SECOND DIVISION

MANUEL GO CINCO and

ARACELI S. GO CINCO,
Petitioners,

G.R. No. 151903

Present:
*

CORONA, J.,
CARPIO-MORALES,
Acting Chairperson,
***
NACHURA,
BRION, and
ABAD, JJ.
**

versus -

COURT OF APPEALS, ESTER

SERVACIO and MAASIN
Promulgated:
TRADERS LENDING
CORPORATION,
October 9, 2009
Respondents.
x ------------------------------------------------------------------------------------------x
DECISION

BRION, J.:

Before the Court is a petition for review on certiorari[1] filed by petitioners,

spouses Manuel and Araceli Go Cinco (collectively, the spouses Go Cinco),
assailing the decision[2] dated June 22, 2001 of the Court of Appeals (CA) in CAG.R. CV No. 47578, as well as the resolution[3] dated January 25, 2002 denying the
spouses Go Cincos motion for reconsideration.
THE FACTUAL ANTECEDENTS
1

In December 1987, petitioner Manuel Cinco (Manuel) obtained a commercial loan

in the amount of P700,000.00 from respondent Maasin Traders Lending
Corporation (MTLC). The loan was evidenced by a promissory note
datedDecember 11, 1987,[4] and secured by a real estate mortgage executed
on December 15, 1987 over the spouses Go Cincos land and 4-storey building
located in Maasin, Southern Leyte.
Under the terms of the promissory note, the P700,000.00 loan was subject to a
monthly interest rate of 3% or 36% per annum and was payable within a term of
180 days or 6 months, renewable for another 180 days. As of July 16, 1989,
Manuels outstanding obligation with MTLC amounted to P1,071,256.66, which
amount included the principal, interest, and penalties.[5]
To be able to pay the loan in favor of MTLC, the spouses Go Cinco applied for a
loan with the Philippine National Bank, Maasin Branch (PNB or the bank) and
offered as collateral the same properties they previously mortgaged to MTLC. The
PNB approved the loan application for P1.3 Million[6] through a letter dated July 8,
1989; the release of the amount, however, was conditioned on the cancellation of
the mortgage in favor of MTLC.
On July 16, 1989, Manuel went to the house of respondent Ester Servacio (Ester),
MTLCs President, to inform her that there was money with the PNB for the
payment of his loan with MTLC. Ester then proceeded to the PNB to verify the
information, but she claimed that the banks officers informed her that Manuel had
no pending loan application with them. When she told Manuel of the banks
response, Manuel assured her there was money with the PNB and promised to
execute a document that would allow her to collect the proceeds of the PNB loan.
On July 20, 1989, Manuel executed a Special Power of Attorney [7] (SPA)
authorizing Ester to collect the proceeds of his PNB loan. Ester again went to the
bank to inquire about the proceeds of the loan. This time, the banks officers
confirmed the existence of the P1.3 Million loan, but they required Ester to first
sign a deed of release/cancellation of mortgage before they could release the
proceeds of the loan to her. Outraged that the spouses Go Cinco used the same
properties mortgaged to MTLC as collateral for the PNB loan, Ester refused to sign
the deed and did not collect the P1.3 Million loan proceeds.
As the MTLC loan was already due, Ester instituted foreclosure proceedings
against the spouses Go Cinco on July 24, 1989.
2

To prevent the foreclosure of their properties, the spouses Go Cinco filed an

action for specific performance, damages, and preliminary injunction [8] before the
Regional Trial Court (RTC), Branch 25, Maasin, Southern Leyte.The spouses Go
Cinco alleged that foreclosure of the mortgage was no longer proper as there had
already been settlement of Manuels obligation in favor of MTLC. They claimed
that the assignment of the proceeds of the PNB loan amounted to the payment of
the MTLC loan. Esters refusal to sign the deed of release/cancellation of mortgage
and to collect the proceeds of the PNB loan were, to the spouses Go Cinco,
completely unjustified and entitled them to the payment of damages.
Ester countered these allegations by claiming that she had not been
previously informed of the spouses Go Cincos plan to obtain a loan from the PNB
and to use the loan proceeds to settle Manuels loan with MTLC. She claimed that
she had no explicit agreement with Manuel authorizing her to apply the proceeds
of the PNB loan to Manuels loan with MTLC; the SPA merely authorized her
to collect the proceeds of the loan. She thus averred that it was unfair for the
spouses Go Cinco to require the release of the mortgage to MTLC when no actual
payment of the loan had been made.
In a decision dated August 16, 1994,[9] the RTC ruled in favor of the spouses
Go Cinco. The trial court found that the evidence sufficiently established the
existence of the PNB loan whose proceeds were available to satisfy Manuels
obligation with MTLC, and that Ester unjustifiably refused to collect the
amount. Creditors, it ruled, cannot unreasonably prevent payment or performance
of obligation to the damage and prejudice of debtors who may stand liable for
payment of higher interest rates.[10] After finding MTLC and Ester liable for abuse
of rights, the RTC ordered the award of the following amounts to the spouses Go
Cinco:
(a)

P1,044,475.15 plus 535.63 per day hereafter, representing

loss of savings on interest, by way of actual or compensatory
damages, if defendant corporation insists on the original 3%
monthly interest rate;
(b) P100,000.00 as unrealized profit;
(c) P1,000,000.00 as moral damages;
(d) P20,000.00 as exemplary damages;
(e) P22,000.00 as litigation expenses; and
(f) 10% of the total amount as attorneys fees plus costs.[11]
3

Through an appeal with the CA, MTLC and Ester successfully secured a
reversal of the RTCs decision. Unlike the trial court, the appellate court found it
significant that there was no explicit agreement between Ester and the spouses Go
Cinco for the cancellation of the MTLC mortgage in favor of PNB to facilitate the
release and collection by Ester of the proceeds of the PNB loan. The CA read the
SPA as merely authorizing Ester to withdraw the proceeds of the loan. As Manuels
loan obligation with MTLC remained unpaid, the CA ruled that no valid objection
could be made to the institution of the foreclosure proceedings. Accordingly, it
dismissed the spouses Go Cinco complaint.From this dismissal, the spouses Go
Cinco filed the present appeal by certiorari.
THE PETITION
The spouses Go Cinco impute error on the part of the CA for its failure to
consider their acts as equivalent to payment that extinguished the MTLC loan;
their act of applying for a loan with the PNB was indicative of their good faith and
honest intention to settle the loan with MTLC. They contend that the creditors have
the correlative duty to accept the payment.
The spouses Go Cinco charge MTLC and Ester with bad faith and ill-motive
for unjustly refusing to collect the proceeds of the loan and to execute the deed of
release of mortgage. They assert that Esters justifications for refusing the payment
were flimsy excuses so she could proceed with the foreclosure of the mortgaged
properties that were worth more than the amount due to MTLC. Thus, they
conclude that the acts of MTLC and of Ester amount to abuse of rights that
warrants the award of damages in their (spouses Go Cincos) favor.
In refuting the claims of the spouses Go Cinco, MTLC and Ester raise the
same arguments they raised before the RTC and the CA. They claim that they were
not aware of the loan and the mortgage to PNB, and that there was no agreement
that the proceeds of the PNB loan were to be used to settle Manuels obligation with
MTLC. Since the MTLC loan remained unpaid, they insist that the institution of
the foreclosure proceedings was proper. Additionally, MTLC and Ester contend
that the present petition raised questions of fact that cannot be addressed in a Rule
45 petition.
THE COURTS RULING
4

The Court finds the petition meritorious.

Preliminary Considerations
Our review of the records shows that there are no factual questions involved in this
case; the ultimate facts necessary for the resolution of the case already appear in
the records. The RTC and the CA decisions differed not so much on the findings of
fact, but on the conclusions derived from these factual findings. The correctness of
the conclusions derived from factual findings raises legal questions when the
conclusions are so linked to, or are inextricably intertwined with, the appreciation
of the applicable law that the case requires, as in the present case. [12] The petition
raises the issue of whether the loan due the MTLC had been extinguished; this is a
question of law that this Court can fully address and settle in an appeal
by certiorari.
Payment as Mode of
Extinguishing Obligations
Obligations are extinguished, among others, by payment or performance,
[13]
the mode most relevant to the factual situation in the present case. Under Article
1232 of the Civil Code, payment means not only the delivery of money but also the
performance, in any other manner, of an obligation. Article 1233 of the Civil Code
states that a debt shall not be understood to have been paid unless the thing or
service in which the obligation consists has been completely delivered or rendered,
as the case may be. In contracts of loan, the debtor is expected to deliver the sum
of money due the creditor. These provisions must be read in relation with the other
rules on payment under the Civil Code,[14] which rules impliedly require acceptance
by the creditor of the payment in order to extinguish an obligation.
In the present case, Manuel sought to pay Ester by authorizing her, through
an SPA, to collect the proceeds of the PNB loan an act that would have led to
payment if Ester had collected the loan proceeds as authorized. Admittedly, the
delivery of the SPA was not, strictly speaking, a delivery of the sum of money due
to MTLC, and Ester could not be compelled to accept it as payment based on
Article 1233. Nonetheless, the SPA stood as an authority to collect the proceeds of
the already-approved PNB loan that, upon receipt by Ester, would have constituted
as payment of the MTLC loan.[15] Had Ester presented the SPA to the bank and
signed the deed of release/cancellation of mortgage, the delivery of the sum of
money would have been effected and the obligation extinguished. [16] As the records
show, Ester refused to collect and allow the cancellation of the mortgage.
5

Under these facts, Manuel posits two things: first, that Esters refusal was
based on completely unjustifiable grounds; and second, that the refusal was
equivalent to payment that led to the extinguishment of the obligation.
a. Unjust Refusal to Accept Payment
After considering Esters arguments, we agree with Manuel that Esters
refusal of the payment was without basis.
Ester refused to accept the payment because the bank required her to first
sign a deed of release/cancellation of the mortgage before the proceeds of the PNB
loan could be released. As a prior mortgagee, she claimed that the spouses Go
Cinco should have obtained her consent before offering the properties already
mortgaged to her as security for the PNB loan. Moreover, Ester alleged that the
SPA merely authorized her to collect the proceeds of the loan; there was no explicit
agreement that the MTLC loan would be paid out of the proceeds of the PNB loan.
There is nothing legally objectionable in a mortgagors act of taking a second
or subsequent mortgage on a property already mortgaged; a subsequent mortgage
is recognized as valid by law and by commercial practice, subject to the prior
rights of previous mortgages. Section 4, Rule 68 of the 1997 Rules of Civil
Procedure on the disposition of the proceeds of sale after foreclosure actually
requires the payment of the proceeds to, among others, the junior encumbrancers in
the order of their priority.[17] Under Article 2130 of the Civil Code, a stipulation
forbidding the owner from alienating the immovable mortgaged is considered
void. If the mortgagor-owner is allowed to convey the entirety of his interests in
the mortgaged property, reason dictates that the lesser right to encumber his
property with other liens must also be recognized. Ester, therefore, could not
validly require the spouses Go Cinco to first obtain her consent to the PNB loan
and mortgage. Besides, with the payment of the MTLC loan using the proceeds of
the PNB loan, the mortgage in favor of the MTLC would have naturally been
cancelled.
We find it improbable for Ester to claim that there was no agreement to
apply the proceeds of the PNB loan to the MTLC loan. Beginning July 16, 1989,
Manuel had already expressed intent to pay his loan with MTLC and thus
requested for an updated statement of account. Given Manuels express intent of
fully settling the MTLC loan and of paying through the PNB loan he would secure
6

(and in fact secured), we also cannot give credit to the claim that the SPA only
allowed Ester to collect the proceeds of the PNB loan, without giving her the
accompanying authority, although verbal, to apply these proceeds to the MTLC
loan. Even Esters actions belie her claim as she in fact even went to the PNB to
collect the proceeds. In sum, the surrounding circumstances of the case simply do
not support Esters position.
b. Unjust Refusal Cannot be Equated to Payment
While Esters refusal was unjustified and unreasonable, we cannot agree with
Manuels position that this refusal had the effect of payment that extinguished his
obligation to MTLC. Article 1256 is clear and unequivocal on this point when it
provides that
ARTICLE 1256. If the creditor to whom tender of payment has
been made refuses without just cause to accept it, the debtor shall be
released from responsibility by the consignation of the thing or sum
due. [Emphasis supplied.]
In short, a refusal without just cause is not equivalent to payment; to have the
effect of payment and the consequent extinguishment of the obligation to pay, the
law requires the companion acts of tender of payment and consignation.
Tender of payment, as defined in Far East Bank and Trust Company v. Diaz
Realty, Inc.,[18] is the definitive act of offering the creditor what is due him or her,
together with the demand that the creditor accept the same. When a creditor refuses
the debtors tender of payment, the law allows the consignation of the thing or the
sum due. Tender and consignation have the effect of payment, as by consignation,
the thing due is deposited and placed at the disposal of the judicial authorities for
the creditor to collect.[19]
A sad twist in this case for Manuel was that he could not avail
of consignation to extinguish his obligation to MTLC, as PNB would not release
the proceeds of the loan unless and until Ester had signed the deed of
release/cancellation of mortgage, which she unjustly refused to do. Hence, to
compel Ester to accept the loan proceeds and to prevent their mortgaged properties
from being foreclosed, the spouses Go Cinco found it necessary to institute the
present case for specific performance and damages.
7

c. Effects of Unjust Refusal

Under these circumstances, we hold that while no completed tender of
payment and consignation took place sufficient to constitute payment, the spouses
Go Cinco duly established that they have legitimately secured a means of paying
off their loan with MTLC; they were only prevented from doing so by the unjust
refusal of Ester to accept the proceeds of the PNB loan through her refusal to
execute the release of the mortgage on the properties mortgaged to MTLC. In other
words, MTLC and Ester in fact prevented the spouses Go Cinco from the exercise
of their right to secure payment of their loan. No reason exists under this legal
situation why we cannot compel MTLC and Ester: (1) to release the mortgage to
MTLC as a condition to the release of the proceeds of the PNB loan, upon PNBs
acknowledgment that the proceeds of the loan are ready and shall forthwith be
released; and (2) to accept the proceeds, sufficient to cover the total amount of the
loan to MTLC, as payment for Manuels loan with MTLC.
We also find that under the circumstances, the spouses Go Cinco have
undertaken, at the very least, the equivalent of a tender of payment that cannot but
have legal effect. Since payment was available and was unjustifiably refused,
justice and equity demand that the spouses Go Cinco be freed from the obligation
to pay interest on the outstanding amount from the time the unjust refusal
took place;[20] they would not have been liable for any interest from the time tender
of payment was made if the payment had only been accepted. Under Article 19 of
the Civil Code, they should likewise be entitled to damages, as the unjust refusal
was effectively an abusive act contrary to the duty to act with honesty and good
faith in the exercise of rights and the fulfillment of duty.
For these reasons, we delete the amounts awarded by the RTC to the spouses
Go Cinco (P1,044,475.15, plus P563.63 per month) representing loss of savings on
interests for lack of legal basis. These amounts were computed based on the
difference in the interest rates charged by the MTLC (36% per annum) and the
PNB (17% to 18% per annum), from the date of tender of payment up to the time
of the promulgation of the RTC decision. The trial court failed to consider the
effects of a tender of payment and erroneously declared that MTLC can charge
interest at the rate of only 18% per annum the same rate that PNB charged, not the
36% interest rate that MTLC charged; the RTC awarded the difference in the
interest rates as actual damages.
8

As part of the actual and compensatory damages, the RTC also

awarded P100,000.00 to the spouses Go Cinco representing unrealized
profits. Apparently, if the proceeds of the PNB loan (P1,203,685.17) had been
applied to the MTLC loan (P1,071,256.55), there would have been a balance
of P132,428.62 left, which amount the spouses Go Cinco could have invested in
their businesses that would have earned them a profit of at least P100,000.00.
We find no factual basis for this award. The spouses Go Cinco were unable
to substantiate the amount they claimed as unrealized profits; there was only their
bare claim that the excess could have been invested in their other
businesses. Without more, this claim of expected profits is at best speculative and
cannot be the basis for a claim for damages. In Lucas v. Spouses Royo,[21] we
declared that:
In determining actual damages, the Court cannot rely on speculation,
conjecture or guesswork as to the amount. Actual and compensatory
damages are those recoverable because of pecuniary loss in business,
trade, property, profession, job or occupation and the same must be
sufficiently proved, otherwise, if the proof is flimsy and
unsubstantiated, no damages will be given. [Emphasis supplied.]
We agree, however, that there was basis for the award of moral and exemplary
damages and attorneys fees.
Esters act of refusing payment was motivated by bad faith as evidenced by the
utter lack of substantial reasons to support it. Her unjust refusal, in her behalf and
for the MTLC which she represents, amounted to an abuse of rights; they acted in
an oppressive manner and, thus, are liable for moral and exemplary damages.
[22]
We nevertheless reduce the P1,000,000.00 to P100,000.00 as the originally
awarded amount for moral damages is plainly excessive.
We affirm the grant of exemplary damages by way of example or correction
for the public good in light of the same reasons that justified the grant of moral
damages.
As the spouses Go Cinco were compelled to litigate to protect their interests,
they are entitled to payment of 10% of the total amount of awarded damages as
attorneys fees and expenses of litigation.
9

WHEREFORE, we GRANT the petitioners petition for review

on certiorari, and REVERSE the decision of June 22, 2001 of the Court of
Appeals in CA-G.R. CV No. 47578, as well as the resolution of January 25,
2002 that followed. We REINSTATE the decision dated August 16, 1994 of the
Regional Trial Court, Branch 25, Maasin, Southern Leyte, with the
following MODIFICATIONS:
(1)

(2)
(3)
(4)

The respondents are hereby directed to accept the

proceeds of the spouses Go Cincos PNB loan, if still available,
and to consent to the release of the mortgage on the property
given as security for the loan upon PNBs acknowledgment that
the proceeds of the loan, sufficient to cover the total indebtedness
to respondent Maasin Traders Lending Corporation computed as
of June 20, 1989, shall forthwith be released;
The award for loss of savings and unrealized profit is
deleted;
The award for moral damages is reduced
to P100,000.00; and
The awards for exemplary damages, attorneys fees,
and expenses of litigation are retained.

The awards under (3) and (4) above shall be deducted from the amount of the
outstanding loan due the respondents as of June 20, 1989. Costs against the
respondents.
SO ORDERED.
ARTURO D. BRION
Associate Justice
WE CONCUR:

CONCHITA CARPIO MORALES

Associate Justice
Acting Chairperson

10

RENATO C. CORONA
Associate Justice

ANTONIO EDUARDO B. NACHURA

Associate Justice

ROBERTO A. ABAD
Associate Justice
ATTESTATION
I attest that the conclusions in the above Decision had been reached in consultation
before the case was assigned to the writer of the opinion of the Courts Division.

CONCHITA CARPIO-MORALES
Associate Justice
Acting Chairperson
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, and the Acting
Division Chairpersons Attestation, it is hereby certified that the conclusions in the
above Decision were reached in consultation before the case was assigned to the
writer of the opinion of the Courts Division.

ANTONIO T. CARPIO*
Acting Chief Justice

11

Designated additional Member of the Second Division per Special Order No. 718
dated October 2, 2009.
**
Designated Acting Chairperson of the Second Division per Special Order No.
690 dated September 4, 2009.
***
Designated additional Member of the Second Division per Special Order No.
730 dated October 5, 2009.
[1]
Under Rule 45 of the 1997 Rules of Civil Procedure. Rollo, pp. 5-32.
[2]
Penned by Associate Justice Renato Dacudao (retired), with Associate Justice
Romeo Callejo, Jr., who retired as Member of this Court, and Associate Justice
Sergio Pestao, concurring; id. at 75-84.
[3]
Id. at 99-100.
[4]
Id. at 46.
[5]
Id. at 49.
[6]
The net proceeds of the PNB loan were P1,203,685.17.
[7]
Rollo, p. 47.
[8]
Docketed as Civil Case No. R-2575.
[9]
Penned by Judge Numeriano Avila, Jr. Rollo, pp. 60-73.
[10]
Id. at 67.
[11]
Id. at 73.
[12]
See Philippine American General Insurance Company v. Pks Shipping
Company, 449 Phil. 223 (2003).
[13]
CIVIL CODE, Article 1231 (1).
[14]
The pertinent provisions of the Civil Code on Payment are:
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. 1236. The creditor is not bound to accept payment or performance by a third
person who has no interest in the fulfillment of the obligation, unless there is a
stipulation to the contrary.
Whoever pays for another may demand from the debtor what he has paid, except
that if he paid without the knowledge or against the will of the debtor, he can
recover only insofar as the payment has been beneficial to the debtor.
Art. 1238. Payment made by a third person who does not intend to be reimbursed
by the debtor is deemed to be a donation, which requires the debtor's consent.
But the payment is in any case valid as to the creditor who has accepted it.
Art. 1244. The debtor of a thing cannot compel the creditor to receive a different
one, although the latter may be of the same value as, or more valuable than that
which is due.
12

In obligations to do or not to do, an act or forbearance cannot be substituted by

another act or forbearance against the obligee's will.
Art. 1248. Unless there is an express stipulation to that effect, the creditor cannot
be compelled partially to receive the prestations in which the obligation
consists. Neither may the debtor be required to make partial payments.
However, when the debt is in part liquidated and in part unliquidated, the creditor
may demand and the debtor may effect the payment of the former without
waiting for the liquidation of the latter.
[15]

We apply here, by parity of reasoning, the principle adopted in payment using

mercantile documents. Payment by means of mercantile documents like checks
and promissory notes in lieu of the sum of money due does not extinguish the
obligation until they have been accepted and cashed by the creditor.
See Crystal v. Court of Appeals, 159 Phil. 557 (1975).
[16]
The PNBs officers testified that had the required document (deed of
release/cancellation of mortgage) been submitted, the bank could have released
the loan proceeds. Rollo, p. 81.
[17]
SEC. 4. Disposition of proceeds of sale. - The amount realized from the
foreclosure sale of the mortgaged property shall, after deducting the costs of the
sale, be paid to the person foreclosing the mortgage, and when there shall be
any balance or residue, after paying off the mortgage debt due, the same shall
be paid to junior encumbrancers in the order of their priority, to be ascertained
by the court, or if there be no such encumbrancers or there be a balance or
residue after payment to them, then to the mortgagor or his duly authorized
agent, or to the person entitled to it.
[18]
416 Phil. 147 (2001).
[19]
CIVIL CODE, Article 1258.
[20]
Spouses Biesterbos v. Court of Appeals and Bartlome, 458 Phil. 265 (2003),
citing Araneta, Inc. v. De Paterno and Vidal, 91 Phil. 786 (1952).
[21]
398 Phil. 400 (2000).
[22]
CIVIL CODE, Articles 2220 and 2232.
*
Designated Acting Chief Justice from October 6 to 11, 2009 per Special Order
No. 721 dated October 5, 2009.

13

SECOND DIVISION
DEVELOPMENT BANK OF THE
PHILIPPINES[1] and
PRIVATIZATION AND
MANAGEMENT OFFICE (formerly
ASSET PRIVATIZATION TRUST),
Petitioners,

G.R. No. 138703

Present:
PUNO, J., Chairperson,*
SANDOVAL-GUTIERREZ,**
CORONA,
AZCUNA, and
GARCIA, JJ.

- versus -

HON. COURT OF APPEALS,

PHILIPPINE UNITED FOUNDRY
AND MACHINERY CORP. and
PHILIPPINE
IRON
MANUFACTURING CO., INC.,
Respondents.

Promulgated:
June 30, 2006

x-----------------------------------------------------------------------------------------x
DECISION
AZCUNA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court
of the decision of the Court of Appeals (CA) dated May 7, 1999 in CA-G.R. CV
No. 49239 entitled Philippine United Foundry and Machinery Corp. and Philippine
Iron Manufacturing Co., Inc. v. Development Bank of the Philippines and Asset
Privatization Trust which upheld the decision of the Regional Trial Court (RTC),
Branch 98 of Quezon City in Civil Case No. Q-49650.
Sometime in March 1968, the Development Bank of the Philippines (DBP)
granted to respondents Philippine United Foundry and Machineries Corporation
and Philippine Iron Manufacturing Company, Inc. an industrial loan in the amount
14

of P2,500,000 consisting of P500,000 in cash and P2,000,000 in DBP Progress

Bonds. The loan was evidenced by a promissory note [2] dated June 26, 1968 and
secured by a mortgage[3] executed by respondents over their present and future
properties such as buildings, permanent improvements, various machineries and
equipment for manufacture.
Subsequently, DBP granted to respondents another loan in the form of a fiveyear revolving guarantee amounting to P1,700,000 which was reflected in the
amended mortgage contract[4] dated November 20, 1968. According to respondents,
the loan guarantee was extended to them when they encountered difficulty in
negotiating the DBP Progress Bonds. Respondents were only able to sell the bonds
in 1972 or about five years from its issuance for an amount that was 25% less than
its face value.[5]
On September 10, 1975, the outstanding accounts of respondents with DBP
were restructured in view of their failure to pay. Thus, the outstanding principal
balance of the loans and advances amounting to P4,655,992.35 were consolidated
into a single account. The restructured loan was evidenced by a new promissory
note[6] dated November 12, 1975 payable within seven years, with partial payments
on the principal to be made beginning on the third year plus a 12% interest per
annum payable every month. The following paragraph appears at the bottom
portion of the note:
This promissory note represents the consolidation into one
account of the outstanding principal balance of PHILIMCO
and PHUMACOs account, and is prepared pursuant to Res. No. 228,
dated September 10, 1975, approved by the Executive Committee
pursuant to Bd. Res. No. 3577, s. of 1975. This note is secured by
mortgages on the existing assets of the firms.[7]
On the other hand, all accrued interest and charges due amounting
to P3,074,672.21 were denominated as Notes Taken for Interests and evidenced by
a separate promissory note[8] dated November 12, 1975. The following annotation
appears at the bottom portion of the note:
15

This promissory note represents all accrued interests and charges

which are taken up as NOTES TAKEN FOR INTEREST due on the
accounts of PHILIMCO and PHUMACO approved under Bd. Res. No.
3577, s. of 1975. This note is secured by (a) mortgage on the existing
assets of the firm.[9]

Both notes provided for the following additional charges and penalties:
(1) 12% interest per annum on unpaid amortizations[10];
(2) 10% penalty charge per annum on the total amortizations past due
effective 30 days from the date respondents failed to comply
with any of the terms stipulated in the notes[11]; and,
(3) Bank advances for insurance premiums, taxes, rentals, litigation
and acquired assets expenses, collection and other out-of-pocket
expenses not covered by inspection and processing fees subject
to the following charges[12]:
(a) One time service charge of % on the amount advanced to be
included in the receivable account;
(b) Penalty charge of 8% per annum on past due advances; and
(c) Interest at 12% per annum.
Notwithstanding the restructuring, respondents were still unable to comply
with the terms and conditions of the new promissory notes. As a result, respondents
requested DBP to refinance the matured obligation. The request was granted by
DBP, pursuant to which three foreign currency denominated loans sourced
from DBPs own foreign borrowings were extended to respondents on various dates
between 1980 and 1981.[13] These loans were secured by mortgages [14] on the
properties of respondents and were evidenced by the following promissory notes:
Face Value
(1)

Promissory $661,330

Maturity
Date
December

Interest Rate Per

Annum
3%
16

Note[15] datedDece
mber 11, 1980

15, 1990
June
1991

over DBPsborrowing
rate[16]

(2) Promissory
Note[17] datedJune
5, 1981

$666,666

23,

(3) Promissory
Note[19] datedDece
mber 16, 1981

$486,472.37 December
31, 1982

3%
over DBPsborrowing
rate[18]
4%
over DBPsborrowing
cost

Apart from the interest, the promissory notes imposed additional charges and
penalties if respondents defaulted on their payments. The notes dated December 11,
1980 and June 5, 1981 specifically provided for a 2% annual service fee computed
on the outstanding principal balance of the loans as well as the following additional
interest and penalty charges on the loan amortizations or portions in arrears:
(a)

If in arrears for thirty (30) days or less:

i.

Additional interest at the basic loan interest rate per

annum computed on total amortizations past due, irrespective
of age.
ii. No penalty charge
(b) If in arrears for more than thirty (30) days:
i. Additional interest at the basic loan interest rate per annum
computed on total amortizations past due, irrespective of
age, plus,
ii. Penalty charge of 16% per annum computed on amortizations
or portions thereof in arrears for more than thirty (30) days
counted from the date the amount in arrears becomes liable
to this charge.[20]
Under these two notes, respondents also bound themselves to pay bank
advances for insurance premiums, taxes, litigation and acquired assets expenses
17

and other out-of-pocket expenses not covered by inspection and processing fees as
follows:
(a)
(b)

One-time service charge of 2% of the amount advanced,

same to be included in the receivable account.
Interest at 16% per annum.

(c) Penalty charge from date of advance at 16% per annum.

The note dated December 16, 1981, on the other hand, provided for the
interest and penalty charges on loan amortizations or portions of it in arrears as
follows:
(a)

Additional interest at the basic loan interest per annum

computed on total amortizations past due irrespective of age;
plus

(b)

Penalty charges of 8% per annum computed on total

amortizations in arrears, irrespective of age.[21]

Respondents were likewise bound to pay bank advances for insurance

premiums, taxes, litigation and acquired assets expenses and other out-of-pocket
expenses not covered by inspection and processing fees as follows:
(a)

One-time service charge of 2% of (the) amount advanced,

same to be included and debited to the advances account;

(b)

Interest at the basic loan interest rate; and

(c)

Penalty charge from date of advance at 8% per annum.[22]

Sometime in October 1985, DBP initiated foreclosure proceedings upon its

computation that respondents loans were in arrears by P62,954,473.68.
[23]
According to DBP, this figure already took into account the intermittent
18

payments made by respondents between 1968 and 1981 in the aggregate amount
of P5,150,827.71.[24]
However, the foreclosure proceedings were suspended on twelve separate
occasions from October 1985 to December 1986 upon the representations of
respondents that a financial rehabilitation fund arising from a contract with the
military was forthcoming. On December 23, 1986, before DBP could proceed with
the foreclosure proceedings, respondents instituted the present suit for injunction.
On January 6, 1987, the complaint was amended to include the annulment of
mortgage. On December 15, 1987, the complaint was amended a second time
to implead the Asset Privatization Trust (APT) (now the Privatization and
Management Office [PMO])[25] as a party defendant.
Respondents cause of action arose from their claim that DBP was collecting
from them an unconscionable if not unlawful or usurious obligation
of P62,954,473.68 as of September 30, 1985, out of a mere P6,200,000 loan.
Primarily, respondents contended that the amount claimed by DBP is erroneous
since they have remitted to DBP approximately P5,300,000 to repay their original
debt. Additionally, respondents assert that since the loans were procured for the
Self-Reliant Defense Posture Program of the Armed Forces of the Philippines
(AFP), the latters breach of its commitment to purchase military armaments and
equipment from respondents amounts to a failure of consideration that would
justify the annulment of the mortgage on respondents properties.[26]
On December 24, 1986, the RTC issued a temporary restraining order. A Writ
of Preliminary Injunction was subsequently issued on May 4, 1987. After trial on
the merits, the court rendered a decision in favor of respondents,[27] the dispositive
portion of which reads:
WHEREFORE, in view of the foregoing consideration,
judgment is hereby rendered in favor of the [respondents] and against
the defendants [DBP and APT], ordering that:
(1) The Writ of Preliminary Injunction already issued be made
permanent;
19

(2) The [respondents] be made to pay the original loans in the

aggregate amount of Six Million Two Hundred Thousand (P6,200,000)
Pesos;
(3) The [respondents] payment in the amount of Five Million
Three Hundred Thirty-Five Thousand, Eight Hundred Twenty-seven
Pesos and Seventy-one Centavos (P5,335,827.71) be applied to
payment for interest and penalties; and
(4) No further interest and/or penalties on the aforementioned
principal obligation of P6.2 million shall be imposed/charged upon the
[respondents] for failure of the military establishment to honor their
commitment to a valid and consummated contract with the former.
Costs against the defendants.
SO ORDERED.
Both DBP and PMO appealed the decision to the CA. The CA, however,
affirmed the decision of the RTC. Aggrieved, DBP filed with the CA a motion for a
reconsideration[28] dated May 26, 1999, which motion has not been resolved by the
CA to date. PMO, on the other hand, sought relief directly with the Court by filing
this present petition upon the following grounds:
I.

THE CA DISREGARDED THE BINDING AND

OBLIGATORY FORCE OF CONTRACTS WHICH IS THE
LAW BETWEEN THE PARTIES.
xxx

II. THE CA VIOLATED THE PRINCIPLE OF LAW THAT

CONTRACTS TAKE EFFECT ONLY BETWEEN THE
PARTIES AS IT LINKED RESPONDENTS CONTRACTS
WITH THE AFP WITH RESPONDENTS LOANS WITH DBP.
xxx
III. THE CA ERRED IN PERMANENTLY ENJOINING THE DBP
AND APT FROM FORECLOSING THE MORTGAGES ON
20

RESPONDENTS PROPERTIES THEREBY VIOLATING THE

PROVISIONS OF P[RESIDENTIAL] D[ECREE NO.] 385
AND PROCLAMATION NO. 50.[29]
On the first issue, PMO asserts that the CA erred in declaring that the interest
rate on the loans had been unilaterally increased by DBP despite the evidence on
record (consisting of promissory notes and testimonies of witnesses for DBP)
showing otherwise. PMO also claims that the CA failed to take into account the
effect of the restructuring and refinancing of the loans granted by DBP upon the
request of respondents.
Anent the second issue, PMO argues that the failure of the AFP to honor its
commitment to respondents should have had no bearing on respondents loan
obligations to DBP as DBP was not a party to their contract. Hence, PMO contends
that the CA ran afoul of the principle of relativity of contracts when it ruled that no
further interest could be imposed on the loans.
Finally, PMO claims that DBP, being a government financial institution,
could not be enjoined by any restraining order or injunction, whether permanent or
temporary, from proceeding with the foreclosure proceedings mandated under
Section 1 of Presidential Decree No. 385.
For their part, respondents moved for the denial of the petition in their
comment dated October 27, 1999,[30]stating that (1) the petition merely raises
questions of fact and not of law; (2) PMO is engaged in forum shopping
considering that the motion for reconsideration filed by its co-defendant, DBP,
against the CA decision was still pending before the appellate court; and, (3) the
petition is fatally defective because the attached certification against non-forum
shopping does not conform to the requirements set by law. After PMO filed its
reply denying the foregoing allegations, the parties submitted their respective
memoranda.
The petition is partly meritorious.
Prefatorily, it bears stressing that only questions of law may be raised in a
petition for review on certiorari under Rule 45 of the Rules of Court. This Court is
21

not a trier of facts, its jurisdiction in such a proceeding being limited to reviewing
only errors of law that may have been committed by the lower courts.
Consequently, findings of fact of the trial court and the CA are final and
conclusive, and cannot be reviewed on appeal. [31] It is not the function of the Court
to reexamine or reevaluate evidence, whether testimonial or documentary, adduced
by the parties in the proceedings below.[32] Nevertheless, the rule admits of certain
exceptions and has, in the past, been relaxed when the lower courts findings were
not supported by the evidence on record or were based on a misapprehension of
facts,[33]or when certain relevant and undisputed facts were manifestly overlooked
that, if properly considered, would justify a different conclusion.[34]
The resolution of the present controversy turns on the issue regarding the
precise amount of respondents principal obligation under the series of mortgages
which DBP, as mortgagee-creditor, attempted to foreclose. In this case, the total
amount of respondents indebtedness is not simply a question of fact but is a
question of law, one requiring the application of legal principles for the
computation of the amount owed, and is thus a matter that can be properly brought
up for the Courts determination.[35]
PMO claims that the total outstanding obligation of respondents
reached P62.9 Million on September 30, 1985.This amount was purportedly the
peso equivalent of the foreign-currency denominated loans granted to respondents
to refinance the original loans they procured, and is inclusive of interest, penalties
and other surcharges incurred from that date as a result of respondents past
defaults. Respondents contend, on the other hand, that DBP grossly misstated the
extent of their obligation, and insist that they should be made liable only for the
amount of P6.2 Million which they actually received from DBP.
As mentioned, the RTC ultimately sustained respondents and made
permanent the writ of preliminary injunction it issued to enjoin the foreclosure
proceedings. Respondents were directed to pay only the amount of the original
loans, that is, P6.2 Million, with the P5.3 Million which they previously paid to be
applied as interest and penalties. The RTC did not find respondents culpable for
defaulting on their loan obligations and passed the blame to the AFP for not
fulfilling its contractual obligations to respondents.
22

The CA affirmed the RTC decision and agreed that DBP cannot be allowed
to foreclose on the mortgage securing respondents loan. The CA surmised that
since DBP failed to adequately explain how it arrived at P62.9 Million, the original
loan amount of P6.2 Million could only have been blatantly enlarged or
erroneously computed by DBP through the imposition of an unconscionable rate of
interest and charges. The CA also agreed with the trial court that there was no
consideration for the mortgage contracts executed by respondents considering the
proceeds from the alleged foreign currency loans were never actually received by
the latter. This view is untenable and lacks foundation.
As correctly pointed out by PMO, the original loans alluded to by
respondents had been refinanced and restructured in order to extend their maturity
dates. Refinancing is an exchange of an old debt for a new debt, as by negotiating a
different interest rate or term or by repaying the existing loan with money acquired
from a new loan.[36]On the other hand, restructuring, as applied to a debt, implies
not only a postponement of the maturity [37] but also a modification of the essential
terms of the debt (e.g., conversion of debt into bonds or into equity,[38] or a change
in or amendment of collateral security) in order to make the account of the debtor
current.[39]
In this instance, it is important to note that DBP accommodated respondents
request to restructure and refinance their account twice in view of the financial
difficulties the latter were experiencing. The first restructuring/refinancing was
granted in 1975 while the second one was undertaken sometime in the early 1980s.
Pursuant to the restructuring schemes, respondents executed promissory notes and
mortgage contracts in favor of DBP,[40] the second restructuring being evidenced by
three promissory notes dated December 11, 1980, June 5, 1981 and December 16,
1981 in the total amount of $1.8 Million. The reason respondents seek to be
excused from fulfilling their obligation under the second batch of promissory notes
is that first, they allegedly had no choice but to sign the documents in order to have
the loan restructured[41] and thus avert the foreclosure of their properties, and
second, they never received any proceeds from the same. This reasoning cannot
be sustained.
Respondents allegation that they had no choice but to sign is tantamount to
saying that DBP exerted undue influence upon them. The Court is mindful that the
law grants an aggrieved party the right to obtain the annulment of a contract on
23

account of factors such as mistake, violence, intimidation, undue influence and

fraud which vitiate consent.[42] However, the fact that the representatives were
forced to sign the promissory notes and mortgage contracts in order to have
respondents original loans restructured and to prevent the foreclosure of their
properties does not amount to vitiated consent.
The financial condition of respondents may have motivated them to contract
with DBP, but undue influence cannot be attributed to DBP simply because the
latter had lent money. The concept of undue influence is defined as follows:
There is undue influence when a person takes improper
advantage of his power over the will of another, depriving the latter of
a reasonable freedom of choice. The following circumstances shall be
considered: the confidential, family, spiritual and other relations
between the parties or the fact that the person alleged to have been
unduly influenced was suffering from mental weakness, or was
ignorant or in financial distress.[43]

While respondents were purportedly financially distressed, there is no clear

showing that those acting on their behalf had been deprived of their free agency
when they executed the promissory notes representing respondents refinanced
obligations to DBP. For undue influence to be present, the influence exerted must
have so overpowered or subjugated the mind of a contracting party as to destroy
the latters free agency, making such party express the will of another rather than its
own. The alleged lingering financial woes of a debtor per se cannot be equated
with the presence of undue influence.[44]
Corollarily, the threat to foreclose the mortgage would not in itself vitiate
consent as it is a threat to enforce a just or legal claim through competent authority.
[45]
It bears emphasis that the foreclosure of mortgaged properties in case of default
in payment of a debtor is a legal remedy given by law to a creditor.[46] In the event
of default by the mortgage debtor in the performance of the principal obligation,

24

the mortgagee undeniably has the right to cause the sale at public auction of the
mortgaged property for payment of the proceeds to the mortgagee.[47]
It is likewise of no moment that respondents never physically received the
proceeds of the foreign currency loans. When the loan was refinanced and
restructured, the proceeds were understandably not actually given by DBP to
respondents since the transaction was but a renewal of the first or original loan and
the supposed proceeds were applied as payment for the latter.
It also bears emphasis that the second set of promissory notes executed by
respondents must govern the contractual relation of the parties for they
unequivocally express the terms and conditions of the parties loan agreement,
which are binding and conclusive between them. Parties are free to enter into
stipulations, clauses, terms and conditions they may deem convenient; that is, as
long as these are not contrary to law, morals, good customs, public order or public
policy.[48] With the signatures of their duly authorized representatives on the subject
notes and mortgage contracts, the genuineness and due execution of which having
been admitted,[49] respondents in effect freely and voluntarily affirmed all the
concurrent rights and obligations flowing therefrom. Accordingly, respondents are
barred from claiming the contrary without transgressing the principle of estoppel
and mutuality of contracts. Contracts must bind both contracting parties; their
validity or compliance cannot be left to the will of one of them.[50]
The significance of the promissory notes should not have been overlooked
by the trial court and the CA. By completely disregarding the promissory notes, the
lower courts unilaterally modified the contractual obligations of respondents after
the latter already benefited from the extension of the maturity date on their original
loans, to the damage and prejudice of PMO which steps into the shoes of DBP as
mortgagee-creditor.
At this juncture, it must be emphasized that a party to a contract cannot deny
its validity after enjoying its benefits without outrage to ones sense of justice and
fairness. Where parties have entered into a well-defined contractual relationship, it
is imperative that they should honor and adhere to their rights and obligations as
25

stated in their contracts because obligations arising from it have the force of law
between the contracting parties and should be complied with in good faith.[51]
As a rule, a court in such a case has no alternative but to enforce the
contractual stipulations in the manner they have been agreed upon and written.
Courts, whether trial or appellate, generally have no power to relieve parties from
obligations voluntarily assumed simply because their contract turned out to be
disastrous or unwise investments.[52]
Thus, respondents cannot be absolved from their loan obligations on the
basis of the failure of the AFP to fulfill its commitment under the manufacturing
agreement[53] entered by them allegedly upon the prompting of certain AFP and
DBP officials. While it is true that the DBP representatives appear to have been
aware that the proceeds from the sale to the AFP were supposed to be applied to
the loan, the records are bereft of any proof that would show that DBP was a party
to the contract itself or that DBP would condone respondents credit if the contract
did not materialize. Even assuming that the AFP defaulted in its obligations under
the manufacturing agreement, respondents cause of action lies with the AFP, and
not with DBP or PMO. The loan contract of respondents is separate and distinct
from their manufacturing agreement with the AFP.
Incidentally, the CA sustained the validity of a loan obligation but annulled
the mortgage securing it on the ground of failure of consideration. This is
erroneous. A mortgage is a mere accessory contract and its validity would depend
on the validity of the loan secured by it.[54] Hence, the consideration of the
mortgage contract is the same as that of the principal contract from which it
receives life, and without which it cannot exist as an independent contract. [55] The
debtor cannot escape the consequences of the mortgage contract once the validity
of the loan is upheld.
Again, as a rule, courts cannot intervene to save parties from
disadvantageous provisions of their contracts if they consented to the same freely
and voluntarily.[56] Thus, respondents cannot now protest against the fact that the
loans were denominated in foreign currency and were to be paid in its peso
equivalent after they had already given their consent to such terms. [57] There is no
legal impediment to having obligations or transactions paid in a foreign currency as
26

long as the parties agree to such an arrangement. In fact, obligations in foreign

currency may be discharged in Philippine currency based on the prevailing rate at
the time of payment.[58] For this reason, it was improper for the CA to reject
outright DBPs claim that the conversion of the remaining balance of the foreign
currency loans into peso accounted for the considerable differential in the total
indebtedness of respondents mainly because the exchange rates at the time of
demand had been volatile and led to the depreciation of the peso.[59]
PMO also denies that a unilateral increase in the interest rates on the loans
caused the substantial increase in the indebtedness of respondents and points out
that the promissory notes themselves specifically provided for the rates of interest
as well as penalty and other charges which were merely applied on respondents
outstanding obligations. It should be noted, however, that at the time of the
transaction, Act No. 2655, as amended by Presidential Decree No. 116 (Usury
Law), was still in full force and effect. Basic is the rule that the laws in force at the
time the contract is made governs the effectivity of its provisions. [60] Section 2 of
the Usury Law specifically provides as follows:
Sec. 2. No person or corporation shall directly or indirectly take
or receive in money or other property, real or personal, or choses in
action, a higher rate of interest or a greater sum or value, including
commissions, premiums, fines and penalties, for the loan or renewal
thereof or forbearance of money, goods, or credits, where such loan or
renewal or forbearance is secured in whole or in part by a mortgage
upon real estate the title to which is duly registered, or by any
document conveying such real estate or interest therein, than twelve
per centum per annum or the maximum rate prescribed by the
Monetary Board and in force at the time the loan or renewal thereof or
forbearance is granted: Provided, that the rate of interest under this
section or the maximum rate of interest that may be prescribed by the
monetary board under this section may likewise apply to loans secured
by other types of security as may be specified by the Monetary Board.
A perusal of the promissory notes reveals that the interest charged upon the
notes is dependent upon the borrowing cost of DBP which, however, would be
pegged at a fixed rate assuming certain factors. The notes dated December 11,
1980 and June 5, 1981, for example, had a per annum interest rate of
27

3% over DBPs borrowing rate that will become 1 % per annum in the event the
loan is drawn under the Central Banks Jumbo Loan. These were further subject to
the condition that should the loan from where they were drawn be fully repaid, the
interest to be charged on respondents remaining dollar obligation would be pegged
at 16% per annum.[61] The promissory note dated December 16, 1981, on the other
hand, had a per annum interest rate of 4% over DBPs borrowing rate. This rate
would also become 1 % per annum in the event the loan is drawn under the Central
Banks Jumbo Loan. However, should the loan from where respondents foreign
currency loan was drawn be fully repaid, the interest to be charged on their
remaining dollar obligation would be pegged at 18% per annum.[62]
Due to the variable factors mentioned above, it cannot be determined
whether DBP did in fact apply an interest rate higher than what is prescribed under
the law. It appears on the records, however, that DBP attempted to explain how it
arrived at the amount stated in the Statement of Account [63] it submitted in support
of its claim but was not allowed by the trial court to do so citing the rule that the
best evidence of the same is the document itself. [64] DBP should have been given
the opportunity to explain its entries in the Statement of Account in order to place
the figures that were cited in the proper context. Assuming the interest applied to
the principal obligation did, in fact, exceed 12%, in addition to the other
penalties stipulated in the note, this should be stricken out for being usurious.
In usurious loans, the entire obligation does not become void because of an
agreement for usurious interest; the unpaid principal debt still stands and remains
valid but the stipulation as to the interest is void. The debt is then considered to
be without stipulation as to the interest. In the absence of an express stipulation
as to the rate of interest, the legal rate of 12% per annum shall be imposed.[65]
As to the issue raised by PMO that the injunction issued by the lower courts
violated Presidential Decree No. 385, the Court agrees with the ruling of the
CA. Presidential Decree No. 385 was issued primarily to see to it that government
financial institutions are not denied substantial cash inflows which are necessary to
finance development projects all over the country, by large borrowers who, when
they become delinquent, resort to court actions in order to prevent or delay the
governments collection of their debts and loans.[66]
28

The government, however, is bound by basic principles of fairness and

decency under the due process clause of the Bill of Rights. Presidential Decree No.
385 does not provide the government blanket authority to unqualifiedly impose the
mandatory provisions of the decree without due regard to the constitutional rights
of the borrowers. In fact, it is required that a hearing first be conducted to
determine whether or not 20% of the outstanding arrearages has been paid, as a
prerequisite for the issuance of a temporary restraining order or a writ of
preliminary injunction. Hence, the trial court can, on the basis of the evidence then
in its possession, make a provisional determination on the matter of the actual
existence of the arrearages and the amount on which the 20% requirement is to be
computed. Consequently, Presidential Decree No. 385 cannot be invoked where
the
extent of the loan actually received by the borrower is still to be determined.[67]
Finally, respondents allegation that PMO is engaged in forum shopping is
untenable. Forum shopping is the act of a party, against whom an adverse judgment
has been rendered in one forum, of seeking another and possibly favorable opinion
in another forum by appeal or a special civil action of certiorari. [68] As correctly
pointed out by PMO, the present petition is merely an appeal from the adverse
decision rendered in the same action where it was impleaded as co-defendant with
DBP. That DBP opted to file a motion for reconsideration with the CA rather than a
direct appeal to this Court does not bar PMO from seeking relief from the
judgment by taking the latter course of action.
It must be remembered that PMO was impleaded as party defendant through
the amended complaint[69] datedNovember 25, 1987. Persons made partiesdefendants via a supplemental complaint possess locus standi or legal personality
to seek a review by the Court of the decision by the CA which they assail even if
their co-defendants did not appeal the said ruling of the appellate court. [70] Even
assuming that separate actions have been filed by two different parties involving
essentially the same subject matter, no forum shopping is committed where the
parties did not resort to multiple judicial remedies. [71]
In any event, the Court deems it fit to put an end to this controversy and to
finally adjudicate the rights and obligations of the parties in the interest of a speedy
29

dispensation of justice, taking into account the length of time this action has been
pending with the courts as well as in light of the fact that PMO is the real party-ininterest in this case, being the successor-in-interest of DBP.
WHEREFORE, the petition is PARTLY GRANTED and the assailed
Decision dated May 7, 1999 rendered by the Court of Appeals in CA-G.R. CV No.
49239 is REVERSED AND SET ASIDE. The case is hereby remanded to the trial
court for determination of the total amount of the respondents obligation based on
the promissory notes dated December 11, 1980, June 5, 1981 and December 16,
1981 according to the interest rate agreed upon by the parties or the interest rate of
12% per annum, whichever is lower.
No costs.
SO ORDERED.

ADOLFO S. AZCUNA
Associate Justice

WE CONCUR:

REYNATO S. PUNO
Acting Chief Justice
Chairperson
(On Official Business)
ANGELINA SANDOVAL-GUTIERREZ RENATO C. CORONA
Associate Justice Associate Justice

CANCIO C. GARCIA
30

Associate Justice

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that
the conclusions in the above Decision had been reached in consultation before the
case was assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNO
Acting Chief Justice

Based on the records, only the Privatization and Management Office (PMO) filed
the present petition for review on certiorari. DBP, for its part, moved for
reconsideration of the CA decision instead.
*
Acting Chief Justice.
**
On Official Business.
[2]
Exhibit F, p. 42.
[3]
Exhibit 1, pp. 115-132.
[4]
Exhibit 2, pp. 133-146.
[5]
TSN, October 26, 1990, pp. 17-24; TSN, March 22, 1991, pp. 28-37.
[6]
Exhibit 8, pp. 202-203.
[7]
Exhibit 8, p. 203.
[8]
Exhibit 9, pp. 204-205.
[9]
Id. at 205.
[10]
Exhibit 8, pp. 202, 204.
[11]
Id.
[12]
Id.
[13]
TSN, March 22, 1991, pp. 41-43.
[14]
Exhibits 4 and 5, pp. 152-200.
31

[15]

Exhibit 10, pp. 206-207.

It was agreed that this rate will become 1 % per annum in the event the loan is
drawn under the Central Banks Jumbo Loan. However, should the loan from
where respondents foreign currency loan was drawn be fully repaid, the
interest to be charged on their remaining dollar obligation would be pegged
at 16% per annum. See Exhibit 10, p. 206.
[17]
Exhibit 11, pp. 208-209.
[18]
It was agreed that this rate will become 1 % per annum in the event the loan is
drawn under the Central Banks Jumbo Loan. However, should the loan from
where respondents foreign currency loan was drawn be fully repaid, the
interest to be charged on their remaining dollar obligation would be pegged
at 18% per annum. See Exhibit 11, p. 208.
[19]
Exhibit 12, pp. 210-211.
[20]
Exhibit 10, pp. 206-207, Exhibit 11, pp. 208-209.
[21]
Exhibit 12, p. 210.
[22]
Id.
[23]
Exhibit 15, pp. 215-216.
[24]
TSN, May 13, 1994, pp. 18-23.
[25]
Former President Corazon C. Aquino issued Proclamation No. 50 which created
the Asset Privatization Trust (APT). APT was mandated to take title to and
possess, manage and dispose of the non-performing assets of the national
government. Pursuant to the proclamation, DBP transferred and assigned its
rights and interests in the mortgage to APT by virtue of a Deed of Transfer
dated February 27, 1987 (Records, pp. 215-234). Because of the expiration
of APTs term of existence on December 31, 2000, Executive Order No. 323
was issued on December 6, 2000which created the PMO. PMO assumed the
functions, duties and responsibilities of the now defunct APT.
[26]
CA Rollo, p. 202.
[27]
Records, pp. 512-527.
[28]
CA Rollo, pp. 241-250.
[29]
Rollo, pp. 37-38.
[30]
Id. at 93-110.
[31]
Donato C. Cruz Trading Corp. v. CA, G.R. No. 129189, December 5, 2000, 347
SCRA 13; Baylon v. CA, G.R. No. 109941, August 17, 1999, 312 SCRA 502.
[32]
Kwok v. Philippine Carpet Manufacturing Corp., G.R. No. 149252, April 28,
2005, 457 SCRA 465.
[33]
Swagman Hotels and Travel, Inc. v. CA, G.R. No. 161135, April 8, 2005, 455
SCRA 175.
[34]
New Sampaguita Builders Construction, Inc. v. Philippine National Bank, G.R.
No. 148753, July 30, 2004, 435 SCRA 565.
[16]

32

[35]

Landl & Company (Phil.), Inc. v. Metropolitan Bank & Trust Co., G.R. No.
159622, July 30, 2004, 435 SCRA 639.
[36]
Blacks Law Dictionary, 8th edition.
[37]
Development Bank of the Philippines v. Perez, G.R. No. 148541, November 11,
2004, 442 SCRA 238.
[38]
Garcia v. CA, G.R. No. 80201, November 20, 1990, 191 SCRA 493.
[39]
Ajax Marketing and Development Corporation v. CA, G.R. No. L118585, September 14, 1995, 248 SCRA 222.
[40]
TSN, March 22, 1991, pp. 37-42.
[41]
TSN, September 18, 1992, pp. 3-4; TSN, October 2, 1992, p. 15.
[42]
CIVIL CODE, Article 1391, in relation to Article 1390.
[43]
CIVIL CODE, Article 1337.
[44]
Carpo v. Chua, G.R. Nos. 150773 and 153599, September 30, 2005, 471 SCRA
471.
[45]
CIVIL CODE, Article 1335.
[46]
BPI Family Savings Bank, Inc. v. Veloso, G.R. No. 141974, August 9, 2004, 436
SCRA 1.
[47]
CIVIL CODE, Art. 2087; RULES OF COURT, Rule 68, Sec. 5; Act 3135, Sec.
4.
[48]
CIVIL CODE, Article 1306.
[49]
TSN, September 18, 1992, pp. 3-10.
[50]
Asian Construction & Devt. Corp. v. Tulabut, G.R. No. 161904, April 26, 2005,
457 SCRA 317.
[51]
CIVIL CODE, Article 1159; Premiere Development Bank v. CA, G.R. No.
159352, April 14, 2004, 427 SCRA 686.
[52]
Lim v. Queensland Tokyo Commodities, Inc., G.R. No. 136031, January 4, 2002,
373 SCRA 31.
[53]
Exhibit Q, pp. 50-64.
[54]
Naguiat v. CA, G.R. No. 118375, October 3, 2003, 412 SCRA 591.
[55]
Carpo v. Chua, G.R. Nos. 150773 and 153599, September 30, 2005, 471 SCRA
471.
[56]
Pryce Corporation v. PAGCOR, G.R. No. 157480, May 6, 2005, 458 SCRA
164.
[57]
The following paragraphs appear in the promissory notes:
(a) Promissory note dated December 11, 1980 x x x Borrowers obligation shall remain denominated in US Dollars
or in any foreign currency available for relending by DBP. In case
of default in the payment of any installment above, we bind
ourselves to pay DBP for advances made on the installment in
equivalent pesos computed at commercial banks selling rate as of
33

[the] date DBP paid for [the] installment or as of [the] date of [the]
borrowers payment to DBP, whichever is higher. x x x (Exhibit 10,
p. 206)
(b) Promissory notes dated June 5, 1981 and December 31, 1981x x x In case of default in the payment of any installment above, we
bind ourselves to pay DBP for advances made on the installment in
equivalent pesos computed at commercial banks selling rate as of
[the] date DBP paid for [the] installment or as of [the] date of [the]
borrowers payment to DBP, whichever is higher. x x x (Exhibits 11
and 12 pp. 208, 210)
[58]
CF Sharp & Co., Inc. v. Northwest Airlines, Inc., G.R. No. 133498, April 18,
2002, 381 SCRA
314.
[59]
TSN, July 18, 1994, p. 38.
[60]
Puerto v. CA, G.R. No. 138210, June 6, 2002, 383 SCRA 185.
[61]
Supra, note 16.
[62]
Supra, note 18.
[63]
Exhibit 15, pp. 215-216.
[64]
TSN, April 4, 1994, p. 17.
[65]
Development Bank of the Philippines v. Perez, G.R. No. 148541, November 11,
2004, 442 SCRA 238.
[66]
Republic v. CA, G.R. No. 107943, February 3, 2000, 324 SCRA 569.
[67]
Polysterene Manufacturing Co., Inc. v. CA, G.R. No. 77631, May 9, 1990, 185
SCRA 207.
[68]
Heirs of Trinidad de Leon Vda. De Roxas v. CA, G.R. No. 138660, February 5,
2004, 422 SCRA 101; Velasquez v. Hernandez, G.R. No. 138660, February
5, 2004, 437 SCRA 357.
[69]
Records, pp. 244-257.
[70]
Tan v. Mandap, G.R. No. 150925, May 27, 2004, 429 SCRA 711.
[71]
Republic v. Express Telecommunications Co., Inc., G.R. No. 147096, January
15, 2002, 373 SCRA 316.

34

FIRST DIVISION
EQUITABLE PCI BANK,* G.R. No. 171545
AIMEE YU and BEJAN
LIONEL APAS,
Petitioners, Present:
PUNO, C.J., Chairperson,
- v e r s u s - SANDOVAL-GUTIERREZ,
CORONA,
AZCUNA and
LEONARDO-DE CASTRO, JJ.
**
NG SHEUNG NGOR doing
business under the name
and style KEN MARKETING, Promulgated:
KEN APPLIANCE DIVISION,
INC. and BENJAMIN E. GO,
Respondents. December 19, 2007
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - - x
DECISION
CORONA, J.:
This petition for review on certiorari[1] seeks to set aside the decision[2] of the Court
of Appeals (CA) in CA-G.R. SP No. 83112 and its resolution [3] denying
reconsideration.
On October 7, 2001, respondents Ng Sheung Ngor,[4] Ken Appliance
Division, Inc. and Benjamin E. Go filed an action for annulment and/or
reformation of documents and contracts[5] against petitioner Equitable PCI Bank
(Equitable) and its employees, Aimee Yu and Bejan Lionel Apas, in the Regional
Trial Court (RTC), Branch 16 of Cebu City.[6] They claimed that Equitable induced
them to avail of its peso and dollar credit facilities by offering low interest
35

rates[7] so they accepted Equitable's proposal and signed the bank's pre-printed
promissory notes on various dates beginning 1996. They, however, were unaware
that the documents contained identical escalation clauses granting Equitable
authority to increase interest rates without their consent.[8]
Equitable, in its answer, asserted that respondents knowingly accepted all the terms
and conditions contained in the promissory notes.[9] In fact, they continuously
availed of and benefited from Equitable's credit facilities for five years.[10]
After trial, the RTC upheld the validity of the promissory notes. It found that, in
2001 alone, Equitable restructured respondents' loans amounting to US$228,200
and P1,000,000.[11] The trial court, however, invalidated the escalation clause
contained therein because it violated the principle of mutuality of contracts.
[12]

Nevertheless, it took judicial notice of the steep depreciation of the peso during

the intervening period[13] and declared the existence of extraordinary deflation.

[14]

Consequently, the RTC ordered the use of the 1996 dollar exchange rate in

computing respondents' dollar-denominated loans.[15] Lastly, because the business

reputation of respondents was (allegedly) severely damaged when Equitable froze
their accounts,[16] the trial court awarded moral and exemplary damages to them.[17]
The dispositive portion of the February 5, 2004 RTC decision[18] provided:
WHEREFORE, premises considered, judgment is hereby rendered:
A)

Ordering [Equitable] to reinstate and return the amount of

[respondents'] deposit placed on hold status;

B)

Ordering [Equitable] to pay [respondents] the sum of P12

[m]illion [p]esos as moral damages;

36

C)

Ordering [Equitable] to pay [respondents] the sum of P10

[m]illion [p]esos as exemplary damages;

D)

Ordering defendants Aimee Yu and Bejan [Lionel] Apas to

pay [respondents], jointly and severally, the sum of [t]wo
[m]illion [p]esos as moral and exemplary damages;

E)

Ordering [Equitable, Aimee Yu and Bejan Lionel Apas],

jointly and severally, to pay [respondents'] attorney's fees in the
sum of P300,000; litigation expenses in the sum of P50,000 and
the cost of suit;

F)

Directing plaintiffs Ng Sheung Ngor and Ken Marketing to

pay [Equitable] the unpaid principal obligation for the peso loan
as well as the unpaid obligation for the dollar denominated
loan;
G) Directing plaintiff Ng Sheung Ngor and Ken Marketing to
pay [Equitable] interest as follows:
1)
2)

H)

12% per annum for the peso loans;

8% per annum for the dollar loans. The basis for the
payment of the dollar obligation is the conversion rate of
P26.50 per dollar availed of at the time of incurring of the
obligation in accordance with Article 1250 of the Civil Code
of the Philippines;

Dismissing [Equitable's] counterclaim except the payment of

the aforestated unpaid principal loan obligations and interest.

SO ORDERED.[19]

Equitable and respondents filed their respective notices of appeal.[20]

In the March 1, 2004 order of the RTC, both notices were denied due course
because Equitable and respondents failed to submit proof that they paid their
respective appeal fees.[21]
37

WHEREFORE, premises considered, the appeal interposed by

defendants from the Decision in the above-entitled case
is DENIED due course. As of February 27, 2004, the Decision
dated February 5, 2004, is considered final and executory in so far
as [Equitable, Aimee Yu and Bejan Lionel Apas] are concerned.
[22]
(emphasis supplied)

Equitable moved for the reconsideration of the March 1, 2004 order of the
RTC[23] on the ground that it did in fact pay the appeal fees. Respondents, on the
other hand, prayed for the issuance of a writ of execution.[24]
On March 24, 2004, the RTC issued an omnibus order denying Equitable's motion
for reconsideration for lack of merit[25] and ordered the issuance of a writ of
execution

in

favor

of

respondents.[26] According

to

the

RTC,

because

respondents did not move for the reconsideration of the previous order (denying
due course to the parties notices of appeal), [27] the February 5, 2004 decision
became final and executory as to both parties and a writ of execution against
Equitable was in order.[28]
A writ of execution was thereafter issued [29] and three real properties of Equitable
were levied upon.[30]
On March 26, 2004, Equitable filed a petition for relief in the RTC from the March
1, 2004 order.[31] It, however, withdrew that petition on March 30, 2004 [32] and
instead filed a petition for certiorari with an application for an injunction in the CA
to enjoin the implementation and execution of the March 24, 2004 omnibus order.
[33]

38

On June 16, 2004, the CA granted Equitable's application for injunction. A writ of
preliminary injunction was correspondingly issued.[34]
Notwithstanding the writ of injunction, the properties of Equitable previously
levied upon were sold in a public auction on July 1, 2004. Respondents were the
highest bidders and certificates of sale were issued to them.[35]
On August 10, 2004, Equitable moved to annul the July 1, 2004 auction sale and to
cite the sheriffs who conducted the sale in contempt for proceeding with the
auction despite the injunction order of the CA.[36]
On October 28, 2005, the CA dismissed the petition for certiorari. [37] It found
Equitable guilty of forum shopping because the bank filed its petition for certiorari
in the CA several hours before withdrawing its petition for relief in the RTC.
[38]

Moreover, Equitable failed to disclose, both in the statement of material dates

and certificate of non-forum shopping (attached to its petition for certiorari in the
CA), that it had a pending petition for relief in the RTC.[39]
Equitable moved for reconsideration[40] but it was denied.[41] Thus, this petition.
Equitable asserts that it was not guilty of forum shopping because the petition for
relief was withdrawn on the same day the petition for certiorari was filed.[42] It
likewise avers that its petition for certiorari was meritorious because the RTC
committed grave abuse of discretion in issuing the March 24, 2004 omnibus order
which was based on an erroneous assumption. The March 1, 2004 order denying its
notice of appeal for non payment of appeal fees was erroneous because it had in
fact paid the required fees.[43] Thus, the RTC, by issuing its March 24, 2004

39

omnibus order, effectively prevented Equitable from appealing the patently

wrong February 5, 2004 decision.[44]
This petition is meritorious.

EQUITABLE
WAS
NOT
GUILTY
OF
FORUM
SHOPPING

Forum shopping exists when two or more actions involving the same transactions,
essential facts and circumstances are filed and those actions raise identical issues,
subject matter and causes of action.[45] The test is whether, in two or more pending
cases, there is identity of parties, rights or causes of actions and reliefs.[46]
Equitable's petition for relief in the RTC and its petition for certiorari in the CA did
not have identical causes of action. The petition for relief from the denial of its
notice of appeal was based on the RTCs judgment or final order preventing it from
taking an appeal by fraud, accident, mistake or excusable negligence. [47] On the
other hand, its petition for certiorari in the CA, a special civil action, sought to
correct the grave abuse of discretion amounting to lack of jurisdiction committed
by the RTC.[48]
In a petition for relief, the judgment or final order is rendered by a court with
competent jurisdiction. In a petition for certiorari, the order is rendered by a court
without or in excess of its jurisdiction.

40

Moreover, Equitable substantially complied with the rule on non-forum shopping

when it moved to withdraw its petition for relief in the RTC on the same day (in
fact just four hours and forty minutes after) it filed the petition for certiorari in the
CA. Even if Equitable failed to disclose that it had a pending petition for relief in
the RTC, it rectified what was doubtlessly a careless oversight by withdrawing the
petition for relief just a few hours after it filed its petition for certiorari in the CA
a clear indication that it had no intention of maintaining the two actions at the
same time.
THE
TRIAL
COURT
COMMITTED GRAVE ABUSE
OF DISCRETION IN ISSUING
ITS MARCH 1, 2004 AND
MARCH 24, 2004 ORDERS
Section 1, Rule 65 of the Rules of Court provides:
Section 1. Petition for Certiorari. When any tribunal, board or
officer exercising judicial or quasi-judicial function has acted
without or in excess of its or his jurisdiction, or with grave abuse
of discretion amounting to lack or excess of jurisdiction, and there
is no appeal, nor any plain, speedy or adequate remedy in the
ordinary course of law, a person aggrieved thereby may file a
verified petition in the proper court, alleging the facts with certainty
and praying that judgment be rendered annulling or modifying the
proceedings of such tribunal, board or officer, and granting such
incidental reliefs as law and justice may require.
The petition shall be accompanied by a certified true copy of the
judgment, order or resolution subject thereof, copies of all pleadings
and documents relevant and pertinent thereto, and a sworn certificate
of non-forum shopping as provided in the third paragraph of Section
3, Rule 46.
41

There are two substantial requirements in a petition for certiorari. These are:
1.

that the tribunal, board or officer exercising judicial or

quasi-judicial functions acted without or in excess of his or its
jurisdiction or with grave abuse of discretion amounting to
lack or excess of jurisdiction; and

2.

that there is no appeal or any plain, speedy and adequate

remedy in the ordinary course of law.

For a petition for certiorari premised on grave abuse of discretion to prosper,

petitioner must show that the public respondent patently and grossly abused his
discretion and that abuse amounted to an evasion of positive duty or a virtual
refusal to perform a duty enjoined by law or to act at all in contemplation of law, as
where the power was exercised in an arbitrary and despotic manner by reason of
passion or hostility.[49]
The March 1, 2004 order denied due course to the notices of appeal of both
Equitable and respondents. However, it declared that the February 5, 2004 decision
was final and executory only with respect to Equitable.[50] As expected, the
March 24, 2004 omnibus order denied Equitable's motion for reconsideration and
granted respondents'motion for the issuance of a writ of execution.[51]
The March 1, 2004 and March 24, 2004 orders of the RTC were obviously
intended to prevent Equitable, et al. from appealing the February 5, 2004
decision. Not only that. The execution of the decision was undertaken with
indecent haste, effectively obviating or defeating Equitable's right to avail of
possible legal remedies. No matter how we look at it, the RTC committed grave
abuse of discretion in rendering those orders.
42

With regard to whether Equitable had a plain, speedy and adequate remedy in the
ordinary course of law, we hold that there was none. The RTC denied due course to
its notice of appeal in the March 1, 2004 order. It affirmed that denial in the March
24, 2004 omnibus order. Hence, there was no way Equitable could have possibly
appealed the February 5, 2004 decision.[52]
Although Equitable filed a petition for relief from the March 24, 2004 order, that
petition was not a plain, speedy and adequate remedy in the ordinary course of law.
[53]

A petition for relief under Rule 38 is an equitable remedy allowed only in

exceptional circumstances or where there is no other available or adequate remedy.

[54]

Thus, we grant Equitable's petition for certiorari and consequently give due course
to its appeal.

EQUITABLE RAISED PURE

QUESTIONS OF LAW IN ITS
PETITIONFOR REVIEW
The jurisdiction of this Court in Rule 45 petitions is limited to questions of law.
[55]

There is a question of law when the doubt or controversy concerns the correct

application of law or jurisprudence to a certain set of facts; or when the issue does
not call for the probative value of the evidence presented, the truth or falsehood of
facts being admitted.[56]
Equitable does not assail the factual findings of the trial court. Its arguments
essentially focus on the nullity of the RTCs February 5, 2004 decision. Equitable
43

points out that that decision was patently erroneous, specially the exorbitant
award of damages, as it was inconsistent with existing law and jurisprudence.[57]
THE PROMISSORY NOTES
WERE VALID
The RTC upheld the validity of the promissory notes despite respondents
assertion that those documents were contracts of adhesion.
A contract of adhesion is a contract whereby almost all of its provisions are drafted
by one party.[58] The participation of the other party is limited to affixing his
signature or his adhesion to the contract.[59] For this reason, contracts of adhesion
are strictly construed against the party who drafted it.[60]
It is erroneous, however, to conclude that contracts of adhesion are invalid per
se. They are, on the contrary, as binding as ordinary contracts. A party is in reality
free to accept or reject it. A contract of adhesion becomes void only when the
dominant party takes advantage of the weakness of the other party, completely
depriving the latter of the opportunity to bargain on equal footing.[61]
That was not the case here. As the trial court noted, if the terms and conditions
offered by Equitable had been truly prejudicial to respondents, they would have
walked out and negotiated with another bank at the first available instance. But
they did not. Instead, they continuously availed of Equitable's credit facilities for
five long years.
While the RTC categorically found that respondents had outstanding dollar- and
peso-denominated loans with Equitable, it, however, failed to ascertain the total
44

amount due (principal, interest and penalties, if any) as of July 9, 2001. The trial
court did not explain how it arrived at the amounts of US$228,200 and P1,000,000.
[62]

In Metro Manila Transit Corporation v. D.M. Consunji, [63] we reiterated that this

Court is not a trier of facts and it shall pass upon them only for compelling reasons
which unfortunately are not present in this case. [64] Hence, we ordered the partial
remand of the case for the sole purpose of determining the amount of actual
damages.[65]

ESCALATION
CLAUSE
VIOLATED THE PRINCIPLE
OF
MUTUALITYOF CONTRACTS
Escalation clauses are not void per se. However, one which grants the creditor an
unbridled right to adjust the interest independently and upwardly, completely
depriving the debtor of the right to assent to an important modification in the
agreement is void. Clauses of that nature violate the principle of mutuality of
contracts.[66] Article 1308[67] of the Civil Code holds that a contract must bind both
contracting parties; its validity or compliance cannot be left to the will of one of
them.[68]
For this reason, we have consistently held that a valid escalation clause provides:
1.

that the rate of interest will only be increased if the

applicable maximum rate of interest is increased by law or by
the Monetary Board; and
45

2.

that the stipulated rate of interest will be reduced if

the applicable maximum rate of interest is reduced by law or by
the Monetary Board (de-escalation clause).[69]

The RTC found that Equitable's promissory notes uniformly stated:

If subject promissory note is extended, the interest for subsequent
extensions shall be at such rate as shall be determined by the bank.[70]
Equitable dictated the interest rates if the term (or period for repayment) of
the loan was extended. Respondents had no choice but to accept them. This was a
violation of Article 1308 of the Civil Code. Furthermore, the assailed escalation
clause did not contain the necessary provisions for validity, that is, it neither
provided that the rate of interest would be increased only if allowed by law or the
Monetary Board, nor allowed de-escalation. For these reasons, the escalation
clause was void.
With regard to the proper rate of interest, in New Sampaguita Builders v.
Philippine National Bank[71] we held that, because the escalation clause was
annulled, the principal amount of the loan was subject to the original or stipulated
rate of interest. Upon maturity, the amount due was subject to legal interest at the
rate of 12% per annum.[72]
Consequently, respondents should pay Equitable the interest rates of 12.66% p.a.
for their dollar-denominated loans and 20% p.a. for their peso-denominated loans
from January 10, 2001 to July 9, 2001. Thereafter, Equitable was entitled to legal
interest of 12% p.a. on all amounts due.

46

THERE
WAS
NO
EXTRAORDINARY DEFLATI
ON

Extraordinary inflation exists when there is an unusual decrease in the purchasing

power of currency (that is, beyond the common fluctuation in the value of
currency) and such decrease could not be reasonably foreseen or was manifestly
beyond the contemplation of the parties at the time of the obligation. Extraordinary
deflation, on the other hand, involves an inverse situation.[73]
Article 1250 of the Civil Code provides:
Article 1250. In case an extraordinary inflation or deflation of the
currency stipulated should intervene, the value of the currency at the
time of the establishment of the obligation shall be the basis of
payment, unless there is an agreement to the contrary.

For extraordinary inflation (or deflation) to affect an obligation, the

following requisites must be proven:
1.
that there was an official declaration of extraordinary
inflation or deflation from the Bangko Sentral ng Pilipinas
(BSP);[74]
2.
3.

that the obligation was contractual in nature;[75] and

that the parties expressly agreed to consider the effects of
the extraordinary inflation or deflation.[76]

Despite the devaluation of the peso, the BSP never declared a situation of
extraordinary inflation. Moreover, although the obligation in this instance arose out
of a contract, the parties did not agree to recognize the effects of extraordinary
47

inflation (or deflation).[77] The RTC never mentioned that there was a such
stipulation either in the promissory note or loan agreement. Therefore, respondents
should pay their dollar-denominated loans at the exchange rate fixed by the BSP on
the date of maturity.[78]
THE AWARD OF MORAL AND
EXEMPLARY
DAMAGES
LACKEDBASIS
Moral damages are in the category of an award designed to compensate the
claimant for actual injury suffered, not to impose a penalty to the wrongdoer. [79] To
be entitled to moral damages, a claimant must prove:
1.

That he or she suffered besmirched reputation, or physical,

mental or psychological suffering sustained by the claimant;

2.

That the defendant committed a wrongful act or omission;

3.

That the wrongful act or omission was the proximate cause

of the damages the claimant sustained;

4.

The case is predicated on any of the instances expressed or

envisioned by Article 2219[80] and 2220[81]. [82]

In culpa contractual or breach of contract, moral damages are recoverable

only if the defendant acted fraudulently or in bad faith or in wanton disregard of
his contractual obligations.[83] The breach must be wanton, reckless, malicious or in
bad faith, and oppressive or abusive.[84]
The RTC found that respondents did not pay Equitable the interest due on February
9, 2001 (or any month thereafter prior to the maturity of the loan) [85] or the amount
48

due (principal plus interest) due on July 9, 2001.[86]Consequently, Equitable applied

respondents' deposits to their loans upon maturity.
The relationship between a bank and its depositor is that of creditor and debtor.
[87]

For this reason, a bank has the right to set-off the deposits in its hands for the

payment of a depositor's indebtedness.[88]

Respondents indeed defaulted on their obligation. For this reason, Equitable had
the option to exercise its legal right to set-off or compensation. However, the RTC
mistakenly (or, as it now appears, deliberately) concluded that Equitable acted
fraudulently or in bad faith or in wanton disregard of its contractual obligations
despite the absence of proof. The undeniable fact was that, whatever damage
respondents sustained was purely the consequence of their failure to pay their
loans. There was therefore absolutely no basis for the award of moral damages to
them.
Neither was there reason to award exemplary damages. Since respondents were not
entitled to moral damages, neither should they be awarded exemplary damages.
[89]

And if respondents were not entitled to moral and exemplary damages, neither

could they be awarded attorney's fees and litigation expenses.[90]

ACCORDINGLY, the petition is hereby GRANTED.
The October 28, 2005 decision and February 3, 2006 resolution of the Court of
Appeals in CA-G.R. SP No. 83112 are hereby REVERSED and SET ASIDE.
The March 24, 2004 omnibus order of the Regional Trial Court, Branch 16, Cebu
City in Civil Case No. CEB-26983 is hereby ANNULLED for being rendered with
49

grave abuse of discretion amounting to lack or excess of jurisdiction. All

proceedings undertaken pursuant thereto are likewise declared null and void.
The March 1, 2004 order of the Regional Trial Court, Branch 16 of Cebu City in
Civil Case No. CEB-26983 is hereby SET ASIDE. The appeal of petitioners
Equitable PCI Bank, Aimee Yu and Bejan Lionel Apas is therefore given due
course.
The February 5, 2004 decision of the Regional Trial Court, Branch 16 of Cebu City
in Civil Case No. CEB-26983 is accordingly SET ASIDE. New judgment is
hereby entered:
1.

ordering respondents Ng Sheung Ngor, doing business under the

name and style of Ken Marketing, Ken Appliance Division, Inc. and
Benjamin E. Go to pay petitioner Equitable PCI Bank the principal
amount of their dollar- and peso-denominated loans;

2.

ordering respondents Ng Sheung Ngor, doing business under the

name and style of Ken Marketing, Ken Appliance Division, Inc. and
Benjamin E. Go to pay petitioner Equitable PCI Bank interest at:
a)

12.66% p.a. with respect to their dollar-denominated

loans from January 10, 2001 to July 9, 2001;

b)

20% p.a. with

respect

to

their

peso-denominated

loans from January 10, 2001 to July 9, 2001;[91]

c)

pursuant to our ruling in Eastern Shipping Lines v. Court

of Appeals,[92] the total amount due on July 9, 2001 shall earn
legal interest at 12% p.a. from the time petitioner Equitable PCI

50

Bank demanded payment, whether judicially or extra-judicially;

and
d)

after this Decision becomes final and executory, the

applicable rate shall be 12% p.a. until full satisfaction;

3.

all other claims and counterclaims are dismissed.

As a starting point, the Regional Trial Court, Branch 16 of Cebu City shall
compute the exact amounts due on the respective dollar-denominated and pesodenominated loans, as of July 9, 2001, of respondents Ng Sheung Ngor, doing
business under the name and style of Ken Marketing, Ken Appliance Division and
Benjamin E. Go.
SO ORDERED.
RENATO C. CORONA
Associate Justice
WE CONCUR:
REYNATO S. PUNO
Chief Justice
Chairperson

ANGELINA SANDOVAL-GUTIERREZ ADOLFO S. AZCUNA

Associate Justice Associate Justice

TERESITA J. LEONARDO-DE CASTRO

Associate Justice
51

C E R T I FI C AT I O N
Pursuant to Section 13, Article VIII of the Constitution, I certify that the
conclusions in the above decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNO
Chief Justice

Now, Banco De Oro Unibank.

Also referred to as Ng Seung Ngor in the records.
[1]
Under Rule 45 of the Rules of Court.
[2]
Penned by Associate Justice Mercedes Gozo-Dadole (retired) and concurred in
by Associate Justices Pampio A. Abarintos and Enrico A. Lanzanas of the
Eighteenth Division of the Court of Appeals. Dated October 28,
2005. Rollo, pp. 88-111.
[3]
Penned by Associate Justice Enrico A. Lanzanas and concurred in by Associate
Justices Isaias P. Dicdican and Pampio A. Abarintos of the Special Former
Eighteenth Division of the Court of Appeals. Dated February 3, 2006. Id.,
pp. 112-115.
[4]
Doing business in the name and style of Ken Marketing.
[5]
Docketed as Civil Case No. CEB-26983. Rollo, pp. 115-143.
[6]
Id., pp. 116-117, 177.
[7]
The interest rate initially offered by Equitable was 12.75% p.a. for dollardenominated loans. Id., p. 187.
[8]
Id., p. 118.
[9]
Id., pp. 155-175.
[10]
Id.
**

52

[11]

Id., pp. 180, 183. SCHEDULE OF LOANS:

Respondents' submission
Principal Interest Date Availed Date of Maturity Amount Due
US$223,000 12.66%, p.a. 10 January 2001 9 July 2001 (total=)
36,700 12.66%, p.a. 10 January 2001 9 July 2001 US$232,248.00
P995,000 20%, p.a. 10 January 2001 9 July 2001 P1,081,703.14
Equitable's submission
Principal Interest Date Availed Date of Maturity Amount due
US$184,000 12.66%, p.a. 10 January 2001 9 July 2001 US$207,771.78
37,700 12.66%, p.a. 10 January 2001 9 July 2001 41,441.44
P1,050,000 20%, p.a. 10 January 2001 9 July 2001 P1,166,193.34
Note:
1.
Equitable and respondents agreed neither as to the amount of the
principal nor as to the amount due.
2.
The RTC concluded that the rates of interest stated in the promissory
notes were only applicable for 30 days (or from January 10, 2001 to
February 9, 2001). Thereafter(or every 30 days until the loan matures),
Equitable may change the rates if it so desired without the prior notice to
respondents.
3.
Interest due must be paid every month beginning February 9, 2001
until maturity.
4.
The findings of the trial court, with regard to the amount of
respondents' obligation to Equitable, agreed neither with the submission
of Equitable nor with that of respondents. The RTC made its own finding
as to the amount of respondent's obligation to Equitable but did not
explain how it arrived at the figures. It merely stated:

The evidence adduced during trial show [respondents] received

the proceeds of peso and dollar loans from defendant bank as
follows: (a) US$228,200 in four (4) different availments and the
(b) principal amount of P1,000,000. xxx
[12]
Id., pp. 185-186.
[13]
Id. The RTC took judicial notice of the fact that the exchange rate in 1996 was
US$1 = P26.50 while in 2001, it was US$1 = P55. Because the cost of
purchasing dollar increased by 200% over the relatively short period of six
years, it concluded that there was extraordinary inflation.
[14]
Id.
53

[15]

Id., p. 190.
Id., pp. 188-189.
[17]
Id.
[18]
Penned by Judge Agapito L. Hontanosas, Jr. (dismissed from the service per
resolution in J. King and Sons Company, Inc. v. Judge Agapito L.
Hontanosas, Jr., A.M. No. RTJ-03-1802, 21 September 2004, 438 SCRA
525). Id., pp. 177-190.
[19]
Id., pp. 189-190.
[20]
Id., pp. 191-193.
[21]
Id., p. 194.
[22]
Id.
[23]
Id., pp. 195-202. Equitable attached proof that it paid the appeal fees.
[24]
Id., pp. 203-204.
[25]
Id., p. 206.
[26]
Id., pp. 205-207.
[27]
Id., p. 205.
[28]
Id., p. 207.
[29]
Id., pp. 208-210.
[30]
Id., p. 218. Covered by TCT No. 124096, TCT No. 118031 and tax declarations
GR2K-06-038-00391 and GRK-06-038-00392.
[31]
Id., pp. 272-276.
[16]

See RULES OF COURT, Rule 38, Sec. 2. The section provides:

Sec. 2. Petition for relief from denial of appeal.-- When a judgment or
final order is rendered by any court in a case, and a party thereto, by fraud,
accident, mistake or excusable negligence, has been prevented from taking
an appeal, he may file a petition in such court and in the same case praying
that the appeal be given due course.
[32]

Id., pp. 279-281.

Docketed as CA-G.R. SP No. 83112. Id., p. 221.
[34]
Penned by Associate Justice Estela M. Perlas-Bernabe and concurred in by
Associate Justices Monina Arevalo-Zenarosa and Vicente I. Yap (retired) of
the Special Eighteenth Division of the Court of Appeals. Dated June 16,
2004. Id., pp. 221-223.
[35]
Id., pp. 226-231.
[36]
Id., pp. 232-240.
[37]
Supra note 2.
[33]

54

[38]

Id., pp. 106-110. The petition for certiorari was filed in the CA on March 30,
2004 at 9 a.m. while the motion to withdraw the petition for relief in the
RTC was filed also on March 30, 2004 at 1:40 p.m.
[39]
Id.
[40]
Id., pp. 248-271.
[41]
Supra note 3.
[42]
Id., p. 38.
[43]
Id., p. 55.
[44]
Id., pp. 62-68.
[45]
Ligon v. Court of Appeals, G.R. No. 127683, 7 August 1998, 294 SCRA 73, 88.
[46]
Id.
[47]
Supra note 31.
[48]
Florenz B. Regalado, 2 REMEDIAL LAW COMPENDIUM 18th ed., 716
citing Matute v. Macadaeg, et al., 99 Phil. 340 (1956) and de Gala-Sison v.
Maddela, et al., 160-B Phil. 626 (1975).
[49]
See Aggabao v. Commission on Elections, G.R. No. 163756, 26 January 2005,
449 SCRA 400. See also Zarate v. Maybank, G.R. No. 160976, 8 June 2005,
459 SCRA 785. See also Agustin v. Court of Appeals, G.R. No. 162571, 15
June 2005, 460 SCRA 315.
[50]
Rollo, p. 194.
[51]
Id., pp. 225-231.
[52]
See RULES OF COURT, Rule 41, Sec. 2. The section provides:
Section 2. Modes of appeal.-(a) Ordinary appeal.-- The appeal to the Court of Appeals in cases decided by
the Regional Trial Court in the exercise of its original jurisdiction shall
be taken by filing a notice of appeal with the court which rendered the
judgment or final order appealed from and serving a copy thereof upon
the adverse party. No record on appeal shall be required except in special
proceedings and other cases of multiple or separate appeals where the law or
these Rules so require. In such cases, the record on appeal shall be filed and
served in the like manner.
(b) Petition for review.-- The appeal to the Court of Appeals in cases decided by
the Regional Trial Court in exercise of its appellate jurisdiction shall be by
petition for review in accordance with Rule 42.

