70.) PAZ P. ARRIETA and VITALIADO ARRIETA, plaintiffs-appellees, vs. for Commercial Letter Credit.
tter Credit. The application was accompanied by a
NATIONAL RICE AND CORN CORPORATION, defendant-appellant,
MANILA UNDERWRITERS INSURANCE CO., INC., defendant-appellee.
This is an appeal of the defendant-appellant NARIC from the decision of the
trial court dated February 20, 1958, awarding to the plaintiffs-appellees the
amount of $286,000.00 as damages for breach of contract and dismissing
the counterclaim and third party complaint of the defendant-appellant
NARIC.
In accordance with Section 13 of Republic Act No. 3452, "the National Rice
and Corn Administration (NARIC) is hereby abolished and all its assets,
liabilities, functions, powers which are not inconsistent with the provisions
of this Act, and all personnel are transferred "to the Rice and Corn
Administration (RCA).
All references, therefore, to the NARIC in this decision must accordingly be
adjusted and read as RCA pursuant to the aforementioned law.
On May 19, 1952, plaintiff-appellee participated in the public bidding called
by the NARIC for the supply of 20,000 metric tons of Burmese rice. As her
bid of $203.00 per metric ton was the lowest, she was awarded the contract
for the same. Accordingly, on July 1, 1952, plaintiff-appellee Paz P. Arrieta
and the appellant corporation entered into a Contract of Sale of Rice, under
the terms of which the former obligated herself to deliver to the latter
20,000 metric tons of Burmess Rice at $203.00 per metric ton, CIF Manila. In
turn, the defendant corporation committed itself to pay for the imported
rice "by means of an irrevocable, confirmed and assignable letter of credit in
U.S. currency in favor of the plaintiff-appellee and/or supplier in Burma,
immediately." Despite the commitment to pay immediately "by means of an
irrevocable, confirmed and assignable Letter of Credit," however, it was only
on July 30, 1952, or a full month from the execution of the contract, that the
defendant corporation, thru its general manager, took the first to open a
letter of credit by forwarding to the Philippine National Bank its Application
transmittal letter, the relevant paragraphs of which read:
In view of the fact that we do not have sufficient deposit with your
institution with which to cover the amount required to be deposited as a
condition for the opening of letters of credit, we will appreciate it if this
application could be considered special case.
We understand that our supplier, Mrs. Paz P. Arrieta, has a deadline to meet
which is August 4, 1952, and in order to comply therewith, it is imperative
that the L/C be opened prior to that date. We would therefore request your
full cooperation on this matter.
On the same day, July 30, 1952, Mrs. Paz P. Arrieta thru counsel, advised the
appellant corporation of the extreme necessity for the immediate opening
of the letter credit since she had by then made a tender to her supplier in
Rangoon, Burma, "equivalent to 5% of the F.O.B. price of 20,000 tons at
$180.70 and in compliance with the regulations in Rangoon this 5% will be
confiscated if the required letter of credit is not received by them before
August 4, 1952."
On August 4, 1952, the Philippine National Bank informed the appellant
corporation that its application, "for a letter of credit for $3,614,000.00 in
favor of Thiri Setkya has been approved by the Board of Directors with the
condition that marginal cash deposit be paid and that drafts are to be paid
upon presentment." (Exh. J-pl.; Exh. 10-def., p. 19, Folder of Exhibits).
Furthermore, the Bank represented that it "will hold your application in
abeyance pending compliance with the above stated requirement."
As it turned out, however, the appellant corporation not in any financial
position to meet the condition. As matter of fact, in a letter dated August 2,
1952, the NARIC bluntly confessed to the appellee its dilemma: "In this
connection, please be advised that our application for opening of the letter
of credit has been presented to the bank since July 30th but the latter
requires that we first deposit 50% of the value of the letter amounting to
ObliCon Chapter 4 Cases 1 | P a g e
aproximately $3,614,000.00 which we are not in a position to meet."
(Emphasis supplied. Exh. 9-Def.; Exh. 1-Pe., p. 18, Folder of Exhibits)
Consequently, the credit instrument applied for was opened only on
September 8, 1952 "in favor of Thiri Setkya, Rangoon, Burma, and/or
assignee for $3,614,000.00," (which is more than two months from the
execution of the contract) the party named by the appellee as beneficiary of
the letter of credit.1äwphï1.ñët
As a result of the delay, the allocation of appellee's supplier in Rangoon was
cancelled and the 5% deposit, amounting to 524,000 kyats or approximately
P200,000.00 was forfeited. In this connection, it must be made of record
that although the Burmese authorities had set August 4, 1952, as the
deadline for the remittance of the required letter of credit, the cancellation
of the allocation and the confiscation of the 5% deposit were not effected
until August 20, 1952, or, a full half month after the expiration of the
deadline. And yet, even with the 15-day grace, appellant corporation was
unable to make good its commitment to open the disputed letter of credit.
The appellee endeavored, but failed, to restore the cancelled Burmese rice
allocation. When the futility of reinstating the same became apparent, she
offered to substitute Thailand rice instead to the defendant NARIC,
communicating at the same time that the offer was "a solution which should
be beneficial to the NARIC and to us at the same time." (Exh. X-Pe., Exh. 25
—Def., p. 38, Folder of Exhibits). This offer for substitution, however, was
rejected by the appellant in a resolution dated November 15, 1952.
On the foregoing, the appellee sent a letter to the appellant, demanding
compensation for the damages caused her in the sum of $286,000.00, U.S.
currency, representing unrealized profit. The demand having been rejected
she instituted this case now on appeal.
At the instance of the NARIC, a counterclaim was filed and the Manila
Underwriters Insurance Company was brought to the suit as a third party
defendant to hold it liable on the performance bond it executed in favor of
the plaintiff-appellee.
We find for the appellee.
It is clear upon the records that the sole and principal reason for the
cancellation of the allocation contracted by the appellee herein in Rangoon,
Burma, was the failure of the letter of credit to be opened with the
contemplated period. This failure must, therefore, be taken as the
immediate cause for the consequent damage which resulted. As it is then,
the disposition of this case depends on a determination of who was
responsible for such failure. Stated differently, the issue is whether
appellant's failure to open immediately the letter of credit in dispute
amounted to a breach of the contract of July 1, 1952 for which it may be
held liable in damages.
Appellant corporation disclaims responsibility for the delay in the opening of
the letter of credit. On the contrary, it insists that the fault lies with the
appellee. Appellant contends that the disputed negotiable instrument was
not promptly secured because the appellee , failed to seasonably furnish
data necessary and required for opening the same, namely, "(1) the amount
of the letter of credit, (2) the person, company or corporation in whose
favor it is to be opened, and (3) the place and bank where it may be
negotiated." Appellant would have this Court believe, therefore, that had
these informations been forthwith furnished it, there would have been no
delay in securing the instrument.
Appellant's explanation has neither force nor merit. In the first place, the
explanation reaches into an area of the proceedings into which We are not
at liberty to encroach. The explanation refers to a question of fact. Nothing
in the record suggests any arbitrary or abusive conduct on the part of the
trial judge in the formulation of the ruling. His conclusion on the matter is
sufficiently borne out by the evidence presented. We are denied, therefore,
the prerogative to disturb that finding, consonant to the time-honored
tradition of this Tribunal to hold trial judges better situated to make
ObliCon Chapter 4 Cases 2 | P a g e
conclusions on questions of fact. For the record, We quote hereunder the
lower court's ruling on the point:
The defense that the delay, if any in opening the letter of credit was due to
the failure of plaintiff to name the supplier, the amount and the bank is not
tenable. Plaintiff stated in Court that these facts were known to defendant
even before the contract was executed because these facts were necessarily
revealed to the defendant before she could qualify as a bidder. She stated
too that she had given the necessary data immediately after the execution
of Exh. "A" (the contract of July 1, 1952) to Mr. GABRIEL BELMONTE,
General Manager of the NARIC, both orally and in writing and that she also
pressed for the opening of the letter of credit on these occasions. These
statements have not been controverted and defendant NARIC,
notwithstanding its previous intention to do so, failed to present Mr.
Belmonte to testify or refute this. ...
Secondly, from the correspondence and communications which form part of
the record of this case, it is clear that what singularly delayed the opening of
the stipulated letter of credit and which, in turn, caused the cancellation of
the allocation in Burma, was the inability of the appellant corporation to
meet the condition importation by the Bank for granting the same. We do
not think the appellant corporation can refute the fact that had it been able
to put up the 50% marginal cash deposit demanded by the bank, then the
letter of credit would have been approved, opened and released as early as
August 4, 1952. The letter of the Philippine National Bank to the NARIC was
plain and explicit that as of the said date, appellant's "application for a letter
of credit ... has been approved by the Board of Directors with the condition
that 50% marginal cash deposit be paid and that drafts are to be paid upon
presentment." (Emphasis supplied)
The liability of the appellant, however, stems not alone from this failure or
inability to satisfy the requirements of the bank. Its culpability arises from
its willful and deliberate assumption of contractual obligations even as it
was well aware of its financial incapacity to undertake the prestation. We
base this judgment upon the letter which accompanied the application filed
by the appellant with the bank, a part of which letter was quoted earlier in
this decision. In the said accompanying correspondence, appellant admitted
and owned that it did "not have sufficient deposit with your institution (the
PNB) with which to cover the amount required to be deposited as a
condition for the opening of letters of credit. ... .
A number of logical inferences may be drawn from the aforementioned
admission. First, that the appellant knew the bank requirements for opening
letters of credit; second, that appellant also knew it could not meet those
requirement. When, therefore, despite this awareness that was financially
incompetent to open a letter of credit immediately, appellant agreed in
paragraph 8 of the contract to pay immediately "by means of an irrevocable,
confirm and assignable letter of credit," it must be similarly held to have
bound itself to answer for all and every consequences that would result
from the representation. aptly observed by the trial court:
... Having called for bids for the importation of rice involving millions,
$4,260,000.00 to be exact, it should have a certained its ability and capacity
to comply with the inevitably requirements in cash to pay for such
importation. Having announced the bid, it must be deemed to have
impliedly assured suppliers of its capacity and facility to finance the
importation within the required period, especially since it had imposed the
supplier the 90-day period within which the shipment of the rice must be
brought into the Philippines. Having entered in the contract, it should have
taken steps immediately to arrange for the letter of credit for the large
amount involved and inquired into the possibility of its issuance.
In relation to the aforequoted observation of the trial court, We would like
to make reference also to Article 11 of the Civil Code which provides:
Those who in the performance of their obligation are guilty of fraud,
negligence, or delay, and those who in any manner contravene the tenor
thereof, are liable in damages.
ObliCon Chapter 4 Cases 3 | P a g e
Under this provision, not only debtors guilty of fraud, negligence or default
in the performance of obligations a decreed liable; in general, every debtor
who fails in performance of his obligations is bound to indemnify for the
losses and damages caused thereby (De la Cruz Seminary of Manila, 18 Phil.
330; Municipality of Moncada v. Cajuigan, 21 Phil. 184; De la Cavada v. Diaz,
37 Phil. 982; Maluenda & Co. v. Enriquez, 46 Phil. 916; Pasumil v. Chong, 49
Phil. 1003; Pando v. Gimenez, 54 Phil. 459; Acme Films v. Theaters Supply,
63 Phil. 657). The phrase "any manner contravene the tenor" of the
obligation includes any illicit act which impairs the strict and faithful
fulfillment of the obligation or every kind or defective performance. (IV
Tolentino, Civil Code of the Philippines, citing authorities, p. 103.)
The NARIC would also have this Court hold that the subsequent offer to
substitute Thailand rice for the originally contracted Burmese rice amounted
to a waiver by the appellee of whatever rights she might have derived from
the breach of the contract. We disagree. Waivers are not presumed, but
must be clearly and convincingly shown, either by express stipulation or acts
admitting no other reasonable explanation. (Ramirez v. Court of Appeals, 52
O.G. 779.) In the case at bar, no such intent to waive has been established.
We have carefully examined and studied the oral and documentary
evidence presented in this case and upon which the lower court based its
award. Under the contract, the NARIC bound itself to buy 20,000 metric
tons of Burmese rice at "$203.00 U.S. Dollars per metric ton, all net shipped
weight, and all in U.S. currency, C.I.F. Manila ..." On the other hand,
documentary and other evidence establish with equal certainty that the
plaintiff-appellee was able to secure the contracted commodity at the cost
price of $180.70 per metric ton from her supplier in Burma. Considering
freights, insurance and charges incident to its shipment here and the
forfeiture of the 5% deposit, the award granted by the lower court is fair
and equitable. For a clearer view of the equity of the damages awarded, We
reproduce below the testimony of the appellee, adequately supported by
the evidence and record:
Q. Will you please tell the court, how much is the damage you suffered?
A. Because the selling price of my rice is $203.00 per metric ton, and the
cost price of my rice is $180.00 We had to pay also $6.25 for shipping and
about $164 for insurance. So adding the cost of the rice, the freight, the
insurance, the total would be about $187.99 that would be $15.01 gross
profit per metric ton, multiply by 20,000 equals $300,200, that is my
supposed profit if I went through the contract.
The above testimony of the plaintiff was a general approximation of the
actual figures involved in the transaction. A precise and more exact
demonstration of the equity of the award herein is provided by Exhibit HH
of the plaintiff and Exhibit 34 of the defendant, hereunder quoted so far as
germane.
It is equally of record now that as shown in her request dated July 29, 1959,
and other communications subsequent thereto for the opening by your
corporation of the required letter of credit, Mrs. Arrieta was supposed to
pay her supplier in Burma at the rate of One Hundred Eighty Dollars and
Seventy Cents ($180.70) in U.S. Currency, per ton plus Eight Dollars ($8.00)
in the same currency per ton for shipping and other handling expenses, so
that she is already assured of a net profit of Fourteen Dollars and Thirty
Cents ($14.30), U.S., Currency, per ton or a total of Two Hundred and Eighty
Six Thousand Dollars ($286,000.00), U.S. Currency, in the aforesaid
transaction. ...
Lastly, herein appellant filed a counterclaim asserting that it has suffered,
likewise by way of unrealized profit damages in the total sum of
$406,000.00 from the failure of the projected contract to materialize. This
counterclaim was supported by a cost study made and submitted by the
appellant itself and wherein it was illustrated how indeed had the
importation pushed thru, NARIC would have realized in profit the amount
asserted in the counterclaim. And yet, the said amount of P406,000.00 was
realizable by appellant despite a number of expenses which the appellee
under the contract, did not have to incur. Thus, under the cost study
submitted by the appellant, banking and unloading charges were to be
ObliCon Chapter 4 Cases 4 | P a g e
shouldered by it, including an Import License Fee of 2% and
superintendence fee of $0.25 per metric ton. If the NARIC stood to profit
over P400 000.00 from the disputed transaction inspite of the extra
expenditures from which the herein appellee was exempt, we are convicted
of the fairness of the judgment presently under appeal.
In the premises, however, a minor modification must be effected in the
dispositive portion of the decision appeal from insofar as it expresses the
amount of damages in U.S. currency and not in Philippine Peso. Republic Act
529 specifically requires the discharge of obligations only "in any coin or
currency which at the time of payment is legal tender for public and private
debts." In view of that law, therefore, the award should be converted into
and expressed in Philippine Peso.
be measured in the prevailing rate of exchange at the time the obligation
was incurred (Sec. 1, idem)."
UPON ALL THE FOREGOING, the decision appealed from is hereby affirmed,
with the sole modification that the award should be converted into the
Philippine peso at the rate of exchange prevailing at the time the obligation
was incurred or on July 1, 1952 when the contract was executed. The
appellee insurance company, in the light of this judgment, is relieved of any
liability under this suit. No pronouncement as to costs.

This brings us to a consideration of what rate of exchange should apply in

the conversion here decreed. Should it be at the time of the breach, at the
time the obligation was incurred or at the rate of exchange prevailing on the
promulgation of this decision.

In the case of Engel v. Velasco & Co., 47 Phil. 115, We ruled that in an action
for recovery of damages for breach of contract, even if the obligation
assumed by the defendant was to pay the plaintiff a sum of money
expressed in American currency, the indemnity to be allowed should be
expressed in Philippine currency at the rate of exchange at the time of the
judgment rather than at the rate of exchange prevailing on the date of
defendant's breach. This ruling, however, can neither be applied nor
extended to the case at bar for the same was laid down when there was no
law against stipulating foreign currencies in Philippine contracts. But now
we have Republic Act No. 529 which expressly declares such stipulations as
contrary to public policy, void and of no effect. And, as We already
pronounced in the case of Eastboard Navigation, Ltd. v. Juan Ysmael & Co.,
Inc., G.R. No. L-9090, September 10, 1957, if there is any agreement to pay
an obligation in a currency other than Philippine legal tender, the same is
null and void as contrary to public policy (Republic Act 529), and the most
that could be demanded is to pay said obligation in Philippine currency "to
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71.) OCTAVIO A. KALALO, plaintiff-appellee, vs.
ALFREDO J. LUZ, defendant-appellant.
Appeal from the decision, dated, February 10, 1967, of the Court of First
Instance of Rizal (Branch V, Quezon City) in its Civil Case No. Q-6561.
On November 17, 1959, plaintiff-appellee Octavio A. Kalalo hereinafter
referred to as appellee), a licensed civil engineer doing business under the
firm name of O. A. Kalalo and Associates, entered into an agreement
(Exhibit A )1 with defendant-appellant Alfredo J . Luz (hereinafter referred
to as appellant), a licensed architect, doing business under firm name of A. J.
Luz and Associates, whereby the former was to render engineering design
services to the latter for fees, as stipulated in the agreement. The services
included design computation and sketches, contract drawing and technical
specifications of all engineering phases of the project designed by O. A.
Kalalo and Associates bill of quantities and cost estimate, and consultation
and advice during construction relative to the work. The fees agreed upon
were percentages of the architect's fee, to wit: structural engineering, 12-½
%; electrical engineering, 2-½%. The agreement was subsequently
supplemented by a "clarification to letter-proposal" which provided, among
other things, that "the schedule of engineering fees in this agreement does
not cover the following: ... D. Foundation soil exploration, testing and
evaluation; E. Projects that are principally engineering works such as
industrial plants, ..." and "O. A. Kalalo and Associates reserve the right to
increase fees on projects ,which cost less than P100,000 ...."2 Pursuant to
said agreement, appellee rendered engineering services to appellant in the
following projects:
(a) Fil-American Life Insurance Building at Legaspi City;
(b) Fil-American Life Insurance Building at Iloilo City;
(c) General Milling Corporation Flour Mill at Opon Cebu;
(d) Menzi Building at Ayala Blvd., Makati, Rizal;
(e) International Rice Research Institute, Research center Los Baños, Laguna;
(f) Aurelia's Building at Mabini, Ermita, Manila;
(g) Far East Bank's Office at Fil-American Life Insurance Building at Isaac
Peral Ermita, Manila;
(h) Arthur Young's residence at Forbes Park, Makati, Rizal;
(i) L & S Building at Dewey Blvd., Manila; and
(j) Stanvac Refinery Service Building at Limay, Bataan.
On December 1 1, '1961, appellee sent to appellant a statement of account
(Exhibit "1"),3 to which was attached an itemized statement of defendant-
appellant's account (Exh. "1-A"), according to which the total engineering
fee asked by appellee for services rendered amounted to P116,565.00 from
which sum was to be deducted the previous payments made in the amount
of P57,000.00, thus leaving a balance due in the amount of P59,565.00.
On May 18, 1962 appellant sent appellee a resume of fees due to the latter.
Said fees, according to appellant. amounted to P10,861.08 instead of the
amount claimed by the appellee. On June 14, 1962 appellant sent appellee a
check for said amount, which appellee refused to accept as full payment of
the balance of the fees due him.
On August 10, 1962, appellee filed a complaint against appellant, containing
four causes of action. In the first cause of action, appellee alleged that for
services rendered in connection with the different projects therein
mentioned there was due him fees in sum s consisting of $28,000 (U.S.) and
P100,204.46, excluding interests, of which sums only P69,323.21 had been
paid, thus leaving unpaid the $28,000.00 and the balance of P30,881.25. In
the second cause of action, appellee claimed P17,000.00 as consequential
and moral damages; in the third cause of action claimed P55,000.00 as
ObliCon Chapter 4 Cases 6 | P a g e
moral damages, attorney's fees and expenses of litigation; and in the fourth
cause of action he claimed P25,000.00 as actual damages, and also for
attorney's fees and expenses of litigation.
In his answer, appellant admitted that appellee rendered engineering
services, as alleged in the first cause of action, but averred that some of
appellee's services were not in accordance with the agreement and
appellee's claims were not justified by the services actually rendered, and
that the aggregate amount actually due to appellee was only P80,336.29, of
which P69,475.21 had already been paid, thus leaving a balance of only
P10,861.08. Appellant denied liability for any damage claimed by appellee
to have suffered, as alleged in the second, third and fourth causes of action.
Appellant also set up affirmative and special defenses, alleging that appellee
had no cause of action, that appellee was in estoppel because of certain
acts, representations, admissions and/or silence, which led appellant to
believe certain facts to exist and to act upon said facts, that appellee's claim
regarding the Menzi project was premature because appellant had not yet
been paid for said project, and that appellee's services were not complete
or were performed in violation of the agreement and/or otherwise
unsatisfactory. Appellant also set up a counterclaim for actual and moral
damages for such amount as the court may deem fair to assess, and for
attorney's fees of P10,000.00.
Inasmuch as the pleadings showed that the appellee's right to certain fees
for services rendered was not denied, the only question being the
assessment of the proper fees and the balance due to appellee after
deducting the admitted payments made by appellant, the trial court, upon
agreement of the parties, authorized the case to be heard before a
Commissioner. The Commissioner rendered a report which, in resume,
states that the amount due to appellee was $28,000.00 (U.S.) as his fee in
the International Research Institute Project which was twenty percent (20%)
of the $140,000.00 that was paid to appellant, and P51,539.91 for the other
projects, less the sum of P69,475.46 which was already paid by the
appellant. The Commissioner also recommended the payment to appellee
of the sum of P5,000.00 as attorney's fees.
At the hearing on the Report of the Commissioner, the respective counsel of
the parties manifested to the court that they had no objection to the
findings of fact of the Commissioner contained in the Report, and they
agreed that the said Report posed only two legal issues, namely: (1)
whether under the facts stated in the Report, the doctrine of estoppel
would apply; and (2) whether the recommendation in the Report that the
payment of the amount. due to the plaintiff in dollars was legally
permissible, and if not, at what rate of exchange it should be paid in pesos.
After the parties had submitted their respective memorandum on said
issues, the trial court rendered its decision dated February 10, 1967, the
dispositive portion of which reads as follows:
WHEREFORE, judgment is rendered in favor of plaintiff and against the
defendant, by ordering the defendant to pay plaintiff the sum of P51,539.91
and $28,000.00, the latter to be converted into the Philippine currency on
the basis of the current rate of exchange at the time of the payment of this
judgment, as certified to by the Central Bank of the Philippines, from which
shall be deducted the sum of P69,475.46, which the defendant had paid the
plaintiff, and the legal rate of interest thereon from the filing of the
complaint in the case until fully paid for; by ordering the defendant to pay
to plaintiff the further sum of P8,000.00 by way of attorney's fees which the
Court finds to be reasonable in the premises, with costs against the
defendant. The counterclaim of the defendant is ordered dismissed.
From the decision, this appeal was brought, directly to this Court, raising
only questions of law.
During the pendency of this appeal, appellee filed a petition for the issuance
of a writ of attachment under Section 1 (f) of Rule 57 of the Rules of Court
upon the ground that appellant is presently residing in Canada as a
permanent resident thereof. On June 3, 1969, this Court resolved, upon
appellee's posting a bond of P10,000.00, to issue the writ of attachment,
and ordered the Provincial Sheriff of Rizal to attach the estate, real and
ObliCon Chapter 4 Cases 7 | P a g e
personal, of appellant Alfredo J. Luz within the province, to the value of not
less than P140,000.00.
The appellant made the following assignments of errors:
I. The lower court erred in not declaring and holding that plaintiff-appellee's
letter dated December 11, 1961 (Exhibit "1") and the statement of account
(Exhibit "1-A") therein enclosed, had the effect, cumulatively or
alternatively, of placing plaintiff-appellee in estoppel from thereafter
modifying the representations made in said exhibits, or of making plaintiff-
appellee otherwise bound by said representations, or of being of decisive
weight in determining the true intent of the parties as to the nature and
extent of the engineering services rendered and/or the amount of fees due.
II. The lower court erred in declaring and holding that the balance owing
from defendant-appellant to plaintiff-appellee on the IRRI Project should be
paid on the basis of the rate of exchange of the U.S. dollar to the Philippine
peso at the time of payment of judgment. .
III. The lower court erred in not declaring and holding that the aggregate
amount of the balance due from defendant-appellant to plaintiff-appellee is
only P15,792.05.
IV. The lower court erred in awarding attorney's fees in the sum of
P8,000.00, despite the commissioner's finding, which plaintiff-appellee has
accepted and has not questioned, that said fee be only P5,000.00; and
V. The lower court erred in not granting defendant-appellant relief on his
counter-claim.
1. In support of his first assignment of error appellant argues that in Exhibit
1-A, which is a statement of accounts dated December 11, 1961, sent by
appellee to appellant, appellee specified the various projects for which he
claimed engineering fees, the precise amount due on each particular
engineering service rendered on each of the various projects, and the total
of his claims; that such a statement barred appellee from asserting any
claim contrary to what was stated therein, or from taking any position
different from what he asserted therein with respect to the nature of the
engineering services rendered; and consequently the trial court could not
award fees in excess of what was stated in said statement of accounts.
Appellant argues that for estoppel to apply it is not necessary, contrary to
the ruling of the trial court, that the appellant should have actually relied on
the representation, but that it is sufficient that the representations were
intended to make the defendant act there on; that assuming arguendo that
Exhibit 1-A did not put appellee in estoppel, the said Exhibit 1-A
nevertheless constituted a formal admission that would be binding on
appellee under the law on evidence, and would not only belie any
inconsistent claim but also would discredit any evidence adduced by
appellee in support of any claim inconsistent with what appears therein;
that, moreover, Exhibit 1-A, being a statement of account, establishes prima
facie the accuracy and correctness of the items stated therein and its
correctness can no longer be impeached except for fraud or mistake; that
Exhibit 1-A furthermore, constitutes appellee's own interpretation of the
contract between him and appellant, and hence, is conclusive against him.
On the other hand, appellee admits that Exhibit 1-A itemized the services
rendered by him in the various construction projects of appellant and that
the total engineering fees charged therein was P116,565.00, but maintains
that he was not in estoppel: first, because when he prepared Exhibit 1-A he
was laboring under an innocent mistake, as found by the trial court; second,
because appellant was not ignorant of the services actually rendered by
appellee and the fees due to the latter under the original agreement, Exhibit
"A."
We find merit in the stand of appellee.
The statement of accounts (Exh. 1-A) could not estop appellee, because
appellant did not rely thereon as found by the Commissioner, from whose
Report we read:
ObliCon Chapter 4 Cases 8 | P a g e
While it is true that plaintiff vacillated in his claim, yet, defendant did not in
anyway rely or believe in the different claims asserted by the plaintiff and
instead insisted on a claim that plaintiff was only entitled to P10,861.08 as
per a separate resume of fees he sent to the plaintiff on May 18, 1962 (See
Exhibit 6).4
The foregoing finding of the Commissioner, not disputed by appellant, was
adopted by the trial court in its decision. Under article 1431 of the Civil
Code, in order that estoppel may apply the person, to whom
representations have been made and who claims the estoppel in his favor
must have relied or acted on such representations. Said article provides:
Art. 1431. Through estoppel an admission or representation is rendered
conclusive upon the person making it, and cannot be denied or disproved as
against the person relying thereon.
An essential element of estoppel is that the person invoking it has been
influenced and has relied on the representations or conduct of the person
sought to be estopped, and this element is wanting in the instant case. In
Cristobal vs. Gomez,5 this Court held that no estoppel based on a document
can be invoked by one who has not been mislead by the false statements
contained therein. And in Republic of the Philippines vs. Garcia, et al.,6 this
Court ruled that there is no estoppel when the statement or action invoked
as its basis did not mislead the adverse party-Estoppel has been
characterized as harsh or odious and not favored in law.7 When misapplied,
estoppel becomes a most effective weapon to accomplish an injustice,
inasmuch as it shuts a man's mouth from speaking the truth and debars the
truth in a particular case.8 Estoppel cannot be sustained by mere argument
or doubtful inference: it must be clearly proved in all its essential elements
by clear, convincing and satisfactory evidence.9 No party should be
precluded from making out his case according to its truth unless by force of
some positive principle of law, and, consequently, estoppel in pains must be
applied strictly and should not be enforced unless substantiated in every
particular. 1 0
The essential elements of estoppel in pais may be considered in relation to
the party sought to be estopped, and in relation to the party invoking the
estoppel in his favor. As related to the party to be estopped, the essential
elements are: (1) conduct amounting to false representation or
concealment of material facts or at least calculated to convey the
impression that the facts are otherwise than, and inconsistent with, those
which the party subsequently attempts to assert; (2) intent, or at least
expectation that his conduct shall be acted upon by, or at least influence,
the other party; and (3) knowledge, actual or constructive, of the real facts.
As related to the party claiming the estoppel, the essential elements are (1)
lack of knowledge and of the means of knowledge of the truth as the facts in
questions; (2) (reliance, in good faith, upon the conduct or statements of
the party to be estopped; (3) action or inaction based thereon of such
character as To change the position or status of the party claiming the
estoppel, to his injury, detriment or prejudice. 1 1
The first essential element in relation to the party sought to be estopped
does not obtain in the instant case, for, as appears in the Report of the
Commissioner, appellee testified "that when he wrote Exhibit 1 and
prepared Exhibit 1-A, he had not yet consulted the services of his counsel
and it was only upon advice of counsel that the terms of the contract were
interpreted to him resulting in his subsequent letters to the defendant
demanding payments of his fees pursuant to the contract Exhibit A." 1 2 This
finding of the Commissioner was adopted by the trial court. 1 3 It is
established , therefore, that Exhibit 1-A was written by appellee through
ignorance or mistake. Anent this matter, it has been held that if an act,
conduct or misrepresentation of the party sought to be estopped is due to
ignorance founded on innocent mistake, estoppel will not arise. 1 4
Regarding the essential elements of estoppel in relation to the party
claiming the estoppel, the first element does not obtain in the instant case,
for it cannot be said that appellant did not know, or at least did not have the
means of knowing, the services rendered to him by appellee and the fees
due thereon as provided in Exhibit A. The second element is also wanting,
for, as adverted to, appellant did not rely on Exhibit 1-A but consistently
denied the accounts stated therein. Neither does the third element obtain,
ObliCon Chapter 4 Cases 9 | P a g e
for appellant did not act on the basis of the representations in Exhibit 1-A,
and there was no change in his position, to his own injury or prejudice.
Appellant, however, insists that if Exhibit 1-A did not put appellee in
estoppel, it at least constituted an admission binding upon the latter. In this
connection, it cannot be gainsaid that Exhibit 1-A is not a judicial admission.
Statements which are not estoppels nor judicial admissions have no quality
of conclusiveness, and an opponent. whose admissions have been offered
against him may offer any evidence which serves as an explanation for his
former assertion of what he now denies as a fact. This may involve the
showing of a mistake. Accordingly, in Oas vs. Roa, 1 6 it was held that when
a party to a suit has made an admission of any fact pertinent to the issue
involved, the admission can be received against him; but such an admission
is not conclusive against him, and he is entitled to present evidence to
overcome the effect of the admission. Appellee did explain, and the trial
court concluded, that Exhibit 1-A was based on either his ignorance or
innocent mistake and he, therefore, is not bound by it.
Appellant further contends that Exhibit 1-A being a statement of account,
establishes prima facie the accuracy and correctness of the items stated
therein. If prima facie, as contended by appellant, then it is not absolutely
conclusive upon the parties. An account stated may be impeached for fraud,
mistake or error. In American Decisions, Vol. 62, p. 95, cited as authority by
appellant himself. we read thus:
An account stated or settled is a mere admission that the account is correct.
It is not an estoppel. The account is still open to impeachment for mistakes
or errors. Its effect is to establish, prima facie, the accuracy of the items
without other proof; and the party seeking to impeach it is bound to show
affirmatively the mistake or error alleged. The force of the admission and
the strength of the evidence necessary to overcome it will depend upon the
circumstances of the case.
In the instant case, it is Our view that the ignorance mistake that attended
the writing of Exhibit 1-A by appellee was sufficient to overcome the prima
facie evidence of correctness and accuracy of said Exhibit 1-A.
Appellant also urges that Exhibit 1-A constitutes appellee's own
interpretation of the contract, and is, therefore, conclusive against him.
Although the practical construction of the contract by one party, evidenced
by his words or acts, can be used against him in behalf of the other party, 1
7 yet, if one of the parties carelessly makes a wrong interpretation of the
words of his contract, or performs more than the contract requires (as
reasonably interpreted independently of his performance), as happened in
the instant case, he should be entitled to a restitutionary remedy, instead of
being bound to continue to his erroneous interpretation or his erroneous
performance and "the other party should not be permitted to profit by such
mistake unless he can establish an estoppel by proving a material change of
position made in good faith. The rule as to practical construction does not
nullify the equitable rules with respect to performance by mistake." 1 8 In
the instant case, it has been shown that Exhibit 1-A was written through
mistake by appellee and that the latter is not estopped by it. Hence, even if
said Exhibit 1-A be considered as practical construction of the contract by
appellee, he cannot be bound by such erroneous interpretation. It has been
held that if by mistake the parties followed a practice in violation of the
terms of the agreement, the court should not perpetuate the error. 1 9
2. In support of the second assignment of error, that the lower court erred
in holding that the balance from appellant on the IRRI project should be
paid on the basis of the rate of exchange of the U.S. dollar to the Philippine
peso at the time of payment of the judgment, appellant contends: first, that
the official rate at the time appellant received his architect's fees for the
IRRI project, and correspondingly his obligation to appellee's fee on August
25, 1961, was P2.00 to $1.00, and cites in support thereof Section 1612 of
the Revised Administrative Code, Section 48 of Republic Act 265 and Section
6 of Commonwealth Act No. 699; second, that the lower court's conclusion
that the rate of exchange to be applied in the conversion of the $28,000.00
is the current rate of exchange at the time the judgment shall be satisfied
ObliCon Chapter 4 Cases 10 | P a g e
was based solely on a mere presumption of the trial court that the
defendant did not convert, there being no showing to that effect, the dollars
into Philippine currency at the official rate, when the legal presumption
should be that the dollars were converted at the official rate of $1.00 to
P2.00 because on August 25, 1961, when the IRRI project became due and
payable, foreign exchange controls were in full force and effect, and partial
decontrol was effected only afterwards, during the Macapagal
administration; third, that the other ground advanced by the lower court for
its ruling, to wit, that appellant committed a breach of his obligation to turn
over to the appellee the engineering fees received in U.S. dollars for the IRRI
project, cannot be upheld, because there was no such breach, as proven by
the fact that appellee never claimed in Exhibit 1-A that he should be paid in
dollars; and there was no provision in the basic contract (Exh. "A") that he
should be paid in dollars; and, finally, even if there were such provision, it
would have no binding effect under the provision of Republic Act 529; that,
moreover, it cannot really be said that no payment was made on that
account for appellant had already paid P57,000.00 to appellee, and under
Article 125 of the Civil Code, said payment could be said to have been
applied to the fees due from the IRRI project, this project being the biggest
and this debt being the most onerous.
In refutation of appellant's argument in support of the second assignment of
error, appellee argues that notwithstanding Republic Act 529, appellant can
be compelled to pay the appellee in dollars in view of the fact that appellant
received his fees in dollars, and appellee's fee is 20% of appellant's fees; and
that if said amount is be converted into Philippine Currency, the rate of
exchange should be that at the time of the execution of the judgment. 2 0
We have taken note of the fact that on August 25, 1961, the date when
appellant said his obligation to pay appellee's fees became due, there was
two rates of exchange, to wit: the preferred rate of P2.00 to $1.00, and the
free market rate. It was so provided in Circular No. 121 of the Central Bank
of the Philippines, dated March 2, 1961. amending an earlier Circular No.
117, and in force until January 21, 1962 when it was amended by Circular
No. 133, thus:
1. All foreign exchange receipts shall be surrendered to the Central Bank of
those authorized to deal in foreign exchange as follows:
Percentage of Total to be surrendered at
Preferred: Free Market Rate: Rate:
(a) Export Proceeds, U.S. Government Expenditures invisibles other than
those specifically mentioned below. ................................................ 25 75
(b) Foreign Investments, Gold Proceeds, Tourists and Inward Remittances of
Veterans and Filipino Citizens; and Personal Expenses of Diplomatic Per
personnel ................................. 100"2 1
The amount of $140,000.00 received by appellant foil the International Rice
Research Institute project is not within the scope of sub-paragraph (a) of
paragraph No. 1 of Circular No. 121. Appellant has not shown that 25% of
said amount had to be surrendered to the Central Bank at the preferred rate
because it was either export proceeds, or U.S. Government expenditures, or
invisibles not included in sub-paragraph (b). Hence, it cannot be said that
the trial court erred in presuming that appellant converted said amount at
the free market rate. It is hard to believe that a person possessing dollars
would exchange his dollars at the preferred rate of P2.00 to $1.00, when he
is not obligated to do so, rather than at the free market rate which is much
higher. A person is presumed to take ordinary care of his concerns, and that
the ordinary course of business has been
followed. 2 2
Under the agreement, Exhibit A, appellee was entitled to 20% of
$140,000.00, or the amount of $28,000.00. Appellee, however, cannot
oblige the appellant to pay him in dollars, even if appellant himself had
received his fee for the IRRI project in dollars. This payment in dollars is
prohibited by Republic Act 529 which was enacted on June 16, 1950. Said
act provides as follows:
ObliCon Chapter 4 Cases 11 | P a g e

SECTION 1. Every provision contained in, or made with respect to, any
obligation which provision purports to give the obligee the right to require
payment in gold or in a particular kind of coin or currency other than
Philippine currency or in an amount of money of the Philippines measured
thereby, be as it is hereby declared against public policy, and null, void and
of no effect, and no such provision shall be contained in, or made with
respect to, any obligation hereafter incurred. Every obligation heretofore or
here after incurred, whether or not any such provision as to payment is
contained therein or made with respect thereto, shall be discharged upon
payment in any coin or currency which at the time of payment is legal
tender for public and private debts: Provided, That, ( a) if the obligation was
incurred prior to the enactment of this Act and required payment in a
particular kind of coin or currency other than Philippine currency, it shall be
discharged in Philippine currency measured at the prevailing rate of
exchange at the time the obligation was incurred, (b) except in case of a
loan made in a foreign currency stipulated to be payable in the same
currency in which case the rate of exchange prevailing at the time of the
stipulated date of payment shall prevail. All coin and currency, including
Central Bank notes, heretofore or hereafter issued and declared by the
Government of the Philippines shall be legal tender for all debts, public and
private.
Under the above-quoted provision of Republic Act 529, if the obligation was
incurred prior to the enactment of the Act and require payment in a
particular kind of coin or currency other than the Philippine currency the
same shall be discharged in Philippine currency measured at the prevailing
rate of exchange at the time the obligation was incurred. As We have
adverted to, Republic Act 529 was enacted on June 16, 1950. In the case
now before Us the obligation of appellant to pay appellee the 20% of
$140,000.00, or the sum of $28,000.00, accrued on August 25, 1961, or after
the enactment of Republic Act 529. It follows that the provision of Republic
Act 529 which requires payment at the prevailing rate of exchange when the
obligation was incurred cannot be applied. Republic Act 529 does not
provide for the rate of exchange for the payment of obligation incurred
after the enactment of said Act. The logical Conclusion, therefore, is that the
rate of exchange should be that prevailing at the time of payment. This view
finds support in the ruling of this Court in the case of Engel vs. Velasco & Co.
2 3 where this Court held that even if the obligation assumed by the
defendant was to pay the plaintiff a sum of money expressed in American
currency, the indemnity to be allowed should be expressed in Philippine
currency at the rate of exchange at the time of judgment rather than at the
rate of exchange prevailing on the date of defendant's breach. This is also
the ruling of American court as follows:
The value in domestic money of a payment made in foreign money is fixed
with respect to the rate of exchange at the time of payment. (70 CJS p. 228)
According to the weight of authority the amount of recovery depends upon
the current rate of exchange, and not the par value of the particular money
involved. (48 C.J. 605-606)
The value in domestic money of a payment made in foreign money is fixed
in reference to the rate of exchange at the time of such payment. (48 C.J.
605)
It is Our considered view, therefore, that appellant should pay the appellee
the equivalent in pesos of the $28,000.00 at the free market rate of
exchange at the time of payment. And so the trial court did not err when it
held that herein appellant should pay appellee $28,000.00 "to be converted
into the Philippine currency on the basis of the current rate of exchange at
the time of payment of this judgment, as certified to by the Central Bank of
the Philippines, ...." 2 4
Appellant also contends that the P57,000.00 that he had paid to appellee
should have been applied to the due to the latter on the IRRI project
because such debt was the most onerous to appellant. This contention is
untenable. The Commissioner who was authorized by the trial court to
receive evidence in this case, however, reports that the appellee had not
been paid for the account of the $28,000.00 which represents the fees of
ObliCon Chapter 4 Cases 12 | P a g e
appellee equivalent to 20% of the $140,000.00 that the appellant received
as fee for the IRRI project. This is a finding of fact by the Commissioner
which was adopted by the trial court. The parties in this case have agreed
that they do not question the finding of fact of the Commissioner. Thus, in
the decision appealed from the lower court says:
At the hearing on the Report of the Commissioner on February 15, 1966, the
counsels for both parties manifested to the court that they have no
objection to the findings of facts of the Commissioner in his report; and
agreed that the said report only poses two (2)legal issues, namely: (1)
whether under the facts stated in the Report, the doctrine of estoppel will
apply; and (2) whether the recommendation in the Report that the payment
of amount due to the plaintiff in dollars is permissible under the law, and, if
not, at what rate of exchange should it be paid in pesos (Philippine
currency) .... 2 5
In the Commissioner's report, it is spetifically recommended that the
appellant be ordered to pay the plaintiff the sum of "$28,000. 00 or its
equivalent as the fee of the plaintiff under Exhibit A on the IRRI project." It is
clear from this report of the Commissioner that no payment for the account
of this $28,000.00 had been made. Indeed, it is not shown in the record that
the peso equivalent of the $28,000.00 had been fixed or agreed upon by the
parties at the different times when the appellant had made partial
payments to the appellee.
3. In his third assignment of error, appellant contends that the lower court
erred in not declaring that the aggregate amount due from him to appellee
is only P15,792.05. Appellant questions the propriety or correctness of most
of the items of fees that were found by the Commissioner to be due to
appellee for services rendered. We believe that it is too late for the
appellant to question the propriety or correctness of those items in the
present appeal. The record shows that after the Commissioner had
submitted his report the lower court, on February 15, 1966, issued the
following order:
When this case was called for hearing today on the report of the
Commissioner, the counsels of the parties manifested that they have no
objection to the findings of facts in the report. However, the report poses
only legal issues, namely: (1) whether under the facts stated in the report,
the doctrine of estoppel will apply; and (2) whether the recommendation in
the report that the alleged payment of the defendant be made in dollars is
permissible by law and, if not, in what rate it should be paid in pesos
(Philippine Currency). For the purpose of resolving these issues the parties
prayed that they be allowed to file their respective memoranda which will
aid the court in the determination of said issues. 2 6
In consonance with the afore-quoted order of the trial court, the appellant
submitted his memorandum which opens with the following statements:
As previously manifested, this Memorandum shall be confined to:
(a) the finding in the Commissioner's Report that defendant's defense of
estoppel will not lie (pp. 17-18, Report); and
(b) the recommendation in the Commissioner's Report that defendant be
ordered to pay plaintiff the sum of '$28,000.00 (U.S.) or its equivalent as the
fee of the plaintiff under Exhibit 'A' in the IRRI project.'
More specifically this Memorandum proposes to demonstrate the
affirmative of three legal issues posed, namely:
First: Whether or not plaintiff's letter dated December 11, 1961 (Exhibit 'I')
and/or Statement of Account (Exhibit '1-A') therein enclosed has the effect
of placing plaintiff in estoppel from thereafter modifying the
representations made in said letter and Statement of Account or of making
plaintiff otherwise bound thereby; or of being decisive or great weight in
determining the true intent of the parties as to the amount of the
engineering fees owing from defendant to plaintiff;
ObliCon Chapter 4 Cases 13 | P a g e
Second: Whether or not defendant can be compelled to pay whatever
balance is owing to plaintiff on the IRRI (International Rice and Research
Institute) project in United States dollars; and
Third: Whether or not in case the ruling of this Honorable Court be that
defendant cannot be compelled to pay plaintiff in United States dollars, the
dollar-to-peso convertion rate for determining the peso equivalent of
whatever balance is owing to plaintiff in connection with the IRRI project
should be the 2 to 1 official rate and not any other rate. 2 7
It is clear, therefore, that what was submitted by appellant to the lower
court for resolution did not include the question of correctness or propriety
of the amounts due to appellee in connection with the different projects for
which the appellee had rendered engineering services. Only legal questions,
as above enumerated, were submitted to the trial court for resolution. So
much so, that the lower court in another portion of its decision said, as
follows:
The objections to the Commissioner's Report embodied in defendant's
memorandum of objections, dated March 18, 1966, cannot likewise be
entertained by the Court because at the hearing of the Commissioner's
Report the parties had expressly manifested that they had no objection to
the findings of facts embodied therein.
We, therefore hold that the third assignment of error of the appellant has
no merit.
4. In his fourth assignment of error, appellant questions the award by the
lower court of P8,000.00 for attorney's fees. Appellant argues that the
Commissioner, in his report, fixed the sum of P5,000.00 as "just and
reasonable" attorney's fees, to which amount appellee did not interpose
any objection, and by not so objecting he is bound by said finding; and that,
moreover, the lower court gave no reason in its decision for increasing the
amount to P8,000.00.
Appellee contends that while the parties had not objected to the findings of
the Commissioner, the assessment of attorney's fees is always subject to the
court's appraisal, and in increasing the recommended fees from P5,000.00
to P8,000.00 the trial court must have taken into consideration certain
circumstances which warrant the award of P8,000.00 for attorney's fees.
We believe that the trial court committed no error in this connection.
Section 12 of Rule 33 of the Rules of Court, on which the fourth assignment
of error is presumably based, provides that when the parties stipulate that a
commissioner's findings of fact shall be final, only questions of law arising
from the facts mentioned in the report shall thereafter be considered.
Consequently, an agreement by the parties to abide by the findings of fact
of the commissioner is equivalent to an agreement of facts binding upon
them which the court cannot disregard. The question, therefore, is whether
or not the estimate of the reasonable fees stated in the report of the
Commissioner is a finding of fact.
The report of the Commissioner on this matter reads as follows:
As regards attorney's fees, under the provisions of Art 2208, par (11), the
same may be awarded, and considering the number of hearings held in this
case, the nature of the case (taking into account the technical nature of the
case and the voluminous exhibits offered in evidence), as well as the way
the case was handled by counsel, it is believed, subject to the Court's
appraisal of the matter, that the sum of P5,000.00 is just and reasonable as
attorney's fees." 2 8
It is thus seen that the estimate made by the Commissioner was an
expression of belief, or an opinion. An opinion is different from a fact. The
generally recognized distinction between a statement of "fact" and an
expression of "opinion" is that whatever is susceptible of exact knowledge is
a matter of fact, while that not susceptible of exact knowledge is generally
regarded as an expression of opinion. 2 9 It has also been said that the word
"fact," as employed in the legal sense includes "those conclusions reached
by the trior from shifting testimony, weighing evidence, and passing on the
ObliCon Chapter 4 Cases 14 | P a g e
credit of the witnesses, and it does not denote those inferences drawn by
the trial court from the facts ascertained and settled by it. 3 0 In the case at
bar, the estimate made by the Commissioner of the attorney's fees was an
inference from the facts ascertained by him, and is, therefore, not a finding
of facts. The trial court was, consequently, not bound by that estimate, in
spite of the manifestation of the parties that they had no objection to the
findings of facts of the Commissioner in his report. Moreover, under Section
11 of Rule 33 of the Rules of Court, the court may adopt, modify, or reject
the report of the commissioner, in whole or in part, and hence, it was within
the trial court's authority to increase the recommended attorney's fees of
P5,000.00 to P8,000.00. It is a settled rule that the amount of attorney's fees
is addressed to the sound discretion of the court. 3 1

It is true, as appellant contends, that the trial court did not state in the
decision the reasons for increasing the attorney's fees. The trial court,
however, had adopted the report of the Commissioner, and in adopting the
report the trial court is deemed to have adopted the reasons given by the
Commissioner in awarding attorney's fees, as stated in the above-quoted
portion of the report. Based on the reasons stated in the report, the trial
court must have considered that the reasonable attorney's fees should be
P8,000.00. Considering that the judgment against the appellant would
amount to more than P100,000.00, We believe that the award of P8,000.00
for attorney's fees is reasonable.

5. In his fifth assignment of error appellant urges that he is entitled to relief

on his counterclaim. In view of what We have stated in connection with the
preceding four assignments of error, We do not consider it necessary to
dwell any further on this assignment of error.

WHEREFORE, the decision appealed from is affirmed, with costs against the
defendant-appellant. It is so ordered.

