SECOND DIVISION

[ G.R. No. 158262, July 21, 2008 ]

SPS. PEDRO AND FLORENCIA VIOLAGO, PETITIONERS, VS. BA FINANCE CORPORATION AND
AVELINO VIOLAGO, RESPONDENTS.

D E C I S I O N
VELASCO JR., J.:
This is a Petition for Review on Certiorari of the August 20, 2002 Decision
[1]
and May 15, 2003
Resolution
[2]
of the Court of Appeals (CA) in CA-G.R. CV No. 48489 entitled BA Finance
Corporation, Plaintiff-Appellee v. Sps. Pedro and Florencia Violago, Defendants and Third
Party Plaintiffs-Appellants v. Avelino Violago, Third Party Defendant-Appellant. Petitioners-
spouses Pedro and Florencia Violago pray for the reversal of the appellate court's ruling
which held them liable to respondent BA Finance Corporation (BA Finance) under a
promissory note and a chattel mortgage. Petitioners likewise pray that respondent Avelino
Violago be adjudged directly liable to BA Finance.
The Facts

Sometime in 1983, Avelino Violago, President of Violago Motor Sales Corporation (VMSC),
offered to sell a car to his cousin, Pedro F. Violago, and the latter's wife, Florencia. Avelino
explained that he needed to sell a vehicle to increase the sales quota of VMSC, and that the
spouses would just have to pay a down payment of PhP 60,500 while the balance would be
financed by respondent BA Finance. The spouses would pay the monthly installments to BA
Finance while Avelino would take care of the documentation and approval of financing of the
car. Under these terms, the spouses then agreed to purchase a Toyota Cressida Model 1983
from VMSC.
[3]


On August 4, 1983, the spouses and Avelino signed a promissory note under which they
bound themselves to pay jointly and severally to the order of VMSC the amount of PhP
209,601 in 36 monthly installments of PhP 5,822.25 a month, the first installment to be due
and payable on September 16, 1983. Avelino prepared a Disclosure Statement of Loan/Credit
Transportation which showed the net purchase price of the vehicle, down payment, balance,
and finance charges. VMSC then issued a sales invoice in favor of the spouses with a detailed
description of the Toyota Cressida car. In turn, the spouses executed a chattel mortgage over
the car in favor of VMSC as security for the amount of PhP 209,601. VMSC, through Avelino,
endorsed the promissory note to BA Finance without recourse. After receiving the amount of
PhP 209,601, VMSC executed a Deed of Assignment of its rights and interests under the
promissory note and chattel mortgage in favor of BA Finance. Meanwhile, the spouses
remitted the amount of PhP 60,500 to VMSC through Avelino.
[4]


The sales invoice was filed with the Land Transportation Office (LTO)-Baliwag Branch, which
issued Certificate of Registration No. 0137032 in the name of Pedro on August 8, 1983. The
spouses were unaware that the same car had already been sold in 1982 to Esmeraldo
Violago, another cousin of Avelino, and registered in Esmeraldo's name by the LTO-San
Rafael Branch. Despite the spouses' demand for the car and Avelino's repeated assurances,
there was no delivery of the vehicle. Since VMSC failed to deliver the car, Pedro did not pay
any monthly amortization to BA Finance.
[5]


On March 1, 1984, BA Finance filed with the Regional Trial Court (RTC), Branch 116 in Pasay
City a complaint for Replevin with Damages against the spouses. The complaint, docketed as
Civil Case No. 1628-P, prayed for the delivery of the vehicle in favor of BA Finance or, if
delivery cannot be effected, for the payment of PhP 199,049.41 plus penalty at the rate of
3% per month from February 15, 1984 until fully paid. BA Finance also asked for the payment
of attorney's fees, liquidated damages, replevin bond premium, expenses in the seizure of
the vehicle, and costs of suit. The RTC issued an Order of Replevin on March 28, 1984. The
Violago spouses, as defendants a quo, were declared in default for failing to file an answer.
Eventually, the RTC rendered on December 3, 1984 a decision in favor of BA Finance. A writ
of execution was thereafter issued on January 11, 1985, followed by an alias writ of
execution.
[6]


In the meantime, Esmeraldo conveyed the vehicle to Jose V. Olvido who was then issued
Certificate of Registration No. 0014830-4 by the LTO-Cebu City Branch on April 29, 1985. On
May 8, 1987, Jose executed a Chattel Mortgage over the vehicle in favor of Generoso Lopez
as security for a loan covered by a promissory note in the amount of PhP 260,664. This
promissory note was later endorsed to BA Finance, Cebu City branch.
[7]


On August 21, 1989, the spouses Violago filed a Motion for Reconsideration and Motion to
Quash Writ of Execution on the basis of lack of a valid service of summons on them, among
other reasons. The RTC denied the motions; hence, the spouses filed a petition for certiorari
under Rule 65 before the CA, docketed as CA G.R. No. 2002-SP. On May 31, 1991, the CA
nullified the RTC's order. This CA decision became final and executory.

On January 28, 1992, the spouses filed their Answer before the RTC, alleging the following:
they never received the vehicle from VMSC; the vehicle was previously sold to Esmeraldo; BA
Finance was not a holder in due course under Section 59 of theNegotiable Instruments
Law (NIL); and the recourse of BA Finance should be against VMSC. On February 25, 1995,
the Violago spouses, with prior leave of court, filed a Third Party Complaint against Avelino
praying that he be held liable to them in the event that they be held liable to BA Finance, as
well as for damages. VMSC was not impleaded as third party defendant. In his Motion to
Dismiss and Answer, Avelino contended that he was not a party to the transaction
personally, but VMSC. Avelino's motion was denied and the third party complaint against him
was entertained by the trial court. Subsequently, the spouses belabored to prove that they
affixed their signatures on the promissory note and chattel mortgage in favor of VMSC in
blank.
[8]


The RTC rendered a Decision on March 5, 1994, finding for BA Finance but against the
Violago spouses. The RTC, however, declared that they are entitled to be indemnified by
Avelino. The dispositive portion of the RTC's decision reads:
WHEREFORE, defendant-[third]-party plaintiffs spouses Pedro F. Violago and Florencia R.
Violago are ordered to deliver to plaintiff BA Finance Corporation, at its principal office the
BAFC Building, Gamboa St., Legaspi Village, Makati, Metro Manila the Toyota Cressida car,
model 1983, bearing Engine No. 21R-02854117, and with Serial No. RX60-804614, covered by
the deed of chattel mortgage dated August 4, 1983; or if such delivery cannot be made, to
pay, jointly and severally, to the plaintiff the sum of P198,003.06 together with the penalty
[thereon] at three percent (3%) a month, from March 1, 1984, until the amount is fully paid.

In either case, the defendant-third-party plaintiffs are required to pay, jointly and severally,
to the plaintiff a sum equivalent to twenty-five percent (25%) of P198,003.06 as attorney's
fees, and another amount also equivalent to twenty five percent (25%) of the said unpaid
balance, as liquidated damages. The defendant-third party-plaintiffs are also required to
shoulder the litigation expenses and costs.

As indemnification, third-party defendant Avelino Violago is ordered to deliver to
defendants-third-party plaintiffs spouses Pedro F. Violago and Florencia R. Violago the
aforedescribed motor vehicle; or if such delivery is not possible, to pay to the said spouses
the sum of P198,003.06, together with the penalty thereon at three (3%) a month from
March 1, 1984, until the amount is entirely paid.

In either case, the third-party defendant should pay to the defendant-third-party plaintiffs
spouses a sum equivalent to twenty-five percent (25%) of P198,003.06 as attorney's fees,
and another sum equivalent also to twenty-five percent (25%) of the said unpaid balance, as
liquidated damages.

Third-party defendant Avelino Violago is further ordered to return to the third-party plaintiffs
the sum of P60,500.00 they paid to him as down payment for the car; and to pay them
P15,000.00 as moral damages; P10,000.00 as exemplary damages; and reimburse them for
all the expenses and costs of the suit.

The counterclaims of the defendants and third-party defendant, for lack of merit, are
dismissed.
[9]

The Ruling of the CA

Petitioners-spouses and Avelino appealed to the CA. The spouses argued that the promissory
note is a negotiable instrument; hence, the trial court should have applied the NIL and not
the Civil Code. The spouses also asserted that since VMSC was not the owner of the vehicle
at the time of sale, the sale was null and void for the failure in the "cause or consideration" of
the promissory note, which in this case was the sale and delivery of the vehicle. The spouses
also alleged that BA Finance was not a holder in due course of the note since it knew,
through its Cebu City branch, that the car was never delivered to the spouses.
[10]
On the
other hand, Avelino prayed for the dismissal of the complaint against him because he was
not a party to the transaction, and for an order to the spouses to pay him moral damages
and costs of suit.

The appellate court ruled that the promissory note was a negotiable instrument and that BA
Finance was a holder in due course, applying Secs. 8, 24, and 52 of the NIL. The CA faulted
petitioners for failing to implead VMSC, the seller of the vehicle and creditor in the
promissory note, as a party in their Third Party Complaint. Citing Salas v. Court of
Appeals,
[11]
the appellate court reasoned that since VMSC is an indispensable party, any
judgment will not bind it or be enforced against it. The absence of VMSC rendered the
proceedings in the RTC and the judgment in the Third Party Complaint "null and void, not
only as to the absent party but also to the present parties, namely the Defendants-Appellants
(petitioners herein) and the Third-Party-Defendant-Appellant (Avelino Violago)." The CA set
aside the trial court's order holding Avelino liable for damages to the spouses without
prejudice to the action of the spouses against VMSC and Avelino in a separate action.
[12]


The dispositive portion of the August 20, 2002 CA Decision reads:
IN THE LIGHT OF ALL THE FOREGOING, the appeal of the Plaintiffs-Appellants is DISMISSED.
The appeal of the Third-Party-Defendant-Appellant is GRANTED. The Decision of the Court a
quo is AFFIRMED, with the modification that the Third-Party Complaint against the Third-
Party-Defendant-appellant is DISMISSED, without prejudice. The counterclaims of the Third-
Party Defendant Appellant against the Defendants-Appellants are DISMISSED, also without
prejudice.
[13]

The spouses Violago sought but were denied reconsideration by the CA per its Resolution of
May 15, 2003.
The Issues

Petitioners raise the following issues:
WHETHER OR NOT THE HOLDER OF AN INVALID NEGOTIABLE PROMISSORY NOTE MAY BE
CONSIDERED A HOLDER IN DUE COURSE

WHETHER OR NOT A CHATTEL MORTGAGE SHOULD BE CONSIDERED VALID DESPITE
VITIATION OF CONSENT OF, AND THE FRAUD COMMITTED ON, THE MORTGAGORS BY
AVELINO, AND THE CLEAR ABSENCE OF OBJECT CERTAIN

WHETHER OR NOT THE VEIL OF CORPORATE ENTITY MAY BE INVOKED AND SUSTAINED
DESPITE THE FRAUD AND DECEPTION OF AVELINO
The Court's Ruling

The ruling of the appellate court is set aside insofar as it dismissed, without prejudice, the
third party complaint of petitioners against Avelino thereby effectively absolving Avelino
from any liability under the third party complaint.

In addressing the threshold issue of whether BA Finance is a holder in due course of the
promissory note, we must determine whether the note is a negotiable instrument and,
hence, covered by the NIL. In their appeal to the CA, petitioners argued that the promissory
note is a negotiable instrument and that the provisions of the NIL, not the Civil Code, should
be applied. In the present petition, however, petitioners claim that Article 1318 of the Civil
Code
[14]
should be applied since their consent was vitiated by fraud, and, thus, the
promissory note does not carry any legal effect despite its negotiation. Either way, the
petitioners' arguments deserve no merit.

The promissory note is clearly negotiable. The appellate court was correct in finding all the
requisites of a negotiable instrument present. The NIL provides:
Section 1. Form of Negotiable Instruments. - An instrument to be negotiable must conform to
the following requirements:

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;

(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty.
The promissory note signed by petitioners reads:
209,601.00 Makati, Metro Manila, Philippines, August 4, 1983

For value received, I/we, jointly and severally, promise to pay to the order of VIOLAGO
MOTOR SALES CORPORATION, its office, the principal sum of TWO HUNDRED NINE
THOUSAND SIX HUNDRED ONE ONLY Pesos (P209,601.00), Philippines Currency, with interest
at the rate stipulated herein below, in installments as follows:

Thirty Six (36) successive monthly installments of P5,822.25, the first installment to be paid
on 9-16-83, and the succeeding monthly installments on the 16th day of each and every
succeeding month thereafter until the account is fully paid, provided that the penalty charge
of three (3%) per cent per month or a fraction thereof shall be added on each unpaid
installment from maturity thereof until fully paid.

x x x x

Notice of demand, presentment, dishonor and protest are hereby waived.
(Sgd.) (Sgd.)
PEDRO F. VIOLAGO FLORENCIA R. VIOLAGO
763 Constancia St., Sampaloc, Manila same
(Address) (Address)
(Sgd.) (Sgd.)
Marivic Avaria Jesus Tuazon
(WITNESS) (WITNESS)
PAY TO THE ORDER OF BA FINANCE CORPORATION
WITHOUT RECOURSE

VIOLAGO MOTOR SALES CORPORATION

By:

(Sgd.)

AVELINO A. VIOLAGO, Pres.
[15]

The promissory note clearly satisfies the requirements of a negotiable instrument under the
NIL. It is in writing; signed by the Violago spouses; has an unconditional promise to pay a
certain amount, i.e., PhP 209,601, on specific dates in the future which could be determined
from the terms of the note; made payable to the order of VMSC; and names the drawees
with certainty. The indorsement by VMSC to BA Finance appears likewise to be valid and
regular.

The more important issue now is whether or not BA Finance is a holder in due course. The
resolution of this issue will determine whether petitioners' defense of fraud and nullity of the
sale could validly be raised against respondent corporation. Sec. 52 of the NIL provides:
Section 52. What constitutes a holder in due course.--A holder in due course is a holder who
has taken the instrument under the following conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice that it had
been previously dishonored, if such was the fact;

(c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.
The law presumes that a holder of a negotiable instrument is a holder thereof in due
course.
[16]
In this case, the CA is correct in finding that BA Finance meets all the foregoing
requisites:
In the present recourse, on its face, (a) the "Promissory Note", Exhibit "A", is complete and
regular; (b) the "Promissory Note" was endorsed by the VMSC in favor of the Appellee; (c)
the Appellee, when it accepted the Note, acted in good faith and for value; (d) the Appellee
was never informed, before and at the time the "Promissory Note" was endorsed to the
Appellee, that the vehicle sold to the Defendants-Appellants was not delivered to the latter
and that VMSC had already previously sold the vehicle to Esmeraldo Violago. Although Jose
Olvido mortgaged the vehicle to Generoso Lopez, who assigned his rights to the BA Finance
Corporation (Cebu Branch), the same occurred only on May 8, 1987, much later than August
4, 1983, when VMSC assigned its rights over the "Chattel Mortgage" by the Defendants-
Appellants to the Appellee. Hence, Appellee was a holder in due course.
[17]

In the hands of one other than a holder in due course, a negotiable instrument is subject to
the same defenses as if it were non-negotiable.
[18]
A holder in due course, however, holds the
instrument free from any defect of title of prior parties and from defenses available to prior
parties among themselves, and may enforce payment of the instrument for the full amount
thereof.
[19]
Since BA Finance is a holder in due course, petitioners cannot raise the defense of
non-delivery of the object and nullity of the sale against the corporation. The NIL considers
every negotiable instrument prima facie to have been issued for a valuable
consideration.
[20]
In Salas, we held that a party holding an instrument may enforce payment
of the instrument for the full amount thereof. As such, the maker cannot set up the defense
of nullity of the contract of sale.
[21]
Thus, petitioners are liable to respondent corporation for
the payment of the amount stated in the instrument.

From the third party complaint to the present petition, however, petitioners pray that the
veil of corporate fiction be set aside and Avelino be adjudged directly liable to BA Finance.
Petitioners likewise pray for damages for the fraud committed upon them.

In Concept Builders, Inc. v. NLRC, we held:
It is a fundamental principle of corporation law that a corporation is an entity separate and
distinct from its stockholders and from other corporations to which it may be connected. But,
this separate and distinct personality of a corporation is merely a fiction created by law for
convenience and to promote justice. So, when the notion of separate juridical personality is
used to defeat public convenience, justify wrong, protect fraud or defend crime, or is used as
a device to defeat the labor laws, this separate personality of the corporation may be
disregarded or the veil of corporate fiction pierced. This is true likewise when the corporation
is merely an adjunct, a business conduit or an alter ego of another corporation.

x x x x

The test in determining the applicability of the doctrine of piercing the veil of corporate
fiction is as follows:
1. Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own;
2. Such control must have been used by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal
duty, or dishonest and unjust acts in contravention of plaintiffs legal
rights; and
3. The aforesaid control and breach of duty must proximately cause the
injury or unjust loss complained of.
[22]

This case meets the foregoing test. VMSC is a family-owned corporation of which Avelino was
president. Avelino committed fraud in selling the vehicle to petitioners, a vehicle that was
previously sold to Avelino's other cousin, Esmeraldo. Nowhere in the pleadings did Avelino
refute the fact that the vehicle in this case was already previously sold to Esmeraldo; he
merely insisted that he cannot be held liable because he was not a party to the transaction.
The fact that Avelino and Pedro are cousins, and that Avelino claimed to have a need to
increase the sales quota, was likely among the factors which motivated the spouses to buy
the car. Avelino, knowing fully well that the vehicle was already sold, and with abuse of his
relationship with the spouses, still proceeded with the sale and collected the down payment
from petitioners. The trial court found that the vehicle was not delivered to the spouses.
Avelino clearly defrauded petitioners. His actions were the proximate cause of petitioners'
loss. He cannot now hide behind the separate corporate personality of VMSC to escape from
liability for the amount adjudged by the trial court in favor of petitioners.

The fact that VMSC was not included as defendant in petitioners' third party complaint does
not preclude recovery by petitioners from Avelino; neither would such non-inclusion
constitute a bar to the application of the piercing-of-the-corporate-veil doctrine. We
suggested as much in Arcilla v. Court of Appeals, an appellate proceeding involving petitioner
Arcilla's bid to avoid the adverse CA decision on the argument that he is not personally liable
for the amount adjudged since the same constitutes a corporate liability which nevertheless
cannot even be enforced against the corporation which has not been impleaded as a party
below. In that case, the Court found as well-taken the CA's act of disregarding the separate
juridical personality of the corporation and holding its president, Arcilla, liable for the
obligations incurred in the name of the corporation although it was not a party to the
collection suit before the trial court. An excerpt from Arcilla:
x x x In short, even if We are to assume arguendo that the obligation was incurred in the
name of the corporation, the petitioner [Arcilla] would still be personally liable therefor
because for all legal intents and purposes, he and the corporation are one and the same. Csar
Marine Resources, Inc. is nothing more than his business conduit and alter ego. The fiction of
separate juridical personality conferred upon such corporation by law should be disregarded.
Significantly, petitioner does not seriously challenge the [CA's] application of the doctrine
which permits the piercing of the corporate veil and the disregarding of the fiction of a
separate juridical personality; this is because he knows only too well that from the beginning,
he merely used the corporation for his personal purposes.
[23]

WHEREFORE, the CA's August 20, 2002 Decision and May 15, 2003 Resolution in CA-G.R. CV
No. 48489 are SET ASIDEinsofar as they dismissed without prejudice the third party
complaint of petitioners-spouses Pedro and Florencia Violago against respondent Avelino
Violago. The March 5, 1994 Decision of the RTC is REINSTATED and AFFIRMED. Costs against
Avelino Violago.

SO ORDERED.

Quisumbing, (Chairperson), Ynares-Santiago, Carpio Morales, and Tinga, JJ., concur.

SECOND DIVISION
[ G.R. No. 72593, April 30, 1987 ]
CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, AND RODOLFO T. VERGARA,
PETITIONERS, VS. IFC LEASING AND ACCEPTANCE CORPORATION, RESPONDENT.

D E C I S I O N
GUTIERREZ, JR., J.:
This is a petition for certiorari under Rule 45 of the Rules of Court which assails on questions
of law a decision of the Intermediate Appellate Court in AC-G.R. CV No. 68609 dated July 17,
1985, as well as its resolution dated October 17, 1985, denying the motion for
reconsideration.

The antecedent facts culled from the petition are as follows:

The petitioner is a corporation engaged in the logging business. It had for its program of
logging activities for the year 1978 the opening of additional roads, and simultaneous logging
operations along the route of said roads, in its logging concession area at Baganga, Manay,
and Caraga, Davao Oriental. For this purpose, it needed two (2) additional units of tractors.

Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf & Pacific Company of
Manila, through its sister company and marketing arm, Industrial Products Marketing (the
"seller-assignor"), a corporation dealing in tractors and other heavy equipment business,
offered to sell to petitioner-corporation two (2) "Used" Allis Crawler Tractors, one (1) an HD-
21-B and the other an HD-16-B.

In order to ascertain the extent of work to which the tractors were to be exposed, (t.s.n.,
May 28, 1980, p. 44) and to determine the capability of the "Used" tractors being offered,
petitioner-corporation requested the seller-assignor to inspect the jobsite. After conducting
said inspection, the seller-assignor assured petitioner-corporation that the "Used" Allis
Crawler Tractors which were being offered were fit for the job, and gave the corresponding
warranty of ninety (90) days performance of the machines and availability of parts. (t.s.n.,
May 28, 1980, pp. 59-66).

With said assurance and warranty, and relying on the seller-assignor's skill and judgment,
petitioner-corporation through petitioners Wee and Vergara, president and vice-president,
respectively, agreed to purchase on installment said two (2) units of "Used" Allis Crawler
Tractors. It also paid the down payment of Two Hundred Ten Thousand Pesos (P210,000.00).

On April 5, 1978, the seller-assignor issued the sales invoice for the two (2) units of tractors
(Exh. "3-A"). At the same time, the deed of sale with chattel mortgage with promissory note
was executed (Exh. "2").

Simultaneously with the execution of the deed of sale with chattel mortgage with promissory
note, the seller-assignor, by means of a deed of assignment (Exh. "1"), assigned its rights and
interest in the chattel mortgage in favor of the respondent.

Immediately thereafter, the seller-assignor delivered said two (2) units of "Used" tractors to
the petitioner-corporation's jobsite and as agreed, the seller-assignor stationed its own
mechanics to supervise the operations of the machines.

Barely fourteen (14) days had elapsed after their delivery when one of the tractors broke
down and after another nine (9) days, the other tractor likewise broke down (t.s.n., May 28,
1980, pp. 68-69).

On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the seller-assignor of the
fact that the tractors broke down and requested for the seller-assignor's usual prompt
attention under the warranty (Exh. "5").

In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit "5", the seller-
assignor sent to the jobsite its mechanics to conduct the necessary repairs (Exhs. "6", "6-A",
"6-B", "6-C", "6-C-1", "6-D", and "6-E"), but the tractors did not come out to be what they
should be after the repairs were undertaken because the units were no longer serviceable
(t.s.n., May 28, 1980, p. 78).

Because of the breaking down of the tractors, the road building and simultaneous logging
operations of petitioner-corporation were delayed and petitioner Vergara advised the seller-
assignor that the payments of the installments as listed in the promissory note would
likewise be delayed until the seller-assignor completely fulfills its obligation under its
warranty (t.s.n., May 28, 1980, p. 79).

Since the tractors were no longer serviceable, on April 7, 1979, petitioner Wee asked the
seller-assignor to pull out the units and have them reconditioned, and thereafter to offer
them for sale. The proceeds were to be given to the respondent and the excess, if any, to be
divided between the seller-assignor and petitioner-corporation which offered to bear one-
half (1/2) of the reconditioning cost (Exh. "7").

No response to this letter, Exhibit "7", was received by the petitioner-corporation and
despite several follow-up calls, the seller-assignor did nothing with regard to the request,
until the complaint in this case was filed by the respondent against the petitioners, the
corporation, Wee, and Vergara.

The complaint was filed by the respondent against the petitioners for the recovery of the
principal sum of One Million Ninety Three Thousand Seven Hundred Eighty Nine Pesos &
71/100 (P1,093,789.71), accrued interest of One Hundred Fifty One Thousand Six Hundred
Eighteen Pesos & 86/100 (P151,618.86) as of August 15, 1979, accruing interest thereafter at
the rate of twelve (12%) percent per annum, attorney's fees of Two Hundred Forty Nine
Thousand Eighty One Pesos & 71/100 (P249,081.71) and costs of suit.

The petitioners filed their amended answer praying for the dismissal of the complaint and
asking the trial court to order the respondent to pay the petitioners damages in an amount at
the sound discretion of the court, Twenty Thousand Pesos (P20,000.00) as and for attorney's
fees, and Five Thousand Pesos (P5,000.00) for expenses of litigation. The petitioners likewise
prayed for such other and further relief as would be just under the premises.

In a decision dated April 20, 1981, the trial court rendered the following judgment:
"WHEREFORE, judgment is hereby rendered:

"1) ordering defendants to pay jointly and severally in their official and personal capacities
the principal sum of ONE MILLION NINETY THREE THOUSAND SEVEN HUNDRED NINETY
EIGHT PESOS & 71/100 (P1,093,798.71) with accrued interest of ONE HUNDRED FIFTY ONE
THOUSAND SIX HUNDRED EIGHTEEN PESOS & 86/100 (P151,618.86) as of August 15, 1979
and accruing interest thereafter at the rate of 12% per annum;

"2) ordering defendants to pay jointly and severally attorney's fees equivalent to ten percent
(10%) of the principal and to pay the costs of the suit.

"Defendants' counterclaim is disallowed." (pp. 45-46, Rollo)
On June 8, 1981, the trial court issued an order denying the motion for reconsideration filed
by the petitioners.

Thus, the petitioners appealed to the Intermediate Appellate Court and assigned therein the
following errors:
I

THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER ATLANTIC GULF AND PACIFIC
COMPANY OF MANILA DID NOT APPROVE DEFENDANTS-APPELLANTS CLAIM OF WARRANTY.
II

THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF-APPELLEE IS A HOLDER IN DUE
COURSE OF THE PROMISSORY NOTE AND SUED UNDER SAID NOTE AS HOLDER THEREOF IN
DUE COURSE.
On July 17, 1985, the Intermediate Appellate Court issued the challenged decision
affirming in toto the decision of the trial court. The pertinent portions of the decision are as
follows:
x x x x x x x x x

"From the evidence presented by the parties on the issue of warranty, We are of the
considered opinion that aside from the fact that no provision of warranty appears or is
provided in the Deed of Sale of the tractors and even admitting that in a contract of sale
unless a contrary intention appears, there is an implied warranty, the defense of breach of
warranty, if there is any, as in this case, does not lie in favor of the appellants and against the
plaintiff-appellee who is the assignee of the promissory note and a holder of the same in due
course. Warranty lies in this case only between Industrial Products Marketing and
Consolidated Plywood Industries, Inc. The plaintiff-appellee herein upon application by
appellant corporation granted financing for the purchase of the questioned units of Fiat-Allis
Crawler Tractors.

x x x x x x x x x

"Holding that breach of warranty, if any, is not a defense available to appellants either to
withdraw from the contract and/or demand a proportionate reduction of the price with
damages in either case (Art. 1567, New Civil Code). We now come to the issue as to whether
the plaintiff-appellee is a holder in due course of the promissory note.

"To begin with, it is beyond arguments that the plaintiff-appellee is a financing corporation
engaged in financing and receivable discounting extending credit facilities to consumers and
industrial, commercial or agricultural enterprises by discounting or factoring commercial
papers or accounts receivable duly authorized pursuant to R.A. 5980 otherwise known as the
Financing Act.

"A study of the questioned promissory note reveals that it is a negotiable instrument which
was discounted or sold to the IFC Leasing and Acceptance Corporation for P800,000.00 (Exh.
"A") considering the following: it is in writing and signed by the maker; it contains an
unconditional promise to pay a certain sum of money payable at a fixed or determinable
future time; it is payable to order (Sec. 1, NIL); the promissory note was negotiated when it
was transferred and delivered by IPM to the appellee and duly endorsed to the latter (Sec.
30, NIL); it was taken in the conditions that the note was complete and regular upon its face
before the same was overdue and without notice, that it had been previously dishonored
and that the note is in good faith and for value without notice of any infirmity or defect in the
title of IPM (Sec. 52, NIL); that IFC Leasing and Acceptance Corporation held the instrument
free from any defect of title of prior parties and free from defenses available to prior parties
among themselves and may enforce payment of the instrument for the full amount thereof
against all parties liable thereon (Sec. 57, NIL); the appellants engaged that they would pay
the note according to its tenor, and admit the existence of the payee IPM and its capacity to
endorse (Sec. 60, NIL).

"In view of the essential elements found in the questioned promissory note, We opine that
the same is legally and conclusively enforceable against the defendants-appellants.

"WHEREFORE, finding the decision appealed from according to law and evidence, We find
the appeal without merit and thus affirm the decision in toto. With costs against the
appellants." (pp. 50-55, Rollo)
The petitioners' motion for reconsideration of the decision of July 17, 1985 was denied by
the Intermediate Appellate Court in its resolution dated October 17, 1985, a copy of which
was received by the petitioners on October 21, 1985.

Hence, this petition was filed on the following grounds:
I.

ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A NEGOTIABLE INSTRUMENT AS
DEFINED UNDER THE LAW SINCE IT IS NEITHER PAYABLE TO ORDER NOR TO BEARER.
II.

THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT IS A MERE ASSIGNEE OF
THE SUBJECT PROMISSORY NOTE.
III.

SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE INSTRUMENT AND THE TRANSFER
OF RIGHTS WAS THROUGH A MERE ASSIGNMENT, THE PETITIONERS MAY RAISE AGAINST
THE RESPONDENT ALL DEFENSES THAT ARE AVAILABLE TO IT AS AGAINST THE SELLER-
ASSIGNOR, INDUSTRIAL PRODUCTS MARKETING.
IV.

THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE PROMISSORY NOTE BECAUSE:
A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF WARRANTY UNDER THE LAW;

B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE SELLER-ASSIGNOR OF THE
PROMISSORY NOTE.

V.

THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLER-ASSIGNOR IN FAVOR OF THE
RESPONDENT DOES NOT CHANGE THE NATURE OF THE TRANSACTION FROM BEING A SALE
ON INSTALLMENTS TO A PURE LOAN.
VI.

THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN EVIDENCE IN ANY COURT
BECAUSE THE REQUISITE DOCUMENTARY STAMPS HAVE NOT BEEN AFFIXED THEREON OR
CANCELLED.
The petitioners prayed that judgment be rendered setting aside the decision dated July 17,
1985, as well as the resolution dated October 17, 1985 and dismissing the complaint but
granting petitioners' counterclaims before the court of origin.

On the other hand, the respondent corporation in its comment to the petition filed on
February 20, 1986, contended that the petition was filed out of time; that the promissory
note is a negotiable instrument and respondent a holder in due course; that respondent is
not liable for any breach of warranty; and finally, that the promissory note is admissible in
evidence.

The core issue herein is whether or not the promissory note in question is a negotiable
instrument so as to bar completely all the available defenses of the petitioner against the
respondent-assignee.

Preliminarily, it must be established at the outset that we consider the instant petition to
have been filed on time because the petitioners' motion for reconsideration actually raised
new issues. It cannot, therefore, be considered pro-forma.

The petition is impressed with merit.

First, there is no question that the seller-assignor breached its express 90-day warranty
because the findings of the trial court, adopted by the respondent appellate court, that "14
days after delivery, the first tractor broke down and 9 days, thereafter, the second tractor
became inoperable" are sustained by the records. The petitioner was clearly a victim of a
warranty not honored by the maker.

The Civil Code provides that:
"ART. 1561. The vendor shall be responsible for warranty against the hidden defects which
the thing sold may have, should they render it unfit for the use for which it is intended, or
should they diminish fitness for such use to such an extent that, had the vendee been aware
thereof, he would not have acquired it or would have given a lower price for it; but said
vendor shall not be answerable for patent defects or those which may be visible, or for those
which are not visible if the vendee is an expert who, by reason of his trade or profession,
should have known them.

"ART. 1562. In a sale of goods, there is an implied warranty or condition as to the quality or
fitness of the goods, as follows:

"(1) Where the buyer, expressly or by implication, makes known to the seller the particular
purpose for which the goods are acquired, and it appears that the buyer relies on the seller's
skill or judgment (whether he be the grower or manufacturer or not), there is an implied
warranty that the goods shall be reasonably fit for such purpose;

x x x x x x x x x

"ART. 1564. An implied warranty or condition as to the quality or fitness for a particular
purpose may be annexed by the usage of trade.

x x x x x x x x x

"ART. 1566. The vendor is responsible to the vendee for any hidden faults or defects in the
thing sold, even though he was not aware thereof.

"This provision shall not apply if the contrary has been stipulated, and the vendor was not
aware of the hidden faults or defects in the thing sold." (Italics supplied).
It is patent then, that the seller-assignor is liable for its breach of warranty against the
petitioner. This liability as a general rule, extends to the corporation to whom it assigned its
rights and interests unless the assignee is a holder in due course of the promissory note in
question, assuming the note is negotiable, in which case the latter's rights are based on the
negotiable instrument and assuming further that the petitioner's defenses may not prevail
against it.

Secondly, it likewise cannot be denied that as soon as the tractors broke down, the
petitioner-corporation notified the seller-assignor's sister company, AG & P, about the
breakdown based on the seller-assignor's express 90-day warranty, with which the latter
complied by sending its mechanics. However, due to the seller-assignor's delay and its
failure to comply with its warranty, the tractors became totally unserviceable and useless for
the purpose for which they were purchased.

Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its contract with the
seller-assignor.

Articles 1191 and 1567 of the Civil Code provide that:
"ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.

"The injured party may choose between the fulfillment and the rescission of the obligation,
with the payment of damages in either case. He may also seek rescission, even after he has
chosen fulfillment, if the latter should become impossible.

x x x x x x x x x

"ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and 1566, the vendee may elect
between withdrawing from the contract and demanding a proportionate reduction of the
price, with damages in either case."

(Italics supplied)
Petitioner, having unilaterally and extrajudicially rescinded its contract with the seller-
assignor, necessarily can no longer sue the seller-assignor except by way of counterclaim if
the seller-assignor sues it because of the rescission.

In the case of the University of the Philippines v. De los Angeles (35 SCRA 102) we held:
"In other words, the party who deems the contract violated may consider it resolved or
rescinded, and act accordingly, without previous court action, but it proceeds at its own
risk. For it is only the final judgment of the corresponding court that will conclusively and
finally settle whether the action taken was or was not correct in law. But the law definitely
does not require that the contracting party who believes itself injured must first file suit and
wait for a judgment before taking extrajudicial steps to protect its interest. Otherwise, the
party injured by the other's breach will have to passively sit and watch its damages
accumulate during the pendency of the suit until the final judgment of rescission is rendered
when the law itself requires that he should exercise due diligence to minimize its own
damages (Civil Code, Article 2203)." (Italics supplied)
Going back to the core issue, we rule that the promissory note in question is not a negotiable
instrument.

The pertinent portion of the note is as follows:
"FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the INDUSTRIAL
PRODUCTS MARKETING, the sum of ONE MILLION NINETY THREE THOUSAND EVEN
HUNDRED EIGHTY NINE PESOS & 71/100 only (P1,093,789.71), Philippine Currency, the said
principal sum, to be payable in 24 monthly installments starting July 15, 1978 and every 15th
of the month thereafter until fully paid. x x x."
Considering that paragraph (d), Section 1 of the Negotiable Instruments Law requires that a
promissory note "must be payable to order or bearer", it cannot be denied that the
promissory note in question is not a negotiable instrument.
"The instrument in order to be considered negotiable must contain the so-called 'words of
negotiability' i.e., must be payable to 'order' or 'bearer'. These words serve as an
expression of consent that the instrument may be transferred. This consent is indispensable
since a maker assumes greater risks under a negotiable instrument than under a non-
negotiable one. x x x.

x x x x x x x x x

"When instrument is payable to order.

"SEC. 8. WHEN PAYABLE TO ORDER. The instrument is payable to order where it is drawn
payable to the order of a specified person or to him or his order. . . .

x x x x x x x x x

"These are the only two ways by which an instrument may be made payable to order. There
must always be a specified person named in the instrument. It means that the bill or note is
to be paid to the person designated in the instrument or to any person to whom he has
indorsed and delivered the same. Without the words 'or order' or 'to the order of,' the
instrument is payable only to the person designated therein and is therefore non-
negotiable. Any subsequent purchaser thereof will not enjoy the advantages of being a
holder of a negotiable instrument, but will merely 'step into the shoes' of the person
designated in the instrument and will thus be open to all defenses available against the
latter." (Campos and Campos, Notes and Selected Cases on Negotiable Instruments Law,
Third Edition, page 38).

(Italics supplied)
Therefore, considering that the subject promissory note is not a negotiable instrument, it
follows that the respondent can never be a holder in due course but remains a mere assignee
of the note in question. Thus, the petitioner may raise against the respondent all defenses
available to it as against the seller-assignor, Industrial Products Marketing.

This being so, there was no need for the petitioner to implead the seller-assignor when it was
sued by the respondent-assignee because the petitioner's, defenses apply to both or either
of them.

Actually, the records show that even the respondent itself admitted to being a mere assignee
of the promissory note in question, to wit:
"ATTY. PALACA:

"Did we get it right from the counsel that what is being assigned is the Deed of Sale with
Chattel Mortgage with the promissory note which is as testified to by the witness was
indorsed? (Counsel for Plaintiff nodding his head.) Then we have no further questions on
cross.

"COURT:

"You confirm his manifestation? You are nodding your head? Do you confirm that?

"ATTY. ILAGAN:

"The Deed of Sale cannot be assigned. A deed of sale is a transaction between two persons;
what is assigned are rights, the rights of the mortgagee were assigned to the IFC Leasing &
Acceptance Corporation.

