PAZ P.

ARRIETA and VITALIADO ARRIETA, plaintiffs-appellees,

vs.
NATIONAL RICE AND CORN CORPORATION, defendant-appellant,
MANILA UNDERWRITERS INSURANCE CO., INC., defendant-appellee.
Teehankee and Carreon for plaintiffs-appellees.
The Government Corporate Counsel for defendant-appellant.
Isidro A. Vera for defendant-appellee.
REGALA, J.:
This is an appeal of the defendant-appellant NARIC from the decision of the trial court dated February 20,
1958, awarding to the plaintiffs-appellees the amount of $286,000.00 as damages for breach of contract and
dismissing the counterclaim and third party complaint of the defendant-appellant NARIC.
In accordance with Section 13 of Republic Act No. 3452, "the National Rice and Corn Administration (NARIC)
is hereby abolished and all its assets, liabilities, functions, powers which are not inconsistent with the
provisions of this Act, and all personnel are transferred "to the Rice and Corn Administration (RCA).
All references, therefore, to the NARIC in this decision must accordingly be adjusted and read as RCA
pursuant to the aforementioned law.
On May 19, 1952, plaintiff-appellee participated in the public bidding called by the NARIC for the supply of
20,000 metric tons of Burmese rice. As her bid of $203.00 per metric ton was the lowest, she was awarded the
contract for the same. Accordingly, on July 1, 1952, plaintiff-appellee Paz P. Arrieta and the appellant
corporation entered into a Contract of Sale of Rice, under the terms of which the former obligated herself to
deliver to the latter 20,000 metric tons of Burmess Rice at $203.00 per metric ton, CIF Manila. In turn, the
defendant corporation committed itself to pay for the imported rice "by means of an irrevocable, confirmed and
assignable letter of credit in U.S. currency in favor of the plaintiff-appellee and/or supplier in Burma,
immediately." Despite the commitment to pay immediately "by means of an irrevocable, confirmed and
assignable Letter of Credit," however, it was only on July 30, 1952, or a full month from the execution of the
contract, that the defendant corporation, thru its general manager, took the first to open a letter of credit by
forwarding to the Philippine National Bank its Application for Commercial Letter Credit. The application was
accompanied by a transmittal letter, the relevant paragraphs of which read:
In view of the fact that we do not have sufficient deposit with your institution with which to cover the amount
required to be deposited as a condition for the opening of letters of credit, we will appreciate it if this
application could be considered special case.
We understand that our supplier, Mrs. Paz P. Arrieta, has a deadline to meet which is August 4, 1952, and in
order to comply therewith, it is imperative that the L/C be opened prior to that date. We would therefore
request your full cooperation on this matter.
On the same day, July 30, 1952, Mrs. Paz P. Arrieta thru counsel, advised the appellant corporation of the
extreme necessity for the immediate opening of the letter credit since she had by then made a tender to her
supplier in Rangoon, Burma, "equivalent to 5% of the F.O.B. price of 20,000 tons at $180.70 and in
compliance with the regulations in Rangoon this 5% will be confiscated if the required letter of credit is not
received by them before August 4, 1952."
On August 4, 1952, the Philippine National Bank informed the appellant corporation that its application, "for a
letter of credit for $3,614,000.00 in favor of Thiri Setkya has been approved by the Board of Directors with the
condition that marginal cash deposit be paid and that drafts are to be paid upon presentment." (Exh. J-pl.;
Exh. 10-def., p. 19, Folder of Exhibits). Furthermore, the Bank represented that it "will hold your application in
abeyance pending compliance with the above stated requirement."

As it turned out, however, the appellant corporation not in any financial position to meet the condition. As
matter of fact, in a letter dated August 2, 1952, the NARIC bluntly confessed to the appellee its dilemma: "In
this connection, please be advised that our application for opening of the letter of credit has been presented to
the bank since July 30th but the latter requires that we first deposit 50% of the value of the letter amounting to
aproximately $3,614,000.00 which we are not in a position to meet." (Emphasis supplied. Exh. 9-Def.; Exh. 1Pe., p. 18, Folder of Exhibits)
Consequently, the credit instrument applied for was opened only on September 8, 1952 "in favor of Thiri
Setkya, Rangoon, Burma, and/or assignee for $3,614,000.00," (which is more than two months from the
execution of the contract) the party named by the appellee as beneficiary of the letter of credit.1wph1.t
As a result of the delay, the allocation of appellee's supplier in Rangoon was cancelled and the 5% deposit,
amounting to 524,000 kyats or approximately P200,000.00 was forfeited. In this connection, it must be made
of record that although the Burmese authorities had set August 4, 1952, as the deadline for the remittance of
the required letter of credit, the cancellation of the allocation and the confiscation of the 5% deposit were not
effected until August 20, 1952, or, a full half month after the expiration of the deadline. And yet, even with the
15-day grace, appellant corporation was unable to make good its commitment to open the disputed letter of
credit.
The appellee endeavored, but failed, to restore the cancelled Burmese rice allocation. When the futility of
reinstating the same became apparent, she offered to substitute Thailand rice instead to the defendant
NARIC, communicating at the same time that the offer was "a solution which should be beneficial to the
NARIC and to us at the same time." (Exh. X-Pe., Exh. 25Def., p. 38, Folder of Exhibits). This offer for
substitution, however, was rejected by the appellant in a resolution dated November 15, 1952.
On the foregoing, the appellee sent a letter to the appellant, demanding compensation for the damages
caused her in the sum of $286,000.00, U.S. currency, representing unrealized profit. The demand having been
rejected she instituted this case now on appeal.
At the instance of the NARIC, a counterclaim was filed and the Manila Underwriters Insurance Company was
brought to the suit as a third party defendant to hold it liable on the performance bond it executed in favor of
the plaintiff-appellee.
We find for the appellee.
It is clear upon the records that the sole and principal reason for the cancellation of the allocation contracted
by the appellee herein in Rangoon, Burma, was the failure of the letter of credit to be opened with the
contemplated period. This failure must, therefore, be taken as the immediate cause for the consequent
damage which resulted. As it is then, the disposition of this case depends on a determination of who was
responsible for such failure. Stated differently, the issue is whether appellant's failure to open immediately the
letter of credit in dispute amounted to a breach of the contract of July 1, 1952 for which it may be held liable in
damages.
Appellant corporation disclaims responsibility for the delay in the opening of the letter of credit. On the
contrary, it insists that the fault lies with the appellee. Appellant contends that the disputed negotiable
instrument was not promptly secured because the appellee , failed to seasonably furnish data necessary and
required for opening the same, namely, "(1) the amount of the letter of credit, (2) the person, company or
corporation in whose favor it is to be opened, and (3) the place and bank where it may be negotiated."
Appellant would have this Court believe, therefore, that had these informations been forthwith furnished it,
there would have been no delay in securing the instrument.
Appellant's explanation has neither force nor merit. In the first place, the explanation reaches into an area of
the proceedings into which We are not at liberty to encroach. The explanation refers to a question of fact.
Nothing in the record suggests any arbitrary or abusive conduct on the part of the trial judge in the formulation
of the ruling. His conclusion on the matter is sufficiently borne out by the evidence presented. We are denied,
therefore, the prerogative to disturb that finding, consonant to the time-honored tradition of this Tribunal to hold

trial judges better situated to make conclusions on questions of fact. For the record, We quote hereunder the
lower court's ruling on the point:

the strict and faithful fulfillment of the obligation or every kind or defective performance. (IV Tolentino, Civil
Code of the Philippines, citing authorities, p. 103.)

The defense that the delay, if any in opening the letter of credit was due to the failure of plaintiff to name the
supplier, the amount and the bank is not tenable. Plaintiff stated in Court that these facts were known to
defendant even before the contract was executed because these facts were necessarily revealed to the
defendant before she could qualify as a bidder. She stated too that she had given the necessary data
immediately after the execution of Exh. "A" (the contract of July 1, 1952) to Mr. GABRIEL BELMONTE,
General Manager of the NARIC, both orally and in writing and that she also pressed for the opening of the
letter of credit on these occasions. These statements have not been controverted and defendant NARIC,
notwithstanding its previous intention to do so, failed to present Mr. Belmonte to testify or refute this. ...

The NARIC would also have this Court hold that the subsequent offer to substitute Thailand rice for the
originally contracted Burmese rice amounted to a waiver by the appellee of whatever rights she might have
derived from the breach of the contract. We disagree. Waivers are not presumed, but must be clearly and
convincingly shown, either by express stipulation or acts admitting no other reasonable explanation. (Ramirez
v. Court of Appeals, 52 O.G. 779.) In the case at bar, no such intent to waive has been established.

Secondly, from the correspondence and communications which form part of the record of this case, it is clear
that what singularly delayed the opening of the stipulated letter of credit and which, in turn, caused the
cancellation of the allocation in Burma, was the inability of the appellant corporation to meet the condition
importation by the Bank for granting the same. We do not think the appellant corporation can refute the fact
that had it been able to put up the 50% marginal cash deposit demanded by the bank, then the letter of credit
would have been approved, opened and released as early as August 4, 1952. The letter of the Philippine
National Bank to the NARIC was plain and explicit that as of the said date, appellant's "application for a letter
of credit ... has been approved by the Board of Directors with the condition that 50% marginal cash deposit be
paid and that drafts are to be paid upon presentment." (Emphasis supplied)
The liability of the appellant, however, stems not alone from this failure or inability to satisfy the requirements
of the bank. Its culpability arises from its willful and deliberate assumption of contractual obligations even as it
was well aware of its financial incapacity to undertake the prestation. We base this judgment upon the letter
which accompanied the application filed by the appellant with the bank, a part of which letter was quoted
earlier in this decision. In the said accompanying correspondence, appellant admitted and owned that it did
"not have sufficient deposit with your institution (the PNB) with which to cover the amount required to be
deposited as a condition for the opening of letters of credit. ... .
A number of logical inferences may be drawn from the aforementioned admission. First, that the appellant
knew the bank requirements for opening letters of credit; second, that appellant also knew it could not meet
those requirement. When, therefore, despite this awareness that was financially incompetent to open a letter
of credit immediately, appellant agreed in paragraph 8 of the contract to pay immediately "by means of an
irrevocable, confirm and assignable letter of credit," it must be similarly held to have bound itself to answer for
all and every consequences that would result from the representation. aptly observed by the trial court:
... Having called for bids for the importation of rice involving millions, $4,260,000.00 to be exact, it should have
a certained its ability and capacity to comply with the inevitably requirements in cash to pay for such
importation. Having announced the bid, it must be deemed to have impliedly assured suppliers of its capacity
and facility to finance the importation within the required period, especially since it had imposed the supplier
the 90-day period within which the shipment of the rice must be brought into the Philippines. Having entered in
the contract, it should have taken steps immediately to arrange for the letter of credit for the large amount
involved and inquired into the possibility of its issuance.
In relation to the aforequoted observation of the trial court, We would like to make reference also to Article 11
of the Civil Code which provides:
Those who in the performance of their obligation are guilty of fraud, negligence, or delay, and those who in any
manner contravene the tenor thereof, are liable in damages.
Under this provision, not only debtors guilty of fraud, negligence or default in the performance of obligations a
decreed liable; in general, every debtor who fails in performance of his obligations is bound to indemnify for
the losses and damages caused thereby (De la Cruz Seminary of Manila, 18 Phil. 330; Municipality of
Moncada v. Cajuigan, 21 Phil. 184; De la Cavada v. Diaz, 37 Phil. 982; Maluenda & Co. v. Enriquez, 46 Phil.
916; Pasumil v. Chong, 49 Phil. 1003; Pando v. Gimenez, 54 Phil. 459; Acme Films v. Theaters Supply, 63
Phil. 657). The phrase "any manner contravene the tenor" of the obligation includes any illicit act which impairs

