G.R. No. 89252 May 24, 1993 RAUL SESBREO, petitioner, vs. HON.

COURT OF APPEALS, DELTA MOTORS CORPORATION AND PILIPINAS BANK, respondents. Salva, Villanueva & Associates for Delta Motors Corporation. Reyes, Salazar & Associates for Pilipinas Bank.

20496 of one (1) Delta Motors Corporation Promissory Note ("DMC PN") No. 2731 for a term of 32 days at 17.0% per annum; (b) the Certificate of securities Delivery Receipt No. 16587 indicating the sale of DMC PN No. 2731 to petitioner, with the notation that the said security was in custodianship of Pilipinas Bank, as per Denominated Custodian Receipt ("DCR") No. 10805 dated 9 February 1981; and (c) post-dated checks payable on 13 March 1981 (i.e., the maturity date of petitioner's investment), with petitioner as payee, Philfinance as drawer, and Insular Bank of Asia and America as drawee, in the total amount of P304,533.33.

On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issued by private respondent Pilipinas Bank ("Pilipinas"). It reads as follows:
PILIPINAS BANK Makati Stock Exchange Bldg., Ayala Avenue, Makati, Metro Manila

FELICIANO, J.: On 9 February 1981, petitioner Raul Sesbreo made a money market placement in the amount of P300,000.00 with the Philippine Underwriters Finance Corporation ("Philfinance"), Cebu Branch; the placement, with a term of thirty-two (32) days, would mature on 13 March 1981, Philfinance, also on 9 February 1981, issued the following documents to petitioner:
(a) the Certificate of Confirmation of Sale, "without recourse," No.

On 13 March 1981, petitioner sought to encash the postdated checks issued by Philfinance. However, the checks were dishonored for having been drawn against insufficient funds.

TO Raul Sesbreo

DENOMINATED CUSTODIAN RECEIPT This confirms that as a duly Custodian Bank, and upon instruction of PHILIPPINE UNDERWRITES FINANCE CORPORATION, we have in our custody the following securities to you [sic] the extent herein indicated. SERIAL MAT. FACE ISSUED REGISTERED AMOUNT NUMBER DATE VALUE BY HOLDER PAYEE

2731 4-6-81 2,300,833.34 L DMC PHIL. 307,933.33 U UNDERWRITERS E FINANCE CORP. D We further A certify that T these securities may be E you or your inspected by duly authorized representative at any time during regular banking hours. A p Upon your r written instructions i we shall undertake physical l delivery of the above securities fully 6 assigned to you should,this Denominated Custodianship 1 Receipt remain outstanding 9 in your favor thirty 8 (30) days after its maturity. 1 M A T U R I

On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private respondent Pilipinas, Makati Branch, and handed her a demand letter informing the bank that his placement with Philfinance in the amount reflected in the DCR No. 10805 had remained unpaid and outstanding, and that he in effect was asking for the physical delivery of the underlying promissory note. Petitioner then examined the original of the DMC PN No. 2731 and found: that the security had been issued on 10 April 1980; that it would mature on 6 April 1981; that it had a face value of P2,300,833.33, with the Philfinance as "payee" and private respondent Delta Motors Corporation ("Delta") as "maker;" and that on face of the promissory note was stamped "NON NEGOTIABLE." Pilipinas did not deliver the Note, nor any certificate of participation in respect thereof, to petitioner. Petitioner later made similar demand letters, dated 3 July 1981 and 3 August 2 1981, again asking private respondent Pilipinas for physical delivery of the original of DMC PN No. 2731. Pilipinas allegedly referred all of petitioner's demand letters to Philfinance for written instructions, as has been supposedly agreed upon in "Securities Custodianship Agreement" between Pilipinas and Philfinance. Philfinance did not provide the appropriate instructions; Pilipinas never released DMC

PN No. 2731, ( nor any other instrument in respect thereof, B to petitioner. y Petitioner also made a written demand on E 3 upon private respondent 14 July 1981 l partial satisfaction of DMC PN Delta for the i No. 2731, explaining that Philfinance, as z had assigned to him said payee thereof, Note to theaextent of P307,933.33. Delta, b however, denied any liability to petitioner e on the promissory note, and explained in t turn that it had previously agreed with Philfinancehto offset its DMC PN No. 2731 (along with DMC PN No. 2730) against PhilfinanceD PN No. 143-A issued in favor of e Delta. V In the meantime, Philfinance, on 18 June i 1981, was placed under the joint l of the Securities and management l exchange commission ("SEC") and the a Central Bank. Pilipinas delivered to the SEC DMC PN No. 2731, which to date I apparently remains in the custody of the 4 l SEC. l e As petitioner g had failed to collect his investmenti and interest thereon, he filed on 28 September b 1982 an action for damages with the Regional Trial Court ("RTC") of l Cebu City, e Branch 21, against private 5 respondents Delta and Pilipinas. The trial court, in a decision dated 5 August 1987, S dismissed the complaint and counterclaims i for lack of merit and for lack of cause of g action, withncosts against petitioner. a Petitioner appealed to respondent Court of t Appeals in u C.A.-G.R. CV No. 15195. In a

Decision dated 21 March 1989, the Court 6 of Appeals denied the appeal and held: Be that as it may, from the evidence on record, if there is anyone that appears liable for the travails of plaintiffappellant, it is Philfinance. As correctly observed by the trial court: This act of Philfinanc e in accepting the investmen t of plaintiff and charging it against DMC PN No. 2731 when its entire face value was already obligated or earmarked for set-off or compensa tion is difficult to comprehe nd and may have

been motivated with bad faith. Philfinanc e, therefore, is solely and legally obligated to return the investmen t of plaintiff, together with its earnings, and to answer all the damages plaintiff has suffered incident thereto. Unfortunat ely for plaintiff, Philfinanc e was not impleaded as one of the defendant s in this case at bar; hence,

this Court is without jurisdiction to pronounce judgement against it. (p. 11, Decision) WHEREFORE, finding no reversible error in the decision appealed from, the same is hereby affirmed in toto. Cost against plaintiff-appellant. Petitioner moved for reconsideration of the above Decision, without success. Hence, this Petition for Review on Certiorari. After consideration of the allegations contained and issues raised in the pleadings, the Court resolved to give due course to the petition and required the 7 parties to file their respective memoranda. Petitioner reiterates the assignment of errors he directed at the trial court decision, and contends that respondent court of Appeals gravely erred: (i) in concluding that he cannot recover from private respondent Delta his assigned portion of DMC PN No. 2731; (ii) in failing to hold private respondent Pilipinas solidarily liable on the DMC PN No. 2731 in view of the provisions stipulated in DCR

No. 10805 issued in favor r of petitioner, and (iii) in refusing to pierce the veil of corporate entity between Philfinance, and private respondents Delta and Pilipinas, considering that the three (3) entities belong to the "Silverio Group of Companies" under the leadership of Mr. 8 Ricardo Silverio, Sr. There are at least two (2) sets of relationships which we need to address: firstly, the relationship of petitioner vis-a-vis Delta; secondly, the relationship of petitioner in respect of Pilipinas. Actually, of course, there is a third relationship that is of critical importance: the relationship of petitioner and Philfinance. However, since Philfinance has not been impleaded in this case, neither the trial court nor the Court of Appeals acquired jurisdiction over the person of Philfinance. It is, consequently, not necessary for present purposes to deal with this third relationship, except to the extent it necessarily impinges upon or intersects the first and second relationships. I. We consider first the relationship between petitioner and Delta. The Court of appeals in effect held that petitioner acquired no rights vis-a-vis Delta in respect of the Delta promissory note (DMC PN No. 2731) which Philfinance sold "without recourse" to petitioner, to the extent of P304,533.33. The Court of Appeals said on this point:

Nor could plaintiffappellant have acquired any right over DMC PN No. 2731 as the same is "non-negotiable" as stamped on its face (Exhibit "6"), negotiation being defined as the transfer of an instrument from one person to another so as to constitute the transferee the holder of the instrument (Sec. 30, Negotiable Instruments Law). A person not a holder cannot sue on the instrument in his own name and cannot demand or receive payment 9 (Section 51, id.) Petitioner admits that DMC PN No. 2731 was non-negotiable but contends that the Note had been validly transferred, in part to him by assignment and that as a result of such transfer, Delta as debtor-maker of the Note, was obligated to pay petitioner the portion of that Note assigned to him by the payee Philfinance. Delta, however, disputes petitioner's contention and argues: (1) that DMC PN No. 2731 was not intended to be negotiated or otherwise transferred by Philfinance as manifested by the word "non-negotiable" stamp across the face of the Note

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and because maker Delta and payee Philfinance intended that this Note would be offset against the outstanding obligation of Philfinance represented by Philfinance PN No. 143-A issued to Delta as payee; (2) that the assignment of DMC PN No. 2731 by Philfinance was without Delta's consent, if not against its instructions; and (3) assuming (arguendo only) that the partial assignment in favor of petitioner was valid, petitioner took the Note subject to the defenses available to Delta, in particular, the offsetting of DMC PN No. 2731 against Philfinance PN No. 143-A.
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We consider Delta's arguments seriatim. Firstly, it is important to bear in mind that the negotiation of a negotiable instrument must be distinguished from the assignment or transfer of an instrument whether that be negotiable or non-negotiable. Only an instrument qualifying as a negotiable instrument under the relevant statute may be negotiated either by indorsement

thereof coupled with delivery, or by delivery alone where the negotiable instrument is in bearer form. A negotiable instrument may, however, instead of being negotiated, also be assigned or transferred. The legal consequences of negotiation as distinguished from assignment of a negotiable instrument are, of course, different. A non-negotiable instrument may, obviously, not be negotiated; but it may be assigned or transferred, absent an express prohibition against assignment or transfer written in the face of the instrument: The words "not negotiable," stamped on the face of the bill of lading, did not destroy its assignability, but the sole effect was to exempt the bill from the statutory provisions relative thereto, and a bill, though not negotiable, may be transferred by assignment; the assignee taking subject to the equities between the original 12 parties. (Emphasis added) DMC PN No. 2731, while marked "nonnegotiable," was not at the same time stamped "non-transferable" or "nonassignable." It contained no stipulation which prohibited Philfinance from assigning or transferring, in whole or in part, that Note.

Delta adduced the "Letter of Agreement" which it had entered into with Philfinance and which should be quoted in full:

Philippine Underwriters Finance Corp. Benavidez St., Makati, Metro Manila. A t t e n t i o GENTLEMEN: n : This refers to our M outstanding placement of r P4,601,666.67 as . evidenced by your Promissory Note No. 143A

A, dated April 10, 1980, to mature on April 6, 1981. As agreed upon, we enclose our nonnegotiable Promissory Note No. 2730 and 2731 for P2,000,000.00 each, dated April 10, 1980, to be offsetted [sic] against your PN No. 143-A upon coterminal maturity. Please deliver the proceeds of our PNs to our representative, Mr. Eric Castillo.

We find nothing in his "Letter of Agreement" which can be reasonably construed as a prohibition upon Philfinance assigning or transferring all or part of DMC PN No. 2731, before the maturity thereof. It is scarcely necessary to add that, even had this "Letter of Agreement" set forth an explicit prohibition of transfer upon Philfinance, such a prohibition cannot be invoked against an assignee or transferee V of the Noteewho parted with valuable consideration in good faith and without r notice of such prohibition. It is not disputed y that petitioner was such an assignee or transferee. Our conclusion on this point is T reinforced by r the fact that what Philfinance and Delta were doing by their exchange of u their promissory notes was this: Delta l invested, by making a money market y placement with Philfinance, approximately P4,600,000.00 Y on 10 April 1980; but promptly, on o the same day, borrowed back the bulk of that placement, i.e., u P4,000,000.00, by issuing its two (2) r promissory notes: DMC PN No. 2730 and s DMC PN No. 2731, both also dated 10 , April 1980. Thus, Philfinance was left with not P4,600,000.00 but only P600,000.00 in ( two (2) Delta promissory cash and the S notes. g

Apropos Delta's complaint that the partial assignment by Philfinance of DMC PN No. 2731 had been effected without the consent of Delta, we note that such consent was not necessary for the validity and enforceability of the assignment in 14 favor of petitioner. Delta's argument that Philfinance's sale or assignment of part of its rights to DMC PN No. 2731 constituted conventional subrogation, which required its (Delta's) consent, is quite mistaken. Conventional subrogation, which in the first 15 place is never lightly inferred, must be clearly established by the unequivocal terms of the substituting obligation or by the evident incompatibility of the new and 16 old obligations on every point. Nothing of the sort is present in the instant case. It is in fact difficult to be impressed with Delta's complaint, since it released its DMC PN No. 2731 to Philfinance, an entity engaged in the business of buying and selling debt instruments and other securities, and more generally, in money market transactions. In Perez v. Court of 17 Appeals, the Court, speaking through Mme. Justice Herrera, made the following important statement: There is another aspect to this case. What is involved here is a money market transaction. As defined by Lawrence Smith "the money market is a market dealing in standardized short-term credit instruments (involving large amounts) where

lenders and borrowers do not deal directly with each other but through a middle manor a dealer in the open market." It involves "commercial papers" which are instruments "evidencing indebtness of any person or entity. . ., which are issued, endorsed, sold or transferred or in any manner conveyed to another person or entity, with or without recourse". The fundamental function of the money market device in its operation is to match and bring together in a most impersonal manner both the "fund users" and the "fund suppliers." The money market is an "impersonal market", free from personal considerations. "The market mechanism is intended to provide quick mobility of money and securities." The impersonal character of the money market device overlooks the individuals or entities concerned. The issuer of a commercial paper in the money market necessarily knows in advance that it would be expenditiously

transacted and transferred to any investor/lender without need of notice to said issuer. In practice, no notification is given to the borrower or issuer of commercial paper of the sale or transfer to the investor. xxx xxx xxx There is need to individuate a money market transaction, a relatively novel institution in the Philippine commercial scene. It has been intended to facilitate the flow and acquisition of capital on an impersonal basis. And as specifically required by Presidential Decree No. 678, the investing public must be given adequate and effective protection in availing of the credit of a borrower in the commercial paper market. 18 (Citations omitted; emphasis supplied) We turn to Delta's arguments concerning alleged compensation or offsetting between DMC PN No. 2731 and Philfinance PN No. 143-A. It is important to note that at the time Philfinance sold part of its rights under DMC PN No. 2731 to petitioner on 9 February 1981, no

compensation had as yet taken place and indeed none could have taken place. The essential requirements of compensation are listed in the Civil Code as follows: Art. 1279. In order that compensation may be proper, it is necessary: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) That both debts consists in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3) That the two debts are due; (4) That they be liquidated and demandable; (5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. (Emphasis supplied)

On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was due. This was explicitly recognized by Delta in its 10 April 1980 "Letter of Agreement" with Philfinance, where Delta acknowledged that the relevant promissory notes were "to be offsetted (sic) against [Philfinance] PN No. 143-A upon coterminal maturity." As noted, the assignment to petitioner was made on 9 February 1981 or from fortynine (49) days before the "co-terminal maturity" date, that is to say, before any compensation had taken place. Further, the assignment to petitioner would have prevented compensation had taken place between Philfinance and Delta, to the extent of P304,533.33, because upon execution of the assignment in favor of petitioner, Philfinance and Delta would have ceased to be creditors and debtors of each other in their own right to the extent of the amount assigned by Philfinance to petitioner. Thus, we conclude that the assignment effected by Philfinance in favor of petitioner was a valid one and that petitioner accordingly became owner of DMC PN No. 2731 to the extent of the portion thereof assigned to him. The record shows, however, that petitioner notified Delta of the fact of the assignment 19 to him only on 14 July 1981, that is, after the maturity not only of the money market placement made by petitioner but also of both DMC PN No. 2731 and Philfinance PN No. 143-A. In other words, petitioner notified Delta of his rights as assignee after compensation had taken place by

operation of law because the offsetting instruments had both reached maturity. It is a firmly settled doctrine that the rights of an assignee are not any greater that the rights of the assignor, since the assignee is merely substituted in the place of the 20 assignor and that the assignee acquires his rights subject to the equities i.e., the defenses which the debtor could have set up against the original assignor before notice of the assignment was given to the debtor. Article 1285 of the Civil Code provides that: Art. 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a third person, cannot set up against the assignee the compensation which would pertain to him against the assignor, unless the assignor was notified by the debtor at the time he gave his consent, that he reserved his right to the compensation. If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set up the compensation of debts previous to the cession, but not of subsequent ones.

If the assignment is made without the knowledge of the debtor, he may set up the compensation of all credits prior to the same and also later ones until he had knowledge of the assignment. (Emphasis supplied) Article 1626 of the same code states that: "the debtor who, before having knowledge of the assignment, pays his creditor shall be released from the obligation." In Sison 21 v. Yap-Tico, the Court explained that: [n]o man is bound to remain a debtor; he may pay to him with whom he contacted to pay; and if he pay before notice that his debt has been assigned, the law holds him exonerated, for the reason that it is the duty of the person who has acquired a title by transfer to demand payment of the debt, to give his debt or 22 notice. At the time that Delta was first put to notice of the assignment in petitioner's favor on 14 July 1981, DMC PN No. 2731 had already been discharged by compensation. Since the assignor Philfinance could not have then compelled payment anew by Delta of DMC PN No. 2731, petitioner, as assignee of Philfinance, is similarly

disabled from collecting from Delta the portion of the Note assigned to him. It bears some emphasis that petitioner could have notified Delta of the assignment or sale was effected on 9 February 1981. He could have notified Delta as soon as his money market placement matured on 13 March 1981 without payment thereof being made by Philfinance; at that time, compensation had yet to set in and discharge DMC PN No. 2731. Again petitioner could have notified Delta on 26 March 1981 when petitioner received from Philfinance the Denominated Custodianship Receipt ("DCR") No. 10805 issued by private respondent Pilipinas in favor of petitioner. Petitioner could, in fine, have notified Delta at any time before the maturity date of DMC PN No. 2731. Because petitioner failed to do so, and because the record is bare of any indication that Philfinance had itself notified Delta of the assignment to petitioner, the Court is compelled to uphold the defense of compensation raised by private respondent Delta. Of course, Philfinance remains liable to petitioner under the terms of the assignment made by Philfinance to petitioner. II. We turn now to the relationship between petitioner and private respondent Pilipinas. Petitioner contends that Pilipinas became solidarily liable with Philfinance and Delta when Pilipinas issued DCR No. 10805 with the following words:

Upon your written instruction, we [Pilipinas] shall undertake physical delivery of the above securities fully assigned to 23 you . The Court is not persuaded. We find nothing in the DCR that establishes an obligation on the part of Pilipinas to pay petitioner the amount of P307,933.33 nor any assumption of liability in solidum with Philfinance and Delta under DMC PN No. 2731. We read the DCR as a confirmation on the part of Pilipinas that: (1) it has in its custody, as duly constituted custodian bank, DMC PN No. 2731 of a certain face value, to mature on 6 April 1981 and payable to the order of Philfinance; (2) Pilipinas was, from and after said date of the assignment by Philfinance to petitioner (9 February 1981), holding that Note on behalf and for the benefit of petitioner, at least to the extent it had been assigned to petitioner by payee 24 Philfinance; (3) petitioner may inspect the Note either "personally or by authorized

representative", at any time during regular bank hours; and (4) upon written instructions of petitioner, Pilipinas would physically deliver the DMC PN No. 2731 (or a participation therein to the extent of P307,933.33) "should this Denominated Custodianship receipt remain outstanding in [petitioner's] favor thirty (30) days after its maturity." Thus, we find nothing written in printers ink on the DCR which could reasonably be read as converting Pilipinas into an obligor under the terms of DMC PN No. 2731 assigned to petitioner, either upon maturity thereof or any other time. We note that both in his complaint and in his testimony before the trial court, petitioner referred merely to the obligation of private respondent Pilipinas to effect the physical 25 delivery to him of DMC PN No. 2731. Accordingly, petitioner's theory that Pilipinas had assumed a solidary obligation to pay the amount represented by a portion of the Note assigned to him by Philfinance, appears to be a new theory constructed only after the trial court had ruled against him. The solidary liability that petitioner seeks to impute Pilipinas cannot, however, be lightly inferred. Under article 1207 of the Civil Code, "there is a solidary liability only when the law or the nature of the obligation

requires solidarity," The record here exhibits no express assumption of solidary liability vis-a-vis petitioner, on the part of Pilipinas. Petitioner has not pointed to us to any law which imposed such liability upon Pilipinas nor has petitioner argued that the very nature of the custodianship assumed by private respondent Pilipinas necessarily implies solidary liability under the securities, custody of which was taken by Pilipinas. Accordingly, we are unable to hold Pilipinas solidarily liable with Philfinance and private respondent Delta under DMC PN No. 2731. We do not, however, mean to suggest that Pilipinas has no responsibility and liability in respect of petitioner under the terms of the DCR. To the contrary, we find, after prolonged analysis and deliberation, that private respondent Pilipinas had breached its undertaking under the DCR to petitioner Sesbreo. We believe and so hold that a contract of deposit was constituted by the act of Philfinance in designating Pilipinas as custodian or depositary bank. The depositor was initially Philfinance; the obligation of the depository was owed, however, to petitioner Sesbreo as beneficiary of the custodianship or depository agreement. We do not consider that this is a simple case of a stipulation pour autri. The custodianship or depositary agreement was established as an integral part of the money market transaction entered into by petitioner with Philfinance. Petitioner bought a portion of DMC PN No. 2731; Philfinance as assignor-vendor

deposited that Note with Pilipinas in order that the thing sold would be placed outside the control of the vendor. Indeed, the constituting of the depositary or custodianship agreement was equivalent to constructive delivery of the Note (to the extent it had been sold or assigned to petitioner) to petitioner. It will be seen that custodianship agreements are designed to facilitate transactions in the money market by providing a basis for confidence on the part of the investors or placers that the instruments bought by them are effectively taken out of the pocket, as it were, of the vendors and placed safely beyond their reach, that those instruments will be there available to the placers of funds should they have need of them. The depositary in a contract of deposit is obliged to return the security or the thing deposited upon demand of the depositor (or, in the presented case, of the beneficiary) of the contract, even though a term for such return may have been established in the 26 said contract. Accordingly, any stipulation in the contract of deposit or custodianship that runs counter to the fundamental purpose of that agreement or which was not brought to the notice of and accepted by the placer-beneficiary, cannot be enforced as against such beneficiaryplacer. We believe that the position taken above is supported by considerations of public policy. If there is any party that needs the equalizing protection of the law in money market transactions, it is the members of the general public whom place their savings in such market for the purpose of

generating interest revenues. The custodian bank, if it is not related either in terms of equity ownership or management control to the borrower of the funds, or the commercial paper dealer, is normally a preferred or traditional banker of such borrower or dealer (here, Philfinance). The custodian bank would have every incentive to protect the interest of its client the borrower or dealer as against the placer of funds. The providers of such funds must be safeguarded from the impact of stipulations privately made between the borrowers or dealers and the custodian banks, and disclosed to fund-providers only after trouble has erupted. In the case at bar, the custodian-depositary bank Pilipinas refused to deliver the security deposited with it when petitioner first demanded physical delivery thereof on 2 April 1981. We must again note, in this connection, that on 2 April 1981, DMC PN No. 2731 had not yet matured and therefore, compensation or offsetting against Philfinance PN No. 143-A had not yet taken place. Instead of complying with the demand of the petitioner, Pilipinas purported to require and await the instructions of Philfinance, in obvious contravention of its undertaking under the DCR to effect physical delivery of the Note upon receipt of "written instructions" from petitioner Sesbreo. The ostensible term written into the DCR (i.e., "should this [DCR] remain outstanding in your favor thirty [30] days after its maturity") was not a defense against petitioner's demand for physical surrender of the Note on at least three grounds: firstly, such term was never

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brought to the attention of petitioner Sesbreo at the time the money market placement with Philfinance was made; secondly, such term runs counter to the very purpose of the custodianship or depositary agreement as an integral part of a money market transaction; and thirdly, it is inconsistent with the provisions of Article 1988 of the Civil Code noted above. Indeed, in principle, petitioner became entitled to demand physical delivery of the Note held by Pilipinas as soon as petitioner's money market placement matured on 13 March 1981 without payment from Philfinance. We conclude, therefore, that private respondent Pilipinas must respond to petitioner for damages sustained by arising out of its breach of duty. By failing to deliver the Note to the petitioner as depositor-beneficiary of the thing deposited, Pilipinas effectively and unlawfully deprived petitioner of the Note deposited with it. Whether or not Pilipinas itself benefitted from such conversion or unlawful deprivation inflicted upon petitioner, is of no moment for present purposes. Prima facie, the damages suffered by petitioner consisted of P304,533.33, the portion of the DMC PN No. 2731 assigned to petitioner but lost by him by reason of discharge of the Note by compensation, plus legal interest of six percent (6%) per annum containing from 14 March 1981. The conclusion we have reached is, of course, without prejudice to such right of

reimbursement as Pilipinas may have visa-vis Philfinance. III. The third principal contention of petitioner that Philfinance and private respondents Delta and Pilipinas should be treated as one corporate entity need not detain us for long. In the first place, as already noted, jurisdiction over the person of Philfinance was never acquired either by the trial court nor by the respondent Court of Appeals. Petitioner similarly did not seek to implead Philfinance in the Petition before us. Secondly, it is not disputed that Philfinance and private respondents Delta and Pilipinas have been organized as separate corporate entities. Petitioner asks us to pierce their separate corporate entities, but has been able only to cite the presence of a common Director Mr. Ricardo Silverio, Sr., sitting on the Board of Directors of all three (3) companies. Petitioner has neither alleged nor proved that one or another of the three (3) concededly related companies used the other two (2) as mere alter egos or that the corporate affairs of the other two (2) were administered and managed for the benefit of one. There is simply not enough evidence of record to justify disregarding the separate corporate personalities of delta and Pilipinas and to hold them liable for any assumed or undetermined liability of Philfinance to 28 petitioner.

WHEREFORE, for all the foregoing, the Decision and Resolution of the Court of Appeals in C.A.-G.R. CV No. 15195 dated 21 march 1989 and 17 July 1989, respectively, are hereby MODIFIED and SET ASIDE, to the extent that such Decision and Resolution had dismissed petitioner's complaint against Pilipinas Bank. Private respondent Pilipinas bank is hereby ORDERED to indemnify petitioner for damages in the amount of P304,533.33, plus legal interest thereon at the rate of six percent (6%) per annum counted from 2 April 1981. As so modified, the Decision and Resolution of the Court of Appeals are hereby AFFIRMED. No pronouncement as to costs. SO ORDERED

representing unpaid balances on two agricultural sugar crop loans due allegedly from defendants. 1

The said sugar crop loans were obtained by defendant Maximo Sta. Maria from plaintiff bank under a special power of attorney, executed in his favor by his six brothers and sisters, defendantsappellants herein, to mortgage a 16-odd hectare parcel of land, jointly owned by all of them, the pertinent portion of which reads as follows:

full authorized amounts of the loans executed by the Associated Insurance & Surety Co., Inc. as surety with Maximo Sta. Maria as principal. The records of the crop loan application further disclose that among the securities given by Maximo for the loans were a "2nd mortgage on 25.3023 Has. of sugarland, including sugar quota rights therein" including, the parcel of land jointly owned by Maximo and his six brothers and sisters herein for the 1952-1953 crop loan, with the notation that the bank already held a first mortgage on the same properties for the 1951-1952 crop loan of Maximo, 4 and a 3rd mortgage on the same properties for the 1953-1954 crop loan. 5

That we, VALERIANA, EMETERIA, TEOFILO, QUINTIN, ROSARIO and LEONILA all surnamed STA. MARIA, sole heirs of our deceased parents CANDIDO STA. MARIA and FRANCISCA DE LOS REYES, all of legal age, Filipinos, and residents of Dinalupihan, Bataan, do hereby name, constitute and appoint Dr. MAXIMO STA. MARIA, of legal age, married, and residing at Dinalupihan, Bataan to be our true and lawful attorney of and in our place, name and stead to mortgage, or convey as security to any bank, company or to any natural or juridical person, our undivided shares over a certain parcel of land together the improvements thereon which parcel of land is more particularly described as follows, to wit:

The trial court rendered judgment in favor of plaintiff and against defendants thus:1wph1.t

WHEREFORE premises considered, judgment is hereby rendered condemning the defendant Maximo R. Sta. Maria and his co-defendants Valeriana, Quintin, Rosario, Emeteria, Teofilo, and Leonila all surnamed Sta. Maria and the Associated Insurance and Surety Company, Inc., jointly and severally, to pay the plaintiff, the Philippine National Bank, Del Carmen Branch, as follows:

G.R. No. L-24765

August 29, 1969

"Situated in the Barrio of Pinulot, Municipality of Dinalupihan, Bataan, containing an area of 16.7249 hectares and bounded as follows to wit: North by property of Alejandro Benito; on the Northeast, by public land and property of Tomas Tulop; on the southeast, by property of Ramindo Agustin; on the southwest, by properties of Jose V. Reyes and Emilio Reyes; and on the northwest, by excluded portion claimed by Emilio Reyes."

1. On the first cause of action, the sum of P8,500.72 with a daily interest of P0.83 on P6,100.00 at 6% per annum beginning August 21, 1963 until fully paid;

2. On the second cause of action, the sum of P14,299.79 with a daily interest of P1.53 on P9,346.44 at 6% per annum until fully paid; and

3. On both causes of action the further sum equivalent to 10% of the total amount due as attorney's fee as of the date of the execution of this decision, and the costs. 6

PHILIPPINE NATIONAL BANK, plaintiff-appellee, vs. MAXIMO STA. MARIA, ET AL., defendant, VALERIANA, EMETERIA, TEOFILO, QUINTIN, ROSARIO and LEONILA, all surnamed STA. MARIA, defendants-appellants.

of which parcel of land aforementioned we are together with our said attorney who is our brother, the owners in equal undivided shares as evidenced by Transfer Certificate of Title No. T-2785 of the Registry of Deeds of Bataan dated Feb. 26th 1951. (Exh. E)2

Tomas Besa and Jose B. Galang G.P. Nuguid, Jr. for defendants-appellants.

for

plaintiff-appellee.

In addition, Valeriana Sta. Maria alone also executed in favor of her brother, Maximo, a special power of attorney to borrow money and mortgage any real estate owned by her, granting him the following authority:

TEEHANKEE, J.: For me and in my name to borrow money and make, execute, sign and deliver mortgages of real estate now owned by me standing in my name and to make, execute, sign and deliver any and all promissory notes necessary in the premises. (Exh. E-I)3

In this appeal certified to this Court by the Court of Appeals as involving purely legal issues, we hold that a special power of attorney to mortgage real estate is limited to such authority to mortgage and does not bind the grantor personally to other obligations contracted by the grantee, in the absence of any ratification or other similar act that would estop the grantor from questioning or disowning such other obligations contracted by the grantee.

Defendant Maximo Sta. Maria and his surety, defendant Associated Insurance & Surety Co., Inc. who did not resist the action, did not appeal the judgment. This appeals been taken by his six brothers and sisters, defendants-appellants who reiterate in their brief their main contention in their answer to the complaint that under this special power of attorney, Exh. E, they had not given their brother, Maximo, the authority to borrow money but only to mortgage the real estate jointly owned by them; and that if they are liable at all, their liability should not go beyond the value of the property which they had authorized to be given as security for the loans obtained by Maximo. In their answer, defendants-appellants had further contended that they did not benefit whatsoever from the loans, and that the plaintiff bank's only recourse against them is to foreclose on the property which they had authorized Maximo to mortgage.

Plaintiff bank filed this action on February 10, 1961 against defendant Maximo Sta. Maria and his six brothers and sisters, defendants-appellants, Valeriana, Emeteria, Teofilo, Quintin, Rosario and Leonila, all surnamed Sta. Maria, and the Associated Insurance & Surety Co., Inc. as surety, for the collection of certain amounts

By virtue of the two above powers, Maximo Sta. Maria applied for two separate crop loans, for the 1952-1953 and 1953-1954 crop years, with plaintiff bank, one in the amount of P15,000.00, of which only the sum of P13,216.11 was actually extended by plaintiff, and the other in the amount of P23,000.00, of which only the sum of P12,427.57 was actually extended by plaintiff. As security for the two loans, Maximo Sta. Maria executed in his own name in favor of plaintiff bank two chattel mortgages on the standing crops, guaranteed by surety bonds for the

We find the appeal of defendants-appellants, except for defendant Valeriana Sta. Maria who had executed another special power of attorney, Exh. E-1, expressly authorizing Maximo to borrow money on her behalf, to be well taken.

1. Plaintiff bank has not made out a cause of action against defendants-appellants (except Valeriana), so as to hold them liable for the unpaid balances of the loans obtained by Maximo under the chattel mortgages executed by him in his own name alone. In the early case

of Bank of P.I. vs. De Coster, this Court, in holding that the broad power of attorney given by the wife to the husband to look after and protect the wife's interests and to transact her business did not authorize him to make her liable as a surety for the payment of the pre-existing debt of a third person, cited the fundamental construction rule that "where in an instrument powers and duties are specified and defined, that all of such powers and duties are limited andconfined to those which are specified and defined, and all other powers and duties are excluded." 7 This is but in accord with the disinclination of courts to enlarge an authority granted beyond the powers expressly given and those which incidentally flow or derive therefrom as being usual or reasonably necessary and proper for the performance of such express powers. Even before the filing of the present action, this Court in the similar case of De Villa vs. Fabricante 8 had already ruled that where the power of attorney given to the husband by the wife was limited to a grant of authority to mortgage a parcel of land titled in the wife's name, the wife may not be held liable for the payment of the mortgage debt contracted by the husband, as the authority to mortgage does not carry with it the authority to contract obligation. This Court thus held in the said case:

grant Maximo any authority to contract for any loans in their names and behalf. Maximo alone, with Valeriana who authorized him to borrow money, must answer for said loans and the other defendants-appellants' only liability is that the real estate authorized by them to be mortgaged would be subject to foreclosure and sale to respond for the obligations contracted by Maximo. But they cannot be held personally liable for the payment of such obligations, as erroneously held by the trial court.

Appellant claims that the trial court erred in holding that only Cesario A. Fabricante is liable to pay the mortgage debt and not his wife who is exempt from liability. The trial court said: "Only the defendant Cesario A. Fabricante is liable for the payment of this amount because it does not appear that the other defendant Maria G. de Fabricante had authorized Cesario A. Fabricante to contract the debt also in her name. The power of attorney was not presented and it is to be presumed that the power (of attorney) was limited to a grant of authority to Cesario A. Fabricante to mortgage the parcel of land covered by Transfer Certificate of Title in the name of Maria G. de Fabricante.

3. The fact that Maximo presented to the plaintiff bank Valeriana's additional special power of attorney expressly authorizing him to borrow money, Exh. E-1, aside from the authority to mortgage executed by Valeriana together with the other defendants-appellants also in Maximo's favor, lends support to our view that the bank was not satisfied with the authority to mortgage alone. For otherwise, such authority to borrow would have been deemed unnecessary and a surplusage. And having failed to require that Maximo submit a similar authority to borrow, from the other defendants-appellants, plaintiff, which apparently was satisfied with the surety bond for repayment put up by Maximo, cannot now seek to hold said defendantsappellants similarly liable for the unpaid loans. Plaintiff's argument that "a mortgage is simply an accessory contract, and that to effect the mortgage, a loan has to be secured" 10 falls, far short of the mark. Maximo had indeed, secured the loan on his own account and the defendants-appellants had authorized him to mortgage their respective undivided shares of the real property jointly owned by them as security for the loan. But that was the extent of their authority land consequent liability, to have the real property answer for the loan in case of non-payment. It is not unusual in family and business circles that one would allow his property or an undivided share in real estate to be mortgaged by another as security, either as an accommodation or for valuable consideration, but the grant of such authority does not extend to assuming personal liability, much less solidary liability, for any loan secured by the grantee in the absence of express authority so given by the grantor.

5. Now, as to the extent of defendant Valeriana Sta. Maria's liability to plaintiff. As already stated above, Valeriana stands liable not merely on the mortgage of her share in the property, but also for the loans which Maximo had obtained from plaintiff bank, since she had expressly granted Maximo the authority to incur such loans. (Exh. E1.) Although the question has not been raised in appellants' brief, we hold that Valeriana's liability for the loans secured by Maximo is not joint and several or solidary as adjudged by the trial court, but only joint, pursuant to the provisions of Article 1207 of the Civil Code that "the concurrence ... of two or more debtors in one and the same obligation does not imply that ... each one of the (debtors) is bound to render entire compliance with the prestation. There is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity." It should be noted that in the additional special power of attorney, Exh. E-1, executed by Valeriana, she did not grant Maximo the authority to bind her solidarity with him on any loans he might secure thereunder.

6. Finally, as to the 10% award of attorney's fees, this Court believes that considering the resources of plaintiff bank and the fact that the principal debtor, Maximo Sta. Maria, had not contested the suit, an award of five (5%) per cent of the balance due on the principal, exclusive of interests, i.e., a balance of P6,100.00 on the first cause of action and a balance of P9,346.44 on the second cause of action, per the bank's statements of August 20, 1963, (Exhs. Q-1 and BB-1, respectively) should be sufficient.

WHEREFORE, the judgment of the trial court against defendantsappellants Emeteria, Teofilo, Quintin, Rosario and Leonila, all surnamed Sta. Maria is hereby reversed and set aside, with costs in both instances against plaintiff. The judgment against defendant-appellant Valeriana Sta. Maria is modified in that her liability is held to be joint and not solidary, and the award of attorney's fees is reduced as set forth in the preceding paragraph, without costs in this instance.

G.R. No. 72275 November 13, 1991 We went over the contents of the deed of mortgage executed by Cesario Fabricante in favor of Appellant on April 18, 1944, and there is really nothing therein from which we may infer that Cesario was authorized by his wife to construct the obligation in her name. The deed shows that the authority was limited to the execution of the mortgage insofar as the property of the wife is concerned. There is a difference between authority to mortgage and authority to contract obligation. Since the power of attorney was not presented as evidence, the trial court was correct in presuming that the power was merely limited to a grant of authority to mortgage unless the contrary is shown.9 4. The outcome might be different if there had been an express ratification of the loans by defendants-appellants or if it had been shown that they had been benefited by the crop loans so as to put them in estoppel. But the burden of establishing such ratification or estoppel falls squarely upon plaintiff bank. It has not only failed to discharge this burden, but the record stands undisputed that defendant-appellant Quintin Sta. Maria testified that he and his co-defendants executed the authority to mortgage "to accommodate (my) brother Dr. Maximo Sta. Maria ... and because he is my brother, I signed it to accommodate him as security for whatever he may apply as loan. Only for that land, we gave him as, security" and that "we brothers did not receive any centavo as benefit." 11 The record further shows plaintiff bank itself admitted during the trial that defendants-appellants "did not profit from the loan" and that they "did not receive any money (the loan proceeds) from (Maximo)." 12 No estoppel, therefore, can be claimed by plaintiff as against defendants-appellants.

PACIFIC BANKING CORPORATION, vs. HON INTERMEDIATE APPELLATE COURT AND REGALA, JR., respondents.

petitioner, ROBERTO

Ocampo, Dizon & Domingo for petitioner.

Angara, Concepcion, Regala & Cruz for private respondent.

MEDIALDEA, J.:p

2. The authority granted by defendants-appellants (except Valeriana) unto their brother, Maximo, was merely to mortgage the property jointly owned by them. They did not

This is a petition for review on certiorari of the decision (pp 21-31, Rollo) of the Intermediate Appellate Court (now Court of Appeals) in AC-G.R. C.V. No. 02753, 1 which modified the decision of the trial court against

herein private respondent Roberto Regala, Jr., one of the defendants in the case for sum of money filed by Pacific Banking Corporation.

"C-112") under her Pacificard, for which the plaintiff advanced the cost amounting to P92,803.98 at the time of the filing of the complaint.

The facts of the case as adopted by the respondent appellant court from herein petitioner's brief before said court are as follows: In view of defendant Celia Regala's failure to settle her account for the purchases made thru the use of the Pacificard, a written demand (Exh. "D") was sent to the latter and also to the defendant Roberto Regala, Jr. (Exh. " ") under his "Guarantor's Undertaking."

On October 24, 1975, defendant Celia Syjuco Regala (hereinafter referred to as Celia Regala for brevity), applied for and obtained from the plaintiff the issuance and use of Pacificard credit card (Exhs. "A", "Al",), under the Terms and Conditions Governing the Issuance and Use of Pacificard (Exh. "B" and hereinafter referred to as Terms and Conditions), a copy of which was issued to and received by the said defendant on the date of the application and expressly agreed that the use of the Pacificard is governed by said Terms and Conditions. On the same date, the defendant-appelant Robert Regala, Jr., spouse of defendant Celia Regala, executed a "Guarantor's Undertaking" (Exh. "A-1-a") in favor of the appellee Bank, whereby the latter agreed "jointly and severally of Celia Aurora Syjuco Regala, to pay the Pacific Banking Corporation upon demand, any and all indebtedness, obligations, charges or liabilities due and incurred by said Celia Aurora Syjuco Regala with the use of the Pacificard, or renewals thereof, issued in her favor by the Pacific Banking Corporation". It was also agreed that "any changes of or novation in the terms and conditions in connection with the issuance or use of the Pacificard, or any extension of time to pay such obligations, charges or liabilities shall not in any manner release me/us from responsibility hereunder, it being understood that I fully agree to such charges, novation or extension, and that this understanding is a continuing one and shall subsist and bind me until the liabilities of the said Celia Syjuco Regala have been fully satisfied or paid.

WHEREFORE, the Court renders judgment for the plaintiff and against the defendants condemning the latter, jointly and severally, to pay said plaintiff the amount of P92,803.98, with interest thereon at 14% per annum, compounded annually, from the time of demand on November 17, 1978 until said principal amount is fully paid; plus 15% of the principal obligation as and for attorney's fees and expense of suit; and the costs.

The counterclaim of defendant Roberto Regala, Jr. is dismissed for lack of merit.

A complaint was subsequently filed in Court for defendant's (sic) repeated failure to settle their obligation. Defendant Celia Regala was declared in default for her failure to file her answer within the reglementary period. Defendant-appellant Roberto Regala, Jr., on the other hand, filed his Answer with Counterclaim admitting his execution of the "Guarantor's Understanding", "but with the understanding that his liability would be limited to P2,000.00 per month."

SO ORDERED. (pp. 22-23, Rollo)

The defendants appealed from the decision of the court a quo to the Intermediate Appellate Court.

In view of the solidary nature of the liability of the parties, the presentation of evidence exparte as against the defendant Celia Regala was jointly held with the trial of the case as against defendant Roberto Regala.

On August 12, 1985, respondent appellate court rendered judgment modifying the decision of the trial court. Private respondent Roberto Regala, Jr. was made liable only to the extent of the monthly credit limit granted to Celia Regala, i.e., at P2,000.00 a month and only for the advances made during the one year period of the card's effectivity counted from October 29, 1975 up to October 29, 1976. The dispositive portion of the decision states:

After the presentation of plaintiff's testimonial and documentary evidence, fire struck the City Hall of Manila, including the court where the instant case was pending, as well as all its records.

Plaintiff-appellee Pacific Banking Corporation has contracted with accredited business establishments to honor purchases of goods and/or services by Pacificard holders and the cost thereof to be advanced by the plaintiff-appellee for the account of the defendant cardholder, and the latter undertook to pay any statements of account rendered by the plaintiff-appellee for the advances thus made within thirty (30) days from the date of the statement, provided that any overdue account shall earn interest at the rate of 14% per annum from date of default.

Upon plaintiff-appellee's petition for reconstitution, the records of the instant case were duly reconstituted. Thereafter, the case was set for pre-trial conference with respect to the defendant-appellant Roberto Regala on plaintiff-appellee's motion, after furnishing the latter a copy of the same. No opposition thereto having been interposed by defendant-appellant, the trial court set the case for pre-trial conference. Neither did said defendant-appellant nor his counsel appear on the date scheduled by the trial court for said conference despite due notice. Consequently, plaintiff-appellee moved that the defendant-appellant Roberto Regala he declared as in default and that it be allowed to present its evidence ex-parte, which motion was granted. On July 21, 1983, plaintiff-appellee presented its evidence exparte. (pp. 23-26, Rollo)

WHEREFORE, the judgment of the trial court dated December 5, 1983 is modified only as to appellant Roberto Regala, Jr., so as to make him liable only for the purchases made by defendant Celia Aurora Syjuco Regala with the use of the Pacificard from October 29, 1975 up to October 29, 1976 up to the amount of P2,000.00 per month only, with interest from the filing of the complaint up to the payment at the rate of 14% per annum without pronouncement as to costs. (p. 32, Rollo)

A motion for reconsideration was filed by Pacific Banking Corporation which the respondent appellate court denied for lack of merit on September 19, 1985 (p. 33, Rollo).

On November 8, 1985, Pacificard filed this petition. The petitioner contends that while the appellate court correctly recognized Celia Regala's obligation to Pacific Banking Corp. for the purchases of goods and services with the use of a Pacificard credit card in the total amount of P92,803.98 with 14% interest per annum, it erred in limiting private respondent Roberto Regala, Jr.'s liability only for purchases made by Celia Regala with the use of the card from October 29, 1975 up to October 29, 1976 up to the amount of P2,000.00 per month with 14% interest from the filing of the complaint.

There is merit in this petition. The defendant Celia Regala, as such Pacificard holder, had purchased goods and/or services on credit (Exh. "C", "C-l" to After trial, the court a quo rendered judgment on December 5, 1983, the dispositive portion of which reads:

The pertinent portion of the "Guarantor's Undertaking" which private respondent Roberto Regala, Jr. signed in favor of Pacific Banking Corporation provides:

I/We, the undersigned, hereby agree, jointly and severally with Celia Syjuco Regala to pay the Pacific Banking Corporation upon demand any and all indebtedness, obligations, charges or liabilities due and incurred by said Celia Syjuco Regala with the use of the Pacificard or renewals thereof issued in his favor by the Pacific Banking Corporation. Any changes of or Novation in the terms and conditions in connection with the issuance or use of said Pacificard, or any extension of time to pay such obligations, charges or liabilities shall not in any manner release me/us from the responsibility hereunder, it being understood that the undertaking is a continuing one and shall subsist and bind me/us until all the liabilities of the said Celia Syjuco Regala have been fully satisfied or paid. (p. 12, Rollo)

It is true that under Article 2054 of the Civil Code, "(A) guarantor may bind himself for less, but not for more than the principal debtor, both as regards the amount and the onerous nature of the conditions. 2 It is likewise not disputed by the parties that the credit limit granted to Celia Regala was P2,000.00 per month and that Celia Regala succeeded in using the card beyond the original period of its effectivity, October 29, 1979. We do not agree however, that Roberto Jr.'s liability should be limited to that extent. Private respondent Roberto Regala, Jr., as surety of his wife, expressly bound himself up to the extent of the debtor's (Celia) indebtedness likewise expressly waiving any "discharge in case of any change or novation of the terms and conditions in connection with the issuance of the Pacificard credit card." Roberto, in fact, made his commitment as a surety a continuing one, binding upon himself until all the liabilities of Celia Regala have been fully paid. All these were clear under the "Guarantor's Undertaking" Roberto signed, thus:

A guarantor or surety does not incur liability unless the principal debtor is held liable. It is in this sense that a surety, although solidarily liable with the principal debtor, is different from the debtor. It does not mean, however, that the surety cannot be held liable to the same extent as the principal debtor. The nature and extent of the liabilities of a guarantor or a surety is determined by the clauses in the contract of suretyship(see PCIB v. CA, L-34959, March 18, 1988, 159 SCRA 24).

ACCORDINGLY, the petition is GRANTED. The questioned decision of respondent appellate court is SET ASIDE and the decision of the trial court is REINSTATED.

SO ORDERED.

The undertaking signed by Roberto Regala, Jr. although denominated "Guarantor's Undertaking," was in substance a contract of surety. As distinguished from a contract of guaranty where the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor only in case the latter should fail to do so, in a contract of suretyship, the surety binds himself solidarily with the principal debtor (Art. 2047, Civil Code of the Philippines).

. . . Any changes of or novation in the terms and conditions in connection with the issuance or use of said Pacificard, or any extension of time to pay such obligations, charges or liabilities shall not in any manner release me/us from the responsibility hereunder, it being understood that the undertaking is a continuing one and shall subsist and bind me/us until all the liabilities of the said Celia Syjuco Regala have been fully satisfied or paid. (p. 12, supra; emphasis supplied)

G.R. No. L-55138 September 28, 1984

ERNESTO V. RONQUILLO, petitioner, vs. HONORABLE COURT OF APPEALS AND ANTONIO P. SO, respondents.

Gloria A. Fortun for petitioner.

Roselino Reyes Isler for respondents. Private respondent Roberto Regala, Jr. had been made aware by the terms of the undertaking of future changes in the terms and conditions governing the issuance of the credit card to his wife and that, notwithstanding, he voluntarily agreed to be bound as a surety. As in guaranty, a surety may secure additional and future debts of the principal debtor the amount of which is not yet known (see Article 2053, supra).

We need not look elsewhere to determine the nature and extent of private respondent Roberto Regala, Jr.'s undertaking. As a surety he bound himself jointly and severally with the debtor Celia Regala "to pay the Pacific Banking Corporation upon demand, any and all indebtedness, obligations, charges or liabilities due and incurred by said Celia Syjuco Regala with the use of Pacificard or renewals thereof issued in (her) favor by Pacific Banking Corporation." This undertaking was also provided as a condition in the issuance of the Pacificard to Celia Regala, thus:

CUEVAS, J.:

The application by respondent court of the ruling in Government v. Tizon, supra is misplaced. It was held in that case that:

This is a petition to review the Resolution dated June 30, 1980 of the then Court of Appeals (now the Intermediate Appellate Court) in CAG.R. No. SP-10573, entitled "Ernesto V. Ronquillo versus the Hon. Florellana Castro-Bartolome, etc." and the Order of said court dated August 20, 1980, denying petitioner's motion for reconsideration of the above resolution.

5. A Pacificard is issued to a Pacificardholder against the joint and several signature of a third party and as such, the Pacificard holder and the guarantor assume joint and several liabilities for any and all amount arising out of the use of the Pacificard. (p. 14, Rollo)

The respondent appellate court held that "all the other rights of the guarantor are not thereby lost by the guarantor becoming liable solidarily and therefore a surety." It further ruled that although the surety's liability is like that of a joint and several debtor, it does not make him the debtor but still the guarantor (or the surety), relying on the case of Government of the Philippines v. Tizon. G.R. No. L-22108, August 30, 1967, 20 SCRA 1182. Consequently, Article 2054 of the Civil Code providing for a limited liability on the part of the guarantor or debtor still applies.

. . . although the defendants bound themselves in solidum, the liability of the Surety under its bond would arise only if its co-defendants, the principal obligor, should fail to comply with the contract. To paraphrase the ruling in the case of Municipality of Orion vs. Concha, the liability of the Surety is "consequent upon the liability" of Tizon, or "so dependent on that of the principal debtor" that the Surety "is considered in law as being the same party as the debtor in relation to whatever is adjudged, touching the obligation of the latter"; or the liabilities of the two defendants herein "are so interwoven and dependent as to be inseparable." Changing the expression, if the defendants are held liable, their liability to pay the plaintiff would be solidary, but the nature of the Surety's undertaking is such that it does not incur liability unless and until the principal debtor is held liable.

Petitioner Ernesto V. Ronquillo was one of four (4) defendants in Civil Case No. 33958 of the then Court of First Instance of Rizal (now the Regional Trial Court), Branch XV filed by private respondent Antonio P. So, on July 23, 1979, for the collection of the sum of P17,498.98 plus attorney's fees and costs. The other defendants were Offshore Catertrade Inc., Johnny Tan and Pilar Tan. The amount of P117,498.98 sought to be collected represents the value of the checks issued by said defendants in payment for foodstuffs delivered to and received by them. The said checks were dishonored by the drawee bank.

On December 13, 1979, the lower court rendered its Decision 1 based on the compromise agreement submitted by the parties, the pertinent portion of which reads as follows:

1. Plaintiff agrees to reduce its total claim of P117,498-95 to only P11,000 .00 and defendants agree to acknowledge the validity of such claim and further bind themselves to initially pay out of the total

indebtedness of P10,000.00 the amount of P55,000.00 on or before December 24, 1979, the balance of P55,000.00, defendants individually and jointly agree to pay within a period of six months from January 1980, or before June 30, 1980; (Emphasis supplied)

ORDER

xxx xxx xxx

4. That both parties agree that failure on the part of either party to comply with the foregoing terms and conditions, the innocent party will be entitled to an execution of the decision based on this compromise agreement and the defaulting party agrees and hold themselves to reimburse the innocent party for attorney's fees, execution fees and other fees related with the execution.

Regardless of whatever the compromise agreement has intended the payment whether jointly or individually, or jointly and severally, the fact is that only P27,500.00 has been paid. There appears to be a nonpayment in accordance with the compromise agreement of the amount of P27,500.00 on or before December 24, 1979. The parties are reminded that the payment is condition sine qua non to the lifting of the preliminary attachment and the execution of an affidavit of desistance.

WHEREFORE, let writ of execution issue as prayed for

On March 17, 1980, petitioner moved for the reconsideration of the above order, and the same was set for hearing on March 25,1980. xxx xxx xxx Meanwhile, or more specifically on March 19, 1980, a writ of execution was issued for the satisfaction of the sum of P82,500.00 as against the properties of the defendants (including petitioner), "singly or jointly hable." 6

This Court, however, finds the present petition to have been filed prematurely. The rule is that before a petition for certiorari can be brought against an order of a lower court, all remedies available in that court must first be exhausted. In the case at bar, herein petitioner filed a petition without waiting for a resolution of the Court on the motion for reconsideration, which could have been favorable to the petitioner. The fact that the hearing of the motion for reconsideration had been reset on the same day the public sale was to take place is of no moment since the motion for reconsideration of the Order of March 17, 1980 having been seasonably filed, the scheduled public sale should be suspended. Moreover, when the defendants, including herein petitioner, defaulted in their obligation based on the compromise agreement, private respondent had become entitled to move for an execution of the decision based on the said agreement.

On December 26, 1979, herein private respondent (then plaintiff filed a Motion for Execution on the ground that defendants failed to make the initial payment of P55,000.00 on or before December 24, 1979 as provided in the Decision. Said motion for execution was opposed by herein petitioner (as one of the defendants) contending that his inability to make the payment was due to private respondent's own act of making himself scarce and inaccessible on December 24, 1979. Petitioner then prayed that private respondent be ordered to accept his payment in the amount of P13,750.00. 2

WHEREFORE, the instant petition for certiorari and prohibition with preliminary injunction is hereby denied due course. The restraining order issued in our resolution dated April 9, 1980 is hereby lifted without pronouncement as to costs.

On March 20, 1980, Special Sheriff Eulogio C. Juanson of Rizal, issued a notice of sheriff's sale, for the sale of certain furnitures and appliances found in petitioner's residence to satisfy the sum of P82,500.00. The public sale was scheduled for April 2, 1980 at 10:00 a.m. 7

SO ORDERED.

During the hearing of the Motion for Execution and the Opposition thereto on January 16, 1980, petitioner, as one of the four defendants, tendered the amount of P13,750.00, as his prorata share in the P55,000.00 initial payment. Another defendant, Pilar P. Tan, offered to pay the same amount. Because private respondent refused to accept their payments, demanding from them the full initial installment of P 55,000.00, petitioner and Pilar Tan instead deposited the said amount with the Clerk of Court. The amount deposited was subsequently withdrawn by private respondent. 3

On the same day, January 16, 1980, the lower court ordered the issuance of a writ of execution for the balance of the initial amount payable, against the other two defendants, Offshore Catertrade Inc. and Johnny Tan 4 who did not pay their shares.

Petitioner's motion for reconsideration of the Order of Execution dated March 17, 1980 which was set for hearing on March 25, 1980, was upon motion of private respondent reset to April 2, 1980 at 8:30 a.m. Realizing the actual threat to property rights poised by the re-setting of the hearing of s motion for reconsideration for April 2, 1980 at 8:30 a.m. such that if his motion for reconsideration would be denied he would have no more time to obtain a writ from the appellate court to stop the scheduled public sale of his personal properties at 10:00 a.m. of the same day, April 2, 1980, petitioner filed on March 26, 1980 a petition for certiorari and prohibition with the then Court of Appeals (CA-G.R. No. SP-10573), praying at the same time for the issuance of a restraining order to stop the public sale. He raised the question of the validity of the order of execution, the writ of execution and the notice of public sale of his properties to satisfy fully the entire unpaid obligation payable by all of the four (4) defendants, when the lower court's decision based on the compromise agreement did not specifically state the liability of the four (4) defendants to be solidary.

Petitioner moved to reconsider the aforesaid Resolution alleging that on April 2, 1980, the lower court had already denied the motion referred to and consequently, the legal issues being raised in the petition were already "ripe" for determination. 8 The said motion was however denied by the Court of Appeals in its Resolution dated August 20, 1980.

Hence, this petition for review, petitioner contending that the Court of Appeals erred in

(a) declaring as premature, and in denying due course to the petition to restrain implementation of a writ of execution issued at variance with the final decision of the lower court filed barely four (4) days before the scheduled public sale of the attached movable properties;

On January 22, 1980, private respondent moved for the reconsideration and/or modification of the aforesaid Order of execution and prayed instead for the "execution of the decision in its entirety against all defendants, jointly and severally." 5 Petitioner opposed the said motion arguing that under the decision of the lower court being executed which has already become final, the liability of the four (4) defendants was not expressly declared to be solidary, consequently each defendant is obliged to pay only his own pro-rata or 1/4 of the amount due and payable.

On April 2, 1980, the lower court denied petitioner's motion for reconsideration but the scheduled public sale in that same day did not proceed in view of the pendency of a certiorari proceeding before the then Court of Appeals.

(b) denying reconsideration of the Resolution of June 30, 1980, which declared as premature the filing of the petition, although there is proof on record that as of April 2, 1980, the motion referred to was already denied by the lower court and there was no more motion pending therein;

(c) failing to resolve the legal issues raised in the petition and in not declaring the liabilities of the defendants, under the final decision of the lower court, to be only joint;

On June 30, 1980, the said court issued a Resolution, the pertinent portion of which reads as follows: (d) not holding the lower court's order of execution dated March 17, 1980, the writ of execution and the notice of sheriff's sale, executing the lower court's decision against "all defendants, singly and jointly", to be

On March 17, 1980, the lower court issued an Order reading as follows:

at variance with the lower court's final decision which did not provide for solidary obligation; and

(e) not declaring as invalid and unlawful the threatened execution, as against the properties of petitioner who had paid his pro-rata share of the adjudged obligation, of the total unpaid amount payable by his joint co-defendants.