ObliCon Chapter 4 Cases 15 | P a g e

72.) MYRON C. PAPA, Administrator of the Testate Estate of Angela M.
Butte, Petitioner, v. A. U. VALENCIA and CO. INC., FELIX PEARROYO, SPS.
ARSENIO B. REYES & AMANDA SANTOS, and DELFIN JAO, Respondents.
In this petition for review on certiorari under Rule 45 of the Rules of Court,
petitioner Myron C. Papa seeks to reverse and set aside 1) the Decision
dated 27 January 1992 of the Court of Appeals which affirmed with
modification the decision of the trial court; and, 2) the Resolution dated 22
April 1992 of the same court, which denied petitioners motion for
reconsideration of the above decision.
The antecedent facts of this case are as follows:
Sometime in June 1982, herein private respondents A.U. Valencia and Co.,
Inc. (hereinafter referred to as respondent Valencia, for brevity) and Felix
Pearroyo (hereinafter called respondent Pearroyo), filed with the Regional
Trial Court of Pasig, Branch 151, a complaint for specific performance
against herein petitioner Myron C. Papa, in his capacity as administrator of
the Testate Estate of one Angela M. Butte.
The complaint alleged that on 15 June 1973, petitioner Myron C. Papa,
acting as attorney-in-fact of Angela M. Butte, sold to respondent Pearroyo,
through respondent Valencia, a parcel of land, consisting of 286.60 square
meters, located at corner Retiro and Cadiz Streets, La Loma, Quezon City,
and covered by Transfer Certificate of Title No. 28993 of the Register of
Deeds of Quezon City; that prior to the alleged sale, the said property,
together with several other parcels of land likewise owned by Angela M.
Butte, had been mortgaged by her to the Associated Banking Corporation
(now Associated Citizens Bank); that after the alleged sale, but before the
title to the subject property had been released, Angela M. Butte passed
away; that despite representations made by herein respondents to the bank
to release the title to the property sold to respondent Pearroyo, the bank
refused to release it unless and until all the mortgaged properties of the late
Angela M. Butte were also redeemed; that in order to protect his rights and
interests over the property, respondent Pearroyo caused the annotation on
the title of an adverse claim as evidenced by Entry No. P.E. - 6118/T-28993,
inscribed on 18 January 1977.
The complaint further alleged that it was only upon the release of the title
to the property, sometime in April 1977, that respondents Valencia and
Pearroyo discovered that the mortgage rights of the bank had been
assigned to one Tomas L. Parpana (now deceased), as special administrator
of the Estate of Ramon Papa, Jr., on 12 April 1977; that since then, herein
petitioner had been collecting monthly rentals in the amount of P800.00
from the tenants of the property, knowing that said property had already
been sold to private respondents on 15 June 1973; that despite repeated
demands from said respondents, petitioner refused and failed to deliver the
title to the property. Thereupon, respondents Valencia and Pearroyo filed a
complaint for specific performance, praying that petitioner be ordered to
deliver to respondent Pearroyo the title to the subject property (TCT
28993); to turn over to the latter the sum of P72,000.00 as accrued rentals
as of April 1982, and the monthly rental of P800.00 until the property is
delivered to respondent Pearroyo; to pay respondents the sum of
P20,000.00 as attorneys fees; and to pay the costs of the suit.
In his Answer, petitioner admitted that the lot had been mortgaged to the
Associated Banking Corporation (now Associated Citizens Bank). He
contended, however, that the complaint did not state a cause of action; that
the real property in interest was the Testate Estate of Angela M. Butte,
which should have been joined as a party defendant; that the case
amounted to a claim against the Estate of Angela M. Butte and should have
been filed in Special Proceedings No. A-17910 before the Probate Court in
Quezon City; and that, if as alleged in the complaint, the property had been
assigned to Tomas L. Parpana, as special administrator of the Estate of
Ramon Papa, Jr., said estate should be impleaded. Petitioner, likewise,
claimed that he could not recall in detail the transaction which allegedly
occurred in 1973; that he did not have TCT No. 28993 in his possession; that
he could not be held personally liable as he signed the deed merely as
attorney-in-fact of said Angela M. Butte. Finally, petitioner asseverated that
ObliCon Chapter 4 Cases 16 | P a g e
as a result of the filing of the case, he was compelled to hire the services of
counsel for a fee of P20,000.00, for which respondents should be held liable.
Upon his motion, herein private respondent Delfin Jao was allowed to
intervene in the case. Making common cause with respondents Valencia and
Pearroyo, respondent Jao alleged that the subject lot which had been sold
to respondent Pearroyo through respondent Valencia was in turn sold to
him on 20 August 1973 for the sum of P71,500.00, upon his paying earnest
money in the amount of P5,000.00. He, therefore, prayed that judgment be
rendered in favor of respondents Valencia and Pearroyo; and, that after the
delivery of the title to said respondents, the latter in turn be ordered to
execute in his favor the appropriate deed of conveyance covering the
property in question and to turn over to him the rentals which aforesaid
respondents sought to collect from petitioner Myron C. Papa.
Respondent Jao, likewise, averred that as a result of petitioners refusal to
deliver the title to the property to respondents Valencia and Pearroyo, who
in turn failed to deliver the said title to him, he suffered mental anguish and
serious anxiety for which he sought payment of moral damages; and,
additionally, the payment of attorneys fees and costs.
For his part, Petitioner, as administrator of the Testate Estate of Angela M.
Butte, filed a third-party complaint against herein private respondents,
spouses Arsenio B. Reyes and Amanda Santos (respondent Reyes spouses,
for short). He averred, among others, that the late Angela M. Butte was the
owner of the subject property; that due to non-payment of real estate tax
said property was sold at public auction by the City Treasurer of Quezon City
to the respondent Reyes spouses on 21 January 1980 for the sum of
P14,000.00; that the one-year period of redemption had expired; that
respondents Valencia and Pearroyo had sued petitioner Papa as
administrator of the estate of Angela M. Butte, for the delivery of the title to
the property; that the same aforenamed respondents had acknowledged
that the price paid by them was insufficient, and that they were willing to
add a reasonable amount or a minimum of P55,000.00 to the price upon
delivery of the property, considering that the same was estimated to be
worth P143,000.00; that petitioner was willing to reimburse respondent
Reyes spouses whatever amount they might have paid for taxes and other
charges, since the subject property was still registered in the name of the
late Angela M. Butte; that it was inequitable to allow respondent Reyes
spouses to acquire property estimated to be worth P143,000.00, for a
measly sum of P14,000.00. Petitioner prayed that judgment be rendered
cancelling the tax sale to respondent Reyes spouses; restoring the subject
property to him upon payment by him to said respondent Reyes spouses of
the amount of P14,000.00, plus legal interest; and, ordering respondents
Valencia and Pearroyo to pay him at least P55,000.00 plus everything they
might have to pay the Reyes spouses in recovering the property.
Respondent Reyes spouses in their Answer raised the defense of
prescription of petitioners right to redeem the property.
At the trial, only respondent Pearroyo testified. All the other parties only
submitted documentary proof.
On 29 June 1987, the trial court rendered a decision, the dispositive portion
of which reads:
WHEREUPON, judgment is hereby rendered as follows:
1) Allowing defendant to redeem from third-party defendants and ordering
the latter to allow the former to redeem the property in question, by paying
the sum of P14,000.00 plus legal interest of 12% thereon from January 21,
1980;
2) Ordering defendant to execute a Deed of Absolute Sale in favor of
plaintiff Felix Pearroyo covering the property in question and to deliver
peaceful possession and enjoyment of the said property to the said plaintiff,
free from any liens and encumbrances;
ObliCon Chapter 4 Cases 17 | P a g e
Should this not be possible, for any reason not attributable to defendant,
said defendant is ordered to pay to plaintiff Felix Pearroyo the sum of
P45,000.00 plus legal interest of 12% from June 15, 1973;
3) Ordering plaintiff Felix Pearroyo to execute and deliver to intervenor a
deed of absolute sale over the same property, upon the latters payment to
the former of the balance of the purchase price of P71,500.00;
Should this not be possible, plaintiff Felix Pearroyo is ordered to pay
intervenor the sum of P5,000.00 plus legal interest of 12% from August 23,
1973; and
4) Ordering defendant to pay plaintiffs the amount of P5,000.00 for and as
attorneys fees and litigation expenses.
SO ORDERED.1cräläwvirtualibräry
Petitioner appealed the aforesaid decision of the trial court to the Court of
Appeals, alleging among others that the sale was never consummated as he
did not encash the check (in the amount of P40,000.00) given by
respondents Valencia and Pearroyo in payment of the full purchase price of
the subject lot. He maintained that what said respondents had actually paid
was only the amount of P5,000.00 (in cash) as earnest money.
Respondent Reyes spouses, likewise, appealed the above decision.
However, their appeal was dismissed because of failure to file their
appellants brief.
On 27 January 1992, the Court of Appeals rendered a decision, affirming
with modification the trial courts decision, thus:
WHEREFORE, the second paragraph of the dispositive portion of the
appealed decision is MODIFIED, by ordering the defendant-appellant to
deliver to plaintiff-appellees the owners duplicate of TCT No. 28993 of
Angela M. Butte and the peaceful possession and enjoyment of the lot in
question or, if the owners duplicate certificate cannot be produced, to
authorize the Register of Deeds to cancel it and issue a certificate of title in
the name of Felix Pearroyo. In all other respects, the decision appealed from
is AFFIRMED. Costs against defendant-appellant Myron C. Papa.
SO ORDERED.2cräläwvirtualibräry
In affirming the trial courts decision, respondent court held that contrary to
petitioners claim that he did not encash the aforesaid check, and therefore,
the sale was not consummated, there was no evidence at all that petitioner
did not, in fact, encash said check. On the other hand, respondent Pearroyo
testified in court that petitioner Papa had received the amount of
P45,000.00 and issued receipts therefor. According to respondent court, the
presumption is that the check was encashed, especially since the payment
by check was not denied by defendant-appellant (herein petitioner) who, in
his Answer, merely alleged that he can no longer recall the transaction
which is supposed to have happened 10 years ago.3cräläwvirtualibräry
On petitioners claim that he cannot be held personally liable as he had acted
merely as attorney-in-fact of the owner, Angela M. Butte, respondent court
held that such contention is without merit. This action was not brought
against him in his personal capacity, but in his capacity as the administrator
of the Testate Estate of Angela M. Butte.4cräläwvirtualibräry
On petitioners contention that the estate of Angela M. Butte should have
been joined in the action as the real party in interest, respondent court held
that pursuant to Rule 3, Section 3 of the Rules of Court, the estate of Angela
M. Butte does not have to be joined in the action. Likewise, the estate of
Ramon Papa, Jr., is not an indispensable party under Rule 3, Section 7 of the
same Rules. For the fact is that Ramon Papa, Jr., or his estate, was not a
party to the Deed of Absolute Sale, and it is basic law that contracts bind
only those who are parties thereto.5cräläwvirtualibräry
Respondent court observed that the conditions under which the mortgage
rights of the bank were assigned are not clear. In any case, any obligation
ObliCon Chapter 4 Cases 18 | P a g e
which the estate of Angela M. Butte might have to the estate of Ramon
Papa, Jr. is strictly between them. Respondents Valencia and Pearroyo are
not bound by any such obligation.
Petitioner filed a motion for reconsideration of the above decision, which
motion was denied by respondent Court of Appeals.
Hence, this petition wherein petitioner raises the following issues:
I. THE CONCLUSION OR FINDING OF THE COURT OF APPEALS THAT THE SALE
IN QUESTION WAS CONSUMMATED IS GROUNDED ON SPECULATION OR
CONJECTURE, AND IS CONTRARY TO THE APPLICABLE LEGAL PRINCIPLE.
II. THE COURT OF APPEALS, IN MODIFYING THE DECISION OF THE TRIAL
COURT, ERRED BECAUSE IT, IN EFFECT, CANCELLED OR NULLIFIED AN
ASSIGNMENT OF THE SUBJECT PROPERTY IN FAVOR OF THE ESTATE OF
RAMON PAPA, JR. WHICH IS NOT A PARTY IN THIS CASE.
III. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE ESTATE OF
ANGELA M. BUTTE AND THE ESTATE OF RAMON PAPA, JR. ARE
INDISPENSABLE PARTIES IN THIS CASE.6cräläwvirtualibräry
Petitioner argues that respondent Court of Appeals erred in concluding that
the alleged sale of the subject property had been consummated. He
contends that such a conclusion is based on the erroneous presumption that
the check (in the amount of P40,000.00) had been cashed, citing Art. 1249
of the Civil Code, which provides, in part, that payment by checks shall
produce the effect of payment only when they have been cashed or when
through the fault of the creditor they have been impaired.7 Petitioner
insists that he never cashed said check; and, such being the case, its delivery
never produced the effect of payment. Petitioner, while admitting that he
had issued receipts for the payments, asserts that said receipts, particularly
the receipt of PCIB Check No. 761025 in the amount of P40,000.00, do not
prove payment. He avers that there must be a showing that said check had
been encashed. If, according to petitioner, the check had been encashed,
respondent Pearroyo should have presented PCIB Check No. 761025 duly
stamped received by the payee, or at least its microfilm copy.
Petitioner finally avers that, in fact, the consideration for the sale was still in
the hands of respondents Valencia and Pearroyo, as evidenced by a letter
addressed to him in which said respondents wrote, in part:
x x x. Please be informed that I had been authorized by Dr. Ramon Papa, Jr.,
heir of Mrs. Angela M. Butte to pay you the aforementioned amount of
P75,000.00 for the release and cancellation of subject propertys mortgage.
The money is with me and if it is alright with you, I would like to tender the
payment as soon as possible. x x x.8cräläwvirtualibräry
We find no merit in petitioners arguments.
It is an undisputed fact that respondents Valencia and Pearroyo had given
petitioner Myron C. Papa the amounts of Five Thousand Pesos (P5,000.00)
in cash on 24 May 1973, and Forty Thousand Pesos (P40,000.00) in check on
15 June 1973, in payment of the purchase price of the subject lot. Petitioner
himself admits having received said amounts,9 and having issued receipts
therefor.10 Petitioners assertion that he never encashed the aforesaid
check is not subtantiated and is at odds with his statement in his answer
that he can no longer recall the transaction which is supposed to have
happened 10 years ago. After more than ten (10) years from the payment in
part by cash and in part by check, the presumption is that the check had
been encashed. As already stated, he even waived the presentation of oral
evidence.
Granting that petitioner had never encashed the check, his failure to do so
for more than ten (10) years undoubtedly resulted in the impairment of the
check through his unreasonable and unexplained delay.
While it is true that the delivery of a check produces the effect of payment
only when it is cashed, pursuant to Art. 1249 of the Civil Code, the rule is
otherwise if the debtor is prejudiced by the creditors unreasonable delay in
ObliCon Chapter 4 Cases 19 | P a g e
presentment. The acceptance of a check implies an undertaking of due
diligence in presenting it for payment, and if he from whom it is received
sustains loss by want of such diligence, it will be held to operate as actual
payment of the debt or obligation for which it was given.11 It has, likewise,
been held that if no presentment is made at all, the drawer cannot be held
liable irrespective of loss or injury12 unless presentment is otherwise
excused. This is in harmony with Article 1249 of the Civil Code under which
payment by way of check or other negotiable instrument is conditioned on
its being cashed, except when through the fault of the creditor, the
instrument is impaired. The payee of a check would be a creditor under this
provision and if its non-payment is caused by his negligence, payment will
be deemed effected and the obligation for which the check was given as
conditional payment will be discharged.13cräläwvirtualibräry
Considering that respondents Valencia and Pearroyo had fulfilled their part
of the contract of sale by delivering the payment of the purchase price, said
respondents, therefore, had the right to compel petitioner to deliver to
them the owners duplicate of TCT No. 28993 of Angela M. Butte and the
peaceful possession and enjoyment of the lot in question.
With regard to the alleged assignment of mortgage rights, respondent Court
of Appeals has found that the conditions under which said mortgage rights
of the bank were assigned are not clear. Indeed, a perusal of the original
records of the case would show that there is nothing there that could shed
light on the transactions leading to the said assignment of rights; nor is
there any evidence on record of the conditions under which said mortgage
rights were assigned. What is certain is that despite the said assignment of
mortgage rights, the title to the subject property has remained in the name
of the late Angela M. Butte.14 This much is admitted by petitioner himself in
his answer to respondents complaint as well as in the third-party complaint
that petitioner filed against respondent-spouses Arsenio B. Reyes and
Amanda Santos.15 Assuming arquendo that the mortgage rights of the
Associated Citizens Bank had been assigned to the estate of Ramon Papa,
Jr., and granting that the assigned mortgage rights validly exist and
constitute a lien on the property, the estate may file the appropriate action
to enforce such lien. The cause of action for specific performance which
respondents Valencia and Pearroyo have against petitioner is different from
the cause of action which the estate of Ramon Papa, Jr. may have to enforce
whatever rights or liens it has on the property by reason of its being an
alleged assignee of the banks rights of mortgage.
Finally, the estate of Angela M. Butte is not an indispensable party. Under
Section 3 of Rule 3 of the Rules of Court, an executor or administrator may
sue or be sued without joining the party for whose benefit the action is
presented or defended, thus:
Sec. 3. Representative parties. - A trustee of an express trust, a guardian,
executor or administrator, or a party authorized by statute, may sue or be
sued without joining the party for whose benefit the action is presented or
defended; but the court may, at any stage of the proceedings, order such
beneficiary to be made a party. An agent acting in his own name and for the
benefit of an undisclosed principal may sue or be sued without joining the
principal except when the contract involves things belonging to the
principal.16cräläwvirtualibräry
Neither is the estate of Ramon Papa, Jr. an indispensable party without
whom, no final determination of the action can be had. Whatever prior and
subsisting mortgage rights the estate of Ramon Papa, Jr. has over the
property may still be enforced regardless of the change in ownership
thereof.
WHEREFORE, the petition for review is hereby DENIED and the Decision of
the Court of Appeals, dated 27 January 1992 is AFFIRMED.
SO ORDERED.
ObliCon Chapter 4 Cases 20 | P a g e
73.) PHILIPPINE AIRLINES, INC., petitioner, vs.
HON. COURT OF APPEALS, HON. JUDGE RICARDO D. GALANO, Court of
First Instance of Manila, Branch XIII, JAIME K. DEL ROSARIO, Deputy
Sheriff, Court of First Instance, Manila, and AMELIA TAN, respondents.
Behind the simple issue of validity of an alias writ of execution in this case is
a more fundamental question. Should the Court allow a too literal
interpretation of the Rules with an open invitation to knavery to prevail over
a more discerning and just approach? Should we not apply the ancient rule
of statutory construction that laws are to be interpreted by the spirit which
vivifies and not by the letter which killeth?
This is a petition to review on certiorari the decision of the Court of Appeals
in CA-G.R. No. 07695 entitled "Philippine Airlines, Inc. v. Hon. Judge Ricardo
D. Galano, et al.", dismissing the petition for certiorari against the order of
the Court of First Instance of Manila which issued an alias writ of execution
against the petitioner.
The petition involving the alias writ of execution had its beginnings on
November 8, 1967, when respondent Amelia Tan, under the name and style
of Able Printing Press commenced a complaint for damages before the
Court of First Instance of Manila. The case was docketed as Civil Case No.
71307, entitled Amelia Tan, et al. v. Philippine Airlines, Inc.
After trial, the Court of First Instance of Manila, Branch 13, then presided
over by the late Judge Jesus P. Morfe rendered judgment on June 29, 1972,
in favor of private respondent Amelia Tan and against petitioner Philippine
Airlines, Inc. (PAL) as follows:
WHEREFORE, judgment is hereby rendered, ordering the defendant
Philippine Air Lines:
1. On the first cause of action, to pay to the plaintiff the amount of
P75,000.00 as actual damages, with legal interest thereon from plaintiffs
extra-judicial demand made by the letter of July 20, 1967;
2. On the third cause of action, to pay to the plaintiff the amount of
P18,200.00, representing the unrealized profit of 10% included in the
contract price of P200,000.00 plus legal interest thereon from July 20,1967;
3. On the fourth cause of action, to pay to the plaintiff the amount of
P20,000.00 as and for moral damages, with legal interest thereon from July
20, 1 967;
4. On the sixth cause of action, to pay to the plaintiff the amount of
P5,000.00 damages as and for attorney's fee.
Plaintiffs second and fifth causes of action, and defendant's counterclaim,
are dismissed.
With costs against the defendant. (CA Rollo, p. 18)
On July 28, 1972, the petitioner filed its appeal with the Court of Appeals.
The case was docketed as CA-G.R. No. 51079-R.
On February 3, 1977, the appellate court rendered its decision, the
dispositive portion of which reads:
IN VIEW WHEREOF, with the modification that PAL is condemned to pay
plaintiff the sum of P25,000.00 as damages and P5,000.00 as attorney's fee,
judgment is affirmed, with costs. (CA Rollo, p. 29)
Notice of judgment was sent by the Court of Appeals to the trial court and
on dates subsequent thereto, a motion for reconsideration was filed by
respondent Amelia Tan, duly opposed by petitioner PAL.
On May 23,1977, the Court of Appeals rendered its resolution denying the
respondent's motion for reconsideration for lack of merit.
No further appeal having been taken by the parties, the judgment became
final and executory and on May 31, 1977, judgment was correspondingly
entered in the case.
ObliCon Chapter 4 Cases 21 | P a g e
The case was remanded to the trial court for execution and on September
2,1977, respondent Amelia Tan filed a motion praying for the issuance of a
writ of execution of the judgment rendered by the Court of Appeals. On
October 11, 1977, the trial court, presided over by Judge Galano, issued its
order of execution with the corresponding writ in favor of the respondent.
The writ was duly referred to Deputy Sheriff Emilio Z. Reyes of Branch 13 of
the Court of First Instance of Manila for enforcement.
Four months later, on February 11, 1978, respondent Amelia Tan moved for
the issuance of an alias writ of execution stating that the judgment rendered
by the lower court, and affirmed with modification by the Court of Appeals,
remained unsatisfied.
On March 1, 1978, the petitioner filed an opposition to the motion for the
issuance of an alias writ of execution stating that it had already fully paid its
obligation to plaintiff through the deputy sheriff of the respondent court,
Emilio Z. Reyes, as evidenced by cash vouchers properly signed and
receipted by said Emilio Z. Reyes.
On March 3,1978, the Court of Appeals denied the issuance of the alias writ
for being premature, ordering the executing sheriff Emilio Z. Reyes to
appear with his return and explain the reason for his failure to surrender the
amounts paid to him by petitioner PAL. However, the order could not be
served upon Deputy Sheriff Reyes who had absconded or disappeared.
On March 28, 1978, motion for the issuance of a partial alias writ of
execution was filed by respondent Amelia Tan.
On April 19, 1978, respondent Amelia Tan filed a motion to withdraw
"Motion for Partial Alias Writ of Execution" with Substitute Motion for Alias
Writ of Execution. On May 1, 1978, the respondent Judge issued an order
which reads:
As prayed for by counsel for the plaintiff, the Motion to Withdraw 'Motion
for Partial Alias Writ of Execution with Substitute Motion for Alias Writ of
Execution is hereby granted, and the motion for partial alias writ of
execution is considered withdrawn.
Let an Alias Writ of Execution issue against the defendant for the fall
satisfaction of the judgment rendered. Deputy Sheriff Jaime K. del Rosario is
hereby appointed Special Sheriff for the enforcement thereof. (CA Rollo, p.
34)
On May 18, 1978, the petitioner received a copy of the first alias writ of
execution issued on the same day directing Special Sheriff Jaime K. del
Rosario to levy on execution in the sum of P25,000.00 with legal interest
thereon from July 20,1967 when respondent Amelia Tan made an extra-
judicial demand through a letter. Levy was also ordered for the further sum
of P5,000.00 awarded as attorney's fees.
On May 23, 1978, the petitioner filed an urgent motion to quash the alias
writ of execution stating that no return of the writ had as yet been made by
Deputy Sheriff Emilio Z. Reyes and that the judgment debt had already been
fully satisfied by the petitioner as evidenced by the cash vouchers signed
and receipted by the server of the writ of execution, Deputy Sheriff Emilio Z.
Reyes.
On May 26,1978, the respondent Jaime K. del Rosario served a notice of
garnishment on the depository bank of petitioner, Far East Bank and Trust
Company, Rosario Branch, Binondo, Manila, through its manager and
garnished the petitioner's deposit in the said bank in the total amount of
P64,408.00 as of May 16, 1978. Hence, this petition for certiorari filed by the
Philippine Airlines, Inc., on the grounds that:
I
AN ALIAS WRIT OF EXECUTION CANNOT BE ISSUED WITHOUT PRIOR
RETURN OF THE ORIGINAL WRIT BY THE IMPLEMENTING OFFICER.
II
PAYMENT OF JUDGMENT TO THE IMPLEMENTING OFFICER AS DIRECTED IN
THE WRIT OF EXECUTION CONSTITUTES SATISFACTION OF JUDGMENT.
ObliCon Chapter 4 Cases 22 | P a g e
III
INTEREST IS NOT PAYABLE WHEN THE DECISION IS SILENT AS TO THE
PAYMENT THEREOF.
IV
SECTION 5, RULE 39, PARTICULARLY REFERS TO LEVY OF PROPERTY OF
JUDGMENT DEBTOR AND DISPOSAL OR SALE THEREOF TO SATISFY
JUDGMENT.
Can an alias writ of execution be issued without a prior return of the original
writ by the implementing officer?
We rule in the affirmative and we quote the respondent court's decision
with approval:
The issuance of the questioned alias writ of execution under the
circumstances here obtaining is justified because even with the absence of a
Sheriffs return on the original writ, the unalterable fact remains that such a
return is incapable of being obtained (sic) because the officer who is to
make the said return has absconded and cannot be brought to the Court
despite the earlier order of the court for him to appear for this purpose.
(Order of Feb. 21, 1978, Annex C, Petition). Obviously, taking cognizance of
this circumstance, the order of May 11, 1978 directing the issuance of an
alias writ was therefore issued. (Annex D. Petition). The need for such a
return as a condition precedent for the issuance of an alias writ was
justifiably dispensed with by the court below and its action in this regard
meets with our concurrence. A contrary view will produce an abhorent
situation whereby the mischief of an erring officer of the court could be
utilized to impede indefinitely the undisputed and awarded rights which a
prevailing party rightfully deserves to obtain and with dispatch. The final
judgment in this case should not indeed be permitted to become illusory or
incapable of execution for an indefinite and over extended period, as had
already transpired. (Rollo, pp. 35-36)
Judicium non debet esse illusorium; suum effectum habere debet (A
judgment ought not to be illusory it ought to have its proper effect).
Indeed, technicality cannot be countenanced to defeat the execution of a
judgment for execution is the fruit and end of the suit and is very aptly
called the life of the law (Ipekdjian Merchandising Co. v. Court of Tax
Appeals, 8 SCRA 59 [1963]; Commissioner of Internal Revenue v. Visayan
Electric Co., 19 SCRA 697, 698 [1967]). A judgment cannot be rendered
nugatory by the unreasonable application of a strict rule of procedure.
Vested rights were never intended to rest on the requirement of a return,
the office of which is merely to inform the court and the parties, of any and
all actions taken under the writ of execution. Where such information can
be established in some other manner, the absence of an executing officer's
return will not preclude a judgment from being treated as discharged or
being executed through an alias writ of execution as the case may be. More
so, as in the case at bar. Where the return cannot be expected to be
forthcoming, to require the same would be to compel the enforcement of
rights under a judgment to rest on an impossibility, thereby allowing the
total avoidance of judgment debts. So long as a judgment is not satisfied, a
plaintiff is entitled to other writs of execution (Government of the
Philippines v. Echaus and Gonzales, 71 Phil. 318). It is a well known legal
maxim that he who cannot prosecute his judgment with effect, sues his case
vainly.
More important in the determination of the propriety of the trial court's
issuance of an alias writ of execution is the issue of satisfaction of judgment.
Under the peculiar circumstances surrounding this case, did the payment
made to the absconding sheriff by check in his name operate to satisfy the
judgment debt? The Court rules that the plaintiff who has won her case
should not be adjudged as having sued in vain. To decide otherwise would
not only give her an empty but a pyrrhic victory.
It should be emphasized that under the initial judgment, Amelia Tan was
found to have been wronged by PAL.
She filed her complaint in 1967.
ObliCon Chapter 4 Cases 23 | P a g e

After ten (10) years of protracted litigation in the Court of First Instance and
the Court of Appeals, Ms. Tan won her case.
It is now 1990.
Almost twenty-two (22) years later, Ms. Tan has not seen a centavo of what
the courts have solemnly declared as rightfully hers. Through absolutely no
fault of her own, Ms. Tan has been deprived of what, technically, she should
have been paid from the start, before 1967, without need of her going to
court to enforce her rights. And all because PAL did not issue the checks
intended for her, in her name.
Under the peculiar circumstances of this case, the payment to the
absconding sheriff by check in his name did not operate as a satisfaction of
the judgment debt.
In general, a payment, in order to be effective to discharge an obligation,
must be made to the proper person. Article 1240 of the Civil Code provides:
Payment shall be made to the person in whose favor the obligation has
been constituted, or his successor in interest, or any person authorized to
receive it. (Emphasis supplied)
Thus, payment must be made to the obligee himself or to an agent having
authority, express or implied, to receive the particular payment (Ulen v.
Knecttle 50 Wyo 94, 58 [2d] 446, 111 ALR 65). Payment made to one having
apparent authority to receive the money will, as a rule, be treated as though
actual authority had been given for its receipt. Likewise, if payment is made
to one who by law is authorized to act for the creditor, it will work a
discharge (Hendry v. Benlisa 37 Fla. 609, 20 SO 800,34 LRA 283). The receipt
of money due on ajudgment by an officer authorized by law to accept it will,
therefore, satisfy the debt (See 40 Am Jm 729, 25; Hendry v. Benlisa supra;
Seattle v. Stirrat 55 Wash. 104 p. 834,24 LRA [NS] 1275).
The theory is where payment is made to a person authorized and
recognized by the creditor, the payment to such a person so authorized is
deemed payment to the creditor. Under ordinary circumstances, payment
by the judgment debtor in the case at bar, to the sheriff should be valid
payment to extinguish the judgment debt.
There are circumstances in this case, however, which compel a different
conclusion.
The payment made by the petitioner to the absconding sheriff was not in
cash or legal tender but in checks. The checks were not payable to Amelia
Tan or Able Printing Press but to the absconding sheriff.
Did such payments extinguish the judgment debt?
Article 1249 of the Civil Code provides:
The payment of debts in money shall be made in the currency stipulated,
and if it is not possible to deliver such currency, then in the currency which
is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or
other mercantile documents shall produce the effect of payment only when
they have been cashed, or when through the fault of the creditor they have
been impaired.
In the meantime, the action derived from the original obligation shall be
held in abeyance.
In the absence of an agreement, either express or implied, payment means
the discharge of a debt or obligation in money (US v. Robertson, 5 Pet. [US]
641, 8 L. ed. 257) and unless the parties so agree, a debtor has no rights,
except at his own peril, to substitute something in lieu of cash as medium of
payment of his debt (Anderson v. Gill, 79 Md.. 312, 29 A 527, 25 LRA 200,47
Am. St. Rep. 402). Consequently, unless authorized to do so by law or by
ObliCon Chapter 4 Cases 24 | P a g e
consent of the obligee a public officer has no authority to accept anything
other than money in payment of an obligation under a judgment being
executed. Strictly speaking, the acceptance by the sheriff of the petitioner's
checks, in the case at bar, does not, per se, operate as a discharge of the
judgment debt.
Since a negotiable instrument is only a substitute for money and not money,
the delivery of such an instrument does not, by itself, operate as payment
(See. 189, Act 2031 on Negs. Insts.; Art. 1249, Civil Code; Bryan Landon Co.
v. American Bank, 7 Phil. 255; Tan Sunco v. Santos, 9 Phil. 44; 21 R.C.L. 60,
61). A check, whether a manager's check or ordinary cheek, is not legal
tender, and an offer of a check in payment of a debt is not a valid tender of
payment and may be refused receipt by the obligee or creditor. Mere
delivery of checks does not discharge the obligation under a judgment. The
obligation is not extinguished and remains suspended until the payment by
commercial document is actually realized (Art. 1249, Civil Code, par. 3).
If bouncing checks had been issued in the name of Amelia Tan and not the
Sheriff's, there would have been no payment. After dishonor of the checks,
Ms. Tan could have run after other properties of PAL. The theory is that she
has received no value for what had been awarded her. Because the checks
were drawn in the name of Emilio Z. Reyes, neither has she received
anything. The same rule should apply.
It is argued that if PAL had paid in cash to Sheriff Reyes, there would have
been payment in full legal contemplation. The reasoning is logical but is it
valid and proper? Logic has its limits in decision making. We should not
follow rulings to their logical extremes if in doing so we arrive at unjust or
absurd results.
In the first place, PAL did not pay in cash. It paid in cheeks.
And second, payment in cash always carries with it certain cautions. Nobody
hands over big amounts of cash in a careless and inane manner. Mature
thought is given to the possibility of the cash being lost, of the bearer being
waylaid or running off with what he is carrying for another. Payment in
checks is precisely intended to avoid the possibility of the money going to
the wrong party. The situation is entirely different where a Sheriff seizes a
car, a tractor, or a piece of land. Logic often has to give way to experience
and to reality. Having paid with checks, PAL should have done so properly.
Payment in money or cash to the implementing officer may be deemed
absolute payment of the judgment debt but the Court has never, in the least
bit, suggested that judgment debtors should settle their obligations by
turning over huge amounts of cash or legal tender to sheriffs and other
executing officers. Payment in cash would result in damage or interminable
litigations each time a sheriff with huge amounts of cash in his hands
decides to abscond.
As a protective measure, therefore, the courts encourage the practice of
payments by cheek provided adequate controls are instituted to prevent
wrongful payment and illegal withdrawal or disbursement of funds. If
particularly big amounts are involved, escrow arrangements with a bank and
carefully supervised by the court would be the safer procedure. Actual
transfer of funds takes place within the safety of bank premises. These
practices are perfectly legal. The object is always the safe and incorrupt
execution of the judgment.
It is, indeed, out of the ordinary that checks intended for a particular payee
are made out in the name of another. Making the checks payable to the
judgment creditor would have prevented the encashment or the taking of
undue advantage by the sheriff, or any person into whose hands the checks
may have fallen, whether wrongfully or in behalf of the creditor. The
issuance of the checks in the name of the sheriff clearly made possible the
misappropriation of the funds that were withdrawn.
As explained and held by the respondent court:
... [K]nowing as it does that the intended payment was for the private party
respondent Amelia Tan, the petitioner corporation, utilizing the services of
ObliCon Chapter 4 Cases 25 | P a g e
its personnel who are or should be knowledgeable about the accepted
procedures and resulting consequences of the checks drawn, nevertheless,
in this instance, without prudence, departed from what is generally
observed and done, and placed as payee in the checks the name of the
errant Sheriff and not the name of the rightful payee. Petitioner thereby
created a situation which permitted the said Sheriff to personally encash
said checks and misappropriate the proceeds thereof to his exclusive
personal benefit. For the prejudice that resulted, the petitioner himself
must bear the fault. The judicial guideline which we take note of states as
follows:
As between two innocent persons, one of whom must suffer the
consequence of a breach of trust, the one who made it possible by his act of
confidence must bear the loss. (Blondeau, et al. v. Nano, et al., L-41377, July
26, 1935, 61 Phil. 625)
Having failed to employ the proper safeguards to protect itself, the
judgment debtor whose act made possible the loss had but itself to blame.
The attention of this Court has been called to the bad practice of a number
of executing officers, of requiring checks in satisfaction of judgment debts to
be made out in their own names. If a sheriff directs a judgment debtor to
issue the checks in the sheriff's name, claiming he must get his commission
or fees, the debtor must report the sheriff immediately to the court which
ordered the execution or to the Supreme Court for appropriate disciplinary
action. Fees, commissions, and salaries are paid through regular channels.
This improper procedure also allows such officers, who have sixty (60) days
within which to make a return, to treat the moneys as their personal finds
and to deposit the same in their private accounts to earn sixty (60) days
interest, before said finds are turned over to the court or judgment creditor
(See Balgos v. Velasco, 108 SCRA 525 [1981]). Quite as easily, such officers
could put up the defense that said checks had been issued to them in their
private or personal capacity. Without a receipt evidencing payment of the
judgment debt, the misappropriation of finds by such officers becomes
clean and complete. The practice is ingenious but evil as it unjustly enriches
court personnel at the expense of litigants and the proper administration of
justice. The temptation could be far greater, as proved to be in this case of
the absconding sheriff. The correct and prudent thing for the petitioner was
to have issued the checks in the intended payee's name.
The pernicious effects of issuing checks in the name of a person other than
the intended payee, without the latter's agreement or consent, are as many
as the ways that an artful mind could concoct to get around the safeguards
provided by the law on negotiable instruments. An angry litigant who loses a
case, as a rule, would not want the winning party to get what he won in the
judgment. He would think of ways to delay the winning party's getting what
has been adjudged in his favor. We cannot condone that practice especially
in cases where the courts and their officers are involved.1âwphi1 We rule
against the petitioner.
Anent the applicability of Section 15, Rule 39, as follows:
Section 15. Execution of money judgments. — The officer must enforce an
execution of a money judgment by levying on all the property, real and
personal of every name and nature whatsoever, and which may be disposed
of for value, of the judgment debtor not exempt from execution, or on a
sufficient amount of such property, if they be sufficient, and selling the
same, and paying to the judgment creditor, or his attorney, so much of the
proceeds as will satisfy the judgment. ...
the respondent court held:
We are obliged to rule that the judgment debt cannot be considered
satisfied and therefore the orders of the respondent judge granting the alias
writ of execution may not be pronounced as a nullity.
xxx xxx xxx
It is clear and manifest that after levy or garnishment, for a judgment to be
executed there is the requisite of payment by the officer to the judgment
ObliCon Chapter 4 Cases 26 | P a g e
creditor, or his attorney, so much of the proceeds as will satisfy the
judgment and none such payment had been concededly made yet by the
absconding Sheriff to the private respondent Amelia Tan. The ultimate and
essential step to complete the execution of the judgment not having been
performed by the City Sheriff, the judgment debt legally and factually
remains unsatisfied.
WHEREFORE, IN VIEW OF THE FOREGOING, the petition is hereby
DISMISSED. The judgment of the respondent Court of Appeals is AFFIRMED
and the trial court's issuance of the alias writ of execution against the
petitioner is upheld without prejudice to any action it should take against
the errant sheriff Emilio Z. Reyes. The Court Administrator is ordered to
follow up the actions taken against Emilio Z. Reyes.

Strictly speaking execution cannot be equated with satisfaction of a SO ORDERED.

judgment. Under unusual circumstances as those obtaining in this petition,
the distinction comes out clearly.

Execution is the process which carries into effect a decree or judgment

(Painter v. Berglund, 31 Cal. App. 2d. 63, 87 P 2d 360, 363; Miller v. London,
294 Mass 300, 1 NE 2d 198, 200; Black's Law Dictionary), whereas the
satisfaction of a judgment is the payment of the amount of the writ, or a
lawful tender thereof, or the conversion by sale of the debtor's property
into an amount equal to that due, and, it may be done otherwise than upon
an execution (Section 47, Rule 39). Levy and delivery by an execution officer
are not prerequisites to the satisfaction of a judgment when the same has
already been realized in fact (Section 47, Rule 39). Execution is for the
sheriff to accomplish while satisfaction of the judgment is for the creditor to
achieve. Section 15, Rule 39 merely provides the sheriff with his duties as
executing officer including delivery of the proceeds of his levy on the
debtor's property to satisfy the judgment debt. It is but to stress that the
implementing officer's duty should not stop at his receipt of payments but
must continue until payment is delivered to the obligor or creditor.

Finally, we find no error in the respondent court's pronouncement on the

inclusion of interests to be recovered under the alias writ of execution. This
logically follows from our ruling that PAL is liable for both the lost checks
and interest. The respondent court's decision in CA-G.R. No. 51079-R does
not totally supersede the trial court's judgment in Civil Case No. 71307. It
merely modified the same as to the principal amount awarded as actual
damages.

ObliCon Chapter 4 Cases 27 | P a g e

74.) REPARATIONS COMMISSION, plaintiff-appellants, vs. UNIVERSAL
DEEP-SEA FISHING CORPORATION and MANILA SURETY AND FIDELITY CO.,
INC., defendant-appellants.
MANILA SURETY & FIDELITY CO., INC., third-party plaintiff-appellee,
vs.
PABLO S. SARMIENTO, third-party defendant-appellant.
Appeal of the defendant Universal Deep-Sea Fishing Corporation, defendant
and third-party plaintiff Manila Surety and Fidelity Co., Inc., and third-party
defendant Pablo Sarmiento from the decision of the Court of First Instance
of Manila, the dispositive portion of which reads as follows:
WHEREFORE, judgment is rendered as follows:
1. The defendant Universal Deep-Sea Fishing Corporation is hereby
sentenced to pay the plaintiff the sum of P100,242.04 in the first cause of
action, P141,343.45 in the second cause of action and P54,500.00 in the
third cause of action, all with interest at the rate of 6% per annum from
August 10, 1962, the date of the filing of the complaint, until fully paid;
2. Defendant Manila Surety & Fidelity Co., Inc., is hereby sentenced to pay
the plaintiff, jointly and severally with defendant Universal Deep-Sea Fishing
Corporation, the sum of P53,643.00 in the first cause of action, P68,777.77
in the second cause of action and P54,508.00 in the third cause of action;
3. Defendant Universal Deep-Sea Fishing Corporation and Pablo Sarmiento
are hereby sentenced to pay, jointly and severally, the Manila Surety &
Fidelity Co., Inc., the sum of P53,643.00 and P68,777.77 with interest
thereon at the rate of 12% per annum from August 10, 1962 until fully paid
plus P2,000.00 as attorney's fees;
4. Defendant Universal Deep-Sea Fishing Corporation is hereby sentenced to
pay the Manila Surety & Fidelity Co., Inc., the sum of P54,508.00 with
interest thereon at the rate of 12% per annum from August 10, 1962, until
fully paid;
5. Defendant Universal Deep-Sea Fishing Corporation shall pay the costs. 1
It is not disputed that the Universal Deep-Sea Fishing Corporation,
hereinafter referred to as UNIVERSAL for short. was awarded six (6) trawl
boats by the. Reparations Commission as end-user of reparations goods.
These fishing boats, christened the M/S UNIFISH 1, M/S UNIFISH 2. M/S
UNIFISH 3. M/S UNIFISH 4, M/S UNIFISH 5, and M/S UNIFISH 6. were
delivered to UNIVERSAL two at a time, f.o.b. Japanese port.
The M/S UNIFISH 1 and M/S UNIFISH 2, with an aggregate purchase price of
P536,428.44, were delivered to UNIVERSAL on November 20,1958, and the
contract of Conditional Purchase and Sale of Reparations Goods, executed
by and between the parties on February 12, 1960, provided among others,
that "the first installment representing 10% of the amount or FIFTY THREE
THOUSAND SIX HUNDRED FORTY TWO PESOS AND EIGHTY FOUR CENTAVOS
(P53,642.84) shall be paid within 24 months from the date of complete
delivery thereof, the balance shall be paid in the manner herein stated as
shown in the Schedule of Payments, 2 ... to wit:
TOTAL F.O.B. COST — P536,428.44
AMOUNT OF 1st INSTALLMENT (10% OF F.O.B. COST) — P53,642.84
DUE DATE OF 1st INSTALLMENT — May 8, 1961
TERM: Ten (10) EQUAL YEARLY INSTALLMENTS
RATE OF INTEREST: THREE PERCENT (3%) PER ANNUM
No. of Installments Date Due Amount
1 May 8, 1962 P56,597.20
2 May 8, 1963 P56,597.20
3 May 8, 1964 P56,597.20
4 May 8, 1965 P56,597.20
5 May 8, 1966 P56,597.2
6 May 8, 1967 P56,597.20
7 May 8, 1968 P56,597.20
8 May 8, 1969 P56,597.20
9 May 8, 1970 P56,597.20
10 May 8, 1971 P56,597.20
To guarantee the faithful compliance with the obligations under said
contract, a performance bond in the amount of P53,643.00, with UNIVERSAL
ObliCon Chapter 4 Cases 28 | P a g e
as principal and the Manila Surety & Fidelity Co., Inc., as surety, was
executed in favor of the Reparations Commission. 3 A Corresponding
indemnity agreement was executed to indemnify the surety company for
any damage, loss charges, etc., which it may sustain or incur as a
consequence of having become a surety upon the performance bond. 4
The M/S UNIFISH 3 and M/S UNIFISH 4, with a total purchase price of
P687,777.76 were delivered to UNIVERSAL on April 20, 1959 and the
Contract of Conditional Purchase and Sale Reparations Goods, dated
November 25, 1959, 5 provided that "the first installment representing 10%
of the amount or SIXTY-EIGHT THOUSAND SEVEN HUNDRED SEVENTY-
SEVEN PESOS AND SEVENTY-SEVEN CENTAVOS shall be paid within 24
months from the date of complete delivery thereof, the balance shall be
paid in the manner herein stated as shown in the Schedule of
Payments, . . . , to wit:
TOTAL F.O.B. COSTS — P687,777.76
AMOUNT OF 1st INSTALLMENT (10% of F.O.B. COST) — P68,777.77
DUE DATE OF 1st INSTALLMENT — July, 1961
TERM: Ten (10) EQUAL YEARLY INSTALLMENTS
RATE OF INTEREST: THREE PERCENT (3%) PER ANNUM
No. of Installments Due Date Amount
1 July, 1962 P72,565.68
2 July, 1963 P72,565.68
3 July, 1964 P72,565.68
4 July, 1965 P72,565.68
5 July, 1966 P72,565.68
6 July, 1967 P72,565.68
7 July, 1968 P72,565.68
8 July, 1969 P72,565.68
9 July, 1970 P72,565.68
10 July, 1971 P72,565.68
A performance bond in the amount of P68,777.77, issued by the Manila
Surety & Fidelity Co., Inc., was also submitted to guarantee the faithful
compliance with the obligations set forth in the contract, 6 and indemnity
agreement was executed in favor of the surety company in consideration of
the said bond. 7
The delivery of the M/S UNIFISH 5 and M/S UNIFISH 6 is covered by a
contract for the Utilization of Reparations Goods (M/S "UNIFISH 5" and M/S
"UNIFISH 6") executed by the parties on February 12, 1960, 8 and the
Schedule of Payments attached thereto, provided, as follows:
AMOUNT OF 1st INSTALLMENT (10% of F.O.B. COST) — P54,500.00
DUE DATE OF 1st INSTALLMENT — Oct. 17, 1961
TERM: TEN (10) EQUAL YEARLY INSTALLMENTS
RATE OF INTEREST: THREE PERCENT (3%) PER ANNUM
No. of Installments Date Due Amount
1 Oct. 17, 1962 P57,501.57
2 Oct. 17, 1963 P57,501.57
3 Oct. 17, 1964 P57,501.57
4 Oct. 17, 1965 P57,501.57
5 Oct. 17, 1966 P57,501.57
6 Oct. 17, 1967 P57,501.57
7 Oct. 17, 1968 P57,501.57
8 Oct. 17, 1969 P57,501.57
9 Oct. 17, 1970 P57,501.57
10 Oct. 17, 1971 P57,501.57 9
A performance bond in judgment, amount of P54,500.00 issued by
judgment, Manila Surety & Fidelity Co., Inc., 10 was submitted, and an
indemnity agreement was executed by UNIVERSAL in favor of judgment,
surety company. 11
On August 10, 1962, judgment, Reparations Commission instituted
judgment, present action against UNIVERSAL and judgment, surety company
ObliCon Chapter 4 Cases 29 | P a g e
to recover various amounts of money due under these contracts. In answer,
UNIVERSAL claimed that judgment, amounts of money sought to be
collected are not yet due and demandable. The surety company also
contended that judgment, action is premature, but set up a cross-claim
against UNIVERSAL for reimbursement of whatever amount of money it may
have to pay judgment, plaintiff by reason of judgment, complaint, including
interest, and for judgment, collection of accumulated and unpaid premiums
on judgment, bonds with interest thereon. With leave of courts first
obtained, judgment, surety company filed a third-party complaint against
Pablo S. Sarmiento, one of the indemnitors in judgment, indemnity
agreements. The third-party defendant Pablo S. Sarmiento denied personal
liability claiming that he signed judgment, indemnity agreements in
question in his capacity as acting general manager of UNIVERSAL. After
appropriate proceedings and upon judgment, preceding facts, judgment,
trial court rendered judgment, judgment hereinbefore stated. hence, this
appeal.
(1) The principal issue for resolution is whether or not judgment, first
installments under judgment, three (3) contracts of conditional purchase
and sale of reparations goods were already due and demandable when
judgment, complaint was filed. UNIVERSAL contends that there is an
obscurity in judgment, terms of judgment, contracts in question which were
caused by the plaintiff as to judgment, amounts and due dates of judgment,
first installments which should have been first fixed before a creditor can
demand its payment from judgment, debtor. To be explicit. counsel points
to judgment, Schedule of Payment attached to, and forming a part of, the
contract for judgment, purchase and sale of judgment, M/S UNIFISH 1 and
M/S UNIFISH 2 which states that judgment, amount of first installment is
P53,642.84 and judgment, due date of its payment is May 8, 1961. However,
judgment, amount of the first of succeeding itemized installments is
P56,597.20 and judgment, due date is May 8, 1962. In the case of the M/S
UNIFISH 3 and M/S UNIFISH 4, the first installments are P68,777.77 and due
in July, 1961 and P72,565.68 and due in July 1962, respectively. In the
contract for the purchase and sale of the M/S UNIFISH 5 and M/S UNIFISH 6,
the amounts indicated as first installments are P54,500.00 and P57,501.57,
and the due dates of payment are October 17, 1961 and October 17, 1962,
respectively.
The terms of the contracts for the purchase and sale of the reparations
vessels, however, are very clear and leave no doubt as to the intent of the
contracting parties. Thus, in the contract concerning the M/S UNIFISH 1 and
M/S UNIFISH 2, the parties expressly agreed that the first installment
representing 10% of the purchase price or P53,642.84 shall be paid within
24 months from the date of complete delivery of the vessel or on May 8,
1961, and the balance to be paid in ten (10) equal yearly installments. The
amount of P56,597.20 due on May 8, 1962, which is also claimed to be a
"first installment," is but the first of the ten (10) equal yearly installments of
balance of judgment, purchase price. In judgment, case of Reparations
Commission vs. Northern Lines, Inc. et al., 12 where judgment, Schedule of
Payments, likewise on RC-LEGAL DEPT FORM NO. 1, also allegedly indicated
two (2) due dates for judgment, payment of judgment, first installment,
judgment, Court said:
(a) The major premise in appellants' process of reasoning is that the first
installments due on April 25, 1963, and May 26, 1963, are 'first installments.
although they are not so designated in judgment, schedule appended to
each of judgment, contracts between judgment, parties. Appellant's,
moreover, assume that judgment, 'first' installment is included  in judgment,
ten (10) equal yearly installments' mentioned subsequently to said 'first'
installment. In feet, however, only one installment is labeled as 'first' in each
one of said schedules, and that is judgment, installment due on 'April 25,
1962' - as regards M/S Don Salvador or Magsaysay - and that due on 'May
26, 1962'- as regards M/S Don Amando or Estancia. The schedules do not
describe judgment, 'ten (10) equal yearly installments' — following the one
characterized therein as 'first' — meaning 'number,' not order or sequence,
of installments — and the numerals 1, 2, 3, 4, 5, 6, 7, 8, 9, 10 written before
each of said 'ten (10) equal yearly installments following the 'first' to accrue
after the due date of said 'first' installment. Just the same, the parties have
not so described (as 'first') — in the schedules forming part of their
contracts — the installments numbered '1' in the list contained in each.
Moreover, considering that the words 'TERMS: Ten (10) EQUAL YEARLY
INSTALLMENTS,' appear after the lines reading: 'AMOUNT OF 1st
ObliCon Chapter 4 Cases 30 | P a g e
INSTALLMENT (10% OF F.O.B. COSTS) P174,761.42' and DUE DATE OF 1st
INSTALLMENT April 25, 1962 (or May 26, 1962) and that, subsequently  to
said 'TERM: Ten (10) EQUAL YEARLY INSTALLMENTS,' there is a list of ten
(10) equal yearly installments, it is clear that the latter do not include the
one designated as 'first' installment.
xxx xxx xxx
(b) The pertinent part of Section 12 of Rep. Act No. 1789, pursuant to which
the vessels in question were sold to the Buyer reads:
. . . Capital goods . . . disposed of to private parties as provided for in
subsection (a) of Section two hereof shall be sold on a cash or credit basis,
under rules and regulations as may be determined by the Commission. Sales
on a credit basis shall be payable in installments: Provided, That judgment,
first installment shall be paid within twenty-four months after complete
delivery of judgment, capital goods and judgment, balance within a period
not exceeding ten years, . . . plus judgment, service provided for in section
ten thereof; Provided further, That judgment, unpaid balance of judgment,
price thereof shall bear interest at judgment, rate of not more than three
percent per annum. . . . .
It should be noted that, pursuant to judgment, schedules attached to
judgment, contracts with judgment, Buyer, judgment, 'complete delivery' of
judgment, vessels took place on April 25, and May 26, 1960, respectively, so
that judgment, the 24 months taxed by law for judgment, payment of
judgment, 'First installment expired on April 25, 1962 and May
26,1962, which are judgment, very dates stated in judgment,
aforementioned schedules for judgment, payment of judgment, respective
'1st' installments. What is more, in view of said legal provision, judgment,
Commission had no authority to agree that the 1st installment shall be paid
on any later date, and judgment, Buyer must have been aware of this fact.
Hence, judgment, parties could not have intended judgment, first
installments to become due on April 25, and May 26, 1963 It is, likewise,
obvious - particularly when considered in relation to judgment, provision
above quoted - that judgment, 'ten (10) equal yearly installments.'
mentioned in the schedules, refer to the 'balance' of the price to be paid by
the buyer, after deducting judgment, 'first' installment, so hat, altogether,
there would be 'eleven' installments, namely, the first , which would be the
10% of the F.O.B. cost of the vessel — as agreed upon between 'The
Governments of the Philippines and Japan — and 'ten (10) yearly
installments,' representing the balance of "he amount due to he
Commission from judgment, Buyer, including tile interest thereon.
Viewing judgment, contracts between judgment, parties in judgment, light
of the foregoing exposition, judgment, first installment on judgment, M/S
UNIFISH 1 and M/S UNIFISH 2 of judgment, amount of P53,642.84 was due
on May 8, 1961, while judgment, first installments on judgment, M/S
UNIFISH 3 and M/S UNIFISH 4, and judgment, M/S UNIFISH 5 and M/S
UNIFISH 6 in judgment, amounts of P68,777.77 and P54,500.00 were due on
July 31, 1961 and October 17, 1961, respectively. Accordingly judgment,
obligation of UNIVERSAL to pay judgment, first installments on the purchase
price of judgment, six (6) reparations vessels was already due and
demandable when the present action was commenced on August 10, 1962.
Also due and demanded from UNIVERSAL were the first of the ten (10)
equal yearly installments on the balance of the purchase price of the M/S
UNIFISH I and M/S UNIFISH 2 in the amount of P56,597.20 and P72,565.68
on judgment, M/S UNIFISH 3 and M/S UNIFISH 4. The first accrued on May
8, 1962, while judgment, second fell due on July 31, 1962.
(2) The claim of judgment, surety company to the effect that the trial court
erred in not awarding it the amount of P7,251.42, as premium is the
performance bonds, is well taken. The payment of premiums on the bonds
to the surety company had been expressly undertaken by UNIVERSAL in the
indemnity agreements executed by it in favor of judgment, surety company.
The premium is judgment, consideration for furnishing judgment, bonds and
judgment, obligation to pay judgment, same subsists for as long as
judgment, liability of judgment, surety shall exist. 13 Hence, UNIVERSAL
should pay judgment, amount of P7,251.42 to judgment, surety company.
(3) The surety company also claims that judgment, trial court erred in not
applying judgment, amount of P10,000.00, paid as down payment by
UNIVERSAL to judgment, Reparations Commission, to judgment, guaranteed
indebtedness. According to judgment, surety company, under Article 1254
of judgment, Civil rode, where there is no imputation of payment made by
either judgment, debtor or creditor, The debt which is the most onerous to
the debtor shall be deemed to have been satisfied, so that the amount of
ObliCon Chapter 4 Cases 31 | P a g e
P10,000.00 paid by UNIVERSAL as down payment on the purchase of the, Besides, the "acknowledgment" stated that "Pablo S. Sarmiento for himself
M/S UNIFISH 1 and M/S UNIFISH 2 should be applied to the guaranteed and on behalf of Universal Deep-Sea Fishing Corporation" personally
portion of the debt, this releasing part of the liability hence the obligation of appeared before the notary and acknowledged that judgment, document is
'The surety company shall be only P43,643.00, instead of P53,643.00. his own free and voluntary act and deed.
The rules contained in Articles 1252 to 1254 of judgment, Civil Code apply to WHEREFORE, judgment, judgment appealed from is hereby affirmed with
a person owing several debts of judgment, same kind to a single creditor. judgment, modification that judgment, UNIVERSAL Deep-Sea Fishing
They cannot be made applicable to a person whose obligation as a mere Corporation is further ordered to pay judgment, Manila Surety & Fidelity
surety is both contingent and singular, 14 which in this case is the full and Co., Inc., judgment, amount of P7,251.42 for judgment, premiums and
faithful compliance with the terms of the contract of conditional purchase documentary stamps on judgment, performance bonds. Appellants shall pay
and sale of reparations goods, The obligation included the payment, not proportionate costs.
only of the first installment in the amount of P53,643.00, but also of the ten SO ORDERED.
(10) equal yearly installments of P56,597.20 per annum. The amount of
P10,000.00 was, indeed, deducted from judgment, amount of P53,643.00,
but then judgment, first of judgment, ten (10) equal yearly installments had
also accrued, hence, no error was committed in holding judgment, surety
company to judgment, full extent of its undertaking.
(4) Finally, We find no merit in judgment, claim of judgment, third-party
defendant Pablo S. Sarmiento that he is not personally liable having merely
executed judgment, indemnity agreements 15 in his capacity as acting
general manager of UNIVERSAL. Pablo S. Sarmiento appears to have signed
the indemnity agreement twice — the first, in this capacity as acting general
manager of UNIVERSAL, and the second, in his individual capacity. The
indemnity agreements in question state the following. among others:
In consideration of judgment, responsibility undertaken by judgment,
Company, for judgment, original bond, and for any renewal, extension or
substitution thereof, judgment, undersigned, jointly and severally, bind
themselves in favor of judgment, said COMPANY in judgment, following
terms:
xxx xxx xxx
Dated at City of Manila this - - - - day of July l969.
600 Cottage 3, UNIVERSAL DEEP-SEA FISHING CORP.
Aguinaldo Com- BY:
pound, Echague, s/PABLO S. SARMIENTO Manila t/PABLO S. SARMIENTO
Signature
s/PABLO S. SARMIENTO Address t/PABLO S. SARMIENTO Signature
ObliCon Chapter 4 Cases 32 | P a g e
75.) NEREO J. PACULDO, Petitioner, v. BONIFACIO C. REGALADO,
Respondent.
The case before the Court is an appeal via certiorari seeking to set aside the
decision of the Court of Appeals 1 which affirmed that of the Regional Trial
Court, Quezon City, and the Metropolitan Trial Court, Quezon City ordering
the ejectment of petitioner from the property subject of the
controversy.chanrob1es virtua1 1aw 1ibrary
The facts are as follows:
On December 27, 1990, petitioner Nereo J. Paculdo (hereafter Nereo) and
respondent Bonifacio C. Regalado (hereafter Bonifacio) entered into a
contract of lease over a 16,478 square meter parcel of land with a wet
market building, located along Don Mariano Marcos Avenue, Fairview Park,
Quezon City. The contract was for twenty five (25) years, commencing on
January 1, 1991 and ending on December 31, 2015. For the first five (5)
years of the contract beginning December 27, 1990, Nereo would pay a
monthly rental of P450,000.00, payable within the first five (5) days of each
month at Bonifacio’s office, with a 2% penalty for every month of late
payment.
Aside from the above lease, petitioner leased eleven (11) other property
from respondent, ten (10) of which were located within the Fairview
compound, while the eleventh was located along Quirino Highway, Quezon
City. Petitioner also purchased from respondent eight (8) units of heavy
equipment and vehicles in the aggregate amount of P1,020,000.00.
On account of petitioner’s failure to pay P361,895.55 2 in rental for the
month of May, 1992, and the monthly rental of P450,000.00 for the months
of June and July 1992, on July 6, 1992, respondent sent a demand letter to
petitioner demanding payment of the back rentals, and if no payment was
made within fifteen (15) days from receipt of the letter, it would cause the
cancellation of the lease contract. 3 Another demand letter followed this on
July 17, 1992, reiterating the demand for payment and for petitioner to
vacate the subject premises. 4
Without the knowledge of petitioner, on August 3, 1992, respondent
mortgaged the land subject of the lease contract, including the
improvements which petitioner introduced into the land amounting to
P35,000,000.00, to Monte de Piedad Savings Bank, as security for a loan in
the amount of P20,000,000.00. 5
On August 12, 1992, and on subsequent dates thereafter, respondent
refused to accept petitioner’s daily rental payments. 6
On August 20, 1992, petitioner filed with the Regional Trial Court, Quezon
City an action for injunction and damages seeking to enjoin respondent
from disturbing his possession of the property subject of the lease contract.
7 On the same day, respondent filed with the Metropolitan Trial Court,
Quezon City a complaint for ejectment against petitioner. Attached to the
complaint were the two (2) demand letters dated July 6 and July 17, 1992. 8
On August 25, 1992, five (5) days after the filing of the ejectment complaint,
respondent moved to withdraw the complaint on the ground that certain
details had been omitted in the complaint and must be re-
computed.chanrob1es virtua1 1aw 1ibrary
On April 22, 1993, respondent re-filed the ejectment complaint with the
Metropolitan Trial Court, Quezon City. Computed from August 1992 until
March 31, 1993, the monthly reasonable compensation that petitioner was
liable for was in the total sum of P3,924,000.00. 9
On January 31, 1994, the Metropolitan Trial Court, Quezon City rendered a
decision in favor of respondent, the dispositive portion of which reads:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and
against the defendant, as follows:
"1. Ordering the defendant and all persons claiming right under him to
vacate the leased premises located at Don Mariano Marcos Avenue,
ObliCon Chapter 4 Cases 33 | P a g e
Fairview Park, Quezon City, Metro-Manila covered by Transfer Certificate of
Title RT-6883 of the Registry of Deeds of Quezon City;
"2. Ordering the defendant to pay the sum of P527,119.27 representing the
unpaid monthly rentals as of June 30, 1992 plus 2% interest thereon;
"3. Ordering the defendant to pay the sum of P450,000.00 a month plus 2%
interest thereon starting July 1992 and every month thereafter until the
defendant and all persons claiming right under him shall have actually
vacated the premises and surrender possession thereof to the plaintiff;
"4. Ordering the defendant to pay the sum of P5,000,000.00 as and for
attorney’s fees; and
"5. Ordering the defendant to pay the costs of suit.
"SO ORDERED." 10
In time, petitioner appealed to the Regional Trial Court, Quezon City, Branch
220. 11
On February 19, 1994, respondent, with the support of fifty (50) armed
security guards forcibly entered the property and took possession of the
wet market building. 12
On July 6, 1994, the Regional Trial Court, Quezon City, Branch 220 rendered
a decision affirming in toto the decision of the Metropolitan Trial Court, to
wit:
"WHEREFORE, the appealed decision dated January 31, 1994, for being in
accordance with the evidence presented and the law on the matter, is
hereby affirmed in toto.
"Let a writ of execution issue against defendant and his surety, to answer
for the decision of the lower court." 13
On the same day, the Regional Trial Court issued a writ of execution 14
whereupon, petitioner vacated the subject premises voluntarily. By July 12,
1994, petitioner had completely turned over possession of subject property
to Respondent.
Meanwhile, on July 21, 1994, petitioner filed a petition for review with the
Court of Appeals. 15 He alleged that he had paid the amount of
P11,478,121.85 for security deposit and rentals on the wet market building,
but respondent, without his consent, applied portions of the payment to his
other obligations. The vouchers and receipts indicated that the payments
made were for rentals. Thus, at the time of payment petitioner had declared
as to which obligation the payment must be applied.chanrob1es virtua1 1aw
1ibrary
On February 10, 1995, the Court of Appeals promulgated its decision finding
that petitioner impliedly consented to respondent’s application of payment
to his other obligations and, thus, dismissed the petition for lack of merit. 16
On March 3, 1995, petitioner filed a motion for reconsideration; 17
however, on February 9, 1996 the Court of Appeals denied the motion. 18
Hence, this appeal. 19
At issue is whether petitioner was truly in arrears in the payment of rentals
on the subject property at the time of the filing of the complaint for
ejectment.
As found by the Metropolitan Trial Court and Regional Trial Court, petitioner
made a total payment of P10,949,447.18, to respondent as of July 2, 1992.
If the payment made by respondent applied to petitioner’s other obligations
is set aside, and the amount petitioner paid be applied purely to the rentals
on the Fairview wet market building, there would be an excess payment of
P1,049,447.18 as of July 2, 1992. The computation in such case would be as
follows:chanrob1es virtual 1aw library
Amount paid as of July 2, 1992 P10,949,447.18
Less:chanrob1es virtual 1aw library
ObliCon Chapter 4 Cases 34 | P a g e