We have carefully examined and studied the oral and documentary evidence presented in this case and upon
which the lower court based its award. Under the contract, the NARIC bound itself to buy 20,000 metric tons of
Burmese rice at "$203.00 U.S. Dollars per metric ton, all net shipped weight, and all in U.S. currency, C.I.F.
Manila ..." On the other hand, documentary and other evidence establish with equal certainty that the plaintiffappellee was able to secure the contracted commodity at the cost price of $180.70 per metric ton from her
supplier in Burma. Considering freights, insurance and charges incident to its shipment here and the forfeiture
of the 5% deposit, the award granted by the lower court is fair and equitable. For a clearer view of the equity of
the damages awarded, We reproduce below the testimony of the appellee, adequately supported by the
evidence and record:
Q. Will you please tell the court, how much is the damage you suffered?
A. Because the selling price of my rice is $203.00 per metric ton, and the cost price of my rice is $180.00 We
had to pay also $6.25 for shipping and about $164 for insurance. So adding the cost of the rice, the freight, the
insurance, the total would be about $187.99 that would be $15.01 gross profit per metric ton, multiply by
20,000 equals $300,200, that is my supposed profit if I went through the contract.
The above testimony of the plaintiff was a general approximation of the actual figures involved in the
transaction. A precise and more exact demonstration of the equity of the award herein is provided by Exhibit
HH of the plaintiff and Exhibit 34 of the defendant, hereunder quoted so far as germane.
It is equally of record now that as shown in her request dated July 29, 1959, and other communications
subsequent thereto for the opening by your corporation of the required letter of credit, Mrs. Arrieta was
supposed to pay her supplier in Burma at the rate of One Hundred Eighty Dollars and Seventy Cents
($180.70) in U.S. Currency, per ton plus Eight Dollars ($8.00) in the same currency per ton for shipping and
other handling expenses, so that she is already assured of a net profit of Fourteen Dollars and Thirty Cents
($14.30), U.S., Currency, per ton or a total of Two Hundred and Eighty Six Thousand Dollars ($286,000.00),
U.S. Currency, in the aforesaid transaction. ...
Lastly, herein appellant filed a counterclaim asserting that it has suffered, likewise by way of unrealized profit
damages in the total sum of $406,000.00 from the failure of the projected contract to materialize. This
counterclaim was supported by a cost study made and submitted by the appellant itself and wherein it was
illustrated how indeed had the importation pushed thru, NARIC would have realized in profit the amount
asserted in the counterclaim. And yet, the said amount of P406,000.00 was realizable by appellant despite a
number of expenses which the appellee under the contract, did not have to incur. Thus, under the cost study
submitted by the appellant, banking and unloading charges were to be shouldered by it, including an Import
License Fee of 2% and superintendence fee of $0.25 per metric ton. If the NARIC stood to profit over P400
000.00 from the disputed transaction inspite of the extra expenditures from which the herein appellee was
exempt, we are convicted of the fairness of the judgment presently under appeal.
In the premises, however, a minor modification must be effected in the dispositive portion of the decision
appeal from insofar as it expresses the amount of damages in U.S. currency and not in Philippine Peso.
Republic Act 529 specifically requires the discharge of obligations only "in any coin or currency which at the
time of payment is legal tender for public and private debts." In view of that law, therefore, the award should be
converted into and expressed in Philippine Peso.

This brings us to a consideration of what rate of exchange should apply in the conversion here decreed.
Should it be at the time of the breach, at the time the obligation was incurred or at the rate of exchange
prevailing on the promulgation of this decision.
In the case of Engel v. Velasco & Co., 47 Phil. 115, We ruled that in an action for recovery of damages for
breach of contract, even if the obligation assumed by the defendant was to pay the plaintiff a sum of money
expressed in American currency, the indemnity to be allowed should be expressed in Philippine currency at
the rate of exchange at the time of the judgment rather than at the rate of exchange prevailing on the date of
defendant's breach. This ruling, however, can neither be applied nor extended to the case at bar for the same
was laid down when there was no law against stipulating foreign currencies in Philippine contracts. But now
we have Republic Act No. 529 which expressly declares such stipulations as contrary to public policy, void and
of no effect. And, as We already pronounced in the case of Eastboard Navigation, Ltd. v. Juan Ysmael & Co.,
Inc., G.R. No. L-9090, September 10, 1957, if there is any agreement to pay an obligation in a currency other
than Philippine legal tender, the same is null and void as contrary to public policy (Republic Act 529), and the
most that could be demanded is to pay said obligation in Philippine currency "to be measured in the prevailing
rate of exchange at the time the obligation was incurred (Sec. 1, idem)."

(b) Fil-American Life Insurance Building at Iloilo City;

(c) General Milling Corporation Flour Mill at Opon Cebu;
(d) Menzi Building at Ayala Blvd., Makati, Rizal;
(e) International Rice Research Institute, Research center Los Baos, Laguna;
(f) Aurelia's Building at Mabini, Ermita, Manila;
(g) Far East Bank's Office at Fil-American Life Insurance Building at Isaac Peral Ermita, Manila;
(h) Arthur Young's residence at Forbes Park, Makati, Rizal;

UPON ALL THE FOREGOING, the decision appealed from is hereby affirmed, with the sole modification that
the award should be converted into the Philippine peso at the rate of exchange prevailing at the time the
obligation was incurred or on July 1, 1952 when the contract was executed. The appellee insurance company,
in the light of this judgment, is relieved of any liability under this suit. No pronouncement as to costs.

(i) L & S Building at Dewey Blvd., Manila; and

G.R. No. L-27782 July 31, 1970

On December 1 1, '1961, appellee sent to appellant a statement of account (Exhibit "1"), 3 to which was
attached an itemized statement of defendant-appellant's account (Exh. "1-A"), according to which the total
engineering fee asked by appellee for services rendered amounted to P116,565.00 from which sum was to be
deducted the previous payments made in the amount of P57,000.00, thus leaving a balance due in the amount
of P59,565.00.

OCTAVIO A. KALALO, plaintiff-appellee,

vs.
ALFREDO J. LUZ, defendant-appellant.
Amelia K. del Rosario for plaintiff-appellee.
Pelaez, Jalandoni & Jamir for defendant-appellant.

ZALDIVAR, J.:
Appeal from the decision, dated, February 10, 1967, of the Court of First Instance of Rizal (Branch V, Quezon
City) in its Civil Case No. Q-6561.
On November 17, 1959, plaintiff-appellee Octavio A. Kalalo hereinafter referred to as appellee), a licensed civil
engineer doing business under the firm name of O. A. Kalalo and Associates, entered into an agreement
(Exhibit A ) 1 with defendant-appellant Alfredo J . Luz (hereinafter referred to as appellant), a licensed architect,
doing business under firm name of A. J. Luz and Associates, whereby the former was to render engineering
design services to the latter for fees, as stipulated in the agreement. The services included design
computation and sketches, contract drawing and technical specifications of all engineering phases of the
project designed by O. A. Kalalo and Associates bill of quantities and cost estimate, and consultation and
advice during construction relative to the work. The fees agreed upon were percentages of the architect's fee,
to wit: structural engineering, 12-%; electrical engineering, 2-%. The agreement was subsequently
supplemented by a "clarification to letter-proposal" which provided, among other things, that "the schedule of
engineering fees in this agreement does not cover the following: ... D. Foundation soil exploration, testing and
evaluation; E. Projects that are principally engineering works such as industrial plants, ..." and "O. A. Kalalo
and Associates reserve the right to increase fees on projects ,which cost less than P100,000 ...." 2 Pursuant to
said agreement, appellee rendered engineering services to appellant in the following projects:
(a) Fil-American Life Insurance Building at Legaspi City;

(j) Stanvac Refinery Service Building at Limay, Bataan.

On May 18, 1962 appellant sent appellee a resume of fees due to the latter. Said fees, according to appellant.
amounted to P10,861.08 instead of the amount claimed by the appellee. On June 14, 1962 appellant sent
appellee a check for said amount, which appellee refused to accept as full payment of the balance of the fees
due him.
On August 10, 1962, appellee filed a complaint against appellant, containing four causes of action. In the first
cause of action, appellee alleged that for services rendered in connection with the different projects therein
mentioned there was due him fees in sum s consisting of $28,000 (U.S.) and P100,204.46, excluding
interests, of which sums only P69,323.21 had been paid, thus leaving unpaid the $28,000.00 and the balance
of P30,881.25. In the second cause of action, appellee claimed P17,000.00 as consequential and moral
damages; in the third cause of action claimed P55,000.00 as moral damages, attorney's fees and expenses of
litigation; and in the fourth cause of action he claimed P25,000.00 as actual damages, and also for attorney's
fees and expenses of litigation.
In his answer, appellant admitted that appellee rendered engineering services, as alleged in the first cause of
action, but averred that some of appellee's services were not in accordance with the agreement and appellee's
claims were not justified by the services actually rendered, and that the aggregate amount actually due to
appellee was only P80,336.29, of which P69,475.21 had already been paid, thus leaving a balance of only
P10,861.08. Appellant denied liability for any damage claimed by appellee to have suffered, as alleged in the
second, third and fourth causes of action. Appellant also set up affirmative and special defenses, alleging that
appellee had no cause of action, that appellee was in estoppel because of certain acts, representations,
admissions and/or silence, which led appellant to believe certain facts to exist and to act upon said facts, that
appellee's claim regarding the Menzi project was premature because appellant had not yet been paid for said
project, and that appellee's services were not complete or were performed in violation of the agreement and/or
otherwise unsatisfactory. Appellant also set up a counterclaim for actual and moral damages for such amount
as the court may deem fair to assess, and for attorney's fees of P10,000.00.
Inasmuch as the pleadings showed that the appellee's right to certain fees for services rendered was not
denied, the only question being the assessment of the proper fees and the balance due to appellee after
deducting the admitted payments made by appellant, the trial court, upon agreement of the parties, authorized