55

(c) Appeal by certiorari.-- In all cases where only questions of law are raised or
involved the appeal shall be to the Supreme Court by petition for review
on certiorari in accordance with Rule 45. (emphasis supplied)
[53]
Supra note 48 at 400 citing Palmares, et al. v. Jimenez, et al., 90 Phil. 773.
(1952).
[54]
Tuason v. Court of Appeals, G.R. No. 116607, 10 April 1996, 256 SCRA 158,
167. See also Cerezo v. Tuazon, G.R. No. 141538, 23 March 2004, 426
SCRA 167, 183. See also Azucena v. Foreign Manpower Services, G.R. No.
147955, 25 October 2004, 441 SCRA 346, 354-355.
[55]
Supra note 52 and Usero v. Court of Appeals, G.R. Nos. 152112 and 155055, 26
January 2005, 449 SCRA 352, 358.
[56]
Bukidnon Doctor's Hospital v. Metropolitan Bank and Trust Company, G.R. No.
161882, 8 July 2005, 463 SCRA 222, 233.
[57]
Rollo, pp. 46-50.
[58]
Citibank, N.A. v. Sabeniano, G.R. No. 156132, 6 February 2007.
[59]
Id.
[60]
Id.
[61]
Perez v. Development Bank of the Philippines, G.R. No. 148541, 11 November
2004, 442 SCRA 238, 249-250 citing Rizal Commercial Banking
Corporation v. Court of Appeals, G.R. No. 127139, 19 February 1999, 303
SCRA 449, 454.
[62]
Supra note 11.
[63]
G.R. No. 147594, 7 March 2007.
[64]
Id.
[65]
Id.
[66]
See New Sampaguita Builders Construction, Inc. v. Philippine National
Bank, G.R. No. 148753, 30 July 2004, 435 SCRA 565, 581 citing Philippine
National Bank v. Court of Appeals, 328 Phil. 54, 62-63 (1996).
[67]
Art. 1308. The contracts must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.
[68]
Jose B.L. Reyes and Ricardo C. Puno, 4 AN OUTLINE OF PHILIPPINE
CIVIL LAW 1957 ed., p. 178.
[69]
Llorin v. Court of Appeals, G.R. No. 103592, 4 February 1993, 218 SCRA 438,
442.
[70]
Rollo, p. 147.
[71]
Supra note 66.
[72]
Id., pp. 608-609.
[73]
Sangrador v. Valderrama, G.R. No. 58122, 29 December 1989, 168 SCRA 215,
228 citing Filipino Pipe and Foundry Corporation v. National Waterworks
and Sewage Authority, G.R. No. L- 43446, 3 May 1988.
56

[74]

Citibank v. Sabeniano, supra note 58. See also Mobil Oil Philippines v. Court of
Appeals, G.R. No. 58122, 29 December 1989, 180 SCRA 651, 667.
[75]
Extraordinary inflation or deflation does not affect obligations which arise from
sources other than contracts. See Velasco v. Manila Electric Company, 149
Phil.657 (1971).
See CIVIL CODE, Art. 1157. The article provides:
Art. 1157. Obligations arise from:
1.
Law;
2.
Contracts;
3.
Quasi-contracts;
4.
Acts or omission punished by law; and
5.
Quasi-delicts.
[76]
Commissioner of Public Highway v. Burgos, G.R. No. L-36706, 31 March 1980,
96 SCRA 831, 837.
[77]
The requisites for Article 1250 apply to both extraordinary inflation and
deflation. This case involved extraordinary inflation because, as RTC Judge
Hontanosas noted, the peso substantially depreciated during the intervening
period.
For Article 1250 to apply, not only must the obligation be contractual, the
parties must more importantly agree to recognize the effects of extraordinary
inflation (or deflation, as the case may be). Here, despite the fact that the
obligation was contractual (i.e., a loan), neither the loan agreement nor the
promissory notes contained a provision stating that the parties agreed to
recognize the effects of extraordinary inflation or deflation. For this reason,
Article 1250 was inapplicable.
[78]
Bank of the Philippine Islands v. Leobrera, G.R. Nos. 137147-48, 18 November
2003, 416 SCRA 15, 19 citing C.F. Sharp & Co. v. Northwest Airlines,
Inc.,G.R. No. 133498, 18 April 2002, 381 SCRA 314. See also Jammang v.
Takahashi, G.R. No. 149429, 9 October 2006, 504 SCRA 31, 36. Note that
Equitable did not present proof that respondents agreed to pay their dollardenominated loans in US dollars.
[79]
Supercars Management & Development Corporation v. Flores, G.R. No.
148173, 10 December 2004, 446 SCRA 34, 44.
See CIVIL CODE, Art. 2217. The article provides:

57

Art. 2217. 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 estimation, moral damages may be recovered if they are the
proximate result of the defendant's wrongful act or omission. (emphasis
supplied)
[80]
Art. 2219. Moral damages may be recovered in the following and analogous
cases:
1.
A criminal offense resulting in physical injury;
2.
Quasi-delict causing physical injuries;
3.
Seduction, abduction, rape or other lascivious acts;
4.
Adultery or concubinage;
5.
Illegal or arbitrary detention or arrest;
6.
Illegal search;
7.
Libel, slander or any other form of defamation;
8.
Malicious prosecution;
9.
Acts mentioned in Art. 309;
10. Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30,
32, 34, and 35.
The parents of the female seduced, abducted, raped or abused, referred to in No. 3
of this article, may also recover moral damages.
The spouse, descendants, ascendants, brothers and sisters may bring the action
mentioned in No. 9 of this article, in the order named.
[81]
Art. 2220. Willful injury to property may be a legal ground for awarding moral
damages if the court should find that, under the circumstances, such
damages are justly due. The same rule applies to breaches of contract
where the defendant acted fraudulently or in bad faith. (emphasis
supplied)
[82]
Philippine National Bank v. Pike, G.R. No. 157845, 20 September 2005, 470
SCRA 328, 349-350 citing Philippine Telegraph & Telephone Corporation
v. Court of Appeals, G.R. No. 139268, 3 September 2002, 388 SCRA 270.
[83]
Id.
[84]
Id. citing Herbosa v. Court of Appeals, G.R. No. 119086, 25 January 2002, 374
SCRA 578. See also Salvador v. Court of Appeals, G.R. No. 124899, 30
March 2004, 426 SCRA 433.
[85]
Supra note 11.
[86]
Id.
58

[87]

Gullas v. National Bank, 62 Phil. 519, 521 (1935) citing Fulton Iron Works Co.
v. China Banking Corporation, 55 Phil. 208 (1930) and San Carlos Milling
Co. v. Bank of the Philippine Islands and China Banking Corporation, 59
Phil. 59 (1933).
[88]
Id., pp. 521-522.
[89]
Mahinay v. Velasquez, Jr., G.R. No. 152753, 13 January 2004, 419 SCRA 118,
122.
[90]
Supercars Management & Development Corporation v. Flores, supra note 79 at
44.
[91]
While this case involved extraordinary inflation because of the substantial
depreciation of the peso during the intervening period, Article 1250 of the
Civil Code was inapplicable. For Article 1250 to apply, not only must the
obligation be contractual, the parties must, more importantly, agree to
recognize the effects of extraordinary inflation (or deflation, as the case may
be). Here, despite the contractual obligation (i.e., a loan), neither the loan
agreement nor the promissory notes contained a provision stating that the
parties agreed to recognize the effects of extraordinary inflation or deflation.
(See note 77.)
[92]

G.R. No. 97412, 12 July 1994, 234 SCRA 74, 95.

59

Republic of the Philippines

Supreme Court
Manila

SECOND DIVISION

DELFIN TAN,

G.R. No. 153820

Petitioner,
Present:
*

QUISUMBING, J.,

CARPIO-MORALES,
**

- versus -

NACHURA,

BRION, and
ABAD, JJ.

60

ERLINDA C. BENOLIRAO,
ANDREW C. BENOLIRAO,
ROMANO C. BENOLIRAO,
DION C. BENOLIRAO,
SPS. REYNALDO TANINGCO

Promulgated:

and NORMA D. BENOLIRAO,

EVELYN T. MONREAL, and
ANN KARINA TANINGCO,

October 16, 2009

Respondents.

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

DECISION

BRION, J.:

Is an annotation made pursuant to Section 4, Rule 74 of the Rules of Court

(Rules) on a certificate of title covering real property considered an encumbrance
on the property? We resolve this question in the petition for review
on certiorari[1] filed by Delfin Tan (Tan) to assail the decision of the Court of
Appeals (CA) in CA-G.R. CV No. 52033[2] and the decision of the Regional Trial
61

Court (RTC)[3] that commonly declared the forfeiture of his P200,000.00 down
payment as proper, pursuant to the terms of his contract with the respondents.

THE ANTECEDENTS

The facts are not disputed. Spouses Lamberto and Erlinda Benolirao and the
Spouses Reynaldo and Norma Taningcowere the co-owners of a 689-square meter
parcel of land (property) located in Tagaytay City and covered by Transfer
Certificate of Title (TCT) No. 26423. On October 6, 1992, the co-owners executed
a Deed of Conditional Sale over the property in favor of Tan for the price
of P1,378,000.00. The deed stated:

a)

An initial down-payment of TWO HUNDRED (P200,000.00)

THOUSAND PESOS, Philippine Currency, upon signing of this contract;
then the remaining balance of ONE MILLION ONE HUNDRED
SEVENTY EIGHT THOUSAND (P1,178,000.00) PESOS, shall be
payable within a period of one hundred fifty (150) days from date hereof
without interest;

b)

That for any reason, BUYER fails to pay the remaining balance within
above mentioned period, the BUYER shall have a grace period of sixty
(60) days within which to make the payment, provided that there shall be
an interest of 15% per annum on the balance amount due from the
SELLERS;

c)

That should in case (sic) the BUYER fails to comply with the terms
and conditions within the above stated grace period, then the SELLERS
shall have the right to forfeit the down payment, and to rescind this
conditional sale without need of judicial action;
62

d)

That in case, BUYER have complied with the terms and conditions of
this contract, then the SELLERS shall execute and deliver to the BUYER
the appropriate Deed of Absolute Sale;

Pursuant to the Deed of Conditional Sale, Tan issued and delivered to the coowners/vendors Metrobank Check No. 904407 for P200,000.00 as down payment
for the property, for which the vendors issued a corresponding receipt.

On November 6, 1992, Lamberto Benolirao died intestate. Erlinda Benolirao

(his widow and one of the vendors of the property) and her children, as heirs of the
deceased, executed an extrajudicial settlement of Lambertos estate on January 20,
1993. On the basis of the extrajudicial settlement, a new certificate of title over the
property, TCT No. 27335, was issued on March 26, 1993 in the names of the
Spouses Reynaldo and Norma Taningco and Erlinda Benolirao and her
children. Pursuant to Section 4, Rule 74 of the Rules, the following annotation was
made on TCT No. 27335:

x x x any liability to credirots (sic), excluded heirs and other

persons having right to the property, for a period of two (2) years,
with respect only to the share of Erlinda, Andrew, Romano and Dion,
all surnamed Benolirao

As stated in the Deed of Conditional Sale, Tan had until March 15, 1993 to
pay the balance of the purchase price. By agreement of the parties, this period was
extended by two months, so Tan had until May 15, 1993 to pay the balance. Tan
63

failed to pay and asked for another extension, which the vendors again
granted. Notwithstanding this second extension, Tan still failed to pay the
remaining balance due on May 21, 1993. The vendors thus wrote him a letter
demanding payment of the balance of the purchase price within five (5) days from
notice; otherwise, they would declare the rescission of the conditional sale and the
forfeiture of his down payment based on the terms of the contract.

Tan refused to comply with the vendors demand and instead wrote them a
letter (dated May 28, 1993) claiming that the annotation on the title, made pursuant
to Section 4, Rule 74 of the Rules, constituted an encumbrance on the property that
would prevent the vendors from delivering a clean title to him. Thus, he alleged
that he could no longer be required to pay the balance of the purchase price and
demanded the return of his down payment.

When the vendors refused to refund the down payment, Tan, through
counsel, sent another demand letter to the vendors on June 18, 1993. The vendors
still refused to heed Tans demand, prompting Tan to file on June 19, 1993 a
complaint with the RTC of Pasay City for specific performance against the
vendors, including Andrew Benolirao, Romano Benolirao, Dion Benolirao as heirs
of Lamberto Benolirao, together with Evelyn Monreal and Ann Karina Taningco
(collectively, the respondents). In his complaint, Tan alleged that there was a
novation of the Deed of Conditional Sale done without his consent since the
annotation on the title created an encumbrance over the property. Tan prayed for
the refund of the down payment and the rescission of the contract.

On August 9, 1993, Tan amended his Complaint, contending that if the

respondents insist on forfeiting the down payment, he would be willing to pay the
balance of the purchase price provided there is reformation of the Deed of
Conditional Sale. In the meantime, Tan caused the annotation on the title of a
notice of lis pendens.

64

On August 21, 1993, the respondents executed a Deed of Absolute Sale over
the property in favor of Hector de Guzman (de Guzman) for the price
of P689,000.00.

Thereafter, the respondents moved for the cancellation of the notice of lis
pendens on the ground that it was inappropriate since the case that Tan filed was a
personal action which did not involve either title to, or possession of, real
property. The RTC issued an order dated October 22, 1993 granting the
respondents motion to cancel the lis pendens annotation on the title.

Meanwhile, based on the Deed of Absolute Sale in his favor, de Guzman

registered the property and TCT No. 28104 was issued in his name. Tan then filed
a motion to carry over the lis pendens annotation to TCT No. 28104 registered in
de Guzmans name, but the RTC denied the motion.

On September 8, 1995, after due proceedings, the RTC rendered judgment ruling
that the respondents forfeiture of Tans down payment was proper in accordance
with the terms and conditions of the contract between the parties.[4]The RTC
ordered Tan to pay the respondents the amount of P30,000.00, plus P1,000.00 per
court appearance, as attorneys fees, and to pay the cost of suit.

On appeal, the CA dismissed the petition and affirmed the ruling of the trial
court in toto. Hence, the present petition.

THE ISSUES

Tan argues that the CA erred in affirming the RTCs ruling to cancel the lis
pendens annotation on TCT No. 27335. Due to the unauthorized novation of the
65

agreement, Tan presented before the trial court two alternative remedies in his
complaint either the rescission of the contract and the return of the down payment,
or the reformation of the contract to adjust the payment period, so that Tan will pay
the remaining balance of the purchase price only after the lapse of the required
two-year encumbrance on the title. Tan posits that the CA erroneously disregarded
the alternative remedy of reformation of contract when it affirmed the removal of
the lis pendens annotation on the title.

Tan further contends that the CA erred when it recognized the validity of the
forfeiture of the down payment in favor of the vendors. While admitting that the
Deed of Conditional Sale contained a forfeiture clause, he insists that this clause
applies only if the failure to pay the balance of the purchase price was through his
own fault or negligence. In the present case, Tan claims that he was justified in
refusing to pay the balance price since the vendors would not have been able to
comply with their obligation to deliver a clean title covering the property.

Lastly, Tan maintains that the CA erred in ordering him to pay the
respondents P30,000.00, plus P1,000.00 per court appearance as attorneys fees,
since he filed the foregoing action in good faith, believing that he is in the right.

The respondents, on the other hand, assert that the petition should be dismissed for
raising pure questions of fact, in contravention of the provisions of Rule 45 of the
Rules which provides that only questions of law can be raised in petitions for
review on certiorari.

THE COURTS RULING

The petition is granted.

66

No new issues can be raised in the

Memorandum

At the onset, we note that Tan raised the following additional assignment of
errors in his Memorandum: (a) the CA erred in holding that the petitioner could
seek reformation of the Deed of Conditional Sale only if he paid the balance of the
purchase price and if the vendors refused to execute the deed of absolute sale; and
(b) the CA erred in holding that the petitioner was estopped from asking for the
reformation of the contract or for specific performance.

The Courts September 27, 2004 Resolution expressly stated that No new
issues may be raised by a party in his/its Memorandum. Explaining the reason for
this rule, we said that:

The raising of additional issues in a memorandum before the

Supreme Court is irregular, because said memorandum is supposed to
be in support merely of the position taken by the party concerned in
his petition, and the raising of new issues amounts to the filing of a
petition beyond the reglementary period. The purpose of this rule is to
provide all parties to a case a fair opportunity to be heard. No new
points of law, theories, issues or arguments may be raised by a party in
the Memorandum for the reason that to permit these would be
offensive to the basic rules of fair play, justice and due process.[5]

67

Tan contravened the Courts explicit instructions by raising these additional

errors. Hence, we disregard them and focus instead on the issues previously raised
in the petition and properly included in the Memorandum.

Petition raises a question of law

Contrary to the respondents claim, the issue raised in the present petition defined in
the opening paragraph of this Decision is a pure question of law. Hence, the
petition and the issue it presents are properly cognizable by this Court.

Lis pendens annotation not proper in

personal actions

Section 14, Rule 13 of the Rules enumerates the instances when a notice
of lis pendens can be validly annotated on the title to real property:

Sec. 14. Notice of lis pendens.

In an action affecting the title or the right of possession of
real property, the plaintiff and the defendant, when affirmative relief is
claimed in his answer, may record in the office of the registry of deeds
of the province in which the property is situated a notice of the
pendency of the action. Said notice shall contain the names of the
parties and the object of the action or defense, and a description of the
property in that province affected thereby. Only from the time of filing
such notice for record shall a purchaser, or encumbrancer of the
property affected thereby, be deemed to have constructive notice of
68

the pendency of the action, and only of its pendency against the
parties designated by their real names.

The notice of lis pendens hereinabove mentioned may be

cancelled only upon order of the court, after proper showing that the
notice is for the purpose of molesting the adverse party, or that it is
not necessary to protect the rights of the party who caused it to be
recorded.

The litigation subject of the notice of lis pendens must directly involve a
specific property which is necessarily affected by the judgment.[6]

Tans complaint prayed for either the rescission or the reformation of the
Deed of Conditional Sale. While the Deed does have real property for its object,
we find that Tans complaint is an in personam action, as Tan asked the court to
compel the respondents to do something either to rescind the contract and return
the down payment, or to reform the contract by extending the period given to pay
the remaining balance of the purchase price. Either way, Tan wants to enforce his
personal rights against the respondents, not against the property subject of the
Deed. As we explained in Domagas v. Jensen:[7]

The settled rule is that the aim and object of an action

determine its character. Whether a proceeding is in rem, or in
personam, or quasi in rem for that matter, is determined by its
nature and purpose, and by these only. A proceeding in personam is a
proceeding to enforce personal rights and obligations brought against
the person and is based on the jurisdiction of the person, although it
may involve his right to, or the exercise of ownership of, specific
property, or seek to compel him to control or dispose of it in
69

accordance with the mandate of the court. The purpose of a

proceeding in personam is to impose, through the judgment of a court,
some responsibility or liability directly upon the person of the
defendant. Of this character are suits to compel a defendant to
specifically perform some act or actions to fasten a pecuniary liability
on him.

Furthermore, as will be explained in detail below, the contract between the parties
was merely a contract to sell where the vendors retained title and ownership to the
property until Tan had fully paid the purchase price. Since Tan had no claim of
ownership or title to the property yet, he obviously had no right to ask for the
annotation of a lis pendensnotice on the title of the property.

Contract is a mere contract to sell

A contract is what the law defines it to be, taking into consideration its
essential elements, and not what the contracting parties call it. [8] Article 1485 of the
Civil Code defines a contract of sale as follows:

Art. 1458. By the contract of sale one of the contracting parties

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

A contract of sale may be absolute or conditional.

70

The very essence of a contract of sale is the transfer of ownership in exchange

for a price paid or promised.[9]

In contrast, a contract to sell is defined as a bilateral contract whereby the

prospective seller, while expressly reserving the ownership of the
property despite delivery thereof to the prospective buyer, binds himself to sell
the property exclusively to the prospective buyer upon fulfillment of the
condition agreed, i.e., full payment of the purchase price.[10] A contract to sell may
not even be considered as a conditional contract of sale where the seller may
likewise reserve title to the property subject of the sale until the fulfillment of a
suspensive condition, because in a conditional contract of sale, the first
element of consent is present, although it is conditioned upon the happening of a
contingent event which may or may not occur.[11]

In the present case, the true nature of the contract is revealed by paragraph D
thereof, which states:
xxx
d)

That in case, BUYER has complied with the terms and conditions of
this contract, then the SELLERS shall execute and deliver to the BUYER
the appropriate Deed of Absolute Sale;

xxx

Jurisprudence has established that where the seller promises to execute a

deed of absolute sale upon the completion by the buyer of the payment of the price,
the contract is only a contract to sell. [12] Thus, while the contract is denominated as
71

a Deed of Conditional Sale, the presence of the above-quoted provision identifies

the contract as being a mere contract to sell.

A Section 4, Rule 74 annotation is an

encumbrance on the property

While Tan admits that he refused to pay the balance of the purchase price, he
claims that he had valid reason to do so the sudden appearance of an annotation on
the title pursuant to Section 4, Rule 74 of the Rules, which Tan considered an
encumbrance on the property.

We find Tans argument meritorious.

The annotation placed on TCT No. 27335, the new title issued to reflect the
extrajudicial partition of Lamberto Benoliraos estate among his heirs, states:

x x x any liability to credirots (sic), excluded heirs and other

persons having right to the property, for a period of two (2)
years, with respect only to the share of Erlinda, Andrew, Romano
and Dion, all surnamed Benolirao[Emphasis supplied.]

This annotation was placed on the title pursuant to Section 4, Rule 74 of the
Rules, which reads:

72

Sec. 4. Liability of distributees and estate. - If it shall appear at any

time within two (2) years after the settlement and distribution of an
estate in accordance with the provisions of either of the first two
sections of this rule, that an heir or other person has been unduly
deprived of his lawful participation in the estate, such heir or such
other person may compel the settlement of the estate in the courts in
the manner hereinafter provided for the purpose of satisfying such
lawful participation. And if within the same time of two (2) years, it
shall appear that there are debts outstanding against the estate
which have not been paid, or that an heir or other person has been
unduly deprived of his lawful participation payable in money, the
court having jurisdiction of the estate may, by order for that
purpose, after hearing, settle the amount of such debts or lawful
participation and order how much and in what manner each
distributee shall contribute in the payment thereof, and may issue
execution, if circumstances require, against the bond provided in
the preceding section or against the real estate belonging to the
deceased, or both. Such bond and such real estate shall remain
charged with a liability to creditors, heirs, or other persons for the full
period of two (2) years after such distribution, notwithstanding any
transfers of real estate that may have been made. [Emphasis supplied.]

Senator Vicente Francisco discusses this provision in his book The Revised
Rules of Court in the Philippines,[13] where he states:

The provision of Section 4, Rule 74 prescribes the procedure to

be followed if within two years after an extrajudicial partition or
summary distribution is made, an heir or other person appears to have
been deprived of his lawful participation in the estate, or some
outstanding debts which have not been paid are discovered. When the
lawful participation of the heir is not payable in money, because,
73

for instance, he is entitled to a part of the real property that has

been partitioned, there can be no other procedure than to cancel
the partition so made and make a new division, unless, of
course, the heir agrees to be paid the value of his participation
with interest. But in case the lawful participation of the heir consists
in his share in personal property of money left by the decedent, or in
case unpaid debts are discovered within the said period of two years,
the procedure is not to cancel the partition, nor to appoint an
administrator to re-assemble the assets, as was allowed under the old
Code, but the court, after hearing, shall fix the amount of such debts
or lawful participation in proportion to or to the extent of the assets
they have respectively received and, if circumstances require, it may
issue execution against the real estate belonging to the decedent, or
both. The present procedure is more expedient and less expensive in
that it dispenses with the appointment of an administrator and does
not disturb the possession enjoyed by the distributees. [14] [Emphasis
supplied.]

An annotation is placed on new certificates of title issued pursuant to the

distribution and partition of a decedents real properties to warn third persons on the
possible interests of excluded heirs or unpaid creditors in these properties. The
annotation, therefore, creates a legal encumbrance or lien on the real property
in favor of the excluded heirs or creditors. Where a buyer purchases the real
property despite the annotation, he must be ready for the possibility that the
title could be subject to the rights of excluded parties. The cancellation of the
sale would be the logical consequence where: (a) the annotation clearly appears on
the title, warning all would-be buyers; (b) the sale unlawfully interferes with the
rights of heirs; and (c) the rightful heirs bring an action to question the transfer
within the two-year period provided by law.

As we held in Vda. de Francisco v. Carreon:[15]

74

And Section 4, Rule 74 xxx expressly authorizes the court to

give to every heir his lawful participation in the real estate
notwithstanding any transfers of such real estate and to issue
execution thereon. All this implies that, when within the amendatory
period the realty has been alienated, the court in re-dividing it
among the heirs has the authority to direct cancellation of such
alienation in the same estate proceedings, whenever it becomes
necessary to do so. To require the institution of a separate action for
such annulment would run counter to the letter of the above rule and
the spirit of these summary settlements. [Emphasis supplied.]

Similarly, in Sps. Domingo v. Roces,[16] we said:

The foregoing rule clearly covers transfers of real property

to any person, as long as the deprived heir or creditor vindicates his
rights within two years from the date of the settlement and distribution
of estate. Contrary to petitioners contention, the effects of this
provision are not limited to the heirs or original distributees of the
estate properties, but shall affect any transferee of the properties.
[Emphasis supplied.]

Indeed, in David v. Malay,[17] although the title of the property had already
been registered in the name of the third party buyers, we cancelled the sale and
ordered the reconveyance of the property to the estate of the deceased for proper
disposal among his rightful heirs.

75

By the time Tans obligation to pay the balance of the purchase price arose on
May 21, 1993 (on account of the extensions granted by the respondents), a new
certificate of title covering the property had already been issued onMarch 26, 1993,
which contained the encumbrance on the property; the encumbrance would remain
so attached until the expiration of the two-year period. Clearly, at this time, the
vendors could no longer compel Tan to pay the balance of the purchase since
considering they themselves could not fulfill their obligation to transfer a clean
title over the property to Tan.
Contract to sell is not rescinded but
terminated
What then happens to the contract?
We have held in numerous cases[18] that the remedy of rescission
under Article 1191 cannot apply to mere contracts to sell. We explained the reason
for this in Santos v. Court of Appeals,[19] where we said:
[I]n a contract to sell, title remains with the vendor and does not pass
on to the vendee until the purchase price is paid in full. Thus, in
a contract to sell, the payment of the purchase price is a positive
suspensive condition. Failure to pay the price agreed upon is not a
mere breach, casual or serious, but a situation that prevents the
obligation of the vendor to convey title from acquiring an
obligatory force. This is entirely different from the situation in a
contract of sale, where non-payment of the price is a negative
resolutory condition. The effects in law are not identical. In a contract
of sale, the vendor has lost ownership of the thing sold and cannot
recover it, unless the contract of sale is rescinded and set aside. In a
contract to sell, however, the vendor remains the owner for as long
as the vendee has not complied fully with the condition of paying
the purchase price. If the vendor should eject the vendee for failure
to meet the condition precedent, he is enforcing the contract and not
76

rescinding it. x x x Article 1592 speaks of non-payment of the

purchase price as a resolutory condition. It does not apply to a
contract to sell. As to Article 1191, it is subordinated to the provisions
of Article 1592 when applied to sales of immovable property. Neither
provision is applicable [to a contract to sell]. [Emphasis supplied.]

We, therefore, hold that the contract to sell was terminated when the vendors
could no longer legally compel Tan to pay the balance of the purchase price as a
result of the legal encumbrance which attached to the title of the property. Since
Tans refusal to pay was due to the supervening event of a legal encumbrance on the
property and not through his own fault or negligence, we find and so hold that the
forfeiture of Tans down payment was clearly unwarranted.

Award of Attorneys fees

As evident from our previous discussion, Tan had a valid reason for refusing
to pay the balance of the purchase price for the property. Consequently, there is no
basis for the award of attorneys fees in favor of the respondents.

On the other hand, we award attorneys fees in favor of Tan, since he was
compelled to litigate due to the respondents refusal to return his down payment
despite the fact that they could no longer comply with their obligation under the
contract to sell, i.e., to convey a clean title. Given the facts of this case, we find the
award of P50,000.00 as attorneys fees proper.

Monetary award is subject to legal interest

77

Undoubtedly, Tan made a clear and unequivocal demand on the vendors to

return his down payment as early as May 28, 1993. Pursuant to

our definitive ruling in Eastern Shipping Lines, Inc. v. Court of Appeals,[20] we hold
that the vendors should return the P200,000.00 down payment to Tan, subject to
the legal interest of 6% per annum computed from May 28, 1993, the date of the
first demand letter.

Furthermore, after a judgment has become final and executory, the rate of legal
interest, whether the obligation was in the form of a loan or forbearance of money
or otherwise, shall be 12% per annum from such finality until its satisfaction.
Accordingly, the principal obligation of P200,000.00 shall bear 6% interest from
the date of first demand or from May 28, 1993. From the date the liability for the
principal obligation and attorneys fees has become final and executory, an annual
interest of 12% shall be imposed on these obligations until their final satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of
credit.

WHEREFORE, premises considered, we hereby GRANT the petition and,

accordingly, ANNUL and SET ASIDE the May 30, 2002 decision of the Court of
Appeals in CA-G.R. CV No. 52033. Another judgment is rendered declaring the
Deed of Conditional Sale terminated and ordering the respondents to return
the P200,000.00 down payment to petitioner Delfin Tan, subject to legal interest of
6% per annum, computed from May 28, 1993. The respondents are also ordered to
pay, jointly and severally, petitioner Delfin Tan the amount of P50,000.00 as and
by way of attorneys fees. Once this decision becomes final and
78

executory, respondents are ordered to pay interest at 12% per annum on the
principal obligation as well as the attorneys fees, until full payment of these
amounts. Costs against the respondents.

SO ORDERED.

ARTURO D. BRION
Associate Justice

WE CONCUR:

LEONARDO A. QUISUMBING
Associate Justice
Chairperson

CONCHITA CARPIO MORALES

ANTONIO EDUARDO B. NACHURA

Associate Justice

Associate Justice

79

ROBERTO A. ABAD
Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, it is

hereby certified that the conclusions in the above Decision were
reached in consultation before the case was assigned to the writer
of the opinion of the Courts Division.

LEONARDO A. QUISUMBING
Acting Chief Justice

Designated Acting Chief Justice effective October 12 to 16, 2009 per Special
Order No. 721 dated October 5, 2009.

**

Designated additional Member of the Second Division effective October 7,

2009 per Special Order No. 730 dated October 5, 2009.

[1]

Under Rule 45 of the Rules of Court, dated July 25, 2002; rollo, pp. 30-50.
80

[2]

Penned by Associate Justice Romeo J. Callejo, Sr. (retired member of this

Court), with the concurrence of Associate Justice Remedios Salazar-Fernando
and Associate Justice Danilo B. Pine; id., pp. 6- 26.

[3]

Dated September 8, 1995; id, pp. 76-82.

[4]

Id., pp. 76-82.

[5]

Heirs of Marasigan v. Marasigan, G.R. No. 156078, March 14, 2008, 548 SCRA
409.

[6]

Heirs of Eugenio Lopez, Sr. v. Enriquez, G.R. No. 146262, January 21, 2005, 449
SCRA 173.

[7]

G.R. No. 158407, January 17, 2005, 448 SCRA 663.

[8]

Quiroga v. Parsons Hardware Co., 38 Phil. 501 (1918).

[9]

Schmid & Oberly, Inc. v. RJL Martinez Fishing Corp., G.R. No. 75198, October
18, 1988, 166 SCRA 493, citing Commissioner of Internal Revenue v.
Constantino, 31 SCRA 779 (1970); Ker & Co., Ltd. v. Lingad, No. L20871, April 30, 1971, 38 SCRA 524, citing Salisbury v. Brooks, 94 SE 117
(1917).

[10]

Sps. Ebrada v. Sps. Ramos, G.R. No. 154413, August 31, 2005, 468 SCRA 597.

[11]

Sps. Reyes v. Salvador, et al., G.R. No. 139047, September 11, 2008,
citing Coronel v. CA, 263 SCRA 15 (1996).

[12]

Philippine National Bank v. Court of Appeals, 330 Phil. 1048 (1996).

[13]

Volume V-A (1970 ed.).

[14]

Id., pp. 701-702, citing McMicking v. Sy Combieng, 21 Phil. 211 (1912); Lopez
v. Enriquez, 16 Phil. 336 (1910); Espino v. Rovira, 50 Phil. 152 (1927).

[15]

95 Phil. 237 (1954).

81

[16]

G.R. No. 147468, April 9, 2003, 401 SCRA 197.

[17]

G.R. No. 132644, November 19, 1999, 318 SCRA 711.

[18]

Gomez v. Court of Appeals, G.R. No. 120747, September 21, 2000, 340 SCRA
720; Padilla v. Paredes, G.R. No. 124874, March 17, 2000, 328 SCRA
434; Valarao v. Court of Appeals, G.R. No. 130347, March 3, 1999, 304 SCRA
155; Pangilinan v. Court of Appeals, G.R. No. 83588, September 29, 1997, 279
SCRA 590; Rillo v. Court of Appeals, G.R. No. 125347, June 19, 1997, 274
SCRA 461.

[19]

G.R. No. 120820, August 1, 2000, 337 SCRA 67.

[20]

G.R. No. 97412, July 12, 1994, 234 SCRA 78.

The Court held:

2. When an obligation, not constituting a loan or forbearance of money, is

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

82

FIRST DIVISION

JOSEFA S. ABALOS* AND

THE DEVELOPMENT BANK
OF THE PHILIPPINES,

G.R. No. 164693

Petitioners,
Present:

CORONA, C.J.,
Chairperson,
VELASCO, JR.,
- versus -

LEONARDO-DE
CASTRO,
DEL CASTILLO, and
PEREZ, JJ.

Promulgated:
83

SPS. LOMANTONG DARAPA

AND SINAB DIMAKUTA,

March 23, 2011

Respondents.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION
PEREZ, J.:

The petitioner, Development Bank of the Philippines (DBP), files the present
petition for review on certiorari viaRule 45 of the Rules of Court,[1] asking us to
reverse and set aside the Court of Appeals decision in CA G.R. CV. No. 70693
dated 26 September 2003[2] which affirmed the decision of the Regional Trial Court
(RTC), Branch 3, Iligan City.[3]

BACKGROUND FACTS

On 25 June 1962, petitioner DBP, Ozamis Branch, granted a P31,000.00

loan to respondent spouses Lomantong Darapa and Sinab Dimakuta (spouses) who
executed therefore a real and chattel mortgage contract, which covered, among
others, the following:

A warehouse to house the rice and corn mill, xxx constructed

on a 357 square meter lot situated at poblacion, Linamon, Lanao
del Norte which lot is covered by Tax Declaration No. A-148 of
Linamon, Lanao del Norte.

The equity rights, participation and interest of the mortgagors over

the above-mentioned parcel of land on which the bodega is
84

constructed situated in the Municipality of Linamon, Province of

Lanao del Norte, containing an area of 357 square meters, more
or less, declared for tax purposes in the name of Sinab
Dimakuta and assessed at P2,430.00 per Tax Declaration No. A-148
for the year 1961 and bounded as follows: on the North by Rafael
Olaybar; on the South, by National Road[;] on the East by Ulpiano
Jimenez; on the West, by Rafael Olaybar; of which property the
mortgagors are in complete and absolute possession. x x x.

The aforesaid equity rights, participation and interest of the

mortgagors in said parcel of land are not registered under the Spanish
Mortgage Law nor under Act 496 and the parties hereto hereby agree
that this instrument shall be registered under Act 3344, as amended.

It is further the agreement of the parties that immediately after the

mortgagors acquire absolute ownership of the land above-mentioned
on which the aforementioned building is erected by means of a free or
sales patent or any other title vesting them with ownership in fee
simple, the Mortgagors shall execute a Real Estate Mortgage thereon
in favor of the Mortgagee, the Development Bank of the Philippines,
to replace and substitute only, this portion of the herein mortgage
contract.[4]

The assignment of the spouses equity rights over the land covered by Tax
Declaration No. A-148 in DBPs favor was embedded in the Deed of Assignment of
Rights and Interests[5] which the spouses executed simultaneous with the real and
chattel mortgage contract.

In 1970, the spouses applied for the renewal and increase of their loan using Sinab
Dimakutas (Dimakuta) Transfer Certificate of Title (TCT) No. T-1,997 as
85

additional collateral. The DBP disapproved the loan application without returning,
however, Dimakutas TCT.

When the spouses failed to pay their loan, DBP extrajudicially foreclosed the
mortgages on 16 September 1971, which, unknown to the spouses, included the
TCT No. T-1,997. The spouses failed to redeem the land under TCT No. T-1,997
which led to its cancellation, and, the eventual issuance of TCT No. T-7746 in
DBPs name.

In 1984, the spouses discovered all these and they immediately consulted a
lawyer who forthwith sent a demand letter to the bank for the reconveyance of the
land. The bank assured them of the return of the land. In 1994, however, a bank
officer told them that such is no longer possible as the land has already been
bought by Abalos, daughter of the then provincial governor.

On 12 May 1994,[6] the DBP sold the land to its co-petitioner Josefa Abalos
(Abalos). The TCT No. T-7746 (originally TCT No. T-1,997) was cancelled and on
6 July 1994, T-16,280 was issued in Abalos name.[7]

On 20 August 1994,[8] the spouses filed with the RTC of Iligan City, a
Complaint for Annulment of Title, Recovery of Possession and Damages, against
DBP and Abalos.[9]

The spouses averred that TCT No. T-1,997 was not one of the mortgaged
properties, and, thus, its foreclosure by DBP and its eventual sale to Abalos was
null and void.

On the other hand, DBP countered that TCT No. T-1,997 had its roots in Tax
Declaration No. A-148, which the spouses mortgaged with the DBP in 1962 as
evidenced by the Real Estate Mortgage and the Deed of Assignment. Abalos, on
her part, contended that she was an innocent purchaser for value who relied in
good faith on the cleanliness of the DBPs Title.
86

The RTC, in a Decision dated 29 November 2000, annulled the DBPs

foreclosure sale of the land under TCT No. T-1,997 and its sale to Abalos; further,
it declared Dimakuta as the lands lawful owner. Thus:

WHEREFORE, premises all considered, judgment is hereby rendered:

1.

Declaring the foreclosure of TCT No. T-1,997, the Sheriffs

Certificate of Sale dated September 20, 1971 as far as TCT No. T1,997 is concerned and the Affidavit of Consolidation of
Ownership dated October 19, 1978, also insofar as it included TCT
No. T-1,997 null and void ab initio;

2.

Annulling TCT No. T-7746 in the name of DBP and TCT No.
T-16,280 in the name of defendant Josepha S. Abalos;

3.

Declaring plaintiff Sinab Dimakuta the lawful owner of the land

covered by TCT No. T-1,997. For this purpose, the Registrar of
Deeds of Lanao del Norte is ordered to reinstate TCT No. T-1,997
in the name of Sinab Dimakuta and perforce cancel TCT No. T16,280 in the name of Josefa Abalos and the latter to surrender
possession of the lot covered by TCT No. 1,997 to plaintiff Sinab
Di[m]akuta;

4.

Ordering
DBP to
pay
plaintiffs P50,000.00
moral
damages; P20,000.00 exemplary damages and P20,000.00
attorneys fees;

87

5.

Directing DBP to pay defendant Josefa Abalos the current fair

market value of TCT No. T-1,997 plus actual damages
of P50,000.00; moral damages of P50,000.00, exemplary damages
of P20,000.00 and attorneys fees of P20,000.00.[10]

The DBP and Abalos assailed the RTC decision before the Court of
Appeals; Abalos, however, later abandoned her appeal.

The Court of Appeals denied the petition in a Decision dated 26 September

2003. It ratiocinated that DBP had no right to foreclose the land under TCT No. T1,997, it not having been mortgaged:[11]

WHEREFORE, premises considered, the instant appeal is

hereby DISMISSED for lack of merit. The assailed 29 November
2000 Decision of the court is hereby AFFIRMED.[12]
Hence, this petition for review on certiorari.

In the main, DBP wants to convince this Court that the land covered by Tax
Declaration No. A-148 mortgaged in 1962, then untitled, is the same land now
covered by TCT No. T-1,997[13] and that DBP came to its possession when the
spouses voluntarily delivered the title in 1970 to the banks manager, Tauti R.
Derico, who executed an affidavit which stated that:

x x x the land covered by Tax Declaration No. A-148 and TCT No. T1,997 are one and the same parcel of land which was mortgaged to the
Development Bank of the Philippines.[14]

OUR RULING
88

We find the petition unmeritorious, and thus, affirm the Court of Appeals.

It is fundamental procedural law that a petition for review on certiorari filed

with this Court under Rule 45 of the Rules of Civil Procedure shall, as a general
rule, raise only questions of law.[15]

A question of law arises when there is doubt as to what the law is on a

certain state of facts[16] this is in contradistinction from a question of fact which
arises from doubt as to the truth or falsity of the alleged facts. [17] A question of law
does not involve an examination of the probative value of the evidence presented
by the litigants or any of them[18] and the resolution of the issue must rest solely on
what the law provides on the given set of circumstances.[19]

The DBPs insistence that TCT No. T-1,997 is the same land covered by Tax
Declaration No. A-148 is to ask the Court to evaluate the pieces of evidence passed
upon by the RTC and the Court of Appeals. To grant this petition will entail the
Court's review and determination of the weight, credence, and probative value of
the evidence presented at the trial court matters which, without doubt, are factual
and, therefore, outside the ambit of Rule 45.

Petitioners ought to remember that the Court of Appeals factual findings,

affirming that of the trial court, are final and conclusive on this Court and may not
be reviewed on appeal, except for the most compelling of reasons, such as when:
(1) the conclusion is grounded on speculations, surmises or conjectures; (2) the
inference is manifestly mistaken, absurd or impossible; (3) there is grave abuse of
discretion; (4) the judgment is based on a misapprehension of facts; (5) the
findings of fact are conflicting; (6) there is no citation of specific evidence on
which the factual findings are based; (7) the findings of absence of facts are
contradicted by the presence of evidence on record; (8) the findings of the Court of
Appeals are contrary to those of the trial court; (9) the Court of Appeals manifestly
overlooked certain relevant and undisputed facts that, if properly considered,
would justify a different conclusion; (10) the findings of the Court of Appeals are
89

beyond the issues of the case; and (11) such findings are contrary to the admissions
of both parties.[20] None of the exceptions is present in this petition.

In any event, we have meticulously reviewed the cases records and found no
reason to disturb the findings of the RTC as affirmed by the Court of Appeals. The
records reveal that the land covered by TCT No. T-1,997 was not among the
properties, the spouses mortgaged with the DBP in 1962.[21]
No less than the 1962 mortgage contract and its accompanying deed of
assignment show that the land covered by Tax Declaration No. A-148 is located in
Linamon, Lanao del Norte with an area of 357 square meters and bounded on the
north by Rafael Olaybar; on the south, by National Road; on the east by Ulpiano
Jimenez; and, on the west, by Rafael Olaybar.[22]

On the other hand, the land covered by TCT No. T-1,997 is situated
in Barrio Buru-an, Municipality of Iligan, Lanao del Norte and contains an area of
342 square meters.[23] TCT No. T-1,997 traces its roots in Original Certificate of
Title (OCT) No. RP-407 (244), pursuant to a Homestead patent granted by the
President of the Philippines in 1933 under Act No. 2874, and which was registered
as early as 26 June 1933 as recorded in Registration Book No. I, page 137 of the
Office of the Register of Deeds, Lanao del Norte.[24]

That TCT No. T-1,997 was not included in the 1962 mortgage was also
admitted by the DBPs former property examiner and appraiser, Mamongcarao Blo,
who testified that he was the person who examined and appraised the lands which
the spouses mortgaged with the DBP, and that he never examined any land
in Barrio Buru-an, Linamon, as described in TCT No. T-1,997.[25] Even the banks
own witness, Marie Magsangcay (Magsangcay), the DBPs Executive Officer,
claimed during the direct examination that the questioned TCT originated from
OCT No. P-1485, an entirely different land as the trial court would later discover.
[26]
Magsangcays testimony contradicted the banks consistent claim that TCT No.
T-1,997 originated from Tax Declaration No. A-148.
These blatant inconsistencies make the DBPs contention incredulous. Other
than the questionable annotation at the back of Dimakutas TCT No. T-1,997,
claiming that this TCT originated from Tax Declaration No. A-148, DBP submitted
90

nothing more to substantiate its claim that these two documents refer to the land
mortgaged in 1962; DBP did not even bother to submit the Tax Declaration, under
which its claim is based. The annotation of such unilateral claim at the back of
Dimakutas TCT cannot improve petitioners position. This undated annotation
should have been disallowed outright for being violative of Sections 60 [27] in
relation to Section 54, and Section 61 [28] of the Presidential Decree No. 1529,
[29]
otherwise known as the Property Registration Decree basic provisions, which
every Register of Deeds is presumed to know. The DBPs annotation that the
property originally covered by Tax Declaration No. A-148 is now covered by TCT
No. T-1,997[30] is neither the deed nor the instrument referred to by Sections 60 and
61 of the above quoted law and such annotation will in no way change the fact that
the two documents refer to different lands: one, which was indeed a subject of the
mortgage contract; and two, which Dimakuta had delivered to DBP in 1970
supposedly for another loan, but, which was, however, disapproved. It should be
underscored that it was this annotation, albeit irregular, that paved to the sale of the
land now in question.

Needles to say, the bank utterly failed to establish, by preponderance of

evidence, that TCT No. T-1,997 originated from Tax Declaration No. A-148.

Thus, we find no reversible error in the RTC and the Court of Appeals
findings that the DBPs foreclosure sale of the land under TCT No. T-1,997 was
null and void.

The Court also finds unmeritorious the DBPs contention that the spouses
cause of action is barred by estoppel, laches and prescription. DBP claims that the
failure of the spouses to redeem their property estopped them from questioning the
validity of the foreclosure sale; and, that laches and prescription have already set in
because the spouses filed their action only after the lapse of 16 years [31] from the
issuance of DBPs title.
In Pacific Mills, Inc. v. Court of Appeals, [32] we laid down the requisites
of estoppel as follows: (a) 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; (b) intent, or at least expectation that this conduct
91

shall be acted upon, or at least influenced by the other party; and (c) knowledge,
actual or constructive, of the factual facts.[33]
In the present petition, it cannot be concluded that the spouses are guilty
of estoppel for the requisites are not attendant.

Laches, on the other hand, is a doctrine meant to bring equity not to further
oppress those who already are.Laches has been defined as neglect or omission to
assert a right, taken in conjunction with lapse of time and other circumstances
causing prejudice to an adverse party, as will operate as a bar in equity. [34] It is a
delay in the assertion of a right which works disadvantage to another because of
the inequity founded on some change in the condition or relations of the property
or parties.[35]

The elements of laches must, however, be proved positively because it is

evidentiary in nature and cannot be established by mere allegations in the
pleadings.[36] These are but factual in nature which the Court cannot grant without
violating the basic procedural tenet that, as discussed, the Court is not trier of
facts. Yet again, the records as established by the trial court show that it was rather
the DBPs tactic which delayed the institution of the action. DBP made the spouses
believe that there was no need to institute any action for the land would be returned
to the spouses soon, only to be told, after ten (10) years of naivet, that
reconveyance would no longer be possible for the same land was already sold to
Abalos, an alleged purchaser in good faith and for value.

The Court also disagrees with the DBPs contention that for failure to
institute the action within ten years from the accrual of the right thereof,
prescription has set in, barring the spouses from vindicating their transgressed
rights.

The DBP contends that the prescriptive period for the reconveyance of
fraudulently registered real property is ten (10) years reckoned from the date of the
issuance of the certificate of title.[37]
92

While the above disquisition of the DBP is true, the 10-year prescriptive
period applies only when the reconveyance is based on fraud which makes a
contract voidable (and that the aggrieved party is not in possession of the land
whose title is to be actually reconveyed). It does not apply to an action to nullify a
contract which is void ab initio, as in the present petition. Article 1410 of the Civil
Code categorically states that an action for the declaration of the inexistence of a
contract does not prescribe.[38]

The spouses action is an action for Annulment of Title, Recovery of

Possession and Damages,[39] grounded on the theory that the DBP foreclosed their
land covered by TCT No. T-1,997 without any legal right to do so, rendering the
sale and the subsequent issuance of TCT in DBPs name void ab initio and subject
to attack at any time conformably to the rule in Article 1410 of the Civil Code.

In finis, the Court notes that Abalos, DBPs co-defendant, was ordered by the
RTC to return to the spouses the land she bought from DBP; the RTC also ordered
the cancellation of Abalos title. Abalos, however, abandoned her appeal then
pending before the Court of Appeals, resulting in its dismissal. In this Courts
Resolution dated 13 February 2006, she was subsequently dropped as partypetitioner. By abandoning her appeal, the RTC decision with respect to her, thus,
became final.
IN LIGHT OF THE FOREGOING, the petition is DENIED. The
Decision of the Court of Appeals in CA-G.R. CV. No. 70693 dated 26 September
2003 is AFFIRMED.

SO ORDERED.

JOSE PORTUGAL PEREZ

Associate Justice
93

WE CONCUR:

RENATO C. CORONA
Chief Justice
Chairperson

PRESBITERO J. VELASCO, JR. TERESITA J. LEONARDO-DE CASTRO

Associate Justice Associate Justice

MARIANO C. DEL CASTILLO

Associate Justice

CERTIFICATION
94

Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified

that the conclusions in the above Decision were reached in consultation before the
case was assigned to the writer of the opinion of the Court.

RENATO C. CORONA
Chief Justice

* The Courts Resolution dated 13 February 2006 dropped Josefa S. Abalos

participation as party-petitioner due to her abandonment pending appeal with
the Court of Appeals.
[1]

Petition. Rollo, pp. 9-36.

[2]

Penned by Associate Justice Andres B. Reyes with Associate Justices

Buenaventura J. Guerrero and Regalado E. Maambong, concurring. Id. at
39-54.

[3]

Id. at 54.

[4]

Mortgage of Contract. Id. at 134 (at the back page).

[5]

Records, p. 206. Exhibit II.

[6]

Petition. Rollo, p. 15.

[7]

Transfer of Certificate of Title No. T-16,280. Id. at 133.

95

[8]

Records, p. 7.

[9]

Id. at 1-8.

[10]

Decision of the RTC. Id. at 263-264.

[11]

Rollo, p. 51.

[12]

Id. at 54.

[13]

Id. at 19-23.

[14]

Id. at 13.

[15]

THE 1997 REVISED RULES OF COURT, Rule 45.

Section 1. Filing of petition with the Supreme Court. A party desiring to
appeal by certiorari from a judgment or final order or resolution of the
Court of Appeals, the Sandiganbayan, the Regional Trial Court or other
courts whenever authorized by law, may file with the Supreme Court a
verified petition for review on certiorari. The petition shall raise only
questions of law which must be distinctly set forth.

[16]

Marcelo v. Bungubong, G.R. No. 175201, 23 April 2008, 552 SCRA 589, 605.

[17]

Vector Shipping Corporation v. Macasa, G.R. No. 160219, 21 July 2008, 97

SCRA 105.

[18]

Binay v. Odea, G.R. No. 163683, 8 June 2007, 524 SCRA 248, 255-256.

[19]

Id.

[20]

International Container Terminal Services, Inc. v. FGU Insurance

Corporation, G.R. No. 161539, 28 June 2008, 556 SCRA 194, 119.

[21]

Rollo, p. 53.

[22]

Id. at 11.

[23]

Id. at 125.

[24]

Id. at 125.
96

[25]

Records, p. 13.

[26]

Id. at 33.

[27]

Sec. 60. Mortgage or lease of registered land. Mortgages and leases shall be
registered in the manner provided in Section 54 of this Decree. The owner of
the registered land may mortgage or lease it by executing the deed in a form
sufficient in law. Such deed of mortgage or lease and all instruments which
assign, extend discharge or otherwise deal with the mortgage or lease shall
be registered, and shall take effect upon the title only from time of
registration.

[28]

Sec. 61. Registration. Upon presentation for registration of the deed of

mortgage or lease together with the owners duplicate, the Register of Deeds
shall enter upon the Original Certificate of title and also upon the owners
duplicate certificate a memorandum thereof, the date and time of filing and
the file number assigned to the deed, and shall sign the said memorandum.
He shall also9 note on the deed the date and time of filing and a reference to
the volume and page of the registration book in which it is registered.

[29]

AMENDING AND CODIFYING THE LAWS RELATIVE TO

REGISTRATION OF PROPERTY AND FOR OTHER PURPOSES. Signed
into law on June 11, 1978.

[30]

Rollo, p. 125 (at the back page).

[31]

Id. at 130.

[32]

513 Phil. 534 (2005).

[33]

Id. at 544.

[34]

De Vera-Cruz v. Miguel, G.R. No. 144103, 31 August 2005, 468 SCRA 506,
518.

[35]

Id.

[36]

Department of Education v. Oate, G.R. No. 161758, 8 June 2007, 524 SCRA
200, 216.
97

[37]

Rollo, p. 30.

[38]

Art. 1410. The action or defense for the declaration of the inexistence of a
contract does not prescribe.

[39]

Rollo, p. 58.

98

FIRST DIVISION

REPUBLIC
OF
THE
PHILIPPINES, represented
by
the CHIEF OF THEPHILIPPINE
NATIONAL POLICE,
Petitioner,

G.R. No. 175021

Present:
VELASCO, JR .,*
Acting Chairperson,
LEONARDO-DE CASTRO,
BERSAMIN,**
DEL CASTILLO, and

- versus -

PEREZ, JJ.
Promulgated:

THI THU THUY T. DE GUZMAN,

Respondent.

June 15, 2011

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

DECISION

99

LEONARDO-DE CASTRO, J.:

This is a Petition for Review on Certiorari[1] filed by Republic of the

Philippines, as represented by the Chief of the Philippine National Police (PNP), of
the September 27, 2006 Decision[2] of the Court of Appeals in CA-G.R. CV No.
80623, which affirmed with modification the September 8, 2003 Decision [3] of the
Regional Trial Court (RTC), Branch 222, of Quezon City in Civil Case No. Q9937717.

Respondent is the proprietress of Montaguz General Merchandise (MGM),

a contractor accredited by the PNP for the supply of office and construction
materials and equipment, and for the delivery of various services such as printing
and rental, repair of various equipment, and renovation of buildings, facilities,
vehicles, tires, and spare parts.[5]
[4]

On December 8, 1995, the PNP Engineering Services (PNPES), released a

Requisition and Issue Voucher[6]for the acquisition of various building materials
amounting to Two Million Two Hundred Eighty-Eight Thousand Five Hundred
Sixty-Two Pesos and Sixty Centavos (P2,288,562.60) for the construction of a
four-storey condominium building with roof deck at Camp Crame, Quezon City.[7]

Respondent averred that on December 11, 1995, MGM and petitioner,

represented by the PNP, through its chief, executed a Contract of Agreement [8] (the
Contract) wherein MGM, for the price of P2,288,562.60, undertook to procure and
deliver to the PNP the construction materials itemized in the purchase
order[9] attached to the Contract. Respondent claimed that after the PNP Chief
approved the Contract and purchase order,[10] MGM, on March 1, 1996, proceeded
with the delivery of the construction materials, as evidenced by Delivery Receipt
Nos. 151-153,[11] Sales Invoice Nos. 038 and 041,[12] and the Report of Public
Property Purchase[13] issued by the PNPs Receiving and Accounting Officers to
their Internal Auditor Chief. Respondent asseverated that following the PNPs
100

inspection of the delivered materials on March 4, 1996,[14] the PNP issued two
Disbursement Vouchers; one in the amount of P2,226,147.26 in favor of MGM,
[15]
and the other, [16] in the amount of P62,415.34, representing the three percent
(3%) withholding tax, in favor of the Bureau of Internal Revenue (BIR).[17]

On November 5, 1997, the respondent, through counsel, sent a letter dated

October 20, 1997[18] to the PNP, demanding the payment of P2,288,562.60 for the
construction materials MGM procured for the PNP under their December 1995
Contract.

On November 17, 1997, the PNP, through its Officer-in-Charge, replied [19] to
respondents counsel, informing her of the payment made to MGM via Land Bank
of the Philippines (LBP) Check No. 0000530631, [20] as evidenced by Receipt No.
001, [21] issued by the respondent to the PNP on April 23, 1996.[22]

On November 26, 1997, respondent, through counsel, responded by

reiterating her demand[23] and denying having ever received the LBP check,
personally or through an authorized person. She also claimed that Receipt No. 001,
a copy of which was attached to the PNPs November 17, 1997 letter, could not
support the PNPs claim of payment as the aforesaid receipt belonged to Montaguz
Builders, her other company, which was also doing business with the PNP, and not
to MGM, with which the contract was made.

On May 5, 1999, respondent filed a Complaint for Sum of Money against

the petitioner, represented by the Chief of the PNP, before the RTC, Branch 222 of
Quezon City.[24] This was docketed as Civil Case No. Q99-37717.

The petitioner filed a Motion to Dismiss [25] on July 5, 1999, on the ground
that the claim or demand set forth in respondents complaint had already been paid
or extinguished,[26] as evidenced by LBP Check No. 0000530631 dated April 18,
101

1996, issued by the PNP to MGM, and Receipt No. 001, which the respondent
correspondingly issued to the PNP. The petitioner also argued that aside from the
fact that the respondent, in her October 20, 1997 letter, demanded the incorrect
amount since it included the withholding tax paid to the BIR, her delay in making
such demand [did] not speak well of the worthiness of the cause she espouse[d].[27]

Respondent opposed petitioners motion to dismiss in her July 12, 1999

Opposition[28]and September 10, 1999 Supplemental Opposition to Motion to
Dismiss.[29] Respondent posited that Receipt No. 001, which the petitioner claimed
was issued by MGM upon respondents receipt of the LBP check, was, first, under
the business name Montaguz Builders, an entity separate from MGM. Next,
petitioners allegation that she received the LBP check on April 19, 1996 was belied
by the fact that Receipt No. 001, which was supposedly issued for the check, was
dated four days later, or April 23, 1996. Moreover, respondent averred, the PNPs
own Checking Account Section Logbook or the Warrant Register, showed that it
was one Edgardo Cruz (Cruz) who signed for the check due to MGM, [30]contrary
to her usual practice of personally receiving and signing for checks payable to her
companies.

After conducting hearings on the Motion to Dismiss, the RTC issued an

Order on May 4, 2001, denying the petitioners motion for lack of merit. The
petitioner thereafter filed its Answer,[32] wherein it restated the same allegations in
its Motion to Dismiss.
[31]

Trial on the merits followed the pre-trial conference, which was terminated
on June 25, 2002 when the parties failed to arrive at an amicable settlement.[33]

On September 3, 2002, shortly after respondent was sworn in as a witness,

and after her counsel formally offered her testimony in evidence, Atty. Norman
Bueno, petitioners counsel at that time, made the following stipulations in open
court:
102

Atty. Bueno (To Court)

Your Honor, in order to expedite the trial, we will admit that this
witness was contracted to deliver the construction
supplies or materials. We will admit that she complied,
that she actually delivered the materials. We will
admit that Land Bank Corporation check was issued
although we will not admit that the check was not
released to her, as [a] matter of fact, we have the copy of
the check. We will admit that Warrant Register indicated
that the check was released although we will not admit
that the check was not received by the [respondent].

Court (To Atty. Albano)

So, the issues here are whether or not the [respondent] received the
check for the payment of the construction materials or
supplies and who received the same. That is all.

Atty. Albano (To Court)

Yes, your Honor.

Court (To Atty. Albano)

103

I think we have an abbreviated testimony here. Proceed.[34] (Emphasis

ours.)

The stipulations made by the petitioner through Atty. Bueno were in

consonance with the admissions it had previously made, also through Atty. Bueno,
in its Answer,[35] and pre-trial brief[36]:

Answer:
IX
It ADMITS the allegation in paragraph 9 of the Complaint that
[respondent] delivered to the PNP Engineering Service the
construction materials. It also ADMITS the existence of Receipt Nos.
151, 152 and 153 alleged in the same paragraph, copies of which are
attached to the Complaint as Annexes G, G-1 and G-2.[37] (Emphasis
ours.)

Pre-trial Brief:

III

ADMISSIONS

3.1. Facts and/or documents admitted

104

For brevity, [petitioner] admit[s] only the allegations in [respondents]

Complaint and the annexes thereto that were admitted in the
Answer.[38] (Emphases ours.)

With the issue then confined to whether respondent was paid or not, the RTC
proceeded with the trial.

Respondent, in her testimony, narrated that on April 18, 1996, she went to
the PNP Finance Center to claim a check due to one of her companies, Montaguz
Builders. As the PNP required the issuance of an official receipt upon claiming its
checks, respondent, in preparation for the PNP check she expected, already signed
Montaguz Builders Official Receipt No. 001, albeit the details were still
blank. However, upon arriving at the PNP Finance Center, respondent was told that
the check was still with the LBP, which could not yet release it. Respondent then
left for the Engineering Services Office to see Captain Rama, along with Receipt
No. 001, which she had not yet issued. [39]Respondent claimed that after some time,
she left her belongings, including her receipt booklet, at a bench in Captain Ramas
office when she went around the Engineering Office to talk to some other people.
[40]
She reasoned that since she was already familiar and comfortable with the
people in the PNPES Office, she felt no need to ask anyone to look after her
belongings, as it was her normal practice[41] to leave her belongings in one of the
offices there. The next day, respondent alleged that when she returned for the
check due to Montaguz Builders that she was not able to claim the day before, she
discovered for the first time that Receipt No. 001, which was meant for that check,
was missing.Since she would not be able to claim her check without issuing a
receipt, she just informed the releaser of the missing receipt and issued Receipt No.
002 in its place.[42] After a few months, respondent inquired with the PNP Finance
Center about the payment due to MGM under the Contract of December 1995 and
was surprised to find out that the check payable to MGM had already been
released. Upon making some inquiries, respondent learned that the check, payable
to MGM, in the amount of P2,226,147.26, was received by Cruz, who signed the
PNPs Warrant Register.Respondent admitted to knowing Cruz, as he was
105

connected
with
Highland
Enterprises,
a
fellow
PNP-accredited
contractor. However, she denied ever having authorized Cruz or Highland
Enterprises to receive or claim any of the checks due to MGM or Montaguz
Builders.[43] When asked why she had not filed a case against Cruz or Herminio
Reyes, the owner of Highland Enterprises, considering the admitted fact that Cruz
claimed the check due to her, respondent declared that there was no reason for her
to confront them as it was the PNPs fault that the check was released to the wrong
person. Thus, it was the PNPs problem to find out where the money had gone,
while her course of action was to go after the PNP, as the party involved in the
Contract.[44]

On April 29, 2003, petitioner presented Ms. Jesusa Magtira, who was then
the check releaser[45] of the PNP, to prove that the respondent received the LBP
check due to MGM, and that respondent herself gave the check to Cruz. [46] Ms.
Magtira testified that on April 23, 1996, she released the LBP check payable to the
order of MGM, in the amount of P2,226,147.26, to the respondent herein, whom
she identified in open court. She claimed that when she released the check to
respondent, she also handed her a voucher, and a logbook also known as the
Warrant Register, for signing.[47] When asked why Cruz was allowed to sign for the
check, Ms. Magtira explained that this was allowed since the respondent already
gave her the official receipt for the check, and it was respondent herself who gave
the logbook to Cruz for signing.[48]

The petitioner next presented Edgardo Cruz for the purpose of proving that
the payment respondent was claiming rightfully belonged to Highland
Enterprises. Cruz testified that Highland Enterprises had been an accredited
contractor of the PNP since 1975. In 1995, Cruz claimed that the PNPES was
tasked to construct by administration a condominium building. This meant that the
PNPES had to do all the work, from the canvassing of the materials to the
construction of the building. The PNPES allegedly lacked the funds to do this and
so asked for Highland Enterprisess help.[49] In a meeting with its accredited
contractors, the PNPES asked if the other contractors would agree to the use of
their business name[50] for a two percent (2%) commission of the purchase order
106

price to avoid the impression that Highland Enterprises was monopolizing the
supply of labor and materials to the PNP.[51] Cruz alleged that on April 23, 1996, he
and the respondent went to the PNP Finance Center to claim the LBP check due to
MGM. Cruz said that the respondent handed him the already signed Receipt No.
001, which he filled up. He claimed that the respondent knew that the LBP check
was really meant for Highland Enterprises as she had already been paid her 2%
commission for the use of her business name in the concerned transaction.[52]

On September 8, 2003, the RTC rendered its Decision, the dispositive of

which reads:

WHEREFORE, premises considered, judgment is hereby rendered in

favor of [respondent] and against [petitioner] ordering the latter to pay
[respondent] the following sums:

(1) P2,226,147.26 representing the principal sum plus interest

at 14% per annum from April 18, 1996 until the same shall
have been fully paid;

(2) 20% of the sum to be collected as attorneys fees; and,

(3) Costs of suit.[53]

The RTC declared that while Cruzs testimony seemed to offer a plausible
explanation on how and why the LBP check ended up with him, the petitioner,
already admitted in its Answer, and Pre-trial Brief, that MGM, did in fact deliver
107

the construction materials worth P2,288,562.60 to the PNP. The RTC also pointed
out the fact that the petitioner made the same admissions in open court to expedite
the trial, leaving only one issue to be resolved: whether the respondent had been
paid or not. Since this was the only issue, the RTC said that it had no choice but to
go back to the documents and the documentary evidence clearly indicates that the
check subject of this case was never received by [respondent]. [54] In addition, the
PNPs own Warrant Register showed that it was Edgardo Cruz who received the
LBP check, and Receipt No. 001 submitted by the petitioner to support its claim
was not issued by MGM, but by Montaguz Builders, a different entity. Finally, the
RTC held that Cruzs testimony, which appeared to be an afterthought to cover up
the PNPs blunder, were irreconcilable with the petitioners earlier declarations and
admissions, hence, not credit-worthy.

The petitioner appealed this decision to the Court of Appeals, which

affirmed with modification the RTCs ruling on September 27, 2006:

WHEREFORE,
the
decision
appealed
from
is AFFIRMED with the MODIFICATION that the 14% interest per
annum imposed on the principal amount is ordered reduced to 12%,
computed from November 16, 1997 until fully paid.The order for the
payment of attorneys fees and costs of the suit is DELETED.[55]

The Court of Appeals, in deciding against the petitioner, held that the
petitioners admissions and declarations, made in various stages of the proceedings
are express admissions, which cannot be overcome by allegations of respondents
implied admissions. Moreover, petitioner cannot controvert its own admissions and
it is estopped from denying that it had a contract with MGM, which MGM duly
complied with. The Court of Appeals agreed with the RTC that the real issue for
determination was whether the petitioner was able to discharge its contractual
obligation with the respondent. The Court of Appeals held that while the PNPs
108

own Warrant Register disclosed that the payment due to MGM was received by
Cruz, on behalf of Highland Enterprises, the PNPs contract was clearly with
MGM, and not with Highland Enterprises. Thus, in order to extinguish its
obligation, the petitioner should have directed its payment to MGM unless MGM
authorized a third person to accept payment on its behalf.

The petitioner is now before this Court, praying for the reversal of the lower
courts decisions on the ground that the Court of Appeals committed a serious error
in law by affirming the decision of the trial court.[56]

THE COURTS RULING:

This case stemmed from a contract executed between the respondent and the
petitioner. While the petitioner, in proclaiming that the respondents claim had
already been extinguished, initially insisted on having fulfilled its contractual
obligation, it now contends that the contract it executed with the respondent is
actually a fictitious contract to conceal the fact that only one contractor will be
supplying all the materials and labor for the PNP condominium project.

Both the RTC and the Court of Appeals upheld the validity of the contract
between the petitioner and the respondent on the strength of the documentary
evidence presented and offered in Court and on petitioners own stipulations and
admissions during various stages of the proceedings.

It is worthy to note that while this petition was filed under Rule 45 of the
Rules of Court, the assertions and arguments advanced herein are those that will
necessarily require this Court to re-evaluate the evidence on record.

109

It is a well-settled rule that in a petition for review under Rule 45, only
questions of law may be raised by the parties and passed upon by this Court.[57]

This Court has, on many occasions, distinguished between a question of law

and a question of fact. We held that when there is doubt as to what the law is on a
certain state of facts, then it is a question of law; but when the doubt arises as to the
truth or falsity of the alleged facts, then it is a question of fact. [58] Simply put, when
there is no dispute as to fact, the question of whether or not the conclusion drawn
therefrom is correct, is a question of law.[59]To elucidate further, this Court, in Hko
Ah Pao v. Ting[60] said:
One test to determine if there exists a question of fact or law in a
given case is whether the Court can resolve the issue that was raised
without having to review or evaluate the evidence, in which case, it is
a question of law; otherwise, it will be a question of fact. Thus, the
petition must not involve the calibration of the probative value of
the evidence presented.In addition, the facts of the case must be
undisputed, and the only issue that should be left for the Court to
decide is whether or not the conclusion drawn by the CA from a
certain set of facts was appropriate.[61] (Emphases ours.)

In this case, the circumstances surrounding the controversial LBP check are
central to the issue before us, the resolution of which, will require a perusal of the
entire records of the case including the transcribed testimonies of the
witnesses. Since this is an appeal via certiorari, questions of fact are not
reviewable. As a rule, the findings of fact of the Court of Appeals are final and
conclusive[62] and this Court will only review them under the following recognized
exceptions: (1) when the inference made is manifestly mistaken, absurd or
impossible; (2) when there is a grave abuse of discretion; (3) when the finding is
grounded entirely on speculations, surmises or conjectures; (4) when the judgment
of the Court of Appeals is based on misapprehension of facts; (5) when the
110

findings of fact are conflicting; (6) when the Court of Appeals, in making its
findings, went beyond the issues of the case and the same is contrary to the
admissions of both appellant and appellee; (7) when the findings of the Court of
Appeals are contrary to those of the trial court; (8) when the findings of fact are
conclusions without citation of specific evidence on which they are based; (9)
when the Court of Appeals manifestly overlooked certain relevant facts not
disputed by the parties and which, if properly considered, would justify a different
conclusion; and (10) when the findings of fact of the Court of Appeals are
premised on the absence of evidence and are contradicted by the evidence on
record.[63]

Although petitioners sole ground to support this petition was stated in such a
manner as to impress upon this Court that the Court of Appeals committed an error
in law, what the petitioner actually wants us to do is to review and re-examine the
factual findings of both the RTC and the Court of Appeals.

Since the petitioner has not shown this Court that this case falls under any of
the enumerated exceptions to the rule, we are constrained to uphold the facts as
established by both the RTC and the Court of Appeals, and, consequently, the
conclusions reached in the appealed decision.

Nonetheless, even if we were to exercise utmost liberality and veer away

from the rule, the records will show that the petitioner had failed to establish its
case by a preponderance of evidence.[64] Section 1, Rule 133 of the Revised Rules
of Court provides the guidelines in determining preponderance of evidence:

SECTION 1. Preponderance of evidence, how determined. In

civil cases, the party having the burden of proof must establish his
case by a preponderance of evidence. In determining where the
preponderance or superior weight of evidence on the issues involved
lies, the court may consider all the facts and circumstances of the case,
111

the witnesses manner of testifying, their intelligence, their means and

opportunity of knowing the facts to which they are testifying, the
nature of the facts to which they testify, the probability or
improbability of their testimony, their interest or want of interest, and
also their personal credibility so far as the same may legitimately
appear upon the trial. The court may also consider the number of
witnesses, though the preponderance is not necessarily with the
greater number.

Expounding on the concept of preponderance of evidence, this Court

in Encinas v. National Bookstore, Inc.,[65] held:

Preponderance of evidence is the weight, credit, and value of the

aggregate evidence on either side and is usually considered to be
synonymous with the term greater weight of the evidence or greater
weight of the credible evidence. Preponderance of evidence is a
phrase which, in the last analysis, means probability of the truth. It is
evidence which is more convincing to the court as worthy of belief
than that which is offered in opposition thereto.[66]

The petitioner avers that the Court of Appeals should not have relied heavily,
if not solely[67] on the admissions made by petitioners former counsel, thereby
losing sight of the secret agreement between the respondent and Highland
Enterprises, which explains why all the documentary evidence were in respondents
name.[68]

112

The petitioner relies mainly on Cruzs testimony to support its

allegations. Not only did it not present any other witness to corroborate Cruz, but it
also failed to present any documentation to confirm its story. It is doubtful that the
petitioner or the contractors would enter into any secret agreement involving
millions of pesos based purely on verbal affirmations. Meanwhile, the respondent
not only presented all the documentary evidence to prove her claims, even the
petitioner repeatedly admitted that respondent had fully complied with her
contractual obligations.

The petitioner argued that the Court of Appeals should have appreciated the
clear and adequate testimony of Cruz, and should have given it utmost weight and
credit especially since his testimony was a judicial admission against interest a
primary evidence which should have been accorded full evidentiary value.[69]

The trial courts appreciation of the witnesses testimonies is entitled to the

highest respect since it was in a better position to assess their credibility.[70] The
RTC held Cruzs testimony to be not credit worthy [71] for being irreconcilable with
petitioners earlier admissions. Contrary to petitioners contentions, Cruzs testimony
cannot be considered as a judicial admission against his interest as he is neither a
party to the case nor was his admission against his own interest, but actually
against either the petitioners or the respondents interest. Petitioners statements on
the other hand, were deliberate, clear, and unequivocal and were made in the
course of judicial proceedings; thus, they qualify as judicial admissions.
[72]
In Alfelor v. Halasan,[73] this Court held that:

A party who judicially admits a fact cannot later challenge that fact as
judicial admissions are a waiver of proof; production of evidence is
dispensed with. A judicial admission also removes an admitted fact
from the field of controversy. Consequently, an admission made in the
pleadings cannot be controverted by the party making such admission
and are conclusive as to such party, and all proofs to the contrary or
inconsistent therewith should be ignored, whether objection is
113

interposed by the party or not. The allegations, statements or

admissions contained in a pleading are conclusive as against the
pleader. A party cannot subsequently take a position contrary of or
inconsistent with what was pleaded.[74]

The petitioner admitted to the existence and validity of the Contract of

Agreement executed between the PNP and MGM, as represented by the
respondent, on December 11, 1995. It likewise admitted that respondent delivered
the construction materials subject of the Contract, not once, but several times
during the course of the proceedings.The only matter petitioner assailed was
respondents allegation that she had not yet been paid. If Cruzs testimony were true,
the petitioner should have put respondent in her place the moment she sent a letter
to the PNP, demanding payment for the construction materials she had allegedly
delivered. Instead, the petitioner replied that it had already paid respondent as
evidenced by the LBP check and the receipt she supposedly issued. This line of
defense continued on, with the petitioner assailing only the respondents claim of
nonpayment, and not the rest of respondents claims, in its motion to dismiss, its
answer, its pre-trial brief, and even in open court during the respondents
testimony. Section 4, Rule 129 of the Rules of Court states:

SECTION 4. Judicial Admissions.An admission, verbal or

written, made by a party in the course of the proceedings in the same
case, does not require proof. The admission may be contradicted only
by showing that it was made through palpable mistake or that no such
admission was made.

Petitioners admissions were proven to have been made in various stages of

the proceedings, and since the petitioner has not shown us that they were made
through palpable mistake, they are conclusive as to the petitioner.Hence, the only
114

question to be resolved is whether the respondent was paid under the December
1995 Contract of Agreement.

The RTC and the Court of Appeals correctly ruled that the petitioners
obligation has not been extinguished.The petitioners obligation consists of
payment of a sum of money. In order for petitioners payment to be effective in
extinguishing its obligation, it must be made to the proper person. Article 1240 of
the Civil Code states:

Art. 1240. 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.

In Cembrano v. City of Butuan,[75] this Court elucidated on how payment will

effectively extinguish an obligation, to wit:

Payment made by the debtor to the person of the creditor or to

one authorized by him or by the law to receive it extinguishes the
obligation. When payment is made to the wrong party, however, the
obligation is not extinguished as to the creditor who is without fault or
negligence even if the debtor acted in utmost good faith and by
mistake as to the person of the creditor or through error induced by
fraud of a third person.

In general, a payment in order to be effective to discharge an

obligation, must be made to the proper person. Thus, payment must be
made to the obligee himself or to an agent having authority, express or
115

implied, to receive the particular payment. 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. The receipt of money
due on a judgment by an officer authorized by law to accept it will,
therefore, satisfy the debt.[76]

The respondent was able to establish that the LBP check was not received by
her or by her authorized personnel. The PNPs own records show that it was
claimed and signed for by Cruz, who is openly known as being connected to
Highland Enterprises, another contractor. Hence, absent any showing that the
respondent agreed to the payment of the contract price to another person, or that
she authorized Cruz to claim the check on her behalf, the payment, to be effective
must be made to her.[77]

The petitioner also challenged the RTCs findings, on the ground that it
overlooked material fact and circumstance of significant weight and substance.
[78]
Invoking the doctrine of adoptive admission, the petitioner pointed out that the
respondents inaction towards Cruz, whom she has known to have claimed her
check as early as 1996, should be taken against her. Finally, the petitioner contends
that Cruzs testimony should be taken against respondent as well, under Rule 130,
Sec. 32 of the Revised Rules on Evidence, since she has not presented any
controverting evidence x x x notwithstanding that she personally heard it.[79]

The respondent has explained her inaction towards Cruz and Highland
Enterprises. Both the RTC and the Court of Appeals have found her explanation
sufficient and this Court finds no cogent reason to overturn the assessment by the
trial court and the Court of Appeals of the respondents testimony. It may be
recalled that the respondent argued that since it was the PNP who owed her money,
116

her actions should be directed towards the PNP and not Cruz or Highland
Enterprises, against whom she has no adequate proof. [80] Respondent has also
adequately explained her delay in filing an action against the petitioner,
particularly that she did not want to prejudice her other pending transactions with
the PNP.[81]

The petitioner claims that the RTC overlooked material fact and
circumstance of significant weight and substance,[82] but it ignores all the
documentary evidence, and even its own admissions, which are evidence of the
greater weight and substance, that support the conclusions reached by both the
RTC and the Court of Appeals.

We agree with the Court of Appeals that the RTC erred in the interest rate
and other monetary sums awarded to respondent as baseless. However, we must
further modify the interest rate imposed by the Court of Appeals pursuant to the
rule laid down in Eastern Shipping Lines, Inc. v. Court of Appeals[83]:

I. When an obligation, regardless of its source, i.e., law,

contracts, quasi-contracts, delicts or quasi-delicts is breached, the
contravenor can be held liable for damages. The provisions under Title
XVIII on "Damages" of the Civil Code govern in determining the
measure of recoverable damages.
II. With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate of interest, as
well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the

payment of a sum of money, i.e., a loan or forbearance of money, the
interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest
117

from the time it is judicially demanded. In the absence of stipulation,

the rate of interest shall be 12%per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and subject to
the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of

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

3. When the judgment of the court awarding a sum of money

becomes final and executory, the rate of legal interest, whether the
case falls under paragraph 1 or paragraph 2, above, shall be 12% per
annum from such finality until its satisfaction, this interim period
being deemed to be by then an equivalent to a forbearance of credit.[84]

Since the obligation herein is for the payment of a sum of money, the legal
interest rate to be imposed, under Article 2209 of the Civil Code is six percent
(6%) per annum:
118

Art. 2209. If the obligation consists in the payment of a sum of

money, and the debtor incurs in delay, the indemnity for damages,
there being no stipulation to the contrary, shall be the payment of the
interest agreed upon, and in the absence of stipulation, the legal
interest, which is six per cent per annum.

Following the guidelines above, the legal interest of 6% per annum is to be

imposed from November 16, 1997, the date of the last demand, and 12% in lieu of
6% from the date this decision becomes final until fully paid.

Petitioners allegations of sham dealings involving our own government

agencies are potentially disturbing and alarming. If Cruzs testimony were true, this
should be a lesson to the PNP not to dabble in spurious transactions.Obviously, if it
can afford to give a 2% commission to other contractors for the mere use of their
business names, then the petitioner is disbursing more money than it normally
would in a legitimate transaction. It is recommended that the proper agency
investigate this matter and hold the involved personnel accountable to avoid any
similar occurrence in the future.

WHEREFORE, the Petition is hereby DENIED and the Decision of the

Court of Appeals in C.A. G.R. CV No. 80623 dated September 27, 2006
is AFFIRMED with the MODIFICATION that the legal interest to be paid is
SIX PERCENT (6%) per annum on the amount of P2,226,147.26, computed from
the date of the last demand or on November 16, 1997. A TWELVE PERCENT
(12%) per annum interest in lieu of SIX PERCENT (6%) shall be imposed on such
amount upon finality of this decision until the payment thereof.
119

SO ORDERED.

TERESITA J. LEONARDO-DE CASTRO

Associate Justice

WE CONCUR:

PRESBITERO J. VELASCO, JR.

Associate Justice
Acting Chairperson

LUCAS P. BERSAMIN
Associate Justice

MARIANO C. DEL CASTILLO

Associate Justice

120

JOSE PORTUGAL PEREZ

Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision were reached in consultation
before the case was assigned to the writer of the opinion of the Courts Division.

PRESBITERO J. VELASCO, JR.

Associate Justice
Acting Chairperson, First Division
121

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division Acting
Chairpersons Attestation, it is hereby certified that the conclusions in the above
Decision were reached in consultation before the case was assigned to the writer of
the opinion of the Courts Division.

RENATO C. CORONA
Chief Justice

Per Special Order No. 1003 dated June 8, 2011.

**

Additional member per Special Order No. 1000 dated June 8, 2011.

[1]

Under Rule 45 of the 1997 Rules of Civil Procedure.

122

[2]

Rollo, pp. 9-21; penned by Associate Justice Amelita G. Tolentino with

Associate Justices Portia Alio-Hormachuelos and Arcangelita RomillaLontok, concurring.

[3]

CA rollo, pp. 34-37.

[4]

Id. at 43.

[5]

Records, p. 10.

[6]

Id. at 11-13.

[7]

Id. at 14.

[8]

Id. at 14-15.

[9]

Id. at 16-17.

[10]

Id. at 18.

[11]

Id. at 19-21.

[12]

Id. at 22-23.

[13]

Id. at 23A-24.

[14]

Id. at 25.

[15]

Id. at 26

[16]

Id. at 27.

[17]

Id.

[18]

Id. at 29.

[19]

Id. at 263.

[20]

Id. at 28.
123

[21]

Id. at 44.

[22]

Id.

[23]

Id. at 266-267.

[24]

Id. at 2-7.

[25]

Id. at 40-43.

[26]

Id. at 40.

[27]

Id. at 42.

[28]

Id. at 46-48.

[29]

Id. at 51-53.

[30]

Id. at 54.

[31]

Id. at 159-160.

[32]

Id. at 167-175.

[33]

Id. at 201-202.

[34]

TSN, September 3, 2002, pp. 8-9.

[35]

Records, pp. 167-176.

[36]

Id. at 184-190.

[37]

Id. at 170.

[38]

Id. at 186.

[39]

TSN, September 3, 2002, pp. 25-27.

[40]

TSN, December 3, 2002, pp. 15-18.

124

[41]

Id. at 18.

[42]

TSN, September 3, 2002, p. 31.

[43]

Id. at 10-16.

[44]

TSN, December 3, 2002, pp. 37-40.

[45]

TSN, April 29, 2003, p. 6.

[46]

Id. at 14.

[47]

Id. at 8-11.

[48]

Id. at 24-26.

[49]

Id. at 42-45.

[50]

Id. at 84.

[51]

Id. at 74-78.

[52]

Id. at 50-54.

[53]

CA rollo, p. 37.

[54]

Id. at 36.

[55]

Rollo, p. 20.

[56]

Id. at 30.

[57]

Jarantilla, Jr. v. Jarantilla, G.R. No. 154486, December 1, 2010.

[58]

Suarez v. Judge Villarama, Jr., G.R. No. 124512, June 27, 2006, 493 SCRA 74,
80.
[59]

Cucueco v. Court of Appeals, 484 Phil. 254, 264 (2004).

125

[60]

G.R. No. 153476, September 27, 2006, 503 SCRA 551.

[61]

Id. at 559.

[62]

Microsoft Corporation v. Maxicorp, Inc., G.R. No. 140946, September 13,

2004, 438 SCRA 224, 230.

[63]

Go v. Court of Appeals, 403 Phil. 883, 890 (2001).

[64]

Hko Ah Pao v. Ting, supra note 60 at 560.

[65]

G.R. No. 162704, November 19, 2004, 443 SCRA 293.

[66]

Id. at 302.

[67]

Rollo, p. 33.

[68]

Id.

[69]

Id.

[70]

People v. Gasacao, 511 Phil. 435, 445 (2005).

[71]

CA rollo, p. 37.

[72]

Alfelor v. Halasan, G.R. No. 165987, March 31, 2006, 486 SCRA 451, 459.

[73]

Id.

[74]

Id. at 459-460.

[75]

G.R. No. 163605, September 20, 2006, 502 SCRA 494.

[76]

Id. at 511-512.

[77]

Montecillo v. Reynes, 434 Phil. 456, 464-465 (2002).

[78]

Rollo, p. 34.
126

[79]

Id.

[80]

TSN, December 3, 2002, pp. 35-40.

[81]

TSN, September 3, 2002, pp. 45-47.

[82]

Rollo, p. 34.

[83]

G.R. No. 97412, July 12, 1994, 234 SCRA 78.

[84]

Id. at 95-97.

127

FIRST DIVISION

PCI LEASING AND FINANCE, INC.,

Petitioner,

G.R. No. 142618

Present:

PUNO, C.J., Chairperson,

*

SANDOVAL-GUTIERREZ,

- versus -

CORONA,
AZCUNA, and
GARCIA, JJ.

GIRAFFE-X CREATIVE IMAGING, Promulgated:

INC.,
Respondent.

July 12, 2007

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

DECISION
128

GARCIA, J.:

On a pure question of law involving the application of Republic Act (R.A.) No.
5980, as amended by R.A. No. 8556 in relation to Articles 1484 and 1485 of the
Civil Code, petitioner PCI Leasing and Finance, Inc. (PCI LEASING, for short)
has directly come to this Court via this petition for review under Rule 45 of the
Rules of Court to nullify and set aside the Decision and Resolution dated
December 28, 1998 and February 15, 2000, respectively, of the Regional Trial
Court (RTC) of Quezon City, Branch 227, in its Civil Case No. Q-98-34266, a suit
for a sum of money and/or personal property with prayer for a writ of replevin,
thereat instituted by the petitioner against the herein respondent, Giraffe-X
Creative Imaging, Inc. (GIRAFFE, for brevity).

The facts:

On December 4, 1996, petitioner PCI LEASING and respondent GIRAFFE

entered into a Lease Agreement,[1]whereby the former leased out to the latter one
(1) set of Silicon High Impact Graphics and accessories worth P3,900,00.00 and
one (1) unit of Oxberry Cinescan 6400-10 worth P6,500,000.00. In connection
with this agreement, the parties subsequently signed two (2) separate documents,
each denominated as Lease Schedule.[2] Likewise forming parts of the basic lease
agreement were two (2) separate documents denominated Disclosure Statements of
Loan/Credit Transaction (Single Payment or Installment Plan)[3] that GIRAFFE
also executed for each of the leased equipment. These disclosure statements inter
alia described GIRAFFE, vis--vis the two aforementioned equipment, as
the borrower who acknowledged the net proceeds of the loan, the net amount to be
129

financed, the financial charges,the total installment payments that it must pay
monthly for thirty-six (36) months, exclusive of the 36% per annumlate payment
charges. Thus, for the Silicon High Impact Graphics, GIRAFFE agreed to
pay P116,878.21 monthly, and for Oxberry Cinescan, P181.362.00 monthly.
Hence, the total amount GIRAFFE has to pay PCI LEASING for 36 months of the
lease, exclusive of monetary penalties imposable, if proper, is as indicated below:

P116,878.21 @ month (for the Silicon High

Impact Graphics) x 36 months = P 4,207,615.56

-- PLUS--

P181,362.00 @ month (for the Oxberry

Cinescan) x 36 months = P 6,529,032.00
Total Amount to be paid by GIRAFFE
(or the NET CONTRACT AMOUNT) P 10,736,647.56

By the terms, too, of the Lease Agreement, GIRAFFE undertook to remit the
amount of P3,120,000.00 by way of guaranty deposit, a sort of performance and
compliance bond for the two equipment. Furthermore, the same agreement
embodied a standard acceleration clause, operative in the event GIRAFFE fails to
pay any rental and/or other accounts due.