"COURT:

"He puts it in a simple way, as one deed of sale and chattel mortgage were assigned; . . .
you want to make a distinction, one is an assignment of mortgage right and the other one is
indorsement of the promissory note. What counsel for defendants wants is that you
stipulate that it is contained in one single transaction?

"ATTY. ILAGAN:

"We stipulate it is one single transaction." (pp. 27-29, TSN., February 13, 1980).
Secondly, even conceding for purposes of discussion that the promissory note in question is a
negotiable instrument, the respondent cannot be a holder in due course for a more
significant reason.

The evidence presented in the instant case shows that prior to the sale on installment of the
tractors, there was an arrangement between the seller-assignor, Industrial Products
Marketing, and the respondent whereby the latter would pay the seller-assignor the entire
purchase price and the seller-assignor, in turn, would assign its rights to the respondent
which acquired the right to collect the price from the buyer, herein petitioner Consolidated
Plywood Industries, Inc.

A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory Note, the Deed of
Assignment and the Disclosure of Loan/Credit Transaction shows that said documents
evidencing the sale on installment of the tractors were all executed on the same day by and
among the buyer, which is herein petitioner Consolidated Plywood Industries, Inc.; the seller-
assignor which is the Industrial Products Marketing; and the assignee-financing company,
which is the respondent. Therefore, the respondent had actual knowledge of the fact that
the seller-assignor's right to collect the purchase price was not unconditional, and that it was
subject to the condition that the tractors sold were not defective. The respondent knew that
when the tractors turned out to be defective, it would be subject to the defense of failure of
consideration and cannot recover the purchase price from the petitioners. Even assuming
for the sake of argument that the promissory note is negotiable, the respondent, which took
the same with actual knowledge of the foregoing facts so that its action in taking the
instrument amounted to bad faith, is not a holder in due course. As such, the respondent is
subject to all defenses which the petitioners may raise against the seller-assignor. Any other
interpretation would be most inequitous to the unfortunate buyer who is not only saddled
with two useless tractors but must also face a lawsuit from the assignee for the entire
purchase price and all its incidents without being able to raise valid defenses available as
against the assignor.

Lastly, the respondent failed to present any evidence to prove that it had no knowledge of
any fact, which would justify its act of taking the promissory note as not amounting to bad
faith.

Sections 52 and 56 of the Negotiable Instruments Law provide that:
"SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE. A holder in due course is a
holder who has taken the instrument under the following conditions:

x x x x x x x x x

x x x x x x x x x

"(c) That he took it in good faith and for value;

"(d) That at the time it was negotiated to him he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.

x x x x x x x x x

"SEC. 56. WHAT CONSTITUTES NOTICE OF DEFECT. To constitute notice of an infirmity in
the instrument or defect in the title of the person negotiating the same, the person to whom
it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of
such facts that his action in taking the instrument amounts to bad faith." (Italics supplied)
We subscribe to the view of Campos and Campos that a financing company is not a holder in
good faith as to the buyer, to wit:
"In installment sales, the buyer usually issues a note payable to the seller to cover the
purchase price. Many times, in pursuance of a previous arrangement with the seller, a
finance company pays the full price and the note is indorsed to it, subrogating it to the right
to collect the price from the buyer, with interest. With the increasing frequency of
installment buying in this country, it is most probable that the tendency of the courts in the
United States to protect the buyer against the finance company will find judicial approval
here. Where the goods sold turn out to be defective, the finance company will be subject to
the defense of failure of consideration and cannot recover the purchase price from the
buyer. As against the argument that such a rule would seriously affect 'a certain mode of
transacting business adopted throughout the State,' a court in one case stated:
"'It may be that our holding here will require some changes in business methods and will
impose a greater burden on the finance companies. We think the buyer Mr. & Mrs.
General Public should have some protection somewhere along the line. We believe the
finance company is better able to bear the risk of the dealer's insolvency than the buyer and
in a far better position to protect his interests against unscrupulous and insolvent dealers. . . .

"'If this opinion imposes great burdens on finance companies it is a potent argument in favor
of a rule which will afford protection to the general buying public against unscrupulous
dealers in personal property . . . .' (Mutual Finance Co. v. Martin, 63 So. 2d 649, 44 ALR 2d 1
[1953]) "(Campos and Campos, Notes and Selected Cases on Negotiable Instruments Law,
Third Edition, p. 128).'"
In the case of Commercial Credit Corporation v. Orange Country Machine Works (34 Cal. 2d
766) involving similar facts, it was held that in a very real sense, the finance company was a
moving force in the transaction from its very inception and acted as a party to it. When a
finance company actively participates in a transaction of this type from its inception, it
cannot be regarded as a holder in due course of the note given in the transaction.

In like manner, therefore, even assuming that the subject promissory note is negotiable, the
respondent, a financing company which actively participated in the sale on installment of the
subject two Allis Crawler tractors, cannot be regarded as a holder in due course of said
note. It follows that the respondent's rights under the promissory note involved in this case
are subject to all defenses that the petitioners have against the seller-assignor, Industrial
Products Marketing. For Section 58 of the Negotiable Instruments Law provides that in the
hands of any holder other than a holder in due course, a negotiable instrument is subject to
the same defenses as if it were non-negotiable. x x x."

Prescinding from the foregoing and setting aside other peripheral issues, we find that both
the trial and respondent appellate court erred in holding the promissory note in question to
be negotiable. Such a ruling does not only violate the law and applicable jurisprudence, but
would result in unjust enrichment on the part of both the seller-assignor and respondent
assignee at the expense of the petitioner-corporation which rightfully rescinded an
inequitable contract. We note, however, that since the seller-assignor has not been
impleaded herein, there is no obstacle for the respondent to file a civil suit and litigate its
claims against the seller-assignor in the rather unlikely possibility that it so desires.

WHEREFORE, in view of the foregoing, the decision of the respondent appellate court dated
July 17, 1985, as well as its resolution dated October 17, 1986, are hereby ANNULLED and
SET ASIDE. The complaint against the petitioner before the trial court is DISMISSED.

SO ORDERED.

Fernan, (Chairman), Paras, Padilla, Bidin, and Cortes, JJ., concur.

THIRD DIVISION
[ G.R. No. 74886, December 03, 1992 ]
PRUDENTIAL BANK, PETITIONER, VS. INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON
MILLS INC. AND ANACLETO R. CHI, RESPONDENTS.

D E C I S I O N
DAVIDE, JR, J.:
Petitioner seeks to review and set aside the decision
[1]
of public respondent Intermediate
Appellate Court (now Court of Appeals), dated 10 March 1986, in AC-G.R. No. 66733 which
affirmed in toto the 15 June 1978 decision of Branch 9 (Quezon City) of the then Court of
First Instance (now Regional Trial Court) of Rizal in Civil Case No. Q-19312. The latter involved
an action instituted by the petitioner for the recovery of a sum of money representing the
amount paid by it to the Nissho Company Ltd. of Japan for textile machinery imported by the
defendant, now private respondent, Philippine Rayon Mills, Inc. (hereinafter Philippine
Rayon), represented by co-defendant Anacleto R. Chi.
The facts which gave rise to the instant controversy are summarized by the public
respondent as follows:
"On August 8, 1962, defendant-appellant Philippine Rayon Mills, Inc. entered into a contract
with Nissho Co., Ltd. of Japan for the importation of textile machineries under a five-year
deferred payment plan (Exhibit B, Plaintiff's Folder of Exhibits, p. 2). To effect payment for
said machineries, the defendant-appellant applied for a commercial letter of credit with the
Prudential Bank and Trust Company in favor of Nissho. By virtue of said application, the
Prudential Bank opened Letter of Credit No. DPP-63762 for $128,548.78 (Exhibit A, Ibid., p.
1). Against this letter of credit, drafts were drawn and issued by Nissho (Exhibits X, X-1 to X-
11, Ibid., pp. 65, 66 to 76), which were all paid by the Prudential Bank through its
correspondent in Japan, the Bank of Tokyo, Ltd. As indicated on their faces, two of these
drafts (Exhibits X and X-1, Ibid., pp. 65-66) were accepted by the defendant-appellant
through its president, Anacleto R. Chi, while the others were not (Exhibits X-2 to X-11, Ibid.,
pp. 66 to 76).
Upon the arrival of the machineries, the Prudential Bank indorsed the shipping documents to
the defendant-appellant which accepted delivery of the same. To enable the defendant-
appellant to take delivery of the machineries, it executed, by prior arrangement with the
Prudential Bank, a trust receipt which was signed by Anacleto R. Chi in his capacity as
Prisident (sic) of defendant-appellant company (Exhibit C, Ibid., p. 13).
At the back of the trust receipt is a printed form to be accomplished by two sureties who, by
the very terms andconditions thereof, were to be jointly and severally liable to the Prudential
Bank should the defendant-appellant fail to pay the total amount or any portion of the drafts
issued by Nissho and paid for by Prudential Bank. The defendant-appellant was able to take
delivery of the textile machineries and installed the same at its factory site at 69 Obudan
Street, Quezon City.
Sometime in 1967, the defendant-appellant ceased business operation (sic). On December
29, 1969, defendant-appellant's factory was leased by Yupangco Cotton Mills for an annual
rental of P200,000.00 (Exhibit I, Ibid., p. 22). The lease was renewed on January 3, 1973
(Exhibit J, Ibid., p. 26). On January 5, 1974, all the textile machineries in the defendant-
appellant's factory were sold to AIC Development Corporation for P300,000.00 (Exhibit
K, Ibid., p. 29).
The obligation of the defendant-appellant arising from the letter of credit and the trust
receipt remained unpaid and unliquidated. Repeated formal demands (Exhibits U, V, and
W, Ibid., pp. 62, 63, 64) for the payment of the said trust receipt yielded no result. Hence, the
present action for the collection of the principal amount of P956,384.95 was filed on October
3, 1974 against the defendant-appellant and Anacleto R. Chi. In their respective answers, the
defendants interposed identical special defenses, viz., the complaint states no cause of
action; if there is, the same has prescribed; and the plaintiff is guilty of laches."
[2]

On 15 June 1978, the trial court rendered its decision the dispositive portion of
which reads:
"WHEREFORE, judgment is hereby rendered sentencing the defendant Philippine Rayon Mills,
Inc. to pay plaintiff the sum of P153,645.22, the amounts due under Exhibits "X" & "X-1",
with interest at 6% per annum beginning September 15, 1974 until fully paid.
Insofar as the amounts involved in drafts Exhs. "X" (sic) to "X-11", inclusive, the same not
having been accepted by defendant Philippine Rayon Mills, Inc., plaintiff's cause of action
thereon has not accrued, hence, the instant case is premature.
Insofar as defendant Anacleto R. Chi is concerned, the case is dismissed. Plaintiff is ordered
to pay defendant Anacleto R. Chi the sum of P20,000.00 as attorney's fees.
With costs against defendant Philippine Rayon Mills, Inc.
SO ORDERED."
[3]

Petitioner appealed the decision to the then Intermediate Appellate Court. In urging the said
court to reverse or modify the decision, petitioner alleged in its Brief that the trial court erred
in (a) disregarding its right to reimbursement from the private respondents for the entire
unpaid balance of the imported machines, the total amount of which was paid to the Nissho
Company Ltd., thereby violating the principle of the third party payor's right to
reimbursement provided for in the second paragraph of Article 1236 of the Civil Code and
under the rule against unjust enrichment; (b) refusing to hold Anacleto R. Chi, as the
responsible officer of defendant corporation, liable under Section 13 of P.D. No. 115 for the
entire unpaid balance of the imported machines covered by the bank's trust receipt (Exhibit
"C"); (c) finding that the solidary guaranty clause signed by Anacleto R. Chi is not a guaranty
at all; (d) controverting the judicial admissions of Anacleto R. Chi that he is at least a simple
guarantor of the said trust receipt obligation; (e) contravening, based on the assumption that
Chi is a simple guarantor, Articles 2059, 2060 and 2062 of the Civil Code and the related
evidence and jurisprudence which provide that such liability had already attached; (f)
contravening the judicial admissions of Philippine Rayon with respect to its liability to pay the
petitioner the amounts involved in the drafts (Exhibits "X", "X-1" to "X-11");
and (g) interpreting "sight" drafts as Rollo, requiring acceptance by Philippine Rayon before
the latter could be held liable thereon.
[4]

In its decision, public respondent sustained the trial court in all respects. As to the first and
last assigned errors, it ruled that the provision on unjust enrichment, Article 2142 of the Civil
Code, applies only if there is no express contract between the parties and there is a clear
showing that the payment is justified. In the instant case, the relationship existing between
the petitioner and Philippine Rayon is governed by specific contracts, namely the application
for letters of credit, the promissory note, the drafts and the trust receipt. With respect to the
last ten (10) drafts (Exhibits "X-2" to "X-11") which had not been presented to and were not
accepted by Philippine Rayon, petitioner was not justified in unilaterally paying the amounts
stated therein. The public respondent did not agree with the petitioner's claim that the drafts
were sight drafts which did not require presentment for acceptance to Philippine Rayon
because paragraph 8 of the trust receipt presupposes prior acceptance of the drafts. Since
the ten (10) drafts were not presented and accepted, no valid demand for payment can be
made.
Public respondent also disagreed with the petitioner's contention that private respondent
Chi is solidarily liable with Philippine Rayon pursuant to Section 13 of P.D. No. 115 and based
on his signature on the solidary guaranty clause at the dorsal side of the trust receipt. As to
the first contention, the public respondent ruled that the civil liability provided for in said
Section 13 attaches only after conviction. As to the second, it expressed misgivings as to
whether Chi's signature on the trust receipt made the latter automatically liable thereon
because the so-called solidary guaranty clause at the dorsal portion of the trust receipt is to
be signed not by one (1) person alone, but by two (2) persons; the last sentence of the same
is incomplete and unsigned by witnesses; and it is not acknowledged before a notary public.
Besides, even granting that it was executed and acknowledged before a notary public, Chi
cannot be held liable therefore because the records fail to show that petitioner had either
exhausted the properties of Philippine Rayon or had resorted to all legal remedies as
required in Article 2058 of the Civil Code. As provided for under Articles 2052 and 2054 of the
Civil Code, the obligation of a guarantor is merely accessory and subsidiary, respectively.
Chi's liability would therefore arise only when the principal debtor fails to comply with his
obligation.
[5]

Its motion to reconsider the decision having been denied by the public respondent in its
Resolution of 11 June 1986,
[6]
petitioner filed the instant petition on 31 July 1986 submitting
the following legal issues:
"I. WHETHER OR NOT THE RESPONDENT APPELLATE COURT GRIEVOUSLY ERRED IN
DENYING PETITIONER'S CLAIM FOR FULL REIMBURSEMENT AGAINST THE PRIVATE
RESPONDENTS FOR THE PAYMENT PETITIONER MADE TO NISSHO CO. LTD. FOR THE BENEFIT
OF PRIVATE RESPONDENT UNDER ART. 1283 OF THE NEW CIVIL CODE OF THE PHILIPPINES
AND UNDER THE GENERAL PRINCIPLE AGAINST UNJUST ENRICHMENT;
II. WHETHER OR NOT RESPONDENT CHI IS SOLIDARILY LIABLE UNDER THE TRUST RECEIPT
(EXH. C);
III. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS OF RESPONDENT CHI
HE IS LIABLE THEREON AND TO WHAT EXTENT;
IV. WHETHER OR NOT RESPONDENT CHI IS MERELY A SIMPLE GUARANTOR; AND IF SO,
HAS HIS LIABILITY AS SUCH ALREADY ATTACHED;
V. WHETHER OR NOT AS THE SIGNATORY AND RESPONSIBLE OFFICER OF RESPONDENT
PHIL. RAYON RESPONDENT CHI IS PERSONALLY LIABLE PURSUANT TO THE PROVISION OF
SECTION 13, P.D. 115;
VI. WHETHER OR NOT RESPONDENT PHIL. RAYON IS LIABLE TO THE PETITIONER UNDER
THE TRUST RECEIPT (EXH. C);
VIII. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS RESPONDENT PHIL.
RAYON IS LIABLE TO THE PETITIONER UNDER THE DRAFTS (EXHS. X, X-1 TO X-11) AND TO
WHAT EXTENT;
VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE PRIOR ACCEPTANCE FROM RESPONDENT
PHIL. RAYON BEFORE THE LATTER BECOMES LIABLE TO PETITIONER."
[7]

In the Resolution of 12 March 1990,
[8]
this Court gave due course to the petition after the
filing of the Comment thereto by private respondent Anacleto Chi and of the Reply to the
latter by the petitioner; both parties were also required to submit their respective
memoranda which they subsequently complied with.
As We see it, the issues may be reduced as follows:
1. Whether presentment for acceptance of the drafts was indispensable to make Philippine
Rayon liable thereon;
2. Whether Philippine Rayon is liable on the basis of the trust receipt;
3. Whether private respondent Chi is jointly and severally liable with Philippine Rayon for
the obligation sought to be enforced and if not, whether he may be considered a guarantor;
in the latter situation, whether the case should have been dismissed on the ground of lack of
cause of action as there was no prior exhaustion of Philippine Rayon's properties.
Both the trial court and the public respondent ruled that Philippine Rayon could be held
liable for the two (2) drafts, Exhibits "X" and "X-1", because only these appear to have been
accepted by the latter after due presentment. The liability for the remaining ten (10) drafts
(Exhibits "X-2" to "X-11" inclusive) did not arise because the same were not presented for
acceptance. In short, both courts concluded that acceptance of the drafts by Philippine
Rayon was indispensable to make the latter liable thereon. We are unable to agree with this
proposition. The transaction in the case at bar stemmed from Philippine Rayon's application
for a commercial letter of credit with the petitioner in the amount of $128,548.78 to cover
the former's contract to purchase and import loom and textile machinery from Nissho
Company, Ltd. of Japan under a five-year deferred payment plan. Petitioner approved the
application. As correctly ruled by the trial court in its Order of 6 March 1975:
[9]

"x x x By virtue of said Application and Agreement for Commercial Letter of Credit, plaintiff
bank
[10]
was under obligation to pay through its correspondent bank in Japan the drafts that
Nisso (sic) Company, Ltd., periodically drew against said letter of credit from 1963 to 1968,
pursuant to plaintiff's contract with the defendant Philippine Rayon Mills, Inc. In turn,
defendant Philippine Rayon Mills, Inc., was obligated to pay plaintiff bank the amounts of the
drafts drawn by Nisso (sic) Company, Ltd. against said plaintiff bank together with any
accruing commercial charges, interest, etc. pursuant to the terms and conditions stipulated
in the Application and Agreement of Commercial Letter of Credit Annex "A"."
A letter of credit is defined as an engagement by a bank or other person made at the request
of a customer that the issuer will honor drafts or other demands for payment upon
compliance with the conditions specified in the credit.
[11]
Through a letter of credit, the bank
merely substitutes its own promise to pay for the promise to pay of one of its customers who
in return promises to pay the bank the amount of funds mentioned in the letter of credit plus
credit or commitment fees mutually agreed upon.
[12]
In the instant case then, the drawee
was necessarily the herein petitioner. It was to the latter that the drafts were presented for
payment. In fact, there was no need for acceptance as the issued drafts are sight drafts.
Presentment for acceptance is necessary only in the cases expressly provided for in Section
143 of the Negotiable Instruments Law (NIL).
[13]
The said section reads:
"SEC. 143. When presentment for acceptance must be made. -- Presentment for acceptance
must be made:
(a) Where the bill is payable after sight, or in any other case, where presentment for
acceptance is necessary in order to fix the maturity of the instrument; or
(b) Where the bill expressly stipulates that it shall be presented for acceptance; or
(c) Where the bill is drawn payable elsewhere than at the residence or place of business
of the drawee.
In no other case is presentment for acceptance necessary in order to render any party to the
bill liable."
Obviously then, sight drafts do not require presentment for acceptance.
The acceptance of a bill is the signification by the drawee of his assent to the order of the
drawer;
[14]
this may be done in writing by the drawee in the bill itself, or in a separate
instrument.
[15]

The parties herein agree, and the trial court explicitly ruled, that the subject drafts
are sight drafts. Said the latter:
"x x x In the instant case the drafts being at sight, they are supposed to be payable upon
acceptance unless plaintiff bank has given the Philippine Rayon Mills Inc. time within which
to pay the same. The first two drafts (Annexes C & D, Exh. X & X-1) were duly accepted as
indicated on their face (sic), and upon such acceptance should, have been paid forthwith.
These two drafts were not paid and although Philippine Rayon Mills ought to have paid the
same, the fact remains that until now they are still unpaid.
[16]

Corollarily, they are, pursuant to Section 7 of the NIL, payable on demand. Section 7
provides:
"SEC. 7. When payable on demand. -- An instrument is payable on demand --
(a) When so it is expressed to be payable on demand, or at sight, or on presentation;
or
(b) In which no time for payment is expressed.
Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the
person so issuing, accepting, or indorsing it, payable on demand." (underscoring supplied)
Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment at maturity of
any accepted draft, bill of exchange or indebtedness shall not be extinguished or
modified"
[17]
does not, contrary to the holding of the public respondent, contemplate prior
acceptance by Philippine Rayon, but by the petitioner. Acceptance, however, was not even
necessary in the first place because the drafts which were eventually issued
were sight drafts. And even if these were not sight drafts, thereby necessitating acceptance,
it would be the petitioner -- and not Philippine Rayon -- which had to accept the same for the
latter was not the drawee. Presentment for acceptance is defined as the production of a bill
of exchange to a drawee for acceptance.
[18]
The trial court and the public respondent,
therefore, erred in ruling that presentment for acceptance was an indispensable requisite for
Philippine Rayon's liability on the drafts to attach. Contrary to both courts pronouncements,
Philippine Rayon immediately became liable thereon upon petitioner's payment thereof.
Such is the essence of the letter of credit issued by the petitioner. A different conclusion
would violate the principle upon which commercial letters of credit are founded because in
such a case, both the beneficiary and the issuer, Nissho Company Ltd. and the petitioner,
respectively, would be placed at the mercy of Philippine Rayon even if the latter had already
received the imported machinery and the petitioner had fully paid for it. The typical setting
and purpose of a letter of credit are described in Hibernia Bank and Trust Co. vs. J. Aron &
CO., Inc.,
[19]
thus:
1. "Commercial letters of credit have come into general use in international sales
transactions where much time necessarily elapses between the sale and the receipt by a
purchaser of the merchandise, during which interval great price changes may occur. Buyers
and sellers struggle for the advantage of position. The seller is desirous of being paid as
surely and as soon as possible, realizing that the vendee at a distant point has it in his power
to reject on trivial grounds merchandise on arrival, and cause considerable hardship to the
shipper. Letters of credit meet this condition by affording celerity and certainty of payment.
Their purpose is to insure to a seller payment of a definite amount upon presentation of
documents. The bank deals only with documents. It has nothing to do with the quality of the
merchandise. Disputes as to the merchandise shipped may arise and be litigated later
between vendor and vendee, but they may not impede acceptance of drafts and payment by
the issuing bank when the proper documents are presented."
The trial court and the public respondent likewise erred in disregarding the trust receipt and
in not holding that Philippine Rayon was liable thereon. In People vs. Yu Chai Ho,
[20]
this Court
explains the nature of a trust receipt by quoting In re Dunlap Carpet Co.,
[21]
thus:
"By this arrangement a banker advances money to an intending importer, and thereby lends
the aid of capital, of credit, or of business facilities and agencies abroad, to the enterprise of
foreign commerce. Much of this trade could hardly be carried on by any other means; and
therefore it is of the first importance that the fundamental factor in the transaction, the
banker's advance of money and credit, should receive the amplest protection. Accordingly, in
order to secure that the banker shall be repaid at the critical point -- that is, when the
imported goods finally reach the hands of the intended vendee -- the banker takes the full
title to the goods at the very beginning; he takes it as soon as the goods are bought and
settled for by his payments or acceptances in the foreign country, and he continues to hold
that title as his indispensable security until the goods are sold in the United States and the
vendee is called upon to pay for them. This security is not an ordinary pledge by the importer
to the banker, for the importer has never owned the goods, and moreover he is not able to
deliver the possession; but the security is the complete title vested originally in the bankers,
and this characteristic of the transaction has again and again been recognized and protected
by the courts. Of course, the title is at bottom a security title, as it has sometimes been
called, and the banker is always under the obligation to reconvey; but only after his advances
have been fully repaid and after the importer has fulfilled the other terms of the contract."
As further stated in National Bank vs. Viuda e Hijos de Angel Jose,
[22]
trust receipts:
"x x x [I]n a certain manner, x x x partake of the nature of a conditional sale as provided by
the Chattel Mortgage Law, that is, the importer becomes absolute owner of the imported
merchandise as soon as he has paid its price. The ownership of the merchandise continues to
be vested in the owner thereof or in the person who has advanced payment, until he has
been paid in full, or if the merchandise has already been sold, the proceeds of the sale should
be turned over to him by the importer or by his representative or successor in interest."
Under P.D. No. 115, otherwise known as the Trust Receipts Law, which took effect on 29
January 1973, a trust receipt transaction is defined as "any transaction by and between a
person referred to in this Decree as the entruster, and another person referred to in this
Decree as the entrustee, whereby the entruster, who owns or holds absolute title or security
interests over certain specified goods, documents or instruments, releases the same to the
possession of the entrustee upon the latter's execution and delivery to the entruster of a
signed document called the trust receipt wherein the entrustee binds himself to hold the
designated goods, documents or instruments in trust for the entruster and to sell or
otherwise dispose of the goods, documents or instruments with the obligation to turn over
to the entruster the proceeds thereof to the extent of the amount owing to the entruster or
as appears in the trust receipt or the goods, instruments themselves if they are unsold or not
otherwise disposed of, in accordance with the terms and conditions specified in the trust
receipt, or for other purposes substantially equivalent to any one of the following: x x x."
It is alleged in the complaint that private respondents "not only have presumably put said
machinery to good use and have profited by its operation and/or disposition but very recent
information that (sic) reached plaintiff bank that defendants already sold the machinery
covered by the trust receipt to Yupangco Cotton Mills," and that "as trustees of the property
covered by the trust receipt, x x x and therefore acting in fiduciary (sic) capacity, defendants
have willfully violated their duty to account for the whereabouts of the machinery covered
by the trust receipt or for the proceeds of any lease, sale or other disposition of the same
that they may have made, notwithstanding demands therefore; defendants have
fraudulently misapplied or converted to their own use any money realized from the lease,
sale, and other disposition of said machinery."
[23]
While there is no specific prayer for the
delivery to the petitioner by Philippine Rayon of the proceeds of the sale of the machinery
covered by the trust receipt, such relief is covered by the general prayer for "such further
and other relief as may be just and equitable on the premises."
[24]
And although it is true that
the petitioner commenced a criminal action for the violation of the Trust Receipts Law, no
legal obstacle prevented it from enforcing the civil liability arising out of the trust receipt in a
separate civil action. Under Section 13 of the Trust Receipts Law, the failure of an entrustee
to turn over the proceeds of the sale of goods, documents or instruments covered by a trust
receipt to the extent of the amount owing to the entruster or as appears in the trust receipt
or to return said goods, documents or instruments if they were not sold or disposed of in
accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable
under the provisions of Article 315, paragraph 1(b) of the Revised Penal Code.
[25]
Under
Article 33 of the Civil Code, a civil action for damages, entirely separate and distinct from the
criminal action, may be brought by the injured party in cases of defamation, fraud and
physical injuries. Estafa falls under fraud.
We also conclude, for the reason hereinafter discussed, and not for that adduced by the
public respondent, that private respondent Chi's signature in the dorsal portion of the trust
receipt did not bind him solidarily with Philippine Rayon. The statement at the dorsal portion
of the said trust receipt, which petitioner describes as a "solidary guaranty clause", reads:
"In consideration of the PRUDENTIAL BANK AND TRUST COMPANY complying with the
foregoing, we jointly and severally agree and undertake to pay on demand to the
PRUDENTIAL BANK AND TRUST COMPANY all sums of money which the said PRUDENTIAL
BANK AND TRUST COMPANY may call upon us to pay arising out of or pertaining to, and/or in
any event connected with the default of and/or nonfulfillment in any respect of the
undertaking of the aforesaid:
PHILIPPINE RAYON MILLS, INC.
We further agree that the PRUDENTIAL BANK AND TRUST COMPANY does not have to take
any steps or exhaust its remedy against aforesaid:
before making demand on me/us.
(Sgd.) Anacleto R. Chi
ANACLETO R. CHI"
[26]

Petitioner insists that by virtue of the clear wording of the statement, specifically the clause
"x x x we jointly and severally agree and undertake x x x," and the concluding sentence on
exhaustion, Chi's liability therein is solidary.
In holding otherwise, the public respondent ratiocinates as follows:
"With respect to the second argument, we have our misgivings as to whether the mere
signature of defendant-appellee Chi of (sic) the guaranty agreement, Exhibit C-1", will make
it an actionable document. It should be noted that Exhibit "C-1" was prepared and printed by
the plaintiff-appellant. A perusal of Exhibit "C-1" shows, that it was to be signed and
executed by two persons. It was signed only by defendant-appellee Chi. Exhibit "C-1" was to
be witnessed by two persons, but no one signed in that capacity. The last sentence of the
guaranty clause is incomplete. Furthermore, the plaintiff-appellant also failed to have the
purported guarantee clause acknowledged before a notary public. All these show that the
alleged guaranty provision was disregarded and, therefore, not consummated.
But granting arguendo that the guaranty provision in Exhibit "C-1" was fully executed and
acknowledged still defendant-appellee Chi cannot be held liable thereunder because the
records show that the plaintiff-appellant had neither exhausted the property of the
defendant-appellant nor had it resorted to all legal remedies against the said defendant-
appellant as provided in Article 2058 of the Civil Code. The obligation of a guarantor is merely
accessory under Article 2052 of the Civil Code and subsidiary under Article 2054 of the Civil
Code. Therefore, the liability of the defendant-appellee arises only when the principal debtor
fails to comply with his obligation."
[27]

Our own reading of the questioned solidary guaranty clause yields no other conclusion than
that the obligation of Chi is only that of a guarantor. This is further bolstered by the last
sentence which speaks of waiver of exhaustion, which, nevertheless, is ineffective in this case
because the space therein for the party whose property may not be exhausted was not filled
up. Under Article 2058 of the Civil Code, the defense of exhaustion (excussion) may be raised
by a guarantor before he may be held liable for the obligation. Petitioner likewise admits that
the questioned provision is a solidary guaranty clause, thereby clearly distinguishing it from a
contract of surety. It, however, described the guaranty as solidary between the guarantors;
this would have been correct if two (2) guarantors had signed it. The clause "we jointly and
severally agree and undertake" refers to the undertaking of the two (2) parties who are to
sign it or to the liability existing between themselves. It does not refer to the undertaking
between either one or both of them on the one hand and the petitioner on the other
with respect to the liability described under the trust receipt. Elsewise stated, their liability is
not divisible as between them, i.e., it can be enforced to its full extent against any one of
them.
Furthermore, any doubt as to the import or true intent of the solidary guaranty clause should
be resolved against the petitioner. The trust receipt, together with the questioned solidary
guaranty clause, is on a form drafted and prepared solely by the petitioner; Chi's
participation therein is limited to the affixing of his signature thereon. It is, therefore, a
contract of adhesion
[28]
as such, it must be strictly construed against the party responsible for
its preparation.
[29]

Neither can We agree with the reasoning of the public respondent that this solidary guaranty
clause was effectively disregarded simply because it was not signed and witnessed by two (2)
persons and acknowledged before a notary public. While indeed, the clause ought to have
been signed by two (2) guarantors, the fact that it was only Chi who signed the same did not
make his act an idle ceremony or render the clause totally meaningless. By his signing, Chi
became the sole guarantor. The attestation by witnesses and the acknowledgement before a
notary public are not required by law to make a party liable on the instrument. The rule is
that contracts shall be obligatory in whatever form they may have been entered into,
provided all the essential requisites for their validity are present; however, when the law
requires that a contract be in some form in order that it may be valid or enforceable, or that
it be proved in a certain way, that requirement is absolute and indispensable.
[30]
With respect
to a guaranty,
[31]
which is a promise to answer for the debt or default of another, the law
merely requires that it, or some note or memorandum thereof, be in writing. Otherwise, it
would be unenforceable unless ratified.
[32]
While the acknowledgement of a surety before a
notary public is required to make the same a public document, under Article 1358 of the Civil
Code, a contract of guaranty does not have to appear in a public document.
And now to the other ground relied upon by the petitioner as basis for the solidary liability of
Chi, namely the criminal proceedings against the latter for the violation of P.D. No. 115.
Petitioner claims that because of the said criminal-proceedings, Chi would be answerable for
the civil liability arising therefrom pursuant to Section 13 of P.D. No. 115. Public respondent
rejected this claim because such civil liability presupposes prior conviction as can be gleaned
from the phrase "without prejudice to the civil liability arising from the criminal offense."
Both are wrong. The said section reads:
"SEC. 13. Penalty Clause. -- The failure of an entrustee to turn over the proceeds of the sale
of the goods, documents or instruments covered by a trust receipt to the extent of the
amount owing to the entruster or as appears in the trust receipt or to return said goods,
documents or instruments if they were not sold or disposed of in accordance with the terms
of the trust receipt shall constitute the crime of estafa, punishable under the provisions of
Article Three hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight
hundred and fifteen, as amended, otherwise known as the Revised Penal Code. If the
violation or offense is committed by a corporation, partnership, association or other juridical
entities, the penalty provided for in this Decree shall be imposed upon the directors, officers,
employees or other officials or persons therein responsible for the offense, without prejudice
to the civil liabilities arising from the criminal offense."
A close examination of the quoted provision reveals that it is the last sentence which
provides for the correct solution. It is clear that if the violation or offense is committed by
a corporation, partnership, association or other juridical entities, the penalty shall be
imposed upon the directors, officers, employees or other officials or persons therein
responsible for the offense. The penalty referred to is imprisonment, the duration of which
would depend on the amount of the fraud as provided for in Article 315 of the Revised Penal
Code. The reason for this is obvious: corporations, partnerships, associations and other
juridical entities cannot be put in jail. However, it is these entities which are made liable for
the civil liability arising from the criminal offense. This is the import of the clause "without
prejudice to the civil liabilities arising from the criminal offense." And, as We stated earlier,
since that violation of a trust receipt constitutes fraud under Article 33 of the Civil Code,
petitioner was acting well within its rights in filing an independent civil action to enforce the
civil liability arising therefrom against Philippine Rayon.
The remaining issue to be resolved concerns the propriety of the dismissal of the case against
private respondent Chi. The trial court based the dismissal, and the respondent Court its
affirmance thereof, on the theory that Chi is not liable on the trust receipt in any capacity --
either as surety or as guarantor -- because his signature at the dorsal portion thereof was
useless; and even if he could be bound by such signature as a simple guarantor, he cannot,
pursuant to Article 2058 of the Civil Code, be compelled to pay until after petitioner has
exhausted and resorted to all legal remedies against the principal debtor, Philippine Rayon.
The records fail to show that petitioner had done so.
[33]
Reliance is thus placed on Article
2058 of the Civil Code which provides:
"ART. 2058. The guarantor cannot be compelled to pay the creditor unless the latter has
exhausted all the property of the debtor, and has resorted to all the legal remedies against
the debtor."
Simply stated, there is as yet no cause of action against Chi.
We are not persuaded. Excussion is not a condition sine qua non for the institution of an
action against a guarantor. InSouthern Motors, Inc. vs. Barbosa,
[34]
this Court stated:
"4. Although an ordinary Personal guarantor -- not a mortgagor or pledgor -- may demand
the aforementioned exhaustion, the creditor may, prior thereto, secure a judgment against
said guarantor, who shall be entitled, however, to a deferment of the execution
of said judgment against him until after the properties of the principal debtor shall have been
exhausted to satisfy the obligation involved in the case."
There was then nothing procedurally objectionable in impleading private respondent Chi as a
co-defendant in Civil Case No. Q-19312 before the trial court. As a matter of fact, Section 6,
Rule 3 of the Rules of Court on permissive joinder of parties explicitly allows it. It reads:
"SEC. 6. Permissive joinder of parties. -- All persons in whom or against whom any right to
relief in respect to or arising out of the same transaction or series of transactions is alleged to
exist, whether jointly, severally, or in the alternative, may, except as otherwise provided in
these rules, join as plaintiffs or be joined as defendants in one complaint, where any question
of law or fact common to all such plaintiffs or to all such defendants may arise in the action;
but the court may make such orders as may be just to prevent any plaintiff or defendant
from being embarrassed or put to expense in connection with any proceedings in which he
may have no interest."
This is the equity rule relating to multifariousness. It is based on trial convenience and is
designed to permit the joinder of plaintiffs or defendants whenever there is a common
question of law or fact. It will save the parties unnecessary work, trouble and expense.
[35]

However, Chi's liability is limited to the principal obligation in the trust receipt plus all the
accessories thereof including judicial costs; with respect to the latter, he shall only be liable
for those costs incurred after being judicially required to pay.
[36]
Interest and damages, being
accessories of the principal obligation, should also be paid; these, however, shall run only
from the date of the filing of the complaint. Attorney's fees may even be allowed in
appropriate cases.
[37]

In the instant case, the attorney's fees to be paid by Chi cannot be the same as that to be
paid by Philippine Rayon since it is only the trust receipt that is covered by the guaranty and
not the full extent of the latter's liability. All things considered, he can be held liable for the
sum of P10,000.00 as attorney's fees in favor of the petitioner.
Thus, the trial court committed grave abuse of discretion in dismissing the complaint as
against private respondent Chi and condemning petitioner to pay him P20,000.00 as
attorney's fees.
In the light of the foregoing, it would no longer be necessary to discuss the other issues
raised by the petitioner.
WHEREFORE, the instant Petition is hereby GRANTED. The appealed Decision of 10 March
1986 of the public respondent in AC-G.R. CV No. 66733 and, necessarily, that of Branch 9
(Quezon City) of the then Court of First Instance of Rizal in Civil Case No. Q-19312 are hereby
REVERSED and SET ASIDE and another is hereby entered:
1. Declaring private respondent Philippine Rayon Mills, Inc. liable on the twelve drafts in
question (Exhibits "X", "X-1" to "X-11", inclusive) and on the trust receipt (Exhibit "C"), and
ordering it to pay petitioner: (a) the amounts due thereon in the total sum of P956,384.95 as
of 15 September 1974, with interest thereon at six percent (6%) per annum from 16
September 1974 until it is fully paid, less whatever may have been applied thereto by virtue
of foreclosure of mortgages, if any; (b) a sum equal to ten percent (10%) of the aforesaid
amount as attorney's fees; and (c) the costs.
2. Declaring private respondent Anacleto R. Chi secondarily liable on the trust receipt and
ordering him to pay the face value thereof, with interest at the legal rate, commencing from
the date of the filing of the complaint in Civil Case No. Q-19312 until the same is fully paid as
well as the costs and attorney's fees in the sum of P10,000.00 if the writ of execution for the
enforcement of the above awards against Philippine Rayon Mills, Inc. is returned unsatisfied.
Costs against private respondents.
SO ORDERED.