Art. 1207. The concurrence of two or more debtors in one and the same obligation does not imply that each one of the former has a right to demand, or that each one of the latter is bound to render, entire compliance with the prestation. Then is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity.

IN VIEW OF THE FOREGOING CONSIDERATIONS, the instant petition is hereby DISMISSED. Cost against petitioner.

SO ORDERED.

[G.R. No. 96405. June 26, 1996]

The foregoing assigned errors maybe synthesized into the more important issues of

1. Was the filing of a petition for certiorari before the then Court of Appeals against the Order of Execution issued by the lower court, dated March 17, 1980, proper, despite the pendency of a motion for reconsideration of the same questioned Order?

Art. 1208. If from the law,or the nature or the wording of the obligation to which the preceding article refers the contrary does not appear, the credit or debt shall be presumed to be divided into as many equal shares as there are creditors and debtors, the credits or debts being considered distinct from one another, subject to the Rules of Court governing the multiplicity of quits.

BALDOMERO INCIONG, JR., petitioner, vs. COURT OF APPEALS and PHILIPPINE BANK OF COMMUNICATIONS, respondents.

SYLLABUS

2. What is the nature of the liability of the defendants (including petitioner), was it merely joint, or was it several or solidary? The decision of the lower court based on the parties' compromise agreement, provides: Anent the first issue raised, suffice it to state that while as a general rule, a motion for reconsideration should precede recourse to certiorari in order to give the trial court an opportunity to correct the error that it may have committed, the said rule is not absolutes 9 and may be dispensed with in instances where the filing of a motion for reconsideration would serve no useful purpose, such as when the motion for reconsideration would raise the same point stated in the motion 10 or where the error is patent for the order is void 11 or where the relief is extremely urgent, as in cases where execution had already been ordered 12 where the issue raised is one purely of law. 13

In the case at bar, the records show that not only was a writ of execution issued but petitioner's properties were already scheduled to be sold at public auction on April 2, 1980 at 10:00 a.m. The records likewise show that petitioner's motion for reconsideration of the questioned Order of Execution was filed on March 17, 1980 and was set for hearing on March 25, 1980 at 8:30 a.m., but upon motion of private respondent, the hearing was reset to April 2, 1980 at 8:30 a.m., the very same clay when petitioner's properties were to be sold at public auction. Needless to state that under the circumstances, petitioner was faced with imminent danger of his properties being immediately sold the moment his motion for reconsideration is denied. Plainly, urgency prompted recourse to the Court of Appeals and the adequate and speedy remedy for petitioner under the situation was to file a petition for certiorari with prayer for restraining order to stop the sale. For him to wait until after the hearing of the motion for reconsideration on April 2, 1980 before taking recourse to the appellate court may already be too late since without a restraining order, the public sale can proceed at 10:00 that morning. In fact, the said motion was already denied by the lower court in its order dated April 2, 1980 and were it not for the pendency of the petition with the Court of Appeals and the restraining order issued thereafter, the public sale scheduled that very same morning could have proceeded.

1. Plaintiff agrees to reduce its total claim of P117,498.95 to only P110,000.00 and defendants agree to acknowledge the validity of such claim and further bind themselves to initially pay out of the total indebtedness of P110,000.00, the amount of P5,000.00 on or before December 24, 1979, the balance of P55,000.00, defendants individually and jointly agree to pay within a period of six months from January 1980 or before June 30, 1980. (Emphasis supply)

1. REMEDIAL LAW; EVIDENCE; PAROL EVIDENCE RULE; DOES NOT SPECIFY THAT THE WRITTEN AGREEMENT BE A PUBLIC INSTRUMENT.- Clearly, the rule does not specify that the written agreement be a public document. What is required is that the agreement be in writing as the rule is in fact founded on "long experience that written evidence is so much more certain and accurate than that which rests in fleeting memory only, that it would be unsafe, when parties have expressed the terms of their contract in writing, to admit weaker evidence to control and vary the stronger and to show that the parties intended a different contract from that expressed in the writing signed by them" [FRANCISCO, THE RULES OF COURT OF THE PHILIPPINES, Vol. VII, Part I, 1990 ed., p. 179] Thus, for the parol evidence rule to apply, a written contract need not be in any particular form, or be signed by both parties. As a general rule, bills, notes and other instruments of a similar nature are not subject to be varied or contradicted by parol or extrinsic evidence.

Clearly then, by the express term of the compromise agreement and the decision based upon it, the defendants obligated themselves to pay their obligation "individually and jointly".

The term "individually" has the same meaning as "collectively", "separately", "distinctively", respectively or "severally". An agreement to be "individually liable" undoubtedly creates a several obligation, 14 and a "several obligation is one by which one individual binds himself to perform the whole obligation. 15

2. CIVIL LAW; OBLIGATIONS; SOLIDARY OR JOINT AND SEVERAL OBLIGATION, DEFINED.- A solidary or joint and several obligation is one in which each debtor is liable for the entire obligation, and each creditor is entitled to demand the whole obligation. [TOLENTINO, CIVIL CODE OF THE PHILIPPINES, Vol. IV, 1991 ed., p. 217] Section 4, Chapter 3, Title 1, Book IV of the Civil Code states the law on joint and several obligations. Under Art. 1207 thereof, when there are two or more debtors in one and the same obligation, the presumption is that the obligation is joint so that each of the debtors is liable only for the proportionate part of the debt. There is a solidary liability only when the obligation expressly so states, when the law so provides or when the nature of the obligation so requires. [Sesbreo v. Court of Appeals, G.R. No. 89252, May 24, 1993, 222 SCRA 466, 481.]

In the case of Parot vs. Gemora 16 We therein ruled that "the phrase juntos or separadamente or in the promissory note is an express statement making each of the persons who signed it individually liable for the payment of the fun amount of the obligation contained therein." Likewise in Un Pak Leung vs. Negorra 17 We held that "in the absence of a finding of facts that the defendants made themselves individually hable for the debt incurred they are each liable only for one-half of said amount

The other issue raised refers to the nature of the liability of petitioner, as one of the defendants in Civil Case No. 33958, that is whether or not he is liable jointly or solidarily. In this regard, Article 1207 and 1208 of the Civil Code provides

The obligation in the case at bar being described as "individually and jointly", the same is therefore enforceable against one of the numerous obligors.

3. ID.; GUARANTY; GUARANTOR AS DISTINGUISHED FROM SOLIDARY DEBTOR.- While a guarantor may bind himself solidarily with the principal debtor, the liability of a guarantor is different from that of a solidary debtor. Thus, Tolentino explains: "A guarantor who binds himself in solidum with the principal debtor under the provisions of the second paragraph does not become a solidary co-debtor to all intents and purposes. There is a difference between a solidary co-debtor, and a fiador in solidum (surety). The latter, outside of the liability he assumes to pay the debt before the property of the principal debtor has been exhausted, retains all the other rights, actions and benefits which pertain to him by reason of the fiansa; while a solidary co-debtor has no other rights than those bestowed upon him in Section 4, Chapter 3, Title 1, Book IV of the Civil Code." [Tolentino, Civil Code of the Philippines, Vol. V, 1992 ed., p. 502]

APPEARANCES OF COUNSEL

Emilio G. Abrogena for petitioner.

Teogenes X. Velez for private respondent.

DECISION

also intimated to him that Rene C. Naybe was interested in the business and would contribute a chainsaw to the venture. He added that, although Naybe had no money to buy the equipment Pio Tio had assured Naybe of the approval of a loan he would make with private respondent. Campos then persuaded petitioner to act as a "co-maker" in the said loan. Petitioner allegedly acceded but with the understanding that he would only be a co-maker for the loan of P5,000.00.

Annexed to the petition is a copy of an affidavit executed on May 3, 1988, or after the rendition of the decision of the lower court, by Gregorio Pantanosas, Jr., an MTCC judge and petitioner's co-maker in the promissory note. It supports petitioner's allegation that they were induced to sign the promissory note on the belief that it was only for P5,000.00, adding that it was Campos who caused the amount of the loan to be increased to P50,000.00.

ROMERO, J.: Petitioner alleged further that five (5) copies of a blank promissory note were brought to him by Campos at his office. He affixed his signature thereto but in one copy, he indicated that he bound himself only for the amount of P5,000.00. Thus, it was by trickery, fraud and misrepresentation that he was made liable for the amount of P50,000.00.

This is a petition for review on certiorari of the decision of the Court of Appeals affirming that of the Regional Trial Court of Misamis Oriental, Branch 18,i[1] which disposed of Civil Case No. 10507 for collection of a sum of money and damages, as follows:

"WHEREFORE, defendant BALDOMERO L. INCIONG, JR. is adjudged solidarily liable and ordered to pay to the plaintiff Philippine Bank of Communications, Cagayan de Oro City, the amount of FIFTY THOUSAND PESOS (P50,000.00),with interest thereon from May 5, 1983 at 16% per annum until fully paid; and 6% per annum on the total amount due, as liquidated damages or penalty from May 5, 1983 until fully paid; plus 10% of the total amount due for expenses of litigation and attorney's fees; and to pay the costs.

The counterclaim, as well as the cross claim, are dismissed for lack of merit.

In the aforementioned decision of the lower court, it noted that the typewritten figure "P50,000-" clearly appears directly below the admitted signature of the petitioner in the promissory note.iii[3] Hence, the latter's uncorroborated testimony on his limited liability cannot prevail over the presumed regularity and fairness of the transaction, under Sec. 5 (q) of Rule 131. The lower court added that it was "rather odd" for petitioner to have indicated in a copy and not in the original, of the promissory note, his supposed obligation in the amount of P5,000.00 only. Finally, the lower court held that even granting that said limited amount had actually been agreed upon, the same would have been merely collateral between him and Naybe and, therefore, not binding upon the private respondent as creditor-bank.

The affidavit is clearly intended to buttress petitioner's contention in the instant petition that the Court of Appeals should have declared the promissory note null and void on the following grounds: (a) the promissory note was signed in the office of Judge Pantanosas, outside the premises of the bank; (b) the loan was incurred for the purpose of buying a second-hand chainsaw which cost only P5,000.00; (c) even a new chainsaw would cost only P27,500.00; (d) the loan was not approved by the board or credit committee which was the practice, at it exceeded P5,000.00; (e) the loan had no collateral; (f) petitioner and Judge Pantanosas were not present at the time the loan was released in contravention of the bank practice, and (g) notices of default are sent simultaneously and separately but no notice was validly sent to him.viii[8] Finally, petitioner contends that in signing the promissory note, his consent was vitiated by fraud as, contrary to their agreement that the loan was only for the amount of P5,000. 00, the promissory note stated the amount of P50,000.00.

SO ORDERED."

Petitioner's liability resulted from the promissory note in the amount of P50,000.00 which he signed with Rene C. Naybe and Gregorio D. Pantanosas on February 3, 1983, holding themselves jointly and severally liable to private respondent Philippine Bank of Communications, Cagayan de Oro City branch. The promissory note was due on May 5, 1983.

The lower court also noted that petitioner was a holder of a Bachelor of Laws degree and a labor consultant who was supposed to take due care of his concerns, and that, on the witness stand, Pio Tio denied having participated in the alleged business venture although he knew for a fact that the falcata logs operation was encouraged by the bank for its export potential.

The above-stated points are clearly factual. Petitioner is to be reminded of the basic rule that this Court is not a trier of facts. Having lost the chance to fully ventilate his factual claims below, petitioner may no longer be accorded the same opportunity in the absence of grave abuse of discretion on the part of the court below. Had he presented Judge Pantanosas' affidavit before the lower court, it would have strengthened his claim that the promissory note did not reflect the correct amount of the loan.

Said due date expired without the promissors having paid their obligation. Consequently, on November 14, 1983 and on June 8, 1984, private respondent sent petitioner telegrams demanding payment thereof.ii[2] On December 11, 1984 private respondent also sent by registered mail a final letter of demand to Rene C. Naybe. Since both obligors did not respond to the demands made, private respondent filed on January 24, 1986 a complaint for collection of the sum of P50,000.00 against the three obligors.

Petitioner appealed the said decision to the Court of Appeals which, in its decision of August 31, 1990, affirmed that of the lower court. His motion for reconsideration of the said decision having been denied, he filed the instant petition for review on certiorari.

Nor is there merit in petitioner's assertion that since the promissory note "is not a public deed with the formalities prescribed by law but x x x a mere commercial paper which does not bear the signature of x x x attesting witnesses," parol evidence may "overcome" the contents of the promissory note.ix[9] The first paragraph of the parol evidence rulex[10] states:

On November 25, 1986, the complaint was dismissed for failure of the plaintiff to prosecute the case. However, on January 9, 1987, the lower court reconsidered the dismissal order and required the sheriff to serve the summonses. On January 27, 1987, the lower court dismissed the case against defendant Pantanosas as prayed for by the private respondent herein. Meanwhile, only the summons addressed to petitioner was served as the sheriff learned that defendant Naybe had gone to Saudi Arabia.

On February 6,1991, the Court denied the petition for failure of petitioner to comply with the Rules of Court and paragraph 2 of Circular No. 1-88, and to sufficiently show that respondent court had committed any reversible error in its questioned decision.iv[4] His motion for the reconsideration of the denial of his petition was likewise denied with finality in the Resolution of April 24, 1991.v[5] Thereafter, petitioner filed a motion for leave to file a second motion for reconsideration which, in the Resolution of May 27, 1991, the Court denied. In the same Resolution, the Court ordered the entry of judgment in this case.vi[6]

"When the terms of an agreement have been reduced to writing, it is considered as containing all the terms agreed upon and there can be, between the parties and their successors-in-interest, no evidence of such terms other than the contents of the written agreement."

Clearly, the rule does not specify that the written agreement be a public document.

Unfazed, petitioner filed a motion for leave to file a motion for clarification. In the latter motion, he asserted that he had attached Registry Receipt No. 3268 to page 14 of the petition in compliance with Circular No. 1-88. Thus, on August 7,1991, the Court granted his prayer that his petition be given due course and reinstated the same.vii[7]

In his answer, petitioner alleged that sometime in January 1983, he was approached by his friend, Rudy Campos, who told him that he was a partner of Pio Tio, the branch manager of private respondent in Cagayan de Oro City, in the falcata logs operation business. Campos

Nonetheless, we find the petition unmeritorious.

What is required is that agreement be in writing as the rule is in fact founded on "long experience that written evidence is so much more certain and accurate than that which rests in fleeting memory only, that it would be unsafe, when parties have expressed the terms of their contract in writing, to admit weaker evidence to control and vary the stronger and to show that the parties intended a different contract from that expressed in the writing signed by them."xi[11] Thus, for the parol evidence rule to apply, a written contract need not be in any particular form, or be signed by both parties.xii[12] As a general rule, bills, notes and other instruments of a similar nature are not subject to be varied or contradicted by parol or extrinsic evidence.xiii[13]

By alleging fraud in his answer,xiv[14] petitioner was actually in the right direction towards proving that he and his co-makers agreed to a loan of P5,000.00 only considering that, where a parol contemporaneous agreement was the inducing and moving cause of the written contract, it may be shown by parol evidence.xv[15] However, fraud must be established by clear and convincing evidence, mere preponderance of evidence, not even being adequate.xvi[16] Petitioner's attempt to prove fraud must, therefore, fail as it was evidenced only by his own uncorroborated and, expectedly, self-serving testimony.

Section 4, Chapter 3, Title I, Book IV of the Civil Code states the law on joint and several obligations. Under Art. 1207 thereof, when there are two or more debtors in one and the same obligation, the presumption is that the obligation is joint so that each of the debtors is liable only for a proportionate part of the debt. There is a solidarity liability only when the obligation expressly so states, when the law so provides or when the nature of the obligation so requires.xix[19]

Petitioner also argues that the dismissal of the complaint against Naybe, the principal debtor, and against Pantanosas, his co-maker, constituted a release of his obligation, especially because the dismissal of the case against Pantanosas was upon the motion of private respondent itself. He cites as basis for his argument, Article 2080 of the Civil Code which provides that:

Because the promissory note involved in this case expressly states that the three signatories therein are jointly and severally liable, any one, some or all of them may be proceeded against for the entire obligation.xx[20] The choice is left to the solidary creditor to determine against whom he will enforce collection.xxi[21] Consequently, the dismissal of the case against Judge Pontanosas may not be deemed as having discharged petitioner from liability as well. As regards Naybe, suffice it to say that the court never acquired jurisdiction over him. Petitioner, therefore, may only have recourse against his co-makers, as provided by law.

"The guarantors, even though they be solidary, are released from their obligation whenever by some act of the creditor, they cannot be subrogated to the rights, mortgages, and preferences of the latter."

WHEREFORE, the instant petition for review on certiorari is hereby DENIED and the questioned decision of the Court of Appeals is AFFIRMED. Costs against petitioner.

It is further argued that under the compromise, the plaintiff is required to submit a performance bond upon the approval thereof and that he has not yet done so. At the hearing of the motion of June 21, it was in the amount of P60,000.00 which was thereafter increased to P100,000.00 to make it equal to 20% of the cost of the next stage of the construction to be undertaken by the plaintiff. This is a sufficient compliance. Since the work is to be undertaken by stages, it would be unreasonable to compel the plaintiff to submit a performance bond equal to the cost of the entire project, it not being known when the City of Pasay shall have the funds for the completion thereof and it claim it does not even have money to pay for the phase of the work finished years ago. Besides, there is nothing in the compromise which makes the submission of the bond a condition precedent to the payment of P613,096.00 to the plaintiff (p. 76, rec.).

It is to be noted, however, that petitioner signed the promissory note as a solidary co-maker and not as a guarantor. This is patent even from the first sentence of the promissory note which states as follows:

SO ORDERED.

"Ninety one (91) days after date, for value received, I/we, JOINTLY and SEVERALLY promise to pay to the PHILIPPINE BANK OF COMMUNICATIONS at its office in the City of Cagayan de Oro, Philippines the sum of FIFTY THOUSAND ONLY (P50,000. 00) Pesos, Philippine Currency, together with interest x x x at the rate of SIXTEEN (16) per cent per annum until fully paid."

G.R. No. L-32162 September 28, 1984

On August 12, 1964, respondent-appellee V.D. Isip, Sons & Associates represented by Vicente David Isip entered into a contract with the City of Pasay represented by the then Mayor Pablo Cuneta. The contract entitled "Contract and Agreement" was for the construction of a new Pasay City Hall at F.B. Harrison St., Pasay City. Pertinent provision of the said contract is as follows:

A solidary or joint and several obligation is one in which each debtor is liable for the entire obligation, and each creditor is entitled to demand the whole obligation.xvii[17] On the other hand, Article 2047 of the Civil Code states:

THE PASAY CITY GOVERNMENT, THE CITY MAYOR OF DEFENDANT PASAY CITY GOVERNMENT, THE MEMBERS OF THE MUNICIPAL BOARD OF PASAY ClTY and THE CITY TREASURER OF PASAY CITY GOVERNMENT, petitioners-appellants, vs. THE HONORABLE COURT OF FIRST INSTANCE OF MANILA, BRANCH X and VICENTE DAVID ISIP (doing business under the firm name V.D. ISIP SONS & ASSOCIATES), respondents-appellees.

xxx xxx xxx

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

This is a petition for review on certiorari of the order rendered by the Court of First Instance of Manila, Branch X, presided by Honorable Judge Jose L. Moya on July 23, 1969, the dispositive portion of which is as follows:

Whereas one of the conditions set forth in the proposal is that the Contractor shag start the construction of the Pasay City Hall Building as per plans and specifications by stages advancing the necessary amount needed for each stage of work and the Party of the First Part (Pasay City) to reimburse the amount spent on the work accomplished by the Contractor before proceeding on the next stage ... ...

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

While a guarantor may bind himself solidarily with the principal debtor, the liability of a guarantor is different from that of a solidary debtor. Thus, Tolentino explains:

WHEREFORE, the motions for reconsideration, dated July 21 and July 22, 1969, are denied and it is ordered once more that the writ of execution as well as of garnishment already issued be enforced by taking possession of the amount of P613,096.00 from the deposits of the Pasay City government in the branch of the Philippine National Bank in Pasay City and delivering them to the plaintiff.

xxx xxx xxx

2. That the work shall be done in stages to be determined by the City Engineer considering structural and functional criteria and consistent with funds immediately available for the purpose;

"A guarantor who binds himself in solidum with the principal debtor under the provisions of the second paragraph does not become a solidary co-debtor to all intents and purposes. There is a difference between a solidary co-debtor, and a fiador in solidum (surety). The later, outside of the liability he assumes to pay the debt before the property of the principal debtor has been exhausted, retains all the other rights, actions and benefits which pertain to him by reason of the fiansa; while a solidary co-debtor has no other rights than those bestowed upon him in Section 4, Chapter 3, title I, Book IV of the Civil Code."xviii[18]

SO ORDERED (p. 78, rec.).

on the ground, among others, that:

3. That the Contractor shall advance the necessary amount needed for each stage of work; Provided that the Contractor, shall before starting each stage of work, inform the First Party in writing as to the amount necessary to be advanced by the former; ... ...

xxx xxx xxx

4. That the Party of the First Part shall reimburse the Contractor the cost of the work completed as estimated by the City Engineer for back stage of work before the Contractor proceed to the next stage; ... ... (pp. 33-34, rec.).

1. That the contract and agreement, Annex "A" here of dated August 12, 1964 ... is hereby formally confirmed and officially approved by the parties hereto, subject to the following changes and/or modification only:

Pursuant to the aforesaid contract, the respondent-appellee proceeded with the construction of the new Pasay City Hall building as per duly approved plans and specifications. The respondent-appellee accomplished under various stages of construction the amount of work (including supplies and materials) equivalent to an estimated value of ONE MILLION SEVEN HUNDRED THIRTEEN THOUSAND NINETYSIX PESOS (P1,713,096.00) of the total contract price of FOUR MILLION NINE HUNDRED FOURTEEN THOUSAND FIVE HUNDRED 80/100 PESOS (P4,914,500.80).

xxx xxx xxx

The appellants paid only the total amount of ONE MILLION ONE HUNDRED THOUSAND PESOS (P1,100,000.00) to the respondentappellee leaving an amount of SIX HUNDRED THIRTEEN THOUSAND NINETY SIX PESOS (P613,096.00) immediately due from the petitioner-appellants to the respondent-appellee.

Notwithstanding demands for payment thereof, the petitioner-appellants failed to remit the aforesaid amount of P613,096.00 to the respondentappellee.

On May 16, 1968, respondent appellee filed an action for specific performance with damages against herein petitioners-appellants before the respondent Court.

On May 23, 1968, the appellants filed a motion for the amendment of the complaint and for bin of particulars (p. 9, Appellant's Brief; p. 159, rec.). This was denied by the respondent Court. The appellants later filed a motion for reconsideration. This was likewise denied. On August 10, 1968, the appellants filed their answer.

B. That immediately upon final approval hereof by this Honorable Court, the plaintiff contractor will submit and file in favor of Pasay City Government a new performance bond in the amount required by pertinent law, rules and regulations, in proportion to the remaining value or cost of the unfinished work of the construction as per approved plans and specification

approval of this compromise agreement by this Honorable Court, provided, however that in any case or event the construction herein contemplated shall not extend beyond one and a half (1 1/2) years from the date of the final approval hereof by this Honorable Court;

xxx xxx xxx

2. That within a reasonable period of time, at least ninety (90) days from the final approval of this Compromise Agreement by this Honorable Court, the defendant Pasay City Government shall pay and remit the amount of SIX HUNDRED THIRTEEN THOUSAND NINETY-SIX PESOS (P613,096.00) ... to the plaintiff contractor, who, in turn, immediately upon receipt thereof, shall be bound and obliged to commence and start the construction work corresponding to the next stage thereof;

xxx xxx xxx

The parties arrived at a draft of amicable agreement which was submitted to the Municipal Board of Pasay City for its consideration. Protracted pre-trial hearings and conferences were held where the respondent Court suggested and advised that "under the principle of quantum meruit, the plaintiff is forthwith entitled to at least that which is due to him for defendants under the contract and that public interest must perforce require the continuity of construction of a public work project, instead of delaying its immediate completion by litigating upon technical grounds which would undoubtedly redound to public detriment (p. 40, rec.).

On February 25, 1969, the Municipal Board of Pasay enacted Ordinance No. 1012 which approved the Compromise Agreement and also authorized and empowered the incumbent City Mayor Jovito Claudio to represent the appellant Pasay City Government, subject to the final approval of the respondent Court herein.

On March 12, 1969, the respondent Court approved the said Compromise Agreement including a Manifestation and Addendum thereto. Relevant provisions of the said compromise agreement are as follows:

D. That if and when warranted by the finances and income of the Pasay City Government and subject to the pertinent and applicable government auditing and accounting rules and procedure, the plaintiff contractor shall without delay finish and complete the construction as per attached plans and specifications ... within a period of one (1) year from the date of final

3. That within a similar period, the defendant Pasay City Government shall pay and remit to plaintiff contractor an amount equivalent to three (3%) per cent of the above mentioned amount of SIX HUNDRED THIRTEEN THOUSAND NINETY-SIX PESOS (P613,096.00), for and as adverse attorney's fees in this case;

4. That any and all other of plaintiff contractor in its complaint relative to and arising out of the contract, Annex "A" hereof, are hereby waived and relinquished and the case against the defendants City Mayor, Jovito 0. Claudio, City Treasurer and Members of the Municipal Board of Pasay City, either in their official or personal capacities, are hereby likewise waived, relinquished and dismissed with prejudice;

5. That any willful, gross, deliberate and wanton violation and/or avoidance of the terms and conditions of this Compromise Agreement by either of the parties herein shall, with due notice, forthwith entitle the aggrieved party to an immediate execution hereof and to the necessary and

corresponding reliefs and remedies therefor (pp. 43-46, rec.).

National Bank, Pasay City Branch and delivering the same to the plaintiff.

On June 5, 1970, the Supreme Court resolved to require the petitionerappellants to file a petition for review on certiorari (p. 6, rec.).

On April 10, 1969, the appellants filed an urgent motion seeking a declaration of legality of the original contract and agreement dated August 4, 1964 from the respondent Court. On May 10, 1969, the respondent Court issued an order declaring that the original contract is legal and valid (p. 59, rec.).

On July 23, 1969, the respondent Court issued an order, the pertinent provision of which is now being questioned by the appellants in this petition for review on certiorari, to wit:

On June 21, 1969, at the instance of the appellee, the respondent Court granted an order of execution pursuant to which a writ of execution dated June 25, 1969 was issued.

On July 9, 1969, an application for and notice of garnishment were made and effected upon the funds of appellant Pasay City Government with the Philippine National Bank (p. 61, rec.).

On July 11, 1969, the appellant filed an urgent motion to set aside the respondent Court's order of June 21, 1969 and to quash the writ of execution issued pursuant thereto upon the following grounds: 1) that the execution sought was then still premature, the period of 90 days stipulated not having elapsed as yet; 2) that the obligations of the parties under the Compromise Agreement were reciprocal and the appellee not having put up a new performance bond in the sufficient amount equivalent to 20% of the remaining cost of construction as per agreement, the appellants cannot be obliged to pay the sum due appellee as yet; 3) that the Sheriff has no power or authority to levy or garnish on execution the general funds, especially more so, the trust funds of the defendant Pasay City (pp. 6366, rec.).

It is further argued that under the compromise, the plaintiff is required to submit a performance bond upon the approval thereof and that he has not yet done so. At the hearing of the motion of June 21, it was shown that the plaintiff has submitted a performance bond in the amount of P60,000.00 which was thereafter increased to P100,000.00 to make it equal to 20% of the cost of the next stage of the construction to be undertaken by the plaintiff. This is a sufficient compliance. Since the work is to be undertaken by stages, it would be unreasonable to compel the plaintiff to submit a performance bond equal to the cost of the entire project, it not being known when the City of Pasay shall have the funds for the completion thereof and it claims it does not even have money to pay for the phase of the work finished years ago. Besides, there is nothing in the compromise which makes the submission of the bond a condition precedent to the payment of P613,096.00 to the plaintiff (p. 76, rec.).

On June 29, 1970, the defendants filed their cautionary answer to the supplemental complaint alleging that the Court has no jurisdiction over the subject of the present supplemental complaint; that the cause of action is already barred by prior judgment; that the principle of res judicata applies; that plaintiff's supplemental complaint states no cause of action and that the present claim of plaintiff has been paid, waived, abandoned and extinguished.

On July 14, 1970, the appellants filed their petition for review on certiorari (pp. 11-24, rec.). This was denied for lack of merit by the Supreme Court.

On August 14, 1970, the respondent Court set for pre-trial the supplemental complaint.

On October 16, 1970, the Supreme Court granted the petitioner's motion for reconsideration and their petition for review on certiorari was given due course (p. 102, rec.).

On July 21, 1971, the appellees filed their brief praying that the petition for review on certiorari be dismissed since the issues involved in the supplemental complaint are prejudicial to the present petition for review (p. 179, rec.). On December 6, 1971, the appellants filed their manifestation and petition alleging that the supplemental complaint is not prejudicial to the present petition for review (p. 199-201, rec.).

On July 19, 1969, the respondent Court issued an order stating that inasmuch as the defendant has not yet paid the plaintiff as of this date then "the writ of execution and of garnishment are declared to be again in full force and effect ..." (p. 67, rec.).

On July 23, 1969, the appellants Med their notice of appeal from the orders of the respondent Court dated June 21, July 19 and July 23, 1969 (p. 2, rec.).

The two purposes of a compromise agreement are enunciated in Article 2028 of the New Civil Code, to wit:

On July 22, 1969, the appellants filed a motion for reconsideration on three grounds, to wit:

On July 24, 1969, the appellants filed their manifestation and petition to suspend the writ of execution and garnishment (pp. 80-82, rec.).

A. 2028. A compromise is a contract where by the parties,by making reciprocal concessions, avoid a litigation or put an end to one already commenced. The first purpose "to avoid a litigation" occurs when there is a threat of an impending litigation. At this point, no case has yet reached the courts. The moment a case has been filed in court then the second purpose "to put an end to one already commenced" applies.

1. That the same is not supported by the facts and pertinent law, rule and regulation on the matter;

On July 25, 1969, the appellants filed their manifestation and withdrawal of notice of appeal On July 28, 1969, the respondent Court approved said withdrawal (p. 85, rec.).

2. That the funds of the defendant Pasay City Government which were garnished by the City Sheriff are by law exempt from execution and/or garnishment; and

On August 22, 1969, the appellants filed an amended notice of appeal (pp. 86-87, rec.) and a record on appeal which were duly approved as per order of the respondent Court dated January 7, 1970 and a notice of transmittal dated May 29, 1970 (p. 89, rec.).

In the herein case, We are concerned with the second purpose. The latter purpose is given effect in Article 2037 of the New Civil Code which reads:

3. That plaintiff's claim may not as yet be enforceable by ex- execution" (pp. 68-71, rec.).

On July 22, 1969, the respondent Court denied and rejected the appellants' motion for reconsideration. The respondent Court ordered the enforcement of the garnishment already issued to the City Sheriff for Pasay by taking possession of the amount of P613,096.00 from the deposits of appellant Pasay City Government with the Philippine

On October 23, 1969, the plaintiff, Vicente David Isip, in the original complaint for specific performance filed an urgent motion for permit to serve a supplemental complaint seeking rescission of the original contract titled Contract and Agreement and of the Compromise Agreement and claiming damages in the sum of P672,653.91 alleging the violations of the defendants specially the Pasay City Government in complying with its obligations incumbent upon it in the compromise agreement and in view of the rights granted to the plaintiff in paragraph 5 of the resolutory clause of the compromise agreement.

Article 2037. A compromise has upon the parties the effect and authority of res judicata; but there shall be no execution except in compliance with a judicial compromise.

A compromise agreement not contrary to law, public order, public policy, morals or good customs is a valid contract which is the law between the parties themselves (Municipal Board of Cabanatuan City vs. Samahang Magsasaka, Inc., 62 SCRA 435). A judgment on a compromise is a final

and executory (Samonte vs. Samonte, 64 SCRA 524). It is immediately executory (Pamintuan vs. Muos et al., L-26331, 22 SCRA 1109 [March 15, 1968]) in the absence of a motion to set the same aside on the ground of fraud, mistake or duress (Cadano vs. Cadano L-34998, 49 SCRA 33 [January 11, 1973]).

has become final and executory, the court no longer has the power and jurisdiction to alter, amend or revoke, and its only power thereof is to order its execution (Ocampo vs. Caluag, L-21113, 19 SCRA 791 [April 27, 1967]).

and consistent with funds available for the purpose;

immediately

In fact in the herein case before Us, execution has already been issued. Considering this in the light of Article 2041 of the New Civil Code, to wit:

Art. 2041. If one of the parties fails or refuses to abide by the compromise, the other party may either enforce the compromise or regard it as rescinded and insist upon his original demand.,

After the perfection of an appeal, the trial court loses jurisdiction over its judgment and cannot vacate the same Alama vs. Abbas, L-19616, 18 SCRA 679 [Nov. 29, 1966]; Commissioner of Immigration vs. Romero, L-19782, 10 SCRA 216 [Jan. 31, 1964]; Valdez vs. CFI, etc., L-3366 [April 27, 1951] cited in Cabungcal vs. Fernandez, L-16520, 10 SCRA 731 [April 30, 1964]; Government vs. Mendoza, 51 Phil. 403; Ayllon vs. Siojo, 26 Phil. 195).

3. That the Contractor shall advance the necessary amount needed for each stage of work; Provided that the Contractor shalt before starting each stage of work, inform the First Party in writing as to the amount necessary to be advanced by the former; ...

it is obvious that the respondent-appellee did not only succeed in enforcing the compromise but said plaintiff-appellee likewise wants to rescind the said compromise. It is clear from the language of the law, specifically Article 2041 of the New Civil Code that one of the parties to a compromise has two options: 1) to enforce the compromise; or 2) to rescind the same and insist upon his original demand. The respondentappellee in the case herein before Us wants to avail of both of these options. This can not be done. The respondent-appellee cannot ask for rescission of the compromise agreement after it has already enjoyed the first option of enforcing the compromise by asking for a writ of execution resulting thereby in the garnishment of the Pasay City funds deposited with the Philippine National Bank which eventually was delivered to the respondent-appellee.

Moreover, supplemental pleadings are meant to supply deficiencies in aid of original pleading, not to entirely substitute the latter (British Traders' Insurance Co., Ltd. vs. Commissioner of Internal Revenue, L20501, 13 SCRA 719, 728 [April 30, 1965]). Here, the respondentappellee originally asked for specific performance which was later settled through a compromise agreement. After this, the respondentappellee asked for rescission of both the contract and agreement and the compromise agreement using a supplemental complaint. It is clear that the supplemental complaint We have before Us is not only to "supply deficiencies in aid of original pleading but is also meant as an entirely new "substitute" to the latter. A supplemental complaint must be consistent with and in aid of, the cause of action set forth in the original complaint and a new and independent cause of action cannot be set up by such complaint (Bishop vs. Taylor, 210 App. Div. 1, 205 NVS 653), especially where judgment has already been obtained by him in the original action (Anadarko First National Bank vs. Anadarko First National Bank, 39 0kl. 225, 134 Phil. 866).

4. That the Party of the First Part shall reimburse the Contractor the cost of the work completed as estimated by the City Engineer for each stage of work before the Contractor proceed to the next stage; (pp. 33-34, rec.).

And sub-paragraph H of paragraph 1 and paragraph 2 of the compromise agreement also reiterated the stage by stage construction and payment as follows:

H. That detailed, separate reports on the progress of the construction work during each stage shall regularly be submitted to the City Enginer and the City Mayor;

xxx xxx xxx

Upon the issuance of the writ of execution, the petitioner-appellants moved for its quashal alleging among other things the exemption of the government from execution. This move on the part of the petitionerappellant is at first glance laudable for "all government funds deposited with the Philippine National Bank by any agency or instrumentality of the government, whether by way of general or special deposit, remain government funds and may not be subject to garnishment or levy (Commissioner of Public Highways vs. San Diego, L-30098, 31 SCRA 616 [Feb. 18, 1970]). But, inasmuch as an ordinance has already been enacted expressly appropriating the amount of P613,096.00 of payment to the respondent-appellee, then the herein case is covered by the exception to the general nile stated in the case of Republic vs. Palacio (L-20322, 23 SCRA 899 [May 29,1968]), to wit:

WE find no error in the order of the respondent Court dated July 23, 1969. From the reading of the premises and provisions of the contract and agreement which was "formally confirmed and officially approved by the parties" in the compromise agreement later entered into by the same parties, subject only to the enumerated changes and/or modifications, it is obvious that the contracting parties envisioned a stage by stage construction (on the part of the respondent-appellee) and payment (on the part of the defendant-appellant). This is manifested in the contract and agreement, to quote:

xxx xxx xxx

2. That within a reasonable period ,at least ninety(90) days from the final approval of this Compromise Agreement by this Honorable Court, the defendant Pasay City Government shall pay and remit the amount of SIX HUNDRED THIRTEEN THOUSAND NINETY-SIX PESOS (P 613,096.00) ... ... to the plaintiff contractor, who, in turn, immediately upon receipt thereof, shall be bound and obliged to commence and start the construction work corresponding to the next stage thereof; ... ... (p. 45, rec.).

Judgments against a State in cases where it has consented to be sued, generally operate merely to liquidate and establish plaintiff's claim in the absence of express provision; otherwise they cannot be enforced by processes of the law; and it is for the legislature to provide for the payment in such manner as it sees fit.

Hence, the respondent Court was correct in refusing to quash the writ of execution it has issued.

WHEREAS, one of the conditions set forth in the proposal is that the Contractor shag start the construction of the Pasay City Hall building as per plans and specifications by stages advancing the necessary amount needed for each stage of work and the Party of the First Part to reimburse the amount spent on the work accomplished by the Contractor before proceeding on the next stage; Provided, the First Party shall supply the cement needed;

Sub-paragraph B of paragraph 1 of the Compromise Agreement, to wit:

B. That immediately upon final approval hereof by this Honorable Court, the plaintiff contractor will submit and file in favor of Pasay City Government a new performance bond in the amount required by pertinent law, rules and regulations, in proportion to the regular value or cost of the unfinished work of the construction as per approved plans and specifications ... (p. 4, rec.),

xxx xxx xxx Having established that the compromise agreement was final and immediately executory, and in fact was already enforced, the respondent Court was in error when it still entertained the supplemental complaint filed by the respondent-appellee for by then the respondent Court had no more jurisdiction over the subject matter. When a decision read together with the stage-by-stage construction and payment approach, would inevitably lead to the conclusion that the parties to the compromise contemplated a divisible obligation necessitating therefore a performance bond "in proportion to" the uncompleted work.

2. That the work shall be done in stages to be determined by the City Engineer considering structural and functional criteria

What is crucial in sub-paragraph B of paragraph 1 of the compromise agreement are the words " in proportion." If the parties really intended the legal rate of 20% performance bond to refer to the whole unfinished work, then the provision should have required the plaintiff contractor to submit and file a new performance bond to cover the remaining value cost of the unfinished work of the construction. Using the words in proportion then significantly changed the meaning of the paragraph to ultimately mean a performance bond equal to 20% of the next stage of work to be done.

WE hereby grant the amount of P 18,392.78 which is 3% of P613,096.00 as attorney's fees in favor of the respondent-appellee.

WHEREFORE, THE ORDER OF THE RESPONDENT COURT DATED JULY 23, 1969 IS HEREBY AFFIRMED AND THE PETITIONERSAPPELLANTS ARE HEREBY DIRECTED TO PAY ATTORNEY'S FEES IN THE AMOUNT OF EIGHTEEN THOUSAND THREE HUNDRED NINETY-TWO AND 78/100 (P18,392.78) PESOS. COSTS AGAINST PETITIONERS-APPELLANTS.

And, We note that in the Contract and Agreement, the respondentappellee was allowed to file a performance bond of P222,250.00 which is but 5% of the total bid of P4,914,500.80. A security bond was likewise filed with an amount of P97,290.00. The sum total of bond then filed was P320,540.00 which is just 6.5% of the total Ibid. It is rather curious why all of a sudden the petitioners-appellants are insisting on a 20% performance bond of the entire unfinished work when they were quite content with a bond just 5% of the entire work. For Us to allow the petitioners-appellants to adamantly stick to the 20% performance bond would be tantamount to allowing them to evade their obligation in the compromise agreement. This cannot be allowed. The bond of a contractor for a public work should not be extended beyond the reasonable intent as gathered from the purpose and language of the instrument construed in connection with the proposals, plans and specifications, and contract (John L. Roper Lumber Co. vs. Lawson, 195 NC 840, 143 SE 847,67 ALR 984).

SO ORDERED.

SOLEDAD LEONOR PEA SUATENGCO and ANTONIO ESTEBAN SUATENGCO, Complainants - versus CARMENCITA O. REYES, Respondent.

DECISION

The premium of the bond will be sizeable and will eat up the profit of the contractor, who is faced with the fluctuation of prices of materials due to inflation and devaluation. Right now, many contractors cannot proceed with the implementation of their contracts because of the extraordinary rise in cost of materials and labor. No contractor would be willing to bid for public works contracts under the oppressive interpretation by petitioners-appellants.

Again, the respondent Court was correct in ruling that the submission of the bond was not a condition precedent to the payment of P613,096.00 to the plaintiff. Nowhere in the Contract and Agreement nor in the Compromise Agreement could be found the fact that payment by the petitioners- appellants of the amount of P613,096.00 was dependent upon the submission by the respondent-appellee of the performance bond. It cannot be argued that reciprocal obligation was created in the Compromise Agreement, for the obligation to pay on the part of the petitioners-appellants was established several years ago when the respondent-appellee finished some of the stages of construction. And, this argument is already moot and academic, for the amount of P613,096.00 has already been collected through execution and garnishment upon the funds of Pasay City with the Philippine National Bank.

This resolves the petition for review on certiorari seeking the modification of the Decision1[1] dated October 29, 2003 and the Resolution2[2] dated March 10, 2004 of the Court of Appeals (CA) in CA-G.R. CV No. 53185. The assailed decision affirmed with modification the Decision3[3] of the Regional Trial Court (RTC) of Marinduque, Branch 30 in Civil Case No. 95-4 in an action for collection of a sum of money with damages commenced by herein respondent, Carmencita O. Reyes against herein petitioners, spouses Soledad Leonor Pea Suatengco (also known as Sylvia Pea Suatengco) and Antonio Esteban Suatengco. The essential facts of the case, as recounted by the trial court, are as follows: This is an action for Sum of Money with Damages filed by Carmencita O.

Reyes against defendants [petitioners] Spouses Soledad Leonor Pea and Antonio Esteban Suatengco, wherein plaintiff (respondent) claimed that sometime in the first quarter of 1994, defendant Sylvia (Soledad) approached her for the purpose of borrowing a sum of money in order to pay her obligation to Philippine Phosphate Fertilizer Corporation (Philphos for brevity). On May 31, 1994, plaintiff paid Philphos the amount of P1,336,313.00 and by reason thereof defendants Spouses Sylvia (Soledad) and Antonio executed on June 24, 1994 a Promissory Note binding themselves jointly and severally to pay plaintiff the said amount in 31 monthly installments beginning June 30, 1994. Of the amount, however, only one (1) payment in the amount of P15,000.00 on July 27, 1994 have been made by defendants. That pursuant to a specific clause in the Promissory Note, defendants have unequivocally waived the necessity of demand to be made upon them to pay as well as a Notice of Dishonor and presentation with acceleration clause. As of March 31, 1995 defendants owe plaintiff P1,321,313.00 exclusive of interest, other charges which is already due and demandable but remains unpaid, hence this collection suit with prayer for moral damages and attorneys fees. A perusal of the record showed that notwithstanding the leniency graciously observed by this court in giving defendants several extensions of time to file their answer with responsive pleading, they failed to do the same thus, upon motion of plaintiffs counsel, defendants were declared as in default on October 27, 1995 and the ex-parte reception of plaintiffs evidence was delegated to the Clerk of Court. At the ex-parte hearing, ATTY. EDMUNDO O. REYES, JR., a lawyer by profession connected with the Siguion Reyna, Montecillo and Ongsiako Law Offices, testified that he is the attorney-infact of his mother Congresswoman Carmencita O. Reyes, herein plaintiff, to enter into and execute, among other acts, any agreement with the defendant Soledad Leonor Pea Suatengco to collect the amount of around P1.4 MILLION and to hold the same in trust for her as shown by a Special Power of Attorney marked Exhibits A to A-2. Confronted with a document styled as Promissory Note dated June 24, 1994 (Exhibit B), he identified the signatures of Soledad Pea Suatengco (also known as Sylvia Pea Suatengco) (Exhs. B1, B-5, B-10 and B-13), Antonio Suatengco (Exhs. B-2, B-6, B-11 and B-14), Atty. Domingo Ganuelas (Exhs. B-3, B-7, B-9 and B-15) and his own signatures (Exhs. B-4, B-

Inasmuch as the parties in the herein case have agreed in the Compromise Agreement, to wit:

3. That within a similar period the defendant Pasay City Government shall pay and remit to plaintiff contractor an amount equivalent to three (3%) percent of the above mentioned amount of SIX HUNDRED THIRTEEN NINETY SIX PESOS (P613,096.00), for and as adverse attorney's fees in this case; ... (p. 45, rec.).

8, B-12 and B-16). That their signatures were signed in his presence on June 24, 1994 at the Siguion Reyna, Montecillo and Ongsiako Law Offices. Atty. Domingo Ganuelas was there at the time to assist and advise defendants before executing the Promissory Note. He explained that defendants own and manage Goldfields Business Development Corporation. Of the P1,336,313.00 paid by plaintiff to Philphos on May 31, 1994, which defendants jointly and severally assumed to pay plaintiff under the Promissory Note (Exh. B), only P15,000.00 had been paid by them thereby leaving an outstanding balance of P1,321,313.00 plus 12% interest per annum computed from May 31, 1994 and attorneys fees equivalent to 20% of defendants total outstanding balance inclusive of interest, which he believes to be reasonable based on experience considering that the case will be prosecuted outside Metro Manila and the long distance would entail quite an amount of travel for retained counsel. To corroborate the testimony of Atty. Edmundo O. Reyes, Jr. and to prove the obligation due as well as the damages prayed for, plaintiff Congresswoman CARMENCITA O. REYES representative of the lone district of Marinduque testified that she has been a member of Congress since 1978 until it was abolished in 1986 but after which re-elected in 1987, 1992 and 1995. She identified her signature on Exhibit A Special Power of Attorney (Exhs. A-1 and A-2) as well as her signature on the verification portion of her complaint (page 8, Record) and affirmed that she had caused the preparation of the same and that the contents thereof are true and correct. That on May 31, 1994, she paid Philphos the amount of P1,336,313.00 representing defendants obligation with Philphos. In return for the sum she had advanced, defendants agreed to issue the Promissory Note (Exh. B) for the total amount of indebtedness but out of the said amount of P1,336,313.00 only P15,000.00 had been paid by them. As a result, her feeling was hurt and wounded. She felt degraded because after helping them to get out of their indebtedness without asking for any interest, it would seem that they lost interest in paying their obligations. She was even more deeply hurt when she found out that the sheriff of this court who went to their place to take some actions regarding this case, was even threatened exposing her constituent to such danger. Said amount is substantial enough to help her constituents because as much as possible she would not deny them everytime they come to her since

it would really be a matter of life and death for them.4[4]

As can be gleaned from the above narration, the RTC declared the petitioners in default for failure to file their Answer to the complaint. Thereafter, trial ex parte was delegated to the Clerk of Court to receive respondents evidence. Testimonial and documentary evidence were all admitted. On November 29, 1995, the lower court rendered its decision, the dispositive portion of which reads as follows: WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendants ordering defendants: a) To pay plaintiff actual damages in the amount of P1,321,313.00 plus interest at 12% per annum from May 31, 1994 representing the total outstanding balance of defendants indebtedness to plaintiff by virtue of the Promissory Note dated June 24, 1994. b) To pay plaintiff moral damages in the amount of P1,000,000.00; c) To pay plaintiff attorneys fees in the amount of 20% of the sum collected; and d) To pay costs of suit.

Court of Marinduque in Civil Case No. 95-4 is hereby AFFIRMED with MODIFICATION. The defendant-appellants are ordered to pay plaintiff-appellee moral damages in the amount of P200,000.00. 6[6] Petitioners moved for the reconsideration of the CAs decision, but the same was denied by the CA in its Resolution dated March 10, 2004. Aggrieved, petitioners elevated the case to this Court via a petition for review on certiorari under Rule 45 of the Rules of Court, submitting thusly 1. The Court of Appeals acted with grave abuse of discretion and committed a mistake of law in awarding 20% attorneys fees contrary to the 5% as stipulated in the promissory note, Exhibit B. 2. The Court of Appeals acted with grave abuse of discretion and committed a mistake of law in not reducing the award of the 12% penalty interest.

Clearly from the foregoing formulation of the issues in the present petition, petitioners do not dispute the amount of their indebtedness. They only seek a modification of the decision of the CA insofar as it upheld the RTCs award of attorneys fees equivalent to 20% of their total indebtedness/obligation and the 12% per annum interest of the said obligation. In support of their contention that the award of attorneys fees was illegal or erroneous, petitioners point to the unqualified rate of 5% stipulated in the promissory note as the stipulated amount which was way lower than the 20% as awarded by the RTC. Petitioners cited the case of Chua v. Court of Appeals7[7] where the Court ruled that is not the province of the court to alter a contract by construction or to make a new contract for the parties; its duty is confined to the interpretation of the one which they have made for themselves, without regard to its wisdom or folly, as the court cannot supply material stipulations or read into contract words which it does not contain. The testimony of Atty. Edmundo O. Reyes that the attorneys fees should be 20% of the outstanding balance cannot prevail over the 5% stipulated in the promissory note. Citing the case of Baas v. Asia Pacific Finance

SO ORDERED.5[5]

In their appeal to the CA, petitioners did not question the amount of the judgment debt for which they were held liable but limited the issue to the award of attorneys fees. On October 29, 2003, the CA promulgated a decision affirming with modification the trial courts decision. It upheld the award of attorneys fees equivalent to 20% of the balance of petitioners obligation and modified the decision of the trial court by lowering the award of moral damages from One Million Pesos (P1,000,000.00) to Two Hundred Thousand Pesos (P200,000.00). Dispositively, the decision reads: WHEREFORE, the assailed decision of Branch 30, of the Regional Trial

Corporation,8[8] petitioners maintained that oral evidence cannot prevail over the written agreement of the parties. On the other hand, respondent contend that petitioners have already waived their rights to question the award for attorneys fees because in their Appell ants Brief filed before the CA, they stated that the stipulated attorneys fees was 20% (not 5%) of the total balance of the outstanding indebtedness. Respondent adds that despite such stipulation, said attorneys fees are subject to judicial control. Ac cording to respondent it was not surprising for the CA to focus on the issue of reasonableness of the said attorneys fees because petitioners line of argument was focused on the same. The petition is partly meritorious. The fifth paragraph of the Promissory Note executed by petitioners in favor of respondent undeniably carried a stipulation for attorneys fees and interest in case of the latters default in the payment of any installment due. It specifically provided that: Failure on the part of Sylvia and/or Antonio Suatengco to pay any installment due will render the entire unpaid balance immediately, due and demandable and Cong. Reyes becomes entitled not only for the unpaid balance but also for 12% interest per annum of the outstanding balance of P1,336,313.00 from May 31, 1994 until fully paid plus attorneys fees equivalent to 5% of the total outstanding indebtedness. Strictly speaking, the attorneys fees herein litigated are in the nature of liquidated damages and not the attorneys fees recoverable as between attorney and client enunciated and regulated by the Rules of Court.9[9] Liquidated damages are those agreed upon by the parties to a contract to be paid in case of breach thereof.10[10] The stipulation on attorneys fees contained i n the said Promissory Note constitutes what is known as a penal clause. A penalty clause, expressly recognized by law, is an accessory undertaking to assume greater liability on the part of the obligor in case of breach of an obligation. It functions to strengthen the coercive force of obligation and to provide, in effect, for what could be the liquidated damages resulting

from such a breach. The obligor would then be bound to pay the stipulated indemnity without the necessity of proof on the existence and on the measure of damages caused by the breach.11[11] It is wellsettled that so long as such stipulation does not contravene law, morals, or public order, it is strictly binding upon the obligor. The attorneys fees so provided are awarded in favor of the litigant, not his counsel.12[12] In this case, there is a contractual stipulation in the Promissory Note that in case of petitioners default on the terms and conditions of the said Promissory Note by failing to pay any installment due, then this will render the entire balance of the obligation immediately due and payable. The total obligation of petitioners amounted to P1,321,313.00 (P1,336,313.00 less P15,000.00) plus the 12% interest per annum of the said balance, as well as attorneys fees equivalent to 5% of the total outstanding indebtedness. The Promissory Note was signed by both parties voluntarily, thus the stipulation therein has the force of law between the parties and should be complied with by them in good faith. The RTC and CA, in awarding attorneys fees equivalent to 20% of petitioners total obligation, disregarded the stipulation expressly agreed upon in the Promissory Note and instead increased the award of attorneys fees by giving weight and value to the testimony of prosecution witness Atty. Reyes. In agreeing to the reasonableness of the attorneys fees, the CA erroneously took into account the time spent, the extent of the services rendered, as well as the professional standing of the lawyer. Oral evidence certainly cannot prevail over the written agreements of the parties. The courts need only to rely on the faces of the written contracts to determine their true intention on the principle that when the parties have reduced their agreements in writing, it is presumed that they have made the writings the only repositories and memorials of their true agreement.13[13] Moreover, it is undeniable from the evidence submitted by respondent herself to the trial court that the agreement of the parties with respect to attorneys fees is only 5% of the total obligation and the trial court granted the 20% rate based on the testimony of respondents counsel who opined that the same is the reasonable amount of attorneys fees, despite the unequivocal agreement of the parties. Ev en granting that petitioners may have erroneously stated that the stipulated attorneys fees is 20% in their appellants brief before the CA, they have nonetheless squarely raised the matter of the lower rate of attorneys fees agreed upon by the parties in the promissory note before that court

in their motion for reconsideration. In our mind, there was essentially no change in petitioners theory of the case before the CA since in their appellants brief and their motion for reconsideration, their main contention remains the same: that the attorneys fees awarded by the trial court and affirmed by the CA were unwarranted and contrary to law. Neither can we give credence to respondents assertion that the 5% attorneys fees agreed upon in the promissory not e were intended only to be the minimum rate as the promissory note never mentioned a minimum. In sum, we find it improper for both the RTC and the CA to increase the award of attorneys fees despite the express stipulation contained in the said Promissory Note which we deem to be proper under these circumstances, since it is not intended to be compensation for respondents counsel but was rather in the nature of a penalty or liquidated damages. On the matter of interest, we affirm the amount of interest awarded by the two courts below, there being a written stipulation as to its rate. In Eastern Shipping Lines, Inc. v. Court of Appeals,14[14] we laid down the following guidelines on the imposition of legal interest: xxx xxx xxx II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows: 1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due is that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. 2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum xxx 3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.

The stipulated interest in this case is 12% per annum. As of July 1994, the total indebtedness of petitioners amounted to P1,321,313.00. From then on, the P1,321,313.00 should have earned the stipulated interest of 12% per annum plus attorneys fees equiv alent to 5% of the total outstanding indebtedness. However, once the judgment becomes final and executory and the amount adjudged is still not satisfied, legal interest at the rate of 12% applies until full payment. The rate of 12% per annum is proper because the interim period from the finality of judgment, awarding a monetary claim and until payment thereof, is deemed to be equivalent to a forbearance of credit. The actual base for the computation of this 12% interest is the amount due upon finality of this decision.15[15] WHEREFORE, the Decision dated October 29, 2003 of the Court of Appeals is hereby MODIFIED in that the amount of attorneys fees is reduced to five percent (5%) of the total balance of the outstanding indebtedness but the said Decision is AFFIRMED in all other respects. No costs. SO ORDERED.

[G.R. No. 116909. February 25, 1999]

family, and, in addition, I further agree to pay the said attorney a yearly retainership fee of P24,000.00 per annum in twelve (12) equal monthly payments of P2,000.00 each, payable on or before the 5th of every ensuing month starting April 1977.

I.

VIVENCIO M. RUIZ, EMILIO D. CASTELLANES and BLAS A. MIRANDA, petitioners, vs. THE COURT OF APPEALS, and PEDRO V. GARCIA, as represented by his legal representative, MA. LUISA G. MAGPAYO, Respondents.

Accordingly, the petitioners handled Civil Case Nos. 14297 and 17713 which were consolidated before Branch 13 of the Court of First Instance in Pasig, Rizal. Civil Case No. Pq-6596 was before Branch 29, of the Court of First Instance in Pasay City.

RESPONDENT COURT ERRED IN FINDING THAT THE INSTANT CASE FOR RECOVERY OF ATTORNEYS PROFESSIONAL FEES WHICH HAD NOT BEEN ADJUDICATED BY FINAL PRONOUNCEMENT IS ABATED BY THE DEATH OF THE DEFENDANT-CLIENT AND SHOULD THEREFORE BE DISMISSED IN ACCORDANCE WITH SECTION 21, RULE 3 OF THE RULES OF COURT.

DECISION

PURISIMA, J.:

Before the Court is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court seeking review of the 26 November 1993 Decisionxxii[1 and the 02 September 1994 Resolution[2 of the Court of Appealsxxiii[3 in CA-G.R. CV No. 34360.

On July 22, 1982, Pablo V. Garcia unilaterally terminated the said Contract of Retainership on the alleged ground that the petitioners, his lawyers, failed to settle amicably his (Garcia) differences with V. C. Ponce Co., Inc. Petitioners were paid attorneys fees up to the month of July, 1982. Thereafter, the petitioners Ruiz and Castellanes manifested their withdrawal as counsel for Pedro V. Garcia and moved that their attorneys lien be put on record,xxv[5 in the cases involved. Such motion was granted by the trial court.

II.

RESPONDENT COURT ERRED IN NOT TAKING JUDICIAL NOTICE OF THE DECISION OF THE THEN INTERMEDIATE APPELLATE COURT IN AC-GR NO. SP-05291 FINDING THE INSTANT CASE ONE FOR RECOVERY OF LAND OR AN INTEREST THEREIN;

III. On February 9, 1984, petitioners Ruiz and Castellanes brought their action For Collection of Sum of Money and for Specific Performance, docketed as Civil Case No. 6465 before Branch 140, of the Regional Trial Court in Makati City.