130

A year into the life of the Lease Agreement, GIRAFFE defaulted in its
monthly rental-payment obligations. And following a three-month default, PCI
LEASING, through one Atty. Florecita R. Gonzales, addressed a formal pay-orsurrender-equipment type of demand letter[4] dated February 24, 1998 to
GIRAFFE.

The demand went unheeded.

Hence, on May 4, 1998, in the RTC of Quezon City, PCI LEASING

instituted the instant case against GIRAFFE. In its complaint, [5] docketed in said
court as Civil Case No. 98-34266 and raffled to Branch 227[6]thereof,
PCI LEASING prayed for the issuance of a writ of replevin for the recovery of the
leased property, in addition to the following relief:

2. After trial, judgment be rendered in favor of plaintiff [PCI

LEASING] and against the defendant [GIRAFFE], as follows:

a. Declaring the plaintiff entitled to the possession of the

subject properties;

b. Ordering the defendant to pay the balance of

rental/obligation
in
the
total
amount
of P8,248,657.47 inclusive of interest and charges
thereon;

131

c. Ordering defendant to pay plaintiff the expenses of

litigation and cost of suit. (Words in bracket
added.)

Upon PCI LEASINGs posting of a replevin bond, the trial court issued a
writ of replevin, paving the way for PCI LEASING to secure the seizure and
delivery of the equipment covered by the basic lease agreement.

Instead of an answer, GIRAFFE, as defendant a quo, filed a Motion to

Dismiss, therein arguing that the seizure of the two (2) leased equipment stripped
PCI LEASING of its cause of action. Expounding on the point, GIRAFFE argues
that, pursuant to Article 1484 of the Civil Code on installment sales of personal
property, PCI LEASING is barred from further pursuing any claim arising from the
lease agreement and the companion contract documents, adding that the agreement
between the parties is in reality a lease of movables with option to buy. The given
situation, GIRAFFE continues, squarely brings into applicable play Articles 1484
and 1485 of the Civil Code, commonly referred to as the Recto Law. The cited
articles respectively provide:

ART. 1484. 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;

132

(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. (Emphasis added.)

ART. 1485. The preceding article shall be applied to contracts

purporting to be leases of personal property with option to buy, when
the lessor has deprived the lessee of the possession or enjoyment of
the thing.

It is thus GIRAFFEs posture that the aforequoted Article 1484 of the Civil
Code applies to its contractual relation with PCI LEASING because the lease
agreement in question, as supplemented by the schedules documents, is really
a lease with option to buy under the companion article, Article 1485.
Consequently, so GIRAFFE argues, upon the seizure of the leased equipment
pursuant to the writ of replevin, which seizure is equivalent to foreclosure, PCI
LEASING has no further recourse against it. In brief, GIRAFFE asserts in its
Motion to Dismiss that the civil complaint filed by PCI LEASING is proscribed by
the application to the case of Articles 1484 and 1485, supra, of the Civil Code.

133

In its Opposition to the motion to dismiss, PCI LEASING maintains that its
contract with GIRAFFE is a straight lease without an option to buy. Prescinding
therefrom, PCI LEASING rejects the applicability to the suit ofArticle 1484 in
relation to Article 1485 of the Civil Code, claiming that, under the terms and
conditions of the basic agreement, the relationship between the parties is one
between an ordinary lessor and an ordinary lessee.

In a decision[7] dated December 28, 1998, the trial court granted GIRAFFEs
motion to dismiss mainly on the interplay of the following premises: 1) the lease
agreement package, as memorialized in the contract documents, is akin to the
contract contemplated in Article 1485 of the Civil Code, and 2) GIRAFFEs loss of
possession of the leased equipment consequent to the enforcement of the writ of
replevin is akin to foreclosure, the condition precedent for application of Articles
1484 and 1485 [of the Civil Code]. Accordingly, the trial court dismissed Civil
Case No. Q-98-34266, disposing as follows:

WHEREFORE,
premises
considered,
the
defendant
[GIRAFFE] having relinquished any claim to the personal properties
subject of replevin which are now in the possession of the
plaintiff [PCI LEASING], plaintiff is DEEMED fully satisfied
pursuant to the provisions of Articles 1484 and 1485 of the New Civil
Code. By virtue of said provisions, plaintiff is DEEMED estopped
from further action against the defendant, the plaintiff having
recovered thru (replevin) the personal property sought to be
payable/leased on installments, defendants being under protection of
said RECTO LAW. In view thereof, this case is hereby DISMISSED.

With its motion for reconsideration having been denied by the trial court in
its resolution of February 15, 2000,[8] petitioner has directly come to this
Court via this petition for review raising the sole legal issue of whether or not the
underlying Lease Agreement, Lease Schedules and the Disclosure Statements that
134

embody the financial leasing arrangement between the parties are covered by and
subject to the consequences of Articles 1484 and 1485 of the New Civil Code.

As in the court below, petitioner contends that the financial leasing

arrangement it concluded with the respondent represents a straight lease
covered by R.A. No. 5980, the Financing Company Act, as last amended by R.A.
No. 8556, otherwise known as Financing Company Act of 1998, and is outside the
application and coverage of the Recto Law. To the petitioner, R.A. No.
5980 defines and authorizes its existence and business.

The recourse is without merit.

R.A. No. 5980, in its original shape and as amended, partakes of a

supervisory or regulatory legislation, merely providing a regulatory framework for
the organization, registration, and regulation of the operations of financing
companies. As couched, it does not specifically define the rights and obligations of
parties to a financial leasing arrangement. In fact, it does not go beyond defining
commercial or transactional financial leasing and other financial leasing concepts.
Thus, the relevancy of Article 18 of the Civil Code which reads:

Article 18. - In matters which are governed by special laws,

their deficiency shall be supplied by the provisions of this [Civil]
Code.

Petitioner foists the argument that the Recto Law, i.e., the Civil Code
provisions on installment sales of movable property, does not apply to a financial
leasing agreement because such agreement, by definition, does not confer on the
135

lessee the option to buy the property subject of the financial lease. To the
petitioner, the absence of an option-to-buy stipulation in a financial leasing
agreement, as understood under R.A. No. 8556, prevents the application thereto of
Articles 1484 and 1485 of the Civil Code.
We are not persuaded.

The Court can allow that the underlying lease agreement has the earmarks or
made to appear as a financial leasing,[9] a term defined in Section 3(d) of R.A. No.
8556 as -

a mode of extending credit through a non-cancelable lease

contract under which the lessor purchases or acquires, at the instance
of the lessee, machinery, equipment, office machines, and other
movable or immovable property in consideration of the periodic
payment by the lessee of a fixed amount of money sufficient to
amortize at least seventy (70%) of the purchase price or acquisition
cost, including any incidental expenses and a margin of profit over an
obligatory period of not less than two (2) years during which the
lessee has the right to hold and use the leased propertybut with no
obligation or option on his part to purchase the leased property from
the owner-lessor at the end of the lease contract.

In its previous holdings, however, the Court, taking into account the
following mix: the imperatives of equity, the contractual stipulations in question
and the actuations of parties vis--vis their contract, treated disguised transactions
technically tagged as financing lease, like here, as creating a different contractual
relationship. Notable among the Courts decisions because of its parallelism with
this case is BA Finance Corporation v. Court of Appeals[10] which involved a motor
136

vehicle. Thereat, the Court has treated a purported financial lease as actually a sale
of a movable property on installments and prevented recovery beyond the buyers
arrearages. Wrote the Court in BA Finance:

The
transaction involved is one
of a
"financial
lease" or "financial leasing," where a financing company would,
in effect, initially purchase a mobile equipment and turn around
to lease it to a client who gets, in addition, an option to purchase
the property at the expiry of the lease period. xxx.

xxx xxx xxx

The pertinent provisions of [RA] 5980, thus implemented, read:

"'Financing companies,' are primarily organized

for the purpose of extending credit facilities to consumers
either by leasing of motor vehicles, and office machines
and equipment, and other movable property."

"'Credit' shall mean any loan, any contract to sell,

or sale or contract of sale of property or service, under
which part or all of the price is payable subsequent to the
making of such sale or contract; any rental-purchase
contract; .;"

The foregoing provisions indicate no less than a mere financing

scheme extended by a financing company to a client in acquiring a
motor vehicle and allowing the latter to obtain the immediate
137

possession and use thereof pending full payment of the financial

accommodation that is given.

In the case at bench, xxx. [T]he term of the contract [over a

motor vehicle] was for thirty six (36) months at a "monthly rental"
(P1,689.40), or for a total amount of P60,821.28. The contract also
contained [a] clause [requiring the Lessee to give a guaranty deposit
in the amount of P20,800.00] xxx

After the private respondent had paid the sum of P41,670.59,

excluding the guaranty deposit of P20,800.00, he stopped further
payments. Putting the two sums together, the financing company had
in its hands the amount of P62,470.59 as against the total agreed
"rentals" of P60,821.28 or an excess of P1,649.31.

The respondent appellate court considered it only just and

equitable for the guaranty deposit made by the private respondent to
be applied to his arrearages and thereafter to hold the contract
terminated. Adopting the ratiocination of the court a quo, the appellate
court said:

xxx In view thereof, the guaranty deposit of

P20,800.00 made by the defendant should and must be
credited in his favor, in the interest of fairness, justice
and equity. The plaintiff should not be allowed to
unduly enrich itself at the expense of the defendant.
xxx This is even more compelling in this case where
although the transaction, on its face, appear
ostensibly, to be a contract of lease, it is actually a
financing agreement, with the plaintiff financing the
138

purchase of defendant's automobile . The Court is

constrained, in the interest of truth and justice, to go into
this aspect of the transaction between the plaintiff and the
defendant with all the facts and circumstances existing
in this case, and which the court must consider in
deciding the case, if it is to decide the case according to
all the facts. xxx.

xxx xxx xxx

Considering the factual findings of both the court a quo and the
appellate court, the only logical conclusion is that the private
respondent did opt, as he has claimed, to acquire the motor
vehicle, justifying then the application of the guarantee deposit to
the balance still due and obligating the petitioner to recognize it as
an exercise of the option by the private respondent. The result
would thereby entitle said respondent to the ownership and
possession of the vehicle as the buyer thereof. We, therefore, see no
reversible error in the ultimate judgment of the appellate court.
[11]
(Italics in the original; underscoring supplied and words in bracket
added.)

In Cebu Contractors Consortium Co. v. Court of Appeals,[12] the Court

viewed and thus declared a financial lease agreement as having been simulated to
disguise a simple loan with security, it appearing that the financing company
purchased equipment already owned by a capital-strapped client, with the intention
of leasing it back to the latter.

139

In the present case, petitioner acquired the office equipment in question for
their subsequent lease to the respondent, with the latter undertaking to pay a
monthly fixed rental therefor in the total amount of P292,531.00, or a total
of P10,531,116.00 for the whole 36 months. As a measure of good faith,
respondent made an up-front guarantee deposit in the amount of P3,120,000.00.
The basic agreement provides that in the event the respondent fails to pay any
rental due or is in a default situation, then the petitioner shall
have cumulative remedies, such as, but not limited to, the following:[13]

1.

2.

3.

Obtain possession of the property/equipment;

Retain all amounts paid to it. In addition, the guaranty

deposit may be applied towards the payment of liquidated
damages;

Recover all accrued and unpaid rentals;

4.

Recover all rentals for the remaining term of the lease

had it not been cancelled, as additional penalty;

5.

Recovery of any and all amounts advanced by PCI

LEASING for GIRAFFEs account xxx;

6.

Recover all expenses incurred in repossessing, removing,

repairing and storing the property; and,
140

7.

Recover all damages suffered by PCI LEASING by

reason of the default.

In addition, Sec. 6.1 of the Lease Agreement states that the guaranty deposit
shall be forfeited in the event the respondent, for any reason, returns the
equipment before the expiration of the lease.

At bottom, respondent had paid the equivalent of about a years lease rentals,
or a total of P3,510,372.00, more or less. Throw in the guaranty
deposit (P3,120,000.00) and the respondent had made a total cash outlay
ofP6,630,372.00 in favor of the petitioner. The replevin-seized leased equipment
had, as alleged in the complaint, an estimated residual value of P6,900.000.00 at
the time Civil Case No. Q-98-34266 was instituted on May 4, 1998. Adding all
cash advances thus made to the residual value of the equipment, the total
value which the petitioner had actually obtained by virtue of its lease agreement
with
the
respondent
amounts
to P13,530,372.00 (P3,510,372.00 +P3,120,000.00 + P6,900.000.00
= P13,530,372.00).

The acquisition cost for both the Silicon High Impact Graphics equipment
and the Oxberry Cinescan was, as stated in no less than the petitioners letter to the
respondent dated November 11, 1996[14] approving in the latters favor a lease
facility, was P8,100,000.00. Subtracting the acquisition cost of P8,100,000.00 from
the total amount, i.e., P13,530,372.00, creditable to the respondent, it would clearly
appear that petitioner realized a gross income of P5,430,372.00 from its lease
transaction with the respondent. The amount of P5,430,372.00 is not yet a final
figure as it does not include the rentals in arrears, penalties thereon,
and interest earned by the guaranty deposit.
141

As may be noted, petitioners demand letter [15] fixed the amount

of P8,248,657.47 as representing the respondents rental balance which became due
and demandable consequent to the application of the acceleration and other clauses
of the lease agreement. Assuming, then, that the respondent may be compelled to
pay P8,248,657.47,
then
it
would
end
up
paying
a
total
of P21,779,029.47 (P13,530,372.00 + P8,248,657.47 = P21,779,029.47) for its use
- for a year and two months at the most - of the equipment. All in all, for an
investment of P8,100,000.00, the petitioner stands to make in a years time, out of
the transaction, a total of P21,779,029.47, or a net of P13,679,029.47,if we are to
believe its outlandish legal submission that the PCI LEASING-GIRAFFE Lease
Agreement was an honest-to-goodness straight lease.

A financing arrangement has a purpose which is at once practical and

salutary. R.A. No. 8556 was, in fact, precisely enacted to regulate financing
companies operations with the end in view of strengthening their critical role in
providing credit and services to small and medium enterprises and to curtail acts
and practices prejudicial to the public interest, in general, and to their clienteles, in
particular.[16] As a regulated activity, financing arrangements are not meant to
quench only the thirst for profit. They serve a higher purpose, and R.A. No.
8556 has made that abundantly clear.

We stress, however, that there is nothing in R.A. No. 8556 which defines the
rights and obligations, as between each other, of the financial lessor and the lessee.
In determining the respective responsibilities of the parties to the agreement,
courts, therefore, must train a keen eye on the attendant facts and circumstances of
the case in order to ascertain the intention of the parties, in relation to the law and
the written agreement. Likewise, the public interest and policy involved should be
considered. It may not be amiss to state that, normally, financing contracts come in
a standard prepared form, unilaterally thought up and written by the financing
companies requiring only the personal circumstances and signature of the borrower
or lessee; the rates and other important covenants in these agreements are still
142

largely imposed unilaterally by the financing companies. In other words, these

agreements are usually one-sided in favor of such companies. A perusal of the
lease agreement in question exposes the many remedies available to the petitioner,
while there are only the standard contractual prohibitions against the respondent.
This is characteristic of standard printed form contracts.

There is more. In the adverted February 24, 1998 demand letter[17] sent to the
respondent, petitioner fashioned its claim in the alternative: payment of the full
amount of P8,248,657.47, representing the unpaid balance for the entire 36-month
lease period or the surrender of the financed asset under pain of legal action. To
quote the letter:

Demand is hereby made upon you to pay in full your

outstanding balance in the amount of P8,248,657.47 on or before
March 04, 1998 OR to surrender to us the one (1) set Silicon High
Impact Graphics and one (1) unit Oxberry Cinescan 6400-10

We trust you will give this matter your serious and preferential
attention. (Emphasis added).

Evidently, the letter did not make a demand for the payment of
the P8,248,657.47 AND the return of the equipment; only either one of the two was
required. The demand letter was prepared and signed by Atty. Florecita R.
Gonzales, presumably petitioners counsel. As such, the use of or instead of and in
the letter could hardly be treated as a simple typographical error, bearing in mind
the nature of the demand, the amount involved, and the fact that it was made by a
lawyer. Certainly Atty. Gonzales would have known that a world of difference
exists between and and or in the manner that the word was employed in the letter.
143

A rule in statutory construction is that the word "or" is a

disjunctive term signifying dissociation and independence of one
thing from other things enumerated unless the context requires a
different interpretation.[18]

In its elementary sense, "or", as used in a statute, is a

disjunctive article indicating an alternative. It often connects a series
of words or propositions indicating a choice of either. When "or" is
used, the various members of the enumeration are to be taken
separately.[19]

The word "or" is a disjunctive term signifying disassociation

and independence of one thing from each of the other things
enumerated.[20]

The demand could only be that the respondent need not return the equipment
if it paid the P8,248,657.47 outstanding balance, ineluctably suggesting that the
respondent can keep possession of the equipment if it exercises its option to
acquire the same by paying the unpaid balance of the purchase price. Stated
otherwise, if the respondent was not minded to exercise its option of acquiring the
equipment by returning them, then it need not pay the outstanding balance. This is
the logical import of the letter: that the transaction in this case is a lease in name
only. The so-called monthly rentals are in truth monthly amortizations of the price
of the leased office equipment.

144

On the whole, then, we rule, as did the trial court, that the PCI LEASINGGIRAFFE lease agreement is in reality a lease with an option to
purchase the equipment. This has been made manifest by the actions of the
petitioner itself, foremost of which is the declarations made in its demand letter to
the respondent. There could be no other explanation than that if the respondent
paid the balance, then it could keep the equipment for its own; if not, then it should
return them. This is clearly an option to purchase given to the respondent. Being
so, Article 1485 of the Civil Code should apply.

The present case reflects a situation where the financing company can
withhold and conceal - up to the last moment - its intention to sell the property
subject of the finance lease, in order that the provisions of the Recto Lawmay be
circumvented. It may be, as petitioner pointed out, that the basic lease agreement
does not contain a purchase option clause. The absence, however, does not
necessarily argue against the idea that what the parties are into is not a straight
lease, but a lease with option to purchase. This Court has, to be sure, long been
aware of the practice of vendors of personal property of denominating a contract of
sale on installment as one of lease to prevent the ownership of the object of the sale
from passing to the vendee until and unless the price is fully paid. As this Court
noted in Vda. de Jose v. Barrueco:[21]
Sellers desirous of making conditional sales of their goods, but
who do not wish openly to make a bargain in that form, for one
reason or another, have frequently resorted to the device of making
contracts in the form of leases either with options to the buyer to
purchase for a small consideration at the end of term, provided
the so-called rent has been duly paid, or with stipulations that if
the rent throughout the term is paid, title shall thereupon vest in
the lessee. It is obvious that such transactions are leases only in
name. The so-called rent must necessarily be regarded as payment of
the price in installments since the due payment of the agreed amount
results, by the terms of the bargain, in the transfer of title to the
lessee.
145

In another old but still relevant case of U.S. Commercial v. Halili,[22] a lease
agreement was declared to be in fact a sale of personal property by installments.
Said the Court:

. . . There can hardly be any question that the so-called

contracts of lease on which the present action is based were veritable
leases of personal property with option to purchase, and as such come
within the purview of the above article [Art. 1454-A of the old Civil
Code on sale of personal property by installment]. xxx

Being leases of personal property with option to purchase as

contemplated in the above article, the contracts in question are subject
to the provision that when the lessor in such case has chosen to
deprive the lessee of the enjoyment of such personal property, he shall
have no further action against the lessee for the recovery of any
unpaid balance owing by the latter, agreement to the contrary being
null and void.

In choosing, through replevin, to deprive the respondent of possession of the

leased equipment, the petitioner waived its right to bring an action to recover
unpaid rentals on the said leased items. Paragraph (3), Article 1484 in relation to
Article 1485 of the Civil Code, which we are hereunder re-reproducing, cannot be
any clearer.

146

ART. 1484. 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:
xxx xxx xxx

(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.

ART. 1485. The preceding article shall be applied to contracts purporting to

be leases of personal property with option to buy, when the lessor has
deprived the lessee of the possession or enjoyment of the thing.

As we articulated in Elisco Tool Manufacturing Corp. v. Court of Appeals,

the remedies provided for in Article 1484 of the Civil Code are alternative, not
cumulative. The exercise of one bars the exercise of the others. This limitation
applies to contracts purporting to be leases of personal property with option to buy
by virtue of the same Article 1485. The condition that the lessor has deprived the
lessee of possession or enjoyment of the thing for the purpose of applying Article
1485 was fulfilled in this case by the filing by petitioner of the complaint for a sum
of money with prayer for replevin to recover possession of the office equipment.
[24]
By virtue of the writ of seizure issued by the trial court, the petitioner has
effectively deprived respondent of their use, a situation which, by force of
the Recto Law, in turn precludes the former from maintaining an action for
recovery of accrued rentals or the recovery of the balance of the purchase price
plus interest. [25]
[23]

147

The imperatives of honest dealings given prominence in the Civil Code

under the heading: Human Relations,provide another reason why we must hold the
petitioner to its word as embodied in its demand letter. Else, we would witness
a situation where even if the respondent surrendered the equipment voluntarily, the
petitioner can still sue upon its claim. This would be most unfair for the
respondent. We cannot allow the petitioner to renege on its word. Yet more than
that, the very word or as used in the letter conveys distinctly its intention not to
claim both the unpaid balance and the equipment. It is not difficult to discern why:
if we add up the amounts paid by the respondent, the residual value of the property
recovered, and the amount claimed by the petitioner as sued upon herein (for a
total of P21,779,029.47), then it would end up making an instant killing out of the
transaction at the expense of its client, the respondent. The Recto Law was
precisely enacted to prevent this kind of aberration. Moreover, due to
considerations of equity, public policy and justice, we cannot allow this to

happen. Not only to the respondent, but those similarly situated who may fall prey
to a similar scheme.

WHEREFORE, the instant petition is DENIED and the trial courts

decision is AFFIRMED.

Costs against petitioner.

SO ORDERED.

148

CANCIO C. GARCIA
Associate Justice

WE CONCUR:

REYNATO S. PUNO
Chief Justice
Chairperson

(On leave)
ANGELINA SANDOVAL-GUTIERREZ

RENATO C. CORONA
149

Associate Justice
Associate Justice

ADOLFO S. AZCUNA
Associate Justice

C E R T I F I C AT I O N

Pursuant to Section 13, Article VIII of the Constitution, I certify that the
conclusions in the above decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNO
Chief Justice

150

On leave.

[1]

Annex C, Petition; rollo, pp. 30-31.

[2]

Annexes D and E, Petition; id. at 32-33.

[3]

Annexes F and G, Petition; id. at 35-36.

[4]

RTC Records, p. 14.

[5]

Rollo, pp. 37-41.

[6]

Then presided by Judge (now Court of Appeals Associate Justice) Vicente

Roxas.
[7]

Rollo, pp. 24-27.

[8]

Id. at 29.

[9]

Used interchangeably with the terms financing lease and financial lease.

[10]

G.R. No. 105190, December 16, 1993, 228 SCRA 530.

[11]

BA

[12]

G.R. No. 107199, July 22, 2003, 407 SCRA 154.

[13]

Secs. 19.2 and 20.1 of the Lease Agreement.

[14]

Rollo, p. 82.

Finance Corporation v. Court of Appeals,

105190, December 16, 1993, 228 SCRA 530.

G.R.

No.

151

[15]

Supra note 4.

[16]

Sec. 2, R.A. No. 8556.

[17]

Supra note 4.

[18]

Pimentel v. COMELEC, G.R. No. 126394, April 24, 1998, 289 SCRA
586, 597.
[19]

Centeno v. Villalon-Pornillos, G.R. No. 113092, September 1, 1994, 236 SCRA

197, 206.
[20]

Castillo-Co v. Barbers, G.R. No. 129952, June 16, 1998, 290 SCRA 717, 723.

[21]

67 Phil. 191 (1939) cited in Elisco Tool Manufacturing Corp. v. CA, G.R. No.
109966, May 31, 1999, 307 SCRA 731.

[22]

93 Phil. 271 (1953).

[23]

G.R. No. 109966, May 31, 1999, 307 SCRA 731.

[24]

Ibid.

[25]

Ibid.

[Syllabus]
FIRST DIVISION

[G.R. No. 119580. September 26, 1996]

PHILIPPINE NATIONAL BANK, petitioner, vs. COURT OF APPEALS and

LAPAZ KAW NGO, respondents.
DECISION
152

HERMOSISIMA, JR., J.:

The question at issue, one of law, is whether or not from the undisputed facts
there was entered between the Philippine National Bank and Lapaz Kaw Ngo a
perfected contract of sale of prime real property located in the heart of
downtown Manila.
Before us is a petition for review on certiorari seeking the reversal of the
decision[1] of the respondent Court of Appeals[2] in an action for specific
performance[3] filed in the Regional Trial Court (RTC)[4] by private respondent
Lapaz Kaw Ngo against petitioner Philippine National Bank (hereafter, "PNB").
Except for the award of P610,000.00 as actual damages which was deleted,
respondent appellate court affirmed in all other respects the judgment [5] rendered
by the RTC in favor of private respondent Ngo.
The facts of this case, as narrated by respondent appellate court, are
undisputed:
"The subject matter of the case is a parcel of land containing a net area of
1,190.72 square meters (1391.70 square meters minus 200.98 square meters
reserved for road widening and Light Rail Transit) situated at the corner of Carlos
Palanca and Helios Streets, Sta. Cruz, Manila, covered by and embraced in
Transfer Certificate of Title No. 134695 of the Registry of Deeds of manila x x x
owned and registered in the name of x x x the Philippine National Bank x x x
xxx
On July 14, 1983 Lapaz made a formal offer to purchase the parcel of land
consisting of 1,250.70 [square meters] located at the corner of Carlos Palanca and
Helios Streets, Sta. Cruz, Manila, owned by and registered in the name of x x x
PNB x x x PNB advised Lapaz of its approval of the latter's offer to purchase the
subject property subject to the terms and conditions stated in its official
communication to the plaintiff [private respondent] dated September 8, 1983, viz:
'x x x
x x x your offer to purchase the Bank-acquired property x x x was approved by the
Bank, subject to the following terms and conditions:
1. That the selling price shall be P5,394,300.00 (P100,000.00 already deposited) x
xx
153

2. (a) That upon your failure to pay the additional deposit of P978,860.00 upon
receipt of advice accepting your offer, your P100,000.00 initial deposit shall be
forfeited and for this purpose the Bank shall be authorized to sell the property to
other interested parties.
xxx
3. That the Bank sells only whatever rights, interests and participation it may have
in the property and you are charged with full knowledge of the nature and extent of
said rights, interests and participation and waives [sic] your right to warranty
against eviction.
xxx
4. That the property shall be cleared of its present tenants/ occupants but all
expenses to be incurred in connection with the ejectment proceedings shall be for
your account.
6. That the sale shall be subject to such other terms and conditions that the Legal
Department may impose to protect the interest of the Bank.
x x x'
On December 15, 1983, the plaintiff [private respondent] signified her conformity
to the above letter-agreement by affixing her signature thereon x x x.
One of the conditions in the agreement was to clear the subject property of its then
occupants; thus, Lapaz undertook the ejectment of the squatters/tenants at her own
expense.
In a letter dated January 23, 1984, Lapaz, citing the then prevailing credit
squeeze, requested for adjustment of payment proposals x x x.
On February 28, 1984, PNB wrote Lapaz reminding her Of her failure to remit the
amount of P978,860.00 as embodied in its letter dated December 6, 1983 x x x and
of her refusal to send her letter of conformity to the letter-agreement. Lapaz was
likewise advised to remit her cash payment of the full price amounting
to P5,378,902.50; otherwise, the subject property shall be sold to other interested
party/ies and her deposit forfeited. Lapaz's request for adjustment of payments was
likewise denied x x x.
154

In a letter dated March 1, 1984 x x x Lapaz, due to a significant reduction in the

land area being purchased, requested for the reduction of the selling price from
P5,394,300.00 to P5,135,599.17 on cash basis or a total of P6,066,706.49 on
installment x x x.
On May 15, 1984, PNB favorably acted on Lapaz's request x x x.
However, when no further payment was received by PNB from Lapaz, the former
notified the latter by telegram that it was giving her a last chance to pay the
balance of the required downpayment of P563,341.29; failure of which shall cause
the cancellation of the sale in her favor and the forfeiture of her P100,000.00
deposit x x x.
The sale in favor of Lapaz never materialized because of her failure to remit the
required amount agreed upon; hence, the proposed sale was cancelled x x x and
the plaintiff's [private respondent's] deposit of P100,000.00 was forfeited by the
defendant [petitioner]. PNB then leased the property to a certain Morse Rivera x x
x.
On October 3, 1984 Lapaz requested for a refund of her deposit in the total
amount of P660,000.00 (P550,000.00) with a further request that since the Bank
was willing to refund to her her deposit provided that the P100,000.00 is forfeited
in favor of the Bank, the amount of P100,000.00 be reduced to P30,000.00 because
her deposit of P660,000.00 (P550,000.00) had, after all, already accumulated to a
sizable amount of interest and, besides there was a delay in the approval of the
contract or proposal. Lapaz further intimated that her request for refund shall be
subject to the release of the fund within one (1) week from receipt thereof;
otherwise, she would insist on purchasing the property subject to mutually agreed
grace period x x x.
On October 16, 1984, PNB released in favor of Lapaz the amount of P550,000.00
representing the refund of deposit made on the offer to purchase the subject
property x x x.
On August 30, 1985, [Lapaz] wrote a letter to the former President of the
Philippines, Ferdinand E. Marcos, requesting for the lifting of the directive
suspending the sale of the subject property, which letter was transmitted to the
then President of the PNB for comment and/or action.

155

In its letter dated May 14, 1986, PNB advised Lapaz of the approval of her request
for revival of the previously approved offer to purchase the subject property
subject to the terms and conditions as follows:
'1. That the selling price shall be P5,135,599.17 (P200,000.00) already deposited x
xx
2. a. That upon your failure to pay the additional deposit of P827,119.83 upon
receipt of advice of approval, your P200,000.00 deposit shall be forfeited and for
this purpose, the Bank can sell the property to other interested parties;
xxx
3. That your previous deposit of P100,000.00 which was forfeited by the Bank due
to your failure to consummate the previously-approved sale, shall not be
considered as part of the purchase price;
4. That the Bank sells only whatever rights, interests and participation it may have
in the property and you are charged with full knowledge of the nature and extent of
said rights, interests and participation and waives [sic] your right to warranty
against eviction;
xxx
6. That the property shall be cleared of its present tenants/occupants but all
expenses to be incurred in connection with the ejectment proceedings shall be for
your account;
7. That the sale shall be subject to all terms and conditions covering sale of
similar acquired real estate properties;
8. That the sale shall also be subject to all terms and conditions that the Legal
Department may impose to protect the interest of the Bank.' x x x
A copy of the said letter appears to have been received by the plaintiff [private
respondent] herself on May 20, 1986 x x x.
In a letter dated May 23, 1986 x x x Lapaz informed the PNB management that the
terms and conditions set forth in its letter of May 14, 1986 were acceptable to her
except condition no. 6 which says:
156

'6 That the property shall be cleared of its present tenants/occupants but all
expenses to be incurred in connection with the ejectment proceedings shall be for
your account.'
She therefore requested for the deletion of the above condition because she had
already defrayed the expenses for the ejectment of the previous occupants of the
premises in compliance with the condition in the original approved offer to
purchase. Besides, the present occupants are not squatters, but lessees of PNB x x
x Lapaz's request for modification was not acceptable to the Bank; thus, she was
given up to July 10, 1986 to submit, duly signed, the letter-conforme dated May 14,
1986 and to remit the initial amount of P827,119.83 to comply with the approved
terms and conditions; otherwise, the approved sale will be cancelled and her
deposit of P200,000.00 forfeited x x x.
In a letter dated January 14, 1987, Lapaz through counsel informed PNB that she
was willing to pay and remit the amount of P827,119.83 representing the balance
of the 20% downpayment of the approved purchase price as soon as the subject
property was cleared of its present tenants/occupants. However, the bank in its
letter dated January 30, 1987 informed Lapaz that it could no longer grant her any
extension to pay the abovestated amount, and cancelled on January 30, 1987 the
approved sale in plaintiff's [private respondent's] favor for being stale and
unimplemented and forfeited her deposit of P200,000.00 x x x.
To demonstrate her protest over the cancellation, Lapaz through counsel sent the
letter dated February 6, 1987 asking for a reconsideration of bank's position on
the matter by honoring the approved sale in plaintiff's [private respondent's] favor
as well as her deposit x x x. In reply, the Bank denied any further extension in
favor of the plaintiff [private respondent] and likewise informed her that it had
already decided to sell the property for not less than P7,082,972.00 through
negotiated or sealed bidding x x x.
As a consequence of the cancellation of the approved offer to purchase in her
favor, Lapaz filed [an] action for Specific Performance and Damages with Prayer
for a Writ of Preliminary Injunction and Temporary Restraining Order.
After trial, the lower court on November 15, 1990, rendered judgment in favor of
the plaintiff [private respondent] x x x."[6]
In the decretal portion of the trial court's judgment, petitioner was ordered to
comply with the approved sale of the subject property but without the right to
impose the condition that private respondent shall bear the expenses for ejecting
157

the occupants of the subject property. Petitioner was also ordered to

pay P610,000.00 as actual expenses, P100,000.00 as attorney's fees, plus P1,000.00
per appearance, and the costs of suit.
The aforecited judgment of the court a quo, totally unacceptable to petitioner,
was appealed to the respondent court.Petitioner took exception to the following
postulations of the trial court: (1) that there was a perfected contract of sale
between herein private parties notwithstanding the suspensive condition imposed
upon private respondent for her to bear the expenses for ejecting the occupants of
the subject property; (2) that the deposit of P200,000.00 given by private
respondent was earnest money which is proof of the perfection of the contract of
sale albeit the said condition imposed thereon; and (3) that the cancellation of the
second sale was baseless notwithstanding proof of private respondent's refusal to
pay the balance of the 20% down payment of the purchase price of the subject
property.
The respondent court disagreed with and answered each of, the aforegoing
asseverations of petitioner in this wise:
"The plaintiff-appellee's [private respondent's] offer to purchase the subject
property was originally approved by the defendantappellant [petitioner] onSeptember 8, 1983 subject however to the terms and
conditions enumerated therein x x x.
From the moment the plaintiff-appellee [private respondent] signed the letteragreement signifying her conformity thereto, which simply means that she was
accepting the terms and conditions therein absolutely, there was created between
the parties, a perfected contract of sale.
xxx
The failure of the plaintiff [private respondent] to remit the required downpayment
does not negate the perfection of the first contract of sale between the parties. The
failure of the vendee x x x to pay the price agreed upon in the contract only gives
the vendor x x x the right to exact the fulfillment or to rescind the contract (Art.
1191, supra.; Jacinto vs. Kaparaz, 209 SCRA 246).
The terms and conditions in the letter-agreement need not be complied with before
it could be said that the contract had already attained its perfection. A reading of
the letter-agreement would reveal that the perfection of the contract does not
depend on the fulfillment of the terms and conditions therein. Since there was a
meeting of the minds between the parties upon the object of the contract and upon
158

the price, the contract of sale had already been perfected. Thus, whether or not the
conditions were fulfilled, the agreement remains to be valid and each party may
reciprocally demand for its performance x x x.
Admittedly, the x x x [private respondent] failed to remit the required downpayment
for the first contract after several notices for payment therefor x x x Thus, it was
just proper for the defendant-Bank [petitioner] to cancel the agreement to protect
its interests. Anyway, it was merely exercising its right under Article 1191 of the
New Civil Code which right was clearly stipulated in the agreement x x x.
The agreement nonetheless was subsequently revived, pursuant to which, another
letter-agreement dated May 14, 1986 was sent by appellant [petitioner] to
appellee[private respondent] x x x. The latter did not sign the letter-agreement but
instead sent a letter to the appellant [petitioner] dated May 23, 1986 expressing
her conformity to the terms and conditions stipulated therein except for the
condition which states that the subject 'property shall be cleared of its present
tenants/occupants' at her expense. x x x. On the other hand,
appellant [petitioner]posits the view that since the approval of the revival of the
offer to purchase was made subject to the terms and conditions stated therein,
which conditions were necessary for the enforceability of the obligation against
the appellant [petitioner], and there being no absolute acceptance by the
plaintiff [private respondent] of such terms and conditions, then no contract of sale
was perfected between the parties.
Appellant's [petitioner's] view is devoid of merit.
We note that the appellant [petitioner] itself admitted that the second agreement
was merely a revival of the first agreement which was duly approved by the bank,
and the terms and conditions thereof accepted by the appellee [private
respondent] x x x. Although there were some changes in the second agreement,
such changes were not substantial so as to make it a different contract of sale from
that of the first agreement of the parties. x x x.
xxx
Considering that there was already an ejectment case filed by the
appellant[petitioner] against its lessees, then there was no longer any need for the
plaintiff-appellee [private respondent] to initiate another ejectment case at her
expense, much less was there a need to incorporate condition no. 6 in the
agreement. Thus, the forfeiture of the plaintiff's [private respondent's] deposit
of P200,000.00 and the subsequent unilateral cancellation of the agreement have
159

no legal basis at all.Such cancellation was made without the

appellant's [petitioner's] action on the appellee's [private respondent's] request for
reconsideration of the PNBs denial other of her request for deletion of condition
no. 6 x x x.
xxx
Appellant [petitioner] likewise argues that the deposits given by the
appellee[private respondent] were expressly subject to conditions agreed upon by
the parties; hence, cannot be deemed as earnest money contemplated in Article
1482 of the New Civil Code.
xxx
A close scrutiny of the two letters-agreement shows that the deposits
of P100,000.00 x x x and P200,000.00 x x x were made part of the selling/purchase
price. x x x.
On the basis of the above, there can be no other conclusion than that the deposits
made x x x were actually earnest money, such that from the total selling price the
arras (earnest money) must be deducted and the balance is all that has to be paid x
x x.
xxx
The appellant [petitioner] likewise assigns as error the findings of the lower court
on the absence of proof that the appellee [private respondent] refused to pay the x
x x downpayment in the second agreement x x x
x x x The only reason which prevented the appellee [private respondent] from
paying the required downpayment was the stipulation in the agreement requiring
her to eject the present occupants of the premises when in fact she already spent
for the eviction of its previous tenants x x x. However x x x there is no need for
such stipulation because anyway the appellant [petitioner] had already instituted
an action against its tenants x x x Besides, the protest letter sent by
appellee's [private respondent's] lawyer x x x as well as the filing of this case are
eloquent proofs of the appellee's [private respondent's] desire, capacity and
willingness to proceed with the sale of the property. As we noted above, the
appellant [petitioner] never replied to the appellee's [private respondent's] request
for reconsideration of its refusal to delete condition no. 6. PNB's inaction must
have made Lapaz to suspend payment.[7]
160

Likewise rebuffed by the respondent Court of Appeals which, however, deleted

the P610,000.00 award for actual damages granted by the trial court to private
respondent, petitioner prays that the herein assailed decision be set aside because
the respondent court apparently decided questions of substance not in accord with
statutory and case law:
"THE COURT OF APPEALS ERRED:
I
IN HOLDING THAT THERE WAS A PERFECTED CONTRACT BETWEEN PNB
AND MS. NGO DESPITE THEIR CLEAR DISAGREEMENT ON THE
SUBSTANTIVE CONDITION THAT THE LATTER SHOULDER THE EXPENSES
FOR THE EJECTMENT OF THE OCCUPANTS OF THE LOT TO BE SOLD.
A. PNB's acceptance of Ms. Ngo's offer to revive her purchase of subject
lot was subject to certain substantive conditions.
B. PNB's acceptance of Ms. Ngo's offer was in fact a counter-offer which
she rejected by her insistence that PNB delete condition number 6.
C. PNB's Condition Number 6 is material and should be agreed upon at
inception of contract.
D. The area of agreement in PNB's counter-offer/acceptance extends to
Condition number 6 together with all other conditions PNB specified.
II
IN HOLDING THAT MS. NGO'S REFUSAL TO PAY THE P827,199.83
DOWNPAYMENT IS NOT A VALID BASIS FOR PNB'S CANCELLATION OF THE
'APPROVED' SALE."[8]
The petition is meritorious.
There are two separate transactions in the instant case; the first having been
unconditionally cancelled, effects thereof cannot be deemed applicable to the
second transaction.
-------------------------------------------------------

161

Even private respondent admits in her pleadings that she failed to remit the
required downpayment under the first letter-agreement, dated September 8,
1983. On this basis, respondent appellate court held that "[t]hus, it was just proper
for the [petitioner] Bank to cancel the agreement to protect its interests [9]," as it did
so on October 16, 1984. Notwithstanding such ruling, however, respondent court
theorized that because private respondent accepted the terms and conditions in that
first letter-agreement, and petitioner approved the revival thereof in another letteragreement, dated May 14, 1986, conformity to this second letter-agreement by
private respondent would be superfluous, the letter-agreement dated May 14, 1986
being "merely a revival of the first agreement which was duly approved by the
bank and the terms and conditions thereof accepted by the appellee [private
respondent]"[10]. Needless to say, this postulation of respondent court is in complete
disregard of the status of the first letter-agreement as being non-existent and totally
inefficacious as a result of its cancellation.
Respondent court then proceeded to state that petitioner having already
complied with the condition that she shoulder all expenses for the ejectment of the
occupants of the subject property under the first letter-agreement, "it would have
been too cumbersome and inequitable if the plaintiff appellee [private respondent
were again made to shoulder the expenses for the eviction of the subsequent
tenants/occupants of subject property[11]". Evidently, respondent court perceived the
two letter-agreements to be a single transaction such that it justified private
respondent's non-compliance with condition No. 6 in the second letter-agreement
by invoking her earlier compliance with the same condition in the first letteragreement.
This is confused sophism. When the first letter-agreement was cancelled by
petitioner, and private respondent agreed to that cancellation upon
receiving P550,000.00 as refund of her aggregate deposit, all the effects of that
agreement were terminated. Upon mutual assent to that cancellation, the agreement
so cancelled thereafter no longer existed. Thus, compliance by private respondent
with the terms and conditions of that first agreement served the purposes of that
agreement and cannot be made to serve the purposes of the second letteragreement. Respondent court fallaciously tacked the two agreements with each
other and commingled their effects; it incorrectly considered petitioner's successful
ejectment of the subject property's 1983 occupants under the first letter-agreement
to be sufficient compliance with the condition under the second letter-agreement
that the subject property be cleared of its 1986 occupants.
The records attest to the fact that private respondent refused to accept condition
No. 6 of the second letter-agreement, dated May 14, 1986. Private respondent
162

offered, for the second time, after the first letter-agreement was cancelled, to buy
the subject property from petitioner who accepted such offer but subject to
specified terms and conditions. Thus, petitioner's acceptance of private
respondent's offer was a qualified acceptance, which in effect, is a counter-offer
necessitating private respondent's acceptance in return. Refusing to bind herself to
bear the expenses for a second ejectment suit involving the subject property,
private respondent in effect rejected petitioner's counter offer or at the least,
accepted the same subject to the deletion of condition No. 6. This, it has to be
noted, is another counter-offer necessitating acceptance this time by
petitioner. Petitioner was unwilling to accept the same and demanded remittance of
the remainder of the downpayment, the failure of which payment, petitioner
warned private respondent, would result in the forfeiture of the initial deposit
of P200,000.00 and the ipso facto cancellation of the second letter-agreement
enabling petitioner to sell the subject property through sealed bidding.
From the foregoing, it is clear that private respondent and petitioner were
negotiating for terms mutually acceptable to them. Unfortunately, a mutually
acceptable set of terms was not reached between them, and petitioner exercised its
right under the second letter-agreement to cancel the same. This process of
negotiation undertaken in 1986 by herein private parties is undeniably distinct from
and entirely independent of the events that transpired in 1983 in the context of the
first letter agreement. Precisely another negotiation was necessary because this
1986 transaction is different and separate from that undertaken by the said parties
in 1983.
Both letter-agreements are in the nature of contracts to sell; non-compliance
with the suspensive conditions set forth therein prevents the obligation of the
vendor to convey title from having obligatory force
----------------------------------------------------------The fundamental flaw in the reasoning of both the trial court and the
respondent appellate court is their admitted premise that both letter-agreements are
contracts of sale the perfection of which are proven by the earnest money tendered
to and accepted by petitioner in the form of deposits of P100,000.00
and P200,000.00 under the first and second letter-agreements, respectively.
A perusal of the letter-agreements shows that they are contracts to sell and not
contracts of sale.

163

A contract to sell is akin to a conditional sale where the efficacy or obligatory

force of the vendor's obligation to transfer title is subordinated to the happening of
a future and uncertain event so that if the suspensive condition does not take place,
the parties would stand as if the conditional obligation had never existed. [12] The
suspensive condition is commonly full payment of the purchase price.[13]
"Thus it has been held that a deed of sale is absolute in nature although
denominated as a "Deed of Conditional Sale" where nowhere in the contract in
question is a proviso or stipulation to the effect that title to the property is sold is
reserved in the vendor until full payment of the purchase price, nor is there a
stipulation giving the vendor the right to unilaterally rescind the contract the
moment the vendee fails to pay within a fixed period x x x."[14]
If it were not full payment of the purchase price upon which depends the passing of
title from the vendor to the vendee, it may be some other condition or conditions
that have been stipulated and must be fulfilled before the contract is converted
from a contract to sell or at the most an executory sale into an executed one.[15]
"x x x Where the seller promised to execute a deed of absolute sale upon
completing payment of the price, it is a contract to sell. In the case at bar, the sale
is still in the executory stage, namely, that if private respondent is able to secure
the needed funds to be used in the purchase of the two lots owned by petitioners.A
mere executory sale, one where the sellers merely promise to transfer the property
at some future date, or where some conditions have to be fulfilled before the
contract is converted from an executory to an executed one, does not pass
ownership over the real estate being sold.
In our jurisdiction, it has been held that an accepted bilateral promise to buy and
sell is in a sense similar to, but not exactly the same, as a perfected contract of
sale because there is already a meeting of minds upon the thing which is the object
of the contract and upon the price. but a contract of sale is consummated only
upon delivery and payment. x x x
x x x Petitioners as promisors were never obliged to convey title before the
happening of the suspensive condition. In fact, nothing stood in the way of their
selling the property to another after unsuccessful demand for said price upon the
expiration of the time agreed upon."[16]
The differences between a contract to sell and a contract of sale are well-settled
in jurisprudence. As early as 1951, we have held that:
164

"x x x [a] distinction must be made between a contract of sale in which title passes
to the buyer upon delivery of the thing sold and a contract to sell x x x where by
agreement the ownership is reserved in the seller and is not to pass until the full
payment, of the purchase price is made. In the first case, non-payment of the price
is a negative resolutory condition; in the second case, full payment is a positive
suspensive condition. Being contraries, their effect in law cannot be identical. In
the first case, the vendor has lost and cannot recover the ownership of the land
sold until and unless the contract of sale is itself resolved and set aside. In the
second case, however, the title remains in the vendor if the vendee does not comply
with the condition precedent of making payment at the time specified in the
contract."[17]
In other words, in a contract to sell, ownership is retained by the seller and is not to
pass to the buyer until full payment of the price or the fulfillment of some other
conditions either of which is a future and uncertain event the non-happening of
which is not a breach, casual or serious, but simply an event that prevents the
obligation of the vendor to convey title from acquiring binding force. [18] To
illustrate the effect of a Positive suspensive condition upon the nature of the
transaction, as to whether it is a contract to sell or a contract of sale, we have held
thus:
"In the agreement in question, entitled PURCHASE AND SALE OF SCRAP IRON,
the seller bound and promised itself to sell the scrap iron upon the fulfillment by
the private respondent of his obligation to make or indorse an irrevocable and
unconditional letter of credit in payment of the purchase price. Its principal
stipulation reads, to wit:
xxx
'Witnesseth:
That the SELLER agrees to sell, and the BUYER agrees to buy x x x on the
following terms and conditions:
1. x x x
2. To cover payment of the purchase price, BUYER will open, make or indorse an
irrevocable and unconditional letter of credit not later than May 15, 1983 at the
Consolidated Bank and Trust Company, Dumaguete City Branch, in favor of the
SELLER in the sum of x x x (P250,000.00) x x x
165

3. x x x
4. x x x'
The petitioner corporation's obligation to sell is unequivocally subject to a positive
suspensive condition, i.e., the private respondent's opening, making or endorsing
of an irrevocable and unconditional letter of credit. The former agreed to deliver
the scrap iron only upon payment of the purchase price by means of an irrevocable
and unconditional letter of credit. Otherwise stated, the contract is not one of sale
where the buyer acquired ownership over the property subject to the resolutory
condition that the purchase price would be paid after delivery. Thus, there was to
be no actual sale until the opening, making or endorsing of the irrevocable and
unconditional letter of credit. Since what obtains in the case at bar is a mere
promise to sell, the failure of the private respondent to comply with the positive
suspensive condition cannot even be considered a breach -- casual or serious -but simply an event that prevented the obligation of petitioner corporation to
convey title from acquiring binding force.
xxx
In the instant case, x x x private respondent fail[ed] to open, make or indorse an
irrevocable and unconditional letter of credit x x x
Consequently, the obligation of the petitioner corporation to sell did not arise; it
therefore cannot be compelled by specific performance to comply with its
prestation. x x x"[19]
In the instant case, private respondent does not dispute the fact that, under
identical provisions in the two letter-agreements, her obligation was to deposit an
initial amount (P100,000.00 under the first letter-agreement and P200,000.00 under
the second letter-agreement) and then subsequently to deposit and additional
amount representing roughly 20% of the purchase price (P978,860.00 under the
first letter agreement and P827,119.93 under the second letter-agreement). Under
both letter-agreements, the consequences of private respondent's failure to remit
the additional deposit, are unequivocal and plainly comprehensible: "x x x deposit
shall be forfeited and for this purpose, the Bank can sell the property to other
interested parties x x x due to your [private respondent's] failure to consummate the
previously-approved sale x x x "[20]
This right reserved in the petitioner to in effect cancel the agreement to sell
upon failure of petitioner to remit the additional deposit and to consequently open
166

the subject property anew to purchase offers, is in the nature of a stipulation

reserving title in the vendor until full payment of the purchase price or giving the
vendor the right to unilaterally rescind the contract the moment the vendee fails to
pay within a fixed period.
We had already made the finding that the letter-agreements in question indeed
bear the provisions reserving title in petitioner until payment of the additional
deposit representing more or less 20% of the purchase price. We also find,
however, that the intention of the private parties herein to make the sale dependent
on petitioner's compliance with certain other conditions, is undeniable and plainly
evident in the letter-agreements. Identical provisions therein relating to petitioner's
waiver of her right to warranty against eviction and her accountability for the
expenses for the ejectment proceedings, are not so called "standard" provisions that
are more of a rhetorical device than conditions genuinely meant by the parties to be
suspensive conditions in the legal sense. In fact we find the inclusion of these
provisions to be part of the consideration of petitioner in considering private
respondent's offer to purchase the subject property. Corollarily, we find condition
No. 6 under the second letter-agreement relating to the accountability of petitioner
for the expenses for the ejectment proceedings, to be a positive suspensive
condition, among the other positive suspensive conditions embodied in the letteragreement, non-compliance of which prevents petitioner's obligation to proceed
with the sale and ultimately transfer title to private respondent, from having
obligatory force.
Moreover, no less revealing is the fact that the letter-agreements are not deeds
of sale, thereunder no title having been passed from petitioner to private
respondent. Herein lies another important distinction between a contract to sell and
a contract of sale.
"x x x The distinction between the two is important for in a contract of sale, the
title passes to the vendee upon the delivery of the thing sold, whereas in a contract
to sell, by agreement, ownership is reserved in the vendor and is not to pass until
the full payment of the price. In a contract of sale, the vendor has lost and cannot
recover ownership until and unless the contract is resolved or rescinded, whereas
in a contract to sell, title is retained by the vendor until the full payment of the
price, such payment being a positive suspensive condition, failure of which is not a
breach but an event that prevented the obligation of the vendor to convey title from
becoming effective."[21]
We have often stated that it is not enough to say that the contract of sale, being
consensual, became automatically and immediately effective.[22]
167

"Manuel v. Rodriguez, 109 Phil. 1, was one such occasion. In Manuel, 'only the
price and the terms of payment were in writing,' but the most important matter in
the controversy, the allege transfer of title was never 'reduced to any written
document. It was held that the contract should not be considered x x x a sale but a
promise to sell; and that 'the absence of a formal deed of conveyance' was a strong
indication 'that the parties did not intend immediate transfer of title, but only a
transfer after full payment of the price.' Under these circumstances, the Court
ruled Article 1504 of the Civil Code of 1889 (Art. 1592 of the present Code) to be
inapplicable to the contract in controversy -- a contract to sell or promise to sell -'where title remains with the vendor until fulfillment of a positive suspensive
condition x x x."[23]
Thus, we have applied the above doctrine not in a few cases and looked into, in
determining the true nature of an alleged sale transaction, whether or not there was
transfer of title. In one case, we found that:
"Applying these distinctions, the Court finds that the agreement between PBC and
the private respondents was only a contract to sell, not a contract of sale. And the
reasons are obvious.
There was no immediate transfer of title to the private respondents as would have
happened if there had been a sale at the outset. The supposed sale was never
registered and TCT No. 218661 in favor of PBC was not replaced with another
certificate of title in favor of the private respondents. x x x"[24]
In the instant case, there was apparently no transfer of title, not even mention
of such a transfer in the future, considering that all the parties were aware of the
occupancy of the subject property by third persons. This circumstance all the more
reinforces our finding that the transaction contemplated under the letter-agreements
was a contract to sell or a conditional sale which absolutely depends, for its
efficacy, upon the happening of the conditions specified in the said letteragreements.
Private respondent also asseverates that the initial deposit of P200,000.00
under the second letter-agreement is earnest money, that is, by express provision of
the Civil Code, considered part of the purchase price and proof of the perfection of
the sale.
Indeed under Article 1482 of the Civil Code, earnest money given in a sale
transaction is considered part of the purchase price and proof of the perfection of
the sale. This provision, however, gives no more than a disputable presumption
168

that prevails in the absence of contrary or rebuttal evidence. In the instant case, the
letter-agreements themselves are the evidence of an intention on the part of herein
private parties to enter into negotiations leading to a contract of sale that is
mutually acceptable as to absolutely bind them to the performance of their
obligations thereunder. The letter-agreements are replete with substantial condition
precedents, acceptance of which on the part of private respondent must first be
made in order for petitioner to proceed to the next step in the negotiations. The
initial deposits under the two letter-agreements, therefore, should rather be
construed, not strictly as earnest money, but as part of the consideration for
petitioner's promise to reserve the subject property for private
respondent. Certainly in excluding all other prospective buyers from bidding for
the subject property, petitioner was in effect giving up what may have been more
lucrative offers or better deals.
WHEREFORE, the Petition for Review is HEREBY GRANTED. The
decision of the Court of Appeals in CA-G.R. CV No. 33490 and the decision of the
Regional Trial Court of Manila, Branch XXVI, in Civil Case No. 87-39598, are
hereby reversed and set aside. Private respondent's complaint for specific
performance and damages in Civil Case No. 87-39598 is dismissed.
No pronouncement as to costs.
SO ORDERED.
Padilla, (Chairman), Bellosillo, Vitug, and Kapunan, JJ., concur.

[1]

In CA-G.R. CV No. 33490, dated March 15, 1995, penned by Associate Justice
Delilah Vidallon-Magtolis and concurred in by Associate Justice Gloria C. Paras
and Quirino D. Abad Santos, Jr.
[2]
Fourth Division.
[3]
Civil Case No. 87-39598.
[4]
Branch 26, Manila, National Capital Region, presided by then Judge, now
Associate Justice, Corona Ibay-Somera.
[5]
Dated November 15, 1990.
[6]
Decision in CA-G.R. CV No. 33490, supra, pp.2-9; Rollo, pp.28-35.
[7]
Id., pp.10-16; Rollo, pp.36-42.
[8]
Culled from the Petition for Review on Certiorari dated May 3, 1995, pp.1318; Rollo, pp.18-23.
[9]
Decision in CA-G.R. CV No. 33490 supra, p.11; Rollo, p.37.
[10]
Id., p.12; Rollo, p.38.
169

[11]

Ibid.
Rose Packing Co., Inc. vs. Court of Appeals, 167 SCRA 309, 318 (1988), citing
Gaite vs. Fonacier, 2 SCRA 831 (1961).
[13]
Lim vs. Court of Appeals, 182 SCRA 564, 670 (1990), citing Sing
Yee vs. Santos, 47 O.G. 6372 (1951); Jacinto vs. Kaparaz, 209 SCRA 246, 254
(1992); Visayan Sawmill Company, Inc. vs. Court of Appeals, 219 SCRA 378, 389
(1993), citing Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc., 46
SCRA 381 (1972); Bowe vs. Court of Appeals, 220 SCRA 158, 165 (1993);
Pingol vs. Court of Appeals, 226 SCRA 118, 126 (1993); Bricktown Development
Corp. vs. Amor Tierra Development Corp., 239 SCRA 126, 132 (1994), citing
Roque vs. Lapuz, 96 SCRA 741 and Agustin vs. Court of Appeals, 186 SCRA 375).
[14]
Dignos vs. Court of Appeals, 158 SCRA 375, 382 (1988), citing Taguba vs. Vda.
de Leon, 132 SCRA 722 Luzon Brokerage Co., Inc. vs. Maritime Building Co.,
Inc., 86 SCRA 305; Pingol vs. Court of Appeals, 226 SCRA 118, 127 (1993)
[15]
Macion. vs. Guiani, 225 SCRA 102,107-108 (1993).
[16]
Ibid.
[17]
Bowe vs. Court of Appeals, 220 SCRA 158, 164 (1993), citing Lim vs. Court of
Appeals, 182 SCRA 564 (1990) and Sing Yee vs. Santos, 47 O.G. 6372 (1951).
[18]
Jacinto vs. Kaparaz, 209 SCRA 246, 254 (1992).
[19]
Visayan Sawmill Company, Inc. vs. Court of Appeals, 219 SCRA 378, 388-390
(1993)
[20]
Decision in CA-G.R. CV No. 33490 dated March 15, 1995, pp.3 and
7; Rollo, pp.29 and 33.
[21]
Pingol vs. Court of Appeals, 226 SCRA 118, 126 (1993).
[22]
Lim vs. Court of Appeals, 182 SCRA 564, 570 (1990); Bowe vs. Court of
Appeals, 220 SCRA 158, 164 (1993).
[23]
Alfonso vs. Court of Appeals, 186 SCRA 400, 404-405 (1990), citing
Manuel vs. Rodriguez, 109 Phil. 1, Caridad Estates v. Santero, 71 Phil. 114,
Albea vs. Inquimboy, 86 Phil. 476; Jocson vs. Capitol Subdivision, Inc., et al., L6573, Feb. 28, 1955; Miranda vs. Caridad Estates, L-1077 and Aspuria vs. Caridad
Estates, L-2121, Oct. 3, 1950.
[24]
Lim vs. Court of Appeals, 182 SCRA 564, 570 (1990)
[12]

170

THIRD DIVISION

SEBASTIAN SIGA-AN,

G.R. No. 173227

Petitioner,
Present:

YNARES-SANTIAGO,
Chairperson,
AUSTRIA-MARTINEZ,
-versus

CHICO-NAZARIO,
NACHURA, and
LEONARDO-DE CASTRO,* JJ.

Promulgated:

171

January 20, 2009

ALICIA VILLANUEVA,
Respondent.
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION
CHICO-NAZARIO, J.:

Before Us is a Petition[1] for Review on Certiorari under Rule 45 of the

Rules of Court seeking to set aside the Decision,[2] dated 16 December 2005, and
Resolution,[3] dated 19 June 2006 of the Court of Appeals in CA-G.R. CV No.
71814, which affirmed in toto the Decision,[4] dated 26 January 2001, of the Las
Pinas City Regional Trial Court, Branch 255, in Civil Case No. LP-98-0068.

The facts gathered from the records are as follows:

On 30 March 1998, respondent Alicia Villanueva filed a complaint [5] for sum
of money against petitioner Sebastian Siga-an before the Las Pinas City Regional
Trial Court (RTC), Branch 255, docketed as Civil Case No. LP-980068. Respondent alleged that she was a businesswoman engaged in supplying
office materials and equipments to the Philippine Navy Office (PNO) located at

172

Fort Bonifacio, Taguig City, while petitioner was a military officer and comptroller
of the PNO from 1991 to 1996.

Respondent claimed that sometime in 1992, petitioner approached her inside

the PNO and offered to loan her the amount of P540,000.00. Since she needed
capital for her business transactions with the PNO, she accepted petitioners
proposal. The loan agreement was not reduced in writing. Also, there was no
stipulation as to the payment of interest for the loan.[6]

On 31 August 1993, respondent issued a check worth P500,000.00 to

petitioner as partial payment of the loan. On 31 October 1993, she issued another
check in the amount of P200,000.00 to petitioner as payment of the remaining
balance of the loan. Petitioner told her that since she paid a total amount
of P700,000.00 for the P540,000.00 worth of loan, the excess amount
of P160,000.00 would be applied as interest for the loan. Not satisfied with the
amount applied as interest, petitioner pestered her to pay additional
interest. Petitioner threatened to block or disapprove her transactions with the PNO
if she would not comply with his demand. As all her transactions with the PNO
were subject to the approval of petitioner as comptroller of the PNO, and fearing
that petitioner might block or unduly influence the payment of her vouchers in the
PNO, she conceded. Thus, she paid additional amounts in cash and checks as
interests for the loan. She asked petitioner for receipt for the payments but
petitioner told her that it was not necessary as there was mutual trust and
confidence between them. According to her computation, the total amount she paid
to petitioner for the loan and interest accumulated to P1,200,000.00.[7]

Thereafter, respondent consulted a lawyer regarding the propriety of paying

interest on the loan despite absence of agreement to that effect. Her lawyer told her
173

that petitioner could not validly collect interest on the loan because there was no
agreement between her and petitioner regarding payment of interest. Since she paid
petitioner a total amount of P1,200,000.00 for the P540,000.00 worth of loan, and
upon being advised by her lawyer that she made overpayment to petitioner, she
sent a demand letter to petitioner asking for the return of the excess amount
of P660,000.00. Petitioner, despite receipt of the demand letter, ignored her claim
for reimbursement.[8]

Respondent prayed that the RTC render judgment ordering petitioner to pay
respondent (1) P660,000.00 plus legal interest from the time of demand;
(2) P300,000.00 as moral damages; (3) P50,000.00 as exemplary damages; and (4)
an amount equivalent to 25% of P660,000.00 as attorneys fees.[9]

In his answer[10] to the complaint, petitioner denied that he offered a loan to

respondent. He averred that in 1992, respondent approached and asked him if he
could grant her a loan, as she needed money to finance her business venture with
the PNO. At first, he was reluctant to deal with respondent, because the latter had a
spotty record as a supplier of the PNO. However, since respondent was an
acquaintance of his officemate, he agreed to grant her a loan. Respondent paid the
loan in full.[11]

Subsequently, respondent again asked him to give her a loan. As respondent

had been able to pay the previous loan in full, he agreed to grant her another
loan. Later, respondent requested him to restructure the payment of the loan
because she could not give full payment on the due date. He acceded to her
request. Thereafter, respondent pleaded for another restructuring of the payment of
the loan. This time he rejected her plea. Thus, respondent proposed to execute a
promissory note wherein she would acknowledge her obligation to him, inclusive
174

of interest, and that she would issue several postdated checks to guarantee the
payment of her obligation. Upon his approval of respondents request for
restructuring of the loan, respondent executed a promissory note dated 12
September 1994 wherein she admitted having borrowed an amount
of P1,240,000.00, inclusive of interest, from petitioner and that she would pay said
amount in March 1995. Respondent also issued to him six postdated checks
amounting to P1,240,000.00 as guarantee of compliance with her obligation.
Subsequently, he presented the six checks for encashment but only one check was
honored. He demanded that respondent settle her obligation, but the latter failed to
do so. Hence, he filed criminal cases for Violation of the Bouncing Checks Law
(Batas Pambansa Blg. 22) against respondent. The cases were assigned to the
Metropolitan Trial Court of Makati City, Branch 65 (MeTC).[12]

Petitioner insisted that there was no overpayment because respondent

admitted in the latters promissory note that her monetary obligation as of 12
September 1994 amounted to P1,240,000.00 inclusive of interests. He argued that
respondent was already estopped from complaining that she should not have paid
any interest, because she was given several times to settle her obligation but failed
to do so. He maintained that to rule in favor of respondent is tantamount to
concluding that the loan was given interest-free. Based on the foregoing averments,
he asked the RTC to dismiss respondents complaint.

After trial, the RTC rendered a Decision on 26 January 2001 holding that
respondent made an overpayment of her loan obligation to petitioner and that the
latter should refund the excess amount to the former. It ratiocinated that
respondents obligation was only to pay the loaned amount of P540,000.00, and that
the alleged interests due should not be included in the computation of respondents
total monetary debt because there was no agreement between them regarding
payment of interest. It concluded that since respondent made an excess payment to
175

petitioner in the amount of P660,000.00 through mistake, petitioner should return

the said amount to respondent pursuant to the principle of solutio indebiti.[13]

The RTC also ruled that petitioner should pay moral damages for the
sleepless nights and wounded feelings experienced by respondent. Further,
petitioner should pay exemplary damages by way of example or correction for the
public good, plus attorneys fees and costs of suit.

The dispositive portion of the RTC Decision reads:

WHEREFORE, in view of the foregoing evidence and in the

light of the provisions of law and jurisprudence on the matter,
judgment is hereby rendered in favor of the plaintiff and against the
defendant as follows:

(1)
Ordering defendant to pay plaintiff the amount
of P660,000.00 plus legal interest of 12% per annum computed from 3
March 1998 until the amount is paid in full;
(2) Ordering defendant to
of P300,000.00 as moral damages;

pay

plaintiff

the

amount

(3) Ordering defendant to

of P50,000.00 as exemplary damages;

pay

plaintiff

the

amount

176

(4) Ordering defendant to pay plaintiff the amount equivalent to

25% of P660,000.00 as attorneys fees; and

(5) Ordering defendant to pay the costs of suit.[14]

Petitioner appealed to the Court of Appeals. On 16 December 2005, the

appellate court promulgated its Decision affirming in toto the RTC Decision, thus:

WHEREFORE, the foregoing considered, the instant appeal is

hereby DENIED and the assailed decision [is] AFFIRMED in toto.[15]

Petitioner filed a motion for reconsideration of the appellate courts decision

but this was denied.[16] Hence, petitioner lodged the instant petition before us
assigning the following errors:
I.

THE RTC AND THE COURT OF APPEALS ERRED IN RULING

THAT NO INTEREST WAS DUE TO PETITIONER;

177

II.

THE RTC AND THE COURT OF APPEALS ERRED IN APPLYING

THE PRINCIPLE OF SOLUTIO INDEBITI.[17]

Interest is a compensation fixed by the parties for the use or forbearance of

money. This is referred to as monetary interest. Interest may also be imposed by
law or by courts as penalty or indemnity for damages. This is called compensatory
interest.[18] The right to interest arises only by virtue of a contract or by virtue of
damages for delay or failure to pay the principal loan on which interest is
demanded.[19]

Article 1956 of the Civil Code, which refers to monetary interest,

[20]
specifically mandates that no interest shall be due unless it has been expressly
stipulated in writing. As can be gleaned from the foregoing provision, payment of
monetary interest is allowed only if: (1) there was an express stipulation for the
payment of interest; and (2) the agreement for the payment of interest was reduced
in writing. The concurrence of the two conditions is required for the payment of
monetary interest. Thus, we have held that collection of interest without any
stipulation therefor in writing is prohibited by law.[21]

It appears that petitioner and respondent did not agree on the payment of
interest for the loan. Neither was there convincing proof of written agreement
between the two regarding the payment of interest. Respondent testified that
although she accepted petitioners offer of loan amounting to P540,000.00, there
178

was, nonetheless, no verbal or written agreement for her to pay interest on the loan.
[22]

Petitioner presented a handwritten promissory note dated 12 September

1994[23] wherein respondent purportedly admitted owing petitioner capital and
interest. Respondent, however, explained that it was petitioner who made a
promissory note and she was told to copy it in her own handwriting; that all her
transactions with the PNO were subject to the approval of petitioner as comptroller
of the PNO; that petitioner threatened to disapprove her transactions with the PNO
if she would not pay interest; that being unaware of the law on interest and fearing
that petitioner would make good of his threats if she would not obey his instruction
to copy the promissory note, she copied the promissory note in her own
handwriting; and that such was the same promissory note presented by petitioner
as alleged proof of their written agreement on interest. [24] Petitioner did not rebut
the foregoing testimony.It is evident that respondent did not really consent to the
payment of interest for the loan and that she was merely tricked and coerced by
petitioner to pay interest. Hence, it cannot be gainfully said that such promissory
note pertains to an express stipulation of interest or written agreement of interest
on the loan between petitioner and respondent.

Petitioner, nevertheless, claims that both the RTC and the Court of Appeals
found that he and respondent agreed on the payment of 7% rate of interest on the
loan; that the agreed 7% rate of interest was duly admitted by respondent in her
testimony in the Batas Pambansa Blg. 22 cases he filed against respondent; that
despite such judicial admission by respondent, the RTC and the Court of Appeals,
citing Article 1956 of the Civil Code, still held that no interest was due him since
the agreement on interest was not reduced in writing; that the application of Article
1956 of the Civil Code should not be absolute, and an exception to the application
of such provision should be made when the borrower admits that a specific rate of
interest was agreed upon as in the present case; and that it would be unfair to allow
179

respondent to pay only the loan when the latter very well knew and even admitted
in the Batas Pambansa Blg. 22 cases that there was an agreed 7% rate of interest on
the loan.[25]

We have carefully examined the RTC Decision and found that the RTC did
not make a ruling therein that petitioner and respondent agreed on the payment of
interest at the rate of 7% for the loan. The RTC clearly stated that although
petitioner and respondent entered into a valid oral contract of loan amounting
to P540,000.00, they, nonetheless, never intended the payment of interest thereon.
[26]
While the Court of Appeals mentioned in its Decision that it concurred in the
RTCs ruling that petitioner and respondent agreed on a certain rate of interest as
regards the loan, we consider this as merely an inadvertence because, as earlier
elucidated, both the RTC and the Court of Appeals ruled that petitioner is not
entitled to the payment of interest on the loan. The rule is that factual findings of
the trial court deserve great weight and respect especially when affirmed by the
appellate court.[27] We found no compelling reason to disturb the ruling of both
courts.

Petitioners reliance on respondents alleged admission in the Batas Pambansa

Blg. 22 cases that they had agreed on the payment of interest at the rate of 7%
deserves scant consideration. In the said case, respondent merely testified that after
paying the total amount of loan, petitioner ordered her to pay interest.
[28]
Respondent did not categorically declare in the same case that she and
respondent made an express stipulation in writing as regards payment of interest at
the rate of 7%. As earlier discussed, monetary interest is due only if there was
an express stipulation in writing for the payment of interest.

180

There are instances in which an interest may be imposed even in the absence
of express stipulation, verbal or written, regarding payment of interest. Article
2209 of the Civil Code states that if the obligation consists in the payment of a sum
of money, and the debtor incurs delay, a legal interest of 12% per annum may be
imposed as indemnity for damages if no stipulation on the payment of interest was
agreed upon. Likewise, Article 2212 of the Civil Code provides that interest due
shall earn legal interest from the time it is judicially demanded, although the
obligation may be silent on this point.

All the same, the interest under these two instances may be imposed only as
a penalty or damages for breach of contractual obligations. It cannot be charged as
a compensation for the use or forbearance of money. In other words, the two
instances apply only to compensatory interest and not to monetary interest. [29] The
case at bar involves petitioners claim for monetary interest.

Further, said compensatory interest is not chargeable in the instant case

because it was not duly proven that respondent defaulted in paying the loan. Also,
as earlier found, no interest was due on the loan because there was no written
agreement as regards payment of interest.

Apropos the second assigned error, petitioner argues that the principle
of solutio indebiti does not apply to the instant case. Thus, he cannot be compelled
to return the alleged excess amount paid by respondent as interest.[30]

Under Article 1960 of the Civil Code, if the borrower of loan pays interest
when there has been no stipulation therefor, the provisions of the Civil Code
concerning solutio indebiti shall be applied. Article 2154 of the Civil Code
181

explains the principle of solutio indebiti. Said provision provides that if something
is received when there is no right to demand it, and it was unduly delivered
through mistake, the obligation to return it arises. In such a case, a creditor-debtor
relationship is created under a quasi-contract whereby the payor becomes the
creditor who then has the right to demand the return of payment made by mistake,
and the person who has no right to receive such payment becomes obligated to
return the same. The quasi-contract of solutio indebiti harks back to the ancient
principle that no one shall enrich himself unjustly at the expense of another.[31] The
principle of solutio indebiti applies where (1) a payment is made when there exists
no binding relation between the payor, who has no duty to pay, and the person who
received the payment; and (2) the payment is made through mistake, and not
through liberality or some other cause.[32] We have held that the principle of solutio
indebiti applies in case of erroneous payment of undue interest.[33]

It was duly established that respondent paid interest to petitioner.

Respondent was under no duty to make such payment because there was no
express stipulation in writing to that effect. There was no binding relation between
petitioner and respondent as regards the payment of interest. The payment was
clearly a mistake. Since petitioner received something when there was no right to
demand it, he has an obligation to return it.

We shall now determine the propriety of the monetary award and damages
imposed by the RTC and the Court of Appeals.

Records show that respondent received a loan amounting to P540,000.00

from petitioner.[34] Respondent issued two checks with a total worth of P700,000.00
in favor of petitioner as payment of the loan. [35] These checks were subsequently
encashed by petitioner.[36] Obviously, there was an excess of P160,000.00 in the
182

payment for the loan. Petitioner claims that the excess of P160,000.00 serves as
interest on the loan to which he was entitled. Aside from issuing the said two
checks, respondent also paid cash in the total amount of P175,000.00 to petitioner
as interest.[37] Although no receipts reflecting the same were presented because
petitioner refused to issue such to respondent, petitioner, nonetheless, admitted in
his Reply-Affidavit[38] in the Batas Pambansa Blg. 22 cases that respondent paid
him a total amount of P175,000.00 cash in addition to the two checks. Section 26
Rule 130 of the Rules of Evidence provides that the declaration of a party as to a
relevant fact may be given in evidence against him. Aside from the amounts
of P160,000.00 and P175,000.00 paid as interest, no other proof of additional
payment as interest was presented by respondent. Since we have previously found
that petitioner is not entitled to payment of interest and that the principle of solutio
indebiti applies to the instant case, petitioner should return to respondent the excess
amount of P160,000.00 and P175,000.00 or the total amount of P335,000.00.
Accordingly, the reimbursable amount to respondent fixed by the RTC and the
Court of Appeals should be reduced from P660,000.00 to P335,000.00.

As earlier stated, petitioner filed five (5) criminal cases for violation of Batas
Pambansa Blg. 22 against respondent. In the said cases, the MeTC found
respondent guilty of violating Batas Pambansa Blg. 22 for issuing five dishonored
checks to petitioner. Nonetheless, respondents conviction therein does not affect
our ruling in the instant case. The two checks, subject matter of this case,
totaling P700,000.00 which respondent claimed as payment of the P540,000.00
worth of loan, were not among the five checks found to be dishonored or bounced
in the five criminal cases. Further, the MeTC found that respondent made an
overpayment of the loan by reason of the interest which the latter paid to petitioner.
[39]

Article 2217 of the Civil Code provides that moral damages may be
recovered if the party underwent physical suffering, mental anguish, fright, serious
183

anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation

and similar injury. Respondent testified that she experienced sleepless nights and
wounded feelings when petitioner refused to return the amount paid as interest
despite her repeated demands. Hence, the award of moral damages is
justified. However, its corresponding amount of P300,000.00, as fixed by the RTC
and the Court of Appeals, is exorbitant and should be equitably reduced. Article
2216 of the Civil Code instructs that assessment of damages is left to the discretion
of the court according to the circumstances of each case. This discretion is limited
by the principle that the amount awarded should not be palpably excessive as to
indicate that it was the result of prejudice or corruption on the part of the trial
court.[40] To our mind, the amount of P150,000.00 as moral damages is fair,
reasonable, and proportionate to the injury suffered by respondent.

Article 2232 of the Civil Code states that in a quasi-contract, such as solutio
indebiti, exemplary damages may be imposed if the defendant acted in an
oppressive manner. Petitioner acted oppressively when he pestered respondent to
pay interest and threatened to block her transactions with the PNO if she would not
pay interest. This forced respondent to pay interest despite lack of agreement
thereto. Thus, the award of exemplary damages is appropriate. The amount
of P50,000.00 imposed as exemplary damages by the RTC and the Court is fitting
so as to deter petitioner and other lenders from committing similar and other
serious wrongdoings.[41]

Jurisprudence instructs that in awarding attorneys fees, the trial court must
state the factual, legal or equitable justification for awarding the same. [42] In the
case under consideration, the RTC stated in its Decision that the award of attorneys
fees equivalent to 25% of the amount paid as interest by respondent to petitioner is
reasonable and moderate considering the extent of work rendered by respondents
lawyer in the instant case and the fact that it dragged on for several years.
[43]
Further, respondent testified that she agreed to compensate her lawyer handling
184

the instant case such amount.[44] The award, therefore, of attorneys fees and its
amount equivalent to 25% of the amount paid as interest by respondent to
petitioner is proper.

Finally, the RTC and the Court of Appeals imposed a 12% rate of legal
interest on the amount refundable to respondent computed from 3 March 1998
until its full payment. This is erroneous.

We held in Eastern Shipping Lines, Inc. v. Court of Appeals,[45] that when an

obligation, not constituting a loan or forbearance of money is breached, an interest
on the amount of damages awarded may be imposed at the rate of 6% per
annum. We further declared that when the judgment of the court awarding a sum of
money becomes final and executory, the rate of legal interest, whether it is a
loan/forbearance of money or not, shall be 12% per annum from such finality until
its satisfaction, this interim period being deemed equivalent to a forbearance of
credit.

In the present case, petitioners obligation arose from a quasi-contract

of solutio indebiti and not from a loan or forbearance of money. Thus, an interest
of 6% per annum should be imposed on the amount to be refunded as well as on
the damages awarded and on the attorneys fees, to be computed from the time of
the extra-judicial demand on 3 March 1998,[46] up to the finality of this Decision. In
addition, the interest shall become 12% per annum from the finality of this
Decision up to its satisfaction.

WHEREFORE, the Decision of the Court of Appeals in CA-G.R. CV No.

71814, dated 16 December 2005, is hereby AFFIRMED with the
185

following MODIFICATIONS: (1) the amount of P660,000.00 as refundable

amount of interest is reduced to THREE HUNDRED THIRTY FIVE THOUSAND
PESOS (P335,000.00); (2) the amount of P300,000.00 imposed as moral damages
is reduced to ONE HUNDRED FIFTY THOUSAND PESOS (P150,000.00); (3) an
interest of 6% per annum is imposed on the P335,000.00, on the damages awarded
and on the attorneys fees to be computed from the time of the extra-judicial
demand on 3 March 1998 up to the finality of this Decision; and (4) an interest of
12% per annum is also imposed from the finality of this Decision up to its
satisfaction. Costs against petitioner.

SO ORDERED.

MINITA V. CHICO-NAZARIO
Associate Justice

WE CONCUR:

CONSUELO YNARES-SANTIAGO
Associate Justice
186

Chairperson

MA. ALICIA AUSTRIA-MARTINEZ ANTONIO EDUARDO B. NACHURA

Associate Justice Associate Justice

TERESITA J. LEONARDO-DE CASTRO

Associate Justice

ATTESTATION

187

I attest that the conclusions in the above Decision were reached in consultation
before the case was assigned to the writer of the opinion of the Courts Division.

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson, Third Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division
Chairpersons Attestation, it is hereby certified that the conclusions in the above
Decision were reached in consultation before the case was assigned to the writer of
the opinion of the Courts Division.

REYNATO S. PUNO
Chief Justice

188

* Per Special Order No. 546, Associate Justice Teresita J. Leonardo-De Castro was
designated to sit as additional member in view of the retirement of Associate
Justice Ruben T. Reyes dated 5 January 2009.
[1]

Rollo, pp. 9-23.

[2]

Penned by Associate Justice Josefina Guevara-Salonga with Associate Justices

Eliezer R. de Los Santos and Fernanda Lampas-Peralta, concurring; rollo, pp. 2432.
[3]

Rollo, pp. 34-35.

[4]

Penned by Judge Florentino M. Alumbres; records, pp. 510-516.

[5]

Records, pp. 1-5.

[6]

Id. at 2.

[7]

Id. at 2-3.

[8]

Id. at 3-4.

[9]

Id. at 4-5.

[10]

Id. at 150-160.

[11]

Id. at 3-4.

[12]

Id. at 4-5.

[13]

Id. at 514-515.
189

[14]

Id. at 515-516.

[15]

Rollo, p. 32.

[16]

Id. at 34-35.

[17]

Id. at 16.

[18]

Paras, CIVIL CODE OF THE PHILIPPINES ANNOTATED (13th Edition,

1995, Volume V), p. 854; Caguioa, COMMENTS AND CASES ON CIVIL
LAW, (1st Edition, Volume VI), p. 260.

[19]

Baretto v. Santa Marina, 37 Phil. 568, 571 (1918).

[20]

Supra note 18.

[21]

Ching v. Nicdao, G.R. No. 141181, 27 April 2007, 522 SCRA 316, 361; Tan v.
Valdehueza, 160 Phil. 760, 767 (1975).

[22]

TSN, 18 April 2000, pp. 7-8.

[23]

Records, p. 321.

[24]

Rollo, pp. 70-71; TSN, 18 April 2000, pp. 17-18.

[25]

Id. at 17-18.

[26]

Records, p. 514.

[27]

Pantranco North Express Inc. v. Standard Insurance Company Inc., G.R. No.
140746, 16 March 2005, 453 SCRA 482, 490.
[28]

CA rollo, p. 88.

[29]

Supra note 18 at 856-857.

[30]

Rollo, pp. 18-20.

190

[31]

Moreo-Lentfer v. Wolff, G.R. No. 152317, 10 November 2004, 441 SCRA 584,
591.
[32]

Id.

[33]

Velez v. Balzarza, 73 Phil. 630, 632 (1942).

[34]

TSN, 18 April 2000, p. 7.

[35]

Exhibits A & B; records, pp. 367, 371 and 372.

[36]

CA rollo, pp. 58-63.

[37]

TSN, 18 April 2000, p. 23.

[38]

CA rollo, pp. 94-96.

[39]

Records, pp. 510-516.

[40]

Philippine Airlines v. Court of Appeals, G.R. No. 123238, 22 September 2008.

[41]

Id.

[42]

Serrano v. Gutierrez, G.R. No. 162366, 10 November 2006, 506 SCRA 712,
724; Buing v. Santos, G.R. No. 152544, 19 September 2006, 502 SCRA 315, 321323; Ballesteros v. Abion, G.R. No. 143361, 9 February 2006, 482 SCRA 23, 3940.
[43]

Records, p. 515.

[44]

TSN, 18 April 2000, pp. 35-36.

[45]

G.R. No. 97412, 12 July 1994, 234 SCRA 78, 95-97.

[46]

Records, p. 7.

191

FIRST DIVISION
ELOISA MERCHANDISING,
INC. and TREBEL
INTERNATIONAL,
INC.,Petitioners,
- versus -

G.R. No. 192716

Present:
LEONARDO-DE CASTRO, J.,*
Acting Chairperson,
BERSAMIN,
DEL CASTILLO, VILLARAMA,
JR., and
PERLAS-BERNABE,* JJ.

BANCO DE ORO UNIVERSAL

BANK and ENGRACIO M.
Promulgated:
ESCASINAS, JR., in his capacity
as Ex-Officio Sheriff of the RTC of June 13, 2012
Makati City,
Respondents.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION
VILLARAMA, JR., J.:
Assailed in this petition for review on certiorari under Rule 45 are the
Decision[1] dated March 30, 2010 and Resolution[2] dated June 15, 2010 of the
Court of Appeals (CA) in CA-G.R. CV No. 89779. The CA affirmed the trial
courts dismissal of petitioners complaint on the ground of failure to prosecute.
On November 11, 1993, petitioner Eloisa Merchandising, Inc. (EMI) executed in
favor of respondent Banco de Oro Universal Bank (BDO) a real estate mortgage
(REM) over its properties located at No. 129 Neptune St., Bel-Air Village II,
Makati City, Metro Manila and covered by Transfer Certificate of Title Nos.
157092 and 157093. The REM was further amended on May 16, 1996, December
23, 1996, September 16, 1998 and July 2, 1999 to secure the principal obligation
totalling Twenty-Nine Million Nine Hundred Thousand Pesos (P29,900,000.00)
drawn from the Credit Line Agreement of EMI and Term Loan Agreement of
192

Trebel International, Inc. (Trebel). EMI likewise executed a Continuing Suretyship

in favor of BDO to secure the credit accommodation extended by BDO to
petitioners affiliate, Trebel.[3]
On January 10, 2002, BDO initiated foreclosure proceedings by filing an
application for extrajudicial foreclosure before the Office of the Ex-Officio Sheriff
of the Regional Trial Court (RTC) of Makati City.[4] Accordingly, respondent
Engracio M. Escasinas, Jr. issued a notice setting the auction sale of the mortgaged
property on March 7, 2002.
On March 1, 2002, petitioners filed a Complaint[5] for Annulment of Real Estate
Mortgage, Injunction & Damages With Prayer for Issuance of a Writ of
Preliminary Injunction and/or Temporary Restraining Order, docketed as Civil
Case No. 02-245 of the RTC of Makati City, Branch 59. Petitioners alleged the
following as grounds for nullity of the REM: (1) the contract is in the nature of a
third-party mortgage to secure the loans of Trebel despite the fact that EMI is not
in the suretyship business; (2) after maturity of the loans, BDO granted Trebel
extensions of time to pay without notice to EMI, thus extinguishing the corporate
guaranty or suretyship and REM, pursuant to Art. 2079 of the Civil Code; (3)
under the promissory notes, BDO unilaterally fixed an adjustable, floating interest
rate on each interest period as may be favorable to it, a potestative condition which
is null and void under Art. 1308 of the Civil Code; and (4) the penalty of 3% per
month or 36% per annum is exorbitant and excessive. Petitioners further claimed
that BDO acted with malice and evident bad faith in initiating the extrajudicial
foreclosure proceedings.
BDO filed a motion to dismiss[6] on the ground of lack of cause of action which can
be determined from the facts alleged in the complaint and considering all annexes,
motions and evidence on record.
On May 7, 2002, petitioners filed an amended complaint [7] which impleaded the
Register of Deeds and alleged that the mortgaged property was sold at a public
auction on March 7, 2002.
On July 18, 2002, petitioners filed a Motion for Leave to File and to Admit Second
Amended Complaint,[8] which averred that the Register of Deeds of Makati City
has consolidated the titles over the foreclosed properties and issued new titles in
the name of BDO.
193

On November 28, 2002, the trial court issued an order [9] granting the motion to
admit second amended complaint and denying the motion to dismiss. BDO was
directed to file a responsive pleading.
On January 17, 2003, BDO filed its Answer [10] traversing the allegations of the
complaint and asserting that: (1) there was only forbearance on BDOs part before
filing the extrajudicial foreclosure due to insistent request of petitioners who
repeatedly promised to settle their obligations, and for humanitarian reasons; (2)
the loan documents clearly stated that no prior demand is necessary before the
entire obligation becomes due and demandable; (3) on June 22, 1999, Trebel
obtained a Term Loan Agreement in addition to the previously
granted P5,000,000.00 Credit/Trust Receipts Line granted by BDO, from which
Trebel availed of P19,900,000.00, part of which was used to pay off EMIs loans; in
consideration thereof, EMI executed a Continuing Suretyship and the Fourth
Amended REM to the extent of P29,900,000.00 in favor of BDO; (4) Trebel
subsequently made several drawings from its own credit lines in the total amount
of P29,880,000.00 under Promissory Notes (PNs) executed on various dates; (5)
because Trebel failed to satisfy its loan obligations under the aforesaid PNs, BDO
was compelled to file an application for extrajudicial foreclosure of the REM on
January 10, 2002, and BDO won as the highest bidder during the public auction
sale; (6) EMI was not a third-party mortgagor considering that it secured its own
obligations and Trebel has assumed its obligations in full; the veil of corporate
fiction maybe pierced in this case, and EMI is already estopped from raising the
issue of ultra vires act after Trebel had defaulted on its obligations; (7) with the
execution of the Continuing Suretyship, EMI bound itself solidarily with the
principal debtor, Trebel, and the right of BDO to proceed against EMI as surety
exists independently of its right to proceed against Trebel; EMI as surety is not
even entitled to a notice of the principals default; (8) the Conforme Letter dated
June 14, 1999 sent by BDO to EMI showed the consent of Mr. Roberto L. Del
Rosario (President) and Ms. Emma M. Del Rosario (Finance Manager) who both
signed the said letter which provides for a floating interest rate based on the 364day Treasury Bill Rates plus 4% or the BDO Reference Rate plus 7.5%; T-Bill
Rates are one of the most objective and generally used standard for interest rates;
and (9) the liquidated penalty was part of the parties agreement, which will not
accrue until Trebel defaults on its obligations with BDO.