Gutierrez, Jr., (Chairman), Bidin, Romero, and Melo, JJ., concur.

THIRD DIVISION
[ G.R. No. 105395, December 10, 1993 ]
BANK OF AMERICA, NT & SA, PETITIONERS, VS. COURT OF APPEALS, INTER-RESIN
INDUSTRIAL CORPORATION, FRANCISCO TRAJANO, JOHN DOE AND JANE DOE,
RESPONDENTS.

D E C I S I O N
VITUG, J.:
A "fiasco," involving an irrevocable letter of credit, has found the distressed parties coming to
court as adversaries in seeking a definition of their respective rights or liabilities thereunder.
On 05 March 1981, petitioner Bank of America, NT & SA, Manila, received by registered mail
an Irrevocable Letter of Credit No. 20272/81 purportedly issued by Bank of Ayudhya,
Samyaek Branch, for the account of General Chemicals, Ltd., of Thailand in the amount of
US$2,782,000.00 to cover the sale of plastic ropes and "agricultural files," with the petitioner
as advising bank and private respondent Inter-Resin Industrial Corporation as beneficiary.
On 11 March 1981, Bank of America wrote Inter-Resin informing the latter of the foregoing
and transmitting, along with the bank's communication, the letter of credit. Upon receipt of
the letter-advice with the letter of credit, Inter-Resin sent Atty. Emiliano Tanay to Bank of
America to have the letter of credit confirmed. The bank did not. Reynaldo Dueas, bank
employee in charge of letters of credit, however, explained to Atty. Tanay that there was no
need for confirmation because the letter of credit would not have been transmitted if it were
not genuine.
Between 26 March to 10 April 1981, Inter-Resin sought to make a partial availment under the
letter of credit by submitting to Bank of America invoices, covering the shipment of 24,000
bales of polyethylene rope to General Chemicals valued at US$1,320,600.00, the
corresponding packing list, export declaration and bill of lading. Finally, after being satisfied
that Inter-Resin's documents conformed with the conditions expressed in the letter of credit,
Bank of America issued in favor of Inter-Resin a Cashier's Check for P10,219,093.20, "the
Peso equivalent of the draft (for) US$1,320,600.00 drawn by Inter-Resin, after deducting the
costs for documentary stamps, postage and mail insurance.
[1]
The check was picked up by
Inter-Resin's Executive Vice-President Barcelina Tio. On 10 April 1981, Bank of America wrote
Bank of Ayudhya advising the latter of the availment under the letter of credit and sought the
corresponding reimbursement therefor.
Meanwhile, Inter-Resin, through Ms. Tio, presented to Bank of America the documents for
the second availment under the same letter of credit consisting of a packing list, bill of lading,
invoices, export declaration and bills in set, evidencing the second shipment of goods.
Immediately upon receipt of a telex from Bank of Ayudhya declaring the letter of credit
fraudulent,
[2]
Bank of America stopped the processing of Inter-Resin's documents and sent a
telex to its branch office in Bangkok, Thailand, requesting assistance in determining the
authenticity of the letter of credit.
[3]
Bank of America kept Interresin informed of the
developments. Sensing a fraud, Bank of America sought the assistance of the National
Bureau of Investigation (NBI). With the help of the staff of the Philippine Embassy at
Bangkok, as well as the police and customs personnel of Thailand, the NBI agents, who were
sent to Thailand, discovered that the vans exported by Inter-Resin did not contain ropes but
plastic strips, wrappers, rags and waste materials. Here at home, the NBI also investigated
Inter-Resin's President Francisco Trajano and Executive Vice President Barcelina Tio, who,
thereafter, were criminally charged for estafa through falsification of commercial documents.
The case, however, was eventually dismissed by the Rizal Provincial Fiscal who found
no prima facie evidence to warrant prosecution.
Bank of America sued Inter-Resin for the recovery of P10,219,093.20, the peso equivalent of
the draft for US$1,320,600.00 on the partial availment of the now disowned letter of credit.
On the other hand, Inter-Resin claimed that not only was it entitled to retain P10,219,093.20
on its first shipment but also to the balance US$1,461,400.00 covering the second shipment.
On 28 June 1989, the trial court ruled for Inter-Resin,
[4]
holding that: (a) Bank of America
made assurances that enticed Inter-Resin to send the merchandise to Thailand; (b) the telex
declaring the letter of credit fraudulent was unverified and self-serving, hence hearsay, but
even assuming that the letter of credit was fake, "the fault should be borne by the BA which
was careless and negligent
[5]
for failing to utilize its modern means of communication to
verify with Bank of Ayudhya in Thailand the authenticity of the letter of credit before sending
the same to Inter-Resin; (c) the loading of plastic products into the vans were under strict
supervision, inspection and verification of government officers who have in their favor the
presumption of regularity in the performance of official functions; and (d) Bank of America
failed to prove the participation of Inter-Resin or its employees in the alleged fraud as, in
fact, the complaint for estafa through falsification of documents was dismissed by the
Provincial Fiscal of Rizal.
[6]

On appeal, the Court of Appeals
[7]
sustained the trial court; hence, this present recourse by
petitioner Bank of America.
The following issues are raised by Bank of America: (a) whether it has warranted the
genuineness and authenticity of the letter of credit and, corollarily, whether it has acted
merely as an advising bank or as a confirming bank; (b) whether Inter-Resin has actually
shipped the ropes specified by the letter of credit; and, (c) following the dishonor of the
letter of credit by Bank of Ayudhya, whether Bank of America may recover against Inter-
Resin under the draft executed in its partial availment of the letter of credit.
[8]

In rebuttal, Inter-Resin holds that: (a) Bank of America cannot, on appeal, belatedly raise the
issue of being only an advising bank; (b) the findings of the trial court that the ropes have
actually been shipped is binding on the Court; and, (c) Bank of America cannot recover from
Inter-Resin because the drawer of the letter of credit is the Bank of Ayudhya and not Inter-
Resin.
If only to understand how the parties, in the first place, got themselves into the mess, it may
be well to start by recalling how, in its modern use, a letter of credit is employed in trade
transactions.
A letter of credit is a financial device developed by merchants as a convenient and relatively
safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a
seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have
control of the goods before paying.
[9]
To break the impasse, the buyer may be required
to contract a bank to issue a letter of credit in favor of the seller so that, by virtue of the
letter of credit, the issuing bank can authorize the seller to draw drafts and engage to pay
them upon their presentment simultaneously with the tender of documents required by the
letter of credit.
[10]
The buyer and the seller agree on what documents are to be presented for
payment, but ordinarily they are documents of title evidencing or attesting to the shipment
of the goods to the buyer.
Once the credit is established, the seller ships the goods to the buyer and in the process
secures the required shipping documents or documents of title. To get paid, the seller
executes a draft and presents it together with the required documents to the issuing bank.
The issuing bank redeems the draft and pays cash to the seller if it finds that the documents
submitted by the seller conform with what the letter of credit requires. The bank then
obtains possession of the documents upon paying the seller. The transaction is completed
when the buyer reimburses the issuing bank and acquires the documents entitling him to the
goods. Under this arrangement, the seller gets paid only if he delivers the documents of title
over the goods, while the buyer acquires the said documents and control over the goods only
after reimbursing the bank.
What characterizes letters of credit, as distinguished from other accessory contracts, is the
engagement of the issuing bank to pay the seller once the draft and the required shipping
documents are presented to it. In turn, this arrangement assures the seller of prompt
payment, independent of any breach of the main sales contract. By this so-called
"independence principle," the bank determines compliance with the letter of credit only by
examining the shipping documents presented; it is precluded from determining whether the
main contract is actually accomplished or not.
[11]

There would at least be three (3) parties: (a) the buyer,
[12]
who procures the letter of credit
and obliges himself to reimburse the issuing bank upon receipt of the documents of title; (b)
the bank issuing the letter of credit,
[13]
which undertakes to pay the seller upon receipt of the
draft and proper documents of titles and to surrender the documents to the buyer upon
reimbursement; and, (c) the seller,
[14]
who in compliance with the contract of sale ships the
goods to the buyer and delivers the documents of title and draft to the issuing bank to
recover payment.
The number of the parties, not infrequently and almost invariably in international trade
practice, may be increased. Thus, the services of an advising (notifying) bank
[15]
may be
utilized to convey to the seller the existence of the credit; or, of a confirmingbank
[16]
which
will lend credence to the letter of credit issued by a lesser known issuing bank; or,
of a paying bank
[17]
which undertakes to encash the drafts drawn by the exporter. Further,
instead of going to the place of the issuing bank to claim payment, the buyer may approach
another bank, termed the negotiating bank,
[18]
to have the draft discounted.
Being a product of international commerce, the impact of this commercial instrument
transcends national boundaries, and it is thus not uncommon to find a dearth of national law
that can adequately provide for its governance. This country is no exception. Our own Code
of Commerce basically introduces only its concept under Articles 567-572, inclusive, thereof.
It is no wonder then why great reliance has been placed on commercial usage and practice,
which, in any case, can be justified by the universal acceptance of the autonomy of contracts
rule. The rules were later developed into what is now known as the Uniform Customs and
Practice for Documentary Credits ("U.C.P.") issued by the International Chamber of
Commerce. It is by no means a complete text by itself, for, to be sure, there are other
principles, which, although part of lex mercatoria, are not dealt with in the U.C.P.
In FEATI Bank and Trust Company v. Court of Appeals,
[19]
we have accepted, to the extent of
their pertinency, the application in our jurisdiction of this international commercial credit
regulatory set of rules.
[20]
In Bank of Phil. Islands v. De Nery,
[21]
wehave said that the
observance of the U.C.P. is justified by Article 2 of the Code of Commerce which expresses
that, in the absence of any particular provision in the Code of Commerce, commercial
transactions shall be governed by usages and customs generally observed. We have further
observed that there being no specific provisions which govern the legal complexities arising
from transactions involving letters of credit not only between or among banks themselves
but also between banks and the seller or the buyer, as the case may be, the applicability of
the U.C.P. is undeniable.
The first issue raised by the petitioner, i.e., that it has in this instance merely been an
advising bank, is outrightly rejected by Inter-Resin and is thus sought to be discarded for
having been raised only on appeal. We cannot agree. The crucial point of dispute in this case
is whether under the "letter of credit," Bank of America has incurred any liability to the
"beneficiary" thereof, an issue that largely is dependent on the bank's participation in that
transaction; as a mere advising or notifying bank, it would not be liable, but as a confirming
bank, had this been the case, it could be considered as having incurred that liability.
[22]

In Insular Life Assurance Co. Ltd. Employees Association-- Natu vs. Insular Life Assurance Co.,
Ltd.,
[23]
the Court said: Where the issues already raised also rest on other issues not
specifically presented, as long as the latter issues bear relevance and close relation to the
former and as long as they arise from matters on record, the court has the authority to
include them in its discussion of the controversy and to pass upon them just as well. In brief,
in those cases where questions not particularly raised by the parties surface as necessary for
the complete adjudication of the rights and obligations of the parties, and such questions fall
within the issues already framed by the parties, the interests of justice dictate that the court
should consider and resolve them. The rule that only issues or theories raised in the initial
proceedings may be taken up by a party thereto on appeal should only refer to independent,
not concomitant matters, to support or oppose the cause of action or defense. The evil that
is sought to be avoided, i.e., surprise to the adverse party, is in reality not existent on matters
that are properly litigated in the lower court and appear on record.
It cannot seriously be disputed, looking at this case, that Bank of America has, in fact, only
been an advising, not confirming, bank, and this much is clearly evident, among other things,
by the provisions of the letter of credit itself, the petitioner bank's letter of advice, its request
for payment of advising fee, and the admission of Inter-Resin that it has paid the same. That
Bank of America has asked Inter-Resin to submit documents required by the letter of credit
and eventually has paid the proceeds thereof, did not obviously make it a confirming bank.
The fact, too, that the draft required by the letter of credit is to be drawnunder the account
of General Chemicals (buyer) only means that the same had to be presented to Bank of
Ayudhya (issuing bank) for payment. It may be significant to recall that the letter of credit is
an engagement of the issuing bank, not the advising bank, to pay the draft.
No less important is that Bank of Americas letter of 11 March 1981 has expressly stated that
"[t]he enclosure is solely anadvise of credit opened by the abovementioned correspondent
and conveys no engagement by us.
[24]
This written reservation by Bank of America in limiting
its obligation only to being an advising bank is in consonance with the provisions of U.C.P.
As an advising or notifying bank, Bank of America did not incur any obligation more than just
notifying Inter-Resin of the letter of credit issued in its favor, let alone to confirm the letter of
credit.
[25]
The bare statement of the bank employee, aforementioned, in responding to the
inquiry made by Atty. Tanay, Inter-Resin's representative, on the authenticity of the letter of
credit certainly did not have the effect of novating the letter of credit and Bank of America's
letter of advise,
[26]
nor can it justify the conclusion that the bank must now assume total
liability on the letter of credit. Indeed, Inter-Resin itself cannot claim to have been all that
free from fault. As the seller, the issuance of the letter of credit should have obviously
been a great concern to it.
[27]
It would have, in fact, been strange if it did not, prior to the
letter of credit, enter into a contract, or negotiated at the very least, with General
Chemicals.
[28]
In the ordinary course of business, the perfection of contract precedes the
issuance of a letter of credit.
Bringing the letter of credit to the attention of the seller is the primordial obligation of an
advising bank. The view that Bank of America should have first checked the authenticity of
the letter of credit with Bank of Ayudhya, by using advanced mode of business
communications, before dispatching the same to Inter-Resin finds no real support in U.C.P.
Article 18 of the U.C.P. states that: "Banks assume no liability or responsibility for the
consequences arising out of the delay and/or loss in transit of any messages, letters or
documents, or for delay, mutilation or other errors arising in the transmission of any
telecommunication x x x" As advising bank, Bank of America is bound only to check the
"apparent authenticity" of the letter of credit, which it did.
[29]
Clarifying its meaning,
Webster's Ninth New Collegiate Dictionary
[30]
explains that the word "APPARENT suggests
appearance to unaided senses that is not or may not be borne out by more rigorous
examination or greater knowledge."
May Bank of America then recover what it has paid under the letter of credit when the
corresponding draft for partial availment thereunder and the required documents therefor
were later negotiated with it by Inter-Resin? The answer is yes. This kind of transaction is
what is commonly referred to as a discounting arrangement. This time, Bank of America, has
acted independently as a negotiating bank, thus saving Inter-Resin from the hardship of
presenting the documents directly to Bank of Ayudhya to recover payment. (Inter-Resin, of
course, could have chosen other banks with which to negotiate the draft and thedocuments.)
As a negotiating bank, Bank of America has a right of recourse against the issuer bank and
until reimbursement is obtained, Inter-Resin, as the drawer of the draft, continues to assume
a contingent liability thereon.
[31]

While Bank of America has indeed failed to allege material facts in its complaint that might
have likewise warranted the application of the Negotiable Instruments Law and possibly then
allowed it to even go after the indorsers of the draft, this failure,
[32]
nonetheless, does not
preclude petitioner bank's right (as a negotiating bank) of recovery from Inter-Resin itself.
Inter-Resin admits having received P10,219,093.20 from Bank of America on the letter of
credit transaction and in having executed the corresponding draft. That payment to Inter-
Resin has given, as aforesaid, Bank of America the right ofreimbursement from the issuing
bank, Bank of Ayudhya which, in turn, could then seek indemnification from the buyer (the
General Chemicals of Thailand). Since Bank of Ayudhya disowned the letter of credit,
however, Bank of America may now turn to Inter-Resin for restitution.
"Between the seller and the negotiating bank there is the usual relationship existing between
a drawer and purchaser of drafts. Unless drafts drawn in pursuance of the credit are
indicated to be without recourse therefore, the negotiating bank has the ordinary right of
recourse against the seller in the event of dishonor by the issuing bank x x x The fact that the
correspondent and the negotiating bank may be one and the same does not affect its rights
and obligations in either capacity, although a special agreement is always a possibility x x
x"
[33]

The additional ground raised by the petitioner, i.e., that Inter-Resin sent waste instead of its
products, is really of no consequence. In the operation of a letter of credit, the involved
banks deal only with documents and not on goods described in those documents.
[34]

The other issues raised in the instant petition, for instance, whether or not Bank of Ayudhya
did issue the letter of credit and whether or not the main contract of sale that has given rise
to the letter of credit has been breached, are not relevant to this controversy. They are
matters, instead, that can only be of concern to the herein parties in an appropriate recourse
against those who, unfortunately, are not impleaded in these proceedings.
In fine, we hold that -
First, given the factual findings of the courts below, we conclude that petitioner Bank of
America has acted merely as a notifyingbank and did not assume the responsibility of
a confirming bank; and
Second, petitioner bank, as a negotiating bank, is entitled to recover on Inter-Resin's partial
availment as beneficiary of the letter of credit which has been disowned by the alleged issuer
bank.
No judgment of civil liability against the other defendants, Francisco Trajano and other
unidentified parties, can be made, in this instance, there being no sufficient evidence to
warrant any such finding.
WHEREFORE, the assailed decision is SET ASIDE, and respondent Inter-Resin Industrial
Corporation is ordered to refund to petitioner Bank of American NT & SA the amount of
P10,219,093.20 with legal interest the filing of the complaint until fully paid.
No costs.
SO ORDERED.

Feliciano, (Chairman), Bidin, Romero, and Melo, JJ., concur.

SECOND DIVISION
[ G.R. NO. 171266, April 04, 2007 ]
INTERNATIONAL EXCHANGE BANK, PETITIONER, VS. COMMISSIONER OF INTERNAL
REVENUE, RESPONDENT.

D E C I S I O N
CARPIO MORALES, J.:
Is a Savings Account-Fixed Savings Deposit (FSD) evidenced by a passbook issued by
International Exchange Bank (petitioner) subject to documentary stamp tax (DST) for the
years 1996 and 1997?

Petitioner, a banking institution duly organized and existing under the laws of the Philippines,
was on April 13, 1999 served Letter of Authority No. 000020535
[1]
by the Commissioner of
Internal Revenue (respondent) directing the examination by a "Special Team created
pursuant to RSO 797-98" (Special Team) of petitioner's books of accounts and other
accounting records for the year 1997 and "unverified prior years." An examination of said
documents was in fact conducted.

Petitioner subsequently received on November 16, 1999 a "Notice to Taxpayer"
[2]
from the
Assistant Commissioner, Enforcement Service of the Bureau of Internal Revenue, notifying it
of the results of the examination conducted by the Special Team regarding its tax liabilities,
which amounted to P465,158,118.31 for 1996 and P17,033,311,974.23 for 1997, and
requesting it to appear for an informal conference to present its side.

Between November
[3]
and December
[4]
1999, petitioner's representatives met with the
Special Team to discuss and/or dispute portions of the Special Team's audit findings.
Eventually, the parties resolved issues relating to transactions involving payment of final
withholding and gross receipts taxes.
[5]


On January 6, 2000, petitioner was personally served with an undated Pre-Assessment
Notice
[6]
(PAN) assessing it of deficiency on its purchases of securities from the Bangko
Sentral ng Pilipinas or Government Securities Purchased-Reverse Repurchase Agreement
(RRPA) and its FSD for the taxable years 1996 and 1997, viz:
Details of Discrepancies
(Taxable Year 1996)

INDUSTRY ISSUES

1. DOCUMENTARY STAMP TAX (DST) On Government Securities Purchased-RRPA and
Savings Deposits SD totaling P25,180,492.15.

Government Securities Purchased-RRP amounting to P3,584,098,013.35 is subject to DST
under Section 180 of the NIRC, as amended, since this falls under the classification of
Deposits Substitutes as defined by RR 3-97.

Savings Deposit-FSD amounting to P9,845,497,800.27 should be treated as time deposits
considering that its features are very much the same as time deposits (interest rates; terms).
In substance, these are certificate[s] of deposits subject to Documentary Stamp Tax under
Section 180 of the NIRC which provides among others that certificate[s] of deposits bearing
interest and others not payable on sight or demand are subject to DST.
[7]

Details of Discrepancies
(Taxable Year 1997)

INDUSTRY ISSUES

1. DOCUMENTARY STAMP TAX (DST) On Government Securities Purchased-RRPA and
Savings Deposits-FSD totaling P75,383,751.55.

Government Securities Purchased-RRP amounting to P12,180.427,820.44 is subject to DST
under Sec. 180 of the NIRC, as amended, since this falls under the classification of Deposit
Substitutes as defined by RR 3-97.

Savings Deposits-FSD amounting to P28,024,239,673.35 should be treated as time deposits
considering that its features are very much the same as time deposits (interest rates; terms).
In substance, these are certificates of deposit subject to Documentary Stamp Tax under
Section 180 of the NIRC which provides among others that certificate[s] of deposit bearing
interest and others not payable on sight or demand are subject to DST.
[8]
(Underscoring in the
original)
The PAN advised petitioner that in case it was not agreeable to the above-quoted findings, it
may "see the Assistant Commissioner-Enforcement Service to clarify issues arising from the
investigation and/or review," and its failure to do so within 15 days from receipt of the PAN
would mean that it was agreeable.
[9]


On January 12, 2000, petitioner received a Formal Assessment Notice
[10]
(FAN) for deficiency
DST on its RRPA and FSD, including surcharges, in the amounts of P25,180,492.15 for 1996
and P75,383,751.55 for 1997, and an accompanying demand letter
[11]
requesting payment
thereof within 30 days.

Acting on the FAN, petitioner filed on February 11, 2000 a protest letter
[12]
alleging that the
assessments should be reconsidered on the grounds that: (1) the assessments are null and
void for having been issued without any authority and due process, and were made beyond
the prescribed period for making assessments; (2) there is no law imposing DST on RRPA, and
assuming that DST was payable, it is the Bangko Sentral ng Pilipinas which is liable therefor;
(3) there is no law imposing DST on its FSD; and (4) assuming the deficiency assessments for
DST were proper, the imposition of surcharges was patently without legal authority.

Respondent failed to act on the protest, prompting petitioner to file a petition for review
before the Court of Tax Appeals (CTA).

By Decision
[13]
of October 26, 2004, the First Division of the CTA (CTA Division) disposed as
follows:
WHEREFORE, petitioner's deficiency assessments pertaining to the reverse purchase
agreements in the amounts of P6,720,183.77 and P22,838,302.16 inclusive of surcharges, for
the years 1996 and 1997, respectively, are hereby CANCELLED and WITHDRAWN. However,
the deficiency assessments pertaining to savings deposits-FSD are hereby UPHELD and
petitioner is ORDERED to PAY the respondent the amount of P71,005,757.77 representing
deficiency documentary stamp tax for the years 1996 and 1997. In addition thereto,
petitioner is ORDERED to PAY respondent 20% delinquency interest from February 12, 2000
until fully paid pursuant to Section 249 of the 1997 NIRC.
[14]
(Emphasis and underscoring
supplied)
Petitioner moved for reconsideration of the CTA Division decision. Respondent moved too
for a partial review of the decision.

Petitioner argued that its FSD is not subject to DST since it was not one of the documents
enumerated either under the 1977 Tax Code (Tax Code) or the 1997 National Internal
Revenue Code (NIRC). Respondent on the other hand argued that petitioner should be liable
not only for DST on its FSD but also on its RRPA.

For lack of merit, the CTA Division, by Resolution
[15]
of April 20, 2005, denied petitioner's
motion for reconsideration and respondent's motion for partial reconsideration.

Only petitioner appealed to the CTA En Banc before which it proffered that its FSD cannot be
considered a certificate of deposit subject to DST under Section 180 of the Tax Code for,
unlike a certificate of deposit which is a negotiable instrument, the passbook it issued for its
FSD was not payable to the order of the depositor or to some other person as the deposit
could only be withdrawn by the depositor or by a duly authorized representative.
[16]


Petitioner likewise proffered that the legislative deliberations on the bill that was to become
Republic Act No. (R.A.) 9243
[17]
showed that the definition of certificates of deposit was
amended to include "other evidences of deposits that are either drawing interest
significantly higher than the regular savings deposit taking into consideration the size of the
deposit and the risks involved or drawing interest and having a specific maturity date" in
order to plug a revenue loophole caused by the term "certificates of deposit" provided under
the Tax Code and the NIRC.
[18]


Furthermore, petitioner argued that a "deposits [sic] evidenced by a passbook [which] have
features akin to a time deposit," such as petitioner's FSD, is not subject to DST under the Tax
Code and the NIRC.
[19]


Finally, petitioner argued that the FAN for 1996 and 1997 were issued in violation of its right
to due process, they having been issued even before it could respond to the PAN; and that
the 1996 assessment is null and void for having been issued beyond the 3-year prescriptive
period.

By Decision
[20]
of January 30, 2006, the CTA En Banc affirmed the decision of the CTA Division
finding petitioner liable for payment of deficiency DST for its FSD.

In affirming the CTA Division Decision, the CTA En Banc held that a time deposit is a type of a
certificate of deposit drawing interest, and petitioner's FSD has the same nature and
characteristics as those of a time deposit; that the requirement of due process had been
substantially complied with; and the 1996 assessment was not barred by prescription
because there was no requirement for the filing of a DST return under the Tax Code.

Hence, the present petition for review on certiorari, petitioner reiterating the same grounds
advanced before the CTA En Banc.

The issue, in the main, is whether petitioner's FSD is subject to DST for the years assessed.

The applicable provision is Section 180 of the Tax Code, as amended by R.A. 7660,
[21]
which
reads:
Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of exchange, drafts,
instruments and securities issued by the government or any of its instrumentalities,
certificates of deposit bearing interest and others not payable on sight or demand. On all
loan agreements signed abroad wherein the object of the contract is located or used in the
Philippines; bills of exchange (between points within the Philippines), drafts, instruments and
securities issued by the Government or any of its instrumentalities or certificates of deposits
drawing interest, or orders for the payment of any sum of money otherwise than at sight or
on demand, or on all promissory notes, whether negotiable or non-negotiable, except bank
notes issued for circulation, and on each renewal of any such note, there shall be collected a
documentary stamp tax of Thirty centavos (P0.30) on each two hundred pesos, or fractional
part thereof, of the face value of any such agreement, bill of exchange, draft, certificate of
deposit, or note: Provided, That only one documentary stamp tax shall be imposed on either
loan agreement, or promissory notes issued to secure such loan, whichever will yield a higher
tax: Provided, however, That loan agreements or promissory notes the aggregate of which
does not exceed Two hundred fifty thousand pesos (P250,000) executed by an individual for
his purchase on installment for his personal use or that of his family and not for business,
resale, barter or hire of a house, lot, motor vehicle, appliance or furniture shall be exempt
from the payment of the documentary stamp tax provided under this section. (Emphasis and
underscoring supplied)
Petitioner posits that based on this Court's definition of a certificate of deposit in Far East
Bank and Trust Company v. Querimit,
[22]
viz:
A certificate of deposit is defined as a written acknowledgment by a bank or banker of the
receipt of a sum of money on deposit which the bank or banker promises to pay to the
depositor, to the order of the depositor, or to some other person or his order, whereby the
relation of debtor and creditor between the bank and the depositor is created. . . .
[23]

its FSD is not a certificate of deposit since there is nothing in the terms and conditions
printed on the passbook evidencing it that can be construed to mean that the bank or banker
acknowledges the receipt of a sum of money on deposit.
[24]


Petitioner moreover posits that the FSD, unlike a certificate of deposit, is not negotiable or
payable to the order of some other person or his order but is "only withdrawable by the
depositor or his authorized representative."
[25]


Petitioner's position does not lie.

As correctly found by the CTA En Banc, a passbook representing an interest earning deposit
account issued by a bank qualifies as a certificate of deposit drawing interest.
[26]


A document to be deemed a certificate of deposit requires no specific form as long as there is
some written memorandum that the bank accepted a deposit of a sum of money from a
depositor.
[27]
What is important and controlling is the nature or meaning conveyed by the
passbook and not the particular label or nomenclature attached to it, inasmuch as substance,
not form, is paramount.
[28]


Contrary to petitioner's claim, not all certificates of deposit are negotiable. A certificate of
deposit may or may not be negotiable as gathered from the use of the conjunction or,
instead of and, in its definition. A certificate of deposit may be payable to the depositor, to
the order of the depositor, or to some other person or his order.

In any event, the negotiable character of any and all documents under Section 180 is
immaterial for purposes of imposing DST.

Orders for the payment of sum of money payable at sight or on demand are of course
explicitly exempted from the payment of DST. Thus, a regular savings account with a
passbook which is withdrawable at any time is not subject to DST, unlike a time deposit
which is payable on a fixed maturity date.

As for petitioner's argument that its FSD is similar to a regular savings deposit because it is
evidenced by a passbook,
[29]
and that based on the legislative deliberations on the bill which
was to become R.A. 9243 which amended Section 180 of the NIRC (which is to a large extent
the same as Section 180 of the Tax Code, as amended by R.A. 7660), Congress admitted that
deposits evidenced by passbooks which have features akin to time deposits are not subject
to DST,
[30]
the same does not lie.

The FSD, like a time deposit, provides for a higher interest rate when the deposit is not
withdrawn within the required fixed period; otherwise, it earns interest pertaining to a
regular savings deposit. Having a fixed term and the reduction of interest rates in case of pre-
termination are essential features of a time deposit. Thus explains the CTA En Banc:
It is well-settled that certificates of time deposit are subject to the DST and that a certificate
of time deposit is but a type of a certificate of deposit drawing interest. Thus, in resolving the
issue before Us, it is necessary to determine whether petitioner's Savings Account-Fixed
Savings Deposit (SA-FSD) has the same nature and characteristics as a time deposit. In this
regard, the findings of fact stated in the assailed Decision [of the CTA Division] are as follows:
"In this case, a depositor of a savings deposit-FSD is required to keep the money with the
bank for at least thirty (30) days in order to yield a higher interest rate. Otherwise, the
deposit earns interest pertaining only to a regular savings deposit.

The same feature is present in a time deposit. A depositor is allowed to withdraw his time
deposit even before its maturity subject to bank charges on its pre[-]termination and the
depositor loses his entitlement to earn the interest rate corresponding to the time deposit.
Instead, he earns interest pertaining only to a regular savings deposit. Thus, petitioner's
argument that the savings deposit-FSD is withdrawable anytime as opposed to a time deposit
which has a maturity date, is not tenable. In both cases, the deposit may be withdrawn
anytime but the depositor gets to earn a lower rate of interest. The only difference lies on
the evidence of deposit, a savings deposit-FSD is evidenced by a passbook, while a time
deposit is evidenced by a certificate of time deposit."
In order for a depositor to earn the agreed higher interest rate in a SA-FSD, the amount of
deposit must be maintained for a fixed period. Such being the case, We agree with the
finding that the SA-FSD is a deposit account with a fixed term. Withdrawal before the
expiration of said fixed term results in the reduction of the interest rate. Having a fixed term
and reduction of interest rate in case of pre-termination are essentially the features of a time
deposit. Hence, this Court concurs with the conclusion reached in the assailed Decision that
petitioner's SA-FSD and time deposit are substantially the same. . . .
[31]
(Italics in the original;
underscoring supplied)
The findings and conclusions reached by the CTA which, by the very nature of its function, is
dedicated exclusively to the consideration of tax problems and has necessarily developed an
expertise on the subject, and unless there has been an abuse or improvident exercise of
authority,
[32]
and none has been shown in the present case, deserves respect.

It bears emphasis that DST is levied on the exercise by persons of certain privileges conferred
by law for the creation, revision, or termination of specific legal relationships through the
execution of specific instruments.
[33]
It is an excise upon the privilege, opportunity or facility
offered at exchanges for the transaction of the business.
[34]


While tax avoidance schemes and arrangements are not prohibited, tax laws cannot be
circumvented in order to evade payment of just taxes.
[35]
To claim that time deposits
evidenced by passbooks should not be subject to DST is a clear evasion of the rule on equality
and uniformity in taxation that requires the imposition of DST on documents evidencing
transactions of the same kind, in this particular case, on all certificates of deposits drawing
interest.
[36]


The further amendment of Section 180 of the NIRC and its renumbering as Section 179 by
R.A. 9243, which was approved on February 17, 2004, viz:
SEC. 5. Section 180 of the National Internal Revenue Code of 1997, as amended, is hereby
renumbered as Section 179 and further amended to read as follows:
SEC. 179. Stamp Tax on All Debt Instruments. On every original issue of debt instruments,
there shall be collected a documentary stamp tax of One peso (P1.00) on each Two hundred
pesos (P200), or fractional part thereof, of the issue price of any such debt
instruments: Provided, That for such debt instruments with terms of less than one (1) year,
the documentary stamp tax to be collected shall be of a proportional amount in accordance
with the ratio of its term in number of days to three hundred sixty-five (365) days: Provided,
further, That only one documentary stamp tax shall be imposed on either loan agreement, or
promissory notes issued to secure such loan.
For purposes of this section, the term debt instrument shall mean instruments representing
borrowing and lending transactions including but not limited to debentures, certificates of
indebtedness, due bills, bonds, loan agreements, including those signed abroad wherein the
object of contract is located or used in the Philippines, instruments and securities issued by
the government of any of its instrumentalities, deposit substitute debt
instruments, certificates or other evidences of deposits that are either drawing interest
significantly higher than the regular savings deposit taking into consideration the size of the
deposit and the risks involved or drawing interest and having a specific maturity date, orders
for payment of any sum of money otherwise than at sight or on demand, promissory notes,
whether negotiable or non-negotiable, except bank notes issued for circulation."
(Underscoring supplied),
does not mean that as proffered, prior to its further amendment on said date, Section 180 of
the Tax Code and the NIRC time deposits for which passbooks were issued were exempted
from payment of DST.

If at all, the further amendment was intended to eliminate precisely the scheme used by
banks of issuing passbooks to "cloak" its time deposits as regular savings deposits. This is
reflected from the following exchanges between Mr. Miguel Andaya of the Bankers
Association of the Philippines and Senator Ralph Recto, Senate Chairman of the Committee
on Ways and Means, during the deliberations on Senate Bill No. 2518 which eventually
became R.A. 9243:
MR. MIGUEL ANDAYA (Bankers Association of the Philippines). Just to clarify. Savings deposit
at the present time is not subject to DST.

THE CHAIRMAN. That's right.

MR. ANDAYA. Time deposit is subject. I agree with you in principle that if we are going to
encourage deposits, whether savings or time...

THE CHAIRMAN. Uh-huh.

MR. ANDAYA. . .it's questionable whether we should tax it with DST at all, even the question
of imposing final withholding tax has been raised as an issue.

THE CHAIRMAN. If I had it my way, I'll cut it by half.

MR. ANDAYA. Yeah, but I guess concerning the constraint of government revenue, even the
industry itself right now is not pushing in that direction, but in the long term, when most of
us in this room are gone, we hope that DST will disappear from the face of this earth, 'no.

Now, I think the move of the DOF to expand the coverage of or to add that phrase, "Other
evidence of indebtedness," it just removed ambiguity. When we testified earlier in the House
on this very same bull, we did not interpose any objections if only for the sake of avoiding
further ambiguity in the implementation of DST on deposits. Because of what has happened
so far is, we don't know whether the examiner is gonna come in and say, "This savings
deposit is not savings but it's time deposit." So, I think what DOF has done is to eliminate any
confusion. They said that a deposit that has a maturity. . .

THE CHAIRMAN. Uh-huh.

MR. ANDAYA. . . . which is time, in effect, regardless of what form it takes should be subject
to DST.

THE CHAIRMAN. Would that include savings deposit now?

MR. ANDAYA. So that if we cloaked a deposit as savings deposit but it has got a fixed
maturity . . .

THE CHAIRMAN. Uh-huh.

MR. ANDAYA. . . that would fall under the purview.
[37]
(Underscoring supplied)
Finally, as the records show, contrary to petitioner's claim, it had been afforded the
opportunity to protest the assessment notices as in fact it even requested for a re-
investigation which is, given the nature of the present case, the essence of due process.
[38]


WHEREFORE, the petition is DENIED.

SO ORDERED.

Quisumbing, (Chairperson), Carpio, Tinga, and Velasco, Jr., JJ., concur.

[ G. R. No. L-11776, August 30, 1958 ]
RAMON GONZALES, PLAINTIFF AND APPELLEE VS. GO TIONG AND LUZON SURETY CO., INC.,
DEFENDANTS AND APPELLANTS.

D E C I S I O N
MONTEMAYOR, J.:
Defendants Go Tiong and Luzon Surety Co. are appealing from the decision of the Court of
First Instance of Manila, Judge Magno S. Gatmaitan presiding, the dispositive part of which
reads as follows:
"In view whereof, judgment is rendered condemning defendant Go Tiong and Luzon Surety
Co., jointly and severally, to pay plaintiff the sum of P4,920 with legal interest from the date
of the filing of the complaint until fully paid; judgment is also rendered against Go Tiong to
pay the sum of P3,680 unto plaintiff, also with legal interest from the date of the filing of the
complaint until fully paid. Go Tiong is also condemned to pay the sum of P1,000 as attorney's
fees, plus costs."
The appeal was first taken to the Court of Appeals, the latter indorsing the case to us later
under the provisions of Section 17 (6) of Republic Act No. 296, on the ground that the issues
raised were purely questions of law.