the case to be heard before a Commissioner. The Commissioner rendered a report which, in resume, states
that the amount due to appellee was $28,000.00 (U.S.) as his fee in the International Research Institute
Project which was twenty percent (20%) of the $140,000.00 that was paid to appellant, and P51,539.91 for the
other projects, less the sum of P69,475.46 which was already paid by the appellant. The Commissioner also
recommended the payment to appellee of the sum of P5,000.00 as attorney's fees.
At the hearing on the Report of the Commissioner, the respective counsel of the parties manifested to the
court that they had no objection to the findings of fact of the Commissioner contained in the Report, and they
agreed that the said Report posed only two legal issues, namely: (1) whether under the facts stated in the
Report, the doctrine of estoppel would apply; and (2) whether the recommendation in the Report that the
payment of the amount. due to the plaintiff in dollars was legally permissible, and if not, at what rate of
exchange it should be paid in pesos. After the parties had submitted their respective memorandum on said
issues, the trial court rendered its decision dated February 10, 1967, the dispositive portion of which reads as
follows:
WHEREFORE, judgment is rendered in favor of plaintiff and against the defendant, by ordering the defendant
to pay plaintiff the sum of P51,539.91 and $28,000.00, the latter to be converted into the Philippine currency
on the basis of the current rate of exchange at the time of the payment of this judgment, as certified to by the
Central Bank of the Philippines, from which shall be deducted the sum of P69,475.46, which the defendant
had paid the plaintiff, and the legal rate of interest thereon from the filing of the complaint in the case until fully
paid for; by ordering the defendant to pay to plaintiff the further sum of P8,000.00 by way of attorney's fees
which the Court finds to be reasonable in the premises, with costs against the defendant. The counterclaim of
the defendant is ordered dismissed.
From the decision, this appeal was brought, directly to this Court, raising only questions of law.
During the pendency of this appeal, appellee filed a petition for the issuance of a writ of attachment under
Section 1 (f) of Rule 57 of the Rules of Court upon the ground that appellant is presently residing in Canada as
a permanent resident thereof. On June 3, 1969, this Court resolved, upon appellee's posting a bond of
P10,000.00, to issue the writ of attachment, and ordered the Provincial Sheriff of Rizal to attach the estate,
real and personal, of appellant Alfredo J. Luz within the province, to the value of not less than P140,000.00.
The appellant made the following assignments of errors:
I. The lower court erred in not declaring and holding that plaintiff-appellee's letter dated December 11, 1961
(Exhibit "1") and the statement of account (Exhibit "1-A") therein enclosed, had the effect, cumulatively or
alternatively, of placing plaintiff-appellee in estoppel from thereafter modifying the representations made in
said exhibits, or of making plaintiff-appellee otherwise bound by said representations, or of being of decisive
weight in determining the true intent of the parties as to the nature and extent of the engineering services
rendered and/or the amount of fees due.
II. The lower court erred in declaring and holding that the balance owing from defendant-appellant to plaintiffappellee on the IRRI Project should be paid on the basis of the rate of exchange of the U.S. dollar to the
Philippine peso at the time of payment of judgment. .
III. The lower court erred in not declaring and holding that the aggregate amount of the balance due from
defendant-appellant to plaintiff-appellee is only P15,792.05.
IV. The lower court erred in awarding attorney's fees in the sum of P8,000.00, despite the commissioner's
finding, which plaintiff-appellee has accepted and has not questioned, that said fee be only P5,000.00; and
V. The lower court erred in not granting defendant-appellant relief on his counter-claim.
1. In support of his first assignment of error appellant argues that in Exhibit 1-A, which is a statement of
accounts dated December 11, 1961, sent by appellee to appellant, appellee specified the various projects for

which he claimed engineering fees, the precise amount due on each particular engineering service rendered
on each of the various projects, and the total of his claims; that such a statement barred appellee from
asserting any claim contrary to what was stated therein, or from taking any position different from what he
asserted therein with respect to the nature of the engineering services rendered; and consequently the trial
court could not award fees in excess of what was stated in said statement of accounts. Appellant argues that
for estoppel to apply it is not necessary, contrary to the ruling of the trial court, that the appellant should
have actually relied on the representation, but that it is sufficient that the representations were intended to
make the defendant act there on; that assuming arguendo that Exhibit 1-A did not put appellee in estoppel, the
said Exhibit 1-A nevertheless constituted a formal admission that would be binding on appellee under the law
on evidence, and would not only belie any inconsistent claim but also would discredit any evidence adduced
by appellee in support of any claim inconsistent with what appears therein; that, moreover, Exhibit 1-A, being a
statement of account, establishesprima facie the accuracy and correctness of the items stated therein and its
correctness can no longer be impeached except for fraud or mistake; that Exhibit 1-A furthermore, constitutes
appellee's own interpretation of the contract between him and appellant, and hence, is conclusive against him.
On the other hand, appellee admits that Exhibit 1-A itemized the services rendered by him in the various
construction projects of appellant and that the total engineering fees charged therein was P116,565.00, but
maintains that he was not in estoppel: first, because when he prepared Exhibit 1-A he was laboring under an
innocent mistake, as found by the trial court; second, because appellant was not ignorant of the services
actually rendered by appellee and the fees due to the latter under the original agreement, Exhibit "A."
We find merit in the stand of appellee.
The statement of accounts (Exh. 1-A) could not estop appellee, because appellant did not rely thereon as
found by the Commissioner, from whose Report we read:
While it is true that plaintiff vacillated in his claim, yet, defendant did not in anyway rely or believe in the
different claims asserted by the plaintiff and instead insisted on a claim that plaintiff was only entitled to
P10,861.08 as per a separate resume of fees he sent to the plaintiff on May 18, 1962 (See Exhibit 6). 4
The foregoing finding of the Commissioner, not disputed by appellant, was adopted by the trial court in its
decision. Under article 1431 of the Civil Code, in order that estoppel may apply the person, to whom
representations have been made and who claims the estoppel in his favor must have relied or acted on such
representations. Said article provides:
Art. 1431. Through estoppel an admission or representation is rendered conclusive upon the person making it,
and cannot be denied or disproved as against the person relying thereon.
An essential element of estoppel is that the person invoking it has been influenced and has relied on the
representations or conduct of the person sought to be estopped, and this element is wanting in the instant
case. In Cristobal vs. Gomez, 5 this Court held that no estoppel based on a document can be invoked by one
who has not been mislead by the false statements contained therein. And in Republic of the Philippines vs.
Garcia, et al., 6 this Court ruled that there is no estoppel when the statement or action invoked as its basis did
not mislead the adverse party-Estoppel has been characterized as harsh or odious and not favored in
law. 7 When misapplied, estoppel becomes a most effective weapon to accomplish an injustice, inasmuch as it
shuts a man's mouth from speaking the truth and debars the truth in a particular case. 8 Estoppel cannot be
sustained by mere argument or doubtful inference: it must be clearly proved in all its essential elements by
clear, convincing and satisfactory evidence. 9 No party should be precluded from making out his case
according to its truth unless by force of some positive principle of law, and, consequently, estoppel in pains
must be applied strictly and should not be enforced unless substantiated in every particular. 1 0
The essential elements of estoppel in pais may be considered in relation to the party sought to be estopped,
and in relation to the party invoking the estoppel in his favor. As related to the party to be estopped, the
essential elements are: (1) conduct amounting to false representation or concealment of material facts or at
least calculated to convey the impression that the facts are otherwise than, and inconsistent with, those which
the party subsequently attempts to assert; (2) intent, or at least expectation that his conduct shall be acted
upon by, or at least influence, the other party; and (3) knowledge, actual or constructive, of the real facts. As

related to the party claiming the estoppel, the essential elements are (1) lack of knowledge and of the means
of knowledge of the truth as the facts in questions; (2) (reliance, in good faith, upon the conduct or statements
of the party to be estopped; (3) action or inaction based thereon of such character as To change the position
or status of the party claiming the estoppel, to his injury, detriment or prejudice. 1 1
The first essential element in relation to the party sought to be estopped does not obtain in the instant case,
for, as appears in the Report of the Commissioner, appellee testified "that when he wrote Exhibit 1 and
prepared Exhibit 1-A, he had not yet consulted the services of his counsel and it was only upon advice of
counsel that the terms of the contract were interpreted to him resulting in his subsequent letters to the
defendant demanding payments of his fees pursuant to the contract Exhibit A." 1 2 This finding of the
Commissioner was adopted by the trial court. 1 3 It is established , therefore, that Exhibit 1-A was written by
appellee through ignorance or mistake. Anent this matter, it has been held that if an act, conduct or
misrepresentation of the party sought to be estopped is due to ignorance founded on innocent mistake,
estoppel will not arise. 1 4 Regarding the essential elements of estoppel in relation to the party claiming the
estoppel, the first element does not obtain in the instant case, for it cannot be said that appellant did not know,
or at least did not have the means of knowing, the services rendered to him by appellee and the fees due
thereon as provided in Exhibit A. The second element is also wanting, for, as adverted to, appellant did not rely
on Exhibit 1-A but consistently denied the accounts stated therein. Neither does the third element obtain, for
appellant did not act on the basis of the representations in Exhibit 1-A, and there was no change in his
position, to his own injury or prejudice.
Appellant, however, insists that if Exhibit 1-A did not put appellee in estoppel, it at least constituted an
admission binding upon the latter. In this connection, it cannot be gainsaid that Exhibit 1-A is not a judicial
admission. Statements which are not estoppels nor judicial admissions have no quality of conclusiveness, and
an opponent. whose admissions have been offered against him may offer any evidence which serves as an
explanation for his former assertion of what he now denies as a fact. This may involve the showing of a
mistake. Accordingly, in Oas vs. Roa, 1 6 it was held that when a party to a suit has made an admission of any
fact pertinent to the issue involved, the admission can be received against him; but such an admission is not
conclusive against him, and he is entitled to present evidence to overcome the effect of the admission.
Appellee did explain, and the trial court concluded, that Exhibit 1-A was based on either his ignorance or
innocent mistake and he, therefore, is not bound by it.
Appellant further contends that Exhibit 1-A being a statement of account, establishes prima facie the accuracy
and correctness of the items stated therein. If prima facie, as contended by appellant, then it is not absolutely
conclusive upon the parties. An account stated may be impeached for fraud, mistake or error. In American
Decisions, Vol. 62, p. 95, cited as authority by appellant himself. we read thus:
An account stated or settled is a mere admission that the account is correct. It is not an estoppel. The account
is still open to impeachment for mistakes or errors. Its effect is to establish, prima facie, the accuracy of the
items without other proof; and the party seeking to impeach it is bound to show affirmatively the mistake or
error alleged. The force of the admission and the strength of the evidence necessary to overcome it will
depend upon the circumstances of the case.

