING ANYTHING MORE
THERETO DESPITE THE FACT THAT THE SAID ARGUMENT OF THE RESPONDENTS COULD NOT HAVE
BEEN SUSTAINED IN VIEW OF UNREBUTTED EVIDENCE ON RECORD.[9]

Anent the first assigned error, petitioners point out that the CAs finding that petitioner Sicam is personally liable for the loss of the
pawned jewelries is a virtual and uncritical reproduction of the arguments set out on pp. 5-6 of the Appellants brief.[10]

Petitioners argue that the reproduced arguments of respondents in their Appellants Brief suffer from infirmities, as follows:

(1) Respondents conclusively asserted in paragraph 2 of their Amended Complaint that Agencia de R.C. Sicam,
Inc. is the present owner of Agencia de R.C. Sicam Pawnshop, and therefore, the CA cannot rule against said
conclusive assertion of respondents;

(2) The issue resolved against petitioner Sicam was not among those raised and litigated in the trial court; and

(3) By reason of the above infirmities, it was error for the CA to have pierced the corporate veil since a corporation
has a personality distinct and separate from its individual stockholders or members.

Anent the second error, petitioners point out that the CA finding on their negligence is likewise an unedited reproduction of
respondents brief which had the following defects:

(1) There were unrebutted evidence on record that petitioners had observed the diligence required of them, i.e,
they wanted to open a vault with a nearby bank for purposes of safekeeping the pawned articles but was
discouraged by the Central Bank (CB) since CB rules provide that they can only store the pawned articles in a
vault inside the pawnshop premises and no other place;

(2) Petitioners were adjudged negligent as they did not take insurance against the loss of the pledged jelweries,
but it is judicial notice that due to high incidence of crimes, insurance companies refused to cover pawnshops
and banks because of high probability of losses due to robberies;

(3) In Hernandez v. Chairman, Commission on Audit (179 SCRA 39, 45-46), the victim of robbery was
exonerated from liability for the sum of money belonging to others and lost by him to robbers.

Respondents filed their Comment and petitioners filed their Reply thereto. The parties subsequently submitted their respective
Memoranda.
We find no merit in the petition.

To begin with, although it is true that indeed the CA findings were exact reproductions of the arguments raised in respondents
(appellants) brief filed with the CA, we find the same to be not fatally infirmed. Upon examination of the Decision, we find that it
expressed clearly and distinctly the facts and the law on which it is based as required by Section 8, Article VIII of the Constitution.
The discretion to decide a case one way or another is broad enough to justify the adoption of the arguments put forth by one of
the parties, as long as these are legally tenable and supported by law and the facts on records. [11]

Our jurisdiction under Rule 45 of the Rules of Court is limited to the review of errors of law committed by the appellate
court. Generally, the findings of fact of the appellate court are deemed conclusive and we are not duty-bound to analyze and
calibrate all over again the evidence adduced by the parties in the court a quo.[12] This rule, however, is not without exceptions,
such as where the factual findings of the Court of Appeals and the trial court are conflicting or contradictory[13] as is obtaining in
the instant case.

However, after a careful examination of the records, we find no justification to absolve petitioner Sicam from liability.

The CA correctly pierced the veil of the corporate fiction and adjudged petitioner Sicam liable together with petitioner
corporation. The rule is that the veil of corporate fiction may be pierced when made as a shield to perpetrate fraud and/or confuse
legitimate issues. [14] The theory of corporate entity was not meant to promote unfair objectives or otherwise to shield them. [15]

Notably, the evidence on record shows that at the time respondent Lulu pawned her jewelry, the pawnshop was owned by
petitioner Sicam himself. As correctly observed by the CA, in all the pawnshop receipts issued to respondent Lulu in September
1987, all bear the words Agencia de R. C. Sicam, notwithstanding that the pawnshop was allegedly incorporated in April 1987. The
receipts issued after such alleged incorporation were still in the name of Agencia de R. C. Sicam, thus inevitably misleading, or at
the very least, creating the wrong impression to respondents and the public as well, that the pawnshop was owned solely by
petitioner Sicam and not by a corporation.

Even petitioners counsel, Atty. Marcial T. Balgos, in his letter[16] dated October 15, 1987 addressed to the Central Bank, expressly
referred to petitioner Sicam as the proprietor of the pawnshop notwithstanding the alleged incorporation in April 1987.

We also find no merit in petitioners' argument that since respondents had alleged in their Amended Complaint that petitioner
corporation is the present owner of the pawnshop, the CA is bound to decide the case on that basis.

Section 4 Rule 129 of the Rules of Court provides that an admission, verbal or written, made by a party in the course of the
proceedings in the same case, does not require proof. The admission may be contradicted only by showing that it was made
through palpable mistake or that no such admission was made.
Thus, the general rule that a judicial admission is conclusive upon the party making it and does not require proof, admitsof two
exceptions, to wit: (1) when it is shown that such admission was made through palpable mistake, and (2) when it is shown that no
such admission was in fact made. The latter exception allows one to contradict an admission by denying that he made such
an admission.[17]
The Committee on the Revision of the Rules of Court explained the second exception in this wise:

x x x if a party invokes an admission by an adverse party, but cites the admission out of context, then the one
making the admission may show that he made no such admission, or that his admission was taken out of
context.

x x x that the party can also show that he made no such admission, i.e., not in the sense in which the
admission is made to appear.

That is the reason for the modifier such because if the rule simply states that the admission may be contradicted
by showing that no admission was made, the rule would not really be providing for a contradiction of the
admission but just a denial.[18](Emphasis supplied).

