Civil Cases Obligations With A Period To Novation

on Audit (COA).
The assailed issuances affirmed the Notice of

Disallowance No. (ND) 2000-002-101(97) dated November 14, 2001
Obligations with a period 1 issued by Rexy M. Ramos, COA State Auditor IV, pursuant to COA
Salonte v. Commission on Audit ................................................................. 1
Assignment Order No. 2000-63.3
Reciprocal Obligations 3
Fil-Estate Properties, Inc. v. Ronquillo ....................................................... 3 The Facts
Golden Valley Exploration, Inc. vs. Pinkian Mining Company .................. 5
Sangguniang Panlungsod Ng Baguio City vs. Jadewell Parking Systems On April 26, 1989, the City of Mandaue and F.F. Cruz and Co., Inc. (F.F.
Corporation .......................................................................................... 7 Cruz) entered into a Contract of Reclamation4 in which F.F. Cruz, in
Metropolitan Bank and Trust Company vs. Chiok .................................... 19 consideration of a defined land sharing formula thus stipulated, agreed to
The Wellex Group, Inc. vs. U-land Airlines, Co. Ltd ................................ 28
undertake, at its own expense, the reclamation of 180 hectares, more or
Swire Realty Development Corporation v. Yu .......................................... 40
less, of foreshore and submerged lands fromthe Cabahug Causeway in
Joint Obligation 42
Berot v. Siapno ......................................................................................... 42 that city. The timetables, i.e., commencement of the contract and project
Alternative Obligation 45 completion, are provided in paragraphs 2 and 15 of the Contract which
Arco Pulp and Paper Co., Inc. v. Lim........................................................ 45 state:
Solidary Obligation 49
2. COMMENCEMENT. Work on the reclamation shall commence not
Olongapo City v. Subic Water and Sewerage Co., Inc. ............................. 49
Estanislao and Africa Sinamban v. China Banking Corporation ............... 52 later than [July 1989], after thiscontract shall be ratified by the
Obligation with a penal clause 56 Sanggunian Panlungsod;
J Plus Asia Development Corp. v. Utility Assurance Corp. ...................... 56
xxxx
Nacar v. Gallery Frames ........................................................................... 61
Venzon v. Rural Bank of Buenavista, Inc. ................................................ 64 15. CONTRACT DURATION. The project is estimated to be completed
S.C. Megaworld Construction and Development Corp. v. Parada ............. 65
Secretary of the Department of Public Works and Highways v. Tecson ... 69
in six (6) years: (3 years for the dredge-filling and seawall construction
Extinguishment of Obligations 73 and 3 years for the infrastructures completion). However, if all the
Metro Concast Steel Corp. v. Allied Bank Corp ....................................... 73 infrastructures within the OWNERS’ share of the project are already
Payment/Performance 75 completed within the six (6) year period agreed upon, any extension of
International Hotel Corp. vs Joaquin ........................................................ 75 time for works to bedone within the share of the DEVELOPERS, shall be
Dela Cruz vs. Concepcion ......................................................................... 79 at the discretion of the DEVELOPERS, as a growing city, changes in
National Power Corporation v. Ibrahim .................................................... 81 requirements of the lot buyers are inevitable.
Netlink Computer Incorporated v. Delmo ................................................. 85
Philippine Commercial International Bank v. Franco ............................... 87 On a best effort basis, the construction of roadways, drainage system and
Bognot v. RRI Lending Corporation ......................................................... 89 open spaces in the area designated as share of the City of Mandaue, shall
Evangelista v. Screenex, Inc. .................................................................... 93 be completed not later than December 31, 1991. (emphasis supplied)
Tender of payment and consignment 95
Cacayorin v. Armed Forces and Police Mutual Benefit Association, Inc. . 95 Subsequently, the parties inked inrelation to the above project a
Bonrostro v. Luna ..................................................................................... 97 Memorandum of Agreement (MOA) dated October 24, 19895 whereby
Del Carmen v. Sabordo ........................................................................... 100 the City of Mandaue allowed F.F. Cruz to put up structures on a portion
Philippine National Bank v. Chan ........................................................... 101 of a parcel of land owned by the city for the use of and to house F.F. Cruz
Loss of thing due/Impossibility of performance 103 personnel assigned at the project site, subject to terms particularly
Comglasco Corporation/Aguila Glass v. Santos Car Check Center provided in paragraphs 3, 4 and 5 of the MOA:
Corporation ...................................................................................... 103
Compensation 105 3) That [F.F. Cruz] desires to use a portion of a parcel of land of the [City
Soriano v. People .................................................................................... 105 of Mandaue] described under paragraph 1 hereof to the extent of 495
Mondrago Personal Sales, Inc. v. Sola, Jr. .............................................. 107 square meters x x x to be used by them in the construction of their offices
Union Bank of the Philippines v. Development Bank of the Philippines 109
First United Constructors Corp. v. Bayanihan Automotive Corp. ........... 112
to house its personnel to supervise the Mandaue City Reclamation Project
Areza v. Express Savings Bank, Inc. ....................................................... 114 x x x.
California Manufacturing Company, Inc. v. Advanced Technology System,
Inc. ................................................................................................... 118
xxxx
Novation 120 4) That the [City of Mandaue] agrees to the desire of [F.F. Cruz] to use a
ACE Foods, Inc. v. Micro Pacific Technologies., Ltd. ............................ 120
portion of the parcel of land described under paragraph 1 by [F.F. Cruz]
Philippine Reclamation Authority v. Romago, Inc. ................................. 121
Vector Shipping Corporation v. Amercan Home Assurance Co.............. 124 for the latter to use for the construction of their offices to house its
Asian Terminals, Inc. v. Philam Insurance Co., Inc. ............................... 126 personnel to supervise the said Mandaue City Reclamation Project with
Degaños v. People of the Philippines ...................................................... 130 no rental to be paid by [F.F. Cruz] to the [City of Mandaue].
Arco Pulp and Paper Co., Inc. v. Lim...................................................... 133
Bognot v. RRI Lending Corporation ....................................................... 133 5) That the [City of Mandaue] and [F.F. Cruz] have agreed that upon the
The Wellex Group, INc. v. U-Land Airlines, Co. Ltd. ............................ 133 completion of the Mandaue City Reclamation Project, all improvements
Bank of the Philippine Islands v. Domingo ............................................. 133 introduced by [F.F. Cruz] to the portion of the parcel of land owned by
Paradigm Development Corp. of the Philippines v. Bank of the Philippine the [City of Mandaue]as described under paragraph 3 hereof existing
Islands .............................................................................................. 139 upon the completion of the said Mandaue City Reclamation Project shall
ipso facto belong to the [City of Mandaue] in ownershipas compensation
for the use of said parcel of land by [F.F. Cruz] without any rental
whatsoever. (emphasis supplied)
————————————————————————————
Pursuant to the MOA, F.F. Cruz proceeded to construct the contemplated
O BLIGATIONS WITH A PERIOD housing units and other facilities which included a canteen and a septic
tank.
Salonte v. Commission on Audit
G.R. No. 207348 August 19, 2014 Later developments saw the City of Mandaue undertaking the Metro Cebu
Development Project II (MCDP II), part of which required the widening
ROWENA R. SALONTE, Petitioner,
of the Plaridel Extension Mandaue Causeway. However, the structures
vs.
and facilities built by F.F. Cruz subject of the MOA stood in the direct
COMMISSION ON AUDIT, CHAIRPERSON MA. GRACIA PULIDO-
path of the road widening project. Thus, the Department of Public Works
TAN, COMMISSIONER JUANITO G. ESPINO, JR.,
and Highways (DPWH) and Samuel B. Darza, MCDP II project director,
COMMISSIONER HEIDI L. MENDOZA, and FORTUNATA M.
entered into an Agreement to Demolish, Remove and Reconstruct
RUBICO, DIRECTOR IV, COA COMMISSION SECRETARIAT, in
Improvement dated July 23, 19976 with F.F. Cruz whereby the latter
their official capacities, Respondents.
would demolish the improvements outside of the boundary of the road
DECISION widening project and, in return, receive the total amount of PhP
1,084,836.42 in compensation.
VELASCO, JR., J.:
Accordingly, petitioner Rowena B.Rances (now Rowena RancesSolante),
The Case Human Resource Management Officer III, prepared and, with the
approval of Samuel B. Darza (Darza), then issued Disbursement Voucher
This is a petition for review filed under Rule 64 assailing the February 15, (DV) No. 102-07-88-97 dated July 24, 19977 for PhP 1,084,836.42 in
2008 Decision1 and November 5, 2012 Resolution,2 denominated as favor of F.F. Cruz. In the voucher, Solante certified that the expense
Decision Nos. 2008-018 and 2012-190, respectively, of the Commission
Obligations Part 2 | Page 1 of 143

covered by it was "necessary, lawful and incurred under my direct The resolution of the present controversy rests on the determination of a
supervision." sole issue: who between the City ofMandaue and F.F. Cruz owned during
the period material the properties that were demolished.
Thereafter, Darza addressed a letter-complaint to the Office of the
Ombudsman, Visayas, inviting attention to several irregularities The Court’s Ruling
regarding the implementation of MCDP II. The letter was referred to the
COA which then issued Assignment Order No. 2000-063 for a team to The petition is meritorious. The COA and its audit team obviously
audit the accounts of MCDP II. Following an audit, the audit team issued misread the relevant stipulations of the MOA in relation to the provisions
Special Audit Office (SAO) Report No. 2000-28, par. 5 of which states: on project completion and termination of contract of the Mandaue-F.F.
Cruz reclamation contract.
F.F. Cruz and Company, Inc. was paid ₱1,084,836.42 for the cost of the
property affected by the widening of Plaridel Extension, Mandaue Essentially, the COA is alleging that the Contract of Reclamation
Causeway. However, under Section 5 of its MOA with Mandaue City, the establishes an obligation on the part of F.F. Cruz to finish the project
former was no longer the lawful owner of the properties at the time the within the allotted period of six (6) years from contract execution in
payment was made.8 August 1989. Prescinding from this premise, the COA would conclude
that after the six (6)-year period, F.F. Cruz is automatically deemed to be
Based on the above findings, the SAO audit team, through Rexy Ramos, in delay, the contract considered as completed, and the ownership of the
issued the adverted ND 2000-002-101-(97)9 disallowing the payment of structures built in accordance with the MOA transferred to the City of
PhP 1,084,836.42 to F.F. Cruz and naming that company, Darza and Mandaue.
Solante liable for the transaction. Therefrom, Solante sought
reconsideration, while F.F. Cruz appealed, but the motion for COA’s basic position and the arguments holding it together is untenable.
reconsideration and the appeal were jointly denied in Legal and On this point, the Civil Code provision on obligations with a period is
Adjudication Office (LAO) Local Decision No. 2004-040 dated March 5, relevant. Article 1193 thereof provides:
2004, which F.F. Cruz in time appealed to COA Central.
Article 1193. Obligations for whose fulfillment a day certain has been
In the meantime, the adverted letter-complaint of Darza was upgraded as fixed, shall be demandable only when that day comes.
an Ombudsman case, docketed as OMB-V-C-03-0173-C, against Solante,
et al., albeit the Ombudsman, by Resolution of June 29, 2006,10 would Obligations with a resolutory period take effect at once, but terminate
subsequently dismiss the same for lack of merit. upon arrival of the day certain.
The Ruling of the Commission on Audit A day certain is understood to bethat which must necessarily come,
although it may not be known when.
In its February 15, 2008 Decision,11
the COA, as indicated at the outset,
affirmed ND 2000-002-101-97 on the strength of the following premises: If the uncertainty consists in whether the day will come or not, the
obligation is conditional, and it shall be regulated by the rules of the
From the above provision of the MOA, it is clear that the improvements preceding Section. (emphasis supplied)
introduced by F.F. Cruz x x x would be owned by the City upon
completion of the project which under the Contract of reclamation should A plain reading of the Contract ofReclamation reveals that the six (6)-
have been in 1995. However, the project was not completed in 1995 and year period provided for projectcompletion, or, with like effect,
even in 1997 when MDCP paid for these improvements. The fact that the termination of the contract was a mere estimateand cannot be considered
reclamation project had not yet been completed or turned over to the City a period or a "day certain" inthe context of the aforequoted Art. 1193. To
of Mandaue by F.F. Cruz in 1997 or two years after it should have been be clear, par. 15 of the Contract of Reclamation states: "[T]he project is
completed, does not negate the right over such improvements by the City estimated to be completed in six (6) years." As such, the lapse of six (6)
x x x. Clearly, the intention of the stipulation is for F.F. Cruz x x x to years from the perfection of the contract did not, by itself, make the
compensate the government for the use of the land on which the office, obligation to finish the reclamation project demandable, such as to put the
pavement, canteen, extension shed, house and septic tank were erected. obligor in a state of actionable delay for its inability to finish. Thus, F.F.
Thus, to make the government pay for the cost of the demolished Cruz cannot be deemed to be in delay. Parenthetically, the Ombudsman,
improvements will defeat the intention of parties as regards compensation in a Resolution of June 29, 2006 in OMB-V-C-03-0173-C, espoused a
due from the contractor for its use of [the] subject land. Under Article similar view in dismissing the complaint against Solante, thus:
1315 of the Civil Code, from the moment a contract is perfected, the
parties are bound to the fulfillment to what has been expressly stipulated A careful reading of the pertinent section of the Contract of Reclamation
and all the consequences which according to their nature, may be in between F.F. Cruz and Mandaue City, however, would confirm
keeping with good faith, usage and law. Thus, even if the contractual respondents Rances-Solante[’s]and Sungahid’s view that herein
stipulations may turn out to be financially disadvantageous to any party, respondent Cruz was still the owner of the subject properties at the time
such will not relieve any or both parties fromtheir contractual these were demolished. Indeed, the Contract specifies that the six (6)-year
obligations.12 (emphasis supplied) period was no more than an estimate of the project completion. It was not
a fixed period agreed upon. Being so, the mere lapse of six (6) years from
From such decision, Solante filed a Motion for Reconsideration dated the execution of the Contract, did not by itself deem the reclamation
June 28, 2010 purportedly with Audit Team Leader, Leila Socorro P. project completed, muchless bring about the fulfillment of the condition
Domantay. This motion was denied by the COA in a Resolution dated stipulated in the MOA (on the shift of ownership over the demolished
November 5, 201213wherein the commission held: properties). Herein respondent Cruz, and/or his company, at least on this
particular regard, can be said to be still the owner of the structures along
x x x The arguments of Ms. Solante that as long as the Project has not yet Plaridel Extension x x x, when these were demolished to give way to road
been turned over, the ownership of the said improvements would not be widening. It was nothing but equitable that they get compensated for the
acquired yet by the City would put the entire contract at the mercy of F.F. damages caused by the demolition.16 (emphasis supplied)
Cruz & Co., Inc., thus, negating the mutuality of contracts principle
expressed in Article 1308 ofthe New Civil Code, which states: Put a bit differently, the lapse of six (6) years from the perfection of the
subject reclamation contract, withoutmore, could not have automatically
Art. 1308. The contracts must bindboth contracting parties; its validity or vested Mandaue City, under the MOA, with ownership of the structures.
compliance cannot be leftto the will of one of them.
Moreover, even if we consider the allotted six (6) years within which F.F.
On February 15, 2013, Solante received a Notice of Finality of Decision Cruz was supposed to completethe reclamation project, the lapse thereof
(NFD)14 stating that the COA Decision dated February 15, 2008 and does not automatically mean thatF.F. Cruz was in delay. As may be noted,
Resolution dated November 5, 2012 have become final and executory, a the City of Mandaue never madea demand for the fulfillment of its
copy of the Resolution having been served on the parties on November 9, obligation under the Contract of Reclamation. Article 1169 of the Civil
2012 by registered mail. Notably, Solante never received a copy of the Code on the interaction of demand and delay and the exceptions to the
COA Resolution. She came to get one only on May 8, 2013 after inquiring requirement of demand relevantly states:
from the Cebu Central Post Office, which, in a Certification of
Deliverydated May 8, 2013,15 stated that the registered mail containing Article 1169. Those obliged to deliver orto do something incur in delay
said copy was in fact not delivered. from the time the obligeejudicially or extrajudicially demands from them
the fulfillment of their obligation.
Hence, the instant petition.
However, the demand by the creditor shall not be necessary in order that
The Issue delay may exist:
(1) When the obligation or the law expressly so declares; or

(2) When from the nature and the circumstances of the obligation it As culled from the records, the facts are as follow:
appears that the designation of the time when the thing is to be delivered
or the service is to be rendered was a controlling motive for the Petitioner Fil-Estate Properties, Inc. is the owner and developer of the
establishment of the contract; or Central Park Place Tower while co-petitioner Fil-Estate Network, Inc. is
its authorized marketing agent. Respondent Spouses Conrado and Maria
(3) When demand would be useless, as when the obligor has rendered it Victoria Ronquillo purchased from petitioners an 82-square meter
beyond his power to perform. condominium unit at Central Park Place Tower in Mandaluyong City for
a pre-selling contract price of FIVE MILLION ONE HUNDRED
In reciprocal obligations, neither party incurs in delay if the other does SEVENTY-FOUR THOUSAND ONLY (₱5,174,000.00). On 29 August
not comply or is not ready to comply in a proper manner with what is 1997, respondents executed and signed a Reservation Application
incumbent upon him. From the momentone of the parties fulfills his Agreement wherein they deposited ₱200,000.00 as reservation fee. As
obligation, delay by the other begins. agreed upon, respondents paid the full downpayment of ₱1,552,200.00
Thus, in J Plus Asia Development Corporation v. Utility Assurance and had been paying the ₱63,363.33 monthly amortizations until
Corporation,17 the Court has held: September 1998.
In this jurisdiction, the following requisites must be present in order that Upon learning that construction works had stopped, respondents likewise
the debtor may be in default: (1) that the obligation be demandable and stopped paying their monthly amortization. Claiming to have paid a total
already liquidated;(2) that the debtor delays performance; and (3) that the of ₱2,198,949.96 to petitioners, respondents through two (2) successive
creditor requires the performance judicially or extrajudicially. (emphasis letters, demanded a full refund of their payment with interest. When their
supplied) demands went unheeded, respondents were constrained to file a
Complaint for Refund and Damages before the Housing and Land Use
In the instant case, the records are bereft of any document whence to Regulatory Board (HLURB). Respondents prayed for
deduce that the City of Mandaue exactedfrom F.F. Cruz the fulfillment of reimbursement/refund of ₱2,198,949.96 representing the total
its obligation under the reclamation contract. And to be sure, not one of amortization payments, ₱200,000.00 as and by way of moral damages,
the exceptions to the requisite demand under Art. 1169 is established, let attorney’s fees and other litigation expenses.
alone asserted. On the contrary, the then city mayor of Mandaue, no less,
absolved F.F. Cruz from incurring under the premises in delay. In his On 21 October 2000, the HLURB issued an Order of Default against
affidavit dated July 9, 2004,18 then Mayor Ouano stated: petitioners for failing to file their Answer within the reglementary period
despite service of summons.2
That although x x x the reclamation wasestimatedto be completed in six
years ending in 1995, the said project however, was not fully completed Petitioners filed a motion to lift order of default and attached their position
when the demolition of the mentioned improvements of [F.F. Cruz] was paper attributing the delay in construction to the 1997 Asian financial
made x x x [and in fact] up to now the said Mandaue Reclamation Project crisis. Petitioners denied committing fraud or misrepresentation which
has not yet been fully completed and turned over to the City of Mandaue. could entitle respondents to an award of moral damages.
x x x [S]ince at the time of the demolition the said improvements actually On 13 June 2002, the HLURB, through Arbiter Atty. Joselito F. Melchor,
belonged to [F.F. Cruz] and the City of Mandaue has no claim whatsoever rendered judgment ordering petitioners to jointly and severally pay
on the said payment x x x for the demolished improvements. (emphasis respondents the following amount:
supplied) a) The amount of TWO MILLION ONE HUNDRED NINETY-EIGHT
As it were, the Mandaue-F.F.Cruz MOA states that the structures built by THOUSAND NINE HUNDRED FORTY NINE PESOS & 96/100
F .F. Cruz on the property of the city will belong to the latter only upon (₱2,198,949.96) with interest thereon at twelve percent (12%) per annum
the completion of the project. Clearly, the completion of the project is a to be computed from the time of the complainants’ demand for refund on
suspensive condition that has yet to be fulfilled. Until the condition
1âwphi1
October 08, 1998 until fully paid,
arises, ownership of the structures properly pertains to F .F. Cruz. b) ONE HUNDRED THOUSAND PESOS (₱100,000.00) as moral
To be clear, the MOA does not state that the structures shall inure in damages,
ownership to the City of Mandaue after the lapse of six ( 6) years from c) FIFTY THOUSAND PESOS (₱50,000.00) as attorney’s fees,
the execution of the Contract of Reclamation. What the MOA does
provide is that ownership of the structures shall vest upon, or ipso facto d) The costs of suit, and
belong to, the City of Mandaue when the Contract of Reclamation shall
have been completed. Logically, before such time, or until the agreed e) An administrative fine of TEN THOUSAND PESOS (₱10,000.00)
reclamation project is actually finished, F.F. Cruz owns the structures. payable to this Office fifteen (15) days upon receipt of this decision, for
The payment of compensation for the demolition thereof is justified. The violation of Section 20 in relation to Section 38 of PD 957.3
disallowance of the payment is without factual and legal basis. COA then The Arbiter considered petitioners’ failure to develop the condominium
gravely abused its discretion when it decreed the disallowance. project as a substantial breach of their obligation which entitles
WHEREFORE, the instant petition is GRANTED. Accordingly, the respondents to seek for rescission with payment of damages. The Arbiter
assailed February 15, 2008 Decision, November 5, 2012 Resolution, and also stated that mere economic hardship is not an excuse for contractual
Notice of Disallowance No. 2000-002-101 (97) dated November 14, 2001 and legal delay.
issued by the Commission on Audit are hereby REVERSED and SET Petitioners appealed the Arbiter’s Decision through a petition for review
ASIDE. pursuant to Rule XII of the 1996 Rules of Procedure of HLURB. On 17
No costs. February 2005, the Board of Commissioners of the HLURB denied4 the
petition and affirmed the Arbiter’s Decision. The HLURB reiterated that
SO ORDERED. the depreciation of the peso as a result of the Asian financial crisis is not
a fortuitous event which will exempt petitioners from the performance of
R ECIPROCAL O BLIGATIONS their contractual obligation.
Fil-Estate Properties, Inc. v. Ronquillo
G.R. No. 185798 January 13, 2014 Petitioners filed a motion for reconsideration but it was denied5 on 8 May
2006. Thereafter, petitioners filed a Notice of Appeal with the Office of
FIL-ESTATE PROPERTIES, INC. AND FIL-ESTATE NETWORK the President. On 18 April 2007, petitioners’ appeal was dismissed6 by
INC., Petitioners, the Office of the President for lack of merit. Petitioners moved for a
vs. reconsideration but their motion was denied7 on 26 July 2007.
SPOUSES CONRADO AND MARIA VICTORIA
RONQUILLO, Respondents. Petitioners sought relief from the Court of Appeals through a petition for
review under Rule 43 containing the same arguments they raised before
DECISION the HLURB and the Office of the President:
PEREZ, J.: I.
Before the Court is a petition for review on certiorari under Rule 45 of the THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN
1997 Rules .of Civil Procedure assailing the Decision1 of the Court of AFFIRMING THE DECISION OF THE HONORABLE HOUSING
Appeals in CA-G.R. SP No. 100450 which affirmed the Decision of the AND LAND USE REGULATORY BOARD AND ORDERING
Office of the President in O.P. Case No. 06-F-216. PETITIONERS-APPELLANTS TO REFUND RESPONDENTS-
APPELLEES THE SUM OF ₱2,198,949.96 WITH 12% INTEREST

FROM 8 OCTOBER 1998 UNTIL FULLY PAID, CONSIDERING as not liable to pay interest on deposits during the period that its
THAT THE COMPLAINT STATES NO CAUSE OF ACTION operations are ordered suspended by the Monetary Board of the Central
AGAINST PETITIONERS-APPELLANTS. Bank.
II. Lastly, petitioners aver that they should not be ordered to pay moral
damages because they never intended to cause delay, and again blamed
THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN the Asian economic crisis as the direct, proximate and only cause of their
AFFIRMING THE DECISION OF THE OFFICE BELOW ORDERING failure to complete the project. Petitioners submit that moral damages
PETITIONERS-APPELLANTS TO PAY RESPONDENTS- should not be awarded unless so stipulated except under the instances
APPELLEES THE SUM OF ₱100,000.00 AS MORAL DAMAGES enumerated in Article 2208 of the New Civil Code. Lastly, petitioners
AND ₱50,000.00 AS ATTORNEY’S FEES CONSIDERING THE refuse to pay the administrative fine because the delay in the project was
ABSENCE OF ANY FACTUAL OR LEGAL BASIS THEREFOR. caused not by their own deceptive intent to defraud their buyers, but due
III. to unforeseen circumstances beyond their control.
THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN Three issues are presented for our resolution: 1) whether or not the Asian
AFFIRMING THE DECISION OF THE HOUSING AND LAND USE financial crisis constitute a fortuitous event which would justify delay by
REGULATORY BOARD ORDERING PETITIONERS-APPELLANTS petitioners in the performance of their contractual obligation; 2) assuming
TO PAY ₱10,000.00 AS ADMINISTRATIVE FINE IN THE ABSENCE that petitioners are liable, whether or not 12% interest was correctly
OF ANY FACTUAL OR LEGAL BASIS TO SUPPORT SUCH imposed on the judgment award, and 3) whether the award of moral
FINDING.8 damages, attorney’s fees and administrative fine was proper.
On 30 July 2008, the Court of Appeals denied the petition for review for It is apparent that these issues were repeatedly raised by petitioners in all
lack of merit. The appellate court echoed the HLURB Arbiter’s ruling that the legal fora. The rulings were consistent that first, the Asian financial
"a buyer for a condominium/subdivision unit/lot unit which has not been crisis is not a fortuitous event that would excuse petitioners from
developed in accordance with the approved condominium/subdivision performing their contractual obligation; second, as a result of the breach
plan within the time limit for complying with said developmental committed by petitioners, respondents are entitled to rescind the contract
requirement may opt for reimbursement under Section 20 in relation to and to be refunded the amount of amortizations paid including interest
Section 23 of Presidential Decree (P.D.) 957 x x x."9 The appellate court and damages; and third, petitioners are likewise obligated to pay
supported the HLURB Arbiter’s conclusion, which was affirmed by the attorney’s fees and the administrative fine.
HLURB Board of Commission and the Office of the President, that This petition did not present any justification for us to deviate from the
petitioners’ failure to develop the condominium project is tantamount to rulings of the HLURB, the Office of the President and the Court of
a substantial breach which warrants a refund of the total amount paid, Appeals.
including interest. The appellate court pointed out that petitioners failed
to prove that the Asian financial crisis constitutes a fortuitous event which Indeed, the non-performance of petitioners’ obligation entitles
could excuse them from the performance of their contractual and statutory respondents to rescission under Article 1191 of the New Civil Code which
obligations. The appellate court also affirmed the award of moral damages states:
in light of petitioners’ unjustified refusal to satisfy respondents’ claim and
the legality of the administrative fine, as provided in Section 20 of Article 1191. The power to rescind obligations is implied in reciprocal
Presidential Decree No. 957. ones, in case one of the obligors should not comply with what is
incumbent upon him.
Petitioners sought reconsideration but it was denied in a
Resolution10 dated 11 December 2008 by the Court of Appeals. The injured party may choose between the fulfillment and the rescission
of the obligation, with payment of damages in either case. He may also
Aggrieved, petitioners filed the instant petition advancing substantially seek rescission, even after he has chosen fulfillment, if the latter should
the same grounds for review: become impossible.
A. More in point is Section 23 of Presidential Decree No. 957, the rule
governing the sale of condominiums, which provides:
THE HONORABLE COURT OF APPEALS ERRED WHEN IT
AFFIRMED IN TOTO THE DECISION OF THE OFFICE OF THE Section 23. Non-Forfeiture of Payments. No installment payment made
1âwp hi1
PRESIDENT WHICH SUSTAINED RESCISSION AND REFUND IN by a buyer in a subdivision or condominium project for the lot or unit he
FAVOR OF THE RESPONDENTS DESPITE LACK OF CAUSE OF contracted to buy shall be forfeited in favor of the owner or developer
ACTION. when the buyer, after due notice to the owner or developer, desists from
further payment due to the failure of the owner or developer to develop
B. the subdivision or condominium project according to the approved plans
GRANTING FOR THE SAKE OF ARGUMENT THAT THE and within the time limit for complying with the same. Such buyer may,
PETITIONERS ARE LIABLE UNDER THE PREMISES, THE at his option, be reimbursed the total amount paid including amortization
HONORABLE COURT OF APPEALS ERRED WHEN IT AFFIRMED interests but excluding delinquency interests, with interest thereon at the
THE HUGE AMOUNT OF INTEREST OF TWELVE PERCENT legal rate. (Emphasis supplied).
(12%). Conformably with these provisions of law, respondents are entitled to
C. rescind the contract and demand reimbursement for the payments they
had made to petitioners.
THE HONORABLE COURT OF APPEALS LIKEWISE ERRED
WHEN IT AFFIRMED IN TOTO THE DECISION OF THE OFFICE Notably, the issues had already been settled by the Court in the case of
OF THE PRESIDENT INCLUDING THE PAYMENT OF ₱100,000.00 Fil-Estate Properties, Inc. v. Spouses Go13promulgated on 17 August
AS MORAL DAMAGES, ₱50,000.00 AS ATTORNEY’S FEES AND 2007, where the Court stated that the Asian financial crisis is not an
₱10,000.00 AS ADMINISTRATIVE FINE IN THE ABSENCE OF instance of caso fortuito. Bearing the same factual milieu as the instant
ANY FACTUAL OR LEGAL BASIS TO SUPPORT SUCH case, G.R. No. 165164 involves the same company, Fil-Estate, albeit
CONCLUSIONS.11 about a different condominium property. The company likewise reneged
on its obligation to respondents therein by failing to develop the
Petitioners insist that the complaint states no cause of action because they condominium project despite substantial payment of the contract price.
allegedly have not committed any act of misrepresentation amounting to Fil-Estate advanced the same argument that the 1997 Asian financial
bad faith which could entitle respondents to a refund. Petitioners claim crisis is a fortuitous event which justifies the delay of the construction
that there was a mere delay in the completion of the project and that they project. First off, the Court classified the issue as a question of fact which
only resorted to "suspension and reformatting as a testament to their may not be raised in a petition for review considering that there was no
commitment to their buyers." Petitioners attribute the delay to the 1997 variance in the factual findings of the HLURB, the Office of the President
Asian financial crisis that befell the real estate industry. Invoking Article and the Court of Appeals. Second, the Court cited the previous rulings of
1174 of the New Civil Code, petitioners maintain that they cannot be held Asian Construction and Development Corporation v. Philippine
liable for a fortuitous event. Commercial International Bank14 and Mondragon Leisure and Resorts
Corporation v. Court of Appeals15 holding that the 1997 Asian financial
Petitioners contest the payment of a huge amount of interest on account crisis did not constitute a valid justification to renege on obligations. The
of suspension of development on a project. They liken their situation to a Court expounded:
bank which this Court, in Overseas Bank v. Court of Appeals,12 adjudged

Also, we cannot generalize that the Asian financial crisis in 1997 was GVEI, granting the latter "full, exclusive and irrevocable possession, use,
unforeseeable and beyond the control of a business corporation. It is occupancy , and control over the [mining claims], and every matter
unfortunate that petitioner apparently met with considerable difficulty e.g. pertaining to the examination, exploration, development and mining of
increase cost of materials and labor, even before the scheduled the [mining claims] and the processing and marketing of the products x x
commencement of its real estate project as early as 1995. However, a real x ,"8 for a period of 25 years.9
estate enterprise engaged in the pre-selling of condominium units is
concededly a master in projections on commodities and currency In a Letter10 dated June 8, 1999, PMC extra-judicially rescinded the OA
movements and business risks. The fluctuating movement of the upon GVEI’s violation of Section 5.01,11Article V thereof. Cited as
Philippine peso in the foreign exchange market is an everyday occurrence, further justification for its action were reasons such as: (a) violation of
and fluctuations in currency exchange rates happen everyday, thus, not an Section 2.03, Article II of the OA, or the failure of GVEI to advance the
instance of caso fortuito.16 actual cost for the perfection of the mining claims or for the acquisition
of mining rights, cost of lease applications, lease surveys and legal
The aforementioned decision becomes a precedent to future cases in expenses incidental thereto; (b) GVEI’s non-reimbursement of the
which the facts are substantially the same, as in this case. The principle expenses incurred by PMC General Manager Benjamin Saguid in
of stare decisis, which means adherence to judicial precedents, applies. connection with the visit of a financier to the mineral property in 1996;
(c) its non-remittance of the US$300,000.00 received from Excelsior
In said case, the Court ordered the refund of the total amortizations paid Resources, Ltd.; (d) its nondisclosure of contracts entered into with other
by respondents plus 6% legal interest computed from the date of demand. mining companies with respect to the mining claims; (e) its being a mere
The Court also awarded attorney’s fees. We follow that ruling in the case "promoter/broker" of PMC’s mining claims instead of being the operator
before us. thereof; and (f) its nonperformance of the necessary works on the mining
The resulting modification of the award of legal interest is, also, in line claims.12
with our recent ruling in Nacar v. Gallery Frames,17 embodying the GVEI contested PMC’s extra-judicial rescission of the OA through a
amendment introduced by the Bangko Sentral ng Pilipinas Monetary Letter dated December 7, 1999, averring therein that its obligation to pay
Board in BSP-MB Circular No. 799 which pegged the interest rate at 6% royalties to PMC arises only when the mining claims are placed in
regardless of the source of obligation. commercial production which condition has not yet taken place. It also
We likewise affirm the award of attorney’s fees because respondents were reminded PMC of its prior payment of the amount of ₱185,000.00 as
forced to litigate for 14 years and incur expenses to protect their rights future royalties in exchange for PMC’s express waiver of any breach or
and interest by reason of the unjustified act on the part of default on the part of GVEI.13
petitioners.18 The imposition of ₱10,000.00 administrative fine is correct PMC no longer responded to GVEI’s letter. Instead, it entered into a
pursuant to Section 38 of Presidential Decree No. 957 which reads: Memorandum of Agreement dated May 2, 2000 (MOA) with CVI,
Section 38. Administrative Fines. The Authority may prescribe and whereby the latter was granted the right to "enter, possess, occupy and
impose fines not exceeding ten thousand pesos for violations of the control the mining claims" and "to explore and develop the mining claims,
provisions of this Decree or of any rule or regulation thereunder. Fines mine or extract the ores, mill, process and beneficiate and/or dispose the
shall be payable to the Authority and enforceable through writs of mineral products in any method or process," among others, for a period
execution in accordance with the provisions of the Rules of Court. of 25 years.14
Finally, we sustain the award of moral damages. In order that moral Due to the foregoing, GVEI filed a Complaint15 for Specific Performance,
damages may be awarded in breach of contract cases, the defendant must Annulment of Contract and Damages against PMC and CVI before the
have acted in bad faith, must be found guilty of gross negligence RTC, docketed as Civil Case No. 01-324.
amounting to bad faith, or must have acted in wanton disregard of The RTC Ruling
contractual obligations.19 The Arbiter found petitioners to have acted in
bad faith when they breached their contract, when they failed to address On August 18, 2006, the RTC rendered a Decision16 in favor of GVEI,
respondents’ grievances and when they adamantly refused to refund holding that since the mining claims have not been placed in commercial
respondents' payment. production, there is no demandable obligation yet for GVEI to pay
royalties to PMC. It further declared that no fault or negligence may be
In fine, we find no reversible error on the merits in the impugned Court attributed to GVEI for the delay in the commercial production of the
of Appeals' Decision and Resolution. mining claims because the non-issuance of the requisite Mineral
WHEREFORE, the petition is PARTLY GRANTED. The appealed Production Sharing Agreement (MPSA) and other government permits,
Decision is AFFIRMED with the MODIFICATION that the legal interest licenses, and consent were all affected by factors beyond GVEI’s
to be paid is SIX PERCENT (6%) on the amount due computed from the control.17 The RTC, thus, declared the rescission of the OA void and the
time of respondents' demand for refund on 8 October 1998. execution of the MOA between PMC and CVI without force and effect.
In this relation, it ordered PMC to comply with the terms and conditions
SO ORDERED. of the OA until the expiration of its period.18
Golden Valley Exploration, Inc. vs. Pinkian Mining Company At odds with the RTC’s ruling, PMC elevated the case on appeal to the
G.R. No. 190080 June 11, 2014 CA.
GOLDEN VALLEY EXPLORATION, INC., Petitioner, The CA Ruling
vs.
PINKIAN MINING COMPANY and COPPER VALLEY, In a Decision19 dated July 23, 2009, the CA reversed the RTC ruling,
INC., Respondents. finding that while the OA gives PMC the right to rescind only on the
ground of (GVEI’s) failure to pay the stipulated royalties, Article 1191 of
DECISION the Civil Code allows PMC the right to rescind the agreement based on a
breach of any of its provisions.20 It further held that the inaction of GVEI
PERLAS-BERNABE, J.: for a period of more than seven (7) years to operate the areas that were
Assailed in this petition for review on certiorari1 are the Decision2 dated already covered by a perfected mining lease contract and to acquire the
July 23, 2009 and the Resolution3 dated October 23, 2009 of the Court of necessary permits and licenses amounted to a substantial breach of the
Appeals (CA) in CA-G.R. CV. No. 90682 which reversed the OA, the very purpose of which was the mining and commercial
Decision4 dated August 18, 2006 of the Regional Trial Court of Makati distribution of derivative products that may be recovered from the mining
City, Branch 145 (RTC) in Civil Case No. 01-324 and, consequently, property.21 For the foregoing reasons, the CA upheld the validity of
affirmed the validity of the rescission of the Operating Agreement PMC’s rescission of the OA and its subsequent execution of the MOA
between petitioner Golden Valley Exploration, Inc. (GVEI) and with CVI.22
respondent Pinkian Mining Company (PMC) covering various mining Dissatisfied with the CA’s ruling, GVEI filed a motion for reconsideration
claims in Kayapa, Nueva Vizcaya, as well as the Memorandum of which was, however, denied by the CA in a Resolution23 dated October
Agreement between PMC and respondent Copper Valley, Inc. (CVI). 23, 2009, hence, this petition.
The Facts The Issue Before the Court
PMC is the owner of 81 mining claims located in Kayapa, Nueva Vizcaya, The central issue for the Court’s resolution is whether or not there was a
15 of which were covered by Mining Lease Contract (MLC) No. MRD- valid rescission of the OA.
56,5 while the remaining 66 had pending applications for lease.6 On
October 30, 1987, PMC entered into an Operating Agreement7 (OA) with The Court’s Ruling

The Court resolves the issue in the affirmative. (3) royalty payments to the government;
In reciprocal obligations, either party may rescind the contract upon the (4) ad valorem and export taxes, if any, paid to the government.
other’s substantial breach of the obligation/s he had assumed thereunder.
The basis therefor is Article 1191 of the Civil Code which states as The aforesaid royalties shall be paid to PINKIAN within five (5) days
follows: after receipt of the smelter or refinery returns. (Emphases and
underscoring supplied)
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 By expressly stipulating in the OA that GVEI’s non-payment of royalties
upon him. would give PMC sufficient cause to cancel or rescind the OA, the parties
clearly had considered such violation to be a substantial breach of their
The injured party may choose between the fulfillment and the rescission agreement. Thus, in view of the above-stated jurisprudence on the matter,
of the obligation, with the payment of damages in either case. He may PMC’s extra-judicial rescission of the OA based on the said ground was
also seek rescission, even after he has chosen fulfillment, if the latter valid.
should become impossible.
In this relation, the Court finds it apt to clarify that the following defenses
The court shall decree the rescission claimed, unless there be just cause raised by GVEI in its petition would not impel a different conclusion:
authorizing the fixing of a period.
First, GVEI cannot excuse its non-payment of royalties on the argument
This is understood to be without prejudice to the rights of third persons that no commercial mining was yet in place. This is precisely because the
who have acquired the thing, in accordance with Articles 1385 and 1388 obligation to develop the mining areas and put them in commercial
and the Mortgage Law. operation also belonged to GVEI as it expressly undertook "to explore,
develop, and equip the Claims to mine and beneficiate the ore thereof by
More accurately referred to as resolution, the right of rescission under any method or process"35 and "to enter into contract, agreement,
Article 1191 is predicated on a breach of faith that violates the reciprocity assignments, conveyances and understandings of any kind whatsoever
between parties to the contract.24 This retaliatory remedy is given to the with reference to the exploration, development, equipping and operation
contracting party who suffers the injurious breach on the premise that it of the Claims, and the mining and beneficiation of the ore derived
is "unjust that a party be held bound to fulfill his promises when the other therefrom, and marketing the resulting marketable products."36
violates his."25
Records reveal that when the OA was signed on October 30, 1987, 15
As a general rule, the power to rescind an obligation must be invoked mining claims were already covered by a perfected mining lease contract,
judicially and cannot be exercised solely on a party’s own judgment that i.e., MLC No. MRD-56, granting to the holder thereof "the right to extract
the other has committed a breach of the obligation.26 This is so because all mineral deposits found on or underneath the surface of his mining
rescission of a contract will not be permitted for a slight or casual breach, claims x x x; to remove, process and otherwise utilize the mineral deposits
but only for such substantial and fundamental violations as would defeat for his own benefit."37 This meant that GVEI could have immediately
the very object of the parties in making the agreement.27 As a well- extracted mineral deposits from the covered mineral land and carried out
established exception, however, an injured party need not resort to court commercial mining operations from the very start. However, despite
action in order to rescind a contract when the contract itself provides that earlier demands made by PMC, no meaningful steps were taken by GVEI
it may be revoked or cancelled upon violation of its terms and towards the commercial production of the 15 perfected mining claims and
conditions.28 As elucidated in Froilan v. Pan Oriental Shipping the beneficial exploration of those remaining. Consequently, seven years
Co.,29 "there is x x x nothing in the law that prohibits the parties from into the life of the OA, no royalties were paid to PMC. Compounding its
entering into agreement that violation of the terms of the contract would breach, GVEI not only failed to pay royalties to PMC but also did not
cause cancellation thereof, even without court intervention."30 Similarly, carry out its obligation to conduct operations on and/or commercialize the
in Dela Rama Steamship Co., Inc. v. Tan,31 it was held that judicial mining claims already covered by MLC No. MRD-56. Truth be told,
permission to rescind an obligation is not necessary if a contract contains GVEI’s non-performance of the latter obligation under the OA actually
a special provision granting the power of cancellation to a party.32 made the payment of royalties to PMC virtually impossible. Hence, GVEI
With this in mind, the Court therefore affirms the correctness of the CA’s cannot blame anyone but itself for its breach of the OA, which, in turn,
Decision upholding PMC’s unilateral rescission of the OA due to GVEI’s gave PMC the right to unilaterally rescind the same.
non-payment of royalties considering the parties’ express stipulation in Second, neither can GVEI successfully oppose PMC’s rescission of the
the OA that said agreement may be cancelled on such ground. This is OA on the argument that the ground to rescind the OA was only limited
found in Section 8.01, Article VIII33 in relation to Section 5.01, Article to its non-payment of royalties precisely because said ground was actually
V34 of the OA which provides: among the reasons for PMC’s rescission thereof. Considering the
ARTICLE VIII stipulations above-cited, the ground for non-payment of royalties was in
CANCELLATION/TERMINATION OF AGREEMENT itself sufficient for PMC to extra-judicially rescind the OA.
8.01 This Agreement may be cancelled or terminated prior to the In any event, even discounting the ground of non-payment of royalties,
expiration of the period, original or renewal mentioned in the next PMC still had the right to rescind the OA based on the other grounds it
preceding Section only in either of the following ways: had invoked therefor, namely, (a) violation of Section 2.03, Article II of
the OA, or the failure of GVEI to advance the actual cost for the perfection
a. By written advance notice of sixty (60) days from OPERATOR to of the mining claims or for the acquisition of mining rights, cost of lease
PINKIAN with or without cause by registered mail or personal delivery applications, lease surveys and legal expenses incidental thereto, (b)
of the notice to PINKIAN. GVEI’s non-reimbursement of the expenses incurred by PMC General
Manager Benjamin Saguid in connection with the visit of a financier to
b. By written notice from PINKIAN by registered or personal deliver of the mineral property in 1996, (c) its non-remittance of the US$300,000.00
the notice to OPERATOR based on the failure to OPERATOR to make received from Excelsior Resources, Ltd., (d) its non-disclosure of
any payments determined to be due PINKIAN under Section 5.01 hereof contracts entered into with other mining companies with respect to the
after written demand for payment has been made on OPERATOR: mining claims, (e) its being a mere "promoter/broker" of PMC’s mining
Provided that OPERATOR shall have a grace period of ninety (90) days claims instead of being the operator thereof, and (f) its non-performance
from receipt of such written demand within which to make the said of the necessary works on the mining claims, albeit the said grounds
payments to PINKIAN. should have been invoked judicially since the court would still need to
ARTICLE V determine if the same would constitute substantial breach and not merely
ROYALTIES a slight or casual breach of the contract. While Section 8.01, Article VIII
of the OA as above-cited appears to expressly restrict the availability of
5.01 Should the PROPERTIES be placed in commercial production the an extra-judicial rescission only to the grounds stated thereunder, the
PINKIAN shall be entitled to a Royalty computed as follows: Court finds that the said stipulation does not negate PMC’s implied
statutory right to judicially rescind the contract for other unspecified acts
(a) For gold – 3.0 percent of net realizable value of gold that may actually amount to a substantial breach of the contract. This is
(b) For copper and others – 2.0 percent of net realizable value based on Article 1191 of the Civil Code (also above-cited) which
pertinently provides that the "power to rescind obligations is implied in
"Net REALIZABLE Value" is gross value less the sum of the following: reciprocal ones, in case one of the obligors should not comply with what
is incumbent upon him" and that "[t]he court shall decree the rescission
(1) marketing expenses including freight and insurance; claimed, unless there be just cause authorizing the fixing of a period."
(2) all smelter charges and deductions;

While it remains apparent that PMC had not judicially invoked the other infractions, when taken together, ultimately resulted in GVEI's failure to
grounds to rescind in this case, the only recognizable effect, however, is faithfully perform its primordial obligation under the OA to explore and
with respect to the reckoning point as to when the contract would be develop PMC's mining claims as well as to put the same into commercial
formally regarded as rescinded. Where parties agree to a stipulation operation. Accordingly, PMC's rescission of the OA on the foregoing
allowing extra-judicial rescission, no judicial decree is necessary for grounds, in addition to the ground of non-payment of royalties, is equally
rescission to take place; the extra-judicial rescission immediately releases valid.
the party from its obligation under the contract, subject only to court
reversal if found improper. On the other hand, without a stipulation
1âwphi1
Finally, the Court cannot lend credence to GVEI's contention that when
allowing extra-judicial rescission, it is the judicial decree that rescinds, PMC entered into an agreement with CVI covering the mining claims, it
and not the will of the rescinding party. This may be gathered from was committing a violation of the terms and conditions of the OA. As
previous Court rulings on the matter. above-explained, the invocation of a stipulation allowing extra-judicial
rescission effectively puts an end to the contract and, thus, releases the
For instance, in Ocejo, Perez & Co. v. International Banking parties from the obligations thereunder, notwithstanding the lack of a
Corporation,38 where the seller, without having reserved title to the thing judicial decree for the purpose. In the case at bar, PMC, through its Letter
sold, sought to re-possess the subject matter of the sale through an action dated June 8, 1999 to GVEI, invoked Section 8.01, Article VIII in relation
for replevin after the buyer failed to pay its purchase price, the Court ruled to Section 5.01, Article V of the OA which allows it to extra-judicially
that the action of replevin (which operates on the assumption that the rescind the contract for GVEI's non-payment of royalties. Thus, at that
plaintiff is the owner of the thing subject of the suit) "will not lie upon the point in time, PMC had effectively rescinded the OA and was then
theory that the rescission has already taken place and that the seller has considered to have been released from its legal effects. Accordingly, there
recovered title to the thing sold." It held that the title which had already stood no legal impediment so as to hinder PMC from entering into a
passed by delivery to the buyer is not ipso facto re-vested in the seller contract with CVI covering the same mining claims subject of this case.
upon the latter’s own determination to rescind the sale because it is the
judgment of the court that produces the rescission. In fine, the Court denies the instant petition and affirms the assailed CA
Decision and Resolution. WHEREFORE, the petition is DENIED. The
On the other hand, in De Luna v. Abrigo39 (De Luna), the Court upheld Decision dated July 23, 2009 and the Resolution dated October 23, 2009
the validity of a stipulation providing for the automatic reversion of of the Court of Appeals in CA-G.R. CV. No. 90682 are hereby
donated property to the donor upon non-compliance of certain conditions AFFIRMED.
therefor as the same was akin to an agreement granting a party the right
to extra-judicially rescind the contract in case of breach. The Court ruled, SO ORDERED.
in effect, that a subsequent court judgment does not rescind the contract Sangguniang Panlungsod Ng Baguio City vs. Jadewell Parking
but merely declares the fact that the same has been rescinded, viz.: Systems Corporation
[J]udicial intervention is necessary not for purposes of obtaining a judicial G.R. No. 160025 April 23, 2014
declaration rescinding a contract already deemed rescinded by virtue of SANGGUNIANG PANLUNGSOD NG BAGUIO CITY, Petitioner,
an agreement providing for rescission even without judicial intervention, vs.
but in order to determine whether or not the rescission was JADEWELL PARKING SYSTEMS CORPORATION, Respondent.
proper.40 (Emphases and underscoring supplied)
x-----------------------x
A similar agreement in Roman Catholic Archbishop of Manila v.
CA41 allowing the ipso facto reversion of the donated property upon G.R. No. 163052
noncompliance with the conditions was likewise upheld, with the Court
reiterating De Luna and declaring in unmistakable terms that:42 JADEWELL PARKING SYSTEMS CORPORATION, Petitioner,
vs.
Where [the propriety of the automatic rescission] is sustained, the MAYOR BERNARDO M. VERGARA, CITY MAYOR OF BAGUIO,
decision of the court will be merely declaratory of the revocation, but it is VICE MAYOR BETTY LOURDES F. TABANDA, VICE MAYOR OF
not in itself the revocatory act. (Emphasis and underscoring supplied) BAGUIO, COUNCILOR BRAULIO D. YARANON, COUNCILOR
ELMER O. DATUIN, COUNCILOR ANTONIO R. TABORA, JR.,
This notwithstanding, jurisprudence still indicates that an extra-judicial COUNCILOR GALO D. WEYGAN, COUNCILOR EDILBERTO B.
rescission based on grounds not specified in the contract would not TENEFRANCIA, COUNCILOR FEDERICO J. MANDAPAT, JR.,
preclude a party to treat the same as rescinded. The rescinding party, COUNCILOR RICHARD A. CARINO, COUNCILOR FAUSTINO A.
however, by such course of action, subjects himself to the risk of being OLOWAN, COUNCILOR DELFIN V. BALAJADIA, COUNCILOR
held liable for damages when the extra-judicial rescission is questioned RUFINO M. PANAGAN, CITY SECRETARY RONALDO B. PEREZ,
by the opposing party in court. This was made clear in the case of U.P. v. SANGGUNIANG PANLUNGSOD NG BAGUIO,Respondents.
De Los Angeles,43 wherein the Court held as follows:
x-----------------------x
Of course, it must be understood that the act of a party in treating a
contract as cancelled or resolved on account of infractions by the other G.R. No. 164107
contracting party must be made known to the other and is always
provisional, being ever subject to scrutiny and review by the proper court. JADEWELL PARKING SYSTEMS CORPORATION, Petitioner,
If the other party denies that rescission is justified, it is free to resort to vs.
judicial action in its own behalf, and bring the matter to court. Then, CITY MAYOR BRAULIO D. YARANON, Respondent.
should the court, after due hearing, decide that the resolution of the x-----------------------x
contract was not warranted, the responsible party will be sentenced to
damages; in the contrary case, the resolution will be affirmed, and the G.R. No. 165564
consequent indemnity awarded to the party prejudiced.
JADEWELL PARKING SYSTEMS CORPORATION, Petitioner,
In other words, the party who deems the contract violated may consider it vs.
resolved or rescinded, and act accordingly, without previous court action, CITY MAYOR BRAULIO D. YARANON, Respondent.
but it proceeds at its own risk. For it is only the final judgment of the
corresponding court that will conclusively and finally settle whether the x-----------------------x
action taken was or was not correct in law. x x x.44 (Emphases and G.R. No. 172215
underscoring supplied)
JADEWELL PARKING SYSTEMS CORPORATION, Petitioner,
The pronouncement, which was also reiterated in the case of Angeles v. vs.
Calasanz,45 sought to explain various rulings that continued to require JUDGE FERNANDO VIL PAMINTUAN, PRESIDING JUDGE OF
judicial confirmation even in cases when the rescinding party has a proven BRANCH 3 OF THE REGIONAL TRIAL COURT OF BAGUIO CITY,
contractual right to extra-judicially rescind the contract. The observation BENEDICTO BALAJADIA, PATERNO AQUINO, RICHARD
then was mainly on the practical effect of a stipulation allowing extra- LABERINTO, ROLANDO ABELLERA, FERNANDO SANGALANG,
judicial rescission being merely "to transfer to the defaulter the initiative ALLAN ATOS, ANGELINO SANGALANG, CITY OF BAGUIO, AND
on instituting suit, instead of the rescinder."46 CITY MAYOR BRAULIO D. YARANON, Respondents.
Proceeding from the foregoing, the Court has determined that the other x-----------------------x
grounds raised by PMC in its Letter dated June 8, 1999 to GVEI (the
existence of which had not been convincingly disputed herein) amounts G.R. No. 172216
to the latter's substantial breach of the OA. To the Court's mind, said

JADEWELL PARKING SYSTEMS CORPORATION, Petitioner, (c) the liability of : (i) respondent city officials of Baguio, for various
vs. counts of indirect contempt of this court, (ii) some respondents, who are
JUDGE FERNANDO VIL PAMINTUAN, PRESIDING JUDGE, lawyers at the same time, for acts that require the disciplinary action of
BRANCH 03 REGIONAL TRIAL COURT OF BAGUIO disbarment, (iii) respondent Judge Pamintuan, for taking cognizance of a
CITY, Respondent. civil case allegedly in defiance of this Court’s authority;
x-----------------------x (d) the validity of the administrative suspension of one of the respondents
herein, former Mayor Braulio Yaranon, by the Office of the President in
G.R. No. 173043 relation to his acts of non-recognition of the MOA; and
JADEWELL PARKING SYSTEMS CORPORATION, Petitioner, (e) the nullification of certain acts of officials of Baguio City directed
vs. against Jadewell pursuant to their belief that the latter had no authority to
CITY MAYOR BRAULIO D. YARANON, Respondent. continue implementing the terms of the MOA.
x-----------------------x THE ANTECEDENT FACTS
G.R. No. 174879 On 1 March 1999, Jadewell proposed the privatization3 of the
JADEWELL PARKING SYSTEMS CORPORATION, Petitioner, administration of on-street parking in Baguio City using Schlumberger’s
vs. DG4S Pay and Display Parking Meter (hereinafter "DG4S P&D"), which
ACTING CITY MAYOR AND FORMERLY VICE MAYOR AND it touted as "technologically advanced, up to the level of more progressive
PRESIDING OFFICER OF THE SANGGUNIANG PANLUNGSOD countries and which would make the city as the first and only city in the
NG BAGUIO, REINALDO A. BAUTISTA, JR., MEMBERS OF THE Philippines, if not in Asia, to have metered parking as an important part
SANGGUNIANG PANLUNGSOD NG BAGUIO, LEONARDO B. of its traffic and parking system."4
YANGOT, JR., ROCKY THOMAS A. BALISONG, EDILBERTO B. Respondent Sanggunian acted favorably on the proposal.5 On 31 May
TENEFRANCIA, FAUSTINO A. OLOWAN, GALO P. WEYGAN, 2000, it passed Resolution No. 159, Series of 1999, authorizing the City
FEDERICO J. MANDAP AT, PERLITA L. CHAN-RONDEZ, Mayor of Baguio to negotiate and enter into a Memorandum of
ANTONIO R. TABORA, JOSE M. MOLINTAS AND RUFINO M. Agreement with Jadewell for the installation of its proposed DG4S
PANAGAN AND CITY LEGAL OFFICER MELCHOR CARLOS R. parking technology.6
RABANES, Respondents.
On 16 July 1999, the City Mayor of Baguio wrote to Jadewell,
x-----------------------x transmitting to it the finalized draft of the MOA, with amendments
G.R. No. 181488 emanating from his office. The City Mayor informed Jadewell that the
finalization of the MOA would be subject to the appropriate action of the
CITY MAYOR BRAULIO D. YARANON, Petitioner, Sanggunian and the passage of an enabling ordinance.7
vs.
JADEWELL PARKING SYSTEMS CORPORATION, HON. On 27 March 2000, respondent Sanggunian enacted City Ordinance No.
EXECUTIVE SECRETARY EDUARDO R. ERMITA, ACTING BY 003, Series of 2000 (Ordinance No. 003-2000) amending Ordinance No.
AUTHORITY OF THE PRESIDENT, AND HON. RONALDO V. 13, Series of 1983, outlining the rules and policy on the privatization of
PUNO, IN HIS CAPACITY AS SECRETARY OF THE the administration of on-street parking in the city streets of Baguio.8 For
DEPARTMENT OF INTERIOR AND LOCAL this purpose, the City of Baguio authorized the intervention of a private
GOVERNMENT, Respondents. operator for the regulation, charging and collection of parking fees and
the installation of modern parking meters, among others.
DECISION
On 10 April 2000, the City Legal Officer of Baguio City advised the City
SERENO, CJ: Mayor that the project for the regulation of on-street parking and
installation of parking meters was not an infrastructure. Hence, the project
Before this Court are nine (9) Petitions involving essentially the same was not covered by the Build-Operate-Transfer Law9 and did not require
parties - officials of the City Government of Baguio and Jadewell Parking publication of a notice for its validity.10
Systems Corporation (Jadewell). The only party here that is neither an
official of the City Government of Baguio nor an officer of Jadewell is Nevertheless, for the sake of transparency, the City Legal Officer
former Judge Fernando Vil Pamintuan. recommended the publication of the appropriate notice on the project and
an invitation to bid. An invitation to bid for the proposed regulation of on-
The two principal parties executed a Memorandum of Agreement (MOA) street parking and installation of parking meters on Baguio City’s streets
on 26 June 2000, whereby the City of Baguio authorized Jadewell to was published in the Philippine Daily Inquirer on 8, 9 and 10 May 2000.
regulate and collect parking fees for on-street parking in the city, as well Four interested bidders submitted their proposals, but three were
as to implement the installation of modern parking meters. disqualified. The bid of Jadewell was the only one not disqualified; hence,
The legal disputes embodied in the nine Petitions began when the it was awarded the project.11
Sangguniang Panlungsod of Baguio City (Sanggunian) revoked the MOA On 26 June 2000, the MOA was finally executed between Jadewell and
through City Resolution No. 037, Series of 2002 (Resolution 37), alleging the City of Baguio – through its then City Mayor, Mauricio G. Domogan
substantial breach of the MOA on the part of Jadewell. Then Mayor – for the installation, management and operation of the DG4S P&D
Alfredo Vergara vetoed the Resolution. The Sanggunian Panlungsod parking meters.12
overrode the veto through an unnumbered Resolution dated 17 April
2002. These twin Resolutions constitute what we call here as the first act On 17 July 2000, the Sanggunian confirmed the MOA through its
of Rescission1 of the MOA by the city officials of Baguio. Jadewell Resolution No. 205-2000.13
denied the breach and commenced an action before the Regional Trial
Court (RTC) of Baguio,2questioning the validity of the MOA’s revocation On 31 August 2000, the parties executed a supplemental MOA to include
and the Sanggunian’s capacity to pass a resolution revoking the MOA. the Ganza/Burnham parking space, owned by the Philippine Tourism
Authority and managed by the City of Baguio, in the project.14 This
There was a second act of rescission that the city officials of Baguio supplemental agreement was neither confirmed nor ratified by the
performed in 2006, the circumstances of which will be narrated later on. Sanggunian.
While the main case was under litigation, and then under appeal, the In September of 2000, Jadewell began to mobilize and take over the
parties filed contempt charges against each other. Six of these cases are parking facilities at the Ganza/Burnham Park area.15 Around this time,
part of the consolidated Petitions before us. questions arose regarding the compliance by Jadewell with the provisions
of the MOA, notably on matters such as obtaining the recommendation
These nine highly-voluminous cases, however, all boil down essentially from the Department of Public Works and Highways (DPWH) for the
to just these five sets of legal questions requiring resolution: installation of the parking meters and the legality of the collection of
(a) The validity or invalidity and legal efficacy of Saggunian’s two parking fees being done by its parking attendants prior to the installation
distinct acts of rescission of the MOA; of the parking meters at Burnham Park.16
(b) The duty of a trial judge to dismiss a case assailing the validity of the On 20 December 2000, Jadewell wrote then Vice-Mayor Daniel T.
MOA and the city resolution approving it in view of the pendency of the Fariñas to inform him of the progress of the deputization by the
various petitions before this Court; Department of Transportation and Communications–Land Transportation
Office (DOTC-LTO) of parking attendants required for the

implementation of the MOA. Jadewell explained that they were still since it started operations. Jadewell responded by saying that it had
working on the required deputization of Jadewell’s parking attendants. complied with this obligation.32
Nevertheless, it claimed that its parking attendants were authorized to
collect parking fees pending the actual installation of the parking meters. On 19 February 2002, the Sanggunian passed Resolution 37,33 expressing
It also claimed that the parking meters had not yet been installed because its intent to rescind the MOA with Jadewell. The said Resolution
the necessary civil works were yet to be completed.17 enumerated in the "Whereas" clauses the alleged violations of Jadewell
prompting it to rescind the MOA. It reads:
Shortly thereafter, a case was filed by Edgar M. Avila, et al. with the RTC-
Baguio City (Branch 61), assailing Ordinance No. 003-2000 as xxxx
unconstitutional and seeking to restrain the City Government of Baguio WHEREAS, it now appears from verified facts that:
from implementing the provisions of the MOA. It further alleged that the
City Government could not delegate the designation of pay parking zones 1. contrary to its commitment to install a technologically based P & D
to Jadewell, that the parking attendants deployed by Jadewell were not parking system, at no cost to the City, including "such equipment and
deputized, and that the questioned ordinance creates class legislation as paraphernalia to meter the length of usage of the affected parking spaces
the designated taxi and jeepney stands were discriminatorily removed. for purposes of payment of the parking fees", Jadewell has installed only
The case was docketed as Civil Case No. 4892-R.18 This was dismissed fourteen (14) parking meters (only 12 of which are working) in only three
on motion by Jadewell joined by the City Government of Baguio. The (3) streets, and Jadewell does not intend to install anymore [sic]; instead
lower court declared that Ordinance No. 003-2000 is constitutional and it has resorted as a rule to an exceptional circumstance of manual
that all acts emanating from it are deemed "reasonable and non- collection of parking fees by parking attendants who, despite express
discriminatory...having been enacted in accordance with the powers provisions of the Ordinance, are not duly deputized by the DOTC-LTO.
granted to Baguio City by law."19 Complainants’ Motion for Despite assurances to the Honorable City Mayor that Jadewell would stop
Reconsideration (MR) was denied. collection of parking fees until the parking meters have been duly
installed, Jadewell continues to collect parking fees manually by using
On 24 August 2001, Edgar Avila, et al., filed a Rule 65 Petition for undeputized parking attendants to do the collection;
Certiorari, Prohibition and Mandamus with the Supreme Court assailing
the RTC’s dismissal of their Complaint. The case was docketed as G.R. 2. contrary to its commitment to install a technologically based P & D
No. 149642. On 10 October 2001, this Court issued a Resolution parking system, at no cost to the City, Jadewell has charged the cost of
dismissing the petition of Avila, et al. for failure to state in their petition such and similar equipment as direct costs, thus substantially eroding the
the material dates when they received the appealed resolution and order, share of the City in the parking fees;
and to append the original or certified true copies of the questioned
resolution and order subject of their petition.20 There was no resolution 3. contrary to its obligation to post a performance bond, Jadewell has not
on the merits. The Resolution became final and executory on 2 April fully complied, and when required to update its performance bond
2002.21 Jadewell refused to do so rationalizing its non-compliance by the
assertion that they are already performing and therefore are no longer
A case was also filed by Nelia G. Cid against then Mayor Bernardo obligated to post a performance bond;
Vergara, et al. when her vehicle was clamped, towed away, and
impounded by Jadewell after the latter found her car to be illegally parked. 4. contrary to its obligation to remit the share of the City within the first
She refused to pay the corresponding fees to Jadewell and as a result, the ten (10) days of the following month, Jadewell had initially resisted
latter refused to release her vehicle.22 Cid filed a case for replevin and making payments to the City on the pretext that the profits cannot be
questioned the validity of Ordinance No. 003-2000 and the MOA, as well determined until after the end of the fiscal year and initially failed to have
as the authority of Jadewell to clamp down/tow away vehicles whose their tickets pre-numbered and registered with the Office of the City
owners refuse to pay parking fees. The case was docketed as Civil Case Treasurer;
No. 5165-R and was assigned to Branch 7 of RTC-Baguio. On 24 May 5. contrary to its promise that the City would derive substantial revenue
2002, an Omnibus Order was issued by this RTC that addressed several from the on-street pay parking system, Jadewell has not paid a single
pending incidents related to the authority of Jadewell to clamp down/tow centavo of the City share in on-street parking operation; whatever
away vehicles. The Omnibus Order upheld Jadewell’s authority to retain Jadewell has remitted to the City are properly chargeable against the share
the vehicle of petitioner Nelia G. Cid pending her payment of the parking of the City in the MOA on off-street parking (the Burnham Parking Area
and towage fees to Jadewell, and held that the authority of Jadewell was near Ganza), and it appears less than what the City is entitled thereto; and
lawfully provided in Ordinance No. 003-2000 and the MOA. Also, the
RTC-Baguio took cognizance of the ruling by this Court in G.R. No. 6. contrary to its representations that the P & D System which it proposed
149642 which, in its mistaken view, upheld the validity of the questioned would eliminate fraud in the collection of parking fees, Jadewell has
ordinance and the MOA.23 perpetrated fraud on the City by, according to the affidavit of its former
bookkeeper, Mr. Adonis Cabungan, doctoring the financial statements
Ultimately, Jadewell was able to install no more than 14 parking meters before the same are submitted to City authorities.34
in three (3) areas of Baguio City: six (6) on Session Road, five (5) on
Harrison Road and three (3) on Lake Drive.24 At the time that these meters WHEREAS, there has been no substantial improvement of the traffic
were installed, there were already verbal complaints being raised against situation in the City even with the introduction of the P & D Parking
Jadewell by the Sanggunian for the following alleged violations: System and thus it increasingly appears that the system introduced by
Jadewell is more for revenue raising than for regulatory purposes. As a
a. Failure to install parking meters for each parking space as specified in consequence the legal principle applies that the collection of taxes cannot
Section 3-F of Ordinance No. 003-2000;25 be let to any person. In other words, government cannot allow private
b. Failure to install a convenient and technologically advanced parking persons to collect public funds for themselves with the agreement that part
device that is solar-powered and can measure the time a vehicle stays in thereof or as it turned out in this case no part thereof is shared with the
a parking slot;26 City;
c. Failure to give the City of Baguio the latter's share of the collected WHEREAS, in its financial reports to the City showing substantial loses
parking fee;27 [sic] and in its statement to other persons that it is losing money on the
project, the kindest thing that the City can do for Jadewell is to prevent
d. Failure to post a performance bond in the amount of ₱1 million after Jadewell from incurring anymore [sic] loses.
its previous bond expired.28
NOW THEREFORE, on motion of Hon. Bautista, and Hon. Cariño,
The Sanggunian passed Resolution No. 395, Series of 2000, directing seconded by Hon. Yaranon, Hon. Weygan and Hon. Tabora, be it
Jadewell to comply with its obligations under the MOA for the installation RESOLVED, as it is hereby resolved, to rescind the Memorandum of
of the necessary number of parking meters.29 Agreement (MOA) executed between the City of Baguio and Jadewell
Parking System Corporation dated 26 June 2000 on the basis of the
On 15 March 2001, Jadewell wrote to the City Mayor in response to the foregoing premises and exercising its rights under Section 12 of the MOA
mentioned Resolution, informing the said office that the former had on the subject of On-Street Parking executed between the City of Baguio
started operation of the off-street parking on 2 December 2000 and of the and Jadewell Parking Systems Corporation dated 26 June 2000 and, more
on-street parking on 15 December 2000.30 On 27 January 2001, Jadewell importantly, performing its duty to protect and promote the general
also wrote the City Treasurer that the former had completed installation welfare of the people of Baguio City.
of the parking meters.31
RESOLVED FURTHER, to direct the City Legal Officer to cause the
In response to the letter of Jadewell, the City Treasurer demanded the proper notice of rescission to Jadewell Parking Systems Corporation
remittance of Baguio’s share of the parking fees collected by Jadewell

forthwith and to take all appropriate steps to implement and enforce the – the City of Baguio and Jadewell – with Ordinance No. 003-2000 and
intent of this Resolution. the MOA. The COA-CAR Report has 12 findings, essentially as follows:
RESOLVED FURTHERMORE, to inform all City officials and 1) The provisions of the MOA and its Supplement as regards the sharing
employees and all other persons concerned to be guided accordingly.35 of the fees are contradicting, hence the share of the City Government
cannot be determined;48
On 1 March 2002, the then City Mayor of Baguio, Bernardo M. Vergara,
vetoed Resolution 37, through a letter dated 1 March 2002 addressed to 2) There was no proper segregation by area of the parking fees collected,
the Vice-Mayor, as Presiding Officer of the Sanggunian, and its members. hence the proper share of Baguio City cannot be determined;49
Mayor Vergara reasoned that it was premature for the Sangguniang
Panlungsod to rescind the MOA, because the latter provides for a 3) The City Government did not strictly implement the collection of
minimum period of five years before the right of rescission can be penalties arising from the late remittances of Jadewell, hence additional
exercised; and, that the right of Jadewell to due process was violated due revenues were not collected;50
to the lack of opportunity to hear the latter’s side. The City Mayor 4) The City Treasurer did not conduct an audit of the books and accounts
proposed a re-negotiation of the MOA with Jadewell as a solution to the of Jadewell, thus the City Government’s share from parking fees cannot
problem.36 be ascertained;51
Meanwhile, on 13 March 2002, the DOTC–Cordillera Autonomous 5) The use of the P&D parking meters were [sic] not maximized due to
Region (DOTC-CAR) issued a cease and desist order to Jadewell Jadewell’s non-compliance with Ordinance No. 003-2000 and the MOA,
prohibiting it from clamping down and/or towing away vehicles in Baguio resulting in the collection of meager income from its use;52
City for violation of traffic rules and regulations.37
6) The MOA does not specify the guidelines for determining the
On 17 April 2002, the Sanggunian resolved through a Resolution of the economic viability of installing the parking meters and the period within
same date, to override the veto of the City Mayor, worded thus: which to install it [sic];53
NOW THEREFORE, the Sangguniang Panlungsod (City Council) in 7) The Supplemental MOA was not confirmed by the City Council of
Regular Session assembled, by twelve affirmative votes constituting more Baguio in violation of R.A. No. 7160 (the Local Government Code);54
that [sic] a two-thirds vote of all its Members, has resolved to override, as
it hereby overrides, the veto of His Honor, Mayor Bernardo M. Vergara, 8) The coverage of the parking operations contained in Annex "A" of the
of City Resolution Numbered 037, Series of 2002, entitled "Rescinding MOA was not confirmed by the City Council in violation of R.A. No.
the Memorandum of Agreement (MOA) Executed Between the City of 7160;55
Baguio and Jadewell Parking Systems Corporation Dated 26 June
2000."38 9) The City Government failed to ensure proper compliance by Jadewell
with the MOA provisions;56
Also at this time, Braulio D. Yaranon, who was then a member of the
Sanggunian, requested a special audit from the Commission on Audit– 10) The pay parking project was awarded to a bidder who did not have all
Cordillera Autonomous Region (COA-CAR) on the operations of the qualifications as stated in the "Invitation to Bid" in violation of R.A.
Jadewell as regards the pay parking project embodied in the MOA. No. 7160 and Audit Circular No. 92-386;57
On 27 May 2002, Jadewell filed with the RTC of Baguio City a Rule 65 11) The provisions on deputization in Ordinance No. 003-2000 and the
Petition for Certiorari, Prohibition and Mandamus with Prayer for the MOA are contrary to R.A. No. 4136 (the Land Transportation and Traffic
Issuance of a Writ of Preliminary Injunction, assailing the validity of Code), thus rendering it invalid;58
Resolution No. 037-2002, which rescinded the MOA between the 12) The monthly minimum amount to be remitted to the City Government
Sangguniang Panlungsod and Jadewell.39 The case was docketed as Civil is doubtful due to the discrepancy in the amounts collected and expenses
Case No. 5285-R and was raffled off to RTC-Baguio (Branch 61). for the year 1999 provided by the City Government to Jadewell as against
On 8 October 2002, the RTC Br. 61 promulgated its Decision40 finding the amount certified by the Office of the City Architect and Parks
the Sanggunian’s rescission of the MOA unlawful. The Sanggunian then Superintendent-Burnham Parks Office for the City Government
filed an appeal assailing the RTC’s decision with the Court of Appeals; overseeing the Ganza-Burnham parking spaces.59
the case was docketed as CA-G.R. SP No. 74756. On 11 February 2004, after G.R. No. 160025 was filed and pending
Meanwhile, pending resolution of CA-G.R. SP No. 74756 before the CA, resolution by this Court, the Sangguniang Panlungsod adopted Resolution
the Sanggunian passed Resolution No. 089, Series of 2003. The resolution No. 056, Series of 2004. The said Resolution informs the general public
sought the assistance of the DOTC-CAR specifically, for it to take that Jadewell had neither the authority nor the police power to clamp, tow,
immediate action against the officers and personnel of Jadewell for or impound vehicles at any place in the City of Baguio.60 Also, on the
defying the 13 March 2002 cease-and-desist Order it issued prohibiting same date, the Sangguniang Panlungsod passed Resolution No. 059,
the latter from clamping down and/or towing away vehicles.41 On 27 May Series of 2004, in which it made a formal demand upon Jadewell to restore
2003, City Mayor Vergara approved and signed Resolution No. 089- to it possession of the Ganza Parking Area.61
2003. In response, Jadewell filed a Petition for Indirect Contempt with the With these developments, Jadewell filed directly with this Court its first
CA against Mayor Vergara, the Sanggunian and other local government indirect contempt case against Bernardo M. Vergara (then City Mayor of
officers. The case was docketed as CA-G.R. SP No. 77341. The original Baguio), its Vice-Mayor, and the entire City Council for enacting
petition was followed by three (3) supplemental petitions filed by Resolution Nos. 056 & 059, Series of 2004 pending resolution by this
Jadewell in the same case. Court of G.R. 160025. The case was docketed as G.R. No. 163052.
On 7 July 2003, the CA rendered a Decision42 in CA G.R. SP No. 74756, On 23 June 2004, this Court through its First Division, ordered G.R. No.
affirming the assailed Decision of the trial court which declared as invalid 163052 consolidated with G.R. No. 160025.62
the Sanggunian’s rescission of the MOA. The Sanggunian filed a Motion
For Reconsideration, but this was denied by the CA through a Resolution On 1 July 2004, then Baguio City Mayor Braulio D. Yaranon issued
dated 4 September 2003.43 Aggrieved by the denial of their appeal, the Executive Order No. 001-04,63 the decretal portion of which reads:
Sanggunian filed a Rule 45 Petition for Review on Certiorari with this
Court, seeking to reverse and set aside the 7 July 2003 Decision and its NOW, THEREFORE, the undersigned City Mayor, pursuant to his
Resolution dated 04 September 2003 of the CA. The petition was authority to enforce all laws and ordinances relative to the governance of
docketed as G.R. No. 160025, the first of the consolidated petitions the City, and to issue executive orders for the faithful and appropriate
herein.44 enforcement and execution of such laws and ordinances (Sec. 455 (b) (2)
and (iii), R.A. 7160) hereby affirms and gives protection to the right of
In CA-G.R. SP No. 77341, the CA dismissed in a Decision45 promulgated the citizenry, particularly affected motor vehicle owners, operators, and
on 28 July 2004 the contempt petitions filed by Jadewell for lack of merit. drivers, to refuse to submit to the enforcement of Ordinance 003-2000, by
The latter’s Motion For Reconsideration was likewise denied by the the Jadewell Parking Systems Corporation, and further to refuse to pay
CA.46Jadewell elevated the dismissal of its contempt petitions to this public revenue in the form of fees, charges, impositions, fines, and
Court on 8 December 2004 by filing a Rule 45 Petition for Review on penalties provided for in the said ordinance, to the said entity, such acts
Certiorari. The case was docketed as G.R. No. 166094. This is not among being patently illegal and prohibited by law; this Executive Order shall be
the consolidated petitions herein. in force and effect until the City Council, as the legislative arm of the City
of Baguio, shall have adopted appropriate remedial or corrective
On 13 July 2003, the COA-CAR promulgated the requested Report.47 The measures on the matters and concerns specified hereinabove.
Report’s objective was to ascertain compliance by the contracting parties

On 8 July 2004, Mayor Yaranon issued a Memorandum64 to the City Acting on the urgent motion dated January 26, 2005 of respondent
Director of the Baguio City Police Department, directing the department Jadewell Parking Systems Corporation for the issuance of a temporary
to stop and prevent Jadewell from clamping, towing, and impounding mandatory/preventive order and/or for writ of preliminary
vehicles; to arrest and file criminal charges against Jadewell personnel mandatory/prohibitory injunction pending appeal in G.R. No. 160025,
who would execute the proscribed acts specified in the said alleging that the effects of the acts of City Mayor Yaranon, unless stayed,
Memorandum; and to confiscate the equipment used by Jadewell to would also make effective what the petitioner Sangguniang Panglungsod
clamp, tow, or impound vehicles under the authority of the rescinded ng Baguio failed to obtain in the instant case, the net effect of which
MOA. would not only be grave damage and injury to the respondent but also to
the City of Baguio, the Court further Resolved:
On 12 July 2004, Jadewell filed its second Petition for indirect contempt
again with this Court, this time against Mayor Yaranon for having issued (a) to ISSUE, the WRIT OF PRELIMINARY MANDATORY
the above-cited Order also for the same reasons given in its first contempt INJUNCTION prayed for, effective immediately, commanding City
petition with this Court. The Petition was docketed as G.R. No. 164107. Mayor Yaranon to immediately reopen the streets and/or premises
operated and/or occupied by the respondent and to let them remain open,
Furthermore, on 15 July 2004, Jadewell filed an administrative case until further orders of this Court; and
against Mayor Yaranon before the Office of the President (OP). Docketed
as Case No. OP 04-G-294, it sought the mayor’s suspension and removal (b) to require petitioner to POST a CASH BOND or a SURETY BOND
from office. The case against Mayor Yaranon was for his issuance of the from a reputable bonding company of indubitable solvency in the amount
following: (1) Executive Order No. 001-04 dated 1 July 2004; (2) the of ONE HUNDRED THOUSAND PESOS (₱100,000.00), with terms
Memorandum dated 7 July 2004 limiting the pay parking business of and conditions to be approved by the Court, within five (5) days from
Jadewell to certain parts of Baguio City;; and (3) Memorandum dated 8 notice, otherwise, the writ of preliminary mandatory injunction herein
July 2004 directing the Baguio City Police Department to prevent issued shall AUTOMATICALLY be lifted.
Jadewell from apprehending, towing and impounding vehicles. A
supplemental petition filed by Jadewell on 19 January 2005, complaining NOW THEREFORE, You, [City Mayor Braulio D. Yaranon], your
of Executive Order No. 005-2004, which was issued on 15 October 2004, agents, representatives and/or any person or persons acting upon your
was also included in administrative case OP 04-G-294. orders or in your place or stead, are hereby DIRECTED to
IMMEDIATELY REOPEN the streets and/or premises operated and/or
On the following day, 16 July 2004, Jadewell filed a Supplemental occupied by the respondents and to let the said streets and premises
Petition with Motion for Leave of this Court65 in the second contempt remain OPEN, until further orders from this Court.
petition before this Court, G.R. No. 164107, alleging as a supplemental
fact, Mayor Yaranon’s Memorandum of 08 July 2004. On 8 April 2005, Mayor Yaranon issued a Memorandum80 directing Col.
Isagani Nerez, Director of the Baguio City Police District, to create a
On 15 October 2004, Mayor Yaranon issued Executive Order No. 005- special task force to stop Jadewell from clamping, towing, and
2004.66 This was a cease and desist order against Jadewell to prevent it impounding vehicles in violation of parking rules in Baguio City; to
from performing the following acts: (1) charging and collecting from impound the wrecker/tow trucks used by Jadewell.
motorists, parking fees without their consent;67 (2) seizing and detaining
vehicles of motorists who refuse to pay parking fees to Jadewell;68 and On 20 April 2005, this Court promulgated a Resolution in G.R. No.
(3) using yellow-colored heavy wreckers or tow trucks bearing the name 160025, finding Mayor Yaranon guilty of direct and indirect contempt.
"City of Baguio".69 He was cited for direct contempt when it was proven that he had submitted
pleadings before this Court containing falsehoods. Mayor Yaranon had
In addition to Executive Order No. 005-2004, Mayor Yaranon issued stated in his Compliance that the streets were opened for Jadewell to
Executive Order No. 005-2004-A, which is essentially a rehash of resume operations, but upon inspection these were found to be
Executive Order No. 005-2004.70 closed.81 He was also cited for indirect contempt, for having continuously
refused to carry out the writ issued by this Court to reopen the streets so
On 25 October 2004, Jadewell filed a third Petition with this Court, Jadewell could resume operations.82 This Court likewise fined Mayor
praying that Mayor Yaranon be cited for contempt and that Executive Yaranon the amount of ₱10,000, which he paid. The Court further
Order No. 005-2004 be nullified.71 This case was docketed as G.R. No. ordered the National Bureau of Investigation (NBI) to immediately arrest
165564. On 16 November 2004, Jadewell filed a Supplemental Petition and detain Mayor Yaranon pending his compliance with the 9 February
to this Petition alleging as a supplemental ground the issuance of 2005 writ of preliminary mandatory injunction issued by this Court,
Executive Order No. 005-2004-A.72 which ordered the reopening of some streets so Jadewell could continue
On 20 December 2004, Mayor Yaranon issued Administrative Order No. its operations.83
622, Series of 2004, which declared that Jadewell exceeded its area of On 10 August 2005, Benedicto Balajadia, et al. filed Civil Case No. 6089-
operations for the administration of on-street parking and was thus R against Jadewell before the RTC–Baguio City. The case was
required to show lawful cause why its business permit should not be subsequently raffled to Branch 3 of the RTC presided by Judge Fernando
revoked. In response to this Order, Jadewell filed a Second Supplemental Vil Pamintuan.84 Balajadia, et al. sought to nullify the MOA between
Petition for contempt against Mayor Yaranon in G.R. No. 165564 on 25 Jadewell and the City Government of Baguio and its enabling ordinance,
January 2005. Ordinance No. 003-2000. The complainants also prayed for the issuance
On 10 January 2005, this Court through a Resolution73 ordered the of a Temporary Restraining Order (TRO) and for a writ of preliminary
consolidation of G.R. No. 160025 with G.R. Nos. 163052, 164107, and injunction against Jadewell.
165564. On 19 April 2006, Judge Pamintuan issued an Order in Civil Case No.
On 17 January 2005, this Court denied Jadewell’s petition in G.R. No. 6089-R granting the prayer of complainants Balajadia et al. for the
166094 for failure to show any reversible error on the part of the CA in issuance of a Writ of Preliminary Prohibitory Injunction. The injunction
dismissing its petition for contempt in CA-G.R. SP No. 77341.74 Its was meant to restrain Jadewell from proceeding with the supervision and
Motion For Reconsideration was likewise denied with finality.75 collection of parking, towing, and impounding fees on the streets of
Baguio City. Further, Judge Pamintuan ordered the holding in abeyance
In the beginning of the year 2005, Jadewell attempted to renew its of the implementation of City Ordinance No. 003-2000 and the MOA.85
business permit from the City of Baguio and tendered the fees required.
However, the Office of the City Mayor refused to renew the business On 27 April 2006, Jadewell filed with this Court a Rule 65 Petition for
permit and returned the amount tendered.76 Because of these actions of Certiorari, Prohibition, and Mandamus against Judge Pamintuan86 for
Mayor Yaranon, Jadewell filed on 15 April 2005 its Third Supplemental refusing to dismiss Civil Case No. 6089-R. The case was docketed as G.R.
Petition in G.R. No. 164107, which had been consolidated with G.R. Nos. No. 172215. On the same day, Jadewell filed a Petition asking this Court
160025, 163052, and 165564. Aside from its main prayer to cite the to cite Judge Pamintuan for contempt. This fourth contempt case, albeit
mayor for contempt, Jadewell also prayed that Mayor Yaranon, a lawyer, primarily against a member of the judiciary, was docketed as G.R. No.
be disbarred.77 On 25 April 2005, this Court, through its Third Division, 172216.
admitted the Third Supplemental Petition of Jadewell.78 On 19 June 2006, G.R. No. 172215 was ordered consolidated with G.R.
On 9 February 2005, this Court, in G.R. No. 160025, issued a Writ of Nos. 160025, 163052, 164107, and 165564.87
preliminary mandatory injunction ordering Mayor Yaranon to On 23 June 2006, Mayor Yaranon wrote Jadewell a letter demanding that
immediately reopen the streets and premises occupied and/or operated by it desist from operating the pay parking system in Baguio City.
Jadewell. The Court also required Jadewell to post a cash or surety bond Simultaneously, he wrote the Sanggunian, requesting it to cancel
in the amount of ₱100,000 within five days from receipt of the order.79 Ordinance No. 003-2000, the enabling ordinance for the MOA.
The order, in part, reads:

On 26 June 2006, Jadewell filed a Supplemental Petition88 in G.R. No. THE ISSUES
172215 complaining of Judge Pamintuan’s issuance of the following
Orders in Civil Case No. 6089-R: (a) Order dated 24 April 1. On G.R. No. 160025 and on the
200689 directing the parties to file a pre-trial brief and setting the pre-trial claim in G.R. No. 174879 that the second
of the case; (b) Order dated 01 June 200690 informing Jadewell that public act of rescission was a valid act of
respondent was not suspending the proceedings, because he believed he rescission.
was not covered by the writ issued by this Court; (c) Order dated 14 June Whilst the issues are spread out among the nine cases, we have grouped
200691 upholding the writ he issued in the civil case despite his receipt of these according to what are common to the specific cases.
a copy of the writ of preliminary injunction issued by this Court; and (d)
Order dated 16 June 200692 directing Jadewell to comply with the writ of In our effort to simplify the issues and provide forms of relief to the parties
preliminary prohibitory injunction under pain of direct contempt. that are not purely academic, it is necessary to examine the operative
effects that may result from any resolution of this Court. Such
On the same day, 26 June 2006, the Office of the President (OP) rendered examination may also help guide the parties in their future actions, and
a Decision in OP 04-G-294, the administrative case Jadewell had filed perhaps the overly-litigated matters brought before us in the consolidated
against Mayor Yaranon, finding him guilty of grave misconduct, abuse of petitions may finally be put to rest.
authority, and oppression. Mayor Yaranon was meted out a penalty
totalling 12 months suspension from office.93This suspension was We note at the outset that on 22 November 2006, 60 days had lapsed from
implemented by the Department of Interior and Local Government receipt of the letter dated 22 September 2006, informing Jadewell of the
(DILG). Aggrieved by his suspension, Mayor Yaranon filed his Motion decision of the City of Baguio to rescind the MOA under Section 12
For Reconsideration, which was denied on 22 August 2006 by the OP. thereof. It may be recalled that Section 12 requires that notice of the
intention to rescind be given 60 days prior to the effectivity of the
On 29 June 2006, in response to Mayor Yaranon’s letters of 23 June 2006, rescission. Jadewell has not questioned the legal efficacy of this notice. It
Jadewell filed before this Court yet another case for contempt – its fifth has brought this matter of a second rescission to the Court’s attention only
contempt case, and the third one specifically against Mayor Yaranon. In as a matter of contumacious behavior on the part of the respondents in
addition to its prayer to cite the mayor for contempt, Jadewell also prayed G.R. No. 174879, in the same way that it brought various actions of the
that Mayor Yaranon, a lawyer, be disbarred.94 The case was docketed as public respondents before the Court in its other contempt petitions. Since
G.R. No. 173043. the legal efficacy of the rescission in 2006 has not been contested by
On 31 July 2006, G.R. No. 173043 was ordered consolidated with G.R. Jadewell in any of the petitions before us, we thus consider this notice of
Nos. 160025, 163052, 164107, 165564, and 172215.95 On 27 September rescission to have taken legal effect and therefore, at the latest, the MOA
2006, G.R. No. 172216 was consolidated with G.R. Nos. 160025, 163052, between the City of Baguio and Jadewell has ceased to legally exist as of
164107, 165564.96 22 November 2006.
On 23 August 2006, while the consolidated cases were pending resolution Parenthetically, we note that while the validity of the second act of
before this Court, the Sangguniang Panlungsod enacted Resolution No. rescission described in G.R. No. 174879 is not principally determinative
204, Series of 2006. The Resolution directed the City Legal Officer to of the respondents’ liability for indirect contempt therein, a conclusion
notify Jadewell of the Baguio City Government’s intention to rescind the that the second act of rescission was undertaken competently and
MOA, and to inform Jadewell to stop its operations under the MOA 60 appropriately will to a certain degree impact our appreciation of such
days after receipt of the Notice.97 possible liability. We will discuss this issue in our subsequent discussion
on the charges of contempt.
On 28 August 2006, the legal counsel for Jadewell wrote to Baguio City
Vice-Mayor Bautista, Jr., informing him that the OP had denied the Inasmuch as there is no longer any existing MOA, no order of this Court
Motion for Reconsideration of Mayor Yaranon assailing the OP can have the effect of directing the City of Baguio to enforce any of the
resolution ordering the latter’s suspension as City Mayor of Baguio terms of the MOA, which brings us to the matter of G.R. No. 160025. In
City.98 The counsel for Jadewell likewise stated in his letter that they were whatever direction we rule on the question of the validity of the first act
aware that the Sanggunian was planning to issue a resolution to repeal of rescission, such ruling will only have the effect of either providing
Ordinance No. 003-2000 and rescind the MOA. The letter requested the Jadewell a basis to seek damages from the City of Baguio for the wrongful
Vice-Mayor to veto the measure in light of the pending petitions with the termination of the MOA, should we find wrongful termination to have
Supreme Court.99 The said counsel likewise sent a similar letter to the taken place, or, deny Jadewell that right. The possible susceptibility of the
Sanggunian, urging it to desist from implementing the repeal of City of Baguio and its officials to an action for damages on a finding of
Ordinance No. 003-2000 and the rescission of the MOA pending the wrongful termination is why we do not consider G.R. No. 160025 as
resolution of the cases with the Supreme Court.100 having been rendered moot by the lawful rescission of the MOA on 22
November 2006. Thus, we will proceed to rule on the issues in G.R. No.
On 13 September 2006, Mayor Yaranon appealed to the CA, in a case 160025.
docketed as CA G.R. CV SP No. 96116, praying for the lifting of the
penalty of suspension meted him in OP 04-G-294, but this appeal was The fallo of the RTC Decision upheld by the CA, which affirmance is the
denied. Mayor Yaranon moved for reconsideration.101 lis mota in G.R. No. 160025, reads as follows:
On 22 September 2006, City Legal Officer Rabanes wrote a letter to WHEREFORE, judgment is rendered declaring both Sangguniang
Jadewell, through its President, Mr. Rogelio Tan, informing Jadewell of Panlungsod Resolution No. 037, Series of 2002 and the April 17, 2002
Resolution No. 204, Series of 2006, which rescinded the MOA, and Resolution overriding the Mayor’s veto as NULL and VOID. The Writ of
ordering it to stop operations within 60 days from notice.102 This letter Preliminary Injunction earlier issued by this Court is made
was received on the same day it was issued;103 hence, the 60-day period PERMANENT, with costs against respondents.106
lapsed on 22 November 2006. This notice, together with the resolution, The RTC did not order the respondents therein to comply with the MOA.
constitute the second act of rescission of the MOA by the city officials of An order to perform a contract is not necessarily subsumed in an order
Baguio. not to terminate the same.
On 19 October 2006, Jadewell filed the sixth contempt case with this Contrast this legal point with the fact that the prayer of Jadewell in its
Court against the acting City Mayor of Baguio, Reinaldo A. Bautista, Jr., original petition asked the RTC, in relevant part:
and the members of the Sanggunian, including City Legal Officer
Melchor Carlos R. Rabanes, for the second act of rescission of the ...that the writ of preliminary injunction be made permanent and the writs
MOA.104 The case was docketed as G.R. No. 174879. applied for be issued against the respondents nullifying and voiding
Resolution No. 037, series of 2002 and the resolution over-riding the veto
On 9 October 2007, the CA dismissed Mayor Yaranon’s Petition in CA … and instead, directing them to perform what the memorandum of
G.R. CV SP No. 96116 on the ground that it had become moot and agreement requires them to do. (Emphasis supplied)107
academic due to Mayor Yaranon’s failure to be re-elected in the 17 May
2007 elections. Mayor Yaranon filed a Motion for Reconsideration on 07 This latter part, which is effectively a prayer for a permanent mandatory
November 2007, but this was also denied by the CA on 24 January 2008. injunction against respondents therein to perform the terms of the MOA,
Thus, on 17 March 2008, Mayor Yaranon filed a Rule 45 Petition before are not in the fallo of the RTC decision. We consider therefore that the
this Court seeking to reverse and set aside the CA Decision and RTC deliberately withheld granting the specific prayer to order Baguio
Resolution. It was docketed as G.R. No. 181488. City to perform the MOA. No motion to correct or clarify the said fallo
having been filed by Jadewell, the prayer to order the city officials of
On 12 November 2008, G.R. No. 181488 was ordered consolidated with Baguio to perform the MOA is hereby deemed abandoned.
the cases already mentioned.105
We further note three things:

1. Jadewell has not questioned - in its Petition, Reply to Comment, and hearing, the preliminary injunction be made permanent. It further prayed
Memorandum before this Court - the implication of the RTC and CA for the issuance of a writ of certiorari to nullify the assailed Resolution;
Decisions to the effect that the Sanggunian had the authority to perform and for a mandatory injunction to compel the City Government to perform
acts of contractual rescission on behalf of the City of Baguio when both the latter’s obligations under the MOA.118 Jadewell alternatively invoked
these courts ignored the issue raised by Jadewell in its Petition before the the provisions of Section 18 of the Implementing Rules and Regulations
RTC, and we therefore do not consider this to be a genuine issue in this (IRR) of the BOT Law,119 in the event the RTC would uphold the validity
Petition before us; of the questioned Resolution.
2. While the Sangguniang Panlungsod has insinuated that there was fraud The trial court ruled that the rescission violated the due process clause of
and excess of authority on the part of the mayor in the execution108 of the the Constitution and failed to meet the requirements for rescission under
MOA - because the latter provided for a smaller sharing of "20 % from the Civil Code and the MOA itself. In the Sanggunian’s Memorandum,
the gross profit of the operation or 50% of the net profit whichever is on appeal before the CA, the Sanggunian assigned three errors to the
higher" instead of the intended "20% of gross receipts,"109- petitioners in Decision of the trial court: (1) the RTC ignored the evidence on record
G.R. No. 160025 conceded even at the RTC level that they are not and the requirements of Rule 65 when it declared the subject Resolution
assailing the MOA for being defective but for having been breached in void; (2) Jadewell was not denied due process when the MOA was
the performance. We thus disregard all arguments in G.R. No. 160025 rescinded; and (3) by ruling that the Sangguniang Panlungsod had no right
regarding the validity of the execution of the MOA, for being a non-issue of rescission for the first 5 years of the MOA – an issue not raised in the
in this case;110 pleadings – the trial court improperly took up the cudgels for Jadewell in
the case.120
3. We also immediately set aside claims of Jadewell in its Petition before
the RTC that an alternative relief should be provided by the courts in the As earlier stated, the CA upheld the RTC’s Decision in toto.
form of compensation for terminated Build-Operate-Transfer (BOT)
contracts under the BOT Law (Republic Act No. 6957) as there is not the The Sanggunian filed its Motion for Reconsideration arguing that the CA
slightest basis on record that the administration of on-street parking can had erred as follows: (1) treating Jadewell’s petition as an original action
be classified as an infrastructure contract, a basic element that must be for injunction;121 (2) ruling that Jadewell was deprived of due
present for any contract to come within the terms of the BOT Law. process122 when it rescinded the MOA; and (3) finding that the MOA
stipulated for a five-year minimum guarantee against rescission.123 This
Having preliminarily screened out the non-issues in this case, we proceed was denied, and this denial and the CA Decision are the subjects of G. R.
to examine the rulings of the courts a quo in G.R. 160025. 160025.
The CA affirmed the RTC Decision in toto, along the following points: 2. G.R. No. 172215 – Certiorari,
Prohibition and Mandamus, filed by
1. On the sole procedural issue. - The RTC was correct in treating the Jadewell against Judge Pamintuan
Petition as one for permanent injunction with a prayer for a preliminary for not dismissing Civil Case No. 6089-R
injunction, instead of treating it by its formal title: "Petition for Certiorari,
Prohibition and Mandamus with a Prayer for a Writ of Preliminary Jadewell directly filed the instant Rule 65 Petition for Certiorari before
Injunction." It was correct in holding that if the Petition had been treated this Court to nullify the denial by the trial court of its Motion to Dismiss
by its formal denomination, then it would have been dismissed for failing and its Motion for Reconsideration of the same order,124 and for ordering
to satisfy the requirement that the act sought to be nullified was rendered Jadewell to cease collecting parking fees, and from towing and
in a judicial or quasi-judicial capacity by the respondents, but then this impounding vehicles on the streets of Baguio City. It also seeks to nullify
formal denomination could be disregarded and the nature of the Petition the proceedings in Civil Case No. 6089-R, invoking both res judicata and
should be determined by its allegations and prayers. Since there was a litis pendentia.125 It contends that, since the issue on the validity of the
prayer to permanently enjoin respondents from enforcing the questioned questioned city ordinance and the MOA was favorably ruled upon
resolutions, the RTC was correct in treating it as one for permanent previously by RTC Branches 7 and 61 of Baguio City in separate cases,
injunction. Branch 3 of the same RTC presided by Judge Pamintuan is bound by the
rulings of the other branches.126 Litis pendentia is being invoked in
2. On the substantive issues: relation to the petitions already before this Court.
a. On the lack of due process afforded Jadewell. – The RTC was correct Mayor Yaranon is impleaded in this case on the basis of the order of Judge
in ruling that Jadewell was denied the right to be heard before the Pamintuan to the city mayor to perform his duty to supervise the roads,
Sanggunian rescinded the MOA. There is no evidence on record that the streets and park of Baguio City, in coordination with the police and the
Sanggunian afforded Jadewell an opportunity to present its side or refute LTO during the validity of the Writ of Injunction that Judge Pamintuan
the charges of the latter’s violation committed under the MOA.111 issued.127
b. On the authority of the RTC to consider the effect of Section 9 of the The main issue to be resolved in Jadewell’s Petition for certiorari is
MOA112 when Jadewell never raised the matter of Section 9 in any of its whether Judge Pamintuan’s rulings in Civil Case No. 6089-R violated the
pleadings. – The RTC correctly considered Jadewell’s letter dated 24 res judicata/litis pendentia doctrines.
November 2001, addressed to the Sanggunian and offered during the trial,
which introduced the subject matter of the five (5) year guarantee against 3. G.R. No. 181488 – The
rescission provided in Section 9 of the MOA. The CA regarded the RTC’s Certiorari petition filed by Yaranon
consideration of said letter as judicious and added that even without it, the seeking to reverse Resolutions dated
MOA, and its provisions, form part of the case records.113 9 October 2008 and 24 January 2008
in CA-G.R. SP No. 96116 which
c. On the failure to observe the 60-day notice requirement. – The RTC upheld the validity of his suspension
correctly found that the Sanggunian cannot validly and unilaterally as City Mayor of Baguio.
rescind the MOA without observing the provisions in Section 12 of the
MOA requiring that a 60-day notice be given before rescission can take Mayor Yaranon’s instant Petition before this Court raises the following
place. To allow the Sanggunian to unilaterally rescind the MOA without issues: (1) that his failed re-election bid was not a supervening event in
giving Jadewell an opportunity to present its side is to render the right to the final determination by the CA of whether he was guilty of grave
rescission provided in the MOA legally vulnerable.114 misconduct, abuse of authority, and oppression; and (2) that the CA
should rule on the substantive validity of his suspension.
d. On the lack of substantiveness of the alleged breach of performance of
the MOA by Jadewell. – The CA reviewed the records of the case and 4. The Petitions for Contempt
upheld the findings of the RTC that the violations of Jadewell were not
substantial to merit the consequence of rescission under the MOA.115 a. G.R. No. 163052 – This is the first contempt petition filed by Jadewell
directly with this Court against City Mayor Vergara, the Vice Mayor, and
We elucidate on the arguments of the parties, the RTC, and the CA. the entire Sanggunian, for enacting Resolution Nos. 056 & 059, Series of
2004. To recall, Resolution No. 056, Series of 2004 informs the general
In its Petition before the RTC, Jadewell argues that the rescission of the public that Jadewell had neither the authority nor the police power to
MOA was not valid, on due process grounds, and also because there was clamp, tow or impound vehicles at any place in the City of Baguio.128 In
no substantial breach on its part to justify a rescission of the MOA.116 It Resolution No. 059, Series of 2004, the City of Baguio made a formal
also asserts that the Sanggunian had no authority to rescind the MOA, demand upon Jadewell to surrender the Ganza and Burnham Park Parking
because the latter was not a party thereto.117 Areas within thirty days. In the same Resolution, the City of Baguio also
Jadewell sought a writ of preliminary injunction to prevent the directed the City Legal Officer to file the appropriate legal actions
implementation of the questioned Resolution, and prayed that after

necessary to recover the said parking areas and to ask for damages against A. Olowan, Federico J. Mandapat, Perlita L. Chan-Rondez, and Jose M.
Jadewell.129 Molintas, be disbarred.
The core issue to be resolved in this case is whether the Sanggunian These acts, in Jadewell’s view, are contumacious in light of the pending
Panlungsod is guilty of indirect contempt for enacting the above G.R. No. 160025 before this Court.
resolutions, pending resolution of G.R. No. 160025.
OUR RULINGS
b. G.R. No. 164107 – This contempt petition was filed directly with this
Court against then Baguio City Mayor Braulio D. Yaranon after he issued 1. On G.R. No. 160025
Executive Order No. 001-04 announcing that, as City Mayor, he would a. On the Treatment of
give protection to motor vehicle owners, operators, and drivers who Jadewell’s Petition as one for
would refuse to submit to the enforcement of traffic rules by Jadewell Permanent Injunction.
such as by refusing to pay the parking fees or fines the latter imposes.
The CA sustained the position of the Sanggunian that certiorari could not
Yaranon also issued a Memorandum dated 8 July 2004, ordering the arrest prosper because when the latter enacted Resolution 37, the Sanggunian
and filing of criminal charges against Jadewell personnel who would was exercising its legislative function and not its judicial or quasi-judicial
clamp, tow, or impound motor vehicles in defiance of Executive Order function. The writ of certiorari under Rule 65 requires: (a) that it is
No. 001-04. This was followed by a Memorandum on 8 April 2005 directed against a tribunal, a board or an officer exercising judicial or
directing the Baguio City Police District to create a special task force to quasi-judicial functions; (b) that such tribunal, board, or officer has acted
prevent Jadewell from clamping, towing, and impounding vehicles found without or in excess of jurisdiction or with grave abuse of discretion; and
to be in violation of the parking rules in Baguio City. (c) that there is no appeal nor any plain, speedy and adequate remedy in
The issue to be resolved in this petition is whether Mayor Yaranon could the ordinary course of law.138
be cited for contempt for the above, pending resolution of the issue of the The CA nevertheless proceeded to treat the Petition as an original action
validity of the rescission of the MOA in G.R. Nos. 160025 and 163052. for injunction, ruling in this wise:
c. G.R. No. 165564 – Jadewell filed this third contempt petition against xxxx
Mayor Yaranon for issuing Executive Order No. 005-2004 dated 15
October 2004. The order directs Jadewell to cease and desist from: (a) Although in the trial court, Jadewell filed said petition for Certiorari,
charging and collecting parking fees on the streets of Baguio City without Prohibition and Mandamus under Rule 65, it is essentially one for
the consent of the City Government;130 (b) seizing and detaining vehicles Injunction under Rule 58. Said petition’s form and substance satisfied all
of motorists who refuse to pay the parking fees to Jadewell131 and (c) the requirements of a civil action for Injunction, which is the proper
using yellow-colored tow trucks bearing the name "City of remedy under the attendant circumstances.
Baguio".132 Jadewell’s petition also seeks to nullify Executive Order No.
005-2004. The rules of procedure ought not to be applied in a very rigid technical
sense, rules of procedure are used only to help secure, not override
On 16 November 2004, Jadewell filed a Supplemental Petition. The act substantial justice. If a technical and rigid enforcement of the rules is
complained of this time was the issuance of Executive Order No. 005- made, their aim would be defeated.
2004-A which is a mere rehash of Executive Order No. 005-2004.133 On
25 January 2005, Jadewell filed a Second Supplemental Petition in Considering the clear and patent denial of due process committed by the
connection with Mayor Yaranon’s issuance of Administrative Order No. Sanggunian in precipitately rescinding the MOA and in the interest of
622, Series of 2004. The said administrative order declared that Jadewell substantial justice, WE deem it more prudent to treat the petition filed
exceeded its area of operations for the administration of on-street parking below as an action for Injunction under Rule 58, which is well within the
and it required to show lawful cause why its business permit should not jurisdiction of the trial court. Consequently, the present appeal shall be
be revoked. considered as an appeal from the permanent injunction ordered by the trial
court, which is properly appealable to this Court, as held in Casilan vs.
Like in the earlier contempt petitions, Jadewell alleges that these Ybaňez.139
issuances by Mayor Yaranon are contumacious because they were made
while the main petition, G.R. No. 160025 questioning the rescission of xxxx
the MOA by the Sanggunian, is still pending resolution with this Court. We sustain the ruling of the appellate court treating Jadewell’s original
d. G.R. No. 172216 – On 27 April 2006, Jadewell filed a petition for action for certiorari as one for injunction based on the allegations in the
contempt against Judge Fernando Vil Pamintuan, Presiding Judge of latter’s pleadings.
RTC-Branch 3 of Baguio City, in relation to Civil Case No. 6089-R In Ramon Jimenez, Jr. v. Juan Jose Jordana,140 the issue to be resolved
pending before his sala.134 In the said civil case, Judge Pamintuan issued was whether the nature of the action was one for specific performance or
an Order directing Jadewell to desist from the collection of parking fees, for recovery of real property. In determining that the case was one for the
from towing and impounding vehicles on the streets of Baguio City and recovery of real property, the Court characterized the suit on the basis of
to hold in abeyance the implementation of City Ordinance 003-2000 and the allegations in the Complaint. We restated the rule that the nature of an
the MOA. The validity of the Order of Judge Pamintuan is the subject of action is determined by the material averments in the complaint and the
a Petition for Certiorari, Prohibition, and Mandamus instituted by character of the relief sought. In the recent case of Reyes v. Alsons
Jadewell in G.R. No. 172215. Development and Investment Corporation,141 we likewise ruled that the
The main issue to be resolved in this case is whether Judge Pamintuan nature of an action is determined by the allegations in the pleadings.
should be cited for indirect contempt by this Court for issuing the assailed In Lee, Jr. v. Court of Appeals,142 the controversy to be resolved was
Orders. whether the appeal filed by the petitioner was one under Rule 65 or Rule
e. G.R. No. 173043 – On 29 June 2006, Jadewell filed yet another 42. The determination of the issue was crucial, because the appellate court
contempt case against Mayor Yaranon. In addition to its prayer to cite him had dismissed the appeal of the petitioner, saying that the wrong mode of
for contempt, Jadewell also prays that Mayor Yaranon, as a lawyer, be appeal had been used. The CA had ruled that petitioner should have filed
disbarred.135Jadewell instituted this fifth contempt case after it received a a certiorari petition under Rule 65 – instead of a petition under Rule 42 –
letter from Mayor Yaranon demanding that it stop its business operations to appeal the assailed decision rendered by the RTC in the exercise of its
in Baguio City, at the same time directing the Sangguniang Panlungsod appellate jurisdiction.
to cancel Ordinance 003-2000. We held:
The issue to be resolved in this case is whether Mayor Yaranon was guilty Our perusal of the petition filed before the Court of Appeals clearly shows
of indirect contempt and professional misconduct for the above acts that it is a petition for review under Rule 42, and not a special civil action
pending resolution of G.R. Nos. 160025, 163052,164107, 165564 and for certiorari under Rule 65. We note that in the Court of Appeals’
172215.136 petition, under the heading "Nature of the Petition," petitioner stated that
f. G.R. No. 174879 - On 19 October 2006, Jadewell filed a contempt case it was a "petition for review on certiorari to set aside, invalidate and
against the acting City Mayor of Baguio, Reinaldo A. Bautista, Jr., and reverse the Decision dated December 14, 2001 of public respondent Judge
the members of the Sangguniang Panlungsod, including City Legal Victor T. Llamas, Jr." Also, the reversal sought was premised on the
Officer Melchor Carlos R. Rabanes, in connection with the second act of ground that the decision was issued in gross error. The statement under
rescission.137 Jadewell also asks that the respondents who are lawyers, the heading "Nature of the Petition" that the trial courts’ decisions were
namely: Rocky Thomas A. Balisong, Edilberto B. Tenefrancia, Faustino issued with grave abuse of discretion amounting to lack of jurisdiction,
and even the caption impleading the lower courts, would not

automatically bring the petition within the coverage of Rule 65. It is City of Baguio in a governmental capacity, or in a purely proprietary
hornbook doctrine that it is not the caption of the pleading but the capacity.
allegations therein that determine the nature of the action. (Emphasis
supplied) The regulation of on-street and off-street parking is a governmental
function that can be exercised by local governments. It is important to
In the original action filed by Jadewell before the RTC of Baguio City, understand the objective of the Baguio City Government in: (1)
although the action was clearly denominated as a Petition for Certiorari, privatizing the administration of on-street and off-street parking; and (2)
Prohibition and Mandamus against the Sangguniang Panlungsod, the its execution of a MOA with Jadewell. This can be gleaned from the
allegations actually supported an action for injunction under Rule 58 of Explanatory Note and other provisions of the agreement, to wit:
the Revised Rules on Civil Procedure. As can be gleaned from its
allegations and especially in its prayers, Jadewell filed the case with the The City of Baguio has earned the reputation of the CLEANEST AND
trial court with the ultimate end of restraining the implementation of GREENEST HIGHLY URBANIZED CITY for the previous years. This
Resolution No. 037, Series of 2002. has become possible due to the collective effort of both the Citizens of
Baguio and the City Government. However, the increase in population,
We agree with the CA when it ruled that Jadewell sought permanent volume of vehicles and the absence of a regulatory measure to address
injunction aside from the auxiliary remedy of preliminary injunction, this concern gradually tainted what used to be a reputation we were proud
thus: of.
An action for injunction is a recognized remedy in this jurisdiction. It is a The ever increasing problems, specifically those relevant to the Traffic
suit for the purpose of enjoining the defendant, perpetually or for a situation is at this point the biggest contributor to environmental
particular time, from committing or continuing to commit a specific act, degradation. Other Salient points we must consider relevant to this matter
or compelling the defendant to continue performing a particular act. It has are the problems on OBSTRUCTION AND DOUBLE PARKING which
an independent existence. The action for injunction is distinct from the are very rampant. We further add to these the problems on
ancillary remedy of preliminary injunction, which cannot exist except DISORGANIZED PARKING, LACK OF DEPUTIZED AGENTS to
only as part or an incident of an independent action or monitor, supervise and enforce traffic rules and regulations.
proceeding.143 xxxx...
At this point in time, we feel the immediate need of focusing on these
In Garcia v. Adeva,144 this Court had the opportunity to clarify that while problems. There is an urgent need to adopt measures that would alleviate
injunction can be a provisional remedy, it can also be a main case. The these matters. This we recommend that PARKING SPACES should be
Court had to make this preliminary distinction in order to find out whether REGULATED in such a manner that it would bring advantage both to the
the SEC had the jurisdiction to prevent, on a permanent basis, the City Government and the Citizens of Baguio. We further propose the
commission of certain acts by the respondents. Thus, the necessity to collection of REGULATORY FEES that would be used in maintaining
make the distinction between injunction as a provisional remedy and our roads and to hire people that would de deputized to help ease the
injunction as a main case. It found guidance from Garayblas v. Atienza, problems as stated above.
Jr.,145 and quoting from the latter:
Finally, we believe that our roads are beyond the Commerce of Man. To
Injunction is a judicial writ, process or proceeding whereby a party is convert our roads into PAY PARKING SPACES, would be violative of
ordered to do or refrain from doing a certain act. It may be the main action this principle. However to REGULATE its use and its eventual effect
or merely a provisional remedy for and as an incident in the main action. would redound to the GENERAL WELFARE will be an appreciated
The Court has distinguished the main action for injunction from the gesture to help preserve our image as the CLEANEST AND GREENEST
provisional or ancillary remedy of preliminary injunction, thus: HIGHLY URBANIZED CITY.
The main action for injunction is distinct from the provisional or ancillary xxxx
remedy of preliminary injunction which cannot exist except only as part
or an incident of an independent action or proceeding. As a matter of SECTION 4. Parking spaces. A parking place may be divided into parking
course, in an action for injunction, the auxiliary remedy of preliminary spaces and for the purposes of this Ordinance, each space or for a number
injunction, whether prohibitory or mandatory, may issue. Under the law, of spaces as determined by the private parking operator in consultation
the main action for injunction seeks a judgment embodying a final with the concerned Official of the City of Baguio.
injunction which is distinct from, and should not be confused with, the xxxx
provisional remedy of preliminary injunction, the sole object of which is
to preserve the status quo until the merits can be heard. A preliminary SECTION 5. Prohibitions against parking outside the parking spaces. No
injunction is granted at any stage of an action or proceeding prior to the spaces shall park any motor vehicle on the sidewalk or cause or permit
judgment or final order. It persists until it is dissolved or until the any motor vehicle to wait to any road or length of road on which in any
termination of the action without the court issuing a final injunction. place in which or adjacent to or in close proximity to which there is a
parking place.
We, therefore, rule that the CA did not commit any error in treating
Jadewell’s Petition for Certiorari as an original action for injunction. xxxx
b. On the denial of due process. SECTION 7. Payment of Prescribed Charges. (1) No person shall park
any motor vehicle in a parking place or parking space during the times
The second issue in this Petition is the correctness of the CA’s ruling that specified in this Ordinance without paying the prescribed charge for the
Jadewell was deprived of due process when the Sangguniang Panlungsod required parking period; (2) The prescribed charge payable in respect to
rescinded the MOA. The findings of the CA are as follows: the parking of a motor vehicle in a parking space shall be paid by the
In the instant case, evidence on record does not show that before the insertion into the parking meter provided for that parking space a
Sanggunian passed the disputed Resolution it gave Jadewell an coin/coins of Philippine Currency or by using cards in order to obtain the
opportunity to present its side. Neither did the Sanggunian convene an payment ticket to evidence the payment of the prescribed charge; (3) The
investigatory body to inquire into Jadewell’s alleged violations nor at payment ticket shall be displayed at a conspicuous part of a motor vehicle
least invite Jadewell to a conference to discuss the alleged violations, if in a parking place or parking space; (4) The payment ticket shall be valid
only to give Jadewell the chance to refute any evidence gathered by it to be used on any parking space within the authorized period indicated in
against the latter. As it is, the Sanggunian arrogated upon itself the role of the payment ticket.
a prosecutor, judge and executioner in rescinding the MOA, all in clear xxxx
violation of Jadewell’s constitutionally embedded right to due process.146
SECTION 22. Rules. The Memorandum of Agreement (MOA) to be
x x x. entered into by the City Mayor shall be governed by this Ordinance.
Both courts held that Jadewell was denied due process. When the denial From the above, the following are clear: (1) that the City of Baguio
of due process argument is raised, it is directed primarily against the decided on the privatization of the administration of parking for
exercise of governmental authority that "deprives life, liberty and environmental and peace and safety reasons, both of which are within its
property" without observance what is, in the circumstances, the applicable powers under Section 458(A)(5)(v) and (vi) of the Local Government
standards of "due process." It is not an argument that is relevant in Code; and (2) that the terms of agreement between the City of Baguio and
situations of contractual breach between two purely private entities, nor Jadewell involve the delegation of governmental functions in terms of
is it available against the government when the latter is not discharging a regulating the designation and use of parking spaces as well as the
governmental function, but merely pursuing a purely commercial activity collection of fees for such use. These are indicators that any privatization
in a proprietary capacity. In order to consider the due process argument, contract pursuant to the above Resolution takes the essential character of
this Court must first determine whether the MOA was entered into by the

a franchise because what is being privatized is a government- However, the power of declaring extrajudicial rescission conferred upon
monopolized function. the injured party is regulated by the Civil Code. If the extrajudicial
rescission is impugned by the other party, it shall be subject to a judicial
It would thus be relevant to ask if there is a provision in the applicable determination153where court action must be taken, and the function of the
laws or the franchise (MOA) that grants the City of Baguio the right to court is to declare the rescission as having been properly or improperly
revoke the latter either at will, or upon the satisfaction of certain made, or to give a period within which the debtor must perform the
conditions, such that ordinary due process protection can be considered obligation alleged to be breached.154 A unilateral cancellation of a
to have been waived by the franchisee. We must caution that when we contract may be questioned in courts by the affected party to determine
refer to revocation at will here, we are referring to the revocation of whether or not cancellation is warranted.155 Thus, in an extrajudicial
resolutory, not suspensive, obligations.147 decree of rescission, revocation cannot be completely exercised solely on
We have looked closely at Resolution No. 003-2000 and the MOA and a party’s own judgment that the other has committed a breach of the
have additionally reflected on the applicable provision under the Civil obligation156but always subject to the right of the other party to judicially
Code. We have come to the conclusion that: impugn such decision.
(a) There is only one provision that allows for unilateral revocation of the It is important to contextualize that the agreement entered into by the City
MOA, which can be found in Section 9 thereof: of Baguio with Jadewell is the embodiment of a grant of franchise imbued
with public interest and is not merely an agreement between two private
9. Minimum Guaranty – The FIRST PARTY guaranties (sic) a minimum parties.
period of five (5) years against rescission; provided that after such period,
the parties may agree to increase to a reasonable rate the parking fees and It is our view that the first act of rescission by the City of Baguio may be
the share of the city from the parking fees collected as provided for in the valid even if there is a stipulation against it within the first five years of
guidelines, (Annex "B"); the MOA’s existence. Article 1191 of the New Civil Code provides a
party the right to rescind the agreement and clearly overrides any
(b) This Section 9 requires that five years must have lapsed – presumably stipulation to the contrary. However, the grounds that would serve as basis
from the date of execution of the MOA – before the unilateral right to to the application of the said article must be clearly established.
revoke the MOA can be exercised;
In the exercise of this option under Article 1191, was it necessary for the
(c) Therefore, before the five year period has lapsed, the right to revoke City of Baguio to provide Jadewell an opportunity to air its side on the
the MOA arises only under Article 1191 of the Civil Code, which reads: matter before the former implemented the rescission of the MOA? In the
instant case, was Jadewell deprived of procedural due process?
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 We answer in the negative. We disagree with the rulings of the RTC and
upon him. the CA that Jadewell was deprived of due process. In Taxicab Operators
of Metro Manila v. The Board of Transportation,157 we confronted the
The injured party may choose between the fulfillment and the rescission issue of whether the petitioners were denied procedural due process when
of the obligation, with the payment of damages in either case. He may the respondent Board of Transportation issued a circular ordering the
also seek rescission, even after he has chosen fulfillment, if the latter phasing out of old vehicles to be used as taxicabs. In the said case, the
should become impossible. phase-out was embodied in a circular that was promulgated without
The court shall decree the rescission claimed, unless there be just cause holding a public hearing or at least requiring those affected to submit their
authorizing the fixing of a period. position papers on the policy to be implemented. We held for the
respondent Board, and ruled in this wise:
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 Dispensing with a public hearing prior to the issuance of the Circulars is
and the Mortgage Law. neither violative of procedural due process. As held in Central Bank vs.
Hon. Cloribel and Banco Filipino, 44 SCRA 307 (1972):
From the above, it appears that in order to effect a valid revocation of the
MOA prior to the lapse of the 5-year period provided for in Section 9, the Previous notice and hearing as elements of due process, are
City of Baguio had to approach the problem from one or both of two constitutionally required for the protection of life or vested property
perspectives: one, negotiate the termination of the MOA with Jadewell, rights, as well as of liberty, when its limitation or loss takes place in
or two, exercise its option under Article 1191 of the Civil Code. consequence of a judicial or quasi-judicial proceeding, generally
dependent upon a past act or event which has to be established or
The first option, a negotiated pretermination of the contract, is an inherent ascertained. It is not essential to the validity of general rules or regulations
right of every party in a contract. This can be inferred from the freedom promulgated to govern future conduct of a class or persons or enterprises,
of the parties to contract and modify their previous covenants provided it unless the law provides otherwise.
would not be contrary to law, morals, good customs, public order or
public policy.148 Despite the provision on the minimum warranty against In the instant case, the assailed act by the Sanggunian Panlungsod in
rescission stipulated in the MOA, the parties were not constrained to rescinding the MOA – be it first or second act of rescission – was clearly
mutually modify such restriction. The Sanggunian could have proposed in the exercise of its legislative or administrative functions and was not
to Jadewell the possibility of lifting the warranty against rescission an exercise of a judicial or quasi-judicial function. The Sanggunian
subject to the condition that the latter will comply with its obligations Panlungsod does not possess any judicial or quasi-judicial functions. The
under the MOA. preamble of the MOA lends support to this view. Evidently, the foremost
reason why the agreement was entered into by the parties was to provide
This scenario could have impressed upon Jadewell that its contractual order, given Baguio City’s parking problems in identified areas, as well
relations with the city government of Baguio were less than ideal. The as to generate income.
suggested approach for the Sanggunian could have been legally sound and
practical. Obviously, this was not done in this case; thus, Jadewell’s The objectives of the Sanggunian Panlungsod, as well as its intention to
Complaint before the RTC of Baguio City. rescind the MOA; because it deems to no longer serve the interest of the
City of Baguio, are clearly an exercise of its legislative or administrative
The second option is the exercise of the unilateral right to rescind a function. However, it is another matter as to whether the City of Baguio
bilateral contract on the part of a party who believes that it has been was able to clearly establish the grounds as basis for the exercise of its
injured by a breach substantial enough to warrant revocation. Where one right to rescind.
party allegedly failed to comply with his obligations under a contract, the
injured party may rescind the obligation if the other does not perform or c. On the allegation of Jadewell’s
is not ready and willing to perform.149 We will examine the acts of Baguio substantial breach of the MOA.
City in relation to what is allowed under Article 1191. The Baguio City government has repeatedly mentioned that Jadewell had
Rescission under Article 1191 takes place through either of two modes: so far installed only 14 parking meters, with only 12 functioning. The
(1) through an extrajudicial declaration of rescission; or (2) upon the grant COA-CAR Report dated 13 July 2003 enumerated 12 findings,158 a
of a judicial decree of rescission. majority of which indicates that Jadewell was remiss in the fulfilment of
its obligations under the MOA. While Finding Nos. (1), (2), (3), (4), (5),
Extrajudicial declaration of rescission is recognized as a power which (8) and (12) of the COA-CAR Report state that Jadewell collected parking
does not require judicial intervention.150 If the rescission is not opposed, fees, Jadewell failed to properly remit the same. Finding No. (11) of the
extrajudicial declaration of rescission produces legal effect151 such that COA-CAR Report states that Jadewell failed to have its parking
the injured party is already relieved from performing the undertaking.152 attendants deputized,159 a condition under the MOA that is also important
to the overall objective of the endeavor.