Monthly rent from January 1991-July 1992
P450,000.00 x 19 months P8,550,000.00
Less:chanrob1es virtual 1aw library
Security deposit 1,350,000.00
===========
Excess amount paid P1,049,447.18
In the letter dated November 19, 1991, respondent proposed that
petitioner’s security deposit for the Quirino lot, in the amount of
P643,276.48, be applied as partial payment for his account under the
subject lot as well as to real estate taxes on the Quirino lot. 20 Petitioner
interposed no objection, as evidenced by his signature signifying his
conformity thereto.
In an earlier letter, dated July 15, 1991, 21 respondent informed petitioner
that the payment was to be applied not only to petitioner’s accounts under
both the subject land and the Quirino lot but also to heavy equipment
bought by the latter from Respondent. Petitioner claimed that the amount
applied as payment for the heavy equipment was critical because it was
equivalent to more than two (2) months rental of the subject property,
which was the basis for the ejectment case in the Metropolitan Trial Court.
The controversy stemmed from the fact that unlike the November 19, 1991
letter, which bore a conformity portion with petitioner’s signature, the July
15, 1991 letter did not contain the signature of petitioner.
In nevertheless concluding that petitioner gave his consent thereto, the
Court of Appeals upheld both the lower court’s and trial court’s findings that
petitioner received the second letter and its attachment and he raised no
objection thereto.
In other words, would petitioner’s failure to object to the letter of July 15,
1991 and its proposed application of payments amount to consent to such
application?
Petitioner submits that his silence is not consent but is in fact a rejection.
The right to specify which among his various obligations to the same
creditor is to be satisfied first rests with the debtor, 22 as provided by law,
to wit:jgc:chanrobles.com.ph
"ARTICLE 1252. He who has various debts of the same kind in favor of one
and the same creditor, may declare at the time of making the payment, to
which of them the same must be applied. Unless the parties so stipulate, or
when the application of payment is made by the party for whose benefit the
term has been constituted, application shall not be made as to debts which
are not yet due.
If the debtor accepts from the creditor a receipt in which an application of
the payment is made, the former cannot complain of the same, unless there
is a cause for invalidating the contract." 23
At the time petitioner made the payments, he made it clear to respondent
that they were to be applied to his rental obligations on the Fairview wet
market property. Though he entered into various contracts and obligations
with respondent, including a lease contract over eleven (11) property in
Quezon City and sale of eight (8) heavy equipment, all the payments made,
about P11,000,000.00, were to be applied to rental and security deposit on
the Fairview wet market property.
Respondent Regalado argues that assuming that petitioner expressed at the
time of payment which among his obligations were to be satisfied first,
petitioner is estopped by his assent to the application made by the
ObliCon Chapter 4 Cases 35 | P a g e
Respondent. This assent is inferred from the silence of petitioner on the July
15, 1991 letter 24 containing a statement of the application of payments,
which was different from the application made by petitioner. A big chunk of
the amount paid by petitioner went into the satisfaction of an obligation
which was not yet due and demandable — the payment of the eight (8)
heavy equipment amounting to about P1,020,000.00.
The statement of account prepared by respondent was not the receipt
contemplated under the law. The receipt is the evidence of payment
executed at the time of payment, and not the statement of account
executed several days thereafter.
There was no clear assent by petitioner to the change in the manner of
application of payment. The petitioner’s silence as regards the application of
payment by respondent cannot mean that he consented thereto. There was
no meeting of the minds. Though an offer may be made, the acceptance of
such offer must be unconditional and unbounded in order that concurrence
can give rise to a perfected contract. 25 Hence, petitioner could not be in
estoppel.chanrob1es virtua1 1aw 1ibrary
Assuming arguendo that, as alleged by respondent, petitioner did not, at the
time the payments were made, choose the obligation to be satisfied first,
respondent may exercise the right to apply the payments to the other
obligations of petitioner. But this is subject to the condition that the
petitioner must give his consent. Petitioner’s silence is not tantamount to
consent. The consent must be clear and definite.
Under the law, if the debtor did not declare at the time he made the
payment to which of his debts with the creditor the payment is to be
applied, the law provided the guideline — no payment is to be made to a
debt that is not yet due 26 and the payment has to be applied first to the
debt most onerous to the debtor. 27
In the instant case, the purchase price of the eight (8) heavy equipment was
not yet due at the time the payment was made, for there was no date set
for such payment. Neither was there a demand by the creditor to make the
obligation to pay the purchase price due and demandable. 28 Hence, the
application made by respondent is contrary to the provisions of the law.
The lease over the Fairview wet market property is the most onerous among
all the obligations of petitioner to Respondent. It was established that the
wet market is a going-concern and that petitioner has invested about
P35,000,000.00, in the form of improvements, on the property. Hence,
petitioner would stand to lose more if the lease would be rescinded, than if
the contract of sale of heavy equipment would not proceed.
The decision of the Court of Appeals was based on a misapprehension of the
facts and the law on the application of payment. Hence, the ejectment case
subject of the instant petition must be dismissed, without prejudice to the
determination and settlement of the money claims of the parties inter se.
WHEREFORE, the Court GRANTS the petition. The Court REVERSES and SETS
ASIDE the decision of the Court of Appeals in CA-G.R. SP No. 34634.
ACCORDINGLY, the Court REVERSES the decision of the Regional Trial Court,
Quezon City, Branch 220 in Civil Case No. 94-20813, and dismisses the
complaint filed with the Metropolitan Trial Court, Quezon City, Branch 36 in
Civil Case No. MTC XXXVI-7089.
No costs.
SO ORDERED.
ObliCon Chapter 4 Cases 36 | P a g e
76.) DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs.
COURT OF APPEALS and LYDIA CUBA, respondents.
G.R. No. 118367 January 5, 1998
LYDIA P. CUBA, petitioner, vs.
COURT OF APPEALS, DEVELOPMENT BANK OF THE PHILIPPINES and
AGRIPINA P. CAPERAL, respondents.
These two consolidated cases stemmed from a complaint1 filed against the
Development Bank of the Philippines (hereafter DBP) and Agripina Caperal
filed by Lydia Cuba (hereafter CUBA) on 21 May 1985 with the Regional Trial
Court of Pangasinan, Branch 54. The said complaint sought (1) the
declaration of nullity of DBP's appropriation of CUBA's rights, title, and
interests over a 44-hectares fishpond located in Bolinao, Pangasinan, for
being violative of Article 2088 of the Civil Code; (2) the annulment of the
Deed of Conditional Sale executed in her favor by DBP; (3) the annulment of
DBP's sale of the subject fishpond to Caperal; (4) the restoration of her
rights, title, and interests over the fishpond; and (5) the recovery of
damages, attorney's fees, and expenses of litigation.
After the joinder of issues following the filing by the parties of their
respective pleadings, the trial court conducted a pre-trial where CUBA and
DBP agreed on the following facts, which were embodied in the pre-trial
order:
1. Plaintiff Lydia P. Cuba is a grantee of a Fishpond Lease Agreement No.
2083 (new) dated May 13, 1974 from the Government;
2. Plaintiff Lydia P. Cuba obtained loans from the Development Bank of the
Philippines in the amounts of P109,000.00; P109,000.00; and P98,700.00
under the terms stated in the Promissory Notes dated September 6, 1974;
August 11, 1975; and April 4, 1977;
3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of
Assignment of her Leasehold Rights;
4. Plaintiff failed to pay her loan on the scheduled dates thereof in
accordance with the terms of the Promissory Notes;
5. Without foreclosure proceedings, whether judicial or extra-judicial,
defendant DBP appropriated the Leasehold Rights of plaintiff Lydia Cuba
over the fishpond in question;
6. After defendant DBP has appropriated the Leasehold Rights of plaintiff
Lydia Cuba over the fishpond in question, defendant DBP, in turn, executed
a Deed of Conditional Sale of the Leasehold Rights in favor of plaintiff Lydia
Cuba over the same fishpond in question;
7. In the negotiation for repurchase, plaintiff Lydia Cuba addressed two
letters to the Manager DBP, Dagupan City dated November 6, 1979 and
December 20, 1979. DBP thereafter accepted the offer to repurchase in a
letter addressed to plaintiff dated February 1, 1982;
8. After the Deed of Conditional Sale was executed in favor of plaintiff Lydia
Cuba, a new Fishpond Lease Agreement No. 2083-A dated March 24, 1980
was issued by the Ministry of Agriculture and Food in favor of plaintiff Lydia
Cuba only, excluding her husband;
9. Plaintiff Lydia Cuba failed to pay the amortizations stipulated in the Deed
of Conditional Sale;
10. After plaintiff Lydia Cuba failed to pay the amortization as stated in Deed
of Conditional Sale, she entered with the DBP a temporary arrangement
whereby in consideration for the deferment of the Notarial Rescission of
Deed of Conditional Sale, plaintiff Lydia Cuba promised to make certain
payments as stated in temporary Arrangement dated February 23, 1982;
11. Defendant DBP thereafter sent a Notice of Rescission thru Notarial Act
dated March 13, 1984, and which was received by plaintiff Lydia Cuba;
12. After the Notice of Rescission, defendant DBP took possession of the
Leasehold Rights of the fishpond in question;
13. That after defendant DBP took possession of the Leasehold Rights over
the fishpond in question, DBP advertised in the SUNDAY PUNCH the public
bidding dated June 24, 1984, to dispose of the property;
14. That the DBP thereafter executed a Deed of Conditional Sale in favor of
defendant Agripina Caperal on August 16, 1984;
15. Thereafter, defendant Caperal was awarded Fishpond Lease Agreement
No. 2083-A on December 28, 1984 by the Ministry of Agriculture and Food.
ObliCon Chapter 4 Cases 37 | P a g e
Defendant Caperal admitted only the facts stated in paragraphs 14 and 15 of
the pre-trial order.3
Trial was thereafter had on other matters.
The principal issue presented was whether the act of DBP in appropriating
to itself CUBA's leasehold rights over the fishpond in question without
foreclosure proceedings was contrary to Article 2088 of the Civil Code and,
therefore, invalid. CUBA insisted on an affirmative resolution. DBP stressed
that it merely exercised its contractual right under the Assignments of
Leasehold Rights, which was not a contract of mortgage. Defendant Caperal
sided with DBP.
The trial court resolved the issue in favor of CUBA by declaring that DBP's
taking possession and ownership of the property without foreclosure was
plainly violative of Article 2088 of the Civil Code which provides as follows:
Art. 2088. The creditor cannot appropriate the things given by way of pledge
or mortgage or dispose of them. Any stipulation to the contrary is null and
void.
It disagreed with DBP's stand that the Assignments of Leasehold Rights were
not contracts of mortgage because (1) they were given as security for loans,
(2) although the "fishpond land" in question is still a public land, CUBA's
leasehold rights and interest thereon are alienable rights which can be the
proper subject of a mortgage; and (3) the intention of the contracting
parties to treat the Assignment of Leasehold Rights as a mortgage was
obvious and unmistakable; hence, upon CUBA's default, DBP's only right was
to foreclose the Assignment in accordance with law.
The trial court also declared invalid condition no. 12 of the Assignment of
Leasehold Rights for being a clear case of pactum commissorium expressly
prohibited and declared null and void by Article 2088 of the Civil Code. It
then concluded that since DBP never acquired lawful ownership of CUBA's
leasehold rights, all acts of ownership and possession by the said bank were
void. Accordingly, the Deed of Conditional Sale in favor of CUBA, the notarial
rescission of such sale, and the Deed of Conditional Sale in favor of
defendant Caperal, as well as the Assignment of Leasehold Rights executed
by Caperal in favor of DBP, were also void and ineffective.
As to damages, the trial court found "ample evidence on record" that in
1984 the representatives of DBP ejected CUBA and her caretakers not only
from the fishpond area but also from the adjoining big house; and that
when CUBA's son and caretaker went there on 15 September 1985, they
found the said house unoccupied and destroyed and CUBA's personal
belongings, machineries, equipment, tools, and other articles used in
fishpond operation which were kept in the house were missing. The missing
items were valued at about P550,000. It further found that when CUBA and
her men were ejected by DBP for the first time in 1979, CUBA had stocked
the fishpond with 250,000 pieces of bangus fish (milkfish), all of which died
because the DBP representatives prevented CUBA's men from feeding the
fish. At the conservative price of P3.00 per fish, the gross value would have
been P690,000, and after deducting 25% of said value as reasonable
allowance for the cost of feeds, CUBA suffered a loss of P517,500. It then set
the aggregate of the actual damages sustained by CUBA at P1,067,500.
The trial court further found that DBP was guilty of gross bad faith in falsely
representing to the Bureau of Fisheries that it had foreclosed its mortgage
on CUBA's leasehold rights. Such representation induced the said Bureau to
terminate CUBA's leasehold rights and to approve the Deed of Conditional
Sale in favor of CUBA. And considering that by reason of her unlawful
ejectment by DBP, CUBA "suffered moral shock, degradation, social
humiliation, and serious anxieties for which she became sick and had to be
hospitalized" the trial court found her entitled to moral and exemplary
damages. The trial court also held that CUBA was entitled to P100,000
attorney's fees in view of the considerable expenses she incurred for
lawyers' fees and in view of the finding that she was entitled to exemplary
damages.
In its decision of 31 January 1990,4 the trial court disposed as follows:
ObliCon Chapter 4 Cases 38 | P a g e

WHEREFORE, judgment is hereby rendered in favor of plaintiff:
1. DECLARING null and void and without any legal effect the act of
defendant Development Bank of the Philippines in appropriating for its own
interest, without any judicial or extra-judicial foreclosure, plaintiff's
leasehold rights and interest over the fishpond land in question under her
Fishpond Lease Agreement No. 2083 (new);
2. DECLARING the Deed of Conditional Sale dated February 21, 1980 by and
between the defendant Development Bank of the Philippines and plaintiff
(Exh. E and Exh. 1) and the acts of notarial rescission of the Development
Bank of the Philippines relative to said sale (Exhs. 16 and 26) as void and
ineffective;
3. DECLARING the Deed of Conditional Sale dated August 16, 1984 by and
between the Development Bank of the Philippines and defendant Agripina
Caperal (Exh. F and Exh. 21), the Fishpond Lease Agreement No. 2083-A
dated December 28, 1984 of defendant Agripina Caperal (Exh. 23) and the
Assignment of Leasehold Rights dated February 12, 1985 executed by
defendant Agripina Caperal in favor of the defendant Development Bank of
the Philippines (Exh. 24) as void ab initio;
4. ORDERING defendant Development Bank of the Philippines and
defendant Agripina Caperal, jointly and severally, to restore to plaintiff the
latter's leasehold rights and interests and right of possession over the
fishpond land in question, without prejudice to the right of defendant
Development Bank of the Philippines to foreclose the securities given by
plaintiff;
5. ORDERING defendant Development Bank of the Philippines to pay to
plaintiff the following amounts:
a) The sum of ONE MILLION SIXTY-SEVEN THOUSAND FIVE HUNDRED PESOS
(P1,067,500.00), as and for actual damages;
b) The sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS as moral
damages;
c) The sum of FIFTY THOUSAND (P50,000.00) PESOS, as and for exemplary
damages;
d) And the sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS, as and
for attorney's fees;
6. And ORDERING defendant Development Bank of the Philippines to
reimburse and pay to defendant Agripina Caperal the sum of ONE MILLION
FIVE HUNDRED THIRTY-TWO THOUSAND SIX HUNDRED TEN PESOS AND
SEVENTY-FIVE CENTAVOS (P1,532,610.75) representing the amounts paid by
defendant Agripina Caperal to defendant Development Bank of the
Philippines under their Deed of Conditional Sale.
CUBA and DBP interposed separate appeals from the decision to the Court
of Appeals. The former sought an increase in the amount of damages, while
the latter questioned the findings of fact and law of the lower court.
In its decision5 of 25 May 1994, the Court of Appeals ruled that (1) the trial
court erred in declaring that the deed of assignment was null and void and
that defendant Caperal could not validly acquire the leasehold rights from
DBP; (2) contrary to the claim of DBP, the assignment was not a cession
under Article 1255 of the Civil Code because DBP appeared to be the sole
creditor to CUBA — cession presupposes plurality of debts and creditors; (3)
the deeds of assignment represented the voluntary act of CUBA in assigning
her property rights in payment of her debts, which amounted to a novation
of the promissory notes executed by CUBA in favor of DBP; (4) CUBA was
estopped from questioning the assignment of the leasehold rights, since she
agreed to repurchase the said rights under a deed of conditional sale; and
(5) condition no. 12 of the deed of assignment was an express authority
from CUBA for DBP to sell whatever right she had over the fishpond. It also
ruled that CUBA was not entitled to loss of profits for lack of evidence, but
agreed with the trial court as to the actual damages of P1,067,500. It,
however, deleted the amount of exemplary damages and reduced the
award of moral damages from P100,000 to P50,000 and attorney's fees,
from P100,000 to P50,000.
The Court of Appeals thus declared as valid the following: (1) the act of DBP
in appropriating Cuba's leasehold rights and interest under Fishpond Lease
Agreement No. 2083; (2) the deeds of assignment executed by Cuba in favor
of DBP; (3) the deed of conditional sale between CUBA and DBP; and (4) the
deed of conditional sale between DBP and Caperal, the Fishpond Lease
ObliCon Chapter 4 Cases 39 | P a g e
Agreement in favor of Caperal, and the assignment of leasehold rights
executed by Caperal in favor of DBP. It then ordered DBP to turn over
possession of the property to Caperal as lawful holder of the leasehold
rights and to pay CUBA the following amounts: (a) P1,067,500 as actual
damages; P50,000 as moral damages; and P50,000 as attorney's fees.
Since their motions for reconsideration were denied,6 DBP and CUBA filed
separate petitions for review.
In its petition (G.R. No. 118342), DBP assails the award of actual and moral
damages and attorney's fees in favor of CUBA.
Upon the other hand, in her petition (G.R. No. 118367), CUBA contends that
the Court of Appeals erred (1) in not holding that the questioned deed of
assignment was a pactum commissorium contrary to Article 2088 of the Civil
Code; (b) in holding that the deed of assignment effected a novation of the
promissory notes; (c) in holding that CUBA was estopped from questioning
the validity of the deed of assignment when she agreed to repurchase her
leasehold rights under a deed of conditional sale; and (d) in reducing the
amounts of moral damages and attorney's fees, in deleting the award of
exemplary damages, and in not increasing the amount of damages.
We agree with CUBA that the assignment of leasehold rights was a
mortgage contract.
It is undisputed that CUBA obtained from DBP three separate loans totalling
P335,000, each of which was covered by a promissory note. In all of these
notes, there was a provision that: "In the event of foreclosure of the
mortgage securing this notes, I/We further bind myself/ourselves, jointly
and severally, to pay the deficiency, if any."7
Simultaneous with the execution of the notes was the execution of
"Assignments of Leasehold Rights"8 where CUBA assigned her leasehold
rights and interest on a 44-hectare fishpond, together with the
improvements thereon. As pointed out by CUBA, the deeds of assignment
constantly referred to the assignor (CUBA) as "borrower"; the assigned
rights, as mortgaged properties; and the instrument itself, as mortgage
contract. Moreover, under condition no. 22 of the deed, it was provided
that "failure to comply with the terms and condition of any of the loans shall
cause all other loans to become due and demandable and all mortgages
shall be foreclosed." And, condition no. 33 provided that if "foreclosure is
actually accomplished, the usual 10% attorney's fees and 10% liquidated
damages of the total obligation shall be imposed." There is, therefore, no
shred of doubt that a mortgage was intended.
Besides, in their stipulation of facts the parties admitted that the assignment
was by way of security for the payment of the loans; thus:
3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of
Assignment of her Leasehold Rights.
In People's Bank & Trust Co. vs. Odom,9 this Court had the occasion to rule
that an assignment to guarantee an obligation is in effect a mortgage.
We find no merit in DBP's contention that the assignment novated the
promissory notes in that the obligation to pay a sum of money the loans
(under the promissory notes) was substituted by the assignment of the
rights over the fishpond (under the deed of assignment). As correctly
pointed out by CUBA, the said assignment merely complemented or
supplemented the notes; both could stand together. The former was only an
accessory to the latter. Contrary to DBP's submission, the obligation to pay a
sum of money remained, and the assignment merely served as security for
the loans covered by the promissory notes. Significantly, both the deeds of
assignment and the promissory notes were executed on the same dates the
loans were granted. Also, the last paragraph of the assignment stated: "The
assignor further reiterates and states all terms, covenants, and conditions
stipulated in the promissory note or notes covering the proceeds of this
loan, making said promissory note or notes, to all intent and purposes, an
integral part hereof."
ObliCon Chapter 4 Cases 40 | P a g e
Neither did the assignment amount to payment by cession under Article
1255 of the Civil Code for the plain and simple reason that there was only
one creditor, the DBP. Article 1255 contemplates the existence of two or
more creditors and involves the assignment of all the debtor's property.
Nor did the assignment constitute dation in payment under Article 1245 of
the civil Code, which reads: "Dation in payment, whereby property is
alienated to the creditor in satisfaction of a debt in money, shall be
governed by the law on sales." It bears stressing that the assignment, being
in its essence a mortgage, was but a security and not a satisfaction of
indebtedness.10
We do not, however, buy CUBA's argument that condition no. 12 of the
deed of assignment constituted pactum commissorium. Said condition
reads:
12. That effective upon the breach of any condition of this assignment, the
Assignor hereby appoints the Assignee his Attorney-in-fact with full power
and authority to take actual possession of the property above-described,
together with all improvements thereon, subject to the approval of the
Secretary of Agriculture and Natural Resources, to lease the same or any
portion thereof and collect rentals, to make repairs or improvements
thereon and pay the same, to sell or otherwise dispose of whatever rights
the Assignor has or might have over said property and/or its improvements
and perform any other act which the Assignee may deem convenient to
protect its interest. All expenses advanced by the Assignee in connection
with purpose above indicated which shall bear the same rate of interest
aforementioned are also guaranteed by this Assignment. Any amount
received from rents, administration, sale or disposal of said property may be
supplied by the Assignee to the payment of repairs, improvements, taxes,
assessments and other incidental expenses and obligations and the balance,
if any, to the payment of interest and then on the capital of the
indebtedness secured hereby. If after disposal or sale of said property and
upon application of total amounts received there shall remain a deficiency,
said Assignor hereby binds himself to pay the same to the Assignee upon
demand, together with all interest thereon until fully paid. The power
herein granted shall not be revoked as long as the Assignor is indebted to
the Assignee and all acts that may be executed by the Assignee by virtue of
said power are hereby ratified.
The elements of pactum commissorium are as follows: (1) there should be a
property mortgaged by way of security for the payment of the principal
obligation, and (2) there should be a stipulation for automatic appropriation
by the creditor of the thing mortgaged in case of non-payment of the
principal obligation within the stipulated period.11
Condition no. 12 did not provide that the ownership over the leasehold
rights would automatically pass to DBP upon CUBA's failure to pay the loan
on time. It merely provided for the appointment of DBP as attorney-in-fact
with authority, among other things, to sell or otherwise dispose of the said
real rights, in case of default by CUBA, and to apply the proceeds to the
payment of the loan. This provision is a standard condition in mortgage
contracts and is in conformity with Article 2087 of the Civil Code, which
authorizes the mortgagee to foreclose the mortgage and alienate the
mortgaged property for the payment of the principal obligation.
DBP, however, exceeded the authority vested by condition no. 12 of the
deed of assignment. As admitted by it during the pre-trial, it had "[w]ithout
foreclosure proceedings, whether judicial or extrajudicial, . . . appropriated
the [l]easehold [r]ights of plaintiff Lydia Cuba over the fishpond in question."
Its contention that it limited itself to mere administration by posting
caretakers is further belied by the deed of conditional sale it executed in
favor of CUBA. The deed stated:
WHEREAS, the Vendor [DBP] by virtue of a deed of assignment executed in
its favor by the herein vendees [Cuba spouses] the former acquired all the
right and interest of the latter over the above-described property;
xxx xxx xxx
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The title to the real estate property [sic] and all improvements thereon shall
remain in the name of the Vendor until after the purchase price, advances
and interest shall have been fully paid. (Emphasis supplied).
It is obvious from the above-quoted paragraphs that DBP had appropriated
and taken ownership of CUBA's leasehold rights merely on the strength of
the deed of assignment.
DBP cannot take refuge in condition no. 12 of the deed of assignment to
justify its act of appropriating the leasehold rights. As stated earlier,
condition no. 12 did not provide that CUBA's default would operate to vest
in DBP ownership of the said rights. Besides, an assignment to guarantee an
obligation, as in the present case, is virtually a mortgage and not an
absolute conveyance of title which confers ownership on the assignee.12
At any rate, DBP's act of appropriating CUBA's leasehold rights was violative
of Article 2088 of the Civil Code, which forbids a credit or from
appropriating, or disposing of, the thing given as security for the payment of
a debt.
The fact that CUBA offered and agreed to repurchase her leasehold rights
from DBP did not estop her from questioning DBP's act of appropriation.
Estoppel is unavailing in this case. As held by this Court in some cases,13
estoppel cannot give validity to an act that is prohibited by law or against
public policy. Hence, the appropriation of the leasehold rights, being
contrary to Article 2088 of the Civil Code and to public policy, cannot be
deemed validated by estoppel.
Instead of taking ownership of the questioned real rights upon default by
CUBA, DBP should have foreclosed the mortgage, as has been stipulated in
condition no. 22 of the deed of assignment. But, as admitted by DBP, there
was no such foreclosure. Yet, in its letter dated 26 October 1979, addressed
to the Minister of Agriculture and Natural Resources and coursed through
the Director of the Bureau of Fisheries and Aquatic Resources, DBP declared
that it "had foreclosed the mortgage and enforced the assignment of
leasehold rights on March 21, 1979 for failure of said spouses [Cuba
spouces] to pay their loan amortizations."14 This only goes to show that
DBP was aware of the necessity of foreclosure proceedings.
In view of the false representation of DBP that it had already foreclosed the
mortgage, the Bureau of Fisheries cancelled CUBA's original lease permit,
approved the deed of conditional sale, and issued a new permit in favor of
CUBA. Said acts which were predicated on such false representation, as well
as the subsequent acts emanating from DBP's appropriation of the
leasehold rights, should therefore be set aside. To validate these acts would
open the floodgates to circumvention of Article 2088 of the Civil Code.
Even in cases where foreclosure proceedings were had, this Court had not
hesitated to nullify the consequent auction sale for failure to comply with
the requirements laid down by law, such as Act No. 3135, as amended.15
With more reason that the sale of property given as security for the
payment of a debt be set aside if there was no prior fore closure
proceeding.
Hence, DBP should render an accounting of the income derived from the
operation of the fishpond in question and apply the said income in
accordance with condition no. 12 of the deed of assignment which
provided: "Any amount received from rents, administration, . . . may be
applied to the payment of repairs, improvements, taxes, assessment, and
other incidental expenses and obligations and the balance, if any, to the
payment of interest and then on the capital of the indebtedness. . ."
We shall now take up the issue of damages.
Article 2199 provides:
Except as provided by law or by stipulation, one is entitled to an adequate
compensation only for such pecuniary loss suffered by him as he has duly
proved. Such compensation is referred to as actual or compensatory
damages.
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Actual or compensatory damages cannot be presumed, but must be proved
with reasonable degree of certainty.16 A court cannot rely on speculations,
conjectures, or guesswork as to the fact and amount of damages, but must
depend upon competent proof that they have been suffered by the injured
party and on the best obtainable evidence of the actual amount thereof.17
It must point out specific facts which could afford a basis for measuring
whatever compensatory or actual damages are borne.18
In the present case, the trial court awarded in favor of CUBA P1,067,500 as
actual damages consisting of P550,000 which represented the value of the
alleged lost articles of CUBA and P517,500 which represented the value of
the 230,000 pieces of bangus allegedly stocked in 1979 when DBP first
ejected CUBA from the fishpond and the adjoining house. This award was
affirmed by the Court of Appeals.
We find that the alleged loss of personal belongings and equipment was not
proved by clear evidence. Other than the testimony of CUBA and her
caretaker, there was no proof as to the existence of those items before DBP
took over the fishpond in question. As pointed out by DBP, there was not
"inventory of the alleged lost items before the loss which is normal in a
project which sometimes, if not most often, is left to the care of other
persons." Neither was a single receipt or record of acquisition presented.
Curiously, in her complaint dated 17 May 1985, CUBA included "losses of
property" as among the damages resulting from DBP's take-over of the
fishpond. Yet, it was only in September 1985 when her son and a caretaker
went to the fishpond and the adjoining house that she came to know of the
alleged loss of several articles. Such claim for "losses of property," having
been made before knowledge of the alleged actual loss, was therefore
speculative. The alleged loss could have been a mere afterthought or
subterfuge to justify her claim for actual damages.
With regard to the award of P517,000 representing the value of the alleged
230,000 pieces of bangus which died when DBP took possession of the
fishpond in March 1979, the same was not called for. Such loss was not duly
proved; besides, the claim therefor was delayed unreasonably. From 1979
until after the filing of her complaint in court in May 1985, CUBA did not
bring to the attention of DBP the alleged loss. In fact, in her letter dated 24
October 1979,19 she declared:
1. That from February to May 1978, I was then seriously ill in Manila and
within the same period I neglected the management and supervision of the
cultivation and harvest of the produce of the aforesaid fishpond thereby
resulting to the irreparable loss in the produce of the same in the amount of
about P500,000.00 to my great damage and prejudice due to fraudulent
acts of some of my fishpond workers.
Nowhere in the said letter, which was written seven months after DBP took
possession of the fishpond, did CUBA intimate that upon DBP's take-over
there was a total of 230,000 pieces of bangus, but all of which died because
of DBP's representatives prevented her men from feeding the fish.
The award of actual damages should, therefore, be struck down for lack of
sufficient basis.
In view, however, of DBP's act of appropriating CUBA's leasehold rights
which was contrary to law and public policy, as well as its false
representation to the then Ministry of Agriculture and Natural Resources
that it had "foreclosed the mortgage," an award of moral damages in the
amount of P50,000 is in order conformably with Article 2219(10), in relation
to Article 21, of the Civil Code. Exemplary or corrective damages in the
amount of P25,000 should likewise be awarded by way of example or
correction for the public good.20 There being an award of exemplary
damages, attorney's fees are also recoverable.21
WHEREFORE, the 25 May 1994 Decision of the Court of Appeals in CA-G.R.
CV No. 26535 is hereby REVERSED, except as to the award of P50,000 as
moral damages, which is hereby sustained. The 31 January 1990 Decision of
the Regional Trial Court of Pangasinan, Branch 54, in Civil Case No. A-1574 is
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MODIFIED setting aside the finding that condition no. 12 of the deed of
assignment constituted pactum commissorium and the award of actual
damages; and by reducing the amounts of moral damages from P100,000 to
P50,000; the exemplary damages, from P50,000 to P25,000; and the
attorney's fees, from P100,000 to P20,000. The Development Bank of the
Philippines is hereby ordered to render an accounting of the income derived
from the operation of the fishpond in question.

Let this case be REMANDED to the trial court for the reception of the
income statement of DBP, as well as the statement of the account of Lydia
P. Cuba, and for the determination of each party's financial obligation to
one another.

SO ORDERED.

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77.) FILINVEST CREDIT CORPORATION, plaintiff-appellee, vs.
PHILIPPINE ACETYLENE, CO., INC., defendant-appellant.
This case is certified to Us by the Court of Appeals in its Resolution 1 dated
March 22, 1979 on the ground that it involves purely questions of law, as
raised in the appeal of the decision of the Court of First Instance of Manila,
Branch XII in Civil Case No. 91932, the dispositive portion of which reads as
follows:
In view of the foregoing consideration, the court hereby renders judgment -
l) directing defendant to pay plaintiff:
a) the sum of P22,227.81 which is the outstanding unpaid obligation of the
defendant under the assigned credit, with 12 %interest from the date of the
firing of the complaint in this suit until the same is fully paid;
b) the sum equivalent to l5% of P22,227.81 as and for attorney's fees; and
2) directing plaintiff to deliver to, and defendant to accept, the motor
vehicle, subject of the chattel may have been changed by the result of
ordinary wear and tear of the vehicle.
Defendant to pay the cost of suit.
SO ORDERED.
The facts, as found in the decision 2 subject of the instant appeal, are
undisputed.
On October 30, 1971, the Philippine Acetylene Co., Inc., defendant-
appellant herein, purchased from one Alexander Lim, as evidenced by a
Deed of Sale marked as Exhibit G, a motor vehicle described as Chevorlet,
1969 model with Serial No. 136699Z303652 for P55,247.80 with a down
payment of P20,000.00 and the balance of P35,247.80 payable, under the
terms and conditions of the promissory note (Exh. B), at a monthly
installment of P1,036.70 for thirty-four (34) months, due and payable on the
first day of each month starting December 1971 through and inclusive
September 1, 1974 with 12 % interest per annum on each unpaid
installment, and attorney's fees in the amount equivalent to 25% of the
total of the outstanding unpaid amount.
As security for the payment of said promissory note, the appellant executed
a chattel mortgage (Exh. C) over the same motor vehicle in favor of said
Alexander Lim. Subsequently, on November 2, 1971. Alexander Lim assigned
to the Filinvest Finance Corporation all his rights, title, and interests in the
promissory note and chattel mortgage by virtue of a Deed of Assignment
(Exh. D).
Thereafter, the Filinvest Finance Corporation, as a consequence of its
merger with the Credit and Development Corporation assigned to the new
corporation, the herein plaintiff-appellee Filinvest Credit Corporation, all its
rights, title, and interests on the aforesaid promissory note and chattel
mortgage (Exh. A) which, in effect, the payment of the unpaid balance owed
by defendant-appellant to Alexander Lim was financed by plaintiff-appellee
such that Lim became fully paid.
Appellant failed to comply with the terms and conditions set forth in the
promissory note and chattel mortgage since it had defaulted in the payment
of nine successive installments. Appellee then sent a demand letter (Exh. 1)
whereby its counsel demanded "that you (appellant) remit the aforesaid
amount in full in addition to stipulated interest and charges or return the
mortgaged property to my client at its office at 2133 Taft Avenue, Malate,
Manila within five (5) days from date of this letter during office hours. "
Replying thereto, appellant, thru its assistant general- manager, wrote back
(Exh. 2) advising appellee of its decision to "return the mortgaged property,
which return shall be in full satisfaction of its indebtedness pursuant to
Article 1484 of the New Civil Code." Accordingly, the mortgaged vehicle was
returned to the appellee together with the document "Voluntary Surrender
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with Special Power of Attorney To Sell" 3 executed by appellant on March
12, 1973 and confirmed to by appellee's vice-president.
On April 4, 1973, appellee wrote a letter (Exh. H) to appellant informing the
latter that appellee cannot sell the motor vehicle as there were unpaid taxes
on the said vehicle in the sum of P70,122.00. On the last portion of the said
letter, appellee requested the appellant to update its account by paying the
installments in arrears and accruing interest in the amount of P4,232.21 on
or before April 9, 1973.
On May 8, 1973, appellee, in a letter (Exh. 1), offered to deliver back the
motor vehicle to the appellant but the latter refused to accept it, so
appellee instituted an action for collection of a sum of money with damages
in the Court of First Instance of Manila on September 14, 1973.
In its answer, appellant, while admitting the material allegations of the
appellee's complaint, avers that appellee has no cause of action against it
since its obligation towards the appellee was extinguished when in
compliance with the appellee's demand letter, it returned the mortgaged
property to the appellee, and that assuming arguendo that the return of the
property did not extinguish its obligation, it was nonetheless justified in
refusing payment since the appellee is not entitled to recover the same due
to the breach of warranty committed by the original vendor-assignor
Alexander Lim.
After the case was submitted for decision, the Court of First Instance of
Manila, Branch XII rendered its decision dated February 25, 1974 which is
the subject of the instant appeal in this Court.
Appellant's five assignment of errors may be reduced to, or said to revolve
around two issues: first, whether or not the return of the mortgaged motor
vehicle to the appellee by virtue of its voluntary surrender by the appellant
totally extinguished and/or cancelled its obligation to the appellee; second,
whether or not the warranty for the unpaid taxes on the mortgaged motor
vehicle may be properly raised and imputed to or passed over to the
appellee.
Consistent with its stand in the court a quo, appellant now reiterates its
main contention that appellee, after giving appellant an option either to
remit payment in full plus stipulated interests and charges or return the
mortgaged motor vehicle, had elected the alternative remedy of exacting
fulfillment of the obligation, thus, precluding the exercise of any other
remedy provided for under Article 1484 of the Civil Code of the Philippines
which reads:
Article 1484. Civil Code. - In a contract of sale of personal property the price
of which is payable in installments, the vendor may exercise any of the
following remedies:
1) Exact fulfillment of the obligation, should the vendee fail to pay;
2) Cancel the sale, should the vendee's failure to pay cover two or more
installments;
3) Foreclose the chattel mortgage on the thing sold, if one has been
constituted, should the vendee's failure to pay cover two or more
installments. In this case, he shall have no further action against the
purchaser to recover any unpaid balance of the price. Any agreement to the
contrary shall be void.
In support of the above contention, appellant maintains that when it opted
to return, as in fact it did return, the mortgaged motor vehicle to the
appellee, said return necessarily had the effect of extinguishing appellant's
obligation for the unpaid price to the appellee, construing the return to and
acceptance by the appellee of the mortgaged motor vehicle as a mode of
payment, specifically, dation in payment or dacion en pago which according
to appellant, virtually made appellee the owner of the mortgaged motor
vehicle by the mere delivery thereof, citing Articles 1232, 1245, and 1497 of
the Civil Code, to wit:
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Article 1232. Payment means not only the delivery of money but also the
performance, in any manner, of an obligation.
xxx xxx xxx
Article 1245. Dation in payment, whereby property is alienated to the
creditor in satisfaction of a debt in money, shall be governed by the law of
sales.
xxx xxx xxx
Article 1497. The thing sold shall be understood as delivered, when it is
placed in the control and possession of the vendee.
Passing at once on the relevant issue raised in this appeal, We find
appellant's contention devoid of persuasive force. The mere return of the
mortgaged motor vehicle by the mortgagor, the herein appellant, to the
mortgagee, the herein appellee, does not constitute dation in payment or
dacion en pago in the absence, express or implied of the true intention of
the parties. Dacion en pago, according to Manresa, is the transmission of
the ownership of a thing by the debtor to the creditor as an accepted
equivalent of the performance of obligation. 4 In dacion en pago, as a
special mode of payment, the debtor offers another thing to the creditor
who accepts it as equivalent of payment of an outstanding debt. The
undertaking really partakes in one sense of the nature of sale, that is, the
creditor is really buying the thing or property of the debtor, payment for
which is to be charged against the debtor's debt. As such, the essential
elements of a contract of sale, namely, consent, object certain, and cause or
consideration must be present. In its modern concept, what actually takes
place in dacion en pago is an objective novation of the obligation where the
thing offered as an accepted equivalent of the performance of an obligation
is considered as the object of the contract of sale, while the debt is
considered as the purchase price. 5 In any case, common consent is an
essential prerequisite, be it sale or innovation to have the effect of totally
extinguishing the debt or obligation.
The evidence on the record fails to show that the mortgagee, the herein
appellee, consented, or at least intended, that the mere delivery to, and
acceptance by him, of the mortgaged motor vehicle be construed as actual
payment, more specifically dation in payment or dacion en pago. The fact
that the mortgaged motor vehicle was delivered to him does not necessarily
mean that ownership thereof, as juridically contemplated by dacion en
pago, was transferred from appellant to appellee. In the absence of clear
consent of appellee to the proferred special mode of payment, there can be
no transfer of ownership of the mortgaged motor vehicle from appellant to
appellee. If at all, only transfer of possession of the mortgaged motor
vehicle took place, for it is quite possible that appellee, as mortgagee,
merely wanted to secure possession to forestall the loss, destruction,
fraudulent transfer of the vehicle to third persons, or its being rendered
valueless if left in the hands of the appellant.
A more solid basis of the true intention of the parties is furnished by the
document executed by appellant captioned "Voluntary Surrender with
Special Power of Attorney To Sell" dated March 12, 1973, attached as Annex
"C" of the appellant's answer to the complaint. An examination of the
language of the document reveals that the possession of the mortgaged
motor vehicle was voluntarily surrendered by the appellant to the appellee
authorizing the latter to look for a buyer and sell the vehicle in behalf of the
appellant who retains ownership thereof, and to apply the proceeds of the
sale to the mortgage indebtedness, with the undertaking of the appellant to
pay the difference, if any, between the selling price and the mortgage
obligation. With the stipulated conditions as stated, the appellee, in essence
was constituted as a mere agent to sell the motor vehicle which was
delivered to the appellee, not as its property, for if it were, he would have
full power of disposition of the property, not only to sell it as is the limited
authority given him in the special power of attorney. Had appellee intended
to completely release appellant of its mortgage obligation, there would be
no necessity of executing the document captioned "Voluntary Surrender
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with Special Power of Attorney To Sell." Nowhere in the said document can
We find that the mere surrender of the mortgaged motor vehicle to the
appellee extinguished appellant's obligation for the unpaid price.
Appellant would also argue that by accepting the delivery of the mortgaged
motor vehicle, appellee is estopped from demanding payment of the unpaid
obligation. Estoppel would not he since, as clearly set forth above, appellee
never accepted the mortgaged motor vehicle in full satisfaction of the
mortgaged debt.
Under the law, the delivery of possession of the mortgaged property to the
mortgagee, the herein appellee, can only operate to extinguish appellant's
liability if the appellee had actually caused the foreclosure sale of the
mortgaged property when it recovered possession thereof. 6 It is worth
noting that it is the fact of foreclosure and actual sale of the mortgaged
chattel that bar the recovery by the vendor of any balance of the
purchaser's outstanding obligation not satisfied by the sale. 7 As held by this
Court, if the vendor desisted, on his own initiative, from consummating the
auction sale, such desistance was a timely disavowal of the remedy of
foreclosure, and the vendor can still sue for specific performance. 8 This is
exactly what happened in the instant case.
subsequently that "there are such counterclaims, offsets or defenses that
may be interposed by the debtor at the time of the assignment, such
counterclaims, offsets or defenses shall not prejudice the FILINVEST
FINANCE CORPORATION and I (Alexander Lim) further warrant and hold the
said corporation free and harmless from any such claims, offsets, or
defenses that may be availed of." 9
It must be noted that the unpaid taxes on the motor vehicle is a burden on
the property. Since as earlier shown, the ownership of the mortgaged
property never left the mortgagor, the herein appellant, the burden of the
unpaid taxes should be home by him, who, in any case, may not be said to
be without remedy under the law, but definitely not against appellee to
whom were transferred only rights, title and interest, as such is the essence
of assignment of credit. 10
WHEREFORE, the judgment appealed from is hereby affirmed in toto with
costs against defendant-appellant.
SO ORDERED.

On the second issue, there is no dispute that there is an unpaid taxes of

P70,122.00 due on the mortgaged motor vehicle which, according to
appellant, liability for the breach of warranty under the Deed of Sale is
shifted to the appellee who merely stepped into the shoes of the assignor
Alexander Lim by virtue of the Deed of Assignment in favor of appellee. The
Deed of Sale between Alexander Lim and appellant and the Deed of
Assignment between Alexander Lim and appellee are very clear on this
point. There is a specific provision in the Deed of Sale that the seller
Alexander Lim warrants the sale of the motor vehicle to the buyer, the
herein appellant, to be free from liens and encumbrances. When appellee
accepted the assignment of credit from the seller Alexander Lim, there is a
specific agreement that Lim continued to be bound by the warranties he
had given to the buyer, the herein appellant, and that if it appears
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78.) PEDRO DE GUZMAN, petitioner, vs.
COURT OF APPEALS and ERNESTO CENDANA, respondents.
Respondent Ernesto Cendana, a junk dealer, was engaged in buying up used
bottles and scrap metal in Pangasinan. Upon gathering sufficient quantities
of such scrap material, respondent would bring such material to Manila for
resale. He utilized two (2) six-wheeler trucks which he owned for hauling the
material to Manila. On the return trip to Pangasinan, respondent would load
his vehicles with cargo which various merchants wanted delivered to
differing establishments in Pangasinan. For that service, respondent charged
freight rates which were commonly lower than regular commercial rates.
Sometime in November 1970, petitioner Pedro de Guzman a merchant and
authorized dealer of General Milk Company (Philippines), Inc. in Urdaneta,
Pangasinan, contracted with respondent for the hauling of 750 cartons of
Liberty filled milk from a warehouse of General Milk in Makati, Rizal, to
petitioner's establishment in Urdaneta on or before 4 December 1970.
Accordingly, on 1 December 1970, respondent loaded in Makati the
merchandise on to his trucks: 150 cartons were loaded on a truck driven by
respondent himself, while 600 cartons were placed on board the other truck
which was driven by Manuel Estrada, respondent's driver and employee.
Only 150 boxes of Liberty filled milk were delivered to petitioner. The other
600 boxes never reached petitioner, since the truck which carried these
boxes was hijacked somewhere along the MacArthur Highway in Paniqui,
Tarlac, by armed men who took with them the truck, its driver, his helper
and the cargo.
On 6 January 1971, petitioner commenced action against private
respondent in the Court of First Instance of Pangasinan, demanding
payment of P 22,150.00, the claimed value of the lost merchandise, plus
damages and attorney's fees. Petitioner argued that private respondent,
being a common carrier, and having failed to exercise the extraordinary
diligence required of him by the law, should be held liable for the value of
the undelivered goods.
In his Answer, private respondent denied that he was a common carrier and
argued that he could not be held responsible for the value of the lost goods,
such loss having been due to force majeure.
On 10 December 1975, the trial court rendered a Decision 1 finding private
respondent to be a common carrier and holding him liable for the value of
the undelivered goods (P 22,150.00) as well as for P 4,000.00 as damages
and P 2,000.00 as attorney's fees.
On appeal before the Court of Appeals, respondent urged that the trial
court had erred in considering him a common carrier; in finding that he had
habitually offered trucking services to the public; in not exempting him from
liability on the ground of force majeure; and in ordering him to pay damages
and attorney's fees.
The Court of Appeals reversed the judgment of the trial court and held that
respondent had been engaged in transporting return loads of freight "as a
casual
occupation — a sideline to his scrap iron business" and not as a common
carrier. Petitioner came to this Court by way of a Petition for Review
assigning as errors the following conclusions of the Court of Appeals:
1. that private respondent was not a common carrier;
2. that the hijacking of respondent's truck was force majeure; and
3. that respondent was not liable for the value of the undelivered cargo.
(Rollo, p. 111)
We consider first the issue of whether or not private respondent Ernesto
Cendana may, under the facts earlier set forth, be properly characterized as
a common carrier.
The Civil Code defines "common carriers" in the following terms:
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Article 1732. Common carriers are persons, corporations, firms or
associations engaged in the business of carrying or transporting passengers
or goods or both, by land, water, or air for compensation, offering their
services to the public.
The above article makes no distinction between one whose principal
business activity is the carrying of persons or goods or both, and one who
does such carrying only as an ancillary activity (in local Idiom as "a sideline").
Article 1732 also carefully avoids making any distinction between a person
or enterprise offering transportation service on a regular or scheduled basis
and one offering such service on an occasional, episodic or unscheduled
basis. Neither does Article 1732 distinguish between a carrier offering its
services to the "general public," i.e., the general community or population,
and one who offers services or solicits business only from a narrow segment
of the general population. We think that Article 1733 deliberaom making
such distinctions.
So understood, the concept of "common carrier" under Article 1732 may be
seen to coincide neatly with the notion of "public service," under the Public
Service Act (Commonwealth Act No. 1416, as amended) which at least
partially supplements the law on common carriers set forth in the Civil
Code. Under Section 13, paragraph (b) of the Public Service Act, "public
service" includes:
... every person that now or hereafter may own, operate, manage, or
control in the Philippines, for hire or compensation, with general or limited
clientele, whether permanent, occasional or accidental, and done for
general business purposes, any common carrier, railroad, street railway,
traction railway, subway motor vehicle, either for freight or passenger, or
both, with or without fixed route and whatever may be its classification,
freight or carrier service of any class, express service, steamboat, or
steamship line, pontines, ferries and water craft, engaged in the
transportation of passengers or freight or both, shipyard, marine repair
shop, wharf or dock, ice plant,
ice-refrigeration plant, canal, irrigation system, gas, electric light, heat and
power, water supply and power petroleum, sewerage system, wire or
wireless communications systems, wire or wireless broadcasting stations
and other similar public services. ... (Emphasis supplied)
It appears to the Court that private respondent is properly characterized as
a common carrier even though he merely "back-hauled" goods for other
merchants from Manila to Pangasinan, although such back-hauling was
done on a periodic or occasional rather than regular or scheduled manner,
and even though private respondent's principal occupation was not the
carriage of goods for others. There is no dispute that private respondent
charged his customers a fee for hauling their goods; that fee frequently fell
below commercial freight rates is not relevant here.
The Court of Appeals referred to the fact that private respondent held no
certificate of public convenience, and concluded he was not a common
carrier. This is palpable error. A certificate of public convenience is not a
requisite for the incurring of liability under the Civil Code provisions
governing common carriers. That liability arises the moment a person or
firm acts as a common carrier, without regard to whether or not such carrier
has also complied with the requirements of the applicable regulatory
statute and implementing regulations and has been granted a certificate of
public convenience or other franchise. To exempt private respondent from
the liabilities of a common carrier because he has not secured the necessary
certificate of public convenience, would be offensive to sound public policy;
that would be to reward private respondent precisely for failing to comply
with applicable statutory requirements. The business of a common carrier
impinges directly and intimately upon the safety and well being and
property of those members of the general community who happen to deal
with such carrier. The law imposes duties and liabilities upon common
carriers for the safety and protection of those who utilize their services and
the law cannot allow a common carrier to render such duties and liabilities
merely facultative by simply failing to obtain the necessary permits and
authorizations.
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We turn then to the liability of private respondent as a common carrier.
Common carriers, "by the nature of their business and for reasons of public
policy" 2 are held to a very high degree of care and diligence ("extraordinary
diligence") in the carriage of goods as well as of passengers. The specific
import of extraordinary diligence in the care of goods transported by a
common carrier is, according to Article 1733, "further expressed in Articles
1734,1735 and 1745, numbers 5, 6 and 7" of the Civil Code.
Article 1734 establishes the general rule that common carriers are
responsible for the loss, destruction or deterioration of the goods which
they carry, "unless the same is due to any of the following causes only:
(1) Flood, storm, earthquake, lightning or other natural disaster or calamity;
(2) Act of the public enemy in war, whether international or civil;
(3) Act or omission of the shipper or owner of the goods;
(4) The character-of the goods or defects in the packing or-in the containers;
and
(5) Order or act of competent public authority.
It is important to point out that the above list of causes of loss, destruction
or deterioration which exempt the common carrier for responsibility
therefor, is a closed list. Causes falling outside the foregoing list, even if they
appear to constitute a species of force majeure fall within the scope of
Article 1735, which provides as follows:
In all cases other than those mentioned in numbers 1, 2, 3, 4 and 5 of the
preceding article, if the goods are lost, destroyed or deteriorated, common
carriers are presumed to have been at fault or to have acted negligently,
unless they prove that they observed extraordinary diligence as required in
Article 1733. (Emphasis supplied)
Applying the above-quoted Articles 1734 and 1735, we note firstly that the
specific cause alleged in the instant case — the hijacking of the carrier's
truck — does not fall within any of the five (5) categories of exempting
causes listed in Article 1734. It would follow, therefore, that the hijacking of
the carrier's vehicle must be dealt with under the provisions of Article 1735,
in other words, that the private respondent as common carrier is presumed
to have been at fault or to have acted negligently. This presumption,
however, may be overthrown by proof of extraordinary diligence on the
part of private respondent.
Petitioner insists that private respondent had not observed extraordinary
diligence in the care of petitioner's goods. Petitioner argues that in the
circumstances of this case, private respondent should have hired a security
guard presumably to ride with the truck carrying the 600 cartons of Liberty
filled milk. We do not believe, however, that in the instant case, the
standard of extraordinary diligence required private respondent to retain a
security guard to ride with the truck and to engage brigands in a firelight at
the risk of his own life and the lives of the driver and his helper.
The precise issue that we address here relates to the specific requirements
of the duty of extraordinary diligence in the vigilance over the goods carried
in the specific context of hijacking or armed robbery.
As noted earlier, the duty of extraordinary diligence in the vigilance over
goods is, under Article 1733, given additional specification not only by
Articles 1734 and 1735 but also by Article 1745, numbers 4, 5 and 6, Article
1745 provides in relevant part:
Any of the following or similar stipulations shall be considered
unreasonable, unjust and contrary to public policy:
xxx xxx xxx
(5) that the common carrier shall not be responsible for the acts or
omissions of his or its employees;
ObliCon Chapter 4 Cases 51 | P a g e
(6) that the common carrier's liability for acts committed by thieves, or of
robbers who do not act with grave or irresistible threat, violence or force, is
dispensed with or diminished; and
(7) that the common carrier shall not responsible for the loss, destruction or
deterioration of goods on account of the defective condition of the car
vehicle, ship, airplane or other equipment used in the contract of carriage.
(Emphasis supplied)
In these circumstances, we hold that the occurrence of the loss must
reasonably be regarded as quite beyond the control of the common carrier
and properly regarded as a fortuitous event. It is necessary to recall that
even common carriers are not made absolute insurers against all risks of
travel and of transport of goods, and are not held liable for acts or events
which cannot be foreseen or are inevitable, provided that they shall have
complied with the rigorous standard of extraordinary diligence.

Under Article 1745 (6) above, a common carrier is held responsible — and
will not be allowed to divest or to diminish such responsibility — even for
acts of strangers like thieves or robbers, except where such thieves or
robbers in fact acted "with grave or irresistible threat, violence or force."
We believe and so hold that the limits of the duty of extraordinary diligence
in the vigilance over the goods carried are reached where the goods are lost
as a result of a robbery which is attended by "grave or irresistible threat,
violence or force."
We, therefore, agree with the result reached by the Court of Appeals that
private respondent Cendana is not liable for the value of the undelivered
merchandise which was lost because of an event entirely beyond private
respondent's control.
ACCORDINGLY, the Petition for Review on certiorari is hereby DENIED and
the Decision of the Court of Appeals dated 3 August 1977 is AFFIRMED. No
pronouncement as to costs.

In the instant case, armed men held up the second truck owned by private SO ORDERED.
respondent which carried petitioner's cargo. The record shows that an
information for robbery in band was filed in the Court of First Instance of
Tarlac, Branch 2, in Criminal Case No. 198 entitled "People of the Philippines
v. Felipe Boncorno, Napoleon Presno, Armando Mesina, Oscar Oria and one
John Doe." There, the accused were charged with willfully and unlawfully
taking and carrying away with them the second truck, driven by Manuel
Estrada and loaded with the 600 cartons of Liberty filled milk destined for
delivery at petitioner's store in Urdaneta, Pangasinan. The decision of the
trial court shows that the accused acted with grave, if not irresistible, threat,
violence or force.3 Three (3) of the five (5) hold-uppers were armed with
firearms. The robbers not only took away the truck and its cargo but also
kidnapped the driver and his helper, detaining them for several days and
later releasing them in another province (in Zambales). The hijacked truck
was subsequently found by the police in Quezon City. The Court of First
Instance convicted all the accused of robbery, though not of robbery in
band. 4
ObliCon Chapter 4 Cases 52 | P a g e
79. MEAT PACKING CORPORATION OF THE PHILIPPINES, petitioner, vs.
THE HONORABLE SANDIGANBAYAN, THE PRESIDENTIAL COMMISSION ON
GOOD GOVERNMENT and PHILIPPINE INTEGRATED MEAT CORPORATION,
respondents.
This is a petition for certiorari, mandamus and prohibition, assailing the
Resolutions of the Sandiganbayan in Civil Case No. 0024, dated July 2, 1991
and November 29, 1991, directing petitioner to accept the tender of
payment of rentals by the Presidential Commission on Good Government
(hereinafter, PCGG).
Petitioner Meat Packing Corporation of the Philippines (hereinafter, MPCP),
is a corporation wholly owned by the Government Service Insurance System
(GSIS). It is the owner of three (3) parcels of land situated in Barrio Ugong,
Pasig City, as well as the meat processing and packing plant thereon. On
November 3, 1975, MPCP and the Philippine Integrated Meat Corporation
(hereinafter, PIMECO) entered into an Agreement1 whereby MPCP leased
to PIMECO, under a lease-purchase arrangement, its aforesaid property at
an annual rental rate of P1,375,563.92, payable over a period of twenty-
eight years commencing on the date of execution of the Agreement, or for a
total consideration of P38,515,789.87. The Agreement contained rescission
clauses, to wit:
5. If for any reason whatsoever the LESSEE-VENDEE should fail or default in
the payment of rentals equivalent to the cumulative sum total of three (3)
annual installments, this Agreement shall be deemed automatically
cancelled and forfeited without need of judicial intervention, and LESSOR-
VENDOR shall have the complete and absolute power, authority, and
discretion, and without reservation by the LESSEE-VENDEE, to dispose of,
sell, transfer, convey, lease, assign, or encumber the project to any person
or persons, natural or juridical, in the same manner as if this lease-purchase
arrangement was never entered into. In the event of such cancellation or
forfeiture, the LESSEE-VENDEE unconditionally agrees that all forms of
money paid or due from the LESSEE-VENDEE shall be considered as rentals
for the use and occupancy of the project, and the LESSEE-VENDEE hereby
waives and forfeits all rights to ask for and demand the return or
reimbursement thereof.2
xxx xxx xxx.
16. Violation of any of the terms and conditions of this Agreement shall be
sufficient ground for the LESSOR-VENDOR to rescind and/or consider null
and void this Agreement without need of judicial intervention by giving the
LESSEE-VENDEE one hundred eighty (180) days written notice to that effect,
which shall be final and binding on the LESSEE-VENDEE, and the LESSEE-
VENDEE shall thereupon leave and vacate the project, provided that if
LESSEE-VENDEE has subleased portions of the project, LESSEE-VENDEE shall
relinquish all its rights and/or interests over the sublease contracts in favor
of the LESSOR-VENDOR. LESSEE-VENDEE shall leave all improvements,
whether finished or unfinished, in good and serviceable condition
immediately after the corresponding notice in writing has been received by
the LESSEE-VENDEE, and all said improvements shall automatically belong to
and become the property of the LESSOR-VENDOR without liability or
obligation on the part of the LESSOR-VENDOR to pay for the value thereof.
LESSEE-VENDEE further holds the LESSOR-VENDOR free and harmless from
any and all liabilities arising from and/or connected with such sublease
contracts.3
Subsequently, on November 3, 1975, MPCP and PIMECO entered into a
Supplementary and Loan Agreement,4 whereby, in consideration of the
additional expenditures incurred by MPCP for rehabilitating and refurbishing
the meat processing and packing plant, the total contract price of the lease-
purchase agreement was increased to P93,695,552.59, payable over a
period of twenty-eight years commencing on January 1, 1981, at the annual
rental rate of P3,346,269.70.
On March 17, 1986, the PCGG, in a letter signed by then Commissioner
Ramon A. Diaz, sequestered all the assets, properties and records of
PIMECO.5 The sequestration included the meat packing plant and the lease-
purchase agreement.
ObliCon Chapter 4 Cases 53 | P a g e