194

In the Notice of Pre-Trial[11] dated January 22, 2003, the trial court set the pre-trial
conference on February 27, 2003.In compliance with the trial courts directive, the
parties submitted their respective pre-trial briefs.
On March 13, 2003, petitioners filed a Motion to Admit Supplemental Complaint
which further alleged that BDOs petition for issuance of a writ of possession was
granted by the RTC of Makati City, Branch 143 in a Decision dated February 18,
2003. EMI reiterated that its rights as surety-mortgagor were violated in the
railroaded ex parteproceedings implementing the writ of possession even as EMIs
pending motion for reconsideration was still unresolved by Branch 143.[12]
In its Order[13] dated June 19, 2003, the trial court denied the motion to admit
supplemental complaint on the ground that the matters raised in the supplemental
complaint were improper as they pertain to issuances by another branch in a
separate petition for writ of possession.
At the scheduled pre-trial conference on June 26, 2003, on motion of
petitioners, they were allowed to present evidence exparte in view of the absence
of BDO which was non-suited. In its motion for reconsideration, BDOs counsel
cited extraordinary and non-moving traffic as reason for his failure to arrive on
time for the pre-trial conference. The trial court, in an Order dated August 27,
2003, granted the said motion, reinstated the case and set the case again for pretrial conference on September 26, 2003, later moved to November 10, 2003, and
finally rescheduled to January 12, 2004 by agreement of the parties.[14]
On July 16, 2003, petitioners filed a motion for reconsideration of the June
19, 2003 Order denying their motion to admit supplemental complaint; BDO filed
its opposition to the said motion.
For failure of the petitioners to appear despite due notice at the scheduled pre-trial
conference on January 12, 2004, the case was ordered dismissed. [15] In their motion
for reconsideration, petitioners counsel claimed that his failure to attend was due to
his accidental falling on the stairs of his house in the morning of January 12, 2004,
due to which he had to be attended by a hilot. In an Order dated May 7, 2004, the
trial court reconsidered the dismissal and scheduled anew the pre-trial conference
on June 29, 2004, which date was subsequently reset to August 3, 2004 for lack of
proof of service upon petitioners counsel.[16]
195

Since petitioners again failed to appear on the re-scheduled pre-trial conference on

August 3, 2004, the trial court issued the following Order:
When this case was called for pre-trial conference, only counsel
for the defendants appeared. There was no appearance on the part of
the plaintiffs, despite the fact that as early as June 29, 2004, they were
notified for todays hearing. The Court, however, is in receipt of a
Motion to Reset filed by counsel for the plaintiff, alleging among
others, that he is to appear at the MTC of San Jose, Batangas, which
was set earlier than the hearing of this case. The Court finds the
ground not meritorious because counsel of plaintiffs in open Court on
June 29, 2004 signed the notification for the hearing of this
case. Counsel could have objected to the chosen date if indeed he was
not available. Likewise, the records will show that on January 12,
2004, this case was also dismissed for failure of the plaintiffs to
appear for pre-trial conference. This should have served as a warning
to herein plaintiffs.
In view hereof, upon motion of the herein defendants, the
above-entitled case is hereby ordered dismissed pursuant to Section 5,
Rule 18 of the Rules of Court.
SO ORDERED.[17] (Italics supplied.)
Petitioners moved to reconsider the above order, their counsel alleging that
he had misplaced or lost his calendar book and could not have ascertained the
availability of his schedule. Stressing that he had no intention to ignore the hearing
as in fact he filed a motion to reset the same six days prior to the scheduled
hearing, petitioners counsel pleaded for the kind indulgence of the court.
On December 29, 2004, the trial court issued an Order [18] granting petitioners
motion for reconsideration in the interest of justice and reinstating the case. The
trial court, however directed petitioners to be more circumspect in attending to this
case.
In its Order[19] dated September 20, 2005, the trial court dismissed the case for
failure of petitioners to prosecute their case. Citing the two previous dismissals on
account of petitioners non-appearance at the pre-trial conference, the trial court
said that [f]rom the date of its second reconsideration of the order of dismissal on
196

December 29, 2004 until today, plaintiffs did not do anything to prosecute the
instant case.
Petitioners filed a motion for reconsideration in which they averred that:
1. After the reconsideration of the Order of dismissal on
December 29, 2004, the plaintiffs counsel, Atty. Anselmo A.
Marqueda, on several occasion, passed by the court and diligently
followed-up the hearing of this case. He was assured by an officer of
the court to just wait for the notice of hearing that they will issue in
the instant case.
2. While waiting for the notice of hearing from this court, the
respective counsels of the parties negotiated in earnest for an amicable
settlement of the case. During the last telephone conversation with
Atty. Roy P.R. Talao, the defendants bank counsel, and the
undersigned agree on some proposals for settlement which are
however subject to final confirmation of their respective clients. The
plaintiff believe that the parties are very close to agree and enter into
an amicable settlement of this case.
3. Apart from the reliance of the undersigned counsel on the
statement of the court officer to just wait for the notice of hearing, the
undersigned counsel suffered a handicap in making a personal followup of this case because of his numerous travels and lengthy sojourn in
the province due to family conflict and death of a member of the
family.
x x x x[20]
In its Order[21] dated April 10, 2006, the trial court denied petitioners motion for
reconsideration, as follows:
x x x Records show that this case has been dismissed thrice
(January 12, 2004; August 3, 2004 and September 20, 2005). The first
two dismissals were due to the failure of the plaintiffs to appear
during the pre-trial conference despite notice. In both cases plaintiffs
were admonished to be more circumspect in attending to this
case. This time the instant case was dismissed due to inaction of
herein plaintiffs for unreasonable length of time.
197

The Court has been lenient for quite sometime however,

plaintiffs seemed inclined to abuse the Courts leniency.Finding no
compelling reason to reconsider the assailed order, motion is hereby
DENIED.
SO ORDERED.
Aggrieved, petitioners appealed to the CA arguing that the trial court erred in
dismissing the case for failure to prosecute considering that (1) the trial court has
not yet resolved petitioners motion for reconsideration of the order denying their
motion to admit supplemental complaint; (2) petitioners are very much
interested to prosecute this case to protect their rights in the premises; (3)
petitioners have valid and meritorious causes of action; (4) petitioners may not be
deprived of their day in court by the negligence of their counsel; and (5) non-suit
or default judgment is not encouraged as it violates due process.[22]
By Decision dated March 30, 2010, the CA affirmed the trial courts dismissal of
the case. The CA said that petitioners cannot justify their prolonged inaction by
belatedly raising as issue the pending motion for reconsideration from the trial
courts denial of their motion to admit the supplemental complaint, when all along
they were aware that the case was at the pre-trial stage as in fact the case was twice
dismissed for their failure to attend the pre-trial conference. Under the
circumstances stated in its September 20, 2005 Order, the CA held that the trial
court cannot be faulted for dismissing the case on the ground of petitioners failure
to prosecute their action, citing this Courts ruling in Olave v. Mistas.[23]
The CA also denied the motion for reconsideration filed by the petitioners.
Petitioners contend that the only reason for the trial courts dismissal of the
case was the failure of their counsel to move to set the case for pre-trial. However,
Section 1, Rule 18 of the 1997 Rules of Civil Procedure, as amended, imposing
upon the plaintiff the duty to promptly move to set the case for pre-trial, had been
repealed and amended by A.M. No. 03-1-09-SC which took effect on August 16,
2004. This amendment to the rule on pre-trial now imposes on the clerk of court
the duty to issue a notice of pre-trial if the plaintiff fails to file a motion to set the
case for pre-trial conference.

198

Petitioners point out that the case was not yet ripe for pre-trial because of the
unresolved pending motion for reconsideration of the trial courts denial of the
motion to admit supplemental complaint. In any event, petitioners assert that they
are very much interested to prosecute the case as they have presented evidence in
their application for the issuance of TRO and writ of preliminary injunction,
amended the complaint several times, their representatives have always been
attending as notified by their lawyers, and their counsel was following up the case
but the Clerk of Court could not set the case for pre-trial because of the pending
motion. As to the prior dismissals of the case, these should not be taken as badges
of failure to prosecute because these had been set aside on meritorious
grounds. The circumstances that respondent BDO itself had been declared in
default for failure to appear at the pre-trial on June 26, 2003 and has asked
repeatedly for extensions of time from the court, the ongoing negotiations with
BDO for amicable settlement even at the appeal stage, and petitioners meritorious
causes of action, justify a liberal application of the rules so that petitioners will be
given their day in court.
Respondent BDO, on the other hand, asserts that the failure of petitioners to
move for the setting of the case for pre-trial conference, coupled with their
repeated violations of the Rules which prompted the trial court to dismiss their
complaint twice, are sufficient grounds for the trial court to finally dismiss the
complaint. A.M. No. 03-1-09-SC did not remove plaintiffs obligation to set the
case for pre-trial. Petitioners claim that they relied on a supposed assurance by a
court personnel to set the case for pre-trial is doubtful, aside from being
contradictory to the admission of petitioners counsel that he suffered a handicap in
making a personal follow-up of this case because of [his] numerous travels and
lengthy sojourn in the province due to family conflict and death of a member of the
family.
As to the alleged negotiations for an amicable settlement, respondent
admitted there were talks during court hearings and telephone calls but these were
casual and at best, exploratory. No serious offer was made by petitioners, much
less concretized. At any rate, even if true, such talks is not a ground to tarry and
delay the prosecution of the case which had been pending with the trial court for
more than three years and had not even left the pre-trial stage. If indeed petitioners
were sincere in their desire to settle, they should have promptly moved for the
setting of pre-trial so that the case can be referred for mandatory mediation
proceedings.
199

The petition has no merit.

Under Section 3,[24] Rule 17 of the 1997 Rules of Civil Procedure, as
amended, the failure on the part of the plaintiff, without any justifiable cause, to
comply with any order of the court or the Rules, or to prosecute his action for an
unreasonable length of time, may result in the dismissal of the complaint
either motu proprio or on motion by the defendant. The failure of a plaintiff to
prosecute the action without any justifiable cause within a reasonable period of
time will give rise to the presumption that he is no longer interested to obtain from
the court the relief prayed for in his complaint; hence, the court is authorized to
order the dismissal of the complaint on its own motion or on motion of the
defendants. The presumption is not, by any means, conclusive because the
plaintiff, on a motion for reconsideration of the order of dismissal, may allege and
establish a justifiable cause for such failure.[25] The burden to show that there are
compelling reasons that would make a dismissal of the case unjustified is on the
petitioners.[26]
Under Section 1, Rule 18 of the 1997 Rules of Civil Procedure, as amended,
it is the duty of the plaintiff, after the last pleading has been served and filed, to
promptly move ex parte that the case be set for pre-trial. On August 16, 2004, A.M.
No. 03-1-09-SC (Re: Proposed Rule on Guidelines to be Observed by Trial Court
Judges and Clerks of Court in the Conduct of Pre-Trial and Use of DepositionDiscovery Measures) took effect, which provides that:
Within five (5) days from date of filing of the reply, the plaintiff
must promptly move ex parte that the case be set for pre-trial
conference. If the plaintiff fails to file said motion within the given
period, the Branch COC shall issue a notice of pre-trial.
We note that when the above guidelines took effect, the case was already at the
pre-trial stage and it was the failure of petitioners to set the case anew for pre-trial
conference which prompted the trial court to dismiss their complaint.
In Olave v. Mistas,[27] this Court said that even if the plaintiff fails to promptly
move for pre-trial without any justifiable cause for such delay, the extreme
sanction of dismissal of the complaint might not be warranted if no substantial
prejudice would be caused to the defendant, and there are special and compelling
reasons which would make the strict application of the rule clearly unjustified. In
200

the more recent case of Espiritu v. Lazaro,[28] this Court affirmed the dismissal of a
case for failure to prosecute, the plaintiff having failed to take the initiative to set
the case for pre-trial for almost one year from their receipt of the Answer. Although
said case was decided prior to the effectivity of A.M. No. 03-1-09-SC, the Court
considered the circumstances showing petitioners and their counsels lack of
interest and laxity in prosecuting their case.
In this case, while there was no substantial prejudice caused to herein
respondent, who has already consolidated the ownership of petitioners properties,
secured new titles in its name and successfully implemented a writ of possession
issued by another branch, there was neither patent abuse in the trial courts
dismissal of the complaint for the third time, the earlier two dismissals having been
precipitated by petitioners non-appearance at the pre-trial conference. Contrary to
petitioners assertion, the trial court did not find their offered excuses as meritorious
or justifiable; the trial court in the exercise of discretion simply reinstated the case
in the interest of justice but explicitly warned petitioners to be more circumspect in
attending to the case.
However, despite the trial courts leniency and admonition, petitioners
continued to exhibit laxity and inattention in attending to their case. Assuming
domestic problems had beset petitioners counsel in the interregnum, with greater
reason should he make proper coordination with the trial court to ensure his
availability on the date to be chosen by the trial court for the long-delayed conduct
of a pre-trial conference. Petitioners themselves did nothing to get the case moving
for nine months and set the case anew for pre-trial even as BDO was already
seeking their judicial ejectment with the implementation of the writ of possession
issued by Branch 143. Such circumstance also belies their pretense that the parties
were then still negotiating for a settlement. We have held that a party cannot blame
his counsel when he himself was guilty of neglect; and that the laws aid the
vigilant, not those who slumber on their rights. Vigilantibus sed non dormientibus
jura subveniunt.[29]
We also agree with the CA that petitioners are belatedly raising as issue the
unresolved motion for reconsideration of the denial of petitioners motion to admit
supplemental complaint. Petitioners did not even file a motion to resolve the said
pending incident which, in any event, could have been brought to the trial courts
attention had petitioners acted promptly to have the case set anew for pre-trial
conference soon after or within a reasonable time from the reinstatement of the
case on December 29, 2004.
201

While under the present Rules, it is now the duty of the clerk of court to set
the case for pre-trial if the plaintiff fails to do so within the prescribed period, this
does not relieve the plaintiff of his own duty to prosecute the case diligently. This
case had been at the pre-trial stage for more than two years and petitioners have not
shown special circumstances or compelling reasons to convince us that the
dismissal of their complaint for failure to prosecute was unjustified.
WHEREFORE, the
petition
for
review
on
certiorari
is DENIED. The Decision dated March 30, 2010 and Resolution dated June 15,
2010 of the Court of Appeals in CA-G.R. CV No. 89779 are hereby AFFIRMED
and UPHELD.
Costs against the petitioners.
SO ORDERED.

MARTIN S. VILLARAMA, JR.

Associate Justice
WE CONCUR:

TERESITA J. LEONARDO-DE CASTRO

Associate Justice
Acting Chairperson

LUCAS P. BERSAMIN
Associate Justice

MARIANO C. DEL CASTILLO

Associate Justice

202

ESTELA M. PERLAS-BERNABE
Associate Justice

AT T E S TAT I O N
I attest that the conclusions in the above Decision had been reached in consultation
before the case was assigned to the writer of the opinion of the Courts Division.

TERESITA J. LEONARDO-DE CASTRO

Associate Justice
Acting Chairperson

C E R T I F I C AT I O N
I certify that the conclusions in the above Decision had been reached in
consultation before the case was assigned to the writer of the opinion of the Court.

ANTONIO T. CARPIO
Senior Associate Justice
(Per Section 12, R.A. 296,
The Judiciary Act of 1948, as amended)

203

Designated Acting Chairperson of the First Division per Special Order No. 1226
dated May 30, 2012.
*
Designated Acting Member of the First Division per Special Order No. 1227
dated May 30, 2012.
[1]
Rollo, pp. 34-43. Penned by Associate Justice Fernanda Lampas Peralta with
Associate Justices Marlene Gonzales-Sison and Ruben C. Ayson concurring.
[2]
Id. at 68.
[3]
Records, pp. 78-105, 113-116, 179-180.
[4]
Id. at 13-15.
[5]
Id. at 1-10.
[6]
Id. at 205-217.
[7]
Id. at 225-237.
[8]
Id. at 312-326.
[9]
Id. at 361-363.
[10]
Id. at 367-380.
[11]
Id. at 381-382.
[12]
Id. at 403-409.
[13]
Id. at 443.
[14]
Id. at 445-449, 460, 462-463.
[15]
Id. at 465.
[16]
Id. at 466-468, 473, 475.
[17]
Id. at 479.
[18]
Id. at 490.
[19]
Id. at 492.
[20]
Id. at 493-494.
[21]
Id. at 510.
[22]
CA rollo, p. 32.
[23]
G.R. No. 155193, November 26, 2004, 444 SCRA 479.
[24]
SEC. 3. Dismissal due to fault of plaintiff. If, for no justifiable cause, the
plaintiff fails to appear on the date of the presentation of his evidence in chief
on the complaint, or to prosecute his action for an unreasonable length of time,
or to comply with these Rules or any order of the court, the complaint may be
dismissed upon motion of the defendant or upon the court's own motion,
without prejudice to the right of the defendant to prosecute his counterclaim in
the same or in a separate action. This dismissal shall have the effect of an
adjudication upon the merits, unless otherwise declared by the court.
204

[25]

Malayan Insurance Co., Inc. v. Ipil International, Inc., G.R. No. 141860,
August 31, 2006, 500 SCRA 371, 380, citing Olave v. Mistas, supra note 23 at
494.
[26]
Espiritu v. Lazaro, G.R. No. 181020, November 25, 2009, 605 SCRA 566, 573.
[27]
Supra note 23 at 495.
[28]
Supra note 26 at 572-573.
[29]
Heirs of the Late Flor Tungpalan v. Court of Appeals, G.R. No. 136207, June
21, 2005, 460 SCRA 392, 397-398, citing Villanueva v. People, G.R. No.
135098, April 12, 2000, 330 SCRA 695, 703 and Mendoza v. Cayas, 98 Phil.
107, 111.

205

Republic of the Philippines

Supreme Court
Manila
THIRD DIVISION
JULIE NABUS,* MICHELLE
NABUS* and BETTY TOLERO,
Petitioners,

- versus -

G.R. No. 161318

Present:
CORONA, J., Chairperson,
CHICO-NAZARIO,
VELASCO, JR.,
NACHURA, and
PERALTA, JJ.
Promulgated:
November 25, 2009

JOAQUIN PACSON and JULIA

PACSON,
Respondents.
x-----------------------------------------------------------------------------------------x

DECISION
PERALTA, J.:
This is a petition for review on certiorari [1] of the Decision[2] of the Court of
Appeals in CA-G.R. CV No. 44941 dated November 28, 2003. The Court of
Appeals affirmed with modification the Decision of the Regional Trial Court of La
Trinidad, Benguet, Branch 10, ordering petitioner Betty Tolero to execute a deed of
absolute sale in favor of respondents, spouses Joaquin and Julia Pacson, over the
lots covered by Transfer Certificate of Title (TCT) Nos. T-18650 and T-18651 upon
payment to her by respondents of the sum of P57,544.[8]4 representing the balance
due for the full payment of the property subject of this case; and ordering petitioner
206

Betty Tolero to surrender to respondentsher owners duplicate copy of TCT Nos. T18650 and T-18651.
The facts, as stated by the trial court,[3] are as follows:
The spouses Bate and Julie Nabus were the owners of parcels of land with a
total area of 1,665 square meters, situated in Pico, La Trinidad, Benguet, duly
registered in their names under TCT No. T-9697 of the Register of Deeds of
the Province of Benguet. The property was mortgaged by the Spouses Nabus to the
Philippine National Bank (PNB), La Trinidad Branch, to secure a loan in the
amount of P30,000.00.
On February 19, 1977, the Spouses Nabus executed a Deed of Conditional
Sale covering 1,000 square meters of the 1,665 square meters of land in favor of
respondents Spouses Pacson for a consideration of P170,000.00,which was duly
notarized on February 21, 1977. The consideration was to be paid, thus:
[4]

THAT, the consideration of the amount of P170,000.00 will be

paid by the VENDEE herein in my favor in the following manner:
a.

That the sum of P13,000.00, more or less, on or

before February 21, 1977 and which amount will be paid
directly to the PNB, La Trinidad Branch, and which will
form part of the purchase price;

b.

That after paying the above amount to the PNB, La

Trinidad, Benguet branch, a balance of about P17,500.00
remains as my mortgage balance and this amount will be
paid by the VENDEE herein at the rate of not less
than P3,000.00 a month beginning March 1977, until the
said mortgage balance is fully liquidated, and that all
payments made by the VENDEE to the PNB, La Trinidad,
Benguet branch, shall form part of the consideration of this
sale;

c. That, as soon as the mortgage obligation with the PNB as

cited above is fully paid, then the VENDEE herein hereby
obligates himself, his heirs and assigns, to pay the amount of
not less than P2,000.00 a month in favor of the VENDOR,
207

his heirs and assigns, until the full amount of P170,000.00 is

fully covered (including the payments cited in Pars. a and b
above);
THAT, as soon as the full consideration of this sale has been
paid by the VENDEE, the corresponding transfer documents shall be
executed by the VENDOR to the VENDEE for the portion sold;
THAT, the portion sold is as shown in the simple sketch hereto
attached as Annex "A" and made part hereof;
THAT, a segregation survey for the portion sold in favor of the
VENDEE and the portion remaining in favor of the VENDOR shall
be executed as soon as possible, all at the expense of the VENDEE
herein;
THAT, it is mutually understood that in as much as there is a
claim by other persons of the entire property of which the portion
subject of this Instrument is only a part, and that this claim is now the
subject of a civil case now pending before Branch III of the Court of
First Instance of Baguio and Benguet, should the VENDOR herein be
defeated in the said civil action to the end that he is divested of title
over the area subject of this Instrument, then he hereby warrants that
he shall return any and all monies paid by the VENDEE herein
whether paid to the PNB, La Trinidad, Benguet Branch, or directly
received by herein VENDOR, all such monies to be returned upon
demand by the VENDEE;
THAT, [a] portion of the parcel of land subject of this
instrument is presently in the possession of Mr. Marcos Tacloy, and
the VENDOR agrees to cooperate and assist in any manner possible in
the ouster of said Mr. Marcos Tacloy from said possession and
occupation to the end that the VENDEE herein shall make use of said
portion as soon as is practicable;
THAT, finally, the PARTIES hereby agree that this Instrument
shall be binding upon their respective heirs, successors or assigns.[5]
Pursuant to the Deed of Conditional Sale, respondents paid PNB the amount
of P12,038.86 on February 22, 1977[6] and P20,744.30 on July 17, 1978[7] for the
full payment of the loan.
208

At the time of the transaction, Mr. Marcos Tacloy had a basket-making shop
on the property, while the spouses Delfin and Nelita Flores had a store. Tacloy and
the Spouses Flores vacated the property after respondents paid themP4,000.00
each.
Thereafter, respondents took possession of the subject property. They
constructed an 80 by 32-feet building and a steel-matting fence around the
property to house their truck body-building shop which they called the Emiliano
Trucking Body Builder and Auto Repair Shop.
On December 24, 1977, before the payment of the balance of the mortgage
amount with PNB, Bate Nabus died. On August 17, 1978, his surviving spouse,
Julie Nabus, and their minor daughter, Michelle Nabus, executed a Deed of Extra
Judicial Settlement over the registered land covered by TCT No. 9697. On the
basis of the said document, TCT No. T- 17718[8] was issued on February 17,
1984 in the names of Julie Nabus and Michelle Nabus.
Meanwhile, respondents continued paying their balance, not in installments
of P2,000.00 as agreed upon, but in various, often small amounts ranging from as
low as P10.00[9] to as high as P15,566.00,[10] spanning a period of almost seven
years, from March 9, 1977[11] to January 17, 1984.[12]
There was a total of 364 receipts of payment,[13] which receipts were mostly
signed by Julie Nabus, who also signed as Julie Quan when she remarried. The
others who signed were Bate Nabus; PNB, La Trinidad Branch; Maxima Nabus;
Sylvia Reyes; Michelle Nabus and the second husband of Julie Nabus, Gereon
Quan. Maxima Nabus is the mother of Bate Nabus, while Sylvia Reyes is a niece.
The receipts showed that the total sum paid by respondents to the Spouses
Nabus was P112,455.16,[14] leaving a balance of P57,544.84. The sum
of P30,000.00 which was the value of the pick-up truck allegedly sold and
delivered in 1978 to the Spouses Nabus, was not considered as payment because
the registration papers remained in the name of its owner, Dominga D. Pacson,
who is the sister of Joaquin Pacson. The vehicle was also returned to respondents.

209

During the last week of January 1984, Julie Nabus, accompanied by her
second husband, approached Joaquin Pacson to ask for the full payment of the
lot. Joaquin Pacson agreed to pay, but told her to return after four days as his
daughter, Catalina Pacson, would have to go over the numerous receipts to
determine the balance to be paid. When Julie Nabus returned after four days,
Joaquin sent her and his daughter, Catalina, to Atty. Elizabeth Rillera for the
execution of the deed of absolute sale. Since Julie was a widow with a minor
daughter, Atty. Rillera required Julie Nabus to return in four days with the
necessary documents, such as the deed of extrajudicial settlement, the transfer
certificate of title in the names of Julie Nabus and minor Michelle Nabus, and the
guardianship papers of Michelle.However, Julie Nabus did not return.
Getting suspicious, Catalina Pacson went to the Register of Deeds of
the Province of Benguet and asked for a copy of the title of the land. She found
that it was still in the name of Julie and Michelle Nabus.
After a week, Catalina Pacson heard a rumor that the lot was already sold to
petitioner Betty Tolero. Catalina Pacson and Atty. Rillera went to the Register of
Deeds of the Province of Benguet, and found that Julie Nabus and her minor
daughter, Michelle Nabus, represented by the formers mother as appointed
guardian by a court order dated October 29, 1982, had executed a Deed of
Absolute Sale in favor of Betty Tolero on March 5, 1984, covering the whole lot
comprising 1,665 square meters.[15] The property was described in the deed of sale
as comprising four lots: (1) Lot A-2-A, with an area of 832 square meters; (2) Lot
A-2-B, 168 square meters; (3) Lot A-2-C, 200 square meters; and (4) Lot A-2-D,
465 square meters. Lots A-2-A and A-2-B, with a combined area of 1,000 square
meters, correspond to the lot previously sold to Joaquin and Julia Pacson in the
Deed of Conditional Sale.
Catalina Pacson and Atty. Rillera also found that the Certificate of Title over
the property in the name of Julie and Michelle Nabus was cancelled on March 16,
1984, and four titles to the fours lots were issued in the name of Betty Tolero,
namely: TCT No. T-18650[16] for Lot A-2-A; TCT No. 18651[17] for Lot A-2-B;
TCT No. T-18652[18] for Lot A-2-C; and T-18653[19] for Lot A-2-D.
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On March 22, 1984, the gate to the repair shop of the Pacsons was
padlocked. A sign was displayed on the property stating No Trespassing.[20]
On March 26, 1984, Catalina Pacson filed an affidavit-complaint regarding
the padlocking incident of their repair shop with the police station at La Trinidad,
Benguet.
On March 28, 2008, respondents Joaquin and Julia Pacson filed with the
Regional Trial Court of La Trinidad, Benguet (trial court) a Complaint [21] for
Annulment of Deeds, with damages and prayer for the issuance of a writ of
preliminary injunction.[22] They sought the annulment of (1) the Extra-judicial
Settlement of Estate, insofar as their right to the 1,000-square-meter lot subject of
the Deed of Conditional Sale[23] was affected; (2) TCT No. T-17718 issued in the
names of Julie and Michelle Nabus; and (3) the Deed of Absolute Sale [24] in favor
of Betty Tolero and the transfer certificates of title issued pursuant thereto. They
also prayed for the award of actual, moral and exemplary damages, as well as
attorneys fees.
In their Answer,[25] Julie and Michelle Nabus alleged that respondent Joaquin
Pacson did not proceed with the conditional sale of the subject property when he
learned that there was a pending case over the whole property.Joaquin proposed
that he would rather lease the property with a monthly rental of P2,000.00
and apply the sum of P13,000.00 as rentals, since the amount was already paid to
the bank and could no longer be withdrawn. Hence, he did not affix his signature
to the second page of a copy of the Deed of Conditional Sale. [26] Julie Nabus
alleged that in March 1994, due to her own economic needs and those of her minor
daughter, she sold the property to Betty Tolero, with authority from the court.
During the hearing on the merits, Julie Nabus testified that she sold the
property to Betty Tolero because she was in need of money. She stated that she
was free to sell the property because the Deed of Conditional Sale executed in
favor of the Spouses Pacson was converted into a contract of lease. She claimed
211

that at the time when the Deed of Conditional Sale was being explained to them by
the notary public, Joaquin Pacson allegedly did not like the portion of the contract
stating that there was a pending case in court involving the subject
property. Consequently, Joaquin Pacson did not continue to sign the document;
hence, the second page of the document was unsigned.[27] Thereafter, it was
allegedly their understanding that the Pacsons would occupy the property as
lessees and whatever amount paid by them would be considered rentals.
Betty Tolero put up the defense that she was a purchaser in good faith and
for value. She testified that it was Julie Nabus who went to her house and offered
to sell the property consisting of two lots with a combined area of 1,000 square
meters. She consulted Atty. Aurelio de Peralta before she agreed to buy the
property. She and Julie Nabus brought to Atty. De Peralta the pertinent papers such
as TCT No. T-17718 in the names of Julie and Michelle Nabus, the guardianship
papers of Michelle Nabus and the blueprint copy of the survey plan showing the
two lots.After examining the documents and finding that the title was clean, Atty.
De Peralta gave her the go-signal to buy the property.
Tolero testified that upon payment of the agreed price of P200,000.00, the
Deed of Absolute Sale was executed and registered, resulting in the cancellation of
the title of Julie and Michelle Nabus and the issuance in her name of TCT Nos. T18650 and T-18651[28] corresponding to the two lots. Thereafter, she asked her
common-law husband, Ben Ignacio, to padlock the gate to the property and hang
the No Trespassing sign.
Tolero also testified that as the new owner, she was surprised and shocked to
receive the Complaint filed by the Spouses Pacson. She admitted that she knew
very well the Spouses Pacson, because they used to buy vegetables regularly from
her. She had been residing along the highway at Kilometer 4, La Trinidad, Benguet
since 1971. She knew the land in question, because it was only 50 meters away
across the highway. She also knew that the Spouses Pacson had a shop on the
property for the welding and body-building of vehicles. She was not aware of the
Deed of Conditional Sale executed in favor of the Pacsons, and she saw the
document for the first time when Joaquin Pacson showed it to her after she had
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already bought the property and the title had been transferred in her name. At the
time she was buying the property, Julie Nabus informed her that the Pacsons were
merely renting the property. She did not bother to verify if that was true, because
the Pacsons were no longer in the property for two years before she bought it.
In a Decision dated September 30, 1993, the trial court ruled in favor of
respondents. The dispositive portion of the Decision reads:
WHEREFORE, premises considered, judgment is hereby
rendered in favor of the plaintiffs, ordering defendant Betty Tolero to
execute a deed of absolute sale in favor of the Spouses Joaquin and
Julia Pacson over the lots covered by Transfer Certificates of Title
Nos. T-18650 and T-18651 upon payment to her by the plaintiffs of
the sum of P57,544.[8]4 representing the balance due for the full
payment of the property subject of this case. In addition to the
execution of a deed of absolute sale, defendant Betty Tolero shall
surrender to the plaintiffs her owners duplicate copy of Transfer
Certificates of Title Nos. T-18650 and T-18651.
Defendants Julie Nabus, Michelle Nabus, and Betty Tolero shall
also pay the plaintiffs damages as follows: P50,000.00 for moral
damages; P20,000.00 for exemplary damages; and P10,000.00 for
attorneys fees and expenses for litigation.[29]
Two issues determined by the trial court were: (1) Was the Deed
of Conditional Sale between the Spouses Pacson and the Nabuses converted into a
contract of lease? and (2) Was Betty Tolero a buyer in good faith?
The trial court held that the Deed of Conditional Sale was not converted into
a contract of lease because the original copy of the contract[30] showed that all the
pages were signed by all the parties to the contract. By the presumption of
regularity, all other carbon copies must have been duly signed. The failure of
Joaquin Pacson to sign the second page of one of the carbon copies of the contract
was by sheer inadvertence. The omission was of no consequence since the
signatures of the parties in all the other copies of the contract were
213

complete. Moreover, all the receipts of payment expressly stated that they were
made in payment of the lot. Not a single receipt showed payment for rental.
Further, the trial court held that Betty Tolero was not a purchaser in good
faith as she had actual knowledge of the Conditional Sale of the property to the
Pacsons.
The trial court stated that the Deed of Conditional Sale contained reciprocal
obligations between the parties, thus:
THAT, as soon as the full consideration of this sale has been
paid by the VENDEE, the corresponding transfer documents shall be
executed by the VENDOR to the VENDEE for the portion sold;
xxxx
THAT, finally, the PARTIES hereby agree that this Instrument
shall be binding upon their respective heirs, successors or assigns.[31]

In other words, the trial court stated, when the vendees (the Spouses Pacson)
were already ready to pay their balance, it was the corresponding obligation of the
vendors (Nabuses) to execute the transfer documents.
The trial court held that [u]nder Article 1191 of the Civil Code, an injured
party in a reciprocal obligation, such as the Deed of Conditional Sale in the case at
bar, may choose between the fulfillment [or] the rescission of the obligation, with
the payment of damages in either case. It stated that in filing the case, the Spouses
Pacson opted for fulfillment of the obligation, that is, the execution of the Deed of
Absolute Sale in their favor upon payment of the purchase price.
Respondents appealed the decision of the trial court to the Court of Appeals.

214

In the Decision dated November 28, 2003, the Court of Appeals affirmed the
trial courts decision, but deleted the award of attorneys fees. The dispositive
portion of the Decision reads:
WHEREFORE, finding no reversible error in the September 30,
1993 Decision of the Regional Trial Court of La Trinidad, Benguet,
Branch 10, in Civil Case No. 84-CV-0079, the instant appeal is hereby
DISMISSED for lack of merit, and the assailed Decision is hereby
AFFIRMED and UPHELD with the modification that the award of
attorneys fees is deleted.[32]

Petitioners filed this petition raising the following issues:

I
THE [COURT OF APPEALS] ERRED IN CONSIDERING
THE CONTRACT ENTERED INTO BETWEEN THE SPOUSES
BATE NABUS AND JULIE NABUS AND SPOUSES JOAQUIN
PACSON AND JULIA PACSON TO BE A CONTRACT OF SALE.
II
THE COURT A QUO ERRED IN FINDING THAT THERE
ARE ONLY TWO ISSUES IN THE CASE ON APPEAL AND THEY
ARE:
WHETHER
THE
DEED
OF
CONDITIONAL SALE WAS CONVERTED INTO A CONTRACT
OF LEASE; AND THAT [WHETHER] PETITIONER BETTY
TOLERO WAS A BUYER IN GOOD FAITH.
III
THAT THE TRIAL COURT ERRED IN HOLDING THAT
[RESPONDENTS] BALANCE TO THE SPOUSES NABUS UNDER
THE CONDITIONAL SALE IS ONLY P57,544.[8]4.
IV
THAT ASSUMING WITHOUT ADMITTING THAT
PETITIONER BETTY TOLERO WAS AWARE OF THE
EXISTENCE OF THE DEED OF CONDITIONAL SALE, THE
TRIAL COURT, AS WELL AS THE [COURT OF APPEALS],
ERRED IN ORDERING PETITIONER BETTY TOLERO TO
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EXECUTE A DEED OF ABSOLUTE SALE IN FAVOR OF THE

[RESPONDENTS] AND TO SURRENDER THE OWNER'S
DUPLICATE COPY OF TCT NOS. T-18650 AND T-18651, WHICH
WAS NOT PRAYED FOR IN THE PRAYER IN THE
COMPLAINT.
V
THAT THE [COURT OF APPEALS] ERRED IN FINDING
BETTY TOLERO [AS] A BUYER [WHO] FAILED TO TAKE
STEPS IN INQUIRING FROM THE [RESPONDENTS] THE
STATUS OF THE PROPERTY IN QUESTION BEFORE HER
PURCHASE, CONTRARY TO FACTS ESTABLISHED BY
EVIDENCE.
VI
THE [COURT OF APPEALS] ERRED IN CONSIDERING
PETITIONER BETTY TOLERO A BUYER IN BAD FAITH,
IGNORING THE APPLICATION OF THE DOCTRINE IN THE
RULING OF THE SUPREME COURT IN THE CASE
OF RODOLFO ALFONSO, ET AL. VS. COURT OF APPEALS, G.R.
NO. 63745.[33]

The main issues to be resolved are:

1)

Whether or not the Deed of Conditional Sale was converted into a

contract of lease;
2) Whether the Deed of Conditional Sale was a contract to sell or a
contract of sale.
As regards the first issue, the Deed of Conditional Sale entered into by
the Spouses Pacson and the Spouses Nabus was not converted into a contract of
lease. The 364 receipts issued to the Spouses Pacson contained either the phrase as
partial payment of lot located in Km. 4 or cash vale or cash vale (partial payment
of lot located in Km. 4), evidencing sale under the contract and not the lease of the
property. Further, as found by the trial court, Joaquin Pacsons non-signing of the
second page of a carbon copy of the Deed of Conditional Sale was through sheer
216

inadvertence, since the original contract[34] and the other copies of the contract were
all signed by Joaquin Pacson and the other parties to the contract.
On the second issue, petitioners contend that the contract executed by the
respondents and the Spouses Nabus was a contract to sell, not a contract of
sale. They allege that the contract was subject to the suspensive condition of
full payment of the consideration agreed upon before ownership of the subject
property could be transferred to the vendees. Since respondents failed to pay the
full amount of the consideration, having an unpaid balance of P57,544.84, the
obligation of the vendors to execute the Deed of Absolute Sale in favor of
respondents did not arise.Thus, the subsequent Deed of Absolute Sale executed in
favor of Betty Tolero, covering the same parcel of land was valid, even if Tolero
was aware of the previous deed of conditional sale.
Moreover, petitioners contend that respondents violated the stipulated
condition in the contract that the monthly installment to be paid was P2,000.00,
as respondents gave meager amounts as low as P10.00.
Petitioners also assert that respondents allegation that Julie Nabus failure to
bring the pertinent documents necessary for the execution of the final deed of
absolute sale, which was the reason for their not having paid the balance of the
purchase price, was untenable, and a lame and shallow excuse for violation of
the Deed of Conditional Sale. Respondents could have made a valid tender of
payment of their remaining balance, as it had been due for a long time, and upon
refusal to accept payment, they could have consigned their payment to the court as
provided by law. This, respondents failed to do.
The Court holds that the contract entered into by the Spouses Nabus and
respondents was a contract to sell, not a contract of sale.
A contract of sale is defined in Article 1458 of the Civil Code, thus:

217

Art. 1458. By the contract of sale, one of the contracting parties

obligates himself to transfer the ownership of and to deliver a
determinate thing, and the other to pay therefor a price certain in
money or its equivalent.
A contract of sale may be absolute or conditional.
Ramos v. Heruela[35] differentiates a contract of absolute sale and a contract
of conditional sale as follows:
Article 1458 of the Civil Code provides that a contract of sale
may be absolute or conditional. A contract of sale is absolute when
title to the property passes to the vendee upon delivery of the thing
sold. A deed of sale is absolute when there is no stipulation in the
contract that title to the property remains with the seller until full
payment of the purchase price. The sale is also absolute if there is no
stipulation giving the vendor the right to cancel unilaterally the
contract the moment the vendee fails to pay within a fixed period. In a
conditional sale, as in a contract to sell, ownership remains with the
vendor and does not pass to the vendee until full payment of the
purchase price. The full payment of the purchase price partakes of a
suspensive condition, and non-fulfillment of the condition prevents
the obligation to sell from arising.[36]
Coronel v. Court of Appeals[37] distinguished a contract to sell from a
contract of sale, thus:
Sale, by its very nature, is a consensual contract because it is
perfected by mere consent. The essential elements of a contract of sale
are the following:
a) Consent or meeting of the minds, that is, consent to
transfer ownership in exchange for the price;
b) Determinate subject matter; and
c) Price certain in money or its equivalent.

218

Under this definition, a Contract to Sell may not be considered

as a Contract of Sale because the first essential element is lacking. In
a contract to sell, the prospective seller explicitly reserves the
transfer of title to the prospective buyer, meaning, the prospective
seller does not as yet agree or consent to transfer ownership of the
property subject of the contract to sell until the happening of an
event, which for present purposes we shall take as the full
payment of the purchase price. What the seller agrees or obliges
himself to do is to fulfill his promise to sell the subject property
when the entire amount of the purchase price is delivered to
him. In other words, the full payment of the purchase price
partakes of a suspensive condition, the non-fulfilment of which
prevents the obligation to sell from arising and, thus, ownership is
retained by the prospective seller without further remedies by the
prospective buyer.
xxxx
Stated positively, upon the fulfillment of the suspensive
condition which is the full payment of the purchase price, the
prospective sellers obligation to sell the subject property by entering
into a contract of sale with the prospective buyer becomes
demandable as provided in Article 1479 of the Civil Code which
states:
Art. 1479. A promise to buy and sell a determinate
thing for a price certain is reciprocally demandable.
An accepted unilateral promise to buy or to sell a
determinate thing for a price certain is binding upon the
promissor if the promise is supported by a consideration
distinct from the price.
A contract to sell may thus be defined as a bilateral contract
whereby the prospective seller, while expressly reserving the
ownership of the subject property despite delivery thereof to the
prospective buyer, binds himself to sell the said property exclusively
to the prospective buyer upon fulfillment of the condition agreed
upon, that is, full payment of the purchase price.
A contract to sell as defined hereinabove, may not even be
considered as a conditional contract of sale where the seller may
likewise reserve title to the property subject of the sale until the
219

fulfillment of a suspensive condition, because in a conditional contract

of sale, the first element of consent is present, although it is
conditioned upon the happening of a contingent event which may or
may not occur. If the suspensive condition is not fulfilled, the
perfection of the contract of sale is completely abated. However, if the
suspensive condition is fulfilled, the contract of sale is thereby
perfected, such that if there had already been previous delivery of the
property subject of the sale to the buyer, ownership thereto
automatically transfers to the buyer by operation of law without any
further act having to be performed by the seller.
In a contract to sell, upon the fulfillment of the suspensive
condition which is the full payment of the purchase price,
ownership will not automatically transfer to the buyer although
the property may have been previously delivered to him. The
prospective seller still has to convey title to the prospective buyer
by entering into a contract of absolute sale.[38]

Further, Chua v. Court of Appeals[39] cited this distinction between a contract

of sale and a contract to sell:
In a contract of sale, the title to the property passes to the
vendee upon the delivery of the thing sold; in a contract to sell,
ownership is, by agreement, reserved in the vendor and is not to pass
to the vendee until full payment of the purchase price. Otherwise
stated, in a contract of sale, the vendor loses ownership over the
property and cannot recover it until and unless the contract is resolved
or rescinded; whereas, in a contract to sell, title is retained by the
vendor until full payment of the price. In the latter contract, payment
of the price is a positive suspensive condition, failure of which is not a
breach but an event that prevents the obligation of the vendor to
convey title from becoming effective.[40]
It is not the title of the contract, but its express terms or stipulations that
determine the kind of contract entered into by the parties. In this case, the
contract entitled Deed of Conditional Sale is actually a contract to sell. The
contract stipulated that as soon as the full consideration of the sale has been
220

paid by the vendee, the corresponding transfer documents shall be executed by

the vendor to the vendee for the portion sold.[41] Where the vendor promises to
execute a deed of absolute sale upon the completion by the vendee of the payment
of the price, the contract is only a contract to sell. [42] The aforecited stipulation
shows that the vendors reserved title to the subject property until full payment of
the purchase price.
If respondents paid the Spouses Nabus in accordance with the stipulations in
the Deed of Conditional Sale, the consideration would have been fully paid in June
1983. Thus, during the last week of January 1984, Julie Nabus approached Joaquin
Pacson to ask for the full payment of the lot. Joaquin Pacson agreed to pay, but
told her to return after four days as his daughter, Catalina Pacson, would have to
go over the numerous receipts to determine the balance to be paid.
When Julie Nabus returned after four days, Joaquin Pacson sent Julie
Nabus and his daughter, Catalina, to Atty. Elizabeth Rillera for the execution of the
deed of sale. Since Bate Nabus had already died, and was survived by Julie and
their minor daughter, Atty. Rillera required Julie Nabus to return in four days with
the necessary documents such as the deed of extrajudicial settlement, the transfer
certificate of title in the names of Julie Nabus and minor Michelle Nabus, and the
guardianship papers of Michelle. However, Julie Nabus did not return.
As vendees given possession of the subject property, the ownership of
which was still with the vendors, the Pacsons should have protected their interest
and inquired from Julie Nabus why she did not return and then followed through
with full payment of the purchase price and the execution of the deed of absolute
sale. The Spouses Pacson had the legal remedy of consigning their payment to the
court; however, they did not do so. A rumor that the property had been sold to
Betty Tolero prompted them to check the veracity of the sale with the Register of
Deeds of the Province of Benguet. They found out that on March 5, 1984, Julie
Nabus sold the same property to Betty Tolero through a Deed of Absolute Sale,
and new transfer certificates of title to the property were issued to Tolero.

221

Thus, the Spouses Pacson filed this case for the annulment of the contract
of absolute sale executed in favor of Betty Tolero and the transfer certificates of
title issued in her name.
Unfortunately for the Spouses Pacson, since the Deed of Conditional Sale
executed in their favor was merely a contract to sell, the obligation of the seller to
sell becomes demandable only upon the happening of the suspensive condition.
[43]
The full payment of the purchase price is the positive suspensive condition, the
failure of which is not a breach of contract, but simply an event that
prevented the obligation of the vendor to convey title from acquiring binding
force.[44] Thus, for its non-fulfilment, there is no contract to speak of, the obligor
having failed to perform the suspensive condition which enforces a juridical
relation.[45] With this circumstance, there can be no rescission or fulfilment of an
obligation that is still non-existent, the suspensive condition not having occurred
as yet.[46] Emphasis should be made that the breach contemplated in Article 1191 of
the New Civil Code is the obligors failure to comply with an obligation already
extant, not a failure of a condition to render binding that obligation.[47]
The trial court, therefore, erred in applying Article 1191 of the Civil
Code in this case by ordering fulfillment of the obligation, that is, the execution
of the deed of absolute sale in favor of the Spouses Pacson upon full payment of
the purchase price, which decision was affirmed by the Court of Appeals. Ayala
Life Insurance, Inc. v. Ray Burton Development Corporation[49] held:
[48]

Evidently, before the remedy of specific performance may be

availed of, there must be a breach of the contract.
Under a contract to sell, the title of the thing to be sold is
retained by the seller until the purchaser makes full payment of the
agreed purchase price. Such payment is a positive suspensive
condition, the non-fulfillment of which is not a breach of
contract but merely an event that prevents the seller from conveying
title to the purchaser. The non-payment of the purchase price renders
the contract to sell ineffective and without force and effect. Thus, a
cause of action for specific performance does not arise.[50]

222

Since the contract to sell was without force and effect, Julie
Nabus validly conveyed the subject property to another buyer, petitioner Betty
Tolero, through a contract of absolute sale, and on the strength thereof, new
transfer certificates of title over the subject property were duly issued to Tolero.[51]

The Spouses Pacson, however, have the right to the reimbursement of their
payments to the Nabuses, and are entitled to the award of nominal damages. The
Civil Code provides:
Art. 2221. Nominal damages are adjudicated in order that a
right of the plaintiff, which has been violated or invaded by the
defendant, may be vindicated or recognized, and not for the purpose
of indemnifying the plaintiff for any loss suffered by him.
Art. 2222. The court may award nominal damages in every
obligation arising from any source enumerated in article 1157, or in
every case where any property right has been invaded.

As stated by the trial court, under the Deed of Conditional Sale, respondents
had the right to demand from petitioners Julie and Michelle Nabus that the latter
execute in their favor a deed of absolute sale when they were ready to pay the
remaining balance of the purchase price. The Nabuses had the corresponding duty
to respect the respondents right, but they violated such right, for they could no
longer execute the document since they had sold the property to Betty Tolero.
[52]

Hence, nominal damages in the amount of P10,000.00 are awarded to

respondents.
Respondents are not entitled to moral damages because contracts are not
referred to in Article 2219[53] of the Civil Code, which enumerates the cases when
moral damages may be recovered. Article 2220[54] of the Civil Code allows the
223

recovery of moral damages in breaches of contract where the defendant acted

fraudulently or in bad faith.However, this case involves a contract to sell,
wherein full payment of the purchase price is a positive suspensive condition, the
non-fulfillment of which is not a breach of contract, but merely an event that
prevents the seller from conveying title to the purchaser. Since there is no breach
of contract in this case, respondents are not entitled to moral damages.
In the absence of moral, temperate, liquidated or compensatory damages,
exemplary damages cannot be granted for they are allowed only in addition to any
of the four kinds of damages mentioned.[55]
WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals
in CA-G.R. CV No. 44941, dated November 28, 2003, is REVERSED and SET
ASIDE. Judgment is hereby rendered upholding the validity of the sale of the
subject property made by petitioners Julie Nabus and Michelle Nabus in favor of
petitioner Betty Tolero, as well as the validity of Transfer Certificates of Title Nos.
T-18650 and T-18651 issued in the name of Betty Tolero.Petitioners Julie Nabus
and Michelle Nabus are ORDERED to REIMBURSE respondents spouses
Joaquin and Julia Pacson the sum of One Hundred Twelve Thousand Four Hundred
Fifty-Five Pesos and Sixteen Centavos (P112,455.16), and to pay Joaquin and Julia
Pacson nominal damages in the amount of Ten Thousand Pesos (P10,000.00), with
annual interest of twelve percent (12%) until full payment of the amounts due to
Joaquin and Julia Pacson.
No costs.
SO ORDERED.

DIOSDADO M. PERALTA
Associate Justice
WE CONCUR:

RENATO C. CORONA
Associate Justice
224

Chairperson

MINITA V. CHICO-NAZARIO PRESBITERO J. VELASCO, JR.

Associate Justice Associate Justice

ANTONIO EDUARDO B. NACHURA

Associate Justice

ATTESTATION
I attest that the conclusions in the above Decision had been reached in consultation
before the case was assigned to the writer of the opinion of the Courts Division.

RENATO C. CORONA
Associate Justice
Third Division, Chairperson
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution and the Division
Chairpersons Attestation, I certify that the conclusions in the above Decision had
been reached in consultation before the case was assigned to the writer of the
opinion of the Courts Division.

REYNATO S. PUNO
Chief Justice
225

Referred to as NABOS in the RTC and CA Decisions, and in the pleadings.

Under Rule 45 of the Rules of Court.
[2]
Penned by Associate Justice Sergio L. Pestao, with Associate Justices Marina L.
Buzon and Jose C. Mendoza, concurring; rollo, pp. 38-43.
[3]
CA rollo, pp. 20-26.
[4]
Exhibit B, compilation of exhibits, p. 5.
[5]
Rollo, pp. 57-58.
[6]
Exhibit D, compilation of exhibits, p. 13.
[7]
Exhibit E, id.
[8]
Exhibit R, id. at 60.
[9]
Exhibits K-14, K-25, K-29, and L-27, id. at 33-34, 37.
[10]
Exhibit J-19, id. at 31.
[11]
Exhibit H, id. at 22.
[12]
Exhibit N-1, id. at 41.
[13]
Exhibits D to F; F-1 to F-3; G; G-1 to G-88; H; H-1 to H-42; I; I-1 to I-57; J; J1 to J-62; K; K-1 to K-52; L; L-1 to L-28; M; M-1 to M-40; N and N-1, id. at 1341.
[14]
Exhibits UU, UU-1 to UU-9, id. at 131.
[15]
Exhibit Q, id. at 55.
[16]
Exhibit S, id. at 61.
[17]
Exhibit T, id. at 62.
[18]
Exhibit U, id. at 63.
[19]
Exhibit V, id. at 64.
[20]
Exhibit W, id. at 65.
[21]
Annex C, rollo, pp. 48-56.
[22]
Docketed as Civil Case No. 84-CV-0079.
[23]
Rollo, pp. 57-60.
[24]
Id. at 61-65.
[25]
Id. at 66-73.
[26]
Annex A, records, vol. I, p. 11.
[27]
Id.
[28]
Exhibits 9 and 10, records, vol. II, pp. 1469-1470.
[29]
CA rollo, pp. 29-30.
[30]
Exhibit A, compilation of exhibits, p. 1.
[31]
Rollo, p. 58.
[32]
Id. at 42.
[33]
Id. at 15-16.
[34]
Exhibits A and A-5, compilation of exhibits, pp. 1-2.
[35]
G.R. No. 145330, October 14, 2005, 473 SCRA 79.
[1]

226

[36]

Id. at 86. (Emphasis supplied.)

331 Phil. 294 (1996).
[38]
Id. at 308-311. (Emphasis supplied; citations omitted).
[39]
449 Phil. 25 (2003).
[40]
Id. at 41-42, citing Salazar v. Court of Appeals, 258 SCRA 317 (1996).
[41]
Emphasis supplied.
[42]
Ver Reyes v. Salvador, Sr., G.R. Nos. 139047 & 139365, September 11, 2008,
564 SCRA 456, 479-480.
[43]
Chua v. Court of Appeals, supra note 39.
[44]
Heirs of Pedro Escanlar v. Court of Appeals, G.R. No. 119777, October 23,
1997, 281 SCRA 176, 188. (Emphasis supplied.)
[45]
Cheng v. Genato, 360 Phil. 891, 904-905 (1998).
[46]
Id. at 905.
[47]
Id.
[48]
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in
case one of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing
the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage
Law.
[49]
G.R. No. 163075, January 23, 2006, 479 SCRA 462.
[50]
Id. at 469. (Emphasis supplied.)
[51]
See Ver Reyes v. Salvador, Sr., supra note 42.
[52]
RTC Decision, records, p. 20.
[53]
Art. 2219. Moral damages may be recovered in the following analogous cases:
(1) A criminal case resulting in physical injuries;
(2) Quasi-delicts causing physical injuries;
(3) Seduction, abduction, rape, or other lascivious acts;
(4) Adultery or concubinage
(5) Illegal or arbitrary detention or arrest;
(6) Illegal search;
(7) Libel, slander or any other form of defamation;
(8) Malicious prosecution;
(9) Acts mentioned in Article 309;
[37]

227

(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34,
and 35.
[54]
Art. 2220. Willful injury to property may be a legal ground for awarding moral
damages if the court should find that, under the circumstances, such damages are
justly due. The same rule applies to breaches of contract where the defendant acted
fraudulently or in bad faith.
[55]
Civil Code, Art. 2229. Exemplary or corrective damages are imposed, by way
of example or correction for the public good; in addition to the moral, temperate,
liquidated or compensatory damages.

228

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-11827

July 31, 1961

FERNANDO A. GAITE, plaintiff-appellee,

vs.
ISABELO FONACIER, GEORGE KRAKOWER, LARAP MINES &
SMELTING CO., INC., SEGUNDINA VIVAS, FRNACISCO DANTE,
PACIFICO ESCANDOR and FERNANDO TY, defendants-appellants.
Alejo Mabanag for plaintiff-appellee.
Simplicio U. Tapia, Antonio Barredo and Pedro Guevarra for defendantsappellants.
REYES, J.B.L., J.:
This appeal comes to us directly from the Court of First Instance because the
claims involved aggregate more than P200,000.00.
Defendant-appellant Isabelo Fonacier was the owner and/or holder, either by
himself or in a representative capacity, of 11 iron lode mineral claims, known as
the Dawahan Group, situated in the municipality of Jose Panganiban, province of
Camarines Norte.
By a "Deed of Assignment" dated September 29, 1952(Exhibit "3"), Fonacier
constituted and appointed plaintiff-appellee Fernando A. Gaite as his true and
lawful attorney-in-fact to enter into a contract with any individual or juridical
person for the exploration and development of the mining claims aforementioned
on a royalty basis of not less than P0.50 per ton of ore that might be extracted
therefrom. On March 19, 1954, Gaite in turn executed a general assignment
(Record on Appeal, pp. 17-19) conveying the development and exploitation of said
mining claims into the Larap Iron Mines, a single proprietorship owned solely by
and belonging to him, on the same royalty basis provided for in Exhibit "3".
229

Thereafter, Gaite embarked upon the development and exploitation of the mining
claims in question, opening and paving roads within and outside their boundaries,
making other improvements and installing facilities therein for use in the
development of the mines, and in time extracted therefrom what he claim and
estimated to be approximately 24,000 metric tons of iron ore.
For some reason or another, Isabelo Fonacier decided to revoke the authority
granted by him to Gaite to exploit and develop the mining claims in question, and
Gaite assented thereto subject to certain conditions. As a result, a document
entitled "Revocation of Power of Attorney and Contract" was executed on
December 8, 1954 (Exhibit "A"),wherein Gaite transferred to Fonacier, for the
consideration of P20,000.00, plus 10% of the royalties that Fonacier would receive
from the mining claims, all his rights and interests on all the roads, improvements,
and facilities in or outside said claims, the right to use the business name "Larap
Iron Mines" and its goodwill, and all the records and documents relative to the
mines. In the same document, Gaite transferred to Fonacier all his rights and
interests over the "24,000 tons of iron ore, more or less" that the former had
already extracted from the mineral claims, in consideration of the sum of
P75,000.00, P10,000.00 of which was paid upon the signing of the agreement, and
b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00) will be
paid from and out of the first letter of credit covering the first shipment of
iron ores and of the first amount derived from the local sale of iron ore made
by the Larap Mines & Smelting Co. Inc., its assigns, administrators, or
successors in interests.
To secure the payment of the said balance of P65,000.00, Fonacier promised to
execute in favor of Gaite a surety bond, and pursuant to the promise, Fonacier
delivered to Gaite a surety bond dated December 8, 1954 with himself (Fonacier)
as principal and the Larap Mines and Smelting Co. and its stockholders George
Krakower, Segundina Vivas, Pacifico Escandor, Francisco Dante, and Fernando Ty
as sureties (Exhibit "A-1"). Gaite testified, however, that when this bond was
presented to him by Fonacier together with the "Revocation of Power of Attorney
and Contract", Exhibit "A", on December 8, 1954, he refused to sign said Exhibit
"A" unless another bond under written by a bonding company was put up by
230

defendants to secure the payment of the P65,000.00 balance of their price of the
iron ore in the stockpiles in the mining claims. Hence, a second bond, also dated
December 8, 1954 (Exhibit "B"),was executed by the same parties to the first bond
Exhibit "A-1", with the Far Eastern Surety and Insurance Co. as additional surety,
but it provided that the liability of the surety company would attach only when
there had been an actual sale of iron ore by the Larap Mines & Smelting Co. for an
amount of not less then P65,000.00, and that, furthermore, the liability of said
surety company would automatically expire on December 8, 1955. Both bonds
were attached to the "Revocation of Power of Attorney and Contract", Exhibit "A",
and made integral parts thereof.
On the same day that Fonacier revoked the power of attorney he gave to Gaite and
the two executed and signed the "Revocation of Power of Attorney and Contract",
Exhibit "A", Fonacier entered into a "Contract of Mining Operation", ceding,
transferring, and conveying unto the Larap Mines and Smelting Co., Inc. the right
to develop, exploit, and explore the mining claims in question, together with the
improvements therein and the use of the name "Larap Iron Mines" and its good
will, in consideration of certain royalties. Fonacier likewise transferred, in the
same document, the complete title to the approximately 24,000 tons of iron ore
which he acquired from Gaite, to the Larap & Smelting Co., in consideration for
the signing by the company and its stockholders of the surety bonds delivered by
Fonacier to Gaite (Record on Appeal, pp. 82-94).
Up to December 8, 1955, when the bond Exhibit "B" expired with respect to the
Far Eastern Surety and Insurance Company, no sale of the approximately 24,000
tons of iron ore had been made by the Larap Mines & Smelting Co., Inc., nor had
the P65,000.00 balance of the price of said ore been paid to Gaite by Fonacier and
his sureties payment of said amount, on the theory that they had lost right to make
use of the period given them when their bond, Exhibit "B" automatically expired
(Exhibits "C" to "C-24"). And when Fonacier and his sureties failed to pay as
demanded by Gaite, the latter filed the present complaint against them in the Court
of First Instance of Manila (Civil Case No. 29310) for the payment of the
P65,000.00 balance of the price of the ore, consequential damages, and attorney's
fees.
231

All the defendants except Francisco Dante set up the uniform defense that the
obligation sued upon by Gaite was subject to a condition that the amount of
P65,000.00 would be payable out of the first letter of credit covering the first
shipment of iron ore and/or the first amount derived from the local sale of the iron
ore by the Larap Mines & Smelting Co., Inc.; that up to the time of the filing of the
complaint, no sale of the iron ore had been made, hence the condition had not yet
been fulfilled; and that consequently, the obligation was not yet due and
demandable. Defendant Fonacier also contended that only 7,573 tons of the
estimated 24,000 tons of iron ore sold to him by Gaite was actually delivered, and
counterclaimed for more than P200,000.00 damages.
At the trial of the case, the parties agreed to limit the presentation of evidence to
two issues:
(1) Whether or not the obligation of Fonacier and his sureties to pay Gaite
P65,000.00 become due and demandable when the defendants failed to renew the
surety bond underwritten by the Far Eastern Surety and Insurance Co., Inc.
(Exhibit "B"), which expired on December 8, 1955; and
(2) Whether the estimated 24,000 tons of iron ore sold by plaintiff Gaite to
defendant Fonacier were actually in existence in the mining claims when these
parties executed the "Revocation of Power of Attorney and Contract", Exhibit "A."
On the first question, the lower court held that the obligation of the defendants to
pay plaintiff the P65,000.00 balance of the price of the approximately 24,000 tons
of iron ore was one with a term: i.e., that it would be paid upon the sale of
sufficient iron ore by defendants, such sale to be effected within one year or before
December 8, 1955; that the giving of security was a condition precedent to Gait's
giving of credit to defendants; and that as the latter failed to put up a good and
sufficient security in lieu of the Far Eastern Surety bond (Exhibit "B") which
expired on December 8, 1955, the obligation became due and demandable under
Article 1198 of the New Civil Code.
As to the second question, the lower court found that plaintiff Gaite did have
approximately 24,000 tons of iron ore at the mining claims in question at the time
of the execution of the contract Exhibit "A."
232

Judgment was, accordingly, rendered in favor of plaintiff Gaite ordering defendants

to pay him, jointly and severally, P65,000.00 with interest at 6% per annum from
December 9, 1955 until payment, plus costs. From this judgment, defendants
jointly appealed to this Court.
During the pendency of this appeal, several incidental motions were presented for
resolution: a motion to declare the appellants Larap Mines & Smelting Co., Inc.
and George Krakower in contempt, filed by appellant Fonacier, and two motions to
dismiss the appeal as having become academic and a motion for new trial and/or to
take judicial notice of certain documents, filed by appellee Gaite. The motion for
contempt is unmeritorious because the main allegation therein that the appellants
Larap Mines & Smelting Co., Inc. and Krakower had sold the iron ore here in
question, which allegedly is "property in litigation", has not been substantiated;
and even if true, does not make these appellants guilty of contempt, because what
is under litigation in this appeal is appellee Gaite's right to the payment of the
balance of the price of the ore, and not the iron ore itself. As for the several
motions presented by appellee Gaite, it is unnecessary to resolve these motions in
view of the results that we have reached in this case, which we shall hereafter
discuss.
The main issues presented by appellants in this appeal are:
(1) that the lower court erred in holding that the obligation of appellant Fonacier to
pay appellee Gaite the P65,000.00 (balance of the price of the iron ore in
question)is one with a period or term and not one with a suspensive condition, and
that the term expired on December 8, 1955; and
(2) that the lower court erred in not holding that there were only 10,954.5 tons in
the stockpiles of iron ore sold by appellee Gaite to appellant Fonacier.
The first issue involves an interpretation of the following provision in the contract
Exhibit "A":
7. That Fernando Gaite or Larap Iron Mines hereby transfers to Isabelo F.
Fonacier all his rights and interests over the 24,000 tons of iron ore, more or
less, above-referred to together with all his rights and interests to operate the
233

mine in consideration of the sum of SEVENTY-FIVE THOUSAND PESOS

(P75,000.00) which the latter binds to pay as follows:
a. TEN THOUSAND PESOS (P10,000.00) will be paid upon the signing of
this agreement.
b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00)will be
paid from and out of the first letter of credit covering the first shipment of
iron ore made by the Larap Mines & Smelting Co., Inc., its assigns,
administrators, or successors in interest.
We find the court below to be legally correct in holding that the shipment or local
sale of the iron ore is not a condition precedent (or suspensive) to the payment of
the balance of P65,000.00, but was only a suspensive period or term. What
characterizes a conditional obligation is the fact that its efficacy or obligatory force
(as distinguished from its demandability) is subordinated to the happening of a
future and uncertain event; so that if the suspensive condition does not take place,
the parties would stand as if the conditional obligation had never existed. That the
parties to the contract Exhibit "A" did not intend any such state of things to prevail
is supported by several circumstances:
1) The words of the contract express no contingency in the buyer's obligation to
pay: "The balance of Sixty-Five Thousand Pesos (P65,000.00) will be paid out of
the first letter of credit covering the first shipment of iron ores . . ." etc. There is no
uncertainty that the payment will have to be made sooner or later; what is
undetermined is merely the exact date at which it will be made. By the very terms
of the contract, therefore, the existence of the obligation to pay is recognized; only
its maturity or demandability is deferred.
2) A contract of sale is normally commutative and onerous: not only does each one
of the parties assume a correlative obligation (the seller to deliver and transfer
ownership of the thing sold and the buyer to pay the price),but each party
anticipates performance by the other from the very start. While in a sale the
obligation of one party can be lawfully subordinated to an uncertain event, so that
the other understands that he assumes the risk of receiving nothing for what he
gives (as in the case of a sale of hopes or expectations, emptio spei), it is not in the
234

usual course of business to do so; hence, the contingent character of the obligation
must clearly appear. Nothing is found in the record to evidence that Gaite desired
or assumed to run the risk of losing his right over the ore without getting paid for
it, or that Fonacier understood that Gaite assumed any such risk. This is proved by
the fact that Gaite insisted on a bond a to guarantee payment of the P65,000.00, an
not only upon a bond by Fonacier, the Larap Mines & Smelting Co., and the
company's stockholders, but also on one by a surety company; and the fact that
appellants did put up such bonds indicates that they admitted the definite existence
of their obligation to pay the balance of P65,000.00.
3) To subordinate the obligation to pay the remaining P65,000.00 to the sale or
shipment of the ore as a condition precedent, would be tantamount to leaving the
payment at the discretion of the debtor, for the sale or shipment could not be made
unless the appellants took steps to sell the ore. Appellants would thus be able to
postpone payment indefinitely. The desireability of avoiding such a construction of
the contract Exhibit "A" needs no stressing.
4) Assuming that there could be doubt whether by the wording of the contract the
parties indented a suspensive condition or a suspensive period (dies ad quem) for
the payment of the P65,000.00, the rules of interpretation would incline the scales
in favor of "the greater reciprocity of interests", since sale is essentially onerous.
The Civil Code of the Philippines, Article 1378, paragraph 1, in fine, provides:
If the contract is onerous, the doubt shall be settled in favor of the greatest
reciprocity of interests.
and there can be no question that greater reciprocity obtains if the buyer' obligation
is deemed to be actually existing, with only its maturity (due date) postponed or
deferred, that if such obligation were viewed as non-existent or not binding until
the ore was sold.
The only rational view that can be taken is that the sale of the ore to Fonacier was a
sale on credit, and not an aleatory contract where the transferor, Gaite, would
assume the risk of not being paid at all; and that the previous sale or shipment of
the ore was not a suspensive condition for the payment of the balance of the agreed
price, but was intended merely to fix the future date of the payment.
235

This issue settled, the next point of inquiry is whether appellants, Fonacier and his
sureties, still have the right to insist that Gaite should wait for the sale or shipment
of the ore before receiving payment; or, in other words, whether or not they are
entitled to take full advantage of the period granted them for making the payment.
We agree with the court below that the appellant have forfeited the right court
below that the appellants have forfeited the right to compel Gaite to wait for the
sale of the ore before receiving payment of the balance of P65,000.00, because of
their failure to renew the bond of the Far Eastern Surety Company or else replace it
with an equivalent guarantee. The expiration of the bonding company's
undertaking on December 8, 1955 substantially reduced the security of the vendor's
rights as creditor for the unpaid P65,000.00, a security that Gaite considered
essential and upon which he had insisted when he executed the deed of sale of the
ore to Fonacier (Exhibit "A"). The case squarely comes under paragraphs 2 and 3
of Article 1198 of the Civil Code of the Philippines:
"ART. 1198. The debtor shall lose every right to make use of the period:
(1) . . .
(2) When he does not furnish to the creditor the guaranties or securities
which he has promised.
(3) When by his own acts he has impaired said guaranties or securities after
their establishment, and when through fortuitous event they disappear,
unless he immediately gives new ones equally satisfactory.
Appellants' failure to renew or extend the surety company's bond upon its
expiration plainly impaired the securities given to the creditor (appellee Gaite),
unless immediately renewed or replaced.
There is no merit in appellants' argument that Gaite's acceptance of the surety
company's bond with full knowledge that on its face it would automatically expire
within one year was a waiver of its renewal after the expiration date. No such
waiver could have been intended, for Gaite stood to lose and had nothing to gain
barely; and if there was any, it could be rationally explained only if the appellants
236

had agreed to sell the ore and pay Gaite before the surety company's bond expired
on December 8, 1955. But in the latter case the defendants-appellants' obligation to
pay became absolute after one year from the transfer of the ore to Fonacier by
virtue of the deed Exhibit "A.".
All the alternatives, therefore, lead to the same result: that Gaite acted within his
rights in demanding payment and instituting this action one year from and after the
contract (Exhibit "A") was executed, either because the appellant debtors had
impaired the securities originally given and thereby forfeited any further time
within which to pay; or because the term of payment was originally of no more
than one year, and the balance of P65,000.00 became due and payable thereafter.
Coming now to the second issue in this appeal, which is whether there were really
24,000 tons of iron ore in the stockpiles sold by appellee Gaite to appellant
Fonacier, and whether, if there had been a short-delivery as claimed by appellants,
they are entitled to the payment of damages, we must, at the outset, stress two
things: first, that this is a case of a sale of a specific mass of fungible goods for a
single price or a lump sum, the quantity of "24,000 tons of iron ore, more or less,"
stated in the contract Exhibit "A," being a mere estimate by the parties of the total
tonnage weight of the mass; and second, that the evidence shows that neither of the
parties had actually measured of weighed the mass, so that they both tried to arrive
at the total quantity by making an estimate of the volume thereof in cubic meters
and then multiplying it by the estimated weight per ton of each cubic meter.
The sale between the parties is a sale of a specific mass or iron ore because no
provision was made in their contract for the measuring or weighing of the ore sold
in order to complete or perfect the sale, nor was the price of P75,000,00 agreed
upon by the parties based upon any such measurement.(see Art. 1480, second par.,
New Civil Code). The subject matter of the sale is, therefore, a determinate object,
the mass, and not the actual number of units or tons contained therein, so that all
that was required of the seller Gaite was to deliver in good faith to his buyer all of
the ore found in the mass, notwithstanding that the quantity delivered is less than
the amount estimated by them (Mobile Machinery & Supply Co., Inc. vs. York
Oilfield Salvage Co., Inc. 171 So. 872, applying art. 2459 of the Louisiana Civil
Code). There is no charge in this case that Gaite did not deliver to appellants all the
237

ore found in the stockpiles in the mining claims in questions; Gaite had, therefore,
complied with his promise to deliver, and appellants in turn are bound to pay the
lump price.
But assuming that plaintiff Gaite undertook to sell and appellants undertook to buy,
not a definite mass, but approximately 24,000 tons of ore, so that any substantial
difference in this quantity delivered would entitle the buyers to recover damages
for the short-delivery, was there really a short-delivery in this case?
We think not. As already stated, neither of the parties had actually measured or
weighed the whole mass of ore cubic meter by cubic meter, or ton by ton. Both
parties predicate their respective claims only upon an estimated number of cubic
meters of ore multiplied by the average tonnage factor per cubic meter.
Now, appellee Gaite asserts that there was a total of 7,375 cubic meters in the
stockpiles of ore that he sold to Fonacier, while appellants contend that by actual
measurement, their witness Cirpriano Manlagit found the total volume of ore in
the stockpiles to be only 6.609 cubic meters. As to the average weight in tons per
cubic meter, the parties are again in disagreement, with appellants claiming the
correct tonnage factor to be 2.18 tons to a cubic meter, while appellee Gaite claims
that the correct tonnage factor is about 3.7.
In the face of the conflict of evidence, we take as the most reliable estimate of the
tonnage factor of iron ore in this case to be that made by Leopoldo F. Abad, chief
of the Mines and Metallurgical Division of the Bureau of Mines, a government
pensionado to the States and a mining engineering graduate of the Universities of
Nevada and California, with almost 22 years of experience in the Bureau of Mines.
This witness placed the tonnage factor of every cubic meter of iron ore at between
3 metric tons as minimum to 5 metric tons as maximum. This estimate, in turn,
closely corresponds to the average tonnage factor of 3.3 adopted in his corrected
report (Exhibits "FF" and FF-1") by engineer Nemesio Gamatero, who was sent by
the Bureau of Mines to the mining claims involved at the request of appellant
Krakower, precisely to make an official estimate of the amount of iron ore in
Gaite's stockpiles after the dispute arose.

238

Even granting, then, that the estimate of 6,609 cubic meters of ore in the stockpiles
made by appellant's witness Cipriano Manlagit is correct, if we multiply it by the
average tonnage factor of 3.3 tons to a cubic meter, the product is 21,809.7 tons,
which is not very far from the estimate of 24,000 tons made by appellee Gaite,
considering that actual weighing of each unit of the mass was practically
impossible, so that a reasonable percentage of error should be allowed anyone
making an estimate of the exact quantity in tons found in the mass. It must not be
forgotten that the contract Exhibit "A" expressly stated the amount to be 24,000
tons, more or less. (ch. Pine River Logging & Improvement Co. vs U.S., 279, 46 L.
Ed. 1164).
There was, consequently, no short-delivery in this case as would entitle appellants
to the payment of damages, nor could Gaite have been guilty of any fraud in
making any misrepresentation to appellants as to the total quantity of ore in the
stockpiles of the mining claims in question, as charged by appellants, since Gaite's
estimate appears to be substantially correct.
WHEREFORE, finding no error in the decision appealed from, we hereby affirm
the same, with costs against appellants.
Bengzon, C.J., Padilla, Labrador, Concepcion, Barrera, Paredes, Dizon, De Leon
and Natividad, JJ., concur.

239

THIRD DIVISION
[G.R. No. 155173. November 23, 2004]
LAFARGE CEMENT PHILIPPINES, INC., (formerly Lafarge Philippines,
Inc.),
LUZON
CONTINENTAL
LAND
CORPORATION,
CONTINENTAL OPERATING CORPORATION and PHILIP
ROSEBERG,
petitioners,
vs.
CONTINENTAL
CEMENT
CORPORATION, GREGORY T. LIM and ANTHONY A.
MARIANO, respondents.
DECISION
PANGANIBAN, J.:
May defendants in civil cases implead in their counterclaims persons who were
not parties to the original complaints? This is the main question to be answered in
this controversy.
The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court,
seeking to nullify the May 22, 2002[2] and the September 3, 2002 Orders[3] of the
Regional Trial Court (RTC) of Quezon City (Branch 80) in Civil Case No. Q-0041103. The decretal portion of the first assailed Order reads:
WHEREFORE, in the light of the foregoing as earlier stated, the plaintiffs motion
to dismiss claims is granted. Accordingly, the defendants claims against Mr. Lim
and Mr. Mariano captioned as their counterclaims are dismissed.[4]
The second challenged Order denied petitioners Motion for Reconsideration.
The Facts
Briefly, the origins of the present controversy can be traced to the Letter of
Intent (LOI) executed by both parties on August 11, 1998, whereby Petitioner
Lafarge Cement Philippines, Inc. (Lafarge) -- on behalf of its affiliates and other
240

qualified entities, including Petitioner Luzon Continental Land Corporation

(LCLC) -- agreed to purchase the cement business of Respondent Continental
Cement Corporation (CCC). On October 21, 1998, both parties entered into a Sale
and Purchase Agreement (SPA). At the time of the foregoing transactions,
petitioners were well aware that CCC had a case pending with the Supreme Court.
The case was docketed as GR No. 119712, entitled Asset Privatization Trust (APT)
v. Court of Appeals and Continental Cement Corporation.
In anticipation of the liability that the High Tribunal might adjudge against
CCC, the parties, under Clause 2 (c) of the SPA, allegedly agreed to retain from the
purchase price a portion of the contract price in the amount of P117,020,846.84 -the equivalent of US$2,799,140. This amount was to be deposited in an interestbearing account in the First National City Bank of New York (Citibank) for
payment to APT, the petitioner in GR No. 119712.
However, petitioners allegedly refused to apply the sum to the payment to APT,
despite the subsequent finality of the Decision in GR No. 119712 in favor of the
latter and the repeated instructions of Respondent CCC. Fearful that nonpayment
to APT would result in the foreclosure, not just of its properties covered by the SPA
with Lafarge but of several other properties as well, CCC filed before the Regional
Trial Court of Quezon City on June 20, 2000, a Complaint with Application for
Preliminary Attachment against petitioners. Docketed as Civil Case No. Q-0041103, the Complaint prayed, among others, that petitioners be directed to pay the
APT Retained Amount referred to in Clause 2 (c) of the SPA.
Petitioners moved to dismiss the Complaint on the ground that it violated the
prohibition on forum-shopping. Respondent CCC had allegedly made the same
claim it was raising in Civil Case No. Q-00-41103 in another action, which
involved the same parties and which was filed earlier before the International
Chamber of Commerce. After the trial court denied the Motion to Dismiss in its
November 14, 2000 Order, petitioners elevated the matter before the Court of
Appeals in CA-GR SP No. 68688.
In the meantime, to avoid being in default and without prejudice to the
outcome of their appeal, petitioners filed their Answer and Compulsory
Counterclaims ad Cautelam before the trial court in Civil Case No. Q-00-41103. In
241

their Answer, they denied the allegations in the Complaint. They prayed -- by way
of compulsory counterclaims against Respondent CCC, its majority stockholder
and president Gregory T. Lim, and its corporate secretary Anthony A. Mariano -for the sums of (a) P2,700,000 each as actual damages, (b) P100,000,000 each as
exemplary damages, (c) P100,000,000 each as moral damages, and (d) P5,000,000
each as attorneys fees plus costs of suit.
Petitioners alleged that CCC, through Lim and Mariano, had filed the baseless
Complaint in Civil Case No. Q-00-41103 and procured the Writ of Attachment in
bad faith. Relying on this Courts pronouncement in Sapugay v. CA,[5] petitioners
prayed that both Lim and Mariano be held jointly and solidarily liable with
Respondent CCC.
On behalf of Lim and Mariano who had yet to file any responsive pleading,
CCC moved to dismiss petitioners compulsory counterclaims on grounds that
essentially constituted the very issues for resolution in the instant Petition.
Ruling of the Trial Court
On May 22, 2002, the Regional Trial Court of Quezon City (Branch 80)
dismissed petitioners counterclaims for several reasons, among which were the
following: a) the counterclaims against Respondents Lim and Mariano were not
compulsory; b) the ruling in Sapugay was not applicable; and c) petitioners Answer
with Counterclaims violated procedural rules on the proper joinder of causes of
action.[6]
Acting on the Motion for Reconsideration filed by petitioners, the trial court -in an Amended Order dated September 3, 2002[7] -- admitted some errors in its May
22, 2002 Order, particularly in its pronouncement that their counterclaim had been
pleaded against Lim and Mariano only. However, the RTC clarified that it was
dismissing the counterclaim insofar as it impleaded Respondents Lim and Mariano,
even if it included CCC.
Hence this Petition.[8]
Issues
242

In their Memorandum, petitioners raise the following issues for our

consideration:
[a] Whether or not the RTC gravely erred in refusing to rule that
Respondent CCC has no personality to move to dismiss petitioners
compulsory counterclaims on Respondents Lim and Marianos
behalf.
[b] Whether or not the RTC gravely erred in ruling that (i) petitioners
counterclaims against Respondents Lim and Mariano are not
compulsory; (ii) Sapugay v. Court of Appeals is inapplicable here;
and (iii) petitioners violated the rule on joinder of causes of action.[9]
For clarity and coherence, the Court will resolve the foregoing in reverse order.
The Courts Ruling
The Petition is meritorious.
First Issue:
Counterclaims and
Joinder of Causes of Action.
Petitioners Counterclaims
Compulsory
Counterclaims are defined in Section 6 of Rule 6 of the Rules of Civil
Procedure as any claim which a defending party may have against an opposing
party. They are generally allowed in order to avoid a multiplicity of suits and to
facilitate the disposition of the whole controversy in a single action, such that the
defendants demand may be adjudged by a counterclaim rather than by an
independent suit. The only limitations to this principle are (1) that the court should
have jurisdiction over the subject matter of the counterclaim, and (2) that it could

243

acquire jurisdiction over third parties whose presence is essential for its
adjudication.[10]
A counterclaim may either be permissive or compulsory. It is permissive if it
does not arise out of or is not necessarily connected with the subject matter of the
opposing partys claim.[11] A permissive counterclaim is essentially an independent
claim that may be filed separately in another case.
A counterclaim is compulsory when its object arises out of or is necessarily
connected with the transaction or occurrence constituting the subject matter of the
opposing partys claim and does not require for its adjudication the presence of
third parties of whom the court cannot acquire jurisdiction.[12]
Unlike permissive counterclaims, compulsory counterclaims should be set up
in the same action; otherwise, they would be barred forever. NAMARCO v.
Federation of United Namarco Distributors[13] laid down the following criteria to
determine whether a counterclaim is compulsory or permissive: 1) Are issues of
fact and law raised by the claim and by the counterclaim largely the same? 2)
Would res judicata bar a subsequent suit on defendants claim, absent the
compulsory counterclaim rule? 3) Will substantially the same evidence support or
refute plaintiffs claim as well as defendants counterclaim? 4) Is there any logical
relation between the claim and the counterclaim? A positive answer to all four
questions would indicate that the counterclaim is compulsory.
Adopted in Quintanilla v. CA[14] and reiterated in Alday v. FGU Insurance
Corporation,[15] the compelling test of compulsoriness characterizes a counterclaim
as compulsory if there should exist a logical relationship between the main claim
and the counterclaim. There exists such a relationship when conducting separate
trials of the respective claims of the parties would entail substantial duplication of
time and effort by the parties and the court; when the multiple claims involve the
same factual and legal issues; or when the claims are offshoots of the same basic
controversy between the parties.
We shall now examine the nature of petitioners counterclaims against
respondents with the use of the foregoing parameters.
244

Petitioners base their counterclaim on the following allegations:

Gregory T. Lim and Anthony A. Mariano were the persons responsible for making
the bad faith decisions for, and causing plaintiff to file this baseless suit and to
procure an unwarranted writ of attachment, notwithstanding their knowledge that
plaintiff has no right to bring it or to secure the writ. In taking such bad faith
actions, Gregory T. Lim was motivated by his personal interests as one of the
owners of plaintiff while Anthony A. Mariano was motivated by his sense of
personal loyalty to Gregory T. Lim, for which reason he disregarded the fact that
plaintiff is without any valid cause.
Consequently, both Gregory T. Lim and Anthony A. Mariano are the plaintiffs cojoint tortfeasors in the commission of the acts complained of in this answer and in
the compulsory counterclaims pleaded below. As such they should be held jointly
and solidarily liable as plaintiffs co-defendants to those compulsory counterclaims
pursuant to the Supreme Courts decision in Sapugay v. Mobil.
xxxxxxxxx
The plaintiffs, Gregory T. Lim and Anthony A. Marianos bad faith filing of this
baseless case has compelled the defendants to engage the services of counsel for a
fee and to incur costs of litigation, in amounts to be proved at trial, but in no case
less than P5 million for each of them and for which plaintiff Gregory T. Lim and
Anthony A. Mariano should be held jointly and solidarily liable.
The plaintiffs, Gregory T. Lims and Anthony A. Marianos actions have damaged
the reputations of the defendants and they should be held jointly and solidarily
liable to them for moral damages of P100 million each.
In order to serve as an example for the public good and to deter similar baseless,
bad faith litigation, the plaintiff, Gregory T. Lim and Anthony A. Mariano should
be held jointly and solidarily liable to the defendants for exemplary damages
of P100 million each. [16]
The above allegations show that petitioners counterclaims for damages were
the result of respondents (Lim and Mariano) act of filing the Complaint and
245

securing the Writ of Attachment in bad faith. Tiu Po v. Bautista[17] involved the
issue of whether the counterclaim that sought moral, actual and exemplary
damages and attorneys fees against respondents on account of their malicious and
unfounded complaint was compulsory. In that case, we held as follows:
Petitioners counterclaim for damages fulfills the necessary requisites of a
compulsory counterclaim. They are damages claimed to have been suffered by
petitioners as a consequence of the action filed against them. They have to be
pleaded in the same action; otherwise, petitioners would be precluded by the
judgment from invoking the same in an independent action. The pronouncement
in Papa vs. Banaag (17 SCRA 1081) (1966) is in point:
Compensatory, moral and exemplary damages, allegedly suffered by the creditor in
consequence of the debtors action, are also compulsory counterclaim barred by the
dismissal of the debtors action. They cannot be claimed in a subsequent action by
the creditor against the debtor.
Aside from the fact that petitioners counterclaim for damages cannot be the subject
of an independent action, it is the same evidence that sustains petitioners
counterclaim that will refute private respondents own claim for damages. This is an
additional factor that characterizes petitioners counterclaim as compulsory.[18]
Moreover, using the compelling test of compulsoriness, we find that, clearly,
the recovery of petitioners counterclaims is contingent upon the case filed by
respondents; thus, conducting separate trials thereon will result in a substantial
duplication of the time and effort of the court and the parties.
Since the counterclaim for damages is compulsory, it must be set up in the
same action; otherwise, it would be barred forever. If it is filed concurrently with
the main action but in a different proceeding, it would be abated on the ground
of litis pendentia; if filed subsequently, it would meet the same fate on the ground
of res judicata.[19]
Sapugay v. Court of Appeals
Applicable to the Case at Bar
246

Sapugay v. Court of Appeals finds application in the present case.

