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G.R. No. 173211. October 11, 2012.*
HEIRS OF DR. MARIO S. INTAC and ANGELINA MENDOZA-INTAC, petitioners,
vs. COURT OF APPEALS and SPOUSES MARCELO ROY, JR. and JOSEFINA
MENDOZA-ROY and SPOUSES DOMINADOR LOZADA and MARTINA
MENDOZA-LOZADA, respondents.
Civil Law; Contracts; Words and Phrases; A contract, as defined in the Civil Code, is
a meeting of minds, with respect to the other, to give something or to render some
service.―A contract, as defined in the Civil Code, is a meeting of minds, with respect
to the other, to give something or to render some service. Article 1318 provides: Art.
1318. There is no contract unless the following requisites concur: (1) Consent of the
contracting parties; (2) Object certain which is the subject matter of the contract; (3)
Cause of the obligation which is established. Accordingly, for a contract to be valid, it
must have three essential elements: (1) consent of the contracting parties; (2) object
certain which is the subject matter of the contract; and (3) cause of the obligation
which is established.
Same; Same; Simulated Contracts; If the parties state a false cause in the contract to
conceal their real agreement, the contract is only relatively simulated and the parties
are still bound by their real agreement.―If the parties state a false cause in the
contract to conceal their real agreement, the contract is only relatively simulated and
the parties are still bound by their real agreement. Hence, where the essential
requisites of a contract are present and the simulation refers only to the content or
terms of the contract, the agreement is absolutely binding and enforceable between
the parties and their successors in interest.
Same; Same; Same; In absolute simulation, there is a colorable contract but it has no
substance as the parties have no intention to be bound by it.―In absolute simulation,
there is a colorable contract but it has no substance as the parties have no intention
to be bound by it. “The main characteristic of an absolute simulation is that the
apparent contract is not really desired or intended to produce legal effect or in any
way alter the juridical situation of the parties.” “As a result, an absolutely simulated or
fictitious contract is void, and the parties may recover from each other what they may
have given under the contract.”
Same; Same; The primary consideration in determining the true nature of a contract is
the intention of the parties.―The primary consideration in determining the true nature
of a contract is the intention of the parties. If the words of a contract appear to
contravene the evident intention of the parties, the latter shall prevail. Such intention
is determined not only from the express terms of their agreement, but also from the
contemporaneous and subsequent acts of the parties. As heretofore shown, the
contemporaneous and subsequent acts of both parties in this case, point to the fact
that the intention of Ireneo was just to lend the title to the Spouses Intac to enable
them to borrow money and put up a hospital in Sta. Cruz, Laguna. Clearly, the subject
contract was absolutely simulated and, therefore, void.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
MENDOZA, J.:
This is a Petition for Review on Certiorari under Rule 45 assailing the February 16,
2006 Decision1 of the Court of Appeals (CA), in CA-G.R. CV No. 75982, which
modified the April 30, 2002 Decision2 of the Regional Trial Court, Branch 220,
Quezon City (RTC), in Civil Case No. Q-94-19452, an action for cancellation of
transfer certificate of title and reconveyance of property.
The Facts
From the records, it appears that Ireneo Mendoza (Ireneo), married to Salvacion
Fermin (Salvacion), was the owner of the subject property, presently covered by TCT
No. 242655 of the Registry of Deeds of Quezon City and situated at No. 36, Road 8,
Bagong Pag-asa, Quezon City, which he purchased in 1954. Ireneo had two children:
respondents Josefina and Martina (respondents), Salvacion being their stepmother.
When he was still alive, Ireneo, also took care of his niece, Angelina, since she was
three years old until she got married. The property was then covered by TCT No.
106530 of the Registry of Deeds of Quezon City. On October 25, 1977, Ireneo, with
the consent of Salvacion, executed a deed of absolute sale of the property in favor of
Angelina and her husband, Mario (Spouses Intac). Despite the sale, Ireneo and his
family, including the respondents, continued staying in the premises and paying the
realty taxes. After Ireneo died intestate in 1982, his widow and the respondents
remained in the premises.3 After Salvacion died, respondents still maintained their
residence there. Up to the present, they are in the premises, paying the real estate
taxes thereon, leasing out portions of the property, and collecting the rentals.4
The Dispute
The controversy arose when respondents sought the cancellation of TCT No. 242655,
claiming that the sale was only simulated and, therefore, void. Spouses Intac resisted,
claiming that it was a valid sale for a consideration.
On February 22, 1994, respondents filed the Complaint for Cancellation of Transfer
Certificate of Title (TCT) No. 2426555 against Spouses Intac before the RTC. The
complaint prayed not only for the cancellation of the title, but also for its reconveyance
to them. Pending litigation, Mario died on May 20, 1995 and was substituted by his
heirs, his surviving spouse, Angelina, and their children, namely, Rafael, Kristina, Ma.
Tricia Margarita, Mario, and Pocholo, all surnamed Intac (petitioners).
Averments of the Parties
In their Complaint, respondents alleged, among others, that when Ireneo was still
alive, Spouses Intac borrowed the title of the property (TCT No. 106530) from him to
be used as collateral for a loan from a financing institution; that when Ireneo informed

respondents about the request of Spouses Intac, they objected because the title
would be placed in the names of said spouses and it would then appear that the
couple owned the property; that Ireneo, however, tried to appease them, telling them
not to worry because Angelina would not take advantage of the situation considering
that he took care of her for a very long time; that during his lifetime, he informed them
that the subject property would be equally divided among them after his death; and
that respondents were the ones paying the real estate taxes over said property.
It was further alleged that after the death of Ireneo in 1982, a conference among
relatives was held wherein both parties were present including the widow of Ireneo,
Salvacion; his nephew, Marietto Mendoza (Marietto); and his brother, Aurelio
Mendoza (Aurelio). In the said conference, it was said that Aurelio informed all of
them that it was Ireneo’s wish to have the property divided among his heirs; that
Spouses Intac never raised any objection; and that neither did they inform all those
present on that occasion that the property was already sold to them in 1977.6
Respondents further alleged that sometime in 1993, after the death of Salvacion,
rumors spread in the neighborhood that the subject property had been registered in
the names of Spouses Intac; that upon verification with the Office of the Register of
Deeds of Quezon City, respondents were surprised to find out that TCT No. 106530
had indeed been cancelled by virtue of the deed of absolute sale executed by Ireneo
in favor of Spouses Intac, and as a result, TCT No. 242655 was issued in their
names; that the cancellation of TCT No. 106530 and the subsequent issuance of TCT
No. 242655 were null and void and had no legal effect whatsoever because the deed
of absolute sale was a fictitious or simulated document; that the Spouses Intac were
guilty of fraud and bad faith when said document was executed; that Spouses Intac
never informed respondents that they were already the registered owners of the
subject property although they had never taken possession thereof; and that the
respondents had been in possession of the subject property in the concept of an
owner during Ireneo’s lifetime up to the present.
In their Answer,7 Spouses Intac countered, among others, that the subject property
had been transferred to them based on a valid deed of absolute sale and for a
valuable consideration; that the action to annul the deed of absolute sale had already
prescribed; that the stay of respondents in the subject premises was only by tolerance
during Ireneo’s lifetime because they were not yet in need of it at that time; and that
despite respondents’ knowledge about the sale that took place on October 25, 1977,
respondents still filed an action against them.
Ruling of the RTC
On April 30, 2002, the RTC rendered judgment in favor of respondents and against
Spouses Intac. The dispositive portion of its Decision reads:
WHEREFORE, premises considered, judgment is hereby rendered:
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(1) Declaring the Deed of Absolute Sale executed by Ireneo Mendoza in favor of
Mario and Angelina Intac dated October 25, 1977 as an equitable mortgage;
(2) Ordering the Register of Deeds of Quezon City to cancel Transfer Certificate
Title No. 242655 and, in lieu thereof, issue a new Transfer Certificate of Title in the
name of Ireneo Mendoza; and
(3) Ordering defendants to pay plaintiffs the amount of Thirty Thousand Pesos
(Php30,000.00) as and for attorney’s fees.
The other claims for damages are hereby denied for lack of merit.
SO ORDERED.8
The RTC ruled, among others, that the sale between Ireneo and Salvacion, on one
hand, and Spouses Intac was null and void for being a simulated one considering that
the said parties had no intention of binding themselves at all. It explained that the
questioned deed did not reflect the true intention of the parties and construed the said
document to be an equitable mortgage on the following grounds: [1] the signed
document did not express the real intention of the contracting parties because Ireneo
signed the said document only because he was in urgent need of funds; [2] the
amount of P60,000.00 in 1977 was too inadequate for a purchase price of a 240-
square meter lot located in Quezon City; [3] Josefina and Martina continued to be in
possession of the subject property from 1954 and even after the alleged sale took
place in 1977 until this case was filed in 1994; and [4] the Spouses Intac started
paying real estate taxes only in 1999. The RTC added that the Spouses Intac were
guilty of fraud because they effected the registration of the subject property even
though the execution of the deed was not really intended to transfer the ownership of
the subject property.
Ruling of the CA
On appeal, the CA modified the decision of the RTC. The CA ruled that the RTC erred
in first declaring the deed of absolute sale as null and void and then interpreting it to
be an equitable mortgage. The CA believed that Ireneo agreed to have the title
transferred in the name of the Spouses Intac to enable them to facilitate the
processing of the mortgage and to obtain a loan. This was the exact reason why the
deed of absolute sale was executed. Marietto testified that Ireneo never intended to
sell the subject property to the Spouses Intac and that the deed of sale was executed
to enable them to borrow from a bank. This fact was confirmed by Angelina herself
when she testified that she and her husband mortgaged the subject property
sometime in July 1978 to finance the construction of a small hospital in Sta. Cruz,
Laguna.
The CA further observed that the conduct of Spouses Intac belied their claim of
ownership. When the deed of absolute sale was executed, Spouses Intac never
asserted their ownership over the subject property, either by collecting rents, by
informing respondents of their ownership or by demanding possession of the land
from its occupants. It was not disputed that it was respondents who were in

possession of the subject property, leasing the same and collecting rentals. Spouses
Intac waited until Ireneo and Salvacion passed away before they disclosed the
transfer of the title to respondents. Hence, the CA was of the view that the veracity of
their claim of ownership was suspicious.
Moreover, wrote the CA, although Spouses Intac claimed that the purchase of the
subject property was for a valuable consideration (P60,000.00), they admitted that
they did not have any proof of payment. Marietto, whose testimony was assessed by
the RTC to be credible, testified that there was no such payment because Ireneo
never sold the subject property as he had no intention of conveying its ownership and
that his only purpose in lending the title was to help Spouses Intac secure a loan.
Thus, the CA concluded that the deed of absolute sale was a simulated document
and had no legal effect.
Finally, the CA stated that even assuming that there was consent, the sale was still
null and void because of lack of consideration. The decretal portion of the CA
Decision reads:
WHEREFORE, in view of the foregoing premises, the decision of the Regional Trial
Court of Quezon City, Branch 220, is AFFIRMED with modifications, as follows:
1. The Deed of Absolute Sale dated October 25, 1977 executed by Ireneo Mendoza
and Salvacion Fermen in favor of Spouses Mario and Angelina Intac is hereby
declared NULL AND VOID;
2. The Register of Deed[s] of Quezon City is ordered to cancel TCT No. 242655
and, in lieu thereof, issue a new one and reinstate Ireneo Mendoza as the registered
owner;
3. The defendant appellants are hereby ordered to pay the plaintiff appellees the
amount of thirty thousand pesos (Php30,000.00) as and for attorney’s fees; and
4. The other claims for damages are denied for lack of merit.
SO ORDERED.9
Not in conformity, petitioners filed this petition for review anchored on the following
ASSIGNMENT OF ERRORS
I THE HONORABLE COURT OF APPEALS GRAVELY ERRED WHEN IT
AFFIRMED THE DECISION OF THE REGIONAL TRIAL COURT DATED
FEBRUARY 16, 2006 WHICH WAS CONTRARY TO THE APPLICABLE LAWS AND
EXISTING JURISPRUDENCE.
II THE HONORABLE COURT OF APPEALS GRAVELY ERRED WHEN IT CLEARLY
OVERLOOKED, MISUNDERSTOOD AND/OR MISAPPLIED THE EVIDENCE
PRESENTED IN THE COURT A QUO.
Petitioners’ position
Petitioners primarily argue that the subject deed of sale was a valid and binding
contract between the parties. They claim that all the elements of a valid contract of
sale were present, to wit: [a] consent or meeting of the minds, that is, consent to
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transfer ownership in exchange of price; [b] determinate subject matter; and [c] price
certain in money or its equivalent.
Petitioners claim that respondents have validly gave their consent to the questioned
sale of the subject property. In fact, it was Ireneo and Salvacion who approached
them regarding their intention to sell the subject property. Ireneo and Salvacion
affixed their signatures on the questioned deed and never brought any action to
invalidate it during their lifetime. They had all the right to sell the subject property
without having to inform their children of their intention to sell the same. Ordinary
human experience dictates that a party would not affix his or her signature on any
written instrument which would result in deprivation of one’s property right if there was
really no intention to be bound by it. A party would not keep silent for several years
regarding the validity and due execution of a document if there was an issue on the
real intention of the vendors. The signatures of Ireneo and Salvacion meant that they
had knowingly and willfully entered into such agreement and that they were prepared
for the consequences of their act.
Respondents’ Position
Respondents are of the position that the RTC and the CA were correct in ruling that
the questioned deed of absolute sale was a simulated one considering that Ireneo
and Salvacion had no intention of selling the subject property. The true intention
rather was that Spouses Intac would just borrow the title of the subject property and
offer it as a collateral to secure a loan. No money actually changed hands.
According to respondents, there were several circumstances which put in doubt the
validity of the deed of absolute sale. First, the parties were not on equal footing
because Angelina was a doctor by profession while Ireneo and Salvacion were less
educated people who were just motivated by their trust, love and affection for her
whom they considered as their own child. Second, if there was really a valid sale, it
was just and proper for Spouses Intac to divulge the conveyance to respondents,
being compulsory heirs, but they did not. Third, Ireneo and Salvacion did nothing to
protect their interest because they banked on the representation of Spouses Intac that
the title would only be used to facilitate a loan with a bank. Fourth, Ireneo and
Salvacion remained in possession of the subject property without being disturbed by
Spouses Intac. Fifth, the price of the sale was inadequate and inequitable for a prime
property located in Pag-asa, Quezon City. Sixth, Ireneo and Salvacion had no
intention of selling the subject property because they had heirs who would inherit the
same. Seventh, the Spouses Intac abused the trust and affection of Ireneo and
Salvacion by arrogating unto themselves the ownership of the subject property to the
prejudice of his own children, Josefina and Martina.
Finally, petitioners could not present a witness to rebut Marietto’s testimony which
was straightforward and truthful.
The Court’s Ruling