While it is true that respondents alleged in their Amended Complaint that petitioner corporation is the present owner of the
pawnshop, they did so only because petitioner Sicam alleged in his Answer to the original complaint filed against him that he was
not the real party-in-interest as the pawnshop was incorporated in April 1987. Moreover, a reading of the Amended Complaint in
its entirety shows that respondents referred to both petitioner Sicam and petitioner corporation where they (respondents) pawned
their assorted pieces of jewelry and ascribed to both the failure to observe due diligence commensurate with the business which
resulted in the loss of their pawned jewelry.
Markedly, respondents, in their Opposition to petitioners Motion to Dismiss Amended Complaint, insofar as petitioner Sicam is
concerned, averred as follows:

Roberto C. Sicam was named the defendant in the original complaint because the pawnshop tickets involved in
this case did not show that the R.C. Sicam Pawnshop was a corporation. In paragraph 1 of his Answer, he
admitted the allegations in paragraph 1 and 2 of the Complaint. He merely added that defendant is not now the
real party in interest in this case.
It was defendant Sicam's omission to correct the pawnshop tickets used in the subject transactions in this case
which was the cause of the instant action. He cannot now ask for the dismissal of the complaint against him simply
on the mere allegation that his pawnshop business is now incorporated. It is a matter of defense, the merit of
which can only be reached after consideration of the evidence to be presented in due course.[19]
Unmistakably, the alleged admission made in respondents' Amended Complaint was taken out of context by petitioner Sicam to
suit his own purpose. Ineluctably, the fact that petitioner Sicam continued to issue pawnshop receipts under his name and not
under the corporation's name militates for the piercing of the corporate veil.
We likewise find no merit in petitioners' contention that the CA erred in piercing the veil of corporate fiction of petitioner corporation,
as it was not an issue raised and litigated before the RTC.

Petitioner Sicam had alleged in his Answer filed with the trial court that he was not the real party-in-interest because since April
20, 1987, the pawnshop business initiated by him was incorporated and known as Agencia de R.C. Sicam. In the pre-trial brief
filed by petitioner Sicam, he submitted that as far as he was concerned, the basic issue was whether he is the real party in interest
against whom the complaint should be directed.[20] In fact, he subsequently moved for the dismissal of the complaint as to him but
was not favorably acted upon by the trial court. Moreover, the issue was squarely passed upon, although erroneously, by the trial
court in its Decision in this manner:

x x x The defendant Roberto Sicam, Jr likewise denies liability as far as he is concerned for the reason that he
cannot be made personally liable for a claim arising from a corporate transaction.

This Court sustains the contention of the defendant Roberto C. Sicam, Jr. The amended complaint itself asserts
that plaintiff pawned assorted jewelries in defendant's pawnshop. It has been held that as a consequence of the
separate juridical personality of a corporation, the corporate debt or credit is not the debt or credit of the
stockholder, nor is the stockholder's debt or credit that of a corporation.[21]

Clearly, in view of the alleged incorporation of the pawnshop, the issue of whether petitioner Sicam is personally liable is
inextricably connected with the determination of the question whether the doctrine of piercing the corporate veil should or should
not apply to the case.

The next question is whether petitioners are liable for the loss of the pawned articles in their possession.

Petitioners insist that they are not liable since robbery is a fortuitous event and they are not negligent at all.

We are not persuaded.

Article 1174 of the Civil Code provides:

Art. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when
the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which
could not be foreseen or which, though foreseen, were inevitable.

Fortuitous events by definition are extraordinary events not foreseeable or avoidable. It is therefore, not enough that the event
should not have been foreseen or anticipated, as is commonly believed but it must be one impossible to foresee or to avoid. The
mere difficulty to foresee the happening is not impossibility to foresee the same. [22]

To constitute a fortuitous event, the following elements must concur: (a) the cause of the unforeseen and unexpected occurrence
or of the failure of the debtor to comply with obligations must be independent of human will; (b) it must be impossible to foresee
the event that constitutes the caso fortuito or, if it can be foreseen, it must be impossible to avoid; (c) the occurrence must be such
as to render it impossible for the debtor to fulfill obligations in a normal manner; and, (d) the obligor must be free from any
[23]
participation in the aggravation of the injury or loss.
The burden of proving that the loss was due to a fortuitous event rests on him who invokes it.[24] And, in order for a fortuitous event
to exempt one from liability, it is necessary that one has committed no negligence or misconduct that may have occasioned the
loss. [25]
It has been held that an act of God cannot be invoked to protect a person who has failed to take steps to forestall the possible
adverse consequences of such a loss. One's negligence may have concurred with an act of God in producing damage and injury
to another; nonetheless, showing that the immediate or proximate cause of the damage or injury was a fortuitous event would not
exempt one from liability. When the effect is found to be partly the result of a person's participation -- whether by active intervention,
[26]
neglect or failure to act -- the whole occurrence is humanized and removed from the rules applicable to acts of God.

Petitioner Sicam had testified that there was a security guard in their pawnshop at the time of the robbery. He likewise testified
that when he started the pawnshop business in 1983, he thought of opening a vault with the nearby bank for the purpose of
safekeeping the valuables but was discouraged by the Central Bank since pawned articles should only be stored in a vault inside
the pawnshop. The very measures which petitioners had allegedly adopted show that to them the possibility of robbery was not
only foreseeable, but actually foreseen and anticipated. Petitioner Sicams testimony, in effect, contradicts petitioners defense of
fortuitous event.

Moreover, petitioners failed to show that they were free from any negligence by which the loss of the pawned jewelry may have
been occasioned.

Robbery per se, just like carnapping, is not a fortuitous event. It does not foreclose the possibility of negligence on the part of
herein petitioners. In Co v. Court of Appeals,[27] the Court held:

It is not a defense for a repair shop of motor vehicles to escape liability simply because the damage or
loss of a thing lawfully placed in its possession was due to carnapping. Carnapping per se cannot be considered
as a fortuitous event. The fact that a thing was unlawfully and forcefully taken from another's rightful
possession, as in cases of carnapping, does not automatically give rise to a fortuitous event. To be
considered as such, carnapping entails more than the mere forceful taking of another's property. It must
be proved and established that the event was an act of God or was done solely by third parties and that
neither the claimant nor the person alleged to be negligent has any participation. In accordance with
the Rules of Evidence, the burden of proving that the loss was due to a fortuitous event rests on him
who invokes it which in this case is the private respondent. However, other than the police report of the
alleged carnapping incident, no other evidence was presented by private respondent to the effect that the
incident was not due to its fault. A police report of an alleged crime, to which only private respondent is privy,
does not suffice to establish the carnapping. Neither does it prove that there was no fault on the part of private
respondent notwithstanding the parties' agreement at the pre-trial that the car was carnapped. Carnapping does
not foreclose the possibility of fault or negligence on the part of private respondent.[28]
Just like in Co, petitioners merely presented the police report of the Paraaque Police Station on the robbery committed
based on the report of petitioners' employees which is not sufficient to establish robbery. Such report also does not prove that
petitioners were not at fault.