In Sapugay, Respondent Mobil Philippines filed before the trial court of Pasig an
action for replevin against Spouses Marino and Lina Joel Sapugay. The Complaint
arose from the supposed failure of the couple to keep their end of their Dealership
Agreement. In their Answer with Counterclaim, petitioners alleged that after
incurring expenses in anticipation of the Dealership Agreement, they requested the
plaintiff to allow them to get gas, but that it had refused. It claimed that they still
had to post a surety bond which, initially fixed at P200,000, was later raised
to P700,000.
The spouses exerted all efforts to secure a bond, but the bonding companies
required a copy of the Dealership Agreement, which respondent continued to
withhold from them. Later, petitioners discovered that respondent and its manager,
Ricardo P. Cardenas, had intended all along to award the dealership to Island Air
Product Corporation.
In their Answer, petitioners impleaded in the counterclaim Mobil Philippines
and its manager -- Ricardo P. Cardenas -- as defendants. They prayed that
judgment be rendered, holding both jointly and severally liable for pre-operation
expenses, rental, storage, guarding fees, and unrealized profit including damages.
After both Mobil and Cardenas failed to respond to their Answer to the
Counterclaim, petitioners filed a Motion to Declare Plaintiff and its Manager
Ricardo P. Cardenas in Default on Defendants Counterclaim.
Among the issues raised in Sapugay was whether Cardenas, who was not a
party to the original action, might nevertheless be impleaded in the counterclaim.
We disposed of this issue as follows:
A counterclaim is defined as any claim for money or other relief which a defending
party may have against an opposing party. However, the general rule that a
defendant cannot by a counterclaim bring into the action any claim against persons
other than the plaintiff admits of an exception under Section 14, Rule 6 which
provides that when the presence of parties other than those to the original action is
required for the granting of complete relief in the determination of a counterclaim
or cross-claim, the court shall order them to be brought in as defendants, if
247

jurisdiction over them can be obtained. The inclusion, therefore, of Cardenas in

petitioners counterclaim is sanctioned by the rules.[20]
The prerogative of bringing in new parties to the action at any stage before
judgment is intended to accord complete relief to all of them in a single action and
to avert a duplicity and even a multiplicity of suits thereby.
In insisting on the inapplicability of Sapugay, respondents argue that new
parties cannot be included in a counterclaim, except when no complete relief can
be had. They add that [i]n the present case, Messrs. Lim and Mariano are not
necessary for petitioners to obtain complete relief from Respondent CCC as
plaintiff in the lower court. This is because Respondent CCC as a corporation with
a separate [legal personality] has the juridical capacity to indemnify petitioners
even without Messrs. Lim and Mariano.[21]
We disagree. The inclusion of a corporate officer or stockholder -- Cardenas
in Sapugay or Lim and Mariano in the instant case -- is not premised on the
assumption that the plaintiff corporation does not have the financial ability to
answer for damages, such that it has to share its liability with individual
defendants. Rather, such inclusion is based on the allegations of fraud and bad faith
on the part of the corporate officer or stockholder. These allegations may warrant
the piercing of the veil of corporate fiction, so that the said individual may not seek
refuge therein, but may be held individually and personally liable for his or her
actions.
In Tramat Mercantile v. Court of Appeals,[22] the Court held that generally, it
should only be the corporation that could properly be held liable. However,
circumstances may warrant the inclusion of the personal liability of a corporate
director, trustee, or officer, if the said individual is found guilty of bad faith or
gross negligence in directing corporate affairs.
Remo Jr. v. IAC[23] has stressed that while a corporation is an entity separate and
distinct from its stockholders, the corporate fiction may be disregarded if used to
defeat public convenience, justify a wrong, protect fraud, or defend crime. In these
instances, the law will regard the corporation as an association of persons, or in
case of two corporations, will merge them into one. Thus, there is no debate on
248

whether, in alleging bad faith on the part of Lim and Mariano the counterclaims
had in effect made them indispensable parties thereto; based on the alleged facts,
both are clearly parties in interest to the counterclaim.[24]
Respondents further assert that Messrs. Lim and Mariano cannot be held
personally liable [because their assailed acts] are within the powers granted to
them by the proper board resolutions; therefore, it is not a personal decision but
rather that of the corporation as represented by its board of directors. [25] The
foregoing assertion, however, is a matter of defense that should be threshed out
during the trial; whether or not fraud is extant under the circumstances is an issue
that must be established by convincing evidence.[26]
Suability and liability are two distinct matters. While the Court does rule that
the counterclaims against Respondent CCCs president and manager may be
properly filed, the determination of whether both can in fact be held jointly and
severally liable with respondent corporation is entirely another issue that should be
ruled upon by the trial court.
However, while a compulsory counterclaim may implead persons not parties to
the original complaint, the general rule -- a defendant in a compulsory
counterclaim need not file any responsive pleading, as it is deemed to have adopted
the allegations in the complaint as its answer -- does not apply. The filing of a
responsive pleading is deemed a voluntary submission to the jurisdiction of the
court; a new party impleaded by the plaintiff in a compulsory counterclaim cannot
be considered to have automatically and unknowingly submitted to the jurisdiction
of the court. A contrary ruling would result in mischievous consequences whereby
a party may be indiscriminately impleaded as a defendant in a compulsory
counterclaim; and judgment rendered against it without its knowledge, much less
participation in the proceedings, in blatant disregard of rudimentary due process
requirements.
The correct procedure in instances such as this is for the trial court, per Section
12 of Rule 6 of the Rules of Court, to order [such impleaded parties] to be brought
in as defendants, if jurisdiction over them can be obtained, by directing that
summons be served on them. In this manner, they can be properly appraised of and
249

answer the charges against them. Only upon service of summons can the trial court
obtain jurisdiction over them.
In Sapugay, Cardenas was furnished a copy of the Answer with Counterclaim,
but he did not file any responsive pleading to the counterclaim leveled against him.
Nevertheless, the Court gave due consideration to certain factual circumstances,
particularly the trial courts treatment of the Complaint as the Answer of Cardenas
to the compulsory counterclaim and of his seeming acquiescence thereto, as
evidenced by his failure to make any objection despite his active participation in
the proceedings. It was held thus:
It is noteworthy that Cardenas did not file a motion to dismiss the counterclaim
against him on the ground of lack of jurisdiction. While it is a settled rule that the
issue of jurisdiction may be raised even for the first time on appeal, this does not
obtain in the instant case. Although it was only Mobil which filed an opposition to
the motion to declare in default, the fact that the trial court denied said motion,
both as to Mobil and Cardenas on the ground that Mobils complaint should be
considered as the answer to petitioners compulsory counterclaim, leads us to the
inescapable conclusion that the trial court treated the opposition as having been
filed in behalf of both Mobil and Cardenas and that the latter had adopted as his
answer the allegations raised in the complaint of Mobil. Obviously, it was this
ratiocination which led the trial court to deny the motion to declare Mobil and
Cardenas in default. Furthermore, Cardenas was not unaware of said incidents and
the proceedings therein as he testified and was present during trial, not to speak of
the fact that as manager of Mobil he would necessarily be interested in the case and
could readily have access to the records and the pleadings filed therein.
By adopting as his answer the allegations in the complaint which seeks affirmative
relief, Cardenas is deemed to have recognized the jurisdiction of the trial court
over his person and submitted thereto. He may not now be heard to repudiate or
question that jurisdiction.[27]
Such factual circumstances are unavailing in the instant case. The records do
not show that Respondents Lim and Mariano are either aware of the counterclaims
filed against them, or that they have actively participated in the proceedings
involving them. Further, in dismissing the counterclaims against the individual
250

respondents, the court a quo -- unlike in Sapugay -- cannot be said to have treated
Respondent CCCs Motion to Dismiss as having been filed on their behalf.
Rules on Permissive Joinder of Causes
of Action or Parties Not Applicable
Respondent CCC contends that petitioners counterclaims violated the rule on
joinder of causes of action. It argues that while the original Complaint was a suit
for specific performance based on a contract, the counterclaim for damages was
based on the tortuous acts of respondents.[28] In its Motion to Dismiss, CCC cites
Section 5 of Rule 2 and Section 6 of Rule 3 of the Rules of Civil Procedure, which
we quote:
Section 5. Joinder of causes of action. A party may in one pleading assert, in the
alternative or otherwise, as many causes of action as he may have against an
opposing party, subject to the following conditions:
(a) The party joining the causes of action shall comply with the rules on joinder of
parties; x x x
Section 6. Permissive joinder of parties. All persons in whom or against whom
any right to relief in respect to or arising out of the same transaction or
series oftransactions is alleged to exist whether jointly, severally, or in the
alternative, may, except as otherwise provided in these Rules, join as plaintiffs or
be joined as defendants in one complaint, where any question of law or fact
common to all such plaintiffs or to all such defendants may arise in the action; but
the court may make such orders as may be just to prevent any plaintiff or defendant
from being embarrassed or put to expense in connection with any proceedings in
which he may have no interest.
The foregoing procedural rules are founded on practicality and convenience.
They are meant to discourage duplicity and multiplicity of suits. This objective is
negated by insisting -- as the court a quo has done -- that the compulsory
counterclaim for damages be dismissed, only to have it possibly re-filed in a
separate proceeding. More important, as we have stated earlier, Respondents Lim
251

and Mariano are real parties in interest to the compulsory counterclaim; it is

imperative that they be joined therein. Section 7 of Rule 3 provides:
Compulsory joinder of indispensable parties. Parties in interest without whom no
final determination can be had of an action shall be joined either as plaintiffs or
defendants.
Moreover, in joining Lim and Mariano in the compulsory counterclaim,
petitioners are being consistent with the solidary nature of the liability alleged
therein.
Second Issue:
CCCs Personality to Move to Dismiss
the Compulsory Counterclaims
Characterizing their counterclaim for damages against Respondents CCC, Lim
and Mariano as joint and solidary, petitioners prayed:
WHEREFORE, it is respectfully prayed that after trial judgment be rendered:
1. Dismissing the complaint in its entirety;
2. Ordering the plaintiff, Gregory T. Lim and Anthony A. Mariano jointly
and solidarily to pay defendant actual damages in the sum of at
least P2,700,000.00;
3. Ordering the plaintiff, Gregory T. Lim and Anthony A, Mariano
jointly and solidarily to pay the defendants LPI, LCLC, COC
and Roseberg:
a. Exemplary damages of P100 million each;
b. Moral damages of P100 million each; and
c. Attorneys fees and costs of suit of at least P5 million
each.
252

Other reliefs just and equitable are likewise prayed for.[29]

Obligations may be classified as either joint or solidary. Joint or jointly or
conjoint means mancum or mancomunada orpro rata obligation; on the other hand,
solidary obligations may be used interchangeably with joint and several or several.
Thus, petitioners usage of the term joint and solidary is confusing and ambiguous.
The ambiguity in petitioners counterclaims notwithstanding, respondents
liability, if proven, is solidary. This characterization finds basis in Article 1207 of the
Civil Code, which provides that obligations are generally considered joint, except
when otherwise expressly stated or when the law or the nature of the obligation
requires solidarity. However, obligations arising from tort are, by their nature,
always solidary. We have assiduously maintained this legal principle as early as
1912 in Worcester v. Ocampo,[30] in which we held:
x x x The difficulty in the contention of the appellants is that they fail to recognize
that the basis of the present action is tort. They fail to recognize the universal
doctrine that each joint tort feasor is not only individually liable for the tort in
which he participates, but is also jointly liable with his tort feasors. x x x
It may be stated as a general rule that joint tort feasors are all the persons who
command, instigate, promote, encourage, advise, countenance, cooperate in, aid or
abet the commission of a tort, or who approve of it after it is done, if done for their
benefit. They are each liable as principals, to the same extent and in the same
manner as if they had performed the wrongful act themselves. x x x
Joint tort feasors are jointly and severally liable for the tort which they commit.
The persons injured may sue all of them or any number less than all. Each is liable
for the whole damages caused by all, and all together are jointly liable for the
whole damage. It is no defense for one sued alone, that the others who participated
in the wrongful act are not joined with him as defendants; nor is it any excuse for
him that his participation in the tort was insignificant as compared to that of the
others. x x x
Joint tort feasors are not liable pro rata. The damages can not be apportioned
among them, except among themselves. They cannot insist upon an apportionment,
253

for the purpose of each paying an aliquot part. They are jointly and severally liable
for the whole amount. x x x
A payment in full for the damage done, by one of the joint tort feasors, of course
satisfies any claim which might exist against the others. There can be but
satisfaction. The release of one of the joint tort feasors by agreement generally
operates to discharge all. x x x
Of course the court during trial may find that some of the alleged tort feasors are
liable and that others are not liable. The courts may release some for lack of
evidence while condemning others of the alleged tort feasors. And this is true even
though they are charged jointly and severally.
In a joint obligation, each obligor answers only for a part of the whole liability;
in a solidary or joint and several obligation, the relationship between the active and
the passive subjects is so close that each of them must comply with or demand the
fulfillment of the whole obligation.[31] The fact that the liability sought against the
CCC is for specific performance and tort, while that sought against the individual
respondents is based solely on tort does not negate the solidary nature of their
liability for tortuous acts alleged in the counterclaims. Article 1211 of the Civil
Code is explicit on this point:
Solidarity may exist although the creditors and the debtors may not be bound in the
same manner and by the same periods and conditions.
The solidary character of respondents alleged liability is precisely why
credence cannot be given to petitioners assertion. According to such assertion,
Respondent CCC cannot move to dismiss the counterclaims on grounds that
pertain solely to its individual co-debtors. [32] In cases filed by the creditor, a
solidary debtor may invoke defenses arising from the nature of the obligation, from
circumstances personal to it, or even from those personal to its co-debtors. Article
1222 of the Civil Code provides:
A solidary debtor may, in actions filed by the creditor, avail itself of all defenses
which are derived from the nature of the obligation and of those which are personal
to him, or pertain to his own share. With respect to those which personally
254

belong to the others, he may avail himself thereof only as regards that part of
the debt for which the latter are responsible. (Emphasis supplied).
The act of Respondent CCC as a solidary debtor -- that of filing a motion to
dismiss the counterclaim on grounds that pertain only to its individual co-debtors -is therefore allowed.
However, a perusal of its Motion to Dismiss the counterclaims shows that
Respondent CCC filed it on behalf of Co-respondents Lim and Mariano; it did not
pray that the counterclaim against it be dismissed. Be that as it may, Respondent
CCC cannot be declared in default. Jurisprudence teaches that if the issues raised
in the compulsory counterclaim are so intertwined with the allegations in the
complaint, such issues are deemed automatically joined.[33] Counterclaims that are
only for damages and attorneys fees and that arise from the filing of the complaint
shall be considered as special defenses and need not be answered.[34]
CCCs Motion to Dismiss the
Counterclaim on Behalf of
Respondents Lim and
Mariano Not Allowed
While Respondent CCC can move to dismiss the counterclaims against it by
raising grounds that pertain to individual defendants Lim and Mariano, it cannot
file the same Motion on their behalf for the simple reason that it lacks the requisite
authority to do so. A corporation has a legal personality entirely separate and
distinct from that of its officers and cannot act for and on their behalf, without
being so authorized. Thus, unless expressly adopted by Lim and Mariano, the
Motion to Dismiss the compulsory counterclaim filed by Respondent CCC has no
force and effect as to them.
In summary, we make the following pronouncements:
1. The counterclaims against Respondents CCC, Gregory T. Lim and Anthony
A. Mariano are compulsory.
255

2. The counterclaims may properly implead Respondents Gregory T. Lim and

Anthony A. Mariano, even if both were not parties in the original
Complaint.
3. Respondent CCC or any of the three solidary debtors (CCC, Lim or
Mariano) may include, in a Motion to Dismiss, defenses available to their
co-defendants; nevertheless, the same Motion cannot be deemed to have
been filed on behalf of the said co-defendants.
4. Summons must be served on Respondents Lim and Mariano before the trial
court can obtain jurisdiction over them.
WHEREFORE, the Petition is GRANTED and the assailed Orders
REVERSED. The court of origin is hereby ORDEREDto take cognizance of the
counterclaims pleaded in petitioners Answer with Compulsory Counterclaims and
to cause the service of summons on Respondents Gregory T. Lim and Anthony A.
Mariano. No costs.
SO ORDERED.
Sandoval-Gutierrez, Carpio-Morales, and Garcia, JJ., concur.
Corona, J., on leave.

[1]

Rollo, pp. 18-53.

[2]

Id., pp. 55-58. Penned by Judge Agustin S. Dizon.

[3]

Id., pp. 59-61.

[4]

RTC Order dated May 22, 2002, p. 4; rollo, p. 58.

[5]

183 SCRA 464, March 21, 1990.

256

[6]

RTC Order dated May 22, 2002; rollo, pp. 9-12.

[7]

Rollo, pp. 59-61.

[8]

This case was deemed submitted for decision on November 13, 2003, upon
receipt by this Court of Petitioners Memorandum signed by Atty. Norma
Margarita B. Patacsil of the Sycip Salazar Hernandez & Gatmaitan Law
Firm. Respondent CCCs Memorandum, signed by Attys. Rodolf C.
Britanico and Melanie T. Chua of the Pangilinan Britanico Sarmiento &
Franco Law Offices, was received by the Court on October 10, 2003.

[9]

Rollo, p. 383.

[10]

See Section 7, Rule 6 of the 1997 Rules of Civil Procedure.

[11]

Lopez v. Gloria, 40 Phil. 26, August 30, 1919, per Torres, J.

[12]

See Section 7, Rule 6 of the 1997 Rules of Civil Procedure.

[13]

151 Phil. 338, January 31, 1973.

[14]

344 Phil. 811, September 24, 1997.

[15]

350 SCRA 113, January 23, 2001.

[16]

Answer and Counterclaim ad Cautelam, pp. 7-9; rollo, (Annex-L) pp. 190-192.

[17]

191 Phil. 17, March 17, 1981.

[18]

Id., p. 20, per Melencio-Herrera, J.

[19]

Metals Engineering Resources v. Court of Appeals, 203 SCRA 273, October 28,
1991.

[20]

Sapugay v. CA, supra on pp. 469-470, per Regalado, J. Section 14, Rule 6 is
now Section 12, Rule 6 under the 1997 Rules of Civil Procedure.

[21]

Respondents Memorandum, p. 11; rollo, p. 360.

257

[22]

238 SCRA 14, November 7, 1994.

[23]

172 SCRA 405, April 18, 1989, p. 408, per Gancayao, J.

[24]

Section 2 of Rule 3 of the 1997 Rules of Civil Procedure:

Real party-in-interest. A real party in interest is the party who stands
to be benefited or injured by the judgment in the suit or the party entitled to
the avails of the suit. Unless otherwise authorized by law or these Rules,
every action must be prosecuted or defended in the name of the real party in
interest.
Section 7 of Rule 3 of the 1997 Rules of Civil Procedure:
Compulsory Joinder of indispensable parties. Parties in interest
without whom no final determination can be had of an action shall be joined
either as plaintiffs or defendants.

[25]

Respondent CCCs Memorandum, p. 12-13; rollo, pp. 361-362.

[26]

Remo Jr. v. IAC, supra.

[27]

Sapugay v. Court of Appeals; supra, pp. 470-471.

[28]

See Respondent CCCs Memorandum, pp. 11-12; rollo, pp. 360-361.

[29]

Answer and Compulsory Counterclaims ad Cautelan, p. 9; rollo, p. 192.

[30]

22 Phil. 42, February 27, 1912, per Johnson, J. The pronouncement

in Worcester was later reiterated in Perfecto v. Contreras, 28 Phil. 538,
December 2, 1914; Versoza and Ruiz, Remetria y Cia v. Lim , 45 Phil. 416,
November 15, 1923.

[31]

Paras, Civil Code of the Phil.ippines, Annotated, Vol. IV, 10th ed., pp. 215-216
(citing 8 Manresa 194), 216. See Article 1207 of the Civil Code, which
defines solidary obligations as follows:

258

The concurrence of two or more creditors or of two or more debtors in

one and the same obligation does not imply that each one of the former has a
right to demand, or that each one of the latter is bound to render, entire
compliance with the prestation. There is a solidary liability only when the
obligation expressly so states, or when the law or the nature of the obligation
requires solidarity.
[32]

The grounds raised by Respondent CCC in its Motion to Dismiss the

counterclaim solely pertain to Lim and Mariano:

a) Lim and Mariano were not parties to the original Complaint and cannot
therefore be impleaded in the counterclaim.
b) Lim and Mariano were mere officials of CCC; their assailed acts, done by virtue
of a Board Resolution, were corporate acts for which they cannot be made
personally liable. (Motion to Dismiss dated December 29, 2001; rollo, pp.
220-225.
[33]

Gojo v. Goyola, 35 SCRA 557, October 30, 1970.

[34]

Worcester v. Lorenzana, July 31, 1953.

259

FIRST DIVISION
EQUITABLE PCI BANK,* G.R. No. 171545
AIMEE YU and BEJAN
LIONEL APAS,
Petitioners, Present:
PUNO, C.J., Chairperson,
- v e r s u s - SANDOVAL-GUTIERREZ,
CORONA,
AZCUNA and
LEONARDO-DE CASTRO, JJ.
**
NG SHEUNG NGOR doing
business under the name
and style KEN MARKETING, Promulgated:
KEN APPLIANCE DIVISION,
INC. and BENJAMIN E. GO,
Respondents. December 19, 2007
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - - x
DECISION
CORONA, J.:
This petition for review on certiorari[1] seeks to set aside the decision[2] of the Court
of Appeals (CA) in CA-G.R. SP No. 83112 and its resolution [3] denying
reconsideration.
On October 7, 2001, respondents Ng Sheung Ngor,[4] Ken Appliance
Division, Inc. and Benjamin E. Go filed an action for annulment and/or
reformation of documents and contracts[5] against petitioner Equitable PCI Bank
(Equitable) and its employees, Aimee Yu and Bejan Lionel Apas, in the Regional
Trial Court (RTC), Branch 16 of Cebu City.[6] They claimed that Equitable induced
them to avail of its peso and dollar credit facilities by offering low interest
260

rates[7] so they accepted Equitable's proposal and signed the bank's pre-printed
promissory notes on various dates beginning 1996. They, however, were unaware
that the documents contained identical escalation clauses granting Equitable
authority to increase interest rates without their consent.[8]
Equitable, in its answer, asserted that respondents knowingly accepted all the terms
and conditions contained in the promissory notes.[9] In fact, they continuously
availed of and benefited from Equitable's credit facilities for five years.[10]
After trial, the RTC upheld the validity of the promissory notes. It found that, in
2001 alone, Equitable restructured respondents' loans amounting to US$228,200
and P1,000,000.[11] The trial court, however, invalidated the escalation clause
contained therein because it violated the principle of mutuality of contracts.
[12]

Nevertheless, it took judicial notice of the steep depreciation of the peso during

the intervening period[13] and declared the existence of extraordinary deflation.

[14]

Consequently, the RTC ordered the use of the 1996 dollar exchange rate in

computing respondents' dollar-denominated loans.[15] Lastly, because the business

reputation of respondents was (allegedly) severely damaged when Equitable froze
their accounts,[16] the trial court awarded moral and exemplary damages to them.[17]
The dispositive portion of the February 5, 2004 RTC decision[18] provided:
WHEREFORE, premises considered, judgment is hereby rendered:
A)

Ordering [Equitable] to reinstate and return the amount of

[respondents'] deposit placed on hold status;

B)

Ordering [Equitable] to pay [respondents] the sum of P12

[m]illion [p]esos as moral damages;

C)

Ordering [Equitable] to pay [respondents] the sum of P10

[m]illion [p]esos as exemplary damages;
261

D)

Ordering defendants Aimee Yu and Bejan [Lionel] Apas to

pay [respondents], jointly and severally, the sum of [t]wo
[m]illion [p]esos as moral and exemplary damages;

E)

Ordering [Equitable, Aimee Yu and Bejan Lionel Apas],

jointly and severally, to pay [respondents'] attorney's fees in the
sum of P300,000; litigation expenses in the sum of P50,000 and
the cost of suit;

F)

Directing plaintiffs Ng Sheung Ngor and Ken Marketing to

pay [Equitable] the unpaid principal obligation for the peso loan
as well as the unpaid obligation for the dollar denominated
loan;
G) Directing plaintiff Ng Sheung Ngor and Ken Marketing to
pay [Equitable] interest as follows:
1)
2)

H)

12% per annum for the peso loans;

8% per annum for the dollar loans. The basis for the
payment of the dollar obligation is the conversion rate of
P26.50 per dollar availed of at the time of incurring of the
obligation in accordance with Article 1250 of the Civil Code
of the Philippines;

Dismissing [Equitable's] counterclaim except the payment of

the aforestated unpaid principal loan obligations and interest.

SO ORDERED.[19]

Equitable and respondents filed their respective notices of appeal.[20]

In the March 1, 2004 order of the RTC, both notices were denied due course
because Equitable and respondents failed to submit proof that they paid their
respective appeal fees.[21]

262

WHEREFORE, premises considered, the appeal interposed by

defendants from the Decision in the above-entitled case
is DENIED due course. As of February 27, 2004, the Decision
dated February 5, 2004, is considered final and executory in so far
as [Equitable, Aimee Yu and Bejan Lionel Apas] are concerned.
[22]
(emphasis supplied)

Equitable moved for the reconsideration of the March 1, 2004 order of the
RTC[23] on the ground that it did in fact pay the appeal fees. Respondents, on the
other hand, prayed for the issuance of a writ of execution.[24]
On March 24, 2004, the RTC issued an omnibus order denying Equitable's motion
for reconsideration for lack of merit[25] and ordered the issuance of a writ of
execution

in

favor

of

respondents.[26] According

to

the

RTC,

because

respondents did not move for the reconsideration of the previous order (denying
due course to the parties notices of appeal), [27] the February 5, 2004 decision
became final and executory as to both parties and a writ of execution against
Equitable was in order.[28]
A writ of execution was thereafter issued [29] and three real properties of Equitable
were levied upon.[30]
On March 26, 2004, Equitable filed a petition for relief in the RTC from the March
1, 2004 order.[31] It, however, withdrew that petition on March 30, 2004 [32] and
instead filed a petition for certiorari with an application for an injunction in the CA
to enjoin the implementation and execution of the March 24, 2004 omnibus order.
[33]

263

On June 16, 2004, the CA granted Equitable's application for injunction. A writ of
preliminary injunction was correspondingly issued.[34]
Notwithstanding the writ of injunction, the properties of Equitable previously
levied upon were sold in a public auction on July 1, 2004. Respondents were the
highest bidders and certificates of sale were issued to them.[35]
On August 10, 2004, Equitable moved to annul the July 1, 2004 auction sale and to
cite the sheriffs who conducted the sale in contempt for proceeding with the
auction despite the injunction order of the CA.[36]
On October 28, 2005, the CA dismissed the petition for certiorari. [37] It found
Equitable guilty of forum shopping because the bank filed its petition for certiorari
in the CA several hours before withdrawing its petition for relief in the RTC.
[38]

Moreover, Equitable failed to disclose, both in the statement of material dates

and certificate of non-forum shopping (attached to its petition for certiorari in the
CA), that it had a pending petition for relief in the RTC.[39]
Equitable moved for reconsideration[40] but it was denied.[41] Thus, this petition.
Equitable asserts that it was not guilty of forum shopping because the petition for
relief was withdrawn on the same day the petition for certiorari was filed.[42] It
likewise avers that its petition for certiorari was meritorious because the RTC
committed grave abuse of discretion in issuing the March 24, 2004 omnibus order
which was based on an erroneous assumption. The March 1, 2004 order denying its
notice of appeal for non payment of appeal fees was erroneous because it had in
fact paid the required fees.[43] Thus, the RTC, by issuing its March 24, 2004
omnibus order, effectively prevented Equitable from appealing the patently
wrong February 5, 2004 decision.[44]
264

This petition is meritorious.

EQUITABLE
WAS
NOT
GUILTY
OF
FORUM
SHOPPING

Forum shopping exists when two or more actions involving the same transactions,
essential facts and circumstances are filed and those actions raise identical issues,
subject matter and causes of action.[45] The test is whether, in two or more pending
cases, there is identity of parties, rights or causes of actions and reliefs.[46]
Equitable's petition for relief in the RTC and its petition for certiorari in the CA did
not have identical causes of action. The petition for relief from the denial of its
notice of appeal was based on the RTCs judgment or final order preventing it from
taking an appeal by fraud, accident, mistake or excusable negligence. [47] On the
other hand, its petition for certiorari in the CA, a special civil action, sought to
correct the grave abuse of discretion amounting to lack of jurisdiction committed
by the RTC.[48]
In a petition for relief, the judgment or final order is rendered by a court with
competent jurisdiction. In a petition for certiorari, the order is rendered by a court
without or in excess of its jurisdiction.
Moreover, Equitable substantially complied with the rule on non-forum shopping
when it moved to withdraw its petition for relief in the RTC on the same day (in
fact just four hours and forty minutes after) it filed the petition for certiorari in the
265

CA. Even if Equitable failed to disclose that it had a pending petition for relief in
the RTC, it rectified what was doubtlessly a careless oversight by withdrawing the
petition for relief just a few hours after it filed its petition for certiorari in the CA
a clear indication that it had no intention of maintaining the two actions at the
same time.
THE
TRIAL
COURT
COMMITTED GRAVE ABUSE
OF DISCRETION IN ISSUING
ITS MARCH 1, 2004 AND
MARCH 24, 2004 ORDERS
Section 1, Rule 65 of the Rules of Court provides:
Section 1. Petition for Certiorari. When any tribunal, board or
officer exercising judicial or quasi-judicial function has acted
without or in excess of its or his jurisdiction, or with grave abuse
of discretion amounting to lack or excess of jurisdiction, and there
is no appeal, nor any plain, speedy or adequate remedy in the
ordinary course of law, a person aggrieved thereby may file a
verified petition in the proper court, alleging the facts with certainty
and praying that judgment be rendered annulling or modifying the
proceedings of such tribunal, board or officer, and granting such
incidental reliefs as law and justice may require.
The petition shall be accompanied by a certified true copy of the
judgment, order or resolution subject thereof, copies of all pleadings
and documents relevant and pertinent thereto, and a sworn certificate
of non-forum shopping as provided in the third paragraph of Section
3, Rule 46.
There are two substantial requirements in a petition for certiorari. These are:
1.

that the tribunal, board or officer exercising judicial or

quasi-judicial functions acted without or in excess of his or its
266

jurisdiction or with grave abuse of discretion amounting to

lack or excess of jurisdiction; and
2.

that there is no appeal or any plain, speedy and adequate

remedy in the ordinary course of law.

For a petition for certiorari premised on grave abuse of discretion to prosper,

petitioner must show that the public respondent patently and grossly abused his
discretion and that abuse amounted to an evasion of positive duty or a virtual
refusal to perform a duty enjoined by law or to act at all in contemplation of law, as
where the power was exercised in an arbitrary and despotic manner by reason of
passion or hostility.[49]
The March 1, 2004 order denied due course to the notices of appeal of both
Equitable and respondents. However, it declared that the February 5, 2004 decision
was final and executory only with respect to Equitable.[50] As expected, the
March 24, 2004 omnibus order denied Equitable's motion for reconsideration and
granted respondents'motion for the issuance of a writ of execution.[51]
The March 1, 2004 and March 24, 2004 orders of the RTC were obviously
intended to prevent Equitable, et al. from appealing the February 5, 2004
decision. Not only that. The execution of the decision was undertaken with
indecent haste, effectively obviating or defeating Equitable's right to avail of
possible legal remedies. No matter how we look at it, the RTC committed grave
abuse of discretion in rendering those orders.
With regard to whether Equitable had a plain, speedy and adequate remedy in the
ordinary course of law, we hold that there was none. The RTC denied due course to
its notice of appeal in the March 1, 2004 order. It affirmed that denial in the March
267

24, 2004 omnibus order. Hence, there was no way Equitable could have possibly
appealed the February 5, 2004 decision.[52]
Although Equitable filed a petition for relief from the March 24, 2004 order, that
petition was not a plain, speedy and adequate remedy in the ordinary course of law.
[53]

A petition for relief under Rule 38 is an equitable remedy allowed only in

exceptional circumstances or where there is no other available or adequate remedy.

[54]

Thus, we grant Equitable's petition for certiorari and consequently give due course
to its appeal.

EQUITABLE RAISED PURE

QUESTIONS OF LAW IN ITS
PETITIONFOR REVIEW
The jurisdiction of this Court in Rule 45 petitions is limited to questions of law.
[55]

There is a question of law when the doubt or controversy concerns the correct

application of law or jurisprudence to a certain set of facts; or when the issue does
not call for the probative value of the evidence presented, the truth or falsehood of
facts being admitted.[56]
Equitable does not assail the factual findings of the trial court. Its arguments
essentially focus on the nullity of the RTCs February 5, 2004 decision. Equitable
points out that that decision was patently erroneous, specially the exorbitant
award of damages, as it was inconsistent with existing law and jurisprudence.[57]

268

THE PROMISSORY NOTES

WERE VALID
The RTC upheld the validity of the promissory notes despite respondents
assertion that those documents were contracts of adhesion.
A contract of adhesion is a contract whereby almost all of its provisions are drafted
by one party.[58] The participation of the other party is limited to affixing his
signature or his adhesion to the contract.[59] For this reason, contracts of adhesion
are strictly construed against the party who drafted it.[60]
It is erroneous, however, to conclude that contracts of adhesion are invalid per
se. They are, on the contrary, as binding as ordinary contracts. A party is in reality
free to accept or reject it. A contract of adhesion becomes void only when the
dominant party takes advantage of the weakness of the other party, completely
depriving the latter of the opportunity to bargain on equal footing.[61]
That was not the case here. As the trial court noted, if the terms and conditions
offered by Equitable had been truly prejudicial to respondents, they would have
walked out and negotiated with another bank at the first available instance. But
they did not. Instead, they continuously availed of Equitable's credit facilities for
five long years.
While the RTC categorically found that respondents had outstanding dollar- and
peso-denominated loans with Equitable, it, however, failed to ascertain the total
amount due (principal, interest and penalties, if any) as of July 9, 2001. The trial
court did not explain how it arrived at the amounts of US$228,200 and P1,000,000.
[62]

In Metro Manila Transit Corporation v. D.M. Consunji, [63] we reiterated that this

Court is not a trier of facts and it shall pass upon them only for compelling reasons
269

which unfortunately are not present in this case. [64] Hence, we ordered the partial
remand of the case for the sole purpose of determining the amount of actual
damages.[65]

ESCALATION
CLAUSE
VIOLATED THE PRINCIPLE
OF
MUTUALITYOF CONTRACTS
Escalation clauses are not void per se. However, one which grants the creditor an
unbridled right to adjust the interest independently and upwardly, completely
depriving the debtor of the right to assent to an important modification in the
agreement is void. Clauses of that nature violate the principle of mutuality of
contracts.[66] Article 1308[67] of the Civil Code holds that a contract must bind both
contracting parties; its validity or compliance cannot be left to the will of one of
them.[68]
For this reason, we have consistently held that a valid escalation clause provides:
1.

that the rate of interest will only be increased if the

applicable maximum rate of interest is increased by law or by
the Monetary Board; and

2.

that the stipulated rate of interest will be reduced if

the applicable maximum rate of interest is reduced by law or by
the Monetary Board (de-escalation clause).[69]

270

The RTC found that Equitable's promissory notes uniformly stated:

If subject promissory note is extended, the interest for subsequent
extensions shall be at such rate as shall be determined by the bank.[70]
Equitable dictated the interest rates if the term (or period for repayment) of
the loan was extended. Respondents had no choice but to accept them. This was a
violation of Article 1308 of the Civil Code. Furthermore, the assailed escalation
clause did not contain the necessary provisions for validity, that is, it neither
provided that the rate of interest would be increased only if allowed by law or the
Monetary Board, nor allowed de-escalation. For these reasons, the escalation
clause was void.
With regard to the proper rate of interest, in New Sampaguita Builders v.
Philippine National Bank[71] we held that, because the escalation clause was
annulled, the principal amount of the loan was subject to the original or stipulated
rate of interest. Upon maturity, the amount due was subject to legal interest at the
rate of 12% per annum.[72]
Consequently, respondents should pay Equitable the interest rates of 12.66% p.a.
for their dollar-denominated loans and 20% p.a. for their peso-denominated loans
from January 10, 2001 to July 9, 2001. Thereafter, Equitable was entitled to legal
interest of 12% p.a. on all amounts due.
THERE
WAS
NO
EXTRAORDINARY DEFLATI
ON

271

Extraordinary inflation exists when there is an unusual decrease in the purchasing

power of currency (that is, beyond the common fluctuation in the value of
currency) and such decrease could not be reasonably foreseen or was manifestly
beyond the contemplation of the parties at the time of the obligation. Extraordinary
deflation, on the other hand, involves an inverse situation.[73]
Article 1250 of the Civil Code provides:
Article 1250. In case an extraordinary inflation or deflation of the
currency stipulated should intervene, the value of the currency at the
time of the establishment of the obligation shall be the basis of
payment, unless there is an agreement to the contrary.

For extraordinary inflation (or deflation) to affect an obligation, the

following requisites must be proven:
1.
that there was an official declaration of extraordinary
inflation or deflation from the Bangko Sentral ng Pilipinas
(BSP);[74]
2.
3.

that the obligation was contractual in nature;[75] and

that the parties expressly agreed to consider the effects of
the extraordinary inflation or deflation.[76]

Despite the devaluation of the peso, the BSP never declared a situation of
extraordinary inflation. Moreover, although the obligation in this instance arose out
of a contract, the parties did not agree to recognize the effects of extraordinary
inflation (or deflation).[77] The RTC never mentioned that there was a such
stipulation either in the promissory note or loan agreement. Therefore, respondents

272

should pay their dollar-denominated loans at the exchange rate fixed by the BSP on
the date of maturity.[78]
THE AWARD OF MORAL AND
EXEMPLARY
DAMAGES
LACKEDBASIS
Moral damages are in the category of an award designed to compensate the
claimant for actual injury suffered, not to impose a penalty to the wrongdoer. [79] To
be entitled to moral damages, a claimant must prove:
1.

That he or she suffered besmirched reputation, or physical,

mental or psychological suffering sustained by the claimant;

2.

That the defendant committed a wrongful act or omission;

3.

That the wrongful act or omission was the proximate cause

of the damages the claimant sustained;

4.

The case is predicated on any of the instances expressed or

envisioned by Article 2219[80] and 2220[81]. [82]

In culpa contractual or breach of contract, moral damages are recoverable

only if the defendant acted fraudulently or in bad faith or in wanton disregard of
his contractual obligations.[83] The breach must be wanton, reckless, malicious or in
bad faith, and oppressive or abusive.[84]
The RTC found that respondents did not pay Equitable the interest due on February
9, 2001 (or any month thereafter prior to the maturity of the loan) [85] or the amount
due (principal plus interest) due on July 9, 2001.[86]Consequently, Equitable applied
respondents' deposits to their loans upon maturity.
273

The relationship between a bank and its depositor is that of creditor and debtor.
[87]

For this reason, a bank has the right to set-off the deposits in its hands for the

payment of a depositor's indebtedness.[88]

Respondents indeed defaulted on their obligation. For this reason, Equitable had
the option to exercise its legal right to set-off or compensation. However, the RTC
mistakenly (or, as it now appears, deliberately) concluded that Equitable acted
fraudulently or in bad faith or in wanton disregard of its contractual obligations
despite the absence of proof. The undeniable fact was that, whatever damage
respondents sustained was purely the consequence of their failure to pay their
loans. There was therefore absolutely no basis for the award of moral damages to
them.
Neither was there reason to award exemplary damages. Since respondents were not
entitled to moral damages, neither should they be awarded exemplary damages.
[89]

And if respondents were not entitled to moral and exemplary damages, neither

could they be awarded attorney's fees and litigation expenses.[90]

ACCORDINGLY, the petition is hereby GRANTED.
The October 28, 2005 decision and February 3, 2006 resolution of the Court of
Appeals in CA-G.R. SP No. 83112 are hereby REVERSED and SET ASIDE.
The March 24, 2004 omnibus order of the Regional Trial Court, Branch 16, Cebu
City in Civil Case No. CEB-26983 is hereby ANNULLED for being rendered with
grave abuse of discretion amounting to lack or excess of jurisdiction. All
proceedings undertaken pursuant thereto are likewise declared null and void.
274

The March 1, 2004 order of the Regional Trial Court, Branch 16 of Cebu City in
Civil Case No. CEB-26983 is hereby SET ASIDE. The appeal of petitioners
Equitable PCI Bank, Aimee Yu and Bejan Lionel Apas is therefore given due
course.
The February 5, 2004 decision of the Regional Trial Court, Branch 16 of Cebu City
in Civil Case No. CEB-26983 is accordingly SET ASIDE. New judgment is
hereby entered:
1.

ordering respondents Ng Sheung Ngor, doing business under the

name and style of Ken Marketing, Ken Appliance Division, Inc. and
Benjamin E. Go to pay petitioner Equitable PCI Bank the principal
amount of their dollar- and peso-denominated loans;

2.

ordering respondents Ng Sheung Ngor, doing business under the

name and style of Ken Marketing, Ken Appliance Division, Inc. and
Benjamin E. Go to pay petitioner Equitable PCI Bank interest at:
a)

12.66% p.a. with respect to their dollar-denominated

loans from January 10, 2001 to July 9, 2001;

b)

20% p.a. with

respect

to

their

peso-denominated

loans from January 10, 2001 to July 9, 2001;[91]

c)

pursuant to our ruling in Eastern Shipping Lines v. Court

of Appeals,[92] the total amount due on July 9, 2001 shall earn
legal interest at 12% p.a. from the time petitioner Equitable PCI
Bank demanded payment, whether judicially or extra-judicially;
and

d)

after this Decision becomes final and executory, the

applicable rate shall be 12% p.a. until full satisfaction;
275

3.

all other claims and counterclaims are dismissed.

As a starting point, the Regional Trial Court, Branch 16 of Cebu City shall
compute the exact amounts due on the respective dollar-denominated and pesodenominated loans, as of July 9, 2001, of respondents Ng Sheung Ngor, doing
business under the name and style of Ken Marketing, Ken Appliance Division and
Benjamin E. Go.
SO ORDERED.
RENATO C. CORONA
Associate Justice
WE CONCUR:
REYNATO S. PUNO
Chief Justice
Chairperson

ANGELINA SANDOVAL-GUTIERREZ ADOLFO S. AZCUNA

Associate Justice Associate Justice

TERESITA J. LEONARDO-DE CASTRO

Associate Justice

276

C E R T I FI C AT I O N
Pursuant to Section 13, Article VIII of the Constitution, I certify that the
conclusions in the above decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNO
Chief Justice

Now, Banco De Oro Unibank.

Also referred to as Ng Seung Ngor in the records.
[1]
Under Rule 45 of the Rules of Court.
[2]
Penned by Associate Justice Mercedes Gozo-Dadole (retired) and concurred in
by Associate Justices Pampio A. Abarintos and Enrico A. Lanzanas of the
Eighteenth Division of the Court of Appeals. Dated October 28,
2005. Rollo, pp. 88-111.
[3]
Penned by Associate Justice Enrico A. Lanzanas and concurred in by Associate
Justices Isaias P. Dicdican and Pampio A. Abarintos of the Special Former
Eighteenth Division of the Court of Appeals. Dated February 3, 2006. Id.,
pp. 112-115.
[4]
Doing business in the name and style of Ken Marketing.
[5]
Docketed as Civil Case No. CEB-26983. Rollo, pp. 115-143.
[6]
Id., pp. 116-117, 177.
[7]
The interest rate initially offered by Equitable was 12.75% p.a. for dollardenominated loans. Id., p. 187.
[8]
Id., p. 118.
[9]
Id., pp. 155-175.
[10]
Id.
[11]
Id., pp. 180, 183. SCHEDULE OF LOANS:
**

Respondents' submission
Principal Interest Date Availed Date of Maturity Amount Due
US$223,000 12.66%, p.a. 10 January 2001 9 July 2001 (total=)
36,700 12.66%, p.a. 10 January 2001 9 July 2001 US$232,248.00
P995,000 20%, p.a. 10 January 2001 9 July 2001 P1,081,703.14
277

Equitable's submission
Principal Interest Date Availed Date of Maturity Amount due
US$184,000 12.66%, p.a. 10 January 2001 9 July 2001 US$207,771.78
37,700 12.66%, p.a. 10 January 2001 9 July 2001 41,441.44
P1,050,000 20%, p.a. 10 January 2001 9 July 2001 P1,166,193.34
Note:
1.
Equitable and respondents agreed neither as to the amount of the
principal nor as to the amount due.
2.
The RTC concluded that the rates of interest stated in the promissory
notes were only applicable for 30 days (or from January 10, 2001 to
February 9, 2001). Thereafter(or every 30 days until the loan matures),
Equitable may change the rates if it so desired without the prior notice to
respondents.
3.
Interest due must be paid every month beginning February 9, 2001
until maturity.
4.
The findings of the trial court, with regard to the amount of
respondents' obligation to Equitable, agreed neither with the submission
of Equitable nor with that of respondents. The RTC made its own finding
as to the amount of respondent's obligation to Equitable but did not
explain how it arrived at the figures. It merely stated:
The evidence adduced during trial show [respondents] received
the proceeds of peso and dollar loans from defendant bank as
follows: (a) US$228,200 in four (4) different availments and the
(b) principal amount of P1,000,000. xxx
[12]
Id., pp. 185-186.
[13]
Id. The RTC took judicial notice of the fact that the exchange rate in 1996 was
US$1 = P26.50 while in 2001, it was US$1 = P55. Because the cost of
purchasing dollar increased by 200% over the relatively short period of six
years, it concluded that there was extraordinary inflation.
[14]
Id.
[15]
Id., p. 190.
[16]
Id., pp. 188-189.
[17]
Id.
[18]
Penned by Judge Agapito L. Hontanosas, Jr. (dismissed from the service per
resolution in J. King and Sons Company, Inc. v. Judge Agapito L.
Hontanosas, Jr., A.M. No. RTJ-03-1802, 21 September 2004, 438 SCRA
525). Id., pp. 177-190.
278

[19]

Id., pp. 189-190.

Id., pp. 191-193.
[21]
Id., p. 194.
[22]
Id.
[23]
Id., pp. 195-202. Equitable attached proof that it paid the appeal fees.
[24]
Id., pp. 203-204.
[25]
Id., p. 206.
[26]
Id., pp. 205-207.
[27]
Id., p. 205.
[28]
Id., p. 207.
[29]
Id., pp. 208-210.
[30]
Id., p. 218. Covered by TCT No. 124096, TCT No. 118031 and tax declarations
GR2K-06-038-00391 and GRK-06-038-00392.
[31]
Id., pp. 272-276.
[20]

See RULES OF COURT, Rule 38, Sec. 2. The section provides:

Sec. 2. Petition for relief from denial of appeal.-- When a judgment or
final order is rendered by any court in a case, and a party thereto, by fraud,
accident, mistake or excusable negligence, has been prevented from taking
an appeal, he may file a petition in such court and in the same case praying
that the appeal be given due course.
[32]

Id., pp. 279-281.

Docketed as CA-G.R. SP No. 83112. Id., p. 221.
[34]
Penned by Associate Justice Estela M. Perlas-Bernabe and concurred in by
Associate Justices Monina Arevalo-Zenarosa and Vicente I. Yap (retired) of
the Special Eighteenth Division of the Court of Appeals. Dated June 16,
2004. Id., pp. 221-223.
[35]
Id., pp. 226-231.
[36]
Id., pp. 232-240.
[37]
Supra note 2.
[38]
Id., pp. 106-110. The petition for certiorari was filed in the CA on March 30,
2004 at 9 a.m. while the motion to withdraw the petition for relief in the
RTC was filed also on March 30, 2004 at 1:40 p.m.
[39]
Id.
[40]
Id., pp. 248-271.
[41]
Supra note 3.
[42]
Id., p. 38.
[43]
Id., p. 55.
[33]

279

[44]

Id., pp. 62-68.

Ligon v. Court of Appeals, G.R. No. 127683, 7 August 1998, 294 SCRA 73, 88.
[46]
Id.
[47]
Supra note 31.
[48]
Florenz B. Regalado, 2 REMEDIAL LAW COMPENDIUM 18th ed., 716
citing Matute v. Macadaeg, et al., 99 Phil. 340 (1956) and de Gala-Sison v.
Maddela, et al., 160-B Phil. 626 (1975).
[49]
See Aggabao v. Commission on Elections, G.R. No. 163756, 26 January 2005,
449 SCRA 400. See also Zarate v. Maybank, G.R. No. 160976, 8 June 2005,
459 SCRA 785. See also Agustin v. Court of Appeals, G.R. No. 162571, 15
June 2005, 460 SCRA 315.
[50]
Rollo, p. 194.
[51]
Id., pp. 225-231.
[52]
See RULES OF COURT, Rule 41, Sec. 2. The section provides:
[45]

Section 2. Modes of appeal.-(a) Ordinary appeal.-- The appeal to the Court of Appeals in cases decided by
the Regional Trial Court in the exercise of its original jurisdiction shall
be taken by filing a notice of appeal with the court which rendered the
judgment or final order appealed from and serving a copy thereof upon
the adverse party. No record on appeal shall be required except in special
proceedings and other cases of multiple or separate appeals where the law or
these Rules so require. In such cases, the record on appeal shall be filed and
served in the like manner.
(b) Petition for review.-- The appeal to the Court of Appeals in cases decided by
the Regional Trial Court in exercise of its appellate jurisdiction shall be by
petition for review in accordance with Rule 42.
(c) Appeal by certiorari.-- In all cases where only questions of law are raised or
involved the appeal shall be to the Supreme Court by petition for review
on certiorari in accordance with Rule 45. (emphasis supplied)
[53]
Supra note 48 at 400 citing Palmares, et al. v. Jimenez, et al., 90 Phil. 773.
(1952).
[54]
Tuason v. Court of Appeals, G.R. No. 116607, 10 April 1996, 256 SCRA 158,
167. See also Cerezo v. Tuazon, G.R. No. 141538, 23 March 2004, 426
SCRA 167, 183. See also Azucena v. Foreign Manpower Services, G.R. No.
147955, 25 October 2004, 441 SCRA 346, 354-355.
280

[55]

Supra note 52 and Usero v. Court of Appeals, G.R. Nos. 152112 and 155055, 26
January 2005, 449 SCRA 352, 358.
[56]
Bukidnon Doctor's Hospital v. Metropolitan Bank and Trust Company, G.R. No.
161882, 8 July 2005, 463 SCRA 222, 233.
[57]
Rollo, pp. 46-50.
[58]
Citibank, N.A. v. Sabeniano, G.R. No. 156132, 6 February 2007.
[59]
Id.
[60]
Id.
[61]
Perez v. Development Bank of the Philippines, G.R. No. 148541, 11 November
2004, 442 SCRA 238, 249-250 citing Rizal Commercial Banking
Corporation v. Court of Appeals, G.R. No. 127139, 19 February 1999, 303
SCRA 449, 454.
[62]
Supra note 11.
[63]
G.R. No. 147594, 7 March 2007.
[64]
Id.
[65]
Id.
[66]
See New Sampaguita Builders Construction, Inc. v. Philippine National
Bank, G.R. No. 148753, 30 July 2004, 435 SCRA 565, 581 citing Philippine
National Bank v. Court of Appeals, 328 Phil. 54, 62-63 (1996).
[67]
Art. 1308. The contracts must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.
[68]
Jose B.L. Reyes and Ricardo C. Puno, 4 AN OUTLINE OF PHILIPPINE
CIVIL LAW 1957 ed., p. 178.
[69]
Llorin v. Court of Appeals, G.R. No. 103592, 4 February 1993, 218 SCRA 438,
442.
[70]
Rollo, p. 147.
[71]
Supra note 66.
[72]
Id., pp. 608-609.
[73]
Sangrador v. Valderrama, G.R. No. 58122, 29 December 1989, 168 SCRA 215,
228 citing Filipino Pipe and Foundry Corporation v. National Waterworks
and Sewage Authority, G.R. No. L- 43446, 3 May 1988.
[74]
Citibank v. Sabeniano, supra note 58. See also Mobil Oil Philippines v. Court of
Appeals, G.R. No. 58122, 29 December 1989, 180 SCRA 651, 667.
[75]
Extraordinary inflation or deflation does not affect obligations which arise from
sources other than contracts. See Velasco v. Manila Electric Company, 149
Phil.657 (1971).
See CIVIL CODE, Art. 1157. The article provides:
Art. 1157. Obligations arise from:
281

1.
Law;
2.
Contracts;
3.
Quasi-contracts;
4.
Acts or omission punished by law; and
5.
Quasi-delicts.
[76]
Commissioner of Public Highway v. Burgos, G.R. No. L-36706, 31 March 1980,
96 SCRA 831, 837.
[77]
The requisites for Article 1250 apply to both extraordinary inflation and
deflation. This case involved extraordinary inflation because, as RTC Judge
Hontanosas noted, the peso substantially depreciated during the intervening
period.
For Article 1250 to apply, not only must the obligation be contractual, the
parties must more importantly agree to recognize the effects of extraordinary
inflation (or deflation, as the case may be). Here, despite the fact that the
obligation was contractual (i.e., a loan), neither the loan agreement nor the
promissory notes contained a provision stating that the parties agreed to
recognize the effects of extraordinary inflation or deflation. For this reason,
Article 1250 was inapplicable.
[78]
Bank of the Philippine Islands v. Leobrera, G.R. Nos. 137147-48, 18 November
2003, 416 SCRA 15, 19 citing C.F. Sharp & Co. v. Northwest Airlines,
Inc.,G.R. No. 133498, 18 April 2002, 381 SCRA 314. See also Jammang v.
Takahashi, G.R. No. 149429, 9 October 2006, 504 SCRA 31, 36. Note that
Equitable did not present proof that respondents agreed to pay their dollardenominated loans in US dollars.
[79]
Supercars Management & Development Corporation v. Flores, G.R. No.
148173, 10 December 2004, 446 SCRA 34, 44.
See CIVIL CODE, Art. 2217. The article provides:
Art. 2217. 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 estimation, moral damages may be recovered if they are the
proximate result of the defendant's wrongful act or omission. (emphasis
supplied)
[80]
Art. 2219. Moral damages may be recovered in the following and analogous
cases:
1.
A criminal offense resulting in physical injury;
2.
Quasi-delict causing physical injuries;
282

3.
4.
5.
6.
7.
8.
9.
10.

Seduction, abduction, rape or other lascivious acts;

Adultery or concubinage;
Illegal or arbitrary detention or arrest;
Illegal search;
Libel, slander or any other form of defamation;
Malicious prosecution;
Acts mentioned in Art. 309;
Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30,
32, 34, and 35.

The parents of the female seduced, abducted, raped or abused, referred to in No. 3
of this article, may also recover moral damages.
The spouse, descendants, ascendants, brothers and sisters may bring the action
mentioned in No. 9 of this article, in the order named.
[81]
Art. 2220. Willful injury to property may be a legal ground for awarding moral
damages if the court should find that, under the circumstances, such
damages are justly due. The same rule applies to breaches of contract
where the defendant acted fraudulently or in bad faith. (emphasis
supplied)
[82]
Philippine National Bank v. Pike, G.R. No. 157845, 20 September 2005, 470
SCRA 328, 349-350 citing Philippine Telegraph & Telephone Corporation
v. Court of Appeals, G.R. No. 139268, 3 September 2002, 388 SCRA 270.
[83]
Id.
[84]
Id. citing Herbosa v. Court of Appeals, G.R. No. 119086, 25 January 2002, 374
SCRA 578. See also Salvador v. Court of Appeals, G.R. No. 124899, 30
March 2004, 426 SCRA 433.
[85]
Supra note 11.
[86]
Id.
[87]
Gullas v. National Bank, 62 Phil. 519, 521 (1935) citing Fulton Iron Works Co.
v. China Banking Corporation, 55 Phil. 208 (1930) and San Carlos Milling
Co. v. Bank of the Philippine Islands and China Banking Corporation, 59
Phil. 59 (1933).
[88]
Id., pp. 521-522.
[89]
Mahinay v. Velasquez, Jr., G.R. No. 152753, 13 January 2004, 419 SCRA 118,
122.
[90]
Supercars Management & Development Corporation v. Flores, supra note 79 at
44.
[91]
While this case involved extraordinary inflation because of the substantial
depreciation of the peso during the intervening period, Article 1250 of the
283

Civil Code was inapplicable. For Article 1250 to apply, not only must the
obligation be contractual, the parties must, more importantly, agree to
recognize the effects of extraordinary inflation (or deflation, as the case may
be). Here, despite the contractual obligation (i.e., a loan), neither the loan
agreement nor the promissory notes contained a provision stating that the
parties agreed to recognize the effects of extraordinary inflation or deflation.
(See note 77.)
[92]

G.R. No. 97412, 12 July 1994, 234 SCRA 74, 95.

284

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 195889

September 24, 2014

PHILIPPINE NATIONAL BANK, Petitioner,

vs.
SPOUSES EDUARDO AND MA. ROSARIO TAJONERA and EDUAROSA
REALTY DEVELOPMENT, INC.,Respondents.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil
Procedure seeking to reverse and set aside the November 30, 2010 Decision1 of the
Court of Appeals (CA), and its March 2, 2011 Resolution,2 in CA-G.R. CV No.
85458, entitled "Spouses Eduardo & Ma. Rosario Tajonera and Eduarosa Realty &
Development, Inc. v. Philippine National Bank," which affirmed with modification
the December 8, 2003 Decision3 of the Regional Trial Court, Branch 71, Pasig City
(RTC), in a case for annulment of sale, cancellation of title, cancellation of
mortgage and damages.
The Facts
Respondent Eduarosa Realty Development, Inc. (ERDI) was engaged in realty
construction and sale of condominium buildings. Respondent Ma. Rosario
Tajonera (Rosario),as the Vice President ofERDI, also performed the duties of
president and marketing director dealing with banks, suppliers and contractors.
ERDI, through Rosario, obtained loans from petitioner Philippine National Bank
(PNB)and entered into several credit agreements to finance the completion of the
construction of their 20-storey Eduarosa Tower Condominium located in Roxas
Boulevard, Paranaque City.
285

Pursuant to the Credit Agreement,4 dated March 5, 1991, the principal amount of
loan extended by PNB to ERDI was Sixty Million Pesos (60,000,000.00). As
security for the initial loan, ERDI executed the Real Estate Mortgage (REM)
consisting of three (3) parcels of land covered by Transfer Certificate of Title
(TCT) Nos. 38845, 38846 and 38847 with an aggregate area of 1,352 square
meters situated in Roxas Boulevard, Tambo, Paranaque, Metro Manila, registered
in the name of ERDI (Paranaque properties).In addition, the loan was secured by
the assignment of proceeds of contract receivables arising from the sale of
condominium units to be constructed on the mortgaged Paranaque properties.
On January 31, 1992, ERDI executed an amendment to the Credit
Agreement5 (First Amendment)and obtained an additional loan of Forty Million
Pesos (P40,000,000.00). As additional security to the increased amounts of loan,
the respondent spouses 958-square meter lot and the improvements thereon,
situated in Greenhills, San Juan, Metro Manila (Greenhills property)and covered
by TCT No. 29733, was mortgaged in favor of PNB as evidencedby the
Supplement to REM.6 On October 28, 1992, a Second Amendment to Credit
Agreement7 (Second Amendment)was executed by the parties to extend the
repayment dates of the loan and the additional loan subject to the terms set forth in
the said agreement.
The following year, or on November 3, 1993, a Third Amendment to the Credit
Agreement8 (Third Agreement)was entered into by the parties wherein PNB
granted an additional loan of Fifty Five Million Pesos (P55,000,000.00) to ERDI,
subject to several conditions stated in the said agreement.
As of September 30, 1994, ERDIs outstanding loan obligation with PNB
amounted to P211,935,067.40.9
ERDI failed to settle its obligation.As a consequence, PNB filed an application for
foreclosure of the Greenhills property. As the highest bidder, PNB was issued the
Certificate of Sale,10 dated October 9, 1997. Upon ERDIs failure to redeem the
property, PNB consolidated its title and caused the cancellation of TCT No.
29733.11 A new title, TCT No. 9424-R, was issued in the name of PNB.12
The Complaint
286

This prompted the respondents to file a complaint against PNB for annulment of
sale, cancellation oftitle, cancellation of mortgage, and damages before the RTC. In
the complaint, the respondents alleged that: the title to the mortgaged property that
was transferred to PNB as a consequence of the foreclosure proceedings was null
and void as their mortgage obligation had been novated and no new loans were
released to them, in violation of the provisions of the Supplement to REM; the
foreclosure proceedings were defective due to PNBs failure to send personal
notice to the respondent spouses; PNBs delay in the release of loan proceeds under
the credit agreements caused the non-completion of the condominium project; and
the properties mortgaged under the original mortgage contract covering the
respondents condominium titles should now be discharged, as the property of the
respondent spouses had already been foreclosed.13
PNBs Answer
In its Answer with Counterclaim, PNB denied the respondents allegations and
raised the following defenses: 1) the mortgage contract was supported by valuable
consideration asthe loan proceeds under the credit agreements were fully released
to them; 2) there was no novation of the contract; 3) demand letters were given to
and duly received by the respondents; and 4) the sufficiency of the mortgage over
the condominium titles cannot be determined because the court has no jurisdiction
over such issue.14
The RTC Decision
On December 8, 2003, the RTC rendered its judgment in favor of the respondents
and disposed as follows:
WHEREFORE, judgment is hereby rendered in favor of plaintiffs and against the
defendant:
1. NULLIFYING and CANCELLING the Supplement to Real Estate
Mortgage dated January 28, 1992 and the Certificate of Sale dated October
9, 1997.

287

2. NULLIFYING and CANCELLING the Transfer Certificate of Title No.

9424-R, Registry of Deeds for San Juan, Metro Manila, and REINSTATING
Transfer Certificate of Title No. 29733, Registry of Deeds for San Juan,
Metro Manila.
3. ORDERING the defendant to pay the plaintiffs the amount
of P500,000.00 as moral damages.
4. ORDERING the defendant to pay the plaintiffs the amount
of P200,000.00 as exemplary damages.
5. ORDERING the defendant to pay the plaintiffs the amount
of P100,000.00 as and by way of attorneys fees.
6. Costs of suit.
Counterclaims are hereby DISMISSED for lack of merit.
SO ORDERED.15
The RTC annulled the mortgage contract constituted over the Greenhills property
on the ground of breach of contract on the part of PNB by violating the credit
agreements.
The CA Decision
Aggrieved, PNB elevated the matter to the CA. In its Decision, dated November
30, 2010, the CA affirmed the decision of the RTC, but deleted the award of moral
and exemplary damages. In the dispositive portion of its assailed decision, the CA
declared:
WHEREFORE, the challenged Decision dated 08 December 2003 is AFFIRMED
with Modification in that the awards for moral and exemplary damages are deleted.
SO ORDERED.16
The CA agreed with the RTC ruling that inasmuch as PNB did not release the
remaining balance of the approved loan amounting to P39,503,088.84 under the
288

Third Amendment, there was no sufficient valuable consideration in the execution

of the Supplement to REM that secured the said credit agreement. There was,
according to the CA, breach of contract on the part of PNB that warranted the
annulment and cancellation of the Supplement to REM covering the Greenhills
property. Further, the CA rejected PNBs claim that its refusal to release the
balance of the last loan was due to the respondents failureto comply with the
undertaking of bringing new investors with additional collaterals to secure the
additional loan as such requirement was not categorically stated in the terms of the
credit agreement. Also, such claim was belied by PNBs own witness who testified
that the reason for its refusal to release was simply the respondents failure to settle
their amortization.
PNB filed a motion for reconsideration of the said decision, but the same was
denied by the CA in its assailed Resolution, dated March 2, 2011.
Hence, this petition.
The Issues:
In its Memorandum,17 PNB submits the following issues for consideration:
Whether or not the CA decided in accordance with the applicable laws and
jurisprudence when:
(1) it ruled that the Supplement to Real Estate Mortgage, dated 28 January
1992, lacked sufficient valuable consideration even when the loan proceeds
secured by it under the Third Amendment, dated 03 November 1993, had
been substantially released by PNB, and the Credit Agreement, dated 05
March 1991, as well as the First and Second Amendments thereto, dated 31
January 1992 and 28 October 1992, respectively, upon which the same
Supplement to Real Estate Mortgagewas similarly constituted as additional
security, had all been duly executed and consummated;
(2) it ruled that PNB breached its contractual obligation when it supposedly
failed to release the remaining balance of the approved loan in the amount
of P39,503,088.84 to the respondents even when the latterhad not had a
289

single history of payment and did not need the entire amount for the
purpose-specific loan grant under the Credit Agreement and its
Amendments;
(3) upon a finding of breach of contractual obligation on the part of PNB due
to its supposed unjustified release of a portion of the loan proceeds, it ruled
for the annulment and cancellation of supplement to real mortgage (the
accessory contract) yet ratiocinated that the Third Amendment (the principal
contract) became unenforceable only to the extent of unreleased portion of
the loan proceeds.18
The Courts Ruling
PNBs assignment of errors boils down to the sole issue of whether the CA erred in
annulling the mortgage contract constituted over the Greenhills property of the
respondents.
PNB contends that the Supplement to REM was supported by sufficient and
valuable consideration because the loan proceeds secured by it under the Third
Amendment had been substantially released to the respondents. It avers that had it
not been for the additional collateral over the Greenhills property, PNB would not
have made the respondents loan account current under the First Amendment. This
consideration, according to it, must be deemed valuable and sufficient enough to
uphold the validity of the Supplement to the REM.
PNB insists that there was no breach, substantial or otherwise, of its contractual
obligation when it did not release the remaining balance of the approved loan to
the respondents considering that the latter had no history of any payment either on
interest or principal of the loan. PNB, thus, asserts that the CA erred when it
affirmed the RTC in ordering the annulment and cancellation of the supplement
REM covering the Greenhills property.
PNBs arguments fail to persuade.
Record shows that ERDI obtained loans from, and entered into, several credit
agreements with PNB to finance the completion of the construction of its 20-storey
290

condominium project, the Eduarosa Towers. Pertinent details of the said credit
agreements are summarized as follows:
Amount of Loan ( ) Grant

Date of Execution

Credit Agreement

P60,000,000.00
P5,000,000.00

Loan
March 5, 1991
Domestic Bills
Purchased (DBP)

Amendment to
Credit Agreement

P40,000,000.00

Additional Loan

January 31, 1992

2nd Amendment to None

Credit Agreement

Extension of
repayment dates
of the loan and
additional loan

October 28, 1992

3rd Amendment to
Credit Agreement

Additional Loan

November 3, 1993

P55,000,000.00

As recited earlier, on March 5, 1991, ERDI obtained from PNB a loan in the
amount of P60,000,000.00 plus P5,000,000.00 Domestic Bills. To secure this
initial loan, ERDI mortgaged in favor of PNB its Paranaque properties together
with the 20-storey condominium building to be erected thereon.
Thereafter or on January 31, 1992,ERDI and PNB entered into The First
Amendment wherein the former obtained an additional loan of P40,000,000.00. As
security for the additional loan, the respondents Greenhills property was
mortgaged as evidenced by the Supplement to REM executed by the parties on
January 28,1992. The Second Amendment was likewise entered into by the parties
for the purpose of extending the repayment dates of the loan and the additional
loan.
On November 3, 1993, the Third Amendment was entered into by the parties
wherein the respondents were granted a second additional loan of P55,000,000.00.

291

The agreement between PNB and the respondents was one of a loan. Under the
law, a loan requires the delivery of money or any other consumable object by one
party to another who acquires ownership thereof, on the condition that the same
amount orquality shall be paid. Loan is a reciprocal obligation, as it arises from the
same causewhere one party is the creditor, and the other the debtor. The obligation
of one party in a reciprocal obligation is dependent upon the obligation of the
other, and the performance should ideally be simultaneous. This means that in a
loan, the creditor should release the full loan amountand the debtor repays it when
it becomes due and demandable.19
PNB, not having released the balance of the last loan proceeds in accordance with
the Third Amendment had no right to demand from the respondents compliance
with their own obligation under the loan. Indeed, if a party in a reciprocal contract
like a loan does not perform its obligation, the other party cannot be obliged to
perform what is expected of them while the other's obligation remains unfulfilled.20
When PNB and the respondents entered into the First, Second and Third
Amendments on January 31, 1992, October 28,1992 and November 3, 1993,
respectively, they undertook reciprocal obligations. In reciprocal obligations, the
obligation or promise ofeach party is the consideration for that of the other; and
when one party has performed or is ready and willing to perform his part of the
contract, the other party who has not performed or is not ready and willing to
perform incurs in delay.21 The promise of the respondents to pay was the
consideration for the obligation of PNB to furnish the P40,000,000.00 additional
loan under the First Amendment as well as the P55,000,000.00 the second
additional loan under the Third Amendment. When the respondents executed the
Supplement to REM covering their Greenhills property, they signified their
willingness to pay the additional loans. It should be noted, as correctly found by
the CA, that the Supplement to REM was constituted not only as security for the
execution of the First Amendment but also in consideration of the Second and
Third Amendments. The provisions of the Third Amendment read in part:
SECTION 2. THE AMENDMENTS
xxx
292

2.05 The full payment of the Loans and any and all sums payable by the Borrower
hereunder and under the Notes and the other documents contemplated hereby and
the faithful compliance by the Borrower with the terms and conditions hereof and
thereof and the Notes shall be secured by the following collaterals:
xxx
b) Existing real estate mortgageon a parcel of land with an area of 958 sq. m., more
or less, together with the improvements thereon, situated in San Juan, Metro
Manila, covered by TCT No. 29733 of the land records for Metro Manila (D-11)
and registered in the name of Rosario M. Mendoza married to Eduardo Tajonera
(the "Accommodation Mortgagors"), as evidenced by that Supplement to Real
Estate Mortgage dated January 28, 1992 and acknowledged before Notary Public
for the City ofManila, Rowena Fe N. Suarez as Doc. No. 300, Page No. 61, Book
No. II Series of 1992;22
xxx
The obligation of PNB was to furnish the P55,000,000.00 additional loan accrued
on November 3, 1993, the date the parties entered into the Third Amendment.
Thus, PNBs delay in furnishing the entire additional loan started from the said
date.
Considering that PNB refused to release the total amount of the additional loan
granted to ERDI under the Third Amendment amounting to P39,503,088.84, the
CA was correct in affirming the RTCs conclusion that there was no sufficient
valuable consideration in the execution of the Supplement to REM. In the assailed
decision, the CA wrote:
Indeed, the execution of the subject Supplement to Real Estate Mortgage dated
January 28, 1992 lacks sufficient valuable consideration since PNB did not release
the balance of the Php160,000,000.00 approved loan in the amount of
Php39,503,038.54, pursuant to the Third Amendment to Credit Agreement of the
parties. As the records would show, the subject Supplement to Real Estate
Mortgage, supra, was constituted by Appellees as additional security for the
execution of the 1st, 2nd as well as the 3rd Amendment to Credit Agreements.
293

To elucidate, the Greenhills property was first mortgaged by Appellees in favor of

PNB as collateral security to the additional loan of Php40,000,000.00, evidenced
by the provisions of the 1st Amendment to Credit Agreement, reading as follows:
xxx
We agree with the court a quowhen it correctly ruled that the subject supplement
mortgage over Appellees Greenhills property was likewise constituted in
consideration of the Third Amendment to Credit Agreement, supra, as evidenced
by 2.05 (b), Section 2 thereof which provides, to wit: xxx
In view of the foregoing,We hold that the court a quoaptly ruled that the refusal of
PNB to release portion of the additional loan granted under the Third Amendment
to Credit Transaction is not justified. In this jurisdiction, breach of contract is
defined as follows:
xxx
[It] is the "failure without legal reason to comply with the terms of a contract." Itis
also defined as the "[f]ailure, without legal excuse, to perform any promise which
forms the whole or part of the contract."
xxx
Undoubtedly, PNB breached its contractual obligation when it failed to release to
Appellees the remaining balance of the approved loan amounting to
Php39,503,088.84.23
The RTC found that PNB was guilty of breach of contract as the credit agreements
had been violated. For its failure to release the balance of the approved loan, the
construction of the Eduarosa Towers Condominium project was not finished,
transgressing the very purpose of the credit agreements, that is, to finance the
completion of the construction of Eduarosa Towers. This factual findingwas
affirmed by the CA. Thus, the Court is bound to uphold such finding. "The settled
rule is that conclusions and findings of fact of the trial court are entitled to great
weight on appeal and should not be disturbed unless for strong and cogent reasons
because the trial court is in a better position to examine real evidence, as well as
294

observe the demeanor of the witnesses while testifying in the case. The fact that the
CA adopted the findings of fact of the trial court makes the same binding upon this
Court."24
At any rate, the Court finds no merit in PNBs claim that its refusal to release the
balance of the approved additional loan was justified on the ground of the
respondentsfailure to settle their amortization. PNBs own witness, Mr. Mallari,
testified, thus:
Cross Examination
xxx
ATTY. LLAUDER:
Q. Now, what happened to the balance of the loan that was yet to be released to
plaintiff corporation?
A: The bank did not allow further availments because of the failure of the borrower
to pay the maturing obligation.
xxx
Redirect Examination
xxx
ATTY. BALDONO:
xxx
Q: What was the reason, Mr. Witness, why the PNB withheld the release of the
additional loan?
A: Because the borrower failed to settle the quarterly amortization June 30, 1994.
Even the June 30, the amortization were never settled by the borrower.
COURT:
295

What year?
A: June 30, 1994, your Honor.25
Evidently and as aptly observed by the CA, PNB cannot justify its failure to release
the balance of the last loan executed with the respondents under the Third
Amendment on November 3, 1993 considering that the latters liability to pay their
first amortization arose only on June 30, 1994.
As expressly provided in the terms ofthe second additional loan embodied in the
Third Amendment, to wit:
SECTION 1. TERMS OF THE SECOND ADDITIONAL LOAN
xxx
1.05 Repayment Dates. The Borrower agrees to repay the Second Additional Loan
in full in eleven (11) equal (or as nearly equal as possible) consecutive quarterly
installments ("Repayment Dates"), the first installment to commence on June 30,
1994 and every quarter thereafter up to December 31, 1996.
SECTION 2. THE AMENDMENTS
2.01 The Interest Payment Dates and Repayment Dates of the Loan, the Additional
Loan and the Second Additional Loan (Collectively the "Loans") shall be the same.
Accordingly, the Credit Documents are hereby amended to change the Interest
Payment Dates and Repayment Dates in the following manner:
xxx
First principal payment on the Loans shall commence on June 30, 1994 and every
quarter thereafter until maturity of all the loans on December 31,
1996.26 [Underscoring Supplied] Equally without merit is PNBs reliance on the
case of Sps. Omengan v. Philippine National Bank.27 The said case finds no
application inasmuch as the circumstances in that case are not in all fours with the
present case. In Omengancase, there was no actual meeting of the minds with
respect to the conditionally approved additional loan as the condition attached to
296

the increase in borrowers credit line was not acknowledged and accepted by them.
Hence, there being no perfectedcontract over the increase in credit line, it was held
that no breach of contract could be attributed to PNB in not releasing the additional
loan. In the present case, there was a perfected contract in so far as the Third
Amendment was concerned. Thus, PNBs action in not releasing the entire amount
of the additional loan was not justified.
Still in the said case, atthe time the original loan was approved, the title to the
property offered as collateral appeared topertain exclusively to Spouses Omengan.
By the time the application for increase was considered, PNB had acquired
information that the said property, although in the name of spouses petitioners was
owned in co-ownership. The Court justified PNBs act of withholding the release
of the additional loan because it already had reason to suspect the spouses claim of
exclusive ownership over the mortgaged collateral. Inthis case, the respondents
were unquestionably the exclusive owners ofthe mortgaged property (Greenhills
property) at the time the initial and the additional loans were approved.
For said reasons, the Court holds that PNB was indeed guilty of breach of contract
of its reciprocal obligation under the credit agreements.
Considering that there was no sufficient valuable consideration in the execution of
the Supplement to REM on the Third Amendment as the balance of the last
approved additional loan in the amount of P39,503,088.54 remained unreleased,
the cancellation of the Supplement to REM constituted over the respondents
Greenhills property was in order.
It is true that loans are often secured by a mortgage constituted on real or personal
property to protect the creditor's interest in case of the default of the debtor. By its
nature, however, a mortgage remains an accessory contract dependent on the
principal obligation, such that enforcement of the mortgage contract depends on
whether or not there has been a violation of the principal obligation. While a
creditor and a debtor could regulate the order in which they should comply with
their reciprocal obligations, it is presupposed that in a loan the lender should
perform its obligation the release of the full loan amount.28

297

In this case, to repeat, PNB did not fulfill its principal obligation under the Third
Amendment by failing torelease the amount of the last additional loan in full.
Consequently, the Supplement to REM covering the Greenhills property became
unenforceable, as the said property could not be entirely foreclosed to satisfy the
respondents total debts to PNB. Moreover, the Supplement to REM was no longer
necessary because PNBs interest was amply protected as the loans had been
sufficiently secured by the Paranaque properties. As aptly found by the RTC, the
Paranaque properties together with the 20-storey condominium building to be
erected thereon would have been sufficient security in the execution of the REM
even without the Greenhills property as additional collateral. Thus, under the
circumstances, PNBs actuation in foreclosing the Greenhills property was legally
unfounded.
Being a banking institution, PNB owes it to the respondents to observe the high
standards of integrity and performance in all its transactions because its business is
imbued with public interest. The high standards are also necessary to ensure public
confidence in the banking system, for, according to Philippine National Bank v.
Pike,29 "[t]he stability of banks largely depends on the confidence of the people in
the honesty and efficiency of banks."30Thus, PNB was duty bound tocomply with
the terms and stipulations under its credit agreements with the respondents,
specifically the release of the amount ofthe additional loan in its entirety, lest it
erodes public confidence.1wphi1 Yet, PNB failed in this regard.
Regarding the award of damages, the CA ruled that the RTC erred in awarding
moral and exemplary damages for failure of the respondents to prove with
convincing evidence malice or bad faith on the part of PNB. The Court finds no
reason to overturn this finding.
Moral damages are explicitly authorized in breaches of contract when the
defendant has acted fraudulently or in bad faith.31 Exemplary damages, on the other
hand, are intended to serve as an example or a correction for the public good.
Courts may award them if the defendant is found to have acted in a wanton,
fraudulent, reckless, oppressive, or malevolent manner.32 Concededly, PNB was
remiss in its obligation to release the balance of the additional loan it extended to
the respondents. Nothing in the records or findings of the RTC and the CA,
298

however, would show that PNB acted with a deliberate intent to maliciously cause
damage or harm to the respondents. And, inasmuch as the respondents were also
found to h;we been remiss in their obligation to pay their loan amortization, the CA
was correct in deleting the award for moral and exemplary damages in favor of the
respondents.
Finally, the Court sustains the award for attorney's fees because the same is just
and equitable under the circumstances.33 Considering PNB 's failure to release the
remaining balance of the approved loan, the Court agrees that the respondents were
compelled to litigate for the purpose of recovering their property and to protect
their interest, making the awmd or attorney's fees proper.
WHEREFORE, the petition is DENIED. The November 30, 2010 Decision and the
March 2, 2011 Resolution of the Court of Appeals in CAG.R. CV No. 85458 are
AFFIRMED.
SO ORDERED.
JOSE CATRAL MENDOZA
Associate Justice
WE CONCUR:
ANTONIO T. CARPIO
Associate Justice
Chairperson
ARTURO D. BRION
Associate Justice

MARIANO C. DEL CASTILLO

Associate Justice

MARVIC M.V.F. LEONEN

Associate Justice
AT T E S TAT I O N
I attest that the conclusions in the above Decision had been reached in consultation
before the case was assigned to the writer of the opinion or the Court's Division.
299

ANTONIO T. CARPIO
Associate Justice
Chairperson, Second Division
C E R T I F I C AT I O N
Pursuant to Section 13, Article VIII of the Constitution and the Division
Chairperson's Attestation, I certify that the conclusions in the above Decision had
been reached in consultation before the case was assigned to the writer of the
opinion of the Court's Division.
MARIA LOURDES P. A. SERENO
Chief Justice

Footnotes
1

Rollo. pp. 65-82. Penned by Associate Justice Jane Aurora C. Lantion with
Associate Justices Andres B. Reyes. Jr. and Japar B. Dimaampao,
concurring.
2

Id. at 83-84.

Id. at 134-156.

Id. at 85-91.

Id. at 102-107.

Id. at 108-111.

Id. at 112-116.

Id. at 117-122.

Id. at 123-124.
300

10

Id. at 128.

11

Id. at 129.

12

Id. at 130.

13

Id. at 66.

14

Id. at 67.

15

Id. at 155-156.

16

Id. at 82.

17

Dated October 19, 2012, id. at 313-380.

18

Id. at 330-331.

19

Development Bank of the Philippines v. Guarina Agricultural and Realty

Development Corporation, G.R. No. 160758, January 15, 2014.
20

Id., citing Cortes v. Court of Appeals, 527 Phil. 153, 160 (2006).

21

Central Bank of the Philippines v. Court of Appeals, 223 Phil. 266, 273
(1985).
22

Rollo, pp. 119-120.

23

Id. at 76-78.

24

Dato v. Bank of the Philippine Islands, G.R. No. 181873, November 27,
2013, 710 SCRA 716, 729, citing Magdiwang Realty Corporation v. The
Manila Banking Corporation, G.R. No. 195592, September 5, 2012, 680
SCRA 251, 263-264, citing Bernales v. Heirs of Julian Sambaan, G.R. No.
163271, January 15, 2010, 610 SCRA 90, 104-105.
25

Rollo, pp. 79-80.

26

Id. at 117-119.
301

27

541 Phil. 293 (2007).

28

Development Bank of the Philippines v. Guarina Agricultural and Realty

Development Corporation, supra note 19.
29

507 Phil. 322, 340 (2005).

30

Development Bank of the Philippines v. Guarina Agricultural and Realty

Development Corporation, supra note 19.
31

Philippine National Bank v. RBL Enterprises, Inc., G.R. No. 149569, May
28, 2004, 430 SCRA 299, citing Spouses Mirasol v. Court of Appeals, 403
Phil. 760, 779 (2001).
32

Id., citing Article 2232 of the Civil Code.

33

Article 2208 (11) of the Civil Code.

302

THIRD DIVISION

SEBASTIAN SIGA-AN,

G.R. No. 173227

Petitioner,
Present:

YNARES-SANTIAGO,
Chairperson,
AUSTRIA-MARTINEZ,
-versus

CHICO-NAZARIO,
NACHURA, and
LEONARDO-DE CASTRO,* JJ.

Promulgated:

303

January 20, 2009

ALICIA VILLANUEVA,
Respondent.
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION
CHICO-NAZARIO, J.:

Before Us is a Petition[1] for Review on Certiorari under Rule 45 of the

Rules of Court seeking to set aside the Decision,[2] dated 16 December 2005, and
Resolution,[3] dated 19 June 2006 of the Court of Appeals in CA-G.R. CV No.
71814, which affirmed in toto the Decision,[4] dated 26 January 2001, of the Las
Pinas City Regional Trial Court, Branch 255, in Civil Case No. LP-98-0068.

The facts gathered from the records are as follows:

On 30 March 1998, respondent Alicia Villanueva filed a complaint [5] for sum
of money against petitioner Sebastian Siga-an before the Las Pinas City Regional
Trial Court (RTC), Branch 255, docketed as Civil Case No. LP-980068. Respondent alleged that she was a businesswoman engaged in supplying
office materials and equipments to the Philippine Navy Office (PNO) located at

304

Fort Bonifacio, Taguig City, while petitioner was a military officer and comptroller
of the PNO from 1991 to 1996.

Respondent claimed that sometime in 1992, petitioner approached her inside

the PNO and offered to loan her the amount of P540,000.00. Since she needed
capital for her business transactions with the PNO, she accepted petitioners
proposal. The loan agreement was not reduced in writing. Also, there was no
stipulation as to the payment of interest for the loan.[6]

On 31 August 1993, respondent issued a check worth P500,000.00 to

petitioner as partial payment of the loan. On 31 October 1993, she issued another
check in the amount of P200,000.00 to petitioner as payment of the remaining
balance of the loan. Petitioner told her that since she paid a total amount
of P700,000.00 for the P540,000.00 worth of loan, the excess amount
of P160,000.00 would be applied as interest for the loan. Not satisfied with the
amount applied as interest, petitioner pestered her to pay additional
interest. Petitioner threatened to block or disapprove her transactions with the PNO
if she would not comply with his demand. As all her transactions with the PNO
were subject to the approval of petitioner as comptroller of the PNO, and fearing
that petitioner might block or unduly influence the payment of her vouchers in the
PNO, she conceded. Thus, she paid additional amounts in cash and checks as
interests for the loan. She asked petitioner for receipt for the payments but
petitioner told her that it was not necessary as there was mutual trust and
confidence between them. According to her computation, the total amount she paid
to petitioner for the loan and interest accumulated to P1,200,000.00.[7]

Thereafter, respondent consulted a lawyer regarding the propriety of paying

interest on the loan despite absence of agreement to that effect. Her lawyer told her
305

that petitioner could not validly collect interest on the loan because there was no
agreement between her and petitioner regarding payment of interest. Since she paid
petitioner a total amount of P1,200,000.00 for the P540,000.00 worth of loan, and
upon being advised by her lawyer that she made overpayment to petitioner, she
sent a demand letter to petitioner asking for the return of the excess amount
of P660,000.00. Petitioner, despite receipt of the demand letter, ignored her claim
for reimbursement.[8]

Respondent prayed that the RTC render judgment ordering petitioner to pay
respondent (1) P660,000.00 plus legal interest from the time of demand;
(2) P300,000.00 as moral damages; (3) P50,000.00 as exemplary damages; and (4)
an amount equivalent to 25% of P660,000.00 as attorneys fees.[9]

In his answer[10] to the complaint, petitioner denied that he offered a loan to

respondent. He averred that in 1992, respondent approached and asked him if he
could grant her a loan, as she needed money to finance her business venture with
the PNO. At first, he was reluctant to deal with respondent, because the latter had a
spotty record as a supplier of the PNO. However, since respondent was an
acquaintance of his officemate, he agreed to grant her a loan. Respondent paid the
loan in full.[11]

Subsequently, respondent again asked him to give her a loan. As respondent

had been able to pay the previous loan in full, he agreed to grant her another
loan. Later, respondent requested him to restructure the payment of the loan
because she could not give full payment on the due date. He acceded to her
request. Thereafter, respondent pleaded for another restructuring of the payment of
the loan. This time he rejected her plea. Thus, respondent proposed to execute a
promissory note wherein she would acknowledge her obligation to him, inclusive
306

of interest, and that she would issue several postdated checks to guarantee the
payment of her obligation. Upon his approval of respondents request for
restructuring of the loan, respondent executed a promissory note dated 12
September 1994 wherein she admitted having borrowed an amount
of P1,240,000.00, inclusive of interest, from petitioner and that she would pay said
amount in March 1995. Respondent also issued to him six postdated checks
amounting to P1,240,000.00 as guarantee of compliance with her obligation.
Subsequently, he presented the six checks for encashment but only one check was
honored. He demanded that respondent settle her obligation, but the latter failed to
do so. Hence, he filed criminal cases for Violation of the Bouncing Checks Law
(Batas Pambansa Blg. 22) against respondent. The cases were assigned to the
Metropolitan Trial Court of Makati City, Branch 65 (MeTC).[12]

Petitioner insisted that there was no overpayment because respondent

admitted in the latters promissory note that her monetary obligation as of 12
September 1994 amounted to P1,240,000.00 inclusive of interests. He argued that
respondent was already estopped from complaining that she should not have paid
any interest, because she was given several times to settle her obligation but failed
to do so. He maintained that to rule in favor of respondent is tantamount to
concluding that the loan was given interest-free. Based on the foregoing averments,
he asked the RTC to dismiss respondents complaint.