Go Tiong owned a rice mill and warehouse, located at Mabini, Urdaneta, Pangasinan. On
February 4, 1953, he obtained a license to engage in the business of a bonded
warehouseman (Exhibit N). To secure the performance of his obligations as such bonded
warehouseman, the Luzon Surety Co. executed Guaranty Bond No. 294 in the Bum of
118,334 (Exhibit 0), conditioned particularly on the fulfillment by Go Tiong of his duly or
obligation to deliver to the depositors in his storage warehouse, the palay received by him
for storage, at any time demand is made, or to pay ihe market value thereof, in case he was
unable to return the same. The bond was executed on January 26, 1953. Go Tiong insured
the warehouse and the palay deposited therein with the Alliance Surety and Insurance
Company.

But prior to the issuance of the license to Go Tiong to operate as bonded warehouseman, he
had on several occasions received palay for deposit from plaintiff Ramon Gonzales, totalling
368 sacks, for which he issued receipts, Exhibits A, B, C, and D. After he was licensed as
bonded warehouseman, Go Tiong again received various deliveries of palay from plaintiff,
totalling 492 sacks, for which he issued the corresponding receipts, all the deliveries having a
grand total of 860 sacks, valued at P8,600 at the rate of P10 per sack.

On or about March 15, 1953, plaintiff demanded from Go Tiong the value of his deposits in
the amount of P8,600, but he was told to return after two days, which he did, but Go Tiong
again told him to come back. A few days later, the warehouse burned to the ground. Before
the lire, Go Tiong had been accepting deliveries of palay from other depositors and at the
time of the fire, there were 5,847 sacks of palay in the warehouse, in excess of the 5,000
sacks authorized under his license. The receipts issued by Go Tiong to the plaintiff were
ordinary receipts, not the "warehouse receipts" defined by the Warehouse Receipts Act (Act
No. 2137).

After the burning of the warehouse, the depositors of palay, including plaintiff, filed their
claims with the Bureau of. Commerce, and it would appear that with the proceeds of the
insurance policy, the Bureau of Commerce paid off some of the claims. Plaintiff's counsel
later withdrew his claim with the Bureau of Commerce, according to Go Tiong, because his
claim was denied by the Bureau, but according to the decision of the trial court, because
nothing came from plaintiff's efforts to have his claim paid. Thereafter, Gonzales filed the
present action against Go Tiong and the Luzon Surety fdr the sum of P8,600, the value of his
palay, with legal interest, damages in the sum of P5,000 and P1,500 as attorney's fees.
Gonzales later renewed his claim with the Bureau of Commerce (Exhibit S).

While the case was pending in court, Gonzales and Go Tiong entered into a contract of
amicable settlement to the effect that upon the settlement of all accounts due to him by Go
Hong, he, Gonzales, would have all actions pending against Go Tiong dismissed. Inasmuch as
Go Tiong failed to settle the accounts, Gonzales prosecuted his court action.

For purposes of reference, we reproduce the assignment of errors of Go Tiong, as well as the
assignment of errors of the Luzon Surety, all reading thus:
"I. The trial court erred in finding that plaintiff-appellee's claim is covered by the Bonded
Warehouse Law, Act 3893, as amended, and not by the Civil Code.

"II. The trial court erred in not exempting defendant-appellant Go Tiong for the loss of the
palay deposited, pursuant to the provisions of the New Civil Code."
* * * * * * *

"I. The trial court erred in not declaring that the amicable settlement by and between
plaintiff-appellee and defendant Go Tiong constituted a material alteration of the surety
bond of appellant Luzon Surety which extinguished and discharged its liability.

"II. The trial court erred in holding that the receipts for the palay received by Go Tiong,
though not in the form of "quedans" or warehouse receipts are chargeable against the surety
bond filed under the provisions of the General Bonded Warehouse Act (Act No. 3893 as
amended by Republic Act No. 247) as a result of a loss.

"III. The trial court erred in not holding that the plaintiff had renounced and abandoned his
rights under the Bonded Warehouse Act by the withdrawal of his claim from the Bureau of
Commerce and the execution of the 'amicable settlement'.

"IV. The trial court erred in not holding that the palay delivered to Go Tiong constitutes
gratuitous deposit which was extinguished upon the loss and destruction of the subject-
matter.

"V. The trial court erred in not declaring that the transaction between defendant Go Tiong
and plaintiff was more of a sale rather titan a deposit.

"VI. The trial court erred in declaring that the Luzon Surety Co., Inc., had not complied with
its undertaking despite the liquidation of all the claims by the Bureau of Commerce.

"VII. The lower court erred in adjudging the herein surety liable under the terms of the
Bond."
We shall discuss the assigned errors at the same time, considering the close relation between
them, although we do not propose to discuss and rule upon all of them. Both appellants urge
that plaintiff's claim is governed by the Civil Code and not by the Bonded Warehouse Act (Act
No. 3893, as amended by Republic Act No. 247), for the reason that, as already stated, what
Go Tiong issued to plaintiff were ordinary receipts, not the warehouse receipts contemplated
by the Warehouse Receipts Law, and because the deposits of palay of plaintiff were
gratuitous.

Act No. 3893 as amended is a special law regulating the business of receiving commodities
for storage and denning the rights and obligations of a bonded warehouse- man and those
transacting business with him. Consequently, any deposit made with him as a bonded
warehouseman must necessarily be governed by the provisions of Act No. 3893. The kind or
nature of the receipts issued by him for the deposits is not very material, much less decisive.
Though it is desirable that receipts issued by a bonded warehouseman should conform to the
provisions of the Warehouse Receipts Law, said provisions in our opinion are not mandatory
and indispensable in the sense that if they fell short of the requirements of the Warehouse
Receipts Act, then the commodities delivered for storage become ordinary deposits and will
not be governed by the provisions of the Bonded Warehouse Act. Under Section 1 of the
Warehouse Receipts Act, one would gather the impression that the issuance of a warehouse
receipt in the form provided by it is merely permissive and directory and not obligatory:
"SECTION 1. Persons who may issue receipts.Warehouse receipts may be issued by any
warehouseman.", and the Bonded Warehouse Act as amended permits the warehouseman
to issue any receipt, thus:

"* * *. 'receipt' as any receipt issued by a warehouseman for commodity delivered to him."
As the trial court well observed, as far as Go Tiong was concerned, the fact that the receipts
issued by him were not "quedans" is no valid ground for defense because he was the
principal obligor. Furthermore, as found by the trial court, Go Tiong had repeatedly promised
plaintiff to issue to him "quedans" and had assured him that he should not worry; and that
Go Tiong was in the habit of issuing ordinary receipts (not "quedans") to his depositors.

As to the contention that the deposits made by the plaintiff were free because he paid no
fees therefor, it would appear that Go Tiong induced plaintiff to deposit his palay in the
warehouse free of charge in order to promote his business and to attract other depositors, it
being understood that because of this accommodation, plaintiff would convince other palay
owners to deposit with Go Tiong.

Appellants contend that the burning of the warehouse was a fortuitous event and not due to
any fault of Go Tiong and that consequently, he should not be held liable, appellants
supporting the contention with the ruling in the case of La Sociedad Dalisay vs. De los Reyes,
55 Phil. 452, reading as follows:
"Inasmuch as the fire, according to the judgment appealed from, was neither intentional nor
due to the negligence of the appellant company or its officials; and it appearing from the
evidence that the then manager attempted to save the palay, the appellant company should
not be held responsible for damages resulting from said fire. ***."
The trial court correctly disposed of this same contention, thus:
"The defense that the palay was destroyed by fire .neither does. the Court consider to be
good for while the contract was in the nature of a deposit and the loss of the thing would
exempt the obligor in a contract of deposit to return the goods, this exemption from the
responsibility for the damages must be conditioned in his proof that the loss was by force
majeure, and without his fault. The Court does not see from the evidence that the proof is
clear on the legal exemption. On the contrary, the fact that he exceeded the limit of the
authorized deposit must have increased the risk and would militate against his defense of
nonliability. For this reason, the Court does not follow La Sociedad vs. De Los Santos, 55 Phil.
42 quoted by Go Tiong." (p. 3, Decision)
Considering the fact, as already stated, that prior to the burning of the warehouse, plaintiff
demanded the payment of the value of his palay from Go Tiong on two occasions but was put
off without any valid reason, under the circumstances, the better rule which we accept is the
following:
"* * * This rule proceeds upon the theory that the facts surrounding the care of the property
by a bailee are peculiarly within his knowledge and power to prove, and that the
enforcement of any other rule would impose great difficulties upon the bailors. * * * It is
illogical and unreasonable to hold that the presumption of negligence in case of this kind is
rebutted by the bailee by simply proving that the property bailed was destroyed by an
ordinary fire which broke out on the bailee's own premises, without regard to the care
exercised by the latter to prevent the fire, or to save the property after the commencement
of the fire. All the authorities seem to agree that the rule that there shall be a presumption of
negligence in bailment cases like the present one, where there is default in delivery or
accounting, for the goods is just a necessary one. * * * " (9 A.L.R. 566; see also Hanes vs.
Shapiro, 84 S.E. 33; J. Russel Mfg. Co. va. New Haven, S.B. Co., 50 N.Y. 211; Beck vs. Wilkins-
Ricks Co.,102 S.E. 313; Fleishman vs. Southern R. Co., 56 S.E. 974).
Besides, as observed by the trial court, the defendant violated the terms of his license by
accepting for deposit palay in excess of the limit authorized by his license, which fact must
have increased the risk.

The Luzon Surety claims that the amicable settlement by and between Gonzales and Go
Tiong constituted a material, alteration of its bond, thereby extinguishing and discharging its
liability. It is evident, however, that while there was an attempt to settle the case amicably,
the settlement was never consummated because Go Tiong failed to settle the accounts of
Gonzales to the Tatter's satisfaction. Consequently, said nonconsummated compromise
settlement does not discharge the surety:
"A compromise or settlement between the creditor or obligee and the principal, by which the
latter is discharged from liability, discharges the, sorely, * * *. But an unconsummated * * *
agreement to compromise, falling short of an effective settlement, will not discharge the
surety." (50 C. J. 185)
In relation to the failure of Go Tiong to issue the warehouse receipts contemplated by the
Warehouse Receipts Act, which failure, according to appellants, precluded plaintiff from
suing on the bond, reference may be made to Section 2 of Act No. 3893, defining receipt as
any receijjt issued by a warehouseman for commodity delivered to him, showing that the law
does not require as indispensable that a warehouse receipt be issued. Furthermore, Section
7 of said law provides that as long as the depositor is injured by a breach of any obligation of
the warehouseman, which obligation is secured by a bond, said depositor may sue on said
bond. In other words, the surety cannot avoid liability from the mere failure of the
warehouseman to issue the prescribed receipt. In the case of Andreson vs. Krueger, 212 N.W.
198, 199, it was held:
"The surety company concedes that the bond which it gave contains the statutory conditions.
The statute * * * requires that the bond'shall be conditioned upon the faithful
performance of the public local grain warehouseman of all the provisions of law relating to
the storage of grain by such warehouseman.'

"The surety company thereby made itself responsible for the performance by the
warehouseman of all the duties and obligations imposed upon him by the statute; and, if he
failed to perform any such duty to the loss or detriment of those who delivered grain for
storage, the surety company became liable therefor. Where the warehouseman receives
grain for storage and refuses to return or pay it, the fact that he failed to issue the receipt,
when the statute required him to issue on receiving it, is not available to the surety as a
defense against an action on the bond. The obligation of the surety covers the duty of the
warehouseman to issue the prescribed receipt, as well as the other duties imposed upon him
by the statute."
We deem it unnecessary to discuss and rule upon the other questions raised in the appeal. In
view of the foregoing, the appealed decision is hereby affirmed, with costs.

Paras, C. J., Padilla, Reyes, A., Bautista Angelo, Concepcion, Endencia, Reyes, J. B. L., and Felix,
JJ., concur.

Bengzon, J., concurs in the result.

SECOND DIVISION
[ G.R. No. 95536, March 23, 1992 ]
ANICETO G. SALUDO, JR., MARIA SALVACION SALUDO, LEOPOLDO G. SALUDO AND
SATURNINO G. SALUDO, PETITIONERS, VS. HON. COURT OF APPEALS, TRANS WORLD
AIRLINES, INC., AND PHILIPPINE AIRLINES, INC., RESPONDENTS.

D E C I S I O N
REGALADO, J.:
Assailed in this petition for review on certiorari is the decision in CA-G.R. CV No. 20951 of
respondent Court of Appeals
[1]
which affirmed the decision of the trial court
[2]
dismissing for
lack of evidence herein petitioners' complaint in Civil Case No. R-2101 of the then Court of
First Instance of Southern Leyte, Branch I.
The facts, as recounted by the court a quo and adopted by respondent court after
"considering the evidence on record," are as follows:
"After the death of plaintiffs' mother, Crispina Galdo Saludo, in Chicago, Illinois, (on) October
23, 1976 (Exh. A), Pomierski and Son Funeral Home of Chicago, made the necessary
preparations and arrangements for the shipment of the remains from Chicago to the
Philippines. The funeral home had the remains embalmed (Exh. D) and secured a permit for
the disposition of dead human body on October 25, 1976 (Exh. C). Philippine Vice Consul in
Chicago, Illinois, Bienvenido M. Llaneta, at 3:00 p.m. on October 26, 1976 at the Pomierski &
Son Funeral Home, sealed the shipping case containing a hermetically sealed casket that is
airtight and waterproof wherein was contained the remains of Crispina Saludo Galdo (sic)
(Exh. B). On the same date, October 26, 1976, Pomierski brought the remains to C.M.A.S.
(Continental Mortuary Air Services) at the airport (Chicago) which made the necessary
arrangements such as flights, transfers, etc.; C.M.A.S. is a national service used by
undertakers throughout the nation (U.S.A.), they furnish the air pouch which the casket is
enclosed in, and they see that the remains are taken to the proper air freight terminal (Exh.
6-TWA). C.M.A.S. booked the shipment with PAL thru the carrier's agent Air Care
International, with Pomierski F.H. as the shipper and Mario (Maria) Saludo as the consignee.
PAL, Airway Bill No. 079-01180454 Ordinary was issued wherein the requested routing was
from Chicago to San Francisco on board TWA Flight 131 of October 27, 1976, and from San
Francisco to Manila on board PAL Flight No. 107 of the same date, and from Manila to Cebu
on board PAL Flight 149 of October 29, 1976 (See Exh. E, also Exh. 1-PAL).
"In the meantime, plaintiffs Maria Salvacion Saludo and Saturnino Saludo, thru a travel agent,
were booked with United Airlines from Chicago to California, and with PAL from California to
Manila. She then went to the funeral director of Pomierski Funeral Home who had her
mother's remains and she told the director that they were booked with United Airlines. But
the director told her that the remains were booked with TWA flight to California. This upset
her, and she and her brother had to change reservations from UA to the TWA flight after she
confirmed by phone that her mother's remains would be on that TWA flight. They went to
the airport and watched from the look-out area. She saw no body being brought. So, she
went to the TWA counter again, and she was told there was no body on that flight.
Reluctantly, they took the TWA flight upon assurance of her cousin, Ani Bantug, that he
would look into the matter and inform her about it on the plane or have it radioed to her.
But no confirmation from her cousin reached her that her mother was on the West Coast.
"Upon arrival at San Francisco at about 5:00 p.m., she went to the TWA counter there to
inquire about her mother's remains. She was told they did not know anything about it.
"She then called Pomierski that her mother's remains were not at the West Coast terminal,
and Pomierski immediately called C.M.A.S., which in a matter of 10 minutes informed him
that the remains were on a plane to Mexico City, that there were two bodies at the terminal,
and somehow they were switched; he relayed this information to Miss Saluda in California;
later C.M.A.S. called and told him they were sending the remains back to California via Texas
(see Exh. 6-TWA).
"It turned out that TWA had carried a shipment under PAL Airway Bill No. 079-ORD-
01180454 on TWA Flight 603 of October 27, 1976, a flight earlier than TWA Flight 131 of the
same date. TWA delivered or transferred the said shipment said to contain human remains to
PAL at 1400H or 2:00 p.m. of the same date, October 27, 1976 (See Exh. 1?TWA). 'Due to a
switch(ing) in Chicago', this shipment was withdrawn from PAL by CMAS at 1805H (or 6:05
p.m.) of the same date, October 27 (Exh. 3-PAL, see Exh. 3-a-PAL).
"What transpired at the Chicago (A)irport is explained in a memo or incident report by
Pomierski (Exh. 6-TWA) to Pomierski's lawyers who in turn referred to said memo and
enclosed it in their (Pomierski's lawyers) answer dated July 18, 1981 to herein plaintiff's
counsel (See Exh. 5-TWA). In that memo or incident report (Exh. 6-TWA), it is stated that the
remains (of Crispina Saludo) were taken to CMAS at the airport; that there were two bodies
at the (Chicago Airport) terminal, and somehow they were switched, that the remains (of
Crispina Saludo) were on a plane to Mexico City; that CMAS is a national service used by
undertakers throughout the nation (U.S.A.), makes all the necessary arrangements, such as
flights, transfers, etc., and see(s) to it that the remains are taken to the proper air freight
terminal.
"The following day October 28, 1976, the shipment or remains of Crispina Saludo arrived (in)
San Francisco from Mexico on board American Airlines. This shipment was transferred to or
received by PAL at 1945H or 7:45 p.m. (Exh. 2-PAL, Exh. 2-a-PAL). This casket bearing the
remains of Crispina Saludo, which was mistakenly sent to Mexico and was opened (there),
was resealed by Crispin F. Padagas for shipment to the Philippines (See Exh. B-1). The
shipment was immediately loaded on PAL flight for Manila that same evening and arrived (in)
Manila on October 30, 1976, a day after its expected arrival on October 29, 1976."
[3]

In a letter dated December 15, 1976,
[4]
petitioners' counsel informed private respondent
Trans World Airlines (TWA) of the misshipment and eventual delay in the delivery of the
cargo containing the remains of the late Crispina Saludo, and of the discourtesy of its
employees to petitioners Maria Salvacion Saludo and Saturnino Saludo. In a separate letter
on June 10, 1977 addressed to co-respondent Philippine Airlines (PAL),
[5]
petitioners stated
that they were holding PAL liable for said delay in delivery and would commence judicial
action should no favorable explanation be given.
Both private respondents denied liability. Thus, a damage suit
[6]
was filed by petitioners
before the then Court of First Instance, Branch III, Leyte, praying for the award of actual
damages of P50,000.00, moral damages of P1,000,000.00, exemplary damages, attorney's
fees and costs of suit.
As earlier stated, the court below absolved the two respondent airline companies of liability.
The Court of Appeals affirmed the decision of the lower court in toto, and in a subsequent
resolution,
[7]
denied herein petitioners' motion for reconsideration for lack of merit.
In predictable disagreement and dissatisfaction with the conclusions reached by respondent
appellate court, petitioners now urge this Court to review the appealed decision and to
resolve whether or not (1) the delay in the delivery of the casketed remains of petitioners'
mother was due to the fault of respondent airline companies, (2) the one-day delay in the
delivery of the same constitutes contractual breach as would entitle petitioners to damages,
(3) damages are recoverable by petitioners for the humiliating, arrogant and indifferent acts
of the employees of TWA and PAL, and (4) private respondents should be held liable for
actual, moral and exemplary damages, aside from attorney's fees and litigation expenses.
[8]

At the outset and in view of the spirited exchanges of the parties on this aspect, it is to be
stressed that only questions of law may be raised in a petition filed in this Court to review
on certiorari the decision of the Court of Appeals.
[9]
This being so, the factual findings of the
Court of Appeals are final and conclusive and cannot be reviewed by the Supreme Court. The
rule, however, admits of established exceptions, to wit: (a) where there is grave abuse of
discretion; (b) when the finding is grounded entirely on speculations, surmises or
conjectures; (c) when the inference made is manifestly mistaken, absurd or impossible; (d)
when the judgment of the Court of Appeals was based on a misapprehension of facts; (e)
when the factual findings are conflicting; (f) when the Court of Appeals, in making its
findings, went beyond the issues of the case and the same are contrary to the admissions of
both appellant and appellee;
[10]
(g) when the Court of Appeals manifestly overlooked certain
relevant facts not disputed by the parties and which, if properly considered, would justify a
different conclusion;
[11]
and (h) where the findings of fact of the Court of Appeals are
contrary to those of the trial court, or are mere conclusions without citation of specific
evidence, or where the facts set forth by the petitioner are not disputed by the respondent,
or where the findings of fact of the Court of Appeals are premised on the absence of
evidence and are contradicted by the evidence on record.
[12]

To distinguish, a question of law is one which involves a doubt or controversy on what the
law is on a certain state of facts; and, a question of fact, contrarily, is one in which there is a
doubt or difference as to the truth or falsehood of the alleged facts.
[13]
One test, it has been
held, is whether the appellate court can determine the issue raised without reviewing or
evaluating the evidence, in which case it is a question of law, otherwise it will be a question
of fact.
[14]

Respondent airline companies object to the present recourse of petitioners on the ground
that this petition raises only factual questions.
[15]
Petitioners maintain otherwise or,
alternatively, they are of the position that, assuming that the petition raises factual
questions, the same are within the recognized exceptions to the general rule as would render
the petition cognizable and worthy of review by the Court.
[16]

Since it is precisely the soundness of the inferences or conclusions that may be drawn from
the factual issues which are here being assayed, we find that the issues raised in the instant
petition indeed warrant a second look if this litigation is to come to a reasonable
denouement. A discussion seriatim of said issues will further reveal that the sequence of the
events involved is in effect disputed. Likewise to be settled is whether or not the conclusions
of the Court of Appeals subject of this review indeed find evidentiary and legal support.
I. Petitioners fault respondent court for "not finding that private respondents failed to
exercise extra?ordinary diligence required by law which resulted in the switching and/or
misdelivery of the remains of Crispina Saludo to Mexico causing gross delay in its shipment to
the Philippines, and consequently, damages to petitioners."
[17]

Petitioners allege that private respondents received the casketed remains of petitioners'
mother on October 26, 1976, as evidenced by the issuance of PAL Air Waybill No. 079-
01180454
[18]
by Air Care International as carrier's agent; and from said date, private
respondents were charged with the responsibility to exercise extraordinary diligence so
much so that for the alleged switching of the caskets on October 27, 1976, or one day after
private respondents received the cargo, the latter must necessarily be liable.
To support their assertion, petitioners rely on the jurisprudential dictum, both under
American and Philippine law, that "(t)he issuance of a bill of lading carries the presumption
that the goods were delivered to the carrier issuing the bill, for immediate shipment, and it is
nowhere questioned that a bill of lading is prima facie evidence of the receipt of the goods by
the carrier. x x x In the absence of convincing testimony establishing mistake, recitals in the
bill of lading showing that the carrier received the goods for shipment on a specified date
control (13 C.J.S. 235)."
[19]

A bill of lading is a written acknowledgment of the receipt of the goods and an agreement to
transport and deliver them at a specified place to a person named or on his order. Such
instrument may be called a shipping receipt, forwarder's receipt and receipt for
transportation.
[20]
The designation, however, is immaterial. It has been held that freight
tickets for bus companies as well as receipts for cargo transported by all forms of
transportation, whether by sea or land, fall within the definition. Under the Tariff and
Customs Code, a bill of lading includes airway bills of lading.
[21]
The two-fold character of a
pill of lading is all too familiar: it is a receipt as to the quantity and description of the goods
shipped and a contract to transport the goods to the consignee or other person therein
designated, on the terms specified in such instrument.
[22]

Logically, since a bill of lading acknowledges receipt of goods to be transported, delivery of
the goods to the carrier normally precedes the issuance of the bill; or, to some extent,
delivery of the good sand issuance of the bill are regarded in commercial practice as
simultaneous acts.
[23]
However, except as may be prohibited by law, there is nothing to
prevent an inverse order of events, that is, the execution of the bill of lading even prior to
actual possession and control by the carrier of the cargo to be transported. There is no law
which requires that the delivery of the goods for carriage and the issuance of the covering bill
of lading must coincide in point of time or, for that matter, that the former should precede
the latter.
Ordinarily, a receipt is not essential to a complete delivery of goods to the carrier for
transportation but, when issued, is competent and prima facie, but not conclusive, evidence
of delivery to the carrier. A bill of lading, when properly executed and delivered to a shipper,
is evidence that the carrier has received the goods described therein for shipment. Except as
modified by statute, it is a general rule as to the parties to a contract of carriage of goods in
connection with which a bill of lading is issued reciting that goods have been received for
transportation, that the recital being in essence a receipt alone, is not conclusive, but may be
explained, varied or contradicted by parol or other evidence.
[24]

While we agree with petitioners' statement that "an airway bill estops the carrier from
denying receipt of goods of the quantity and quality described in the bill," a further reading
and a more faithful quotation of the authority cited would reveal that "(a) bill of lading may
contain constituent elements of estoppel and thus become something more than a contract
between the shipper and the carrier. x x x (However), as between the shipper and the
carrier, when no goods have been delivered for shipment no recitals in the bill can estop the
carrier from showing the true facts x x x. Between the consignor of goods and a receiving
carrier, recitals in a bill of lading as to the goods shipped raise only a rebuttable presumption
that such goods were delivered for shipment. As between the consignor and a receiving
carrier, the fact must outweigh the recital."
[25]
(Emphasis supplied.)
For this reason, we must perforce allow explanation by private respondents why, despite the
issuance of the airway bill and the date thereof, they deny having received the remains of
Crispina Saludo on October 26, 1976 as alleged by petitioners.
The findings of the trial court, as favorably adopted by the Court of Appeals and which we
have earlier quoted, provide us with the explanation that sufficiently overcomes the
presumption relied on by petitioners in insisting that the remains of their mother were
delivered to and received by private respondents on October 26, 1976. Thus -
"x x x Philippine Vice Consul in Chicago, Illinois, Bienvenido M. Llaneta, at 3:00 p.m. on
October 26, 1976 at the Pomierski & Son Funeral Home, sealed the shipping case containing
a hermetically sealed casket that is airtight and waterproof wherein was contained the
remains of Crispina Saludo Galdo (sic) (Exh. B). On the same date October 26, 1976,
Pomierski brought the remains to C.M.A.S. (Continental Mortuary Air Services) at the airport
(Chicago) which made the necessary arrangements such as flights, transfers, etc; C.M.A.S. is a
national service used by undertakers throughout the nation (U.S.A.), they furnish the air
pouch which the casket is enclosed in, and they see that the remains are taken to the proper
air freight terminal (Exh. G-TWA). C.M.A.S. booked the shipment with PAL thru the carrier's
agent Air Care International, with Pomierski F.H. as the shipper and Mario (Maria) Saludo as
the consignee. PAL Airway Bill No. 079-01180454 Ordinary was issued wherein the requested
routing was from Chicago to San Francisco on board TWA Flight 131 of October 27, 1976, and
from San Francisco to Manila on board PAL Flight No. 107 of the same date, and from Manila
to Cebu on board PAL Flight 149 of October 29, 1976 (See Exh. E, also Exh. 1-
PAL)."
[26]
(Emphasis ours.)
Moreover, we are persuaded to believe private respondent PAL's account as to what
transpired on October 26, 1976:
"x x x Pursuant thereto, on 26 October 1976, CMAS acting upon the instruction of Pomierski,
F.H., the shipper requested booking of the casketed remains of Mrs. Cristina (sic) Saludo on
board PAL's San Francisco-Manila Flight No. PR 107 on October 27, 1976.
"2. To signify acceptance and confirmation of said booking, PAL issued to said Pomierski F.H.,
PAL Airway Bill No. 079-01180454 dated October 27, 1976 (sic, '10/26/76'). PAL confirmed
the booking and transporting of the shipment on board of its Flight PR 107 on October 27,
1976 on the basis of the representation of the shipper and/or CMAS that the said cargo
would arrive in San Francisco from Chicago on board United Airlines Flight US 121 on 27
October 1976."
[27]

In other words, on October 26, 1976 the cargo containing the casketed remains of Crispina
Saludo was booked for PAL Flight Number PR-107 leaving San Francisco for Manila on
October 27, 1976. PAL Airway Bill No. 079-01180454 was issued, not as evidence of receipt of
delivery of the cargo on October 26, 1976, but merely as a confirmation of the booking thus
made for the San Francisco-Manila flight scheduled on October 27, 1976. Actually, it was not
until October 28, 1976 that PAL received physical delivery of the body at San Francisco, as
duly evidenced by the Interline Freight Transfer Manifest of the American Airline Freight
System and signed for by Virgilio Rosales at 1945H, or 7:45 P.M. on said date.
[28]

Explicit is the rule under Article 1736 of the Civil Code that the extraordinary responsibility of
the common carrier begins from the time the goods are delivered to the carrier. This
responsibility remains in full force and effect even when they are temporarily unloaded or
stored in transit, unless the shipper or owner exercises the right of
stoppage in transitu,
[29]
and terminates only after the lapse of a reasonable time for the
acceptance of the goods by the consignee or such other person entitled to receive
them.
[30]
And, there is delivery to the carrier when the goods are ready for and have been
placed in the exclusive possession, custody and control of the carrier for the purpose of their
immediate transportation and the carrier has accepted them.
[31]
Where such a delivery has
thus been accepted by the carrier, the liability of the common carrier
commences eo instanti.
[32]

Hence, while we agree with petitioners that the extraordinary diligence statutorily required
to be observed by the carrier instantaneously commences upon delivery of the goods
thereto, for such duty to commence there must in fact have been delivery of the cargo
subject of the contract of carriage. Only when such fact of delivery has been unequivocally
established can the liability for loss, destruction or deterioration of goods in the custody of
the carrier, absent the excepting causes under Article 1734, attach and the presumption of
fault of the carrier under Article 1735 be invoked.
As already demonstrated, the facts in the case at bar belie the averment that there was
delivery of the cargo to the carrier on October 26, 1976. Rather, as earlier explained, the
body intended to be shipped as agreed upon was really placed in the possession and control
of PAL on October 28, 1976 and it was from that date that private respondents became
responsible for the agreed cargo under their undertakings in PAL Airway Bill No. 079--
01180454. Consequently, for the switching of caskets prior thereto which was not caused by
them, and subsequent events caused thereby, private respondents cannot be held liable.
Petitioners, proceeding on the premise that there was delivery of the cargo to private
respondents on October 26, 1976 and that the latter's extraordinary responsibility had by
then become operative, insist on foisting the blame on private respondents for the switching
of the two caskets which occurred on October 27, 1976. It is argued that since there is no
clear evidence establishing the fault of Continental Mortuary Air Services (CMAS) for the mix-
up, private respondents are presumably negligent pursuant to Article 1735 of the Civil Code
and, for failure to rebut such presumption, they must necessarily be held liable; or, assuming
that CMAS was at fault, the same does not absolve private respondents of liability because
whoever brought the cargo to the airport or loaded it on the plane did so as agent of private
respondents.
This contention is without merit. As pithily explained by the Court of Appeals:
"The airway bill expressly provides that 'Carrier certifies goods described below were
received for carriage', and said cargo was casketed human remains of Crispina Saludo, with
Maria Saludo as Consignee; Pomierski F.H. as Shipper; Air Care International as carrier's
agent. On the face of the said airway bill, the specific flight numbers, specific routes of
shipment and dates of departure and arrival were typewritten, to wit: Chicago TWA Flight
131/27 to San Francisco and from San Francisco by PAL 107 on October 27, 1976 to
Philippines and to Cebu via PAL Flight 149 on October 29, 1976. The airway bill also contains
the following typewritten words, as follows: all documents have been examined (sic). Human
remains of Crispina Saludo. Please return back (sic) first available flight to SFO.
"But, as it turned out and was discovered later the casketed human remains which was
issued PAL Airway Bill #079-1180454 was not the remains of Crispina Saludo, the casket
containing her remains having been shipped to Mexico City.
"However, it should be noted that, Pomierski F.H., the shipper of Mrs. Saludo's remains,
hired Continental Mortuary Services (hereafter referred to as C.M.A.S.), which is engaged in
the business of transporting and forwarding human remains. Thus, C.M.A.S. made all the
necessary arrangements - such as flights, transfers, etc. for shipment of the remains of
Crispina Saludo.
'The remains were taken on October 26th, 1976, to C.M.A.S. at the airport. These people
made all the necessary arrangements, such as flights, transfers, etc. This is a national service
used by undertakers throughout the nation. They furnished the air pouch which the casket is
enclosed in, and they see that the remains are taken to the proper air freight terminal. I was
very surprised when Miss Saludo called me to say that the remains were not at the west
coast terminal. I immediately called C.M.A.S. They called me back in a matter of ten minutes
to inform me that the remains were on a plane to Mexico City. The man said that there were
two bodies at the terminal, and somehow they were switched. x x x (Exh. 6-'TWA', which is
the memo or incident report enclosed in the stationery of Walter Pomierski & Sons Ltd.)'
"Consequently, when the cargo was received from C.M.A.S. at the Chicago airport terminal
for shipment, which was supposed to contain the remains of Crispina Saludo, Air Care
International and/or TWA, had no way of determining its actual contents, since the casket
was hermetically sealed by the Philippine Vice?Consul in Chicago and in an air pouch of
C.M.A.S., to the effect that Air Care International and/or TWA had to rely on the information
furnished by the shipper regarding the cargo's content. Neither could Air Care International
and/or TWA open the casket for further verification, since they were not only without
authority to do so, but even prohibited.
"Thus, under said circumstances, no fault and/or negligence can be attributed to PAL (even if
Air Care International should be considered as an agent of PAL) and/or TWA, the entire fault
or negligence being exclusively with C.M.A.S."
[33]
(Emphasis supplied.)
It can correctly and logically be concluded, therefore that the switching occurred or, more
accurately, was discovered on October 27, 1976; and based on the above findings of the
Court of Appeals, it happened while the cargo was still with CMAS, well before the same was
placed in the custody of private respondents.
Thus, while the Air Cargo Transfer Manifest of TWA of October 27, 1976
[34]
was signed by
Garry Marcial of PAL at 1400H, or 2:00 P.M., on the same date, thereby indicating
acknowledgment by PAL of the transfer to them by TWA of what was in truth the erroneous
cargo, said misshipped cargo was in fact withdrawn by CMAS from PAL as shown by the
notation on another copy of said manifest
[35]
stating "Received by CMAS - Due to switch in
Chicago 10/27-1805H," the authenticity of which was never challenged. This shows that said
misshipped cargo was in fact withdrawn by CMAS from PAL and the correct shipment
containing the body of Crispina Saludo was received by PAL only on October 28, 1976, at
1945H, or 7:45 P.M., per American Airlines Interline Freight Transfer Manifest No.
AA204312.
[36]

Witness the deposition of TWA's ramp serviceman, Michael Giosso, on this matter:
"ATTY. JUAN COLLAS, JR.:
On that date, do (sic) you have occasion to handle or deal with the transfer of cargo from
TWA Flight No. 603 to PAL San Francisco?
MICHAEL GIOSSO:
Yes, I did.
ATTY. JUAN COLLAS, JR.:
What was your participation with the transfer of the cargo?
MICHAEL GIOSSO:
I manifested the freight on a transfer manifest and physically moved it to PAL and concluded
the transfer by signing it off.
ATTY. JUAN COLLAS, JR.:
You brought it there yourself?
MICHAEL GIOSSO:
Yes sir.
ATTY. JUAN COLLAS, JR.:
Do you have anything to show that PAL received the cargo from TWA on October 27, 1976?
MICHAEL GIOSSO:
Yes, I do.
(Witness presenting a document)
ATTY. JUAN COLLAS, JR.:
For purposes of clarity, Exhibit I is designated as Exhibit I-TWA.
x x x
ATTY. JUAN COLLAS, JR.:
This Exhibit I-TWA, could you tell what it is what it shows?
MICHAEL GIOSSO:
It shows transfer of manifest on 10-27-76 to PAL at 1400 and verified with two signatures as
it completed the transfer.
ATTY. JUAN COLLAS, JR.:
Very good. Who was the PAL employee who received the cargo?
MICHAEL GIOSSO:
The name is Garry Marcial."
[37]