On the contrary, by the very evidence of petitioners, the CA did not err in finding that petitioners are guilty of concurrent or
contributory negligence as provided in Article 1170 of the Civil Code, to wit:

Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those
who in any manner contravene the tenor thereof, are liable for damages.[29]

Article 2123 of the Civil Code provides that with regard to pawnshops and other establishments which are engaged in making
loans secured by pledges, the special laws and regulations concerning them shall be observed, and subsidiarily, the provisions
on pledge, mortgage and antichresis.

The provision on pledge, particularly Article 2099 of the Civil Code, provides that the creditor shall take care of the thing pledged
with the diligence of a good father of a family. This means that petitioners must take care of the pawns the way a prudent person
would as to his own property.

In this connection, Article 1173 of the Civil Code further provides:

Art. 1173. The fault or negligence of the obligor consists in the omission of that diligence which is required by the
nature of the obligation and corresponds with the circumstances of the persons, of time and of the place. When
negligence shows bad faith, the provisions of Articles 1171 and 2201, paragraph 2 shall apply.

If the law or contract does not state the diligence which is to be observed in the performance, that which
is expected of a good father of a family shall be required.
We expounded in Cruz v. Gangan[30] that negligence is the omission to do something which a reasonable man, guided by
those considerations which ordinarily regulate the conduct of human affairs, would do; or the doing of something which a prudent
and reasonable man would not do.[31] It is want of care required by the circumstances.
A review of the records clearly shows that petitioners failed to exercise reasonable care and caution that an ordinarily prudent
person would have used in the same situation. Petitioners were guilty of negligence in the operation of their pawnshop business.
Petitioner Sicam testified, thus:

Court:
Q. Do you have security guards in your pawnshop?
A. Yes, your honor.

Q. Then how come that the robbers were able to enter the premises when according to you there was a security
guard?
A. Sir, if these robbers can rob a bank, how much more a pawnshop.

Q. I am asking you how were the robbers able to enter despite the fact that there was a security guard?
A. At the time of the incident which happened about 1:00 and 2:00 o'clock in the afternoon and it happened on a
Saturday and everything was quiet in the area BF Homes Paraaque they pretended to pawn an article in the
pawnshop, so one of my employees allowed him to come in and it was only when it was announced that it
was a hold up.

Q. Did you come to know how the vault was opened?

A. When the pawnshop is official (sic) open your honor the pawnshop is partly open. The combination is off.

Q. No one open (sic) the vault for the robbers?

A. No one your honor it was open at the time of the robbery.

Q. It is clear now that at the time of the robbery the vault was open the reason why the robbers were able to get
all the items pawned to you inside the vault.
A. Yes sir.[32]

revealing that there were no security measures adopted by petitioners in the operation of the pawnshop. Evidently, no sufficient
precaution and vigilance were adopted by petitioners to protect the pawnshop from unlawful intrusion. There was no clear showing
that there was any security guard at all. Or if there was one, that he had sufficient training in securing a pawnshop. Further, there
is no showing that the alleged security guard exercised all that was necessary to prevent any untoward incident or to ensure that
no suspicious individuals were allowed to enter the premises. In fact, it is even doubtful that there was a security guard, since it is
quite impossible that he would not have noticed that the robbers were armed with caliber .45 pistols each, which were allegedly
poked at the employees.[33] Significantly, the alleged security guard was not presented at all to corroborate
petitioner Sicam's claim; not one of petitioners' employees who were present during the robbery incident testified in court.

Furthermore, petitioner Sicam's admission that the vault was open at the time of robbery is clearly a proof of petitioners' failure to
observe the care, precaution and vigilance that the circumstances justly demanded. Petitioner Sicam testified that once the
pawnshop was open, the combination was already off. Considering petitioner Sicam's testimony that the robbery took place on a
Saturday afternoon and the area in BF Homes Paraaque at that time was quiet, there was more reason for petitioners to have
exercised reasonable foresight and diligence in protecting the pawned jewelries. Instead of taking the precaution to protect them,
they let open the vault, providing no difficulty for the robbers to cart away the pawned articles.

We, however, do not agree with the CA when it found petitioners negligent for not taking steps to insure themselves against loss
of the pawned jewelries.

Under Section 17 of Central Bank Circular No. 374, Rules and Regulations for Pawnshops, which took effect on July 13, 1973, and
which was issued pursuant to Presidential Decree No. 114, Pawnshop Regulation Act, it is provided that pawns pledged must be
insured, to wit:

Sec. 17. Insurance of Office Building and Pawns- The place of business of a pawnshop and the pawns pledged
to it must be insured against fire and against burglary as well as for the latter(sic), by an insurance company
accredited by the Insurance Commissioner.

However, this Section was subsequently amended by CB Circular No. 764 which took effect on October 1, 1980, to wit:

Sec. 17 Insurance of Office Building and Pawns The office building/premises and pawns of a pawnshop must
be insured against fire. (emphasis supplied).
where the requirement that insurance against burglary was deleted. Obviously, the Central Bank considered it not feasible
to require insurance of pawned articles against burglary.
The robbery in the pawnshop happened in 1987, and considering the above-quoted amendment, there is no statutory duty imposed
on petitioners to insure the pawned jewelry in which case it was error for the CA to consider it as a factor in concluding that
petitioners were negligent.

Nevertheless, the preponderance of evidence shows that petitioners failed to exercise the diligence required of them under the
Civil Code.
The diligence with which the law requires the individual at all times to govern his conduct varies with the nature of the situation in
which he is placed and the importance of the act which he is to perform. [34] Thus, the cases of Austria v. Court of
Appeals,[35] Hernandez v. Chairman, Commission on Audit[36] and Cruz v. Gangan[37] cited by petitioners in their pleadings, where
the victims of robbery were exonerated from liability, find no application to the present case.