The late Pedro V. Garcia was a businessman with substantial shareholdings in V. C. Ponce Co., Inc. consisting of shares of stock and real properties. Sometime in 1977, an internal conflict developed and besieged the company, engendering suits between respondent Garcia and V.C. Ponce Co., Inc. over the formers funds and assets.

On March 10, 1977, respondent Pedro V. Garcia engaged the legal services of herein petitioners, Attys. Vivencio M. Ruiz and Emilio D. Castellanes, and an Agreement denominated as a Contract of Retainership xxiv[4 was executed by them, the pertinent portion of which, reads:

On September 27, 1990, while the said case was pending before the said lower court of origin, Pedro V. Garcia died. And so, on October 4, 1990, after notifying the trial court of the demise of their client, counsel moved for the dismissal of the case, invoking Section 21, Rule 3 of the Rules of Court.xxvi[6

RESPONDENT COURT ERRED IN FINDING THAT THE INSTANT CASE IS ONE TO COMPEL THE CLIENT-DEFENDANT TO RECOGNIZE FOREMOST THE EXISTENCE OF THE ATTORNEYCLIENT RELATIONSHIP AFTER IT WAS SEVERRED AND AS A CONSEQUENCE, INCIDENTALLY CLAIM PAYMENT OF THEIR PROFESSIONAL FEES.

The pivot of inquiry here is: Whether or not the case at bar has survived the death of the private respondent, Pedro V. Garcia.

On February 8, 1991, the lower court issued an Order dismissing petitioners complaint, stating that:

CONTRACT OF RETAINERSHIP x x x the Court is of the opinion and so holds that the present action is one for recovery of money or interest in whatever recovery the deceased defendant may obtain in cases for which the plaintiffs services were contracted; and that plaintiffs client, the herein defendant, died before final judgment in this case, hence, Section 21 of Rule 3 of the Rules of Court applies .

It is petitioners theory that the action they brought below was, among others, for the enforcement of their charging lien in Civil Case Nos. 14297 and 17713, and Civil Case No. Pq-6596; which involved a claim over the real properties litigated upon, and therefore, an action which survived the death of their client, Pedro V. Garcia.

I, PEDRO V. GARCIA, of legal age, amrried to Remedios T. Garcia and residing at #100 Adelita Chioco St., Phase II, B.F. Homes, Paraaque, Metro Manila, do hereby declare and certify that I have engaged and retained, as I do hereby retain and engage, the services of Atty. V. M. RUIZ and his associate, E.D. CASTELLANES as my counsel to handle, protect and prosecute all cases involving my rights and interests and that of my family in the 370,000 shares of stocks which we own in the V. C. Ponce Co., Inc., especially the case I have filed against Vicente C. Ponce before the Securities and Exchange Commission (SEC Case No. 001451, Series of 1977), all other related and allied cases, both civil and criminal, which may be assigned to and accepted by him or which have been specifically endorsed to him and now pending before the courts and other venues x x x

Section 21, Rule 3 of the Rules of Courtxxvii[7 provides:

On appeal, the Court of Appeals handed down its challenged Decision, disposing, thus:

Where claims does not survive - When the action is for recovery of money, debt or interest thereon, and the defendant dies before final judgment in the Court of First Instance, it shall be dismissed to be prosecuted in the manner especially provided in these rules.

WHEREFORE, the Order appealed from is herby MODIFIED to read, as follows:

To begin with, the aforequoted provision of law was modified by the enactment of the 1997 Civil Procedure, Section 20, Rule 3 of which, reads:

xxx xxx xxx

and IN CONSIDERATION of the services of the said attorney, I do hereby assign and transfer to him, his heirs, executors and assigns, forever, fifteen (15%) percent of all my/our shares of stock aforesaid, fully paid, evidenced by Certificate of Stock Nos. 003, 010, and 004, issued by the Corporation in our respective names x x x and of all the benefits and dividends due but not declared and paid on said shares from 1963 up to the execution of this retainership, including any/all monies and assets due us and other recoverables, for me and my

In view of the foregoing, the motion to dismiss and the supplemental motion are hereby granted. Civil Case No. 6364 is hereby DISMISSED in accordance with Section 21, Rule 3 of the Rules of Court, and the notice of lis pendens annotated in T.C.T. No. 64567 is hereby ordered cancelled.

No pronouncement as to cost.

When the action is for recovery of money arising from contract, express or implied, and the defendant dies before final entry of final judgment in the court in which the action was pending at the time of such death, it shall not be dismissed but shall be allowed to continue until entry of final judgment. A favorable judgment obtained by the plaintiff therein shall be enforced in the manner especially provided in these Rules for prosecuting claims against the estate of a deceased person.

With the denial of their motion for reconsideration, petitioners found their way to this Court via the present Petition; theorizing, that:

It is a fundamental rule in legal hermeneutics that statutes regulating the procedure of the courts will be construed as applicable to actions pending and undetermined at the time of the passage,xxviii[8 Considering that the case under scrutiny was passed upon by the lower courts under the old rule, it follows that the old rule governs.

In Harden vs. Harden, 20 SCRA 706, the Court ruled that an action for the satisfaction of attorneys fees is founded on a personal obligation which does not survive the death of the defendant before adjudication.[13

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

Under the plain language of Section 21, Rule 3 of B.P. 129, it is beyond cavil that if the defendant dies before the Court of First Instance or the Regional Trial Court has rendered a judgment, the action is dismissed and the plaintiff is required to file a money claim against the estate of the deceased. But if the defendant dies after the said court has rendered a judgment and pending appeal, the action is not dismissed and the deceased defendant is substituted by his executor or administrator or legal heirs.[9

As enunciated in Bonila, the litmus test in determining what action survives and what does not depends on the nature of the action and not on the object or kind of property sought to be recovered.

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

All things studiedly considered, we are of the opinion, and, so hold, that the respondent Court of Appeals erred not in affirming the decision of the court a quo.

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

To determine whether the action survives or not, the Court ruling in Bonilla vs. Barcena (71 SCRA 491) comes to the fore, thus:

WHEREFORE, the Petition is hereby DENIED; and the decision of the Court of Appeals in CA-G.R. CV No. 34360 AFFIRMED in toto. No pronouncement as to costs.

"2. Out of the approved loan of THIRTY MILLION PESOS (P30,000,000.00), the sum of P9,595,000.00 was released to defendant Moonwalk as of November 28, 1973;

The question as to whether an action survives or not depends on the nature of the action and the damage sued for (Iron Gate Bank vs. Brady, 184 U.S. 665, 22 SCT, 46 L.ed 739). In the cause of action which survive, the wrong complained affects primarily and principally property and property rights, the injuries to the person being merely incidental, while in the causes of action which do not survive, the injury complained of is to the person, the property and rights of property affected being incidental xxx..

SO ORDERED.

"3. A third Amended Deed of First Mortgage was executed on December 18, 1973 Annex `D' providing for restructuring of the payment of the released amount of P9,595,000.00.

G.R. No. 73345. April 7, 1993. "4. Defendants Rosita U. Alberto and Rosita U. Alberto, mother and daughter respectively, under paragraph 5 of the aforesaid Third Amended Deed of First Mortgage substituted Associated Construction and Surveys Corporation, Philippine Model Homes Development Corporation, Mariano Z. Velarde and Eusebio T. Ramos, as solidary obligors;

The core of petitioners argument is that action should not be dismissed since their complaint involves not just monetary claim but also real properties, as well..

SOCIAL SECURITY SYSTEM, petitioner, vs. MOONWALK DEVELOPMENT & HOUSING CORPORATION, ROSITA U. ALBERTO, ROSITA U. ALBERTO, JMA HOUSE, INC., MILAGROS SANCHEZ SANTIAGO, in her capacity as Register of Deeds for the Province of Cavite, ARTURO SOLITO, in his capacity as Register of Deeds for Metro Manila District IV, Makati, Metro Manila and the INTERMEDIATE APPELLATE COURT, respondents.

Petitioners contention is untenable. While they maintain that what they are claiming include real properties, their Complaint is captioned as For Collection of Money and for Specific Performance. Obviously, the petitioners themselves, who are lawyers, believed that their cause of action against the private respondent is in the nature of actio in personam.

DECISION

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

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

Actio in personam is a personal action seeking redress against a particular person. Personal actions are such whereby a man claims a debt, or personal duty, or damages in lieu thereof.[10 In the present case, petitioners seek to recover attorneys fees from private respondent for professional services they rendered to the latter. Attorneys fee is basically a compensation.xxix[11 In its ordinary sense, the term (compensation) applies not only to salaries, but to compensation by fees for specific service. [12

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

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

Viewed in proper perspective, an action to recover attorneys fees is basically a monetary claim, which under Section 21, Rule 3 of B.P. 129 is an action that does not survive. Such is the fate of Civil Case No. 6465.

Petitioners theorize that the inclusion of real properties as part of the attorneys fees private respondent owe them, converted the action into one that survives or at the very least, split the action into one that did not survive, with respect to the monetary obligation, and which survived, with respect to the real properties of the deceased.

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

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

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

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

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

"10. The genuineness and due execution of the documents marked as Annex (sic) 'A' to 'O' inclusive, of the Complaint and the letter dated

December 21, 1979 of the defendant's counsel to the plaintiff are admitted.

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

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

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

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

penalty was made prior to the extinguishment of the obligation because then the obligation of Moonwalk would consist of: 1) the principal obligation 2) the interest of 12% on the principal obligation and 3) the penalty of 12% for late payment for after demand, Moonwalk would be in mora and therefore liable for the penalty.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Now, besides the Real Estate Mortgages, the penal clause which is also an accessory obligation must also be deemed extinguished considering that the principal obligation was considered extinguished, and the penal clause being an accessory obligation. That being the case, the demand for payment of the penal clause made by plaintiff-appellant in its demand letter dated November 28, 1979 and its follow up letter dated December 17, 1979 (which parenthetically are the only demands for payment of the penalties) are therefore ineffective as there was nothing to demand. It would be otherwise, if the demand for the payment of the

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

Article 1226 of the Civil Code provides:

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

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

grammatical sense, because it involves the beginning of a special condition or status which has its own peculiar effects or results." 11 In order that the debtor may be in default it is necessary that the following requisites be present: (1) that the obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the performance judicially and extrajudicially. 12 Default generally begins from the moment the creditor demands the performance of the obligation. 13

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

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

A penal clause is an accessory undertaking to assume greater liability in case of breach. 6 It has a double function: (1) to provide for liquidated damages, and (2) to strengthen the coercive force of the obligation by the threat of greater responsibility in the event of breach. 7 From the foregoing, it is clear that a penal clause is intended to prevent the obligor from defaulting in the performance of his obligation. Thus, if there should be default, the penalty may be enforced. One commentator of the Civil Code wrote:

"Now when is the penalty deemed demandable in accordance with the provisions of the Civil Code? We must make a distinction between a positive and a negative obligation. With regard to obligations which are positive (to give and to do), the penalty is demandable when the debtor is in mora; hence, the necessity of demand by the debtor unless the same is excused . . ." 8

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

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

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

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

xxx xxx xxx

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

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

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

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

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

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

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

(3) When the demand would be useless, as when the obligor has rendered it beyond his power to perform." 9 "No discretion or alternative is granted respondent Commission in the enforcement of the law's mandate that the employer who fails to comply with his legal obligation to remit the premiums to the System within the prescribed period shall pay a penalty of three (3%) per month. The prescribed penalty is evidently of a punitive character, provided by the legislature to assure that employers do not take lightly the State's exercise of the police power in the implementation of the Republic's declared policy "to develop, establish gradually and perfect a social security system which shall be suitable to the needs of the people throughout the Philippines and (to) provide protection to employers against the hazards of disability, sickness, old age and death . . ."

SO ORDERED.

This case does not fall within any of the established exceptions. Hence, despite the provision in the promissory note that "(a)ll amortization payments shall be made every first five (5) days of the calendar month until the principal and interest on the loan or any portion thereof actually released has been fully paid," 10 petitioner is not excused from making a demand. It has been established that at the time of payment of the full obligation, private respondent Moonwalk has long been delinquent in meeting its monthly arrears and in paying the full amount of the loan itself as the obligation matured sometime in January, 1977. But mere delinquency in payment does not necessarily mean delay in the legal concept. To be in default ". . . is different from mere delay in the

DECISION

KAPUNAN, J.:

This is a petition for review of the decision of the Court of Appeals affirming in toto the decision of the Regional Trial Court, National Capital Region, Branch 38 in Civil Case No. 83-18464 for a sum of money. The undisputed facts, as quoted from the respondent courts decision are as follows:

On March 9, 1978, Lomuyon Timber Industries, Inc. (hereafter, Lomuyon) agreed to sell to plaintiff its receivables at a discount on a with recourse basis (Exh. A). It was agreed in that sale that should a receivable remain unpaid, plaintiff, at its discretion, may impose a penalty fee of 3% per month. To secure the payment of the receivables, the Malonjaos also executed in favor of plaintiff, a real estate mortgage over their real property covered by Transfer Certificates of Title Nos. (445856) S-65586 and No. (162775) S-65585 (Exh. B).

Pursuant to their agreement, on March 9, 10 and 15, 1978 and July 19, 1978, Lomuyon sold to plaintiff for a total consideration of P2,558,073.75 (Exhs. C, D, E and F), various receivables consisting of checks as follows: TCBTC 618821 June 9, 1978 P371,319.58 TCBTC 618820 September 9, 1978 P371,319.58 TCBTC 618819 December 9, 1978 P371,319.58 TCBTC 618818 March 9, 1978 P371,319.58 TCBTC 618817 June 9, 1979 P371,319.58 TCBTC 618816 September 9, 1979 P371,319.58 TCBTC 618814 December 9, 1979 P371,319.58 TCBTC 618828 March 9, 1980 P371,319.58 MBTC 06659490 September 30, 1978 60,000.00 (Exhs. C-1, D-1, E-1, F-1 and G to G-7).

TCBTC (The Consolidated Bank and Trust Corporation) checks were all drawn by Amanda Malonjao to the order of payee Lomuyon which in turn, indorsed the checks to plaintiff. The MBTC (Metropolitan Bank and Trust Company) check was drawn by one Antonietta MalonjaoRoque to the order of payee Amanda Malonjao who in turn, indorsed said check to plaintiff. [G.R. No. 112590.* July 12, 2001]

STATE INVESTMENT HOUSE, INC., petitioner, vs. COURT OF APPEALS, LOMUYON TIMBER INDUSTRIES, INC., AMANDA MALONJAO and RUFINO MALONJAO, respondents.

When plaintiff presented the checks for payment to the drawee banks, the same were dishonored for having been drawn against insufficient funds (Exhs. H to H-7) except for TCBTC 618821.

Plaintiff made repeated written demands on defendants to make good the checks they indorsed and to pay the penalty charges it has imposed thereon, (Exhs. I, J, K, L, L-1, M and N).

18. The interest and charges made by plaintiff is usurious and unconscionable (id., pp. 91-92).xxii[1]

Defendants failed to pay the value of the checks. Plaintiff thus decided to undertake foreclosure of the real estate mortgage.

On January 11, 1981, the trial court rendered its decision with the following dispositive portion:

attention on the penalty charge of 3% a month which was imposed on the principal obligation as a result of their default in payments. Undaunted by the disallowance of its claim in the August 27, 1992 decision, petitioner reiterated its position in a motion for reconsideration, averring that the respondent court and the trial court failed to reconcile the figures due it. Petitioner asserts that as of September 26, 1981, private respondents obligation amounted to P4,809,187.12. At that time of the foreclosure sale on February 14, 1983, the obligation to SIHI was computed to be P6,833,021.62 inclusive of interest and penalty charges. Considering that the bid price of the foreclosed properties was only P4,233,874.00, petitioner was still entitled to a deficiency of about P2,601,147.62. Petitioner further added that until the original obligation is fully paid, private respondents outstanding obligation continue to earn interest and penalty charges from day to day. Thus, from the time of the foreclosure sale on February 14, 1983 (P2,601,147.62) up to the filing of the complaint for the deficiency claim on May 31, 1983 (P2,876,929.27), and up to the trial on June 3, 1988 in the RTC, private respondents outstanding obligation to SIHI rose to P7,651,969.41.

On October 6, 1982, plaintiff filed with the Provincial Sheriff of Rizal a petition for extrajudicial foreclosure of real estate mortgage dated September 28, 1981. In said petition, plaintiff alleged among others, that as of said date, September 28, 1981, defendants outstanding obligation, inclusive of interest and charges, is P4,809,187.12 (Exh. O).

WHEREFORE, in view of all the foregoing, judgment is hereby rendered:

1. Declaring that the plaintiff is not entitled to any deficiency amount from the defendants; 2. Dismissing defendants counterclaim; and

On February 14, 1983, the Provincial Sheriff sold at public auction, defendants mortgaged properties to plaintiff who was the highest bidder for P4,233,874.00. The following day, the Provincial Sheriff issued a Certificate of Sale (Exh. P).

3. Ordering the plaintiff and defendants to pay the costs of suit.

SO ORDERED.xxii[2] On June 27, 1983, plaintiff filed the complaint alleging that after deducting the price of the mortgaged properties from defendants outstanding obligation, there remains a deficiency of P2,601,147.62 as of February 14, 1983, which as of May 31, 1983 amounted to P2,876,929.27 inclusive of interest and charges. As an alternative cause of action, plaintiff alleged that it is entitled to recover from the defendant the total value of the checks amounting to P2,239,237.10. Plaintiff further prayed that it be awarded exemplary damages, attorneys fees and litigation expenses (Records, pp. 1-38). There is no dispute that the payment of penalty is sanctioned by the law, although the penalty may be reduced by the courts if it is iniquitous or unconscionable.xxii[5] Petitioner argues that while it recognizes the authority of the court to reduce the penalty if it is iniquitous or unconscionable, the court, however, does not have the authority to delete the payment of the penalty charges altogether for this is in clear contravention of Article 1229 and the law of contracts between the parties.

On appeal, petitioner assigned the following errors committed by the trial court:

In their answer, defendants admitted having incurred the obligation with the plaintiff brought about by the dishonor of the checks. However, defendants contended that plaintiffs computation of their outstanding obligation is erroneous. Thus, by way of special affirmative defenses, defendants alleged that: 12. 13.

I. THE LOWER COURT ERRED IN NOT FINDING THAT DEFENDANTS-APPELLEES OBLIGATION TO SIHI AS OF THE TIME OF FORECLOSURE AUCTION SALE AMOUNTED TO P6,835,021.62 THUS, AFTER DEDUCTING THE AUCTION PRICE OF THE MORTGAGED PROPERTIES IN THE AMOUNT OF P4,233,874.00, THE BALANCE WOULD BE P2,601,141.62.

This contention is not well-taken.

II. THE LOWER COURT ERRED IN FINDING THAT SIHI HAD ALREADY FULLY RECOVERED ITS RECEIVABLES FROM THE DEFENDANTS.

x x x. III. THE LOWER COURT ERRED IN FINDING THAT SIHI IS NOT ENTITLED TO ANY DEFICIENCY AMOUNT FROM THE DEFENDANTS.xxii[3]

The complaint states no cause of action;

14. The value of the mortgaged properties sold at public auction is more than sufficient to cover the obligation of the defendants; 15. The alleged purchase price of the mortgaged properties sold at public auction is unconscionably very very low; 16. Assuming for the sake of argument, that the outstanding obligation of the defendants as of September 26, 1981 (sic) was P4,809,187.12 per statement of account as alleged in the complaint and the alleged purchase price at public auction was P4,233,874.00, the deficiency would only be P575,313.12 and not P2,601,147.62 as erroneously alleged in the complaint. 17.

On August 27, 1992, the respondent court rendered the assailed decision disallowing the claim for deficiency on the finding that the penalty charges imposed by petitioner on the principal obligation were highly iniquitous and unconscionable. The subsequent motion for reconsideration was, likewise, denied. Hence, petitioner filed the instant petition raising the sole issue that:

The Court does not find any reversible error committed by the respondent court in ruling that the petitioner was no longer entitled to recover any deficiency amount after the foreclosure sale on February 14, 1983. Per Statement of Account dated September 21, 1981, the obligation of the private respondent was computed to be P4,809,187.12 inclusive of interest and penalty charges. Since the private respondent failed to fulfill its obligation, petitioner then decided to foreclose the real estate mortgage on two properties of the private respondent. At the time of the auction sale on February 14, 1983, the properties were sold in the amount of P4,223,874.00 with the petitioner as the highest bidder. Deducting this amount from the outstanding obligation of P4,809,187.12 as stipulated in the Statement of Account, there would therefore be a balance of only about P575,313.12.

THE COURT OF APPEALS GROSSLY MISAPPRECIATED THE FACTS AND APPLICABLE LAW BY NOT DECLARING THAT SIHI IS STILL ENTITLED TO THE DEFICIENCY AFTER THE FORECLOSURE AUCTION SALE.xxii[4]

Whether or not the alleged deficiency from the foreclosure sale was P575,313.12 or P2,601,147.62 as claimed by petitioner was of no moment. The respondent court disallowed the payment of the deficiency altogether because it found that the principal obligation of the private respondent would not have ballooned to such a horrendous amount of P4.8M as of September 21, 1991 if not for the penalty charge of 3% per month or 36% per annum. The trial court justified, to wit:

No demand was ever made upon the defendant;

In disallowing the claim for deficiency, the respondent court found that the proceeds of the auction sale was sufficient to cover the principal obligation of the private respondent including interest, penalty and other charges. Both the respondent court and the trial court took particular

x x x [F]rom the various checks the defendants had sold originally to the plaintiff at the beginning of their transactions, it is shown that the amount including interests and other charges, is P2,970,556.64. For a two year period from June 9, 1978 to March 9, 1980 and up to September 26, 1981 the amount grew to P4,809.187.12. In other

words, the money of the plaintiff has already earned interests and other charges to more or less P1,638,630.48. As alleged in plaintiffs complaint, the total amount purchased by plaintiff was only for P2,500,000.00. There is reason to believe that the P2,970,566.64 represented by the various checks include therein, the interest and other charges upon their maturity dates. Deducting the amount of P2,500,000.00 from P2,970,556.64 is P420,556.64. In brief, the interests and charges that plaintiff has already earned from the time it has foreclosed defendants' properties has passed the P2,000,000.00.xxii[6] Contrary to petitioners contention, the respon dent court acted in accordance to Article 1229 when it declared that petitioner was no longer entitled to the payment of the deficiency amount. The disallowance of the payment of deficiency was in effect merely a reduction of the penalty charges and not as a deletion of the penalties as contended by the petitioner.

foreclosed and sold at the auction sale in 1983, obtaining a sum of about P4,223,874.00. These foreclosed properties located in Makatixxii[8] are undoubtedly valuable properties whose market value has greatly appreciated to substantially satisfy the payment of the outstanding obligation. Notwithstanding the balance of P575,313.12, petitioner has clearly recouped its investment and earned more than enough profit in two years (1978-1981) by way of penalty charges. Although petitioner claims that the penalty charge was well within the banking and business practice, no proof was adduced thereof. To allow the petitioner to recover the amount of P6,835,021.21 at the time of the foreclosure sale in 1983, or P7,651,969.41 at the time of the trial of the case in 1988 which amounts are almost three times more than the original investment of about P2,558,073.75 is rather unwarranted. We quote with favor the respondent courts ratiocination: The lower court did not err in its ruling under its statement that since plaintiff had already recovered fully the receivables from the defendants, the court, considering that the plaintiff for the two properties foreclosed by it bidded the amount of P4,233,874.00, far and above the amount it had originally given to the defendants which was only over P2,000,000.00, it is rather most shocking and unconscionable for plaintiff to still collect from the defendants the alleged collectibles of P2,601,147.62 with 3% penalty charges. The plaintiff should have stopped imposing the 3% penalty charges and other burdens when it had consolidated finally the two titles of the properties it had foreclosed (Decision, p. 8). After due consideration and reflection on all the factual circumstances obtaining in the case at bar, it is Our opinion that the lower court properly exercised its discretion under Article 1229 of the Civil Code to reduce the penalty charges for being highly and grossly unconscionable. x x xxxii[9]

DECISION

SANDOVAL-GUTIERREZ, J.:

Petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, of the decision of the Court of Appeals in CAG.R. CV No. 37899, affirming the decision of the Regional Trial Court, Branch 16, Malolos, Bulacan, in Civil Case No. 375-M-91, Spouses Danilo and Ursula Solangon vs. Jose Avelino Salazar for annulment of mortgage. The dispositive portion of the RTC decision reads: WHEREFORE, judgment is hereby rendered against the plaintiffs in favor of the defendant Salazar, as follows:

1. Ordering the dismissal of the complaint;

In the case of Rizal Commercial Banking Corporation vs. Court of Appeals,xxii[7] we held that:

2. Ordering the dissolution of the preliminary injunction issued on July 8, 1991;

xxx

3. Ordering the plaintiffs to pay the defendant the amount of P10,000.00 by way of attorneys fees; and

On the issue of payment of surcharges and penalties, we partly agree that GOYUs pitiful situation must be taken into account. We do not agree, however, that payment of any amount as surcharges and penalties should altogether be deleted. x x x

4. To pay the costs. SO ORDERED.xxii[1]

Surcharges and penalties agreed to be paid by the debtor in case of default partake of the nature of liquidated damages, covered by Section 4, Chapter 3, Title XVIII of the Civil Code. Article 2227 thereof provides:

While the Court recognizes the right of the parties to enter into contracts and are expected ro comply with the terms and obligations, this rule is not absolute. The Court allowed to temper interest rates when necessary. Article 1229 of the New Civil Code clearly provides:

The facts as summarized by the Court of Appeals in its decision being challenged are: On August 22, 1986, the plaintiffs-appellants executed a deed or real estate mortgage in which they mortgaged a parcel of land situated in Sta. Maria, Bulacan, in favor of the defendant-appellee, to secure payment of a loan of P60,000.00 payable within a period of four (4) months, with interest thereon at the rate of 6% per month (Exh. B).

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

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

In exercising this vested power to determine what is iniquitous and unconscionable, the Court must consider the circumstances of each case. It should be stressed that the Court will not make any sweeping ruling that surcharges and penalties imposed by banks for non-payment of the loans extended by them are generally iniquitous and unconscionable. What may be iniquitous and unconscionable in one case, may be totally just and equitable in another. This provision of law will have to be applied to the established facts of any given case. Given the circumstances under which GOYU found itself after the occurrence of the fire, the Court rules the surcharges rates ranging anywhere from 9% to 27%, plus the penalty charges of 36%, to be definitely iniquitous and unconscionable. x x x

Likewise, Article 2227 provides: On May 27, 1987, the plaintiffs-appellants executed a deed of real estate mortgage in which they mortgaged the same parcel of land to the defendant-appellee, to secure payment of a loan of P136,512.00, payable within a period of one (1) year, with interest thereon at the legal rate (Exh. 1).

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

ACCORDINGLY, the judgment appealed from is hereby AFFIRMED.

SO ORDERED. Likewise, in the case at bar, the two courts below found the penalty charge of 3% a month or 36% per annum iniquitous and unconscionable. Petitioner computed the amount of P4,809,187.12 as the outstanding obligation of the petitioner as of September 21, 1981 after imposing the 3% penalty charge when petitioner defaulted in their payments. This amount was no longer questioned and was particularly taken into consideration when the mortgaged properties were

On December 29, 1990, the plaintiffs-appellants executed a deed of real estate mortgage in which they mortgaged the same parcel of land in favor of defendant-appellee, to secure payment of a loan in the amount of P230,000.00 payable within a period of four (4) months, with interest thereon at the legal rate (Exh. 2, Exh. C).

[G.R. No. 125944. June 29, 2001] This action was initiated by the plaintiffs-appellants to prevent the foreclosure of the mortgaged property. They alleged that they obtained only one loan form the defendant-appellee, and that was for the amount of P60,000.00, the payment of which was secured by the first of the above-mentioned mortgages. The subsequent mortgages were merely

SPOUSES DANILO SOLANGON and URSULA SOLANGON, petitioners, vs. JOSE AVELINO SALAZAR, respondent.

continuations of the first one, which is null and void because it provided for unconscionable rate of interest. Moreover, the defendant-appellee assured them that he will not foreclose the mortgage as long as they pay the stipulated interest upon maturity or within a reasonable time thereafter. They have already paid the defendant-appellee P78,000.00 and tendered P47,000.00 more, but the latter has initiated foreclosure proceedings for their alleged failure to pay the loan P230,000.00 plus interest.

its contents is contrary to common experience. The uncorroborated testimony of Ursula Solangon cannot be given weight.xxii[2]

removed the interest ceilings prescribed by the Usury Law and that the Usury Law is now legally inexistent.

Petitioners likewise insist that, contrary to the finding of the Court of appeals, they had paid the amount of P136,512.00, or the second loan. In fact, such payment was confirmed by respondent Salazar in his answer to their complaint.

On the other hand, the defendant-appellee Jose Avelino Salazar claimed that the above-described mortgages were executed to secure three separate loans of P60,000.00 P136,512.00 and P230,000.00, and that the first two loans were paid, but the last one was not. He denied having represented that he will not foreclose the mortgage as long as the plaintiffs-appellants pay interest.

In their petition, spouses Danilo and Ursula Solangon ascribe to the Court of Appeals the following errors:

1. The Court of Appeals erred in holding that three (3) mortgage contracts were executed by the parties instead of one (1);

It is readily apparent that petitioners are raising issues of fact in this petition. In a petition for review under Rule 45 of the 1997 Rules of Civil Procedure, as amended, only questions of law may be raised and they must be distinctly set forth. The settled rule is that findings of fact of the lower courts (including the Court of Appeals) are final and conclusive and will not be reviewed on appeal except: (1) when the conclusion is a finding grounded entirely on speculation, surmises or conjectures; (2) when the inference made is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the findings of facts are conflicting; (6) when the Court of Appeals, in making its findings, went beyond the issues of the case and such findings are contrary to the admission of both appellant and appellee; (6) when the findings of the Court of Appeals are contrary to those of the trial court; and (7) when the findings of fact are conclusions without citation of specific evidence on which they are based.xxii[3]

In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61 the Court held that CB Circular No. 905 did not repeal nor in any way amend the Usury Law but simply suspended the lat ters effectivity. Indeed, we have held that a Central Bank Circular can not repeal a law. Only a law can repeal another law. In the recent case of Florendo v. Court of Appeals, the Court reiterated the ruling that by virtue of CB Circular 905, the Usury Law has been rendered ineffective. Usury Law has been legally non-existent in our jurisdiction. Interest can now be charged as lender and borrower may agree upon.

Nevertheless, we find the interest at 5.5 % per month, or 66% per annum, stipulated upon by the parties in the promissory note iniquitous or unconscionable, and hence, contrary to morals (contra bonos mores), if not against the law. The stipulation is void. The courts shall reduce equitably liquidated damages, whether intended as an indemnity or a penalty if they are iniquitous or unconscionable. (Emphasis supplied)

2. The Court of Appeals erred in ruling that a loan obligation secured by a real estate mortgage with an interest of 72% per cent per annum or 6% per month is not unconscionable;

None of these instances are extant in the present case.

In the case at bench, petitioners stand on a worse situation. They are required to pay the stipulated interest rate of 6% per month or 72% per annum which is definitely outrageous and inordinate. Surely, it is more consonant with justice that the said interest rate be reduced equitably. An interest of 12% per annum is deemed fair and reasonable.

4. The Court of Appeals erred in holding that the loan of P136,512.00 HAS NOT BEEN PAID when the mortgagee himself states in his ANSWER that the same was already paid; and

Parenthetically, petitioners are questioning the rate of interest involved here. They maintain that the Court of Appeals erred in decreeing that the stipulated interest rate of 72% per annum or 6% per month is not unconscionable.

WHEREFORE, the appealed decision of the Court of Appeals is AFFIRMED subject to the MODIFICATION that the interest rate of 72% per annum is ordered reduced to 12 % per annum.

5. The Court of Appeals erred in not resolving the SPECIFIC ISSUES raised by the appellants.

SO ORDERED. The Court of Appeals, in sustaining the stipulated interest rate, ratiocinated that since the Usury Law had been repealed by Central Bank Circular No. 905 there is no more maximum rate of interest and the rate will just depend on the mutual agreement of the parties. Obviously, this was in consonance with our ruling in Liam Law v. Olympic Sawmill Co.xxii[4]

[G. R. No. 126486. February 9, 1998]

In his comment, respondent Jose Avelino Salazar avers that the petition should not be given due course as it raises questions of facts which are not allowed in a petition for review on certiorari.

BARONS MARKETING CORP., petitioner, vs. COURT OF APPEALS and PHELPS DODGE PHILS., INC. respondents.

We find no merit in the instant petition.

The core of the present controversy is the validity of the third contract of mortgage which was foreclosed.

Petitioners contend that they obtained from respondent Avelino Salazar only one (1) loan in the amount of P60,000.00 secured by the first mortgage of August 1986. According to them, they signed the third mortgage contract in view of respondents assurance that the same will not be foreclosed. The trial court, which is in the best position to evaluate the evidence presented before it, did not give credence to petitioners corroborated testimony and ruled: The testimony is improbable. The real estate mortgage was signed not only by Ursula Solangon but also by her husband including the Promissory Note appended to it. Signing a document without knowing

The factual circumstances of the present case require the application of a different jurisprudential instruction. While the Usury Law ceiling on interest rates was lifted by C.B. Circular No. 905, nothing in the said circular grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.xxii[5] In Medel v. Court of Appeals,xxii[6] this court had the occasion to rule on this question - whether or not the stipulated rate of interest at 5.5% per month on a loan amounting to P500,000.00 is usurious. While decreeing that the aforementioned interest was not usurious, this Court held that the same must be equitably reduced for being iniquitous, unconscionable and exorbitant, thus: We agree with petitioners that the stipulated rate of interest at 5.5% per month on the P500,000.00 loan is excessive, iniquitous, unconscionable and exorbitant. However, we can not consider the rate usurious because this Court has consistently held that Circular No. 905 of the Central Bank, adopted on December 22, 1982, has expressly

DECISION

KAPUNAN, J.:

The instant petition raises two issues: (1) whether or not private respondent is guilty of abuse of right; and (2) whether or not private respondent is entitled to interest and attorneys fees.

The facts are undisputed:

On August 31, 1973, plaintiff [Phelps Dodge, Philippines, Inc. private respondent herein] appointed defendant [petitioner Barons Marketing, Corporation] as one of its dealers of electrical wires and cables effective September 1, 1973 (Exh. A). As such dealer, defendant was given by plaintiff 60 days credit for its purchases of plaintiffs electrical products.

This credit term was to be reckoned from the date of delivery by plaintiff of its products to defendant (Exh. 1).

4. Costs of suit.xxii[3]

Under this provision, the prestation , i.e., the object of the obligation, must be performed in one act, not in parts.

During the period covering December 1986 to August 17, 1987, defendant purchased, on credit, from plaintiff various electrical wires and cables in the total amount of P4,102,438.30 (Exh. B to K). These wires and cables were in turn sold, pursuant to previous arrangements, by defendant to MERALCO, the former being the accredited supplier of the electrical requirements of the latter. Under the sales invoices issued by plaintiff to defendant for the subject purchases, it is stipulated that interest at 12% on the amount due for attorneys fees and coll ection (Exh. BB).xxii[1] On September 7, 1987, defendant paid plaintiff the amount of P300,000.00 out of its total purchases as above-stated (Exh. S), thereby leaving an unpaid account on the aforesaid deliveries of P3,802,478.20. On several occasions, plaintiff wrote defendant demanding payment of its outstanding obligations due plaintiff (Exhs. L, M, N, and P). In response, defendant wrote plaintiff on October 5, 1987 requesting the latter if it could pay its outstanding account in monthly installments of P500,000.00 plus 1% interest per month commencing on October 15, 1987 until full payment (Exh. O and O-4). Plaintiff, however, rejected defendants offer and accordingly reiterated its demand for the full payment of defendants account (Exh. P). xxii[2]

Both parties appealed to respondent court. Private respondent claimed that the trial court should have awarded it the sum of P3,802,478.20, the amount which appeared in the body of the complaint and proven during the trial rather than P3,108,000.00. The latter amount appears in petitioners prayer supposedly as a result of a typographical error.

Tolentino concedes that the right has its limitations: Partial Prestations. Since the creditor cannot be compelled to accept partial performance, unless otherwise stipulated, the creditor who refuses to accept partial prestations does not incur in delay or mora accipiendi, except when there is abuse of right or if good faith requires acceptance.xxii[6]

On the other hand, petitioner reiterated its claims for damages as a result of creditors abuse. It also alleged that private respondent failed to prove its cause of action against it.

On 25 June 1996, the Court of Appeals rendered a decision modifying the decision of the trial court, thus:

Indeed, the law, as set forth in Article 19 of the Civil Code, prescribes a primordial limitation on all rights by setting certain standards that must be observed in the exercise thereof .xxii[7] Thus:

WHEREFORE, from all the foregoing considerations, the Court finds Phelps Dodge Phils., Inc. to have preponderantly proven its case and hereby orders Barons Marketing, Inc. to pay Phelps Dodge the following: 1. P3,802,478.20 constituting the unpaid balance of defendants purchases from plaintiff and interest thereon at 12% per annum computed from the respective expiration of the 60 day credit term, vis-vis the various sales invoices and/or delivery receipts; and 2. 5% of the preceding obligation for and as attorneys fees.

ART. 19. Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith.

On 29 October 1987, private respondent Phelps Dodge Phils., Inc. filed a complaint before the Pasig Regional Trial Court against petitioner Barons Marketing Corporation for the recovery of P3,802,478.20 representing the value of the wires and cables the former had delivered to the latter, including interest. Phelps Dodge likewise prayed that it be awarded attorneys fees at the rate of 25% of the amount demanded, exemplary damages amounting to at least P100,000.00, the expenses of litigation and the costs of suit.

Petitioner now invokes Article 19 and Article 21xxii[8] of the Civil Code, claiming that private respondent abused its rights when it rejected petitioners offer of settlement and subsequently filed the action for collection considering:

No costs.xxii[4] Petitioner, in its answer, admitted purchasing the wires and cables from private respondent but disputed the amount claimed by the latter. Petitioner likewise interposed a counterclaim against private respondent, alleging that it suffered injury to its reputation due to Phelps Dodges acts. Such acts were purportedly calculated to humiliate petitioner and constituted an abuse of rights.

Petitioner Barons Marketing is now before this Court alleging that respondent court erred when it held (1) private respondent Phelps Dodge not guilty of creditors abuse, and (2) petitioner liable to private respondent for interest and attorneys fees.

xxx that the relationship between the parties started in 1973 spanning more than 13 years before the complaint was filed, that the petitioner had been a good and reliable dealer enjoying a good credit standing during the period before it became delinquent in 1987, that the relationship between the parties had been a fruitful one especially for the private respondent, that the petitioner exerted its outmost efforts to settle its obligations and avoid a suit, that the petitioner did not evade in the payment of its obligation to the private respondent, and that the petitioner was just asking a small concession that it be allowed to liquidate its obligation to eight (8) monthly installments of P500,000.00 plus 1% interest per month on the balance which proposal was supported by post-dated checks.xxii[9]

After hearing, the trial court on 17 June 1991 rendered its decision, the dispositive portion of which reads:

I Expounding on its theory, petitioner states: Petitioner does not deny private respondents rights to institute an action for collection and to claim full payment. Indeed, petitioners right to file an action for collection is beyond cavil.xxii[5] Likewise, private respondents right to reject petitioners offer to pay in installments is guaranteed by Article 1248 of the Civil Code which states:

WHEREFORE, from all the foregoing considerations, the Court finds Phelps Dodge Phils., Inc. to have preponderantly proven its case and hereby orders Barons Marketing, Inc. to pay Phelps Dodge the following: 1. P3,108,000.00 constituting the unpaid balance of defendants purchases from plaintiff and interest thereon at 12% per annum computed from the respective expiration of the 60 day credit term, vis-vis the various sales invoices and/or delivery receipts; 2. 25% of the preceding obligation for and as attorneys fees;

ART. 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled partially to receive the prestations in which the obligation consists. Neither may the debtor be required to make partial payments.

In the ordinary course of events, a suit for collection of a sum of money filed in court is done for the primary purpose of collecting a debt or obligation. If there is an offer by the debtor to pay its debt or obligation supported by post-dated checks and with provision for interests, the normal response of a creditor would be to accept the offer of compromise and not file the suit for collection. It is of common knowledge that proceedings in our courts would normally take years before an action is finally settled. It is always wiser and more prudent to accept an offer of payment in installment rather than file an action in court to compel the debtor to settle his obligation in full in a single payment.

However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the debtor may effect the payment of the former without waiting for the liquidation of the latter.

xxx.

3. P10,000.00 as exemplary damages; xxx. Why then did private respondent elect to file a suit for collection rather than accept petitioners offer of settlement, supported by post -

dated checks, by paying monthly installments of P500,000.00 plus 1% per month commencing on October 15, 1987 until full payment? The answer is obvious. The action of private respondent in filling a suit for collection was an abuse of right and exercised for the sole purpose of prejudicing and injuring the petitioner.xxii[10]

a mere exercise of rights, not an abuse thereof. Under these circumstances, we do not deem private respondent to have acted in a manner contrary to morals, good customs or public policy as to violate the provisions of Article 21 of the Civil Code. Consequently, petitioners prayer for moral and exemplary damages must thus be rejected. Petitioners claim for moral damages is anchored on Article 2219 (10) of the Civil Code which states:

Petitioner nevertheless urges this Court to reduce the attorneys fees for being grossly excessive, considering the nature of the case which is a mere action for collection of a sum of money. It may be pointed out however that the above penalty is supposed to answer not only for attorneys fees but for collection fees as well. Moreover: x x x the attorneys fees here provided is not, strictly speaking, the attorneys fees recoverable as between attorney and client spoken of and regulated by the Rules of Court. Rather, the attorneys fees here are in the nature of liquidated damages and the stipulation therefor is aptly called a penal clause. It has been said that so long as such stipulation does not contravene law, morals, or public order, it is strictly binding upon defendant. The attorneys fees so provided are awarded in favor of the litigant, not his counsel. It is the litigant, not counsel, who is the judgment creditor entitled to enforce the judgment by execution.xxii[19]

Petitioner prays that the Court order private respondent to pay petitioner moral and exemplary damages, attorneys fees, as well as the costs of suit. It likewise asks that it be allowed to liquidate its obligation to private respondent, without interests, in eight equal monthly installments. Petitioners theory is untenable.

ART. 2219. Moral damages may be recovered in the following and analogous cases:

xxx. Both parties agree that to constitute an abuse of rights under Article 19 the defendant must act with bad faith or intent to prejudice the plaintiff. They cite the following comments of Tolentino as their authority: Test of Abuse of Right. Modern jurisprudence does not permit acts which, although not unlawful, are anti-social. There is undoubtedly an abuse of right when it is exercised for the only purpose of prejudicing or injuring another. When the objective of the actor is illegitimate, the illicit act cannot be concealed under the guise of exercising a right. The principle does not permit acts which, without utility or legitimate purpose cause damage to another, because they violate the concept of social solidarity which considers law as rational and just. Hence, every abnormal exercise of a right, contrary to its socio-economic purpose, is an abuse that will give rise to liability. The exercise of a right must be in accordance with the purpose for which it was established, and must not be excessive or unduly harsh; there must be no intention to injure another. Ultimately, however, and in practice, courts, in the sound exercise of their discretion, will have to determine all the facts and circumstances when the exercise of a right is unjust, or when there has been an abuse of right.xxii[11]

(10) Acts and actions referred to in articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.

Nonetheless, courts are empowered to reduce such penalty if the same is iniquitous or unconscionable. Article 1229 of the Civil Code states thus:

xxx. Having ruled that private respondents acts did not transgress the provisions of Article 21, petitioner cannot be entitled to moral damages or, for that matter, exemplary damages. While the amount of exemplary damages need not be proved, petitioner must show that he is entitled to moral, temperate or compensatory damages before the court may consider the question of whether or not exemplary damages should be awarded.xxii[13] As we have observed above, petitioner has failed to discharge this burden. It may not be amiss to state that petitioners contract with private respondent has the force of law between them.xxii[14] Petitioner is thus bound to fulfill what has been expressly stipulated therein.xxii[15] In the absence of any abuse of right, private respondent cannot be allowed to perform its obligation under such contract in parts. Otherwise, private respondents right under Article 1248 will be negated, the sanctity of its contract with petitioner defiled. The principle of autonomy of contractsxxii[16] must be respected. ART. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable. (Underscoring supplied.)

The sentiments of the law are echoed in Article 2227 of the same Code:

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

The question, therefore, is whether private respondent intended to prejudice or injure petitioner when it rejected petitioners offer and filed the action for collection.

We hold in the negative. It is an elementary rule in this jurisdiction that good faith is presumed and that the burden of proving bad faith rests upon the party alleging the same.xxii[12] In the case at bar, petitioner has failed to prove bad faith on the part of private respondent. Petitioners allegation that private respondent was motivated by a desi re to terminate its agency relationship with petitioner so that private respondent itself may deal directly with Meralco is simply not supported by the evidence. At most, such supposition is merely speculative.

II

It is true that we have upheld the reasonableness of penalties in the form of attorneys fees consisting of twenty -five percent (25%) of the principal debt plus interest.xxii[20] In the case at bar, however, the interest alone runs to some four and a half million pesos (P4.5M), even exceeding the principal debt amounting to almost four million pesos (P4.0M). Twenty five percent (25%) of the principal and interest amounts to roughly two million pesos (P2M). In real terms, therefore, the attorneys fees and collection fees are manifestly exorbitant. Accordingly, we reduce the same to ten percent (10%) of the principal.

Under said contract, petitioner is liable to private respondent for the unpaid balance of its purchases from private respondent plus 12% interest. Private respondents sales invoices expressly provide that:

xxx. Interest at 12% per annum will be charged on all overdue account plus 25% on said amount for attorneys fees and collection. xxx. xxii[17] Moreover, we find that private respondent was driven by very legitimate reasons for rejecting petitioners offer and instituting the action for collection before the trial court. As pointed out by private respondent, the corporation had its own cash position to protect in order for it to pa y its own obligations. This is not such a lame and poor rationalization as petitioner purports it to be. For if private respondent were to be required to accept petitioners offer, there would be no reason for the latter to reject similar offers from its other debtors. Clearly, this would be inimical to the interests of any enterprise, especially a profit-oriented one like private respondent. It is plain to see that what we have here is

Private respondent, however, argues that petitioner failed to question the award of attorneys fees on appeal before respondent court and raised the issue only in its motion for reconsideration. Consequently, petitioner should be deemed to have waived its right to question such award. Private respondents attempts to dissuade us from reducing the penalty are futile. The Court is clothed with ample authority to review matters, even if they are not assigned as errors in their appeal, if it finds that their consideration is necessary in arriving at a just decision of the case.xxii[21]

It may also be noted that the above stipulation, insofar as it provides for the payment of 25% on said amount for attorneys fees and collection (sic), constitutes what is known as a penal clause.xxii[18] Petitioner is thus obliged to pay such penalty in addition to the 12% annual interest, there being an express stipulation to that effect.

WHEREFORE, the decision of the Court of Appeals is hereby MODIFIED in that the attorneys and collection fees are reduced to ten percent (10%) of the principal but is AFFIRMED in all other respects.

This action is filed by the plaintiff against the Manila Jockey Club and its partners for the recovery from them of the forfeited amount of P100,000 and for the payment of P50,000 as damages. The appealed judgment absolves the defendants.

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court, assailing the decision and resolutions of the Court of Appeals in CA-G.R. CV No. 34594, entitled "Security Bank and Trust Co. vs. Tolomeo Ligutan, et al."

SO ORDERED. Assuming these facts to be true, if the clause of the contract referring to the forfeiture of the P100,000 already paid, should the purchaser Campos fail to pay the subsequent installments, is valid, the case does not present any difficulty because the contract is clear on this point. Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained on 11 May 1981 a loan in the amount of P120,000.00 from respondent Security Bank and Trust Company. Petitioners executed a promissory note binding themselves, jointly and severally, to pay the sum borrowed with an interest of 15.189% per annum upon maturity and to pay a penalty of 5% every month on the outstanding principal and interest in case of default. In addition, petitioners agreed to pay 10% of the total amount due by way of attorneys fees if the matter were indorsed to a lawyer for collection or if a suit were instituted to enforce payment. The obligation matured on 8 September 1981; the bank, however, granted an extension but only up until 29 December 1981.

G.R. No. L-46533

October 28, 1939

THE MANILA RACING CLUB, INC., plaintiff-appellant, vs. THE MANILA JOCKEY CLUB, ET AL., defendants-appellees.

AVANCEA, C. J.:p

On September 18, 1936 Rafael J. Campos entered a contract (Exhibit C) with the Manila Jockey Club, an unregistered partnership, whereby he purchased from it the parcel of land described in transfer certificate of title No. 8724 with its improvements, the good-will, and certain personal property. The price agreed upon in this transaction is P1,200,000 payable as follows: P50,000 upon the signing of the contract; P50,000 on or before September 28, 1936; P300,000 on or before December 24, 1936; P200,000 on or before March 24, 1937. It was agreed that should the purchaser fail to pay the amounts paid for itself. One of the clauses of the deed also states that the purchaser may form a corporation called the Manila Racing Club, Inc., to whom he may transfer all his rights and obligations under the contract.

This clause regarding the forfeiture of what has been partially paid is valid. It is in the nature of a penal clause which may be legally established by the parties (article 1152 and 1255 of the Civil Code). In its double purpose of insuring compliance with the contract and of otherwise measuring beforehand the damages which may result from non-compliance, it is not contrary to law, morals or public order because it was voluntarily and knowingly agreed upon by the parties. Viewing concretely the true effects thereof in the present case, the amount forfeited constitutes only eight per cent of the stipulated price, which is not excessive if considered as profit which would have been obtained had the contract been complied with. There is, moreover, evidence that the defendants, because of this contract with Campos, had to reject other propositions to buy the same property. At any rate, the penal clause does away with the duty to prove the existence and measure of the damages caused by the breach.

Despite several demands from the bank, petitioners failed to settle the debt which, as of 20 May 1982, amounted to P114,416.10. On 30 September 1982, the bank sent a final demand letter to petitioners informing them that they had five days within which to make full payment. Since petitioners still defaulted on their obligation, the bank filed on 3 November 1982, with the Regional Trial Court of Makati, Branch 143, a complaint for recovery of the due amount.

The purchaser Campos made the down payment P50,000 upon signing the contract and on September 28, 1938 paid the second installment of P50,000.

On October 22, 1936, the Manila Racing Club, Inc., was organized and Campos transferred to it all his rights and obligations under his contract with the Manila Jockey Club.

As the third installment of P300,000 became due on December 24, 1936, and the purchaser could not pay it, the vendor, on January 11, 1937, declared the contract cancelled and kept the amount of P100,000 already paid, corresponding to the first installments. The purchaser was, however, granted an extension until January 22, 1937, to revive the contract by paying the P300,000, but having failed to do this, the partners of the vendor ratified on January 23, 1937, the cancellation of the contract agreed upon by its board of directors and the forfeiture of the P100,000 paid by the purchaser. Although the plaintiff contends that the Manila Jockey Club granted to purchaser Campos an indefinite time to pay the P300,000, corresponding to the third installment, there is no sufficient evidence thereof and, on the contrary, Campos admits, and defendants' evidence so indicate, that January 22, 1937, was the last extension granted to him to make this payment.lwphi1.nt

On the other hand, the allegation that the defendants were responsible for non-compliance with the contract is in no wise justified. It is said that the majority of the members of the Manila Jockey Club promised to subscribe to one-half of the shares of the plaintiff, and for failure to live up to this promise, the money to pay the third installment of P300,000 could not be raised. There is, however, no sufficient evidence of such promise which, according to Campos, was merely verbal. Furthermore, Campos himself attributes the failure to pay the third installment to the fact that the public, due to the state of the stock market, did not respond to the expectations of the incorporators of the plaintiff. But it seems that even this is not the cause of the breach, for on the date the third installment became due, the plaintiff had subscribed shares of its capital stock in the amount of P600,000, paid in part and the remainder payable on demand. The deduction from all this is that the breach of the contract cannot be attributed to the defendants and, much less, to the company which, it is also alleged, the defendants brought into being to defeat the organization of the plaintiff.

After petitioners had filed a joint answer to the complaint, the bank presented its evidence and, on 27 March 1985, rested its case. Petitioners, instead of introducing their own evidence, had the hearing of the case reset on two consecutive occasions. In view of the absence of petitioners and their counsel on 28 August 1985, the third hearing date, the bank moved, and the trial court resolved, to consider the case submitted for decision.

Two years later, or on 23 October 1987, petitioners filed a motion for reconsideration of the order of the trial court declaring them as having waived their right to present evidence and prayed that they be allowed to prove their case. The court a quo denied the motion in an order, dated 5 September 1988, and on 20 October 1989, it rendered its decision,xxii[1] the dispositive portion of which read: WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants, ordering the latter to pay, jointly and severally, to the plaintiff, as follows:

In view of the foregoing considerations, the appealed judgment is affirmed, with the costs to the appellant. So ordered.

"1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per annum, 2% service charge and 5% per month penalty charge, commencing on 20 May 1982 until fully paid;

[G.R. No. 138677. February 12, 2002] "2. To pay the further sum equivalent to 10% of the total amount of indebtedness for and as attorneys fees; and To pay the costs of the suit.xxii[2]

TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA, petitioners, vs. HON. COURT OF APPEALS & SECURITY BANK & TRUST COMPANY, respondents.

On March 23, 1937 the Manila Jockey Club, Inc., was organized and to it were transferred all the properties, rights and actions of the Manila Jockey Club.

"3. DECISION

VITUG, J.:

Petitioners interposed an appeal with the Court of Appeals, questioning the rejection by the trial court of their motion to present evidence and assailing the imposition of the 2% service charge, the 5% per month

penalty charge and 10% attorney's fees. In its decisionxxii[3] of 7 March 1996, the appellate court affirmed the judgment of the trial court except on the matter of the 2% service charge which was deleted pursuant to Central Bank Circular No. 783. Not fully satisfied with the decision of the appellate court, both parties filed their respective motions for reconsideration.xxii[4] Petitioners prayed for the reduction of the 5% stipulated penalty for being unconscionable. The bank, on the other hand, asked that the payment of interest and penalty be commenced not from the date of filing of complaint but from the time of default as so stipulated in the contract of the parties.

2. The sum equivalent to 10% of the total amount of the indebtedness as and for attorneys fees.xxii[5]

amount of P5,584.00 had been remitted out of the entire loan of P120,000.00.xxii[9]

On 28 October 1998, the Court of Appeals resolved the two motions thusly: We find merit in plaintiff-appellees claim that the principal sum of P114,416.00 with interest thereon must commence not on the date of filing of the complaint as we have previously held in our decision but on the date when the obligation became due. Default generally begins from the moment the creditor demands the performance of the obligation. However, demand is not necessary to render the obligor in default when the obligation or the law so provides. In the case at bar, defendants-appellants executed a promissory note where they undertook to pay the obligation on its maturity date 'without necessity of demand.' They also agreed to pay the interest in case of non-payment from the date of default. x x x

On 16 November 1998, petitioners filed an omnibus motion for reconsideration and to admit newly discovered evidence,xxii[6] alleging that while the case was pending before the trial court, petitioner Tolomeo Ligutan and his wife Bienvenida Ligutan executed a real estate mortgage on 18 January 1984 to secure the existing indebtedness of petitioners Ligutan and dela Llana with the bank. Petitioners contended that the execution of the real estate mortgage had the effect of novating the contract between them and the bank. Petitioners further averred that the mortgage was extrajudicially foreclosed on 26 August 1986, that they were not informed about it, and the bank did not credit them with the proceeds of the sale. The appellate court denied the omnibus motion for reconsideration and to admit newly discovered evidence, ratiocinating that such a second motion for reconsideration cannot be entertained under Section 2, Rule 52, of the 1997 Rules of Civil Procedure. Furthermore, the appellate court said, the newly-discovered evidence being invoked by petitioners had actually been known to them when the case was brought on appeal and when the first motion for reconsideration was filed.xxii[7]

A penalty clause, expressly recognized by law,xxii[10] is an accessory undertaking to assume greater liability on the part of an obligor in case of breach of an obligation. It functions to strengthen the coercive force of the obligationxxii[11] and to provide, in effect, for what could be the liquidated damages resulting from such a breach. The obligor would then be bound to pay the stipulated indemnity without the necessity of proof on the existence and on the measure of damages caused by the breach.xxii[12] Although a court may not at liberty ignore the freedom of the parties to agree on such terms and conditions as they see fit that contravene neither law nor morals, good customs, public order or public policy, a stipulated penalty, nevertheless, may be equitably reduced by the courts if it is iniquitous or unconscionable or if the principal obligation has been partly or irregularly complied with.xxii[13]

Aggrieved by the decision and resolutions of the Court of Appeals, petitioners elevated their case to this Court on 9 July 1999 via a petition for review on certiorari under Rule 45 of the Rules of Court, submitting thusly I.

xxx

xxx

While we maintain that defendants-appellants must be bound by the contract which they acknowledged and signed, we take cognizance of their plea for the application of the provisions of Article 1229 x x x. Considering that defendants-appellants partially complied with their obligation under the promissory note by the reduction of the original amount of P120,000.00 to P114,416.00 and in order that they will finally settle their obligation, it is our view and we so hold that in the interest of justice and public policy, a penalty of 3% per month or 36% per annum would suffice. x x x

II.

III.

IV. xxx xxx

WHEREFORE, the decision sought to be reconsidered is hereby MODIFIED. The defendants-appellants Tolomeo Ligutan and Leonidas dela Llana are hereby ordered to pay the plaintiff-appellee Security Bank and Trust Company the following: 1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per annum and 3% per month penalty charge commencing May 20, 1982 until fully paid;

The respondent Court of Appeals seriously erred in not holding that the 15.189% interest and the penalty of three (3%) percent per month or thirty-six (36%) percent per annum imposed by private respondent bank on petitioners loan obligation are still manifestly exorbitant, iniquitous and unconscionable. The respondent Court of Appeals gravely erred in not reducing to a reasonable level the ten (10%) percent award of attorneys fees which is highly and grossly excessive, unreasonable and unconscionable. The respondent Court of Appeals gravely erred in not admitting petitioners newly discovered evidence which could not have been timely produced during the trial of this case. The respondent Court of Appeals seriously erred in not holding that there was a novation of the cause of action of private respondents complaint in the instant case due to the subsequent execution of the real estate mortgage during the pendency of this case and the subsequent foreclosure of the mortgage.xxii[8]

The question of whether a penalty is reasonable or iniquitous can be partly subjective and partly objective. Its resolution would depend on such factors as, but not necessarily confined to, the type, extent and purpose of the penalty, the nature of the obligation, the mode of breach and its consequences, the supervening realities, the standing and relationship of the parties, and the like, the application of which, by and large, is addressed to the sound discretion of the court. In Rizal Commercial Banking Corp. vs. Court of Appeals,xxii[14] just an example, the Court has tempered the penalty charges after taking into account the debtors pitiful situation and its offer to settle the entire obligation with the creditor bank. The stipulated penalty might likewise be reduced when a partial or irregular performance is made by the debtor.xxii[15] The stipulated penalty might even be deleted such as when there has been substantial performance in good faith by the obligor,xxii[16] when the penalty clause itself suffers from fatal infirmity, or when exceptional circumstances so exist as to warrant it.xxii[17]

The Court of Appeals, exercising its good judgment in the instant case, has reduced the penalty interest from 5% a month to 3% a month which petitioner still disputes. Given the circumstances, not to mention the repeated acts of breach by petitioners of their contractual obligation, the Court sees no cogent ground to modify the ruling of the appellate court..