The deposition of Alberto A. Lim, PAL's cargo supervisor at San Francisco, as deponent-
witness for PAL, makes this further clarification:
"ATTY. CESAR P. MANALAYSAY:
You mentioned Airway Bill, Mr. Lim. I am showing to you a PAL Airway Bill Number 01180454
which for purposes of evidence, I would like to request that the same be marked as evidence
Exhibit I for PAL.
x x x
In what circumstances did you encounter Exhibit I-PAL?
ALBERTO A. LIM:
If I recall correctly, I was queried by Manila, our Manila office with regard to a certain
complaint that a consignee filed that this shipment did not arrive on the day that the
consignee expects the shipment to arrive.
ATTY. CESAR P. MANALAYSAY:
Okay. Now, upon receipt of that query from your Manila office, did you conduct any
investigation to pinpoint the possible causes of mishandling?
ALBERTO A. LIM:
Yes.
x x x
ATTY. CESAR P. MANALAYSAY:
What is the result of your investigation?
ALBERTO A. LIM:
In the course of my investigation. I found that we received the body on October 28, 1976,
from American Airlines.
ATTY. CESAR P. MANALAYSAY:
What body are you referring to?
x x x
ALBERTO A. LIM:
The remains of Mrs. Cristina (sic) Saludo.
ATTY. CESAR P. MANALAYSAY:
Is that the same body mentioned in this Airway Bill?
ALBERTO A. LIM:
Yes.
ATTY. CESAR P MANALAYSAY:
What time did you receive said body on October 28, 1976?
ALBERTO A. LIM:
If I recall correctly, approximately 7:45 of October 28, 1976.
ATTY. CESAR P. MANALAYSAY:
Do you have any proof with you to back the statement?
ALBERTO A. LIM:
Yes. We have on our records a Transfer Manifest from American Airlines Number 204312
showing that we received a human remains shipment belong to Mrs. Cristina (sic) Saludo or
the human remains of Mrs. Cristina (sic) Saludo.
ATTY. CESAR P. MANALAYSAY:
At this juncture, may I request that the Transfer Manifest referred to by the witness be
marked as an evidence as Exhibit II-PAL.
x x x
Mr. Lim, yesterday your co-defendant TWA presented as their Exhibit I evidence tending to
show that on October 27, 1976 at about 2:00 in the afternoon they delivered to you a cargo
bearing human remains. Could you go over this Exhibit I and please give us your comments as
to that exhibit?
ATTY. ALBERTO C. MENDOZA:
That is a vague question. I would rather request that counsel propound specific questions
rather than asking for comments on Exhibit I-TWA.
ATTY. CESAR P. MANALAYSAY:
In that case, I will reform my question. Could you tell us whether TWA in fact delivered to
you the human remains as indicated in that Transfer Manifest?
ALBERTO A. LIM:
Yes, they did.
ATTY. CESAR P. MANALAYSAY:
I noticed that the Transfer Manifest of TWA Marked as Exhibit I-TWA bears the same
numbers or the same entries as the Airway Bill marked as Exhibit I-A PAL tending to show
that this is the human remains of Mrs Cristina (sic) Saludo. Could you tell us whether this is
true?
ALBERTO A. LIM:
It is true that we received human remains shipment from TWA as indicated on this Transfer
Manifest. But in the course of investigation, it was found out that the human remains
transferred to us is not the remains of Mrs. Cristina (sic) Saludo which is the reason why we
did not board it on our flight."
[38]

Petitioners consider TWA's statement that "it had to rely on the information furnished by the
shipper" a lame excuse and that its failure to prove that its personnel verified and identified
the contents of the casket before loading the same constituted negligence on the part of
TWA.
[39]

We uphold the favorable consideration by the Court of Appeals of the following findings of
the trial court:
"It was not (to) TWA, but to C.M.A.S. that the Pomierski & Son Funeral Home delivered the
casket containing the remains of Crispina Saludo. TWA would have no knowledge therefore
that the remains of Crispina Saludo were not the ones inside the casket that was being
presented to it for shipment. TWA would have to rely on the representations of C.M.A.S. The
casket was hermetically sealed and also sealed by the Philippine Vice Consul in Chicago. TWA
or any airline for that matter would not have opened such a sealed casket just for the
purpose of ascertaining whose body was inside and to make sure that the remains inside
were those of the particular person indicated to be by C.M.A.S. TWA had to accept whatever
information was being furnished by the shipper or by the one presenting the casket for
shipment. And so as a matter of fact, TWA carried to San Francisco and transferred to
defendant PAL a shipment covered by or under PAL Airway Bill No. 079-ORD-01180454, the
airway bill for the shipment of the casketed remains of Crispina Saludo. Only, it turned out
later, while the casket was already with PAL, that what was inside the casket was not the
body of Crispina Saludo so much so that it had to be withdrawn by C.M.A.S. from PAL. The
body of Crispina Saludo had been shipped to Mexico. The casket containing the remains of
Crispina Saludo, was transshipped from Mexico and arrived in San Francisco the following
day on board American Airlines. It was immediately loaded by PAL on its flight for Manila.
"The foregoing points at C.M.A.S., not defendant TWA much less defendant PAL, as the ONE
responsible for the switching or mix-up of the two bodies at the Chicago Airport terminal,
and started a chain reaction of the misshipment of the body of Crispina Saludo and a one-day
delay in the delivery thereof to its destination.
[40]

Verily, no amount of inspection by respondent airline companies could have guarded against
the switching that had already taken place. Or, granting that they could have opened the
casket to inspect its contents, private respondents had no means of ascertaining whether the
body therein contained was indeed that of Crispina Saludo except, possibly, if the body was
that of a male person and such fact was visually apparent upon opening the casket. However,
to repeat, private respondents had no authority to unseal and open the same nor did they
have any reason or justification to resort thereto.
It is the right of the carrier to require good faith on the part of those persons who deliver
goods to be carried, or enter into contracts with it, and inasmuch as the freight may depend
on the value of the article to be carried, the carrier ordinarily has the right to inquire as to its
value. Ordinarily, too, it is the duty of the carrier to make inquiry as to the general nature of
the articles shipped and of their value before it consents to carry them; and its failure to do
so cannot defeat the shipper's right to recovery of the full value of the package if lost, in the
absence of showing of fraud or deceit on the part of the shipper. In the absence of more
definite information, the carrier has the right to accept shipper's marks as to the contents of
the package offered for transportation and is not bound to inquire particularly about them in
order to take advantage of a false classification and where a shipper expressly represents the
contents of a package to be of a designated character, it is not the duty of the carrier to ask
for a repetition of the statement nor disbelieve it and open the box and see for
itself.
[41]
However, where a common carrier has reasonable ground to suspect that the
offered goods are of a dangerous or illegal character, the carrier has the right to know the
character of such goods and to insist on an inspection, if reasonable and practical under the
circumstances, as a condition of receiving and transporting such goods.
[42]

It can safely be said then that a common carrier is entitled to fair representation of the
nature and value of the goods to be carried, with the concomitant right to rely thereon, and
further noting at this juncture that a carrier has no obligation to inquire into the correctness
or sufficiency of such information.
[43]
The consequent duty to conduct an inspection thereof
arises in the event that there should be reason to doubt the veracity of such representations.
Therefore, to be subjected to unusual search, other than the routinary inspection procedure
customarily undertaken, there must exist proof that would justify cause for apprehension
that the baggage is dangerous as to warrant exhaustive inspection, or even refusal to accept
carriage of the same; and it is the failure of the carrier to act accordingly in the face of such
proof that constitutes the basis of the common carrier's liability.
[44]

In the case at bar, private respondents had no reason whatsoever to doubt the truth of the
shipper's representations. The airway bill expressly providing that "carrier certifies goods
received below were received for carriage," and that the cargo contained "casketed human
remains of Crispina Saludo," was issued on the basis of such representations. The reliance
thereon by private respondents was reasonable and, for so doing, they cannot be said to
have acted negligently. Likewise, no evidence was adduced to suggest even an iota of
suspicion that the cargo presented for transportation was anything other than what it was
declared to be, as would require more than routine inspection or call for the carrier to insist
that the same be opened for scrutiny of its contents per declaration.
Neither can private respondents be held accountable on the basis of petitioners'
preposterous proposition that whoever brought the cargo to the airport or loaded it on the
airplane did so as agent of private respondents, so that even if CMAS whose services were
engaged for the transit arrangements for the remains was indeed at fault, the liability
therefor would supposedly still be attributable to private respondents.
While we agree that the actual participation of CMAS has been sufficiently and correctly
established, to hold that it acted as agent for private respondents would be both an
inaccurate appraisal and an unwarranted categorization of the legal position it held in the
entire transaction.
It bears repeating that CMAS was hired to handle all the necessary shipping arrangements for
the transportation of the human remains of Crispina Saludo to Manila. Hence, it was to CMAS
that, the Pomierski & Son Funeral Home, as shipper, brought the remains of petitioners'
mother for shipment, with Maria Saludo as consignee. Thereafter, CMAS booked the
shipment with PAL through the carrier's agent, Air Care International.
[45]
With its aforestated
functions, CMAS may accordingly be classified as a forwarder which, by accepted commercial
practice, is regarded as an agent of the shipper and not of the carrier. As such, it merely
contracts for the transportation of goods by carriers, and has no interest in the freight but
receives compensation from the shipper as his agent.
[46]

At this point, it can be categorically stated that, as culled from the findings of both the trial
court and appellate courts, the entire chain of events which culminated in the present
controversy was not due to the fault or negligence of private respondents. Rather, the facts
of the case would point to CMAS as the culprit. Equally telling of the more likely possibility of
CMAS' liability is petitioners' letter to and demanding an explanation from CMAS regarding
the statement of private respondents laying the blame on CMAS for the incident, portions of
which, reading as follows:
"x x x we were informed that the unfortunate a mix-up occurred due to your negligence. x x
x.
"Likewise, the two airlines pinpoint the responsibility upon your agents. Evidence were
presented to prove that allegation.
"On the face of this overwhelming evidence we could and should have filed a case against
you. x x x."
[47]

clearly allude to CMAS as the party at fault. This is tantamount to an admission by petitioners
that they consider private respondents without fault, or is at the very least indicative of the
fact that petitioners entertained serious doubts as to whether herein private respondents
were responsible for the unfortunate turn of events.
Undeniably, petitioners' grief over the death of their mother was aggravated by the
unnecessary inconvenience and anxiety that attended their efforts to bring her body home
for a decent burial. This is unfortunate and calls for sincere commiseration with petitioners.
But, much as we would like to give them consolation for their undeserved distress, we are
barred by the inequity of allowing recovery of the damages prayed for by them at the
expense of private respondents whose fault or negligence in the very acts imputed to them
has not been convincingly and legally demonstrated.
Neither are we prepared to delve into, much less definitively rule on, the possible liability of
CMAS as the evaluation and adjudication of the same is not what is presently at issue here
and is best deferred to another time and addressed to another forum.
II. Petitioners further fault the Court of Appeals for ruling that there was no contractual
breach on the part of private respondents as would entitle petitioners to damages.
Petitioners hold that respondent TWA, by agreeing to transport the remains of petitioners'
mother on its Flight 131 from Chicago to San Francisco on October 27, 1976, made itself a
party to the contract of carriage and, therefore, was bound by the terms of the issued airway
bill. When TWA undertook to ship the remains on its Flight 603, ten hours earlier than
scheduled, it supposedly violated the express agreement embodied in the airway bill. It was
allegedly this breach of obligation which compounded, if not directly caused, the switching of
the caskets.
In addition, petitioners maintain that since there is no evidence as to who placed the body on
board Flight 603, or that CMAS actually put the cargo on that flight, or that the two caskets at
the Chicago airport were to be transported by the same airline, or that they came from the
same funeral home, or that both caskets were received by CMAS, then the employees or
agents of TWA presumably caused the mix-up by loading the wrong casket on the plane. For
said error, they contend, TWA must necessarily be presumed negligent and this presumption
of negligence stands undisturbed unless rebutting evidence is presented to show that the
switching or misdelivery was due to circumstances that would exempt the carrier from
liability.
Private respondent TWA professes otherwise. Having duly delivered or transferred the cargo
to its co-respondent PAL on October 27, 1976 at 2:00 P.M., as supported by the TWA
Transfer Manifest, TWA faithfully complied with its obligation under the airway bill. Said
faithful compliance was not affected by the fact that the remains were shipped on an earlier
flight as there was no fixed time for completion of carriage stipulated on. Moreover, the
carrier did not undertake to carry the cargo aboard any specified aircraft, in view of the
condition on the back of the airway bill which provides:
"CONDITIONS OF CONTRACT
x x x
"It is agreed that no time is fixed for the completion of carriage hereunder and that Carrier
may without notice substitute alternate carriers or aircraft. Carrier assumes no obligation to
carry the goods by any specified aircraft or over any particular route or routes or to make
connection at any point according to any particular schedule, and Carrier is hereby
authorized to select, or deviate from the route or routes of shipment, notwithstanding that
the same may be stated on the face hereof. The shipper guarantees payment of all charges
and advances."
[48]

Hence, when respondent TWA shipped the body on an earlier flight and on a different
aircraft, it was acting well within its rights. We find this argument tenable.
The contention that there was contractual breach on the part of private respondents is
founded on the postulation that there was ambiguity in the terms of the airway bill, hence
petitioners' insistence on the application of the rules on interpretation of contracts and
documents. We find no such ambiguity. The terms are clear enough as to preclude the
necessity to probe beyond the apparent intendment of the contractual provisions.
The hornbook rule on interpretation of contracts consecrates the primacy of the intention of
the parties, the same having the force of law between them. When the terms of the
agreement are clear and explicit, that they do not justify an attempt to read into any alleged
intention of the parties, the terms are to be understood literally just as they appear on the
face of the contract.
[49]
The various stipulations of a contract shall be interpreted
together
[50]
and such a construction is to be adopted as will give effect to all provisions
thereof.
[51]
A contract cannot be construed by parts, but its clauses should be interpreted in
relation to one another. The whole contract must be interpreted or read together in order to
arrive at its true meaning. Certain stipulations cannot be segregated and then made to
control; neither do particular words or phrases necessarily determine the character of a
contract. The legal effect of the contract is not to be determined alone by any particular
provision disconnected from all others, but in the ruling intention of the parties as gathered
from all the language they have used and from their contemporaneous and subsequent
acts.
[52]

Turning to the terms of the contract at hand, as presented by PAL Air Waybill No. 079-
01180454, respondent court approvingly quoted the trial court's disquisition on the
aforequoted condition appearing on the reverse side of the airway bill and its disposition of
this particular assigned error:
"The foregoing stipulation fully answers plaintiffs' objections to the one-day delay and the
shipping of the remains in TWA Flight 603 instead of TWA Flight 131. Under the stipulation,
parties agreed that no time was fixed to complete the contract of carriage and that the
carrier may, without notice, substitute alternate carriers or aircraft. The carrier did not
assume the obligation to carry the shipment on any specified aircraft.
x x x
"Furthermore, contrary to the claim of plaintiffs-appellants, the conditions of the Air Waybill
are big enough, to be read and noticed. Also, the mere fact that the cargo in question was
shipped in TWA Flight 603, a flight earlier on the same day than TWA Flight 131, did not in
any way cause or add to the one-day delay complained of and/or the switching or mix-up of
the bodies."
[53]

Indubitably, that private respondent can use substitute aircraft even without notice and
without the assumption of any obligation whatsoever to carry the goods on any specified
aircraft is clearly sanctioned by the contract of carriage as specifically provided for under the
conditions thereof.
Petitioners' invocation of the interpretative rule in the Rules of Court that written words
control printed words in documents,
[54]
to bolster their assertion that the typewritten
provisions regarding the routing and flight schedule prevail over the printed conditions, is
tenuous. Said rule may be considered only when there is inconsistency between the written
and printed words of the contract.
As previously stated, we find no ambiguity in the contract subject of this case that would call
for the application of said rule. In any event, the contract has provided for such a situation by
explicitly stating that the above condition remains effective "notwithstanding that the same
(fixed time for completion of carriage, specified aircraft, or any particular route or schedule)
may be stated on the face hereof." While petitioners hinge private respondents' culpability
on the fact that the carrier "certifies goods described below were received for carriage," they
may have overlooked that the statement on the face of the airway bill properly and
completely reads -
"Carrier certifies goods described below were received for carriage subject to the Conditions
on the reverse hereofthe goods then being in apparent good order and condition except as
noted hereon."
[55]
(Emphasis ours.)
Private respondents further aptly observe that the carrier's certification regarding receipt of
the goods for carriage "was of a smaller print than the condition of the Air Waybill, including
Condition No. 5 - and thus if plaintiffs-appellants had recognized the former, then with more
reason they were aware of the latter."
[56]

In the same vein, it would also be incorrect to accede to the suggestion of petitioners that
the typewritten specifications of the flight, routes and dates of departures and arrivals on the
face of the airway bill constitute a special contract which modifies the printed conditions at
the back thereof. We reiterate that typewritten provisions of the contract are to be read and
understood subject to and in view of the printed conditions, fully reconciling and giving effect
to the manifest intention of the parties to the agreement.
The oft-repeated rule regarding a carrier's liability for delay is that in the absence of a special
contract, a carrier is not an insurer against delay in transportation of goods. When a common
carrier undertakes to convey goods, the law implies a contract that they shall be delivered at
destination within a reasonable time, in the absence of any agreement as to the time of
delivery.
[57]
But where a carrier has made an express contract to transport and deliver
property within a specified time, it is bound to fulfill its contract and is liable for any delay, no
matter from what cause it may have arisen.
[58]
This result logically follows from the well-
settled rule that where the law creates a duty or charge, and the party is disabled from
performing it without any default in himself, and has no remedy over, then the law will
excuse him, but where the party by his own contract creates a duty or charge upon himself,
he is bound to make it good notwithstanding any accident or delay by inevitable necessity
because he might have provided against it by contract. Whether or not there has been such
an undertaking on the part of the carrier is to be determined from the circumstances
surrounding the case and by application of the ordinary rules for the interpretation of
contracts.
[59]

Echoing the findings of the trial court, the respondent court correctly declared that ?
"In a similar case of delayed delivery of air cargo under a very similar stipulation contained in
the airway bill which reads: The carrier does not obligate itself to carry the goods by any
specified aircraft or on a specified time. Said carrier being hereby authorized to deviate from
the route of the shipment without any liability therefor, our Supreme Court ruled that
common carriers are not obligated by law to carry and to deliver merchandise, and persons
are not vested with the right to prompt delivery, unless such common carriers previously
assume the obligation. Said rights and obligations are created by a specific contract entered
into by the parties (Mendoza vs. PAL, 90 Phil. 836).
"There is no showing by plaintiffs that such a special or specific contract had been entered
into between them and the defendant airline companies.
"And this special contract for prompt delivery should call the attention of the carrier to the
circumstances surrounding the case and the approximate amount of damages to be suffered
in case of delay (See Mendoza vs. PAL, supra). There was no such contract entered into in the
instant case."
[60]

Also, the theory of petitioners that the specification of the flights and dates of departures
and arrivals constitute a special contract that could prevail over the printed stipulations at
the back of the airway bill is vacuous. To countenance such a postulate would unduly burden
the common carrier for that would have the effect of unilaterally transforming every single
bill of lading or trip ticket into a special contract by the simple expedient of filling it up with
the particulars of the flight, trip or voyage, and thereby imposing upon the carrier duties
and/or obligations which it may not have been ready or willing to assume had it been timely
advised thereof.
Neither does the fact that the challenged condition No. 5 was printed at the back of the
airway bill militate against its binding effect on petitioners as parties to the contract, for
there were sufficient indications on the face of said bill that would alert them to the
presence of such additional condition to put them on their guard. Ordinary prudence on the
part of any person entering or contemplating to enter into a contract would prompt even a
cursory examination of any such conditions, terms and/or stipulations.
There is a holding in most jurisdictions that the acceptance of a bill of lading without dissent
raises a presumption that all terms therein were brought to the knowledge of the shipper
and agreed to by him, and in the absence of fraud or mistake, he is estopped from thereafter
denying that he assented to such terms. This rule applies with particular force where a
shipper accepts a bill of lading with full knowledge of its contents, and acceptance under
such circumstances makes it a binding contract. In order that any presumption of assent to a
stipulation in a bill of lading limiting the liability of a carrier may arise, it must appear that the
clause containing this exemption from liability plainly formed a part of the contract
contained in the bill of lading. A stipulation printed on the back of a receipt or bill of lading or
on papers attached to such receipt will be quite as effective as if printed on its face, if it is
shown that the consignor knew of its terms. Thus, where a shipper accepts a receipt which
states that its conditions are to be found on the back, such receipt comes within the general
rule, and the shipper is held to have accepted and to be bound by the conditions there to be
found.
[61]

Granting arguendo that Condition No. 5 partakes of the nature of a contract of adhesion and
as such must be construed strictly against the party who drafted the same or gave rise to any
ambiguity therein, it should be borne in mind that a contract of adhesion may be struck
down as void and unenforceable, for being subversive of public policy, only when the weaker
party is imposed upon in dealing with the dominant bargaining party and is reduced to the
alternative of taking it or leaving it, completely deprived of the opportunity to bargain on
equal footing.
[62]
However, Ong Yiu vs. Court of Appeals, et al.
[63]
instructs us that contracts of
adhesion are not entirely prohibited. The one who adheres to the contract is in reality free to
reject it entirely; if he adheres, he gives his consent. Accordingly, petitioners, far from being
the weaker party in this situation, duly signified their presumed assent to all terms of the
contract through their acceptance of the airway bill and are consequently bound thereby. It
cannot be gainsaid that petitioners were not without several choices as to carriers in Chicago
with its numerous airways and airlines servicing the same.
We wish to allay petitioners' apprehension that Condition No. 5 of the airway bill is
productive of mischief as it would validate delay in delivery, sanction violations of contractual
obligations with impunity or put a premium on breaches of contract.
Just because we have said that Condition No. 5 of the airway bill is binding upon the parties
to and fully operative in this transaction, it does not mean, and let this serve as fair warning
to respondent carriers, that they can at all times whimsically seek refuge from liability in the
exculpatory sanctuary of said Condition No. 5 or arbitrarily vary routes, flights and schedules
to the prejudice of their customers. This condition only serves to insulate the carrier from
liability in those instances when changes in routes, flights and schedules are clearly justified
by the peculiar circumstances of a particular case, or by general transportation practices,
customs and usages, or by contingencies or emergencies in aviation such as weather
turbulence, mechanical failure, requirements of national security and the like. And even as it
is conceded that specific routing and other navigational arrangements for a trip, flight or
voyage, or variations therein, generally lie within the discretion of the carrier in the absence
of specific routing instructions or directions by the shipper, it is plainly incumbent upon the
carrier to exercise its rights with due deference to the rights, interests and convenience of its
customers.
A common carrier undertaking to transport property has the implicit duty to carry and deliver
it within a reasonable time, absent any particular stipulation regarding time of delivery, and
to guard against delay. In case of any unreasonable delay, the carrier shall be liable for
damages immediately and proximately resulting from such neglect of duty.
[64]
As found by
the trial court, the delay in the delivery of the remains of Crispina Saludo, undeniable and
regrettable as it was, cannot be attributed to the fault, negligence or malice of private
respondents,
[65]
a conclusion concurred in by respondent court and which we are not inclined
to disturb.
We are further convinced that when TWA opted to ship the remains of Crispina Saludo on an
earlier flight, it did so in the exercise of sound discretion and with reasonable prudence, as
shown by the explanation of its counsel in his letter of February 19, 1977 in response to
petitioners' demand letter:
"Investigation of TWA's handling of this matter reveals that although the shipment was
scheduled on TWA Flight 131 of October 27, 1976, it was actually boarded on TWA Flight 603
of the same day, approximately 10 hours earlier, in order to assure that the shipment would
be received in San Francisco in sufficient time for transfer to PAL. This transfer was effected
in San Francisco at 2:00 P.M. on October 27, 1976.
[66]

Precisely, private respondent TWA knew of the urgency of the shipment by reason of this
notation on the lower portion of the airway bill: "All documents have been certified. Human
remains of Cristina (sic) Saludo. Please return bag first available flight to SFO." Accordingly,
TWA took it upon itself to carry the remains of Crispina Saludo on an earlier flight, which we
emphasize it could do under the terms of the airway bill, to make sure that there would be
enough time for loading said remains on the transfer flight on board PAL.
III. Petitioners challenge the validity of respondent court's finding that private respondents
are not liable for tort on account of the humiliating, arrogant and indifferent acts of their
officers and personnel. They posit that since their mother's remains were transported ten
hours earlier than originally scheduled, there was no reason for private respondents'
personnel to disclaim knowledge of the arrival or whereabouts of the same other than their
sheer arrogance, indifference and extreme insensitivity to the feelings of petitioners.
Moreover, being passengers and not merely consignors of goods, petitioners had the right to
be treated with courtesy, respect, kindness and due consideration.
In riposte, TWA claims that its employees have always dealt politely with all clients,
customers and the public in general. PAL, on the other hand, declares that in the
performance of its obligation to the riding public, other customers and clients, it has always
acted with justice, honesty, courtesy and good faith.
Respondent appellate court found merit in and reproduced the trial court's refutation of this
assigned error:
"About the only evidence of plaintiffs that may have reference to the manner with which the
personnel of defendants treated the two plaintiffs at the San Francisco Airport are the
following pertinent portions of Maria Saludo's testimony:
'Q - When you arrived there, what did you do, if any?
A - I immediately went to the TWA counter and I inquired about whether my mother was
there or if they knew anything about it.
Q - What was the answer?
A - They said they do not know. So, we waited.
Q - About what time was that when you reached San Francisco from Chicago?
A - I think 5 o'clock. Somewhere around that in the afternoon.
Q - You made inquiry it was immediately thereafter?
A - Right after we got off the plane.
Q - Up to what time did you stay in the airport to wait until the TWA people could tell you the
whereabouts?
A - Sorry, Sir, but the TWA did not tell us anything We stayed there until about 9 o'clock.
They have not heard anything about it. They did not say anything.
Q - Do you want to convey to the Court that from 5 up to 9 o'clock in the evening you
yourself went back to the TWA and they could not tell you where the remains of your mother
were?
A - Yes sir.
Q - And after nine o'clock, what did you do?
A - I told my brother my Mom was supposed to be on the Philippine Airlines flight. 'Why
don't we check with PAL instead to see if she was there?' We tried to comfort each other. I
told him anyway that was a shortest flight from Chicago to California. We will be with our
mother on this longer flight. So, we checked with the PAL.
Q - What did you find?
A - We learned, Yes, my Mom would be on the flight.
Q - Who was that brother?
A - Saturnino Saludo.
Q - And did you find what was your flight from San Francisco to the Philippines?
A - I do not know the number. It was the evening flight of the Philippine Airline(s) from San
Francisco to Manila.
Q - You took that flight with your mother?
A - We were scheduled to, Sir.
Q - Now, you could not locate the remains of your mother in San Francisco could you tell us
what did you feel?
A - After we were told that my mother was not there?
Q - After you learned that your mother could not fly with you from Chicago to California?
A - Well, I was very upset. Of course, I wanted the confirmation that my mother was in the
West Coast. The flight was about 5 hours from Chicago to California. We waited anxiously all
that time on the plane. I wanted to be assured about my mother's remains. But there was
nothing and we could not get any assurance from anyone about it.
Q - Your feeling when you reached San Francisco and you could not find out from the TWA
the whereabouts of the remains, what did you feel?
A - Something nobody would be able to describe unless he experiences it himself. It is a kind
of panic. I think it's a feeling you are about to go crazy. It is something I do not want to live
through again.' (Inting, t.s.n., Aug. 9, 1983, pp. 14-18).'
"The foregoing does not show any humiliating or arrogant manner with which the personnel
of both defendants treated the two plaintiffs. Even their alleged indifference is not clearly
established. The initial answer of the TWA personnel at the counter that they did not know
anything about the remains, and later, their answer that they have not heard anything about
the remains, and the inability of the TWA counter personnel to inform the two plaintiffs of
the whereabouts of the remains, cannot be said to be total or complete indifference to the
said plaintiffs. At any rate, it is any rude or discourteous conduct, malfeasance or neglect, the
use of abusive or insulting language calculated to humiliate and shame passenger or bad
faith by or on the part of the employees of the carrier that gives the passenger an action for
damages against the carrier (Zulueta vs. Pan American World Airways, 43 SCRA 397; Air
France vs. Carrascoso, et al., 18 SCRA 155; Lopez, et al. vs. Pan American World Airways, 16
SCRA 431; Northwest Airlines, Inc. vs. Cuenca, 14 SCRA 1063), and none of the above is
obtaining in the instant case."
[67]

We stand by respondent court's findings on this point, but only to the extent where it holds
that the manner in which private respondent TWA's employees dealt with petitioners was
not grossly humiliating, arrogant or indifferent as would assume the proportions of malice or
bad faith and lay the basis for an award of the damages claimed. It must however, be pointed
out that the lamentable actuations of respondent TWA's employees leave much to be
desired, particularly so in the face of petitioners' grief over the death of their mother,
exacerbated by the tension and anxiety wrought by the impasse and confusion over the
failure to ascertain over an appreciable period of time what happened to her remains.
Airline companies are hereby sternly admonished that it is their duty not only to cursorily
instruct but to strictly require their personnel to be more accommodating towards
customers, passengers and the general public. After all, common carriers such as airline
companies are in the business of rendering public service, which is the primary reason for
their enfranchisement and recognition in our law. Because the passengers in a contract of
carriage do not contract merely for transportation, they have a right to be treated with
kindness, respect, courtesy and consideration.
[68]
A contract to transport passengers is quite
different in kind and degree from any other contractual relation, and generates a relation
attended with public duty. The operation of a common carrier is a business affected with
public interest and must be directed to serve the comfort and convenience of
passengers.
[69]
Passengers are human beings with human feelings and emotions; they should
not be treated as mere numbers or statistics for revenue.
The records reveal that petitioners, particularly Maria and Saturnino Saludo, agonized for
nearly five hours, over the possibility of losing their mother's mortal remains, unattended to
and without any assurance from the employees of TWA that they were doing anything about
the situation. This is not to say that petitioners were to be regaled with extra special
attention. They were, however, entitled to the understanding and humane consideration
called for by and commensurate with the extraordinary diligence required of common
carriers, and not the cold insensitivity to their predicament. It is hard to believe that the
airline's counter personnel were totally helpless about the situation. Common sense could
and should have dictated that they exert a little extra effort in making a more extensive
inquiry, by themselves or through their superiors, rather than just shrug off the problem with
a callous and uncaring remark that they had no knowledge about it. With all the modern
communications equipment readily available to them, which could have easily facilitated said
inquiry and which are used as a matter of course by airline companies in their daily
operations, their apathetic stance while not legally reprehensible is morally deplorable.
Losing a loved one, especially one's parent, is a painful experience. Our culture accords the
tenderest human feelings toward and in reverence to the dead. That the remains of the
deceased were subsequently delivered, albeit belatedly, and eventually laid in her final
resting place is of little consolation. The imperviousness displayed by the airline's personnel,
even for just that fraction of time, was especially condemnable particularly in the hour of
bereavement of the family of Crispina Saludo, intensified by anguish due to the uncertainty
of the whereabouts of their mother's remains. Hence, it is quite apparent that private
respondents' personnel were remiss in the observance of that genuine human concern and
professional attentiveness required and expected of them.
The foregoing observations, however, do not appear to be applicable or imputable to
respondent PAL or its employees. No attribution of discourtesy or indifference has been
made against PAL, by petitioners and, in fact, petitioner Maria Saludo testified that it was to
PAL, that they repaired after failing to receive proper attention from TWA. It was from PAL
that they received confirmation that their mother's remains would be on the same flight to
Manila with them.
We find the following substantiation on this particular episode from the deposition of
Alberto A. Lim, PAL's cargo supervisor earlier adverted to, regarding their investigation of and
the action taken on learning of petitioner's problem:
"ATTY. ALBERTO C. MENDOZA:
Yes.
Mr. Lim, what exactly was your procedure adopted in your so called investigation?
ALBERTO A. LIM:
I called the lead agent on duty at that time and requested for a copy of airway bill, transfer
manifest and other documents concerning the shipment.
ATTY ALBERTO C. MENDOZA:
Then, what?
ALBERTO A. LIM:
They proceeded to analyze exactly where PAL failed, if any, in forwarding the human remains
of Mrs. Cristina (sic) Saludo. And I found out that there was not (sic) delay in shipping the
remains of Mrs. Saludo to Manila. Since we received the body from American Airlines on 28
October at 7:45 and we expedited the shipment so that it could have been loaded on our
flight leaving at 9:00 in the evening or just barely one hour and 15 minutes prior to the
departure of the aircraft. That is so (sic) being the case, I reported to Manila these
circumstances."
[70]

IV. Finally, petitioners insist, as a consequence of the delay in the shipment of their mother's
remains allegedly caused by wilful contractual breach, on their entitlement to actual, moral
and exemplary damages as well as attorney's fees, litigation expenses, and legal interest.
The uniform decisional tenet in our jurisdiction holds that moral damages may be awarded
for wilful or fraudulent breach of contract
[71]
or when such breach is attended by malice or
bad faith.
[72]
However, in the absence of strong and positive evidence of fraud, malice or bad
faith, said damages cannot be awarded.
[73]
Neither can there be an award of exemplary
damages
[74]
nor of attorney's fees
[75]
as an item of damages in the absence of proof that
defendant acted with malice, fraud or bad faith.
The censurable conduct of TWA's employees cannot, however, be said to have approximated
the dimensions of fraud, malice or bad faith. It can be said to be more of a lethargic reaction
produced and engrained in some people by the mechanically routine nature of their work
and a racial or societal culture which stultifies what would have been their accustomed
human response to a human need under a former and different ambience.
Nonetheless, the facts show that petitioners' right to be treated with due courtesy in
accordance with the degree of diligence required by law to be exercised by every common
carrier was violated by TWA and this entitles them, at least, to nominal damages from TWA
alone. Articles 2221 and 2222 of the Civil Code make it clear that nominal damages are not
intended for indemnification of loss suffered but for the vindication or recognition of a right
violated or invaded. They are recoverable where some injury has been done but the amount
of which the evidence fails to show, the assessment of damages being left to the discretion
of the court according to the circumstances of the case.
[76]
In the exercise of our discretion,
we find an award of P40,000.00 as nominal damages in favor of petitioners to be a
reasonable amount under the circumstances of this case.
WHEREFORE, with the modification that an award of P40,000.00 as and by way of nominal
damages is hereby granted in favor of petitioners to be paid by respondent Trans World
Airlines, the appealed decision is AFFIRMED in all other respects.
SO ORDERED.

Melencio-Herrera, (Chairman), Paras, Padilla, and Nocon, JJ., concur.

THIRD DIVISION
[ G.R. No. 90888, September 13, 1990 ]
FRUCTUOSO R. CAPCO, PETITIONER, VS. MANUEL R. MACASAET, JACOBO FELICIANO AND
HONORABLE COURT OF APPEALS, RESPONDENTS.