In Austria, Maria Abad received from Guillermo Austria a pendant with diamonds to be sold on commission basis, but
which Abad failed to subsequently return because of a robbery committed upon her in 1961. The incident became the subject of
a criminal case filed against several persons. Austria filed an action against Abad and her husband (Abads) for recovery of the
pendant or its value, but the Abads set up the defense that the robbery extinguished their obligation. The RTC ruled in favor
of Austria, as the Abads failed to prove robbery; or, if committed, that Maria Abad was guilty of negligence. The CA, however,
reversed the RTC decision holding that the fact of robbery was duly established and declared the Abads not responsible for the
loss of the jewelry on account of a fortuitous event. We held that for the Abads to be relieved from the civil liability of returning the
pendant under Art. 1174 of the Civil Code, it would only be sufficient that the unforeseen event, the robbery, took place without
any concurrent fault on the debtors part, and this can be done by preponderance of evidence; that to be free from liability for
reason of fortuitous event, the debtor must, in addition to the casus itself, be free of any concurrent or contributory fault or
negligence.[38]

We found in Austria that under the circumstances prevailing at the time the Decision was promulgated in 1971, the City of Manila
and its suburbs had a high incidence of crimes against persons and property that rendered travel after nightfall a matter to be
sedulously avoided without suitable precaution and protection; that the conduct of Maria Abad in returning alone to her house in
the evening carrying jewelry of considerable value would have been negligence per se and would not exempt her from
responsibility in the case of robbery. However we did not hold Abad liable for negligence since, the robbery happened ten years
previously; i.e., 1961, when criminality had not reached the level of incidence obtaining in 1971.
In contrast, the robbery in this case took place in 1987 when robbery was already prevalent and petitioners in fact had already
foreseen it as they wanted to deposit the pawn with a nearby bank for safekeeping. Moreover, unlike in Austria, where no
negligence was committed, we found petitioners negligent in securing their pawnshop as earlier discussed.

In Hernandez, Teodoro Hernandez was the OIC and special disbursing officer of the Ternate Beach Project of the Philippine
Tourism in Cavite. In the morning of July 1, 1983, a Friday, he went to Manila to encash two checks covering the wages of the
employees and the operating expenses of the project. However for some reason, the processing of the check was delayed and
was completed at about 3 p.m. Nevertheless, he decided to encash the check because the project employees would be waiting
for their pay the following day; otherwise, the workers would have to wait until July 5, the earliest time, when the main office would
open. At that time, he had two choices: (1) return to Ternate, Cavite that same afternoon and arrive early evening; or (2) take the
money with him to his house in Marilao, Bulacan, spend the night there, and leave for Ternate the following day. He chose the
second option, thinking it was the safer one. Thus, a little past 3 p.m., he took a passenger jeep bound for Bulacan. While the jeep
was on Epifanio de los Santos Avenue, the jeep was held up and the money kept by Hernandez was taken, and the robbers
jumped out of the jeep and ran. Hernandez chased the robbers and caught up with one robber who was subsequently charged
with robbery and pleaded guilty. The other robber who held the stolen money escaped. The Commission on Audit found Hernandez
negligent because he had not brought the cash proceeds of the checks to his office in Ternate, Cavite for safekeeping, which is
the normal procedure in the handling of funds. We held that Hernandez was not negligent in deciding to encash the check and
bringing it home to Marilao, Bulacan instead of Ternate, Cavite due to the lateness of the hour for the following reasons: (1) he
was moved by unselfish motive for his co-employees to collect their wages and salaries the following day, a Saturday, a non-
working, because to encash the check on July 5, the next working day after July 1, would have caused discomfort to laborers who
were dependent on their wages for sustenance; and (2) that choosing Marilao as a safer destination, being nearer, and in view of
the comparative hazards in the trips to the two places, said decision seemed logical at that time. We further held that the fact that
two robbers attacked him in broad daylight in the jeep while it was on a busy highway and in the presence of other passengers
could not be said to be a result of his imprudence and negligence.

Unlike in Hernandez where the robbery happened in a public utility, the robbery in this case took place in the pawnshop which is
under the control of petitioners. Petitioners had the means to screen the persons who were allowed entrance to the premises and
to protect itself from unlawful intrusion. Petitioners had failed to exercise precautionary measures in ensuring that the robbers
were prevented from entering the pawnshop and for keeping the vault open for the day, which paved the way for the robbers to
easily cart away the pawned articles.
In Cruz, Dr. Filonila O. Cruz, Camanava District Director of Technological Education and Skills Development Authority (TESDA),
boarded the Light Rail Transit (LRT) from Sen. Puyat Avenue to Monumento when her handbag was slashed and the contents
were stolen by an unidentified person. Among those stolen were her wallet and the government-issued cellular phone. She then
reported the incident to the police authorities; however, the thief was not located, and the cellphone was not recovered. She also
reported the loss to the Regional Director of TESDA, and she requested that she be freed from accountability for the cellphone.
The Resident Auditor denied her request on the ground that she lacked the diligence required in the custody of government
property and was ordered to pay the purchase value in the total amount of P4,238.00. The COA found no sufficient justification to
grant the request for relief from accountability. We reversed the ruling and found that riding the LRT cannot per se be denounced
as a negligent act more so because Cruzs mode of transit was influenced by time and money considerations; that she boarded
the LRT to be able to arrive in Caloocan in time for her 3 pm meeting; that any prudent and rational person under similar
circumstance can reasonably be expected to do the same; that possession of a cellphone should not hinder one from boarding
the LRT coach as Cruz did considering that whether she rode a jeep or bus, the risk of theft would have also been present; that
because of her relatively low position and pay, she was not expected to have her own vehicle or to ride a taxicab; she did not have
a government assigned vehicle; that placing the cellphone in a bag away from covetous eyes and holding on to that bag as she
did is ordinarily sufficient care of a cellphone while traveling on board the LRT; that the records did not show any specific act of
negligence on her part and negligence can never be presumed.