Basically, the Court is being asked to resolve the issue of whether the Deed of
Absolute Sale,11 dated October 25, 1977, executed by and between Ireneo Mendoza
and Salvacion Fermin, as vendors, and Mario Intac and Angelina Intac, as vendees,
involving the subject real property in Pagasa, Quezon City, was a simulated contract
or a valid agreement.
The Court finds no merit in the petition.
A contract, as defined in the Civil Code, is a meeting of minds, with respect to the
other, to give something or to render some service. Article 1318 provides:
Art. 1318. There is no contract unless the following requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established.
Accordingly, for a contract to be valid, it must have three essential elements: (1)
consent of the contracting parties; (2) object certain which is the subject matter of the
contract; and (3) cause of the obligation which is established.12
All these elements must be present to constitute a valid contract. Consent is essential
to the existence of a contract; and where it is wanting, the contract is non-existent. In
a contract of sale, its perfection is consummated at the moment there is a meeting of
the minds upon the thing that is the object of the contract and upon the price. Consent
is manifested by the meeting of the offer and the acceptance of the thing and the
cause, which are to constitute the contract.
In this case, the CA ruled that the deed of sale executed by Ireneo and Salvacion was
absolutely simulated for lack of consideration and cause and, therefore, void. Articles
1345 and 1346 of the Civil Code provide:
Art. 1345. Simulation of a contract may be absolute or relative. The former takes
place when the parties do not intend to be bound at all; the latter, when the parties
conceal their true agreement.
Art. 1346. An absolutely simulated or fictitious contract is void. A relative simulation,
when it does not prejudice a third person and is not intended for any purpose contrary
to law, morals, good customs, public order or public policy binds the parties to their
real agreement.
If the parties state a false cause in the contract to conceal their real agreement, the
contract is only relatively simulated and the parties are still bound by their real
agreement. Hence, where the essential requisites of a contract are present and the
simulation refers only to the content or terms of the contract, the agreement is
absolutely binding and enforceable between the parties and their successors in
interest.13
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In absolute simulation, there is a colorable contract but it has no substance as the
parties have no intention to be bound by it. “The main characteristic of an absolute
simulation is that the apparent contract is not really desired or intended to produce
legal effect or in any way alter the juridical situation of the parties.”14 “As a result, an
absolutely simulated or fictitious contract is void, and the parties may recover from
each other what they may have given under the contract.”15
In the case at bench, the Court is one with the courts below that no valid sale of the
subject property actually took place between the alleged vendors, Ireneo and
Salvacion; and the alleged vendees, Spouses Intac. There was simply no
consideration and no intent to sell it.
Critical is the testimony of Marietto, a witness to the execution of the subject absolute
deed of sale. He testified that Ireneo personally told him that he was going to execute
a document of sale because Spouses Intac needed to borrow the title to the property
and use it as collateral for their loan application. Ireneo and Salvacion never intended
to sell or permanently transfer the full ownership of the subject property to Spouses
Intac. Marietto was characterized by the RTC as a credible witness.
Aside from their plain denial, petitioners failed to present any concrete evidence to
disprove Marietto’s testimony. They claimed that they actually paid P150,000.00 for
the subject property. They, however, failed to adduce proof, even by circumstantial
evidence, that they did, in fact, pay it. Even for the consideration of P60,000.00 as
stated in the contract, petitioners could not show any tangible evidence of any
payment therefor. Their failure to prove their payment only strengthened Marietto’s
story that there was no payment made because Ireneo had no intention to sell the
subject property.
Angelina’s story, except on the consideration, was consistent with that of Marietto.
Angelina testified that she and her husband mortgaged the subject property sometime
in July 1978 to finance the construction of a small hospital in Sta. Cruz, Laguna.
Angelina claimed that Ireneo offered the property as he was in deep financial need.
Granting that Ireneo was in financial straits, it does not prove that he intended to sell
the property to Angelina. Petitioners could not adduce any proof that they lent money
to Ireneo or that he shared in the proceeds of the loan they had obtained. And, if their
intention was to build a hospital, could they still afford to lend money to Ireneo? And if
Ireneo needed money, why would he lend the title to Spouses Intac when he himself
could use it to borrow money for his needs? If Spouses Intac took care of him when
he was terminally ill, it was not surprising for Angelina to reciprocate as he took care
of her since she was three (3) years old until she got married. Theircaring acts for
him, while they are deemed services of value, cannot be considered as consideration
for the subject property for lack of quantification and the Filipino culture of taking care
of their elders.
Thus, the Court agrees with the courts below that the questioned contract of sale was
only for the purpose of lending the title of the property to Spouses Intac to enable

them to secure a loan. Their arrangement was only temporary and could not give rise
to a valid sale. Where there is no consideration, the sale is null and void ab initio. In
the case of Lequin v. Vizconde,16 the Court wrote:
There can be no doubt that the contract of sale or Kasulatan lacked the essential
element of consideration. It is a well-entrenched rule that where the deed of sale
states that the purchase price has been paid but in fact has never been paid, the
deed of sale is null and void ab initio for lack of consideration. Moreover, Art. 1471 of
the Civil Code, which provides that “if the price is simulated, the sale is void,” also
applies to the instant case, since the price purportedly paid as indicated in the
contract of sale was simulated for no payment was actually made.
Consideration and consent are essential elements in a contract of sale. Where a
party’s consent to a contract of sale is vitiated or where there is lack of consideration
due to a simulated price, the contract is null and void ab initio. [Emphases supplied]
More importantly, Ireneo and his family continued to be in physical possession of the
subject property after the sale in 1977 and up to the present. They even went as far
as leasing the same and collecting rentals. If Spouses Intac really purchased the
subject property and claimed to be its true owners, why did they not assert their
ownership immediately after the alleged sale took place? Why did they have to assert
their ownership of it only after the death of Ireneo and Salvacion? One of the most
striking badges of absolute simulation is the complete absence of any attempt on the
part of a vendee to assert his right of dominion over the property.17
On another aspect, Spouses Intac failed to show that they had been paying the real
estate taxes of the subject property. They admitted that they started paying the real
estate taxes on the property for the years 1996 and 1997 only in 1999. They could
only show two (2) tax receipts (Real Property Tax Receipt No. 361105, dated April 21,
1999, and Real Property Tax Receipt No. 361101, dated April 21, 1999).18
Noticeably, petitioners’ tax payment was just an afterthought. The non-payment of
taxes was also taken against the alleged vendees in the case of Lucia Carlos Aliño v.
Heirs of Angelica A. Lorenzo.19 Thus,
Furthermore, Lucia religiously paid the realty taxes on the subject lot from 1980 to
1987. While tax receipts and declarations of ownership for taxation purposes are not,
in themselves, incontrovertible evidence of ownership, they constitute at least proof
that the holder has a claim of title over the property, particularly when accompanied
by proof of actual possession. They are good indicia of the possession in the concept
of owner, for no one in his right mind would be paying taxes for a property that is not
in his actual or at least constructive possession. The voluntary declaration of a piece
of property for taxation purposes manifests not only one’s sincere and honest desire
to obtain title to the property and announces his adverse claim against the State and
all other interested parties, but also the intention to contribute needed revenues to the
Government. Such an act strengthens one’s bona fide claim of acquisition of
ownership.
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On the other hand, respondent heirs failed to present evidence that Angelica, during
her lifetime, paid the realty taxes on the subject lot. They presented only two tax
receipts showing that Servillano, Sr. belatedly paid taxes due on the subject lot for the
years 1980-1981 and part of year 1982 on September 8, 1989, or about a month after
the institution of the complaint on August 3, 1989, a clear indication that payment was
made as an afterthought to give the semblance of truth to their claim.
Thus, the subsequent acts of the parties belie the intent to be bound by the deed of
sale. [Emphases supplied]
The primary consideration in determining the true nature of a contract is the intention
of the parties. If the words of a contract appear to contravene the evident intention of
the parties, the latter shall prevail. Such intention is determined not only from the
express terms of their agreement, but also from the contemporaneous and
subsequent acts of the parties.20 As heretofore shown, the contemporaneous and
subsequent acts of both parties in this case, point to the fact that the intention of
Ireneo was just to lend the title to the Spouses Intac to enable them to borrow money
and put up a hospital in Sta. Cruz, Laguna. Clearly, the subject contract was
absolutely simulated and, therefore, void.
In view of the foregoing, the Court finds it hard to believe the claim of the Spouses
Intac that the stay of Ireneo and his family in the subject premises was by their mere
tolerance as they were not yet in need of it. As earlier pointed out, no convincing
evidence, written or testimonial, was ever presented by petitioners regarding this
matter. It is also of no moment that TCT No. 106530 covering the subject property
was cancelled and a new TCT (TCT No. 242655)21 was issued in their names. The
Spouses Intac never became the owners of the property despite its registration in
their names. After all, registration does not vest title.
As a logical consequence, petitioners did not become the owners of the subject
property even after a TCT had been issued in their names. After all, registration does
not vest title. Certificates of title merely confirm or record title already existing and
vested. They cannot be used to protect a usurper from the true owner, nor can they
be used as a shield for the commission of fraud, or to permit one to enrich oneself at
the expense of others. Hence, reconveyance of the subject property is warranted.22
The Court does not find acceptable either the argument of the Spouses Intac that
respondents’ action for cancellation of TCT No. 242655 and the reconveyance of the
subject property is already barred by the Statute of Limitations. The reason is that the
respondents are still in actual possession of the subject property. It is a well-settled
doctrine that “if the person claiming to be the owner of the property is in actual
possession thereof, the right to seek reconveyance, which in effect seeks to quiet title
to the property, does not prescribe.”23 In Lucia Carlos Aliño, it was also written:
The lower courts fault Lucia for allegedly not taking concrete steps to recover the
subject lot, demanding its return only after 10 years from the registration of the title.
They, however, failed to consider that Lucia was in actual possession of the property.
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It is well-settled that an action for reconveyance prescribes in 10 years, the reckoning

point of which is the date of registration of the deed or the date of issuance of the
certificate of title over the property. In an action for reconveyance, the decree of
registration is highly regarded as incontrovertible. What is sought instead is the
transfer of the property or its title, which has been erroneously or wrongfully
registered in another person’s name, to its rightful or legal owner or to one who has a
better right.

However, in a number of cases in the past, the Court has consistently ruled that if the
person claiming to be the owner of the property is in actual possession thereof, the
right to seek reconveyance, which in effect seeks to quiet title to the property, does
not prescribe. The reason for this is that one who is in actual possession of a piece of
land claiming to be the owner thereof may wait until his possession is disturbed or his
title is attacked before taking steps to vindicate his right. The reason being, that his
undisturbed possession gives him the continuing right to seek the aid of a court of
equity to ascertain the nature of the adverse claim of a third party and its effect on his
title, which right can be claimed only by one who is in possession. Thus, considering
that Lucia continuously possessed the subject lot, her right to institute a suit to clear
the cloud over her title cannot be barred by the statute of limitations.24 [Emphases
supplied]

WHEREFORE, the petition is DENIED.

SO ORDERED.

Velasco, Jr. (Chairperson), Peralta, Abad and Perez,** JJ., concur.

Petition denied.

Notes.―In absolute simulation, there is a colorable contract but it has no substance

as the parties have no intention to be bound by it; An absolutely simulated or fictitious
contract is void, and the parties may recover from each other what they may have
given under the contract. (Villaceran vs. De Guzman, 666 SCRA 454 [2012])

If the words of a contract appear to contravene the evident intention of the parties, the
latter shall prevail. (Id.)