2. In support of the second assignment of error, that the lower court erred in holding that the balance from
appellant on the IRRI project should be paid on the basis of the rate of exchange of the U.S. dollar to the
Philippine peso at the time of payment of the judgment, appellant contends: first, that the official rate at the
time appellant received his architect's fees for the IRRI project, and correspondingly his obligation to
appellee's fee on August 25, 1961, was P2.00 to $1.00, and cites in support thereof Section 1612 of the
Revised Administrative Code, Section 48 of Republic Act 265 and Section 6 of Commonwealth Act No. 699;
second, that the lower court's conclusion that the rate of exchange to be applied in the conversion of the
$28,000.00 is the current rate of exchange at the time the judgment shall be satisfied was based solely on a
mere presumption of the trial court that the defendant did not convert, there being no showing to that effect,
the dollars into Philippine currency at the official rate, when the legal presumption should be that the dollars
were converted at the official rate of $1.00 to P2.00 because on August 25, 1961, when the IRRI project
became due and payable, foreign exchange controls were in full force and effect, and partial decontrol was
effected only afterwards, during the Macapagal administration; third, that the other ground advanced by the
lower court for its ruling, to wit, that appellant committed a breach of his obligation to turn over to the appellee
the engineering fees received in U.S. dollars for the IRRI project, cannot be upheld, because there was no
such breach, as proven by the fact that appellee never claimed in Exhibit 1-A that he should be paid in dollars;
and there was no provision in the basic contract (Exh. "A") that he should be paid in dollars; and, finally, even
if there were such provision, it would have no binding effect under the provision of Republic Act 529; that,
moreover, it cannot really be said that no payment was made on that account for appellant had already paid
P57,000.00 to appellee, and under Article 125 of the Civil Code, said payment could be said to have been
applied to the fees due from the IRRI project, this project being the biggest and this debt being the most
onerous.
In refutation of appellant's argument in support of the second assignment of error, appellee argues that
notwithstanding Republic Act 529, appellant can be compelled to pay the appellee in dollars in view of the fact
that appellant received his fees in dollars, and appellee's fee is 20% of appellant's fees; and that if said
amount is be converted into Philippine Currency, the rate of exchange should be that at the time of the
execution of the judgment. 2 0
We have taken note of the fact that on August 25, 1961, the date when appellant said his obligation to pay
appellee's fees became due, there was two rates of exchange, to wit: the preferred rate of P2.00 to $1.00, and
the free market rate. It was so provided in Circular No. 121 of the Central Bank of the Philippines, dated March
2, 1961. amending an earlier Circular No. 117, and in force until January 21, 1962 when it was amended by
Circular No. 133, thus:
1. All foreign exchange receipts shall be surrendered to the Central Bank of those authorized to deal in foreign
exchange as follows:
Percentage of Total to be surrendered at
Preferred: Free Market Rate: Rate:

In the instant case, it is Our view that the ignorance mistake that attended the writing of Exhibit 1-A by
appellee was sufficient to overcome the prima facie evidence of correctness and accuracy of said Exhibit 1-A.

(a) Export Proceeds, U.S. Government Expenditures invisibles other than those specifically mentioned
below. ................................................ 25 75

Appellant also urges that Exhibit 1-A constitutes appellee's own interpretation of the contract, and is, therefore,
conclusive against him. Although the practical construction of the contract by one party, evidenced by his
words or acts, can be used against him in behalf of the other party, 1 7 yet, if one of the parties carelessly
makes a wrong interpretation of the words of his contract, or performs more than the contract requires (as
reasonably interpreted independently of his performance), as happened in the instant case, he should be
entitled to a restitutionary remedy, instead of being bound to continue to his erroneous interpretation or his
erroneous performance and "the other party should not be permitted to profit by such mistake unless he can
establish an estoppel by proving a material change of position made in good faith. The rule as to practical
construction does not nullify the equitable rules with respect to performance by mistake." 1 8 In the instant
case, it has been shown that Exhibit 1-A was written through mistake by appellee and that the latter is not
estopped by it. Hence, even if said Exhibit 1-A be considered as practical construction of the contract by
appellee, he cannot be bound by such erroneous interpretation. It has been held that if by mistake the parties
followed a practice in violation of the terms of the agreement, the court should not perpetuate the error. 1 9

(b) Foreign Investments, Gold Proceeds, Tourists and Inward Remittances of Veterans and Filipino Citizens;
and Personal Expenses of Diplomatic Per personnel ................................. 100" 2 1
The amount of $140,000.00 received by appellant foil the International Rice Research Institute project is not
within the scope of sub-paragraph (a) of paragraph No. 1 of Circular No. 121. Appellant has not shown that
25% of said amount had to be surrendered to the Central Bank at the preferred rate because it was either
export proceeds, or U.S. Government expenditures, or invisibles not included in sub-paragraph (b). Hence, it
cannot be said that the trial court erred in presuming that appellant converted said amount at the free market
rate. It is hard to believe that a person possessing dollars would exchange his dollars at the preferred rate of
P2.00 to $1.00, when he is not obligated to do so, rather than at the free market rate which is much higher. A
person is presumed to take ordinary care of his concerns, and that the ordinary course of business has been
followed. 2 2

Under the agreement, Exhibit A, appellee was entitled to 20% of $140,000.00, or the amount of $28,000.00.
Appellee, however, cannot oblige the appellant to pay him in dollars, even if appellant himself had received his
fee for the IRRI project in dollars. This payment in dollars is prohibited by Republic Act 529 which was enacted
on June 16, 1950. Said act provides as follows:
SECTION 1. Every provision contained in, or made with respect to, any obligation which provision purports to
give the obligee the right to require payment in gold or in a particular kind of coin or currency other than
Philippine currency or in an amount of money of the Philippines measured thereby, be as it is hereby declared
against public policy, and null, void and of no effect, and no such provision shall be contained in, or made with
respect to, any obligation hereafter incurred. Every obligation heretofore or here after incurred, whether or not
any such provision as to payment is contained therein or made with respect thereto, shall be discharged upon
payment in any coin or currency which at the time of payment is legal tender for public and private
debts: Provided, That, ( a) if the obligation was incurred prior to the enactment of this Act and required
payment in a particular kind of coin or currency other than Philippine currency, it shall be discharged in
Philippine currency measured at the prevailing rate of exchange at the time the obligation was incurred, (b)
except in case of a loan made in a foreign currency stipulated to be payable in the same currency in which
case the rate of exchange prevailing at the time of the stipulated date of payment shall prevail. All coin and
currency, including Central Bank notes, heretofore or hereafter issued and declared by the Government of the
Philippines shall be legal tender for all debts, public and private.
Under the above-quoted provision of Republic Act 529, if the obligation was incurred prior to the enactment of
the Act and require payment in a particular kind of coin or currency other than the Philippine currency the
same shall be discharged in Philippine currency measured at the prevailing rate of exchange at the time the
obligation was incurred. As We have adverted to, Republic Act 529 was enacted on June 16, 1950. In the case
now before Us the obligation of appellant to pay appellee the 20% of $140,000.00, or the sum of $28,000.00,
accrued on August 25, 1961, or after the enactment of Republic Act 529. It follows that the provision of
Republic Act 529 which requires payment at the prevailing rate of exchange when the obligation was incurred
cannot be applied. Republic Act 529 does not provide for the rate of exchange for the payment of obligation
incurred after the enactment of said Act. The logical Conclusion, therefore, is that the rate of exchange should
be that prevailing at the time of payment. This view finds support in the ruling of this Court in the case of Engel
vs. Velasco & Co. 2 3 where this Court held that even if the obligation assumed by the defendant was to pay
the plaintiff a sum of money expressed in American currency, the indemnity to be allowed should be expressed
in Philippine currency at the rate of exchange at the time of judgment rather than at the rate of exchange
prevailing on the date of defendant's breach. This is also the ruling of American court as follows:

At the hearing on the Report of the Commissioner on February 15, 1966, the counsels for both parties
manifested to the court that they have no objection to the findings of facts of the Commissioner in his report;
and agreed that the said report only poses two (2)legal issues, namely: (1) whether under the facts stated in
the Report, the doctrine of estoppel will apply; and (2) whether the recommendation in the Report that the
payment of amount due to the plaintiff in dollars is permissible under the law, and, if not, at what rate of
exchange should it be paid in pesos (Philippine currency) .... 2 5
In the Commissioner's report, it is spetifically recommended that the appellant be ordered to pay the plaintiff
the sum of "$28,000. 00 or its equivalent as the fee of the plaintiff under Exhibit A on the IRRI project." It is
clear from this report of the Commissioner that no payment for the account of this $28,000.00 had been made.
Indeed, it is not shown in the record that the peso equivalent of the $28,000.00 had been fixed or agreed upon
by the parties at the different times when the appellant had made partial payments to the appellee.
3. In his third assignment of error, appellant contends that the lower court erred in not declaring that the
aggregate amount due from him to appellee is only P15,792.05. Appellant questions the propriety or
correctness of most of the items of fees that were found by the Commissioner to be due to appellee for
services rendered. We believe that it is too late for the appellant to question the propriety or correctness of
those items in the present appeal. The record shows that after the Commissioner had submitted his report the
lower court, on February 15, 1966, issued the following order:
When this case was called for hearing today on the report of the Commissioner, the counsels of the parties
manifested that they have no objection to the findings of facts in the report. However, the report poses only
legal issues, namely: (1) whether under the facts stated in the report, the doctrine of estoppel will apply; and
(2) whether the recommendation in the report that the alleged payment of the defendant be made in dollars is
permissible by law and, if not, in what rate it should be paid in pesos (Philippine Currency). For the purpose of
resolving these issues the parties prayed that they be allowed to file their respective memoranda which will aid
the court in the determination of said issues. 2 6
In consonance with the afore-quoted order of the trial court, the appellant submitted his memorandum which
opens with the following statements:
As previously manifested, this Memorandum shall be confined to:

The value in domestic money of a payment made in foreign money is fixed with respect to the rate of
exchange at the time of payment. (70 CJS p. 228)

(a) the finding in the Commissioner's Report that defendant's defense of estoppel will not lie (pp. 17-18,
Report); and

According to the weight of authority the amount of recovery depends upon the current rate of exchange, and
not the par value of the particular money involved. (48 C.J. 605-606)

(b) the recommendation in the Commissioner's Report that defendant be ordered to pay plaintiff the sum of
'$28,000.00 (U.S.) or its equivalent as the fee of the plaintiff under Exhibit 'A' in the IRRI project.'

The value in domestic money of a payment made in foreign money is fixed in reference to the rate of
exchange at the time of such payment. (48 C.J. 605)

More specifically this Memorandum proposes to demonstrate the affirmative of three legal issuesposed,
namely:

It is Our considered view, therefore, that appellant should pay the appellee the equivalent in pesos of the
$28,000.00 at the free market rate of exchange at the time of payment. And so the trial court did not err when
it held that herein appellant should pay appellee $28,000.00 "to be converted into the Philippine currency on
the basis of the current rate of exchange at the time of payment of this judgment, as certified to by the Central
Bank of the Philippines, ...." 2 4

First: Whether or not plaintiff's letter dated December 11, 1961 (Exhibit 'I') and/or Statement of Account
(Exhibit '1-A') therein enclosed has the effect of placing plaintiff in estoppel from thereafter modifying
the representations made in said letter and Statement of Account or of making plaintiff otherwise bound
thereby; or of being decisive or great weight in determining the true intent of the parties as to the amount of
the engineering fees owing from defendant to plaintiff;

Appellant also contends that the P57,000.00 that he had paid to appellee should have been applied to the due
to the latter on the IRRI project because such debt was the most onerous to appellant. This contention is
untenable. The Commissioner who was authorized by the trial court to receive evidence in this case, however,
reports that the appellee had not been paid for the account of the $28,000.00 which represents the fees of
appellee equivalent to 20% of the $140,000.00 that the appellant received as fee for the IRRI project. This is a
finding of fact by the Commissioner which was adopted by the trial court. The parties in this case have agreed
that they do not question the finding of fact of the Commissioner. Thus, in the decision appealed from the
lower court says:

Second: Whether or not defendant can be compelled to pay whatever balance is owing to plaintiff on the IRRI
(International Rice and Research Institute) project in United States dollars; and
Third: Whether or not in case the ruling of this Honorable Court be that defendant cannot be compelled to pay
plaintiff in United States dollars, the dollar-to-peso convertion rate for determining the peso equivalent of
whatever balance is owing to plaintiff in connection with the IRRI project should be the 2 to 1 official rate and
not any other rate. 2 7

It is clear, therefore, that what was submitted by appellant to the lower court for resolution did not include the
question of correctness or propriety of the amounts due to appellee in connection with the different projects for
which the appellee had rendered engineering services. Only legal questions, as above enumerated, were
submitted to the trial court for resolution. So much so, that the lower court in another portion of its decision
said, as follows:

report the trial court is deemed to have adopted the reasons given by the Commissioner in awarding attorney's
fees, as stated in the above-quoted portion of the report. Based on the reasons stated in the report, the trial
court must have considered that the reasonable attorney's fees should be P8,000.00. Considering that the
judgment against the appellant would amount to more than P100,000.00, We believe that the award of
P8,000.00 for attorney's fees is reasonable.