The MOA does not specifically provide for the exact number of parking (d) Any improper conduct tending, directly or indirectly, to impede,
meters to be installed by Jadewell pursuant to the parties’ objective in obstruct, or degrade the administration of justice;
regulating parking in the city. Nevertheless, 100 parking spaces were
allotted as mentioned in Annex A of the MOA.160 The agreement also (e) Assuming to be an attorney or an officer of a court, and acting as such
obligates Jadewell to have its parking attendants deputized by the DOTC- without authority;
LTO so that they shall have the authority to enforce traffic rules and (f) Failure to obey a subpoena duly served;
regulations in the regulated areas.161 To the Court’s mind, these are two
of the most important obligations that Jadewell had to comply with, (g) The rescue, or attempted rescue, of a person or property in the custody
considering the nature and objective of the agreement it had entered into. of an officer by virtue of an order or process of a court held by him.
Despite the enumeration of the above-mentioned faults of Jadewell, we But nothing in this section shall be so construed as to prevent the court
do not make a categorical finding that there was substantial breach from issuing process to bring the respondent into court, or from holding
committed by Jadewell to justify a unilateral rescission of the MOA. We him in custody pending such proceedings.
find, however, that the RTC had not properly received evidence that
would allow it to determine the extent of the claimed violations of the The rule alerts us to three possible situations, wherein, in the context of
MOA. Had these violations by Jadewell been proven in a proper hearing, the facts of these petitions, contumacious behaviour could have been
the finding of a substantial breach of the MOA would have been a distinct committed by public respondents. First, disobedience or resistance to a
probability. lawful order of this Court under paragraph (b). Second, unlawful
interference with the proceedings of this Court under paragraph (c). Third,
Unfortunately, neither the RTC nor the CA provided a clear basis for their improper conduct tending, directly or indirectly, to impeded, obstruct, or
rulings on the extent of the breach of the MOA by Jadewell. Save from degrade the administration of justice by this Court under paragraph (d).
reiterating the Sanggunian’s litany of violations said to be committed by
Jadewell, there was no testimony on record to prove such facts and no Jadewell, in G.R. Nos. 163052, 164107, 165564, 172216, 173043, and
indication as to whether the RTC or CA dismissed them or took them at 174879, bases its charges of indirect contempt against public respondents
face value. on a claim that any action that tends to stop the implementation of the
MOA is contumacious. Such actions include desistance orders to desist
Whatever the extent of breach of contract that Jadewell may have against Jadewell itself, the second act of unilateral rescission of the MOA;
committed – and the enumeration of Jadewell’s alleged faults in orders to other public officers to prevent Jadewell from exercising its
Resolution 37 is quite extensive – the City of Baguio was still duty-bound authority under the MOA; and the official encouragement for motorists to
to establish the alleged breach. resist attempts of Jadewell to collect parking fees or clamp/tow vehicles
that do not observe the parking regulations.
Matters became complicated when the RTC and the CA lumped the issues
on the due process violation of Baguio City with Jadewell’s alleged We find scant jurisprudence to guide us on this matter. The closest
substantial breaches under the MOA, instead of making a clear finding on situation is that presented in Southern Broadcasting Network v. Davao
the existence and extent of such breach. The facts and legal issues were Light and Power,162 penned by Justice Felix Makasiar. In that case,
thus muddled. petitioner’s representative, Carmen Pacquing, wrote a letter to President
Marcos asking for his intervention so that her Motion for Reconsideration
We find fault in the lower and appellate court’s lapse in examining the (MR) of the resolution of this Court denying her Petition could be
issue on Jadewell’s alleged substantial breach. Evidence-taking had to be favorably granted. Respondent Davao Light asked that petitioner
undertaken by these courts before they could arrive at a judicial Pacquing be cited for contempt, arguing that her act in writing to the
conclusion on the presence of substantial breach. President asking him to intervene in the case showed disrespect to and
We thus DENY the Petition of the Sanggunian Panlungsod in G.R. No. disregard for the authority of this Court as the final arbiter of all cases.
160025 and AFFIRM the questioned CA Decision. However, we reject We found petitioner Pacquing guilty of contempt, thus:
the ruling made by the appellate court that the violations of Jadewell x x x. WE hold that such actuation of herein petitioner’s representative
under the MOA were not substantial. We hold that there is no sufficient only bespeaks more of her contumacious attempt to trifle with the orderly
evidence on record to make such determination. administration of justice because if she know that this Court will
While Jadewell prays for damages against the public respondent, and ultimately decide the case "regardless of the President’s intervention,"
while ordinarily we could grant the same, the context of this case prevents then she should have desisted from writing to the President.
us from giving any form of recompense to Jadewell even if the rescission In the light of the foregoing, there is no doubt that Mrs. Pacquing
of the MOA did not follow the required legal procedure. This is because committed an "improper conduct tending, directly or indirectly, to
it would be appalling to grant Jadewell any award of damages, impede, obstruct, or degrade the administration of justice" (Section 3, par.
considering (1) it installed only 14 out of the apparently 100 contemplated [d] Rule 71, Rules of Court) and impair the respect due to the courts of
parking meters; (2) its employees, private citizens who did not possess justice in general, and the Supreme Court, in particular.
any authority from the LTO, were manually collecting parking fees from
the public, and (3) it did not, apparently properly remit any significant In the above case, respondent Carmen Pacquing was clearly asking the
amount of money to the City of Baguio. These three facts are uncontested, President to commit an improper act – to influence the Supreme Court –
these omissions are offensive to the concept of public service that the that obstructs the orderly administration of justice, as the Court is
residents of Baguio were promised through Jadewell. From its ambiguous constitutionally required to act independently free from the promptings of
responses extant in the records, it is clear that Jadewell does not appear to the President. Pacquing clearly violated both Sections (c) and (d) of
be an investor who has lost in its investments in the Baguio City project. Section 3, Rule 71.
Thus, we do not award any damages to Jadewell.
No such similar situation occurred here. Public respondents never asked
2. On G.R. Nos. 163052, 164107, anyone to employ pressure or influence on this Court for the former’s
165564, 172216, 173043 and 174879 benefit.
(The Contempt Petitions)
Instead, the acts that have been allegedly committed by public
Section 3 of Rule 71 of the Revised Rules of Civil Procedure enumerates respondents are acts done pursuant to their belief that: (a) the MOA has
the acts constituting indirect contempt, thus: been validly voided, and more importantly, (b) that Jadewell’s personnel
do not have the legal authority to perform the governmental function of
(a) Misbehavior of an officer of a court in the performance of his official administering the regulation of on-street and off-street parking, of towing
duties or in his official transactions; or clamping vehicles that violate such regulation, and of collecting
(b) Disobedience of or resistance to a lawful writ, process, order, or parking fees from motorists.
judgment of a court, including the act of a person who, after being It is important to note that the Court never gave a mandatory injunction
dispossessed or ejected from any real property by the judgment or process that is couched in a way that requires public respondents to fully comply
of any court of competent jurisdiction, enters or attempts or induces with the terms of the MOA. The writ of preliminary mandatory injunction
another to enter into or upon such real property, for the purpose of (WPMI) issued on 9 February 2005 is directed to Mayor Yaranon only,
executing acts of ownership or possession, or in any manner disturbs the and it directs him to perform only one specific act: to reopen, and maintain
possession given to the person adjudged to be entitled thereto; open, the street and premises then being occupied and operated by
(c) Any abuse of or any unlawful interference with the processes or Jadewell.
proceedings of a court not constituting direct contempt under Section 1 of Mayor Yaranon did not immediately comply with this WPMI. Thus, this
this Rule; Court fined him ₱10,000 on 20 April 2005, and ordered the NBI to arrest

him if he further failed to comply with the WPMI. Subsequently, Mayor remedy in the ordinary course of law. Conversely, absent a showing of
Yaranon paid the fine, and there is nothing on record to show that he has, lack or excess of jurisdiction or grave abuse of discretion amounting to
since April of 2005, further defied this Court on that score. lack or excess of jurisdiction, the acts of the respondents may not be
subjected to our review under Rule 65.
The Court did not issue a WPMI specifically ordering the parties to
observe the terms of the MOA. Thus, public respondents were not In Indiana Aerospace University v. Commission on Higher
expressly prohibited to act on their beliefs regarding the validity or Education,169 this Court ruled thus:
invalidity of the MOA, or, the authority or lack of authority of Jadewell
personnel to perform governmental functions in the streets of Baguio. An order denying a motion to dismiss is interlocutory, and so the proper
remedy in such a case is to appeal after a decision has been rendered. A
This is an important result, because to hold otherwise is to effectively writ of certiorari is not intended to correct every controversial
grant one of the parties a mandatory injunction even without an express interlocutory ruling; it is resorted to only to correct a grave abuse of
resolution to this effect from the Court. Without an express order, the discretion or a whimsical exercise of judgment equivalent to lack of
pendency of a suit before the Supreme Court is not a prima facie jurisdiction. Its function is limited to keeping an inferior court within its
entitlement of provisional relief to either party. jurisdiction and to relieve persons from arbitrary acts -- acts which courts
or judges have no power or authority in law to perform. It is not designed
Public respondents therefore were, at liberty to question and inform the to correct erroneous findings and conclusions made by the court.
public of their belief regarding the lack of authority of Jadewell and its
personnel to regulate public parking in Baguio. They were certainly free In East Asia Traders, Inc. v. Republic of the Philippines, et al.,170 we
to formally write Jadewell on their beliefs and pass the corresponding decreed:
resolutions to this effect. The mayor was also not under legal compulsion
to renew Jadewell’s business permit in view of his opinion that Jadewell The petition for certiorari and prohibition filed by petitioner with the
was exceeding its allowable area of operation, which Jadewell was not Court of Appeals is not the proper remedy to assail the denial by the RTC
able to fully disprove. This is especially true for two important reasons: of the motion to dismiss. The Order of the RTC denying the motion to
(1) there is an uncontested cease and desist order that was issued by the dismiss is merely interlocutory. An interlocutory order does not terminate
DOTC-CAR on 13 March 2002 which Jadewell defied well into 2005, nor finally dispose of the case, but leaves something to be done by the
and (2) public respondents are city officials of Baguio who have the legal court before the case is finally decided on the merits. It is always under
duty to ensure the laws are being followed, including laws that define who the control of the court and may be modified or rescinded upon sufficient
may enforce regulations on public parking. grounds shown at any time before final judgment. This proceeds from the
court’s inherent power to control its process and orders so as to make them
That Jadewell personnel do not have the legal authority to enforce conformable to law and justice. The only limitation is that the judge
regulations on public parking is categorical from the Letter dated 1 cannot act with grave abuse of discretion, or that no injustice results
February 2001 by the Regional Director of the DOTC-CAR denying the thereby.
request of Jadewell for the deputation of its personnel.163
East Asia Trader also reiterated our ruling in Indiana Aerospace. Further,
We therefore do not find any of the public respondents who were then in Bonifacio Construction Management Corporation v. Hon. Perlas
officials of the City of Baguio, liable for indirect contempt, and thereby Bernabe,171 we reiterated our rulings in East Asia Traders and Indiana
dismiss G.R. Nos. 163052, 164107, 165564, 173043 and 174879. In G.R. Aerospace. We had ruled in these earlier cases that an order of the trial
174879, we have already pronounced that the Sanggunian was within its court denying a motion to dismiss is an interlocutory order, and to use a
full right to perform the second act of rescission, and thus, it is even with writ of certiorari to assail it is improper.
more reason, that its members and the City Legal Officer cannot be held
in contempt therefor. We deny the prayer in the petitions to disbar the The procedural policy in the cited cases was again referred to in Bernas
respondents therein who are lawyers. v. Sovereign Ventures, Inc.,172 highlighting the following:
We also do not find Judge Fernando Vil Pamintuan liable for contempt in Let it be stressed at this point the basic rule that when a motion to dismiss
G.R. No. 172216. is denied by the trial court, the remedy is not to file a petition for certiorari,
but to appeal after a decision has been rendered. (Emphasis supplied)
Jadewell wants this Court to cite Judge Pamintuan for contempt for
issuing a writ of preliminary prohibitory injunction ordering Jadewell to G.R. No. 181488
stop collecting parking fees; to refrain from supervising the parking in The question of law raised by petitioner Yaranon in this Petition for
Baguio City; as well as to hold in abeyance the implementation of the Review on Certiorari is whether the CA correctly dismissed his appeal
MOA and its enabling ordinance.164 questioning the validity of his suspension from office as City Mayor, on
It was only on 5 June 2006 that this Court, in G.R. No. 172215, issued a the ground that his suit had become moot and academic due to his non-
Temporary Restraining Order (TRO)165directing the trial court to re-election to office. The CA cited Crespo v. Provincial Board of Nueva
discontinue the proceedings in Civil Case No. 6089-R. Upon receipt by Ecija173 as basis for the dismissal.
Judge Pamintuan of the TRO, he immediately ordered the cancellation of For his part, Mayor Yaranon contends that the appellate court should have
the 29 June 2006 hearing.166 ruled on the validity of his suspension from office despite his failure to
We do not consider the promulgation of the assailed writ of preliminary get re-elected as City Mayor. He argues that he has the right to know
prohibitory injunction against Jadewell as a defiance of our writ issued on whether his suspension was valid or not and, in the event his suspension
9 February 2005, considering, it was directed against Mayor Yaranon is declared invalid, Mayor Yaranon believes he is entitled to the salaries
only. We have held in Leonidas v. Supnet that "a party cannot be held in and benefits accruing during the period he was suspended.
indirect contempt for disobeying a court order which is not addressed to We deny the Petition of Mayor Yaranon.
him."167 We note that Judge Pamintuan observed deference to the Orders
of this Court when he immediately suspended the proceedings in Civil The appeal of Mayor Yaranon has been rendered moot and academic. We
Case No. 6089-R upon receipt of the TRO. hold that the resolution of the issue raised herein would serve no practical
purpose.
G.R. No. 172215
In Miriam College v. Court of Appeals,174 we ruled that a case becomes
In this Petition for certiorari, prohibition, and mandamus under Rule 65 moot and academic when there is no more actual controversy between the
of the Rules of Civil Procedure, Jadewell assails the Orders of RTC- parties, or when no useful purpose can be served in passing upon the
Branch 3 (Baguio City) denying its motion to dismiss and motion for merits. Further, courts will not determine a moot question in which no
reconsideration in Civil Case No. 6089-R. practical relief can be granted.175
We deny the petition of Jadewell in this case. Mayor Yaranon has already served his suspension. We find no practical
In Manuel Camacho v. Atty. Jovito Coresis, Jr.,168 we described the value in remanding his case to the appellate court for the determination of
nature of special civil action for certiorari under Rule 65, as follows: the factual basis and legal issues of his appeal pertaining to the validity of
his suspension as then City Mayor of Baguio City.
A special civil action for certiorari under Rule 65 of the Rules of Court is
an extraordinary remedy for the correction of errors of jurisdiction. To We have held in Nicart, Jr. v. Sandiganbayan (Third Division),176 that an
invoke the Court’s power of judicial review under this Rule, it must first issue becomes moot when a petitioner is not entitled to substantial relief:
be shown that respondent tribunal, board or officer exercising judicial or x x x [T]he propriety of the preventive suspension of petitioner effected
quasi- judicial functions has indeed acted without or in excess of its or his through the assailed Resolution of February 15, 2001 has become a moot
jurisdiction, and that there is no appeal, or any plain, speedy and adequate issue, it appearing that he has already served his suspension. An issue

becomes moot and academic when it ceases to present a justifiable x-----------------------x
controversy so that a determination thereof would be of no practical use
and value. In such cases, there is no actual substantial relief to which G.R. No. 175302
petitioner would be entitled to and which would be negated by the BANK OF THE PHILIPPINE ISLANDS, Petitioner,
dismissal of the petition. vs.
We cannot sustain Mayor Yaranon’s argument that his appeal should not WILFRED N. CHIOK, Respondent.
have been dismissed because, in the event that the finding of the Office x-----------------------x
of the President to suspend him is reversed, he is still entitled to the
salaries accruing during the period he was suspended. We take note of the G.R. No. 175394
cases cited by Mayor Yaranon such as Crespo v. Provincial Board of
Nueva Ecija,177 Baquerfo v. Sanchez178 and Reyes v. Cristi,179 among GLOBAL BUSINESS BANK, INC., Petitioner,
others. These cases involve substantial issues – such as denial of due vs.
process and procedural irregularities – other than a mere claim for WILFRED N. CHIOK, Respondent.
entitlement to salaries. The factual background and the legal issues for DECISION
resolution in the cases mentioned are not similar to the case at bar.
LEONARDO-DE CASTRO, J.:
In Triste v. Leyte State College Board of Trustees180 the Court elucidated
on the nature of the salary of a public official: The three consolidated petitions herein all assail the Decision1 of the
Court of Appeals in CA-G.R. CV No. 77508 dated May 5, 2006, and the
Mechem states that "(l)ike the requirement of an oath, the fact of the Resolution2 in the same case dated November 6, 2006.
payment of a salary and/or fees may aid in determining the nature of a
position, but it is not conclusive, for while a salary or fees are usually Respondent Wilfred N. Chiok (Chiok) had been engaged in dollar trading
annexed to the office, it is not necessarily so. As in the case of the oath, for several years. He usually buys dollars from Gonzalo B. Nuguid
the salary or fees are mere incidents and form no part of the office. Where (Nuguid) at the exchange rate prevailing on the date of the sale. Chiok
a salary or fees are annexed, the office is often said to be ‘coupled with pays Nuguid either in cash or manager’s check, to be picked up by the
an interest’; where neither is provided for it is a naked or honorary office, latter or deposited in the latter’s bank account. Nuguid delivers the dollars
and is supposed to be accepted merely for the public good." (Emphasis either on the same day or on a later date as may be agreed upon between
supplied) them, up to a week later. Chiok and Nuguid had been dealing in this
manner for about six to eight years, with their transactions running into
Given the circumstances of this case, we find that Mayor Yaranon’s claim millions of pesos. For this purpose, Chiok maintained accounts with
for unpaid salaries, in case of exoneration, does not constitute such petitioners Metropolitan Bank and Trust Company (Metrobank) and
substantial relief that would justify the revival of his appeal. Even if we Global Business Bank, Inc. (Global Bank), the latter being then referred
did sustain his Petition, we nevertheless find that it has been mooted by to as the Asian Banking Corporation (Asian Bank). Chiok likewise
our resolution in the main petition. entered into a Bills Purchase Line Agreement (BPLA) with Asian Bank.
WHEREFORE, we hereby rule as follows: Under the BPLA, checks drawn in favor of, or negotiated to, Chiok may
be purchased by Asian Bank. Upon such purchase, Chiok receives a
a.) In G.R. No. 160025, the Petition of the Sangguniang Panlungsod of discounted cash equivalent of the amount of the check earlier than the
Baguio City is DENIED. The CA Decision dated 7 July 2003 in CA G.R. normal clearing period.
SP No. 74756 is hereby AFFIRMED with modification. There is not
enough evidence on record to conclude that Jadewell’s violations were On July 5, 1995, pursuant to the BPLA, Asian Bank "bills purchased"
sufficient to justify the unilateral cancellation of the MOA by the Security Bank & Trust Company (SBTC) Manager’s Check (MC) No.
Sangguniang Panlungsod of Baguio City; at the same time, neither the 037364 in the amount of ₱25,500,000.00 issued in the name of Chiok,
RTC nor the CA provided a clear finding whether the breach of the MOA and credited the same amount to the latter’s Savings Account No. 2-007-
by Jadewell was substantial. We affirm the CA as to the rest of its 03-00201-3.
dispositions in its assailed Decision. Nevertheless, no award of damages On the same day, July 5, 1995, Asian Bank issued MC No. 025935 in the
is hereby made in favour of Jadewell and neither is there any amount of ₱7,550,000.00 and MC No. 025939 in the amount of
pronouncement as to costs. ₱10,905,350.00 to Gonzalo Bernardo, who is the same person as Gonzalo
b.) G.R. Nos. 163052, 164107, 165564, 172216, 173043 and 174879, the B. Nuguid. The two Asian Bank manager’s checks, with a total value of
Petitions of Jadewell to cite Mayor Braulio D. Yaranon, Mayor Bernardo ₱18,455,350.00 were issued pursuant toChiok’s instruction and was
M. Vergara, Acting City Mayor Reinaldo A. Bautista, Vice Mayor Betty debited from his account. Likewise upon Chiok’s application, Metrobank
Lourdes F. Tabanda, the members of the Sangguniang Panlungsod of issued Cashier’s Check (CC) No. 003380 in the amount of ₱7,613,000.00
Baguio City namely: Elmer O. Datuin, Antonio R. Tabora, Edilberto B. in the name of Gonzalo Bernardo. The same was debited from Chiok’s
Tenefrancia, Federico J. Mandapat, Jr., Richard A. Carino, Faustino A. Savings Account No. 154-42504955. The checks bought by Chiok for
Olowan, Rufino M. Panagan, Leonardo B. Yangot, Jr., Rocky Thomas A. payee Gonzalo Bernardo are therefore summarized as follows:
Balisong, Galo P. Weygan, Perlita L. Chan-Rondez, Jose M. Molintas,
and Judge Fernando Vil Pamintuan for indirect contempt and to disbar Drawee Bank/Check No. Amount (P)
Sangguniang Panlungsod members Rocky Thomas A. Balisong,
Edilberto B. Tenefrancia, Faustino A. Olowan, Federico J. Mandapat,
Perlita L. Chan-Rondez, Jose M. Molintas, Melchor Carlos B. Rabanes Asian Bank MC No. 025935 7,550,000.00
and Mayor Braulio D. Yaranon are all hereby DISMISSED for lack of
merit. No pronouncement as to costs.
Asian Bank MC No. 025939 10,905,350.00
c.) We DENY the Petition of Jadewell for lack of merit in G.R. No.
172215. We likewise DENY its prayer for the issuance of a temporary
restraining order and/or writ of preliminary injunction for being moot and (aggregate value of
academic. No pronouncement as to costs.
Asian Bank MCs:
d.) We DENY the Petition of Mayor Braulio D. Yaranon in G.R. No.
181488, for lack of merit and AFFIRM the CA Decision CA-G.R. SP No. 18,455,350.00)
96116. No pronouncement as to costs.
SO ORDERED.
Metrobank CC No. 003380 7,613,000.00

Metropolitan Bank and Trust Company vs. Chiok
G.R. No. 172652 November 26, 2014
METROPOLITAN BANK AND TRUST COMPANY, Petitioner,
vs. TOTAL 26,068,350.00
WILFRED N. CHIOK, Respondent.

The plaintiff’s urgent motion todeclare defendants Asian Bank and Metro
Bank in contempt of court filed last July 13, 1995 is hereby denied for
Chiok then deposited the three checks (Asian Bank MC Nos. 025935 and lack of legal basis.
025939, and Metrobank CC No. 003380), with an aggregate value of
₱26,068,350.00 in Nuguid’s account with Far East Bank & Trust The writ of preliminary prohibitory injunction and a copy of this order
Company (FEBTC), the predecessor-in-interest of petitioner Bank of the shall be served on the defendants by Deputy Sheriff Jose Martinez of this
Philippine Islands (BPI). Nuguid was supposed to deliver Branch.8
US$1,022,288.50,4 the dollar equivalent of the three checks as agreed
upon, in the afternoon of the same day. Nuguid, however, failed to do so, Upon the filing by Chiok of the requisite bond, the Writ was subsequently
prompting Chiok to request that payment on the three checks be stopped. issued on July 26, 1995.
Chiok was allegedly advised to secure a court order within the 24-hour Before the RTC, Asian Bank pointed out that SBTC returned and issued
clearing period. On the following day, July 6, 1995, Chiok filed a a Stop Payment Order on SBTC MC No. 037364 (payable to Chiok in the
Complaint for damages with application for ex parte restraining order amount of ₱25,500,000.00) on the basis of an Affidavit of Loss &
and/or preliminary injunction with the Regional Trial Court (RTC) of Undertaking executed by a certain Helen Tan. Under said Affidavit of
Quezon City against the spouses Gonzalo and Marinella Nuguid, and the Loss & Undertaking, Tan claims that she purchased SBTC MC No.
depositary banks, Asian Bank and Metrobank, represented by their 037364 from SBTC, but the manager’s check got lost on that day. Asian
respective managers, Julius de la Fuente and Alice Rivera. The complaint Bank argued that Chiok would therefore be liable for the dishonor of the
was docketed as Civil Case No. Q-95-24299 and was raffled to Branch manager’s check under the terms of the BPLA, which provides for
96. The complaint was later amended5 to include the prayer of Chiok to recourse against the seller (Chiok) of the check when it is dishonored by
be declared the legal owner of the proceeds of the subject checks and to the drawee (SBTC) for any reason, whether valid or not.
be allowed to withdraw the entire proceeds thereof.
On October 18, 1995, FEBTC filed a Complaint-in-Intervention in Civil
On the same day, July 6, 1995, the RTC issued a temporary restraining Case No. Q-95-24299. On February6, 1996, the RTC initially denied
order (TRO) directing the spouses Nuguid to refrain from presenting the FEBTC’s intervention in the case. On Motion for Reconsideration,
said checks for payment and the depositary banks from honoring the however, the RTC, on April 15, 1996, reversed itself and allowed the
sameuntil further orders from the court.6 same.
Asian Bank refused to honor MC Nos. 025935 and 025939 in deference In the Complaint-in-Intervention, FEBTC claimed that it allowed the
to the TRO. Metrobank claimed that when it received the TRO on July 6, immediate withdrawal of the proceeds of Asian Bank MC Nos. 025935
1995, it refused to honor CC No. 003380 and stopped payment thereon. and 025939 on the ground that, as manager’schecks, they were the direct
However, in a letter also dated July 6, 1995, Ms. Jocelyn T. Paz of obligations of Asian Bank and were accepted in advance by Asian Bank
FEBTC, Cubao-Araneta Branch informed Metrobank that the TRO was by the mere issuance thereof. FEBTC presented the checks for payment
issued a day after the check was presented for payment. Thus, according on July 5, 1995 through the PCHC. Asian Bank, as admitted in its Answer
to Paz, the transaction was already consummated and FEBTC had already before the RTC, received the same on that day. Consequently, Asian Bank
validly accepted the same. In another letter, FEBTC informed Metrobank was deemed to have confirmed and booked payment of the subject checks
that "the restraining order indicates the name of the payee of the check as in favor of FEBTC or, at the latest, during the first banking hour of July
GONZALO NUGUID, but the check isin fact payable to GONZALO 6, 1995, when payment should have been made. FEBTC claimed that
BERNARDO. We believe there is a defect in the restraining order and as Asian Bank exhibited bad faith when, in anticipation of the TRO, it opted
such should not bind your bank."7 Alice Rivera of Metrobank replied to to float the checks until it received the TRO at 12:00 noon of July 6, 1995
said letters, reiterating Metrobank’s position tocomply with the TRO lest to justify the nonpayment thereof.
it be cited for contempt by the trial court. However, as would later be
alleged in Metrobank’s Answer before the trial court, Metrobank In their own Answer, the spouses Nuguid claimed that Gonzalo Nuguid
eventually acknowledged the check when it became clear that nothing had delivered much more dollars than what was required for the three
more can be done to retrieve the proceeds of the check. Metrobank checks at the time of payment. By way of special affirmative defense, the
furthermore claimed that since it is the issuer of CC No. 003380, the check spouses Nuguid also claims that since the subject checks had already been
is its primary obligation and should not be affected by any prior paid to him, Chiok is no longer entitled to an injunction (to hold the
transaction between the purchaser (Chiok) and the payee (Nuguid). payment of the subject checks), and Civil Case No. Q-95-24299 has
already become moot.
In the meantime, FEBTC, as the collecting bank, filed a complaint against
Asian Bank before the Philippine Clearing House Corporation (PCHC) On August 29, 2002, the RTC rendered its Decision, the dispositive
Arbitration Committee for the collection of the value of Asian Bank MC portion of which states:
No. 025935 and 025939, which FEBTC had allegedly allowed Nuguid to
withdraw on July 5, 1995, the same day the checks were deposited. The WHEREFORE, judgment is rendered:
case was docketed as Arbicom Case No. 95-082. The PCHC Arbitration 1. Declaring as permanent the writ of preliminary injunction issued under
Committee later relayed, in a letter dated August 4, 1995, its refusal to the Order of July 25, 1995;
assume jurisdiction over the case on the ground that any step it may take
might be misinterpreted as undermining the jurisdiction of the RTC over 2. Ordering Global Business Bank, Inc.to pay the plaintiff [Chiok]:
the case or a violation of the July 6, 1995 TRO.
a.) The amount of ₱34,691,876.71 (less the attorney’s fees of
On July 25, 1995, the RTC issued an Order directing the issuance of a ₱255,000.00 which shall remain with Global Business Bank, Inc.), plus
writ of preliminary prohibitory injunction: interest at the legal rate of 12%/p.a. from September 30, 1999 until fully
paid;
WHEREFORE, upon filing by the plaintiff of a sufficient bond in the
amount of ₱26,068,350.00, to be executed in favor of the defendants b.) The amount of ₱215,000.00, representing the excess amount debited
under the condition that the same shall answer for whatever damages they from the plaintiff’s deposit in his account with Global Business Bank, Inc.
may sustain by reason of this injunction should the Court ultimately on July 7, 1995, plus interest of 12%/p.a. from July 7, 1995, until fully
determine that he was not entitled thereto, let a writ of preliminary paid;
prohibitory injunction issue restraining and preventing during the
pendency of the case: c.) Attorney’s fees equivalentof 5% of the total amount due; and
a) Defendant Asian Bank frompaying Manager’s Checks No. 025935 in 3. Ordering Metropolitan Bank & Trust Companyto pay the plaintiff:
the amount of ₱7,550,000.00 and No. 025939 in the amount of a. The amount of his deposit of ₱7,613,000.00, plus interest of 12%/p.a.
₱10,905,350.00; and from July 5, 1995 until said amount is fully paid; and
b) Defendant Metro Bank frompaying Cashier’s Check No. 003380 in the b. Attorney’s fees of 5%of the total amount due;
amount of ₱7,613,000.00.
4. Ordering Spouses Gonzalo B. Nuguid and Marinella O. Nuguid liable
The application for preliminary mandatory injunctionis hereby denied and jointly and severally with Global Business Bank, Inc. and Metropolitan
the order issued on July 7, 1995 directing defendant Metro Bank Bank & Trust Company, Inc. for the respective attorney’s fees;
(Annapolis, Greenhills Branch) to allow the plaintiff to withdraw the
proceeds of Cashier’s Check No. 003380 in the amount of ₱7,613,000.00 5. Dismissing the complaint-in-interventionof BPI for lack of merit;
is hereby set aside.
6. Ordering the defendantsand the intervenorto pay, jointly and severally,
the costs of suit.9

(Emphases supplied.) With respect to Metrobank, the RTC ruled that it should pay Chiok
₱7,613,000.00, the amount paid by Chiok to purchase the CC, plus
The RTC held that Nuguid failed to prove the delivery of dollars to Chiok. interest of 12 percent per annum from July 5,1995 until full payment. The
According to the RTC, Nuguid’s claim that Chiok was still liable for RTC explained this finding as follows:
seven dishonored China Banking Corporation (CBC) checks with a total
worth of ₱72,984,020.00 is highly doubtful since such claim was not The same conclusion is true with respect to Metro Bank, with whom the
presented as a counterclaim in the case. Furthermore, the court ruled that funds amounting to ₱7,613,000.00 for the purchase of CC No. 003380
the certification of CBC stating the reasons10 for the stop payment order has remained. According to Chiok, Metro Bank used such funds in its
"are indicative of Chiok’s non-liability to Nuguid." The RTC further operations.
noted that there was a criminal case filed by Chiok against Nuguid on
March 29, 1996 for estafa and other deceit on account of Nuguid’s alleged In the hearing on May 17, 2001, Lita Salonga Tan was offered as a witness
failure to return the originals of the seven CBC checks.11 for Metro Bank, but in lieu ofher testimony, the parties agreed to stipulate
on the following as her testimony, to wit:
The RTC went on to rule that manager’s checks and cashier’s checks may
be the subject of a Stop Payment Order from the purchaser on the basis of 1. That Metro Bank paid the amount of CC No. 003280;
the payee’s contractual breach. As explanation for this ruling, the RTC 2. That the payment on July 12, 1995 was made while the TRO of July 5,
adopted its pronouncements when it issued the July 25, 1995 Order: 1995 was in force;
Defendant Nuguid’s argument that the injunction could render manager’s 3. [That] the payment on July 12, 1995 was on the third clearing of CC
and cashier’schecks unworthy of the faith they should have and could No. 003380; and
impair their nature as independent undertakings of the issuing banks is
probably an undistinguished simplification. While the argument may be 4. That the PCHC Rule book was the authority on the rules and regulations
applicable to such checks in general, it does not adequately address the on the clearing operations of banks.
situation, as here, when specific manager’s and cashier’s checks are
already covered by reciprocal undertakings between their purchaser and The payment to FEBTC by Metro Bank of CC No. 003380 on July 12,
their payee, in which the latter allegedly failed to perform. The agreement 1995 was an open defiance of the TRO of July 6, 1995. Metro Bank’s
herein was supposedly one in which Nuguid would deliver the equivalent Branch Manager Alice Rivera, through her letter of July 10, 1995 to
amount in US dollars ($1,022,288.23) "on the same date" that the plaintiff FEBTC as the collecting bank, returned the CC to FEBTC in compliance
purchased and delivered the manager’s and cashier’s checks with the TRO which was received about 12:10 noon of July 6, 1999.
(₱26,068,350.00). Assuming that such a reciprocity was true, the Hence, Metro Bank should not have paid because the TRO was served
purchaser should have the legal protection of the injunctive writ (which, within the 24-hour period to clear checks. Moreover, the payment, being
after all, the legal departments of the issuing banks themselves allegedly made on third clearing, was unjustified for violating existing regulations,
advised the plaintiff to obtain), since the usual order or instruction to stop particularly paragraph 1 of the Clearing House Operating Memo
payment available in case of ordinary checks did not avail. This was (CHOM), effective September 1, 1984, which prohibited the reclearing of
probably the reason that Asian Bank has expressly announced in its own a check after its first presentation if it was returned for the reason of "stop
comment/opposition of July 14, 1995 that it was not opposing the payment" or "closed account."
application for the prohibitory injunction. It also seems that Metro Bank paid the CC without first checking whether,
The dedication of such checks pursuantto specific reciprocal undertakings in fact, any actual payment of the 3 checks had been made on July 5, 1995
between their purchasers and payees authorizes rescission by the former to the payee when the checks were deposited in payee’s account with
to prevent substantial and material damage to themselves, which authority FEBTC on July 5, 1995. The records show no such payment was ever
includes stopping the payment of the checks.12 According to the RTC, made to render the TRO of July 6, 1995 or the writ of preliminary
both manager’s and cashier’s checks are still subject to regular clearing injunction applied for moot and academic.
under the regulations of the Bangko Sentral ng Pilipinas. Since manager’s Jessy A. Degaños – adopted by Metro Bank as its own witness in
and cashier’s checks are the subject of regular clearing, they may injunction hearing of July 24, 1995 – stated that the payment of the 3
consequently be refused for cause by the drawee, which refusal is in fact checks consisted of the accounting entry made at the PCHC during the
provided for in the PCHC Rule Book. presenting process by debiting the respective accounts of the drawees and
The RTC found the argument by BPI that the manager’s and cashier’s crediting the account of collecting bank FEBTC. Yet, as already found
checks are pre-cleared untenable under Section 60 of the New Central hereinabove, such process was reversed due to the return by the drawees
Bank Act and Article 1249 of the Civil Code, which respectively of the checks which they dishonored on account of the TRO.
provides: Also, Degaños, testifying on January 17, 2002 for intervenor BPI, was
Section 60. Legal Character. – Checks representing demand deposits do asked in what form was the withdrawal of the amounts of the checks made
not have legal tender power and their acceptance in the payment of debts, by Nuguid on July 5, 1995, that is, whether:- 1) cash withdrawal; or 2)
both public and private, is at the option of the creditor; Provided, however, credit to Nuguid’s account; or 3) draft issued to Nuguid. His reply was
that a check which has been cleared and credited to the account of the that only the bank’s branch which serviced the payee’s account could
creditor shall be equivalent to a delivery to the creditor of cash in an provide the answer. Yet, BPI did not present any competent personnel
amount equal to the amount credited to his account. from the branch concerned to enlighten the Court on this material point.
Art. 1249. The payment of debts inmoney shall be made in the currency This amount of ₱7,613,000.00, having remained with Metro Bank since
stipulated, and if it is not possible to deliver such currency, then in the the service of the TRO of July 6, 1995 and the writ of preliminary
currency which is legal tender in the Philippines. The delivery of injunction issued under the Order of July 25, 1998, should be returned to
promissory notes payable to order, or bills of exchange or other Chiok with interest of 12%/p.a. from July 7, 1995 until full payment.16
mercantile documents shall produce the effect of payment only when they (Citations omitted.)
have been cashed, or when through the fault of the creditor they have been
impaired. The RTC likewise denied BPI’s complaint-in-intervention to recover the
value of the three checks from drawees Global Bank and Metrobank for
In the meantime, the action derived from the original obligation shall be lack of merit. The RTC, after reprimanding Global Bank and Metrobank
held in the abeyance. The RTC went on to rule that due to the timely for siding with BPI on this issue, held that BPI, as a mere collecting bank
service of the TRO and the injunction, the value of the three checks of the payee with a void title to the checks, had no valid claim as to the
remained with Global Bank and Metrobank.13 The RTC concluded that amounts of such checks. The RTC explained:
since Nuguid did not have a valid title to the proceeds of the manager’s
and cashier’s checks, Chiok is entitled to be paid back everything he had Firstly: BPI, being a collecting bankin relation to the 3 checks, was merely
paid to the drawees for the checks.14 performing collection services as an agent of Nuguid, the payee. If, as
found hereinbefore, Nuguid could not have legal title to the 3 checks, it
With respect to Global Bank, the RTC ruled that the entire amount of follows that BPI could not stake any claim for title better than Nuguid’s
₱34,691,876.71 it recovered from SBTC from the September 15, 1997 own void title. Consequently, BPI has no right to claim the amounts of
PCHC Decision, as reflected in the September 29, 1999 Charge Slip No. the 3 checks from the drawee-banks.
114977, less the sum of ₱225,000.00 awarded by the arbitration
committee’s decision as attorney’s fees, should be paidto Chiok, with Secondly: The purpose of the delivery of the 3 checks to BPI – which was
interest at 12% per annum from September 30, 1999 until full payment. not even accompanied by Nuguid’s endorsement – was solely for deposit
The RTC likewise ordered Global Bank to pay Chiok the amount of in the account of payee Nuguid. Assuming, for the sake of argument, that
₱215,390.00, an amount debited from Chiok’s account as payment for BPI as the collecting bank paid the value of the checks – of which fact
outstanding bills purchase.15

there has been no proof whatsoever – BPI was nonetheless, at best, a mere Art. 1191. The power to rescind obligations is implied in reciprocal ones,
transferee whose title was no better than the void title of the transferor, in case one of the obligors should not comply with what is incumbent
payee Nuguid. Under such circumstance, BPI has no legal basis to upon him.
demand payment of the amounts of the 3 checks from the draweebanks.
The injured party may choose between the fulfillment and the rescission
Thirdly: Under Sec. 49, Negotiable Instruments Law, BPI, as transferee of the obligation, with the payment of damages in either case. He may
without indorsement, was not considered a holder of the instrument since also seek rescission, even after he has chosen fulfillment, if the latter
it was neither a payee nor an indorsee. It would become so only when and should become impossible.
if the indorsement is actually made, and only as of then, but not before, is
the issue whether BPI was a holder in due course or not is determined. The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
Consequently, any alleged payment by BPI as the collecting bank,
through the supposed though unproved withdrawal of the amounts of the xxxx
3 checks by Nuguid upon the deposit of the checks on July 5, 1995, is not Although the complaint a quowas entitled "DAMAGES, W/ EX PARTE
the payment which discharges liability under the 3 checks because BPI is RESTRAINING ORDER/INJUNCTION" when the action was really one
neither the party primarily liable northe drawee. for rescission and damages, it is an elementary rule of procedure that what
Such a payment, if true, is akin to, if it is not, drawing against uncollected controls or determines the nature of the action is not the caption of the
deposits (DAUD). In such a case, BPI was in duty bound to send the 3 complaint but the allegations contained therein. And even without the
checks to the PCHC for clearing pursuant to Section 1603.c.1 of the BSP prayer for a specific remedy, proper relief may nevertheless be granted by
Manual of Regulations and Sec. 60, R.A. No. 7653. It serves well to note the court if the facts alleged in the complaint and the evidence introduced
herein that Global Bank and Metro Bank returned the checks through the so warrant.
PCHC on July 6, 1995, well within the 24-hour clearing period, in That Chiok had intended rescission isevident from his prayer to be
compliance with the TRO of July 6, 1995. Finally: As earlier noted and declared the legal owner of the proceeds of the subject checks and to be
discussed, there is no evidence of any prior valid payment by the allowed to withdraw the same. Therefore, the argument of BPI that the
collecting bank to support its claim of the amounts of the 3 checks against obligation on the part of Nuguid to deliver the dollars still subsists is
the defendant banks.17 (Citation omitted.) untenable. Article 1385 of the same Code provides that rescission creates
The RTC held Global Bank and Metrobank liable for attorney’s fees the obligation to return the things which were the object of the contract,
equivalent to 5% of the total amountdue them, while the spouses Nuguid together with their fruits, and the price with its interest. The object of the
were held solidarily liable for said fees. contract herein to buy foreign currency is the peso-value of the dollars
bought but in the form of negotiable instruments – Manager’s
Defendants Global Bank, Metrobank, and the spouses Nuguid, and Check/Cashier’s Check. Hence, respecting the negotiation thereof, and in
intervenor BPI filed separate notices of appeal, which were approved in order to afford complete relief to Chiok, there arose the necessity for the
the Order18 dated April 3, 2003. Chiok filed a Motion to Dismiss against issuance of the injunction restraining the payment of the subject checks
the appeal of Global Bank, on the ground that the latter had ceased to with the end in view of the eventual return of the proceeds to give effect
operate as a banking institution. to Article 1385. In other words, the injunctive relief was necessary in
order not to render ineffectual the judgment in the instant case. We quote
On May 26, 2004, the Court of Appeals dismissed the appeal of the with approval the following disquisition of the trial court, to wit:
spouses Nuguid pursuant to Section 1(e), Rule 50 of the Rules of Court,
on account of their failure to file their appellant’s brief. In the same xxxx
Resolution, the Court of Appeals denied Chiok’s Motion to Dismiss.
There is no question about the nature of manager’s and cashier’s checks
On May 5, 2006, the Court of Appeals rendered the assailed Decision being as good as cash, being primary obligations of the issuing bank and
affirming the RTC Decision with modifications. The fallo of the Decision accepted in advanceby their mere issuance. But even as such nature of
reads: unconditional commitment to pay on the part of the issuing bank may be
conceded, the Court opines that the injunctive relief cannot be denied to
WHEREFORE, premises considered, the Decision dated August 29, 2000 a party who purchased the manager’s or cashier’s check to stop its
of the RTC, Branch 96, Quezon City is AFFIRMED with the following payment to the payee in a suit against the payee and the issuing banks
MODIFICATIONS: upon a claim that the payee himself had not performed his reciprocal
1.) The contract to buy foreign currency in the amount of $1,022,288.50 obligation for which the issuance and delivery of the self-same
between plaintiff-appellee Wilfred N. Chiok and defendant Gonzalo B. manager’sor cashier’s check were, in the first place, made x x x.
Nuguid is hereby rescinded. Corollarily, Manager’s Check Nos. 025935 It bears stressing that the subject checks would not have been issued were
and 025939 and Cashier’s Check No. 003380 are ordered cancelled. it not for the contract between Chiok and Nuguid. Therefore, they cannot
2.) Global Business Holdings, Inc. is ordered to credit Savings Account be disassociated from the contract and given a distinct and exclusive
No. 2-007-03-00201-3 with: signification, as the purchase thereof is part and parcel of the series of
transactions necessary to consummate the contract. Taken in this light, it
a) The amount of ₱25,500,000.00, plus interest at 4% from September cannot be argued that the issuing banks are bound to honor only their
29, 1999 until withdrawn by plaintiff-appellee; unconditional undertakings on the subject checks vis-à-vis the payee
thereof regardless of the failed transaction between the purchaser of the
b) The amount of ₱215,390.00, plus interest at 4% from July 7, 1995 until checks and the payee on the ground that the banks were not privy to the
withdrawn by plaintiff-appellee. said transaction.
3.) Metropolitan Bank & Trust Company is ordered to credit Savings Lest it be forgotten, the purchase of the checks was funded by the account
Account No. 154-42504955 the amount of ₱7,613,000.00, with interest of Chiok with the banks. As such, the banks were equally obligated to
at 6% [per annum] from July 12, 1995 until the same is withdrawn; treat the account of their depositor with meticulous care bearing in mind
4.) The Spouses Gonzalo B. Nuguid and Marinella O. Nuguid are ordered the fiduciary nature of their relationship with the depositor. Surely, the
to pay attorney’s fees equivalent to 5% of the total amount due to plaintiff- banks would not allow their depositor to sit idly by and watch the
appellee from both depository banks, as well as the costs of suit.19 dissipation of his livelihood considering that the business of foreign
currency exchange is a highly volatile undertaking where the probability
According to the Court of Appeals, Article 1191 of the Civil Code of losing or gaining is counted by the ticking of the clock. With the
provides a legal basis of the right of purchasers of MCs and CCs to make millions of money involved in this transaction, Chiok could not afford to
a stop payment order on the ground of the failure of the payee to perform be complacent and his vigilance for his rights could not have been more
his obligation to the purchaser. The appellate court ruled that such claim opportune under the circumstances.20 (Citations omitted.)
was impliedly incorporated in Chiok’s complaint. The Court of Appeals
held: The Court of Appeals proceeded to sustain the dismissal of BPI’s
complaint-in-intervention, which sought to recover from Global Bank the
By depositing the subject checks to the account of Nuguid, Chiok had amounts allegedly paid to Nuguid. The Court of Appeals pointed out that
already performed his obligation under the contract, and the subsequent BPI failed to prove the alleged withdrawal by Nuguid of the proceeds of
failure of Nuguid to comply with what was incumbent upon him gave rise the two manager’s checks, as BPI’s representative, Jessy A. Degaños,
to an action for rescission pursuant to Article 1191 of the Civil Code, failed to answer the question on the form of the alleged withdrawal.
which states: Furthermore, BPI failed to prove that it was a holder in due course of the
subject manager’s checks, for two reasons: (1) the checks were not

indorsed to it by Nuguid; and (2) BPI never presented its alleged bills presenting bank in this case who paid the value of the
purchase agreement with Nuguid.21 Cashier’s/Manager’s Checks to the payee.27
The Court of Appeals likewise modified the order by the RTC for Global Finally, Global Bank rely upon the following grounds in its petition with
Bank and Metrobank to pay Chiok. The Court of Appeals held that this Court:
Chiok’s cause of action against Global Bank is limited to the proceeds of
the two manager’s checks. Hence, Global Bank was ordered to credit A.
Chiok’s Savings Account No. 2-007-03-00201-3 with the amount of THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT
₱25,500,000.00, the aggregate value of the two managers’ checks, instead PETITIONER GLOBAL BANK HAD NO JUSTIFICATION FOR ITS
of the entire ₱34,691,876.71 recovered from SBTC from the September RIGHT OF RECOURSE AGAINST RESPONDENT CHIOK
15, 1997 PCHC Decision. The interest was also reduced from 12% per NOTWITHSTANDING THE CLEAR AND UNMISTAKABLE
annum to that imposed upon savings deposits, which was established PROVISIONS OF THE BILLS PURCHASE AGREEMENT.
during the trial as 4% per annum.22
B.
As regards Metrobank, the appellate court noted that there was no
evidence as to the interest rate imposed upon savings deposits at THE COURT OF APPEALS GRAVELY ERRED IN MAKING
Metrobank. Metrobank was ordered to credit the amount of PETITIONER GLOBAL BANK LIABLE FOR INTEREST OF 4% PER
₱7,613,000.00 to Chiok’s Savings Account No. 154-42504955, with ANNUM DESPITE THE FACT THAT:
interest at 6% per annum.23
1. RESPONDENT DID NOT ASK FOR SUCH RELIEF IN HIS
Global Bank and BPI filed separate Motions for Reconsideration of the COMPLAINT;
May 5, 2006 Court of Appeals’ Decision. On November 6, 2006, the
Court of Appeals denied the Motions for Reconsideration. 2. RESPONDENT HAD WAIVED HIS RIGHT TO ANY INTEREST;
AND
Metrobank (G.R. No. 172652), BPI (G.R. No. 175302), and Global Bank
(G.R. No. 175394) filed with this Court separate Petitions for Review on 3. THERE IS NO EVIDENCE ON RECORD AS THE BASIS FOR ANY
Certiorari. In Resolutions dated February 21, 200724 and March 12, INTEREST.28
2007,25 this Court resolved to consolidate the three petitions. Metrobank Before delving into the merits of these cases, we shall first dispose of a
submitted the following issues for the consideration of this Court: procedural development during their pendency with the Court.
(A) WHETHER OR NOT THE HONORABLE COURT OF APPEALS Joint Manifestation and Motion allegedly
ERRED IN RULING THAT "IT IS LEGALLY POSSIBLE FOR A filed by Metrobank, Global Bank and
PURCHASER OF A MANAGER’S CHECK OR CASHIER’S CHECK respondent Chiok
TO STOP PAYMENT THEREON THROUGH A COURT ORDER ON
THE GROUND OF THE PAYEE’S ALLEGED BREACH OF On May 28, 2013, this Court received a Joint Manifestation and Motion
CONTRACTUAL OBLIGATION AMOUNTING TO AN ABSENCE allegedly filed by petitioners Metrobank, Global Bank, and respondent
OF CONSIDERATION THEREFOR." Chiok, which reads:
(B) GRANTING ARGUENDO THAT A MANAGER’S CHECK OR PETITIONERS METROPOLITAN BANK & TRUST COMPANY &
CASHIER’S CHECK, "IN VIEW OF THE PECULIAR GLOBAL BUSINESS BANK, INC., and RESPONDENT WILFRED N.
CIRCUMSTANCES OF THIS CASE" MAY BE SUBJECT TO A STOP CHIOK, by their respective counsels, unto this Honorable Court,
PAYMENT ORDER BY THE PURCHASER THEREOF THROUGH A respectfully state that after a thorough consideration, the parties herein
COURT ORDER, WHETHER OR NOT THE HONORABLE COURT have decided to forego their respective claims against each other,
OF APPEALS ERRED IN CONCLUDING THAT PETITIONER including, past, present and/or contingent, in relation to the above
HEREIN "HAD KNOWLEDGE OF CIRCUMSTANCES THAT referenced cases.
WOULD DEFEAT THE TITLE OF THE PAYEE TO THE CHECKS"
WITHOUT, HOWEVER, CITING ANY SPECIFIC EVIDENCE PRAYER
WHICH WOULD PROVE THE EXISTENCE OF SUCH WHEREFORE, it is respectfully prayed that no further action be taken by
KNOWLEDGE. (C) WHETHER OR NOT THE HONORABLE COURT this Honorable Court on the foregoing petitions, that the instant
OF APPEALS ERRED IN SUSTAINING THE TRIAL COURT’S proceedings be declared CLOSED and TERMINATED, and that an Order
ORDER FOR PETITIONER HEREIN "TO PAY (TO CHIOK) THE be rendered dismissing the above-referenced cases with prejudice.
VALUE OF CASHIER’S CHECK NO. 003380 IN THE AMOUNT OF
₱7,613,000.00, WHICH WAS DEBITED AGAINST CHIOK’S In the above Joint Manifestation and Motion, respondent Chiok was not
SAVINGS ACCOUNT # 154-42504955 ON THE OBSERVATION represented by his counsel of record, Cruz Durian Alday and Cruz-
THAT THE PAYMENT TO FEBTC BY METROBANK OF CC NO. Matters, but was assisted by Espiritu Vitales Espiritu Law Office, with
003380ON JULY 12, 1995 WAS AN OPEN DEFIANCE OF THE TRO Atty. Cesar D. Vitales as signatory, by way of special appearance and
OF JULY 6, 1995."26 assistance.
BPI, on the other hand, presented the following issues: On June 19, 2013, this Court issued a Resolution requiring petitioner BPI
to comment on the Joint Manifestation and Motion filed by its
I. copetitioners Metrobank, Global Bank, and respondent Chiok. The
Whether or not the Court of Appeals detracted from well-settled concepts Resolution reads:
and principles in commercial law regarding the nature, causes, and effects Considering the joint manifestation and motion of petitioners
of a manager’s check and cashier’s checkin ruling that [the] power of the Metropolitan Bank and Trust Company and Global Business Bank, Inc.,
court can be invoked by the purchaser [Chiok] in a proper action, which and respondent, that after a thorough consideration, they have decided to
the Court su[b]stantially construed as a rescissory action or the power to forego their respective claims against each other, including past, present
rescind obligations under Article 1191 of the Civil Code. and/or contingent, in these cases and praying that the instant proceedings
II. in G.R. Nos. 172652 and 175394 be declared closed and terminated, the
Court resolves to require petitioner Bank of the Philippine Islands to
Whether or not the Honorable Court of Appeals erred in ruling that where COMMENT thereon within ten (10) days from notice thereof x x x.
a purchaser invokes rescission due to an alleged breach of the payee’s
contractual obligation, it is deemed as "peculiar circumstance" which On September 12, 2013, respondent Chiok, this time assisted by his
justifies a stop payment order issued by the purchaser or a temporary counsel of record, Cruz Durian Alday & Cruz-Matters, filed a Motion for
restraining order/injunction from a Court to prevent payment of a Reconsideration of our Resolution dated June 19, 2013. The signatory to
Manager’s Check or a Cashier’s Check. the Motion for Reconsideration, Atty. Angel Cruz, grossly misread our
Resolution requiring BPI to comment on the Joint Manifestation and
III. Motion, and apparently contemplated that we are already granting said
Motion. Atty. Cruz objected to the Joint Manifestation and Motion,
Whether or not the Honorable Court of Appeals erred in ruling that labeling the same as tainted with fraud. According to Atty. Cruz, Espiritu
judicial admissions in the pleadings of Nuguid, BPI, Asian Bank, Vitales and Espiritu’s failure to give prior notice to him is in violation of
Metrobank and even Chiok himself that Nuguid had withdrawn the Canon 8 of the Code of Professional Responsibility. Atty. Cruz prays that
proceeds of the checks will not defeat Chiok’s "substantial right" to Metrobank and Global Bank be ordered to submit a document of their
restrain the drawee bank from paying BPI, the collecting bank or

settlement showing the amounts paid to Chiok, and for the June19, 2013 The legal effects of a manager’s check and a cashier’s check are the same.
Resolution of this Court be reconsidered and set aside. A manager’s check, like a cashier’s check, is an order of the bank to pay,
drawn upon itself, committing in effect its total resources, integrity, and
On October 9, 2013, BPI filed its comment to the Joint Manifestation and honor behind its issuance. By its peculiar character and general use in
Motion, opposing the samefor being an implied procedural shortcut to a commerce, a manager’s check or a cashier’s check is regarded
Compromise Agreement. It averred that while the courts encourage substantially to be as good as the money it represents.32 Thus, the
parties to amicably settle cases, such settlements are strictly scrutinized succeeding discussions and jurisprudence on manager’s checks, unless
by the courts for approval. BPI also pointed out that the Joint stated otherwise, are applicable to cashier’s checks, and vice versa. The
Manifestation and Motion was not supported by any required appropriate RTC effectively ruled that payment of manager’s and cashier’s checks are
Board Resolution of Metrobank and Global Bank granting the supposed subject to the condition that the payee thereof complies with his
signatories the authority to enter into a compromise. BPI prayed that the obligations to the purchaser of the checks:
Joint Manifestation and Motion of Metrobank, Global Bank, and Chiok
be denied, and to render a full Decision on the merits reversing the The dedication of such checks pursuant to specific reciprocal
Decision of the Court of Appeals. undertakings between their purchasers and payees authorizes rescission
by the former to prevent substantial and material damage to themselves,
On January 20, 2014, Global Bank filed a Comment to Atty. Cruz’s which authority includes stopping the payment of the checks.
Motion for Reconsideration on behalf of Chiok, praying that said Motion
be expunged from the records for failure of Atty. Cruz to indicate the Moreover, it seems to be fallacious to hold that the unconditional payment
number and date of issue of his MCLE Certificate of Compliance or of manager’s and cashier’s checks is the rule. To begin with, both
Certificate of Exemption for the immediately preceding compliance manager’sand cashier’s checks are still subject to regular clearing under
period. the regulations of the Bangko Sentral ng Pilipinas, a fact borne out by the
BSP manual for banks and intermediaries, which provides, among others,
As far as this Court is concerned, the counsel of record of respondent in its Section 1603.1, c, as follows:
Chiok is still Cruz Durian Alday & Cruz-Matters. The requisites of a
proper substitution of counsel of record are stated and settled in xxxx
jurisprudence:
c. Items for clearing. All checks and documents payable on demand and
No substitution of counsel of record is allowed unless the following drawn against a bank/branch, institution or entity allowed to clear may be
essential requisites of a valid substitution of counsel concur: (1) there exchanged through the Clearing Office inManila and the Regional
must be a written request for substitution; (2) it must be filed with the Clearing Units in regional clearing centers designated by the Central Bank
written consent of the client; (3) it must be with the written consent of the x x x.33
attorney to be substituted; and (4) in case the consent of the attorney to be
substituted cannot be obtained, there must be at least a proof of notice that The RTC added that since manager’s and cashier’s checks are the subject
the motion for substitution was served on him in the manner prescribed of regular clearing, they may consequently be refused for cause by the
by the Rules of Court.29 (Citation omitted.) drawee, which refusal is in fact provided for in Section 20 of the Rule
Book of the PCHC:
Therefore, while we should indeed require Atty. Cruz to indicate the
number and date of issue of his MCLE Certificate of Compliance or Sec. 20 – REGULAR RETURN ITEM PROCEDURE
Certificate of Exemption for the immediately preceding compliance 20.1 Any check/item sent for clearing through the PCHC on which
period, he is justified in pointing out the violation of Canon 830 of the payment should be refused by the Drawee Bank in accordance with long
Code of Professional Responsibility, Rule 8.02 of which provides: standing and accepted banking practices, such as but not limited to the
Rule 8.02. – A lawyer shall not, directly or indirectly, encroach upon the fact that:
professional employment of another lawyer; however, it is the right of any (a) it bears the forged or unauthorized signature of the drawer(s); or
lawyer, without fear or favor, to give proper advice and assistance to those
seeking relief against unfaithful or neglectful counsel. (b) it is drawn against a closed account; or
We should also give weight to the opposition of BPI to the supposed (c) it is drawn against insufficient funds; or
compromise agreement. As stated above, the consolidated petitions filed
by Metrobank, BPI, and Global Bank all assail the Decision of the Court (d) payment thereof has been stopped; or
of Appeals in CA-G.R. CV No. 77508 dated May 5, 2006, and the (e) it is post-dated or stale-dated; and
Resolution on the same case dated November 6, 2006. BPI itself has a
claim against Global Bank, which appear to be intimately related to issues (f) it is a cashier’s/manager’s/treasurer’s check of the drawee which has
brought forth in the other consolidated petitions. been materially altered;
Furthermore, the failure of the parties to the Joint Manifestation and shall be returned through the PCHC not later than the next regular clearing
Motion to declare with particularity the terms of their agreement prevents for local exchanges and the acceptance of said return by the Sending Bank
us from approving the same so as to allow it to attain the effect of res shall be mandatory.
judicata. A judicial compromise is not a mere contract between the
parties. Thus, we have held that: It goes without saying that under the aforecited clearing rule[,] the
enumeration of causes to return checks is not exclusive but may include
A compromise agreement intended to resolve a matter already under other causes which are consistent with long standing and accepted
litigation is a judicial compromise. Having judicial mandate and entered banking practices. The reason of plaintiffs can well constitute such a
as its determination of the controversy, such judicial compromise has the justifiable cause to enjoin payment.34
force and effect of a judgment. It transcends its identity as a mere contract
between the parties, as it becomes a judgment that is subject to execution The RTC made an error at this point. While indeed, it cannot be said that
in accordance with the Rules of Court. Thus, a compromise agreement manager’s and cashier’s checks are pre-cleared, clearing should not be
that has been made and duly approved by the court attains the effect and confused with acceptance. Manager’s and cashier’s checks are still the
authority of res judicata, although no execution may be issued unless the subject of clearing to ensure that the same have not been materially altered
agreement receives the approval of the court where the litigation is or otherwise completely counterfeited. However, manager’s and cashier’s
pending and compliance with the terms of the agreement is checks are pre-accepted by the mere issuance thereof by the bank, which
decreed.31 (Citation omitted.) is both its drawer and drawee. Thus, while manager’s and cashier’s checks
are still subject to clearing, they cannot be countermanded for being
We are therefore constrained to deny the Joint Manifestation and Motion drawn against a closed account, for being drawn against insufficient
filed with this Court on May 28, 2013 and to hereby decide the funds, or for similar reasons such as a condition not appearing on the face
consolidated petitions on their merits. of the check. Long standing and accepted banking practicesdo not
countenance the countermanding of manager’s and cashier’s checks on
The Court’s ruling on the merits of these the basis of a mere allegation of failure of the payee to comply with its
consolidated petitions obligations towards the purchaser. On the contrary, the accepted banking
Whether or not payment of manager’s practice is that such checks are as good as cash. Thus, in New Pacific
and cashier’s checks are subject to the Timber & Supply Company, Inc. v. Hon. Seneris,35 we held:
condition that the payee thereof should It is a well-known and accepted practice in the business sector that a
comply with his obligations to the Cashier's Check is deemed as cash. Moreover, since the said check had
purchaser of the checks been certified by the drawee bank, by the certification, the funds

represented by the check are transferred from the credit of the maker to purchase thereof is part and parcel of the series of transactions necessary
that of the payee or holder, and for all intents and purposes, the latter to consummate the contract."41
becomes the depositor of the drawee bank, with rights and duties of one
in such situation. Where a check is certified by the bank on which it is We disagree with the above ruling.
drawn, the certification is equivalent to acceptance. Said certification The right to rescind invoked by the Court of Appeals is provided by
"implies that the check is drawn upon sufficient funds in the hands of the Article 1191 of the Civil Code, which reads:
drawee, that they have been set apart for its satisfaction, and that they
shall be so applied whenever the check is presented for payment. It is an Art. 1191. The power to rescind obligations is implied in reciprocal ones,
understanding that the check is good then, and shall continue good, and in case one of the obligors should not comply with what is incumbent
this agreement is as binding on the bank as its notes in circulation, a upon him.
certificate of deposit payable to the order of the depositor, or any other
obligation it can assume. The object of certifying a check, as regards both The injured party may choose between the fulfillment and the rescission
parties, is to enable the holder to use it as money." When the holder of the obligation, with the payment of damages in either case. He may
procures the check to be certified, "the check operates as an assignment also seek rescission, even after he has chosen fulfillment, if the latter
of a part of the funds to the creditors." Hence, the exception to the rule should become impossible.
enunciated under Section 63 of the Central Bank Act to the effect "that a The court shall decree the rescission claimed, unless there be just cause
check which has been cleared and credited to the account of the creditor authorizing the fixing of a period.
shall be equivalent to a delivery to the creditor in cash in an amount equal
to the amount credited to his account" shall apply in this case. x x x. This is understood to be without prejudice to the rights of third persons
(Emphases supplied, citations omitted.) who have acquired the thing, in accordance with Articles 1385 and 1388
and the Mortgage Law.
Even more telling is the Court’s pronouncement in Tan v. Court of
Appeals,36 which unequivocally settled the unconditional nature of the The cause of action supplied by the above article, however, is clearly
credit created by the issuance of manager’s or cashier’s checks: predicated upon the reciprocity of the obligations of the injured party and
the guilty party. Reciprocal obligations are those which arise from the
A cashier’s check is a primary obligation of the issuing bank and accepted same cause, and in which each party is a debtor and a creditor of the other,
in advanceby its mere issuance. By its very nature, a cashier’s check is such that the obligation of one is dependent upon the obligation of the
the bank’s order to pay drawn upon itself, committing in effect its total other. They are to be performed simultaneously such that the performance
resources, integrity and honor behind the check. A cashier’s check by its of one is conditioned upon the simultaneous fulfillment of the
peculiar character and general use in the commercial world is regarded other.42 When Nuguid failed to deliver the agreed amount to Chiok, the
substantially to be as good asthe money which it represents. In this case, latter had a cause of action against Nuguid to ask for the rescission of their
therefore, PCIB by issuing the check created an unconditional creditin contract. On the other hand, Chiok did not have a cause of action against
favor of any collecting bank. (Emphases supplied, citations omitted.) Metrobank and Global Bank that would allow him to rescind the contracts
Furthermore, under the principle of ejusdem generis, where a statute of sale of the manager’s or cashier’s checks, which would have resulted
describes things of a particular class or kind accompanied by words of a in the crediting of the amounts thereof back to his accounts.
generic character, the generic word willusually be limited to things of a Otherwise stated, the right of rescission43 under Article 1191 of the Civil
similar nature with those particularly enumerated, unless there be Code can only be exercised in accordance with the principle of relativity
something in the context of the statute which would repel such of contracts under Article 1131 of the same code, which provides:
inference.37 Thus, any long standing and accepted banking practice which
can be considered as a valid cause to return manager’s or cashier’s checks Art. 1311. Contracts take effect only between the parties, their assigns and
should be of a similar nature to the enumerated cause applicable to heirs, except in case where the rights and obligations arising from the
manager’s or cashier’s checks: material alteration. As stated above, an contract are not transmissible by their nature, or by stipulation or by
example ofa similar cause is the presentation of a counterfeit check. provision of law. x x x.
Whether or not the purchaser of In several cases, this Court has ruled that under the civil law principle of
manager’s and cashier’s checks has the relativity of contracts under Article 1131, contracts can only bind the
right to have the checks cancelled by parties who entered into it, and it cannot favor or prejudice a third person,
filing an action for rescission of its even if he is aware of such contract and has acted with knowledge
contract with the payee thereof.44 Metrobank and Global Bank are not parties to the contract to
buy foreign currency between Chiok and Nuguid. Therefore, they are not
The Court of Appeals affirmed the order of the RTC for Global Bank and bound by such contract and cannot be prejudiced by the failure of Nuguid
Metrobank to pay Chiok for the amounts of the subject manager’s and to comply with the terms thereof.
cashier’s checks. However, since it isclear to the appellate court that the
payment of manager’s and cashier’s checks cannot be considered to be Neither could Chiok be validly granted a writ of injunction against
subject to the condition the payee thereof complies with his obligations to Metrobank and Global Bank to enjoin said banks from honoring the
the purchaser of the checks, the Court of Appeals provided another legal subject manager’s and cashier’s checks. It is elementary that "(a)n
basis for such liability – rescission under Article 1191 of the Civil Code: injunction should never issue when an action for damages would
adequately compensate the injuries caused. The very foundation of the
WHEREFORE, premises considered, the Decision dated August 29, 2000 jurisdiction to issue the writ of injunction rests in the fact that the damages
of the RTC, Branch 96, Quezon City is AFFIRMED with the following caused are irreparable and that damages would not adequately
MODIFICATIONS: compensate."45 Chiok could have and should have proceeded directly
1.) The contract to buy foreign currency in the amount of $1,022,288.50 against Nuguid to claim damages for breach of contract and to have the
between plaintiff-appellee Wilfred N. Chiok and defendant Gonzalo B. very account where he deposited the subject checks garnished under
Nuguid is hereby rescinded. Corollarily, Manager’s Check Nos. 025935 Section 7(d)46 and Section 8,47 Rule 57 of the Rules of Court. Instead,
and 025939 and Cashier’s Check No. 003380 are ordered cancelled.38 Chiok filed an action to enjoin Metrobank and Global Bank from
complying with their primary obligation under checks in which they are
According to the Court of Appeals, while such rescission was not liable as both drawer and drawee.
mentioned in Chiok’s Amended Complaint, the same was evident from
his prayer to be declared the legal owner of the proceeds of the subject It is undisputed that Chiok personally deposited the subject manager’s and
checks and to be allowed to withdraw the same. Since rescission creates cashier’s checks to Nuguid’s account. If the intention of Chiok was for
1âwphi1
the obligation to return the things which are the object of the contract, Nuguid to be allowed to withdraw the proceeds of the checks after
together with the fruits, the price and the interest,39 injunctive relief was clearing, he could have easily deposited personal checks, instead of going
necessary to restrain the payment of the subject checks with the end in through the trouble of purchasing manager’s and cashier’s checks. Chiok
view of the return of the proceeds to Chiok.40 therefore knew, and actually intended, that Nuguid will be allowed to
immediately withdraw the proceeds of the subject checks. The deposit of
Thus, as it was construed by the Court of Appeals, the Amended the checks which were practically as good as cash was willingly and
Complaint of Chiok was in reality an action for rescission of the contract voluntarily made by Chiok, without any assurance that Nuguid will
to buy foreign currency between Chiok and Nuguid. The Court of Appeals comply with his end of the bargain on the same day. The explanation for
then proceeded to cancel the manager’s and cashier’s checks as a such apparently reckless action was admitted by Chiok in the Amended
consequence of the granting of the action for rescission, explaining that Complaint itself:
"the subject checks would not have been issued were it not for the contract
between Chiok and Nuguid. Therefore, they cannot be disassociated from That plaintiff [Chiok] due to the numberof years (five to seven years) of
the contract and given a distinct and exclusive signification, as the business transactions with defendant [Nuguid] has reposed utmost trust

and confidence on the latterthat their transactions as of June 1995 reaches gone. Jose Go inquired for his check from Uy, but the check was
millions of pesos. x x x.48 (Emphases supplied.) nowhereto be found. At the advice of Uy, Jose Go accomplished a Stop
Payment Order and executed an affidavit of loss. Uy reported the loss to
As between two innocent persons, one of whom must suffer the the police. Petitioner Marcelo Mesina tried to encash the check with
consequences of a breach of trust, the one who made it possible by his act Prudential Bank, but the check was dishonored by Associated Bank by
of confidence must bear the loss.49 Evidently, it was the utmost trust and sending it back to Prudential Bank with the words "Payment Stopped"
confidence reposed by Chiok to Nuguid that caused this entire debacle, stamped on it. When the police asked Mesina how he came to possess the
dragging three banks into the controversy, and having their resources check, he said it was paid to him by Alexander Lim in a "certain
threatened because of an alleged default in a contract they were not privy transaction"but refused to elucidate further. Associated Bank filed an
to. action for Interpleader against Jose Go and Mesina to determine which of
Whether or not the peculiar them is entitled to the proceeds of the check. It was in the appeal on said
circumstances of this case justify the interpleader case that this Court allowed the deviation from the general
deviation from the general principles on principles on cashier’s checks on account of the bank’s awareness of
causes and effects of manager’s and certain facts that would prevent the payee to collect on the check.
cashier’s checks There is no arguing that the peculiar circumstances in Mesina indeed
The Court of Appeals, while admitting that the general principles on the called for such deviation on account of the drawee bank’s awareness of
causes and effects of manager’s and cashier’s checks do not allow the certain relevant facts. There is, however, no comparable peculiar
countermanding of such checks on the basis of an alleged failure of circumstance in the case at bar that would justify applying the Mesina
consideration of the payee to the purchaser, nevertheless held that the disposition. In Mesina, the cashier’s check was stolen while it was in the
peculiar circumstances of this case justify a deviation from said general possession of the drawee bank. In the case at bar, the manager’s and
principles, applying the aforementioned case of Mesina. The Court of cashier’s checks were personally deposited by Chiok in the account of
Appeals held: Nuguid. The only knowledge that can be attributed to the drawee banks
is whatever was relayed by Chiok himself when he asked for a Stop
At the core of the appeal interposed by the intervenor BPI, as well as the Payment Order. Chiok testified on this matter, to wit:
depository banks, Global Bank and Metrobank, is the issue of whether or
not it is legally possible for a purchaser of a Manager’s Check or Cashier’s Q: Now, Mr. witness, since according to you the defendant failed to
Check to stop payment thereon through a court order on the ground of the deliver [this] amount of ₱1,023,288.23 what action have you undertaken
payee’s alleged breach of contractual obligation amounting to an absence to protect yourinterest Mr. witness?
of consideration therefor. A: I immediately call my lawyer, Atty. Espiritu to seek his legal advise in
In view of the peculiar circumstances of this case, and in the interest of this matter.
substantial justice, We are constrained to rule in the affirmative. Q: Prior to that matter that you soughtthe advise of your lawyer, Atty.
xxxx Espiritu insofar as the issuing bank is concerned, namely, Asian Bank,
what did you do in order to protect your interest? A: I immediately call
In the case of Mesina v. Intermediate Appellate Court, cited by BPI in its the bank asking them if what is the procedure for stop payment and the
appeal brief, the Supreme Court had the occasion to rule that general bank told me that you have to secure a court order as soon as possible
principles on causes and effects of a cashier’s check, i.e., that it cannot be before the clearing of these checks.52 (Emphasis supplied.)
countermanded in the hands of a holder in due course and that it is a bill
of exchange drawn by the bank against itself, cannot be applied without Asian Bank, which is now Global Bank, obeyed the TRO and denied the
considering that the bank was aware of facts (in this case, the cashier’s clearing of the manager’s checks. As such, Global Bank may not be held
check was stolen) that would not entitle the payee thereof to collect on the liable on account of the knowledge of whatever else Chiok told them
check and, consequently, the bank has the right to refuse payment when when he asked for the procedure to secure a Stop Payment Order. On the
the check is presented by the payee. other hand, there was no mention that Metrobank was ever notified of the
alleged failure of consideration. Only Asian Bank was notified of such
While the factual milieu of the Mesinacase is different from the case at fact. Furthermore, the mere allegation of breach on the part of the payee
bench, the inference drawn therein by the High Court is nevertheless of his personal contract with the purchaser should not be considered a
applicable. The refusal of Nuguid to deliver the dollar equivalent of the sufficient cause to immediately nullify such checks, thereby eroding their
three checks in the amount of $1,022,288.50 in the afternoon of July 5, integrity and honor as being as good as cash.
1995 amounted to a failure of consideration that would not entitle Nuguid
to collect on the subject checks. In view of all the foregoing, we resolve that Chiok’s complaint should be
denied insofar as it prayed for the withdrawal of the proceeds of the
xxxx subject manager’s and cashier’s checks. Accordingly, the writ of
preliminary prohibitory injunction enjoining Metrobank and Global Bank
Let it be emphasized that in resolving the matter before Us, We do not from honoring the subject manager’s and cashier’s checks should be
detract from well-settled concepts and principles in commercial law lifted.
regarding the nature, causes and effects of a manager’s check and
cashier’s check. Such checks are primary obligations of the issuing bank Since we have ruled that Chiok cannot claim the amounts of the checks
and accepted in advance by the mere issuance thereof. They are a bank’s from Metrobank and Global Bank, the issue concerning the setting off of
order to pay drawn upon itself, committing in effect its total resources, Global Bank’s judgment debt to Chiok with the outstanding obligations
integrity, and honor. By their peculiar character and general use in the of Chiok is hereby mooted. We furthermore note that Global Bank had
commercial world, they are regarded substantially as good as the money not presented53 such issue as a counterclaim in the case at bar, preventing
they represent. However, in view of the peculiar circumstances of the case us from ruling on the same.
at bench, We are constrained to set aside the foregoing concepts and
principles in favor of the exercise of the right to rescind a contract upon BPI’s right to the proceeds of the
the failure of consideration thereof.50 (Emphases ours, citations omitted.) manager’s checks from Global Bank
In deviating from general banking principles and disposing the case on While our ruling in Mesinais inapplicable to the case at bar, a much more
the basis of equity, the courts a quo should have at least ensured that their relevant case as regards the effect of a Stop Payment Order upon a
dispositions were indeed equitable. This Court observes that equity was manager’s check would be Security Bank and Trust Company v. Rizal
not served in the dispositions below wherein Nuguid, the very person Commercial Banking Corporation,54 which was decided by this Court in
found to have violated his contract by not delivering his dollar obligation, 2009. In said case, SBTC issued a manager’s check for ₱8 million,
was absolved from his liability, leaving the banks who are not parties to payable to "CASH," as proceeds of the loan granted to Guidon
the contract to suffer the losses of millions of pesos. Construction and Development Corporation (GCDC). On the same day,
the manager’s check was deposited by Continental Manufacturing
The Court of Appeals’ reliance in the 1986 case of Mesina was likewise Corporation (CMC) in its current account with Rizal Commercial
inappropriate. In Mesina, respondent Jose Go purchased from Associated Banking Corporation (RCBC). RCBC immediately honored the
Bank a cashier’s check for ₱800,000.00, payable to bearer.51 Jose Go manager’s check and allowed CMC to withdraw the same. GCDC issued
inadvertently left the check on the top desk of the bank manager a Stop Payment Order to SBTC on the next day, claiming that the check
was released to a third party by mistake. SBTC dishonored and returned
when he left the bank. The bank manager entrusted the check for the manager’s check to RCBC. The check was returned back and forth
safekeeping to a certain bank official named Albert Uy, who then had a between the two banks, resulting in automatic debits and credits in each
certain Alexander Lim as visitor. Uy left his deskto answer a phone call bank’s clearing balance. RCBC filed a complaint for damages against
and to go to the men’s room. When Uy returned to his desk, Lim was SBTC. When the case reached this Court, we held:

At the outset, it must be noted that the questioned check issued by SBTC checks deposited into his account, likewise prevents us from ordering
is not just an ordinary check but a manager’s check. A manager’s check Nuguid to deliver the amounts of the checks to Chiok. Parties who did not
is one drawn by a bank’s manager upon the bank itself. It stands on the appeal will not be affected by the decision of an appellate court rendered
same footing as a certified check, which is deemed to have been accepted to appealing parties.58
by the bank that certified it. As the bank’s own check, a manager’s check
becomes the primary obligation of the bank and is accepted in advance by Another reason given by the Court of Appeals for sustaining the dismissal
the act of its issuance. of BPI’s complaint-in-intervention was that BPI failed to prove that it was
a holder in due course with respect to the manager’s checks.59
In this case, RCBC, in immediately crediting the amount of ₱8 million to
CMC’s account, relied on the integrity and honor of the check as it is We agree with the finding of the Court of Appeals that BPI is not a holder
regarded in commercial transactions. Where the questioned check, which in due course with respect to manager’s checks. Said checks were never
was payable to"Cash," appeared regular on its face, and the bank found indorsed by Nuguid to FEBTC, the predecessor-in-interest of BPI, for the
nothing unusual in the transaction, as the drawer usually issued checks in reason that they were deposited by Chiok directly to Nuguid’s account
big amounts made payable to cash, RCBC cannot be faulted in paying the with FEBTC. However, inview of our ruling that Nuguid has withdrawn
value of the questioned check. the value of the checks from his account, BPI has the rights of an equitable
assignee for value under Section 49 of the Negotiable Instruments Law,
In our considered view, SBTC cannot escape liability by invoking which provides:
Monetary Board Resolution No. 2202 dated December 21, 1979,
prohibiting drawings against uncollected deposits. For we must point out Section 49. Transfer without indorsement; effect of. – Where the holder
that the Central Bank at that timeissued a Memorandum dated July 9, of an instrument payable to his order transfers it for value without
1980, which interpreted said Monetary Board Resolution No. 2202. In its indorsing it, the transfer vests in the transferee suchtitle as the transferor
pertinent portion, saidMemorandum reads: had therein, and the transferee acquires in addition, the right to have the
indorsement of the transferor. But for the purpose of determining whether
MEMORANDUM TO ALL BANKS the transferee is a holder in due course, the negotiation takes effect as of
the time when the indorsement is actually made.
July 9, 1980
As an equitable assignee, BPI acquires the instrument subject to defenses
For the guidance of all concerned, Monetary Board Resolution No. 2202 and equities available among prior parties60 and, in addition, the right to
dated December 31, 1979 prohibiting, as a matter of policy, drawing have the indorsement of Nuguid. Since the checks in question are
against uncollected deposit effective July 1, 1980, uncollected deposits manager’s checks, the drawer and the drawee thereof are both Global
representing manager’s/cashier’s/treasurer’schecks, treasury warrants, Bank. Respondent Chiok cannot be considered a prior party as he is not
postal money orders and duly funded "on us" checks which may be the check’s drawer, drawee, indorser, payee or indorsee. Global Bank is
permitted at the discretion of each bank, covers drawings against demand consequently primarily liable upon the instrument, and cannot hide
deposits as well as withdrawals from savings deposits. behind respondent Chiok’s defenses. As discussed above, manager’s
Thus, it is clear from the July 9, 1980 Memorandum that banks were given checks are pre-accepted. By issuing the manager’s check, therefore,
the discretion to allow immediate drawings on uncollected deposits of Global Bank committed in effect its total resources, integrity and honor
manager’s checks, among others. Consequently, RCBC, in allowing the towards its payment.61
immediate withdrawal against the subject manager’s check, only Resultantly, Global Bank should pay BPI the amount of ₱18,455,350.00,
exercised a prerogative expressly granted to it bythe Monetary Board. representing the aggregate face value ofMC No. 025935 and MC No.
Moreover, neither Monetary Board Resolution No. 2202 nor the July 9, 025939. Since Global Bank was merely following the TRO and
1980 Memorandum alters the extraordinary nature of the manager’s check preliminary injunction issued by the RTC, it cannot be held liable for legal
and the relativerights of the parties thereto. SBTC’s liability as drawer interest during the time said amounts are in its possession. Instead, we are
remains the same— by drawing the instrument, it admits the existence of adopting the formulation of the Court of Appeals that the amounts be
the payee and his then capacity to indorse; and engages that on due treated as savings deposits in Global Bank. The interest rate, however,
presentment, the instrument will be accepted, or paid, or both, according should not be fixed at 4% as determined by the Court of Appeals, since
to its tenor.55(Emphases supplied, citations omitted.) said rates have fluctuated since July 7, 1995, the date Global Bank refused
to honor the subject manager’s checks. Thus, Global Bank should pay BPI
As in SBTC, BPI in the case at bar relied on the integrity and honor of the interest based on the rates it actually paid its depositors from July 7, 1995
manager’s and cashier’s checks asthey are regarded in commercial until the finality of this Decision, in accordance with the same
transactions when it immediately credited their amounts to Nuguid’s compounding rules it applies to its depositors. The legal rate of6% per
account. annum shall apply after the finality of this Decision.62
The Court of Appeals, however, sustained the dismissal of BPI’s We have to stress that respondent Chiok is not left without recourse.
complaint-in-intervention to recover the amounts of the manager’s checks Respondent Chiok’s cause of action to recover the value of the checks is
from Global Bank on account of BPI’s failure to prove the supposed against Nuguid. Unfortunately, Nuguid allowed his appeal with the Court
withdrawal by Nuguid of the value of the checks: of Appeals to lapse, without taking steps tohave it reinstated. As stated
above, parties who did not appeal will not be affected by the decision of
BPI’s cause of action against Asian Bank (now Global Bank) is derived the appellate court rendered to appealing parties.63 Moreover, since
from the supposed withdrawal by Nuguid of the proceeds of the two Nuguid was not impleaded as a party to the present consolidated cases, he
Manager’s Checks it issued and the refusal of Asian Bank to make good cannot be bound by our judgment herein. Respondent Chiok should
the same. That the admissions in the pleadings to the effect that Nuguid therefore pursue his remedy against Nuguid in a separate action to recover
had withdrawn the said proceeds failed to satisfy the trial court is the amounts of the checks.
understandable. Such withdrawal is anessential fact that, if properly
substantiated, would have defeated Chiok’s right toan injunction. BPI Despite the reversal of the Court of Appeals Decision, the liability of
could so easily have presented withdrawal slips or, with Nuguid’s Nuguid therein to respondent Chiok for attorney’s fees equivalent to 5%
consent, statements of account orthe passbook itself, which would of the total amount due remains valid, computed from the amounts stated
indubitably show that money actually changed hands at the crucial period in said Decision. This is a consequence of the finality of the Decision of
before the issuance of the TRO. But it did not.56 the Court of Appeals with respect to him.
We disagree with this ruling. As provided for in Section 4, Rule 129 of WHEREFORE, the Court resolves to DENY the Joint Manifestation and
the Rules of Court, admissions in pleadings are judicial admissions and Motion filed with this Court on May 28, 2013.
do not require proof:
The petitions in G.R. No. 172652 and G.R. No. 175302 are GRANTED.
Section 4. Judicial admissions. – An admission, verbal or written, made The Decision of the Court of Appeals in CA-G.R. CV No. 77508 dated
by a party in the course of the proceedings in the same case, does not May 5, 2006, and the Resolution on the same case dated November 6,
require proof. The admission may be contradicted only by showing that it 2006 are hereby REVERSED AND SET ASIDE, and a new one is issued
was made through palpable mistake or that no such admission was made. ordering the DENIAL of the Amended Complaint in Civil Case No. Q-
95-24299 in Branch 96 of the Regional Trial Court of Quezon City for
Nuguid has admitted that FEBTC (now BPI) has paid him the value of the lack of merit. The Writ of Preliminary Prohibitory Injunction enjoining
subject checks.57 This statement by Nuguid is certainly against his own Asian Banking Corporation (now Global Business Bank, Inc.) from
interest as he can be held liable for said amounts. Unfortunately, Nuguid honoring MC No. 025935 and MC No. 025939, and Metropolitan Bank
allowed his appeal with the Court of Appeals to lapse, without taking & Trust Company from honoring CC No. 003380, is hereby LIFTED and
steps to have it reinstated. This course of action, which is highly unlikely SET ASIDE.
if Nuguid had not withdrawn the value of the manager’s and cashier’s

Global Business Bank, Inc. is ORDERED TO PAY the Bank of the (a) U-LAND shall acquire from WELLEX, shares of stock of AIR
Philippine Islands, as successor-in-interest of Far East Bank & Trust PHILIPPINES INTERNATIONAL CORPORATION ("APIC")
Company, the amount of ₱18,455,350.00, representing the aggregate face equivalent to at least 35% of the outstanding capital stock of APIC, but in
value of MC No. 025935 and MC No. 025939, with interest based on the any case, not less than 1,050,000,000 shares . . . [;]
rates it actually paid its depositors from July 7, 1995 until the finality of
this Decision, in accordance with the same compounding rules it applies (b) U-LAND shall acquire from WELLEX, shares of stock of
to its depositors. PHILIPPINE ESTATES CORPORATION ("PEC") equivalent to at least
35% of the outstanding capital stock of PEC, but in any case, not less than
The petition in G.R. No. 175394 is hereby rendered MOOT. 490,000,000 shares . . . [;]
The liabilities of spouses Gonzalo B. Nuguid and Marinella O. Nuguid (c) U-LAND shall enter into a joint development agreement with PEC . .
under the Decision and Resolution of the Court of Appeals in CAG.R. CV . [; and]
No. 77508 remain VALID and SUBSISTING, computed from the
amounts adjudged by the Court of Appeals, without prejudice to any (d) U-LAND shall be given the option to acquire from WELLEX shares
further action that may be filed by Wilfred N. Chiok. of stock of EXPRESS SAVINGS BANK ("ESB") up to 40% of the
outstanding capital stock of ESB . . . under terms to be mutually agreed.16
SO ORDERED.
I. Acquisition of APIC and PEC shares
The Wellex Group, Inc. vs. U-land Airlines, Co. Ltd
G.R. No. 167519 January 14, 2015 The First Memorandum of Agreement stated that within 40 days from its
execution date, Wellex and U-Land would execute a share purchase
THE WELLEX GROUP, INC., Petitioner, agreement covering U-Land’s acquisition of the shares of stock of both
vs. APIC (APIC shares) and PEC (PEC shares).17 In this share purchase
U-LAND AIRLINES, CO., LTD., Respondent. agreement, U-Land would purchase from Wellex its APIC shares and
PEC shares.18
DECISION
Wellex and U-Land agreed to an initial purchase price of P0.30 per share
LEONEN, J.: of APIC and 0.65 per share of PEC. However, they likewise agreed that
This is a Petition1 for Review on Certiorari under Rule 45 of the Rules of the final price of the shares of stock would be reflected in the actual share
Court. The Wellex Group, Inc. (Wellex) prays that the Decision2 dated purchase agreement.19
July 30, 2004 of the Court of Appeals in CA-GR. CV No. 74850 be Both parties agreed that the purchase price of APIC shares and PEC
reversed and set aside.3 shares would be paid upon the execution of the share purchase agreement
The Court of Appeals affirmed the Decision4 of the Regional Trial Court, and Wellex’s delivery of the stock certificates covering the shares of
Branch 62 of Makati City in Civil Case No. 99-1407. The Regional Trial stock. The transfer of APIC shares and PEC shares to U-Land was
Court rendered judgment in favor of U-Land Airlines, Co., Ltd. (ULand) conditioned on the full remittance of the final purchase price as reflected
and ordered the rescission of the Memorandum of Agreement5 between in the share purchase agreement. Further, the transfer was conditioned on
Wellex and U-Land.6 the approval of the Securities and Exchange Commission of the issuance
of the shares of stock and the approval by the Taiwanese government of
Wellex is a corporation established under Philippine law and it maintains U-Land’s acquisition of these shares of stock.20
airline operations in the Philippines.7 It owns shares of stock in several
corporations including Air Philippines International Corporation (APIC), Thus, Section 2 of the First Memorandum of Agreement reads:
Philippine Estates Corporation (PEC), and Express Savings Bank 2. Acquisition of APIC and PEC Shares. - Within forty (40) days from
(ESB).8 Wellex alleges that it owns all shares of stock of Air Philippines date hereof (unless extended by mutual agreement), U-LAND and
Corporation (APC).9 WELLEX shall execute a Share Purchase Agreement ("SHPA") covering
U-Land Airlines Co. Ltd. (U-Land) "is a corporation duly organized and the acquisition by U-LAND of the APIC Shares and PEC Shares
existing under the laws of Taiwan, registered to do business . . . in the (collectively, the "Subject Shares"). Without prejudice to any subsequent
Philippines."10 It is engaged in the business of air transportation in Taiwan agreement between the parties, the purchase price for the APIC Shares to
and in other Asian countries.11 be reflected in the SHPA shall be THIRTY CENTAVOS (P0.30) per
share and that for the PEC Shares at SIXTY FIVE CENTAVOS (P0.65)
On May 16, 1998, Wellex and U-Land entered into a Memorandum of per share.
Agreement12 (First Memorandum of Agreement) to expand their
respective airline operations in Asia.13 The purchase price for the Subject Shares as reflected in the SHPA shall
be paid in full upon execution of the SHPA against delivery of the Subject
Terms of the First Memorandum of Agreement Shares. The parties may agree on such other terms and conditions
governing the acquisition of the Subject Shares to be provided in a
The preambular clauses of the First Memorandum of Agreement state: separate instrument.
WHEREAS, U-LAND is engaged in the business of airline transportation The transfer of the Subject Shares shall be effected to U-LAND provided
in Taiwan, Philippines and/or in other countries in the Asian region, and that: (i) the purchase price reflected in the SHPA has been fully paid; (ii)
desires to expand its operation and increase its market share by, among the Philippine Securities & Exchange Commission (SEC) shall have
others, pursuing a long-term involvement in the growing Philippine approved the issuance of the Subject Shares; and (iii) any required
airline industry; approval by the Taiwanese government of the acquisition by U-LAND of
WHEREAS, WELLEX, on the other hand, has current airline operation the Subject Shares shall likewise have been obtained.21
in the Philippines through its majority-owned subsidiary Air Philippines II. Operation and management of APIC/PEC/APC
International Corporation and the latter’s subsidiary, Air Philippines
Corporation, and in like manner also desires to expand its operation in the U-Land was "entitled to a proportionate representation in the Board of
Asian regional markets, a Memorandum of Agreement on ______, a Directors of APIC and PEC in accordance with Philippine
certified copy of which is attached hereto as Annex "A" and is hereby law."22 Operational control of APIC and APC would be exercised jointly
made an integral part hereof, which sets forth, among others, the basis for by Wellex and U-Land "on the basis of mutual agreement and
WELLEX’s present ownership of shares in Air Philippines International consultations."23 The parties intended that U-Land would gain primary
Corporation. WHEREAS, the parties recognize the opportunity to control and responsibility for the international operations of
develop a long-term profitable relationship by combining such of their APC.24 Wellex manifested that APC is a subsidiary of APIC in the second
respective resources in an expanded airline operation as well as in preambular clause of the First Memorandum of Agreement.25
property development and in other allied business activities in the
Philippines, and desire to set forth herein the basic premises and their Section 3 of the First Memorandum of Agreement reads:
understanding with respect to their joint cooperation and undertakings.14 3. Operation/Management of APIC/APC. - U-LAND shall be entitled to
In the First Memorandum of Agreement, Wellex and U-Land agreed to a proportionate representation in the Board of Directors of APIC and PEC
develop a long-term business relationship through the creation of joint in accordance with Philippine law. For this purpose, WELLEX shall
interest in airline operations and property development projects in the cause the resignation of its nominated Directors in APIC and PEC to
Philippines.15This long-term business relationship would be implemented accommodate U-LAND’s pro rata number of Directors. Subject to
through the following transactions, stated in Section 1 of the First applicable Philippine law and regulations, operational control of APIC
Memorandum of Agreement: and Air Philippines Corporation ("APC") shall be lodged jointly to
WELLEX and U-LAND on the basis of mutual agreement and

consultations. Further, U-LAND may second technical and other This Memorandum of Agreement, made and executed this ___th day of
consultants into APIC and/or APC with the view to increasing service, ______ at Makati City, by and between:
productivity and efficiency, identifying and implementing profit-service
opportunities, developing technical capability and resources, and THE WELLEX GROUP, INC., a corporation duly organized and existing
installing adequate safety systems and procedures. In addition, U-LAND under the laws of the Philippines, with offices at 22F Citibank Tower,
shall arrange for the lease by APC of at least three (3) aircrafts owned by 8741 Paseo de Roxas, Makati City (hereinafter referred to as "TWGI"),
ULAND under such terms as the parties shall mutually agree upon. It is AIR PHILIPPINES INTERNATIONAL CORPORATION (formerly
the intent of the parties that U-LAND shall have primary control and FORUM PACIFIC, INC.), likewise a corporation duly organized and
responsibility for APC’s international operations.26 existing under the laws of the Philippines, with offices at 8F Rufino
III. Entering into and funding a joint development agreement Towers, Ayala Avenue, Makati City (hereinafter referred to as "APIC"),
Wellex and U-Land also agreed to enter into a joint development - and –
agreement simultaneous with the execution of the share purchase AIR PHILIPPINES CORPORATION, corporation duly organized and
agreement. The joint development agreement shall cover housing and existing under the laws of the Philippines, with offices at Multinational
other real estate development projects.27 Building, Ayala Avenue, Makati City (hereinafter referred to as "APC").
U-Land agreed to remit the sum ofUS$3 million not later than May 22, W I T N E S S E T H: That -
1998. This sum was to serve as initial funding for the development
projects that Wellex and U-Land were to undertake pursuant to the joint WHEREAS, TWGI is the registered and beneficial owner, or has
development agreement. In exchange for the US$3 million, Wellex would otherwise acquired _____ (illegible in rollo) rights to the entire issued and
deliver stock certificates covering 57,000,000 PEC shares to U-Land.28 outstanding capital stock (the "APC SHARES") of AIR PHILIPPINES
CORPORATION ("APC") and has made stockholder advances to APC
The execution of a joint development agreement was also conditioned on for the _____ (illegible in rollo) of aircraft, equipment and for working
the execution of a share purchase agreement.29 capital used in the latter’s operations (the "_____ (illegible in rollo)
Section 4 of the First Memorandum of Agreement reads: ADVANCES").
4. Joint Development Agreement with PEC. – Simultaneous with the WHEREAS, APIC desires to obtain full ownership and control of APC,
execution of the SHPA, U-LAND and PEC shall execute a joint including all of _____ (illegible in rollo) assets, franchise, goodwill and
development agreement ("JDA") to pursue property development projects operations, and for this purpose has offered to acquire the _____ (illegible
in the Philippines. The JDA shall cover specific housing and other real in rollo) 302SHARES of TWGI in APC, including the APC ADVANCES
estate development projects as the parties shall agree. All profits derived due to TWGI from APC, with _____ (illegible in rollo) of acquiring all
from the projects covered by the JDA shall be shared equally between the assets, franchise, goodwill and operations of APC; and TWGI has
ULAND and PEC. U-LAND shall, not later than May 22, 1998, remit the _____ (illegible in rollo) to the same in consideration of the conveyance
sum of US$3.0 million as initial funding for the aforesaid development by APIC to TWGI of certain investments, _____ (illegible in rollo)
projects against delivery by WELLEX of 57,000,000 shares of PEC as issuance of TWGI of shares of stock of APIC in exchange for said APC
security for said amount in accordance with Section 9 below.30 SHARES and the _____ (illegible in rollo) ADVANCES, as more
particularly described hereunder.
In case of conflict between the provisions of the First Memorandum of
Agreement and the provisions of the share purchase agreement or its NOW, THEREFORE, the parties agree as follows:
implementing agreements, the terms of the First Memorandum of 1. TWGI agrees to transfer the APC ADVANCES in APIC in exchange
Agreement would prevail, unless the parties specifically stated otherwise for the _____ (illegible in rollo) by APIC to TWGI of investment shares
or the context of any agreement between the parties would reveal a of APIC in Express Bank, Petro Chemical _____ (illegible in rollo) of
different intent.31 Thus, in Section 6 of the First Memorandum of Asia Pacific, Republic Resources & Development Corporation and
Agreement: Philippine _____ (illegible in rollo) Corporation (the "APIC
6. Primacy of Agreement. – It is agreed that in case of conflict between INVESTMENTS").
the provisions of this Agreement and those of the SHPA and the 2. TWGI likewise agrees to transfer the APC SHARES to APIC in
implementing agreements of the SHPA, the provisions of this Agreement exchange solely _____ (illegible in rollo) the issuance by APIC of One
shall prevail, unless the parties specifically state otherwise, or the context Billion Seven Hundred Ninety-Seven Million Eight Hundred Fifty Seven
clearly reveal a contrary intent.32 Thousand Three Hundred Sixty Four (1,797,857,364) shares of its capital
Finally, Wellex and U-Land agreed that if they were unable to agree on stock of a _____ (illegible in rollo) value of ₱1.00 per share (the "APIC
the terms of the share purchase agreement and the joint development SHARES"), taken from the currently authorized but _____ (illegible in
agreement within 40 days from signing, then the First Memorandum of rollo) shares of the capital stock of APIC, as well as from the increase in
Agreement would cease to be effective.33 the authorized capital _____ (illegible in rollo) of APIC from ₱2.0 billion
to ₱3.5 billion.
In case no agreements were executed, the parties would be released from
their respective undertakings, except that Wellex would be required to 3. It is the basic understanding of the parties hereto that the transfer of the
refund within three (3) days the US$3 million given as initial funding by APC _____ (illegible in rollo) as well as the APC ADVANCES to APIC
U-Land for the development projects. If Wellex was unable to refund the shall be intended to enable APIC to obtain _____ (illegible in rollo) and
US$3 million to U-Land, U-Land would have the right to recover on the control of APC, including all of APC’s assets, franchise, goodwill and
57,000,000 PEC shares that would be delivered to it.34 Section 9 of the _____ (illegible in rollo).
First Memorandum of Agreement reads: 4. Unless the parties agree otherwise, the effectivity of this Agreement
9. Validity. - In the event the parties are unable to agree on the terms of and transfers _____ (illegible in rollo) APC ADVANCES in exchange for
the SHPA and/or the JDA within forty (40) days from date hereof (or such the APIC INVESTMENTS, and the transfer of the _____ (illegible in
period as the parties shall mutually agree), this Memorandum of rollo) SHARES in exchange for the issuance of new APIC SHARES,
Agreement shall cease to be effective and the parties released from their shall be subject to _____ (illegible in rollo) due diligence as the parties
respective undertakings herein, except that WELLEX shall refund the shall see fit, and the condition subsequent that the _____ (illegible in
US$3.0 million provided under Section 4 within three (3) days therefrom, rollo) for increase in the authorized capital stock of the APIC from ₱2.0
otherwise U-LAND shall have the right to recover on the 57,000,000 PEC billion to ₱3.5 _____ (illegible in rollo) shall have been approved by the
shares delivered to U-LAND under Section 4.35 Securities and Exchange Commission.
The First Memorandum of Agreement was signed by Wellex Chairman IN WITNESS WHEREOF, the parties have caused these presents to be
and President William T. Gatchalian (Mr. Gatchalian) and U-Land signed on the date _____ (illegible in rollo) first above
Chairman Ker Gee Wang (Mr. Wang) on May 16, 1998.36 written.38 (Emphasis supplied)
Annex "A" or the Second Memorandum of Agreement This Second Memorandum of Agreement was allegedly incorporated into
the First Memorandum of Agreement as a "disclosure to [U-Land] [that]
Attached and made an integral part of the First Memorandum of . . . [Wellex] was still in the process of acquiring and consolidating its title
Agreement was Annex "A," as stated in the second preambular clause. It to shares of stock of APIC."39 It "included the terms of a share swap
is a document denoted as a "Memorandum of Agreement" entered into by whereby [Wellex] agreed to transfer to APIC its shareholdings and
Wellex, APIC, and APC.37 advances to APC in exchange for the issuance by APIC of shares of stock
to [Wellex]."40
The Second Memorandum of Agreement states:

The Second Memorandum of Agreement was signed by Mr. Gatchalian, Despite these transactions, Wellex and U-Land still failed to enter into the
APIC President Salud,41 and APC President Augustus C. Paiso.42 It was share purchase agreement and the joint development agreement.
not dated, and no place was indicated as the place of signing.43 It was not
notarized either, and no other witnesses signed the document.44 In the letter56 dated July 22, 1999, 10 months57 after the last formal
communication between the two parties, U-Land, through counsel,
The 40-day period lapsed on June 25, 1998.45 Wellex and U-Land were demanded the return of the US$7,499,945.00.58 This letter was sent 14
not able to enter into any share purchase agreement although drafts were months after the signing of the First Memorandum of Agreement.
exchanged between the two.
Counsel for U-Land claimed that "[Wellex] ha[d] unjustifiably refused to
Despite the absence of a share purchase agreement, U-Land remitted to enter into the. . . Share Purchase Agreement."59 As far as U-Land was
Wellex a total of US$7,499,945.00.46These were made in varying concerned, the First Memorandum of Agreement was no longer in effect,
amounts and through the issuance of post-dated checks.47 The dates of pursuant to Section 9.60 As such, U-Land offered to return all the stock
remittances were the following: certificates covering APIC shares and PEC shares as well as the titles to
real property given by Wellex as security for the amount remitted by U-
Land.61
Date Amount (in US$)
Wellex sent U-Land a letter62 dated August 2, 1999, which refuted U-
Land’s claims. Counsel for Wellex stated that the two parties carried out
June 30, 1998 990,000.00
several negotiations that included finalizing the terms of the share
purchase agreement and the terms of the joint development agreement.
July 2, 1998 990,000.00
Wellex asserted that under the joint development agreement,
agreed to remit the sum of US$3 million by May 22,1998 as initial
U-Land
funding for the development projects.63

20,000.00
Wellex further asserted that it conducted extended discussions with U-
Land in the hope of arriving at the final terms of the agreement despite
July 30, 1998 990,000.00
the failure of the remittance of the US$3 million on May 22, 1998.64 That
remittance pursuant to the joint development agreement "would have
demonstrated [U-Land’s] good faith in finalizing the agreements."65
490,000.00
Wellex averred that, "[s]ave for a few items, [Wellex and U-Land]
virtually agreed on the terms of both [the share purchase agreement and
the joint development agreement.]"66 Wellex believed 490,000.00
that the parties had
already "gone beyond the ‘intent’ stage of the [First Memorandum of
August 1, 1998 990,000.00
Agreement] and [had already] effected partial implementation of an over-
all agreement."67 U-Land even delivered a total of 12 post-dated checks
to Wellex as payment for the APIC shares and PEC shares.68 "[Wellex]
490,000.00
on the other hand, had [already] delivered to[U-Land] certificates of stock
of APEC [sic] and PEC as well as various land titles to cover actual
remittances."69 Wellex alleged that the agreements were not finalized
490,000.00
because U-Land was "forced to suspend operations because of financial
problems spawned by the regional economic turmoil."70
August 3, 1998 990,000.00
Thus, Wellex maintained that "the inability of the parties to execute the
[share purchase agreement] and the [joint development agreement]
principally arose from problems at [U-Land’s] side, 70,000.00
and not due to
[Wellex’s] ‘unjustified refusal to enter into [the] [share purchase
agreement][.]’"71
September 25, 1998 399,972.50
On July 30, 1999, U-Land filed a Complaint72 praying for rescission of
the First Memorandum of Agreement and damages against Wellex and
for the issuance of a Writ of Preliminary Attachment.73 From U-Land’s
point of view, its primary reason for purchasing APIC shares from Wellex
99, 972.50
was APIC’s majority ownership of shares of stock in APC (APC
74
shares). After verification with the Securities and Exchange
Total Commission, U-Land discovered that US$7,499,945.0048
"APIC did not own a single share
of stock in APC."75 U-Land alleged that it repeatedly requested that the
parties enter into the share purchase agreement.76 U-Land attached the
demand letter dated July 22, 1999 to the Complaint.77 However, the 40-
day period lapsed, and no share purchase agreement was finalized.78
U-Land alleged that, as of the date of filing of the Complaint, Wellex still
Wellex acknowledged the receipt of these remittances in a confirmation refused to return the amount of US$7,499,945.00 while refusing to enter
letter addressed to U-Land dated September 30, 1998.49 into the share purchase agreement.79 U-Land stated that it was induced by
Wellex to enter into and execute the First Memorandum of Agreement, as
According to Wellex, the parties agreed to enter into a security well as release the amount of US$7,499,945.00.80
arrangement. If the sale of the shares of stock failed to push through, the
partial payments or remittances U-Land made were to be secured by these In its Answer with Compulsory Counterclaim,81 Wellex countered that U-
shares of stock and parcels of land.50 This meant that U-Land could Land had no cause of action.82 Wellex maintained that under the First
recover the amount it paid to Wellex by selling these shares of stock and Memorandum of Agreement, the parties agreed to enter into a share
land titles or using them to generate income. purchase agreement and a joint development agreement.83 Wellex alleged
that to bring the share purchase agreement to fruition, it would have to
Thus, after the receipt of US$7,499,945.00, Wellex delivered to U-Land acquire the corresponding shares in APIC.84 It claimed that U-Land was
stock certificates representing 60,770,000 PEC shares and 72,601,000 fully aware that the former "still ha[d] to consolidate its title over these
APIC shares.51 These were delivered to U-Land on July 1, 1998, shares."85 This was the reason for Wellex’s attachment of the Second
September 1, 1998, and October 1, 1998.52 Memorandum of Agreement to the First Memorandum of Agreement.
Wellex attached the Second Memorandum of Agreement as evidence to
In addition, Wellex delivered to U-Land Transfer Certificates of Title
refute U-Land’s claim of misrepresentation.86
(TCT) Nos. T-216769, T-216771, T-228231, T-228227, T-211250, and
T-216775 covering properties owned by Westland Pacific Properties Wellex further alleged that U-Land breached the First Memorandum of
Corporation in Bulacan; and TCT Nos. T-107306, T-115667, T-105910, Agreement since the payment for the shares was to begin during the 40-
T-120250, T-1114398, and T-120772 covering properties owned by day period, which began on May 16, 1998.87 In addition, U-Land failed
Rexlon Realty Group, Inc.53 On October 1, 1998,54 U-Land received a to remit the US$3 million by May 22, 1998 that would serve as initial
letter from Wellex, indicating a list of stock certificates that the latter was funding for the development projects.88 Wellex claimed that the
giving to the former by way of "security."55 remittance of the US$3 million on May 22, 1998 was a mandatory

obligation on the part of U-Land.89 Wellex averred that it presented draft through a confirmation letter. Despite the remittance of this amount, no
versions of the share purchase agreement, which were never share purchase agreement was entered into by the parties.113
finalized.90 Thus, it believed that there was an implied extension of the
40-day period within which to enter into the share purchase agreement Wellex presented its sole witness, Ms. Elvira Ting (Ms. Ting), Vice
and the joint development agreement since U-Land began remitting sums President of Wellex. She admitted her knowledge of the First
of money in partial payment for the purchase of the shares of stock.91 Memorandum of Agreement as she was involved in its drafting. She
testified that the First Memorandum of Agreement made reference, under
In its counterclaim against U-Land, Wellex alleged that it had already set its second preambular clause, to the Second Memorandum of Agreement
in motion building and development of real estate projects on four (4) entered into by Wellex, APIC, and APC. She testified that under the First
major sites in Cavite, Iloilo, and Davao. It started initial construction on Memorandum of Agreement, U-Land’s purchase of APIC shares and PEC
the basis of its agreement with U-Land to pursue real estate development shares from Wellex would take place within 40 days, with the execution
projects.92 of a share purchase agreement.114
Wellex claims that, had the development projects pushed through, the According to Ms. Ting, after the 40-day period lapsed, U-Land Chairman
parties would have shared equally in the profits of these projects.93 These Mr. Wang requested sometime in June of 1998 for an extension for the
projects would have yielded an income of ₱2,404,948,000.00, as per the execution of the share purchase agreement and the remittance of the US$3
study Wellex conducted, which was duly recognized by U-Land.94 Half million. As proof that Mr. Wang made this request, Ms. Ting testified that
of that amount, ₱1,202,474,000.00, would have redounded to Mr. Wang sent several post-dated checks to cover the payment of the
Wellex.95 Wellex, thus, prayed for the rescission of the First APIC shares and PEC shares and the initial funding of US$3 million for
Memorandum of Agreement and the payment of ₱1,202,474,000 in the joint development agreement. She testified that Mr. Wang presented
damages for loss of profit.96 It prayed for the payment of moral damages, a draft of the share purchase agreement, which Wellex rejected. Wellex
exemplary damages, attorney’s fees, and costs of suit.97 drafted a new version of the share purchase agreement.115 However, the
share purchase agreement was not executed because during the period of
In its Reply,98 U-Land denied that there was an extension of the 40-day negotiation, Wellex learned from other sources that U-Land "encountered
period within which to enter into the share purchase agreement and the difficulties starting October of 1998."116 Ms. Ting admitted that U-Land
joint development agreement. It also denied requesting for an extension made the remittances to Wellex in the amount of US$7,499,945.00.117
of the 40-day period. It further raised that there was no provision in the
First Memorandum of Agreement that required it to remit payments for Ms. Ting testified that U-Land was supposed to make an initial payment
Wellex’s shares of stock in APIC and PEC within the 40-day period. of US$19 million under the First Memorandum of Agreement. However,
Rather, the remittances were supposed to begin upon the execution of the U-Land only paid US$7,499,945.00. The total payments should have
share purchase agreement.99 amounted to US$41 million.118
As for the remittance of the US$3 million, U-Land stated that the issuance Finally, Ms. Ting testified that Wellex tried to contact U-Land to have a
of this amount on May 22, 1998 was supposed to be simultaneously made meeting to thresh out the problems of the First Memorandum of
with Wellex’s delivery of the stock certificates for 57,000,000 PEC Agreement, but U-Land did not reply. Instead, Wellex only received
shares. These stock certificates were not delivered on that date.100 communication from U-Land regarding their subsequent negotiations
through the latter’s demand letter dated July 22, 1999. In response,
With regard to the drafting of the share purchase agreement, U-Land Wellex wrote to U-Land requesting another meeting to discuss the
denied that it was Wellex that presented versions of the agreement. U- demands. However, U-Land already filed the Complaint for rescission
Land averred that it was its own counsel who drafted versions of the share and caused the attachment against the properties of Wellex, causing
purchase agreement and the joint development agreement, which Wellex embarrassment to Wellex.119
refused to sign.101
In the Decision dated April 10, 2001, the Regional Trial Court of Makati
U-Land specifically denied that it had any knowledge prior to or during City held that rescission of the First Memorandum of Agreement was
the execution of the First Memorandum of Agreement that Wellex still proper:
had to "consolidate its title over" its shares in APIC. U-Land averred that
it relied on Wellex’s representation that it was a majority owner of APIC The first issue must be resolved in the negative. Preponderance of
shares and that APIC owned a majority of APC shares.102 evidence leans in favor of plaintiff that it is entitled to the issuance of the
writ of preliminary attachment. Plaintiff’s evidence establishes the facts
Moreover, U-Land denied any knowledge of the initial steps that Wellex that it is engaged in the airline business in Taiwan, was approached by
undertook to pursue the development projects and denied any awareness defendant, through its Chairman William Gatchalian, and was invited by
of a study conducted by Wellex regarding the potential profit of these the latter to invest in an airline business in the Philippines, Air Philippines
projects.103 Corporation (APC); that plaintiff became interested in the invitation of
The case proceeded to trial. defendant; that during the negotiations between plaintiff and defendant,
defendant induced plaintiff to buy shares in Air Philippines International
U-Land presented Mr. David Tseng (Mr. Tseng), its President and Chief Corporation (APIC) since it owns majority of the shares of APC; that
Executive Officer, as its sole witness.104 Mr. Tseng testified that defendant also induced plaintiff to buy shares of APIC in Philippine
"[s]ometime in 1997, Mr. William Gatchalian who was in Taiwan invited Estates Corporation (PEC); that the negotiations between plaintiff and
[U-Land] to join in the operation of his airline company[.]"105 U-Land did defendant culminated into the parties executing a MOA (Exhs. "C" to "C-
not accept the offer at that time.106 During the first quarter of 1998, Mr. 3", also Exh. "1"); that in the second "Whereas" clause of the MOA,
Gatchalian "went to Taiwan and invited [U-Land] to invest in Air defendant represented that it has a current airline operation through its
Philippines[.]"107 This time, U-Land alleged that subsequent meetings majority-owned subsidiary APIC, that under the MOA, the parties were
were held where Mr. Gatchalian, representing Wellex, "claimed supposed to enter into a Share Purchase Agreement (SPA) within forty
ownership of a majority of the shares of APIC and ownership by APIC of (40) days from May 16, 1998, the date the MOA in order to effect the
a majority of the shares of [APC,] a domestic carrier in the transfer of APIC and PEC shares of defendant to plaintiff; that plaintiff
Philippines."108 Wellex, through Mr. Gatchalian, offered to sell to U-Land learned from defendant that APIC does not actually own a single share in
PEC shares as well.109 APC; that plaintiff verified with the Securities and Exchange Commission
(SEC), by obtaining a General Information Sheet therefrom (Exh. "C-
According to Mr. Tseng, the parties agreed to enter into the First Attachment"); that APIC does not in fact own APC; that defendant
Memorandum of Agreement after their second meeting.110 Mr. Tseng induced plaintiff to still remit its investment to defendant, which plaintiff
testified that under this memorandum of agreement, the parties would did as admitted by defendant per its Confirmation Letter (Exh. "D") in
enter into a share purchase agreement "within forty (40) days from its order that APC shares could be transferred to APIC; that plaintiff remitted
execution which [would] put into effect the sale of the shares [of stock] a total of US$7,499,945.00 to defendant; and that during the forty-day
of APIC and PEC[.]"111 However, the "[s]hare [p]urchase [a]greement period stipulated in the MOA and even after the lapse of the said period,
was not executed within the forty-day period despite the draft . . . given defendant has not entered into the SPA, nor has defendant caused the
[by U-Land to Wellex]."112 transfer of APC shares to APIC.
Mr. Tseng further testified that it was only after the lapse of the 40-day In the second "Whereas" clause of the MOA (Exh. "C"), defendant’s
period that U-Land discovered that Wellex needed money for the transfer misrepresentation that APIC owns APC is made clear, as follows:
of APC shares to APIC. This allegedly shocked U-Land since under the
First Memorandum of Agreement, APIC was supposed to own a majority "WHEREAS, WELLEX, on the other hand, has current airline operation
of APC shares. Thus, U-Land remitted to Wellex a total of in the Philippines through its majority-owned subsidiary Air Philippines
US$7,499,945.00 because of its intent to become involved in the aviation International Corporation (Exh. "C") and the latter’s subsidiary, Air
business in the Philippines. These remittances were confirmed by Wellex Philippines Corporation, and in like manner also desires to expand its

operation in the Asian regional markets; x x x" (Second Whereas of Exh. of AIR PHILIPPINES CORPORATION to AIR PHILIPPINES
"C") INTERNATIONCAL [sic] CORPORATION[,] am I correct?
On the other hand, defendant’s evidence failed to disprove plaintiff’s A APC to APIC, well at that time it’s still in the process.
evidence. The testimony of defendant’s sole witness Elvira Ting, that
plaintiff knew at the time of the signing of the MOA that APIC does not Q In fact, Madam Witness, is it not correct for me to say that one of the
own a majority of the shares of APC because another Memorandum of reasons why U-Land Incorporated was convinced to remit the amounts of
Agreement was attached to the MOA (Exh "1") pertaining to the purchase money totalling seven million dollars plus,
of APC shares by APIC is unavailing. The second "Whereas" clause of was that your company said that it needed funds to effect these transfers,
the MOA leaves no room for interpretation. . . . The second MOA is that correct?
purportedly attached as Annex "A" of this MOA merely enlightens the
parties on the manner by which APIC acquired the shares of APC. A Yes, sir."
Besides, . . . the second MOA was not a certified copy and did not contain
a marking that it is an Annex "A" when it was supposed to be an Annex (lbid, pp. 25-29)
"A" and a certified copy per the MOA between plaintiff and defendant. As the evidence adduced by the parties stand, plaintiff has established the
As can be also gathered from her testimony, Ms. Ting does not have fact that it had made remittances in the total amount of US$7,499,945.00
personal knowledge that plaintiff was not informed that APIC did not own to defendant in order that defendant will make good its representation that
shares of APC during the negotiations as she was not present during the APC is a subsidiary of APIC. The said remittances are admitted by
negotiations between plaintiff and defendant’s William Gatchalian. Her defendant.
participation in the agreement between the parties [was] merely limited to
the preparation of the documents to be signed. Ms. Ting testified, as Notwithstanding the said remittances, APIC does not own a single share
follows: of APC. On the other hand, defendant could not even satisfactorily
substantiate its claim that at least it had the intention to cause the transfer
"Q During the negotiation, you did not know anything about that?" of APC shares to APIC. [D]efendant obviously did not enter into the
A I was not involved in the negotiation, sir. stipulated SPA because it did not have the shares of APC transferred to
APIC despite its representations. Under the circumstances, it is clear that
Q And you are just making your statement that U-Land knew about the defendant fraudulently violated the provisions of the MOA.120 (Emphasis
intended transfer of shares from APC to APIC because of this WHEREAS supplied)
CLAUSE and the Annex to this Memorandum of Agreement?
On appeal, the Court of Appeals affirmed the ruling of the Regional Trial
A Yes, it was part of the contract." Court.121 In its July 30, 2004 Decision, the Court of Appeals held that the
Regional Trial Court did not err in granting the rescission:
(TSN, Elvira Ting, June 6, 2000, pp. 8-10)
Records show that in the answer filed by defendant-appellant, the latter
Defendant’s fraud in the performance of its obligation under the MOA is itself asked for the rescission of the MOA. Thus, in effect, it prays for the
further revealed when Ms. Ting testified on cross-examination that return of what has been given or paid under the MOA, as the law creates
notwithstanding the remittances made by plaintiff in the total amountn said obligation to return the things which were the object of the contract,
[sic] of US$7,499, 945.00 to partially defray the cost of transferring APC and the same could be carried out only when he who demands rescission
shares to APIC even as of the year 2000, as follows: can return whatever he may be obliged to restore. The law says:
"Q Ms. Ting, can you please tell the Court if you know who owns shares "Rescission creates the obligation to return the things which were the
of Air Philippines Corporation at this time? object of the contract, together with their fruits, and the price with its
A Air Philippines Corporation right now is own [sic] by Wellex Group interest; consequently, it can be carried out only when he who demands
and certain individual. rescission can return whatever he may be obliged to restore."
Q How much shares of Air Philippines Corporation is owned by Wellex Appellant, therefore, cannot ask for rescission of the MOA and yet refuse
Group? to return what has been paid to it. Further, appellant’s claim that the lower
court erred in ruling for the rescission of the MOA is absurd and
A Around twenty...at this moment around twenty five percent (25%). ridiculous because rescission thereof is prayed for by the former. . . . This
Court agrees with the lower court that appellee is the injured party in this
Q Can you tell us if you know who are the other owners of the shares of case, and therefore is entitled to rescission, because the rescission referred
Air Philippines? to here is predicated on the breach of faith by the appellant which breach
A There are several individual owners, I cannot recall the names. is violative of the reciprocity between the parties. It is noted that appellee
has partly complied with its own obligation, while the appellant has not.
Q Could [sic] you know if Air Philippines Int’l. Corporation is one of the It is, therefore, the right of the injured party to ask for rescission because
owners? the guilty party cannot ask for rescission.
A As of this moment, no sir." The lower court . . . correctly ruled that:
(lbid, p. 16) ". . . This Court agrees with plaintiff that defendant’s misrepresentations
regarding APIC’s not owning shares in APC vitiates its consent to the
That defendant represented to plaintiff that it needed the remittances of MOA. Defendant’s continued misrepresentation that it will cause the
plaintiff, even if no SPA was executed yet between the parties, to effect transfer of APC shares in APIC inducing plaintiff to remit money despite
the transfer of APC shares to APIC is admitted by its same witness also the lapse of the stipulated forty day period, further establishes plaintiff’s
in this wise: right to have the MOA rescinded.
"Q You said that remittances were made to the Wellex Group, Section 9 of the MOA itself provides that in the event of the non-
Incorporated by plaintiff for the period from June 1998 to September execution of an SPA within the 40 day period, or within the extensions
1998[,] is that correct? thereof, the payments made by plaintiff shall be returned to it, to wit:
A Yes, Sir. "9 Validity.- In the event that the parties are unable to agree on the terms
Q During all these times, that remittances were made in the total amount of the SHPA and/or JDA within forty (40) days from the date hereof (or
of more than seven million dollars, did you ever know if plaintiff asked such period as the parties shall mutually agree), this Memorandum of
for evidence from your company that AIR PHILIPPINES Agreement shall cease to be effective and the parties released from their
INTERNATIONAL CORPORATION has already acquired shares of respective undertakings herein, except that WELLEX shall refund the
AIR PHILIPPINES CORPORATION? US$3.0 million under Section 4 within three (3) days therefrom,
otherwise U-LAND shall have the right to recover the 57,000,000 PEC
A There were queries on the matter. shares delivered to ULAND under Section 4."
Q And what was your answer to those queries, Madam Witness? Clearly, the parties were not able to agree on the terms of the SPA within
and even after the lapse of the stipulated 40 day period. There being no
A We informed them that the decision was still in the process. SPA entered into by and between the plaintiff and defendant, defendant’s
Q Even up to the time that plaintiff U-Land stopped the remittances return of the remittances [of] plaintiff in the total amount of
sometime in September 1998 you have not effected the transfer of shares US$7,499,945 is only proper, in the same vein, plaintiff should return to

defendant the titles and certificates of stock given to it by APC, another airline company.144 Under Article 1191 of the Civil Code,
defendant.122 (Citations omitted) respondent U-Land, as the injured party, was entitled to rescission due to
the fatal misrepresentations committed by petitioner Wellex.145
Hence, this Petition was filed.
Respondent U-Land further asserts that the "shareholdings in APIC and
Petitioner’s Arguments APC were never in question."146 Rather, it was petitioner Wellex’s
Petitioner Wellex argues that contrary to the finding of the Court of misrepresentation that APIC was a majority shareholder of APC that
Appeals, respondent U-Land was not entitled to rescission because the compelled it to enter into the agreement.147
latter itself violated the First Memorandum of Agreement. Petitioner As for Suria, respondent U-land avers that this case was inapplicable
Wellex states that respondent U-Land was actually bound to pay US$17.5 because the pertinent provision in Suria was not Article 1191 but
million for all of APIC shares and PEC shares under the First rescission under Article 1383 of the Civil Code.148 The "rescission"
Memorandum of Agreement and the US$3 million to pursue the referred to in Article 1191 referred to "resolution" of a contract due to a
development projects under the joint development agreement. In sum, breach of a mutual obligation, while Article 1384 spoke of "rescission"
respondent U-Land was liable to petitioner Wellex for the total amount of because of lesion and damage.149 Thus, the rescission that is relevant to
US$20.5 million. Neither the Court of Appeals nor the Regional Trial the present case is that of Article 1191, which involves breach in a
Court made any mention of the legal effect of respondent U-Land’s failure reciprocal obligation. It is, in fact, resolution, and not rescission as a result
to pay the full purchase price.123 of fraud or lesion, as found in Articles 1381, 1383, and 1384 of the Civil
On the share purchase agreement, petitioner Wellex asserts that its Code.150
obligation to deliver the totality of the shares of stock would become The Issue
demandable only upon remittance of the full purchase price of US$17.5
million.124 The full remittance of the purchase price of the shares of stock The question presented in this case is whether the Court of Appeals erred
was a suspensive condition for the execution of the share purchase in affirming the Decision of the Regional Trial Court that granted the
agreement and delivery of the shares of stock. Petitioner Wellex argues rescission of the First Memorandum of Agreement prayed for by U-Land.
that the use of the term "upon" in Section 2 of the First Memorandum of
Agreement clearly provides that the full payment of the purchase price The Petition must be denied.
must be given "simultaneously" or "concurrent" with the execution of the I
share purchase agreement.125
The requirement of a share
Petitioner Wellex raises that the Court of Appeals erred in saying that the purchase agreement
rescission of the First Memorandum of Agreement was proper because
petitioner Wellex itself asked for this in its Answer before the trial The Civil Code provisions on the interpretation of contracts are
court.126 It asserts that "there can be no rescission of a non-existent controlling to this case, particularly Article 1370, which reads:
obligation, such as [one] whose suspensive condition has not yet
happened[,]"127 as held in Padilla v. Spouses Paredes.128 Citing Villaflor ART. 1370. If the terms of a contract are clear and leave no doubt upon
v. Court of Appeals129 and Spouses Agustin v. Court of Appeals,130 it the intention of the contracting parties, the literal meaning of its
argues that "the vendor. . . has no obligation to deliver the thing sold. . . stipulations shall control.
if the buyer. . . fails to fully pay the price as required by the contract."131 In If the words appear to be contrary to the evident intention of the parties,
this case, petitioner Wellex maintains that respondent U-Land’s the latter shall prevail over the former.
remittance of US$7,499,945.00 constituted mere partial performance of a
reciprocal obligation.132 Thus, respondent U-Land was not entitled to In Norton Resources and Development Corporation v. All Asia Bank
rescission. The nature of this reciprocal obligation requires both parties’ Corporation:151
simultaneous fulfillment of the totality of their reciprocal obligations and
not only partial performance on the part of the allegedly injured party. The cardinal rule in the interpretation of contracts is embodied in the first
paragraph of Article 1370 of the Civil Code: "[i]f the terms of a contract
As to the finding of misrepresentations, petitioner Wellex raises that a are clear and leave no doubt upon the intention of the contracting parties,
seller may sell a thing not yet belonging to him at the time of the the literal meaning of its stipulations shall control." This provision is akin
transaction, provided that he will become the owner at the time of delivery to the "plain meaning rule" applied by Pennsylvania courts, which
so that he can transfer ownership to the buyer. Contrary to the finding of assumes that the intent of the parties to an instrument is "embodied in the
the lower courts, petitioner Wellex was obliged to be the owner of the writing itself, and when the words are clear and unambiguous the intent
shares only when the time came to deliver these to respondent U-Land is to be discovered only from the express language of the agreement." It
and not during the perfection of the contract itself.133 also resembles the "four corners" rule, a principle which allows courts in
some cases to search beneath the semantic surface for clues to meaning.
Finally, petitioner Wellex argues that respondent U-Land could have A court's purpose in examining a contract is to interpret the intent of the
recovered through the securities given to the latter.134 Petitioner Wellex contracting parties, as objectively manifested by them. The process of
invokes Suria v. Intermediate Appellate Court,135 which held that an interpreting a contract requires the court to make a preliminary inquiry as
"action for rescission is not a principal action that is retaliatory in to whether the contract before it is ambiguous. A contract provision is
character [under Article 1191 of the Civil Code, but] a subsidiary one ambiguous if it is susceptible of two reasonable alternative
which. . . is available only in the absence of any other legal remedy [under interpretations. Where the written terms of the contract are not ambiguous
Article 1384 of the Civil Code]."136Respondent’s Arguments and can only be read one way, the court will interpret the contract as a
Respondent U-Land argues that it was the execution of the share purchase matter of law. If the contract is determined to be ambiguous, then the
agreement that would result in its purchase of the APIC shares and PEC interpretation of the contract is left to the court, to resolve the ambiguity
shares.137 It was not the full remittance of the purchase price of the shares in the light of the intrinsic evidence.152 (Emphasis supplied)
of stock as indicated in the First Memorandum of Agreement, as alleged As held in Norton, this court must first determine whether a provision or
by petitioner Wellex.138 Respondent U-Land asserts that the First stipulation contained in a contract is ambiguous. Absent any ambiguity,
Memorandum of Agreement provides that the exact number of APIC the provision on its face will be read as it is written and treated as the
shares and PEC shares to be purchased under the share purchase binding law of the parties to the contract.
agreement and the final price of these shares were not yet determined by
the parties.139 The parties have differing interpretations of the terms of the First
Memorandum of Agreement. Petitioner Wellex even admits that "the
Respondent U-Land reiterates that it was petitioner Wellex that requested facts of the case are fairly undisputed [and that] [i]t is only the parties’
for the remittances amounting to US$7,499,945.00 to facilitate APIC’s respective [understanding] of these facts that are not in harmony."153
purchase of APC shares.140 Thus, it was petitioner Wellex’s refusal to
enter into the share purchase agreement that led to respondent U-Land The second preambular clause of the First Memorandum of Agreement
demanding rescission of the First Memorandum of Agreement and the reads:
return of the US$7,499,945.00.141 Respondent U-Land further argues
before this court that petitioner Wellex failed to present evidence as to WHEREAS, WELLEX, on the other hand, has current airline operation
how the money was spent, stating that Ms. Ting admitted that the Second in the Philippines through its majority-owned subsidiary Air Philippines
Memorandum of Agreement "was not consummated at any International Corporation and the latter’s subsidiary, Air Philippines
time."142 Respondent U-Land raises that petitioner Wellex was guilty of Corporation, and in like manner also desires to expand its operation in the
fraud by making it appear that APC was a subsidiary of APIC.143 It Asian regional markets; a Memorandum of Agreement on ______, a
reiterates that, as an airline company, its primary reason for entering into certified copy of which is attached hereto as Annex "A" and is hereby
the First Memorandum of Agreement was to acquire management of made an integral part hereof, which sets forth, among others, the basis for