MPCP wrote a letter on November 17, 1986 to PIMECO,6 giving notice of
the rescission of the lease-purchase agreement on the ground, among
others, of non-payment of rentals of more than P2,000,000.00 for the year
1986.
GSIS asked the PCGG to exclude the meat packing plant from the
sequestered assets of PIMECO, inasmuch as the same is owned by MPCP.
However, PCGG denied the request. Likewise, MPCP sought the turnover to
it of the meat packing plant on the ground that the lease-purchase
agreement had already been rescinded. Acceding to this, PCGG passed on
January 24, 1989 a resolution stating thus:
WHEREAS, the Presidential Commission on Good Government at its session
en banc on September 20, 1988 ordered the transfer of subject property,
consisting of a meat packing complex including the land located at Barrio
Ugong, Pasig, Metro Manila, to the GSIS under the condition then that the
PCGG management team might continue its operations for the purpose of
completing the outstanding orders up to December 1988;
WHEREAS, the Government Service Insurance System has shown, to the
satisfaction of the Commission, that it owns the said plant complex; that it
has the legal and equitable right to regain possession and control thereof;
that whatever claim PIMECO had to the complex under its so-called
agreement to lease/purchase with GSIS/MPCP has been validly rescinded by
the GSIS; and that the projected turn-over to the GSIS will not adversely
affect the ill-gotten wealth case pending against "crony" Peter Sabido before
the Sandiganbayan;
WHEREFORE, the turn-over to the GSIS of the said property should be done
forthwith upon compliance with these conditions, to be implemented by the
Operations and Legal Departments: (a) joint PCGG-COA audit; (b) approval
by the Sandiganbayan; and (c) execution of a Memorandum of Agreement
to contain these stipulations, among others: (a) that the shares of Peter
Sabido in PIMECO are subject to the Sandiganbayan case; (b) that any
disposition or transfer by the GSIS of said property or any part thereof shall
be with the conformity of the PCGG; and (c) that this Memorandum be
annotated on the title of the property.7
Meanwhile, PCGG instituted with the Sandiganbayan on July 29, 1987 a
complaint for reconveyance, reversion, accounting, restitution and
damages, docketed as Civil Case No. 0024, entitled, "Republic of the
Philippines, Plaintiff versus Peter Sabido, et al., Defendants."8 The complaint
alleged, in pertinent part, that Peter Sabido obtained, under favored and
very liberal terms, huge loans from the GSIS in favor of PIMECO, among
other corporations, which was beneficially held and controlled by
defendants Peter Sabido, Roberto S. Benedicto and Luis D. Yulo; and that
PIMECO was granted the monopoly to supply meat products in the Greater
Manila Area.
Defendant Peter Sabido filed his answer,9 alleging that the acts, deeds,
transactions and contracts referred to in the complaint were negotiated
and/or executed by his father, the late Roberto M. Sabido, and not by him;
and that, far from being illegal, the acts performed or committed by the late
Roberto M. Sabido as a corporate officer of PIMECO were done in good
faith, to the best of his ability and in accordance with law, and whatever
income he received as an officer of PIMECO and whatever assets or
properties he acquired during his lifetime were the fruits of his dedication to
his profession, hard work, and honest labor.
On April 28, 1989, defendant Sabido filed with the Sandiganbayan an Urgent
Manifestation and Motion,10 to the effect that he has come across
newspaper reports stating that PCGG intends to turn over the management,
control and possession of PIMECO to the GSIS and MPCP. Sabido also
learned from a reliable source that the PCGG has passed a resolution to
implement the said turnover. Hence, Sabido argued that inasmuch as
PIMECO was a sequestered asset, the projected turnover must be approved
by the Sandiganbayan. He prayed that PCGG be required to admit or deny
these matters.
ObliCon Chapter 4 Cases 54 | P a g e
The Sandiganbayan, in a Resolution dated May 4, 1989,11 ordered the PCGG
to submit its comment as to the veracity of the alleged turnover of the
management, control and possession of PIMECO to the GSIS or MPCP, and if
true, to furnish movant Sabido a copy of the PCGG resolution approving the
same.
Meanwhile, on May 20, 1989, Sabido filed an Urgent Manifestation and
Motion,12 alleging that, according to newspaper accounts, PCGG had in fact
already turned over the management and operation of PIMECO to the
GSIS/MPCP. Thus, he prayed that the transfer of the management, control
and possession of PIMECO to GSIS be declared null and void ab initio for
having been done without the approval of the Sandiganbayan.
Sometime thereafter, the Sandiganbayan received a letter13 from members
of the PIMECO Labor Union, praying for the maintenance of the status quo
to enable PIMECO to continue its business operations and to ensure their
continuity of work and security of tenure. Thus, on June 2, 1989, the
Sandiganbayan issued a Resolution, the dispositive portion of which reads:
WHEREFORE, in the interest of justice, and conformably with this Court’s
adherence to the rule of law, to the end that undue prejudice and/or injury
may be avoided to any and all parties affected by these proceedings,
especially the avoidance of any cessation in the operations of PIMECO, a
temporary restraining order is hereby issued commanding the Presidential
Commission on Good Government, their officers, agents, representatives,
monitors or persons acting in their behalf or stead, to cease and desist from
enforcing the contemplated turnover of the management, control and
possession of PIMECO to the Meat Packing Corporation of the Philippines
until further orders. In view of the serious issues involved, let the instant
incident be re-scheduled for hearing and consideration on June 6, 1989, at
2:30 o’clock p.m.
SO ORDERED.14
On June 22, 1989, Sabido filed with the Sandiganbayan a Motion for the
Issuance of a Writ of Preliminary Injunction, alleging that the PCGG, in an
Order dated May 11, 1989, had ordered that the status quo as regards the
management and operations of PIMECO be maintained pending submission
of inventory and financial audit. However, at the hearings of this incident, it
was sufficiently shown that the transfer of PIMECO to MPCP will result in
the dissipation of assets which will cause irreparable injury to Sabido’s rights
and interests in the company in the event that the Sandiganbayan shall
ultimately rule that the same was not ill-gotten.
The Sandiganbayan, finding that the PCGG committed grave abuse of
authority, power and discretion in unilaterally terminating the lease-
purchase agreement of PIMECO with MPCP and in turning over its
management, control and operation to the latter, ordered the issuance of a
writ of preliminary injunction, to wit:
WHEREFORE, finding the verified application for issuance of a writ of
preliminary injunction to be sufficient in form and substance and that after
due hearing, it appears that great and irreparable injury will be caused not
only to defendant-applicant but also to PIMECO should the acts sought to
be enjoined be allowed to be done or performed, accordingly, upon
defendant-applicant’s posting of a bond of P50,000.00, let the
corresponding writ of preliminary injunction issue commanding the
Presidential Commission on Good Government, its officers, representatives,
nominees or agents from proceeding or consummating the projected
turnover of PIMECO to the GSIS-MPCP or to interfere with its present
management and operations, until further orders of this Court.
SO ORDERED.15
Accordingly, upon the posting of the requisite bond, the Writ of Preliminary
Injunction was issued on July 10, 1989, enjoining the Presidential
Commission on Good Government, its officers, representatives, nominees or
agents, from proceeding or consummating the projected turn-over of
ObliCon Chapter 4 Cases 55 | P a g e
PIMECO to GSIS-MPCP or to interfere with its present management and
operations, until further orders from this Court.16
PCGG filed a Motion for Reconsideration of the Resolution of June 22, 1989.
On August 3, 1989, the Sandiganbayan issued its Resolution, viz:
WHEREFORE, premises considered, plaintiff’s "Motion for Reconsideration
(Re: Resolution dated June 22, 1989)" dated July 3, 1989 is hereby
GRANTED, and the dispositive portion of Our Resolution of June 22, 1989,
ordered amended to read as follows:
"WHEREFORE, finding the verified application for issuance of a writ of
preliminary injunction to be sufficient in form and substance and that after
due hearing, it appears that great and irreparable injury will be caused not
only to defendant-applicant but also to PIMECO should the acts sought to
be enjoined be allowed to be done or performed, accordingly, upon
defendant-applicant’s posting of a bond of P50,000.00, let the
corresponding writ of preliminary injunction issue commanding the
Presidential Commission on Good Government, its officers, representatives,
nominees or agents from proceeding or consummating the projected
turnover of PIMECO to the GSIS-MPCP until further orders of this Court and
from replacing, dismissing, demoting, reassigning, grounding, or otherwise
prejudicing the present members of the PCGG management team in
PIMECO, except for valid and serious reasons not attributable to or arising
from their objection or opposition to or activities of statements against the
said turnover."
SO ORDERED.17
Thereafter, the Sandiganbayan continued to conduct hearings on the issue
of the validity of the turn-over of the meat packing plant to GSIS. On
November 29, 1989, it issued a Resolution disposing thus:
WHEREFORE, considering the attendant circumstances of the present
incident in light of the standard laid down by the Supreme Court, this Court
finds and holds:
(1) That the PCGG gravely abused its discretion when it passed the
resolutions dated September 20, 1988, and January 24, 1989, turning over
the "meat packing complex including the land located at Barrio Ugong,
Pasig, Metro Manila," to the GSIS/MPCP (Exh. E).
(2) That the PCGG commissioner concerned exceeded his authority when he
executed the Memorandum of Agreement with MPCP on April 28, 1989,
transferring the management and operation of PIMECO to the GSIS/MPCP
(Record, pp. 1828-1832).
(3) That, accordingly, the said turnovers or transfers are declared null and
void ab initio, and
(4) That the PCGG, its commissioners, officers, representatives, and agents
are permanently enjoined from implementing the same turnovers or
transfers.
SO ORDERED.18
On August 30, 1990, PIMECO filed with the Sandiganbayan a petition,
docketed as Civil Case No. 0108, entitled, "Philippine Integrated Meat
Corporation (PIMECO), Petitioner versus Meat Packing Corporation of the
Philippines (MPCP) and Presidential Commission on Good Government
(PCGG), Respondents," captioned as for "Declaratory Relief and Other
Similar Remedies (Related to PCGG Case No. 25 and Civil Case No. 0024)."19
In its petition, PIMECO alleged that from 1981 to 1985, PIMECO has been
regularly paying the annual rentals in the amount of P3,346,269.70; and that
prior to its sequestration in January 1986, PIMECO was able to pay MPCP
the amount of P846,269.70. However, after its sequestration, the PCGG
Management Team that took over the plant became erratic and irregular in
ObliCon Chapter 4 Cases 56 | P a g e
its payments of the annual rentals to MPCP, thus presenting the danger that
PIMECO may be declared in default in the payment of rentals equivalent to
three (3) annual installments and causing the cancellation of the lease-
purchase agreement. Hence, PIMECO prayed for a declaration that it is no
longer bound by the provisions of the above-quoted paragraph 5 of the
lease-purchase agreement.
In the meantime, PCGG tendered to MPCP two checks in the amounts of
P3,000,000.00 and P2,000,000.00, or a total of P5,000,000.00, representing
partial payment of accrued rentals on the meat packing plant, which MPCP
refused to accept on the theory that the lease-purchase agreement had
been rescinded. Thus, the PCGG filed an Urgent Motion20 praying that the
Sandiganbayan order MPCP to accept the tendered amount of
P5,000,000.00.
The Sandiganbayan set the aforesaid Urgent Motion for hearing. On April 3,
1991, MPCP, by special appearance, filed its Comment,21 alleging that the
Sandiganbayan had no jurisdiction over MPCP since it was not a party in Civil
Case No. 0024; that its lease-purchase agreement with PIMECO has been
rescinded as early as November 19, 1986; and that PIMECO was in arrears in
the payment of rentals in the amount of P12,378,171.06, which is more than
the equivalent of three cumulative rentals at the annual rate of
P3,346,269.70.
On July 2, 1991, the Sandiganbayan issued the first assailed Resolution, as
follows:
WHEREFORE, the Court declares that the tender of payment and
consignation of P5,000,000.00 in the form of two checks, namely: China
Banking Corporation Check No. LIB M 003697 for P3,000,000.00 and Far East
Bank and Trust Company Check No. 29A A 021341 for P2,000,000.00, both
dated January 30, 1991, and payable to GSIS-MPCP, have been validly made
in accordance with law and, accordingly, orders Meat Packing Corporation
of the Philippines to accept the payment and issue the corresponding
receipt.
SO ORDERED.22
MPCP, still under a special appearance, filed a Motion for Reconsideration
of the above Resolution.23 On November 29, 1991, the Sandiganbayan
issued the second assailed Resolution,24 denying MPCP’s Motion for
Reconsideration. Said the Sandiganbayan:
When the PCGG sequestered the assets and records of PIMECO, including
the lease-purchase agreement over MPCP’s meat packing plant, it assumed
the duty to preserve and conserve those assets and documents while they
remained in its possession and control. That duty did not disappear when
the writ was deemed ipso facto lifted. On the contrary, it continued until the
sequestered assets and records where returned to PIMECO. And in the
performance of that duty in order to prevent the cancellation of the lease-
purchase agreement by reason of the failure to pay three accumulated
yearly rentals-installments, the PCGG made the timely tender of payment
and consignation which the Resolution sought to be reconsidered sustained.
To rule otherwise would be unfair and unjust to PIMECO considering that
during the time the PCGG had possession and control of the sequestered
assets and records, PIMECO was not in the position to take steps necessary
for the preservation and conservation of those assets and records.25
Meanwhile, on December 2, 1991, the Sandiganbayan dismissed Civil Case
No. 0108, i.e., the petition for declaratory relief, it appearing that while the
unpaid rentals as of January 27, 1991 have reached P7,530,036.21, PCGG’s
tender of payment and consignation of the amount of P5,000,000.00, which
was upheld by the Sandiganbayan in Civil Case No. 0024, averted the
accumulation of the unpaid rentals to three yearly rentals-installments.
Consequently, the petition for declaratory relief has become moot and
academic.26
Hence, MPCP brought this petition for certiorari, mandamus and
prohibition, arguing in fine that the Sandiganbayan did not have jurisdiction
over its person since it was not a party to Civil Case No. 0024; that the
ObliCon Chapter 4 Cases 57 | P a g e
Sandiganbayan likewise did not acquire jurisdiction over the person of
PIMECO since it has not been served summons; and that the PCGG is in
estoppel because it has already admitted in its en banc resolutions that the
lease-purchase agreement between MPCP and PIMECO has been rescinded.
MPCP prays for injunctive relief and for judgment setting aside the assailed
Resolutions of the Sandiganbayan; ordering the Sandiganbayan to deny the
PCGG’s motion for consignation and to compel MPCP to accept the
tendered amount of P5,000,000.00; and prohibiting the Sandiganbayan
from accepting any papers or pleadings from PCGG or PIMECO against
MPCP in Civil Case No. 0024.
Counsel for Peter Sabido filed his Comment,27 with the qualification that
the same was being filed only on behalf of Sabido, a stockholder of PIMECO,
and not on behalf of the corporation. He argued that the Sandiganbayan
correctly held that the MPCP voluntarily submitted itself to the court’s
jurisdiction; that there was a valid consignation made by PCGG; and that the
Sandiganbayan did not commit grave abuse of discretion in issuing the
assailed resolutions.
PCGG filed its Comment,28 also contending that MPCP voluntarily
submitted itself to the jurisdiction of the Sandiganbayan; and that the
consignation was validly made.
Copies of this Court’s resolutions were furnished PIMECO at its principal
office at 117 E. Rodriguez, Sr. Ave., Barrio Ugong, Pasig City. However, all of
these were returned unserved with the notation, "RTS Closed."29 Thus, on
June 19, 1995, this Court resolved to dispense with the comment of
PIMECO.30
The petition, being one for certiorari, mandamus and prohibition, is mainly
anchored on the alleged grave abuse of discretion amounting to want of
jurisdiction on the part of the Sandiganbayan.
Grave abuse of discretion implies a capricious and whimsical exercise of
judgment as is equivalent to lack of jurisdiction, or, when the power is
exercised in an arbitrary or despotic manner by reason of passion or
personal hostility, and it must be so patent and gross as to amount to an
evasion of positive duty enjoined or to act at all in contemplation of law.31
It is not sufficient that a tribunal, in the exercise of its power, abused its
discretion; such abuse must be grave.32
In the assailed resolutions, the Sandiganbayan approved the consignation by
PCGG of the amount of P5,000,000.00 as payment for back rentals or
accrued amortizations on the meat packing plant, after the MPCP refused
the tender of payment of the same.
Consignation is the act of depositing the thing due with the court or judicial
authorities whenever the creditor cannot accept or refuses to accept
payment, and it generally requires a prior tender of payment.33 It should be
distinguished from tender of payment. Tender is the antecedent of
consignation, that is, an act preparatory to the consignation, which is the
principal, and from which are derived the immediate consequences which
the debtor desires or seeks to obtain. Tender of payment may be
extrajudicial, while consignation is necessarily judicial, and the priority of
the first is the attempt to make a private settlement before proceeding to
the solemnities of consignation.34 Tender and consignation, where validly
made, produces the effect of payment and extinguishes the obligation.
If the creditor to whom tender of payment has been made refuses without
just cause to accept it, the debtor shall be released from responsibility by
the consignation of the thing or sum due.
Consignation alone shall produce the same effect in the following cases:
(1) When the creditor is absent or unknown, or does not appear at the place
of payment;
(2) When he is incapacitated to receive the payment at the time it is due;
(3) When, without just cause, he refuses to give a receipt;
ObliCon Chapter 4 Cases 58 | P a g e

(4) When two or more persons claim the same right to collect;
(5) When the title of the obligation has been lost.35
In the case at bar, there was prior tender by PCGG of the amount of
P5,000,000.00 for payment of the rentals in arrears. MPCP’s refusal to
accept the same, on the ground merely that its lease-purchase agreement
with PIMECO had been rescinded, was unjustified. As found by the
Sandiganbayan, from January 29, 1986 to January 30, 1990, PIMECO paid,
and GSIS/MPCP received, several amounts due under the lease-purchase
agreement, such as annual amortizations or rentals, advances, insurance,
and taxes, in total sum of P15,921,205.83.36 Surely, the acceptance by
MPCP and GSIS of such payments for rentals and amortizations negates any
rescission of the lease-purchase agreement. Parenthetically, the factual
findings of the Sandiganbayan are conclusive upon this Court, subject to
certain exceptions.37 The aforesaid factual findings, moreover, have not
been disputed by petitioner.
In support of its contention that the lease-purchase agreement has been
rescinded, MPCP makes reference to the resolutions of the PCGG turning
over to the GSIS the meat packing complex and the land on which it is
situated. MPCP argues that PCGG was estopped from taking a contrary
position. A closer perusal of the resolutions, however, readily shows that
the turn-over was explicitly made dependent on certain conditions
precedent, among which was the approval by the Sandiganbayan and the
execution of a Memorandum of Agreement between PCGG and MPCP.38 A
Memorandum of Agreement was in fact executed on April 28, 1989,
although the same suffers from formal and substantial infirmities. However,
no approval was sought from the Sandiganbayan. On the contrary, the
Sandiganbayan, in its Resolution declaring the turn-over null and void,
refused to honor the PCGG resolutions, reasoning thus:
First, what was approved by the PCGG in its resolutions of September 20,
1988, and January 24, 1989, is the transfer of the "meat packing complex
including the land located at Barrio Ugong, Pasig, Metro Manila," and not
"the management and operation of PIMECO." It is, however, the latter that
the Memorandum of Agreement, executed on April 28, 1989, pursuant to
the said resolutions, transferred to the GSIS.
Second, the second resolution made the turnover of the "meat packing
complex including the land located at Barrio Ugong, Pasig Metro Manila,"
"upon compliance with these conditions, to be implemented by the [PCGG]
Operations and Legal Departments: . . . (b) approval by the
Sandiganbayan . . ." Until now, however, no motion has been presented to
secure that approval, and none can be expected because the same
Memorandum of Agreement changed the requirement of approval to "(t)he
Sandiganbayan shall be advised of this Agreement." Even the advice
stipulated has never been given by the PCGG.
Since the Memorandum of Agreement was executed by one PCGG
commissioner only, the same cannot validly amend the resolutions passed
by the PCGG itself. Consequently, the turnover of the management and
operation of PIMECO, which, of course, include the meat packing complex
and the land of which it stands, stipulated in the Memorandum of
Agreement, cannot be legally enforced. Needless to say, the commissioners
should be the first to abide by the PCGG’s resolutions.39
Under the terms of the lease-purchase agreement, the amount of arrears in
rentals or amortizations must be equivalent to the cumulative sum of three
annual installments, in order to warrant the rescission of the contract.
Therefore, it must be shown that PIMECO failed to pay the aggregate
amount of at least P10,038,809.10 before the lease-purchase agreement
can be deemed automatically cancelled. Assuming in the extreme that, as
alleged by MPCP, the arrears at the time of tender on January 30, 1991
amounted to P12,578,171.00,40 the tender and consignation of the sum of
P5,000,000.00, which had the effect of payment, reduced the back rentals
to only P7,578,171.00, an amount less than the equivalent of three annual
installments. Thus, with the Sandiganbayan’s approval of the consignation
ObliCon Chapter 4 Cases 59 | P a g e
and directive for MPCP to accept the tendered payment, the lease-purchase
agreement could not be said to have been rescinded.
MPCP’s chief complaint in its present petition is that it was not a party in
Civil Case No. 0024. As such, it alleges that the Sandiganbayan had no
jurisdiction over its person and may not direct it to accept the consigned
amount of P5,000,000.00. In rejecting this argument, the Sandiganbayan
held that Civil Case No. 0024, i.e., the sequestration case, on the one hand,
and Civil Case No. 0108, i.e., the petition for declaratory relief in which it
was the named respondent, on the other hand, were interrelated since they
both involved the sequestered assets of PIMECO. Thus, the titles of both
cases appear on the caption of the assailed Resolutions dated July 2, 1991.
On this point, the Sandiganbayan further ruled:
While MPCP is not a named party in Civil Case No. 0024, it is in Civil Case No.
0108. These two civil actions are interrelated in the sense that they both
involve the sequestered and taken-over assets of PIMECO, principal of
which are the lease-purchase agreement, the rights thereunder of PIMECO,
and, since these rights can not be exercised without possession of the meat
processing plant, the plant itself. It is for this reason that the caption of the
present Urgent Motion expressly indicates that Civil Case No. 0024 is
"Related to Civil Case No. 0108." In view of these circumstances, the Court
considers the Urgent Motion as also filed in Case No. 0108.
Moreover, when the propriety of the turn-over of the management and
control of PIMECO, including the meat packing plant, to MPCP was in issue
in Civil Case No. 0024, MPCP, through its officers, appeared in all the
proceedings and actively coordinated with PCGG. To justify the turn-over,
the Office of the Solicitor General echoed the stand of MPCP that the lease-
purchase agreement had already been rescinded. And in the present Urgent
Motion, MPCP again appeared. In fact, it appeared in Case No. 0024 even if
the matter at hand was not the said motion. Although MPCP’s lawyer
entered a special appearance in the present incident, he did not confine
himself to assailing the jurisdiction of this Court over MPCP, but went to the
extent of participating in the oral argument on the merits of the motion,.
Indeed, his Comment devoted only one page on the issue of jurisdiction and
seven pages to the alleged untenability of the motion. Although MPCP did
not expressly pray for the denial of the urgent motion, not even for lack of
jurisdiction over it, by setting forth therein arguments not only on the
jurisdictional issue, but more extensively on the alleged lack of merit of the
motion, it thereby impliedly prayed for affirmative relief in its favor. Under
these circumstances, MPCP voluntarily submitted itself to the jurisdiction of
the Court.41
Jurisdiction over the person of the defendant in civil cases is acquired either
by his voluntary appearance in court and his submission to its authority or
by service of summons.42 Furthermore, the active participation of a party in
the proceedings is tantamount to an invocation of the court’s jurisdiction
and a willingness to abide by the resolution of the case, and will bar said
party from later on impugning the court or body’s jurisdiction.43 In this
case, petitioner MPCP is precluded from questioning the jurisdiction of the
Sandiganbayan over its person in Civil Case No. 0024, considering that, as
shown by the records, it actively participated in the discussion of the merits
of the said case, even going to the extent of seeking affirmative relief. The
Sandiganbayan did not commit grave abuse of discretion in saying
so.1âwphi1.nêt
WHEREFORE, in view of the foregoing, the instant petition is DISMISSED for
lack of merit.
SO ORDERED.
ObliCon Chapter 4 Cases 60 | P a g e
80.) TEDDY G. PABUGAIS, Petitioner, v. DAVE P. SAHIJWANI, Respondent.
Assailed in this Petition for Review on Certiorari is the January 16, 2003
Amended Decision1 of the Court of Appeals2 in CA-G.R. CV No. 55740 which
set aside the November 29, 1996 Decision3 of the Regional Trial Court of
Makati, Branch 64, in Civil Case No. 94-2363.
Pursuant to an Agreement And Undertaking4 dated December 3, 1993,
petitioner Teddy G. Pabugais, in consideration of the amount of Fifteen
Million Four Hundred Eighty Seven Thousand Five Hundred Pesos
(P15,487,500.00), agreed to sell to respondent Dave P. Sahijwani a lot
containing 1,239 square meters located at Jacaranda Street, North Forbes
Park, Makati, Metro Manila. Respondent paid petitioner the amount of
P600,000.00 as option/reservation fee and the balance of P14,887,500.00 to
be paid within 60 days from the execution of the contract, simultaneous
with delivery of the owners duplicate Transfer Certificate of Title in
respondents name the Deed of Absolute Sale; the Certificate of Non-Tax
Delinquency on real estate taxes and Clearance on Payment of Association
Dues. The parties further agreed that failure on the part of respondent to
pay the balance of the purchase price entitles petitioner to forfeit the
P600,000.00 option/reservation fee; while non-delivery by the latter of the
necessary documents obliges him to return to respondent the said
option/reservation fee with interest at 18% per annum, thus
5.DEFAULT In case the FIRST PARTY [herein respondent] fails to pay the
balance of the purchase price within the stipulated due date, the sum of
P600,000.00 shall be deemed forfeited, on the other hand, should the
SECOND PARTY [herein petitioner] fail to deliver within the stipulated period
the documents hereby undertaken, the SECOND PARTY shall return the sum
of P600,000.00 with interest at 18% per annum.5 ςrνll
Petitioner failed to deliver the required documents. In compliance with their
agreement, he returned to respondent the latters P600,000.00
option/reservation fee by way of Far East Bank & Trust Company Check No.
25AO54252P, which was, however, dishonored.
What transpired thereafter is disputed by both parties. Petitioner claimed
that he twice tendered to respondent, through his counsel, the amount of
P672,900.00 (representing the P600,000.00 option/reservation fee plus 18%
interest per annum computed from December 3, 1993 to August 3, 1994) in
the form of Far East Bank & Trust Company Managers Check No. 088498,
dated August 3, 1994, but said counsel refused to accept the same. His first
attempt to tender payment was allegedly made on August 3, 1994 through
his messenger;6 while the second one was on August 8, 1994,7 when he
sent via DHL Worldwide Services, the managers check attached to a letter
dated August 5, 1994.8 On August 11, 1994, petitioner wrote a letter to
respondent saying that he is consigning the amount tendered with the
Regional Trial Court of Makati City.9 On August 15, 1994, petitioner filed a
complaint for consignation.10 ςrνll
Respondents counsel, on the other hand, admitted that his office received
petitioners letter dated August 5, 1994, but claimed that no check was
appended thereto.11 He averred that there was no valid tender of payment
because no check was tendered and the computation of the amount to be
tendered was insufficient,12 because petitioner verbally promised to pay 3%
monthly interest and 25% attorneys fees as penalty for default, in addition
to the interest of 18% per annum on the P600,000.00 option/reservation
fee.13 ςrνll
On November 29, 1996, the trial court rendered a decision declaring the
consignation invalid for failure to prove that petitioner tendered payment to
respondent and that the latter refused to receive the same. It further held
that even assuming that respondent refused the tender, the same is
justified because the managers check allegedly offered by petitioner was not
legal tender, hence, there was no valid tender of payment. The trial court
ordered petitioner to pay respondent the amount of P600,000.00 with
interest of 18% per annum from December 3, 1993 until fully paid, plus
moral damages and attorneys fees.14 ςrνll
ObliCon Chapter 4 Cases 61 | P a g e
Petitioner appealed the decision to the Court of Appeals. Meanwhile, his
counsel, Atty. Wilhelmina V. Joven, died and she was substituted by Atty.
Salvador P. De Guzman, Jr.15 On December 20, 2001, petitioner executed a
Deed of Assignment16 assigning in favor of Atty. De Guzman, Jr., part of the
P672,900.00 consigned with the trial court as partial payment of the latters
attorneys fees.17 Thereafter, on January 7, 2002, petitioner filed an Ex Parte
Motion to Withdraw Consigned Money.18 This was followed by a Motion to
Intervene filed by Atty. De Guzman, Jr., praying that the amount consigned
be released to him by virtue of the Deed of Assignment.19 ςrνll
Petitioners motion to withdraw the amount consigned was denied by the
Court of Appeals and the decision of the trial court was affirmed with
modification as to the amount of moral damages and attorneys fees.20 ςrνll
On a motion for reconsideration, the Court of Appeals declared the
consignation as valid in an Amended Decision dated January 16, 2003. It
held that the validity of the consignation had the effect of extinguishing
petitioners obligation to return the option/reservation fee to respondent.
Hence, petitioner can no longer withdraw the same. The decretal portion of
the Amended Decision states:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ
WHEREFORE, premises considered, our decision dated April 26, 2002 is
RECONSIDERED. The trial courts decision is hereby REVERSED and SET
ASIDE, and a new one is entered (1) DECLARING as valid the consignation by
the plaintiff-appellant in favor of defendant-appellee of the amount of
P672,900.00 with the Makati City RTC Clerk of Court and deposited under
Official Receipt No. 379061 dated 15 August 1994 and (2) DECLARING as
extinguished appellants obligation in favor of appellee under paragraph 5 of
the parties AGREEMENT AND UNDERTAKING. Neither party shall recover
costs from the other.
SO ORDERED.21 ςrνll
Unfazed, petitioner filed the instant Petition for Review contending, inter
alia, that he can withdraw the amount deposited with the trial court as a
matter of right because at the time he moved for the withdrawal thereof,
the Court of Appeals has yet to rule on the consignations validity and the
respondent had not yet accepted the same.
The resolution of the case at bar hinges on the following issues: (1) Was
there a valid consignation? and (2) Can petitioner withdraw the amount
consigned as a matter of right?chanroblesvirtualawlibrary
Consignation is the act of depositing the thing due with the court or judicial
authorities whenever the creditor cannot accept or refuses to accept
payment and it generally requires a prior tender of payment.22 In order that
consignation may be effective, the debtor must show that: (1) there was a
debt due; (2) the consignation of the obligation had been made because the
creditor to whom tender of payment was made refused to accept it, or
because he was absent or incapacitated, or because several persons claimed
to be entitled to receive the amount due or because the title to the
obligation has been lost; (3) previous notice of the consignation had been
given to the person interested in the performance of the obligation; (4) the
amount due was placed at the disposal of the court; and (5) after the
consignation had been made the person interested was notified thereof.
Failure in any of these requirements is enough ground to render a
consignation ineffective.23 ςrνll
The issues to be resolved in the instant case concerns one of the important
requisites of consignation, i.e, the existence of a valid tender of payment. As
testified by the counsel for respondent, the reasons why his client did not
accept petitioners tender of payment were (1) the check mentioned in the
August 5, 1994 letter of petitioner manifesting that he is settling the
obligation was not attached to the said letter; and (2) the amount tendered
was insufficient to cover the obligation. It is obvious that the reason for
respondents non-acceptance of the tender of payment was the alleged
insufficiency thereof and not because the said check was not tendered to
respondent, or because it was in the form of managers check. While it is
true that in general, a managers check is not legal tender, the creditor has
the option of refusing or accepting it.24 Payment in check by the debtor
ObliCon Chapter 4 Cases 62 | P a g e
may be acceptable as valid, if no prompt objection to said payment is
made.25 Consequently, petitioners tender of payment in the form of
managers check is valid.
Anent the sufficiency of the amount tendered, it appears that only the
interest of 18% per annum on the P600,000.00 option/reservation fee
stated in the default clause of the Agreement And Undertaking was agreed
upon by the parties, thus
5.DEFAULT In case the FIRST PARTY [herein respondent] fails to pay the
balance of the purchase price within the stipulated due date, the sum of
P600,000.00 shall be deemed forfeited, on the other hand, should the
SECOND PARTY [herein petitioner] fail to deliver within the stipulated period
the documents hereby undertaken, the SECOND PARTY shall return the sum
of P600,000.00 with interest at 18% per annum.26 ςrνll
The managers check in the amount of P672,900.00 (representing the
P600,000.00 option/reservation fee plus 18% interest per annum computed
from December 3, 1993 to August 3, 1994) which was tendered but refused
by respondent, and thereafter consigned with the court, was enough to
satisfy the obligation.
There being a valid tender of payment in an amount sufficient to extinguish
the obligation, the consignation is valid.
As regards petitioners right to withdraw the amount consigned, reliance on
Article 1260 of the Civil Code is misplaced. The said Article provides
Art. 1260. Once the consignation has been duly made, the debtor may ask
the judge to order the cancellation of the obligation.
Before the creditor has accepted the consignation, or before a judicial
confirmation that the consignation has been properly made, the debtor may
withdraw the thing or the sum deposited, allowing the obligation to remain
in force.
The amount consigned with the trial court can no longer be withdrawn by
petitioner because respondents prayer in his answer that the amount
consigned be awarded to him is equivalent to an acceptance of the
consignation, which has the effect of extinguishing petitioners obligation.
Moreover, petitioner failed to manifest his intention to comply with the
Agreement And Undertaking by delivering the necessary documents and the
lot subject of the sale to respondent in exchange for the amount deposited.
Withdrawal of the money consigned would enrich petitioner and unjustly
prejudice respondent.
The withdrawal of the amount deposited in order to pay attorneys fees to
petitioners counsel, Atty. De Guzman, Jr., violates Article 1491 of the Civil
Code which forbids lawyers from acquiring by assignment, property and
rights which are the object of any litigation in which they may take part by
virtue of their profession.27 Furthermore, Rule 10 of the Canons of
Professional Ethics provides that the lawyer should not purchase any
interest in the subject matter of the litigation which he is conducting. The
assailed transaction falls within the prohibition because the Deed assigning
the amount of P672,900.00 to Atty. De Guzman, Jr., as part of his attorneys
fees was executed during the pendency of this case with the Court of
Appeals. In his Motion to Intervene, Atty. De Guzman, Jr., not only asserted
ownership over said amount, but likewise prayed that the same be released
to him. That petitioner knowingly and voluntarily assigned the subject
amount to his counsel did not remove their agreement within the ambit of
the prohibitory provisions.28 To grant the withdrawal would be to sanction
a void contract.
WHEREFORE, in view of all the foregoing, the instant Petition for Review is
DENIED. The January 16, 2003 Amended Decision of the Court of Appeals in
CA-G.R. CV No. 55740, which declared the consignation by the petitioner in
favor of respondent of the amount of P672,900.00 with the Clerk of Court of
the Regional Trial Court of Makati City valid, and which declared petitioners
obligation to respondent under paragraph 5 of the Agreement And
ObliCon Chapter 4 Cases 63 | P a g e
Undertaking as having been extinguished, is AFFIRMED. No costs. SO
ORDERED.
81.) JESUS V. OCCENA and EFIGENIA C. OCCENA, petitioners, vs.
HON. RAMON V. JABSON, Presiding Judge of the Court Of First Instance of
Rizal, Branch XXVI; COURT OF APPEALS and TROPICAL HOMES, INC.,
respondents.
The Court reverses the Court of Appeals appealed resolution. The Civil Code
authorizes the release of an obligor when the service has become so difficult
as to be manifestly beyond the contemplation of the parties but does not
authorize the courts to modify or revise the subdivision contract between
the parties or fix a different sharing ratio from that contractually stipulated
with the force of law between the parties. Private respondent's complaint
for modification of the contract manifestly has no basis in law and must
therefore be dismissed for failure to state a cause of action. On February 25,
1975 private respondent Tropical Homes, Inc. filed a complaint for
modification of the terms and conditions of its subdivision contract with
petitioners (landowners of a 55,330 square meter parcel of land in Davao
City), making the following allegations:
"That due to the increase in price of oil and its derivatives and the
concomitant worldwide spiralling of prices, which are not within the control
of plaintiff, of all commodities including basis raw materials required for
such development work, the cost of development has risen to levels which
are unanticipated, unimagined and not within the remotest contemplation
of the parties at the time said agreement was entered into and to such a
degree that the conditions and factors which formed the original basis of
said contract, Annex 'A', have been totally changed; 'That further
performance by the plaintiff under the contract.
That further performance by the plaintiff under the contract,Annex 'S', will
result in situation where defendants would be unustly enriched at the
expense of the plaintiff; will cause an inequitous distribution of proceeds
from the sales of subdivided lots in manifest actually result in the unjust and
intolerable exposure of plaintiff to implacable losses, all such situations
resulting in an unconscionable, unjust and immoral situation contrary to and
in violation of the primordial concepts of good faith, fairness and equity
which should pervade all human relations.
Under the subdivision contract, respondent "guaranteed (petitioners as
landowners) as the latter's fixed and sole share and participation an amount
equivalent to forty (40%) percent of all cash receifpts fromthe sale of the
subdivision lots"
Respondent pray of the Rizal court of first instance that "after due trial, this
Honorable Court render judgment modifying the terms and conditions of
the contract ... by fixing the proer shares that shouls pertain to the herein
parties out of the gross proceeds from the sales of subdivided lots of
subjects subdivision".
Petitioners moved to dismiss the complaint principally for lack of cause of
action, and upon denial thereof and of reconsideration by the lower court
elevated the matter on certiorari to respondent Court of Appeals.
Respondent court in its questioned resolution of June 28, 1976 set aside the
preliminary injunction previously issued by it and dimissed petition on the
ground that under Article 1267 of the Civil Code which provides that
ART. 1267. When the service has become so difficult as to be manifestly
beyond the contemplation of the parties, the obligor may also be released
therefrom, in whole or in part. 1
... a positive right is created in favor of the obligor to be released from the
performance of an obligation in full or in part when its performance 'has
become so difficult as to be manifestly beyond the contemplation of the
parties.
Hence, the petition at abar wherein petitioners insist that the worldwide
increase inprices cited by respondent does not constitute a sufficient casue
of action for modification of the subdivision contrct. After receipt of
ObliCon Chapter 4 Cases 64 | P a g e
respondent's comment, the Court in its Resolution of September 13, 1976
resolved to treat the petition as special civil actionand declared the case
submitted for decision.
The petition must be granted.
While respondent court correctly cited in its decision the Code
Commission's report giving the rationale for Article 1267 of the Civil Code,
to wit;
The general rule is that impossibility of performance releases the obligor.
However, it is submitted that when the service has become so difficult as to
be manifestly beyond the contemplation of the parties, the court should be
authorized to release the obligor in whole or in part. The intention of the
parties should govern and if it appears that the service turns out to be so
difficult as have been beyond their contemplation, it would be doing
violence to that intention to hold the obligor still responsible. ... 2
It misapplied the same to respondent's complaint.
If respondent's complaint were to be released from having to comply with
the subdivision contract, assuming it could show at the trial that the service
undertaken contractually by it had "become so difficult as to be manifestly
beyond the contemplation of the parties", then respondent court's
upholding of respondet's complaint and dismissal of the petition would be
justifiable under the cited codal article. Without said article, respondent
would remain bound by its contract under the theretofore prevailing
doctrine that performance therewith is ot excused "by the fact that the
contract turns out to be hard and improvident, unprofitable, or
unespectedly burdensome", 3 since in case a party desires to be excuse
from performance in the event of such contingencies arising, it is his duty to
provide threfor in the contract.
But respondent's complaint seeks not release from the subdivision contract
but that the court "render judgment I modifying the terms and Conditions of
the Contract by fixing the proper shares that should pertain to the herein
parties out of the gross proceed., from the sales of subdivided lots of
subject subdivision". The cited article does not grant the courts this
authority to remake, modify or revise the contract or to fix the division of
shares between the parties as contractually stipulated with the force of law
between the parties, so as to substitute its own terms for those covenanted
by the partiesthemselves. Respondent's complaint for modification of
contract manifestly has no basis in law and therefore states no cause of
action. Under the particular allegations of respondent's complaint and the
circumstances therein averred, the courts cannot even in equity grant the
relief sought.
A final procedural note. Respondent cites the general rule that an erroneous
order denying a motion to dismiss is interlocutory and should not be
corrected by certiorari but by appeal in due course. This case however
manifestly falls within the recognized exception that certiorari will lie when
appeal would not prove to be a speedy and adequate remedy.' Where the
remedy of appeal would not, as in this case, promptly relieve petitioners
from the injurious effects of the patently erroneous order maintaining
respondent's baseless action and compelling petitioners needlessly to go
through a protracted trial and clogging the court dockets by one more futile
case, certiorari will issue as the plain, speedy and adequate remedy of an
aggrieved party.
ACCORDINGLY, the resolution of respondent appellate court is reversed and
the petition for certiorari is granted and private respondent's complaint in
the lower court is ordered dismissed for failure to state a sufficient cause of
action. With costs in all instances against private respondent.
ObliCon Chapter 4 Cases 65 | P a g e
82.) NAGA TELEPHONE CO., INC. (NATELCO) AND LUCIANO M. MAGGAY,
petitioners, vs.
THE COURT OF APPEALS AND CAMARINES SUR II ELECTRIC COOPERATIVE,
INC. (CASURECO II), respondents.
The case of Reyes v. Caltex (Philippines), Inc.1 enunciated the doctrine that
where a person by his contract charges himself with an obligation possible
to be performed, he must perform it, unless its performance is rendered
impossible by the act of God, by the law, or by the other party, it being the
rule that in case the party desires to be excused from performance in the
event of contingencies arising thereto, it is his duty to provide the basis
therefor in his contract.
With the enactment of the New Civil Code, a new provision was included
therein, namely, Article 1267 which provides:
When the service has become so difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also be released therefrom, in
whole or in part.
In the report of the Code Commission, the rationale behind this innovation
was explained, thus:
The general rule is that impossibility of performance releases the obligor.
However, it is submitted that when the service has become so difficult as to
be manifestly beyond the contemplation of the parties, the court should be
authorized to release the obligor in whole or in part. The intention of the
parties should govern and if it appears that the service turns out to be so
difficult as to have been beyond their contemplation, it would be doing
violence to that intention to hold their contemplation, it would be doing
violence to that intention to hold the obligor still responsible.2
In other words, fair and square consideration underscores the legal precept
therein.
Naga Telephone Co., Inc. remonstrates mainly against the application by the
Court of Appeals of Article 1267 in favor of Camarines Sur II Electric
Cooperative, Inc. in the case before us. Stated differently, the former insists
that the complaint should have been dismissed for failure to state a cause of
action.
The antecedent facts, as narrated by respondent Court of Appeals are, as
follows:
Petitioner Naga Telephone Co., Inc. (NATELCO) is a telephone company
rendering local as well as long distance telephone service in Naga City while
private respondent Camarines Sur II Electric Cooperative, Inc. (CASURECO II)
is a private corporation established for the purpose of operating an electric
power service in the same city.
On November 1, 1977, the parties entered into a contract (Exh. "A") for the
use by petitioners in the operation of its telephone service the electric light
posts of private respondent in Naga City. In consideration therefor,
petitioners agreed to install, free of charge, ten (10) telephone connections
for the use by private respondent in the following places:
(a) 3 units — The Main Office of (private respondent);
(b) 2 Units — The Warehouse of (private respondent);
(c) 1 Unit — The Sub-Station of (private respondent) at Concepcion
Pequeña;
(d) 1 Unit — The Residence of (private respondent's) President;
(e) 1 Unit — The Residence of (private respondent's) Acting General
Manager; &
(f) 2 Units — To be determined by the General Manager.3
Said contract also provided:
(a) That the term or period of this contract shall be as long as the party of
the first part has need for the electric light posts of the party of the second
part it being understood that this contract shall terminate when for any
reason whatsoever, the party of the second part is forced to stop,
ObliCon Chapter 4 Cases 66 | P a g e
abandoned [sic] its operation as a public service and it becomes necessary
to remove the electric lightpost; (sic)4
It was prepared by or with the assistance of the other petitioner, Atty.
Luciano M. Maggay, then a member of the Board of Directors of private
respondent and at the same time the legal counsel of petitioner.
After the contract had been enforced for over ten (10) years, private
respondent filed on January 2, 1989 with the Regional Trial Court of Naga
City (Br. 28) C.C. No. 89-1642 against petitioners for reformation of the
contract with damages, on the ground that it is too one-sided in favor of
petitioners; that it is not in conformity with the guidelines of the National
Electrification Administration (NEA) which direct that the reasonable
compensation for the use of the posts is P10.00 per post, per month; that
after eleven (11) years of petitioners' use of the posts, the telephone cables
strung by them thereon have become much heavier with the increase in the
volume of their subscribers, worsened by the fact that their linemen bore
holes through the posts at which points those posts were broken during
typhoons; that a post now costs as much as P2,630.00; so that justice and
equity demand that the contract be reformed to abolish the inequities
thereon.
As second cause of action, private respondent alleged that starting with the
year 1981, petitioners have used 319 posts in the towns of Pili, Canaman,
Magarao and Milaor, Camarines Sur, all outside Naga City, without any
contract with it; that at the rate of P10.00 per post, petitioners should pay
private respondent for the use thereof the total amount of P267,960.00
from 1981 up to the filing of its complaint; and that petitioners had refused
to pay private respondent said amount despite demands.
And as third cause of action, private respondent complained about the poor
servicing by petitioners of the ten (10) telephone units which had caused it
great inconvenience and damages to the tune of not less than P100,000.00
In petitioners' answer to the first cause of action, they averred that it should
be dismissed because (1) it does not sufficiently state a cause of action for
reformation of contract; (2) it is barred by prescription, the same having
been filed more than ten (10) years after the execution of the contract; and
(3) it is barred by estoppel, since private respondent seeks to enforce the
contract in the same action. Petitioners further alleged that their utilization
of private respondent's posts could not have caused their deterioration
because they have already been in use for eleven (11) years; and that the
value of their expenses for the ten (10) telephone lines long enjoyed by
private respondent free of charge are far in excess of the amounts claimed
by the latter for the use of the posts, so that if there was any inequity, it was
suffered by them.
Regarding the second cause of action, petitioners claimed that private
respondent had asked for telephone lines in areas outside Naga City for
which its posts were used by them; and that if petitioners had refused to
comply with private respondent's demands for payment for the use of the
posts outside Naga City, it was probably because what is due to them from
private respondent is more than its claim against them.
And with respect to the third cause of action, petitioners claimed, inter alia,
that their telephone service had been categorized by the National
Telecommunication Corporation (NTC) as "very high" and of "superior
quality."
During the trial, private respondent presented the following witnesses:
(1) Dioscoro Ragragio, one of the two officials who signed the contract in its
behalf, declared that it was petitioner Maggay who prepared the contract;
that the understanding between private respondent and petitioners was
that the latter would only use the posts in Naga City because at that time,
petitioners' capability was very limited and they had no expectation of
expansion because of legal squabbles within the company; that private
respondent agreed to allow petitioners to use its posts in Naga City because
there were many subscribers therein who could not be served by them
because of lack of facilities; and that while the telephone lines strung to the
ObliCon Chapter 4 Cases 67 | P a g e
posts were very light in 1977, said posts have become heavily loaded in
1989.
(2) Engr. Antonio Borja, Chief of private respondent's Line Operation and
Maintenance Department, declared that the posts being used by petitioners
totalled 1,403 as of April 17, 1989, 192 of which were in the towns of Pili,
Canaman, and Magarao, all outside Naga City (Exhs. "B" and "B-1"); that
petitioners' cables strung to the posts in 1989 are much bigger than those in
November, 1977; that in 1987, almost 100 posts were destroyed by typhoon
Sisang: around 20 posts were located between Naga City and the town of
Pili while the posts in barangay Concepcion, Naga City were broken at the
middle which had been bored by petitioner's linemen to enable them to
string bigger telephone lines; that while the cost per post in 1977 was only
from P700.00 to P1,000.00, their costs in 1989 went up from P1,500.00 to
P2,000.00, depending on the size; that some lines that were strung to the
posts did not follow the minimum vertical clearance required by the
National Building Code, so that there were cases in 1988 where, because of
the low clearance of the cables, passing trucks would accidentally touch said
cables causing the posts to fall and resulting in brown-outs until the electric
lines were repaired.
(3) Dario Bernardez, Project Supervisor and Acting General Manager of
private respondent and Manager of Region V of NEA, declared that
according to NEA guidelines in 1985 (Exh. "C"), for the use by private
telephone systems of electric cooperatives' posts, they should pay a
minimum monthly rental of P4.00 per post, and considering the escalation
of prices since 1985, electric cooperatives have been charging from P10.00
to P15.00 per post, which is what petitioners should pay for the use of the
posts.
(4) Engineer Antonio Macandog, Department Head of the Office of Services
of private respondent, testified on the poor service rendered by petitioner's
telephone lines, like the telephone in their Complaints Section which was
usually out of order such that they could not respond to the calls of their
customers. In case of disruption of their telephone lines, it would take two
to three hours for petitioners to reactivate them notwithstanding their calls
on the emergency line.
(5) Finally, Atty. Luis General, Jr., private respondent's counsel, testified that
the Board of Directors asked him to study the contract sometime during the
latter part of 1982 or in 1983, as it had appeared very disadvantageous to
private respondent. Notwithstanding his recommendation for the filing of a
court action to reform the contract, the former general managers of private
respondent wanted to adopt a soft approach with petitioners about the
matter until the term of General Manager Henry Pascual who, after failing
to settle the matter amicably with petitioners, finally agreed for him to file
the present action for reformation of contract.
On the other hand, petitioner Maggay testified to the following effect:
(1) It is true that he was a member of the Board of Directors of private
respondent and at the same time the lawyer of petitioner when the contract
was executed, but Atty. Gaudioso Tena, who was also a member of the
Board of Directors of private respondent, was the one who saw to it that the
contract was fair to both parties.
(2) With regard to the first cause of action:
(a) Private respondent has the right under the contract to use ten (10)
telephone units of petitioners for as long as it wishes without paying
anything therefor except for long distance calls through PLDT out of which
the latter get only 10% of the charges.
(b) In most cases, only drop wires and not telephone cables have been
strung to the posts, which posts have remained erect up to the present;
(c) Petitioner's linemen have strung only small messenger wires to many of
the posts and they need only small holes to pass through; and
(d) Documents existing in the NTC show that the stringing of petitioners'
cables in Naga City are according to standard and comparable to those of
PLDT. The accidents mentioned by private respondent involved trucks that
were either overloaded or had loads that protruded upwards, causing them
to hit the cables.
(3) Concerning the second cause of action, the intention of the parties when
they entered into the contract was that the coverage thereof would include
ObliCon Chapter 4 Cases 68 | P a g e
the whole area serviced by petitioners because at that time, they already
had subscribers outside Naga City. Private respondent, in fact, had asked for
telephone connections outside Naga City for its officers and employees
residing there in addition to the ten (10) telephone units mentioned in the
contract. Petitioners have not been charging private respondent for the
installation, transfers and re-connections of said telephones so that
naturally, they use the posts for those telephone lines.
(4) With respect to the third cause of action, the NTC has found petitioners'
cable installations to be in accordance with engineering standards and
practice and comparable to the best in the country.
On the basis of the foregoing countervailing evidence of the parties, the trial
court found, as regards private respondent's first cause of action, that while
the contract appeared to be fair to both parties when it was entered into by
them during the first year of private respondent's operation and when its
Board of Directors did not yet have any experience in that business, it had
become disadvantageous and unfair to private respondent because of
subsequent events and conditions, particularly the increase in the volume of
the subscribers of petitioners for more than ten (10) years without the
corresponding increase in the number of telephone connections to private
respondent free of charge. The trial court concluded that while in an action
for reformation of contract, it cannot make another contract for the parties,
it can, however, for reasons of justice and equity, order that the contract be
reformed to abolish the inequities therein. Thus, said court ruled that the
contract should be reformed by ordering petitioners to pay private
respondent compensation for the use of their posts in Naga City, while
private respondent should also be ordered to pay the monthly bills for the
use of the telephones also in Naga City. And taking into consideration the
guidelines of the NEA on the rental of posts by telephone companies and
the increase in the costs of such posts, the trial court opined that a monthly
rental of P10.00 for each post of private respondent used by petitioners is
reasonable, which rental it should pay from the filing of the complaint in this
case on January 2, 1989. And in like manner, private respondent should pay
petitioners from the same date its monthly bills for the use and transfers of
its telephones in Naga City at the same rate that the public are paying.
On private respondent's second cause of action, the trial court found that
the contract does not mention anything about the use by petitioners of
private respondent's posts outside Naga City. Therefore, the trial court held
that for reason of equity, the contract should be reformed by including
therein the provision that for the use of private respondent's posts outside
Naga City, petitioners should pay a monthly rental of P10.00 per post, the
payment to start on the date this case was filed, or on January 2, 1989, and
private respondent should also pay petitioners the monthly dues on its
telephone connections located outside Naga City beginning January, 1989.
And with respect to private respondent's third cause of action, the trial
court found the claim not sufficiently proved.
Thus, the following decretal portion of the trial court's decision dated July
20, 1990:
WHEREFORE, in view of all the foregoing, decision is hereby rendered
ordering the reformation of the agreement (Exh. A); ordering the
defendants to pay plaintiff's electric poles in Naga City and in the towns of
Milaor, Canaman, Magarao and Pili, Camarines Sur and in other places
where defendant NATELCO uses plaintiff's electric poles, the sum of TEN
(P10.00) PESOS per plaintiff's pole, per month beginning January, 1989 and
ordering also the plaintiff to pay defendant NATELCO the monthly dues of all
its telephones including those installed at the residence of its officers,
namely; Engr. Joventino Cruz, Engr. Antonio Borja, Engr. Antonio Macandog,
Mr. Jesus Opiana and Atty. Luis General, Jr. beginning January, 1989.
Plaintiff's claim for attorney's fees and expenses of litigation and
defendants' counterclaim are both hereby ordered dismissed. Without
pronouncement as to costs.
Disagreeing with the foregoing judgment, petitioners appealed to
respondent Court of Appeals. In the decision dated May 28, 1992,
respondent court affirmed the decision of the trial court,5 but based on
different grounds to wit: (1) that Article 1267 of the New Civil Code is
applicable and (2) that the contract was subject to a potestative condition
ObliCon Chapter 4 Cases 69 | P a g e
which rendered said condition void. The motion for reconsideration was
denied in the resolution dated September 10, 1992.6 Hence, the present
petition.
Petitioners assign the following pertinent errors committed by respondent
court:
1) in making a contract for the parties by invoking Article 1267 of the New
Civil Code;
2) in ruling that prescription of the action for reformation of the contract in
this case commenced from the time it became disadvantageous to private
respondent; and
3) in ruling that the contract was subject to a potestative condition in favor
of petitioners.
Petitioners assert earnestly that Article 1267 of the New Civil Code is not
applicable primarily because the contract does not involve the rendition of
service or a personal prestation and it is not for future service with future
unusual change. Instead, the ruling in the case of Occeña, et al. v. Jabson,
etc., et al.,7 which interpreted the article, should be followed in resolving
this case. Besides, said article was never raised by the parties in their
pleadings and was never the subject of trial and evidence.
In applying Article 1267, respondent court rationalized:
We agree with appellant that in order that an action for reformation of
contract would lie and may prosper, there must be sufficient allegations as
well as proof that the contract in question failed to express the true
intention of the parties due to error or mistake, accident, or fraud. Indeed,
in embodying the equitable remedy of reformation of instruments in the
New Civil Code, the Code Commission gave its reasons as follows:
Equity dictates the reformation of an instrument in order that the true
intention of the contracting parties may be expressed. The courts by the
reformation do not attempt to make a new contract for the parties, but to
make the instrument express their real agreement. The rationale of the
doctrine is that it would be unjust and inequitable to allow the enforcement
of a written instrument which does not reflect or disclose the real meeting
of the minds of the parties. The rigor of the legalistic rule that a written
instrument should be the final and inflexible criterion and measure of the
rights and obligations of the contracting parties is thus tempered to forestall
the effects of mistake, fraud, inequitable conduct, or accident. (pp. 55-56,
Report of Code Commission)
Thus, Articles 1359, 1361, 1362, 1363 and 1364 of the New Civil Code
provide in essence that where through mistake or accident on the part of
either or both of the parties or mistake or fraud on the part of the clerk or
typist who prepared the instrument, the true intention of the parties is not
expressed therein, then the instrument may be reformed at the instance of
either party if there was mutual mistake on their part, or by the injured
party if only he was mistaken.
Here, plaintiff-appellee did not allege in its complaint, nor does its evidence
prove, that there was a mistake on its part or mutual mistake on the part of
both parties when they entered into the agreement Exh. "A", and that
because of this mistake, said agreement failed to express their true
intention. Rather, plaintiff's evidence shows that said agreement was
prepared by Atty. Luciano Maggay, then a member of plaintiff's Board of
Directors and its legal counsel at that time, who was also the legal counsel
for defendant-appellant, so that as legal counsel for both companies and
presumably with the interests of both companies in mind when he prepared
the aforesaid agreement, Atty. Maggay must have considered the same fair
and equitable to both sides, and this was affirmed by the lower court when
it found said contract to have been fair to both parties at the time of its
execution. In fact, there were no complaints on the part of both sides at the
time of and after the execution of said contract, and according to 73-year
old Justino de Jesus, Vice President and General manager of appellant at the
time who signed the agreement Exh. "A" in its behalf and who was one of
the witnesses for the plaintiff (sic), both parties complied with said contract
"from the very beginning" (p. 5, tsn, April 17, 1989).
ObliCon Chapter 4 Cases 70 | P a g e
That the aforesaid contract has become inequitous or unfavorable or
disadvantageous to the plaintiff with the expansion of the business of
appellant and the increase in the volume of its subscribers in Naga City and
environs through the years, necessitating the stringing of more and bigger
telephone cable wires by appellant to plaintiff's electric posts without a
corresponding increase in the ten (10) telephone connections given by
appellant to plaintiff free of charge in the agreement Exh. "A" as
consideration for its use of the latter's electric posts in Naga City, appear,
however, undisputed from the totality of the evidence on record and the
lower court so found. And it was for this reason that in the later (sic) part of
1982 or 1983 (or five or six years after the subject agreement was entered
into by the parties), plaintiff's Board of Directors already asked Atty. Luis
General who had become their legal counsel in 1982, to study said
agreement which they believed had become disadvantageous to their
company and to make the proper recommendation, which study Atty.
General did, and thereafter, he already recommended to the Board the
filing of a court action to reform said contract, but no action was taken on
Atty. General's recommendation because the former general managers of
plaintiff wanted to adopt a soft approach in discussing the matter with
appellant, until, during the term of General Manager Henry Pascual, the
latter, after failing to settle the problem with Atty. Luciano Maggay who had
become the president and general manager of appellant, already agreed for
Atty. General's filing of the present action. The fact that said contract has
become inequitous or disadvantageous to plaintiff as the years went by did
not, however, give plaintiff a cause of action for reformation of said
contract, for the reasons already pointed out earlier. But this does not mean
that plaintiff is completely without a remedy, for we believe that the
allegations of its complaint herein and the evidence it has presented
sufficiently make out a cause of action under Art. 1267 of the New Civil Code
for its release from the agreement in question.
xxx xxx xxx
The understanding of the parties when they entered into the Agreement
Exh. "A" on November 1, 1977 and the prevailing circumstances and
conditions at the time, were described by Dioscoro Ragragio, the President
of plaintiff in 1977 and one of its two officials who signed said agreement in
its behalf, as follows:
Our understanding at that time is that we will allow NATELCO to utilize the
posts of CASURECO II only in the City of Naga because at that time the
capability of NATELCO was very limited, as a matter of fact we do [sic] not
expect to be able to expand because of the legal squabbles going on in the
NATELCO. So, even at that time there were so many subscribers in Naga City
that cannot be served by the NATELCO, so as a mater of public service we
allowed them to sue (sic) our posts within the Naga City. (p. 8, tsn April 3,
1989)
Ragragio also declared that while the telephone wires strung to the electric
posts of plaintiff were very light and that very few telephone lines were
attached to the posts of CASURECO II in 1977, said posts have become
"heavily loaded" in 1989 (tsn, id.).
In truth, as also correctly found by the lower court, despite the increase in
the volume of appellant's subscribers and the corresponding increase in the
telephone cables and wires strung by it to plaintiff's electric posts in Naga
City for the more 10 years that the agreement Exh. "A" of the parties has
been in effect, there has been no corresponding increase in the ten (10)
telephone units connected by appellant free of charge to plaintiff's offices
and other places chosen by plaintiff's general manager which was the only
consideration provided for in said agreement for appellant's use of plaintiffs
electric posts. Not only that, appellant even started using plaintiff's electric
posts outside Naga City although this was not provided for in the agreement
Exh. "A" as it extended and expanded its telephone services to towns
outside said city. Hence, while very few of plaintiff's electric posts were
being used by appellant in 1977 and they were all in the City of Naga, the
number of plaintiff's electric posts that appellant was using in 1989 had
jumped to 1,403,192 of which are outside Naga City (Exh. "B"). Add to this
the destruction of some of plaintiff's poles during typhoons like the strong
typhoon Sisang in 1987 because of the heavy telephone cables attached
thereto, and the escalation of the costs of electric poles from 1977 to 1989,
ObliCon Chapter 4 Cases 71 | P a g e
and the conclusion is indeed ineluctable that the agreement Exh. "A" has
already become too one-sided in favor of appellant to the great
disadvantage of plaintiff, in short, the continued enforcement of said
contract has manifestly gone far beyond the contemplation of plaintiff, so
much so that it should now be released therefrom under Art. 1267 of the
New Civil Code to avoid appellant's unjust enrichment at its (plaintiff's)
expense. As stated by Tolentino in his commentaries on the Civil Code citing
foreign civilist Ruggiero, "equity demands a certain economic equilibrium
between the prestation and the counter-prestation, and does not permit
the unlimited impoverishment of one party for the benefit of the other by
the excessive rigidity of the principle of the obligatory force of contracts (IV
Tolentino, Civil Code of the Philippines, 1986 ed.,
pp. 247-248).
We therefore, find nothing wrong with the ruling of the trial court, although
based on a different and wrong premise (i.e., reformation of contract), that
from the date of the filing of this case, appellant must pay for the use of
plaintiff's electric posts in Naga City at the reasonable monthly rental of
P10.00 per post, while plaintiff should pay appellant for the telephones in
the same City that it was formerly using free of charge under the terms of
the agreement Exh. "A" at the same rate being paid by the general public. In
affirming said ruling, we are not making a new contract for the parties
herein, but we find it necessary to do so in order not to disrupt the basic
and essential services being rendered by both parties herein to the public
and to avoid unjust enrichment by appellant at the expense of plaintiff, said
arrangement to continue only until such time as said parties can re-
negotiate another agreement over the same
subject-matter covered by the agreement Exh. "A". Once said agreement is
reached and executed by the parties, the aforesaid ruling of the lower court
and affirmed by us shall cease to exist and shall be substituted and
superseded by their new agreement. . . ..8
Article 1267 speaks of "service" which has become so difficult. Taking into
consideration the rationale behind this provision,9 the term "service" should
be understood as referring to the "performance" of the obligation. In the
present case, the obligation of private respondent consists in allowing
petitioners to use its posts in Naga City, which is the service contemplated in
said article. Furthermore, a bare reading of this article reveals that it is not a
requirement thereunder that the contract be for future service with future
unusual change. According to Senator Arturo M. Tolentino,10 Article 1267
states in our law the doctrine of unforseen events. This is said to be based
on the discredited theory of rebus sic stantibus in public international law;
under this theory, the parties stipulate in the light of certain prevailing
conditions, and once these conditions cease to exist the contract also ceases
to exist. Considering practical needs and the demands of equity and good
faith, the disappearance of the basis of a contract gives rise to a right to
relief in favor of the party prejudiced.
In a nutshell, private respondent in the Occeña case filed a complaint
against petitioner before the trial court praying for modification of the
terms and conditions of the contract that they entered into by fixing the
proper shares that should pertain to them out of the gross proceeds from
the sales of subdivided lots. We ordered the dismissal of the complaint
therein for failure to state a sufficient cause of action. We rationalized that
the Court of Appeals misapplied Article 1267 because:
. . . respondent's complaint seeks not release from the subdivision contract
but that the court "render judgment modifying the terms and conditions of
the contract . . . by fixing the proper shares that should pertain to the herein
parties out of the gross proceeds from the sales of subdivided lots of subject
subdivision". The cited article (Article 1267) does not grant the courts (the)
authority to remake, modify or revise the contract or to fix the division of
shares between the parties as contractually stipulated with the force of law
between the parties, so as to substitute its own terms for those covenanted
by the parties themselves. Respondent's complaint for modification of
contract manifestly has no basis in law and therefore states no cause of
action. Under the particular allegations of respondent's complaint and the
circumstances therein averred, the courts cannot even in equity grant the
relief sought.11
ObliCon Chapter 4 Cases 72 | P a g e
The ruling in the Occeña case is not applicable because we agree with
respondent court that the allegations in private respondent's complaint and
the evidence it has presented sufficiently made out a cause of action under
Article 1267. We, therefore, release the parties from their correlative
obligations under the contract. However, our disposition of the present
controversy does not end here. We have to take into account the possible
consequences of merely releasing the parties therefrom: petitioners will
remove the telephone wires/cables in the posts of private respondent,
resulting in disruption of their service to the public; while private
respondent, in consonance with the contract12 will return all the telephone
units to petitioners, causing prejudice to its business. We shall not allow
such eventuality. Rather, we require, as ordered by the trial court: 1)
petitioners to pay private respondent for the use of its posts in Naga City
and in the towns of Milaor, Canaman, Magarao and Pili, Camarines Sur and
in other places where petitioners use private respondent's posts, the sum of
ten (P10.00) pesos per post, per month, beginning January, 1989; and 2)
private respondent to pay petitioner the monthly dues of all its telephones
at the same rate being paid by the public beginning January, 1989. The
peculiar circumstances of the present case, as distinguished further from
the Occeña case, necessitates exercise of our equity jurisdiction.13 By way
of emphasis, we reiterate the rationalization of respondent court that:
. . . In affirming said ruling, we are not making a new contract for the parties
herein, but we find it necessary to do so in order not to disrupt the basic
and essential services being rendered by both parties herein to the public
and to avoid unjust enrichment by appellant at the expense of plaintiff . . . .
14
Petitioners' assertion that Article 1267 was never raised by the parties in
their pleadings and was never the subject of trial and evidence has been
passed upon by respondent court in its well reasoned resolution, which we
hereunder quote as our own:
First, we do not agree with defendant-appellant that in applying Art. 1267 of
the New Civil Code to this case, we have changed its theory and decided the
same on an issue not invoked by plaintiff in the lower court. For basically,
the main and pivotal issue in this case is whether the continued
enforcement of the contract Exh. "A" between the parties has, through the
years (since 1977), become too inequitous or disadvantageous to the
plaintiff and too one-sided in favor of defendant-appellant, so that a
solution must be found to relieve plaintiff from the continued operation of
said agreement and to prevent defendant-appellant from further unjustly
enriching itself at plaintiff's expense. It is indeed unfortunate that defendant
had turned deaf ears to plaintiffs requests for renegotiation, constraining
the latter to go to court. But although plaintiff cannot, as we have held,
correctly invoke reformation of contract as a proper remedy (there having
been no showing of a mistake or error in said contract on the part of any of
the parties so as to result in its failure to express their true intent), this does
not mean that plaintiff is absolutely without a remedy in order to relieve
itself from a contract that has gone far beyond its contemplation and has
become so highly inequitous and disadvantageous to it through the years
because of the expansion of defendant-appellant's business and the
increase in the volume of its subscribers. And as it is the duty of the Court to
administer justice, it must do so in this case in the best way and manner it
can in the light of the proven facts and the law or laws applicable thereto.
It is settled that when the trial court decides a case in favor of a party on a
certain ground, the appellant court may uphold the decision below upon
some other point which was ignored or erroneously decided by the trial
court (Garcia Valdez v. Tuazon, 40 Phil. 943; Relativo v. Castro, 76 Phil. 563;
Carillo v. Salak de Paz, 18 SCRA 467). Furthermore, the appellate court has
the discretion to consider an unassigned error that is closely related to an
error properly assigned (Paterno v. Jao Yan, 1 SCRA 631; Hernandez v.
Andal, 78 Phil. 196). It has also been held that the Supreme Court (and this
Court as well) has the authority to review matters, even if they are not
assigned as errors in the appeal, if it is found that their consideration is
necessary in arriving at a just decision of the case (Saura Import & Export
Co., Inc. v. Phil. International Surety Co. and PNB, 8 SCRA 143). For it is the
material allegations of fact in the complaint, not the legal conclusion made
therein or the prayer, that determines the relief to which the plaintiff is
ObliCon Chapter 4 Cases 73 | P a g e
entitled, and the plaintiff is entitled to as much relief as the facts warrant
although that relief is not specifically prayed for in the complaint (Rosales v.
Reyes and Ordoveza, 25 Phil. 495; Cabigao v. Lim, 50 Phil. 844; Baguioro v.
Barrios, 77 Phil. 120). To quote an old but very illuminating decision of our
Supreme Court through the pen of American jurist Adam C. Carson:
"Under our system of pleading it is the duty of the courts to grant the relief
to which the parties are shown to be entitled by the allegations in their
pleadings and the facts proven at the trial, and the mere fact that they
themselves misconstrue the legal effect of the facts thus alleged and proven
will not prevent the court from placing the just construction thereon and
adjudicating the issues accordingly." (Alzua v. Johnson, 21 Phil. 308)
And in the fairly recent case of Caltex Phil., Inc. v IAC, 176 SCRA 741, the
Honorable Supreme Court also held:
We rule that the respondent court did not commit any error in taking
cognizance of the aforesaid issues, although not raised before the trial
court. The presence of strong consideration of substantial justice has led
this Court to relax the well-entrenched rule that, except questions on
jurisdiction, no question will be entertained on appeal unless it has been
raised in the court below and it is within the issues made by the parties in
their pleadings (Cordero v. Cabral, L-36789, July 25, 1983, 123 SCRA
532). . . .
We believe that the above authorities suffice to show that this Court did not
err in applying Art. 1267 of the New Civil Code to this case. Defendant-
appellant stresses that the applicability of said provision is a question of
fact, and that it should have been given the opportunity to present evidence
on said question. But defendant-appellant cannot honestly and truthfully
claim that it (did) not (have) the opportunity to present evidence on the
issue of whether the continued operation of the contract Exh. "A" has now
become too one-sided in its favor and too inequitous, unfair, and
disadvantageous to plaintiff. As held in our decision, the abundant and
copious evidence presented by both parties in this case and summarized in
said decision established the following essential and vital facts which led us
to apply Art. 1267 of the New Civil Code to this case:
xxx xxx xxx 15
On the issue of prescription of private respondent's action for reformation
of contract, petitioners allege that respondent court's ruling that the right of
action "arose only after said contract had already become disadvantageous
and unfair to it due to subsequent events and conditions, which must be
sometime during the latter part of 1982 or in 1983 . . ." 16 is erroneous. In
reformation of contracts, what is reformed is not the contract itself, but the
instrument embodying the contract. It follows that whether the contract is
disadvantageous or not is irrelevant to reformation and therefore, cannot
be an element in the determination of the period for prescription of the
action to reform.
Article 1144 of the New Civil Code provides, inter alia, that an action upon a
written contract must be brought within ten (10) years from the time the
right of action accrues. Clearly, the ten (10) year period is to be reckoned
from the time the right of action accrues which is not necessarily the date of
execution of the contract. As correctly ruled by respondent court, private
respondent's right of action arose "sometime during the latter part of 1982
or in 1983 when according to Atty. Luis General, Jr. . . ., he was asked by
(private respondent's) Board of Directors to study said contract as it already
appeared disadvantageous to (private respondent) (p. 31, tsn, May 8, 1989).
(Private respondent's) cause of action to ask for reformation of said contract
should thus be considered to have arisen only in 1982 or 1983, and from
1982 to January 2, 1989 when the complaint in this case was filed, ten (10)
years had not yet elapsed." 17
Regarding the last issue, petitioners allege that there is nothing purely
potestative about the prestations of either party because petitioner's
permission for free use of telephones is not made to depend purely on their
will, neither is private respondent's permission for free use of its posts
dependent purely on its will.
ObliCon Chapter 4 Cases 74 | P a g e