After trial, the RTC rendered a Decision on 26 January 2001 holding that
respondent made an overpayment of her loan obligation to petitioner and that the
latter should refund the excess amount to the former. It ratiocinated that
respondents obligation was only to pay the loaned amount of P540,000.00, and that
the alleged interests due should not be included in the computation of respondents
total monetary debt because there was no agreement between them regarding
payment of interest. It concluded that since respondent made an excess payment to
307

petitioner in the amount of P660,000.00 through mistake, petitioner should return

the said amount to respondent pursuant to the principle of solutio indebiti.[13]

The RTC also ruled that petitioner should pay moral damages for the
sleepless nights and wounded feelings experienced by respondent. Further,
petitioner should pay exemplary damages by way of example or correction for the
public good, plus attorneys fees and costs of suit.

The dispositive portion of the RTC Decision reads:

WHEREFORE, in view of the foregoing evidence and in the

light of the provisions of law and jurisprudence on the matter,
judgment is hereby rendered in favor of the plaintiff and against the
defendant as follows:

(1)
Ordering defendant to pay plaintiff the amount
of P660,000.00 plus legal interest of 12% per annum computed from 3
March 1998 until the amount is paid in full;
(2) Ordering defendant to
of P300,000.00 as moral damages;

pay

plaintiff

the

amount

(3) Ordering defendant to

of P50,000.00 as exemplary damages;

pay

plaintiff

the

amount

308

(4) Ordering defendant to pay plaintiff the amount equivalent to

25% of P660,000.00 as attorneys fees; and

(5) Ordering defendant to pay the costs of suit.[14]

Petitioner appealed to the Court of Appeals. On 16 December 2005, the

appellate court promulgated its Decision affirming in toto the RTC Decision, thus:

WHEREFORE, the foregoing considered, the instant appeal is

hereby DENIED and the assailed decision [is] AFFIRMED in toto.[15]

Petitioner filed a motion for reconsideration of the appellate courts decision

but this was denied.[16] Hence, petitioner lodged the instant petition before us
assigning the following errors:
I.

THE RTC AND THE COURT OF APPEALS ERRED IN RULING

THAT NO INTEREST WAS DUE TO PETITIONER;

309

II.

THE RTC AND THE COURT OF APPEALS ERRED IN APPLYING

THE PRINCIPLE OF SOLUTIO INDEBITI.[17]

Interest is a compensation fixed by the parties for the use or forbearance of

money. This is referred to as monetary interest. Interest may also be imposed by
law or by courts as penalty or indemnity for damages. This is called compensatory
interest.[18] The right to interest arises only by virtue of a contract or by virtue of
damages for delay or failure to pay the principal loan on which interest is
demanded.[19]

Article 1956 of the Civil Code, which refers to monetary interest,

[20]
specifically mandates that no interest shall be due unless it has been expressly
stipulated in writing. As can be gleaned from the foregoing provision, payment of
monetary interest is allowed only if: (1) there was an express stipulation for the
payment of interest; and (2) the agreement for the payment of interest was reduced
in writing. The concurrence of the two conditions is required for the payment of
monetary interest. Thus, we have held that collection of interest without any
stipulation therefor in writing is prohibited by law.[21]

It appears that petitioner and respondent did not agree on the payment of
interest for the loan. Neither was there convincing proof of written agreement
between the two regarding the payment of interest. Respondent testified that
although she accepted petitioners offer of loan amounting to P540,000.00, there
310

was, nonetheless, no verbal or written agreement for her to pay interest on the loan.
[22]

Petitioner presented a handwritten promissory note dated 12 September

1994[23] wherein respondent purportedly admitted owing petitioner capital and
interest. Respondent, however, explained that it was petitioner who made a
promissory note and she was told to copy it in her own handwriting; that all her
transactions with the PNO were subject to the approval of petitioner as comptroller
of the PNO; that petitioner threatened to disapprove her transactions with the PNO
if she would not pay interest; that being unaware of the law on interest and fearing
that petitioner would make good of his threats if she would not obey his instruction
to copy the promissory note, she copied the promissory note in her own
handwriting; and that such was the same promissory note presented by petitioner
as alleged proof of their written agreement on interest. [24] Petitioner did not rebut
the foregoing testimony.It is evident that respondent did not really consent to the
payment of interest for the loan and that she was merely tricked and coerced by
petitioner to pay interest. Hence, it cannot be gainfully said that such promissory
note pertains to an express stipulation of interest or written agreement of interest
on the loan between petitioner and respondent.

Petitioner, nevertheless, claims that both the RTC and the Court of Appeals
found that he and respondent agreed on the payment of 7% rate of interest on the
loan; that the agreed 7% rate of interest was duly admitted by respondent in her
testimony in the Batas Pambansa Blg. 22 cases he filed against respondent; that
despite such judicial admission by respondent, the RTC and the Court of Appeals,
citing Article 1956 of the Civil Code, still held that no interest was due him since
the agreement on interest was not reduced in writing; that the application of Article
1956 of the Civil Code should not be absolute, and an exception to the application
of such provision should be made when the borrower admits that a specific rate of
interest was agreed upon as in the present case; and that it would be unfair to allow
311

respondent to pay only the loan when the latter very well knew and even admitted
in the Batas Pambansa Blg. 22 cases that there was an agreed 7% rate of interest on
the loan.[25]

We have carefully examined the RTC Decision and found that the RTC did
not make a ruling therein that petitioner and respondent agreed on the payment of
interest at the rate of 7% for the loan. The RTC clearly stated that although
petitioner and respondent entered into a valid oral contract of loan amounting
to P540,000.00, they, nonetheless, never intended the payment of interest thereon.
[26]
While the Court of Appeals mentioned in its Decision that it concurred in the
RTCs ruling that petitioner and respondent agreed on a certain rate of interest as
regards the loan, we consider this as merely an inadvertence because, as earlier
elucidated, both the RTC and the Court of Appeals ruled that petitioner is not
entitled to the payment of interest on the loan. The rule is that factual findings of
the trial court deserve great weight and respect especially when affirmed by the
appellate court.[27] We found no compelling reason to disturb the ruling of both
courts.

Petitioners reliance on respondents alleged admission in the Batas Pambansa

Blg. 22 cases that they had agreed on the payment of interest at the rate of 7%
deserves scant consideration. In the said case, respondent merely testified that after
paying the total amount of loan, petitioner ordered her to pay interest.
[28]
Respondent did not categorically declare in the same case that she and
respondent made an express stipulation in writing as regards payment of interest at
the rate of 7%. As earlier discussed, monetary interest is due only if there was
an express stipulation in writing for the payment of interest.

312

There are instances in which an interest may be imposed even in the absence
of express stipulation, verbal or written, regarding payment of interest. Article
2209 of the Civil Code states that if the obligation consists in the payment of a sum
of money, and the debtor incurs delay, a legal interest of 12% per annum may be
imposed as indemnity for damages if no stipulation on the payment of interest was
agreed upon. Likewise, Article 2212 of the Civil Code provides that interest due
shall earn legal interest from the time it is judicially demanded, although the
obligation may be silent on this point.

All the same, the interest under these two instances may be imposed only as
a penalty or damages for breach of contractual obligations. It cannot be charged as
a compensation for the use or forbearance of money. In other words, the two
instances apply only to compensatory interest and not to monetary interest. [29] The
case at bar involves petitioners claim for monetary interest.

Further, said compensatory interest is not chargeable in the instant case

because it was not duly proven that respondent defaulted in paying the loan. Also,
as earlier found, no interest was due on the loan because there was no written
agreement as regards payment of interest.

Apropos the second assigned error, petitioner argues that the principle
of solutio indebiti does not apply to the instant case. Thus, he cannot be compelled
to return the alleged excess amount paid by respondent as interest.[30]

Under Article 1960 of the Civil Code, if the borrower of loan pays interest
when there has been no stipulation therefor, the provisions of the Civil Code
concerning solutio indebiti shall be applied. Article 2154 of the Civil Code
313

explains the principle of solutio indebiti. Said provision provides that if something
is received when there is no right to demand it, and it was unduly delivered
through mistake, the obligation to return it arises. In such a case, a creditor-debtor
relationship is created under a quasi-contract whereby the payor becomes the
creditor who then has the right to demand the return of payment made by mistake,
and the person who has no right to receive such payment becomes obligated to
return the same. The quasi-contract of solutio indebiti harks back to the ancient
principle that no one shall enrich himself unjustly at the expense of another.[31] The
principle of solutio indebiti applies where (1) a payment is made when there exists
no binding relation between the payor, who has no duty to pay, and the person who
received the payment; and (2) the payment is made through mistake, and not
through liberality or some other cause.[32] We have held that the principle of solutio
indebiti applies in case of erroneous payment of undue interest.[33]

It was duly established that respondent paid interest to petitioner.

Respondent was under no duty to make such payment because there was no
express stipulation in writing to that effect. There was no binding relation between
petitioner and respondent as regards the payment of interest. The payment was
clearly a mistake. Since petitioner received something when there was no right to
demand it, he has an obligation to return it.

We shall now determine the propriety of the monetary award and damages
imposed by the RTC and the Court of Appeals.

Records show that respondent received a loan amounting to P540,000.00

from petitioner.[34] Respondent issued two checks with a total worth of P700,000.00
in favor of petitioner as payment of the loan. [35] These checks were subsequently
encashed by petitioner.[36] Obviously, there was an excess of P160,000.00 in the
314

payment for the loan. Petitioner claims that the excess of P160,000.00 serves as
interest on the loan to which he was entitled. Aside from issuing the said two
checks, respondent also paid cash in the total amount of P175,000.00 to petitioner
as interest.[37] Although no receipts reflecting the same were presented because
petitioner refused to issue such to respondent, petitioner, nonetheless, admitted in
his Reply-Affidavit[38] in the Batas Pambansa Blg. 22 cases that respondent paid
him a total amount of P175,000.00 cash in addition to the two checks. Section 26
Rule 130 of the Rules of Evidence provides that the declaration of a party as to a
relevant fact may be given in evidence against him. Aside from the amounts
of P160,000.00 and P175,000.00 paid as interest, no other proof of additional
payment as interest was presented by respondent. Since we have previously found
that petitioner is not entitled to payment of interest and that the principle of solutio
indebiti applies to the instant case, petitioner should return to respondent the excess
amount of P160,000.00 and P175,000.00 or the total amount of P335,000.00.
Accordingly, the reimbursable amount to respondent fixed by the RTC and the
Court of Appeals should be reduced from P660,000.00 to P335,000.00.

As earlier stated, petitioner filed five (5) criminal cases for violation of Batas
Pambansa Blg. 22 against respondent. In the said cases, the MeTC found
respondent guilty of violating Batas Pambansa Blg. 22 for issuing five dishonored
checks to petitioner. Nonetheless, respondents conviction therein does not affect
our ruling in the instant case. The two checks, subject matter of this case,
totaling P700,000.00 which respondent claimed as payment of the P540,000.00
worth of loan, were not among the five checks found to be dishonored or bounced
in the five criminal cases. Further, the MeTC found that respondent made an
overpayment of the loan by reason of the interest which the latter paid to petitioner.
[39]

Article 2217 of the Civil Code provides that moral damages may be
recovered if the party underwent physical suffering, mental anguish, fright, serious
315

anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation

and similar injury. Respondent testified that she experienced sleepless nights and
wounded feelings when petitioner refused to return the amount paid as interest
despite her repeated demands. Hence, the award of moral damages is
justified. However, its corresponding amount of P300,000.00, as fixed by the RTC
and the Court of Appeals, is exorbitant and should be equitably reduced. Article
2216 of the Civil Code instructs that assessment of damages is left to the discretion
of the court according to the circumstances of each case. This discretion is limited
by the principle that the amount awarded should not be palpably excessive as to
indicate that it was the result of prejudice or corruption on the part of the trial
court.[40] To our mind, the amount of P150,000.00 as moral damages is fair,
reasonable, and proportionate to the injury suffered by respondent.

Article 2232 of the Civil Code states that in a quasi-contract, such as solutio
indebiti, exemplary damages may be imposed if the defendant acted in an
oppressive manner. Petitioner acted oppressively when he pestered respondent to
pay interest and threatened to block her transactions with the PNO if she would not
pay interest. This forced respondent to pay interest despite lack of agreement
thereto. Thus, the award of exemplary damages is appropriate. The amount
of P50,000.00 imposed as exemplary damages by the RTC and the Court is fitting
so as to deter petitioner and other lenders from committing similar and other
serious wrongdoings.[41]

Jurisprudence instructs that in awarding attorneys fees, the trial court must
state the factual, legal or equitable justification for awarding the same. [42] In the
case under consideration, the RTC stated in its Decision that the award of attorneys
fees equivalent to 25% of the amount paid as interest by respondent to petitioner is
reasonable and moderate considering the extent of work rendered by respondents
lawyer in the instant case and the fact that it dragged on for several years.
[43]
Further, respondent testified that she agreed to compensate her lawyer handling
316

the instant case such amount.[44] The award, therefore, of attorneys fees and its
amount equivalent to 25% of the amount paid as interest by respondent to
petitioner is proper.

Finally, the RTC and the Court of Appeals imposed a 12% rate of legal
interest on the amount refundable to respondent computed from 3 March 1998
until its full payment. This is erroneous.

We held in Eastern Shipping Lines, Inc. v. Court of Appeals,[45] that when an

obligation, not constituting a loan or forbearance of money is breached, an interest
on the amount of damages awarded may be imposed at the rate of 6% per
annum. We further declared that when the judgment of the court awarding a sum of
money becomes final and executory, the rate of legal interest, whether it is a
loan/forbearance of money or not, shall be 12% per annum from such finality until
its satisfaction, this interim period being deemed equivalent to a forbearance of
credit.

In the present case, petitioners obligation arose from a quasi-contract

of solutio indebiti and not from a loan or forbearance of money. Thus, an interest
of 6% per annum should be imposed on the amount to be refunded as well as on
the damages awarded and on the attorneys fees, to be computed from the time of
the extra-judicial demand on 3 March 1998,[46] up to the finality of this Decision. In
addition, the interest shall become 12% per annum from the finality of this
Decision up to its satisfaction.

WHEREFORE, the Decision of the Court of Appeals in CA-G.R. CV No.

71814, dated 16 December 2005, is hereby AFFIRMED with the
317

following MODIFICATIONS: (1) the amount of P660,000.00 as refundable

amount of interest is reduced to THREE HUNDRED THIRTY FIVE THOUSAND
PESOS (P335,000.00); (2) the amount of P300,000.00 imposed as moral damages
is reduced to ONE HUNDRED FIFTY THOUSAND PESOS (P150,000.00); (3) an
interest of 6% per annum is imposed on the P335,000.00, on the damages awarded
and on the attorneys fees to be computed from the time of the extra-judicial
demand on 3 March 1998 up to the finality of this Decision; and (4) an interest of
12% per annum is also imposed from the finality of this Decision up to its
satisfaction. Costs against petitioner.

SO ORDERED.

MINITA V. CHICO-NAZARIO
Associate Justice

WE CONCUR:

CONSUELO YNARES-SANTIAGO
Associate Justice
318

Chairperson

MA. ALICIA AUSTRIA-MARTINEZ ANTONIO EDUARDO B. NACHURA

Associate Justice Associate Justice

TERESITA J. LEONARDO-DE CASTRO

Associate Justice

ATTESTATION

319

I attest that the conclusions in the above Decision were reached in consultation
before the case was assigned to the writer of the opinion of the Courts Division.

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson, Third Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division
Chairpersons Attestation, it is hereby certified that the conclusions in the above
Decision were reached in consultation before the case was assigned to the writer of
the opinion of the Courts Division.

REYNATO S. PUNO
Chief Justice

320

* Per Special Order No. 546, Associate Justice Teresita J. Leonardo-De Castro was
designated to sit as additional member in view of the retirement of Associate
Justice Ruben T. Reyes dated 5 January 2009.
[1]

Rollo, pp. 9-23.

[2]

Penned by Associate Justice Josefina Guevara-Salonga with Associate Justices

Eliezer R. de Los Santos and Fernanda Lampas-Peralta, concurring; rollo, pp. 2432.
[3]

Rollo, pp. 34-35.

[4]

Penned by Judge Florentino M. Alumbres; records, pp. 510-516.

[5]

Records, pp. 1-5.

[6]

Id. at 2.

[7]

Id. at 2-3.

[8]

Id. at 3-4.

[9]

Id. at 4-5.

[10]

Id. at 150-160.

[11]

Id. at 3-4.

[12]

Id. at 4-5.

[13]

Id. at 514-515.
321

[14]

Id. at 515-516.

[15]

Rollo, p. 32.

[16]

Id. at 34-35.

[17]

Id. at 16.

[18]

Paras, CIVIL CODE OF THE PHILIPPINES ANNOTATED (13th Edition,

1995, Volume V), p. 854; Caguioa, COMMENTS AND CASES ON CIVIL
LAW, (1st Edition, Volume VI), p. 260.

[19]

Baretto v. Santa Marina, 37 Phil. 568, 571 (1918).

[20]

Supra note 18.

[21]

Ching v. Nicdao, G.R. No. 141181, 27 April 2007, 522 SCRA 316, 361; Tan v.
Valdehueza, 160 Phil. 760, 767 (1975).

[22]

TSN, 18 April 2000, pp. 7-8.

[23]

Records, p. 321.

[24]

Rollo, pp. 70-71; TSN, 18 April 2000, pp. 17-18.

[25]

Id. at 17-18.

[26]

Records, p. 514.

[27]

Pantranco North Express Inc. v. Standard Insurance Company Inc., G.R. No.
140746, 16 March 2005, 453 SCRA 482, 490.
[28]

CA rollo, p. 88.

[29]

Supra note 18 at 856-857.

[30]

Rollo, pp. 18-20.

322

[31]

Moreo-Lentfer v. Wolff, G.R. No. 152317, 10 November 2004, 441 SCRA 584,
591.
[32]

Id.

[33]

Velez v. Balzarza, 73 Phil. 630, 632 (1942).

[34]

TSN, 18 April 2000, p. 7.

[35]

Exhibits A & B; records, pp. 367, 371 and 372.

[36]

CA rollo, pp. 58-63.

[37]

TSN, 18 April 2000, p. 23.

[38]

CA rollo, pp. 94-96.

[39]

Records, pp. 510-516.

[40]

Philippine Airlines v. Court of Appeals, G.R. No. 123238, 22 September 2008.

[41]

Id.

[42]

Serrano v. Gutierrez, G.R. No. 162366, 10 November 2006, 506 SCRA 712,
724; Buing v. Santos, G.R. No. 152544, 19 September 2006, 502 SCRA 315, 321323; Ballesteros v. Abion, G.R. No. 143361, 9 February 2006, 482 SCRA 23, 3940.
[43]

Records, p. 515.

[44]

TSN, 18 April 2000, pp. 35-36.

[45]

G.R. No. 97412, 12 July 1994, 234 SCRA 78, 95-97.

[46]

Records, p. 7.

323

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
PACIFIC REHOUSE
CORPORATION, PACIFIC
CONCORDE CORPORATION,
MIZPAH HOLDINGS, INC.,
FORUM HOLDINGS
CORPORATION, and
EAST ASIA OIL COMPANY,INC.,
Petitioners,

G.R. No. 184036

Present:
CORONA, C.J., Chairperson,
VELASCO, JR.,
LEONARDO-DE CASTRO,
DEL CASTILLO, and
PEREZ, JJ.

- versus Promulgated:
EIB SECURITIES, INC.,
Respondent.

October 13, 2010

x-----------------------------------------------------------------------------------------x
DECISION
VELASCO, JR., J.:
The Case
Via this Petition for Review on Certiorari under Rule 45, petitioners seek
reversal of the Decision[1] dated April 11, 2008 of the Court of Appeals (CA) in
CA-G.R. CV No. 87713 which revoked the October 18, 2005 Resolution, [2] a
judgment on the pleadings, of the Regional Trial Court (RTC), Branch 66 in
Makati City, in Civil Case No. 05-178 entitled Pacific Rehouse Corporation,
Pacific Concorde Corporation, Mizpah Holdings, Inc., et al. v. EIB Securities, Inc.,
and remanded the case for further proceedings. Also assailed is the CA
Resolution[3] dated August 5, 2008 denying petitioners motion for reconsideration.
Petitioners initiatory pleading in Civil Case No. 05-178 reveals the
following averments:
324

COMMON ALLEGATIONS FOR ALL CAUSES OF ACTION

1.
On various dates during the period June 2003 to March
2004, plaintiffs bought 60,790,000 Kuok Properties, Inc. (KPP) shares
of stock through the Philippine Stock Exchange (PSE). The KPP
shares were acquired by plaintiffs through their broker, defendant
EIB.
2.
The KPP shares of stock were bought by plaintiffs at an
average price of P0.22 per share.
3.
Also on various dates in July and August 2003, plaintiffs
bought/acquired 32,180,000 DMCI shares of stock through the PSE.
Of these shares, 16,180,000 were likewise acquired by the plaintiffs
through their broker, defendant EIB, while the remaining 16,000,000
DMCI shares were transferred from Westlink Global Equities, Inc.
4.
The DMCI shares of stock were bought by plaintiffs at an
average price of P0.38 per share.
5.
On 01 April 2004, plaintiffs and defendant EIB agreed to
sell the 60,790,000 KPP shares of plaintiffs to any party for the price
of P0.14 per share. Attached as Annexes A to A-6 are copies of the
notices of sales sent by defendant EIB to the plaintiffs, which bear the
conformity of plaintiffs representative.
6.
As agreed by plaintiffs and defendant, the sale of the KPP
shares of plaintiffs was made with an option on the part of the
plaintiffs to buy back or reacquire the said KPP shares within a period
of thirty (30) days from the transaction date, at the buy-back price of
P0.18 per share (See Annexes A to A-6).
7.
When the last day of the 30-day buy back period for the
KPP shares came, plaintiff were undecided on whether or not to
exercise their option to reacquire said shares. Thus, plaintiffs and
defendant EIB agreed that plaintiffs would have an extended period of
until 03 June 2004 to exercise their option to buy back/reacquire the
KKP shares that had been sold.
325

8.
Eventually, plaintiffs decided not to exercise their option
to buy back the KPP shares and did not give any buy-back
instruction/s to their broker, defendant EIB.
9.
On various dates in June 2004, without plaintiffs prior
knowledge and consent, defendant EIB sold plaintiffs 32,180,000
DMCI shares of stock for an average price of P0.24 per share.
Defendant EIB sold the DMCI shares of plaintiffs for an average price
of only P0.24 per share despite full knowledge by defendant EIB that
the sale would result in a substantial loss to the plaintiffs of around
P4.5 Million since plaintiffs acquired the DMCI shares at P0.38 per
share. (cf. Article 1888, Civil Code). Attached Annexes B to B-7 are
the Sell Confirmation slips issued by defendant EIB showing the
unauthorized sale of plaintiffs 32,180,000 DMCI shares.
9.1 The proceeds of said DMCI shares sold by defendant
EIB without plaintiffs knowledge and consent were used by
defendant EIB to buy back 61,100,000 KPP shares earlier sold
by plaintiffs on 01 April 2004. Attached as Annexes C to C-5
are the Buy Confirmation slips issued by defendant showing the
unauthorized buy back of KPP shares.
9.2 Defendant EIB sold without authority plaintiffs
32,180,000 DMCI shares and used the proceeds thereof to buy
back 61,000,000 KPP shares because defendant EIB made an
unauthorized promise and commitment to the buyer/s of
plantiffs KPP shares in April 2004 that plaintiffs would buy
back the KPP shares.
9.3 Plaintiffs learned of the unauthorized sale of their
32,180,000 DMCI shares and the unauthorized buy back of
61,000,000 KPP shares only much later. Upon further inquiry,
plaintiffs also learned that all throughout their business
dealings, defendant EIB had surreptitiously charged and
collected from plaintiffs exorbitant interest amounting to thirty
percent (30%) of all amounts owing from the plaintiffs.
10. On 05 January 2005, plaintiffs wrote to defendant EIB to demand that
their 32,180,000 DMCI shares be transferred to Westlink Global
Equities Inc. (Westlink). Copies of the demand letters, all dated 05
January 2005, are attached as Annex D to D-4 respectively.
326

11. Since the 32,180,000 DMCI shares belonging to plaintiffs had already
been sold by defendant EIB without plaintiffs prior knowledge and
consent as early as June 2004, defendant EIB could not comply with
the demand of plaintiffs as stated in their demand letters dated 05
January 2005.
12. In his letters to the plaintiffs dated 12 January 2005, defendant
EIB admitted having sold the 32,180,000 DMCI shares of stock of
plaintiffs without the latters prior knowledge and consent. Copies of
defendant EIBs letters to plaintiffs, all dated 12 January 2005, are
attached as Annexes E to E-4, respectively.
12.1 Defendant EIB states in its aforesaid letters that it sent
statements of account to plaintiffs in July 2004. Defendant EIB
claims, albeit erroneously, that since plaintiffs made no
exceptions to the statements of account, the sale of plaintiffs
DMCI shares in June 2004 [was] supposedly validly executed.
13. Hence, this Complaint.
xxxx
SECOND CAUSE OF ACTION
17. Plaintiffs replead all of the foregoing allegations.
18. The sale by defendant EIB of the 32,180,000 DMCI shares of
plaintiffs was done with malice and fraudulent intent. As such,
defendant should be directed to pay plaintiffs the amount of at least
PhP3,000,000.00 as moral damages.[4]
In response, respondent EIB Securities, Inc. (EIB) submitted its Answer
which contained the following averments:
ADMISSIONS AND DENIALS:
1.
Defendant admits the allegations contained in paragraphs
under the heading The Parties. Likewise, defendant admits the
allegations contained in paragraph 1.
327

2.
Paragraph 2 of the Complaint is specifically denied, the
truth of the matter is that the KPP shares of stock were bought by
plaintiffs at an average price of only 18 centavos per share.
3.
Paragraph 3 is admitted, qualified, however, that the
remaining 16,000,000 DMCI shares of plaintiffs were transferred by
Westlink Global Equities, Inc. and other brokerages firms to the
defendant primarily to serve as a collateral in the cash account
obligations of the plaintiffs to the defendant.
4.
Paragraph 4 of the Complaint is specifically denied, the
truth of the matter being the DMCI shares of stock were bought by the
plaintiffs at an approximate average price of only 25 centavos per
share.
5.
Defendant admits paragraph 5 of the Complaint insofar
as the allegation that plaintiffs and defendant agreed to sell the
60,790,000 KPP share of plaintiffs to any party for the price of 14
centavos per share, qualified, however, by the presence of a provision
Full Cross to Seller meaning that the Sellers (who are the plaintiffs)
have the obligation to buy back or reacquire the shares from the
buyers.
6.
Defendant specifically denies paragraph 6 of the
Complaint, the truth of the matter and as evidenced by the same
Notices of Sale (AnnexA to A-6 of the Complaint), plaintiffs have no
option to buy back or reacquire the said KPP shares, the nature or kind
of transaction agreement is Full Cross to seller which is an obligation
and not merely an option on the part of the plaintiffs to buy back or
reacquire the said KPP shares sold to buyers.
7.
Defendant specifically and vehemently denies the
allegations of paragraphs 7 and 8 of the Complaint. The truth of the
matter is that there was no extension agreed upon by the parties for
the plaintiffs to exercise option to buy back/reacquire the Kuok
Properties, Inc. shares of stocks (KKP). The Contracts for the sale of
KPP shares of stocks as already stated above and as clearly shown
from the same Annexes A to A-6 of the Complaint was an obligation
that there was no extension period given to the plaintiffs.
8.
Defendant also specifically and vehemently denies the
allegations of paragraphs 9 of the Complaint and its sub-paragraphs.
The truth of the matter being that under the trading rules, honoring
ones obligation is a sacred commitment of stocks and market traders.
328

Considering that in the sale of the KPP shares there is an obligation as

certified by the word Full Cross to Seller, the KPP shares of stocks
that were sold to buyers have to be bought back 30 days from the
transaction date at the Buy Back Amount of 18 centavos per share and
that plaintiffs and defendant have to honor the said buy back
obligation. Considering, however, that plaintiffs were not delivering
funds to the defendant in order to honor the said buy back obligation,
not to mention the Cash account obligations of the plaintiffs to the
defendant amounting to more or less 70 Million Pesos, defendant had
no more recourse but to buy back the KPP shares from the buyers by
selling the DMCI shares of the plaintiffs under the defendants
possession, and thus, enforcing the provisions of the Securities
Dealing Accounts Agreements that was signed by the plaintiffs in
favor of the defendant, a copy of which is hereto attached and made
an integral part hereof as Annex 1. Section 7 of the aforesaid
Securities Dealing Accounts Agreements states:
7. Lien
The client agrees that all monies and/or securities and/or all
other property of the Client (plaintiffs) in the Companys
(defendant) custody or control held from time to time shall be
subject to a general lien in favour of Company for the discharge
of all or any indebtedness of the Client to the Company. The
Client shall not be entitled to withdraw any monies or securities
held by the Company pending the payment in full to the
Company of any indebtedness of the Client to the
Company. The company shall be entitled at any time and
without notice to the Client to retain, apply, sell or dispose
of all or any of the [clients] property if any such obligation
or liability is not discharged in full by the client when due or
on demand in or towards the payment and discharge of
such obligation or liability and the Company shall be under
no duty to the client as to the price obtained or any losses or
liabilities incurred or arising in respect of any such sale or
disposal. Subject to the relevant law and regulation on the
matter, the client hereby authorizes the Company, on his/its
behalf, at any time and without notice to the clients property if
any such obligation or liability is not discharged. [Emphasis in
the original.]
329

[Defendant] specifically denies the allegation of the plaintiffs

that defendant sold the DMCI shares of plaintiffs for an average price
of only 24 centavos for the truth of the matter being the average price
those DMCI shares were sold was P0.2565 centavos per share and
likewise, that price was the controlling market price of DMCI share at
the time of the transaction. Defendant likewise, specifically denies the
allegation that defendant surreptitiously charged and collected an
interest of 30% from the plaintiff for the truth of the matter is that
what defendant did not charge such interest.
Moreoever, and contrary to the allegations of the Complaint,
plaintiffs are fully aware and knowledgeable of the sale of their DMCI
shares as early as June 2004 and that the proceeds thereof were not
even enough to fully pay the buy back obligation of the plaintiffs to
the buyers of KPP shares of stocks.
Plaintiffs, in order to feign ignorance of the sale of their DMCI
shares had attached in the Complaint various Sales Confirmations
Receipts which were marked thereto as Annexes B to B-7. Wittingly
or unwittingly, plaintiffs attached only the Receipts that do not bear
the corresponding acknowledgement signatures of their respective
officers. As averred by the defendant, plaintiffs were fully aware and
knowledgeable of the sale of their DMCI shares as early June 2004,
and to expose the real truth, defendant hereto attaches the identical
Sales Confirmation Receipts hereto marked as Annexes 2 to 2-G.
In the same manner that in each and every Sales Confirmation
Receipts (Annexes 2 to 2-G) the following IMPORTANT NOTICE is
written:
All transaction are subject to the rules and customs of the
Exchange and its Clearing House. It is agreed that all securities
shall secure all my/our liabilities to e.securities and is
authorized in their discretion to all or any of them without
notice to we/us whenever in the opinion of e.securities
my/our account is not properly secured. [Emphasis in the
original.]
Likewise, after each and every transaction, defendant sent
Statement of Accounts showing a detailed transaction that were
entered into and that plaintiffs duly received aforesaid Statement of
Accounts from the defendants as evidenced by the signatures of
plaintiffs respective officers hereto marked as Annexes 3 to 3-G.
330

In each and every Statements of Accounts the following Notice

is clearly printed therein:
This statement will be considered correct unless we
receive notice in writing of any exceptions within 5 days from
receipt. Please address all correspondence concerning
exceptions to our OPERATIONS DEPARTMENT. Kindly
notify us in writing of any changes in your address.
Hence, plaintiffs, may have other ulterior motives in filing this
baseless Complaint since they fully knew and consented almost a year
ago of the nature of their transactions with the defendant.
9.
Defendant admits paragraphs 10 to 12 inclusive of the
subparagraphs only to the existence of the plaintiffs demand letters all
dated January 5, 20[0]5, but qualifies that the aforesaid letters had
been answered by the defendant on January 12, 2005. The rest of the
allegations are being specifically denied. In defendants reply to the
said letters, defendant clearly pointed out that plaintiffs had been duly
notified of the subject transactions as early as June 9, 2004. That
defendant had furnished the plaintiffs as early as July 14, 2004
Statements of Accounts of all their transactions for the period of June
1-20, 2004 which included the sale of the subject shares with a clear
instruction to notify the defendant in writing within five (5) days from
receipt thereof of any exception therein. That if no correspondence
was received by the defendant from the plaintiffs, the sale shall be
considered as validly executed.[5]
On July 19, 2005, petitioners registered a Motion for Judgment on the
Pleadings,[6] asserting that EIB materially admitted the allegations of their
complaint by not tendering any genuine issue in its answer. This was opposed[7] by
EIB, with both parties subsequently filing their respective reply and rejoinder. On
October 7, 2005, petitioners moved that the trial court resolve their motion for
judgment on the pleadings.
The Ruling of the RTC
On October 18, 2005, the RTC rendered its judgment on the pleadings
through a Resolution, the dispositive portion of which reads:
331

WHEREFORE, premises considered, judgment is hereby

rendered directing the defendant [EIB] to return the plaintiffs
[petitioners] 32,180,000 DMCI shares, as of judicial demand.
On the other hand, plaintiffs are directed to reimburse the
defendant the amount of P10,942,200.00, representing the buy back
price of the 60,790,000 KPP shares of stocks at P0.18 per share.
Defendants Motion to Discharge Writ of Preliminary
Attachment, based on the submitted counter bond issued by Intra
Strata Assurance Corporation is hereby GRANTED.
SO ORDERED.[8]
The trial court found merit in rendering a judgment on the pleadings: first,
the assailed transactions were all documented; second, the transactions were
admitted by the parties; and third, the main issues can be resolved based on the
parties documentary evidence appended to the pleadings.
The RTC, interpreting the agreement agreed upon by the parties, held that
the sale of the Kuok Properties, Inc. (KKP) shares was with a buy-back obligation
and not an option as petitioners argued. However, it found that, as per their notices
of sale agreements, the collateral for the sale transactions is the same KKP
shares. Thus, it held that EIB erred in selling the DMCI shares instead of the KKP
shares which served as collateral. It ruled that Section 7 of the Securities Dealings
Account Agreement (SDAA) does not apply, since it provided for a general
agreement executed prior to the subsequent and specific agreements entered into
by the parties specifically for the sale and repurchase of the KKP shares. Thus, the
trial court concluded that EIB went beyond its authority in selling petitioners
DMCI shares in order to buy back the KKP shares.
Anent petitioners apparent lack of objection to the account statements issued
by EIB and the sales confirmation receipts covering the sale of DMCI shares, the
RTC viewed it as not constituting ratification by petitioners for said documents did
not disclose the purpose of the sale, applying the rule that any ambiguity in a
written document should be strictly construed against the party who caused its
332

preparation. In fine, it held that since the parties relation is fiduciary in nature, with
more reason that EIB should have been more forthright in getting the prior consent
of petitioners before selling the DMCI shares.
EIB timely filed its motion for partial reconsideration of the RTC Resolution
dated October 18, 2005. In the meantime, EIB moved to inhibit Judge Rommel O.
Baybay from further handling the case. Both motions of EIB were opposed by
petitioners.
On April 28, 2006, RTC Judge Baybay inhibited himself.[9]
Subsequently, on July 26, 2006, the RTC, Branch 66, through its new
Presiding Judge, Joselito C. Villarosa, denied EIBs motion for partial
reconsideration.[10] After oral arguments on June 23, 2006, the RTC affirmed the
propriety of the judgment on the pleadings rendered by Pairing Judge
Baybay. Citing Savellano v. Northwest Airlines,[11] on the strict construal of any
ambiguity on a written document on the party issuing it, the trial court reiterated its
ruling that petitioners are not estopped from assailing the sale by EIB of their
DMCI shares, for the sale confirmation receipts do not disclose the purpose of the
sales made.
The Ruling of the CA
On April 11, 2008, the appellate court rendered the assailed decision,
revoking the RTCs judgment on the pleadings and remanding the case back to the
RTC for further proceedings. The fallo reads:
WHEREFORE, premises considered, the instant appeal
is GRANTED. Accordingly, the Court a quos Resolution dated 18
October 2005 is REVOKED and SET ASIDE and this case is ordered
remanded to the Court a quo which is directed to conduct further
proceedings hereof with dispatch.
SO ORDERED.[12]

333

While EIB raised six issues on appeal, the CA resolvedwhat it considered the
pivotal issuethe propriety of the rendition by the trial court of a judgment on the
pleadings. The CA found that while some material allegations in petitioners
complaint were admitted by EIB, the latters answer nonetheless raised other
genuine issues which it viewed can only be threshed out in a full-blown trial, like
the average price of the KPP shares of stock, the scope of the collaterals stated in
the Notices of Sale and the monetary claims of the Appellant [EIB] against the
Appellees [petitioners].[13]
Petitioners filed their motion for reconsideration, while EIB filed a
Manifestation with Motion for Clarification/Deletion which was opposed by
petitioners. In its motion for clarification/deletion, EIB took exception to the
appellate courts pronouncement that it (EIB) admitted the sale of petitioners DMCI
shares for the purpose of buying back the KKP shares, which strengthened
petitioners claim of the nullity of the sale. Both motions were denied by the
assailed resolution issued on August 5, 2008.
Thus, we have this petition.
The Issues
I
CONTRARY TO THE RULING OF THE COURT OF APPEALS,
THE TRIAL COURT WAS CORRECT IN RENDERING
JUDGMENT ON THE PLEADINGS IN THE CASE BEFORE IT.
II
THE TRIAL COURT WAS CORRECT IN RULING THAT
PETITIONERS DMCI SHARES COULD NOT BE SOLD BY
RESPONDENT EIB UNDER THE NOTICES OF SALE.
III
THE TRIAL COURT WAS CORRECT IN HOLDING THAT
RESPONDENT EIB COULD NOT INVOKE SECTION 7 OF THE
334

SECURITIES DEALINGS ACCOUNT AGREEMENT AS BASIS

FOR THE SALE OF PETITIONERS DMCI SHARES.
IV
THE TRIAL COURT WAS CORRECT IN HOLDING THAT
PETITIONERS WERE NOT BARRED BY RATIFICATION,
LACHES OR ESTOPPEL FROM QUESTIONING THE
UNAUTHORIZED SALE OF THEIR DMCI SHARES.
V
THE TRIAL COURT HAD JURISDICTION OVER THE CASE
FILED BEFORE IT BY PETITIONERS WHO HAD FULLY PAID
THE DOCKET FEES ASSESSED BY THE CLERK OF COURT.
VI
UNDER PREVAILING JURISPRUDENCE, THE PAIRING JUDGE
DID NOT COMMIT GRAVE ABUSE OF DISCRETION. IN ANY
EVENT, THE APPOINTMENT OF A PRESIDING JUDGE WHO
EVENTUALLY DENIED RESPONDENTS MOTION FOR
RECONSIDERATION RENDERED THE MATTER MOOT AND
ACADEMIC.[14]
The Courts Ruling
We grant the petition.

Threshold Issue: Proper Payment of Docket Fees

EIB asserts that the trial court has no jurisdiction over the complaint on
account of insufficient dockets fees. Although petitioners paid a total of PhP
120,758.80[15] in legal fees with the RTC, EIB argues that what was paid is based
merely on petitioners prayer for moral damages of PhP 3 million, exemplary
damages of PhP 3 million, and attorneys fees of PhP 2 million, but not including
335

petitioners claim for PhP 4.5 million as actual damages as averred in paragraph 9
of the complaint. Thus, EIB, relying on Manchester Development Corporation v.
Court of Appeals[16](Manchester) and Sun Insurance Office, Ltd. v. Asuncion,
[17]
maintains that the RTC should not have entertained the case.
It is hornbook law that courts acquire jurisdiction over a case only upon
payment of the prescribed docket fee. A plain reading of the prayer does not show
that petitioners asked for the payment of actual damages of PhP 4.5 million. The
reliefs asked by petitioners in the prayer are:
1.

Upon the filing of the Complaint, a writ of preliminary

attachment be issued ex parte against defendant pursuant to
Section 2, Rule 57 of the 1997 Rules of Civil Procedure;

2.

After trial, judgment rendered in favor of plaintiffs and against

defendant as follows:
On the FIRST CAUSE OF ACTION declaring void the sale by
defendant of the 32,180,000 DMCI shares of stock of plaintiffs and
directing defendant to return to plaintiffs the latters 32,180,000
DMCI shares of stock, or in the event the return thereof is not
possible, holding defendant liable under Articles 1888,1889,1909
and other pertinent provisions of the Civil Code.
On the SECOND CAUSE OF ACTION directing defendant to
pay plaintiffs moral damages in the amount of at least
P3,000,000.00;
On the THIRD CAUSE OF ACTION directing defendant to pay
plaintiffs exemplary damages in the amount of at least
P3,000,000.00; and
On the FOURTH CAUSE OF ACTION directing defendant to
pay plaintiffs attorneys fees in the amount of P2,000,000.00 and
such amounts as may be proven at the trial as litigation expenses.
Other just and equitable relief are likewise prayed for.[18]

Since the prayer did not ask for the payment of actual damages of PhP 4.5
million, the clerk of court correctly assessed the amount of PhP 120,758.80 as
docket fees based on the total amount of PhP 8 million consisting of PhP 3 million
336

as moral damages, PhP 3 million as exemplary damages, and PhP 2 million as

attorneys fees.
In disputing the fees paid by petitioners, respondent relies on our ruling
in Manchester, where we said that all complaints, petitions, answers and other
similar pleadings should specify the amount of damages being prayed for not only
in the body of the pleading but also in the prayer, and said damages shall be
considered in the assessment of the filing fees in any case.[19]
EIB insinuates that petitioners, by alleging the substantial loss of PhP 4.5
million from the sale of the DMCI shares but not specifying the amount in their
prayer, circumvented the Manchester ruling to evade the payment of the correct
filing fees. This postulation is incorrect. It is clear that petitioners demanded the
return of the DMCI shares in the prayer of the complaint and NOT the alleged loss
in the value of the shares. If the DMCI shares are returned, then no actual damages
are suffered by petitioners. A recall of the averment in par. 9 of the complaint
shows that the alleged loss of PhP 4.5 million to petitioners resulted from the sale
of DMCI shares at PhP 0.24 per share when they acquired it at PhP 0.38 per share.
More importantly, the court was proscribed by the Manchester ruling from
granting actual damages of PhP 4.5 million to petitioners, because precisely the
alleged damages were never sought in the prayer. Ergo, EIBs attack on the trial
courts assumption of jurisdiction must fail.
Procedural Issue: Judgment on the Pleadings
At the outset, we lay stress on the Courts policy that cases should be
promptly and expeditiously resolved. The Rules of Court seeks to abbreviate court
procedure in order to allow the swift disposition of cases. Specifically, special
strategies like demurrer to evidence, judgment on the pleadings, and summary
judgment were adopted to attain this avowed goal. Full-blown trial is dispensed
with and judgment is rendered on the basis of the pleadings, supporting affidavits,
depositions, and admissions of the parties.
In the instant petition, the Court is confronted with the propriety of the
judgment on the pleadings rendered by the Makati City RTC. Petitioners claim
such adjudication on said papers and attachments is proper.
337

The petitioners position is impressed with merit.

Rule 34 of the Rules of Court provides that where an answer fails to tender
an issue or otherwise admits the material allegations of the adverse partys pleading,
the court may, on motion of that party, direct judgment on such pleading. Judgment
on the pleadings is, therefore, based exclusively upon the allegations appearing in
the pleadings of the parties and the annexes, if any, without consideration of any
evidence aliunde.[20]
When what is left are not genuinely issues requiring trial but questions
concerning the proper interpretation of the provisions of some written contract
attached to the pleadings, judgment on the pleadings is proper.[21]
From the pleadings, the parties admitted the following facts:
(1) EIB is the stockbroker of petitioners.
(2) Petitioners and EIB entered into a SDAA, Annex 1 of EIBs answer,
which governed the relationship between petitioners as clients and EIB as
stockbroker. Sec. 7 of the SDAA provides:
7. Lien
The client agrees that all monies and/or securities and/or all other
property of the Client (plaintiffs) in the Companys (defendant)
custody or control held from time to time shall be subject to a
general lien in favour of Company for the discharge of all or any
indebtedness of the Client to the Company. The Client shall not be
entitled to withdraw any monies or securities held by the
Company pending the payment in full to the Company of any
indebtedness of the Client to the Company. The company shall be
entitled at any time and without notice to the Client to retain, apply,
sell or dispose of all or any of the [clients] property if any such
obligation or liability is not discharged in full by the client when due
or on demand in or towards the payment and discharge of such
obligation or liability and the Company shall be under no duty to the
client as to the price obtained or any losses or liabilities incurred or
arising in respect of any such sale or disposal. Subject to the relevant
338

law and regulation on the matter, the client hereby authorizes the
Company, on his/its behalf, at any time and without notice to the
clients property if any such obligation or liability is not discharged.
[22]
(Emphasis supplied.)
It is clear from the SDAA that all monies, securities, and other properties of
petitioners in EIBs custody or control shall be subject to a general lien in favor of
the latter solely for the discharge of all or any indebtedness to EIB.
(3) From June 2003 to March 2004, petitioners, through their broker, EIB,
bought 60,790,000 KKP shares of stock at the Philippine Stock Exchange (PSE).
(4) On various dates in July and August 2003, petitioners bought 16,180,000
DMCI shares of stock through EIB likewise at the PSE, while 16,000,000 DMCI
shares of petitioners were transferred to EIB by Westlink Global Equities, Inc.
Thus, a total of 32,180,000 DMCI shares of stock owned by petitioners were
placed in the custody or control of EIB.
(5) On April 1, 2004, petitioners ordered the sale of 60,790,000 KPP shares
to any buyer at the price of PhP 0.14 per share. The KPP shares were eventually
sold at PhP 0.14 per share to interested buyers.
(6) Petitioners failed to reacquire or buy back the KPP shares at PhP 0.18 per
share after 30 days from date of transaction.
(7) As petitioners failed to deliver funds to EIB to honor the buy-back
obligation, not to mention the cash account obligations of petitioners in the amount
of PhP 70 million to EIB, EIB had no recourse but to sell the DMCI shares of
petitioners to reacquire the KPP shares.
(8) Thus, on various dates in June 2004, EIB, without petitioners knowledge
and consent, sold petitioners 32,180,000 DMCI shares at the controlling market
price. EIB later sent sales confirmation receipts to petitioners regarding the sale of
their DMCI shares, said receipts containing the common notice, which reads:
All transaction[s] are subject to the rules and customs of the
Exchange and its Clearing House. It is agreed that all securities
shall secure all my/our liabilities to e.securities and is authorized in
their discretion to sell all or any of them without notice to we/us
339

whenever in the opinion of e.securities my/our account is not properly

secured.[23] (Emphasis supplied.)
(9) EIB sent statements of accounts to petitioners showing the sale of the
DMCI shares which uniformly contained the following notice:
This statement will be considered correct unless we receive notice in
writing of any exceptions within 5 days from receipt. Please address
all correspondence concerning exceptions to our OPERATIONS
DEPARTMENT. Kindly notify us in writing of any changes in your
address.[24]
(10) On January 12, 2005, petitioners wrote EIB demanding the return of the
32,180,000 DMCI shares.
(11) On January 12, 2005, EIB rejected petitioners demand for the return of
the DMCI shares, as those were already sold to cover the buy back of the KPP
shares.
(12) Petitioners prayer is the return of the 32,180,000 DMCI shares by EIB
to them.
The principal issue in petitioners complaint is whether EIB can be
compelled to return DMCI shares to petitioners based on the alleged unauthorized
disposal or sale of said shares to comply with the buy back of the KKP shares. The
threshold issue raised in the answer is the lack of jurisdiction over the complaint
due to the alleged nonpayment of the proper docket fees. Affirmative defenses
presented are that EIB disposed of the DMCI shares pursuant to Sec. 7 of the
SDAA, and the notices of sale, ratification and laches.
Based on the admissions in the pleadings and documents attached, the Court
finds that the issues presented by the complaint and the answer can be resolved
within the four corners of said pleadings without need to conduct further hearings.
As explained by the Court in Philippine National Bank v. Utility Assurance &
Surety Co., Inc.,[25]when what remains to be done is the proper interpretation of
the contracts or documents attached to the pleadings, then judgment on the
pleadings is proper. In the case at bar, the issue of whether the sale of DMCI
shares to effectuate the buy back of the KKP shares is valid can be decided by the
trial court based on the SDAA, Notices of Sale, Sales Confirmation Receipts, the
340

letters of the parties, and other appendages to the pleadings in conjunction with the
allegations or admissions contained in the pleadings without need of trial. The
Makati City RTC is, therefore, correct in issuing the October 18, 2005 Resolution
granting the Motion for Judgment on the Pleadings.
The CA nullified the October 18, 2005 Resolution on the ground that there
are other issues that must be resolved during a full-blown trial, ratiocinating this
way:
While it may be true that the Appellant has already admitted
that the sale of the DMCI shares was for the purpose of buying back
the KPP shares and that such admission strengthened Appellees claim
that the sale of the DMCI shares is a nullity, there were other issues
raised by the Appellant that can only be threshed out during a full
blown trial, viz: the average price of the KPP shares of stock, the
scope of the collaterals stated in the Notices of Sale and the monetary
claims of the Appellant against the Appellees.[26]
To the mind of the Court, these matters are not genuinely triable issues but
actually minor issues or mere incidental questions that can be resolved by
construing the statements embodied in the appendages to the pleadings. The facts
that gave rise to the side issues are undisputed and were already presented to the
trial court rendering trial unnecessary.
On the disparity in the average price of KPP shares of stock, petitioners
claim that the average purchase price of the KPP share is PhP 0.22 per share (par. 2
of the complaint), while EIB claims it is only PhP 0.18 per share (par. 2 of the
answer). The dissimilarity in the acquisition price paid by petitioners for the KPP
shares is a non-issue, since the relief prayed for is the return of the DMCI shares
and not the KPP shares. Petitioners did not even claim actual damages in the prayer
of the complaint.
On the scope of the collaterals stated in the Notices of Sale, it is clear from
the notices that the collateral is KPP Shares/Property:
April 01, 2004
341

PACIFIC REHOUSE CORP.

Makati City
Philippine[s]
RE: SALE OF KUOK PROPERTIES INC., (KPP)
As agreed upon the above mentioned stock will be sold to a party with
the following conditions attached:
NUMBER OF SHARES : 5,800,000/SHARES
AMOUNT @ SHARE : PHP 0.14
CHARGES : Sellers Account
BUY BACK DATE : after 30 days (used on transaction date)
BUY BACK AMOUNT : PHP 0.18
DATE OF EXECUTION : APRIL 01, 200[4]
KIND OF TRANSACTION : FULL CROSS TO SELLER
COLLATERAL : KPP SHARES/PROPERTY
For and behalf of EIB Securities.
[Signed]
PAULINE TAN[27]
April 01, 2004
FORUM HOLDINGS CORP.
Makati City
Philippine[s]
RE: SALE OF KUOK PROPERTIES INC., (KPP)
As agreed upon the above mentioned stock will be sold to a party with
the following conditions attached:
NUMBER OF SHARES : 15,560,000/SHARES
AMOUNT @ SHARE : PHP 0.14
CHARGES : Sellers Account
BUY BACK DATE : after 30 days (used on transaction date)
BUY BACK AMOUNT : PHP 0.18
DATE OF EXECUTION : APRIL 01, 200[4]
342

KIND OF TRANSACTION : FULL CROSS TO SELLER

COLLATERAL : KPP SHARES/PROPERTY
For and behalf of EIB Securities.
[Signed]
PAULINE TAN[28]

April 01, 2004

MIZPAH HOLDINGS INC.
Makati City
Philippine[s]
RE: SALE OF KUOK PROPERTIES INC., (KPP)
As agreed upon the above mentioned stock will be sold to a party with
the following conditions attached:
NUMBER OF SHARES : 8,430,000/SHARES
AMOUNT @ SHARE : PHP 0.14
CHARGES : Sellers Account
BUY BACK DATE : after 30 days (used on transaction date)
BUY BACK AMOUNT : PHP 0.18
DATE OF EXECUTION : APRIL 01, 200[4]
KIND OF TRANSACTION : FULL CROSS TO SELLER
COLLATERAL : KPP SHARES/PROPERTY
For and behalf of EIB Securities.
[Signed]
PAULINE TAN[29]
April 01, 2004
REXLON REALTY GROUP INC.
Makati City
Philippine[s]
RE: SALE OF KUOK PROPERTIES INC., (KPP)
343

As agreed upon the above mentioned stock will be sold to a party with
the following conditions attached:
NUMBER OF SHARES : 5,000,000/SHARES
AMOUNT @ SHARE : PHP 0.14
CHARGES : Sellers Account
BUY BACK DATE : after 30 days (used on transaction date)
BUY BACK AMOUNT : PHP 0.18
DATE OF EXECUTION : APRIL 01, 200[4]
KIND OF TRANSACTION : FULL CROSS TO SELLER
COLLATERAL : KPP SHARES/PROPERTY
For and behalf of EIB Securities.
[Signed]
PAULINE TAN[30]

April 01, 2004

RECOVERY DEVELOPMENT CORP.
Makati City
Philippine[s]
RE: SALE OF KUOK PROPERTIES INC., (KPP)
As agreed upon the above mentioned stock will be sold to a party with
the following conditions attached:
NUMBER OF SHARES : 12,350,000/SHARES
AMOUNT @ SHARE : PHP 0.14
CHARGES : Sellers Account
BUY BACK DATE : after 30 days (used on transaction date)
BUY BACK AMOUNT : PHP 0.18
DATE OF EXECUTION : APRIL 01, 200[4]
KIND OF TRANSACTION : FULL CROSS TO SELLER
COLLATERAL : KPP SHARES/PROPERTY
344

For and behalf of EIB Securities.

[Signed]
PAULINE TAN[31]
April 01, 2004
PACIFIC WIDE REALTY DEVELOPMENT CORP.
Makati City
Philippine[s]
RE: SALE OF KUOK PROPERTIES INC., (KPP)
As agreed upon the above mentioned stock will be sold to a party with
the following conditions attached:
NUMBER OF SHARES : 9,000,000/SHARES
AMOUNT @ SHARE : PHP 0.14
CHARGES : Sellers Account
BUY BACK DATE : after 30 days (used on transaction date)
BUY BACK AMOUNT : PHP 0.18
DATE OF EXECUTION : APRIL 01, 200[4]
KIND OF TRANSACTION : FULL CROSS TO SELLER
COLLATERAL : KPP SHARES/PROPERTY
For and behalf of EIB Securities
[Signed]
PAULINE TAN[32]

The determination of the collateral in said notices can easily be made from
the notices itself and Sec. 7 of the SDAA. The KPP shares stated in the notices
refer to the KPP shares owned by the Petitioners and sold to third parties by EIB.
The word Property in the notices is elucidated in the aforementioned Sec. 7 as all
monies and/or securities and/or all other property of the Client in the companys
custody or control held from time to time (Clients Property) x x x. These properties
shall be subject to a general lien in favour of the Company for the discharge of all
or any indebtedness and other obligations of the client to [EIB]. [33] Thus, the DMCI
345

shares owned by petitioners are covered by the word Property in the Notices of
Sale.
On the monetary claims by petitioners against EIB, said claims are not a bar
to a judgment on the pleadings. While it was averred by petitioners under par. 9 of
the complaint that they suffered a loss of PhP 4.5 million from the sale of the
DMCI shares, the claim for actual damages was not set up as a relief in the prayer
and, therefore, the Manchester doctrine precludes such award to petitioners. Anent
the claim for moral damages of PhP 3 million, exemplary damages of PhP 3
million, and attorneys fees of PhP 2 million, the claim is not proper in a judgment
on the pleadings in the absence of proof. [34] Sans such proof extent on record, the
claim for damages is a non-issue.
In sum, there are no genuine issues that cannot be determined based on the
pleadings. Ergo, the assailed October 18, 2005 Resolution of the Makati City RTC
granting judgment on the pleadings is in accord with Rule 34 of the Rules of
Court and settled jurisprudence.

Authority of EIB to Sell DMCI Shares of Petitioners

Petitioners assert the inapplicability of Sec. 7 of the SDAA to their liability
to reacquire the KKP shares, as the DMCI shares were not sold to pay for their
PhP 70 million obligation to EIB but to settle their obligation to the buyers of their
KKP shares.
Petitioners position is impressed with merit. We rule that EIB has no legal
authority to sell the DMCI shares for the purpose or reacquiring the KKP shares.
Sec. 7 of the SDAA pertains to outstanding obligations or indebtedness of
petitioners to EIB but does not cover any obligation of petitioners to third-party
purchasers to reacquire its KKP shares under the full cross to seller buy-back
obligation subject of the various notices of sale.
Let us scrutinize anew Sec. 7 of the SDAA:
346

7. Lien
The client agrees that all monies and/or securities and/or all other
property of the Client (plaintiffs) in the Companys (defendant)
custody or control held from time to time shall be subject to a
general lien in favour of Company for the discharge of all or any
indebtedness of the Client to the Company. The Client shall not be
entitled to withdraw any monies or securities held by the Company
pending the payment in full to the Company of any indebtedness of
the Client to the Company. The company shall be entitled at any time
and without notice to the Client to retain, apply, sell or dispose of all
or any of the [clients] property if any such obligation or liability is not
discharged in full by the client when due or on demand in or towards
the payment and discharge of such obligation or liability and the
Company shall be under no duty to the client as to the price obtained
or any losses or liabilities incurred or arising in respect of any such
sale or disposal. Subject to the relevant law and regulation on the
matter, the client hereby authorizes the Company, on his/its behalf, at
any time and without notice to the clients property if any such
obligation or liability is not discharged. (Emphasis supplied.)
As couched, the lien in favor of EIB attaches to any money, securities, or
properties of petitioners which are in EIBs possession for the discharge of all or
any indebtedness and obligations of petitioners to EIB. For this, petitioners are also
barred from withdrawing its assets that are in the possession of EIB pending full
payment by petitioners of their indebtedness to EIB. The above proviso also gives
EIB the authority to sell or dispose of petitioners securities or properties in its
possession to pay for petitioners indebtedness to EIB. It is, thus, evident from the
above SDAA provision that said lien and authority granted to EIB to dispose of
petitioners securities or properties in the formers possession apply only to
discharge and pay off petitioners indebtedness to EIB and nothing more.
Sec. 7 of the SDAA does not apply to petitioners obligations to third-party
purchasers of their KKP shares under the full cross to seller obligation, and
certainly EIB could not use said provision for the repurchase of the KKP shares.
Indubitably, the sale of the DMCI shares made by EIB is null and void for lack of
authority to do so, for petitioners never gave their consent or permission to the
sale.
347

Moreover, Article 1881 of the Civil Code provides that the agent must act
within the scope of his authority. Pursuant to the authority given by the principal,
the agent is granted the right to affect the legal relations of his principal by the
performance of acts effectuated in accordance with the principals manifestation of
consent.[35] In the case at bar, the scope of authority of EIB as agent of petitioners is
to retain, apply, sell or dispose of all or any of the clients [petitioners] property, if
all or any indebtedness or other obligations of petitioners to EIB are not discharged
in full by petitioners when due or on demand in or towards the payment and
discharge of such obligation or liability. The right to sell or dispose of the
properties of petitioners by EIB is unequivocally confined to payment of the
obligations and liabilities of petitioners to EIB and none other. Thus, when EIB
sold the DMCI shares to buy back the KKP shares, it paid the proceeds to the
vendees of said shares, the act of which is clearly an obligation to a third party and,
hence, is beyond the ambit of its authority as agent. Such act is surely illegal and
does not bind petitioners as principals of EIB.
As a last-ditch effort, EIB seeks refuge from the notices of sales it issued to
petitioners:
Let us scrutinize a typical notice of sale issued to petitioners, thus:
RE: SALE OF KUOK PROPERTIES INC. (KPP)
As agreed upon the above mentioned stock will be sold to a party with
the following conditions attached:
NUMBER OF SHARES : x x x/SHARES
AMOUNT @ SHARE : PHP 0.14
CHARGES : Sellers Account
BUY BACK DATE : After 30 days [based on transaction
Date]
BUY BACK AMOUNT : PHP 0.18
DATE OF EXECUTION : APRIL 1, 200[4]
KIND OF TRANSACTION : FULL CROSS TO SELLER
COLLATERAL : KPP SHARES/PROPERTY
348

For and behalf of EIB Securities.

[Signed]
PAULINE TAN

The above notice states that the collateral is KPP Shares/Property.

EIB asserts that the word Property refers to all the monies and/or securities and/or
all other property of petitioners in EIBs custody or control pursuant to Sec. 7 of the
SDAA. This postulation is correct. The DMCI shares are included in the word
Property under Sec. 7 of the SDAA. However, EIBs theory stops there. As earlier
explained, the SDAA, more particularly its Sec. 7, cannot be made the legal basis
for EIB to sell petitioners properties in its possession or custody to pay petitioners
obligations to third parties. The SDAA is confined only to obligations of
petitioners to EIB and not to third parties like the purchases of the KKP shares.
Thus, the sale of the DMCI shares to buy back the KPP shares is illegal and
ineffective, since it is only answerable for the liabilities of petitioners to EIB and
no one else.
The notices of sale issued by EIB covering the sale of the KKP shares of
petitioners clearly show that the very same KKP shares sold to third parties albeit
under a buy-back arrangement and the Property of petitioners were made the
collaterals to secure the payment of the reacquisition. Since the possession of the
KKP shares and the Property were placed in EIB, a third party by common
agreement, then the accessory contract in the case at bar is a contract of pledge
governed by Arts. 2085 to 2092 of the Civil Code, which are provisions common
to pledge and mortgage, and Arts. 2093 to 2139 on pledge.
The query is whether or not the pledge on KKP Shares/Property is valid. The
answer is no.
Art. 2085 of the Civil Code provides:
Art. 2085. The following requisites are essential to the contracts of
pledge and mortgage:
349

(1)
That they be constituted to secure the fulfillment of
a principal obligation;
(2)
That the pledgor or mortgator be the absolute
owner of the thing pledged or mortgaged;
(3)
That the persons constituting the pledge or
mortgage have the free disposal of their property, and in the absence
thereof, that they be legally authorized for the purpose.
Third persons who are not parties to the principal obligation
may secure the latter by pledging or mortgaging their own property.
It is indispensable that the pledgor is the absolute owner of the thing pledged
(second element). In the case at bar, the KKP shares were sold to third parties by
EIB at PhP 0.14 and, as a result, petitioners lost their right of ownership over the
KKP shares. Hence, from the time of the sale, petitioners were no longer the
absolute owners of said shares, making the pledge constituted over said KKP
shares null and void.[36]
Also, it is necessary under Art. 2085 that the person constituting the pledge has the
free disposal of his or her property, and in the absence of that free disposal, that he
or she be legally authorized for the purpose (third element). This element is absent
in the case at bar. Petitioners no longer have the free disposal of the KKP shares
when EIB sold said shares at the stock exchange as they are no longer the owners
of the shares. Thus, there was no valid pledge constituted on the KKP shares.
The notice of sale, assuming it incorporates the accessory contract of pledge,
merely stated Property as collateral in addition to KKP shares. This is a blatant
violation of Art. 2096, which provides that a pledge shall not take effect against
third persons if description of the thing pledged and the date of the pledge do not
appear in a public instrument. The thing pledged must be amply and clearly
described and specifically identified. Evidently, the word Property is vague, broad,
and confusing as to the ownership. Hence, it does not satisfy the prescription under
Art. 2096 of the Code. Worse, the notice of sale is not in a public instrument as
350

required by said legal provision; therefore, the pledge on property is void and
without legal effect.
Moreover, the notices of sale must be construed against EIB. Any ambiguity in a
contract whose terms are susceptible of different interpretations must be read
against the party who drafted it.[37]
The DMCI shares which EIB construed to be included within the ambit of the
word property cannot be considered the thing pledged to secure the buy back of the
KKP shares in view of the vagueness of the word Property and the nonapplicability of the SDAA to the sale of the KKP shares.
Lastly, the appellate court ruled that the affirmative defense of estoppel was
raised by EIB due to the alleged failure of petitioners to object to the sale of the
DMCI shares.
The principle of estoppel rests on the rule that:
[W]here a party, by his or her deed or conduct, has induced
another to act in particular manner, estoppel effectively bars the
former from adopting an inconsistent position, attitude or course of
conduct that causes loss or injury to the latter. The doctrine of estoppel
is based upon the grounds of public policy, fair dealing, good faith and
justice, and its purpose is to forbid one to speak against his own act,
representations, or commitments to the injury of one whom they were
directed and who reasonably relied thereon.[38]
The essential elements of estoppel as related to the party estopped are: (1)
conduct which amounts to a false representation or concealment of material facts,
or, at least, which calculated to convey the impression that the facts are otherwise
than, and inconsistent with, those which the party subsequently attempts to assert;
(2) intention, or at least expectation, that such conduct shall be acted upon by the
other party; and (3) knowledge, actual or constructive, of the actual facts.[39]
Reliance by respondent EIB on estoppel is misplaced. The first element does
not obtain from the factual setting presented by the pleadings, attachments, and
351

admissions. There is no allegation that petitioners performed an act which can be

considered as false representation that EIB can sell their DMCI shares to reacquire
the KKP shares, or concealed a material fact. Sec. 7 of the SDAA is unequivocal
that EIB can only sell the shares of petitioners for payment of any indebtedness to
EIB. There was no act or concealment on the part of petitioners that made known
or conveyed the impression to EIB that it can sell the DMCI shares of petitioners
for the latters indebtedness or obligation to a third party in contravention of EIBs
authority under Sec. 7 of the SDAA. Moreover, the second element is also absent.
There was no showing that petitioners authorized EIB to pay a third party from the
proceeds of the sale of their DMCI shares. Lastly, on the third element, petitioners
had no knowledge of the fact that the proceeds of the sale of DMCI shares were
paid to buy back the KPP shares. Reliance of EIB on the sales confirmation
receipts[40] issued to petitioners does not help any. The condition printed on said
receipts explicitly states that the securities shall secure [petitioners] liabilities to
e.securities. Even the account statements[41] issued by EIB do not reflect the
payment of the proceeds of the sale of DMCI shares owned by petitioners to buy
back the KKP shares previously owned by petitioners. All that these accounts show
is the crediting of the proceeds of the sale of DMCI shares to petitioners and
nothing more. There was no disclosure of the purpose of the sale of the DMCI
shares. Clearly, there is no estoppel.
WHEREFORE, the petition is GRANTED. The CA Decision dated April
11, 2008 in CA-G.R. CV No. 87713 is REVERSED and SET ASIDE. The RTC
Resolution dated October 18, 2005 in Civil Case No. 05-178 is
hereby REINSTATED.
No costs.
SO ORDERED.
PRESBITERO J. VELASCO, JR.
Associate Justice

WE CONCUR:
352

RENATO C. CORONA
Chief Justice
Chairperson

TERESITA J. LEONARDO-DE CASTRO MARIANO

C. DEL CASTILLO Associate Justice Associate Justice

JOSE PORTUGAL PEREZ

Associate Justice

C E R T I F I C AT I O N

Pursuant to Section 13, Article VIII of the Constitution, I certify that the
conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Courts Division.

RENATO C. CORONA
Chief Justice

353

[1]

Rollo, pp. 50-59. Penned by Associate Justice Myrna Dimaranan Vidal

and concurred in by Associate Justices Bienvenido L. Reyes and Vicente Q. Roxas.
[2]
Id. at 186-190. Penned by Judge Rommel O. Baybay.
[3]
Id. at 61-63.
[4]
Id. at 65-69.
[5]
Id. at 114-118.
[6]
Id. at 157-166.
[7]
Id. at 167-171.
[8]
Id. at 190.
[9]
Id. at 207.
[10]
Id. at 208-209.
[11]
G.R. No. 151783, July 8, 2003, 405 SCRA 416.
[12]
Rollo, pp. 58-59.
[13]
Id. at 58.
[14]
Id. at 16-18.
[15]
Broken down as follows:
Special Allowances for Judiciary - PhP 55,162.00
Judiciary Development Fund - 63,274.00
Legal Research Fund - 1,173.80
Summons Fee - 144.00
Victims Compensation - 5.00
Sheriffs Trust Fund - 1,000.00
Total Payment - PhP 120,758.80
[16]
No. L-75919, May 7, 1987, 149 SCRA 562.
[17]
G.R. Nos. 79937-38, February 13, 1989, 170 SCRA 274.
[18]
Rollo, pp. 72-73.
[19]
Supra note 16, at 569.
[20]
1 F.D. Regalado, REMEDIAL LAW COMPENDIUM 393 (9th revised
ed., 2005).
[21]
Philippine National Bank v. Utility Assurance & Surety Co., Inc., G.R.
No. 32915, September 1, 1989, 177 SCRA 208, 215-216.
[22]
Rollo, p. 116.
[23]

Id. at 117.
Id. at 118.
[25]
Supra note 21.
[26]
Rollo, p. 58.
[24]

354

[27]

Id. at 88. Annex A-1 of the Complaint.

Id. at 89. Annex A-2 of the Complaint.
[29]
Id. at 90. Annex A-3 of the Complaint.
[30]
Id. at 91. Annex A-4 of the Complaint.
[31]
Id. at 92. Annex A-5 of the Complaint.
[32]
Id. at 93. Annex A-6 of the Complaint.
[33]
Id. at 130.
[34]
Lichauco v. Guash, 76 Phil. 5 (1946).
[35]
Paras, CIVIL CODE OF THE PHILIPPINES ANNOTATED 762 (1st ed.,
1995).
[36]
National Bank v. Palma Gil, 55 Phil. 639 (1931).
[37]
Prudential Bank v. Alviar, G.R. No. 150197, July 28, 2005, 464 SCRA
353, 368-369; citing Garcia v. Court of Appeals, G.R. No. 119845, July 5, 1996,
258 SCRA 446, 457.
[38]
Genato v. Viola, G.R. No. 169706, February 5, 2010, 611 SCRA 677,
688.
[39]
Board of Directors v. Alanday, 109 Phil. 1058 (1960).
[40]
Rollo, pp. 136-143.
[41]
Id. at 144-148.
[28]

355

THIRD DIVISION
[G.R. No. 160531. August 30, 2005]
L & L LAWRENCE FOOTWEAR, INC., SAE CHAE LEE and JOHN
DOE, petitioners, vs.
PCI
LEASING
AND
FINANCE
CORPORATION, respondent.
DECISION
PANGANIBAN, J.:
Under a financial leasing agreement, a finance company purchases, on behalf
of or at the instance of the lessee, the equipment that the latter is interested to buy
but has insufficient funds for. Simultaneous with the purchase, the finance
company then leases the equipment to the lessee in consideration of the periodic
payment of a fixed amount of rental. Recognized by this Court as fairly common
transactions in the commercial world, such agreements have been accepted as
genuine and legitimate.
The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court,
challenging the August 14, 2003 Decision[2] of the Court of Appeals (CA) in CAGR CV No. 70603. The decretal portion of the assailed Decision reads:
WHEREFORE, premises considered, the decision and order appealed from are
hereby AFFIRMED in toto and the present appeal is hereby DISMISSED for
utter lack of merit.
The Facts
The undisputed facts are narrated by petitioners as follows:
PCI Leasing and L & L Lawrence entered into several LOAN contracts embodied
in several Memoranda of Agreement and Disclosure Statements from 1994 up to
1997 involving various shoe making equipment. x x x.
356

As a condition for the loan extended by PCI Leasing to L & L, the latter was also
made to enter into several LEASE CONTRACTS embodied in numerous Lease
Schedules whereby the imported shoe making equipment would be considered as
the leased property. Pursuant to the agreement between the parties, L & L gave PCI
Leasing a THIRTY (30%) PERCENT GUARANTY DEPOSIT for ALL the
leased contracts between them in the total sum of US$359,525.90. Furthermore,
PCI Leasing received from L & L a total of US$1,164,380.42 as rental payments
under the numerous Lease Schedules.
Sae Chae Lee, the former President of L & L, was made to sign a x x x Continuing
Guaranty of Lease Obligations dated 16 May 1994 securing the payment of the
obligation of L & L under [a] Lease Agreement dated 13 May 1994.
L & L, by reason of the economic crisis that hit the country coupled with the
cancellation of the contracts with its buyers abroad and its labor problems, failed to
meet its obligations on time. For this reason, L & L tried its best to negotiate with
the PCI Leasing for a possible amicable settlement between the parties.
In the course of the negotiation between the parties, PCI Leasing sent to L & L a
letter dated 05 May 1998, stating that:
Demand is hereby made on you to pay in full the outstanding balance in the
amount of $826,003.27 plus penalty charges amounting to $6,329.05 on or before
May 12, 1998 or to surrender to us the various equipments (please see attached
lists) subject of Lease Schedule
Nos.7760/7935/8081/8196/8312/8405/8451/8474/8593/8609/
8663/9364/9432/9512/9704/9924/10041/10065/10067/10280/10441/10921
xxxxxxxxx
On 16 December 1998, PCI Leasing filed a complaint for recovery of sum of
money and/or personal property with prayer for the issuance of a writ of replevin
against L & L Lawrence Footwear, Inc., Sae Chae Lee and a certain John Doe with
the Regional Trial Court of Quezon City.

357

On 28 January 1999, the x x x [t]rial [c]ourt issued an Order x x x granting the

prayer of PCI Leasing for the issuance of a Writ of Replevin.
The subject leased properties were turned over to PCI Leasing, x x x as shown by
the Sheriffs Reports dated 01 October 1999 and 06 December 1999. x x x.
On 16 February 2000, PCI Leasing filed a motion to declare L & L and Sae Chae
Lee in default for failure to file their Answer.
The x x x [t]rial [c]ourt, in its Order dated 28 February 2000, declared L & L and
Sae Chae Lee in default and allowed PCI Leasing to present its evidence ex-parte.
L & L and Sae Chae Lee x x x filed a Motion to Set Aside Order of Default dated
06 March 2000 x x x.
The x x x [t]rial [c]ourt x x x denied the Motion to Set Aside Order of Default and
ordered the ex-parte presentation of the evidence for PCI Leasing on 10 April
2000.
On 10 April 2000, PCI Leasing presented ex-parte its evidence before a
Commissioner. PCI Leasing presented as its lone witness Ms. Theresa Soriano, an
Account Officer of the said corporation. x x x On the same hearing, the counsel of
PCI Leasing orally offered the documentary exhibits.
x x x [Petitioners] received a copy of the Decision dated 03 July 2000, the
dispositive portion of which reads as follows:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the
[respondent] and against [petitioners] L & L LAWRENCE FOOTWEAR, INC. and
SAE CHAE LEE as follows:
a) to pay [respondent] the amount of P32,909,836.61 representing the outstanding
balance of the obligation as of March 3, 2000 including attorneys fees, legal
expenses and other charges; and

358

b) affirming [respondents] right to the possession of the replevined properties as

well as its entitlement to the possession of other properties subject matter of the
lease agreement.
SO ORDERED
xxxxxxxxx
[After the denial of their Motion for Reconsideration,] L & L and Sae Chae Lee
filed a Notice of Appeal.
The case was elevated to the Honorable Court of Appeals x x x.[3]
Ruling of the Court of Appeals
Sustaining the trial court, the CA found the monetary award to be fully
supported and substantiated by the evidence presented. It noted that the award,
consisting of accrued rentals and penalties as well as the possession of the
properties that were subject of replevin, were all in accord with the provisions of
the Lease Agreement freely entered into by the parties.
Hence, this Petition.[4]
Issues
Petitioners raise the following issues for our consideration:
1. Whether a plaintiff is AUTOMATICALLY ENTITLED to the relief prayed for
in its Complaint, by reason of the declaration in default, WITHOUT regard to the
evidence presented in support of its claim;
2. Whether a corporation can be held in ESTOPPEL by reason of the
representation of its officer; and
3. Whether a surety can be held liable for an obligation that is NOT
SPECIFIED in the surety agreement.[5]
The Courts Ruling
359

The Petition is unmeritorious.

First Issue:
No Automatic Relief
At the outset, the Court stresses that the present Petition for Review was filed
under Rule 45 of the Rules of Court. Here, the Supreme Courts role is limited to
reviewing errors of law allegedly committed by the appellate court. This Court has
pointed out, time and time again, that it is not a trier of facts; and that, save for a
few exceptional instances, its function is not to analyze or weigh all over again the
factual findings of the lower courts.[6]
Although apparently couched in language meant to disguise them as questions
of law, those raised by petitioners are, in reality, questions of fact.
A question of law must not involve an examination of the probative value of
the evidence presented by the litigants. There is a question of law in a given case
when a doubt or difference arises as to what the law is on a certain state of facts.
There is a question of fact when the doubt or difference arises as to the truth or the
falsity of alleged facts.[7] The test of whether the question is one of law or of fact is
whether the issue being raised can be determined without reviewing the evidence,
in which case it is a question of law; otherwise, it is a question of fact.[8]
Questions of fact are not entertained, inter alia, absent any showing that the
factual findings complained of are totally devoid of support in the record or are
glaringly erroneous.[9]
Having been declared in default, petitioners have waived not only their
opportunity to contest the evidence presented by respondent, but also to present
evidence in support of a valid defense. They, however, seek to extricate themselves
by having this Court review the factual findings of the trial court.
Section 3 of Rule 9 of the Rules of Court provides thus:
Section 3. Default; declaration of. - If the defending party fails to answer within
the time therefor, the court shall, upon motion of the claiming party with notice to
360

the defending party, and proof of such failure, declare the defending party in
default. Thereupon the court shall proceed to render judgment granting the
claimant such relief as his pleading may warrant, unless the court in its discretion
requires the claimant to submit evidence. Such reception of evidence may be
delegated to the clerk of court.
It is undisputed that, upon the order of the trial court, respondent presented its
evidence ex parte. Petitioners themselves pointed out that respondent had presented
one witness -- its account officer Theresa M. Soriano -- and then formally offered
its documentary evidence to support its claim. Hence, the contention that it
was automatically granted the relief prayed for in its Complaint deserves scant
consideration. Obviously, the trial court weighed the evidence presented and
applied the relevant law in its judgment.
Second Issue:
No Estoppel
Petitioners emphasize that the account officer of PCI Leasing testified that
respondent had admittedly deducted the proceeds of the sale of the leased
properties from the outstanding obligations. They argue that, by its admission,
respondent recognized that the properties were in fact owned by L & L Lawrence
Corporation. In turn, this fact allegedly proves that the Contract between the
parties was one of loan, not of lease.
This argument is patently without merit. No such inference can be made from
the statements of the witness. On the contrary, her testimony reinforced the fact
that the true intent of the parties was to enter into a contract known as a financial
leasing agreement.
In such an agreement, a finance company purchases on behalf of or at the
instance of the lessee the equipment which the latter is interested to buy but has
insufficient funds for the purpose. The finance company therefore leases the
equipment to the lessee in consideration of the periodic payment by the lessee of a
fixed amount of rental.[10] Recognized by this Court as being fairly common
transactions in the commercial world, agreements such as these have been accepted
361

as genuine and legitimate.[11] In Cebu Contractors Consortium v. CA,[12] the Court

elucidated on the nature of a financial leasing agreement as follows:
A financing lease may be seen to be a contract sui generis, possessing some but not
necessarily all the elements of an ordinary or civil law lease. Thus, legal title to the
equipment leased is lodged in the financial lessor. The financial lessee is entitled to
the possession and use of the leased equipment. At the same time, the financial
lessee is obligated to make periodic payments denominated as lease rentals, which
enable the financial lessor to recover the purchase price of the equipment which
had been paid to the supplier thereof.[13]
Third Issue:
Surety Valid
Petitioner Sae Chae Lee seeks to extricate himself from his obligation as surety
for petitioner company. He insists that the Continuing Guaranty of Lease
Obligation that he signed made reference to a Lease Agreement dated May 13,
1994, while the Agreement in question was notarized on May 27, 1994.
The contention is untenable. Neither the existence and the due execution of the
Continuing Guaranty presented by respondent, nor the allegation that petitioners
had entered into a subsequent Lease Agreement with PCI Leasing and Finance
Corporation, was ever contested. As the CA found, no Lease Agreement between
the parties had been actually executed on May 13, 1994; hence, the Continuing
Guaranty could only have referred to the very same Agreement that was notarized
on May 27, 1994.
There is nothing vague about the terms of the Continuing Guaranty. Petitioner
Sae Chae Lee agreed to be solidarily liable for the obligations incurred by
petitioner company under the Lease Agreement it had entered into with respondent.
Likewise, the terms and conditions of the Lease Agreement are clear and leave no
doubt upon the intention of the parties.

362

Obligations arising from a contract have the force of law between the parties.
Not being contrary to law, morals, good customs, public order or public policy,
the parties to the contract are bound by its terms and conditions.
[14]

WHEREFORE, the Petition is hereby DENIED and

Decision AFFIRMED. Costs against petitioners.

the

assailed

SO ORDERED.
Sandoval-Gutierrez, Corona, Carpio-Morales, and Garcia, JJ., concur.

[1]

Rollo, pp. 3-27.

[2]

Id., pp. 31-37. Ninth Division. Penned by Justice B. A. Adefuin-de la Cruz

(Division chair) and concurred in by Justices Bienvenido L. Reyes and
Arsenio J. Magpale (members).

[3]

Petitioners Memorandum, pp. 5-9; rollo, pp. 106-110.

[4]

The case was deemed submitted for decision on June 4, 2004, upon receipt by
this Court of respondents Memorandum signed by Attys. Peter M. Bantilan
and Armin Noel B. Villamonte. Petitioners Memorandum, signed by Atty.
Edgar Allan C. Estrebillo, was received by the Court on June 3, 2004.

[5]

Petitioners Memorandum, p. 10; rollo, p. 111.

[6]

Barcenas v. Spouses Tomas, GR No. 150321, March 31, 2005; Ceballos v.

Intestate Estate of Emigdio Mercado, 430 SCRA 323, 331, May 28, 2004
(citing Borromeo v. Sun, 375 Phil. 595, October 22, 1999; Go Ong v. CA,
154 SCRA 270, September 24, 1987).

[7]

Barcenas v. Spouses Tomas, supra; Naguiat v. CA, 412 SCRA 591, 596, October
3, 2003.
363

[8]

Philippine Telegraph & Telephone Corporation v. CA, 412 SCRA 263, 272,
September 29, 2003 (citing Goyena v. Ledesma-Gustillo, 395 SCRA 117,
January 14, 2003.)

[9]

Conahap v. Heirs of Regaa, GR No. 152021, May 17, 2005; Yang v. CA, 409
SCRA 159, 167, August 15, 2003.

[10]

Cebu Contractors Consortium v. CA, 407 SCRA 154, 161, July 22, 2003, per
Azcuna, J.

[11]

BA Finance v. CA, 228 SCRA 530, 533, December 16, 1993; Beltran v. PAIC
Finance Corporation, 209 SCRA 105, 116, May 19, 1992.

[12]

Supra.

[13]

Id., p. 159 (citing Beltran v. PAIC Finance Corporation, supra.)

[14]

Article 1159 of the Civil Code.

364

FIRST DIVISION

[G.R. No. 147410. February 5, 2004]

THE INSULAR LIFE ASSURANCE COMPANY, LTD., petitioner, vs. ASSET

BUILDERS CORPORATION, respondent.
DECISION
PANGANIBAN, J.:
Where the parties merely exchange offers and counteroffers, no agreement or
contract is perfected. A party may withdraw its offer or counteroffer prior to its
receipt of the other partys acceptance thereof. To produce an agreement, the offer
must be certain and the acceptance timely and absolute.
The Case
Before us is a Petition for Review on Certiorari[1] under Rule 45 of the Rules
of Court, assailing the September 20, 2000 Decision [2] and the March 7, 2001
Resolution[3] of the Court of Appeals (CA) in CA-GR CV No. 61607. The
dispositive part of the Decision reads as follows:
IN THE LIGHT OF ALL THE FOREGOING, the appeal of the [petitioner]
is DISMISSED. The Decision of the Court a quo is AFFIRMED.[4]
The assailed Resolution denied petitioners Motion for Reconsideration.
The Facts
The appellate court summarized the facts of the case as follows:
Sometime in November, 1992, the Insular Life Assurance Company, Limited,
[petitioner], invited companies/corporations engaged in the building construction
business to participate in the bidding of [petitioners] proposed Insular Life building
in Lucena City. [Petitioner] distributed copies of Bid Document[s], including the
365

general construction x x x contract, with the winning bidder and Bid Proposal
Forms[,] and furnished copies of the Instruction to Bidders to participating
bidders, containing the rules to be followed in the bidding, including the following
rules: (a) all bond proposals shall be accompanied with a bid bond from the Insular
General Insurance Company, Inc., in an amount equivalent to ten (10) percent of
the bid or five (5) percent of the bid in Managers or Cashiers check payable to
Insular Life, which bid bonds will be returned to the bidder after sixty (60) days
from opening of bids or after award of the project, whichever date comes first;
[5]
(b) the bid shall be valid for sixty (60) days [after] opening of bids[,] but the
owner of the project (the [petitioner]) had the option to request the bidder to extend
the bid validity period after expiration of the original validity period;[6] [and] (c) the
bidder, whose proposal had been deemed acceptable and complying with the
requirements of the owner ([petitioner]) and the project, shall be notified in
writingto personally appear to execute the Contract Agreements within five (5)
days after the receipt of the Notice of Award[,] and that failure on the part of the
winning bidder to execute the contract shall constitute a breach of the agreement,
as effected by acceptance of the proposal, resulting in the nullification of the
award; and that the bond heretofore, offered by the winning bidder shall be
retained by the owner ([petitioner]) as payment due for liquidated damages.[7]
Asset Builders Corporation, [respondent], with four (4) other bidders,
namely, Q.K. Calderon Construction [Co., Inc.], Specified Contractors, A.
[A.] Alarilla Construction[,] and Serg Construction, submitted their respective
bid proposals secured by bid bonds, valid for sixty (60) days.[8] Under its Proposal
Form which the [respondent] submitted to the [petitioner], [respondent] bound and
obliged itself to enter into a Contract with the petitioner within ten (10) days from
notice of the award, with good and sufficient securities for the faithful compliance
thereof.[9]
On November 9, 1993, the respective proposals of the bidders were opened. The
[petitioner] forwarded a Summary of Bids and Tender Documents to Adrian
Wilson International Associate[s], Inc.[10] (AWIA for brevity), [petitioners]
designated Project Manager[,] for the proposed Insular Life Building in Lucena
City for its evaluation and analysis. AWIA, in due time, submitted a report of its
evaluation to the Real Property Division of the [petitioner]. As [could] be gleaned
from the Report of AWIA, [respondents] P12,962,845.54[11] bid was the lowest
among the bidders.
On January 21, 1994, Engineer Pete S. Espiritu (Espiritu for brevity) of the Real
Property Department, who was designated as Project Coordinator of the
366

petitioner[,] recommended that [respondent] and the other bidders, Q.K.