WELLEX’s present ownership of shares in Air Philippines International petitioner Wellex. A perusal of the stipulation on its face allows for no
Corporation.154 (Emphasis supplied) other interpretation.
Section 1 of the First Memorandum of Agreement reads: The need for a share purchase agreement to be entered into before
payment of the full purchase price can further be discerned from the other
I. Basic Agreement. - The parties agree to develop a long-term business stipulations of the First Memorandum of Agreement.
relationship initially through the creation of joint interest in airline
operations as well as in property development projects in the Philippines In Section 1, the parties agreed to enter into a joint business venture,
to be implemented as follows: through entering into two (2) agreements: a share purchase agreement and
a joint development agreement. However, Section 1 provides that in the
(a) U-LAND shall acquire from WELLEX, shares of stock of AIR share purchase agreement, "U-LAND shall acquire from WELLEX,
PHILIPPINES INTERNATIONAL CORPORATION ("APIC") shares of stock of AIR PHILIPPINES INTERNATIONAL
equivalent to at least 35% of the outstanding capital stock of APIC, but in CORPORATION (‘APIC’) equivalent to at least 35% of the outstanding
any case, not less than 1,050,000,000 shares (the "APIC Shares"). capital stock of APIC, but in any case, not less than 1,050,000,000 shares
(b) U-LAND shall acquire from WELLEX, shares of stock of (the ‘APIC Shares’)."159
PHILIPPINE ESTATES CORPORATION ("PEC") equivalent to at least As for the PEC shares, Section 1 provides that respondent U-Land shall
35% of the outstanding capital stock of PEC, but in any case, not less than purchase from petitioner Wellex "shares of stock of PHILIPPINE
490,000,000 shares (the "PEC Shares"). ESTATES CORPORATION (‘PEC’) equivalent to at least 35% of the
(c) U-LAND shall enter into a joint development agreement with PEC to outstanding capital stock of PEC, but in any case, not less than
jointly pursue property development projects in the Philippines. 490,000,000 shares(the ‘PEC Shares’)."160
(d) U-LAND shall be given the option to acquire from WELLEX shares The use of the terms "at least 35% of the outstanding capital stock of
of stock of EXPRESS SAVINGS BANK ("ESB") up to 40% of the APIC, but in any case, not less than 1,050,000,000 shares" and "at least
outstanding capital stock of ESB (the "ESB Shares") under terms to be 35% of the outstanding capital stock of PEC, but in any case, not less than
mutually agreed.155 490,000,000 shares" means that the parties had yet to agree on the number
of shares of stock to be purchased.
The First Memorandum of Agreement contained the following
stipulations regarding the share purchase agreement: The need to execute a share purchase agreement before payment of the
purchase price of the shares is further shown by the clause, "[w]ithout
2. Acquisition of APIC and PEC Shares. - Within forty (40) days from prejudice to any subsequent agreement between the parties, the purchase
date hereof (unless extended by mutual agreement), U-LAND and price for the APIC Shares to be reflected in the [share purchase
WELLEX shall execute a Share Purchase Agreement ("SHPA") covering agreement] shall be... P0.30 per share and that for the PEC Shares at...
the acquisition by U-LAND of the APIC Shares and PEC Shares P0.65 per share."161 This phrase clearly shows that the final price of the
(collectively, the "Subject Shares"). Without prejudice to any subsequent shares of stock was to be reflected in the share purchase agreement. There
agreement between the parties, the purchase price for the APIC Shares to being no share purchase agreement executed, respondent U-Land was
be reflected in the SHPA shall be THIRTY CENTAVOS (P0.30) per under no obligation to begin payment or remittance of the purchase price
share and that for the PEC Shares at SIXTY FIVE CENTAVOS (P0.65) of the shares of stock.
per share.
Petitioner Wellex argues that the use of "upon" in Section 2162 of the First
The purchase price for the Subject Shares as reflected in the SHPA shall Memorandum of Agreement means that respondent U-Land must pay the
be paid in full upon execution of the SHPA against delivery of the Subject purchase price of the shares of stock in its entirety when they are
Shares. The parties may agree on such other terms and conditions transferred. This argument has no merit.
governing the acquisition of the Subject Shares to be provided in a
separate instrument. Article 1373 of the Civil Code provides:
The transfer of the Subject Shares shall be effected to U-LAND provided ART. 1373. If some stipulation of any contract should admit of several
that: (i) the purchase price reflected in the SHPA has been fully paid; (ii) meanings, it shall be understood as bearing that import which is most
the Philippine Securities & Exchange Commission (SEC) shall have adequate to render it effectual.
approved the issuance of the Subject Shares; and (iii) any required It is necessary for the parties to first agree on the final purchase price and
approval by the Taiwanese government of the acquisition by U-LAND of the number of shares of stock to be purchased before respondent U-Land
the Subject Shares shall likewise have been obtained.156 (Emphasis is obligated to pay or remit the entirety of the purchase price. Thus,
supplied) petitioner Wellex’s argument cannot be sustained since the parties to the
As for the joint development agreement, the First Memorandum of First Memorandum of Agreement were clearly unable to agree on all the
Agreement contained the following stipulation: terms concerning the share purchase agreement. It would be absurd for
petitioner Wellex to expect payment when respondent U-Land did not yet
4. Joint Development Agreement with PEC. – Simultaneous with the agree to the final amount to be paid for the totality of an indeterminate
execution of the SHPA, U-LAND and PEC shall execute a joint number of shares of stock.
development agreement ("JDA") to pursue property development projects
in the Philippines. The JDA shall cover specific housing and other real The third paragraph of Section 2163 provides that the "transfer of the
estate development projects as the parties shall agree. All profits derived Subject Shares" shall take place upon the fulfillment of certain conditions,
from the projects covered by the JDA shall be shared equally between such as full payment of the purchase price "as reflected in the [share
ULAND and PEC. U-LAND shall, not later than May 22, 1998, remit the purchase agreement]." The transfer of the shares of stock is different from
sum of US$3.0 million as initial funding for the aforesaid development the execution of the share purchase agreement. The transfer of the shares
projects against delivery by WELLEX of 57,000,000 shares of PEC as of stock requires full payment of the final purchase price. However, that
security for said amount in accordance with Section 9 final purchase price must be reflected in the share purchase agreement.
below.157 (Emphasis provided) The execution of the share purchase agreement will require the existence
of a final agreement.
Finally, the parties included the following stipulation in case of a failure
to agree on the terms of the share purchase agreement or the joint In its Answer with counterclaim before the trial court, petitioner Wellex
development agreement: argued that the payment of the shares of stock was to begin within the 40-
day period. Petitioner Wellex’s claim is not in any of the stipulations of
9. Validity. - In the event the parties are unable to agree on the terms of the contract. Its subsequent claim that respondent U-Land was actually
the SHPA and/or the JDA within forty (40) days from date hereof (or such required to remit a total of US$20.5 million is likewise bereft of basis
period as the parties shall mutually agree), this Memorandum of since there was no final purchase price of the shares of stock that was
Agreement shall cease to be effective and the parties released from their agreed upon, due to the failure of the parties to execute a share purchase
respective undertakings herein, except that WELLEX shall refund the agreement. In addition, the parties had yet to agree on the final number of
US$3.0 million provided under Section 4 within three (3) days therefrom, APIC shares and PEC shares that respondent U-Land would acquire from
otherwise U-LAND shall have the right to recover on the 57,000,000 PEC petitioner Wellex.
shares delivered to U-LAND under Section 4.158
Therefore, the understanding of the parties captured in the First
Section 2 of the First Memorandum of Agreement clearly provides that Memorandum of Agreement was to continue their negotiation to
the execution of a share purchase agreement containing mutually determine the price and number of the shares to be purchased. Had it been
agreeable terms and conditions must first be accomplished by the parties otherwise, the specific number or percentage of shares and its price should
before respondent U-Land purchases any of the shares owned by

already have been provided clearly and unambiguously. Thus, they agreed 3) The old contract must be extinguished.
to a 40-day period of negotiation.
4) There must be a valid new contract.
Section 9 of the First Memorandum of Agreement explicitly provides
that: Novation may also be express or implied. It is express when the new
obligation declares in unequivocal terms that the old obligation is
In the event the parties are unable to agree on the terms of the SHPA extinguished. It is implied when the new obligation is incompatible with
and/or the JDA within forty (40)days from date hereof (or such period as the old one on every point. The test of incompatibility is whether the two
the parties shall mutually agree), this Memorandum of Agreement shall obligations can stand together, each one with its own independent
cease to be effective and the parties released from their respective existence. (Emphasis from the original omitted)
undertakings herein . . .164
Because novation requires that it be clear and unequivocal, it is never
The First Memorandum of Agreement was, thus, an agreement to enter presumed, thus:
into a share purchase agreement. The share purchase agreement should
have been executed by the parties within 40 days from May 16, 1998, the In the civil law setting, novatiois literally construed as to make new. So it
date of the signing of the First Memorandum of Agreement. is deeply rooted in the Roman Law jurisprudence, the principle — novatio
non praesumitur— that novation is never presumed. At bottom, for
When the 40-day period provided for in Section 9 lapsed, the efficacy of novation to be a jural reality, its animus must be ever present, debitum
the First Memorandum of Agreement ceased. The parties were "released pro debito— basically extinguishing the old obligation for the new
from their respective undertakings." Thus, from June 25, 1998, the date one.169 (Emphasis from the original omitted, citations omitted)
when the 40-day period lapsed, the parties were no longer obliged to
negotiate with each other in order to enter into a share purchase Applying Arco, it is clear that there was no novation of the original
agreement. obligation.
However, Section 9 provides for another period within which the parties After the 40-day period, the parties did not enter into any subsequent
could still be required to negotiate. The clause "or such period as the written agreement that was couched in unequivocal terms. The transaction
parties shall mutually agree" means that the parties should agree on a of the First Memorandum of Agreement involved large amounts of money
period within which to continue negotiations for the execution of an from both parties. The parties sought to participate in the air travel
agreement. This means that after the 40-day period, the parties were still industry, which has always been highly regulated and subject to the
allowed to negotiate, provided that they could mutually agree on a new strictest commercial scrutiny. Both parties admitted that their counsels
period of negotiation. participated in the crafting and execution of the First Memorandum of
Agreement as well as in the efforts to enter into the share purchase
Based on the records and the findings of the lower courts, the parties were agreement. Any subsequent agreement would be expected to be clearly
never able to arrive at a specific period within which they would bind agreed upon with their counsels’ assistance and in writing, as well.
themselves to enter into an agreement. There being no other period
specified, the parties were no longer under any obligation to negotiate and Given these circumstances, there was no express novation.
enter into a share purchase agreement. Section 9 clearly freed them from There was also no implied novation of the original obligation. In Quinto
this undertaking. v. People:170
II [N]o specific form is required for an implied novation, and all that is
There was no express or implied prescribed by law would be an incompatibility between the two contracts.
novation of the First Memorandum While there is really no hard and fast rule to determine what might
of Agreement constitute to be a sufficient change that can bring about novation, the
touchstone for contrariety, however, would be an irreconcilable
The subsequent acts of the parties after the 40-day period were, therefore, incompatibility between the old and the new obligations.
independent of the First Memorandum of Agreement.
....
In its Appellant’s Brief before the Court of Appeals, petitioner Wellex
mentioned that there was an "implied partial objective or real . . . The test of incompatibility is whether or not the two obligations can
novation"165 of the First Memorandum of Agreement. Petititoner did not stand together, each one having its independent existence. If they cannot,
raise this argument of novation before this court. In Gayos v. they are incompatible and the latter obligation novates the first.
Gayos,166 this court held that "it is a cherished rule of procedure that a Corollarily, changes that breed incompatibility must be essential in nature
court should always strive to settle the entire controversy in a single and not merely accidental. The incompatibility must take place in any of
proceeding leaving no root or branch to bear the seeds of future the essential elements of the obligation, such as its object, cause or
litigation[.]"167 principal conditions thereof; otherwise, the change would be merely
modificatory in nature and insufficient to extinguish the original
Articles 1291 and 1292 of the Civil Code provides how obligations may obligation.171 (Citations omitted)
be modified:
There was no incompatibility between the original terms of the First
Article 1291. Obligations may be modified by: Memorandum of Agreement and the remittances made by respondent U-
Land for the shares of stock. These remittances were actually made with
(1) Changing their object or principal conditions; the view that both parties would subsequently enter into a share purchase
(2) Substituting the person of the debtor; agreement. It is clear that there was no subsequent agreement inconsistent
with the provisions of the First Memorandum of Agreement.
(3) Subrogating a third person in the rights of the creditor.
Thus, no implied novation took place. In previous cases,172 this court has
Article 1292. In order that an obligation may be extinguished by another consistently ruled that presumed novation or implied novation is not
which substitute the same, it is imperative that it be so declared in deemed favorable. In United Pulp and Paper Co., Inc. v. Acropolis Central
unequivocal terms, or that the old and the new obligations be on every Guaranty Corporation:173
point incompatible with each other.
Neither can novation be presumed in this case. As explained in Duñgo v.
In Arco Pulp and Paper Co. v. Lim,168 this court discussed the concept of Lopena:
novation:
"Novation by presumption has never been favored. To be sustained, it
Novation extinguishes an obligation between two parties when there is a need be established that the old and new contracts are incompatible in all
substitution of objects or debtors or when there is subrogation of the points, or that the will to novate appears by express agreement of the
creditor. It occurs only when the new contract declares so "in unequivocal parties or in acts of similar import."174 (Emphasis supplied)
terms" or that "the old and the new obligations be on every point
incompatible with each other." There being no novation of the First Memorandum of Agreement,
respondent U-Land is entitled to the return of the amount it remitted to
.... petitioner Wellex. Petitioner Wellex is likewise entitled to the return of
the certificates of shares of stock and titles of land it delivered to
For novation to take place, the following requisites must concur: respondent U-Land. This is simply an enforcement of Section 9 of the
1) There must be a previous valid obligation. First Memorandum of Agreement. Pursuant to Section 9, only the
execution of a final share purchase agreement within either of the periods
2) The parties concerned must agree to a new contract.

contemplated by this stipulation will justify the parties’ retention of what Articles 1380 and 1381, on the other hand, provide an enumeration of
they received or would receive from each other. rescissible contracts: ART. 1380. Contracts validly agreed upon may be
rescinded in the cases established by law. ART. 1381. The following
III contracts are rescissible:
Applying Article 1185 of the Civil (1) Those which are entered into by guardians whenever the wards whom
Code, the parties are obligated to they represent suffer lesion by more than one-fourth of the value of the
return to each other all they have things which are the object thereof;
received
(2) Those agreed upon in representation of absentees, if the latter suffer
Article 1185 of the Civil Code provides that: the lesion stated in the preceding number;
ART. 1185. The condition that some event will not happen at a (3) Those undertaken in fraud of creditors when the latter cannot in any
determinate time shall render the obligation effective from the moment other manner collect the claims due them;
the time indicated has elapsed, or if it has become evident that the event
cannot occur. (4) Those which refer to things under litigation if they have been entered
into by the defendant without the knowledge and approval of the litigants
If no time has been fixed, the condition shall be deemed fulfilled at such or of competent judicial authority;
time as may have probably been contemplated, bearing in mind the nature
of the obligation. (5) All other contracts specially declared by law to be subject to
rescission.
Article 1185 provides that if an obligation is conditioned on the
nonoccurrence of a particular event at a determinate time, that obligation Article 1383 expressly provides for the subsidiary nature of rescission:
arises (a) at the lapse of the indicated time, or(b) if it has become evident
that the event cannot occur. ART. 1383. The action for rescission is subsidiary; it cannot be instituted
except when the party suffering damage has no other legal means to
Petitioner Wellex and respondent U-Land bound themselves to negotiate obtain reparation for the same.
with each other within a 40-day period to enter into a share purchase
agreement. If no share purchase agreement was entered into, both parties Rescission itself, however, is defined by Article 1385:
would be freed from their respective undertakings. ART. 1385. Rescission creates the obligation to return the things which
It is the non-occurrence or non-execution of the share purchase agreement were the object of the contract, together with their fruits, and the price
that would give rise to the obligation to both parties to free each other with its interest; consequently, it can be carried out only when he who
from their respective undertakings. This includes returning to each other demands rescission can return whatever he may be obliged to restore.
all that they received in pursuit of entering into the share purchase Neither shall rescission take place when the things which are the object
agreement. of the contract are legally in the possession of third persons who did not
act in bad faith.
At the lapse of the 40-day period, the parties failed to enter into a share
purchase agreement. This lapse is the first circumstance provided for in In this case, indemnity for damages may be demanded from the person
Article 1185 that gives rise to the obligation. Applying Article 1185, the causing the loss. Gotesco Properties v. Fajardo175 categorically stated
parties were then obligated to return to each other all that they had that Article 1385 is applicable to Article 1191:
received in order to be freed from their respective undertakings. At this juncture, it is noteworthy to point out that rescission does not
However, the parties continued their negotiations after the lapse of the 40- merely terminate the contract and release the parties from further
day period. They made subsequent transactions with the intention to enter obligations to each other, but abrogates the contract from its inception and
into the share purchase agreement. Despite that, they still failed to enter restores the parties to their original positions as if no contract has been
into a share purchase agreement. Communication between the parties made. Consequently, mutual restitution, which entails the return of the
ceased, and no further transactions took place. benefits that each party may have received as a result of the contract, is
thus required. To be sure, it has been settled that the effects of rescission
It became evident that, once again, the parties would not enter into the as provided for in Article 1385 of the Code are equally applicable to cases
share purchase agreement. This is the second circumstance provided for under Article 1191, to wit:
in Article 1185. Thus, the obligation to free each other from their
respective undertakings remained. xxxx
As such, petitioner Wellex is obligated to return the remittances made by Mutual restitution is required in cases involving rescission under Article
respondent U-Land, in the same way that respondent U-Land is obligated 1191. This means bringing the parties back to their original status prior to
to return the certificates of shares of stock and the land titles to petitioner the inception of the contract. Article 1385 of the Civil Code provides,
Wellex. thus:
IV ART. 1385. Rescission creates the obligation to return the things which
were the object of the contract, together with their fruits, and the price
Respondent U-Land is praying for with its interest; consequently, it can be carried out only when he who
rescission or resolution under demands rescission can return whatever he may be obligated to restore.
Article 1191, and not rescission Neither shall rescission take place when the things which are the object
under Article 1381 of the contract are legally in the possession of third persons who did not
act in bad faith.
The arguments of the parties generally rest on the propriety of the
rescission of the First Memorandum of Agreement. This requires a In this case, indemnity for damages may be demanded from the person
clarification of rescission under Article 1191, and rescission under Article causing the loss.
1381 of the Civil Code.
This Court has consistently ruled that this provision applies to rescission
Article 1191 of the Civil Code provides: under Article 1191: [S]ince Article 1385 of the Civil Code expressly and
clearly states that "rescission creates the obligation to return the things
ART. 1191. The power to rescind obligations is implied in reciprocal which were the object of the contract, together with their fruits, and the
ones, in case one of the obligors should not comply with what is price with its interest," the Court finds no justification to sustain
incumbent upon him. petitioners’ position that said Article 1385 does not apply to rescission
The injured party may choose between the fulfillment and the rescission under Article 1191. x x x176(Emphasis from the original, citations
of the obligation, with the payment of damages in either case. He may omitted)
also seek rescission, even after he has chosen fulfillment, if the latter Rescission, as defined by Article 1385, mandates that the parties must
should become impossible. return to each other everything that they may have received as a result of
The court shall decree the rescission claimed, unless there be just cause the contract. This pertains to rescission or resolution under Article 1191,
authorizing the fixing of a period. as well as the provisions governing all forms of rescissible contracts.
This is understood to be without prejudice to the rights of third persons For Article 1191 to be applicable, however, there must be reciprocal
who have acquired the thing, in accordance with articles 1385 and 1388 prestations as distinguished from mutual obligations between or among
and the Mortgage Law. the parties. A prestation is the object of an obligation, and it is the conduct

required by the parties to do or not to do, or to give.177 Parties may be 4. Those which refer to things under litigation if they have been entered
mutually obligated to each other, but the prestations of these obligations into by the defendant without the knowledge and approval of the litigants
are not necessarily reciprocal. The reciprocal prestations must necessarily or of competent judicial authority; [and]
emanate from the same cause that gave rise to the existence of the
contract. This distinction is best illustrated by an established authority in 5. All other contracts specially declared by law to be subject to
civil law, the late Arturo Tolentino: rescission.183 (Citations omitted)
This article applies only to reciprocal obligations. It has no application to When a party seeks the relief of rescission as provided in Article 1381,
every case where two persons are mutually debtor and creditor of each there is no need for reciprocal prestations to exist between or among the
other. There must be reciprocity between them. Both relations must arise parties. All that is required is that the contract should be among those
from the same cause, such that one obligation is correlative to the other. enumerated in Article 1381 for the contract to be considered rescissible.
Thus, a person may be the debtor of another by reason of an agency, and Unlike Article 1191, rescission under Article 1381 must be a subsidiary
his creditor by reason of a loan. They are mutually obligated, but the action because of Article 1383.
obligations are not reciprocal. Reciprocity arises from identity of cause, Contrary to petitioner Wellex’s argument, this is not rescission under
and necessarily the two obligations are created at the same Article 1381 of the Civil Code. This case does not involve prejudicial
time.178(Citation omitted) transactions affecting guardians, absentees, or fraud of creditors. Article
Ang Yu Asuncion v. Court of Appeals179 provides a clear necessity of the 1381(3) pertains in particular to a series of fraudulent actions on the part
cause in perfecting the existence of an obligation: of the debtor who is in the process of transferring or alienating property
that can be used to satisfy the obligation of the debtor to the creditor.
An obligation is a juridical necessity to give, to do or not to do (Art. 1156, There is no allegation of fraud for purposes of evading obligations to other
Civil Code). The obligation is constituted upon the concurrence of the creditors. The actions of the parties involving the terms of the First
essential elements thereof, viz: (a) The vinculum juris or juridical tie Memorandum of Agreement do not fall under any of the enumerated
which is the efficient cause established by the various sources of contracts that may be subject of rescission.
obligations (law, contracts, quasi-contracts, delicts and quasi-delicts); (b)
the object which is the prestation or conduct, required to be observed (to Further, respondent U-Land is pursuing rescission or resolution under
give, to do or not to do); and (c) the subject-persons who, viewed from Article 1191, which is a principal action. Justice J.B.L. Reyes’ concurring
the demandability of the obligation, are the active (obligee) and the opinion in the landmark case of Universal Food Corporation v. Court of
passive (obligor) subjects.180 Appeals184gave a definitive explanation on the principal character of
resolution under Article 1191 and the subsidiary nature of actions under
The cause is the vinculum juris or juridical tie that essentially binds the Article 1381:
parties to the obligation. This linkage between the parties is a binding
relation that is the result of their bilateral actions, which gave rise to the The rescission on account of breach of stipulations is not predicated on
existence of the contract. injury to economic interests of the party plaintiff but on the breach of faith
by the defendant, that violates the reciprocity between the parties. It is not
The failure of one of the parties to comply with its reciprocal prestation a subsidiary action, and Article 1191 may be scanned without disclosing
allows the wronged party to seek the remedy of Article 1191. The anywhere that the action for rescission thereunder is subordinated to
wronged party is entitled to rescission or resolution under Article 1191, anything other than the culpable breach of his obligations by the
and even the payment of damages. It is a principal action precisely defendant. This rescission is a principal action retaliatory in character, it
because it is a violation of the original reciprocal prestation. being unjust that a party be held bound to fulfill his promises when the
other violates his. As expressed in the old Latin aphorism: "Non servanti
Article 1381 and Article 1383, on the other hand, pertain to rescission fidem, non est fides servanda." Hence, the reparation of damages for the
where creditors or even third persons not privy to the contract can file an breach is purely secondary.
action due to lesion or damage as a result of the contract. In Ong v. Court
of Appeals,181 this court defined rescission: On the contrary, in the rescission by reason of lesion or economic
prejudice, the cause of action is subordinated to the existence of that
Rescission, as contemplated in Articles 1380, et seq., of the New Civil prejudice, because it is the raison detre as well as the measure of the right
Code, is a remedy granted by law to the contracting parties and even to to rescind. Hence, where the defendant makes good the damages caused,
third persons, to secure the reparation of damages caused to them by a the action cannot be maintained or continued, as expressly provided in
contract, even if this should be valid, by restoration of things to their Articles 1383 and 1384. But the operation of these two articles is limited
condition at the moment prior to the celebration of the contract. It implies to the cases of rescission for lesión enumerated in Article 1381 of the Civil
a contract, which even if initially valid, produces a lesion or a pecuniary Code of the Philippines, and does not apply to cases under Article 1191.185
damage to someone.182(Citations omitted)
Rescission or resolution under Article 1191, therefore, is a principal
Ong elaborated on the confusion between "rescission" or resolution under action that is immediately available to the party at the time that the
Article 1191 and rescission under Article 1381: reciprocal prestation was breached. Article 1383 mandating that
On the other hand, Article 1191 of the New Civil Code refers to rescission rescission be deemed a subsidiary action cannot be applicable to
applicable to reciprocal obligations. Reciprocal obligations are those rescission or resolution under Article 1191. Thus, respondent U-Land
which arise from the same cause, and in which each party is a debtor and correctly sought the principal relief of rescission or resolution under
a creditor of the other, such that the obligation of one is dependent upon Article 1191.
the obligation of the other. They are to be performed simultaneously such The obligations of the parties gave rise to reciprocal prestations, which
that the performance of one is conditioned upon the simultaneous arose from the same cause: the desire of both parties to enter into a share
fulfillment of the other. Rescission of reciprocal obligations under Article purchase agreement that would allow both parties to expand their
1191 of the New Civil Code should be distinguished from rescission of respective airline operations in the Philippines and other neighboring
contracts under Article 1383. Although both presuppose contracts validly countries.
entered into and subsisting and both require mutual restitution when
proper, they are not entirely identical. V
While Article 1191 uses the term "rescission," the original term which The jurisprudence relied upon by
was used in the old Civil Code, from which the article was based, was petitioner Wellex is not applicable
"resolution." Resolution is a principal action which is based on breach of
a party, while rescission under Article 1383 is a subsidiary action limited The cases that petitioner Wellex cited to advance its arguments against
to cases of rescissionfor lesion under Article 1381 of the New Civil Code, respondent U-Land’s right to rescission are not in point.
which expressly enumerates the following rescissible contracts: Suria v. Intermediate Appellate Court is not applicable. In that case, this
1. Those which are entered into by guardians whenever the wards whom court specifically stated that the parties entered into a contract of sale, and
they represent suffer lesion by more than one fourth of the value of the their reciprocal obligations had already been fulfilled:186
things which are the object thereof; There is no dispute that the parties entered into a contract of sale as
2. Those agreed upon in representation of absentees, if the latter suffer the distinguished from a contract to sell.
lesion stated in the preceding number; By the contract of sale, the vendor obligates himself to transfer the
3. Those undertaken in fraud of creditors when the latter cannot in any ownership of and to deliver a determinate thing to the buyer, who in turn,
manner collect the claims due them; is obligated to pay a price certain in money or its equivalent (Art. 1458,
Civil Code). From the respondents’ own arguments, we note that they

have fully complied with their part of the reciprocal obligation. As a share purchase, the obligation of petitioner Wellex to transfer the shares
matter of fact, they have already parted with the title as evidenced by the of stock and of respondent U-Land to pay the price of these shares would
transfer certificate of title in the petitioners’ name as of June 27, 1975. have arisen.
The buyer, in turn, fulfilled his end of the bargain when he executed the Enforcement of Section 9 of the First Memorandum of Agreement has the
deed of mortgage. The payments on an installment basis secured by the same effect as rescission or resolution under Article 1191 of the Civil
execution of a mortgage took the place of a cash payment. In other words, Code. The parties are obligated to return to each other all that they may
the relationship between the parties is no longer one of buyer and seller have received as a result of the breach by petitioner Wellex of the
because the contract of sale has been perfected and consummated. It is reciprocal obligation. Therefore, the Court of Appeals did not err in
already one of a mortgagor and a mortgagee. In consideration of the affirming the rescission granted by the trial court.
petitioners’ promise to pay on installment basis the sum they owe the
respondents, the latter have accepted the mortgage as security for the VI
obligation. Petitioner Wellex was not guilty of
The situation in this case is, therefore, different from that envisioned in fraud but of violating Article 1159
the cited opinion of Justice J.B.L. Reyes. The petitioners’ breach of of the Civil Code
obligations is not with respect to the perfected contract of sale but in the In the issuance of the Writ of Preliminary Attachment, the lower court
obligations created by the mortgage contract. The remedy of rescission is found that petitioner Wellex committed fraud by inducing respondent U-
not a principal action retaliatory in character but becomes a subsidiary Land to purchase APIC shares and PEC shares and by leading the latter
one which by law is available only in the absence of any other legal to believe that APC was a subsidiary of APIC.
remedy. (Art. 1384, Civil Code). Foreclosure here is not only a remedy
accorded by law but, as earlier stated, is a specific provision found in the Determining the existence of fraud is not necessary in an action for
contract between the parties.187 (Emphasis supplied) rescission or resolution under Article 1191. The existence of fraud must
be established if the rescission prayed for is the rescission under Article
In Suria, this court clearly applied rescission under Article 1384 and not 1381.
rescission or resolution under Article 1191. In addition, the First
Memorandum of Agreement is not a contract to sell shares of stock. It is However, the existence of fraud is a question that the parties have raised
an agreement to negotiate with the view of entering into a share purchase before this court. To settle this question with finality, this court will
agreement. examine the established facts and determine whether petitioner Wellex
indeed defrauded respondent U-Land.
Villaflor v. Court of Appealsis not applicable either. In Villaflor, this
court held that non-payment of consideration of contracts only gave rise In Tankeh v. Development Bank of the Philippines,193 this court
to the right to sue for collection, but this non-payment cannot serve as enumerated the relevant provisions of the Civil Code on fraud:
proof of a simulated contract.188 The case did not rule that the vendor has
no obligation to deliver the thing sold if the buyer fails to fully pay the Fraud is defined in Article 1338 of the Civil Code as:
price required by the contract. In Villaflor: x x x fraud when, through insidious words or machinations of one of the
Petitioner insists that nonpayment of the consideration in the contracts contracting parties, the other is induced to enter into a contract which,
proves their simulation. We disagree. Nonpayment, at most, gives him without them, he would not have agreed to.
only the right to sue for collection. Generally, in a contract of sale, This is followed by the articles which provide legal examples and
payment of the price is a resolutory condition and the remedy of the seller illustrations of fraud.
is to exact fulfillment or, in case of a substantial breach, to rescind the
contract under Article 1191 of the Civil Code. However, failure to pay is ....
not even a breach, but merely an event which prevents the vendor’s
obligation to convey title from acquiring binding force.189 (Citations Art. 1340. The usual exaggerations in trade, when the other party had an
omitted) This court’s statement in Villaflor regarding rescission under opportunity to know the facts, are not in themselves fraudulent. (n)
Article 1191 was a mere obiter dictum. In Land Bank of the Philippines Art. 1341. A mere expression of an opinion does not signify fraud, unless
v. Suntay,190 this court discussed the nature of an obiter dictum: made by an expert and the other party has relied on the former’s special
An obiter dictum has been defined as an opinion expressed by a court knowledge. (n)
upon some question of law that is not necessary in the determination of Art. 1342. Misrepresentation by a third person does not vitiate consent,
the case before the court. It is a remark made, or opinion expressed, by a unless such misrepresentation has created substantial mistake and the
judge, in his decision upon a cause by the way, that is, incidentally or same is mutual. (n)
collaterally, and not directly upon the question before him, or upon a point
not necessarily involved in the determination of the cause, or introduced Art. 1343. Misrepresentation made in good faith is not fraudulent but may
by way of illustration, or analogy or argument. It does not embody the constitute error. (n) The distinction between fraud as a ground for
resolution or determination of the court, and is made without argument, rendering a contract voidable or as basis for an award of damages is
or full consideration of the point. It lacks the force of an adjudication, provided in Article 1344:
being a mere expression of an opinion with no binding force for purposes
of res judicata.191 (Citations omitted) In order that fraud may make a contract voidable, it should be serious and
should not have been employed by both contracting parties.
Petitioner Wellex’s reliance on Padilla v. Spouses Paredes and Spouses
Agustin v. Court of Appeals is also misplaced. In these cases, this court Incidental fraud only obliges the person employing it to pay damages.
held that there can be no rescission for an obligation that is nonexistent, (1270)194
considering that the suspensive condition that will give rise to the
Tankeh further discussed the degree of evidence needed to prove the
obligation has not yet happened. This is based on an allegation that the
existence of fraud:
contract involved is a contract to sell. In a contract to sell, the failure of
the buyer to pay renders the contract without effect. A suspensive [T]he standard of proof required is clear and convincing evidence. This
condition is one whose non-fulfillment prevents the existence of the standard of proof is derived from American common law. It is less than
obligation.192 Payment of the purchase price, therefore, constitutes a proof beyond reasonable doubt (for criminal cases) but greater than
suspensive condition in a contract to sell. Thus, this court held that non- preponderance of evidence (for civil cases). The degree of believability is
remittance of the full price allowed the seller to withhold the transfer of higher than that of an ordinary civil case. Civil cases only require a
the thing to be sold. preponderance of evidence to meet the required burden of proof.
However, when fraud is alleged in an ordinary civil case involving
In this case, the First Memorandum of Agreement is not a contract to sell.
contractual relations, an entirely different standard of proof needs to be
Entering into the share purchase agreement or the joint development
satisfied. The imputation of fraud in a civil case requires the presentation
agreement remained a stipulation that the parties themselves agreed to
of clear and convincing evidence. Mere allegations will not suffice to
pursue in the First Memorandum of Agreement.
sustain the existence of fraud. The burden of evidence rests on the part of
Based on the First Memorandum of Agreement, the execution of the share the plaintiff or the party alleging fraud. The quantum of evidence is such
purchase agreement was necessary to put into effect respondent U-Land’s that fraud must be clearly and convincingly shown.195
purchase of the shares of stock. This is the stipulation indicated in this
To support its allegation of fraud, Mr. Tseng, respondent U-Land’s
memorandum of agreement. There was no suspensive condition of full
witness before the trial court, testified that Mr. Gatchalian approached
payment of the purchase price needed to execute either the share purchase
respondent U-Land on two (2) separate meetings to propose entering into
agreement or the joint development agreement. Upon the execution of the

an agreement for joint airline operations in the Philippines. Thus, the Respondent U-Land was not bound
parties entered into the First Memorandum of Agreement. Respondent U- to pay the US$3 million under the
Land primarily anchors its allegation of fraud against petitioner Wellex joint development agreement
on the existence of the second preambular clause of the First
Memorandum of Agreement. The alleged failure of respondent U-Land to pay the amount of US$3
million to petitioner Wellex does not justify the actions of the latter in
In its Appellant’s Brief before the Court of Appeals, petitioner Wellex refusing to return the US$7,499,945.00.
admitted that "[t]he amount of US$7,499,945.00 was remitted for the
purchase of APIC and PEC shares."196 In that brief, it argued that the Article 1374 of the Civil Code provides that:
parties were already in the process of partially executing the First ART. 1374. The various stipulations of a contract shall be interpreted
Memorandum of Agreement. together, attributing to the doubtful ones that sense which may result from
As held in Tankeh, there must be clear and convincing evidence of fraud. all of them taken jointly.
Based on the established facts, respondent U-Land was unable to clearly The execution of the joint development agreement was contingent on the
convince this court of the existence of fraud. execution of the share purchase agreement. This is provided for in
1âwp hi1
Respondent U-Land had every reasonable opportunity to ascertain Section 4 of the First Memorandum of Agreement, which stated that the
whether APC was indeed a subsidiary of APIC. This is a multimillion execution of the two agreements is "[s]imultaneous."201 Thus, the failure
dollar transaction, and both parties admitted that the share purchase of the share purchase agreement’s execution would necessarily mean the
agreement underwent several draft creations. Both parties admitted the failure of the joint development agreement’s execution.
participation of their respective counsels in the drafting of the First Section 9 of the First Memorandum of Agreement provides that should
Memorandum of Agreement. Respondent U-Land had every opportunity the parties fail to execute the agreement, they would be released from their
to ascertain the ownership of the shares of stock. Respondent U-Land mutual obligations. Had respondent U-Land paid the US$3 million and
itself admitted that it was not contesting petitioner Wellex’s ownership of petitioner Wellex delivered the 57,000,000 PEC shares for the purpose of
the APIC shares or APC shares; hence, it was not contesting the existence the joint development agreement, they would have been obligated to
of the Second Memorandum of Agreement. Upon becoming aware of return these to each other.
petitioner Wellex’s representations concerning APIC’s ownership or
control of APC as a subsidiary, respondent U-Land continued to make Section 4 and Section 9 of the First Memorandum of Agreement must be
remittances totalling the amount sought to be rescinded. It had the option interpreted together. Since the parties were unable to agree on a final share
to opt out of negotiations after the lapse of the 40-day period. However, purchase agreement and there was no exchange of money or shares of
it proceeded to make the remittances to petitioner Wellex and proceed stock due to the continuing negotiations, respondent U-Land was no
with negotiations. longer obliged to provide the money for the real estate development
projects. The payment of the US$3 million was for pursuing the real estate
Respondent U-Land was not defrauded by petitioner Wellex to agree to development projects under the joint development agreement. There
the First Memorandum of Agreement. To constitute fraud under Article
1awp++i1
being no joint development agreement, the obligation to deliver the US$3

1338, the words and machinations must have been so insidious or million and the delivery of the PEC shares for that purpose were no longer
deceptive that the party induced to enter into the contract would not have incumbent upon the parties.
agreed to be bound by its terms if that party had an opportunity to be
aware of the truth.197 Respondent U-Land was already aware that APC VIII
was not a subsidiary of APIC after the 40-day period. Still, it agreed to be
bound by the First Memorandum of Agreement by making the Respondent U-Land was not
remittances from June 30 to September 25, 1998.198 Thus, petitioner obligated to exhaust the "securities"
Wellex’s failure to inform respondent U-Land that APC was not a given by petitioner Wellex
subsidiary of APIC when the First Memorandum of Agreement was being Contrary to petitioner Wellex’s assertion, there is no obligation on the
executed did not constitute fraud. part of respondent U-Land to exhaust the "securities" given by petitioner
However, the absence of fraud does not mean that petitioner Wellex is Wellex. No such meeting of the minds to create a guarantee or surety or
free of culpability. By failing to inform respondent U-Land that APC was any other form of security exists. The principal obligation is not a loan or
not yet a subsidiary of APIC at the time of the execution of the First an obligation subject to the conditions of sureties or guarantors under the
Memorandum of Agreement, petitioner Wellex violated Article 1159 of Civil Code. Thus, there is no need to exhaust the securities given to
the Civil Code. Article 1159 reads: respondent U-Land, and there is no need for a legal condition where
respondent U-Land should pursue other remedies.
ART. 1159. Obligations arising from contracts have the force of law
between the contracting parties and should be complied with in good Neither petitioner Wellex nor respondent U-Land stated that there was
faith. already a transfer of ownership of the shares of stock or the land titles.
Respondent U-Land itself maintained that the delivery of the shares of
In Ochoa v. Apeta,199 this court defined good faith: stock and the land titles were not in the nature of a pledge or
mortgage.202 It received the certificates of shares of stock and the land
Good faith is an intangible and abstract quality with no technical meaning titles with an understanding that the parties would subsequently enter a
or statutory definition, and it encompasses, among other things, an honest share purchase agreement. There being no share purchase agreement,
belief, the absence of malice and the absence of design to defraud or to respondent U-Land is obligated to return the certificates of shares of stock
seek an unconscionable advantage. It implies honesty of intention, and and the land titles to petitioner Wellex.
freedom from knowledge of circumstances which ought to put the holder
upon inquiry. The essence of good faith lies in an honest belief in the The parties are bound by the 40-day period provided for in the First
validity of one’s right, ignorance of a superior claim and absence of Memorandum of Agreement. Adherence by the parties to Section 9 of the
intention to overreach another.200 (Citations omitted) First Memorandum of Agreement has the same effect as the rescission or
resolution prayed for and granted by the trial court.
It was incumbent upon petitioner Wellex to negotiate the terms of the
pending share purchase agreement in good faith. This duty included Informal acts are prone to ambiguous legal interpretation. This will be
providing a full disclosure of the nature of the ownership of APIC in APC. based on the say-so of each party and is a fragile setting for good business
Unilaterally compelling respondent U-Land to remit money to finalize the transactions. It will contribute to the unpredictability of the market as it
transactions indicated in the Second Memorandum of Agreement cannot would provide courts with extraordinary expectations to determine the
constitute good faith. business actor's intentions. The parties appear to be responsible
businessmen who know that their expectations and obligations should be
The absence of fraud in a transaction does not mean that rescission under clearly articulated between them. They have the resources to engage legal
Article 1191 is not proper. This case is not an action to declare the First representation. Indeed, they have reduced their agreement in writing.
Memorandum of Agreement null and void due to fraud at the inception of
the contract or dolo causante. This case is not an action for fraud based Petitioner Wellex now wants this court to define obligations that do not
on Article 1381 of the Civil Code. Rescission or resolution under Article appear in these instruments. We cannot do so. This court cannot interfere
1191 is predicated on the failure of one of the parties in a reciprocal in the bargains, good or bad, entered into by the parties. Our duty is to
obligation to fulfill the prestation as required by that obligation. It is not affirm legal expectations, not to guarantee good business judgments.
based on vitiation of consent through fraudulent misrepresentations.
WHEREFORE, the petition is DENIED. The Decision of the Regional
VII Trial Court in Civil Case No. 99-1407 and the Decision of the Court of

Appeals in CA-G.R. CV No. 74850 are AFFIRMED. Costs against The delay in the completion of the project in accordance with the license
petitioner The Wellex Group, Inc. to sell also renders [petitioner] liable for the payment of administrative
fine.
SO ORDERED.
Wherefore, the decision of the Office below is set aside and a new
Swire Realty Development Corporation v. Yu decision is rendered as follows:
March 9,2015
1.Declaring the contract to sell as rescinded and directing [petitioner] to
G.R. No. 207133 refund to [respondent] the amount of P7,519,371.80 at 6% per annum
SWIRE REALTY DEVELOPMENT CORPORATION, Petitioner, from the time of extrajudicial demand on January 05, 2001: subject to
vs. computation and payment of the correct filing fee;
JAYNE YU, Respondent. 2.Directing [petitioner] to pay respondent attorney’s fees in the amount
DECISION of P20,000.00;
PERALTA, J.: 3.Directing [petitioner] to pay an administrative fine of P10,000.00 for

violation of Section 20, in relation to Section 38 of P.D. 957:
This is a Petition for Review on Certiorari under Rule 45 of the 1997
Rules of Civil Procedure which seeks to reverse and set aside the SO ORDERED.6
Decision1 dated January 24, 2013 and Resolution2 dated April 30, 2013 Petitioner moved for reconsideration, but the same was denied by the
of the Court of Appeals (CA) in CA-G.R. SP No. 121175. HLURB Board of Commissioners in a Resolution7 dated June 14, 2007.
The facts follow. Unfazed, petitioner appealed to the Office of the President (OP) on
Respondent Jayne Yu and petitioner Swire Realty Development August 7, 2007.
Corporation entered into a Contract to Sell on July 25, 1995 covering one In a Decision8 dated November 21, 2007, the OP, through then Deputy
residential condominium unit, specifically Unit 3007 of the Palace of Executive Secretary Manuel Gaite, dismissed petitioner’s appeal on the
Makati, located at P. Burgos comer Caceres Sts., Makati City, with an ground that it failed to promptly file its appeal before the OP. It held:
area of 137.30 square meters for the total contract price of P7,519,371.80,
payable in equal monthly installments until September 24, 1997. Records show that [petitioner] received its copy of the 30 March 2006
Respondent likewise purchased a parking slot in the same condominium HLURB Decision on 17 April 2006 and instead of filing an appeal, it
building for P600,000.00. opted first to file a Motion for Reconsideration on 28 April 2006 or eleven
(11) days thereafter. The said motion interrupted the 15-day period to
On September 24, 1997, respondent paid the full purchase price of appeal.
P7,519,371.80 for the unit while making a down payment of P20,000.00
for the parking lot. However, notwithstanding full payment of the contract On 23 July 2007, [petitioner] received the HLURB Resolution dated 14
price, petitioner failed to complete and deliver the subject unit on time. June 2007 denying the Motion for Reconsideration.
This prompted respondent to file a Complaint for Rescission of Contract
with Damages before the Housing and Land Use Regulatory Board Based on the ruling in United Overseas Bank Philippines, Inc. v. Ching
(HLURB) Expanded National Capital Region Field Office (ENCRFO). (486 SCRA 655), the period to appeal decisions of the HLURB Board of
Commissioners to the Office of the President is 15 days from receipt
On October 19, 2004, the HLURB ENCRFO rendered a thereof pursuant to Section 15 of P.D. No. 957 and Section 2 of P.D. No.
Decision3 dismissing respondent’s complaint. It ruled that rescission is 1344 which are special laws that provide an exception to Section 1 of
not permitted for slight or casual breach of the contract but only for such Administrative Order No. 18.
breaches as are substantial and fundamental as to defeat the object of the
parties in making the agreement. It disposed of the case as follows: Corollary thereto, par. 2, Section 1 of Administrative Order No. 18, Series
of 1987 provides that:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby
rendered ordering [petitioner] the following: The time during which a motion for reconsideration has been pending
with the Ministry/Agency concerned shall be deducted from the period of
1.To finish the subject unit as pointed out in the inspection Report appeal. But where such a motion for reconsideration has been filed during
office hours of the last day of the period herein provided, the appeal must
2.To pay [respondent] the following: be made within the day following receipt of the denial of said motion by
a.the amount of P100,000 as compensatory damages for the minor the appealing party (Underscoring supplied)
irreversible defects in her unit [respondent], or, in the alternative, conduct xxxx
the necessary repairs on the subject unit to conform to the intended
specifications; Accordingly, the [petitioner] had only four (4) days from receipt on 23
July 2007 of HLURB Resolution dated 14 June 2007, or until 27 July
b.moral damages of P20,000.00 2007 to file the Notice of Appeal before this Office. However, [petitioner]
c.Attorney’s fees of P20,000.00 filed its appeal only on 7 August 2007 or eleven (11) days late.
On the other hand, [respondent] is hereby directed to immediately update Thus, this Office need not delve on the merits of the appeal filed as the
her account insofar as the parking slot is concerned, without interest, records clearly show that the said appeal was filed out of time.
surcharges or penalties charged therein. WHEREFORE, premises considered, [petitioner]’s appeal is hereby
All other claims and counterclaims are hereby dismissed for lack of merit. DISMISSED, and the HLURB Decision dated 30 March 2006 and
HLURB Resolution dated 14 June 2007 are hereby AFFIRMED.
IT IS SO ORDERED.4
SO ORDERED.9
Respondent then elevated the matter to the HLURB Board of
Commissioners. Immediately thereafter, petitioner filed a motion for reconsideration
against said decision.
In a Decision5 dated March 30, 2006, the HLURB Board of
Commissioners reversed and set aside the ruling of the HLURB ENCRFO In a Resolution10 dated February 17, 2009, the OP, through then
and ordered the rescission of the Contract to Sell, ratiocinating: Executive Secretary Eduardo Ermita, granted petitioner’s motion and set
aside Deputy Executive Secretary Gaite’s decision. It held that after a
We find merit in the appeal. The report on the ocular inspection conducted careful and thorough evaluation and study of the records of the case, the
on the subject condominium project and subject unit shows that the OP was more inclined to agree with the earlier decision of the HLURB
amenities under the approved plan have not yet been provided as of May ENCRFO as it was more in accord with facts, law and jurisprudence
3, 2002, and that the subject unit has not been delivered to [respondent] relevant to the case. Thus:
as of August 28, 2002, which is beyond the period of development of
December 1999 under the license to sell. The delay in the completion of WHEREFORE, premises considered, the instant Motion for
the project as well as of the delay in the delivery of the unit are breaches Reconsideration is hereby GRANTED. The Decision and Resolution of
of statutory and contractual obligations which entitles [respondent] to the HLURB Third Division Board of Commissioners, dated March 30,
rescind the contract, demand a refund and payment of damages. 2006 and June 14, 2007, respectively, are hereby SET ASIDE, and the

HLURB ENCRFO Decision dated October 19, 2004 is hereby Records show that petitioner received a copy of the HLURB Board of
REINSTATED. Commissioners’ decision on April 17, 2006. Correspondingly, it had
fifteen days from April 17, 2006 within which to file its appeal or until
SO ORDERED.11 May 2, 2006. However, on April 28, 2006, or eleven days after receipt of
Respondent sought reconsideration of said resolution, however, the same the HLURB Board of Commissioner’s decision, it filed a Motion for
was denied by the OP in a Resolution12dated August 18, 2011. Reconsideration, instead of an appeal.
Consequently, respondent filed an appeal to the CA. Concomitantly, Section 1 of Administrative Order No. 1823 provides that
the time during which a motion for reconsideration has been pending with
In a Decision dated January 24, 2013, the CA granted respondent’s appeal the ministry or agency concerned shall be deducted from the period for
and reversed and set aside the Order of the OP. The fallo of its decision appeal. Petitioner received the HLURB Board Resolution denying its
reads: Motion for Reconsideration on July 23, 2007 and filed its appeal only on
August 7, 2007. Consequently therefore, petitioner had only four days
WHEREFORE, the Petition is hereby GRANTED. The assailed from July 23, 2007, or until July 27, 2007, within which to file its appeal
Resolution dated 17 February 2009 and Order dated 18 August 2011 of to the OP as the filing of the motion for reconsideration merely suspended
the Office of the President, in O.P. Case No. 07-H-283, are hereby the running of the 15-day period. However, records reveal that petitioner
REVERSED and SET ASIDE. Accordingly, the Decision dated 30 March only appealed to the OP on August 7, 2007, or eleven days late. Ergo, the
2006 and Resolution dated 14 June 2007 of the HLURB Board of HLURB Board of Commissioners’ decision had become final and
Commissioners in HLURB Case No. REM-A-050127-0014, are executory on account of the fact that petitioner did not promptly appeal
REINSTATED. with the OP.
SO ORDERED.13 In like manner, we find no cogent reason to exempt petitioner from the
Petitioner moved for reconsideration, however, the CA denied the same effects of its failure to comply with the rules.
in a Resolution dated April 30, 2013. In an avuncular case, we have held that while the dismissal of an appeal
Hence, the present petition wherein petitioner raises the following on purely technical grounds is concededly frowned upon, it bears
grounds to support its petition: emphasizing that the procedural requirements of the rules on appeal are
not
THE COURT OF APPEALS GRAVELY ERRED IN IGNORING THE
LEGAL PRECEPTS THAT: harmless and trivial technicalities that litigants can just discard and
disregard at will. Neither being a natural right nor a part of due process,
A.TECHNICAL RULES ARE NOT BINDING UPON the rule is settled that the right to appeal is merely a statutory privilege
ADMINISTRATIVE AGENCIES; and which may be exercised only in the manner and in accordance with the
provisions of the law.24
B.RESCISSION WILL BE ORDERED ONLY WHERE THE BREACH
COMPLAINED OF IS SUBSTANTIAL AS TO DEFEAT THE OBJECT Time and again, we have held that rules of procedure exist for a noble
OF THE PARTIES IN ENTERING INTO THE AGREEMENT.14 purpose, and to disregard such rules, in the guise of liberal construction,
would be to defeat such purpose. Procedural rules are not to be disdained
In essence, the issues are: (1) whether petitioner’s appeal was timely filed as mere technicalities. They may not be ignored to suit the convenience
before the OP; and (2) whether rescission of the contract is proper in the of a party.25 The reason for the liberal application of the rules before
instant case. quasi- judicial agencies cannot be used to perpetuate injustice and hamper
We shall resolve the issues in seriatim. the just resolution of the case. Neither is the rule on liberal construction a
license to disregard the rules of procedure.26
First, the period to appeal the decision of the HLURB Board of
Commissioners to the Office of the President has long been settled in the Thus, while there may be exceptions for the relaxation of technical rules
case of SGMC Realty Corporation v. Office of the President,15 as principally geared to attain the ends of justice, petitioner’s fatuous belief
reiterated in the cases of Maxima Realty Management and Development that it had a fresh 15-day period to elevate an appeal with the OP is not
Corporation v. Parkway Real Estate Development Corporation16and the kind of exceptional circumstance that merits relaxation.
United Overseas Bank Philippines, Inc. v. Ching.17 Second, Article 1191 of the Civil Code sanctions the right to rescind the
In the aforementioned cases, we ruled that the period to appeal decisions obligation in the event that specific performance becomes impossible, to
of the HLURB Board of Commissioners is fifteen (15) days from receipt wit:
thereof pursuant to Section 1518 of PD No. 95719 and Section 220 of PD Article 1191. The power to rescind obligations is implied in reciprocal
No. 134421which are special laws that provide an exception to Section 1 ones, in case one of the obligors should not comply with what is
of Administrative Order No. 18. Thus, in the SGMC Realty Corporation incumbent upon him.
v. Office of the President case, the Court explained:
The injured party may choose between the fulfillment and the rescission
As pointed out by public respondent, the aforecited administrative order of the obligation, with the payment of damages in either case. He may
allows aggrieved party to file its appeal with the Office of the President also seek rescission, even after he has chosen fulfillment, if the latter
within thirty (30) days from receipt of the decision complained of. should become impossible.
Nonetheless, such thirty-day period is subject to the qualification that
there are no other statutory periods of appeal applicable. If there are The court shall decree the rescission claimed, unless there be just cause
special laws governing particular cases which provide for a shorter or authorizing the fixing of a period.
longer reglementary period, the same shall prevail over the thirty-day
period provided for in the administrative order. This is in line with the This is understood to be without prejudice to the rights of third persons
rule in statutory construction that an administrative rule or regulation, in who have acquired the thing, in accordance with Articles 1385 and 1388
order to be valid, must not contradict but conform to the provisions of the and the Mortgage Law.
enabling law. Basic is the rule that the right of rescission of a party to an obligation
We note that indeed there are special laws that mandate a shorter period under Article 1191 of the Civil Code is predicated on a breach of faith by
of fifteen (15) days within which to appeal a case to public respondent. the other party who violates the reciprocity between them. The breach
First, Section 15 of Presidential Decree No. 957 provides that the contemplated in the said provision is the obligor’s failure to comply with
decisions of the National Housing Authority (NHA) shall become final an existing obligation. When the obligor cannot comply with what is
and executory after the lapse of fifteen (15) days from the date of receipt incumbent upon it, the obligee may seek rescission and, in the absence of
of the decision. Second, Section 2 of Presidential Decree No. 1344 states any just cause for the court to determine the period of compliance, the
that decisions of the National Housing Authority shall become final and court shall decree the rescission.27
executory after the lapse of fifteen (15) days from the date of its receipt. In the instant case, the CA aptly found that the completion date of the
The latter decree provides that the decisions of the NHA is appealable condominium unit was November 1998 pursuant to License No. 97-12-
only to the Office of the President. Further, we note that the regulatory 3202 dated November 2, 1997 but was extended to December 1999 as per
functions of NHA relating to housing and land development has been License to Sell No. 99-05-3401 dated May 8, 1999. However, at the time
transferred to Human Settlements Regulatory Commission, now known of the ocular inspection conducted by the HLURB ENCRFO, the unit was
as HLURB. x x x22 not yet completely finished as the kitchen cabinets and fixtures were not
yet installed and the agreed amenities were not yet available. Said
inspection report states:

May 3, 2002: THE FACTS
1.The unit of the [respondent] is Unit 3007, which was labeled as P2-07, Considering that there are no factual issues in this case, we adopt the
at the Palace of Makati, located at the corner of P. Burgos Street and findings of fact of the CA, as follows:
Caceres Street, Poblacion, Makati City. Based on the approved plans, the
said unit is at the 26th Floor. On May 23, 2002, Macaria Berot (or "Macaria") and spouses Rodolfo A.
Berot (or "appellant") and Lilia P. Berot (or "Lilia") obtained a loan from
2.During the time of inspection, the said unit appears to be completed Felipe C. Siapno (or "appellee") in the sum of ₱250,000.00, payable
except for the installation of kitchen cabinets and fixtures. within one year together with interest thereon at the rate of 2% per annum
from that date until fully paid.
3.Complainant pinpointed to the undersigned the deficiencies as follows:
As security for the loan, Macaria, appellant and Lilia (or "mortgagors",
a.The delivered unit has high density fiber (HDF) floorings instead of when collectively)mortgaged to appellee a portion, consisting of 147
narra wood parquet. square meters (or "contested property"), of that parcel of land with an area
b.The [petitioners] have also installed baseboards as borders instead of of 718 square meters, situated in Banaoang, Calasiao, Pangasinan and
pink porrino granite boarders. covered by Tax Declaration No. 1123 in the names of Macaria and her
husband Pedro Berot (or "Pedro"), deceased. On June 23, 2003, Macaria
c.Walls are newly painted by the respondent and the alleged obvious signs died.
of cladding could not be determined.
Because of the mortgagors’ default,appellee filed an action against them
d.Window opening at the master bedroom conforms to the approved for foreclosure of mortgageand damages on July 15, 2004 in the Regional
plans. As a result it leaves a 3 inches (sic) gap between the glass window Trial Court of Dagupan City (Branch 42). The action was anchored on the
and partitioning of the master’s bedroom. averment that the mortgagors failed and refused to pay the
abovementioned sum of ₱250,000.00 plus the stipulated interest of 2%
e.It was verified and confirmed that a square column replaced the round per month despite lapse of one year from May 23, 2002.
column, based on the approved plans.
In answer, appellant and Lilia (or "Berot spouses", when collectively
f.At the time of inspection, amenities such as swimming pool and change [referred to]) alleged that the contested property was the inheritance of
room are seen at the 31st floor only. These amenities are reflected on the the former from his deceased father, Pedro; that on said property is their
27th floor plan of the approved condominium plans. Health spa for men family home; that the mortgage is void as it was constituted over the
and women, Shiatsu Massage Room, Two-Level Sky Palace Restaurant family home without the consent of their children, who are the
and Hall for games and entertainments, replete with billiard tables, a bar, beneficiaries thereof; thattheir obligation is only joint; and that the lower
indoor golf with spectacular deck and karaoke rooms were not yet court has no jurisdiction over Macaria for the reason that no summons
provided by the [petitioner]. was served on her as she was already dead.
g.The [master’s] bedroom door bore sign of poor quality of workmanship With leave of court, the complaint was amended by substituting the estate
as seen below. of Macaria in her stead. Thus, the defendants named in the amended
h.The stairs have been installed in such manner acceptable to the complaint are now the "ESTATE OF MACARIA BEROT, represented
undersigned. by Rodolfo A. Berot, RODOLFO A. BEROT and LILIA P. BEROT".
i.Bathrooms and powder room have been installed in such manner After trial, the lower court rendered a decision dated June 30, 2006, the
acceptable to the undersigned.28 decretal portion of which reads:
From the foregoing, it is evident that the report on the ocular inspection WHEREFORE, the Court hereby renders judgment allowing the
conducted on the subject condominium project and subject unit shows foreclosure of the subject mortgage. Accordingly, the defendants are
that the amenities under the approved plan have not yet been provided as hereby ordered to pay to the plaintiff within ninety (90) days from notice
of May 3, 2002, and that the subject unit has not been delivered to of thisDecision the amount of ₱250,000.00 representing the principal
respondent as of August 28, 2002, which is beyond the period of loan, with interest at two (2%) percent monthly from February, 2004 the
development of December 1999 under the license to sell. month when they stopped paying the agreed interest up to satisfaction of
Incontrovertibly, petitioner had incurred delay in the performance of its the claim and 30% of the amount to be collected as and for attorney’s fees.
obligation amounting to breach of contract as it failed to finish and deliver Defendants are also assessed to pay the sum of ₱20,000.00 as litigation
the unit to respondent within the stipulated period. The delay in the expenses and another sum of ₱10,000.00 as exemplary damages for their
completion of the project as well as of the delay in the delivery of the unit refusal to pay their aforestated loan obligation. If within the aforestated
are breaches of statutory and contractual obligations which entitle 90-day period the defendants fail to pay plaintiff the above-mentioned
respondent to rescind the contract, demand a refund and payment of amounts, the sale of the property subject of the mortgage shall be made
damages. and the proceeds of the sale to be delivered to the plaintiff to cover the
debt and charges mentioned above, and after such payments the excess, if
WHEREFORE, premises considered, the instant petition is DENIED. The any shall be delivered to the defendants.
Decision dated January 24, 2013 and Resolution dated April 30, 2013 of
the Court of Appeals in CA-G.R. SP No. 121175 are hereby AFFIRMED, SO ORDERED.
with MODIFICATION that moral damages be awarded in the amount of Appellant filed a motion for reconsideration of the decision but it was
P20,000.00. denied per order dated September 8, 2006. Hence, this appeal interposed
SO ORDERED. by appellant imputing errors to the lower court in –
1. SUBSTITUTING AS DEFENDANT THE ESTATE OF MACARIA
J OINT O BLIGATION
BEROT WHICH HAS NO PERSONALITY TO SUE AND TO BE
Berot v. Siapno SUED;
G.R. No. 188944 July 9, 2014
2. APPOINTING RODOLFO BEROT AS A REPRESENTATIVE OF
SPOUSES RODOLFO BEROT AND LILIA BEROT, Petitioners, THE ESTATE OF THE DECEASED MACARIA BEROT TO THE
vs. PREJUDICE OF THE OTHER HEIRS, GRANTING FOR THE SAKE
FELIPE C. SIAPNO, Respondent. OF ARGUMENT THAT THE ESTATE OF MACARIA BEROT HAS A
PERSONALITY TO SUE AND BE SUED;
DECISION
3. NOT FINDING THE MORTGAGE NULL AND VOID, WHICH
SERENO, CJ:
WAS ENTERED INTOWITHOUT THE WRITTEN CONSENT OF
Before us is a Petition for Review on Certiorari under Rule 45 of the 1997 THE BENEFICIARIES OF THE FAMILY HOME WHO WERE OF
Revised Rules on Civil Procedure assailing the Court of Appeals (CA) LEGAL AGE;
Decision dated 29 January 2009 in CA-G.R. CV No. 87995.1 The assailed
4. MAKING DEFENDANTS LIABLE FOR THE ENTIRE
CA Decision affirmed with modification the Decision2 in Civil Case No.
OBLIGATION OF PH250,000.00, WHEN THE OBLIGATION IS
2004-0246-D issued by the Regional Trial Court (RTC), First Judicial
ONLY JOINT;
Region of Dagupan City, Branch 42. The RTC Decision allowed the
foreclosure of a mortgaged property despite the objections of petitioners
claiming, among others, that its registered owner was impleaded in the
suit despite being deceased.

5. IMPOSING ATTORNEY’S FEE(S) IN THE DISPOSITIVE such an action is a nullity and a motion to amend the party plaintiff will
PORTION WITHOUT MAKING A FINDING OF THE BASIS not, likewise, lie, there being nothing before the court to amend.
THEREOF IN THE BODY; and Considering that capacity to be sued isa correlative of the capacity to sue,
to the same extent, a decedent does not have the capacity to be sued and
6. IMPOSING EXEMPLARY DAMAGES AND LITIGATION may not be named a party defendant in a court action.
EXPENSES.
When respondent filed the foreclosure case on 15 June 2004 and
Appellant contends that the substitution of the estate of Macaria for her is impleaded Macaria Berot as respondent, the latter had already passed
improper as the estate has no legal personality to be sued.3 away the previous year, on 23 June 2003. In their Answer14 to the
On 29 January 2009, the CA, through its Seventh Division, promulgated Complaint, petitioners countered among others, that the trial court did not
a Decision that affirmed the RTC Decision but with modification where have jurisdiction over Macaria, because no summons was served on her,
it deleted the award of exemplary damages, attorney’s fees and expenses precisely for the reason that she had already died. Respondent then
of litigation. The appellate court explained in its ruling that petitioners amended his Complaint with leave of court and substituted the deceased
correctly argued that a decedent’s estate is not a legal entity and thus, Macaria by impleading her intestate estate and identified Rodolfo Berot
cannot sue or be sued. However,it noted that petitioners failed to object as the estate’s representative. Thereafter, the case proceeded on the merits
to the trial court’s exercise of jurisdiction over the estate of Macaria when at the trial, where this case originated and where the Decision was
the latter was impleaded by respondents by amending the original promulgated.
complaint.4 Adopting the rationale of the trial court on this matter, the CA It can be gleaned from the records ofthe case that petitioners did not object
held: when the estate of Macaria was impleaded as respondent in the
As aptly observed by the trial court: foreclosure case. Petitioner Rodolfo Berot did not object either when the
original Complaint was amended and respondent impleaded him as the
It may be recalled that when the plaintiff filed his Amended Complaint administrator of Macaria’s estate, in addition to his being impleaded as an
substituting the estate of Macaria Berot in place of Macaria Berot as party individual respondent in the case. Thus, the trial and appellate courts were
defendant, defendants made no objection thereto. Not even an amended correct in ruling that, indeed, petitionersimpliedly waived any objection
answer was filed by the defendants questioning the substitution of the to the trial court’s exercise of jurisdiction over their persons at the
estate of Macaria Berot. For these reasons, the defendants are deemed to inception of the case. In resolving the Motion for Reconsideration of
have waivedany objection on the personality of the estate of Macaria petitioners as defendants in Civil Case No. 2004-0246-D, the RTC was in
Berot. Section 1, Rule 9 of the Rules of Court provides that, ‘Defenses point when it ruled:
and objections not pleaded either in a motion to dismiss or in the answer
are deemed waived. (Order dated September 8, 2006)5 [Underscoring It may be recalled that when the plaintiff filed his Amended Complaint
supplied] substituting the estate of Macaria Berot in place of Macaria Berot as party
defendant, defendants made no objections thereto. Not even an amended
The CA also found the action of respondent to be procedurally correct answer was filed by the defendants questioning the substitution of the
under Section 7, Rule 86 of the Rules ofCourt, when it decided to estate of Macaria Berot. For these reasons, the defendants are deemed to
foreclose on the mortgage of petitioner and prove his deficiency as an have waivedany objection on the personality of the estate of Macaria
ordinary claim.6The CA did not make a categorical finding that the nature Berot. Section 1, Rule 9 of the Rules of Court provides that, "Defenses
of the obligation was joint or solidary on the part of petitioners.7 It neither and objections not pleaded either in a motion to dismiss or in the answer
sustained their argument that the mortgage was invalidfor having are deemed waived. x x x. (Underscoring ours)15
beenconstituted over a family home without the written consent of the
beneficiaries who were of legal age.8 However, it upheld their argument Indeed, the defense of lack of jurisdiction over the person of the defendant
that the award of exemplary damages and attorney’s fees in favor is one that may bewaived by a party to a case. In order to avail of that
ofrespondent was improper for lack of basis,9 when it ruled thus: defense, one must timely raise an objection before the court.16
WHEREFORE, the appealed decision is AFFIRMED with The records of the case show that on 9 November 2004, a hearing was
MODIFICATION in that the award of exemplary damages, attorney’s held on the Motion for Leave to Filefiled by respondent to have her
fees and expenses of litigation is DELETED. amended Complaint admitted. During the said hearing, the counsel for
petitioners did not interpose an objection to the said Motion for
SO ORDERED.10 Leave.17 On 18 March 2005, a hearing was held on respondent’s Motion
to Admit Amended Complaint, wherein counselfor petitioners again
Petitioners moved for the reconsideration of the CA Decision, but their failed to interpose any objection.18 Thus, the trial court admitted
motion was denied through a Resolution dated 9 July 2009.11 Aggrieved respondent’s Amended Complaint and ordered thata copy and a summons
by the denial of their Motion for Reconsideration, they now come to us be served anew on petitioners.19
through a Petition for Review on Certiorari under Rule 45, proffering
purely questions of law. In an Order20 dated 14 April 2005, the RTC noted that petitioners received
the summons and the copy of the amended Complaint on 3 February 2005
THE ISSUES and yet they did not file an Answer. During the trial on the merits that
The following are the issues presented by petitioners for resolution by this followed, petitioners failed to interpose any objection to the trial court’s
Court: exercise of jurisdiction over the estate of Macaria Berot. Clearly, their full
participation in the proceedings of the case can only be construed as a
The Court of Appeals erred in: waiver of any objection to or defense of the trial court’s supposed lack of
jurisdiction over the estate.
1. Holding that the intestate estate of Macaria Berot could be a proper
party by waiver expressly or impliedly by voluntary appearance; In Gonzales v. Balikatan Kilusang Bayan sa Panlalapi, Inc.,21 we held that
a party’s appearance in a case is equivalent to a service of summons and
2. In not holding that the obligation is joint12 that objections must be timely raised:
THE COURT’S RULING In this regard, petitioners should be reminded of the provision in the Rules
We DENYthe Petition for lack of merit. of Court that a defendant’svoluntary appearance in an action shall be
equivalent to service of summons. Further, the lack of jurisdiction over
Petitioners were correct when they argued that upon Macaria Berot’s the person of the defendant may be waived either expressly or impliedly.
death on 23 June 2003, her legal personality ceased, and she could no When a defendant voluntarily appears, he is deemed to have submitted
longer be impleaded as respondent in the foreclosure suit. It is also true himself to the jurisdiction of the court. If he does not wish to waive this
that her death opened to her heirs the succession of her estate, which in defense, he must do so seasonably by motion, and object thereto.
this case was an intestate succession. The CA, in fact, sustained
petitioners’ position that a deceased person’s estate has no legal It should be noted that Rodolfo Berot is the son of the deceased
personality to be sued. Citing the Court’s ruling in Ventura v. Macaria22 and as such, he is a compulsory heir of his mother. His
Militante,13 it correctly ruled that a decedent does not have the capacity substitution is mandated by Section 16, Rule 3 of the Revised Rules of
to be sued and may not be madea defendant in a case: Court. Notably, there is no indication inthe records of the case that he had
other siblings who would have been his co-heirs. The lower and appellate
A deceased person does not have suchlegal entity asis necessary to bring courts veered from the real issue whether the proper parties have been
action so much so that a motion to substitute cannot lie and should be impleaded. They instead focused on the issue whether there was need for
denied by the court. An action begun by a decedent’s estate cannot be said a formal substitution when the deceasedMacaria, and later its estate, was
to have been begun by a legal person, since an estate is not a legal entity; impleaded. As the compulsory heir of the estate of Macaria, Rodolfo is
the real party in interest in accordance with Section 2, Rule 3 of the

Revised Rules of Court. At the time of the filing of the complaint for on substitution of heirs in this light, the Court of Appeals,in the resolution
foreclosure, as well as the time it was amended to implead the estate of denying petitioner's motion for reconsideration, thus expounded:
Macaria, it is Rodolfo – as heir – who is the real party in interest. He
stands to be benefitted or injured by the judgment in the suit. Although the jurisprudential rule is that failure to make the substitution is
a jurisdictional defect, it should be noted that the purpose of this
Rodolfo is also Macaria’s co-defendant in the foreclosure proceedings in procedural rule is to comply with due process requirements. The original
his own capacity as co-borrower ofthe loan. He participated in the party having died, he could not continue, to defend himself in court
proceedings of the case, from the initial hearing of the case, and most despite the fact that the action survived him. For the case to continue, the
particularly when respondent filed his amended complaint impleading the real party in interest must be substituted for the deceased. The real party
estate of Macaria. When respondent amended his complaint, Rodolfo did in interest is the one who would beaffected by the judgment. It could be
not file an amended Answer nor raise any objection, even if he was also the administrator or executor or the heirs. In the instant case, the heirs are
identified therein as the representative ofthe estate of the deceased the proper substitutes. Substitution gives them the opportunity to continue
Macaria. The lower court noted this omission by Rodolfo in its Order the defense for the deceased. Substitution is important because such
dated 8 September 2006 ruling on his Motionfor Reconsideration to the opportunity to defend is a requirement to comply with due process. Such
said court’s Decision dated 30 June 2006. Thus, his continued substitution consists of making the proper changes in the caption of the
participation in the proceedings clearly shows that the lower court case which may be called the formal aspect of it. Such substitution also
acquired jurisdiction over the heir of Macaria. includes the process of letting the substitutes know that they shall be
bound by any judgment in the case and that they should therefore actively
In Regional Agrarian Reform Adjudication Board v. Court of participate in the defense of the deceased. This part may be called the
Appeals,23 we ruled that: substantive aspect. This is the heart of the procedural rule because this
[W]e have to point out that the confusion in this case was brought about substantive aspect is the one that truly embodies and gives effect to the
by respondents themselves when they included in their complaint two purpose of the rule. It is this court's view that compliance with the
defendants who were already dead. Instead of impleading the decedent’s substantive aspect of the rule despite failure to comply with the formal
heirs and current occupants of the landholding, respondents filed their aspect may he considered substantial compliance.Such is the situation in
complaint against the decedents, contrary to the following provision of the case at bench because the only inference that could be deduced from
the 1994 DARAB Rules of Procedure: the following facts was that there was active participation of the heirs in
the defense ofthe deceased after his death:
RULE V
1. The original lawyer did not stop representing the deceased. It would be
PARTIES, CAPTION AND SERVICE OF PLEADINGS absurd to think that the lawyer would continue to represent somebody if
nobody is paying him his fees. The lawyer continued to represent him in
SECTION 1. Parties in Interest. Every agrarian case must be initiated and the litigation before the trial court which lasted for about two more years.
defended inthe name of the real party in interest. x x x. A dead party cannot pay him any fee. With or without payment of fees,
A real party in interest is defined as "the party who stands to be benefited the fact remains that the said counsel was allowed by the petitioner who
or injured by the judgment in the suit, or the party entitled to the avails of was well aware of the instant litigation to continue appearing as counsel
a suit." The real parties in interest, at the time the complaint was filed, until August 23, 1993 when the challenged decision was rendered;
were no longer the decedents Avelino and Pedro, but rather their 2. After the death of the defendant, his wife, who is the petitioner in the
respective heirs who are entitled to succeed to their rights (whether as instant case, even testified in the court and declared that her husband is
agricultural lessees or as farmers-beneficiaries) under our agrarian laws. already deceased. She knew therefore that there was a litigation against
They are the ones who, as heirs of the decedents and actualtillers, stand her husband and that somehow her interest and those of her children were
to be removed from the landholding and made to pay back rentals to involved;
respondents if the complaint is sustained.
3. This petition for annulmentof judgment was filed only after the appeal
Since respondents failed to correcttheir error (they did not amend the was decided against the defendant on April 3, 1995, more than one and a
erroneous caption of their complaint to include the real parties-ininterest), half year (sic) after the decision was rendered (even if we were to give
they cannot be insulated from the confusion which it engendered in the credence to petitioner's manifestation that she was notaware that an appeal
proceedings below. But at any rate, notwithstanding the erroneous caption had been made);
and the absence of a formal substitution of parties, jurisdiction was
acquired over the heirs of Avelino and Pedro who voluntarily participated 4. The Supreme Court has already established that there is such a thing as
in the proceedings below. This Court has ruled that formal substitution of jurisdiction byestoppel. This principle was established even in cases
parties is not necessary when the heirs themselves voluntarily appeared, where jurisdiction over the subject matter was being questioned. In the
participated, and presented evidence during the proceedings. instant case, only jurisdiction over the person of the heirs is in issue.
Jurisdiction over the person may be acquired by the court more easily than
As such, formal substitution of the parties in this case is not necessary. jurisdiction over the subject matter. Jurisdiction over the person may be
In Vda. De Salazar v. Court of Appeals24 we ruled that a formal acquired by the simple appearance of the person in court as did herein
substitution of the heirs in place of the deceased is no longer necessary if petitioner appear;
the heirs continued to appear and participated in the proceedings of the 5. The case cited by the herein petitioner (Ferreria et al. vs. Manuela Ibarra
case. In the cited case, we explained the rationale of our ruling and related vda. de Gonzales, etal.) cannot be availed of to support the said
it to the due process issue, to wit: petitioner's contention relative to nonacquisition of jurisdiction by the
We are not unaware of several cases where we have ruled that a party court. In that case, Manolita Gonzales was not served notice and, more
having died in an action that survives, the trial held by the court without importantly, she never appeared in court, unlike herein petitioner who
appearance of the deceased's legal representative or substitution of heirs appeared and even testified regarding the death of her husband.
and the judgment rendered after such trial, are null and void because the In this case, Rodolfo’s continued appearance and participation in the
court acquired no jurisdiction over the persons of the legal representatives proceedings of the case dispensed with the formal substitution of the heirs
or of the heirs upon whom the trial and the judgment would be binding. in place of the deceased Macaria. The failure of petitioners to timely
This general rule notwithstanding, in denying petitioner's motion for object to the trial court’s exercise of jurisdiction over the estate of Macaria
reconsideration, the Court of Appeals correctly ruled that formal Berot amounted to a waiver on their part. Consequently, it would be too
substitution of heirs is not necessary when the heirs themselves late for them at this point to raise that defense to merit the reversal of the
voluntarily appeared, participated in the case and presented evidence in assailed decision of the trial court. We are left with no option other than
defense of deceased defendant. Attending the case at bench, after all, are to sustain the CA’s affirmation of the trial court’s Decision on this matter.
these particular circumstances which negate petitioner's belated and
seemingly ostensible claim of violation of her rights to due process. We On the second issue of whether the nature of the loan obligation
should not lose sight of the principle underlying the general rule that contracted by petitioners is joint or solidary, we rule that it is joint.
formal substitution of heirs must be effectuated for them to be bound by
a subsequent judgment. Such had been the general rule established not Under Article 1207 of the Civil Code of the Philippines, the general rule
because the rule on substitution of heirs and that on appointment of a legal is that when there is a concurrence of two or more debtors under a single
representative are jurisdictional requirements per se but because non- obligation, the obligation is presumed to be joint:
compliance therewith results in the undeniable violation of the right to Art. 1207. The concurrence of two or more creditors or of two or more
due process of those who, though not duly notified of the proceedings, are debtors in one and the same obligation does not imply that each one of
substantially affected by the decision rendered therein. Viewing the rule the former has a right to demand, orthat each one of the latter is bound to
render, entire compliance with the prestations. There is a solidary liability

only when the obligation expressly so states, or when the law or the nature validly mortgaged the property to secure a loan obligation, and given our
of the obligation requires solidarity. ruling in this case that the obligation is joint, her intestate estate is liable
to a third of the loan contracted during her lifetime. Thus, the foreclosure
The law further provides that to consider the obligation as solidary in of the property may proceed, but would be answerable only to the extent
nature, it must expressly be stated as such, or the law or the nature of the of the liability of Macaria to respondent. WHEREFORE, the CA Decision
obligation itself must require solidarity. In PH Credit Corporation v. in CA-G.R. CV No. 87995 sustaining the RTC Decision in Civil Case No.
Court of Appeals,25we held that: 2004-0246-D is hereby AFFIRMED with the MODIFICATION that the
A solidaryobligation is one in which each of the debtors is liable for the obligation of petitioners and the estate of Macaria Berot is declared as
entire obligation, and each of the creditors is entitled to demand the joint in nature.
satisfaction of the whole obligation from any or all of the debtors. On the SO ORDERED.
other hand, a jointobligation is one in which each debtors is liable only
for a proportionate part of the debt, and the creditor is entitled to demand A LTERNATIVE O BLIGATION
only a proportionate part of the credit from each debtor. The Arco Pulp and Paper Co., Inc. v. Lim
wellentrenched rule is that solidary obligations cannot be inferred lightly. G.R. No. 206806 June 25, 2014
They must be positively and clearly expressed. A liability is solidary
"only when the obligation expressly so states, when the law so provides ARCO PULP AND PAPER CO., INC. and CANDIDA A.
or when the nature of the obligation so requires." SANTOS, Petitioners,
vs.
In the instant case, the trial court expressly ruled that the nature of DAN T. LIM, doing business under the name and style of QUALITY
petitioners’ obligation to respondent was solidary.26 It scrutinized the real PAPERS & PLASTIC PRODUCTS ENTERPRISES, Respondent.
estate mortgage and arrived at the conclusion that petitioners had bound
themselves to secure their loan obligation by way of a realestate mortgage DECISION
in the event that they failed to settle it.27But such pronouncement was not
expressly stated in its 30 June 2006 Decision. This was probably the LEONEN, J.:
reason why, when the trial court Decision was appealed to it, the CA did Novation must be stated in clear and unequivocal terms to extinguish an
not squarely address the issue when the latter ruled that: obligation. It cannot be presumed and may be implied only if the old and
It is noteworthy that the appealed decision makes no pronouncement that new contracts are incompatible on every point.
the obligation of the mortgagors is solidary; and that said decision has not Before us is a petition for review on certiorari1 assailing the Court of
been modifiedby the trial court. Hence, it is unnecessary for US to make Appeals’ decision2 in CA-G.R. CV No. 95709, which stemmed from a
a declaration on the nature of the obligation of the complaint3 filed in the Regional Trial Court of Valenzuela City, Branch
mortgagors.28 However, a closer scrutiny of the records would reveal that 171, for collection of sum of money.
the RTC expressly pronounced that the obligation of petitioners to the
respondent was solidary. In resolving petitioners’ Motion for The facts are as follows:
Reconsideration to its 30 June 2006 Decision, the trial court categorically
ruled that: Dan T. Lim works in the business of supplying scrap papers, cartons, and
other raw materials, under the name Quality Paper and Plastic Products,
Defendants [sic] obligation with plaintiff is solidary. A careful scrutiny Enterprises, to factories engaged in the paper mill business.4 From
of the Real Estate Mortgage(Exh. "A") will show that all the defendants, February 2007 to March 2007, he delivered scrap papers worth
for a single loan, bind themselves to cede, transfer, and convey by way of 7,220,968.31 to Arco Pulp and Paper Company, Inc. (Arco Pulp and
real estate mortgage all their rights, interest and participation in the Paper) through its Chief Executive Officer and President, Candida A.
subject parcelof land including the improvements thereon in favor of the Santos.5 The parties allegedly agreed that Arco Pulp and Paper would
plaintiff, and warrant the same to be free from liens and encumbrances, either pay Dan T. Lim the value of the raw materials or deliver to him
and that should theyfail to perform their obligation the mortgage will be their finished products of equivalent value.6
foreclosed. From this it can be gleaned that each of the defendants
obligated himself/herself to perform the said solidary obligation with the Dan T. Lim alleged that when he delivered the raw materials, Arco Pulp
plaintiff.29 We do not agree with this finding by the trial court. and Paper issued a post-dated check dated April 18, 20077 in the amount
of 1,487,766.68 as partial payment, with the assurance that the check
We have scoured the records of the case, but found no record of the would not bounce.8 When he deposited the check on April 18, 2007, it
principal loan instrument, except an evidence that the realestate mortgage was dishonored for being drawn against a closed account.9
was executed by Macaria and petitioners. When petitioner Rodolfo Berot
testified in court, he admitted that heand his mother, Macaria had On the same day, Arco Pulp and Paper and a certain Eric Sy executed a
contracted the loan for their benefit: memorandum of agreement10 where Arco Pulp and Paper bound
themselves to deliver their finished products to Megapack Container
Q: On the Real Estate Mortgage, you and your mother obtained a loan Corporation, owned by Eric Sy, for his account. According to the
from Mr. Siapno in the amountof ₱250,000.00, now as between you and memorandum, the raw materials would be supplied by Dan T. Lim,
your mother whose loan is that? through his company, Quality Paper and Plastic Products. The
memorandum of agreement reads as follows:
A: It is the loan of my mother and myself, sir.30
Per meeting held at ARCO, April 18, 2007, it has been mutually agreed
The testimony of petitioner Rodolfo only established that there was that between Mrs. Candida A. Santos and Mr. Eric Sy that ARCO will deliver
existing loan to respondent, and that the subject property was mortgaged 600 tons Test Liner 150/175 GSM, full width 76 inches at the price of
as security for the said obligation. His admission of the existence of the ₱18.50 per kg. to Megapack Container for Mr. Eric Sy’s account.
loan made him and his late mother liable to respondent. We have Schedule of deliveries are as follows:
examined the contents of the real estate mortgagebut found no indication
in the plain wordings of the instrument that the debtors – the late Macaria ....
and herein petitioners – had expressly intended to make their obligation
to respondent solidary in nature. Absent from the mortgage are the It has been agreed further that the Local OCC materials to be used for the
express and indubitable terms characterizing the obligation as solidary. production of the above Test Liners will be supplied by Quality Paper &
Respondent was not able to prove by a preponderance of evidence that Plastic Products Ent., total of 600 Metric Tons at ₱6.50 per kg. (price
petitioners' obligation to him was solidary. Hence, applicable to this case subject to change per advance notice). Quantity of Local OCC delivery
is the presumption under the law that the nature of the obligation herein will be based on the quantity of Test Liner delivered to Megapack
can only be considered as joint. It is incumbent upon the party alleging Container Corp. based on the above production schedule.11
otherwise to prove with a preponderance of evidence that petitioners'
On May 5, 2007, Dan T.Lim sent a letter12 to Arco Pulp and Paper
obligation under the loan contract is indeed solidary in character.31
demanding payment of the amount of 7,220,968.31, but no payment was
The CA properly upheld respondent's course of action as an availment of made to him.13
the second remedy provided under Section 7, Rule 86 of the 1997 Revised
Dan T. Lim filed a complaint14 for collection of sum of money with prayer
Rules of Court.32 Under the said provision for claims against an estate, a
for attachment with the Regional Trial Court, Branch 171, Valenzuela
mortgagee has the legal option to institute a foreclosure suit and to recover
City, on May 28, 2007. Arco Pulp and Paper filed its answer15 but failed
upon the security, which is the mortgaged property.
to have its representatives attend the pre-trial hearing. Hence, the trial
During her lifetime, Macaria was the registered owner of the mortgaged court allowed Dan T. Lim to present his evidence ex parte.16
property, subject of the assailed foreclosure. Considering that she had

On September 19, 2008, the trial court rendered a judgment in favor of The choice of the debtor must also be communicated to the creditor who
Arco Pulp and Paper and dismissed the complaint, holding that when must receive notice of it since: The object of this notice is to give the
Arco Pulp and Paper and Eric Sy entered into the memorandum of creditor . . . opportunity to express his consent, or to impugn the election
agreement, novation took place, which extinguished Arco Pulp and made by the debtor, and only after said notice shall the election take legal
Paper’s obligation to Dan T. Lim.17 effect when consented by the creditor, or if impugned by the latter, when
declared proper by a competent court.34
Dan T. Lim appealed18 the judgment with the Court of Appeals.
According to him, novation did not take place since the memorandum of According to the factual findings of the trial court and the appellate court,
agreement between Arco Pulp and Paper and Eric Sy was an exclusive the original contract between the parties was for respondent to deliver
and private agreement between them. He argued that if his name was scrap papers worth ₱7,220,968.31 to petitioner Arco Pulp and Paper. The
mentioned in the contract, it was only for supplying the parties their payment for this delivery became petitioner Arco Pulp and Paper’s
required scrap papers, where his conformity through a separate contract obligation. By agreement, petitioner Arco Pulp and Paper, as the debtor,
was indispensable.19 had the option to either (1) pay the price or(2) deliver the finished
products of equivalent value to respondent.35
On January 11, 2013, the Court of Appeals20 rendered a
decision21 reversing and setting aside the judgment dated September 19, The appellate court, therefore, correctly identified the obligation between
2008 and ordering Arco Pulp and Paper to jointly and severally pay Dan the parties as an alternative obligation, whereby petitioner Arco Pulp and
T. Lim the amount of ₱7,220,968.31 with interest at 12% per annum from Paper, after receiving the raw materials from respondent, would either pay
the time of demand; ₱50,000.00 moral damages; ₱50,000.00 exemplary him the price of the raw materials or, in the alternative, deliver to him the
damages; and ₱50,000.00 attorney’s fees.22 finished products of equivalent value.
The appellate court ruled that the facts and circumstances in this case When petitioner Arco Pulp and Paper tendered a check to respondent in
clearly showed the existence of an alternative obligation.23 It also ruled partial payment for the scrap papers, they exercised their option to pay the
that Dan T. Lim was entitled to damages and attorney’s fees due to the price. Respondent’s receipt of the check and his subsequent act of
bad faith exhibited by Arco Pulp and Paper in not honoring its depositing it constituted his notice of petitioner Arco Pulp and Paper’s
undertaking.24 option to pay.
Its motion for reconsideration25 having been denied,26 Arco Pulp and This choice was also shown by the terms of the memorandum of
Paper and its President and Chief Executive Officer, Candida A. Santos, agreement, which was executed on the same day. The memorandum
bring this petition for review on certiorari. declared in clear terms that the delivery of petitioner Arco Pulp and
Paper’s finished products would be to a third person, thereby
On one hand, petitioners argue that the execution of the memorandum of extinguishing the option to deliver the finished products of equivalent
agreement constituted a novation of the original obligation since Eric Sy value to respondent.
became the new debtor of respondent. They also argue that there is no
legal basis to hold petitioner Candida A. Santos personally liable for the The memorandum of
transaction that petitioner corporation entered into with respondent. The agreement did not constitute
Court of Appeals, they allege, also erred in awarding moral and a novation of the original
exemplary damages and attorney’s fees to respondent who did not show contract
proof that he was entitled to damages.27
The trial court erroneously ruled that the execution of the memorandum
Respondent, on the other hand, argues that the Court of Appeals was of agreement constituted a novation of the contract between the parties.
correct in ruling that there was no proper novation in this case. He argues When petitioner Arco Pulp and Paper opted instead to deliver the finished
that the Court of Appeals was correct in ordering the payment of products to a third person, it did not novate the original obligation
7,220,968.31 with damages since the debt of petitioners remains between the parties.
unpaid.28 He also argues that the Court of Appeals was correct in holding
petitioners solidarily liable since petitioner Candida A. Santos was "the The rules on novation are outlined in the Civil Code, thus:
prime mover for such outstanding corporate liability."29 In their reply, Article 1291. Obligations may be modified by:
petitioners reiterate that novation took place since there was nothing in
the memorandum of agreement showing that the obligation was (1) Changing their object or principal conditions;
alternative. They also argue that when respondent allowed them to deliver
the finished products to Eric Sy, the original obligation was novated.30 (2) Substituting the person of the debtor;
A rejoinder was submitted by respondent, but it was noted without action (3) Subrogating a third person in the rights of the creditor. (1203)
in view of A.M. No. 99-2-04-SC dated November 21, 2000.31 Article 1292. In order that an obligation may be extinguished by another
The issues to be resolved by this court are as follows: which substitute the same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new obligations be on every
1. Whether the obligation between the parties was extinguished by point incompatible with each other. (1204)
novation
Article 1293. Novation which consists in substituting a new debtor in the
2. Whether Candida A. Santos was solidarily liable with Arco Pulp and place of the original one, may be made even without the knowledge or
Paper Co., Inc. against the will of the latter, but not without the consent of the creditor.
Payment by the new debtor gives him the rights mentioned in Articles
3. Whether moral damages, exemplary damages, and attorney’s fees can 1236 and 1237. (1205a)
be awarded
Novation extinguishes an obligation between two parties when there is a
The petition is denied. substitution of objects or debtors or when there is subrogation of the
The obligation between the creditor. It occurs only when the new contract declares so "in unequivocal
parties was an alternative terms" or that "the old and the new obligations be on every point
obligation incompatible with each other."36
The rule on alternative obligations is governed by Article 1199 of the Novation was extensively discussed by this court in Garcia v. Llamas:37
Civil Code, which states: Novation is a mode of extinguishing an obligation by changing its objects
Article 1199. A person alternatively bound by different prestations shall or principal obligations, by substituting a new debtor in place of the old
completely perform one of them. one, or by subrogating a third person to the rights of the creditor. Article
1293 of the Civil Code defines novation as follows:
The creditor cannot be compelled to receive part of one and part of the
other undertaking. "Art. 1293. Novation which consists in substituting a new debtor in the
place of the original one, may be made even without the knowledge or
"In an alternative obligation, there is more than one object, and the against the will of the latter, but not without the consent of the creditor.
fulfillment of one is sufficient, determined by the choice of the debtor Payment by the new debtor gives him rights mentioned in articles 1236
who generally has the right of election."32 The right of election is and 1237."
extinguished when the party who may exercise that option categorically
and unequivocally makes his or her choice known.33 In general, there are two modes of substituting the person of the debtor:
(1) expromision and (2) delegacion. In expromision, the initiative for the

change does not come from — and may even be made without the Under Article 2220 of the Civil Code, moral damages may be awarded in
knowledge of — the debtor, since it consists of a third person’s case of breach of contract where the breach is due to fraud or bad faith:
assumption of the obligation. As such, it logically requires the consent of
the third person and the creditor. In delegacion, the debtor offers, and the Art. 2220. Willfull injury to property may be a legal ground for awarding
creditor accepts, a third person who consents to the substitution and moral damages if the court should find that, under the circumstances, such
assumes the obligation; thus, the consent of these three persons are damages are justly due. The same rule applies to breaches of contract
necessary. Both modes of substitution by the debtor require the consent where the defendant acted fraudulently or in bad faith. (Emphasis
of the creditor. supplied)
Novation may also be extinctive or modificatory. It is extinctive when an Moral damages are not awarded as a matter of right but only after the
old obligation is terminated by the creation of a new one that takes the party claiming it proved that the breach was due to fraud or bad faith. As
place of the former. It is merely modificatory when the old obligation this court stated:
subsists to the extent that it remains compatible with the amendatory Moral damages are not recoverable simply because a contract has been
agreement. Whether extinctive or modificatory, novation is made either breached. They are recoverable only if the party from whom it is claimed
by changing the object or the principal conditions, referred to as objective acted fraudulently or in bad faith or in wanton disregard of his contractual
or real novation; or by substituting the person of the debtor or subrogating obligations. The breach must be wanton, reckless, malicious or in bad
a third person to the rights of the creditor, an act known as subjective or faith, and oppressive or abusive.42
personal novation. For novation to take place, the following requisites
must concur: Further, the following requisites must be proven for the recovery of moral
damages:
1) There must be a previous valid obligation.
An award of moral damages would require certain conditions to be met,
2) The parties concerned must agree to a new contract. to wit: (1)first, there must be an injury, whether physical, mental or
3) The old contract must be extinguished. psychological, clearly sustained by the claimant; (2) second, there must
be culpable act or omission factually established; (3) third, the wrongful
4) There must be a valid new contract. act or omission of the defendant is the proximate cause of the injury
sustained by the claimant; and (4) fourth, the award of damages is
Novation may also be express or implied. It is express when the new predicated on any of the cases stated in Article 2219 of the Civil Code.43
obligation declares in unequivocal terms that the old obligation is
extinguished. It is implied when the new obligation is incompatible with Here, the injury suffered by respondent is the loss of ₱7,220,968.31 from
the old one on every point. The test of incompatibility is whether the two his business. This has remained unpaid since 2007. This injury
obligations can stand together, each one with its own independent undoubtedly was caused by petitioner Arco Pulp and Paper’s act of
existence.38 (Emphasis supplied) refusing to pay its obligations.
Because novation requires that it be clear and unequivocal, it is never When the obligation became due and demandable, petitioner Arco Pulp
presumed, thus: and Paper not only issued an unfunded check but also entered into a
contract with a third person in an effort to evade its liability. This proves
In the civil law setting, novatio is literally construed as to make new. So the third requirement.
it is deeply rooted in the Roman Law jurisprudence, the principle —
novatio non praesumitur —that novation is never presumed.At bottom, As to the fourth requisite, Article 2219 of the Civil Code provides that
for novation tobe a jural reality, its animus must be ever present, debitum moral damages may be awarded in the following instances:
pro debito — basically extinguishing the old obligation for the new
one.39 (Emphasis supplied) There is nothing in the memorandum of Article 2219. Moral damages may be recovered in the following and
agreement that states that with its execution, the obligation of petitioner analogous cases:
Arco Pulp and Paper to respondent would be extinguished. It also does (1) A criminal offense resulting in physical injuries;
not state that Eric Sy somehow substituted petitioner Arco Pulp and Paper
as respondent’s debtor. It merely shows that petitioner Arco Pulp and (2) Quasi-delicts causing physical injuries;
Paper opted to deliver the finished products to a third person instead.
(3) Seduction, abduction, rape, or other lascivious acts;
The consent of the creditor must also be secured for the novation to be
valid: (4) Adultery or concubinage;
Novation must be expressly consented to. Moreover, the conflicting (5) Illegal or arbitrary detention or arrest;
intention and acts of the parties underscore the absence of any express (6) Illegal search;
disclosure or circumstances with which to deduce a clear and unequivocal
intent by the parties to novate the old agreement.40 (Emphasis supplied) (7) Libel, slander or any other form of defamation;
In this case, respondent was not privy to the memorandum of agreement, (8) Malicious prosecution;
thus, his conformity to the contract need not be secured. This is clear from
the first line of the memorandum, which states: (9) Acts mentioned in Article 309;
Per meeting held at ARCO, April 18, 2007, it has been mutually agreed (10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34,
between Mrs. Candida A. Santos and Mr. Eric Sy. . . .41 and 35.
If the memorandum of agreement was intended to novate the original Breaches of contract done in bad faith, however, are not specified within
agreement between the parties, respondent must have first agreed to the this enumeration. When a party breaches a contract, he or she goes against
substitution of Eric Sy as his new debtor. The memorandum of agreement Article 19 of the Civil Code, which states: Article 19. Every person must,
must also state in clear and unequivocal terms that it has replaced the in the exercise of his rights and in the performance of his duties, act with
original obligation of petitioner Arco Pulp and Paper to respondent. justice, give everyone his due, and observe honesty and good faith.
Neither of these circumstances is present in this case. Persons who have the right to enter into contractual relations must
Petitioner Arco Pulp and Paper’s act of tendering partial payment to exercise that right with honesty and good faith. Failure to do so results in
respondent also conflicts with their alleged intent to pass on their an abuse of that right, which may become the basis of an action for
obligation to Eric Sy. When respondent sent his letter of demand to damages. Article 19, however, cannot be its sole basis:
petitioner Arco Pulp and Paper, and not to Eric Sy, it showed that the Article 19 is the general rule which governs the conduct of human
former neither acknowledged nor consented to the latter as his new relations. By itself, it is not the basis of an actionable tort. Article 19
debtor. These acts, when taken together, clearly show that novation did describes the degree of care required so that an actionable tort may arise
not take place. Since there was no novation, petitioner Arco Pulp and when it is alleged together with Article 20 or Article 21.44
Paper’s obligation to respondent remains valid and existing. Petitioner
Arco Pulp and Paper, therefore, must still pay respondent the full amount Article 20 and 21 of the Civil Code are as follows:
of ₱7,220,968.31.
Article 20. Every person who, contrary to law, wilfully or negligently
Petitioners are liable for causes damage to another, shall indemnify the latter for the same.
damages

Article 21.Any person who wilfully causes loss or injury to another in a The purpose of exemplary damages is to serve as a deterrent to future and
manner that is contrary to morals, good customs or public policy shall subsequent parties from the commission of a similar offense. The case of
compensate the latter for the damage. People v. Ranteciting People v. Dalisay held that:
To be actionable, Article 20 requires a violation of law, while Article 21 Also known as ‘punitive’ or ‘vindictive’ damages, exemplary or
only concerns with lawful acts that are contrary to morals, good customs, corrective damages are intended to serve as a deterrent to serious wrong
and public policy: doings, and as a vindication of undue sufferings and wanton invasion of
the rights of an injured or a punishment for those guilty of outrageous
Article 20 concerns violations of existing law as basis for an injury. It conduct. These terms are generally, but not always, used interchangeably.
allows recovery should the act have been willful or negligent. Willful may In common law, there is preference in the use of exemplary damages
refer to the intention to do the act and the desire to achieve the outcome when the award is to account for injury to feelings and for the sense of
which is considered by the plaintiff in tort action as injurious. Negligence indignity and humiliation suffered by a person as a result of an injury that
may refer to a situation where the act was consciously done but without has been maliciously and wantonly inflicted, the theory being that there
intending the result which the plaintiff considers as injurious. should be compensation for the hurt caused by the highly reprehensible
Article 21, on the other hand, concerns injuries that may be caused by acts conduct of the defendant—associated with such circumstances as
which are not necessarily proscribed by law. This article requires that the willfulness, wantonness, malice, gross negligence or recklessness,
act be willful, that is, that there was an intention to do the act and a desire oppression, insult or fraud or gross fraud—that intensifies the injury. The
to achieve the outcome. In cases under Article 21, the legal issues revolve terms punitive or vindictive damages are often used to refer to those
around whether such outcome should be considered a legal injury on the species of damages that may be awarded against a person to punish him
part of the plaintiff or whether the commission of the act was done in for his outrageous conduct. In either case, these damages are intended in
violation of the standards of care required in Article 19.45 good measure to deter the wrongdoer and others like him from similar
conduct in the future.50 (Emphasis supplied; citations omitted)
When parties act in bad faith and do not faithfully comply with their
obligations under contract, they run the risk of violating Article 1159 of The requisites for the award of exemplary damages are as follows:
the Civil Code: (1) they may be imposed by way of example in addition to compensatory
Article 1159. Obligations arising from contracts have the force of law damages, and only after the claimant's right to them has been established;
between the contracting parties and should be complied with in good (2) that they cannot be recovered as a matter of right, their determination
faith. depending upon the amount of compensatory damages that may be
Article 2219, therefore, is not an exhaustive list of the instances where awarded to the claimant; and
moral damages may be recovered since it only specifies, among others, (3) the act must be accompanied by bad faith or done in a wanton,
Article 21. When a party reneges on his or her obligations arising from fraudulent, oppressive or malevolent manner.51
contracts in bad faith, the act is not only contrary to morals, good customs,
and public policy; it is also a violation of Article 1159. Breaches of Business owners must always be forthright in their dealings. They cannot
contract become the basis of moral damages, not only under Article 2220, be allowed to renege on their obligations, considering that these
but also under Articles 19 and 20 in relation to Article 1159. obligations were freely entered into by them. Exemplary damages may
also be awarded in this case to serve as a deterrent to those who use
Moral damages, however, are not recoverable on the mere breach of the fraudulent means to evade their liabilities.
contract. Article 2220 requires that the breach be done fraudulently or in
bad faith. In Adriano v. Lasala:46 Since the award of exemplary damages is proper, attorney’s fees and cost
of the suit may also be recovered.
To recover moral damages in an action for breach of contract, the breach
must be palpably wanton, reckless and malicious, in bad faith, oppressive, Article 2208 of the Civil Code states:
or abusive. Hence, the person claiming bad faith must prove its existence
by clear and convincing evidence for the law always presumes good faith. Article 2208. In the absence of stipulation, attorney's fees and expenses
of litigation, other than judicial costs, cannot be recovered, except:
Bad faith does not simply connote bad judgment or negligence. It imports
a dishonest purpose or some moral obliquity and conscious doing of a (1) When exemplary damages are awarded[.]
wrong, a breach of known duty through some motive or interest or ill will Petitioner Candida A. Santos
that partakes of the nature of fraud. It is, therefore, a question of intention, is solidarily liable with
which can be inferred from one’s conduct and/or contemporaneous petitioner corporation
statements.47 (Emphasis supplied) Petitioners argue that the finding of solidary liability was erroneous since
Since a finding of bad faith is generally premised on the intent of the doer, no evidence was adduced to prove that the transaction was also a personal
it requires an examination of the circumstances in each case. undertaking of petitioner Santos. We disagree.
When petitioner Arco Pulp and Paper issued a check in partial payment In Heirs of Fe Tan Uy v. International Exchange Bank,52 we stated that:
of its obligation to respondent, it was presumably with the knowledge that Basic is the rule in corporation law that a corporation is a juridical entity
it was being drawn against a closed account. Worse, it attempted to shift which is vested with a legal personality separate and distinct from those
their obligations to a third person without the consent of respondent. acting for and in its behalf and, in general, from the people comprising it.
Petitioner Arco Pulp and Paper’s actions clearly show "a dishonest Following this principle, obligations incurred by the corporation, acting
purpose or some moral obliquity and conscious doing of a wrong, a breach through its directors, officers and employees, are its sole liabilities. A
of known duty through some motive or interest or ill will that partakes of director, officer or employee of a corporation is generally not held
the nature of fraud."48 Moral damages may, therefore, be awarded. personally liable for obligations incurred by the corporation.
Nevertheless, this legal fiction may be disregarded if it is used as a means
Exemplary damages may also be awarded. Under the Civil Code, to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an
exemplary damages are due in the following circumstances: existing obligation, the circumvention of statutes, or to confuse legitimate
issues.
Article 2232. In contracts and quasi-contracts, the court may award
exemplary damages if the defendant acted in a wanton, fraudulent, ....
reckless, oppressive, or malevolent manner.
Before a director or officer of a corporation can be held personally liable
Article 2233. Exemplary damages cannot be recovered as a matter of for corporate obligations, however, the following requisites must concur:
right; the court will decide whether or not they should be adjudicated. (1) the complainant must allege in the complaint that the director or
officer assented to patently unlawful acts of the corporation, or that the
Article 2234. While the amount of the exemplary damages need not be officer was guilty of gross negligence or bad faith; and (2) the
proven, the plaintiff must show that he is entitled to moral, temperate or complainant must clearly and convincingly prove such unlawful acts,
compensatory damages before the court may consider the question of negligence or bad faith.
whether or not exemplary damages should be awarded.
While it is true that the determination of the existence of any of the
In Tankeh v. Development Bank of the Philippines,49 we stated that: circumstances that would warrant the piercing of the veil of corporate
fiction is a question of fact which cannot be the subject of a petition for
review on certiorari under Rule 45, this Court can take cognizance of
factual issues if the findings of the lower court are not supported by the

evidence on record or are based on a misapprehension of demanded. In the absence of stipulation, the rate of interest shall be 6%
facts.53 (Emphasis supplied) 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
As a general rule, directors, officers, or employees of a corporation cannot Code.
be held personally liable for obligations incurred by the corporation.
However, this veil of corporate fiction may be pierced if complainant is 2. When an obligation, not constituting a loan or forbearance of money,
able to prove, as in this case, that (1) the officer is guilty of negligence or is breached, an interest on the amount of damages awarded may be
bad faith, and (2) such negligence or bad faith was clearly and imposed at the discretion of the court at the rate of 6% per annum. No
convincingly proven. interest, however, shall be adjudged on unliquidated claims or damages,
except when or until the demand can be established with reasonable
Here, petitioner Santos entered into a contract with respondent in her certainty. Accordingly, where the demand is established with reasonable
capacity as the President and Chief Executive Officer of Arco Pulp and certainty, the interest shall begin to run from the time the claim is made
Paper. She also issued the check in partial payment of petitioner judicially or extrajudicially (Art. 1169, Civil Code), but when such
corporation’s obligations to respondent on behalf of petitioner Arco Pulp certainty cannot be so reasonably established at the time the demand is
and Paper. This is clear on the face of the check bearing the account name, made, the interest shall begin to run only from the date the judgment of
"Arco Pulp & Paper, Co., Inc."54 Any obligation arising from these acts the court is made (at which time the quantification of damages may be
would not, ordinarily, be petitioner Santos’ personal undertaking for deemed to have been reasonably ascertained). The actual base for the
which she would be solidarily liable with petitioner Arco Pulp and Paper. computation of legal interest shall, in any case, be on the amount finally
We find, however, that the corporate veil must be pierced. In Livesey v. adjudged.
Binswanger Philippines:55 3. When the judgment of the court awarding a sum of money becomes
Piercing the veil of corporate fiction is an equitable doctrine developed to final and executory, the rate of legal interest, whether the case falls under
address situations where the separate corporate personality of a paragraph 1 or paragraph 2, above, shall be 6% per annum from such
corporation is abused or used for wrongful purposes. Under the doctrine, finality until its satisfaction, this interim period being deemed to be by
the corporate existence may be disregarded where the entity is formed or then an equivalent to a forbearance of credit.
used for non-legitimate purposes, such as to evade a just and due And, in addition to the above, judgments that have become final and
obligation, or to justify a wrong, to shield or perpetrate fraud or to carry executory prior to July 1, 2013, shall not be disturbed and shall continue
out similar or inequitable considerations, other unjustifiable aims or to be implemented applying the rate of interest fixed therein.61 (Emphasis
intentions, in which case, the fiction will be disregarded and the supplied; citations omitted.)
individuals composing it and the two corporations will be treated as
identical.56 (Emphasis supplied) According to these guidelines, the interest due on the obligation of
₱7,220,968.31 should now be at 6% per annum, computed from May 5,
According to the Court of Appeals, petitioner Santos was solidarily liable 2007, when respondent sent his letter of demand to petitioners. This
with petitioner Arco Pulp and Paper, stating that: interest shall continue to be due from the finality of this decision until its
In the present case, We find bad faith on the part of the [petitioners] when full satisfaction.
they unjustifiably refused to honor their undertaking in favor of the WHEREFORE, the petition is DENIED in part. The decision in CA-G.R.
[respondent]. After the check in the amount of 1,487,766.68 issued by CV No. 95709 is AFFIRMED.
[petitioner] Santos was dishonored for being drawn against a closed
account, [petitioner] corporation denied any privity with [respondent]. Petitioners Arco Pulp & Paper Co., Inc. and Candida A. Santos are hereby
These acts prompted the [respondent] to avail of the remedies provided ordered solidarily to pay respondent Dan T. Lim the amount of
by law in order to protect his rights.57 ₱7,220,968.31 with interest of 6% per annum at the time of demand until
finality of judgment and its full satisfaction, with moral damages in the
We agree with the Court of Appeals. Petitioner Santos cannot be allowed amount of ₱50,000.00, exemplary damages in the amount of ₱50,000.00,
to hide behind the corporate veil. When petitioner Arco Pulp and Paper’s
1âwphi1
and attorney's fees in the amount of ₱50,000.00.

obligation to respondent became due and demandable, she not only issued
an unfunded check but also contracted with a third party in an effort to SO ORDERED.
shift petitioner Arco Pulp and Paper’s liability. She unjustifiably refused
to honor petitioner corporation’s obligations to respondent. These acts S OLIDARY O BLIGATION
clearly amount to bad faith. In this instance, the corporate veil may be Olongapo City v. Subic Water and Sewerage Co., Inc.
pierced, and petitioner Santos may be held solidarily liable with petitioner G.R. No. 171626 August 6, 2014
Arco Pulp and Paper.
OLONGAPO CITY, Petitioner,
The rate of interest due on vs.
the obligation must be SUBIC WATER AND SEWERAGE CO., INC., Respondent.
reduced in view of Nacar v.
Gallery Frames58 DECISION
In view, however, of the promulgation by this court of the decision dated BRION, J.:
August 13, 2013 in Nacar v. Gallery Frames,59 the rate of interest due on
We resolve in this petition for certiorari1 under Rule 65 the challenge to
the obligation must be modified from 12% per annum to 6% per annum
the July 6, 2005 decision2 and the January 3, 2006 resolution3 (assailed
from the time of demand.
CA rulings) of the Court of Appeals (CA) in CAG.R. SP No. 80947.
Nacar effectively amended the guidelines stated in Eastern Shipping v.
These assailed CA rulings annulled and set aside: a) the July 29, 2003
Court of Appeals,60 and we have laid down the following guidelines with
order4 of the Regional Trial Court of Olongapo, Br. 75 (RTC Olongapo ),
regard to the rate of legal interest:
which directed the issuance of a writ of execution in Civil Case No. 582-
To recapitulate and for future guidance, the guidelines laid down in the 0-90, against respondent Subic Water and Sewerage Co., Inc. (Subic
case of Eastern Shipping Linesare accordingly modified to embody BSP- Water); b) the July 31, 2003 writ of execution5subsequently issued by the
MB Circular No. 799, as follows: same court; and c) the October 7, 2003 order6 of R TC Olongapo, denying
Subic Water's special appearance with motion to reconsider order dated
I. When an obligation, regardless of its source, i.e., law, contracts, quasi- July 29, 2003 and to quash writ of execution dated July 31, 2003.7
contracts, delicts or quasi-delicts is breached, the contravenor can be held
liable for damages. The provisions under Title XVIII on "Damages" of Factual Antecedents
the Civil Code govern in determining the measure of recoverable
On May 25, 1973, Presidential Decree No. 1988 (PD 198) took effect.
damages.
This law authorized the creation of local water districts which may
II. With regard particularly to an award of interest in the concept of actual acquire, install, maintain and operate water supply and distribution
and compensatory damages, the rate of interest, as well as the accrual systems for domestic, industrial, municipal and agricultural uses.9
thereof, is imposed, as follows:
Pursuant to PD 198, petitioner Olongapo City (petitioner) passed
1. When the obligation is breached, and it consists in the payment of a Resolution No. 161, which transferred all itsexisting water facilities and
sum of money, i.e., a loan or forbearance of money, the interest due should assets under the Olongapo City Public Utilities Department Waterworks
be that which may have been stipulated in writing. Furthermore, the Division, to the jurisdiction and ownership of the Olongapo City Water
interest due shall itself earn legal interest from the time it is judicially District (OCWD).10

PD 198, as amended,11 allows local water districts (LWDs)which have to be OCWD’s former counsel, filed a manifestation alleging that OCWD
acquired an existing water system of a localgovernment unit (LGU) to had already been dissolved and that Subic Water is now the former
enter into a contract to pay the concerned LGU. In lieu of the LGU’s share OCWD.29
in the acquired water utility plant, it shall be paid by the LWD an amount
not exceeding three percent (3%) of the LWD’s gross receipts from water Because of this assertion, Subic Water also filed a manifestation
sales in any year.12 informing the trial court that as borne out by the articles of incorporation
and general information sheet of Subic Water x x x defendant OCWD is
On October 24, 1990, petitioner filed a complaint for sum of money and not Subic Water.30The manifestation also indicated that OCWD was only
damages against OCWD. Among others, petitioner alleged that OCWD a ten percent (10%) shareholder of Subic Water; and that its 10% share
failed to pay its electricity bills to petitioner and remit its payment under was already inthe process of being transferred to petitioner pursuant to the
the contract to pay, pursuant to OCWD’s acquisition of petitioner’s water Deed of Assignment dated November 24, 1997.31
system. In its complaint, petitioner prayed for the following reliefs:
The trial court granted the motion for execution and directed its issuance
"WHEREOF, it is respectfully prayed of this Honorable Court that after against OCWD and/or Subic Water. Because of this unfavorable order,
due hearing and notice, judgment be rendered in favor of plaintiff Subic Water filed a special appearance with motion to: (1) reconsider
ordering the defendant to: order dated July29, 2003; and (2) quash writ of execution dated July 31,
2003.32
(a) pay the amount of ₱26,798,223.70 plus legal interests from the filing
of the Complaint to actual full payment; The trial court denied Subic Water’s special appearance, motion for
reconsideration, and its motion to quash. Subic Water then filed a petition
(b) pay the amount of its in lieu share representing three percent of the for certiorari33 with the CA, imputing grave abuse of discretion
defendant’s gross receipts from water sales starting 1981 up to present; amounting to lack or excess of jurisdiction to RTC Olongapo for issuing
(c) pay the amount of ₱1,000,000 as moral damages; and its July 29, 2003 and October 7, 2003 orders aswell as the writ of
execution dated July 31, 2003. The CA’s Ruling
(d) pay the cost of suit and other litigation expenses."13
In its decision dated July 6, 2005,34 the CA granted Subic Water’s petition
In its answer,14 OCWD posed a counterclaim against petitioner for unpaid for certiorariand reversed the trial court’s rulings.
water bills amounting to ₱3,080,357.00.15
The CA found that the writ ofexecution dated July 31, 200335 did not
In the interim, OCWD entered into a Joint Venture Agreement16 (JVA) comply with Section 6, Rule 39 of the Rules of Court, to wit:
with Subic Bay Metropolitan Authority (SBMA), Biwater International
Limited (Biwater), and D.M. Consunji, Inc. (DMCI) on November 24, Section 6. Execution by motion orby independent action. — A final and
1996. Pursuant to this agreement, Subic Water– a new corporate entity – executory judgment or order may be executed on motion within five (5)
was incorporated, withthe following equity participation from its years from the date of its entry. After the lapse of such time, and before it
shareholders: is barred by the statute of limitations, a judgment may be enforced by
action. The revived judgment may also be enforced by motion within five
SBMA 19.99% or 20% (5) years from the date of its entry and thereafter by action before it is
barred by the statute of limitations. (6a)[emphasis ours]
OCWD 9.99% or 10%
A judgment on a compromiseagreement is immediately executory and is
Biwater 29.99% or 30% considered to have been entered on the date it was approved by the trial
DMCI 39.99% or 40%17 court.36 Since the compromise agreement was approved and adoptedby
the trial court on June 13, 1997, this should be the reckoning date for the
On November 24, 1996, Subic Water was granted the franchise to operate counting of the period for the filing of a valid motion for issuance of a
and to carry on the businessof providing water and sewerage services in writ of execution. Petitioner thus had until June 13, 2002, to file its
the Subic BayFree Port Zone, as well as in Olongapo City.18 Hence, Subic motion.
Water took over OCWD’s water operations in Olongapo City.19
The CA further remarked that whileit was true that a motion for execution
To finally settle their money claims against each other, petitioner and was filed by petitioner on May 7, 1999, and the same was granted by the
OCWD entered into a compromise agreement20 on June 4, 1997. In this trial court in its July 23, 1999 order,37 no writ of execution was actually
agreement, petitioner and OCWD offset their respective claims and issued.
counterclaims. OCWD also undertook to pay to petitioner its net
obligation amounting to ₱135,909,467.09, to be amortized for a period of As the CA looked at the case, petitioner, instead of following up with the
not exceeding twenty-five (25) years at twenty-fourpercent (24%) per trial court the issuance ofthe writ of execution, did not do anything to
annum.21 secure its prompt issuance. It waitedanother four years to file a second
motion for execution on May 30, 2003.38 By this time, the allowed period
The compromise agreement also contained a provision regarding the for the filing of a motion for the issuance of the writ had already lapsed.
parties’ requestthat Subic Water, Philippines,which took over the Hence, the trial court’s July 29, 2003 order granting the issuance of the
operations of the defendant Olongapo City Water District be made the co- writ was null and void for having been issued by a court without
makerfor OCWD’s obligations. Mr. Noli Aldip, then chairman of Subic jurisdiction.
Water, acted as its representative and signed the agreement on behalf of
Subic Water. The CA denied petitioner’s subsequentmotion for reconsideration.
Petitioner is now before us on a petition for certiorari under Rule 65.
Subsequently, the parties submitted the compromise agreement to RTC
Olongapo for approval. In its decision dated June 13, 1997,22 the trial The Petition
court approved the compromiseagreement and adopted it as its judgment The petitioner acknowledged the rule that the execution of a judgment
in Civil Case No. 580-0-90. could no longer be made by mere motion after the prescribed five-year
Pursuant to the compromise agreement and in payment of OCWD’s period had already lapsed. However, it argued that the delay for the
obligations to petitioner,petitioner and OCWD executed a Deed of issuance of the writ of execution was caused by OCWD and Subic Water.
Assignment onNovember 24, 1997.23 OCWD assigned all of its rights in The petitioner submitted that this Court had allowed execution by mere
the JVA in favor of the petitioner, including but not limited to the motion even after the lapse ofthe five-year period, when the delay was
assignment of its shares, lease payments, regulatory assistance fees and caused or occasioned by the actions of the judgment debtor.39
other receivables arising out of or related to the Joint Venture Agreement Also, the petitioner asserted that although Subic Water was not a party in
and the Lease Agreement.24 On December 15,1998, OCWD was the case, it could still be subjected to a writ of execution, since it was
judicially dissolved.25 identified as OCWD’s co-maker and successor-in-interest in the
On May 7, 1999, to enforce the compromise agreement, the petitioner compromise agreement.40
filed a motion for the issuance of a writ of execution26 with the trial court. Lastly, the petitioner contended that the compromise agreement was
In its July 23, 1999 order,27 the trial court granted the motion, but did not signed by Mr. Noli R. Aldip,then Subic Water’s chairman, signifying
issue the corresponding writ of execution. Subic Water’s consent to the agreement.
Almost four years later, on May 30, 2003, the petitioner, through its new The Court’s Ruling
counsel, filed a notice of appearance with urgent
motion/manifestation28 and prayed again for the issuance of a writ of
execution against OCWD. A certain Atty. Segundo Mangohig, claiming

We DISMISSthe petition for being the wrong remedy and, in any case, judgment was sought within five (5) years from the date of its entry. On
for lack of merit; what we have before us is a final judgment that we can the other hand, execution by independent action is mandatory if the five-
no longer touch unless there is grave abuse of discretion. year prescriptive period for execution by motion had already
elapsed.51 However, for execution by independent action to prosper – the
A. Procedural Law Aspect Rules impose another limitation – the action must be filed before it is
Certiorari is not a substitute for a lost appeal. barred by the statute of limitations which, under the Civil Code, is ten (10)
years from the finality of the judgment.52
At the outset, we emphasize thatthe present petition, brought under Rule
65, merits outright dismissal for having availed an improper remedy. On May 7, 1999, within the five-year period from the trial court’s
judgment, petitioner filed its motion for the issuance of a writ of
The instant petition should havebeen brought under Rule 45 in a petition execution. However, despite the grant of the motion, the court did not
for review on certiorari. Section 1 of this Rule mandates: issue an actual writ. It was only onMay 30, 2003 that petitioner filed a
second motion to ask again for the writ’s issuance. By this time, the
Section 1. Filing of petition with Supreme Court. — A party desiring to allowed five-year period for execution by motion had already lapsed.
appeal by certiorari from a judgment or final order or resolution of the
Court of Appeals, the Sandiganbayan, the Regional Trial Court or other As will be discussed below, since the second motion was filed beyond the
courts whenever authorized by law, may file with the Supreme Court a five-year prescriptive period set by the Rules, then the writ of execution
verified petition for review on certiorari. The petition shall raise only issued by the trial court on July 31, 2003 was null and void for having
questions of law which must be distinctly set forth. (1a, 2a) [emphasis been issued by a court already ousted ofits jurisdiction.
supplied]
In Arambulo v. Court of First Instance of Laguna,53 we explained the rule
Supplementing Rule 45 are Sections 341
and 442
of Rule 56 which govern that the jurisdiction of a court to issue a writ of execution by motion is
the applicable procedure in the Supreme Court. only effective within the five-year period from the entry of judgment.
Outside this five-year period, any writ of execution issued pursuant to a
Appeals from judgmentsor final orders or resolutions of the CA should be motion filed by the judgment creditor, is null and void. If no writ of
made through a verified petition for review on certiorari under Rule execution was issued by the court within the five-year period, even a
45.43 In this case, petitioner questioned the July 6, 2005 decision44 and the motion filed within such prescriptive period would not suffice. A writ
January 3, 2006 resolution45 of the CA which declared as null and void issued by the court after the lapse of the five-year period is already null
the writ of execution issued by the trial court. Since the CA’s and void.54The judgment creditor’s only recourse then is to file an
pronouncement completely disposed of the case and the issues raised by independent action, which must also be within the prescriptive period set
the parties, it was the proper subject of a Rule 45 petition. It was already by law for the enforcement of judgments.
a final order that resolved the subject matter in its entirety, leaving nothing
else to be done. This Court subsequently reiterated its Arambuloruling in Ramos v.
Garciano,55 where we said:
A petition for certiorari under Rule 65 is appropriate only if there is no
appeal, or any plain, speedy, and adequate remedy in the ordinary course There seems to be no serious dispute that the 4th alias writ of execution
of law available tothe aggrieved party. As we have distinctly explained in was issued eight (8) daysafter the lapse of the five (5) year period from
the case of Pasiona v. Court of Appeals:46 the dateof the entry of judgment in Civil Case No. 367. As a general rule,
after the lapse of such period a judgment may be enforced only by
The aggrieved party is proscribed from assailing a decision or final order ordinary action, not by mere motion (Section 6, Rule 39, Rules of Court).
of the CA viaRule 65 because such recourse is proper only if the party has
no plain,speedy and adequate remedy in the course of law. In this case, xxxx
petitioner had an adequate remedy, namely, a petition for review on
certiorari under Rule 45 ofthe Rules of Court.A petition for review on The limitation that a judgment beenforced by execution within five years,
certiorari, not a special civil action for certiorari was, therefore, the otherwise itloses efficacy, goes tothe very jurisdiction of the Court.A writ
correct remedy. issued after such period is void, and the failure to object thereto does
notvalidate it, for the reason that jurisdiction of courts is solely conferred
xxxx by law and not by express or implied will of the parties.56[emphasis
supplied]
Settled is the rule that where appeal is available to the aggrieved party,
the special civil actionfor certiorari will not be entertained – remedies of To clearly restate these rulings, for execution by motion to be valid, the
appealand certiorari are mutually exclusive, not alternative or successive. judgment creditor mustensure the accomplishment of two acts within the
Hence, certiorari is not and cannot be a substitute for a lost five-year prescriptive period. These are:a) the filing of the motion for the
appeal,especially if one's own negligence or error in one's choice of issuance of the writ of execution; and b) the court’s actual issuance of the
remedy occasioned such loss or lapse.47 [emphasis ours] writ.In the instanceswhen the Court allowed execution by motion even
after the lapse of five years, we only recognized one exception, i.e., when
The petitioner received the CA’s assailed resolution denying its motion the delay is caused or occasioned by actions of the judgment debtor and/or
for reconsideration on January 9, 2006. Following Rule 45, Section 2 of is incurred for his benefit or advantage.57However, petitioner failed
the Rules of Court,48 the petitioner had until January 24, 2006 to file its toshow or cite circumstances showing how OCWD or Subic Water caused
petition for review. It could have even filed a motion for a 30-day it to belatedly file its second motion for execution.
extension of time, a motion that this Court grants for justifiable
reasons.49 But all of these, it failed to do. Thus, the assailed CA rulings Strictly speaking, the issuance of the writ should have been a ministerial
became final and executory and could no longer be the subject of an duty on the partof the trial court after it gave its July 23, 1999 order,
appeal. approving the first motion and directing the issuance of such writ. The
petitioner could have easily compelled the court to actually issue the writ
Apparently, to revive its lost appeal, petitioner filed the present petition by filing a manifestation onthe existence of the July 23, 1999 order.
for certiorari that – under Rule 65 – may be filed within sixty days from However, petitioner idly sat and waited for the five-year period to lapse
the promulgation of the assailed CA resolution (on January 3, 2006). A before it filed its second motion. Having slept on its rights, petitioner had
Rule 65 petition for certiorari, however, cannot be a substitute for a lost no one to blame but itself.
appeal. With the lapse of the prescribed period for appeal without an
action from the petitioner, the present petition for certiorari– a mere A writ of execution cannot affect a non- party to a case.
replacement –must be dismissed.
Strangers to a case are not bound by the judgment rendered in it. Thus, a
But even without the procedural infirmity, the present recourse to us has writ of execution can only beissued against a party and not against one
no basis on the merits and must be denied. who did not have his day in court.58
Execution by motion is only available within the five-year period from Subic Water never participated in the proceedings in Civil Case No. 580-
entry of judgment. 0-90, where OCWD and petitioner were the contending parties. Subic
Water only came into the picture when one Atty. Segundo Mangohig,
Under Rule 39, Section 6,50 a judgment creditor has two modes in claiming to beOCWD’s former counsel, manifested before the trial court
enforcing the court’s judgment. Execution may be either through motion that OCWD had already been judicially dissolved and thatSubic Water
or an independent action. assumed OCWD’s personality.
These two modes of execution are available depending on the timing In the present case, the compromise agreement, although signed by Mr.
when the judgmentcreditor invoked its right to enforce the court’s Noli Aldip, did not carry the express conformity of Subic Water. Mr.
judgment. Execution by motion is only available if the enforcement of the Aldip was never given any authorization to conform to or bind Subic