Respondent bank, which did not take an appeal, would, however, have it that the penalty sought to be deleted by petitioners was even insufficient to fully cover and compensate for the cost of money brought about by the radical devaluation and decrease in the purchasing power of the peso, particularly vis-a-vis the U.S. dollar, taking into account the time frame of its occurrence. The Bank would stress that only the

Anent the stipulated interest of 15.189% per annum, petitioners, for the first time, question its reasonableness and prays that the Court reduce the amount. This contention is a fresh issue that has not been raised and ventilated before the courts below. In any event, the interest stipulation, on its face, does not appear as being that excessive. The essence or rationale for the payment of interest, quite often referred to as cost of money, is not exactly the same as that of a surcharge or a penalty. A penalty stipulation is not necessarily preclusive of interest, if there is an agreement to that effect, the two being distinct concepts which may separately be demanded.xxii[18] What may justify a court in not allowing the creditor to impose full surcharges and penalties, despite an express stipulation therefor in a valid agreement, may not equally justify the non-payment or reduction of interest. Indeed, the interest prescribed in loan financing arrangements is a fundamental part of the banking business and the core of a bank's existence.xxii[19]

Petitioners next assail the award of 10% of the total amount of indebtedness by way of attorney's fees for being grossly excessive, exorbitant and unconscionable vis-a-vis the time spent and the extent of services rendered by counsel for the bank and the nature of the case.

Bearing in mind that the rate of attorn eys fees has been agreed to by the parties and intended to answer not only for litigation expenses but also for collection efforts as well, the Court, like the appellate court, deems the award of 10% attorneys fees to be reasonable.

Neither can the appellate court be held to have erred in rejecting petitioners' call for a new trial or to admit newly discovered evidence. As the appellate court so held in its resolution of 14 May 1999 Under Section 2, Rule 52 of the 1997 Rules of Civil Procedure, no second motion for reconsideration of a judgment or final resolution by the same party shall be entertained. Considering that the instant motion is already a second motion for reconsideration, the same must therefore be denied. Furthermore, it would appear from the records available to this court that the newly-discovered evidence being invoked by defendantsappellants have actually been existent when the case was brought on appeal to this court as well as when the first motion for reconsideration was filed. Hence, it is quite surprising why defendants-appellants raised the alleged newly-discovered evidence only at this stage when they could have done so in the earlier pleadings filed before this court. The propriety or acceptability of such a second motion for reconsideration is not contingent upon the averment of 'new' grounds to assail the judgment, i.e., grounds other than those theretofore presented and rejected. Otherwise, attainment of finality of a judgment might be stayed off indefinitely, dependin g on the partys ingenuousness or cleverness in conceiving and formulating 'additional flaws' or 'newly discovered errors' therein, or thinking up some injury or prejudice to the rights of the movant for reconsideration.xxii[20]

principal conditions, such as a change of the nature of the prestation; or (3) the subjects, such as the substitution of a debtorxxii[27] or the subrogation of the creditor. Extinctive novation does not necessarily imply that the new agreement should be complete by itself; certain terms and conditions may be carried, expressly or by implication, over to the new obligation. WHEREFORE, the petition is DENIED. SO ORDERED.

and in consideration of FORTY SEVEN THOUSAND (P47,000.00) PESOS, Philippine Currency, to me in hand paid by RIDO MONTECILLO, of legal age, Filipino, married, with residence and postal address at Mabolo, Cebu City, Philippines, the receipt hereof is hereby acknowledged, have sold, transferred, and conveyed, unto RIDO MONTECILLO, his heirs, executors, administrators, and assigns, forever, a parcel of land together with the improvements thereon, situated at Mabolo, Cebu City, Philippines, free from all liens and encumbrances, and more particularly described as follows:

[G.R. No. 138018. July 26, 2002]

A parcel of land (Lot 203-B-2-B of the subdivision plan Psd-07-01-00 2370, being a portion of Lot 203-B-2, described on plan (LRC) Psd76821, L.R.C. (GLRO) Record No. 5988), situated in the Barrio of Mabolo, City of Cebu. Bounded on the SE., along line 1-2 by Lot 206; on the SW., along line 2-3, by Lot 202, both of Banilad Estate; on the NW., along line 4-5, by Lot 203-B-2-A of the subdivision of Four Hundred Forty Eight (448) square meters, more or less. and of which I am the absolute owner in accordance with the provisions of the Land Registration Act, my title being evidenced by Transfer Certificate of Title No. 74196 of the Registry of Deeds of the City of Cebu, Philippines. That This Land Is Not Tenanted and Does Not Fall Under the Purview of P.D. 27.xxii[8] (Emphasis supplied)

RIDO MONTECILLO, petitioner, vs. IGNACIA REYNES SPOUSES REDEMPTOR and ELISA ABUCAY, respondents.

DECISION

CARPIO, J.: Reynes further alleged that Montecillo failed to pay the purchase price after the lapse of the one-month period, prompting Reynes to demand from Montecillo the return of the Deed of Sale. Since Montecillo refused to return the Deed of Sale,xxii[9] Reynes executed a document unilaterally revoking the sale and gave a copy of the document to Montecillo.

The Case

At any rate, the subsequent execution of the real estate mortgage as security for the existing loan would not have resulted in the extinguishment of the original contract of loan because of novation. Petitioners acknowledge that the real estate mortgage contract does not contain any express stipulation by the parties intending it to supersede the existing loan agreement between the petitioners and the bank.xxii[21] Respondent bank has correctly postulated that the mortgage is but an accessory contract to secure the loan in the promissory note.

On March 24, 1993, the Regional Trial Court of Cebu City, Branch 18, rendered a Decisionxxii[1] declaring the deed of sale of a parcel of land in favor of petitioner null and void ab initio. The Court of Appeals,xxii[2] in its July 16, 1998 Decisionxxii[3] as well as its February 11, 1999 Orderxxii[4] denying petitioners Motion for Reconsideration, affirmed the trial courts decision in toto. Before this Court now is a Petition for Review on Certiorarixxii[5] assailing the Court of Appeals decision and order.

Subsequently, on May 23, 1984 Reynes signed a Deed of Sale transferring to the Abucay Spouses the entire Mabolo Lot, at the same time confirming the previous sale in 1981 of a 185-square meter portion of the lot. This Deed of Sale states: I, IGNACIA T. REYNES, of legal age, Filipino, widow and resident of Mabolo, Cebu City, do hereby confirm the sale of a portion of Lot No. 74196 to an extent of 185 square meters to Spouses Redemptor Abucay and Elisa Abucay covered by Deed per Doc. No. 47, Page No. 9, Book No. V, Series of 1981 of notarial register of Benedicto Alo, of which spouses is now in occupation;

The Facts Respondents Ignacia Reynes (Reynes for brevity) and Spouses Abucay (Abucay Spouses for brevity) filed on June 20, 1984 a complaint for Declaration of Nullity and Quieting of Title against petitioner Rido Montecillo (Montecillo for brevity). Reynes asserted that she is the owner of a lot situated in Mabolo, Cebu City, covered by Transfer Certificate of Title No. 74196 and containing an area of 448 square meters (Mabolo Lot for brevity). In 1981, Reynes sold 185 square meters of the Mabolo Lot to the Abucay Spouses who built a residential house on the lot they bought.

Extinctive novation requires, first, a previous valid obligation; second, the agreement of all the parties to the new contract; third, the extinguishment of the obligation; and fourth, the validity of the new one.xxii[22] In order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligation be on every point incompatible with each other.xxii[23] An obligation to pay a sum of money is not extinctively novated by a new instrument which merely changes the terms of payment or adding compatible covenants or where the old contract is merely supplemented by the new one.xxii[24] When not expressed, incompatibility is required so as to ensure that the parties have indeed intended such novation despite their failure to express it in categorical terms. The incompatibility, to be sure, should take place in any of the essential elements of the obligation, i.e., (1) the juridical relation or tie, such as from a mere commodatum to lease of things, or from negotiorum gestio to agency, or from a mortgage to antichresis,xxii[25] or from a sale to one of loan;xxii[26] (2) the object or

Reynes alleged further that on March 1, 1984 she signed a Deed of Sale of the Mabolo Lot in favor of Montecillo (Montecillos Deed of Sale for brevity). Reynes, being illiterate,xxii[6] signed by affixing her thumb-markxxii[7] on the document. Montecillo promised to pay the agreed P47,000.00 purchase price within one month from the signing of the Deed of Sale. Montecillos Deed of Sale states as follows: That I, IGNACIA T. REYNES, of legal age, Filipino, widow, with residence and postal address at Mabolo, Cebu City, Philippines, for

That for and in consideration of the total sum of FIFTY THOUSAND (P50,000) PESOS, Philippine Currency, received in full and receipt whereof is herein acknowledged from SPOUSES REDEMPTOR ABUCAY and ELISA ABUCAY, do hereby in these presents, SELL, TRANSFER and CONVEY absolutely unto said Spouses Redemptor Abucay and Elisa Abucay, their heirs, assigns and successors-ininterest the whole parcel of land together with improvements thereon and more particularly described as follows:

TCT No. 74196

A parcel of land (Lot 203-B-2-B of the subdivision plan psd-07-01002370, being a portion of Lot 203-B-2, described on plan (LRC) Psd 76821, LRC (GLRO) Record No. 5988) situated in Mabolo, Cebu City,

along Arcilla Street, containing an area of total FOUR HUNDRED FORTY EIGHT (448) Square meters.

of which I am the absolute owner thereof free from all liens and encumbrances and warrant the same against claim of third persons and other deeds affecting said parcel of land other than that to the said spouses and inconsistent hereto is declared without any effect. In witness whereof, I hereunto signed this 23 rd day of May, 1984 in Cebu City, Philippines. xxii[10]

The trial court rendered a decision on March 24, 1993 declaring the Deed of Sale to Montecillo null and void. The trial court ordered the cancellation of Montecillos Transfer Certificate of Title No. 90805 and the issuance of a new certificate of title in favor of the Abucay Spouses. The trial court found that Montecillos Deed of Sale had no cause or consideration because Montecillo never paid Reynes the P47,000.00 purchase price, contrary to what is stated in the Deed of Sale that Reynes received the purchase price. The trial court ruled that Montecillos Deed of Sale produced no effect whatsoever for want of consideration. The dispositive portion of the trial courts decision reads as follows: WHEREFORE, in view of the foregoing consideration, judgment is hereby rendered declaring the deed of sale in favor of defendant null and void and of no force and effect thereby ordering the cancellation of Transfer Certificate of Title No. 90805 of the Register of Deeds of Cebu City and to declare plaintiff Spouses Redemptor and Elisa Abucay as rightful vendees and Transfer Certificate of Title to the property subject matter of the suit issued in their names. The defendants are further directed to pay moral damages in the sum of P20,000.00 and attorneys fees in the sum of P2,000.00 plus cost of the suit. xxx Not satisfied with the trial courts Decision, Montecillo appealed the same to the Court of Appeals.

First issue: manner of payment of the P47,000.00 purchase price. Montecillos Deed of Sale does not state that the P47,000.00 purchase price should be paid by Montecillo to Cebu Ice Storage. Montecillo failed to adduce any evidence before the trial court showing that Reynes had agreed, verbally or in writing, that the P47,000.00 purchase price should be paid to Cebu Ice Storage. Absent any evidence showing that Reynes had agreed to the payment of the purchase price to any other party, the payment to be effective must be made to Reynes, the vendor in the sale. Article 1240 of the Civil Code provides as follows: Payment shall be made to the person in whose favor the obligation has been constituted, or his successor in interest, or any person authorized to receive it. Thus, Montecillos payment to Cebu Ice Storage is not the payment that would extinguishxxii[16] Montecillos obligation to Reynes under the Deed of Sale.

Reynes and the Abucay Spouses alleged that on June 18, 1984 they received information that the Register of Deeds of Cebu City issued Certificate of Title No. 90805 in the name of Montecillo for the Mabolo Lot. Reynes and the Abucay Spouses argued that for lack of consideration there (was) no meeting of the mindsxxii[11] between Reynes and Montecillo. Thus, the trial court should declare null and void ab initio Montecillos Deed of Sale, and order the cance llation of Certificate of Title No. 90805 in the name of Montecillo.

In his Answer, Montecillo, a bank executive with a B.S. Commerce degree,xxii[12] claimed he was a buyer in good faith and had actually paid the P47,000.00 consideration stated in his Deed of Sale. Montecillo, however, admitted he still owed Reynes a balance of P10,000.00. He also alleged that he paid P50,000.00 for the release of the chattel mortgage which he argued constituted a lien on the Mabolo Lot. He further alleged that he paid for the real property tax as well as the capital gains tax on the sale of the Mabolo Lot.

It militates against common sense for Reynes to sell her Mabolo Lot for P47,000.00 if this entire amount would only go to Cebu Ice Storage, leaving not a single centavo to her for giving up ownership of a valuable property. This incredible allegation of Montecillo becomes even more absurd when one considers that Reynes did not benefit, directly or indirectly, from the payment of the P47,000.00 to Cebu Ice Storage. The trial court found that Reynes had nothing to do with Jayags mortgage debt with Cebu Ice Storage. The trial court made the following findings of fact: x x x. Plaintiff Ignacia Reynes was not a party to nor privy of the obligation in favor of the Cebu Ice and Cold Storage Corporation, the obligation being exclusively of Bienvenido Jayag and wife who mortgaged their residential house constructed on the land subject matter of the complaint. The payment by the defendant to release the residential house from the mortgage is a matter between him and Jayag and cannot by implication or deception be made to appear as an encumbrance upon the land.xxii[17] Thus, Montecillos payment to Jayags creditor could not possibly redound to the benefitxxii[18] of Reynes. We find no reason to disturb the factual findings of the trial court. In petitions for review on certiorari as a mode of appeal under Rule 45, as in the instant case, a petitioner can raise only questions of law.xxii[19] This Court is not the proper venue to consider a factual issue as it is not a trier of facts.

Ruling of the Court of Appeals

In their Reply, Reynes and the Abucay Spouses contended that Montecillo did not have authority to discharge the chattel mortgage, especially after Reynes revoked Montecillos Deed of Sale and gave the mortgagee a copy of the document of revocation. Reynes and the Abucay Spouses claimed that Montecillo secured the release of the chattel mortgage through machination. They further asserted that Montecillo took advantage of the real property taxes paid by the Abucay Spouses and surreptitiously caused the transfer of the title to the Mabolo Lot in his name.

The appellate court affirmed the Decision of the trial court in toto and dismissed the appealxxii[13] on the ground that Montecillos Deed of Sale is void for lack of consideration. The appellate court also denied Montecillos Motion for Reconsiderationxxii[14] on the ground that it raised no new arguments.

Still dissatisfied, Montecillo filed the present petition for review on certiorari.

The Issues

During pre-trial, Montecillo claimed that the consideration for the sale of the Mabolo Lot was the amount he paid to Cebu Ice and Cold Storage Corporation (Cebu Ice Storage for brevity) for the mortgage debt of Bienvenido Jayag (Jayag for brevity). Montecillo argued that the release of the mortgage was necessary since the mortgage constituted a lien on the Mabolo Lot. Reynes, however, stated that she had nothing to do with Jayags mortgage debt except that the house mortgaged by Jayag stood on a portion of the Mabolo Lot. Reynes further stated that the payment by Montecillo to release the mortgage on Jayags house is a matter between Montecillo and Jayag. The mortgage on the house, being a chattel mortgage, could not be interpreted in any way as an encumbrance on the Mabolo Lot. Reynes further claimed that the mortgage debt had long prescribed since the P47,000.00 mortgage debt was due for payment on January 30, 1967.

Montecillo raises the following issues: 1. Was there an agreement between Reynes and Montecillo that the stated consideration of P47,000.00 in the Deed of Sale be paid to Cebu Ice and Cold Storage to secure the release of the Transfer Certificate of Title? 2. If there was none, is the Deed of Sale void from the beginning or simply rescissible?xxii[15]

Second issue: whether the Deed of Sale is void ab initio or only rescissible. Under Article 1318 of the Civil Code, [T]here is no contract unless the following requisites concur: (1) Consent of the contracting parties; (2) Object certain which is the subject matter of the contract; (3) Cause of the obligation which is established. Article 1352 of the Civil Code also provides that [C]ontracts without cause x x x produce no effect whatsoever.

The Ruling of the Court

The petition is devoid of merit.

Montecillo argues that his Deed of Sale has all the requisites of a valid contract. Montecillo points out that he agreed to purchase, and Reynes agreed to sell, the Mabolo Lot at the price of P47,000.00. Thus, the three requisites for a valid contract concur: consent, object certain and consideration. Montecillo asserts there is no lack of consideration that would prevent the existence of a valid contract. Rather, there is only non-payment of the consideration within the period agreed upon for payment.

mortgage was constructed on the parcel of land in question. Plaintiff Ignacia Reynes was not a party to nor privy of the obligation in favor of the Cebu Ice and Cold Storage Corporation, the obligation being exclusively of Bienvenido Jayag and wife who mortgaged their residential house constructed on the land subject matter of the complaint. The payment by the defendant to release the residential house from the mortgage is a matter between him and Jayag and cannot by implication or deception be made to appear as an encumbrance upon the land. xxii[23]

Applying this well-entrenched doctrine to the instant case, we rule that Montecillos Deed of Sale is null and void ab initio for lack of consideration. Montecillo asserts that the only issue in controversy is the mode and/or manner of payment and/or whether or not payment has been made. xxii[30] Montecillo implies that the mode or manner of payment is separate from the consideration and does not affect the validity of the contract. In the recent case of San Miguel Properties Philippines, Inc. v. Huang,xxii[31] we ruled that In Navarro v. Sugar Producers Cooperative Marketing Association, Inc. (1 SCRA 1181 [1961]), we laid down the rule that the manner of payment of the purchase price is an essential element before a valid and binding contract of sale can exist. Although the Civil Code does not expressly state that the minds of the parties must also meet on the terms or manner of payment of the price, the same is needed, otherwise there is no sale. As held in Toyota Shaw, Inc. v. Court of Appeals (244 SCRA 320 [1995]), agreement on the manner of payment goes into the price such that a disagreement on the manner of payment is tantamount to a failure to agree on the price. (Emphasis supplied)

Montecillo argues there is only a breach of his obligation to pay the full purchase price on time. Such breach merely gives Reynes a right to ask for specific performance, or for annulment of the obligation to sell the Mabolo Lot. Montecillo maintains that in reciprocal obligations, the injured party can choose between fulfillment and rescission,xxii[20] or more properly cancellation, of the obligation under Article 1191xxii[21] of the Civil Code. This Article also provides that the court shall decree the rescission claimed, unless there be just cause authorizing the fixing of the period. Montecillo claims that because Reynes failed to make a demand for payment, and instead unilaterally revoked Montecillos Deed of Sale, the court has a just cause to fix the period for payment of the balance of the purchase price.

Factual findings of the trial court are binding on us, especially if the Court of Appeals affirms such findings.xxii[24] We do not disturb such findings unless the evidence on record clearly does not support such findings or such findings are based on a patent misunderstanding of facts,xxii[25] which is not the case here. Thus, we find no reason to deviate from the findings of both the trial and appellate courts that no valid consideration supported Montecillos Deed of Sale.

These arguments are not persuasive. Montecillos Deed of Sale states that Montecillo paid, and Reynes received, the P47,000.00 purchase price on March 1, 1984, the date of signing of the Deed of Sale. This is clear from the following provision of the Deed of Sale: That I, IGNACIA T. REYNES, x x x for and in consideration of FORTY SEVEN THOUSAND (P47,000.00) PESOS, Philippine Currency, to me in hand paid by RIDO MONTECILLO xxx, receipt of which is hereby acknowledged, have sold, transferred, and conveyed, unto RIDO MONTECILLO, x x x a parcel of land x x x. On its face, Montecillos Deed of Absolute Salexxii[22] appears supported by a valuable consideration. However, based on the evidence presented by both Reynes and Montecillo, the trial court found that Montecillo never paid to Reynes, and Reynes never received from Montecillo, the P47,000.00 purchase price. There was indisputably a total absence of consideration contrary to what is stated in Montecillos Deed of Sale. As pointed out by the trial court From the allegations in the pleadings of both parties and the oral and documentary evidence adduced during the trial, the court is convinced that the Deed of Sale (Exhibits 1 and 1-A) executed by plaintiff Ignacia Reynes acknowledged before Notary Public Ponciano Alvinio is devoid of any consideration. Plaintiff Ignacia Reynes through the representation of Baudillo Baladjay had executed a Deed of Sale in favor of defendant on the promise that the consideration should be paid within one (1) month from the execution of the Deed of Sale. However, after the lapse of said period, defendant failed to pay even a single centavo of the consideration. The answer of the defendant did not allege clearly why no consideration was paid by him except for the allegation that he had a balance of only P10,000.00. It turned out during the pre-trial that what the defendant considered as the consideration was the amount which he paid for the obligation of Bienvenido Jayag with the Cebu Ice and Cold Storage Corporation over which plaintiff Ignacia Reynes did not have a part except that the subject of the

This is not merely a case of failure to pay the purchase price, as Montecillo claims, which can only amount to a breach of obligation with rescission as the proper remedy. What we have here is a purported contract that lacks a cause - one of the three essential requisites of a valid contract. Failure to pay the consideration is different from lack of consideration. The former results in a right to demand the fulfillment or cancellation of the obligation under an existing valid contractxxii[26] while the latter prevents the existence of a valid contract

Where the deed of sale states that the purchase price has been paid but in fact has never been paid, the deed of sale is null and void ab initio for lack of consideration. This has been the well-settled rule as early as Ocejo Perez & Co. v. Flores,xxii[27] a 1920 case. As subsequently explained in Mapalo v. Mapaloxxii[28] In our view, therefore, the ruling of thi s Court in Ocejo Perez & Co. vs. Flores, 40 Phil. 921, is squarely applicable herein. In that case we ruled that a contract of purchase and sale is null and void and produces no effect whatsoever where the same is without cause or consideration in that the purchase price which appears thereon as paid has in fact never been paid by the purchaser to the vendor.

One of the three essential requisites of a valid contract is consent of the parties on the object and cause of the contract. In a contract of sale, the parties must agree not only on the price, but also on the manner of payment of the price. An agreement on the price but a disagreement on the manner of its payment will not result in consent, thus preventing the existence of a valid contract for lack of consent. This lack of consent is separate and distinct from lack of consideration where the contract states that the price has been paid when in fact it has never been paid.

The Court reiterated this rule in Vda. De Catindig v. Heirs of Catalina Roque,xxii[29] to wit The Appellate Courts finding that the price was not pa id or that the statement in the supposed contracts of sale (Exh. 6 to 26) as to the payment of the price was simulated fortifies the view that the alleged sales were void. If the price is simulated, the sale is void . . . (Art. 1471, Civil Code)

Reynes expected Montecillo to pay him directly the P47,000.00 purchase price within one month after the signing of the Deed of Sale. On the other hand, Montecillo thought that his agreement with Reynes required him to pay the P47,000.00 purchase price to Cebu Ice Storage to settle Jayags mortgage debt. Montecillo also acknowledged a balance of P10,000.00 in favor of Reynes although this amount is not stated in Montecillos Deed of Sale. Thus, there was no consent, or meeting of the minds, between Reynes and Montecillo on the manner of payment. This prevented the existence of a valid contract because of lack of consent. In summary, Montecillos Deed of Sale is null and void ab initio not only for lack of consideration, but also for lack of consent. The cancellation of TCT No. 90805 in the name of Montecillo is in order as there was no valid contract transferring ownership of the Mabolo Lot from Reynes to Montecillo.

A contract of sale is void and produces no effect whatsoever where the price, which appears thereon as paid, has in fact never been paid by the purchaser to the vendor (Ocejo, Perez & Co. vs. Flores and Bas, 40 Phil. 921; Mapalo vs. Mapalo, L-21489, May 19, 1966, 64 O.G. 331, 17 SCRA 114, 122). Such a sale is non-existent (Borromeo vs. Borromeo, 98 Phil. 432) or cannot be considered consummated (Cruzado vs. Bustos and Escaler, 34 Phil. 17; Garanciang vs. Garanciang, L-22351, May 21, 1969, 28 SCRA 229).

WHEREFORE, the petition is DENIED and the assailed Decision dated July 16, 1998 of the Court of Appeals in CA-G.R. CV No. 41349 is AFFIRMED. Costs against petitioner.

G.R. No. 108630 April 2, 1996

PHILIPPINE NATIONAL BANK, vs. COURT OF APPEALS and LORETO TAN, respondents.

petitioner,

Private respondent Tan subsequently demanded payment in the amount of P32,480.00 from petitioner, but the same was refused on the ground that petitioner had already paid and delivered the amount to Sonia Gonzaga on the strength of a Special Power of Attorney (SPA) allegedly executed in her favor by Tan.

On June 7, 1989, the trial court rendered judgment ordering petitioner and Tagamolila to pay private respondent jointly and severally the amount of P32,480.00 with legal interest, damages and attorney's fees.

Both petitioner and Tagamolila appealed the case to the Court of Appeals. ROMERO, J.:p Petitioner Philippine National Bank (PNB) questions the decision 1 of the Court of Appeals partially affirming the judgment of the Regional Trial Court, Branch 44, Bacolod City. The dispositive portion of the trial court's decision states: On June 8, 1978, Tan executed an affidavit before petitioner's lawyer, Alejandro S. Some, stating that: In a resolution dated April 8, 1991, the appellate court dismissed Tagamolila's appeal for failure to pay the docket fee within the reglementary period.

1) he had never executed any Special Power of Attorney in favor of Sonia S. Gonzaga;

2) he had never authorized Sonia Gonzaga to receive the sum of P32,480.00 from petitioner; WHEREFORE, premises considered, the Court hereby renders judgment in favor of the plaintiff and against the defendants as follows: 1) Ordering defendants to pay plaintiff jointly and severally the sum of P32,480.00, with legal rate of interest to be computed from May 2, 1979, date of filing of this complaint until fully paid; 2) Ordering defendants to pay plaintiff jointly and severally the sum of P5,000.00 as exemplary damages; 3) Ordering defendants to pay plaintiff jointly and severally the sum of P5,000.00 as attorney's fees; and 4) To pay the costs of this suit. SO ORDERED. 2

On August 31, 1992, the Court of Appeals affirmed the decision of the trial court against petitioner, with the modification that the award of P5,000.00 for exemplary damages and P5,000.00 for attorney's fees by the trial court was deleted.

3) he signed a motion for the court to issue an Order to release the said sum of money to him and gave the same to Mr. Nilo Gonzaga (husband of Sonia) to be filed in court. However, after the Order was subsequently issued by the court, a certain Engineer Decena of the Highway Engineer's Office issued the authority to release the funds not to him but to Mr. Gonzaga.

Hence, this petition.

When he failed to recover the amount from PNB, private respondent filed a motion with the court to require PNB to pay the same to him.

Petitioner PNB states that the issue in this case is whether or not the SPA ever existed. It argues that the existence of the SPA need not be proved by it under the "best evidence rule" because it already proved the existence of the SPA from the testimonies of its witnesses and by the certification issued by the Far East Bank and Trust Company that it allowed Sonia Gonzaga to encash Tan's check on the basis of the SPA.

Petitioner filed an opposition contending that Sonia Gonzaga presented to it a copy of the May 22, 1978 order and a special power of attorney by virtue of which petitioner delivered the check to her.

We find the petition unmeritorious.

The facts are the following:

The matter was set for hearing on July 21, 1978 and petitioner was directed by the court to produce the said special power of attorney thereat. However, petitioner failed to do so.

Private respondent Loreto Tan (Tan) is the owner of a parcel of land abutting the national highway in Mandalagan, Bacolod City. Expropriation proceedings were instituted by the government against private respondent Tan and other property owners before the then Court of First Instance of Negros Occidental, Branch IV, docketed as Civil Case No. 12924.

There is no question that no payment had ever been made to private respondent as the check was never delivered to him. When the court ordered petitioner to pay private respondent the amount of P32,480.00, it had the obligation to deliver the same to him. Under Art. 1233 of the Civil Code, a debt shall not be understood to have been paid unless the thing or service in which the obligation consists has been completely delivered or rendered, as the case may be. The burden of proof of such payment lies with the debtor. 3 In the instant case, neither the SPA nor the check issued by petitioner was ever presented in court.

The court decided that there was need for the matter to be ventilated in a separate civil action and thus private respondent filed a complaint with the Regional Trial Court in Bacolod City (Branch 44) against petitioner and Juan Tagamolila, PNB's Assistant Branch Manager, to recover the said amount.

Tan filed a motion dated May 10, 1978 requesting issuance of an order for the release to him of the expropriation price of P32,480.00.

In its defense, petitioner contended that private respondent had duly authorized Sonia Gonzaga to act as his agent.

On May 22, 1978, petitioner PNB (Bacolod Branch) was required by the trial court to release to Tan the amount of P32,480.00 deposited with it by the government.

On May 24, 1978, petitioner, through its Assistant Branch Manager Juan Tagamolila, issued a manager's check for P32,480.00 and delivered the same to one Sonia Gonzaga without Tan's knowledge, consent or authority. Sonia Gonzaga deposited it in her account with Far East Bank and Trust Co. (FEBTC) and later on withdrew the said amount.

On September 28, 1979, petitioner filed a third-party complaint against the spouses Nilo and Sonia Gonzaga praying that they be ordered to pay private respondent the amount of P32,480.00. However, for failure of petitioner to have the summons served on the Gonzagas despite opportunities given to it, the third-party complaint was dismissed.

The testimonies of petitioner's own witnesses regarding the check were conflicting. Tagamolila testified that the check was issued to the order of "Sonia Gonzaga as attorney-in-fact of Loreto Tan," 4 while Elvira Tibon, assistant cashier of PNB (Bacolod Branch), stated that the check was issued to the order of "Loreto Tan." 5

Tagamolila, in his answer, stated that Sonia Gonzaga presented a Special Power of Attorney to him but borrowed it later with the promise to return it, claiming that she needed it to encash the check.

Furthermore, contrary to petitioner's contention that all that is needed to be proved is the existence of the SPA, it is also necessary for evidence to be presented regarding the nature and extent of the alleged powers and authority granted to Sonia Gonzaga; more specifically, to determine whether the document indeed authorized her to receive payment intended for private respondent. However, no such evidence was ever presented.

Section 2, Rule 130 of the Rules of Court states that:

Sec. 2. Original writing must produced; exceptions. There can be no evidence of a writing the contents of which is the subject of inquiry, other than the original writing itself, except in the following cases:

In Rasonable v. NLRC, et al., 7 we held that when a party is forced to litigate to protect his rights, he is entitled to an award of attorney's fees.

As for the award of exemplary damages, we agree with the appellate court that the same should be deleted.

(a) When the original has been lost, destroyed, or cannot be produced in court;

(b) When the original is in the possession of the party against whom the evidence is offered, and the latter fails to produce it after reasonable notice;

Under Art. 2232 of the Civil Code, exemplary damages may be awarded if a party acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. However, they cannot be recovered as a matter of right; the court has yet to decide whether or not they should be adjudicated. 8

Jurisprudence has set down the requirements for exemplary damages to be awarded: (c) When the original is a record or other document in the custody of a public officer; 1. they may be imposed by way of example in addition to compensatory damages, and only after the claimant's right to them has been established;

(d) When the original has been recorded in an existing record a certified copy of which is made evidence by law;

(e) When the original consists of numerous accounts or other documents which cannot be examined in court without great loss of time and the fact sought to be established from them is only the general result of the whole.

2. they cannot be recovered as a matter of right, their determination depending upon the amount of compensatory damages that may be awarded to the claimant;

3. the act must be accompanied by bad faith or done in a wanton, fraudulent, oppressive or malevolent manner. 9

1. CIVIL LAW; CONTRACT OF LOAN; SUBSTANTIAL PERFORMANCE BY OBLIGOR, RECOGNIZED; CASE AT BAR. From the conduct of the respondent bank it is clear that it neither enforced its right under the acceleration clause nor its right to foreclose under the mortgage contract, For more than four years, the respondent bank made petitioner believe that it was applying her payment on the loan and interest just like before when the respondent bank accepted such payment and issued a receipt therefor. It is bound by estoppel to apply the same as payment for petitioner's obligation as it did when it received previous payments on three occasions. Its act of applying said payments to accounts payable is clearly prejudicial to petitioner. We cannot countenance this act of the bank. We hold that the payment amounting to P8,650.00 for the balance of P3,558.20 as of August 26, 1978 plus the P1,000.00 it was asked to pay on April 24, 1984 would at the very least constitute substantial performance. Article 1234 of the Civil Code, provides: "Article 1234. If the obligation has been substantially performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee." Petitioner in this case has the right to move for the cancellation of the mortgage and the release of the mortgaged property, upon payment of the balance of the loan. Thus, aside from the fact that the respondent bank was estopped from enforcing its right to foreclose by virtue of its acceptance of the delayed payments for a period of more than six years, the application of such payment to the interest and the principal during the first three payments constitutes a virtual waiver of the acceleration clause provided in the contract. We cannot sustain the legality of the foreclosure under the peculiar facts of this case, because there is substantial performance of the obligation on the part of petitioner. Under Article 1235 of the Civil Code, when the creditor accepts performance, knowing its incompleteness and irregularity without protest or objection, the obligation is deemed complied with. 2. ID.; MORAL DAMAGES, WHEN AVAILABLE; CASE AT BAR. This Court cannot ignore the fact that the respondent bank succeeded in taking advantage of the ignorance of petitioner in transactions such as the one involved in the case at bar by lodging the bulk of petitioner's payment to account payable based on the flimsy reason that she had been in default, and then considering the entire debt pursuant to an acceleration clause as earning interest and penalty charges at an exorbitant rate of 19% each from the date of first default up to the date of foreclosure, thus bringing the obligation to an astronomical amount of P29,554.81. This indicates bad faith on the part of the respondent bank. For the mental anguish, sleepless nights and serious anxiety this has caused petitioner, the respondent bank is liable for moral damages which this Court fixes at P50,000.00.

Section 4, Rule 130 of the Rules of Court allows the presentation of secondary evidence when the original is lost or destroyed, thus:

Sec. 4. Secondary evidence when original is lost or destroyed. When the original writing has been lost or destroyed, or cannot be produced in court, upon proof of its execution and loss or destruction, or unavailability, its contents may be proved by a copy, or by a recital of its contents in some authentic document, or by the recollection of witnesses.

In the case at bench, while there is a clear breach of petitioner's obligation to pay private respondents, there is no evidence that it acted in a fraudulent, wanton, reckless or oppressive manner. Furthermore, there is no award of compensatory damages which is a prerequisite before exemplary damages may be awarded. Therefore, the award by the trial court of P5,000.00 as exemplary damages is baseless.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED with the modification that the award by the Regional Trial Court of P5,000.00 as attorney's fees is REINSTATED.

SO ORDERED. 3. ID.; EXEMPLARY DAMAGES; ATTORNEY'S FEES; IMPOSED UPON THE BANK TO DETER REPEATING SIMILAR ACT; CASE AT BAR. To serve as a deterrent for the respondent bank from repeating similar acts and to set an example and correction for the public good, this Court likewise awards exemplary damages. In view of its nature, it should be imposed in such amount as to sufficiently and effectively deter similar acts in the future by the respondent bank and other banks, which amount this court fixes at P20,000.00 on top of the forfeiture of whatever balance on the loan which the respondent may actually have in its favor. Attorney's fees by way of damages is likewise awarded for the same reason that exemplary damages is awarded and this is fixed at P10,000.00.

Considering that the contents of the SPA are also in issue here, the best evidence rule applies. Hence, only the original document (which has not been presented at all) is the best evidence of the fact as to whether or not private respondent indeed authorized Sonia Gonzaga to receive the check from petitioner. In the absence of such document, petitioner's arguments regarding due payment must fail.

G.R. No. 90169. April 7, 1993.

PILAR PAGSIBIGAN, petitioner, vs. COURT OF APPEALS and PLANTERS DEVELOPMENT BANK, respondents.

Regarding the award of attorney's fees, we hold that private respondent Tan is entitled to the same. Art. 2208 of the Civil Code allows attorney's fees to be awarded if the claimant is compelled to litigate with third persons or to incur expenses to protect his interest by reason of an unjustified act or omission of the party from whom it is sought. 6

Juanito Cruz for petitioner.

Raymundo S. Senga for private respondent.

DECISION

SYLLABUS

CAMPOS, JR., J p:

2. Whether or not petitioner is entitled to recover damages as well as attorney's fees as a result of the foreclosure and auction sale." 3

after she had paid a total of P2,200.00 over a period of nine months from the time the loan was obtained.

This is a petition for review on certiorari of the decision ** of the Court of Appeals in CA-G.R. CV No. 18385 entitled "Pilar Pagsibigan, Plaintiffappellee vs. Planters Development Bank, Defendant-appellant," the decretal portion of which reads:

"WHEREFORE, the decision appealed from is hereby reversed and another one entered ordering plaintiff-appellee Norma Manalili, to pay the deficiency of P21,391.81. No pronouncement is made as to costs.

It is petitioner's contention that the bank has no right to foreclose the mortgage, there having been full payment of the principal obligation. As per their computation 4 the payment which they have made totalling P11,900.00 more than sufficiently covered their total obligation with respect to their loan, there having been, in fact, an overpayment of either P4,642.38 or P6,106.75 based on the interest rate used in the computation. Thus, the principal obligation having been extinguished by payment, the accessory obligation of mortgage is necessarily extinguished, and the foreclosure thereof is improper and not valid.

From this conduct of the respondent bank it is clear that it neither enforced its right under the acceleration clause nor its right to foreclose under the mortgage contract, For more than four years, the respondent bank made petitioner believe that it was applying her payment on the loan and interest just like before when the respondent bank accepted such payment and issued a receipt therefor. It is bound by estoppel to apply the same as payment for petitioner's obligation as it did when it received previous payments on three occasions. Its act of applying said payments to accounts payable is clearly prejudicial to petitioner. We cannot countenance this act of the bank.

"SO ORDERED." 1 The respondent bank on the other hand countered that the computation relied upon by petitioner is not in consonance with the Promissory Note 5 which she signed because the Promissory Note contains an acceleration clause. Respondent bank also averred that upon petitioner's failure to pay her first installment, the entire obligation became due and demandable and its right to foreclose the mortgage has accrued. Thus, when it foreclosed the mortgage in 1984, with the outstanding obligation at P29,554.81, it was acting well within its rights. We hold that the payment amounting to P8,650.00 for the balance of P3,558.20 as of August 26, 1978 8 plus the P1,000.00 it was asked to pay on April 24, 1984 would at the very least constitute substantial performance.

The undisputed facts are summarized by the respondent court as follows:

"Stripped of non-essentials, it appears that on August 4, 1974, plaintiffappellee, [petitioner, herein] through her daughter as attorney-in-fact, obtained an agricultural loan from the Planters Development Bank (formerly Bulacan Development Bank), in the sum of P4,500.00 secured by a mortgage over a parcel of land covered by Transfer Certificate of Title No. T-129603 (Exhibit "A"; "A-1"), which loan was later fully paid (Exhibits "B"; "B-1" to "B-3". Another loan for the same amount was obtained from the bank on November 3, 1977 [year 1977 should read 1976 instead] secured by the same parcel of land. The Promissory Note for the second loan (Exhibit "1") stipulated that for a first payment to be made on May 3, 1977 and payments every six months thereafter at P1,018.14 with 19% interest for unpaid amortizations. The said Promissory Note, containing an acceleration clause (Exhibit "1-A"), was not denied by plaintiff-appellee [petitioner] (TSN, December 10, 1986, pp. 9-10).

Article 1234 of the Civil Code, provides:

We note at this point that the respondent bank does not dispute the fact that petitioner had made several payments in an amount totalling to P11,900.00. It likewise admits that only part of the amount tendered was applied to the loan and the bulk of such payment was "temporarily lodged to accounts payable since the account was already past due" 6 [Emphasis Ours]. Petitioner assails the respondent bank for not applying her payment to the loan. Because of said act, the loan remained outstanding when it should have been extinguished and should have also extinguished the accessory contract of real estate mortgage.

"Article 1234. If the obligation has been substantially performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee."

Petitioner in this case has the right to move for the cancellation of the mortgage and the release of the mortgaged property, upon payment of the balance of the loan. Definitely, it would not be in the amount demanded by the respondent bank, which the trial court held to be P29,554.81.

Initial payment was made on July 6, 1978 [year 1978 should read 1977 instead] followed by several payments in the total amount of P11,900.00 (Exhibits "D"; "D-1" to "D-7"). However, only four of these payments were applied to the loan (TSN, March 16, 1987, pp. 14-16), while the rest were "temporarily lodged to accounts payable since the account was already past due" (TSN, June 1, 1987, pp. 15-16). On the basis of a Petition for Extrajudicial Foreclosure of Mortgage (Exhibit "6") and the statement of Account (Exhibit "12"), the property was foreclosed extrajudicially on May 7, 1984 for failure to pay an outstanding balance of P29,554.81 (Exhibit "13"). This resulted in the property being sold to the bank for P8,163.00, and the bank thereafter claimed a deficiency of P21,391.81.

Petitioner wants Us to rule not only on the regularity or legality of the foreclosure but also on its propriety in the light of the attending circumstances.

This Court, in Angeles vs. Calasanz 9 held that:

In the action for annulment of sale with damages and writ of preliminary injunction instituted by plaintiff-appellee, the lower court sustained appellee's [petitioner] theory of overpayment (Decision, p. 3), as against the propriety of the foreclosure." 2 [Bracketed words Ours].

There is no question that the respondent bank has the right to foreclose the mortgage upon the first default of petitioner on May 3, 1977, but the records show that it did not. When it received payment of petitioner on July 6, 1977, which had been 2 months and 3 days delayed, it applied P154.80 to the principal, P210.00 to interest, and only P25.20 to penalty. From this act of receiving delayed payment, it is clear that the respondent bank had waived its right under the acceleration clause so that instead of claiming penalty charges on the entire amount of P4,500.00, it only computed the penalty based on the defaulted amortization payment which is P1,018.14. If it computed the penalty charge at 19% of the entire amount of P4,500.00 which would have been due and demandable by virtue of the acceleration clause, the penalty charges would be much more than P25.20.

"The breach of the contract adverted to by the defendants-appellants is so slight and casual when we consider that apart from the initial downpayment of P392.00 the plaintiffs-appellees had already paid the monthly installments for a period of almost nine (9) years. In other words, in only a short time, the entire obligation would have been paid. Furthermore, although the principal obligation was only P3,920.00 excluding the 7 percent interests, the plaintiffs-appellees had already paid an aggregate amount of P4,533.38. To sanction the rescission made by the defendants-appellants will work injustice to the plaintiffsappellees. It would unjustly enrich the defendants-appellants.

Article 1234 of the Civil Code which provides that:

xxx xxx xxx This is similarly observed in payments which the respondent bank received on June 6, 1978 and August 26, 1978. We also noticed that in Exhibit "D-3", the receipt which the respondent bank issued to petitioner for the August 26, 1978 partial payment, it waived its right under Article 1253 7 of the Civil Code on Application of Payments when it applied the payment to the principal instead of the interest. Thus, on that date the outstanding obligation of petitioner was already reduced to P3,558.21

Petitioner submits the following Issues for resolution:

also militates against the unilateral act of the defendants-appellants in cancelling the contract."

"1. Whether or not the foreclosure and auction sale of the property is valid and justified under the circumstances; and

Thus, aside from the fact that the respondent bank was estopped from enforcing its right to foreclose by virtue of its acceptance of the delayed payments for a period of more than six years, the application of such

payment to the interest and the principal during the first three payments constitutes a virtual waiver of the acceleration clause provided in the contract. We cannot sustain the legality of the foreclosure under the peculiar facts of this case, because there is substantial performance of the obligation on the part of petitioner. Under Article 1235 of the Civil Code, when the creditor accepts performance, knowing its incompleteness and irregularity without protest or objection, the obligation is deemed complied with.

Facundo T. Bautista for petitioners.

Jesus T. Garcia for private respondent.

while the difference the indebtedness came from Celerina Labuguin (p. 73, Rollo). Moreover, petitioners asserted that not a single centavo of the P27,000.00 representing the remaining balance was paid to them. Because of the apprehension that the heirs of Juan Galicia, Sr. are disavowing the contract inked by their predecessor, private respondent filed the complaint for specific performance.

MELO, J.: This Court cannot ignore the fact that the respondent bank succeeded in taking advantage of the ignorance of petitioner in transactions such as the one involved in the case at bar by lodging the bulk of petitioner's payment to account payable based on the flimsy reason that she had been in default, and then considering the entire debt pursuant to an acceleration clause as earning interest and penalty charges at an exorbitant rate of 19% each from the date of first default up to the date of foreclosure, thus bringing the obligation to an astronomical amount of P29,554.81. This indicates bad faith on the part of the respondent bank. For the mental anguish, sleepless nights and serious anxiety this has caused petitioner, the respondent bank is liable for moral damages which this Court fixes at P50,000.00.

The deed of conveyance executed on May 28, 1975 by Juan Galicia, Sr., prior to his demise in 1979, and Celerina Labuguin, in favor of Albrigido Leyva involving the undivided one-half portion of a piece of land situated at Poblacion, Guimba, Nueva Ecija for the sum of P50,000.00 under the following terms:

In addressing the issue of whether the conditions of the instrument were performed by herein private respondent as vendee, the Honorable Godofredo Rilloraza, Presiding Judge of Branch 31 of the Regional Trial Court, Third Judicial Region stationed at Guimba, Nueva Ecija, decided to uphold private respondent's theory on the basis of constructive fulfillment under Article 1186 and estoppel through acceptance of piecemeal payments in line with Article 1235 of the Civil Code.

1. The sum of PESOS: THREE THOUSAND (P3,000.00) is HEREBY acknowledged to have been paid upon the execution of this agreement;

To serve as a deterrent for the respondent bank from repeating similar acts and to set an example and correction for the public good, this Court likewise awards exemplary damages. In view of its nature, it should be imposed in such amount as to sufficiently and effectively deter similar acts in the future 10 by the respondent bank and other banks, which amount this court fixes at P20,000.00 on top of the forfeiture of whatever balance on the loan which the respondent may actually have in its favor.

2. The sum of PESOS: TEN THOUSAND (P10,000.00) shall be paid within ten (10) days from and after the execution of this agreement;

This Court likewise orders the annulment of the foreclosure sale and the reconveyance of the property subject of the real estate mortgage pursuant to the annotation of lis pendens in the certificate of title of the subject property.

3. The sum of PESOS: TEN THOUSAND (P10,000.00) represents the VENDORS' indebtedness with the Philippine Veterans Bank which is hereby assumed by the VENDEE; and

Anent the P10,000.00 specified as second installment, the lower court counted against the vendors the candid statement of Josefina Tayag who sat on the witness stand and made the admission that the check issued as payment thereof was nonetheless paid on a staggered basis when the check was dishonored (TSN, September 1, 1983, pp. 3-4; p. 3, Decision; p. 66, Rollo). Regarding the third condition, the trial court noted that plaintiff below paid more than P6,000.00 to the Philippine Veterans Bank but Celerina Labuguin, the sister and co-vendor of Juan Galicia, Sr. paid P3,778.77 which circumstance was construed to be a ploy under Article 1186 of the Civil Code that "prematurely prevented plaintiff from paying the installment fully" and "for the purpose of withdrawing the title to the lot". The acceptance by petitioners of the various payments even beyond the periods agreed upon, was perceived by the lower court as tantamount to faithful performance of the obligation pursuant to Article 1235 of the Civil Code. Furthermore, the trial court noted that private respondent consigned P18,520.00, an amount sufficient to offset the remaining balance, leaving the sum of P1,315.00 to be credited to private respondent.

On September 12, 1984, judgment was rendered: 4. The balance of PESOS: TWENTY SEVEN THOUSAND (P27,000.00.) shall be paid within one (1) year from and after the execution of this instrument. (p. 53, Rollo) 1. Ordering the defendants heirs of Juan Galicia, to execute the Deed of Sale of their undivided ONE HALF (1/2) portion of Lot No. 1130, Guimba Cadastre, covered by TCT No. NT-120563, in favor of plaintiff Albrigido Leyva, with an equal frontage facing the national road upon finality of judgment; that, in their default, the Clerk of Court II, is hereby ordered to execute the deed of conveyance in line with the provisions of Section 10, Rule 39 of the Rules of Court;

Attorney's fees by way of damages is likewise awarded for the same reason that exemplary damages is awarded and this is fixed at P10,000.00.

WHEREFORE, the appealed decision is hereby SET ASIDE and a new one entered ordering the reconveyance of the foreclosed property and the payment of moral damages, exemplary damages and attorney's fees as above specified, with costs against private respondent Planters Development Bank.

is the subject matter of the present litigation between the heirs of Juan Galicia, Sr. who assert breach of the conditions as against private respondent's claim anchored on full payment and compliance with the stipulations thereof.

SO ORDERED.

G.R. No. 96053 March 3, 1993

The court of origin which tried the suit for specific performance filed by private respondent on account of the herein petitioners' reluctance to abide by the covenant, ruled in favor of the vendee (p. 64, Rollo) while respondent court practically agreed with the trial court except as to the amount to be paid to petitioners and the refund to private respondent are concerned (p. 46, Rollo).

2. Ordering the defendants, heirs of Juan Galicia, jointly and severally to pay attorney's fees of P6,000.00 and the further sum of P3,000.00 for actual and compensatory damages;

JOSEFINA TAYAG, RICARDO GALICIA, TERESITA GALICIA, EVELYN GALICIA, JUAN GALICIA, JR. and RODRIGO GALICIA, petitioners, vs. COURT OF APPEALS and ALBRIGIDO LEYVA, respondents.

There is no dispute that the sum of P3,000.00 listed as first installment was received by Juan Galicia, Sr. According to petitioners, of the P10,000.00 to be paid within ten days from execution of the instrument, only P9,707.00 was tendered to, and received by, them on numerous occasions from May 29, 1975, up to November 3, 1979. Concerning private respondent's assumption of the vendors' obligation to the Philippine Veterans Bank, the vendee paid only the sum of P6,926.41

3. Ordering Celerina Labuguin and the other defendants herein to surrender to the Court the owner's duplicate of TCT No. NT120563, province of Nueva Ecija, for the use

of plaintiff in registering the portion, subject matter of the instant suit;

4. Ordering the withdrawal of the amount of P18,520.00 now consigned with the Court, and the amount of P17,204.75 be delivered to the heirs of Juan Galicia as payment of the balance of the sale of the lot in question, the defendants herein after deducting the amount of attorney's fees and damages awarded to the plaintiff hereof and the delivery to the plaintiff of the further sum of P1,315.25 excess or over payment and, defendants to pay the cost of the suit. (p. 69, Rollo)

Petitioners are of the impression that the decision appealed from, which agreed with the conclusions of the trial court, is vulnerable to attack via the recourse before Us on the principal supposition that the full consideration of the agreement to sell was not paid by private respondent and, therefore, the contract must be rescinded.

and following the appeal interposed with respondent court, Justice Dayrit with whom Justices Purisima and Aldecoa, Jr. concurred, modified the fourth paragraph of the decretal portion to read:

The suggestion of petitioners that the covenant must be cancelled in the light of private respondent's so-called breach seems to overlook petitioners' demeanor who, instead of immediately filing the case precisely to rescind the instrument because of non-compliance, allowed private respondent to effect numerous payments posterior to the grace periods provided in the contract. This apathy of petitioners who even permitted private respondent to take the initiative in filing the suit for specific performance against them, is akin to waiver or abandonment of the right to rescind normally conferred by Article 1191 of the Civil Code. As aptly observed by Justice Gutierrez, Jr. in Angeles vs. Calasanz (135 SCRA 323 [1985]; 4 Paras, Civil Code of the Philippines Annotated, Twelfth Ed. [1989], p. 203:

considering that the heirs of Juan Galicia, Sr. accommodated private respondent by accepting the latter's delayed payments not only beyond the grace periods but also during the pendency of the case for specific performance (p. 27, Memorandum for petitioners; p. 166, Rollo). Indeed, the right to rescind is not absolute and will not be granted where there has been substantial compliance by partial payments (4 Caguioa, Comments and Cases on Civil Law, First Ed. [1968] p. 132). By and large, petitioners' actuation is susceptible of but one construction that they are now estopped from reneging from their commitment on account of acceptance of benefits arising from overdue accounts of private respondent.

4. Ordering the withdrawal of the amount of P18,500.00 now consigned with the Court, and that the amount of P16,870.52 be delivered to the heirs of Juan Galicia, Sr. as payment to the unpaid balance of the sale, including the reimbursement of the amount paid to Philippine Veterans Bank, minus the amount of attorney's fees and damages awarded in favor of plaintiff. The excess of P1,649.48 will be returned to plaintiff. The costs against defendants. (p. 51, Rollo)

. . . We agree with the plaintiffs-appellees that when the defendants-appellants, instead of availing of their alleged right to rescind, have accepted and received delayed payments of installments, though the plaintiffs-appellees have been in arrears beyond the grace period mentioned in paragraph 6 of the contract, the defendantsappellants have waived, and are now estopped from exercising their alleged right of rescission . . .

Now, as to the issue of whether payments had in fact been made, there is no doubt that the second installment was actually paid to the heirs of Juan Galicia, Sr. due to Josefina Tayag's admission in judicio that the sum of P10,000.00 was fully liquidated. It is thus erroneous for petitioners to suppose that "the evidence in the records do not support this conclusion" (p. 18, Memorandum for Petitioners; p. 157, Rollo). A contrario, when the court of origin, as well as the appellate court, emphasized the frank representation along this line of Josefina Tayag before the trial court (TSN, September l, 1983, pp. 3-4; p. 5, Decision in CA-G.R. CV No. 13339, p. 50, Rollo; p. 3, Decision in Civil Case No. 681-G, p. 66, Rollo), petitioners chose to remain completely mute even at this stage despite the opportunity accorded to them, for clarification. Consequently, the prejudicial aftermath of Josefina Tayag's spontaneous reaction may no longer be obliterated on the basis of estoppel (Article 1431, Civil Code; Section 4, Rule 129; Section 2(a), Rule 131, Revised Rules on Evidence).

As to how the foregoing directive was arrived at, the appellate court declared:

In Development Bank of the Philippines vs. Sarandi (5 CAR (25) 811; 817-818; cited in 4 Padilla, Civil Code Annotated, Seventh Ed. [1987], pp. 212-213) a similar opinion was expressed to the effect that:

With respect to the fourth condition stipulated in the contract, the period indicated therein is deemed modified by the parties when the heirs of Juan Galicia, Sr. accepted payments without objection up to November 3, 1979. On the basis of receipts presented by appellee commencing from August 8, 1975 up to November 3, 1979, a total amount of P13,908.25 has been paid, thereby leaving a balance of P13,091.75. Said unpaid balance plus the amount reimbursable to appellant in the amount of P3,778.77 will leave an unpaid total of P16,870.52. Since appellee consigned in court the sum of P18,500.00, he is entitled to get the excess of P1,629.48. Thus, when the heirs of Juan Galicia, Sr. (obligees) accepted the performance, knowing its incompleteness or irregularity and without expressing any protest or objection, the obligation is deemed fully complied with (Article 1235, Civil Code). (p. 50, Rollo)

In a perfected contract of sale of land under an agreed schedule of payments, while the parties may mutually oblige each other to compel the specific performance of the monthly amortization plan, and upon failure of the buyer to make the payment, the seller has the right to ask for a rescission of the contract under Art. 1191 of the Civil Code, this shall be deemed waived by acceptance of posterior payments.

Insofar as the third item of the contract is concerned, it may be recalled that respondent court applied Article 1186 of the Civil Code on constructive fulfillment which petitioners claim should not have been appreciated because they are the obligees while the proviso in point speaks of the obligor. But, petitioners must concede that in a reciprocal obligation like a contract of purchase, (Ang vs. Court of Appeals, 170 SCRA 286 [1989]; 4 Paras, supra, at p. 201), both parties are mutually obligors and also obligees (4 Padilla, supra, at p. 197), and any of the contracting parties may, upon non-fulfillment by the other privy of his part of the prestation, rescind the contract or seek fulfillment ( Article 1191, Civil Code). In short, it is puerile for petitioners to say that they are the only obligees under the contract since they are also bound as obligors to respect the stipulation in permitting private respondent to assume the loan with the Philippine Veterans Bank which petitioners impeded when they paid the balance of said loan. As vendors, they are supposed to execute the final deed of sale upon full payment of the balance as determined hereafter.

Both the trial and appellate courts were, therefore, correct in sustaining the claim of private respondent anchored on estoppel or waiver by acceptance of delayed payments under Article 1235 of the Civil Code in that:

When the obligee accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, the obligation is deemed fully complied with.

Lastly, petitioners argue that there was no valid tender of payment nor consignation of the sum of P18,520.00 which they acknowledge to have been deposited in court on January 22, 1981 five years after the amount of P27,000.00 had to be paid (p. 23, Memorandum for Petitioners; p. 162, Rollo). Again this suggestion ignores the fact that consignation alone produced the effect of payment in the case at bar because it was established below that two or more heirs of Juan Galicia, Sr. claimed the same right to collect (Article 1256, (4), Civil Code; pp. 4-5, Decision in Civil Case No. 681-G; pp. 67-68, Rollo). Moreover, petitioners did not bother to refute the evidence on hand that, aside from the P18,520.00 (not P18,500.00 as computed by respondent court) which was consigned, private respondent also paid the sum of P13,908.25 (Exhibits "F" to "CC"; p. 50, Rollo). These two figures representing private respondent's payment of the fourth condition amount to P32,428.25, less the P3,778.77 paid by petitioners to the bank, will lead

us to the sum of P28,649.48 or a refund of P1,649.48 to private respondent as overpayment of the P27,000.00 balance.