The objections to the Commissioner's Report embodied in defendant's memorandum of objections, dated
March 18, 1966, cannot likewise be entertained by the Court because at the hearing of the Commissioner's
Report the parties had expressly manifested that they had no objection to the findings of facts embodied
therein.

5. In his fifth assignment of error appellant urges that he is entitled to relief on his counterclaim. In view of what
We have stated in connection with the preceding four assignments of error, We do not consider it necessary to
dwell any further on this assignment of error.

We, therefore hold that the third assignment of error of the appellant has no merit.
4. In his fourth assignment of error, appellant questions the award by the lower court of P8,000.00 for
attorney's fees. Appellant argues that the Commissioner, in his report, fixed the sum of P5,000.00 as "just and
reasonable" attorney's fees, to which amount appellee did not interpose any objection, and by not so objecting
he is bound by said finding; and that, moreover, the lower court gave no reason in its decision for increasing
the amount to P8,000.00.
Appellee contends that while the parties had not objected to the findings of the Commissioner, the assessment
of attorney's fees is always subject to the court's appraisal, and in increasing the recommended fees from
P5,000.00 to P8,000.00 the trial court must have taken into consideration certain circumstances which warrant
the award of P8,000.00 for attorney's fees.
We believe that the trial court committed no error in this connection. Section 12 of Rule 33 of the Rules of
Court, on which the fourth assignment of error is presumably based, provides that when the parties stipulate
that a commissioner's findings of fact shall be final, only questions of law arising from the facts mentioned in
the report shall thereafter be considered. Consequently, an agreement by the parties to abide by the findings
of fact of the commissioner is equivalent to an agreement of facts binding upon them which the court cannot
disregard. The question, therefore, is whether or not the estimate of the reasonable fees stated in the report of
the Commissioner is a finding of fact.

WHEREFORE, the decision appealed from is affirmed, with costs against the defendant-appellant. It is so
ordered.
G.R. No. L-27796 March 25, 1976
ST. PAUL FIRE & MARINE INSURANCE CO., plaintiff-appellant,
vs.
MACONDRAY & CO., INC., BARBER STEAMSHIP LINES, INC., WILHELM WILHELMSEN MANILA PORT
SERVICE and/or MANILA RAILROAD COMPANY, defendants-appellees.
Chuidian Law Office for appellant.
Salcedo, Del Rosario Bito & Mesa for appellee Macondray & Co., Inc., Barber Steamship Lines, Inc. and
Wilhelm Wilhelmsen
Macaranas & Abrenica for appellee Manila Port Service and/or Manila Railroad Company.

ANTONIO, J.:
The report of the Commissioner on this matter reads as follows:
As regards attorney's fees, under the provisions of Art 2208, par (11), the same may be awarded, and
considering the number of hearings held in this case, the nature of the case (taking into account the technical
nature of the case and the voluminous exhibits offered in evidence), as well as the way the case was handled
by counsel, it is believed, subject to the Court's appraisal of the matter, that the sum of P5,000.00 is just and
reasonable as attorney's fees." 2 8
It is thus seen that the estimate made by the Commissioner was an expression of belief, or an opinion.
An opinionis different from a fact. The generally recognized distinction between a statement of "fact" and an
expression of "opinion" is that whatever is susceptible of exact knowledge is a matter of fact, while that not
susceptible of exact knowledge is generally regarded as an expression of opinion. 2 9 It has also been said
that the word "fact," as employed in the legal sense includes "those conclusions reached by the trior from
shifting testimony, weighing evidence, and passing on the credit of the witnesses, and it does not denote those
inferences drawn by the trial court from the facts ascertained and settled by it. 3 0 In the case at bar, the
estimate made by the Commissioner of the attorney's fees was an inference from the facts ascertained by
him, and is, therefore, not a finding of facts. The trial court was, consequently, not bound by that estimate, in
spite of the manifestation of the parties that they had no objection to the findings of facts of the Commissioner
in his report. Moreover, under Section 11 of Rule 33 of the Rules of Court, the court may adopt, modify, or
reject the report of the commissioner, in whole or in part, and hence, it was within the trial court's authority to
increase the recommended attorney's fees of P5,000.00 to P8,000.00. It is a settled rule that the amount of
attorney's fees is addressed to the sound discretion of the court. 3 1
It is true, as appellant contends, that the trial court did not state in the decision the reasons for increasing the
attorney's fees. The trial court, however, had adopted the report of the Commissioner, and in adopting the

Certified to this Court by the Court of Appeals in its Resolution of May 8, 1967, 1 on the ground that the appeal
involves purely questions of law, thus: (a) whether or not, in case of loss or damage, the liability of the carrier
to the consignee is limited to the C.I.F. value of the goods which were lost or damaged, and (b) whether the
insurer who has paid the claim in dollars to the consignee should be reimbursed in its peso equivalent on the
date of discharge of the cargo or on the date of the decision.
According to the records, on June 29, 1960, Winthrop Products, Inc., of New York, New York, U.S.A., shipped
aboard the SS "Tai Ping", owned and operated by Wilhelm Wilhelmsen 218 cartons and drums of drugs and
medicine, with the freight prepaid, which were consigned to Winthrop-Stearns Inc., Manila, Philippines. Barber
Steamship Lines, Inc., agent of Wilhelm Wilhelmsen issued Bill of Lading No. 34, in the name of Winthrop
Products, Inc. as shipper, with arrival notice in Manila to consignee Winthrop-Stearns, Inc., Manila, Philippines.
The shipment was insured by the shipper against loss and/or damage with the St. Paul Fire & Marine
Insurance Company under its insurance Special Policy No. OC-173766 dated June 23, 1960 (Exhibit "S").
On August 7, 1960, the SS "Tai Ping" arrived at the Port of Manila and discharged its aforesaid shipment into
the custody of Manila Port Service, the arrastre contractor for the Port of Manila. The said shipment was
discharged complete and in good order with the exception of one (1) drum and several cartons which were in
bad order condition. Because consignee failed to receive the whole shipment and as several cartons of
medicine were received in bad order condition, the consignee filed the corresponding claim in the amount of
Fl,109.67 representing the C.I.F. value of the damaged drum and cartons of medicine with the carrier, herein
defendants- appellees (Exhibits "G" and "H") and the Manila Port Service (Exhibits "I" & "J" However, both
refused to pay such claim. consequently, the consignee filed its claim with the insurer, St. Paul Fire & Marine
insurance Co. (Exhibit "N"), and the insurance company, on the basis of such claim, paid to the consignee the

insured value of the lost and damaged goods, including other expenses in connection therewith, in the total
amount of $1,134.46 U.S. currency (Exhibit "U").
On August 5, 1961, as subrogee of the rights of the shipper and/or consignee, the insurer, St. Paul Fire &
Marine Insurance Co., instituted with the Court of First Instance of Manila the present action 2 against the
defendants for the recovery of said amount of $1,134.46, plus costs.
On August 23, 1961, the defendants Manila Port Service and Manila Railroad Company resisted the action,
contending, among others, that the whole cargo was delivered to the consignee in the same condition in which
it was received from the carrying vessel; that their rights, duties and obligations as arrastre contractor at the
Port of Manila are governed by and subject to the terms, conditions and limitations contained in the
Management Contract between the Bureau of Customs and Manila Port Service, and their liability is limited to
the invoice value of the goods, but in no case more than P500.00 per package, pursuant to paragraph 15 of
the said Management Contract; and that they are not the agents of the carrying vessel in the receipt and
delivery of cargoes in the Port of Manila.
On September 7, 1961, the defendants Macondray & Co., Inc., Barber Steamship Lines, Inc. and Wilhelm
Wilhelmsen also contested the claim alleging, among others, that the carrier's liability for the shipment ceased
upon discharge thereof from the ship's tackle; that they and their co-defendant Manila Port Service are not the
agents of the vessel; that the said 218 packages were discharged from the vessel SS "Tai Ping" into the
custody of defendant Manila Port Service as operator of the arrastre service for the Port of Manila; that if any
damage was sustained by the shipment while it was under the control of the vessel, such damage was caused
by insufficiency of packing, force majeure and/or perils of the sea; and that they, in good faith and for the
purpose only of avoiding litigation without admitting liability to the consignee, offered to settle the latter's claim
in full by paying the C.I.F. value of 27 lbs. caramel 4.13 kilos methyl salicylate and 12 pieces pharmaceutical
vials of the shipment, but their offer was declined by the consignee and/or the plaintiff.
After due trial, the lower court, on March 10, 1965 rendered judgment ordering defendants Macondray & Co.,
Inc., Barber Steamship Lines, Inc. and Wilhelm Wilhelmsen to pay to the plaintiff, jointly and severally, the sum
of P300.00, with legal interest thereon from the filing of the complaint until fully paid, and defendants Manila
Railroad Company and Manila Port Service to pay to plaintiff, jointly and severally, the sum of P809.67, with
legal interest thereon from the filing of the complaint until fully paid, the costs to be borne by all the said
defendants. 3
On April 12, 1965, plaintiff, contending that it should recover the amount of $1,134.46, or its equivalent in
pesos at the rate of P3.90, instead of P2.00, for every US$1.00, filed a motion for reconsideration, but this was
denied by the lower court on May 5, 1965. Hence, the present appeal.
Plaintiff-appellant argues that, as subrogee of the consignee, it should be entitled to recover from the
defendants-appellees the amount of $1,134.46 which it actually paid to the consignee (Exhibits "N" & "U") and
which represents the value of the lost and damaged shipment as well as other legitimate expenses such as
the duties and cost of survey of said shipment, and that the exchange rate on the date of the judgment, which
was P3.90 for every US$1.00, should have been applied by the lower court.
Defendants-appellees countered that their liability is limited to the C.I.F. value of the goods, pursuant to
contract of sea carriage embodied in the bill of lading that the consignee's (Winthrop-Stearns Inc.) claim
against the carrier (Macondray & Co., Inc., Barber Steamship Lines, Inc., Wilhelm Wilhelmsen and the arrastre
operators (Manila Port Service and Manila Railroad Company) was only for the sum of Pl,109.67 (Exhibits "G",
"H", "I" & "J"), representing the C.I.F. value of the loss and damage sustained by the shipment which was the
amount awarded by the lower court to the plaintiff-appellant; 4 defendants appellees are not insurers of the
goods and as such they should not be made to pay the insured value therefor; the obligation of the
defendants-appellees was established as of the date of discharge, hence the rate of exchange should be
based on the rate existing on that date, i.e., August 7, 1960, 5 and not the value of the currency at the time the
lower court rendered its decision on March 10, 1965.
The appeal is without merit.