Water in the compromiseagreement. Also, the agreement merely labeled particular business, are incidental to, or may be implied from, the powers
Subic Water as a co-maker. It did not contain any provision where Subic intentionally conferred, powers added bycustom and usage, as usually
Water acknowledged its solidary liability with OCWD. pertaining to the particular officer or agent,and such apparent powers as
the corporation has caused persons dealing with the officer oragent to
Lastly, Subic Water did not voluntarily submit tothe court’s jurisdiction. believe that ithas conferred.64 [emphasis ours]
In fact, the motion it filed was only made as a special appearance,
precisely toavoid the court’s acquisition of jurisdiction over its person. Mr. Noli Aldip signedthe compromise agreement purely in his own
Without any participation inthe proceedings below, it cannot be made capacity. Moreover, the compromise agreement did not expressly provide
liable on the writ ofexecution issuedby the court a quo. that Subic Water consented to become OCWD’s co-maker. As worded,
the compromise agreement merely provided that both parties
B. Substantive Law Aspect [also]requestSubic Water, Philippines, which took over the operations of
Solidary liability mustbe expressly stated. Olongapo City Water District be made asco-maker [for the obligations
above-cited].This request was never forwarded to Subic Water’s board of
The petitioner also argued that Subic Water could be held solidarily liable directors. Even if due notification had been made (which does not
under the writ of execution since it was identified as OCWD’s co-maker appearin the records), Subic Water’s board does not appear to have given
in the compromise agreement.The petitioner’s basis for this is the any approval tosuch request. Nodocument such as the minutes of Subic
following provision of the agreement: Water’s board of directors’ meeting or a secretary’s certificate, purporting
to be an authorization to Mr. Aldip to conform to the compromise
4. Both parties also requestthat Subic Water,Philippines which took over agreement, was everpresented. In effect, Mr. Aldip’s act of signing the
the operations of the defendant Olongapo City Water District be made as compromise agreement was outside of his authority to undertake.
co-makerfor the obligation herein abovecited.59 [emphasis supplied]
Since Mr. Aldip was never authorized and there was no showing that
As the rule stands, solidary liability is not presumed. This stems from Art. Subic Water’s articles of incorporation or by-laws granted him such
1207 of the Civil Code, which provides: authority, then the compromise agreement he signed cannot bind Subic
Art. 1207. x x x There is a solidary liability only when the obligation Water. Subic Water cannot likewise be made a surety or even a guarantor
expressly so states, or when the law orthe nature of the obligation for OCWD’s obligations. OCWD’s debts under the compromise
requiressolidarity. [emphasis supplied] agreement are its own corporate obligations to petitioner.
In Palmares v. Court of Appeals,60 the Court did not hesitate to rule that OCWD and Subic Water are two separate and different entities.
although a party to a promissory note was onlylabeled as a comaker, his Petitioner practically suggests that since Subic Water took over OCWD’s
liability was that ofa surety, since the instrument expressly provided for water operations in OlongapoCity, it also acquired OCWD’s juridical
his joint and several liabilitywith the principal. personality, making the two entities one and the same.
In the present case, the joint and several liability of Subic Water and This is an interpretation that we cannot make or adopt under the facts and
OCWD was nowhere clear in the agreement. The agreement simply and the evidence of this case. Subic Water clearly demonstrated that it was a
plainly stated that petitioner and OCWD were only requestingSubic separate corporate entity from OCWD. OCWD is just a ten percent (10%)
Water to be a co-maker, in view of its assumption of OCWD’s water shareholder of Subic Water. As a mere shareholder, OCWD’s juridical
operations. No evidence was presented to show that such request was ever personality cannot be equated nor confused with that ofSubic Water. It is
approved by Subic Water’s board of directors. basic in corporation law that a corporation is a juridical entity vested with
Under these circumstances, petitioner cannot proceed after Subic Water a legal personality separate and distinct from those acting for and in its
for OCWD’s unpaid obligations. The law explicitly states that solidary behalf and, in general, from the people comprising it.65 Under this
liability is not presumed and must be expressly provided for. Not being a corporate reality, Subic Water cannot be held liable for OCWD’s
surety, Subic Water is not an insurer of OCWD’s obligations under the corporate obligations in the same manner that OCWD cannot be held
compromise agreement. At best, Subic Water was merely a guarantor liable for the obligations incurred by Subic Water as a separate entity. The
against whom petitioner can claim, provided it was first shown that: a) corporate veilshould not and cannot be pierced unless it is clearly
petitioner had already proceeded after the properties of OCWD, the established that the separate and distinct personality of the corporation
principal debtor; b) and despite this, the obligation under the compromise was used to justify a wrong, protect fraud, or perpetrate a deception.66
agreement, remains to be not fully satisfied.61 But as will be discussed In Concept Builders, Inc. v. NLRC,67 the Court enumerated the possible
next, Subic Water could not also be recognized as a guarantorof OCWD’s probative factors of identity which could justify the application of the
obligations. doctrine of piercing the corporate veil. These are:
An officer’s actions can only bind the corporation ifhe had been (1) Stock ownership by one or common ownership of both corporations;
authorized to do so.
(2) Identity of directors and officers;
An examination of the compromise agreement reveals that it was not
accompanied by any document showing a grant of authority to Mr. Noli (3) The manner of keeping corporate books and records; and
Aldip to sign on behalf of Subic Water.
(4) Methods of conducting the business.68
Subic Water is a corporation. A corporation, as a juridical entity,
primarily acts through its board ofdirectors, which exercises its corporate The burden of proving the presence of any of these probative factors lies
powers. In this capacity, the general rule is that, in the absence of authority with the one alleging it. Unfortunately, petitioner simply claimed that
from the board ofdirectors, no person, not even its officers, can validly Subic Water took over OCWD's water operations in Olongapo City. Apart
bind a corporation.62 Section 23 of the Corporation Code provides: from this allegation, petitioner failed to demonstrate any link to justify the
construction that Subic Water and OCWD are one and the same.
Section 23. The board of directors or trustees.– Unless otherwise provided
in this Code, the corporate powers of all corporations formed under this Under this evidentiary situation, our duty is to respect the separate and
Code shall be exercised, all business conducted and all property of such distinct personalities of these two juridical entities.
1âwphi1
corporations controlled and held by the board of directors or trusteesto be We thus deny the present petition. The writ of execution issued by RTC
elected from among the holders of stocks, or where there is no stock, from Olongapo, Br. 75, in favor of Olongapo City, is hereby confirmed to be
among the members of the corporation, who shall hold office for one (1) null and void. Accordingly, respondent Subic Water cannot be made
year until their successors are elected and qualified. (28a) [emphasis liable under this writ.
supplied]
WHEREFORE, premises considered, we hereby DISMISS the petition.
In People’s Aircargo and Warehousing Co., Inc. v. Court of Appeals,63 we The Court of Appeals' decision dated July 6, 2005 and resolution dated
held that under Section 23 of the Corporation Code, the power and January 3, 2006, annulling and setting aside the orders of the Regional
responsibility to decide whether a corporation can enter into a binding Trial Court of Olongapo, Branch 75 dated July 29, 2003 and October 7,
contract is lodged with the board of directors, subject to the articles of 2003, and the writ of execution dated July 31, 2003, are hereby
incorporation, by-laws, or relevant provisions of law. As we have clearly AFFIRMED. Costs against the City of Olongapo.
explained in another case:
SO ORDERED.
A corporate officer or agent may represent and bind the corporation in
transactions with third persons to the extent that [the] authority to do so Estanislao and Africa Sinamban v. China Banking Corporation
has been conferred upon him, and this includes powers which have been G.R. No. 193890 March 11, 2015
intentionally conferred, and also such powers as, in the usual courseof the

ESTANISLAO and AFRICA SINAMBAN, Petitioners, 36%
vs. PN
CHINA BANKING CORPORATION, Respondent. NUMBE PENALTY
R PRINCIPAL INTEREST FEE TOTAL
DECISION ------------ ------------------ ------------------ ------------------ -----------------
----------- ----- ----- ----- ------
REYES, J.:
Before this Court is a Petition for Review on Certiorari1 of the OACL 325,000.00 184,679.00 258,050.00 767,729.00
Decision2 dated May 19, 2010 of the Court of Appeals (CA) in CA-G.R. 636-95
CV. No. 66274 modifying the Decision3 dated July 30, 1999 of the
Regional Trial Court (RTC) of San Fernando City, Pampanga, Branch 45 OACL 1,800,000.00 1,035,787.50 1,429,200.00 4,264,987.50
for Sum of Money in Civil Case No. 11708. 634-95
Factual Antecedents
CLF 005- 148,255.08 64,461.84 156,541.58 369,258.50
On February 19, 1990, the spouses Danilo and Magdalena Manalastas 93
(spouses Manalastas) executed a Real Estate Mortgage (REM)4 in favor ------------------ ------------------ ------------------ -----------------
----- ----- ----- ------
of respondent China Banking Corporation (Chinabank) over two real
estate properties covered by Transfer Certificate of Title Nos. 173532-R
and 173533-R, Registry of Deeds of Pampanga, to secure a loan from TOTAL P2,273,255.08 1,284,928.34 1,843,791.58 5,401,975.00
Chinabank of ₱700,000.00 intended as working capital in their rice
milling business. During the next few years, they executed several
TOTAL AMOUNT DUE - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 5,401,975.00
amendments to the mortgage contract progressively increasing their credit --
line secured by the aforesaid mortgage. Thus, from ₱700,000.00 in 1990,
their loan limit was increased to ₱1,140,000.00 on October 31, 1990, then
to ₱1,300,000.00 on March 4, 1991, and then to2,450,000.00 on March PLUS 10% ATTORNEY’S FEE - - - - - - - - - - - - - - - - - - - - - - - - 540,197.50
--
23, 1994.5 The spouses Manalastas executed several promissory notes -----------------
(PNs) in favor of Chinabank. In two of the PNs, petitioners Estanislao and ------
Africa Sinamban (spouses Sinamban) signed as co-makers. 5,942,172.50
On November 18, 1998, Chinabank filed a Complaint6 for sum of money,
docketed as Civil Case No. 11708, against the spouses Manalastas and the ADD: OTHER EXPENSES
spouses Sinamban (collectively called the defendants) before the RTC.
The complaint alleged that they reneged on their loan obligations under
INSURANCE PREMIUM 22,618.37
the PNs which the spouses Manalastas executed in favor of Chinabank on
different dates, namely:
POSTING OF NOTICE OF SALE 700.00
1. PN No. OACL 634-95, dated April 24, 1995, for a loan principal of
₱1,800,000.00, with interest at 23% per annum; the spouses Manalastas
signed alone as makers.7 PUBLICATION FEE 17,500.00
2. PN No. OACL 636-95, dated May 23, 1995, for a loan principal of
REGISTRATION OF CERTIFICATE OF SALE 1,000.00
325,000.00, with interest at 21% per annum; the spouses Sinamban signed (MISC.)
as solidary co-makers;8
3. PN No. CLF 5-93, dated February 26, 1991, for a loan principal of REGISTRATION OF CERTIFICATE OF SALE (REGISTER OF
₱1,300,000.00, with interest at 22.5% per annum; only Estanislao DEEDS)
Sinamban signed as solidary co-maker.9
All of the three promissory notes carried an acceleration clause stating Registration 10,923.00
fee
that if the borrowers failed to pay any stipulated interest, installment or
loan amortization as they accrued, the notes shall, at the option of
Chinabank and without need of notice, immediately become due and Entry fee 30.00
demandable. A penalty clause also provides that an additional amount
shall be paid equivalent to 1/10 of 1% per day of the total amount due Legal fund 20.00
from date of default until fully paid, and the further sum of 10% of the
total amount due, inclusive of interests, charges and penalties, as and for
attorney’s fees and costs.10 BIR 60.00
certification
In Chinabank’s Statement of Account11 dated May 18, 1998, reproduced
below, the outstanding balances of the three loans are broken down, as Doc. stamps 69,000.00
follows: tax
(a) PN No. OACL 636-95 has an outstanding principal of ₱325,000.00,

cumulative interest of ₱184,679.00, and cumulative penalties of Capital Gains 276,000.00 356,033.00
tax
₱258,050.00, or a total amount due of ₱767,729.00; (b) PN No. OACL -----------------
634-95 has an outstanding principal of ₱1,800,000.00, cumulative ------
interest of ₱1,035,787.50, and cumulative penalties of 1,429,200.00, or a
total amount due of 4,264,987.50; and
EXPENSES INCURRED ON OCULAR 404.00
INSPECTION MADE ON
(c) PN No. CLF 5-93 has an outstanding principal of ₱148,255.08,
cumulative interest of ₱64,461.84, and cumulative penalties of TCT#173532-R & TCT#173533-R
₱156,541.58, or a total amount due of ₱369,258.50. Note that from the
original amount of ₱1,300,000.00, the loan principal had been reduced to
ATTORNEY’S FEE 18,000.00
only ₱148,255.08 as of May 18, 1998.12
CHINA BANKING CORPORATION
San Fernando, Pampanga 416,255.37
SPS. DANILO & MAGDALENA MANALASTAS
STATEMENT OF ACCOUNT
LESS: BID PRICE 4,600,000.00
As of May 18, 1998
----------
-

GRAND TOTAL - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1,758,427.87 1
estate properties subject hereof in the amount of ₱4,600,000.00.It would
--- 3 appear then that the Spouses Sinamban could not be held liable for the
deficiency in the amount of ₱1,758,427.87 which should justly be borne
alone by the defendant Spouses Manalastas. Guided by law and equity on
the matter, the court will not hesitate to amend a portion of its assailed
On the basis of the above statement of account, and pursuant to the decision to serve the interest of justice.
promissory notes, Chinabank instituted extrajudicial foreclosure
proceedings against the mortgage security. The foreclosure sale was held WHEREFORE, premises considered, the decision dated July 30, 1999 is
on May 18, 1998, with Chinabank offering the highest bid of hereby Reconsidered and Set Aside with respect to the Spouses Estanislao
₱4,600,000.00, but by then the defendants’ total obligations on the three and Africa Sinamban hereby Relieving them from any liability arising
promissory notes had risen to ₱5,401,975.00, before attorney’s fees of from the said Decision which is affirmed in toto with respect to Spouses
10% and auction expenses, leaving a loan deficiency of Manalastas.
₱1,758,427.87.14 Thus, in the complaint before the RTC, Chinabank SO ORDERED.28 (Emphases ours)
prayed to direct the defendants to jointly and severally settle the said
deficiency, plus 12% interest per annum after May 18, 1998,15 the date of The RTC ruled that the proceeds of the auction were sufficient to answer
the auction sale.16 for the two PNs co-signed by the spouses Sinamban, including interest
and penalties thereon, and therefore the spouses Manalastas should solely
The spouses Sinamban, in their Answer17 dated February 26, 1999, assume the deficiency of ₱1,758,427.87. Chinabank moved for
averred that they do not recall having executed PN No. OACL 636-95 for reconsideration on November 11, 1999,29 to which the spouses Sinamban
₱325,000.00 on May 23, 1995, or PN No. CLF 5-93 for ₱1,300,000.00 filed their comment/opposition on November 23, 1999.30
on February 26, 1991, and had no participation in the execution of PN No.
OACL 634-95 for ₱1,800,000.00 on April 24, 1995. They however On December 8, 1999, the RTC set aside its Order dated October 22, 1999
admitted that they signed some PN forms as co-makers upon the request and reinstated its Decision dated July 30, 1999, with modification, as
of the spouses Manalastas who are their relatives; although they insisted follows:31
that they derived no money or other benefits from the loans. They denied
knowing about the mortgage security provided by the spouses WHEREFORE, premises considered, the instant Motion for
Manalastas, or that the latter defaulted on their loans. They also refused Reconsideration of plaintiff is Granted.
to acknowledge the loan deficiency of ₱1,758,427.87 on the PNs,
Order dated October 22, 1999 is hereby Set Aside.
insisting that the mortgage collateral was worth more than
₱10,000,000.00, enough to answer for all the loans, interests and Accordingly, the dispositive portion of the Decision dated July 30, 1999
penalties. They also claimed that they were not notified of the auction is hereby Modified to read as follows:
sale, and denied that they knew about the Certificate of Sale18 and the
Statement of Account dated May 18, 1998, and insisted that Chinabank WHEREFORE, premises considered, judgment [is] hereby rendered in
manipulated the foreclosure sale to exclude them therefrom. By way of favor of plaintiff China Banking Corporation and against the defendant
counterclaim, the Spouses Sinamban prayed for damages and attorney’s Sps. Danilo and Magdalena Manalastas and defendant Sps. Estanislao and
fees of 25%, plus litigation expenses and costs of suit. Africa Sinamban, ordering them to pay as follows:
The spouses Manalastas were declared in default in the RTC 1. For defendant Sps. Danilo and Magdalena Manalastas, the amount of
Order19 dated April 6, 1999, and Chinabank was allowed to present ₱1,758,427.87, the deficiency between the acquisition cost of the
evidence ex parte as against them, but at the pre-trial conference held on foreclosed real properties and their outstanding obligation;
July 5, 1999, the spouses Sinamban and their counsel also did not
2. For defendant Sps. Sinamban a percentage of ₱1,758,427.87, jointly
appear;20 hence, in the Order21 dated July 5, 1999, the RTC allowed
and severally with the defendant Sps. [Manalastas] only on two (2)
Chinabank to present evidence ex parte against the defendants before the
promissory notes;
Branch Clerk of Court. During the testimony of Rosario D. Yabut, Branch
Manager of Chinabank-San Fernando Branch, all the foregoing facts were 3. The corresponding interests thereon at legal rate;
adduced and confirmed, particularly the identity of the pertinent loan
documents and the signatures of the defendants. On July 21, 1999, the 4. Attorney’s fees; and
court admitted the exhibits of Chinabank and declared the case submitted
5. Costs of suit.
for decision.22
SO ORDERED.32
Ruling of the RTC
This time the RTC held that the spouses Sinamban must, solidarily with
On July 30, 1999, the RTC rendered its Decision23 with the following
the spouses Manalastas, proportionately answer for the loan deficiency
dispositive portion: WHEREFORE, premises considered, judgment is
pertaining to the two PNs they co-signed, since the mortgage security
hereby rendered in favor of plaintiff China Banking Corporation and
provided by the spouses Manalastas secured all three PNs and thus also
against defendant Sps. Danilo and Magdalena Manalastas and defendant
benefited them as co-makers. But since they did not co-sign PN No.
Sps. Estanislao and Africa Sinamban to jointly and severally pay
OACL 634-95, the deficiency judgment pertaining thereto will be the sole
[Chinabank] the amount of ₱1,758,427.87, representing the deficiency
liability of the spouses Manalastas.
between the acquisition cost of the foreclosed real estate properties and
the outstanding obligation of defendants at the time of the foreclosure Ruling of the CA
sale; interest at the legal rate of 12% per annum from and after May 18,
1998; attorney’s fees equivalent to 10% of the aforesaid deficiency From the Order dated December 8, 1999 of the RTC, the spouses
amount and the litigation and costs of suit. Sinamban appealed to the CA on January 4, 2000, docketed as CA-G.R.
CV. No. 66274, interposing the following errors of the RTC, viz:
SO ORDERED.24
I
On Motion for Reconsideration25 of the spouses Sinamban dated August
27, 1999, to which Chinabank filed an Opposition26 dated September 14, THE LOWER COURT ERRED WHENIT HELD
1999, the RTC in its Order27 dated October 22, 1999 set aside the DEFENDANTSAPPELLANTS SPS. SINAMBAN LIABLE TO PAY A
Decision dated July 30, 1999 with respect to the spouses Sinamban, in PERCENTAGE OF ₱1,758,427.87, JOINTLY AND SEVERALLY
this wise: WITH THE DEFENDANTS SPS. MANALASTAS ON THE TWO
PROMISSORY NOTES (EXHIBITS ‘C’ AND ‘A’).
As it is undisputed that Exhibit "B" (Promissory Note dated April 24,
1995 in the amount of ₱1,800,000.00), was not signed by the Spouses II
Sinamban it would not be equitable that the said defendants be made
THE LOWER COURT ERRED WHEN IT RECONSIDERED AND SET
solidarily liable for the payment of the said note as co-makers of their co-
ASIDE ITS PREVIOUS ORDER DATED 22 OCTOBER 1999
defendants Spouses Manalastas who are the one[s] principally liable
RELIEVING DEFENDANTS-APPELLANTS SPS. SINAMBAN
thereto. Prescinding from this premise, the movant spouses could only be
FROM ANY LIABILITY ARISING FROM THE DECISION DATED
held liable for the two (2) promissory notes they have signed, Promissory
30 JULY 1999.
Notes dated May 23, 1995 in the amount of ₱325,000.00 and February
26, 1991 in the amount of ₱1,300,000.00, Exhibits "A" and "C", III
respectively. As the total amount of the said notes is only ₱1,625,000.00,
so even if we would add the interests due thereon, there is no way that the THE LOWER COURT ERRED WHEN IT RENDERED THE VAGUE
said outstanding loan exceed[s] the acquisition cost of the foreclosed real ORDER OF 8 DECEMBER 1999 (ANNEX ‘B’ HEREOF).33

On May 19, 2010, the CA rendered judgment denying the appeal, the fallo law or the nature of the obligation requires solidarity." It is settled that
of which reads: WHEREFORE, considering the foregoing disquisition, when the obligor or obligors undertake to be "jointly and severally" liable,
the appeal is DENIED. The Decision dated 30 July 1999 and the Order it means that the obligation is solidary.39 In this case, the spouses
dated 08 December 1999 of the Regional Trial Court of San Fernando, Sinamban expressly bound themselves to be jointly and severally, or
Pampanga, Branch 45 in Civil Case No. 11708are hereby AFFIRMED solidarily, liable with the principal makers of the PNs, the spouses
with MODIFICATION in that: Manalastas.
1. Sps. Danilo and Magdalena Manalastas are solidarily liable for the Moreover, as the CA pointed out, in Paragraph 5 of the PNs, the borrowers
deficiency amount of Php507,741.62 (inclusive of 10% attorney’s fees) and their co-makers expressly authorized Chinabank, as follows:
on Promissory Note No. OACL 634-95 dated 24 April 1995;
[T]o apply to the payment of this note and/or any other particular
2. Sps. Estanislao and Africa Sinamban are solidarily liable with Sps. obligation or obligations of all or any one of us to the CHINA BANKING
Danilo and Magdalena Manalastas for the amount of Php844,501.90 CORPORATION as the said Corporation may select, irrespective of the
(inclusive of 10% attorney’s fees) on Promissory Note No. OACL00636- dates of maturity, whether or not said obligations are then due, any or all
95 dated 23 May 1995; moneys, securities and things of value which are now or which may
hereafter be in its hands on deposit or otherwise to the credit of, or
3. Estanislao Sinamban and Sps. Danilo and Magdalena Manalastas are belonging to, all or any one of us, and the CHINA BANKING
solidarily liable for the amount of Php406,184.35 (inclusive of 10% CORPORATION is hereby authorized to sell at public or private sale such
attorney’s fees) on Promissory Note No. CLF 5-93 dated 26 February securities or things of value for the purpose of applying their proceeds to
1991; and such payments.40
4. The foregoing amounts shall bear interest at the rate of 12% per annum Pursuant to Article 1216 of the Civil
from 18 November 1998 until fully paid. Code, as well as Paragraph 5 of the
SO ORDERED.34 (Some emphasis ours) PNs, Chinabank opted to proceed
against the co-debtors
Petition for Review to the Supreme Court simultaneously, as implied in its
May 18, 1998 statement of
In this petition for review, the spouses Sinamban seek to be completely account when it applied the entire
relieved of any liability on the PNs, solidary or otherwise, by interposing amount of its auction bid to the
the following issues: aggregate amount of the loan
5.1 Whether or not the Honorable Court of Appeals erred in not obligations.
considering that the Sps. Sinamban’s obligations under PN# OACL 636- The PNs were executed to acknowledge each loan obtained from the
95 dated May 23, 1995 in the principal sum of Php325,000.00 and PN# credit line extended by Chinabank, which the principal makers and true
CLF 5-93 dated February 26, 1991 in the principal sum of beneficiaries, the spouses Manalastas, secured with a REM they executed
Php1,300,000.00 are more onerous and burdensome on their part as mere over their properties. As the RTC noted in its Order dated December 8,
sureties (co-makers) of their co-defendants-spouses Danilo and 1999, "the real estate mortgage was constituted to secure all the three (3)
Magdalena Manalastas’ (hereinafter referred to as the "Sps. Manalastas") promissory notes," concluding that "[j]ust as the liability of the [spouses]
obligations over the same, compared to the Sps. Manalastas’ sole Sinamban was lessened by the foreclosure proceedings, so must they also
obligation under PN# OACL 634-95 dated 24 April 1995 in the principal share in the deficiency judgment, in proportion to the PNs they co-signed
amount of Php1,800,000.00, such that the proceeds of the auction sale of with the [spouses] Manalastas, but notthe entire deficiency judgment of
the properties securing all the three (3) promissory notes should first be ₱1,758,427.87."41
applied to satisfy the promissory notes signed by the Sps. Sinamban; and
Significantly, in modifying the RTC’s second amended decision, which
5.2 Whether or not the Honorable Court of Appeals erred in not provides for the pro rata distribution of the loan deficiency of
considering the facts indubitably showing that it is the Sps. Sinamban, as ₱1,758,427.87, the CA first applied the entire net proceeds of the auction
the debtors, and not the respondent bank, who are given the choice under sale of ₱4,183,744.63 (after auction expenses of ₱416,255.37), to PN No.
Article 1252 of the Civil Code to have the proceeds of the auction sale OACL 634-95, which on May 18, 1998 had an outstanding balance of
applied as payments to their obligations under PN# OACL 636-95 dated ₱4,264,987.50, inclusive of interest and penalties, plus 10% attorney’s
23 May 1995 and PN# CLF 5-93 dated 26 February 1991.35 fees, or a total of ₱4,691,486.25. Thus, ₱4,691,486.25 less
Ruling of the Court ₱4,183,744.63 leaves a deficiency on PN No. OACL 634-95 of
₱507,741.62, which is due solely from the spouses Manalastas.
The Court modifies the CA decision.
As for PN No. OACL 636-95, the CA ordered the spouses Sinamban to
A co-maker of a PN who binds pay, solidarily with the spouses Manalastas, the entire amount due
himself with the maker "jointly and thereon, ₱844,501.90, consisting of the loan principal of ₱767,729.00
severally" renders himself directly plus accrued interest, penalties and 10% attorney’s fees; concerning PN
and primarily liable with the maker No. CLF 5-93, the CA ordered the spouses Sinamban to pay, solidarily
on the debt, without reference to his with the spouses Manalastas, the amount of ₱406,184.35, consisting of
solvency. the balance of the loan principal of ₱369,258.50 plus accrued interest,
penalties and 10% attorney’s fees. The CA further ordered the payment
"A promissory note is a solemn acknowledgment of a debt and a formal of 12% interest per annum from November 18, 1998, the date of judicial
commitment to repay it on the date and under the conditions agreed upon demand, until fully paid, on the above deficiencies.
by the borrower and the lender. A person who signs such an instrument is
bound to honor it as a legitimate obligation duly assumed by him through Article 1216 of the Civil Code provides that "[t]he creditor may proceed
the signature he affixes thereto as a token of his good faith. If he reneges against any one of the solidary debtors or some or all of them
on his promise without cause, he forfeits the sympathy and assistance of simultaneously. The demand made against one of them shall not be an
this Court and deserves instead its sharp repudiation."36 obstacle to those which may subsequently be directed against the others,
so long as the debt has not been fully collected." Article 125242 of the
Employing words of common commercial usage and well-accepted legal Civil Code does not apply, as urged by the petitioners, because in the said
significance, the three subject PNs uniformly describe the solidary nature article the situation contemplated is that of a debtor with several debts
and extent of the obligation assumed by each of the defendants in Civil due, whereas the reverse is true, with each solidary debt imputable to
Case No. 11708, to wit: several debtors.
"FOR VALUE RECEIVED, I/We jointly and severally promise to pay to While the CA correctly noted that the choice is given to the solidary
the CHINA BANKING CORPORATION or its order the sum of PESOS creditor to determine against whom he wishes to enforce payment, the CA
x x x[.]"37 (Emphasis ours) stated that Chinabank, in the exercise of the aforesaid option, chose to
According to Article 2047 of the Civil Code,38 if a person binds himself apply the net proceeds of the extrajudicial foreclosure sale first to the PN
solidarily with the principal debtor, the provisions of Articles 1207 to solely signed by spouses Manalastas.43 Thus, the net proceeds were
1222 of the Civil Code (Section 4, Chapter 3,Title I, Book IV) on joint applied first to PN No. OACL 634-95 in the principal amount of
and solidary obligations shall be observed. Thus, where there is a ₱1,800,000.00, instead of pro rata to all three PNs due.
concurrence of two or more creditors or of two or more debtors in one and The Court finds this factual conclusion of the CA not supported by any
the same obligation, Article 1207 provides that among them, "[t]here is a evidence or any previous arrangement. To the contrary, as clearly shown
1âwphi1
solidary liability only when the obligation expressly so states, or when the in its Statement of Account dated May 18, 1998, Chinabank opted to

apply the entire auction proceeds to the aggregate amount of the three PNs of San Fernando City, Pampanga, Branch 45 in Civil Case No. 11708 are
due, ₱5,401,975.00 (before attorney’s fees and auction expenses). Had it hereby AFFIRMED with MODIFICATIONS as follows:
chosen to enforce the debts as ruled by the CA, the Statement of Account
would have shown that the loan due on PN No. OACL 634-95 which is 1. Spouses Danilo and Magdalena Manalastas are solidarily liable for the
₱4,691,486.25, should have been deducted first from the net auction deficiency amount of 1,388,320.55 (inclusive of 10% attorney’s fees) on
proceeds of ₱4,183,744.63, arriving at a deficiency of ₱507,741.62on PN Promissory Note No. OACL 634-95 dated April 24, 1995;
No. OACL 634-95 alone; thereby, leaving no remainder of the proceeds 2. Spouses Estanislao and Africa Sinamban are solidarily liable with
available to partially settle the other two PNs. As it appears, the auction spouses Danilo and Magdalena Manalastas for the deficiency amount of
proceeds are not even sufficient to cover just PN No. OACL 634-95 alone. ₱249,907.87(inclusive of 10% attorney’s fees) on Promissory Note No.
But as the Court has noted, by deducting the auction proceeds from the OACL 636-95 dated May 23, 1995;
aggregate amount of the three loans due, Chinabank in effect opted to 3. Estanislao Sinamban and spouses Danilo and Magdalena Manalastas
apply the entire proceeds of the auction simultaneously to all the three are solidarily liable for the deficiency amount of ₱120,199.45 (inclusive
loans. This implies that each PN will assume a pro rata portion of the of 10% attorney’s fees) on Promissory Note No. CLF 5-93 dated February
resulting deficiency on the total indebtedness as bears upon each PN’s 26, 1991; and
outstanding balance. Contrary to the spouses Sinamban’s insistence, none
of the three PNs is more onerous than the others to justify applying the 4. The foregoing amounts shall bear interest at the rate of twelve percent
proceeds according to Article 1254 of the Civil Code, in relation to (12%) per annum from November 18, 1998 to June 30, 2013, and six
Articles 1252 and 1253.44 Since each loan, represented by each PN, was percent (6%) per annum from July 1, 2013 until fully paid.
obtained under a single credit line extended by Chinabank for the working
capital requirements of the spouses Manalastas’ rice milling business, SO ORDERED.
which credit line was secured also by a single REM over their properties,
then each PN is simultaneously covered by the same mortgage security,
the foreclosure of which will also benefit them proportionately. No PN O BLIGATION WITH A PENAL CLAUSE
enjoys any priority or preference in payment over the others, with the only
J Plus Asia Development Corp. v. Utility Assurance Corp.
difference being that the spouses Sinamban are solidarily liable for the
G.R. No. 199650 June 26, 2013
deficiency on two of them.
J PLUS ASIA DEVELOPMENT CORPORATION, Petitioner,
Pursuant, then, to the order or manner of application of the auction
vs.
proceeds chosen by Chinabank, the solidary liability of the defendants
UTILITY ASSURANCE CORPORATION, Respondent.
pertaining to each PN shall be as follows:
DECISION
a) PN No. OACL 634-95, with a balance as of May 18, 1998 of
₱4,264,987.50: its share in the total deficiency is computed as the ratio of VILLARAMA, JR., J.:
₱4,264,987.50 to ₱5,401,975.00, multiplied by ₱1,758,427.87, or
₱1,388,320.55, (not ₱507,741.62 as found by the CA); Before the Court is a petition for review on certiorari under Rule 45 of the
1
1997 Rules of Civil Procedure, as amended, assailing the Decision dated
b) PN No. OACL 636-95, with a balance of ₱767,729.00 as of May 18, 2
1998: its share in the deficiency is computed as the ratio of ₱767,729.00 January 27,2011 and Resolution dated December 8, 2011 of the Court of
to ₱5,401,975.00, multiplied by ₱1,758,427.87, or ₱249,907.87, (not Appeals (CA) in CA-G.R. SP No. 112808.
₱844,501.90 as computed by the CA);
The Facts
c) PN No. CLF 5-93, with an outstanding balance of ₱369,258.50 as of
On December 24, 2007, petitioner J Plus Asia Development Corporation
May 18, 1998: its share in the deficiency is computed as the ratio of
represented by its Chairman, Joo Han Lee, and Martin E. Mabunay, doing
₱369,258.50 to ₱5,401,975.00, multiplied by ₱1,758,427.87, or
business under the name and style of Seven Shades of Blue Trading and
₱120,199.45, (not ₱406,184.35 as found by the CA). 3
Services, entered into a Construction Agreement whereby the latter
In short, in the CA decision, the spouses Manalastas would be solely undertook to build the former's 72-room condominium/hotel (Condotel
liable on PN No. OACL 634-95 for only ₱507,741.62(instead of the much Building 25) located at the Fairways & Bluewaters Golf & Resort in
bigger amount of ₱1,388,320.55which this Court found), whereas the Boracay Island, Malay, Aklan. The project, costing ₱42,000,000.00, was
spouses Sinamban would be solidarily liable with the spouses Manalastas to be completed within one year or 365 days reckoned from the first
for a total deficiency of ₱1,250,686.25 on PN No. OACL 636-95 and PN calendar day after signing of the Notice of Award and Notice to Proceed
No. CLF 5-93. But under the Court’s interpretation, the spouses Sinamban and receipt of down payment (20% of contract price). The ₱8,400,000.00
are solidarily liable with the spouses Manalastas for only ₱370,107.32on 4
down payment was fully paid on January 14, 2008. Payment of the
the said two PNs, for a significant difference of ₱880,578.93. balance of the contract price will be based on actual work finished within
Pursuant to Monetary Board 15 days from receipt of the monthly progress billings. Per the agreed work
Circular No. 799, effective July 1, schedule, the completion date of the project was December
5 6
2013, the rate of interest for the 2008. Mabuhay also submitted the required Performance Bond issued
loan or forbearance of any money, by respondent Utility Assurance Corporation (UTASSCO) in the amount
goods or credits and the rate equivalent to 20% down payment or ₱8.4 million.
allowed in judgments, in the
absence of an express contract as to Mabunay commenced work at the project site on January 7, 2008.
such rate of interest, has been Petitioner paid up to the 7th monthly progress billing sent by Mabunay.
reduced to six percent (6%) per As of September 16, 2008, petitioner had paid the total amount of
annum. ₱15,979,472.03 inclusive of the 20% down payment. However, as of said
7
date, Mabunay had accomplished only 27.5% of the project.
The subject three PNs bear interests ranging from 21% to 23% per annum,
exclusive of penalty of 1% on the overdue amount per month of delay, 8
In the Joint Construction Evaluation Result and Status Report signed by
whereas in its complaint, Chinabank prayed to recover only the legal rate Mabunay assisted by Arch. Elwin Olavario, and Joo Han Lee assisted by
of 12% on whatever judgment it could obtain. Meanwhile, the Monetary Roy V. Movido, the following findings were accepted as true, accurate
Board of the Bangko Sentral ng Pilipinas in its Resolution No. 796 dated and correct:
May 16, 2013, and now embodied in Monetary Board Circular No. 799,
has effective July 1, 2013 reduced to 6%, from 12%, the legal rate of III STATUS OF PROJECT AS OF 14 NOVEMBER 2008
interest for the loan or forbearance of any money, goods or credits and the
rate allowed in judgments, in the absence of stipulation.45 Since 1) After conducting a joint inspection and evaluation of the project to
Chinabank demanded only the legal, not the stipulated, interest rate on the determine the actual percentage of accomplishment, the contracting
deficiency and attorney’s fees due, the defendants will solidarily pay parties, assisted by their respective technical groups, SSB assisted by
interest on their shares in the deficiency at the rate of 12% from November Arch. Elwin Olavario and JPLUS assisted by Engrs. Joey Rojas and
18, 1998 to June 30, 2013, and 6% from July 1, 2013 until fully paid. Shiela Botardo, concluded and agreed that as of 14 November 2008, the
WHEREFORE, the Decision of the Court of Appeals dated May 19, 2010 project is only Thirty One point Thirty Nine Percent (31.39%) complete.
in CA-G.R. CV No. 66274 is MODIFIED. The Decision dated July 30,
2) Furthermore, the value of construction materials allocated for the
1999 and the Order dated December 8, 1999 of the Regional Trial Court
completion of the project and currently on site has been determined and
agreed to be ONE MILLION FORTY NINE THOUSAND THREE

HUNDRED SIXTY FOUR PESOS AND FORTY FIVE CENTAVOS 3. Respondent Mabunay to indemnify respondent Utassco of the amounts
(₱1,049,364.45) respondent Utassco will have paid to claimant under this decision, plus
interest thereon at the rate of 12% per annum computed from the date he
3) The additional accomplishment of SSB, reflected in its reconciled and is notified of such payment made by respondent Utassco to claimant until
consolidated 8th and 9th billings, is Three point Eighty Five Percent fully paid, and to pay Utassco ₱100,000.00 as attorney’s fees.
(3.85%) with a gross value of ₱1,563,553.34 amount creditable to SSB
after deducting the withholding tax is ₱1,538,424.84 SO ORDERED.
17
4) The unrecouped amount of the down payment is ₱2,379,441.53 after Dissatisfied, respondent filed in the CA a petition for review under Rule
deducting the cost of materials on site and the net billable amount 43 of the 1997 Rules of Civil Procedure, as amended.
reflected in the reconciled and consolidated 8th and 9th billings. The
uncompleted portion of the project is 68.61% with an estimated value per In the assailed decision, the CA agreed with the CIAC that the specific
9 condition in the Performance Bond did not clearly state the limitation of
construction agreement signed is ₱27,880,419.52. (Emphasis supplied.)
18
the surety’s liability. Pursuant to Article 1377 of the Civil Code, the CA
On November 19, 2008, petitioner terminated the contract and sent said that the provision should be construed in favor of petitioner
demand letters to Mabunay and respondent surety. As its demands went considering that the obscurely phrased provision was drawn up by
10
unheeded, petitioner filed a Request for Arbitration before the respondent and Mabunay. Further, the appellate court stated that
Construction Industry Arbitration Commission (CIAC). Petitioner prayed respondent could not possibly guarantee the down payment because it is
that Mabunay and respondent be ordered to pay the sums of not Mabunay who owed the down payment to petitioner but the other way
₱8,980,575.89 as liquidated damages and ₱2,379,441.53 corresponding around. Consequently, the completion by Mabunay of 31.39% of the
to the unrecouped down payment or overpayment petitioner made to construction would not lead to the extinguishment of respondent’s
Mabunay.
11 liability. The ₱8.4 million was a limit on the amount of respondent’s
liability and not a limitation as to the obligation or undertaking it
12 guaranteed.
In his Answer, Mabunay claimed that the delay was caused by
retrofitting and other revision works ordered by Joo Han Lee. He asserted However, the CA reversed the CIAC’s ruling that Mabunay had incurred
that he actually had until April 30, 2009 to finish the project since the 365 delay which entitled petitioner to the stipulated liquidated damages and
days period of completion started only on May 2, 2008 after clearing the unrecouped down payment. Citing Aerospace Chemical Industries, Inc.
retrofitted old structure. Hence, the termination of the contract by 19
petitioner was premature and the filing of the complaint against him was v. Court of Appeals, the appellate court said that not all requisites in
baseless, malicious and in bad faith. order to consider the obligor or debtor in default were present in this case.
It held that it is only from December 24, 2008 (completion date) that we
Respondent, on the other hand, filed a motion to dismiss on the ground should reckon default because the Construction Agreement provided only
that petitioner has no cause of action and the complaint states no cause of for delay in the completion of the project and not delay on a monthly basis
action against it. The CIAC denied the motion to dismiss. Respondent’s using the work schedule approved by petitioner as the reference point.
13 Hence, petitioner’s termination of the contract was premature since the
motion for reconsideration was likewise denied.
delay in this case was merely speculative; the obligation was not yet
In its Answer Ex Abundante Ad Cautelam With Compulsory demandable.
14
Counterclaims and Cross-claims, respondent argued that the The dispositive portion of the CA Decision reads:
performance bond merely guaranteed the 20% down payment and not the
entire obligation of Mabunay under the Construction Agreement. Since WHEREFORE, premises considered, the instant petition for review is
the value of the project’s accomplishment already exceeded the said GRANTED. The assailed Decision dated 13 January 2010 rendered by
amount, respondent’s obligation under the performance bond had been the CIAC Arbitral Tribunal in CIAC Case No. 03-2009 is hereby
fully extinguished. As to the claim for alleged overpayment to Mabunay, REVERSED and SET ASIDE. Accordingly, the Writ of Execution dated
respondent contended that it should not be credited against the 20% down 24 November 2010 issued by the same tribunal is hereby ANNULLED
payment which was already exhausted and such application by petitioner and SET ASIDE.
is tantamount to reviving an obligation that had been legally extinguished
20
by payment. Respondent also set up a cross-claim against Mabunay who SO ORDERED.
executed in its favor an Indemnity Agreement whereby Mabunay
undertook to indemnify respondent for whatever amounts it may be Petitioner moved for reconsideration of the CA decision while respondent
adjudged liable to pay petitioner under the surety bond. filed a motion for partial reconsideration. Both motions were denied.
Both petitioner and respondent submitted their respective documentary The Issues
and testimonial evidence. Mabunay failed to appear in the scheduled Before this Court petitioner seeks to reverse the CA insofar as it denied
hearings and to present his evidence despite due notice to his counsel of petitioner’s claims under the Performance Bond and to reinstate in its
record. The CIAC thus declared that Mabunay is deemed to have waived entirety the February 2, 2010 CIAC Decision. Specifically, petitioner
15
his right to present evidence. alleged that –
16 A. THE COURT OF APPEALS SERIOUSLY ERRED IN NOT
On February 2, 2010, the CIAC rendered its Decision and made the
following award: HOLDING THAT THE ALTERNATIVE DISPUTE RESOLUTION
ACT AND THE SPECIAL RULES ON ALTERNATIVE DISPUTE
Accordingly, in view of our foregoing discussions and dispositions, the RESOLUTION HAVE STRIPPED THE COURT OF APPEALS OF
Tribunal hereby adjudges, orders and directs: JURISDICTION TO REVIEW ARBITRAL AWARDS.
1. Respondents Mabunay and Utassco to jointly and severally pay B. THE COURT OF APPEALS SERIOUSLY ERRED IN REVERSING
claimant the following: THE ARBITRAL AWARD ON AN ISSUE THAT WAS NOT RAISED
IN THE ANSWER. NOT IDENTIFIED IN THE TERMS OF
a) ₱4,469,969.90, as liquidated damages, plus legal interest thereon at the REFERENCE, NOT ASSIGNED AS ANERROR, AND NOT ARGUED
rate of 6% per annum computed from the date of this decision up to the IN ANY OF THE PLEADINGS FILED BEFORE THE COURT.
time this decision becomes final, and 12% per annum computed from the
date this decision becomes final until fully paid, and C. THE COURT OF APPEALS SERIOUSLY ERRED IN RELYING
ON THE CASE OF AEROSPACE CHEMICAL INDUSTRIES, INC. v.
b) ₱2,379,441.53 as unrecouped down payment plus interest thereon at COURT OF APPEALS, 315 SCRA 94, WHICH HAS NOTHING TO
the rate of 6% per annum computed from the date of this decision up to 21
the time this decision becomes final, and 12% per annum computed from DO WITH CONSTRUCTION AGREEMENTS.
the date this decision becomes final until fully paid. Our Ruling
It being understood that respondent Utassco’s liability shall in no case On the procedural issues raised, we find no merit in petitioner’s
exceed ₱8.4 million. contention that with the institutionalization of alternative dispute
22
2. Respondent Mabunay to pay to claimant the amount of ₱98,435.89, resolution under Republic Act (R.A.) No. 9285, otherwise known as the
which is respondent Mabunay’s share in the arbitration cost claimant had Alternative Dispute Resolution Act of 2004, the CA was divested of
advanced, with legal interest thereon from January 8, 2010 until fully jurisdiction to review the decisions or awards of the CIAC. Petitioner
paid. erroneously relied on the provision in said law allowing any party to a

domestic arbitration to file in the Regional Trial Court (RTC) a petition 1. The CONTRACTOR shall complete the works called for under this
either to confirm, correct or vacate a domestic arbitral award. Agreement within ONE (1) YEAR or 365 Days reckoned from the 1st
calendar day after signing of the Notice of Award and Notice to Proceed
We hold that R.A. No. 9285 did not confer on regional trial courts and receipt of down payment.
jurisdiction to review awards or decisions of the CIAC in construction
disputes. On the contrary, Section 40 thereof expressly declares that 2. In this regard the CONTRACTOR shall submit a detailed work
confirmation by the RTC is not required, thus: schedule for approval by OWNER within Seven (7) days after signing of
this Agreement and full payment of 20% of the agreed contract price. Said
SEC. 40. Confirmation of Award. – The confirmation of a domestic detailed work schedule shall follow the general schedule of activities and
arbitral award shall be governed by Section 23 of R.A. 876. shall serve as basis for the evaluation of the progress of work by
29
A domestic arbitral award when confirmed shall be enforced in the same CONTRACTOR.
manner as final and executory decisions of the Regional Trial Court.
In this jurisdiction, the following requisites must be present in order that
The confirmation of a domestic award shall be made by the regional trial the debtor may be in default: (1) that the obligation be demandable and
court in accordance with the Rules of Procedure to be promulgated by the already liquidated; (2) that the debtor delays performance; and (3) that the
Supreme Court. 30
creditor requires the performance judicially or extrajudicially.
A CIAC arbitral award need not be confirmed by the regional trial court In holding that Mabunay has not at all incurred delay, the CA pointed out
to be executory as provided under E.O. No. 1008. (Emphasis supplied.) that the obligation to perform or complete the project was not yet
Executive Order (EO) No. 1008 vests upon the CIAC original and demandable as of November 19, 2008 when petitioner terminated the
exclusive jurisdiction over disputes arising from, or connected with, contract, because the agreed completion date was still more than one
contracts entered into by parties involved in construction in the month away (December 24, 2008). Since the parties contemplated delay
Philippines, whether the dispute arises before or after the completion of in the completion of the entire project, the CA concluded that the failure
the contract, or after the abandonment or breach thereof. By express of the contractor to catch up with schedule of work activities did not
provision of Section 19 thereof, the arbitral award of the CIAC is final constitute delay giving rise to the contractor’s liability for damages.
and unappealable, except on questions of law, which are appealable to the We cannot sustain the appellate court’s interpretation as it is inconsistent
Supreme Court. With the amendments introduced by R.A. No. 7902 and with the terms of the Construction Agreement. Article 1374 of the Civil
promulgation of the 1997 Rules of Civil Procedure, as amended, the Code requires that the various stipulations of a contract shall be
CIAC was included in the enumeration of quasijudicial agencies whose interpreted together, attributing to the doubtful ones that sense which may
decisions or awards may be appealed to the CA in a petition for review result from all of them taken jointly. Here, the work schedule approved
under Rule 43. Such review of the CIAC award may involve either by petitioner was intended, not only to serve as its basis for the payment
23
questions of fact, of law, or of fact and law. of monthly progress billings, but also for evaluation of the progress of
work by the contractor. Article 13.01 (g) (iii) of the Construction
Petitioner misread the provisions of A.M. No. 07-11-08-SC (Special ADR Agreement provides that the contractor shall be deemed in default if,
Rules) promulgated by this Court and which took effect on October 30, among others, it had delayed without justifiable cause the completion of
2009. Since R.A. No. 9285 explicitly excluded CIAC awards from the project "by more than thirty (30) calendar days based on official work
domestic arbitration awards that need to be confirmed to be executory, 31
said awards are therefore not covered by Rule 11 of the Special ADR schedule duly approved by the OWNER."
24
Rules, as they continue to be governed by EO No. 1008, as amended Records showed that as early as April 2008, or within four months after
and the rules of procedure of the CIAC. The CIAC Revised Rules of Mabunay commenced work activities, the project was already behind
25 schedule for reasons not attributable to petitioner. In the succeeding
Procedure Governing Construction Arbitration provide for the manner
and mode of appeal from CIAC decisions or awards in Section 18 thereof, months, Mabunay was still unable to catch up with his accomplishment
which reads: even as petitioner constantly advised him of the delays, as can be gleaned
from the following notices of delay sent by petitioner’s engineer and
SECTION 18.2 Petition for review. – A petition for review from a final construction manager, Engr. Sheila N. Botardo:
award may be taken by any of the parties within fifteen (15) days from
receipt thereof in accordance with the provisions of Rule 43 of the Rules April 30, 2008
of Court. Seven Shades of Blue
As to the alleged error committed by the CA in deciding the case upon an Boracay Island
issue not raised or litigated before the CIAC, this assertion has no basis. Malay, Aklan
Whether or not Mabunay had incurred delay in the performance of his 1âwphi1
obligations under the Construction Agreement was the very first issue
26
stipulated in the Terms of Reference (TOR), which is distinct from the Attention : Mr. Martin Mabunay
issue of the extent of respondent’s liability under the Performance Bond.
General Manager
Indeed, resolution of the issue of delay was crucial upon which depends
petitioner’s right to the liquidated damages pursuant to the Construction
Agreement. Contrary to the CIAC’s findings, the CA opined that delay Thru : Engr. Reynaldo Gapasin
should be reckoned only after the lapse of the one-year contract period,
and consequently Mabunay’s liability for liquidated damages arises only
Project : Villa Beatriz
upon the happening of such condition.
We reverse the CA.
Subject : Notice of Delay
Default or mora on the part of the debtor is the delay in the fulfillment of
the prestation by reason of a cause imputable to the former. It is the non-
27
fulfillment of an obligation with respect to time. Dear Mr. Mabunay:
Article 1169 of the Civil Code provides: This is to formalize our discussion with your Engineers during our
ART. 1169. Those obliged to deliver or to do something incur in delay meeting last April 23, 2008 regarding the delay in the implementation of
from the time the obligee judicially or extrajudicially demands from them major activities based on your submitted construction schedule.
the fulfillment of their obligation. Substantial delay was noted in concreting works that affects your roof
framing that should have been 40% completed as of this date. This delay
xxxx will create major impact on your over-all schedule as the finishing works
will all be dependent on the enclosure of the building.
It is a general rule that one who contracts to complete certain work within
a certain time is liable for the damage for not completing it within such In this regard, we recommend that you prepare a catch-up schedule and
28 expedite the delivery of critical materials on site. We would highly
time, unless the delay is excused or waived.
appreciate if you could attend our next regular meeting so we could
The Construction Agreement provides in Article 10 thereof the following immediately address this matter. Thank you.
conditions as to completion time for the project

Very truly yours, OWNER, plus One (1) Week grace period, without any justifiable reason,
the CONTRACTOR hereby agrees –
Engr. Sheila N. Botardo
32 a. The CONTRACTOR shall pay the OWNER liquidated damages
Construction Manager – LMI/FEPI
equivalent to One Tenth of One Percent (1/10 of 1%) of the Contract
October 15, 2008 Amount for each day of delay after any and all extensions and the One (1)
week Grace Period until completed by the CONTRACTOR.
xxxx
b. The CONTRACTOR, even after paying for the liquidated damages due
Dear Mr. Mabunay, to unexecuted works and/or delays shall not relieve it of the obligation to
We have noticed continuous absence of all the Engineers that you have complete and finish the construction.
assigned on-site to administer and supervise your contracted work. For Any sum which maybe payable to the OWNER for such loss may be
the past two (2) weeks, your company does not have a Technical deducted from the amounts retained under Article 9 or retained by the
Representative manning the jobsite considering the critical activities that OWNER when the works called for under this Agreement have been
are in progress and the delays in schedule that you have already incurred. finished and completed.
In this regard, we would highly recommend the immediate replacement
of your Project Engineer within the week. Liquidated Damage[s] payable to the OWNER shall be automatically
deducted from the contractors collectibles without prior consent and
We would highly appreciate your usual attention on this matter. concurrence by the CONTRACTOR.
33
xxxx 12.02 To give full force and effect to the foregoing, the CONTRACTOR
hereby, without necessity of any further act and deed, authorizes the
November 5, 2008 OWNER to deduct any amount that may be due under Item (a) above,
xxxx from any and all money or amounts due or which will become due to the
CONTRACTOR by virtue of this Agreement and/or to collect such
Dear Mr. Mabunay, amounts from the Performance Bond filed by the CONTRACTOR in this
36
Agreement. (Emphasis supplied.)
This is in reference to your discussion during the meeting with Mr. Joohan
Lee last October 30, 2008 regarding the construction of the Field Office Liability for liquidated damages is governed by Articles 2226 to 2228 of
and Stock Room for Materials intended for Villa Beatriz use only. We the Civil Code, which provide:
understand that you have committed to complete it November 5, 2008 but
as of this date there is no improvement or any ongoing construction ART. 2226. Liquidated damages are those agreed upon by the parties to
activity on the said field office and stockroom. a contract, to be paid in case of breach thereof.
We are expecting deliveries of Owner Supplied Materials very soon, ART. 2227. Liquidated damages, whether intended as an indemnity or a
therefore, this stockroom is badly needed. We will highly appreciate if penalty, shall be equitably reduced if they are iniquitous or
this matter will be given your immediate attention. unconscionable.
Thank you. ART. 2228. When the breach of the contract committed by the defendant
is not the one contemplated by the parties in agreeing upon the liquidated
34
xxxx damages, the law shall determine the measure of damages, and not the
stipulation.
November 6, 2008
A stipulation for liquidated damages is attached to an obligation in order
xxxx to ensure performance and has a double function: (1) to provide for
Dear Mr. Mabunay, liquidated damages, and (2) to strengthen the coercive force of the
obligation by the threat of greater responsibility in the event of
We would like to call your attention regarding the decrease in your 37
breach. The amount agreed upon answers for damages suffered by the
manpower assigned on site. We have observed that for the past three (3) 38
owner due to delays in the completion of the project. As a precondition
weeks instead of increasing your manpower to catch up with the delay it
was reduced to only 8 workers today from an average of 35 workers in to such award, however, there must be proof of the fact of delay in the
39
the previous months. performance of the obligation.
Please note that based on your submitted revised schedule you are already Concededly, Article 12.01 of the Construction Agreement mentioned
delayed by approximately 57% and this will worsen should you not only the failure of the contractor to complete the project within the
address this matter properly. stipulated period or the extension granted by the owner. However, this
will not defeat petitioner’s claim for damages nor respondent’s liability
We are looking forward for [sic] your cooperation and continuous under the Performance Bond. Mabunay was clearly in default considering
commitment in delivering this project as per contract agreement. the dismal percentage of his accomplishment (32.38%) of the work he
35 contracted on account of delays in executing the scheduled work activities
xxxx and repeated failure to provide sufficient manpower to expedite
construction works. The events of default and remedies of the Owner are
Subsequently, a joint inspection and evaluation was conducted with the
set forth in Article 13, which reads:
assistance of the architects and engineers of petitioner and Mabunay and
it was found that as of November 14, 2008, the project was only 31.39% ARTICLE 13 – DEFAULT OF CONTRACTOR:
complete and that the uncompleted portion was 68.61% with an estimated
value per Construction Agreement as ₱27,880,419.52. Instead of 13.01 Any of the following shall constitute an Event of Default on the
doubling his efforts as the scheduled completion date approached, part of the CONTRACTOR.
Mabunay did nothing to remedy the delays and even reduced the
deployment of workers at the project site. Neither did Mabunay, at xxxx
anytime, ask for an extension to complete the project. Thus, on November g. In case the CONTRACTOR has done any of the following:
19, 2008, petitioner advised Mabunay of its decision to terminate the
contract on account of the tremendous delay the latter incurred. This was (i.) has abandoned the Project
followed by the claim against the Performance Bond upon the respondent
on December 18, 2008. (ii.) without reasonable cause, has failed to commence the construction or
has suspended the progress of the Project for twenty-eight days
Petitioner’s claim against the Performance Bond included the liquidated
damages provided in the Construction Agreement, as follows: (iii.) without justifiable cause, has delayed the completion of the Project
by more than thirty (30) calendar days based on official work schedule
ARTICLE 12 – LIQUIDATED DAMAGES: duly approved by the OWNER
12.01 Time is of the essence in this Agreement. Should the (iv.) despite previous written warning by the OWNER, is not executing
CONTRACTOR fail to complete the PROJECT within the period the construction works in accordance with the Agreement or is
stipulated herein or within the period of extension granted by the persistently or flagrantly neglecting to carry out its obligations under the
Agreement.

(v.) has, to the detriment of good workmanship or in defiance of the It is a special provision of this undertaking that the liability of the surety
Owner’s instructions to the contrary, sublet any part of the Agreement. under this bond shall in no case exceed the sum of ₱8,400,000.00
Philippine Currency.
13.02 If the CONTRACTOR has committed any of the above reasons
cited in Item 13.01, the OWNER may after giving fourteen (14) calendar Now, Therefore, if the Principal shall well and truly perform and fulfill
days notice in writing to the CONTRACTOR, enter upon the site and all the undertakings, covenants, terms, conditions and agreements
expel the CONTRACTOR therefrom without voiding this Agreement, or stipulated in said contract, then this obligation shall be null and void;
releasing the CONTRACTOR from any of its obligations, and liabilities 43
otherwise to remain in full force and effect. (Emphasis supplied.)
under this Agreement. Also without diminishing or affecting the rights
and powers conferred on the OWNER by this Agreement and the While the above condition or specific guarantee is unclear, the rest of the
OWNER may himself complete the work or may employ any other recitals in the bond unequivocally declare that it secures the full and
contractor to complete the work. If the OWNER shall enter and expel the faithful performance of Mabunay’s obligations under the Construction
CONTRACTOR under this clause, the OWNER shall be entitled to Agreement with petitioner. By its nature, a performance bond guarantees
confiscate the performance bond of the CONTRACTOR to compensate that the contractor will perform the contract, and usually provides that if
for all kinds of damages the OWNER may suffer. All expenses incurred the contractor defaults and fails to complete the contract, the surety can
to finish the Project shall be charged to the CONTRACTOR and/or his itself complete the contract or pay damages up to the limit of the
bond. Further, the OWNER shall not be liable to pay the CONTRACTOR 44
bond. Moreover, the rule is that if the language of the bond is
until the cost of execution, damages for the delay in the completion, if ambiguous or uncertain, it will be construed most strongly against a
any, and all; other expenses incurred by the OWNER have been compensated surety and in favor of the obligees or beneficiaries under the
ascertained which amount shall be deducted from any money due to the bond, in this case petitioner as the Project Owner, for whose benefit it was
CONTRACTOR on account of this Agreement. The CONTRACTOR 45
will not be compensated for any loss of profit, loss of goodwill, loss of ostensibly executed.
use of any equipment or property, loss of business opportunity, additional The imposition of interest on the claims of petitioner is likewise in order.
financing cost or overhead or opportunity losses related to the As we held in Commonwealth Insurance Corporation v. Court of
40 46
unaccomplished portions of the work. (Emphasis supplied.) Appeals
As already demonstrated, the contractor’s default in this case pertains to Petitioner argues that it should not be made to pay interest because its
his failure to substantially perform the work on account of tremendous issuance of the surety bonds was made on the condition that its liability
delays in executing the scheduled work activities. Where a party to a shall in no case exceed the amount of the said bonds.
building construction contract fails to comply with the duty imposed by
the terms of the contract, a breach results for which an action may be We are not persuaded. Petitioner’s argument is misplaced.
maintained to recover the damages sustained thereby, and of course, a
breach occurs where the contractor inexcusably fails to perform Jurisprudence is clear on this matter. As early as Tagawa vs. Aldanese
41 and Union Gurantee Co. and reiterated in Plaridel Surety & Insurance Co.,
substantially in accordance with the terms of the contract.
Inc. vs. P.L. Galang Machinery Co., Inc., and more recently, in Republic
The plain and unambiguous terms of the Construction Agreement vs. Court of Appeals and R & B Surety and Insurance Company, Inc., we
authorize petitioner to confiscate the Performance Bond to answer for all have sustained the principle that if a surety upon demand fails to pay, he
kinds of damages it may suffer as a result of the contractor’s failure to can be held liable for interest, even if in thus paying, its liability becomes
complete the building. Having elected to terminate the contract and expel more than the principal obligation. The increased liability is not because
the contractor from the project site under Article 13 of the said of the contract but because of the default and the necessity of judicial
Agreement, petitioner is clearly entitled to the proceeds of the bond as collection.
indemnification for damages it sustained due to the breach committed by Petitioner’s liability under the suretyship contract is different from its
Mabunay. Such stipulation allowing the confiscation of the contractor’s liability under the law. There is no question that as a surety, petitioner
1âwphi1
performance bond partakes of the nature of a penalty clause. A penalty should not be made to pay more than its assumed obligation under the
clause, expressly recognized by law, is an accessory undertaking to surety bonds. However, it is clear from the above-cited jurisprudence that
assume greater liability on the part of the obligor in case of breach of an petitioner’s liability for the payment of interest is not by reason of the
obligation. It functions to strengthen the coercive force of obligation and suretyship agreement itself but because of the delay in the payment of its
to provide, in effect, for what could be the liquidated damages resulting 47
from such a breach. The obligor would then be bound to pay the stipulated obligation under the said agreement. (Emphasis supplied; citations
indemnity without the necessity of proof on the existence and on the omitted.)
measure of damages caused by the breach. It is well-settled that so long WHEREFORE, the petition for review on certiorari is GRANTED. The
as such stipulation does not contravene law, morals, or public order, it is Decision dated January 27, 2011 and Resolution dated December 8, 2011
42
strictly binding upon the obligor. of the Court of Appeals in CA-G.R. SP No. 112808 are hereby
REVERSED and SET ASIDE.
Respondent, however, insists that it is not liable for the breach committed
by Mabunay because by the terms of the surety bond it issued, its liability The Award made in the Decision dated February 2, 2010 of the
is limited to the performance by said contractor to the extent equivalent Construction Industry Arbitration Commission Is hereby REINSTATED
to 20% of the down payment. It stresses that with the 32.38% completion with the following MODIFICATIONS:
of the project by Mabunay, its liability was extinguished because the
value of such accomplishment already exceeded the sum equivalent to "Accordingly, in view of our foregoing discussions and dispositions, the
20% down payment (₱8.4 million). Tribunal hereby adjudges, orders and directs:
The appellate court correctly rejected this theory of respondent when it 1) Respondent Utassco to pay to petitioner J Plus Asia Development
ruled that the Performance Bond guaranteed the full and faithful Corporation the full amount of the Performance Bond, ₱8,400,000.00,
compliance of Mabunay’s obligations under the Construction Agreement, pursuant to Art. 13 of the Construction Agreement dated December 24,
and that nowhere in law or jurisprudence does it state that the obligation 2007, with interest at the rate of 6% per annum computed from the date
or undertaking by a surety may be apportioned. of the filing of the complaint until the finality of this decision, and 12%
per annum computed from the date this decision becomes final until fully
The pertinent portions of the Performance Bond provide: paid; and
The conditions of this obligation are as follows: 2) Respondent Mabunay to indemnify respondent Utassco of the amounts
respondent Utassco will have paid to claimant under this decision, plus
Whereas the JPLUS ASIA, requires the principal SEVEN SHADES OF interest thereon at the rate of 12% per annum computed from the date he
BLUE CONSTRUCTION AND DEVELOPMENT, INC. to post a bond is notified of such payment made by respondent Utassco to claimant until
of the abovestated sum to guarantee 20% down payment for the fully paid, and to pay Utassco ₱100,000.00 as attorney's fees.
construction of Building 25 (Villa Beatriz) 72-Room Condotel, The
Lodgings inside Fairways and Bluewater, Boracay Island, Malay, Aklan. SO ORDERED.
Whereas, said contract required said Principal to give a good and With the above modifications, the Writ of Execution dated November 24,
sufficient bond in the above-stated sum to secure the full and faithful 2010 issued by the CIAC Arbitral Tribunal in CIAC Case No. 03-2009 is
performance on his part of said contract. hereby REINSTATED and UPHELD.
No pronouncement as to costs.

SO ORDERED. xxxx
Nacar v. Gallery Frames WHEREFORE, premises considered, judgment is hereby rendered
G.R. No. 189871 August 13, 2013 finding respondents guilty of constructive dismissal and are therefore,
ordered:
DARIO NACAR, PETITIONER,
vs. To pay jointly and severally the complainant the amount of sixty-two
GALLERY FRAMES AND/OR FELIPE BORDEY, thousand nine hundred eighty-six pesos and 56/100 (₱62,986.56) Pesos
JR., RESPONDENTS. representing his separation pay;
DECISION To pay jointly and severally the complainant the amount of nine (sic) five
thousand nine hundred thirty-three and 36/100 (₱95,933.36) representing
PERALTA, J.: his backwages; and
1
This is a petition for review on certiorari assailing the Decision dated All other claims are hereby dismissed for lack of merit.
September 23, 2008 of the Court of Appeals (CA) in CA-G.R. SP No.
2 4
98591, and the Resolution dated October 9, 2009 denying petitioner’s SO ORDERED.
motion for reconsideration. Respondents appealed to the NLRC, but it was dismissed for lack of merit
5
The factual antecedents are undisputed. in the Resolution dated February 29, 2000. Accordingly, the NLRC
sustained the decision of the Labor Arbiter. Respondents filed a motion
Petitioner Dario Nacar filed a complaint for constructive dismissal before 6
the Arbitration Branch of the National Labor Relations Commission for reconsideration, but it was denied.
(NLRC) against respondents Gallery Frames (GF) and/or Felipe Bordey, Dissatisfied, respondents filed a Petition for Review on Certiorari before
Jr., docketed as NLRC NCR Case No. 01-00519-97. the CA. On August 24, 2000, the CA issued a Resolution dismissing the
3 petition. Respondents filed a Motion for Reconsideration, but it was
On October 15, 1998, the Labor Arbiter rendered a Decision in favor of 7
petitioner and found that he was dismissed from employment without a likewise denied in a Resolution dated May 8, 2001.
valid or just cause. Thus, petitioner was awarded backwages and Respondents then sought relief before the Supreme Court, docketed as
separation pay in lieu of reinstatement in the amount of ₱158,919.92. The G.R. No. 151332. Finding no reversible error on the part of the CA, this
dispositive portion of the decision, reads: 8
Court denied the petition in the Resolution dated April 17, 2002.
With the foregoing, we find and so rule that respondents failed to
discharge the burden of showing that complainant was dismissed from An Entry of Judgment was later issued certifying that the resolution
9
employment for a just or valid cause. All the more, it is clear from the became final and executory on May 27, 2002. The case was, thereafter,
records that complainant was never afforded due process before he was referred back to the Labor Arbiter. A pre-execution conference was
terminated. As such, we are perforce constrained to grant complainant’s 10
consequently scheduled, but respondents failed to appear.
prayer for the payments of separation pay in lieu of reinstatement to his
former position, considering the strained relationship between the parties, On November 5, 2002, petitioner filed a Motion for Correct Computation,
and his apparent reluctance to be reinstated, computed only up to praying that his backwages be computed from the date of his dismissal on
promulgation of this decision as follows: January 24, 1997 up to the finality of the Resolution of the Supreme Court
11
on May 27, 2002. Upon recomputation, the Computation and
SEPARATION PAY Examination Unit of the NLRC arrived at an updated amount in the sum
12
of ₱471,320.31.
Date Hired = August 1990
13
On December 2, 2002, a Writ of Execution was issued by the Labor
Arbiter ordering the Sheriff to collect from respondents the total amount
Rate = ₱198/day
of ₱471,320.31. Respondents filed a Motion to Quash Writ of Execution,
arguing, among other things, that since the Labor Arbiter awarded
Date of Decision = Aug. 18, 1998 separation pay of ₱62,986.56 and limited backwages of ₱95,933.36, no
more recomputation is required to be made of the said awards. They
claimed that after the decision becomes final and executory, the same
Length of Service = 8 yrs. & 1 month 14
cannot be altered or amended anymore. On January 13, 2003, the Labor
15
Arbiter issued an Order denying the motion. Thus, an Alias Writ of
₱198.00 x 26 days x 8 months = ₱41,184.00 16
Execution was issued on January 14, 2003.
BACKWAGES Respondents again appealed before the NLRC, which on June 30, 2003
17
issued a Resolution granting the appeal in favor of the respondents and
Date Dismissed = January 24, 1997 ordered the recomputation of the judgment award.
On August 20, 2003, an Entry of Judgment was issued declaring the
Rate per day = ₱196.00 Resolution of the NLRC to be final and executory. Consequently, another
pre-execution conference was held, but respondents failed to appear on
time. Meanwhile, petitioner moved that an Alias Writ of Execution be
Date of Decisions = Aug. 18, 1998 issued to enforce the earlier recomputed judgment award in the sum of
18
₱471,320.31.
a) 1/24/97 to 2/5/98 = 12.36 mos.
The records of the case were again forwarded to the Computation and
Examination Unit for recomputation, where the judgment award of
₱196.00/day x 12.36 mos. = ₱62,986.56 petitioner was reassessed to be in the total amount of only ₱147,560.19.
Petitioner then moved that a writ of execution be issued ordering
b) 2/6/98 to 8/18/98 = 6.4 months respondents to pay him the original amount as determined by the Labor
Arbiter in his Decision dated October 15, 1998, pending the final
Prevailing Rate per day = ₱62,986.00 computation of his backwages and separation pay.
On January 14, 2003, the Labor Arbiter issued an Alias Writ of Execution
₱198.00 x 26 days x 6.4 mos. = ₱32,947.20 to satisfy the judgment award that was due to petitioner in the amount of
₱147,560.19, which petitioner eventually received.
TOTAL = ₱95.933.76 Petitioner then filed a Manifestation and Motion praying for the re-
19
computation of the monetary award to include the appropriate interests.

20 judgment. Also in Session Delights, the dismissed employee failed to
On May 10, 2005, the Labor Arbiter issued an Order granting the
motion, but only up to the amount of ₱11,459.73. The Labor Arbiter appeal the decision of the labor arbiter. The Court clarified, thus:
reasoned that it is the October 15, 1998 Decision that should be enforced In concrete terms, the question is whether a re-computation in the course
considering that it was the one that became final and executory. However, of execution of the labor arbiter's original computation of the awards
the Labor Arbiter reasoned that since the decision states that the made, pegged as of the time the decision was rendered and confirmed
separation pay and backwages are computed only up to the promulgation with modification by a final CA decision, is legally proper. The question
of the said decision, it is the amount of ₱158,919.92 that should be is posed, given that the petitioner did not immediately pay the awards
executed. Thus, since petitioner already received ₱147,560.19, he is only stated in the original labor arbiter's decision; it delayed payment because
entitled to the balance of ₱11,459.73. it continued with the litigation until final judgment at the CA level.
21
Petitioner then appealed before the NLRC, which appeal was denied by A source of misunderstanding in implementing the final decision in this
22 case proceeds from the way the original labor arbiter framed his decision.
the NLRC in its Resolution dated September 27, 2006. Petitioner filed
a Motion for Reconsideration, but it was likewise denied in the The decision consists essentially of two parts.
23
Resolution dated January 31, 2007. The first is that part of the decision that cannot now be disputed because
it has been confirmed with finality. This is the finding of the illegality of
Aggrieved, petitioner then sought recourse before the CA, docketed as the dismissal and the awards of separation pay in lieu of reinstatement,
CA-G.R. SP No. 98591. backwages, attorney's fees, and legal interests.
24
On September 23, 2008, the CA rendered a Decision denying the The second part is the computation of the awards made. On its face, the
petition. The CA opined that since petitioner no longer appealed the computation the labor arbiter made shows that it was time-bound as can
October 15, 1998 Decision of the Labor Arbiter, which already became be seen from the figures used in the computation. This part, being merely
final and executory, a belated correction thereof is no longer allowed. The a computation of what the first part of the decision established and
CA stated that there is nothing left to be done except to enforce the said declared, can, by its nature, be re-computed. This is the part, too, that the
judgment. Consequently, it can no longer be modified in any respect, petitioner now posits should no longer be re-computed because the
except to correct clerical errors or mistakes. computation is already in the labor arbiter's decision that the CA had
affirmed. The public and private respondents, on the other hand, posit that
Petitioner filed a Motion for Reconsideration, but it was denied in the a re-computation is necessary because the relief in an illegal dismissal
25
Resolution dated October 9, 2009. decision goes all the way up to reinstatement if reinstatement is to be
made, or up to the finality of the decision, if separation pay is to be given
Hence, the petition assigning the lone error: in lieu reinstatement.
I That the labor arbiter's decision, at the same time that it found that an
WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS illegal dismissal had taken place, also made a computation of the award,
SERIOUSLY ERRED, COMMITTED GRAVE ABUSE OF is understandable in light of Section 3, Rule VIII of the then NLRC Rules
DISCRETION AND DECIDED CONTRARY TO LAW IN of Procedure which requires that a computation be made. This Section in
UPHOLDING THE QUESTIONED RESOLUTIONS OF THE NLRC part states:
WHICH, IN TURN, SUSTAINED THE MAY 10, 2005 ORDER OF [T]he Labor Arbiter of origin, in cases involving monetary awards and at
LABOR ARBITER MAGAT MAKING THE DISPOSITIVE PORTION all events, as far as practicable, shall embody in any such decision or order
OF THE OCTOBER 15, 1998 DECISION OF LABOR ARBITER the detailed and full amount awarded.
LUSTRIA SUBSERVIENT TO AN OPINION EXPRESSED IN THE
26 Clearly implied from this original computation is its currency up to the
BODY OF THE SAME DECISION.
finality of the labor arbiter's decision. As we noted above, this implication
Petitioner argues that notwithstanding the fact that there was a is apparent from the terms of the computation itself, and no question
computation of backwages in the Labor Arbiter’s decision, the same is would have arisen had the parties terminated the case and implemented
not final until reinstatement is made or until finality of the decision, in the decision at that point.
case of an award of separation pay. Petitioner maintains that considering
that the October 15, 1998 decision of the Labor Arbiter did not become However, the petitioner disagreed with the labor arbiter's findings on all
final and executory until the April 17, 2002 Resolution of the Supreme counts - i.e., on the finding of illegality as well as on all the consequent
Court in G.R. No. 151332 was entered in the Book of Entries on May 27, awards made. Hence, the petitioner appealed the case to the NLRC which,
2002, the reckoning point for the computation of the backwages and in turn, affirmed the labor arbiter's decision. By law, the NLRC decision
separation pay should be on May 27, 2002 and not when the decision of is final, reviewable only by the CA on jurisdictional grounds.
the Labor Arbiter was rendered on October 15, 1998. Further, petitioner The petitioner appropriately sought to nullify the NLRC decision on
posits that he is also entitled to the payment of interest from the finality jurisdictional grounds through a timely filed Rule 65 petition for
of the decision until full payment by the respondents. certiorari. The CA decision, finding that NLRC exceeded its authority in
On their part, respondents assert that since only separation pay and limited affirming the payment of 13th month pay and indemnity, lapsed to finality
backwages were awarded to petitioner by the October 15, 1998 decision and was subsequently returned to the labor arbiter of origin for execution.
of the Labor Arbiter, no more recomputation is required to be made of It was at this point that the present case arose. Focusing on the core illegal
said awards. Respondents insist that since the decision clearly stated that dismissal portion of the original labor arbiter's decision, the implementing
the separation pay and backwages are "computed only up to [the] labor arbiter ordered the award re-computed; he apparently read the
promulgation of this decision," and considering that petitioner no longer figures originally ordered to be paid to be the computation due had the
appealed the decision, petitioner is only entitled to the award as computed case been terminated and implemented at the labor arbiter's level. Thus,
by the Labor Arbiter in the total amount of ₱158,919.92. Respondents the labor arbiter re-computed the award to include the separation pay and
added that it was only during the execution proceedings that the petitioner the backwages due up to the finality of the CA decision that fully
questioned the award, long after the decision had become final and terminated the case on the merits. Unfortunately, the labor arbiter's
executory. Respondents contend that to allow the further recomputation approved computation went beyond the finality of the CA decision (July
of the backwages to be awarded to petitioner at this point of the 29, 2003) and included as well the payment for awards the final CA
proceedings would substantially vary the decision of the Labor Arbiter as decision had deleted - specifically, the proportionate 13th month pay and
it violates the rule on immutability of judgments. the indemnity awards. Hence, the CA issued the decision now questioned
The petition is meritorious. in the present petition.
The instant case is similar to the case of Session Delights Ice Cream and We see no error in the CA decision confirming that a re-computation is
27 necessary as it essentially considered the labor arbiter's original decision
Fast Foods v. Court of Appeals (Sixth Division), wherein the issue in accordance with its basic component parts as we discussed above. To
submitted to the Court for resolution was the propriety of the computation reiterate, the first part contains the finding of illegality and its monetary
of the awards made, and whether this violated the principle of consequences; the second part is the computation of the awards or
immutability of judgment. Like in the present case, it was a distinct monetary consequences of the illegal dismissal, computed as of the time
feature of the judgment of the Labor Arbiter in the above-cited case that 28
the decision already provided for the computation of the payable of the labor arbiter's original decision.
separation pay and backwages due and did not further order the Consequently, from the above disquisitions, under the terms of the
computation of the monetary awards up to the time of the finality of the decision which is sought to be executed by the petitioner, no essential

change is made by a recomputation as this step is a necessary consequence 36
Section 2. In view of the above, Subsection X305.1 of the Manual of
that flows from the nature of the illegality of dismissal declared by the 37 38
29 Regulations for Banks and Sections 4305Q.1, 4305S.3 and
Labor Arbiter in that decision. A recomputation (or an original 39
computation, if no previous computation has been made) is a part of the 4303P.1 of the Manual of Regulations for Non-Bank Financial
law – specifically, Article 279 of the Labor Code and the established Institutions are hereby amended accordingly.
jurisprudence on this provision – that is read into the decision. By the This Circular shall take effect on 1 July 2013.
nature of an illegal dismissal case, the reliefs continue to add up until full
satisfaction, as expressed under Article 279 of the Labor Code. The Thus, from the foregoing, in the absence of an express stipulation as to
recomputation of the consequences of illegal dismissal upon execution of the rate of interest that would govern the parties, the rate of legal interest
the decision does not constitute an alteration or amendment of the final for loans or forbearance of any money, goods or credits and the rate
decision being implemented. The illegal dismissal ruling stands; only the allowed in judgments shall no longer be twelve percent (12%) per annum
computation of monetary consequences of this dismissal is affected, and 40
- as reflected in the case of Eastern Shipping Lines and Subsection
this is not a violation of the principle of immutability of final X305.1 of the Manual of Regulations for Banks and Sections 4305Q.1,
30
judgments. 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank
Financial Institutions, before its amendment by BSP-MB Circular No.
That the amount respondents shall now pay has greatly increased is a 799 - but will now be six percent (6%) per annum effective July 1, 2013.
consequence that it cannot avoid as it is the risk that it ran when it It should be noted, nonetheless, that the new rate could only be applied
continued to seek recourses against the Labor Arbiter's decision. Article prospectively and not retroactively. Consequently, the twelve percent
279 provides for the consequences of illegal dismissal in no uncertain (12%) per annum legal interest shall apply only until June 30, 2013. Come
terms, qualified only by jurisprudence in its interpretation of when July 1, 2013 the new rate of six percent (6%) per annum shall be the
separation pay in lieu of reinstatement is allowed. When that happens, the prevailing rate of interest when applicable.
finality of the illegal dismissal decision becomes the reckoning point
instead of the reinstatement that the law decrees. In allowing separation Corollarily, in the recent case of Advocates for Truth in Lending, Inc. and
pay, the final decision effectively declares that the employment 41
Eduardo B. Olaguer v. Bangko Sentral Monetary Board, this Court
relationship ended so that separation pay and backwages are to be affirmed the authority of the BSP-MB to set interest rates and to issue and
31
computed up to that point. enforce Circulars when it ruled that "the BSP-MB may prescribe the
maximum rate or rates of interest for all loans or renewals thereof or the
Finally, anent the payment of legal interest. In the landmark case of forbearance of any money, goods or credits, including those for loans of
32
Eastern Shipping Lines, Inc. v. Court of Appeals, the Court laid down low priority such as consumer loans, as well as such loans made by
the guidelines regarding the manner of computing legal interest, to wit: pawnshops, finance companies and similar credit institutions. It even
authorizes the BSP-MB to prescribe different maximum rate or rates for
II. With regard particularly to an award of interest in the concept of actual different types of borrowings, including deposits and deposit substitutes,
and compensatory damages, the rate of interest, as well as the accrual or loans of financial intermediaries."
thereof, is imposed, as follows:
Nonetheless, with regard to those judgments that have become final and
1. When the obligation is breached, and it consists in the payment of a executory prior to July 1, 2013, said judgments shall not be disturbed and
sum of money, i.e., a loan or forbearance of money, the interest due should shall continue to be implemented applying the rate of interest fixed
be that which may have been stipulated in writing. Furthermore, the therein.1awp++i1
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% To recapitulate and for future guidance, the guidelines laid down in the
per annum to be computed from default, i.e., from judicial or extrajudicial 42
case of Eastern Shipping Lines are accordingly modified to embody
demand under and subject to the provisions of Article 1169 of the Civil BSP-MB Circular No. 799, as follows:
Code.
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-
2. When an obligation, not constituting a loan or forbearance of money, contracts, delicts or quasi-delicts is breached, the contravenor can be held
is breached, an interest on the amount of damages awarded may be liable for damages. The provisions under Title XVIII on "Damages" of
imposed at the discretion of the court at the rate of 6% per annum. No the Civil Code govern in determining the measure of recoverable
interest, however, shall be adjudged on unliquidated claims or damages damages. 1â wph i1
except when or until the demand can be established with reasonable

certainty. Accordingly, where the demand is established with reasonable II. With regard particularly to an award of interest in the concept of actual
certainty, the interest shall begin to run from the time the claim is made and compensatory damages, the rate of interest, as well as the accrual
judicially or extrajudicially (Art. 1169, Civil Code) but when such thereof, is imposed, as follows:
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 When the obligation is breached, and it consists in the payment of a sum
the court is made (at which time the quantification of damages may be of money, i.e., a loan or forbearance of money, the interest due should be
deemed to have been reasonably ascertained). The actual base for the that which may have been stipulated in writing. Furthermore, the interest
computation of legal interest shall, in any case, be on the amount finally due shall itself earn legal interest from the time it is judicially demanded.
adjudged. In the absence of stipulation, the rate of interest shall be 6% per annum to
be computed from default, i.e., from judicial or extrajudicial demand
3. When the judgment of the court awarding a sum of money becomes under and subject to the provisions of Article 1169 of the Civil Code.
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 When an obligation, not constituting a loan or forbearance of money, is
finality until its satisfaction, this interim period being deemed to be by breached, an interest on the amount of damages awarded may be imposed
33 at the discretion of the court at the rate of 6% per annum. No interest,
then an equivalent to a forbearance of credit. however, shall be adjudged on unliquidated claims or damages, except
Recently, however, the Bangko Sentral ng Pilipinas Monetary Board when or until the demand can be established with reasonable certainty.
(BSP-MB), in its Resolution No. 796 dated May 16, 2013, approved the Accordingly, where the demand is established with reasonable certainty,
34 the interest shall begin to run from the time the claim is made judicially
amendment of Section 2 of Circular No. 905, Series of 1982 and, or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot
35
accordingly, issued Circular No. 799, Series of 2013, effective July 1, be so reasonably established at the time the demand is made, the interest
2013, the pertinent portion of which reads: 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
The Monetary Board, in its Resolution No. 796 dated 16 May 2013, reasonably ascertained). The actual base for the computation of legal
approved the following revisions governing the rate of interest in the interest shall, in any case, be on the amount finally adjudged.
absence of stipulation in loan contracts, thereby amending Section 2 of
Circular No. 905, Series of 1982: 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
Section 1. The rate of interest for the loan or forbearance of any money, paragraph 1 or paragraph 2, above, shall be 6% per annum from such
goods or credits and the rate allowed in judgments, in the absence of an finality until its satisfaction, this interim period being deemed to be by
express contract as to such rate of interest, shall be six percent (6%) per then an equivalent to a forbearance of credit.
annum.

And, in addition to the above, judgments that have become final and 9
On July 13, 2006, the trial court issued a Resolution dismissing Civil
executory prior to July 1, 2013, shall not be disturbed and shall continue Case No. 5535. It held that –
to be implemented applying the rate of interest fixed therein.
The plaintiff, however, may have erroneously relied the [sic] mandatorily
WHEREFORE, premises considered, the Decision dated September 23, [sic] requirement of the aforestated provision of law upon failure to
2008 of the Court of Appeals in CA-G.R. SP No. 98591, and the consider that the other party is a Rural Bank. Under the R.A. No. 720 as
Resolution dated October 9, 2009 are REVERSED and SET ASIDE. amended, (Rural Bank Act) property worth exceeding ₱100,000.00 [sic]
Respondents are Ordered to Pay petitioner: is exempt from the requirement of publication. This may have been the
(1) backwages computed from the time petitioner was illegally dismissed reason why the foreclosure prosper [sic] without the observance of the
on January 24, 1997 up to May 27, 2002, when the Resolution of this required publication. Moreover, neither in the said applicable laws
Court in G.R. No. 151332 became final and executory; provide [sic] for the impairment of the extrajudicial foreclosure and the
subsequent sale to the public. The Court ruled in Bonnevie, et al. vs. CA,
(2) separation pay computed from August 1990 up to May 27, 2002 at the et al. that Act No. 3135 as amended does not require personal notice to
rate of one month pay per year of service; and the mortgagor. In the same view, lack of final demand or notice of
redemption are [sic] not considered indispensable requirements and
(3) interest of twelve percent (12%) per annum of the total monetary failure to observe the same does not render the extrajudicial foreclosure
awards, computed from May 27, 2002 to June 30, 2013 and six percent 10
(6%) per annum from July 1, 2013 until their full satisfaction. sale a nullity.
The Labor Arbiter is hereby ORDERED to make another recomputation In other words, the trial court meant that under the Rural Banks Act, the
of the total monetary benefits awarded and due to petitioner in accordance foreclosure of mortgages covering loans granted by rural banks and
with this Decision. executions of judgments thereon involving real properties levied upon by
a sheriff shall be exempt from publication where the total amount of the
SO ORDERED. loan, including interests due and unpaid, does not exceed
11
₱10,000.00. Since petitioner’s outstanding obligation amounted to just
Venzon v. Rural Bank of Buenavista, Inc.
G.R. No. 178031 August 28, 2013 over ₱6,000.00 publication was not necessary.
12
VIRGINIA M. VENZON, Petitioner, Petitioner moved for reconsideration, but in the September 6, 2006
vs. 13
Resolution, the trial court denied the same.
RURAL BANK OF BUENAVISTA (AGUSAN DEL NORTE), INC.,
represented by LOURDESITA E. PARAJES,Respondent. Ruling of the Court of Appeals
DECISION 14
Petitioner went up to the CA via an original Petition for Certiorari. On
DEL CASTILLO, J.: December 14, 2006, the CA issued the first assailed
15
Resolution dismissing the Petition. It held that petitioner’s remedy
1
Before us is a Petition for Review on Certiorari questioning the should have been an appeal under Rule 41 of the Rules of Court since the
2 July 13, 2006 Resolution is a final order of dismissal. Petitioner received
December 14, 2006 Resolution of the Court of Appeals (CA) in CA-G.R.
SP No. 01341-MIN which dismissed the Petition in said case, as well as the Resolution denying her Motion for Reconsideration on September 18,
16
3
its May 7, 2007 Resolution denying reconsideration thereof. 2006; but she filed the Petition for Certiorari on October 25, 2006 when
she should have interposed an appeal on or before October 3, 2006.
Factual Antecedents Having done so, her Petition may not even be treated as an appeal for the
same was belatedly filed.
4
On January 28, 2005, petitioner Virginia M. Venzon filed a Petition to
nullify foreclosure proceedings and Tax Declaration Nos. 96-GR-06-003- The CA added that the Petition does not provide a sufficient factual
7002-R and 96-GR-06-7003-R issued in the name of respondent Rural background of the case as it merely alleges a chronology of the legal
5 remedies she took before the trial court which does not comply with the
Bank of Buenavista (Agusan del Norte), Inc. The case was docketed as 17
requirement under Section 3 of Rule 46.
Civil Case No. 5535 and raffled to Branch 5 of the Regional Trial Court
(RTC) of Butuan City. Petitioner alleged that in 1983 she and her late 18
Petitioner moved for reconsideration by submitting a rewritten Petition.
spouse, George F. Venzon, Sr., obtained a ₱5,000.00 loan from
respondent against a mortgage on their house and lot in Libertad, Butuan However, in a Resolution dated May 7, 2007, the CA denied the same,
City, covered by Tax Declaration Nos. 28289 and 42710 issued in their hence the present Petition.
names, which were later on replaced with Tax Declaration Nos. 96 GR- Issues
06-003-2884-R and 96 GR-06-003-2885-R; that she was able to pay
₱2,300.00, thus leaving an outstanding balance of only ₱2,370.00; that Petitioner submits the following assignment of errors:
sometime in March 1987, she offered to pay the said balance in full, but
the latter refused to accept payment, and instead shoved petitioner away I
from the bank premises; that in March 1987, respondent foreclosed on the WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS
mortgage, and the property was sold at auction for ₱6,472.76 to REVERSIBLY ERRED IN DISMISSING THE PETITION FOR
respondent, being the highest bidder; that the foreclosure proceedings are CERTIORARI THEREBY PREVENTING THE COURT FROM
null and void for lack of notice and publication of the sale, lack of sheriff’s FINDING OUT THAT ACTUALLY NO EXTRAJUDICIAL
final deed of sale and notice of redemption period; and that she paid FORECLOSURE WAS CONDUCTED BY THE OFFICE OF THE
respondent ₱6,000.00 on October 9, 1995, as evidenced by respondent’s PROVINCIAL SHERIFF ON PETITIONER’S PROPERTY AT THE
6
Official Receipt No. 410848 issued on October 9, 1995. INSTANCE OF THE PRIVATE RESPONDENT.
7 II
In its Answer with Counterclaims, respondent claimed that petitioner did
not make any payment on the loan; that petitioner never went to the bank WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS
in March 1987 to settle her obligations in full; that petitioner was not REVERSIBLY ERRED IN NOT DISREGARDING TECHNICALITIES
shoved and driven away from its premises; that the foreclosure IN ORDER TO ADMINISTER SUBSTANTIAL JUSTICE TO THE
proceedings were regularly done and all requirements were complied 19
with; that a certificate of sale was issued by the sheriff and duly recorded PETITIONER.
in the Registry of Deeds; that petitioner’s claim that she paid ₱6,000.00 Petitioner’s Arguments
on October 9, 1995 is utterly false; that petitioner’s cause of action has
long prescribed as the case was filed only in 2005 or 18 years after the Petitioner claims that no extrajudicial foreclosure proceedings ever took
foreclosure sale; and that petitioner is guilty of laches. Respondent place, citing a February 2, 2005 Certification issued by the Office of the
interposed its counterclaim for damages and attorney’s fees as well. Clerk of Court of Butuan City stating that the record pertaining to the
foreclosure proceedings covering her property "could not be found in
8 20
In her Reply, petitioner insisted that the foreclosure proceedings were spite of diligent efforts to find the same." And because no foreclosure
irregular and that prescription and laches do not apply as the foreclosure proceedings took place, there could not have been notice and publication
proceedings are null and void to begin with. of the sale, and no sheriff’s certificate of sale. For this reason, she claims
Ruling of the Regional Trial Court that the CA erred in dismissing her case.

Petitioner adds that, technicalities aside, a Petition for Certiorari is By making such an ambiguous allegation in its Answer with
available to her in order to prevent the denial of her substantial rights. She Counterclaims, respondent is deemed to have admitted receiving the
also argues that her payment to respondent of the amount of ₱6,000.00 in amount of ₱6,000.00 from petitioner as evidenced by Official Receipt No.
1995 should be considered as a valid redemption of her property. 410848, which amount under the circumstances it had no right to receive.
"If an allegation is not specifically denied or the denial is a negative
Respondent’s Arguments 24
pregnant, the allegation is deemed admitted." "Where a fact is alleged
For its part, respondent merely validates the pronouncements of the CA with some qualifying or modifying language, and the denial is
by citing and echoing the same, and holding petitioner to a strict conjunctive, a ‘negative pregnant’ exists, and only the qualification or
observance of the rules for perfecting an appeal within the reglementary 25
modification is denied, while the fact itself is admitted." "A denial in
period, as it claims they are necessary for the orderly administration of the form of a negative pregnant is an ambiguous pleading, since it cannot
21
justice, as well as that which requires that only questions of law may be be ascertained whether it is the fact or only the qualification that is
raised in a Petition for Review on Certiorari. 26
intended to be denied." "Profession of ignorance about a fact which is
Our Ruling patently and necessarily within the pleader's knowledge, or means of
27
knowing as ineffectual, is no denial at all." In fine, respondent failed to
The Court denies the Petition. refute petitioner’s claim of having paid the amount of ₱6,000.00.
The Court finds no error in the CA’s treatment of the Petition for Since respondent was not entitled to receive the said amount, as it is
Certiorari. The trial court’s July 13, 2006 Resolution dismissing the case deemed fully paid from the foreclosure of petitioner’s property since its
was indeed to be treated as a final order, disposing of the issue of bid price at the auction sale covered all that petitioner owed it by way of
publication and notice of the foreclosure sale – which is the very core of 28
principal, interest, attorney’s fees and charges, it must return the same
petitioner’s cause of action in Civil Case No. 5535 – and declaring the
same to be unnecessary pursuant to the Rural Banks Act, as petitioner’s to petitioner. "If something is received when there is no right to demand
outstanding obligation did not exceed ₱10,000.00, and thus leaving it, and it was unduly delivered through mistake, the obligation to return it
29
petitioner without basis to maintain her case. This constitutes a dismissal arises." Moreover, pursuant to Circular No. 799, series of 2013 of the
with the character of finality. As such, petitioner should have availed of Bangko Sentral ng Pilipinas which took effect July 1, 2013, the amount
the remedy under Rule 41, and not Rule 65. of ₱6,000.00 shall earn interest at the rate of 6% per annum computed
from the filing of the Petition in Civil Case No. 5535 up to its full
The Court is not prepared to be lenient in petitioner’s case, either. Civil satisfaction.
Case No. 5535 was instituted only in 2005, while the questioned
foreclosure proceedings took place way back in 1987. Petitioner’s long WHEREFORE, premises considered, the Petition is DENIED. The
inaction and commission of a procedural faux pas certainly cannot earn December 14, 2006 and May 7, 2007 Resolutions of the Court of Appeals
the sympathy of the Court. in CA-G.R. SP No. 01341-MIN are AFFIRMED.
Nor can the Court grant the Petition on the mere allegation that no However, respondent Rural Bank of Buenavista (Agusan del Norte), Inc.
foreclosure proceedings ever took place. The February 2, 2005 is ORDERED to return to petitioner Virginia M. Venzon or her assigns
Certification issued by the Office of the Clerk of Court of Butuan City to the amount of ₱6,000.00, with interest at the rate of 6% per annum
the effect that the record of the foreclosure proceedings could not be found computed from the filing of the Petition in Civil Case No. 5535 up to its
is not sufficient ground to invalidate the proceedings taken. Petitioner full satisfaction.
22
herself attached the Sheriff’s Certificate of Sale as Annex "A" of her SO ORDERED.
Petition in Civil Case No. 5535; this should belie the claim that no record
exists covering the foreclosure proceedings. Besides, if petitioner insists S.C. Megaworld Construction and Development Corp. v. Parada
that no foreclosure proceedings took place, then she should not have filed G.R. No. 183804 September 11, 2013
an action to annul the same since there was no foreclosure to begin with.
She should have filed a different action. S.C. MEGAWORLD CONSTRUCTION and DEVELOPMENT
CORPORATION, Petitioner,
However, petitioner is entitled to a return of the ₱6,000.00 she paid to vs.
respondent in 1995. While this may not be validly considered as a ENGR. LUIS U. PARADA, represented by ENGR. LEONARDO A.
redemption of her property as the payment was made long after the PARADA of GENLITE INDUSTRIES,Respondent.
redemption period expired, respondent had no right to receive the amount.
In its Answer with Counterclaims in Civil Case No. 5535, respondent DECISION
simply alleged therein that – REYES, J.:
10. Defendant DENIES the allegations under paragraph 10 of the petition 1 2
for being utterly false, highly self-serving and patently speculative, the Before us on appeal by certiorari is the Decision dated April 30, 2008
truth being --- of the Court of Appeals (CA) in CA-G.R. CV No. 83811 which upheld
3
the Decision dated May 8, 2004 of the Regional Trial Court (RTC) of
• Assumption cannot be had that there was an alleged foreclosure of the Quezon City, Branch 100, in Civil Case No. Q-01-45212.
then property of the petitioner for the truth of the matter is that a
foreclosure proceeding was duly conducted, which fact remains Factual Antecedents
undisputable for so many years now.
S.C. Megaworld Construction and Development Corporation (petitioner)
• Without necessarily admitting that payment of ₱6,000.00 was made, the bought electrical lighting materials from Gentile Industries, a sole
same however could hardly and could never be considered as redemption proprietorship owned by Engineer Luis U. Parada (respondent), for its
price for the following reasons --- Read-Rite project in Canlubang, Laguna. The petitioner was unable to pay
for the above purchase on due date, but blamed it on its failure to collect
The redemption period had long lapsed when the payment of ₱6,000.00 under its sub-contract with the Enviro KleenTechnologies, Inc. (Enviro
was allegedly made. Thus, there is no point talking about redemption Kleen). It was however able to persuade Enviro Kleen to agree to settle
price when the redemption period had long been gone at the time the its above purchase, but after paying the respondent ₱250,000.00 on June
alleged payment was made. 4
2, 1999, Enviro Kleen stopped making further payments, leaving an
Even x x x granting, without conceding, that the amount of ₱6,000.00 outstanding balance of ₱816,627.00. It also ignored the various demands
was a redemption price, said amount, however, could not constitute as a of the respondent, who then filed a suit in the RTC, docketed as Civil Case
legal redemption price since the same was not enough to cover the entire No.Q-01-45212, to collect from the petitioner the said balance, plus
23 damages, costs and expenses, as summarized in the RTC’s decision, as
redemption price as mandated by the rules and laws. (Emphases
supplied) follows:
Interestingly, respondent did not deny being the issuer of Official Receipt The petitioner in its answer denied liability, claiming that it was released
No. 410848. Instead, it averred that petitioner’s payment to it of from its indebtedness to the respondent by reason of the novation of their
₱6,000.00 was false and self-serving, but in the same breath argued that, contract, which, it reasoned, took place when the latter accepted the
without necessarily admitting that payment of ₱6,000.00 was made, the partial payment of Enviro Kleen in its behalf, and thereby acquiesced to
same cannot be considered as redemption price. the substitution of Enviro Kleen as the new debtor in the petitioner’s
6
place. After trial, the RTC rendered judgment on May 28, 2004 in favor
of the respondent, the fallo of which reads, as follows:

WHEREFORE, judgment is hereby rendered for the respondent. The Petition for Review in the Supreme Court
petitioner is hereby ordered to pay the respondent the following:
In this petition, the petitioner insists, firstly, that the complaint should
A. the sum of ₱816,627.00 representing the principal obligation due; have been dismissed outright by the trial court for an invalid non-forum
shopping certification; and, secondly, that the appellate court erred in not
B. the sum equivalent to twenty percent (20%)per month of the principal declaring that there was a novation of the contract between the parties
obligation due from date of judicial demand until fully paid as and for through substitution of the debtor, which resulted in the release of the
interest; and petitioner from its obligation to pay the respondent the amount of its
13
C. the sum equivalent to twenty-five percent (25%) of the principal sum purchase.
due as and for attorney’s fees and other costs of suits. The compulsory
counterclaim interposed by the petitioner is hereby ordered dismissed for Our Ruling
lack of merit. The petition is devoid of merit.
7
SO ORDERED. (Emphasis supplied) The verification and certification of
non-forum shopping in the
On appeal to the CA, the petitioner maintained that the trial court erred in complaint is not a jurisdictional but
ruling that no novation of the contract took place through the substitution a formal requirement, and any
of Enviro Kleen as the new debtor. But for the first time, it further argued objection as to non-compliance
that the trial court should have dismissed the complaint for failure of the therewith should be raised in the
respondent to implead Genlite Industries as "a proper party in interest", proceedings below and not for the
as provided in Section 2 of Rule 3 of the 1997 Rules of Civil Procedure. first time on appeal.
The said section provides:
"It is well-settled that no question will be entertained on appeal unless it
SEC. 2. Parties in interest. — A real party in interest is the party who has been raised in the proceedings below. Points of law, theories, issues
stands to be benefited or injured by the judgment in the suit, or the party and arguments not brought to the attention of the lower court,
entitled to the avails of the suit. Unless otherwise authorized by law or administrative agency or quasi-judicial body, need not be considered by
these Rules, every action must be prosecuted or defended in the name of are viewing court, as they cannot be raised for the first time at that late
the real party in interest. stage. Basic considerations of fairness and due process impel this rule.
14
In Section 1(g) of Rule 16 of the Rules of Court, it is also provided that Any issue raised for the first time on appeal is barred by estoppel."
the defendant may move to dismiss the suit on the ground that it was not
brought in the name of or against the real party in interest, with the effect Through a Special Power of Attorney (SPA), the respondent authorized
that the complaint is then deemed to state no cause of action. Engr. Leonardo A. Parada (Leonardo), the eldest of his three children, to
perform the following acts in his behalf: a) to file a complaint against the
In dismissing the appeal, the CA noted that the petitioner in its answer petitioner for sum of money with damages; and b) to testify in the trial
below raised only the defense of novation, and that at no stage in the thereof and sign all papers and documents related thereto, with full
proceedings did it raise the question of whether the suit was brought in 15
powers to enter into stipulation and compromise. Incidentally, the
the name of the real party in interest. Moreover, the appellate court found respondent, a widower, died of cardio-pulmonary arrest on January
from the sales invoices and receipts that the respondent is the sole 16
proprietor of Genlite Industries, and therefore the real party-plaintiff. Said 21,2009, survived by his legitimate children, namely, Leonardo, Luis,
the CA: Jr., and Lalaine, all surnamed Parada. They have since substituted him in
this petition, per the Resolution of the Supreme Court dated September 2,
Settled is the rule that litigants cannot raise an issue for the first time on 17
2009. Also, on July 23, 2009, Luis, Jr. and Lalaine Parada executed an
appeal as this would contravene the basic rules of fair play and justice. SPA authorizing their brother Leonardo to represent them in the instant
18
In any event, there is no question that respondent Engr.Luis U. Parada is petition.
the proprietor of Genlite Industries, as shown on the sales invoice and
delivery receipts. There is also no question that a special power of In the verification and certification of non-forum shopping attached to the
attorney was executed by respondent Engr.Luis U. Parada in favor of complaint in Civil Case No. Q01-45212, Leonardo as attorney-in-fact of
Engr. Leonardo A. Parada authorizingthe latter to file a complaint against his father acknowledged as follows:
8
the petitioner. (Citations omitted) xxxx
The petitioner also contended that a binding novation of the purchase That I/we am/are the Plaintiff in the above-captioned case;
contract between the parties took place when the respondent accepted the
partial payment of Enviro Kleen of ₱250,000.00 in its behalf, and thus That I/we have caused the preparation of this Complaint;
acquiesced to the substitution by Enviro Kleen of the petitioner as the new That I/we have read the same and that all the allegations therein are true
debtor. But the CA noted that there is nothing in the two (2) letters of the and correct to the best of my/our knowledge;
respondent to Enviro Kleen, dated April 14, 1999 and June 16, 1999,
which would imply that he consented to the alleged novation, and, 19
x x x x.
particularly, that he intended to release the petitioner from its primary
obligation to pay him for its purchase of lighting materials. The appellate In this petition, the petitioner reiterates its argument before the CA that
9 the above verification is invalid, since the SPA executed by the
court cited the RTC’s finding that the respondent informed Enviro Kleen
in his first letter that he had served notice to the petitioner that he would respondent did not specifically include an authority for Leonardo to sign
take legal action against it for its overdue account, and that he retained his the verification and certification of non-forum shopping, thus rendering
option to pull out the lighting materials and charge the petitioner for any the complaint defective for violation of Sections 4 and 5 of Rule 7. The
damage they might sustain during the pull-out: said sections provide, as follows:
Respondent x x x has served notice to the petitioner that unless the Sec. 4. Verification. — A pleading is verified by an affidavit that the
overdue account is paid, the matter will be referred to its lawyers and there affiant has read the pleading and that the allegations therein are true and
may be a pull-out of the delivered lighting fixtures. It was likewise stated correct of his personal knowledge or based on authentic records.
therein that incidental damages that may result to the structure in the Sec. 5. Certification against forum shopping. –– The plaintiff or principal
10
course of the pull-out will be to the account of the petitioner. party shall certify under oath in the complaint or other initiatory pleading
asserting a claim for relief, or in a sworn certification annexed thereto and
The CA concurred with the RTC that by retaining his option to seek simultaneously filed therewith: (a) that he has not thereto fore
satisfaction from the petitioner, any acquiescence which the respondent commenced any action or filed any claim involving the same issues in any
had made was limited to merely accepting Enviro Kleen as an additional court, or tribunal x x x and, to the best of his knowledge, no such other
debtor from whom he could demand payment, but without releasing the action or claim is pending therein; (b) if there is such other pending action
petitioner as the principal debtor from its debt to him. or claim, a complete statement of the present status thereof; and (c) if he
11 should thereafter learn that the same or similar action or claim has been
On motion for reconsideration, the petitioner raised for the first time filed or is pending, he shall report that fact x x x to the court wherein his
the issue of the validity of the verification and certification of non-forum aforesaid complaint or initiatory pleading has been filed.
shopping attached to the complaint. On July 18, 2008, the CA denied the
12
said motion for lack of merit.

Failure to comply with the foregoing requirements shall not be curable by Novation is never presumed but
mere amendment of the complaint or other initiatory pleading but shall be must be clearly and unequivocally
cause for the dismissal of the case without prejudice, unless otherwise shown.
provided, upon motion and after hearing.
Novation is a mode of extinguishing an obligation by changing its objects
The petitioner’s argument is untenable. The petitioner failed to reckon or principal obligations, by substituting a new debtor in place of the old
that any objection as to compliance with the requirement of verification 27
one, or by subrogating a third person to the rights of the creditor. It is
in the complaint should have been raised in the proceedings below, and "the substitution of a new contract, debt, or obligation for an existing one
20 28
not in the appellate court for the first time. In KILUSAN-OLALIA v. between the same or different parties." Article 1293 of the Civil Code
21
CA, it was held that verification is a formal, not a jurisdictional defines novation as follows:
requisite:
Art. 1293. Novation which consists in substituting a new debtor in the
We have emphasized, time and again, that verification is a formal, not a place of the original one, may be made even without the knowledge or
jurisdictional requisite, as it is mainly intended to secure an assurance that against the will of the latter, but not without the consent of the creditor.
the allegations therein made are done in good faith or are true and correct Payment by the new debtor gives him rights mentioned in Articles
and not mere speculation. The Court may order the correction of the 1236and 1237.
pleading, if not verified, or act on the unverified pleading if the attending
circumstances are such that a strict compliance with the rule may be Thus, in order to change the person of the debtor, the former debtor must
dispensed with in order that the ends of justice may be served. be expressly released from the obligation, and the third person or new
debtor must assume the former’s place in the contractual
Further, in rendering justice, courts have always been, as they ought to 29
relation. Article 1293 speaks of substitution of the debtor, which may
be, conscientiously guided by the norm that on the balance, technicalities either be in the form of expromision or delegacion, as seems to be the case
take a backseat vis-à-vis substantive rights, and not the other way around. here. In both cases, the old debtor must be released from the obligation,
22 30
x x x. (Citations omitted) otherwise, there is no valid novation. As explained in Garcia :
23
In Young v. John Keng Seng, it was also held that the question of forum In general, there are two modes of substituting the person of the debtor:
shopping cannot be raised in the CA and in the Supreme Court, since such (1) expromision and (2) delegacion. In expromision, the initiative for the
an issue must be raised at the earliest opportunity in a motion to dismiss change does not come from—and may even be made without the
or a similar pleading. The high court even warned that "invoking it in the knowledge of—the debtor, since it consists of a third person’s assumption
later stages of the proceedings or on appeal may result in the dismissal of of the obligation. As such, it logically requires the consent of the third
24 person and the creditor. In delegacion, the debtor offers, and the creditor
the action x x x."
accepts, a third person who consents to the substitution and assumes the
Moreover, granting that Leonardo has no personal knowledge of the obligation; thus, the consent of these three persons are necessary. Both
transaction subject of the complaint below, Section 4 of Rule 7 provides modes of substitution by the debtor require the consent of the
that the verification need not be based on the verifier’s personal 31
creditor. (Citations omitted)
knowledge but even only on authentic records. Sales invoices, statements
of accounts, receipts and collection letters for the balance of the amount From the circumstances obtaining below, we can infer no clear and
still due to the respondent from the petitioner are such records. There is unequivocal consent by the respondent to the release of the petitioner
clearly substantial compliance by the respondent’s attorney-in-fact with from the obligation to pay the cost of the lighting materials. In fact, from
the requirement of verification. the letters of the respondent to Enviro Kleen, it can be said that he retained
his option to go after the petitioner if Enviro Kleen failed to settle the
Lastly, it is well-settled that a strict compliance with the rules may be petitioner’s debt. As the trial court held:
dispensed with in order that the ends of substantial justice may be
25 The fact that Enviro Kleen Technologies, Inc. made payments to the
served. It is clear that the present controversy must be resolved on its
merits, lest for a technical oversight the respondent should be deprived of respondent and the latter accepted it does not ipso facto result innovation.
what is justly due him. Novation to be given its legal effect requires that the creditor should
consent to the substitution of a new debtor and the old debtor be released
A sole proprietorship has no from its obligation (Art. 1293, New Civil Code). A reading of the letters
juridical personality separate and dated 14 April 1999 (Exh. 1) and dated 16 June 1999 (Exhs. 4 &4-a) sent
distinct from that of its owner, and by the respondent to Enviro Kleen Technologies, Inc. clearly shows that
need not be impleaded as a party- there was nothing therein that would evince that the[respondent] has
plaintiff in a civil case. consented to the exchange of the person of the debtor from the petitioner
to Enviro Kleen Technologies, Inc.
On the question of whether Genlite Industries should have been
impleaded as a party-plaintiff, Section 1 of Rule 3 of the Rules of Court xxxx
provides that only natural or juridical persons or entities authorized by
law may be parties in a civil case. Article 44 of the New Civil Code Notably in Exh. 1, albeit addressed to Enviro Kleen Technologies, Inc.,
enumerates who are juridical persons: the respondent expressly stated that it has served notice to the petitioner
that unless the overdue account is paid, the matter will be referred to its
Art. 44. The following are juridical persons: lawyers and there may be a pull-out of the delivered lighting fixtures. It
was likewise stated therein that incident damages that may result to the
(1) The State and its political subdivisions; structure in the course of the pull-out will be to the account of the
(2) Other corporations, institutions and entities for public interest or petitioner.
purpose, created by law; their personality begins as soon as they have It is evident from the two (2) aforesaid letters that there is no indication
been constituted according to law; of the respondent’s intention to release the petitioner from its obligation
(3) Corporations, partnerships and associations for private interest or to pay and to transfer it to Enviro Kleen Technologies, Inc. The
purpose to which the law grants a juridical personality, separate and acquiescence of Enviro Kleen Technologies, Inc. to assume the obligation
distinct from that of each shareholder, partner or member. of the petitioner to pay the unpaid balance of [P]816,627.00 to the
respondent when there is clearly no agreement to release the petitioner
Genlite Industries is merely the DTI-registered trade name or style of the will result merely to the addition of debtors and not novation. Hence, the
respondent by which he conducted his business. As such, it does not exist creditor can still enforce the obligation against the original debtor x x x.
as a separate entity apart from its owner, and therefore it has no separate A fact which points strongly to the conclusion that the respondent did not
26 assent to the substitution of Enviro Kleen Technologies, Inc. as the new
juridical personality to sue or be sued. As the sole proprietor of Genlite
Industries, there is no question that the respondent is the real party in debtor is the present action instituted by the respondent against the
interest who stood to be directly benefited or injured by the judgment in petitioner for the fulfillment of its obligation. A mere recital that the
the complaint below. There is then no necessity for Genlite Industries to respondent has agreed or consented to the substitution of the debtor is not
32
be impleaded as a party-plaintiff, since the complaint was already filed in sufficient to establish the fact that there was a novation. x x x.
the name of its proprietor, Engr. Luis U. Parada. To heed the petitioner’s
33
sophistic reasoning is to permit a dubious technicality to frustrate the ends The settled rule is that novation is never presumed, but must be clearly
of substantial justice. 34
and unequivocally shown. In order for a new agreement to supersede
the old one, the parties to a contract must expressly agree that they are

35 It is settled that other than in the case of judgments which are void ab
abrogating their old contract in favor of a new one. Thus, the mere
36 initio for lack of jurisdiction, or which are null and void per se, and thus
substitution of debtors will not result innovation, and the fact that the may be questioned at any time, when a decision is final, even the court
creditor accepts payments from a third person, who has assumed the which issued it can no longer alter or modify it, except to correct clerical
obligation, will result merely in the addition of debtors and not novation, 46
37 errors or mistakes.
and the creditor may enforce the obligation against both debtors. If
there is no agreement as to solidarity, the first and new debtors are The foregoing notwithstanding, of more important consideration in the
38 39 case before us is the fact that it is nowhere stated in the trial court’s
considered obligated jointly. As explained in Reyes v. CA :
decision that the parties had in fact stipulated an interest on the amount
The consent of the creditor to a novation by change of debtor is as due to the respondent. Even granting that there was such an agreement,
indispensable as the creditor’s consent in conventional subrogation in there is no finding by the trial court that the parties stipulated that the
order that a novation shall legally take place. The mere circumstance of outstanding debt of the petitioner would be subject to two percent (2%)
AFP-MBAI receiving payments from respondent Eleazar who acquiesced monthly interest. The most that the decision discloses is that the
to assume the obligation of petitioner under the contract of sale of respondent demanded a monthly interest of 2% on the amount
securities, when there is clearly no agreement to release petitioner from outstanding.
her responsibility, does not constitute novation. At most, it only creates a
juridical relation of co-debtorship or surety ship on the part of respondent Article 2209 of the Civil Code provides that "if the obligation consists in
Eleazar to the contractual obligation of petitioner to AFP-MBAI and the the payment of a sum of money, and the debtor incurs in delay, the
latter can still enforce the obligation against the petitioner. In Ajax indemnity for damages, there being no stipulation to the contrary, shall be
Marketing and Development Corporation vs. Court of Appeals which is the payment of the interest agreed upon, and in the absence of stipulation,
relevant in the instant case, we stated that — the legal interest, which is six percent per annum." Pursuant to the said
provision, then, since there is no finding of a stipulation by the parties as
"In the same vein, to effect a subjective novation by a change in the person 47
to the imposition of interest, only the amount of 12% per annum may
of the debtor, it is necessary that the old debtor be released expressly from be awarded by the court by way of damages in its discretion, not two
the obligation, and the third person or new debtor assumes his place in the percent(2%) per month, following the guidelines laid down in the
relation. There is no novation without such release as the third person who 48
has assumed the debtor’s obligation becomes merely a co-debtor or landmark case of Eastern Shipping Lines v. Court of Appeals, to wit:
surety. xxx. Novation arising from a purported change in the person of II. With regard particularly to an award of interest in the concept of actual
the debtor must be clear and express xxx." and compensatory damages, the rate of interest, as well as the accrual
In the civil law setting, novatio is literally construed as to make new. So thereof, is imposed, as follows:
it is deeply rooted in the Roman Law jurisprudence, the principle – 1. When the obligation is breached, and it consists in the payment of a
novatio non praesumitur — that novation is never presumed. At bottom, sum of money, i.e., a loan or forbearance of money, the interest due should
for novation to be a jural reality, its animus must be ever present, debitum be that which may have been stipulated in writing. Furthermore, the
pro debito — basically extinguishing the old obligation for the new interest due shall itself earn legal interest from the time it is judicially
40
one. (Citation omitted) 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
The trial court found that the respondent never agreed to release the demand under and subject to the provisions of Article 1169 of the Civil
petitioner from its obligation, and this conclusion was upheld by the CA. Code.
We generally accord utmost respect and great weight to factual findings
of the trial court and the CA, unless there appears in the record some fact 2. When an obligation, not constituting a loan or forbearance of money,
or circumstance of weight and influence which has been overlooked, or is breached, an interest on the amount of damages awarded may be
the significance of which has been misinterpreted, that if considered imposed at the discretion of the court at the rate of 6% per annum. No
41 interest, however, shall be adjudged on unliquidated claims or damages
would have affected the result of the case. We find no such oversight in
the appreciation of the facts below, nor such a misinterpretation thereof, except when or until the demand can be established with reasonable
as would otherwise provide a clear and unequivocal showing that a certainty. Accordingly, where the demand is established with reasonable
novation has occurred in the contract between the parties resulting in the certainty, the interest shall begin to run from the time the claim is made
release of the petitioner. judicially or extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the time the demand is
Pursuant to Article 2209 of the made, the interest shall begin to run only from the date the judgment of
Civil Code, except as provided the court is made (at which time the quantification of damages may be
under Central Bank Circular deemed to have been reasonably ascertained).The actual base for the
No. 905, and now under Bangko computation of legal interest shall, in any case, be on the amount finally
Sentral ng Pilipinas Circular adjudged.
No. 799, which took effect on
July 1, 2013, the respondent may 3. When the judgment of the court awarding a sum of money becomes
be awarded interest of six percent final and executory, the rate of legal interest, whether the case falls under
(6%) of the judgment amount by paragraph 1 or paragraph 2, above, shall be 12% per annum from such
way of actual and compensatory finality until its satisfaction, this interim period being deemed to be by
49
damages. then an equivalent to a forbearance of credit. (Citations omitted)
It appears from the recital of facts in the trial court’s decision that the 50
As further clarified in the case of Sunga-Chan v. CA, a loan or
respondent demanded interest of two percent (2%) per month upon the forbearance of money, goods or credit describes a contractual obligation
balance of the purchase price of ₱816,627.00, from judicial demand until whereby a lender or creditor has refrained during a given period from
full payment. There is then an obvious clerical error committed in the fallo requiring the borrower or debtor to repay the loan or debt then due and
of the trial court’s decision, for it incorrectly ordered the defendant there 51
into pay "the sum equivalent to twenty percent (20%) per month of the payable. Thus:
principal obligation due from date of judicial demand until fully paid as In Reformina v. Tomol, Jr., the Court held that the legal interest at 12%
42
and for interest." per annum under Central Bank (CB) Circular No. 416 shall be adjudged
only in cases involving the loan or forbearance of money. And for
A clerical mistake is one which is visible to the eyes or obvious to the transactions involving payment of indemnities in the concept of damages
understanding; an error made by a clerk or a transcriber; a mistake in arising from default in the performance of obligations in general and/or
43
copying or writing. The Latin maxims Error placitandi aequitatem non for money judgment not involving a loan or forbearance of money, goods,
tollit ("A clerical error does not take away equity"), and Error scribentis or credit, the governing provision is Art. 2209 of the Civil Code
nocere non debit ("An error made by a clerk ought not to injure; a clerical prescribing a yearly 6% interest. Art. 2209 pertinently provides:
44
error may be corrected") are apt in this case. Viewed against the "Art. 2209. If the obligation consists in the payment of a sum of money,
45
landmark case of Medel v. CA , an award of interest of 20% per month and the debtor incurs in delay, the indemnity for damages, there being no
on the amount due is clearly excessive and iniquitous. It could not have stipulation to the contrary, shall be the payment of the interest agreed
been the intention of the trial court, not to mention that it is way beyond upon, and in the absence of stipulation, the legal interest, which is six per
what the plaintiff had prayed for below. cent per annum."

The term "forbearance," within the context of usury law, has been even be supplied by the CA. As concisely explained in Frias v. San Diego-
described as a contractual obligation of a lender or creditor to refrain, 59
Sison :
during a given period of time, from requiring the borrower or debtor to
repay the loan or debt then due and payable. Article 2208 of the New Civil Code enumerates the instances where such
may be awarded and, in all cases, it must be reasonable, just and equitable
Eastern Shipping Lines, Inc. synthesized the rules on the imposition of if the same were to be granted. Attorney’s fees as part of damages are not
interest, if proper, and the applicable rate, as follows: The12% per annum meant to enrich the winning party at the expense of the losing litigant.
rate under CB Circular No. 416 shall apply only to loans or forbearance They are not awarded every time a party prevails in a suit because of the
of money, goods, or credits, as well as to judgments involving such loan policy that no premium should be placed on the right to litigate. The award
or forbearance of money, goods, or credit, while the 6% per annum under of attorney’s fees is the exception rather than the general rule. As such, it
Art. 2209 of the Civil Code applies "when the transaction involves the is necessary for the trial court to make findings of facts and law that would
payment of indemnities in the concept of damage arising from the breach bring the case within the exception and justify the grant of such award.
or a delay in the performance of obligations in general," with the The matter of attorney’s fees cannot be mentioned only in the dispositive
application of both rates reckoned "from the time the complaint was filed portion of the decision. They must be clearly explained and justified by
until the adjudged amount is fully paid." In either instance, the reckoning the trial court in the body of its decision. On appeal, the CA is precluded
period for the commencement of the running of the legal interest shall be from supplementing the bases for awarding attorney’s fees when the trial
subject to the condition "that the courts are vested with discretion, court failed to discuss in its Decision the reasons for awarding the
depending on the equities of each case, on the award of same. Consequently, the award of attorney’s fees should be
1â wphi1
52 60
interest." (Citations omitted and emphasis ours) deleted. (Citations omitted)
Pursuant, then, to Central Bank Circular No. 416, issued on July WHEREFORE, premises considered, the Decision dated April 30, 2008
53
29,1974, in the absence of a written stipulation, the interest rate to be of the Court of Appeals in CA-G.R. CV No. 83811 is AFFIRMED with
imposed in judgments involving a forbearance of credit shall be 12% per MODIFICATION. Petitioner S.C. Megaworld Construction and
annum, up from 6% under Article 2209 of the Civil Code. This was Development Corporation is ordered to pay respondent Engr. Luis A.
reiterated in Central Bank Circular No. 905, which suspended the Parada, represented by Engr. Leonardo A. Parada, the principal amount
54
effectivity of the Usury Law from January 1, 1983. But if the judgment due of ₱816,627.00, plus interest at twelve percent (12%) per annum,
refers to payment of interest as damages arising from a breach or delay in reckoned from judicial demand until June 30, 2013, and six percent (6%)
general, the applicable interest rate is 6% per annum, following Article per an own from July 1, 2013 until finality hereof, by way of actual and
55 compensatory damages. Thereafter, the principal amount due as adjusted
2209 of the Civil Code. Both interest rates apply from judicial or by interest shall likewise earn interest at six percent (6%) per annum until
extrajudicial demand until finality of the judgment. But from the finality fully paid. The award of attorney's fees is DELETED.
of the judgment awarding a sum of money until it is satisfied, the award
shall be considered a forbearance of credit, regardless of whether the SO ORDERED.
award in fact pertained to one, and therefore during this period, the
56 Secretary of the Department of Public Works and Highways v.
interest rate of 12% per annum for forbearance of money shall apply.
Tecson
But notice must be taken that in Resolution No. 796 dated May 16,2013, G.R. No. 179334 April 21, 2015
the Monetary Board of the Bangko Sentral ng Pilipinas approved the SECRETARY OF THE DEPARTMENT OF PUBLIC WORKS AND
revision of the interest rate to be imposed for the loan or forbearance of HIGHWAYS and DISTRICT ENGINEER CELESTINO R.
any money, goods or credits and the rate allowed in judgments, in the CONTRERAS, Petitioners,
absence of an express contract as to such rate of interest. Thus, under BSP vs.
Circular No.799, issued on June 21, 2013 and effective on July 1, 2013, SPOUSES HERACLEO and RAMONA TECSON, Respondents.
the said rate of interest is now back at six percent (6%), viz:
RESOLUTION
BANGKO SENTRAL NG PILIPINAS
OFFICE OF THE GOVERNOR PERALTA, J.:
CIRCULAR NO. 799 For resolution is the Motion for Reconsideration1 filed by respondents-
Series of 2013 movants spouses Heracleo and Ramona Tecson imploring the Court to
take a second look at its July 1, 2013 Decision, the dispositive portion of
Subject: Rate of interest in the absence of stipulation which reads:
The monetary Board, in its Resolution No. 796 dated 16 May WHEREFORE, premises considered, the petition is PARTIALLY
2013,approved the following revisions governing the rate of interest in GRANTED. The Court of Appeals Decision dated July 31, 2007 in
the absence of stipulation in loan contracts, thereby amending Section 2 CAG.R. CV No. 77997 is MODIFIED, in that the valuation of the subject
of Circular No. 905, Series of 1982: property owned by respondents shall be P0.70 instead of ₱1,500.00 per
Section 1. The rate of interest for the loan or forbearance of any money, square meter, with interest at six percent (6%) per annum from the date
goods or credits and the rate allowed in judgments, in the absence of an of taking in 1940 instead of March 17, 1995, until full payment.2
express contract as to such rate of interest, shall be six percent (6%) per In view of the contrasting opinions of the members of the Third Division
annum. on the instant motion, and the transcendental importance of the issue
Section 2. In view of the above, Subsection X305.1 of the Manual of raised herein, the members of the Third Division opted to refer the issue
Regulations for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the to the En Banc for resolution.
Manual of Regulations for Non-Bank Financial Institutions are hereby For a proper perspective, we briefly state the factual background of the
amended accordingly. case.
This Circular shall take effect on 1 July 2013. In 1940, the Department of Public Works and Highways (DPWH) took
FOR THE MONETARY BOARD: respondents-movants' subject property without the benefit of
expropriation proceedings for the construction of the MacArthur
DIWA C. GUINIGUNDO Highway. In a letter dated December 15, 1994,respondents-movants
Officer-In-Charge demanded the payment of the fair market value of the subject parcel of
land. Celestino R. Contreras (Contreras), then District Engineer of the
The award of attorney’s fees is not proper. First Bulacan Engineering District of the DPWH, offered to pay for the
Other than to say that the petitioner "unjustifiably failed and refused to subject land at the rate of Seventy Centavos (P0.70) per square meter, per
pay the respondent," the trial court did not state in the body of its decision Resolution of the Provincial Appraisal Committee (PAC) of Bulacan.
the factual or legal basis for its award of attorney’s fees to the respondent, Unsatisfied with the offer, respondents-movants demanded the return of
as required under Article 2208 of the New Civil Code, for which reason their property, or the payment of compensation at the current fair market
we have resolved to delete the same. The rule is settled that the trial court value.3 Hence, the complaint for recovery of possession with damages
must state the factual, legal or equitable justification for its award of filed by respondents-movants. Respondents-movants were able to obtain
57 favorable decisions in the Regional Trial Court (RTC) and the Court of
attorney’s fees. Indeed, the matter of attorney’s fees cannot be stated Appeals (CA), with the subject property valued at One Thousand Five
only in the dispositive portion, but the reasons must be stated in the body Hundred Pesos (₱1,500.00) per square meter, with interest at six percent
58
of the court’s decision. This failure or oversight of the trial court cannot (6%) per annum.