WHEREFORE, the petition is hereby DISMISSED and the decision appealed from is hereby AFFIRMED with the slight modification of Paragraph 4 of the dispositive thereof which is thus amended to read:

4. ordering the withdrawal of the sum of P18,520.00 consigned with the Regional Trial Court, and that the amount of P16,870.52 be delivered by private respondent with legal rate of interest until fully paid to the heirs of Juan Galicia, Sr. as balance of the sale including reimbursement of the sum paid to the Philippine Veterans Bank, minus the attorney's fees and damages awarded in favor of private respondent. The excess of P1,649.48 shall be returned to private respondent also with legal interest until fully paid by petitioners. With costs against petitioners.

Private respondents Eastern Plywood Corporation (Eastern) and Benigno D. Lim (Lim), an officer and stockholder of Eastern, held at least one joint bank account ("and/or" account) with the Commercial Bank and Trust Co. (CBTC), the predecessor-in-interest of petitioner Bank of the Philippine Islands (BPI). Sometime in March 1975, a joint checking account ("and" account) with Lim in the amount of P120,000.00 was opened by Mariano Velasco with funds withdrawn from the account of Eastern and/or Lim. Various amounts were later deposited or withdrawn from the joint account of Velasco and Lim. The money therein was placed in the money market.

And paragraph 05 thereof reads:

Velasco died on 7 April 1977. At the time of his death, the outstanding balance of the account stood at P662,522.87. On 5 May 1977, by virtue of an Indemnity Undertaking executed by Lim for himself and as 2 President and General Manager of Eastern, one-half of this amount was provisionally released and transferred to one of the bank accounts of Eastern with CBTC. 3

The acceptance of this holdout shall not impair the right of Comtrust to declare the loan payable on demand at any time, nor shall the existence hereof and the nonresolution of the dispute between the contending parties in respect of entitlement to the Account Balance, preclude Comtrust from instituting an action for recovery against Eastply and/or Mr. Lim in the event the Loan is declared due and payable and Eastply and/or Mr. Lim shall default in payment of all obligations and liabilities thereunder.

SO ORDERED.

Thereafter, on 18 August 1978, Eastern obtained a loan of P73,000.00 from CBTC as "Additional Working Capital," evidenced by the "Disclosure Statement on Loan/Credit Transaction" (Disclosure Statement) signed by CBTC through its branch manager, Ceferino Jimenez, and Eastern, through Lim, as its President and General Manager. 4 The loan was payable on demand with interest at 14% per annum.

In the meantime, a case for the settlement of Velasco's estate was filed with Branch 152 of the RTC of Pasig, entitled "In re Intestate Estate of Mariano Velasco," and docketed as Sp. Proc. No. 8959. In the said case, the whole balance of P331,261.44 in the aforesaid joint account of Velasco and Lim was being claimed as part of Velasco's estate. On 9 September 1986, the intestate court granted the urgent motion of the heirs of Velasco to withdraw the deposit under the joint account of Lim and Velasco and authorized the heirs to divide among themselves the amount withdrawn. 8 Sometime in 1980, CBTC was merged with BPI. 9 On 2 December 1987, BPI filed with the RTC of Manila a complaint against Lim and Eastern demanding payment of the promissory note for P73,000.00. The complaint was docketed as Civil Case No. 87- 42967 and was raffled to Branch 19 of the said court, then presided over by Judge Wenceslao M. Polo. Defendants Lim and Eastern, in turn, filed a counterclaim against BPI for the return of the balance in the disputed account subject of the Holdout Agreement and the interests thereon after deducting the amount due on the promissory note.

G.R. No. 104612 May 10, 1994 For this loan, Eastern issued on the same day a negotiable promissory note for P73,000.00 payable on demand to the order of CBTC with interest at 14% per annum. 5 The note was signed by Lim both in his own capacity and as President and General Manager of Eastern. No reference to any security for the loan appears on the note. In the Disclosure Statement, the box with the printed word "UNSECURED" was marked with "X" meaning unsecured, while the line with the words "this loan is wholly/partly secured by" is followed by the typewritten words "Hold-Out on a 1:1 on C/A No. 2310-001-42," which refers to the joint account of Velasco and Lim with a balance of P331,261.44.

BANK OF THE PHILIPPINE ISLANDS (successor-in- interest of COMMERCIAL AND TRUST CO.), petitioner, vs. HON. COURT OF APPEALS, EASTERN PLYWOOD CORP. and BENIGNO D. LIM, respondents.

Leonen, Ramirez & Associates for petitioner.

Constante A. Ancheta for private respondents. In addition, Eastern and Lim, and CBTC signed another document entitled "Holdout Agreement," also dated 18 August 1978, 6 wherein it was stated that "as security for the Loan [Lim and Eastern] have offered [CBTC] and the latter accepts a holdout on said [Current Account No. 2310-011-42 in the joint names of Lim and Velasco] to the full extent of their alleged interests therein as these may appear as a result of final and definitive judicial action or a settlement between and among the contesting parties thereto." 7 Paragraph 02 of the Agreement provides as follows:

DAVIDE, JR., J.: The petitioner urges us to review and set aside the amended Decision 1 of 6 March 1992 of respondent Court of Appeals in CA- G.R. CV No. 25739 which modified the Decision of 15 November 1990 of Branch 19 of the Regional Trial Court (RTC) of Manila in Civil Case No. 87-42967, entitled Bank of the Philippine Islands (successor-in-interest of Commercial Bank and Trust Company) versus Eastern Plywood Corporation and Benigno D. Lim. The Court of Appeals had affirmed the dismissal of the complaint but had granted the defendants' counterclaim for P331,261.44 which represents the outstanding balance of their account with the plaintiff.

After due proceedings, the trial court rendered its decision on 15 November 1990 dismissing the complaint because BPI failed to make out its case. Furthermore, it ruled that "the promissory note in question is subject to the 'hold-out' agreement," 10 and that based on this agreement, "it was the duty of plaintiff Bank [BPI] to debit the account of the defendants under the promissory note to set off the loan even though the same has no fixed maturity." 11 As to the defendants' counterclaim, the trial court, recognizing the fact that the entire amount in question had been withdrawn by Velasco's heirs pursuant to the order of the intestate court in Sp. Proc. No. 8959, denied it because the "said claim cannot be awarded without disturbing the resolution" of the intestate court. 12

As culled from the records and the pleadings of the parties, the following facts were duly established:

Eastply [Eastern] and Mr. Lim hereby confer upon Comtrust [CBTC], when and if their alleged interests in the Account Balance shall have been established with finality, ample and sufficient power as shall be necessary to retain said Account Balance and enable Comtrust to apply the Account Balance for the purpose of liquidating the Loan in respect of principal and/or accrued interest.

Both parties appealed from the said decision to the Court of Appeals. Their appeal was docketed as CA-G.R. CV No. 25739.

On 23 January 1991, the Court of Appeals rendered a decision affirming the decision of the trial court. It, however, failed to rule on the defendants' (private respondents') partial appeal from the trial court's denial of their counterclaim. Upon their motion for reconsideration, the Court of Appeals promulgated on 6 March 1992 an Amended Decision 13 wherein it ruled that the settlement of Velasco's estate had nothing to do with the claim of the defendants for the return of the balance of their account with CBTC/BPI as they were not privy to that case, and that the

defendants, as depositors of CBTC/BPI, are the latter's creditors; hence, CBTC/BPI should have protected the defendants' interest in Sp. Proc. No. 8959 when the said account was claimed by Velasco's estate. It then ordered BPI "to pay defendants the amount of P331,261.44 representing the outstanding balance in the bank account of defendants." 14

On 22 April 1992, BPI filed the instant petition alleging therein that the Holdout Agreement in question was subject to a suspensive condition stated therein, viz., that the "P331,261.44 shall become a security for respondent Lim's promissory note only if respondents' Lim and Eastern Plywood Corporation's interests to that amount are established as a result of a final and definitive judicial action or a settlement between and among the contesting parties thereto." 15 Hence, BPI asserts, the Court of Appeals erred in affirming the trial court's decision dismissing the complaint on the ground that it was the duty of CBTC to debit the account of the defendants to set off the amount of P73,000.00 covered by the promissory note.

We disagree, however, with the Court of Appeals in its interpretation of the Holdout Agreement. It is clear from paragraph 02 thereof that CBTC, or BPI as its successor-in-interest, had every right to demand that Eastern and Lim settle their liability under the promissory note. It cannot be compelled to retain and apply the deposit in Lim and Velasco's joint account to the payment of the note. What the agreement conferred on CBTC was a power, not a duty. Generally, a bank is under no duty or obligation to make the application. 18 To apply the deposit to the payment of a loan is a privilege, a right of set-off which the bank has the option to exercise. 19

determination by a probate court of whether that property is included in the estate of a deceased is merely provisional in character and cannot be the subject of execution. 24

Private respondents Eastern and Lim dispute the "suspensive condition" argument of the petitioner. They interpret the findings of both the trial and appellate courts that the money deposited in the joint account of Velasco and Lim came from Eastern and Lim's own account as a finding that the money deposited in the joint account of Lim and Velasco "rightfully belong[ed] to Eastern Plywood Corporation and/or Benigno Lim." And because the latter are the rightful owners of the money in question, the suspensive condition does not find any application in this case and the bank had the duty to set off this deposit with the loan. They add that the ruling of the lower court that they own the disputed amount is the final and definitive judicial action required by the Holdout Agreement; hence, the petitioner can only hold the amount of P73,000.00 representing the security required for the note and must return the rest. 16

Also, paragraph 05 of the Holdout Agreement itself states that notwithstanding the agreement, CBTC was not in any way precluded from demanding payment from Eastern and from instituting an action to recover payment of the loan. What it provides is an alternative, not an exclusive, method of enforcing its claim on the note. When it demanded payment of the debt directly from Eastern and Lim, BPI had opted not to exercise its right to apply part of the deposit subject of the Holdout Agreement to the payment of the promissory note for P73,000.00. Its suit for the enforcement of the note was then in order and it was error for the trial court to dismiss it on the theory that it was set off by an equivalent portion in C/A No. 2310-001-42 which BPI should have debited. The Court of Appeals also erred in affirming such dismissal.

Because the ownership of the deposit remained undetermined, BPI, as the debtor with respect thereto, had no right to pay to persons other than those in whose favor the obligation was constituted or whose right or authority to receive payment is indisputable. The payment of the money deposited with BPI that will extinguish its obligation to the creditor-depositor is payment to the person of the creditor or to one authorized by him or by the law to receive it. 25 Payment made by the debtor to the wrong party does not extinguish the obligation as to the creditor who is without fault or negligence, even if the debtor acted in utmost good faith and by mistake as to the person of the creditor, or 26 through error induced by fraud of a third person. The payment then by BPI to the heirs of Velasco, even if done in good faith, did not extinguish its obligation to the true depositor, Eastern.

In the light of the above findings, the dismissal of the petitioner's complaint is reversed and set aside. The award on the counterclaim is sustained subject to a modification of the interest.

The "suspensive condition" theory of the petitioner is, therefore, untenable.

WHEREFORE, the instant petition is partly GRANTED. The challenged amended decision in CA-G.R. CV No. 25735 is hereby MODIFIED. As modified:

The petitioner filed a Reply to the aforesaid Comment. The private respondents filed a Rejoinder thereto.

We gave due course to the petition and required the parties to submit simultaneously their memoranda.

The Court of Appeals correctly decided on the counterclaim. The counterclaim of Eastern and Lim for the return of the P331,261.44 20 was equivalent to a demand that they be allowed to withdraw their deposit with the bank. Article 1980 of the Civil Code expressly provides that "[f]ixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan." In Serrano vs. Central Bank of the Philippines, 21 we held that bank deposits are in the nature of irregular deposits; they are really loans because they earn interest. The relationship then between a depositor and a bank is one of creditor and debtor. The deposit under the questioned account was an ordinary bank deposit; hence, it was payable on demand of the depositor. 22

(1) Private respondents are ordered to pay the petitioner the promissory note for P73,000.00 with interest at:

(a) 14% per annum on the principal, computed from 18 August 1978 until payment;

The key issues in this case are whether BPI can demand payment of the loan of P73,000.00 despite the existence of the Holdout Agreement and whether BPI is still liable to the private respondents on the account subject of the Holdout Agreement after its withdrawal by the heirs of Velasco.

The collection suit of BPI is based on the promissory note for P73,000.00. On its face, the note is an unconditional promise to pay the said amount, and as stated by the respondent Court of Appeals, "[t]here is no question that the promissory note is a negotiable instrument." 17 It further correctly ruled that BPI was not a holder in due course because the note was not indorsed to BPI by the payee, CBTC. Only a negotiation by indorsement could have operated as a valid transfer to make BPI a holder in due course. It acquired the note from CBTC by the contract of merger or sale between the two banks. BPI, therefore, took the note subject to the Holdout Agreement.

The account was proved and established to belong to Eastern even if it was deposited in the names of Lim and Velasco. As the real creditor of the bank, Eastern has the right to withdraw it or to demand payment thereof. BPI cannot be relieved of its duty to pay Eastern simply because it already allowed the heirs of Velasco to withdraw the whole balance of the account. The petitioner should not have allowed such withdrawal because it had admitted in the Holdout Agreement the questioned ownership of the money deposited in the account. As early as 12 May 1979, CBTC was notified by the Corporate Secretary of Eastern that the deposit in the joint account of Velasco and Lim was being claimed by them and that one-half was being claimed by the heirs of Velasco. 23

(b) 12% per annum on the interest which had accrued up to the date of the filing of the complaint, computed from that date until payment pursuant to Article 2212 of the Civil Code.

Moreover, the order of the court in Sp. Proc. No. 8959 merely authorized the heirs of Velasco to withdraw the account. BPI was not specifically ordered to release the account to the said heirs; hence, it was under no judicial compulsion to do so. The authorization given to the heirs of Velasco cannot be construed as a final determination or adjudication that the account belonged to Velasco. We have ruled that when the ownership of a particular property is disputed, the

(2) The award of P331,264.44 in favor of the private respondents shall bear interest at the rate of 12% per annum computed from the filing of the counterclaim.

No pronouncement as to costs.

SO ORDERED.

G.R. No. 72703 November 13, 1992

the unpaid and overdue account at the rate of 18% per annum. It was further alleged that the collection of said interest and service charges is sanctioned by law, and is in accordance with the terms and conditions of the sale of petroleum products to respondent, which was made with the conformity of said private respondent who had accepted the validity of said interest and service charges.

In a Resolution dated November 27, 1985, this Court, acting on the petition, required private respondent to file its Comment; granted the prayer of the petitioner in his urgent motion, and a temporary restraining order was issued enjoining the appellate court from remanding the records of the case for execution of judgment.

CALTEX (PHILIPPINES), INC., petitioner, vs. THE INTERMEDIATE APPELLATE COURT and ASIA PACIFIC AIRWAYS, INC., respondents.

Private respondent filed its COMMENT dated December 14, 1985. On November 7, 1983, the trial court rendered its decision dismissing the complaint, as well as the counterclaim filed by defendant therein. In a Resolution dated January 27, 1986, the Court resolved to give due course to the petition, and required the parties to submit their memoranda. In compliance with the said Resolution, the parties filed their respective memoranda.

BIDIN, J.:

Private respondent (plaintiff) appealed to the Intermediate Appellate Court (IAC). On August 27, 1985, a decision was rendered by the said appellate court reversing the decision of the trial court, and ordering petitioner to return the amount of P510,550.63 to private respondent.

This is a petition for certiorari seeking the annulment of the decision dated August 27,1985 of the then Intermediate Appellate Court in CAG.R. No. 02684, which reversed the judgment of the trial court and ordered petitioner to return the amount of P510, 550.63 to private respondent plus interest at the legal rate of 14% per annum.

Counsel for petitioner received a copy of the appellate court's decision on September 6, 1985. On September 20, 1985 or 14 days after receipt of the aforesaid decision, an Urgent Motion for extension of five days within which to file a motion for reconsideration was filed by petitioner. On September 26, 1985, the Motion for Reconsideration was filed. The following day, petitioner filed a motion to set the motion for reconsideration for hearing.

On August 15, 1986, petitioner filed a Motion to Remand Records to the Court of Appeals in view of the resolution of this Court dated May 30, 1986 in the Habaluyas case which considered and set aside its decision dated August 5, 1985 by giving it prospective application beginning one month after the promulgation of the said resolution. This motion was opposed by private respondent. On September 22, 1986, petitioner filed its Reply to Opposition to which private respondent filed its rejoinder. In a Resolution dated December 3, 1986, the motion to remand records was denied.

The facts of the case are as follows: In a Resolution dated October 24, 1985, the appellate court denied the aforesaid three motions. The first motion praying for an extension of five days within which to file a motion for reconsideration was denied by the appellate court citing the new ruling of the Supreme Court in Habaluyas Enterprises Inc. vs. Japzon (138 SCRA 46 [1985]) as authority. The appellate court, following said ruling, held that the 15-day period for filing a motion for reconsideration cannot be extended. Thus, the motion for reconsideration filed on September 26, 1985 was stricken from the record, having been filed beyond the non-extensible 15-day reglementary period. The third motion was likewise denied for being moot and academic. Petitioner's Brief raised six (6) assignment of errors, to wit:

On January 12, 1978, private respondent Asia Pacific Airways Inc., entered into an agreement with petitioner Caltex (Philippines) Inc., whereby petitioner agreed to supply private respondent's aviation fuel requirements for two (2) years, covering the period from January 1, 1978 until December 31, 1979. Pursuant thereto, petitioner supplied private respondent's fuel supply requirements. As of June 30, 1980, private respondents had an outstanding obligation to petitioner in the total amount of P4,072,682.13, representing the unpaid price of the fuel supplied. To settle this outstanding obligation, private respondent executed a Deed of Assignment dated July 31, 1980, wherein it assigned to petitioner its receivables or refunds of Special Fund Import Payments from National Treasury of the Philippines to be applied as payment of the amount of P4,072,682.13 which private respondent owed to petitioner. On February 12, 1981, pursuant to the Deed of Assignment, Treasury Warrant No. B04708613 in the amount of P5,475,294.00 representing the refund to respondent of Special Fund Import Payment on its fuel purchases was issued by the National Treasury in favor of the petitioner. Four days later, on February 16, 1981, private respondent, having learned that the amount remitted to petitioner exceeded the amount covered by the Deed of Assignment, wrote a letter to petitioner, requesting a refund in the amount of P900,000.00 plus in favor of private respondent. The latter, believing that it was entitled to a larger amount by way of refund, wrote a petitioner anew, demanding the refund of the remaining amount. In response thereto, petitioner informed private respondent that the amount not returned (P510,550.63) represented interest and service charges at the rate of 18% per annum on the unpaid and overdue account of respondent from June 1, 1980 to July 31, 1981.

I.

THE IAC ERRED IN APPLYING THE NEW POLICY OF NOT GRANTING ANY EXTENSION OF TIME TO FILE MOTION FOR RECONSIDERATION.

II. On November 4, 1985, the prevailing party (respondent herein) filed Urgent Motion for Entry of Judgment. Two days latter, or on November 6, 1985, the petitioner filed a Motion for Reconsideration of the Resolution dated October 24, 1985.

The appellate court in a Resolution dated November 12, 1985 granted the motion for entry of judgment filed by private respondent. It directed the entry of judgment and ordered the remand of the records of the case to the court of origin for execution.

On November 14, 1985, petitioner, without waiting for the resolution of the appellate court in the urgent motion for reconsideration it filed on November 6, 1985, filed the instant petition to annul and set aside the resolution of the appellate court dated October 24, 1985 which denied the Motion for Reconsideration of its decision dated August 27, 1985.

THE IAC ERRED IN RULING THAT THE OBLIGATION OF RESPONDENT WAS LIMITED TO P4,072,682.13 NOTWITHSTANDING THAT FACT THAT THE DEED OF ASSIGNMENT (THE CONTRACT SUED UPON) ITSELF EXPRESSLY AND REPEATEDLY SPEAKS OF RESPONDENT'S OBLIGATION AS "THE AMOUNT OF P4,072,682.13 AS JUNE 30, 1980 PLUS APPLICABLE INTEREST CHARGES ON OVERDUE ACCOUNT AND OTHER AVTURBO FUEL LIFTING AND DELIVERIES THAT ASSIGNOR MAY FROM TIME TO TIME RECEIVE FROM ASSIGNEE."

Thus, on September 13, 1982, private respondent filed a complaint against petitioner in the Regional Trial Court of Manila, to collect the sum of P510,550.63.00.

Petitioner (defendant in the trial court) filed its answer, reiterating that the amount not returned represented interest and service charges on

In a motion dated November 21, 1985, petitioner prayed of the issuance of temporary restraining order to enjoin the appellate court from remanding the records of the case for execution of the judgment. The petitioner also filed a Supplement to Petition for Certiorari, dated November 21, 1985.

III.

THE IAC ERRED IN RULING THAT THE DEED OF ASSIGNMENT SATISFIES THE REQUISITES OF DATION IN PAYMENT

(WHICH HAS THE EFFECT OF IMMEDIATE EXTINGUISHMENT OF THE OBLIGATION) DESPITE THE FACT THAT SAID DEED OF ASSIGNMENT (1) COVERS FUTURE OBLIGATION FOR "APPLICABLE INTEREST CHARGES ON OVER DUE ACCOUNT AND OTHER AVTURBO FUEL LIFTING THE DELIVERIES THAT ASSIGNOR MAY FROM TIME TO TIME RECEIVE FROM ASSIGNEES" AND (2) INCLUDES AN EXPRESS RESERVATION BY ASSIGNEE TO DEMAND FULL PAYMENT OF THE OBLIGATIONS OF THE ASSIGNOR "IN CASE OF UNREASONABLE DELAY OR NONRECEIPT OF ASSIGNEE OF THE AFOREMENTIONED FUNDS AND/OR REFUND OF SPECIAL FUND IMPORT PAYMENT FROM THE GOVERNMENT DUE TO ANY CAUSE OR REASON WHATSOEVER.

The two vital issues presented to the Court for resolution are, as follows:

in its sound discretion either grant or deny the extension requested.

1. Whether or not the Urgent Motion for Extension of Time to File a Motion for Reconsideration filed by petitioner on September 20, 1985, as well as the Motion for Reconsideration filed on September 26, 1985 (within the period of extension prayed for), may be validly granted; and

In Singh vs. IAC, (148 SCRA 277 [1987]), this Court applying the aforesaid ruling in the Habaluyas case, held.

2. Whether or not the Deed of Assignment entered into by the parties herein on July 31, 1980 constituted dacion en pago, as ruled by the appellate court, such that the obligation is totally extinguished, hence after said date, no interest and service charges could anymore be imposed on private respondent, so that petitioner was not legally authorized to deduct the amount of P510,550.63 as interest and service charges on the unpaid and overdue accounts of private respondent.

In other words, there is one month grace period from the promulgation on May 30, 1986, of the Court's Resolution in the clarificatory Habaluyas case, or up to June 30, 1986, within which the rule barring extensions of time to file motions for reconsideration is, as yet, not strictly enforceable (Bayaca vs. IAC, G.R. No. 78424, September 15, 1986).

Anent the first issue, we rule in the affirmative. Since petitioners herein filed their Motion for Extension on August 6, 1985, it was still within the grace period, which expired on June 30, 1986, and may still be allowed.

IV.

THE IAC ERRED IN FAILING TO TAKE INTO ACCOUNT THE CONTEMPORANEOUS AND SUBSEQUENT ACTS OF THE PARTIES WHICH ALSO CLEARLY SHOW THAT THEY DID NOT INTEND THE DEED OF ASSIGNMENT TO HAVE EFFECT OF DATION IN PAYMENT.

We held in the case of Habaluyas Enterprises, Inc., et. al. vs. Japson et. al. (138 SCRA 46 [1985], promulgated August 5, 1985), that the "15-day period for appealing or for filing a motion for reconsideration cannot be extended". Subsequently, the Court, acting on respondent's motion for reconsideration in the same entitled case (142 SCRA 208 [1986]), restated and clarified the rule on this point for the guidance of the Bench and Bar by giving the rule prospective application in its resolution dated May 30, 1986;

Similarly, when petitioner herein filed its Motion for Extension of time to file motion for reconsideration on September 20, 1985, the said motion was filed within the one-month grace period, which expired on June 30, 1986, and may still be allowed. Consequently, the Motion for Reconsideration filed by petitioner on September 26, 1985, was also filed on time.

V.

IF THE DEED OF ASSIGNMENT HAD THE EFFECT OF A DATION IN PAYMENT, THEN THE IAC ERRED IN NOT RULING THAT PETITIONER HAS A RIGHT TO RETAIN THE ENTIRE CREDIT ASSIGNED TO IT IN LIEU OF PAYMENT OF RESPONDENT'S OBLIGATION INSTEAD OF BEING REQUIRED TO RETURN PORTION OF THE CREDIT WHICH IS CLAIMED TO BE IN EXCESS OF RESPONDENT'S OBLIGATION.

After considering the able arguments of counsels for petitioners and respondents, the Court resolved that the interest of justice would be better served if the ruling in the original decision were applied prospectively from the time herein stated. The reason is that it would be unfair to deprive parties of the right to appeal simply because they availed themselves of a procedure which was not expressly prohibited or allowed by the law or the Rules. On the otherhand, a motion for new trial or reconsideration is not a pre-requisite to an appeal, a petition for review or a petition for review on certiorari, and since the purpose of the amendments above referred to is to expedite the final disposition of cases, a strict but prospective application of the said ruling is in order. Hence, for the guidance of the Bench and Bar, the Court restates and clarifies the rules on this point, as follows.

With respect to the second issue, We rule that the Deed of Assignment executed by the parties on July 31, 1980 is not a dation in payment and did not totally extinguish respondent's obligation as stated therein.

The then Intermediate Appellate Court ruled that the three (3) requisites dacion en pago * are all present in the instant case, and concluded that the Deed of Assignment of July 31, 1980 (Annex "C" of Partial Stipulation of Facts) constitutes a dacion in payment provided for in Article 1245 ** of the Civil Code which has the effect of extinguishing the obligation, thus supporting the claim of private respondent for the return of the amount retained by petitioner.

This Court, speaking of the concept of dation in payment, in the case of Lopez vs. Court of Appeals (114 SCRA 671, 685 [1982]), among others, stated:

VI. 1.) Beginning one month after the promulgation of this Resolution, the rule shall be strictly enforced that no motion for extension of time to file a motion for new trial or reconsideration may be filed with the Metropolitan or Municipal Trial Courts, the Regional Trial Courts, and the Intermediate Appellate Court. Such a motion may be filed only in cases pending with the Supreme Court as the court of last resort, which may

ASSUMING THAT PETITIONER IS LIABLE TO MAKE A RETURN OF A PORTION OF THE CREDIT ASSIGNED, THE IAC ERRED IN AWARDING "INTEREST AT THE LEGAL RATE OF 14% PER ANNUM FROM THE FILING OF THE LEGAL OF THE COMPLAINT."

The dation in payment extinguishes the obligation to the extent of the value of the thing delivered, either as agreed upon by the parties or as may be proved, unless the parties by agreement, express or implied, or by their silence, consider the thing as equivalent to the obligation, in which case the obligation is totally extinguished. (8 Manresa 324; 3 Valverde 174 fn.)

We find merit in the instant petition.

From the above, it is clear that a dation in payment does not necessarily mean total extinguishment of the obligation. The obligation is totally

extinguished only when the parties, by agreement, express or implied, or by their silence, consider the thing as equivalent to the obligation.

(Annex "J", Partial Stipulation of Facts), respondent addressed the following request to petitioner;

The Case

In the instant case, the then Intermediate Appellate Court failed to take into account the following express recitals of the Deed of Assignment

Moreover, we would also like to request for a consideration in the following

The foregoing principle is used by this Court in resolving the Petition for Review1 on Certiorari before us, challenging the January 26, 1999 Decision2 of the Court of Appeals3 (CA) in CA-GR CV No. 45349. The dispositive portion of the assailed Decision reads as follows:

That Whereas, ASSIGNOR has an outstanding obligation with ASSIGNEE in the amount of P4,072,682.13 as of June 30, 1980, plus any applicable interest on overdue account. (p. 2, Deed of Assignment)

1. Interest charges be limited December 31, 1980 only; and

up

to "WHEREFORE, the judgment appealed from is hereby MODIFIED, to read as follows:

2. Reduction of 2% of 18% interest rate p.a. 'WHEREFORE, JUDGMENT IS HEREBY RENDERED, ORDERING:

Now therefore in consideration of the foregoing premises, ASSIGNOR by virtue of these presents, does hereby irrevocably assign and transfer unto ASSIGNEE any and all funds and/or Refund of Special Fund Payments, including all its rights and benefits accruing out of the same, that ASSIGNOR might be entitled to, by virtue of and pursuant to the decision in BOE Case No. 80-123, in payment of ASSIGNOR's outstanding obligation plus any applicable interest charges on overdue account and other avturbo fuel lifting and deliveries that ASSIGNOR may from time to time receive from the ASSIGNEE, and ASSIGNEE does hereby accepts such assignment in its favor . (p. 2, Deed of Assignment) (Emphasis supplied)

We are hoping for your consideration on this matter.

usual

kind '1. The plaintiffs to pay Far East Bank & Trust Company the principal sum of P1,067,000.00 plus interests thereon computed at 12% per annum from July 9, 1988 until fully paid; .

In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered (Art. 1253, Civil Code). The foregoing subsequent acts of the parties clearly show that they did not intend the Deed of Assignment to have the effect of totally extinguishing the obligations of private respondent without payment of the applicable interest charges on the overdue account.

'2. The parties to negotiate for a new lease over the subject premises; and

Finally, the payment of applicable interest charges on overdue account, separate from the principal obligation of P4,072.682.13 was expressly stipulated in the Deed of Assignment. The law provides that "if the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered." (Art. 1253, Civil Code).

'3. The defendant to pay the plaintiff the sum of fifteen thousand (P15,000.00) pesos as and for attorney's fees plus the costs of litigation.

Hence, it could easily be seen that the Deed of Assignment speaks of three (3) obligations (1) the outstanding obligation of P4,072,682.13 as of June 30, 1980; (2) the applicable interest charges on overdue accounts; and (3) the other avturbo fuel lifting and deliveries that assignor (private respondent) may from time to time receive from assignee (Petitioner). As aptly argued by petitioner, if it were the intention of the parties to limit or fix respondent's obligation to P4,072.682.13; they should have so stated and there would have been no need for them to qualify the statement of said amount with the clause "as of June 30, 1980 plus any applicable interest charges on overdue account" and the clause "and other avturbo fuel lifting and deliveries that ASSIGNOR may from time to time receive from the ASSIGNEE". The terms of the Deed of Assignment being clear, the literal meaning of its stipulations should control (Art. 1370, Civil Code). In the construction of an instrument where there are several provisions or particulars, such a construction is, if possible, to be adopted as will give effect to all (Rule 130, Sec. 9, Rules of Court).

"All other claims of the parties against each other are DENIED."4 WHEREFORE, the decision of the then Intermediate Appellate Court dated August 27, 1985 is hereby SET ASIDE, and the November 7, 1983 decision of the trial court is REINSTATED. Likewise assailed is the May 4, 1999 CA Resolution, 5 which denied petitioner's Motion for Reconsideration.

SO ORDERED. The Facts G.R. No. 138588 August 23, 2001 The court a quo summarized the antecedents of the case as follows: FAR EAST BANK & TRUST vs. DIAZ REALTY INC., respondents. COMPANY, petitioner, "Sometime in August 1973, Diaz and Company got a loan from the former PaBC [Pacific Banking Corporation] in the amount of P720,000.00, with interest at 12% per annum, later increased to 14%, 16%, 18% and 20%. The loan was secured by a real estate mortgage over two parcels of land owned by the plaintiff Diaz Realty, both located in Davao City. In 1981, Allied Banking Corporation rented an office space in the building constructed on the properties covered by the mortgage contract, with the conformity of mortgagee PaBC, whereby the parties agreed that the monthly rentals shall be paid directly to the mortgagee for the lessor's account, either to partly or fully pay off the aforesaid mortgage indebtedness. Pursuant to such contract, Allied Bank paid the monthly rentals to PaBC instead of to the plaintiffs. On July 5, 1985, the Central Bank closed PaBC, placed it under receivership, and appointed Renan Santos as its liquidator. Sometime in

PANGANIBAN, J.: Likewise, the then Intermediate Appellate Court failed to take into consideration the subsequent acts of the parties which clearly show that they did not intend the Deed of Assignment to totally extinguish the obligation (1) After the execution of the Deed of Assignment on July 31, 1980, petitioner continued to charge respondent with interest on its overdue account up to January 31, 1981 (Annexes "H", "I", "J" and "K" of the Partial Stipulation of Facts). This was pursuant to the Deed of Assignment which provides for respondent's obligation for "applicable interest charges on overdue account." The charges for interest were made every month and not once did respondent question or take exception to the interest; and (2) In its letter of February 16, 1981

For a valid tender of payment, it is necessary that there be a fusion of intent, ability and capability to make good such offer, which must be absolute and must cover the amount due. Though a check is not legal tender, and a creditor may validly refuse to accept it if tendered as payment, one who in fact accepted a fully' funded check after the debtor's manifestation that it had been given to settle an obligation is estopped from later on denouncing the efficacy of such tender of payment.

December 1986, appellant FEBTC purchased the credit of Diaz & Company in favor of PaBC, but it was not until March 23, 1988 that Diaz was informed about it.

'1. The plaintiff and defendant shall jointly compute the interest due on the P1,057,000.00 loan from April 18, 1985 until November 14, 1988 at 12% per annum (IBAA Salazar Case Supra).

'1. The plaintiff and defendant shall jointly compute the interest due on the P1,167,000.00 loan from April 18, 1985 until November 14, 1988 at 12% per annum.

"According to the plaintiff as alleged in the complaint and testified to by Antonio Diaz (President of Diaz & Company and Vice-President of Diaz Realty), on March 23, 1988, he went to office of PaBC which by then housed FEBTC and was told that the latter had acquired PaBC; that Cashier Ramon Lim told him that as of such date, his loan was P1,447,142.03; that he (Diaz) asked the defendant to make an accounting of the monthly rental payments made by Allied Bank; that on December 14, 1988,6 Diaz tendered to FEBTC the amount of P1,450,000.00 through an Interbank check, in order to prevent the imposition of additional interests, penalties and surcharges on its loan; that FEBTC did not accept it as payment; that instead, Diaz was asked to deposit the amount with the defendant's Davao City Branch Office, allegedly pending the approval of Central Bank Liquidator Renan Santos; that in the meantime, Diaz wrote the defendant, asking that the interest rate be reduced from 20% to 12% per annum, but no reply was ever made; that subsequently, the defendant told him to change the P1,450,000.00 deposit into a money market placement, which he did; that the money market placement expired on April 14, 1989; that when there was still no news from the defendant whether or not it [would] accept his tender of payment, he filed this case at the Regional Trial Court of Davao City.

'2. That the parties shall then add the result of the joint computation mentioned in paragraph one of the dispositive portion to the P1,057,000.00 principal.

'2. That the parties shall then add the result of the joint computation mentioned in paragraph one above to the P1,067,000.00 principal.

'3. The result of the addition of the P1,057,000.00 principal and the interests arrived at shall then be compared with the P1,450,000.00 deposit and if P1,450,000.00 is not enough, then the plaintiff shall pay the difference/deficiency between the P1,450,000.00 deposit and what the parties jointly computed[;] conversely, if the P1,450,000.00 is more than what the parties have arrived [at] after the computation, the defendant shall return the difference or the excess to the plaintiffs.

'3. The result of the addition of the P1,067,000.00 principal and the interests arrived at shall then be compared with the P1,450,000.00 money market placement put up by the plaintiff with the defendant bank if the same is still existing or has not yet matured.

'4. The defendant shall cancel the mortgage.

'4. The defendant shall cancel the mortgage.

'5. Paragraph eight of the lease contract between Allied Bank and the plaintiff in which the defendant['s predecessor], Pacific Banking gave its conformity (Exh. 'H') is hereby cancelled and deleted, so that the rental should now be paid to the plaintiff.

"In its responsive pleading, the defendant set up the following special/affirmative defenses: that sometime in December 1986, FEBTC purchased from the PaBC the account of the plaintiffs for a total consideration of P1,828,875.00; that despite such purchase, PaBC Davao Branch continued to collect interests and penalty charges on the loan from January 6, 1987 to July 8, 1988; that it was therefore not FEBTC which collected the interest rates mentioned in the complaint, but PaBC; that it is not true that FEBTC was trying to impose [exorbitant] rates of interest; that as a matter of fact, after the transfer of plaintiff's account, it sought to negotiate with the plaintiffs, and in fact, negotiations were made for a settlement and possible reduction of charges; that FEBTC has no knowledge of the rates of interest imposed and collected by PaBC prior to the purchase of the account from the latter, hence it could not be held responsible for those transactions which transpired prior to the purchase; and that the defendant acted at the opportune time for the settlement of the account, albeit exercising prudence in the handling of such account. The rest of the 'affirmative defenses' are bare denials.

'5. Paragraph eight of the Lease Contract between Allied Bank and the plaintiffs in which the defendant's predecessor, Pacific Banking gave its conformity (Exh. 'H') is hereby cancelled, so that the rental should now be paid to the plaintiffs.

'6. The defendant shall pay the plaintiff the sums:

'6. A Fifteen [t]housand [p]esos as attorney's fees; '6. The defendant shall pay the plaintiffs the sums: '6. B Cost of suit."7 '6-A. Fifteen thousand pesos as attorney's fees.

The CA Ruling

'6-B. Three [h]undred [t]housand [p]esos (P300,000.00) as exemplary damages.

'6-C. The cost of suit.

The CA sustained the trial court's finding that there was a valid tender of payment in the sum of P1,450,000, made by Diaz Realty Inc. in favor of Far East Bank and Trust Company. The appellate court reasoned that petitioner failed to effectively rebut respondent's evidence that it so tendered the check to liquidate its indebtedness, and that petitioner had unilaterally treated the same as a deposit instead.

'SO ORDERED." The CA further ruled that in the computation of interest charges, the legal rate of 12 percent per annum should apply, reckoned from July 9, 1988, until full and final payment of the whole indebtedness. It explained that while petitioner's purchase of respondent's account from Pacific Banking Corporation (PaBC) was valid, the 20 percent interest stipulated in the Promissory Note should not apply, because the account transfer was without the knowledge and the' consent of respondent -obligor.

"After trial, the court a quo rendered judgment on August 6, 1993, the dispositive portion of which reads as follows:

'WHEREFORE, judgment is hereby rendered as follows:

"Upon a motion for reconsideration filed by defendant FEBTC and after due notice and hearing, the court a quo issued an order on October 12, 1993, modifying the aforequoted decision, such that its dispositive portion as amended would now read as follows:

'IN VIEW WHEREOF, the decision rendered last August 6, is modified, accordingly, to wit:

The appellate colin, however, sustained petitioner's assertion that the trial court should not have cancelled the real estate mortgage,' inasmuch as the principal obligation upon which it was anchored was yet to be extinguished. Further, the CA held that the lease contract was subject to renegotiation by the parties.

"Whether or not the petition, as argued by private respondent, raises questions of fact not reviewable by certiorari."8 xxx In the main, the Court will determine (1) the efficacy of the alleged tender of payment made by respondent, (2) the effect of the transfer to petitioner of respondent's account with PaBC, (3) the interest rate applicable, and (4) the status of the Real Estate Mortgage. xxx

payment to the obligee for the former's obligation and demanding that the latter accept the same.

xxx

Lastly, the court a quo upheld the trial court's award of attorney's fees, pointing to petitioner's negligence in not immediately informing respondent of the purchase and transfer of its credit, and in failing to negotiate in order to avoid litigation.

The Court's Ruling Issues The Petition9 is not meritorious. Petitioner submits for our resolution the following issues: First Issue: "A. Tender of Payment "'Whether or not the Court of Appeals correctly ruled that the validity of the tender of payment was not properly raised in the trial court and could not thus be raised in the appeal.

"Thus, tender of payment cannot be presumed by a mere inference from surrounding circumstances. At most, sufficiency of available funds is only affirmative of the capacity or ability of the obligor to fulfill his part of the bargain. But whether or not the obligor avails himself of such funds to settle his outstanding account remains to be proven by independent and credible evidence. Tender of payment presupposes not only that the obligor is able, ready, and willing, but more so, in the act of performing his obligation. Ab posse ad actu non vale illatio. 'A proof that an act could have been done is no proof that it was actually done."'

Petitioner resolutely argues that the CA erred in upholding the validity of the tender of payment made by respondent. What the latter had tendered to settle its outstanding obligation, it points out, was a check which could not be considered legal tender.

In other words, tender of pament is the definitive act of offering the creditor what is due him or her, together with the demand that the creditor accept the same. More important, there must be a fusion of intent, ability and capability to make good such offer, which must be absolute and must cover the amount due.14

"B. We disagree. The records show that petitioner bank purchased respondent's account from PaBC in December 1986, and that the latter was notified of the transaction only on March 23, 1988. Thereafter, Antonio Diaz, president of respondent corporation, inquired from petitioner on the status and the amount of its obligation. He was informed that the obligation summed up to P1,447,142.03. On November 14, 1988, petitioner; received from respondent Interbank Check No. 81399841 dated November 13, 1988, bearing the amount of P1,450,000, with the notation "Re: Full Payment of Pacific Bank Account now turn[ed] over to Far East Bank." 10 The check was subsequently cleared and honored by Interbank, as shown by the Certification it issued on January 20, 1992.11

"'Whether or not the Court of Appeals erred in failing to apply settled jurisprudential principles militating against the private respondent's contention that a valid tender of payment had been made by it.

"C.

That respondent intended to settle its obligation with petitioner is evident from the records of the case. After learning that its loan balance was P1,447,142.03, it presented to petitioner a check in the amount of P1,450,000, with the specific notation that it was for full payment of its Pacific Bank account that had been purchased by petitioner. The latter accepted the check, even if it now insists that it considered the same as a mere deposit. The check was sufficiently funded, as in fact it was honored by the drawee bank. When petitioner refused to release the mortgage, respondent instituted the present case to compel the bank to acknowledge the tender of payment, accept payment and cancel the mortgage. These acts demonstrate respondent's intent, ability and capability to fully settle and extinguish its obligation to petitioner.

"Whether or not the Court of Appeals correctly found that the transaction between petitioner and PaBC was an 'ineffective novation' and that the consent of private respondent was necessary therefor.

"D.

True, jurisprudence holds that, in general, a check does not constitute legal tender, and that a creditor may validly refuse it. 12 It must be emphasized, however, that this dictum does not prevent a creditor from accepting a check as payment. In other words, the creditor has the option and the discretion of refusing or accepting it.

That respondent subsequently withdrew the money from petitioner-bank is of no moment, because such withdrawal would not affect the efficacy or the legal ramifications of the tender of payment made on November 14, 1988. As already discussed, the tender of payment to settle respondent's obligation as computed by petitioner was accepted, the check given in payment thereof converted into money, and the money kept in petitioner's possession for several months.

"Whether or not the Court of Appeals erred in refusing to apply the rate of interest freely stipulated upon by the parties to the respondent's obligation.

"E.

"In the present case, petitioner bank did not refuse respondent's check. On the contrary, it accepted the check which, it insisted, was a deposit. As earlier stated, the check proved to be fully funded and was in fact honored by the drawee bank. Moreover, petitioner was in possession of the money for several months.

Finally, petitioner points out that, in any case, tender of payment extinguishes the obligation only after proper consignation, which respondent did not do.

"Whether or not the Court of Appeals committed an irreconcilable error in ordering the parties to re-negotiate the terms of the contract while finding at the same time that the mortgage contract containing the lease was valid.

In further contending that there was no valid tender of payment, petitioner emphasizes our pronouncement in Roman Catholic Bishop of Malolos, Inc. v. Intermediate Appellate Court,13 as follows:

The argument does not persuade. For a consignation to be necessary, the creditor must have refused, without just cause, to accept the debtor's payment.15 However, as pointed out earlier, petitioner accepted respondent's check.

"F.

"Tender of payment involves a positive and unconditional act by the obligor of offering legal tender currency as

T o iterate, the tender was made by respondent for the purpose of settling its obligation. It was incumbent upon petitioner to refuse, or accept it as payment. The latter did not have the right or the option to

accept and treat it as a deposit. Thus, by accepting the tendered check and converting it into money, petitioner is presumed to have accepted it as payment. To hold otherwise would be inequitable and unfair to the obligor.

Fourth Issue:

Status of Mortgage Contract

Second Issue:

Nature of the Transfer of Respondent's Account

Petitioner bewails the CA's characterization of the transfer of respondent's account from Pacific Banking Corporation to petitioner as an "ineffective novation." Petitioner contends that the transfer was an assignment of credit.

The Real Estate Mortgage executed between respondent and PaBC to secure the former's principal obligation, as well as the provision in the Contract of Lease between respondent and Allied Bank with regard to the application of rent payment to the former's indebtedness, should subsist until full and final settlement of such obligation pursuant to the guidelines set forth in this Decision. Thereafter, the parties are free to negotiate a renewal of either or both contracts, or to end any and all of their contractual relations.

Indeed, the transfer of respondent's credit from PaBC to petitioner was an assignment of credit. Petitioner's acquisition of respondent's credit did not involve any changes in the original agreement between PaBC and respondent; neither did it vary the rights and the obligations of the parties. Thus, no novation by conventional subrogation could have taken place.

WHEREFORE, the Petition is hereby DENIED. The assailed Decision of the Court of Appeals is AFFIRMED with the following modifications: Respondent Diaz Realty Inc. is ORDERED to pay Far East Bank and Trust Co. its principal loan obligation in the amount of P1,067,000, with interest thereon computed at 20 percent per annum until November 14, 1988, less any interest payments made to PaBC, petitioner's assignor. Thereafter, interest shall be computed at 12 percent per annum until fully paid.1wphi1.nt

1. P400,000.00 Check January 15, 1992 2. P200,000.00 Check February 1, 1992 3. P200,000.00 Check February 22, 1992 4. P200,000.00 Check March 14, 1992 5. P200,000.00 Check April 4, 1992 6. P200,000.00 Check April 25, 1992 (pp. 59-61, Rollo).

No.

301245

No.

301246

No.

301247

No.

301248

No.

301249

No.

301250

An assignment of credit is an agreement by virtue of which the owner of a credit (known as the assignor), by a legal cause -- such as sale, dation in payment, exchange or donation - and without the need of the debtor's consent, transfers that credit and its accessory rights to another (known as the assignee), who acquires the power to enforce it, to the same extent as the assignor could have enforced it against the debtor.16

SO ORDERED.

Subsequently, in a letter dated January 22, 1992, petitioner informed private respondent that his checking account with PCI Bank has been closed and a new checking account with the same drawee bank is opened for practical purposes. The letter further stated that the postdated checks issued will be replaced with new ones in the same drawee bank (p. 63, Rollo).

G.R. No. 116805

June 22, 2000 On January 25, 1992, petitioner through Ms. Socorro Diaz, wife of petitioner, paid private respondent Mario Espina P200,000.00, acknowledged by him as partial payment for the condominium unit subject of this controversy (p. 64, Rollo).

In the present case, it is undisputed that petitioner purchased respondent's loan from PaBC. In doing so , the former acquired all of the latter's rights against respondent. Thus, petitioner had the right to collect the full value of the credit from respondent, subject to the terms as originally agreed upon in the Promissory Note.

MARIO S. ESPINA, petitioner, vs. THE COURT OF APPEALS and RENE G. DIAZ, respondents.

PARDO, J.:

On July 26, 1992, private respondent sent petitioner a "Notice of Cancellation" of the Provisional Deed of Sale (p. 48, Rollo).

Third Issue:

Applicable Interest Rate

The case before the Court is an appeal from a decision of the Court of Appeals 1 reversing that of the Regional Trial Court, Antipolo, Rizal, 2 affirming in all respects the decision of the Municipal Trial Court, Antipolo, Rizal, 3 ordering respondent Rene G. Diaz to vacate the condominium unit owned by petitioner and to pay back current rentals, attorney's fees and costs.1wphi1.nt

However, despite the Notice of Cancellation from private respondent, the latter accepted payment from petitioner per Metrobank Check No. 395694 dated and encashed on October 28, 1992 in the amount of P100,000.00 (p. 64, Rollo).

Petitioner bank, as assignee of respondent's credit, is entitled to the interest rate of 20 percent in the computation of the debt of private respondent, as stipulated in the August 26, 1983 Promissory Note executed by the latter in favor of PaBC.17

The facts, as found by the Court of Appeals, are as follows: On February 24, 1993, private respondent filed a complaint docketed as Civil Case No. 2104 for Unlawful Detainer against petitioner before the Municipal Trial Court of Antipolo, Branch 1.

However, because there was a valid tender of payment made on November 14, 1988, the accrual of interest based on the stipulated rate should stop on that date. Thus, respondent should pay petitioner-bank its principal obligation in the amount of P1,067,000 plus accrued interest thereon at 20 percent per annum until November 14, 1988, less interest payments given to PaBC from December 1986 to July 8, 1988. 18

Mario S. Espina is the registered owner of a Condominium Unit No. 403, Victoria Valley Condominium, Valley Golf Subdivision, Antipolo, Rizal. Such ownership is evidenced by Condominium Certificate of Title No. N-10 (p. 31, Rollo).

On November 12, 1993, the trial court rendered its decision, the dispositive portion of which reads:

Thereafter, the interest shall be computed at 12 percent per annum until full payment.

On November 29, 1991, Mario S. Espina, the private respondent as seller, and Rene G. Diaz, the petitioner as buyer, executed a Provisional Deed of Sale, whereby the former sold to the latter the aforesaid condominium unit for the amount of P100,000.00 to be paid upon the execution of the contract and the balance to be paid through PCI Bank postdated checks as follows:

WHEREFORE, in view of the foregoing consideration, judgment is hereby rendered ordering the defendant and all persons claiming rights under him to vacate unit 403 of the Victoria Golf Valley Condominium, Valley Golf Subdivision, Antipolo, Rizal; to

pay the total arrears of P126,000.00, covering the period July 1991 up to the filing (sic) complaint, and to pay P7,000.00 every month thereafter as rentals unit (sic) he vacates the premises; to pay the amount of P5,000.00 as and attorney's fees; the amount of P300.00 per appearance, and costs of suit.

However, the plaintiff may refund to the defendant the balance from (sic) P400,000.00 after deducting all the total obligations of the defendant as specified in the decision from receipt of said decision.

SO ORDERED. (Decision, Annex "B"; p. 27, Rollo).

From the said decision, petitioner appealed to the Regional Trial Court Branch 71, Antipolo, Rizal. On April 29, 1994, said appellate court affirmed in all respects the decision of the trial court. 4

On June 14, 1994, petitioner filed with the Court of Appeals a petition for review.

The question is, did the provisional deed of sale novate the existing lease contract? The answer is no. The novation must be clearly proved since its existence is not presumed. 10 "In this light, novation is never presumed; it must be proven as a fact either by express stipulation of the parties or by implication derived from an irreconcilable incompatibility between old and new obligations or contracts." 11 Novation takes place only if the parties expressly so provide, otherwise, the original contract remains in force. In other words, the parties to a contract must expressly agree that they are abrogating their old contract in favor of a new one. 12 Where there is no clear agreement to create a new contract in place of the existing one, novation cannot be presumed to take place, unless the terms of the new contract are fully incompatible with the former agreement on every point. 13 Thus, a deed of cession of the right to repurchase a piece of land does not supersede a contract of lease over the same property. 14 In the provisional deed of sale in this case, after the initial down payment, respondent's checks in payment of six installments all bounced and were dishonored upon presentment for the reason that the bank account was closed. 15 Consequently, on July 26, 1992, petitioner terminated the provisional deed of sale by a notarial notice of cancellation. 16 Nonetheless, respondent Diaz continued to occupy the premises, as lessee, but failed to pay the rentals due. On October 28, 1992, respondent made a payment of P100,000.00 that may be applied either to the back rentals or for the purchase of the condominium unit. On February 13, 1993, petitioner gave respondent a notice to vacate the premises and to pay his back rentals. 17 Failing to do so, respondent's possession became unlawful and his eviction was proper. Hence, on February 24, 1993, petitioner filed with the Municipal Trial Court, Antipolo, Rizal, Branch 01 an action for unlawful detainer against respondent Diaz. 18

QUISUMBING, J.:

Petitioners filed this petition for review on certiorari seeking to set aside the decision[1 dated January 22, 1999 of the Court of Appeals, Thirteenth Division, in CA-G.R. CR. No. 20030, which affirmed the decision[2 of the Regional Trial Court of Iriga City, Branch 37, convicting petitioners of violation of Batas Pambansa Blg. 22, otherwise known as the Bouncing Checks Law. They were sentenced to suffer the penalty of six months imprisonment and to indemnify private complainant the sum of P58,237.75 with legal interest from date of judicial demand. Also assailed in this petition is the Court of Appeals resolution[3 dated May 13, 1999 denying petitioners Motion for Reconsideration.

The facts, as culled from records, are as follows:

Petitioners Steve Tan and Marciano Tan are the owners of Master Tours and Travel Corporation and operators of Philippine Lawin Bus Co., Inc., while respondent Fabian Mendez, Jr. is the owner of three gasoline stations in Iriga City, Ligao, Albay, and Sipocot, Camarines Sur. Petitioners opened a credit line for their buses lubricants and fuel consumption with respondent. At the same time, the latter was also designated by petitioners as the booking and ticketing agent of Philippine Lawin Bus Co. in Iriga City.

On July 20, 1994, the Court of Appeals promulgated its decision reversing the appealed decision and dismissing the complaint for unlawful detainer with costs against petitioner Espina.

On August 8, 1994, petitioner filed a motion for reconsideration of the decision of the Court of Appeals. 5
6

Now respondent contends that the petitioner's subsequent acceptance of such payment effectively withdrew the cancellation of the provisional sale. We do not agree. Unless the application of payment is expressly indicated, the payment shall be applied to the obligation most onerous to the debtor. 19 In this case, the unpaid rentals constituted the more onerous obligation of the respondent to petitioner. As the payment did not fully settle the unpaid rentals, petitioner's cause of action for ejectment survives. Thus, the Court of Appeals erred in ruling that the payment was "additional payment" for the purchase of the property.

Under such arrangement, petitioners drivers purchased on credit fuel and various oil products for its buses through withdrawal slips issued by petitioners, with periodic payments to respondent through the issuance of checks. On the other hand, respondent remitted the proceeds of ticket sales to petitioners also through the issuance of checks. Sent together with respondents remittance are the remittances of the ticket sales in the Baao Booking office, which is managed separately and independently by another agent, Elias Bacsain.

On August 19, 1994, the Court of Appeals denied the motion. Hence, this appeal via petition for review on certiorari. 7

The basic issue raised is whether the Court of Appeals erred in ruling that the provisional deed of sale novated the existing contract of lease and that petitioner had no cause of action for ejectment against respondent Diaz.

WHEREFORE, the Court GRANTS the petition for review on certiorari, and REVERSES the decision of the Court of Appeals. 20 Consequently, the Court REVIVES the decision of the Regional Trial Court, Antipolo, Rizal, Branch 71, 21 affirming in toto the decision of the Municipal Trial Court, Antipolo, Rizal, Branch 01. 22

Accordingly, petitioners issued several checks to respondent as payment for oil and fuel products. One of these is FEBTC check no. 704227 dated June 4, 1991 in the amount of P58,237.75, as payment for gasoline and oil products procured during the period May 2 to 15, 1991. Said check was dishonored by the bank upon presentment for payment for being drawn against insufficient funds.

No costs.

Respondent sent a demand letter dated June 21, 1991 to petitioners demanding that they make good the check or pay the amount thereof, to no avail. Hence, an information for violation of B.P. 22 was filed against petitioners, upon the complaint of respondent, before the RTC of Iriga City, Branch 37, as follows: That on or about the 4th day of June 1991, in Iriga City, Philippines, and within the jurisdiction of this Honorable Court, the above-named accused having purchased from Shellhouse Iriga, Iriga City, owned and managed by Atty. Fabian O. Mendez, Jr., fuel and other oil products in the amount of FIFTY EIGHT THOUSAND TWO HUNDRED THIRTY SEVEN and 75/100 (P58,237.75) PESOS, Philippine currency, and that in payment thereof, the said accused knowing fully well that they had no sufficient funds or credit with the drawee bank, conspiring and confederating with each other, did, then and there, willfully, unlawfully and feloniously, issue and make out Far East Bank and Trust CompanyBinondo Check No. 704227, payable to the order of Shell house Iriga, dated June 4, 1991 in the amount of P58,237.75, and delivered to

We resolve the issue in favor of petitioner.

SO ORDERED.1wphi1.nt

According to respondent Diaz, the provisional deed of sale that was subsequently executed by the parties novated the original existing contract of lease. The contention cannot be sustained. Respondent originally occupied the condominium unit in question in 1987 as a lessee. 8 While he occupied the premises as lessee, petitioner agreed to sell the condominium unit to respondent by installments. 9 The agreement to sell was provisional as the consideration was payable in installments.

[G.R. No. 138669. June 6, 2002]

STEVE TAN and MARCIANO TAN, Petitioners, vs. FABIAN MENDEZ, JR., Respondent.

DECISION

herein private complainant Atty. Fabian O. Mendez, Jr., in Iriga City and upon its presentment for payment to the drawee bank, the same was dishonored and refused payment for the reason Drawn Against Insufficient Funds and despite repeated demands, accused failed and refused and still fails and refuses to make the necessary deposit with said bank sufficient money to cover the said check or to pay the said Atty. Fabian O. Mendez, Jr., the value of the check in the amount of P58,237.75, to the latters damage and prejudice in the aforesaid amount, plus other form of damages as may be proven in court.

Your check: Sales Iriga May 29-31 P 17,373.00 June 1-5 28,057.55 Baao June 3-4 5,375.00 May 28-June2 16,033.70 66,839.25 Balance to be paid for schedule P226,785.83 ESTEBAN TAN

THE HONORABLE COURT OF APPEALS ERRED WHEN IT FAILED TO CONSIDER THE FACT OF PAYMENT BY OFFSETTING PRIOR TO THE DEMAND LETTER SENT BY RESPONDENT DESPITE THE ABUNDANCE OF EVIDENCE PROVING THE SAME.