――o0o――
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G.R. No. 156162. June 22, 2015.* down guidelines in establishing novation, viz.: Novation is never presumed, and the
animus novandi, whether totally or partially, must appear by express agreement of the
CCC INSURANCE CORPORATION, petitioner, vs. KAWASAKI STEEL parties, or by their acts that are too clear and unequivocal to be mistaken. The
CORPORATION, F.F. MAÑACOP CONSTRUCTION CO., INC., and FLORANTE F. extinguishment of the old obligation by the new one is a necessary element of
MAÑACOP, respondents. novation which may be effected either expressly or impliedly. The term “expressly”
means that the contracting parties incontrovertibly disclose that their object in
Civil Law; Suretyship; Words and Phrases; Jurisprudence also defines a contract of
executing the new contract is to extinguish the old one. Upon the other hand, no
suretyship as an agreement where a party called the surety guarantees the
specific form is required for an implied novation, and all that is prescribed by law
performance by another party called the principal or obligor of an obligation or
would be an incompatibility between the two contracts. While there is really no hard
undertaking in favor of a third person called the obligee.—The statutory definition of
and fast rule to determine what might constitute to be a sufficient change that can
suretyship is found in Article 2047 of the Civil Code, thus: Art. 2047. By guaranty a
bring about novation, the touchstone for contrariety, however, would be an
person, called the guarantor, binds himself to the creditor to fulfill the obligation of the
irreconcilable incompatibility between the old and the new obligations. There are two
principal debtor in case the latter should fail to do so. If a person binds himself
ways which could indicate, in fine, the presence of novation and thereby produce the
solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this
effect of extinguishing an obligation by another which substitutes the same. The first
Book shall be observed. In such case the contract is called a suretyship. (Emphasis
is when novation has been explicitly stated and declared in unequivocal terms. The
supplied) Jurisprudence also defines a contract of suretyship as “an agreement where
second is when the old and the new obligations are incompatible on every point. The
a party called the surety guarantees the performance by another party called the
test of incompatibility is whether or not the two obligations can stand together, each
principal or obligor of an obligation or undertaking in favor of a third person called the
one having its independent existence. If they cannot, they are incompatible and the
obligee. Specifically, suretyship is a contractual relation resulting from an agreement
latter obligation novates the first. Corollarily, changes that breed incompatibility must
whereby one person, the surety, engages to be answerable for the debt, default or
be essential in nature and not merely accidental. The incompatibility must take place
miscarriage of another, known as the principal.” The Court expounds that “a surety’s
in any of the essential elements of the obligation, such as its object, cause or principal
liability is joint and several, limited to the amount of the bond, and determined strictly
conditions thereof; otherwise, the change would be merely modificatory in nature and
by the terms of contract of suretyship in relation to the principal contract between the
insufficient to extinguish the original obligation.
obligor and the obligee. It bears stressing, however, that although the contract of
suretyship is secondary to the principal contract, the surety’s liability to the obligee is Same; Same; Subrogation; In Autocorp Group v. Intra Strata Assurance Corporation,
nevertheless direct, primary, and absolute.” 556 SCRA 250 (2008), the Court ruled that: The benefit of subrogation, an extinctive
subjective novation by a change of creditor, which “transfers to the person
Same; Contracts; Principle of Relativity of Contracts; According to the principle of
subrogated, the credit and all the rights thereto appertaining, either against the debtor
relativity of contracts in Article 1311 of the Civil Code, a contract takes effect only
or against third persons,” is granted by the Article 2067 of the Civil Code only to the
between the parties, their assigns, and heirs; except when the contract contains a
“guarantor (or surety) who pays.”—Pursuant to Articles 2066 and 2067, the rights of
stipulation in favor of a third person, which gives said person the right to demand
CCCIC as surety to indemnification and subrogation will arise only after it has paid its
fulfillment of said stipulation.—According to the principle of relativity of contracts in
obligations to Kawasaki as the debtor-obligee. In Autocorp Group v. Intra Strata
Article 1311 of the Civil Code, a contract takes effect only between the parties, their
Assurance Corporation, 556 SCRA 250 (2008), the Court ruled that: The benefit of
assigns, and heirs; except when the contract contains a stipulation in favor of a third
subrogation, an extinctive subjective novation by a change of creditor, which
person, which gives said person the right to demand fulfillment of said stipulation. In
“transfers to the person subrogated, the credit and all the rights thereto appertaining,
this case, the Surety and Performance Bonds are enforceable by and against the
either against the debtor or against third persons,” is granted by the Article 2067 of
parties FFMCCI (the obligor) and CCCIC (the surety), as well as the third person
the Civil Code only to the “guarantor (or surety) who pays.” (Emphases supplied,
Kawasaki (the obligee) in whose favor said bonds had been explicitly constituted;
citations omitted) In the present case, CCCIC has yet to pay Kawasaki.
while the related Consortium Agreement binds the parties Kawasaki and FFMCCI.
Since the Republic is neither a party to the Surety and Performance Bonds nor the Remedial Law; Civil Procedure; Domestic Corporations; Service of Summons; Rule
Consortium Agreement, any action or omission on its part has no effect on the liability 14, Section 13 of the 1964 Rules of Court, which was then in force, allowed the
of CCCIC under said bonds. service of summons upon a director of a private domestic corporation.—Rule 14,
Section 13 of the 1964 Rules of Court, which was then in force, allowed the service of
Same; Novation; It is well-settled that novation is never presumed — novatio non
summons upon a director of a private domestic corporation: Sec. 13. Service upon
praesumitur.—It is well-settled that novation is never presumed — novatio non
private domestic corporation or partnership.—If the defendant is a corporation
praesumitur. As the party alleging novation, the onus of showing clearly and
organized under the laws of the Philippines or a partnership duly registered, service
unequivocally that novation had indeed taken place rests on CCCIC. The Court laid

may be made on the president, manager, secretary, cashier, agent, or any of its
directors. The aforementioned rule does not require that service on the private
domestic corporation be served at its principal office in order for the court to acquire
jurisdiction over the same. The Court, in Talsan Enterprises, Inc. v. Baliwag Transit,
Inc., 310 SCRA 156 (1999), citing Baltazar v. Court of Appeals, 168 SCRA 354
(1988), affirmed that: [S]ervice on respondent’s bus terminal at the address stated in
the summons and not in its main office in Baliwag do not render the service of
summons invalid. In Artemio Baltazar v. Court of Appeals, we held: “The regular
mode, in other words, of serving summons upon a private Philippine Corporation is by
personal service upon one of the officers of such corporation identified in Section 13.
Ordinarily, such personal service may be expected to be made at the principal office
of the corporation. Section 13, does not, however, impose such requirement, and so
personal service upon the corporation may be effected through service upon, for
instance, the president of the corporation at his office or residential address.” x x x. In
fine, the service of summons upon respondent Baliwag Transit is proper.
Consequently, the trial court validly acquired jurisdiction over respondent Baliwag.
(Citation omitted) Hence, the personal service of the Alias Summons on an FFMCCI
director was sufficient for the RTC to acquire jurisdiction over FFMCCI itself.
Same; Same; Cause of Action; Words and Phrases; A cause of action is defined as
the act or omission by which a party violates a right of another.—Nevertheless, the
Third-Party Complaint filed by CCCIC against FFMCCI and Mañacop must be
dismissed on the ground of lack of cause of action. A cause of action is defined as the
act or omission by which a party violates a right of another. The essential elements of
a cause of action are: (a) the existence of a legal right in favor of the plaintiff; (b) a
correlative legal duty of the defendant to respect such right; and (c) an act or omission
by such defendant in violation of the right of the plaintiff with a resulting injury or
damage to the plaintiff for which the latter may maintain an action for the recovery of
relief from the defendant.
Attorney’s Fees; Article 2208(2) of the Civil Code allows the award of attorney’s fees
“[w]hen the defendant’s act or omission has compelled the plaintiff to litigate with third
persons or to incur expenses to protect his interest[.]”—Article 2208(2) of the Civil
Code allows the award of attorney’s fees “[w]hen the defendant’s act or omission has
compelled the plaintiff to litigate with third persons or to incur expenses to protect his
interest[.]” In Servicewide Specialists, Incorporated v. Court of Appeals, 256 SCRA
649 (1996), the Court declared that: Article 2208 of the Civil Code allows attorney’s
fees to be awarded by a court when its claimant is compelled to litigate with third
persons or to incur expenses to protect his interest by reason of an unjustified act or
omission on the part of the party from whom it is sought. To be sure, private
respondents were forced to litigate to protect their rights but as we have previously
held: “where no sufficient showing of bad faith would be reflected in a party’s
persistence in a case other than an erroneous conviction of the righteousness of his
cause, attorney’s fee shall not be recovered as cost.”
|8
Bad Faith; Words and Phrases; Bad faith has been defined as a breach of a known
duty through some motive of interest or ill will.—Bad faith has been defined as “a
breach of a known duty through some motive of interest or ill will. It must, however, be
substantiated by evidence. Bad faith under the law cannot be presumed, it must be
established by clear and convincing evidence.” There is no evidence in this case to
show bad faith on the part of CCCIC. CCCIC, in refusing the claim of Kawasaki, was
merely acting based on its belief in the righteousness of its defense. Hence, even
though Kawasaki was compelled to litigate to enforce its claim against CCCIC, the
award of attorney’s fees is not proper.
Interest Rates; The Supreme Court (SC), in Nacar v. Gallery Frames, 703 SCRA 439
(2013), modified the guidelines in imposing interests, taking into account Bangko
Sentral ng Pilipinas-Monetary Board (BSP-MB) Resolution No. 796 dated May 16,
2013 and Circular No. 799, Series of 2013, which fixed the legal rate at six percent
(6%) per annum effective July 1, 2013.—The Court, in Nacar v. Gallery Frames, 703
SCRA 439 (2013), modified the guidelines in imposing interests, taking into account
Bangko Sentral ng Pilipinas-Monetary Board Resolution No. 796 dated May 16, 2013
and Circular No. 799, Series of 2013, which fixed the legal rate at 6% per annum
effective July 1, 2013. In the absence of stipulated interest in the present case, the
Court imposes upon the amounts covered by the Surety and Performance Bonds the
legal rate of 12% per annum from September 15, 1989, the date of demand, until
June 30, 2013; and then the legal rate of 6% per annum from July 1, 2013 until full
payment of the same.
PETITION for review on certiorari of the decision and resolution of the Court of
Appeals.
The facts are stated in the opinion of the Court.
LEONARDO-DE CASTRO, J.:
Assailed in this Petition for Review on Certiorari are: (1) the Decision1 dated May 30,
2002 of the Court of Appeals in C.A.-G.R. CV No. 54066, which reversed and set
aside the Decision2 dated May 2, 1996 of the Regional Trial Court (RTC), Makati City,
Branch 66, and held petitioner CCC Insurance Corporation (CCCIC) liable under its
Surety and Performance Bonds to respondent Kawasaki Steel Corporation
(Kawasaki); and (2) the Resolution3 dated November 14, 2002 of the appellate court
in the same case which denied the Motion for Reconsideration of CCCIC.
The antecedents of this case are as follows:
On August 16, 1988, Kawasaki, represented by its Manager, Yoshimitsu Hosoya, and
F.F. Mañacop Construction Company, Inc. (FFMCCI), represented by its President,
Florante F. Mañacop (Mañacop), executed a Consortium Agreement for Pangasinan
Fishing Port Network Project (Consortium Agreement).4 Kawasaki and FFMCCI
formed a consortium (Kawasaki-FFMCCI Consortium) for the purpose of contracting
with the Philippine Government for the construction of a fishing port network in

Pangasinan (Project). According to their Consortium Agreement, Kawasaki and
FFMCCI undertook to perform and accomplish their respective and specific portions
of work in the intended contract with the Philippine Government.5
The Project was awarded to the Kawasaki-FFMCCI Consortium for the contract price
of P62,000,441.00, 33.37% of which or P20,692,026.00 was the price of work of
FFMCCI. On October 4, 1988, the Republic of the Philippines (Republic), through the
Department of Public Works and Highways (DPWH), represented by former Secretary
Romulo M. del Rosario, as owner, and the Kawasaki-FFMCCI Consortium,
represented by Shigeru Kohda, as contractor, entered into a Contract Agreement
entitled Stage I-A Construction of Pangasinan Fishing Port Network (Construction
Contract).6
In accordance with Article 10 of the Consortium Agreement,7 “Consortium Leader”
Kawasaki, on behalf of the Consortium, secured from the Philippine Commercial
International Bank (PCIB) Letter of Credit No. 38-001-1836178 in the amount of
P6,200,044.10 in favor of DPWH, available from September 9, 1988 to November 19,
1990. Said Letter of Credit guaranteed the faithful performance by Kawasaki-FFMCCI
Consortium of its obligation under the Construction Contract.
The Republic made an advance payment for the Project to the Kawasaki-FFMCCI
Consortium in the amount of P9,300,066.15, representing 15% of the contract price of
P62,000,441.00.
For the release of its share in the advance payment made by the Republic, and also
pursuant to Article 10 of the Consortium Agreement, FFMCCI secured from CCCIC
the following bonds in favor of Kawasaki: (a) Surety Bond No. B-88/111919 in the
amount of P3,103,803.90 (equivalent to 15% of the price of work of FFMCCI),
effective from October 26, 1988 to October 26, 1989, to counter-guarantee the
amount of advance payment FFMCCI would receive from Kawasaki; and (b)
Performance Bond B-88/1119310 in the amount of P2,069,202.60 (equivalent to 10%
of the price of work of FFMCCI), effective from October 27, 1988 to October 27, 1989,
to guarantee completion by FFMCCI of its scope of work in the Project. In turn,
FFMCCI and Mañacop executed two Indemnity Agreements11 promising to
compensate CCCIC for any damages the insurance company might incur from
issuing the Surety and Performance Bonds.
In two letters dated October 27, 1998,12 FFMCCI submitted the Surety and
Performance Bonds to Kawasaki and requested Kawasaki to release the advance
payment in the amount of P3,103,803.90. FFMCCI eventually received the amount of
advance payment it requested on a staggered basis.13
The Project commenced in November 1988.14 Sometime in April 1989, FFMCCI
ceased performing its work in the Project after suffering financial problems and/or
business reverses. After discussions, Kawasaki and FFMCCI then executed a new
Agreement15 on August 24, 1989 wherein Kawasaki recognized the “Completed
Portion of Work” of FFMCCI as of April 25, 1989, and agreed to take over the
|9
unfinished portion of work of FFMCCI, referred to as “Transferred Portion of Work.”
Kawasaki and FFMCCI further agreed that “[a]ny profit or benefit arising from the
performance by [Kawasaki] of the Transferred Portion of Work shall accrue to
[Kawasaki].”
In a letter dated September 14, 1989,16 Kawasaki informed CCCIC about the
cessation of operations of FFMCCI, and the failure of FFMCCI to perform its
obligations in the Project and repay the advance payment made by Kawasaki.
Consequently, Kawasaki formally demanded that CCCIC, as surety, pay Kawasaki
the amounts covered by the Surety and Performance Bonds. Because CCCIC did not
act upon its demand, Kawasaki filed on November 6, 1989 before the RTC a
Complaint17 against CCCIC to collect on Surety Bond No. B-88/11191 and
Performance Bond No. B-88/11193.
In its Answer with Counterclaims,18 CCCIC denied any liability on its Surety and
Performance Bonds on the following grounds: (a) the rights of Kawasaki under the
Surety and Performance Bonds had not yet accrued since the said Bonds were mere
counter-guarantees, for which CCCIC could only be held liable upon the filing of a
claim by the Republic against the Kawasaki-FFMCCI Consortium; (b) Kawasaki and
FFMCCI, without the consent of CCCIC, executed a new Agreement dated August
24, 1989 novating the terms of the Consortium Agreement, which prevented CCCIC
from being subrogated to the right of Kawasaki against FFMCCI; (c) Kawasaki, in
completing the Transferred Portion of Work was correspondingly compensated, which
negated any allegation of loss on the part of Kawasaki; and (d) the obligation of
CCCIC was extinguished when the Republic granted the Kawasaki-FFMCCI
Consortium an extension of time to complete the Project, without the consent of
CCCIC.
CCCIC subsequently filed on August 19, 1991 before the RTC a Third-Party
Complaint19 against FFMCCI and its President Mañacop based on the two Indemnity
Agreements which FFMCCI and Mañacop executed in favor of CCCIC. The RTC
issued summonses but FFMCCI and Mañacop failed to file any responsive pleading
to the Third-Party Complaint of CCCIC. Upon motion of CCCIC, the RTC issued an
Order20 dated December 2, 1991 declaring FFMCCI and Mañacop in default.
After trial, the RTC rendered a Decision on May 2, 1996 dismissing the Complaint of
Kawasaki and the counterclaim of CCCIC. The RTC agreed with CCCIC that the
Surety and Performance Bonds issued by the insurance company were mere counter-
guarantees and the cause of action of Kawasaki based on said Bonds had not yet
accrued. Since the Republic did not exercise its right to claim against the PCIB Letter
of Credit No. 38-001--183617, nor compelled Kawasaki to perform the unfinished
work of FFMCCI, Kawasaki could not claim indemnification from CCCIC. Moreover,
the RTC, citing Article 2079 of the Civil Code, ruled that the obligations of CCCIC
under the Surety and Performance Bonds were extinguished when the Republic
granted the Kawasaki-FFMCCI Consortium a 43-day extension to finish the Project,
absent the consent of CCCIC. The RTC found no deliberate intent on the part of