Petitioners thus elevated the matter to this Court in a petition for review including the control tower, the Kalibo crash fire rescue station, the
on certiorari. The only issue resolved by the Court in the assailed decision Kalibo airport terminal, and the Headquarters of the PNP Aviation
is the amount of just compensation which respondents-movants are Security Group. In 1995,several stores and restaurants were constructed
entitled to receive from the government for the taking of their property. on the remaining portion of the lot. In 1997, respondent filed a complaint
Both the RTC and the CA valued the property at One Thousand Five for recovery of possession with damages against the storeowners wherein
Hundred Pesos (₱1,500.00) per square meter, plus six percent (6%) ATO intervened claiming that the storeowners were its lessees.
interest from the time of the filing of the complaint until full payment.
We, however, did not agree with both courts and ruled instead that just These cases stemmed from similar background, that is, government took
compensation should be based on the value of the property at the time of control and possession of the subject properties for public use without
taking in 1940, which is Seventy Centavos (P0.70) per square meter.4 In initiating expropriation proceedings and without payment of just
addition, and by way of compensation, we likewise awarded an interest compensation; while the landowners failed for a long period of time to
of six percent (6%) per annum from 1940 until full payment.5 question such government act and later instituted actions for recovery of
possession with damages. In these cases, the Court has uniformly ruled
Aggrieved, respondents-movants hereby move for the reconsideration of that the fair market value of the property at the time of taking is
said decision on the following grounds: controlling for purposes of computing just compensation.
A. THE HONORABLE COURT MAY LOOK INTO THE "JUSTNESS" In Forfom, the payment of just compensation was reckoned from the time
OF THE MISERABLE AMOUNT OF COMPENSATION BEING of taking in 1973; in Eusebio, the Court fixed the just compensation by
AWARDED TO THE HEREIN RESPONDENTS; and determining the value of the property at the time of taking in 1980;
in MIAA, the value of the lot at the time of taking in 1972 served as basis
B. THE HONORABLE COURT MAY SETTLE FOR A HAPPY for the award of compensation to the owner; and, in Republic,the Court
MIDDLE GROUND IN THE NAME OF DOCTRINAL PRECISION was convinced that the taking occurred in 1956 and was thus the basis in
AND SUBSTANTIAL JUSTICE.6 fixing just compensation.
Citing the views of Justices Presbitero J. Velasco, Jr. and Marvic Mario As in the aforementioned cases, just compensation due respondents-
Victor F. Leonen in their Dissenting and Concurring Opinion and movants in this case should, therefore, be fixed not as of the time of
Separate Opinion, respectively, respondents-movants insist that gross payment but at the time of taking in 1940 which is Seventy Centavos
injustice will result if the amount that will be awarded today will be based (P0.70) per square meter, and not One Thousand Five Hundred Pesos
simply on the value of the property at the time of the actual taking. Hence, (₱1,500.00) per square meter, as valued by the RTC and CA.
as proposed by Justice Leonen, they suggest that a happy middle ground
be achieved by meeting the need for doctrinal precision and the thirst for While disparity in the above amounts is obvious and may appear
substantial justice.7 inequitable to respondents-movants as they would be receiving such
outdated valuation after a very long period, it should be noted that the
We maintain our conclusions in the assailed July 1, 2013 Decision with purpose of just compensation is not to reward the owner for the property
modification on the amount of interest awarded, as well as the additional taken but to compensate him for the loss thereof. As such, the true
grant of exemplary damages and attorney's fees. measure of the property, as upheld by a plethora of cases, is the market
At the outset, it should be stressed that the matter of the validity of the value at the time of the taking, when the loss resulted. This principle was
State's exercise of the power of eminent domain has long been settled. In plainly laid down in Apo Fruits Corporation and Hijo Plantation, Inc. v.
fact, in our assailed decision, We have affirmed the ruling of the CA that Land Bank of the Philippines,14 to wit:
the pre-trial order issued on May 17, 2001 has limited the issues as x x x In Land Bank of the Philippines v. Orilla, a valuation case under our
follows: (1) whether or not the respondents-movants are entitled to just agrarian reform law, this Court had occasion to state:
compensation; (2) whether or not the valuation would be based on the
corresponding value at the time of the taking or at the time of the filing of Constitutionally, "just compensation" is the sum equivalent to the market
the action; and (3) whether or not the respondents-movants are entitled to value of the property, broadly described as the price fixed by the seller in
damages.8 Moreover, it was held that for failure of respondents-movants open market in the usual and ordinary course of legal action and
to question the lack of expropriation proceedings for a long period of time, competition, or the fair value of the property as between the one who
they are deemed to have waived and are estopped from assailing the receives and the one who desires to sell, it being fixed at the time of the
power of the government to expropriate or the public use for which the actual taking by the government. Just compensation is defined as the
power was exercised.9 What is, therefore, left for determination in the full and fair equivalent of the property taken from its owner by the
instant Motion for Reconsideration, in accordance with our Decision expropriator. It has been repeatedly stressed by this Court that the true
dated July 1, 2013, is the propriety of the amount awarded to respondents measure is not the taker's gain but the owner's loss. The word "just" is
as just compensation. used to modify the meaning of the word "compensation" to convey the
idea that the equivalent to be given for the property to be taken shall
At this juncture, We hold that the reckoning date for property valuation be real, substantial, full and ample. [Emphasis supplied.]15
in determining the amount of just compensation had already been
addressed and squarely answered in the assailed decision. To be sure, the Indeed, the State is not obliged to pay premium to the property owner for
justness of the award had been taken into consideration in arriving at our appropriating the latter's property; it is only bound to make good the loss
earlier conclusion. sustained by the landowner, with due consideration of the circumstances
availing at the time the property was taken. More, the concept of just
We have in the past been confronted with the same issues under similar compensation does not imply fairness to the property owner alone.
factual and procedural circumstances. We find no reason to depart from Compensation must also be just to the public, which ultimately bears the
the doctrines laid down in the earlier cases as we adopted in the assailed cost of expropriation.16
decision. In this regard, we reiterate the doctrines laid down in the cases
of Forfom Development Corporation (Forfom) v. Philippine National Notwithstanding the foregoing, we recognize that the owner's loss is not
Railways (PNR),10 Eusebio v. Luis,11 Manila International Airport only his property but also its income-generating potential.17 Thus, when
Authority v. Rodriguez,12 and Republic v. Sarabia.13 property is taken, full compensation of its value must immediately be paid
to achieve a fair exchange for the property and the potential income
In Forfom, PNR entered the property of Forfom in January 1973 for lost.18 Accordingly, in Apo, we held that the rationale for imposing the
railroad tracks, facilities and appurtenances for use of the Carmona interest is to compensate the petitioners for the income they would have
Commuter Service without initiating expropriation proceedings. In 1990, made had they been properly compensated for their properties at the time
Forfom filed a complaint for recovery of possession of real property of the taking.19 Thus:
and/or damages against PNR. In Eusebio, respondent's parcel of land was
taken in 1980 by the City of Pasig and used as a municipal road without We recognized in Republic v. Court of Appeals the need for prompt
the appropriate expropriation proceedings. In1996, respondent filed a payment and the necessity of the payment of interest to compensate for
complaint for reconveyance and/or damages against the city government any delay in the payment of compensation for property already taken. We
and the mayor. In MIAA, in the early 1970s, petitioner implemented ruled in this case that:
expansion programs for its runway, necessitating the acquisition and
occupation of some of the properties surrounding its premises. As to The constitutional limitation of "just compensation" is considered to be
respondent's property, no expropriation proceedings were initiated. In the sum equivalent to the market value of the property, broadly described
1997, respondent initiated a case for accion reivindicatoriawith damages to be the price fixed by the seller in open market in the usual and ordinary
against petitioner. In Republic, sometime in 1956, the Air Transportation course of legal action and competition or the fair value of the property as
Office (ATO) took possession and control of a portion of a lot situated in between one who receives, and one who desires to sell, i[f] fixed at the
Aklan, registered in the name of respondent, without initiating time of the actual taking by the government. Thus, if property is taken for
expropriation proceedings. Several structures were erected thereon, public use before compensation is deposited with the court having

jurisdiction over the case, the final compensation must include interest[s] The Monetary Board, in its Resolution No. 796 dated 16 May 2013,
on its just value to be computed from the time the property is taken to the approved the following revisions governing the rate of interest in the
time when compensation is actually paid or deposited with the court. In absence of stipulation in loan contracts, thereby amending Section 2 of
fine, between the taking of the property and the actual payment, legal Circular No. 905, Series of 1982:
interest[s] accrue in order to place the owner in a position as good as (but
not better than) the position he was in before the taking Section 1. The rate of interest for the loan or forbearance of any money,
occurred.[Emphasis supplied]20 goods or credits and the rate allowed in judgments, in the absence of an
express contract as to such rate of interest, shall be six percent (6%) per
In other words, the just compensation due to the landowners amounts to annum.
an effective forbearance on the part of the State-a proper subject of
interest computed from the time the property was taken until the full Section 2. In view of the above, Subsection X305.1 of the Manual of
amount of just compensation is paid-in order to eradicate the issue of the Regulations for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the
constant variability of the value of the currency over time.21 In the Court's Manual of Regulations for Non-Bank Financial Institutions are hereby
own words: amended accordingly.
The Bulacan trial court, in its 1979 decision, was correct in imposing This Circular shall take effect on 01 July 2013.29
interests on the zonal value of the property to be computed from the time Accordingly, the prevailing interest rate for loans and forbearance of
petitioner instituted condemnation proceedings and "took" the property in money is six percent (6%) per annum, in the absence of an express
September 1969. This allowance of interest on the amount found to be the contract as to such rate of interest.
value of the property as of the time of the taking computed, being an
effective forbearance, at 12% per annum should help eliminate the issue In summary, the interest rates applicable to loans and forbearance of
of the constant fluctuation and inflation of the value of the currency over money, in the absence of an express contract as to such rate of interest,
time x x x.22 for the period of 1940 to present are as follows:
On this score, a review of the history of the pertinent laws, rules and
regulations, as well as the issuances of the Central Bank (CB)or Bangko Law, Rule and Regulations, Date of Effec
Sentral ng Pilipinas (BSP)is imperative in arriving at the proper amount BSP Issuance
of interest to be awarded herein.
On May 1, 1916, Act No. 265523 took effect prescribing an interest rate Act No. 2655 May 1, 1916
of six percent (6%) or such rate as may be prescribed by the Central Bank
Monetary Board (CB-MB)for loans or forbearance of money, in the
absence of express stipulation as to such rate of interest, to wit: CB Circular No. 416 July 29, 1974
Section 1. The rate of interest for the loan or forbearance of any money
goods, or credits and the rate allowed in judgments, in the absence of CB Circular No. 905 December 22
express contract as to such rate of interest, shall be six per centum per
annum or such rate as may be prescribed by the Monetary Board of the
Central Bank of the Philippines for that purpose in accordance with the CB Circular No. 799 July 1, 2013
authority hereby granted.
Sec. 1-a. The Monetary Board is hereby authorized to prescribe the
maximum rate or rates of interest for the loan or renewal thereof or the
It is important to note, however, that interest shall be compounded at the
forbearance of any money, goods or credits, and to change such rate or
time judicial demand is made pursuant to Article 221230 of the Civil Code
rates whenever warranted by prevailing economic and social conditions.
of the Philippines, and sustained in Eastern Shipping Lines v. Court of
In the exercise of the authority herein granted, the Monetary Board may Appeals,31then later on in Nacar v. Gallery Frames,32 save for the
prescribe higher maximum rates for loans of low priority, such as reduction of interest rate to 6% for loans or forbearance of money, thus:
consumer loans or renewals thereof as well as such loans made by
1. When the obligation is breached, and it consists in the payment of a
pawnshops finance companies and other similar credit institutions
sum of money, i.e., a loan or forbearance of money, the interest due
although the rates prescribed for these institutions need not necessarily be
should be that which may have been stipulated in writing.
uniform. The Monetary Board is also authorized to prescribe different
Furthermore, the interest due shall itself earn legal interest from the
maximum rate or rates for different types of borrowings, including
time it is judicially demanded. In the absence of stipulation, the rate of
deposits and deposit substitutes, or loans of financial intermediaries.24
interest shall be 6% per annum to be computed from default, i.e., from
Under the aforesaid law, any amount of interest paid or stipulated to be judicial or extrajudicial demand under and subject to the provisions of
paid in excess of that fixed by law is considered usurious, therefore Article 1169 of the Civil Code.33
unlawful.25
Applying the foregoing law and jurisprudence, respondents-movants are
On July 29, 1974, the CB-MB, pursuant to the authority granted to it entitled to interest in the amount of One Million Seven Hundred Eighteen
under the aforequoted provision, issued Resolution No. 1622. On even
1âwphi1
Thousand Eight Hundred Forty-Eight Pesos and Thirty-Two Centavos
date, Circular No. 416 was issued, implementing MB Resolution No. (₱1,718,848.32) as of September 30, 2014,34 computed as follows:
1622, increasing the rate of interest for loans and forbearance of money
to twelve percent (12%) per annum, thus: January 1, 194035 to July 28, 1974
By virtue of the authority granted to it under Section 1 of Act No. 2655,
as amended, otherwise known as the "Usury Law," the Monetary Board, July 29, 1974 to March 16, 1995
in its Resolution No. 1622 dated July 29, 1974, has prescribed that the
rate of interest for the loan or forbearance of any money, goods or credits
and the rate allowed in judgments, in the absence of express contract as March 17, 199536to June 30, 2013
to such rate of interest, shall be twelve per cent (12%) per annum.26
The foregoing rate was sustained in CB Circular No. 90527 which took July 1, 2013 to September 30, 2014
effect on December 22, 1982, particularly Section 2 thereof, which states:
Sec. 2. The rate of interest for the loan or forbearance of any money, Market Value of the Property at the time of
goods or credits and the rate allowed in judgments, in the absence of taking including interest
express contract as to such rate of interest, shall continue to be twelve per
cent (12%) per annum.28
Market value of the property at the time of
Recently, the BSP Monetary Board (BSP-MB),in its Resolution No. 796
dated May 16, 2013, approved the amendment of Section 2 of Circular taking including interest
No. 905, Series of 1982, and accordingly, issued Circular No. 799, Series
of 2013, effective July 1, 2013, the pertinent portion of which reads:
Add: Exemplary damages

equitably reduced. We hold that Rodriguez is entitled only
Attorney's fees 200,000.00
to ₱200,000.00 as exemplary damages, and attorney's fees equivalent to
43
one percent (1%) of the amount due.
Total Amount of Interest due to Respondents-
Similarly, in Republic v. CA,44 We held that the failure of the government
Movants as of September 30, 2014 ₱1,718,848.16
to initiate an expropriation proceeding to the prejudice of the landowner
may be corrected with the awarding of exemplary damages, attorney's
fees and costs of litigation. Thus:
Considering that respondents-movants only resorted to judicial demand The Court will not award attorney's fees in light of respondent's choice
for the payment of the fair market value of the land on March 17, 1995, it not to appeal the CA Decision striking down the award. However, we find
is only then that the interest earned shall itself earn interest. it proper to award temperate and exemplary damages in light of NIA's
misuse of its power of eminent domain. Any arm of the State that
Lastly, from finality of the Court's Resolution on reconsideration until full exercises the delegated power of eminent domain must wield that power
payment, the total amount due to respondents-movants shall earn a with circumspection and utmost regard for procedural requirements. A
straight six percent (6%) legal interest, pursuant to Circular No. 799 and government instrumentality that fails to observe the constitutional
the case of Nacar. Such interest is imposed by reason of the Court's guarantees of just compensation and due process abuses the authority
decision and takes the nature of a judicial debt. delegated to it, and is liable to the property owner for damages.
Clearly, the award of interest on the value of the land at the time of taking Temperate or moderate damages may be recovered if pecuniary loss has
in 1940 until full payment is adequate compensation to respondents- been suffered but the amount cannot be proved with certainty from the
movants for the deprivation of their property without the benefit of nature of the case. Here, the trial and appellate courts found that the
1âwphi1
expropriation proceedings. Such interest, however meager or enormous it owners were unable to plant palay on 96,655 square meters of the
may be, cannot be inequitable and unconscionable because it resulted Property for an unspecified period during and after NIA's construction of
directly from the application of law and jurisprudence-standards that have the canals in 1972. The passage of time, however, has made it impossible
taken into account fairness and equity insetting the interest rates due for to determine these losses with any certainty. NIA also deprived the
the use or forbearance of money.41 Thus, adding the interest computed to owners of the Property of possession of a substantial portion of their land
the market value of the property at the time of taking signifies the real, since 1972. Considering the particular circumstances of this case, an
substantial, full and ample value of the property. Verily, the same award of ₱150,000 as temperate damages is reasonable.
constitutes due compliance with the constitutional mandate on eminent
domain and serves as a basic measure of fairness. In addition to the NIA's irresponsible exercise of its eminent domain powers also deserves
foregoing interest, additional compensation shall be awarded to censure. For more than three decades, NIA has been charging irrigation
respondents-movants by way of exemplary damages and attorney's fees fees from respondent and other landowners for the use of the canals built
in view of the government's taking without the benefit of expropriation on the Property, without reimbursing respondent a single cent for the loss
proceedings. As held in Eusebio v. Luis,42 an irregularity in an and damage. NIA exhibits a disturbingly cavalier attitude towards
expropriation proceeding cannot ensue without consequence. Thus, the respondent's property rights, rights to due process of law and to equal
Court held that the government agency's illegal occupation of the owner's protection of the laws. Worse, this is not the first time NIA has
property for a very long period of time surely resulted in pecuniary loss disregarded the rights of private property owners by refusing to pay just
to the owner, to wit: compensation promptly. To dissuade NIA from continuing this practice
and to set an example for other agencies exercising eminent domain
However, in taking respondents' property without the benefit of powers, NIA is directed to pay respondent exemplary damages of
expropriation proceedings and without payment of just compensation, the ₱250,000.45
City of Pasig clearly acted in utter disregard of respondents' proprietary
rights. Such conduct cannot be countenanced by the Court. For said Applying the aforequoted doctrines to the present case, considering that
illegal taking, the City of Pasig should definitely be held liable for respondents-movants were deprived of beneficial ownership over their
damages to respondents. Again, in Manila International Airport property for more than seventy (70) years without the benefit of a timely
Authority v. Rodriguez, the Court held that the government agency's expropriation proceedings, and to serve as a deterrent to the State from
illegal occupation of the owner's property for a very long period of time failing to institute such proceedings within the prescribed period under
surely resulted in pecuniary loss to the owner. The Court held as follows: the law, a grant of exemplary damages in the amount of One Million Pesos
(₱1,000,000.00) is fair and reasonable. Moreover, an award for attorney's
Such pecuniary loss entitles him to adequate compensation in the form fees in the amount of Two Hundred Thousand Pesos (₱200,000.00) in
of actual or compensatory damages, which in this case should be the legal favor of respondents-movants is in order.
interest (6%) on the value of the land at the time of taking, from said point
up to full payment by the MIAA. This is based on the principle that In sum, respondents-movants shall be entitled to an aggregate amount
interest "runs as a matter of law and follows from the right of the of One Million Seven Hundred Eighteen Thousand Eight Hundred Forty-
landowner to be placed in as good position as money can accomplish, as Eight Pesos and Thirty-Two Centavos (₱1,718,848.32) as just
of the date of the taking." compensation as of September 30, 2014, computed as follows:
The award of interest renders unwarranted the grant of back Market value of the property at the time
rentals as extended by the courts below. In Republic v. Lara, et al., the
Court ruled that the indemnity for rentals is inconsistent with a property of taking in 1940 including interest
owner's right to be paid legal interest on the value of the property, for if
the condemn or is to pay the compensation due to the owners from the
Add: Exemplary Damages
time of the actual taking of their property, the payment of such
compensation is deemed to retro act to the actual taking of the property;
and, hence, there is no basis for claiming rentals from the time of actual Attorney's fees
taking. More explicitly, the Court held in Republic v. Garcellano that:
The uniform rule of this Court, however, is that this compensation must Total Amount due to Respondents-
be, not in the form of rentals, but by way of 'interest from the date that the
company [or entity] exercising the right of eminent domain take movants as of September 30, 2014
possession of the condemned lands, and the amounts granted by the court
shall cease to earn interest only from the moment they are paid to the
owners or deposited in court x x x.
This Court is not unaware that at present, stringent laws and rules are put
xxxx in place to ensure that owners of real property acquired for national
government infrastructure projects are promptly paid just compensation.
For more than twenty (20) years, the MIAA occupied the subject lot Specifically, Section 4 of Republic Act No. 8974 (R.A. 8974),46 which
without the benefit of expropriation proceedings and without the MIAA took effect on November 26, 2000, provides sufficient guidelines for
exerting efforts to ascertain ownership of the lot and negotiating with any implementing an expropriation proceeding, to wit:
of the owners of the property. To our mind, these are wanton and
irresponsible acts which should be suppressed and corrected. Section 4. Guidelines for Expropriation Proceedings. - Whenever it is
Hence, the award of exemplary damages and attorneys fees is in necessary to acquire real property for the right-of-way or location for any
order. However, while Rodriguez is entitled to such exemplary damages national government infrastructure project through expropriation, the
and attorney's fees, the award granted by the courts below should be

appropriate implementing agency shall initiate the expropriation need be resorted to where a provision of law peremptorily calls for
proceedings before the proper court under the following guidelines: application.50 Equity and equitable principles only come into full play
when a gap exists in the law and jurisprudence.51 As we have shown
(a) Upon the filing of the complaint, and after due notice to the defendant, above, established rulings of this Court are in place for full application to
the implementing agency shall immediately pay the owner of the property the case at bar, hence, should be upheld.
the amount equivalent to the sum of (1) one hundred percent (100%) of
the value of the property based on the current relevant zonal valuation of WHEREFORE, the motion for reconsideration is hereby DENIED for
the Bureau of Internal Revenue (BIR); and (2) the value of the lack of merit.
improvements and/or structures as determined under Section 7 hereof;
SO ORDERED.
(b) In provinces, cities, municipalities and other areas where there is no
zonal valuation, the BIR is hereby mandated within the period of sixty E XTINGUISHMENT OF O BLIGATIONS
(60) days from the date of the expropriation case, to come up with a zonal Metro Concast Steel Corp. v. Allied Bank Corp
valuation for said area; and G.R. No. 177921 December 4, 2013
(c) In case the completion of a government infrastructure project is of METRO CONCAST STEEL CORPORATION, SPOUSES JOSE S.
utmost urgency and importance, and there is no existing valuation of the DYCHIAO AND TIUOH YAN, SPOUSES GUILLERMO AND
area concerned, the implementing agency shall immediately pay the MERCEDES DYCHIAO, AND SPOUSES VICENTE AND
owner of the property its proffered value taking into consideration the FILOMENA DYCHIAO, Petitioners,
standards prescribed in Section 5 hereof. vs.
ALLIED BANK CORPORATION, Respondent.
Upon compliance with the guidelines abovementioned, the court shall
immediately issue to the implementing agency an order to take possession RESOLUTION
of the property and start the implementation of the project.
PERLAS-BERNABE, J.:
Before the court can issue a Writ of Possession, the implementing agency
shall present to the court a certificate of availability of funds from the Assailed in this petition for review on certiorari1 are the Decision2 dated
proper official concerned. February 12, 2007 and the Resolution3dated May 10, 2007 of the Court
of Appeals (CA) in CA-G.R. CV No. 86896 which reversed and set aside
In the event that the owner of the property contests the implementing the Decision4 dated January 17, 2006 of the Regional Trial Court of
agency's proffered value, the court shall determine the just compensation Makati, Branch 57 (RTC) in Civil Case No. 00-1563, thereby ordering
to be paid the owner within sixty (60) days from the date of filing of the petitioners Metro Concast Steel Corporation (Metro Concast), Spouses
expropriation case. When the decision of the court becomes final and Jose S. Dychiao and Tiu Oh Yan, Spouses Guillermo and Mercedes
executory, the implementing agency shall pay the owner the difference Dychiao, and Spouses Vicente and Filomena Duchiao (individual
between the amount already paid and the just compensation as determined petitioners) to solidarily pay respondent Allied Bank Corporation (Allied
by the court. Bank) the aggregate amount of ₱51,064,094.28, with applicable interests
and penalty charges.
Failure to comply with the foregoing directives shall subject the
government official or employee concerned to administrative, civil and/or The Facts
criminal sanctions, thus:
On various dates and for different amounts, Metro Concast, a corporation
Section 11. Sanctions. - Violation of any provisions of this Act shall duly organized and existing under and by virtue of Philippine laws and
subject the government official or employee concerned to appropriate engaged in the business of manufacturing steel,5 through its officers,
administrative, civil and/or criminal sanctions, including suspension herein individual petitioners, obtained several loans from Allied Bank.
and/or dismissal from the government service and forfeiture of benefits. These loan transactions were covered by a promissory note and separate
While the foregoing provisions, being substantive in nature or disturbs letters of credit/trust receipts, the details of which are as follows:
substantive rights, cannot be retroactively applied to the present case, We
trust that this established mechanism will surely deter hasty acquisition of Date Document
private properties in the future without the benefit of immediate payment
of the value of the property in accordance with Section 4 of R.A. 8974.
This effectively addresses J. Velasco's concerns that sustaining our earlier December 13, 1996 Promissory Note No. 96-213016
rulings on the matter would be licensing the government to dispense with
constitutional requirements in taking private properties. Moreover, any
November 7, 1995 Trust Receipt No. 96-2023657
gap on the procedural aspect of the expropriation proceedings will be
remedied by the aforequoted provisions.
May 13, 1996 Trust Receipt No. 96-9605228
In effect, R.A. 8974 enshrines a new approach towards eminent domain
that reconciles the inherent unease attending expropriation proceedings
with a position of fundamental equity.47 May 24, 1996 Trust Receipt No. 96-9605249
Despite the foregoing developments, however, We emphasize that the

government's failure, to initiate the necessary expropriation proceedings March 21, 1997 Trust Receipt No. 97-20472410
prior to actual taking cannot simply invalidate the State's exercise of its
eminent domain power, given that the property subject of expropriation June 7, 1996 Trust Receipt No. 96-20328011
is indubitably devoted for public use, and public policy imposes upon the
public utility the obligation to continue its services to the public. To
hastily nullify said expropriation in the guise of lack of due process would July 26, 1995 Trust Receipt No. 95-20194312
certainly diminish or weaken one of the State's inherent powers, the
ultimate objective of which is to serve the greater good. Thus, the non-
August 31, 1995 Trust Receipt No. 95-20205313
filing of the case for expropriation will not necessarily lead to the return
of the property to the landowner. What is left to the landowner is the right
of compensation.48 November 16, 1995 Trust Receipt No. 96-20243914
All told, We hold that putting to rest the issue on the validity of the
exercise of eminent domain is neither tantamount to condoning the acts July 3, 1996 Trust Receipt No. 96-20355215
of the DPWH in disregarding the property rights of respondents-movants
nor giving premium to the government's failure to institute an
June 20, 1995 Trust Receipt No. 95-20171016
expropriation proceeding. This Court had steadfastly adhered to the
doctrine that its first and fundamental duty is the application of the law
according to its express terms, interpretation being called for only when December 13, 1995 Trust Receipt No. 96-37908917
such literal application is impossible.49 To entertain other formula for
computing just compensation, contrary to those established by law and
jurisprudence, would open varying interpretation of economic policies - December 13, 1995 Trust Receipt No. 96/20258118
a matter which this Court has no competence to take cognizance of. Time
and again, we have held that no process of interpretation or construction

The interest rate under Promissory Note No. 96-21301 was pegged at (c) was apprised of developments regarding the sale and disposition of the
15.25% per annum (p.a.), with penalty charge of 3% per month in case of scrap metal – then it stands to reason that the MoA between Metro
default; while the twelve (12) trust receipts uniformly provided for an Concast and Peakstar was binding upon said bank.
interest rate of 14% p.a. and 1% penalty charge. By way of security, the
individual petitioners executed several Continuing The CA Ruling
Guaranty/Comprehensive Surety Agreements19 in favor of Allied Bank. Allied Bank appealed to the CA which, in a Decision32 dated February 12,
Petitioners failed to settle their obligations under the aforementioned 2007, reversed and set aside the ruling of the RTC, ratiocinating that there
promissory note and trust receipts, hence, Allied Bank, through counsel, was "no legal basis in fact and in law to declare that when Bankwise
sent them demand letters,20 all dated December 10, 1998, seeking reneged its guarantee under the [MoA], herein [petitioners] should be
payment of the total amount of ₱51,064,093.62, but to no avail. Thus, deemed to be discharged from their obligations lawfully incurred in favor
Allied Bank was prompted to file a complaint for collection of sum of of [Allied Bank]."33
money21 (subject complaint) against petitioners before the RTC, docketed
as Civil Case No. 00-1563. In their second22 Amended The CA examined the MoA executed between Metro Concast, as seller of
Answer,23petitioners admitted their indebtedness to Allied Bank but the ferro scrap, and Peakstar, as the buyer thereof, and found that the same
denied liability for the interests and penalties charged, claiming to have did not indicate that Allied Bank intervened or was a party thereto. It also
paid the total sum of ₱65,073,055.73 by way of interest charges for the pointed out the fact that the post-dated checks pursuant to the MoA were
period covering 1992 to 1997.24 issued in favor of Jose Dychiao. Likewise, the CA found no sufficient
evidence on record showing that Atty. Saw was duly and legally
They also alleged that the economic reverses suffered by the Philippine authorized to act for and on behalf of Allied Bank, opining that the RTC
economy in 1998 as well as the devaluation of the peso against the US was "indulging in hypothesis and speculation"34 when it made a contrary
dollar contributed greatly to the downfall of the steel industry, directly pronouncement. While Atty. Saw received the earnest money from
affecting the business of Metro Concast and eventually leading to its Peakstar, the receipt was signed by him on behalf of Jose Dychiao.35
cessation. Hence, in order to settle their debts with Allied Bank,
petitioners offered the sale of Metro Concast’s remaining assets, It also added that "[i]n the final analysis, the aforesaid checks and receipts
consisting of machineries and equipment, to Allied Bank, which the latter, were signed by [Atty.] Saw either as representative of [petitioners] or as
however, refused. Instead, Allied Bank advised them to sell the equipment partner of the latter’s legal counsel, and not in anyway as representative
and apply the proceeds of the sale to their outstanding obligations. of [Allied Bank]."36
Accordingly, petitioners offered the equipment for sale, but since there
were no takers, the equipment was reduced into ferro scrap or scrap metal Consequently, the CA granted the appeal and directed petitioners to
over the years. In 2002, Peakstar Oil Corporation (Peakstar), represented solidarily pay Allied Bank their corresponding obligations under the
by one Crisanta Camiling (Camiling), expressed interest in buying the aforementioned promissory note and trust receipts, plus interests, penalty
scrap metal. During the negotiations with Peakstar, petitioners claimed charges and attorney’s fees. Petitioners sought reconsideration37 which
that Atty. Peter Saw (Atty. Saw), a member of Allied Bank’s legal was, however, denied in a Resolution38 dated May 10, 2007. Hence, this
department, acted as the latter’s agent. Eventually, with the alleged petition.
conformity of Allied Bank, through Atty. Saw, a Memorandum of The Issue Before the Court
Agreement25 dated November 8, 2002 (MoA) was drawn between Metro
Concast, represented by petitioner Jose Dychiao, and Peakstar, through At the core of the present controversy is the sole issue of whether or not
Camiling, under which Peakstar obligated itself to purchase the scrap the loan obligations incurred by the petitioners under the subject
metal for a total consideration of ₱34,000,000.00, payable as follows: promissory note and various trust receipts have already been
extinguished.
(a) ₱4,000,000.00 by way of earnest money – ₱2,000,000.00 to be paid
in cash and the other ₱2,000,000.00 to be paid in two (2) post-dated The Court’s Ruling
checks of ₱1,000,000.00 each;26 and
Article 1231 of the Civil Code states that obligations are extinguished
(b) the balance of ₱30,000,000.00 to be paid in ten (10) monthly either by payment or performance, the loss of the thing due, the
installments of ₱3,000,000.00, secured by bank guarantees from condonation or remission of the debt, the confusion or merger of the rights
Bankwise, Inc. (Bankwise) in the form of separate post-dated checks.27 of creditor and debtor, compensation or novation.
Unfortunately, Peakstar reneged on all its obligations under the MoA. In
1â wphi1 In the present case, petitioners essentially argue that their loan obligations
this regard, petitioners asseverated that: to Allied Bank had already been extinguished due to Peakstar’s failure to
perform its own obligations to Metro Concast pursuant to the MoA.
(a) their failure to pay their outstanding loan obligations to Allied Bank Petitioners classify Peakstar’s default as a form of force majeure in the
must be considered as force majeure ; and sense that they have, beyond their control, lost the funds they expected to
(b) since Allied Bank was the party that accepted the terms and conditions have received from the Peakstar (due to the MoA) which they would, in
of payment proposed by Peakstar, petitioners must therefore be deemed turn, use to pay their own loan obligations to Allied Bank. They further
to have settled their obligations to Allied Bank. To bolster their defense, state that Allied Bank was equally bound by Metro Concast’s MoA with
petitioner Jose Dychiao (Jose Dychiao) testified28 during trial that it was Peakstar since its agent, Atty. Saw, actively represented it during the
Atty. Saw himself who drafted the MoA and subsequently received29 the negotiations and execution of the said agreement. Petitioners’ arguments
₱2,000,000.00 cash and the two (2) Bankwise post-dated checks worth are untenable. At the outset, the Court must dispel the notion that the MoA
₱1,000,000.00 each from Camiling. However, Atty. Saw turned over only would have any relevance to the performance of petitioners’ obligations
the two (2) checks and ₱1,500,000.00 in cash to the wife of Jose to Allied Bank. The MoA is a sale of assets contract, while petitioners’
Dychiao.30 obligations to Allied Bank arose from various loan transactions. Absent
any showing that the terms and conditions of the latter transactions have
Claiming that the subject complaint was falsely and maliciously filed, been, in any way, modified or novated by the terms and conditions in the
petitioners prayed for the award of moral damages in the amount of MoA, said contracts should be treated separately and distinctly from each
₱20,000,000.00 in favor of Metro Concast and at least ₱25,000,000.00 other, such that the existence, performance or breach of one would not
for each individual petitioner, ₱25,000,000.00 as exemplary damages, depend on the existence, performance or breach of the other. In the
₱1,000,000.00 as attorney’s fees, ₱500,000.00 for other litigation foregoing respect, the issue on whether or not Allied Bank expressed its
expenses, including costs of suit. conformity to the assets sale transaction between Metro Concast and
Peakstar (as evidenced by the MoA) is actually irrelevant to the issues
The RTC Ruling related to petitioners’ loan obligations to the bank. Besides, as the CA
After trial on the merits, the RTC, in a Decision31 dated January 17, 2006, pointed out, the fact of Allied Bank’s representation has not been proven
dismissed the subject complaint, holding that the "causes of action sued in this case and hence, cannot be deemed as a sustainable defense to
upon had been paid or otherwise extinguished." It ruled that since Allied exculpate petitioners from their loan obligations to Allied Bank. Now,
Bank was duly represented by its agent, Atty. Saw, in all the negotiations anent petitioners’ reliance on force majeure, suffice it to state that
and transactions with Peakstar – considering that Atty. Saw Peakstar’s breach of its obligations to Metro Concast arising from the
MoA cannot be classified as a fortuitous event under jurisprudential
(a) drafted the MoA, formulation. As discussed in Sicam v. Jorge:39
(b) accepted the bank guarantee issued by Bankwise, and Fortuitous events by definition are extraordinary events not foreseeable
or avoidable. It is therefore, not enough that the event should not have
1âwphi1
been foreseen or anticipated, as is commonly believed but it must be one

impossible to foresee or to avoid. The mere difficulty to foresee the

happening is not impossibility to foresee the same. To constitute a (8) the preparation of the staff for actual hotel operations; and (9) the
fortuitous event, the following elements must concur: (a) the cause of the 4
actual hotel operations.
unforeseen and unexpected occurrence or of the failure of the debtor to
comply with obligations must be independent of human will; (b) it must The IHC Board of Directors approved phase one to phase six of the
be impossible to foresee the event that constitutes the caso fortuito or, if proposal during the special board meeting on February 11, 1969, and
it can be foreseen, it must be impossible to avoid; (c) the occurrence 5
earmarked ₱2,000,000.00 for the project. Anent the financing, IHC
must be such as to render it impossible for the debtor to fulfill applied with DBP for a foreign loan guaranty. DBP processed the
obligations in a normal manner; and (d) the obligor must be free from 6
any participation in the aggravation of the injury or loss.40(Emphases application, and approved it on October 24, 1969 subject to several
7
supplied) conditions.
While it may be argued that Peakstar’s breach of the MoA was unforseen On July 11, 1969, shortly after submitting the application to DBP, Joaquin
by petitioners, the same us clearly not "impossible"to foresee or even an wrote to IHC to request the payment of his fees in the amount of
event which is independent of human will." Neither has it been shown ₱500,000.00 for the services that he had provided and would be providing
that said occurrence rendered it impossible for petitioners to pay their loan to IHC in relation to the hotel project that were outside the scope of the
obligations to Allied Bank and thus, negates the former’s force technical proposal. Joaquin intimated his amenability to receive shares of
majeure theory altogether. In any case, as earlier stated, the performance 8
stock instead of cash in view of IHC’s financial situation.
or breach of the MoA bears no relation to the performance or breach of
the subject loan transactions, they being separate and distinct sources of On July 11, 1969, the stockholders of IHC met and granted Joaquin’s
obligations. The fact of the matter is that petitioners’ loan obligations to request, allowing the payment for both Joaquin and Rafael Suarez for
Allied Bank remain subsisting for the basic reason that the former has not 9
their services in implementing the proposal.
been able to prove that the same had already been paid41 or, in any way,
extinguished. In this regard, petitioners’ liability, as adjudged by the CA, On June 20, 1970, Joaquin presented to the IHC Board of Directors the
must perforce stand. Considering, however, that Allied Bank’s extra- results of his negotiations with potential foreign financiers. He narrowed
judicial demand on petitioners appears to have been made only on the financiers to Roger Dunn & Company and Materials Handling
December 10, 1998, the computation of the applicable interests and Corporation. He recommended that the Board of Directors consider
penalty charges should be reckoned only from such date. Materials Handling Corporation based on the more beneficial terms it had
10
WHEREFORE, the petition is DENIED. The Decision dated February 12, offered. His recommendation was accepted.
2007 and Resolution dated May 10, 2007 of the Court of Appeals in CA- Negotiations with Materials Handling Corporation and, later on, with its
G.R. CV No. 86896 are hereby AFFIRMED with MODIFICATION principal, Barnes International (Barnes), ensued. While the negotiations
reckoning the applicable interests and penalty charges from the date of with Barnes were ongoing, Joaquin and Jose Valero, the Executive
the extrajudicial demand or on December 10, 1998. The rest of the Director of IHC, met with another financier, the Weston International
appellate court’s dispositions stand. 11
Corporation (Weston), to explore possible financing. When Barnes
SO ORDERED. failed to deliver the needed loan, IHC informed DBP that it would submit
12
Weston for DBP’s consideration. As a result, DBP cancelled its
P AYMENT /P ERFORMANCE 13
previous guaranty through a letter dated December 6, 1971.
International Hotel Corp. vs Joaquin
G.R. No. 158361 April 10, 2013 On December 13, 1971, IHC entered into an agreement with Weston, and
INTERNATIONAL HOTEL CORPORATION, Petitioner, communicated this development to DBP on June 26, 1972. However,
vs. DBP denied the application for guaranty for failure to comply with the
14
FRANCISCO B. JOAQUIN, JR. and RAFAEL SUAREZ, Respondents. conditions contained in its November 12, 1971 letter.
DECISION Due to Joaquin’s failure to secure the needed loan, IHC, through its
President Bautista, canceled the 17,000 shares of stock previously issued
BERSAMIN, J.: to Joaquin and Suarez as payment for their services. The latter requested
To avoid unjust enrichment to a party from resulting out of a substantially a reconsideration of the cancellation, but their request was rejected.
performed contract, the principle of quantum meruit may be used to Consequently, Joaquin and Suarez commenced this action for specific
determine his compensation in the absence of a written agreement for that performance, annulment, damages and injunction by a complaint dated
purpose. The principle of quantum meruit justifies the payment of the December 6, 1973 in the Regional Trial Court in Manila (RTC),
reasonable value of the services rendered by him. impleading IHC and the members of its Board of Directors, namely, Felix
The Case Angelo Bautista, Sergio O. Rustia, Ephraim G. Gochangco, Mario B.
Julian, Benjamin J. Bautista, Basilio L. Lirag, Danilo R. Lacerna and
Under review is the decision the Court of Appeals (CA) promulgated on 15
Hermenegildo R. Reyes. The complaint alleged that the cancellation of
1
November 8, 2002, disposing: the shares had been illegal, and had deprived them of their right to
participate in the meetings and elections held by IHC; that Barnes had
WHEREFORE, premises considered, the decision dated August 26, 1993 been recommended by IHC President Bautista, not by Joaquin; that they
of the Regional Trial Court, Branch 13, Manila in Civil Case No. R-82- had failed to meet their obligation because President Bautista and his son
2434 is AFFIRMED with Modification as to the amounts awarded as had intervened and negotiated with Barnes instead of Weston; that DBP
follows: defendant-appellant IHC is ordered to pay plaintiff-appellant had canceled the guaranty because Barnes had failed to release the loan;
Joaquin ₱700,000.00 and plaintiff-appellant Suarez ₱200,000.00, both to and that IHC had agreed to compensate their services with 17,000 shares
be paid in cash. 16
of the common stock plus cash of ₱1,000,000.00.
SO ORDERED.
IHC, together with Felix Angelo Bautista, Sergio O. Rustia, Mario B.
Antecedents Julian and Benjamin J. Bautista, filed an answer claiming that the shares
issued to Joaquin and Suarez as compensation for their "past and future
On February 1, 1969, respondent Francisco B. Joaquin, Jr. submitted a services" had been issued in violation of Section 16 of the Corporation
proposal to the Board of Directors of the International Hotel Corporation Code; that Joaquin and Suarez had not provided a foreign financier
(IHC) for him to render technical assistance in securing a foreign loan for acceptable to DBP; and that they had already received ₱96,350.00 as
the construction of a hotel, to be guaranteed by the Development Bank of 17
2 payment for their services.
the Philippines (DBP). The proposal encompassed nine phases, namely:
(1) the preparation of a new project study; (2) the settlement of the On their part, Lirag and Lacerna denied any knowledge of or participation
unregistered mortgage prior to the submission of the application for 18
in the cancellation of the shares.
guaranty for processing by DBP; (3) the preparation of papers necessary
to the application for guaranty; (4) the securing of a foreign financier for Similarly, Gochangco and Reyes denied any knowledge of or
the project; (5) the securing of the approval of the DBP Board of participation in the cancellation of the shares, and clarified that they were
3 19
Governors; (6) the actual follow up of the application with DBP ; (7) the not directors of IHC. In the course of the proceedings, Reyes died and
overall coordination in implementing the projections of the project study; 20
was substituted by Consorcia P. Reyes, the administratrix of his estate.
Ruling of the RTC

Under its decision rendered on August 26, 1993, the RTC held IHC liable Stock would be reasonable for the present accomplishments and to this
pursuant to the second paragraph of Article 1284 of the Civil Code, effect, the President is authorized to issue the same in the name of the
disposing thusly: Technical Group, as follows:
WHEREFORE, in the light of the above facts, law and jurisprudence, the ₱200,000.00 in common stock to Rafael Suarez, as associate in the
Court hereby orders the defendant International Hotel Corporation to pay Technical Group, and ₱200,000.00 in common stock to Francisco G.
plaintiff Francisco B. Joaquin, the amount of Two Hundred Thousand Joaquin, Jr., also a member of the Technical Group.
Pesos (₱200,000.00) and to pay plaintiff Rafael Suarez the amount of
Fifty Thousand Pesos (₱50,000.00); that the said defendant IHC likewise It is apparent that not all of the ₱2,000,000.00 was allocated exclusively
pay the co-plaintiffs, attorney’s fees of ₱20,000.00, and costs of suit. to compensate plaintiffs-appellants. Rather, it was intended to fund the
whole undertaking including their compensation. On the same date,
21 defendant-appellant IHC also authorized its president to pay-appellant
IT IS SO ORDERED.
Joaquin ₱500,000.00 either in cash or in stock or both.
The RTC found that Joaquin and Suarez had failed to meet their
obligations when IHC had chosen to negotiate with Barnes rather than The amount awarded by the lower court was therefore less than what
with Weston, the financier that Joaquin had recommended; and that the defendant-appellant IHC agreed to pay plaintiffs-appellants. While this
cancellation of the shares of stock had been proper under Section 68 of Court cannot decree that the cancelled shares be restored, for they are
the Corporation Code, which allowed such transfer of shares to without a doubt null and void, still and all, defendant-appellant IHC
compensate only past services, not future ones. cannot now put up its own ultra vires act as an excuse to escape obligation
to plaintiffs-appellants. Instead of shares of stock, defendant-appellant
Ruling of the CA IHC is ordered to pay plaintiff-appellant Joaquin a total of ₱700,000.00
and plaintiff-appellant Suarez ₱200,000.00, both to be paid in cash.
22
Both parties appealed.
Although the lower court failed to explain why it was granting the
Joaquin and Suarez assigned the following errors, to wit: attorney’s fees, this Court nonetheless finds its award proper given
25
DESPITE HAVING CORRECTLY ACKNOWLEDGED THAT defendant-appellant IHC’s actions.
PLAINTIFFS-APPELLANTS FULLY PERFORMED ALL THAT WAS Issues
INCUMBENT UPON THEM, THE HONORABLE JUDGE ERRED IN
NOT ORDERING THAT: In this appeal, the IHC raises as issues for our consideration and resolution
the following:
A. DEFENDANTS WERE UNJUSTIFIED IN CANCELLING THE
SHARES OF STOCK PREVIOUSLY ISSUED TO PLAINTIFFS- I
APPELLANTS; AND
WHETHER OR NOT THE COURT OF APPEALS IS CORRECT IN
B. DEFENDANTS PAY PLAINTIFFS-APPELLANTS TWO MILLION AWARDING COMPENSATION AND EVEN MODIFYING THE
SEVEN HUNDRED PESOS (sic) (₱2,700,000.00), INCLUDING PAYMENT TO HEREIN RESPONDENTS DESPITE NON-
INTEREST THEREON FROM 1973, REPRESENTING THE TOTAL FULFILLMENT OF THEIR OBLIGATION TO HEREIN PETITIONER
23
OBLIGATION DUE PLAINTIFFS-APPELLANTS. II
On the other hand, IHC attributed errors to the RTC, as follows: WHETHER OR NOT THE COURT OF APPEALS IS CORRECT IN
26
I. AWARDING ATTORNEY’S FEES TO RESPONDENTS
THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFFS- IHC maintains that Article 1186 of the Civil Code was erroneously
APPELLANTS HAVE NOTBEEN COMPLETELY PAID FOR THEIR applied; that it had no intention of preventing Joaquin from complying
SERVICES, AND IN ORDERING THE DEFENDANT-APPELLANT with his obligations when it adopted his recommendation to negotiate
TO PAY TWO HUNDRED THOUSAND PESOS (₱200,000.00) AND with Barnes; that Article 1234 of the Civil Code applied only if there was
FIFTY THOUSAND PESOS (₱50,000.00) TO PLAINTIFFS- a merely slight deviation from the obligation, and the omission or defect
APPELLANTS FRANCISCO B. JOAQUIN AND RAFAEL SUAREZ, was technical and unimportant; that substantial compliance was
RESPECTIVELY. unacceptable because the foreign loan was material and was, in fact, the
ultimate goal of its contract with Joaquin and Suarez; that because the
II. obligation was indivisible and subject to a suspensive condition, Article
27
THE LOWER COURT ERRED IN AWARDING PLAINTIFFS- 1181 of the Civil Code applied, under which a partial performance was
24 equivalent to non-performance; and that the award of attorney’s fees
APPELLANTS ATTORNEY’S FEES AND COSTS OF SUIT.
should be deleted for lack of legal and factual bases.
In its questioned decision promulgated on November 8, 2002, the CA
28
concurred with the RTC, upholding IHC’s liability under Article 1186 of On the part of respondents, only Joaquin filed a comment, arguing that
the Civil Code. It ruled that in the context of Article 1234 of the Civil the petition was fatally defective for raising questions of fact; that the
Code, Joaquin had substantially performed his obligations and had obligation was divisible and capable of partial performance; and that the
become entitled to be paid for his services; and that the issuance of the 29
suspensive condition was deemed fulfilled through IHC’s own actions.
shares of stock was ultra vires for having been issued as consideration for
future services. Ruling
Anent how much was due to Joaquin and Suarez, the CA explained thusly: We deny the petition for review on certiorari subject to the ensuing
disquisitions.
This Court does not subscribe to plaintiffs-appellants’ view that
defendant-appellant IHC agreed to pay them ₱2,000,000.00. Plaintiff- 1.
appellant Joaquin’s letter to defendant-appellee F.A. Bautista, quoting
defendant-appellant IHC’s board resolutions which supposedly IHC raises questions of law
authorized the payment of such amount cannot be sustained. The We first consider and resolve whether IHC’s petition improperly raised
resolutions are quite clear and when taken together show that said amount questions of fact.
was only the "estimated maximum expenses" which defendant-appellant
IHC expected to incur in accomplishing phases 1 to 6, not exclusively to A question of law exists when there is doubt as to what the law is on a
plaintiffs-appellants’ compensation.This conclusion finds support in an certain state of facts, but, in contrast, a question of fact exists when the
unnumbered board resolution of defendant-appellant IHC dated July 11, doubt arises as to the truth or falsity of the facts alleged. A question of
1969: law does not involve an examination of the probative value of the
evidence presented by the litigants or by any of them; the resolution of
"Incidentally, it was also taken up the necessity of giving the Technical the issue must rest solely on what the law provides on the given set of
Group a portion of the compensation that was authorized by this 30
corporation in its Resolution of February 11, 1969 considering that the circumstances. When there is no dispute as to the facts, the question of
assistance so far given the corporation by said Technical Group in whether or not the conclusion drawn from the facts is correct is a question
31
continuing our project with the DBP and its request for guaranty for a of law.
foreign loan is 70% completed leaving only some details which are now
being processed. It is estimated that ₱400,000.00 worth of Common

Considering that what IHC seeks to review is the CA’s application of the intention negated the basis for the CA’s reliance on Article 1186 of the
law on the facts presented therein, there is no doubt that IHC raises Civil Code.
questions of law. The basic issue posed here is whether the conclusions
drawn by the CA were correct under the pertinent laws. Nor do we agree with the CA’s upholding of IHC’s liability by virtue of
Joaquin and Suarez’s substantial performance. In so ruling, the CA
2. applied Article 1234 of the Civil Code, which states:
Article 1186 and Article 1234 of the Civil Code cannot be the source of Article 1234. If the obligation has been substantially performed in good
IHC’s obligation to pay respondents IHC argues that it should not be held faith, the obligor may recover as though there had been a strict and
liable because: (a) it was Joaquin who had recommended Barnes; and (b) complete fulfillment, less damages suffered by the obligee.
IHC’s negotiation with Barnes had been neither intentional nor willfully
intended to prevent Joaquin from complying with his obligations. It is well to note that Article 1234 applies only when an obligor admits
35
breaching the contract after honestly and faithfully performing all the
IHC’s argument is meritorious. material elements thereof except for some technical aspects that cause no
36
Article 1186 of the Civil Code reads: serious harm to the obligee. IHC correctly submits that the provision
refers to an omission or deviation that is slight, or technical and
Article 1186. The condition shall be deemed fulfilled when the obligor unimportant, and does not affect the real purpose of the contract.
voluntarily prevents its fulfillment.
Tolentino explains the character of the obligor’s breach under Article
This provision refers to the constructive fulfillment of a suspensive 1234 in the following manner, to wit:
32
condition, whose application calls for two requisites, namely: (a) the
intent of the obligor to prevent the fulfillment of the condition, and (b) the In order that there may be substantial performance of an obligation, there
actual prevention of the fulfillment. Mere intention of the debtor to must have been an attempt in good faith to perform, without any willful
prevent the happening of the condition, or to place ineffective obstacles or intentional departure therefrom. The deviation from the obligation
to its compliance, without actually preventing the fulfillment, is must be slight, and the omission or defect must be technical and
33 unimportant, and must not pervade the whole or be so material that the
insufficient. object which the parties intended to accomplish in a particular manner is
The error lies in the CA’s failure to determine IHC’s intent to pre-empt not attained. The non-performance of a material part of a contract will
Joaquin from meeting his obligations. The June 20, 1970 minutes of prevent the performance from amounting to a substantial compliance.
IHC’s special board meeting discloses that Joaquin impressed upon the The party claiming substantial performance must show that he has
members of the Board that Materials Handling was offering more attempted in good faith to perform his contract, but has through oversight,
favorable terms for IHC, to wit: misunderstanding or any excusable neglect failed to completely perform
xxxx in certain negligible respects, for which the other party may be adequately
indemnified by an allowance and deduction from the contract price or by
At the meeting all the members of the Board of Directors of the an award of damages. But a party who knowingly and wilfully fails to
International Hotel Corporation were present with the exception of perform his contract in any respect, or omits to perform a material part of
Directors Benjamin J. Bautista and Sergio O. Rustia who asked to be it, cannot be permitted, under the protection of this rule, to compel the
excused because of previous engagements. In that meeting, the President other party, and the trend of the more recent decisions is to hold that the
called on Mr. Francisco G. Joaquin, Jr. to explain the different percentage of omitted or irregular performance may in and of itself be
negotiations he had conducted relative to obtaining the needed financing 37
sufficient to show that there had not been a substantial performance.
for the hotel project in keeping with the authority given to him in a
resolution approved by the Board of Directors. By reason of the inconsequential nature of the breach or omission, the law
deems the performance as substantial, making it the obligee’s duty to
Mr. Joaquin presently explained that he contacted several local and 38
pay. The compulsion of payment is predicated on the substantial benefit
foreign financiers through different brokers and after examining the
different offers he narrowed down his choice to two (2), to wit: the foreign derived by the obligee from the partial performance. Although compelled
financier recommended by George Wright of the Roger Dunn & to pay, the obligee is nonetheless entitled to an allowance for the sum
Company and the offer made by the Materials Handling Corporation. required to remedy omissions or defects and to complete the work agreed
39
upon.
After explaining the advantages and disadvantages to our corporation of
the two (2) offers specifically with regard to the terms and repayment of Conversely, the principle of substantial performance is inappropriate
the loan and the rate of interest requested by them, he concluded that the when the incomplete performance constitutes a material breach of the
offer made by the Materials Handling Corporation is much more contract. A contractual breach is material if it will adversely affect the
advantageous because the terms and conditions of payment as well as the nature of the obligation that the obligor promised to deliver, the benefits
rate of interest are much more reasonable and would be much less onerous that the obligee expects to receive after full compliance, and the extent
to our corporation. However, he explained that the corporation accepted, that the non-performance defeated the purposes of the
in principle, the offer of Roger Dunn, per the corporation’s telegrams to 40
contract. Accordingly, for the principle embodied in Article 1234 to
Mr. Rudolph Meir of the Private Bank of Zurich, Switzerland, and until apply, the failure of Joaquin and Suarez to comply with their commitment
such time as the corporation’s negotiations with Roger Dunn is should not defeat the ultimate purpose of the contract.
terminated, we are committed, on one way or the other, to their financing.
The primary objective of the parties in entering into the services
It was decided by the Directors that, should the negotiations with Roger agreement was to obtain a foreign loan to finance the construction of
Dunn materialize, at the same time as the offer of Materials Handling IHC’s hotel project. This objective could be inferred from IHC’s approval
Corporation, that the funds committed by Roger Dunn may be diverted to of phase 1 to phase 6 of the proposal. Phase 1 and phase 2, respectively
other borrowers of the Development Bank of the Philippines. With this the preparation of a new project study and the settlement of the
condition, Director Joaquin showed the advantages of the offer of unregistered mortgage, would pave the way for Joaquin and Suarez to
Materials Handling Corporation. Mr. Joaquin also informed the render assistance to IHC in applying for the DBP guaranty and thereafter
corporation that, as of this date, the bank confirmation of Roger Dunn & to look for an able and willing foreign financial institution acceptable to
Company has not been received. In view of the fact that the corporation DBP. All the steps that Joaquin and Suarez undertook to accomplish had
is racing against time in securing its financing, he recommended that the a single objective – to secure a loan to fund the construction and eventual
corporation entertain other offers. operations of the hotel of IHC. In that regard, Joaquin himself admitted
After a brief exchange of views on the part of the Directors present and that his assistance was specifically sought to seek financing for IHC’s
41
after hearing the clarification and explanation made by Mr. C. M. Javier hotel project.
who was present and who represented the Materials Handling
Corporation, the Directors present approved unanimously the Needless to say, finding the foreign financier that DBP would guarantee
recommendation of Mr. Joaquin to entertain the offer of Materials was the essence of the parties’ contract, so that the failure to completely
34 satisfy such obligation could not be characterized as slight and
Handling Corporation. unimportant as to have resulted in Joaquin and Suarez’s substantial
Evidently, IHC only relied on the opinion of its consultant in deciding to performance that consequentially benefitted IHC. Whatever benefits IHC
transact with Materials Handling and, later on, with Barnes. In negotiating gained from their services could only be minimal, and were even probably
with Barnes, IHC had no intention, willful or otherwise, to prevent outweighed by whatever losses IHC suffered from the delayed
Joaquin and Suarez from meeting their undertaking. Such absence of any construction of its hotel. Consequently, Article 1234 did not apply.

3. "RESOLVED, as it is hereby RESOLVED, that if the Reparations
allocation and the plan being negotiated with the DBP is realized the
IHC is nonetheless liable to pay under the rule on constructive fulfillment estimated maximum expenses of ₱2,000,000.00 for this phase is hereby
of a mixed conditional obligation authorized subject to the sound discretion of the committee composed of
Notwithstanding the inapplicability of Article 1186 and Article 1234 of Justice Felix Angelo Bautista, Jose N. Valero and Ephraim G.
47
the Civil Code, IHC was liable based on the nature of the obligation. Gochangco." (Emphasis supplied)
Considering that the agreement between the parties was not circumscribed Joaquin’s claim for the additional sum of ₱500,000.00 was similarly
by a definite period, its termination was subject to a condition – the without factual and legal bases. He had requested the payment of that
42 amount to cover services rendered and still to be rendered to IHC
happening of a future and uncertain event. The prevailing rule in
conditional obligations is that the acquisition of rights, as well as the separately from those covered by the first six phases of the scope of work.
extinguishment or loss of those already acquired, shall depend upon the However, there is no reason to hold IHC liable for that amount due to his
43 failure to present sufficient proof of the services rendered towards that
happening of the event that constitutes the condition. end. Furthermore, his July 11, 1969 letter revealed that the additional
To recall, both the RTC and the CA held that Joaquin and Suarez’s services that he had supposedly rendered were identical to those
obligation was subject to the suspensive condition of successfully enumerated in the technical proposal, thus:
securing a foreign loan guaranteed by DBP. IHC agrees with both lower The Board of Directors
courts, and even argues that the obligation with a suspensive condition
did not arise when the event or occurrence did not happen. In that International Hotel Corporation
instance, partial performance of the contract subject to the suspensive
condition was tantamount to no performance at all. As such, the Thru: Justice Felix Angelo Bautista
respondents were not entitled to any compensation. President & Chairman of the Board
We have to disagree with IHC’s argument. Gentlemen:
To secure a DBP-guaranteed foreign loan did not solely depend on the I have the honor to request this Body for its deliberation and action on the
diligence or the sole will of the respondents because it required the action fees for my services rendered and to be rendered to the hotel project and
and discretion of third persons – an able and willing foreign financial to the corporation. These fees are separate from the fees you have
institution to provide the needed funds, and the DBP Board of Governors approved in your previous Board Resolution, since my fees are separate.
to guarantee the loan. Such third persons could not be legally compelled I realize the position of the corporation at present, in that it is not in a
to act in a manner favorable to IHC. There is no question that when the financial position to pay my services in cash, therefore, I am requesting
fulfillment of a condition is dependent partly on the will of one of the this Body to consider payment of my fees even in the form of shares of
44 stock, as you have done to the other technical men and for other services
contracting parties, or of the obligor, and partly on chance, hazard or rendered to the corporation by other people.
45
the will of a third person, the obligation is mixed. The existing rule in
a mixed conditional obligation is that when the condition was not fulfilled Inasmuch as my fees are contingent on the successful implementation of
but the obligor did all in his power to comply with the obligation, the this project, I request that my fees be based on a percentage of the total
46 project cost. The fees which I consider reasonable for the services that I
condition should be deemed satisfied. have rendered to the project up to the completion of its construction is
Considering that the respondents were able to secure an agreement with ₱500,000.00. I believe said amount is reasonable since this is
Weston, and subsequently tried to reverse the prior cancellation of the approximately only ¾ of 1% of the total project cost.
guaranty by DBP, we rule that they thereby constructively fulfilled their So far, I have accomplished Phases 1-5 of my report dated February 1,
obligation. 1969 and which you authorized us to do under Board Resolution of
4. February 11, 1969. It is only Phase 6 which now remains to be
implemented. For my appointment as Consultant dated May 12, 1969 and
Quantum meruit should apply in the absence of an express agreement on the Board Resolution dated June 23, 1969 wherein I was appointed to the
the fees Technical Committee, it now follows that I have been also authorized to
implement part of Phases 7 & 8.
The next issue to resolve is the amount of the fees that IHC should pay to
Joaquin and Suarez. A brief summary of my accomplished work has been as follows:
Joaquin claimed that aside from the approved ₱2,000,000.00 fee to 1. I have revised and made the new Project Study of your hotel project,
implement phase 1 to phase 6, the IHC Board of Directors had approved making it bankable and feasible.
an additional ₱500,000.00 as payment for his services. The RTC declared
that he and Suarez were entitled to ₱200,000.00 each, but the CA revised 2. I have reduced the total cost of your project by approximately
the amounts to ₱700,000.00 for Joaquin and ₱200,000.00 for Suarez. ₱24,735,000.00.
Anent the ₱2,000,000.00, the CA rightly concluded that the full amount 3. I have seen to it that a registered mortgage with the Reparations
of ₱2,000,000.00 could not be awarded to respondents because such Commission did not affect the application with the IBP for approval to
amount was not allocated exclusively to compensate respondents, but was processing.
intended to be the estimated maximum to fund the expenses in 4. I have prepared the application papers acceptable to the DBP by means
undertaking phase 6 of the scope of services. Its conclusion was of an advance analysis and the presentation of the financial mechanics,
unquestionably borne out by the minutes of the February 11, 1969 which was accepted by the DBP.
meeting, viz:
5. I have presented the financial mechanics of the loan wherein the
xxxx requirement of the DBP for an additional ₱19,000,000.00 in equity from
II the corporation became unnecessary.
The preparation of the necessary papers for the DBP including the 6. The explanation of the financial mechanics and the justification of this
preparation of the application, the presentation of the mechanics of project was instrumental in changing the original recommendation of the
financing, the actual follow up with the different departments of the DBP Investment Banking Department of the DBP, which recommended
which includes the explanation of the feasibility studies up to the approval disapproval of this application, to the present recommendation of the Real
of the loan, conditioned on the DBP’s acceptance of the project as Estate Department which is for the approval of this project for proceeding.
feasible. The estimated expenses for this particular phase would be 7. I have submitted to you several offers already of foreign financiers
contingent, i.e. upon DBP’s approval of the plan now being studied and which are in your files. We are presently arranging the said financiers to
prepared, is somewhere around ₱2,000,000.00. confirm their funds to the DBP for our project,
After a brief discussion on the matter, the Board on motion duly made and 8. We have secured the approval of the DBP to process the loan
seconded, unanimously adopted a resolution of the following tenor: application of this corporation as per its letter July 2, 1969.
RESOLUTION NO. ______ 9. We have performed other services for the corporation which led to the
(Series of 1969) cooperation and understanding of the different factions of this
corporation.

I have rendered services to your corporation for the past 6 months with only be applied if no express contract was entered into, and no specific
no clear understanding as to the compensation of my services. All I have 53
statutory provision was applicable.
drawn from the corporation is the amount of ₱500.00 dated May 12, 1969
and personal payment advanced by Justice Felix Angelo Bautista in the Under the established circumstances, we deem the total amount of
amount of ₱1,000.00. ₱200,000.00 to be reasonable compensation for respondents’ services
under the principle of quantum meruit.
I am, therefore, requesting this Body for their approval of my fees. I have
shown my good faith and willingness to render services to your Finally, we sustain IHC’s position that the grant of attorney’s fees lacked
corporation which is evidenced by my continued services in the past 6 factual or legal basis. Attorney’s fees are not awarded every time a party
months as well as the accomplishments above mentioned. I believe that prevails in a suit because of the policy that no premium should be placed
the final completion of this hotel, at least for the processing of the DBP on the right to litigate. There should be factual or legal support in the
up to the completion of the construction, will take approximately another records before the award of such fees is sustained. It is not enough
2 ½ years. In view of the above, I again reiterate my request for your justification for the award simply because respondents were compelled to
approval of my fees. When the corporation is in a better financial position, 54
protect their rights.
I will request for a withdrawal of a monthly allowance, said amount to be
determined by this Body. ACCORDINGLY, the Court DENIES the petition for review on
certiorari; and AFFIRMS the decision of the Court of Appeals
Very truly yours, promulgated on November 8, 2002 in C.A.-G.R. No. 47094 subject to the
(Sgd.) MODIFICATIONS that: (a) International Hotel Corporation is ordered
48 to. pay Francisco G. Joaquin, Jr. and Rafael Suarez ₱100,000.00 each as
Francisco G., Joaquin, Jr. compensation for their services, and (b) the award of ₱20,000.00 as
(Emphasis supplied) attorney's fees is deleted.
Joaquin could not even rest his claim on the approval by IHC’s Board of No costs of suit.
Directors. The approval apparently arose from the confusion between the
supposedly separate services that Joaquin had rendered and those to be SO ORDERED.
done under the technical proposal. The minutes of the July 11, 1969 board
meeting (when the Board of Directors allowed the payment for Joaquin’s Dela Cruz vs. Concepcion
past services and for the 70% project completion by the technical group) G.R. No. 172825 October 11, 2012
showed as follows: SPOUSES MINIANO B. DELA CRUZ and LETA L. DELA
III CRUZ, Petitioners,
vs.
The Third order of business is the compensation of Mr. Francisco G. ANA MARIE CONCEPCION, Respondent.
Joaquin, Jr. for his services in the corporation.
DECISION
After a brief discussion that ensued, upon motion duly made and
seconded, the stockholders unanimously approved a resolution of the PERALTA, J.:
following tenor: Assailed in this petition for review on certiorari under Rule 45 of the
RESOLUTION NO. ___ Rules of Court filed by petitioners spouses Miniano B. Dela Cruz and
(Series of 1969) Leta L. Dela Cruz against respondent Ana Marie Concepcion are the
Court of Appeals (CA) Decision1 dated March 31, 2005 and
"RESOLVED that Mr. Francisco G. Joaquin, Jr. be granted a Resolution2 dated May 24, 2006 in CA-G.R. CV No. 83030.
compensation in the amount of Five Hundred Thousand (₱500,000.00)
Pesos for his past services and services still to be rendered in the future to The facts of the case are as follows:
the corporation up to the completion of the Project. The President is
1âwphi1
On March 25, 1996, petitioners (as vendors) entered into a Contract to

given full discretion to discuss with Mr. Joaquin the manner of payment Sell3 with respondent (as vendee) involving a house and lot in Cypress St.,
of said compensation, authorizing him to pay part in stock and part in Phase I, Town and Country Executive Village, Antipolo City for a
cash." consideration of P2,000,000.00 subject to the following terms and
Incidentally, it was also taken up the necessity of giving the Technical conditions:
Group a portion of the compensation that was authorized by this a) That an earnest money of P100,000.00 shall be paid immediately;
corporation in its Resolution of February 11, 1969 considering that the
assistance so far given the corporation by said Technical Group in b) That a full down payment of Four Hundred Thousand Pesos
continuing our project with the DBP and its request for guaranty for a (P400,000.00) shall be paid on February 29, 1996;
foreign loan is 70% completed leaving only some details which are now
being processed. It is estimated that ₱400,000.00 worth of Common c) That Five Hundred Thousand Pesos (P500,000.00) shall be paid on or
Stock would be reasonable for the present accomplishments and to this before May 5, 1996; and
effect, the President is authorized to issue the same in the name of the d) That the balance of One Million Pesos (P1,000,000.00) shall be paid
Technical Group, as follows: on installment with interest of Eighteen Percent (18%) per annum or One
₱200,000.00 in Common Stock to Rafael Suarez, an associate in the and a half percent (1-1/2 %) interest per month, based on the diminishing
Technical Group, and ₱200,000.00 in Common stock to Francisco G. balance, compounded monthly, effective May 6, 1996. The interest shall
49 continue to run until the whole obligation shall have been fully paid. The
Joaquin, Jr., also a member of the Technical Group.
whole One Million Pesos shall be paid within three years from May 6,
Lastly, the amount purportedly included services still to be rendered that 1996;
supposedly extended until the completion of the construction of the hotel. e) That the agreed monthly amortization of Fifty Thousand Pesos
It is basic, however, that in obligations to do, there can be no payment (P50,000.00), principal and interest included, must be paid to the
50
unless the obligation has been completely rendered. Vendors, without need of prior demand, on or before May 6, 1996, and
every month thereafter. Failure to pay the monthly amortization on time,
It is notable that the confusion on the amounts of compensation arose a penalty equal to Five Percent (5%) of the amount due shall be imposed,
from the parties’ inability to agree on the fees that respondents should until the account is updated. In addition, a penalty of One Hundred Pesos
receive. Considering the absence of an agreement, and in view of per day shall be imposed until the account is updated;
respondents’ constructive fulfillment of their obligation, the Court has to
apply the principle of quantum meruit in determining how much was still f) That after receipt of the full payment, the Vendors shall execute the
due and owing to respondents. Under the principle of quantum meruit, a necessary Absolute Deed of Sale covering the house and lot mentioned
contractor is allowed to recover the reasonable value of the services above x x x4
51
rendered despite the lack of a written contract. The measure of recovery
Respondent made the following payments, to wit: (1) P500,000.00 by way
under the principle should relate to the reasonable value of the services of downpayment; (2) P500,000.00 on May 30, 1996; (3) P500,000.00 paid
52
performed. The principle prevents undue enrichment based on the on January 22, 1997; and (4) P500,000.00 bounced check dated June 30,
equitable postulate that it is unjust for a person to retain any benefit 1997 which was subsequently replaced by another check of the same
without paying for it. Being predicated on equity, the principle should amount, dated July 7, 1997. Respondent was, therefore, able to pay a total
of P2,000,000.00.5

Before respondent issued the P500,000.00 replacement check, she told THE TRIAL COURT ERRED IN DISMISSING THE COMPLAINT ON
petitioners that based on the computation of her accountant as of July 6, THE GROUND THAT THE DEFENDANT FULLY PAID THE
1997, her unpaid obligation which includes interests and penalties was CLAIMS OF PLAINTIFFS BASED ON THE ALLEGED RECEIPT OF
only P200,000.00.6 Petitioners agreed with respondent and said "if PAYMENT BY ADORACION LOSLOSO FROM ANA MARIE
P200,000.00 is the correct balance, it is okay with us."7 CONCEPCION MAGLASANG WHICH HAS NOTHING TO DO
WITH THE JUDICIALLY ADMITTED OBLIGATION OF
Meanwhile, the title to the property was transferred to respondent. APPELLEE."23
Petitioners later reminded respondent to pay P209,000.00 within three
months.8 They claimed that the said amount remained unpaid, despite the Invoking the rule on judicial admission, petitioners insist that respondent
transfer of the title to the property to respondent. Several months later, admitted in her Answer with Compulsory Counterclaim that she had paid
petitioners made further demands stating the supposed correct only a total amount of P2 million and that her unpaid obligation amounts
computation of respondent’s liabilities.9 Despite repeated demands, to P200,000.00.24 They thus maintain that the RTC and the CA erred in
petitioners failed to collect the amounts they claimed from respondent. concluding that said amount had already been paid by respondent.
Hence, the Complaint for Sum of Money With Damages10 filed with the Petitioners add that respondent’s total liability as shown in the latter’s
Regional Trial Court (RTC)11 of Antipolo, Rizal. The case was docketed statement of account was erroneously computed for failure to compound
as Civil Case No. 98-4716. the monthly interest agreed upon.25 Petitioners also claim that the RTC
and the CA erred in giving credence to the receipt presented by respondent
In her Answer with Compulsory Counterclaim,12 respondent claimed that to show that her unpaid obligation had already been paid having been
her unpaid obligation to petitioners is only P200,000.00 as earlier allegedly given to a person who was not armed with authority to receive
confirmed by petitioners and not P487,384.15 as later alleged in the payment.26
complaint. Respondent thus prayed for the dismissal of the complaint. By
way of counterclaim, respondent prayed for the payment of moral The petition is without merit.
damages and attorney’s fees. During the presentation of the parties’
evidence, in addition to documents showing the statement of her paid It is undisputed that the parties entered into a contract to sell a house and
obligations, respondent presented a receipt purportedly indicating lot for a total consideration of P2 million. Considering that the property
payment of the remaining balance of P200,000.00 to Adoracion Losloso was payable in installment, they likewise agreed on the payment of
(Losloso) who allegedly received the same on behalf of petitioners.13 interest as well as penalty in case of default. It is likewise settled that
respondent was able to pay the total purchase price of P2 million ahead
On March 8, 2004, the RTC rendered a Decision14 in favor of respondent, of the agreed term. Afterwhich, they agreed on the remaining balance by
the dispositive portion of which reads: way of interest and penalties which is P200,000.00. Considering that the
term of payment was not strictly followed and the purchase price had
WHEREFORE, premises considered, this case is hereby DISMISSED. already been fully paid by respondent, the latter presented to petitioners
The plaintiff is hereby ordered to pay the defendant’s counterclaim, her computation of her liabilities for interests and penalties which was
amounting to wit: agreed to by petitioners. Petitioners also manifested their conformity to
a) P300,000 as moral damages; and the statement of account prepared by respondent.
b) P100,000 plus P2,000 per court appearance as attorney’s fees. In paragraph (9) of petitioners’ Complaint, they stated that:
SO ORDERED.15 9) That the Plaintiffs answered the Defendant as follows: "if P200,000 is
the correct balance, it is okay with us." x x x.27
The RTC noted that the evidence formally offered by petitioners have not
actually been marked as none of the markings were recorded. Thus, it But in paragraph (17) thereof, petitioners claimed that defendant’s
found no basis to grant their claims, especially since the amount claimed outstanding liability as of November 6, 1997 was
in the complaint is different from that testified to. The court, on the other P487,384.15.28 Different amounts, however, were claimed in their
hand, granted respondent’s counterclaim.16 demand letter and in their testimony in court.
On appeal, the CA affirmed the decision with modification by deleting With the foregoing factual antecedents, petitioners cannot be permitted to
the award of moral damages and attorney’s fees in favor of assert a different computation of the correct amount of respondent’s
respondent.17 It agreed with the RTC that the evidence presented by liability.
petitioners cannot be given credence in determining the correct liability It is noteworthy that in answer to petitioners’ claim of her purported
of respondent.18 Considering that the purchase price had been fully paid unpaid obligation, respondent admitted in her Answer with Compulsory
by respondent ahead of the scheduled date agreed upon by the parties, Counterclaim that she paid a total amount of P2 million representing the
petitioners were not awarded the excessive penalties and interests.19 The purchase price of the subject house and lot. She then manifested to
CA thus maintained that respondent’s liability is limited to P200,000.00 petitioners and conformed to by respondent that her only balance was
as claimed by respondent and originally admitted by petitioners.20 This P200,000.00. Nowhere in her Answer did she allege the defense of
amount, however, had already been paid by respondent and received by payment. However, during the presentation of her evidence, respondent
petitioners’ representative.21 Finally, the CA pointed out that the RTC did submitted a receipt to prove that she had already paid the remaining
not explain in its decision why moral damages and attorney’s fees were balance. Both the RTC and the CA concluded that respondent had already
awarded. Considering also that bad faith cannot be attributed to paid the remaining balance of P200,000.00. Petitioners now assail this,
petitioners when they instituted the collection suit, the CA deleted the insisting that the court should have maintained the judicial admissions of
grant of their counterclaims.22 respondent in her Answer with Compulsory Counterclaim, especially as
Aggrieved, petitioners come before the Court in this petition for review to their agreed stipulations on interests and penalties as well as the
on certiorari under Rule 45 of the Rules of Court raising the following existence of outstanding obligations.
errors: It is, thus, necessary to discuss the effect of failure of respondent to plead
I. payment of its obligations.
"THE TRIAL COURT ERRED IN DISMISSING THE COMPLAINT Section 1, Rule 9 of the Rules of Court states that "defenses and objections
ON THE GROUND THAT PLAINTIFF FAILED TO FORMALLY not pleaded either in a motion to dismiss or in the answer are deemed
OFFER THEIR EVIDENCE AS DEFENDANT JUDICIALLY waived." Hence, respondent should have been barred from raising the
ADMITTED IN HER ANSWER WITH COMPULS[O]RY defense of payment of the unpaid P200,000.00. However, Section 5, Rule
COUNTERCLAIM HER OUTSTANDING OBLIGATION STILL DUE 10 of the Rules of Court allows the amendment to conform to or authorize
TO PLAINTIFFS AND NEED NO PROOF. presentation of evidence, to wit:
II. Section 5. Amendment to conform to or authorize presentation of

evidence. – When issues not raised by the pleadings are tried with the
THE TRIAL COURT ERRED IN DISMISSING THE COMPLAINT express or implied consent of the parties, they shall be treated in all
FOR ALLEGED FAILURE OF PLAINTIFFS TO PRESENT respects as if they had been raised in the pleadings. Such amendment of
COMPUTATION OF THE AMOUNT BEING CLAIMED AS the pleadings as may be necessary to cause them to conform to the
DEFENDANT JUDICIALLY ADMITTED HAVING RECEIVED THE evidence and to raise these issues may be made upon motion of any party
DEMAND LETTER DATED OCTOBER 22, 1997 WITH at any time, even after judgment; but failure to amend does not affect the
COMPUTATION OF THE BALANCE DUE. result of the trial of these issues. If evidence is objected to at the trial on
the ground that it is not within the issues made by the pleadings, the court
III. may allow the pleadings to be amended and shall do so with liberality if

the presentation of the merits of the action and the ends of substantial discharge. The receipt of money due on a judgment by an officer
justice will be subserved thereby. The court may grant a continuance to authorized by law to accept it will, therefore, satisfy the debt.38
enable the amendment to be made.
Admittedly, payment of the remaining balance of P200,000.00 was not
The foregoing provision envisions two scenarios, namely, when evidence made to the creditors themselves. Rather, it was allegedly made to a
is introduced in an issue not alleged in the pleadings and no objection was certain Losloso. Respondent claims that Losloso was the authorized agent
interjected; and when evidence is offered on an issue not alleged in the of petitioners, but the latter dispute it.
pleadings but this time an objection was raised.29 When the issue is tried
without the objection of the parties, it should be treated in all respects as Losloso’s authority to receive payment was embodied in petitioners’
if it had been raised in the pleadings.30 On the other hand, when there is Letter39 addressed to respondent, dated August 7, 1997, where they
an objection, the evidence may be admitted where its admission will not informed respondent of the amounts they advanced for the payment of the
prejudice him.31 1997 real estate taxes. In said letter, petitioners reminded respondent of
her remaining balance, together with the amount of taxes paid. Taking
Thus, while respondent judicially admitted in her Answer that she only into consideration the busy schedule of respondent, petitioners advised
paid P2 million and that she still owed petitioners P200,000.00, the latter to leave the payment to a certain "Dori" who admittedly is
respondent claimed later and, in fact, submitted an evidence to show that Losloso, or to her trusted helper. This is an express authority given to
she already paid the whole amount of her unpaid obligation. It is Losloso to receive payment.
noteworthy that when respondent presented the evidence of payment,
petitioners did not object thereto. When the receipt was formally offered Moreover, as correctly held by the CA:
as evidence, petitioners did not manifest their objection to the Furthermore, that Adoracion Losloso was indeed an agent of the appellant
admissibility of said document on the ground that payment was not an spouses is borne out by the following admissions of plaintiff-appellant
issue. Apparently, petitioners only denied receipt of said payment and Atty. Miniano dela Cruz, to wit:
assailed the authority of Losloso to receive payment. Since there was an
implied consent on the part of petitioners to try the issue of payment, even Q: You would agree with me that you have authorized this Doiry Losloso
if no motion was filed and no amendment of the pleading has been to receive payment of whatever balance is due you coming from Ana
ordered,32 the RTC cannot be faulted for admitting respondent’s Marie Concepcion, that is correct?
testimonial and documentary evidence to prove payment.33
A: In one or two times but not total authority, sir.
As stressed by the Court in Royal Cargo Corporation v. DFS Sports
Unlimited, Inc.,34 Q: Yes, but you have authorized her to receive payment?
The failure of a party to amend a pleading to conform to the evidence A: One or two times, yes x x x. (TSN, June 28, 1999, pp. 16-17)40
adduced during trial does not preclude adjudication by the court on the Thus, as shown in the receipt signed by petitioners’ agent and pursuant to
basis of such evidence which may embody new issues not raised in the the authority granted by petitioners to Losloso, payment made to the latter
pleadings. x x x Although, the pleading may not have been amended to is deemed payment to petitioners. We find no reason to depart from the
conform to the evidence submitted during trial, judgment may RTC and the CA conclusion that payment had already been made and that
nonetheless be rendered, not simply on the basis of the issues alleged but it extinguished respondent's obligations.
also on the issues discussed and the assertions of fact proved in the course
of the trial. The court may treat the pleading as if it had been amended to WHEREFORE, premises considered, the petition is DENIED for lack of
conform to the evidence, although it had not been actually amended. x x merit. The Court of Appeals Decision dated March 31, 2005 and
x Clearly, a court may rule and render judgment on the basis of the Resolution dated May 24, 2006 in CA-G.R. CV No. 83030, are
evidence before it even though the relevant pleading had not been AFFIRMED.
previously amended, so long as no surprise or prejudice is thereby caused
to the adverse party. Put a little differently, so long as the basic SO ORDERED.
requirements of fair play had been met, as where the litigants were given National Power Corporation v. Ibrahim
full opportunity to support their respective contentions and to object to or G.R. No. 175863 February 18, 2015
refute each other's evidence, the court may validly treat the pleadings as
if they had been amended to conform to the evidence and proceed to NATIONAL POWER CORPORATION, Petitioner,
adjudicate on the basis of all the evidence before it. (Emphasis supplied)35 vs.
LUCMAN M. IBRAHIM, ATTY. OMAR G. MARUHOM, ELIAS G.
To be sure, petitioners were given ample opportunity to refute the fact of MARUHOM, BUCAY G. MARUHOM, MAMOD G. MARUHOM,
and present evidence to prove payment. FAROUK G. MARUHOM, HIDJARA G. MARUHOM, ROCANIA G.
With the evidence presented by the contending parties, the more MARUHOM, POTRISAM G. MARUHOM, LUMBA G. MAR UH OM,
important question to resolve is whether or not respondent’s obligation SIN AB G. MARUHOM, ACMAD G. MARUHOM, SOLAYMAN G.
had already been extinguished by payment. MARUHOM, MOHAMAD M. IBRAHIM, CAIRONESA M. IBRAHIM
and MACAPANTON K. MANGONDATORespondents.
We rule in the affirmative as aptly held by the RTC and the CA.
DECISION
Respondent’s obligation consists of payment of a sum of money. In order
to extinguish said obligation, payment should be made to the proper PEREZ, J.:
person as set forth in Article 1240 of the Civil Code, to wit: At bench is a petition for review on certiorari1 assailing the
Article 1240. Payment shall be made to the person in whose favor the Decision2 dated 24 June 2005 and Resolution3 dated 5 December 2006 of
obligation has been constituted, or his successor in interest, or any person the Court of Appeals in CA-G.R. CV No. 68061. The facts:
authorized to receive it. (Emphasis supplied) The Subject Land
The Court explained in Cambroon v. City of Butuan,36 cited in Republic In 1978, petitioner took possession of a 21,995 square meter parcel of
v. De Guzman,37 to whom payment should be made in order to extinguish land in Marawi City (subject land) for the purpose of building thereon a
an obligation: hydroelectric power plant pursuant to its Agus 1 project. The subject land,
Payment made by the debtor to the person of the creditor or to one while in truth a portion of a private estate registered under Transfer
authorized by him or by the law to receive it extinguishes the obligation. Certificate of Title (TCT) No. 378-A4 in the name of herein respondent
When payment is made to the wrong party, however, the obligation is not Macapanton K. Mangondato (Mangondato),5 was occupied by petitioner
extinguished as to the creditor who is without fault or negligence even if under the mistaken belief that such land is part of the vast tract of public
the debtor acted in utmost good faith and by mistake as to the person of land reserved for its use by the government under Proclamation No. 1354,
the creditor or through error induced by fraud of a third person. s. 1974.6
In general, a payment in order to be effective to discharge an obligation, Mangondato first discovered petitioner’s occupation of the subject land
must be made to the proper person. Thus, payment must be made to the in 1979—the year that petitioner started its construction of the Agus
obligee himself or to an agent having authority, express or implied, to 1plant. Shortly after such discovery, Mangondato began demanding
receive the particular payment. Payment made to one having apparent compensation for the subject land from petitioner.
authority to receive the money will, as a rule, be treated as though actual In support of his demand for compensation, Mangondato sent to petitioner
authority had been given for its receipt. Likewise, if payment is made to a letter7 dated 28 September 1981 wherein the former detailed the origins
one who by law is authorized to act for the creditor, it will work a

of his ownership over the lands covered by TCT No. 378-A, including the In their complaint, the Ibrahims and Maruhoms disputed Mangondato’s
subject land. The relevant portions of the letter read: ownership of the lands covered by TCT No. 378-A, including the subject
land. The Ibrahims and Maruhoms asseverate that they are the real owners
Now let me trace the basis of the title to the land adverted to for of the lands covered by TCT No. 378-A; they being the lawful heirs of
particularity. The land titled in my name was originally consisting of the late Datu Magayo-ong Maruhom, who was the original proprietor of
seven (7) hectares. This piece of land was particularly set aside by the the said lands.14 They also claimed that Mangondato actually holds no
Patriarch Maruhom, a fact recognized by all royal datus of Guimba, to claim or right over the lands covered by TCT No. 378-A except that of a
belong to his eldest son, Datu Magayo-ong Maruhom. This is the very trustee who merely holds the said lands in trust for them.15 The Ibrahims
foundation of the right and ownership over the land in question which was and Maruhoms submit that since they are the real owners of the lands
titled in my name because as the son-in-law of Hadji Ali Maruhom the covered by TCT No. 378-A, they should be the ones entitled to any rental
eldest son of, and only lawyer among the descendants of Datu Magayo- fees or expropriation indemnity that may be found due for the subject
ong Maruhom, the authority and right to apply for the title to the land was land.
given to me by said heirs after mutual agreement among themselves
besides the fact that I have already bought a substantial portion of the Hence, the Ibrahims and Maruhoms prayed for the following reliefs in
original seven (7) hectares. their complaint:16
The original title of this seven (7) hectares has been subdivided into 1. That Mangondato be ordered to execute a Deed of Conveyance
several TCTs for the other children of Datu Magayo-ong Maruhom with transferring to them the ownership of the lands covered by TCT No. 378-
whom I have executed a quit claim. Presently, only three (3) hectares is A;
left to me out of the original seven (7) hectares representing those portion
[sic] belonging to my wife and those I have bought previously from other 2. That petitioner be ordered to pay to them whatever indemnity for the
heirs. This is now the subject of this case.8 subject land it is later on adjudged to pay in Civil Case No. 605-92 and
Civil Case No. 610-92;
Petitioner, at first, rejected Mangondato’s claim of ownership over the
subject land; the former then adamant in its belief that the said land is 3. That Mangondato be ordered to pay to them any amount that the former
public land covered by Proclamation No. 1354, s. 1974. But, after more may have received from the petitioner by way of indemnity for the subject
than a decade, petitioner finally acquiesced to the fact that the subject land land;
is private land covered by TCT No. 378-A and consequently 4. That petitioner and Mangondatobe ordered jointly and severally liable
acknowledged Mangondato’s right, as registered owner, to receive to pay attorney’s fees in the sum of ₱200,000.00.
compensation therefor.
In the same complaint, the Ibrahims and Maruhoms also prayed for the
Thus, during the early 1990s, petitioner and Mangondato partook in a issuance of a temporary restraining order (TRO) and a writ of preliminary
series of communications aimed at settling the amount of compensation injunction to enjoin petitioner, during the pendency of the suit, from
that the former ought to pay the latter in exchange for the subject land. making any payments to Mangondato concerning expropriation
Ultimately, however, the communications failed to yield a genuine indemnity for the subject land.17
consensus between petitioner and Mangondato as to the fair market value
of the subject land. Civil Case No. 605-92 and Civil Case No. 610-92 On 30 March 1993, Branch 10 of the Marawi City RTC granted the prayer
of the Ibrahims and Maruhoms for the issuance of a TRO.18 On 29 May
With an agreement basically out of reach, Mangondato filed a complaint 1993, after conducting an appropriate hearing for the purpose, the same
for reconveyance against petitioner before the Regional Trial Court court likewise granted the prayer for the issuance of a writ of preliminary
(RTC) of Marawi City in July 1992. In his complaint, Mangondato asked injunction.19
for, among others, the recovery of the subject land and the payment by
petitioner of a monthly rental from 1978 until the return of such land. In due course, trial then ensued in Civil Case No. 967-93.
Mangondato’s complaint was docketed as Civil Case No. 605-92.
The Decision of the Court of Appeals in CA-G.R. CV No. 39353 and the
For its part, petitioner filed an expropriation complaint9 before the RTC Decision of this Court in G.R. No. 113194
on 27 July 1992. Petitioner’s complaint was docketed as Civil Case No.
610-92. On 21 December 1993, the Court of Appeals rendered a Decision in CA-
G.R. CV No. 39353 denying the appeal of petitioner and affirming in toto
Later, Civil Case No. 605-92 and Civil Case No. 610-92 were the 21 August 1992 Decision in Civil Case No. 605-92 and Civil Case
consolidated before Branch 8 of the Marawi City RTC. No. 610-92. Undeterred, petitioner next filed a petition for review on
certiorari with this Court that was docketed herein as G.R. No. 113194.20
On 21 August 1992, Branch 8 of the Marawi City RTC rendered a
Decision10 in Civil Case No. 605-92 and Civil Case No. 610-92. The On 11 March 1996, we rendered our Decision in G.R. No. 113194
decision upheld petitioner’s right to expropriate the subject land: it denied wherein we upheld the Court of Appeals’ denial of petitioner’s
Mangondato’s claim for reconveyance and decreed the subject land appeal.21 In the same decision, we likewise sustained the appellate court’s
condemned in favor of the petitioner, effective July of 1992, subject to affirmance of the decision in Civil Case No. 605-92 and Civil Case No.
payment by the latter of just compensation in the amount of 610-92 subject only to a reduction of the rate of interest on the monthly
₱21,995,000.00. Anent petitioner’s occupation of the subject land from rental fees from 12% to 6% per annum.22
1978to July of 1992, on the other hand, the decision required the former
to pay rentals therefor at the rate of ₱15,000.00 per month with12% Our decision in G.R. No. 113194 eventually became final and executory
interest per annum. The decision’s fallo reads: on 13 May 1996.23
WHEREFORE, the prayer in the recovery case for [petitioner’s] Execution of the 21 August 1992 Decision in Civil Case No. 605-92 and
surrender of the property is denied but[petitioner] is ordered to pay Civil Case No. 610-92, as Modified
monthly rentals in the amount of ₱15,000.00 from 1978 up to July 1992 In view of the finality of this Court’s decision in G.R. No. 113194,
with 12% interest per annum xxx and the property is condemned in favor Mangondato filed a motion for execution of the decision in Civil Case
of [petitioner] effective July 1992 upon payment of the fair market value No. 605-92 and Civil Case No. 610-92.24 Against this motion, however,
of the property at One Thousand (₱1,000.00) Pesos per square meter or a petitioner filed an opposition.25
total of Twenty-One Million Nine Hundred Ninety-Five Thousand
(₱21,995,000.00) [P]esos.11 In its opposition, petitioner adverted to the existence of the writ of
preliminary injunction earlier issued in Civil Case No. 967-93 that enjoins
Disagreeing with the amount of just compensation that it was adjudged to it from making any payment of expropriation indemnity over the subject
pay under the said decision, petitioner filed an appeal with the Court of land in favor of Mangondato.26 Petitioner, in sum, posits that such writ of
Appeals. This appeal was docketed in the Court of Appeals as CA-G.R. preliminary injunction constitutes a legal impediment that effectively bars
CV No. 39353. any meaningful execution of the decision in Civil Case No. 605-92 and
Respondents Ibrahims and Maruhoms and Civil Case No. 967-93 Civil Case No. 610-92.
During the pendency of CA-G.R. CV No. 39353, or on 29 March 1993, Finding no merit in petitioner’s opposition, however, Branch 8 of the
herein respondents the Ibrahims and Maruhoms12 filed before the RTC of Marawi City RTC rendered a Resolution27dated 4 June 1996 ordering the
Marawi City a complaint13 against Mangondato and petitioner. This issuance of a writ of execution in favor of Mangondato in Civil Case No.
complaint was docketed as Civil Case No. 967-93and was raffled to 605-92 and Civil Case No. 610-92. Likewise, in the same resolution, the
Branch 10of the Marawi City RTC. trial court ordered the issuance of a notice of garnishment against several
of petitioner’s bank accounts28 for the amount of ₱21,801,951.00—the
figure representing the total amount of judgment debt due from petitioner

in Civil Case No. 605-92 and Civil Case No. 610-92 less the amount then While the foregoing appeal was still pending decision by the Court of
already settled by the latter. The dispositive portion of the resolution Appeals, however, the Ibrahims and Maruhoms were able to secure with
reads: the court a quo a writ of execution pending appeal36 of the decision in
Civil Case No. 967-93. The enforcement of such writ led to the
WHEREFORE, let a Writ of Execution and the corresponding order or garnishment of Mangondato’s moneys in the possession of the Social
notice of garnishment be immediately issued against [petitioner] and in Security System (SSS) in the amount of ₱2,700,000.00 on 18 September
favor of [Mangondato] for the amount of Twenty One Million Eight 1998.37 Eventually, the amount thereby garnished was paid to the
Hundred One Thousand and Nine Hundred Fifty One (₱21,801,951.00) Ibrahims and Mangondato in partial satisfaction of the decision in Civil
Pesos. Case No. 967-93.
x x x.29 On 24 June 2005, the Court of Appeals rendered its Decision38 in CA-
Pursuant to the above resolution, a notice of garnishment30 dated 5 June G.R. CV No. 68061 denying petitioner’s appeal. The appellate court
1996 for the amount of ₱21,801,951.00 was promptly served upon the denied petitioner’s appeal and affirmed the decision in Civil Case No.
Philippine National Bank (PNB)—the authorized depositary of petitioner. 967-93, subject to the right of petitioner to deduct the amount of
Consequently, the amount thereby garnished was paid to Mangondato in ₱2,700,000.00 from its liability as a consequence of the partial execution
full satisfaction of petitioner’s judgment debt in Civil Case No. 605-92 of the decision in Civil Case No. 967-93.39
and Civil Case No. 610-92. Hence, the present appeal by petitioner.
Decision in Civil Case No. 967-93 The Present Appeal
Upon the other hand, on 16 April 1998, Branch 10 of the Marawi City The present appeal poses the question of whether it is correct, in view of
RTC decided Civil Case No. 967-93.31 In its decision, Branch 10 of the the facts and circumstances in this case, to hold petitioner liable in favor
Marawi City RTC made the following relevant findings:32 of the Ibrahims and Maruhoms for the rental fees and expropriation
1. The Ibrahims and Maruhoms—not Mangondato—are the true owners indemnity adjudged due for the subject land.
of the lands covered by TCT No. 378-A, which includes the subject land. In their respective decisions, both Branch 10 of the Marawi City RTC and
2. The subject land, however, could no longer be reconveyed to the the Court of Appeals had answered the foregoing question in the
Ibrahims and Maruhoms since the same was already expropriated and affirmative. The two tribunals postulated that, notwithstanding
paid for by the petitioner under Civil Case No. 605-92 and Civil Case No. petitioner’s previous payment to Mangondato of the rental fees and
610-92. expropriation indemnity as a consequence of the execution of the decision
in Civil Case No. 605-92 and 610-92, petitioner may still be held liable to
3. Be that as it may, the Ibrahims and Maruhoms, as true owners of the the Ibrahims and Maruhoms for such fees and indemnity because its
subject land, are the rightful recipients of whatever rental fees and previous payment to Mangondato was tainted with "bad faith."40 As proof
indemnity that may be due for the subject land as a result of its of such bad faith, both courts cite the following considerations:41
expropriation.
1. Petitioner "allowed" payment to Mangondato despite its prior
Consistent with the foregoing findings, Branch 10 of the Marawi City knowledge, which dates back as early as 28 September 1981, by virtue of
RTC thus required payment of all the rental fees and expropriation Mangondato’s letter of even date, that the subject land was owned by a
indemnity due for the subject land, as previously adjudged in Civil Case certain Datu Magayo-ong Maruhom and not by Mangondato; and
No. 605-92 and Civil Case No. 610-92, to the Ibrahims and Maruhoms.
2. Petitioner "allowed" such payment despite the issuance of a TRO and
Notable in the trial court’s decision, however, was that it held both a writ of preliminary injunction in Civil Case No. 967-93 that precisely
Mangondato and the petitioner solidarily liable to the Ibrahims and enjoins it from doing so.
Maruhoms for the rental fees and expropriation indemnity adjudged in
Civil Case No. 605-92 and Civil Case No. 610-92.33 For the two tribunals, the bad faith on the part of petitioner rendered its
previous payment to Mangondato invalid insofar as the Ibrahims and
In addition, Mangondato and petitioner were also decreed solidarily liable Maruhoms are concerned. Hence, both courts concluded that petitioner
to the Ibrahims and Maruhoms for attorney’s fees in the amount of may still be held liable to the Ibrahims and Maruhoms for the rental fees
₱200,000.00.34 and expropriation indemnity previously paid to Mangondato.42
The pertinent dispositions in the decision read: Petitioner, however, argues otherwise. It submits that a finding of bad
faith against it would have no basis in fact and law, given that it merely
WHEREFORE, premises considered, judgment is hereby rendered in complied with the final and executory decision in Civil Case No. 605-92
favor of [the Ibrahims and Maruhoms] and against [Mangondato and and Civil Case No. 610-92 when it paid the rental fees and expropriation
petitioner] as follows: indemnity due the subject to Mangondato.43 Petitioner thus insists that it
1. x x x should be absolved from any liability to pay the rental fees and
expropriation indemnity to the Ibrahims and Maruhoms and prays for the
2. Ordering [Mangondato and petitioner] to pay jointly and severally [the dismissal of Civil Case No. 967-93 against it.
Ibrahims and Maruhoms] all forms of expropriation indemnity as
adjudged for [the subject land] consisting of 21,995 square meters in the OUR RULING
amount of ₱21,801,051.00 plus other forms of indemnity such as rentals We grant the appeal.
and interests;
No Bad Faith On The Part of Petitioner
3. Ordering [Mangondato and petitioner] to pay [the Ibrahims and
Maruhoms] jointly and severally the sum of ₱200,000.00 as attorney’s Petitioner is correct. No "bad faith" may be taken against it in paying
fees; Mangondato the rental fees and expropriation indemnity due the subject
land.
4. x x x
Our case law is not new to the concept of bad faith. Decisions of this
5. x x x Court, both old and new, had been teeming with various pronouncements
6. x x x that illuminate the concept amidst differing legal contexts. In any attempt
to understand the basics of bad faith, it is mandatory to take a look at some
SO ORDERED.35 of these pronouncements:
Petitioner’s Appeal to the Court of Appeals and the Execution In Lopez, et al. v. Pan American World Airways,44 a 1966 landmark tort
case, we defined the concept of bad faith as:
Pending Appeal of the Decision in Civil Case No. 967-93
"…a breach of a known duty through some motive of interest or ill will."45
Petitioner appealed the decision in Civil Case No. 967-93 with the Court
of Appeals: contesting mainly the holding in the said decision that it ought Just months after the promulgation of Lopez, however, came the case of
to be solidarily liable with Mangondato to pay to the Ibrahims and Air France v. Carrascoso, et al.,46 In Air France, we expounded on
Maruhoms the rental fees and expropriation indemnity adjudged due for Lopez’s definition by describing bad faith as:
the subject land. This appeal was docketed as CA-G.R. CV No. 68061.
"xxx a state of mind affirmatively operating with furtive design or with
some motive of self-interest or will or for ulterior purpose."47

Air France’s articulation of the meaning of bad faith was, in turn, echoed Without the existence of bad faith, the ruling of the RTC and of the Court
in a number subsequent cases,48 one of which, is the 2009 case of of Appeals apropos petitioner’s remaining liability to the Ibrahims and
Balbuena, et al. v. Sabay, et al.49 Maruhoms becomes devoid of legal basis. In fact, petitioner’s previous
payment to Mangondato of the rental fees and expropriation indemnity
In the 1967 case of Board of Liquidators v. Heirs of M. Kalaw,50 on the due the subject land pursuant to the final judgment in Civil Case No. 605-
other hand, we enunciated one of the more oft-repeated formulations of 92 and Civil Case No. 610-92 may be considered to have extinguished the
bad faith in our case law: former’s obligation regardless of who between Mangondato, on one hand,
"xxx bad faith does not simply connote bad judgment or negligence; it and the Ibrahims and Maruhoms, on the other, turns out to be the real
imports a dishonest purpose or some moral obliquity and conscious doing owner of the subject land.62 Either way, petitioner cannot be made liable
of wrong. It means breach of a known duty thru some motive or interest to the Ibrahims and Maruhoms:
of ill will; it partakes of the nature of fraud."51 First. If Mangondato is the real owner of the subject land, then the
As a testament to its enduring quality, the foregoing pronouncement in obligation by petitioner to pay for the rental fees and expropriation
Board of Liquidators had been reiterated in a slew of later cases,52 more indemnity due the subject land is already deemed extinguished by the
recently, in the 2009 case of Nazareno, et al. v. City of Dumaguete53 and latter’s previous payment under the final judgment in Civil Case No. 605-
the 2012 case of Aliling v. Feliciano.54 92 and Civil Case No. 610-92. This would be a simple case of an
obligation being extinguished through payment by the debtor to its
Still, in 1995, the case of Far East Bank and Trust Company v. Court of creditor.63 Under this scenario, the Ibrahims and Maruhoms would not
Appeals55 contributed the following description of bad faith in our even be entitled to receive anything from anyone for the subject land.
jurisprudence: Hence, petitioner cannot be held liable to the Ibrahims and Maruhoms.
"Malice or bad faith implies a conscious and intentional design to do a Second. We, however, can reach the same conclusion even if the Ibrahims
wrongful act for a dishonest purpose or moral obliquity;xxx."56 and Maruhoms turn out to be the real owners of the subject land.
The description of bad faith in Far East Bank and Trust Companythen Should the Ibrahims and Maruhoms turn out to be the real owners of the
went on to be repeated in subsequent cases such as 1995’s Ortega v. Court subject land, petitioner’s previous payment to Mangondato pursuant to
of Appeals,57 1997’s Laureano Investment and Development Corporation Civil Case No. 605-92 and Civil Case No. 610-92—given the absence of
v. Court of Appeals,58 2010’s Lambert Pawnbrokers v. Binamira59 and bad faith on petitioner’s part as previously discussed—may nonetheless
2013’s California Clothing, Inc., v. Quiñones,60 to name a few. be considered as akin to a payment made in "good faith "to a person in
"possession of credit" per Article 1242 of the Civil Code that, just the
Verily, the clear denominator in all of the foregoing judicial same, extinguishes its obligation to pay for the rental fees and
pronouncements is that the essence of bad faith consists in the deliberate expropriation indemnity due for the subject land. Article 1242 of the Civil
commission of a wrong. Indeed, the concept has often been equated with Code reads:
malicious or fraudulent motives, yet distinguished from the mere
unintentional wrongs resulting from mere simple negligence or "Payment made in good faith to any person in possession of the credit
oversight.61 shall release the debtor." Article 1242 of the Civil Code is an exception
to the rule that a valid payment of an obligation can only be made to the
A finding of bad faith, thus, usually assumes the presence of two (2) person to whom such obligation is rightfully owed.64 It contemplates a
elements: first, that the actor knew or should have known that a particular situation where a debtor pays a "possessor of credit" i.e., someone who is
course of action is wrong or illegal, and second, that despite such actual not the real creditor but appears, under the circumstances, to be the real
or imputable knowledge, the actor, voluntarily, consciously and out of his creditor.65 In such scenario, the law considers the payment to the
own free will, proceeds with such course of action. Only with the "possessor of credit" as valid even as against the real creditor taking into
concurrence of these two elements can we begin to consider that the account the good faith of the debtor.
wrong committed had been done deliberately and, thus, in bad faith.
Borrowing the principles behind Article 1242 of the Civil Code, we find
In this case, both Branch 10 of the Marawi City RTC and the Court of that Mangondato—being the judgment creditor in Civil Case No. 605-92
Appeals held that petitioner was in bad faith when it paid to Mangondato and Civil Case No. 610-92 as well as the registered owner of the subject
the rental fees and expropriation indemnity due the subject land. The two land at the time66 —may be considered as a "possessor of credit" with
tribunals, in substance, fault petitioner when it "allowed" such payment respect to the rental fees and expropriation indemnity adjudged due for
to take place despite the latter’s alleged knowledge of the existing claim the subject land in the two cases, if the Ibrahims and Maruhoms turn out
of the Ibrahims and Maruhoms upon the subject land and the issuance ofa to be the real owners of the subject land. Hence, petitioner’s payment to
TRO in Civil Case No. 967-93. Hence, the two tribunals claim that Mangondato of the fees and indemnity due for the subject land as a
petitioner’s payment to Mangondato is ineffective as to the Ibrahims and consequence of the execution of Civil Case No. 605-92 and Civil Case
Maruhoms, whom they found to be the real owners of the subject land. No. 610-92 could still validly extinguish its obligation to pay for the same
We do not agree. even as against the Ibrahims and Maruhoms.
Branch 10 of the Marawi City RTC and the Court of Appeals erred in Effect of Extinguishment of
their finding of bad faith because they have overlooked the utter Petitioner’s Obligation
significance of one important fact: that petitioner’s payment to The extinguishment of petitioner’s obligation to pay for the rental fees
Mangondato of the rental fees and expropriation indemnity adjudged due and expropriation indemnity due the subject land carries with it certain
for the subject land in Civil Case No. 605-92 and Civil Case No. 610-92, legal effects:
was required by the final and executory decision in the said two cases and
was compelled thru a writ of garnishment issued by the court that First. If Mangondato turns out to be the real owner of the subject land, the
rendered such decision. In other words, the payment to Mangondato was Ibrahims and Maruhoms would not be entitled to recover anything from
not a product of a deliberate choice on the part of the petitioner but was anyone for the subject land. Consequently, the partial execution of the
1âwphi1
made only in compliance to the lawful orders of a court with jurisdiction. decision in Civil Case No. 967-93 that had led to the garnishment of
Mangondato’s moneys in the possession of the Social Security System
Contrary then to the view of Branch 10 of the Marawi City RTC and of (SSS) in the amount of ₱2,700,000.00 in favor of the Ibrahims and
the Court of Appeals, it was not the petitioner that "allowed" the payment Maruhoms, becomes improper and unjustified. In this event, therefore,
of the rental fees and expropriation indemnity to Mangondato. Indeed, the Ibrahims and Maruhoms may be ordered to return the amount so
given the circumstances, the more accurate rumination would be that it garnished to Mangondato.
was the trial court in Civil Case No. 605-92 and Civil Case No. 610-92
that ordered or allowed the payment to Mangondato and that petitioner Otherwise, i.e. if the Ibrahims and Maruhoms really are the true owners
merely complied with the order or allowance by the trial court. Since of the subject land, they may only recover the rental fees and
petitioner was only acting under the lawful orders of a court in paying expropriation indemnity due the subject land against Mangondato but
Mangondato, we find that no bad faith can be taken against it, even only up to whatever payments the latter had previously received from
assuming that petitioner may have had prior knowledge about the claims petitioner pursuant to Civil Case No. 605-92 and Civil Case No. 610-92.
of the Ibrahims and Maruhoms upon the subject land and the TRO issued
in Civil Case No. 967-93. Second. At any rate, the extinguishment of petitioner’s obligation to pay
for the rental fees and expropriation indemnity due the subject land
Sans Bad Faith, Petitioner negates whatever cause of action the Ibrahims and Maruhoms might have
Cannot Be Held Liable to the had against the former in Civil Case No. 967-93. Hence, regardless of
Ibrahims and Maruhoms who between Mangondato, on one hand, and the Ibrahims and Maruhoms,
on the other, turns out to be the real owner of the subject land, the

dismissal of Civil Case No. 967-93 insofar as petitioner isconcerned is WHEREFORE, judgment is hereby rendered declaring complainant as
called for. illegally and unjustly dismissed and respondents are ordered to reinstate
complainant to his former position without loss of seniority rights with
Re: Attorney’s Fees full backwages and other benefits and respondents are hereby ordered to
The dismissal of Civil Case No. 967-93 as against petitioner necessarily pay complainant as follows:
absolves the latter from paying attorney’s fees to the Ibrahims and
Maruhoms arising from that case. ₱161,000.00 - Backwages, basic pay and allowance
WHEREFORE, premises considered, the instant petition is GRANTED.

The Decision dated 24 June2005 and Resolution dated 5 December 2006 15,000.00 - 13th month pay for 1996 to 1998
of the Court of Appeals in CA-G.R. CV No. 68061 is hereby SET ASIDE.
The Decision dated 16 April 1998 of the Regional Trial Court in Civil
Case No. 967-93 is MODIFIED in that petitioner is absolved from any 993,558.89 - unpaid commissions
liability in that case in favor of the respondents Lucman M. Ibrahim, Atty.
Omar G. Maruhom, Elias G. Maruhom, Bucay G. Maruhom, Mamod G. ₱1,169,558.89 - Total
Maruhom, Farouk G. Maruhom, Hidjara G. Maruhom, Rocania G.
Maruhom, Potrisam G. Maruhom, Lumba G. Maruhom, Sinab G.
Maruhom, Acmad G. Maruhom, Solayman G. Maruhom, Mohamad M. plus US$7,588.30 - unpaid commissions
Ibrahim and Caironesa M. Ibrahim. Civil Case No. 967-93 is
DISMISSED as against petitioner.
plus 10% attorney’s fees
No costs.
SO ORDERED.
Netlink Computer Incorporated v. Delmo The reinstatement aspect is immediately executory even pending appeal.
G.R. No. 160827 June 18, 2014 In case reinstatement is no longer feasible, complainant shall be paid
separation pay of one-month pay for every year of service. All other
NETLINK COMPUTER INCORPORATED, Petitioner, claims are hereby dismissed.
vs.
ERIC DELMO, Respondent. SO ORDERED.5
DECISION Decision of the NLRC
BERSAMIN, J.: On appeal, the National Labor Relations Commission (NLRC) modified
the decision of the Labor Arbiter by setting aside the backwages and
In the absence of a written agreement between the employer and the reinstatement decreed by the Labor Arbiter due to the existence of valid
employee that sales commissions shall be paid in a foreign currency, the and just causes for the termination of Delmo’s employment, to wit:
latter has the right to be paid in such foreign currency once the same has WHEREFORE, premises considered, the decision of the Labor Arbiter a
become an established practice of the former. The rate of exchange at the quo is hereby SET ASIDEand a new one ENTERED, ordering the
time of payment, not the rate of exchange at the time of the sales, controls. respondents-appellantsto pay the following:
Antecedents 1. TWO THOUSAND PESOS (₱2,000.00) as indemnity for failure to
observe procedural due process;
On November 3, 1991, Netlink Computer, Inc. Products and Services
(Netlink) hired Eric S. Delmo (Delmo) as account manager tasked to 2. Unpaid commission in the amount of ₱993,558.89;
canvass and source clients and convince them to purchase the products
and services of Netlink. Delmo worked in the field most of the time. He 3. US$7,588.30 as unpaid commission;
and his fellow account managers were not required to accomplish time
4. ₱15,000.00 representing the 13th month pay for 1996, 1997, and 1998;
cards to record their personal presence in the office of Netlink.1 He was
able to generate sales worth ₱35,000,000.00, more or less, from which he 5. 10% attorney’s fees of the total amount awarded.
earned commissions amounting to ₱993,558.89 and US$7,588.30. He
then requested payment of his commissions, but Netlink refused and only SO ORDERED.6
gave him partial cash advances chargeable to his commissions. Later on,
The NLRC denied the motion for reconsideration, after which Netlink
Netlink began to nitpick and fault find, like stressing his supposed
filed a petition for certiorariin the CA.
absences and tardiness. In order to force him to resign, Netlink issued
several memoranda detailing his supposed infractions of the company’s Judgment of the CA
attendance policy. Despite the memoranda, Delmo continued to generate
huge sales for Netlink.2 On May 9, 2003, the CA promulgated its assailed decision upholding the
NLRC’s ruling subject to modifications,7viz:
On November 28, 1996, Delmo was shocked when he was refused entry
into the company premises by the security guard pursuant to a In the present case, since the payment of the commission is made to
memorandum to that effect. His personal belongings were still inside the depend on the future and uncertain event – which is the payment of the
company premises and he sought their return to him. This incident accounts by the persons who have transacted business with the petitioner,
prompted Delmo to file a complaint for illegal dismissal.3 without payment by the former to the latter, the obligation to pay the
commission has not yet arisen.
In its answer to Delmo’s complaint,Netlink countered that there were
guidelines regarding company working time and its utilization and how The evidence on record shows that the ALCATEL, private respondent’s
the employees’ time would be recorded. Allegedly, all personnel were biggest client has not paid fully the amount it owes to the petitioner as of
required to use the bundy clock to punch in and out in the morning, and March 10, 1998. (Rollo, pp. 101, 397, 398) The obligation therefore, on
in and out in the afternoon. Excepted from the rules were the company the part of the petitioner to pay the private respondent for his commission
officers, and the authorized personnel in the field project assignments. for the said unpaid account has not yet arisen. Thus it is a grave abuse of
Netlink claimed that it would be losing on the business transactions closed discretion on the part of the public respondent to make petitioner liable to
by Delmo due to the high costs of equipment, and in fact his biggest client the private respondent for the payment of the said commission, when it is
had not yet paid. Netlink pointed out that Delmo had becomevery lax in clear on the record, as We have discussed above, that the obligation
his obligations, with the other account managers eventually having therefor has not yet arisen.
outperformed him. Netlink asserted that warning, reprimand, and
suspension memoranda were given to employees who violated company Perusal of the records, likewise, show that petitioner failed to refute by
rules and regulations, but such actions were considered as a necessary evidence that the private respondent is not entitled to the ₱993, 558.89
management tool to instill discipline.4 commission. Petitioner however claimed that since the amounts out of
which the commission will be taken has not yet been paid fully, petitioner
Ruling of the Labor Arbiter must, likewise, not be made liable for the said commission. However,
public respondent committed grave abuse of discretion when it disregard
On September 23, 1998, the Labor Arbiter ruled against Netlink and in the evidence on record which is not disputed by the private respondent
favor of Delmo, to wit: that out of the total commissions of the private respondent, petitioner has

paid the petitioner in the amount of ₱216,799.45 in the form of advance Netlink submits that the CA committed a palpable and reversible error of
payment. (Rollo, p. 12) law in not holding that the applicable exchange rate for computing the US
dollar commissions of Delmo should be the rates prevailing at the time
In view of the foregoing discussions, therefore, the advance payment when the sales were actually generated, not the rates prevailing at the time
made by the petitioner in favorof the private respondent in the amount of of the payment; and in awarding attorney’s fees.
₱216, 799.45 must be deducted to the ₱993, 558.89 unpaid commission
of the private respondent. The difference amounting to ₱776, 779.44 must In his comment,8 Delmo counters that because he had earned in US
likewise be deducted to the amount of ₱4, 066.19 which represents the dollars it was only fair that his commissions be paid in US dollars; that
amount which the petitioner had admitted as the net commission payable Netlink should not be allowed to flip-flop after it had paid commissions
to private respondent. The difference thereof amounting to ₱772, 713.25 in US dollar on the sales generated by its sales agents on US-dollar
shall represent the unpaid commission which shall be payable to the denominated transactions; and that attorney’s fees were warranted
private respondent by the petitioner upon payment of the accounts out of because of the unanimous finding that there was violation of procedural
which such commission shall be taken. due process.
We, likewise, agree with the petitioner that the private respondent is not In its reply,9 Netlink maintains that the commissions of Delmo should be
entitled to 13th month pay in the years 1997 and 1998. The order of the based on sales generated, actually paid by and collected from the
public respondent making the petitioner liable to the private respondent customers; that commissions must be paid on the basis of the conversion
for the 13th month pay of the latter in the years 1997 and 1998 is contrary of the US dollar to the Philippine peso at the time of sale; and that no
to its findings that there are valid and just cause for the termination of the cogent and justifiable reason existed for the award of attorney’s fees.
private respondent from employment, although private respondent was
not given his right to due process. (Rollo, pp. 32-33) The rule applicable To be considered for resolution are,therefore, the following, namely: (1)
in the present case is the decision of the Supreme Court in the case of whether or not the payment of the commissions should be in US dollars;
Sebuguero vs National Labor Relations Commission [248 SCRA 532, and (2) whether or not the award ofattorney’s fees was warranted.
547 (1995)] where it was ruled that "where the dismissal of an employee Ruling of the Court
is in fact for a just and valid cause and is so proven to be but he is not
accorded his right to due process,i.e., he was not furnished the twin The appeal lacks merit.
requirements of notice and the opportunityto be heard, the dismissal shall
be upheld but the employer must be sanctioned for non-compliance with As a general rule, all obligations shall be paid in Philippine currency.
the requirements of or for failureto observe due process." Hence, However, the contracting parties may stipulate that foreign currencies
petitioner should not be made to pay the 13th month pay to private may be used for settling obligations. This is pursuant to Republic Act No.
respondent whose employment was terminated for cause but without due 8183,10 which provides as follows:
process in 1996. Section 1. All monetary obligations shall be settled in the Philippine
xxxx currency which is legal tender in the Philippines. However, the parties
may agree that the obligation ortransaction shall be settled in any other
Thus, private respondent is entitled only to a 13th month pay computed currency at the time of payment.
pro-rata from January 1996 to November 1996 which as properly
computed by the petitioner amounts to ₱4, 584.00. (Rollo, p. 11) We remarked in C.F. Sharp & Co. v. Northwest Airlines, Inc.11 that the
repeal of Republic Act No. 529 had the effect of removing the prohibition
With respect to the other arguments of the petitioner, this Court is not on the stipulation of currency other than Philippine currency, such that
persuaded. Petitioner failed to refute by evidence that private respondent obligations or transactions could already be paid in the currency agreed
is not entitled to the commissions payable in US dollars. Neither is there upon by the parties. However, both Republic Act No. 529 and Republic
any reason for us to agree with the petitioner that the computation of these Act No. 8183 did not stipulate the applicable rate of exchange for the
commissions must be based on the value of [the] Peso in relation to a conversion of foreign currency-incurred obligations to their peso
Dollar at the time of sale. As properly observed by the Labor Arbiter a equivalent. It follows, therefore, that the jurisprudence established under
quo, viz: "Likewise the devaluation of the peso cannot be used as a shield Republic Act No. 529 with regard to the rate of conversion remains
against the complainant because that should have been the lookout of the applicable. In C.F. Sharp, the Court cited Asia World Recruitment,Inc. v.
respondent company in providing for such a clause that in case of NLRC,12 to the effect that the real value of the foreign exchange-incurred
devaluation, the price agreed upon should be at the exchange rate when obligation up to the date of itspayment should be preserved.
the contract of sale had been consummated. For the lack of foresight and
inefficiency of the respondent company and as regards its contracts or There was no written contract between Netlink and Delmo stipulating that
agreements with its clientele, the complainant should not be made to the latter’s commissions would be paid in US dollars. The absence of the
1âwphi1
suffer." (Labor Arbiter Ricardo Olairez’ Decision, September 23, 1998, contractual stipulation notwithstanding, Netlink was still liable to pay
pp. 11-12, Rollo,pp. 328-329) In this regardtherefore, We uphold the well Delmo in US dollars because the practice of paying its sales agents in US
settled rule that "the findings of facts of the NLRC, particularly where the dollars for their US dollar-denominatedsales had become a company
NLRC and the Labor Arbiter are in agreement, are deemed binding and policy. This was impliedly admitted by Netlink when it did not refute the
conclusive upon the Court." (Permex, Inc. vs National Labor Relations allegation that the commissions earned by Delmo and its other sales
Commission, 323 SCRA 121, 126). agents had been paid in US dollars. Instead of denying the allegation,
Netlink only sought a declaration that the US dollar commissions be paid
xxxx using the exchange rate at the time of sale. The principle of non-
diminution of benefits, which has been incorporated in Article 10013 of
WHEREFORE, premises considered, the assailed Resolutions are hereby the Labor Code, forbade Netlink from unilaterally reducing, diminishing,
AFFIRMED with MODIFICATION, ordering the petitioner to pay the discontinuing or eliminating the practice. Verily, the phrase
private respondent the following: "supplements, or other employee benefits" in Article 100 is construed to
1. TWO-THOUSAND PESOS (₱2,000.00) as indemnity for failure to mean the compensation and privileges received by an employee aside
observe procedural due process; from regular salaries or wages.
2. ₱4,066.19 representing the unpaid commissions that have accrued in With regard to the length of timethe company practice should have been
favor of the private respondent; observed to constitute a voluntary employer practice that cannot be
unilaterally reduced, diminished, discontinued or eliminated by the
3. ₱776,779.44 payable to the private respondent upon payment of the employer, we find that jurisprudence has not laid down any rule requiring
accounts out of which the said amount will be taken; a specific mmimum number of years. In Davao Fruits Corporation v.
Associated Labor Unions,14 the company practice lasted for six years. In
4. ₱4,584.00 representing the unpaid 13th month pay of the private Davao Integrated Port Stevedoring Services v. Abarquez,15 the employer,
respondent; for three years and nine months, approved the commutation to cash of the
5. US$7,588.30 as unpaid commission; unenjoyed portion of the sick leave with pay benefits of its intermittent
workers. In Tiangco v. Leogardo, Jr.,16 the employer carried on the
6. 10% attorney’s fees of the total amount awarded excluding the amount practice of giving a fixed monthly emergency allowance from November
contained in the No.3 of this Order. 1976 to February 1980, or three years and four months. In Sevilla Trading
Company v. Semana, 17 the employer kept the practice of including non-
SO ORDERED. basic benefits such as paid leaves for unused sick leave and vacation in
Issues the computation of their 13th-month pay for at least two years.
Hence, this appeal.

With the payment of US dollar commissions having ripened into a had visited the defendant bank to request for a status on his investments,
company practice, there is no way that the commissions due to Delmo bank officers would normally pull out his (sic) ledger card and show
were to be paid in US dollars or their equivalent in Philippine currency plaintiff the updated amount due him; that sometime in 1995, plaintiff
determined at the time of the sales. To rule otherwise would be to cause discovered that one of his children had leukemia and[,] in the ensuing
an unjust diminution of the commissions due and owing to Delmo. hospitalization and treatment, plaintiff spent a lot of money; that because
his funds were already exhausted, plaintiff then turned to his Trust
Finally, we affirm the following justification of the CA in granting Indenture Certificates and started inquiring as to how he could liquidate
attorney's fees to Delmo, viz: The award of attorney's fees must, likewise, the trust; that in the beginning, defendant bank constantly asked for time
be upheld in line of (sic) the decision of the Supreme Court in the case of to look for his records, at one time [on June 18, 1998], promising to have
Consolidated Rural Bank (Cagayan Valley), Inc. vs. National Labor an answer before July 15, 1998, then writing plaintiff on May 18, 2000
Relations Commission, 301 SCRA 223, 235, where it was held that "in saying that the bank [had] coordinated with their Branch and Trust
actions for recovery of wages or where an employee was forced to litigate Department but that it might take [some time] to retrieve their records;
and thus incur expenses to protect her rights and interests, even if not so [and] that to plaintiff’s surprise, on June 22, 2000, he received a letter
claimed, an award of attorney's fees equivalent to ten percent (10%) of signed by defendant’s counsel, Curato Divina & Partners, in effect
the total award is legally and morally justifiable. There is no doubt that in denying plaintiff’s request for payment by stating that due to the
the present case, the private respondent has incurred expenses for the conversion of all outstanding PCIBank trust indenture accounts into
protection and enforcement of his right to his commissions.18 common trust certificates, all such PCIBank trust indenture certificates
WHEREFORE, the Court DENIES the petition for review on certiorari; have been rendered "null and void." Plaintiff prays for the payment of the
AFFIRMS the decision promulgated on May 9, 2003; and ORDERS the amounts under the Trust Indenture Certificates, plus interest, moral and
petitioner to pay the costs of suit. exemplary damages and attorney’s fees.
SO ORDERED In their Answer, defendants admit the issuance by defendant PCIB of the
Trust Indenture Certificates subject matter of the complaint, but deny the
Philippine Commercial International Bank v. Franco allegation that the investments subject of the Trust Indenture Certificates
G.R. No. 180069 March 5, 2014 are automatically rolled-over as such certificates have their own fixed
term and maturity date, and that the present action had already prescribed.
PHILIPPINE COMMERCIAL INTERNATIONAL BANK (now BDO
UNIBANK, INC.), Petitioner, As stated in the Pre-Trial Order issued by this court on 15 February 2002,
vs. the following issues were defined and agreed upon by the parties, to wit:
ARTURO P. FRANCO, substituted by his heirs, namely: MAURICIA P.
FRANCO, FLORIBEL P. FRANCO, AND ALEXANDER P. 1. Whether or not the plaintiff is entitled to the relief he seeks; and
FRANC0,1 Respondents. 2. Whether or not the cause of action as exerted (sic) by the defendant has
DECISION already prescribed.
PERALTA, J.: Plaintiff presented as its witness plaintiff Arturo P. Franco himself [who]
testified, among others[:] that he is the proprietor of Fair Marketing
Assailed in this petition for review on certiorari under Rule 45 of the Freight Services[,] which is the investor named in Trust Indenture
Rules of Court are the July 31, 2007 Decision2and October 4, 2007 Certificate 094846; that[,] in 1986, he decided to save up for his
Resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 82340, retirement and to invest his hard earned money; that he was then 51 years
which affirmed the October 21, 2003 Decision4 of the Makati City old and his choice was to deposit his funds with defendant PCIB which
Regional Trial Court (RTC), Branch 61. later on merged with defendant Equitable Banking Corp. and is now
known as Equitable PCIBank; that he chose defendant PCIB for the
The pertinent facts, as narrated by the trial court and as adopted both by latter’s representation that by making such investment, he was actually
the CA, as well as petitioner Philippine Commercial International Bank providing for his future since his investment would be commingled,
(Bank),5 are as follows: pooled and automatically rolled-over for better investment return and
This is an action for damages filed [on September 5, 2000] by plaintiff which will provide for his needs upon retirement, without need for him to
Arturo P. Franco against Philippine Commercial International Bank take any further action; that he was a loyal client of the defendants from
(PCIB), now known as Equitable-PCIBank, and Equitable Banking Corp. 1986 up to 1997; that he entered into a trust agreement with defendant
PCIB for which the latter issued subject Trust Indenture Certificates
The complaint essentially alleges, among others, that plaintiff secured ([TICs], for brevity); that sometime in 1997, when he was then 62 years
from defendant PCIB the following Trust Indenture Certificates: old, he [tried] to encash the trust indenture certificates only to be given a
run-around by the defendants; that sometime in 1995, his son, Arthur, was
Number Issued Maturity Amount Interest diagnosed to be afflicted with leukemia and eventually died on October
24, 1997; that because of his son’s illness, he was forced to go to
defendants and try to encash his trust indenture certificates but was denied
094846 Dec. 8, 1986 Jan. 7, 1987 ₱100,000.00 8.75% by defendant bank; that in a letter dated June 22, 2000, defendants,
(Exh. "B") p.a. through their counsel, informed plaintiff that the subject [TICs] are "null
and void"; that when he received the letter of June 22, 2000, he was at
first speechless and totally defeated and at a loss; that he and his wife
135928 Jan. 19, 1987 Feb. 18, 1987 ₱850,594.54 7.75% begun to experience sleepless nights, became anxious because their hope
(Exh. "C") p.a.
to secure their life in their old age had fallen apart[;] that instead of just
enjoying a secured life with his wife and enjoying his grandchildren and
205007 May 13, 1987 June 15, 1987 ₱500,000.00 8.50% spending more time with the Lord, he was now in debt and burdened with
(Exh. "D") p.a. the fact that his lifetime savings just disappeared before his very eyes
without a trace; [and] that plaintiff was constrained to file this case and
[spend] ₱22,117.80 in filing fees, to engage the services of counsel for
205146 July 15, 1987 Aug 14, 1987 ₱502,958.90 9.25% the amount of ₱50,000.00 with appearance fee of ₱3,000.00 per hearing,
(Exh. "E") p.a.
and that he suffered moral damages in the amount of ₱200,000.00.
The foregoing facts were not rebutted by defendants. The court finds the
witness and his testimony credible as the witness testified in a simple and
that despite demands, defendants refused and still refuses to return to straightforward manner. Upon admission of plaintiff’s exhibits, plaintiff
plaintiff the trust amounts, plus the stipulated interest[;] that in all of the rested his case.
trust transactions that defendant PCIB had entered into with the plaintiff,
defendant PCIB represented to plaintiff that[,] in making the trust The defendants presented Cecilia P. Soriano and Antonio M. Fortuno as
investment, plaintiff was actually providing for his future since the money their witnesses.
invested was going to be managed and administered by their PCIB-Trust
Services Group and will be commingled, pooled and automatically rolled- Cecilia P. Soriano, Operations Officer of defendant Equitable-PCIBank,
over for better investment return; that believing the representation of the testified that she came to know plaintiff in 1987 when she was assigned
bank, the plaintiff invested his lifetime savings in the hope that the at PCIB Gil Puyat Branch; that plaintiff was one of the bank’s valued
defendant bank will actually provide for their future by reinvesting and clients[;] and that plaintiff secured the [TICs] subject matter of the
rolling-over their investment automatically, without any need for the complaint. On cross-examination, the witness admitted that she has seen
plaintiff to take any further action; that on the few occasions that plaintiff only the photocopies of plaintiff’s [TICs]; that she had no direct dealing

with plaintiff regarding the [TICs] and she had no idea what happened to 7. Attorney’s fees in the amount of ₱50,000.00, plus ₱3,000.00 for every
plaintiff’s [TICs] after their respective maturity dates; [and] that valued hearing attended; and
clients of the bank were given special privileges, such as allowing these
clients to withdraw or encash [TICs] or investments over the phone[,] but 8. ₱22,117.80 as reimbursement for filing fees.
she did not receive any call from plaintiff withdrawing or encashing the The case against Equitable Banking Corporation is dismissed for
plaintiff’s [TICs]. insufficiency of evidence.
The testimony of their next witness, Antonio Martin S. Fortuno, was SO ORDERED.7
offered to prove, among others, that [TICs] expired upon maturity and
after which, they were automatically rolled-over. Considering that the four TICs have not been replaced or cancelled, the
RTC held that the relationship of express trust between petitioner Bank
Antonio Martin S. Fortuno, Operations Officer of defendant Equitable- and respondent still subsists at the time the latter demanded the
PCIBank, testified that he is familiar with the Trust Indenture Certificates withdrawal of his funds under them. While the TICs contain a maturity
issued by defendant bank; that when a client would like to secure a Trust date, the court opined that the same refers only to the gross income
Indenture Certificate from the bank, they would ask the client, among expectation or the applicable interest rate because the funds are
others, to sign [roll-over] agreement/rules and regulations; that when a automatically rolled-over with varying interest rates depending on the
client would like to withdraw his proceeds from the certificate upon prevailing interest rates as determined by petitioner’s Trust Department.
maturity, they follow the following steps: (1) they retrieve the old With respect, however, to the interest rate applicable after the stipulated
certificates from client, (2) they have [the] client sign on the back portion maturity dates, the court deemed it fair and reasonable to impose the legal
of the certificate, (3) they prepare mode of payment – MC or credit to rate of interest for want of evidence on the prevailing rate at the time of
other accounts, and (4) they file the paid certificate to paid/roll-over file; roll-over. Finally, the court found that petitioner Bank is in bad faith in its
that if the holder of a certificate does not withdraw the placement upon dealings with respondent when it unilaterally declared – despite claiming
maturity, they replace the old certificate with a new one; that if the client that respondent was one of its valued clients – the TICs as null and void
is at the branch, the old certificate is replaced with a new certificate, have by reason of their conversion to Common Trust Funds in 1991. The
the client sign at the register copy, then stamp the old certificate as Old absence of good faith was made more manifest when Fortuno testified
Certificate-Stamp rolled-over/replaced; that if the client is not at the that the trust indenture certificate and common trust fund have the same
branch, they replace the old certificate with a new certificate and stamped features and the only difference is in the name and classification of the
with rolled-over; that certificates have fixed maturity dates; that interest amount of investment.
rates stated in the certificates vary as they go either up or down depending
on the prevailing bank rates as provided by the Trust Department; that[,] On appeal, the CA affirmed the RTC ruling. According to the appellate
in 1992[,] all existing Trust Indenture Certificates were converted into court, Soriano could not have possibly known if respondent indeed
Common Trust Funds; [and] that he is not aware of any Trust Indenture withdrew any or all of his participation in the subject TICS, because by
Certificate belonging to plaintiff which were converted into Common her very own admission during the cross-examination, she did not have
Trust Funds in 1992. any direct dealing with him with respect to the TICs at the time they
matured or even thereafter. Likewise, petitioner Bank failed to adduce any
On cross-examination, the witness admitted that he is familiar with Trust documentary evidence to establish the alleged fact that the four TICs were
Indenture Certificates; that Trust Indenture Certificates have been already paid or cancelled, or that respondent’s participation therein was
converted into Common Trust Funds; that the change is only in name already withdrawn. Further, respondent’s testimony that he gave verbal
because they have the same features and that the only difference is that instructions to petitioner Bank to roll-over his investment upon their
Common Trust Funds are classified into several product types depending maturity was bolstered by Fortuno’s admission in open court that it has
on the limit of the amount of investment; that there is nothing in the been petitioner Bank’s practice to roll-over investments which remain
certificate that says it has a roll-over feature; that, however, if the unclaimed after their maturity even without instruction from their owners.
certificate expires and the client does not claim or withdraw his funds or With all these findings, the CA concluded that the claim of respondent is
surrender the certificate, they roll-over the funds of the client; that if a not yet barred by prescription, since the maturity dates of the four TICs
guest comes with the original Trust Indenture Certificate without any did not terminate the express trust created between the parties.
stamp as being taken or cancelled, the bank should verify with the
outstanding copy because the bank should have an outstanding copy of A motion for reconsideration was filed by petitioner, but the CA acted
unfavorably; hence, this petition.
that Trust Indenture Certificate; that he is not aware that the Trust
Indenture Certificates of the plaintiff were verified with their records; and We deny.
that he does not know whether plaintiff’s Trust Indenture Certificates
were actually paid out by the bank to plaintiff. Upon perusal of the entire case records, the Court finds no reversible error
committed by the CA in sustaining the RTC Decision. Considering the
Defendants did not conduct any re-direct.6 evidence at hand, both courts have applied the law in accordance with the
facts of the case.
On October 21, 2003, the RTC rendered a Decision, the dispositive
portion of which reads: A quick point, however, on the issue of alleged payment by petitioner
Bank on the subject trust certificate indentures.
WHEREFORE, all the foregoing premises considered, judgment is
hereby rendered in favor of plaintiff and ordering defendant Philippine Jurisprudence abounds that, in civil cases, one who pleads payment has
Commercial International Bank, now known as Equitable-PCIBank, to the burden of proving it.8 Even where the plaintiff must allege non-
pay plaintiff the following: payment, the general rule is that the burden rests on the defendant to prove
payment, rather than on the plaintiff to prove non-payment.9 When the
1. On the First Cause of Action, the sum of ₱100,000.00, plus the creditor is in possession of the document of credit, he need not prove non-
stipulated interest of 8.75% per annum for the period December 8, 1986 payment for it is presumed.10 The creditor's possession of the evidence of
to January 7, 1987, plus interest of 6% per annum from January 8, 1987 debt is proof that the debt has not been discharged by payment.11
until fully paid;
In this case, respondent's possession of the original copies of the subject
2. On the Second Cause of Action, the sum of ₱840,594.54, plus the TICs strongly supports his claim that petitioner Bank's obligation to return
stipulated interest of 7.75% per annum for the period January 19, 1987 to the principal plus interest of the money placement has not been
February 18, 1987, plus interest of 6% per annum from February 19, 1987 extinguished. The TICs in the hands of respondent is a proof of
until fully paid; indebtedness and a prima facie evidence that they have not been paid.
3. On the Third Cause of Action, the sum of ₱500,000.00, plus the Petitioner Bank could have easily presented documentary evidence to
stipulated interest of 8.50% per annum for the period May 13, 1987 to dispute the claim, but it did not. In its omission, it may be reasonably
June 15, 1987, plus interest of 6% per annum from June 16, 1987 until deduced that no evidence to that effect really exist. Worse, the testimonies
fully paid; of petitioner Bank's own witnesses, reinforce, rather than belie,
respondent's allegations of non-payment.
4. On the Fourth Cause of Action, the sum of ₱502,958.90, plus the
stipulated interest of 9.25% per annum for the period July 15, 1987 to WHEREFORE, premises considered, the instant Petition is DENIED.
August 14, 1987, plus interest of 6% per annum from August 15, 1987 The July 31, 2007 Decision and October 4, 2007 Resolution of the Court
until fully paid; of Appeals in CA-G.R. CV No. 82340, which affirmed the October 21,
2003 Decision of the Makati City Regional Trial Court, Branch 61, are
5. ₱50,000.00 as moral damages; AFFIRMED.
6. ₱200,000.00 as exemplary damages; SO ORDERED.