Apart from applying Article 1267, respondent court cited another legal
remedy available to private respondent under the allegations of its
complaint and the preponderant evidence presented by it:
. . . we believe that the provision in said agreement —
(a) That the term or period of this contract shall be as long as the party of
the first part [herein appellant] has need for the electric light posts of the
party of the second part [herein plaintiff] it being understood that this
contract shall terminate when for any reason whatsoever, the party of the
second part is forced to stop, abandoned [sic] its operation as a public
service and it becomes necessary to remove the electric light post [sic]";
(Emphasis supplied)
is invalid for being purely potestative on the part of appellant as it leaves
the continued effectivity of the aforesaid agreement to the latter's sole and
exclusive will as long as plaintiff is in operation. A similar provision in a
contract of lease wherein the parties agreed that the lessee could stay on
the leased premises "for as long as the defendant needed the premises and
can meet and pay said increases" was recently held by the Supreme Court in
Lim v. C.A., 191 SCRA 150, citing the much earlier case of Encarnacion v.
Baldomar, 77 Phil. 470, as invalid for being "a purely potestative condition
because it leaves the effectivity and enjoyment of leasehold rights to the
sole and exclusive will of the lessee." Further held the High Court in the Lim
case:
The continuance, effectivity and fulfillment of a contract of lease cannot be
made to depend exclusively upon the free and uncontrolled choice of the
lessee between continuing the payment of the rentals or not, completely
depriving the owner of any say in the matter. Mutuality does not obtain in
such a contract of lease of no equality exists between the lessor and the
lessee since the life of the contract is dictated solely by the lessee.
The above can also be said of the agreement Exh. "A" between the parties in
this case. There is no mutuality and equality between them under the afore-
quoted provision thereof since the life and continuity of said agreement is
made to depend as long as appellant needs plaintiff's electric posts. And this
is precisely why, since 1977 when said agreement was executed and up to
1989 when this case was finally filed by plaintiff, it could do nothing to be
released from or terminate said agreement notwithstanding that its
continued effectivity has become very disadvantageous and inequitous to it
due to the expansion and increase of appellant's telephone services within
Naga City and even outside the same, without a corresponding increase in
the ten (10) telephone units being used by plaintiff free of charge, as well as
the bad and inefficient service of said telephones to the prejudice and
inconvenience of plaintiff and its customers. . . . 18
Petitioners' allegations must be upheld in this regard. A potestative
condition is a condition, the fulfillment of which depends upon the sole will
of the debtor, in which case, the conditional obligation is void. 19 Based on
this definition, respondent court's finding that the provision in the contract,
to wit:
(a) That the term or period of this contract shall be as long as the party of
the first part (petitioner) has need for the electric light posts of the party of
the second part (private respondent) . . ..
is a potestative condition, is correct. However, it must have overlooked the
other conditions in the same provision, to wit:
. . . it being understood that this contract shall terminate when for any
reason whatsoever, the party of the second part (private respondent) is
forced to stop, abandoned (sic) its operation as a public service and it
becomes necessary to remove the electric light post (sic);
which are casual conditions since they depend on chance, hazard, or the will
of a third person. 20 In sum, the contract is subject to mixed conditions, that
is, they depend partly on the will of the debtor and partly on chance, hazard
ObliCon Chapter 4 Cases 75 | P a g e
or the will of a third person, which do not invalidate the aforementioned
provision. 21 Nevertheless, in view of our discussions under the first and
second issues raised by petitioners, there is no reason to set aside the
questioned decision and resolution of respondent court.

WHEREFORE, the petition is hereby DENIED. The decision of the Court of

Appeals dated May 28, 1992 and its resolution dated September 10, 1992
are AFFIRMED.

SO ORDERED.

ObliCon Chapter 4 Cases 76 | P a g e

83.) Daniel T. So vs Food Fest Land, Inc.
Food Fest Land Inc. (Food Fest) entered into a September 14, 1999 Contract
of Lease1cЃa with Daniel T. So (So) over a commercial space in San Antonio
Village, Makati City for a period of three years (1999-2002) on which Food
Fest intended to operate a Kentucky Fried Chicken carry out branch.
Before forging the lease contract, the parties entered into a preliminary
agreement dated July 1, 1999, the pertinent portion of which stated:
The lease shall not become binding upon us unless and until the
government agencies concerned shall authorize, permit or license us to
open and maintain our business at the proposed Lease Premises. We shall
promptly make an application for permits, licenses and authority for our
business and shall exercise due diligence to obtain it, provided, however,
that you shall assist us by submitting such documents and papers and
comply with such other requirements as the governmental agencies may
impose. We shall give notice to you when the permits, license and
authorities have been obtained. We shall also notify you if any of the
required permits, licenses and authorities shall not be be (sic) given or
granted within fifteen days (15) from your conform (sic)hereto. In such case,
the agreement may be canceled and all rights and obligations hereunder
shall cease.2cЃa (underscoring supplied)
While Food Fest was able to secure the necessary licenses and permits for
the year 1999, it failed to commence business operations. For the year
2000, Food Fest's application for renewal of barangay business clearance
was "held in abeyance until further study of [its] kitchen
facilities."3cräläwvirtualibräry
As the barangay business clearance is a prerequisite to the processing of
other permits, licenses and authority by the city government, Food Fest was
unable to operate. Fearing further business losses, Food Fest, by its claim,
communicated its intent to terminate the lease contract to So who,
however, did not accede and instead offered to help Food Fest secure
authorization from the barangay. On So's advice, Food Fest wrote requests
addressed to city officials for assistance to facilitate renewal.
In August 2000, Food Fest, for the second time, purportedly informed So of
its intent to terminate the lease, and it in fact stopped paying rent.
So later sent a November 22, 2000 demand letter to Food Fest for the
payment of rental arrearages and reiterated his offer to help it secure
clearance from the barangay. Thus So wrote: "With regard to securing
permits from the barangay & the City Hall, [with] which I am trying to help
you, some form of representation, maybe not in cash, would definitely help
in forging a longer term relationship."4cЃa Food Fest demurred to the offer.
By letter of March 26, 2001,5cЃa So again demanded payment of rentals
from Food Fest from September 2000 to March 2001 amounting to
P123,200.00. Food Fest denied any liability, however, and started to remove
its fixtures and equipment from the premises.
On April 2, 2001, So sent Food Fest a Final Notice of Termination with
demand to pay and to vacate.6cräläwvirtualibräry
On April 26, 2001, So filed a complaint for ejectment and damages against
Food Fest before the Metropolitan Trial Court (MeTC) of Makati City.
Branch 64 of the MeTC, by Decision of July 4, 2005,7cЃa rendered judgment
in favor of So, disposing as follows:
WHEREFORE, premises considered, judgment is hereby rendered in favor of
the plaintiff and against defendant, Food Fest Land, Inc., as follows:
a. Ordering the defendant to pay the unpaid rentals from August 2000 until
March 2001 with penalties accrued thereon. The security deposit in the sum
of Sixty Four Thousand Pesos (Php64,000.00) is forfeited in favor of the
plaintiff;
ObliCon Chapter 4 Cases 77 | P a g e
b. Ordering the defendant to pay liquidated damages in a sum equivalent to
25% of the total sum due and demandable;
c. Ordering the defendant to pay the plaintiff a sum equivalent to 25% of the
total claim as and for attorney's fees; and
d. The costs of suit.
SO ORDERED.8
On appeal, Branch 143 of the Regional Trial Court (RTC), by Decision of
November 30, 2006 reversed the MeTC Decision, disposing as follows:
WHEREFORE, premises considered, the judgment of the lower court dated
04 July 2005 is hereby REVERSED and SET ASIDE, ordering plaintiff Daniel T.
So to pay defendant Food Fest the amount of Thirty Two Thousand Pesos
(P32,000.00) as reimbursement for rentals paid for the months of July and
August 2000; Twenty Thousand Pesos (P20,000.00) as exemplary damages;
Twenty Thousand Pesos (P20,000.00) as attorney's fees and costs of suit.
SO ORDERED.10
In reversing the MeTC, the RTC found that Food Fest already vacated the
leased premises before So filed the complaint for ejectment; and whereas
possession is the only issue for resolution in an ejectment case, So's cause of
action only pertained to collection of the rental arrears.
As to So's claim for payment of arrears, the RTC noted that since the claim
exceeded the jurisdictional amount over which it can cognize, the RTC,
applying Sec. 8, Rule 40 of the Rules of Court,11cЃa treated the case as if it
was originally filed with it.
On the merits, the RTC held that Food Fest's failure to secure the authority
to commence business operations resulted in the termination of its
contractual obligations to So, including the obligation to pay rent.
On petition for review, the Court of Appeals, by Decision of April 18,
2008,12cЃa upheld the RTC's jurisdiction over the complaint. It, however,
declared that Food Fest's obligation to pay rent was not extinguished upon
its failure to secure permits to operate. Thus, it disposed:
WHEREFORE, premises considered, the assailed decision dated November
30, 2006 of the RTC, Branch 143, Makati City is hereby REVERSED and SET
ASIDE, ordering respondent FFLI to pay petitioner Daniel T. So the following:
1. Unpaid rentals from August 2000 until March 31, 2001 with penalties
accrued thereon. The security deposit is forfeited in favor of petitioner So;
2. Temperate damages in the amount of P50,000.00
3. P20,000.00 as attorney's fees; and
4. Costs of suit.
SO ORDERED.13
The parties' respective motions for reconsideration having been denied,
they filed their respective petitions before this Court which, by Resolution of
October 6, 2008, resolved to consolidate G.R. No. 183628 (Daniel T. So vs.
Food Fest Land, Inc.) with G.R. No. 183670 (Food Fest Land, Inc. vs. Daniel T.
So).
So maintains that the MeTC had jurisdiction over his complaint for
ejectment. For, So contends, Food Fest did not vacate the leased premises
before his filing (on April 26, 2001) of the complaint.
So admitted in his Complaint, however, that Food Fest started pulling out
equipment and other machineries from the premises even before the final
notice was received by it on April 2, 2001.
13. In or the last few days of March 2001, defendant FOOD FEST LAND, INC.
started to remove and pull out its equipment, appliances, fittings,
furnishings, movable articles and other accessories and facilities that it had
earlier placed and installed in the leased premises, but due to its wanton
ObliCon Chapter 4 Cases 78 | P a g e
lack of care in doing so, so much damage and destruction was caused to the
leased premises, resulting in the breakage of and damage to the concrete
walls and partition in the building as well as the steel gate leading to the
leased premises and other parts of the building and its premises.14cЃa
(emphasis and underscoring supplied)
Two elements are paramount in possession - there must be occupancy,
apprehension or taking, and there must be intent to possess.15cЃa In the
present case, given the immediately quoted allegation-admission of So,
intent to possess was not present on Food Fest's part.
In another vein, So claims that Food Fest did not exercise care in removing
the installations and fixtures, thereby causing destruction to the premises to
thus entitle him to damages, as well as to damages corresponding to
unrealized profits (lucrum cessans) to answer for the period during which
the unit was not rented out.
Un realized profits fall under the category of actual or compensatory
damages. If there exists a basis for a reasonable expectation that profits
would have continued to be generated had there been no breach of
contract, indemnification for damages based on such expected profits is
proper. This is, however, subject to the rule that a party is entitled to an
adequate compensation only for such pecuniary loss suffered by him as he
has duly proved.16cЃa
Other than the photographs evincing damage to the premises, no evidence
was proffered to show So's entitlement to unrealized profits. That the
leased unit was not subsequently leased is not solely attributable to Food
Fest. As borne by the records, no renovation was undertaken by So for
almost three years following Food Fest's vacation of the premises in 2001.
The quotations issued by construction companies for purposes of
renovation were issued only in 2004.
So is not without recourse under the lease contract, however. Thus the
pertinent provisions of the lease contract provide:
7. LIABILITY OF LESSEE FOR DAMAGES- LESSEE hereby agrees that any
damage to the leased premises or its appurtenances caused by said LESSEE
or its agents, employees, customers, guests or any other person without the
fault of LESSOR shall be LESSEE's sole responsibility and liability, which
damage shall, upon demand by LESSOR be repaired promptly at its expense.
16. TERMINATION OF THE LEASE- LESSEE agrees to return and surrender the
leased premises at the expiration of the term of this lease in as good
condition as reasonable wear and tear will permit and without delay
whatsoever, devoid of all occupants, furniture, machinery, equipment and
signages, articles and effects of any kind, other than such alterations or
improvements which cannot be removed without damaging the leased
premises.
23. PENALTY CLAUSE - Any and all accounts payable by LESSEE under this
Contract of Lease and other charges which may be claimed against LESSEE,
but not paid by LESSEE to LESSOR within fifteen (15) days from due date
shall be subject to penalty charges of ONE PERCENT (1%) per month from
due date until the account is paid in full.
23.1. Should LESSOR be compelled to seek judicial relief against LESSEE the
latter shall, in addition to any other claim for damages pay as liquidated
damages to LESSOR an amount equivalent to twenty-five percent (25%) of
the amount due, but in no case less than P500.00: and an attorney's fee in
the amount equivalent to 25% of the amount claimed but in no case less
than P3,000.00 as well as all expenses of litigation.17
Respecting So's claim for renovation expenses, the same must be denied
absent proof as to the actual cost of renovation. Only firm offers or
quotations from construction companies are in the records. Following
Article 2224 of the Civil Code,18cЃa however, the appellate court's award of
temperate damages is in order.
ObliCon Chapter 4 Cases 79 | P a g e
This Court notes that the appellate court did not award liquidated damages
in contravention of the contract. As for the appellate court's award of
P20,000.00 as attorney's fees, the contractual stipulation should prevail.
As for Food Fest's invocation of the principle of rebus sic stantibus as
enunciated in Article 1267 of the Civil Code to render the lease contract
functus officio, and consequently release it from responsibility to pay
rentals, the Court is not persuaded. Article 1267 provides:
Article 1267. When the service has become so difficult as to be manifestly
beyond the contemplation of the parties, the obligor may also be released
therefrom, in whole or in part.
This article, which enunciates the doctrine of unforeseen events, is not,
however, an absolute application of the principle of rebus sic stantibus,
which would endanger the security of contractual relations. The parties to
the contract must be presumed to have assumed the risks of unfavorable
developments. It is, therefore, only in absolutely exceptional changes of
circumstances that equity demands assistance for the
debtor.19cräläwvirtualibräry
Food Fest claims that its failure to secure the necessary business permits
and licenses rendered the impossibility and non-materialization of its
purpose in entering into the contract of lease, in support of which it cites
the earlier-quoted portion of the preliminary agreement dated July 1, 1999
of the parties.20cräläwvirtualibräry
The cause or essential purpose in a contract of lease is the use or enjoyment
of a thing.21cЃa A party's motive or particular purpose in entering into a
contract does not affect the validity or existence of the contract; an
exception is when the realization of such motive or particular purpose has
been made a condition upon which the contract is made to depend. The
exception does not apply here.
It is clear that the condition set forth in the preliminary agreement pertains
to the initial application of Food Fest for the permits, licenses and authority
to operate. It should not be construed to apply to Food Fest's subsequent
applications. Consider the following qualification in the preliminary
agreement:
xxx We shall also notify you if any of the required permits, licenses and
authorities shall not be be (sic) given or granted within fifteen days (15)
from your conform (sic) hereto. In such case, the agreement may be
canceled and all rights and obligations hereunder shall cease.22cЃa
(underscoring supplied)
Food Fest was able to secure the permits, licenses and authority to operate
when the lease contract was executed. Its failure to renew these permits,
licenses and authority for the succeeding year, does not, however, suffice to
declare the lease functus officio, nor can it be construed as an unforeseen
event to warrant the application of Article 1267.
Contracts, once perfected, are binding between the contracting parties.
Obligations arising therefrom have the force of law and should be complied
with in good faith. Food Fest cannot renege from the obligations it has
freely assumed when it signed the lease contract.
WHEREFORE, the Court of Appeals Decision of April 18, 2008 is AFFIRMED
with MODIFICATION.
Food Fest is ORDERED to pay So liquidated damages in the amount
equivalent to 25% of the total sum due and demandable. Further, So is
ORDERED to pay attorney's fees in the amount equivalent to 25% of the
total sum due and demandable. In all other respects, the decision is
AFFIRMED.
SO ORDERED.
ObliCon Chapter 4 Cases 80 | P a g e
85.) VICTOR YAM & YEK SUN LENT, doing business under the name and style
of Philippine Printing Works; petitioners,
vs.
THE COURT OF APPEALS and MANPHIL INVESTMENT CORPORATION,
respondents.
This is a petition for review of the decision 1 of the Court of Appeals
affirming in toto the decision of the Regional Trial Court of Manila (Branch
149), ordering petitioners to pay private respondent the amount of
P266,146.88 plus interest, service charge, penalty fees, and attorney's fees
and the costs, otherwise the chattel mortgage given to secure payment of
the loan would be foreclosed.
The following are the facts:
On May 10,1979, the parties in this case entered into a Loan Agreement
with Assumption of Solidary Liability whereby petitioners were given a loan
of P500,000.00 by private respondent. The contract provided for the
payment of 12% annual interest, 2% monthly penalty, 1 1/2% monthly
service charge, and 10% attorney's fees. 2 Denominated the first Industrial
Guarantee and Loan Fund (IGLF), the loan was secured by a chattel
mortgage on the printing machinery in petitioners' establishment. 3
Petitioners subsequently obtained a second IGLF loan of P300,000.00
evidenced by two promissory notes, dated July 3, 1981 and September 30,
1981. For this purpose, a new loan agreement 4 was entered into by the
parties containing identical provisions as the first one, except as to the
annual interest which was increased to 14% and the service charge which
was reduced to 1% per annum. The deed of chattel mortgage was amended
correspondingly. 5
By April 2, 1985, petitioners had paid their first loan of P500,000.00. On
November 4, 1985, private respondent was placed under receivership by
the Central Bank and Ricardo Lirio and Cristina Destajo were appointed as
receiver and in-house examiner, respectively.
On May 17, 1986, petitioners made a partial payment of P50,000.00 on the
second loan. They later wrote private respondent a letter, dated June 18,
1986, proposing to settle their obligation. On July 2, 1986, private
respondent, through its counsel, replied with a counter-offer, namely, that it
would reduce the penalty charges up to P140,000.00, provided petitioners
can pay their obligation on or before July 30, 1986. 6
As of July 31, 1986, petitioners' total liability to private respondent was
P727,001.35, broken down as follows: 7
Principal — P295,469.47
Interest — 165,385.00
Penalties — 254,820.55
Service Charges — 11,326.33
—————
TOTAL P727,001.35
On this date, petitioners paid P410,854.47 by means of a Pilipinas Bank
check, receipt of which was acknowledged by Destajo. 8 The corresponding
voucher for the check bears the following notation: "full payment of IGLF
LOAN." 9
The amount of P410,854.47 was the sum of the principal (P295,469.47) and
the interest; (P165,385.00) less the partial payment of P50,000.00. The
private respondent sent two demand letters to petitioners, dated
September 4, 1986 and September 25, 1986, seeking payment of the
balance of P266,146.88. As petitioners did not respond, private respondent
filed this case in the Regional Trial Court of Metro Manila for the collection
of P266,146.88 plus interests, penalties, and service charges or, in the
alternative, for the foreclosure of the mortgaged machineries.
In their Answer, petitioners claimed that they had fully paid their obligation
to private respondent. They contended that some time after receiving
private respondent's letter of July 25, 1986 (concerning the conditional offer
to reduce their penalty charges), petitioner Victor Yam and his wife, Elena
Yam, met with Carlos Sobrepeñas, president of respondent corporation,
ObliCon Chapter 4 Cases 81 | P a g e
during which the latter agreed to waive the penalties and service charges,
provided petitioners paid the principal and interest, computed as of July 31,
1986, less the earlier payment of P50,000.00. This is the reason why
according to them they only paid P410,854.47. Petitioners added that this
fact of full payment is reflected in the voucher accompanying the Pilipinas
Bank check they issued, which bore the notation "full payment of IGLF
loan."
On April 30, 1990, the lower court rendered a decision, the dispositive
portion of which reads:
WHEREFORE, in view of the foregoing, the defendants Victor Yam and Yek
Sun Lent are hereby ordered to pay jointly and severally, the principal loan.
balance of P266,146.88 as of September 4, 1986 plus interest at 14% per
annum, service charge at 1% per annum and penalty fees at 2% per month
and to pay plaintiff attorney's fees equivalent to 10% of the amount to be
recovered, and to pay the costs of suit, failing in which, the chattel mortgage
instituted on the printing machineries and equipment described in the Deed
of Chattel Mortgage dated May 10, 1979, as amended, is hereby declared
foreclosed and the subject thereof sold in accordance with law to satisfy the
judgment herein rendered.
SO ORDERED. 10
On appeal, the Court of Appeals affirmed the decision of the trial court in
toto. Hence, this petition. Petitioners reiterate the same assignment of
errors made by them before the Court of Appeals, to wit: 11
FIRST ASSIGNED ERROR
THAT THE LOWER COURT GRIEVOUSLY ERRED IN FAILING TO GIVE
CREDENCE TO THE DOCUMENTARY AS WELL AS TESTIMONIAL EVIDENCE OF
THE PETITIONERS RELATIVE TO THE PAYMENT TO THE RESPONDENT OF THE
ADDITIONAL LOAN UNDER THE AMENDMENT OF DEED OF CHATTEL
MORTGAGE: (EXHIBIT K, RESPONDENT) AND AS AGAINST THE TESTIMONY
OF RESPONDENT'S WITNESS, CRISTINA L. DESTAJO.
SECOND ASSIGNED ERROR
THAT THE COURT BELOW ERRED IN NOT TOTALLY DISREGARDING EXHIBITS
E AND F OF THE RESPONDENTS.
The question in whether petitioners are liable for the payment of the
penalties and service charges on their loan which, as of July 31, 1986,
amounted to P266;246.88.
The answer is in the affirmative. Art. 1270, par. 2 of the Civil Code provides
that express condonation must comply with the forms of donation. 12 Art.
748, par. 3 provides that the donation and acceptance of a movable, the
value of which exceeds P5,000,00, must be made in writing, otherwise the
same shall be void. In this connection, under Art. 417, par. 1, obligations,
actually referring to credits, l3 are considered movable property. In the case
at bar, it is undisputed than the alleged agreement to condone P266,196.88
of the second IGLF loan was not reduced in writing. 14
Nonetheless, petitioners insist that the voucher covering the Pilipinas Bank
check for P410,854.47, containing the notation that the amount is in "full
payment of IGLF loan," constitutes documentary evidence of such oral
agreement. This contention is without merit. The notation in "full payment
of IGLF loan" merely states petitioners' intention in making the payment,
but in no way does it bind private respondent. It would have been a
different matter if the notation appeared in a receipt issued by respondent
corporation, through its receiver, because then it would be an admission
against interest. Indeed, if private respondent really condoned the amount
in question, petitioners should have asked for a certificate of full payment
from respondent corporation, as they did in the case of their first IGLF loan
of P500,000.00. 15
Petitioners, however, contend that the Central Bank examiner assigned to
respondent corporation, Cristina Destajo, signed the voucher in question.
Destajo claimed that, when she signed the voucher, she failed to notice the
ObliCon Chapter 4 Cases 82 | P a g e
statement that the amount of P410,854.47 was being given in "full payment
of IGLF Loan." She said she merely took note of the amount and the check
number indicated therein. 16 In any event, Destajo, by countersigning the
voucher, did no more than acknowledge receipt of the payment. She cannot
be held to have ascented thereby to the payment in full of petitioners'
indebtedness to private respondent. It was obvious she had no authority to
condone any indebtedness, her "issuing official receipts, preparing check
vouchers and documentation." 17

Moreover, it is to be noted that the alleged agreement to condone the

amount in question was supposedly entered into by the parties sometime in
July 1986, that is, after respondent corporation had been placed under
receivership on November 4, 1985. As held in Villanueva v. Court of Appeals
18 "the appointment of a receiver operates to suspend the authority of a
[corporation] and of its directors and officers over its property and effects,
such authority being reposed in the receiver:" 19 Thus, Sobrepeñas had no
authority to condone the debt.

Indeed, Mrs. Yam herself testified that when she and her husband sought
the release of the chattel mortgage over their property, they were told that
only the Central Bank would authorize the same "because [the CB] the
receiver." 20 Considering this, petitioners cannot feign ignorance and plead
good faith.

The second assignment of error pertains to the petitioners' allegation that

they did not receive the two letters of demand sent by private respondent
on September 4 and September 25, 1986. Both the lower court and the
Court of Appeals found otherwise. We have no reason to disturb this factual
finding. It is settled that findings of fact of trial courts, adopted and
confirmed by the Court of Appeals, are final and conclusive and, as a rule,
will not be reviewed on appeal. 21

WHEREFORE, the decision of the Court of Appeals is AFFIRMED.

SO ORDERED.
ObliCon Chapter 4 Cases 83 | P a g e
86.) BANK OF THE PHILIPPINES ISLAND and GRACE ROMERO, petitioners,
vs.
COURT OF APPEALS and EDVIN F. REYES, respondents.
Petitioners seek a review of the Decision1 of respondent Court of Appeals in
CA-G.R. CV No. 41543 reversing the Decision2 of the Regional Trial Court of
Quezon City, Branch 79, and ordering petitioners to credit private
respondent's Savings Account No. 3185-0172-56 with P10,556,00 plus
interest.
The facts reveal that on September 25, 1985, private respondent Edvin F.
Reyes opened Savings Account No. 3185-0172-56 at petitioner Bank of the
Philippine Islands (BPI) Cubao, Shopping Center Branch. It is a joint
"AND/OR" account with his wife, Sonia S. Reyes.
Private respondent also held a joint "AND/OR" Savings Account No. 3185-
0128-82 with his grandmother, Emeteria M. Fernandez, opened on February
11, 1986 at the same BPI branch. He regularly deposited in this account the
U.S. Treasury Warrants payable to the order of Emeteria M. Fernandez as
her monthly pension.
Emeteria M. Fernandez died on December 28, 1989 without the knowledge
of the U.S. Treasury Department. She was still sent U.S. Treasury Warrant
No. 21667302 dated January 1, 1990 in the amount of U.S. $377.003 or
P10,556.00. On January 4, 1990, private respondent deposited the said U.S.
treasury check of Fernandez in Savings Account No. 3185-0128-82. The U.S.
Veterans Administration Office in Manila conditionally cleared the check.4
The check was then sent to the United States for further clearing.5
Two months after or on March 8, 1990, private respondent closed Savings
Account No. 3185-0128-82 and transferred its funds amounting to
P13,112.91 to Savings Account No. 3185-0172-56, the joint account with his
wife.
On January 16, 1991, U.S. Treasury Warrant No. 21667302 was dishonored
as it was discovered that Fernandez died three (3) days prior to its issuance.
The U.S. Department of Treasury requested petitioner bank for a refund.6
For the first time petitioner bank came to know of the death of Fernandez.
On February 19, 1991, private-respondent received a PT&T urgent telegram
from petitioner bank requesting him to contact Manager Grace S. Romero
or Assistant Manager Carmen Bernardo. When he called up the bank, he
was informed that the treasury check was the subject of a claim by Citibank
NA, correspondent of petitioner bank. He assured petitioners that he would
drop by the bank to look into the matter. He also verbally authorized them
to debit from his other joint account the amount stated in the dishonored
U.S. Treasury Warrant.7 On the same day, petitioner bank debited the
amount of P10,556.00 from private respondent's Savings Account No. 3185-
0172-56.
On February 21, 1991, private respondent with his lawyer Humphrey
Tumaneng visited the petitioner bank and the refund documents were
shown to them. Surprisingly, private respondent demanded from petitioner
bank restitution of the debited amount. He claimed that because of the
debit, he failed to withdraw his money when he needed them. He then filed
a suit for Damages8 against petitioners before the Regional Trial Court of
Quezon City, Branch 79.
Petitioners contested the complaint and counter claimed, for moral and
exemplary damages. By way of Special and Affirmative Defense, they
averred that private respondent gave them his express verbal authorization
to debit the questioned amount. They claimed that private respondent later
refused to execute a written authority.9
In a Decision dated January 20, 1993, the trial court dismissed the complaint
of private respondent for lack of cause of action.10
ObliCon Chapter 4 Cases 84 | P a g e
Private respondent appealed to the respondent Court of Appeals. On August
16, 1994, the Sixteenth Division of respondent court in AC-G.R. CV No.
41543 reversed the impugned decision, viz:
WHEREFORE, the judgement appealed from is set aside, and another one
entered ordering defendant (petitioner) to credit plaintiff's (private
respondent's) S.A. No. 3185-0172-56 with P10,556.00 plus interest at the
applicable rates for express teller savings accounts from February 19, 1991,
until compliance herewith. The claim and counterclaim for damages are
dismissed for lack of merit.
We find merit in the petition.
The first issue for resolution is whether private respondent verbally
authorized petitioner bank to debit his joint account with his wife for the
amount of the returned U.S. Treasury Warrant. We find that petitioners
were able to prove this verbal authority by preponderance of evidence. The
testimonies of Bernardo and Romero deserve credence. Bernardo testified:
xxx xxx xxx
Q After that, what happened?

SO ORDERED.11 A . . . Dr. Reyes Called me up and I informed him about the return of the U.S.
Treasury Warrant and we are requested to reimburse for the amount.
Petitioners now contend that respondent Court of Appeals erred:
I Q What was his response if any?
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING THAT
RESPONDENT REYES GAVE EXPRESS AUTHORITY TO PETITIONER BANK TO A Don't you worry about it, there is no personal problem.
DEBIT HIS JOINT ACCOUNT WITH HIS WIFE FOR THE VALUE OF THE xxx xxx xxx
RETURNED U.S. TREASURY WARRANT.
II Q And so what was his response?
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING THAT
PETITIONER BANK HAS LEGAL RIGHT TO APPLY THE DEPOSIT OF A He said that don' t you worry about.
RESPONDENT REYES TO HIS OUTSTANDING OBLIGATION TO PETITIONER xxx xxx xxx
BANK BROUGHT ABOUT BY THE RETURN OF THE U.S. TREASURY WARRANT
HE EARLIER DEPOSITED UNDER THE PRINCIPLE OF "LEGAL COMPENSATION." Q You said that you asked him the advice and he did not answer, what
III advice are you referring to?
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT APPLYING
CORRECTLY THE PRINCIPLES ENUNCIATED BY THE SUPREME COURT IN THE A In our conversation, he promised me that he will give me written
CASE OF GULLAS V. PNB, 62 PHIL. 519. confirmation or authorization.13
IV.
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT APPRECIATING The conversation was promptly relayed to Romero who testified:
THE FACT THAT THE MONEY DEBITED BY PETITIONER BANK WAS THE SAME xxx xxx xxx
MONEY TRANSFERRED BY RESPONDENT REYES FROM HIS JOINT "AND/OR" Q . . . Was there any opportunity where in said Mrs. Bernardo was able to
ACCOUNT WITH HIS GRANDMOTHER TO HIS JOINT "AND/OR" ACCOUNT convey to you the contents of their conversation?
WITH HIS WIFE.12
ObliCon Chapter 4 Cases 85 | P a g e
A This was immediately relayed to me as manager of the Bank of the
Philippine Islands, sir.
Q What, any was the content of her conversation, if you know?
A Mr. Reyes instructed Mrs. Bernardo to debit his account with the bank.
His account was maintained jointly with his wife then he promised to drop
by to give us a written confirmation, sir.
xxx xxx xxx
Q You said that you authorized the debiting of the account on February 19,
1991, is that correct?
A I did not authorize, we merely followed the instruction of Mr. Reyes, sir.14
We are not disposed to believe private respondent's allegation that he did
not give any verbal authorization. His testimony is uncorroborated. Nor does
he inspire credence. His past and fraudulent conduct is an evidence against
him.15 He concealed from petitioner bank the death of Fernandez on
December 28, 1989. 16 As of that date, he knew that Fernandez was no
longer entitled to receive any pension. Nonetheless, he-still received the
U.S. Treasury Warrant of Fernandez, and on January 4, 1990 deposited the
same in Savings Account No. 3185-0128-82. To pre-empt a refund, private
respondent closed his joint account with Fernandez (Savings Account No.
31-85-0128-82) on March 8, 1990 and transferred its balance to his joint
account with his wife (Savings Account No. 3185-0172-56). Worse, private
respondent declared under the penalties of perjury in the withdrawal slip 17
dated March 8, 1990 that his co-depositor, Fernandez, is still living. By his
acts, private respondent has stripped himself of credibility.
More importantly, the respondent court erred when it failed to rule that
legal compensation is proper. Compensation shall take place when two
persons, in their own right, are creditors and debtors of each other.18
Article 1290 of the Civil Code provides that "when all the requisites
mentioned in Article 1279 are present, compensation takes effect by
operation of law, and extinguishes both debts to the concurrent amount,
even though the creditors and debtors are not aware of the compensation."
Legal compensation operates even against the will of the interested parties
and even without the consent of them. 19 Since this compensation takes
place ipso jure, its effects arise on the very day on which all its requisites
concur. 20 When used as a defense, it retroacts to the date when its
requisites are fulfilled.21
Article 1279 states that in order that compensation may be proper, it is
necessary:
(1) That each one of the obligors be bound principally, and that he be at the
same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;
(3) That the two debts be due
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the debtor.
The elements of legal compensation are all present in the case at bar. The
obligors bound principally are at the same time creditors of each other.
Petitioner bank stands as a debtor of the private respondent, a depositor. At
the same time, said bank is the creditor of the private respondent with
respect to the dishonored U.S. Treasury Warrant which the latter illegally
transferred to his joint account. The debts involved consist of a sum of
money. They are due, liquidated, and demandable. They are not claimed by
a third person.
It is true that the joint account of private respondent and his wife was
debited in the case at bar. We hold that the presence of private
respondent's wife does not negate the element of mutuality of parties, i.e.,
that they must be creditors and debtors of each other in their own right.
The wife of private respondent is not a party in the case at bar. She never
asserted any right to the debited U.S. Treasury Warrant. Indeed, the right of
ObliCon Chapter 4 Cases 86 | P a g e
the petitioner bank to make the debit is clear and cannot be doubted. To
frustrate the application of legal compensation on the ground that the
parties are not all mutually obligated would result in unjust enrichment on
the part of the private respondent and his wife who herself out of honesty
has not objected to the debit. The rule as to mutuality is strictly applied at
law. But not in equity, where to allow the same would defeat a clear right or
permit irremediable injustice.22

In VIEW HEREOF, the Decision of respondent Court of Appeals in CA-G.R. CV

No. 41543 dated August 16, 1994 is ANNULLED and SET ASIDE and the
Decision of the trial court in Civil Case No. Q-91-8451 dated January 20,
1993 is REINSTATED. Costs against private respondent.

SO ORDERED.

ObliCon Chapter 4 Cases 87 | P a g e

87.) SILAHIS MARKETING CORPORATION, petitioner vs.
INTERMEDIATE APPELLATE COURT and GREGORIO DE LEON, doing
business under the name and style of "MARK INDUSTRIAL SALES",
respondents.
Petitioner Silahis Marketing Corporation seeks in this petition for review on
certiorari a reversal of the decision of the then Intermediate Appellate Court
(IAC) in AC-G.R. CV No. 67162 entitled "De Leon, etc. v. Silahis Marketing
Corporation", disallowing petitioner's counterclaim for commission to
partially offset the claim against it of private respondent Gregorio de Leon
for the purchase price of certain merchandise.
A review of the record shows that on various dates in October, November
and December, 1975, Gregorio de Leon (De Leon for short) doing business
under the name and style of Mark Industrial Sales sold and delivered to
Silahis Marketing Corporation (Silahis for short) various items of
merchandise covered by several invoices in the aggregate amount of P
22,213.75 payable within thirty (30) days from date of the covering invoices.
Allegedly due to Silahis' failure to pay its account upon maturity despite
repeated demands, de Leon filed before the then Court of First Instance of
Manila a complaint for the collection of the said accounts including accrued
interest thereon in the amount of P 661.03 and attorney's fees of P 5,000.00
plus costs of litigation.
The answer admitted the allegations of the complaint insofar as the invoices
were concerned but presented as affirmative defenses; [al a debit memo for
P 22,200.00 as unrealized profit for a supposed commission that Silahis
should have received from de Leon for the sale of sprockets in the amount
of P 111,000.00 made directly to Dole Philippines, Incorporated by the latter
sometime in August 1975 without coursing the same through the former
allegedly in violation of the usual practice concerning sale of merchandise to
Dole Philippines, Inc.; and [b] Silahis' claim that it is entitled to return the
stainless steel screen covered by Exhibits '6-A' and '6-B' which was found
defective by its client, Borden International, Davao City, and to have the
corresponding amount cancelled from its account with de Leon.
In a decision dated August 25, 1978, 1 the lower court confirmed the liability
of Silahis for the claim of de Leon but at the same time ordered that it be
partially offset by Silahis' counterclaim as contained in the debit memo for
unrealized profit and commission. Judge Bienvenido C. Ejercito of said court
held:
There is no question that the defendant received from the plaintiff the items
contained in Exhs. 'A' to 'F'. The only question is whether or not the
defendant is entitled to set off against the claim of the plaintiff the amount
contained in the debit memo of the defendant, Exh. '1', and whether or not
the defendant is entitled to return the steel wire mesh which was returned
to them by Borden Philippines, as shown by Exhs. '6-A' and '6-B'. The Court
believes that the defendant is properly chargeable for the amounts of the
unpaid invoices set forth in the complaint. However, the Court also believes
that the plaintiff is also properly chargeable for the debit memo of P
22,200.00, Exh. '1'. This is because it was proven by the defendant from the
testimonies of Isaias Fernando, Jr. and Jose Joel Tamon that contrary to the
agreement between plaintiff and defendant that the latter was to serve the
account of Dole Philippines in Davao, the plaintiff made a direct sale of
sprockets for P 111,000.00 which therreby deprives the defendant of its
corresponding commission for P 22,200.00 which the defendant would have
otherwise made if the plaintiff had followed its previous arrangement with
the defendant. However, as to the counterclaim of the defendant for a
cancellation of the amount of P 6,000.00 for defective stainless screen wire
purchased and intended for Borden International, Davao City, the Court
believes that it is much too late now to present said claim because the
purchase was made and delivered as early as December 22,1975 and the
proposed return to the defendant by Borden was made on April 1, 1976
only. The Court is not ready to award damages to any of the parties. After
deducting the amount of P 22,200.00, which is the unpaid commission of
the defendant from the principal total amount of the unpaid invoices of the
plaintiff of P 22,213.75, the unpaid balance in favor of the plaintiff is P
13.75. The claim for interest and attorney's fees of the plaintiff may be
offset against the interest and attorney's fees of the defendant.
ObliCon Chapter 4 Cases 88 | P a g e
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and
against the defendant ordering the defendant to pay to the plaintiff the
amount of P 13.75, with interest at 12% per annum from the date of the
filing of the action on July 1, 1976 until fully paid, without pronouncement
as to costs.
SO ORDERED.2
De Leon appealed from the said decision insofar as it directed partial
compensation and its failure to award interest on his principal claim as well
as attomey's fees in his favor. In a decision dated March 1 7, 1986, 3
respondent Intermediate Appellate Court 4 set aside the decision of the
lower court and dismissed herein petitioner's (therein defendant-
appellee's) counterclaim for lack of factual or legal basis. The appellate court
found that there was no agreement, verbal or otherwise, nor was there any
contractual obligation between De Leon and Silahis prohibiting any direct
sales to Dole Philippines, Inc. by de Leon; nor was there anything in the
debit memo obligating de Leon to pay a commission to Silahis for the sale of
P 111,000.00 worth of sprockets to Dole Philippines although in the past,
the former did supply certain items to the latter for delivery to Dole
Philippines, Incorporated.
Hence, in this petition for review on certiorari, the central issue is whether
or not private respondent is liable to the petitioner for the commission or
margin for the direct sale which the former concluded and consummated
with Dole Philippines, Incorporated without coursing the same through
herein petitioner.
We have carefully gone over the record of this case particularly the debit
memo upon which petitioner's counterclaim rests and found nothing
contained therein to show that private respondent obligated himself to set-
off or compensate petitioner's outstanding accounts with the alleged
unrealized commission from the assailed sale of sprockets in the amount of
P 111,000.00 to Dole Philippines, Inc.
It must be remembered that compensation takes place when two persons,
in their own right, are creditors and debtors to each other. Article 1279 of
the Civil Code provides that: "In order that compensation may be proper, it
is necessary: [1] that each one of the obligors be bound principally, and that
he be at the same time a principal creditor of the other; [2] that both debts
consist in a sum of money, or if the things due are consumable, they be of
the same kind, and also of the same quality if the latter has been stated; [3]
that the two debts be due; [4] that they be liquidated and demandable; [5]
that over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the debtor.
When all the requisites mentioned in Art. 1279 of the Civil Code are present,
compensation takes effect by operation of law, even without the consent or
knowledge of the creditors and debtors.5 Article 1279 requires, among
others, that in order that legal compensation shall take place, "the two
debts be due" and "they be liquidated and demandable." Compensation is
not proper where the claim of the person asserting the set-off against the
other is not clear nor liquidated; compensation cannot extend to
unliquidated, disputed claim existing from breach of contract.6
Undoubtedly, petitioner admits the validity of its outstanding accounts with
private respondent in the amount of P 22,213.75 as contained in its answer.
But whether private respondent is liable to pay the petitioner a 20% margin
or commission on the subject sale to Dole Philippines, Inc. is vigorously
disputed. This circumstance prevents legal compensation from taking place.
The Court agrees with respondent appellate court that there is no evidence
on record from which it can be inferred that there was any agreement
between the petitioner and private respondent prohibiting the latter from
selling directly to Dole Philippines, Incorporated. Definitely, it cannot be
asserted that the debit memo was a contract binding between the parties
considering that the same, as correctly found by the appellate court, was
not signed by private respondent nor was there any mention therein of any
commitment by the latter to pay any commission to the former involving
ObliCon Chapter 4 Cases 89 | P a g e
the sale of sprockets to Dole Philippines, Inc. in the amount of P 111,000.00.
Indeed, such document can be taken as self-serving with no probative value
absent a showing or at the very least an inference, that the party sought to
be bound assented to its contents or showed conformity thereto.

In fact the letter written by private respondent's lawyer dated March 5,1975
7 in reply to petitioner's letter dated February 19, 1976 transmitting its
Debit Memo No. 1695 8 further strengthens private respondent's stand that
it never agreed to give petitioner any commission on the direct sale to Dole
Philippines, Inc. by its company because said letter denied any utilization of
petitioners personnel and facilities at its Davao Branch in the transaction
with Dole Philippines, Inc. which would otherwise lend a basis for
petitioner's monetary claim.

WHEREFORE, in view of the foregoing, the questioned decision of

respondent appellate court is hereby AFFIRMED.

SO ORDERED.