Kawasaki to cause prejudice to CCCIC, so it did not grant the counterclaims for moral
and exemplary damages and attorney’s fees of CCCIC against Kawasaki.
Kawasaki appealed before the Court of Appeals assigning the following errors on the
part of the RTC:
I. THE COURT A QUO GROSSLY ERRED IN HOLDING THAT [CCCIC] CAN BE
HELD LIABLE TO [Kawasaki] UNDER THE SUBJECT BONDS ONLY “IF THE
GOVERNMENT EXERCISES ITS RIGHTS AGAINST THE GUARANTEE-BONDS
ISSUED TO IT BY [Kawasaki]” ON THE THEORY ADVANCED BY [CCCIC], WHICH
THE COURT A QUO FULLY EMBRACED AND ADOPTED, THAT THE BONDS ARE
MERE “COUNTER-GUARANTEES.”
II. THE COURT A QUO GROSSLY ERRED IN HOLDING THAT THE EXTENSION
GRANTED BY THE GOVERNMENT TO THE CONSORTIUM FOR THE
CONSTRUCTION OF THE PANGASINAN FISHING PORT NETWORK PROJECT
EXTINGUISHED THE LIABILITY OF [CCCIC].
III. THE COURT A QUO GROSSLY ERRED IN HOLDING THAT ARTICLE 2079 OF
THE CIVIL CODE OF THE PHILIPPINES APPLIES TO THE CASE AT BAR. IN A
LONG LINE OF DECISIONS, THE SUPREME COURT HAS HELD THAT THE RULE
OF “STRICTISSIMI JURIS” DOES NOT APPLY TO SURETY COMPANIES SUCH
AS [CCCIC] HEREIN.
IV. THE SUBJECT BONDS ARE FIXED UNTIL OCTOBER 26 AND 27, 1989
RESPECTIVELY WHILE THE ORIGINAL PERIOD OF THE CONTRACT WITH THE
GOVERNMENT, THE PERFORMANCE OF WHICH BY [CCCIC] ARE PRECISELY
GUARANTEED BY THESE BONDS, IS UNTIL DECEMBER 30, 1989. ON THE
OTHER HAND, THE DEFAULT BY [FFMCCI] WHICH THE BONDS GUARANTEED
AGAINST OCCURRED ON [OR] ABOUT AUGUST 24, 1989. THEREFORE,
IRRESPECTIVE OF WHETHER THERE WAS AN EXTENSION OR NOT AT THE
END OF THE ORIGINAL CONTRACT PERIOD AND IRRESPECTIVE OF
WHETHER THIS EXTENSION IS KNOWN OR UNKNOWN TO [CCCIC], THE
LIABILITY THAT IT BOUND ITSELF UNTO UNDER THE BONDS IS VERY
CLEARLY AND UNEQUIVOCALLY FIXED UNTIL OCTOBER 26 AND 27, 1989
RESPECTIVELY. THEREFORE, ARTICLE 2079 WILL NOT APPLY. HENCE, THE
COURT A QUO GROSSLY ERRED IN HOLDING OTHERWISE.21
The Court of Appeals, in its Decision dated May 30, 2002, reversed the appealed
RTC Decision, reasoning as follows:
From the language of the aforesaid bonds, it is clear that, in the case of the surety
bond, the same was posted, jointly and severally, by [FFMCCI] and CCCIC “to fully
and faithfully guarantee the repayment of the down payment made by the principal
([FFMCCI]) to the obligee (KAWASAKI) in connection with the construction of the
Pangasinan Fishing Port Network Project at Pangasinan” subject only to the condition
that “the liability of the [herein] surety shall in no case exceed the amount of Pesos:
THREE MILLION ONE HUNDRED THREE THOUSAND EIGHT HUNDRED THREE
& 90/100 (P3,103,803.90) Philippine currency; and in the case of the performance
bond, the same was posted, jointly and severally by [FFMCCI] and CCCIC “to
| 10
guarantee the full and faithful performance of the principal ([FFMCCI]) of its obligation
in connection with the project for the construction of the Pangasinan Fishing Port
Network located at Pangasinan in accordance with the plans and specifications of the
contract” subject only to the condition that “the liability of the [herein] surety shall in no
case exceed the amount of Pesos: TWO MILLION SIXTY-NINE THOUSAND TWO
HUNDRED TWO & 60/100 (P2,069,202.60) Philippine currency.”
The right of KAWASAKI as the obligee/creditor of the said bonds was not made
subject to any other condition expressly so provided in the Consortium Agreement,
which was the reason for the bonds posted by [FFMCCI] and CCCIC, or in the subject
bonds themselves.
It is not provided, neither in the Consortium Agreement nor in the subject bonds
themselves that before KAWASAKI may proceed against the bonds posted by
[FFMCCI] and CCCIC, the Philippine government as employer must first exercise its
rights against the bond issued in its favor by the consortium.
Hence, this Court finds that the court a quo did err in ruling that “[u]nder the
Consortium Agreement, the bonds are counter-guarantees which only guarantee the
plaintiff KAWASAKI for reimbursement to the extent of the value of the bonds in case
the employer (government) successfully exercised its rights under the bonds issued to
it by plaintiff KAWASAKI”; and that “[c]onsidering that the government did not exercise
its rights against the bond issued to it by the Consortium Leader, it follows that the
Consortium Leader cannot collect from the counter-guarantees furnished by
[FFMCCI].”
Time and again, the Supreme Court has stressed the rule that a contract is the law
between the parties, and courts have no choice but to enforce such contract so long
as they are not contrary to law, morals, good customs or public policy.
With respect to the second, third and fourth issues raised, suffice it to say that this
Court finds Article 2079 of the Civil Code of the Philippines not applicable.
[Kawasaki] claims that since the issue in this case is the liability of CCCIC to
KAWASAKI, the extension of forty-three (43) days within which to complete the
Pangasinan Fishing Port Network Project granted by the Philippine government, who
is not a party to the two (2) bonds posted by [FFMCCI] and CCCIC, to the consortium,
does not absolve CCCIC’s liabilities to KAWASAKI under the subject bonds.
We agree.
As stated earlier, the parties insofar as the surety bond and performance bond are
concerned are: KAWASAKI, as obligee, [FFMCCI], as principal; and CCCIC, as
surety.
Considering therefore that the extension of time within which to complete the
construction of the Pangasinan Fishing Port Network Project was granted by the
Philippine government, who is not the creditor of the bonds, this Court finds that

Article 2079 of the Civil Code of the Philippines does not apply and the extension of
time granted by the Philippine government, contrary to the ruling of the trial court,
does not absolve the surety of its liabilities to KAWASAKI under the subject bonds.
The principle of relativity of contracts provides that contracts can only bind the parties
who entered into it.
Finally, this Court finds the award of attorney’s fees in favor of the appellant
warranted under the circumstance, pursuant to paragraph (2) of Article 2208 of the
Civil Code of the Philippines.22
In the end, the Court of Appeals decreed:
WHEREFORE, the instant appeal is hereby GRANTED. Accordingly, the assailed
decision of the Regional Trial Court of Makati City, Branch 66, is hereby REVERSED
and SET ASIDE.
CCC Insurance Corporation is hereby ordered to pay KAWASAKI the following:
1. The amount of P3,103,803.90 representing its liability to Kawasaki Steel
Corporation under Surety Bond No. B-88/11191, plus legal interest at the rate of 12%
per annum computed from 15 September 1989, until fully paid;
2. The amount of P2,069,202.80 representing its liability to Kawasaki Steel
Corporation under Performance Bond No. B--88/11193, plus legal interest at the rate
of 12% per annum computed from 15 September 1989, until fully paid; and
3. 15% of the total amount due as and for attorney’s fees.23
In its Resolution dated November 14, 2002, the Court of Appeals denied the Motion
for Reconsideration of CCCIC. However, in the same Resolution, the appellate court
partially granted the Third-Party Complaint of CCCIC by holding Mañacop liable under
the Indemnity Agreements he executed in favor of the insurance company, while
declaring the RTC was without jurisdiction over FFMCCI due to invalid service of
summons. The Court of Appeals ultimately resolved:
WHEREFORE, judgment is hereby rendered in favor of third party plaintiff CCC
Insurance Corporation and against third party defendant Florante F. Mañacop,
ordering the latter to indemnify the former the total amount paid by the former to
Kawasaki Steel Corporation representing CCC Insurance Corporation’s liabilities
under Surety Bond No. B-88/11191 and Performance Bond No. B-88/11193 and to
pay CCC Insurance Corporation 25% of the total amount due, as and for attorney’s
fees.24
In the instant Petition for Review on Certiorari, CCCIC assails the aforementioned
Decision and Resolution of the Court of Appeals on six grounds, viz.:
A. THE COURT OF APPEALS, CONTRARY TO LAW, FAILED TO CONSIDER
THE TRUE NATURE OF THE TRANSACTION BETWEEN THE PARTIES
AND THE TRUE NATURE OF A COUNTER-GUARANTEE.
| 11
B. THE COURT OF APPEALS, CONTRARY TO LAW, FAILED TO
APPRECIATE THE APPLICABILITY OF ARTICLE 2079 OF THE CIVIL
CODE, WHICH PROVIDES THAT AN EXTENSION GRANTED TO THE
DEBTOR BY THE CREDITOR WITHOUT THE CONSENT OF THE
GUARANTOR EXTINGUISHES THE GUARANTY.
C. THE COURT OF APPEALS, CONTRARY TO LAW, ERRONEOUSLY
FAILED TO CONSIDER THE FACT THAT KAWASAKI AND FFMCCI HAVE
NOVATED THEIR ORIGINAL AGREEMENT WITHOUT THE KNOWLEDGE
AND CONSENT OF CCCIC, THEREBY RELEASING THE LATTER FROM
ANY OBLIGATION UNDER THE BONDS IT ISSUED.
D. THE COURT OF APPEALS, CONTRARY TO LAW, ERRONEOUSLY
RENDERED CCCIC LIABLE TO PAY THE FULL AMOUNT OF THE
SURETY AND PERFORMANCE BONDS DESPITE THE FACT THAT
FFMCCI WAS ABLE TO PARTIALLY EXECUTE ITS PORTION OF THE
WORK AND THAT KAWASAKI HAD BEEN FULLY COMPENSATED FOR
TAKING OVER THE UNFINISHED PORTION.
E. THE COURT OF APPEALS, CONTRARY TO LAW, ERRONEOUSLY
AWARDED ATTORNEY’S FEES TO KAWASAKI UNDER PARAGRAPH 2
OF ARTICLE 2208 OF THE CIVIL CODE.
F. THE COURT OF APPEALS, CONTRARY TO LAW, ERRONEOUSLY
RULED THAT THERE WAS NO VALID SERVICE OF SUMMONS UPON
FFMCCI.25
CCCIC avers that its liabilities under the Surety and Performance Bonds are directly
linked with the obligation of the Kawasaki-FFMCCI Consortium to finish the Project for
the Republic, so that its liability as surety of FFMCCI will only arise if the Republic
made a claim on the PCIB Letter of Credit furnished by Kawasaki, on behalf of the
Consortium. Since the Republic has not exercised its right against said Letter of
Credit, Kawasaki does not have a cause of action against CCCIC.
CCCIC also maintains that its obligations under the Surety and Performance Bonds
had been extinguished when (a) the Republic extended the completion period for the
Project upon the request of Kawasaki but without the knowledge or consent of
CCCIC, based on Article 2079 of the Civil Code; and (b) when Kawasaki and FFMCCI
executed the Agreement dated August 24, 1989, without the consent of CCCIC, there
being a novation of the Consortium Agreement.
CCCIC further argues that when Kawasaki, under the Agreement dated August 24,
1989, voluntarily took over the Transferred Portion of Work from FFMCCI, it resulted
in the reduction of revenue of FFMCCI on which CCCIC relied upon as a source of
indemnification. CCCIC additionally posits that Kawasaki already received
compensation for doing the Transferred Portion of Work, so the Court of Appeals had
no basis for still ordering Kawasaki to pay the full value of the Surety and
Performance Bonds, plus interest.