Bognot v. RRI Lending Corporation abandoned or otherwise extinguished. He denied being a party to any loan
G.R. No. 180144 September 24, 2014 application and/or renewal in May 1997. He also denied having issued the
BPI check post-dated to June 30, 1997, as well as the promissory note
LEONARDO BOGNOT, Petitioner, dated June 30, 1997, claiming that this note had been tampered. He
vs. claimed that the one (1) month loan contracted by Rolando and his wife
RRI LENDING CORPORATION, represented by its General Manager, in November 1996 which was lastly renewed in March 1997 had already
DARIO J. BERNARDEZ, Respondent. been fully paid and extinguished in April 1997.11
DECISION Trial on the merits thereafter ensued.
BRION, J.: The Regional Trial Court Ruling
certiorari1
Before the Court is the petition for review on filed by Leonardo In a decision12 dated January 17, 2000,the RTC ruled in the respondent’s
Bognot (petitioner) assailing the March 28, 2007 decision2 and the favor and ordered the Bognot siblings to pay the amount of the loan, plus
October 15, 2007 resolution3 of the Court of Appeals (CA) in CA-G.R. interest and penalty charges. It considered the wordings of the promissory
CV No. 66915. note and found that the loan they contracted was joint and solidary. It also
Background Facts noted that the petitioner signed the promissory note as a principal (and not
merely as a guarantor), while Rolando was the co-maker. It brushed the
RRI Lending Corporation (respondent) is an entity engaged in the petitioner’s defense of full payment aside, ruling that the respondent had
business of lending money to its borrowers within Metro Manila. It is duly successfully proven, by preponderance of evidence, the nonpayment of
represented by its General Manager, Mr. Dario J. Bernardez (Bernardez). the loan. The trial court said:
Sometime in September 1996, the petitioner and his younger brother, Records likewise reveal that while he claims that the obligation had been
Rolando A. Bognot (collectively referred to as the "Bognot siblings"), fully paid in his Answer, he did not, in order to protect his right filed (sic)
applied for and obtained a loan of Five Hundred Thousand Pesos a cross-claim against his co-defendant Rolando Bognot despite the fact
(₱500,000.00) from the respondent, payable on November 30, 1996.4 The that the latter did not file any responsive pleading.
loan was evidenced by a promissory note and was secured by a post dated
check5 dated November 30, 1996. In fine, defendants are liable solidarily to plaintiff and must pay the loan
of ₱500,000.00 plus 5% interest monthly as well as 10% monthly penalty
Evidence on record shows that the petitioner renewed the loan several charges from the filing of the complaint on December 3, 1997 until fully
times on a monthly basis. He paid a renewal fee of ₱54,600.00 for each paid. As plaintiff was constrained to engage the services of counsel in
renewal, issued a new post-dated checkas security, and executed and/or order to protect his right,defendants are directed to pay the former jointly
renewed the promissory note previouslyissued. The respondent on the and severally the amount of ₱50,000.00 as and by way of attorney’s fee.
other hand, cancelled and returned to the petitioner the post-dated checks
issued prior to their renewal. The petitioner appealed the decision to the Court of Appeals.
Sometime in March 1997, the petitioner applied for another loan renewal. The Court of Appeals Ruling
He again executed as principal and signed Promissory Note No. 97- In its decision dated March 28, 2007, the CA affirmed the RTC’s findings.
0356 payable on April 1, 1997; his co-maker was again Rolando. As It found the petitioner’s defense of payment untenable and unsupported
security for the loan, the petitioner also issued BPI Check No. by clear and convincing evidence. It observed that the petitioner did not
0595236,7 post dated to April 1, 1997.8 present any evidence showing that the check dated June 30, 1997 had, in
Subsequently, the loan was again renewed on a monthly basis (until June fact, been encashed by the respondent and the proceeds applied to the
30, 1997), as shown by the Official Receipt No. 7979 dated May 5, 1997, loan, or any official receipt evidencing the payment of the loan. It further
and the Disclosure Statement dated May 30, 1997 duly signed by stated that the only document relied uponby the petitioner to substantiate
Bernardez. The petitioner purportedly paid the renewal fees and issued a his defense was the April 1, 1997 checkhe issued which was cancelled
post-dated check dated June 30, 1997 as security. As had been done in the and returned to him by the respondent.
past, the respondent superimposed the date "June 30, 1997" on the upper The CA, however, noted the respondent’s established policy of cancelling
right portion of Promissory Note No. 97-035 to make it appear that it and returning the post-dated checks previously issued, as well as the
would mature on the said date. subsequent loan renewals applied for by the petitioner, as manifested by
Several days before the loan’s maturity, Rolando’s wife, Julieta Bognot the official receipts under his name. The CA thus ruled that the petitioner
(Mrs. Bognot), went to the respondent’s office and applied for another failed to discharge the burden of proving payment.
renewal of the loan. She issued in favor of the respondent Promissory The petitioner moved for the reconsideration of the decision, but the CA
Note No. 97-051, and International Bank Exchange (IBE) Check No. denied his motion in its resolution of October 15, 2007, hence, the present
00012522, dated July 30, 1997, in the amount of ₱54,600.00 as renewal recourse to us pursuant toRule 45 of the Rules of Court.
fee.
The Petition
On the excuse that she needs to bring home the loan documents for the
Bognot siblings’ signatures and replacement, Mrs. Bognot asked the The petitioner submits that the CA erred in holding him solidarily liable
respondent’s clerk to release to her the promissory note, the disclosure with Rolando and his wife. Heclaimed that based on the legal presumption
statement, and the check dated July 30, 1997. Mrs. Bognot, however, provided by Article 1271 of the Civil Code,13 his obligation had been
never returned these documents nor issued a new post-dated check. discharged by virtue of his possession of the post-dated check (stamped
Consequently, the respondent sent the petitioner follow-up letters "CANCELLED") that evidenced his indebtedness. He argued that it was
demanding payment of the loan, plus interest and penalty charges. These Mrs. Bognot who subsequently assumed the obligation by renewing the
demands went unheeded. loan, paying the fees and charges, and issuing a check. Thus, there is an
entirely new obligation whose payment is her sole responsibility.
On November 27, 1997, the respondent, through Bernardez, filed a
complaint for sum of money before the Regional Trial Court (RTC) The petitioner also argued that as a result of the alteration of the
against the Bognot siblings. The respondent mainly alleged that the loan promissory note without his consent (e.g., the superimposition of the date
renewal payable on June 30, 1997 which the Bognot siblings applied for "June 30, 1997" on the upper right portion of Promissory Note No. 97-
remained unpaid; that before June30, 1997, Mrs. Bognot applied for 035 to make it appear that it would mature on this date), the respondent
another loan extension and issued IBE Check No. 00012522 as payment can no longer collect on the tampered note, let alone, hold him solidarily
for the renewal fee; that Mrs. Bognot convinced the respondent’s clerk to liable with Rolando for the payment of the loan. He maintained that even
release to her the promissory note and the other loan documents; that since without the proof of payment, the material alteration of the promissory
Mrs. Bognot never issued any replacement check, no loanextension took note is sufficient to extinguish his liability.
place and the loan, originally payable on June 30, 1997, became due on
this date; and despite repeated demands, the Bognot siblings failed to pay Lastly, he claimed that he had been released from his indebtedness by
their joint and solidary obligation. novation when Mrs. Bognot renewed the loan and assumed the
indebtedness.
Summons were served on the Bognotsiblings. However, only the
petitioner filed his answer. The Case for the Respondents
In his Answer,10 the petitioner claimed that the complaint states no cause The respondent submits that the issues the petitioner raised hinge on the
of action because the respondent’s claim had been paid, waived, appreciation of the adduced evidence and of the factual lower courts’
findings that, as a rule, are notreviewable by this Court.

The Issues evidence would be required than what normally would be called for to
prove payment.21Thus, reliance by the petitioner on the legal presumption
The case presents to us the following issues: to prove payment is misplaced.
1. Whether the CA committed a reversible error in holding the petitioner To reiterate, no cash payment was proven by the petitioner. The
solidarily liable with Rolando; cancellation and return of the check dated April 1, 1997, simply
2. Whether the petitioner is relieved from liability by reason of the established his renewal of the loan – not the fact of payment. Furthermore,
material alteration in the promissory note; and it has been established during trial, through repeated acts, that the
respondent cancelled and surrendered the post-dated check previously
3. Whether the parties’ obligation was extinguished by: (i) payment; and issued whenever the loan is renewed. We trace whatwould amount to a
(ii) novation by substitution of debtors. practice under the facts of this case, to the following testimonial
exchanges:
Our Ruling
Civil Case No. 97-0572
We find the petition partly meritorious.
TSN December 14, 1998, Page 13.
As a rule, the Court’s jurisdiction in a Rule 45 petition is limited to the
review of pure questions of law.14 Appreciation of evidence and inquiry Atty. Almeda:
on the correctness of the appellate court's factual findings are not the
functions of this Court; we are not a trier of facts.15 Q: In the case of the renewal of the loan you admitted that a renewal fee
is charged to the debtor which he or she must pay before a renewal is
A question of law exists when the doubt or dispute relates to the allowed. I show you Exhibit "3" official receipt of plaintiff dated July 3,
application of the law on given facts. On the other hand, a question of fact 1997, would this be your official receipt which you issued to your client
exists when the doubt or dispute relates to the truth or falsity of the parties’ which they make renewal of the loan?
factual allegations.16
A: Yes, sir.
As the respondent correctly pointedout, the petitioner’s allegations are
factual issuesthat are not proper for the petition he filed. In the absence of xxx xxx xxx
compelling reasons, the Court cannot re-examine, review or re-evaluate Q: And naturally when a loan has been renewed, the old one which is
the evidence and the lower courts’ factual conclusions. This is especially replaced by the renewal has already been cancelled, is that correct?
true when the CA affirmed the lower court’s findings, as in this case.
Since the CA’s findings of facts affirmed those of the trial court, they are A: Yes, sir.
binding on this Court, rendering any further factual review unnecessary.
Q: It is also true to say that all promissory notes and all postdated checks
If only to lay the issues raised - both factual and legal – to rest, we shall covered by the old loan which have been the subject of the renewal are
proceed to discuss their merits and demerits. deemed cancelled and replaced is that correct?
No Evidence Was Presented to Establish the Fact of Payment A: Yes, sir. xxx22
Jurisprudence tells us that one who pleads payment has the burden of Civil Case No. 97-0572
proving it;17 the burden rests on the defendant to prove payment, rather
than on the plaintiff to prove non-payment.18 Indeed, once the existence TSN November 27, 1998, Page 27.
of an indebtedness is duly established by evidence, the burden of showing Q: What happened to the check that Mr. Bognot issued?
with legal certainty that the obligation has been discharged by payment
rests on the debtor.19 Court: There are two Bognots. Who in particular?
In the present case, the petitioner failed to satisfactorily prove that his Q: Leonardo Bognot, Your Honor.
obligation had already been extinguished by payment. As the CA
correctly noted, the petitioner failed to present any evidence that the A: Every month, they were renewed, he issued a new check, sir.
respondent had in fact encashed his check and applied the proceeds to the Q: Do you have a copy of the checks?
payment of the loan. Neither did he present official receipts evidencing
payment, nor any proof that the check had been dishonored. A: We returned the check upon renewing the loan.23
We note that the petitioner merely relied on the respondent’s cancellation In light of these exchanges, wefind that the petitioner failed to discharge
and return to him of the check dated April 1, 1997. The evidence shows his burden ofproving payment.
that this check was issued to secure the indebtedness. The acts imputed
on the respondent, standing alone, do not constitute sufficient evidence of The Alteration of the Promissory Note
payment. Did Not Relieve the Petitioner From Liability
Article 1249, paragraph 2 of the Civil Code provides: We now come to the issue of material alteration. The petitioner raised as
xxxx defense the alleged material alteration of Promissory Note No. 97-035 as
basis to claim release from his loan. He alleged that the respondent’s
The delivery of promissory notes payable to order, or bills of exchange or superimposition of the due date "June 30, 1997" on the promissory note
other mercantile documents shall produce the effect of payment only without his consent effectively relieved him of liability.
when they have been cashed, or when through the fault of the creditor
they have been impaired. (Emphasis supplied) We find this defense untenable.
Also, we held in Bank of the Philippine Islands v. Spouses Royeca:20 Although the respondent did not dispute the fact of alteration, he
nevertheless denied that the alteration was done without the petitioner’s
Settled is the rule that payment must be made in legal tender. A check is consent. The parties’ Pre-Trial Order dated November 3, 199824 states
not legal tender and, therefore, cannot constitute a valid tender of that:
payment. Since a negotiable instrument is only a substitute for money and
not money, the delivery of such an instrument does not, by itself, operate xxx There being no possibility of a possible compromise agreement,
as payment. Mere delivery of checks does not discharge the obligation stipulations, admissions, and denials were made, to wit:
under a judgment. The obligation is not extinguished and remains FOR DEFENDANT LEONARDO BOGNOT
suspended until the payment by commercial document is actually
realized.(Emphasis supplied) 13. That the promissory note subject of this case marked as Annex "A" of
the complaint was originally dated April 1, 1997 with a superimposed
Although Article 1271 of the Civil Code provides for a legal presumption rubber stamp mark "June 30, 1997" to which the plaintiff admitted the
of renunciation of action (in cases where a private document evidencing superimposition.
a credit was voluntarily returned by the creditor to the debtor), this
presumption is merely prima facieand is not conclusive; the presumption 14. The superimposition was done without the knowledge, consent or
loses efficacy when faced with evidence to the contrary. prior consultation with Leonardo Bognot which was denied by
plaintiff."25 (Emphasis supplied)
Moreover, the cited provision merely raises a presumption, not of
payment, but of the renunciation of the credit where more convincing

Significantly, the respondent also admitted in the Pre-Trial Order that part debtor’s place in the contractual relationship. Depending on who took the
of its company practice is to rubber stamp, or make a superimposition initiative, novation by substitution of debtor has two forms – substitution
through a rubber stamp, the old promissory note which has been renewed by expromision and substitution by delegacion. The difference between
to make it appear that there is a new loan obligation. The petitioner did these two was explained in Garcia v. Llamas:37
not rebut this statement. To our mind, the failure to rebut is tantamount to
an admission of the respondent’s allegations: "In expromision, the initiative for the change does not come from -- and
may even be made without the knowledge of -- the debtor, since it consists
"22. That it is the practice of plaintiff to just rubber stamp or make of a third person’s assumption of the obligation. As such, it logically
superimposition through a rubber stamp on old promissory note which requires the consent of the third person and the creditor. In delegacion,
has been renewed to make it appear that there is a new loan obligation to the debtor offers, and the creditor accepts, a third person who consents to
which the plaintiff admitted." (Emphasis Supplied).26 the substitution and assumes the obligation; thus, the consent of these
three persons are necessary."
Even assuming that the note had indeed been tampered without the
petitioner’s consent, the latter cannot totally avoid payment of his In both cases, the original debtor must be released from the obligation;
obligation to the respondent based on the contract of loan. otherwise, there can be no valid novation.38Furthermore, novation by
substitution of debtor must alwaysbe made with the consent of the
Based on the records, the Bognot Siblings had applied for and were creditor.39
granted a loan of ₱500,000.00 by the respondent. The loan was evidenced
by a promissory note and secured by a post-dated check27 dated The petitioner contends thatnovation took place through a substitution of
November 30, 1996. In fact, the petitioner himself admitted his loan debtors when Mrs. Bognot renewed the loan and assumed the debt. He
application was evidenced by the Promissory Note dated April 1, alleged that Mrs. Bognot assumed the obligation by paying the renewal
1997.28 This loan was renewed several times by the petitioner, after fees and charges, and by executing a new promissory note. He further
paying the renewal fees, as shown by the Official Receipt Nos. 79729 and claimed that she issued her own check40 to cover the renewal fees, which
58730 dated May 5 and July 3, 1997, respectively. These official receipts fact, according to the petitioner, was done with the respondent’s consent.
were issued in the name of the petitioner. Although the petitioner had
insisted that the loan had been extinguished, no other evidence was Contrary to the petitioner’s contention, Mrs. Bognot did not substitute the
presented to prove payment other than the cancelled and returnedpost- petitioner as debtor. She merely attempted to renew the original loan by
dated check. executing a new promissory note41 and check. The purported one month
renewal of the loan, however, did not push through, as Mrs. Bognot did
Under this evidentiary situation, the petitioner cannot validly deny his not return the documents or issue a new post dated check. Since the loan
obligation and liability to the respondent solely on the ground that the was not renewed for another month, the originaldue date, June 30,1997,
Promissory Note in question was tampered. Notably, the existence of the continued to stand.
obligation, as well as its subsequent renewals, have been duly established
by: first, the petitioner’s application for the loan; second, his admission More importantly, the respondent never agreed to release the petitioner
that the loan had been obtained from the respondent; third, the post-dated from his obligation. That the respondent initially allowed Mrs. Bognot to
checks issued by the petitioner to secure the loan; fourth, the testimony of bring home the promissory note, disclosure statement and the petitioner’s
Mr. Bernardez on the grant, renewal and non-payment of the loan; fifth, previous check dated June 30, 1997, does not ipso factoresult in novation.
proof of non-payment of the loan; sixth, the loan renewals; and seventh, Neither will this acquiescence constitute an implied acceptance of the
the approval and receipt of the loan renewals. substitution of the debtor.
In Guinsatao v. Court of Appeals,31 this Court pointed out that while a In order to give novation legal effect, the creditor should consent to the
promissory note is evidence of an indebtedness, it is not the only substitution of a new debtor. Novation must be clearly and unequivocally
evidence, for the existence of the obligation can be proven by other shown, and cannot be presumed.
documentary evidence such as a written memorandum signed by the Since the petitioner failed to show thatthe respondent assented to the
parties. In Pacheco v. Court of Appeals,32 this Court likewise expressly substitution, no valid novation took place with the effect of releasing the
recognized that a check constitutes anevidence of indebtedness and is a petitioner from his obligation to the respondent.
veritable proof of an obligation. It canbe used in lieu of and for the same
purpose as a promissory note and can therefore be presented to establish Moreover, in the absence of showing that Mrs. Bognot and the respondent
the existence of indebtedness.33 had agreed to release the petitioner, the respondent can still enforce the
payment of the obligation against the original debtor. Mere acquiescence
In the present petition, we find that the totality of the evidence on record to the renewal of the loan, when there is clearly no agreement to release
sufficiently established the existence of the petitioner’s indebtedness (and the petitioner from his responsibility, does not constitute novation.
liability) based on the contract ofloan. Even with the tampered promissory
note, we hold that the petitioner can still be held liable for the unpaid loan. The Nature of the Petitioner’s Liability
The Petitioner’s BelatedClaim of Novation by Substitution May no On the nature of the petitioner’s liability, we rule however, that the CA
Longer be Entertained erred in holding the petitioner solidarily liable with Rolando.
It has not escaped the Court’s attention that the petitioner raised the A solidary obligation is one in which each of the debtors is liable for the
argument that the obligation had been extinguished by novation. The entire obligation, and each of the creditors is entitled to demand the
petitioner never raised this issue before the lower courts. satisfaction of the whole obligation from any or all of the debtors.42 There
is solidary liability when the obligation expressly so states, when the law
It is a settled principle of law thatno issue may be raised on appeal unless so provides, or when the nature of the obligation so requires.43 Thus, when
it has been brought before the lower tribunal for its the obligor undertakes to be "jointly and severally" liable, the obligation
consideration.34 Matters neither alleged in the pleadingsnor raised during is solidary,
the proceedings below cannot be ventilated for the first time on appeal
before the Supreme Court.35 In this case, both the RTC and the CA found the petitioner solidarily liable
with Rolando based on Promissory Note No. 97-035 dated June 30, 1997.
In any event, we find no merit in the defense of novation as we discuss at Under the promissory note, the Bognot Siblings defined the parameters
length below. Novation cannot be presumed and must be clearly and of their obligation as follows:
unequivocably proven.
"FOR VALUE RECEIVED, I/WE, jointly and severally, promise to pay
Novation is a mode of extinguishing an obligation by changing its objects to READY RESOURCES INVESTORS RRI LENDING CORPO. or
or principal obligations, by substituting a new debtor in place of the old Order, its office at Paranaque, M.M. the principal sum of Five Hundred
one, or by subrogating a third person to the rights of the creditor.36 Thousand PESOS (₱500,000.00), PhilippineCurrency, with interest
Article 1293 of the Civil Code defines novation as follows: thereon at the rate of Five percent (5%) per month/annum, payable in One
Installment (01) equal daily/weekly/semi-monthly/monthly of PESOS
"Art. 1293. Novation which consists insubstituting a new debtor in the Five Hundred Thousand Pesos (₱500,000.00), first installment to become
place of the originalone, may be made even without the knowledge or due on June 30, 1997. xxx"44 (Emphasis Ours).
against the will of the latter, but not without the consent of the creditor.
Payment by the new debtor gives him rights mentioned in Articles 1236 Although the phrase "jointly and severally" in the promissory note clearly
and 1237." and unmistakably provided for the solidary liability of the parties, we note
and stress that the promissory note is merely a photocopyof the original,
To give novation legal effect, the original debtor must be expressly which was never produced.
released from the obligation, and the new debtor must assume the original

Under the best evidence rule, whenthe subject of inquiry is the contents
of a document, no evidence isadmissible other than the original document
itself except in the instances mentioned in Section 3, Rule 130 of the
Revised Rules of Court.45
The records show that the respondenthad the custody of the original
promissory note dated April 1, 1997, with a superimposed rubber stamp
mark "June 30, 1997", and that it had been given every opportunity to
present it. The respondent even admitted during pre-trial that it could not
present the original promissory note because it is in the custody of its
cashier who is stranded in Bicol.46 Since the respondent never produced
the original of the promissory note, much less offered to produce it, the
photocopy of the promissory note cannot be admitted as evidence. Other
than the promissory note in question, the respondent has not presented
any other evidence to support a finding of solidary liability. As we earlier
noted, both lower courts completely relied on the note when they found
the Bognot siblingssolidarily liable.
The well-entrenched rule is that solidary obligation cannot be inferred
lightly. It must be positively and clearly expressed and cannot be
presumed.47
In view of the inadmissibility of the promissory note, and in the absence
of evidence showing that the petitioner had bound himself solidarily with
Rolando for the payment of the loan, we cannot but conclude that the
obligation to pay is only joint.48
The 5% Monthly Interest Stipulated in the Promissory Note is
Unconscionable and Should be Equitably Reduced
Finally, on the issue of interest, while we agree with the CA that the
petitioner is liable to the respondentfor the unpaid loan, we find the
imposition of the 5% monthly interest to be excessive, iniquitous,
unconscionable and exorbitant, and hence, contrary to morals and
jurisprudence. Although parties to a loan agreement have wide latitude to
stipulate on the applicable interest rate under Central Bank Circular No.
905 s. 1982 (which suspended the Usury Law ceiling on interest effective
January 1, 1983), we stress that unconscionable interest rates may still be
declared illegal.49
In several cases, we haveruled that stipulations authorizing iniquitous or
unconscionable interests are contrary to morals and are illegal. In Medel
v. Court of Appeals,50 we annulled a stipulated 5.5% per month or 66%
per annum interest on a ₱500,000.00 loan, and a 6% per month or 72%
per annum interest on a ₱60,000.00 loan, respectively, for being
excessive, iniquitous, unconscionableand exorbitant. 1âwphi1
We reiterated this ruling in Chua v. Timan,51 where we held that the

stipulated interest rates of 3% per month and higher are excessive,
iniquitous, unconscionable and exorbitant, and must therefore be reduced
to 12% per annum.
Applying these cited rulings, we now accordingly hold that the stipulated
interest rate of 5% per month, (or 60% per annum) in the promissory note
is excessive, unconscionable, contrary to morals and is thus illegal. It is
void ab initiofor violating Article 130652 of the Civil Code. We 1âwphi1
accordingly find it equitable to reduce the interest rate from 5% per month
to 1% per month or 12% per annum in line with the prevailing
jurisprudence.
WHEREFORE, premises considered, the Decision dated March 28, 2007
of the Court of Appeals in CA-G.R. CV No. 66915 is hereby AFFIRMED
with MODIFICATION, as follows:
1. The petitioner Leonardo A. Bognotand his brother, Rolando A. Bognot
are JOINTLY LIABLE to pay the sum of ₱500,000.00 plus 12% interest
per annum from December 3, 1997 until fully paid.
2. The rest of the Court of Appeals' dispositions are hereby AFFIRMED.
Costs against petitioner Leonardo A. Bognot.
SO ORDERED.

Evangelista v. Screenex, Inc.

T ENDER OF PAYMENT AND CONSIGNMENT
Cacayorin v. Armed Forces and Police Mutual Benefit
Association, Inc.
G.R. No. 171298 April 15, 2013
SPOUSES OSCAR and THELMA CACAYORIN, Petitioners,
vs.
ARMED FORCES AND POLICE MUTUAL BENEFIT
ASSOCIATION, INC., Respondent.
DECISION
DEL CASTILLO, J.:
Consignation is necessarily judicial. Article 1258 of the Civil Code
specifically provides that consignation shall be made by depositing the
thing or things due at the disposal of judicial authority. The said provision
clearly precludes consignation in venues other than the courts.
1
Assailed in this Petition for Review on Certiorari are the September 29,
2
2005 Decision of the Court of Appeals (CA) which granted the Petition
for Certiorari in CA-G.R. SP No. 84446 and its January 12, 2006
3 4
Resolution denying petitioners' Motion for Reconsideration.
Factual Antecedents
Petitioner Oscar Cacayorin (Oscar) is a member of respondent Armed
Forces and Police Mutual Benefit Association, Inc. (AFPMBAI), a
mutual benefit association duly organized and existing under Philippine
laws and engaged in the business of developing low-cost housing projects
for personnel of the Armed Forces of the Philippines, Philippine National
Police, Bureau of Fire Protection, Bureau of Jail Management and
Penology, and Philippine Coast Guard. He filed an application with
AFPMBAI to purchase a piece of property which the latter owned,
specifically Lot 5, Block 8, Phase I, Kalikasan Mutual Homes, San Pedro,
Puerto Princesa City (the property), through a loan facility.
On July 4, 1994, Oscar and his wife and co-petitioner herein, Thelma, on
one hand, and the Rural Bank of San Teodoro (the Rural Bank) on the
5
other, executed a Loan and Mortgage Agreement with the former as
borrowers and the Rural Bank as lender, under the auspices of Pag-IBIG
or Home Development Mutual Fund’s Home Financing Program.
6
The Rural Bank issued an August 22, 1994 letter of guaranty informing
AFPMBAI that the proceeds of petitioners’ approved loan in the amount
of ₱77,418.00 shall be released to AFPMBAI after title to the property is
transferred in petitioners’ name and after the registration and annotation
of the parties’ mortgage agreement.
On the basis of the Rural Bank’s letter of guaranty, AFPMBAI executed
7
in petitioners’ favor a Deed of Absolute Sale, and a new title – Transfer
8
Certificate of Title No. 37017 (TCT No. 37017) – was issued in their
name, with the corresponding annotation of their mortgage agreement
9
with the Rural Bank, under Entry No. 3364.
Unfortunately, the Pag-IBIG loan facility did not push through and the
Rural Bank closed and was placed under receivership by the Philippine
Deposit Insurance Corporation (PDIC). Meanwhile, AFPMBAI somehow
was able to take possession of petitioners’ loan documents and TCT No.
37017, while petitioners were unable to pay the loan/consideration for the
property.
AFPMBAI made oral and written demands for petitioners to pay the loan/
10
consideration for the property.
11
In July 2003, petitioners filed a Complaint for consignation of loan
payment, recovery of title and cancellation of mortgage annotation
against AFPMBAI, PDIC and the Register of Deeds of Puerto Princesa
City. The case was docketed as Civil Case No. 3812 and raffled to Branch
47 of the Regional Trial Court (RTC) of Puerto Princesa City (Puerto
Princesa RTC). Petitioners alleged in their Complaint that as a result of
the Rural Bank’s closure and PDIC’s claim that their loan papers could
not be located, they were left in a quandary as to where they should tender
full payment of the loan and how to secure cancellation of the mortgage
annotation on TCT No. 37017. Petitioners prayed, thus:
a. That after the filing of this complaint an order be made allowing the
consignation x x x of Php77,418.00.
b. For the court to compute and declare the amount of interest to be paid
by the plaintiffs and thereafter to allow the consignation of the interest
payments in order to give way for the full discharge of the loan.

c. To order the AFPMBAI to turn over to the custody of the court the loan 20
Respondent, on the other hand, insists in its Comment that jurisdiction
records and title (T.C.T. No. 37017) of the plaintiffs if the same are in over petitioners’ case lies with the HLURB, as it springs from their
their possession. contractual relation as seller and buyer, respectively, of a subdivision lot.
d. To declare the full payment of the principal loan and interest and The prayer in petitioners’ Complaint involves the surrender or delivery of
ordering the full discharge from mortgage of the property covered by the title after full payment of the purchase price, which respondent claims
T.C.T. No. 37017. are reciprocal obligations in a sale transaction covered by PD 957.
Respondent adds that in effect, petitioners are exacting specific
e. To order the Register of Deeds of Puerto Princesa City to cancel the performance from it, which places their case within the jurisdiction of the
annotation of real estate mortgage under Entry No. 3364 at the back of HLURB.
T.C.T. No. 37017.
Our Ruling
f. Thereafter, to turn over to the plaintiffs their title free from the aforesaid
12 The Court grants the Petition.
mortgage loan.
The Complaint makes out a case for consignation.
13
AFPMBAI filed a Motion to Dismiss claiming that petitioners’
Complaint falls within the jurisdiction of the Housing and Land Use The settled principle is that "the allegations of the Complaint determine
Regulatory Board (HLURB) and not the Puerto Princesa RTC, as it was the nature of the action and consequently the jurisdiction of the courts.
filed by petitioners in their capacity as buyers of a subdivision lot and it This rule applies whether or not the plaintiff is entitled to recover upon
prays for specific performance of contractual and legal obligations all or some of the claims asserted therein as this is a matter that can be
14 21
decreed under Presidential Decree No. 957 (PD 957). It added that since resolved only after and as a result of the trial."
no prior valid tender of payment was made by petitioners, the Does the Complaint in Civil Case No. 3812 make out a case for
consignation case was fatally defective and susceptible to dismissal. consignation? It alleges that:
Ruling of the Regional Trial Court 22
6.0 – Not long after however, RBST closed shop and defendant
15 Philippine Deposit Insurance Corporation (PDIC) was appointed as its
In an October 16, 2003 Order, the trial court denied AFPMBAI’s
Motion to Dismiss, declaring that since title has been transferred in the receiver. The plaintiffs, through a representative, made a verbal inquiry
name of petitioners and the action involves consignation of loan to the PDIC regarding the payment of their loan but were told that it has
payments, it possessed jurisdiction to continue with the case. It further no information or record of the said loan. This made [sic] the plaintiffs in
held that the only remaining unsettled transaction is between petitioners quandary as to where or whom they will pay their loan, which they intend
and PDIC as the appointed receiver of the Rural Bank. to pay in full, so as to cancel the annotation of mortgage in their title.
16 7.0 – It was discovered that the loan papers of the plaintiffs, including the
AFPMBAI filed a Motion for Reconsideration, which the trial court duplicate original of their title, were in the possession of defendant
17
denied in its March 19, 2004 Order. AFPMBAI. It was unclear though why the said documents including the
title were in the possession of AFPMBAI. These papers should have been
Ruling of the Court of Appeals in RBST’s possession and given to PDIC after its closure in the latter’s
AFPMBAI thus instituted CA-G.R. SP No. 84446, which is a Petition for capacity as receiver.
18
Certiorari raising the issue of jurisdiction. On September 29, 2005, the 8.0 – Plaintiffs are now intending to pay in full their real estate loan but
CA rendered the assailed Decision decreeing as follows: could not decide where to pay the same because of RBST [sic] closure
and PDIC’s failure to locate the loan records and title. This court’s
WHEREFORE, premises considered, this Petition is GRANTED. The intervention is now needed in order to determine to [sic] where or whom
Assailed 16 October 2003 and 19 March 2004 Orders of the public the loan should be paid.
respondent judge are hereby ordered VACATED and SET ASIDE.
9.0 – Plaintiffs hereby respectfully prays [sic] for this court to allow the
19
SO ORDERED. deposit of the amount of Php77,418.00 as full payment of their principal
loan, excluding interest, pursuant to the Loan and Mortgage Agreement
The CA held that Civil Case No. 3812 is a case for specific performance 23
of AFPMBAI’s contractual and statutory obligations as owner/developer on 4 July 1994.
of Kalikasan Mutual Homes, which makes PD 957 applicable and thus From the above allegations, it appears that the petitioners’ debt is
places the case within the jurisdiction of the HLURB. It said that since outstanding; that the Rural Bank’s receiver, PDIC, informed petitioners
one of the remedies prayed for is the delivery to petitioners of TCT No. that it has no record of their loan even as it took over the affairs of the
37017, the case is cognizable exclusively by the HLURB. Rural Bank, which on record is the petitioners’ creditor as per the July 4,
Petitioners moved for reconsideration which was denied by the CA in its 1994 Loan and Mortgage Agreement; that one way or another, AFPMBAI
January 12, 2006 Resolution. came into possession of the loan documents as well as TCT No. 37017;
that petitioners are ready to pay the loan in full; however, under the
Hence, the instant Petition. circumstances, they do not know which of the two – the Rural Bank or
AFPMBAI – should receive full payment of the purchase price, or to
Issue whom tender of payment must validly be made.
The sole issue that must be resolved in this Petition is: Does the Complaint 24
Under Article 1256 of the Civil Code, the debtor shall be released from
in Civil Case No. 3812 fall within the exclusive jurisdiction of the
HLURB? responsibility by the consignation of the thing or sum due, without need
of prior tender of payment, when the creditor is absent or unknown, or
Petitioners’ Arguments when he is incapacitated to receive the payment at the time it is due, or
when two or more persons claim the same right to collect, or when the
Petitioners assert that the elements which make up a valid case for title to the obligation has been lost. Applying Article 1256 to the
consignation are present in their Complaint. They add that since a deed of petitioners’ case as shaped by the allegations in their Complaint, the Court
absolute sale has been issued in their favor, and possession of the property finds that a case for consignation has been made out, as it now appears
has been surrendered to them, not to mention that title has been placed in that there are two entities which petitioners must deal with in order to
their name, the HLURB lost jurisdiction over their case. And for this same fully secure their title to the property: 1) the Rural Bank (through PDIC),
reason, petitioners argue that their case may not be said to be one for which is the apparent creditor under the July 4, 1994 Loan and Mortgage
specific performance of contractual and legal obligations under PD 957 Agreement; and 2) AFPMBAI, which is currently in possession of the
as nothing more was left to be done in order to perfect or consolidate their loan documents and the certificate of title, and the one making demands
title. upon petitioners to pay. Clearly, the allegations in the Complaint present
Petitioners thus pray that the herein assailed Decision and Resolution of a situation where the creditor is unknown, or that two or more entities
the CA be set aside, and that the trial court be ordered to continue with appear to possess the same right to collect from petitioners. Whatever
the proceedings in Civil Case No. 3812. transpired between the Rural Bank or PDIC and AFPMBAI in respect of
petitioners’ loan account, if any, such that AFPMBAI came into
Respondent's Arguments possession of the loan documents and TCT No. 37017, it appears that
petitioners were not informed thereof, nor made privy thereto.

Indeed, the instant case presents a unique situation where the buyer,
through no fault of his own, was able to obtain title to real property in his
name even before he could pay the purchase price in full. There appears Bonrostro v. Luna
to be no vitiated consent, nor is there any other impediment to the G.R. No. 172346 July 24, 2013
consummation of their agreement, just as it appears that it would be to the SPOUSES NAMEAL and LOURDES BONROSTRO, Petitioners,
best interests of all parties to the sale that it be once and for all completed vs.
and terminated. For this reason, Civil Case No. 3812 should at this SPOUSES JUAN and CONSTANCIA LUNA, Respondents.
juncture be allowed to proceed.
DECISION
Moreover, petitioners’ position is buttressed by AFPMBAI’s own
25 DEL CASTILLO, J.:
admission in its Comment that it made oral and written demands upon
the former, which naturally aggravated their confusion as to who was their Questioned in this case is the Court of Appeals' (CA) disquisition on the
rightful creditor to whom payment should be made – the Rural Bank or matter of interest.
AFPMBAI. Its subsequent filing of the Motion to Dismiss runs counter
to its demands to pay. If it wanted to be paid with alacrity, then it should Petitioners spouses Nameal and Lourdes Bonrostro (spouses Bonrostro)
not have moved to dismiss Civil Case No. 3812, which was brought 1
assail through this Petition for Review on Certiorari the April 15, 2005
precisely by the petitioners in order to be able to finally settle their 2
obligation in full. Decision of the CA in CA-G.R. CV No. 56414 which affirmed with
3
modifications the April 4, 1997 Decision of the Regional Trial Court
Finally, the lack of prior tender of payment by the petitioners is not fatal (RTC) of Quezon City, Branch 104 in Civil Case No. Q-94-18895. They
to their consignation case. They filed the case for the exact reason that 4
they were at a loss as to which between the two – the Rural Bank or likewise question the CA April17, 2006 Resolution denying their motion
AFPMBAI – was entitled to such a tender of payment. Besides, as earlier for partial reconsideration.
stated, Article 1256 authorizes consignation alone, without need of prior Factual Antecedents
tender of payment, where the ground for consignation is that the creditor
is unknown, or does not appear at the place of payment; or is incapacitated In 1992, respondent Constancia Luna (Constancia), as buyer, entered into
to receive the payment at the time it is due; or when, without just cause, 5
a Contract to Sell with Bliss Development Corporation (Bliss) involving
he refuses to give a receipt; or when two or more persons claim the same a house and lot identified as Lot 19, Block 26 of New Capitol Estates in
right to collect; or when the title of the obligation has been lost. Diliman, Quezon City. Barely a year after, Constancia, this time as the
6
Consignation is necessarily judicial; hence, jurisdiction lies with the RTC, seller, entered into another Contract to Sell with petitioner Lourdes
not with the HLURB. Bonrostro (Lourdes) concerning the same property under the following
terms and conditions:
On the question of jurisdiction, petitioners’ case should be tried in the
Puerto Princesa RTC, and not the HLURB. Consignation is necessarily 1. The stipulated price of ₱1,250,000.00 shall be paid by the VENDEE to
26 the VENDOR in the following manner:
judicial, as the Civil Code itself provides that consignation shall be
made by depositing the thing or things due at the disposal of judicial (a) ₱200,000.00 upon signing x x x the Contract To Sell,
authority, thus:
(b) ₱300,000.00 payable on or before April 30, 1993,
Art. 1258. Consignation shall be made by depositing the things due at the
disposal of judicial authority, before whom the tender of payment shall be (c) ₱330,000.00 payable on or before July 31, 1993,
proved, in a proper case, and the announcement of the consignation in
other cases. (d) ₱417,000.00 payable to the New Capitol Estate, for 15 years at
₱6,867.12 a month,
The consignation having been made, the interested parties shall also be
notified thereof. (Emphasis and underscoring supplied) 2. x x x In the event the VENDEE fails to pay the second installment on
time, the VENDEE will pay starting May 1, 1993 a 2% interest on the
The above provision clearly precludes consignation in venues other than ₱300,000.00 monthly. Likewise, in the event the VENDEE fails to pay
the courts. Elsewhere, what may be made is a valid tender of payment,
1âwphi1
the amount of ₱630,000.00 on the stipulated time, this CONTRACT TO
but not consignation. The two, however, are to be distinguished. SELL shall likewise be deemed cancelled and rescinded and x x x 5% of
the total contract price of ₱1,250,000.00 shall be deemed forfeited in
Tender of payment must be distinguished from consignation. Tender is favor of the VENDOR. Unpaid monthly amortization shall likewise be
the antecedent of consignation, that is, an act preparatory to the 7
consignation, which is the principal, and from which are derived the deducted from the initial down payment in favor of the VENDOR.
immediate consequences which the debtor desires or seeks to obtain.
Immediately after the execution of the said second contract, the spouses
Tender of payment may be extrajudicial, while consignation is necessarily Bonrostro took possession of the property. However, except for the
judicial, and the priority of the first is the attempt to make a private ₱200,000.00 down payment, Lourdes failed to pay any of the stipulated
settlement before proceeding to the solemnities of consignation. (8
27 subsequent amortization payments.
Manresa 325).
Ruling of the Regional Trial Court
While it may be true that petitioners’ claim relates to the terms and
conditions of the sale of AFPMBAI’s subdivision lot, this is On January 11, 1994, Constancia and her husband, respondent Juan Luna
8
overshadowed by the fact that since the Complaint in Civil Case No. 3812 (spouses Luna), filed before the RTC a Complaint for Rescission of
pleads a case for consignation, the HLURB is without jurisdiction to try Contract and Damages against the spouses Bonrostro praying for the
it, as such case may only be tried by the regular courts. rescission of the contract, delivery of possession of the subject property,
payment by the latter of their unpaid obligation, and awards of actual,
WHEREFORE, premises considered, the Petition is GRANTED. The
moral and exemplary damages, litigation expenses and attorney’s fees.
September 29, 2005 Decision and January 12, 2006 Resolution of the
Court of Appeals in CA-G.R. SP No. 84446 are ANNULLED and SET 9
In their Answer with Compulsory Counterclaim, the spouses Bonrostro
ASIDE. The October 16, 2003 and March 19, 2004 Orders of the Regional
averred that they were willing to pay their total balance of ₱630,000.00
Trial Court of Puerto Princesa City, Branch 47, are REINSTATED, and
to the spouses Luna after they sought from them a 60-day extension to
the case is REMANDED to the said court for continuation of the 10
proceedings. pay the same. However, during the time that they were ready to pay the
said amount in the last week of October 1993, Constancia and her lawyer,
SO ORDERED. Atty. Arlene Carbon (Atty. Carbon), did not show up at their rendezvous.
11
On November 24, 1993, Lourdes sent Atty. Carbon a letter expressing
her desire to pay the balance, but received no response from the latter.
Claiming that they are still willing to settle their obligation, the spouses
Bonrostro prayed that the court fix the period within which they can pay
the spouses Luna.
The spouses Bonrostro likewise belied that they were not paying the
monthly amortization to New Capitol Estates and asserted that on
November 18, 1993, they paid Bliss, the developer of New Capitol

Estates, the amount of ₱46,303.44. Later during trial, Lourdes testified not provide for interest in case of default in payment of the sum of
that Constancia instructed Bliss not to accept amortization payments from ₱330,000.00 to Constancia and the monthly amortizations to BLISS.
12
anyone as evidenced by her March 4, 1993 letter to Bliss. Considering that Lourdes had incurred x x x delay in the performance of
13 her obligations, she should pay (i) interest at the rate of 2% per month on
On April 4, 1997, the RTC rendered its Decision focusing on the sole the sum of ₱300,000.00 from May 1, 1993 until fully paid and (ii) interest
issue of whether the spouses Bonrostro’s delay in their payment of the at the legal rate on the amounts of ₱330,000.00 and ₱214,492.62 from
installments constitutes a substantial breach of their obligation under the the date of default (August 1, 1993 and April 4, 1997 date of the appealed
contract warranting rescission. The RTC ruled that the delay could not be 21
considered a substantial breach considering that Lourdes (1) requested for decision, respectively) until the same are fully paid x x x
an extension within which to pay; (2) was willing and ready to pay as Hence, the dispositive portion of the said Decision:
early as the last week of October 1993 and even wrote Atty. Carbon about
this on November 24, 1993; (3) gave Constancia a down payment of WHEREFORE, the appealed decision is AFFIRMED with the
₱200,000.00; and, (4) made payment to Bliss. MODIFICATIONS that paragraphs 2, 3, and 4 of its dispositive portion
shall now read:
The dispositive portion of the said Decision reads:
2.) Ordering the defendants to pay plaintiffs the sum of ₱300,000.00 plus
WHEREFORE, in view of the foregoing, judgment is hereby rendered as interest thereon at the rate of 2% per month from May 1, 1993 until fully
follows: paid;
1.) Declaring the Contract to Sell executed by the plaintiff Constancia and 3.) Ordering the defendants to pay plaintiffs the sum of ₱330,000.00 plus
defendant Lourdes with respect to the house and lot located at Blk. 26, interest thereon at the legal rate from August 1, 1993 until fully paid; and
Lot 19, New Capitol Estates, Diliman, Quezon City to be in force and
effect. And that Lourdes Bonrostro must remain in the possession of the 4.) Ordering the defendants to reimburse plaintiffs the sum of
premises. ₱214,492.62, which plaintiffs paid to Bliss Development Corporation,
plus interest thereon at the legal rate from filing of the complaint until
2.) Ordering the defendants to pay plaintiffs within 60 days from receipt fully reimbursed.
of this decision the sum of ₱300,000.00 plus an interest of 2% per month
from April 1993 to November 1993. 22
SO ORDERED.
3.) Ordering the defendants to pay plaintiffs within sixty (60) days from The spouses Luna no longer assailed the ruling. On the other hand, the
receipt of this decision the sum of ₱330,000.00 plus an interest of 2% per spouses Bonrostro filed a Partial Motion for
month from July 1993 to November 1993. 23
Reconsideration questioning the above-mentioned modifications. The
4.) Ordering the defendants to reimburse plaintiffs the sum of CA, however, denied for lack of merit the said motion in a
₱214,492.62 which plaintiffs paid to Bliss Development Corporation. 24
Resolution dated April 17, 2006.
No pronouncement as to Cost. Hence, this Petition for Review on Certiorari.
14
SO ORDERED. Issue
15 The basic issue in this case is whether the CA correctly modified the RTC
As their Motion for Reconsideration was likewise denied in an
16 17 Decision with respect to interests.
Order dated July 15, 1997, the spouses Luna appealed to the CA.
The Parties’ Arguments
Ruling of the Court of Appeals
As may be recalled, the RTC under paragraphs 2 and 3 of the dispositive
18
In its Decision of April 15, 2005, the CA concluded that since the portion of its Decision ordered the spouses Bonrostro to pay the spouses
contract entered into by and between the parties is a Contract to Sell, Luna the sums of ₱300,000.00 plus interest of 2% per month from April
rescission is not the proper remedy. Moreover, the subject contract being 1993 to November 1993 and ₱330,000.00 plus interest of 2% per month
specifically a contract to sell a real property on installment basis, it is from July 1993 to November 1993, respectively. The CA modified these
19
governed by Republic Act No. 6552 or the Maceda Law, Section 4 of by reckoning the payment of the 2% interest on the ₱300,000.00 from
which states: May 1, 1993 until fully paid and by imposing interest at the legal rate on
the ₱330,000.00 reckoned from August 1, 1993 until fully paid.
Sec. 4. In case where less than two years of installment were paid, the
seller shall give the buyer a grace period of not less than sixty days from The spouses Bonrostro harp on the factual finding of the RTC, as affirmed
the date the installment became due. by the CA, that Lourdes was willing and ready to pay her obligation as
evidenced by her November 24, 1993 letter to Atty. Carbon. They also
If the buyer fails to pay the installments due at the expiration of the grace assert that the sending of the said letter constitutes a valid tender of
period, the seller may cancel the contract after thirty days from receipt by payment on their part. Hence, they argue that they should not be assessed
the buyer of the notice of cancellation or the demand for rescission of the any interest subsequent to the date of the said letter. Neither should they
contract by a notarial act. (Emphases supplied) be ordered to pay interest on the amount of ₱214,492.62 which covers the
amortizations paid by the spouses Luna to Bliss. They point out that it
The CA held that while the spouses Luna sent the spouses Bonrostro was Constancia who prevented them from fulfilling their obligation to pay
20
letters rescinding the contract for non-payment of the sum of the amortizations when she instructed Bliss not to accept payment from
₱630,000.00, the same could not be considered as valid and effective them.
25
cancellation under the Maceda Law since they were made within the 60-
day grace period and were not notarized. The CA concluded that there The spouses Luna, on the other hand, aver that the November 24, 1993
being no cancellation effected in accordance with the procedure letter of Lourdes is not equivalent to tender of payment since the mere
prescribed by law, the contract therefore remains valid and subsisting. sending of a letter expressing the intention to pay, without the
accompanying payment, cannot be considered a valid tender of payment.
The CA also affirmed the RTC’s finding that Lourdes was ready to pay Also, if the spouses Bonrostro were really willing and ready to pay at that
her obligation on November 24, 1993. time and assuming that the spouses Luna indeed refused to accept
However, the CA modified the RTC Decision with respect to interest, viz: payment, the former should have resorted to consignation. Anent the
payment of amortization, the spouses Luna explain that under the parties’
Nevertheless, there is a need to modify the appealed decision insofar as Contract to Sell, Lourdes was to assume Constancia’s balance to Bliss by
(i) the interest imposed on the sum of ₱300,000.00 is only for the period paying the monthly amortization in order to avoid the cancellation of the
April 1993 to November 1993; (ii) the interest imposed on the sum of 26
earlier Contract to Sell entered into by Constancia with Bliss. However,
₱330,000.00 is 2% per month and is only for the period July 1993 to since Lourdes was remiss in paying the same, the spouses Luna were
November 1993; (iii) it does not impose interest on the amount of constrained to pay the amortization. They thus assert that reimbursement
₱214,492.62 which was paid by Constancia to BLISS in behalf of to them of the said amount with interest is proper considering that by
Lourdes x x x reason of such payment, the spouses Bonrostro were spared from the
The rule is that ‘no interest shall be due unless it has been expressly interests and penalties which would have been imposed by Bliss if the
stipulated in writing’ (Art. 1956, Civil Code). However, the contract does amortizations remained unpaid.
Our Ruling

The Petition lacks merit. When a tender of payment is made in such a form that the creditor could
have immediately realized payment if he had accepted the tender,
The spouses Bonrostro’s reliance on the RTC’s factual finding that followed by a prompt attempt of the debtor to deposit the means of
Lourdes was willing and ready to pay on November 24, 1993 is payment in court by way of consignation, the accrual of interest on the
misplaced. obligation will be suspended from the date of such tender. But when the
As mentioned, the RTC in resolving the Complaint focused on the sole tender of payment is not accompanied by the means of payment, and the
issue of whether the failure of spouses Bonrostro to pay the installments debtor did not take any immediate step to make a consignation, then
36
of ₱300,000.00 on April 30, 1993 and ₱330,000.00 on July 31, 1993 is a interest is not suspended from the time of such tender. x x x x (Emphasis
substantial breach of their obligation under the contract as to warrant the supplied)
27
rescission of the same. The said court ratiocinated, viz: Here, the subject letter merely states Lourdes’ willingness and readiness
After careful evaluation of the evidence testimonial and documentary, the to pay but it was not accompanied by payment. She claimed that she made
Court believes that the defendants’ delay in the payment of the two numerous telephone calls to Atty. Carbon reminding the latter to collect
installments is not so substantial as to warrant rescission of contract. her payment, but, neither said lawyer nor Constancia came to collect the
Although, the defendant failed to pay the two installments in due time, payment. After that, the spouses Bonrostro took no further steps to effect
she was able to communicate with the plaintiffs through letters requesting payment. They did not resort to consignation of the payment with the
for an extension of two months within which to pay the installments. In proper court despite knowledge that under the contract, non-payment of
fact, on November 24, 1993 defendant informed Atty. Arlene Carbon that the installments on the agreed date would make them liable for interest
she was ready to pay the installments and the money is ready for pick-up. thereon. The spouses Bonrostro erroneously assumed that their notice to
However, plaintiff did not bother to get or pick-up the money without any pay would excuse them from paying interest. Their claimed tender of
valid reason. It would be very prejudicial on the part of the defendant if payment did not produce any effect whatsoever because it was not
the contract to sell be rescinded considering that she made a accompanied by actual payment or followed by consignation. Hence, it
downpayment of ₱200,000.00 and made partial amortization to the Bliss did not suspend the running of interest. The spouses Bonrostro are
Development Corporation. In fact, the defendant testified that she is therefore liable for interest on the subject installments from the date of
willing and ready to pay the balance including the interest on November default until full payment of the sums of ₱300,000.00 and ₱330,000.00.
24, 1993. The spouses Bonrostro are likewise liable for interest on the amount paid
The Court is of the opinion that the delay in the payment of the balance by the spouses Luna to Bliss as amortization.
of the purchase price of the house and lot is not so substantial as to warrant The spouses Bonrostro want to be relieved from paying interest on the
the rescission of the contract to sell. The question of whether a breach of amount of ₱214,492.62 which the spouses Luna paid to Bliss as
28
contract is substantial depends upon the attendant circumstance. x x x amortizations by asserting that they were prevented by the latter from
fulfilling such obligation. They invoke Art. 1186 of the Civil Code which
Clearly, the RTC arrived at the above-quoted conclusion based on its provides that "the condition shall be deemed fulfilled when the obligor
mistaken premise that rescission is applicable to the case. Hence, its voluntarily prevents its fulfillment."
determination of whether there was substantial breach. As may be
recalled, however, the CA, in its assailed Decision, found the contract However, the Court finds Art. 1186 inapplicable to this case. The said
between the parties as a contract to sell, specifically of a real property on provision explicitly speaks of a situation where it is the obligor who
installment basis, and as such categorically declared rescission to be not voluntarily prevents fulfillment of the condition. Here, Constancia is not
the proper remedy. This is considering that in a contract to sell, payment the obligor but the obligee. Moreover, even if this significant detail is to
of the price is a positive suspensive condition, failure of which is not a be ignored, the mere intention to prevent the happening of the condition
29 or the mere placing of ineffective obstacles to its compliance, without
breach of contract warranting rescission under Article 1191 of the Civil
Code but rather just an event that prevents the supposed seller from being actually preventing fulfillment is not sufficient for the application of Art.
30 37
bound to convey title to the supposed buyer. Also, and as correctly 1186. Two requisites must concur for its application, to wit: (1) intent
ruled by the CA, Article 1191 cannot be applied to sales of real property to prevent fulfillment of the condition; and, (2) actual prevention of
31 38
on installment since they are governed by the Maceda Law. compliance.
There being no breach to speak of in case of non-payment of the purchase In this case, while it is undisputed that Constancia indeed instructed Bliss
price in a contract to sell, as in this case, the RTC’s factual finding that on March 4, 1994 not to accept payment from anyone but her, there is
Lourdes was willing and able to pay her obligation – a conclusion arrived nothing on record to show that Bliss heeded the instruction of Constancia
at in connection with the said court’s determination of whether the non- as to actually prevent the spouses Bonrostro from making payments to
payment of the purchase price in accordance with the terms of the contract Bliss. There is no showing that subsequent to the said letter, the spouses
was a substantial breach warranting rescission – therefore loses Bonrostro attempted to make payment to and was refused by Bliss.
significance. The spouses Bonrostro’s reliance on the said factual finding Neither was there a witness presented to prove that Bliss indeed gave
is thus misplaced. They cannot invoke their readiness and willingness to effect to the instruction contained in Constancia’s letter. While Bliss’
pay their obligation on November 24, 1993 as an excuse from being made Project Development Officer, Mr. Ariel Cordero, testified during trial,
liable for interest beyond the said date. nothing could be gathered from his testimony regarding this except for
39
the fact that Bliss received the said letter. In view of these, the spouses
The spouses Bonrostro are liable for interest on the installments due from Luna could not be said to have placed an effective obstacle as to actually
the date of default until fully paid. prevent the spouses Bonrostro from making amortization payments to
The spouses Bonrostro assert that Lourdes’ letter of November 24, 1993 Bliss.
amounts to tender of payment of the remaining balance amounting to On the other hand, there are telling circumstances which militate against
₱630,000.00. Accordingly, thenceforth, accrual of interest should be the spouses Bonrostro’s claimed keenness to comply with their obligation
suspended. to pay the monthly amortization. After the execution of the contract in
Tender of payment "is the manifestation by the debtor of a desire to January 1993, they immediately took possession of the property but failed
comply with or pay an obligation. If refused without just cause, the tender to make amortization payments. It was only after seven months or on
of payment will discharge the debtor of the obligation to pay but only after November 18, 1993 that they made payments to Bliss in the amount of
40
a valid consignation of the sum due shall have been made with the proper ₱46,303.44. Whether the same covers previous unpaid amortizations is
32 41
court." "Consignation is the deposit of the proper amount with a judicial also not clear as the receipt does not indicate the same and per
authority in accordance with rules prescribed by law, after the tender of 42
Statement of Account as of March 8, 1994 issued by Bliss, the unpaid
payment has been refused or because of circumstances which render monthly amortizations for February to November 1993 in the total
33
direct payment to the creditor impossible or inadvisable." amount of ₱78,271.69 remained outstanding. There was also no payment
made of the amortizations due on December 4, 1993 and January 4,
34 43
"Tender of payment, without more, produces no effect." "To have the 1994 before the filing of the Complaint on January 11, 1994.
effect of payment and the consequent extinguishment of the obligation to
pay, the law requires the companion acts of tender of payment and On the part of the spouses Luna, it is understandable that they paid the
35 amortizations due. The assumption of payment of the monthly
consignation." 1âwphi1
amortization to Bliss was made part of the obligations of the spouses

As to the effect of tender of payment on interest, noted civilist Arturo M. Bonrostro under their contract with the spouses Luna precisely to avoid
Tolentino explained as follows: the cancellation of the earlier contract entered into by Constancia with

Bliss. But as the spouses Bonrostro failed in this obligation, the spouses respondents Restituto and Mima Sabordo, subject to the condition that the
Luna were constrained to pay Bliss to avoid the adverse effect of such latter shall pay the balance of the sale price. On September 3, 1974,
failure. This act of the spouses Luna proved to be even more beneficial to respondents and the Suico and Flores spouses executed a supplemental
the spouses Bonrostro as the cancellation of the Contract to Sell between agreement whereby they affirmed that what was actually sold to
Constancia and Bliss would result in the cancellation of the subsequent respondents were Lots 512 and 513, while Lots 506 and 514 were given
Contract to Sell between Constancia and Lourdes. Also, the spouses to them as usufructuaries. DBP approved the sale of rights of the Suico
Bonrostro were relieved from paying the penalties that would have been and Flores spouses in favor of herein respondents. Subsequently,
imposed by Bliss if the monthly amortizations covered by the said respondents were able to repurchase the foreclosed properties of the Suico
44 and Flores spouses.
payment remained unpaid. The Statements of Account issued by Bliss
clearly state that each monthly amortization is due on or before the fourth On September 13, 1976, respondent Restituto Sabordo (Restituto) filed
day of every month and a penalty equivalent to 1/10th of 1% per day of with the then Court of First Instance of Negros Occidental an original
delay shall be imposed for all payments made after due date. That action for declaratory relief with damages and prayer for a writ of
translates to 3% monthly or 36% per annum rate of interest, three times preliminary injunction raising the issue of whether or not the Suico
higher than the 12% per annum rate of interest correctly imposed by the spouses have the right to recover from respondents Lots 506 and 514.
CA.
In its Decision dated December 17, 1986, the Regional Trial Court (RTC)
Hence, the resulting situation is that the spouses Luna are constrained to of San Carlos City, Negros Occidental, ruled in favor of the Suico spouses
part with their money while the spouses Bonrostro, despite being remiss directing that the latter have until August 31, 1987 within which to redeem
in their obligation to pay the monthly amortization, are relieved from or buy back from respondents Lots 506 and 514.
paying higher penalties at the expense of the former. This is aside from
the fact that the spouses Bonrostro are in continued possession of the On appeal, the CA, in its Decision3 in CA-G.R. CV No. 13785, dated
subject property and are enjoying the beneficial use thereof. Under the April 24, 1990, modified the RTC decision by giving the Suico spouses
circumstances and considering that the spouses Bonrostro are obviously until October 31, 1990 within which to exercise their option to purchase
in delay in complying with their obligation to pay the amortizations due or redeem the subject lots from respondents by paying the sum of
from February 1993 to January 1995 for which the spouses Luna paid ₱127,500.00. The dispositive portion of the CADecision reads as follows:
45
₱214,492.62, the CA correctly ordered the reimbursement to the latter
xxxx
of the said amount with interest. "Delay in the performance of an
obligation is looked upon with disfavor because, when a party to a For reasons given, judgment is hereby rendered modifying the dispositive
contract incurs delay, the other party who performs his part of the contract portion of [the] decision of the lower court to read:
46
suffers damages thereby." As discussed, the spouses Luna obviously
1) The defendants-appellees are granted up to October 31, 1990 within
suffered damages brought about by the failure of the spouses Bonrostro which toexercise their option to purchase from the plaintiff-appellant
to comply with their obligation on time. "And, sans elaboration of the Restituto Sabordo and Mima Mahilum Lot No. 506, covered by Transfer
47
matter at hand, damages take the form of interest x x x." Certificate of Title No. T-102598 and Lot No. 514, covered by Transfer
Certificate of Title No. T-102599, both of Escalante Cadastre, Negros
Under Article 2209 of the Civil Code, "if the obligation consists in the Occidental by reimbursing or paying to the plaintiff the sum of ONE
payment of a sum of money, and the debtor incurs in delay, the indemnity HUNDRED TWENTY-SEVEN THOUSAND FIVE HUNDRED
for damages, there being no stipulation to the contrary, shall be the PESOS (₱127,500.00);
payment of the interest agreed upon, and in the absence of stipulation, the
legal interest x x x." There being no stipulation on interest in case of delay 2) Within said period, the defendants-appellees shall continue to have
in the payment of amortization, the CA thus correctly imposed interest at usufructuary rights on the coconut trees on Lots Nos. 506 and 514,
the legal rate which is now 12% per annum. Escalante Cadastre, Negros Occidental;
WHEREFORE, the Petition for Review on Certiorari is DENIED and the 3) The Writ of Preliminary Injunction dated August 12, 1977 shall be
assailed Decision dated April 15, 2005 and the Resolution dated April 17, effective untildefendants-appellees shall have exercised their option to
2006 of the Court of Appeals in CA-G.R. CV No. 56414 are AFFIRMED. purchase within said period by paying or reimbursing to the plaintiff-
appellant the aforesaid amount.
SO ORDERED.
No pronouncement as to costs.
Del Carmen v. Sabordo
G.R. No. 181723 August 11, 2014 SO ORDERED.4
ELIZABETH DEL CARMEN, Petitioner, In a Resolution5 dated February 13, 1991, the CA granted the Suico
vs. spouses an additional period of 90 days from notice within which to
SPOUSES RESTITUTO SABORDO and MIMA MAHILUM- exercise their option to purchase or redeem the disputed lots.
SABORDO, Respondents.
In the meantime, Toribio Suico (Toribio) died leaving his widow,
DECISION Eufrocina, and several others, includingherein petitioner, as legal heirs.
Later, they discovered that respondents mortgaged Lots 506 and 514 with
PERALTA, J.: Republic Planters Bank (RPB) as security for a loan which, subsequently,
This treats of the petition for review on certiorari assailing the became delinquent.
Decision1 and Resolution2 of the Court of Appeals (CA), dated May 25, Thereafter, claiming that theyare ready with the payment of ₱127,500.00,
2007 and January 24, 2008, respectively, in CA-G.R. CV No. 75013. but alleging that they cannot determine as to whom such payment shall be
The factual and procedural antecedents of the case are as follows: made, petitioner and her co-heirs filed a Complaint6 with the RTC of San
Carlos City, Negros Occidental seeking to compel herein respondents and
Sometime in 1961, the spouses Toribio and Eufrocina Suico (Suico RPB to interplead and litigate between themselves their respective
spouses), along with several business partners, entered into a business interests on the abovementioned sum of money. The Complaint also
1â wphi1
venture by establishing a rice and com mill at Mandaue City, Cebu. As prayed that respondents be directed to substitute Lots 506 and 514 with
part of their capital, they obtained a loan from the Development Bank of other real estate properties as collateral for their outstanding obligation
the Philippines (DBP), and to secure the said loan, four parcels of land with RPB and that the latter be ordered toaccept the substitute collateral
owned by the Suico spouses, denominated as Lots 506, 512, 513 and 514, and release the mortgage on Lots 506 and 514. Upon filing of their
and another lot owned by their business partner, Juliana Del Rosario, were complaint, the heirs of Toribio deposited the amount of ₱127,500.00 with
mortgaged. Subsequently, the Suico spouses and their business partners the RTC of San Carlos City, Branch 59.
failed to pay their loan obligations forcing DBP to foreclose the mortgage.
After the Suico spouses and their partners failed to redeem the foreclosed Respondents filed their Answer7 with Counterclaim praying for the
properties, DBP consolidated its ownership over the same. Nonetheless, dismissal of the above Complaint on the grounds that (1) the action for
DBP later allowed the Suico spouses and Reginald and Beatriz Flores interpleader was improper since RPB isnot laying any claim on the sum
(Flores spouses), as substitutes for Juliana Del Rosario, to repurchase the of ₱127,500.00; (2) that the period withinwhich the complainants are
subject lots by way of a conditional sale for the sum of ₱240,571.00. The allowed to purchase Lots 506 and 514 had already expired; (3) that there
Suico and Flores spouses were able to pay the downpayment and the first was no valid consignation, and (4) that the case is barred by litis
monthly amortization, but no monthly installments were made thereafter. pendenciaor res judicata.
Threatened with the cancellation of the conditional sale, the Suico and
Flores spouses sold their rights over the said properties to herein

On the other hand, RPB filed a Motion to Dismiss the subject Complaint finds no cogent reason to depart from the findings of the CA and the RTC
on the ground that petitioner and her co-heirs had no valid cause of action that petitioner and her co-heirs failed to make a prior valid tender of
and that they have no primary legal right which is enforceable and binding payment to respondents.
against RPB.
It is settled that compliance with the requisites of a valid consignation is
On December 5, 2001, the RTC rendered judgment, dismissing the mandatory.20 Failure to comply strictly with any of the requisites will
Complaint of petitioner and her co-heirs for lack of merit.8 Respondents' render the consignation void. One of these requisites is a valid prior tender
Counterclaim was likewise dismissed. of payment.21
Petitioner and her co-heirs filed an appeal with the CA contending that Under Article 1256, the only instances where prior tender of payment is
the judicial deposit or consignation of the amount of ₱127,500.00 was excused are: (1) when the creditor is absent or unknown, or does not
valid and binding and produced the effect of payment of the purchase appear at the place of payment; (2) when the creditor is incapacitated to
price of the subject lots. receive the payment at the time it is due; (3) when, without just cause, the
creditor refuses to give a receipt; (4) when two or more persons claim the
In its assailed Decision, the CA denied the above appeal for lack of merit same right to collect; and (5) when the title of the obligation has been lost.
and affirmed the disputed RTC Decision. None of these instances are present in the instant case. Hence, the fact that
Petitioner and her co-heirs filed a Motion for Reconsideration,9 but it was the subject lots are in danger of being foreclosed does not excuse
likewise denied by the CA. petitioner and her co-heirs from tendering payment to respondents, as
directed by the court.
Hence, the present petition for review on certiorariwith a lone Assignment
of Error, to wit: WHEREFORE, the instant petition is DENIED. The Decision of the
Court of Appeals, dated May 25, 2007, and its Resolution dated January
THE COURT OF APPEALS ERRED IN AFFIRMING THE DECISION 24, 2008, both in CA-G.R. CV No. 75013, are AFFIRMED.
OF THE LOWER COURT WHICH HELD THAT THE JUDICIAL
DEPOSIT OF ₱127,500.00 MADE BY THE SUICOS WITH THE SO ORDERED.
CLERK OF COURT OF THE RTC, SAN CARLOS CITY, IN Philippine National Bank v. Chan
COMPLIANCE WITH THE FINAL AND EXECUTORY DECISION March 13, 2017
OF THE COURT OF APPEALS IN CA-G.R. CV-13785 WAS NOT
VALID.10 G.R. No. 206037
Petitioner's main contention is that the consignation which she and her co- PHILIPPINE NATIONAL BANK, Petitioner
heirs made was a judicial deposit based on a final judgment and, as such, vs
does not require compliance with the requirements of Articles 125611 and LILIBETH S. CHAN, Respondent
125712of the Civil Code.
DECISION
The petition lacks merit. At the outset, the Court quotes withapproval the
discussion of the CA regarding the definition and nature of consignation, DEL CASTILLO, J.:
to wit: … consignation [is] the act of depositing the thing due with the We resolve the Petition for Review on Certiorari under Rule 45 of the
court or judicial authorities whenever the creditor cannot accept or refuses Rules of Court, assailing the May 28, 2012 Decision1 and the February
to accept payment, and it generally requires a prior tender of payment. It 21, 2013 Resolution2 of the Court of Appeals (CA) in CA-G.R. SP No.
should be distinguished from tender of payment which is the 98112.
manifestation by the debtor to the creditor of his desire to comply with
his obligation, with the offer of immediate performance.Tender is the The Antecedent Facts
antecedent of consignation, thatis, an act preparatory to the consignation,
which is the principal, and from which are derived the immediate Respondent Lilibeth S. Chan owns a three-story commercial building
consequences which the debtor desires or seeks to obtain. Tender of located along A. Linao Street, Paco, Manila covered by Transfer
payment may be extrajudicial, while consignation is necessarily judicial, Certificate of Title (TCT) No. 208782.3 On May 10, 2000, she leased said
and the priority of the first is the attempt to make a private settlement commercial building to petitioner Philippine National Bank (PNB) for a
before proceeding to the solemnities of consignation. Tender and period of five years from December 15, 1999 to December 14, 2004, with
consignation, where validly made, produces the effect of payment and a monthly rental of ₱76,160.00.4 When the lease expired, PNB continued
extinguishes the obligation.13 to occupy the property on a month-to-month basis with a monthly rental
of ₱116,788.44. PNB vacated the premises on March 23, 2006.5
In the case of Arzaga v. Rumbaoa,14 which was cited by petitioner in
support of his contention, this Court ruled that the deposit made with the Meanwhile, on January 22, 2002, respondent obtained a ₱l,500,000.00
court by the plaintiff-appellee in the saidcase is considered a valid loan from PNB which was secured by a Real Estate Mortgage constituted
payment of the amount adjudged, even without a prior tender of payment over the leased property.6 In addition, respondent executed a Deed of
thereof to the defendants-appellants,because the plaintiff-appellee, upon Assignment7over the rental payments in favor of PNB.
making such deposit, expressly petitioned the court that the defendants- The amount of the respondent's loan was subsequently increased to
appellees be notified to receive the tender of payment.This Court held that ₱7,500,000.00. Consequently, PNB and the respondent executed an
while "[t]he deposit, by itself alone, may not have been sufficient, but "Amendment to the Real Estate Mortgage by Substitution of Collateral"
with the express terms of the petition, there was full and complete offer on March 31, 2004, where the mortgage over the leased property was
of payment made directly to defendants-appellants."15 In the instant case, released and substituted by a mortgage over a parcel of land located in
however, petitioner and her co-heirs, upon making the deposit with the Paco, Manila, covered by TCT No. 209631.8
RTC, did not ask the trial court that respondents be notified to receive the
amount that they have deposited. In fact, there was no tender of payment. On August 26, 2005, respondent filed a Complaint for Unlawful Detainer
Instead, what petitioner and her co-heirs prayed for is thatrespondents and before the Metropolitan Trial Court (MeTC), Branch 7, Manila against
RPB be directed to interplead with one another to determine their alleged PNB, alleging that the latter failed to pay its monthly rentals from October
respective rights over the consigned amount; that respondents be likewise 2004 until August 2005:9
directed to substitute the subject lots with other real properties as
collateral for their loan with RPB and that RPB be also directed to accept In its defense, PNB claimed that it applied the rental proceeds from
the substitute real properties as collateral for the said loan. October 2004 to January 15, 2005 as payment for respondent's
Nonetheless,the trial court correctly ruled that interpleader is not the outstanding loan which became due and demandable in October
proper remedy because RPB did notmake any claim whatsoever over the 2004.10 As for the monthly rentals from January 16, 2005 to February
amount consigned by petitioner and her co-heirs with the court. 2006, PNB explained that it received a demand letter11 from a certain
Lamberto Chua (Chua) who claimed to be the new owner of the leased
In the cases of Del Rosario v. Sandico16 and Salvante v. Cruz,17 likewise property and requested that the rentals be paid directly to him, reckoned
cited as authority by petitioner, this Court held that, for a consignation or from January 15, 2005 until PNB decides to vacate the premises or a new
deposit with the court of an amount due on a judgment to be considered lease contract with Chua is executed. PNB thus deposited the rentals in a
as payment, there must beprior tender to the judgment creditor who separate non-drawing savings account for the benefit of the rightful
refuses to accept it. The same principle was reiterated in the later case of party.12
Pabugais v. Sahijwani.18 As stated above, tender of payment involves a
positive and unconditional act by the obligor of offering legal tender The MeTC held a hearing on April 25, 2006 where the parties agreed to
currency as payment to the obligee for the former’s obligation and apply the rental proceeds from October 2004 to January 15, 2005 to the
demanding that the latter accept the same.19 In the instant case, the Court respondent's outstanding loan.13 PNB, too, consigned the amount of

₱l,348,643.92, representing ti1ie rentals due from January 16, 2005 to (2) From January 16, 2005 to October 31, 2006: New Principal + Interest
February 2006, with the court on May 31, 2006.14 + Penalties - Interest Earned by PN'B from the Savings Account =
Outstanding Obligation as of October 31, 2006
Ruling of the Metropolitan Trial Court
(3) Outstanding Obligation as of October 31, 2006 – ₱15,311,000.00 =
In its August 9, 2006 Decision,15 the MeTC ordered PNB to pay Deficiency38
respondent accrued rentals in the amount of ₱l,348,643.92,16 with interest
at 6% per annum from January 16, 2005 up to March 23, 2006, when PNB As regards the payment of legal interest, the CA noted that PNB merely
finally vacated the leased propeity.17 The MeTC likewise directed PNB opened a non-drawing savings account wherein it deposited the monthly
to pay attorney's fees in the amount of ₱20,000.00 and the cost of suit. rentals from January 16, 2005 to February 2006. Such deposit of the
rentals in a savings account, however, is not the consignation
PNB appealed the August 9, 2006 MeTC Decision to the Regional Trial contemplated by law. Thus, the CA found PNB liable to pay the 6% legal
Court (RTC), Branch 14, Manila, insisting that respondent is not entitled interest rate prescribed under Article 2209 of the Civil Code for having
to the disputed rental proceeds amounting to ₱l,348,643.92. According to defaulted in the payment of its monthly rentals to the respondent.39
PNB, the money should be applied to offset respondent's outstanding loan
pursuant to the Finally, the CA deleted the award of atton1ey's fees, pursuant to the
general rule that attorney's fees cannot be recovered as part of damages
Deed of Assignment the latter executed in its favor. PNB also argued that because of the public policy that no premium should be placed on the right
it is not liable to pay any interest on the lease rentals since it did not incur to litigate.40
any delay in the payment of rent.18
PNB filed a partial Motion for Reconsideration, but the CA denied the
While the appeal was pending before the RTC, PNB initiated foreclosure motion in its Resolution dated February 21, 2013. As a consequence, PNB
proceedings on the mortgaged property covered by TCT No. filed the present Petition for Review on Certiorari before the Court,
209631.19 The property was sold on October 31, 2006 for ₱l5,311,000.00 assailing the CA's May 28, 2012 Decision and February 21, 2013
to PNB as the highest bidder. Notably, the Certificate of Sale provides Resolution.
that respondent's indebtedness amounted to ₱ll,211,283.53 as of May 15,
2005, "exclusive of penalties, expenses, charges and the ten (10) percent Issues
attorney's fees, plus sheriff fees and other lawful expenses of foreclosure
and sale."20 In the present Petition, PNB raises the following issues for the Court's
resolution: first, whether PNB properly consigned the disputed rental
In light of this development, respondent filed a Memorandum21 before the payments in the amount of ₱l,348,643.92 with the Office of the Clerk of
RTC, claiming that PNB had no right to retain foe ₱l,348,643.92 Court of the MeTC of Manila;41 second, whether PNB incurred delay in
consigned with the court. She insisted that her loan was fully paid when the payment of rentals to the respondent, making it liable to pay legal
PNB bought the mortgaged property at ₱15,3ll,000.00.22 interest to the latter;42 and third, whether PNB is entitled to the disputed
rental proceeds in order to cover the alleged deficiency in payment of the
PNB filed a Rejoinder23 and argued that respondent's outstanding respondent's liability after the foreclosure proceedings.43
obligation as of October 31, 2006 was ₱18,016,300.71 while the bid price
was only ₱l5,31l,000.00. Thus, PNB claimed that it is entitled to a The Court's Ruling
deficiency claim amounting to ₱2,705,300.71 to which the rental
proceeds of ₱l,348,643.92 can be applied.24 We DENY the Petition for Review on Certiorari as we find no reversible
error committed by the CA in issuing its assailed Decision and
Ruling of the Regional Trial Court Resolution.
The RTC affirmed the MeTC ruling in its December 7, 2006 Decision.25 It "Consignation is the act of depositing the thing due with the court or
found that respondent's obligation to PNB "has already been paid, judicial authorities whenever the creditor cannot accept or refuses to
notwithstanding the belated claim of [the latter] that there remains a accept payment. [ I]t generally requires a prior tender of payment."44
deficiency."26 The RTC noted that the ₱11,211,283.53 amount of
indebtedness stated in the Notice of Extra-Judicial Sale27 dated August 9, Under Article 1256 of the Civil Code, consignation alone is sufficient
2006 as of May 15, 2006 plus penalties, expenses, charges, attorney's fees even without a prior tender of payment a) when the creditor is absent or
and expenses could have been easily covered by the ₱l5,31l,000.00 bid unknown or does not appear at the place of payment; b) when he is
price.28 incapacitated to receive the payment at the time it is due; c) when, without
just cause, he refuses to give a receipt; d) when two or more persons claim
In addition, the RTC held that PNB incurred delay "when despite demand, the same right to collect; and e) when the title of the obligation has been
it refused to pay and vacate the premises.29 " As such, the RTC ruled that lost.
the respondent is entitled to legal interest at 6% per annum and attorney's
fees for having been compelled to litigate to protect her interests.30 For consignation to be valid, the debtor must comply with the following
requirements under the law:
The respondent then moved for the issuance of a Writ of Execution which
was granted by the HTC in its December 18, 2006 Order.31 According to 1) there was a debt due;
the Sheriff's Report of Execution32 dated January 2, 2007, the amount of 2) valid prior tender of payment, unless the consignation was made
₱l,348,643.92, representing the monthly rentals from January 16, 2005 because of some legal cause provided in Article 1256;
up to March 23, 2006, was turned over to the respondent on December
20, 2006.33 3) previous notice of the consignation has been given to the persons
interested in the performance of the obligation;
PNB filed a motion for reconsideration of the December 7, 2006 Decision
and for the quashal of the Writ of Execution, but the RTC denied the 4) the amount or thing due was placed at the disposal of the court; and,
motion in its Order dated February 6, 2007.34 Following the denial, PNB
filed a Petition for Review under Rule 42 of the Rules of Court before the 5) after the consignation had been made, the persons interested were
CA, challenging the RTC's December 7, 2006 Decision and February 6, notified thereof:45
2007 Order. "Failure in any of the requirements is enough ground to render a
Ruling of the Court of Appeals consignation ineffective."46
The CA pointed out that PNB' s entitlement to the rental proceeds in the In the present case, the records show that: first, PNB had the obligation to
amount of ₱1,348,643.92 is dependent on whether there is a deficiency in pay respondent a monthly rental of ₱l16,788.44, amounting to
payment after the foreclosure sale.35 It, however, found no sufficient ₱l,348,643.92, from January 16, 2005 to March 23, 2006;47 second, PNB
evidence on record that the amount of respondent's liability as of October had the option to pay the monthly rentals to respondent or to apply the
31, 2006 is indeed ₱18,016,300.71, as PNB claims.36Consequently, the same as payment for respondent's loan with the bank, but PNB did
CA remanded the case the MeTC for the proper reception of evidence and neither;48 third, PNB instead opened a non-drawing savings account at its
determination, if any, of the deficiency on the foreclosure sale with the Paco Branch under Account No. 202- 565327-3, where it deposited the
following guidelines:37 subject monthly rentals, due to the claim of Chua of the same right to
collect the rent;49 and fourth, PNB consigned the amount of
(1) From October 2004 to January 15, 2005: Principal+ Interest+ Pl,348,643.92 with the Office of the Clerk of Court of the MeTC of
Penalties - Monthly Rentals (from October 2004 to January 15, 2005 by Manila on
virtue of the Deed of Assignment) =New Principal
May 31, 2006.50

Note that PNB's deposit of the subject monthly rentals in a non-drawing G.R. No. 202989
savings account is not the consignation contemplated by law, precisely
because it does not place the same at the disposal of the COMGLASCO CORPORATION/AGUILA GLASS, Petitioner,
court.51 Consignation is necessarily judicial; it is not allowed in venues vs.
other than the courts.52 Consequently, PNB's obligation to pay rent for the SANTOS CAR CHECK CENTER CORPORATION, Respondent.
period of January 16, 2005 up to March 23, 2006 remained subsisting, as DECISION
the deposit of the rentals cannot be considered to have the effect of
payment. REYES, J.:
It is important to point out that PNB's obligation to pay the subject On August 16, 2000, respondent Santos Car Check Center Corporation
monthly rentals had already fallen due and demandable before PNB (Santos), owner of a showroom located at 75 Delgado Street, in Iloilo
consigned the rental proceeds with the MeTC on May 31, 2006. Although City, leased out the said space to petitioner Comglasco Corporation
it is true that consignment has a retroactive effect, such payment is (Comglasco), an entity engaged in the sale, replacement and repair of
deemed to have been made only at the time of the deposit of the thing in automobile windshields, for a period of five years at a monthly rental of
court or when it was placed at the disposal of the judicial P60,000.00 for the first year, P66,000.00 on the second year, and
authority.53 Based on these premises, PNB's payment of the monthly P72,600.00 on the third through fifth years.1
rentals can only be considered to have been made not earlier than May
31, 2006. On October 4, 2001, Comglasco advised Santos through a letter2 that it
was pre-terminating their lease contract effective December 1, 2001.
Given its belated consignment of the rental proceeds in court, PNB Santos refused to accede to the pre-termination, reminding Comglasco
clearly defaulted in the payment of monthly rentals to the respondent for that their contract was for five years. On January 15, 2002, Comglasco
the period January 16, 2005 up to March 23, 2006, when it finally vacated vacated the leased premises and stopped paying any further rentals.
the leased property, As such, it is liable to pay interest in accordance with Santos sent several demand letters, which Comglasco completely ignored.
Article 2209 of the Civil Code. 1âwphi1 On September 15, 2003, Santos sent its final demand letter,3 which
Comglasco again ignored. On October 20, 2003, Santos filed suit for
Article 2209 provides that if the debtor incurs delay in the performance breach of contract.4
of an obligation consisting of the payment of a sum of money, he shall be
liable to pay the interest agreed upon, and in the absence of stipulation, Summons and a copy of the complaint, along with the annexes, were
the legal interest at 6% per annum. There being no stipulated interest in served on Comglasco on January 21, 2004, but it moved to dismiss the
this case, PNB is liable to pay legal interest at 6% per annum, from complaint for improper service. The Regional Trial Court (RTC) of Iloilo
January 16, 2005 up to May 30, 2006 City, Branch 37, dismissed the motion and ordered the summons served
anew. On June 28, 2004, Comglasco filed its Answer.5Santos moved for
As for the issue on PNB' s entitlement to the subject rental proceeds to a judgment on the pleadings, which the RTC granted. On August 18,
cover the deficiency in payment after the foreclosure sale of the 2004, the trial court rendered its judgment,6 the dispositive portion of
mortgaged property, we agree with the CA's finding that there is no which reads:
sufficient evidence on record to show that such a deficiency
exists.54 Unfortunately, the Statement of Account55 submitted by PNB is WHEREFORE, judgment is hereby rendered in favor of [Santos] and
not enough to prove this claim, considering that it is unsupported by any against [Comglasco]:
corroborating evidence. Besides, the copy of the document in our records,
both in the CA rollo and the Supreme Court rollo,56 consists of illegible 1.Ordering [Comglasco] to faithfully comply with [its] obligation under
pages. the Contract of Lease and pay its unpaid rentals starting January 16, 2002
to August 15, 2003 in the total amount of Php1,333,200.00, plus 12%
We likewise agree with the CA's conclusion that the RTC seriously erred interest per annum until fully paid;
when it categorically stated that the loan was folly paid by virtue of the
foreclosure sale without determining the extent of the respondent's 2.To pay [Santos]:
liability as of October 1, 2006, the date of the foreclosure a)Php200,000.00 as attorney’s fees;
sale.57 Specifically, the RTC held that:
b)[Php]50,000.00 as litigation expenses;
x x x In this regard, the amount of the indebtedness was clearly stated in
the Notice of Extra-Judicial Sale dated August 9, 2006 as ₱l1,211,283.53, c)[Php]400,000.00 as exemplary damages.
as of May 15, [2006], exclusive of penalties, expenses, charges, attorney's
fees and expenses. And since the property was sold to the bank as the 3.Costs of the suit.
winning bidder at ₱15,311,000,00, obviously, the difference could have SO ORDERED.7
easily covered the said penalties, etc."58
On February 14, 2005, Santos moved for execution pending Comglasco’s
This is clearly an error. It is settled that a mortgagee has the light to appeal, which the trial court granted on May 12, 2005. In its appeal,
recover the deficiency resulting from the difference between the amount Comglasco interposed the following issues for resolution:
obtained in the sale at public auction and the outstanding obligation of the
mortgagor at the time of the foreclosure proceedings.59 The RTC failed to 1.Whether or not judgment on the pleadings was properly invoked by the
consider that the amount of indebtedness indicated in the Notice of Extra- trial court as basis for rendering its decision;
Judicial Sale60 dated August 9, 2006 was computed by PNB as of May
15, 2006. Surely, the respondent's liability would have significantly 2.Whether or not material issues were raised in [Comglasco’s] Answer;
increased by the time the foreclosure sale was held on October 31, 2006.
3.Whether or not damages may be granted by the trial court without proof
It also appears that the RTC merely assumed that the bid price would and legal basis.8
cover the deficiency in payment, without actually making a determination In its Decision9 dated August 10, 2011, the Court of Appeals (CA)
of whether such a deficiency exists and how much it really is.
affirmed the judgment of the RTC but reduced the award of attorney’s
In these lights, we uphold the CA's ruling remanding the case to the MeTC fees to ?100,000.00 and deleted the award of litigation expenses and
for the proper reception of evidence and computation of respondent's total exemplary damages.
indebtedness as of October 31, 2006, in order to determine whether there
Petition for Review to the Supreme Court
exists a deficiency in payment as PNB insists.
In this petition, Comglasco raises the following issues:
WHEREFORE, we DENY the Petition for Review
on Certiorari and AFFIRM the Decision dated May 28, 2012 and the 1.Whether or not judgment on the pleadings was properly invoked by the
Resolution dated February 21, 2013 of the Court of Appeals in CA-G.R. trial court as basis for rendering its decision?
SP No. 98112.
2.Whether or not material issues were raised in [Comglasco’s] answer?
SO ORDERED.
3.Whether or not summary judgment or judgment on the pleadings is the
L OSS OF THING DUE /I MPOSSIBILITY OF PERFORMANCE proper remedy for [Santos] under the circumstances of the present case?
Comglasco Corporation/Aguila Glass v. Santos Car Check Center 4.Whether or not the amount deposited for advance rental and deposit
Corporation should be credited to [Comglasco’s] account?
March 25, 2015

5.Whether or not attorney’s fees may be granted by the trial court without Anent petitioner’s alleged poor financial condition, the same will neither
proof and legal basis?10 release petitioner from the binding effect of the contract of lease. As held
in Central Bank v. Court of Appeals, cited by private respondents, mere
Paragraph 15 of the parties’ lease contract11 permits pre-termination with pecuniary inability to fulfill an engagement does not discharge a
cause in the first three years and without cause after the third year. Citing contractual obligation, nor does it constitute a defense to an action for
business reverses which it ascribed to the 1997 Asian financial crisis, specific performance.14
Comglasco insists that under Article 1267 of the Civil Code it is exempted
from its obligation under the contract, because its business setback is the Relying on Article 1267 of the Civil Code to justify its decision to pre-
"cause" contemplated in their lease which authorized it to pre-terminate terminate its lease with Santos, Comglasco invokes the 1997 Asian
the same. Article 1267 provides: currency crisis as causing it much difficulty in meeting its obligations.
But in PNCC,15 the Court held that the payment of lease rentals does not
Art. 1267. When the service has become so difficult as to be manifestly involve a prestation "to do" envisaged in Articles 1266 and 1267 which
beyond the contemplation of the parties, the obligor may also be released has been rendered legally or physically impossible without the fault of the
therefrom, in whole or in part. obligor-lessor. Article 1267 speaks of a prestation involving service
Comglasco argues that it cannot be said to have admitted in its Answer which has been rendered so difficult by unforeseen subsequent events as
the material allegations of the complaint precisely because it invoked to be manifestly beyond the contemplation of the parties. To be sure, the
therein a valid cause for its decision to pre-terminate the lease before the Asian currency crisis befell the region from July 1997 and for sometime
lapse of three years; that therefore, in view of its pleaded "cause" for thereafter, but Comglasco cannot be permitted to blame its difficulties on
reneging on its rentals (the 1997 Asian financial crisis), the RTC should the said regional economic phenomenon because it entered into the
have ordered the reception of evidence for this purpose, after which a subject lease only on August 16, 2000, more than three years after it
summary judgment would then have been proper, not a judgment on the began, and by then Comglasco had known what business risks it assumed
pleadings. After all, Santos has claimed in its Motion for Summary when it opened a new shop in Iloilo City.
Judgment that Comglasco’s cited "cause" for pre-termination was This situation is no different from the Court’s finding in PNCC wherein
fictitious or a sham, whereas in truth the prevailing business climate PNCC cited the assassination of Senator Benigno Aquino Jr. (Senator
which ensued after the 1997 currency crisis resulted in great difficulty on Aquino) on August 21, 1983 and the ensuing national political and
its part to comply with the terms of the lease "as to be manifestly beyond economic crises as putting it in such a difficult business climate that it
the contemplation of the parties"; thus, Comglasco should be deemed should be deemed released from its lease contract. The Court held that the
released from the lease. political upheavals, turmoils, almost daily mass demonstrations,
Next, Comglasco insists that its advance rentals and deposit totaling unprecedented inflation, and peace and order deterioration which
?309,000.00 should be deducted from any sum awarded to Santos while followed Senator Aquino’s death were a matter of judicial notice, yet
it also insists that there is no factual and legal basis for the award of despite this business climate, PNCC knowingly entered into a lease with
damages. therein respondents on November 18, 1985, doing so with open eyes of
the deteriorating conditions of the country. The Court rules now, as in
Ruling of the Court PNCC, that there are no "absolutely exceptional changes of circumstances
that equity demands assistance for the debtor."16
The petition is denied.
As found by the CA, Comglasco’s Answer admitted the material
The first three issues being related will be discussed together. allegations in the complaint, to wit: a) that Santos holds absolute title to a
Comglasco maintains that the RTC was wrong to rule that its answer to showroom space; b) that Comglasco leased the said showroom from
Santos’ complaint tendered no issue, or admitted the material allegations Santos; c) that after a little over a year, Comglasco pre-terminated the
therein; that the court should have heard it out on the reason it invoked to lease; d) that, disregarding Santos’ rejection of the pre-termination of their
justify its action to pre-terminate the parties’ lease; that therefore a lease, Comglasco vacated the leased premises on January 15, 2002; e) that
summary judgment would have been the proper recourse, after a hearing. Comglasco never denied the existence and validity of the parties’ lease
contract. Specifically, the CA noted that Paragraph 2 of the Answer
In Philippine National Construction Corporation v. CA12 (PNCC), which admitted the allegations in Paragraphs 2, 3 and 4 of the complaint that the
also involves the termination of a lease of property by the lessee "due to lease was for five years, starting on August 16, 2000 and to expire on
financial, as well as technical, difficulties,"13 the Court ruled: August 15, 2005, at a monthly rental of ?60,000.00 on the first year,
?66,000.00 on the second year, and ?72,600.00 on the third up to the fifth
The obligation to pay rentals or deliver the thing in a contract of lease year.
falls within the prestation "to give"; hence, it is not covered within the
scope of Article 1266. At any rate, the unforeseen event and causes The RTC acted correctly in resorting to Section 1 of Rule 34, on Judgment
mentioned by petitioner are not the legal or physical impossibilities on the Pleadings, to cut short a needless trial. This Court agrees with the
1âwphi1
contemplated in said article. Besides, petitioner failed to state specifically CA that Comglasco cannot cite Article 1267 of the Civil Code, and that it
the circumstances brought about by "the abrupt change in the political must be deemed to have admitted the material allegations in the
climate in the country" except the alleged prevailing uncertainties in complaint. Section 1, Rule 34 reads:
government policies on infrastructure projects. 1âwphi1
Sec. 1. Judgment on the pleadings. - Where an answer fails to tender an

The principle of rebus sic stantibus neither fits in with the facts of the issue, or otherwise admits the material allegations of the adverse party’s
case. Under this theory, the parties stipulate in the light of certain pleading, the court may, on motion of that party, direct judgment on such
prevailing conditions, and once these conditions cease to exist, the pleading. However, in actions for declaration of nullity or annulment of
contract also ceases to exist. This theory is said to be the basis of Article marriage or for legal separation, the material facts alleged in the
1267 of the Civil Code, which provides: complaint shall always be proved.
Art. 1267. When the service has become so difficult as to be manifestly A judgment on the pleadings is a judgment on the facts as pleaded,17 and
beyond the contemplation of the parties, the obligor may also be released is based exclusively upon the allegations appearing in the pleadings of the
therefrom, in whole or in part. parties and the accompanying annexes.18 It is settled that the trial court
has the discretion to grant a motion for judgment on the pleadings filed
This article, which enunciates the doctrine of unforeseen events, is not, by a party if there is no controverted matter in the case after the answer is
however, an absolute application of the principle of rebus sic stantibus, filed.19 A genuine issue of fact is that which requires the presentation of
which would endanger the security of contractual relations. The parties to evidence, as distinguished from a sham, fictitious, contrived or false
the contract must be presumed to have assumed the risks of unfavorable issue.20 Come to think of it, under Rule 35, on Summary Judgments,
developments. It is therefore only in absolutely exceptional changes of Comglasco had recourse to move for summary judgment, wherein it could
circumstances that equity demands assistance for the debtor. have adduced supporting evidence to justify its action on the parties' lease,
In this case, petitioner wants this Court to believe that the abrupt change but it did not do so. Section 2 of Rule 35 provides:
in the political climate of the country after the EDSA Revolution and its Sec. 2. Summary judgment for defending party. - A party against whom a
poor financial condition "rendered the performance of the lease contract claim, counterclaim, or cross-claim is asserted or a declaratory relief is
impractical and inimical to the corporate survival of the petitioner." sought may, at any time, move with supporting affidavits, depositions or
This Court cannot subscribe to this argument. As pointed out by private admissions for a summary judgment in his favor as to all or any part
respondents: thereof.
xxxx Concerning, now, whether Comglasco's alleged rental deposit and

advance rentals of P309,000.00 should be credited to Comglasco's

account, let it suffice to state that it never raised this matter in its answer During pre-trial, the following transpired:
to the complaint, nor in its appeal to the CA. Certainly, it cannot do so
now. 1. Parties admitted that on September 9, 1993, private complainant
Consolacion Alagao borrowed cash from the accused in the amount of
Finally, as to whether attorney's fees may be recovered by Santos, Article ₱10,000, guaranteed by a titled land, owned by her daughter Evelyn
2208(2) of the Civil Code justifies the award thereof, in the absence of Alagao;
stipulation, where the defendant's act or omission has compelled the
plaintiff to incur expenses to protect his interest. The pre-termination of 2. Parties also agreed that the aforesaid debt was fully paid with corn
the lease by Comglasco was not due to any fault of Santos, and Comglasco grains by the private complainant in February, 1994;
completely ignored all four demands of Santos to pay the rentals due from 3. Parties also agreed that subsequent to this transaction, private
January 16, 2002 to August 15, 2003, thereby compelling Santos to sue complainant’s daughter Evelyn Alagao executed a Contract of Loan
to obtain relief. It is true that the policy of the Court is that no premium secured by Real Estate Mortgage now marked Exh. "1" for the defense,
should be placed on the right to litigate,21 but it is also true that attorney's to secure the payment of ₱40,000.00 which private complainant admitted
fees are in the nature of actual damages, the reason being that litigation to have received ₱51,730.00 in the form of fertilizers and cash advances
costs money.22 But the Court agrees with the CA that the lesser amount [:]
of Pl 00,000.00 it awarded to Santos instead of P200,000.00 adjudged by
the RTC, is more reasonable.
Fertilizers & Pioneer corn seeds ₱17,910.00
WHEREFORE, premises considered, the petition is DENIED for lack (Exh. "A")
of merit.
SO ORDERED. 110 bags chicken dung 6,600.00
C OMPENSATION (Chicken manure)

Soriano v. People
G.R. No. 181692 August 14, 2013 Hauling expense of th[e]se materials 1,570.00
ADELAIDA SORIANO, PETITIONER,
vs. Additional fertilizers 9,550.00
PEOPLE OF THE PHILIPPINES, RESPONDENT.
(As shown in Exh. "B")
DECISION
VILLARAMA, JR., J.: and several cash advances as follows:
Before this Court is a petition for review on certiorari assailing the May
1 2 2-7-94 ₱4,000.00
19, 2005 Decision and January 11, 2008 Resolution of the Court of
Appeals (CA) in CA-G.R. CR No. 23108 insofar as it ordered petitioner
to pay ₱74,807 plus interest to private complainant Consolacion R. 2-14-94 2,000.00
Alagao.
Petitioner Adelaida Soriano was charged with the crime of estafa on 3-3-94 2,000.00
January 30, 1995 under an Information which reads as follows:
That on September 9, 1994, at more or less 2:00 o'clock [sic] in the No date 100.00
afternoon, and days thereafter, at Piaping Puti, Macabalan, Cagayan de
Oro City, Philippines, and within the jurisdiction of this Honorable Court, 5-1-94 2,000.00
the above-named accused, with intent to defraud and cause damage and
prejudice by means of deceit, and false pretenses or fraudulent acts
executed prior to or simultaneously with the commission of the fraud, did 5-6-94 2,000.00
then and there wil[l]fully, unlawfully and feloniously represent and
pretend to the offended party, Consolacion Alagao y Regala, who was
7-19-94 500.00
then canvassing for buyers of her one (1) truck load of corn grits
containing 398 sacks, that she (accused Adelaida Soriano) was engaged
in the business of buying corn grits, among others from the public under 7-20-94 500.00
the business style of A & R Soriano Trading, paying it in cash, with place
of business located at Piaping Puti, Macab[a]lan, this City; that due to
(but which accused claimed [to be]
accused[’s] representation, said offended party was persuaded and
convinced to sell her own corn grits to the former, which cereals came all ₱1,500.00)
the way from Old Nungnungan, Don Carlos, Bukidnon; that after
unloading said 398 sacks of corn grains in the establishment of said
Adelaida Soriano, said accused did not pay offended party for the said 9-10-94 3,000.00 16,100.00
goods delivered, but instead she let offended party to sign a Cash
Voucher, making it appear thereat that offended party has received the Total ₱51,730.00
sum of ₱85,607.00, when in truth and in fact accused has not paid the
same; that inspite of that misrepresented entries in the Cash Voucher
above-cited, the accused further directed to collect the same amount from
a neighbor of the offended party in OId.Nungnungan, above-mentioned; 4. That private complainant claimed that x x x on August 17, 1994, she
that perplexed about the actions of Mrs. Adelaida Soriano, offended party delivered a 10-wheeler corn grains (sic) to the accused which parties
proceeded to demand payment from her but the accused failed to pay her agreed [was] worth more than ₱80,000.00. And the private complainant
monetary obligation [to] the offended party as the accused and her claimed having paid the accused partially in the amount of ₱8,060.00
business establishment disappeared from Piaping Puti, Macabalan, this which accused denied. The latter claimed that no payment was ever made
City after the incident, and transferred to an unknown location; that she because the corn grains were owned by private complainant and another
couId.not also get back the said 398 sacks of corn grits anymore because person and that private complainant and companion were paid of the
the accused had disposed of it already; thus misapplying, worth of the delivery;
misappropriating and converting the said sum of ₱85,607.00 the value of
398 sacks of corn grits, to her own gain and benefit, to the damage and 5. Parties agreed that on September 9, 1994 at 2:00 o’clock (sic) in the
prejudice of the said offended party, in the aforestated sum of ₱85,607.00, afternoon[,] there was a delivery by the private complainant with her
Philippine currency. companions, corn grains worth ₱85,607.00. Private complainant claimed
that she was only paid ₱3,000.00 and which accused claimed that she did
Contrary to and in violation to Article 315, par. 2(a), of the Revised Penal not pay her because that delivery was in payment of her account and the
Code, as amended.
3 ₱3,000.00 which she received was advanced payment of whatever
remaining after paying her previous accounts to the accused;
4
When arraigned, petitioner pleaded not guilty.

6. Parties agreed that there was a Cash Voucher of the amount of corn the ₱3,000 petitioner had paid Alagao and the ₱7,800 which the CA
grains delivered to the accused on September 9, 1994, now marked [as] considered as the value of the 64 sacks of corn grains which Alagao
5
Exh. "C." (Emphasis and underscoring supplied.) intended as partial payment for the ₱40,000 loan, thus leaving the balance
of ₱74,807.
Trial on the merits ensued.
Unsatisfied, petitioner is now before this Court questioning her civil
Based on the evidence presented and what transpired during the pre-trial, liability. She assigns to the CA the following errors:
the facts are:
1)
On February 18, 1994, Evelyn Alagao (Evelyn), daughter of private
complainant Consolacion Alagao (Alagao), as borrower-mortgagor, The Court of Appeals committed error in the computation of petitioner’s
executed a "Contract of Loan Secured by Real Estate Mortgage with civil liability as it failed to apply correctly the principle of set-off or
Special Power to Sell Mortgage Property without Judicial compensation.
6
Proceedings" in favor of petitioner as lender-mortgagee. The instrument 2)
provides for a ₱40,000 loan secured by a parcel of land covered by
7 The Court of Appeals, in applying set-off or compensation, erroneously
Original Certificate of Title No. P-6254, located in OId.Nongnongan,
placed private complainant’s indebtedness to petitioner at ₱40,000.00
Don Carlos, Bukidnon, registered in Evelyn’s name. It likewise provides instead of ₱51,730.00 as found by it and as stipulated during pre-trial.
that the loan was to be paid two years from the date of execution of the
contract, or on February 18, 1996, and that Evelyn agrees to give 3)
petitioner ¼ of every harvest from her cornland until the full amount of
the loan has been paid, starting from the first harvest. Based on Alagao’s The Court of [A]ppeals omitted to off-set the amount equivalent to ¼
8 share of the harvest (or ₱57,200.00) against petitioner’s indebtedness to
testimony, the first harvest was made only in September 1994. Petitioner
private complainant in the amount of ₱85,607.00 despite admission by
on the other hand claims that from the time the loan was obtained until 15
September 1994, there were already four harvests. During pre-trial, it was private complainant.
admitted by Alagao that she did not only receive ₱40,000 as provided in Petitioner argues that while the CA found her indebted to Alagao in the
the contract of loan but ₱51,730 in the form of fertilizers and cash sum of ₱85,607, it only offset ₱40,000 instead of ₱51,730 which was the
9
advances. amount stipulated during pre-trial. Petitioner contends that the
compensation should be as follows:
On September 9, 1994, Alagao and some companions delivered 398 sacks
of corn grains to petitioner. Petitioner prepared a voucher indicating that
Alagao had received the amount of ₱85,607 as full payment for the 398 Petitioner’s indebtedness: [Alagao
sacks of corn grains. Alagao signed said voucher even if she only received
10
₱3,000. According to Alagao, 64 of the 398 sacks will serve as partial ₱85,607.00 (value of 398 sacks) ₱51,73
payment of her ₱40,000 loan with petitioner while the remaining balance
will come from the ₱85,607 cash she was supposed to receive as payment
11 - 3,000.00 (cash payment) - 7,800
for the corn grains delivered so she can redeem her daughter’s land title.
On March 16, 1999, the Regional Trial Court (RTC) of Misamis Oriental, ₱82,607.00 ₱43,93
12
Branch 40, rendered a decision finding petitioner guilty beyond
reasonable doubt of the crime of estafa. The fallo of the RTC decision - 7,800.00 (value of 64 sacks)
reads:
₱74,807.00 (as correctly found by
WHEREFORE, IN VIEW OF THE FOREGOING PREMISES, accused
Adelaida Soriano is hereby found guilty beyond reasonable doubt of the the Court of Appeals)16
crime of Estafa as defined and penalized under Article 315, par. 2(a) of
the Revised Penal Code, and is hereby sentenced to suffer imprisonment
of Four (4) Years, Two (2) Months and One (1) day of Prision
Correccional, as minimum, to Thirteen (13) Years, Four (4) Months of Thus, deducting Alagao’s indebtedness of ₱43,930 from petitioner’s
Reclusion Temporal, as maximum and, is hereby further ordered to pay indebtedness amounting to ₱74,807, petitioner’s remaining indebtedness
the offended party in this case the amount of ₱85,607.00 representing the shouId.only be ₱30,877.
value of the 398 sacks of corn grains. Costs against the accused.
Petitioner likewise argues that the CA also failed to consider Alagao’s
13 obligation to deliver to her ¼ of every harvest. Petitioner claims that her
SO ORDERED.
¼ share in the harvest amounted to ₱57,200 for four harvests. Therefore,
Petitioner’s conviction, however, was set aside by the CA in the assailed applying the principle of set off, it is Alagao who is indebted to petitioner
decision. The CA disposed as follows: in the amount of ₱26,323 (₱57,200 minus ₱30,877).
WHEREFORE, premises considered, the assailed Decision of the Respondent on the other hand contends that the amount of loan extended
Regional Trial Court of Misamis Oriental, Branch 40, dated 16 March to Alagao was ₱40,000 and not ₱51,730 as claimed by petitioner.
1999 in Criminal Case No. 95-41 is REVERSED and SET ASIDE. Moreover, the entire value of the 398 sacks of corn grains shouId.not be
Appellant ADELAIDA SORIANO is ACQUITTED of the crime charged set off with Alagao’s loan since (1) the loan was not yet due and
on the ground of reasonable doubt. However, Appellant ADELAIDA demandable at the time of delivery of the 398 sacks of corn grains in
SORIANO is hereby ordered to pay private complainant September 1994; and (2) only 154 of the 398 sacks of corn grains belong
CONSOLACION R. ALAGAO the sum of seventy-four thousand, eight 17
to Alagao. Respondent also claims that ₱13,765.95 should be
hundred seven pesos (₱74,807.00) as payment for the remaining balance considered as the correct value of the 64 sacks intended by Alagao as
of the cash value of the 398 sacks of corn grains, plus, legal interest at the partial payment for the loan and not ₱7,800 as found by the CA.
rate of 12% per annum computed from 9 September 1994 until fully paid.
14
The petition is partly meritorious.
SO ORDERED.
Compensation is a mode of extinguishing to the concurrent amount, the
The CA ruled that the prosecution failed to establish that petitioner made debts of persons who in their own right are creditors and debtors of each
false pretenses, fraudulent acts or fraudulent means to induce Alagao to other. The object of compensation is the prevention of unnecessary suits
deliver to her the 398 sacks of corn grains. In fact, in Alagao’s testimony, and payments through the mutual extinction by operation of law of
she admitted that she delivered the corn grains to petitioner because the 18
concurring debts. Article 1279 of the Civil Code provides for the
latter was demanding payment from her and she wanted to pay her requisites for compensation to take effect:
obligation of ₱40,000 to petitioner so that she couId.get back the title of
her daughter’s mortgaged property and the balance of the total cash value ART. 1279. In order that compensation may be proper, it is necessary:
of the 398 sacks of corn. Thus, the CA heId. in the absence of deceit,
petitioner’s liability is only civil. (1) That each one of the obligors be bound principally, and that he be at
the same time a principal creditor of the other;
In determining petitioner’s civil liability, the CA deducted from ₱85,607
– the total value of the 398 sacks of corn grains delivered to petitioner –

(2) That both debts consist in a sum of money, or if the things due are With respect to the 114 share in the harvest due to petitioner as provided
consumable, they be of the same kind, and also of the same quality if the in the contract of loan, the same cannot be considered in the legal
latter has been stated; compensation of the debts of the parties since it does not consist in a sum
of money, said share being in the form of harvests. More importantly, it
(3) That the two debts be due; is not yet liquidated. There is still a dispute as to how many harvests were
(4) That they be liquidated and demandable; made from the time of the execution of contract of loan up to the time the
action was commenced against petitioner and even when the principal
(5) That over neither of them there be any retention or controversy, obligation became due in February 1996. Thus, the harvests due petitioner
commenced by third persons and communicated in due time to the debtor. is not capable of determination.
This Court rules that all the above requisites for compensation are present WHEREFORE, the May 19, 2005 Decision and January 11, 2008
in the instant case. Resolution of the Court of Appeals in CA-G.R. CR No. 23108 are hereby
AFFIRMED with MODIFICATION. Petitioner Adelaida Soriano is
First, petitioner and Alagao are debtors and creditors of each other. It is hereby ordered to pay ₱30,877 as payment for the remaining balance of
undisputable that petitioner and Alagao owe each other sums of money. the cash value of the 398 sacks of corn grains, plus legal interest at the
Petitioner owes ₱85,607 for the value of the corn grains delivered to her 21
rate of 6% per annum computed from finality of this Decision until its
by Alagao in September 1994 while Alagao owes petitioner ₱51,730 by
virtue of a loan extended by the latter in February 1994. full satisfaction.
Second, both debts consist in a sum of money. There is no issue as to the No pronouncement as to costs.
₱85,607 debt by petitioner that it consists a sum of money. As to the SO ORDERED.
₱51,730 received by Alagao from petitioner, though what was extended
by petitioner consists of cash advances and fertilizers, there is no dispute Mondrago Personal Sales, Inc. v. Sola, Jr.
that said amount is payable in money. G.R. No. 174882 January 21, 2013
Third, both debts are due. Upon delivery of the 398 sacks to petitioner, MONDRAGON PERSONAL SALES, INC., Petitioner,
she was under the obligation to pay for the value thereof as buyer. As to vs.
Alagao’s debt, the contract of loan provided that it is payable in February VICTORIANO S. SOLA, JR., Respondent.
1996. Though it was not yet due in September 1994 when she delivered
the 398 sacks of corn grains to petitioner, it eventually became due at the DECISION
time of trial of the instant case. PERALTA, J.:
Fourth, both debts are liquidated and demandable. A debt is liquidated
1âwphi1
Before us is a petition for review on certiorari seeking to set aside the

when the amount is known or is determinable by inspection of the terms 1 2
19 Decision dated February 10, 2006 and the Resolution dated September
and conditions of relevant documents. There is no dispute that the value 6, 2006 issued by the Court of Appeals (CA) in CA-G.R. CV No. 71690.
of the 398 sacks of corn grains is ₱85,607. As to Alagao’s debt, we
disagree with respondent People that the loan amount is only ₱40,000 Petitioner Mondragon Personal Sales Inc., a company engaged in the
since during pre-trial, Alagao herself admitted that she did not only business of selling various consumer products through a network of sales
receive ₱40,000 but ₱51,730 in the form of cash advances and fertilizers 3
representatives, entered into a Contract of Services with respondent
from petitioner. It is well settled that an admission made in a stipulation Victoriano S. Sola, Jr. for a period of three years commencing on October
of facts at pre-trial by the parties is considered a judicial admission and, 2, 1994 up to October 1, 1997. Under the said contract, respondent, as
under the Rules of Court, requires no proof. Such admission may be service contractor, would provide service facilities, i.e., bodega cum
controverted only by a showing that it was made through a palpable office, to petitioner's products, sales force and customers in General
20
mistake or that no such admission was made. Santos City and as such, he was entitled to commission or service fee as
follows:
And lastly, neither of the debts are subject of a controversy commenced
by a third person. There are no third-party claims with respect to Alagao’s
MONTHLY SALES
₱51,730 loan. As to petitioner’s ₱85,607 debt representing the 398 sacks
of corn grains, Alagao claims that she is not the sole owner of all the 398 (net of vat)
sacks. This claim of Alagao, however, was never substantiated and a
perusal of the information for estafa shows that the subject corn grains are
all owned by her. Moreover, the alleged other owners have not ₱50,000.00 to 2,500,000.00
commenced any action to protect their claim over it. Thus, the ₱85, 607
debt cannot be considered subject of a controversy by a third person.
₱2,500,001.00 to 3,000.000.00
With the presence of all the requisites mentioned in Article 1279, legal
compensation took effect by operation of law as provided in Article 1290
₱3,000,001.00 to 3,500,000.00
of the Civil Code, to wit:
ART. 1290. When all the requisites mentioned in Article 1279 are present,
₱3,500,001.00 – UP
compensation takes effect by operation of law, and extinguishes both
debts to the concurrent amount, even though the creditors and debtors are
not aware of the compensation.
Thus, the computation of petitioner's civil liability should be as follows: The agreement then came into effect when petitioner's goods were
delivered to respondent's bodega and were sold by petitioner's employees.
Prior to the execution of the contract, however, respondent’s wife, Lina
Value of the 398 sacks of corn grains ₱85,607
Sola, had an existing obligation with petitioner arising from her Franchise
Distributorship Agreement with the latter. On January 26, 1995,
Cash payment by petitioner upon delivery 5 -3,000G. de Leon, petitioner's
respondent wrote a letter addressed to Renato
Vice-President for Finance, wherein he acknowledged and confirmed his
wife’s indebtedness to petitioner in the amount of ₱1,973,154.73 (the
₱82,607
other accountability in the sum of ₱1,490,091.15 was still subject to
reconciliation) and, together with his wife, bound himself to pay on
Alagao's debt installment basis the said debt. Consequently,
-51,730petitioner withheld the
payment of respondent's service fees from February to April 1995 and
applied the same as partial payments to the debt which he obligated to
pay. On April 29, 1995, respondent closed and₱30.877
suspended operation of his
Petitioner's net civil liability to Alagao office cum bodega where petitioner's products were stored and customers
========
were being dealt with.
On May 24, 1995, respondent filed with the Regional Trial Court (RTC)
6
of Davao, a Complaint for accounting and rescission against petitioner
alleging that petitioner withheld portions of his service fees covering the

months from October 1994 to January 1995 and his whole service fees for WHEREFORE, in the light of the foregoing premises, herein appeal is
the succeeding months of February to April 1995, the total amount of GRANTED. Accordingly, the Contract of Services is hereby
which was ₱222,202.84; that petitioner's act grossly hampered, if not RESCINDED. Let the case be REMANDED to the court a quo for the
paralyzed, his business operation, thus left with no other recourse, he proper determination of the amount of service fees unlawfully withheld
suspended operations to minimize losses. He prayed for the rescission of from the appellant.
the contract of services and for petitioner to render an accounting of his
service fees. Furthermore, Appellee is hereby ordered to pay the Appellant attorney’s
14
fees in the amount of twenty-five thousand pesos (₱25,000.00).
7
In its Answer with Counterclaim filed on June 14, 1995, petitioner
contended that respondent’s letter dated January 26, 1995 addressed to The CA found that under Article 1191 of the Civil Code, respondent was
petitioner's Vice-President for Finance, confirmed and obligated himself entitled to rescind the contract of services as it was petitioner who
to pay on installment basis the accountability of his wife with petitioner, breached the same by withholding the service fees lawfully due to the
thus respondent's service fees/commission earned for the period of former; that petitioner's act of unlawfully withholding the service fees due
February to April 1995 amounting to ₱125,040.01 was applied by way of respondent constituted a willful and deliberate infringement on
compensation to the amounts owing to it; that all the service fees earned contractual obligations which would justify rescission under Article 1191.
by respondent prior to February 1995 were fully paid to him. By way of The CA declared that the contract of services entered into by the parties
counterclaim, petitioner asked for the payment of the amount of did not fall under any of the rescissible contracts enumerated under
₱1,547,892.55 which respondent obligated to pay plus interest; the Article 1381 of the Civil Code but under Article 1191 which pertains to
delivery of petitioner's products padlocked in respondent's office cum rescission of reciprocal obligations as in the instant case.
bodega, the payment for the loss of income in the amount of ₱833,600.00 The CA ruled that respondent did not assume his wife's obligation as he
as well as the remaining balance of ₱45,728.30 from the ₱100,000.00 did not substitute himself in the shoes of his wife regarding the payment
given by petitioner to respondent as advance money for the purchase of of the latter's liability; that there can be no novation as novation was never
office equipment and the renovation of the bodega cum office. presumed. Petitioner's act of withholding respondent's service fee and
8 thereafter applying them to the obligation of his wife was unlawful,
In his Reply and Answer to petitioner's counterclaim, respondent averred considering that respondent never assumed his wife's obligation with
that he was made to believe that the sales commission contained in petitioner; that there could be no legal compensation, since it was
petitioner's memorandum dated July 5, 1994 would be applicable to him; respondent's wife who was principally indebted to petitioner owing from
that it was improper for petitioner to confuse respondent's transaction with the franchise distributorship agreement she earlier entered into with
that of his wife as it was divergent in nature and terms. petitioner; that granting the debt redounded to the benefit of the family
Pending trial, petitioner moved for the issuance of a preliminary and incurred with the consent of respondent, and the spouse, as joint
attachment and replevin which the RTC granted in its Order dated June administrators of the community property are solidarily liable with their
9 separate properties for debts incurred, however, such liability is only
19, 1995 upon the filing of bonds. Respondent filed a Motion to Quash subsidiary, when the community property is not sufficient to pay for all
the Writ of Attachment, which the RTC denied in an Order dated July 24, liabilities, however, in this case, there was no showing that the community
10
1995. As respondent's motion for reconsideration was also denied, he property of the spouses was insufficient to pay the debt.
filed with us a petition for certiorari, docketed as G.R. No. 126427,
11 The CA ordered the deletion of attorney's fees as it was respondent who
assailing the RTC orders which we dismissed in a Resolution dated was entitled to such award, since he was compelled to litigate to protect
November 11, 1996 on procedural matters. his interest for the unjustified act of petitioner.
Trial thereafter ensued. Petitioner's motion for reconsideration was denied in a Resolution dated
12 September 6, 2006.
On July 6, 2000, the RTC rendered its Decision, the dispositive portion
of which reads: Hence, this petition where petitioner alleges that the CA erred:
FOR THE FOREGOING, judgment is hereby rendered in favor of 1. In finding that petitioner breached its contract with respondent and that
defendant and against plaintiff, ordering the latter to pay the former: there is no compensation in accordance to Article 1279 of the Civil Code;
1) the sum of ₱1,543,643.96 representing the principal balance of 2. In finding that respondent did not assume the obligation of his wife;
plaintiff's account with defendant, plus legal interest from the time of
filing of the complaint until fully paid, at the rate of 6% per annum; 3. In remanding the case to the court a quo for proper determination of
service fee withheld when the same has been determined;
2) attorney's fees in the amount of ₱25,000.00
4. In obliterating the award of petitioner's counterclaim when respondent
13 15
3) costs of the suit. admitted his obligation to petitioner.
In so ruling, the RTC found that in computing the service The CA found that petitioner's act of withholding respondent's service
fees/commissions due respondent, the rate as provided in the contract of fees and thereafter applying them as partial payment to the obligation of
service dated January 27, 1995 was controlling, since respondent was a respondent's wife with petitioner was unlawful, considering that
party thereto duly affixing his signature therein; that petitioner's respondent never assumed his wife’s obligation, thus, there can be no
computation of respondent's service fees for the months of February to legal compensation under Article 1279 of the Civil Code.
April 1995 in the total amount of ₱125,040.01 which was based on the
said contract deserved credence. The RTC ruled that while Article 1381 We do not agree.
of the Civil Code provides for the grounds for which a contract may be In his letter dated January 26, 1995 addressed to Mr. Renato G. De Leon,
rescinded, none of these grounds existed in this case; that there was no petitioner's Vice-President for Finance, respondent wrote, and which we
showing of fraud which petitioner employed when it entered into the quote in full:
contract with respondent nor did respondent agree to such a contract
without knowing its content, thus the contract was not rescissible. Gentlemen:
As regards to petitioner's counterclaim that respondent confirmed and This refers to the account of my wife, Lina (Beng) Sola, with Mondragon
assumed the payment of his wife's account with petitioner, the RTC found Personal Sales, Inc. in the amount of ₱3,463,173.88. Of this total amount,
that respondent obligated himself to pay his wife's account as evidenced we are initially confirming the total amount of ₱1,973,154.73 as due from
by his letter dated January 26, 1995; that after deducting from the Lina (Beng) Sola, while the remaining balance of ₱1,490,091.15 will be
confirmed amount of ₱1,668,683.97 the respondent's service commission subject to a reconciliation on or before February 5, 1995.
for the period from February 1995 to April 1995, which was in the total
amount of ₱125,040.01, the amount owing to petitioner would still be In recognition of Lina (Beng) Sola's account, we undertake to pay
₱1,543,643.96. The RTC dismissed the other counterclaims, since they ₱100,000.00 on or before February 01, 1995 and the balance of
were not substantiated but found petitioner entitled to attorney's fees due ₱1,873,154.73 plus interest of 18% per annum and 2% administrative
to the amount of money involved and the time spent in pursuing the case. charge per month on the diminishing balance will be covered by postdated
checks of not less than ₱100,000.00 per month starting February 28, 1995
Respondent filed his appeal to the CA to which petitioner filed its and every end of the month thereafter but not to exceed eighteen (18)
appellee's brief. On February 10, 2006, the CA rendered its assailed months or July 31, 1996.
decision, the dispositive portion of which reads as follows:

With regards to the remaining balance of ₱1,490,019.15, we agree that As legal compensation took place in this case, there is no basis for
upon final verification of these accounts, we will issue additional respondent to ask for rescission since he was the first to breach their
postdated checks subject to the same terms and conditions as stated above. contract when, on April 29, 1995, he suddenly closed and padlocked his
bodega cum office in General Santos City occupied by petitioner. 1âwphi1
We further agree that all subsequent orders that will be released to us will
be covered by postdated checks. Petitioner claims that the CA erred in obliterating the RTC’s award of its
counterclaim which it had alleged and proved during trial and which
I fully understand and voluntarily agree to the above undertaking with full respondent even admitted.
knowledge of the consequences which may arise therefrom.
We agree.
Very truly yours,
In his letter dated January 6, 1995, respondent confirmed the amount of
(signed) ₱1,973,154.73 owing to petitioner. On September 29, 1997, petitioner
16 20
Victoriano S. Sola wrote another letter to petitioner's Credit and Collection Manager,
A reading of the letter shows that respondent becomes a co-debtor of his Rudy Machanco, wherein he again confirmed the indebtedness in the
wife's accountabilities with petitioner. Notably, the last paragraph of his amount of ₱1,973,154.73. In the same letter, he showed the payments he
letter which states "I fully understand and voluntarily agree to the above had already made and after deducting the same from the confirmed
undertaking with full knowledge of the consequences which may arise indebtedness, the total balance remained to be at ₱1,668,683.97. As we
therefrom" and which was signed by respondent alone, shows that he have said earlier, respondent's service fees from February to April 1995
solidarily bound himself to pay such debt. Based on the letter, which was in the total amount of ₱125,040.01 was not assailed at all by
respondent's wife had an account with petitioner in the amount of respondent in his appeal with the CA, thus he is bound by such
₱3,463,173.88, out of which only the amount of ₱1,973,154.73 was computation. Hence, the amount of ₱125,040.01 which petitioner owes
confirmed while the remaining amount of ₱1,490,019.15 would still be respondent shall be offset against the ₱1,973,154.73 which respondent
subject to reconciliation. As respondent bound himself to pay the amount owes petitioner, and therefore leaving a balance of ₱1,543,643.96 which
of ₱1,973,154.73, he becomes petitioner's principal debtor to such respondent must pay.
amount. WHEREFORE, the petition for review is GRANTED. The Decision dated
On the other hand, respondent, as petitioner's service contractor, was February 10, 2006 and the Resolution dated September 6, 2006 of the
entitled to a payment of service fees as provided in their contract of Court of Appeals are hereby REVERSED and SET ASIDE. Respondent
services dated January 26, 1995. We note that respondent never refuted is hereby ordered to pay petitioner the amount of ₱1,543,643.96 with 6%
the amount of monthly sales recorded but only assailed in the RTC the percent per annum from June 14, 1995 until finality of this Decision and
rate of the service fees which he was entitled to. However, we find that 12% percent per annum thereafter until full payment.
there could be no other computation of the rate of the service fees other SO ORDERED.
than what was provided in the contract of services dated January 26, 1995
signed by respondent and petitioner. Thus, we give credence to Union Bank of the Philippines v. Development Bank of the
petitioner's computation of respondent's service fees for the months of Philippines
February to April 1995 in the total amount of ₱125,040.01. Since G.R. No. 191555 January 20, 2014
respondent promised petitioner in his letter dated January 26, 1995, to
monthly pay a certain amount to cover the indebtedness to petitioner UNION BANK OF THE PHILIPPINES, Petitioner,
which he failed to do, the latter withheld the payment of respondent's vs.
service fees and applied the same as partial payments of the debt by way DEVELOPMENT BANK OF THE PHILIPPINES, Respondent.
of compensation. DECISION
We find that petitioner's act of withholding respondent's service PERLAS-BERNABE, J.:
fees/commissions and applying them to the latter's outstanding obligation
with the former is merely an acknowledgment of the legal compensation Assailed in this petition for review on Certiorari1 are the Decision2 dated
17 November 3, 2009 and Resolution3 dated February 26, 2010 of the Court
that occurred by operation of law between the parties. Compensation is
a mode of extinguishing to the concurrent amount the obligations of of Appeals (CA) in CA-G.R. SP No. 93833 which affirmed the
persons who in their own right and as principals are reciprocally debtors Orders4 dated November 9, 2005 and January 30, 2006 of the Regional
and creditors of each other. Legal compensation takes place by operation Trial Court of Makati, Branch 585 (RTC) in Civil Case No. 7648 denying
of law when all the requisites are present, as opposed to conventional the motion to affirm legal compensation6 filed by petitioner Union Bank
compensation which takes place when the parties agree to compensate of the Philippines (Union Bank) against respondent Development Bank
18 of the Philippines (DBP).
their mutual obligations even in the absence of some requisites. Legal
compensation requires the concurrence of the following conditions: The Facts
(1) That each one of the obligors be bound principally, and that he be at Foodmasters, Inc. (FI) had outstanding loan obligations to both Union
the same time a principal creditor of the other; Bank’s predecessor-in-interest, Bancom Development Corporation
(Bancom), and to DBP.
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the On May 21, 1979, FI and DBP, among others, entered into a Deed of
latter has been stated; Cession of Property In Payment of Debt7(dacion en pago) whereby the
former ceded in favor of the latter certain properties (including a
(3) That the two debts be due; processing plant in Marilao, Bulacan [processing plant]) in consideration
(4) That they be liquidated and demandable; of the following: (a) the full and complete satisfaction of FI’s loan
obligations to DBP; and (b) the direct assumption by DBP of FI’s
(5) That over neither of them there be any retention or controversy, obligations to Bancom in the amount of ₱17,000,000.00 (assumed
commenced by third persons and communicated in due time to the obligations).8
19
debtor. On the same day, DBP, as the new owner of the processing plant, leased
We find the presence of all the requisites for legal compensation. back9 for 20 years the said property to FI (Lease Agreement) which was,
Petitioner and respondent are both principal obligors and creditors of each in turn, obliged to pay monthly rentals to be shared by DBP and Bancom.
other. Their debts to each other consist in a sum of money. Respondent DBP also entered into a separate agreement10 with Bancom (Assumption
acknowledged and bound himself to pay petitioner the amount of Agreement) whereby the former: (a) confirmed its assumption of FI’s
₱1,973,154.73 which was already due, while the service fees owing to obligations to Bancom; and (b) undertook to remit up to 30% of any and
respondent by petitioner become due every month. Respondent's debt is all rentals due from FI to Bancom (subject rentals) which would serve as
liquidated and demandable, and petitioner's payments of service fees are payment of the assumed obligations, to be paid in monthly installments.
liquidated and demandable every month as they fall due. Finally, there is The pertinent portions of the Assumption Agreement reads as follows:
no retention or controversy commenced by third persons over either of
the debts. Thus, compensation is proper up to the concurrent amount WHEREAS, DBP has agreed and firmly committed in favor of Bancom
where petitioner owes respondent ₱125,040.01 for service fees, while that the above obligations to Bancom which DBP has assumed shall be
respondent owes petitioner ₱1,973,154.73. settled, paid and/or liquidated by DBP out of a portion of the lease rentals
or part of the proceeds of sale of those properties of the Assignors

conveyed to DBP pursuant to the [Deed of Cession of Property in obligations to remit the subject rentals to Union Bank precisely because
Payment of Debt dated May 21, 1979] and which are the subject of [the it had yet to receive the rental payments of FW.23
Lease Agreement] made and executed by and between DBP and [FI], the
last hereafter referred to as the "Lessee" to be effective as of July 31, 1978. Separately, the CA upheld the RTC’s denial of DBP’s motion to dismiss
for the reason that the transfer of its rights, title and interests over the
xxxx subject matter to the APT occurred pendente lite, and, as such, the
substitution of parties is largely discretionary on the part of the court.
4. DBP hereby covenants and undertakes that the amount up to 30% of
any and all rentals due from the Lessee pursuant to the Lease Agreement At odds with the CA’s ruling, Union Bank and DBP filed separate
shall be remitted by DBP to Bancom at the latter’s offices at Pasay Road, petitions for review on certiorari before the Court, respectively docketed
Makati, Metro Manila within five (5) days from due dates thereof, and as G.R. Nos. 115963 and 119112, which were thereafter consolidated.
applied in payment of the Assumed Obligations. Likewise, the amount up
to 30% of the proceeds from any sale of the Leased Properties shall within The Court’s Ruling in G.R. Nos. 115963 & 119112
the same period above, be remitted by DBP to Bancom and applied in The Court denied both petitions in a Resolution24 dated December 13,
payment or prepayment of the Assumed Obligations. x x x. 1995. First, it upheld the CA’s finding that while DBP directly assumed
Any balance of the Assumed Obligations after application of the entire FI’s obligations to Union Bank, DBP was only obliged to remit to the
rentals and or the entire sales proceeds actually received by Bancom on latter 30% of the lease rentals collected from FW, from which any
the Leased Properties shall be paid by DBP to Bancom not later than deficiency was to be settled by DBP not later than December 29,
December 29, 1998. (Emphases supplied) 1998.25 Similarly, the Court agreed with the CA that the denial of DBP’s
motion to dismiss was proper since substitution of parties, in case of
Meanwhile, on May 23, 1979, FI assigned its leasehold rights under the transfers pendente lite, is merely discretionary on the part of the court,
Lease Agreement to Foodmasters Worldwide, Inc. (FW);11 while on May adding further that the proposed substitution of APT will amount to a
9, 1984, Bancom conveyed all its receivables, including, among others, novation of debtor which cannot be done without the consent of the
DBP’s assumed obligations, to Union Bank.12 creditor.26
Claiming that the subject rentals have not been duly remitted despite its On August 2, 2000, the Court’s resolution became final and executory.27
repeated demands, Union Bank filed, on June 20, 1984, a collection case
against DBP before the RTC, docketed as Civil Case No. 7648.13 In The RTC Execution Proceedings
opposition, DBP countered, among others, that the obligations it assumed On May 16, 2001, Union Bank filed a motion for execution28 before the
were payable only out of the rental payments made by FI. Thus, since FI RTC, praying that DBP be directed to pay the amount of ₱9,732,420.555
had yet to pay the same, DBP’s obligation to Union Bank had not which represents the amount of the subject rentals (i.e., 30% of the FW’s
arisen.14 In addition, DBP sought to implead FW as third party-defendant total rental debt in the amount of ₱32,441,401.85). DBP opposed29 Union
in its capacity as FI’s assignee and, thus, should be held liable to Union Bank’s motion, contending that it sought to effectively vary the
Bank.15 dispositive portion of the CA’s May 27, 1994 Decision in CA-G.R. CV
In the interim, or on May 6, 1988, DBP filed a motion to dismiss on the No. 35866. Also, on September 12, 2001, DBP filed its own motion for
ground that it had ceased to be a real-party-in-interest due to the execution against FW, citing the same CA decision as its basis.
supervening transfer of its rights, title and interests over the subject matter In a Consolidated Order30 dated October 15, 2001 (Order of Execution),
to the Asset Privatization Trust (APT). Said motion was, however, denied the RTC granted both motions for execution. Anent Union Bank’s
by the RTC in an Order dated May 27, 1988.16 motion, the RTC opined that the CA’s ruling that DBP’s payment to
The RTC Ruling in Civil Case No. 7648 Union Bank shall be demandable only upon payment of FW must be
viewed in light of the date when the same was rendered. It noted that the
Finding the complaint to be meritorious, the RTC, in a Decision17 dated CA decision was promulgated only on May 27, 1994, which was before
May 8, 1990, ordered: (a) DBP to pay Union Bank the sum of the December 29, 1998 due date within which DBP had to fully pay its
₱4,019,033.59, representing the amount of the subject rentals (which, obligation to Union Bank under the Assumption Agreement. Since the
again, constitutes 30% of FI’s [now FW’s] total rental debt), including latter period had already lapsed, "[i]t would, thus, be too strained to argue
interest until fully paid; and (b) FW, as third-party defendant, to that payment by DBP of its assumed obligation[s] shall be dependent on
indemnify DBP, as third- party plaintiff, for its payments of the subject [FW’s] ability, if not availability, to pay."31 In similar regard, the RTC
rentals to Union Bank. It ruled that there lies no evidence which would granted DBP’s motion for execution against FW since its liability to
show that DBP’s receipt of the rental payments from FW is a condition Union Bank and DBP remained undisputed.
precedent to the former’s obligation to remit the subject rentals under the
Lease Agreement. Thus, when DBP failed to remit the subject rentals to As a result, a writ of execution32 dated October 15, 2001 (October 15,
Union Bank, it defaulted on its assumed obligations.18 DBP then elevated 2001 Writ of Execution) and, thereafter, a notice of garnishment33 against
the case on appeal before the CA, docketed as CA-G.R. CV No. 35866. DBP were issued. Records, however, do not show that the same writ was
implemented against FW.
The CA Ruling in CA-G.R. CV No. 35866
DBP filed a motion for reconsideration34 from the Execution Order,
In a Decision19 dated May 27, 1994 (May 27, 1994 Decision), the CA set averring that the latter issuance varied the import of the CA’s May 27,
aside the RTC’s ruling, and consequently ordered: (a) FW to pay DBP the 1994 Decision in CA-G.R. CV No. 35866 in that it prematurely ordered
amount of ₱32,441,401.85 representing the total rental debt incurred DBP to pay the assumed obligations to Union Bank before FW’s
under the Lease Agreement, including ₱10,000.00 as attorney’s fees; and payment. The motion was, however, denied on December 5,
(b) DBP, after having been paid by FW its unpaid rentals, to remit 30% 2001.35 Thus, DBP’s deposits were eventually garnished.36 Aggrieved,
thereof (i.e., the subject rentals) to Union Bank.20 DBP filed a petition for certiorari37 before the CA, docketed as CA-G.R.
SP No. 68300.
It rejected Union Bank’s claim that DBP has the direct obligation to remit
the subject rentals not only from FW’s rental payments but also out of its The CA Ruling in CA-G.R. SP No. 68300
own resources since said claim contravened the "plain meaning" of the
Assumption Agreement which specifies that the payment of the assumed In a Decision38 dated July 26, 2002, the CA dismissed DBP’s petition,
obligations shall be made "out of the portion of the lease rentals or part of finding that the RTC did not abuse its discretion when it issued the
the proceeds of the sale of those properties of [FI] conveyed to DBP."21 It October 15, 2001 Writ of Execution. It upheld the RTC’s observation that
also construed the phrase under the Assumption Agreement that DBP is there was "nothing wrong in the manner how [said writ] was
obligated to "pay any balance of the Assumed Obligations after implemented," as well as "in the zealousness and promptitude exhibited
application of the entire rentals and/or the entire sales proceeds actually by Union Bank" in moving for the same. DBP appealed the CA’s ruling
received by [Union Bank] on the Leased Properties . . . not later than before the Court, which was docketed as G.R. No. 155838.
December 29, 1998" to mean that the lease rentals must first be applied The Court’s Ruling in G.R. No. 155838
to the payment of the assumed obligations in the amount of
₱17,000,000.00, and that DBP would have to pay out of its own money In a Decision39 dated January 13, 2004 (January 13, 2004 Decision), the
only in case the lease rentals were insufficient, having only until Court granted DBP’s appeal, and thereby reversed and set aside the CA’s
December 29, 1998 to do so. Nevertheless, the monthly installments in ruling in CA-G.R. SP No. 68300. It found significant points of variance
satisfaction of the assumed obligations would still have to be first sourced between the CA’s May 27, 1994 Decision in CA-G.R. CV No. 35866, and
from said lease rentals as stipulated in the assumption agreement.22 In the RTC’s Order of Execution/October 15, 2001 Writ of Execution. It
view of the foregoing, the CA ruled that DBP did not default in its ruled that both the body and the dispositive portion of the same decision
acknowledged that DBP’s obligation to Union Bank for remittance of the

lease payments is contingent on FW’s prior payment to DBP, and that any (5) That over neither of them there be any retention or controversy,
deficiency DBP had to pay by December 29, 1998 as per the Assumption commenced by third persons and communicated in due time to the
Agreement cannot be determined until after the satisfaction of FW’s own debtor. (Emphases and underscoring supplied)
1awp++i1
rental obligations to DBP. Accordingly, the Court: (a) nullified the

October 15, 2001 Writ of Execution and all related issuances thereto; and The rule on legal54 compensation is stated in Article 1290 of the Civil
(b) ordered Union Bank to return to DBP the amounts it received pursuant Code which provides that "[w]hen all the requisites mentioned in Article
to the said writ.40 Dissatisfied, Union Bank moved for reconsideration 1279 are present, compensation takes effect by operation of law, and
which was, however, denied by the Court in a Resolution dated March 24, extinguishes both debts to the concurrent amount, even though the
2004 with finality. Thus, the January 13, 2004 Decision attained finality creditors and debtors are not aware of the compensation."
on April 30, 2004.41 Thereafter, DBP moved for the execution of the said In this case, Union Bank filed a motion to seek affirmation that legal
decision before the RTC. After numerous efforts on the part of Union compensation had taken place in order to effectively offset (a) its own
Bank proved futile, the RTC issued a writ of execution (September 6, obligation to return the funds it previously received from DBP as directed
2005 Writ of Execution), ordering Union Bank to return to DBP all funds under the September 6, 2005 Writ of Execution with (b) DBP’s assumed
it received pursuant to the October 15, 2001 Writ of Execution.42 obligations under the Assumption Agreement. However, legal
Union Bank’s Motion to Affirm Legal Compensation compensation could not have taken place between these debts for the
apparent reason that requisites 3 and 4 under Article 1279 of the Civil
On September 13, 2005, Union Bank filed a Manifestation and Motion to Code are not present. Since DBP’s assumed obligations to Union Bank
Affirm Legal Compensation,43 praying that the RTC apply legal for remittance of the lease payments are – in the Court’s words in its
compensation between itself and DBP in order to offset the return of the Decision dated January 13, 2004 in G.R. No. 155838 – " contingent on
funds it previously received from DBP. Union Bank anchored its motion the prior payment thereof by [FW] to DBP," it cannot be said that both
on two grounds which were allegedly not in existence prior to or during debts are due (requisite 3 of Article 1279 of the Civil Code). Also, in the
trial, namely: (a) on December 29, 1998, DBP’s assumed obligations same ruling, the Court observed that any deficiency that DBP had to make
became due and demandable;44 and (b) considering that FWI became non- up (by December 29, 1998 as per the Assumption Agreement) for the full
operational and non-existent, DBP became primarily liable to the balance satisfaction of the assumed obligations " cannot be determined until after
of its assumed obligation, which as of Union Bank’s computation after its the satisfaction of Foodmasters’ obligation to DBP." In this regard, it
claimed set-off, amounted to ₱1,849,391.87.45 cannot be concluded that the same debt had already been liquidated, and
thereby became demandable (requisite 4 of Article 1279 of the Civil
On November 9, 2005, the RTC issued an Order46 denying the above- Code).
mentioned motion for lack of merit, holding that Union Bank’s stated
grounds were already addressed by the Court in the January 13, 2004 The aforementioned Court decision had already attained finality on April
Decision in G.R. No. 155838. With Union Bank’s motion for 30, 200455 and, hence, pursuant to the doctrine of conclusiveness of
reconsideration therefrom having been denied, it filed a petition for judgment, the facts and issues actually and directly resolved therein may
certiorari47 with the CA, docketed as CA-G.R. SP No. 93833. not be raised in any future case between the same parties, even if the latter
suit may involve a different cause of action.56 Its pertinent portions are
Pending resolution, Union Bank issued Manager’s Check48 No. 099- hereunder quoted for ready reference:57
0003192363 dated April 21, 2006 amounting to ₱52,427,250.00 in favor
of DBP, in satisfaction of the Writ of Execution dated September 6, 2005 Both the body and the dispositive portion of the [CA’s May 27, 1994
Writ of Execution. DBP, however, averred that Union Bank still has a Decision in CA-G.R. CV No. 35866] correctly construed the nature of
balance of ₱756,372.39 representing a portion of the garnished funds of DBP’s liability for the lease payments under the various contracts, to wit:
DBP,49 which means that said obligation had not been completely
extinguished. x x x Construing these three contracts, especially the "Agreement" x x x
between DBP and Bancom as providing for the payment of DBP’s
The CA Ruling in CA-G.R. SP No. 93833 assumed obligation out of the rentals to be paid to it does not mean
negating DBP’s assumption "for its own account" of the ₱17.0 million
In a Decision50 dated November 3, 2009, the CA dismissed Union Bank’s debt x x x. It only means that they provide a mechanism for discharging
petition, finding no grave abuse of discretion on the RTC’s part. It [DBP’s] liability. This liability subsists, since under the "Agreement" x x
affirmed the denial of its motion to affirm legal compensation considering x, DBP is obligated to pay "any balance of the Assumed Obligations after
that: (a) the RTC only implemented the Court’s January 13, 2004 application of the entire rentals and or the entire sales proceeds actually
Decision in G.R. No. 155838 which by then had already attained finality; received by [Union Bank] on the Leased Properties … not later than
(b) DBP is not a debtor of Union Bank; and (c) there is neither a December 29, 1998." x x x It only means that the lease rentals must first
demandable nor liquidated debt from DBP to Union Bank.51 be applied to the payment of the ₱17 million debt and that [DBP] would
Undaunted, Union Bank moved for reconsideration which was, however, have to pay out of its money only in case of insufficiency of the lease
denied in a Resolution52 dated February 26, 2010; hence, the instant rentals having until December 29, 1998 to do so. In this sense, it is correct
petition. to say that the means of repayment of the assumed obligation is not
limited to the lease rentals. The monthly installments, however, would
The Issue Before the Court still have to come from the lease rentals since this was stipulated in the
"Agreement."
The sole issue for the Court’s resolution is whether or not the CA correctly
upheld the denial of Union Bank’s motion to affirm legal compensation. xxxx
The Court’s Ruling Since, as already stated, the monthly installments for the payment of the
₱17 million debt are to be funded from the lease rentals, it follows that if
The petition is bereft of merit. Compensation is defined as a mode of the lease rentals are not paid, there is nothing for DBP to remit to [Union
extinguishing obligations whereby two persons in their capacity as Bank], and thus [DBP] should not be considered in default. It is
principals are mutual debtors and creditors of each other with respect to noteworthy that, as stated in the appealed decision, "as regards plaintiff’s
equally liquidated and demandable obligations to which no retention or claim for damages against defendant for its alleged negligence in failing
controversy has been timely commenced and communicated by third and refusing to enforce a lessor’s remedies against Foodmasters
parties.53 The requisites therefor are provided under Article 1279 of the Worldwide, Inc., the Court finds no competent and reliable evidence of
Civil Code which reads as follows: such claim."
Art. 1279. In order that compensation may be proper, it is necessary: xxxx
(1) That each one of the obligors be bound principally, and that he be at WHEREFORE, the decision appealed from is SET ASIDE and another
the same time a principal creditor of the other; one is RENDERED,
(2) That both debts consist in a sum of money, or if the things due are (i) Ordering third-party defendant-appellee Foodmasters Worldwide, Inc.
consumable, they be of the same kind, and also of the same quality if the to pay defendant and third-party plaintiff-appellant Development Bank of
latter has been stated; the Philippines the sum of ₱32,441,401.85, representing the unpaid
(3) That the two debts be due; rentals from August 1981 to June 30, 1987, as well as ₱10,000.00 for
attorney’s fees; and
(4) That they be liquidated and demandable;
(ii) Ordering defendant and third-party plaintiff-appellant Development
Bank of the Philippines after having been paid by third-party defendant-

appellee the sum of ₱32,441,401.85, to remit 30% thereof to plaintiff-
appellee Union Bank of the Philippines.
The parties established a good business relationship, with the respondent
SO ORDERED. extending service and repair work to the units purchased by the
petitioners. The respondent also practiced liberality towards the
In other words, both the body and the dispositive portion of the petitioners in the latter’s manner of payment by later on agreeing to
aforequoted decision acknowledged that DBP’s obligation to Union Bank payment on terms for subsequent purchases.
for remittance of the lease payments is contingent on the prior payment
thereof by Foodmasters to DBP. On September 19, 1992, FUCC ordered from the respondent one unit of
Hino Prime Mover that the respondent delivered on the same date. On
A careful reading of the decision shows that the Court of Appeals, which September 29, 1992, FUCC again ordered from the respondent one unit
was affirmed by the Supreme Court, found that only the balance or the of Isuzu Transit Mixer that was also delivered to the petitioners. For the
deficiency of the ₱17 million principal obligation, if any, would be due two purchases, FUCC partially paid in cash, and the balance through post-
and demandable as of December 29, 1998. Naturally, this deficiency dated checks, as follows:
cannot be determined until after the satisfaction of Foodmasters
obligation to DBP, for remittance to Union Bank in the proportion set out
BANK/CHECK NO. DATE
in the 1994 Decision. (Emphases and underscoring supplied; citations
omitted)
Pilipinas Bank 18027379 23 November 19
xxxx
In fine, since requisites 3 and 4 of Article 1279 of the Civil Code have not
Pilipinas Bank 18027384 1 December 199
concurred in this case, no legal compensation could have taken place
between the above-stated debts pursuant to Article 1290 of the Civil
Code. Perforce, the petition must be denied, and the denial of Union Bank
s motion to affirm legal compensation sustained. Upon presentment of the checks for payment, the respondent learned that
WHEREFORE, the petition is DENIED. The Decision dated November FUCC had ordered the payment stopped. The respondent immediately
3, 2009 and Resolution dated February 26, 2010 of the Court of Appeals demanded the full settlement of their obligation from the petitioners, but
in CA-G.R. SP No. 93833 are hereby AFFIRMED. to no avail. Instead, the petitioners informed the respondent that they were
withholding payment of the checks due to the breakdown of one of the
SO ORDERED. dump trucks they had earlier purchased from respondent, specifically the
second dump truck delivered on May 27, 1992.
First United Constructors Corp. v. Bayanihan Automotive Corp.
G.R. No. 164985 January 15, 2014 Due to the refusal to pay, the respondent commenced this action for
collection on April 29, 1993, seeking payment of the unpaid balance in
FIRST UNITED CONSTRUCTORS CORPORATION and BLUE STAR the amount of ₱735,000.00 represented by the two checks.
CONSTRUCTION CORPORATION,Petitioners,
vs. In their answer, the petitioners averred that they had stopped the payment
BAYANIHAN AUTOMOTIVE CORPORATION, Respondent. on the two checks worth ₱735,000.00 because of the respondent’s refusal
to repair the second dump truck; and that they had informed the
DECISION respondent of the defects in that unit but the respondent had refused to
BERSAMIN, J.: comply with its warranty, compelling them to incur expenses for the
repair and spare parts. They prayed that the respondent return the price of
This case concerns the applicability of the legal principles of recoupment the defective dump truck worth ₱830,000.00 minus the amounts of their
and compensation. two checks worth ₱735,000.00, with 12% per annum interest on the
difference of ₱90,000.00 from May 1993 until the same is fully paid; that
The Case the respondent should also reimburse them the sum of ₱247,950.00 as
Under review is the decision promulgated on July 26, 2004,1 whereby the their expenses for the repair of the dump truck, with 12% per annum
Court of Appeals CA) affirmed the judgment rendered on May 14 1996 interest from December 16, 1992, the date of demand, until fully paid;
by the Regional Trial Court, Branch 107, in Quezon City adjudging the and that the respondent pay exemplary damages as determined to be just
petitioners defendants) liable to pay to the respondent plaintiff) various and reasonable but not less than ₱500,000, and attorney’s fees of ₱50,000
sums of money and damages.2 plus ₱1,000.00 per court appearance and other litigation expenses.
Antecedents It was the position of the respondent that the petitioners were not legally
justified in withholding payment of the unpaid balance of the purchase
Petitioner First United Constructors Corporation (FUCC) and petitioner price of the Hino Prime Mover and the Isuzu Transit Mixer due the
Blue Star Construction Corporation (Blue Star) were associate alleged defects in second dump truck because the purchase of the two
construction firms sharing financial resources, equipment and technical units was an entirely different transaction from the sale of the dump
personnel on a case-to-case basis. From May 27, 1992 to July 8, 1992, trucks, the warranties for which having long expired.
they ordered six units of dump trucks from the respondent, a domestic
corporation engaged in the business of importing and reconditioning used Judgment of the RTC
Japan-made trucks, and of selling the trucks to interested buyers who were On May 14, 1996, the RTC rendered its judgment,3 finding the petitioners
mostly engaged in the construction business, to wit: liable to pay for the unpaid balance of the purchase price of the Hino
Prime Mover and the Isuzu Transit Mixer totaling ₱735,000.00 with legal
TO WHOM interest and attorney’s fees; and declaring the respondent liable to pay to
UNIT the petitionersDATE OFofDELIVERY
the sum ₱71,350.00 as costs of the repairs incurred by
DELIVERY
the petitioners. The RTC held that the petitioners could not avail
themselves of legal compensation because the claims they had set up in
Isuzu Dump Truck FUCC the counterclaim were1992
27 May not liquidated and demandable. The fallo of the
judgment states:
Isuzu Dump Truck FUCC WHEREFORE,

27judgment
May 1992is hereby rendered:
1. Ordering defendants, jointly and severally to pay plaintiff the sum of
Isuzu Dump Truck FUCC ₱360,000.00 and ₱375,000.00
10 June 1992 with interest at the legal rate of 12% per
annum computed from February 11, 1993, which is the date of the first
extrajudicial demand, until fully paid;
Isuzu Dump Truck FUCC 18 June 1992
2. Ordering the defendants, jointly and severally, to pay plaintiff the sum
equivalent to 10% of the principal amount due, for attorney’s fees;
Isuzu Dump Truck Blue Star 4 July 1992
3. On the counterclaim, ordering plaintiff to pay defendants the sum of
₱71,350.00 with interest at the legal rate of 12% per annum computed
Isuzu Dump Truck FUCC from the date 8ofJuly
this 1992
decision until fully paid;

4. Ordering plaintiff to pay the defendants attorney’s fees equivalent to We affirm the decision of the CA with modification.
10% of the amount due;
1.
5. No pronouncement as to costs. Petitioners could not validly resort to recoupment against respondent
SO ORDERED.4 Recoupment (reconvencion) is the act of rebating or recouping a part of a
claim upon which one is sued by means of a legal or equitable right
Decision of the CA resulting from a counterclaim arising out of the same transaction.7 It is the
The petitioners appealed, stating that they could justifiably stop the setting up of a demand arising from the same transaction as the plaintiff’s
payment of the checks in the exercise of their right of recoupment because claim, to abate or reduce that claim.
of the respondent’s refusal to settle their claim for breach of warranty as The legal basis for recoupment by the buyer is the first paragraph of
to the purchase of the second dump truck. Article 1599 of the Civil Code, viz:
In its decision promulgated on July 26, 2004,5 however, the CA affirmed Article 1599. Where there is a breach of warranty by the seller, the buyer
the judgment of the RTC. It held that the remedy of recoupment could not may, at his election:
be properly invoked by the petitioners because the transactions were
different; that the expenses incurred for the repair and spare parts of the (1) Accept or keep the goods and set up against the seller, the breach of
second dump truck were not a proper subject of recoupment because they warranty by way of recoupment in diminution or extinction of the price;
did not arise out of the purchase of the Hino Prime Mover and the Isuzu
Transit Mixer; and that the petitioners’ claim could not also be the subject (2) Accept or keep the goods and maintain an action against the seller for
of legal compensation or set-off, because the debts in a set-off should be damages for the breach of warranty;
liquidated and demandable. (3) Refuse to accept the goods, and maintain an action against the seller
Issues for damages for the breach of warranty;
The petitioners are now before the Court asserting in their petition for (4) Rescind the contract of sale and refuse to receive the goods or if the
review on certiorari that the CA erred in: goods have already been received, return them or offer to return them to
the seller and recover the price or any part thereof which has been paid.
I
When the buyer has claimed and been granted a remedy in anyone of these
x x x NOT UPHOLDING THE RIGHT OF PETITIONER[S] TO ways, no other remedy can thereafter be granted, without prejudice to the
RECOUPMENT UNDER PAR. (1) OF ART. 1599 OF THE CIVIL provisions of the second paragraph of article 1191. (Emphasis supplied)
CODE, WHICH PROVIDES [FOR] THE RIGHTS AND REMEDIES
AVAILABLE TO A BUYER AGAINST A SELLER’S BREACH OF xxxx
WARRANTY. In its decision, the CA applied the first paragraph of Article 1599 of the
II Civil Code to this case, explaining thusly:
x x x RULING THAT PETITIONERS CANNOT AVAIL OF Paragraph (1) of Article 1599 of the Civil Code which provides for the
COMPENSATION ALLEGEDLY BECAUSE THEIR CLAIMS remedy of recoupment in diminution or extinction of price in case of
AGAINST RESPONDENT ARE NOT LIQUIDATED AND breach of warranty by the seller should therefore be interpreted as
DEMANDABLE. referring to the reduction or extinction of the price of the same item or
unit sold and not to a different transaction or contract of sale. This is more
III logical interpretation of the said article considering that it talks of breach
of warranty with respect to a particular item sold by the seller.
x x x NOT HOLDING RESPONDENT LIABLE TO PETITIONERS Necessarily, therefore, the buyer’s remedy should relate to the same
FOR LEGAL INTEREST COMPUTED FROM THE FIRST transaction and not to another.
EXTRAJUDICIAL DEMAND, AND FOR ACTUAL EXEMPLARY
DAMAGES.6 Defendants-appellants’ act of ordering the payment on the prime mover
and transit mixer stopped was improper considering that the said sale was
The petitioners submit that they were justified in stopping the payment of a different contract from that of the dump trucks earlier purchased by
the two checks due to the respondent’s breach of warranty by refusing to defendants-appellants.
repair or replace the defective second dump truck earlier purchased; that
the withholding of payments was an effective exercise of their right of The claim of defendants-appellants for breach of warranty, i.e. the
recoupment as allowed by Article 1599(1) of the Civil Code; due to the expenses paid for the repair and spare parts of dump truck no. 2 is
seller’s breach of warranty that the CA’s interpretation (that recoupment therefore not a proper subject of recoupment since it does not arise out of
in diminution or extinction of price in case of breach of warranty by the the contract or transaction sued on or the claim of plaintiff-appellee for
seller should refer to the reduction or extinction of the price of the same unpaid balances on the last two (2) purchases, i. e. the prime mover and
item or unit sold and not to a different transaction or contract of sale) was the transit mixer.8
not supported by jurisprudence; that recoupment should not be
restrictively interpreted but should include the concept of compensation The CA was correct. It was improper for petitioners to set up their claim
or set-off between two parties who had claims arising from different for repair expenses and other spare parts of the dump truck against their
transactions; and that the series of purchases and the obligations arising remaining balance on the price of the prime mover and the transit mixer
therefrom, being inter-related, could be considered as a single and they owed to respondent. Recoupment must arise out of the contract or
1avvphi1
ongoing transaction for all intents and purposes. transaction upon which the plaintiff’s claim is founded.9To be entitled to
recoupment, therefore, the claim must arise from the same transaction,
The respondent counters that the petitioners could not refuse to pay the i.e., the purchase of the prime mover and the transit mixer and not to a
balance of the purchase price of the Hino Prime Mover and the Isuzu previous contract involving the purchase of the dump truck. That there
Transit Mixer on the basis of the right of recoupment under Article 1599 was a series of purchases made by petitioners could not be considered as
of the Civil Code; that the buyer’s remedy of recoupment related only to a single transaction, for the records show that the earlier purchase of the
the same transaction; and that compensation was not proper because the six dump trucks was a separate and distinct transaction from the
claims of the petitioners as alleged in their counterclaim were not subsequent purchase of the Hino Prime Mover and the Isuzu Transit
liquidated and demandable. Mixer. Consequently, the breakdown of one of the dump trucks did not
grant to petitioners the right to stop and withhold payment of their
There is no longer any question that the petitioners were liable to the remaining balance on the last two purchases.
respondent for the unpaid balance of the purchase price of the Hino Prime
Mover and the Isuzu Transit Mixer. What remain to be resolved are 2.
strictly legal, namely: one, whether or not the petitioners validly exercised Legal compensation was permissible
the right of recoupment through the withholding of payment of the unpaid
balance of the purchase price of the Hino Prime Mover and the Isuzu Legal compensation takes place when the requirements set forth in Article
Transit Mixer; and, two, whether or not the costs of the repairs and spare 1278 and Article 1279 of the Civil Code are present, to wit:
parts for the second dump truck delivered to FUCC on May 27, 1992 Article 1278. Compensation shall take place when two persons, in their
could be offset for the petitioners’ obligations to the respondent. own right, are creditors and debtors of each other."
Ruling Article 1279. In order that compensation may be proper, it is necessary:

(1) That each of the obligors be bound principally, and that he be at the upon, and in the absence of stipulation, the legal interest, which is six per
same time a principal creditor of the other; cent per annum.
(2) That both debts consists in a sum of money, or if the things due are WHEREFORE, the Court AFFIRMS the decision promulgated on July
consumable, they be of the same kind, and also of the same quality if the 26, 2004 in all respects subject to the MODIFICATION that petitioners
latter has been stated; are ordered, jointly and severally, to pay to respondent the sum of 1
663,650.00, plus interest of 6% per annum computed from February
(3) That the two debts be due;
11, 1993, the date of the first extrajudicial demand, until fully paid; and
(4) That they be liquidated and demandable; ORDERS the petitioners to pay the costs of suit.
(5) That over neither of them there be any retention or controversy, SO ORDERED.
commenced by third persons and communicated in due time to the debtor.
Areza v. Express Savings Bank, Inc.
As to whether petitioners could avail themselves of compensation, both G.R. No. 176697 September 10, 2014
the RTC and CA ruled that they could not because the claims of
petitioners against respondent were not liquidated and demandable. CESAR V. AREZA and LOLITA B. AREZA, Petitioners,
vs.
The Court cannot uphold the CA and the RTC. EXPRESS SAVINGS BANK, INC. and MICHAEL
The RTC already found that petitioners were entitled to the amount of POTENCIANO, Respondnets.
₱71,350.00 stated in their counterclaim, and the CA concurred in the DECISION
finding, stating thusly:
PEREZ, J.:
It is noteworthy that in the letter of December 16, 1992 (Exh. "1")
defendants were charging plaintiff only for the following items of repair: Before this Court is a Petition for Review on Certiorari under Ruic 45 of
the Rules of Court, which seeks to reverse the Decision1 and
1. Cost of repair and spare parts - Resolution2 dated 29 June 2006 and 12 February 2007 of the Court of
₱46,800.00
Appeals in CAG.R. CV No. 83192. The Court of Appeals affirmed with
modification the 22 April 2004 Resolution3 of the Regional Trial Court
2. Cost of repair and spare parts - (RTC) of Calamba, Laguna, Branch24,550.00
92, in Civil Case No. B-5886.
The factual antecedents follow.
₱71,350.00
Petitioners Cesar V. Areza and LolitaB. Areza maintained two bank
deposits with respondent Express Savings Bank’s Biñan branch: 1)
Savings Account No. 004-01-000185-5 and 2) Special Savings Account
Said amounts may be considered to have been spent for repairs covered No. 004-02-000092-3.
by the warranty period of three (3) months. While the invoices (Exhs. "2-
B" and "3-A") dated September 26, 1992 and September 18, 1992, this They were engaged in the business of "buy and sell" of brand new and
delay in repairs is attributable to the fact that when defects were brought second-hand motor vehicles. On 2 May 2000, they received an order from
to the attention of the plaintiff in the letter of August 14, 1992 (Exh. "8") a certain Gerry Mambuay (Mambuay) for the purchase of a second-hand
which was within the warranty period, the plaintiff did not respond with Mitsubishi Pajero and a brand-new Honda CRV.
the required repairs and actual repairs were undertaken by defendants. The buyer, Mambuay, paid petitioners with nine (9) Philippine Veterans
Thereafter, the spare parts covered by Exhibits "2-B" and "3-A" pertain Affairs Office (PVAO) checks payable to different payees and drawn
to the engine, which was covered by the warranty. against the Philippine Veterans Bank (drawee), each valued at Two
x x x. Defendants in their letter of August 14, 1992 (Exhb. "8") demanded Hundred Thousand Pesos (₱200,000.00) for a total of One Million Eight
correction of defects. In their letter of August 22, 1992 (Exh. "9") they Hundred Thousand Pesos (₱1,800,000.00).
demanded replacement. In their letter of August 27, 1992 (Exh. "10"), About this occasion, petitioners claimed that Michael Potenciano
they demanded ‘replacement/repair’. In September, 1992, they undertook (Potenciano), the branch manager of respondent Express Savings Bank
repairs themselves (Exhs. "2-B" and "3-A") and demanded payment for (the Bank) was present during the transaction and immediately offered
the expenses in their letter of December 16, 1992 (Exh. "1"). All other the services of the Bank for the processing and eventual crediting of the
items of expenses connected with subsequent breakdowns are no longer said checks to petitioners’ account.4 On the other hand,Potenciano
chargeable to plaintiff which granted only a 3-month warranty. x x x10 countered that he was prevailed upon to accept the checks by way of
Considering that preponderant evidence showing that petitioners had accommodation of petitioners who were valued clients of the Bank.5
spent the amount of ₱71,350.00 for the repairs and spare parts of the On 3 May 2000, petitioners deposited the said checks in their savings
second dump truck within the warranty period of three months supported account with the Bank. The Bank, inturn, deposited the checks with its
the finding of the two lower courts, the Court accepts their finding. Verily, depositary bank, Equitable-PCI Bank, in Biñan,Laguna. Equitable-PCI
factual findings of the trial court, when affirmed by the CA, are Bank presented the checks to the drawee, the Philippine Veterans Bank,
conclusive on the Court when supported by the evidence on record.11 which honored the checks.
A debt is liquidated when its existence and amount are On 6 May 2000, Potenciano informedpetitioners that the checks they
determined.12 Accordingly, an unliquidated claim set up as a deposited with the Bank werehonored. He allegedly warned petitioners
counterclaim by a defendant can be set off against the plaintiff’s claim that the clearing of the checks pertained only to the availability of funds
from the moment it is liquidated by judgment.13 Article 1290 of the Civil and did not mean that the checks were not infirmed.6 Thus, the entire
Code provides that when all the requisites mentioned in Article 1279 of amount of ₱1,800,000.00 was credited to petitioners’ savings account.
the Civil Code are present, compensation takes effect by operation of law, Based on this information, petitioners released the two cars to the buyer.
and extinguishes both debts to the concurrent amount. With petitioners’
expenses for the repair of the dump truck being already established and Sometime in July 2000, the subjectchecks were returned by PVAO to the
determined with certainty by the lower courts, it follows that legal drawee on the ground that the amount on the face of the checks was
compensation could take place because all the requirements were present. altered from the original amount of ₱4,000.00 to ₱200,000.00. The
Hence, the amount of ₱71,350.00 should be set off against petitioners’ drawee returned the checks to Equitable-PCI Bank by way of Special
unpaid obligation of ₱735,000.00, leaving a balance of ₱663,650.00, the Clearing Receipts. In August 2000, the Bank was informed by Equitable-
amount petitioners still owed to respondent. PCI Bank that the drawee dishonored the checks onthe ground of material
alterations. Equitable-PCI Bank initially filed a protest with the Philippine
We deem it necessary to modify the interest rate imposed by the trial and Clearing House. In February 2001, the latter ruled in favor of the drawee
appellate courts. The legal interest rate to be imposed from February 11,
1âwphi1
Philippine Veterans Bank. Equitable-PCI Bank, in turn, debited the

1993, the time of the extrajudicial demand by respondent, should be 6% deposit account of the Bank in the amount of ₱1,800,000.00.
per annum in the absence of any stipulation in writing in accordance with
Article 2209 of the Civil Code, which provides: The Bank insisted that they informed petitioners of said development in
August 2000 by furnishing them copies of the documents given by its
Article 2209. If the obligation consists in the payment of a sum of money, depositary bank.7 On the other hand, petitioners maintained that the Bank
and the debtor incurs in delay, the indemnity for damages, there being no never informed them of these developments.
stipulation to the contrary, shall be the payment of the interest agreed

On 9 March 2001, petitioners issued a check in the amount of We find that the elements of legal compensation are all present in the case
₱500,000.00. Said check was dishonored by the Bank for the reason at bar. Hence, applying the case of the Bank of the Philippine Islands v.
"Deposit Under Hold." According topetitioners, the Bank unilaterally and Court of Appeals, the obligors bound principally are at the same time
unlawfully put their account with the Bank on hold. On 22 March 2001, creditors of each other. Appellee bank stands as a debtor of appellant, a
petitioners’ counsel sent a demand letter asking the Bank to honor their depositor. At the same time, said bank is the creditor of the appellant with
check. The Bank refused to heed their request and instead, closed the respect to the dishonored treasury warrant checks which amount were
Special Savings Account of the petitioners with a balance of already credited to the account of appellants. When the appellants had
₱1,179,659.69 and transferred said amount to their savings account. The withdrawn the amount of the checks they deposited and later on said
Bank then withdrew the amount of ₱1,800,000.00representing the checks were returned, they became indebted to the appellee bank for the
returned checks from petitioners’ savings account. corresponding amount.
Acting on the alleged arbitrary and groundless dishonoring of their checks It should be noted that [G]erry Mambuay was the appellants’ walkin
and the unlawful and unilateral withdrawal from their savings account, buyer. As sellers, appellants oughtto have exercised due diligence in
petitioners filed a Complaint for Sum of Money with Damages against the assessing his credit or personal background. The 24-hour clearing house
Bank and Potenciano with the RTC of Calamba. rule is not the one that governs in this case since the nine checks were
discovered by the drawee bank to contain material alterations.
On 15 January 2004, the RTC, through Judge Antonio S. Pozas, ruled in
favor of petitioners. The dispositive portion of the Decision reads: Appellants merely allege that they were not informed of any development
on the checks returned. However, this Court believes that the bank and
WHEREFORE, the foregoing considered, the Court orders that judgment appellants had opportunities to communicate about the checks
be rendered in favor of plaintiffs and against the defendants jointly and considering that several transactions occurred from the time of alleged
severally to pay plaintiffs as follows, to wit: return of the checks to the date of the debit.
1. ₱1,800,000.00 representing the amount unlawfully withdrawn by the However, this Court agrees withappellants that they should not pay moral
defendants from the account of plaintiffs; and exemplary damages to each of the appellees for lack of basis. The
2. ₱500,000.00 as moral damages; and appellants were not shown to have acted in bad faith.9
3. ₱300,000.00 as attorney’s fees.8 Petitioners filed the present petition for review on certiorariraising both
procedural and substantive issues, to wit:
The trial court reduced the issue to whether or not the rights of petitioners
were violated by respondents when the deposits of the former were 1. Whether or not the Honorable Court of Appeals committed a reversible
debited by respondents without any court order and without their error of law and grave abuse of discretion in upholding the legality and/or
knowledge and consent. According to the trial court, it is the depositary propriety of the Motion for Reconsideration filed in violation of Section
bank which should safeguard the right ofthe depositors over their money. 5, Rule 15 ofthe Rules on Civil Procedure;
Invoking Article 1977 of the Civil Code, the trial court stated that the 2. Whether or not the Honorable Court of Appeals committed a grave
depositary cannot make use of the thing deposited without the express abuse of discretion in declaring that the private respondents "had the right
permission of the depositor. The trial court also held that respondents to debit the amount of ₱1,800,000.00 from the appellants’ accounts" and
should have observed the 24-hour clearing house rule that checks should the bank’s act of debiting was done with the plaintiff’s knowledge.10
be returned within 24-hours after discovery of the forgery but in no event
beyond the period fixed by law for filing a legal action. In this case, Before proceeding to the substantive issue, we first resolve the procedural
petitioners deposited the checks in May 2000, and respondents notified issue raised by petitioners.
them of the problems on the check three months later or in August 2000.
In sum, the trial court characterized said acts of respondents as attended Sections 5, Rule 15 of the Rules of Court states:
with bad faith when they debited the amount of ₱1,800,000.00 from the Section 5. Notice of hearing. – The notice of hearing shall be addressed
account of petitioners. to all parties concerned, and shall specify the time and date of the hearing
Respondents filed a motion for reconsideration while petitioners filed a which must not be later than ten (10) days after the filing of the motion.
motion for execution from the Decision of the RTC on the ground that Petitioners claim that the notice of hearing was addressed to the Clerk of
respondents’ motion for reconsideration did not conform with Section 5, Court and not to the adverse party as the rules require. Petitioners add that
Rule 16 of the Rules of Court; hence, it was a mere scrap of paper that did the hearing on the motion for reconsideration was scheduled beyond 10
not toll the running of the period to appeal. days from the date of filing.
On 22 April 2004, the RTC, through Pairing Judge Romeo C. De Leon As held in Maturan v. Araula,11 the rule requiring that the notice be
granted the motion for reconsideration, set aside the Pozas Decision, and addressed to the adverse party has beensubstantially complied with when
dismissed the complaint. The trial court awarded respondents their a copy of the motion for reconsideration was furnished to the counsel of
counterclaim of moral and exemplary damages of ₱100,000.00 each. The the adverse party, coupled with the fact that the trial court acted on said
trial court first applied the principle of liberality when it disregarded the notice of hearing and, as prayed for, issued an order12 setting the hearing
alleged absence of a notice of hearing in respondents’ motion for of the motion on 26 March 2004.
reconsideration. On the merits, the trial court considered the relationship
of the Bank and petitioners with respect to their savings account deposits We would reiterate later that there is substantial compliance with the
as a contract of loan with the bank as the debtor and petitioners as foregoing Rule if a copy of the said motion for reconsideration was
creditors. As such, Article 1977 of the Civil Code prohibiting the furnished to the counsel of the adverse party.13
depository from making use of the thing deposited without the express
permission of the depositor is not applicable. Instead, the trial court Now to the substantive issues to which procedural imperfection must, in
applied Article 1980 which provides that fixed, savings and current this case, give way.
deposits ofmoney in banks and similar institutions shall be governed by The central issue is whether the Bank had the right to debit ₱1,800,000.00
the provisions governing simple loan. The trial court then opined thatthe from petitioners’ accounts.
Bank had all the right to set-off against petitioners’ savings deposits the
value of their nine checks that were returned. On 6 May 2000, the Bank informed petitioners that the subject checks had
been honored. Thus, the amountof ₱1,800,000.00 was accordingly
On appeal, the Court of Appeals affirmed the ruling of the trial court but credited to petitioners’ accounts, prompting them to release the purchased
deleted the award of damages. The appellate court made the following cars to the buyer.
ratiocination:
Unknown to petitioners, the Bank deposited the checks in its depositary
Any argument as to the notice of hearing has been resolved when the bank, Equitable-PCI Bank. Three months had passed when the Bank was
pairing judge issued the order on February 24, 2004 setting the hearing informed by its depositary bank that the drawee had dishonored the
on March 26, 2004. A perusal of the notice of hearing shows that request checks on the ground of material alterations.
was addressed to the Clerk of Court and plaintiffs’ counsel for hearing to
be set on March 26, 2004. The return of the checks created a chain of debiting of accounts, the last
loss eventually falling upon the savings account of petitioners with
The core issues in this case revolve on whether the appellee bank had the respondent bank. The trial court inits reconsidered decision and the
right to debit the amount of ₱1,800,000.00 from the appellants’ accounts appellate court were one in declaring that petitioners should bear the loss.
and whether the bank’s act of debiting was done "without the plaintiffs’
knowledge." We reverse.

The fact that material alteration caused the eventual dishonor of the LIABILITY OF DEPOSITARY BANK AND COLLECTING BANK
checks issued by PVAO is undisputed. In this case, before the alteration
was discovered, the checks were already cleared by the drawee bank, the A depositary bank is the first bank to take an item even though it is also
Philippine Veterans Bank. Three months had lapsed before the drawee the payor bank, unless the item is presented for immediate payment over
dishonored the checks and returned them to Equitable-PCI Bank, the the counter.22 It is also the bank to which a check is transferred for deposit
respondents’ depositary bank. And itwas not until 10 months later when in an account at such bank, evenif the check is physically received and
petitioners’ accounts were debited. A question thus arises: What are the indorsed first by another bank.23 A collecting bank is defined as any bank
liabilities of the drawee, the intermediary banks, and the petitioners for handling an item for collection except the bank on which the check is
the altered checks? drawn.24
LIABILITY OF THE DRAWEE When petitioners deposited the check with the Bank, they were
designating the latter as the collecting bank. This is in consonance with
Section 63 of Act No. 2031 orthe Negotiable Instruments Law provides the rule that a negotiable instrument, such as a check, whether a manager's
that the acceptor, by accepting the instrument, engages that he will pay it check or ordinary check, is not legal tender. As such, after receiving the
according to the tenor of his acceptance. The acceptor is a drawee who deposit, under its own rules, the Bank shall credit the amount in
accepts the bill. In Philippine National Bank v. Court of Appeals,14 the petitioners’ account or infuse value thereon only after the drawee bank
payment of the amount of a check implies not only acceptance but also shall have paid the amount of the check or the check has been cleared for
compliance with the drawee’s obligation. deposit.25
In case the negotiable instrument isaltered before acceptance, is the The Bank and Equitable-PCI Bank are both depositary and collecting
drawee liable for the original or the altered tenor of acceptance? There are banks.
two divergent intepretations proffered by legal analysts.15 The first view
is supported by the leading case of National City Bank ofChicago v. Bank A depositary/collecting bank where a check is deposited, and which
of the Republic.16 In said case, a certain Andrew Manning stole a draft endorses the check upon presentment with the drawee bank, is an
and substituted his name for that of the original payee. He offered it as endorser. Under Section 66 of the Negotiable Instruments Law, an
payment to a jeweler in exchange for certain jewelry. The jeweler endorser warrants "that the instrument is genuine and in all respects what
deposited the draft to the defendant bank which collectedthe equivalent it purports to be; that he has good title to it; that all prior parties had
amount from the drawee. Upon learning of the alteration, the drawee capacity to contract; and that the instrument is at the time of his
sought to recover from the defendant bank the amount of the draft, as endorsement valid and subsisting." It has been repeatedly held that in
money paid by mistake. The court denied recovery on the ground that the check transactions, the depositary/collecting bank or last endorser
drawee by accepting admitted the existence of the payee and his capacity generally suffers the loss because it has the duty to ascertain the
to endorse.17 Still, in Wells Fargo Bank & Union Trust Co. v. Bank of genuineness of all prior endorsements considering that the act of
Italy,18 the court echoed the court’s interpretation in National City Bank presenting the check for payment to the drawee is an assertion that the
of Chicago, in this wise: party making the presentment has done its duty to ascertain the
genuineness of the endorsements.26 If any of the warranties made by the
We think the construction placed upon the section by the Illinois court is depositary/collecting bank turns out to be false, then the drawee bank may
correct and that it was not the legislative intent that the obligation of the recover from it up to the amount of the check.27
acceptor should be limited to the tenorof the instrument as drawn by the
maker, as was the rule at common law,but that it should be enforceable in The law imposes a duty of diligence on the collecting bank to scrutinize
favor of a holder in due course against the acceptor according to its tenor checks deposited with it for the purpose of determining their genuineness
at the time of its acceptance or certification. and regularity. The collecting bank being primarily engaged in banking
holds itself out to the public as the expert and the law holds it to a high
The foregoing opinion and the Illinois decision which it follows give standard of conduct.28
effect to the literal words of the Negotiable Instruments Law. As stated in
the Illinois case: "The court must take the act as it is written and should As collecting banks, the Bank and Equitable-PCI Bank are both liable for
give to the words their natural and common meaning . . . ifthe language the amount of the materially altered checks. Since Equitable-PCI Bank is
of the act conflicts with statutes or decisions in force before its enactment not a party to this case and the Bank allowed its account with
the courts should not give the act a strained construction in order to make EquitablePCI Bank to be debited, it has the option toseek recourse against
it harmonize with earlier statutes or decisions." The wording of the act the latter in another forum.
suggests that a change in the common law was intended. A careful reading 24-HOUR CLEARING RULE
thereof, independent of any common-law influence, requires that the
words "according to the tenor of his acceptance" be construed as referring Petitioners faulted the drawee bank for not following the 24-hour clearing
to the instrument as it was at the time it came into the hands of the acceptor period because it was only in August 2000 that the drawee bank notified
for acceptance, for he accepts no other instrument than the one presented Equitable-PCI that there were material alterations in the checks.
to him — the altered form — and it alone he engages to pay. This
conclusion is in harmony with the law of England and the continental We do not subscribe to the position taken by petitioners that the drawee
countries. It makes for the usefulness and currency of negotiable paper bank was at fault because it did not follow the 24-hour clearing period
without seriously endangering accepted banking practices, for banking which provides that when a drawee bank fails to return a forged or altered
institutions can readily protect themselves against liability on altered check to the collecting bank within the 24-hour clearing period, the
instruments either by qualifying their acceptance or certification or by collecting bank is absolved from liability.
relying on forgery insurance and specialpaper which will make alterations Section 21 of the Philippine Clearing House Rules and Regulations
obvious. All of the arguments advanced against the conclusion herein provides: Sec. 21. Special Return Items Beyond The Reglementary
announced seem highly technical in the face of the practical facts that the Clearing Period.- Items which have been the subject of material alteration
drawee bank has authenticated an instrument in a certain form, and that or items bearing forged endorsement when such endorsement is necessary
commercial policy favors the protection of anyone who, in due course, for negotiation shall be returned by direct presentation or demand to the
changes his position on the faith of that authentication.19 Presenting Bank and not through the regular clearing house facilities
The second view is that the acceptor/drawee despite the tenor of his within the period prescribed by law for the filing of a legal action by the
acceptance is liable only to the extent of the bill prior to alteration.20 This returning bank/branch, institution or entity sending the same.
view appears to be in consonance with Section 124 of the Negotiable Antonio Viray, in his book Handbook on Bank Deposits, elucidated:
Instruments Law which statesthat a material alteration avoids an
instrument except as against an assenting party and subsequent indorsers, It is clear that the so-called "24-hour" rule has been modified. In the case
but a holder in due course may enforce payment according to its original of Hongkong & Shanghai vs. People’s Bank reiterated in Metropolitan
tenor. Thus, when the drawee bank pays a materially altered check, it Bank and Trust Co. vs. FNCB, the Supreme Court strictly enforced the
violates the terms of the check, as well as its duty tocharge its client’s 24-hour rule under which the drawee bank forever loses the right to claim
account only for bona fide disbursements he had made. If the drawee did against presenting/collecting bank if the check is not returned at the next
not pay according to the original tenor of the instrument, as directed by clearing day orwithin 24 hours. Apparently, the commercial banks felt
the drawer, then it has no right to claim reimbursement from the drawer, strict enforcement of the 24-hour rule is too harsh and therefore made
much less, the right to deduct the erroneous payment it made from the representations and obtained modification of the rule, which modification
drawer’s account which it was expected to treat with utmost is now incorporated in the Manual of Regulations. Since the same
fidelity.21 The drawee, however, still has recourse to recover its loss. It commercial banks controlled the Philippine Clearing House Corporation,
may pass the liability back to the collecting bank which is what the drawee incorporating the amended rule in the PCHC Rules naturally followed.
bank exactly did in this case. It debited the account of Equitable-PCI Bank
for the altered amount of the checks.

As the rule now stands, the 24-hour rule is still in force, that is, any check negligence can be attributed to petitioners. We lend credence to their
which should be refused by the drawee bank in accordance with long claim that at the time of the sales transaction, the Bank’s branch manager
standing and accepted banking practices shall be returned through the was present and even offered the Bank’s services for the processing and
PCHC/local clearing office, as the case may be, not later than the next eventual crediting of the checks. True to the branch manager’s words, the
regular clearing (24-hour). The modification, however, is that items checks were cleared three days later when deposited by petitioners and
which have been the subject of material alteration or bearing forged the entire amount ofthe checks was credited to their savings account.
endorsement may be returned even beyond 24 hours so long that the same
is returned within the prescriptive period fixed by law. The consensus ON LEGAL COMPENSATION
among lawyers is that the prescriptiveperiod is ten (10)years because a Petitioners insist that the Bank cannotbe considered a creditor of the
check or the endorsement thereon is a written contract. Moreover, the item petitioners because it should have made a claim of the amount of
need not be returned through the clearing house but by direct presentation ₱1,800,000.00 from Equitable-PCI Bank, its own depositary bank and the
to the presenting bank.29 collecting bank in this case and not from them.
In short, the 24-hour clearing ruledoes not apply to altered checks. The Bank cannot set-off the amount it paid to Equitable-PCI Bank with
LIABILITY OF PETITIONERS petitioners’ savings account. Under Art. 1278 of the New Civil Code,
compensation shall take place when two persons, in their own right, are
The 2008 case of Far East Bank & Trust Company v. Gold Palace creditors and debtors of each other. And the requisites for legal
Jewellery Co.30 is in point. A foreigner purchased several pieces of compensation are:
jewelry from Gold Palace Jewellery using a United Overseas Bank
(Malaysia) issued draft addressed to the Land Bank of the Philippines Art. 1279. In order that compensation may be proper, it is necessary:
(LBP). Gold Palace Jewellery deposited the draft in the company’s (1) That each one of the obligors be bound principally, and that he be at
account with Far East Bank. Far East Bank presented the draft for clearing the same time a principal creditor of the other;
to LBP. The latter cleared the same and Gold Palace Jewellery’s account
was credited with the amount stated in the draft. Consequently, Gold (2) That both debts consist in a sum of money, or if the things due are
Palace Jewellery released the pieces of jewelries to the foreigner. Three consumable, they be of the same kind, and also of the same quality if the
weeks later, LBP informed Far East Bank that the amount in the foreign latter has been stated;
draft had been materially altered from ₱300,000.00 to ₱380,000.00. LBP
returnedthe check to Far East Bank. Far East Bank refunded LBP the (3) That the two debts be due;
₱380,000.00 paid by LBP. Far East Bank initially debited ₱168,053.36 (4) That they be liquidated and demandable;
from Gold Palace Jewellery’s account and demanded the payment of the
difference between the amount in the altered draft and the amount debited (5) That over neither of them there be any retention or controversy,
from Gold Palace Jewellery. commenced by third persons and communicated in due time to the debtor.
However, for the reasons already discussed above, our pronouncement in It is well-settled that the relationship of the depositors and the Bank or
the Far East Bank and Trust Companycase that "the drawee is liable on similar institution is that of creditor-debtor. Article 1980 of the New Civil
its payment of the check according to the tenor of the check at the time of Code provides that fixed, savings and current deposits of money in banks
payment, which was the raised amount"31 is inapplicable to the factual and similar institutions shall be governed by the provisions concerning
milieu obtaining herein. simple loans. The bank is the debtorand the depositor is the creditor. The
depositor lends the bank money and the bank agrees to pay the depositor
We only adopt said decision in so far as it adjudged liability on the part on demand. The savings deposit agreement between the bank and the
of the collecting bank, thus: depositor is the contract that determines the rights and obligations of the
Thus, considering that, in this case, Gold Palace is protected by Section parties.33
62 of the NIL, its collecting agent, Far East, should not have debited the But as previously discussed, petitioners are not liable for the deposit of
money paid by the drawee bank from respondent company's account. the altered checks. The Bank, asthe depositary and collecting bank
When Gold Palace deposited the check with Far East, the latter, under the ultimately bears the loss. Thus, there being no indebtedness to the Bank
terms of the deposit and the provisions of the NIL, became an agent of the on the part of petitioners, legal compensation cannot take place.
former for the collection of the amount in the draft. The subsequent DAMAGES
payment by the drawee bank and the collection of the amount by the
collecting bank closed the transaction insofar as the drawee and the holder The Bank incurred a delay in informing petitioners of the checks’
of the check or his agent are concerned, converted the check into a mere dishonor. The Bank was informed of the dishonor by Equitable-PCI Bank
voucher, and, as already discussed, foreclosed the recovery by the drawee as early as August 2000 but it was only on 7 March 2001 when the Bank
of the amount paid. This closure of the transaction is a matter of course; informed petitioners that it will debit from their account the altered
otherwise, uncertainty in commercial transactions, delay and annoyance amount. This delay is tantamount to negligence on the part of the
will arise if a bank at some future time will call on the payee for the return collecting bank which would entitle petitioners to an award for damages
of the money paid to him on the check. under Article 1170 of the New Civil Code which reads:
As the transaction in this case had been closed and the principalagent Art. 1170. Those who in the performance of their obligations are guilty of
relationship between the payee and the collecting bank had already fraud, negligence, or delay, and those who in any manner contravene the
ceased, the latter in returning the amount to the drawee bank was already tenor thereof, are liable for damages.
acting on its own and should now be responsible for its own actions. x x
x Likewise, Far East cannot invoke the warranty of the payee/depositor The damages in the form of actual or compensatory damages represent
who indorsed the instrument for collection to shift the burden it brought the amount debited by the Bank from petitioners’ account.
upon itself. This is precisely because the said indorsement is only for We delete the award of moral damages. Contrary to the lower court’s
purposes of collection which, under Section 36 of the NIL, is a restrictive finding, there was no showing that the Bank acted fraudulently or in bad
indorsement. It did not in any way transfer the title of the instrument to faith. It may have been remiss in its duty to diligently protect the account
the collecting bank. Far East did not own the draft, it merely presented it of its depositors but its honest but mistaken belief that petitioners’ account
for payment. Considering that the warranties of a general indorser as should be debited is not tantamount to bad faith. We also delete the award
provided in Section 66 of the NIL are based upon a transfer of title and of attorney’s fees for it is not a sound public policy to place a premium
are available only to holders in due course, these warranties did not attach on the right to litigate. No damages can becharged to those who exercise
to the indorsement for deposit and collection made by Gold Palace to Far such precious right in good faith, even if done erroneously.34
East. Without any legal right to do so, the collecting bank, therefore, could
not debit respondent's account for the amount it refunded to the drawee To recap, the drawee bank, Philippine Veterans Bank in this case, is only
bank. liable to the extent of the check prior to alteration. Since Philippine
1âwphi1
Veterans Bank paid the altered amount of the check, it may pass the
The foregoing considered, we affirm the ruling of the appellate court to liability back as it did, to Equitable-PCI Bank,the collecting bank. The
the extent that Far East could not debit the account of Gold Palace, and collecting banks, Equitable-PCI Bank and the Bank, are ultimately liable
for doing so, it must return what it had erroneously taken.32 for the amount of the materially altered check. It cannot further pass the
Applying the foregoing ratiocination, the Bank cannot debit the savings liability back to the petitioners absent any showing in the negligence on
account of petitioners. A depositary/collecting bank may resist or defend the part of the petitioners which substantially contributed to the loss from
against a claim for breach of warranty if the drawer, the payee, or either alteration.
the drawee bank or depositary bank was negligent and such negligence
substantially contributed tothe loss from alteration. In the instant case, no

Based on the foregoing, we affirm the Pozasdecision only insofar as it PPPC's monthly invoice to CMCI beginning in October 2000. 11 CMCI
ordered respondents to jointly and severally pay petitioners likewise claims that in a letter dated 30 July 2001, 12 Felicisima proposed
₱1,800,000.00, representing the amount withdrawn from the latter’s to set off PPPC's obligation to pay the mobilization fund with the rentals
account. We do not conform with said ruling regarding the finding of bad for the Prodopak machine.
faith on the part of respondents, as well as its failure toobserve the 24-
hour clearing rule. CMCI argued that the proposal was binding on both PPPC and A TSI
because Felicisima was an officer and a majority stockholder of the two
WHEREFORE, the petition is GRANTED. The Decision and Resolution corporations. Moreover, in a letter dated 16 September 2003, 13 she
dated 29 June 2006 and 12 February 2007 respectively of the Court of allegedly represented to the new management of CMCI that she was
Appeals in CA-G.R. CV No. 83192 are REVERSED and SET ASIDE. authorized to request the offsetting of PPPC's obligation with ATSI's
The 15 January 2004 Decision of the Regional Trial Court of Calamba receivable from CMCI. When ATSI filed suit in November 2003, PPPC's
City, Branch 92 in Civil Case No. B-5886 rendered by Judge Antonio S. debt arising from the mobilization fund allegedly amounted to
Pozas is REINSTATEDonly insofar as it ordered respondents to jointly ₱10,766.272.24.
and severally pay petitioners ₱1,800,000.00 representing the amount
withdrawn from the latter’s account. The award of moral damages and Based on the above, CMCl argued that legal compensation had set in and
attorney’s fees are DELETED. that ATSI was even liable for the balance of PPPC's unpaid obligation
after deducting the rentals for the Prodopak machine.
SO ORDERED.
After trial, the RTC rendered a Decision in favor of ATSI with the
California Manufacturing Company, Inc. v. Advanced following dispositive portion:
Technology System, Inc.
G.R. No. 202454 WHEREFORE, foregoing premises considered, judgment is hereby
rendered in favor of plaintiff and against the defendant, ordering the latter
CALIFORNIA MANUFACTURING COMPANY, INC., Petitioner, to pay the former, the following sums:
vs.
ADVANCED TECHNOLOGY SYSTEM, INC., Respondent. 1. Php443,729.39 representing the unpaid rental for the prodopak
machine plus legal interest from the date of extra judicial demand
DECISION (October 13, 2003 - Exh. "E") until satisfaction of this judgment;
SERENO, J.: 2. 30% of the judgment award as and by way of attorney's fees; and
Before us is a Petition for Review on Certiorari assailing the 3. Cost of litigation.14
Decision 1 of the Court of Appeals (CA) in CA-G.R. CV No. 94409,
which denied the appeal filed by California Manufacturing Company, Inc. The trial court ruled that legal compensation did not apply because PPPC
(CMCI) from the Decision2 of Regional Trial Court (RTC) of Pasig City, had a separate legal personality from its individual stockholders, the
Branch 268, in the Complaint for Sum of Money3 filed by Advanced Spouses Celones, and ATSI. Moreover, there was no board resolution or
Technology Systems, Inc. (ATSI) against the former. any other proof showing that Felicisima's proposal to set-off the unpaid
mobilization fund with CMCI 's rentals to A TSI for the Prodopak
The RTC ordered CMCI to pay ATSI the amount of ₱443,729.39 for the Machine had been authorized by the two corporations. Consequently, the
unpaid rentals for a Prodopak machine, plus legal interest from the date RTC ruled that CMCI's financial obligation to pay the rentals for the
of extra-judicial demand until full payment; 30% of the judgment award Prodopak machine stood and that its claim against PPPC could be
as attorney's fees; and the costs of litigation. The CA affirmed the trial properly ventilated in the proper proceeding upon payment of the required
court's decision, but it deleted the award of attorney's fees for lack of docket fees. 15
factual and legal basis and ordered CMCI to pay the costs of litigation.
On appeal by CMCI, the CA affirmed the trial court's ruling that legal
THE ANTECEDENT FACTS compensation had not set in because the element of mutuality of parties
was lacking. Likewise, the appellate court sustained the trial court's
Petitioner CMCI is a domestic corporation engaged in the food and refusal to pierce the corporate veil. It ruled that there must be clear and
beverage manufacturing business. Respondent ATSI is also a domestic convincing proof that the Spouses Celones had used the separate
corporation that fabricates and distributes food processing machinery and personalities of ATSI or PPPC as a shield to commit fraud or any wrong
equipment, spare parts, and its allied products.4 against CMCI, which was not existing in this case. 16
In August 200 I, CMCI leased from ATSI a Prodopak machine which was Aside from the absence of a board resolution issued by ATSI, the CA
used to pack products in 20-ml. pouches.5The parties agreed to a monthly observed that the letter dated 30 July 2001 clearly showed that
rental of ₱98,000 exclusive of tax. Upon receipt of an open purchase Felicisima's proposal to effect the offsetting of debts was limited to the
order on 6 August 2001, ATSI delivered the machine to CMCI's plant at obligation of PPPC. 17The appellate court thus sustained the trial court's
Gateway Industrial Park, General Trias, Cavite on 8 August 2001. finding that ATSI was not bound by Felicisima's conduct.
In November 2003, ATSI filed a Complaint for Sum of Money against Moreover, the CA rejected CMCI's argument that ATSI is barred by
CMCI to collect unpaid rentals for the months of June, July, August, and estoppel as it found no indication that ATSI had created any appearance
September 2003. ATSI alleged that CMCI was consistently paying the of false fact. 18 CA also held that estoppel did not apply to PPPC because
rents until June 2003 when the latter defaulted on its obligation without the latter was not even a party to this case.
just cause. ATSI also claimed that CMCI ignored all the billing statements
and its demand letter. Hence, in addition to the unpaid rents A TSI sought The CA, however, deleted the trial court's award of attorney's fees and
payment for the contingent attorney's fee equivalent to 30% of the costs of litigation in favor of ATSI as it found no discussion in the body
judgment award. of the decision of the factual and legal justification for the award.
CMCI moved for the dismissal of the complaint on the ground of CMCI filed a Motion for Reconsideration of the CA Decision, but the
extinguishment of obligation through legal compensation. The RTC, appellate court denied the motion for lack of merit. 19 Hence, this
however, ruled that the conflicting claims of the parties required trial on petition.20
the merits. It therefore dismissed the motion to dismiss and directed
CMCI to file an Answer.7 THE ISSUE
In its Answer,8 CMCI averred that ATSI was one and the same with The assignment of errors raised by CMCI all boil down to the question of
Processing Partners and Packaging Corporation (PPPC), which was a toll whether the CA erred in affirming the ruling of the RTC that legal
packer of CMCI products. To support its allegation, CMCI submitted compensation between ATSI's claim against CMCI on the one hand, and
copies of the Articles of Incorporation and General Information Sheets the latter's claim against PPPC on the other hand, has not set in.
(GIS)9 of the two corporations. CMCI pointed out that ATSI was even a OUR RULING
stockholder of PPPC as shown in the latter's GIS. 10
We affirm the CA Decision in toto.
CMCI alleged that in 2000, PPPC agreed to transfer the processing of
CMCI's product line from its factory in Meycauayan to Malolos, Bulacan. CMCI argues that both the RTC and the CA overlooked the circumstances
Upon the request of PPPC, through its Executive Vice President that it has proven to justify the piercing of corporate veil in this case, i.e.,
Felicisima Celones, CMCI advanced ₱4 million as mobilization fund. (1) the interlocking board of directors, incorporators, and majority
PPPC President and Chief Executive Officer Francis Celones allegedly stockholder of PPPC and ATSI; (2) control of the two corporations by the
committed to pay the amount in 12 equal instalments deductible from Spouses Celones; and (3) the two corporations were mere alter egos or

business conduits of each other. CMCI now asks us to disregard the but until now, no action has been done yet. It is on this spirit and time
separate corporate personalities of A TSI and PPPC based on those tested principle of diplomacy that I write this letter.
circumstances and to enter judgment in favor of the application of legal
compensation. I am the Executive Vice President of Processing Partners & Packaging
Corporation (PPPC), a duly organized domestic corporation, engaged in
Whether one corporation is merely an alter ego of another, a sham or the toll packing business.
subterfuge, and whether the requisite quantum of evidence has been
adduced to warrant the puncturing of the corporate veil are questions of Sometime in November of 1996, CMC availed of the toll packing
fact. 21Relevant to this point is the settled rule that in a petition for review services of PPPC. At the outset, business relationship between the two
on certiorari like this case, this Court's jurisdiction is limited to reviewing was going smoothly. In due time, PPPC proved its name to CMC in
errors of law in the absence of any showing that the factual findings delivering quality toll packing services. As a matter of fact, after the
complained of are devoid of support in the records or are glaringly expiration of the toll packing contract, CMC still retained the services of
erroneous. 22 This rule alone wan-ants the denial of the petition, which PPPC. Thus, sometime in the year 2000, CMC executed another toll
essentially asks us to reevaluate the evidence adduced by the pm1ies and packing contract with PPC.
the credibility of the witnesses presented. However, the business relationship unexpectedly turned sour when CMC
We have reviewed the evidence on record and have found no cogent changed its Management in the latter part of 2002. Since then CMC's new
reason to disturb the findings of the co mis a quo that A TSI is distinct management has been committing unsound business practices prejudicial
and separate from PPPC, or from the Spouses Celones. to the interests of PPPC.
Any piercing of the corporate veil must be done with caution.23 As the xxxx
CA had correctly observed, it must be ce11ain that the corporate fiction Failure of CMC to honor its
was misused to such an extent that injustice, fraud, or crime was agreement with PPC anent
committed against another, in disregard of rights. Moreover, the the pickling machinery
wrongdoing must be clearly and convincingly established. Sarona v.
NLRC24 instructs, thus: xxxx
Whether the separate personality of the corporation should be pierced Leapfrog Plant/Jasmine al)d
hinges on obtaining facts appropriately pleaded or proved. However, any Rose Plant
piercing of the corporate veil has to be done with caution, albeit the Court
will not hesitate to disregard the corporate veil when it is misused or when x x x x
necessary in the interest of justice. After all, the concept of corporate
entity was not meant to promote unfair objectives. Pre-termination of toll
The doctrine of piercing the corporate veil applies only in three (3) basic [p]acking [a]greement for
areas, namely: 1) defeat of public convenience as when the corporate KLS Spaghetti Sauce without
fiction is used as a vehicle for the evasion of an existing obligation; 2) just cause
fraud cases or when the corporate entity is used to justify a wrong, protect
fraud, or defend a crime; or 3) alter ego cases, where a corporation is xxxx
merely a farce since it is a mere alter ego or business conduit of a person,
or where the corporation is so organized and controlled and its affairs are Unpaid rentals for the lease
so conducted as to make it merely an instrumentality, agency, conduit or of machinery from Advanced
adjunct of another corporation.25 Technology Systems, Inc.
CMCI 's alter ego theory rests on the alleged interlocking boards of CMC has been leasing a machinery of Advanced Technology Systems,
directors and stock ownership of the two corporations. The CA, however, Inc. (Advanced Tech), a domestic corporation of which I am also the
rejected this theory based on the settled rule that mere ownership by a majority stockholder. CMC owes Advanced Tech. unpaid rentals in
single stockholder of even all or nearly all of the capital stocks of a
corporation, by itself, is not sufficient ground to disregard the corporate the amount of P443,729.37, but despite various demands, CMC refused
veil. We can only sustain the CA's ruling. The instrumentality or control to pay Advanced Tech.
test of the alter ego doctrine requires not mere majority or complete stock
control, but complete domination of finances, policy and business practice
with respect to the transaction in question. The corporate entity must be We have already formally lodged our grievances concerning the
shown to have no separate mind, will, or existence of its own at the time foregoing with the management of CMC. However, until now, no action
of the transaction.26 has been done. We believe that before we take coercive actions available
under the law, it is wise to bring said grievances first to your attention to
Without question, the Spouses Celones are incorporators, directors, and exhaust available venues for amicable settlement.
majority stockholders of the ATSI and PPPC. But that is all that CMCI
has proven. There is no proof that PPPC controlled the financial policies Though PPPC's grievances are ripe for judicial action, we still hope that
and business practices of ATSI either in July 2001 when Felicisima we can settle [the] same amicably. However, if we run out of choices, we
proposed to set off the unpaid ₱3.2 million mobilization fund with will [be] constrained to invoke the aid of the appropriate court. (Emphases
CMCI's rental of Prodopak machines; or in August 2001 when the lease supplied)27
agreement between CMCI and ATSI commenced.
Assuming arguendo that Felicisima was sufficiently clothed with Nothing in the narration above supports CMCI's claim that it had been led
authority to propose the offsetting of obligations, her proposal cannot bind to believe that ATSI and PPPC were one and the same; or, that ATSI's
ATSI because at that time the latter had no transaction yet with CMCI. collectible was intertwined with the business transaction of PPPC with
Besides, CMCI had leased only one Prodopak machine. Felicisima's CMCI.
reference to the Prodopak machines in its letter in July 2001 could only
In all its pleadings, CMCI averred that the P4 million mobilization fund
mean that those were different from the Prodopak machine that CMCI
was in furtherance of its agreement with PPPC in 2000. Prior thereto,
1awp++i1
had leased from A TSI. PPPC had been a toll packer of its products as early as 1996. Clearly,
Contrary to the claim of CMCI, none of the letters from the Spouses CMCI had been dealing with PPPC as a distinct juridical person acting
Celones tend to show that ATSI was even remotely involved in the through its own corporate officers from 1996 to 2003.
proposed offsetting of the outstanding debts of CMCI and PPPC. Even CMCI's dealing with ATSI began only in August 2001. It appears,
Felicisima's letter to the new management of CMCI in 2003 contains
however, that CMCI now wants the Court to gloss over the separate
nothing to support CMCI's argument that Felicisima represented herself
corporate existence ATSI and PPPC notwithstanding the dearth of
to be clothed with authority to propose the offsetting. For clarity, we quote
evidence showing that either PPPC or ATSI had used their corporate
below the relevant portions of her letter: cover to commit fraud or evade their respective obligations to CMCI. It
Gentlemen: even appears that CMCI faithfully discharged its obligation to ATSI for a
good two years without raising any concern about its relationship to
I apologize for writing this letter. But kindly spare me your time and allow PPPC.
to ventilate my grievances against California Manufacturing Corporation
x x x. I had formally lodged my grievances with the management of CMC, The fraud test, which is the second of the three-prong test to determine
the application of the alter ego doctrine, requires that the parent

corporation's conduct in using the subsidiary corporation be unjust, VALIDITY : Prices are based on current dollar rate and subject to changes
fraudulent or wrongful. Under the third prong, or the harm test, a causal without prior notice.
connection between the fraudulent conduct committed through the
instrumentality of the subsidiary and the injury suffered or the damage DELIVERY : Immediate delivery for items on stock, otherwise thirty (30)
incurred by the plaintiff has to be established.28 None of these elements to forty-five days upon receipt of [Purchase Order]
have been demonstrated in this case. Hence, we can only agree with the WARRANTY : One (1) year on parts and services. Accessories not
CA and RTC in ruling out mutuality of parties to justify the application included in warranty.
of legal compensation in this case.
On October 29, 2001, ACE Foods accepted MTCL’s proposal and
accordingly issued Purchase Order No. 10002310(Purchase Order) for the
Article 1279 of the Civil Code provides: subject products amounting to ₱646,464.00 (purchase price). Thereafter,
or on March 4, 2002, MTCL delivered the said products to ACE Foods as
ARTICLE 1279. In order that compensation may be proper, it is reflected in Invoice No. 7733 11 (Invoice Receipt). The fine print of the
necessary: invoice states, inter alia, that "[t]itle to sold property is reserved in
MICROPACIFIC TECHNOLOGIES CO., LTD. until full compliance of
(1) That each one of the obligors be bound principally, and that he be at the terms and conditions of above and payment of the price"12 (title
the same time a principal creditor of the other; reservation stipulation). After delivery, the subject products were then
(2) That both debts consist in a sum of money, or if the things due are installed and configured in ACE Foods’s premises. MTCL’s demands
consumable, they be of the same kind, and also of the same quality if the against ACE Foods to pay the purchase price, however, remained
latter has been stated; unheeded.13 Instead of paying the purchase price, ACE Foods sent MTCL
a Letter14 dated September 19, 2002, stating that it "ha[s] been returning
(3) That the two debts be due; the [subject products] to [MTCL] thru [its] sales representative Mr. Mark
Anteola who has agreed to pull out the said [products] but had failed to
(4) That they be liquidated and demandable; do so up to now."
(5) That over neither of them there be any retention or controversy, Eventually, or on October 16, 2002, ACE Foods lodged a
commenced by third persons and communicated in due time to the debtor. Complaint15 against MTCL before the RTC, praying that the latter pull
The law, therefore, requires that the debts be liquidated and demandable. out from its premises the subject products since MTCL breached its "after
Liquidated debts are those whose exact amounts have already been delivery services" obligations to it, particularly, to: (a) install and
determined. 29 configure the subject products; (b) submit a cost benefit study to justify
the purchase of the subject products; and (c) train ACE Foods’s
CMCI has not presented any credible proof, or even just an exact technicians on how to use and maintain the subject products. 16 ACE
computation, of the supposed debt of PPPC. It claims that the Foods likewise claimed that the subject products MTCL delivered are
mobilization fund that it had advanced to PPPC was in the amount of ₱4 defective and not working.17
million. Yet, Felicisima's proposal to conduct offsetting in her letter dated
30 July 2001 pertained to a ₱3.2 million debt of PPPC to CMCI. For its part, MTCL, in its Answer with Counterclaim,18 maintained that it
Meanwhile, in its Answer to ATSI's complaint, CMCI sought to set off had duly complied with its obligations to ACE Foods and that the subject
its unpaid rentals against the alleged ₱10 million debt of PPPC. The products were in good working condition when they were delivered,
uncertainty in the supposed debt of PPPC to CMCI negates the latter's installed and configured in ACE Foods’s premises. Thereafter, MTCL
invocation of legal compensation as justification for its non-payment of even conducted a training course for ACE Foods’s
the rentals for the subject Prodopak machine. representatives/employees; MTCL, however, alleged that there was
actually no agreement as to the purported "after delivery services."
WHEREFORE, the Decision dated 25 August 2011 and Resolution Further, MTCL posited that ACE Foods refused and failed to pay the
dated 21 June 2012 issued by the Court of Appeals in CA-G.R. CV No. purchase price for the subject products despite the latter’s use of the same
94409 are AFFIRMED. The instant Petition is DENIED for lack of for a period of nine (9) months. As such, MTCL prayed that ACE Foods
merit. be compelled to pay the purchase price, as well as damages related to the
transaction.19
SO ORDERED.
The RTC Ruling
N OVATION
On February 28, 2007, the RTC rendered a Decision, 20 directing MTCL
ACE Foods, Inc. v. Micro Pacific Technologies., Ltd.
to remove the subject products from ACE Foods’s premises and pay
G.R. No. 200602 December 11, 2013
actual damages and attorney fees in the amounts of ₱200,000.00 and
ACE FOODS, INC., Petitioner, ₱100,000.00, respectively.21
vs.
At the outset, it observed that the agreement between ACE Foods and
MICRO PACIFIC TECHNOLOGIES CO., LTD.1, Respondent.
MTCL is in the nature of a contract to sell. Its conclusion was based on
DECISION the fine print of the Invoice Receipt which expressly indicated that "title
to sold property is reserved in MICROPACIFIC TECHNOLOGIES CO.,
PERLAS-BERNABE, J.: LTD. until full compliance of the terms and conditions of above and
payment of the price," noting further that in a contract to sell, the
Assailed in this petition for review on certiorari2are the Decision3 dated
prospective seller explicitly reserves the transfer of title to the prospective
October 21, 2011 and Resolution4 dated February 8, 2012 of the Court of
buyer, and said transfer is conditioned upon the full payment of the
Appeals (CA) in CA-G.R. CV No. 89426 which reversed and set aside
purchase price.22 Thus, notwithstanding the execution of the Purchase
the Decision5 dated February 28, 2007 of the Regional Trial Court of
Order and the delivery and installation of the subject products at the
Makati, Branch 148 (RTC) in Civil Case No. 02-1248, holding petitioner
offices of ACE Foods, by express stipulation stated in the Invoice Receipt
ACE Foods, Inc. (ACE Foods) liable to respondent Micro Pacific
issued by MTCL and signed by ACE Foods, i.e., the title reservation
Technologies Co., Ltd. (MTCL) for the payment of Cisco Routers and
stipulation, it is still the former who holds title to the products until full
Frame Relay Products (subject products) amounting to ₱646,464.00
payment of the purchase price therefor. In this relation, it noted that the
pursuant to a perfected contract of sale.
full payment of the price is a positive suspensive condition, the non-
The Facts payment of which prevents the obligation to sell on the part of the
seller/vendor from materializing at all.23 Since title remained with MTCL,
ACE Foods is a domestic corporation engaged in the trading and the RTC therefore directed it to withdraw the subject products from ACE
distribution of consumer goods in wholesale and retail bases,6 while Foods’s premises. Also, in view of the foregoing, the RTC found it
MTCL is one engaged in the supply of computer hardware and unnecessary to delve into the allegations of breach since the non-
equipment.7 happening of the aforesaid suspensive condition ipso jure prevented the
obligation to sell from arising.24
On September 26, 2001, MTCL sent a letter-proposal8 for the delivery
and sale of the subject products to be installed at various offices of ACE Dissatisfied, MTCL elevated the matter on appeal.25
Foods. Aside from the itemization of the products offered for sale, the
said proposal further provides for the following terms, viz.:9 The CA Ruling
TERMS : Thirty (30) days upon delivery In a Decision26 dated October 21, 2011, the CA reversed and set aside the
RTC’s ruling, ordering ACE Foods to pay MTCL the amount of

₱646,464.00, plus legal interest at the rate of 6% per annum to be From that moment, the parties may reciprocally demand performance,
computed from April 4, 2002, and attorney’s fees amounting to subject to the provisions of the law governing the form of contracts.
₱50,000.00.27
At this juncture, the Court must dispel the notion that the stipulation anent
It found that the agreement between the parties is in the nature of a MTCL’s reservation of ownership of the subject products as reflected in
contract of sale, observing that the said contract had been perfected from the Invoice Receipt, i.e., the title reservation stipulation, changed the
the time ACE Foods sent the Purchase Order to MTCL which, in turn, complexion of the transaction from a contract of sale into a contract to
delivered the subject products covered by the Invoice Receipt and sell. Records are bereft of any showing that the said stipulation novated
subsequently installed and configured them in ACE Foods’s the contract of sale between the parties which, to repeat, already existed
premises.28 Thus, considering that MTCL had already complied with its at the precise moment ACE Foods accepted MTCL’s proposal. To be
obligation, ACE Foods’s corresponding obligation arose and was then sure, novation, in its broad concept, may either be extinctive or
duty bound to pay the agreed purchase price within thirty (30) days from modificatory. It is extinctive when an old obligation is terminated by the
March 5, 2002.29 In this light, the CA concluded that it was erroneous for creation of a new obligation that takes the place of the former; it is merely
ACE Foods not to pay the purchase price therefor, despite its receipt of modificatory when the old obligation subsists to the extent it remains
the subject products, because its refusal to pay disregards the very essence compatible with the amendatory agreement. In either case, however,
of reciprocity in a contract of sale.30 The CA also dismissed ACE Foods’s novation is never presumed, and the animus novandi, whether totally or
claim regarding MTCL’s failure to perform its "after delivery services" partially, must appear by express agreement of the parties, or by their acts
obligations since the letter-proposal, Purchase Order and Invoice Receipt that are too clear and unequivocal to be mistaken.38
do not reflect any agreement to that effect.31
In the present case, it has not been shown that the title reservation
Aggrieved, ACE Foods moved for reconsideration which was, however, stipulation appearing in the Invoice Receipt had been included or had
denied in a Resolution 32 dated February 8, 2012, hence, this petition. subsequently modified or superseded the original agreement of the
parties. The fact that the Invoice Receipt was signed by a representative
The Issue Before the Court of ACE Foods does not, by and of itself, prove animus novandi since: (a)
The essential issue in this case is whether ACE Foods should pay MTCL it was not shown that the signatory was authorized by ACE Foods (the
the purchase price for the subject products. actual party to the transaction) to novate the original agreement; (b) the
signature only proves that the Invoice Receipt was received by a
The Court’s Ruling representative of ACE Foods to show the fact of delivery; and (c) as
matter of judicial notice, invoices are generally issued at the
The petition lacks merit. consummation stage of the contract and not its perfection, and have been
A contract is what the law defines it to be, taking into consideration its even treated as documents which are not actionable per se, although they
essential elements, and not what the contracting parties call it.33 The real may prove sufficient delivery. 39 Thus, absent any clear indication that the
nature of a contract may be determined from the express terms of the title reservation stipulation was actually agreed upon, the Court must
written agreement and from the contemporaneous and subsequent acts of deem the same to be a mere unilateral imposition on the part of MTCL
the contracting parties. However, in the construction or interpretation of which has no effect on the nature of the parties’ original agreement as a
an instrument, the intention of the parties is primordial and is to be contract of sale. Perforce, the obligations arising thereto, among others,
pursued. The denomination or title given by the parties in their contract ACE Foods’s obligation to pay the purchase price as well as to accept
is not conclusive of the nature of its contents.34 the delivery of the goods,40 remain enforceable and subsisting. 1âwphi1
The very essence of a contract of sale is the transfer of ownership in As a final point, it may not be amiss to state that the return of the subject
exchange for a price paid or promised. 35This may be gleaned from products pursuant to a rescissory action41is neither warranted by ACE
Article 1458 of the Civil Code which defines a contract of sale as follows: Foods’s claims of breach – either with respect to MTCL’s breach of its
purported "after delivery services" obligations or the defective condition
Art. 1458. By the contract of sale one of the contracting parties obligates of the products - since such claims were not adequately proven in this
himself to transfer the ownership and to deliver a determinate thing, and case. The rule is clear: each party must prove his own affirmative
the other to pay therefor a price certain in money or its equivalent. allegation; one who asserts the affirmative of the issue has the burden of
presenting at the trial such amount of evidence required by law to obtain
A contract of sale may be absolute or conditional. (Emphasis supplied) a favorable judgment, which in civil cases, is by preponderance of
Corollary thereto, a contract of sale is classified as a consensual contract, evidence. 42 This, however, ACE Foods failed to observe as regards its
which means that the sale is perfected by mere consent. No particular allegations of breach. Hence, the same cannot be sustained.
form is required for its validity. Upon perfection of the contract, the WHEREFORE, the petition is DENIED. Accordingly, the Decision
parties may reciprocally demand performance, i.e., the vendee may dated October 21, 2011 and Resolution dated February 8, 2012 of the
compel transfer of ownership of the object of the sale, and the vendor may Court of Appeals in CA-G.R. CV No. 89426 are hereby AFFIRMED.
require the vendee to pay the thing sold.36
SO ORDERED.
In contrast, a contract to sell is defined as a bilateral contract whereby
the prospective seller, while expressly reserving the ownership of the Philippine Reclamation Authority v. Romago, Inc.
property despite delivery thereof to the prospective buyer, binds himself G.R. No. 174665 September 18, 2013
to sell the property exclusively to the prospective buyer upon fulfillment
of the condition agreed upon, i.e., the full payment of the purchase price. PHILIPPINE RECLAMATION AUTHORITY (Formerly known as the
A contract to sell may not even be considered as a conditional contract PUBLIC ESTATES AUTHORITY), Petitioner,
of sale where the seller may likewise reserve title to the property subject vs.
of the sale until the fulfillment of a suspensive condition, because in a ROMAGO, INCORPORATED, Respondent.
conditional contract of sale, the first element of consent is present, x-----------------------x
although it is conditioned upon the happening of a contingent event which
may or may not occur.37 G.R. No. 175221
In this case, the Court concurs with the CA that the parties have agreed to ROMAGO, INCORPORATED, Petitioner,
a contract of sale and not to a contract to sell as adjudged by the RTC. vs.
Bearing in mind its consensual nature, a contract of sale had been PHILIPPINE RECLAMATION AUTHORITY (Formerly known as the
perfected at the precise moment ACE Foods, as evinced by its act of PUBLIC ESTATES AUTHORITY),Respondent.
sending MTCL the Purchase Order, accepted the latter’s proposal to sell
the subject products in consideration of the purchase price of DECISION
₱646,464.00. From that point in time, the reciprocal obligations of the ABAD, J.:
parties – i.e., on the one hand, of MTCL to deliver the said products to
ACE Foods, and, on the other hand, of ACE Foods to pay the purchase These cases pertain to the defense of novation by virtue of the debtor’s
price therefor within thirty (30) days from delivery – already arose and assignment to a third party of its contractual liability to the creditor.
consequently may be demanded. Article 1475 of the Civil Code makes
this clear: The Facts and the Case
Art. 1475. The contract of sale is perfected at the moment there is a In order to convert former military reservations and installations to
meeting of minds upon the thing which is the object of the contract and productive use and raise funds out of the sale of portions of the country’s
1 2
upon the price. military camps, in 1992 Congress enacted Republic Act 7227, creating

the Bases Conversion and Development Authority (BCDA). Pursuant to Because the HPMC refused to recognize the PRA’s contract with it, on
3 March 17, 2004 Romago filed with the Construction Industry Arbitration
this law, the President issued Executive Order 40, Series of 1992, setting
16
aside portions of Fort Bonifacio in Taguig, Metro Manila, for the Heritage Commission (CIAC) a complaint, docketed as CIAC Case 18-
Park Project, aimed at converting a 105-hectare land into a world class 2004,seeking to collect its claims totaling ₱24,467,621.64, plus interest
4 from the PRA, HPMC, and Rosehills Memorial Management (Phils.), Inc.
memorial park for the purpose of generating funds for the BCDA.
(RMMI). Romago claimed that it won the bidding for the construction of
On August 9, 1993 the BCDA entered into a Memorandum of the electrical and lighting facilities at the Heritage Park for
5 17
Agreement (MOA) with the Philippine Reclamation Authority ₱181,779,800.00 but PRA deducted 3% from the bid amount, reducing
(PRA),formerly the Public Estates Authority, designating it as the Project 18
the contract price to₱176,326,794.10.
Manager. On September 9, 1994 the BCDA, PRA, and the Philippine
National Bank (PNB) executed a Pool Formation Trust Agreement Because of problems encountered with illegal settlers, only around 60of
6 the 105-hectare park was delivered to Romago for lighting work, reducing
(PFTA) under which BCDA, as project owner, was to issue Heritage Park
19
Investment Certificates that would evidence the holders’ right to the the contract price to ₱101,083,636.16. But this amount was adjusted to
perpetual use and care of specific interment plots. The PFTA designated 20
₱109,330,032.81 due to PRA variation orders. Although Romago
PRA as Project Manager, tasked with the physical development of the completed 96.15% of the works, it claimed that the PRA paid it
7 21
park. The PNB was to act as trustee for the Heritage Park securitization. only₱82,929,577.22 instead of the ₱105,120,826.50 due it. Romago
After public bidding, the PRA awarded the outdoor electrical and lighting also claimed that it should be reimbursed the ₱9,336,054.15 retention
works for the park to respondent Romago, Inc. (Romago) with which it money that it posted since its services had already been terminated and
22
entered into a Construction Agreement on March 18, 1996 for the contract since it had substantially completed the Heritage Park Project.
8
price of ₱176,326,794.10. On receipt of the PRA’s notice to Romago also sought payment of the additional costs and expenses that it
9 10
proceed, Romago immediately began construction works. Meanwhile, incurred by reason of PRA’s delays in turning over the project area, in
the parties to the PFTA organized the Heritage Park Management delivering the owner-supplied equipment, and in solving the security
11 problems at the work site. These included price escalation of materials
Corporation (HPMC) to take over the management of the project. On
February 24, 2000 the Chairman of HPMC Board of Trustees, Mr. and supplies, at ₱857,799.10; and extended overhead costs, at
23
Rogelio L. Singson, sent a notice of termination of management to then ₱10,051,870.61. And, for mobilizations costs that it spent preparing for
PRA General Manager Carlos P. Doble with a demand for the turnover of works on the entire105-hectare project area, Romago sought additional
12
the park to HPMC. The letter reads: payment of ₱7,524,315.79 plus interest of ₱517,923.74 from April 12,
1999 to May 31,1999 or a total of ₱8,042,239.53. It also claimed
Pursuant to Article 11 of the Pool Formation Trust Agreement(PFTA), proportionate refund of ₱2,327,107.97 out of the 3% discount applied to
the certificate holders of the Heritage Park Management Corporation 24
its original bid and ₱420,944.02 in damages for the unceremonious
(HPMC) duly elected its Board of Trustees at the 03 January2000 meeting 25
held at the BCDA Corporate Center. Attached is a copy of the Secretary’s termination of its services.
Certificate attesting to said election of the HPMC Board of Trustees. Romago admitted, however, owing the PRA ₱15,475,835.42 in
Section 11.07 of the PFTA provides that upon the election of the Board unrecouped prepaid materials and ₱12,286,795.12 in unrecouped down
26
of Trustees, the PNB shall turnover to the Board all its functions and payment.
responsibilities, and all documents in its custody, including all Heritage
Park Accounts, except the General Fund, which will go to BCDA. Upon In its answer, the PRA denied liability, claiming that it entered into the
such turnover and upon the complete and faithful performance by PNB construction agreement with Romago after its approval by the Heritage
and [PRA] of their respective obligations under this Agreement, the Park Executive Committee, the policy-making and governing body of the
respective obligations of [PRA] and PNB under this Agreement shall be Heritage Park Project. The PRA merely processed and recommended
deemed terminated. payment of all the works done. The money came from the project’s
Construction and Development Fund that PRA did not control. PNB acted
[PRA] shall turnover to the Board of Trustees all the documents and as trustee of the fund under the PFTA. Since these funds had all been
equipment it has in its possession relating to the Project and the Park, turned over to the HPMC when the latter came into being, Romago should
including the computer hardware and software pertaining to the 27
not address its claims to PRA.
geographical information system of the Park."
Rather than answer the complaint, the HPMC and RMMI moved to
Pursuant to the foregoing provision, we hereby formally advise you of the dismiss it, claiming that CIAC had no jurisdiction over them since they
termination of [PRA’s] obligations, duties and responsibilities as Project 28
Manager under the PFTA, effective upon receipt of this letter. We also never agreed to arbitration. Additionally, the HPMC said that the
formally request for [PRA] to turn over, within fifteen (15) days from PRA’s turnover of the Heritage Park project to it did not amount to
receipt of this letter, the documents and equipment relating to the Heritage assignment of the PRA’s liabilities under the construction agreement.
Park Project, including the computer hardware and software in [PRA’s] Further, its termination of the PRA’s authority over the project carried
possession pertaining to the geographical information system of the with it the termination of any Construction Agreement that the PRA
13 entered into.
Park.
For its part, RMMI averred that it was merely the undertaker at the
The PRA lost no time in informing Romago of the consequent termination Heritage Park, tasked with providing services for embalming, burial,
14 29
of its services. Thus, it wrote Romago a letter on March 13,2000: cremation, and other activities for the care of the dead.
As a consequence of the assumption of functions, duties and On July 22, 2004 the CIAC issued an order dropping RMMI as respondent
responsibilities by the Heritage Park Management Corporation, as 30
provided for under the provisions of the Pool Formation Trust Agreement, but denying the HPMC’s motion to dismiss the case against it. The
we are constrained to assign the Electrical Works contract entered with HPMC elevated the CIAC order to the Court of Appeals (CA) by special
you on March 18, 1996 including all supplemental agreements relative civil action of certiorari and prohibition in CA-G.R. SP 86342.
thereto, effective March 18, 2000 in favor of the Heritage Park Meantime, after due proceedings, on October 22, 2004 the CIAC rendered
Management Corporation. The formal turnover on March 17, 2000 31
by[PRA] to the Heritage Park Management Corporation of all its a decision, holding the PRA and the HPMC jointly and severally liable
obligations, duties and responsibilities, and all documents relating to the to Romago for the following amounts:
Heritage Park Project, was made pursuant to the attached letter of the
Chairman of HPMC Board of Trustees, Mr. Rogelio L. Singson to the The unpaid balance of the 96.15%
[PRA], received by us on March 02, 2000.
accomplishment ---------------------------------------------------------------
By virtue of this assignment, all the contractual functions, responsibilities
and liabilities, if any, as well as any cause of action for or against [PRA]
shall hereafter accrue to and devolve upon the assignee hereof. Interest from 15 May 2002 to 31
15 January 2004 at 6% per annum --------------------------------------------

Please be guided accordingly.

The PRA and Romago separately moved for reconsideration of the
Plus:
decision but the CA denied both motions in its August 24,
36
2006Resolution. Undeterred, both parties filed separate petitions for
1.1.1 – Retention Charges ---------------- ₱9,336,054.15
review before this Court in G.R. 174665 for the PRA and in G.R. 175221
for Romago.
1.1.2 – Price Escalation ------------------- The775,793.55

Issues Presented
These consolidated cases present the following issues:
1.1.3 – Damages for Closure of Area -- 8,042,239.53
1. Whether or not the CA erred in holding the PRA still liable to Romago
under the Construction Agreement despite the subsequent turnover of the
1.1.4 – Reimbursement for Pro-rata
Heritage Park Project to the HPMC; and
discount ---------------------------- 2. Whether or not the CA erred in reducing the CIAC award for actual
(not entitled)
damages to Romago to just ₱8,935,673.86.
The Rulings of the Court
1.1.5 – Damages for Stoppage of Works 420,944.02
The PRA claims that its liability under its contract with Romago had been
extinguished by novation when it assigned all its obligations to the HPMC
Sub-Total ------- ₱18,575,031.25
pursuant to the provisions of the PFTA. The PRA insists that the CA
erroneously applied to the case the 2001 ruling of the Court in Public
Less: 37
Estates Authority v. Uy that also involved the Heritage Park Project.
Uy dealt only with the PRA and the HPMC came into the picture only
after the case has been filed. Here, while Romago first dealt with the PRA,
Unrecouped prepaid materials and
it eventually dealt with the HPMC before the construction company can
unrecouped downpayment -------------------------------------------------- finish the contracted works, evidencing novation of parties.
27,762,642.54
In novation, a subsequent obligation extinguishes a previous one through
Actual Damages Due -------------------------- substitution either by changing the object or principal conditions, by
₱15,280,012.35
substituting another in place of the debtor, or by subrogating a third
38
person into the rights of the creditor. Novation requires (a) the existence
Plus: of a previous valid obligation; (b) the agreement of all parties to the new
contract; (c) the extinguishment of the old contract; and (d) the validity of
39
Additional 6% interest from February 1, 2004
the new one.
to August 31, 2004 on the ₱15,280,012.35 ----------------------------- There cannot be novation in this case since the proposed substituted
534,800.43
parties did not agree to the PRA’s supposed assignment of its obligations
under the contract for the electrical and light works at Heritage Park to
Costs of Arbitration: the HPMC. The latter definitely and clearly rejected the PRA’s
assignment of its liability under that contract to the HPMC. Romago tried
to follow up its claims with the HPMC, not because of any new contract
Filing Fee ------------------- ₱26,834.39
it entered into with the latter, but simply because the PRA told it that the
HPMC would henceforth assume the PRA’s liability under its contract
with Romago. 1âwph i1
Administrative Fee ------- 28,164.39

Besides, Section 11.07 of the PFTA makes it clear that the termination of
the PRA’s obligations is conditioned upon the turnover of documents,
Arbitrator’s Fees ---------- 316,296.95computer hardware and software on the geographical
equipment,
information system of the Park; and the completion and faithful
performance of its respective duties and responsibilities under the PFTA.
ADF ------------------------- More25,323.99
importantly, Section 11.07 did not say that the HPMC shall,
thereafter, assume the PRA’s obligations. On the contrary, Section 7.01
of the PFTA recognizes that contracts that the PRA entered into in its own
Total Cost of Arbitration -----------------------
name and makes it liable for the same.₱396,608.73
Thus:
Section 7.01. Liability of BCDA and [PRA]. BCDA and [PRA]shall be
Total Award -------------------------------------- liable in accordance herewith only ₱16,211,421.51 32
to the extent of the obligations
specifically undertaken by BCDA and [PRA] herein and any other
documents or agreements relating to the Project, and in which they are
40
Not satisfied with the CIAC decision, the PRA filed a petition for review parties.
of the same with the CA in CA-G.R. SP 88059. Romago claims that the CA award should be increased to₱13,598,139.24
Meantime on February 18, 2005 the CA rendered a Decision in CA-G.R. based on the detailed account of expenses and cash payments as of
SP 86342, dismissing Romago’s complaint before the CIAC against the December 31, 2005 that it submitted. But the Court cannot agree.
HPMC on the ground that the latter did not have an arbitration agreement Engineer J. R. Milan testified that Romago received ₱86,479,617.61 out
33 of ₱105,120,826.50 worth of work that it accomplished, thereby leaving
with Romago. a deficiency of only ₱18,641,208.89. Thus:
34
On December 20, 2005 the CA rendered a Decision in CA-G.R. ATTY. S.B. GARCIA:
S₱88059, the main case, finding that the unpaid accomplishment of
Romago should be reduced from ₱22,191,249.33 to ₱18,641,208.89, and Mr. Witness, from the time you became the Project Manager of Heritage
that interests on the damages awarded to Romago arising from the Park Project up to the time it turned over its responsibilities to HPMC,
reduction in project area and on its unpaid accomplishment from May 15, can you recall how much [PRA] already paid to Romago? You can refer
2002 to January 31, 2004 should be deleted, therefore entitling it to actual to any documents we have now with you for recollection.
35
damages in the amount of ₱8,935,673.86 plus interest from February ENGR. J.R. MILLAN:
1, 2004 to August 31, 2004 and the costs of arbitration.
Based on progress Report No. 50, which was submitted by the Managing
The CA rejected the PRA’s argument that it can no longer be held liable Consultant of Robert Espiritu, the accomplishment as of February 29,
to Romago after turning over and assigning the project, including all its 2000, the amount disbursed as of Billing no. 14A is₱86,479,617.61.
duties and obligations relating to it, to the HPMC. Romago was not a party
to the PFTA and it did not give consent to the PRA’s supposed assignment ATTY. S.B. GARCIA:
of its obligations to the HPMC.

What document again are you referring to, Mr. Witness? collision led to the sinking of both vessels. The entire petroleum cargo of
5
ENGR. J.R. MILLAN:This is a Progress Report dated March 8, 2000 Caltex on board the M/T Vector perished. On July 12, 1988, respondent
addressed to the [Philippine Reclamation Authority], Progress Report No. indemnified Caltex for the loss of the petroleum cargo in the full amount
6
50 submitted by Mr. Roberto Espiritu. of ₱7,455,421.08.
ATTY. S.B. GARCIA: And the one where the ₱86,479,617.61, the On March 5, 1992, respondent filed a complaint against Vector, Soriano,
document which reflects that amount, that is what the document? and Sulpicio Lines, Inc. to recover the full amount of ₱7,455,421.08 it
7
ENGR. J.R. MILLAN: paid to Caltex (Civil Case No. 92-620). The case was raffled to Branch
145 of the Regional Trial Court (RTC) in Makati City.
This is the attachment to the accomplishment of Romago kasi the
Managing Consultant who made the report, they were the ones computing On December 10, 1997, the RTC issued a resolution dismissing Civil
the accomplishments of the contractors. All the contractors in the project, Case No. 92-620 on the following grounds:
bale ito yong report nila . For Romago, ito yong report niya as of This action is upon a quasi-delict and as such must be commenced within
February29, 2000. four 4 years from the day they may be brought. [Art. 1145 in relation to
ATTY. S.B. GARCIA: Art. 1150, Civil Code] "From the day [the action] may be brought" means
from the day the quasi-delict occurred. [Capuno v. Pepsi Cola, 13 SCRA
Your Honor, please, may I request that this accomplishment report as 663]
February 29, 2000 for outdoor electrical and lighting works be marked as
41 The tort complained of in this case occurred on 20 December 1987. The
our exhibit "R-2-10." action arising therefrom would under the law prescribe, unless
Had the above testimony been untrue, Romago should have refuted the interrupted, on 20 December 1991.
same considering that it had every opportunity to do so. On the contrary, When the case was filed against defendants Vector Shipping and
42
it even adopted the same document as its own exhibit. In effect, Francisco Soriano on 5 March 1992, the action not having been
Romago conceded the correctness of the PRA’s valuation of the balance interrupted, had already prescribed.
due it.
Under the same situation, the cross-claim of Sulpicio Lines against Vector
In keeping with this Court’s ruling in Eastern Shipping Lines, Inc. v. Shipping and Francisco Soriano filed on 25 June 1992 had likewise
43 prescribed.
Court of Appeals, the Court deems it proper to impose legal interest of
6% per annum on the amount finally adjudged, reckoned from October The letter of demand upon defendant Sulpicio Lines allegedly on 6
22,2004, the date the CIAC rendered judgment until the same is wholly November 1991 did not interrupt the tolling of the prescriptive period
44
satisfied. since there is no evidence that it was actually received by the addressee.
Under such circumstances, the action against Sulpicio Lines had likewise
WHEREFORE , the Court AFFIRMS the Decision dated December 20, prescribed.
2005 and Resolution dated August 24, 2006 of the Court of Appeals in
CA-G.R. SP 88059 with MODIFICATION , directing the Philippine Even assuming that such written extra-judicial demand was received and
Reclamation Authority to pay Romago in addition to the the prescriptive period interrupted in accordance with Art. 1155, Civil
₱8,935,673.86award of actual damages, legal interest of 6% per annum Code, it was only for the 10-day period within which Sulpicio Lines was
from October 22,2004 until the judgment against it is wholly paid; and required to settle its obligation. After that period lapsed, the prescriptive
the costs of arbitration in the amount of ₱396,608.73. period started again. A new 4-year period to file action was not created
by the extra-judicial demand; it merely suspended and extended the
SO ORDERED. period for 10 days, which in this case meant that the action should be
Vector Shipping Corporation v. Amercan Home Assurance Co. commenced by 30 December 1991, rather than 20 December 1991.
G.R. No. 159213 July 3, 2013 Thus, when the complaint against Sulpicio Lines was filed on 5 March
VECTOR SHIPPING CORPORATION and FRANCISCO 1992, the action had prescribed.
SORIANO, Petitioners, PREMISES CONSIDERED, the complaint of American Home
vs. Assurance Company and the cross-claim of Sulpicio Lines against Vector
AMERICAN HOME ASSURANCE COMPANY and SULPICIO Shipping Corporation and Francisco Soriano are DISMISSED.
LINES, INC., Respondents.
Without costs.
DECISION
8
BERSAMIN, J.: SO ORDERED.
Subrogation under Article 2207 of the Civil Code gives rise to a cause of Respondent appealed to the CA, which promulgated its assailed decision
9
action created by law. For purposes of the law on the prescription of on July 22, 2003 reversing the RTC. Although thereby absolving
actions, the period of limitation is ten years. Sulpicio Lines, Inc. of any liability to respondent, the CA held Vector and
Soriano jointly and severally liable to respondent for the reimbursement
The Case of the amount of ₱7,455,421.08 paid to Caltex, explaining:
Vector Shipping Corporation (Vector) and Francisco Soriano appeal the xxxx
1
decision promulgated on July 22, 2003, whereby the Court of Appeals
(CA) held them jointly and severally liable to pay ₱7 ,455,421.08 to The resolution of this case is primarily anchored on the determination of
American Home Assurance Company (respondent) as and by way of what kind of relationship existed between Caltex and M/V Dona Paz and
actual damages on the basis of respondent being the subrogee of its between Caltex and M/T Vector for purposes of applying the laws on
insured Caltex Philippines, Inc. (Caltex). prescription. The Civil Code expressly provides for the number of years
before the extinctive prescription sets in depending on the relationship
Antecedents that governs the parties.
Vector was the operator of the motor tanker M/T Vector, while Soriano xxxx
was the registered owner of the M/T Vector. Respondent is a domestic
2 After a careful perusal of the factual milieu and the evidence adduced by
insurance corporation. the parties, We are constrained to rule that the relationship that existed
On September 30, 1987, Caltex entered into a contract of between Caltex and M/V Dona Paz is that of a quasi-delict while that
3 between Caltex and M/T Vector is culpa contractual based on a Contract
Affreightment with Vector for the transport of Caltex’s petroleum cargo of Affreightment or a charter party.
through the M/T Vector. Caltex insured the petroleum cargo with
respondent for ₱7,455,421.08 under Marine Open Policy No. 34-5093- xxxx
4
6. In the evening of December 20, 1987, the M/T Vector and the M/V On the other hand, the claim of appellant against M/T Vector is anchored
Doña Paz, the latter a vessel owned and operated by Sulpicio Lines, Inc., on a breach of contract of affreightment. The appellant averred that M/T
collided in the open sea near Dumali Point in Tablas Strait, located Vector committed such act for having misrepresented to the appellant that
between the Provinces of Marinduque and Oriental Mindoro. The said vessel is seaworthy when in fact it is not. The contract was executed

between Caltex and M/T Vector on September 30, 1987 for the latter to Article 1144. The following actions must be brought within ten years
transport thousands of barrels of different petroleum products. Under from the time the cause of action accrues:
Article 1144 of the New Civil Code, actions based on written contract
must be brought within 10 years from the time the right of action accrued. (1)Upon a written contract;
A passenger of a ship, or his heirs, can bring an action based on culpa (2)Upon an obligation created by law;
contractual within a period of 10 years because the ticket issued for the
transportation is by itself a complete written contract (Peralta de Guerrero (3)Upon a judgment.
vs. Madrigal Shipping Co., L 12951, November 17, 1959).
We need to clarify, however, that we cannot adopt the CA’s
Viewed with reference to the statute of limitations, an action against a characterization of the cause of action as based on the contract of
carrier, whether of goods or of passengers, for injury resulting from a affreightment between Caltex and Vector, with the breach of contract
breach of contract for safe carriage is one on contract, and not in tort, and being the failure of Vector to make the M/T Vector seaworthy, as to make
is therefore, in the absence of a specific statute relating to such actions this action come under Article 1144 (1), supra. Instead, we find and hold
governed by the statute fixing the period within which actions for breach that that the present action was not upon a written contract, but upon an
of contract must be brought (53 C.J.S. 1002 citing Southern Pac. R. Co. obligation created by law. Hence, it came under Article 1144 (2) of the
of Mexico vs. Gonzales 61 P. 2d 377, 48 Ariz. 260, 106 A.L.R. 1012). Civil Code. This is because the subrogation of respondent to the rights of
Caltex as the insured was by virtue of the express provision of law
Considering that We have already concluded that the prescriptive periods embodied in Article 2207 of the Civil Code, to wit:
for filing action against M/V Doña Paz based on quasi delict and M/T
Vector based on breach of contract have not yet expired, are We in a Article 2207. If the plaintiff’s property has been insured, and he has
position to decide the appeal on its merit. received indemnity from the insurance company for the injury or loss
arising out of the wrong or breach of contract complained of, the
We say yes. insurance company shall be subrogated to the rights of the insured against
xxxx the wrongdoer or the person who has violated the contract. If the amount
paid by the insurance company does not fully cover the injury or loss, the
Article 2207 of the Civil Code on subrogation is explicit that if the aggrieved party shall be entitled to recover the deficiency from the person
plaintiff’s property has been insured, and he has received indemnity from causing the loss or injury. (Emphasis supplied)
the insurance company for the injury or loss arising out of the wrong or
breach of contract complained of, the insurance company should be The juridical situation arising under Article 2207 of the Civil Code is well
subrogated to the rights of the insured against the wrongdoer or the person explained in Pan Malayan Insurance Corporation v. Court of
17
who has violated the contract. Undoubtedly, the herein appellant has the Appeals, as follows:
rights of a subrogee to recover from M/T Vector what it has paid by way
of indemnity to Caltex. Article 2207 of the Civil Code is founded on the well-settled principle of
subrogation. If the insured property is destroyed or damaged through the
1âwphi1
WHEREFORE, foregoing premises considered, the decision dated fault or negligence of a party other than the assured, then the insurer, upon
December 10, 1997 of the RTC of Makati City, Branch 145 is hereby payment to the assured, will be subrogated to the rights of the assured to
REVERSED. Accordingly, the defendant-appellees Vector Shipping recover from the wrongdoer to the extent that the insurer has been
Corporation and Francisco Soriano are held jointly and severally liable to obligated to pay. Payment by the insurer to the assured operates as an
the plaintiff-appellant American Home Assurance Company for the equitable assignment to the former of all remedies which the latter may
payment of ₱7,455,421.08 as and by way of actual damages. have against the third party whose negligence or wrongful act caused the
loss. The right of subrogation is not dependent upon, nor does it grow
1âwphi1
10
SO ORDERED. out of, any privity of contract or upon written assignment of claim. It
accrues simply upon payment of the insurance claim by the insurer
Respondent sought the partial reconsideration of the decision of the CA, [Compania Maritima v. Insurance Company of North America, G.R. No.
contending that Sulpicio Lines, Inc. should also be held jointly liable with L-18965, October 30, 1964, 12 SCRA 213; Fireman’s Fund Insurance
11
Vector and Soriano for the actual damages awarded. On their part, Company v. Jamilla & Company, Inc., G.R. No. L-27427, April 7, 1976,
however, Vector and Soriano immediately appealed to the Court on 18
70 SCRA 323].
12
September 12, 2003. Thus, on October 1, 2003, the CA held in
abeyance its action on respondent’s partial motion for reconsideration Verily, the contract of affreightment that Caltex and Vector entered into
13 did not give rise to the legal obligation of Vector and Soriano to pay the
pursuant to its internal rules until the Court has resolved this appeal. demand for reimbursement by respondent because it concerned only the
Issues agreement for the transport of Caltex’s petroleum cargo. As the Court has
aptly put it in Pan Malayan Insurance Corporation v. Court of Appeals,
The main issue is whether this action of respondent was already barred by supra, respondent’s right of subrogation pursuant to Article 2207, supra,
prescription for bringing it only on March 5, 1992. A related issue was "not dependent upon, nor did it grow out of, any privity of contract
concerns the proper determination of the nature of the cause of action as or upon written assignment of claim but accrued simply upon payment of
arising either from a quasi-delict or a breach of contract. the insurance claim by the insurer."
The Court will not pass upon whether or not Sulpicio Lines, Inc. should Considering that the cause of action accrued as of the time respondent
also be held jointly liable with Vector and Soriano for the actual damages actually indemnified Caltex in the amount of ₱7,455,421.08 on July 12,
claimed. 19
1988, the action was not yet barred by the time of the filing of its
20
Ruling complaint on March 5, 1992, which was well within the 10-year period
prescribed by Article 1144 of the Civil Code.
The petition lacks merit.
The insistence by Vector and Soriano that the running of the prescriptive
Vector and Soriano posit that the RTC correctly dismissed respondent’s period was not interrupted because of the failure of respondent to serve
complaint on the ground of prescription. They insist that this action was any extrajudicial demand was rendered inconsequential by our foregoing
premised on a quasi-delict or upon an injury to the rights of the plaintiff, finding that respondent’s cause of action was not based on a quasi-delict
which, pursuant to Article 1146 of the Civil Code, must be instituted that prescribed in four years from the date of the collision on December
within four years from the time the cause of action accrued; that because 20, 1987, as the RTC misappreciated, but on an obligation created by law,
respondent’s cause of action accrued on December 20, 1987, the date of for which the law fixed a longer prescriptive period of ten years from the
the collision, respondent had only four years, or until December 20, 1991, accrual of the action.
within which to bring its action, but its complaint was filed only on March
5, 1992, thereby rendering its action already barred for being commenced Still, Vector and Soriano assert that respondent had no right of
14 subrogation to begin with, because the complaint did not allege that
beyond the four-year prescriptive period; and that there was no showing
that respondent had made extrajudicial written demands upon them for respondent had actually paid Caltex for the loss of the cargo. They further
the reimbursement of the insurance proceeds as to interrupt the running assert that the subrogation receipt submitted by respondent was
15 inadmissible for not being properly identified by Ricardo C. Ongpauco,
of the prescriptive period. respondent’s witness, who, although supposed to identify the subrogation
We concur with the CA’s ruling that respondent’s action did not yet receipt based on his affidavit, was not called to testify in court; and that
prescribe. The legal provision governing this case was not Article 1146 respondent presented only one witness in the person of Teresita Espiritu,
16 who identified Marine Open Policy No. 34-5093-6 issued by respondent
of the Civil Code, but Article 1144 of the Civil Code, which states: 21
to Caltex.