Unlike in the Cruz case, the robbery in this case happened in petitioners' pawnshop and they were negligent in not
exercising the precautions justly demanded of a pawnshop.

WHEREFORE, except for the insurance aspect, the Decision of the Court of Appeals dated March 31, 2003 and its
Resolution dated August 8, 2003, are AFFIRMED.

Costs against petitioners.

SO ORDERED.

G.R. No. L-30056 August 30, 1988

MARCELO AGCAOILI, plaintiff-appellee
vs.
GOVERNMENT SERVICE INSURANCE SYSTEM, defendant-appellant.
Artemio L. Agcaoili for plaintiff-appellee.
Office of the Government Corporate Counsel for defendant-appellant.

NARVASA, J.:

The appellant Government Service Insurance System, (GSIS, for short) having approved the application of the appellee Agcaoili
for the purchase of a house and lot in the GSIS Housing Project at Nangka Marikina, Rizal, subject to the condition that the latter
should forthwith occupy the house, a condition that Agacoili tried to fulfill but could not for the reason that the house was absolutely
uninhabitable; Agcaoili, after paying the first installment and other fees, having thereafter refused to make further payment of other
stipulated installments until GSIS had made the house habitable; and appellant having refused to do so, opting instead to cancel
the award and demand the vacation by Agcaoili of the premises; and Agcaoili having sued the GSIS in the Court of First Instance
of Manila for specific performance with damages and having obtained a favorable judgment, the case was appealled to this Court
by the GSIS. Its appeal must fail.

The essential facts are not in dispute. Approval of Agcaoili's aforementioned application for purchase 1 was contained in a
letter 2 addressed to Agcaoili and signed by GSIS Manager Archimedes Villanueva in behalf of the Chairman-General Manager,
reading as follows:

Please be informed that your application to purchase a house and lot in our GSIS Housing Project at Nangka,
Marikina, Rizal, has been approved by this Office. Lot No. 26, Block No. (48) 2, together with the housing unit
constructed thereon, has been allocated to you.

You are, therefore, advised to occupy the said house immediately.

 If you fail to occupy the same within three (3) days from receipt of this notice, your application shall be considered
automatically disapproved and the said house and lot will be awarded to another applicant.

Agcaoili lost no time in occupying the house. He could not stay in it, however, and had to leave the very next day, because the
house was nothing more than a shell, in such a state of incompleteness that civilized occupation was not possible: ceiling, stairs,
double walling, lighting facilities, water connection, bathroom, toilet kitchen, drainage, were inexistent. Agcaoili did however ask a
homeless friend, a certain Villanueva, to stay in the premises as some sort of watchman, pending completion of the construction
of the house. Agcaoili thereafter complained to the GSIS, to no avail.

The GSIS asked Agcaoili to pay the monthly amortizations and other fees. Agcaoili paid the first monthly installment and the
incidental fees, 3 but refused to make further payments until and unless the GSIS completed the housing unit. What the GSIS did
was to cancel the award and require Agcaoili to vacate the premises. 4 Agcaoili reacted by instituting suit in the Court of First
Instance of Manila for specific performance and damages. 5 Pending the action, a written protest was lodged by other awardees
of housing units in the same subdivision, regarding the failure of the System to complete construction of their own
houses. 6 Judgment was in due course rendered ,7 on the basis of the evidence adduced by Agcaoili only, the GSIS having opted
to dispense with presentation of its own proofs. The judgment was in Agcaoili's favor and contained the following dispositions, 8 to
wit:

1) Declaring the cancellation of the award (of a house and lot) in favor of plaintiff (Mariano Agcaoili) illegal and
void;

2) Ordering the defendant (GSIS) to respect and enforce the aforesaid award to the plaintiff relative to Lot No.
26, Block No. (48) 2 of the Government Service Insurance System (GSIS) low cost housing project at Nangka
Marikina, Rizal;

3) Ordering the defendant to complete the house in question so as to make the same habitable and authorizing
it (defendant) to collect the monthly amortization thereon only after said house shall have been completed under
the terms and conditions mentioned in Exhibit A ;and

4) Ordering the defendant to pay P100.00 as damages and P300.00 as and for attorney's fees, and costs.

Appellant GSIS would have this Court reverse this judgment on the argument that—

1) Agcaoili had no right to suspend payment of amortizations on account of the incompleteness of his housing unit, since said unit
had been sold "in the condition and state of completion then existing ... (and) he is deemed to have accepted the same in the
condition he found it when he accepted the award;" and assuming indefiniteness of the contract in this regard, such circumstance
precludes a judgment for specific performance. 9

2) Perfection of the contract of sale between it and Agcaoili being conditioned upon the latter's immediate occupancy of the house
subject thereof, and the latter having failed to comply with the condition, no contract ever came into existence between them ;10

3) Agcaoili's act of placing his homeless friend, Villanueva, in possession, "without the prior or subsequent knowledge or consent
of the defendant (GSIS)" operated as a repudiation by Agcaoili of the award and a deprivation of the GSIS at the same time of the
reasonable rental value of the property. 11

Agcaoili's offer to buy from GSIS was contained in a printed form drawn up by the latter, entitled "Application to Purchase a House
and/or Lot." Agcaoili filled up the form, signed it, and submitted it. 12 The acceptance of the application was also set out in a form
(mimeographed) also prepared by the GSIS. As already mentioned, this form sent to Agcaoili, duly filled up, advised him of the
approval of his "application to purchase a house and lot in our GSIS Housing Project at NANGKA, MARIKINA, RIZAL," and that
"Lot No. 26, Block No. (48) 2, together with the housing unit constructed thereon, has been allocated to you." Neither the application
form nor the acceptance or approval form of the GSIS — nor the notice to commence payment of a monthly amortizations, which
again refers to "the house and lot awarded" — contained any hint that the house was incomplete, and was being sold "as is," i.e.,
in whatever state of completion it might be at the time. On the other hand, the condition explicitly imposed on Agcaoili — "to occupy
the said house immediately," or in any case within three (3) days from notice, otherwise his "application shall be considered
automatically disapproved and the said house and lot will be awarded to another applicant" — would imply that construction of the
house was more or less complete, and it was by reasonable standards, habitable, and that indeed, the awardee should stay and
live in it; it could not be interpreted as meaning that the awardee would occupy it in the sense of a pioneer or settler in a rude
wilderness, making do with whatever he found available in the envirornment.