The purpose of the bill of lading is to provide for the rights and liabilities of the parties in reference to the
contract to carry. 6 The stipulation in the bill of lading limiting the common carrier's liability to the value of the
goods appearing in the bill, unless the shipper or owner declares a greater value, is valid and binding. 7 This
limitation of the carrier's liability is sanctioned by the freedom of the contracting parties to establish such
stipulations, clauses, terms, or conditions as they may deem convenient, provided they are not contrary to law,
morals, good customs and public policy. 8 A stipulation fixing or limiting the sum that may be recovered from
the carrier on the loss or deterioration of the goods is valid, provided it is (a) reasonable and just under the
circumstances, 9 and (b) has been fairly and freely agreed upon. 10 In the case at bar, the liabilities of the
defendants- appellees with respect to the lost or damaged shipments are expressly limited to the C.I.F. value
of the goods as per contract of sea carriage embodied in the bill of lading, which reads:
Whenever the value of the goods is less than $500 per package or other freight unit, their value in the
calculation and adjustment of claims for which the Carrier may be liable shall for the purpose of avoiding
uncertainties and difficulties in fixing value be deemed to be the invoice value, plus frieght and insurance if
paid, irrespective of whether any other value is greater or less.
The limitation of liability and other provisions herein shall inure not only to the benefit of the carrier, its agents,
servants and employees, but also to the benefit of any independent contractor performing services including
stevedoring in connection with the goods covered hereunder. (Paragraph 17, emphasis supplied.)
It is not pretended that those conditions are unreasonable or were not freely and fairly agreed upon. The
shipper and consignee are, therefore, bound by such stipulations since it is expressly stated in the bill of lading
that in "accepting this Bill of Lading, the shipper, owner and consignee of the goods, and the holder of the Bill
of Lading agree to be bound by all its stipulations, exceptions and conditions, whether written, stamped or
printed, as fully as if they were all signed by such shipper, owner, consignee or holder. It is obviously for this
reason that the consignee filed its claim against the defendants-appellees on the basis of the C.I.F. value of
the lost or damaged goods in the aggregate amount of Pl,109.67 (Exhibits "G", "H", "I", and "J"). 11
The plaintiff-appellant, as insurer, after paying the claim of the insured for damages under the insurance, is
subrogated merely to the rights of the assured. As subrogee, it can recover only the amount that is
recoverable by the latter. Since the right of the assured, in case of loss or damage to the goods, is limited or
restricted by the provisions in the bill of lading, a suit by the insurer as subrogee necessarily is subject to like
limitations and restrictions.
The insurer after paying the claim of the insured for damages under the insurance is subrogated merely to the
rights of the insured and therefore can necessarily recover only that to what was recoverable by the insured. 12
Upon payment for a total loss of goods insured, the insurance is only subrogated to such rights of action as
the assured has against 3rd persons who caused or are responsible for the loss. The right of action against
another person, the equitable interest in which passes to the insurer, being only that which the assured has, it
follows that if the assured has no such right of action, none passes to the insurer, and if the assured's right of
action is limited or restricted by lawful contract between him and the person sought to be made responsible for
the loss, a suit by the insurer, in the Tight of the assured, is subject to like limitations or restrictions. 13
Equally untenable is the contention of the plaintiff-appellant that because of extraordinary inflation, it should be
reimbursed for its dollar payments at the rate of exchange on the date of the judgment and not on the date
of the loss or damage. The obligation of the carrier to pay for the damage commenced on the date it failed to
deliver the shipment in good condition to the consignee.
The C.I.F. Manila value of the goods which were lost or damaged, according to the claim of the consignee
dated September 26, 1960 is $226.37 (for the pilferage, Exhibit "G") and $324.33 (shortlanded, Exhibit "H") or
P456.14 and P653.53, respectively, in Philippine Currency. The peso equivalent was based by the consignee
on the exchange rate of P2.015 to $1.00 which was the rate existing at that time. We find, therefore, that the
trial court committed no error in adopting the aforesaid rate of exchange.
WHEREFORE, the appealed decision is hereby affirmed, with costs against the plaintiff-appellant.

[G.R. No. 105188. January 23, 1998]

MYRON C. PAPA, Administrator of the Testate Estate of Angela M. Butte, petitioner, vs. A. U. VALENCIA
and CO. INC., FELIX PEARROYO, SPS. ARSENIO B. REYES & AMANDA SANTOS, and DELFIN
JAO, respondents.
DECISION
KAPUNAN, J.:
In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner Myron C. Papa seeks to
reverse and set aside 1) the Decision dated 27 January 1992 of the Court of Appeals which affirmed with
modification the decision of the trial court; and, 2) the Resolution dated 22 April 1992 of the same court, which
denied petitioners motion for reconsideration of the above decision.
The antecedent facts of this case are as follows:
Sometime in June 1982, herein private respondents A.U. Valencia and Co., Inc. (hereinafter referred to as
respondent Valencia, for brevity) and Felix Pearroyo (hereinafter called respondent Pearroyo), filed with the
Regional Trial Court of Pasig, Branch 151, a complaint for specific performance against herein petitioner
Myron C. Papa, in his capacity as administrator of the Testate Estate of one Angela M. Butte.
The complaint alleged that on 15 June 1973, petitioner Myron C. Papa, acting as attorney-in-fact of Angela M.
Butte, sold to respondent Pearroyo, through respondent Valencia, a parcel of land, consisting of 286.60
square meters, located at corner Retiro and Cadiz Streets, La Loma, Quezon City, and covered by Transfer
Certificate of Title No. 28993 of the Register of Deeds of Quezon City; that prior to the alleged sale, the said
property, together with several other parcels of land likewise owned by Angela M. Butte, had been
mortgaged by her to the Associated Banking Corporation (now Associated Citizens Bank); that after the
alleged sale, but before the title to the subject property had been released, Angela M. Butte passed away; that
despite representations made by herein respondents to the bank to release the title to the property sold to
respondent Pearroyo, the bank refused to release it unless and until all the mortgaged properties of the late
Angela M. Butte were also redeemed; that in order to protect his rights and interests over the property,
respondent Pearroyo caused the annotation on the title of an adverse claim as evidenced by Entry No. P.E. 6118/T-28993, inscribed on 18 January 1977.
The complaint further alleged that it was only upon the release of the title to the property, sometime in April
1977, that respondents Valencia and Pearroyo discovered that the mortgage rights of the bank had been
assigned to one Tomas L. Parpana (now deceased), as special administrator of the Estate of Ramon Papa,
Jr., on 12 April 1977; that since then, herein petitioner had been collecting monthly rentals in the amount
of P800.00 from the tenants of the property, knowing that said property had already been sold to private
respondents on 15 June 1973; that despite repeated demands from said respondents, petitioner refused and
failed to deliver the title to the property. Thereupon, respondents Valencia and Pearroyo filed a complaint for
specific performance, praying that petitioner be ordered to deliver to respondent Pearroyo the title to the
subject property (TCT 28993); to turn over to the latter the sum ofP72,000.00 as accrued rentals as of April
1982, and the monthly rental of P800.00 until the property is delivered to respondent Pearroyo; to pay
respondents the sum of P20,000.00 as attorneys fees; and to pay the costs of the suit.

In his Answer, petitioner admitted that the lot had been mortgaged to the Associated Banking Corporation (now
Associated Citizens Bank). He contended, however, that the complaint did not state a cause of action; that
the real property in interest was the Testate Estate of Angela M. Butte, which should have been joined as a
party defendant; that the case amounted to a claim against the Estate of Angela M. Butte and should have
been filed in Special Proceedings No. A-17910 before the Probate Court in Quezon City; and that, if as alleged
in the complaint, the property had been assigned to Tomas L. Parpana, as special administrator of the Estate
of Ramon Papa, Jr., said estate should be impleaded. Petitioner, likewise, claimed that he could not recall in
detail the transaction which allegedly occurred in 1973; that he did not have TCT No. 28993 in his possession;
that he could not be held personally liable as he signed the deed merely as attorney-in-fact of said Angela M.
Butte. Finally, petitioner asseverated that as a result of the filing of the case, he was compelled to hire the
services of counsel for a fee of P20,000.00, for which respondents should be held liable.
Upon his motion, herein private respondent Delfin Jao was allowed to intervene in the case. Making common
cause with respondents Valencia and Pearroyo, respondent Jao alleged that the subject lot which had been
sold to respondent Pearroyo through respondent Valencia was in turn sold to him on 20 August 1973 for the
sum of P71,500.00, upon his paying earnest money in the amount of P5,000.00. He, therefore, prayed that
judgment be rendered in favor of respondents Valencia and Pearroyo; and, that after the delivery of the title
to said respondents, the latter in turn be ordered to execute in his favor the appropriate deed of conveyance
covering the property in question and to turn over to him the rentals which aforesaid respondents sought to
collect from petitioner Myron C. Papa.
Respondent Jao, likewise, averred that as a result of petitioners refusal to deliver the title to the property to
respondents Valencia and Pearroyo, who in turn failed to deliver the said title to him, he suffered mental
anguish and serious anxiety for which he sought payment of moral damages; and, additionally, the payment of
attorneys fees and costs.
For his part, petitioner, as administrator of the Testate Estate of Angela M. Butte, filed a third-party complaint
against herein private respondents, spouses Arsenio B. Reyes and Amanda Santos (respondent Reyes
spouses, for short). He averred, among others, that the late Angela M. Butte was the owner of the subject
property; that due to non-payment of real estate tax said property was sold at public auction by the City
Treasurer of Quezon City to the respondent Reyes spouses on 21 January 1980 for the sum of P14,000.00;
that the one-year period of redemption had expired; that respondents Valencia and Pearroyo had sued
petitioner Papa as administrator of the estate of Angela M. Butte, for the delivery of the title to the property;
that the same aforenamed respondents had acknowledged that the price paid by them was insufficient, and
that they were willing to add a reasonable amount or a minimum of P55,000.00 to the price upon delivery of
the property, considering that the same was estimated to be worthP143,000.00; that petitioner was willing to
reimburse respondent Reyes spouses whatever amount they might have paid for taxes and other charges,
since the subject property was still registered in the name of the late Angela M. Butte; that it was inequitable to
allow respondent Reyes spouses to acquire property estimated to be worth P143,000.00, for a measly sum
of P14,000.00. Petitioner prayed that judgment be rendered cancelling the tax sale to respondent Reyes
spouses; restoring the subject property to him upon payment by him to said respondent Reyes spouses of the
amount of P14,000.00, plus legal interest; and, ordering respondents Valencia and Pearroyo to pay him at
least P55,000.00 plus everything they might have to pay the Reyes spouses in recovering the property.
Respondent Reyes spouses in their Answer raised the defense of prescription of petitioners right to redeem
the property.
At the trial, only respondent Pearroyo testified. All the other parties only submitted documentary proof.
On 29 June 1987, the trial court rendered a decision, the dispositive portion of which reads:
WHEREUPON, judgment is hereby rendered as follows:
1) Allowing defendant to redeem from third-party defendants and ordering the latter to allow the former to
redeem the property in question, by paying the sum of P14,000.00 plus legal interest of 12% thereon from
January 21, 1980;

2) Ordering defendant to execute a Deed of Absolute Sale in favor of plaintiff Felix Pearroyo covering the
property in question and to deliver peaceful possession and enjoyment of the said property to the said plaintiff,
free from any liens and encumbrances;

indispensable party under Rule 3, Section 7 of the same Rules. For the fact is that Ramon Papa, Jr., or his
estate, was not a party to the Deed of Absolute Sale, and it is basic law that contracts bind only those who are
parties thereto.[5]

Should this not be possible, for any reason not attributable to defendant, said defendant is ordered to pay to
plaintiff Felix Pearroyo the sum of P45,000.00 plus legal interest of 12% from June 15, 1973;

Respondent court observed that the conditions under which the mortgage rights of the bank were assigned
are not clear. In any case, any obligation which the estate of Angela M. Butte might have to the estate of
Ramon Papa, Jr. is strictly between them. Respondents Valencia and Pearroyo are not bound by any such
obligation.