ObliCon Chapter 4 Cases 90 | P a g e

88.) SPOUSES ALEJANDRO MlRASOL and LILIA E. MIRASOL, petitioners, vs.
THE COURT OF APPEALS, PHILIPPINE NATIONAL and PHILIPPINE
EXCHANGE CO., INC., respondent.
This is a petition for review on certiorari of the decision of the Court of
Appeals dated July 22, 1996, in CA-G.R. CY No. 38607, as well as of its
resolution of January 23, 1997, denying petitioners' motion for
reconsideration. The challenged decision reversed the judgment of the
Regional Trial Court of Bacolod City, Branch 42 in Civil Case No. 14725.
The factual background of this case, as gleaned from the records, is as
follows:
The Mirasols are sugarland owners and planters. In 1973-1974, they
produced 70,501.08 piculs1 of sugar, 25,662.36 of which were assigned for
export. The following crop year, their acreage planted to the same crop was
lower, yielding 65,100 piculs of sugar, with 23,696.40 piculs marked for
export.
Private respondent Philippine National Bank (PNB) financed the Mirasols'
sugar production venture for crop years, 1973-1974 and 1974-1975 under a
crop loan financing scheme. Under said scheme, the Mirasols signed Credit
Agreements, a Chattel Mortgage on Standing Crops, and a Real Estate
Mortgage in favor of PNB. The Chattel Mortgage empowered PNB as the
petitioners' attorney-in-fact to negotiate and to sell the latter's sugar in both
domestic and export markets and to apply the proceeds to the payment of
their obligations to it.
Exercising his law-making powers under Martial Law, then President
Ferdinand Marcos issued Presidential Decree (P.D.) No. 5792 in November,
1974. The decree authorized private respondent Philippine Exchange Co.,
Inc. (PHILEX) to purchase sugar allocated for export to the United States and
to other foreign markets. The price and quantity was determined by the
Sugar Quota Administration, PNB, the Department of Trade and Industry,
and finally, by the Office of the President. The decree further authorized
PNB to finance PHILEX's purchases. Finally, the decree directed that
whatever profit PHILEX might realize from sales of sugar abroad was to be
remitted to a special fund of the national government, after commissions,
overhead expenses and liabilities had been deducted. The government
offices and entities tasked by existing laws and administrative regulations to
oversee the sugar export pegged the purchase price of export sugar in crop
years 1973-1974 and 1974-1975 at P180.00 per picul.
PNB continued to finance the sugar production of the Mirasols for crop
years 1975-1976 and 1976-1977. These crop loans and similar obligations
were secured by real estate mortgages over several properties of the
Mirasols and chattel mortgages over standing crops. Believing that the
proceeds of their sugar sales to PNB, if properly accounted for, were more
than enough to pay their obligations, petitioners asked PNB for an
accounting of the proceeds of the sale of their export sugar. PNB ignored
the request. Meanwhile, petitioners continued to avail of other loans from
PNB and to make unfunded withdrawals from their current accounts with
said bank. PNB then asked petitioners to settle their due and demandable
accounts. As a result of these demands for payment, petitioners on August
4, 1977, conveyed to PNB real properties valued at P1,410,466.00 by way of
dacion en pago, leaving an unpaid overdrawn account of P1,513,347.78.
On August 10, 1982, the balance of outstanding sugar crop and other loans
owed by petitioners to PNB stood at P15,964,252.93. Despite demands, the
Mirasols failed to settle said due anti demandable accounts. PNB then
proceeded to extrajudicially for close the mortgaged properties. After
applying the proceeds of the auction sale of the mortgaged realties, PNB still
had a deficiency claim of P12,551,252.93.
Petitioners continued to ask PNB to account for the proceeds of the sale of
their export sugar for crop years 1973-1974 and 1974-1975, insisting that
said proceeds, if properly liquidated, could offset their outstanding
obligations with the batik. PNB remained adamant in its stance that under
P.D. No. 579, there was nothing to account since under said law, all earnings
from the export sales of sugar pertained to the National Government and
ObliCon Chapter 4 Cases 91 | P a g e
were subject to the disposition of the President of the Philippines for public
purposes.1âwphi1.nêt
On August 9, 1979, the Mirasols filed a suit for accounting, specific
performance, and damages against PNB with the Regional Trial Court of
Bacolod City, docketed as Civil Case No. 14725.
On June 16, 1987, the complaint was amended to implead PHILEX as party-
defendant.
The parties agreed at pre-trial to limit the issues to the following:
"1. The constitutionality and/or legality of Presidential Decrees numbered
338, 579, and 1192;
"2. The determination of the total amount allegedly due the plaintiffs from
the defendants corresponding to the allege(d) unliquidated cost price of
export sugar during crop years 1973-1974 and 1974-1975."3
After trial on the merits, the trial court decided as follows:
"WHEREFORE, the foregoing premises considered, judgment is hereby
rendered in favor of the plaintiffs and against the defendants Philippine
National Bank (PNB) and Philippine Exchange Co., Inc. (PHILEX):
(1) Declaring Presidential Decree 579 enacted on November 12, 1974 and all
circulars, as well as policies, orders and other issuances issued in
furtherance thereof, unconstitutional and therefore, NULL and VOID being
in gross violation of the Bill of Rights;
(2) Ordering defendants PNB and PHILEX to pay, jointly and severally,
plaintiffs the whole amount corresponding to the residue of the
unliquidated actual cost price of 25,662 piculs in export sugar for crop year
1973-1974 at an average price of P300.00 per picul, deducting therefrom
however, the amount of P180.00 already paid in advance plus the allowable
deductions in service fees and other charges;
(3) And also, for the same defendants to pay, jointly and severally, same
plaintiffs the whole amount corresponding to the unpaid actual price of
14,596 piculs of export sugar for crop year 1974-1975 at an average rate of
P214.14 per picul minus however, the sum of P180.00 per picul already paid
by the defendants in advance and the allowable deducting (sic) in service
fees and other charges.
"The unliquidated amount of money due the plaintiffs but withheld by the
defendants, shall earn the legal rate of interest at 12% per annum computed
from the date this action was instituted until fully paid; and, finally -
(4) Directing the defendants PNB and PHILEX to pay, jointly and severally,
plaintiffs the sum of P50,000.00 in moral damages and the amount of
P50,000.00 as attorney's fees, plus the costs of this litigation.
"SO ORDERED."4
The same was, however, modified by a Resolution of the trial court dated
May 14, 1992, which added the following paragraph:
"This however whatever benefits that may have accrued in favor of the
plaintiffs with the massage and approval of Republic Act. 7202 otherwise
known as the 'Sugar Restitution Law,' authorizing the restitution of losses
suffered by the plaintiffs from Crop year 1974-1975 to Crop year 1984-1985
occasioned by the actuations of government-owned and controlled
agencies. (Underscoring in the original).
"SO ORDERED."5
The Mirasols then filed an appeal with the respondent court, docketed as
CA-G.R. CY No. 38607, faulting the trial court for not nullifying the dacion en
pago and the mortgage contracts, as well as the foreclosure of their
ObliCon Chapter 4 Cases 92 | P a g e
mortgaged properties. Also faulted was the trial court's failure to award
them the full money claims and damages sought from both PNB and PHILEX.
On July 22, 1996, the Court of Appeals reversed the trial court as follows:
"WHEREFORE, this Court renders judgment REVERSING the appealed
Decision and entering the following verdict:
"1. Declaring the dacion en pago and the foreclosure of the mortgaged
properties valid;
"2. Ordering the PNB to render an accounting of the sugar account of the
Mirasol[s] specifically stating the indebtedness of the latter to the former
and the proceeds of Mirasols' 1973-1974 and 1974-1975 sugar production
sold pursuant to and in accordance with P.D. 579 and the issuances
therefrom;
"3. Ordering the PNB to recompute in accordance with RA 7202 Mirasols'
indebtedness to it crediting to the latter payments already made as well as
the auction price of their foreclosed real estate and stipulated value of their
properties ceded to PNB in the dacon (sic) en pago;
"4. Whatever the result of the recomputation of Mirasols' account, the
outstanding balance or the excess payment shall be governed by the
pertinent provisions of RA 7202.
"SO ORDERED."6
On August 28, 1996, petitioners moved for reconsideration, which the
appellate court denied on January 23, 1997.
Hence, the instant petition, with petitioners submitting the following issues
for our resolution:
"1. Whether the Trial Court has jurisdiction to declare a statute
unconstitutional without notice to the Solicitor General where the parties
have agreed to submit such issue for the resolution of the Trial Court.
"2. Whether PD 579 and subsequent issuances7 thereof are
unconstitutional.
"3. Whether the Honorable Court of Appeals committed manifest error in
not applying the doctrine of piercing the corporate veil between
respondents PNB and PHILEX.
"4. Whether the Honorable Court of Appeals committed manifest error in
upholding the validity of the foreclosure on petitioners property and in
upholding the validity of the dacion en pago in this case.
"5. Whether the Honorable Court of Appeals committed manifest error in
not awarding damages to petitioners grounds relied upon the allowance of
the petition. (Underscored in the original)"8
On the first issue. It is settled that Regional Trial Courts have the authority
and jurisdiction to consider the constitutionality of a statute, presidential
decree, or executive order.9 The Constitution vests the power of judicial
review or the power to declare a law, treaty, international or executive
agreement, presidential decree, order, instruction, ordinance, or regulation
not. only in this Court, but in all Regional Trial Courts.10 In J.M. Tuason and
Co. v. Court of Appeals, 3 SCRA 696 (1961) we held:
"Plainly, the Constitution contemplates that the inferior courts should have
jurisdiction in cases involving constitutionality of any treaty or law, for it
speaks of appellate review of final judgments of inferior courts in cases
where such constitutionality happens to be in issue."11
Furthermore, B.P. BIg. 129 grants Regional Trial Courts the authority to rule
on the conformity of laws or treaties with the Constitution, thus:
ObliCon Chapter 4 Cases 93 | P a g e
"SECTION 19. Jurisdiction in civil cases. - Regional Trial Courts shall exercise
exclusive original jurisdiction:
(1) In all civil actions in which the subject of the litigations is incapable of
pecuniary estimation;"
The pivotal issue, which we must address, is whether it was proper for the
trial court to have exercised judicial review.
Petitioners argue that the Court of Appeals erred in finding that it was
improper for the trial court to have declared P.D. No. 57912
unconstitutional, since petitioners had not complied with Rule 64, Section 3,
of the Rules of Court. Petitioners contend that said Rule specifically refers
only to actions for declaratory relief and not to an ordinary action for
accounting, specific performance, and damages.
Petitioners' contentions are bereft of merit. Rule 64, Section 3 of the Rules
of Court provides:
"SEC. 3. Notice to Solicitor General. - In any action which involves the
validity of a statute, or executive order or regulation, the Solicitor General
shall be notified by the party attacking the statute, executive order, or
regulation, and shall be entitled to be heard upon such question."
This should be read in relation to Section 1 [c] of P.D. No. 478,13 which
states in part:
"SECTION 1. Functions and Organizations - (1) The Office of the Solicitor
General shall...have the following specific powers and functions:
xxx
"[c] Appear in any court in any action involving the validity of any treaty,
law, executive order or proclamation, rule or regulation when in his
judgment his intervention is necessary or when requested by the court."
It is basic legal construction that where words of command such as "shall,"
"must," or "ought" are employed, they are generally and ordinarily regarded
as mandatory.14 Thus, where, as in Rule 64, Section 3 of the Rules of Court,
the word "shall" is used, a mandatory duty is imposed, which the courts
ought to enforce.
The purpose of the mandatory Notice in Rule 64, Section 3 is to enable the
Solicitor General to decide whether or not his intervention in the action
assailing the validity of a law or treaty is necessary. To deny the Solicitor
General such notice would be tantamount to depriving him of his day in
court. We must stress that, contrary to petitioners' stand, the mandatory
notice requirement is not limited to actions involving declaratory relief and
similar remedies. The rule itself provides that such notice is required in "any
action" and not just actions involving declaratory relief. Where there is no
ambiguity in the words used in the true, there is no room for
constnlction.15 In all actions assailing the validity of a statute, treaty,
presidential decree, order, or proclamation, notice to the Solicitor General is
mandatory.
In this case, the Solicitor General was never notified about Civil Case No.
14725. Nor did the trial court ever require him to appear in person or by a
representative or to file any pleading or memorandum on the
constitutionality of the assailed decree. Hence, the Court of Appeals did not
err in holding that lack of the required notice made it improper for the trial
court to pass upon the constitutional validity of the questioned presidential
decrees.
As regards the second issue, petitioners contend that P.D. No. 579 and its
implementing issuances are void for violating the due process clause and
the prohibition against the taking of private property without just
compensation. Petitioners now ask this Court to exercise its power of
judicial review.
Jurisprudence has laid down the following requisites for the exercise of this
power: First, there must be before the Court an actual case calling for the
ObliCon Chapter 4 Cases 94 | P a g e
exercise of judicial review. Second, the question before the Court must be
ripe for adjudication. Third, the person challenging the validity of the act
must have standing to challenge. Fourth, the question of constitutionality
must have been raised at the earliest opportunity, and lastly, the issue of
constitutionality must be the very lis mota of the case.16
As a rule, the courts will not resolve the constitutionality of a law, if the
controversy can be settled on other grounds.17 The policy of the courts is to
avoid ruling on constitutional questions and to presume that the acts of the
political departments are valid, absent a clear and unmistakable showing to
the contrary. To doubt is to sustain. This presumption is based on the
doctrine of separation of powers. This means that the measure had first
been carefully studied by the legislative and executive departments and
found to be in accord with the Constitution before it was finally enacted and
approved.18
The present case was instituted primarily for accounting and specific
performance. The Court of Appeals correctly ruled that PNB's obligation to
render an accounting is an issue, which can be determined, without having
to rule on the constitutionality of P.D. No. 579. In fact there is nothing in
P.D. No. 579, which is applicable to PNB's intransigence in refusing to give
an accounting. The governing law should be the law on agency, it being
undisputed that PNB acted as petitioners' agent. In other words, the
requisite that the constitutionality of the law in question be the very lis
mota of the case is absent. Thus we cannot rule on the constitutionality of
P.D. No. 579.
Petitioners further contend that the passage of R.A. No. 720219 rendered
P.D. No. 579 unconstitutional, since R.A. No. 7202 affirms that under P.D.
579, the due process clause of the Constitution and the right of the sugar
planters not to be deprived of their property without just compensation
were violated.
A perusal of the text of R.A. No. 7202 shows that the repealing clause of said
law merely reads:
"SEC. 10. All laws, acts, executive orders and circulars in conflict herewith
are hereby repealed or modified accordingly."
The settled rule of statutory construction is that repeals by implication are
not favored.20 R.A. No. 7202 cannot be deemed to have repealed P.D. No.
579. In addition, the power to declare a law unconstitutional does not lie
with the legislature, but with the courts.21 Assuming arguendo that R.A. No.
7202 did indeed repeal P.D. No. 579, said repeal is not a legislative
declaration finding the earlier law unconstitutional.
To resolve the third issue, petitioners ask us to apply the doctrine of piercing
the veil of corporate fiction with respect to PNB and PHILEX. Petitioners
submit that PHILEX was a wholly-owned subsidiary of PNB prior to the
latter's privatization.
We note, however, that the appellate court made the following finding of
fact:
"1. PNB and PHILEX are separate juridical persons and there is no reason to
pierce the veil of corporate personality. Both existed by virtue of separate
organic acts. They had separate operations and different purposes and
powers."22
Findings of fact by the Court of Appeals are conclusive and binding upon this
Court unless said findings are not supported by the evidence.23 Our
jurisdiction in a petition for review under Rule 45 of the Rules of Court is
limited only to reviewing questions of law and factual issues are not within
its province.24 In view of the aforequoted finding of fact, no manifest error
is chargeable to the respondent court for refusing to pierce the veil of
corporate fiction.
On the fourth issue, the appellate court found that there were two sets of
accounts between petitioners and PNB, namely:
ObliCon Chapter 4 Cases 95 | P a g e
"1. The accounts relative to the loan financing scheme entered into by the
Mirasols with PNB (PNB's Brief, p. 16) On the question of haw much the PNB
lent the Mirasols for crop years 1973-1974 and 1974-1975, the evidence
recited by the lower court in its decision was deficient. We are offered (sic)
PNB the amount of FIFTEEN MILLION NINE HUNDRED SIXTY FOUR
THOUSAND TWO HUNDRED FIFTY TWO PESOS and NINETY THREE Centavos
(Ps15,964,252.93) but this is the alleged balance the Mirasols owe PNB
covering the years 1975 to 1982.
"2. The account relative to the Mirasol's current account Numbers 5186 and
5177 involving the amount of THREE MILLION FOUR HUNDRED THOUSAND
Pesos (P3,400,000.00). PNB claims against the Mirasols. (PNB's Brief, p. 17)
"In regard to the first set of accounts, besides the proceeds from PNB's sale
of sugar (involving the defendant PHILEX in relation to the export portion of
tile stock), the PNB foreclosed the Mirasols' mortgaged properties realizing
therefrom in 1981 THREE MILLION FOUR HUNDRED THIRTEEN THOUSAND
pesos (P3,413,000.00), the PNB itself having acquired the properties as the
highest bidder.
"As to the second set of accounts, PNB proposed, and the Mirasols
accepted, a dacion en pago scheme by which the Mirasols conveyed to PNB
pieces of property valued at ONE MILLION FOUR HUNDRED TEN THOUSAND
FOUR HUNDRED SIXTY-SIX Pesos (Ps1,410,466.00) (PNB's Brief, pp. 16-
17)."25
Petitioners now claim that the dacion en pago and the foreclosure of their
mortgaged properties were void for want of consideration. Petitioners insist
that the loans granted them by PNB from 1975 to 1982 had been fully paid
by virtue of legal compensation. Hence, the foreclosure was invalid and of
no effect, since the mortgages were already fully discharged. It is also
averred that they agreed to the dacion only by virtue of a martial law Arrest,
Search, and Seizure Order (ASSO).
We find petitioners' arguments unpersuasive. Both the lower court and the
appellate court found that the Mirasols admitted that they were indebted to
PNB in the sum stated in the latter's counterclaim.26 Petitioners
nonetheless insist that the same can be offset by the unliquidated amounts
owed them by PNB for crop years 1973-74 and 1974-75. Petitioners'
argument has no basis in law. For legal compensation to take place, the
requirements set forth in Articles 1278 and 1279 of the Civil Code must be
present. Said articles read as follows:
"Art. 1278. Compensation shall take place when two persons, in their own
right, are creditors and debtors of each other.
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the
same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;
(3) That the two debts are due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the debtor."
In the present case, set-off or compensation cannot take place between the
parties because: First, neither of the parties are mutually creditors and
debtors of each other. Under P.D. No. 579, neither PNB nor PHILEX could
retain any difference claimed by the Mirasols in the price of sugar sold by
the two firms. P.D. No. 579 prescribed where the profits from the sales are
to be paid, to wit:
ObliCon Chapter 4 Cases 96 | P a g e
"SECTION 7. x x x After deducting its commission of two and one-half (2-
1/2%) percent of gross sales, the balance of the proceeds of sugar trading
operations for every crop year shall be set aside by the Philippine Exchange
Company, Inc,. as profits which shall be paid to a special fund of the
National Government subject to the disposition of the President for public
purposes."
Thus, as correctly found by the Court of Appeals, "there was nothing with
which PNB was supposed to have off-set Mirasols' admitted
indebtedness."27
Second, compensation cannot take place where one claim, as in the instant
case, is still the subject of litigation, as the same cannot be deemed
liquidated.28
With respect to the duress allegedly employed by PNB, which impugned
petitioners' consent to the dacion en pago, both the trial court and the
Court of Appeals found that there was no evidence to support said claim.
Factual findings of the trial court, affirmed by the appellate court, are
conclusive upon this Court.29
On the fifth issue, the trial court awarded petitioners P50,000.00 in moral
damages and P50,000.00 in attorney's fees. Petitioners now theorize that it
was error for the Court of Appeals to have deleted these awards,
considering that the appellate court found PNB breached its duty as an
agent to render an accounting to petitioners.
An agent's failure to render an accounting to his principal is contrary to
Article 1891 of the Civil Code.30 The erring agent is liable for damages under
Article 1170 of the Civil Code, which states:
"Those who in the performance of their obligations are guilty of fraud,
negligence, or delay, and those who in any manner contravene the tenor
thereof, are liable for damages."
Article 1170 of the Civil Code, however, must be construed in relation to
Article 2217 of said Code which reads:
"Moral damages include physical suffering, mental anguish, fright, serious
anxiety, besmirched reputation, wounded feelings, moral shock, social
humiliation, and similar injury .Though incapable of pecuniary computation,
moral damages may be recovered if they are the proximate result of the
defendant's wrongful act or omission."
Moral damages are explicitly authorized in breaches of contract where the
defendant acted fraudulently or in bad faith.31 Good faith, however, is
always presumed and any person who seeks to be awarded damages due to
the acts of another has the burden of proving that the latter acted in bad
faith, with malice, or with ill motive. In the instant case, petitioners have
failed to show malice or bad faith32 on the part of PNB in failing to render
an accounting. Absent such showing, moral damages cannot be awarded.
Nor can we restore the award of attorney's fees and costs of suit in favor of
petitioners. Under Article 2208 (5) of the Civil Code, attorney's fees are
allowed in the absence of stipulation only if "the defendant acted in gross
and evident bad faith in refusing to satisfy the plaintiff s plainly valid, just,
and demandable claim." As earlier stated, petitioners have not proven bad
faith on the part of PNB and PHILEX. 1âwphi1.nêt
WHEREFORE, the instant petition is DENIED and the assailed decision of the
respondent court in CA-G.R. CY 38607 AFFIRMED. Costs against petitioners.
SO ORDERED.
ObliCon Chapter 4 Cases 97 | P a g e
89.) MAGDALENA ESTATES, INC., plaintiff-appellee, vs.
ANTONIO A. RODRIGUEZ and HERMINIA C. RODRIGUEZ, defendants-
appellants.
Appeal from the decision of the Court of First Instance of Manila ordering
the defendants-appellants to pay jointly and severally to the plaintiff-
appellee the sum of P655.89, plus legal interest thereon from date of the
judicial demand, the sum of P100.00 as attorney's fees, and to pay the costs.
The appellants bought from the appellee a parcel of land in Quezon City
known as Lot 7-K-2-G, Psd-26193. In view of an unpaid balance of P5,000.00
on account of the purchase price of the lot, the appellants executed on
January 4, 1957, the following promissory note representing the said
account:
PROMISSORY NOTE
P5,000.00
Manila, January 4, 1957
We, the Spouses ANTONIO A. RODRIGUEZ and HERMINIA C. RODRIGUEZ,
jointly and severally promise to pay the Magdalena Estates, Inc., or order, at
its offices in the City of Manila, without any demand the sum of FIVE
THOUSAND PESOS (P5,000.00), Philippine currency, with interest at the rate
of Nine Per Cent 9% per annum, within sixty (60) days from January 7, 1957.
The sum of P5,000.00 represents the balance of the purchase price of the
parcel of land known as Lot 7-K-2-G, Psd. 26193, containing an area of 2,191
square meters, Quezon City.
(Sgd.) Antonio A. Rodriguez
( T ) ANTONIO A. RODRIGUEZ
(Sgd.) Herminia C. Rodriguez
( T ) HERMINIA C. RODRIGUEZ
Signed in the Presence of:
(Sgd.) ILLEGIBLE
(Sgd.) ILLEGIBLE
On the same date, the appellants and the Luzon Surety Co., Inc. executed a
bond in favor of the appellee, the undertaking thereof being embodied
therein as follows:
. . . comply with the obligation to pay the amount of P5,000.00 representing
balance of the purchase price of a parcel of land known as Lot 7-K-2-G, Psd-
26193, with an area of 2191 square meters, Quezon City, covered by
Transfer Certificate of Title No. 13 (6947), Quezon City, within a period of
sixty (60) days from January 7, 1957; That the Surety shall be notified in
writing within Ten (10) days from moment of default otherwise, this
undertaking is automatically null and void.
On June 20, 1958, when the obligation of the appellants became due and
demandable, the Luzon Surety Co., Inc. paid to the appellee the sum of
P5,000.00. Subsequently, the appellee demanded from the appellants the
payment of P655.89 corresponding to the alleged accumulated interests on
the principal of P5,000.00. Due to the refusal of the appellants to pay the
said interest, the appellee started this suit in the Municipal Court of Manila
to enforce the collection thereof. The said court, on February 5, 1959,
rendered judgment in favor of the appellee and against the appellants,
ordering the latter to pay jointly and severally the appellee the sum of
P655.89 with interest thereon at the legal rate from November 10, 1958,
the date of the filing of the complaint, until the whole amount is fully paid.
Not satisfied with that judgment, appellants appealed to the Court of First
Instance of Manila, where the case was submitted for decision on the
pleadings. The Court of First Instance of Manila rendered the judgment
stated at the outset of this decision.
ObliCon Chapter 4 Cases 98 | P a g e
On appeal directly to this Court, the following errors are assigned:
I. The lower court erred in concluding as a fact from the pleadings that the
plaintiff-appellee demanded, and the Luzon Surety Co., Inc. refused, the
payment of interest in the amount of P655.89, and in not finding and
declaring that said plaintiff-appellee waived or condoned the said interests.
II. The lower court erred in not finding and declaring that the obligation of
the defendants-appellants in favor of the plaintiff-appellee was totally
extinguished by payment and/or condonation.
III. The lower court erred in not finding and declaring that the promissory
note executed by the defendants-appellants in favor of the plaintiff-appellee
was, insofar as the said document provided for the payment of interests,
novated when the plaintiff-appellee unqualifiedly accepted the surety bond
which merely guaranteed payment of the principal in the sum of P5,000.00.
Appellants claim that the pleadings do not show that there was demand
made by the appellee for the payment of accrued interest and what could
be deduced therefrom was merely that the appellee demanded from the
Luzon Surety Co., Inc., in the capacity of the latter as surety, the payment of
the obligation of the appellants, and said appellee accepted unqualifiedly
the amount of P5,000.00 as performance by the obligor and/or obligors of
the obligation in its favor. It is further claimed that the unqualified
acceptance of payment made by the Luzon Surety Co., Inc. of P5,000.00 or
only the amount of the principal obligation and without exercising its
(appellee's) right to apply a portion of P655.89 thereof to the payment of
the alleged interest due despite its presumed knowledge of its right to do
so, the appellee showed that it waived or condoned the interests due,
because Articles 1235 and 1253 of the Civil Code provide:
ART. 1235. When the obligee accepts the performance, knowing its
incompleteness or irregularity, and without expressing any protest or
objection, the obligation is deemed fully complied with.
ART. 1253. If the debt produces interest, payment of the principal shall not
be deemed to have been made until the interests have been recovered.
We do not agree with the contention of the appellants. It is very clear in the
promissory note that the principal obligation is the balance of the purchase
price of the parcel of land known as Lot 7-K-2-G, Psd-26193, which is the
sum of P5,000.00, and in the surety bond, the Luzon Surety Co., Inc.
undertook "to pay the amount of P5,000.00 representing balance of the
purchase price of a parcel of land known as Lot 7-K-2-G, Psd-26193, . . . ."
The appellee did not protest nor object when it accepted the payment of
P5,000.00 because it knew that that was the complete amount undertaken
by the surety as appearing in the contract. The liability of a surety is not
extended, by implication, beyond the terms of his contract.1 It is for the
same reason that the appellee cannot apply a part of the P5,000.00 as
payment for the accrued interest. Appellants are relying on Article 1253 of
the Civil Code, but the rules contained in Articles 1252 to 1254 of the Civil
Code apply to a person owing several debts of the same kind of a single
creditor. They cannot be made applicable to a person whose obligation as a
mere surety is both contingent and singular; his liability is confined to such
obligation, and he is entitled to have all payments made applied exclusively
to said application and to no other.2 Besides, Article 1253 of the Civil Code
is merely directory, and not mandatory.3 Inasmuch as the appellee cannot
protest for non-payment of the interest when it accepted the amount of
P5,000.00 from the Luzon Surety Co., Inc., nor apply a part of that amount
as payment for the interest, we cannot now say that there was a waiver or
condonation on the interest due.
It is claimed that there was a novation and/or modification of the obligation
of the appellants in favor of the appellee because the appellee accepted
without reservation the subsequent agreement set forth in the surety bond
despite its failure to provide that it also guaranteed payment of accruing
interest.
The rule is settled that novation by presumption has never been favored. To
be sustained, it needs to be established that the old and new contracts are
ObliCon Chapter 4 Cases 99 | P a g e
incompatible in all points, or that the will to novate appears by express
agreement of the parties or in acts of similar import.4

An obligation to pay a sum of money is not novated, in a new instrument

wherein the old is ratified, by changing only the terms of payment and
adding other obligations not incompatible with the old one,5 or wherein the
old contract is merely supplemented by the new one.6 The mere fact that
the creditor receives a guaranty or accepts payments from a third person
who has agreed to assume the obligation, when there is no agreement that
the first debtor shall be released from responsibility does not constitute a
novation, and the creditor can still enforce the obligation against the
original debtor. (Straight v. Haskel, 49 Phil. 614; Pacific Commercial Co. v.
Sotto, 34 Phil. 237; Estate of Mota v. Serra, 47 Phil. 464; Duñgo v. Lopena,
supra ). In the instant case, the surety bond is not a new and separate
contract but an accessory of the promissory note.

WHEREFORE, the judgment appealed from should be, as it is hereby,

affirmed, with costs against the appellants.

ObliCon Chapter 4 Cases 100 | P a g e

90.) ELSA B. REYES, petitioner, vs.
COURT OF APPEALS, SECRETARY OF JUSTICE, AFP-MUTUAL BENEFIT
ASSOCIATION, INC., and GRACIELA ELEAZAR, respondents.
Petitioner assails the respondent court's decision1 dated May 12, 1995
which sustained the two resolutions of the respondent Secretary of Justice,
namely: 1) the Resolution dated January 23, 1992 affirming the resolution of
the Provincial Prosecutor of Rizal dismissing the complaints of petitioner
against private respondent Eleazar in I.S. Nos. 91-2853, 91-4328 to 29, 91-
4585 to 91 and 91-4738 to 39 for violations of B.P. Blg. 22 and estafa under
Article 315, par. 4, no. 2 (d) of the Revised Penal Code, and 2) the Resolution
dated January 12, 1993 affirming the resolution of the City Prosecutor of
Quezon City finding a prima facie case in I.S. No. 92-926 for violation of B.P.
Blg. 22 and estafa filed by respondent AFP-Mutual Benefit Association, Inc.
(AFP-MBAI, for brevity) against petitioner Reyes.
The facts as summarized by the respondent court are as follows:
Elsa Reyes is the president of Eurotrust Capital Corporation (EUROTRUST), a
domestic corporation engaged in credit financing. Graciela Eleazar, private
respondent, is the president of B.E. Ritz Mansion International Corporation
(BERMIC), a domestic enterprise engaged in real estate development. The
other respondent, Armed Forces of the Philippines Mutual Benefit Asso.,
Inc. (AFP-MBAI), is a corporation duly organized primarily to perform
welfare services for the Armed Forces of the Philippines.
A. Re: Resolution dated January 23, 1992.
In her various affidavits-complaint with the Office of the Provincial
Prosecutor of Rizal, Elsa Reyes alleges that Eurotrust and Bermic entered
into a loan agreement. Pursuant to the said contract, Eurotrust extended to
Bermic P216.053,126.80 to finance the construction of the latter's Ritz
Condominium and Gold Business Park. The loan was without collateral but
with higher interest rates than those allowed by the banks. In turn, Bermic
issued 21 postdated checks to cover payments of the loan packages.
However, when those checks were presented for payment, the same were
dishonored by the drawee bank, Rizal Commercial Banking Corporation
(RCBC), due to stop payment order made by Graciela Eleazar. Despite
Eurotrust's notices and repeated demands to pay, Eleazar failed to make
good the dishonored checks, prompting Reyes to file against her several
criminal complaints for violation of B.P. 22 and estafa under Article 315, 4th
paragraph, No. 2 (d) of the Revised Penal Code.
Graciela Eleazar, in her counter-affidavits, asserts that beginning December
1989, Eurotrust extended to Bermic several loan packages amounting to
P190,336,388.86. For its part, Bermic issued several postdated checks to
cover payments of the principal and interest of every a loan packages
involved.
Subsequently, Elsa Reyes was investigated by the Senate Blue Ribbon
Committee. She was involved in a large scale scam amounting to millions of
pesos belonging to Instructional Material Corporation (IMC), an agency
under the Department of Education, Culture and Sports.
Meanwhile, respondent AFP-MBAI which invested its funds with Eurotrust,
by buying from it government securities, conducted its own investigation
and found that after Eurotrust delivered to AFP-MBAI the securities it
purchased, the former borrowed the same securities but failed to return
them to AFP-MBAI; and that the amounts paid by AFP-MBAI to Eurotrust for
those securities were in turn lent by Elsa Reyes to Bermic and others.
When Eleazar came to know that the funds originally loaned by Eurotrust to
Bermic belonged to AFP-MBAI, she, as President of Bermic, requested a
meeting with Eurotrust representatives. Thus, on February 15, 1991, the
representatives of Eurotrust and Bermic agreed that Bermic would directly
settle its obligations with the real owners of the fund-AFP-MBAI and DECS-
IMC. This agreement was formalized in two letters dated March 19, 1991.
Pursuant to this understanding, Bermic negotiated with AFP-MBAI and
DECS-IMC and made payments to the latter. In fact, Bermic paid AFP-MBAI
P31,711.11 and a check of P1-million.
ObliCon Chapter 4 Cases 101 | P a g e
However, Graciela Eleazar later learned that Elsa Reyes continued to collect
on the postdated checks issued by her (Eleazar) contrary to their
agreement. So, Bermic wrote to Eurotrust to hold the amounts "in
constructive trust" for the real owners. But Reyes continued to collect on
the other postdated checks dated April 17 to June 28, 1991. Upon her
counsel's advise, Eleazar had the payment stopped. Hence, her checks
issued in favor of Eurotrust were dishonored.
After investigation, the Office of the Provincial Prosecutor of Rizal issued a
resolution dismissing the complaints filed by Elsa Reyes against Graciela
Eleazar on the ground that when the latter assumed the obligation of Reyes
to AFP-MBAI, it constituted novation, extinguishing any criminal liability on
the part of Eleazar.
Reyes filed a petition for review of the said resolution with respondent
Secretary of Justice contending that novation did not take place.
The Secretary of Justice dismissed the petition holding that "the novation of
the loan agreement prevents the rise of any incipient criminal liability since
the novation had the effect of canceling the checks and rendering without
effect the subsequent dishonor of the already cancelled checks."
B. Re: Resolution dated January 12, 1993
At the time of the pendency of the cases filed by Elsa Reyes against Graciela
Eleazar, AFP-MBAI lodged a separate complaint for estafa and a violation of
BP 22 against Elsa Reyes with the office of the city prosecutor of Quezon
City docketed as I.S. 92-926. The affidavit of Gudelia Dinapo a member of
the investigating committee formed by AFP-MBAI to investigate the
anomalies committed by Eurotrust/Reyes, shows that between August 1989
and September 1990, Eurotrust offered to sell to AFP-MBAI various
marketable securities, including government securities, such as but not
limited to treasury notes, treasury bills, Land Bank of the Philippines Bonds
and Asset Participation Certificates.
Relying on a canvass conducted by one of its employees, Cristina Cornista,
AFP-MBAI decided to purchase several securities amounting to
P120,000,000.00 from Eurotrust. From February 1990 to September 1990, a
total of 21 transactions were entered into between Eurotrust and AFP-
MBAI. Eurotrust delivered to AFP-MBAI treasury notes amounting to P73
million. However, Eurotrust fraudulently borrowed all those treasury notes
from the AFP-MBAI for purposes of verification with the Central Bank.
Despite AFP-MBAI's repeated demands, Eurotrust failed to return the said
treasury notes. Instead it delivered 21 postdated checks in favor of AFP-
MBAI which were dishonored upon presentment for payment. Eurotrust
nonetheless made partial payment to AFP-MBAI amounting to
P35,151,637.72. However, after deducting this partial payment, the
amounts of P73 million treasury notes with interest and P35,151,637.72
have remained unpaid. Consequently, AFP-MBAI filed with the Office of the
City Prosecutor of Quezon City a complaint for violation of BP 22 and estafa
against Elsa Reyes.
Reyes interposed the defense of novation and insisted that AFP-MBAI's
claim of unreturned P73 million worth of government securities has been
satisfied upon her payment of P30 million. With respect to the remaining
P43 million, the same was paid when Eurotrust assigned its Participation
Certificates to AFP-MBAI.
Eventually, the Office of the City Prosecutor of Quezon City issued a
resolution recommending the filing of an information against Reyes for
violation of BP 22 and estafa.
Whereupon, Reyes filed a petition for review with respondent Secretary of
Justice. The latter dismissed the petition on the ground that only resolutions
of the prosecutors dismissing criminal complaints are cognizable for review
by the Department of Justice.2
On February 2, 1994, petitioner seeking the nullification of either of the two
resolutions of the respondent Secretary of Justice filed a petition for
ObliCon Chapter 4 Cases 102 | P a g e
certiorari, prohibition and mandamus 3 with the respondent court which,
however, denied and dismissed her petition. Her motion for
reconsideration4 was likewise denied in a Resolution5 dated June 27, 1995.
Hence, this present petition.
The first Department of Justice Resolution dated January 23, 1992 which
sustained the Provincial Prosecutor's decision dismissing petitioner's
complaints against respondent Eleazar for violation of B.P. 22 and estafa
ruled that the contract of loan between petitioner and respondent Eleazar
had been novated when they agreed that respondent Eleazar should settle
her firm's (BERMIC) loan obligations directly with AFP-MBAI and DECS-IMC
instead of settling it with petitioner Reyes. This finding was affirmed by the
respondent court which pointed out that "the first contract was novated in
the sense that there was a substitution of creditor"6 when respondent
Eleazar, with the agreement of Reyes, directly paid her obligations to AFP-
MBAI.
We cannot see how novation can take place considering the surrounding
circumstances which negate the same. The principle of novation by
substitution of creditor was erroneously applied in the first questioned
resolution involving the contract of loan between petitioner and respondent
Eleazar.
Admittedly, in order that a novation can take place, the concurrence of the
following requisites7 is indispensable:
1. there must be a previous valid obligation,
2 there must be an agreement of the parties concerned to a new contract,
3. there must be the extinguishment of the old contract, and
4. there must be the validity of the new contract.
Upon the facts shown in the record, there is no doubt that the last three
essential requisites of novation are wanting in the instant case. No new
agreement for substitution of creditor war forged among the parties
concerned which would take the place of the preceding contract. The
absence of a new contract extinguishing the old one destroys any possibility
of novation by conventional subrogation, In concluding that a novation took
place, the respondent court relied on the two letters dated March 19,
1991,8 which, according to it, formalized petitioner's and respondent
Eleazar's agreement that BERMIC would directly settle its obligation with
the real owners of the funds - the AFP MBAI and DECS IMC.9 Be that as it
may, a cursory reading of these letters, however clearly and unmistakably
shows that there was nothing therein that would evince that respondent
AFP-MBAI agreed to substitute for the petitioner as the new creditor of
respondent Eleazar in the contract of loan. It is evident that the two letters
merely gave respondent Eleazar an authority to directly settle the obligation
of petitioner to AFP-MBAI and DECS-IMC. It is essentially an agreement
between petitioner and respondent Eleazar only. There was no mention
whatsoever of AFP-MBAI's consent to the new agreement between
petitioner and respondent Eleazar much less an indication of AFP-MBAI's
intention to be the substitute creditor in the loan contract. Well settled is
the rule that novation by substitution of creditor requires an agreement
among the three parties concerned — the original creditor, the debtor and
the new creditor.10 It is a new contractual relation based on the mutual
agreement among all the necessary parties, Hence, there is no novation if
no new contract was executed by the parties. Article 1301 of the Civil Code
is explicit, thus:
Conventional subrogation of a third person requires the consent of the
original parties and of the third person.
The fact that respondent Eleazar made payments to AFP-MBAI and the
latter accepted them does not ipso facto result in novation. There must be
an express intention to novate — animus novandi.11 Novation is never
ObliCon Chapter 4 Cases 103 | P a g e
presumed.12 Article 1300 of the Civil Code provides inter alia that
conventional subrogation must be clearly established in order that it may
take effect.
Notwithstanding our disagreement with the decision of the respondent
court and the ruling of the Secretary of Justice that a novation by
substitution of creditor has taken place, we opt not to disturb the
Resolution of the respondent Secretary of Justice dated January 23, 1992
finding a prima facie case against the petitioner in as much as it had already
become final. It appears that petitioner filed two motions for
reconsideration to the said resolution, the first one on February 6, 1992 and
the second one in June 2, 1992. These two motions were, however, denied
by the respondent Secretary of Justice, the last denial was contained in a
Resolution dated June 25, 1992 which was received by petitioner on July 9,
1992. Petitioner made no prompt attempt to question the said resolutions
before the proper forum. It took her almost seventeen months (from July 9,
1992 to February 2, 1994) to challenge the January 23, 1992 Resolution
when she filed the petition for certiorari with the respondent court on
February 3, 1994,13 which resolved to affirm the aforesaid resolution of the
Secretary of Justice.
Petitioner who chose her forum but unfortunately lost her claim is bound by
such adverse judgment on account of finality of judgment, otherwise, there
would be no end to litigation. Litigation must end and terminate sometime
and somewhere, and it is essential to an effective administration of justice
that once a judgment has become final, the issue or cause therein should be
laid at rest.14 While the respondent Secretary of Justice was in error in
applying the rule on novation in the January 23, 1992 Resolution, such
irregularity, however, does not affect the validity of the proceedings in the
Department of Justice. Erroneous application of a legal principle cannot
bring a judgment that has already attained the status of finality to an
absolute nullity under the well entrenched rule of finality of judgment. The
basic rule of finality of judgment is grounded on the fundamental principle
of public policy and sound practice that at the risk of occasional error, the
judgment of court and award of quasi-judicial agencies must become final at
some definite date fixed by law.15
We find no plausible explanation nor justifiable reason offered by petitioner
for the obvious delay or omission to take a timely action against the
questioned resolution. She is apparently guilty of laches which bars her from
seeking relief in a court of law after she intentionally and unreasonably fails
to guard of her rights. Laches is the failure or neglect for an unreasonable
and unexplained length of time to do that which by exerting due diligence
could/should have been done earlier.16 Petitioner's omission to assert her
right to avail of the remedies in law within a reasonable time warrants a
presumption that she abandoned it or declined to assert it. The law serves
those who are vigilant and diligent and no those who sleep when the law
requires to act.17
Its bears emphasis that the above pronouncement we laid down applies
only pro hac vice. This Court in affirming the questioned resolution despite
the erroneous application of a legal principle acted according to what the
peculiar circumstances of the instant case demand. Its factual setting led us
to consider that to sustain the resolution is but the proper action to take in
this particular case.
Regarding the second Resolution of respondent Secretary of Justice dated
January 12, 1993 which affirms the City Prosecutor's finding of a prima facie
case against petitioner for violation of B.P. Blg. 22 and estafa involving the
contract of sale of securities, petitioner avers that she could not be held
criminally liable for the crime charged because the contract of sale of
securities between her and respondent AFP-MBAI was novated by
substitution of debtor. According to petitioner, the obligation assumed by
respondent Eleazar pursuant to the authority given by her to respondent
Eleazar in a letter dated March 19, 1991 was precisely her (petitioner's)
obligation to respondent AFP-MBAI under the contract of sale of securities.
She claims that private respondent Eleazar, instead of fulfilling her
obligation under the contract of loan to pay petitioner the amount of debts,
ObliCon Chapter 4 Cases 104 | P a g e
assumed petitioner's obligation under the contract of sale to make surety. . . Novation arising from a purported change in the person of the
payments to respondent AFP-MBAI directly.18 debtor must be clear and express. . .

This contention is bereft of any legal and factual basis. Just like in the first
questioned resolution, no novation took place in this case. A thorough
examination of the records shows that no hard evidence was presented
which would expressly and unequivocably demonstrate the intention of
respondent AFP-MBAI to release petitioner from her obligation to pay under
the contract of sale of securities. It is a rule that novation by substitution of
debtor must always be made with the consent of the creditor.19 Article
1293 of the Civil Code is explicit, thus:
Novation which consists in substituting a new debtor in the place of the
original one, may be made even without or against the will of the latter, but
not without the consent of the creditor. Payment by the new debtor gives
him the rights mentioned in Articles 1236 and 1237.
In the civil law setting, novatio is literally construed as to make new. So it is
deeply rooted in the Roman Law jurisprudence, the principle novatio non
praesumitur — that novation is never presumed. At bottom, for novation to
be a jural reality, its animus must be ever present, debitum pro debito —
basically extinguishing the old obligation for the new one.
The foregoing elements are found wanting in the case at bar.
ACCORDINGLY, finding no reversible error in the decision appealed from
dated May 12, 1995, the same is hereby AFFIRMED in all respects.
SO ORDERED.

The consent of the creditor to a novation by change of debtor is as

indispensable as the creditor's consent in conventional subrogation in order
that a novation shall legally take place. The mere circumstance of AFP-MBAI
receiving payments from respondent Eleazar who acquiesced to assume the
obligation of petitioner under the contract of sale of securities, when there
is clearly no agreement to release petitioner from her responsibility, does
not constitute novation, at most, it only creates a juridical relation of co-
debtorship or suretyship on the part of respondent Eleazar to the
contractual obligation of petitioner to AFP-MBAI and the latter can still
enforce the obligation against the petitioner. In Ajax Marketing and
Development Corporation vs. Court of Appeals.20 which is relevant in the
instant case, we stated that—

In the same vein, to effect a subjective novation by a change in the person

of the debtor, it is necessary that the old debtor be released expressly from
the obligation, and the third person or new debtor assumes his place in the
relation. There is no novation without such release as the third person who
has assumed the debtor's obligation becomes merely a co-debtor or
ObliCon Chapter 4 Cases 105 | P a g e
91.) JOSEPH COCHINGYAN, JR. and JOSE K. VILLANUEVA, petitioners, vs.
R & B SURETY AND INSURANCE COMPANY, INC., respondent.
This case was certified to us by the Court of Appeals in its resolution dated
11 November 1977 as one involving only questions of law and, therefore,
falling within the exclusive appellate jurisdiction of this Court under Section
17, Republic Act 296, as amended.
In November 1963, Pacific Agricultural Suppliers, Inc. (PAGRICO) applied for
and was granted an increase in its line of credit from P400,000.00 to
P800,000.00 (the "Principal Obligation"), with the Philippine National Bank
(PNB). To secure PNB's approval, PAGRICO had to give a good and sufficient
bond in the amount of P400,000.00, representing the increment in its line of
credit, to secure its faithful compliance with the terms and conditions under
which its line of credit was increased. In compliance with this requirement,
PAGRICO submitted Surety Bond No. 4765, issued by the respondent R & B
Surety and Insurance Co., Inc. (R & B Surety") in the specified amount in
favor of the PNB. Under the terms of the Surety Bond, PAGRICO and R & B
Surety bound themselves jointly and severally to comply with the "terms
and conditions of the advance line [of credit] established by the [PNB]." PNB
had the right under the Surety Bond to proceed directly against R & B Surety
"without the necessity of first exhausting the assets" of the principal obligor,
PAGRICO. The Surety Bond also provided that R & B Surety's liability was not
to be limited to the principal sum of P400,000.00, but would also include
"accrued interest" on the said amount "plus all expenses, charges or other
legal costs incident to collection of the obligation [of R & B Surety]" under
the Surety Bond.
In consideration of R & B Surety's issuance of the Surety Bond, two Identical
indemnity agreements were entered into with R & B Surety: (a) one
agreement dated 23 December 1963 was executed by the Catholic Church
Mart (CCM) and by petitioner Joseph Cochingyan, Jr, the latter signed not
only as President of CCM but also in his personal and individual capacity;
and (b) another agreement dated 24 December 1963 was executed by
PAGRICO, Pacific Copra Export Inc. (PACOCO), Jose K. Villanueva and Liu Tua
Ben Mr. Villanueva signed both as Manager of PAGRICO and in his personal
and individual capacity; Mr. Liu signed both as President of PACOCO and in
his individual and personal capacity.
Under both indemnity agreements, the indemnitors bound themselves
jointly and severally to R & B Surety to pay an annual premium of P5,103.05
and "for the faithful compliance of the terms and conditions set forth in said
SURETY BOND for a period beginning ... until the same is CANCELLED and/or
DISCHARGED." The Indemnity Agreements further provided:
(b) INDEMNITY: — TO indemnify the SURETY COMPANY for any damage,
prejudice, loss, costs, payments, advances and expenses of whatever kind
and nature, including [of] attorney's fees, which the CORPORATION may, at
any time, become liable for, sustain or incur as consequence of having
executed the above mentioned Bond, its renewals, extensions or
substitutions and said attorney's fees [shall] not be less than twenty [20%]
per cent of the total amount claimed by the CORPORATION in each action,
the same to be due, demandable and payable, irrespective of whether the
case is settled judicially or extrajudicially and whether the amount has been
actually paid or not;
(c) MATURITY OF OUR OBLIGATIONS AS CONTRACTED HEREWITH: — The
said indemnities will be paid to the CORPORATION as soon as demand is
received from the Creditor or upon receipt of Court order or as soon as it
becomes liable to make payment of any sum under the terms of the above-
mentioned Bond, its renewals, extensions, modifications or substitutions,
whether the said sum or sums or part thereof, have been actually paid or
not.
We authorize the SURETY COMPANY, to accept in any case and at its entire
discretion, from any of us, payments on account of the pending obligations,
and to grant extension to any of us, to liquidate said obligations, without
necessity of previous knowledge of [or] consent from the other obligors.
xxx xxx xxx
ObliCon Chapter 4 Cases 106 | P a g e

(e) INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY. — Any
payment or disbursement made by the SURETY COMPANY on account of the
above-mentioned Bonds, its renewals, extensions or substitutions, either in
the belief that the SURETY COMPANY was obligate[d] to make such
payment or in the belief that said payment was necessary in order to avoid
greater losses or obligations for which the SURETY COMPANY might be
liable by virtue of the terms of the above-mentioned Bond, its renewals,
extensions or substitutions, shall be final and will not be disputed by the
undersigned, who jointly and severally bind themselves to indemnify the
SURETY COMPANY of any and all such payments as stated in the preceding
clauses.
xxx xxx xxx
When PAGRICO failed to comply with its Principal Obligation to the PNB, the
PNB demanded payment from R & B Surety of the sum of P400,000.00, the
full amount of the Principal Obligation. R & B Surety made a series of
payments to PNB by virtue of that demand totalling P70,000.00 evidenced
by detailed vouchers and receipts.
R & B Surety in turn sent formal demand letters to petitioners Joseph
Cochingyan, Jr. and Jose K. Villanueva for reimbursement of the payments
made by it to the PNB and for a discharge of its liability to the PNB under
the Surety Bond. When petitioners failed to heed its demands, R & B Surety
brought suit against Joseph Cochingyan, Jr., Jose K. Villanueva and Liu Tua
Ben in the Court of First Instance of Manila, praying principally that
judgment be rendered:
b. Ordering defendants to pay jointly and severally, unto the plaintiff, the
sum of P20,412.20 representing the unpaid premiums for Surety Bond No.
4765 from 1965 up to 1968, and the additional amount of P5,103.05 yearly
until the Surety Bond No. 4765 is discharged, with interest thereon at the
rate of 12% per annum; [and]
c. Ordering the defendants to pay jointly and severally, unto the plaintiff the
sum of P400,000.00 representing the total amount of the Surety Bond No.
4765 with interest thereon at the rate of 12% per annum on the amount of
P70,000.00 which had been paid to the Phil. National Bank already, the
interest to begin from the month of September, 1966;
xxx xxx xxx
Petitioner Joseph Cochingyan, Jr. in his answer maintained that the
Indemnity Agreement he executed in favor of R & B Surety: (i) did not
express the true intent of the parties thereto in that he had been asked by R
& B Surety to execute the Indemnity Agreement merely in order to make it
appear that R & B Surety had complied with the requirements of the PNB
that credit lines be secured; (ii) was executed so that R & B Surety could
show that it was complying with the regulations of the Insurance
Commission concerning bonding companies; (iii) that R & B Surety had
assured him that the execution of the agreement was a mere formality and
that he was to be considered a stranger to the transaction between the PNB
and R & B Surety; and (iv) that R & B Surety was estopped from enforcing
the Indemnity Agreement as against him.
Petitioner Jose K. Villanueva claimed in his answer that. (i) he had executed
the Indemnity Agreement in favor of R & B Surety only "for accommodation
purposes" and that it did not express their true intention; (ii) that the
Principal Obligation of PAGRICO to the PNB secured by the Surety Bond had
already been assumed by CCM by virtue of a Trust Agreement entered into
with the PNB, where CCM represented by Joseph Cochingyan, Jr. undertook
to pay the Principal Obligation of PAGRICO to the PNB; (iii) that his
obligation under the Indemnity Agreement was thereby extinguished by
novation arising from the change of debtor under the Principal Obligation;
and (iv) that the filing of the complaint was premature, considering that R &
B Surety filed the case against him as indemnitor although the PNB had not
yet proceeded against R & B Surety to enforce the latter's liability under the
Surety Bond.
ObliCon Chapter 4 Cases 107 | P a g e
Petitioner Cochingyan, however, did not present any evidence at all to
support his asserted defenses. Petitioner Villanueva did not submit any
evidence either on his "accommodation" defense. The trial court was
therefore constrained to decide the case on the basis alone of the terms of
the Trust Agreement and other documents submitted in evidence.
In due time, the Court of First Instance of Manila, Branch 24 1 rendered a
decision in favor of R & B Surety, the dispositive portion of which reads as
follows;
Premises considered, judgment is hereby rendered: (a) ordering the
defendants Joseph Cochingyan, Jr. and Jose K. Villanueva to pay, jointly and
severally, unto the plaintiff the sum of 400,000,00, representing the total
amount of their liability on Surety Bond No. 4765, and interest at the rate of
6% per annum on the following amounts:
On P14,000.00 from September 27, 1966;
until full payment; (b) ordering said defendants to pay, jointly and severally,
unto the plaintiff the sum of P20,412.00 as the unpaid premiums for Surety
Bond No. 4765, with legal interest thereon from the filing of plaintiff's
complaint on August 1, 1968 until fully paid, and the further sum of
P4,000.00 as and for attorney's fees and expenses of litigation which this
Court deems just and equitable.
There being no showing the summons was duly served upon the defendant
Liu Tua Ben who has filed no answer in this case, plaintiff's complaint is
hereby dismissed as against defendant Liu Tua Ben without prejudice.
Costs against the defendants Joseph Cochingyan, Jr. and Jose K. Villanueva.
Not satisfied with the decision of the trial court, the petitioners took this
appeal to the Court of Appeals which, as already noted, certified the case to
us as one raising only questions of law.

On P4,000.00 from November 28, 1966; The issues we must confront in this appeal are:

On P4,000.00 from December 14, 1966; 1. whether or not the Trust Agreement had extinguished, by novation, the
obligation of R & B Surety to the PNB under the Surety Bond which, in turn,
On P4,000.00 from January 19, 1967; extinguished the obligations of the petitioners under the Indemnity
Agreements;
On P8,000.00 from February 13, 1967;
2. whether the Trust Agreement extended the term of the Surety Bond so as
On P4,000.00 from March 6, 1967; to release petitioners from their obligation as indemnitors thereof as they
did not give their consent to the execution of the Trust Agreement; and
On P8,000.00 from June 24, 1967;
3. whether or not the filing of this complaint was premature since the PNB
On P8,000. 00 from September 14, 1967; had not yet filed a suit against R & B Surety for the forfeiture of its Surety
Bond.
On P8,000.00 from November 28, 1967; and
We address these issues seriatim.
On P8,000. 00 from February 26, 1968
ObliCon Chapter 4 Cases 108 | P a g e
1. The Trust Agreement referred to by both petitioners in their separate
briefs, was executed on 28 December 1965 (two years after the Surety Bond
and the Indemnity Agreements were executed) between: (1) Jose and
Susana Cochingyan, Sr., doing business under the name and style of the
Catholic Church Mart, represented by Joseph Cochingyan, Jr., as Trustor[s];
(2) Tomas Besa, a PNB official, as Trustee; and (3) the PNB as beneficiary.
The Trust Agreement provided, in pertinent part, as follows:
WHEREAS, the TRUSTOR has guaranteed a bond in the amount of
P400,000.00 issued by the R & B Surety and Insurance Co. (R & B) at the
instance of Pacific Agricultural Suppliers, Inc. (PAGRICO) on December 21,
1963, in favor of the BENEFICIARY in connection with the application of
PAGRICO for an advance line of P400,000.00 to P800,000.00;
WHEREAS, the TRUSTOR has also guaranteed a bond issued by the
Consolacion Insurance & Surety Co., Inc. (CONSOLACION) in the amount of
P900,000.00 in favor of the BENEFICIARY to secure certain credit facilities
extended by the BENEFICIARY to the Pacific Copra Export Co., Inc.
(PACOCO);
WHEREAS, the PAGRICO and the PACOCO have defaulted in the payment of
their respective obligations in favor of the BENEFICIARY guaranteed by the
bonds issued by the R & B and the CONSOLACION, respectively, and by
reason of said default, the BENEFICIARY has demanded compliance by the R
& B and the CONSOLACION of their respective obligations under the
aforesaid bonds;
WHEREAS, the TRUSTOR is, therefore, bound to comply with his obligation
under the indemnity agreements aforementioned executed by him in favor
of R & B and the CONSOLACION, respectively and in order to forestall
impending suits by the BENEFICIARY against said companies, he is willing as
he hereby agrees to pay the obligations of said companies in favor of the
BENEFICIARY in the total amount of P1,300,000 without interest from the
net profits arising from the procurement of reparations consumer goods
made thru the allocation of WARVETS; . . .
l. TRUSTOR hereby constitutes and appoints Atty. TOMAS BESA as TRUSTEE
for the purpose of paying to the BENEFICIARY Philippine National Bank in
the manner stated hereunder, the obligations of the R & B under the R & B
Bond No. G-4765 for P400,000.00 dated December 23, 1963, and of the
CONSOLACION under The Consolacion Bond No. G-5938 of June 3, 1964 for
P900,000.00 or the total amount of P1,300,000.00 without interest from the
net profits arising from the procurement of reparations consumer goods
under the Memorandum of Settlement and Deeds of Assignment of
February 2, 1959 through the allocation of WARVETS;
xxx xxx xxx
6. THE BENEFICIARY agrees to hold in abeyance any action to enforce its
claims against R & B and CONSOLACION, subject of the bond mentioned
above. In the meantime that this TRUST AGREEMENT is being implemented,
the BENEFICIARY hereby agrees to forthwith reinstate the R & B and the
CONSOLACION as among the companies duly accredited to do business with
the BENEFICIARY and its branches, unless said companies have been
blacklisted for reasons other than those relating to the obligations subject of
the herein TRUST AGREEMENT;
xxx xxx xxx
9. This agreement shall not in any manner release the R & B and
CONSOLACION from their respective liabilities under the bonds mentioned
above. (emphasis supplied)
There is no question that the Surety Bond has not been cancelled or fully
discharged 2 by payment of the Principal Obligation. Unless, therefore, the
Surety Bond has been extinguished by another means, it must still subsist.
And so must the supporting Indemnity Agreements. 3
We are unable to sustain petitioners' claim that the Surety Bond and their
respective obligations under the Indemnity Agreements were extinguished
ObliCon Chapter 4 Cases 109 | P a g e
by novation brought about by the subsequent execution of the Trust
Agreement.
Novation is the extinguishment of an obligation by the substitution or
change of the obligation by a subsequent one which terminates it, either by
changing its object or principal conditions, or by substituting a new debtor
in place of the old one, or by subrogating a third person to the rights of the
creditor. 4 Novation through a change of the object or principal conditions
of an existing obligation is referred to as objective (or real) novation.
Novation by the change of either the person of the debtor or of the creditor
is described as subjective (or personal) novation. Novation may also be both
objective and subjective (mixed) at the same time. In both objective and
subjective novation, a dual purpose is achieved-an obligation is extinguished
and a new one is created in lieu thereof.5
If objective novation is to take place, it is imperative that the new obligation
expressly declare that the old obligation is thereby extinguished, or that the
new obligation be on every point incompatible with the old one. 6 Novation
is never presumed: it must be established either by the discharge of the old
debt by the express terms of the new agreement, or by the acts of the
parties whose intention to dissolve the old obligation as a consideration of
the emergence of the new one must be clearly discernible. 7
Again, if subjective novation by a change in the person of the debtor is to
occur, it is not enough that the juridical relation between the parties to the
original contract is extended to a third person. It is essential that the old
debtor be released from the obligation, and the third person or new debtor
take his place in the new relation. If the old debtor is not released, no
novation occurs and the third person who has assumed the obligation of the
debtor becomes merely a co-debtor or surety or a co-surety. 8
Applying the above principles to the instant case, it is at once evident that
the Trust Agreement does not expressly terminate the obligation of R & B
Surety under the Surety Bond. On the contrary, the Trust Agreement
expressly provides for the continuing subsistence of that obligation by
stipulating that "[the Trust Agreement] shall not in any manner release" R &
B Surety from its obligation under the Surety Bond.
Neither can the petitioners anchor their defense on implied novation.
Absent an unequivocal declaration of extinguishment of a pre-existing
obligation, a showing of complete incompatibility between the old and the
new obligation (and nothing else) would sustain a finding of novation by
implication. 9 But where, as in this case, the parties to the new obligation
expressly recognize the continuing existence and validity of the old one,
where, in other words, the parties expressly negated the lapsing of the old
obligation, there can be no novation. The issue of implied novation is not
reached at all.
What the trust agreement did was, at most, merely to bring in another
person or persons-the Trustor[s]-to assume the same obligation that R & B
Surety was bound to perform under the Surety Bond. It is not unusual in
business for a stranger to a contract to assume obligations thereunder; a
contract of suretyship or guarantee is the classical example. The precise
legal effect is the increase of the number of persons liable to the obligee,
and not the extinguishment of the liability of the first debtor. 10 Thus, in
Magdalena Estates vs. Rodriguez, 11 we held that:
[t]he mere fact that the creditor receives a guaranty or accepts payments
from a third person who has agreed to assume the obligation, when there is
no agreement that the first debtor shall be released from responsibility,
does not constitute a novation, and the creditor can still enforce the
obligation against the original debtor.
In the present case, we note that the Trustor under the Trust Agreement,
the CCM, was already previously bound to R & B Surety under its Indemnity
Agreement. Under the Trust Agreement, the Trustor also became directly
liable to the PNB. So far as the PNB was concerned, the effect of the Trust
Agreement was that where there had been only two, there would now be
three obligors directly and solidarily bound in favor of the PNB: PAGRICO, R
& B Surety and the Trustor. And the PNB could proceed against any of the
ObliCon Chapter 4 Cases 110 | P a g e
three, in any order or sequence. Clearly, PNB never intended to release, and
never did release, R & B Surety. Thus, R & B Surety, which was not a party to
the Trust Agreement, could not have intended to release any of its own
indemnitors simply because one of those indemnitors, the Trustor under the
Trust Agreement, became also directly liable to the PNB.
2. We turn to the contention of petitioner Jose K. Villanueva that his
obligation as indemnitor under the 24 December 1963 Indemnity
Agreement with R & B Surety was extinguished when the PNB agreed in the
Trust Agreement "to hold in abeyance any action to enforce its claims
against R & B Surety .
The Indemnity Agreement speaks of the several indemnitors "apply[ing]
jointly and severally (in solidum) to the R & B Surety] — to become SURETY
upon a SURETY BOND demanded by and in favor of [PNB] in the sum of
[P400,000.00] for the faithful compliance of the terms and conditions set
forth in said SURETY BOND — ." This part of the Agreement suggests that
the indemnitors (including the petitioners) would become co-sureties on the
Security Bond in favor of PNB. The record, however, is bereft of any
indication that the petitioners-indemnitors ever in fact became co-sureties
of R & B Surety vis-a-vis the PNB. The petitioners, so far as the record goes,
remained simply indemnitors bound to R & B Surety but not to PNB, such
that PNB could not have directly demanded payment of the Principal
Obligation from the petitioners. Thus, we do not see how Article 2079 of the
Civil Code-which provides in part that "[a]n extension granted to the debtor
by the creditor without the consent of the guarantor extinguishes the
guaranty" could apply in the instant case.
The petitioner-indemnitors are, as, it were, second-tier parties so far as the
PNB was concerned and any extension of time granted by PNB to any of the
first-tier obligators (PAGRICO, R &B Surety and the trustors[s]) could not
prejudice the second-tier parties.
There is no other reason why petitioner Villanueva's contention must fail.
PNB's undertaking under the Trust Agreement "to hold in abeyance any
action to enforce its claims" against R & B Surety did not extend the
maturity of R & B Surety's obligation under the Surety Bond. The Principal
Obligation had in fact already matured, along with that of R &B Surety, by
the time the Trust Agreement was entered into. Petitioner's Obligation had
in fact already matured, for those obligations were to amture "as soon as [R
& B Surety] became liable to make payment of any sum under the terms of
the [Surety Bond] — whether the said sum or sums or part thereof have
been actually paid or not." Thus, the situation was that precisely envisaged
in Article 2079:
[t]he 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 the
referred to herein.(emphasis supplied)
The theory behind Article 2079 is that an extension of time given to the
principal debtor by the creditor without 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 original maturity date. The surety is
said to be entitled to protect himself against the principal debtor upon the
orginal 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. The underlying rationale is not
present in the instant case. As this Court has held,
merely delay or negligence in proceeding against the principal will not
discharge a surety unless there is between the creditor and the principal
debtor a valid and binding agreement therefor, one which tends to
prejudice [the surety] or to deprive it of the power of obtaining indemnity
by presenting a legal objection for the time, to the prosecution of an action
on the original security.12
In the instant case, there was nothing to prevent the petitioners from
tendering payment, if they were so minded, to PNB of the matured
obligation on behalf of R & B Surety and thereupon becoming subrogated to
such remedies as R & B Surety may have against PAGRICO.
ObliCon Chapter 4 Cases 111 | P a g e
 against R & B Surety for the collection of its matured obligation under the
3. The last issue can be disposed of quicjly, Clauses (b) and (c) of the Surety Bond.
Indemnity Agreements (quoted above) allow R & B Surety to recover from
petitioners even before R & B Surety shall have paid the PNB. We have WHEREFORE, the petitioner's appeal is DENIED for the lack of merit and the
previously held similar indemnity clauses to be enforceable and not violative decision of the trial court is AFFIRMED in toto. Costs against the petitioners.
of any public policy. 13
SO ORDERED.
The petitioners lose sight of the fact that the Indemnity Agreements are
contracts of indemnification not only against actual loss but against liability
as well. 14 While in a contract of indemnity against loss as indemnitor will
not be liable until the person to be indemnified makes payment or sustains
loss, in a contract of indemnity against liability, as in this case, the
indemnitor's liability arises as soon as the liability of the person to be
indemnified has arisen without regard to whether or not he has suffered
actual loss. 15 Accordingly, R & B Surety was entitled to proceed against
petitioners not only for the partial payments already made but for the full
amount owed by PAGRICO to the PNB.

Summarizing, we hold that :

(1) The Surety Bond was not novated by the Trust Agreement. Both
agreements can co-exist. The Trust Agreement merely furnished to PNB
another party obligor to the Principal Obligation in addition to PAGRICO and
R & B Surety.