Moreover, CCCIC contends that the Court of Appeals erred in awarding attorney’s
fees in favor of Kawasaki based on paragraph 2 of Article 2208 of the Civil Code as it
is not a sound policy to place a penalty on the right to litigate.
Lastly, CCCIC insists that there was proper service of summons upon FFMCCI,
through one of its directors, as authorized by the Rules of Court.
The Petition is partly meritorious.
The liability of CCCIC under the Surety and Performance Bonds is dependent on the
fulfillment and/or nonfulfillment of the obligation of FFMCCI to KAWASAKI under the
Consortium Agreement.
The statutory definition of suretyship is found in Article 2047 of the Civil Code, thus:
Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor
to fulfill the obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section
4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called
a suretyship. (Emphasis supplied)
Jurisprudence also defines a contract of suretyship as “an agreement where a party
called the surety guarantees the performance by another party called the principal or
obligor of an obligation or undertaking in favor of a third person called the obligee.
Specifically, suretyship is a contractual relation resulting from an agreement whereby
one person, the surety, engages to be answerable for the debt, default or miscarriage
of another, known as the principal.”26 The Court expounds that “a surety’s liability is
joint and several, limited to the amount of the bond, and determined strictly by the
terms of contract of suretyship in relation to the principal contract between the obligor
and the obligee. It bears stressing, however, that although the contract of suretyship
is secondary to the principal contract, the surety’s liability to the obligee is
nevertheless direct, primary, and absolute.”27
At the outset, the Court ascertains that there are two principal contracts in this case:
(1) the Consortium Agreement wherein Kawasaki and FFMCCI agreed to jointly enter
into a contract with the Republic for the Project, each assuming the performance of
specific scopes of work in said Project; and (2) the Construction Contract whereby the
Republic awards the Project to the Kawasaki-FFMCCI Consortium. While there is a
connection between these two contracts, they are each distinguishable from and
enforceable independently of one another: the first governs the rights and obligations
between Kawasaki and FFMCCI, while the second covers contractual relations
between the Republic and the Kawasaki-FFMCCI Consortium. The Surety and
Performance Bonds from CCCIC guaranteed the performance by FFMCCI of its
obligations under the Consortium Agreement; whereas the Letter of Credit from PCIB
warranted the completion of the Project by the Kawasaki-FFMCCI Consortium. At the
crux of the instant controversy are the Surety and Performance Bonds issued by
CCCIC in relation to the Consortium Agreement.
| 12
FFMCCI secured the Surety and Performance Bonds from CCCIC in compliance with
Article 10 of the Consortium Agreement which provided:
ARTICLE 10 – BONDS
10.1 The CONSORTIUM LEADER [Kawasaki] shall arrange, at [its] own cost, all
necessary bonds or guarantees as required under the CONTRACT on behalf of the
CONSORTIUM. [FFMCCI] shall, at its own cost, furnish the CONSORTIUM LEADER
[Kawasaki] with a suitable counter guarantees of its advance payment under the
CONTRACT and the performance of its PORTION OF WORK in the amount of fifteen
(15%) percent (in the case of the repayment guarantee for the advance) and ten
(10%) percent (in the case of the performance guarantee) of the price of its PORTION
OF THE WORK.
10.2 If the EMPLOYER [Republic] exercises its right on the bonds or guarantees
furnished by the CONSORTIUM LEADER, the PARTIES shall decide the respective
responsibilities according to the provisions of this AGREEMENT and the necessary
reimbursement or compensation shall be made also according to the provisions of
this AGREEMENT.28
Pertinent portions of Surety Bond No. B-88/11191 read:
SURETY BOND
KNOW ALL MEN BY THESE PRESENTS:
That we, F.F. MAÑACOP CONSTRUCTION CO., INC., x x x, as principal, and CCC
Insurance Corporation, x x x, as SURETY, are held and firmly bound unto KAWASAKI
STEEL CORPORATION, hereinafter referred to as the OBLIGEE: in the sum of
PESOS: THREE MILLION ONE HUNDRED THREE THOUSAND EIGHT HUNDRED
THREE & 90/100 ONLY (P3,103,803.90), Philippine currency, for the payment of
which, well and truly to be made, we bind ourselves, our heirs, executors,
administrators, successors and assigns, jointly and severally, firmly bound from notice
of acceptance, by these presents.
THE CONDITIONS OF THIS OBLIGATION ARE AS FOLLOWS:
TO FULLY AND FAITHFULLY GUARANTEE THE REPAYMENT OF THE
DOWNPAYMENT MADE BY THE PRINCIPAL TO THE OBLIGEE IN CONNECTION
WITH THE CONSTRUCTION OF THE PANGASINAN FISHING PORT NETWORK
PROJECT AT PANGASINAN; AND
PROVIDED, HOWEVER, THAT THE LIABILITY OF THE HEREIN SURETY SHALL
IN NO CASE EXCEED THE AMOUNT OF PESOS: THREE MILLION ONE
HUNDRED THREE THOUSAND EIGHT HUNDRED THREE & 90/100 ONLY
(P3,103,803.90) PHILIPPINE CURRENCY.

xxxx
WHEREAS, the said OBLIGEE requires said Principal to give a good and sufficient
bond in the above stated sum to secure the full and faithful performance on his part of
said UNDERTAKING.
NOW, THEREFORE, if the above bounden principal shall in all respects duly and fully
observe and perform all and singular the aforesaid covenants, conditions and
agreements to the true intent and meaning thereof, then this obligation shall be null
and void, otherwise to remain in full force and effect.
The liability of the Surety under this bond shall expire on October 26, 1989 and the
Surety does not assume responsibility for any liability incurred or created after said
date. Any claims against this bond must be presented to the Surety in writing not later
than ten (10) days after said expiry date; otherwise, failure to do so shall forthwith
release the Surety from all liabilities under this bond and shall be a bar to any court
action against it and which right to sue is hereby waived by the Obligee after the lapse
of said period of ten (10) days above cited.29 (Emphases supplied)
Performance Bond No. B-88/11193 contains the following terms and conditions:
PERFORMANCE BOND
KNOW ALL MEN BY THESE PRESENTS:
That we, F.F. MAÑACOP CONSTRUCTION CO., INC., x x x, as principal, and CCC
Insurance Corporation, x x x, as SURETY, are held and firmly bound unto KAWASAKI
STEEL CORPORATION, hereinafter referred to as the OBLIGEE: in the sum of
PESOS: TWO MILLION SIXTY-NINE THOUSAND TWO HUNDRED TWO & 60/100
ONLY (P2,069,202.60), Philippine currency, for the payment of which, well and truly
to be made, we bind ourselves, our heirs, executors, administrators, successors and
assigns, jointly and severally, firmly bound from notice of acceptance, by these
presents.
THE CONDITIONS OF THIS OBLIGATION ARE AS FOLLOWS:
TO GUARANTEE THE FULL AND FAITHFUL PERFORMANCE OF THE PRINCIPAL
OF ITS OBLIGATION IN CONNECTION WITH THE PROJECT FOR THE
CONSTRUCTION OF PANGASINAN FISHING PORT NETWORK LOCATED AT
PANGASINAN IN ACCORDANCE WITH THE PLANS AND SPECIFICATION OF
THE CONTRACT; AND
PROVIDED, HOWEVER, THAT THE LIABILITY OF THE HEREIN SURETY SHALL
IN NO CASE EXCEED THE AMOUNT OF PESOS: TWO MILLION SIXTY-NINE
THOUSAND TWO HUNDRED TWO & 60/100 ONLY (P2,069,202.60) PHILIPPINE
CURRENCY.
xxxx
| 13
WHEREAS, the said OBLIGEE requires said Principal to give a good and sufficient
bond in the above stated sum to secure the full and faithful performance on his part of
said UNDERTAKING.
NOW, THEREFORE, if the above bounden principal shall in all respects duly and fully
observe and perform all and singular the aforesaid covenants, conditions and
agreements to the true intent and meaning thereof, then this obligation shall be null
and void, otherwise to remain in full force and effect.
The liability of the Surety under this bond shall expire on October 27, 1989 and the
Surety does not assume responsibility for any liability incurred or created after said
date. Any claims against this bond must be presented to the Surety in writing not later
than ten (10) days after said expiry date; otherwise, failure to do so shall forthwith
release the Surety from all liabilities under this bond and shall be a bar to any court
action against it and which right to sue is hereby waived by the Obligee after the lapse
of said period of ten (10) days above cited.30 (Emphasis supplied)
The Court reiterates that a surety’s liability is determined strictly by the terms of
contract of suretyship, in relation to the principal contract between the obligor and the
obligee. Hence, the Court looks at the Surety and Performance Bonds, in relation to
the Consortium Agreement.
According to the principle of relativity of contracts in Article 1311 of the Civil Code,31
a contract takes effect only between the parties, their assigns, and heirs; except when
the contract contains a stipulation in favor of a third person, which gives said person
the right to demand fulfillment of said stipulation. In this case, the Surety and
Performance Bonds are enforceable by and against the parties FFMCCI (the obligor)
and CCCIC (the surety), as well as the third person Kawasaki (the obligee) in whose
favor said bonds had been explicitly constituted; while the related Consortium
Agreement binds the parties Kawasaki and FFMCCI. Since the Republic is neither a
party to the Surety and Performance Bonds nor the Consortium Agreement, any
action or omission on its part has no effect on the liability of CCCIC under said bonds.
The Surety and Performance Bonds state that their purpose was “to secure the full
and faithful performance on [FFMCCI’s] part of said undertaking,” particularly, the
repayment by FFMCCI of the down payment advanced to it by Kawasaki (in the case
of the Surety Bond) and the full and faithful performance by FFMCCI of its portion of
work in the Project (in the case of the Performance Bond). These are the only
undertakings expressly guaranteed by the bonds, the fulfillment of which by FFMCCI
would release CCCIC from its obligations as surety; or conversely, the
nonperformance of which would give rise to the liabilities of CCCIC as a surety.
The Surety and Performance Bonds do not contain any condition that CCCIC would
be liable only if, in addition to the default on its undertakings by FFMCCI, the Republic
also made a claim against the PCIB Letter of Credit furnished by Kawasaki, on behalf
of the Kawasaki-FFMCCI Consortium. The Court agrees with the observation of the
Court of Appeals that “it is not provided, neither in the Consortium Agreement nor in

the subject bonds themselves that before KAWASAKI may proceed against the bonds
posted by [FFMCCI] and CCCIC, the Philippine government as employer must first
exercise its rights against the bond issued in its favor by the consortium.”32
The Court cannot give any additional meaning to the plain language of the
undertakings in the Surety and Performance Bonds. The extent of a surety’s liability is
determined by the language of the suretyship contract or bond itself. Article 1370 of
the Civil Code provides that “[i]f the terms of a contract are clear and leave no doubt
upon the intention of the contracting parties, the literal meaning of its stipulations shall
control.”33
There is no basis for the interpretation by CCCIC of the word “counter-guarantee” in
Article 10 of the Consortium Agreement. The first paragraph of Article 10 of the
Consortium Agreement provides that Kawasaki, as the Consortium Leader, shall
arrange, at its own cost but on behalf of the Kawasaki-FFMCCI Consortium, for all
necessary bonds and guarantees under the Construction Contract with the Republic.
The same paragraph requires, in turn, that FFMCCI, at its own cost, to furnish
Kawasaki with suitable counter-guarantees for the repayment by FFMCCI for the
advance payment from Kawasaki and performance by FFMCCI of its portion of work
in the Project. Clearly, the “guarantees” and “counter-­guarantees” were securities for
the fulfillment of the obligations of the Kawasaki-FFMCCI Consortium to the Republic
under the Construction Contract and of FFMCCI to the Consortium Leader Kawasaki
under the Consortium Agreement, respectively. The CCCIC Surety and Performance
Bonds were not counter-guarantees to the PCIB Letter of Credit. In fact, in the event
that the Republic did make a claim on the PCIB Letter of Credit, the second
paragraph of Article 10 of the Consortium Agreement stipulates that Kawasaki and
FFMCCI would still have to determine their respective responsibilities,
reimbursements, and/or compensations according to the provisions of the Consortium
Agreement, instead of simply allowing Kawasaki to recover on the “counter-
guarantees” of FFMCCI.
It is not disputed that FFMCCI, due to financial difficulties, was unable to repay the
advance payment it received from Kawasaki and to finish its scope of work in the
Project, thus, FFMCCI defaulted on its obligations to Kawasaki. Given the default of
FFMCCI, CCCIC as surety became directly, primarily, and absolutely liable to
Kawasaki as the obligee under the Surety and Performance Bonds. The following
pronouncements of the Court in Asset Builders Corporation v. Stronghold Insurance
Company, Inc.34 are relevant herein:
Respondent, along with its principal, Lucky Star, bound itself to the petitioner when it
executed in its favor surety and performance bonds. The contents of the said
contracts clearly establish that the parties entered into a surety agreement as defined
under Article 2047 of the New Civil Code. x x x.
xxxx
| 14
As provided in Article 2047, the surety undertakes to be bound solidarily with the
principal obligor. That undertaking makes a surety agreement an ancillary contract as
it presupposes the existence of a principal contract. Although the contract of a surety
is in essence secondary only to a valid principal obligation, the surety becomes liable
for the debt or duty of another although it possesses no direct or personal interest
over the obligations nor does it receive any benefit therefrom. Let it be stressed that
notwithstanding the fact that the surety contract is secondary to the principal
obligation, the surety assumes liability as a regular party to the undertaking.
Stronghold Insurance Company, Inc. v. Republic-Asahi Glass Corporation, reiterating
the ruling in Garcia v. Court of Appeals, expounds on the nature of the surety’s
liability:
x x x. The surety’s obligation is not an original and direct one for the performance of
his own act, but merely accessory or collateral to the obligation contracted by the
principal. Nevertheless, although the contract of a surety is in essence secondary only
to a valid principal obligation, his liability to the creditor or promisee of the principal is
said to be direct, primary and absolute; in other words, he is directly and equally
bound with the principal.
Suretyship, in essence, contains two types of relationship — the principal relationship
between the obligee (petitioner) and the obligor (Lucky Star), and the accessory
surety relationship between the principal (Lucky Star) and the surety (respondent). In
this arrangement, the obligee accepts the surety’s solidary undertaking to pay if the
obligor does not pay. Such acceptance, however, does not change in any material
way the obligee’s relationship with the principal obligor. Neither does it make the
surety an active party to the principal obligee-obligor relationship. Thus, the
acceptance does not give the surety the right to intervene in the principal contract.
The surety’s role arises only upon the obligor’s default, at which time, it can be
directly held liable by the obligee for payment as a solidary obligor.
In the case at bench, when Lucky Star failed to finish the drilling work within the
agreed time frame despite petitioner’s demand for completion, it was already in delay.
Due to this default, Lucky Star’s liability attached and, as a necessary consequence,
respondent’s liability under the surety agreement arose.
Undeniably, when Lucky Star reneged on its undertaking with the petitioner and
further failed to return the P575,000.00 downpayment that was already advanced to it,
respondent, as surety, became solidarily bound with Lucky Star for the repayment of
the said amount to petitioner. The clause, “this bond is callable on demand,” strongly
speaks of respondent’s primary and direct responsibility to the petitioner.
Accordingly, after liability has attached to the principal, the obligee or, in this case, the
petitioner, can exercise the right to proceed against Lucky Star or respondent or both.
x x x. (Emphases supplied, citations omitted)
Article 2079 of the New Civil Code is not applicable to the instant case.