There was then a perfected contract of sale between the parties; there had been a meeting of the minds upon the purchase by
Agcaoili of a determinate house and lot in the GSIS Housing Project at Nangka Marikina, Rizal at a definite price payable in
amortizations at P31.56 per month, and from that moment the parties acquired the right to reciprocally demand performance. 13 It
was, to be sure, the duty of the GSIS, as seller, to deliver the thing sold in a condition suitable for its enjoyment by the buyer for
the purpose contemplated ,14 in other words, to deliver the house subject of the contract in a reasonably livable state. This it failed
to do.

It sold a house to Agcaoili, and required him to immediately occupy it under pain of cancellation of the sale. Under the
circumstances there can hardly be any doubt that the house contemplated was one that could be occupied for purposes of
residence in reasonable comfort and convenience. There would be no sense to require the awardee to immediately occupy and
live in a shell of a house, a structure consisting only of four walls with openings, and a roof, and to theorize, as the GSIS does,
that this was what was intended by the parties, since the contract did not clearly impose upon it the obligation to deliver a habitable
house, is to advocate an absurdity, the creation of an unfair situation. By any objective interpretation of its terms, the contract can
only be understood as imposing on the GSIS an obligation to deliver to Agcaoili a reasonably habitable dwelling in return for his
undertaking to pay the stipulated price. Since GSIS did not fulfill that obligation, and was not willing to put the house in habitable
state, it cannot invoke Agcaoili's suspension of payment of amortizations as cause to cancel the contract between them. It is
axiomatic that "(i)n reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a
proper manner with what is incumbent upon him."15

Nor may the GSIS succeed in justifying its cancellation of the award to Agcaoili by the claim that the latter had not complied with
the condition of occupying the house within three (3) days. The record shows that Agcaoili did try to fulfill the condition; he did try
to occupy the house but found it to be so uninhabitable that he had to leave it the following day. He did however leave a friend in
the structure, who being homeless and hence willing to accept shelter even of the most rudimentary sort, agreed to stay therein
and look after it. Thus the argument that Agcaoili breached the agreement by failing to occupy the house, and by allowing another
person to stay in it without the consent of the GSIS, must be rejected as devoid of merit.

Finally, the GSIS should not be heard to say that the agreement between it and Agcaoili is silent, or imprecise as to its exact
prestation Blame for the imprecision cannot be imputed to Agcaoili; it was after all the GSIS which caused the contract to come
into being by its written acceptance of Agcaoili's offer to purchase, that offer being contained in a printed form supplied by the
GSIS. Said appellant having caused the ambiguity of which it would now make capital, the question of interpretation arising
therefrom, should be resolved against it.

It will not do, however, to dispose of the controversy by simply declaring that the contract between the parties had not been validly
cancelled and was therefore still in force, and that Agcaoili could not be compelled by the GSIS to pay the stipulated price of the
house and lot subject of the contract until and unless it had first completed construction of the house. This would leave the contract
hanging or in suspended animation, as it were, Agcaoili unwilling to pay unless the house were first completed, and the GSIS
averse to completing construction, which is precisely what has been the state of affairs between the parties for more than twenty
(20) years now. On the other hand, assuming it to be feasible to still finish the construction of the house at this time, to compel the
GSIS to do so so that Agcaoili's prestation to pay the price might in turn be demanded, without modifying the price therefor, would
not be quite fair. The cost to the GSIS of completion of construction at present prices would make the stipulated price
disproportionate, unrealistic.

The situation calls for the exercise by this Court of its equity jurisdiction, to the end that it may render complete justice to both
parties.

As we . . reaffirmed in Air Manila, Inc. vs. Court of Industrial Relations (83 SCRA 579, 589 [1978]). "(E)quity as
the complement of legal jurisdiction seeks to reach and do complete justice where courts of law, through the
inflexibility of their rules and want of power to adapt their judgments to the special circumstances of cases, are
incompetent so to do. Equity regards the spirit of and not the letter, the intent and not the form, the substance
rather than the circumstance, as it is variously expressed by different courts... " 16

In this case, the Court can not require specific performance of the contract in question according to its literal terms, as this would
result in inequity. The prevailing rule is that in decreeing specific performance equity requires 17 —

... not only that the contract be just and equitable in its provisions, but that the consequences of specific
performance likewise be equitable and just. The general rule is that this equitable relief will not be granted if,
under the circumstances of the case, the result of the specific enforcement of the contract would be harsh,
inequitable, oppressive, or result in an unconscionable advantage to the plaintiff . .

In the exercise of its equity jurisdiction, the Court may adjust the rights of parties in accordance with the circumstances obtaining
at the time of rendition of judgment, when these are significantly different from those existing at the time of generation of those
rights.

The Court is not restricted to an adjustment of the rights of the parties as they existed when suit was brought,
but will give relief appropriate to events occuring ending the suit. 18

While equitable jurisdiction is generally to be determined with reference to the situation existing at the time the
suit is filed, the relief to be accorded by the decree is governed by the conditions which are shown to exist at the
time of making thereof, and not by the circumstances attending the inception of the litigation. In making up the
final decree in an equity suit the judge may rightly consider matters arising after suit was brought. Therefore, as
a general rule, equity will administer such relief as the nature, rights, facts and exigencies of the case demand at
the close of the trial or at the time of the making of the decree. 19

That adjustment is entirely consistent with the Civil Law principle that in the exercise of rights a person must act with justice, give
everyone his due, and observe honesty and good faith. 20 Adjustment of rights has been held to be particularly applicable when
there has been a depreciation of currency.