D E C I S I O N
GUTIERREZ, JR., J.:
The petitioner submits to us for review the propriety of the Court of Appeals'
disregarding the findings of fact and the award of damages made by the trial court.
This petition is an offshoot of an action for damages filed by the petitioner against the
private respondents docketed as Civil Case No. 24105 and decided by the Regional Trial
Court, National Capital Judicial Region, Branch 151 of Pasig, Metro Manila which ruled as
follows:
"WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendant
Manuel Macasaet, sentencing the latter to pay the former, the following sums:
a) Three Hundred Two Thousand Six Hundred Fifty-Eight Pesos and Twenty Centavos
(P302,658.20) for and as actual damages;
b) One Hundred Thousand Pesos (P100,000.00) for and as moral damages;
c) Fifty Thousand Pesos (P50,000.00) for and as exemplary damages; and
d) Fifty Thousand Pesos (P50,000.00) for and as attorney's fees and litigation expenses.
The complaint and defendant Macasaet's cross claim against defendant Jacobo Feliciano are
dismissed.
Defendants Manuel Macasaet's and Jacobo Feliciano's counterclaims are likewise dismissed.
Costs against defendant Manuel Macasaet." (Rollo, pp. 55-56)
The petitioner was a stockholder of record, director and executive vice-president of
Monte Oro Mineral Resources, Inc. (MonteOro for brevity's sake), a local mining company
whose shares were traded in the stock market. He owned 56,588,358 shares of the capital
stock of Monte Oro with par value of P0.01 per share or a total par value of P565,883.58 as
evidenced by Stock Certificate No. 002 (Exhibit "A") for 14,159,583 share and Stock
Certificate No. 026 (Exhibit "B") for 42,428,775 shares.
On February 18, 1976, the petitioner indorsed and delivered Stock Certificate Nos. 002
and 026 to private respondent ManuelMacasaet, board chairman and President of
Monte Oro, who personally received the said certificate in the following tenor:
"ACKNOWLEDGMENT RECEIPT"
I hereby certify that I have personally received from Mr. Fructuoso R. Capco the following
Monte Oro Certificates in trust and for safe keeping only to be delivered and/or surrendered
to him and/or his heirs or duly authorized representative on demand. (Exhibit "C")
Cert. No. Amount Date Remarks
002 14,159,583 12/04/74 Already Indorsed
026 42,428,775 04/16/75 Already Indorsed
Total 56,588,358
Received as stated:
(Sgd) MANUEL R. MACASAET"
(Exhibit "C")
On April 26, 1976, the petitioner demanded the return of his stock certificates from
respondent Macasaet who failed to produce them because he had given them to the other
private respondent Jacobo Feliciano, another officer of Monte Oro, allegedly in connection
with a contemplated joint venture with the group of one Leonilo Esguerra.
On April 28, 1976, respondent Macasaet replaced the petitioner's Stock Certificate No.
026 with his own Stock Certificate No. 025 covering 42,578,700 shares. The petitioner duly
acknowledged the receipt of the said replacement (Exhibit "3").
On May 4, 1976, Stock Certificate No. 002 was returned by respondent Macasaet to the
petitioner as evidenced by the handwritten receipt signed by the latter (Exhibit "2") who
likewise made a handwritten notation stating "all cleared" at the left hand margin thereof.
On August 12, 1976, the petitioner filed a complaint for damages against the private
respondents alleging, among others, that at the time he demanded his Stock Certificate Nos.
002 and 026 totalling 56,588,358 shares from respondent Macasaet the petitioner had a
ready buyer for P0.014 per share for all shares; that due to the private respondents' failure to
return the said stock certificates upon demand, the petitioner lost P306,115.25 representing
the difference between the amount of P792,237.01 which he would have realized had his
stock certificates been promptly given back and the sum of P486,121.76, the actual net
proceeds from the subsequent sale of 42,550,000 shares at various prices after
respondent Macasaet delivered his own Stock Certificate No. 025 in exchange for the
petitioner's Stock Certificate No. 026; that the aforesaid amount of P306,115.25 had long
been overdue and unpaid and despite repeated demands from the private respondents for
the payment thereof, the latter had failed and refused to pay the same to the petitioner's
damage and prejudice; and that due to the private respondents' intentional, deliberate and
malicious acts, moral and exemplary damages could be awarded to the petitioner.
Respondent Macasaet counter-alleged, among others, that he had in turn entrusted
Stock Certificate Nos. 002 and 026 of the petitioner to his co-defendant, respondent
Feliciano to be shown to a certain group for the purpose of a joint venture; that
respondentMacasaet had actually made several demands for the return of the said stock
certificates from respondent Feliciano who refused and failed to do so; that two days after
the petitioner made the demand, respondent Macasaet replaced the petitioner's Stock
Certificate No. 026 with his own Stock Certificate No. 025 which covered 149, 925 shares
more than those of the petitioner's Stock Certificate No. 026; that the
respondent Macasaet returned the petitioner's Stock Certificate No. 002 on May 4, 1976
after he recovered the same from respondent Feliciano; and that the words "ALL CLEARED"
written by the petitioner himself on his acknowledgment receipt as he received Stock
Certificate No. 002 from respondent Macasaet undoubtedly meant to discharge private
respondent Macasaet from any responsibility or liability regarding the petitioner's stock
certificates.
On August 8, 1983, the lower court rendered a judgment favorable to the petitioner. It
also dismissed the complaint and respondent Macasaet's cross?claim against respondent
Feliciano and likewise dismissed private respondents counter-claims against the petitioner.
On appeal by respondent Macasaet, the Court of Appeals on June 19, 1989, reversed
and set aside the trial court's judgment for lack of merit and supporting proof. The
petitioner's complaint as well as the cross?claims and counter-claims of private respondents
were all dismissed.
After the petitioner's subsequent motion for reconsideration was denied on October
23, 1989, the present petition was filed assigning as errors, to wit:
I
THE HONORABLE COURT OF APPEALS GRAVELY ERRED BLINDLY SUPPORTING THE FIRST AND
SECOND THEORY OF PRIVATE RESPONDENT THAT THE WRITTEN ANNOTATION OF 'ALL
CLEARED' IN STOCK CERTIFICATE NO. 002 NECESSARILY INCLUDED ANOTHER SEPARATE AND
DIFFERENT STOCK CERTIFICATE NO. 026 AND ASSUMING THERETO 'PAYMENT' OF LIABILITY
OF PRIVATE RESPONDENT TO PETITIONER.
II
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN CLEARING PRIVATE RESPONDENT
OF RESPONSIBILITIES BY DISREGARDING OR ABROGATING A VOLUNTARY CONTRACT OF
TRUST, (ACKNOWLEDGMENT RECEIPT, DATED FEBRUARY 18, 1976, ANNEX "C" PLAINTIFF'S
COMPLAINT; EXH. "C" - PLAINTIFF) ALSO ON MERE ASSUMPTIONTHAT THE ENDORSEMENT
ON THE SUBJECT STOCK CERTIFICATES CONSTITUTE FULL AUTHORITY TO PRIVATE
RESPONDENT TO DELIVER, CONVEY AND SELL THE SAME.
III
THE HONORABLE COURT OF APPEALS LIKEWISE COMMITTED GROSS ERROR IN CLEARING THE
PRIVATE RESPONDENTS OF LIABILITY FOR ALL DAMAGES ALREADY SUFFERED AND INCURRED
BY PETITIONER.
IV
THE HONORABLE COURT OF APPEALS ALSO COMMITTED GRAVE ERROR BY CONCLUDING
LACK OF EVIDENCE TO SUPPORT CLAIM OF DAMAGES AND DISREGARDING THE FACTS AND
EVIDENCE DULY ADMITTED AND PROVEN AT A FORMAL TRIAL IN THE LOWER COURT."
(Petition, pp. 5-6, Rollo, pp. 16-17)
The petitioner's main argument rests on the oft?repeated pronouncement that the
conclusions and findings of fact by the trial court are entitled to great weight on appeal and
should not be disturbed unless for strong and cogent reasons because the trial court is in a
better position to examine real evidence as well as observe the demeanor of the witnesses
while testifying citing the case ofChase v. Buencamino (136 SCRA 605 [1985]). The petitioner
faults the respondent court for side-stepping the literal interpretation of the
Acknowledgment Receipt dated February 18, 1972 signed by the respondent Macasaet which
allegedly serves as a clear proof that Stock Certificate Nos. 002 and 026 were held by the
latter in trust and for safekeeping only. The petitioner further labels as capricious the
respondent court's act of completely ignoring all the established evidence, both
documentary and testimonial, duly admitted and considered by the trial court.
The rule that the trial court's findings of fact are accorded due respect on appeal is not
without exceptions. It is not applicable where there are strong and cogent reasons as when
the trial court's findings are not supported by the evidence or when the trial court failed to
consider material facts which would have led to a conclusion different from what was stated
in its judgment or when the trial court's decision was attended by grave abuse of discretion
amounting to lack of jurisdiction. A review of the bases for the trial court's decision shows
that the appellate court was justified in being skeptical as it went over both the facts and the
law.
The instant case was given due course to enable a more thorough presentation by the
parties and review of the records considering the petitioner's stress on the disparity between
the factual findings of the trial court which found respondent Macasaetliable for actual,
moral and exemplary damages and the respondent appellate court which discharged the said
respondent from any liability regarding the petitioner's Stock Certificate Nos. 002 and 026.
It is true that when the petitioner delivered Stock Certificate Nos. 002 and 026 to
respondent Macasaet the latter acknowledged receiving them in trust and for safekeeping
only. This acknowledgment, however, cannot outweigh the legal effects of the stock
certificates having been "already indorsed". There is no dispute that
respondent Macasaet received the petitioner's certificates in that condition as evidenced by
the same Acknowledgment Receipt dated February 18, 1976.
Certificates of stocks are considered as "quasi-negotiable" instruments. When the
owner or shareholder of these certificates signs the printed form of sale or assignment at the
back of every stock certificate without filling in the blanks provided for the name of the
transferee as well as for the name of the attorney-in-fact, the said owner or shareholder, in
effect, confers on another all the indicia of ownership of the said stock certificates. (Campos
and Lopez-Campos, Notes and Selected Cases on Negotiable Instruments Law, 1971 ed., p.
605). In the case at bar, the petitioner signed the printed form at the back of both Stock
Certificate Nos. 002 and 026 without filling in the blanks at the time the said stock certificates
were delivered to respondent Macasaet. Hence, the petitioner's acts of indorsement and
delivery conferred on respondent Macasaet the right to hold them as though they were his
own. On account of this apparent transfer of ownership, it was not irregular on the part of
respondent Macasaet to deliver the stock certificates in question to respondent Feliciano for
consideration in connection with a contemplated tie-up between two business groups.
At this juncture, it is worth noting that in view of the petitioner's concurrent positions
as director, Executive Vice-President and General Manager of Monte Oro at the time of the
incident under consideration, he could not have been unaware of the consequences of the
delivery coupled with the indorsement of his two stock certificates to respondent Macasaet,
notwithstanding the tenor of the Acknowledgment Receipt. Moreover, it is hard to believe
that the petitioner's delivery of the subject stock certificates to respondent Macasaet was
strictly for safe-keeping purposes only because if that were his real and only intention, there
is neither logic nor reason for the indorsement of the said certificates.
After a careful perusal and examination of the records of this case, we find no legal
ground that will constrain us to depart from the rule that the Court of Appeals findings of
fact are deemed final, conclusive and binding on us if supported by substantial evidence. We
reiterate our ruling in the case of Hermo v. Court of Appeals, (155 SCRA 24 [1987]) that:
"At once apparent is that the factual findings of the Court of Appeals are diametrically at
odds with those of the Trial Court, x x x. And basic is the rule that the conclusions of fact of a
trial court are entitled to great weight, and should not generally be disturbed on appeal,
because it is in a better position than the appellate tribunal to examine the evidence directly,
and to observe the demeanor of the witnesses while testifying. Withal, its findings of fact,
though entitled to great respect, are not conclusive on the Court of Appeals. In the exercise
of its appellate jurisdiction, the Court of Appeals may affirm, reverse, or modify the judgment
or order appealed from, and may direct a new trial or further proceeding to be had. It is
indeed the duty of that Court chiefly though not exclusively to review a Trial Court's findings
of fact and correct such serious errors affecting them as may have been properly assigned
and as may be established by a re-examination of the recorded
evidence. And it is the findings of fact ofthe Court of Appeals, not those of the trial court, tha
t are as a rule deemed final, and conclusive even on thisCourt." (Underscoring Supplied) (At
p. 27)
We find no reversible error in the respondent Court's holding that the petitioner failed
to support his claim that he suffered the claimed damages as a result of
respondent Macasaet's failure to return Stock Certificate Nos. 002 and 026 upon
demand. The alleged "unrealized profits" representing actual and compensatory damages
must be supported by substantial and convincing proof. The records are bereft of such kind
of proof. Mere allegation that there was a "ready and willing buyer" of all the petitioner's
shares covered by Stock Certificate Nos. 002 and 026 for P0.014 per share at the time the
demand for the return of the said certificates was made cannot suffice to allow the
petitioner's claim for unrealized profits to prosper. Such claim is clearly speculative in
nature.
Actual or compensatory damages are those recoverable because of pecuniary loss in
business, trade, property, profession, job or occupation, and the same must be proved;
otherwise, if the proof is flimsy and non-substantial, no damages will be given (Danaov. Court
of Appeals, 154 SCRA 447 [1987]; Rubio v. Court of Appeals, 141 SCRA 488 [1986]; Perfecto v.
Gonzales, 128 SCRA 635 [1984]). Actual and compensatory damages require evidentiary
proof. They cannot be presumed. (Dee Hua Liong Electrical Equipment Corporation v. Reyes,
145 SCRA 713 [1986])
The good faith of respondent Macasaet is shown by the fact that after trying to recover
the missing certificates, he immediately substituted Stock Certificate No. 026 with his own
Stock Certificate No. 025 which covered more shares than the petitioner's replaced
certificate. The petitioner's other Stock Certificate No. 002 was subsequently returned and
received by the petitioner with the notation "All Cleared" on the acknowledgment receipt
duly signed and personally written by him. We agree with the respondent court's ruling that
the said notation meant to discharge respondent Macasaet (together with his co-respondent
Feliciano) from any liability with respect to the stock certificates in question as there can be
no other plausible interpretation therefor. He would not have written "all cleared" if he was
unhappy at that time about the substitution of the higher value certificate for his other
certificate.
In fine, considering that in the absence of malice and bad faith, moral damages cannot
be awarded (Philippine National Bank v. Court of Appeals, 159 SCRA 433 [1988]) and that the
grant of moral and exemplary damages has no basis if not predicated upon any of the cases
enumerated in the Civil Code (Bagumbayan Corporation v. Intermediate Appellate Court, 132
SCRA 441 [1984]), we hold that the respondent court properly set aside the award of actual,
moral and exemplary damages given by the trial court in favor of the petitioner.
WHEREFORE, in view of the foregoing, the petition is hereby DISMISSED. The assailed
decision dated June 19, 1989 and the resolution dated October 23, 1989 of the Court of
Appeals are AFFIRMED.
SO ORDERED.
Bidin and Cortes, JJ., concur.
Fernan, C.J., (Chairman), on official leave.
Feliciano, J., see concurring statement.




CONCURRING OPINION
FELICIANO, J.:
I concur in the result reached by Mr. Justice Hugo E. Gutierrez, Jr. I should merely like
to render a brief note in respect of his statement that: "it is hard to believe that petitioners'
delivery of the subject stock certificates to respondent Macasaet was strictly for safekeeping
purposes only because if that were his real and only intention, there is neither logic nor
reason for the indorsement of the said certificates".
Petitioner was very probably not unaware of the consequences of delivering stock
certificates which had been indorsed in blank. However, awareness of such consequences
may precisely explain why the Acknowledgment Receipt executed by private respondent
Macasaet specifically stated that he had received the stock certificates in question
"for safekeeping only to be deliveredand/or surrendered to him x x x on demand". In other
words, there was here no unrestricted delivery of the stock certificates. On the contrary, the
delivery of the stock certificates to private respondent Macasaet was clearly a limited or
qualified delivery, for a specified purpose only. If the Acknowledgment Receipt had not been
a restricted receipt, full authority or absolute ownership over the stock certificates would
have been transferred to private respondent Macasaet. The restricted Acknowledgment
Receipt thus had a qualifying and countervailing effect upon the indorsement in blank of
the stock certificates involved. Although indorsed in blank, the stock certificates are not then
intended to be transferred to and cannot be disposed of by petitioner-holder.
There are a number of possible reasons why petitioner should have wanted to indorse
the stock certificates in blank while delivering them to private respondent under a restricted
receipt: for one thing, the petitioner could go out of town or out of the country on business
or otherwise; during his trip, he would be in a position to instruct private respondent to sell
the shares already indorsed in blank when it might be profitable or convenient to do so
without need of executing and sending back a special power of attorney, by the simple
expedient of lifting the restriction found in the Acknowledgment Receipt. Indorsement in
blank of stock certificates facilitates the ready transferability of the stock certificates; at the
same time, the restricted Acknowledgment Receipt effectively constituted private
respondent a bailee or trustee vis-a-vis petitioner. The arrangement may be seen to have
both a fiduciary quality and a certain flexibility, a combination of substantial utility in the
trading of corporate securities.

FIRST DIVISION
[ G.R. No. 88866, February 18, 1991 ]
METROPOLITAN BANK & TRUST COMPANY, PETITIONER, VS. COURT OF APPEALS, GOLDEN
SAVINGS & LOAN ASSOCIATION, INC., LUCIA CASTILLO, MAGNO CASTILLO AND GLORIA
CASTILLO, RESPONDENTS.

D E C I S I O N
CRUZ, J.:
This case, for all its seeming complexity, turns on a simple question of negligence. The facts,
pruned of all non-essentials, are easily told.

The Metropolitan Bank and Trust Co. is a commercial bank with branches throughout the
Philippines and even abroad. Golden Savings and Loan Association was, at the time these
events happened, operating, in Calapan, Mindoro, with the other private respondents as its
principal officers.

In January 1979, a certain Eduardo Gomez opened an account with Golden Savings and
deposited over a period of two months 38 treasury warrants with a total value of
P1,755,228.37. They were all drawn by the Philippine Fish Marketing Authority and
purportedly signed by its General Manager and countersigned by its Auditor. Six of these
were directly payable to Gomez while the others appeared to have been indorsed by their
respective payees, followed by Gomez as second indorser.
[1]


On various dates between June 25 and July 16, 1979, all these warrants were subsequently
indorsed by Gloria Castillo as Cashier of Golden Savings and deposited to its Savings Account
No. 2498 in the Metrobank branch in Calapan, Mindoro. They were then sent for clearing by
the branch office to the principal office of Metrobank, which forwarded them to the Bureau
of Treasury for special clearing.
[2]


More than two weeks after the deposits, Gloria Castillo went to the Calapan branch several
times to ask whether the warrants had been cleared. She was told to wait. Accordingly,
Gomez was meanwhile not allowed to withdraw from his account. Later, however,
"exasperated" over Gloria's repeated inquiries and also as an accommodation for a "valued
client," the petitioner says it finally decided to allow Golden Savings to withdraw from the
proceeds of the warrants.
[3]
The first withdrawal was made on July 9, 1979, in the amount of
P508,000.00, the second on July 13, 1979, in the amount of P310,000.00, and the third
on July 16, 1979, in the amount of P150,000.00. The total withdrawal was P968,000.00.
[4]


In turn, Golden Savings subsequently allowed Gomez to make withdrawals from his own
account, eventually collecting the total amount of P1,167,500.00 from the proceeds of the
apparently cleared warrants. The last withdrawal was made on July 16, 1979.

On July 21, 1979, Metrobank informed Golden Savings that 32 of the warrants had been
dishonored by the Bureau of Treasury on July 19, 1979, and demanded the refund by Golden
Savings of the amount it had previously withdrawn, to make up the deficit in its account.

The demand was rejected. Metrobank then sued Golden Savings in the Regional Trial Court
of Mindoro.
[5]
After trial, judgment was rendered in favor of Golden Savings, which, however,
filed a motion for reconsideration even as Metrobank filed its notice of appeal. On
November 4, 1986, the lower court modified its decision thus:
ACCORDINGLY, judgment is hereby rendered:

1. Dismissing the complaint with costs against the plaintiff;

2. Dissolving and lifting the writ of attachment of the properties of defendant Golden
Savings and Loan Association, Inc. and defendant Spouses Magno Castillo and Lucia Castillo;

3. Directing the plaintiff to reverse its action of debiting Savings Account No. 2498 of the
sum of P1,754,089.00 and to reinstate and credit to such account such amount existing
before the debit was made including the amount of P812,033.37 in favor of defendant
Golden Savings and Loan Association, Inc. and thereafter, to allow defendant Golden Savings
and Loan Association, Inc. to withdraw the amount outstanding thereon before the debit;

4. Ordering the plaintiff to pay the defendant Golden Savings and Loan Association, Inc.
attorney's fees and expenses of litigation in the amount of P200,000.00

5. Ordering the plaintiff to pay the defendant Spouses Magno Castillo and Lucia Castillo
attorney's fees and expenses of litigation in the amount of P100,000.00.

SO ORDERED.
On appeal to the respondent court,
[6]
the decision was affirmed, prompting Metrobank to file
this petition for review on the following grounds:
1. Respondent Court of Appeals erred in disregarding and failing to apply the clear
contractual terms and conditions on the deposit slips allowing Metrobank to charge back any
amount erroneously credited.

(a) Metrobank's right to charge back is not limited to instances where the checks or treasury
warrants are forged or unauthorized.

(b) Until such time as Metrobank is actually paid, its obligation is that of a mere collecting
agent which cannot be held liable for its failure to collect on the warrants.

2. Under the lower court's decision, affirmed by respondent Court of Appeals, Metrobank is
made to pay for warrants already dishonored, thereby perpetuating the fraud committed by
Eduardo Gomez.

3. Respondent Court of Appeals erred in not finding that as between Metrobank and Golden
Savings, the latter should bear the loss.

4. Respondent Court of Appeals erred in holding that the treasury warrants involved in this
case are not negotiable instruments.
The petition has no merit.

From the above undisputed facts, it would appear to the Court that Metrobank was indeed
negligent in giving Golden Savings the impression that the treasury warrants had been
cleared and that, consequently, it was safe to allow Gomez to withdraw the proceeds thereof
from his account with it. Without such assurance, Golden Savings would not have allowed
the withdrawals; with such assurance, there was no reason not to allow the
withdrawal. Indeed, Golden Savings might even have incurred liability for its refusal to
return the money that to all appearances belonged to the depositor, who could therefore
withdraw it any time and for any reason he saw fit.

It was, in fact, to secure the clearance of the treasury warrants that Golden Savings
deposited them to its account with Metrobank. Golden Savings had no clearing facilities of
its own. It relied on Metrobank to determine the validity of the warrants through its own
services. The proceeds of the warrants were withheld from Gomez until Metrobank allowed
Golden Savings itself to withdraw them from its own deposit.
[7]
It was only when Metrobank
gave the go-signal that Gomez was finally allowed by Golden Savings to withdraw them from
his own account.

The argument of Metrobank that Golden Savings should have exercised more care in
checking the personal circumstances of Gomez before accepting his deposit does not hold
water. It was Gomez who was entrusting the warrants, not Golden Savings that was
extending him a loan; and moreover, the treasury warrants were subject to clearing, pending
which the depositor could not withdraw its proceeds. There was no question of Gomez's
identity or of the genuineness of his signature as checked by Golden Savings. In fact, the
treasury warrants were dishonored allegedly because of the forgery of the signatures of the
drawers, not of Gomez as payee or indorser. Under the circumstances, it is clear that Golden
Savings acted with due care and diligence and cannot be faulted for the withdrawals it
allowed Gomez to make.

By contrast, Metrobank exhibited extraordinary carelessness. The amount involved was not
trifling - more than one and a half million pesos (and this was 1979). There was no reason
why it should not have waited until the treasury warrants had been cleared; it would not
have lost a single centavo by waiting. Yet, despite the lack of such clearance - and
notwithstanding that it had not received a single centavo from the proceeds of the treasury
warrants, as it now repeatedly stresses - it allowed Golden Savings to withdraw - not once,
not twice, but thrice - from the uncleared treasury warrants in the total amount of
P968,000.00.

Its reason? It was "exasperated" over the persistent inquiries of Gloria Castillo about the
clearance and it also wanted to "accommodate" a valued client. It "presumed" that the
warrants had been cleared simply because of "the lapse of one week."
[8]
For a bank with its
long experience, this explanation is unbelievably naive.

And now, to gloss over its carelessness, Metrobank would invoke the conditions printed on
the dorsal side of the deposit slips through which the treasury warrants were deposited by
Golden Savings with its Calapan branch. The conditions read as follows:
Kindly note that in receiving items on deposit, the bank obligates itself only as the depositor's
collecting agent, assuming no responsibility beyond care in selecting correspondents, and
until such time as actual payment shall have come into possession of this bank, the right is
reserved to charge back to the depositor's account any amount previously credited, whether
or not such item is returned. This also applies to checks drawn on local banks and bankers
and their branches as well as on this bank, which are unpaid due to insufficiency of funds,
forgery, unauthorized overdraft or any other reason. (Underscoring supplied.)
According to Metrobank, the said conditions clearly show that it was acting only as a
collecting agent for Golden Savings and give it the right to "charge back to the depositor's
account any amount previously credited, whether or not such item is returned. This also
applies to checks which are unpaid due to insufficiency of funds, forgery, unauthorized
overdraft or any other reason." It is claimed that the said conditions are in the nature of
contractual stipulations and became binding on Golden Savings when Gloria Castillo, as its
Cashier, signed the deposit slips.

Doubt may be expressed about the binding force of the conditions, considering that they
have apparently been imposed by the bank unilaterally, without the consent of the
depositor. Indeed, it could be argued that the depositor, in signing the deposit slip, does so
only to identify himself and not to agree to the conditions set forth in the given permit at the
back of the deposit slip. We do not have to rule on this matter at this time. At any rate, the
Court feels that even if the deposit slip were considered a contract, the petitioner could still
not validly disclaim responsibility thereunder in the light of the circumstances of this case.

In stressing that it was acting only as a collecting agent for Golden Savings, Metrobank seems
to be suggesting that as a mere agent it cannot be liable to the principal. This is not exactly
true. On the contrary, Article 1909 of the Civil Code clearly provides that -
Art. 1909. --The agent is responsible not only for fraud, but also for negligence, which shall be
judged with more or less rigor by the courts, according to whether the agency was or was not
for a compensation.
The negligence of Metrobank has been sufficiently established. To repeat for emphasis, it
was the clearance given by it that assured Golden Savings it was already safe to allow Gomez
to withdraw the proceeds of the treasury warrants he had
deposited. Metrobank misled Golden Savings. There may have been no express clearance,
as Metrobank insists (although this is refuted by Golden Savings) but in any case that
clearance could be implied from its allowing Golden Savings to withdraw from its account not
only once or even twice but three times. The total withdrawal was in excess of its original
balance before the treasury warrants were deposited, which only added to its belief that the
treasury warrants had indeed been cleared.

Metrobank's argument that it may recover the disputed amount if the warrants are not
paid for any reason is not acceptable. Any reason does not mean no reason at
all. Otherwise, there would have been no need at all for Golden Savings to deposit the
treasury warrants with it for clearance. There would have been no need for it to wait until
the warrants had been cleared before paying the proceeds thereof to Gomez. Such a
condition, if interpreted in the way the petitioner suggests, is not binding for being arbitrary
and unconscionable. And it, becomes more so in the case at bar when it is considered that
the supposed dishonor of the warrants was not communicated to Golden Savings before it
made its own payment to Gomez.

The belated notification aggravated the petitioner's earlier negligence in giving express or at
least implied clearance to the treasury warrants and allowing payments therefrom to Golden
Savings. But that is not all. On top of this, the supposed reason for the dishonor, to wit, the
forgery of the signatures of the general manager and the auditor of the drawer corporation,
has not been established.
[9]
This was the finding of the lower courts which we see no reason
to disturb. And as we said in MWSS v. Court of Appeals:
[10]


Forgery cannot be presumed (Siasat, et. al. v. IAC, et al., 139 SCRA 238). It must be
established by clear, positive and convincing evidence. This was not done in the present
case.
A no less important consideration is the circumstance that the treasury warrants in question
are not negotiable instruments. Clearly stamped on their face is the word "non-negotiable."
Moreover, and this is of equal significance, it is indicated that they are payable from a
particular fund, to wit, Fund 501.
The following sections of the Negotiable Instruments Law, especially the underscored parts,
are pertinent:
SECTION 1. - Form of negotiable instruments. - An instrument to be negotiable must
conform to the following requirements:

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;

(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty.
x x x

SEC. 3. When promise is unconditional. - An unqualified order or promise to pay is
unconditional within the meaning of this Act though coupled with -

(a) An indication of a particular fund out of which reimbursement is to be made or a
particular account to be debited with the amount; or

(b) A statement of the transaction which, gives rise to the instrument.

But an order or promise to pay out of a particular fund is not unconditional.
The indication of Fund 501 as the source of the payment to be made on the treasury
warrants makes the order or promise to pay "not unconditional" and the warrants
themselves non-negotiable. There should be no question that the exception on Section 3 of
the Negotiable Instruments Law is applicable in the case at bar. This conclusion conforms to
Abubakar vs. Auditor General
[11]
where the Court held:
The petitioner argues that he is a holder in good faith and for value of a negotiable
instrument and is entitled to the rights and privileges of a holder in due course, free from
defenses. But this treasury warrant is not within the scope of the negotiable instrument
law. For one thing, the document bearing on its face the words "payable from the
appropriation for food administration, is actually an Order for payment out of a particular
fund," and is not unconditional and does not fulfill one of the essential requirements of a
negotiable instrument (Sec. 3 last sentence and section [1(b)] of the Negotiable Instruments
Law).
Metrobank cannot contend that by indorsing the warrants in general, Golden Savings
assumed that they were "genuine and in all respects what they purport to be," in accordance
with Section 66 of the Negotiable Instruments Law. The simple reason is that this law is not
applicable to the non-negotiable treasury warrants. The indorsement was made by Gloria
Castillo not for the purpose of guaranteeing the genuineness of the warrants but merely to
deposit them with Metrobank for clearing. It was in fact Metrobank that made the
guarantee when it stamped on the back of the warrants: "All prior indorsement and/or lack
of endorsements guaranteed, Metropolitan Bank & Trust Co., Calapan Branch."

The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the Philippine
Islands,
[12]
but we feel this case is inapplicable to the present controversy. That case involved
checks whereas this case involves treasury warrants. Golden Savings never represented that
the warrants were negotiable but signed them only for the purpose of depositing them for
clearance. Also, the fact of forgery was proved in that case but not in the case before
us. Finally, the Court found the Jai Alai Corporation negligent in accepting the checks without
question from one Antonio Ramirez notwithstanding that the payee was the Inter-Island Gas
Services, Inc. and it did not appear that he was authorized to indorse it. No similar
negligence can be imputed to Golden Savings.

We find the challenged decision to be basically correct. However, we will have to amend it
insofar as it directs the petitioner to credit Golden Savings with the full amount of the
treasury checks deposited to its account.

The total value of the 32 treasury warrants dishonored was P1,754,089.00, from which
Gomez was allowed to withdraw P1,167,500.00 before Golden Savings was notified of the
dishonor. The amount he has withdrawn must be charged not to Golden Savings but to
Metrobank, which must bear the consequences of its own negligence. But the balance of
P586,589.00 should be debited to Golden Savings, as obviously Gomez can no longer be
permitted to withdraw this amount from his deposit because of the dishonor of the
warrants. Gomez has in fact disappeared. To also credit the balance to Golden Savings
would unduly enrich it at the expense of Metrobank, let alone the fact that it has already
been informed of the dishonor of the treasury warrants.

WHEREFORE, the challenged decision is AFFIRMED, with the modification that Paragraph 3 of
the dispositive portion of the judgment of the lower court shall be reworded as follows:
3. Debiting Savings Account No. 2498 in the sum of P586,589.00 only and thereafter allowing
defendant Golden Savings & Loan Association, Inc. to withdraw the amount outstanding
thereon, if any, after the debit.

SO ORDERED.

Narvasa, (Chairman), Gancayco, Grio-Aquino, and Medialdea, JJ., concur.

Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 74917 January 20, 1988
BANCO DE ORO SAVINGS AND MORTGAGE BANK, petitioner,
vs.
EQUITABLE BANKING CORPORATION, PHILIPPINE CLEARING HOUSE CORPORATION, AND
REGIONAL TRIAL COURT OF QUEZON CITY, BRANCH XCII (92), respondents.

GANCAYCO, J.:
This is a petition for review on certiorari of a decision of the Regional Trial Court of Quezon
City promulgated on March 24, 1986 in Civil Case No. Q-46517 entitled Banco de Oro Savings
and Mortgage Bank versus Equitable Banking Corporation and the Philippine Clearing House
Corporation after a review of the Decision of the Board of Directors of the Philippine Clearing
House Corporation (PCHC) in the case of Equitable Banking Corporation (EBC) vs. Banco de
Oro Savings and Mortgage (BCO), ARBICOM Case No. 84033.
The undisputed facts are as follows:
It appears that some time in March, April, May and August 1983, plaintiff
through its Visa Card Department, drew six crossed Manager's check
(Exhibits "A" to "F", and herein referred to as Checks) having an
aggregate amount of Forty Five Thousand Nine Hundred and Eighty Two
& 23/100 (P45,982.23) Pesos and payable to certain member
establishments of Visa Card. Subsequently, the Checks were deposited
with the defendant to the credit of its depositor, a certain Aida Trencio.
Following normal procedures, and after stamping at the back of the
Checks the usual endorsements. All prior and/or lack of endorsement
guaranteed the defendant sent the checks for clearing through the
Philippine Clearing House Corporation (PCHC). Accordingly, plaintiff paid
the Checks; its clearing account was debited for the value of the Checks
and defendant's clearing account was credited for the same amount,
Thereafter, plaintiff discovered that the endorsements appearing at the
back of the Checks and purporting to be that of the payees were forged
and/or unauthorized or otherwise belong to persons other than the
payees.
Pursuant to the PCHC Clearing Rules and Regulations, plaintiff presented
the Checks directly to the defendant for the purpose of claiming
reimbursement from the latter. However, defendant refused to accept
such direct presentation and to reimburse the plaintiff for the value of
the Checks; hence, this case.
In its Complaint, plaintiff prays for judgment to require the defendant to
pay the plaintiff the sum of P45,982.23 with interest at the rate of 12%
per annum from the date of the complaint plus attorney's fees in the
amount of P10,000.00 as well as the cost of the suit.
In accordance with Section 38 of the Clearing House Rules and
Regulations, the dispute was presented for Arbitration; and Atty. Ceasar
Querubin was designated as the Arbitrator.
After an exhaustive investigation and hearing the Arbiter rendered a
decision in favor of the plaintiff and against the defendant ordering the
PCHC to debit the clearing account of the defendant, and to credit the
clearing account of the plaintiff of the amount of P45,982.23 with
interest at the rate of 12% per annum from date of the complaint and
Attorney's fee in the amount of P5,000.00. No pronouncement as to cost
was made.
1

In a motion for reconsideration filed by the petitioner, the Board of Directors of the PCHC
affirmed the decision of the said Arbiter in this wise:
In view of all the foregoing, the decision of the Arbiter is confirmed; and
the Philippine Clearing House Corporation is hereby ordered to debit the
clearing account of the defendant and credit the clearing account of
plaintiff the amount of Forty Five Thousand Nine Hundred Eighty Two &
23/100 (P45,982.23) Pesos with interest at the rate of 12% per annum
from date of the complaint, and the Attorney's fee in the amount of Five
Thousand (P5,000.00) Pesos.
Thus, a petition for review was filed with the Regional Trial Court of Quezon City, Branch XCII,
wherein in due course a decision was rendered affirming in toto the decision of the PCHC.
Hence this petition.
The petition is focused on the following issues:
1. Did the PCHC have any jurisdiction to give due course to and adjudicate Arbicom Case No.
84033?
2. Were the subject checks non-negotiable and if not, does it fall under the ambit of the
power of the PCHC?
3. Is the Negotiable Instrument Law, Act No. 2031 applicable in deciding controversies of this
nature by the PCHC?
4. What law should govern in resolving controversies of this nature?
5. Was the petitioner bank negligent and thus responsible for any undue payment?
Petitioner maintains that the PCHC is not clothed with jurisdiction because the Clearing
House Rules and Regulations of PCHC cover and apply only to checks that are genuinely
negotiable. Emphasis is laid on the primary purpose of the PCHC in the Articles of
Incorporation, which states:
To provide, maintain and render an effective, convenient, efficient,
economical and relevant exchange and facilitate service limited to check
processing and sorting by way of assisting member banks, entities
in clearing checks and other clearing items as defined in existing and in
future Central Bank of the Philippines circulars, memoranda, circular
letters, rules and regulations and policies in pursuance to the provisions
of Section 107 of R.A. 265. ...
and Section 107 of R.A. 265 which provides:
xxx xxx xxx
The deposit reserves maintained by the banks in the Central Bank, in
accordance with the provisions of Section 1000 shall serve as a basis for
the clearing of checks, and the settlement of interbank balances ...
Petitioner argues that by law and common sense, the term check should be interpreted as
one that fits the articles of incorporation of the PCHC, the Central Bank and the Clearing
House Rules stating that it is a negotiable instrument citing the definition of a "check" as
basically a "bill of exchange" under Section 185 of the NIL and that it should be payable to
"order" or to "bearer" under Section 126 of game law. Petitioner alleges that with the
cancellation of the printed words "or bearer from the face of the check, it becomes non-
negotiable so the PCHC has no jurisdiction over the case.
The Regional Trial Court took exception to this stand and conclusion put forth by the herein
petitioner as it held:
Petitioner's theory cannot be maintained. As will be noted, the PCHC
makes no distinction as to the character or nature of the checks subject
of its jurisdiction. The pertinent provisions quoted in petitioners
memorandum simply refer to check(s). Where the law does not
distinguish, we shall not distinguish.
In the case of Reyes vs. Chuanico (CA-G.R. No. 20813 R, Feb. 5, 1962) the
Appellate Court categorically stated that there are four kinds of checks in
this jurisdiction; the regular check; the cashier's check; the traveller's
check; and the crossed check. The Court, further elucidated, that while
the Negotiable Instruments Law does not contain any provision on
crossed checks, it is coon practice in commercial and banking operations
to issue checks of this character, obviously in accordance with Article 541
of the Code of Commerce. Attention is likewise called to Section 185 of
the Negotiable Instruments Law:
Sec. 185. Check defined. A check is a bill of
exchange drawn on a bank payable on demand.
Except as herein otherwise provided, the provisions
of this act applicable to a bill of exchange payable on
demand apply to a check
and the provisions of Section 61 (supra) that the drawer may insert in the
instrument an express stipulation negating or limiting his own liability to
the holder. Consequently, it appears that the use of the term "check" in
the Articles of Incorporation of PCHC is to be perceived as not limited to
negotiable checks only, but to checks as is generally known in use in
commercial or business transactions.
Anent Petitioner's liability on said instruments, this court is in full accord
with the ruling of the PCHC Board of Directors that:
In presenting the Checks for clearing and for
payment, the defendant made an express guarantee
on the validity of "all prior endorsements." Thus,
stamped at the back of the checks are the
defendant's clear warranty; ALL PRIOR
ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS
GUARANTEED. With. out such warranty, plaintiff
would not have paid on the checks.
No amount of legal jargon can reverse the clear
meaning of defendant's warranty. As the warranty
has proven to be false and inaccurate, the defendant
is liable for any damage arising out of the falsity of its
representation.
The principle of estoppel, effectively prevents the
defendant from denying liability for any damage
sustained by the plaintiff which, relying upon an
action or declaration of the defendant, paid on the
Checks. The same principle of estoppel effectively
prevents the defendant from denying the existence of
the Checks. (Pp. 1011 Decision; pp. 4344, Rollo)
We agree.
As provided in the aforecited articles of incorporation of PCHC its operation extend to
"clearing checks and other clearing items." No doubt transactions on non-negotiable checks
are within the ambit of its jurisdiction.
In a previous case, this Court had occasion to rule: "Ubi lex non distinguish nec nos
distinguere debemos."
2
It was enunciated in Loc Cham v. Ocampo, 77 Phil. 636 (1946):
The rule, founded on logic is a corollary of the principle that general
words and phrases in a statute should ordinarily be accorded their
natural and general significance. In other words, there should be no
distinction in the application of a statute where none is indicated.
There should be no distinction in the application of a statute where none is indicated for
courts are not authorized to distinguish where the law makes no distinction. They should
instead administer the law not as they think it ought to be but as they find it and without
regard to consequences.
3

The term check as used in the said Articles of Incorporation of PCHC can only connote checks
in general use in commercial and business activities. It cannot be conceived to be limited to
negotiable checks only.
Checks are used between banks and bankers and their customers, and are designed to
facilitate banking operations. It is of the essence to be payable on demand, because the
contract between the banker and the customer is that the money is needed on demand.
4