We disagree with petitioners’ assertions. It is undeniable that respondent
preponderantly established its right of subrogation. Its Exhibit C was
Marine Open Policy No. 34-5093-6 that it had issued to Caltex to insure Asian Terminals, Inc. v. Philam Insurance Co., Inc.
22 G.R. No. 181163 July 24, 2013
the petroleum cargo against marine peril. Its Exhibit D was the formal
written claim of Caltex for the payment of the insurance coverage of ASIAN TERMINALS, INC., Petitioner,
23 vs.
₱7,455,421.08 coursed through respondent’s adjuster. Its Exhibits E to
H were marine documents relating to the perished cargo on board the M/V PHILAM INSURANCE CO., INC. (now Chartis Philippines Insurance,
Vector that were processed for the purpose of verifying the insurance Inc.), Respondent.
24
claim of Caltex. Its Exhibit I was the subrogation receipt dated July 12, x-----------------------x
1988 showing that respondent paid Caltex ₱7,455,421.00 as the full
settlement of Caltex’s claim under Marine Open Policy No. 34-5093- G.R. No. 181262
25
6. All these exhibits were unquestionably duly presented, marked, and PHILAM INSURANCE CO., INC. (now Chartis Philippines Insurance,
26 Inc.), Petitioner,
admitted during the trial. Specifically, Exhibit C was admitted as an
authentic copy of Marine Open Policy No. 34-5093-6, while Exhibits D, vs.
E, F, G, H and I, inclusive, were admitted as parts of the testimony of WESTWIND SHIPPING CORPORATION and ASIAN TERMINALS,
respondent’s witness Efren Villanueva, the manager for the adjustment INC., Respondents.
27
service of the Manila Adjusters and Surveyors Company. x-----------------------x
Consistent with the pertinent law and jurisprudence, therefore, Exhibit I G.R. No. 181319
was already enough by itself to prove the payment of ₱7,455,421.00 as
28 WESTWIND SHIPPING CORPORATION, Petitioner,
the full settlement of Caltex’s claim. The payment made to Caltex as
vs.
the insured being thereby duly documented, respondent became PHILAM INSURANCE CO., INC. (now Chartis Philippines Insurance,
subrogated as a matter of course pursuant to Article 2207 of the Civil Inc.) and ASIAN TERMINALS, INC.,Respondents.
Code. In legal contemplation, subrogation is the "substitution of another
person in the place of the creditor, to whose rights he succeeds in relation DECISION
to the debt;" and is "independent of any mere contractual relations
between the parties to be affected by it, and is broad enough to cover every VILLARAMA, JR., J.:
instance in which one party is required to pay a debt for which another is Before us are three consolidated petitions for review on certiorari
primarily answerable, and which in equity and conscience ought to be 1 2
29 assailing the Decision dated October 15, 2007 and the Resolution dated
discharged by the latter."
January 11, 2008 of the Court of Appeals (CA) which affirmed with
3
Lastly, Vector and Soriano argue that Caltex waived and abandoned its modification the Decision of the Regional Trial Court (RTC) of Makati
claim by not setting up a cross-claim against them in Civil Case No. City, Branch 148, in Civil Case No. 96-062. The RTC had ordered
18735, the suit that Sulpicio Lines, Inc. had brought to claim damages for Westwind Shipping Corporation (Westwind) and Asian Terminals, Inc.
the loss of the M/V Doña Paz from them, Oriental Assurance Company (ATI) to pay, jointly and severally, Philam Insurance Co., Inc. (Philam)
(as insurer of the M/T Vector), and Caltex; that such failure to set up its the sum of ₱633,957.15, with interest at 12% per annum from the date of
cross- claim on the part of Caltex, the real party in interest who had judicial demand and ₱158,989.28 as attorney’s fees.
suffered the loss, left respondent without any better right than Caltex, its
insured, to recover anything from them, and forever barred Caltex from The facts of the case follow:
asserting any claim against them for the loss of the cargo; and that
On April 15, 1995, Nichimen Corporation shipped to Universal Motors
respondent was similarly barred from asserting its present claim due to its Corporation (Universal Motors) 219 packages containing 120 units of
being merely the successor-in-interest of Caltex.
brand new Nissan Pickup Truck Double Cab 4x2 model, without engine,
The argument of Vector and Soriano would have substance and merit had tires and batteries, on board the vessel S/S "Calayan Iris" from Japan to
Civil Case No. 18735 and this case involved the same parties and litigated Manila. The shipment, which had a declared value of US$81,368 or
the same rights and obligations. But the two actions were separate from ₱29,400,000, was insured with Philam against all risks under Marine
4
and independent of each other. Civil Case No. 18735 was instituted by Policy No. 708-8006717-4.
Sulpicio Lines, Inc. to recover damages for the loss of its M/V Doña Paz.
In contrast, this action was brought by respondent to recover from Vector The carrying vessel arrived at the port of Manila on April 20, 1995, and
and Soriano whatever it had paid to Caltex under its marine insurance when the shipment was unloaded by the staff of ATI, it was found that the
5
policy on the basis of its right of subrogation. With the clear variance package marked as 03-245-42K/1 was in bad order. The Turn Over
between the two actions, the failure to set up the cross-claim against them 6
Survey of Bad Order Cargoes dated April 21, 1995 identified two
in Civil Case No. 18735 is no reason to bar this action.
packages, labeled 03-245-42K/1 and 03/237/7CK/2, as being dented and
WHEREFORE, the Court DENIES the petition for review on certiorari; broken. Thereafter, the cargoes were stored for temporary safekeeping
AFFIRMS the decision promulgated on July 22, 2003; and ORDERS inside CFS Warehouse in Pier No. 5.
petitioners to pay the costs of suit.
On May 11, 1995, the shipment was withdrawn by R.F. Revilla Customs
SO ORDERED. Brokerage, Inc., the authorized broker of Universal Motors, and delivered
7
to the latter’s warehouse in Mandaluyong City. Upon the request of
Universal Motors, a bad order survey was conducted on the cargoes and
it was found that one Frame Axle Sub without LWR was deeply dented
on the buffle plate while six Frame Assembly with Bush were deformed
8
and misaligned. Owing to the extent of the damage to said cargoes,
Universal Motors declared them a total loss.
On August 4, 1995, Universal Motors filed a formal claim for damages in
9 10
the amount of ₱643,963.84 against Westwind, ATI and R.F. Revilla
11
Customs Brokerage, Inc. When Universal Motors’ demands remained
unheeded, it sought reparation from and was compensated in the sum of
₱633,957.15 by Philam. Accordingly, Universal Motors issued a
12
Subrogation Receipt dated November 15, 1995 in favor of Philam.
On January 18, 1996, Philam, as subrogee of Universal Motors, filed a

13
Complaint for damages against Westwind, ATI and R.F. Revilla
Customs Brokerage, Inc. before the RTC of Makati City, Branch 148.
On September 24, 1999, the RTC rendered judgment in favor of Philam
and ordered Westwind and ATI to pay Philam, jointly and severally, the

sum of ₱633,957.15 with interest at the rate of 12% per annum, Westwind, whom it charges with negligence in the supervision of the
₱158,989.28 by way of attorney’s fees and expenses of litigation. stevedores who unloaded the cargoes. ATI admits that the damage could
have been averted had Westwind observed extraordinary diligence in
The court a quo ruled that there was sufficient evidence to establish the handling the goods. Even so, ATI suspects that Case No. 03-245-42K/1
respective participation of Westwind and ATI in the discharge of and 22
consequent damage to the shipment. It found that the subject cargoes were is "weak and defective" considering that it alone sustained damage out
compressed while being hoisted using a cable that was too short and taut. of the 219 packages.
The trial court observed that while the staff of ATI undertook the physical Notwithstanding, petitioner ATI submits that, at most, it can be held liable
unloading of the cargoes from the carrying vessel, Westwind’s duty to pay only ₱5,000 per package pursuant to its Contract for Cargo
officer exercised full supervision and control throughout the process. It Handling Services. ATI maintains that it was not properly notified of the
held Westwind vicariously liable for failing to prove that it exercised actual value of the cargoes prior to their discharge from the vessel.
extraordinary diligence in the supervision of the ATI stevedores who G.R. No. 181262
unloaded the cargoes from the vessel. However, the court absolved R.F.
Revilla Customs Brokerage, Inc. from liability in light of its finding that Petitioner Philam supports the CA in holding both Westwind and ATI
the cargoes had been damaged before delivery to the consignee. liable for the deformed and misaligned Frame Axle Sub without Lower
inside Case No. 03-245-42K/1. It, however, faults the appellate court for
The trial court acknowledged the subrogation between Philam and disallowing its claim for the value of six Chassis Frame Assembly which
Universal Motors on the strength of the Subrogation Receipt dated were likewise supposedly inside Case Nos. 03-245-51K and 03-245-
November 15, 1995. It likewise upheld Philam’s claim for the value of 42K/1. As to the latter container, Philam anchors its claim on the results
the alleged damaged vehicle parts contained in Case Nos. 03-245-42K/1 23
and 03-245-51K or specifically for "7 pieces of Frame Axle Sub Without of the Inspection/Survey Report of Chartered Adjusters, Inc., which the
14 court received without objection from Westwind and ATI. Petitioner
Lower and Frame Assembly with Bush." believes that with the offer and consequent admission of evidence to the
15 effect that Case No. 03-245-42K/1 contains six pieces of dented Chassis
Westwind filed a Motion for Reconsideration which was, however, Frame Assembly, Philam’s claim thereon should be treated, in all
16
denied in an Order dated October 26, 2000. respects, as if it has been raised in the pleadings. Thus, Philam insists on
the reinstatement of the trial court’s award in its favor for the payment of
On appeal, the CA affirmed with modification the ruling of the RTC. In a ₱633,957.15 plus legal interest, ₱158,989.28 as attorney’s fees and costs.
Decision dated October 15, 2007, the appellate court directed Westwind
and ATI to pay Philam, jointly and severally, the amount of ₱190,684.48 G.R. No. 181319
with interest at the rate of 12% per annum until fully paid, attorney’s fees
of ₱47,671 and litigation expenses. Petitioner Westwind denies joint liability with ATI for the value of the
deformed Frame Axle Sub without Lower in Case No. 03-245-42K/1.
The CA stressed that Philam may not modify its allegations by claiming Westwind argues that the evidence shows that ATI was already in actual
17 custody of said case when the Frame Axle Sub without Lower inside it
in its Appellee’s Brief that the six pieces of Frame Assembly with Bush,
which were purportedly damaged, were also inside Case No. 03-245- was misaligned from being compressed by the tight cable used to unload
42K/1. The CA noted that in its Complaint, Philam alleged that "one (1) it. Accordingly, Westwind ceased to have responsibility over the cargoes
pc. FRAME AXLE SUB W/O LWR from Case No. 03-245-42K/1 was as provided in paragraph 4 of the Bill of Lading which provides that the
completely deformed and misaligned, and six (6) other pcs. of FRAME responsibility of the carrier shall cease when the goods are taken into the
ASSEMBLY WITH BUSH from Case No. 03-245-51K were likewise custody of the arrastre.
18
completely deformed and misaligned." Westwind contends that sole liability for the damage rests on ATI since it
was the latter’s stevedores who operated the ship’s gear to unload the
The appellate court accordingly affirmed Westwind and ATI’s joint and cargoes. Westwind reasons that ATI is an independent company, over
solidary liability for the damage to only one (1) unit of Frame Axle Sub whose employees and operations it does not exercise control. Moreover,
without Lower inside Case No. 03-245-42K/1. It also noted that when it was ATI’s employees who selected and used the wrong cable to lift the
said cargo sustained damage, it was not yet in the custody of the consignee box containing the cargo which was damaged.
or the person who had the right to receive it. The CA pointed out that
Westwind’s duty to observe extraordinary diligence in the care of the Westwind likewise believes that ATI is bound by its acceptance of the
cargoes subsisted during unloading thereof by ATI’s personnel since the goods in good order despite a finding that Case No. 03-245-42K/1 was
former exercised full control and supervision over the discharging partly torn and crumpled on one side. Westwind also notes that the
operation. discovery that a piece of Frame Axle Sub without Lower was completely
deformed and misaligned came only on May 12, 1995 or 22 days after the
Similarly, the appellate court held ATI liable for the negligence of its cargoes were turned over to ATI and after the same had been hauled by
employees who carried out the offloading of cargoes from the ship to the R.F. Revilla Customs Brokerage, Inc.
pier. As regards the extent of ATI’s liability, the CA ruled that ATI cannot
limit its liability to ₱5,000 per damaged package. It explained that Section Westwind further argues that the CA erred in holding it liable considering
19 20 that Philam’s cause of action has prescribed since the latter filed a formal
7.01 of the Contract for Cargo Handling Services does not apply in
this case since ATI was not yet in custody and control of the cargoes when claim with it only on August 17, 1995 or four months after the cargoes
the Frame Axle Sub without Lower suffered damage. arrived on April 20, 1995. Westwind stresses that according to the
24
provisions of clause 20, paragraph 2 of the Bill of Lading as well as
Citing Belgian Overseas Chartering and Shipping N.V. v. Philippine First 25
21 Article 366 of the Code of Commerce, the consignee had until April 20,
Insurance Co., Inc., the appellate court also held that Philam’s action 1995 within which to make a claim considering the readily apparent
for damages had not prescribed notwithstanding the absence of a notice nature of the damage, or until April 27, 1995 at the latest, if it is assumed
of claim. that the damage is not readily apparent.
All the parties moved for reconsideration, but their motions were denied Lastly, petitioner Westwind contests the imposition of 12% interest on the
in a Resolution dated January 11, 2008. Thus, they each filed a petition award of damages to Philam reckoned from the time of extrajudicial
for review on certiorari which were consolidated together by this Court demand. Westwind asserts that, at most, it can only be charged with 6%
considering that all three petitions assail the same CA decision and interest since the damages claimed by Philam does not constitute a loan
resolution and involve the same parties. or forbearance of money.
Essentially, the issues posed by petitioner ATI in G.R. No. 181163, The Court’s Ruling
petitioner Philam in G.R. No. 181262 and petitioner Westwind in G.R.
No. 181319 can be summed up into and resolved by addressing three The three consolidated petitions before us call for a determination of who
questions: (1) Has Philam’s action for damages prescribed? (2) Who between ATI and Westwind is liable for the damage suffered by the
between Westwind and ATI should be held liable for the damaged subject cargo and to what extent. However, the resolution of the issues
cargoes? and (3) What is the extent of their liability? raised by the present petitions is predicated on the appreciation of factual
issues which is beyond the scope of a petition for review on certiorari
Petitioners’ Arguments under Rule 45 of the 1997 Rules of Civil Procedure, as amended. It is
G.R. No. 181163 settled that in petitions for review on certiorari, only questions of law may
26
be put in issue. Questions of fact cannot be entertained.
Petitioner ATI disowns liability for the damage to the Frame Axle Sub
without Lower inside Case No. 03-245-42K/1. It shifts the blame to

There is a question of law if the issue raised is capable of being resolved SEC. 20. Proof of private document. – Before any private document
without need of reviewing the probative value of the evidence. The offered as authentic is received in evidence, its due execution and
resolution of the issue must rest solely on what the law provides on the authenticity must be proved either:
given set of circumstances. Once it is clear that the issue invites a review
of the evidence presented, the question posed is one of fact. If the query (a) By anyone who saw the document executed or written; or
requires a re-evaluation of the credibility of witnesses, or the existence or (b) By evidence of the genuineness of the signature or handwriting of the
relevance of surrounding circumstances and their relation to each other, maker.
27
the issue in that query is factual.
Any other private document need only be identified as that which it is
In the present petitions, the resolution of the question as to who between claimed to be.
Westwind and ATI should be liable for the damages to the cargo and to
what extent would have this Court pass upon the evidence on record. But The requirement of authentication of a private document is excused only
while it is not our duty to review, examine and evaluate or weigh all over in four instances, specifically: (a) when the document is an ancient one
28 36
again the probative value of the evidence presented, the Court may within the context of Section 21, Rule 132 of the Rules; (b) when the
nonetheless resolve questions of fact when the case falls under any of the genuineness and authenticity of the actionable document have not been
following exceptions: specifically denied under oath by the adverse party; (c) when the
genuineness and authenticity of the document have been admitted; or (d)
(1) when the findings are grounded entirely on speculation, surmises, or 37
when the document is not being offered as genuine.
conjectures; (2) when the inference made is manifestly mistaken, absurd,
or impossible; (3) when there is grave abuse of discretion; (4) when the Indubitably, Marine Certificate No. 708-8006717-4 and the Subrogation
judgment is based on a misapprehension of facts; (5) when the findings Receipt are private documents which Philam and the consignee,
of fact are conflicting; (6) when in making its findings the Court of respectively, issue in the pursuit of their business. Since none of the
Appeals went beyond the issues of the case, or its findings are contrary to exceptions to the requirement of authentication of a private document
the admissions of both the appellant and the appellee; (7) when the obtains in these cases, said documents may not be admitted in evidence
findings are contrary to those of the trial court; (8) when the findings are for Philam without being properly authenticated.
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 petitioner’s Contrary to the contention of petitioners ATI and Westwind, however,
main and reply briefs are not disputed by the respondent; and (10) when Philam presented its claims officer, Ricardo Ongchangco, Jr. to testify on
the findings of fact are premised on the supposed absence of evidence and the execution of the Subrogation Receipt, as follows:
29
contradicted by the evidence on record. ATTY. PALACIOS
In the cases at bar, the fifth and seventh exceptions apply. While the CA Q How were you able to get hold of this subrogation receipt?
affirmed the joint liability of ATI and Westwind, it held them liable only
for the value of one unit of Frame Axle Sub without Lower inside Case A Because I personally delivered the claim check to consignee and have
No. 03-245-42K/1. The appellate court disallowed the award of damages them receive the said check.
for the six pieces of Frame Assembly with Bush, which petitioner Philam Q I see. Therefore, what you are saying is that you personally delivered
alleged, for the first time in its Appellee’s Brief, to be likewise inside Case the claim check of Universal Motors Corporation to that company and
No. 03-245-42K/1. Lastly, the CA reduced the award of attorney’s fees to you have the subrogation receipt signed by them personally?
₱47,671.
A Yes, sir.
Foremost, the Court holds that petitioner Philam has adequately
established the basis of its claim against petitioners ATI and Westwind. Q And it was signed in your presence?
Philam, as insurer, was subrogated to the rights of the consignee,
38
Universal Motors Corporation, pursuant to the Subrogation Receipt A Yes, sir.
executed by the latter in favor of the former. The right of subrogation
accrues simply upon payment by the insurance company of the insurance Indeed, all that the Rules require to establish the authenticity of a
30 document is the testimony of a person who saw the document executed or
claim. Petitioner Philam’s action finds support in Article 2207 of the
written. Thus, the trial court did not err in admitting the Subrogation
Civil Code, which provides as follows: Receipt in evidence despite petitioners ATI and Westwind’s objections
Art. 2207. If the plaintiff’s property has been insured, and he has received that it was not authenticated by the person who signed it.
indemnity from the insurance company for the injury or loss arising out However, the same cannot be said about Marine Certificate No. 708-
of the wrong or breach of contract complained of, the insurance company 8006717-4 which Ongchangcho, Jr. merely identified in court. There is
shall be subrogated to the rights of the insured against the wrongdoer or nothing in Ongchangco, Jr.’s testimony which indicates that he saw
the person who has violated the contract. x x x. Philam’s authorized representative sign said document, thus:
31
In their respective comments to Philam’s Formal Offer of ATTY. PALACIOS
32
Evidence, petitioners ATI and Westwind objected to the admission of
Q Now, I am presenting to you a copy of this marine certificate 708-
Marine Certificate No. 708-8006717-4 and the Subrogation Receipt as
8006717-4 issued by Philam Insurance Company, Inc. to Universal
documentary exhibits "B" and "P," respectively. Petitioner Westwind
Motors Corporation on April 15, 1995. Will you tell us what relation does
objects to the admission of both documents for being hearsay as they were it have to that policy risk claim mentioned in that letter?
not authenticated by the persons who executed them. For the same reason,
petitioner ATI assails the admissibility of the Subrogation Receipt. As A This is a photocopy of the said policy issued by the consignee Universal
regards Marine Certificate No. 708-8006717-4, ATI makes issue of the Motors Corporation.
fact that the same was issued only on April 27, 1995 or 12 days after the
shipment was loaded on and transported via S/S "Calayan Iris." ATTY. PALACIOS
The nature of documents as either public or private determines how the I see. May I request, if Your Honor please, that this marine risk policy of
documents may be presented as evidence in court. Public documents, as the plaintiff as submitted by claimant Universal Motors Corporation be
33 marked as Exhibit B.
enumerated under Section 19, Rule 132 of the Rules of Court, are self-
authenticating and require no further authentication in order to be COURT
34
presented as evidence in court. 39
Mark it.
In contrast, a private document is any other writing, deed or instrument
executed by a private person without the intervention of a notary or other As regards the issuance of Marine Certificate No. 708-8006717-4 after
person legally authorized by which some disposition or agreement is the fact of loss occurred, suffice it to say that said document simply
proved or set forth. Lacking the official or sovereign character of a public certifies the existence of an open insurance policy in favor of the
document, or the solemnities prescribed by law, a private document consignee. Hence, the reference to an "Open Policy Number 9595093" in
35 said certificate. The Court finds it completely absurd to suppose that any
requires authentication in the manner prescribed under Section 20, Rule
insurance company, of sound business practice, would assume a loss that
132 of the Rules:
has already been realized, when the profitability of its business rests
precisely on the non-happening of the risk insured against.

Yet, even with the exclusion of Marine Certificate No. 708-8006717-4, goods were then withdrawn from the CFS Warehouse on May 11, 1995
the Subrogation Receipt, on its own, is adequate proof that petitioner and the last of the packages delivered to Universal Motors on May 17,
Philam paid the consignee’s claim on the damaged goods. Petitioners ATI 46
1995. Prior to this, the latter filed a Request for Bad Order Survey on
and Westwind failed to offer any evidence to controvert the same. In May 12,1995 following a joint inspection where it was discovered that six
40
Malayan Insurance Co., Inc. v. Alberto, the Court explained the effect pieces of Chassis Frame Assembly from two bundles were deformed and
of payment by the insurer of the insurance claim in this wise: one Front Axle Sub without Lower from a steel case was dented. Yet, it
was not until August 4, 1995 that Universal Motors filed a formal claim
We have held that payment by the insurer to the insured operates as an for damages against petitioner Westwind.
equitable assignment to the insurer of all the remedies that the insured
may have against the third party whose negligence or wrongful act caused Even so, we have held in Insurance Company of North America v. Asian
the loss. The right of subrogation is not dependent upon, nor does it grow Terminals, Inc. that a request for, and the result of a bad order
out of, any privity of contract. It accrues simply upon payment by the examination, done within the reglementary period for furnishing notice of
insurance company of the insurance claim. The doctrine of subrogation loss or damage to the carrier or its agent, serves the purpose of a claim. A
has its roots in equity. It is designed to promote and accomplish justice; claim is required to be filed within the reglementary period to afford the
and is the mode that equity adopts to compel the ultimate payment of a carrier or depositary reasonable opportunity and facilities to check the
41 validity of the claims while facts are still fresh in the minds of the persons
debt by one who, in justice, equity, and good conscience, ought to pay.
47
who took part in the transaction and documents are still available. Here,
Neither do we find support in petitioner Westwind’s contention that Universal Motors filed a request for bad order survey on May 12, 1995,
Philam’s right of action has prescribed. even before all the packages could be unloaded to its warehouse.
The Carriage of Goods by Sea Act (COGSA) or Public Act No. 521 of Moreover, paragraph (6), Section 3 of the COGSA clearly states that
the 74th US Congress, was accepted to be made applicable to all contracts failure to comply with the notice requirement shall not affect or prejudice
for the carriage of goods by sea to and from Philippine ports in foreign the right of the shipper to bring suit within one year after delivery of the
42
trade by virtue of Commonwealth Act (C.A.) No. 65. Section 1 of C.A. goods. Petitioner Philam, as subrogee of Universal Motors, filed the
No. 65 states: Complaint for damages on January 18, 1996, just eight months after all
the packages were delivered to its possession on May 17, 1995. Evidently,
Section 1. That the provisions of Public Act Numbered Five hundred and petitioner Philam’s action against petitioners Westwind and ATI was
twenty-one of the Seventy-fourth Congress of the United States, approved seasonably filed.
on April sixteenth, nineteen hundred and thirty-six, be accepted, as it is
hereby accepted to be made applicable to all contracts for the carriage of This brings us to the question that must be resolved in these consolidated
goods by sea to and from Philippine ports in foreign trade: Provided, That petitions. Who between Westwind and ATI should be liable for the
nothing in the Act shall be construed as repealing any existing provision damage to the cargo?
of the Code of Commerce which is now in force, or as limiting its
application. It is undisputed that Steel Case No. 03-245-42K/1 was partly torn and
crumpled on one side while it was being unloaded from the carrying
The prescriptive period for filing an action for the loss or damage of the vessel. The damage to said container was noted in the Bad Order Cargo
goods under the COGSA is found in paragraph (6), Section 3, thus: 48
Receipt dated April 20, 1995 and Turn Over Survey of Bad Order
(6) Unless notice of loss or damage and the general nature of such loss or Cargoes dated April 21, 1995. The Turn Over Survey of Bad Order
damage be given in writing to the carrier or his agent at the port of Cargoes indicates that said steel case was not opened at the time of survey
discharge before or at the time of the removal of the goods into the and was accepted by the arrastre in good order. Meanwhile, the Bad Order
custody of the person entitled to delivery thereof under the contract of Cargo Receipt bore a notation "B.O. not yet t/over to ATI." On the basis
carriage, such removal shall be prima facie evidence of the delivery by of these documents, petitioner ATI claims that the contents of Steel Case
the carrier of the goods as described in the bill of lading. If the loss or No. 03-245-42K/1 were damaged while in the custody of petitioner
damage is not apparent, the notice must be given within three days of the Westwind.
delivery. We agree.
Said notice of loss or damage maybe endorsed upon the receipt for the Common carriers, from the nature of their business and for reasons of
goods given by the person taking delivery thereof. public policy, are bound to observe extraordinary diligence in the
The notice in writing need not be given if the state of the goods has at the vigilance over the goods transported by them. Subject to certain
49
time of their receipt been the subject of joint survey or inspection. exceptions enumerated under Article 1734 of the Civil Code, common
carriers are responsible for the loss, destruction, or deterioration of the
In any event the carrier and the ship shall be discharged from all liability goods. The extraordinary responsibility of the common carrier lasts from
in respect of loss or damage unless suit is brought within one year after the time the goods are unconditionally placed in the possession of, and
delivery of the goods or the date when the goods should have been received by the carrier for transportation until the same are delivered,
delivered: Provided, That if a notice of loss or damage, either apparent or actually or constructively, by the carrier to the consignee, or to the person
concealed, is not given as provided for in this section, that fact shall not 50
affect or prejudice the right of the shipper to bring suit within one year who has a right to receive them.
after the delivery of the goods or the date when the goods should have The court a quo, however, found both petitioners Westwind and ATI,
been delivered. jointly and severally, liable for the damage to the cargo. It observed that
43 while the staff of ATI undertook the physical unloading of the cargoes
In the Bill of Lading dated April 15, 1995, Rizal Commercial Banking from the carrying vessel, Westwind’s duty officer exercised full
Corporation (RCBC) is indicated as the consignee while Universal supervision and control over the entire process. The appellate court
Motors is listed as the notify party. These designations are in line with the affirmed the solidary liability of Westwind and ATI, but only for the
subject shipment being covered by Letter of Credit No. I501054, which damage to one Frame Axle Sub without Lower.
RCBC issued upon the request of Universal Motors.
Upon a careful review of the records, the Court finds no reason to deviate
A letter of credit is a financial device developed by merchants as a from the finding that petitioners Westwind and ATI are concurrently
convenient and relatively safe mode of dealing with sales of goods to accountable for the damage to the content of Steel Case No. 03-245-
satisfy the seemingly irreconcilable interests of a seller, who refuses to 42K/1.
part with his goods before he is paid, and a buyer, who wants to have
44 51
control of his goods before paying. However, letters of credit are Section 2 of the COGSA provides that under every contract of carriage
employed by the parties desiring to enter into commercial transactions, of goods by the sea, the carrier in relation to the loading, handling,
not for the benefit of the issuing bank but mainly for the benefit of the stowage, carriage, custody, care and discharge of such goods, shall be
45 subject to the responsibilities and liabilities and entitled to the rights and
parties to the original transaction, in these cases, Nichimen Corporation
52
as the seller and Universal Motors as the buyer. Hence, the latter, as the immunities set forth in the Act. Section 3 (2) thereof then states that
buyer of the Nissan CKD parts, should be regarded as the person entitled among the carrier’s responsibilities are to properly load, handle, stow,
to delivery of the goods. Accordingly, for purposes of reckoning when 53
carry, keep, care for and discharge the goods carried.
notice of loss or damage should be given to the carrier or its agent, the
date of delivery to Universal Motors is controlling. At the trial, Westwind’s Operation Assistant, Menandro G. Ramirez,
testified on the presence of a ship officer to supervise the unloading of the
S/S "Calayan Iris" arrived at the port of Manila on April 20, 1995, and the subject cargoes.
subject cargoes were discharged to the custody of ATI the next day. The

ATTY. LLAMAS No. 03-245-51K were likewise completely deformed and
63
Q Having been present during the entire discharging operation, do you misaligned." Philam later claimed in its Appellee’s Brief that the six
remember who else were present at that time? pieces of Frame Assembly with Bush were also inside the damaged Case
No. 03-245-42K/1.
A Our surveyor and our checker the foreman of ATI.
However, there is nothing in the records to show conclusively that the six
Q Were there officials of the ship present also? Frame Assembly with Bush were likewise contained in and damaged
inside Case No. 03-245-42K/1. In the Inspection Survey Report of
54
A Yes, sir there was an officer of the vessel on duty at that time. Chartered Adjusters, Inc., it mentioned six pieces of chassis frame
assembly with deformed body mounting bracket. However, it merely
xxxx noted the same as coming from two bundles with no identifying marks.
Q Who selected the cable slink to be used? Lastly, we agree with petitioner Westwind that the CA erred in imposing
A ATI Operation. an interest rate of 12% on the award of damages. Under Article 2209 of
the Civil Code, when an obligation not constituting a loan or forbearance
Q Are you aware of how they made that selection? of money is breached, an interest on the amount of damages awarded may
64
be imposed at the discretion of the court at the rate of 6% per annum. In
A Before the vessel arrived we issued a manifesto of the storage plan
informing the ATI of what type of cargo and equipment will be utilitized the similar case of Belgian Overseas Chartering and Shipping NV v.
65
in discharging the cargo.
55 Philippine First Insurance Co., lnc., the Court reduced the rate of
interest on the damages awarded to the carrier therein to 6% from the time
xxxx of the filing of the complaint until the finality of the decision.
Q You testified that it was the ATI foremen who select the cable slink to WHEREFORE, the Court AFFIRMS with MODIFICATION the
be used in discharging, is that correct? Decision dated October 15,2007 and the Resolution dated January 11,
2008 of the Court of Appeals in CA-G.R. CV No. 69284 in that the
A Yes sir, because they are the one who select the slink and they know interest rate on the award of ₱190,684.48 is reduced to 6% per annum
the kind of cargoes because they inspected it before the discharge of said from the date of extrajudicial demand, until fully paid.
cargo.
With costs against the petitioners in G.R. No. 181163 and G.R. No.
Q Are you aware that the ship captain is consulted in the selection of the 181319, respectively.
cable sling?
SO ORDERED.
A Because the ship captain knows for a fact the equipment being utilized
in the discharge of the cargoes because before the ship leave the port of Degaños v. People of the Philippines
Japan the crew already utilized the proper equipment fitted to the G.R. No. 162826 October 14, 2013
56
cargo. (Emphasis supplied.) 1
NARCISO DEGAÑOS, Petitioner,
It is settled in maritime law jurisprudence that cargoes while being vs.
57 PEOPLE OF THE PHILIPPINES, Respondent.
unloaded generally remain under the custody of the carrier. The
58
Damage Survey Report of the survey conducted by Phil. Navtech DECISION
Services, Inc. from April 20-21, 1995 reveals that Case No. 03-245-42K/1
was damaged by ATI stevedores due to overtightening of a cable sling BERSAMIN, J.:
hold during discharge from the vessel’s hatch to the pier. Since the Novation is not a mode of extinguishing criminal liability under the penal
damage to the cargo was incurred during the discharge of the shipment laws of the country. Only the. State may validly waive the criminal action
and while under the supervision of the carrier, the latter is liable for the against an accused. Novation is relevant only to determine if the parties
damage caused to the cargo. have meanwhile altered the nature of the obligation prior to the
This is not to say, however, that petitioner ATI is without liability for the commencement of the criminal prosecution in order to prevent the
damaged cargo. incipient criminal liability of the accused.
The functions of an arrastre operator involve the handling of cargo Antecedents

deposited on the wharf or between the establishment of the consignee or In an amended information dated March 23, 1994, the Office of the
shipper and the ship’s tackle. Being the custodian of the goods discharged Provincial Prosecutor of Bulacan charged Brigida D. Luz, alias Aida Luz,
from a vessel, an arrastre operator’s duty is to take good care of the goods and Narciso Degaños in the Regional Trial Court in Malolos, Bulacan
59
and to turn them over to the party entitled to their possession. with estafa under Article 315 paragraph 1 b) of the Revised Penal Code,
allegedly committed as follows:
Handling cargo is mainly the arrastre operator’s principal work so its
drivers/operators or employees should observe the standards and That on or about the 27th day of April, 1987 until July 20, 1987, in the
measures necessary to prevent losses and damage to shipments under its municipality of Meycauayan, province of Bulacan, Philippines, and
60 within the jurisdiction of this Honorable Court, the above-named accused
custody.
conspiring, confederating and helping one another, received from
While it is true that an arrastre operator and a carrier may not be held Spouses Atty. Jose Bordador and Lydia Bordador gold and pieces of
61
solidarily liable at all times, the facts of these cases show that apart jewelry worth ₱438,702.00, under express obligation to sell the same on
from ATI’s stevedores being directly in charge of the physical unloading commission and remit the proceeds thereof or return the unsold gold and
of the cargo, its foreman picked the cable sling that was used to hoist the pieces of jewelry, but the said accused, once in possession of the said
packages for transfer to the dock. Moreover, the fact that 218 of the 219 merchandise and far from complying with their aforesaid obligation,
packages were unloaded with the same sling unharmed is telling of the inspite of repeated demands for compliance therewith, did then and there
inadequate care with which ATI’s stevedore handled and discharged Case willfully, unlawfully and feloniously, with intent of gain and grave abuse
No. 03-245-42K/1. of confidence misapply, misappropriate and convert to their own use and
benefit the said merchandise and/or the proceeds thereof, to the damage
With respect to petitioners ATI and Westwind’s liability, we agree with and prejudice of said Sps. Atty. Jose Bordador and Lydia Bordador in the
the CA that the same should be confined to the value of the one piece said amount of ₱438,702.00.
Frame Axle Sub without Lower.
2
Contrary to law.
62
In the Bad Order Inspection Report prepared by Universal Motors, the
latter referred to Case No. 03-245-42K/1 as the source of said Frame Axle The decision of the Court of Appeals (CA) summarized the evidence of
Sub without Lower which suffered a deep dent on its buffle plate. Yet, it the parties as follows:
identified Case No. 03-245-51K as the container which bore the six pieces Prior to the institution of the instant case, a separate civil action for the
Frame Assembly with Bush. Thus, in Philam’s Complaint, it alleged that recovery of sum of money was filed on June 25, 1990 by the private
"the entire shipment showed one (1) pc. FRAME AXLE SUB W/O LWR complainants spouses Jose and Lydia Bordador against accused Brigida
from Case No. 03-245-42K/1 was completely deformed and misaligned, D. Luz alias Aida D. Luz and Narciso Degaños. In an amended complaint
and six (6) other pcs. of FRAME ASSEMBLY WITH BUSH from Case dated November 29, 1993, Ernesto Luz, husband of Brigida Luz, was

impleaded as party defendant. The case docketed as Civil Case No. 412- the same was allegedly excessive. In 1998, private complainant Atty. Jose
M-90 was raffled to Branch 15, RTC of Malolos, Bulacan. On June 23, Bordador brought a ledger to her and asked her to sign the same. The said
1995, the said court found Narciso Degaños liable and ordered him to pay ledger contains a list of her supposed indebtedness to the private
the sum of ₱725,463,98 as actual and consequential damages plus interest complainants. She refused to sign the same because the contents thereof
and attorney’s fees in the amount of ₱10,000.00. On the other hand, are not her indebtedness but that of his brother, Narciso Degaños. She
Brigida Luz alias Aida Luz was ordered to pay the amount of ₱21,483.00, even asked the private complainants why they gave so many pieces of
representing interest on her personal loan. The case against Ernesto Luz jewelry and gold bars to Narciso Degaños without her permission, and
was dismissed for insufficiency of evidence. Both parties appealed to the told them that she has no participation in the transactions covered by the
Court of Appeals. On July 9, 1997, this Court affirmed the aforesaid subject "Kasunduan at Katibayan" receipts.
decision. On further appeal, the Supreme Court on December 15, 1997
sustained the Court of Appeals. Sometime in 1994, while the said civil Co-accused Narciso Degaños testified that he came to know the private
case was pending, the private complainants instituted the present case complainants when he went to the latter’s house in 1986 to sell some Bible
against the accused. books. Two days later he returned to their house and was initially given a
gold bracelet and necklace to sell. He was able to sell the same and paid
EVIDENCE FOR THE PROSECUTION the private complainants with the proceeds thereof. Since then he started
conducting similar business transactions with the private complainants.
The prosecution evidence consists of the testimonies of the private Said transactions are usually covered by receipts denominated as
complainants-spouses, Jose and Lydia Bordador. "Kasunduan at Katibayan". All the "Kasunduan at Katibayan" receipts
Private complainant Lydia Bordador, a jeweler, testified that accused were issued by the private complainants and was signed by him. The
Narciso Degaños and Brigida/Aida Luz are brother and sister. She knew phrase "for Brigida Luz" and for "Evely Aquino" were written on the
them because they are the relatives of her husband and their receipts so that in case he fails to pay for the items covered therein, the
Kumpadre/kumadre. Brigida/Aida Luz was the one who gave instructions private complainants would have someone to collect from. He
to Narciso Degaños to get gold and jewelry from Lydia for them to sell. categorically admitted that he is the only one who was indebted to the
Lydia came to know Narciso Degaños because the latter frequently visited private complainants and out of his indebtedness, he already made partial
their house selling religious articles and books. While in their house, payments in the amount of ₱53,307.00. Included in the said partial
Narciso Degaños saw her counting pieces of jewelry and he asked her if payments is the amount of ₱20,000.00 which was contributed by his
he could show the said pieces of jewelry to his sister, Brigida/Aida Luz, brothers and sisters who helped him and which amount was delivered by
3
to which she agreed. Thereafter, Narciso Degaños returned the jewelry Brigida Luz to the private complainants.
and Aida/Brigida Luz called her to ask if she could trust Narciso Degaños
to get the pieces of jewelry from her for Aida/Brigida Luz to sell. Lydia Ruling of the RTC
agreed on the condition that if they could not pay it in cash, they should On June 23, 1999, the RTC found Degaños guilty as charged but acquitted
pay it after one month or return the unsold jewelry within the said period. Luz for insufficiency of evidence, imposing on Degaños twenty years of
She delivered the said jewelry starting sometime in 1986 as evidenced by reclusion temporal, viz:
several documents entitled "Katibayan at Kasunduan", the earliest of
which is dated March 16, 1986. Everytime Narciso Degaños got jewelry WHEREFORE, judgment is hereby rendered as follows:
from her, he signed the receipts in her presence. They were able to pay
only up to a certain point. However, receipt nos. 614 to 745 dated from 1. finding accused Narciso Degaños GUILTY beyond reasonable doubt
April 27, 1987 up to July 20, 1987 (Exhs. "A"-"O") were no longer paid of the crime of estafa penalized under Article 315, Subsection 1,
and the accused failed to return the jewelry covered by such receipts. paragraph (b) of the Revised Penal code and hereby sentences him to
Despite oral and written demands, the accused failed and refused to pay suffer the penalty of TWENTY YEARS (20) of reclusion temporal;
and return the subject jewelry. As of October 1998, the total obligation of 2. finding accused Brigida Luz NOT GUILTY and is hereby
the accused amounted to ₱725,000.00. ACQUITTED on the ground of insufficiency of evidence.
Private complainant Atty. Jose Bordador corroborated the testimony of 4
his wife, Lydia. He confirmed that their usual business practice with the SO ORDERED.
accused was for Narciso Degaños to receive the jewelry and gold items Decision of the CA
for and in behalf of Brigida/Aida Luz and for Narciso Degaños to sign the
"Kasunduan at Katibayan" receipts while Brigida/Aida Luz will pay for On appeal, Degaños assailed his conviction upon the following grounds,
the price later on. The subject items were usually given to Narciso to wit:
Degaños only upon instruction from Brigida/Aida Luz through telephone
calls or letters. For the last one year, the "Kasunduan at Katibayan" I
receipts were signed in his presence. Said business arrangement went on THE HONORABLE COURT A QUO ERRED IN NOT FINDING
for quite sometime since Narciso Degaños and Brigida/Aida Luz had been THAT THE AGREEMENT BETWEEN THE PRIVATE
paying religiously. When the accused defaulted in their payment, they COMPLAINANT LYDIA BORDADOR AND THE ACCUSED WAS
sent demand letters. It was the accused’s sister, Julie dela Rosa, who ONE OF SALE ON CREDIT.
responded, seeking an extension of time for the accused to settle their
obligation. II
EVIDENCE FOR THE DEFENSE THE HONORABLE COURT A QUO ERRED IN NOT FINDING
THAT NOVATION HAD CONVERTED THE LIABILITY OF THE
The defense presented accused Brigida/Aida Luz, who testified that she ACCUSED INTO A CIVIL ONE.
started transacting business of selling gold bars and jewelry with the
private complainants sometime in 1986 through her brother, Narciso III
Degaños. It was the usual business practice for Narciso Degaños to get
the gold bars and pieces of jewelry from the private complainants after THE HONORABLE COURT ERRED IN NOT APPLYING THE
5
she placed orders through telephone calls to the private complainants, INDETERMINATE SENTENCE LAW.
although sometimes she personally went to the private complainants’
house to get the said items. The gold bars and pieces of jewelry delivered On September 23, 2003, however, the CA affirmed the conviction of
6
to her by Narciso Degaños were usually accompanied by a pink receipt Degaños but modified the prescribed penalty, thusly:
which she would sign and after which she would make the payments to
the private complainants through Narciso Degaños, which payments are WHEREFORE, the appealed Decision finding the accused-appellant
in the form of postdated checks usually with a thirty-day period. In return, Narciso Degaños guilty beyond reasonable doubt of the crime of Estafa
the private complainants would give the original white receipts to Narciso under Article 315 (1) par. b of the Revised Penal code is hereby
Degaños for him to sign. Thereafter, as soon as the postdated checks were AFFIRMED with the modification that the accused-appellant is sentenced
honored by the drawee bank, the said white receipts were stamped "paid" to suffer an indeterminate penalty of imprisonment of four (4) years and
by Lydia Bordador, after which the same would be delivered to her by two (2) months of prision correccional in its medium period, as the
Narciso Degaños. minimum, to twenty (20) years of reclusion temporal as maximum .
7
On September 2, 1987, she sent a letter to private complainant Lydia SO ORDERED.
Bordador requesting for an accounting of her indebtedness. Lydia
Bordador made an accounting which contained the amount of Issues
₱122,673.00 as principal and ₱21,483.00 as interest. Thereafter, she paid
Hence, Degaños has appealed, again submitting that:
the principal amount through checks. She did not pay the interest because

I. Novation is not one of the grounds prescribed by the Revised Penal Code
for the extinguishment of criminal liability. It is well settled that criminal
1âwph i1
THE HONORABLE COURT A QUO ERRED IN NOT FINDING liability for estafa is not affected by compromise or novation of contract,
THAT THE AGREEMENT BETWEEN THE PRIVATE for it is a public offense which must be prosecuted and punished by the
COMPLAINANT LYDIA BORDADOR AND THE ACCUSED WAS Government on its own motion even though complete reparation should
ONE OF SALE ON CREDIT; have been made of the damage suffered by the offended party. A criminal
II. offense is committed against the People and the offended party may not
waive or extinguish the criminal liability that the law imposes for the
THE HONORABLE COURT A QUO ERRED IN NOT FINDING commission of the offense. The criminal liability for estafa already
THAT NOVATION HAD CONVERTED THE LIABILITY OF THE 10
committed is not affected by the subsequent novation of the contract.
8
ACCUSED INTO A CIVIL ONE.
We sustain the CA.
Ruling
Degaños’ claim was again factually unwarranted and legally devoid of
The appeal lacks merit. basis, because the partial payments he made and his purported agreement
to pay the remaining obligations did not equate to a novation of the
I. original contractual relationship of agency to one of sale. As we see it, he
Transaction was an agency, not a sale on credit misunderstands the nature and the role of novation in a criminal
prosecution.
Degaños contends that his agreement with the complainants relative to
the items of jewelry and gold subject of the amended information as Novation is the extinguishment of an obligation by the substitution or
embodied in the relevant Kasunduan at Katibayan was a sale on credit, change of the obligation by a subsequent one that terminates the first,
not a consignment to sell on commission basis. either by (a) changing the object or principal conditions; or (b)
substituting the person of the debtor; or (c) subrogating a third person in
The contention of Degaños is devoid of factual and legal bases. the rights of the creditor. In order that an obligation may be extinguished
by another that substitutes the former, it is imperative that the
The text and tenor of the relevant Kasunduan at Katibayan follow: extinguishment be so declared in unequivocal terms, or that the old and
KASUNDUAN AT KATIBAYAN the new obligations be on every point incompatible with each
11
other. Obviously, in case of only slight modifications, the old
xxxx 12
obligation still prevails.
Akong nakalagda sa ibaba nito ay nagpapatunay na tinanggap ko kay 13
Ginang LYDIA BORDADOR ng Calvario, Meycauayan, Bulacan ang The Court has further pointed out in Quinto v. People:
mga hiyas (jewelries) [sic] na natatala sa ibaba nito upang ipagbili ko sa
kapakanan ng nasabing Ginang. Ang pagbibilhan ko sa nasabing mga Novation is never presumed, and the animus novandi, whether totally or
hiyas ay aking ibibigay sa nasabing Ginang, sa loob ng __________ araw partially, must appear by express agreement of the parties, or by their acts
at ang hindi mabili ay aking isasauli sa kanya sa loob din ng nasabing that are too clear and unequivocal to be mistaken.
taning na panahon sa mabuting kalagayan katulad ng aking tanggapin. The extinguishment of the old obligation by the new one is necessary
Ang bilang kabayaran o pabuya sa akin ay ano mang halaga na aking element of novation which may be effected either expressly or impliedly.
mapalabis na mga halagang nakatala sa ibaba nito. Ako ay walang The term "expressly" means that the contracting parties incontrovertibly
karapatang magpautang o kaya ay magpalako sa ibang tao ng nasabing disclose that their object in executing the new contract is to extinguish the
9
mga hiyas. old one. Upon the other hand, no specific form is required for an implied
novation, and all that is prescribed by law would be an incompatibility
xxxx between the two contracts. While there is really no hard and fast rule to
Based on the express terms and tenor of the Kasunduan at Katibayan , determine what might constitute to be a sufficient change that can bring
Degaños received and accepted the items under the obligation to sell them about novation, the touchstone for contrarity, however would be an
in behalf of the complainants ("ang mga hiyas (jewelries) na natatala sa irreconcilable incompatibility between the old and the new obligations.
ibaba nito upang ipagbili ko sa kapakanan ng nasabing Ginang"), and he There are two ways which could indicate, in fine, the presence of novation
would be compensated with the overprice as his commission ("Ang bilang and thereby produce the effect of extinguishing an obligation by another
kabayaran o pabuya sa akin ay ano mang halaga na aking mapalabis na which substitutes the same. The firs t is when novation has been explicitly
mga halagang nakatala sa ibaba nito."). Plainly, the transaction was a stated and declared in unequivocal terms. The second is when the old and
consignment under the obligation to account for the proceeds of sale, or the new obligations are incompatible on every point. The test of
to return the unsold items. As such, he was the agent of the complainants incompatibility is whether or not the two obligations can stand together,
in the sale to others of the items listed in the Kasunduan at Katibayan. each one having its independent existence. If they cannot, they are
In contrast, according the first paragraph of Article 1458 of the Civil incompatible and the latter obligation novates the first. Corollarily,
Code, one of the contracting parties in a contract of sale obligates himself changes that breed incompatibility must be essential in nature and not
to transfer the ownership of and to deliver a determinate thing, while the merely accidental. The incompatibility must take place in any of the
other party obligates himself to pay therefor a price certain in money or essential elements of the obligation, such as its object, cause or principal
its equivalent. Contrary to the contention of Degaños, there was no sale conditions thereof; otherwise, the change would be merely modificatory
on credit to him because the ownership of the items did not pass to him. in nature and insufficient to extinguish the original obligation.
II. The changes alluded to by petitioner consists only in the manner of

payment. There was really no substitution of debtors since private
1âwph i1
Novation did not transpire as to prevent complainant merely acquiesced to the payment but did not give her
the incipient criminal liability from arising 14
consent to enter into a new contract. x x x
Degaños claims that his partial payments to the complainants novated his The legal effects of novation on criminal liability were explained by the
contract with them from agency to loan, thereby converting his liability 15
Court, through Justice J.B.L. Reyes, in People v. Nery, viz:
from criminal to civil. He insists that his failure to complete his payments
prior to the filing of the complaint-affidavit by the complainants The novation theory may perhaps apply prior to the filing of the criminal
notwithstanding, the fact that the complainants later required him to make information in court by the state prosecutors because up to that time the
a formal proposal before the barangay authorities on the payment of the original trust relation may be converted by the parties into an ordinary
balance of his outstanding obligations confirmed that novation had creditor-debtor situation, thereby placing the complainant in estoppel to
occurred. insist on the original trust. But after the justice authorities have taken
The CA rejected the claim of Degaños, opining as follows: cognizance of the crime and instituted action in court, the offended party
may no longer divest the prosecution of its power to exact the criminal
Likewise untenable is the accused-appellant’s argument that novation liability, as distinguished from the civil. The crime being an offense
took place when the private complainants accepted his partial payments against the state, only the latter can renounce it (People vs. Gervacio, 54
before the criminal information was filed in court and therefore, his Off. Gaz. 2898; People vs. Velasco, 42 Phil. 76; U.S. vs. Montañes, 8
criminal liability was extinguished. Phil. 620).

It may be observed in this regard that novation is not one of the means Makati Auto Center, Inc. then assigned, ceded, and transferred all its
recognized by the Penal Code whereby criminal liability can be rights and interests over the said Promissory Note and chattel mortgage
extinguished; hence, the role of novation may only be to either prevent to Far East Bank and Trust Company (FEBTC).
the rise of criminal liability or to cast doubt on the true nature of the
original basic transaction, whether or not it was such that its breach would On April 7, 2000, the Securities and Exchange Commission (SEC)
not give rise to penal responsibility, as when money loaned is made to approved and issued the Certificate of Filing of the Articles of Merger and
appear as a deposit, or other similar disguise is resorted to (cf. Abeto vs. Plan-· of Merger executed on January 20, 2000 by and between BPI, the
People, 90 Phil. 581; U.S. vs. Villareal, 27 Phil. 481). surviving corporation, and FEBTC, the absorbed corporation. By virtue
of said merger, all the assets and liabilities of FEBTC were transferred to
Even in Civil Law the acceptance of partial payments, without further and absorbed by BPI.6
change in the original relation between the complainant and the accused,
can not produce novation. For the latter to exist, there must be proof of The spouses Domingo defaulted when they failed to pay 21 monthly
intent to extinguish the original relationship, and such intent can not be installments that had fallen due consecutively from January 15, 1996 to
inferred from the mere acceptance of payments on account of what is September 15, 1997. BPI, being the surviving corporation after the
totally due. Much less can it be said that the acceptance of partial merger, demanded that the spouses Domingo pay the balance of the
satisfaction can effect the nullification of a criminal liability that is fully Promissory Note including accrued late payment charges/interests or to
matured, and already in the process of enforcement. Thus, this Court has return the possession of the subject vehicle for the purpose of foreclosure
ruled that the offended party’s acceptance of a promissory note for all or in accordance with the undertaking stated in the chattel mortgage. When
part of the amount misapplied does not obliterate the criminal offense the spouses Domingo still failed to comply with its demands, BPI filed on
(Camus vs. Court of Appeals, 48 Off. Gaz. 3898). November 14, 2000 a Complaint7 for Replevin and Damages (or in the
alternative, for the collection of sum of money, interest and other charges,
Novation is not a ground under the law to extinguish criminal liability. and attorney's fees) which was raffled to the Metropolitan Trial Court
16 (MeTC) of Manila, Branch 9, and docketed as Civil Case No. 168949-
Article 89 (on total extinguishment) and Article 94 (on partial
17 CV. BPI included a John Doe as defendant because at the time of filing
extinguishrnent) of the Revised Penal Code list down the various of the Complaint, BPI was already aware that the subject vehicle was in
grounds for the extinguishment of criminal liability. Not being included the possession of a third person but did not yet know the identity of said
in the list, novation is limited in its effect only to the civil aspect of the person.
liability, and, for that reason, is not an efficient defense in estafa. This is
because only the State may validly waive the criminal action against an In their Answer,8 the spouses Domingo raised the following affirmative
18 defenses:
accused. The role of novation may only be either to prevent the rise of
criminal liability, or to cast doubt on the true nature of the original basic 4. [BPI] has no cause of action against the [spouses Domingo].
transaction, whether or not it was such that the breach of the obligation
would not give rise to penal responsibility, as when money loaned is made 5. The Honorable Court has no jurisdiction over this case,
19
to appear as a deposit, or other similar disguise is resorted to.
6. As per the allegations in the complaint, JOHN DOE is an indispensable
Although the novation of a contract of agency to make it one of sale may party to this case so with his whereabouts unknown, service by
relieve an offender from an incipient criminal liability, that did not happen publication should first be made before proceeding with the trial of this
here, for the partial payments and the proposal to pay the balance the case;
accused made during the barangay proceedings were not at all 7. Defendant Maryden Domingo once obtained a car loan from Far East
incompatible with Degafios liability under the agency that had already Bank and Trust Company but the car was later sold to Carmelita S.
attached. Rather than converting the agency to sale, therefore, he even Gonzales with the bank's conformity and the buyer subsequently assumed
thereby confirmed his liability as the sales agent of the complainants. payment of the balance of the mortgaged loan.
VHEREFORE, the Court AFFIRMS the decision of the Court of Appeals During trial, the prosecution presented as witness Vicente Magpusao, a
promulgated on September 23, 2003; and ORDERS petitioner to pay the former employee of FEBTC and now an Account Analyst of BPI. His
costs of suit. testimony was summed up by the MeTC as follows:
SO ORDERED. Vicente Magpusao, [BPI's] Account Analyst and formerly connected with
Arco Pulp and Paper Co., Inc. v. Lim Far East Bank and Trust Company testified that on September 27, 1993,
see page 45 [the spouses Domingo] for consideration executed and delivered to
Makati Auto Center, Inc. a Promissory Note in the sum of ₱629,856.00
Bognot v. RRI Lending Corporation payable in monthly installments in accordance with the schedule of
see page 88 payment indicated in said Promissory Note. In order to secure the
payment of the obligation, the [spouses Domingo] executed in favor of
The Wellex Group, INc. v. U-Land Airlines, Co. Ltd. said Makati Auto Center, Inc. on the same date a Chattel Mortgage over
see page 28 one (1) unit of 1993 Mazda (323) with Motor No. B6-270146 and with
Bank of the Philippine Islands v. Domingo Serial No. BG1062M9100287. With notice to [the spouses Domingo],
March 25, 2015 said Makati Auto Center, Inc. assigned to Far East Bank and Trust Co.
the Chattel Mortgage as shown by the Deed of Assignment executed by
G.R. No. 169407 [Makati Auto Center, Inc.]. Far East Bank and Trust Co. on the other
hand, has been merged with and/or absorbed by herein plaintiff [BPI].
BANK OF THE PHILIPPINE ISLANDS, Petitioner, The [spouses Domingo] defaulted in complying with the terms and
vs. conditions of the Promissory Note with Chattel Mortgage by failing to
AMADOR DOMINGO, Respondent. pay twenty[-one] (21) successive installments which fell due on January
DECISION 15, 1996 up to September 15, 1997. [BPI] sent a demand letter [to]
defendant Mercy Domingo thru registered mail demanding payment of
LEONARDO-DE CASTRO, J.: the whole balance of the Promissory Note plus the stipulated interest and
other charges or return to [BPI] the possession of the above-described
Before the Court is a Petition for Review on Certiorari under Rule 45 of motor vehicle. There were some negotiations made by the [spouses
the Rules of Court, filed by petitioner Bank of the Philippine Islands Domingo] to their In-House Legal Assistant but the same did not
(BPI), seeking the reversal and setting aside of the Decision1 dated July materialize. Based on the Statement of Account dated October 31, 2000,
11, 2005 and Resolution2 dated August 19, 2005 of the Court of Appeals [the spouses Domingo have] an outstanding balance of ₱275,562.00
in CAG.R. SP No. 88836. exclusive of interest and other charges.
The Petition arose from the following facts: On cross-examination, the witness explained that the first time he came
On September 27, 1993, respondent Amador Domingo (Amador) and his to handle [the spouses Domingo's] account was in 1997. Despite the fact
wife, the late Mercy Maryden Domingo (Mercy),3 (collectively referred that he was not yet employed with the bank in 1993, he knew exactly what
to as the spouses Domingo) executed a Promissory Note4 in favor of happened in this particular transaction because of his experience in auto
Makati Auto Center, Inc. in the sum of ₱629,856.00, payable in 48 financing. He also has an access [to] the Promissory Note, Chattel
successive monthly installments in the amount of ₱13,122.00 each. They Mortgage and other records of payment made by the bank. Based on the
simultaneously executed a Deed of Chattel Mortgage5 over a 1993 Mazda records, the [spouses Domingo] issued several postdated checks but not
323 (subject vehicle) to secure the payment of their Promissory Note. for the entire term. There were payments made from October 30, 199[3]
up to September 14, 1994. He was not the one who received payments for

the auto finance. If there were receipts issued, they will only ride for the surety. While finding that BPI was entitled to the reliefs prayed for, the
account of Mrs. Domingo. He was not sure if these receipts are kept in MeTC made no adjudication as to the entitlement of the bank to the Writ
the warehouse or probably disposed of by the bank since the transaction of Replevin, and instead awarded monetary reliefs as were just and
was made in 1997. They already have a computer records of all payments equitable. The dispositive portion of the MeTC decision reads:
made by their client. Based on the subsidiary ledger, there were three (3)
checks that bounced and these are payments from the new buyer. They WHEREFORE, premises considered, judgment is hereby rendered in
only have one (1) photocopy of these checks in the amount of favor of [BPI], ordering defendant Amador Domingo:
₱325,431.60 while the other two (2) are missing. He was not aware who 1. To pay [BPI] the sum of ₱275,562.00 plus interest thereon at the rate
owns Cargo and Hardware Corporation but the check was issued by a of 36% per annum from November 15, 2000 until fully paid;
certain Miss Gonzales. The witness further testified that anyone can pay
the monthly amortization as long as the payment is for the account of 2. To pay [BPI] the sum equivalent to 25% of the total amount due as
Maryden Domingo. They cannot include Carmelita Gonzales as one of attorney's fees; and
the defendants in this case because they don't have a document executed
by the latter in behalf of Far East Bank and Trust Co. The bank did not 3. To pay the costs of suit.11
approve the Deed of Sale with Assumption of Mortgage. Acting on Amador's Motion for Reconsideration, the MeTC issued an
Witness further testified that he found the photocopy of the Deed of Sale Order12 dated September 6, 2004 affirming its earlier judgment but
in the records of Maryden Domingo. The Promissory Note and Chattel reducing the attorney's fees awarded, thus: WHEREFORE, premises
Mortgage were executed by the defendants Maryden and Amador considered the Decision of this Court dated June 10, 2014 stands, subject
Domingo. There was no assumption of obligation of the [spouses to the modification that the attorney's fees of twenty-five percent (25%)
Domingo]. Witness however admitted that Far East Bank did not tum over is ordered reduced to ten percent (10%) of the total amount due.13
to [BPI] all the records pertaining to the account of the [spouses Domingo Dissatisfied, Amador appealed his case before the Regional Trial Court
].9 (Citations omitted.) Amador himself testified for the defense. The (RTC) of Manila, Branch 26, wherein it was docketed as Civil Case No.
MeTC provided the following summary of Amador's testimony: 04-111100. In its Decision dated February 10, 2005, the RTC held that in
For his defense, defendant Amador Domingo testified that his wife and novation, consent of the creditor to the substitution of the debtor need not
co-defendant Mercy Maryden Domingo died on November 27, 2003. He be by express agreement, it can be merely implied. The consent is not
admitted that his wife bought a car and was mortgaged to Far East Bank required to be in any specific or particular form; the only requirement
and Trust Company. He identified the Chattel Mortgage and the being that it must be given by the creditor in one way or another. To the
Promissory Note he executed together with his wife. In connection with RTC, the following circumstances demonstrated the implied consent of
the execution of this Promissory Note, he recalled that his wife issued BPI to the novation: ( 1) BPI had knowledge of the Deed of Sale and
forty-eight (48) checks. The twelve (12) checks were cleared by the bank Assumption of Mortgage executed between Mercy and Carmelita, but did
and his wife was able to obtain a discount for prompt payments up to not interpose any objection to the same; and (2) BPI (through FEBTC)
October 1994. While they were still paying for the car, Carmelita returned the personal checks of the spouses Domingo and accepted the
Gonzales got interested to buy the car and is willing to assume the payments made by Carmelita. The R TC also noted that BPI made a
mortgage. After furnishing the bank [with] the Deed of Sale duly demand for payment upon the spouses Domingo only after 30 months
notarized, Carmelita Gonzales subsequently issued a check payable to Far from the time Carmelita assumed payments for the installments due. The
East Bank and Trust Company and the remaining postdated checks were R TC reasoned that if the spouses Domingo truly remained as debtors,
returned to them. Based on the application of payment prepared by [BPI's] BPI would not have wasted time m demanding payments from them.
witness, Carmelita Gonzales made payments from November 14, 1995 to Ultimately, the RTC decreed:
December 1995. Aside from these payments on May 19, 1997, Carmelita WHEREFORE, premises considered, the judgment appealed from is
Gonzales issued a check to Far East Bank in the amount of ₱385,431.60. hereby reversed. The complaint filed by [BPI] before [MeTC] Branch 9,
In 1996, he received a phone call from a certain Marvin Orence asking Manila, is hereby DISMISSED and ordering [BPI] to pay
for their assistance to locate the car which Carmelita Gonzales bought defendant/appellant Amador Domingo the following, to wit:
from them. His lawyer went to Land Transportation Office for assistance.
From the time Ms. Gonzales started to pay, they never received any a) One Hundred Thousand (₱100,000.00) Pesos as moral damages;
demand letter from Far East Bank. Thereafter, on February 29, 1997, they
received a demand letter from Espino Law Office [on] behalf of b) Fifty Thousand (₱50,000.00) Pesos as exemplary damages;
[FEBTC]. His lawyer made a reply on March 31, 1997 stating therein that c) Fifty Thousand (₱50,000.00) Pesos as attorney's fees;
the motor vehicle for which the loan was obtained had been sold to
Carmelita Gonzales as of July 5, 1994 with the knowledge and approval d) Twenty-Five Thousand (₱25,000.00) [Pesos] as litigation expenses;
of their client. After three years, they received another demand letter dated
October 31, 2000 from Labaguis Law Office. His lawyer made the same e) Costs of this suit.14
reply on March 7, 2000 and another letter on November 24, 2000. Witness
Aggrieved by the foregoing RTC judgment, BPI filed a Petition for
further testified that this malicious complaint probably triggered the early
Review with the Court of Appeals, docketed as CA-G.R. SP No. 88836.
demise of his wife who has a high blood pressure. His wife died of
The Court of Appeals promulgated its Decision on July 11, 2005,
aneurism. As damages, he is asking for the amount of ₱200,000.00 as
affirming the finding of the R TC that novation took place. The Court of
moral damages, ₱75,000.00 as attorney's fees and ₱5,000.00 appearance
Appeals, relying on the declaration in Babst v. Court of Appeals15 that
fee.
consent of the creditor to the substitution of debtors need not always be
On cross-examination, witness elaborates that when his wife presented to express and may be inferred from the acts of the creditor, ruled that:
Far East Bank the Deed of Sale with Assumption of Mortgage, the bank
In this case, there is no doubt that FEBTC had the intention to release
made no objection and returned all their postdated checks. His wife was
private respondent [Amador] and his wife from the obligation when the
the one who deal[t] with Carmelita Gonzales but he always provide[d]
latter sold the subject vehicle to [Carmelita]. This intention can be
assistance with respect to paper works. Aside from the aforesaid Deed of
inferred from the following acts of FEBTC: 1) it returned the postdated
Sale, there is no other document which shows the conformity of the bank.
checks issued by private respondent [Amador's] wife in favor of FEBTC;
They were only verbally assured by Mr. Orence that their papers are in
2) it accepted the payments made by [Carmelita]; 3) it did not interpose
order.10
any objection despite knowledge of the existence of the Deed of Sale with
On June 10, 2004, the Me TC rendered a Decision in favor of BPI as the Assumption of Mortgage; and 4) it did not demand payment from private
bank was able to establish by preponderance of evidence a valid cause of respondent [Amador] and his wife for thirty (30) long months.
action against the spouses Domingo. According to the MeTC, novation is
xxxx
never presumed and must be clearly shown by express agreement or by
acts of equal import. To effect a subjective novation by a change in the As correctly found by the R TC, the testimony of private respondent
person of the debtor, it is necessary that the old debtor be released [Amador] as regards the return of the said checks to them by FEBTC was
expressly from the obligation and the third person or new debtor assumes not rebutted by petitioner BPI.
his place. Without such release, there is no novation and the third person
who assumes the debtor's obligation merely becomes a co-debtor or If indeed the said checks were not returned to private respondent
surety. The MeTC found Amador' s bare testimony as insufficient [Amador' s] wife, the least thing that petitioner BPI or FEB TC could have
evidence to prove that he and his wife Mercy had been expressly released done was to deposit them. Should the checks thereafter bounce, then
from their obligations and that Carmelita Gonzales (Carmelita) assumed petitioner BPI or FEBTC could have filed a separate case against private
their place as the new debtor within the context of subjective novation; respondent [Amador's] wife. This was never done by petitioner BPI or
and if at all, Carmelita only became the spouses Domingo's co-debtor or

FEBTC. Hence, it is safe to conclude that the said checks were indeed BPI comes to this Court via the present Petition for Review/ Appeal by
returned to private respondent [Amador's] wife.16 Certiorari raising the sole issue of whether or not there had been a
novation of the loan obligation with chattel mortgage of the spouses
The Court of Appeals rejected the other arguments of BPI: Domingo to BPI so that the spouses Domingo were released from said
Petitioner BPI further argues that as regards the payment made by the obligation and Carmelita was substituted as debtor.
alleged new debtor, Carmelita Gonzales, it appears that the only payment The Court answers in the negative and grants the Petition.
made by her was a PNB Check No. 00190322 dated May 19, 1997 which
was dishonored due to Account Closed. In De Cortes v. Venturanza,20 the Court discussed some principles and
jurisprudence underlying the concept and nature of novation as a mode of
Careful scrutiny of the records of the case reveals otherwise. As found by extinguishing obligations:
the Me TC in its decision dated June 10, 2004, Carmelita Gonzales made
several payments on the said loan obligation, as testified to by witness According to Manresa, novation is the extinguishment of an obligation by
Vicente Magpusao, petitioner BPI's Account Analyst, thus: the substitution or change of the obligation by a subsequent one which
extinguishes or modifies the first, either by changing the object or
x x x. Based on the subsidiary leger, (Exhibit "2"), there were three (3) principal conditions, or by substituting the person of the debtor, or by
checks that bounced and these are payments from the new buyer. They subrogating a third person to the rights of the creditor (8 Manresa 428,
only have one (1) photocopy of these checks in the amount of cited in IV Civil Code of the Philippines by Tolentino 1962 ed., p. 352).
P.325,431.60 (Exhibit 4) while the other two are missing. He was not Unlike other modes of extinction of obligations, novation is a juridical act
aware who owns Cargo and Hardware Corporation but the check was with a dual function - it extinguishes an obligation and creates a new one
issued by a certain Miss Gonzales. x x x. in lieu of the old.
xxxx Article 1293 of the New Civil Code provides:
Petitioner BPI further argues that it was not its obligation to interpose any "N ovation which consists in substituting a new debtor in the place of the
objection to the Deed of Sale with Assumption of Mortgage. Rather it original one, may be made even without the knowledge or against the will
should be the vendee, [Carmelita], who should secure the approval and of the latter, but not without the consent of the creditor." (emphasis
consent of petitioner BPI to the Deed of Sale. supplied)
This argument is untenable. Under this provision, there are two forms of novation by substituting the
The Deed of Sale with Assumption of Mortgage between private person of the debtor, and they are: (1) expromision and (2) delegacion. In
respondent [Amador's] wife and [Carmelita] was executed way back on the former, the initiative for the change does not come from the debtor
July 5, 1994. The check that was issued by [Carmelita] was dated May and may even be made without his knowledge, since it consists in a third
19, 1997. The position of petitioner BPI is not possible because when the person assuming the obligation. As such, it logically requires the consent
Deed of Sale with Assumption of Mortgage was executed and the said of the third person and the creditor. In the latter, the debtor offers and the
check was issued, private respondent [Amador's] wife and [Carmelita] creditor accepts a third person who consents to the substitution and
were still dealing with FEBTC, considering the fact that the merger of assumes the obligation, so that the intervention and the consent of these
petitioner BPI and FEBTC was formalized on April 10, 2000. three persons are necessary (8 Manresa 436-437, cited in IV Civil Code
of the Philippines by Tolentino, 1962 ed., p. 360). In these two modes of
Nevertheless, FEBTC interposed no objection to the Deed of Sale with substitution, the consent of the creditor is an indispensable requirement
Assumption of Mortgage, hence, it consented to it. (Garcia vs. Khu Yek Chiong, 65 Phil. 466, 468). (Emphases supplied.)
From the foregoing, it is clear that novation took place so that private The Court also emphasized in De Cortes the indispensability of the
respondent Domingo is no longer the debtor of petitioner BPI.17 (Citations creditor's consent to the novation, whether expromision or delegacion,
omitted.) given that the "[s]ubstitution of one debtor for another may delay or
prevent the fulfillment of the obligation by reason of the financial inability
The Court of Appeals, however, deleted the damages awarded to Amador or insolvency of the new debtor; hence, the creditor should agree to accept
for the following reasons: the substitution in order that it may be binding on him."21
As to the second issue, petitioner BPI argues that the RTC awarded moral Both the R TC and the Court of Appeals found that there was novation by
and exemplary damages and attorney's fees to respondent [Amador] only delegacion in the case at bar. The Deed of Sale with Assumption of
in the dispositive portion of the assailed decision without any basis in fact Mortgage was executed between Mercy (representing herself and her
and in law. husband Amador) and Carmelita, thus, their consent to the substitution as
This Court finds the argument tenable. debtors and third person, respectively, are deemed undisputed. It is the
existence of the consent of BPI (or its absorbed corporation FEB TC) as
In the case of Solid Homes, Inc. vs. Court of Appeals, it was held that: creditor that is being challenged herein.
"It is basic that the claim for actual, moral and punitive damages as well As a general rule, since novation implies a waiver of the right the creditor
as exemplary damages and attorney's fees must each be independently had before the novation, such waiver must be express.22 The Court
identified and justified." explained the rationale for the rule in Testate Estate of Lazaro Mota v.
Serra23:
Furthermore, Section 14, paragraph 1 of Article VIII, of the 1987
Constitution lays down the standard in rendering decisions, to wit: it must It should be noted that in order to give novation its legal effect, the law
be express therein clearly and distinctly the facts and law on which it is requires that the creditor should consent to the substitution of a new
based. debtor. This consent must be given expressly for the reason that, since
novation extinguishes the personality of the first debtor who is to be
Perusal of the assailed decision reveals that the award of moral and substituted by a new one, it implies on the part of the creditor a waiver of
exemplary damages as well as attorney's fees and litigation expenses were the right that he had before the novation, which waiver must be express
only touched in the dispositive portion, which is in clear disregard of the under the principle that renuntiatio non praesumitor, recognized by the
established rules laid down by the Constitution and existing law in declaring that a waiver of right may not be performed unless the
jurisprudence. Therefore, their deletion is in order. will to waive is indisputably shown by him who holds the right.
As regards the award of litigation expenses and costs of the suit, the same However, in Asia Banking Corporation v. Elser,24 the Court qualified
should also be deleted considering that "no premium should be placed on thus:
the right to litigate."18 (Citations omitted.)
The aforecited article 1205 [now 1293] of the Civil Code does not state
The Court of Appeals ultimately adjudged: that the creditor's consent to the substitution of the new debtor for the old
WHEREFORE, premises considered, the assailed decision dated be express, or given at the time of the substitution, and the Supreme Court
February 10, 2005 of the Regional Trial Court, Branch 26, Manila in Civil of Spain, in its judgment of June 16, 1908, construing said article, laid
Case No. 04-111100 is hereby AFFIRMED with MODIFICATION in down the doctrine that "article 1205 of the Civil Code does not mean or
that the award of moral and exemplary damages as well as attorney's fees, require that the creditor's consent to the change of debtors must be given
litigation expenses and costs of suit, is hereby deleted.19 simultaneously with the debtor's consent to the substitution; its evident
purpose being to preserve the creditor's full right, it is sufficient that the
In its Resolution dated August 19, 2005, the Court of Appeals denied the latter's consent be given at any time and in any form whatever, while the
Motion for Partial Reconsideration of BPI. agreement of the debtors subsists." The same rule is stated in the
Enciclopedia Juridica Espanola, volume 23, page 503, which reads: "The

rule that this kind of novation, like all others, must be express, is not FEBTC) and Carmelita. Even the account itself is still in the names of the
absolute; for the existence of the consent may well be inferred from the spouses Domingo.
acts of the creditor, since volition may as well be expressed by deeds as
by words." The understanding between Henry W. Elser and the principal The absence of objection on the part of BPI (or FEB TC) cannot be
director of Yangco, Rosenstock & Co., Inc., with respect to Luis R. Y presumed as consent. Jurisprudence requires presentation of proof of
angco' s stock in said corporation, and the acts of the board of directors consent, not mere absence of objection. Amador cannot rely on Babst
after Henry W. Elser had acquired said shares, in substituting the latter which involved a different factual milieu. Relevant portions of the Court's
for Luis R. Y angco, are a clear and unmistakable expression of its ruling in Babst are reproduced below:
consent. When this court said in the case of Estate of Mota vs. Serra (47 In the case at bar, Babst, MULTI and ELISCON all maintain that due to
Phil., 464), that the creditor's express consent is necessary in order that the failure of BPI to register its objection to the take-over by DBP of
there may be a novation of a contract by the substitution of debtors, it did ELISCON's assets, at the creditors' meeting held in June 1981 and
not wish to convey the impression that the word "express" was to be given thereafter, it is deemed to have consented to the substitution of DBP for
an unqualified meaning, as indicated in the authorities or cases, both
Spanish and American, cited in said decision. ELISCON as debtor.
Hence, based on the aforequoted ruling in Asia Banking, the existence of We find merit in the argument. Indeed, there exist clear indications that
the creditor's consent may also be inferred from the creditor's acts, but BPI was aware of the assumption by DBP of the obligations of ELISCON.
such acts still need to be "a clear and unmistakable expression of [the In fact, BPI admits that –
creditor's] consent. "25
"[T]he Development Bank of the Philippines (DBP), for a time, had
In Ajax Marketing and Development Corporation v. Court of proposed a formula for the settlement of Eliscon's past obligations to its
Appeals,26 the Court further clarified that: creditors, including the plaintiff [BPI], but the formula was expressly
rejected by the plaintiff as not acceptable (long before the filing of the
The well settled rule is that novation is never presumed. Novation will not complaint at bar)."
be allowed unless it is clearly shown by express agreement, or by acts of
equal import. Thus, to effect an objective novation it is imperative that The Court of Appeals held that even if the account officer who attended
the new obligation expressly declare that the old obligation is thereby the June 1981 creditors' meeting had expressed consent to the assumption
extinguished, or that the new obligation be on every point incompatible by DBP of ELISCON's debts, such consent would not bind BPI for lack
with the new one. In the same vein, to effect a subjective novation by a of a specific authority therefor. In its petition, ELISCON counters that the
change in the person of the debtor it is necessary that the old debtor be mere presence of the account officer at the meeting necessarily meant that
released expressly from the obligation, and the third person or new debtor he was authorized to represent BPI in that creditors' meeting. Moreover,
assumes his place in the relation. There is no novation without such BPI did not object to the substitution of debtors, although it objected to
release as the third person who has assumed the debtor's obligation the payment formula submitted by DBP.
becomes merely a co-debtor or surety. (Citations omitted.)
Indeed, the authority granted by BPI to its account officer to attend the
The determination of the existence of the consent of BPI to the creditors' meeting was an authority to represent the bank, such that when
substitution of debtors, in accordance with the standards set in the he failed to object to the substitution of debtors, he did so on behalf of and
preceding jurisprudence, is a question of fact because it requires the Court for the bank. Even granting arguendo that the said account officer was not
to review the evidence on record. It is an established rule that the so empowered, BPI could have subsequently registered its objection to
jurisdiction of the Court in cases brought before it from the Court of the substitution, especially after it had already learned that DBP had taken
Appeals via a petition for review on certiorari under Rule 45 of the Rules over the assets and assumed the liabilities of ELISCON. Its failure to do
of Court is generally limited to reviewing errors of law as the former is so can only mean an acquiescence in the assumption by DBP of
not a trier of facts. Thus, the findings of fact of the Court of Appeals are ELISCON's obligations. As repeatedly pointed out by ELISCON and
conclusive and binding upon the Court in the latter's exercise of its power MULTI, BPI's objection was to the proposed payment formula, not to the
to review for it is not the function of the Court to analyze or weigh substitution itself.31 In Babst, there was a clear opportunity for BPI, as
evidence all over again.27 However, several of the recognized creditor therein, to object to the substitution of debtors given that its
exceptions28 to this rule are present in the instant case that justify a factual representative attended a creditor's meeting, during which, said
review, i.e., the inference is manifestly mistaken, the judgment is based representative already objected to the proposed payment formula made by
on misapprehension of facts, and the findings of the Court of Appeals and DBP, as the new debtor. Hence, the silence of BPI during the same
the RTC are contrary to those of the MeTC. meeting as to the matter of substitution of debtors could already be
interpreted as its acquiescence to the same. In contrast, there was no clear
The burden of establishing a novation is on the party who asserts its opportunity for BPI (or FEB TC) to have expressed its objection to the
existence.29 Contrary to the findings of the Court of Appeals and the RTC, substitution of debtors in the case at bar.
Amador failed to discharge such burden as he was unable to present proof
of the clear and unmistakable consent of BPI to the substitution of debtors. Second, the consent of BPI to the substitution of debtors cannot be
deduced from its acceptance of payments from Carmelita, absent proof of
Irrefragably, there is no express consent of BPI to the substitution of its clear and unmistakable consent to release the spouses Domingo from
debtors. The Court of Appeals and the RTC inferred the consent of BPI their obligation. Since the spouses Domingo remained as debtors of BPI,
from the following facts: (1) BPI had a copy of the Deed of Sale and together with Carmelita, the fact that BPI demanded payment from the
Assumption of Mortgage executed between Mercy and Carmelita in its spouses Domingo 30 months after accepting payment from Carmelita is
file, indicating its knowledge of said agreement, and still it did not insignificant.
interpose any objection to the same; (2) BPI (through FEBTC) returned
the spouses Domingo's checks and accepted Carmelita's payments; and The acceptance by a creditor of payments from a third person, who has
(3) BPI did not demand any payment from the spouses Domingo not until assumed the obligation, will result merely to the addition of debtors and
3 0 months after Carmelita assumed the payment of balance on the not novation. The creditor may therefore enforce the obligation against
Promissory Note. both debtors.32As the Court pronounced in Magdalena Estates, Inc. v.
Rodriguez,33 "[t]he mere fact that the creditor receives a guaranty or
The Court disagrees with the inferences made by the Court of Appeals accepts payments from a third person who has agreed to assume the
and the RTC. obligation, when there is no agreement that the first debtor shall be
First, that BPI (or FEB TC) had a copy of the Deed of Sale and released from responsibility, does not constitute a novation, and the
Assumption of Mortgage executed between Mercy and Carmelita in its creditor can still enforce the obligation against the original debtor." The
file does not mean that it had consented to the same. The very Deed itself Court reiterated in Quinto v. People34 that "[n]ot too uncommon is when
states: a stranger to a contract agrees to assume an obligation; and while this may
have the effect of adding to the number of persons liable, it does not
That the VENDEE [Carmelita] assumes as he/she had assumed to pay the necessarily imply the extinguishment of the liability of the first debtor.
aforecited mortgage in accordance with the original terms and conditions Neither would the fact alone that the creditor receives guaranty or accepts
of said mortgage, and the parties hereto [Mercy and Carmelita] have payments from a third person who has agreed to assume the obligation,
agreed to seek the conformity of the MORTGAGEE [FEBTC].30 This constitute an extinctive novation absent an agreement that the first debtor
brings the Court back to the original question of whether there is proof of shall be released from responsibility."
the conformity of BPI.
Absent proof that BPI gave its clear and unmistakable consent to release
The Court notes that the documents of BPI concerning the car loan and the spouses Domingo from the obligation to pay the car loan, Carmelita
chattel mortgage are still in the name of the spouses Domingo. No new is simply considered an additional debtor. Consequently, BPI can still
promissory note or chattel mortgage had been executed between BPI (or

enforce the obligation against the spouses Domingo even 30 months after 1. Q. Do you have with you those 36 checks that were allegedly returned
it had started accepting payments from Carmelita. by Far East Bank?
And third, there is no sufficient or competent evidence to establish the A. These checks have already been discarded, Sir.
return of the checks to the spouses Domingo and the assurance made by
FEBTC that the spouses Domingo were already released from their 2. Q. So, you cannot present those 36 checks anymore?
obligation. A. No, Sir.
During his direct examination, Amador testified as follows: 3. Q. Who was the alleged buyer of the mortgaged car again?
Atty. Rivera: Witness: Carmelita S. Gonzales, Sir.
1. Q. Do you remember who was this person who became interested to Atty. Ganitano:
buy this car?
1. Q. To whom did this Carmelita Gonzales transacted with respect to the
A. Carmelita S. Gonzales, Sir. sale of mortgaged vehicle?
2. Q. What did you tell Mrs. Gonzales when she expressed interest in A. To my wife, Mercy Maryden Domingo, Sir.
buying this car, this Mazda vehicle?
2. Q. Not with you, Mr. Witness?
A. We told her that the car was mortgaged and she told us that she is
willing to assume the mortgage, Sir. A. Well, I always provide assistance to my wife with regards to paper
works, Sir.
3. Q. With that willingness, what happened next on the part of Mrs.
Gonzales to assume the mortgage? 3. Q. When was this Deed of Sale executed, was it before when your wife
and the buyer went to the bank or after they went to the bank?
A. My wife and Mrs. Gonzales went to Far East Bank and Trust Company
and she informed the bank that somebody is interested in buying the car A. I think it was simultaneous, Sir.
and assume the mortgage and the bank informed her that the bank is
agreeable and with no objection. 4. Q. When you say "simultaneous", Mr. Witness, I'm showing to you this
Deed of Sale with Assumption of Mortgage and you said it was with the
Atty. Ganitano: Objection, your Honor. May we object to the answer of conformity of the bank. Will you please tell us in this Deed of Sale with
the witness, it would be hearsay. The witness testified that it was his wife Assumption of Mortgage if you could find any entry which indicate that
and the would be buyer who went to the bank. the bank agreed to the sale with assumption of mortgage?
Atty. Rivera: Then, we are just offering it as part of the narration not Witness: None, Sir.
necessarily to prove the truth of the statement, your Honor.
Atty. Ganitano: Aside from this Deed of Sale with Assumption of
Court: The witness may continue. Mortgage, do you have any document which shows that the bank indeed
conformed to the sale of the mortgaged vehicle with assumption of
Atty. Rivera: So, after that meeting with the bank occurred, what mortgage?
happened next in connection with this intention of Mrs. Gonzales to
purchase the car? Witness: We were verbally assured that our papers are in order, Sir.
Witness: After furnishing the bank with the Deed of Absolute Sale duly Atty. Ganitano: So, there is no document, Mr. Witness, it was only made
notarized, [Ms.] Carmelita Gonzales subsequently issued a check payable orally?
to Far East Bank and Trust Company, Sir.
Witness: Yes, Sir, we were verbally assured that our papers are in order.
Atty. Rivera:
Atty. Ganitano:
1. Q. How about the postdated checks that your wife issued to Far East
Bank and Trust Company? 1. Q. Were you present when your wife and the would-be buyer went to
the bank?
A. The remaining postdated checks were returned to us, Sir.
A. No, Sir.
2. Q. Do you remember what were those postdated checks that were
returned by the bank? 2. Q. How did you know that there was an assurance from the bank?
A. Those were the checks we issued in advance, Sir. A. I received a phone call from Mr. Oronce. I asked about the transaction
and he told me that there is nothing to worry because our documents or
3. Q. What were the dates of these checks? papers were in order, Sir.
A. October 30, 1994 to 1997, Sir. 3. Q. Do I get you right, Mr. Witness, that the confirmation was only
through phone call?
xxxx
A. It was Mr. Oronce who called me, Sir.
Atty. Rivera:
4. Q. I'm just asking what was the means of communication, was it only
1. Q. Aside from this evidence that you have enumerated, were you able thru phone call?
to talk to any representative from Far East Bank relative to the approval
of the change in the personality of the debtor from your wife to ... A. Yes, Sir, thru phone call. I think twice or three times.
A. As I remember, sometime in 1996, I received a call from a certain Atty. Rivera: We would like to manifest, your Honor, as early as 1997,
Marvin Orence asking for our assistance to locate the car that Mrs. just to stress this point, as early as March 1997, the name of Marvin
Carmelita Gonzales bought from us and informed us that we have nothing Oronce ...
to worry except that we provide them assistance to locate the car and I
informed our lawyer, Atty. Rivera, about this and Atty. Rivera went to the Atty. Ganitano: The witness is under cross, your Honor.
Land Transportation Office for assistance.35 Court: You just ask that in re-direct, counsel.
Amador continued to testify on cross-examination, thus: Atty. Rivera: Yes, you Honor.36
CROSS EXAMINATION BY ATTY. GANITANO Amador admitted that it was his wife Mercy, together with Carmelita,
1. Q. You testified that out of the 48 checks you paid to Far East Bank & who directly transacted with FEBTC regarding the sale of the subject
Trust Company, only 12 checks were made good. What happened to the vehicle to and assumption of mortgage by Carmelita. Amador had no
3 6 checks? personal knowledge of what had happened when Mercy and Carmelita
went to the bank so his testimony on the matter was hearsay, which, if not
A. When my wife brought the transaction to Far East Bank and presented excluded, deserves no credence.
the Deed of Absolute Sale, the bank have no objection to the sale of the
car and afterwards, the bank returned all the postdated checks prepared The Court explained in Da Jose v. Angeles37 that:
by my wife that was in the possession of the bank, Sir.

Evidence is hearsay when its probative force depends on the competency Salazar. This Court invalidated a stipulated 5.5% per month or 66% per
and credibility of some persons other than the witness by whom it is annum interest on a ₱500,000.00 loan in Medel and a 6% per month or
sought to be produced. The exclusion of hearsay evidence is anchored on 72% per annum interest on a ₱60,000.00 loan in Solangon for being
three reasons: (1) absence of cross-examination; (2) absence of demeanor excessive, iniquitous, unconscionable and exorbitant. In both cases, we
evidence; and (3) absence of oath. Basic under the rules of evidence is reduced the interest rate to 12% per annum. We held that while the Usury
that a witness can only testify on facts within his or her personal Law has been suspended by Central Bank Circular No. 905, s. 1982,
knowledge. This personal knowledge is a substantive prerequisite in effective on January 1, 1983, and parties to a loan agreement have been
accepting testimonial evidence establishing the truth of a disputed fact. xx given wide latitude to agree on any interest rate, still stipulated interest
x. (Citations omitted.) rates are illegal if they are unconscionable. Nothing in the said circular
grants lenders carte blanche authority to raise interest rates to levels which
The Court of Appeals and the RTC substantively based their finding that will either enslave their borrowers or lead to a hemorrhaging of their
BPI (or FEB TC) consented to the substitution of debtors on the return of assets. On the other hand, in Bautista vs. Pilar Development Corp., this
the checks to the spouses Domingo, but the proof of the issuance of the Court upheld the validity of a 21% per annum interest on a ₱142,326.43
checks, their delivery to the bank, and the return of the checks flimsily loan, and in Garcia vs. Court of Appeals, sustained the agreement of the
consists of Amador's unsubstantiated testimony. Amador recounted that parties to a 24% per annum interest on an ₱8,649,250.00 loan. It is on the
the postdated checks which he and Mercy executed in favor of FEBTC basis of these cases that we reduce the 36% per annum interest to 12%.
were returned to them, however, he failed to provide the details An interest of 12% per annum is deemed fair and reasonable. While it is
surrounding the return. Amador only stated that when Mercy provided true that this Court invalidated a much higher interest rate of 66% per
FEBTC with a copy of the Deed of Sale and Assumption of Mortgage, annum in Medel and 72% in Solangon it has sustained the validity of a
the bank returned the checks to them "subsequently" or "afterwards." much lower interest rate of 21 % in Bautista and 24% in Garcia. We still
Amador did not say how the checks were returned and to whom. The find the 36% per annum interest rate in the case at bar to be substantially
checks were not presented during the trial since according to Amador, greater than those upheld by this Court in the two (2) aforecited cases.
they were already "discarded," although once more, any other detail (Citations omitted.)
surrounding the discarding of the checks is sorely lacking. Aside from
Amador's bare testimony, no other supporting evidence of the return of On the strength of the foregoing jurisprudence, the Court likewise finds
the checks to the spouses Domingo was submitted during trial. For the the interest rate of 3% per month or 36% per annum stipulated in the
foregoing reasons, the Court accords little weight and credence to Promissory Note herein for the balance of ₱275,562.00 as excessive,
Amador' s testimony on the return of the checks. iniquitous, unconscionable, and exorbitant. Following the guidelines set
forth in Eastern Shipping Lines, Inc. v. Court of Appeals39 and Nacar v.
It is worthy to stress that Amador, as the party asserting novation, bears Gallery Frames,40 the Court imposes instead legal interest in the following
the burden of proving its existence. Amador cannot simply rely on the
1âwp hi1
rates: (1) legal interest of 12% per annum from date of extrajudicial
failure of BPI to produce the checks if these were not actually returned to demand on January 29, 1997 until June 30, 2013; and (2) legal interest of
the spouses Domingo. There is simply not enough evidence to establish 6o/o per annum from July 1, 2013 until fully paid.
the prima facie existence of novation to shift the burden of evidence to
BPI to controvert the same. Incidentally, Amador passed away on June 5, 2010 during the pendency
of the instant petition, and is survived by his children, namely: Joann D.
The verbal assurances purportedly given by a Mr. Marvin Orence or Moya, Annabelle G. Domingo, Cristina G. Domingo, Amador G.
Oronce (Orence/Oronce) of FEBTC to Amador over the telephone that Domingo, Jr., Gloria Maryden D. Macatangay, Dante Amador G.
the spouses Domingo's documents were in order do not constitute the Domingo, Gregory Amador A. Domingo, and Ina Joy A. Domingo.41 To
clear and unmistakable consent of the bank to the substitution of debtors. prevent future litigation in the enforcement of the award, the Court
Once again, except for Amador's bare testimony, there is no other clarifies that Amador's heirs are not personally responsible for the debts
evidence of such telephone conversations taking place and the subject of of their predecessor. The extent of liability of Amador's heirs to BPI is
such telephone conversations. In addition, Mr. Orence/Oronce's identity, limited to the value of the estate which they inherited from Amador. In
position at FEBTC, and authority to represent and bind the bank, were not this jurisdiction, "it is the estate or mass of the property left by the
even clearly established. decedent, instead of the heirs directly, that becomes vested and charged
The letter dated March 31, 1997 of Atty. Ricardo J.M. Rivera (Rivera), with his rights and obligations which survive after his death."42 To rule
counsel for the spouses Domingo, addressed to Atty. Cresenciano L. otherwise would unduly deprive Amador' s heirs of their properties.
Espino, counsel for FEBTC, does not serve as supporting evidence for WHEREFORE, in view of the foregoing, the Petition is GRANTED. The
Amador' s testimony regarding the return of the checks and the verbal Decision dated July 11, 2005 and Resolution dated August 19, 2005 of
assurances given by Mr. Orence/Oronce. The contents of such letter are the Court of Appeals in CA-G.R. SP No. 88836, affirming with
mere hearsay because the events stated therein did not personally happen modification the Decision dated February 10, 2005 of the RTC of Manila,
to Atty. Rivera or in his presence, and he merely relied on what his clients, Branch 26 in Civil Case No. 04-111100, is REVERSED and SET ASIDE.
the spouses Domingo, told him. The Decision dated June 10, 2004 and Order dated September 6, 2004 of
The Court is therefore convinced that there is no novation by delegacion the Me TC of Manila, Branch 9 in Civil Case No. 168949-CV, is
in this case and Amador remains a debtor of BPI. The Court reinstates the REINSTATED with MODIFICATIONS. The heirs of respondent
MeTC judgment ordering Amador to pay for the ₱275,562.00 balance on Amador Domingo are ORDERED to pay petitioner Bank of the
the Promissory Note, 10% attorney's fees, and costs of suit; but modifies Philippine Islands the following:
the rate of interest imposed and the date when such interest began to run. (1) the ₱275,562.00 balance on the Promissory Note, plus legal interest
In Ruiz v. Court of Appeals,38
the Court equitably reduced the interest of 12% from January 29, 1997 to June 30, 2013 and 6% from July 1, 2013
rate of 3% per month or 36% per annum stipulated in the promissory notes until fully paid; (2) attorney's fees of 10%; and (3) costs of suit. However,
therein to 1% per month or 12% per annum, based on the following the liability of Amador Domingo's heirs is limited to the value of the
ratiocination: inheritance they received from the deceased.
We affirm the ruling of the appellate court, striking down as invalid the SO ORDERED.
10% compounded monthly interest, the 10% surcharge per month
stipulated in the promissory notes dated May 23, 1995 and December 1,
1995, and the 1% compounded monthly interest stipulated in the
promissory note dated April 21, 1995. The legal rate of interest of 12%
per annum shall apply after the maturity dates of the notes until full
payment of the entire amount due. Also, the only permissible rate of
surcharge is 1% per month, without compounding. We also uphold the
award of the appellate court of attorney's fees, the amount of which having
been reasonably reduced from the stipulated 25% (in the March 22, 1995
promissory note) and 10% (in the other three promissory notes) of the
entire amount due, to a fixed amount of ₱50,000.00. However, we
equitably reduce the 3% per month or 36% per annum interest present in
all four (4) promissory notes to 1 % per month or 12% per annum interest.
The foregoing rates of interests and surcharges are in accord with Medel
vs. Court of Appeals, Garcia vs. Court of Appeals, Bautista vs. Pilar
Development Corporation, and the recent case of Spouses Solangon vs.

SEVENTY[-]SIX MILLION FIVE HUNDRED THOUSAND PESOS
ONLY (₱76,500,000.00), Philippine Currency.
Paradigm Development Corp. of the Philippines v. Bank of the
Philippine Islands Please note that the aforesaid Bid is only in PARTIAL
June 7, 2017 SETTLEMENT of the obligation of [PDCP], x x x. 13
G.R. No. 191174 Upon verification with the Registry of Deeds, PDCP discovered that
FEBTC extra-judicially foreclosed on June 20, 2000 the first and second
PARADIGM DEVELOPMENT CORPORATION OF THE mortgage without notice to it as mortgagor and sold the mortgaged
PHILIPPINES, Petitioner properties to FEBTC as the lone bidder. 14 Thereafter, on August 8, 2000,
vs. the corresponding Certificate of Sale was registered. 15
BANK OF THE PHILIPPINE ISLANDS, Respondent
Consequently, on July 19, 2001, PDCP filed a Complaint for Annulment
DECISION of Mortgage, Foreclosure, Certificate of Sale and Damages 16 with the
REYES, J., J.: RTC of Quezon City, against BPI, successor-in-interest of FEB TC,
alleging that the REMs and their foreclosure were null and void. 17
This is a Petition for Review on Certiorari 1 filed under Rule 45 of the
Rules of Court assailing the Decision 2 dated November 25, 2009 and In its Amended Complaint, 18 PDCP alleged that FEB TC assured it that
Resolution 3 dated February 2, 2010 of the Court of Appeals (CA) in CA- the mortgaged properties will only secure the Credit Line sub-facility of
G.R. CV No. 89755, which granted respondent Bank of the Philippine the Omnibus Line. With this understanding, PDCP President Go allegedly
Islands' (BPI) appeal and accordingly dismissed the complaint filed by agreed to sign on two separate dates a pro-forma and blank REM, securing
petitioner Paradigm Development Corporation of the Philippines (PDCP). the amount of ₱42.4 Million and P8 Million, respectively. PDCP,
however, claimed that it had no intent to be bound under the second REM,
The Facts which was not intended to be a separate contract, but only a means to
reduce registration expenses. 19
Sometime in February 1996, Sengkon Trading (Sengkon), a sole
proprietorship owned by Anita Go, obtained a loan from Far East Bank Moreover, PDCP averred that sometime in September 1997, FEBTC
and Trust Company (FEBTC) under a credit facility denominated as allegedly requested it to sign a document which would effectively extend
Omnibus Line in the amount of PlOO Million on several sub-facilities the liability of the properties covered by the mortgage beyond the Credit
with their particular sub-limits denominated as follows: (i) Discounting Line. Because of its refusal to sign said document, it surmised that this
Line for P20 Million; (ii) Letter of Credit/Trust Receipt (LC-TR) Line for must have been the reason why, as it later discovered, FEBTC registered
P60 Million; and (iii) Bills Purchased Line for PS Million. This was not only the first but also the second REM, contrary to the parties'
embodied in the document denominated as "Agreement for Renewal of agreement. 20
Omnibus Line." 4
In asking for the nullity of the REMs and the foreclosure proceeding,
On April 19, 1996, FEBTC again granted Sengkon another credit facility, PDCP alleged:
denominated as Credit Line, in the amount of ₱60 Million as contained
in the "Agreement for Credit Line." Two real estate mortgage (REM) a.) THAT although the [REM] of April 22, 1996 for Php 8.0 Million was
contracts were executed by PDCP President Anthony L. Go (Go) to not a separate security but was merely intended to reduce registration
partially secure Sengkon's obligations under this Credit Line. One REM, expenses, FEBTC, [BPI's] predecessor-in-interest, fraudulently and in
acknowledged on April 22, 1996, was constituted over Transfer violation of the original intent and agreement of the parties, made it
Certificate of Title (TCT) No. RT-55259 (354583) and secured the appear that said [REM] of April 22, 1996 was separate and distinct from
amount of P8 Million. The other REM, acknowledged on December 19, that of December 18, 1997 and caused the registration of both mortgages
1997, was constituted over TCT Nos. RT-58281, RT-54993 (348989) and with separate considerations totaling Php 50.4 Million;
RT-55260 (352956) and secured the amount of ₱42,400,000.00. 5 b.) THAT the subject [REMs] were foreclosed to answer not only for
In a letter dated September 18, 1997, FEB TC informed Sengkon obligations incurred under SENGKON's Credit Line but also for other
regarding the renewal, increase and conversion of its ₱l00 Million obligations of SENGKON and other companies which were not secured
Omnibus Line to ₱l50 Million LC-TR Line and P20 Million Discounting by said mortgages;
Line, the renewal of the ₱60 Million Credit Line and P8 Million Bills c.) THAT no notice was given to or received by [PDCP] of the projected
Purchased Line. 6 foreclosure x x x since the notice of said foreclosure was sent by
In the same letter, FEBTC also approved the request of Sengkon to change defendant SHERIFF to an address (333 EDSA, Quezon City) other than
the account name from SENGKON TRADING to SENGKON [PDCP's] known address as stated in the [REMs] themselves (333 EDSA
TRADING, INC. (STI). 7 Caloocan City) x x x;
Eventually, Sengkon defaulted in the payment of its loan d.) THAT, contrary to the then prevailing Supreme Court Circular AM
obligations.8 Thus, in a letter dated September 8, 1999, FEBTC demanded 99-10-05-0 x x x, only one (1) bidder was present and participated at the
payment from PDCP of alleged Credit Line and Trust Receipt availments foreclosure sale[; and]
with a principal balance of ₱244,277, 199 .68 plus interest and other e.) THAT, without the knowledge and consent of [PDCPJ, obligation of
charges which Sengkon failed to pay. PDCP responded by requesting for SENGKON has been transferred to STI [,] a juridical personality separate
segregation of Sengkon's obligations under the Credit Line and for the and distinct from SENGKON, a single proprietorship. This substitution
pertinent statement of account and supporting documents. 9 of SENGKON as debtor by STI x x x effectively novated the obligation
Negotiations were then held and PDCP proposed to pay approximately of [PDCP] to FEBTC. x x x. 21 (Underlining ours)
₱50 Million, allegedly corresponding to the obligations secured by its Ruling of the RTC
property, for the release of its properties but FEBTC pressed for a
comprehensive repayment scheme for the entirety of Sengkon's On April 16, 2007, the R TC rendered its Decision22 nullifying the REMs
obligations. 10 and the foreclosure proceedings. It also awarded damages to PDCP. The
dispositive portion of the decision reads:
Meanwhile, the negotiations were put on hold because BPI acquired FEB
TC and assumed the rights and obligations of the latter. 11 WHEREFORE, premises considered the Court renders judgment in favor
of [PDCP] and against defendants [BPI], Sheriff and the Register of
When negotiations for the payment of Sengkon's outstanding obligations, Deeds of Quezon City in the following manner:
however, fell, FEBTC, on April 5, 2000, initiated foreclosure proceedings
against the mortgaged properties of PDCP before the Regional Trial Court 1) Declaring null and void and of no further force and effect the following:
(RTC) of Quezon City. 12 In its Bid for the mortgaged properties,
FEBTC's counsel stated that: (a) the [REMs] (Annexes "F" and "F-1" hereof);
On behalf of our client, [FEBTC], we hereby submit its Bid for the Real (b) the foreclosure thereof;
Properties including all improvements existing thereon covered by [TCT] (c) the Certificate of Sale; and
Nos. RT - 55259 (354583), 58281, RT - 54993 (348989) and RT- 55260
(352956) which are the subject of the Auction Sale scheduled on June, (d) the entries relating to said [REMs] and Certificate of Sale annotated
20, 2000 in the amount of: on TCT Nos. 58281, RT-54993 (348989), RT-55260 (352956) and RT-
55259 (354583) covering the mortgaged properties;

2) Ordering defendant Registrar of Deeds to cancel all the annotations of ACCORD WITH THE RULES ON THE ASSESSMENT OF THE
the [REMs] and the Certificate of Sale on the above stated TCTs covering CREDIBILITY AND WEIGHT OF THE EVIDENCE;
the mortgaged properties and otherwise to clear said TCTs of any liens
and encumbrances annotated thereon relating to the invalid [REMs] II. THE VALIDITY OF THE REMs, AS UPHELD BY THE CA, IS
aforesaid; VITIATED BY THE FACT THAT BPI'S PREDECESSOR-IN-
INTEREST VIOLATED THE TRUE INTENT AND AGREEMENT OF
3) Ordering defendant [BPI] to return to [PDCP] the owner's duplicate THE PARTIES THERETO;
copies of the TCTs covering the mortgaged properties free from any and
all liens and encumbrances; and, III. THE CA DECISION'S REJECTION OF PDCP'S NOVATION
THEORY BASED ON THE ABSENCE OF AN EXPRESS RELEASE
4) Ordering the defendant BPI to pay [PDCP] the following sums: OF THE OLD DEBTOR AND THE SUBSTITUTION IN ITS PLACE
OF A NEW DEBTOR IS MISPLACED AND ERRONEOUS;
(a) Php 150,000.00 as attorney's fees; and,
IV. THE FORECLOSURE OF THE REMs WAS VITIATED NOT
(b) Php 50,000.00 as litigation expenses. ONLY BY THE INADMISSIBILITY OF THE PNs UPON WHICH IT
The Writ of Preliminary Injunction is hereby made FINAL and IS BASED BUT ALSO BECAUSE IT VIOLATED THE THERETO
PERMANENT. APPLICABLE RULES; and
Costs against defendant [BPI]. V. THE APPLICATION BY THE CA OF THE SHORTENED PERIOD
OF REDEMPTION IN THIS CASE VIOLATED THE NON-
SO ORDERED. 23 IMPAIRMENT AND EQUAL PROTECTION CLAUSES OF THE
CONSTITUTION. 36
The RTC observed that the availments under the Credit Line, secured by
PDCP's properties, may be made only within one year, or from April 19, Ruling of the Court
1996 to April 30, 1997. While BPI claimed that the period of said credit
line was extended up to July 31, 1997, PDCP was not notified of the The Court finds the petition meritorious. The registration of the REMs,
extension and thus could not have consented to the extension. Anyhow, even if contrary to the supposed intent of the parties, did not affect the
said the RTC, "no evidence had been adduced to show that Sengkon validity of the mortgage contracts
availed of any loan under the credit line up to July 31, 1997." Thus, in the According to PDCP, when FEBTC registered both REMs, even ifthe
absence of any monetary obligation that needed to be secured, the REM intent was only to register one, the validity of both REMs was vitiated by
cannot be said to subsist. 24 lack of consent. PDCP claims that said intent is supported by the fact that
Further, the RTC agreed with PDCP that novation took place in this case, the REMs were constituted merely as "partial security" for Sengkon's
which resulted in discharging the latter from its obligations as third-party obligations and therefore there was really no intent to be bound under both
mortgagor. In addition, it also nullified the foreclosure proceedings - but only in one - REM.
because the original copies of the promissory notes (PN s ), which were The Court cannot see its way clear through PDCP's argument. To begin
the basis of FEBTC's Petition for Extrajudicial Foreclosure of Mortgage, with, the registration of the REM contract is not essential to its validity.
were not presented in court and no notice of the extrajudicial foreclosure Article 2085 of the Civil Code provides:
sale was given to PDCP. 25
Art. 2085. The following requisites are essential to the contracts of pledge
Lastly, the RTC ruled that the shorter period of redemption under and mortgage:
Republic Act No. 8791 26 cannot apply to PDCP considering that the
REMs were executed prior to the effectivity of said law. As such, the (1) That they be constituted to secure the fulfillment of a principal
longer period of redemption under Act No. 3135 27 applies. 28 obligation;
Aggrieved, BPI appealed to the CA. 29 (2) That the pledgor or mortgagor be the absolute owner of the thing
pledged or mortgaged;
Ruling of the CA
(3) That the persons constituting the pledge or mortgage have the free
In its Decision 30 dated November 25, 2009, the CA reversed the RTC's disposal of their property, and in the absence thereof, that they be legally
ruling on all points. The CA found PDCP's contentions incredible for the authorized for the purpose.
following reasons: (i) the fact that PDCP surrendered the titles to the
mortgaged properties to FEBTC only shows that PDCP intended to Third persons who are not parties to the principal obligation may secure
mortgage all of these properties; (ii) if it were true that FEBTC assured the latter by pledging or mortgaging their own property. In relation
PDCP that it would be registering only one of the two REMs in order to thereto, Article 2125 of the Civil Code reads:
reduce registration expenses, then each of the two REMs should have
covered the four properties but it was not. On the contrary, the four Article 2125. In addition to the requisites stated in Article 2085, it is
properties were spread out with one REM covering one of the four indispensable, in order that a mortgage may be validly constituted, that
properties and the other REMs covering the remaining three properties; the document in which it appears be recorded in the Registry of Property.
and (iii) PDCP never complained to FEB TC regarding the registration of If the instrument is not recorded, the mortgage is nevertheless binding
the two REMs even after it discovered the same. 31 between the parties.
Also, the CA ruled that novation could not have taken place from x x x x (Emphasis ours)
FEBTC's mere act of approving Sengkon's request to change account In Mobil Oil Philippines, Inc. v. Diocares, et al., 37 the trial court refused
name from Sengkon to STI. 32 to order the foreclosure of the mortgaged properties on the ground that
Moreover, it held that the fact that FEBTC failed to submit the original while an unregistered REM contract created a personal obligation
copies of the PN s that formed the basis of its Petition for Extra judicial between the parties, the same did not validly establish a REM. In
Foreclosure of Mortgage cannot affect the validity of foreclosure because reversing the trial court, the Court said:
the validity of the obligations represented in those PNs was never denied The lower court predicated its inability to order the foreclosure in view of
by Sengkon nor by PDCP. 33 the categorical nature of the opening sentence of [Article 2125] that it is
The CA added that even if the obligations of Sengkon in credit facilities indispensable, "in order that a mortgage may be validly constituted, that
(other than the Credit Line) were included, since the REMs contain a the document in which it appears be recorded in the Registry of Property."
dragnet clause, these other obligations were still covered by PDCP's Not[e] that it ignored the succeeding sentence: "If the instrument is not
REMs. 34 Lastly, the CA ruled that the failure to send a notice of recorded, the mortgage is nevertheless binding between the parties." Its
extrajudicial foreclosure sale to PDCP did not affect the validity of the conclusion, however, is that what was thus created was merely "a personal
foreclosure sale because personal notice to the mortgagor is not even obligation but did not establish a [REM]."
generally required. 35 Such a conclusion does not commend itself for approval. The codal
Hence, this present petition,, .where PDCP presented the following provision is clear and explicit. Even if the instrument were not recorded,
arguments: "the mortgage is nevertheless binding between the parties." The law
cannot be any clearer. Effect must be given to it as written. The mortgage
I. THE FINDINGS IN THE CA DECISION WlllCH DEVIATED ON subsists; the parties are bound. As between them, the mere fact that there
ALMOST ALL POINTS FROM THOSE OF THE RTC ARE NOT IN is as yet no compliance with the requirement that it be recorded cannot be
a bar to foreclosure.

xxxx third person or new debtor must assume the former's place in the
contractual 42 relation.
Moreover to rule as the lower court did would be to show less than fealty
to the purpose that animated the legislators in giving expression to their Thus, in Ajax Marketing and Development Corporation v. CA, 43 the
will that the failure of the instrument to be recorded does not result in the Court had already ruled that:
mortgage being any the less "binding between the parties." In the
language of the Report of the Code Commission: "In Article [2125] an The well-settled rule is that novation is never presumed. Novation will
additional provision is made that if the instrument of mortgage is not not be allowed unless it is clearly shown by express agreement, or by acts
recorded, the mortgage, is nevertheless binding between the parties." We of equal import. Thus, to effect an objective novation it is imperative that
are not free to adopt then an interpretation, even assuming that the codal the new obligation expressly declare that the old obligation is thereby
provision lacks the forthrightness and clarity that this particular norm extinguished, or that the new obligation be on every point incompatible
does and therefore requires construction, that would frustrate or nullify with the new one. In the same vein, to effect a subjective novation by a
such legislative objective. 38 (Citation omitted and emphasis and change in the person of the debtor it is necessary that the old debtor be
underlining ours) released expressly from the obligation, and the third person or new debtor
assumes his place in the relation. There is no novation without such
Hence, even assuming that the parties indeed agreed to register only one release as the third person who has assumed the debtor's obligation
of the two REMs, the subsequent registration of both REMs did not affect becomes merely a co-debtor or surety. 44 (Emphasis ours)
an already validly executed REM if there was no other basis for the
declaration of its nullity. That the REMs were intended merely as "partial In the present case, PDCP failed to prove by preponderance of evidence
security" does not make PDCP's argument more plausible because as that Sengkon was already expressly released from the obligation and that
aptly observed by the CA, the PDCP's act of surrendering all the titles to STI assumed the former's obligation. Again, as correctly pointed out by
the properties to FEBTC clearly establishes PDCP' s intent to mortgage the CA, the Deed of Assumption of Line/Loan with Mortgage (Deed of
all of the four properties in favor of FEBTC to secure Sengkon's Assumption) which was supposed to embody STI's assumption of all the
obligation under the Credit Line. The Court notes that the principal obligations of Sengkon under the line, including but not necessarily
debtor, Sengkon, has several obligations under its Omnibus Line limited to the repayment of all the outstanding availments thereon, as well
corresponding to the several credit sub-facilities made available to it by as all applicable interests and other charges, was not signed by the parties.
FEBTC. As found by the trial court, PDCP intended to be bound only for Contrary to PDCP's claim, the CA's rejection of its claim ofnovation is
Sengkon' s availments under the Credit Line sub-facility and not for just not based on the absence of the mortgagor's conformity to the Deed of
any of Sengkon's availments. Hence, it is in this sense that the phrase Assumption. The CA's rejection is based on the fact that the non-
"partial security" should be logically understood. execution of the Deed of Assumption by Sengkon, STI and FEBTC
In this regard, PDCP argued that what its President signed is a pro-forma rendered the existence of novation doubtful because of lack of clear proof
REM whose important details were still left in blank at the time of its that Sengkon is being expressly released from its obligation; that STI was
execution. But notably, nowhere in PDCP's Amended Complaint did it already assuming Sengkon's former place in the contractual relation; and
anchor its cause of action for the nullity of the REMs on this ground. that FEBTC is giving its conformity to this arrangement. While FEBTC
While it indeed alleged this circumstance, PDCP's Amended Complaint indeed approved Sengkon's request for the "change in account name"
is essentially premised on the supposed fraud employed on it by FEBTC from Sengkon to STI, such mere change in account name alone does not
consisting of the latter's assurances that the REMs it already signed would meet the required degree of certainty to establish novation absent any
not be registered. In Solidbank Corporation v. Mindanao Ferroalloy other circumstance to bolster said conclusion.
Corporation, 39 the Court discussed the nature of fraud that would annul The trial court's finding that Sengkon did not avail under the Credit Line
or avoid a contract, thus: taints the foreclosure of the mortgage
Fraud refers to all kinds of deception - whether through insidious PDCP also claims that the foreclosure of the mortgage was invalid
machination, manipulation, concealment or misrepresentation- that would because the PNs that formed the basis of FEBTC's Petition for
lead an ordinarily prudent person into error after taking the circumstances Extrajudicial Foreclosure of Mortgage were inadmissible in evidence.
into account. In contracts, a fraud known as dolo causante or causal fraud Rejecting this argument, the CA ruled that the admissibility of the PNs is
is basically a deception used by one party prior to or simultaneous with a non-issue in this case because in questioning the validity of the REMs
the contract, in order to secure the consent of the other. Needless to say, and the foreclosure proceedings, PDCP did not actually assail the validity
the deceit employed must be serious. In contradistinction, only some or existence of said PNs; what it raised as an issue was whether the
particular or accident of the obligation is referred to by incidental fraud foreclosure covered obligations other than Sengkon's availment under the
or dolo incidente, or that which is not serious in character and without Credit Line. As the CA puts it:
which the other party would have entered into the contract
anyway. 40 (Citations omitted) [W]hat should have been the focal and critical question to be answered on
the issue of whether the subject [REMs] were validly foreclosed should
Under Article 1344 of the Civil Code, the fraud must be serious to annul have been whether the [REMs] executed by [PDCP] covered the
or avoid a contract and render it voidable. This fraud or deception must obligations of [Sengkon] as represented in those [PNs] or, stated in
be so material that had it not been present, the defrauded party would not another way, were the [PNs] used by defendant BPI in its foreclosure
have entered into the contract. proceedings over [PDCP's] mortgages availments by [Sengkon] under its
In the present case, even if FEB TC represented that it will not register Credit Line?
one of the REMs, PDCP cannot disown the REMs it executed after FEB An examination of the subject [PNs] vis-a-vis the Agreement for Credit
TC reneged on its alleged promise. As earlier stated, with or without the Line would yield an affirmative answer.
registration of the REMs, as between the parties thereto, the same is valid
and PDCP is already bound thereby. The signature of PDCP's President In the case at bar, a close look at the Agreement for Credit Line would
coupled with its act of surrendering the titles to the four properties to reveal that the said credit facility for Php60 Million was granted in favor
FEBTC is proof that no fraud existed in the execution of the contract. of [Sengkon] for the purpose of "Additional Working Capital" and that it
Arguably at most, FEBTC's act of registering the mortgage only would be "available by way of short term [PN]." In the same manner, an
amounted to dolo incidente which is not the kind of fraud that avoids a examination of [PNs] PN Nos. 2-002-028618, 2-002-029436 and 2-002-
contract. 029437 would reveal that the said [PNs] were availed of by [Sengkon] for
the purpose of "Additional Working Capital." 45 (Citations omitted and
No novation took place emphasis in the original)
The Court likewise agrees with the CA that no novation took place in the The Court cannot agree with the CA. In order to determine whether the
present case. Novation is a mode of extinguishing an obligation by obligations sought to be satisfied by the foreclosure proceedings were
changing its objects or principal obligations, by substituting a new debtor only Sengkon's availments under the Credit Line, the court necessarily
in place of the old one, or by subrogating a third person to the rights of needs to refer to the PNs themselves, as what the CA in fact did. Thus, it
the creditor. Article 1293 of the Civil Code defines novation as "consists is actually the contents of these PNs that are in issue and the trial court
in substituting a new debtor in the place of the original one, [which] may did not err in applying the best evidence rule.
be made even without the knowledge or against the will of the latter, but
not without the consent of the creditor." However, while the consent of But even if the Court disregards the best evidence rule, the circumstances
the creditor need not be expressed but may be inferred from the creditor's in this case militate against the CA's conclusion. The trial court made a
clear and unmistakable acts,41to change the person of the debtor, the factual finding that Sengkon's availment under the Credit Line, which is
former debtor must be expressly released from the obligation, and the the one secured by PDCP's properties, may be made only within one year,
or from April 19, 1996 to April 30, 1997. While FEBTC claimed that the

period of said credit line was extended up to July 31, 1997, PDCP was not therein, such deficiency being an indebtedness within the meaning of the
notified of the extension. At any rate, the RTC found that "no evidence mortgage, in the absence of a special contract excluding it from the
had been adduced to show that Sengkon availed of any loan under the arrangement.
credit line up to July 31, 1997," which was the period of the extension.
The latter school represents the better position. The parties having
Notably, while PDCP demanded from FEBTC for the segregation of conformed to the "blanket mortgage clause" or "dragnet clause," it is
Sengkon's availments under the Credit Line, FEBTC failed to heed reasonable to conclude that they also agreed to an implied understanding
PDCP's valid request and instead demanded for a comprehensive payment that subsequent loans need not be secured by other securities, as the
of Sengkon's entire obligation, unmindful of the fact of PDCP's status as subsequent loans will be secured by the first mortgage. In other words,
a mere third-party mortgagor and not a principal debtor. As a third-party the sufficiency of the first security is a corollary component of the
mortgagor, the limitation on its liability pertains not only to the properties "dragnet clause." But of course, there is no prohibition, as in the mortgage
it mortgaged but also to the obligations specifically secured thereby. It is contract in issue, against contractually requiring other securities for the
well settled that while a REM may exceptionally secure future loans or subsequent loans. Thus, when the mortgagor takes another loan for which
advancements, these future debts must be specifically described in the another security was given it could not be inferred that such loan was
mortgage contract. An obligation is not secured by a mortgage unless it made in reliance solely on the original security with the "dragnet clause,"
comes fairly within the terms of the mortgage contract. 46 but rather, on the new security given. This is the "reliance on the security
test."
In this case, there was simply no evidence to support the conclusion that
the PNs were in fact availments under the Credit Line secured by PDCP's Hence, based on the "reliance on the security test," the California court in
properties. The PNs that were used by FEBTC in its Petition for the cited case made an inquiry whether the second loan was made in
Extrajudicial Foreclosure of Mortgage were all executed beyond the reliance on the original security containing a "dragnet clause."
extended duration of Sengkon's Credit Line (or until July 1997). While Accordingly, finding a different security was taken for the second loan no
FEBTC wrote a letter 47 dated September 18, 1997, which is a few days intent that the parties relied on the security of the first loan could be
short of the date of the earliest PN (September 23, 1997), addressed to inferred, so it was held. The rationale involved, the court said, was that
STI, approving the renewal of the debtor's Credit Line subject to the the "dragnet clause" in the first security instrument constituted a
condition that the Line "shall be partially secured" by the PDCP's continuing offer by the borrower to secure further loans under the security
mortgaged properties, it is worthy to note that this letter did not bear the of the first security instrument, and that when the lender accepted a
conforme of the debtor, lending credence to the trial court's observation. different security he did not accept the offer.
In this light, FEBTC's failure to heed PDCP's request for the segregation
of the amounts secured by its properties assumes critical significance. The xxxx
lack of proof that the availments subject of the foreclosure proceedings Indeed, in some instances, it has been held that in the absence of clear,
were within the coverage of PDCP's REMs explains FEBTC's omission. supportive evidence of a contrary intention, a mortgage containing a
Despite the foregoing, however, particularly the variance between the "dragnet clause" will not be extended to cover future advances unless the
duration of Sengkon's Credit Line and the dates appearing on the face of document evidencing the subsequent advance refers to the mortgage as
the PNs, the CA upheld the validity of the foreclosure based merely on providing security therefor. 51 (Citations omitted and emphasis and
the similarity in the purpose for which the Credit Line was granted and underlining ours)
the purpose for which the PNs were executed. In the present case, PDCP's REMs indeed contain a blanket mortgage
On the implied premise that what is material is only the identity of the clause in the following language:
debtor whose obligation the mortgagor secures, the CA cited Prudential That, for and in consideration of credit accommodations obtained from
Bank v. Alviar 48 and applied the dragnet clause in PDCP's REMs. the [FEBTC], and to secure the payment of the same and those that may
According to the CA, since the REMs contain a dragnet clause, then hereafter be obtained, the principal of all of which is hereby fixed at x x
PDCP's properties can be made to answer even if the PNs supporting the x PESOS x x x, Philippine Currency, as well as those that the [FEBTC]
Petition for Extrajudicial Foreclosure of Mortgage refer to Sengkon's may extend to the [PDCP], including interest and expenses or any other
obligations in its other credit facilities. 49 obligation owing to the [FEBTC], whether direct or indirect, principal or
The CA unfortunately misapplied the ruling in Prudential Bank. In that secondary, as appears in the accounts, books and records of the [FEBTC]
case, the Court's discussion on the application of the blanket mortgage x x x. 52
clause or dragnet clause was not as much as critically important as the Nonetheless, the parties do not dispute that what the REMs secured were
Court's novel application of the doctrine of reliance on security test. only Sengkon's availments under the Credit Line and not all of Sengkon's
A dragnet clause is a stipulation in a REM contract that extends the availments under other sub-facilities which are also secured by other
coverage of a mortgage to advances or loans other than those already collaterals.53 Since the liability of PDCP's properties was not unqualified,
obtained or specified in the contract. Where there are several advances, the PNs, used as basis of the Petition for Extrajudicial
however, a mortgage containing a dragnet clause will not be extended to Foreclosure of Mortgage should sufficiently indicate that it is within the
cover future advances, unless the document evidencing the subsequent terms of PDCP's limited liability. In this case, the PNs failed to make any
advance refers to the mortgage as providing security therefor or unless reference to PDCP's availments, if any, under its Credit Line. In fact, it
there are clear and supportive evidence to the contrary. 50 This is did not even mention Sengkon's securities under the Credit Line. Notably,
especially true in this case where the advances were not only several but the Disclosure Statements, which were "certified correct" by FEBTC's
were covered by different sub-facilities. Thus, in Prudential Bank, the authorized representative, Ma. Luisa C. Ellescas, and which accompanied
Court stated: the PNs, failed to disclose whether the loan secured thereby was actually
In the case at bar, the subsequent loans obtained by respondents were secured or not.
secured by other securities, thus: PN BD#76/C-345, executed by Don Thus, even if the Court brushes aside the Best Evidence Rule, the
Alviar was secured by a "hold-out" on his foreign currency savings foregoing observations clearly support the trial court's observation that
account, while PN BD#76/C-430, executed by respondents for Donalco FEBTC's foreclosure did not actually cover the specific obligations
Trading, Inc., was secured by "Clean-Phase out TOD CA 3923" and secured by PDCP's properties.
eventually by a deed of assignment on two [PNs] executed by Bancom
Realty Corporation with Deed of Guarantee in favor of A.U. Valencia and FEBTC's failure to send personal notice to the mortgagor is fatal to the
Co., and by a chattel mortgage on various heavy and transportation validity of the foreclosure proceedings
equipment. The matter of PN BD#76/C-430 has already been discussed.
Thus, the critical issue is whether the "blanket mortgage" clause applies Indeed, FEBTC's failure to comply with its contractual obligation to send
even to subsequent advancements for which other securities were notice to PDCP of the foreclosure sale is fatal to the validity of the
intended, or particularly, to PN BD#76/C-345. foreclosure proceedings. In Metropolitan Bank v. Wong,54 the Court ruled
that while as a rule, personal notice to the mortgagor is not required, such
Under American jurisprudence, two schools of thought have emerged on notice may be subject of a contractual stipulation, the breach of which is
this question. One school advocates that a "dragnet clause" so worded as sufficient to nullify the foreclosure sale, thus:
to be broad enough to cover all other debts in addition to the one
specifically secured will be construed to cover a different debt, although In resolving the first query, we resort to the fundamental principle that a
such other debt is secured by another mortgage. The contrary thinking contract is the law between the parties and, that absent any showing that
maintains that a mortgage with such a clause will not secure a note that its provisions are wholly or in part contrary to law, morals, good customs,
expresses on its face that it is otherwise secured as to its entirety, at least public order, or public policy, it shall be enforced to the letter by the
to anything other than a deficiency after exhausting the security specified courts. Section 3, Act No. 3135 reads:

xxxx if the parties did not stipulate therefor. Stated differently, personal notice
is necessary if the parties so agreed in their mortgage contract. In the
The Act only requires (1) the posting of notices of sale in three public present case, the parties provided in their REMs that:
places, and (2) the publication of the same in a newspaper of general
circulation. Personal notice to the mortgagor is not 12. All correspondence relative to this mortgage, including demand
necessary. Nevertheless, the parties to the mortgage contract are not letters, summonses, subpoenas, or notifications of any judicial or
precluded from exacting additional requirements. In this case, petitioner extrajudicial action shall be sent to the [PDCP] at or at the address that
and respondent in entering into a contract of [REM], agreed inter alia: may hereafter be given in writing by the [PDCP] to the [FEBTC]. x x x. 65
"all correspondence relative to this mortgage, including demand letters, This provision clearly establishes the agreement between the parties that
summonses, subpoenas, or notifications of any judicial or extra-judicial personal notice is required before FEBTC may proceed with the
action shall be sent to the MORTGAGOR at 40-42 Aldeguer St. Iloilo foreclosure of the property and thus, FEBTC's act of proceeding with the
City, or at the address that may hereafter be given in writing by the foreclosure despite the absence of personal notice to the mortgagor was
MORTGAGOR to the MORTGAGEE." its own lookout.
Precisely, the purpose of the foregoing stipulation is to apprise respondent That the portion on the mortgagor's address was left in blank cannot be
of any action which petitioner might take on the subject property, thus simply swept under the rug as "an expression of general intent" that
according him the opportunity to safeguard his rights. When petitioner cannot prevail of the parties' specific intent not to require personal notice.
failed to send the notice of foreclosure sale to respondent, he committed Apart from the fact that this reasoning is based on a questionable doctrine,
a contractual breach sufficient to render the foreclosure sale on November the CA's ruling completely ignored the fact that the mortgage contract
23, 1981 null and void. 55 (Citation omitted and italics in the original) containing said stipulation was a standard contract prepared by FEBTC
itself. If the latter did not intend to require personal notice, on top of the
In trivializing FEBTC's failure to send personal notice to PDCP however, statutory requirements of posting and publication, then said provision
the CA, citing Philippine National Bank v. Nepomuceno Productions, should not have at all been included in the mortgage contract. In other
Inc., 56 ruled that since the principal object of a notice of sale is not so words, the REMs in this case are contracts of adhesion, and in case of
much to notify the mortgagor but to inform the public in general of the doubt, the doubt should be resolved against the party who prepared it. 66
particularities of the foreclosure, then personal notice to the mortgagor
may be disregarded.57 The cited case, however, is inapplicable because Accordingly, the CA should have considered the "doubt" created by the
that case did not in fact involve stipulations on personal notice to blank space in the mortgage contract against FEBTC and not in its favor.
mortgagor nor the sending of notice to a wrong address. The issue Nonetheless, even if the Court ignores this particular rule of
involved in that case is whether the parties to the mortgage can validly interpretation, the fact that FEBTC caused the sending of a notice, albeit
waive the statutory requirements of posting and publication and not at a wrong address, to PDCP is itself a clear proof that the parties did
whether the bank can ignore a contractual stipulation for personal notice. intend to impose a contractual requirement of personal notice, FEBTC's
Neither is PNB v. Spouses Rabat 58 likewise cited by the CA applicable undisputed breach of which sufficiently nullifies the foreclosure
because the trial court therein found that the mortgage contract did not in proceeding.
fact require that personal service of notice of foreclosure sale be given to
the mortgagors. The CA's cavalier disregard of the mortgagor's With the foregoing, the Court finds it unnecessary to discuss PDCP's
contractual right to notice of the foreclosure sale runs contrary to argument based on the alleged violation of its constitutional right against
jurisprudence. In Wong, 59 the Court already had the occasion to observe: impairment of obligations and contract.
It is bad enough that the mortgagor has no choice but to yield his property WHEREFORE, premises considered, the petition is GRANTED. The
in a foreclosure proceeding. It is infinitely worse, if prior thereto, he was Decision dated November 25, 2009 and Resolution dated February 2,
denied of his basic right to be informed of the impending loss of his 2010 of the Court of Appeals in CA-G.R. CV No. 89755 are
property. x x x. 60 hereby ANNULLED and SET ASIDE. The Decision dated April 16,
2007 of the Regional Trial Court of Quezon City, Branch 222, in Civil
While the CA acknowledged that there was indeed a contractual Case No. QOl-44630 is REINSTATED and AFFIRMED.
stipulation for notice to PDCP as mortgagor, it considered the absence of
a particular address in the space provided therefor in the mortgage
contract as merely evincing an expression of "general intent" between the SO ORDERED.
parties and that this cannot prevail against their "specific intent" that Act
No. 3135 be the controlling law between them,
citing Cortes v. Intermediate Appellate Court. 61
The Court cannot agree with the CA. To begin with, the value of the
doctrine enunciated in Cortes has long been considered questionable by
this Court. Thus, in Global Holiday Ownership
Corporation v. Metropolitan Bank and Trust Company, 62 the Court held:
But what is stated in Cortes no longer applies in light of the Court's
rulings in Wong and all the subsequent cases, which have been
consistent. Cortes has never been cited in subsequent rulings of the Court,
nor has the doctrine therein ever been reiterated. Its doctrinal value has
been diminished by the policy enunciated in Wong and the subsequent
cases; that is, that in addition to Section 3 of Act 3135, the parties may
stipulate that personal notice of foreclosure proceedings may be required.
Act 3135 remains the controlling law, but the parties may agree, in
addition to posting and publication, to include personal notice to the
mortgagor, the non-observance of which renders the foreclosure
proceedings null and void, since the foreclosure proceedings become an
illegal attempt by the mortgagee to appropriate the property for itself.
Thus, we restate: the general rule is that personal notice to the mortgagor
in extrajudicial foreclosure proceedings is not necessary, and posting and
publication will suffice. Sec. 3 of Act 3135 governing extra-judicial
foreclosure of [REMs], as amended by Act 4118, requires only posting of
the notice of sale in three public places and the publication of that notice
in a newspaper of general circulation. The exception is when the parties
stipulate that personal notice is additionally required to be given the
mortgagor. Failure to abide by the general rule, or its exception, renders
the foreclosure proceedings null and void. 63 (Citation omitted, italics
ours, and emphasis and underlining in the original deleted)
In fact, the 2002 case of Nepomuceno Productions,64 cited by the CA,
already made it clear that while personal notice to the mortgagor in
extrajudicial foreclosure proceedings is not necessary, this holds true only

Civil Cases Obligations With A Period To Novation

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on Audit (COA).

The assailed issuances affirmed the Notice of

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Metrobank CC No. 003380 7,613,000.00

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funding for the development projects.63

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being no joint development agreement, the obligation to deliver the US$3

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PERALTA, J.: 3.Directing [petitioner] to pay an administrative fine of P10,000.00 for

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and attorney's fees in the amount of ₱50,000.00.

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