To free itself from its liabilities under the Surety and Performance Bonds, CCCIC cites
Article 2079 of the Civil Code, which reads:
Art. 2079. An extension granted to the debtor by the creditor without the consent of
the guarantor extinguishes the guaranty. The mere failure on the part of the creditor to
demand payment after the debt has become due does not of itself constitute any
extension of time referred to herein.
The aforequoted provision clearly speaks of an extension for the payment of a debt
granted by the creditor to a debtor without the consent of the surety. The theory
behind Article 2079 was further explained by the Court in Trade and Investment
Development Corporation of the Philippines (formerly Philippine Export and Foreign
Loan Guarantee Corporation) v. Asia Paces Corporation,35 thus:
Comparing a surety’s obligations with that of a guarantor, the Court, in the case of
Palmares v. CA, illumined that a surety is responsible for the debt’s payment at once
if the principal debtor makes default, whereas a guarantor pays only if the principal
debtor is unable to pay, viz.:
A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of
the debtor. A suretyship is an undertaking that the debt shall be paid; a guaranty, an
undertaking that the debtor shall pay. 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. 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. 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. x x x.
Despite these distinctions, the Court in Coching-yan, Jr. v. R&B Surety & Insurance
Co., Inc., and later in the case of Security Bank, held that Article 2079 of the Civil
Code, which pertinently provides that “[a]n extension granted to the debtor by the
creditor without the consent of the guarantor extinguishes the guaranty,” equally
applies to both contracts of guaranty and suretyship. The rationale therefor was
explained by the Court as follows:
The theory behind Article 2079 is that an extension of time given to the principal
debtor by the creditor without the surety’s consent would deprive the surety of his
right to pay the creditor and to be immediately subrogated to the creditor’s remedies
against the principal debtor upon the maturity date. The surety is said to be entitled to
protect himself against the contingency of the principal debtor or the indemnitors
becoming insolvent during the extended period. x x x.
Applying these principles, the Court finds that the payment extensions granted by
Banque Indosuez and PCI Capital to TIDCORP under the Restructuring Agreement
| 15
did not have the effect of extinguishing the bonding companies’ obligations to
TIDCORP under the Surety Bonds, notwithstanding the fact that said extensions were
made without their consent. This is because Article 2079 of the Civil Code refers to a
payment extension granted by the creditor to the principal debtor without the consent
of the guarantor or surety. In this case, the Surety Bonds are suretyship contracts
which secure the debt of ASPAC, the principal debtor, under the Deeds of
Undertaking to pay TIDCORP, the creditor, the damages and liabilities it may incur
under the Letters of Guarantee, within the bounds of the bonds’ respective coverage
periods and amounts. No payment extension was, however, granted by TIDCORP in
favor of ASPAC in this regard; hence, Article 2079 of the Civil Code should not be
applied with respect to the bonding companies’ liabilities to TIDCORP under the
Surety Bonds.
The payment extensions granted by Banque Indosuez and PCI Capital pertain to
TIDCORP’s own debt under the Letters of Guarantee wherein it (TIDCORP)
irrevocably and unconditionally guaranteed full payment of ASPAC’s loan obligations
to the banks in the event of its (ASPAC) default. In other words, the Letters of
Guarantee secured ASPAC’s loan agreements to the banks. Under this arrangement,
TIDCORP therefore acted as a guarantor, with ASPAC as the principal debtor, and
the banks as creditors.
Proceeding from the foregoing discussion, it is quite clear that there are two sets of
transactions that should be treated separately and distinctly from one another
following the civil law principle of relativity of contracts “which provides that contracts
can only bind the parties who entered into it, and it cannot favor or prejudice a third
person, even if he is aware of such contract and has acted with knowledge thereof.”
Verily, as the Surety Bonds concern ASPAC’s debt to TIDCORP and not TIDCORP’s
debt to the banks, the payments extensions (which conversely concern TIDCORP’s
debt to the banks and not ASPAC’s debt to TIDCORP) would not deprive the bonding
companies of their right to pay their creditor (TIDCORP) and to be immediately
subrogated to the latter’s remedies against the principal debtor (ASPAC) upon the
maturity date. It must be stressed that these payment extensions did not modify the
terms of the Letters of Guarantee but only provided for a new payment scheme
covering TIDCORP’s liability to the banks. In fine, considering the inoperability of
Article 2079 of the Civil Code in this case, the bonding companies’ liabilities to
TIDCORP under the Surety Bonds — except those issued by Paramount and covered
by its Compromise Agreement with TIDCORP — have not been extinguished. Since
these obligations arose and have been duly demanded within the coverage periods of
all the Surety Bonds, TIDCORP’s claim is hereby granted. x x x. (Emphases supplied,
citations omitted)
Similarly, there are two sets of transactions in the present case covered by two
different contracts: the Consortium Agreement between Kawasaki and FFMCCI and
the Construction Contract between the Republic and the Kawasaki-FFMCCI
Consortium. The Surety and Performance Bonds guaranteed the performance of the
obligations of FFMCCI to Kawasaki under the Consortium Agreement. The Republic

was not a party in either the Surety and Performance Bonds or the Consortium
Agreement. Under these circumstances, there was no creditor-debtor relationship
between the Republic and FFMCCI and Article 2079 of the Civil Code did not apply.
The extension granted by the Republic to Kawasaki modified the deadline for the
completion of the Project under the Construction Contract, but had no effect on the
obligations of FFMCCI to Kawasaki under the Consortium Agreement, much less, on
the liabilities of CCCIC under the Surety and Performance Bonds.
CCCIC failed to discharge the burden of proving the novation of the Consortium
Agreement which would have extinguished its obligations under the Surety and
Performance Bonds.
CCCIC argues that it was released from its obligations as surety under the Surety and
Performance Bonds because of the novation of the Consortium Agreement by the
subsequent Agreement dated August 24, 1989 executed between Kawasaki and
FFMCCI, without the consent of CCCIC.
The Court first notes that the default of FFMCCI preceded the execution of the
Agreement on August 24, 1989 which purportedly novated the Consortium Agreement
and, in effect, extinguished the Surety and Performance Bonds. As early as his letter
dated July 20, 1989, Mañacop, FFMCCI President, already admitted the inability of
FFMCCI to continue with its portion of work in the Project and authorized Kawasaki to
continue the same. It was precisely because FFMCCI defaulted on its obligations
under the Consortium Agreement that necessitated the execution of the Agreement
dated August 24, 1989 between Kawasaki and FFMCCI, and this is evident from one
of the “whereas” clauses in the said Agreement which says that “due to some
financial reverses[, FFMCCI] can no longer do its portion of the work under the
Contract.” The liabilities of CCCIC as surety to Kawasaki under the Surety and
Performance Bonds had already attached upon the default of FFMCCI while the said
bonds were still in effect and prior to the alleged novation of the Consortium
Agreement by the Agreement dated August 24, 1989 which resulted in the
extinguishment of the bonds.
The Court expounded on the concept of novation in Reyes v. BPI Family Savings
Bank, Inc.:36
Novation is defined as the extinguishment of an obligation by the substitution or
change of the obligation by a subsequent one which terminates the first, either by
changing the object or principal conditions, or by substituting the person of the debtor,
or subrogating a third person in the rights of the creditor.
Article 1292 of the Civil Code on novation further provides:
Article 1292. In order that an obligation may be extinguished by another which
substitute the same, it is imperative that it be so declared in unequivocal terms, or that
the old and the new obligations be on every point incompatible with each other.
| 16
The cancellation of the old obligation by the new one is a necessary element of
novation which may be effected either expressly or impliedly. While there is really no
hard and fast rule to determine what might constitute sufficient change resulting in
novation, the touchstone, however, is irreconcilable incompatibility between the old
and the new obligations.
In Garcia, Jr. v. Court of Appeals, we held that:
In every novation there are four essential requisites: (1) a previous valid obligation; (2)
the agreement of all the parties to the new contract; (3) the extinguishment of the old
contract; and (4) validity of the new one. There must be consent of all the parties to
the substitution, resulting in the extinction of the old obligation and the creation of a
valid new one. x x x. (Citations omitted)
It is well-settled that novation is never presumed — novatio non praesumitur. As the
party alleging novation, the onus of showing clearly and unequivocally that novation
had indeed taken place rests on CCCIC.37 The Court laid down guidelines in
establishing novation, viz.:
Novation is never presumed, and the animus novandi, whether totally or partially,
must appear by express agreement of the parties, or by their acts that are too clear
and unequivocal to be mistaken.
The extinguishment of the old obligation by the new one is a necessary element of
novation which may be effected either expressly or impliedly. The term “expressly”
means that the contracting parties incontrovertibly disclose that their object in
executing the new contract is to extinguish the old one. Upon the other hand, no
specific form is required for an implied novation, and all that is prescribed by law
would be an incompatibility between the two contracts. While there is really no hard
and fast rule to determine what might constitute to be a sufficient change that can
bring about novation, the touchstone for contrariety, however, would be an
irreconcilable incompatibility between the old and the new obligations.
There are two ways which could indicate, in fine, the presence of novation and
thereby produce the effect of extinguishing an obligation by another which substitutes
the same. The first is when novation has been explicitly stated and declared in
unequivocal terms. The second is when the old and the new obligations are
incompatible on every point. The test of incompatibility is whether or not the two
obligations can stand together, each one having its independent existence. If they
cannot, they are incompatible and the latter obligation novates the first. Corollarily,
changes that breed incompatibility must be essential in nature and not merely
accidental. The incompatibility must take place in any of the essential elements of the
obligation, such as its object, cause or principal conditions thereof; otherwise, the
change would be merely modificatory in nature and insufficient to extinguish the
original obligation.38 (Citations omitted)
 | 17

CCCIC failed to discharge the burden of proving novation of the Consortium Gabriel’s liability had arisen; as a consequence, so also did the liability of petitioner as
Agreement by the Agreement dated August 24, 1989. The Court failed to see the a surety arise.
presence of the essential requisites for a novation of contract, specifically, the
irreconcilable incompatibility between the old and new contracts. Indeed, Kawasaki xxxx
and FFMCCI executed the Agreement dated August 24, 1989 pursuant to Article 8.3
By the language of the bonds issued by petitioner, it guaranteed the full and faithful
of the Consortium Agreement:
compliance by Gabriel of its obligations in the construction of the SDS and STP
8.3 If, for any reason, any PARTY should fail in the performance of its PORTION OF specifically set forth in the subcontract agreement, and the repayment of the 15%
WORK or contractual obligations and if such defaulting PARTY refuses to cure or advance payment given by respondent. These guarantees made by petitioner gave
makes no remedial action, without presenting any valid cause, within fifteen (15) days respondent the right to proceed against the former following Gabriel’s noncompliance
following demand of rectification by registered letter sent by the other PARTY, the with her obligation.
defaulting PARTY’s PORTION OF WORK may be performed at the account and
Confusion, however, transpired when Gabriel and respondent agreed, on February
responsibility of the defaulting PARTY, by the non-defaulting PARTY or by any other
26, 1997, to reduce the scope of work and, consequently, the contract price.
contractor selected by the non-defaulting PARTY and approved by the EMPLOYER.
Petitioner viewed such revision as novation of the original subcontract agreement;
In such event, the defaulting PARTY or its representative shall, in no way, interfere
and since no notice was given to it as a surety, it resulted in the extinguishment of its
with the performance of the CONTRACT or impede the progress thereof, on any
obligation.
ground, and shall allow such performing PARTY or the said contractor to use the
materials and equipment of such defaulting PARTY, for the purpose of remedial We wish to stress herein the nature of suretyship, which actually involves two types of
action. relationship — the underlying principal relationship between the creditor (respondent)
and the debtor (Gabriel), and the accessory surety relationship between the principal
FFMCCI was unable to finish its portion of work in the Project because of business
(Gabriel) and the surety (petitioner). The creditor accepts the surety’s solidary
reverses, and by the Agreement dated August 24, 1989, Kawasaki assumed the
undertaking to pay if the debtor does not pay. Such acceptance, however, does not
Transferred Portion of Work from FFMCCI and was accorded the right to receive the
change in any material way the creditor’s relationship with the principal debtor nor
profits and benefits corresponding to said portion. Although the Agreement dated
does it make the surety an active party to the principal creditor-debtor relationship. In
August 24, 1989 resulted in the reallocation of the respective portions of work of
other words, the acceptance does not give the surety the right to intervene in the
Kawasaki and FFMCCI, as well as their corresponding shares in the profits and
principal contract. The surety’s role arises only upon the debtor’s default, at which
benefits under the Consortium Agreement, such changes were not incompatible with
time, it can be directly held liable by the creditor for payment as a solidary obligor.
the object, cause, and principal conditions of the Consortium Agreement.
Consequently, the changes under the Agreement dated August 24, 1989 were only The surety is considered in law as possessed of the identity of the debtor in relation to
modificatory and did not extinguish the original obligations under the Consortium whatever is adjudged touching upon the obligation of the latter. Their liabilities are so
Agreement. interwoven as to be inseparable. Although the contract of a surety is, in essence,
secondary only to a valid principal obligation, the surety’s liability to the creditor is
Even granting that there is novation, the Court in Stronghold Insurance Company,
direct, primary, and absolute; he becomes liable for the debt and duty of another
Incorporated v. Tokyu Construction Company, Ltd.,39 held that to release the surety,
although he possesses no direct or personal interest over the obligations nor does he
the material change in the principal contract must make the obligation of the surety
receive any benefit therefrom.
more onerous. The Court ratiocinated in Stronghold as follows:
Indeed, a surety is released from its obligation when there is a material alteration of
Petitioner’s liability was not affected by the revision of the contract price, scope of
the principal contract in connection with which the bond is given, such as a change
work, and contract schedule. Neither was it extinguished because of the issuance of
which imposes a new obligation on the promising party, or which takes away some
new bonds procured from Tico.
obligation already imposed, or one which changes the legal effect of the original
As early as February 10, 1997, respondent already sent a letter to Gabriel informing contract and not merely its form. However, a surety is not released by a change in the
the latter of the delay incurred in the performance of the work, and of the former’s contract, which does not have the effect of making its obligation more onerous.
intention to terminate the subcontract agreement to prevent further losses.
In the instant case, the revision of the subcontract agreement did not in any way
Apparently, Gabriel had already been in default even prior to the aforesaid letter; and
make the obligations of both the principal and the surety more onerous. To be sure,
demands had been previously made but to no avail. By reason of said default,
petitioner never assumed added obligations, nor were there any additional obligations