The participation of the two banks, petitioner and private respondent, in the clearing
operations of PCHC is a manifestation of their submission to its jurisdiction. Sec. 3 and 36.6 of
the PCHC-CHRR clearing rules and regulations provide:
SEC. 3. AGREEMENT TO THESE RULES. It is the general agreement and
understanding that any participant in the Philippine Clearing House
Corporation, MICR clearing operations by the mere fact of their
participation, thereby manifests its agreement to these Rules and
Regulations and its subsequent amendments."
Sec 36.6. (ARBITRATION) The fact that a bank participates in the
clearing operations of the PCHC shall be deemed its written and
subscribed consent to the binding effect of this arbitration agreement as
if it had done so in accordance with section 4 of the Republic Act No. 876,
otherwise known as the Arbitration Law.
Further Section 2 of the Arbitration Law mandates:
Two or more persons or parties may submit to the arbitration of one or
more arbitrators any controversy existing between them at the time of
the submission and which may be the subject of an action, or the parties
of any contract may in such contract agree to settle by arbitration a
controversy thereafter arising between them. Such submission or
contract shall be valid and irrevocable, save upon grounds as exist at law
for the revocation of any contract.
Such submission or contract may include question arising out of
valuations, appraisals or other controversies which may be collateral,
incidental, precedent or subsequent to any issue between the parties. ...
Sec. 21 of the same rules, says:
Items which have been the subject of material alteration or items bearing
forged endorsement when such endorsement is necessary for negotiation
shall be returned by direct presentation or demand to the Presenting
Bank and not through the regular clearing house facilities within the
period prescribed by law for the filing of a legal action by the returning
bank/branch, institution or entity sending the same. (Emphasis supplied)
Viewing these provisions the conclusion is clear that the PCHC Rules and Regulations should
not be interpreted to be applicable only to checks which are negotiable instruments but also
to non-negotiable instruments and that the PCHC has jurisdiction over this case even as the
checks subject of this litigation are admittedly non-negotiable.
Moreover, petitioner is estopped from raising the defense of non-negotiability of the checks
in question. It stamped its guarantee on the back of the checks and subsequently presented
these checks for clearing and it was on the basis of these endorsements by the petitioner
that the proceeds were credited in its clearing account.
The petitioner by its own acts and representation can not now deny liability because it
assumed the liabilities of an endorser by stamping its guarantee at the back of the checks.
The petitioner having stamped its guarantee of "all prior endorsements and/or lack of
endorsements" (Exh. A-2 to F-2) is now estopped from claiming that the checks under
consideration are not negotiable instruments. The checks were accepted for deposit by the
petitioner stamping thereon its guarantee, in order that it can clear the said checks with the
respondent bank. By such deliberate and positive attitude of the petitioner it has for all legal
intents and purposes treated the said cheeks as negotiable instruments and accordingly
assumed the warranty of the endorser when it stamped its guarantee of prior endorsements
at the back of the checks. It led the said respondent to believe that it was acting as endorser
of the checks and on the strength of this guarantee said respondent cleared the checks in
question and credited the account of the petitioner. Petitioner is now barred from taking an
opposite posture by claiming that the disputed checks are not negotiable instrument.
This Court enunciated in Philippine National Bank vs. Court of Appeals
5
a point relevant to
the issue when it stated the doctrine of estoppel is based upon the grounds of public policy,
fair dealing, good faith and justice and its purpose is to forbid one to speak against his own
act, representations or commitments to the injury of one to whom they were directed and
who reasonably relied thereon.
A commercial bank cannot escape the liability of an endorser of a check and which may turn
out to be a forged endorsement. Whenever any bank treats the signature at the back of the
checks as endorsements and thus logically guarantees the same as such there can be no
doubt said bank has considered the checks as negotiable.
Apropos the matter of forgery in endorsements, this Court has succinctly emphasized that
the collecting bank or last endorser generally suffers the loss because it has the duty to
ascertain the genuineness of all prior endorsements considering that the act of presenting
the check for payment to the drawee is an assertion that the party making the presentment
has done its duty to ascertain the genuineness of the endorsements. This is laid down in the
case of PNB vs. National City Bank.
6
In another case, this court held that if the drawee-bank
discovers that the signature of the payee was forged after it has paid the amount of the
check to the holder thereof, it can recover the amount paid from the collecting bank.
7

A truism stated by this Court is that "The doctrine of estoppel precludes a party from
repudiating an obligation voluntarily assumed after having accepted benefits therefrom. To
countenance such repudiation would be contrary to equity and put premium on fraud or
misrepresentation".
8

We made clear in Our decision in Philippine National Bank vs. The National City Bank of NY &
Motor Service Co. that:
Where a check is accepted or certified by the bank on which it is drawn,
the bank is estopped to deny the genuineness of the drawers signature
and his capacity to issue the instrument.
If a drawee bank pays a forged check which was previously accepted or
certified by the said bank, it can not recover from a holder who did not
participate in the forgery and did not have actual notice thereof.
The payment of a check does not include or imply its acceptance in the
sense that this word is used in Section 62 of the Negotiable Instruments
Act.
9

The point that comes uppermost is whether the drawee bank was negligent in failing to
discover the alteration or the forgery. Very akin to the case at bar is one which involves a suit
filed by the drawer of checks against the collecting bank and this came about in Farmers
State Bank
10
where it was held:
A cause of action against the (collecting bank) in favor of the appellee
(the drawer) accrued as a result of the bank breaching its implied
warranty of the genuineness of the indorsements of the name of the
payee by bringing about the presentation of the checks (to the drawee
bank) and collecting the amounts thereof, the right to enforce that cause
of action was not destroyed by the circumstance that another cause of
action for the recovery of the amounts paid on the checks would have
accrued in favor of the appellee against another or to others than the
bank if when the checks were paid they have been indorsed by the
payee. (United States vs. National Exchange Bank, 214 US, 302, 29 S
CT665, 53 L. Ed 1006, 16 Am. Cas. 11 84; Onondaga County Savings Bank
vs. United States (E.C.A.) 64 F 703)
Section 66 of the Negotiable Instruments ordains that:
Every indorser who indorsee without qualification, warrants to all
subsequent holders in due course' (a) that the instrument is genuine and
in all respects what it purports to be; (b) that he has good title to it; (c)
that all prior parties have capacity to contract; and (d) that the
instrument is at the time of his indorsement valid and subsisting.
11

It has been enunciated in an American case particularly in American Exchange National Bank
vs. Yorkville Bank
12
that: "the drawer owes no duty of diligence to the collecting bank (one
who had accepted an altered check and had paid over the proceeds to the depositor) except
of seasonably discovering the alteration by a comparison of its returned checks and check
stubs or other equivalent record, and to inform the drawee thereof." In this case it was
further held that:
The real and underlying reasons why negligence of the drawer
constitutes no defense to the collecting bank are that there is no privity
between the drawer and the collecting bank (Corn Exchange Bank vs.
Nassau Bank, 204 N.Y.S. 80) and the drawer owe to that bank no duty of
vigilance (New York Produce Exchange Bank vs. Twelfth Ward Bank, 204
N.Y.S. 54) and no act of the collecting bank is induced by any act or
representation or admission of the drawer (Seaboard National Bank vs.
Bank of America (supra) and it follows that negligence on the part of the
drawer cannot create any liability from it to the collecting bank, and the
drawer thus is neither a necessary nor a proper party to an action by the
drawee bank against such bank. It is quite true that depositors in banks
are under the obligation of examining their passbooks and returned
vouchers as a protection against the payment by the depository bank
against forged checks, and negligence in the performance of that
obligation may relieve that bank of liability for the repayment of amounts
paid out on forged checks, which but for such negligence it would be
bound to repay. A leading case on that subject is Morgan vs. United
States Mortgage and Trust Col. 208 N.Y. 218, 101 N.E. 871 Amn. Cas.
1914D, 462, L.R.A. 1915D, 74.
Thus We hold that while the drawer generally owes no duty of diligence to the collecting
bank, the law imposes a duty of diligence on the collecting bank to scrutinize checks
deposited with it for the purpose of determining their genuineness and regularity. The
collecting bank being primarily engaged in banking holds itself out to the public as the expert
and the law holds it to a high standard of conduct.
And although the subject checks are non-negotiable the responsibility of petitioner as
indorser thereof remains.
To countenance a repudiation by the petitioner of its obligation would be contrary to equity
and would deal a negative blow to the whole banking system of this country.
The court reproduces with approval the following disquisition of the PCHC in its decision
II. Payments To Persons Other
Than The Payees Are Not Valid
And Give Rise To An Obligation
To Return Amounts Received
Nothing is more clear than that neither the defendant's depositor nor the
defendant is entitled to receive payment payable for the Checks. As the
checks are not payable to defendant's depositor, payments to persons
other than payees named therein, their successor-in-interest or any
person authorized to receive payment are not valid. Article 1240, New
Civil Code of the Philippines unequivocably provides that:
"Art. 1240. Payment shall be made to the person in
whose favor the obligation has been constituted, or
his successo-in-interest, or any person authorized to
receive it. "
Considering that neither the defendant's depositor nor the defendant is
entitled to receive payments for the Checks, payments to any of them
give rise to an obligation to return the amounts received. Section 2154 of
the New Civil Code mandates that:
Article 2154. If something is received when there is
no right to demand it, and it was unduly delivered
through mistake, the obligation to return it arises.
It is contended that plaintiff should be held responsible for issuing the
Checks notwithstanding that the underlying transactions were fictitious
This contention has no basis in our jurisprudence.
The nullity of the underlying transactions does not diminish, but in fact
strengthens, plaintiffs right to recover from the defendant. Such nullity
clearly emphasizes the obligation of the payees to return the proceeds of
the Checks. If a failure of consideration is sufficient to warrant a finding
that a payee is not entitled to payment or must return payment already
made, with more reason the defendant, who is neither the payee nor the
person authorized by the payee, should be compelled to surrender the
proceeds of the Checks received by it. Defendant does not have any title
to the Checks; neither can it claim any derivative title to them.
III. Having Violated Its Warranty
On Validity Of All Endorsements,
Collecting Bank Cannot Deny
liability To Those Who Relied
On Its Warranty
In presenting the Checks for clearing and for payment, the defendant
made an express guarantee on the validity of "all prior endorsements."
Thus, stamped at the bank of the checks are the defendant's clear
warranty: ALL PRIOR ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS
GUARANTEED. Without such warranty, plaintiff would not have paid on
the checks.
No amount of legal jargon can reverse the clear meaning of defendant's
warranty. As the warranty has proven to be false and inaccurate, the
defendant is liable for any damage arising out of the falsity of its
representation.
The principle of estoppel effectively prevents the defendant from
denying liability for any damages sustained by the plaintiff which, relying
upon an action or declaration of the defendant, paid on the Checks. The
same principle of estoppel effectively prevents the defendant from
denying the existence of the Checks.
Whether the Checks have been issued for valuable considerations or not
is of no serious moment to this case. These Checks have been made the
subject of contracts of endorsement wherein the defendant made
expressed warranties to induce payment by the drawer of the Checks;
and the defendant cannot now refuse liability for breach of warranty as a
consequence of such forged endorsements. The defendant has falsely
warranted in favor of plaintiff the validity of all endorsements and the
genuineness of the cheeks in all respects what they purport to be.
The damage that will result if judgment is not rendered for the plaintiff is
irreparable. The collecting bank has privity with the depositor who is the
principal culprit in this case. The defendant knows the depositor; her
address and her history, Depositor is defendant's client. It has taken a risk
on its depositor when it allowed her to collect on the crossed-checks.
Having accepted the crossed checks from persons other than the payees,
the defendant is guilty of negligence; the risk of wrongful payment has to
be assumed by the defendant.
On the matter of the award of the interest and attorney's fees, the Board
of Directors finds no reason to reverse the decision of the Arbiter. The
defendant's failure to reimburse the plaintiff has constrained the plaintiff
to regular the services of counsel in order to protect its interest
notwithstanding that plaintiffs claim is plainly valid just and demandable.
In addition, defendant's clear obligation is to reimburse plaintiff upon
direct presentation of the checks; and it is undenied that up to this time
the defendant has failed to make such reimbursement.
WHEREFORE, the petition is DISMISSED for lack of merit without pronouncement as to costs.
The decision of the respondent court of 24 March 1986 and its order of 3 June 1986 are
hereby declared to be immediately executory.
SO ORDERED.
Teehankee, C.J., Narvasa, Cruz and Paras, JJ., concur.

[ G.R. No. 45625, April 28, 1939 ]
MARGARITA VILLANUEVA, AS JUDICIAL ADMINISTRATRIX OF THE DECEASED LORENZO
VILLANUEVA, PLAINTIFF AND APPELLANT, VS. JUAN SANTOS, DEFENDANT AND APPELLEE.

D E C I S I O N
IMPERIAL, J.:
This appeal was taken by the plaintiff from the order of the Court of First Instance of Bulacan,
holding that the consignation made by said plaintiff was invalid and that the sale with the
right of repurchase of the parcels of land in litigation was final, and ordering her to yield
possession thereof to the defendant within ten days from receipt of notice of the said order.
The plaintiff, as judicial administratrix of the deceased Lorenzo Villanueva, commenced in the
Court of First Instance of Bulacan civil case No. 5249 against the defendant to annul the deed
of sale with the right of repurchase of two parcels of land executed by the said Lorenzo
"Villanueva while living in favor of the defendant. The following decision was rendered in the
said case:
"When this case was called for trial, the parties through their respective attorneys submitted
the following stipulation for the decision of the court:
'"Both parties, assisted by their respective attorneys, agree that the plaintiff shall pay on
December 4, 1936, to the defendant to repurchase the two parcels of land described in the
complaint, the sum of three hundred fifty-nine pesos and sixty centavos (P359.60), with legal
interest thereon from January 8, 1934 until the said date, December 4, 1936; and that should
she fail to pay the said sum of P359.60, or a part thereof, or the interest thereon, wholly or
partially, then the sale with the right of repurchase of said parcels, as they appear in the
deed of sale Exhibit A of the complaint, shall be deemed final; and that the plaintiff shall
deliver the possession of said parcels.
" 'They likewise agree that should the plaintiff pay the aforesaid sums within the stipulated
period, the expenses for the execution of the corresponding deed and the transfer of
certificates shall be defrayed by the plaintiff.
" 'They also agree that the plaintiff shall on this very date ask the authority of the court to
enter into this stipulation in the intestate of the deceased Lorenzo Villanueva; and to render
a decision in accordance therewith.'
"Wherefore, the court approves this stipulation and orders the parties to observe and
comply strictly with the conditions thereof, without pronouncement as to the costs. So
ordered.
"Malolos, Bulacan, today November 5, 1936.
(Sgd.) "PEDRO MA. SISON
"Judge" (B. E., p. 7.)
On the night of December 4, 1936, the date of the expiration of the period granted to the
plaintiff to pay the repurchase price, the latter offered to the defendant the check No. D-
8695 for P421.04, issued by Ramon Meneses against the Bank of the Philippine Islands in
payment of the repurchase price. As the defendant refused to accept the check on the
allegation that the payment should be made in money or legal tender, the plaintiff, through
counsel, deposited the check with the clerk of court who received the same, and at the same
time put in a motion asking that the payment be deemed effected and the two parcels of
land redeemed, and, further, that the defendant be ordered to pay her the sum of P120 as
damages. After hearing the motion, the court on April 30, 1937, issued the aforementioned
order from which the plaintiff appealed.
In her sole assigned error the plaintiff contends that the court erred in holding that the
consignation of the check with the clerk of court was invalid and that it did not have the
effect of paying her obligation. The court correctly held that the consignation was unavailing
and that it did not produce any legal effect because the defendant did not accept it and it
was not in the form of money or legal tender. Article 1170 of the Civil Code provides that
payment of debts of money shall be made in the specie stipulated and, should it not be
possible to deliver such specie, in silver or gold coin legally current; and provides, further,
that the delivery of promissory notes payable to order, or drafts or other commercial paper,
shall produce the effects of payment only when realized or when, by the fault of the creditor,
the privileges inherent in their negotiable character have been lost. Under this legal provision
the defendant was not under a duty to accept the check because it is known that it does not
constitute legal tender, and the consignation having been refused, it did not produce any
legal effect and could not be considered as payment made by the plaintiff of the repurchase
price. In Belisario vs. Natividad ([1934], 60 Phil., 156), it was held that a creditor is not bound
to accept a check in satisfaction of his demand, because a check, even if good when offered,
does not meet the requirements of a legal tender.
The defendant, in turn, alleges that the court erred in concluding that he testified that the
plaintiff's indebtedness was P421.04, and in not holding that the consignation was invalid
because the plaintiff's debt was P422.29 and the check only amounted toP421.04. These
assigned errors can neither be considered nor passed upon for the simple reason that the
defendant did not appeal from any part of the court's order.
In view of the foregoing, the appealed order is affirmed, with the costs of this instance to the
plaintiff-appellant. So ordered.
Avancea, C. J., Villa-Real, Diaz, Laurel, Concepcion, and Moran, JJ., concur.

[ G. R. No. L-10221, February 28, 1958 ]
INTESTATE OF LUTHER YOUNG AND PACITA YOUNG, SPOUSES. PACIFICA JIMENEZ,
PETITIONER AND APPELLEE, VS. DR. JOSE BUCOY, ADMINISTRATOR AND APPELLANT.

D E C I S I O N
BENGZON, J.:
In this intestate of Luther Young and Pacita Young who died in 1954 and 1952 respectively,
Pacifica Jimenez presented for payment four promissory notes signed by Pacita for different
amounts totalling twenty-one thousand pesos (P21,000).
Acknowledging receipt by Pacita during the Japanese occupation, in the currency then
prevailing, the administrator manifested willingness to pay provided adjustment of the sums
be made in line with the Ballantyne schedule.
The claimant objected to the adjustment insisting on full payment in accordance with the
notes.
Applying doctrines of this Court on the matter, the Hon. Primitivo L. Gonzales, Judge, held
that the notes should be paid in the currency prevailing after the war, and that consequently
plaintiff was entitled to recover P21,000 plus attorneys fees for the sum of P2,000.
Hence this appeal.
Executed in the month of August 1944, the first promissory note read as follows:
"Received from Miss Pacifica Jimenez the total amount of P10,000) ten thousand pesos
payable six months after the war, without interest."
The other three notes were couched in the same terms, except as to amounts and dates.
There can be no serious question that the notes were promises to pay "six months after the
war," the amounts mentioned.
But the important question, which obviously compelled the administrator to appeal, is
wether the amounts should be paid, peso for peso, or whether a reduction should be made
in accordance with the well-known Ballantyne schedule.
This matter of payment of loans contracted during the Japanese occupation has received our
attention is many litigations after the liberation. The gist of our adjudications, in so far as
material here, is that if the loadn could be paid during the Japanese occupation, the
Ballantyne schedule should apply with corresponding reduction of the amount.
[1]
However, if
the loan was expressly agreed to be payable only after the war or after liberation, or became
payable after those dates, no reduction could be effected, and peso-for-peso payment shall
be ordered in Philippine currency.
[2]

"The Ballantyne Conversion Table does not apply where the monetary obligation, under the
contract, was not payable duping the Japanese occupation but until after one year counted
from the date of ratification of the Treaty of Peace concluding the Greater East Asia War."
(Arellano vs. De Domingo, 101 Phil., 902.)
"When a monetary obligation is contracted during the Japanese occupation, to be discharged
after the war, the payment should be made in Philippine Currency." (Kare et al. vs. Imperial
et al., 102 Phil., 173.)
Now then, as In the easa before us, the debtor undertook to pay "six months after the war,"
peso for peso payment is indicated.
The Ang Lam
[3]
case cited by appellant is not controlling, because the loan therein given could
have been repaid during the Japanese occupation. Dated December 26, 1944, it was payable
within one year. Payment could therefore have been made during January 1945. The notes
here in question were payable only after the war.
The appellant administrator calls attention to the fact that the notes contained no express
promise to pay a specified amount. We declare the point to be without merit. In accordance
with doctrines on the matter, the note hareinabove quoted amounted in effect to "a promise
to pay ten thousand pesos six months after the war, without interest." And so of the other
notes.
"An acknowledgment may become a promise by the addition of words by which a promise of
payment is naturally implied, such as, "payable," "payable " on a given day, "payable" on a
given day, payable on deman," "paid . . .when called for," * * *. (10 Corpus Juris Secundum p.
523.)
"To constitute a good promissory note, no precise words fof contract are necessary, provided
they amount, in legal effect, to a promise to pay. In other words, if over and ipve the mere
acknowledgment of the debt there may be collected from the words used, a promise to pay
it, the instrument may be regarded as a promissory note. 1 Daniel, Neg. Inst. 36 et seq.;
Byles, Bills, 10, 11, and cases cited. * * *. "Due A. B. $325, payable on demand," or, "I
acknowledge myself to be indebted to A. in $109, to be paid on demand, for value received,"
or, "I. O. U. $85 to be paid on May 5th," are held to be promissory notes, significance being
given to words of payment as indicating a promise to pay. 1 Daniel Neg. Inst. sec. 39, and
cases cited. (Cowan vs. Hallack, (Colo.) 13 Pacific Reporter 700, 703.)
Another argument of appellant is that as the deceased Luther Young did not sign these notes,
his estate is not liable for the same. This defense, however, was not interposed in the lower
court. There the only issue related to the amount to be paid, considering that the money had
been received in Japanese money. It is now unfair to put up this new defense, because had it
been raised in the court below, appellees could have proved, what they now allege, that
Pacita contracted the obligation to support and maintain herself, her son and her
husband (then concentrated at Santo Tomas University) during the hard days of the
occupation.
It is now settled practice that on appeal a change of theory is not permitted.
"In order that a question may be raised on appeal, it is essential that it be within the issues
made by the parties in their pleadings. Consequently, then a party deliberately adopts a
certain theory, and the case is tried and decided upon that theory in the court below, he will
not be permitted to change his theory on appeal because, to permit him to do so, would be
unfair to the adverse party." (Rules of Court by Koran-1957 Ed. Vol. I p. 715 citing Agoncillo
vs. Javier, 38 Phil., 424; American Express Company vs. Natividad, 46 Phil. 207; San Agustin
vs. Barrios, 68 Phil. 475, 480; Toribio vs. Dacasa, 55 Phil. 461.)
Appellant's last assignment of error concerns attorneys fees. He says there was no reason for
making this an exception to the general rule that attorney's fees are not recoverable in the
absence of stipulation.
Under the new Civil Code, attorney's fees and expenses of litigation may be awarded in this
case if "defendant acted in gross and evident bad faith in refusing to satisfy plaintiff's plainly
valid, just and demandable claim" or "where the court deems it just and equitable that
attorney's fees be recovered" (Art. 2208 Civil Code). These are if applicable-some of the
exceptions to the ganeral rule that In the absence of stipulation no attorney's fees shall be
awarded.
The trial court did not explain why it ordered payment of counsel fees. Needless to say, it is
desirable that the decision should state the reason why such award is made, bearing in mind
that it must necessarily rest on. an exceptional situation. Unless of course the text of the
decision plainly shows the case to fall into one of the exceptions, for instance "in actions for
legal support," "when exemplary damages are awarded," ate. In the case at bar, defendant
could not obviously be held to have "acted in gross and evident bad faith." He did not deny
the debt, and merely pleaded for adjustment, invoking decisions he thought to be
controlling. If the trial judge considered it "just and "equitable" to require payment of
attorney's fees because the defenseadjustment under Ballantyne scheduleproved to be
untenable in view of this Court's applicable rulings, it would be error to uphold his view.
Otherwise, every time a defendant loses, attorney's fees would follow as a matter of course.
Under the article above' cited, even a clearly untenable defense would tie no ground for
awarding attorney's fees unless it amounted to "gross and evident bad faith."
Plaintiff's attorneys attempt to sustain the award on tty ground of defendant's refusal to
accept hsr offer, before the suit, to take P5,000.00 in full settlement of her claim. We do not
think this is tenable, defendant's attitude being merely a consequance of his line of defense,
which though erroneous does not amount to "gross and aviaent bad faith." For one thing,
there is a point raised by defendant, which so far as we are informed, has not been directly
passed upon in this jurisdiction: the notes contained no express promise to pay a definite
amount.
There being no circumstance making it reasonable and just to require defendant to pay
attorney's fees, the last assignment of error inusu be upheld.
Wherefore, in view of the foregoing consideration, the appealed decision is affirmed, except
as to the attorney's fees which are hereby disapproved. So ordered.
Montemayor, Reyes, A., Baustista Angelo, Labrador, Concepcion, Reyes, J. B. L.,
Endencia, and Felix., JJ., concur.

FIRST DIVISION
[ G.R. Nos. L-25836-37, January 31, 1981 ]
THE PHILIPPINE BANK OF COMMERCE, PLAINTIFF-APPELLEE, VS. JOSE M. ARUEGO,
DEFENDANT-APPELLANT.

D E C I S I O N
FERNANDEZ, J.:
The defendant, Jose M. Aruego, appealed to the Court of Appeals from the order of the Court
of First Instance of Manila, Branch XIII, in Civil Case No. 42066 denying his motion to set aside
the order declaring him in default,
[1]
and from the order of said court in the same case
denying his motion to set aside the judgment rendered after he was declared in
default.
[2]
These two appeals of the defendant were docketed as CA-G.R. NO. 27734-R and
CA-G.R. NO. 27940-R, respectively.
Upon motion of the defendant on July 25, 1960,
[3]
he was allowed by the Court of Appeals to
file one consolidated record on appeal of CA-G.R. NO. 27734-R and CA-G.R. 27940-R.
[4]

In a resolution promulgated on March 1, 1966, the Court of Appeals, First Division, certified
the consolidated appeal to the Supreme Court on the ground that only questions of law are
involved.
[5]

On December 1, 1959, the Philippine Bank of Commerce instituted against Jose M. Aruego
Civil Case No. 42066 for the recovery of the total sum of about P35,000.00 with daily interest
thereon from November 17, 1959 until fully paid and commission equivalent to 3/8% for
every thirty (30) days or fraction thereof plus attorney's fees equivalent to 10% of the total
amount due and costs.
[6]
The complaint filed by the Philippine Bank of Commerce contains
twenty-two (22) causes of action referring to twenty-two (22) transactions entered into by
the said Bank and Aruego on different dates covering the period from August 28, 1950 to
March 14, 1951.
[7]
The sum sought to be recovered represents the cost of the printing of
"World Current Events," a periodical published by the defendant. To facilitate the payment of
the printing the defendant obtained a credit accommodation from the plaintiff. Thus, for
every printing of the "World Current Events," the printer, Encal Press and Photo-Engraving,
collected the cost of printing by drawing a draft against the plaintiff, said draft being sent
later to the defendant for acceptance. As an added security for the payment of the amounts
advanced to Encal Press and Photo-Engraving, the plaintiff bank also required defendant
Aruego to execute a trust receipt in favor of said bank wherein said defendant undertook to
hold in trust for plaintiff the periodicals and to sell the same with the promise to turn over to
the plaintiff the proceeds of the sale of said publication to answer for the payment of all
obligations arising from the draft.
[8]

Aruego received a copy of the complaint together with the summons on December 2,
1959.
[9]
On December 14, 1959 the defendant filed an urgent motion for extension of time
to plead, and set the hearing on December 16, 1959.
[10]
At the hearing, the court denied
defendant's motion for extension. Whereupon, the defendant filed a motion to dismiss the
complaint on December 17, 1959 on the ground that the complaint states no cause of action
because:

a) When the various bills of exchange were presented to the defendant as drawee for
acceptance, the amounts thereof had already been paid by the plaintiff to the drawer (Encal
Press and Photo Engraving), without knowledge or consent of the defendant drawee.

b) In the case of a bill of exchange, like those involved in the case at bar, the defendant
drawee is an accommodating party only for the drawer (Encal Press and Photo-Engraving)
and will be liable in the event that the accommodating party (drawer) fails to pay its
obligation to the plaintiff.
[11]

The complaint was dismissed in an order dated December 22, 1959, copy of which was
received by the defendant on December 24, 1959.
[12]

On January 13, 1960, the plaintiff filed a motion for reconsideration.
[13]
On March 7, 1960,
acting upon the motion for reconsideration filed by the plaintiff, the trial court set aside its
order dismissing the complaint and set the case for hearing on March 15, 1960 at 8:00 in the
morning.
[14]
A copy of the order setting aside the order of dismissal was received by the
defendant on March 11, 1960 at 5:00 o'clock in the afternoon according to the affidavit of
the deputy sheriff of Manila, Mamerto de la Cruz. On the following day, March 12, 1960, the
defendant filed a motion to postpone the trial of the case on the ground that there having
been no answer as yet, the issues had not yet been joined.
[15]
On the same date, the
defendant filed his answer to the complaint interposing the following defenses: That he
signed the document upon which the plaintiff sues in his capacity as President of the
Philippine Education Foundation; that his liability is only secondary; and that he believed that
he was signing only as an accommodation party.
[16]

On March 15, 1960, the plaintiff filed an ex parte motion to declare the defendant in default
on the ground that the defendant should have filed his answer on March 11, 1960. He
contends that by filing his answer on March 12, 1960, defendant was one day late.
[17]
On
March 19, 1960 the trial court declared the defendant in default.
[18]
The defendant learned
of the order declaring him in default on March 21, 1960. On March 22, 1960 the defendant
filed a motion to set aside the order of default alleging that although the order of the court
dated March 7, 1960 was received on March 11, 1960 at 5:00 in the afternoon, it could not
have been reasonably expected of the defendant to file his answer on the last day of the
reglementary period, March 11, 1960, within office hours, especially because the order of the
court dated March 7, 1960 was brought to the attention of counsel only in the early hours of
March 12, 1960. The defendant also alleged that he has a good and substantial defense.
Attached to the motion are the affidavits of deputy sheriff Mamerto de la Cruz that he served
the order of the court dated March 7, 1960 on March 11, 1960, at 5:00 oclock in the
afternoon and the affidavit of the defendant Aruego that he has a good and substantial
defense.
[19]
The trial court denied the defendant's motion on March 25, 1960.
[20]
On May 6,
1960, the trial court rendered judgment sentencing the defendant to pay to the plaintiff the
sum of P35,444.35 representing the total amount of his obligation to the said plaintiff under
the twenty-two (22) causes of action alleged in the complaint as of November 15, 1957 and
the sum of P10,000.00 as attorney's fees.
[21]

On May 9, 1960 the defendant filed a notice of appeal from the order dated March 25, 1961
denying his motion to set aside the order declaring him in default, an appeal bond in the
amount of P60.00, and his record on appeal. The plaintiff filed his opposition to the approval
of defendant's record on appeal on May 13, 1960. The following day, May 14, 1960, the
lower court dismissed defendant's appeal from the order dated March 25, 1960 denying his
motion to set aside the order of default.
[22]
On May 19, 1960, the defendant filed a motion
for reconsideration of the trial court's order dismissing his appeal.
[23]
The plaintiff, on May
20, 1960, opposed the defendant's motion for reconsideration of the order dismissing
appeal.
[24]
On May 21, 1960, the trial court reconsidered its previous order dismissing the
appeal and approved the defendant's record on appeal.
[25]
On May 30, 1960, the defendant
received a copy of a notice from the Clerk of Court dated May 26, 1960, informing the
defendant that the record on appeal filed by the defendant was forwarded to the Clerk of the
Court of Appeals.
[26]

On June 1, 1960 Aruego filed a Motion to set aside the judgment rendered after he was
declared in default reiterating the same ground previously advanced by him in his motion for
relief from the order of default.
[27]
Upon opposition of the plaintiff filed on June 3,
1960,
[28]
the trial court denied the defendant's motion to set aside the judgment by default in
an order of June 11, 1960.
[29]
On June 20, 1960, the defendant filed his notice of appeal from
the order of the court denying his motion to set aside the judgment by default, his appeal
bond, and his record on appeal. The defendant's record on appeal was approved by the trial
court on June 25, 1960.
[30]
Thus, the defendant had two appeals with the Court of Appeals:
(1) Appeal from the order of the lower court denying his motion to set aside the order of
default docketed as CA-G.R. NO. 27734-R; (2) Appeal form the order denying his motion to
set aside the judgment by default docketed as CA-G.R. NO. 27940-R.
In his brief, the defendant-appellant assigned the following errors:

"I

THE LOWER COURT ERRED IN HOLDING THAT THE DEFENDANT WAS IN DEFAULT.

"II

THE LOWER COURT ERRED IN ENTERTAINING THE MOTION TO DECLARE DEFENDANT IN
DEFAULT ALTHOUGH AT THE TIME THERE WAS ALREADY ON FILE AN ANSWER BY HIM
WITHOUT FIRST DISPOSING OF SAID ANSWER IN AN APPROPRIATE ACTION.

"III

THE LOWER COURT ERRED IN DENYING DEFENDANT'S PETITION FOR RELIEF OF ORDER OF
DEFAULT AND FROM JUDGMENT BY DEFAULT AGAINST DEFENDANT."
[31]

It has been held that to entitle a party to relief from a judgment taken against him through
his mistake, inadvertence, surprise or excusable neglect, he must show to the court that he
has a meritorious defense.
[32]
In other words, in order to set aside the order of default, the
defendant must not only show that his failure to answer was due to fraud, accident, mistake
or excusable negligence but also that he has a meritorious defense.
The record discloses that Aruego received a copy of the complaint together with the
summons on December 2, 1960; that on December 17, 1960, the last day for filing his
answer, Aruego filed a motion to dismiss; that on December 22, 1960 the lower court
dismissed the complaint; that on January 23, 1960, the plaintiff filed a motion for
reconsideration and on March 7, 1960, acting upon the motion for reconsideration, the trial
court issued an order setting aside the order of dismissal; that a copy of the order was
received by the defendant on March 11, 1960 at 5:00 o'clock in the afternoon as shown in
the affidavit of the deputy sheriff; and that on the following day, March 12, 1960, the
defendant filed his answer to the complaint.
The failure then of the defendant to file his answer on the last day for pleading is excusable.
The order setting aside the dismissal of the complaint was received at 5:00 o'clock in the
afternoon. It was therefore impossible for him to have filed his answer on that same day
because the courts then held office only p to 5:00 o'clock in the afternoon. Moreover, the
defendant immediately filed his answer on the following day.
However, while the defendant successfully proved that his failure to answer was due to
excusable negligence, he has failed to show that he has a meritorious defense.
The defendant does not have a good and substantial defense. Defendant Aruego's defenses
consist of the following:

a) The defendant signed the bills of exchange referred to in the plaintiff's complaint in a
representative capacity, as the then President of the Philippine Education Foundation
Company, publisher of "World Current Events and Decision Law Journal," printed by Encal
Press and Photo-Engraving, drawer of the said bills of exchange in favor of the plaintiff bank;

b) The defendant signed these bills of exchange not as principal obligor, but as
accommodation or additional party obligor, to add to the security of said plaintiff bank. The
reason for this statement is that unlike real bills of exchange, where payment of the face
value is advanced to the drawer only upon acceptance of the same by the drawee, in the
case in question, payment for the supposed bills of exchange were made before acceptance;
so that in effect, although these documents are labelled bills of exchange, legally they are not
bills of exchange but mere instruments evidencing indebtedness of the drawee who received
the face value thereof, with the defendant as only additional security of the same.
[33]

The first defense of the defendant is that he signed the supposed bills of exchange as an
agent of the Philippine Education Foundation Company where he is president. Section 20 of
the Negotiable Instruments Law provides that "Where the instrument contains or a person
adds to his signature words indicating that he signs for or on behalf of a principal or in a
representative capacity, he is not liable on the instrument if he was duly authorized; but the
mere addition of words describing him as an agent or as filling a representative character,
without disclosing his principal, does not exempt him from personal liability."
An inspection of the drafts accepted by the defendant shows that nowhere has he disclosed
that he was signing as a representative of the Philippine Education Foundation
Company.
[34]
He merely signed as follows: "JOSE ARUEGO (Acceptor) (SGD) JOSE ARUEGO."
For failure to disclose his principal, Aruego is personally liable for the drafts he accepted.
The defendant also contends that he signed the drafts only as an accommodation party and
as such, should be made liable only after a showing that the drawer is incapable of paying.
This contention is also without merit.
An accommodation party is one who has signed the instrument as maker, drawer, acceptor,
indorser, without receiving value therefor and for the purpose of lending his name to some
other person. Such person is liable on the instrument to a holder for value, notwithstanding
such holder, at the time of the taking of the instrument knew him to be only an
accommodation party.
[35]
In lending his name to the accommodated party, the
accommodation party is in effect a surety for the latter. He lends his name to enable the
accommodated party to obtain credit or to raise money. He receives no part of the
consideration for the instrument but assumes liability to the other parties thereto because
he wants to accommodate another. In the instant case, the defendant signed as a
drawee/acceptor. Under the Negotiable Instruments Law, a drawee is primarily liable. Thus,
if the defendant who is a lawyer, really intended to be secondarily liable only, he should not
have signed as an acceptor/drawee. In doing so, he became primarily and personally liable
for the drafts.
The defendant also contends that the drafts signed by him were not really bills of exchange
but mere pieces of evidence of indebtedness because payments were made before
acceptance. This is also without merit. Under the Negotiable Instruments Law, a bill of
exchange is an unconditional order in writing addressed by one person to another, signed by
the person giving it, requiring the person to whom it is addressed to pay on demand or at a
fixed or determinable future time a sum certain in money to order or to bearer.
[36]
As long as
a commercial paper conforms with the definition of a bill of exchange, that paper is
considered a bill of exchange. The nature of acceptance is important only in the
determination of the kind of liabilities of the parties involved, but not in the determination of
whether a commercial paper is a bill of exchange or not.
It is evident then that the defendant's appeal can not prosper. To grant the defendant's
prayer will result in a new trial which will serve no purpose and will just waste the time of the
courts as well as of the parties because the defense is nil or ineffective.
[37]

WHEREFORE, the order appealed from in Civil Case No. 42066 of the Court of First Instance
of Manila denying the petition for relief from the judgment rendered in said case is hereby
affirmed, without pronouncement as to costs.
SO ORDERED.
Teehankee, (Chairman), Makasiar, Guerrero, and Melencio-Herrera, JJ., concur.

SECOND DIVISION
[ G.R. NO. 148211, July 25, 2006 ]
SINCERE Z. VILLANUEVA, PETITIONER, VS. MARLYN P. NITE,* RESPONDENT.

D E C I S I O N
CORONA, J.:
In this petition for review on certiorari under Rule 45, petitioner submits that the Court of
Appeals (CA) erred in annulling and setting aside the Regional Trial Court (RTC) decision on
the ground of extrinsic fraud.

The facts follow.
[1]


Respondent allegedly took out a loan of P409,000 from petitioner. To secure the loan,
respondent issued petitioner an Asian Bank Corporation (ABC) check (Check No. AYA 020195)
in the amount of P325,500 dated February 8, 1994. The date was later changed to June 8,
1994 with the consent and concurrence of petitioner.

The check was, however, dishonored due to a material alteration when petitioner deposited
the check on due date. On August 24, 1994, respondent, through her representative Emily P.
Abojada, remitted P235,000 to petitioner as partial payment of the loan. The balance of
P174, 000 was due on or before December 8, 1994.