Depreciation of the currency or other medium of payment contracted for has frequently been held to justify the
court in withholding specific performance or at least conditioning it upon payment of the actual value of the
property contracted for. Thus, in an action for the specific performance of a real estate contract, it has been held
that where the currency in which the plaintiff had contracted to pay had greatly depreciated before enforcement
was sought, the relief would be denied unless the complaint would undertake to pay the equitable value of the
land. (Willard & Tayloe [U.S.] 8 Wall 557,19 L. Ed 501; Doughdrill v. Edwards, 59 Ala 424) 21

In determining the precise relief to give, the Court will "balance the equities" or the respective interests of the parties, and take
account of the relative hardship that one relief or another may occasion to them .22

The completion of the unfinished house so that it may be put into habitable condition, as one form of relief to the plaintiff Agcaoili,
no longer appears to be a feasible option in view of the not inconsiderable time that has already elapsed. That would require an
adjustment of the price of the subject of the sale to conform to present prices of construction materials and labor. It is more in
keeping with the realities of the situation, and with equitable norms, to simply require payment for the land on which the house
stands, and for the house itself, in its unfinished state, as of the time of the contract. In fact, this is an alternative relief proposed
by Agcaoili himself, i.e., "that judgment issue . . (o)rdering the defendant (GSIS) to execute a deed of sale that would embody and
provide for a reasonable amortization of payment on the basis of the present actual unfinished and uncompleted condition, worth
and value of the said house. 23

WHEREFORE, the judgment of the Court a quo insofar as it invalidates and sets aside the cancellation by respondent GSIS of
the award in favor of petitioner Agcaoili of Lot No. 26, Block No. (48) 2 of the GSIS low cost housing project at Nangka, Marikina,
Rizal, and orders the former to respect the aforesaid award and to pay damages in the amounts specified, is AFFIRMED as being
in accord with the facts and the law. Said judgments is however modified by deleting the requirement for respondent GSIS "to
complete the house in question so as to make the same habitable," and instead it is hereby ORDERED that the contract between
the parties relative to the property above described be modified by adding to the cost of the land, as of the time of perfection of
the contract, the cost of the house in its unfinished state also as of the time of perfection of the contract, and correspondingly
adjusting the amortizations to be paid by petitioner Agcaoili, the modification to be effected after determination by the Court a
quo of the value of said house on the basis of the agreement of the parties, or if this is not possible by such commissioner or
commissioners as the Court may appoint. No pronouncement as to costs.

SO ORDERED.

G.R. No. L-3756 June 30, 1952

SAGRADA ORDEN DE PREDICADORES DEL SANTISMO ROSARIO DE FILIPINAS, plaintiff-appellee,
vs.
NATIONAL COCONUT CORPORATION, defendant-appellant.
First Assistant Corporate Counsel Federico C. Alikpala and Assistant Attorney Augusto Kalaw for appellant.
Ramirez and Ortigas for appellee.

LABRADOR, J.:

This is an action to recover the possession of a piece of real property (land and warehouses) situated in Pandacan Manila, and
the rentals for its occupation and use. The land belongs to the plaintiff, in whose name the title was registered before the war. On
January 4, 1943, during the Japanese military occupation, the land was acquired by a Japanese corporation by the name of
Taiwan Tekkosho for the sum of P140,00, and thereupon title thereto issued in its name (transfer certificate of title No. 64330,
Register of Deeds, Manila). After liberation, more specifically on April 4, 1946, the Alien Property Custodian of the United States
of America took possession, control, and custody thereof under section 12 of the Trading with the Enemy Act, 40 Stat., 411, for
the reason that it belonged to an enemy national. During the year 1946 the property was occupied by the Copra Export
Management Company under a custodianship agreement with United States Alien Property Custodian (Exhibit G), and when it
vacated the property it was occupied by the defendant herein. The Philippine Government made representations with the Office
Alien Property Custodian for the use of property by the Government (see Exhibits 2, 2-A, 2-B, and 1). On March 31, 1947, the
defendant was authorized to repair the warehouse on the land, and actually spent thereon the repairs the sum of P26,898.27. In
1948, defendant leased one-third of the warehouse to one Dioscoro Sarile at a monthly rental of P500, which was later raised to
P1,000 a month. Sarile did not pay the rents, so action was brought against him. It is not shown, however, if the judgment was
ever executed.

Plaintiff made claim to the property before the Alien Property Custodian of the United States, but as this was denied, it brought an
action in court (Court of First Instance of Manila, civil case No. 5007, entitled "La Sagrada Orden Predicadores de la Provinicia
del Santisimo Rosario de Filipinas," vs. Philippine Alien Property Administrator, defendant, Republic of the Philippines, intervenor)
to annul the sale of property of Taiwan Tekkosho, and recover its possession. The Republic of the Philippines was allowed to
intervene in the action. The case did not come for trial because the parties presented a joint petition in which it is claimed by
plaintiff that the sale in favor of the Taiwan Tekkosho was null and void because it was executed under threats, duress, and
intimidation, and it was agreed that the title issued in the name of the Taiwan Tekkosho be cancelled and the original title of plaintiff
re-issued; that the claims, rights, title, and interest of the Alien Property Custodian be cancelled and held for naught; that the
occupant National Coconut Corporation has until February 28, 1949, to recover its equipment from the property and vacate the
premises; that plaintiff, upon entry of judgment, pay to the Philippine Alien Property Administration the sum of P140,000; and that
the Philippine Alien Property Administration be free from responsibility or liability for any act of the National Coconut Corporation,
etc. Pursuant to the agreement the court rendered judgment releasing the defendant and the intervenor from liability, but reversing
to the plaintiff the right to recover from the National Coconut Corporation reasonable rentals for the use and occupation of the
premises. (Exhibit A-1.)

The present action is to recover the reasonable rentals from August, 1946, the date when the defendant began to occupy the
premises, to the date it vacated it. The defendant does not contest its liability for the rentals at the rate of P3,000 per month from
February 28, 1949 (the date specified in the judgment in civil case No. 5007), but resists the claim therefor prior to this date. It
interposes the defense that it occupied the property in good faith, under no obligation whatsoever to pay rentals for the use and
occupation of the warehouse. Judgment was rendered for the plaintiff to recover from the defendant the sum of P3,000 a month,
as reasonable rentals, from August, 1946, to the date the defendant vacates the premises. The judgment declares that plaintiff
has always been the owner, as the sale of Japanese purchaser was void ab initio; that the Alien Property Administration never
acquired any right to the property, but that it held the same in trust until the determination as to whether or not the owner is an
enemy citizen. The trial court further declares that defendant can not claim any better rights than its predecessor, the Alien Property
Administration, and that as defendant has used the property and had subleased portion thereof, it must pay reasonable rentals for
its occupation.
Against this judgment this appeal has been interposed, the following assignment of error having been made on defendant-
appellant's behalf:

The trial court erred in holding the defendant liable for rentals or compensation for the use and occupation of the property
from the middle of August, 1946, to December 14, 1948.