imposed, due to the modification of the terms of the contract. Failure to receive any
notice of such change did not, therefore, exonerate petitioner from its liabilities as
surety. (Emphasis supplied, citations omitted)
There is no showing herein that the obligations of CCCIC as surety had become more
onerous with the execution of the Agreement dated August 24, 1989 between
Kawasaki and FFMCCI. The Agreement dated August 24, 1989 did not alter in any
way the original coverage and the terms and conditions of the Surety and
Performance Bonds of CCCIC. If truth be told, the Agreement dated August 24, 1989
made it more onerous for Kawasaki which had to take over the Transferred Portion of
Work from FFMCCI.
That Kawasaki was to receive the profits and benefits corresponding to the
Transferred Portion of Work would not extinguish the liabilities of CCCIC under the
Surety and Performance Bonds. The right of Kawasaki to the profits and benefits
corresponding to the Transferred Portion of Work was granted under the Agreement
dated August 24, 1989 because Kawasaki was the one that would actually perform
the remaining portion of work and complete the Project and should be duly
compensated for the same. It is separate and distinct from the right of Kawasaki to
demand payment of the amounts guaranteed by CCCIC as surety upon the default of
FFMCCI on its undertakings under the Surety and Performance Bonds. CCCIC
cannot standby passively and be benefitted by payments made by the Republic, as
owner of the Project, to Kawasaki, as contractor, for the Transferred Portion of Work.
The only way CCCIC can extinguish its liabilities as surety, which already attached
upon the default of FFMCCI, is to make its own payments to Kawasaki of the amounts
guaranteed under the Surety and Performance Bonds.
Equally without merit is the averment of CCCIC that by executing the Agreement
dated August 24, 1989, which gave Kawasaki the right to the profits and benefits
corresponding to the Transferred Portion of Work, Kawasaki and FFMCCI colluded or
connived to deprive CCCIC of its source of indemnification. Other than its allegation,
CCCIC failed to present any evidence of collusion or connivance between Kawasaki
and FFMCCI to intentionally prejudice CCCIC. The Court reiterates that the execution
of the Agreement dated August 24, 1989 was actually authorized under Article 8.3 of
the Consortium Agreement. Kawasaki was given the right to the profits and benefits
corresponding to the Transferred Portion of Work because it would be the one to
perform the same. It would be the height of inequity to allow FFMCCI to continue
collecting payments for work it was not able to do. Besides, there is utter lack of basis
for the claim of CCCIC that without the compensation for the Transferred Portion of
Work, FFMCCI would have no means to indemnify CCCIC for any payments the latter
would have to make to Kawasaki under the Surety and Performance Bonds. As the
succeeding discussion will show, it is premature for CCCIC to question the capacity of
FFMCCI to indemnify it.
CCCIC must first pay its liabilities to Kawasaki under the Surety and Performance
Bonds before it could be indemnified and subrogated to the rights of Kawasaki
against FFMCCI.
| 18
The rights of a guarantor who pays for the debt of the debtor are governed by the
following provisions of the Civil Code:
Art. 2066. The guarantor who pays for a debtor must be indemnified by the latter.
The indemnity comprises:
(1) The total amount of the debt;
(2) The legal interests thereon from the time the payment was made known to the
debtor, even though it did not earn interest for the creditor;
(3) The expenses incurred by the guarantor after having notified the debtor that
payment had been demanded of him;
(4) Damages, if they are due.
Art. 2067. The guarantor who pays is subrogated by virtue thereof to all the rights
which the creditor had against the debtor.
If the guarantor has compromised with the creditor, he cannot demand of the debtor
more than what he has really paid.
Although the foregoing provisions only speak of a guarantor, they also apply to a
surety, as the Court held in Escaño v. Ortigas, Jr.:40
What is the source of this right to full reimbursement by the surety? We find the right
under Article 2066 of the Civil Code, which assures that “[t]he guarantor who pays for
a debtor must be indemnified by the latter,” such indemnity comprising of, among
others, “the total amount of the debt.” Further, Article 2067 of the Civil Code likewise
establishes that “[t]he guarantor who pays is subrogated by virtue thereof to all the
rights which the creditor had against the debtor.”
Articles 2066 and 2067 explicitly pertain to guarantors, and one might argue that the
provisions should not extend to sureties, especially in light of the qualifier in Article
2047 that the provisions on joint and several obligations should apply to sureties. We
reject that argument, and instead adopt Dr. Tolentino’s observation that “[t]he
reference in the second paragraph of [Article 2047] to the provisions of Section 4,
Chapter 3, Title I, Book IV, on solidary or several obligations, however, does not
mean that suretyship is withdrawn from the applicable provisions governing guaranty.”
For if that were not the implication, there would be no material difference between the
surety as defined under Article 2047 and the joint and several debtors, for both
classes of obligors would be governed by exactly the same rules and limitations.
Accordingly, the rights to indemnification and subrogation as established and granted
to the guarantor by Articles 2066 and 2067 extend as well to sureties as defined
under Article 2047. x x x. (Citations omitted)

Pursuant to Articles 2066 and 2067, the rights of CCCIC as surety to indemnification
and subrogation will arise only after it has paid its obligations to Kawasaki as the
debtor-obligee. In Autocorp Group v. Intra Strata Assurance Corporation,41 the Court
ruled that:
The benefit of subrogation, an extinctive subjective novation by a change of creditor,
which “transfers to the person subrogated, the credit and all the rights thereto
appertaining, either against the debtor or against third persons,” is granted by the
Article 2067 of the Civil Code only to the “guarantor (or surety) who pays.” (Emphases
supplied, citations omitted)
In the present case, CCCIC has yet to pay Kawasaki.
While summons was validly served upon FFMCCI, the Third-Party Complaint of
CCCIC against FFMCCI is dismissed on the ground of lack of cause of action.
The Court disagrees with the ruling of the Court of Appeals that there was no proper
service of summons upon FFMCCI. The appellate court overlooked the fact that the
service of summons on FFMCCI at its principal address at #86 West Avenue, Quezon
City failed because FFMCCI had already vacated said premises without notifying
anyone as to where it transferred. For this reason, the RTC, upon the motion of
CCCIC, issued an Order42 dated September 4, 1991, directing the issuance and
service of Alias Summons to the individual directors of FFMCCI. Eventually, the Alias
Summons was personally served upon FFMCCI director Vicente Concepcion on
September 25, 1991.43
Rule 14, Section 13 of the 1964 Rules of Court, which was then in force, allowed the
service of summons upon a director of a private domestic corporation:
Sec. 13. Service upon private domestic corporation or partnership.—If the
defendant is a corporation organized under the laws of the Philippines or a
partnership duly registered, service may be made on the president, manager,
secretary, cashier, agent, or any of its directors.
The aforementioned rule does not require that service on the private domestic
corporation be served at its principal office in order for the court to acquire jurisdiction
over the same. The Court, in Talsan Enterprises, Inc. v. Baliwag Transit, Inc.,44 citing
Baltazar v. Court of Appeals,45 affirmed that:
[S]ervice on respondent’s bus terminal at the address stated in the summons and not
in its main office in Baliwag do not render the service of summons invalid. In
Artemio Baltazar v. Court of Appeals, we held:
“The regular mode, in other words, of serving summons upon a private Philippine
Corporation is by personal service upon one of the officers of such corporation
identified in Section 13. Ordinarily, such personal service may be expected to be
made at the principal office of the corporation. Section 13, does not, however, impose
| 19
such requirement, and so personal service upon the corporation may be effected
through service upon, for instance, the president of the corporation at his office or
residential address.” x x x.
In fine, the service of summons upon respondent Baliwag Transit is proper.
Consequently, the trial court validly acquired jurisdiction over respondent Baliwag.
(Citation omitted)
Hence, the personal service of the Alias Summons on an FFMCCI director was
sufficient for the RTC to acquire jurisdiction over FFMCCI itself.
Nevertheless, the Third-Party Complaint filed by CCCIC against FFMCCI and
Mañacop must be dismissed on the ground of lack of cause of action.
A cause of action is defined as the act or omission by which a party violates a right of
another. The essential elements of a cause of action are: (a) the existence of a legal
right in favor of the plaintiff; (b) a correlative legal duty of the defendant to respect
such right; and (c) an act or omission by such defendant in violation of the right of the
plaintiff with a resulting injury or damage to the plaintiff for which the latter may
maintain an action for the recovery of relief from the defendant.46
As discussed earlier, the rights to indemnification and subrogation of a surety only
arise upon its payment of the obligation to the obligee. In the case at bar, since
CCCIC up to this point refuses to acknowledge and pay its obligation to Kawasaki
under the Surety and Performance Bonds, it has not yet acquired the rights to seek
indemnification from FFMCCI and subrogation to Kawasaki as against FFMCCI. In
the same vein, the corresponding obligation of FFMCCI to indemnify CCCIC under
the Indemnity Agreements has yet to accrue. Thus far, there is no act or omission on
the part of FFMCCI which violated the right of CCCIC and for which CCCIC may seek
relief from the courts. In the absence of these elements, CCCIC has no cause of
action against FFMCCI and/or FFMCCI President Mañacop. Resultantly, the Third-
Party Complaint of CCCIC should be dismissed.
There is no basis for awarding attorney’s fees in favor of Kawasaki. In addition, the
rate of legal interest imposed shall conform with latest jurisprudence.
Article 2208(2) of the Civil Code allows the award of attorney’s fees “[w]hen the
defendant’s act or omission has compelled the plaintiff to litigate with third persons or
to incur expenses to protect his interest[.]” In Servicewide Specialists, Incorporated v.
Court of Appeals,47 the Court declared that:
Article 2208 of the Civil Code allows attorney’s fees to be awarded by a court when its
claimant is compelled to litigate with third persons or to incur expenses to protect his
interest by reason of an unjustified act or omission on the part of the party from whom
it is sought. To be sure, private respondents were forced to litigate to protect their
rights but as we have previously held: “where no sufficient showing of bad faith would
be reflected in a party’s persistence in a case other than an erroneous conviction of
 | 20

the righteousness of his cause, attorney’s fee shall not be recovered as cost.” obligation or undertaking in favor of another party called the obligee. (American Home
(Citation omitted) Insurance Co. of New York vs. F.F. Cruz & Co., Inc., 655 SCRA 248 [2011])

Bad faith has been defined as “a breach of a known duty through some motive of Although the contract of suretyship is secondary only to a valid principal obligation,
interest or ill will. It must, however, be substantiated by evidence. Bad faith under the the surety’s liability to the creditor is direct, primary, and absolute. (Id.) CCC
law cannot be presumed, it must be established by clear and convincing evidence.”48 Insurance Corporation vs. Kawasaki Steel Corporation, 759 SCRA 332, G.R. No.
There is no evidence in this case to show bad faith on the part of CCCIC. CCCIC, in 156162 June 22, 2015
refusing the claim of Kawasaki, was merely acting based on its belief in the
righteousness of its defense. Hence, even though Kawasaki was compelled to litigate
to enforce its claim against CCCIC, the award of attorney’s fees is not proper.

Finally, the Court, in Nacar v. Gallery Frames,49 modified the guidelines in imposing
interests, taking into account Bangko Sentral ng Pilipinas-Monetary Board Resolution
No. 796 dated May 16, 2013 and Circular No. 799, Series of 2013, which fixed the
legal rate at 6% per annum effective July 1, 2013. In the absence of stipulated interest
in the present case, the Court imposes upon the amounts covered by the Surety and
Performance Bonds the legal rate of 12% per annum from September 15, 1989, the
date of demand, until June 30, 2013; and then the legal rate of 6% per annum from
July 1, 2013 until full payment of the same.

WHEREFORE, premises considered, the instant Petition for Review on Certiorari is

PARTLY GRANTED. The Decision dated May 30, 2002 and Resolution dated
November 14, 2002 of the Court of Appeals are AFFIRMED with the following
MODIFICATIONS:

1) The Third-Party Complaint filed by CCC Insurance Corporation against F.F.

Mañacop Construction Company, Inc. and Mr. Florante F. Mañacop is DISMISSED
on the ground of lack of cause of action;

2) The award of attorney’s fees in favor of Kawasaki Steel Corporation is DELETED;

and

3) In addition to the amounts CCC Insurance Corporation is ordered to pay

Kawasaki Steel Corporation under Surety Bond No. B--88/11191 and Performance
Bond No. B-88/11193, CCC Insurance Corporation is further ORDERED to pay
Kawasaki Steel Corporation legal interest on said amounts at the rates of 12% per
annum from September 15, 1989 to June 30, 2013 and 6% per annum from July 1,
2013 until full payment thereof.

SO ORDERED.

Sereno (CJ., Chairperson), Bersamin, Perez and Perlas-Bernabe, JJ., concur.

Petition partly granted, judgment and resolution affirmed with modifications.