(2) The undertaking of the PNB to 'hold in abeyance any action to enforce its
claim" against R & B Surety did not amount to an "extension granted to the
debtor" without petitioner's consent so as to release petitioner's from their
undertaking as indemnitors of R & B Surety under the INdemnity
Agreements; and

(3) Petitioner's are indemnitors of R & B Surety against both payments to

and liability for payments to the PNB. The present suit is therefore not
premature despite the fact that the PNB has not instituted any action

ObliCon Chapter 4 Cases 112 | P a g e

92.) BROADWAY CENTRUM CONDOMINIUM CORPORATION, petitioner, vs.
TROPICAL HUT FOOD MARKET, INC. and THE HONORABLE COURT OF
APPEALS, respondents.
Petitioner Broadway Centrum Condominium Corporation ("Broadway") and
private respondent Tropical Hut Food Market. Inc. ("Tropical") executed an
28 November 1980 a contract of lease. Broadway, as lessor, agreed to lease
a 3,042.19 square meter portion of the Broadway Centrum Commercial
Complex for a period of ten (10) years, commencing from 1 February 1981
and expiring on 1 February 1991, "renewable for a like period upon the
mutual agreement of both parties." The rental provision of this contract
reads as follows:
3. BASIC RENTAL ON LEASED PREMISES — LESSEE agrees to pay LESSOR a
basic monthly rental on the leased promises in the amount of ONE
HUNDRED TWENTY THOUSAND PESOS (P120,000.00) Philippine Currency,
during the first three (3) years of this lease contract from February 1, 1981
to February 1, 1984, allowing two (2) months grace period on rental for
renovation/improvements on the leased promises from December 1, 1980
to January 31. 1961. The basic rental shall be increased to ONE HUNDRED
FORTY THOUSAND PESOS (P140,000.00) per month during the next three (3)
years from February 1, 1984 to February 1, 1987, and ONE HUNDRED SIXTY
FIVE THOUSAND PESOS (P165,000.00) per month during the last four (4)
years from February 1, 1967 to February 1, 1991.
The first basic monthly rental shall be paid in advance to the LESSOR on or
before December 1, 1980. Succeeding basic monthly rentals starting March,
1981 be paid by LESSEE to LESSOR, without the necessity of a previous
demand or the services of a collector, within the first five (5) days of the
month to which said rental shall correspond, at the Office of the LESSOR at
Broadway Centrum.
During the first year of the lessor-lessee relationship between Broadway
and Tropical, no problems were apparently experienced by either of them.
On 5 February 1982, however, Tropical wrote to Broadway stating that
Tropical's rental payments to Broadway were equivalent to 7.31% of
Tropical's actual sales of P17,246,103.00 in 1981, while "[Tropical's] gross
profit, rate [was] only 10%." Tropical went on to say that the rental specified
in that contract had been "based merely on [Tropical's) projections that
[Tropical] could reach an average sale of P120,000.00 a day;" however,
Tropical's total sales projection for 1982 was only P23,000,000.00. This
would mean again a rental rate of 6.08% of sales "which is too high for
Tropical Hut-Broadway considering that the present rental rates of other
Tropical branches are even below the normal rate of 1.5% on sales."
Accordingly. Tropical made the following proposal to Broadway:
[Tropical] would therefore propose to reduce the present monthly rental to
P50,000.00 or 2.0% of their monthly sales whichever is higher, up to the end
of the third year after which it shall again be subject to renegotiations.
(Emphasis supplied)
On 4 March 1962, Broadway responded to Tropical's latter by stating that it
(Broadway) believed that the problems of Tropical's supermarket in the
Broadway Centrum were within the control of Tropical's management.
Broadway offered six (6) suggestions which, if implemented, should result in
increased sales for Tropical of at least 15% in the succeeding months. In the
meantime, Broadway made the following counter-proposal consisting of
conditional reduction of the stipulated rental by P20,000.00 for a limited
period of four (4) months:
. . . Meantime, we are agreeable to a conditional reduction of your rental by
P20,000.00 per month for four months starting this month on a trial basis;
that is, the P20,000.00 per month reduction in rental will be paid back to us
and spread over the last six months of the years should the target of 15%
increase in sales be achieved by the fourth month. However, should your
sales not increased by 5% in spite of the improvements you have
introduced, the reduction in rental of P20,000.00 per month of P80,000.00
for four months will not have to be paid anymore. In other words, the
monthly reduction in rental is conditioned upon your not achieving the
ObliCon Chapter 4 Cases 113 | P a g e
desired 15% increased in sales volume by the fourth month assuming you
implement all of the above changes.
It is understood, however, that any reduction in rental extended is merely a
temporary suspension of the original rate of rental stipulated in our contract
of lease and not an amendment thereto.2 (Emphases supplied)
Officers of Tropical met with the President of Broadway and during this
conference, Tropical's officers recounted the "low sales volume" that the
Tropical Supermarket in the Broadway Centrum was experiencing,
apparently as a result of the temporary closure of Doña Juana Rodriguez
Avenue.3 This Avenue is a major thoroughfare adjacent to the Broadway
Centrum and was then closed to vehicular traffic because of the road
expansion project of the Government. Broadway's President, Mrs. Cita
Fernandez Orosa, was aware that the temporary closure of the Doña Juana
Rodriguez Avenue had affected the business of all the Broadway's tenants,
including Tropical. She, therefore, agreed on 20 April 1982 to a "provisional
and temporary agreement" which agreement needs to be quoted in full:
Further to our letter dated April 6, 1982, we hereby make formal our
provisional and temporary agreement to a reduction of your monthly rental
on the basis of 2% of gross receipts or P60,000.00 whichever is higher. Gross
receipts should be construed as the total sales and receipts from sublessees
of your area and from whatever source arising from the area leased by you.
This Provisional arrangement should not be interpreted as amendment to
the lease contract entered into between us.
We invite your attention to the fact that, as agreed upon, you have
committed to return by the end of April a certain portion of your leased
premises totalling 466.56 square meters and presently occupied by your
drug store and coffee shop outlets and half of the hallway.
Finally we wish to remind you that the temporary alteration in rental is
conditioned on your good faith implementation an the suggestions we
conveyed to you in our letter of March 4, 1982 regarding the operations of
the supermarket and shall not commence until the area mentioned above to
be surrendered is actually surrendered.
Should you find the foregoing in accordance with our previous verbal
agreement, please signify your acceptance by signing above the word
"conforme."
Thank you for your, continued patronage.
C o n f o r m e: Very, truly yours,
Tropical Hut Food Broadway Centrum
Market, Inc. Condominium Corp.
By: (Signed) By: (Signed) 4
___________________ _____________________
(Emphasis supplied).
Months later, the road expansion project at the Doña Juana Rodriguez
Avenue was completed. By a letter dated 15 December 1982, addressed to
Tropical, Broadway referred to the rental which "as of last, April 20, 1982,
was provisionally reduced" to P60,000.00 a month or 2% of gross receipts
whichever is higher "without waving any of [Broadway's] rights under our
rental agreement." Broadway then went on to say that:
After careful deliberation, we regret that this concession can no longer be
extended in its present form. We, therefore, advising that we shall increase
the monthly rental to P100,000.00.
This increase, however, shall be implemented gradually as follows:
P80,000.00 effective January, 1983 and P100,000.00 effective April, 1993
until further notice.
Considering the fact that you collect a monthly gross rental of P24,600.00
from your concessionaires (other forms of income not considered), the
ObliCon Chapter 4 Cases 114 | P a g e
previous temporary arrangement afforded you mare than sufficient respite
from whatever business constraints you may have had then. The
consequent effect of said temporary arrangement is your payment of a
monthly rental of P35,400.00 or an effective rate of P14.32 only per square
mater. We are sure that you will agree with us that this rate is very low and
cannot therefore be sustained indefinitely.5 (Emphases supplied).
While the rental rate above fixed by Broadway was higher than that set out
in the provisional and temporary agreement of the parties of 20 April 1982,
the rates so fixed were nonetheless lower than that stipulated in their
contract of 28 November 1980. Tropical, however, was not satisfied with the
adjusted rates fixed by Broadway. In a letter dated 4 January 1983, Mr. Luis
Que of Tropical wrote to Broadway's President appealing to Broadway "to
fix our monthly rental at P60,000.00 or 2% of our gross receipts whichever is
higher." In this letter, Mr. Que expressly hoped that
[Broadway would] understand our position, and may we reiterate our
appeal to maintain our present provisional rates until such time that more
sales are achieved. (Emphasis supplied)
Mr. Luis Que's appeal was, however, found unsatisfactory by Broadway. In a
letter dated 13 January 1983, Broadway said:
We are replying to your letter of January 4, 1983. While it may be admitted
that you are incurring losses in your operations, the same is not a monopoly
experienced solely by your corporation. Broadway Centrum itself has had its
share of business setbacks but we have nevertheless decided to absorb part
of your losses last year by agreeing to a temporary reduction of your
monthly rental. However, as we have stated in our December 15, 1982
letter, this concession can no longer be extended in its present form which
continues to be a considerable reduction on the provisions of our existing
long term contract. Consequently, we have to reiterate our advise on you
regarding your rental increased.6 (Emphasis supplied).
Tropical continued its renegotiation efforts. In another letter dated 29
March 1983, Broadway's President wrote to Mr. Luis Que turning down his
request for reconsideration. Broadway, however, was evidently desirous of
keeping Tropical as a tenant if possible and so stated that the P100,000.00
monthly rental would begin, not on April 1983 as stated in its letter of 15
December 1982 but rather on July 1983. By a letter, dated 9 April 1983, the
Credit and Collection Officer of Broadway sent Mr. Luis Que a bill for
P81,320.00 representing the accrued differential of P20,000.00 per month
between the rental which Broadway was willing to grant to Tropical
(P80,000.00 per month starting 1 January, 1983) and up to 30 June
1983)and the P60,000.00 per month or 2% of gross receipts whichever is
higher, under the temporary and provisional letter-agreement of 20 April
1982.
Tropical responded to the statement of account sent by Broadway by
pleading, once more, in a letter dated 15 April 1983, that Tropical's present
rentals of P60,000.00 monthly or 2% of gross receipts, whichever is higher,
"would at least stay until we have somehow recovered," to which Tropical
proposed, however, to add 20% of its income from concessionaires (i.e.,
concessionaires at Tropical-Broadway Supermarket).7
Tropical's last counter-offer was not acceptable to Broadway. In a letter
dated 22 April 1983, Broadway's President wrote to Mr. Luis Que stating
that "the matter was no longer negotiable":
We are responding to your letter of April 15, 1983 proposing a counter offer
to the payment of your rentals. You will remember that in our last meeting
our position on the matter has been unequivocably stated. The temporary
arrangement of reducing your monthly rentals was extended as an
assistance. This had caused us to lose P620,000.00 on rental income.
You will agree that this is a sizeable amount which had tremendous adverse
effects on our financial position. This can no longer be sustained.
ObliCon Chapter 4 Cases 115 | P a g e
We reiterate, therefore, that the matter is no longer negotiable and we
strongly urge you to settle your obligation to minimize the 2% penalty on
delayed payments provided for in our contract.
We trust that you will see the merits of the foregoing.8 (Emphasis supplied).
On 5 May 1983, Mr. Mariano Gue, adopting a new and much harder posture
than Mr. Luis Que had, wrote to Broadway as follows:
. . . I could only confirm what I told you in our conference that we cannot
afford any increase in rentals in the space occupied by us at Broadway
Centrum. And I could only repeat what is contained in the letter sent you by
our Mr. Luis Que dated April 15, 1983. We cannot agree to an increase in
rentals at this time. To do so would put us in a financial situation worse then
we were in before we agreed to reduce the leased premises and adjust the
rentals. Our position is that you cannot arbitrarily and unilaterally increase
the rentals. This is a matter which should be mutually agreed upon by us
and as stated, we are not in a financial position to agree to such an
increase.9 (Emphasis supplied).
On the same day, 5 May 1983, Mrs. Orosa wrote to Mr. Mariano Que
expressing shock and dismay at the posture suddenly adopted by the latter.
Mrs. Orosa wrote:
We are replying to your letter of May 5, 1983 categorically stating that your
position is that we cannot arbitrarily and unilaterally increase the rentals.
We are appealed by the apparent attempt to distort the very crystal clear
arrangement we reached last April 20, 1982 anent the temporary alteration
of your rentals. We hereby attached a xerox copy of said agreement with
our underscores to refresh your memory.
We have exhaustively, repeatedly but patiently labored to explain to you
the temporary and provisional arrangement to reduce your monthly rentals
is not amendment to the lease contract and this was done merely as an
assistance. There is, therefore, absolutely no basis to your claim that we
cannot arbitrarily and unilaterally increase the rentals. We strongly feel that
we should have instead been the recipient an act of gratitude from you.
In view therefore of your obstinate decision to blur your view and continue
refusing to heed our demands, we are hereby formally serving you notice
that if you still fail to pay your back accounts amounting to P100,000.00
exclusive of penalty charges by Monday, May 9, 1983, paragraph five (5) of
our lease contract will be implemented. 10 (Emphasis supplied).
A week later, on 12 May 1983, Tropical filed a Complaint before the
Regional Trial Court, Quezon City, seeking a restraining order or preliminary
injunction to prevent Broadway from invoking and implementing Section 5
of their Lease Contract and asking the court to decree that the, rental
provided for in the letter-agreement of 20 April 1982 "should subsist while
the low volume of sales [of Tropical] still continues." A restraining order was
issued by the trial court ex parte the next day and a preliminary injunction
was granted on 2 June 1983, upon Tropical's filing of a bond in the amount
of P100,000.00.
On 6 January 1984, while trial before the Regional Trial Court was pending,
Broadway informed Tropical that the basic rental would be increased to
P140,000.00 per month during the next three (3) years from 1 February
1984 to 1 February 1987 in accordance with paragraph (3) of the Lease
Contract dated 28 November 1980.
Tropical reacted by filing a supplemental complaint with the trial court
raising for the first time the issue of whether or not the letter-agreement
dated 20 April 1982 had novated the Lease Contract of 28 November 1980.
Tropical alleged that the original Contract. of Lease had been novated in its
principal conditions — i.e., the area subject to the lease and the lease
rentals — by the letter-agreement dated 20 April 1982 and that the reduced
lease rates set out in the letter-agreement are to subsist while Tropical's
sales volume "remains low."
ObliCon Chapter 4 Cases 116 | P a g e
Petitioner, upon the other hand, vehemently denied that the original Lease
Contract had been novated by the letter-agreement of 20 April 1982.
In time, the trial court rendered its decision dated 14 March 1985, the
dispositive portion of which reads as follows:
WHEREFORE, judgment, is hereby rendered in favor of the plaintiff and
against the defendant as follows:
1. The writ of preliminary injunction previously issued is made permanent;
2. The reduced rental provided for in the letter-agreement of April 20, 1982
(Exh. "G" or "5") shall subsist or be effective during the period that a plaintiff
cannot achieve its Projected daily sales average as envisioned in its
feasibility study;
3. The contract of leased dated November 28, 1980 (Exh. "A" or "1") is
declared as partially novated or modified by the letter-agreement;
4. The amount of monthly rentals payable by plaintiff for the reduced area
of the leased promises after plaintiff has achieved its projected daily sales
average is fixed as follows:
February 1, 1981 to February 1, 1984 —
P39.45 per square meter or P101,609.00;
February 1, 1984 to February 1, 1987 —
P46.02 per square meter or P118.530.00;
February 1, 1987 to February 1, 1991 —
P54.24 per square mater or P139,702.00.
Correspondingly, defendant's counterclaim is dismissed.
Costs against the defendant.
So Ordered. 11 (Emphasis supplied).
On appeal, the Court of Appeals affirmed the decision of the trial court. The
Court of Appeals held that the letter-agreement dated 20 April 1982 had
novated the principal conditions of the Lease Contract. The Court of Appeals
also hold that the reduction in the rentals was not entirely a gratuitous
accommodation on the part of Broadway since the reduction of the leased
space by 466.56 square meters, possession of which was returned by
Tropical to Broadway, constituted valuable consideration for the reduction
of rentals while the "low sales volume" of Tropical continued. The Court of
Appeals corrected a microscopic arithmetical error committed by the trial
court and in effect directed Tropical to pay, when its "low sales volume"
shall hove been overcome, the following rental rates:
From 1 February 1984 up to 1 February 1987 — P118.529.15 per month;
From 1 February 1987 up to 1 February 1991 — P139,695.07 per month.
Petitioner Broadway now asks us to review and set aside the Decision of the
Court of Appeals.
The sole issue confronting us here is Whether or not the latter-agreement
dated 20 April 1982 had novated the Contract of Lease of 28 November
1980.
We start with the basic conception that novation is the extinguishment of
an obligation by the substitution of that obligation with a subsequent one,
which terminates it, either by changing its object or principal conditions or
by substituting a now debtor in place of the old one, or by subrogating a
third person to the rights of the creditor. 12 Novation through a change of
the object or principal conditions of an existing obligation is referred to as
objective (or real) novation. Novation by the change of either the person of
the debtor or of the creditor is described as subjective (or personal)
novation. Novation may also be objective and subjective (mixed) at the
ObliCon Chapter 4 Cases 117 | P a g e
same time. In both objective and subjective novation, a dual purpose is
achieved — an obligation in extinguished and a news one is created In lieu
thereof. 13
If objective novation is to take place, it is essential that the new obligation
expressly declare that the old obligation to be extinguished, or that now
obligation be on every point incompatible with the old one. 14 Novation is
never presumed; it must be established either by the discharge of use old
debt by the express terms of the new agreement, or by the acts of the
parties whose intention to dissolve the old obligation as a consideration of
the emergence of the new one must be clearly manifested. 15 It is hardly
necessary to add that the role that novation is never presumed, is not
avoided by merely referring to partial novation. The will to novate, whether
totally or partially, must appear by express agreement of the parties, by
their acts which are too clear and unequivocal to be mistaken.
Applying the above principles to the case at bar, it is entirely clear to the
court that the letter-agreement of 20 April 1992 did not extinguish or alter
the obligations of respondent Tropical and the rights of petitioner Broadway
under their lease contract dated 28 November 1980.
In the first place, the letter-agreement of 20 April 1982 was, by its own
terms, a " provisional and temporary agreement to a reduction of
[Tropical's] monthly rental —." The letter-agreement, as noted earlier, also
contained the following sentence:
This provisional agreement should not be interpreted as amendment to the
contract entered into by us.
The same letter also referred to the reduction of rental as a "temporary
alteration in rental" which was "conditioned" upon good faith
implementation by Tropical of the six (6) principal suggestions Broadway
had conveyed to Tropical concerning improvement of the operations of
Tropical's supermarket at the Broadway Centrum. The non-specification by
Broadway (who had prepared the letter-agreement an which Tropical
placed its conforme) of the period of time during which the reduced rentals
would remain in effect, only meant that Broadway retained for itself the
discretionary right to return to the original contractual rates of rental
whenever Broadway felt it appropriate to do so. There is nothing in the text
of the 20 April 1982 letter-agreement to suggest that the reduced
concessional rental rates could not be terminated Broadway without the
consent of Tropical.
In the second place, the formal notarized Lease Contract of 28 November
1980 made it clear that a temporary and provisional concessional reduction
of rentals which Broadway might grant to Tropical was not to be construed
as alteration or waiver of any; of the terms of the Lease Contract itself. That
Lease Contract provided, among other things, as follows:
32. NON-WAIVER OF CONDITIONS & COVENANTS — The failure of the
LESSOR to insist upon strict performance of any of the terms, conditions and
stipulation hereof shall not be deemed a relinquishment or waiver of any
right or remedy that said LESSOR may have, nor shall it be construed as a
waiver of any subsequent breach of, or default in the terms, conditions and
covenants hereof, which terms, conditions and covenants shall continue
under this Contract and shall be deemed to have been made unless express
in writing and signed by the LESSOR. 16 (Emphasis supplied).
In the third place, the course of negotiations between Broadway and
Tropical before the execution of their letter-agreement of 20 April 1982,
quite clearly indicated that what they were negotiating was a temporary
and provisional reduction of rentals. Thus, Tropical itself, in its letter to
Broadway dated 5 February 1982, quoted earlier, had proposed reduction of
rentals from the stipulated contractual rates to P50,000.00 per month or 2%
of monthly sales, whichever is higher, "up to the end of the third year after
which it shall again subject, to renegotiation."
Any reduction in rental extended is merely a temporary suspension of the
original rate of rental stipulated in our contract of lease and not an
amendment thereto.
ObliCon Chapter 4 Cases 118 | P a g e

In the fourth place, the course of discussions between Broadway and
Tropical, as disclosed in their correspondence, after execution of the 20
April 1982 letter-agreement, shows that the reduction of rentals agreed
upon in the letter-agreement was not to persist, for the rest of the life of
the ten (10)-year Contract of Lease. That correspondence is bereft of any,
sign of mutual agreement or recognition that the reduced rentals had so
permanently replaced the contract stipulations on rentals as to have
become immune to change save by common consent of Tropical and
Broadway. Quite the contrary. In Broadway's letter to Tropical dated 15
December 1982, Mrs. Orosa referred to the letter-agreement of 20 April
1982 which "provisionally reduced to P60,000.00 a month or 2% of
[Tropical's] gross receipts, whichever is higher, without waiving any of our
right under our rental agreement." This 15 December 1982 letter, quoted
earlier, in an obvious effort to be conciliatory, did not try to go back
immediately to the contract stipulation of P120,000.00 monthly rental, from
1 February 1981 to 1 February 1984. Instead, Broadway proposed
P80,000.00 per month effective January 1983 and P100 000.00 per month
effective April 1983 "until further notice." In its reply letter of 4 January
1983, Tropical appealed to Broadway to maintain "our present provisional
rates until such time that more sales are achieved." In its rejoinder of 13
January 1983, Broadway stressed that though it had its own share of
business set backs, it had "nevertheless decided to absorb part of [Tropical-
Broadway Centrum's] losses last year by agreeing to a temporary reduction
of the monthly rental." At the same time, Broadway stressed that "this
concession" could no longer be extended "in its present form which
continues to be a considerable reduction on the provisions of our existing
long-term contract." Finally, in his last letter of 15 April 1983, Mr. Luis Que
of Tropical appealed once more to Broadway to continue the reduction in
rental under the 20 April 1982 letter-agreement "until we have somehow
recovered" and then, at the same time, offered to increase that reduced
rental by adding to it 20% of Tropical's income from concessionaires at its
Broadway Centrum Supermarket. Turning down Mr. Que's last counter-
officer, Mrs. Orosa of Broadway on 22 April 1983 once again stressed that:
The temporary arrangement of reducing your monthly rentals was extended
as an assistance. This had caused us to lose P620,000.00 on rental income.
(Emphasis supplied).
It is thus clear to the Court that Tropical was attempting to modify its formal
Lease Contract with Broadway by implying or inserting terms into the 20
April 1982 letter-agreement which are not found in that letter-agreement.
Under both the Civil Code and our case law on novation and as well the
express terms of the 28 November 1980 Contract of Lease, only evidence of
the clearest and most explicit kind will suffice for that purpose. Tropical's
theory that Broadway had agreed in the 20 April 1982 letter-agreement to
maintain the reduced rental so long as Tropical was suffering from a "low
volume of sales" appears to us as an afterthought, imaginative and original
no doubt, but still an afterthought. Tropical did not pretend to have reached
agreement with Broadway on what level of sales would constitute the
critical "low volume of sales." And so, the trial court ended up with the truly
extraordinary recourse of referring to the feasibility study that Tropical had
made on it's own, before Tropical and Broadway executed their 28
November 1980 Contract of Lease. That feasibility study was no mare than
an expression of Tropical's own expectations when it entered into the 1980
Contract of Lease; yet the trial court held that the reduced rentals were to
remain in effect until Tropical achieved its own expectations concerning its
sales at the Broadway Centrum, which presumably were not "low."
Tropical, in its Memorandum, stressed that Broadway had supplied the
number of customers which Tropical had inputted in its feasibility study.
Whatever number Broadway may have submitted to Tropical in their pre-
contract negotiations was no more than an estimate or speculation as to the
number of customers that might be coming into the then proposed Tropical
Supermarket at the Broadway Centrum. We do not understand Tropical to
have suggested that that number constituted a representation on the part
of Broadway which turned out to be false and which vitiated Tropical's
consent to the original 1980 Contract, of Lease. Neither do we understand
Tropical to be suggesting that Broadway had warranted to Tropical that a
certain number of customers would in fact be visiting the then proposed
ObliCon Chapter 4 Cases 119 | P a g e
Tropical Supermarket at Broadway Centrum. The 1980 Contract of Lease
itself was totally silent as to any such estimated or expected number of
customers either as a representation or as a warranty on the part, of
Broadway. That silence rendered any estimate which Broadway may have
conveyed to Tropical, quite immaterial. 17
We turn to the holding of the Court of Appeals that the surrender of 466.56
square meters of leased space by Tropical to Broadway constituted valuable
consideration, acceptance of which disabled Broadway from insisting on the
original terms of their Contract of Lease. Under the view we have taken
above of the legal effects of the 20 April 1982 letter-agreement, this
supposed valuable consideration appears quite immaterial. We must,
nonetheless, note that comparison of the lease rentals reduced and the
floor space surrendered yields a strong presumption that Broadway could
not have agreed to the supposed partial novation. The rentals were reduced
by Broadway by 50% (from P120,000.00 to P60,000.00 per month). The floor
space was reduced by slightly over 15% only. No substantial relationship
existed between the amount of the reduction of rental and the area of the
space returned by Tropical. Hence, no reasonable presumption can be
indulged that that, return of part of the leased space constituted
consideration for the reduction of rental rates. In that Contract of Lease,
moreover, the rentals were stipulated for a specified portion of the
Broadway Centrum having a total floor area of 3,042.19 square meters; the
rental rate was not specified on a per square meter basis.
1985 of the trial court are hereby REVERSED and SET ASIDE. A new
judgment is hereby entered dismissing the complaint filed by private
respondent Tropical, and requiring private respondent Tropical to pay to
petitioner Broadway the following rental rates:
1. P80,000.00 per month from 1 January 1983 up to 30 June 1983;
2. P100,000.00 per, month from 1 July 1983 up to 31 January 1984;
3. P140,000.00 per month from 1 February 1984 to 1 February 1987; and
4. P160,000.00 per month from 1 February 1987 to 31 January 1991.
The penalty of 2% per month on unpaid rentals specified in Section 5 of the
28 November 1980 Contract of Lease is, in the exercise of the Court's
discretion, hereby equitably REDUCED to ten percent (10%) per annum
computed from accrual of such rentals as above specified until fully paid. In
addition, private respondent Tropical shall pay to petitioner Broadway
attorney's fees in the amount of ten percent (10%) (and not twenty percent
[20%] as specified in Section 33 of the Contract of lease) of the total amount
due and payable to petitioner Broadway under this Decision. Costs against,
private respondent.
SO ORDERED.

We conclude that the Court, of Appeals fell into reversible error when it
affirmed the decision of the trial court. We believe and so hold that the
letter-agreement of 20 April 1982 did not constitute a novation, Whether
partial or total, of the 28 November 1980 Contract of Lease between
Broadway and Tropical.

WHEREFORE, for all the foregoing, the Petition for Review on Certiorari is
hereby GIVEN DUE COURSE, and the Comment filed by private respondent
Tropical is hereby TREATED as its ANSWER and the Decision dated 30
January 1987 of the Court, of Appeals and the Decision dated 14 March
ObliCon Chapter 4 Cases 120 | P a g e
93.) CALIFORNIA BUS LINES, INC., petitioner, vs.
STATE INVESTMENT HOUSE, INC., respondent.
In this petition for review, California Bus Lines, Inc., assails the decision,1
dated April 17, 2001, of the Court of Appeals in CA-G.R. CV No. 52667,
reversing the judgment2 , dated June 3, 1993, of the Regional Trial Court of
Manila, Branch 13, in Civil Case No. 84-28505 entitled State Investment
House, Inc. v. California Bus Lines, Inc., for collection of a sum of money. The
Court of Appeals held petitioner California Bus Lines, Inc., liable for the
value of five promissory notes assigned to respondent State Investment
House, Inc.
The facts, as culled from the records, are as follows:
Sometime in 1979, Delta Motors Corporation—M.A.N. Division (Delta)
applied for financial assistance from respondent State Investment House,
Inc. (hereafter SIHI), a domestic corporation engaged in the business of
quasi-banking. SIHI agreed to extend a credit line to Delta for
₱25,000,000.00 in three separate credit agreements dated May 11, June 19,
and August 22, 1979.3 On several occasions, Delta availed of the credit line
by discounting with SIHI some of its receivables, which evidence actual sales
of Delta’s vehicles. Delta eventually became indebted to SIHI to the tune of
₱24,010,269.32.4
Meanwhile, from April 1979 to May 1980, petitioner California Bus Lines,
Inc. (hereafter CBLI), purchased on installment basis 35 units of M.A.N.
Diesel Buses and two (2) units of M.A.N. Diesel Conversion Engines from
Delta. To secure the payment of the purchase price of the 35 buses, CBLI
and its president, Mr. Dionisio O. Llamas, executed sixteen (16) promissory
notes in favor of Delta on January 23 and April 25, 1980.5 In each
promissory note, CBLI promised to pay Delta or order, ₱2,314,000 payable
in 60 monthly installments starting August 31, 1980, with interest at 14%
per annum. CBLI further promised to pay the holder of the said notes 25% of
the amount due on the same as attorney’s fees and expenses of collection,
whether actually incurred or not, in case of judicial proceedings to enforce
collection. In addition to the notes, CBLI executed chattel mortgages over
the 35 buses in Delta’s favor.
When CBLI defaulted on all payments due, it entered into a restructuring
agreement with Delta on October 7, 1981, to cover its overdue obligations
under the promissory notes.6 The restructuring agreement provided for a
new schedule of payments of CBLI’s past due installments, extending the
period to pay, and stipulating daily remittance instead of the previously
agreed monthly remittance of payments. In case of default, Delta would
have the authority to take over the management and operations of CBLI
until CBLI and/or its president, Mr. Dionisio Llamas, remitted and/or
updated CBLI’s past due account. CBLI and Delta also increased the interest
rate to 16% p.a. and added a documentation fee of 2% p.a. and a 4% p.a.
restructuring fee.
On December 23, 1981, Delta executed a Continuing Deed of Assignment of
Receivables7 in favor of SIHI as security for the payment of its obligations to
SIHI per the credit agreements. In view of Delta’s failure to pay, the loan
agreements were restructured under a Memorandum of Agreement dated
March 31, 1982.8 Delta obligated itself to pay a fixed monthly amortization
of ₱400,000 to SIHI and to discount with SIHI ₱8,000,000 worth of
receivables with the understanding that SIHI shall apply the proceeds
against Delta’s overdue accounts.
CBLI continued having trouble meeting its obligations to Delta. This
prompted Delta to threaten CBLI with the enforcement of the management
takeover clause. To pre-empt the take-over, CBLI filed on May 3, 1982, a
complaint for injunction9 , docketed as Civil Case No. 0023-P, with the Court
of First Instance of Rizal, Pasay City, (now Regional Trial Court of Pasay City).
In due time, Delta filed its amended answer with applications for the
issuance of a writ of preliminary mandatory injunction to enforce the
management takeover clause and a writ of preliminary attachment over the
buses it sold to CBLI.10 On December 27, 1982,11 the trial court granted
Delta’s prayer for issuance of a writ of preliminary mandatory injunction and
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preliminary attachment on account of the fraudulent disposition by CBLI of
its assets.
On September 15, 1983, pursuant to the Memorandum of Agreement, Delta
executed a Deed of Sale12 assigning to SIHI five (5) of the sixteen (16)
promissory notes13 from California Bus Lines, Inc. At the time of
assignment, these five promissory notes, identified and numbered as 80-53,
80-54, 80-55, 80-56, and 80-57, had a total value of ₱16,152,819.80
inclusive of interest at 14% per annum.
SIHI subsequently sent a demand letter dated December 13, 1983,14 to CBLI
requiring CBLI to remit the payments due on the five promissory notes
directly to it. CBLI replied informing SIHI of Civil Case No. 0023-P and of the
fact that Delta had taken over its management and operations.15
As regards Delta’s remaining obligation to SIHI, Delta offered its available
bus units, valued at ₱27,067,162.22, as payment in kind.16 On December
29, 1983, SIHI accepted Delta’s offer, and Delta transferred the ownership of
its available buses to SIHI, which in turn acknowledged full payment of
Delta’s remaining obligation.17 When SIHI was unable to take possession of
the buses, SIHI filed a petition for recovery of possession with prayer for
issuance of a writ of replevin before the RTC of Manila, Branch 6, docketed
as Civil Case No. 84-23019. The Manila RTC issued a writ of replevin and SIHI
was able to take possession of 17 bus units belonging to Delta. SIHI applied
the proceeds from the sale of the said 17 buses amounting to
₱12,870,526.98 to Delta’s outstanding obligation. Delta’s obligation to SIHI
was thus reduced to ₱20,061,898.97. On December 5, 1984, Branch 6 of the
RTC of Manila rendered judgment in Civil Case No. 84-23019 ordering Delta
to pay SIHI this amount.
Thereafter, Delta and CBLI entered into a compromise agreement on July
24, 1984,18 in Civil Case No. 0023-P, the injunction case before the RTC of
Pasay. CBLI agreed that Delta would exercise its right to extrajudicially
foreclose on the chattel mortgages over the 35 bus units. The RTC of Pasay
approved this compromise agreement the following day, July 25, 1984.19
Following this, CBLI vehemently refused to pay SIHI the value of the five
promissory notes, contending that the compromise agreement was in full
settlement of all its obligations to Delta including its obligations under the
promissory notes.
On December 26, 1984, SIHI filed a complaint, docketed as Civil Case No. 84-
28505, against CBLI in the Regional Trial Court of Manila, Branch 34, to
collect on the five (5) promissory notes with interest at 14% p.a. SIHI also
prayed for the issuance of a writ of preliminary attachment against the
properties of CBLI.20
On December 28, 1984, Delta filed a petition for extrajudicial foreclosure of
chattel mortgages pursuant to its compromise agreement with CBLI. On
January 2, 1985, Delta filed in the RTC of Pasay a motion for execution of the
judgment based on the compromise agreement.21 The RTC of Pasay
granted this motion the following day.22
In view of Delta’s petition and motion for execution per the judgment of
compromise, the RTC of Manila granted in Civil Case No. 84-28505 SIHI’s
application for preliminary attachment on January 4, 1985.23 Consequently,
SIHI was able to attach and physically take possession of thirty-two (32)
buses belonging to CBLI.24 However, acting on CBLI’s motion to quash the
writ of preliminary attachment, the same court resolved on January 15,
1986,25 to discharge the writ of preliminary attachment. SIHI assailed the
discharge of the writ before the Intermediate Appellate Court (now Court of
Appeals) in a petition for certiorari and prohibition, docketed as CA-G.R. SP
No. 08378. On July 31, 1987, the Court of Appeals granted SIHI’s petition in
CA-GR SP No. 08378 and ruled that the writ of preliminary attachment
issued by Branch 34 of the RTC Manila in Civil Case No. 84-28505 should
stay.26 The decision of the Court of Appeals attained finality on August 22,
1987.27
Meanwhile, pursuant to the January 3, 1985 Order of the RTC of Pasay, the
sheriff of Pasay City conducted a public auction and issued a certificate of
sheriff’s sale to Delta on April 2, 1987, attesting to the fact that Delta bought
ObliCon Chapter 4 Cases 122 | P a g e
14 of the 35 buses for ₱3,920,000.28 On April 7, 1987, the sheriff of Manila,
by virtue of the writ of execution dated March 27, 1987, issued by Branch 6
of the RTC of Manila in Civil Case No. 84-23019, sold the same 14 buses at
public auction in partial satisfaction of the judgment SIHI obtained against
Delta in Civil Case No. 84-23019.
Sometime in May 1987, Civil Case No. 84-28505 was raffled to Branch 13 of
the RTC of Manila in view of the retirement of the presiding judge of Branch
34. Subsequently, SIHI moved to sell the sixteen (16) buses of CBLI which
had previously been attached by the sheriff in Civil Case No. 84-28505
pursuant to the January 4, 1985, Order of the RTC of Manila.29 SIHI’s
motion was granted on December 16, 1987.30 On November 29, 1988,
however, SIHI filed an urgent ex-parte motion to amend this order claiming
that through inadvertence and excusable negligence of its new counsel, it
made a mistake in the list of buses in the Motion to Sell Attached Properties
it had earlier filed.31 SIHI explained that 14 of the buses listed had already
been sold to Delta on April 2, 1987, by virtue of the January 3, 1985 Order of
the RTC of Pasay, and that two of the buses listed had been released to third
party, claimant Pilipinas Bank, by Order dated September 16, 198732 of
Branch 13 of the RTC of Manila.
CBLI opposed SIHI’s motion to allow the sale of the 16 buses. On May 3,
1989,33 Branch 13 of the RTC of Manila denied SIHI’s urgent motion to
allow the sale of the 16 buses listed in its motion to amend. The trial court
ruled that the best interest of the parties might be better served by denying
further sales of the buses and to go direct to the trial of the case on the
merits.34
After trial, judgment was rendered in Civil Case No. 84-28505 on June 3,
1993, discharging CBLI from liability on the five promissory notes. The trial
court likewise favorably ruled on CBLI’s compulsory counterclaim. The trial
court directed SIHI to return the 16 buses or to pay CBLI ₱4,000,000
representing the value of the seized buses, with interest at 12% p.a. to begin
from January 11, 1985, the date SIHI seized the buses, until payment is
made. In ruling against SIHI, the trial court held that the restructuring
agreement dated October 7, 1981, between Delta and CBLI novated the five
promissory notes; hence, at the time Delta assigned the five promissory
notes to SIHI, the notes were already merged in the restructuring
agreement and cannot be enforced against CBLI.
SIHI appealed the decision to the Court of Appeals. The case was docketed
as CA-G.R. CV No. 52667. On April 17, 2001, the Court of Appeals decided
CA-G.R. CV No. 52667 in this manner:
WHEREFORE, based on the foregoing premises and finding the appeal to be
meritorious, We find defendant-appellee CBLI liable for the value of the five
(5) promissory notes subject of the complaint a quo less the proceeds from
the attached sixteen (16) buses. The award of attorney’s fees and costs is
eliminated. The appealed decision is hereby REVERSED. No costs.
SO ORDERED.35
Hence, this appeal where CBLI contends that
I. THE COURT OF APPEALS ERRED IN DECLARING THAT THE RESTRUCTURING
AGREEMENT BETWEEN DELTA AND THE PETITIONER DID NOT
SUBSTANTIALLY NOVATE THE TERMS OF THE FIVE PROMISSORY NOTES.
II. THE COURT OF APPEALS ERRED IN HOLDING THAT THE COMPROMISE
AGREEMENT BETWEEN DELTA AND THE PETITIONER IN THE PASAY CITY
CASE DID NOT SUPERSEDE AND DISCHARGE THE PROMISSORY NOTES.
III. THE COURT OF APPEALS ERRED IN UPHOLDING THE CONTINUING
VALIDITY OF THE PRELIMINARY ATTACHMENT AND EXONERATING THE
RESPONDENT OF MALEFACTIONS IN PRESERVING AND ASSERTING ITS
RIGHTS THEREUNDER.36
Essentially, the issues are (1) whether the Restructuring Agreement dated
October 7, 1981, between petitioner CBLI and Delta Motors, Corp. novated
the five promissory notes Delta Motors, Corp. assigned to respondent SIHI,
ObliCon Chapter 4 Cases 123 | P a g e
and (2) whether the compromise agreement in Civil Case No. 0023-P
superseded and/or discharged the subject five promissory notes. The issues
being interrelated, they shall be jointly discussed.
CBLI first contends that the Restructuring Agreement did not merely change
the incidental elements of the obligation under all sixteen (16) promissory
notes, but it also increased the obligations of CBLI with the addition of new
obligations that were incompatible with the old obligations in the said
notes.37 CBLI adds that even if the restructuring agreement did not totally
extinguish the obligations under the sixteen (16) promissory notes, the July
24, 1984, compromise agreement executed in Civil Case No. 0023-P did.38
CBLI cites paragraph 5 of the compromise agreement which states that the
agreement between it and CBLI was in "full and final settlement,
adjudication and termination of all their rights and obligations as of the date
of (the) agreement, and of the issues in (the) case." According to CBLI,
inasmuch as the five promissory notes were subject matters of the Civil Case
No. 0023-P, the decision approving the compromise agreement operated as
res judicata in the present case.39
Novation has been defined as the extinguishment of an obligation by the
substitution or change of the obligation by a subsequent one which
terminates the first, either by changing the object or principal conditions, or
by substituting the person of the debtor, or subrogating a third person in
the rights of the creditor.40
Novation, in its broad concept, may either be extinctive or modificatory.41 It
is extinctive when an old obligation is terminated by the creation of a new
obligation that takes the place of the former; it is merely modificatory when
the old obligation subsists to the extent it remains compatible with the
amendatory agreement.42 An extinctive novation results either by changing
the object or principal conditions (objective or real), or by substituting the
person of the debtor or subrogating a third person in the rights of the
creditor (subjective or personal).43 Novation has two functions: one to
extinguish an existing obligation, the other to substitute a new one in its
place.44 For novation to take place, four essential requisites have to be met,
namely, (1) a previous valid obligation; (2) an agreement of all parties
concerned to a new contract; (3) the extinguishment of the old obligation;
and (4) the birth of a valid new obligation.45
Novation is never presumed,46 and the animus novandi, whether totally or
partially, must appear by express agreement of the parties, or by their acts
that are too clear and unequivocal to be mistaken.47
The extinguishment of the old obligation by the new one is a necessary
element of novation which may be effected either expressly or impliedly.48
The term "expressly" means that the contracting parties incontrovertibly
disclose that their object in executing the new contract is to extinguish the
old one.49 Upon the other hand, no specific form is required for an implied
novation, and all that is prescribed by law would be an incompatibility
between the two contracts.50 While there is really no hard and fast rule to
determine what might constitute to be a sufficient change that can bring
about novation, the touchstone for contrariety, however, would be an
irreconcilable incompatibility between the old and the new obligations.
There are two ways which could indicate, in fine, the presence of novation
and thereby produce the effect of extinguishing an obligation by another
which substitutes the same. The first is when novation has been explicitly
stated and declared in unequivocal terms. The second is when the old and
the new obligations are incompatible on every point. The test of
incompatibility is whether the two obligations can stand together, each one
having its independent existence.51 If they cannot, they are incompatible
and the latter obligation novates the first.52 Corollarily, changes that breed
incompatibility must be essential in nature and not merely accidental. The
incompatibility must take place in any of the essential elements of the
obligation, such as its object, cause or principal conditions thereof;
otherwise, the change would be merely modificatory in nature and
insufficient to extinguish the original obligation.53
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The necessity to prove the foregoing by clear and convincing evidence is
accentuated where the obligation of the debtor invoking the defense of
novation has already matured.54
With respect to obligations to pay a sum of money, this Court has
consistently applied the well-settled rule that the obligation is not novated
by an instrument that expressly recognizes the old, changes only the terms
of payment, and adds other obligations not incompatible with the old ones,
or where the new contract merely supplements the old one.55
In Inchausti & Co. v. Yulo56 this Court held that an obligation to pay a sum
of money is not novated in a new instrument wherein the old is ratified, by
changing only the term of payment and adding other obligations not
incompatible with the old one. In Tible v. Aquino57 and Pascual v.
Lacsamana58 this Court declared that it is well settled that a mere extension
of payment and the addition of another obligation not incompatible with
the old one is not a novation thereof.
In this case, the attendant facts do not make out a case of novation. The
restructuring agreement between Delta and CBLI executed on October 7,
1981, shows that the parties did not expressly stipulate that the
restructuring agreement novated the promissory notes. Absent an
unequivocal declaration of extinguishment of the pre-existing obligation,
only a showing of complete incompatibility between the old and the new
obligation would sustain a finding of novation by implication.59 However,
our review of its terms yields no incompatibility between the promissory
notes and the restructuring agreement.
The five promissory notes, which Delta assigned to SIHI on September 13,
1983, contained the following common stipulations:
1. They were payable in 60 monthly installments up to July 31, 1985;
2. Interest: 14% per annum;
3. Failure to pay any of the installments would render the entire remaining
balance due and payable at the option of the holder of the notes;
4. In case of judicial collection on the notes, the maker (CBLI) and co-maker
(its president, Mr. Dionisio O. Llamas, Jr) were solidarily liable of attorney’s
fees and expenses of 25% of the amount due in addition to the costs of suit.
The restructuring agreement, for its part, had the following provisions:
WHEREAS, CBL and LLAMAS admit their past due installment on the
following promissory notes:
a. PN Nos. 16 to 26 (11 units)
Past Due as of September 30, 1981 – ₱1,411,434.00
b. PN Nos. 52 to 57 (24 units)
Past Due as of September 30, 1981 – ₱1,105,353.00
WHEREAS, the parties agreed to restructure the above-mentioned past due
installments under the following terms and conditions:
a. PN Nos. 16 to 26 (11 units) – 37 months
PN Nos. 52 to 57 (24 units) – 46 months
b. Interest Rate: 16% per annum
c. Documentation Fee: 2% per annum
d. Penalty previously incurred and Restructuring fee: 4% p.a.
e. Mode of Payment: Daily Remittance
NOW, THEREFORE, for and in consideration of the foregoing premises, the
parties hereby agree and covenant as follows:
ObliCon Chapter 4 Cases 125 | P a g e
1. That the past due installment referred to above plus the current and/or
falling due amortization as of October 1, 1981 for Promissory Notes Nos. 16
to 26 and 52 to 57 shall be paid by CBL and/or LLAMAS in accordance with
the following schedule of payments:
Daily payments of ₱11,000.00 from<>October 1 to December 31, 1981
Daily payments of ₱12,000.00 from<>January 1, 1982 to March 31, 1982
Daily payments of ₱13,000.00 from<>April 1, 1982 to June 30, 1982
Daily payments of ₱14,000.00 from<>July 1, 1982 to September 30, 1982
Daily payments of ₱15,000.00 from<>October 1, 1982 to December 31,
1982
Daily payments of ₱16,000.00 from<>January 1, 1983 to June 30, 1983
Daily payments of ₱17,000.00 from<>July 1, 1983
2. CBL or LLAMAS shall remit to DMC on or before 11:00 a.m. everyday the
daily cash payments due to DMC in accordance with the schedule in
paragraph 1. DMC may send a collector to receive the amount due at CBL’s
premises. All delayed remittances shall be charged additional 2% penalty
interest per month.
3. All payments shall be applied to amortizations and penalties due in
accordance with paragraph of the restructured past due installments above
mentioned and PN Nos. 16 to 26 and 52 to 57.
4. DMC may at anytime assign and/or send its representatives to monitor
the operations of CBL pertaining to the financial and field operations and
service and maintenance matters of M.A.N. units. Records needed by the
DMC representatives in monitoring said operations shall be made available
by CBL and LLAMAS.
5. Within thirty (30) days after the end of the terms of the PN Nos. 16 to 26
and 52 to 57, CBL or LLAMAS shall remit in lump sum whatever balance is
left after deducting all payments made from what is due and payable to
DMC in accordance with paragraph 1 of this agreement and PN Nos. 16 to
26 and 52 to 57.
6. In the event that CBL and LLAMAS fail to remit the daily remittance
agreed upon and the total accumulated unremitted amount has reached
and (sic) equivalent of Sixty (60) days, DMC and Silverio shall exercise any or
all of the following options:
(a) The whole sum remaining then unpaid plus 2% penalty per month and
16% interest per annum on total past due installments will immediately
become due and payable. In the event of judicial proceedings to enforce
collection, CBL and LLAMAS will pay to DMC an additional sum equivalent to
25% of the amount due for attorney’s fees and expenses of collection,
whether actually incurred or not, in addition to the cost of suit;
(b) To enforce in accordance with law, their rights under the Chattel
Mortgage over various M.A.N. Diesel bus with Nos. CU 80-39, 80-40, 80-41,
80-42, 80-43, 80-44 and 80-15, and/or
(c) To take over management and operations of CBL until such time that CBL
and/or LLAMAS have remitted and/or updated their past due account with
DMC.
7. DMC and SILVERIO shall insure to CBL continuous supply of spare parts
for the M.A.N. Diesel Buses and shall make available to CBL at the price
prevailing at the time of purchase, an inventory of spare parts consisting of
at least ninety (90%) percent of the needs of CBL based on a moving 6-
month requirement to be prepared and submitted by CBL, and acceptable
to DMC, within the first week of each month.
ObliCon Chapter 4 Cases 126 | P a g e
8. Except as otherwise modified in this Agreement, the terms and conditions
stipulated in PN Nos. 16 to 26 and 52 to 57 shall continue to govern the
relationship between the parties and that the Chattel Mortgage over various
M.A.N. Diesel Buses with Nos. CM No. 80-39, 80-40, 80-41, 80-42, 80-43, 80-
44 and CM No. 80-15 as well as the Deed of Pledge executed by Mr. Llamas
shall continue to secure the obligation until full payment.
9. DMC and SILVERIO undertake to recall or withdraw its previous request to
Notary Public Alberto G. Doller and to instruct him not to proceed with the
public auction sale of the shares of stock of CBL subject-matter of the Deed
of Pledge of Shares. LLAMAS, on the other hand, undertakes to move for the
immediate dismissal of Civil Case No. 9460-P entitled "Dionisio O. Llamas vs.
Alberto G. Doller, et al.", Court of First Instance of Pasay, Branch XXIX.60
It is clear from the foregoing that the restructuring agreement, instead of
containing provisions "absolutely incompatible" with the obligations of the
judgment, expressly ratifies such obligations in paragraph 8 and contains
provisions for satisfying them. There was no change in the object of the
prior obligations. The restructuring agreement merely provided for a new
schedule of payments and additional security in paragraph 6 (c) giving Delta
authority to take over the management and operations of CBLI in case CBLI
fails to pay installments equivalent to 60 days. Where the parties to the new
obligation expressly recognize the continuing existence and validity of the
old one, there can be no novation.61 Moreover, this Court has ruled that an
agreement subsequently executed between a seller and a buyer that
provided for a different schedule and manner of payment, to restructure
the mode of payments by the buyer so that it could settle its outstanding
obligation in spite of its delinquency in payment, is not tantamount to
novation. 62
The addition of other obligations likewise did not extinguish the promissory
notes. In Young v. CA63 , this Court ruled that a change in the incidental
elements of, or an addition of such element to, an obligation, unless
otherwise expressed by the parties will not result in its extinguishment.
In fine, the restructuring agreement can stand together with the promissory
notes.
Neither is there merit in CBLI’s argument that the compromise agreement
dated July 24, 1984, in Civil Case No. 0023-P superseded and/or discharged
the five promissory notes. Both Delta and CBLI cannot deny that the five
promissory notes were no longer subject of Civil Case No. 0023-P when they
entered into the compromise agreement on July 24, 1984.
Having previously assigned the five promissory notes to SIHI, Delta had no
more right to compromise the same. Delta’s limited authority to collect for
SIHI stipulated in the September 13, 1985, Deed of Sale cannot be construed
to include the power to compromise CBLI’s obligations in the said
promissory notes. An authority to compromise, by express provision of
Article 187864 of the Civil Code, requires a special power of attorney, which
is not present in this case. Incidentally, Delta’s authority to collect in behalf
of SIHI was, by express provision of the Continuing Deed of Assignment,65
automatically revoked when SIHI opted to collect directly from CBLI.
As regards CBLI, SIHI’s demand letter dated December 13, 1983, requiring
CBLI to remit the payments directly to SIHI effectively revoked Delta’s
limited right to collect in behalf of SIHI. This should have dispelled CBLI’s
erroneous notion that Delta was acting in behalf of SIHI, with authority to
compromise the five promissory notes.
But more importantly, the compromise agreement itself provided that it
covered the rights and obligations only of Delta and CBLI and that it did not
refer to, nor cover the rights of, SIHI as the new creditor of CBLI in the
subject promissory notes. CBLI and Delta stipulated in paragraph 5 of the
agreement that:
5. This COMPROMISE AGREEMENT constitutes the entire understanding by
and between the plaintiffs and the defendants as well as their lawyers, and
operates as full and final settlement, adjudication and termination of all
ObliCon Chapter 4 Cases 127 | P a g e
their rights and obligations as of the date of this agreement, and of the
issues in this case.66
Even in the absence of such a provision, the compromise agreement still
cannot bind SIHI under the settled rule that a compromise agreement
determines the rights and obligations of only the parties to it.67 Therefore,
we hold that the compromise agreement covered the rights and obligations
only of Delta and CBLI and only with respect to the eleven (11) other
promissory notes that remained with Delta.
CBLI next maintains that SIHI is estopped from questioning the compromise
agreement because SIHI failed to intervene in Civil Case No. 0023-P after
CBLI informed it of the takeover by Delta of CBLI’s management and
operations and the resultant impossibility for CBLI to comply with its
obligations in the subject promissory notes. CBLI also adds that SIHI’s failure
to intervene in Civil Case No. 0023-P is proof that Delta continued to act in
SIHI’s behalf in effecting collection under the notes.
The contention is untenable. As a result of the assignment, Delta
relinquished all its rights to the subject promissory notes in favor of SIHI.
This had the effect of separating the five promissory notes from the 16
promissory notes subject of Civil Case No. 0023-P. From that time, CBLI’s
obligations to SIHI embodied in the five promissory notes became separate
and distinct from CBLI’s obligations in eleven (11) other promissory notes
that remained with Delta. Thus, any breach of these independent
obligations gives rise to a separate cause of action in favor of SIHI against
CBLI. Considering that Delta’s assignment to SIHI of these five promissory
notes had the effect of removing the said notes from Civil Case No. 0023-P,
there was no reason for SIHI to intervene in the said case. SIHI did not have
any interest to protect in Civil Case No. 0023-P.
Moreover, intervention is not mandatory, but only optional and
permissive.68 Notably, Section 2,69 Rule 12 of the then 1988 Revised Rules
of Procedure uses the word ‘may’ in defining the right to intervene. The
present rules maintain the permissive nature of intervention in Section 1,
Rule 19 of the 1997 Rules of Civil Procedure, which provides as follows:
SEC. 1. Who may intervene.—A person who has a legal interest in the
matter in litigation, or in the success of either of the parties, or an interest
against both, or is so situated as to be adversely affected by a distribution or
other disposition of property in the custody of the court or of an officer
thereof may, with leave of court, be allowed to intervene in the action. The
court shall consider whether or not the intervention will unduly delay or
prejudice the adjudication of the rights of the original parties, and whether
or not the intervenor's rights may be fully protected in a separate
proceeding.70
Also, recall that Delta transferred the five promissory notes to SIHI on
September 13, 1983 while Civil Case No. 0023-P was pending. Then as now,
the rule in case of transfer of interest pendente lite is that the action may be
continued by or against the original party unless the court, upon motion,
directs the person to whom the interest is transferred to be substituted in
the action or joined with the original party.71 The non-inclusion of a
necessary party does not prevent the court from proceeding in the action,
and the judgment rendered therein shall be without prejudice to the rights
of such necessary party.72
In light of the foregoing, SIHI’s refusal to intervene in Civil Case No. 0023-P
in another court does not amount to an estoppel that may prevent SIHI
from instituting a separate and independent action of its own.73 This is
especially so since it does not appear that a separate proceeding would be
inadequate to protect fully SIHI’s rights.74 Indeed, SIHI’s refusal to intervene
is precisely because it considered that its rights would be better protected in
a separate and independent suit.
The judgment on compromise in Civil Case No. 0023-P did not operate as res
judicata to prevent SIHI from prosecuting its claims in the present case. As
previously discussed, the compromise agreement and the judgment on
compromise in Civil Case No. 0023-P covered only Delta and CBLI and their
ObliCon Chapter 4 Cases 128 | P a g e
respective rights under the 11 promissory notes not assigned to SIHI. In
contrast, the instant case involves SIHI and CBLI and the five promissory
notes. There being no identity of parties and subject matter, there is no res
judicata.
CBLI maintains, however, that in any event, recovery under the subject
promissory notes is no longer allowed by Article 1484(3)75 of the Civil Code,
which prohibits a creditor from suing for the deficiency after it has
foreclosed on the chattel mortgages. SIHI, being the successor-in-interest of
Delta, is no longer allowed to recover on the promissory notes given as
security for the purchase price of the 35 buses because Delta had already
extrajudicially foreclosed on the chattel mortgages over the said buses on
April 2, 1987.
This claim is likewise untenable.
Article 1484(3) finds no application in the present case. The extrajudicial
foreclosure of the chattel mortgages Delta effected cannot prejudice SIHI’s
rights. As stated earlier, the assignment of the five notes operated to create
a separate and independent obligation on the part of CBLI to SIHI, distinct
and separate from CBLI’s obligations to Delta. And since there was a
previous revocation of Delta’s authority to collect for SIHI, Delta was no
longer SIHI’s collecting agent. CBLI, in turn, knew of the assignment and
Delta’s lack of authority to compromise the subject notes, yet it readily
agreed to the foreclosure. To sanction CBLI’s argument and to apply Article
1484 (3) to this case would work injustice to SIHI by depriving it of its right
to collect against CBLI who has not paid its obligations.
That SIHI later on levied on execution and acquired in the ensuing public
sale in Civil Case No. 84-23019 the buses Delta earlier extrajudicially
foreclosed on April 2, 1987, in Civil Case No. 0023-P, did not operate to
render the compromise agreement and the foreclosure binding on SIHI. At
the time SIHI effected the levy on execution to satisfy its judgment credit
against Delta in Civil Case No. 84-23019, the said buses already pertained to
Delta by virtue of the April 2, 1987 auction sale. CBLI no longer had any
interest in the said buses.1âwphi1 Under the circumstances, we cannot see
how SIHI’s belated acquisition of the foreclosed buses operates to hold the
compromise agreement—and consequently Article 1484(3)—applicable to
SIHI as CBLI contends. CBLI’s last contention must, therefore, fail. We hold
that the writ of execution to enforce the judgment of compromise in Civil
Case No. 0023-P and the foreclosure sale of April 2, 1987, done pursuant to
the said writ of execution affected only the eleven (11) other promissory
notes covered by the compromise agreement and the judgment on
compromise in Civil Case No. 0023-P.
In support of its third assignment of error, CBLI maintains that there was no
basis for SIHI’s application for a writ of preliminary attachment.76 According
to CBLI, it committed no fraud in contracting its obligation under the five
promissory notes because it was financially sound when it issued the said
notes on April 25, 1980.77 CBLI also asserts that at no time did it falsely
represent to SIHI that it would be able to pay its obligations under the five
promissory notes.78 According to CBLI, it was not guilty of fraudulent
concealment, removal, or disposal, or of fraudulent intent to conceal,
remove, or dispose of its properties to defraud its creditors;79 and that
SIHI’s bare allegations on this matter were insufficient for the preliminary
attachment of CBLI’s properties.80
The question whether the attachment of the sixteen (16) buses was valid
and in accordance with law, however, has already been resolved with
finality by the Court of Appeals in CA-G.R. SP No. 08376. In its July 31, 1987,
decision, the Court of Appeals upheld the legality of the writ of preliminary
attachment SIHI obtained and ruled that the trial court judge acted with
grave abuse of discretion in discharging the writ of attachment despite the
clear presence of a determined scheme on the part of CBLI to dispose of its
property. Considering that the said Court of Appeals decision has already
attained finality on August 22, 1987, there exists no reason to resolve this
question anew. Reasons of public policy, judicial orderliness, economy and
judicial time and the interests of litigants as well as the peace and order of
society, all require that stability be accorded the solemn and final judgments
of courts or tribunals of competent jurisdiction.81
ObliCon Chapter 4 Cases 129 | P a g e
Finally, in the light of the justness of SIHI’s claim against CBLI, we cannot
sustain CBLI’s contention that the Court of Appeals erred in dismissing its
counterclaim for lost income and the value of the 16 buses over which SIHI
obtained a writ of preliminary attachment. Where the party who requested
the attachment acted in good faith and without malice, the claim for
damages resulting from the attachment of property cannot be sustained.82

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

SO ORDERED.