3) Ordering plaintiff Felix Pearroyo to execute and deliver to intervenor a deed of absolute sale over the
same property, upon the latters payment to the former of the balance of the purchase price of P71,500.00;
Should this not be possible, plaintiff Felix Pearroyo is ordered to pay intervenor the sum of P5,000.00 plus
legal interest of 12% from August 23, 1973; and

Petitioner filed a motion for reconsideration of the above decision, which motion was denied by respondent
Court of Appeals.
Hence, this petition wherein petitioner raises the following issues:

4) Ordering defendant to pay plaintiffs the amount of P5,000.00 for and as attorneys fees and litigation
expenses.
SO ORDERED.[1]
Petitioner appealed the aforesaid decision of the trial court to the Court of Appeals, alleging among others that
the sale was never consummated as he did not encash the check (in the amount ofP40,000.00) given by
respondents Valencia and Pearroyo in payment of the full purchase price of the subject lot. He maintained
that what said respondents had actually paid was only the amount of P5,000.00 (in cash) as earnest money.
Respondent Reyes spouses, likewise, appealed the above decision. However, their appeal was dismissed
because of failure to file their appellants brief.
On 27 January 1992, the Court of Appeals rendered a decision, affirming with modification the trial courts
decision, thus:
WHEREFORE, the second paragraph of the dispositive portion of the appealed decision is MODIFIED, by
ordering the defendant-appellant to deliver to plaintiff-appellees the owners duplicate of TCT No. 28993 of
Angela M. Butte and the peaceful possession and enjoyment of the lot in question or, if the owners duplicate
certificate cannot be produced, to authorize the Register of Deeds to cancel it and issue a certificate of title in
the name of Felix Pearroyo. In all other respects, the decision appealed from is AFFIRMED. Costs against
defendant-appellant Myron C. Papa.
SO ORDERED.[2]
In affirming the trial courts decision, respondent court held that contrary to petitioners claim that he did not
encash the aforesaid check, and therefore, the sale was not consummated, there was no evidence at all that
petitioner did not, in fact, encash said check. On the other hand, respondent Pearroyo testified in court that
petitioner Papa had received the amount of P45,000.00 and issued receipts therefor. According to respondent
court, the presumption is that the check was encashed, especially since the payment by check was not denied
by defendant-appellant (herein petitioner) who, in his Answer, merely alleged that he can no longer recall the
transaction which is supposed to have happened 10 years ago. [3]
On petitioners claim that he cannot be held personally liable as he had acted merely as attorney-in-fact of the
owner, Angela M. Butte, respondent court held that such contention is without merit. This action was not
brought against him in his personal capacity, but in his capacity as the administrator of the Testate Estate of
Angela M. Butte.[4]
On petitioners contention that the estate of Angela M. Butte should have been joined in the action as the real
party in interest, respondent court held that pursuant to Rule 3, Section 3 of the Rules of Court, the estate of
Angela M. Butte does not have to be joined in the action. Likewise, the estate of Ramon Papa, Jr., is not an

I. THE CONCLUSION OR FINDING OF THE COURT OF APPEALS THAT THE SALE IN QUESTION WAS
CONSUMMATED IS GROUNDED ON SPECULATION OR CONJECTURE, AND IS CONTRARY TO THE
APPLICABLE LEGAL PRINCIPLE.
II. THE COURT OF APPEALS, IN MODIFYING THE DECISION OF THE TRIAL COURT, ERRED BECAUSE
IT, IN EFFECT, CANCELLED OR NULLIFIED AN ASSIGNMENT OF THE SUBJECT PROPERTY IN FAVOR
OF THE ESTATE OF RAMON PAPA, JR. WHICH IS NOT A PARTY IN THIS CASE.
III. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE ESTATE OF ANGELA M. BUTTE AND
THE ESTATE OF RAMON PAPA, JR. ARE INDISPENSABLE PARTIES IN THIS CASE. [6]
Petitioner argues that respondent Court of Appeals erred in concluding that the alleged sale of the subject
property had been consummated. He contends that such a conclusion is based on the erroneous
presumption that the check (in the amount of P40,000.00) had been cashed, citing Art. 1249 of the Civil Code,
which provides, in part, that payment by checks shall produce the effect of payment only when they have been
cashed or when through the fault of the creditor they have been impaired. [7] Petitioner insists that he never
cashed said check; and, such being the case, its delivery never produced the effect of payment. Petitioner,
while admitting that he had issued receipts for the payments, asserts that said receipts, particularly the receipt
of PCIB Check No. 761025 in the amount of P40,000.00, do not prove payment. He avers that there must be
a showing that said check had been encashed. If, according to petitioner, the check had been encashed,
respondent Pearroyo should have presented PCIB Check No. 761025 duly stamped received by the payee,
or at least its microfilm copy.
Petitioner finally avers that, in fact, the consideration for the sale was still in the hands of respondents
Valencia and Pearroyo, as evidenced by a letter addressed to him in which said respondents wrote, in part:
x x x. Please be informed that I had been authorized by Dr. Ramon Papa, Jr., heir of Mrs. Angela M. Butte to
pay you the aforementioned amount of P75,000.00 for the release and cancellation of subject propertys
mortgage. The money is with me and if it is alright with you, I would like to tender the payment as soon as
possible. x x x.[8]
We find no merit in petitioners arguments.
It is an undisputed fact that respondents Valencia and Pearroyo had given petitioner Myron C. Papa the
amounts of Five Thousand Pesos (P5,000.00) in cash on 24 May 1973, and Forty Thousand Pesos
(P40,000.00) in check on 15 June 1973, in payment of the purchase price of the subject lot. Petitioner
himself admits having received said amounts, [9] and having issued receipts therefor.[10] Petitioners
assertion that he never encashed the aforesaid check is not subtantiated and is at odds with his statement in
his answer that he can no longer recall the transaction which is supposed to have happened 10 years
ago. After more than ten (10) years from the payment in part by cash and in part by check, the presumption
is that the check had been encashed. As already stated, he even waived the presentation of oral evidence.

Granting that petitioner had never encashed the check, his failure to do so for more than ten (10) years
undoubtedly resulted in the impairment of the check through his unreasonable and unexplained delay.
While it is true that the delivery of a check produces the effect of payment only when it is cashed, pursuant to
Art. 1249 of the Civil Code, the rule is otherwise if the debtor is prejudiced by the creditors unreasonable
delay in presentment. The acceptance of a check implies an undertaking of due diligence in presenting it for
payment, and if he from whom it is received sustains loss by want of such diligence, it will be held to operate
as actual payment of the debt or obligation for which it was given.[11] It has, likewise, been held that if no
presentment is made at all, the drawer cannot be held liable irrespective of loss or injury [12] unless presentment
is otherwise excused. This is in harmony with Article 1249 of the Civil Code under which payment by way of
check or other negotiable instrument is conditioned on its being cashed, except when through the fault of the
creditor, the instrument is impaired. The payee of a check would be a creditor under this provision and if its
non-payment is caused by his negligence, payment will be deemed effected and the obligation for which the
check was given as conditional payment will be discharged. [13]
Considering that respondents Valencia and Pearroyo had fulfilled their part of the contract of sale by
delivering the payment of the purchase price, said respondents, therefore, had the right to compel petitioner
to deliver to them the owners duplicate of TCT No. 28993 of Angela M. Butte and the peaceful possession
and enjoyment of the lot in question.
With regard to the alleged assignment of mortgage rights, respondent Court of Appeals has found that the
conditions under which said mortgage rights of the bank were assigned are not clear. Indeed, a perusal of the
original records of the case would show that there is nothing there that could shed light on the transactions
leading to the said assignment of rights; nor is there any evidence on record of the conditions under which
said mortgage rights were assigned. What is certain is that despite the said assignment of mortgage rights,
the title to the subject property has remained in the name of the late Angela M. Butte. [14] This much is admitted
by petitioner himself in his answer to respondents complaint as well as in the third-party complaint that
petitioner filed against respondent-spouses Arsenio B. Reyes and Amanda Santos.
[15]
Assuming arquendo that the mortgage rights of the Associated Citizens Bank had been assigned to the
estate of Ramon Papa, Jr., and granting that the assigned mortgage rights validly exist and constitute a lien on
the property, the estate may file the appropriate action to enforce such lien. The cause of action for specific
performance which respondents Valencia and Pearroyo have against petitioner is different from the cause of
action which the estate of Ramon Papa, Jr. may have to enforce whatever rights or liens it has on the property
by reason of its being an alleged assignee of the banks rights of mortgage.
Finally, the estate of Angela M. Butte is not an indispensable party. Under Section 3 of Rule 3 of the Rules
of Court, an executor or administrator may sue or be sued without joining the party for whose benefit the
action is presented or defended, thus:
Sec. 3. Representative parties. - A trustee of an express trust, a guardian, executor or administrator, or a party
authorized by statute, may sue or be sued without joining the party for whose benefit the action is presented or
defended; but the court may, at any stage of the proceedings, order such beneficiary to be made a party. An
agent acting in his own name and for the benefit of an undisclosed principal may sue or be sued without
joining the principal except when the contract involves things belonging to the principal. [16]
Neither is the estate of Ramon Papa, Jr. an indispensable party without whom, no final determination of the
action can be had. Whatever prior and subsisting mortgage rights the estate of Ramon Papa, Jr. has over the
property may still be enforced regardless of the change in ownership thereof.