II

CONTRARY TO LAW.[4 On cross-examination, Marciano admitted to have drawn the subject check to pay private respondents gasoline station and that it was not covered by sufficient funds at the time of its issuance due to uncollected receivables.[9 Upon query by the court, he claimed that he did not talk to private complainant and could not tell if the latter agreed to offset the checks with the remittances.[10 SINCE THE HONORABLE COURT OF APPEALS FOUND OFFSETTING CONTENTIOUS IT SHOULD HAVE ACQUITTED PETITIONERS ON THE GROUND OF REASONABLE DOUBT.

Petitioners pleaded not guilty during arraignment and trial ensued.

At the trial, the prosecution presented FABIAN MENDEZ, JR., the private complainant, and MULRY MENDEZ. They testified that FEBTC check no. 704227 and other checks in the amount of P235,387.33 were dishonored upon presentment for payment to the bank and that they called petitioners attention regarding the matter. They sent a demand letter to petitioners asking them to make good the check or pay the value thereof, but petitioners did not heed the request. Instead, petitioners told respondent Fabian to wait a while. After respondent initiated this case, petitioners attempted to settle the same along with other cases pending in other courts in Iriga City. They asked for more time to settle their obligations because they were still waiting for a tax credit certificate in the amount of P517,998 to be issued by the Ministry of Finance, that they would use to settle the cases.[5

III

ISIDRO TAN, petitioners brother, corroborated Marcianos claim of offset. He also admitted speaking with Mulry Mendez regarding the proposed settlement of the case which, however, was not accepted by respondent.[11

THE HONORABLE COURT OF APPEALS ERRED IN CONCLUDING THAT ASSUMING THAT THERE WAS OFFSETTING THE PETITIONERS ARE NONETHELESS GUILTY BECAUSE PAYMENT DOES NOT ABATE THE CRIME OF VIOLATION OF B.P. 22.

On the other hand, the defense presented petitioner MARCIANO TAN and ISIDRO TAN as witnesses. In his testimony, Marciano averred that he cannot be held liable for violation of B.P. 22 because the amount subject of the check had already been extinguished by offset or compensation against the collection from ticket sales from the booking offices. He presented a memorandum[6 dated June 10, 1991 showing the return to respondent of various unencashed checks in the total amount of P66,839.25 representing remittance of ticket sales in the Iriga and Baao offices that were earlier sent by respondent. After the alleged offset, there remains a balance of P226,785.83.[7 The memorandum[8 states:

On rebuttal, respondent disputed petitioners claim of payment through offset or compensation. He claimed that the amount of the four unencashed checks totaling P66,839.25 could not have offset the amount of the dishonored checks since petitioners total obligations at that time had already reached P906,000.[12 Moreover, even if compensation took place, it should have been applied to an alleged earlier obligation of P235,387.33. Respondent also claimed that compensation did not take place as there was no application of payment made by the petitioners in their memorandum dated June 10,1991.[13

Briefly, the following are the issues for our resolution:

1. Whether or not petitioners can be held liable for violation of B.P. 22 or the Bouncing Checks Law; and

2. Whether or not payment through compensation or offset can preclude prosecution for violation of B.P. 22.

After trial, the trial court convicted petitioners for violation of B.P. 22. The dispositve portion of its decision reads:

June 10, 1991

WHEREFORE, the Court finds both accused, as drawers of the check in question, guilty of the violation of Batas Pambansa Blg. 22, as principals thereof, without attendant mitigating or aggravating circumstance, and hereby sentences both accused to suffer the penalty of imprisonment of Six (6) Months, to indemnify the private complainant jointly and severally, the sum of P58,237.75 with legal interest from date of judicial demand, and to pay the costs.

The law enumerates the elements of B.P. Blg. 22 to be (1) the making, drawing, and issuance of any check to apply for account or for value; (2) the knowledge of the maker, drawer, or issuer that at the time of issue he does not have sufficient funds in or credit with the drawee bank for the payment of the check in full upon its presentment; and (3) the subsequent dishonor of the check by the drawee bank for insufficiency of funds or credit or dishonor for the same reason had not the drawer, without any valid cause, ordered the bank to stop payment.[16

To Atty. Fabian Mendez: SO ORDERED.[14 We just would like to inform your good office that we are sending you back the following checks to be offset to our gasoline account: On appeal, the Court of Appeals affirmed the conviction of petitioners, thus: Returned check June 07 P 58,237.75 WHEREFORE, the assailed decision being in conformity with law and the evidence, the same is hereby AFFIRMED. Costs against appellants.

We find all the foregoing elements present in this case. Petitioner Marciano admitted that he drew the subject check as payment for the fuel and oil products of respondents. He knew at that time that there were no sufficient funds to cover the check because he had uncollected receivables.[17 The check was thus dishonored upon presentment to the bank for payment.

Of PLBC for gasoline

235,387.33

SO ORDERED.[15 293,625.08 Hence, this petition. Petitioners raise the following errors:

The law has made the mere act of issuing a bum check a malum prohibitum,[18 an act proscribed by legislature for being deemed pernicious and inimical to public welfare.[19 The gravamen of the offense under this law is the act of issuing a worthless check or a check that is dishonored upon its presentment for payment. Thus, even if there had been payment, through compensation or some other means, there could still be prosecution for violation of B.P. 22. We find that no reversible error was committed by the courts a quo in finding petitioners guilty of violation of B.P. 22.

In their defense, petitioners principally rely on the principle of compensation or offset under the civil law to avoid criminal prosecution. Essentially, they argue that they could not be held liable for violation of B.P. 22 because the amount covered by the subject check had already been paid by compensation or offset through other checks issued by respondent as remittances of ticket sales for petitioners bus company.

Finally, while we sustain the conviction of petitioners, we deem it appropriate to modify the penalties imposed. We delete the penalty of imprisonment and in lieu thereof, we impose upon petitioners a fine amounting to double the value of the subject check, with subsidiary imprisonment in case of insolvency or non-payment.

In this case, we note that petitioners had exerted efforts to settle their obligations. The fact of returning the unencashed checks to respondent indicates good faith on the part of petitioners. Absent any showing that petitioners acted in bad faith, the deletion of the penalty of imprisonment in this case is proper.[33

It bears stressing that the issue of whether or not the obligations covered by the subject check had been paid by compensation or offset is a factual issue that requires evaluation and assessment of certain facts. This is not proper in a petition for review on certiorari to the Supreme Court. We have repeatedly held that this Court is not a trier of facts.[20 The jurisdiction of this Court over cases elevated from the Court of Appeals is confined to the review of errors of law ascribed to the Court of Appeals, whose findings of fact are conclusive absent any showing that such findings are entirely devoid of any substantiation on record.[21

Supreme Court Administrative Circular No. 12-2000, as clarified by Administrative Circular No. 13-2001, established a rule of preference in imposing penalties in B.P. 22 cases. Section 1 of B.P. 22 imposes the following alternative penalties for its violation, to wit: (a) imprisonment of not less than 30 days but not more than one year; or (b) a fine of not less than but not more than double the amount of the check which fine shall in no case exceed P200,000; or (c) both such fine and imprisonment at the discretion of the court.

WHEREFORE, the petition is DENIED and the Decision of Court of Appeals in CA-G.R. CR No. 20030, is AFFIRMED with MODIFICATION. Petitioners are ordered to indemnify respondent in the amount of P58,237.75 with legal interest from date of judicial demand. The sentence of imprisonment of six months is SET ASIDEand in lieu thereof, a FINE in the amount of P116,475.50[34 is imposed upon petitioners, with subsidiary imprisonment not to exceed six months in case of insolvency or non-payment.[35

On this aspect, the Court of Appeals affirmed the findings of the trial court that the alleged compensation is not supported by clear and positive evidence. The trial court noted that the total amount of the two checks issued by petitioners is P293,625.08 while the total amount of the returned checks amounted to only P66,939.75. No application of payment was made as to which check was to be paid. These factual findings should be accorded respect and finality as the trial court is in the best position to assess and evaluate questions of fact. These findings will not be disturbed on appeal in the absence of any clear showing that the trial court overlooked certain facts or circumstances that would substantially affect the disposition of the case.[22

The rationale of Adm. Circular No. 12-2000 is found in our rulings in Eduardo Vaca vs. Court of Appeals[30 and Rosa Lim vs. People of the Philippines.[31 We held in those cases that it would best serve the ends of criminal justice if, in fixing the penalty to be imposed for violation of B.P. 22, the same philosophy underlying the Indeterminate Sentence Law is observed, i.e. that of redeeming valuable human material and preventing unnecessary deprivation of personal liberty and economic usefulness with due regard to the protection of the social order.

Costs against petitioners.

SO ORDERED.

G.R. No. L-33157 June 29, 1982

As found by the trial court, petitioners defense of compensation is unavailing because petitioners did not clearly specify in the memorandum dated June 10, 1991 which dishonored check is being offset. Applying Article 1289[23 in relation to Article 1254[24 of the Civil Code, the unencashed checks amounting to P66,839.25 should have been applied to the earlier dishonored check amounting to P235,387.33 which is more onerous than the subject check amounting to only P58,237.75.

We also note that no compensation can take place between petitioners and respondent as respondent is not a debtor of petitioners insofar as the two checks representing collections from the Baao ticket sales are concerned.[25 Article 1278 of the Civil Code[26 requires, as a prerequisite for compensation, that the parties be mutually and principally bound as creditors and debtors.[27 If they were not mutually creditors and debtors of each other, the law on compensation would not apply.[28 In this case, the memorandum shows that some unencashed checks returned to respondent to allegedly offset the dishonored check were from the Baao ticket sales which are separate from the ticket sales of respondent. Respondent only acted as an intermediary in remitting the Baao ticket sales and, thus, is not a debtor of petitioners.

To be sure, it is not our intention to decriminalize violation of B.P. 22. Neither is it our intention to delete the alternative penalty of imprisonment. The propriety and wisdom of decriminalizing violation of B.P. 22 is best left to the legislature and not this Court. As clarified by Administrative Circular 13-2001, the clear tenor and intention of Administrative Circular No. 12-2000 is not to remove imprisonment as an alternative penalty, but to lay down a rule of preference in the application of the penalties provided for in B.P. 22. Where the circumstances of the case, for instance, clearly indicate good faith or a clear mistake of fact without taint of negligence, the imposition of a fine alone may be considered as the more appropriate penalty. This rule of preference does not foreclose the possibility of imprisonment for violators of B.P. 22. Neither does it defeat the legislative intent behind the law. Needless to say, the determination of whether the circumstances warrant the imposition of a fine alone rests solely upon the judge. Should the judge decide that imprisonment is the more appropriate penalty, Administrative Circular No. 12-2000 ought not to be deemed a hindrance.[32

BENITO H. LOPEZ, petitioner, vs. THE COURT OF APPEALS and THE PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., respondents.

GUERRERO, J.:

On June 2, 1959, petitioner Benito H. Lopez obtained a loan in the amount of P20,000.00 from the Prudential Bank and Trust Company. On the same date, he executed a promissory note for the same amount, in favor of the said Bank, binding himself to repay the said sum one (1) year after the said date, with interest at the rate of 10% per annum. In addition to said promissory note, he executed Surety Bond No. 14164 in which he, as principal, and Philippine American General Insurance Co., Inc. (PHILAMGEN) as surety, bound themselves jointly and severally in favor of Prudential Bank for the payment of the sum of P20,000.00.

We are not unaware of the importance of checks in commercial transactions. In commercial parlance, they have been widely and fittingly known as the substitute of money and have effectively facilitated the smooth flow of commercial transactions. Thus, the pernicious effects and repercussions of circulating worthless checks are simply unimaginable. It is for this reason that B.P. 22 was enacted by the legislature, to penalize individuals who would place worthless checks in circulation and degrade the value and importance of checks in commercial transactions.

On the same occasion, Lopez also executed in favor of Philamgen an indemnity agreement whereby he agreed "to indemnify the Company and keep it indemnified and hold the same harmless from and against any and all damages, losses, costs, stamps, taxes, penalties, charges and expenses of whatever kind and nature which the Company shall or may at any time sustain or incur in consequence of having become surety upon the bond." 1 At the same time, Lopez executed a deed of assignment of 4,000 shares of the Baguio Military Institution entitled "Stock Assignment Separate from Certificate", which reads:

Interestingly, petitioners never alleged compensation when they received the demand letter, during the preliminary investigation, or before trial by filing a motion to dismiss. Moreover, if indeed there was payment by compensation, petitioners should have redeemed or taken the checks back in the ordinary course of business.[29 There is no evidence on record that they did so.

Nevertheless, while we recognize the noble objective of B.P.22, we deem it proper to apply the philosophy underlying the Indeterminate Sentence Law in imposing penalties for its violation. The gist of Administrative Circular No. 12-2000 is to consider the underlying circumstances of the case such that if the situation calls for the imposition of the alternative penalty of fine rather than imprisonment, the courts should not hesitate to do so.

This deed of assignment executed by BENITO H. LOPEZ, Filipino, of legal age, married and with residence and postal address at Baguio City, Philippines, now and hereinafter called the "ASSIGNOR", in favor of the PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., a corporation duly organized and existing under and by virtue of

the laws of the Philippines, with principal offices at Wilson Building, Juan Luna, Manila, Philippines, now and hereinafter called the "ASSIGNEE-SURETY COMPANY" WITNESSETH

shares of stock of Lopez in the event that the latter failed to pay his obligations to the Prudential Bank. Vice-President Abello then instructed Atty. Sumawang to transfer the shares of stock to Philamgen and made a commitment that thereafter he (Abello) and Pio Pedrosa will buy the shares of stock from it so that the proceeds could be paid to the bank, and in the meantime Philamgen will not pay the bank because it did not want payment under the terms of the bank. 3

H. Lopez to pay his said obligation. The certificate bearing No. 44 was cancelled and upon request of the plaintiff to the Baguio Military Institute a new certificate of stock was issued in the name of the plaintiff bearing No. 171, by means of which plaintiff became the registered owner of the 4,000 shares originally belonging to the defendant.

That for and in consideration of the obligations undertaken by the ASSIGNEESURETY COMPANY under the terms and conditions of SURETY BOND NO. 14164, issued on behalf of said BENITO H. LOPEZ and in favor of the PRUDENTIAL BANK & TRUST COMPANY, Manila, Philippines, in the amount of TWENTY THOUSAND PESOS ONLY (P20,000.00), Philippine Currency, and for value received, the ASSIGNOR hereby sells, assigns, and transfers unto THE PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., Four Thousand (4,000) shares of the Baguio military Institute, Inc. standing in the name of said Assignor on the books of said Baguio Military Institute, Inc. represented by Certificate No. 44 herewith and do hereby irrevocably constitutes and appoints THE PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC. as attorney to transfer the said stock on the books of the within named military institute with full power of substitution in the premises. 2

Due to said commitment and instruction of Vice-President Abello, Assistant Treasurer Marcial C. Cruz requested the transfer of Stock Certificate No. 44 for 4,000 shares to Philamgen in a letter dated October 31, 1961. Stock Certificate No. 44 in the name of Lopez was accordingly cancelled and in lieu thereof Stock Certificate No. 171 was issued by the Baguio Military Institute in the name of Philamgen on November 17, 1961.

The complaint was thereafter dismissed. But when no payment was still made by the principal debtor or by the surety, the Prudential Bank filed on November 8, 1963 another complaint for the recovery of the P20,000.00. On November 18, 1963, after being informed of said complaint, Lopez addressed the following letter to Philamgen:

Dear Mr. Sumawang:

With the execution of this deed of assignment, Lopez endorsed the stock certificate and delivered it to Philamgen.

This is with reference to yours of the 13th instant advising me of a complaint filed against us by Prudential Bank & Trust Co. regarding my loan of P20,000.00. In this connection, I would like to know what happened to my shares of stocks of Baguio Military Academy which were pledged to your goodselves to secure said obligation. These shares of stock I think are more than enough to answer for said obligation. 4

It is noteworthy that the transfer of the stocks of the defendant in the name of the plaintiff company was made at the instance of Messrs. Abello and Pedrosa, who promised to buy the same from the plaintiff. Now that these shares of stock of the defendant had already been transferred in the name of the plaintiff, the defendant has already divested himself of the said stocks, and it would seem that the remedy of the plaintiff is to go after Messrs. Abello and Pedrosa on their promise to pay for the said stocks. To go after the defendant after the plaintiff had already become the owner of his shares of stock and compel him to pay his obligation to the Prudential Bank would be most unfair, unjust and illogical for it would amount to double payment on his part. After the plaintiff had already appropriated the said shares of stock, it has already lost its right to recover anything from the defendant, for the reason that the transfer of the said stocks was made without qualification. This transfer takes the form of a reimbursement of what plaintiff had paid to the Prudential Bank, thereby depriving the plaintiff of its right to go after the defendant herein. 5

It appears from the evidence on record that the loan of P20,000.00 was approved conditioned upon the posting of a surety bond of a bonding company acceptable to the bank. Thus, Lopez persuaded Emilio Abello, Assistant Executive Vice-President of Philamgen and member of the Bond Under writing Committee to request Atty. Timoteo J. Sumawang, Assistant Vice- President and Manager of the Bonding Department, to accommodate him in putting up the bond against the security of his shares of stock with the Baguio Military Institute, Inc. It was their understanding that if he could not pay the loan, Vice-President Abello and Pio Pedrosa of the Prudential Bank would buy the shares of stocks and out of the proceeds thereof, the loan would be paid to the Prudential Bank.

On December 9, 1963, Philamgen was forced to pay the Prudential Bank the sum of P27,785.89 which included the principal loan and accumulated interest and the Prudential Bank executed a subrogation receipt on the same date.

Philamgen appealed to the Court of Appeals raising these assignments of errors:

On March 18, 1965, Philamgen brought an action in the Court of First Instance of Manila (Civil Case No. 60272, "The Philippine American General Insurance Co., Inc. vs. Benito H. Lopez") for reimbursement of the said amount. After hearing, the said court rendered judgment dismissing the complaint holding:

The lower court erred in finding that the evidence does not bear out the contention of plaintiff that the shares of stock belonging to defendant were transferred by him to plaintiff by way of pledge.

On June 2, 1960, Lopez' obligation matured without it being settled. Thus, the Prudential Bank made demands for payment both upon Lopez and Philamgen. In turn, Philamgen sent Lopez several written demands for the latter to pay his note (Exhibit H, H-1 & H-2), but Lopez did not comply with said demands. Hence, the Prudential Bank sometime in August, 1961 filed a case against them to enforce payment on the promissory note plus interest.

Upon receipt of the copies of complaint, Atty. Sumawang confronted Emilio Abello and Pio Pedrosa regarding their commitment to buy the

The contention of the plaintiff that the stock of the defendant were merely pledged to it by the defendant is not borne out by the evidence. On the contrary, it appears to be contradicted by the facts of the case. The shares of stock of the defendant were actually transferred to the plaintiff when it became clear after the plaintiff and the defendant had been sued by the Prudential Bank that plaintiff would be compelled to make the payment to the Prudential Bank, in view of the inability of the defendant Benito

II

The lower court erred in finding that plaintiff company appropriated unto itself the shares of stock pledged to it by defendant Benito Lopez and in finding that, with the transfer of the stock in the name of plaintiff company, the latter has already been paid or reimbursed what it paid to Prudential Bank.

III

The lower court erred in not finding that the instant case is one where the pledge has abandoned the security and elected instead to enforce his claim against the pledgor by ordinary action. 6

having thereafter arisen, the latter caused the shares of stock to be transferred to it, taking a new certificate of stock in its name, the transaction was a pledge, and in not holding instead that it was a dation in payment. 10

absolute sale for and in consideration of the same undertaking of Philamgen. There would have been no necessity for the execution of the indemnity agreement if the stock assignment was really intended as an absolute conveyance. Hence, there are strong and cogent reasons to conclude that the parties intended said stock assignment to complement the indemnity agreement and thereby sufficiently guarantee the indemnification of Philamgen should it be required to pay Lopez' loan to Prudential Bank.

On December 17, 1970, the Court of Appeals promulgated a decision in favor of the Philamgen, thereby upholding the foregoing assignments of errors. It declared that the stock assignment was a mere pledge that the transfer of the stocks in the name of Philamgen was not intended to make it the owner thereof; that assuming that Philamgen had appropriated the stocks, this appropriation is null and void as a stipulation authorizing it is a pactum commissorium; and that pending payment, Philamgen is merely holding the stock as a security for the payment of Lopez' obligation. The dispositive portion of the said decision states:

Considering the explicit terms of the deed denominated "Stock Assignment Separate from Certificate", hereinbefore copied verbatim, Lopez sold, assigned and transferred unto Philamgen the stocks involved "for and in consideration of the obligations undertaken" by Philamgen "under the terms and conditions of the surety bond executed by it in favor of the Prudential Bank" and "for value received". On its face, it is neither pledge nor dation in payment. The document speaks of an outright sale as there is a complete and unconditional divestiture of the incorporeal property consisting of stocks from Lopez to Philamgen. The transfer appears to have been an absolute conveyance of the stocks to Philamgen whether or not Lopez defaults in the payment of P20,000.00 to Prudential Bank. While it is a conveyance in consideration of a contingent obligation, it is not itself a conditional conveyance.

WHEREFORE, the decision of the lower court is hereby reversed, and another one is hereby entered ordering the defendant to pay the plaintiff the sum of P27,785.89 with interest at the rate of 12% per annum from December 9, 1963, 10% of the P27,785.89 as attorney's fees and the costs of the suit. 7

The motion for reconsideration with prayer to set the same for oral argument having been denied, Lopez brought this petition for review on certiorari presenting for resolution these questions:

It is true that if Lopez should "well and truly perform and fulfill all the undertakings, covenants, terms, conditions, and agreements stipulated" in his promissory note to Prudential Bank, the obligation of Philamgen under the surety bond would become null and void. Corollarily, the stock assignment, which is predicated on the obligation of Philamgen under the surety bond, would necessarily become null and void likewise, for want of cause or consideration under Article 1352 of the New Civil Code. But this is not the case here because aside from the obligations undertaken by Philamgen under the surety bond, the stock assignment had other considerations referred to therein as "value received". Hence, based on the manifest terms thereof, it is an absolute transfer.

a) Where, as in this case, a party "sells, assigns and transfers" and delivers shares of stock to another, duly endorsed in blank, in consideration of a contingent obligation of the former to the latter, and, the obligations having arisen, the latter causes the shares of stock to be transferred in its name, what is the juridical nature of the transaction-a dation in payment or a pledge?

Notwithstanding the express terms of the "Stock Assignment Separate from Certificate", however, We hold and rule that the transaction should not be regarded as an absolute conveyance in view of the circumstances obtaining at the time of the execution thereof.

The character of the transaction between the parties is to be determined by their intention, regardless of what language was used or what the form of the transfer was. If it was intended to secure the payment of money, it must be construed as a pledge; but if there was some other intention, it is not a pledge. However, even though a transfer, if regarded by itself, appears to have been absolute, its object and character might still be qualified and explained by a contemporaneous writing declaring it to have been a deposit of the property as collateral security. It has been said that a transfer of property by the debtor to a creditor, even if sufficient on its face to make an absolute conveyance, should be treated as a pledge if the debt continues in existence and is not discharged by the transfer, and that accordingly, the use of the terms ordinarily importing conveyance, of absolute ownership will not be given that effect in such a transaction if they are also commonly used in pledges and mortgages and therefore do not unqualifiedly indicate a transfer of absolute ownership, in the absence of clear and unambiguous language or other circumstances excluding an intent to pledge. 11

b) Where, as in this case, the debtor assigns the shares of stock to the creditor under an agreement between the latter and determinate third persons that the latter would buy the shares of stock so that the obligations could be paid out of the proceeds, was there a novation of the obligation by substitution of debtor? 8

Philamgen failed to file its comment on the petition for review on certiorari within the extended period which expired on March 19, 1971. This Court thereby resolved to require Lopez to file his brief. 9

It should be remembered that on June 2, 1959, the day Lopez obtained a loan of P20,000.00 from Prudential Bank, Lopez executed a promissory note for ?20,000.00, plus interest at the rate of ten (10%) per cent per annum, in favor of said Bank. He likewise posted a surety bond to secure his full and faithful performance of his obligation under the promissory note with Philamgen as his surety. In return for the undertaking of Philamgen under the surety bond, Lopez executed on the same day not only an indemnity agreement but also a stock assignment.

We agree with the holding of the respondent Court of Appeals that the stock assignment, Exhibit C, is in truth and in fact, a pledge. Indeed, the facts and circumstances leading to the execution of the stock assignment, Exhibit C, and the admission of Lopez prove that it is in fact a pledge. The appellate court is correct in ruling that the following requirements of a contract of pledge have been satisfied: (1) that it be constituted to secure the fulfillment of a principal obligation; (2) that the pledgor be the absolute owner of the thing pledged; and (3) that the person constituting the pledge has the free disposal of the property, and in the absence thereof, that he be legally authorized for the purpose. (Article 2085, New Civil Code).

Under the first assignment of error, Lopez argues in his brief:

That the Court of Appeals erred in holding that when petitioner "sold, assigned, transferred" and delivered shares of stock, duly endorsed in blank, to private respondent in consideration of a contingent obligation of the former to the latter and the obligation

The indemnity agreement and the stock assignment must be considered together as related transactions because in order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. (Article 1371, New Civil Code). Thus, considering that the indemnity agreement connotes a continuing obligation of Lopez towards Philamgen while the stock assignment indicates a complete discharge of the same obligation, the existence of the indemnity agreement whereby Lopez had to pay a premium of P1,000.00 for a period of one year and agreed at all times to indemnify Philamgen of any and all kinds of losses which the latter might sustain by reason of it becoming a surety, is inconsistent with the theory of an

Article 2087 of the New Civil Code providing that it is also the essence of these contracts (pledge, mortgage, and antichresis) that when the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for the payment to the creditor, further supports the appellate court's ruling, which We also affirm. On this point further, the Court of Appeals correctly ruled:

In addition to the requisites prescribed in article 2085, it is necessary, in order to constitute the contract of pledge, that the thing pledged be placed in the possession of

the creditor, or of a third person by common agreement. (Art. 2093, N.C.C.) Incorporeal rights, including shares of stock may also be pledged (Art. 2095, N.C.C.) All these requisites are found in the transaction between the parties leading to the execution of the Stock Assignment, Exhibit C. And that it is a pledge was admitted by the defendant in his letter of November 18, 1963, Exhibit G, already quoted above, where he asked what had happened to his shares of stock "which were pledged to your goodselves to secure the said obligation". The testimony of the defendant-appellee that it was their agreement or understanding that if he would be unable to pay the loan to the Prudential Bank, plaintiff could sell the shares of stock or appropriate the same in full payment of its debt is a mere after-thought, conceived after he learned of the transfer of his stock to the plaintiff in the books of the Baguio Military Institute.

the extent that it is extinguished being considered as the price. Does this mean that there can be no dation in payment if the debt is not in money? We do not think so. It is precisely in obligations which are not money debts, in which the true juridical nature of dation in payment becomes manifest. There is a real novation with immediate performance of the new obligation. The fact that there must be a prior agreement of the parties on the delivery of the thing in lieu of the original prestation shows that there is a novation which, extinguishes the original obligation, and the delivery is a mere performance of the new obligation.

A distinction might also be made between delivery of property in payment of debt and delivery of such property as collateral security for the debt. Generally, such a transfer was presumed to be made for collateral security, in the absence of evidence tending to show an intention on the part of the parties that the transfer was in satisfaction of the debt. This presumption of a transfer for collateral security arose particularly where the property given was commercial paper, or some other 'specialty' chose of action, that conferred rights upon transfer by delivery of a different nature from the debt, whose value was neither intrinsic nor apparent and was not agreed upon by the parties. 13

We also do not agree with the contention of petitioner that "petitioner's 'sale assignment and transfer' unto private respondent of the shares of stock, coupled with their endorsement in blank and delivery, comes exactly under the Civil Code's definition of dation in payment, a long recognized and deeply rooted concept in Civil Law denominated by Spanish commentators as 'adjudicacion en pago'".

The dation in payment extinguishes the obligation to the extent of the value of the thing delivered, either as agreed upon by the parties or as may be proved, unless the parties by agreement, express or implied, or by their silence, consider the thing as equivalent to the obligation, in which case the obligation is totally extinguished. (8 Manresa 324; 3 Valverde 174 fn

According to Article 1245 of the New Civil Code, dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law of sales.

Speaking of the concept of dation in payment, it is well to cite that:

Dation in payment is the delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation. (2 Castan 525; 8 Manresa, 324) The property given may consist, not only of a thing, but also of a real right (such as a usufruct) or of a credit against a third person. (Perez Gonzales & Alguer :2-I Enneccerus, Kipp & Wolff 317). Thus, it has been held that the assignment to the creditor of the interest of the debtor in an inheritance in payment of his debt, is valid and extinguishes the debt. (Ignacio vs. Martinez, 33 Phil. 576)

Assignment of property by the debtor to his creditors, provided for in article 1255, is similar to dation in payment in that both are substitute forms of performance of an obligation. Unlike the assignment for the benefit of creditors, however, dation in payment does not involve plurality of creditors, nor the whole of the property of the debtor. It does not suppose a situation of financial difficulties, for it may be made even by a person who is completely solvent. It merely involves a change of the object of the obligation by agreement of the parties and at the same time fulfilling the same voluntarily. (8 Manresa 324). 12

Petitioner's argument that even assuming, arguendo that the transaction was at its inception a pledge, it gave way to a dation in payment when the obligation secured came into existence and private respondent had the stocks transferred to it in the corporate books and took a stock certificate in its name, is without merit. The fact that the execution of the stock assignment is accompanied by the delivery of the shares of stock, duly endorsed in blank to Philamgen is no proof that the transaction is a dation in payment. Likewise, the fact that Philamgen had the shares of stock transferred to it in the books of the corporation and took a certificate in its name in lieu of Lopez which was cancelled does not amount to conversion of the stock to one's own use. The transfer of title to incorporeal property is generally an essential part of the delivery of the same in pledge. It merely constitutes evidence of the pledgee's right of property in the thing pledged.

Considering the above jurisprudence, We find that the debt or obligation at bar has not matured on June 2, 1959 when Lopez "alienated" his 4,000 shares of stock to Philamgen. Lopez' obligation would arise only when he would default in the payment of the principal obligation (the loan) to the bank and Philamgen had to pay for it. Such fact being adverse to the nature and concept of dation in payment, the same could not have been constituted when the stock assignment was executed. Moreover, there is no express provision in the terms of the stock assignment between Philamgen and Lopez that the principal obligation (which is the loan) is immediately extinguished by reason of such assignment.

By the contract of pledge, the pledgor does not part with his general right of property in the collateral. The general property therein remains in him, and only a special property vests in the pledgee. The pledgee does not acquire an interest in the property, except as a security for his debt. Thus, the pledgee holds possession of the security subject to the rights of the pledgor; he cannot acquire any interest therein that is adverse to the pledgor's title. Moreover, even where the legal title to incorporeal property which may be pledged is transferred to a pledgee as collateral security, he takes only a special property therein Such transfer merely performs the office that the delivery of possession does in case of a pledge of corporeal property.

xxx xxx xxx

The modern concept of dation in payment considers it as a novation by change of the object, and this is to our mind the more juridically correct view. Our Civil Code, however, provides in this article that, where the debt is in money, the law on sales shall govern; in this case, the act is deemed to be a sale, with the amount of the obligation to

In case of doubt as to whether a transaction is a pledge or a dation in payment, the presumption is in favor of pledge, the latter being the lesser transmission of rights and interests. Under American jurisprudence,

The pledgee has been considered as having a lien on the pledged property. The extent of such lien is measured by the amount of the debt or the obligation that is secured by the collateral, and the lien continues to exist as long as the pledgee retains actual or symbolic possession of the property, and the

debt or obligation remains unpaid. Payment of the debt extinguishes the lien.

Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol. IV, p. 360)

As to the third assignment of error which is merely the consequence of the first two assignments of errors, the same is also devoid of merit.

Though a pledgee of corporation stock does not become personally liable as a stockholder of the company, he may have the shares transferred to him on the books of the corporation if he has been authorized to do so.

The general property in the pledge remains in the pledgor after default as well as prior thereto. The failure of the pledgor to pay his debt at maturity in no way affects the nature of the pledgee's rights concerning the property pledged, except that he then becomes entitled to proceed to make the security available in the manner prescribed by law or by the terms of the contract, ... . 14

In the case at bar, the undertaking of Messrs. Emilio Abello and Pio Pedrosa that they would buy the shares of stock so that Philamgen could be reimbursed from the proceeds that it paid to Prudential Bank does not necessarily imply the extinguishment of the liability of petitioner Lopez. Since it was not established nor shown that Lopez would be released from responsibility, the same does not constitute novation and hence, Philamgen may still enforce the obligation. As the Court of Appeals correctly held that "(t)he representation of Mr. Abello to Atty. Sumawang that he and Mr. Pedrosa would buy the stocks was a purely private arrangement between them, not an agreement between (Philamgen) and (Lopez)" and which We hereby affirm, petitioner's second assignment of error must be rejected.

WHEREFORE, IN VIEW OF ALL THE FOREGOING, the decision of the Court of Appeals is hereby AFFIRMED in toto, with costs against the petitioner.

SO ORDERED.

[G.R. No. 124554. December 9, 1997]

In his second assignment of error, petitioner contends that the Court of Appeals erred in not holding that since private respondent entered into an agreement with determinate third persons whereby the latter would buy the said shares so sold, assigned and transferred to the former by the petitioner for the purpose of paying petitioner's obligation out of the proceeds, there was a novation of the obligation by substitution of debtor.

In fine, We hold and rule that the transaction entered into by and between petitioner and respondent under the Stock Assignment Separate From Certificate in relation to the Surety Bond No. 14164 and the Indemnity Agreement, all executed and dated June 2, 1959, constitutes a pledge of the 40,000 shares of stock by the petitionerpledgor in favor of the private respondent-pledgee, and not a dacion en pago. It is also Our ruling that upon the facts established, there was no novation of the obligation by substitution of debtor.

ETERNAL GARDENS MEMORIAL PARK CORPORATION, petitioner, vs. COURT OF APPEALS and NORTH PHILIPPINE UNION MISSION OF THE SEVENTH DAY ADVENTISTS, respondents.

DECISION

KAPUNAN, J.:

We do not agree.

Under Article 1291 of the New Civil Code, obligations may be modified by: (1) changing their object or principal condition; (2) substituting the person of the debtor; (3) subrogating a third person in the rights of the creditor. And in order that an obligation may be extinguished by another which substitute the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other. (Article 1292, N.C.C.) Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237. (Article 1293, N.C.C.)

The promise of Abello and Pedrosa to buy the shares from private respondent not having materialized (which promise was given to said respondent only and not to petitioner) and no action was taken against the two by said respondent who chose instead to sue the petitioner on the Indemnity Agreement, it is quite clear that this respondent has abandoned its right and interest over the pledged properties and must, therefore, release or return the same to the petitioner-pledgor upon the latter's satisfaction of his obligation under the Indemnity Agreement.

This case is the derivative of G.R. No. 73794, which was decided by the Second Division of this Court on September 19, 1988.xxii[1]

The antecedents are as follows:xxii[2]

Petitioner EGMPC and private respondent NPUM entered into a Land Development Agreement dated October 6, 1976. Under the agreement, EGMPC was to develop a parcel of land owned by NPUM into a memorial park subdivided into lots. The parties further agreed -

It must also be made clear that there is no double payment nor unjust enrichment in this case because We have ruled that the shares of stock were merely pledged. As the Court of Appeals said:

Commenting on the second concept of novation, that is, substituting the person of the debtor, Manresa opines, thus:

In this kind of novation it is pot enough to extend the juridical relation to a third person; it is necessary that the old debtor be released from the obligation, and the third person or new debtor take his place in the relation. Without such release, there is no novation; the third person who has assumed the obligation of the debtor merely becomes a co-debtor or a surety. If there is no agreement as to solidarity, the first and the new debtor are considered obligated jointly. (8 Manresa 435, cited in Tolentino,

The appellant (Philam) is not enriching himself at the expense of the appellee. True, the stock certificate of the appellee had been in the name of the appellant but the transfer was merely nominal, and was not intended to make the plaintiff the owner thereof. No offer had been made for the return of the stocks to the defendant. As the appellant had stated, the appellee could have the stocks transferred to him anytime as long as he reimburses the plaintiff the amount it had paid to the Prudential Bank. Pending payment, plaintiff is merely holding the certificates as a pledge or security for the payment of defendant's obligation.

(d) THAT the FIRST PARTY shall receive forty (40%) percent of the gross collection less Perpetual Care Fees (which in no case shall exceed 10% of the price per lot unless otherwise agreed upon by both parties in writing) or Net Gross Collection (NGC) from this project. This shall be remitted monthly by the SECOND PARTY in the following manner: (i) Forty (40%) percent of the NGC, plus (ii) if it becomes necessary for the FIRST PARTY to vacate the property earlier than two years from the date of this agreement, at the option of the FIRST PARTY, an additional amount equivalent to twenty (20%) percent of the NGC as cash advance for the first four (4) years with interest at twelve (12%) percent per annum which cash advance shall be deductible out of the proceeds from the FIRST PARTYs 40% from the 5th year onward. The SECOND PARTY further agrees that if the FIRST PARTY shall desire to have its projected receivables collected at the 5th year, the SECOND PARTY shall assist in having the same discounted in advance.

The above holding of the appellate court is correct and We affirm the same.

The P1.5 million initial payment mentioned in the Deed of Absolute Sale, covering the first phase of the project, shall be deducted out of the proceeds from the FIRST PARTYs 40% at the end of the 5th year. Subsequent payments made by the SECOND PARTY on account of the stated purchase price in said Deed of Absolute Sale shall be charged against what is due to the FIRST PARTY under this LAND DEVELOPMENT AGREEMENT.xxii[3]

Later, two claimants of the parcel of land surfaced - Maysilo Estate and the heirs of a certain Vicente Singson Encarnacion. EGMPC thus filed an action for interpleader against Maysilo Estate and NPUM, docketed as Civil Case No. 9556 before the Regional Trial Court of Kalookan City, Branch 120. The Singson heirs in turn filed an action for quieting of title against EGMPC and NPUM, docketed as Civil Case No. C-11836 before Branch 122 of the same court.

Following these, the Court, through the Third Division, issued a Resolution dated December 1, 1993 in G.R. No. 73794, thus:

From these two cases, several proceedings ensued. One such case, from the interpleader action, culminated in the filing and subsequent resolution of G.R. No. 73794. In G.R. No. 73794, EGMPC assailed the appellate courts resolution requiring petitioner Eternal Gardens [to] deposit whatever amounts are due from it under the Land Development Agreement with a reputable bank to be designated by the respondent court.xxii[4]

WHEREFORE, considering that the ownership of the property in dispute has now been settled with finality, the Court sees no further legal obstacle in carrying out the respective covenants of the parties to the Land Development Agreement. x x x. In respect to the mutual accounting required to determine the remaining accrued rights and liabilities of said parties, the case is hereby remanded to the Court of Appeals for proper determination and disposition.

All other incidental motions involving G.R. No. 73794, still pending with this Court, are hereby, declared MOOT and are NOTED WITHOUT ACTION.xxii[11]

In the Decision of September 19, 1988, the court ruled thus:

PREMISES CONSIDERED, (a) the petition is DISMISSED for lack of merit; (b) this case (together with all the claims of the intervenors on the merits) is REMANDED to the lower court for further proceedings; and (c) the Resolution of the Third Division of this Court of July 8, 1987 requiring the deposit by the petitioner (see footnote 6)xxii[5] of the amounts contested in a depository bank STANDS (the Motion for Reconsideration thereof being hereby DENIED for reasons already discussed) until after the decision on the merits shall have become final and executory.

In compliance with the Supreme Court resolution, the Court of Appeals proceeded with the disposition of the case, docketed therein as CA G.R. SP No. 04869, and required the parties to appear at a scheduled hearing on June 16, 1994, with counsel and accountants, as well as books of accounts and related records, to determine the remaining accrued rights and liabilities of said parties.xxii[12]

Citing the following provision of the land development agreement:

Entry of judgment was made on April 24, 1989.xxii[6]

Sometime thereafter, the trial court rendered decisions in Civil Case Nos. 9556 (interpleader) and C-11836 (quieting of title). These decisions were appealed to the Court of Appeals, and the appeals were consolidated.

(e) THAT the SECOND PARTY shall keep proper books and accounting records of all transactions affecting the sale of said memorial lots, which records shall be open for inspection by the FIRST PARTY at any time during usual office hours. The SECOND PARTY shall also render to the FIRST PARTY a monthly accounting report of all sales and cash collections effected the preceding month. It is also understood that all financial statements shall be subject to annual audit by a reputable external accounting firm which should be acceptable to the FIRST PARTY.xxii[13]

The appellate court rendered judgment in the consolidated case on December 17, 1991 as follows: (a.) the trial courts decision in Civil Case No. 9556 was affirmed insofar as it dismissed the claims of the intervenors, including the Maysilo Estate, and the titles of NPUM to the subject parcel of land were declared valid; and (b.) the trial courts decision in Civil Case No. C-11836 in favor of the Singson heirs was reversed and set aside.xxii[7]

From the consolidated decision, the Singson heirs, Maysilo Estate and EGMPC each filed with this Court their petitions for review on certiorari. The petition filed by the Singson heirs docketed as G.R. No. 103247-48 was denied for failure to comply with Circular No. 28-91,xxii[8] and entry of judgment made on July 27, 1992. G.R. No. 105159 filed by the Maysilo Estate was denied for failure of petitioner to raise substantial legal issues,xxii[9] and entry of judgment made on August 19, 1992. G.R. Nos. 103230-31 filed by EGMPC was denied for failure to comply with Circular No. 19-91,xxii[10] and entry of judgment made on July 20, 1993. EGMPCs other petition, this time under Rule 65, docketed as G.R. Nos. 107646-47 was dismissed for having been filed out of time and for lack of merit.

the appellate court required EGMPC to produce at the scheduled hearings the following documents: (a) statements of monthly gross income from the year 1981, supported by copies of the contracts/agreements of the sale of lots to buyers/customers; and (b) summary statements, by month, of the forty per cent (40%) share in the net gross income under the land development agreement between the parties.xxii[14] The accounting of the parties respective obligations was referred to the Courts Accountant, Ms. Carmencita Angelo, with the concurrence of the parties, to whom the documents were to be submitted. xxii[15] NPUM prepared and submitted a Summary of Sales and Total Amounts Due based on the following documents it likewise submitted to the court:xxii[16] A-1 Land Development Agreement executed between NPUM and EGMPC on October 6, 1976. A-2 Submittal of requirements filed by EGMPC to the Securities and Exchange Commission dated July 26, 1976 re: its application to develop, sell and maintain a first class private cemetery part situated in Baesa, Kalookan City on the 23 has. property of PUC of NPUM. EGMPCs application calls for the development of 31,326 lawn type memorial lots for underground and above ground interment, and 20,808 garden and family/estates memorial lots for above ground interment, or a total of 52,134 memorial lots.

A-3 EGMPC Daily Sales Report which shows that from 1978, 1979, 1980 and 1981 EGMPC has sold 19,237 memorial lots with gross sales amounting to P52,421,879.70. A-3a Machine copy of EGMPC Daily Sales Report dated December 29, 1979 showing that in 1978 it sold 2,805 memorial lots valued at P5591,716.40 and in 1979 it sold 5,503 memorial lots valued at P11,943,631.00. A-3a-1 Weekly Sales Report of EGMPC corresponding to the period December 26 to 31, 1979, showing cumulatively as of said date it has sold a total of 5,503 memorial lots from January 1 to December 29, 1979. A-3a-2 Sales Report of EGMPC for the period February 12 to 18, 1980. A-3a-4 Letter of Gabriel O. Vida, Executive Vice President and General Manager of EGMPC, dated April 9, 1980, to Pastor Bienvenido Capuli stating among others that for the year 1978, EGMPC has sold 2,805 memorial lots and in the first quarter of 1980 from January 1 to April 2, it has sold 2,418 memorial lots, for a total gross sales of 10,730 memorial lots. A-3b EGMPC Daily Sales Report which show that from 1978 up to December 9, 1980 it has sold a total of 15,253 memorial lots with sales value of P38,085,299.40. A-3b-1 Are supporting sales records and/or weekly sales reports of A-3b-2 EGMPC in relation to Exhibit A-3b. A-3b-3 A-3b-4 A-3b-5 A-36-6 A-3b-7 A-4 Audited Financial Statement of EGMPC for 1985 which it filed with the Securities and Exchange Commission on April 16, 1986 pursuant to the reportorial requirements of the SEC, with accompanying balance sheet and statement of income and expenses, consisting of five (5) pages. A-5 Actual Gross Profit Rate of EGMPC for the year 1985 which shows that it sold 3,623 memorial lots valued at P25,299,601.20. A-6 Machine copy of Assumptions to Projected Cash Flow and Income Statements prepared by EGMPC with assumptions that the 52,000 memorial lots would be sold and that 15% of total sales per year are cash sales and 85% are on installment and that installment sales are payable over a period of 60 months at 12% interest per annum. A-7 Formula for Computation of Interest Income for Lots Sold on Installment. A-8 Sales Price Analysis based on Lawn Class Memorial Lots for the period 1978 to 1988, inclusive. A-8a Price list issued by EGMPC effective December 1, 1977. A-9 Computation of interest due for use of NPUM share. A-9a Letter dated April 11, 1983 of Alfonso P. Roda, President of PUC of NPUM showing summary of gross collections from memorial lots sales starting January 1978 up to June 1982, inclusive, per computation given to PUC by EGMPC. A-9b Are validating documents consisting of accounting ledgers A-9c in support of the computations given by EGMPC to PUC A-9d as mentioned in Dr. Rodas Letter dated April 11, 1983. A-10 Promissory Note of EGMPC dated April 6, 1976 issued to NPUM for a loan of P720,000 for which EGMPC agreed to pay 12% interest per annum. B Price List of Memorial Lots of HIMLAYANG PILIPINO, B-1 INC. effective February 3, 1981. C Price List of Memorial Lots of HIMLAYANG PILIPINO, C-1 INC. effective March 15, 1982. C-2 D Price List of Memorial Lots of HIMLAYANG PILIPINO, D-1 INC. effective February 18, 1983. D-2 E Price List of Memorial Lots of HIMLAYANG PILIPINO,

E-1 INC. effective January 23, 1984. E-2 F Price List of Memorial Lots of HIMLAYANG PILIPINO, F-1 INC. effective July 9, 1984. F-2 G Price List of Memorial Lots of HIMLAYANG PILIPINO, G-1 INC. effective March 1, 1985. G-2 H Price List of Memorial Lots of HIMLAYANG PILIPINO, INC. effective July 1, 1987. I Price List of Memorial Lots of HIMLAYANG PILIPINO, INC. effective January 4, 1989. J Price List of Memorial Lots of HIMLAYANG PILIPINO, INC. effective August 2, 1989. K Price List of Memorial Lots of HIMLAYANG PILIPINO, K-1 INC. effective February 4, 1990. L Price List of Memorial Lots of HIMLAYANG PILIPINO, INC. effective February 2, 1991. M Price List of Memorial Lots of HIMLAYANG PILIPINO, M-1 INC. effective October 2, 1991. N Price List of Memorial Lots of HIMLAYANG PILIPINO, N-1 INC. effective February 5, 1992. O Price List of Memorial Lots of HIMLAYANG PILIPINO, INC. effective October 9, 1992. P Price List of Memorial Lots of HIMLAYANG PILIPINO, INC. effective January 15, 1993. Q Price List of Memorial Lots of HIMLAYANG PILIPINO, INC. effective February 16, 1993. R Price List of Memorial Lots of HIMLAYANG PILIPINO, R-1 INC. effective March 16, 1993. S Price List of Memorial Lots of HIMLAYANG PILIPINO, S-1 INC. effective September 15, 1993. T Price List of Memorial Lots of MANILA MEMORIAL T-1 PARK effective January 1, 1985. T-2 T-3 T-4 U Price List of Memorial Lots of MANILA MEMORIAL U-1 PARK effective June 1, 1991. U-2 U-3 U-4 V Price List of Memorial Lots of MANILA MEMORIAL V-1 PARK effective November 2, 1991. V-2 V-3 V-4 W Price List of Memorial Lots of HOLY CROSS W-1 MEMORIAL PARK effective December 1, 1987. W-2 W-3 It appears that EGMPC did not submit any document whatsoever to aid the appellate court in its mandated task. Thus, in a Resolution dated January 19, 1995, the appellate court declared:

documents submitted by the North Philippine Union Mission of the Seventh Day Adventists only.xxii[17]

Ms. Angelo submitted her Report dated January 31, 1995, to which the appellate court required the parties to comment on.xxii[18] EGMPC took exception to the appellate courts having considered it to have waived its right to present documents.xxii[19] Considering EGMPCs arguments, the court set a hearing date where NPUM would present its documents according to the Rules [of Court], and giving the private respondent [EGMPC] the opportunity to object thereto.xxii[20]

Subsequently, NPUM asked for and the appellate court issued a subpoena duces tecum and subpoena ad testificandum to EGMPCs President, Mr. Gabriel O. Vida requiring him to produce the following documents:

x x x (1) that Eternal Gardens Memorial Park Corporation has waived its rights to present the records and documents necessarily for accounting, which records they were specifically required to preserve under the parties Land Development Agreement; and (2) that it will now proceed to the mutual accounting required to determine the remaining accrued rights and liabilities of the said parties x x x ordered by the Supreme Court in its Resolution of December 1, 1993 (p. 7, rec.), and that the Court will proceed to do what it is required to do on the basis of the

1. Copies of Deeds of Sale corresponding to each memorial lot sold subject of the Land Development Agreement between the parties; 2. Lists of all memorial lots sold under or affecting the said Land Development Agreement with an indication of the types/ kinds of memorial lots and the corresponding prices at which each was sold and the dates when each lot was sold; 3. Lists of all the owners of the memorial lots affected by the Land Development Agreement; 4. Copies of all the annual audits made by the external accounting firm pursuant to provision (a) of the Land Development Agreement; 5. Copies of all audited financial statements of ETERNAL from 1978 to the present; 6. Copies of all monthly accounting reports of all sales and cash collections regarding all the memorial lots sold under the Land Development Agreement pursuant to provision (e) of the said Land Development Agreement; 7. The name/s of the Depository/Trustee Bank/s which acted as the depository/trustee of funds collected by ETERNAL pursuant to provision (f) of the subject Land Development Agreement; 8. All other accounting books and records on all transactions affecting all the memorial lots covered under the Land Development Agreement; 9. List of all the corporate officers and employees of ETERNAL from 1975 up to the present whose duties and responsibilities involved the recording of all sales and other transactions and the safekeeping of such records relating to the sale of the memorial lots subject of the Land Development Agreement. xxii[21] NPUM also filed a Request for Admission of the documents it had earlier submitted to the Court annexed to the Summary of Sales and Total Amounts Due, addressed to Mr. Vida.xxii[22] EGMPC, however, filed a Denial to the Request for Admission, alleging that it was without knowledge or information of the documents, except for the Land Development Agreement of October 6, 1976.xxii[23] NPUM then reiterated its request for and was granted by the appellate court, a subpoena duces tecum and subpoena ad testificandum, this time addressed to the Chief of the Records Division of EGMPC.xxii[24] NPUM further filed a Motion for Production, Inspection and Photocopying of Documents and Books of Accounts of EGMPC, in particular: 1. Master Development and/or Operational Plan of Eternal Gardens for Memorial Park at Baesa, Metro Manila subject of the Land Development Agreement.

2. Inventory of memorial lots developed and sold by Eternal under the Land Development Agreement and the type of memorial lots developed and sold, i.e., whether lawn type, family estate type, garden estate type and the number of each type developed and sold. 3. List of buyers and owners of memorial lots sold under the Land Development Agreement and the corresponding sales contracts. 4. Records of number of memorial lots sold on installment terms, and those sold on cash basis. 5. Sales and marketing records as to the number of memorial lots effected by the Land Development Agreement sold in each of the following years: 1978, 1979, 1980, 1981, 1982, 1983, 1984, 1985, 1986, 1987, 1988, 1989, 1990, 1991, 1992, 1993, 1994 and 1995. 6. Monthly accounting records of collections from sales of memorial lots under the Land Development Agreement from 1978 to 1995, inclusive. 7. Year-end audited financial statements of Eternal Gardens Memorial Park Corporation from 1977 to 1995, inclusive. 8. Price list of Eternals memorial plot lots affected by the Land Development Agreement covering the period 1977 to 1995. 9. List of accredited and/or authorized agents, brokers, salesmen, and sales counsellors of Eternal from 1977 to 1995 and their addresses. 10. Records of collections representing 10% of the gross collections on each memorial lot sold under the Land Development Agreement, for perpetual care fees and constituting a trust fund to secure perpetual care of the memorial park affected by the Land Development Agreement.xxii[25] Later, NPUM filed a second Request for Admissions addressed to Mr. Vida. He was asked to make the following admissions: 1. That the auditor retained by Eternal Gardens Memorial Park Corp. to audit and examine its financial position, and which prepared Eternals audited financial statements, for the years 1982, 1983 and 1984 was the auditing and accounting firms of Josue, Arceo & Co., CPAs, with office at the 2nd Floor, Roman R. Santos Building, Plaza Goeti, Manila. 2. That the auditor retained by Eternal Gardens Memorial Park Corp. to audit and examine its financial position, and which prepared Eternals audited financial statement for the Fiscal years 1985 and 1986 was Roseller A. Ditangco, CPA, with offices at No. 6, Plata Street, Tugatog, Malabon, Metro Manila. 3. That the auditor retained by Eternal Gardens Memorial Park Corp. to audit and examine its financial position, and which prepared Eternals audited financial statements for the Fiscal years 1987, 1988, 1989, 1990, 1991, 1992 and 1993, was Bernardino T. Dela Cruz, CPA with offices at No. 9, Interior II, K-8th Street, Kamuning, Quezon City. 4. That true and faithful copies of the audited financial statements of Eternal Gardens Memorial Park Corp. for the Fiscal years 1981 to 1993, inclusive, specifically those referred to in paragraphs 1, 2 and 3 of this Request, were submitted to and filed with the Bureau of Internal Revenue as an integral part of Eternals Income Tax Returns, as well as with the Securities and Exchange Commission in compliance with the reportorial requirements of the said Securities and Exchange Commission. 5. That each of the following documents, exhibited with and attached to this request, are true and faithful copies of the original and genuine documents, thus: a. Annex A (inclusive of sub-markings from Annexes A-1 to A-9) is the audit report prepared by the accounting firm of Josue, Arceo & Co., (CPAs), of the financial position of Eternal Gardens Memorial Park Corp. at 31 December 1982; b. Annex B (inclusive of sub-markings from Annexes B-1 to B-3) is the audit report prepared by the accounting firm of Josue, Arceo & Co., (CPAs) of the financial position of Eternal Gardens Memorial Park Corp. at 31 December 1983; c. Annex C (inclusive of sub-markings from Annexes C-1 to C-6) is the audit report prepared by the accounting firm of Josue, Arceo & Co. (CPAs) of the financial position of Eternal Gardens Memorial Park Corp. at 31 December 1984;

d. Annex D (inclusive of sub-markings from Annexes D-1 to D-3) is the audit report prepared by Roseller A. Ditangco, CPA of the financial position of Eternal Gardens Memorial Park Corp. at 31 December 1985; e. Annex E (inclusive of sub-markings from Annexes E-1 to E-8) is the audit report prepared by Bernardino T. Dela Cruz, CPA, of the financial position of Eternal Gardens Memorial Park Corp. at 31 December 1987; f. Annex F (inclusive of sub-markings from Annexes F-1 to F-7) is the audit report prepared by Bernardino T. Dela Cruz, CPA, of the financial position of Eternal Gardens Memorial Park Corp. at 31 December 1989; g. Annex G (inclusive of sub-markings from Annexes G-1 to G-9) is the audit report prepared by Bernardino T. Dela Cruz, CPA, of the financial position of Eternal Gardens Memorial Park Corp., at 31 December 1990; h. Annex H (inclusive of sub-markings from Annexes H-1 to H-13) is the audit report prepared by Bernardino T. Dela Cruz, CPA, of the financial position of Eternal Gardens Memorial Park Corp., at 31 December 1991; i. Annex I (inclusive of sub-markings from Annexes I-1 to I-8) is the audit report prepared by Bernardino T. Dela Cruz, CPA, of the financial position of Eternal Gardens Memorial Park Corp. at 31 December 1992; j. Annex J (inclusive of sub-markings from Annexes J-1 to J-7) is the audit report prepared by Bernardino T. Dela Cruz, CPA, of the financial position of Eternal Gardens Memorial Park Corp. at 31 December 1993.xxii[26]

The respondent Eternal Gardens Memorial Park received copy of the [January 15, 1996] resolution on January 22, 1996 and, after twelve (12) days from its receipt or on February 2, 1996, filed a motion for reconsideration thereof. This Court denied Eternal Gardens motion for reconsideration in a resolution promulgated April 12, 1996, a copy of which it received on April 18, 1996. After eleven (11) days from receipt of the resolution denying its motion for reconsideration, or on April 12, 1996 (sic), it filed a motion for extension to file a petition for review with the Supreme Court.

Restraining Order And/Or Injunction and Motion for Contempt of Court. EGMPC prayed that pending resolution of the petition to promptly issue a restraining order and/or injunction against Judge Jaime Discaya of the RTC Br. 120 of Kalookan City in Civil Case No. 9556 x x x. xxii[41]

EGMPC also filed in G.R. No. 73794 on January 17, 1997 an Urgent Motion for Restraining Order And/Or Injunctive Relief with the same prayer as in its Urgent Motion filed in G.R. No. 124554.xxii[42] In G.R. No. 124554, the Court granted EGMPCs motion and issued a temporary restraining order against the trial courts order dated December 16, 1996 and writ of execution dated January 7, 1997.xxii[43]

It is quite clear that after the denial of its motion for reconsideration, Eternal Gardens had only three (3) days left of the reglementary period to file a petition for review, or only up to April 12, 1996, but Eternal Gardens allowed that period to lapse, and then filed its motion to extend to file its petition on April 29, 1996 - which is eight (8) days beyond the period of finality of the resolution sought to be reviewed by the Supreme Court. Consequently, the resolution of January 15, 1996 had attained finality before Eternal Gardens filed its motion to extend before this Honorable Court.xxii[34]

In a Resolution dated January 27, 1997 issued in G.R. No. 73794, the Court denied for lack of merit EGMPCs Urgent Motion .xxii[44]

Entry of judgment was made on June 6, 1996.xxii[35]

The threshold question here is whether Eternal Gardens timely filed its petition for review from the Court of Appeals January 15, 1996 and April 12, 1996 Resolutions.