On August 24, 1994, however, petitioner filed an action for a sum of money and damages
(Civil Case No. Q-94-21495) against ABC for the full amount of the dishonored check. And in a
decision dated May 23, 1997, the RTC of Quezon City, Branch 101 ruled in his favor.
[2]
When
respondent went to ABC Salcedo Village Branch on June 30, 1997 to withdraw money from
her account, she was unable to do so because the trial court had ordered ABC to pay
petitioner the value of respondent's ABC check.

On August 25, 1997, ABC remitted to the sheriff a manager's check amounting to P325,500
drawn on respondent's account. The check was duly received by petitioner on the same date.

Respondent then filed a petition in the CA seeking to annul and set aside the trial court's
decision ordering ABC to pay petitioner the value of the ABC check.
[3]
The CA ruled:
WHEREFORE, premises considered, the petition is GRANTED and the Decision dated May 23,
1997 of the public respondent is hereby ANNULLED and SET ASIDE for extrinsic fraud.

[Petitioner] Villanueva is hereby ordered to pay [Nite] -

1) the sum of [P146,500] as actual damages plus interest at 12% per annum from August 25,
1997 until full payment;
2) the sum of [P75,000] as moral damages;
3) the sum of [P50,000] as exemplary damages; and
4) the sum of [P50,000] as attorney's fees and cost of suit.

SO ORDERED.
[4]

Thus, this petition. We find for respondent.

Annulment of judgment is a remedy in law independent of the case where the judgment
sought to be annulled is promulgated.It can be filed by one who was not a party to the case in
which the assailed judgment was rendered. Section 1 of Rule 47 provides:
Section 1. Coverage. - This Rule shall govern the annulment by the Court of Appeals of
judgments or final orders and resolutions in civil actions of Regional Trial Courts for which the
ordinary remedies of new trial, appeal, petition for relief or other appropriate remedies are
no longer available through no fault of the petitioner.
Respondent may avail of the remedy of annulment of judgment under Rule 47. The ordinary
remedies of new trial, appeal and petition for relief were not available to her for the simple
reason that she was not made a party to the suit against ABC. Thus, she was neither able to
participate in the original proceedings nor resort to the other remedies because the case was
filed when she was abroad.

Annulment of judgment may be based only on extrinsic fraud and lack of
jurisdiction.
[5]
Extrinsic or collateral fraud pertains to such fraud which prevents the
aggrieved party from having a trial or presenting his case to the court, or is used to procure
the judgment without fair submission of the controversy.
[6]
This refers to acts intended to
keep the unsuccessful party away from the courts as when there is a false promise of
compromise or when one is kept in ignorance of the suit.
[7]


We uphold the appellate court's finding of extrinsic fraud:
Barely 6 days after receipt of the partial payment of P235,000.00 and agreeing that the
balance of P174,000.00 shall be paid on or before December 8, 1994, [Sincere] filed his
complaint against [ABC] for the full amount of the dishonored check in the sum of
P320,500.00 without impleading petitioner. The apparent haste by which [Sincere] filed his
complaint and his failure to implead [Marlyn] clearly shows his intent to prevent [Marlyn]
from opposing his action.

[A]t the time news about [Marlyn] having left the country was widespread, appearing even in
print media as early as May 1994, [Marlyn] paid [Sincere] the amount of P235,000.00 as
partial payment on [August 18, 1994], through a representative.

Notwithstanding the foregoing, SIX (6) days later or on [August 24, 1994, Sincere] instituted
an action for collection with damages for the whole amount of the issued check.

[Sincere] does not deny knowledge of such payment neither of the fact that he concurred in
settling the balance of P174,000.00 on December 8, 1994.

[His] actuation and pronouncement shows not only bad faith on his part but also of his
fraudulent intention to completely exclude [Marlyn] from the proceedings in the court a
quo. By doing what he did he prevented the [trial court] from fully appreciating the
particulars of the case.
[8]

In any event, the RTC decision may be annulled for lack of jurisdiction over the person of
respondent. The pertinent provisions of the Negotiable Instruments Law are enlightening:
SEC. 185. Check, defined. - A check is a bill of exchange drawn on a bank payable on demand.
Except as herein otherwise provided, the provisions of this Act applicable to a bill of
exchange payable on demand apply to a check.
[9]
(emphasis ours)

SEC. 189. When check operates as an assignment. - A check of itself does not operate as an
assignment of any part of the funds to the credit of the drawer with the bank, and the bank
is not liable to the holder, unless and until it accepts or certifies the check. (emphasis ours)
If a bank refuses to pay a check (notwithstanding the sufficiency of funds), the payee-holder
cannot, in view of the cited sections, sue the bank. The payee should instead sue the drawer
who might in turn sue the bank. Section 189 is sound law based on logic and established legal
principles: no privity of contract exists between the drawee-bank and the payee. Indeed, in
this case, there was no such privity of contract between ABC and petitioner.

Petitioner should not have sued ABC. Contracts take effect only between the parties, their
assigns and heirs, except in cases where the rights and obligations arising from the contract
are not transmissible by their nature, or by stipulation or by provision of law.
[10]
None of the
foregoing exceptions to the relativity of contracts applies in this case.

The contract of loan was between petitioner and respondent. No collection suit could
prosper without respondent who was anindispensable party. Rule 3, Sec. 7 of the Rules of
Court states:
Sec. 7. Compulsory joinder of indispensable parties. - Parties in interest without whom no
final determination can be had of an action shall be joined either as plaintiffs or defendants.
(emphasis ours)
An indispensable party is one whose interest in the controversy is such that a final decree will
necessarily affect his rights. The court cannot proceed without his presence.
[11]
If an
indispensable party is not impleaded, any judgment is ineffective.
[12]
On this, Aracelona v.
Court of Appeals
[13]
declared:
Rule 3, Section 7 of the Rules of Court defines indispensable parties as parties-in-interest
without whom there can be no final determination of an action. As such, they must be joined
either as plaintiffs or as defendants. The general rule with reference to the making of parties
in a civil action requires, of course, the joinder of all necessary parties where possible, and
the joinder of all indispensable parties under any and all conditions, their presence beingsine
qua non for the exercise of judicial power. It is precisely "when an indispensable party is not
before the court (that) the action should be dismissed." The absence of an indispensable
party renders all subsequent actions of the court null and void for want of authority to act,
not only as to the absent parties but even as to those present.
WHEREFORE, the petition is hereby DENIED. The decision of the Court of Appeals in CA-G.R.
SP No. 44971 is AFFIRMED in toto.

Costs against petitioner.

SO ORDERED.

Puno, (Chairman), Sandoval-Gutierrez, Azcuna, and Garcia, JJ., concur.

FIRST DIVISION
[ G.R. No. 132403 & 132419, September 28, 2007 ]
HI-CEMENT CORPORATION, PETITIONER, VS. INSULAR BANK OF ASIA AND AMERICA (LATER
PHILIPPINE COMMERCIAL INTERNATIONAL BANK AND NOW, EQUITABLE-PCI BANK)
RESPONDENT.

[G.R. NO. 132419. SEPTEMBER 28, 2007]

E.T. HENRY & CO. AND SPOUSES ENRIQUE TAN AND LILIA TAN, PETITIONERS, VS. INSULAR
BANK OF ASIA AND AMERICA (LATER PHILIPPINE COMMERCIAL INTERNATIONAL BANK AND
NOW, EQUITABLE-PCI BANK), RESPONDENT.

D E C I S I O N
CORONA, J.:
At bar are consolidated petitions assailing the decision of the Court of Appeals (CA) dated
January 21, 1998 in CA-G.R. CV No. 31600 entitled Insular Bank of Asia and America [now
Philippine Commercial International Bank/(PCIB)] v. E.T. Henry & Co., et al.
[1]


The antecedent facts follow.

Petitioners Enrique Tan and Lilia Tan (spouses Tan) were the controlling stockholders of E.T.
Henry & Co., Inc. (E.T. Henry), a company engaged in the business of processing and
distributing bunker fuel.
[2]
Among E.T. Henry's customers were petitioner Hi-Cement
Corporation (Hi-Cement),
[3]
Riverside Mills Corporation (Riverside) and Kanebo Cosmetics
Philippines, Inc. (Kanebo). For their purchases, these corporations issued postdated checks to
E.T. Henry.

Sometime in 1979, respondent Insular Bank of Asia and America (later PCIB and now
Equitable PCI-Bank) granted E.T. Henry a credit facility known as Purchase of Short Term
Receivables. Through this arrangement, E.T. Henry was able to encash, with pre-deducted
interest, the postdated checks of its clients. In other words, E.T. Henry and respondent were
into re-discounting of checks.

For every transaction, respondent required E.T. Henry to execute a promissory note and a
deed of assignment bearing the conformity of the client to the re-discounting.
[4]


From 1979 to 1981, E.T. Henry was able to re-discount its clients' checks (with deeds of
assignment) with respondent. However, in February 1981, 20 checks
[5]
of Hi-Cement (which
were crossed and which bore the restriction deposit to payees account only) were
dishonored. So were the checks of Riverside and Kanebo.
[6]


Respondent filed a complaint for sum of money
[7]
in the then Court of First Instance of
Rizal
[8]
against E.T. Henry, the spouses Tan, Hi-Cement (including its general manager
[9]
and
its treasurer
[10]
as signatories of the postdated crossed checks), Riverside and Kanebo.
[11]


In its complaint, respondent claimed that, due to the dishonor of the checks, it suffered
actual damages equivalent to their value, exclusive of accrued and accruing interests, charges
and penalties such as attorneys fees and expenses of litigation, as follows:
1. Riverside Mills Corporation P 115,312.50
2. Kanebo Cosmetics Philippines, Inc. 5,811,750.00
3. Hi-Cement Corporation 10,000,000.00

Respondent also sought to collect from E.T. Henry and the spouses Tan other loan obligations
(amounting to P1,661,266.51 and P4,900,805, respectively) as deficiencies resulting from the
foreclosure of the real estate mortgage on E.T. Henry's property in Sucat, Paraaque.
[12]


Hi-Cement filed its answer alleging, among others, that: (1) its general manager and
treasurer were not authorized to issue the postdated crossed checks in E.T. Henry's favor; (2)
the deed of assignment purportedly executed by Hi-Cement assigning them to respondent
only bore the conformity of its treasurer and (3) respondent was not a holder in due course
as it should not have discounted them for being crossed checks.
[13]


In their answer (with counterclaim against respondent and cross-claims against Hi-Cement,
Riverside and Kanebo),
[14]
E.T. Henry and the spouses Tan claimed that: (1) the drawers of the
postdated checks failed to honor them due to the adverse economic conditions prevailing at
the time respondent presented them for payment; (2) the extra-judicial sale of the
mortgaged Sucat property was void due to gross inadequacy of the bid price
[15]
and (3) their
loans were subjected to a usurious interest rate of 21% p.a.

For their part, Riverside and Kanebo sought the dismissal of the case against them, arguing
that they were not privy to the re-discounting arrangement between respondent and E.T.
Henry.

On June 30, 1989, the trial court rendered a decision which read:
WHEREFORE, in view of the foregoing, and as a consequence of the preponderance of
evidence, this Court hereby renders judgment in favor of [respondent] and against [E.T.
Henry, spouses Tan, Hi-Cement, Riverside and Kanebo], to wit:
1. Ordering [E.T. Henry, spouses Tan, Hi-Cement, Riverside and Kanebo], jointly and
severally, to pay [respondent] damages represented by the face value of the
postdated checks as follows:
(a) Riverside Mills Corporation P 115,312.50
(b) Kanebo Cosmetics Philippines, Inc. 5,811,750.00
(c) Hi-Cement Corporation 10,000,000.00

plus interests, services, charges and penalties until fully paid;
2. Ordering [E.T. Henry] and/or [spouses Tan] to pay to [respondent] the sum of
P4,900,805.00 plus accrued interests, charges, penalties until fully paid;
3. Ordering [E.T. Henry and spouses Tan] to pay [respondent] the sum of
P1,661,266.51 plus interests, charges, and penalties until fully paid;
4. Ordering [E.T. Henry, spouses Tan, Hi-Cement, Riverside and Kanebo] to pay
*respondent+ *a+ttorneys fees and expenses of litigation in the amount of
P200,000.00 and pay the cost of this suit.
[16]

SO ORDERED.
[17]

Only petitioners appealed the decision to the CA which affirmed it in toto. Hence, these
petitions.

In G.R. No. 132403, petitioner Hi-Cement disclaims liability for the postdated crossed checks
because (1) it did not authorize their issuance; (2) respondent was not a holder in due course
and (3) there was no basis for the lower courts holding that it was solidarily liable for the
face value of Riversides and Kanebos checks.
[18]


In G.R. No. 132419, on the other hand, E.T. Henry and the spouses Tan essentially contend
that the lower courts erred in: (1) applying the doctrine of piercing the veil of the corporate
entity to make the spouses Tan solidarily liable with E.T. Henry; (2) not ruling on their cross-
claims and counterclaims, and (3) not declaring the foreclosure of E.T. Henry's Sucat property
as void.
[19]


(A) G.R. 132403

As a rule, an appeal by certiorari under Rule 45 of the Rules of Court is limited to review of
errors of law.
[20]
The factual findings of the trial court, specially when affirmed by the
appellate court, are generally binding on us unless there was a misapprehension of facts or
when the inference drawn from the facts was manifestly mistaken.
[21]
This case falls within
the exception.

AUTHORITY OF HI-CEMENTS
GENERAL MANAGER AND
TREASURER TO ISSUE THE
POSTDATED CROSSED CHECKS

Both the trial court and the CA concluded that Hi-Cement authorized its general manager and
treasurer to issue the subject postdated crossed checks. They both held that Hi-Cement was
already estopped from denying such authority since it never objected to the signatories'
issuance of all previous checks to E.T. Henry which the latter, in turn, was able to re-discount
with respondent.

We agree with the lower courts that both the general manager and treasurer of Hi-Cement
were authorized to issue the subjects checks. However, notwithstanding such fact,
respondent could not be considered a holder in due course.

RESPONDENT BANK NOT A
HOLDER IN DUE COURSE

The Negotiable Instruments Law (NIL), specifically Section 191,
[22]
provides:
Holder means the payee or indorsee of a bill or a note, or the person who is in possession
of it, or the bearer thereof.
On the other hand, Section 52
[23]
states:
A holder in due course is a holder who has taken the instrument under the following
conditions: (a) it is complete and regular on its face; (b) he became the holder of it before it
was overdue, and without notice that it has previously been dishonored, if such was the fact;
(c) he took it in good faith and for value and (d) at the time it was negotiated to him, he had
no notice of any infirmity in the instrument or defect in the title of the person negotiating it.
Absent any of the elements set forth in Section 52, the holder is not a holder in due course.
In the case at bar, the last two requirements were not met.

In Bataan Cigar and Cigarette Factory, Inc. (BCCF) v. CA,
[24]
we held that the holder of crossed
checks was not a holder in due course. There, the drawer (BCCF) issued postdated crossed
checks in favor of one of its suppliers (George King) who promised to deliver bales of tobacco
leaf but failed. George King, however, sold the checks on discount to State Investment
House, Inc. (SIHI) and upon the latters presentment to the drawee bank, BCCF ordered a
stop payment. Thereafter, SIHI filed a collection case against it. In ruling that SIHI was not a
holder in due course, we explained:
In order to preserve the credit worthiness of checks, jurisprudence has pronounced that
crossing of a check should have the following effects: (a) the check may not be encashed but
only deposited in the bank; (b) the check may be negotiated only once to one who has an
account with a bank [and]; (c) the act of crossing the checks serves aswarning to the holder
that the check has been issued for a definite purpose so that he must inquire if he has
received the check pursuant to that purpose, otherwise, he is not a holder in due course.
Likewise, in Atrium Management Corporation v. CA,
[25]
where E.T. Henry, Hi-Cement and its
treasurer
[26]
again engaged in a legal scuffle over four postdated crossed checks, we held that
Atrium (with which the checks were re-discounted) was not a holder in due course. In that
case, E.T. Henry was the payee of four Hi-Cement postdated checks which it endorsed to
Atrium. When the latter presented the crossed checks to the drawee bank, Hi-Cement
stopped payment.
[27]
We held that Atrium was not a holder in due course:
In the instant case, the checks were crossed and specifically indorsed for deposit to payees
account only. From the beginning, Atrium was aware of the fact that the checks were all for
deposit only to payees account, meaning E.T. Henry. Clearly, then, Atrium could not be
considered a holder in due course.
In the case at bar, respondent's claim that it acted in good faith when it accepted and
discounted Hi-Cements postdated crossed checks from E.T. Henry (as payee therein) fails to
convince us. Good faith becomes inconsequential amidst proof of respondent's grossly
negligent conduct in dealing with the subject checks.

Respondent was all too aware that subject checks were crossed and bore restrictions that
they were for deposit to payee's account only; hence, they could not be further negotiated to
it. The records likewise reveal that respondent completely disregarded a telling sign of
irregularity in the re-discounting of the checks when the general manager did not acquiesce
to it as only the treasurer's signature appeared on the deed of assignment. As a banking
institution, it behooved respondent to act with extraordinary diligence in every
transaction.
[28]
Its business is impressed with public interest, thus, it was not expected to be
careless and negligent, specially so where the checks it dealt with were crossed. In Bataan
Cigar and Cigarette Factory, Inc.,
[29]
we ruled:
It is then settled that crossing of checks should put the holder on inquiry and upon him
devolves the duty to ascertain the indorsers title to the check or the nature of his
possession. Failing in this respect, the holder is declared guilty of gross negligence
amounting to legal absence of good faithand as such*,+ the consensus of authority is to the
effect that the holder of the check is not a holder in due course. (emphasis supplied)
The next query is whether Hi-Cement can still be made liable for the checks. We answer in
the negative.

In State Investment House, Inc. (SIHI) v. Intermediate Appellate Court,
[30]
SIHI re-discounted
crossed checks and was declared not a holder in due course. As a result, when it presented
the checks for deposit, we deemed that its presentment to the drawee bank was not proper,
hence, the liability did not attach to the drawer of the checks. We ruled that:
The three subject checks in the case at bar had been crossedwhich could only mean that
the drawer had intended the same for deposit only by the rightful person, i.e., the payee
named therein. Apparently, it was not the payee who presented the same for payment and
therefore, there was no proper presentment, and the liability did not attach to the drawer.
Thus, in the absence of due presentment, the drawer did not become liable.
[31]

Our resolution in the foregoing case was reiterated in Atrium Management Corporation v.
CA,
[32]
where we affirmed the CA ruling that the drawer of the postdated crossed checks was
not liable to the holder who was deemed not a holder in due course.

We note, however, that in the two aforementioned cases, we made it clear that the NIL does
not absolutely bar a holder who is not a holder in due course from recovering on the checks.
In both, we ruled that it may recover from the party who indorsed/encashed the checks if
the latter has no valid excuse for refusing payment. Here, there was no doubt that it was
E.T. Henry that re-discounted Hi-Cement's checks and received their value from respondent.
Since E.T. Henry had no justification to refuse payment, it should pay respondent.

SOLIDARY LIABILITY OF HI-
CEMENT FOR THE FACE VALUE
OF RIVERSIDE'S AND KANEBO'S
CHECKS

Hi-Cement could not also be made solidarily liable with Riverside and Kanebo for the face
value of their checks. Hi-Cement had nothing to do with the checks of these two
corporations. However, although the language of the trial court decision's dispositive portion
seemed confusing, a reading of the decision in its entirety reveals that the fallo was for each
corporation to be liable solidarily with E.T. Henry and/or the spouses Tan for the respective
values of their checks.

Furthermore, solidary liability cannot be presumed but must be established by law or
contract. Neither is present here. Articles 1207 and 1208 of the Civil Code provide:
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 presentation. There is solidary liability only
when the obligation expressly so states, or when the obligation requires
solidarity. (emphasis supplied)

Art. 1208. If from the law, or the nature of the wording of the obligations to which the
preceding article refers to the contrary does not appear, the credit or debt shall be presumed
to be divided into as many equal shares as there are creditors or debtors, the credits or debts
being considered distinct from one another, subject to the Rules governing the multiplicity of
suits.
At any rate, the issue has become moot in view of our ruling that Hi-Cement is not liable for
the checks.

(B) G.R. No. 132419

DOCTRINE OF PIERCING THE
VEIL OF CORPORATE ENTITY

In their petition, E.T. Henry and the spouses Tan argue that the lower courts erred in applying
the piercing the veil of corporate entity doctrine to their case. They claim that both the trial
and appellate courts failed to cite the reasons why the doctrine was relevant to them.

We agree with petitioners E.T. Henry and the spouses Tan in this respect.

If any general rule can be laid down, it is that the corporation will be looked upon as a legal
entity until sufficient reasons to the contrary appear.
[33]
It is only when the fiction or notion
of legal entity is used to defeat public convenience, justify wrong, perpetuate fraud or defend
crime that the law will shred the corporate legal veil and regard it as a mere association of
persons.
[34]
This is referred to as the doctrine of piercing the veil of corporate entity.

After a careful study of the records, we hold that E.T. Henry's corporate veil should not have
been pierced at all.

First, the trial court failed to provide a clear ground why the doctrine was used. It merely
stated that it agreed with respondents arguments but did not explain why the doctrine was
relevant to petitioner E.T. Henry's and the spouses Tans case. On the other hand, the CA
held:
It appears that spouses Tan are controlling stockholders of E.T. Henry & Co., Inc. as well as
its authorized signatories. The business of the corporation was conducted solely for the
benefit of the spouses Tan who colluded with [Hi-Cement] in defrauding [respondent]. As the
lower court cited*I+t is a settled law in this and other jurisdictions that when the
corporation is a mere alter ego of a person, same being true when the corporation is
controlled, and its affairs are so conducted to make it merely an instrumentality, agency or
conduit of another.
[35]

Similarly, the CA left a gaping hole by failing to provide the basis for its ruling that E.T. Henry
and the spouses Tan defrauded respondent. It did not also state what act constituted the
fraud. Fraud is an allegation of fact that demands clear and convincing evidence.
[36]
It is never
presumed.
[37]


Second, the mere ownership by a single stockholder or by another corporation of all or nearly
all of the capital stock of a corporation is not of itself sufficient ground for disregarding the
separate corporate personality.
[38]
For this ground to stand in this case, there must be proof
that the spouses Tan: (1) had control or complete domination of E.T. Henrys finances and
that the latter had no separate existence with respect to the act complained of; (2) used such
control to commit fraud or wrong and (3) the control was the proximate cause of the loss or
injury complained of by respondent.
[39]
The records of this case do not show that these
elements were present.

INADEQUACY OF THE BID PRICE
TO ANNUL FORECLOSURE
PROCEEDING

With respect to the allegation that foreclosure was void due to the inadequacy of the bid
price, we agree with the CA that the mere inadequacy of the price obtained at the *s+heriffs
sale, unless shocking to the conscience, (was) not sufficient to set aside the sale if there (was)
no showing that, in the event of a regular sale, a better price (could) be obtained.
[40]


Furthermore, in the absence of any irregularity in the foreclosure proceeding or proof that it
was carried out without strict observance of the procedure, we will continue to assume its
regularity and strike down any attempt to vitiate it. In this case, E.T. Henry and the spouses
Tan made no mention of any anomaly to support the nullification of the foreclosure sale but
merely alleged a disparity in the bid price and the propertys fair market value.

COUNTERCLAIMS AND CROSS-CLAIMS

Lastly, E.T. Henry and the spouses Tan call this Court's attention to the alleged failure of the
lower court to pass upon their counterclaim against respondent or cross-claims against Hi-
Cement, Riverside and Kanebo. They ask us now to hold these parties liable on the basis of
said claims. We decline to do so.

First, E.T. Henry and the spouses Tan failed to implead Hi-Cement, Riverside and Kanebo as
parties in the case at bar. Under Rule 3 of the Rules of Court, every action, including a
counterclaim (or a cross-claim), must be prosecuted or defended in the name of the real
party in interest.
[41]
The term defendant may refer to the original defending party, the
defendant in a counterclaim, the cross-defendant or the third (fourth, etc.) party
defendant.
[42]
Hence, for this technical lapse, we are constrained not to pass on E.T. Henry's
and the spouses Tan's cross-claims.

Second, E.T. Henry and the spouses Tan filed the counterclaim against respondent on the
basis of an alleged void foreclosure proceeding on E.T. Henry's Sucat property due to an
inadequate bid price. It is no longer necessary to delve into this matter in view of our finding
that the mere inadequacy of the bid price on the property did not automatically render the
foreclosure sale irregular or void.

Incidentally, the petition in G.R. No. 132419 posed no contest on the lower courts ruling on
E.T. Henrys and the spouses Tans solidary liability with Riverside and Kanebo vis-a-vis their
checks.
[43]
To be consistent, however, with our dictum on the separate personality of E.T.
Henry and the spouses Tan, the solidarity liability arising from the checks of Riverside and
Kanebo shall only be enforced against E.T. Henry.

WHEREFORE, the assailed decision of the Court of Appeals in CA-G.R. CV No. 31600 is
hereby AFFIRMED withMODIFICATION. Accordingly, petitioner Hi-Cement Corporation is
discharged from any liability. Only petitioner E.T. Henry & Co. is ORDERED to pay respondent
Insular Bank of Asia and America (later Philippine Commercial International Bank and now
Equitable PCI-Bank) the following:
1. P10,000,000 representing the value of Hi-Cement's checks it received from
respondent plus accrued interests, charges and penalties until fully paid, and
2. the loans for P1,661,266.51 and P4,900,805 plus accrued interests, charges and
penalties until fully paid.
Let the records of this case be remanded to the trial court for the proper computation of E.T.
Henry's, Riverside's and Kanebo's liabilities for the checks, attorney's fees and costs of
litigation.

Costs against petitioners E.T. Henry and the spouses Enrique and Lilia Tan.

SO ORDERED.

Puno, C.J., (Chairperson), Sandoval-Gutierrez, Azcuna, and Garcia, JJ., concur.

THIRD DIVISION
[ G.R. NO. 125851, July 11, 2006 ]
ALLIED BANKING CORPORATION,PETITIONER, VS. COURT OF APPEALS, G.G. SPORTSWEAR
MANUFACTURING CORPORATION, NARI GIDWANI, SPOUSES LETICIA AND LEON DE VILLA
AND ALCRON INTERNATIONAL LTD., RESPONDENTS.

D E C I S I O N
QUISUMBING, J.:
This petition for review on certiorari assails (a) the July 31, 1996 Decision
[1]
of the Court of
Appeals, ordering respondent G.G. Sportswear Manufacturing Corp. to reimburse petitioner
US $20,085; and exonerating the guarantors from liability; and (b) the January 17, 1997
Resolution
[2]
denying the motion for reconsideration.

The facts are undisputed.

On January 6, 1981, petitioner Allied Bank, Manila (ALLIED) purchased Export Bill No. BDO-
81-002 in the amount of US $20,085.00 from respondent G.G. Sportswear Mfg. Corporation
(GGS). The bill, drawn under a letter of credit No. BB640549 covered Men's Valvoline Training
Suit that was in transit to West Germany (Uniger via Rotterdam) under Cont. #73/S0299. The
export bill was issued by Chekiang First Bank Ltd., Hongkong. With the purchase of the bill,
ALLIED credited GGS the peso equivalent of the aforementioned bill amounting to
P151,474.52 and the receipt of which was acknowledged by the latter in its letter dated June
22, 1981.

On the same date, respondents Nari Gidwani and Alcron International Ltd. (Alcron) executed
their respective Letters of Guaranty, holding themselves liable on the export bill if it should
be dishonored or retired by the drawee for any reason.

Subsequently, the spouses Leon and Leticia de Villa and Nari Gidwani also executed a
Continuing Guaranty/Comprehensive Surety (surety, for brevity), guaranteeing payment of
any and all such credit accommodations which ALLIED may extend to GGS. When ALLIED
negotiated the export bill to Chekiang, payment was refused due to some material
discrepancies in the documents submitted by GGS relative to the exportation covered by the
letter of credit. Consequently, ALLIED demanded payment from all the respondents based on
the Letters of Guaranty and Surety executed in favor of ALLIED. However, respondents
refused to pay, prompting ALLIED to file an action for a sum of money.

In their joint answer, respondents GGS and Nari Gidwani admitted the due execution of the
export bill and the Letters of Guaranty in favor of ALLIED, but claimed that they signed blank
forms of the Letters of Guaranty and the Surety, and the blanks were only filled up by ALLIED
after they had affixed their signatures. They also added that the documents did not cover the
transaction involving the subject export bill.

On the other hand, the respondents, spouses de Villa, claimed that they were not aware of
the existence of the export bill; they signed blank forms of the surety; and averred that the
guaranty was not meant to secure the export bill.

Respondent Alcron, for its part, alleged that as a foreign corporation doing business in the
Philippines, its branch in the Philippines is merely a liaison office confined to the following
duties and responsibilities, to wit: acting as a message center between its office in Hongkong
and its clients in the Philippines; conducting credit investigations on Filipino clients; and
providing its office in Hongkong with shipping arrangements and other details in connection
with its office in Hongkong. Respondent Alcron further alleged that neither its liaison office in
the Philippines nor its then representative, Hans-Joachim Schloer, had the authority to issue
Letters of Guaranty for and in behalf of local entities and persons. It also invoked laches
against petitioner ALLIED.

GGS and Nari Gidwani filed a Motion for Summary Judgment on the ground that since the
plaintiff admitted not having protested the dishonor of the export bill, it thereby discharged
GGS from liability. But the trial court denied the motion. After the presentation of evidence
by the petitioner, only the spouses de Villa presented their evidence. The other respondents
did not. The trial court dismissed the complaint.

On appeal, the Court of Appeals modified the ruling of the trial court holding respondent
GGS liable to reimburse petitioner ALLIED the peso equivalent of the export bill, but it
exonerated the guarantors from their liabilities under the Letters of Guaranty. The CA
decision reads as follows:
For the foregoing considerations, appellee GGS is obliged to reimburse appellant Allied Bank
the amount of P151,474.52 which was the equivalent of GGS's contracted obligation of
US$20,085.00.

The lower court however correctly exonerated the guarantors from their liability under their
Letters of Guaranty. A guaranty is an accessory contract. What the guarantors guaranteed in
the instant case was the bill which had been discharged. Consequently, the guarantors
should be correspondingly released.

WHEREFORE, judgment is hereby rendered ordering defendant-appellee G.G. Sportswear
Mfg. Corporation to pay appellant the sum of P151,474.52 with interest thereon at the legal
rate from the filing of the complaint, and the costs.

SO ORDERED.
[3]

The petitioner filed a Motion for Reconsideration, but to no avail. Hence, this appeal, raising
a single issue:
Whether or not respondents Nari, De Villa and Alcron are liable under the Letters of
Guaranty and the Continuing Guaranty/ comprehensive Surety notwithstanding the fact that
no protest was made after the bill, a foreign bill of exchange, was dishonored.
[4]

The main issue raised before us is: Can respondents, in their capacity as guarantors and
surety, be held jointly and severally liable under the Letters of Guaranty and Continuing
Guaranty/Comprehensive Surety, in the absence of protest on the bill in accordance with
Section 152 of the Negotiable Instruments Law?
[5]


The petitioner contends that part of the Court of Appeals'' decision exonerating respondents
Nari Gidwani, Alcron International Ltd., and spouses Leon and Leticia de Villa as guarantors
and/or sureties. Respondents rely on Section 152 of the Negotiable Instruments Law to
support their contention.

Our review of the records shows that what transpired in this case is a discounting
arrangement of the subject export bill, between petitioner ALLIED and respondent GGS.
Previously, we ruled that in a letter of credit transaction, once the credit is established, the
seller ships the goods to the buyer and in the process secures the required shipping
documents of title. To get paid, the seller executes a draft and presents it together with the
required documents to the issuing bank. The issuing bank redeems the draft and pays cash to
the seller if it finds that the documents submitted by the seller conform with what the letter
of credit requires. The bank then obtains possession of the documents upon paying the
seller. The transaction is completed when the buyer reimburses the issuing bank and
acquires the documents entitling him to the goods.
[6]
However, in most cases, instead of
going to the issuing bank to claim payment, the buyer (or the beneficiary of the draft) may
approach another bank, termed the negotiating bank, to have the draft discounted.
[7]
While
the negotiating bank owes no contractual duty toward the beneficiary of the draft to
discount or purchase it, it may still do so. Nothing can prevent the negotiating bank from
requiring additional requirements, like contracts of guaranty and surety, in consideration of
the discounting arrangement.

In this case, respondent GGS, as the beneficiary of the export bill, instead of going to
Chekiang First Bank Ltd. (issuing bank), went to petitioner ALLIED, to have the export bill
purchased or discounted. Before ALLIED agreed to purchase the subject export bill, it
required respondents Nari Gidwani and Alcron to execute Letters of Guaranty, holding them
liable on demand, in case the subject export bill was dishonored or retired for any reason.
[8]


Likewise, respondents Nari Gidwani and spouses Leon and Leticia de Villa executed
Continuing Guaranty/Comprehensive Surety, holding themselves jointly and severally liable
on any and all credit accommodations, instruments, loans, advances, credits and/or other
obligation that may be granted by the petitioner ALLIED to respondent GGS.
[9]
The surety also
contained a clause whereby said sureties waive protest and notice of dishonor of any and all
such instruments, loans, advances, credits and/or obligations.
[10]
These letters of guaranty
and surety are now the basis of the petitioner's action.

At this juncture, we must stress that obligations arising from contracts have the force of law
between the parties and should be complied with in good faith.
[11]
Nothing can stop the
parties from establishing stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public order, or
public policy.
[12]


Here, Art. 2047 of the New Civil Code is pertinent. Art. 2047 states,
Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill
the obligation of the principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section 4,
Chapter 3, Title I of this Book shall be observed. In such case the contract is called a
suretyship.
In this case, the Letters of Guaranty and Surety clearly show that respondents undertook and
bound themselves as guarantors and surety to pay the full amount of the export bill.

Respondents claim that the petitioner did not protest
[13]
upon dishonor of the export bill by
Chekiang First Bank, Ltd. According to respondents, since there was no protest made upon
dishonor of the export bill, all of them, as indorsers were discharged under Section 152 of the
Negotiable Instruments Law.

Section 152 of the Negotiable Instruments Law pertaining to indorsers, relied on by
respondents, is not pertinent to this case. There are well-defined distinctions between the
contract of an indorser and that of a guarantor/surety of a commercial paper, which is what
is involved in this case. The contract of indorsement is primarily that of transfer, while the
contract of guaranty is that of personal security.
[14]
The liability of a guarantor/surety is
broader than that of an indorser. Unless the bill is promptly presented for payment at
maturity and due notice of dishonor given to the indorser within a reasonable time, he will
be discharged from liability thereon.
[15]
On the other hand, except where required by the
provisions of the contract of suretyship, a demand or notice of default is not required to fix
the surety's liability.
[16]
He cannot complain that the creditor has not notified him in the
absence of a special agreement to that effect in the contract of suretyship.
[17]
Therefore, no
protest on the export bill is necessary to charge all the respondents jointly and severally
liable with G.G. Sportswear since the respondents held themselves liable upon demand in
case the instrument was dishonored and on the surety, they even waived notice of dishonor
as stipulated in their Letters of Guarantee.

As to respondent Alcron, it is bound by the Letter of Guaranty executed by its representative
Hans-Joachim Schloer. As to the other respondents, not to be overlooked is the fact that, the
"Suretyship Agreement" they executed, expressly contemplated a solidary obligation,
providing as it did that "... the sureties hereby guarantee jointly and severally the punctual
payment of any and all such credit accommodations, instruments, loans, ... which is/are now
or may hereafter become due or owing ... by the borrower".
[18]
It is a cardinal rule that if the
terms of a contract are clear and leave no doubt as to the intention of the contracting
parties, the literal meaning of its stipulation shall control.
[19]
In the present case, there can be
no mistaking about respondents' intent, as sureties, to be jointly and severally obligated with
respondent G.G. Sportswear.

Respondents also aver that, (1) they only signed said documents in blank; (2) they were
never made aware that said documents will cover the payment of the export bill; and (3)
laches have set in.

Respondents' stance lacks merit. Under Section 3 (d), Rule 131 of the Rules of Court, it is
presumed that a person takes ordinary care of his concerns. Hence, the natural presumption
is that one does not sign a document without first informing himself of its contents and
consequences. Said presumption acquires greater force in the case at bar where not only one
document but several documents were executed at different times and at different places by
the herein respondent guarantors and sureties.
[20]


In this case, having affixed their consenting signatures in several documents executed at
different times, it is safe to presume that they had full knowledge of its terms and conditions,
hence, they are precluded from asserting ignorance of the legal effects of the undertaking
they assumed thereunder. It is also presumed that private transactions have been fair and
regular
[21]
and that he who alleges has the burden of proving his allegation with the requisite
quantum of evidence.
[22]
But here the records of this case do not support their claims.

Last, we find the defense of laches unavailing. The question of laches is addressed to the
sound discretion of the court and since laches is an equitable doctrine, its application is
controlled by equitable considerations.
[23]
Respondents, however, failed to show that the
collection suit against them as sureties was inequitable. Remedies in equity address only
situations tainted with inequity, not those expressly governed by statutes.
[24]


After considering the facts of this case vis--vis the pertinent laws, we are constrained to rule
for the petitioner.

WHEREFORE, the instant petition is GRANTED. The assailed Decision of the Court of Appeals
is hereby MODIFIED, and we hold that respondent Alcron International Ltd. is subsidiarily
liable, while respondents Nari Gidwani, and Spouses Leon and Leticia de Villa are jointly and
severally liable together with G.G. Sportswear, to pay petitioner Bank the sum of
P151,474.52 with interest at the legal rate from the filing of the complaint, and the costs.

SO ORDERED.

Carpio, (Chairperson), Carpio-Morales, Tinga, and Velasco, Jr., JJ concur.