ObliCon Chapter 4 Cases 130 | P a g e

94.) ROMEO C. GARCIA, petitioner, vs. DIONISIO V. LLAMAS, respondent.
Novation cannot be presumed. It must be clearly shown either by the
express assent of the parties or by the complete incompatibility between
the old and the new agreements. Petitioner herein fails to show either
requirement convincingly; hence, the summary judgment holding him liable
as a joint and solidary debtor stands.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court,
seeking to nullify the November 26, 2001 Decision2 and the June 26, 2002
Resolution3 of the Court of Appeals (CA) in CA-GR CV No. 60521. The
appellate court disposed as follows:
"UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment appealed
from, insofar as it pertains to [Petitioner] Romeo Garcia, must be, as it
hereby is, AFFIRMED, subject to the modification that the award for
attorney’s fees and cost of suit is DELETED. The portion of the judgment that
pertains to x x x Eduardo de Jesus is SET ASIDE and VACATED. Accordingly,
the case against x x x Eduardo de Jesus is REMANDED to the court of origin
for purposes of receiving ex parte [Respondent] Dionisio Llamas’ evidence
against x x x Eduardo de Jesus."4
The challenged Resolution, on the other hand, denied petitioner’s Motion
for Reconsideration.
The Antecedents
The antecedents of the case are narrated by the CA as follows:
"This case started out as a complaint for sum of money and damages by x x
x [Respondent] Dionisio Llamas against x x x [Petitioner] Romeo Garcia and
Eduardo de Jesus. Docketed as Civil Case No. Q97-32-873, the complaint
alleged that on 23 December 1996[,] [petitioner and de Jesus] borrowed
₱400,000.00 from [respondent]; that, on the same day, [they] executed a
promissory note wherein they bound themselves jointly and severally to pay
the loan on or before 23 January 1997 with a 5% interest per month; that
the loan has long been overdue and, despite repeated demands, [petitioner
and de Jesus] have failed and refused to pay it; and that, by reason of the[ir]
unjustified refusal, [respondent] was compelled to engage the services of
counsel to whom he agreed to pay 25% of the sum to be recovered from
[petitioner and de Jesus], plus ₱2,000.00 for every appearance in court.
Annexed to the complaint were the promissory note above-mentioned and
a demand letter, dated 02 May 1997, by [respondent] addressed to
[petitioner and de Jesus].
"Resisting the complaint, [Petitioner Garcia,] in his [Answer,] averred that he
assumed no liability under the promissory note because he signed it merely
as an accommodation party for x x x de Jesus; and, alternatively, that he is
relieved from any liability arising from the note inasmuch as the loan had
been paid by x x x de Jesus by means of a check dated 17 April 1997; and
that, in any event, the issuance of the check and [respondent’s] acceptance
thereof novated or superseded the note.
"[Respondent] tendered a reply to [Petitioner] Garcia’s answer, thereunder
asserting that the loan remained unpaid for the reason that the check issued
by x x x de Jesus bounced, and that [Petitioner] Garcia’s answer was not
even accompanied by a certificate of non-forum shopping. Annexed to the
reply were the face of the check and the reverse side thereof.
"For his part, x x x de Jesus asserted in his [A]nswer with [C]ounterclaim that
out of the supposed ₱400,000.00 loan, he received only ₱360,000.00, the
P40,000.00 having been advance interest thereon for two months, that is,
for January and February 1997; that[,] in fact[,] he paid the sum of
₱120,000.00 by way of interests; that this was made when [respondent’s]
daughter, one Nits Llamas-Quijencio, received from the Central Police
District Command at Bicutan, Taguig, Metro Manila (where x x x de Jesus
worked), the sum of ₱40,000.00, representing the peso equivalent of his
accumulated leave credits, another ₱40,000.00 as advance interest, and still
another ₱40,000.00 as interest for the months of March and April 1997; that
he had difficulty in paying the loan and had asked [respondent] for an
ObliCon Chapter 4 Cases 131 | P a g e
extension of time; that [respondent] acted in bad faith in instituting the
case, [respondent] having agreed to accept the benefits he (de Jesus) would
receive for his retirement, but [respondent] nonetheless filed the instant
case while his retirement was being processed; and that, in defense of his
rights, he agreed to pay his counsel ₱20,000.00 [as] attorney’s fees, plus
₱1,000.00 for every court appearance.
"During the pre-trial conference, x x x de Jesus and his lawyer did not
appear, nor did they file any pre-trial brief. Neither did [Petitioner] Garcia
file a pre-trial brief, and his counsel even manifested that he would no
[longer] present evidence. Given this development, the trial court gave
[respondent] permission to present his evidence ex parte against x x x de
Jesus; and, as regards [Petitioner] Garcia, the trial court directed
[respondent] to file a motion for judgment on the pleadings, and for
[Petitioner] Garcia to file his comment or opposition thereto.
"Instead, [respondent] filed a [M]otion to declare [Petitioner] Garcia in
default and to allow him to present his evidence ex parte. Meanwhile,
[Petitioner] Garcia filed a [M]anifestation submitting his defense to a
judgment on the pleadings. Subsequently, [respondent] filed a
[M]anifestation/[M]otion to submit the case for judgement on the
pleadings, withdrawing in the process his previous motion. Thereunder, he
asserted that [petitioner’s and de Jesus’] solidary liability under the
promissory note cannot be any clearer, and that the check issued by de
Jesus did not discharge the loan since the check bounced."5
On July 7, 1998, the Regional Trial Court (RTC) of Quezon City (Branch 222)
disposed of the case as follows:
"WHEREFORE, premises considered, judgment on the pleadings is hereby
rendered in favor of [respondent] and against [petitioner and De Jesus],
who are hereby ordered to pay, jointly and severally, the [respondent] the
following sums, to wit:
‘1) ₱400,000.00 representing the principal amount plus 5% interest thereon
per month from January 23, 1997 until the same shall have been fully paid,
less the amount of ₱120,000.00 representing interests already paid by x x x
de Jesus;
‘2) ₱100,000.00 as attorney’s fees plus appearance fee of ₱2,000.00 for
each day of [c]ourt appearance, and;
‘3) Cost of this suit.’"6
Ruling of the Court of Appeals
The CA ruled that the trial court had erred when it rendered a judgment on
the pleadings against De Jesus. According to the appellate court, his Answer
raised genuinely contentious issues. Moreover, he was still required to
present his evidence ex parte. Thus, respondent was not ipso facto entitled
to the RTC judgment, even though De Jesus had been declared in default.
The case against the latter was therefore remanded by the CA to the trial
court for the ex parte reception of the former’s evidence.
As to petitioner, the CA treated his case as a summary judgment, because
his Answer had failed to raise even a single genuine issue regarding any
material fact.
The appellate court ruled that no novation -- express or implied -- had taken
place when respondent accepted the check from De Jesus. According to the
CA, the check was issued precisely to pay for the loan that was covered by
the promissory note jointly and severally undertaken by petitioner and De
Jesus. Respondent’s acceptance of the check did not serve to make De Jesus
the sole debtor because, first, the obligation incurred by him and petitioner
was joint and several; and, second, the check -- which had been intended to
extinguish the obligation -- bounced upon its presentment.
Hence, this Petition.7
ObliCon Chapter 4 Cases 132 | P a g e
Issues
Petitioner submits the following issues for our consideration:
"I
Whether or not the Honorable Court of Appeals gravely erred in not holding
that novation applies in the instant case as x x x Eduardo de Jesus had
expressly assumed sole and exclusive liability for the loan obligation he
obtained from x x x Respondent Dionisio Llamas, as clearly evidenced by:
a) Issuance by x x x de Jesus of a check in payment of the full amount of the
loan of ₱400,000.00 in favor of Respondent Llamas, although the check
subsequently bounced[;]
b) Acceptance of the check by the x x x respondent x x x which resulted in
[the] substitution by x x x de Jesus or [the superseding of] the promissory
note;
c) x x x de Jesus having paid interests on the loan in the total amount of
₱120,000.00;
d) The fact that Respondent Llamas agreed to the proposal of x x x de Jesus
that due to financial difficulties, he be given an extension of time to pay his
loan obligation and that his retirement benefits from the Philippine National
Police will answer for said obligation.
"II
Whether or not the Honorable Court of Appeals seriously erred in not
holding that the defense of petitioner that he was merely an
accommodation party, despite the fact that the promissory note provided
for a joint and solidary liability, should have been given weight and credence
considering that subsequent events showed that the principal obligor was in
truth and in fact x x x de Jesus, as evidenced by the foregoing circumstances
showing his assumption of sole liability over the loan obligation.
"III
Whether or not judgment on the pleadings or summary judgment was
properly availed of by Respondent Llamas, despite the fact that there are
genuine issues of fact, which the Honorable Court of Appeals itself admitted
in its Decision, which call for the presentation of evidence in a full-blown
trial."8
Simply put, the issues are the following: 1) whether there was novation of
the obligation; 2) whether the defense that petitioner was only an
accommodation party had any basis; and 3) whether the judgment against
him -- be it a judgment on the pleadings or a summary judgment -- was
proper.
The Court’s Ruling
The Petition has no merit.
First Issue:
Novation
Petitioner seeks to extricate himself from his obligation as joint and solidary
debtor by insisting that novation took place, either through the substitution
of De Jesus as sole debtor or the replacement of the promissory note by the
check. Alternatively, the former argues that the original obligation was
extinguished when the latter, who was his co-obligor, "paid" the loan with
the check.
The fallacy of the second (alternative) argument is all too apparent. The
check could not have extinguished the obligation, because it bounced upon
presentment. By law,9 the delivery of a check produces the effect of
payment only when it is encashed.
We now come to the main issue of whether novation took place.
Novation is a mode of extinguishing an obligation by changing its objects or
principal obligations, by substituting a new debtor in place of the old one, or
by subrogating a third person to the rights of the creditor.10 Article 1293 of
the Civil Code defines novation as follows:
"Art. 1293. Novation which consists in substituting a new debtor in the place
of the original one, may be made even without the knowledge or against
the will of the latter, but not without the consent of the creditor. Payment
by the new debtor gives him rights mentioned in articles 1236 and 1237."
ObliCon Chapter 4 Cases 133 | P a g e
In general, there are two modes of substituting the person of the debtor: (1)
expromision and (2) delegacion. In expromision, the initiative for the change
does not come from -- and may even be made without the knowledge of --
the debtor, since it consists of a third person’s assumption of the obligation.
As such, it logically requires the consent of the third person and the
creditor. In delegacion, the debtor offers, and the creditor accepts, a third
person who consents to the substitution and assumes the obligation; thus,
the consent of these three persons are necessary.11 Both modes of
substitution by the debtor require the consent of the creditor.12
Novation may also be extinctive or modificatory. It is extinctive when an old
obligation is terminated by the creation of a new one that takes the place of
the former. It is merely modificatory when the old obligation subsists to the
extent that it remains compatible with the amendatory agreement.13
Whether extinctive or modificatory, novation is made either by changing the
object or the principal conditions, referred to as objective or real novation;
or by substituting the person of the debtor or subrogating a third person to
the rights of the creditor, an act known as subjective or personal
novation.14 For novation to take place, the following requisites must
concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.15
Novation may also be express or implied. It is express when the new
obligation declares in unequivocal terms that the old obligation is
extinguished. It is implied when the new obligation is incompatible with the
old one on every point.16 The test of incompatibility is whether the two
obligations can stand together, each one with its own independent
existence.17
Applying the foregoing to the instant case, we hold that no novation took
place.
The parties did not unequivocally declare that the old obligation had been
extinguished by the issuance and the acceptance of the check, or that the
check would take the place of the note. There is no incompatibility between
the promissory note and the check. As the CA correctly observed, the check
had been issued precisely to answer for the obligation. On the one hand, the
note evidences the loan obligation; and on the other, the check answers for
it. Verily, the two can stand together.
Neither could the payment of interests -- which, in petitioner’s view, also
constitutes novation18 -- change the terms and conditions of the obligation.
Such payment was already provided for in the promissory note and, like the
check, was totally in accord with the terms thereof.
Also unmeritorious is petitioner’s argument that the obligation was novated
by the substitution of debtors. In order to change the person of the debtor,
the old one must be expressly released from the obligation, and the third
person or new debtor must assume the former’s place in the relation.19
Well-settled is the rule that novation is never presumed.20 Consequently,
that which arises from a purported change in the person of the debtor must
be clear and express.21 It is thus incumbent on petitioner to show clearly
and unequivocally that novation has indeed taken place.
In the present case, petitioner has not shown that he was expressly released
from the obligation, that a third person was substituted in his place, or that
the joint and solidary obligation was cancelled and substituted by the
solitary undertaking of De Jesus. The CA aptly held:
"x x x. Plaintiff’s acceptance of the bum check did not result in substitution
by de Jesus either, the nature of the obligation being solidary due to the fact
that the promissory note expressly declared that the liability of appellants
thereunder is joint and [solidary.] Reason: under the law, a creditor may
demand payment or performance from one of the solidary debtors or some
or all of them simultaneously, and payment made by one of them
extinguishes the obligation. It therefore follows that in case the creditor fails
ObliCon Chapter 4 Cases 134 | P a g e
to collect from one of the solidary debtors, he may still proceed against the
other or others. x x x "22
Moreover, it must be noted that for novation to be valid and legal, the law
requires that the creditor expressly consent to the substitution of a new
debtor.23 Since novation implies a waiver of the right the creditor had
before the novation, such waiver must be express.24 It cannot be supposed,
without clear proof, that the present respondent has done away with his
right to exact fulfillment from either of the solidary debtors.25
More important, De Jesus was not a third person to the obligation. From the
beginning, he was a joint and solidary obligor of the ₱400,000 loan; thus, he
can be released from it only upon its extinguishment. Respondent’s
acceptance of his check did not change the person of the debtor, because a
joint and solidary obligor is required to pay the entirety of the obligation.
It must be noted that in a solidary obligation, the creditor is entitled to
demand the satisfaction of the whole obligation from any or all of the
debtors.26 It is up to the former to determine against whom to enforce
collection.27 Having made himself jointly and severally liable with De Jesus,
petitioner is therefore liable28 for the entire obligation.29
Second Issue:
Accommodation Party
Petitioner avers that he signed the promissory note merely as an
accommodation party; and that, as such, he was released as obligor when
respondent agreed to extend the term of the obligation.
This reasoning is misplaced, because the note herein is not a negotiable
instrument. The note reads:
"PROMISSORY NOTE
"₱400,000.00
"RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of FOUR HUNDRED
THOUSAND PESOS, Philippine Currency payable on or before January 23,
1997 at No. 144 K-10 St. Kamias, Quezon City, with interest at the rate of 5%
per month or fraction thereof.
"It is understood that our liability under this loan is jointly and severally
[sic].
"Done at Quezon City, Metro Manila this 23rd day of December, 1996."30
By its terms, the note was made payable to a specific person rather than to
bearer or to order31 -- a requisite for negotiability under Act 2031, the
Negotiable Instruments Law (NIL). Hence, petitioner cannot avail himself of
the NIL’s provisions on the liabilities and defenses of an accommodation
party. Besides, a non-negotiable note is merely a simple contract in writing
and is evidence of such intangible rights as may have been created by the
assent of the parties.32 The promissory note is thus covered by the general
provisions of the Civil Code, not by the NIL.
Even granting arguendo that the NIL was applicable, still, petitioner would
be liable for the promissory note. Under Article 29 of Act 2031, an
accommodation party is liable for the instrument to a holder for value even
if, at the time of its taking, the latter knew the former to be only an
accommodation party. The relation between an accommodation party and
the party accommodated is, in effect, one of principal and surety -- the
accommodation party being the surety.33 It is a settled rule that a surety is
bound equally and absolutely with the principal and is deemed an original
promissor and debtor from the beginning. The liability is immediate and
direct.34
Third Issue:
Propriety of Summary Judgment
or Judgment on the Pleadings
The next issue illustrates the usual confusion between a judgment on the
pleadings and a summary judgment. Under Section 3 of Rule 35 of the Rules
of Court, a summary judgment may be rendered after a summary hearing if
the pleadings, supporting affidavits, depositions and admissions on file show
ObliCon Chapter 4 Cases 135 | P a g e
that (1) except as to the amount of damages, there is no genuine issue
regarding any material fact; and (2) the moving party is entitled to a
judgment as a matter of law.
A summary judgment is a procedural device designed for the prompt
disposition of actions in which the pleadings raise only a legal, not a
genuine, issue regarding any material fact.35 Consequently, facts are
asserted in the complaint regarding which there is yet no admission,
disavowal or qualification; or specific denials or affirmative defenses are set
forth in the answer, but the issues are fictitious as shown by the pleadings,
depositions or admissions.36 A summary judgment may be applied for by
either a claimant or a defending party.37
On the other hand, under Section 1 of Rule 34 of the Rules of Court, a
judgment on the pleadings is proper when an answer fails to render an issue
or otherwise admits the material allegations of the adverse party’s pleading.
The essential question is whether there are issues generated by the
pleadings.38 A judgment on the pleadings may be sought only by a claimant,
who is the party seeking to recover upon a claim, counterclaim or cross-
claim; or to obtain a declaratory relief. 39
promissory note bears the statement: ‘It is understood that our liability
under this loan is jointly and severally [sic].’ Secondly, his claim that his co-
defendant de Jesus already paid the loan by means of a check collapses in
view of the dishonor thereof as shown at the dorsal side of said check."41
From the records, it also appears that petitioner himself moved to submit
the case for judgment on the basis of the pleadings and documents.1âwphi1
In a written Manifestation,42 he stated that "judgment on the pleadings
may now be rendered without further evidence, considering the allegations
and admissions of the parties."43
In view of the foregoing, the CA correctly considered as a summary
judgment that which the trial court had issued against petitioner.
WHEREFORE, this Petition is hereby DENIED and the assailed Decision
AFFIRMED. Costs against petitioner.
SO ORDERED.

Apropos thereto, it must be stressed that the trial court’s judgment against
petitioner was correctly treated by the appellate court as a summary
judgment, rather than as a judgment on the pleadings. His Answer40
apparently raised several issues -- that he signed the promissory note
allegedly as a mere accommodation party, and that the obligation was
extinguished by either payment or novation. However, these are not factual
issues requiring trial. We quote with approval the CA’s observations:

"Although Garcia’s [A]nswer tendered some issues, by way of affirmative

defenses, the documents submitted by [respondent] nevertheless clearly
showed that the issues so tendered were not valid issues. Firstly, Garcia’s
claim that he was merely an accommodation party is belied by the
promissory note that he signed. Nothing in the note indicates that he was
only an accommodation party as he claimed to be. Quite the contrary, the
ObliCon Chapter 4 Cases 136 | P a g e
95.) LEONIDA C. QUINTO, Petitioner, v. PEOPLE OF THE PHILIPPINES,
respondent.
Assailed in this Petition for Review on Certiorari under Rule 45 of the Rules
of Court is the decision of the Court of Appeals, promulgated on 27
September 1996, in People of the Philippines v. Leonida Quinto y Calayan,
docketed CA-G.R. CR No. 16567, which has affirmed the decision of Branch
157 of the Regional Trial Court (RTC), National Capital Judicial Region,
Branch 157, Pasig City, finding Leonida Quinto y Calayan guilty beyond
reasonable doubt of the crime of Estafa.
Leonida Quinto y Calayan, herein petitioner, was indicted for the crime of
estafa under Article 315, paragraph 1(b), of the Revised Penal Code, in an
information which read:
"That on or about the 23rd day of March 1977, in the Municipality of
Makati, Metro Manila, Philippines and within the jurisdiction of this
Honorable Court, the above-named accused, received in trust from one
Aurelia Cariaga the following pieces of jewelry, to wit:
One (1) set of marques with briliantitos
valued at .............................................P17,500.00
One (1) solo ring (2 karats & 30 points)
valued at .............................................P16,000.00
One (1) diamond ring (rosetas)
valued at .............................................P 2,500.00
with a total value of P36,000.00 for the purpose of selling the same on
commission basis and with the express obligation on the part of the accused
to turn over the proceeds of sale thereof, or to return the said jewelries
(sic), if not sold, five (5) days after receipt thereof, but the accused once in
possession of the jewelries (sic), far from complying with her obligation,
with intent of gain, gave abuse of confidence and to defraud said Aurelia
Cariaga, did then and there wilfully, unlawfully and feloniously
misappropriate, misapply and convert to her own personal use and benefit
the said jewelries (sic) and/or the proceeds of sale or to return the pieces of
jewelry, to the damage and prejudice of the said Aurelia Cariaga in the
aforementioned amount of P 36,000.00.
"Contrary to law "1cräläwvirtualibräry
Upon her arraignment on 28 March 1978, petitioner Quinto pleaded not
guilty; trial on the merits thereupon ensued.
According to the prosecution, on or about 23 March 1977, Leonida went to
see Aurelia Cariaga (private complainant) at the latter's residence in Makati.
Leonida asked Aurelia to allow her have some pieces of jewelry that she
could show to prospective buyers. Aurelia acceded and handed over to
Leonida one (1) set of marques with briliantitos worth P17,500.00, one (1)
solo ring of 2.30 karats worth P16,000.00 and one (1) rosetas ring worth
P2,500.00. Leonida signed a receipt (Exhibit "A") therefor, thus:
"RECEIPT
Pinatutunayan ko na tinanggap ko kay Gng. Aurelia B. Cariaga (ang) mga
alahas na nakatala sa ibaba, upang aking ipagbili sa pamamagitan ng BIGAY
PALA o Commission at Kaliwaan lamang. Ako'y hindi pinahihintulutan (na)
ipagbili ang mga ito ng Pautang. Pinananagutan ko na ang mga alahas na ito
ay hindi ko ipagkakaloob o ipagkakatiwala sa kanino pa man upang ilagak o
maipagbili nila, at ang mga ito ay ako ang magbibili sa ilalim ng aking
pangangasiwa at pananagutan sa halagang nakatala sa ibaba. At aking
isasauli ang mga hindi na maipagbili sa loob ng 5 days (sic) araw mula sa
petsa nito o sa kahilingan, na nasa mabuti at malinis na kalagayan katulad ng
tanggapin ko sa petsang ito.
ObliCon Chapter 4 Cases 137 | P a g e
MGA URI NG ALAHAS
1 set marques with titos 17,500.
1 solo 2 karats & 30 points 16,000.
1 ring Rosetas brill 2,500.
Makati, March 23, 1977
(Sgd.)"2cräläwvirtualibräry
When the 5-day period given to her had lapsed, Leonida requested for and
was granted additional time within which to vend the items. Leonida failed
to conclude any sale and, about six (6) months later, Aurelia asked that the
pieces of jewelry be returned. She sent to Leonida a demand letter which
the latter ignored. The inexplicable delay of Leonida in returning the items
spurred the filing of the case for estafa against her.
The defense proffered differently. In its version, the defense sought to prove
that Leonida was engaged in the purchase and sale of jewelry. She was used
to buying pieces of jewelry from a certain Mrs. Antonia Ilagan who later
introduced her (Leonida) to Aurelia. Sometime in 1975, the two, Aurelia and
Leonida, started to transact business in pieces of jewelry among which
included a solo ring worth P40,000.00 which was sold to Mrs. Camacho who
paid P20,000.00 in check and the balance of P20,000.00 in installments later
paid directly to Aurelia. The last transaction Leonida had-with Mrs. Camacho
involved a "marques" worth P16,000.00 and a ring valued at P4,000.00. Mrs.
Camacho was not able to pay the due amount in full and left a balance of
P13,000.00. Leonida brought Mrs. Camacho to Aurelia who agreed to allow
Mrs. Camacho to pay the balance in installments. Leonida was also able to
sell for Aurelia a 2-karat diamond ring worth P17,000.00 to Mrs. Concordia
Ramos who, unfortunately, was unable to pay the whole amount. Leonida
brought Mrs. Ramos to Aurelia and they talked about the terms of payment.
As first payment, Mrs. Ramos gave Leonida a ring valued at P3,000.00. The
next payment made by her was P5,000.00. Leonida herself then paid
P2,000.00.
The RTC, in its 25th January 1993 decision, found Leonida guilty beyond
reasonable doubt of the crime of estafa and sentenced her to suffer the
penalty of imprisonment of seven (7) years and one (1) day of prision mayor
as minimum to nine (9) years of prision mayor as maximum and to
indemnify private complainant in the amount of P36,000.00.
Leonida interposed an appeal to the Court of Appeals which affirmed, in its
27th September 1996 decision, the RTC's assailed judgment.
The instant petition before this Court would have it that the agreement
between petitioner and private complainant was effectively novated when
the latter consented to receive payment on installments directly from Mrs.
Camacho and Mrs. Ramos.
The petition is bereft of merit.
Novation, in its broad concept, may either be extinctive or modificatory. It is
extinctive when an old obligation is terminated by the creation of a new
obligation that takes the place of the former; it is merely modificatory when
the old obligation subsists to the extent it remains compatible with the
amendatory agreement. An extinctive novation results either by changing
the object or principal conditions (objective or real), or by substituting the
person of the debtor or subrogating a third person in the rights of the
creditor (subjective or personal).3 Under this mode, novation would have
dual functions - one to extinguish an existing obligation, the other to
substitute a new one in its place4 - requiring a conflux of four essential
requisites: (1) a previous valid obligation; (2) an agreement of all parties
concerned to a new contract; (3) the extinguishment of the old obligation;
and (4) the birth of a valid new obligation.5
ObliCon Chapter 4 Cases 138 | P a g e
Novation is never presumed,6 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.7
The extinguishment of the old obligation by the new one is a necessary
element of novation which may be effected either expressly or impliedly.8
The term "expressly" means that the contracting parties incontrovertibly
disclose that their object in executing the new contract is to extinguish the
old one.9 Upon the other hand, no specific form is required for an implied
novation,10 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.11
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.12 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.
The changes alluded to by petitioner consists only in the manner of
payment. There was really no substitution of debtors since private
complainant merely acquiesced to the payment but did not give her
consent13 to enter into a new contract. The appellate court observed:
"Appellant, however, insists that their agreement was novated when
complainant agreed to be paid directly by the buyers and on installment
basis. She adds that her liability is merely civil in nature.
"We are unimpressed.
"It is to remembered that one of the buyers, Concordia Ramos, was not
presented to testify on the alleged aforesaid manner of payment.
"The acceptance by complainant of partial payment tendered by the buyer,
Leonor Camacho, does not evince the intention of the complainant to have
their agreement novated. It was simply necessitated by the fact that, at that
time, Camacho had substantial accounts payable to complainant, and
because of the fact that appellant made herself scarce to complainant. (TSN,
April 15, 1981, 31-32) Thus, to obviate the situation where complainant
would end up with nothing, she was forced to receive the tender of
Camacho. Moreover, it is to be noted that the aforesaid payment was for
the purchase, not of the jewelry subject of this case, but of some other
jewelry subject of a previous transaction. (Ibid. June 8, 1981, 10-
11)"14cräläwvirtualibräry
There are two forms of novation by substituting the person of the debtor,
depending on whose initiative it comes from, to wit: expromision and
delegacion. In the former, the initiative for the change does not come from
the debtor and may even be made without his knowledge. Since a third
person would substitute for the original debtor and assume the obligation,
his consent and that of the creditor would be required. In the latter, the
debtor offers, and the creditor accepts, a third person who consents to the
substitution and assumes the obligation, thereby releasing the original
debtor from the obligation, here, the intervention and the consent of all
parties thereto would perforce be necessary.15 In either of these two
modes of substitution, the consent of the creditor, such as can be seen, is an
indispensable requirement.16
ObliCon Chapter 4 Cases 139 | P a g e
It is thus easy to see why Cariaga's acceptance of Ramos and Camacho's
payment on installment basis cannot be construed as a case of either
expromision or delegacion sufficient to justify the attendance of extinctive
novation. Not too uncommon is when a stranger to a contract agrees to
assume an obligation; and while this may have the effect of adding to the
number of persons liable, it does not necessarily imply the extinguishment
of the liability of the first debtor.17 Neither would the fact alone that the
creditor receives guaranty or accepts payments from a third person who has
agreed to assume the obligation, constitute an extinctive novation absent an
agreement that the first debtor shall be released from responsibility.18
Petitioner's reliance on Candida Mariano v. People19 is misplaced. The
factual milieu in Mariano would indicate a clear intention on the part of the
parties to release the accused from her responsibility as an agent and for
her to instead assume the obligation of a guarantor. Unfortunately for
petitioner in the case at bar, the factual findings of both the trial court and
the appellate court prove just the opposite which is that there has never
been any animus novandi between or among the parties.
Article 315 of the Revised Penal Code defines estafa and penalizes any
person who shall defraud another by "misappropriating or converting, to
the prejudice of another, money, goods, or any other personal property
received by the offender in trust or on commission, or for administration, or
under any other obligation involving the duty to make delivery of or to
return the same, even though such obligation be totally or partially
guaranteed by a bond; or by denying having received such money, goods, or
other property." It is axiomatic that the gravamen of the offense is the
appropriation or conversion of money or property received to the prejudice
of the owner. The terms "convert" and "misappropriate" have been held to
connote "an act of using or disposing of another's property as if it were
one's own or devoting it to a purpose or use different from that agreed
upon." The phrase, 'to misappropriate to one's own use" has been said to
include "not only conversion to one's personal advantage, but also every
attempt to dispose of the property of another without right."20 Verily, the
sale of the pieces of jewelry on installments in contravention of the explicit
terms of the authority granted to her in Exhibit "A" (supra) is deemed to be
one of conversion. Thus, neither the theory of "delay in the fulfillment of
commission" nor that of novation posed by petitioner, can avoid the
incipient criminal liability. In People vs. Nery,21 this Court held:
"It may be observed in this regard that novation is not one of the means
recognized by the Penal Code whereby criminal liability can be extinguished;
hence, the role of novation may only be either to prevent the rise of
criminal liability or to cast doubt on the true nature of the original basic
transaction, whether or not it was such that its breach would not give rise to
penal responsibility ..."
The criminal liability for estafa already committed is then not affected by the
subsequent novation of contract, for it is a public offense which must be
prosecuted and punished by the State in its own conation.22
Finally, this Court fails to see any reversible error, let alone any grave abuse
of discretion, in the appreciation of the evidence by the Court of Appeals
which, in fact, hews with those of the trial court. Indeed, under the
circumstances, this Court must be deemed bound by the factual findings of
those courts.
Article 315, 1st paragraph, of the Revised Penal Code, as amended by
Presidential Decree No. 818, provides that the penalty of "prision
correccional in its maximum period to prison mayor in its minimum period,
if the amount of the fraud is over 12,000 but does not exceed 22,000 pesos,
and if such amount exceeds the latter sum, the penalty provided in this
paragraph shall be imposed in its maximum period, adding one year for
each additional 10,000 pesos; but the total penalty which may be imposed
shall not exceed twenty years. In such case, and in connection with the
accessory penalties which may be imposed and for the purpose of the other
provisions of this Code, the penalty shall be termed prision mayor or
reclusion temporal, as the case may be."
In the leading case of People vs. Gabres23 this Court ruled:
ObliCon Chapter 4 Cases 140 | P a g e
 petitioner to an indeterminate penalty of from two (2) years, eight (8)
"Under the Indeterminate Sentence Law, the maximum term of the penalty months and one (1) day of prison correccional to seven (7) years and one (1)
shall be 'that which, in view of the attending circumstances, could be day of prision mayor. The civil liability of appellant for P36,000.00 in favor of
properly imposed' under the Revised Penal Code, and the minimum shall be private complainant is maintained. Costs against petitioner.
'within the range of the penalty next lower to that prescribed' for the
offense. The penalty next lower should be based on the penalty prescribed SO ORDERED.
by the Code for the offense, without first considering any modifying
circumstance attendant to the commission of the crime. The determination
of the minimum penalty is left by law to the sound discretion of the court
and it can be anywhere within the range of the penalty next lower without
any reference to the periods into which it might be subdivided. The
modifying circumstances are considered only in the imposition of the
maximum term of the indeterminate sentence.

"The fact that the amounts involved in the instant case exceed P22,000.00
should not be considered in the initial determination of the indeterminate
penalty; instead, the matter should be so taken as analogous to modifying
circumstances in the imposition of the maximum term of the full
indeterminate sentence. This interpretation of the law accords with the rule
that penal laws should be construed in favor of the accused. Since the
penalty prescribed by law for the estafa charge against accused-appellant is
prision correccional maximum to prision mayor minimum, the penalty next
lower would then be prision correccional minimum to medium. Thus, the
minimum term of the indeterminate sentence should be anywhere within
six (6) months and one (1) day to four (4) years and two (2) months while
the maximum term of the indeterminate sentence should at least be six (6)
years and one (1) day because the amounts involved exceeded P22,000.00,
plus an additional one (1) year for each additional
P10,000.00."24cräläwvirtualibräry

The penalty imposed by the trial court, affirmed by the appellate court,
should accordingly be modified.

WHEREFORE, the assailed decision of the Court of Appeals is AFFIRMED

except that the imprisonment term is MODIFIED by now sentencing
ObliCon Chapter 4 Cases 141 | P a g e
96.) ABELARDO B. LICAROS, petitioner, vs. ANTONIO P. GATMAITAN,
respondent.
This is a petition for review on certiorari under Rule 45 of the Rules of Court.
The petition seeks to reverse and set aside the Decision1 dated February 10,
2000 of the Court of Appeals and its Resolution2 dated April 7, 2000 denying
petitioner's Motion for Reconsideration thereto. The appellate court
decision reversed the Decision3 dated November 11, 1997 of the Regional
Trial Court of Makati, Branch 145 in Civil Case No. 96-1211.
The facts of the case, as stated in the Decision of the Court o Appeals dated
February 10, 2000, are as follows:
"The Anglo-Asean Bank and Trust Limited (Anglo-Asean, for brevity), is a
private bank registered and organized to do business under the laws of the
Republic of Vanuatu but not in the Philippines. Its business consists
primarily in receiving fund placements by way of deposits from institutions
and individuals investors from different parts of the world and thereafter
investing such deposits in money market placements and potentially
profitable capital ventures in Hongkong, Europe and the United States for
the purpose of maximizing the returns on those investments.
Enticed by the lucrative prospects of doing business with Anglo-Asean,
Abelardo Licaros, a Filipino businessman, decided to make a fund placement
with said bank sometime in the 1980's. As it turned out, the grim outcome
of Licaros' foray in overseas fund investment was not exactly what he
envisioned it to be. More particularly, Licaros, after having invested in
Anglo-Asean, encountered tremendous and unexplained difficulties in
retrieving, not only the interest or profits, but even the very investments he
had put in Anglo-Asean.1âwphi1.nêt
Confronted with the dire prospect of not getting back any of his
investments, Licaros then decide to seek the counsel of Antonio P.
Gatmaitan, a reputable banker and investment manager who had been
extending managerial, financial and investment consultancy services to
various firms and corporations both here and abroad. To Licaros' relief,
Gatmaitan was only too willing enough to help. Gatmaitan voluntarily
offered to assume the payment of Anglo-Asean's indebtedness to Licaros
subject to certain terms and conditions. In order to effectuate and formalize
the parties' respective commitments, the two executed a notarized
MEMORANDUM OF AGREEMENT on July 29, 1988 (Exh. "B"); also Exhibit
"1"), the full text of which reads:
Memorandum of Agreement
KNOW ALL MEN BY THESE PRESENTS:
This MEMORANDUM OF AGREEMENT made and executed this 29th day of
July 1988, at Makati by and between:
ABELARDO B. LICAROS, Filipino, of legal age and holding office at
Concepcion Building, Intramuros, Manila hereinafter referred to as THE
PARTY OF THE FIRST PART,
and
ANTONIO P. GATMAITAN, Filipino, of legal age and residing at 7 Mangyan
St., La vista, hereinafter referred to as the PARTY OF THE SECOND PART,
WITNESSETH THAT:
WHEREAS, ANGLO-ASEAN BANK & TRUST, a company incorporated by the
Republic of Vanuatu, hereinafter referred to as the OFFSHORE BANK, is
indebted to the PARTY OF THE FIRST PART in the amount of US dollars; ONE
HUNDRED FIFTY THOUSAND ONLY (US$150,000) which debt is now due and
demandable.
WHEREAS, the PARTY OF THE FIRST PART has encountered difficulties in
securing full settlement of the said indebtedness from the OFFSHORE BANK
and has sought a business arrangement with the PARTY OF THE SECOND
PART regarding his claims;
WHEREAS, the PARTY OF THE SECOND PART, with his own resources and
due to his association with the OFFSHORE BANK, has offered to the PARTY
OF THE FIRST PART to assume the payment of the aforesaid indebtedness,
ObliCon Chapter 4 Cases 142 | P a g e
upon certain terms and conditions, which offer, the PARTY OF THE FIRST
PART has accepted;
WHREAS, the parties herein have come to an agreement on the nature,
form and extent of their mutual prestations which they now record herein
with the express conformity of the third parties concerned;
NOW, THEREFORE, for and in consideration of the foregoing and the mutual
covenants stipulated herein, the PARTY OF THE FIRST PART and the PARTY
OF THE SECOND PART have agreed, as they do hereby agree, as follows:
1. The PARTY OF THE SECOND PART hereby undertakes to pay the PARTY OF
THE FIRST PART the amount of US DOLLARS ONE HOUNDRED FIFTY
THOUSAND (US$150,000) payable in Philippine Currency at the fixed
exchange rate of Philippine Pesos 21 to US$1 without interest on or before
July 15, 1993.
For this purpose, the PARTY OF THE SECOND PART shall execute and deliver
a non negotiable promissory note, bearing the aforesaid material
consideration in favor of the PARTY OF THE FIRST PART upon execution of
this MEMORANDUM OF AGREEMENT, which promissory note shall form
part as ANNEX A hereof.
2. For and in consideration of the obligation of the PARTY OF THE SECOND
PART, the PARTY OF THE FIRST does hereby;
a. Sell, assign, transfer and set over unto the PARTY OF THE SECOND PART
that certain debt now due and owing to the PARTY OF THE FIRST PART by
the OFFSHORE BANK, to the amount of US Dollars One Hundred Fifty
Thousand plus interest due and accruing thereon;
b. Grant the PART OF THE SECOND PART the full power and authority, for
his own use and benefit, but at his own cost and expense, to demand,
collect, receive, compound, compromise and give acquittance for the same
or any part thereof, and in the name of the PARTY OF THE FIRST PART, to
prosecute, and withdraw any suit or proceedings therefor;
c. Agree and stipulate that the debt assigned herein is justly owing and due
to the PARTY OF THE FIRST PART from the said OFFSHORE BANK, and that
the PARTY OF THE FIRST PART has not done and will not cause anything to
be done to diminish or discharge said debt, or to delay or prevent the PARTY
OF THE SECOND PART from collecting the same; and;
d. At the request of the PARTY OF SECOND PART and the latter's own cost
and expense, to execute and do all such further acts and deeds as shall be
reasonably necessary for proving said debt and to more effectually enable
the PARTY OF THE SECOND PART to recover the same in accordance with
the true intent and meaning of the arrangements herein.
IN WITNESS WHEREOF, the parties have caused this MEMORANDUM OF
AGREEMENT to be signed on the date and place first written above.
Sgd.
Sgd.
ABELARDO B. LICAROS
ANTONIO P. GATMAITAN
PARTY OF THE FIRST PART
PARTY OF THE FIRST ART
WITH OUR CONFORME:
ANGLO-ASEAN BANK &amp; TRUST
BY: (Unsigned)
ObliCon Chapter 4 Cases 143 | P a g e

SIGNED IN THE PRESENCE OF:
Sgd. (Illegible)
Conformably with his undertaking under paragraph 1 of the aforequoted
agreement, Gatmaitan executed in favor of Licaros a NON-NEGOTIABLE
PROMISSORY NOTE WITH ASSIGNMENT OF CASH DIVIDENDS (Exhs. "A"; Also
Exh. "2"), which promissory note, appended as Annex "A" to the same
Memorandum of Agreement, states in full, thus
"NON-NEGOTIABLE PROMISSORY NOTE WITH ASSIGNMENT OF CASH
DIVIDENDS
This promissory note is Annex A of the Memorandum of Agreement
executed between Abelardo B. Licaros and Antonio P. Gatmaitan, on ______
1988 at Makati, Philippines and is an integral part of said Memorandum of
Agreement.
P3,150.00.
On or before July 15, 1993, I promise to pay to Abelardo B. Licaros the sum
of Philippine Pesos 3,150,000 (P3,150,000) without interest as material
consideration for the full settlement of his money claims from ANGLO-
ASEAN BANK, referred to in the Memorandum of Agreement as the
'OFFSHORE BANK".
As security for the payment of this of Promissory Note. I hereby ASSIGN,
CEDE and TRANSFER, Seventy Percent (70%) of ALL CASH DIVIDENDS, that
may be due or owing to me as the registered owner of
__________________ (______________) shares of stock in the Prudential
Life Realty, Inc.
This assignment shall likewise include SEVENTY PERCENT (70%) of cash
dividends that may be declared by Prudential Life Realty, Inc. and due or
owing to Prudential Life Plan, Inc., of which I am a stockholder, to the extent
of or in proportion to my aforesaid shareholding in Prudential Life Plan, Inc,
the latter being the holding company of Prudential Life Realty, Inc.
In the event that I decide to sell or transfer my aforesaid shares in either or
both the Prudential Life Plan, Inc. or Prudential Life Realty, Inc. and the
Promissory Note remains unpaid or outstanding, I hereby give Mr. Abelardo
B. Licaros the first option to buy the said shares.
Manila, Philippines
July ______, 1988
(SGD.)
ANTONIO P. GATMAITAN
7 Mangyan St., La Vista QC
SIGNED IN THE PRESENCE OF:
(SGD.)
______________________________
______________________________
Francisco A. Alba
President, Prudential Life Plan, Inc."
Thereafter, Gatmaitan presented to Anglo-Asean the Memorandum of
Agreement earlier executed by him and Licaros for the purpose of collecting
the latter's placement thereat of U.S. $150,000.00. Albeit the officers of
Anglo-Asean allegedly committed themselves to "look into [this matter]", no
formal response was ever made by said bank to either Licaros or Gatmaitan.
To date, Anglo-Asean has not acted on Gatmaitan's monetary claims.
ObliCon Chapter 4 Cases 144 | P a g e

Evidently, because of his inability to collect from Anglo-Asean, Gatmaitan
did not bother anymore to make good his promise to pay Licaros the
amount stated in his promissory note (Exh. "A"; also Exh. 2"). Licaros,
however, thought differently. He felt that he had a right to collect on the
basis of the promissory note regardless of the outcome of Gatmaitan's
recovery efforts. Thus, in July, 1996, Licaros, thru counsel, addressed
successive demand letters to Gatmaitan (Exhs. "C" and "D"), demanding
payment of the later's obligations under the promissory note. Gatmaitan,
however, did not accede to these demands.
Hence, on August 1, 1996, in the Regional Trial Court at Makati, Licaros filed
the complaint in this case. In his complaint, docketed in the court below as
Civil case No. 96-1211, Licaros prayed for a judgment ordering Gatmaitan to
pay him the following:
'a) Principal Obligation in the amount of Three Million Five Hundred
Thousand Pesos (P3,500,000.00);
b) Legal interest thereon at the rate of six (6%) percent per annum from July
16, 1993 when the amount became due until the obligation is fully paid;
b) Twenty percent (20%) of the amount due as reasonable attorney's fees;
d) Costs of the suit.'"4
After trial on the merits, the court a quo rendered judgment in favor of
petitioner Licaros and found respondent Gatmaitan liable under the
Memorandum of Agreement and Promissory Note for P3,150,000.00 plus
12% interest per annum from July 16, 1993 until the amount is fully paid.
Respondent was likewise ordered to pay attorney's fees of P200,000.00.5
Respondent Gatmaitan appealed the trial court's decision to the Court of
Appeals. In a decision promulgated on February 10, 2000, the appellate
court reversed the decision of the trial court and held that respondent
Gatmaitan did not at any point become obligated to pay to petitioner
Licaros the amount stated in the promissory note. In a Resolution dated
April 7, 2000 the Court of Appeals denied petitioner's Motion for
Reconsideration of its February 10, 2000 Decision.
Hence this petition for review on certiorari where petitioner prays for the
reversal of the February 10, 2000 Decision of the Court of Appeals and the
reinstatement of the November 11, 1997 decision of the Regional Trial
Court.
The threshold issue for the determination of this Court is whether the
Memorandum of Agreement between petitioner and respondent is one of
assignment of credit or one of conventional subrogation. This matter is
determinative of whether or not respondent became liable to petitioner
under the promissory note considering that its efficacy is dependent on the
Memorandum of Agreement, the note being merely an annex to the said
memorandum.6
An assignment of credit has been defined as the process of transferring the
right of the assignor to the assignee who would then have the right to
proceed against the debtor. The assignment may be done gratuitously or
onerously, in which case, the assignment has an effect similar to that of a
sale.7
On the other hand, subrogation has been defined as the transfer of all the
rights of the creditor to a third person, who substitutes him in all his rights.
It may either be legal or convention. Legal subrogation is that which takes
place without agreement but by operation of law because of certain acts.
Conventional subrogation is that which takes place by agreement of
parties.8
The general tenor of the foregoing definitions of the terms "subrogation"
and "assignment of credit" may make it seem that they are one and the
same which they are not. A noted expert in civil law notes their distinctions
thus:
ObliCon Chapter 4 Cases 145 | P a g e
"Under our Code, however, conventional subrogation is not identical to
assignment of credit. In the former, the debtor's consent is necessary; in the
latter it is not required. Subrogation extinguishes the obligation and gives
rise to a new one; assignment refers to the same right which passes from
one person to another. The nullity of an old obligation may be cured by
subrogation, such that a new obligation will be perfectly valid; but the
nullity of an obligation is not remedied by the assignment of the creditor's
right to another."9
For our purposes, the crucial distinction deals with the necessity of the
consent of the debtor in the original transaction. In an assignment of credit,
the consent of the debtor is not necessary in order that the assignment may
fully produce legal effects.10 What the law requires in an assignment of
credit is not the consent of the debtor but merely notice to him as the
assignments takes effect only from the time he has knowledge thereof.11 A
creditor may, therefore, validly assign his credit and its accessories without
the debtor's consent.12 On the other hand, conventional subrogation
requires an agreement among the three parties concerned – the original
creditor, the debtor, and the new creditor. It is a new contractual relation
based on the mutual agreement among all the necessary parties. Thus,
Article 1301 of the Civil Code explicitly states that "(C)onventional
subrogation of a third person requires the consent of the original parties
and of the third person."
The trial court, in finding for the petitioner, ruled that the Memorandum of
Agreement was in the nature of an assignment of credit. As such, the court
a quo held respondent liable for the amount stated in the said agreement
even if the parties thereto failed to obtain the consent of Anglo-Asean Bank.
On the other hand, the appellate court held that the agreement was one of
conventional subrogation which necessarily requires the agreement of all
the parties concerned. The Court of Appeals thus ruled that the
Memorandum of Agreement never came into effect due to the failure of the
parties to get the consent of Anglo-Asean Bank to the agreement and, as
such, respondent never became liable for the amount stipulated.
We agree with the finding of the Court of Appeals that the Memorandum of
Agreement dated July 29, 1988 was in the nature of a conventional
subrogation which requires the consent of the debtor, Anglo-Asean Bank,
for its validity. We note with approval the following pronouncement of the
Court of Appeals:
"Immediately discernible from above is the common feature of contracts
involving conventional subrogation, namely, the approval of the debtor to
the subrogation of a third person in place of the creditor. That Gatmaitan
and Licaros had intended to treat their agreement as one of conventional
subrogation is plainly borne by a stipulation in their Memorandum of
Agreement, to wit:
"WHEREAS, the parties herein have come to an agreement on the nature,
form and extent of their mutual prestations which hey now record herein
with the express conformity of the third parties concerned" (emphasis
supplied), which third party is admittedly Anglo-Asean Bank.
Had the intention been merely to confer on appellant the status of a mere
"assignee" of appellee's credit, there is simply no sense for them to have
stipulated in their agreement that the same is conditioned on the "express
conformity" thereto of Anglo-Asean Bank. That they did so only accentuates
their intention to treat the agreement as one of conventional subrogation.
And it is basic in the interpretation of contracts that the intention of the
parties must be the one pursued (Rule 130, Section 12, Rules of Court).
Given our finding that the Memorandum of Agreement (Exh. "B"; also Exh.
"1"), is not one of "assignment of credit" but is actually a "conventional
subrogation", the next question that comes to mind is whether such
agreement was ever perfected at all. Needless to state, the perfection – or
non-perfection – of the subject agreement is of utmost relevance at this
point. For, if the same Memorandum of Agreement was actually perfected,
then it cannot be denied that Gatmaitan still has a subsisting commitment
ObliCon Chapter 4 Cases 146 | P a g e
to pay Licaros on the basis of his promissory note. If not, Licaros' suit for
collection must necessarily fail.
Here, it bears stressing that the subject Memorandum of Agreement
expressly requires the consent of Anglo-Asean to the subrogation. Upon
whom the task of securing such consent devolves, be it on Licaros or
Gatmaitan, is of no significance. What counts most is the hard reality that
there has been an abject failure to get Anglo-Asean's nod of approval over
Gatmaitan's being subrogated in the place of Licaros. Doubtless, the
absence of such conformity on the part of Anglo-Asean, which is thereby
made a party to the same Memorandum of Agreement, prevented the
agreement from becoming effective, much less from being a source of any
cause of action for the signatories thereto"13
Aside for the "whereas clause" cited by the appellate court in its decision,
we likewise note that on the signature page, right under the place reserve
for the signatures of petitioner and respondent, there is, typewritten, the
words "WITH OUR CONFORME." Under this notation, the words "ANGLO-
ASEAN BANK AND TRUST" were written by hand.14 To our mind, this
provision which contemplates the signed conformity of Anglo-Asean Bank,
taken together with the aforementioned preambulatory clause leads to the
conclusion that both parties intended that Anglo-Asean Bank should signify
its agreement and conformity to the contractual arrangement between
petitioner and respondent. The fact that Anglo-Asean Bank did not give such
consent rendered the agreement inoperative considering that, as previously
discussed, the consent of the debtor is needed in the subrogation of a third
person to the rights of a creditor.
In this petition, petitioner assails the ruling of the Court of Appeals that
what was entered into by the parties was a conventional subrogation of
petitioner's rights as creditor of the Anglo-Asean Bank which necessary
requires the consent of the latter. In support, petitioner alleges that: (1) the
Memorandum of Agreement did not create a new obligation and, as such,
the same cannot be a conventional subrogation; (2) the consent of Anglo-
Asean Bank was not necessary for the validity of the Memorandum of
Agreement; (3) assuming that such consent was necessary, respondent
failed to secure the same as was incumbent upon him; and (4) respondent
himself admitted that the transaction was one of assignment of credit.
Petitioner argues that the parties to the Memorandum of Agreement could
not have intended the same to be a conventional subrogation considering
that no new obligation was created. According to petitioner, the obligation
of Anglo-Asean Bank to pay under Contract No. 00193 was not extinguished
and in fact, it was the basic intention of the parties to the Memorandum of
Agreement to enforce the same obligation of Anglo-Asean Bank under its
contract with petitioner. Considering that the old obligation of Anglo-Asean
Bank under Contract No. 00193 was never extinguished under the
Memorandum of Agreement, it is contended that the same could not be
considered as a conventional subrogation.
We are not persuaded.
It is true that conventional subrogation has the effect of extinguishing the
old obligation and giving rise to a new one. However, the extinguishment of
the old obligation is the effect of the establishment of a contract for
conventional subrogation. It is not a requisite without which a contract for
conventional subrogation may not be created. As such, it is not
determinative of whether or not a contract of conventional subrogation was
constituted.
Moreover, it is of no moment that the subject of the Memorandum of
Agreement was the collection of the obligation of Anglo-Asean Bank to
petitioner Licaros under Contract No. 00193. Precisely, if conventional
subrogation had taken place with the consent of Anglo-Asian Bank to effect
a change in the person of its creditor, there is necessarily created a new
obligation whereby Anglo-Asean Bank must now give payment to its new
creditor, herein respondent.
Petitioner next argues that the consent or conformity of Anglo-Asean Bank
is not necessary to the validity of the Memorandum of Agreement as the
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evidence on record allegedly shows that it was never the intention of the
parties thereto to treat the same as one of conventional subrogation. He
claims that the preambulatory clause requiring the express conformity of
third parties, which admittedly was Anglo-Asean Bank, is a mere surplusage
which is not necessary to the validity of the agreement.
As previously discussed, the intention of the parties to treat the
Memorandum of Agreement as embodying a conventional subrogation is
shown not only by the "whereas clause" but also by the signature space
captioned "WITH OUR CONFORME" reserved for the signature of a
representative of Anglo-Asean Bank. These provisions in the
aforementioned Memorandum of Agreement may not simply be
disregarded or dismissed as superfluous.
It is a basic rule in the interpretation of contracts that "(t)he various
stipulations of a contract shall be interpreted together, attributing to the
doubtful ones that sense which may result from all of them taken jointly."15
Moreover, under our Rules of Court, it is mandated that "(I)n the
construction of an instrument where there are several provisions or
particulars, such a construction is, if possible, to be adopted as will give
effect to all."16 Further, jurisprudence has laid down the rule that contracts
should be so construed as to harmonize and give effect to the different
provisions thereof.17
In the case at bench, the Memorandum of Agreement embodies certain
provisions that are consistent with either a conventional subrogation or
assignment of credit. It has not been shown that any clause or provision in
the Memorandum of Agreement is inconsistent or incompatible with a
conventional subrogation. On the other hand, the two cited provisions
requiring consent of the debtor to the memorandum is inconsistent with a
contract of assignment of credit. Thus, if we were to interpret the same as
one of assignment of credit, then the aforementioned stipulations regarding
the consent of Anglo-Asean Bank would be rendered inutile and useless
considering that, as previously discussed, the consent of the debtor is not
necessary in an assignment of credit.
Petitioner next argues that assuming that the conformity of Anglo-Asean
was necessary to the validity of the Memorandum of Agreement,
respondently only had himself to blame for the failure to secure such
conformity as was, allegedly, incumbent upon him under the memorandum.
As to this argument regarding the party responsible for securing the
conformity of Anglo-Asean Bank, we fail to see how this question would
have any relevance on the outcome of this case. Having ruled that the
consent of Anglo-Asean was necessary for the validity of the Memorandum
of Agreement, the determinative fact is that such consent was not secured
by either petitioner or respondent which consequently resulted in the
invalidity of the said memorandum.
With respect to the argument of petitioner that respondent himself
allegedly admitted in open court that an assignment of credit was intended,
it is enough to say that respondent apparently used the word "assignment"
in his testimony in the general sense. Respondent is not a lawyer and as
such, he is no so well versed in law that he would be able to distinguish
between the concepts of conventional subrogation and of assignment of
credit. Moreover, even assuming that there was an admission on his part,
such admission is not conclusive on this court as the nature and
interpretation of the Memorandum of Agreement is a question of law which
may not be the subject of stipulations and admission.18
Considering the foregoing, it cannot then be said that the consent of the
debtor Anglo-Asean Bank is not necessary to the validity of the
Memorandum of Agreement. As above stated, the Memorandum of
Agreement embodies a contract for conventional subrogation and in such a
case, the consent of the original parties and the third person is required.19
The absence of such conformity by Anglo-Asean Bank prevented the
Memorandum of Agreement from becoming valid and effective.
Accordingly, the Court of Appeals did not err when it ruled that the
Memorandum of Agreement was never perfected.
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Having arrived at the above conclusion, the Court finds no need to discuss
the other issues raised by petitioner.

WHEREFORE, the instant petition is DENIED and the Decision of the Court of
Appeals dated February 10, 2000 and its Resolution dated April 7, 2000 are
hereby AFFIRMED.

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97.) ASTRO ELECTRONICS CORP. and PETER ROXAS, Petitioners, v.
PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION,
Respondent.
Assailed in this petition for review on certiorari under Rule 45 of the Rules of
Court is the decision of the Court of Appeals in CA-G.R. CV No. 41274, 1
affirming the decision of the Regional Trial Court (Branch 147) of Makati,
then Metro Manila, whereby petitioners Peter Roxas and Astro Electronics
Corp. (Astro for brevity) were ordered to pay respondent Philippine Export
and Foreign Loan Guarantee Corporation (Philguarantee), jointly and
severally, the amount of P3,621,187.52 with interests and costs. nad
The antecedent facts are undisputed.
Astro was granted several loans by the Philippine Trust Company (Philtrust)
amounting to P3,000,000.00 with interest and secured by three promissory
notes: PN No. PFX-254 dated December 14, 1981 for P600,000.00, PN No.
PFX-258 also dated December 14, 1981 for P400,000.00 and PN No. 15477
dated August 27, 1981 for P2,000,000.00. In each of these promissory notes,
it appears that petitioner Roxas signed twice, as President of Astro and in his
personal capacity. 2 Roxas also signed a Continuing Suretyship Agreement in
favor of Philtrust Bank, as President of Astro and as surety. 3
Thereafter, Philguarantee, with the consent of Astro, guaranteed in favor of
Philtrust the payment of 70% of Astro’s loan, 4 subject to the condition that
upon payment by Philguarantee of said amount, it shall be proportionally
subrogated to the rights of Philtrust against Astro. 5
As a result of Astro’s failure to pay its loan obligations, despite demands,
Philguarantee paid 70% of the guaranteed loan to Philtrust. Subsequently,
Philguarantee filed against Astro and Roxas a complaint for sum of money
with the RTC of Makati.
In his Answer, Roxas disclaims any liability on the instruments, alleging, inter
alia, that he merely signed the same in blank and the phrases "in his
personal capacity" and "in his official capacity" were fraudulently inserted
without his knowledge. 6
After trial, the RTC rendered its decision in favor of Philguarantee with the
following dispositive portion:chanrob1es virtual 1aw library
WHEREFORE, in view of all the foregoing, the Court hereby renders
judgment in favor or (sic) the plaintiff and against the defendants Astro
Electronics Corporation and Peter T. Roxas, ordering the then (sic) to pay,
jointly and severally, the plaintiff the sum of P3,621,187.52 representing the
total obligation of defendants in favor of plaintiff Philguarantee as of
December 31, 1984 with interest at the stipulated rate of 16% per annum
and stipulated penalty charges of 16% per annum computed from January 1,
1985 until the amount is fully paid. With costs.
SO ORDERED. 7
The trial court observed that if Roxas really intended to sign the instruments
merely in his capacity as President of Astro, then he should have signed only
once in the promissory note. 8
On appeal, the Court of Appeals affirmed the RTC decision agreeing with the
trial court that Roxas failed to explain satisfactorily why he had to sign twice
in the contract and therefore the presumption that private transactions
have been fair and regular must be sustained. 9
In the present petition, the principal issue to be resolved is whether or not
Roxas should be jointly and severally liable (solidary) with Astro for the sum
awarded by the RTC.
The answer is in the affirmative.
Astro’s loan with Philtrust Bank is secured by three promissory notes. These
promissory notes are valid and binding against Astro and Roxas. As it
appears on the notes, Roxas signed twice: first, as president of Astro and
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second, in his personal capacity. In signing his name aside from being the
President of Astro, Roxas became a co-maker of the promissory notes and
cannot escape any liability arising from it. Under the Negotiable Instruments
Law, persons who write their names on the face of promissory notes are
makers, 10 promising that they will pay to the order of the payee or any
holder according to its tenor. 11 Thus, even without the phrase "personal
capacity," Roxas will still be primarily liable as a joint and several debtor
under the notes considering that his intention to be liable as such is
manifested by the fact that he affixed his signature on each of the
promissory notes twice which necessarily would imply that he is
undertaking the obligation in two different capacities, official and personal.
Unnoticed by both the trial court and the Court of Appeals, a closer
examination of the signatures affixed by Roxas on the promissory notes,
Exhibits "A-4" and "3-A" and "B-4" and "4-A" readily reveals that portions of
his signatures covered portions of the typewritten words "personal
capacity" indicating with certainty that the typewritten words were already
existing at the time Roxas affixed his signatures thus demolishing his claim
that the typewritten words were just inserted after he signed the
promissory notes. If what he claims is true, then portions of the typewritten
words would have covered portions of his signatures, and not vice
versa.chanrob1es virtua1 1aw 1ibrary
As to the third promissory note, Exhibit "C-4" and "5-A", the copy submitted
is not clear so that this Court could not discern the same observations on
the notes, Exhibits "A-4" and "3-A" and "B-4" and "4-A" .
Nevertheless, the following discussions equally apply to all three promissory
notes.
The three promissory notes uniformly provide: "FOR VALUE RECEIVED, I/We
jointly, severally and solidarily, promise to pay to PHILTRUST BANK or order .
. ." 12 An instrument which begins with "I", "We", or "Either of us" promise
to pay, when signed by two or more persons, makes them solidarily liable.
13 Also, the phrase "joint and several" binds the makers jointly and
individually to the payee so that all may be sued together for its
enforcement, or the creditor may select one or more as the object of the
suit. 14 Having signed under such terms, Roxas assumed the solidary liability
of a debtor and Philtrust Bank may choose to enforce the notes against him
alone or jointly with Astro.
Roxas’ claim that the phrases "in his personal capacity" and "in his official
capacity" were inserted on the notes without his knowledge was correctly
disregarded by the RTC and the Court of Appeals. It is not disputed that
Roxas does not deny that he signed the notes twice. As aptly found by both
the trial and appellate court, Roxas did not offer any explanation why he did
so. It devolves upon him to overcome the presumptions that private
transactions are presumed to be fair and regular 15 and that a person takes
ordinary care of his concerns. 16 Aside from his self-serving allegations,
Roxas failed to prove the truth of such allegations. Thus, said presumptions
prevail over his claims. Bare allegations, when unsubstantiated by evidence,
documentary or otherwise, are not equivalent to proof under our Rules of
Court. 17
Roxas is the President of Astro and reasonably, a businessman who is
presumed to take ordinary care of his concerns. Absent any countervailing
evidence, it cannot be gainsaid that he will not sign a document without first
informing himself of its contents and consequences. Clearly, he knew the
nature of the transactions and documents involved as he not only executed
these notes on two different dates but he also executed, and again, signed
twice, a "Continuing Suretyship Agreement" notarized on July 31, 1981,
wherein he guaranteed, jointly and severally with Astro the repayment of
P3,000,000.00 due to Philtrust. Such continuing suretyship agreement even
re-enforced his solidary liability to Philtrust because as a surety, he bound
himself jointly and severally with Astro’s obligation. 18 Roxas cannot now
avoid liability by hiding under the convenient excuse that he merely signed
the notes in blank and the phrases "in his personal capacity" and "in his
official capacity" were fraudulently inserted without his knowledge.
ObliCon Chapter 4 Cases 151 | P a g e
Lastly, Philguarantee has all the right to proceed against petitioner. It is
subrogated to the rights of Philtrust to demand for and collect payment
from both Roxas and Astro since it already paid the value of 70% of Roxas
and Astro Electronics Corp.’s loan obligation, in compliance with its contract
of "Guarantee" in favor of Philtrust.

Subrogation is the transfer of all the rights of the creditor to a third person,
who substitutes him in all his rights. 19 It may either be legal or
conventional. Legal subrogation is that which takes place without
agreement but by operation of law because of certain acts. 20 Instances of
legal subrogation are those provided in Article 1302 of the Civil Code.
Conventional subrogation, on the other hand, is that which takes place by
agreement of the parties. 21

Roxas’ acquiescence is not necessary for subrogation to take place because

the instant case is one of legal subrogation that occurs by operation of law,
and without need of the debtor’s knowledge. 22 Further, Philguarantee, as
guarantor, became the transferee of all the rights of Philtrust as against
Roxas and Astro because the "guarantor who pays is subrogated by virtue
thereof to all the rights which the creditor had against the debtor." 23

WHEREFORE, finding no error with the decision of the Court of Appeals

dated December 10, 1998, the same is hereby AFFIRMED in toto.chanrob1es
virtua1 1aw 1ibrary

SO ORDERED.

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