Following the above incidents, on June 20, 1996, EGMPC filed in G.R. No. 73794 an Opposition and/or Comment to the Report of the Court of Appeals dated 31 May 1996 with the prayer:

We restate the material dates thus:

Meanwhile, EGMPC failed to present the documents required by the subpoena. It further filed a Denial and/or Objection to the Requests for Admission on the ground that it could not make comparison of the documents with the originals thereof.xxii[27]

On November 10, 1995, Ms. Angelo submitted her Report.xxii[28]

x x x to disregard and nullify the Report of the Court of Appeals dated May 31, 1996 and at the same time allow or tolerate the First Division of the Honorable Supreme Court to resolved (sic) the petitioner Eternal Gardens Petition for Certiorari against the Court of Appeals and NPUM with G.R. No. 124554.xxii[36] In retort to EGMPCs opposition, also in G.R. No. 73794, NPUM filed on June 11, 1996 an Omnibus Motion (a) to dismiss the petition in G.R. No. 124554, or (b) to consolidate the two petitions, and (c) for the issuance of a writ of execution. NPUM contended that as a consequence of the appellate courts resolutions in CA G.R. SP No. 04869 having attained finality, a writ of execution may be issued under G.R. No. 73794, and EGMPC could no longer file a separate petition such as that docketed as G.R. No. 124554.xxii[37]

EGMPC received a copy of the January 15, 1996 Resolution on January 22, 1996. Twelve days from such receipt, or on February 2, 1996, EGMPC filed its Motion for Reconsideration. On April 18, 1996, EGMPC received the appellate courts Resolution of April 12, 1996 denying its Motion for Reconsideration. On April 29, 1996, or eleven days from its receipt of the denial of its motion for reconsideration, EGMPC filed a motion for extension of time to file its Petition for Certiorari and Prohibition and concurrently paid the legal fees. We find that EGMPCs Motion for Extension of Time to File a Petition for Review was timely filed on April 29, 1996, such motion having been filed eleven days from receipt of the appellate courts denial of its motion for reconsideration. Supreme Court Circular No. 10 dated August 28, 1986 on modes and periods of appeal provides thus:

In a Resolution dated January 15, 1996, the Court of Appeals approved the report of Ms. Angelo, finding this to be a just and fair account of what Eternal Gardens and Memorial Park owes to the petitioner North Philippine Union Mission of the Seventh-Day Adventists, and accordingly orders the former to pay and turn over to the latter the amounts of P167,065,195.00 as principal and P167,235,451.00 in interest x x x.xxii[29]

(5) APPEALS BY CERTIORARI TO THE SUPREME COURT EGMPC filed a Motion for Reconsideration, which was denied for lack of merit by the appellate court in a Resolution dated April 12, 1996.xxii[30] In its Comment filed on July 17, 1996, in G.R. No. 124554, NPUM prayed for the denial of the petition for being frivolous and dilatory, citing EGMPCs violation of Circular No. 04-94 on forum shopping, in reference to its (EGMPCs) pleadings filed in G.R. No. 73794. NPUM pointed out that the reliefs sought by EGMPC in G.R. No. 124554 were identical to those in its Opposition And/Or Comment to the Report of the Court of Appeals dated 31 May 1996 filed in G.R. No. 73794.xxii[38]

On April 29, 1996, EGMPC filed a Motion for Extension of Time to File Petition for Certiorari and Prohibition with this Court, docketed as G.R. No. 124554, seeking the review of the appellate courts Resolutions dated January 15, 1996 and April 12, 1996.xxii[31] The Court granted this motion for extension,xxii[32] and on May 27, 1996, EGMPC filed the instant petition.xxii[33]

It appears, however, that in a Report dated May 31, 1996 in CA-G.R. SP No. 04869, the Court of Appeals informed the parties that its January 15, 1996 Resolution had attained finality considering the following:

On December 26, 1996, the Regional Trial Court of Kalookan City, Branch 120, issued an Order in the case of origin, Civil Case No. 9556, granting NPUMs motion for execution of judgment. xxii[39] A writ of execution was subsequently issued by that trial court on January 7, 1997.xxii[40] Because of the trial courts issuance of the writ of execution, on January 10, 1997, EGMPC filed in G.R. No. 124554 an Urgent Motion for

In an appeal by certiorari to this Court under Rule 45 of the Rules of Court, Section 25 of the Interim Rules and Section 7 of PD 1606, a party may file a petition for review on certiorari of the judgment of a regional trial court, the Court of Appeals or the Sandiganbayan within fifteen days from notice of judgment or of the denial of his motion for reconsideration filed in due time, and paying at the same time the corresponding docket fee (Section 1 of Rule 45). In other words, in the event a motion for reconsideration is filed and denied, the period of fifteen days begins to run again from notice of denial (See Codilla vs. Estenzo, 97 SCRA 351; Turingan vs. Cacdad, 122 SCRA 634).

A motion for extension of time to file a petition for review on certiorari may be filed with the Supreme Court within the reglementary period, paying at the same time the corresponding docket fee.xxii[45]

While the petition filed by EGMPC purports to be one of certiorari under Rule 65 of the Revised Rules of Court, we shall treat it as having been filed under Rule 45, considering that it was filed within the 15-day reglementary period for the filing of a petition for review on certiorari. As the Court stated in Delsan Transport Lines, Inc. vs. Court of Appeals, where the Court was liberal in its application of the Rules of Court in the interest of justice: It cannot x x x be claimed that this petition is being used as a substitute for appeal after that remedy has been lost through the fault of petitioner. Moreover, stripped of allegations of grave abuse of discretion, the petition actually avers errors of judgment rather than of jurisdiction, which are the subject of a petition for review.xxii[46]

may have prompted EGMPC to file the motions in both cases. The trial court in the case of origin, acted favorably on NPUMs motion for the issuance of a writ of execution, the basis of which is the alleged finality of the appellate courts January 15, 1996 Resolution. The trial court ruled that the instant case denominated as an original action for certiorari does not interrupt the course of the principal action [G.R. No. 73794] nor the running of the period in the proceeding. xxii[49] To not stay the execution considering the trial courts ratiocination would render moot EGMPCs remedy in the instant case.

EGMPC first contends that the appellate court, in appointing an accountant to make the computations, delegated judicial function, such as to determine the admissibility of evidence.xxii[55]

Under the Revised Internal Rules of the Court of Appeals, that court has the -

The May 31, 1996 Report of the Court of Appeals informed the parties that the January 15, 1996 Resolution had attained finality, erroneously applying the rule applicable to petitions for review filed with the Court of Appeals from a final judgment or order of the regional trial court.xxii[47]

NPUM also contends that EGMPC has committed perjury, pointing to the certification under oath filed by EGMPC, through its President Gabriel O. Vida, where he states that there is no other case pending in any court or tribunal in the Philippines, with the same issues in this case x x x.xxii[50]

d. Authority to receive evidence and perform any and all acts necessary for the resolution of factual issues raised in cases falling within its original jurisdiction.

For the proper disposition of the case, the appellate court, under the above-quoted authority, designated an accountant to receive, collate and analyze the documents to be filed by the parties.xxii[56]

We cannot and do not in the instant case vacate and set aside the May 31, 1996 Report. The report is not before this Court on review. We must however, within the milieu of this case, regard the report impertinent by the fact of EGMPC having timely filed its motion for extension of time to file its petition on April 29, 1996.

Again, we disagree. It does not appear that EGMPC was to pursue the two cases concurrently. EGMPC filed this new petition, and did not assail the appellate courts resolution under G.R. No. 73794, as in fact the Court has informed the parties that no further pleadings were to be entertained in G.R. No. 73794 after remand to the Court of Appeals.xxii[51]

We also consider that the consequences of the issuance of the report, that is, the entry of judgment in the appellate court and the writ of execution issued by the trial court in the case of origin, inextricably affect the resolution of the instant case. Hence, the rationale for our restraining order of January 15, 1997. We next consider whether, as asserted by NPUM, EGM PCs petition must be summarily dismissed on the ground of forum shopping. NPUM points to EGMPCs Opposition and/or Comment to the Report of the Court of Appeals dated May 31, 1996 filed in G. R. No. 73794 vis-a-vis its Petition for Review in the instant case, and the two Urgent Motions for the Issuance of a Temporary Restraining Order filed in G.R. No. 73794 and in the instant case.

EGMPC next asserts that the Resolution of the Third Division dated December 1, 1993 ordering the remand to the Court of Appeals of the case for accounting changed, modified and reversed the September 19, 1988 Decision of the Second Division which ordered the remand of the case to the trial court. EGMPC contends that the Third Division is in violation of the constitution which provides that no doctrine or principle of law laid down in a decision en banc or in division may be changed modified or revised by the Court except when sitting en banc.xxii[52]

No judicial function was exercised by Ms. Angelo. She was not asked to rule on the admissibility of the evidence. The documents were duly marked during the hearing of July 19, 1995, for the consideration of the appellate court, which alone had the power to decide. Ms. Angelos role in the proceedings was to prepare a report, which she did, culling from the documents submitted to her. While it may be true that the report, when adopted by the appellate court, became part of its decision, judicial power lies, not with the official who prepared the report, but with the court itself which wields the power of approval or rejection. Under American jurisprudence, the rule is thus -

EGMPC had raised the very same issue in its Motion for Reconsiderationxxii[53] of the December 1, 1993 Resolution. The Court, in its Resolution dated February 14, 1994 had denied the motion with finality for lack of merit.

NPUM asserts that the reliefs sought by EGMPC in its opposition and in its petition are identical. We disagree. The petition here seeks the setting aside of the Court of Appeals January 15, 1996 and April 12, 1996 Resolutions.

The Opposition in G.R. No. 73794, on the other hand, sought the nullification of the May 31, 1996 Report and as a corollary, for the instant case to be allowed or tolerated.

The opposition and the petition do not seek to provoke from this Court the resolution of a same issue, the evil which Revised Circular No. 2891 and its companion Administrative Circular No. 04-94 address. We read the opposition in G.R. No. 73794 as a complement to the petition here, to which it makes categorical and express reference. xxii[48] We consider it as merely a matter of discourse and emphasis that Eternal Gardens reiterated its case in the later pleading.

Needless to say, the argument raised by EGMPC is utterly without consequence. At the time the September 19, 1988 Decision was rendered, the two civil cases - interpleader and quieting of title - were still pending. What was brought before the appellate courts and subject of G.R. No. 73794 were mere incidents, and not the judgment of the trial court; thus, the remand to the trial court for further proceedings on the merits of the case. The December 1, 1993 Resolution was issued after the issue of ownership of the subject parcel of land was already resolved with finality. What was left for the courts to do was to have an accounting done of the rights and liabilities of EGMPC and NPUM, thus, the remand to the Court of Appeals.

It would seen on principle that a commissioner, master or referee appointed by a court to aid it in the adjudication of a particular case is not a court when performing the functions assigned to him, although the court may adopt his conclusions in its decision x x x. It has, for instance, been held that a statute giving the supreme court of a state the power to appoint commissioners thereof whose duty shall be, under such rules and regulations as the court may adopt, to assist it in the performance of its functions, and in disposing of undetermined cases before it, is not unconstitutional or open to the objection that the commissioners are vested with judicial power, since the commissioners merely report facts found and conclusions reached, and the court retains the power to decide which is the only judicial power. It has also been pointed out that a chancellor does not, by referring a matter to a commissioner, delegate his judicial function to him. The commissioner is appointed for the purpose of assisting the chancellor, not to supplant or replace him, and the findings of a commissioner are merely advisory and not binding on the court.xxii[57]

EGMPC also contends that it was deprived of due process because it was not given reasonable opportunity to know and meet the claim of [NPUM] as its counsel was not able to cross-examine the American Accountant of [NPUM].xxii[58]

We now consider the merits of the case. The gist of EGMPCs contentions is that it owes the amount of only P35,000,000.00 less advances and not P167,065,195.00 as principal and P167,235,451.00 in interest as computed by Court Accountant Carmencita C. Angelo.xxii[54]

The contention is without merit. Contrary to EGMPCs claim, it was given every opportunity to present its case. At the outset, the parties were asked by the appellate court to submit documents for accounting. NPUM made full utilization of the modes of discovery, asking the appellate court to subpoena documents and testimonies, and requesting admissions from EGMPC regarding documents it (EGMPC) had in its possession, documents which

Regarding the motions for the issuance of a temporary restraining order filed by EGMPC on January 10, 1997 in the instant case and on January 17, 1997 in G.R. No. 73794, we consider the exigency which

emanated from the corporation itself, and either sent to NPUM as communiqus, such as the Letter of Mr. Vida dated April 4, 1980 to Pastor Bienvenido Capule of NPUM stating inter alia that for 1978, EGMPC sold 2,805 memorial lots and that during the first quarter of 1980 the corporation sold 2,418 lots, totalling 10,730,xxii[59] or documents available to the general public, as in the Price Lists, or filed with government offices, specifically the Securities and Exchange Commission and the Bureau of Internal Revenue.

EGMPC lastly contends that it is not liable for interest. It claims that it was justified in withholding payment as there was still the unresolved issue of ownership over the property subject of the Land Development Agreement of October 6, 1976.xxii[66]

having asked for the assistance of the lower court by filing a complaint for interpleader where the deposit of aforesaid amounts is not only required by the nature of the action but is a contractual obligation of the petitioner under the Land Development Program.

EGMPC cannot claim that it was denied the forum to confer with NPUM and NPUMs accountant. The appellate court had arranged conferences for the parties and their accountants to allow them to discuss with each other and with Ms. Angelo. Even Ms. Angelo, in her Letter dated November 10, 1995 covering her second and final report spoke of such a conference, to wit:

The argument is without merit. EGMPC under the agreement had the obligation to remit monthly to NPUM forty percent (40%) of its net gross collection from the development of a memorial park on property owned by NPUM. The same agreement provided for the designation of a depository/trustee bank to act as the depository/trustee for all funds collected by EGMPC.xxii[67] There was no obstacle, legal or otherwise, to the compliance by EGMPC of this provision in the contract, even on the affectation that it did not know to whom payment was to be made. Even disregarding the agreement, EGMPC cannot suspend payment on the pretext that it did not know who among the subject propertys claimants was the rightful owner. It had a remedy under the New Civil Code of the Philippines - to give in consignation the amounts due, as these fell due.xxii[68] Consignation produces the effect of payment.xxii[69]

As correctly observed by the Court of Appeals, the essence of an interpleader, aside from the disavowal of interest in the property in litigation on the part of the petitioner, is the deposit of the property or funds in controversy with the court, it is a rule founded on justice and equity: that the plaintiff may not continue to benefit from the property or funds in litigation during the pendency of the suit at the expense of whoever will ultimately be decided as entitled thereto.

In compliance with your instructions in the last conference-meeting with the party-litigants in Case CA-G.R. No. SP No. 04869 held last August 30, 1995, the undersigned together with the representatives of the North Philippine Union Mission (NPUM) and the Eternal Gardens Memorial, Inc. had a discussion on the computations made by each of the party of the amount due to the North Philippine Union Mission which were submitted to the Court.xxii[60]

It was not even imperative that EGMPC cross-examine the accountant who prepared EGMPCs computation, and there was no denial of due process without such cross-examination. This computation was merely to aid Ms. Angelo, who was to make her own independent computation from the documents submitted to her. EGMPC also asserts that substantially if not all records, documents and papers submitted by the private respondent NPUM to the Courts Accountant which eventually became the basis of the report and Resolution of January 15, 1996 of the public respondent Court, were not genuine and not properly identified by the persons who were supposed to have executed the same including the alleged financial statement of Eternal Gardens allegedly issued by the Securities and Exchange Commission (SEC).xxii[61]

The rationale for consignation is to avoid the performance of an obligation becoming more onerous to the debtor by reason of causes not imputable to him. xxii[70] For its failure to consign the amounts due, Eternal Gardens obligation to NPUM necessarily became more onerous as it became liable for interest on the amounts it failed to remit. Notably, EGMPC filed an interpleader action, the essence of which, aside from the disavowal of interest in the property in litigation on the part of the petitioner, is the deposit of the property or funds in controversy with the court. Yet from the outset, EGMPC had assailed any court ruling ordering the deposit with a reputable bank of the amounts due from it under the Land Development Agreement. In G.R. No. 73794,xxii[71] the Court made the following discourse on the disavowal of EGMPC of its obligations, thus:

The case at bar was elevated to the Court of Appeals on certiorari with prohibitory and mandatory injunction. Said appellate court found that more than twenty million pesos are involved; so that on interest alone for savings or time deposit would be considerable, now accruing in favor of the Eternal Gardens. Finding that such is violative of the very essence of the complaint for interpleader as it clearly runs against the interest of justice in this case, the Court of Appeals cannot be faulted for finding that the lower court committed a grave abuse of discretion which requires correction by the requirement that a deposit of said amounts should be made to a bank approved by the Court.

Petitioner would now compound the issue by its obvious turnabout, presently claiming in its memorandum that there is a novation of contract so that the amounts due under the Land Development Agreement were allegedly extinguished, and the requirement to make a deposit of said amounts in a depository bank should be held in abeyance until after the conflicting claims of ownership now on trial before Branch CXXII RTC-Caloocan City, has finally been resolved.

All these notwithstanding, the need for the deposit in question has been established, not only in the lower courts and in the Court of Appeals but also in the Supreme Court where such deposit was required in the resolution of July 8, 1987 to avoid wastage of funds.

From the transcript of stenographic notes of the proceedings in the appellate court, we find that EGMPC acquiesced to the use of the documents submitted by NPUM, including the financial statements, even actively participating in the discussion of the contents of such documents. EGMPCs main objection was only on how the entries in these documents were to be interpreted, for example, on how payments towards the perpetual care fund would be credited.xxii[62] EGMPC did not object even when counsel for NPUM read into the records the contents of the documents.xxii[63]

In the case at bar, a careful analysis of the records will show that petitioner admitted among others in its complaint in Interpleader that it is still obligated to pay certain amounts to private respondent; that it claims no interest in such amounts due and is willing to pay whoever is declared entitled to said amounts. Such admissions in the complaint were reaffirmed in open court before the Court of Appeals as stated in the latter courts resolution dated September 5, 1985 in C.A. G.R. No. 04869 which states: The private respondent (MEMORIAL) then reaffirms before the Court its original position that it is a disinterested party with respect to the property now the subject of the interpleader case. In the light of the willingness, expressly made before the court, affirming the complaint filed below, that the private respondent (MEMORIAL) will pay whatever is due on the Land Development Agreement to the rightful owner/owners, there is no reason why the amount due on subject agreement has not been placed in the custody of the Court.

Even during the pendency of G.R. No. 73794, EGMPC was required to deposit the accruing interests with a reputable commercial bank to avoid possible wastage of funds when the case was given due course.xxii[72] Yet, EGMPC hedged in depositing the amounts due and made obvious attempts to stay payment by filing sundry motions and pleadings.

We thus find that the Court of Appeals correctly held Eternal Gardens liable for interest at the rate of twelve percent (12%). The withholding of the amounts due under the agreement was tantamount to a forbearance of money.xxii[73]

It even appears that after Ms. Angelo came up with her first report, EGMPCs counsel expressed that it was amenable to that computation.xxii[64] In that report, Ms. Angelo had stressed that [s]ince the Eternal Gardens Memorial Park, Inc. did not submit to the Court any documents pertaining to the computations of the 40% share of the North Philippine Union Mission of the Seventh Day Adventists, then we have no other recourse but to base the computation on the available figures and on the other documents as presented by the petitioner [NPUM].xxii[65]

CONSIDERING THE FOREGOING, the Court Resolved to DENY the petition. The Resolutions dated January 15, 1996 and April 12, 1996 are AFFIRMED. The temporary restraining order issued by this Court on January 15, 1997 is LIFTED.

SO ORDERED. Under the circumstances, there appears to be no plausible reason for petitioners objections to the deposit of the amounts in litigation after

[G.R. No. 150913. February 20, 2003]

SPOUSES TEOFILO and SIMEONA RAYOS, and GEORGE RAYOS, petitioners, vs. DONATO REYES, SATURNINO REYES, TOMASA R. BUSTAMANTE and TORIBIA R. CAMELO, respondents.

On 22 June 1961 Francisco Tazal again sold the third parcel of land previously purchased by Mamerto Reyes to petitioner-spouses Teofilo and Simeona Rayos for P400.00. On 1 July 1961 petitioner-spouses bought from Blas Rayos for P400.00 the two (2) lots that Tazal had sold at the first instance to Mamerto Reyes and thereafter to Blas Rayos. Curiously, these contracts of sale in favor of petitioner-spouses were perfected while Civil Case No. A-245 was pending before the trial court.

DECISION On 26 September 1962 the parties in Civil Case No. A-245 submitted a stipulation of facts upon which the Court of First Instance would decide the case. They admitted the genuineness and due execution of the 1 September 1957 deed of sale with right of repurchase although they were in disagreement as to its true character. They also acknowledged the consignation of P724.00 in the Court of First Instance on 31 May 1960 and the payment of taxes by Mamerto Reyes on the three (3) parcels of land from 1958 to 1962.xxii[5]

On 8 July 1993 respondents filed a complaint for damages and recovery of ownership and possession of the three (3) parcels of land in dispute against herein petitioner-spouses Teofilo and Simeona Rayos and petitioner George Rayos as administrator thereof before the Regional Trial Court of Alaminos, Pangasinan.xxii[10] It was respondents theory that neither petitioners nor their predecessors-in-interest Francisco Tazal and Blas Rayos repurchased the properties before buying them in 1958 and 1961 or when the judgment in Civil Case No. A-245 became final and executory in 1990, hence the sale of the three (3) parcels of land to petitioner-spouses did not transfer ownership thereof to them.

BELLOSILLO, J.:

AT STAKE IN THIS PETITION FOR REVIEW is the ownership of three (3) parcels of unregistered land with an area of approximately 130,947 square meters situated in Brgy. Sapa, Burgos, Pangasinan, the identities of which are not disputed.

The three (3) parcels were formerly owned by the spouses Francisco and Asuncion Tazal who on 1 September 1957 sold them for P724.00 to respondents predecessor-in-interest, one Mamerto Reyes, with right to repurchase within two (2) years from date thereof by paying to the vendee the purchase price and all expenses incident to their reconveyance. After the sale the vendee a retro took physical possession of the properties and paid the taxes thereon.xxii[1]

On 5 January 1963 the trial court in Civil Case No. A-245 rejected the contention of Francisco Tazal that the deed of sale executed on 1 September 1957 was an equitable mortgage but held that Tazal could nonetheless redeem the three (3) parcels of land within thirty (30) days from finality of judgment by paying to Mamerto Reyes the purchase price of P724.00 and all expenses to execute the reconveyance, i.e., the expenses of the contract and the necessary and useful expenses made on the properties as required by Art. 1616 of the Civil Code. The dispositive portion of the trial courts decision reads -

Petitioners argued on the other hand that the consignation of P724.00 in Civil Case No. A-245 had the full effect of redeeming the properties from respondents and their predecessor-in-interest, and that respondents were guilty of estoppel and laches since Mamerto Reyes as their predecessor-in-interest did not oppose the sale to Blas Rayos and to petitioner-spouses Teofilo and Simeona Rayos. The parties then filed their respective memoranda after which the case was submitted for decision.

The otherwise inconsequential sale became controversial when two (2) of the three (3) parcels were again sold on 24 December 1958 by Francisco Tazal for P420.00 in favor of petitioners predecessor-ininterest Blas Rayos without first availing of his right to repurchase the properties.

In the meantime, on 1 September 1959 the conventional right of redemption in favor of spouses Francisco and Asuncion Tazal expired without the right being exercised by either the Tazal spouses or the vendee Blas Rayos.

WHEREFORE, the Court, hereby renders judgment declaring the contract x x x entered into by the plaintiffs and the defendant and captioned Deed of Sale with Right to Repurchase as a true sale with right to repurchase x x x and not an equitable mortgage x x x and declaring the plaintiffs entitled to repurchase the property in question within thirty (30) days from finality of this decision, without pronouncement as to cost.xxii[6]

On 15 November 1996 the trial court promulgated its Decision in Civil Case No. A-2032 finding merit in respondents claim for damages as well as ownership and possession of the disputed parcels of land from petitioners.xxii[11] The court declared void the separate deeds of absolute sale thereof executed by Francisco Tazal in favor of Blas Rayos and to spouses Teofilo and Simeona Rayos and by Blas Rayos to the same spouses, and ordered herein petitioners and Francisco Tazal to vacate and reconvey the lands to respondents as heirs of Mamerto Reyes and to pay actual damages for litigation expenses in the sum of P20,000.00, attorneys fees of P10,000.00, and exemplary damages of P50,000.00 plus costs. The court a quo rationalized that petitioners did not present evidence to prove that they and their predecessor-in-interest were able to repurchase the property within the period of redemption set forth by the Court of First Instance in Civil Case No. A-245.xxii[12] Petitioners appealed the Decision to the Court of Appeals.xxii[13]

After the expiration of the redemption period, Francisco Tazal attempted to repurchase the properties from Mamerto Reyes by asserting that the 1 September 1957 deed of sale with right of repurchase was actually an equitable mortgage and offering the amount of P724.00 to pay for the alleged debt.xxii[2] But Mamerto Reyes refused the tender of payment and vigorously claimed that their agreement was not an equitable mortgage.xxii[3]

Mamerto Reyes appealed the Decision to the Court of Appeals,xxii[7] which in turn elevated the appeal to this Courtxxii[8] since only questions of law were involved.xxii[9] When Mamerto Reyes died in 1986, petitioner-spouses Teofilo and Simeona Rayos wrested physical possession of the disputed properties from Reyess heirs.

On 16 May 1990 this Court considered the case closed and terminated for failure of the parties therein to manifest their interest to further prosecute the case. On 20 June 1990 the judgment in Civil Case No. A245 became final and executory.

On 9 May 1960 Francisco Tazal filed a complaint with the Court of First Instance of Pangasinan against Mamerto Reyes, docketed as Civil Case No. A-245, for the declaration of the 1 September 1957 transaction as a contract of equitable mortgage. He also prayed for an order requiring defendant Mamerto Reyes to accept the amount of P724.00 which he had deposited on 31 May 1960 with the trial court as full payment for his debt, and canceling the supposed mortgage on the three (3) parcels of land with the execution of the corresponding documents of reconveyance in his favor.xxii[4] Defendant denied plaintiffs allegations and maintained that their contract was a sale with right of repurchase that had long expired.

Subsequent to the finality of judgment in Civil Case No. A-245 petitioner-spouses did nothing to repurchase the three (3) parcels of land within the thirty (30) - day grace period from finality of judgment since, according to them, they believed that the consignation of P724.00 in the civil case had perfected the repurchase of the disputed properties.

On 31 May 2001 the appellate court promulgated its Decision affirming in toto the judgment appealed from.xxii[14] The Court of Appeals held that the deposit of P724.00 on 31 May 1960 in Civil Case No. A-245 was done belatedly, i.e., after the two (2) year - period from 1 September 1957, the date of the sale as stated in the deed of sale between the spouses Francisco and Asuncion Tazal and Mamerto Reyes, and did not cover the entire redemption price, i.e., the selling price of P724.00 plus the expenses of executing the contract and the necessary and useful expenses made on the properties. The appellate court further ruled that estoppel and laches did not bar the cause of action of respondents as plaintiffs in Civil Case No. A-2032 since Mamerto Reyes as their predecessor-in-interest actively resisted the claim of Francisco Tazal in Civil Case No. A-245 to treat the 1 September 1957 sale as an equitable mortgage and to authorize the redemption of the parcels of land in dispute beyond the two (2)-year period stipulated in the sale with right to repurchase. Hence, the instant petition for review.

On 6 July 1992 respondents as heirs of Mamerto Reyes executed an affidavit adjudicating to themselves the ownership of the parcels of land and declared the properties in their names for assessment and collection of real estate taxes. On 19 January 1993 respondents registered the 1 September 1957 deed of sale with right of repurchase with the register of deeds.

Petitioners argue that the consignation of P724.00 in Civil Case No. A245 provides the best evidence of the repurchase of the three (3) parcels of land; that the consignation was admitted by Mamerto Reyes himself in the stipulation of facts and approved implicitly by the Court of First Instance when it held the 1 September 1957 transaction as a contract of sale with right of repurchase; that respondents failed to

prove the existence of other expenses, i.e., the expenses of the contract and the necessary and useful expenses made on the properties, required by Art. 1616 of the Civil Code to be paid in addition to the purchase price of P724.00 so that petitioners may validly exercise the right to repurchase the real estate; that Mamerto Reyes as respondents predecessor-in-interest was guilty of estoppel and laches for not seeking the annulment of the contracts of sale in favor of Blas Rayos and petitioner-spouses Teofilo and Simeona Rayos; that petitionerspouses are buyers in good faith and for value of the three (3) parcels of land; and finally, that there is no legal basis for awarding damages since Civil Case No. A-2032 was decided solely on the basis of the parties memoranda and not upon any evidence offered.

validity of the consignation. The failure of petitioners to comply with any of these requirements rendered the consignation ineffective.xxii[16]

It appears that petitioners hinge their arguments upon the validity of the consignation of P724.00 and accept the proposition that if the consignation is declared void the subsequent sales to Blas Rayos and petitioner-spouses would be ineffective to transfer ownership of the disputed parcels and concomitantly would vest respondents with the ownership and possession thereof.

Consignation and tender of payment must not be encumbered by conditions if they are to produce the intended result of fulfilling the obligation.xxii[17] In the instant case, the tender of payment of P724.00 was conditional and void as it was predicated upon the argument of Francisco Tazal that he was paying a debt which he could do at any time allegedly because the 1 September 1957 transaction was a contract of equitable mortgage and not a deed of sale with right to repurchase. The ostensible purposes of offering the amount in connection with a purported outstanding debt were to evade the stipulated redemption period in the deed of sale which had already expired when the tender of payment was made and Civil Case No. A245 was instituted, and as a corollary, to avail of the thirty (30)-day grace period under Art. 1606 of the Civil Code within which to exercise the right to repurchase.xxii[18] Mamerto Reyes was therefore within his right to refuse the tender of payment offered by petitioners because it was conditional upon his waiver of the two (2)-year redemption period stipulated in the deed of sale with right to repurchase.

To be sure, while it has been held that approval of the court or the obligees acceptance of the deposit is not necessary where the obligor has performed all acts necessary to a valid consignation such that court approval thereof cannot be doubted, Sia v. Court of Appealsxxii[23] clearly advises that this ruling is applicable only where there is unmistakable evidence on record that the prerequisites of a valid consignation are present, especially the conformity of the proffered payment to the terms of the obligation which is to be paid.xxii[24] In the instant case, since there is no clear and preponderant evidence that the consignation of P724.00 satisfied all the requirements for validity and enforceability, and since Mamerto Reyes vehemently contested the propriety of the consignation, petitioners cannot rely upon sheer speculation and unfounded inference to construe the Decision of the Court of First Instance as one impliedly approving the consignation of P724.00 and perfecting the redemption of the three (3) parcels of land.

On the other hand, respondents maintain that the absence of an express or at least discernible court approval of the consignation of P724.00 in Civil Case No. A-245 prevented the repurchase of the parcels of land in question; that the deposit of only P724.00 did not cover all the expenses required by Art. 1616 of the Civil Code for a valid repurchase of the properties; that Mamerto Reyes as their predecessorin-interest was not guilty of estoppel and laches in not filing a complaint to annul the contracts of sale in favor of Blas Rayos and petitionerspouses Teofilo and Simeona Rayos since during that time Civil Case No. A-245 was pending before the courts; that petitioner-spouses are not buyers in good faith and for value since they knew that the parcels of land had been previously sold to Mamerto Reyes and that, in any event, the rule protecting buyers in good faith and for value applies only to transactions involving registered lands and not to unregistered lands as in the instant case; and finally, that the award of damages is amply supported by their pleadings in the trial court.

Moreover, petitioners failed to prove in Civil Cases Nos. A-245 and A2032 that any form of notice regarding their intention to deposit the amount of P724.00 with the Court of First Instance had been served upon respondents. This requirement is not fulfilled by the notice which could have ensued from the filing of the complaint in Civil Case No. A245 or the stipulation made between Francisco Tazal and Mamerto Reyes regarding the consignation of P724.00. The latter constitutes the second notice required by law as it already concerns the actual deposit or consignation of the amount and is different from the first notice that makes known the debtors intention to deposit the amount, a requirement missing in the instant case.xxii[19] Without any announcement of the intention to resort to consignation first being made to the persons interested in the fulfillment of the obligation, the consignation as a means of payment is void.xxii[20]

It should be recalled that one of the requisites of consignation is the filing of the complaint by the debtor against the creditor. Hence it is the judgment on the complaint where the court declares that the consignation has been properly made that will release the debtor from liability. Should the consignation be disapproved by the court and the case dismissed, there is no payment and the debtor is in mora and he shall be liable for the expenses and bear the risk of loss of the thing.xxii[25]

We deny the instant petition for review and affirm the decision of the court a quo, except for the sole modification to delete and set aside the award of damages. There is no evidence to prove that petitioners paid at any time the repurchase price for the three (3) parcels of land in dispute except for the deposit of P724.00 in the Court of First Instance which however fell short of all the acts necessary for a valid consignation and discharge of their obligation to respondents.

In order that consignation may be effective the debtor must show that (a) there was a debt due; (b) the consignation of the obligation had been made because the creditor to whom a valid tender of payment was made refused to accept it; (c) previous notice of the consignation had been given to the person interested in the performance of the obligation; (d) the amount due was placed at the disposal of the court; and, (e) after the consignation had been made the person interested was notified thereof.xxii[15]

In the instant case, petitioners failed, first, to offer a valid and unconditional tender of payment; second, to notify respondents of the intention to deposit the amount with the court; and third, to show the acceptance by the creditor of the amount deposited as full settlement of the obligation, or in the alternative, a declaration by the court of the

It is also futile to argue that the deposit of P724.00 with the Court of First Instance could have perfected the redemption of the three (3) parcels of land because it was not approved by the trial court, much less accepted by Mamerto Reyes or his heirs, herein respondents. The dispositive portion of the Decision in Civil Case No. A-245, which reads x x x x the Court, hereby renders judgment declaring the contract x x x entered into by the plaintiffs and the defendant and captioned Deed of Sale with Right to Repurchase as a true sale with right to repurchase x x x and not an equitable mortgage x x x and declaring the plaintiffs entitled to repurchase the property in question within thirty (30) days from finality of this decision x x x x plainly rejected the complaint for lack of merit and necessarily also the consignation done pursuant thereto. This conclusion is buttressed by the directive of the trial court in the body of the Decision that Francisco Tazal may still exercise the right to repurchase the property in question by returning to the [Mamerto Reyes] the purchase price of P724.00 plus all expenses incident to the reconveyance within the period of thirty (30)-days from the time this decision becomes final x x x xxxii[21] The obvious reference of this statement was the stipulation made by the parties therein that the defendant [Mamerto Reyes] has been paying the taxes on said properties from 1958 to 1969 x x x xxxii[22] where the taxes paid constituted necessary expenses that petitioners had to reimburse to respondents predecessor-in-interest aside from the P724.00 earlier deposited by Tazal.

To sanction the argument of petitioners and in the process excuse them from their responsibility of securing from the trial court in Civil Case No. A-245 a categorical declaration that the consignation of P724.00 had complied with all the essential elements for its validity would only dilute the rule requiring absolute compliance with the requisites of consignation.xxii[26] It also disturbs a steady and stable status of proprietary rights, i.e., x x x el acreedor tan solo, y no el juez, puede autorizar la variacion que para los derechos de aquel suponga la que se intente en el objeto, cuantia o forma de las obligaciones ,xxii[27] since parties are left guessing on whether the repurchase of the properties had been effected. In a broader sense, this uncertain state will only depress the market value of the land and virtually paralyze efforts of the landowner to meet his needs and obligations and realize the full value of his land. Moreover, we do not think that respondents causes of action in Civil Case No. A-2032 are now barred by estoppel and laches. The essence of estoppel and laches is the failure or neglect for an unreasonable and unexplained length of time to do that which by exercising due diligence could or should have been done earlier; it is the negligence or omission to assert a right within a reasonable time warranting a presumption that the party entitled to assert it either has abandoned or declined to assert it although there is no absolute rule as to what constitutes staleness of demand as each case is to be determined according to its particular circumstances.xxii[28]

In the instant case, it was prudent and discerning for respondents and their predecessor-in-interest Mamerto Reyes that they deferred any action against petitioners, i.e., Civil Case No. A-2032, to recover ownership and possession of the three (3) pieces of real estate, until the finality of judgment in Civil Case No. A-245. For patiently electing not to inundate our courts of justice with cases the outcome of which may well depend upon the then pending civil suit, respondents cannot now be penalized by barring their complaint in Civil Case No. A-2032 on the equitable grounds of estoppel and laches.

We also find no reason to disturb our findings upon petitioners assertion that they were purchasers of the three (3) parcels of land in good faith and for value. As we held in David v. Bandin, the issue of good faith or bad faith of the buyer is relevant only where the subject of the sale is registered land and the purchaser is buying the same from the registered owner whose title to the land is clean x x x in such case the purchaser who relies on the clean title of the registered owner is protected if he is a purchaser in good faith for value .xxii[29] Since the properties in question are unregistered lands, petitioners as subsequent buyers thereof did so at their peril. Their claim of having bought the land in good faith, i.e., without notice that some other person has a right to or interest in the property, would not protect them if it turns out, as it actually did in this case, that their seller did not own the property at the time of the sale.

Similarly, we cannot award attorneys fees since there is no stipulation to grant the same nor were exemplary damages awarded or were improperly imposed as in the instant case.xxii[35] It is appropriate to stress that the mere filing of a complaint does not ipso facto entitle a party to attorneys fees since this act is a means sanctioned by law to protect rights and interests even if found subsequently to be unmeritorious.

That it is the essence of this contract that the vendor, Clara Badayos has the right to repurchase the above described property after two (2) years from and after the execution of this contract for the same amount of SEVEN THOUSAND FOUR HUNDRED PESOS (P7,400.00). 1

At any rate, petitioners failed to discharge their burden of proof that they were purchasers of the three (3) parcels of land in good faith. For, as we ruled in Embrado v. Court of Appeals,xxii[30] the burden of proving the status of a purchaser in good faith and for value lies upon him who asserts that status, which is not discharged by simply invoking the ordinary presumption of good faith, i.e., that everyone is presumed to act in good faith, since the good faith that is here essential is integral with the very status which must be established.

In the proceedings a quo, what is evident is the admitted fact of payment made by Mamerto Reyes as respon dents predecessor-ininterest of the taxes on the properties prior to and at the time when the contracts of sale in favor of petitioner-spouses were perfected, which undoubtedly confirms the precedence of respondents possession of the parcels of land in question. This situation should have compelled petitioners to investigate the right of respondents over the properties before buying them, and in the absence of such inquiry, the rule is settled that a buyer in the same circumstances herein involved cannot claim to be a purchaser in good faith.

WHEREFORE, the instant Petition for Review is DENIED. The assailed Decision of the Court of Appeals in CA-G.R. CV No. 55789 affirming in toto the Decision of the Regional Trial Court, Branch 54, Alaminos, Pangasinan in Civil Case No. A-2032, i.e., declaring void the Deeds of Absolute Sale executed by Francisco Tazal in favor of Blas Rayos, and by the latter in favor of Teofilo Rayos, and by Francisco Tazal in favor of Teofilo Rayos dated 22 June 1961, all encompassing the three (3) parcels of land sold under the Deeds of Sale with the Right to Repurchase, insofar as they authorized the transfer of ownership and possession thereof to petitioner-spouses Teofilo and Simeona Rayos; proclaiming respondents Donato Reyes, Saturnino Reyes, Tomasa R. Bustamante and Toribia R. Camelo who are heirs of Mamerto Reyes as absolute owners of the property in question free from all liens and encumbrances; and, ordering petitioner-spouses Teofilo and Simeona Rayos, petitioner George Rayos and Francisco Tazal and/or their agents or representatives to vacate and surrender the parcels of land in favor of respondents Donato Reyes, Saturnino Reyes, Tomasa R. Bustamante and Toribia R. Camelo, are AFFIRMED with the SOLE MODIFICATION that the award of actual damages for litigation expenses, attorneys fees and exemplary damages plus costs is DELETED and SET ASIDE. No costs.

Two (2) years after the execution of the document in question, or specifically on 17 April 1975, private respondents filed with the then Court of First Instance (now Regional Trial Court) of Cebu an action, docketed as Civil Case No. 14516, to consolidate ownership over the property in question; it is alleged therein that "the two years ( sic) period from March 9, 1973 had already elapsed but defendant never repurchased the said property in violation of the contract of pacto de Retro Sale." 2

SO ORDERED.

In her Answer With Counterclaim, petitioner, as defendant, alleges, inter alia, that: (1) the document in question is actually an equitable mortgage intended to secure her loan of P4,000.00 from private respondents who charged an interest of P3,400.00; (2) after the expiration of the two-year period counted from 9 March 1973, she approached the private respondents to request for an extension of time within which to pay the obligation, which was granted, as she was waiting for the approval of the loan of her daughter in the amount of P30,000.00 with the Philippine National Bank; (3) she owns the property in question and is in possession thereof, enjoying its fruits, and paying the taxes thereon; (4) the piece of land, located in the commercial district of Tabunok, Talisay, Cebu, is classified as residential and has a commercial value of P100.00 per square meter; and (6) the private respondents are lessees thereof, paying rentals of "P18.00 only annually, for a term of 20 years to expire in 1976." 3

G.R. No. 57630 March 13, 1992 In their Reply, private respondents deny that the document in question is an equitable mortgage and that they had granted the petitioner an extension of time within which to pay her obligation.

The absence of good faith on the part of petitioner-spouses Teofilo and Simeona Rayos in purchasing the three (3) parcels of unregistered land precludes the application of the rule on double sales enunciated in Art. 1544 of the Civil Code.xxii[31] In any event, even if we apply Art. 1544, the facts would nonetheless show that respondents and their predecessor-in-interest registered first the source of their ownership and possession, i.e., the 1 September 1957 deed of sale with right to repurchase, held the oldest title, and possessed the real properties at the earliest time. Applying the doctrine of priority in time, priority in rights or prius tempore, potior jure, respondents are entitled to the ownership and possession of the parcels of land in dispute.

CLARA BADAYOS, petitioner, vs. THE COURT OF APPEALS and Spouses MAXIMO LISONDRA and CONRADA GABISAN, respondents.

On 21 July 1975, the trial court issued a pre-trial order setting the case for trial on the merits and stating that the "parties and counsels did not submit any stipulation of facts but relied on their pleadings." 4

DAVIDE, JR., J.:

Finally, on the issue of damages, we agree with petitioners that respondents failed to prove their entitlement to actual damages for litigation expenses of P20,000.00, attorneys fees of P10,000.00 and exemplary damages of P50,000.00 plus costs. No evidence to prove actual damages was offered in Civil Case No. A-2032 since the parties therein submitted the case for decision on the basis of their respective memoranda, hence no actual damages can be awarded.xxii[32] In the same manner, there is no clear and convincing showing that petitioners acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner to warrant the imposition of exemplary damages in respondents favor.xxii[33] In any event, exemplary damages cannot be adjudicated in the instant case since there is no award of moral, temperate or compensatory damages.xxii[34]

We are primarily tasked with the determination of the proper period within which the right to repurchase, granted under the questioned pacto de retro sale, may be exercised.

On 11 August 1975, petitioner filed a manifestation informing the trial court that on 4 August 1975, she consigned the amount of P7,400.00 with the Clerk of Court in favor of the private respondents as payment of her obligation and/or redemption of the property in question; thus, the case has become moot and academic and should be dismissed. 5

The factual antecedents of the case are not disputed.

Acting on the manifestation, the trial court issued on 2 September 1975 an Order granting the petitioner five (5) days within which to submit a motion to dismiss and the private respondents five (5) days from receipt of said motion to interpose their opposition thereto. 6

On 9 March 1973, petitioner executed in favor of private respondents spouses a Deed of Sale With The Right to Repurchase over her undivided half portion of Lot No. 3493 of the Talisay-Minglanilla Estate located at Tabunok, Talisay, Cebu for a consideration of Seven Thousand Four Hundred Pesos (P7,400.00); the sale was made subject to the following stipulation:

In her motion to dismiss filed on 4 September 1975, petitioner contends that:

. . . the right of Clara Badayos to pay her obligation or to redeem the property in question occurred after March 9, 1975, and under this state of things, the right of Clara Badayos to pay her obligation or redeem the property has not yet elapsed or expired when she consigned or consignated the amount of P7,400.00 with the Clerk of Court, on August 4, 1975, or even up to the present. Considering that there is no period fixed within which to pay after March 9, 1975, the law comes in and fixed the period which is four (4) years from the date of the contract, as provided for in Art. 1606 of the New Civil Code . . .

On 3 November 1976, petitioner filed with the trial court a manifestation that she is reinstating and refilling her 4 September 1975 Motion to Dismiss. 14

Finding the motion to dismiss meritorious, the same is GRANTED. 16 Their motion 17 for the reconsideration of this Order having been denied for lack of merit, 18 private respondents appealed to the Court of Appeals, which docketed the case as C.A.-G.R. No. 62677-R.

Thereafter, on 17 March 1977, private respondent filed a Rejoinder to Motion to Dismiss asking for a trial on the merits and alleging that the grounds relied upon for a dismissal are matters of defense. 15

On 27 May 1977, the trial court dismissed the complaint in an Order stating that:

xxx xxx xxx

. . . even granting in gratia argumenti that the right to pay the obligation or to redeem the property has thus elapsed, such rights will be reborn within 30 days after final judgment. So, clearly, . . . there is no more point to proceed with the trial of the case at bar, and the case should therefore be dismissed. 7

A (sic) reading of the deed in question it is very clear and in certain terms as shown in the 4th paragraph of said contract that the right to repurchase the property shall occur after two years from and after the execution of the contract for the same amount of P7,400.00 counted from March 9, 1973.

In its decision promulgated on 4 May 1981, the Court of Appeals reversed the appealed Order principally on the ground that since petitioner abandoned her theory of equitable mortgage, she should have exercised her right of redemption within two (2) years from 9 March 1973, or on or before 9 March 1975. Since she failed to do so, she lost that right. The appellant court held:

Private respondents opposed the motion to dismiss arguing that since the pre-trial order has long become final, the petitioner has lost her right to redeem or repurchase the property and is thus estopped from changing her position that the pacto de retro sale is an equitable mortgage and not a sale with the option to repurchase. 8

It appears that defendant's former theory was that the contract was not a deed of sale with the right to repurchase but an equitable mortgage. Later, however, she changed her theory and admitted the allegations in the complaint for consolidation of right of ownership but the right to exercise the right to repurchase was not within two years, but after two years from execution thereof.

As found by the court below in the disputed order of May 27, 1977, the defendant changed the theory of her case in the amended answer from one of an equitable mortgage to one of a deed of sale with right of repurchase, and contended that her right to repurchase the subject land has not yet expired when she consigned on August 11, 1975 the sum of P7,400.00, pursuant to the penultimate paragraph on the contract. Such being the case, and without any objection from the defendant-appellee, the issue as to the nature of the transaction is settled, it is a deed of sale with right to repurchase.

On 13 January 1976, the trial court ordered the petitioner to file an amended answer based on her new stand as presented in the motion to dismiss. 9

On 21 January 1976, petitioner filed an Amended Answer With Counterclaim incorporating her new stand that the complaint should be dismissed because she has already consigned the P7,400.00 repurchase price with the trial court on 4 August 1975, well within the period prescribed by the document in question. 10

On 26 February 1976, private respondents filed an Opposition to Admission of Amended Answer contending that petitioner must take a definite stand as to whether she considers the document in question as a contract of sale with option to repurchase or a contract of mortgage. 11

Hence, as she is now willing to repurchase the property the defendant argued, and the Court concurs, that the condition of the contract is that the defendant has the right to repurchase for the same amount the half (sic) portion of this Lot No. 3493 after two years from March 9, 1973, effectively on August 11, 1975 a little over two years from March 9, 1973 she (sic) consigned the same amount of P7,400.00 as repurchase price in favor of the plaintiffs thru the Clerk of Court and now asks for the dismissal of the case as she has opted to exercise the right to repurchase within the terms and contents of the contract.

The facts show that the defendant failed to redeem the land on May 9, 1975, which is the expiration date of the two-year period from the execution of the contract on March 9, 1973. This is admitted by the appellee in both her answer and amended answer. We cannot over emphasis (sic) this point. And this fact is confirmed by the fact that the defendant requested for an extension of time to redeem the land. This too is admitted by the appellee in her amended answer. But the plaintiffs did not grant the request of the appellee but filed instead the present suit on April 17, 1975.

The trial court, on 25 March 1976, admitted petitioner's Amended Answer With Counterclaim and required private respondents to file a reply thereto. 12

In their Reply, private respondents contend that petitioner should be considered as having waived her right to repurchase the property as a result of her failure and refusal to exercise such right despite numerous demands. 13

The Court further concurs with the defendant's arguments that even if the complaint is decided in favor of the plaintiffs consolidating their title and under Art. 1606 of the Civil Code, the defendant has still 30 days from final judgment to exercise the right to repurchase and failure to exercise the same the execution of the judgment may follow for the sale of the property at public auction to cover the judgment debt.

It appearing that the appellee had failed to redeemed (sic) the subject property as stipulated in the contract, it follows that the action for consolidation of ownership of the subject land is tenable. The fact that defendant consigned the redemption price in court does not cure the defect because the consignation was effected after the defendant had incurred (sic) delay. 19

Petitioner sought reconsideration of the foregoing decision but the same was denied. 20

Hence, the petitioner filed the instant petition for review on certiorari on 25 August 1981. Petitioner contends that she neither changed nor abandoned her theory that the contract in question is an equitable mortgage but merely alleged alternative defenses, including the defense that if the contract is a true sale with right to repurchase, then there is nothing more to litigate in view of her exercise of the right to repurchase; granting even that the contract is a true sale with right to repurchase, she still had the time to exercise her right; the dismissal of the case by the trial court was justified because it became moot and academic; and that there is no procedural or substantive justification for the Court of Appeals to declare the private respondents as the lawful owners of the property by consolidation, without any trial on the merits.

To the mind of this Court, the principal issue is whether or not petitioner was able to repurchase the property in question within the period stipulated in the deed of sale with right to repurchase. The fourth paragraph of said deed expressly provides:

While the counting of this four-year period shall begin from the execution of the contract, 24 where the right is suspended by agreement until after a certain time, event or condition, the period shall be counted from the time such right could be exercised, but not exceeding ten (10) years from the execution of the contract. 25 Applying the provision to the instant case, the period to repurchase the property must be deemed to be four (4) years from 9 March 1975 or until 9 March 1979. Since petitioner consigned the repurchase price on 11 August 1975, a fact private respondents did not deny, this Court declares that this consignation operated as a valid offer or tender of the redemption price. It must be emphasized that consignation was not necessary for the reason that the relationship that existed between petitioner and private respondents, in respect to the right of redemption, was not one of debtor-creditor. Petitioner was exercising a right, not discharging an obligation, hence a mere tender of payment is sufficient to preserve the 26 right of a vendor a retro.

1. Herein private respondents and their brothers, Jose and Dominador Jimenez, were the registered co-owners of a parcel of land consisting of 17,710 square meters, covered by Transfer Certificate of Title (TCT) No. 309773, 2 situated in Barrio Culasi, Las Pias, Metro Manila.

2. On July 28, 1988, Jose and Dominador Jimenez sold their share consisting of one-half of said parcel of land, specifically the eastern portion thereof, to herein petitioner pursuant to a " Kasulatan sa Bilihan ng Lupa." 3 Subsequently, a "Confirmatory Extrajudicial Partition Agreement" 4 was executed by the Jimenezes, wherein the eastern portion of the subject lot, with an area of 8,855 square meters was adjudicated to Jose and Dominador Jimenez, while the western portion was allocated to herein private respondents.

The foregoing renders unnecessary discussions on the other secondary issues raised. That it is the essence of this contract that the vendor, Clara Badayos has the right to repurchase the above described property after two (2) years from and after the execution of this contract for the same amount of SEVEN THOUSAND FOUR HUNDRED PESOS (P7,400.00). 21

3. Thereafter, herein petitioner expressed interest in buying the western portion of the property from private respondents. Accordingly, on November 25, 1989, an "Exclusive Option to Purchase" 5 was executed between petitioner and private respondents, under the following terms and conditions:

WHEREFORE, the petition is GRANTED. The challenged decision of the respondent Court in C.A.-G.R. No. 62677-R, promulgated on 4 May 1981, is hereby SET ASIDE and the Order of the trial court of 27 May 1977 in Civil Case No. R-14516 is hereby REINSTATED and AFFIRMED.

1. The selling price of said 8,655 square meters of the subject property is TWO MILLION EIGHT HUNDRED FIFTY SIX THOUSAND ONE HUNDRED FIFTY PESOS ONLY (P2,856,150.00)

The respondent Court interpreted this provision to mean that the twoyear period shall commence from the date of the execution of the contract, i.e., from 9 March 1973, and that the right must be exercised within that period. This is not correct. The petition then is impressed with merit.

Costs against private respondents. 2. The sum of P50,000.00 which we received from ADELFA PROPERTIES, INC. as an option money shall be credited as partial payment upon the consummation of the sale and the balance in the sum of TWO MILLION EIGHT HUNDRED SIX THOUSAND ONE HUNDRED FIFTY PESOS (P2,806,150.00) to be paid on or before November 30, 1989;

IT IS SO ORDERED.

G.R. No. 111238 January 25, 1995 The foregoing stipulation is clear and needs no further interpretation; hence, its literal meaning is binding. It simply means that petitioner can redeem the property in question "AFTER TWO (2) years from and after the execution of the contract," NOT WITHIN two (2) years from such execution. Since the contract was executed on 9 March 1973, petitioner can redeem the property only after 9 March 1975. The rule in this jurisdiction is that if the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. 22

ADELFA PROPERTIES, INC., petitioner, vs. COURT OF APPEALS, ROSARIO JIMENEZ-CASTAEDA and SALUD JIMENEZ, respondents.

It is to be noted, however, that while the parties agreed on the period within which the right may not be exercised or will be deemed suspended, they did not specify the period within which such may be exercised thereafter. This suspension remains valid 23 as long as Article 1606 of the Civil Code is not violated. Said Article reads:

REGALADO, J.:

3. In case of default on the part of ADELFA PROPERTIES, INC. to pay said balance in accordance with paragraph 2 hereof, this option shall be cancelled and 50% of the option money to be forfeited in our favor and we will refund the remaining 50% of said money upon the sale of said property to a third party;

The right referred to in article 1601, in the absence of an express agreement, shall last four years from the date of the contract.

The main issues presented for resolution in this petition for review on certiorari of the judgment of respondent Court of appeals, dated April 6, 1993, in CA-G.R. CV No. 34767 1 are (1) whether of not the "Exclusive Option to Purchase" executed between petitioner Adelfa Properties, Inc. and private respondents Rosario Jimenez-Castaeda and Salud Jimenez is an option contract; and (2) whether or not there was a valid suspension of payment of the purchase price by said petitioner, and the legal effects thereof on the contractual relations of the parties.

4. All expenses including the corresponding capital gains tax, cost of documentary stamps are for the account of the VENDORS, and expenses for the registration of the deed of sale in the Registry of Deeds are for the account of ADELFA PROPERTIES, INC.

Should there be an agreement, the period cannot exceed ten years. . . .

The records disclose the following antecedent facts which culminated in the present appellate review, to wit:

Considering, however, that the owner's copy of the certificate of title issued to respondent Salud Jimenez had been lost, a petition for the reissuance of a new owner's copy of said certificate of title was filed in court through Atty. Bayani L. Bernardo, who acted as private respondents' counsel. Eventually, a new owner's copy of the certificate

of title was issued but it remained in the possession of Atty. Bernardo until he turned it over to petitioner Adelfa Properties, Inc. 4. Before petitioner could make payment, it received summons 6 on November 29, 1989, together with a copy of a complaint filed by the nephews and nieces of private respondents against the latter, Jose and Dominador Jimenez, and herein petitioner in the Regional Trial Court of Makati, docketed as Civil Case No. 89-5541, for annulment of the deed of sale in favor of Household Corporation and recovery of ownership of the property covered by TCT No. 309773. 7

option to purchase. Private respondents then requested petitioner to return the owner's duplicate copy of the certificate of title of respondent Salud Jimenez. 12 Petitioner failed to surrender the certificate of title, hence private respondents filed Civil Case No. 7532 in the Regional Trial Court of Pasay City, Branch 113, for annulment of contract with damages, praying, among others, that the exclusive option to purchase be declared null and void; that defendant, herein petitioner, be ordered to return the owner's duplicate certificate of title; and that the annotation of the option contract on TCT No. 309773 be cancelled. Emylene Chua, the subsequent purchaser of the lot, filed a complaint in intervention. 12. The trial court rendered judgment 13 therein on September 5, 1991 holding that the agreement entered into by the parties was merely an option contract, and declaring that the suspension of payment by herein petitioner constituted a counter-offer which, therefore, was tantamount to a rejection of the option. It likewise ruled that herein petitioner could not validly suspend payment in favor of private respondents on the ground that the vindicatory action filed by the latter's kin did not involve the western portion of the land covered by the contract between petitioner and private respondents, but the eastern portion thereof which was the subject of the sale between petitioner and the brothers Jose and Dominador Jimenez. The trial court then directed the cancellation of the exclusive option to purchase, declared the sale to intervenor Emylene Chua as valid and binding, and ordered petitioner to pay damages and attorney's fees to private respondents, with costs.

award of damages and attorney's fees which are not only excessive, but also without in fact and in law. 14

An analysis of the facts obtaining in this case, as well as the evidence presented by the parties, irresistibly leads to the conclusion that the agreement between the parties is a contract to sell, and not an option contract or a contract of sale.

5. As a consequence, in a letter dated November 29, 1989, petitioner informed private respondents that it would hold payment of the full purchase price and suggested that private respondents settle the case with their nephews and nieces, adding that ". . . if possible, although November 30, 1989 is a holiday, we will be waiting for you and said plaintiffs at our office up to 7:00 p.m." 8 Another letter of the same tenor and of even date was sent by petitioner to Jose and Dominador Jimenez. 9 Respondent Salud Jimenez refused to heed the suggestion of petitioner and attributed the suspension of payment of the purchase price to "lack of word of honor."

6. On December 7, 1989, petitioner caused to be annotated on the title of the lot its option contract with private respondents, and its contract of sale with Jose and Dominador Jimenez, as Entry No. 1437-4 and entry No. 1438-4, respectively.