CALDERON [CONSTRUCTION] CO., INC. AND SPECIFIED
CONTRACTORS, be subjected to post-qualification proceedings, including the
inspection of their respective offices, equipment, as well as past and present
projects, and that said bidders be subjected to credit and financial investigations.[12]
[Petitioner] concurred with the recommendation of Espiritu and, indeed, postqualification, inspection[,] and evaluations of [respondent] and Q.K. Calderon
Construction Co., Inc. were effected. On January 25, 1994, [petitioner], with
concurrence of [respondent], visited [respondents] main office at the Tektite Tower
and its past and present projects, i.e., the four (4) and two (2) storey Air
Transportation buildings in its compound; the Government Service Insurance
System (GSIS) Headquarters Complex; and the National Historical Institute
Building, and [respondents] equipment. On February 14, 1994, Espiritu suggested
that a bid clarification and negotiation be undertaken with prospective contractors.
On February 23, 1994, Abraham Torrijos of [petitioners] Real Property
Department (hereinafter referred to as Torrijos) recommended the approval by
the Board of Directors of [petitioner] of the award of the general construction of
the Proposed Lucena Building, in favor of [respondent], emphasizing that:
2. Asset Builders Corporation is a (sic) AAA category Contractor. It has extensive
experience in vertical and horizontal projects. The company [has been] subjected
to a post qualification and credit investigation, the results of which are satisfactory
and acceptable, thus making it technically competent and financially capable of
contracting the work.[13]
On February 24, 1994, a conference was held by and among the representatives of
the [petitioner] and of the [respondent], including [respondents] Operations
Manager, Engineer Ramon Abu, for some clarifications. [Petitioner] proposed that
[respondent] adjust its bid from P12,961,845.54 to P13,000,000.00 to
accommodate the wage increase brought about by Wage Order No. 03, series of
1993, effective December 3, 1993. However, [respondents] representatives were
noncommittal, declaring that they had [to] report to the management of the
[respondent] the proposal of [petitioners] representatives, for its consideration and
approval. Subsequently, the [respondent] agreed to the readjustment of the amount
of its bid as proposed by the [petitioner].
On March 9, 1994, Januario L. Flores (Flores for brevity), head of the Real
Property Department and Assistant Vice-President of the [petitioner], submitted
367

to Mabini L. Juan, the Chief Operating Officer and Senior Executive VicePresident of the [petitioner], his findings on the post-qualification, evaluation and
credit investigation of [respondent], with the recommendation that the award be
given to the [respondent]:
2. On the basis of the above very positive indicators, RPD[,] E.L. Mariano, [F. B.]
Mariano Associates and Co.[,] and Adrian Wilson Intl Associates, [Inc.]
recommen[d] to award the Lucena [p]roject to Asset Builders Corporation. We
honestly believe that they will do a good job.
3. For your consideratio[n/a]pproval.[14]
On March 14, 1994, [Flores] signed a Notice to Proceed, addressed to the
[respondent], for the conformity of the latters President, Rogelio P. Centeno. Under
the [ultimate] paragraph of the Notice to Proceed, the [respondent] may start its
mobilization and proceed with the construction immediately[,] pending execution
of the Construction Agreement.[15] The [petitioner prepared] a draft of the
contract to be executed by the [petitioner] and the [respondent].
On the same day, [Torrijos] informed, by letter, Engineer Bernardo A.
Sajorda (Sajorda for brevitys sake), Project Manager of AWIA, that [petitioner]
had awarded the general construction contract of the proposed Lucena Building to
the [respondent] and advised AWIA to coordinate with [respondent] and inform the
latter that a pre-construction meeting [would] be held on March 22, 1994 at the job
site.[16] A copy of the Notice of Award was appended to said letter.[17] Sajorda
forthwith informed Rogelio P. Centeno, the President of [respondent],
by Memorandum that, pursuant to the AWARD to [respondent], of the general
construction of the Proposed Lucena Building, a pre-construction conference
[would] be held on March 22, 1994 at the job site, during which the following will
be discussed:
1. Contract Amount and completion time
2. Role of AWIA
3. Project Contractors Key [p]ersonnel [l]ist with [s]ignatures and
[p]ositions
4. Channel of [c]ommunications among Architect, Insular Life, ASSET
and AWIA
368

5. [Contractor submittals i.e. Work Schedule, Schedule of] Prices, etc.

6. As-built[s] drawings
7. Submitt[al] of shop drawings prior to use of materials
8. Sanitation
9. Safety programs (first aid kit and hard hats)
10. Night work
11. CAR (Contractors All Ris[k I]nsurance)
12. Owners review of payrolls, vouchers, etc. (sic) payments etc.
13. Sub-contracting [for] approval of subs.
14. Photographs every month
15. Billings based on actual work accomplishments. Undistributed
materials not billable
16. Security measures
17. Tests as required by spec[]s
18. Take note of specific requirements before final payment is made[18]
The [respondent] received a copy of the Memorandum of Sajorda, on March 17,
1994. On March 18, 1994, the [petitioner] transmitted to the [respondent] the
following documents, evidenced by a Transmittal Sheet, received by Roy Roxas,
for the [respondent], to enable the latter to secure a Building Permit for the
project:
ONE (1) LOT DOCUMENTS/PLANS FOR BUILDING PERMIT
4 SETS OF STRUCTURAL COMPUTATION
5 SETS OF SPECS FOR GENERAL CONSTRUCTION
3 SETS OF ELECTRICAL LOAD COMPUTATION
369

5 COPIES OF PRC ID [&] PTR OF DESIGN ENGRS.

6 SETS OF ELMA PLANS
5 SETS OF [R]MDA PLANS/SPECS[19]
On March 22, 1994, the Pre-Construction Conference ensued with the
representatives of the [petitioner] and its Project Manager and of the [respondent],
in the person of its Project Engineer, J.G. Quizon, in attendance:
Attendees: CARLOS M. ESPIRITU -- AWIA Asst. Project Manager
BERNARDO [A]. SAJORDA -- AWIA Project Manager
EDMUNDO C. SABATER -- AWIA Resident Engineer
JANUARIO L. FLORES -- IL/RPD Manager
J.G. QUIZON -- ASSET Project Manager
PETE S. ESPIRITU -- IL/RPD Project Coordinator
ABRAHAM P. TORRIJOS -- IL/RPD Asst. Manager[20]
During the conference, the following were discussed and clarified:
1. Contract Amount and Completion Time: Contract is for P13,000,000.00, to be
completed within 210 calendar days; day one to be 5 days after receipt of NTP by
the Contractor. Actual site mobilization to be first week of April 1994, per Mr. J.G.
Quizon. Issuance of building and other permits being worked out by the
Contractor.[21]
On March 26, 1994, Jacobo G. Quizon, the Project Manager of [respondent], sent
to AWIA a letter requesting for the TCT lot description for the purpose of
relocation of the monuments and the staking out of the building:
We have the honor to request your good office, in relocating the monuments[,] as
per TCT lot description[s,] prior to staking out the building[;] likewise, we can do
the relocation[,] provided the cost will be reimbursed to the Owner[,] with an
approximate fee of P5,000.00 lump sum.

370

Further, problems may occur regarding structur[al] excavation for footing [and
footing] tie beams at Grid Line A & 4. As per plan, the proposed depth [of]
excavation of about 2.5[0M] along the existing adjacent building walls will expose
the CHB footing.[22]
Thereafter, a Ground Breaking ceremony was held at the project site, with Rogelio
B. Centeno, the President of [respondent], [and] Pete S. Espiritu and Januario L.
Flores of the [petitioner] in attendance. A billboard announcing the construction of
[the] Insular Life Building in Lucena City, with the [respondent] as the General
Contractor, was also erected in the project site.
However, the [respondent] did not affix its conformity to any Notice of Award,
much less commence its construction of the project. Neither did it execute
any Construction Agreement. Subsequently, the [respondent] wrote the
[petitioner] a letter dated April 5, 1994, informing the [petitioner] that the
[respondent would] not be able to undertake the project anymore[,] because the
prerequisite paper work and attendant processing could not be fast-trac[k]ed and
that, since the previous two (2) weeks, prices had escalated, which rendered its bid
unattractive.[23] On April 25, 1994, the [petitioner] wrote a letter to the
[respondent], in response to its April 5, 1994 [letter], informing the [respondent]
that, in view of the unjust withdrawal of the [respondent] from the project,
despite the award of the project to the [respondent], the [petitioner] was impelled
to engage the services of another contractor to complete the project[,] without
prejudice to further action of the [petitioner] against the [respondent] for its
withdrawal, pursuant to Section 10 of the Instruction to Bidders, quoted, infra:
The exact amount of damages to the Owner due to the failure to execute the
Contract may be deemed difficult to determine. Failure, thereof, to execute the
Contract within five (5) days after the receipt of the Notice of Award shall cause
[the] annulment of the award. The amount of bid bond deposited with the proposal
shall be retained by the Owner as payment due for liquidated damages incurred.
By way of riposte, the [respondent] sent a letter to the [petitioner] averring that: (a)
it never received any written Notice of Award from the [petitioner]; [and] (b) since
its bid offer had a lifetime of sixty (60) days from November 9, 1993 or until
January 8, 1993 (sic)[,] its offer was automatically withdrawn after said date, since
the [petitioner] had not requested the [respondent] for the extension of the lifetime
thereof.

371

On December 23, 1994, the [petitioner] filed a complaint[24] against the

[respondent], with the Regional Trial Court[25] of Makati City, for Damages, x x x:
xxxxxxxxx
The [petitioner] alleged, inter alia, in its complain[t t]hat the [respondent] was
duly notified by AWIA of the award, in its favor, by the [petitioner], of the
project[,] but the [respondent] unjustly and arbitrarily withdrew from the project
and refused to execute the Construction Contract with the [petitioner,] which
impelled the latter to engage the services of another contractor for the project at the
price of P14,500,000.00 and that, consequently, the [petitioner] was obliged to pay
the amount of P1,500,000.00 which was [the] difference between the contract price
of the project with the [respondent] in the amount of P13,000,000.00
and P14,500,000.00, by way of actual damages or, alternatively, by way of
liquidated damages. In its Answer[26] to the complaint, the [respondent]
alleged, inter alia, that it never received any Notice of Award or Notice to
Proceed; its bid had expired by January 8, 1994, without the [petitioner] asking the
[respondent] for the extension thereof[,] and interposed counterclaims for damages
against the [petitioner], praying that, after due proceedings, judgment be rendered
in its favor, x x x:
xxxxxxxxx
After due proceedings, the Court a quo rendered a Decision,[27] dated December
[5], 1997, in favor of the [respondent] and against the [petitioner], ordering the
dismissal of the complaint of the [petitioner] and ordering the latter to pay damages
to the [respondent], the dispositive portion of which is quoted, infra:
WHEREFORE, judgment is rendered DISMISSING the Complaint with costs
against [petitioner].
On the counter-claim, Insular Life Assurance Co., Ltd., is hereby ordered to pay
Asset Builders Corporation the sums of Pesos: Five Hundred Thousand
(P500,000.00) as compensation for the injury to the latters business standing, and
Pesos: Seventy Five Thousand (P75,000.00) by way of attorneys fees and expenses
of litigation.
Filing fees on the amount of P2,135,000.00 [respondent] sought in the counterclaim shall constitute a first lien on the recovery from [petitioner].
xxxxxxxxx
372

The [petitioner] interposed its appeal from the Decision of the Court a quo and
posed, for [the CAs] resolution, the threshold issues of whether or not: (a) a
construction contract was perfected by and between the [petitioner] and the
[respondent] for the construction of petitioners building project in Lucena City; (b)
the [respondent] waived Section 9 of the Instruction to Bidders and was estopped
from claiming that no construction contract was perfected between it and the
[petitioner]; [and] (c) the [respondent] was liable for damages to the [petitioner].[28]
Ruling of the Court of Appeals
The CA affirmed the lower courts Decision. According to the appellate courts
ruling, the failure of petitioner to prove that it gave respondent a written notice of
the formers unqualified acceptance of the latters bid, as required in the Instruction
to Bidders, did not give birth to consent. The appellate court explained that when
the exact terms desired were not in the offer, any modification or variation
therefrom would annul that offer. Furthermore, estoppel did not apply because of
petitioners own carelessness or want of diligence.
Hence this Petition.[29]
The Issues
I. The Court of Appeals gravely erred in not holding that there exists a
valid contract for the construction of the building project between IL [30] and
ABC.[31]
II. The Court of Appeals gravely erred in not holding that IL has notified
ABC of the award of the construction of the building project to it before it
withdrew its bid proposal.
III. The Court of Appeals gravely erred in not holding that ABCs
withdrawal from the contract constituted a breach of that contract.
IV. The Court of Appeals gravely erred in not holding that the contract had
been perfected and that its consummation stage [had] in fact been
commenced.
V. The Court of Appeals gravely erred in not holding that ABC is estopped
from claiming the contract was not perfected.
373

VI. The Court of Appeals gravely erred in not holding that ABC, instead of
IL, is liable for damages[,] and that, at worst, there is no evidence that
supported the award in favor of ABC.
VII. In any event, there is no basis to penalize IL for going to court.[32]
There is really only one major issue: Was there a valid contract between
petitioner and respondent?
The Courts Ruling
The Petition is unmeritorious.
Sole Issue:
Existence of a Contract
No Notice of Award,
No Contract
It is elementary that, being consensual,[33] a contract[34] is perfected[35] by mere
consent.[36] From the moment of a meeting[37] of the offer and the
acceptance[38] upon the object and the cause that would constitute the contract,
[39]
consent arises.[40] However, the offer must be certain[41] and the acceptance
seasonable and absolute;[42] if qualified,[43] the acceptance[44] would merely
constitute a counter-offer.[45]
Equally important are the three distinct stages of a contract -- its preparation or
negotiation, its perfection, and finally, its consummation. [46] Negotiation begins
when the prospective contracting parties manifest their interest in the contract and
ends at the moment of their agreement. The perfection or birth of the
contract[47] occurs when they agree upon the essential elements thereof.[48] The last
stage is its consummation, wherein they fulfill or perform the terms agreed upon in
the contract, culminating in the extinguishment thereof.[49]
In the case at bar, the parties did not get past the negotiation stage. The events
that transpired between them were indeed initiated by a formal offer, but
this policitacin was merely an imperfect promise that could not be considered a
binding commitment.[50] At any time, either of the prospective contracting parties
may stop the negotiation and withdraw the offer.
374

In the present case, in fact, there was only an offer and a counteroffer [51] that
did not sum up to any final arrangement containing the elements of a contract.
[52]
Clearly, no meeting of minds was established.[53] First, only after the bid bond
had lapsed were post-qualification proceedings, inspections, and credit
investigations conducted. Second, the inter-office memoranda issued by petitioner,
as well as other memoranda between it and its own project manager, were simply
documents to which respondent was not privy. Third, petitioner proposed a
counteroffer to adjust respondents bid to accommodate the wage increase of
December 3, 1993.
In effect, the rule on the concurrence of the offer and its acceptance [54] did not
apply, because other matters or details -- in addition to the subject matter and the
consideration -- would still be stipulated and agreed upon by the parties. [55] While
there was an initial offer made, there was no acceptance; but when there allegedly
came an acceptance that could have had a binding effect, the offer was already
lacking. The offer and its acceptance did not meet to give birth to a contract.[56]
Moreover, the Civil Code provides that no contract shall arise unless its
acceptance is communicated to the offeror.[57]That is, the mere determination to
accept the proposal of a bidder does not constitute a contract; that decision must be
communicated to the bidder.[58] Although consent may be either express or implied,
[59]
the Instruction to Bidders prepared by petitioner itself expressly required (1) a
formal acceptance and (2) a period within which such acceptance was to be made
known to respondent. The effect of giving the Notice of Award to the latter would
have been the perfection of the contract.[60]No such acceptance was communicated
to respondent; therefore, no consent was given. Without that express manifestation,
as required by the terms of its proposal, there was no contract. The due execution
of documents representing a contract is one thing, but its perfection is another.[61]
There is no issue as regards the subject of the contract or the cause of the
obligation. The controversy lies in the consent -- whether there was an acceptance
by petitioner of the offer made by respondent; and, if so, whether that acceptance
was communicated to the latter, thereby perfecting the contract. The period given
to the former within which to accept the offer was not itself founded upon or
supported by any consideration. Therefore, under the law, respondent still had the
freedom and the right to withdraw the offer by communicating such withdrawal to
petitioner[62] before the latters acceptance of the offer;[63] or, if the offer has been
accepted,[64] before the acceptance came to be known by respondent.[65]
Petitioner avers that an acceptance was made, but this allegation has not been
proven. Respondent had no knowledge of such acceptance when it communicated
its withdrawal to the former. Notably, this right to withdraw was not exercised
375

whimsically or arbitrarily by respondent. It did send a formal letter on April 5,

1994, expressing and explaining its withdrawal.As of that date, the decision to
award the contract had not been made according to the terms of the Instruction to
Bidders.
Besides, the subsequent acts between the parties did not even serve as a
confirmation of that decision. The existence of a second proposal -- petitioners
request for an adjustment of the bid to accommodate the wage increase -- in fact
belies the perfection of any contract arising from the first. [66] To the Courts mind,
there was indeed no acceptance of the offer made by respondent. Such failure to
comply with a condition imposed for the perfection of a contract resulted in failure
of the contract.[67]
Subsistence of an Offer
Even Without a Bid Bond
Certainly, the bid bond is an indispensable requirement for the validation of a
bid proposal.[68] This requisite ensures the good faith of bidders and binds them to
enter into a contract with the owner, should their proposal be accepted. [69] One who
submits a bid not only signifies assent to the terms and conditions of a proposal,
but impliedly binds oneself to them, if and when the bid is considered. The
Invitation to Bidders even provided that incomplete proposals might be sufficient
cause for their rejection.[70] If mere insufficiency of a bond required of a bidder is a
ground for rejection, a fortiori, all the more so is the total want thereof.
The proposal of respondent was merely validated by its bid bond, which was
considered by petitioner. The expiration of the bond on January 8, 1994, [71] did not
mean that the bid also lapsed on the same date. The bond, which was an accessory,
merely guaranteed the performance of the principal obligation and could not exist
without the latter.[72] The former was given for the benefit of petitioner, which
could legally waive it. The bid continued without a bond, but still no formal
acceptance was made. Again, on that basis, no contract was perfected.
In the interpretation of a contract, the literal meaning of its stipulations
controls, if their terms are clear and leave no doubt as to the intention of the
contracting parties.[73] When there is no ambiguity in the language of a contract,
there is no room for construction,[74] only compliance.[75] This rule applies to the
Instruction to Bidders, which provides that failure to execute the Contract shall
constitute a breach of agreement as effected by acceptance of the proposal.[76] The
376

language is clear and, like contracts in general, is the law between the parties.
[77]
The contract must be fulfilled according to its literal sense.[78]
No Estoppel
As aptly held by the appellate court, respondents acts subsequent to the
expiration of the bid bond did not constitute a waiver of Section 9 of the
Instruction to Bidders. To be valid and effective, waivers must be couched in clear
and unequivocal terms, leaving no doubt as to the intention of those giving up a
right or a benefit that legally pertains to them. [79] Respondent, contrary to the claim
of petitioner, despite its repeated requests, never received a copy of the Notice of
Award. Indeed, the former never adopted an inconsistent position, attitude or
course of conduct that caused loss or injury to the latter. [80] The attendance of
respondent in the pre-construction conference and the ground-breaking ceremony
was part of the negotiation process. Thus, petitioners claim of estoppel against it
could not be applied.
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.[81] It is hardly separable from the waiver of a right. [82] The party claiming
estoppel must show the following elements: (1) lack of knowledge and of the
means of knowledge of the truth as to the facts in question; (2) reliance, in good
faith, upon the conduct or statements of the party to be estopped; and (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.[83]
None of these elements was proven.
First, petitioner had the knowledge and the means of knowledge of the truth as
to the facts in question. It had the means of knowing if respondent had been served
a copy of the Notice of Award, yet the former did not preserve a copy of such
Notice, which supposedly bore the signature of the latters employee who had
received it. Petitioner did not even enter in its corporate logbooks the release to and
receipt by respondent of that copy. The latter had every reason to withdraw its bid,
given that the prerequisite paper work and attendant processing could not be fasttracked.[84]
Second, respondents conduct and statements were always consistent and
reliable. The manner of acceptance of all bids was prescribed by petitioner
itself. Applying Article 1321 of the Civil Code, such prescription must be complied
with,[85] yet it did not follow its own rules. Of no moment was its reliance in good
377

faith upon respondent. Good faith is always presumed, unless contrary evidence is
adduced.[86]
Third, the action or inaction of petitioner that caused its own injury was its own
fault. The written Notice of Award, which constituted the acceptance of the
proposal, was a sine qua non to the perfection of the contract.[87] The misplacement
of such vital document was inexcusable. Without it, there was no
contract. Moreover, the March 14, 1994 Notice to Proceed clearly stated that its
issuance would depend upon the execution of the construction agreement.
Estoppel is a shield against injustice; the party invoking its protection should
not be allowed to use it to conceal its own lack of diligence [88] or want of
reasonable care and circumspection.[89]
WHEREFORE, the Petition is hereby DENIED, and the assailed Decision and
Resolution AFFIRMED. Costs against petitioner.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Ynares-Santiago, and Carpio, JJ., concur.
Azcuna, J., on official leave.

[1]

Rollo, pp. 39-70.

[2]

Id., pp. 179-205. Penned by Justice Romeo J. Callejo Sr. (Division chairman and
now a member of this Court) and concurred in by Justices Martin S.
Villarama Jr. and Perlita J. Tria Tirona (members).

[3]

Id., p. 207.

[4]

CA Decision, p. 28; rollo, p. 205. All upper case characters, bold fonts, italics,
parentheses, CA corrections, and underscoring have been copied verbatim;
but exhibit references in parentheses have been omitted. Reference to the
parties herein have been replaced with terms enclosed in brackets.

[5]

Instruction to Bidders, p. 2; records, p. 11.

[6]

Ibid.

[7]

Id., pp. 3 & 12.

[8]

Records, pp. 118-120.

[9]

Id., p. 353.
378

[10]

Id., p. 152.

[11]

This amount should be P12,961,845.54; id., p. 352.

[12]

Id., p. 119.

[13]

Id., p. 129.

[14]

Id., p. 131.

[15]

Id., p. 147.

[16]

Id., p. 145.

[17]

Ibid. It was not a Notice of Award that was attached to the letter, but a Notice to
Proceed.

[18]

Id., pp. 148-149.

[19]

Id., p. 150.

[20]

Id., p. 152. Januario is misspelled Juanario in the Minutes of the PreConstruction Conference.

[21]

Ibid.

[22]

Id., p. 156.

[23]

Id., p. 385.

[24]

Id., pp. 1-9.

[25]

Hereinafter referred to as the Court a quo, to be consistent with the CAs

Decision.

[26]

Id., pp. 57-65.

[27]

Records, pp. 503-508.

[28]

CA Decision, pp. 1-9; rollo, pp. 179-187.

[29]

The case was deemed submitted for decision on February 26, 2002, upon
receipt by this Court of petitioners Memorandum, which was signed by
Attys. Emmanuel P. J. Tamase and Aundre R. Dollete. The Memorandum of
respondent, signed by Atty. Julio Arsenio V. Gonong III, was filed on
February 13, 2002.

[30]

IL refers to petitioner.

[31]

ABC refers to respondent.

[32]

Petitioners Memorandum, p. 10; rollo, p. 306.

379

[33]

Gomez v. CA, 340 SCRA 720, 728, September 21, 2000.

[34]

Tolentino, Commentaries and Jurisprudence on the Civil Code of the

Philippines, Vol. IV, 1991 ed., p. 440.

[35]

Uy v. Hon. Evangelista, 413 Phil. 403, 415, July 11, 2001.

[36]

Article 1315 of the Civil Code. See Mindanao Terminal and Brokerage Service,
Inc. v. Roldan-Confesor, 338 Phil. 671, 678, May 5, 1997.

[37]

Perez v. CA, 380 Phil. 592, 598, January 28, 2000.

[38]

Notably, the word offer, is subject to acceptance. Government Service

Insurance System v. CA, 377 SCRA 54, 61, February 15, 2002, per YnaresSantiago, J.

[39]

Metropolitan Manila Development Authority v. JANCOM Environmental Corp.,

375 SCRA 320, 331-332, January 30, 2002; Pua v. CA, 345 SCRA 233, 244,
November 20, 2000.

[40]

Article 1319 of the Civil Code.

[41]

Adelfa Properties, Inc. v. CA, 240 SCRA 565, 580, January 25, 1995, per
Regalado, J.

[42]

Acceptance in order to conclude the agreement must in every respect meet and
correspond with the terms and conditions of the offer. Batagan v. Cojuangco,
78 Phil. 481, 484, May 31, 1947, per Tuason, J. See also Metropolitan Bank
and Trust Company v. Tonda, 338 SCRA 254, 267-268, August 16,
2000; First Philippine International Bank v. CA, 322 Phil. 280, 323-325,
January 24, 1996; and Limketkai Sons Milling, Inc. v. CA, 325 Phil. 967,
987, March 29, 1996.

[43]

A qualified acceptance, or one that involves a new proposal, constitutes a

counter-offer and is a rejection of the original offer. ABS-CBN Broadcasting
Corp. v. CA, 361 Phil. 499, 520, January 21, 1999, per Davide Jr., CJ.

[44]

The acceptance may be evidenced by some acts or conduct communicated to

the offeror either in a formal or an informal manner that clearly manifest a
present intention or determination to accept the offer. Adelfa Properties, Inc.
v. CA, supra, p. 580.

[45]

Regal Films, Inc. v. Concepcion, 414 Phil. 807, 813, August 9, 2001, per
Vitug, J.

[46]

Metropolitan Manila Development Authority v. JANCOM Environmental

Corp., supra, p. 331, per Melo, J.
380

[47]

A contract is a meeting of minds between two persons whereby one binds

himself, with respect to the other, to give something or to render some
service. Article 1305 of the Civil Code. See Metropolitan Manila
Development Authority v. JANCOM Environmental Corp., supra, p. 331.

[48]

Law and jurisprudence recite three minimum elements for any valid contract -(a) consent; (b) object certain which is the subject matter of the contract; and
(c) cause of the obligation which is established. Regal Films, Inc. v.
Concepcion, supra, p. 813; citing Article 1318 of the Civil Code.

[49]

Bugatti v. CA, 343 SCRA 335, 346, October 17, 2000, per GonzagaReyes, J. See Ang Yu Asuncion v. CA, 238 SCRA 602, 611, December 2,
1994.

[50]

Spouses Litonjua v. L & R Corp., 385 Phil. 538, 548, March 27, 2000.

[51]

A counter-offer is always considered in law a rejection of the original offer and

an attempt to enter the negotiations between the parties on a different
basis. Logan v. Philippine Acetylene Co., 33 Phil. 177, 183-184, January 11,
1916, per Moreland, J.

[52]

San Miguel Properties Philippines., Inc. v. Spouses Huang, 336 SCRA 737,
745, July 31, 2000.

[53]

Article 1305 of the Civil Code.

If there is completely no acceptance or if the offer is expressly rejected, there is no

meeting of the minds. Vda. de Urbano v. Government Service Insurance
System (GSIS), 419 Phil. 948, 975, October 19, 2001, per
Puno, J. See Leoquinco v. Postal Savings Bank, 47 Phil. 772, August 25,
1925 and Gamboa v. Ronsalez, 17 Phil. 381, November 23, 1910.
[54]

For concurrence to give rise to a perfected contract, the acceptance of an offer

must be unconditional. Paculdo v. Regalado, 345 SCRA 134, 141,
November 20, 2000.

[55]

A. Magsaysay, Inc. v. Cebu Portland Cement Co., 100 Phil. 351, 354, November
26, 1956.

[56]

Laudico v. Arias Rodriguez, 43 Phil. 270, 272, March 31, 1922, per Avancea, J.

[57]

Rodil Enterprises, Inc. v. CA, 371 SCRA 79, 90, November 29, 2001; citing
Article 1319 of the Civil Code.

381

[58]

Santander v. CA, 187 SCRA 706, 711, July 23, 1990; citing Jalandoni v.
National Resettlement and Rehabilitation Administration, 108 Phil. 486,
492, May 30, 1960.

[59]

Tolentino, supra, p. 447.

[60]

Central Bank of the Philippines v. CA, 63 SCRA 431, 448, April 22, 1975;
citing Valencia v. Rehabilitation Finance Corp., 103 Phil. 444, 450, April 25,
1958.

[61]

Santos v. Heirs of Jose P. Mariano & Erlinda Mariano-Villanueva, 344 SCRA

284, 292, October 24, 2000.

[62]

Spouses Litonjua v. L & R Corp., supra, p. 549.

[63]

Q. Mucius Scvola says apropos: To our mind, the power to revoke is implied in
the criterion that no contract exists until the acceptance is known.As the tie
or bond springs from the meeting or concurrence of the minds, since up to
that moment there exists only a unilateral act, it is evident that he who
makes it must have the power to revoke it by withdrawing his proposition,
although with the obligation to pay such damages as may have been
sustained by the person or persons to whom the offer was made and by
whom it was accepted, if he in turn failed to give them notice of the
withdrawal of the offer. Laudico v. Arias Rodriguez, supra, p. 273.

[64]

Although an acceptance made by letter -- binding the person making the offer
from the date it comes to his knowledge -- may not be the best expression of
modern commercial usage, still it is admitted that its enforcement avoids
uncertainty and tends to security. Enriquez v. Sun Life Assurance Company
of Canada, 41 Phil. 269, 273, November 29, 1920, per Malcolm, J.

[65]

Jardine Davies, Inc. v. CA, 389 Phil. 204, 212, June 19, 2000.

[66]

Weldon Construction Corp. v. CA, 154 SCRA 618, 628-629, October 12, 1987.

[67]

Spouses Babasa v. CA, 352 Phil. 1142, 1154, May 21, 1998 (citing Romero v.
CA, 320 Phil. 269, 280, November 23, 1995; and Lim v. CA, 331 Phil. 853,
864, October 24, 1996).

[68]

Republic v. Capulong, 199 SCRA 134, 144, July 12, 1991, per Medialdea, J.

[69]

Padilla v. Zaldivar, 120 Phil. 1052, 1057, October 31, 1964.

[70]

Invitation to Bidders, p. 3.

[71]

Answer, p. 1; records, pp. 57, 66.

382

[72]

Valencia v. Rehabilitation Finance Corp., supra, p. 450.

[73]

Ong Yong v. Tiu, 375 SCRA 614, 631, February 1, 2002; citing Article 1370 of
the Civil Code. See German Marine Agencies, Inc. v. NLRC, 350 SCRA 629,
641, January 30, 2001; Mortel v. KASSCO, Inc., 348 SCRA 391, 397,
December 15, 2000; and Palmares v. CA, 351 Phil. 664, 679, March 31,
1998 (citing Abella v. CA, 327 Phil. 270, 275, June 20, 1996).

[74]

In the interpretation of contracts, the ascertainment of the intention of the

contracting parties is to be discharged by looking to the words they used to
project that intention in their contract, all the words, not just a particular
word or two, and words in context, not words standing alone.Limson v. CA,
357 SCRA 209, 216, April 20, 2001, per Bellosillo, J.; citing Fernandez v.
CA, 166 SCRA 577, 587, October 18, 1988, per Feliciano, J.

[75]

Leao v. CA, 420 Phil. 836, 848, November 15, 2001, per Pardo, J.

[76]

Item 9, Instruction to Bidders, p. 3

[77]

Jardine Davies, Inc. v. CA, supra, p. 211.

[78]

Roble v. Arbasa, 414 Phil. 343, 355, July 31, 2001.

[79]

Marawi Marantao General Hospital, Inc. v. CA, 349 SCRA 321, 331, January 16,
2001. See also Thomson v. CA, 358 Phil. 761, 778, October 28,
1998; Gatchalian v. Delim, 203 SCRA 126, 132, October 21, 1991; Yepes v.
Samar Express Transit, 123 Phil. 948, 949, May 19, 1966; Andres v. The
Crown Life Insurance Co., 102 Phil. 919, 924, January 28, 1958; Lang v.
Acting Provincial Sheriff of Surigao, 93 Phil. 661, 669, August 31, 1953;
and Fernandez v. Sebido, 70 Phil. 151, 159, June 25, 1940.

[80]

Padcom Condominium Corp. v. Ortigas Center Association, Inc., 382 SCRA

222, 230, May 9, 2002. See Cruz v. CA, 354 Phil. 1036, 1054, July 27, 1998.

Estoppel in pais arises when one, by his acts, representations or admissions, or by

his own silence when he ought to speak out, intentionally or through
culpable negligence, induces another to believe certain facts to exist and
such other rightfully relies and acts on such belief, so that he will be
prejudiced if the former is permitted to deny the existence of such facts. City
of Cebu v. Spouses Dedamo, 381 SCRA 754, 761, May 7, 2002, per Davide
Jr., CJ.; citing Ibaan Rural Bank, Inc. v. CA, 378 Phil. 707, 712-713,
December 17, 1999, per Quisumbing, J. and Philippine National Bank v. CA,
373 Phil. 942, 947, September 28, 1999, per Bellosillo, J.
[81]

Kalalo v. Luz, 145 Phil. 152, 161, July 31, 1970, per Zaldivar, J.
383

[82]

Arcelona v. CA, 345 Phil. 250, 284, October 2, 1997. See Tropical Homes, Inc.
v. CA, 338 Phil. 930, 939, May 14, 1997.

[83]

Mijares v. CA, 338 Phil. 274, 284-285, April 18, 1997, per Kapunan, J.;
citing Kalalo v. Luz, supra, p. 162.

[84]

Records, p. 47.

[85]

This provision states that the person making the offer may fix the x x x manner
of acceptance x x x which must be complied with.

An acceptance that is not made in the manner prescribed by the offeror is not
effective, but constitutes a counteroffer that the offeror may accept or
reject. (Tolentino, supra, p. 462.)
[86]

Rosencor Development Corp. v. Inquing, 354 SCRA 119, 137, March 8, 2001;
citing Heirs of Severa P. Gregorio v. CA, 360 Phil. 753, 764, December 29,
1998.

[87]

Valencia v. Rehabilitation Finance Corp., supra, p. 450.

[88]

Mijares v. CA, supra, p. 286.

[89]

Kalalo v. Luz, supra, p. 162.

384

Republic of the Philippines

Supreme Court
Manila
THIRD DIVISION

PIO MODESTO and CIRILA

RIVERA-MODESTO,
Petitioners,

G.R. No. 189859

Present:
*

NACHURA, J.,
versus BRION, Acting Chairperson,
VILLARAMA, JR.,
*
MENDOZA, and
CARLOS URBINA, substituted by SERENO, JJ.
the heirs of OLYMPIA MIGUEL
VDA. DE URBINA (Surviving
Promulgated:
Spouse) and children, namely:
October 18, 2010
ESCOLASTICA M. URBINA, ET
AL.,
Respondents.
x----------------------------------------------------------------------------------------x
*

RESOLUTION
BRION, J.:
We resolve the motion for reconsideration filed by petitioners Pio Modesto
and Cirila Rivera Modesto (Modestos or petitioners) dated March 1, 2010,
[1]
seeking to reverse our January 11, 2010 Resolution, which denied their petition
for review on certiorari for lack of merit.[2]

FACTUAL ANTECEDENTS
385

Civil Case No. 53483

This case stems from a complaint for recovery of possession filed by
respondent Carlos Urbina (Urbina) against the petitioners with the Regional Trial
Court of Pasig (RTC), docketed as Civil Case No. 53483.
In his complaint, Urbina alleged that he is the owner of a parcel of land
situated at Lower Bicutan, Taguig, designated as Lot 56, PLS 272. According to
Urbina, the Modestos, through stealth, scheme, and machination, were able to
occupy a portion of this property, designated as Lot 356, PLS 272. Thereafter, the
Modestos negotiated with Urbina for the sale of this lot. However, before the
parties could finalize the sale, the Modestos allegedly cancelled the transaction and
began claiming ownership over the lot. Urbina made several demands on the
Modestos to vacate the property, the last of which was through a demand letter sent
on July 22, 1983. When the Modestos still refused to vacate, Urbina filed the
present action against them.
In their answer, the Modestos claimed that Urbina could not be the lawful
owner of the property because it was still government property, being a part of the
Fort Bonifacio Military Reservation.
After the resolution of various procedural issues, [3] the RTC of Pasig City
rendered a decision in favor of Urbina on April 24, 2000, ordering the petitioners
to immediately vacate and surrender the lot to Urbina and to pay him P200.00
monthly as compensation for the use of the property from July 22, 1983 until they
finally vacate.[4]
The RTC noted that the petitioners recognized Urbinas possessory rights
over the property when they entered into a negotiated contract of sale with him for
the property. Thus, the Modestos were estopped from subsequently assailing or
disclaiming Urbinas possessory rights over this lot.
The petitioners appealed this decision with the Court of Appeals (CA).
LMB Conflict No. 110
386

Urbinas claim of ownership over Lot 56 is based primarily on his Miscellaneous

Sales Application No. (III-1) 460 (Miscellaneous Sales Application), which he filed
on July 21, 1966.[5]
While Urbinas accion publiciana complaint was pending before the RTC,
the Modestos filed a letter-protest against Urbinas Miscellaneous Sales Application
with the Land Management Bureau (LMB) on January 29, 1993, claiming that: (a)
they are the owners of Lot 356, PLS 272;[6] (b) they have been occupying this lot
for almost 33 years; and (c) their house is constructed on this lot.
The Modestos also alleged that they filed an unnumbered sales application
for Lot 356 with the LMB, based on their actual occupancy of the property,
pursuant to Proclamations 2476 and 172, on February 10, 1993.
On January 31, 2008, the LMB denied with finality the Modestos unnumbered
sales application/protest against Urbinas application, in turn upholding
Urbinas Miscellaneous Sales Application.
Refusing to give up, the Modestos filed a motion for reconsideration. They
also filed an Insular Government Patent Sales Application over Lot 356 on January
27, 2009.[7]
THE COURT OF APPEALS DECISION
The CA affirmed in toto the RTC decision in Civil Case No. 53483 on
January 26, 2009.[8] The CA agreed with the RTCs observation that the Modestos
were estopped from challenging Urbinas right to possess the property after they
acknowledged this right when they entered into the negotiated contract of sale. The
CA also gave credence to the January 31, 2008 LMB order in LMB Conflict No.
110, ruling that this LMB order bolstered Urbinas possessory rights over the
subject property.
At the time the CA decision was issued, respondent Carlos Urbina had
already passed away and had been substituted by his surviving heirs, his spouse,
387

Olympia Miguel Vda. de Urbina, and his children, Escolastica, Cecilia, Efren,
Manolito, and Purificacion, all surnamed Urbina (respondents).
THE PETITION
The petitioners subsequently filed a petition for review on certiorari with
this Court, asserting that the CA committed reversible error in finding that Urbina
had possessory rights over the property. The Modestos mainly argued that at the
time Urbina filed his MSA and acquired tax declarations over the subject
property, the property was still government property, being part of a military
reservation. The property was thus not alienable and disposable, and could not
legally be possessed by a private individual. Accordingly, Urbina could not use the
MSA and the tax declarations as proof of a better right to possess the property as
against the Modestos.
The Modestos further claimed that the CA committed grievous error when it held
that they were estopped from challenging Urbinas right to possess the subject
property. While they admitted to negotiating with Urbina for the sale of the
property, they alleged that they did so based on Urbinas misrepresentation that he
had a legal claim of ownership over the property. Since their offer to buy the
property from Urbina was based on his false assertions, the principle of
estoppel cannot apply.
Additionally, the Modestos alleged that since the property is covered by
Proclamation No. 172 and Memorandum Order No. 119, the lower courts should
have given due consideration to the primary and exclusive jurisdiction of the
Director of Lands (of the Bureau of Lands, now Director of the Land Management
Bureau) over these parcels of public lands.
Lastly, the Modestos questioned Urbinas qualifications to possess the property,
claiming that Urbina was not in actual, adverse, public and continuous possession
of the property. According to the Modestos, from the time that Urbina filed his
Miscellaneous Sales Application in 1966 until the present, Urbina was a resident of
Makati City, and did not actually occupy the property.

388

In our Order dated January 11, 2010, we denied the Modestos petition for failing to
sufficiently show any reversible error in the assailed CA decision.

THE MOTION FOR RECONSIDERATION

On March 3, 2010, the Modestos filed their motion for reconsideration, raising
essentially the same grounds already brought up in their petition for review
on certiorari.
Notably, the Modestos attached LMB Order dated February 19, 2010
(February 19, 2010 LMB Order), which resolved their motion for reconsideration
of the LMBs January 31, 2008 order in LMB Conflict No. 110. This Order held
that the subject property had indeed been a part of the Fort Bonifacio Military
Reservation, and only became alienable and disposable after October 16, 1987.
Thus, Urbinas Miscellaneous Sales Application over the property was improper
and could not be the source of possessory rights over the property.
The order also noted that Urbina failed to comply with the requirements of
an applicant for ownership of the property, as set forth in Memorandum No. 119,
the implementing guidelines of Proclamation No. 172.
Responding to this motion, the respondents, in their Comment dated May 31, 2010,
reiterated that the petitioners are estopped from assailing Urbinas possessory rights
over the property after they entered into a negotiated sales contract with him over
the subject property. They also accused the Modestos of employing dilatory tactics
in filing the present motion.
THE RULING
We GRANT the motion for reconsideration.

Procedural issue
389

An accion publiciana is an ordinary civil proceeding to determine the better

right of possession of realty independently of title. [9] Accion publiciana is also used
to refer to an ejectment suit where the cause of dispossession is not among the
grounds for forcible entry and unlawful detainer, or when possession has been lost
for more than one year and can no longer be maintained under Rule 70 of the Rules
of Court. The objective of a plaintiff in accion publiciana is to recover possession
only, not ownership.[10]
In asking us to determine which of the parties has a better right to possess
the property, we are asked to resolve a factual issue, involving as it does the
weighing and evaluation of the evidence presented by the parties in the courts
below. Generally, such an exercise is not appropriate in a petition for review
on certiorari under Rule 45 of the Rules of Court, which seeks to resolve only
questions of law. Moreover, the factual findings of the CA, when supported by
substantial evidence, are conclusive and binding on the parties and are not
reviewable by this Court, unless the case falls under any of the following
recognized exceptions:
(1) When the conclusion is a finding grounded entirely on speculation,
surmises and conjectures;
(2) When the inference made is manifestly mistaken, absurd or impossible;
(3) Where there is a grave abuse of discretion;
(4) When the judgment is based on a misapprehension of facts;
(5) When the findings of fact are conflicting;
(6) When the Court of Appeals, in making its findings, went beyond the
issues of the case and the same is contrary to the admissions of both
appellant and appellee;
(7) When the findings are contrary to those of the trial court;
(8) When the findings of fact are conclusions without citation of specific
evidence on which they are based;
(9) When the facts set forth in the petition as well as in the petitioners' main
and reply briefs are not disputed by the respondents; and
(10) When the findings of fact of the Court of Appeals are premised on the
supposed absence of evidence and contradicted by the evidence on
record.[11]
390

Since the CA affirmed the factual findings of the RTC, we would normally
be precluded from re-examining the factual circumstances of this case. However, it
appears that the RTC and the CA, in concluding that Urbina has the right to
lawfully eject the Modestos from the lot in question, have greatly misapprehended
the facts of this case.
In finding for Urbina, both the RTC and the CA mainly relied on the
principle of estoppel, and focused on the Modestos admission that they entered into
a negotiated contract of sale with Urbina. In the process, they injudiciously ignored
the other material issues that the Modestos raised regarding the validity of Urbinas
possession of the property, specifically the Modestos allegation that at the time
Urbina began staking his claim over the property, it was still government land.
This error on the part of the lower courts is made more evident when we take
into account an intervening event which significantly affects the resolution of this
case the issuance by the LMB of its order dated February 19, 2010, which
expressly stated that Urbina did not acquire any possessory rights over the lot. For
these reasons, we find the review of the evidence on record proper.

Jurisdiction of the Court

The authority of the courts to resolve and settle questions relating to the
possession of property has long been settled. [12] This authority continues, even
when the land in question is public land. As we explained in Solis v. Intermediate
Appellate Court:[13]
We hold that the power and authority given to the Director
of Lands to alienate and dispose of public lands does not divest the
regular courts of their jurisdiction over possessory actions
instituted by occupants or applicants against others to protect
their respective possessions and occupations. While the jurisdiction
of the Bureau of Lands [now the Land Management Bureau] is
confined to the determination of the respective rights of rival
claimants to public lands or to cases which involve disposition of
391

public lands, the power to determine who has the actual, physical
possession or occupation or the better right of possession over public
lands remains with the courts.
The rationale is evident. The Bureau of Lands does not have the
wherewithal to police public lands. Neither does it have the means to
prevent disorders or breaches of peace among the occupants. Its
power is clearly limited to disposition and alienation and while it may
decide disputes over possession, this is but in aid of making the proper
awards. The ultimate power to resolve conflicts of possession is
recognized to be within the legal competence of the civil courts
and its purpose is to extend protection to the actual possessors
and occupants with a view to quell social unrest.
Consequently, while we leave it to the LMB to determine the issue of who
among the parties should be awarded the title to the subject property, there is no
question that we have sufficient authority to resolve which of the parties is entitled
to rightful possession.
On the issue of possessory rights
Prefatorily, we observe that the subject property has not yet been titled, nor
has it been the subject of a validly issued patent by the LMB. Therefore, the land
remains part of the public domain, and neither Urbina nor the Modestos can legally
claim ownership over it. This does not mean, however, that neither of the parties
have the right to possess the property.
Urbina alleged that he is the rightful possessor of the property since he has a
pending Miscellaneous Sales Application, as well as tax declarations over the
property. He also relied, to support his claim of a better right to possess the
property, on the admission on the part of the Modestos that they negotiated with
him for the sale of the lot in question.
On the other hand, the Modestos anchored their right to possess the same on
their actual possession of the property. They also questioned the legality of
Urbinas Miscellaneous Sales Application, and his tax declarations over the
property, arguing that since these were obtained when the land was still not
alienable and disposable, they could not be the source of any legal rights.
392

After reviewing the records of this case, we find the reasoning of the Modestos to
be more in accord with applicable laws and jurisprudence.
The February 19, 2010 LMB Order
Factual findings of administrative agencies are generally respected and even
accorded finality because of the special knowledge and expertise gained by these
agencies from handling matters falling under their specialized jurisdiction.
[14]
Given that the LMB is the administrative agency tasked with assisting the
Secretary of the Department of Environment and Natural Resources (DENR) in the
management and disposition of alienable and disposable lands of the public
domain,[15] we defer to its specialized knowledge on these matters. In this regard,
we quote with approval the observations made by the Director of the LMB in the
February 19, 2010 LMB Order:
Movants [the Modestos] have anchored their Motion for
Reconsideration on three (3) assigned errors, to wit:
I.

THIS OFFICE ERRED IN ITS FINDINGS THAT THE

AREA IS NOT COVERED BY PROCLAMATION NO. 172,
AS IMPLEMENTED BY MEMORANDUM ORDER NO. 119;

II.

THIS OFFICE ERRED IN ITS FINDINGS THAT

CARLOS T. URBINA WAS IN ACTUAL, ADVERSE,
PUBLIC AND CONTINUOUS POSSESSION OF THE
PROPERTY IN QUESTION;

III.

THIS OFFICE ERRED IN NOT HOLDING THAT A

NEW SURVEY OF THE AREA IN QUESTION SHOULD BE
DONE AND CONDUCTED TO DETERMINE THE TRUE
BOUNDARIES OF THE PROPERTY IN QUESTION VIS-VIS THE CLAIMS OF EACH PARTY.

In order to clarify the issues raised in the Motion for

Reconsideration, this Office ordered that another ocular inspection
and investigation on the subject premises be conducted by Special
Investigator Danilo Lim. After said investigation, Special Investigator,
393

Danilo Lim, submitted his Report to the Regional Technical Director,

Lands Management Services, thru the Chief, Land Management
Division, DENR-NCR.
In his Report, Special Investigator, Danilo Lim made the
following findings:
The Miscellaneous Sales Application filed by
Carlos Urbina is not appropriate because Lot 356 had
ceased to be public land as it had become part of the
Fort Bonifacio Military Reservation, and hence, no
one can claim possessory rights over the said property
since it is within said Military Reservation. The subject
area which is located in Lower Bicutan, Taguig, only
became alienable and disposable upon the issuance of
Presidential Proclamation No. 172 and its implementing
guidelines Memorandum Order No. 119 on October 16,
1987.
After a judicious evaluation of the arguments raised in the
instant motion, and taking into account the findings and
recommendations of Special Investigator Danilo Lim as contained in
his Report, this Office finds the same to be not entirely without merit.
Anent the first assigned error, Special Investigator Danilo Lim
has found that the area is indeed a part of the Fort Bonifacio
Military Reservation and is covered by Proclamation No. 172 and
Memorandum Order No. 119. Upon a thorough research of the origin
of the subject property, it turned out that the area was originally part
of the vast parcel of land known as Hacienda De Maricaban.
Sometime in 1902, the United States of America purchased said vast
tract of land with an area of Seven Hundred and Twenty Nine and
Fifteenth Hundred (729.15) Hectares and spanning the Municipalities
of Pasig, Taguig, Paranaque and Pasay, from its original owner, Dona
Dolores Pacual Casal Y Ochoa, for the purpose of establishing a US
Military Reservation which they later named Fort William Mc
Kinley. On July 12, 1957, President Carlos P. Garcia
issued Proclamation No. 423, reserving for military purposes, the
parcels of land identified as Parcel No. 2, No. 3 and No. 4, Psu-2031,
on which parcels of land excluding Parcel No. 2, the present Fort
394

Bonifacio was established for the Republic of the Philippines. Parcel

No. 3, Psu-2031 is covered by T.C.T. No. 61524 registered in the
name of the Republic of the Philippines. On October 16, 1987,
President Corazon C. Aquino issued Proclamation No. 172 in order to
exclude from the operation of Proclamation No. 423 which
established Fort Bonifacio, certain portions of land embraced therein
known as Barangays Lower Bicutan, Upper Bicutan, Western Bicutan
and Signal Village, all situated in the Municipality of Taguig, and to
declare the same open for disposition to actual occupants and
qualified applicants under the provisions of Republic Act No. 274 and
Republic Act No. 730 in relation to the Public Land Act as amended;
and under Memorandum Order No. 119 issued by President Corazon
Aquino. In Proclamation No. 172, Lower Bicutan is described as Lot
3 situated in the Municipality of Taguig, M.M., and containing an area
of One Million Eighty Four Thousand Three Hundred Eleven
(1,084,311) sqm more or less or 108.43 hectares.
In view of all the above recitals, it appears that the parcel of land
subject of this case (Lot 356) which is located in Barangay Lower
Bicutan, City of Taguig is covered by Proclamation No. 172 issued
by President Corazon C. Aquino, and hence, the same only became
alienable and disposable to qualified applicants after October 16,
1987, the date of its issuance, contrary to what is believed in the
assailed Order of this Office.
With respect to the second assigned error, the issue can be
resolved by the application of the legal provisions covering the subject
property, which is Proclamation No. 172 and its implementing
guidelines. Under its implementing guidelines, Memorandum No.
119, the following are the qualifications for an applicant to be
qualified to apply for and acquire a lot under Proclamation No. 172,
among others, to wit:
(1) He/She must be a bona fide resident of the proclaimed areas. To
be considered a bona fide resident, the applicant must have the
following qualifications:
a) A Filipino citizen of legal age and/or a head of the family;

395

b) Must have constructed a house in the area proclaimed for

disposition on or before January 6, 1986 and actually
residing therein;
c) Must not own any other residential or commercial lot in
Metro Manila;
d) Must not have been a registered awardee of any lot under
the administration of the NHA, MHS, or any other
government agency, nor the AFP Officers village;
e) Must not be a professional squatter. A professional squatter,
for purposes of this Order, is one who engages in selling lots
in the areas proclaimed for disposition; and
f) Has filed the proper application to purchase.
Based on the Report of Special Investigator Lim and the other
Land Inspectors who investigated this case, namely: Jose P. Antonio
and Jose P. Parayno, it was found that Pio Modesto and his family
are the actual occupants of the area with a residential house and
chapel made of light materials and Pio Modesto and his family are
actually residing in the said residential house. On the other hand, it
was established that Carlos Urbina has been a resident of Pasay
Road or 4929 Pio Del Pilar, Makati City. Applying the
qualifications provided for in Memorandum Order No. 119, we find
that Spouses Modesto are to be qualified to apply for the subject lot as
they have been in occupation thereof and have constructed their
residential house thereon. Hence, they satisfy the requirements in
order to be considered a Bonafide Resident as defined in the
guidelines. As per our records, Spouses Pio and Cirila Modesto have
also filed an unnumbered I.G.P.S.A. Application for the subject lot
on January 27, 2009. Carlos Urbina, however, never constructed
any house on the subject lot and neither did he actually reside
therein. Besides, he already owns a residential lot in Makati
City where he had been residing all this time. Hence, he cannot be
considered a bonafide resident of the subject lot. He likewise failed to
file his I.G.P.S.A application for the lot. Instead, what he had filed on
January 20, 1966 was a Miscellaneous Sales Application. At that time,
however, the area of Barangay Lower Bicutan, where the subject lot is
located, was still part of the Fort Bonifacio Military Reservation, and
the same had not yet been segregated and declared to be alienable and
disposable. Hence, no possessory rights could have been acquired
by his over the subject lot.[16]
396

From this LMB order, we consider the following facts established:

First, the lot in question, situated in Barangay Lower Bicutan, was part of
the Fort Bonifacio Military Reservation, and only became alienable and disposable
after October 16, 1987, pursuant to Proclamation No. 172.This factual finding
finds further support in the testimony, before the RTC, of Jose Exequiel Vale,
Special Investigator and Assisting Hearing Officer of the DENR.[17]
Second, the Modestos are bona fide residents of the lot in question, being the
actual residents of the lot and having built a house and chapel on the property.
Third, the Modestos have a pending Insular Government Patent Sales
Application over the lot in question, filed after the property became alienable and
disposable.
Taking these facts into account, we now make a distinction, based on the
corresponding legal effects, between: (a) possession of the property before October
16, 1987, when the land was still considered inalienable government land, and (b)
possession of the property after October 16, 1987, when the land had already been
declared alienable and disposable.
Possession prior to October 16, 1987
Unless a public land is shown to have been reclassified as alienable or
actually alienated by the State to a private person, that piece of land remains part of
the public domain,[18] and its occupation in the concept of owner, no matter how
long, cannot confer ownership or possessory rights.[19] It is only after the property
has been declared alienable and disposable that private persons can legally
claim possessory rights over it.
Accordingly, even if we recognize that Urbina had been in possession of the
property as early as July 21, 1966, when he filed his Miscellaneous Sales
Application, his occupation was unlawful and could not be the basis of possessory
rights, in keeping with Section 88 of the Public Land Act, that states:
397

Section 88. The tract or tracts of land reserved under the provisions
of section eighty-three shall be non-alienable and shall not be subject
to occupation, entry, sale, lease, or other disposition until again
declared alienable under the provisions of this Act or by proclamation
of the President.
The same holds true for Urbinas tax declarations. Absent any proof that the
property in question had already been declared alienable at the time that Urbina
declared it for tax purposes, his tax declarations over the subject property cannot
be used to support his claim of possession.
Similarly, while the Modestos claim to have been in possession of Lot 356
for almost 33 years,[20] this occupation could not give rise to possessory rights
while the property being occupied remain government land that had not yet been
declared alienable and disposable.
Possession after October 16, 1987
The different land investigators[21] sent by the LMB to survey the subject
property have consistently held that the Modestos are the actual occupants of the
lot in question. This actual occupation is not denied by Urbina. As a matter of fact,
we know from Urbinas final demand letter that the Modestos have been in open
and continuous possession of the property since July 22, 1983. [22] We also consider
established that the Modestos built a house on the subject property, a fact that
Urbina affirmed in his testimony before the RTC. [23] From these circumstances, we
consider as settled the fact that the Modestos were the actual possessors of the
property when it was declared alienable and disposable on October 16, 1987,
and continued to possess the property until the present time.

Furthermore, the Modestos have a valid Insular Government Patent Sales

Application over the property pending with the LMB, which they filed on January
27, 2009.[24] In contrast, Urbina has a Miscellaneous Sales Application filed in
1966, which the LMB considered invalid since it was filed when the property still
formed part of a military reservation.
398

As for the Certification from the City Treasurer of Taguig that the
respondents presented,[25] which certified that Carlos Urbina had paid real estate
taxes on real property describe[d] in the name of Carlos Urbina, with property
located at Lower Bicutan, Taguig City from 2009 and prior years, we note that the
certification contains no description of the property subject of the tax declaration,
leaving us to wonder on the identity of the property covered by the declaration.
In any case, even if we consider this certification as sufficient proof that
Urbina declared the subject property for tax declaration purposes, it must be
stressed that the mere declaration of land for taxation purposes does not
constitute possession thereof nor is it proof of ownership in the absence of the
claimants actual possession.[26]And in light of our categorical finding that the
Modestos actually occupied the property in question from the time that it was
declared alienable and disposable until the present time, the tax declaration fails to
convince us that Urbina has a right to legally possess it.
For these reasons, we find that Urbina utterly failed to prove that he has a
better right to possess the property. Thus, we cannot sustain his complaint for
ejectment against the Modestos and, perforce, must dismiss the same for lack of
merit.

On the finding of estoppel

Lastly, we find the CAs reliance on the principle of estoppel against the Modestos
to be misplaced.
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 on it.[27] This doctrine is based on the grounds of public policy, fair dealing,
good faith and justice, and its purpose is to forbid one to speak against his own act,
representations, or commitments to the injury of one to whom they were directed
and who reasonably relied on it.[28] It bears noting, however, that no estoppel
arises where the representation or conduct of the party sought to be estopped
is due to ignorance founded upon an innocent mistake.[29]
399

Here, the Modestos do not deny that they negotiated with Urbina for the sale
of the subject property. However, because they entered the negotiated sales
contract with Urbina on the mistaken belief, based on Urbinas erroneous assertion,
that he was the lawful owner-possessor of the property in question, we do not
consider them bound by this action. Consequently, the principle of estoppel finds
no application in this case.
WHEREFORE,
premises
considered,
we GRANT the
motion
and REINSTATE the petition. Consequently, we REVERSE and SET ASIDE the
Decision dated January 26, 2009 and Resolution dated October 5, 2009 of the
Court of Appeals in CA-G.R. CV No. 68007. We DISMISS the complaint for
Recovery of Possession filed by Carlos T. Urbina for lack of merit.

SO ORDERED.
ARTURO D. BRION
Associate Justice
WE CONCUR:

ANTONIO EDUARDO B. NACHURA

Associate Justice

MARTIN S. VILLARAMA, JR.

Associate Justice

JOSE CATRAL MENDOZA

Associate Justice

400

MARIA LOURDES P.A. SERENO

Associate Justice

ATTESTATION
I attest that the conclusions in the above Resolution had been reached in
consultation before the case was assigned to the writer of the opinion of the Courts
Division.

ARTURO D. BRION
Associate Justice
Acting Chairperson

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, and the Division
Acting Chairpersons Attestation, it is hereby certified that the conclusions in the
above Resolution had been reached in consultation before the case was assigned to
the writer of the opinion of the Courts Division.

RENATO C. CORONA
Chief Justice

401

Designated Additional Member of the Third Division, per Special Order No. 907
dated October 13, 2010.
*
Designated Acting Chairperson of the Third Division, per Special Order No. 906
dated October 13, 2010.
*
Designated Additional Member of the Third Division, per Special Order No. 911
dated October 15, 2010.
[1]
Rollo, pp. 97-118.
[2]
Id. at 95.
[3]
On February 17, 1989, the RTC issued a ruling based solely on the pleadings in
favor of Urbina, and ordered the Modestos to vacate the lot. The RTC also
ordered the Modestos to pay Urbina the amount of P200.00 a month as
reasonable rental from the time of their occupation in July 1983 until they finally
vacated the premises, and to pay P3,000.00 as attorneys fees.
On appeal, the CA set aside the RTC judgment on the pleadings, and ordered a
remand of the case to the lower court for further proceedings or trial on the
merits, as the case may be.
After conducting trial on the merits, the RTC rendered a decision dated March 4,
1996 which dismissed Urbinas complaint without prejudice on the ground that
the proper government office in charge of the Fort Bonifacio Military
Reservation, being an indispensable party, should be impleaded under Section 7,
Rule 3 of the Rules of Court.
Urbina moved for reconsideration, which the RTC thereafter granted in its Order
dated May 21, 1996. In the same order, it ordered Urbina to include Fort
Bonifacio Military Reservation in its complaint. Urbina then filed an amended
complaint, impleading the Bases Conversion Development Authority as party
defendant. The RTC admitted the amended complaint. The parties, however,
subsequently agreed to drop the Bases Conversion and Development Authority as
party defendant since the assailed lot is no longer within the supervision of the
BCDA but within the jurisdiction of the Bureau of Lands. Id. at 63-65.
[4]
Rollo, pp. 62-69.
[5]
Id. at 65.
[6]
The portion of Lot 56 that the Modestos were occupying.
[7]
Rollo, p. 122.
[8]
Penned by Associate Justice Arturo G. Tayag, with the concurrence of Presiding
Justice Conrado M. Vasquez, Jr., and Associate Justice Hakim S.
Abdulwahid. Id. at 45-60.
[9]
Bejar v. Caluag, G.R. No. 171277, February 17, 2007, 516 SCRA 84,
90; Sps. Cruz v. Torres, 374 Phil. 529, 533 (1999); Bishop of Cebu v. Mangaron,
6 Phil. 286, 291 (1906); Ledesma v. Marcos, 9 Phil. 618, 620 (1908).
402

[10]

Spouses Padilla v. Velasco, G.R. No. 169956, January 19, 2009, 576 SCRA 219.
Ontimare, Jr. v. Elep, G.R. No. 159224, January 20, 2006, 479 SCRA 257, 265.
[12]
See Omandam v. Court of Appeals, G.R. No. 128750, January 18, 2001, 349
SCRA 483; Heirs of Sabanpan v. Comorposa, G.R. No. 152807, August 12,
2003, 408 SCRA 692; City of Baguio v. Nino, G.R. No. 161811, April 12, 2006,
487 SCRA 216; Estrella v. Robles, Jr., G.R. No. 171029, November 22, 2007,
538 SCRA 60.
[13]
G.R. No. 72486, June 19, 1991, 198 SCRA 267.
[14]
Lim v. Commission on Audit, G.R. No. 130325, March 11, 2003, citing Mapa v.
Arroyo, 175 SCRA 76, 81 (1989).
[15]
Section 14, Executive Order No. 192, provides:
There is hereby created the Lands Management Bureau which shall absorb
functions and powers of the Bureau of Lands except those line functions and
powers which are transferred to the regional field office. The Lands Management
Bureau to be headed by a Director and assisted by an Assistant Director shall
advise the Secretary on matters pertaining to rational land classification
management and disposition and shall have the following functions, but not
limited to:
a. Recommend policies and programs for the efficient and effective
administration, surveys, management and disposition of alienable and
disposable lands of the public domain and other lands outside the
responsibilities of other government agencies; such as reclaimed areas
and other areas not needed for or are not being utilized for the
purposes for which they have been established;
b. Advise the Regional Offices on the efficient and effective implementation
of policies, programs and projects for more effective public lands
management;
c. Assist in the monitoring and evaluation of land surveys,
management and disposition of lands to ensure efficiency and
effectiveness thereof;
d. Issue standards, guidelines, regulations and orders to enforce policies for
the maximization of land use and development;
e. Develop operating standards and procedure to enhance the Bureau's
objectives and functions;
f. Assist the Secretary as Executive Officer charged with carrying out
the provisions of the Public Land Act [C.A. 141, as amended], who
shall have direct executive control of the survey, classification, lease,
sale, or any other forms of concessions or disposition and
management of the lands of the public domain; and
[11]

403

g. Perform other functions as may be assigned by the Secretary and/or

provided by law.
[16]
Rollo, pp. 120-122.
[17]
Id. at 64.
[18]
Seville v. National Development Company, G.R. No. 129401, February 2, 2001,
351 SCRA 112.
[19]
Spouses de Ocampo v. Arlos, G.R. No.135527, October 19, 2000, 343 SCRA
716.
[20]
Counted from January 29, 1993, when the Modestos filed their protest to
Urbinas miscellaneous sales application in LMB Conflict No. 110.
[21]
Special Investigator Danilo Lim, Land Inspectors Jose P. Antonio and Jose P.
Parayno.
[22]
Rollo, p. 62.
[23]
Id. at 63.
[24]
Id. at 122.
[25]
Attached to respondent Urbinas Comment dated May 31, 2010; id. at 140.
[26]
See de Luna vs. Court of Appeals, G.R. No. 94490, August 6, 1992, 212 SCRA
276.
[27]
CIVIL CODE, Article 1431.
[28]
Rockland Construction Company v. Mid-Pasig Land Development
Corporation, G.R. No. 164587, February 04, 2008, citing Philippine National
Bank v. Court of Appeals, Nos. L-30831 & L-31176, November 21, 1979, 94
SCRA 357, 368.
[29]
Ramiro v. Grano, 54 Phil. 744 (1930), citing 21 C.J., 1125, 1126.

404

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 154878

March 16, 2007

CAROLYN M. GARCIA, Petitioner,

vs.
RICA MARIE S. THIO, Respondent.
DECISION
CORONA, J.:
Assailed in this petition for review on certiorari1 are the June 19, 2002
decision2 and August 20, 2002 resolution3 of the Court of Appeals (CA) in CAG.R. CV No. 56577 which set aside the February 28, 1997 decision of the Regional
Trial Court (RTC) of Makati City, Branch 58.
Sometime in February 1995, respondent Rica Marie S. Thio received from
petitioner Carolyn M. Garcia a crossed check4 dated February 24, 1995 in the
amount of US$100,000 payable to the order of a certain Marilou
Santiago.5Thereafter, petitioner received from respondent every month
(specifically, on March 24, April 26, June 26 and July 26, all in 1995) the amount
of US$3,0006 and P76,5007 on July 26,8 August 26, September 26 and October 26,
1995.
In June 1995, respondent received from petitioner another crossed check9 dated
June 29, 1995 in the amount of P500,000, also payable to the order of Marilou
Santiago.10 Consequently, petitioner received from respondent the amount
of P20,000 every month on August 5, September 5, October 5 and November 5,
1995.11
According to petitioner, respondent failed to pay the principal amounts of the loans
(US$100,000 and P500,000) when they fell due. Thus, on February 22, 1996,
405

petitioner filed a complaint for sum of money and damages in the RTC of Makati
City, Branch 58 against respondent, seeking to collect the sums of US$100,000,
with interest thereon at 3% a month from October 26, 1995 and P500,000, with
interest thereon at 4% a month from November 5, 1995, plus attorneys fees and
actual damages.12
Petitioner alleged that on February 24, 1995, respondent borrowed from her the
amount of US$100,000 with interest thereon at the rate of 3% per month, which
loan would mature on October 26, 1995.13 The amount of this loan was covered by
the first check. On June 29, 1995, respondent again borrowed the amount
of P500,000 at an agreed monthly interest of 4%, the maturity date of which was
on November 5, 1995.14 The amount of this loan was covered by the second check.
For both loans, no promissory note was executed since petitioner and respondent
were close friends at the time.15 Respondent paid the stipulated monthly interest for
both loans but on their maturity dates, she failed to pay the principal amounts
despite repeated demands.161awphi1.nt
Respondent denied that she contracted the two loans with petitioner and countered
that it was Marilou Santiago to whom petitioner lent the money. She claimed she
was merely asked by petitioner to give the crossed checks to Santiago.17 She issued
the checks for P76,000 and P20,000 not as payment of interest but to accommodate
petitioners request that respondent use her own checks instead of Santiagos.18
In a decision dated February 28, 1997, the RTC ruled in favor of petitioner.19 It
found that respondent borrowed from petitioner the amounts of US$100,000 with
monthly interest of 3% and P500,000 at a monthly interest of 4%:20
WHEREFORE, finding preponderance of evidence to sustain the instant
complaint, judgment is hereby rendered in favor of [petitioner], sentencing
[respondent] to pay the former the amount of:
1. [US$100,000.00] or its peso equivalent with interest thereon at 3% per
month from October 26, 1995 until fully paid;
2. P500,000.00 with interest thereon at 4% per month from November 5,
1995 until fully paid.
406

3. P100,000.00 as and for attorneys fees; and

4. P50,000.00 as and for actual damages.
For lack of merit, [respondents] counterclaim is perforce dismissed.
With costs against [respondent].
IT IS SO ORDERED.21
On appeal, the CA reversed the decision of the RTC and ruled that there was no
contract of loan between the parties:
A perusal of the record of the case shows that [petitioner] failed to substantiate her
claim that [respondent] indeed borrowed money from her. There is nothing in the
record that shows that [respondent] received money from [petitioner]. What is
evident is the fact that [respondent] received a MetroBank [crossed] check dated
February 24, 1995 in the sum of US$100,000.00, payable to the order of Marilou
Santiago and a CityTrust [crossed] check dated June 29, 1995 in the amount
of P500,000.00, again payable to the order of Marilou Santiago, both of which
were issued by [petitioner]. The checks received by [respondent], being crossed,
may not be encashed but only deposited in the bank by the payee thereof, that
is, by Marilou Santiago herself.
It must be noted that crossing a check has the following effects: (a) the check may
not be encashed but only deposited in the bank; (b) the check may be negotiated
only onceto one who has an account with the bank; (c) and the act of crossing
the check serves as warning to the holder that the check has been issued for a
definite purpose so that he must inquire if he has received the check pursuant to
that purpose, otherwise, he is not a holder in due course.
Consequently, the receipt of the [crossed] check by [respondent] is not the issuance
and delivery to the payee in contemplation of law since the latter is not the person
who could take the checks as a holder, i.e., as a payee or indorsee thereof, with
intent to transfer title thereto. Neither could she be deemed as an agent of Marilou
Santiago with respect to the checks because she was merely facilitating the
transactions between the former and [petitioner].
407

With the foregoing circumstances, it may be fairly inferred that there were really
no contracts of loan that existed between the parties. x x x (emphasis supplied)22
Hence this petition.23
As a rule, only questions of law may be raised in a petition for review on certiorari
under Rule 45 of the Rules of Court. However, this case falls under one of the
exceptions, i.e., when the factual findings of the CA (which held that there
were no contracts of loan between petitioner and respondent) and the RTC (which
held that there werecontracts of loan) are contradictory.24
The petition is impressed with merit.
A loan is a real contract, not consensual, and as such is perfected only upon the
delivery of the object of the contract.25 This is evident in Art. 1934 of the Civil
Code which provides:
An accepted promise to deliver something by way of commodatum or simple loan
is binding upon the parties, but the commodatum or simple loan itself shall not be
perfected until the delivery of the object of the contract. (Emphasis supplied)
Upon delivery of the object of the contract of loan (in this case the money received
by the debtor when the checks were encashed) the debtor acquires ownership of
such money or loan proceeds and is bound to pay the creditor an equal amount.26
It is undisputed that the checks were delivered to respondent. However, these
checks were crossed and payable not to the order of respondent but to the order of
a certain Marilou Santiago. Thus the main question to be answered is: who
borrowed money from petitioner respondent or Santiago?
Petitioner insists that it was upon respondents instruction that both checks were
made payable to Santiago.27 She maintains that it was also upon respondents
instruction that both checks were delivered to her (respondent) so that she could, in
turn, deliver the same to Santiago.28 Furthermore, she argues that once respondent
received the checks, the latter had possession and control of them such that she had
the choice to either forward them to Santiago (who was already her debtor), to
retain them or to return them to petitioner.29
408

We agree with petitioner. Delivery is the act by which the res or substance thereof
is placed within the actual or constructive possession or control of
another.30 Although respondent did not physically receive the proceeds of the
checks, these instruments were placed in her control and possession under an
arrangement whereby she actually re-lent the amounts to Santiago.
Several factors support this conclusion.
First, respondent admitted that petitioner did not personally know Santiago.31 It
was highly improbable that petitioner would grant two loans to a complete stranger
without requiring as much as promissory notes or any written acknowledgment of
the debt considering that the amounts involved were quite big. Respondent, on the
other hand, already had transactions with Santiago at that time.32
Second, Leticia Ruiz, a friend of both petitioner and respondent (and whose name
appeared in both parties list of witnesses) testified that respondents plan was for
petitioner to lend her money at a monthly interest rate of 3%, after which
respondent would lend the same amount to Santiago at a higher rate of 5% and
realize a profit of 2%.33 This explained why respondent instructed petitioner to
make the checks payable to Santiago. Respondent has not shown any reason why
Ruiz testimony should not be believed.
Third, for the US$100,000 loan, respondent admitted issuing her own checks in the
amount of P76,000 each (peso equivalent of US$3,000) for eight months to cover
the monthly interest. For the P500,000 loan, she also issued her own checks in the
amount of P20,000 each for four months.34 According to respondent, she merely
accommodated petitioners request for her to issue her own checks to cover the
interest payments since petitioner was not personally acquainted with
Santiago.35 She claimed, however, that Santiago would replace the checks with
cash.36Her explanation is simply incredible. It is difficult to believe that respondent
would put herself in a position where she would be compelled to pay interest, from
her own funds, for loans she allegedly did not contract. We declared in one case
that:
In the assessment of the testimonies of witnesses, this Court is guided by the rule
that for evidence to be believed, it must not only proceed from the mouth of a
409

credible witness, but must be credible in itself such as the common experience of
mankind can approve as probable under the circumstances. We have no test of the
truth of human testimony except its conformity to our knowledge, observation, and
experience. Whatever is repugnant to these belongs to the miraculous, and is
outside of juridical cognizance.37
Fourth, in the petition for insolvency sworn to and filed by Santiago, it was
respondent, not petitioner, who was listed as one of her (Santiagos) creditors.38
Last, respondent inexplicably never presented Santiago as a witness to corroborate
her story.39 The presumption is that "evidence willfully suppressed would be
adverse if produced."40 Respondent was not able to overturn this presumption.
We hold that the CA committed reversible error when it ruled that respondent did
not borrow the amounts of US$100,000 and P500,000 from petitioner. We instead
agree with the ruling of the RTC making respondent liable for the principal
amounts of the loans.
We do not, however, agree that respondent is liable for the 3% and 4% monthly
interest for the US$100,000 and P500,000 loans respectively. There was no written
proof of the interest payable except for the verbal agreement that the loans would
earn 3% and 4% interest per month. Article 1956 of the Civil Code provides that
"[n]o interest shall be due unless it has been expressly stipulated in writing."
Be that as it may, while there can be no stipulated interest, there can be legal
interest pursuant to Article 2209 of the Civil Code. It is well-settled that:
When the obligation is breached, and it consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the interest due should be that which may
have been stipulated in writing. Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In the absence of stipulation, the
rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169
of the Civil Code.41

410

Hence, respondent is liable for the payment of legal interest per annum to be
computed from November 21, 1995, the date when she received petitioners
demand letter.42 From the finality of the decision until it is fully paid, the amount
due shall earn interest at 12% per annum, the interim period being deemed
equivalent to a forbearance of credit.43
The award of actual damages in the amount of P50,000 and P100,000 attorneys
fees is deleted since the RTC decision did not explain the factual bases for these
damages.
WHEREFORE, the petition is hereby GRANTED and the June 19, 2002 decision
and August 20, 2002 resolution of the Court of Appeals in CA-G.R. CV No. 56577
are REVERSED and SET ASIDE. The February 28, 1997 decision of the
Regional Trial Court in Civil Case No. 96-266 is AFFIRMED with
the MODIFICATION that respondent is directed to pay petitioner the amounts of
US$100,000 and P500,000 at 12% per annum interest from November 21, 1995
until the finality of the decision. The total amount due as of the date of finality will
earn interest of 12% perannum until fully paid. The award of actual damages and
attorneys fees is deleted.
SO ORDERED.
RENATO C. CORONA
Associate Justice
WE CONCUR:
REYNATO S. PUNO
Chief Justice
Chairperson
ANGELINA SANDOVALGUTIERREZ
Associate Justice

ADOLFO S. AZCUNA
Asscociate Justice

CANCIO C. GARCIA
Associate Justice
411

C E R T I F I C AT I O N
Pursuant to Section 13, Article VIII of the Constitution, I certify that the
conclusions in the above decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Courts Division.
REYNATO S. PUNO
Chief Justice

Footnotes
1

Under Rule 45 of the Rules of Court.

Penned by former Associate Justice Eubulo G. Verzola (deceased) and

concurred in by Associate Justices Bernardo P. Abesamis (retired) and
Josefina Guevara-Salonga of the Third Division of the Court of
Appeals; rollo, pp. 98-102.
3

Id., pp. 104-105.

This was Metrobank check no. 26910; id., pp. 70, 224 and 368.

Id., pp. 60, 100-101, 224.

Id., pp. 60-61. According to respondent, she originally issued four

postdated checks each in the amount of P76,000 on the same dates
mentioned but these were not encashed and instead each check was replaced
by Santiago with US$3,000 in cash given by respondent to petitioner; id., p.
224.
7

This was the peso equivalent of US$3,000 computed at the exchange rate
of P25.50 to $1.00; id., pp. 17 and 88. These postdated checks were
deposited on their respective due dates and honored by the drawee bank; id.,
p. 225.
412

According to respondent, this check was replaced by Santiago with cash in

the amount of US$3,000.
9

This was City Trust check no. 467257; rollo, pp. 90 and 327.

10

Id., pp. 60, 101 and 225.

11

Id., p. 109.

12

Docketed as Civil Case No. 96-266; rollo, pp. 15, 60 and 364.

13

Id., p. 109.

14

Id., p. 110.

15

Id., p. 16.

16

Id., p. 110.

17

Id., p. 224.

18

Id.

19

Id., pp. 60-95.

20

Id., pp. 79 and 89.

21

Id., pp. 94-95.

22

Id., pp. 100-101, citation omitted.

23

The issues submitted for resolution are the following:

(A) Is actual and physical delivery of the money loaned directly from
the lender to the borrower the only way to perfect a contract of loan?
(B) Does the respondents admission that she paid interests to the
petitioner on the amounts represented by the two checks given to her
413

by said petitioner render said respondent in estoppel to question that

there was no loan transaction between her and the petitioner?
(C) Is respondents written manifestation in the trial court, through
counsel, that she interposes no objection to the admission of
petitioners documentary exhibits for the multiple purposes specified
in the latters Formal Offer of Documentary Exhibits a judicial
admission governed by Rule 129, Section 4, Rules of Court?
(D) Is this Honorable Court bound by the conclusions of fact relied
upon by the [CA] in issuing its disputed Decision?
(E) Have the [RTCs] findings of fact on the lone issue on which
respondent litigated in the [RTC], viz.existence of privity of contract
between petitioner and respondent, been overturned or set aside by the
[CA]?
(F) May the respondent validly change the theory of her case from one
of privity of contract between her and the petitioner in the [RTC], to
one of not being a holder in due course of the crossed checks payable
to a third party in the [CA] and before this Honorable Court?
(G) Is the petitioners entitlement to interest, despite absence of a
written stipulation on the payment thereof, justified?
(H) Is the deletion by the [CA] of the [RTCs] award of attorneys fees
and actual damages in favor pf the petitioner justified? Id., pp. 401402.
24

Philippine National Bank v. Andrada Electric & Engineering Co., G.R.

No. 142936, 17 April 2002, 381 SCRA 244, 253, citing Fuentes v. CA, 335
Phil. 1163, 1167-1169 (1997).
25

Naguiat v. Court of Appeals, G.R. No. 118375, 3 October 2003, 412

SCRA 591, 597.
26

Article 1953 of the Civil Code states:

414

A person who receives a loan of money or any other fungible thing

acquires the ownership thereof, and is bound to pay to the creditor an
equal amount of the same kind and quality.
27

Rollo, p. 39.

28

Id.

29

Id., pp. 39-40.

30

Buenaflor v. Court of Appeals, G.R. No. 142021, 29 November 2000, 346

SCRA 563, 569, citing Black's Law Dictionary, 5th ed.
31

Rollo, p. 64.

32

Id., p. 70.

33

Id., pp. 76 and 85.

34

Id., pp. 16-17, 224-225, 411.

35

Id., p. 224.

36

Id., p. 70.

37

People v. Mala, G.R. No. 152351, 18 September 2003, 411 SCRA 327,
337, citing People v. Dayag, 155 Phil. 421, 431 (1974).
38

Rollo, pp. 88 and 94.

39

Id., p. 93.

40

Sec. 3 (e), Rule 131, Rules of Court.

41

Eusebio-Calderon v. People, G.R. No. 158495, 21 October 2004, 441

SCRA 137, 148-149, citing Eastern Shipping Lines, Inc. v. Court of Appeals,
G.R. No. 97412, 12 July 1994, 234 SCRA 78, 95; Cabrera v. People, G.R.
No. 150618, 24 July 2003, 407 SCRA 247, 261.
415

42

Rollo, p. 65.

43

Cabrera v. People, supra.

416

THIRD DIVISION
[G.R. No. 160531. August 30, 2005]
L & L LAWRENCE FOOTWEAR, INC., SAE CHAE LEE and JOHN
DOE, petitioners, vs.
PCI
LEASING
AND
FINANCE
CORPORATION, respondent.
DECISION
PANGANIBAN, J.:
Under a financial leasing agreement, a finance company purchases, on behalf
of or at the instance of the lessee, the equipment that the latter is interested to buy
but has insufficient funds for. Simultaneous with the purchase, the finance
company then leases the equipment to the lessee in consideration of the periodic
payment of a fixed amount of rental. Recognized by this Court as fairly common
transactions in the commercial world, such agreements have been accepted as
genuine and legitimate.
The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court,
challenging the August 14, 2003 Decision[2] of the Court of Appeals (CA) in CAGR CV No. 70603. The decretal portion of the assailed Decision reads:
WHEREFORE, premises considered, the decision and order appealed from are
hereby AFFIRMED in toto and the present appeal is hereby DISMISSED for
utter lack of merit.
The Facts
The undisputed facts are narrated by petitioners as follows:
PCI Leasing and L & L Lawrence entered into several LOAN contracts embodied
in several Memoranda of Agreement and Disclosure Statements from 1994 up to
1997 involving various shoe making equipment. x x x.
417

As a condition for the loan extended by PCI Leasing to L & L, the latter was also
made to enter into several LEASE CONTRACTS embodied in numerous Lease
Schedules whereby the imported shoe making equipment would be considered as
the leased property. Pursuant to the agreement between the parties, L & L gave PCI
Leasing a THIRTY (30%) PERCENT GUARANTY DEPOSIT for ALL the
leased contracts between them in the total sum of US$359,525.90. Furthermore,
PCI Leasing received from L & L a total of US$1,164,380.42 as rental payments
under the numerous Lease Schedules.
Sae Chae Lee, the former President of L & L, was made to sign a x x x Continuing
Guaranty of Lease Obligations dated 16 May 1994 securing the payment of the
obligation of L & L under [a] Lease Agreement dated 13 May 1994.
L & L, by reason of the economic crisis that hit the country coupled with the
cancellation of the contracts with its buyers abroad and its labor problems, failed to
meet its obligations on time. For this reason, L & L tried its best to negotiate with
the PCI Leasing for a possible amicable settlement between the parties.
In the course of the negotiation between the parties, PCI Leasing sent to L & L a
letter dated 05 May 1998, stating that:
Demand is hereby made on you to pay in full the outstanding balance in the
amount of $826,003.27 plus penalty charges amounting to $6,329.05 on or before
May 12, 1998 or to surrender to us the various equipments (please see attached
lists) subject of Lease Schedule
Nos.7760/7935/8081/8196/8312/8405/8451/8474/8593/8609/
8663/9364/9432/9512/9704/9924/10041/10065/10067/10280/10441/10921
xxxxxxxxx
On 16 December 1998, PCI Leasing filed a complaint for recovery of sum of
money and/or personal property with prayer for the issuance of a writ of replevin
against L & L Lawrence Footwear, Inc., Sae Chae Lee and a certain John Doe with
the Regional Trial Court of Quezon City.

418

On 28 January 1999, the x x x [t]rial [c]ourt issued an Order x x x granting the

prayer of PCI Leasing for the issuance of a Writ of Replevin.
The subject leased properties were turned over to PCI Leasing, x x x as shown by
the Sheriffs Reports dated 01 October 1999 and 06 December 1999. x x x.
On 16 February 2000, PCI Leasing filed a motion to declare L & L and Sae Chae
Lee in default for failure to file their Answer.
The x x x [t]rial [c]ourt, in its Order dated 28 February 2000, declared L & L and
Sae Chae Lee in default and allowed PCI Leasing to present its evidence ex-parte.
L & L and Sae Chae Lee x x x filed a Motion to Set Aside Order of Default dated
06 March 2000 x x x.
The x x x [t]rial [c]ourt x x x denied the Motion to Set Aside Order of Default and
ordered the ex-parte presentation of the evidence for PCI Leasing on 10 April
2000.
On 10 April 2000, PCI Leasing presented ex-parte its evidence before a
Commissioner. PCI Leasing presented as its lone witness Ms. Theresa Soriano, an
Account Officer of the said corporation. x x x On the same hearing, the counsel of
PCI Leasing orally offered the documentary exhibits.
x x x [Petitioners] received a copy of the Decision dated 03 July 2000, the
dispositive portion of which reads as follows:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the
[respondent] and against [petitioners] L & L LAWRENCE FOOTWEAR, INC. and
SAE CHAE LEE as follows:
a) to pay [respondent] the amount of P32,909,836.61 representing the outstanding
balance of the obligation as of March 3, 2000 including attorneys fees, legal
expenses and other charges; and

419

b) affirming [respondents] right to the possession of the replevined properties as

well as its entitlement to the possession of other properties subject matter of the
lease agreement.
SO ORDERED
xxxxxxxxx
[After the denial of their Motion for Reconsideration,] L & L and Sae Chae Lee
filed a Notice of Appeal.
The case was elevated to the Honorable Court of Appeals x x x.[3]
Ruling of the Court of Appeals
Sustaining the trial court, the CA found the monetary award to be fully
supported and substantiated by the evidence presented. It noted that the award,
consisting of accrued rentals and penalties as well as the possession of the
properties that were subject of replevin, were all in accord with the provisions of
the Lease Agreement freely entered into by the parties.
Hence, this Petition.[4]
Issues
Petitioners raise the following issues for our consideration:
1. Whether a plaintiff is AUTOMATICALLY ENTITLED to the relief prayed for
in its Complaint, by reason of the declaration in default, WITHOUT regard to the
evidence presented in support of its claim;
2. Whether a corporation can be held in ESTOPPEL by reason of the
representation of its officer; and
3. Whether a surety can be held liable for an obligation that is NOT
SPECIFIED in the surety agreement.[5]
The Courts Ruling
420

The Petition is unmeritorious.