Notes.—A contract of suretyship is an agreement whereby a party called the surety,

guarantees the performance by another party, called the principal or obligor, of an

G.R. No. 200602. December 11, 2013.*
ACE FOODS, INC., petitioner, vs. MICRO PACIFIC TECHNOLOGIES CO., LTD.,1
respondent.
Civil Law; Contracts; The real nature of a contract may be determined from the
express terms of the written agreement and from the contemporaneous and
subsequent acts of the contracting parties.—A contract is what the law defines it to
be, taking into consideration its essential elements, and not what the contracting
parties call it. The real nature of a contract may be determined from the express terms
of the written agreement and from the contemporaneous and subsequent acts of the
contracting parties. However, in the construction or interpretation of an instrument, the
intention of the parties is primordial and is to be pursued. The denomination or title
given by the parties in their contract is not conclusive of the nature of its contents.
Same; Same; Contract of Sale; A contract of sale is classified as a consensual
contract, which means that the sale is perfected by mere consent.—A contract of sale
is classified as a consensual contract, which means that the sale is perfected by mere
consent. No particular form is required for its validity. Upon perfection of the contract,
the parties may reciprocally demand performance, i.e., the vendee may compel
transfer of ownership of the object of the sale, and the vendor may require the vendee
to pay the thing sold. In contrast, a contract to sell is defined as a bilateral contract
whereby the prospective seller, while expressly reserving the ownership of the
property despite delivery thereof to the prospective buyer, binds himself to sell the
property exclusively to the prospective buyer upon fulfillment of the condition agreed
upon, i.e., the full payment of the purchase price. A contract to sell may not even be
considered as a conditional contract of sale where the seller may likewise reserve title
to the property subject of the sale until the fulfillment of a suspensive condition,
because in a conditional contract of sale, the first element of consent is present,
although it is conditioned upon the happening of a contingent event which may or may
not occur.
Same; Novation; Novation is never presumed, and the animus novandi, whether
totally or partially, must appear by express agreement of the parties, or by their acts
that are too clear and unequivocal to be mistaken.—The Court must dispel the notion
that the stipulation anent MTCL’s reservation of ownership of the subject products as
reflected in the Invoice Receipt, i.e., the title reservation stipulation, changed the
complexion of the transaction from a contract of sale into a contract to sell. Records
are bereft of any showing that the said stipulation novated the contract of sale
between the parties which, to repeat, already existed at the precise moment ACE
Foods accepted MTCL’s proposal. To be sure, novation, in its broad concept, may
| 21
either be extinctive or modificatory. It is extinctive when an old obligation is terminated
by the creation of a new obligation that takes the place of the former; it is merely
modificatory when the old obligation subsists to the extent it remains compatible with
the amendatory agreement. In either case, however, novation is never presumed, and
the animus novandi, whether totally or partially, must appear by express agreement of
the parties, or by their acts that are too clear and unequivocal to be mistaken.
PETITION for review on certiorari of the decision and resolution of the Court of
Appeals.
The facts are stated in the opinion of the Court.
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari2 are the Decision3 dated October 21,
2011 and Resolution4 dated February 8, 2012 of the Court of Appeals (CA) in CA-
G.R. CV No. 89426 which reversed and set aside the Decision5 dated February 28,
2007 of the Regional Trial Court of Makati, Branch 148 (RTC) in Civil Case No. 02-
1248, holding petitioner ACE Foods, Inc. (ACE Foods) liable to respondent Micro
Pacific Technologies Co., Ltd. (MTCL) for the payment of Cisco Routers and Frame
Relay Products (subject products) amounting to P646,464.00 pursuant to a perfected
contract of sale.
The Facts
ACE Foods is a domestic corporation engaged in the trading and distribution of
consumer goods in wholesale and retail bases,6 while MTCL is one engaged in the
supply of computer hardware and equipment.7
On September 26, 2001, MTCL sent a letter-proposal8 for the delivery and sale of the
subject products to be installed at various offices of ACE Foods. Aside from the
itemization of the products offered for sale, the said proposal further provides for the
following terms, viz.:9
TERMS : Thirty (30) days upon delivery
VALIDITY : Prices are based on current dollar rate and subject to changes without
prior notice.
DELIVERY : Immediate delivery for items on stock, otherwise thirty (30) to forty-five
days upon receipt of [Purchase Order]
WARRANTY : One (1) year on parts and services. Accessories not included in
warranty.
On October 29, 2001, ACE Foods accepted MTCL’s proposal and accordingly issued
Purchase Order No. 10002310 (Purchase Order) for the subject products amounting
to P646,464.00 (purchase price). Thereafter, or on March 4, 2002, MTCL delivered
the said products to ACE Foods as reflected in Invoice No. 773311 (Invoice Receipt).
The fine print of the invoice states, inter alia, that “[t]itle to sold property is reserved in
MICROPACIFIC TECHNOLOGIES CO., LTD. until full compliance of the terms and

conditions of above and payment of the price”12 (title reservation stipulation). After
delivery, the subject products were then installed and configured in ACE Foods’
premises. MTCL’s demands against ACE Foods to pay the purchase price, however,
remained unheeded.13 Instead of paying the purchase price, ACE Foods sent MTCL
a Letter14 dated September 19, 2002, stating that it “ha[s] been returning the [subject
products] to [MTCL] thru [its] sales representative Mr. Mark Anteola who has agreed
to pull out the said [products] but had failed to do so up to now.”
Eventually, or on October 16, 2002, ACE Foods lodged a Complaint15 against MTCL
before the RTC, praying that the latter pull out from its premises the subject products
since MTCL breached its “after delivery services” obligations to it, particularly, to: (a)
install and configure the subject products; (b) submit a cost benefit study to justify the
purchase of the subject products; and (c) train ACE Foods’ technicians on how to use
and maintain the subject products.16 ACE Foods likewise claimed that the subject
products MTCL delivered are defective and not working.17
For its part, MTCL, in its Answer with Counterclaim,18 maintained that it had duly
complied with its obligations to ACE Foods and that the subject products were in good
working condition when they were delivered, installed and configured in ACE Foods’
premises. Thereafter, MTCL even conducted a training course for ACE Foods’
representatives/employees; MTCL, however, alleged that there was actually no
agreement as to the purported “after delivery services.” Further, MTCL posited that
ACE Foods refused and failed to pay the purchase price for the subject products
despite the latter’s use of the same for a period of nine (9) months. As such, MTCL
prayed that ACE Foods be compelled to pay the purchase price, as well as damages
related to the transaction.19
The RTC Ruling
On February 28, 2007, the RTC rendered a Decision,20 directing MTCL to remove
the subject products from ACE Foods’ premises and pay actual damages and
attorney’s fees in the amounts of P200,000.00 and P100,000.00, respectively.21
At the outset, it observed that the agreement between ACE Foods and MTCL is in the
nature of a contract to sell. Its conclusion was based on the fine print of the Invoice
Receipt which expressly indicated that “title to sold property is reserved in
MICROPACIFIC TECHNOLOGIES CO., LTD. until full compliance of the terms and
conditions of above and payment of the price,” noting further that in a contract to sell,
the prospective seller explicitly reserves the transfer of title to the prospective buyer,
and said transfer is conditioned upon the full payment of the purchase price.22 Thus,
notwithstanding the execution of the Purchase Order and the delivery and installation
of the subject products at the offices of ACE Foods, by express stipulation stated in
the Invoice Receipt issued by MTCL and signed by ACE Foods, i.e., the title
reservation stipulation, it is still the former who holds title to the products until full
payment of the purchase price therefor. In this relation, it noted that the full payment
of the price is a positive suspensive condition, the nonpayment of which prevents the
obligation to sell on the part of the seller/vendor from materializing at all.23 Since title
remained with MTCL, the RTC therefore directed it to withdraw the subject products
| 22
from ACE Foods’ premises. Also, in view of the foregoing, the RTC found it
unnecessary to delve into the allegations of breach since the nonhappening of the
aforesaid suspensive condition ipso jure prevented the obligation to sell from
arising.24
Dissatisfied, MTCL elevated the matter on appeal.25
The CA Ruling
In a Decision26 dated October 21, 2011, the CA reversed and set aside the RTC’s
ruling, ordering ACE Foods to pay MTCL the amount of P646,464.00, plus legal
interest at the rate of 6% per annum to be computed from April 4, 2002, and
attorney’s fees amounting to P50,000.00.27
It found that the agreement between the parties is in the nature of a contract of sale,
observing that the said contract had been perfected from the time ACE Foods sent
the Purchase Order to MTCL which, in turn, delivered the subject products covered by
the Invoice Receipt and subsequently installed and configured them in ACE Foods’
premises.28 Thus, considering that MTCL had already complied with its obligation,
ACE Foods’ corresponding obligation arose and was then duty bound to pay the
agreed purchase price within thirty (30) days from March 5, 2002.29 In this light, the
CA concluded that it was erroneous for ACE Foods not to pay the purchase price
therefor, despite its receipt of the subject products, because its refusal to pay
disregards the very essence of reciprocity in a contract of sale.30 The CA also
dismissed ACE Foods’ claim regarding MTCL’s failure to perform its “after delivery
services” obligations since the letter-proposal, Purchase Order and Invoice Receipt
do not reflect any agreement to that effect.31
Aggrieved, ACE Foods moved for reconsideration which was, however, denied in a
Resolution32 dated February 8, 2012, hence, this petition.
The Issue Before the Court
The essential issue in this case is whether ACE Foods should pay MTCL the
purchase price for the subject products.
The Court’s Ruling
The petition lacks merit.
A contract is what the law defines it to be, taking into consideration its essential
elements, and not what the contracting parties call it.33 The real nature of a contract
may be determined from the express terms of the written agreement and from the
contemporaneous and subsequent acts of the contracting parties. However, in the
construction or interpretation of an instrument, the intention of the parties is primordial
and is to be pursued. The denomination or title given by the parties in their contract is
not conclusive of the nature of its contents.34
The very essence of a contract of sale is the transfer of ownership in exchange for a
price paid or promised.35 This may be gleaned from Article 1458 of the Civil Code
which defines a contract of sale as follows:

Art. 1458. By the contract of sale one of the contracting parties obligates himself to
transfer the ownership and to deliver a determinate thing, and the other to pay
therefor a price certain in money or its equivalent/
A contract of sale may be absolute or conditional. (Emphasis supplied)
Corollary thereto, a contract of sale is classified as a consensual contract, which
means that the sale is perfected by mere consent. No particular form is required for its
validity. Upon perfection of the contract, the parties may reciprocally demand
performance, i.e., the vendee may compel transfer of ownership of the object of the
sale, and the vendor may require the vendee to pay the thing sold.36
In contrast, a contract to sell is defined as a bilateral contract whereby the prospective
seller, while expressly reserving the ownership of the property despite delivery thereof
to the prospective buyer, binds himself to sell the property exclusively to the
prospective buyer upon fulfillment of the condition agreed upon, i.e., the full payment
of the purchase price. A contract to sell may not even be considered as a conditional
contract of sale where the seller may likewise reserve title to the property subject of
the sale until the fulfillment of a suspensive condition, because in a conditional
contract of sale, the first element of consent is present, although it is conditioned upon
the happening of a contingent event which may or may not occur.37
In this case, the Court concurs with the CA that the parties have agreed to a contract
of sale and not to a contract to sell as adjudged by the RTC. Bearing in mind its
consensual nature, a contract of sale had been perfected at the precise moment ACE
Foods, as evinced by its act of sending MTCL the Purchase Order, accepted the
latter’s proposal to sell the subject products in consideration of the purchase price of
P646,464.00. From that point in time, the reciprocal obligations of the parties — i.e.,
on the one hand, of MTCL to deliver the said products to ACE Foods, and, on the
other hand, of ACE Foods to pay the purchase price therefor within thirty (30) days
from delivery — already arose and consequently may be demanded. Article 1475 of
the Civil Code makes this clear:
Art. 1475. The contract of sale is perfected at the moment there is a meeting of
minds upon the thing which is the object of the contract and upon the price.
From that moment, the parties may reciprocally demand performance, subject to the
provisions of the law governing the form of contracts.
At this juncture, the Court must dispel the notion that the stipulation anent MTCL’s
reservation of ownership of the subject products as reflected in the Invoice
Receipt, i.e., the title reservation stipulation, changed the complexion of the
transaction from a contract of sale into a contract to sell. Records are bereft of any
showing that the said stipulation novated the contract of sale between the parties
which, to repeat, already existed at the precise moment ACE Foods accepted MTCL’s
proposal. To be sure, novation, in its broad concept, may either be extinctive or
modificatory. It is extinctive when an old obligation is terminated by the creation of a
| 23
new obligation that takes the place of the former; it is merely modificatory when the
old obligation subsists to the extent it remains compatible with the amendatory
agreement. In either case, however, novation is never presumed, and the animus
novandi, whether totally or partially, must appear by express agreement of the parties,
or by their acts that are too clear and unequivocal to be mistaken.38
In the present case, it has not been shown that the title reservation stipulation
appearing in the Invoice Receipt had been included or had subsequently modified or
superseded the original agreement of the parties. The fact that the Invoice Receipt
was signed by a representative of ACE Foods does not, by and of itself, prove animus
novandi since: (a) it was not shown that the signatory was authorized by ACE Foods
(the actual party to the transaction) to novate the original agreement; (b) the signature
only proves that the Invoice Receipt was received by a representative of ACE Foods
to show the fact of delivery; and (c) as matter of judicial notice, invoices are generally
issued at the consummation stage of the contract and not its perfection, and have
been even treated as documents which are not actionable per se, although they may
prove sufficient delivery.39 Thus, absent any clear indication that the title reservation
stipulation was actually agreed upon, the Court must deem the same to be a mere
unilateral imposition on the part of MTCL which has no effect on the nature of the
parties’ original agreement as a contract of sale. Perforce, the obligations arising
thereto, among others, ACE Foods’ obligation to pay the purchase price as well as to
accept the delivery of the goods,40 remain enforceable and subsisting.
As a final point, it may not be amiss to state that the return of the subject products
pursuant to a rescissory action41 is neither warranted by ACE Foods’ claims of
breach — either with respect to MTCL’s breach of its purported “after delivery
services” obligations or the defective condition of the products — since such claims
were not adequately proven in this case. The rule is clear: each party must prove his
own affirmative allegation; one who asserts the affirmative of the issue has the burden
of presenting at the trial such amount of evidence required by law to obtain a
favorable judgment, which in civil cases, is by preponderance of evidence.42 This,
however, ACE Foods failed to observe as regards its allegations of breach. Hence,
the same cannot be sustained.
WHEREFORE, the petition is DENIED. Accordingly, the Decision dated October 21,
2011 and Resolution dated February 8, 2012 of the Court of Appeals in CA-G.R. CV
No. 89426 are hereby AFFIRMED.
SO ORDERED.
Carpio (Chairperson), Brion, Del Castillo and Leonen,** JJ., concur.
Petition denied, judgment and resolution affirmed.
Notes.—Novation is never presumed, there must be an express intention to novate;
The creditor’s acceptance of another check, which replaced an earlier dishonored
check, does not result in novation where there was no express agreement to establish
 | 24

that the debtor was already discharged from his liability. (Salazar vs. J.Y. Brothers
Marketing Corporation, 634 SCRA 95 [2010

By the contract of sale, one of the contracting parties obligates himself to transfer the
ownership of and to deliver a determinate thing, and the other to pay therefore a price
certain in money or its equivalent. (Akang vs. Municipality of Isulan, Sultan Kudarat
Province, 699 SCRA 745 [2013])

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