1. Want to "ownership rights" of the Philippine Alien Property Administration did not render illegal or invalidate its grant to
the defendant of the free use of property.

2. the decision of the Court of First Instance of Manila declaring the sale by the plaintiff to the Japanese purchaser null
and void ab initio and that the plaintiff was and has remained as the legal owner of the property, without legal interruption,
is not conclusive.

3. Reservation to the plaintiff of the right to recover from the defendant corporation not binding on the later;

4. Use of the property for commercial purposes in itself alone does not justify payment of rentals.

5. Defendant's possession was in good faith.

6. Defendant's possession in the nature of usufruct.

In reply, plaintiff-appellee's counsel contends that the Philippine Allien Property Administration (PAPA) was a mere administrator
of the owner (who ultimately was decided to be plaintiff), and that as defendant has used it for commercial purposes and has
leased portion of it, it should be responsible therefore to the owner, who had been deprived of the possession for so many years.
(Appellee's brief, pp. 20, 23.)

We can not understand how the trial court, from the mere fact that plaintiff-appellee was the owner of the property and the
defendant-appellant the occupant, which used for its own benefit but by the express permission of the Alien Property Custodian
of the United States, so easily jumped to the conclusion that the occupant is liable for the value of such use and occupation. If
defendant-appellant is liable at all, its obligations, must arise from any of the four sources of obligations, namley, law, contract or
quasi-contract, crime, or negligence. (Article 1089, Spanish Civil Code.) Defendant-appellant is not guilty of any offense at all,
because it entered the premises and occupied it with the permission of the entity which had the legal control and administration
thereof, the Allien Property Administration. Neither was there any negligence on its part. There was also no privity (of contract or
obligation) between the Alien Property Custodian and the Taiwan Tekkosho, which had secured the possession of the property
from the plaintiff-appellee by the use of duress, such that the Alien Property Custodian or its permittee (defendant-appellant) may
be held responsible for the supposed illegality of the occupation of the property by the said Taiwan Tekkosho. The Allien Property
Administration had the control and administration of the property not as successor to the interests of the enemy holder of the title,
the Taiwan Tekkosho, but by express provision of law (Trading with the Enemy Act of the United States, 40 Stat., 411; 50 U.S.C.A.,
189). Neither is it a trustee of the former owner, the plaintiff-appellee herein, but a trustee of then Government of the United States
(32 Op. Atty. Gen. 249; 50 U.S.C.A. 283), in its own right, to the exclusion of, and against the claim or title of, the enemy owner.
(Youghioheny & Ohio Coal Co. vs. Lasevich [1920], 179 N.W., 355; 171 Wis., 347; U.S.C.A., 282-283.) From August, 1946, when
defendant-appellant took possession, to the late of judgment on February 28, 1948, Allien Property Administration had the absolute
control of the property as trustee of the Government of the United States, with power to dispose of it by sale or otherwise, as
though it were the absolute owner. (U.S vs. Chemical Foundation [C.C.A. Del. 1925], 5 F. [2d], 191; 50 U.S.C.A., 283.) Therefore,
even if defendant-appellant were liable to the Allien Property Administration for rentals, these would not accrue to the benefit of
the plaintiff-appellee, the owner, but to the United States Government.

But there is another ground why the claim or rentals can not be made against defendant-appellant. There was no agreement
between the Alien Property Custodian and the defendant-appellant for the latter to pay rentals on the property. The existence of
an implied agreement to that effect is contrary to the circumstances. The copra Export Management Company, which preceded
the defendant-appellant, in the possession and use of the property, does not appear to have paid rentals therefor, as it occupied
it by what the parties denominated a "custodianship agreement," and there is no provision therein for the payment of rentals or of
any compensation for its custody and or occupation and the use. The Trading with the Enemy Act, as originally enacted, was
purely a measure of conversation, hence, it is very unlikely that rentals were demanded for the use of the property. When the
National coconut Corporation succeeded the Copra Export Management Company in the possession and use of the property, it
must have been also free from payment of rentals, especially as it was Government corporation, and steps where then being taken
by the Philippine Government to secure the property for the National Coconut Corporation. So that the circumstances do not justify
the finding that there was an implied agreement that the defendant-appellant was to pay for the use and occupation of the premises
at all.

The above considerations show that plaintiff-appellee's claim for rentals before it obtained the judgment annulling the sale of the
Taiwan Tekkosho may not be predicated on any negligence or offense of the defendant-appellant, or any contract, express or
implied, because the Allien Property Administration was neither a trustee of plaintiff-appellee, nor a privy to the obligations of the
Taiwan Tekkosho, its title being based by legal provision of the seizure of enemy property. We have also tried in vain to find a law
or provision thereof, or any principle in quasi contracts or equity, upon which the claim can be supported. On the contrary, as
defendant-appellant entered into possession without any expectation of liability for such use and occupation, it is only fair and just
that it may not be held liable therefor. And as to the rents it collected from its lessee, the same should accrue to it as a possessor
in good faith, as this Court has already expressly held. (Resolution, National Coconut Corporation vs. Geronimo, 83 Phil. 467.)

Lastly, the reservation of this action may not be considered as vesting a new right; if no right to claim for rentals existed at the time
of the reservation, no rights can arise or accrue from such reservation alone.

Wherefore, the part of the judgment appealed from, which sentences defendant-appellant to pay rentals from August, 1946, to
February 28, 1949, is hereby reversed. In all other respects the judgment is affirmed. Costs of this appeal shall be against the
plaintiff-appellee.