First Issue:
No Automatic Relief
At the outset, the Court stresses that the present Petition for Review was filed
under Rule 45 of the Rules of Court. Here, the Supreme Courts role is limited to
reviewing errors of law allegedly committed by the appellate court. This Court has
pointed out, time and time again, that it is not a trier of facts; and that, save for a
few exceptional instances, its function is not to analyze or weigh all over again the
factual findings of the lower courts.[6]
Although apparently couched in language meant to disguise them as questions
of law, those raised by petitioners are, in reality, questions of fact.
A question of law must not involve an examination of the probative value of
the evidence presented by the litigants. There is a question of law in a given case
when a doubt or difference arises as to what the law is on a certain state of facts.
There is a question of fact when the doubt or difference arises as to the truth or the
falsity of alleged facts.[7] The test of whether the question is one of law or of fact is
whether the issue being raised can be determined without reviewing the evidence,
in which case it is a question of law; otherwise, it is a question of fact.[8]
Questions of fact are not entertained, inter alia, absent any showing that the
factual findings complained of are totally devoid of support in the record or are
glaringly erroneous.[9]
Having been declared in default, petitioners have waived not only their
opportunity to contest the evidence presented by respondent, but also to present
evidence in support of a valid defense. They, however, seek to extricate themselves
by having this Court review the factual findings of the trial court.
Section 3 of Rule 9 of the Rules of Court provides thus:
Section 3. Default; declaration of. - If the defending party fails to answer within
the time therefor, the court shall, upon motion of the claiming party with notice to
421

the defending party, and proof of such failure, declare the defending party in
default. Thereupon the court shall proceed to render judgment granting the
claimant such relief as his pleading may warrant, unless the court in its discretion
requires the claimant to submit evidence. Such reception of evidence may be
delegated to the clerk of court.
It is undisputed that, upon the order of the trial court, respondent presented its
evidence ex parte. Petitioners themselves pointed out that respondent had presented
one witness -- its account officer Theresa M. Soriano -- and then formally offered
its documentary evidence to support its claim. Hence, the contention that it
was automatically granted the relief prayed for in its Complaint deserves scant
consideration. Obviously, the trial court weighed the evidence presented and
applied the relevant law in its judgment.
Second Issue:
No Estoppel
Petitioners emphasize that the account officer of PCI Leasing testified that
respondent had admittedly deducted the proceeds of the sale of the leased
properties from the outstanding obligations. They argue that, by its admission,
respondent recognized that the properties were in fact owned by L & L Lawrence
Corporation. In turn, this fact allegedly proves that the Contract between the
parties was one of loan, not of lease.
This argument is patently without merit. No such inference can be made from
the statements of the witness. On the contrary, her testimony reinforced the fact
that the true intent of the parties was to enter into a contract known as a financial
leasing agreement.
In such an agreement, a finance company purchases on behalf of or at the
instance of the lessee the equipment which the latter is interested to buy but has
insufficient funds for the purpose. The finance company therefore leases the
equipment to the lessee in consideration of the periodic payment by the lessee of a
fixed amount of rental.[10] Recognized by this Court as being fairly common
transactions in the commercial world, agreements such as these have been accepted
422

as genuine and legitimate.[11] In Cebu Contractors Consortium v. CA,[12] the Court

elucidated on the nature of a financial leasing agreement as follows:
A financing lease may be seen to be a contract sui generis, possessing some but not
necessarily all the elements of an ordinary or civil law lease. Thus, legal title to the
equipment leased is lodged in the financial lessor. The financial lessee is entitled to
the possession and use of the leased equipment. At the same time, the financial
lessee is obligated to make periodic payments denominated as lease rentals, which
enable the financial lessor to recover the purchase price of the equipment which
had been paid to the supplier thereof.[13]
Third Issue:
Surety Valid
Petitioner Sae Chae Lee seeks to extricate himself from his obligation as surety
for petitioner company. He insists that the Continuing Guaranty of Lease
Obligation that he signed made reference to a Lease Agreement dated May 13,
1994, while the Agreement in question was notarized on May 27, 1994.
The contention is untenable. Neither the existence and the due execution of the
Continuing Guaranty presented by respondent, nor the allegation that petitioners
had entered into a subsequent Lease Agreement with PCI Leasing and Finance
Corporation, was ever contested. As the CA found, no Lease Agreement between
the parties had been actually executed on May 13, 1994; hence, the Continuing
Guaranty could only have referred to the very same Agreement that was notarized
on May 27, 1994.
There is nothing vague about the terms of the Continuing Guaranty. Petitioner
Sae Chae Lee agreed to be solidarily liable for the obligations incurred by
petitioner company under the Lease Agreement it had entered into with respondent.
Likewise, the terms and conditions of the Lease Agreement are clear and leave no
doubt upon the intention of the parties.

423

Obligations arising from a contract have the force of law between the parties.
Not being contrary to law, morals, good customs, public order or public policy,
the parties to the contract are bound by its terms and conditions.
[14]

WHEREFORE, the Petition is hereby DENIED and

Decision AFFIRMED. Costs against petitioners.

the

assailed

SO ORDERED.
Sandoval-Gutierrez, Corona, Carpio-Morales, and Garcia, JJ., concur.

[1]

Rollo, pp. 3-27.

[2]

Id., pp. 31-37. Ninth Division. Penned by Justice B. A. Adefuin-de la Cruz

(Division chair) and concurred in by Justices Bienvenido L. Reyes and
Arsenio J. Magpale (members).

[3]

Petitioners Memorandum, pp. 5-9; rollo, pp. 106-110.

[4]

The case was deemed submitted for decision on June 4, 2004, upon receipt by
this Court of respondents Memorandum signed by Attys. Peter M. Bantilan
and Armin Noel B. Villamonte. Petitioners Memorandum, signed by Atty.
Edgar Allan C. Estrebillo, was received by the Court on June 3, 2004.

[5]

Petitioners Memorandum, p. 10; rollo, p. 111.

[6]

Barcenas v. Spouses Tomas, GR No. 150321, March 31, 2005; Ceballos v.

Intestate Estate of Emigdio Mercado, 430 SCRA 323, 331, May 28, 2004
(citing Borromeo v. Sun, 375 Phil. 595, October 22, 1999; Go Ong v. CA,
154 SCRA 270, September 24, 1987).

[7]

Barcenas v. Spouses Tomas, supra; Naguiat v. CA, 412 SCRA 591, 596, October
3, 2003.
424

[8]

Philippine Telegraph & Telephone Corporation v. CA, 412 SCRA 263, 272,
September 29, 2003 (citing Goyena v. Ledesma-Gustillo, 395 SCRA 117,
January 14, 2003.)

[9]

Conahap v. Heirs of Regaa, GR No. 152021, May 17, 2005; Yang v. CA, 409
SCRA 159, 167, August 15, 2003.

[10]

Cebu Contractors Consortium v. CA, 407 SCRA 154, 161, July 22, 2003, per
Azcuna, J.

[11]

BA Finance v. CA, 228 SCRA 530, 533, December 16, 1993; Beltran v. PAIC
Finance Corporation, 209 SCRA 105, 116, May 19, 1992.

[12]

Supra.

[13]

Id., p. 159 (citing Beltran v. PAIC Finance Corporation, supra.)

[14]

Article 1159 of the Civil Code.

425

THIRD DIVISION
[G.R. No. 115838. July 18, 2002]
CONSTANTE AMOR DE CASTRO and CORAZON AMOR DE
CASTRO, petitioners, vs. COURT OF APPEALS and FRANCISCO
ARTIGO, respondents.
DECISION
CARPIO, J.:
The Case
Before us is a Petition for Review on Certiorari [1] seeking to annul the Decision
of the Court of Appeals[2] dated May 4, 1994 in CA-G.R. CV No. 37996, which
affirmed in toto the decision[3] of the Regional Trial Court of Quezon City, Branch
80, in Civil Case No. Q-89-2631. The trial court disposed as follows:
WHEREFORE, the Court finds defendants Constante and Corazon Amor de Castro
jointly and solidarily liable to plaintiff the sum of:
a) P303,606.24 representing unpaid commission;
b) P25,000.00 for and by way of moral damages;
c) P45,000.00 for and by way of attorneys fees;
d) To pay the cost of this suit.
Quezon City, Metro Manila, December 20, 1991.
The Antecedent Facts
On May 29, 1989, private respondent Francisco Artigo (Artigo for brevity)
sued petitioners Constante A. De Castro (Constante for brevity) and Corazon A. De
Castro (Corazon for brevity) to collect the unpaid balance of his brokers
426

commission from the De Castros.[4] The Court of Appeals summarized the facts in
this wise:
x x x. Appellants[5] were co-owners of four (4) lots located at EDSA corner New
York and Denver Streets in Cubao, Quezon City. In a letter dated January 24, 1984
(Exhibit A-1, p. 144, Records), appellee[6] was authorized by appellants to act as
real estate broker in the sale of these properties for the amount of P23,000,000.00,
five percent (5%) of which will be given to the agent as commission. It was
appellee who first found Times Transit Corporation, represented by its president
Mr. Rondaris, as prospective buyer which desired to buy two (2) lots only,
specifically lots 14 and 15. Eventually, sometime in May of 1985, the sale of lots
14 and 15 was consummated. Appellee received from appellants P48,893.76 as
commission.
It was then that the rift between the contending parties soon emerged. Appellee
apparently felt short changed because according to him, his total commission
should be P352,500.00 which is five percent (5%) of the agreed price
of P7,050,000.00 paid by Times Transit Corporation to appellants for the two (2)
lots, and that it was he who introduced the buyer to appellants and unceasingly
facilitated the negotiation which ultimately led to the consummation of the
sale.Hence, he sued below to collect the balance of P303,606.24 after having
received P48,893.76 in advance.
On the other hand, appellants completely traverse appellees claims and essentially
argue that appellee is selfishly asking for more than what he truly deserved as
commission to the prejudice of other agents who were more instrumental in the
consummation of the sale. Although appellants readily concede that it was appellee
who first introduced Times Transit Corp. to them, appellee was not designated by
them as their exclusive real estate agent but that in fact there were more or less
eighteen (18) others whose collective efforts in the long run dwarfed those of
appellees, considering that the first negotiation for the sale where appellee took
active participation failed and it was these other agents who successfully brokered
in the second negotiation. But despite this and out of appellants pure liberality,
beneficence and magnanimity, appellee nevertheless was given the largest cut in
the commission (P48,893.76), although on the principle of quantum meruit he
427

would have certainly been entitled to less. So appellee should not have been heard
to complain of getting only a pittance when he actually got the lions share of the
commission and worse, he should not have been allowed to get the entire
commission. Furthermore, the purchase price for the two lots was only P3.6
million as appearing in the deed of sale and not P7.05 million as alleged by
appellee. Thus, even assuming that appellee is entitled to the entire commission, he
would only be getting 5% of the P3.6 million, or P180,000.00.
Ruling of the Court of Appeals
The Court of Appeals affirmed in toto the decision of the trial court.
First. The Court of Appeals found that Constante authorized Artigo to act as
agent in the sale of two lots in Cubao, Quezon City. The handwritten authorization
letter signed by Constante clearly established a contract of agency between
Constante and Artigo. Thus, Artigo sought prospective buyers and found Times
Transit Corporation (Times Transit for brevity). Artigo facilitated the negotiations
which eventually led to the sale of the two lots. Therefore, the Court of Appeals
decided that Artigo is entitled to the 5% commission on the purchase price as
provided in the contract of agency.
Second. The Court of Appeals ruled that Artigos complaint is not dismissible
for failure to implead as indispensable parties the other co-owners of the two
lots. The Court of Appeals explained that it is not necessary to implead the other
co-owners since the action is exclusively based on a contract of agency between
Artigo and Constante.
Third. The Court of Appeals likewise declared that the trial court did not err in
admitting parol evidence to prove the true amount paid by Times Transit to the De
Castros for the two lots. The Court of Appeals ruled that evidence aliunde could be
presented to prove that the actual purchase price was P7.05 million and not P3.6
million as appearing in the deed of sale.Evidence aliunde is admissible considering
that Artigo is not a party, but a mere witness in the deed of sale between the De
Castros and Times Transit. The Court of Appeals explained that, the rule that oral
evidence is inadmissible to vary the terms of written instruments is generally
applied only in suits between parties to the instrument and strangers to the contract
428

are not bound by it. Besides, Artigo was not suing under the deed of sale, but solely
under the contract of agency. Thus, the Court of Appeals upheld the trial courts
finding that the purchase price was P7.05 million and not P3.6 million.
Hence, the instant petition.
The Issues
According to petitioners, the Court of Appeals erred in I. NOT ORDERING THE DISMISSAL OF THE COMPLAINT FOR
FAILURE TO IMPLEAD INDISPENSABLE PARTIES-IN-INTEREST;
II. NOT ORDERING THE DISMISSAL OF THE COMPLAINT ON THE
GROUND THAT ARTIGOS CLAIM HAS BEEN EXTINGUISHED
BY FULL PAYMENT, WAIVER, OR ABANDONMENT;
III. CONSIDERING INCOMPETENT EVIDENCE;
IV. GIVING CREDENCE TO PATENTLY PERJURED TESTIMONY;
V.

SANCTIONING AN AWARD
AND ATTORNEYS FEES;

OF

MORAL

DAMAGES

VI. NOT AWARDING THE DE CASTROS MORAL AND EXEMPLARY

DAMAGES, AND ATTORNEYS FEES.
The Courts Ruling
The petition is bereft of merit.
First Issue: whether the complaint merits dismissal for failure to implead other
co-owners as indispensable parties
The De Castros argue that Artigos complaint should have been dismissed for
failure to implead all the co-owners of the two lots. The De Castros claim that
Artigo always knew that the two lots were co-owned by Constante and Corazon
with their other siblings Jose and Carmela whom Constante merely
429

represented. The De Castros contend that failure to implead such indispensable

parties is fatal to the complaint since Artigo, as agent of all the four co-owners,
would be paid with funds co-owned by the four co-owners.
The De Castros contentions are devoid of legal basis.
An indispensable party is one whose interest will be affected by the courts
action in the litigation, and without whom no final determination of the case can be
had.[7] The joinder of indispensable parties is mandatory and courts cannot proceed
without their presence.[8] Whenever it appears to the court in the course of a
proceeding that an indispensable party has not been joined, it is the duty of the
court to stop the trial and order the inclusion of such party.[9]
However, the rule on mandatory joinder of indispensable parties is not
applicable to the instant case.
There is no dispute that Constante appointed Artigo in a handwritten note dated
January 24, 1984 to sell the properties of the De Castros for P23 million at a 5
percent commission. The authority was on a first come, first serve basis. The
authority reads in full:
24 Jan. 84
To Whom It May Concern:
This is to state that Mr. Francisco Artigo is authorized as our real estate broker in
connection with the sale of our property located at Edsa Corner New York &
Denver, Cubao, Quezon City.
Asking price P23,000,000.00 with
5% commission as agents fee.
C.C. de Castro
owner & representing
co-owners
430

This authority is on a first-come

First serve basis CAC
Constante signed the note as owner and as representative of the other coowners. Under this note, a contract of agency was clearly constituted between
Constante and Artigo. Whether Constante appointed Artigo as agent, in Constantes
individual or representative capacity, or both, the De Castros cannot seek the
dismissal of the case for failure to implead the other co-owners as indispensable
parties. The De Castros admit that the other co-owners are solidarily liable under
the contract of agency,[10] citing Article 1915 of the Civil Code, which reads:
Art. 1915. If two or more persons have appointed an agent for a common
transaction or undertaking, they shall be solidarily liable to the agent for all the
consequences of the agency.
The solidary liability of the four co-owners, however, militates against the De
Castros theory that the other co-owners should be impleaded as indispensable
parties. A noted commentator explained Article 1915 thus
The rule in this article applies even when the appointments were made by the
principals in separate acts, provided that they are for the same transaction. The
solidarity arises from the common interest of the principals, and not from the
act of constituting the agency. By virtue of this solidarity, the agent can
recover from any principal the whole compensation and indemnity owing to
him by the others. The parties, however, may, by express agreement, negate this
solidary responsibility. The solidarity does not disappear by the mere partition
effected by the principals after the accomplishment of the agency.
If the undertaking is one in which several are interested, but only some create the
agency, only the latter are solidarily liable, without prejudice to the effects
of negotiorum gestio with respect to the others. And if the power granted includes
various transactions some of which are common and others are not, only those
interested in each transaction shall be liable for it.[11]

431

When the law expressly provides for solidarity of the obligation, as in the
liability of co-principals in a contract of agency, each obligor may be compelled to
pay the entire obligation.[12] The agent may recover the whole compensation from
any one of the co-principals, as in this case.
Indeed, Article 1216 of the Civil Code provides that a creditor may sue any of
the solidary debtors. This article reads:
Art. 1216. The creditor may proceed against any one of the solidary debtors or
some or all of them simultaneously. The demand made against one of them shall
not be an obstacle to those which may subsequently be directed against the others,
so long as the debt has not been fully collected.
Thus, the Court has ruled in Operators Incorporated vs. American Biscuit Co.,
Inc. that
[13]

x x x solidarity does not make a solidary obligor an indispensable party in a suit

filed by the creditor. Article 1216 of the Civil Code says that the creditor `may
proceed against anyone of the solidary debtors or some or all of them
simultaneously. (Emphasis supplied)
Second Issue: whether Artigos claim has been extinguished by full payment,
waiver or abandonment
The De Castros claim that Artigo was fully paid on June 14, 1985, that is,
Artigo was given his proportionate share and no longer entitled to any
balance. According to them, Artigo was just one of the agents involved in the sale
and entitled to a proportionate share in the commission. They assert that Artigo did
absolutely nothing during the second negotiation but to sign as a witness in the
deed of sale. He did not even prepare the documents for the transaction as an active
real estate broker usually does.
The De Castros arguments are flimsy.
A contract of agency which is not contrary to law, public order, public policy,
morals or good custom is a valid contract, and constitutes the law between the
parties.[14] The contract of agency entered into by Constante with Artigo is the law
432

between them and both are bound to comply with its terms and conditions in good
faith.
The mere fact that other agents intervened in the consummation of the sale and
were paid their respective commissions cannot vary the terms of the contract of
agency granting Artigo a 5 percent commission based on the selling price. These
other agents turned out to be employees of Times Transit, the buyer Artigo
introduced to the De Castros. This prompted the trial court to observe:
The alleged `second group of agents came into the picture only during the socalled `second negotiation and it is amusing to note that these (sic) second group,
prominent among whom are Atty. Del Castillo and Ms. Prudencio, happened to be
employees of Times Transit, the buyer of the properties. And their efforts were
limited to convincing Constante to part away with the properties because the
redemption period of the foreclosed properties is around the corner, so to speak.
(tsn. June 6, 1991).
xxx
To accept Constantes version of the story is to open the floodgates of fraud and
deceit. A seller could always pretend rejection of the offer and wait for sometime
for others to renew it who are much willing to accept a commission far less than
the original broker. The immorality in the instant case easily presents itself if one
has to consider that the alleged `second group are the employees of the buyer,
Times Transit and they have not bettered the offer secured by Mr. Artigo for P7
million.
It is to be noted also that while Constante was too particular about the unrenewed
real estate brokers license of Mr. Artigo, he did not bother at all to inquire as to the
licenses of Prudencio and Castillo. (tsn, April 11, 1991, pp. 39-40).[15] (Emphasis
supplied)
In any event, we find that the 5 percent real estate brokers commission is
reasonable and within the standard practice in the real estate industry for
transactions of this nature.
433

The De Castros also contend that Artigos inaction as well as failure to protest
estops him from recovering more than what was actually paid him. The De Castros
cite Article 1235 of the Civil Code which reads:
Art. 1235. When the obligee accepts the performance, knowing its incompleteness
and irregularity, and without expressing any protest or objection, the obligation is
deemed fully complied with.
The De Castros reliance on Article 1235 of the Civil Code is misplaced. Artigos
acceptance of partial payment of his commission neither amounts to a waiver of
the balance nor puts him in estoppel. This is the import of Article 1235 which was
explained in this wise:
The word accept, as used in Article 1235 of the Civil Code, means to take as
satisfactory or sufficient, or agree to an incomplete or irregular
performance.Hence, the mere receipt of a partial payment is not equivalent to the
required acceptance of performance as would extinguish the whole obligation.[16]
(Emphasis supplied)
There is thus a clear distinction between acceptance and mere receipt. In this
case, it is evident that Artigo merely received the partial payment without waiving
the balance. Thus, there is no estoppel to speak of.
The De Castros further argue that laches should apply because Artigo did not
file his complaint in court until May 29, 1989, or almost four years later. Hence,
Artigos claim for the balance of his commission is barred by laches.
Laches means the failure or neglect, for an unreasonable and unexplained
length of time, to do that which by exercising due diligence could or should have
been done earlier. It is negligence or omission to assert a right within a reasonable
time, warranting a presumption that the party entitled to assert it either has
abandoned it or declined to assert it.[17]
Artigo disputes the claim that he neglected to assert his rights. He was
appointed as agent on January 24, 1984. The two lots were finally sold in June
1985. As found by the trial court, Artigo demanded in April and July of 1985 the
434

payment of his commission by Constante on the basis of the selling price of P7.05
million but there was no response from Constante. [18]After it became clear that his
demands for payment have fallen on deaf ears, Artigo decided to sue on May 29,
1989.
Actions upon a written contract, such as a contract of agency, must be brought
within ten years from the time the right of action accrues. [19] The right of action
accrues from the moment the breach of right or duty occurs. From this moment, the
creditor can institute the action even as the ten-year prescriptive period begins to
run.[20]
The De Castros admit that Artigos claim was filed within the ten-year
prescriptive period. The De Castros, however, still maintain that Artigos cause of
action is barred by laches. Laches does not apply because only four years had
lapsed from the time of the sale in June 1985. Artigo made a demand in July 1985
and filed the action in court on May 29, 1989, well within the ten-year prescriptive
period. This does not constitute an unreasonable delay in asserting ones right. The
Court has ruled, a delay within the prescriptive period is sanctioned by law and is
not considered to be a delay that would bar relief. [21] In explaining that laches
applies only in the absence of a statutory prescriptive period, the Court has stated Laches is recourse in equity. Equity, however, is applied only in the absence,
never in contravention, of statutory law.Thus, laches, cannot, as a rule, be used
to abate a collection suit filed within the prescriptive period mandated by the
Civil Code.[22]
Clearly, the De Castros defense of laches finds no support in law, equity or
jurisprudence.
Third issue: whether the determination of the purchase price was made in
violation of the Rules on Evidence
The De Castros want the Court to re-examine the probative value of the
evidence adduced in the trial court to determine whether the actual selling price of
the two lots was P7.05 million and not P3.6 million. The De Castros contend that it
is erroneous to base the 5 percent commission on a purchase price of P7.05 million
435

as ordered by the trial court and the appellate court. The De Castros insist that the
purchase price is P3.6 million as expressly stated in the deed of sale, the due
execution and authenticity of which was admitted during the trial.
The De Castros believe that the trial and appellate courts committed a mistake
in considering incompetent evidence and disregarding the best evidence and parole
evidence rules. They claim that the Court of Appeals erroneously affirmed sub
silentio the trial courts reliance on the various correspondences between Constante
and Times Transit which were mere photocopies that do not satisfy the best
evidence rule. Further, these letters covered only the first negotiations between
Constante and Times Transit which failed; hence, these are immaterial in
determining the final purchase price.
The De Castros further argue that if there was an undervaluation, Artigo who
signed as witness benefited therefrom, and being equally guilty, should be left
where he presently stands. They likewise claim that the Court of Appeals erred in
relying on evidence which were not offered for the purpose considered by the trial
court. Specifically, Exhibits B, C, D and E were not offered to prove that the
purchase price was P7.05 Million. Finally, they argue that the courts a quo erred in
giving credence to the perjured testimony of Artigo. They want the entire
testimony of Artigo rejected as a falsehood because he was lying when he claimed
at the outset that he was a licensed real estate broker when he was not.
Whether the actual purchase price was P7.05 Million as found by the trial court
and affirmed by the Court of Appeals, or P3.6 Million as claimed by the De
Castros, is a question of fact and not of law. Inevitably, this calls for an inquiry into
the facts and evidence on record. This we can not do.
It is not the function of this Court to re-examine the evidence submitted by the
parties, or analyze or weigh the evidence again.[23] This Court is not the proper
venue to consider a factual issue as it is not a trier of facts. In petitions for review
on certiorari as a mode of appeal under Rule 45, a petitioner can only raise
questions of law. Our pronouncement in the case of Cormero vs. Court of
Appeals[24] bears reiteration:

436

At the outset, it is evident from the errors assigned that the petition is anchored on
a plea to review the factual conclusion reached by the respondent court. Such task
however is foreclosed by the rule that in petitions for certiorari as a mode of
appeal, like this one, only questions of law distinctly set forth may be raised. These
questions have been defined as those that do not call for any examination of the
probative value of the evidence presented by the parties. (Uniland Resources vs.
Development Bank of the Philippines, 200 SCRA 751 [1991] citing Goduco vs.
Court of appeals, et al., 119 Phil. 531; Hernandez vs. Court of Appeals, 149 SCRA
67). And when this court is asked to go over the proof presented by the parties, and
analyze, assess and weigh them to ascertain if the trial court and the appellate court
were correct in according superior credit to this or that piece of evidence and
eventually, to the totality of the evidence of one party or the other, the court cannot
and will not do the same. (Elayda vs. Court of Appeals, 199 SCRA 349
[1991]).Thus, in the absence of any showing that the findings complained of are
totally devoid of support in the record, or that they are so glaringly erroneous as to
constitute serious abuse of discretion, such findings must stand, for this court is not
expected or required to examine or contrast the oral and documentary evidence
submitted by the parties. (Morales vs. Court of Appeals, 197 SCRA 391 [1991]
citing Santa Ana vs. Hernandez, 18 SCRA 973 [1966]).
We find no reason to depart from this principle. The trial and appellate courts
are in a much better position to evaluate properly the evidence. Hence, we find no
other recourse but to affirm their finding on the actual purchase price.
Fourth Issue: whether award of moral damages and attorneys fees is proper
The De Castros claim that Artigo failed to prove that he is entitled to moral
damages and attorneys fees. The De Castros, however, cite no concrete reason
except to say that they are the ones entitled to damages since the case was filed to
harass and extort money from them.
Law and jurisprudence support the award of moral damages and attorneys fees
in favor of Artigo. The award of damages and attorneys fees is left to the sound
discretion of the court, and if such discretion is well exercised, as in this case, it
will not be disturbed on appeal.[25] Moral damages may be awarded when in a
breach of contract the defendant acted in bad faith, or in wanton disregard of his
437

contractual obligation.[26] On the other hand, attorneys fees are awarded in

instances where the defendant acted in gross and evident bad faith in refusing to
satisfy the plaintiffs plainly valid, just and demandable claim. [27] There is no reason
to disturb the trial courts finding that the defendants lack of good faith and unkind
treatment of the plaintiff in refusing to give his due commission deserve censure.
This warrants the award of P25,000.00 in moral damages and P45,000.00 in
attorneys fees. The amounts are, in our view, fair and reasonable. Having found a
buyer for the two lots, Artigo had already performed his part of the bargain under
the contract of agency. The De Castros should have exercised fairness and good
judgment in dealing with Artigo by fulfilling their own part of the bargain - paying
Artigo his 5 percent brokers commission based on the actual purchase price of the
two lots.
WHEREFORE, the petition is denied for lack of merit. The Decision of the
Court of Appeals dated May 4, 1994 in CA-G.R. CV No. 37996 is AFFIRMED in
toto.
SO ORDERED.
Puno, (Chairman), and Panganiban, JJ., concur.
Sandoval-Gutierrez, J., no part due to close family relation with a party.

[1]

Under Rule 45 of the Rules of Court.

[2]

Seventh Division composed of Justices Ricardo J. Francisco (Chairman and

Ponente); Salome A. Montoya and Ramon A. Barcelona (Members).
[3]

Penned by Judge Benigno T. Dayaw.

[4]

When referred to collectively.

[5]

Referring to the De Castros.

438

[6]

Referring to Artigo.

[7]

Rule 3, Section 7 of the Rules of Court; Seno vs. Mangubat, 156 SCRA 113
(1987); Quisumbing vs. Court of Appeals, 189 SCRA 325 (1990);
Lozano vs. Ballesteros, 195 SCRA 681 (1991).
[8]

[9]

Ibid.

Vicente J. Francisco, The Revised Rules of Court, Vol. 1, p. 271, 1973 ed.
[10]

Memorandum of Petitioner dated April 23, 1997, p.8; Rollo, p. 175.

[11]

Arturo M. Tolentino, Commentaries and Jurisprudence on the Civil Code of the

Philippines, Vol. 5, pp.. 428-429, 1992 ed.
[12]

Art. 1207 of the Civil Code provides as follows: Art. 1207. The concurrence of
two or more creditors or of two or more debtors in one and the same obligation
does not imply that each one of the former has a right to demand, or that each one
of the latter is bound to render, entire compliance with the prestation. There is
solidary liability only when the obligation expressly so states, or when the law or
the nature of the obligation requires solidarity.
[13]

154 SCRA 738 (1987), reiterated in Republic vs. Sandiganbayan, 173 SCRA 72
(1989).
[14]

San Andres vs. Rodriguez, 332 SCRA 769 (2000).

[15]

Decision dated December 20, 1991 of RTC Judge Benigno T. Dayan, Rollo, pp.
33-34.
[16]

Tolentino, supra, see note 11, Vol. 4, p. 279.

[17]

Republic vs. Court of Appeals, 301 SCRA 366 (1999); Ochagabia vs. Court of
Appeals, 304 SCRA 587 (1999).
[18]

RTC Decision, p. 7; Rollo, pp. 20-36, see p. 35.

439

[19]

Article 1144 of the Civil Code provides as follows: Art. 1144. The following
actions must be brought within ten years from the time the right of action accrues:
(1) Upon a written contract; (2) Upon an obligation created by law; (3) Upon a
judgment.
[20]

Tolention, supra, see note 16, p. 44.

[21]

Agra vs. Philippine National Bank, 309 SCRA 509 (1999).

[22]

Ibid.

[23]

Moomba Mining Exploration Company vs. Court of Appeals, , 317 SCRA 388
(1999).
[24]

247 SCRA 291 (1995).

[25]

Barzaga vs. Court of Appeals, 268 SCRA 105 (1997).

[26]

Jose C. Vitug, Compendium of Civil Law and Jurisprudence, p. 841, 1993 Ed.

[27]

Art. 2208, Civil Code of the Philippines.

440

Synopsis/Syllabi
THIRD DIVISION
[G.R. No. 131784. September 16, 1999]
FELIX L. GONZALES, petitioner, vs. THE HEIRS OF THOMAS and
PAULA
CRUZ,
herein
represented
by
ELENA
C.
TALENS, respondents.
DECISION
PANGANIBAN, J.:
If a stipulation in a contract admits of several meanings, it shall be understood
as bearing that import most adequate to render it effectual. An obligation cannot be
enforced unless the plaintiff has fulfilled the condition upon which it is
premised. Hence, an obligation to purchase cannot be implemented unless and until
the sellers have shown their title to the specific portion of the property being sold.
The Case

Before us is a Petition for Review on Certiorari assailing the August 13, 1997
Decision[1] of the Court of Appeals[2] in CA-GR CV No. 303754, which disposed as
follows:
WHEREFORE, the decision of the trial court dated November 16, 1990 is hereby
REVERSED. The appellee FELIX GONZALES is hereby ordered to surrender
possession of the property covered by the Contract of Lease/Purchase to the
appellants, Heirs of Thomas and Paula Cruz, and to pay to the appellants the
following amounts:
1. P15,000.00 per annum as rentals counted from December 1, 1984 until
the appellants shall have recovered possession of the property subject of
the Contract of Lease/Purchase;
2. P15,000.00 as attorneys fees; and
441

3. Costs of suit.[3]
On the other hand, the trial court[4] Decision,[5] which was reversed by the CA,
ruled as follows:
WHEREFORE, premises considered, this Court hereby renders judgment in favor
of the defendant, Felix Gonzales, and against the plaintiffs, as follows:
(1) Ordering the dismissal of the case;
(2) Sentencing the plaintiffs, jointly and severally, the sum of P20,000.00
as moral damages and the other sum of P10,000.00 as and for attorneys
fees; and
(3) To pay the costs.[6]
The Facts

We hereby reproduce, unedited, the Court of Appeals summary of the facts of

this case as follows:
On December 1, 1983, Paula Ao Cruz together with the plaintiffs heirs of Thomas
and Paula Cruz, namely Ricardo A. Cruz, Carmelita M. Cruz, Salome A. Cruz,
Irenea C. Victoria, Leticia C. Salvador and Elena C. Talens, entered into a Contract
of Lease/Purchase with the defendant, Felix L. Gonzales, the sole proprietor and
manager of Felgon Farms, of a half-portion of a parcel of land containing an area
of 12 hectares, more or less, and an accretion of 2 hectares, more or less, situated
in Rodriguez Town, Province of Rizal and covered by Transfer Certificate of Title
No. 12111 (Exhibit A, p. 157, Records). The contract of Lease/Purchase contains
the following provisions:
1. The terms of this Contract is for a period of one year upon the signing
thereof.After the period of this Contract, the LESSEE shall purchase the property
on the agreeable price of One Million Pesos (P1,000,000.00) payable within Two
(2) Years period with an interest of 12% per annum subject to the devalued amount
of the Philippine Peso, according to the following schedule of payment:
442

Upon the execution of the Deed of Sale 50% - and thereafter 25% every six (6)
months thereafter, payable within the first ten (10) days of the beginning of each
period of six (6) months.
2. The LESSEE shall pay by way of annual rental an amount equivalent to Two
Thousand Five Hundred (P2,500.00) Pesos per hectare, upon the signing of this
contract on Dec. 1, 1983.
xxxxxxxxx
9. The LESSORS hereby commit themselves and shall undertake to obtain a
separate and distinct T.C.T. over the herein leased portion to the LESSEE within a
reasonable period of time which shall not in any case exceed four (4) years, after
which a new Contract shall be executed by the herein parties which shall be the
same in all respects with this Contract of Lease/Purchase insofar as the terms and
conditions are concerned.
xxxxxxxxx
(Exhibits A, A-1; pp. 157-158. Records)
The defendant Gonzales paid the P2,500.00 per hectare or P15,000.00 annual
rental on the half-portion of the property covered by Transfer Certificate of Title
No. 12111 in accordance with the second provision of the Contract of
Lease/Purchase (p. 12, TSN, September 14, 1989) and thereafter took possession
of the property, installing thereon the defendant Jesus Sambrano as his caretaker
(pp. 16-17, 27, TSN, December 12, 1989). The defendant Gonzales did not,
however, exercise his option to purchase the property immediately after the
expiration of the one-year lease on November 30, 1984 (pp. 19-20, TSN,
September 14, 1989). He remained in possession of the property without paying
the purchase price provided for in the Contract of Lease/Purchase (Ibid.) and
without paying any further rentals thereon (p. 36, TSN, November 7, 1989).
A letter was sent by one of the plaintiffs-heirs Ricardo Cruz to the defendant
Gonzales informing him of the lessors decision to rescind the Contract of
Lease/Purchase due to a breach thereof committed by the defendant (Exhibit C; p.
443

162, Records). The letter also served as a demand on the defendant to vacate the
premises within 10 days from receipt of said letter (Ibid.).
The defendant Gonzales refused to vacate the property and continued possession
thereof (p. 2, Record). The matter was therefore brought before the barangay
captain of San Isidro, but owing to the defendants refusal to appear before the
barangay, a certification allowing the case to be brought to Court was issued on
March 18, 1987 (Exhibit E; p. 165, Records).
The lessor, Paula Ao Cruz died the following day, March 19, 1987 (p. 9, TSN,
September 14, 1989).
A final demand letter to vacate the premises was sent by the remaining lessors who
are also the heirs of the deceased lessor Paula Ao Cruz, through their counsel on
August 24, 1987 which the defendant Gonzales received but did not heed (Exhibits
D and D-1; pp. 163-164, Records).
The property subject of the Contract of Lease/Purchase is currently the subject of
an Extra-Judicial Partition (Exhibits G and G-1; pp. 168-169, Records). Title to the
property remains in the name of the plaintiffs predecessors-in-interest, Bernardina
Calixto and Severo Cruz (Exhibit B; p. 160, Records).
Alleging breach of the provisions of the Contract of Lease/Purchase, the plaintiffs
filed a complaint for recovery of possession of the property - subject of the
contract with damages, both moral and compensatory and attorneys fees and
litigation expenses (p. 3, Records).
Alleging breach of paragraph nine of the Contract of Lease/Purchase, and payment
of only P50,000.00 of the P500,000.00 agreed down payment on the purchase price
of P1,000,000.00, the defendant Gonzales filed his answer on November 23, 1987
praying for a dismissal of the complaint filed against him and an award of moral,
exemplary and actual damages, as well as litigation expenses (pp. 19-22, Records).
The defendant Sambrano was, upon motion, declared in default for failure to file
an answer despite valid service of summons (p. 30, Records).
The parties limited the issues to be resolved to:
444

(1) Whether or not paragraph 9 of the contract is a condition precedent

before the defendant is to pay the down payment;
(2) Whether or not plaintiffs can rescind the Contract of Lease/Purchase;
and
(3) Whether or not plaintiffs can terminate the Contract of Lease. (p. 4,
Decision; p. 262, Records)
After the termination of the pre-trial conference, the trial court proceeded to hear
the case on the merits and arrived at its appealed decision based on the following
findings and conclusions:
Paragraph 9 of the contract clearly indicates that the lessors-plaintiffs shall obtain a
Transfer Certificate of Title in the name of the lessee within 4 years before a new
contract is to be entered into under the same terms and conditions as the original
Contract of Lease/Purchase. Thus, before a deed of Sale can be entered into
between the plaintiffs and the defendant, the plaintiffs have to obtain the Transfer
Certificate of Title in favor of the defendant. Article 1181 of the New Civil Code
states that: In conditional obligations, the acquisition of rights, as well as the
extinguishment or loss of those already acquired, shall depend upon the happening
of the event which constitutes the condition. When the obligation assumed by a
party to a contract is expressly subjected to a condition, the obligation cannot be
enforced against him unless the condition is complied with (Wise & Co. vs. Kelly,
37 Phil. 695; PNB vs. Philippine Trust Co., 68 Phil. 48).
The failure of the plaintiffs to secure the Transfer Certificate of Title, as provided
for in the contract, does not entitle them to rescind the contract[.] Article 1191 of
the New Civil Code states that: The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not comply with what is
incumbent upon him. The injured party may choose between the fulfillment of the
obligation, with the payment of damages in either case. He may seek rescission,
even after he has chosen fulfillment, if the latter should become impossible x x x.
The power to rescind is given to the injured party. Where the plaintiff is the party
who did not perform, he is not entitled to insist upon the performance of the
contract by the defendant or recover damages by reason of his own breach (Mateos
445

vs. Lopez, 6 Phil. 206; Borque vs. Yu Chipco, 14 Phil. 95). An action for specific
performance of a contract is an equitable proceeding, and he who seeks to enforce
it must himself be fair and reasonable, and do equity (Seva vs. Berwin, 48 Phil.
581). In this case, plaintiffs failed to comply with the conditions precedent after 21/2 years from the execution of the contract so as to entitle them to rescind the
contract. Although the contract stated that the same be done within 4 years from
execution, still, the defendant has to be assured that the land subject of the case
will be transferred in his name without any encumbrances, as the Extra-Judicial
Partition dated July 17, 1989 was being processed, and continues to be in process
to this date. The failure to secure the Transfer Certificate of Title in favor of the
defendant entitles not the plaintiffs but, rather, the defendant to either rescind or to
ask for specific performances.
Are the plaintiffs entitled to terminate the Contract of Lease? Article 1670 of the
New Civil Code states that:
If at the end of the contract the lessee should continue enjoying the thing leased for
fifteen days with the acquies[c]ence of the lessor and unless a notice to the
contrary by either party has previously been given, it is understood that there is an
implied new lease, not for the period of the original contract, but for the time
established in Articles 1682 and 1687. The other terms of the original contract shall
be revived.
Article 1682 of the New Civil Code states that:
The lease of a piece of rural land, when its duration has not been fixed, is
understood to have been made for all the time necessary for the gathering of the
fruits which the whole estate leased may yield in one year, or which it may yield
once, although two or more years may have to elapse for the purpose.
The plaintiffs filed the complaint on October 12, 1987 after making an extrajudicial demand on July 2, 1986. The contract was entered into on December 1,
1983. The demand was thus made more than a year and a half from the expiry date
of the original lease considering that there was no payment made for the second
year of the lease. If one has to consider the fact that the defendant was given the
option to purchase the property after two years, then, the lease would presumably
446

run for at least two years. If that is so, then, the demand was made seven months
after the expiration of the two-year lease. Still, this demand by the plaintiffs will
come under the implied new lease of Articles 1682 and 1670 so that the plaintiffs
are not entitled to terminate the Contract of Lease.
In sum, the plaintiffs cannot terminate the Contract of Lease due to their failure to
notify the defendant in due time of their intention to that effect. Nor can they
rescind the Contract of Purchase in view of the fact that there is a condition
precedent which the plaintiffs have not fulfilled. It is the defendant now who has
the option to either rescind or demand the performance of the contract. Moreover,
according to Article 1654 of the New Civil Code, the lessor is obliged to deliver
the thing which is the object of the contract in such condition as to render it fit for
the use intended. Considering that the lessors-plaintiffs have not delivered the
property in whole over the protest of the defendant, the latter suffered damages
therefor. (p. 4-6, Decision; pp. 262-264, Records)
Their complaint thus dismissed, the plaintiffs, now appellants, assign the trial court
of having committed the following errors:
I
THE TRIAL COURT GRAVELY ERRED IN HOLDING THAT PLAINTIFFSAPPELLANTS COULD NOT VALIDLY RESCIND AND TERMINATE THE
LEASE/PURCHASE CONTRACT (EXHIBIT A) AND THEREAFTER TO TAKE
POSSESSION OF THE LAND IN QUESTION AND EJECT THEREFROM
DEFENDANTS-APPELLEES.
II
THE TRIAL COURT EQUALLY ERRED IN NOT GRANTING THE RELIEFS
PLEADED AND PRAYED FOR BY PLAINTIFFS-APPELLANTS IN THEIR
COMPLAINT. (p. 42, Rollo)
The case was submitted for decision without the appellees brief as per the Courts
resolution dated July 8, 1992 (p. 71, Rollo).
Ruling of the Court of Appeals

447

The Court of Appeals reversed the trial court in this wise:

The trial court, in its decision interpreted the ninth provision of the Contract of
Lease/Purchase to mean that before the appellee exercises his option to purchase
the property by paying the 50% plus interest on the P1,000,000.00 purchase price,
the appellants must first transfer the title to the property in the appellees name. The
Court finds this interpretation of the provision strained if not altogether
absurd. The transfer of title to the property in the appellees name cannot be
interpreted as a condition precedent to the payment of the agreed purchase price
because such interpretation not only runs counter [to] the explicit provisions of the
contract but also is contrary to the normal course of things anent the sale of real
properties. The terms of the contract [are] explicit and require no
interpretation. Upon the expiration of the lease, the lessee shall purchase the
property. Besides, the normal course of things anent the sale of real properties
dictates that there must first be payment of the agreed purchase
price before transfer of title to the vendees name can be made.
This was precisely what the appellants and Paula Ao Cruz had in mind when they
had the ninth provision incorporated in the Contract of Lease/Purchase. They had
asked for a period of 4 years from the time they receive the downpayment of 50%
within which to have [the] title to the property transferred in the name of the
appellee. The reason for this four (4) year period is [that] title to the property still
remains in the name of the original owners, the predecessors-in-interest of the
herein appellants and [transferring] the title to their names and eventually to the
lessee-purchaser, appellee herein, would take quite some time.
The appellee wanted to have the title to the property transferred in his
name firstbefore he exercises his option to purchase allegedly in accordance with
the ninth provision of the contract. But the ninth provision does not give him this
right. A reading of the contract in its entirety shows that the 4 year period asked for
by the appellants within which to have title to the property transferred in the
appellees name will only start to run when the appellee exercises his option to
purchase.Since the appellee never exercised his option to purchase, then appellee is
not entitled to have the title to the property transferred in his name.

448

Attributing reversible errors to the appellate court, petitioner elevated the case
to this Court.[7]
The Issues

In his Memorandum,[8] petitioner submits the following main issues:

I. Whether or not the Court of Appeals has gravely erred and committed grave
abuse of discretion in the interpretation of [the] law between the parties.
II. Whether or not the Court of Appeals committed serious mistakes in the finding
of facts which resulted [in] departing from the usual course of judicial proceedings.
For these issues to be resolved, petitioner asks this Court to answer the
following questions:
1. Is there a conflict between the statement in paragraph 1 of the Lease/Purchase
Contract and that [in] paragraph No. 9 thereof?
2. Is paragraph 9 of the Lease/Purchase Contract a condition precedent before
petitioner could exercise his option to buy the property?
3. Can plaintiff rescind or terminate the Contract of Lease after the one-year
period?
In fine, the resolution of this case depends upon the proper interpretation of
paragraph nine of the Contract.
The Courts Ruling

The Petition is meritorious.

Main Issue: Interpretation of Paragraph Nine

In its first paragraph, the disputed agreement provides that petitioner shall lease
the property for one year, after which he shall purchase it. Paragraph nine, on the
other hand, requires herein respondents to obtain a separate and distinct Transfer
Certificate of Title (TCT) over the property, viz.:
449

9. The LESSORS hereby commit themselves and shall undertake to obtain a

separate and distinct T.C.T. over the lease portion to the LESSEE within a
reasonable period of time which shall not in any case exceed four (4) years, after
which a new Contract shall be executed by the herein parties which shall be the
same in all respects with this Contract of Lease/Purchase insofar as the terms and
conditions are concerned.
Alleging that petitioner has not purchased the property after the lapse of one
year, respondents seek to rescind the Contract and to recover the
property. Petitioner, on the other hand, argues that he could not be compelled to
purchase the property, because respondents have not complied with paragraph nine,
which obligates them to obtain a separate and distinct title in their names. He
contends that paragraph nine was a condition precedent to the purchase of the
property.
To be sure, this paragraph and the entire agreement, for that matter -- is not a
model of how a contract should be worded. It is an invitation to a litigation, as in
fact the parties had to go all to way up to this Court to plead for a resolution of
their conflict which is rooted in their failure to express themselves clearly. Small
wonder, even the two lower courts gave contradictory understanding of this
provision, thereby necessitating the intervention of the highest court of the land.
Both the trial court and the Court of Appeals (CA) interpreted this provision to
mean that the respondents had obliged themselves to obtain a TCT in the name
of petitioner-lessee. The trial court held that this obligation was a condition
precedent to petitioners purchase of the property. Since respondents had not
performed their obligation, they could not compel petitioner to buy the parcel of
land. The CA took the opposite view, holding that the property should be
purchased first before respondents may be obliged to obtain a TCT in the name of
petitioner-lessee-buyer.
As earlier noted, petitioner disagrees with the interpretation of the two courts
and maintains that respondents were obligated to procure a TCT in their
names before he could be obliged to purchase the property in question.

450

Basic is the rule in the interpretation of contracts that if some stipulation

therein should admit of several meanings, it shall be understood as bearing that
import most adequate to render it effectual. [9] Considering the antecedents of the
ownership of the disputed lot, it appears that petitioners interpretation renders
clause nine most effectual.
The record shows that at the time the contract was executed, the land in
question was still registered in the name of Bernardina Calixto and Severo Cruz,
respondents predecessors-in-interest. There is no showing whether respondents
were the only heirs of Severo Cruz or whether the other half of the land in the
name of Bernardina Calixto was adjudicated to them by any means. In fact, they
admit that extrajudicial proceedings were still ongoing. Hence, when the Contract
of Lease/Purchase was executed, there was no assurance that the respondents were
indeed the owners of the specific portion of the lot that petitioner wanted to buy,
and if so, in what concept and to what extent.
Thus, the clear intent of the ninth paragraph was for respondents to obtain a
separate and distinct TCT in their names. This was necessary to enable them to
show their ownership of the stipulated portion of the land and their concomitant
right to dispose of it. Absent any title in their names, they could not have sold the
disputed parcel of land.
It is a well-settled principle in law that no one can give what one does not have
-- nemo dat quod non habet. Accordingly, one can sell only what one owns or is
authorized to sell, and the buyer can acquire no more than what the seller can
transfer legally.[10]
Because the property remained registered in the names of their predecessors-ininterest, private respondents could validly sell only their undivided interest in the
estate of Severo Cruz, the extent of which was however not shown in the
records. There being no partition of the estate thus far, there was no guarantee as to
how much and which portion would be adjudicated to respondents.
In a contract of sale, the title to the property passes to the vendee upon the
delivery of the thing sold.[11] In this case, the respondent could not deliver
ownership or title to a specific portion of the yet undivided property. True, they
451

could have intended to sell their hereditary interest, but in the context of the
Contract of Lease/Purchase, the parties under paragraph nine wanted the specific
portion of the land to be segregated, identified and specifically titled. Hence, by the
said Contract, the respondents as sellers were given a maximum of four years
within which to acquire a separate TCT in their names, preparatory to the
execution of the deed of sale and the payment of the agreed price in the manner
described in paragraph nine.
This interpretation is bolstered by the P50,000 petitioner advanced to
respondents in order to help them expedite the transfer of the TCT to their
names. Ineluctably, the intention of the parties was to have the title transferred first
to respondents names as a condition for the completion of the purchase.
In holding that clause nine was not a condition precedent to the purchase of the
property, the CA relied on a literal interpretation to the effect that the TCT should
be obtained in the name of the petitioner-vendee. It reasoned that the title could be
transferred to the name of the buyer only after the completion of the
purchase. Thus, petitioner should first purchase the property before respondents
could be obliged to transfer the TCT to his name.
We disagree. The literal interpretation not only ignores the factual backdrop of
the case; it also utilizes a faulty parsing of paragraph nine, which should
purportedly read as follows: The lessors x x x shall undertake to obtain a separate
and distinct TCT xxx to the LESSEE within a reasonable period of time which shall
not in any case exceed four (4) years x x x. Read in its entirety, however, paragraph
nine does not say that the TCT should be obtained in the name of the lessee. In
fact, paragraph nine requires respondents to obtain a TCT over the herein leased
portion to the LESSEE, thereby showing that the crucial phrase to the LESSEE
adverts to the leased portion and not to the name which should appear in the new
TCT.
Furthermore, the CA interpretation ignores the other part of paragraph nine,
stating that after a separate TCT had been obtained, a new contract shall be
executed by the herein parties which shall be the same in all respects with this
Contract of Lease/Purchase insofar as the terms and conditions are concerned.
452

If, as the CA held, petitioner should purchase the property first before the title
can be transferred to his name, why should there be a waiting period of four years
before the parties can execute the new contract evidencing the sale? Why should
the petitioner still be required to pay rentals after it purchases and pays for the
property? The Contract could not have envisioned this absurd scenario.
Clearly, the appellate courts literal interpretation of the first portion of
paragraph nine renders the latter portion thereof ineffectual. In other words, that
portion can only mean that the respondents should first obtain a TCT in their
names, after which petitioner is given time to purchase and pay for the property.
Respondents insist that the obligation of petitioner to buy the disputed land
immediately after the termination of the one year lease period is explicit.
[12]
However, it is more reasonable to state that the first paragraph was effectively
modified by the ninth. To repeat, petitioner can be compelled to perform his
obligation under the first paragraph, only after respondents have complied with the
ninth.Unless and until respondents have done so, the first paragraph cannot be
enforced against petitioner.
In sum, we hold that the ninth provision was intended to ensure that
respondents would have a valid title over the specific portion they were selling to
petitioner. Only after the title is assured may the obligation to buy the land and to
pay the sums stated in the Contract be enforced within the period stipulated. Verily,
the petitioners obligation to purchase has not yet ripened and cannot be enforced
until and unless respondents can prove their title to the property subject of the
Contract.
Secondary Issues

Ninth Clause Was a Condition Precedent

Because the ninth clause required respondents to obtain a separate and distinct
TCT in their names and not in the name of petitioner, it logically follows that such
undertaking was a condition precedent to the latters obligation to purchase and pay
for the land. Put differently, petitioners obligation to purchase the land is a
conditional one and is governed by Article 1181 of the Civil Code.[13]
453

Condition has been defined as every future and uncertain event upon which an
obligation or provision is made to depend. It is a future and uncertain event upon
which the acquisition or resolution of rights is made to depend by those who
execute the juridical act.[14]Without it, the sale of the property under the Contract
cannot be perfected, and petitioner cannot be obliged to purchase the
property.When the consent of a party to a contract is given subject to the
fulfillment of a suspensive condition, the contract is not perfected unless that
condition is first complied with.[15]
The Court has held that [w]hen the obligation assumed by a party to a contract
is expressly subjected to a condition, the obligation cannot be enforced against him
unless the condition is complied with.[16] Furthermore, [t]he obligatory force of a
conditional obligation is subordinated to the happening of a future and uncertain
event, so that if that event does not take place, the parties would stand as if the
conditional obligation had never existed.[17]
In this case, the obligation of the petitioner to buy the land cannot be enforced
unless respondents comply with the suspensive condition that they acquire first a
separate and distinct TCT in their names. The suspensive condition not having
been fulfilled, then the obligation of the petitioner to purchase the land has not
arisen.
Respondents Cannot Rescind the Contract

In the same vein, respondents cannot rescind the contract, because they have
not caused the transfer of the TCT to their names, which is a condition precedent to
petitioners obligation. This Court has held that there can be no rescission (or more
properly, resolution) of an obligation as yet non-existent, because the suspensive
condition has not happened.[18]
Since the reversal of the CA Decision is inevitable, the trial courts judgment
should be reinstated. However, we find no sufficient factual or legal justifications
for the award of moral damages and attorneys fees.
WHEREFORE, the petition is GRANTED and the appealed Decision
is REVERSED and SET ASIDE. The Decision of the trial court is REINSTATED,
454

but the award of moral damages and attorneys fees is DELETED for lack of
basis. No costs.
SO ORDERED.
Melo, (Chairman), Purisima, and Gonzaga-Reyes, JJ., concur.
Vitug, J., no part; did not participate in deliberations (in PHILJA on official
business).

[1]

Penned by Justice Ramon A. Barcelona; concurred in by Justices Jesus M.

Elbinias (chairman) and Artemio G. Tuquero (member).
[2]

Eleventh Division

[3]

CA Decision, p. 14; rollo, p. 59.

[4]

Regional Trial Court of San Mateo, Rizal, Branch 75.

[5]

Written by Judge Cipriano D. Roma.

[6]

RTC Decision, pp. 6-7; rollo, pp. 43-44.

[7]

This case was deemed submitted for decision on January 6, 1999, upon receipt
by this Court of respondents Memorandum. Petitioners Memorandum was filed
earlier.
[8]

See pp. 10-11; rollo, pp. 103-104.

[9]

Article 1373, Civil Code.

[10]

Segura v. Segura, 165 SCRA 368, September 19, 1988.

455

[11]

Dawson v. Register of Deeds, GR No. 120600, September 22, 1998, per

Panganiban, J.; Salazar v. Court of Appeals, 258 SCRA 317, July 5, 1996; Luzon
Brokerage Co., Inc. v. Maritime Building Co., Inc., 46 SCRA 381, August 18,
1972; Pingol v. Court of Appeals, 226 SCRA 118, September 6, 1993.
[12]

Respondents Memorandum, p. 11; rollo, p. 123.

[13]

The provision reads:

ART. 1181. In conditional obligations, the acquisition of rights, as well as the

extinguishment or loss of those already acquired, shall depend upon the happening
of the event which constitutes the condition.
[14]

Arturo Tolentino, Civil Code of the Philippines, Vol. IV, p. 144; citing Brugi, p.
108; 1 Rugigiero 289; 1 Colin & Capitant 194.
[15]

Ruperto v. Kosea, 26 Phil 227, December 4, 1913, per Torres, J.

[16]

Wise & Co. v. Kelly, 37 Phil 696, February 21, 1918, per Fisher J.;
PNB v. Philippine Trust Co., 68 Phil 48, May 12, 1939, per Diaz, J.;
Roque v. Lapuz, 96 SCRA 741.
[17]

Rose Packing Company, Inc. v. Court of Appeals, 167 SCRA 309, November 14,
1988, per Paras, J.; Gaite v. Fonacier, 2 SCRA 831.
[18]

Luzon Brokerage Co., Inc v. Maritime Building Co., Inc., 46 SCRA 381, August
18, 1972, per Reyes, J.B.L., J.

456

[Syllabus]
THIRD DIVISION
[G.R. No. 103577. October 7, 1996]
ROMULO A. CORONEL, ALARICO A. CORONEL, ANNETTE A.
CORONEL, ANNABELLE C. GONZALES (for herself and on behalf
of Floraida C. Tupper, as attorney-in-fact), CIELITO A. CORONEL,
FLORAIDA
A.
ALMONTE,
and
CATALINA
BALAIS
MABANAG, petitioners, vs.
THE
COURT
OF
APPEALS,
CONCEPCION D. ALCARAZ and RAMONA PATRICIA ALCARAZ,
assisted by GLORIA F. NOEL as attorney-in-fact, respondents.
DECISION
MELO, J.:
The petition before us has its roots in a complaint for specific performance to
compel herein petitioners (except the last named, Catalina Balais Mabanag) to
consummate the sale of a parcel of land with its improvements located along
Roosevelt Avenue in Quezon City entered into by the parties sometime in January
1985 for the price of P1,240,000.00.
The undisputed facts of the case were summarized by respondent court in this
wise:
On January 19, 1985, defendants-appellants Romulo Coronel, et. al. (hereinafter
referred to as Coronels) executed a document entitled Receipt of Down Payment
(Exh. A) in favor of plaintiff Ramona Patricia Alcaraz (hereinafter referred to as
Ramona) which is reproduced hereunder:
RECEIPT OF DOWN PAYMENT
P1,240,000.00 - Total amount
50,000.00 - Down payment
457

-----------------------------------------P1,190,000.00 - Balance
Received from Miss Ramona Patricia Alcaraz of 146 Timog, Quezon City, the sum
of Fifty Thousand Pesos purchase price of our inherited house and lot, covered by
TCT No. 119627 of the Registry of Deeds of Quezon City, in the total amount
of P1,240,000.00.
We bind ourselves to effect the transfer in our names from our deceased father,
Constancio P. Coronel, the transfer certificate of title immediately upon receipt of
the down payment above-stated.
On our presentation of the TCT already in or name, We will immediately execute
the deed of absolute sale of said property and Miss Ramona Patricia Alcaraz shall
immediately pay the balance of the P1,190,000.00.
Clearly, the conditions appurtenant to the sale are the following:
1. Ramona will make a down payment of Fifty Thousand (P50,000.00) pesos upon
execution of the document aforestated;
2. The Coronels will cause the transfer in their names of the title of the property
registered in the name of their deceased father upon receipt of the Fifty Thousand
(P50,000.00) Pesos down payment;
3. Upon the transfer in their names of the subject property, the Coronels will
execute the deed of absolute sale in favor of Ramona and the latter will pay the
former the whole balance of One Million One Hundred Ninety Thousand
(P1,190,000.00) Pesos.
On the same date (January 15, 1985), plaintiff-appellee Concepcion D. Alcaraz
(hereinafter referred to as Concepcion), mother of Ramona, paid the down payment
of Fifty Thousand (P50,000.00) Pesos (Exh. B, Exh. 2).
On February 6, 1985, the property originally registered in the name of the Coronels
father was transferred in their names under TCT No. 327043 (Exh. D; Exh 4)
458

On February 18, 1985, the Coronels sold the property covered by TCT No. 327043
to intervenor-appellant Catalina B. Mabanag (hereinafter referred to as Catalina)
for One Million Five Hundred Eighty Thousand (P1,580,000.00) Pesos after the
latter has paid Three Hundred Thousand (P300,000.00) Pesos (Exhs. F-3; Exh. 6C)
For this reason, Coronels canceled and rescinded the contract (Exh. A) with
Ramona by depositing the down payment paid by Concepcion in the bank in trust
for Ramona Patricia Alcaraz.
On February 22, 1985, Concepcion, et. al., filed a complaint for a specific
performance against the Coronels and caused the annotation of a notice of lis
pendens at the back of TCT No. 327403 (Exh. E; Exh. 5).
On April 2, 1985, Catalina caused the annotation of a notice of adverse claim
covering the same property with the Registry of Deeds of Quezon City (Exh. F;
Exh. 6).
On April 25, 1985, the Coronels executed a Deed of Absolute Sale over the subject
property in favor of Catalina (Exh. G; Exh. 7).
On June 5, 1985, a new title over the subject property was issued in the name of
Catalina under TCT No. 351582 (Exh. H; Exh. 8).
(Rollo, pp. 134-136)
In the course of the proceedings before the trial court (Branch 83,
RTC, Quezon City) the parties agreed to submit the case for decision solely on the
basis of documentary exhibits. Thus, plaintiffs therein (now private respondents)
proffered their documentary evidence accordingly marked as Exhibits A through J,
inclusive of their corresponding submarkings.Adopting these same exhibits as their
own, then defendants (now petitioners) accordingly offered and marked them as
Exhibits 1 through 10, likewise inclusive of their corresponding
submarkings. Upon motion of the parties, the trial court gave them thirty (30) days
within which to simultaneously submit their respective memoranda, and an

459

additional 15 days within which to submit their corresponding comment or reply

thereto, after which, the case would be deemed submitted for resolution.
On April 14, 1988, the case was submitted for resolution before Judge
Reynaldo Roura, who was then temporarily detailed to preside over Branch 82 of
the RTC of Quezon City. On March 1, 1989, judgment was handed down by Judge
Roura from his regular bench at Macabebe, Pampanga for the Quezon City branch,
disposing as follows:
WHEREFORE, judgment for specific performance is hereby rendered ordering
defendant to execute in favor of plaintiffs a deed of absolute sale covering that
parcel of land embraced in and covered by Transfer Certificate of Title No. 327403
(now TCT No. 331582) of the Registry of Deeds for Quezon City, together with all
the improvements existing thereon free from all liens and encumbrances, and once
accomplished, to immediately deliver the said document of sale to plaintiffs and
upon receipt thereof, the plaintiffs are ordered to pay defendants the whole balance
of the purchase price amounting to P1,190,000.00 in cash. Transfer Certificate of
Title No. 331582 of the Registry of Deeds for Quezon City in the name of
intervenor is hereby canceled and declared to be without force and
effect.Defendants and intervenor and all other persons claiming under them are
hereby ordered to vacate the subject property and deliver possession thereof to
plaintiffs.Plaintiffs claim for damages and attorneys fees, as well as the
counterclaims of defendants and intervenors are hereby dismissed.
No pronouncement as to costs.
So Ordered.
Macabebe, Pampanga for Quezon City, March 1, 1989.
(Rollo, p. 106)
A motion for reconsideration was filed by petitioners before the new presiding
judge of the Quezon City RTC but the same was denied by Judge Estrella T.
Estrada, thusly:

460

The prayer contained in the instant motion, i.e., to annul the decision and to render
anew decision by the undersigned Presiding Judge should be denied for the
following reasons: (1) The instant case became submitted for decision as of April
14, 1988 when the parties terminated the presentation of their respective
documentary evidence and when the Presiding Judge at that time was Judge
Reynaldo Roura. The fact that they were allowed to file memoranda at some future
date did not change the fact that the hearing of the case was terminated before
Judge Roura and therefore the same should be submitted to him for decision; (2)
When the defendants and intervenor did not object to the authority of Judge
Reynaldo Roura to decide the case prior to the rendition of the decision, when they
met for the first time before the undersigned Presiding Judge at the hearing of a
pending incident in Civil Case No. Q-46145 on November 11, 1988, they were
deemed to have acquiesced thereto and they are now estopped from questioning
said authority of Judge Roura after they received the decision in question which
happens to be adverse to them; (3) While it is true that Judge Reynaldo Roura was
merely a Judge-on-detail at this Branch of the Court, he was in all respects the
Presiding Judge with full authority to act on any pending incident submitted before
this Court during his incumbency. When he returned to his Official Station at
Macabebe, Pampanga, he did not lose his authority to decide or resolve cases
submitted to him for decision or resolution because he continued as Judge of the
Regional Trial Court and is of co-equal rank with the undersigned Presiding
Judge.The standing rule and supported by jurisprudence is that a Judge to whom a
case is submitted for decision has the authority to decide the case notwithstanding
his transfer to another branch or region of the same court (Sec. 9, Rule 135, Rule of
Court).
Coming now to the twin prayer for reconsideration of the Decision dated March 1,
1989 rendered in the instant case, resolution of which now pertains to the
undersigned Presiding Judge, after a meticulous examination of the documentary
evidence presented by the parties, she is convinced that the Decision of March 1,
1989 is supported by evidence and, therefore, should not be disturbed.
IN VIEW OF THE FOREGOING, the Motion for Reconsideration and/or to Annul
Decision and Render Anew Decision by the Incumbent Presiding Judge
datedMarch 20, 1989 is hereby DENIED.
461

SO ORDERED.
Quezon City, Philippines, July 12, 1989.
(Rollo, pp. 108-109)
Petitioners thereupon interposed an appeal, but on December 16, 1991, the
Court of Appeals (Buena, Gonzaga-Reyes, Abad-Santos (P), JJ.) rendered its
decision fully agreeing with the trial court.
Hence, the instant petition which was filed on March 5, 1992. The last
pleading, private respondents Reply Memorandum, was filed on September 15,
1993. The case was, however, re-raffled to undersigned ponente only on August
28, 1996, due to the voluntary inhibition of the Justice to whom the case was last
assigned.
While we deem it necessary to introduce certain refinements in the disquisition
of respondent court in the affirmance of the trial courts decision, we definitely find
the instant petition bereft of merit.
The heart of the controversy which is the ultimate key in the resolution of the
other issues in the case at bar is the precise determination of the legal significance
of the document entitled Receipt of Down Payment which was offered in evidence
by both parties. There is no dispute as to the fact that the said document embodied
the binding contract between Ramona Patricia Alcaraz on the one hand, and the
heirs of Constancio P. Coronel on the other, pertaining to a particular house and lot
covered by TCT No. 119627, as defined in Article 1305 of the Civil Code of the
Philippines which reads as follows:
Art. 1305. A contract is a meeting of minds between two persons whereby one
binds himself, with respect to the other, to give something or to render some
service.
While, it is the position of private respondents that the Receipt of Down
Payment embodied a perfected contract of sale, which perforce, they seek to
enforce by means of an action for specific performance, petitioners on their part
insist that what the document signified was a mere executory contract to sell,
462

subject to certain suspensive conditions, and because of the absence of Ramona P.

Alcaraz, who left for the United States of America, said contract could not possibly
ripen into a contract of absolute sale.
Plainly, such variance in the contending parties contention is brought about by
the way each interprets the terms and/or conditions set forth in said private
instrument. Withal, based on whatever relevant and admissible evidence may be
available on record, this Court, as were the courts below, is now called upon to
adjudge what the real intent of the parties was at the time the said document was
executed.
The Civil Code defines a contract of sale, thus:
Art. 1458. By the contract of sale one of the contracting parties obligates himself
to transfer the ownership of and to deliver a determinate thing, and the other to pay
therefor a price certain in money or its equivalent.
Sale, by its very nature, is a consensual contract because it is perfected by mere
consent. The essential elements of a contract of sale are the following:
a) Consent or meeting of the minds, that is, consent to transfer ownership in
exchange for the price;
b) Determinate subject matter; and
c) Price certain in money or its equivalent.
Under this definition, a Contract to Sell may not be considered as a
Contract of Sale because the first essential element is lacking. In a contract to sell,
the prospective seller explicitly reserves the transfer of title to the prospective
buyer, meaning, the prospective seller does not as yet agree or consent to transfer
ownership of the property subject of the contract to sell until the happening of an
event, which for present purposes we shall take as the full payment of the purchase
price. What the seller agrees or obliges himself to do is to fulfill his promise to sell
the subject property when the entire amount of the purchase price is delivered to
him. In other words the full payment of the purchase price partakes of a suspensive
condition, the non-fulfillment of which prevents the obligation to sell from arising
463

and thus, ownership is retained by the prospective seller without further remedies
by the prospective buyer. In Roque vs. Lapuz (96 SCRA 741 [1980]), this Court
had occasion to rule:
Hence, We hold that the contract between the petitioner and the respondent was a
contract to sell where the ownership or title is retained by the seller and is not to
pass until the full payment of the price, such payment being a positive suspensive
condition and failure of which is not a breach, casual or serious, but simply an
event that prevented the obligation of the vendor to convey title from acquiring
binding force.
Stated positively, upon the fulfillment of the suspensive condition which is the
full payment of the purchase price, the prospective sellers obligation to sell the
subject property by entering into a contract of sale with the prospective buyer
becomes demandable as provided in Article 1479 of the Civil Code which states:
Art. 1479. A promise to buy and sell a determinate thing for a price certain is
reciprocally demandable.
An accepted unilateral promise to buy or to sell a determinate thing for a price
certain is binding upon the promissor of the promise is supported by a
consideration distinct from the price.
A contract to sell may thus be defined as a bilateral contract whereby the
prospective seller, while expressly reserving the ownership of the subject property
despite delivery thereof to the prospective buyer, binds himself to sell the said
property exclusively to the prospective buyer upon fulfillment of the condition
agreed upon, that is, full payment of the purchase price.
A contract to sell as defined hereinabove, may not even be considered as a
conditional contract of sale where the seller may likewise reserve title to the
property subject of the sale until the fulfillment of a suspensive condition, because
in a conditional contract of sale, the first element of consent is present, although it
is conditioned upon the happening of a contingent event which may or may not
occur. If the suspensive condition is not fulfilled, the perfection of the contract of
sale is completely abated (cf. Homesite and Housing Corp. vs. Court of Appeals,
464

133 SCRA 777 [1984]). However, if the suspensive condition is fulfilled, the
contract of sale is thereby perfected, such that if there had already been previous
delivery of the property subject of the sale to the buyer, ownership thereto
automatically transfers to the buyer by operation of law without any further act
having to be performed by the seller.
In a contract to sell, upon the fulfillment of the suspensive condition which is
the full payment of the purchase price, ownership will not automatically transfer to
the buyer although the property may have been previously delivered to him. The
prospective seller still has to convey title to the prospective buyer by entering into
a contract of absolute sale.
It is essential to distinguish between a contract to sell and a conditional
contract of sale specially in cases where the subject property is sold by the owner
not to the party the seller contracted with, but to a third person, as in the case at
bench.In a contract to sell, there being no previous sale of the property, a third
person buying such property despite the fulfillment of the suspensive condition
such as the full payment of the purchase price, for instance, cannot be deemed a
buyer in bad faith and the prospective buyer cannot seek the relief of reconveyance
of the property. There is no double sale in such case. Title to the property will
transfer to the buyer after registration because there is no defect in the ownersellers title per se, but the latter, of course, may be sued for damages by the
intending buyer.
In a conditional contract of sale, however, upon the fulfillment of the
suspensive condition, the sale becomes absolute and this will definitely affect the
sellers title thereto. In fact, if there had been previous delivery of the subject
property, the sellers ownership or title to the property is automatically transferred
to the buyer such that, the seller will no longer have any title to transfer to any
third person. Applying Article 1544 of the Civil Code, such second buyer of the
property who may have had actual or constructive knowledge of such defect in the
sellers title, or at least was charged with the obligation to discover such defect,
cannot be a registrant in good faith. Such second buyer cannot defeat the first
buyers title. In case a title is issued to the second buyer, the first buyer may seek
reconveyance of the property subject of the sale.
465

With the above postulates as guidelines, we now proceed to the task of

deciphering the real nature of the contract entered into by petitioners and private
respondents.
It is a canon in the interpretation of contracts that the words used therein should
be given their natural and ordinary meaning unless a technical meaning was
intended (Tan vs. Court of Appeals, 212 SCRA 586 [1992]). Thus, when petitioners
declared in the said Receipt of Down Payment that they -Received from Miss Ramona Patricia Alcaraz of 146 Timog, Quezon City, the sum
of Fifty Thousand Pesos purchase price of our inherited house and lot, covered
by TCT No. 1199627 of the Registry of Deeds of Quezon City, in the total amount
of P1,240,000.00.
without any reservation of title until full payment of the entire purchase price, the
natural and ordinary idea conveyed is that they sold their property.
When the Receipt of Down payment is considered in its entirety, it becomes
more manifest that there was a clear intent on the part of petitioners to transfer title
to the buyer, but since the transfer certificate of title was still in the name of
petitioners father, they could not fully effect such transfer although the buyer was
then willing and able to immediately pay the purchase price. Therefore, petitionerssellers undertook upon receipt of the down payment from private respondent
Ramona P. Alcaraz, to cause the issuance of a new certificate of title in their names
from that of their father, after which, they promised to present said title, now in
their names, to the latter and to execute the deed of absolute sale whereupon, the
latter shall, in turn, pay the entire balance of the purchase price.
The agreement could not have been a contract to sell because the sellers herein
made no express reservation of ownership or title to the subject parcel of
land. Furthermore, the circumstance which prevented the parties from entering into
an absolute contract of sale pertained to the sellers themselves (the certificate of
title was not in their names) and not the full payment of the purchase price. Under
the established facts and circumstances of the case, the Court may safely presume
that, had the certificate of title been in the names of petitioners-sellers at that time,
466

there would have been no reason why an absolute contract of sale could not have
been executed and consummated right there and then.
Moreover, unlike in a contract to sell, petitioners in the case at bar did not
merely promise to sell the property to private respondent upon the fulfillment of
the suspensive condition. On the contrary, having already agreed to sell the subject
property, they undertook to have the certificate of title change to their names and
immediately thereafter, to execute the written deed of absolute sale.
Thus, the parties did not merely enter into a contract to sell where the sellers,
after compliance by the buyer with certain terms and conditions, promised to sell
the property to the latter. What may be perceived from the respective undertakings
of the parties to the contract is that petitioners had already agreed to sell the house
and lot they inherited from their father, completely willing to transfer ownership of
the subject house and lot to the buyer if the documents were then in order. It just so
happened, however, that the transfer certificate of title was then still in the name of
their father. It was more expedient to first effect the change in the certificate of title
so as to bear their names. That is why they undertook to cause the issuance of a
new transfer of the certificate of title in their names upon receipt of the down
payment in the amount of P50,000.00. As soon as the new certificate of title is
issued in their names, petitioners were committed to immediately execute the deed
of absolute sale. Only then will the obligation of the buyer to pay the remainder of
the purchase price arise.
There is no doubt that unlike in a contract to sell which is most commonly
entered into so as to protect the seller against a buyer who intends to buy the
property in installment by withholding ownership over the property until the buyer
effects full payment therefor, in the contract entered into in the case at bar, the
sellers were the ones who were unable to enter into a contract of absolute sale by
reason of the fact that the certificate of title to the property was still in the name of
their father. It was the sellers in this case who, as it were, had the impediment
which prevented, so to speak, the execution of an contract of absolute sale.
What is clearly established by the plain language of the subject document is
that when the said Receipt of Down Payment was prepared and signed by
petitioners Romulo A. Coronel, et. al., the parties had agreed to a conditional
467

contract of sale, consummation of which is subject only to the successful transfer

of the certificate of title from the name of petitioners father, Constancio P. Coronel,
to their names.
The Court significantly notes that this suspensive condition was, in fact,
fulfilled on February 6, 1985 (Exh. D; Exh. 4).Thus, on said date, the conditional
contract of sale between petitioners and private respondent Ramona P. Alcaraz
became obligatory, the only act required for the consummation thereof being the
delivery of the property by means of the execution of the deed of absolute sale in a
public instrument, which petitioners unequivocally committed themselves to do as
evidenced by the Receipt of Down Payment.
Article 1475, in correlation with Article 1181, both of the Civil Code, plainly
applies to the case at bench. Thus,
Art. 1475. The contract of sale is perfected at the moment there is a meeting of
minds upon the thing which is the object of the contract and upon the price.
From that moment, the parties may reciprocally demand performance, subject to
the provisions of the law governing the form of contracts.
Art. 1181. In conditional obligations, the acquisition of rights, as well as the
extinguishment or loss of those already acquired, shall depend upon the happening
of the event which constitutes the condition.
Since the condition contemplated by the parties which is the issuance of a
certificate of title in petitioners names was fulfilled on February 6, 1985, the
respective obligations of the parties under the contract of sale became mutually
demandable, that is, petitioners, as sellers, were obliged to present the transfer
certificate of title already in their names to private respondent Ramona P. Alcaraz,
the buyer, and to immediately execute the deed of absolute sale, while the buyer on
her part, was obliged to forthwith pay the balance of the purchase price amounting
to P1,190,000.00.
It is also significant to note that in the first paragraph in page 9 of their petition,
petitioners conclusively admitted that:
468

3. The petitioners-sellers Coronel bound themselves to effect the transfer in

our names from our deceased father Constancio P. Coronel, the transfer
certificate of title immediately upon receipt of the downpayment abovestated". The sale was still subject to this suspensive
condition. (Emphasis supplied.)
(Rollo, p. 16)
Petitioners themselves recognized that they entered into a contract of sale
subject to a suspensive condition. Only, they contend, continuing in the same
paragraph, that:
. . . Had petitioners-sellers not complied with this condition of first transferring the
title to the property under their names, there could be no perfected contract of sale.
(Emphasis supplied.)
(Ibid.)
not aware that they have set their own trap for themselves, for Article 1186 of the
Civil Code expressly provides that:
Art. 1186. The condition shall be deemed fulfilled when the obligor voluntarily
prevents its fulfillment.
Besides, it should be stressed and emphasized that what is more controlling
than these mere hypothetical arguments is the fact that the condition herein
referred to was actually and indisputably fulfilled on February 6, 1985, when a
new title was issued in the names of petitioners as evidenced by TCT No. 327403
(Exh. D; Exh. 4).
The inevitable conclusion is that on January 19, 1985, as evidenced by the
document denominated as Receipt of Down Payment (Exh. A; Exh. 1), the parties
entered into a contract of sale subject to the suspensive condition that the sellers
shall effect the issuance of new certificate title from that of their fathers name to
their names and that, on February 6, 1985, this condition was fulfilled (Exh. D;
Exh. 4).
469

We, therefore, hold that, in accordance with Article 1187 which pertinently
provides Art. 1187. The effects of conditional obligation to give, once the condition has
been fulfilled, shall retroact to the day of the constitution of the obligation . . .
In obligations to do or not to do, the courts shall determine, in each case, the
retroactive effect of the condition that has been complied with.
the rights and obligations of the parties with respect to the perfected contract of
sale became mutually due and demandable as of the time of fulfillment or
occurrence of the suspensive condition on February 6, 1985. As of that point in
time, reciprocal obligations of both seller and buyer arose.
Petitioners also argue there could been no perfected contract on January 19,
1985 because they were then not yet the absolute owners of the inherited property.
We cannot sustain this argument.
Article 774 of the Civil Code defines Succession as a mode of transferring
ownership as follows:
Art. 774. Succession is a mode of acquisition by virtue of which the property,
rights and obligations to the extent and value of the inheritance of a person are
transmitted through his death to another or others by his will or by operation of
law.
Petitioners-sellers in the case at bar being the sons and daughters of the
decedent Constancio P. Coronel are compulsory heirs who were called to
succession by operation of law. Thus, at the point their father drew his last breath,
petitioners stepped into his shoes insofar as the subject property is concerned, such
that any rights or obligations pertaining thereto became binding and enforceable
upon them. It is expressly provided that rights to the succession are transmitted
from the moment of death of the decedent (Article 777, Civil Code; Cuison vs.
Villanueva, 90 Phil. 850 [1952]).

470

Be it also noted that petitioners claim that succession may not be declared
unless the creditors have been paid is rendered moot by the fact that they were able
to effect the transfer of the title to the property from the decedents name to their
names on February 6, 1985.
Aside from this, petitioners are precluded from raising their supposed lack of
capacity to enter into an agreement at that time and they cannot be allowed to now
take a posture contrary to that which they took when they entered into the
agreement with private respondent Ramona P. Alcaraz. The Civil Code expressly
states that:
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.
Having represented themselves as the true owners of the subject property at the
time of sale, petitioners cannot claim now that they were not yet the absolute
owners thereof at that time.
Petitioners also contend that although there was in fact a perfected contract of
sale between them and Ramona P. Alcaraz, the latter breach her reciprocal
obligation when she rendered impossible the consummation thereof by going to the
United States of America, without leaving her address, telephone number, and
Special Power of Attorney (Paragraphs 14 and 15, Answer with Compulsory
Counterclaim to the Amended Complaint, p. 2; Rollo, p. 43), for which reason, so
petitioners conclude, they were correct in unilaterally rescinding the contract of
sale.
We do not agree with petitioners that there was a valid rescission of the
contract of sale in the instant case. We note that these supposed grounds for
petitioners rescission, are mere allegations found only in their responsive
pleadings, which by express provision of the rules, are deemed controverted even
if no reply is filed by the plaintiffs (Sec. 11, Rule 6, Revised Rules of Court). The
records are absolutely bereft of any supporting evidence to substantiate petitioners
allegations. We have stressed time and again that allegations must be proven by
sufficient evidence (Ng Cho Cio vs. Ng Diong, 110 Phil. 882 [1961]; Recaro vs.
471

Embisan, 2 SCRA 598 [1961]). Mere allegation is not an evidence (Lagasca vs. De
Vera, 79 Phil. 376 [1947]).
Even assuming arguendo that Ramona P. Alcaraz was in the United States of
America on February 6, 1985, we cannot justify petitioners-sellers act of
unilaterally and extrajudicially rescinding the contract of sale, there being no
express stipulation authorizing the sellers to extrajudicially rescind the contract of
sale. (cf. Dignos vs. CA, 158 SCRA 375 [1988]; Taguba vs. Vda. De Leon, 132
SCRA 722 [1984])
Moreover, petitioners are estopped from raising the alleged absence of Ramona
P. Alcaraz because although the evidence on record shows that the sale was in the
name of Ramona P. Alcaraz as the buyer, the sellers had been dealing with
Concepcion D. Alcaraz, Ramonas mother, who had acted for and in behalf of her
daughter, if not also in her own behalf.Indeed, the down payment was made by
Concepcion D. Alcaraz with her own personal Check (Exh. B; Exh. 2) for and in
behalf of Ramona P. Alcaraz. There is no evidence showing that petitioners ever
questioned Concepcions authority to represent Ramona P. Alcaraz when they
accepted her personal check. Neither did they raise any objection as regards
payment being effected by a third person. Accordingly, as far as petitioners are
concerned, the physical absence of Ramona P. Alcaraz is not a ground to rescind
the contract of sale.
Corollarily, Ramona P. Alcaraz cannot even be deemed to be in default, insofar
as her obligation to pay the full purchase price is concerned. Petitioners who are
precluded from setting up the defense of the physical absence of Ramona P.
Alcaraz as above-explained offered no proof whatsoever to show that they actually
presented the new transfer certificate of title in their names and signified their
willingness and readiness to execute the deed of absolute sale in accordance with
their agreement. Ramonas corresponding obligation to pay the balance of the
purchase price in the amount of P1,190,000.00 (as buyer) never became due and
demandable and, therefore, she cannot be deemed to have been in default.
Article 1169 of the Civil Code defines when a party in a contract involving
reciprocal obligations may be considered in default, to wit:
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Art. 1169. Those obliged to deliver or to do something, incur in delay from the
time the obligee judicially or extrajudicially demands from them the fulfillment of
their obligation.
xxx
In reciprocal obligations, neither party incurs in delay if the other does not
comply or is not ready to comply in a proper manner with what is incumbent
upon him. From the moment one of the parties fulfill his obligation, delay by the
other begins. (Emphasis supplied.)
There is thus neither factual nor legal basis to rescind the contract of sale
between petitioners and respondents.
With the foregoing conclusions, the sale to the other petitioner, Catalina B.
Mabanag, gave rise to a case of double sale where Article 1544 of the Civil Code
will apply, to wit:
Art. 1544. If the same thing should have been sold to different vendees, the
ownership shall be transferred to the person who may have first taken possession
thereof in good faith, if it should be movable property.
Should it be immovable property, the ownership shall belong to the person
acquiring it who in good faith first recorded it in the Registry of Property.
Should there be no inscription, the ownership shall pertain to the person who in
good faith was first in the possession; and, in the absence thereof to the person who
presents the oldest title, provided there is good faith.
The record of the case shows that the Deed of Absolute Sale dated April 25,
1985 as proof of the second contract of sale was registered with the Registry of
Deeds of Quezon City giving rise to the issuance of a new certificate of title in the
name of Catalina B. Mabanag on June 5, 1985. Thus, the second paragraph of
Article 1544 shall apply.
The above-cited provision on double sale presumes title or ownership to pass
to the buyer, the exceptions being: (a) when the second buyer, in good faith,
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registers the sale ahead of the first buyer, and (b) should there be no inscription by
either of the two buyers, when the second buyer, in good faith, acquires possession
of the property ahead of the first buyer.Unless, the second buyer satisfies these
requirements, title or ownership will not transfer to him to the prejudice of the first
buyer.
In his commentaries on the Civil Code, an accepted authority on the subject,
now a distinguished member of the Court, Justice Jose C. Vitug, explains:
The governing principle is prius tempore, potior jure (first in time, stronger in
right).Knowledge by the first buyer of the second sale cannot defeat the first
buyers rights except when the second buyer first registers in good faith the second
sale (Olivares vs. Gonzales, 159 SCRA 33). Conversely, knowledge gained by the
second buyer of the first sale defeats his rights even if he is first to register, since
knowledge taints his registration with bad faith (see also Astorga vs. Court of
Appeals, G.R. No. 58530, 26 December 1984). In Cruz vs. Cabana (G.R. No.
56232, 22 June 1984, 129 SCRA 656), it was held that it is essential, to merit the
protection of Art. 1544, second paragraph, that the second realty buyer must act in
good faith in registering his deed of sale (citing Carbonell vs. Court of Appeals, 69
SCRA 99, Crisostomo vs. CA, G.R. No. 95843, 02 September 1992).
(J. Vitug, Compendium of Civil Law and Jurisprudence, 1993 Edition, p. 604).
Petitioners point out that the notice of lis pendens in the case at bar was
annotated on the title of the subject property only on February 22, 1985, whereas,
the second sale between petitioners Coronels and petitioner Mabanag was
supposedly perfected prior thereto or on February 18, 1985. The idea conveyed is
that at the time petitioner Mabanag, the second buyer, bought the property under a
clean title, she was unaware of any adverse claim or previous sale, for which
reason she is a buyer in good faith.
We are not persuaded by such argument.
In a case of double sale, what finds relevance and materiality is not whether or
not the second buyer in good faith but whether or not said second buyer registers
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such second sale in good faith, that is, without knowledge of any defect in the title
of the property sold.
As clearly borne out by the evidence in this case, petitioner Mabanag could not
have in good faith, registered the sale entered into on February 18, 1985 because as
early as February 22, 1985, a notice of lis pendens had been annotated on the
transfer certificate of title in the names of petitioners, whereas petitioner Mabanag
registered the said sale sometime in April, 1985. At the time of registration,
therefore, petitioner Mabanag knew that the same property had already been
previously sold to private respondents, or, at least, she was charged with
knowledge that a previous buyer is claiming title to the same property. Petitioner
Mabanag cannot close her eyes to the defect in petitioners title to the property at
the time of the registration of the property.
This Court had occasions to rule that:
If a vendee in a double sale registers the sale after he has acquired knowledge that
there was a previous sale of the same property to a third party or that another
person claims said property in a previous sale, the registration will constitute a
registration in bad faith and will not confer upon him any right. (Salvoro vs.
Tanega, 87 SCRA 349 [1978]; citing Palarca vs. Director of Land, 43 Phil. 146;
Cagaoan vs. Cagaoan, 43 Phil. 554; Fernandez vs. Mercader, 43 Phil. 581.)
Thus, the sale of the subject parcel of land between petitioners and Ramona P.
Alcaraz, perfected on February 6, 1985, prior to that between petitioners and
Catalina B. Mabanag on February 18, 1985, was correctly upheld by both the
courts below.
Although there may be ample indications that there was in fact an agency
between Ramona as principal and Concepcion, her mother, as agent insofar as the
subject contract of sale is concerned, the issue of whether or not Concepcion was
also acting in her own behalf as a co-buyer is not squarely raised in the instant
petition, nor in such assumption disputed between mother and daughter. Thus, We
will not touch this issue and no longer disturb the lower courts ruling on this point.

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WHEREFORE, premises considered, the instant petition is hereby

DISMISSED and the appealed judgment AFFIRMED.
SO ORDERED.
Narvasa, C.J. (Chairman), Davide, Jr., and Francisco, JJ., concur.
Panganiban, J., no part.

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