7. On December 14, 1989, private respondents sent Francisca Jimenez to see Atty. Bernardo, in his capacity as petitioner's counsel, and to inform the latter that they were cancelling the transaction. In turn, Atty. Bernardo offered to pay the purchase price provided that P500,000.00 be deducted therefrom for the settlement of the civil case. This was rejected by private respondents. On December 22, 1989, Atty. Bernardo wrote private respondents on the same matter but this time reducing the amount from P500,000.00 to P300,000.00, and this was also rejected by the latter.

13. On appeal, respondent Court of appeals affirmed in toto the decision of the court a quo and held that the failure of petitioner to pay the purchase price within the period agreed upon was tantamount to an election by petitioner not to buy the property; that the suspension of payment constituted an imposition of a condition which was actually a counter-offer amounting to a rejection of the option; and that Article 1590 of the Civil Code on suspension of payments applies only to a contract of sale or a contract to sell, but not to an option contract which it opined was the nature of the document subject of the case at bar. Said appellate court similarly upheld the validity of the deed of conditional sale executed by private respondents in favor of intervenor Emylene Chua.

1. In view of the extended disquisition thereon by respondent court, it would be worthwhile at this juncture to briefly discourse on the rationale behind our treatment of the alleged option contract as a contract to sell, rather than a contract of sale. The distinction between the two is important for in contract of sale, the title passes to the vendee upon the delivery of the thing sold; whereas in a contract to sell, by agreement the ownership is reserved in the vendor and is not to pass until the full payment of the price. In a contract of sale, the vendor has lost and cannot recover ownership until and unless the contract is resolved or rescinded; whereas in a contract to sell, title is retained by the vendor until the full payment of the price, such payment being a positive suspensive condition and failure of which is not a breach but an event that prevents the obligation of the vendor to convey title from becoming effective. Thus, a deed of sale is considered absolute in nature where there is neither a stipulation in the deed that title to the property sold is reserved in the seller until the full payment of the price, nor one giving the vendor the right to unilaterally resolve the contract the moment the buyer fails to pay within a fixed period. 15

8. On February 23, 1990, the Regional Trial Court of Makati dismissed Civil Case No. 89-5541. Thus, on February 28, 1990, petitioner caused to be annotated anew on TCT No. 309773 the exclusive option to purchase as Entry No. 4442-4.

In the present petition, the following assignment of errors are raised:

1. Respondent court of appeals acted with grave abuse of discretion in making its finding that the agreement entered into by petitioner and private respondents was strictly an option contract;

There are two features which convince us that the parties never intended to transfer ownership to petitioner except upon the full payment of the purchase price. Firstly, the exclusive option to purchase, although it provided for automatic rescission of the contract and partial forfeiture of the amount already paid in case of default, does not mention that petitioner is obliged to return possession or ownership of the property as a consequence of non-payment. There is no stipulation anent reversion or reconveyance of the property to herein private respondents in the event that petitioner does not comply with its obligation. With the absence of such a stipulation, although there is a provision on the remedies available to the parties in case of breach, it may legally be inferred that the parties never intended to transfer ownership to the petitioner to completion of payment of the purchase price.

9. On the same day, February 28, 1990, private respondents executed a Deed of Conditional Sale 10 in favor of Emylene Chua over the same parcel of land for P3,029,250, of which P1,500,000.00 was paid to private respondents on said date, with the balance to be paid upon the transfer of title to the specified one-half portion.

2. Granting arguendo that the agreement was an option contract, respondent court of Appeals acted with grave abuse of discretion in grievously failing to consider that while the option period had not lapsed, private respondents could not unilaterally and prematurely terminate the option period;

10. On April 16, 1990, Atty. Bernardo wrote private respondents informing the latter that in view of the dismissal of the case against them, petitioner was willing to pay the purchase price, and he requested that the corresponding deed of absolute sale be executed. 11 This was ignored by private respondents.

In effect, there was an implied agreement that ownership shall not pass to the purchaser until he had fully paid the price. Article 1478 of the civil code does not require that such a stipulation be expressly made. Consequently, an implied stipulation to that effect is considered valid and, therefore, binding and enforceable between the parties. It should be noted that under the law and jurisprudence, a contract which contains this kind of stipulation is considered a contract to sell .

3. Respondent Court of Appeals acted with grave abuse of discretion in failing to appreciate fully the attendant facts and circumstances when it made the conclusion of law that Article 1590 does not apply; and

11. On July 27, 1990, private respondents' counsel sent a letter to petitioner enclosing therein a check for P25,000.00 representing the refund of fifty percent of the option money paid under the exclusive

4. Respondent Court of Appeals acted with grave abuse of discretion in conforming with the sale in favor of appellee Ma. Emylene Chua and the

Moreover, that the parties really intended to execute a contract to sell, and not a contract of sale, is bolstered by the fact that the deed of absolute sale would have been issued only upon the payment of the balance of the purchase price, as may be gleaned from petitioner's letter dated April 16, 1990 16 wherein it informed private respondents that it "is now ready and willing to pay you simultaneously with the execution of the corresponding deed of absolute sale."

Secondly, it has not been shown there was delivery of the property, actual or constructive, made to herein petitioner. The exclusive option to purchase is not contained in a public instrument the execution of which would have been considered equivalent to delivery. 17 Neither did petitioner take actual, physical possession of the property at any given time. It is true that after the reconstitution of private respondents' certificate of title, it remained in the possession of petitioner's counsel, Atty. Bayani L. Bernardo, who thereafter delivered the same to herein petitioner. Normally, under the law, such possession by the vendee is to be understood as a delivery. 18 However, private respondents explained that there was really no intention on their part to deliver the title to herein petitioner with the purpose of transferring ownership to it. They claim that Atty. Bernardo had possession of the title only because he was their counsel in the petition for reconstitution. We have no reason not to believe this explanation of private respondents, aside from the fact that such contention was never refuted or contradicted by petitioner.

which are to constitute the contract. The offer must be certain and the acceptance absolute. 28

The distinction between an "option" and a contract of sale is that an option is an unaccepted offer. It states the terms and conditions on which the owner is willing to sell the land, if the holder elects to accept them within the time limited. If the holder does so elect, he must give notice to the other party, and the accepted offer thereupon becomes a valid and binding contract. If an acceptance is not made within the time fixed, the owner is no longer bound by his offer, and the option is at an end. A contract of sale, on the other hand, fixes definitely the relative rights and obligations of both parties at the time of its execution. The offer and the acceptance are concurrent, since the minds of the contracting parties meet in the terms of the agreement. 29

We do not subscribe to private respondents' submission, which was upheld by both the trial court and respondent court of appeals, that the offer of petitioner to deduct P500,000.00, (later reduced to P300,000.00) from the purchase price for the settlement of the civil case was tantamount to a counter-offer. It must be stressed that there already existed a perfected contract between the parties at the time the alleged counter-offer was made. Thus, any new offer by a party becomes binding only when it is accepted by the other. In the case of private respondents, they actually refused to concur in said offer of petitioner, by reason of which the original terms of the contract continued to be enforceable.

2. Irrefragably, the controverted document should legally be considered as a perfected contract to sell. On this particular point, therefore, we reject the position and ratiocination of respondent Court of Appeals which, while awarding the correct relief to private respondents, categorized the instrument as "strictly an option contract."

The important task in contract interpretation is always the ascertainment of the intention of the contracting parties and that task is, of course, to be discharged by looking to the words they used to project that intention in their contract, all the words not just a particular word or two, and words in context not words standing alone. 19 Moreover, judging from the subsequent acts of the parties which will hereinafter be discussed, it is undeniable that the intention of the parties was to enter into a contract to sell. 20 In addition, the title of a contract does not necessarily determine its true nature. 21 Hence, the fact that the document under discussion is entitled "Exclusive Option to Purchase" is not controlling where the text thereof shows that it is a contract to sell.

A perusal of the contract in this case, as well as the oral and documentary evidence presented by the parties, readily shows that there is indeed a concurrence of petitioner's offer to buy and private respondents' acceptance thereof. The rule is that except where a formal acceptance is so required, although the acceptance must be affirmatively and clearly made and must be evidenced by some acts or conduct communicated to the offeror, it may be made either in a formal or an informal manner, and may be shown by acts, conduct, or words of the accepting party that clearly manifest a present intention or determination to accept the offer to buy or sell. Thus, acceptance may be shown by the acts, conduct, or words of a party recognizing the existence of the contract of sale. 30

At any rate, the same cannot be considered a counter-offer for the simple reason that petitioner's sole purpose was to settle the civil case in order that it could already comply with its obligation. In fact, it was even indicative of a desire by petitioner to immediately comply therewith, except that it was being prevented from doing so because of the filing of the civil case which, it believed in good faith, rendered compliance improbable at that time. In addition, no inference can be drawn from that suggestion given by petitioner that it was totally abandoning the original contract.

An option, as used in the law on sales, is a continuing offer or contract by which the owner stipulates with another that the latter shall have the right to buy the property at a fixed price within a certain time, or under, or in compliance with, certain terms and conditions, or which gives to the owner of the property the right to sell or demand a sale. It is also sometimes called an "unaccepted offer." An option is not of itself a purchase, but merely secures the privilege to buy. 22 It is not a sale of property but a sale of property but a sale of the right to purchase. 23 It is simply a contract by which the owner of property agrees with another person that he shall have the right to buy his property at a fixed price within a certain time. He does not sell his land; he does not then agree to sell it; but he does sell something, that it is, the right or privilege to buy at the election or option of the other party. 24 Its distinguishing characteristic is that it imposes no binding obligation on the person holding the option, aside from the consideration for the offer. Until acceptance, it is not, properly speaking, a contract, and does not vest, transfer, or agree to transfer, any title to, or any interest or right in the subject matter, but is merely a contract by which the owner of property gives the optionee the right or privilege of accepting the offer and buying the property on certain terms. 25

The records also show that private respondents accepted the offer of petitioner to buy their property under the terms of their contract. At the time petitioner made its offer, private respondents suggested that their transfer certificate of title be first reconstituted, to which petitioner agreed. As a matter of fact, it was petitioner's counsel, Atty. Bayani L. Bernardo, who assisted private respondents in filing a petition for reconstitution. After the title was reconstituted, the parties agreed that petitioner would pay either in cash or manager's check the amount of P2,856,150.00 for the lot. Petitioner was supposed to pay the same on November 25, 1989, but it later offered to make a down payment of P50,000.00, with the balance of P2,806,150.00 to be paid on or before November 30, 1989. Private respondents agreed to the counter-offer made by petitioner. 31 As a result, the so-called exclusive option to purchase was prepared by petitioner and was subsequently signed by private respondents, thereby creating a perfected contract to sell between them.

More importantly, it will be noted that the failure of petitioner to pay the balance of the purchase price within the agreed period was attributed by private respondents to "lack of word of honor" on the part of the former. The reason of "lack of word of honor" is to us a clear indication that private respondents considered petitioner already bound by its obligation to pay the balance of the consideration. In effect, private respondents were demanding or exacting fulfillment of the obligation from herein petitioner. with the arrival of the period agreed upon by the parties, petitioner was supposed to comply with the obligation incumbent upon it to perform, not merely to exercise an option or a right to buy the property.

The obligation of petitioner on November 30, 1993 consisted of an obligation to give something, that is, the payment of the purchase price. The contract did not simply give petitioner the discretion to pay for the property. 32 It will be noted that there is nothing in the said contract to show that petitioner was merely given a certain period within which to exercise its privilege to buy. The agreed period was intended to give time to herein petitioner within which to fulfill and comply with its obligation, that is, to pay the balance of the purchase price. No evidence was presented by private respondents to prove otherwise.

On the other hand, a contract, like a contract to sell, involves a meeting of minds two persons whereby one binds himself, with respect to the other, to give something or to render some service. 26 Contracts, in general, are perfected by mere consent, 27 which is manifested by the meeting of the offer and the acceptance upon the thing and the cause

It cannot be gainsaid that the offer to buy a specific piece of land was definite and certain, while the acceptance thereof was absolute and without any condition or qualification. The agreement as to the object, the price of the property, and the terms of payment was clear and welldefined. No other significance could be given to such acts that than they were meant to finalize and perfect the transaction. The parties even went beyond the basic requirements of the law by stipulating that "all expenses including the corresponding capital gains tax, cost of documentary stamps are for the account of the vendors, and expenses for the registration of the deed of sale in the Registry of Deeds are for the account of Adelfa properties, Inc." Hence, there was nothing left to be done except the performance of the respective obligations of the parties.

The test in determining whether a contract is a "contract of sale or purchase" or a mere "option" is whether or not the agreement could be specifically enforced. 33 There is no doubt that the obligation of petitioner to pay the purchase price is specific, definite and certain, and consequently binding and enforceable. Had private respondents chosen to enforce the contract, they could have specifically compelled petitioner to pay the balance of P2,806,150.00. This is distinctly made manifest in the contract itself as an integral stipulation, compliance with which could legally and definitely be demanded from petitioner as a consequence.

This is not a case where no right is as yet created nor an obligation declared, as where something further remains to be done before the buyer and seller obligate themselves. 34 An agreement is only an "option" when no obligation rests on the party to make any payment except such as may be agreed on between the parties as consideration to support the option until he has made up his mind within the time

specified. 35 An option, and not a contract to purchase, is effected by an agreement to sell real estate for payments to be made within specified time and providing forfeiture of money paid upon failure to make payment, where the purchaser does not agree to purchase, to make payment, or to bind himself in any way other than the forfeiture of the payments made. 36 As hereinbefore discussed, this is not the situation obtaining in the case at bar.

While there is jurisprudence to the effect that a contract which provides that the initial payment shall be totally forfeited in case of default in payment is to be considered as an option contract, 37 still we are not inclined to conform with the findings of respondent court and the court a quo that the contract executed between the parties is an option contract, for the reason that the parties were already contemplating the payment of the balance of the purchase price , and were not merely quoting an agreed value for the property. The term "balance," connotes a remainder or something remaining from the original total sum already agreed upon.

vindicatory action or a foreclosure of mortgage, he may suspend the payment of the price until the vendor has caused the disturbance or danger to cease, unless the latter gives security for the return of the price in a proper case, or it has been stipulated that, notwithstanding any such contingency, the vendee shall be bound to make the payment. A mere act of trespass shall not authorize the suspension of the payment of the price.

was no proper tender of payment nor consignation in this case as required by law.

Respondent court refused to apply the aforequoted provision of law on the erroneous assumption that the true agreement between the parties was a contract of option. As we have hereinbefore discussed, it was not an option contract but a perfected contract to sell. Verily, therefore, Article 1590 would properly apply.

In other words, the alleged option money of P50,000.00 was actually earnest money which was intended to form part of the purchase price. The amount of P50,000.00 was not distinct from the cause or consideration for the sale of the property, but was itself a part thereof. It is a statutory rule that whenever earnest money is given in a contract of sale, it shall be considered as part of the price and as proof of the perfection of the contract. 38 It constitutes an advance payment and must, therefore, be deducted from the total price. Also, earnest money is given by the buyer to the seller to bind the bargain.

There are clear distinctions between earnest money and option money, viz.: (a) earnest money is part of the purchase price, while option money ids the money given as a distinct consideration for an option contract; (b) earnest money is given only where there is already a sale, while option money applies to a sale not yet perfected; and (c) when earnest money is given, the buyer is bound to pay the balance, while when the would-be buyer gives option money, he is not required to buy. 39

Both lower courts, however, are in accord that since Civil Case No. 895541 filed against the parties herein involved only the eastern half of the land subject of the deed of sale between petitioner and the Jimenez brothers, it did not, therefore, have any adverse effect on private respondents' title and ownership over the western half of the land which is covered by the contract subject of the present case. We have gone over the complaint for recovery of ownership filed in said case 41 and we are not persuaded by the factual findings made by said courts. At a glance, it is easily discernible that, although the complaint prayed for the annulment only of the contract of sale executed between petitioner and the Jimenez brothers, the same likewise prayed for the recovery of therein plaintiffs' share in that parcel of land specifically covered by TCT No. 309773. In other words, the plaintiffs therein were claiming to be coowners of the entire parcel of land described in TCT No. 309773, and not only of a portion thereof nor, as incorrectly interpreted by the lower courts, did their claim pertain exclusively to the eastern half adjudicated to the Jimenez brothers.

The mere sending of a letter by the vendee expressing the intention to pay, without the accompanying payment, is not considered a valid tender of payment. 43 Besides, a mere tender of payment is not sufficient to compel private respondents to deliver the property and execute the deed of absolute sale. It is consignation which is essential in order to extinguish petitioner's obligation to pay the balance of the purchase price. 44 The rule is different in case of an option contract 45 or in legal redemption or in a sale with right to repurchase, 46 wherein consignation is not necessary because these cases involve an exercise of a right or privilege (to buy, redeem or repurchase) rather than the discharge of an obligation, hence tender of payment would be sufficient to preserve the right or privilege. This is because the provisions on consignation are not applicable when there is no obligation to pay. 47 A contract to sell, as in the case before us, involves the performance of an obligation, not merely the exercise of a privilege of a right. consequently, performance or payment may be effected not by tender of payment alone but by both tender and consignation.

Furthermore, petitioner no longer had the right to suspend payment after the disturbance ceased with the dismissal of the civil case filed against it. Necessarily, therefore, its obligation to pay the balance again arose and resumed after it received notice of such dismissal. Unfortunately, petitioner failed to seasonably make payment, as in fact it has deposit the money with the trial court when this case was originally filed therein.

The aforequoted characteristics of earnest money are apparent in the so-called option contract under review, even though it was called "option money" by the parties. In addition, private respondents failed to show that the payment of the balance of the purchase price was only a condition precedent to the acceptance of the offer or to the exercise of the right to buy. On the contrary, it has been sufficiently established that such payment was but an element of the performance of petitioner's obligation under the contract to sell. 40

Such being the case, petitioner was justified in suspending payment of the balance of the purchase price by reason of the aforesaid vindicatory action filed against it. The assurance made by private respondents that petitioner did not have to worry about the case because it was pure and simple harassment 42 is not the kind of guaranty contemplated under the exceptive clause in Article 1590 wherein the vendor is bound to make payment even with the existence of a vindicatory action if the vendee should give a security for the return of the price.

By reason of petitioner's failure to comply with its obligation, private respondents elected to resort to and did announce the rescission of the contract through its letter to petitioner dated July 27, 1990. That written notice of rescission is deemed sufficient under the circumstances. Article 1592 of the Civil Code which requires rescission either by judicial action or notarial act is not applicable to a contract to sell. 48 Furthermore, judicial action for rescission of a contract is not necessary where the contract provides for automatic rescission in case of breach, 49 as in the contract involved in the present controversy.

II

1. This brings us to the second issue as to whether or not there was valid suspension of payment of the purchase price by petitioner and the legal consequences thereof. To justify its failure to pay the purchase price within the agreed period, petitioner invokes Article 1590 of the civil Code which provides:

2. Be that as it may, and the validity of the suspension of payment notwithstanding, we find and hold that private respondents may no longer be compelled to sell and deliver the subject property to petitioner for two reasons, that is, petitioner's failure to duly effect the consignation of the purchase price after the disturbance had ceased; and, secondarily, the fact that the contract to sell had been validly rescinded by private respondents.

We are not unaware of the ruling in University of the Philippines vs. De los Angeles, etc. 50 that the right to rescind is not absolute, being ever subject to scrutiny and review by the proper court. It is our considered view, however, that this rule applies to a situation where the extrajudicial rescission is contested by the defaulting party. In other words, resolution of reciprocal contracts may be made extrajudicially unless successfully impugned in court. If the debtor impugns the declaration, it shall be subject to judicial determination 51 otherwise, if said party does not oppose it, the extrajudicial rescission shall have legal effect. 52

Art. 1590. Should the vendee be disturbed in the possession or ownership of the thing acquired, or should he have reasonable grounds to fear such disturbance, by a

The records of this case reveal that as early as February 28, 1990 when petitioner caused its exclusive option to be annotated anew on the certificate of title, it already knew of the dismissal of civil Case No. 895541. However, it was only on April 16, 1990 that petitioner, through its counsel, wrote private respondents expressing its willingness to pay the balance of the purchase price upon the execution of the corresponding deed of absolute sale. At most, that was merely a notice to pay. There

In the case at bar, it has been shown that although petitioner was duly furnished and did receive a written notice of rescission which specified the grounds therefore, it failed to reply thereto or protest against it. Its silence thereon suggests an admission of the veracity and validity of private respondents' claim. 53 Furthermore, the initiative of instituting suit was transferred from the rescinder to the defaulter by virtue of the automatic rescission clause in the contract. 54 But then, the records bear out the fact that aside from the lackadaisical manner with which petitioner treated private respondents' latter of cancellation, it utterly failed to seriously seek redress from the court for the enforcement of its alleged rights under the contract. If private respondents had not taken

the initiative of filing Civil Case No. 7532, evidently petitioner had no intention to take any legal action to compel specific performance from the former. By such cavalier disregard, it has been effectively estopped from seeking the affirmative relief it now desires but which it had theretofore disdained.

On October 23, 1978, Mrs. de Mesa, under a Deed of Sale with Assumption of Mortgage,xxii[4] sold the foreclosed properties to private respondent OSSA under the condition that the latter was to assume the payment of the mortgage debt by the repurchase of all the properties mortgaged on installment basis, with an initial payment of P90,000.00 representing 20% of the total obligation.

In an Order dated July 23, 1982, the lower court allowed OSSA to deposit with the Court a quo by way of consignation, all future quarterly installments without need of formal tenders of payment and service of notices of consignation. Correspondingly and over the period of time stipulated, OSSA deposited with the lower court the 10 th to the 20th installments in the aggregate amount of P172, 562.11.

WHEREFORE, on the foregoing modificatory premises, and considering that the same result has been reached by respondent Court of Appeals with respect to the relief awarded to private respondents by the court a quo which we find to be correct, its assailed judgment in CA-G.R. CV No. 34767 is hereby AFFIRMED.

On October 23, 1978, private respondent OSSA remitted to DBP the initial payment of P90,000.00, in addition to the amount of P10,000.00 previously paid to the petitioner. On February 22, 1979, DBP granted petitioners request to repurchase the foreclosed properties such that in March 1979 a Deed of Conditional Sale was executed under which DBP agreed t o sell the said properties to the petitioner for the sum of P363,408.20, P90,000.00 of which was to be paid as initial payment and the balance in seven (7) years on a quarterly amortization plan, with a first quarterly installment of P15,475.17.

After trial, the lower court came out with a Decision for the private respondent OSSA, holding thus: WHEREFORE, premises considered, judgment is hereby rendered (a) declaring the consignation made by plaintiff as proper and valid and ordering defendants Dolores Ligaya de Mesa and Development Bank of the Philippines to withdraw and receive said payments due them which plaintiff has consigned with the Court;

SO ORDERED.

[G.R. No. 106467-68. October 19, 1999] Private respondent OSSA paid DBP the first to eight quarterly installments from April 11, 1979 to May 8, 1991, in the total amount of P137,595.31, which installment payments were applied to petitioners obligation with DBP pursuant to the Deed of Conditional Sale.

(b) Ordering defendant Development Bank of the Philippines to furnish plaintiff with a statement of payments and balance, if any, still due from defendant de Mesa after applying all payments already received, including the amounts placed under consignation;

DOLORES LIGAYA DE MESA, petitioner, vs. THE COURT OF APPEALS, OSSA HOUSE, INC. AND DEVELOPMENT BANK OF THE PHILIPPINES, respondents.

DECISION

PURISIMA, J.:

At bar is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court questioning the Decisionxxii[1] of the Court of Appealsxxii[2] dated March 31, 1992 in CA-G.R. Nos. 19145 and 19146, which modified the decision of Branch 138 of the Regional Trial Court of Makati in Civil Case Nos. 41059 and 42381.

On March 11, 1981, petitioner de Mesa notified private respondent OSSA that she was rescinding the Deed of Sale with Assumption of Mortgage she executed in favor of the latter on the ground that OSSA failed to comply with the terms and conditions of their agreement, particularly the payment of installments to the Development Bank of the Philippines, the discharge and cancellation of the mortgage on the property listed in item IV of the first whereas clause, and the payment of the balance of more or less P45,000.00 to petitioner, representing the difference between the purchase price of subject properties and the actual obligation to the DBP.

(c) Upon payment by the plaintiff of the balance if any, still due on the properties, defendant Development Bank of the Philippines shall execute a Deed of Absolute Sale in favor of the plaintiff over the properties subject matter of the Deed of Absolute Sale with Assumption of Mortgage executed by and between plaintiff and defendant de Mesa;

(d) Ordering plaintiff to pay defendant de Mesa the difference, if any, between the agreed purchase price of P500,000.00 and the payments made to the defendant Development Bank of the Philippines, less the P10,000.00 down payment already paid and the P34,363.08 consigned with the Court; and

The antecedent facts are as follows:

Petitioner Dolores Ligaya de Mesa owns several parcels of land in Makati, Pasay City, Cavite, and General Santos Cityxxii[3] which were mortgaged to the Development Bank of the Philippines (DBP) as security for a loan she obtained from the bank. Failing to pay her mortgage debt, all her mortgaged properties were foreclosed and sold at public auction held on different days. On April 30, 1977, the Makar property was sold and the corresponding certificate of sale inscribed on March 10, 1978. On August 25, 1977, the Naic, Cavite property was sold and the certificate of sale registered on the same day. On August 30, 1977, the two (2) parcels of land in Makati were sold at public auction and the certificate of sale was inscribed on November 25, 1977. And on January 12, 1978, the three (3) parcels of land in Pasay City were also sold and the certificate of sale was recorded on the same date. In all the said auction sales, DBP was the winning bidder.

On April 11, 1981, OSSA offered to pay the amount of P34,363.08, which is the difference between the purchase price of P500,000.00 and the mortgage obligation to DBP of P455,636.92, after deducting the downpayment of P10,000.00 stipulated in said Deed of Sale with Assumption of Mortgage, but the petitioner refused to accept such payment. So, on April 28, 1981, OSSA brought a Complaint for Consignation against the petitioner, docketed as Civil Case No. 41059 before the then Court of First Instance of Rizal, Branch XV, and at the same time, deposited the amount of P34,363.08 with said court.

(e) Ordering defendant de Mesa to pay plaintiff the sum of P10,000.00 as attorneys fees.

SO ORDERED.' xxii[5]

The petitioner appealed to the Court of Appeals which handed down on March 31, 1992, its decision modifying the challenged decision, as follows: WHEREFORE, the decision appealed from is hereby MODIFIED:

On August 5, 1981, DBP refused to accept the 9th quarterly installment paid by OSSA, prompting the latter to file against DBP and the petitioner, on August 11, 1981, Civil Case No. 42381 for specific performance and consignation, with the then Court of First Instance of Pasig, Rizal, depositing in said case the amount of P15,824.92. On October 21, 1981, upon petitioner de Mesas motion, Civil Case Nos. 41059 and 42381 were consolidated before the then Court of First Instance of Rizal, Branch XV, Makati, Metro Manila, now Regional Trial Court of Makati City , Branch CXXXVIII (138).

(a) declaring the consignation made by OSSA as proper and valid as far as de Mesa is concerned, and ordering de Mesa to receive the said amount consigned with the court and pay DBP with the said amount;

In a letter dated May 29, 1978, petitioner de Mesa requested DBP that she be allowed to repurchase her foreclosed properties.

(b) ordering DBP to furnish de Mesa with a statement of payments and the balance, if any, still due from de Mesa after applying all payments already received, including the amounts paid under consignation;

(c) ordering de Mesa to furnish OSSA with a copy of the statement of payments described in the preceding paragraph, and the balance appearing therein, if any, shall be paid by OSSA for the account of de Mesa;

THIS COURT ERRED IN RULING THAT THE MANDATORY REQUIREMENTS OF THE CIVIL CODE ON CONSIGNATION CAN BE WAIVED BY THE TRIAL COURT.xxii[7]

The VENDEE does hereby assume the payment of the mortgage obligations by repurchase of all the properties mortgaged on installment, with an initial payment of P90,000.00 representing payment 20% of the total obligation; and consequently, the within sale is subject to the mortgage in favor of the Development Bank of the Philippines;

(d) ordering DBP to execute a Deed of Absolute Sale in favor of de Mesa over the properties subject of the Deed of Conditional Sale;

With the denial of her aforestated motion for reconsideration, petitioner found her way to this Court via the present petition, raising the issues: Nowhere is it provided in the aforequoted provisions, as the petitioner insists, that what she sold to respondent OSSA was merely the right to redeem the mortgaged properties and not the foreclosed properties themselves. On the contrary, the very words of the contract reveal that the subject of the sale were all the properties described in items I, I I, III of the First Whereas Clause.

(e) ordering Ossa to pay de Mesa the difference, if any, between the agreed purchase price of P500,000.00 and the payments made to DBP, less the P10,000.00 down payment and the P34,363.08 consigned with the court;

(i) Whether or not the requirements of Articles 1256 to 1261 can be relaxed or substantially complied with.

(ii) Whether or not the Court can supplant its own reading of an ambiguous contract for the actual intention of the contracting parties as testified to in open court and under oath.

(f) ordering de Mesa thereafter, to execute a Deed of Absolute Sale in favor of OSSA over the properties subject of the Deed of Sale with assumption of Mortgage; and

(iii) Whether or not petitioner de Mesa can be held in estoppel for the acts of the DBP.

Indeed, the contract under scrutiny is so explicit and unambiguous that it does not justify any attempt to read into it any supposed intention of the parties, as the said contract is to be understood literally, just as they appear on its face.xxii[9]

(g) ordering de Mesa to pay OSSA the sum of P10,000.00 as and for attorneys fees.

Article 1370 of the New Civil Code, reads:

Petitioner capitalizes on the following prefatory clause of the contract, to wit: WHEREAS, the VENDOR (defendant De Mesa) is the registered owner with a preferential right of redemption of the following mortgaged properties with the Development Bank of the Philippines, more particularly described as follows:

No pronouncement as to costs. SO ORDERED.xxii[6]

"Art. 1370. If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulation shall control. x x x

On May 5, 1992, petitioner interposed a motion for reconsideration of the aforesaid decision, theorizing that: I When the words of a contract are plain and readily understood, there is no room for construction. As the agreement of the parties are reduced to writing, such agreement is considered as containing all its terms and there can be, between the parties and their successors-in-interest, no evidence of the terms of the written agreement other than the contents of the writing.xxii[8] In the case under consideration, the terms of the Deed of Sale with Assumption of Mortgage Debt are clear and leave no doubt as to what were sold thereunder. It provided as follows:

However, not the slightest indication can be gleaned from the abovequoted provision that the subject of the Deed of Sale with Assumption of Mortgage was petitioners right of redemption. The said provision merely speaks of the preferential right of the latter to redeem the real properties involved. Furthermore, the court discerns no inconsistency between the contracts recognition of the preferential right of petitioner to redeem the mortgaged properties, and the sale of the said properties to respondent OSSA. Petitioner can validly redeem subject properties and still recognize the sale thereof to the respondent corporation because nothing therein is contrary to law, morals, good customs, public order or public policy. Besides, it is a well-settled doctrine that in the construction of an instrument where there are several provisions, or particulars, such a construction is, if possible, to be adopted as will give effect to all.xxii[10] Thus, the recognition of both the preferential right of the petitioner to redeem the mortgaged properties and the sale of the same properties to respondent OSSA is in order, as it would harmonize and give effect to all the provisions of the Deed of Sale with Assumption of Mortgage under controversy. As aptly ruled by the respondent court, the grant by DBP of petitioners request to repurchase the mortgaged properties redounded to the benefit of respondent OSSA, the sale of the said properties having been previously agreed upon by the petitioner and respondent OSSA. Petitioner contends that she is not estopped from questioning DBPs application to her account of OSSAs initial payment of P90,000.00 as well as the first to eight quarterly installments. It bears stressing, however, that the remittance of the said payment was made in implementation of the provisions of their contract. The belated claim of

THIS COURT ERRED WHEN IT HELD THAT WHAT WAS SOLD UNDER THE DEED OF SALE WITH ASSUMPTION OF MORTGAGE WERE THE PROPERTIES LISTED THEREIN AND NOT MERELY THE RIGHT OF REDEMPTION DESPITE THE TESTIMONIES OF BOTH CONTRACTING PARTIES THAT WHAT SOLD AND BOUGHT WAS MERELY THE RIGHT OF REDEMPTION.

II THIS COURT ERRED IN HOLDING THAT DE MESAS REQUEST TO REPURCHASE THE FORECLOSED PROPERTIES FROM DBP REDOUNDED TO THE BENEFIT OF OSSA HOUSE, INC.

"WHEREAS, the VENDOR has agreed to sell to the VENDEE (plaintiff Ossa House, Inc.), and the VENDEE has agreed to purchase form the VENDOR, all the properties described in Items I, II, and III, of the First Whereas Clause, for the price and under the terms hereinafter contained;

III

THIS COURT ERRED IN HOLDING DE MESA IN ESTOPPEL.

IV

NOW, THEREFORE, for and in consideration of the premises and the sum of TEN THOUSAND PESOS (P10,000.00), the receipt whereof is hereby acknowledged, and the assumption by the VENDEE of the total mortgage obligation of the VENDOR has sold, transferred, and conveyed, and by these presents does sell, transfer and convey, unto the said VENDEE, its administrators and assigns, free from all liens and encumbrances except as noted herein, the parcels of land hereinabove described in Items I, II, and III, together with all the buildings and improvements thereon;

the petitioner, which was not given credence by the trial court, that she objected to the application by DBP to her account of all the remittances of OSSA is tainted with bad faith as this is an attempt to renegade against her contract with respondent OSSA. Besides, the issue of whether or not petitioner objected is a question of fact that has already been settled by the trial court which best performs the matter of assigning values to the testimony of witnesses,xxii[11] and whose findings are accorded great weight especially when affirmed by the Court of Appealsxxii[12], as in the case at bar. Petitioner next argues that there was no notice to her regarding OSSAs consignation of the amounts corresponding to the 12 th up to the 20th quarterly installments. The records, however, show that several tenders of payment were consistently turned down by the petitioner, so much so that the respondent OSSA found it pointless to keep on making formal tenders of payment and serving notices of consignation to petitioner. Moreover, in a motion dated May 7, 1987, OSSA prayed before the lower court that it be allowed to deposit by way of consignation all the quarterly installments, without making formal tenders of payment and serving notice of consignation, which prayer was granted by the trial court in the Order dated July 3, 1982. The motion and the subsequent court order served on the petitioner in the consignation proceedings sufficiently served as notice to petitioner of OSSAs willingness to pay the quarterly installments and the consignation of such payments with the court. For reasons of equity, the procedural requirements of consignation are deemed substantially complied with in the present case.xxii[13]

G.R. No. L-9935

February 1, 1915

YU TEK and CO., vs. BASILIO GONZALES, defendant-appellant.

plaintiff-appellant,

Beaumont, Tenney and Buencamino and Lontok for defendant.

Ferrier

for

plaintiff.

TRENT, J.:

contracts, it cannot serve the purpose of incorporating into the contract additional contemporaneous conditions which are not mentioned at all in the writing, unless there has been fraud or mistake. In an early case this court declined to allow parol evidence showing that a party to a written contract was to become a partner in a firm instead of a creditor of the firm. (Pastor vs. Gaspar, 2 Phil. Rep., 592.) Again, in Eveland vs. Eastern Mining Co. (14 Phil. Rep., 509) a contract of employment provided that the plaintiff should receive from the defendant a stipulated salary and expenses. The defendant sought to interpose as a defense to recovery that the payment of the salary was contingent upon the plaintiff's employment redounding to the benefit of the defendant company. The contract contained no such condition and the court declined to receive parol evidence thereof.

The basis of this action is a written contract, Exhibit A, the pertinent paragraphs of which follow:

1. That Mr. Basilio Gonzalez hereby acknowledges receipt of the sum of P3,000 Philippine currency from Messrs. Yu Tek and Co., and that in consideration of said sum be obligates himself to deliver to the said Yu Tek and Co., 600 piculs of sugar of the first and second grade, according to the result of the polarization, within the period of three months, beginning on the 1st day of January, 1912, and ending on the 31st day of March of the same year, 1912.

In the case at bar, it is sought to show that the sugar was to be obtained exclusively from the crop raised by the defendant. There is no clause in the written contract which even remotely suggests such a condition. The defendant undertook to deliver a specified quantity of sugar within a specified time. The contract placed no restriction upon the defendant in the matter of obtaining the sugar. He was equally at liberty to purchase it on the market or raise it himself. It may be true that defendant owned a plantation and expected to raise the sugar himself, but he did not limit his obligation to his own crop of sugar. Our conclusion is that the condition which the defendant seeks to add to the contract by parol evidence cannot be considered. The rights of the parties must be determined by the writing itself.

Petitioner also insists that there was no valid tender of payment because the amount tendered was P34,363.08, not P51,243.26, and assuming ex gratia argumenti that it was the correct amount, the tender thereof was still not valid, the same having been made by check. This claim, however, does not accord with the records on hand. Thus, the Court of Appeals ratiocinated: The Deed of Sale with Assumption of Mortgage, was for a consideration of P500,000.00, from which shall be deducted de Mesass outstanding obligation, with the DBP pegged as of May 10, 1978, by the parties themselves, at P455,636.92. This amount of P455,636.92 owing DBP, is what OSSA agreed to assume. What remained to be paid de Mesa was P44,636.08, but OSSA made an advance payment of P10,000.00, hence the remaining amount payable to de Mesa is P34,363.08, which OSSA tendered in cash (Exhibits X, BB and CC).xxii[14]

2. That the said Mr. Basilio Gonzales obligates himself to deliver to the said Messrs. Yu Tek and Co., of this city the said 600 piculs of sugar at any place within the said municipality of Santa Rosa which the said Messrs. Yu Tek and Co., or a representative of the same may designate.

The second contention of the defendant arises from the first. He assumes that the contract was limited to the sugar he might raise upon his own plantation; that the contract represented a perfected sale; and that by failure of his crop he was relieved from complying with his undertaking by loss of the thing due. (Arts. 1452, 1096, and 1182, Civil Code.) This argument is faulty in assuming that there was a perfected sale. Article 1450 defines a perfected sale as follows:

3. That in case the said Mr. Basilio Gonzales does not deliver to Messrs. Yu Tek and Co. the 600 piculs of sugar within the period of three months, referred to in the second paragraph of this document, this contract will be rescinded and the said Mr. Basilio Gonzales will then be obligated to return to Messrs. Yu Tek and Co. the P3,000 received and also the sum of P1,200 by way of indemnity for loss and damages.

The sale shall be perfected between vendor and vendee and shall be binding on both of them, if they have agreed upon the thing which is the object of the contract and upon the price, even when neither has been delivered.

Article 1452 reads: "The injury to or the profit of the thing sold shall, after the contract has been perfected , be governed by the provisions of articles 1096 and 1182."

It is thus beyond cavil that the respondent OSSA tendered the correct amount, the tender of which was in cash and not by check, as theorized by petitioner.

Plaintiff proved that no sugar had been delivered to it under this contract nor had it been able to recover the P3,000. Plaintiff prayed for judgment for the P3,000 and, in addition, for P1,200 under paragraph 4, supra. Judgment was rendered for P3,000 only, and from this judgment both parties appealed.

Premises studiedly considered, the Court is of the ineluctable conclusion, and so holds, that the Court of Appeals erred not in affirming the decision of the trial court of origin.

WHEREFORE, the petition is DENIED and the assailed Decision of the Court of Appeals in CA-G.R. Nos. 19145 and 19156 dated March 31, 1992 AFFIRMED. No pronouncement as to costs.

SO ORDERED.

The points raised by the defendant will be considered first. He alleges that the court erred in refusing to permit parol evidence showing that the parties intended that the sugar was to be secured from the crop which the defendant raised on his plantation, and that he was unable to fulfill the contract by reason of the almost total failure of his crop. This case appears to be one to which the rule which excludes parol evidence to add to or vary the terms of a written contract is decidedly applicable. There is not the slightest intimation in the contract that the sugar was to be raised by the defendant. Parties are presumed to have reduced to writing all the essential conditions of their contract. While parol evidence is admissible in a variety of ways to explain the meaning of written

This court has consistently held that there is a perfected sale with regard to the "thing" whenever the article of sale has been physically segregated from all other articles Thus, a particular tobacco factory with its contents was held sold under a contract which did not provide for either delivery of the price or of the thing until a future time. McCullough vs. Aenlle and Co. (3 Phil. Rep., 295). Quite similar was the recent case of Barretto vs. Santa Marina (26 Phil. Rep., 200) where specified shares of stock in a tobacco factory were held sold by a contract which deferred delivery of both the price and the stock until the latter had been appraised by an inventory of the entire assets of the company. In Borromeo vs. Franco (5 Phil. Rep., 49) a sale of a specific house was held perfected between the vendor and vendee, although the delivery of the price was withheld until the necessary documents of ownership were prepared by the vendee. In Tan Leonco vs. Go Inqui (8 Phil. Rep., 531) the plaintiff had delivered a quantity of hemp into the warehouse of the defendant. The defendant drew a bill of exchange in the sum of

P800, representing the price which had been agreed upon for the hemp thus delivered. Prior to the presentation of the bill for payment, the hemp was destroyed. Whereupon, the defendant suspended payment of the bill. It was held that the hemp having been already delivered, the title had passed and the loss was the vendee's. It is our purpose to distinguish the case at bar from all these cases.

In the case at bar the undertaking of the defendant was to sell to the plaintiff 600 piculs of sugar of the first and second classes. Was this an agreement upon the "thing" which was the object of the contract within the meaning of article 1450, supra? Sugar is one of the staple commodities of this country. For the purpose of sale its bulk is weighed, the customary unit of weight being denominated a "picul." There was no delivery under the contract. Now, if called upon to designate the article sold, it is clear that the defendant could only say that it was "sugar." He could only use this generic name for the thing sold. There was no "appropriation" of any particular lot of sugar. Neither party could point to any specific quantity of sugar and say: "This is the article which was the subject of our contract." How different is this from the contracts discussed in the cases referred to above! In the McCullough case, for instance, the tobacco factory which the parties dealt with was specifically pointed out and distinguished from all other tobacco factories. So, in the Barretto case, the particular shares of stock which the parties desired to transfer were capable of designation. In the Tan Leonco case, where a quantity of hemp was the subject of the contract, it was shown that that quantity had been deposited in a specific warehouse, and thus set apart and distinguished from all other hemp.

agent receiving the order merely enters into an executory contract for the sale of the goods, which does not divest or transfer the title of any determinate object, and which becomes effective for that purpose only when specific goods are thereafter appropriated to the contract; and, in the absence of a more specific agreement on the subject, that such appropriated takes place only when the goods as ordered are delivered to the public carriers at the place from which they are to be shipped, consigned to the person by whom the order is given, at which time and place, therefore, the sale is perfected and the title passes.

to return the P3,000 and pay the sum of P1,200 by way of indemnity for loss and damages. There cannot be the slightest doubt about the meaning of this language or the intention of the parties. There is no room for either interpretation or construction. Under the provisions of article 1255 of the Civil Code contracting parties are free to execute the contracts that they may consider suitable, provided they are not in contravention of law, morals, or public order. In our opinion there is nothing in the contract under consideration which is opposed to any of these principles.

This case and State vs. Shields, referred to in the above quotation are amply illustrative of the position taken by the Louisiana court on the question before us. But we cannot refrain from referring to the case of Larue and Prevost vs. Rugely, Blair and Co. (10 La. Ann., 242) which is summarized by the court itself in the Shields case as follows:

For the foregoing reasons the judgment appealed from is modified by allowing the recovery of P1,200 under paragraph 4 of the contract. As thus modified, the judgment appealed from is affirmed, without costs in this instance.

G.R. No. L-45843

June 30, 1939

. . . It appears that the defendants had made a contract for the sale, by weight, of a lot of cotton, had received $3,000 on account of the price, and had given an order for its delivery, which had been presented to the purchaser, and recognized by the press in which the cotton was stored, but that the cotton had been destroyed by fire before it was weighed. It was held that it was still at the risk of the seller, and that the buyer was entitled to recover the $3,000 paid on account of the price.

REYNALDO LABAYEN and TEODORO appellants, vs. TALISAY-SILAY CO., defendant-appellee.

LABAYEN,

plaintiffs-

Vicente J. Francisco for Nolan and Manaloto and Jose Nava for appellee.

appellants.

A number of cases have been decided in the State of Louisiana, where the civil law prevails, which confirm our position. Perhaps the latest is Witt Shoe Co. vs. Seegars and Co. (122 La., 145; 47 Sou., 444). In this case a contract was entered into by a traveling salesman for a quantity of shoes, the sales having been made by sample. The court said of this contract:

IMPERIAL, J.: We conclude that the contract in the case at bar was merely an executory agreement; a promise of sale and not a sale. At there was no perfected sale, it is clear that articles 1452, 1096, and 1182 are not applicable. The defendant having defaulted in his engagement, the plaintiff is entitled to recover the P3,000 which it advanced to the defendant, and this portion of the judgment appealed from must therefore be affirmed.

But it is wholly immaterial, for the purpose of the main question, whether Mitchell was authorized to make a definite contract of sale or not, since the only contract that he was in a position to make was an agreement to sell or an executory contract of sale. He says that plaintiff sends out 375 samples of shoes, and as he was offering to sell by sample shoes, part of which had not been manufactured and the rest of which were incorporated in plaintiff's stock in Lynchburg, Va., it was impossible that he and Seegars and Co. should at that time have agreed upon the specific objects, the title to which was to pass, and hence there could have been no sale. He and Seegars and Co. might have agreed, and did (in effect ) agree, that the identification of the objects and their appropriation to the contract necessary to make a sale should thereafter be made by the plaintiff, acting for itself and for Seegars and Co., and the legend printed in red ink on plaintiff's billheads ("Our responsibility ceases when we take transportation Co's. receipt `In good order'" indicates plaintiff's idea of the moment at which such identification and appropriation would become effective. The question presented was carefully considered in the case of State vs. Shields, et al. (110 La., 547, 34 Sou., 673) (in which it was absolutely necessary that it should be decided), and it was there held that in receiving an order for a quantity of goods, of a kind and at a price agreed on, to be supplied from a general stock, warehoused at another place, the

The plaintiffs take this appeal from the order of the Court of First Instance of Occidental Negros, dated June 12, 1937, sustaining the demurrer to the amended complaint, filed on May 4, 1937, and granting ten days to the plaintiffs to amend the said pleading, with notice that should they fail to do so within the said period, the same will be dismissed, with costs.

The plaintiff has appealed from the judgment of the trial court on the ground that it is entitled to recover the additional sum of P1,200 under paragraph 4 of the contract. The court below held that this paragraph was simply a limitation upon the amount of damages which could be recovered and not liquidated damages as contemplated by the law. "It also appears," said the lower court, "that in any event the defendant was prevented from fulfilling the contract by the delivery of the sugar by condition over which he had no control, but these conditions were not sufficient to absolve him from the obligation of returning the money which he received."

The amended complaint alleges as first cause of action the following: that the plaintiffs on or before August 27, 1919 until the year 1928, were the undivided owners of the hacienda known as Dos Hermanos, situated in the municipality of Talisay, Occidental Negros, consisting of lots Nos. 1229 and 1327 of the cadastre of the said municipality, described in original certificates of title Nos. 9982 and 9286; that on August 27, 1929, the plaintiffs and the defendant entered into a milling contract the pertinent pacts and conditions of which read:

xxx The above quoted portion of the trial court's opinion appears to be based upon the proposition that the sugar which was to be delivered by the defendant was that which he expected to obtain from his own hacienda and, as the dry weather destroyed his growing cane, he could not comply with his part of the contract. As we have indicated, this view is erroneous, as, under the contract, the defendant was not limited to his growth crop in order to make the delivery. He agreed to deliver the sugar and nothing is said in the contract about where he was to get it.

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PACTS TO WHICH THE CENTRAL BIND ITSELF

We think is a clear case of liquidated damages. The contract plainly states that if the defendant fails to deliver the 600 piculs of sugar within the time agreed on, the contract will be rescinded and he will be obliged

THIRD: That it shall construct and shall thereafter make or cause to be made everything needed for the conservation in good condition, and shall operate during the period of this agreement, without any expense on the part of the planter or planters, a fixed railway, of steam or motor, or both, for the use of the plantation or plantations in the transportation of sugar cane, sugar, fertilizer and goods which the planter may need for his land, for his use, for

that of his family and that of his employees, and shall make the principal line or a branch thereof, as the case may be, to reach a point of the plantation to be hereafter described which shall be not be more than one mile from the boundaries of the said plantation, as the configuration of the land, its curves and grades will permit; it shall provide the said railway with locomotives or motors and wagons in sufficient number to expedite the transportation of sugar cane, sugar, fertilizer and goods aforementioned, and it shall likewise construct a branch of the railway connecting the principal line, factory and warehouses and the aforementioned pier, and it shall also conveniently equip with switches or otherwise the yard of the factory near the sugar mill. All the steam locomotives shall be provided with spark arresters. The railway shall consist of a line or way conveniently and properly designated so that, as far as possible, all the planters may deprive equal benefits therefrom; the right of way for the principal line of the railway shall be three and one-half (3) meters wide on each side measuring from the center of the line, and the branches, deviations, and curves shall be more if necessary.

an average of not less than ninety-two per cent (92%) for each sugar crop in centrifugal sugar of high grades, generally known as sugar A and B, and it shall guarantee an average of ninety-six (96) grades in said sugar class A; and it shall guarantee an average polarization of ninetythree (93) grades in said sugar class B.

The Committee of Planters and the Central, upon agreement, shall determine the class or classes of sugar to be made by the factory.

OBLIGATIONS OF THE PLANTER

FIRST. That during a period of thirty (30) years, from the time he is notified by the Central that it is ready to receive him, he shall deliver to said Central, properly cut and clear of leaves, all the sugar cane planted, cultivated and produced upon his said lands and haciendas.

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EIGHTH. It shall receive all the sugar cane planted by the planter or planters, well cut off, completely clear of leaves, conveniently loaded on the wagons of the Central at those points along the line of its railway or branches thereof, as the case may be, on such days and time as the Committee of Planters may agree upon, taking into account the crops of the planters and the kind of sugar cane to be milled, and shall transport the said sugar cane to the factory free of charge.

That the planter who signs this contract, states and guarantees to the Central that he is the absolute owner of the following parcel of land, situated in the Municipality of Talisay, Province of Negros Occidental, described in this contract as "the plantation" or "the plantations" known as lots Nos. (1229) one thousand two hundred twenty-nine and (1327) one thousand three hundred twenty-seven of the Talisay Cadastre, Province of Negros Occidental, P.I.

rendered in the said case were obtained by the defendant through fraud; consisting in the false testimony given by the witnesses who testified in the case; that said witnesses falsely testified that the railway could not be constructed on the hacienda Dos Hermanos because the curves and grades existing thereon made it materially impossible, knowing that said statements were untrue and false; that as a result of the judgments fraudulently obtained by the defendant, the plaintiffs have suffered damages in the sum of P70,000. As second cause of action of the amended complaint the following facts were alleged: that in the milling contract, through the false representations of the officers of the defendant, the latter induced the plaintiffs to empower it to obtain a loan from any institution and to secure it by the mortgage of the hacienda Dos Hermanos, promising to give the plaintiffs a bonus after the loan had been paid and the mortgage released; that the plaintiffs have been informed, and so allege in their amended complaint, that the defendant, armed with said power, obtained a loan from a bank which it guaranteed by the hacienda Dos Hermanos and that, notwithstanding the payment and release of the mortgage, the defendant has refused and still refuses to pay them the offered bonus to be later determined at the trial. On the strength of the facts alleged in the two causes of action, the plaintiffs asked that judgment be entered in their favor: declaring null and void the judgment rendered by the Court of First Instance of Occidental Negros as well as that rendered by this court affirming the former; that the defendant be sentenced to pay the sum of P70,000; that the hacienda Dos Hermanos be ordered returned to the plaintiffs, without prejudice to the payment by the latter to the defendant of the indebtedness in its favor; that the defendant be ordered to pay to the plaintiffs the bonus to which they are entitled, plus the costs.

The delivery of the sugar cane shall be made on the wagons of the railway of the Central at the places and time agreed upon by the Manager of the Central and the Committee of Planters.

The defendant interposed a demurrer to the amended complaint and alleged, with respect to the first cause of action, that the allegations thereof do not constitute a cause of action in favor of the plaintiffs and against the defendant, and that according to the facts alleged, the question raised was already res judicata as it has been decided in a former case; and with respect to the second cause of action, it alleged likewise that the allegations thereof do not constitute a cause of action in favor of the plaintiffs.

The Central shall have the right to refuse the sugar cane which is unclean, sour or burned. In case of delivery of sugar cane not sufficiently clean or cut off, but which otherwise complies with the other required conditions, the Central shall make a certain per cent reduction from its weight subject to the determination of the Central and the Committee of Planters; and in case of disagreement on this matter, the Central shall clean or take off the leaves of the sugar cane in two wagons to determine the exact amount to be deducted from the weight of all the sugar cane in question, and the expenses occasioned by said cleaning shall be charged against the delinquent planter.

The burned sugar cane, after twenty-four (24) hours from the time of burning, shall be accepted by the Central only upon special agreement between the Central and the Committee of Planters, who shall fix the conditions whereby the same should be milled and the sugar divided.

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TENTH. It shall grind, crush, and mill the said sugar cane, through the proper procedure of fabrication, shall convert the sugar which it guarantees to extract in its mills on

that pursuant to the said contract the plaintiffs planted on the hacienda Dos Hermanos during the agricultural year 1920-1921 thirty-five lacsas of sugar cane to be milled by the defendant; that in the following agricultural year, 1921-1922, the plaintiffs also planted 3,000 lacsas of sugar cane on the same hacienda, also to be milled and converted into centrifugal sugar by the defendant; that the defendant, in violation of the milling contract, did not construct the railway until a convenient place on the hacienda Dos Hermanos, as a result of which the sugar cane produced during the said agricultural years were not brought to and milled by the defendant's central; that for this reason the plaintiffs suffered a loss amounting to P28,620 for the recovery of which they brought civil case No. 3789 of the Court of First Instance of Occidental Negros; that in said case judgment was rendered absolving the defendant and sentencing the plaintiffs, upon the defendant's counterclaim, to pay the latter the sum of P12,114; that the said judgment was appealed to this court (G.R. No. 29298) and here affirmed (Labayen vs. Talisay-Silay Milling Co., 52 Phil., 440); that on the execution of the judgment in favor of the defendant in said case and on foreclosure of the mortgage of the hacienda Dos Hermanos, the sheriff sold the same at public auction and adjudicated it in favor of the defendant; that immediately after it became the owner of the hacienda, the defendant constructed the railway which, at the trial of the case, it had maintained was impossible to construct due to the curves and grades found on the hacienda, thereby showing that the defense which it put up to this effect was false and fraudulent; that the judgments of the Court of First Instance of Occidental Negros and of the Supreme Court

In their sole assignment of error, the plaintiffs-appellants contend that the court erred in sustaining the demurrer interposed to the amended complaint, and in support of the assigned error, they argue that there is no res judicata; that the nullity of judgments should not be resolved by the general rule regarding fraud in procedure, but by the rule of equity; that the perjury of the witnesses who testified in the first case and the other findings made by the court are not a bar to the declaration of nullity of the decision rendered in the former case; and that the allegations contained in the second cause of action constitute a cause of action.

As to the first cause of action of the amended complaint, the only question to decide is whether or not the fraud invoked by the appellants was raised, controverted and decided by the court in the first case. If it was, it is res judicata and cannot serve as a ground to annul both the decision of the trial court and that of this court affirming it. According to the allegations of the amended complaint the fraud consisted in the perjury committed by the witnesses for the defendant who stated that the railway was not constructed on the hacienda Dos Hermanos because on the land were found curves and grades which made its construction materially impossible. This was the special defense put up by the defendant in that case and was the question submitted to the court and the latter resolved it in favor of the defendant. It therefore, appears that the facts upon which the plaintiffs base the fraud now

invoked by them have been already submitted and resolved in the first case, and the court, after hearing the parties, held that they were true, hence, it rendered judgment in favor of the defendant. An action to annul a judgment, upon the ground of fraud, will not lie unless the fraud be extrinsic or collateral and the facts upon which it is based have not been controverted or resolved in the case where the judgment sought to be annulled was rendered (Anuran vs. Aquino Ortiz, 38 Phil., 29; Javier vs. Paredes and Gregorio, 52 Phil., 910). That the testimony upon which a judgment has been based was false or perjured is no ground to assail said judgment, unless the fraud refers to the jurisdiction. (Scotten vs. Rosenblum, 231 Fed., 357; U.S. vs. Chung Shee, 71 Fed., 277; Giffen vs. Christ's Church, 48 Cal. A., 151; 191 P., 718; Pratt vs. Griffin, 223 Ill., 349; 79 N.E. 102.) The testimony which is stigmatized as false and perjured was considered by the court before rendering its decision, and it came to the conclusion that it was true and believable, for which reason it made the same the basis for its holding that the defendant did not construct the railway because the land of the hacienda was very rugged and the curves and grades made the construction thereof impossible. After that holding by the court it is not now proper to question the veracity of said testimony in a collateral proceeding, otherwise there would be no end to controversies submitted and decided by the court. Unless the fraud goes directly to the jurisdiction of the court, the facts in which it consists must be extrinsic or collateral in order that fraud may be a ground to annul a judgment, which has already become final. For these reasons, we conclude that the contention of the plaintiffs-appellants, upon the questions, is unsound.

The second cause of action of the amended complaint is made to consist in that the appellants received the information that the defendant, making use of the power which they conferred upon it, mortgaged the hacienda Dos Hermanos to a bank, and after discharging said mortgage by paying the loan, it refused to pay them the bonus which it had promised. It has not been alleged that the appellants personally knew the execution of the mortgage; all that is affirmed is that they had received an information and they made the allegation upon such information; neither has it been alleged mortgage has been formally executed and registered according to law, wherefore, it appears that, the mortgage, as thus alleged, is not valid from the legal standpoint. Taking this allegations into account, we are of the opinion that the court did not err in sustaining the demurrer interposed to the second cause of action because it is evident that the allegations thereof are, at least, vague and uncertain and the defendant is entitled to have the appellants amend their amended complaint so as to make the allegations thereof more categorical, intelligible and specific, to the end that it set out a real cause of action to which the defendant, in turn, may interpose an answer with such special defenses as it may have in its favor.

In view of the foregoing, the appealed order is affirmed, with the costs of this instance to the plaintiffs-appellants. So ordered.