PHILIPPINE AIRLINES, INC., petitioner,

vs.
HON. COURT OF APPEALS, HON. JUDGE RICARDO D. GALANO, Court of First Instance of Manila,
Branch XIII, JAIME K. DEL ROSARIO, Deputy Sheriff, Court of First Instance, Manila, and AMELIA
TAN,respondents.

GUTIERREZ, JR., J.:

Behind the simple issue of validity of an alias writ of execution in this case is a more fundamental question.
Should the Court allow a too literal interpretation of the Rules with an open invitation to knavery to prevail over
a more discerning and just approach? Should we not apply the ancient rule of statutory construction that laws
are to be interpreted by the spirit which vivifies and not by the letter which killeth?
This is a petition to review on certiorari the decision of the Court of Appeals in CA-G.R. No. 07695 entitled
"Philippine Airlines, Inc. v. Hon. Judge Ricardo D. Galano, et al.", dismissing the petition for certiorari against
the order of the Court of First Instance of Manila which issued an alias writ of execution against the petitioner.
The petition involving the alias writ of execution had its beginnings on November 8, 1967, when respondent
Amelia Tan, under the name and style of Able Printing Press commenced a complaint for damages before the
Court of First Instance of Manila. The case was docketed as Civil Case No. 71307, entitled Amelia Tan, et al.
v. Philippine Airlines, Inc.
After trial, the Court of First Instance of Manila, Branch 13, then presided over by the late Judge Jesus P.
Morfe rendered judgment on June 29, 1972, in favor of private respondent Amelia Tan and against petitioner
Philippine Airlines, Inc. (PAL) as follows:
WHEREFORE, judgment is hereby rendered, ordering the defendant Philippine Air Lines:
1. On the first cause of action, to pay to the plaintiff the amount of P75,000.00 as actual damages, with legal
interest thereon from plaintiffs extra-judicial demand made by the letter of July 20, 1967;
2. On the third cause of action, to pay to the plaintiff the amount of P18,200.00, representing the unrealized
profit of 10% included in the contract price of P200,000.00 plus legal interest thereon from July 20,1967;
3. On the fourth cause of action, to pay to the plaintiff the amount of P20,000.00 as and for moral damages,
with legal interest thereon from July 20, 1 967;
4. On the sixth cause of action, to pay to the plaintiff the amount of P5,000.00 damages as and for attorney's
fee.
Plaintiffs second and fifth causes of action, and defendant's counterclaim, are dismissed.
With costs against the defendant. (CA Rollo, p. 18)

WHEREFORE, the petition for review is hereby DENIED and the Decision of the Court of Appeals, dated 27
January 1992 is AFFIRMED.

On July 28, 1972, the petitioner filed its appeal with the Court of Appeals. The case was docketed as CA-G.R.
No. 51079-R.

SO ORDERED.
On February 3, 1977, the appellate court rendered its decision, the dispositive portion of which reads:
G.R. No. L-49188 January 30, 1990

IN VIEW WHEREOF, with the modification that PAL is condemned to pay plaintiff the sum of P25,000.00 as
damages and P5,000.00 as attorney's fee, judgment is affirmed, with costs. (CA Rollo, p. 29)

already been fully satisfied by the petitioner as evidenced by the cash vouchers signed and receipted by the
server of the writ of execution, Deputy Sheriff Emilio Z. Reyes.

Notice of judgment was sent by the Court of Appeals to the trial court and on dates subsequent thereto, a
motion for reconsideration was filed by respondent Amelia Tan, duly opposed by petitioner PAL.

On May 26,1978, the respondent Jaime K. del Rosario served a notice of garnishment on the depository bank
of petitioner, Far East Bank and Trust Company, Rosario Branch, Binondo, Manila, through its manager and
garnished the petitioner's deposit in the said bank in the total amount of P64,408.00 as of May 16, 1978.
Hence, this petition for certiorari filed by the Philippine Airlines, Inc., on the grounds that:

On May 23,1977, the Court of Appeals rendered its resolution denying the respondent's motion for
reconsideration for lack of merit.

I
No further appeal having been taken by the parties, the judgment became final and executory and on May 31,
1977, judgment was correspondingly entered in the case.
The case was remanded to the trial court for execution and on September 2,1977, respondent Amelia Tan filed
a motion praying for the issuance of a writ of execution of the judgment rendered by the Court of Appeals. On
October 11, 1977, the trial court, presided over by Judge Galano, issued its order of execution with the
corresponding writ in favor of the respondent. The writ was duly referred to Deputy Sheriff Emilio Z. Reyes of
Branch 13 of the Court of First Instance of Manila for enforcement.
Four months later, on February 11, 1978, respondent Amelia Tan moved for the issuance of an alias writ of
execution stating that the judgment rendered by the lower court, and affirmed with modification by the Court of
Appeals, remained unsatisfied.

AN ALIAS WRIT OF EXECUTION CANNOT BE ISSUED WITHOUT PRIOR RETURN OF THE ORIGINAL
WRIT BY THE IMPLEMENTING OFFICER.
II
PAYMENT OF JUDGMENT TO THE IMPLEMENTING OFFICER AS DIRECTED IN THE WRIT OF
EXECUTION CONSTITUTES SATISFACTION OF JUDGMENT.
III
INTEREST IS NOT PAYABLE WHEN THE DECISION IS SILENT AS TO THE PAYMENT THEREOF.

On March 1, 1978, the petitioner filed an opposition to the motion for the issuance of an alias writ of execution
stating that it had already fully paid its obligation to plaintiff through the deputy sheriff of the respondent court,
Emilio Z. Reyes, as evidenced by cash vouchers properly signed and receipted by said Emilio Z. Reyes.
On March 3,1978, the Court of Appeals denied the issuance of the alias writ for being premature, ordering the
executing sheriff Emilio Z. Reyes to appear with his return and explain the reason for his failure to surrender
the amounts paid to him by petitioner PAL. However, the order could not be served upon Deputy Sheriff Reyes
who had absconded or disappeared.
On March 28, 1978, motion for the issuance of a partial alias writ of execution was filed by respondent Amelia
Tan.
On April 19, 1978, respondent Amelia Tan filed a motion to withdraw "Motion for Partial Alias Writ of Execution"
with Substitute Motion for Alias Writ of Execution. On May 1, 1978, the respondent Judge issued an order
which reads:
As prayed for by counsel for the plaintiff, the Motion to Withdraw 'Motion for Partial Alias Writ of Execution with
Substitute Motion for Alias Writ of Execution is hereby granted, and the motion for partial alias writ of execution
is considered withdrawn.
Let an Alias Writ of Execution issue against the defendant for the fall satisfaction of the judgment rendered.
Deputy Sheriff Jaime K. del Rosario is hereby appointed Special Sheriff for the enforcement thereof. (CA
Rollo, p. 34)
On May 18, 1978, the petitioner received a copy of the first alias writ of execution issued on the same day
directing Special Sheriff Jaime K. del Rosario to levy on execution in the sum of P25,000.00 with legal interest
thereon from July 20,1967 when respondent Amelia Tan made an extra-judicial demand through a letter. Levy
was also ordered for the further sum of P5,000.00 awarded as attorney's fees.
On May 23, 1978, the petitioner filed an urgent motion to quash the alias writ of execution stating that no
return of the writ had as yet been made by Deputy Sheriff Emilio Z. Reyes and that the judgment debt had

IV
SECTION 5, RULE 39, PARTICULARLY REFERS TO LEVY OF PROPERTY OF JUDGMENT DEBTOR AND
DISPOSAL OR SALE THEREOF TO SATISFY JUDGMENT.
Can an alias writ of execution be issued without a prior return of the original writ by the implementing officer?
We rule in the affirmative and we quote the respondent court's decision with approval:
The issuance of the questioned alias writ of execution under the circumstances here obtaining is justified
because even with the absence of a Sheriffs return on the original writ, the unalterable fact remains that such
a return is incapable of being obtained (sic) because the officer who is to make the said return has absconded
and cannot be brought to the Court despite the earlier order of the court for him to appear for this purpose.
(Order of Feb. 21, 1978, Annex C, Petition). Obviously, taking cognizance of this circumstance, the order of
May 11, 1978 directing the issuance of an alias writ was therefore issued. (Annex D. Petition). The need for
such a return as a condition precedent for the issuance of an alias writ was justifiably dispensed with by the
court below and its action in this regard meets with our concurrence. A contrary view will produce an abhorent
situation whereby the mischief of an erring officer of the court could be utilized to impede indefinitely the
undisputed and awarded rights which a prevailing party rightfully deserves to obtain and with dispatch. The
final judgment in this case should not indeed be permitted to become illusory or incapable of execution for an
indefinite and over extended period, as had already transpired. (Rollo, pp. 35-36)
Judicium non debet esse illusorium; suum effectum habere debet (A judgment ought not to be illusory it ought
to have its proper effect).
Indeed, technicality cannot be countenanced to defeat the execution of a judgment for execution is the fruit
and end of the suit and is very aptly called the life of the law (Ipekdjian Merchandising Co. v. Court of Tax
Appeals, 8 SCRA 59 [1963]; Commissioner of Internal Revenue v. Visayan Electric Co., 19 SCRA 697, 698
[1967]). A judgment cannot be rendered nugatory by the unreasonable application of a strict rule of procedure.
Vested rights were never intended to rest on the requirement of a return, the office of which is merely to inform
the court and the parties, of any and all actions taken under the writ of execution. Where such information can
be established in some other manner, the absence of an executing officer's return will not preclude a judgment

from being treated as discharged or being executed through an alias writ of execution as the case may be.
More so, as in the case at bar. Where the return cannot be expected to be forthcoming, to require the same
would be to compel the enforcement of rights under a judgment to rest on an impossibility, thereby allowing
the total avoidance of judgment debts. So long as a judgment is not satisfied, a plaintiff is entitled to other writs
of execution (Government of the Philippines v. Echaus and Gonzales, 71 Phil. 318). It is a well known legal
maxim that he who cannot prosecute his judgment with effect, sues his case vainly.
More important in the determination of the propriety of the trial court's issuance of an alias writ of execution is
the issue of satisfaction of judgment.
Under the peculiar circumstances surrounding this case, did the payment made to the absconding sheriff by
check in his name operate to satisfy the judgment debt? The Court rules that the plaintiff who has won her
case should not be adjudged as having sued in vain. To decide otherwise would not only give her an empty
but a pyrrhic victory.
It should be emphasized that under the initial judgment, Amelia Tan was found to have been wronged by PAL.
She filed her complaint in 1967.
After ten (10) years of protracted litigation in the Court of First Instance and the Court of Appeals, Ms. Tan won
her case.
It is now 1990.
Almost twenty-two (22) years later, Ms. Tan has not seen a centavo of what the courts have solemnly declared
as rightfully hers. Through absolutely no fault of her own, Ms. Tan has been deprived of what, technically, she
should have been paid from the start, before 1967, without need of her going to court to enforce her rights.
And all because PAL did not issue the checks intended for her, in her name.
Under the peculiar circumstances of this case, the payment to the absconding sheriff by check in his name did
not operate as a satisfaction of the judgment debt.
In general, a payment, in order to be effective to discharge an obligation, must be made to the proper person.
Article 1240 of the Civil Code provides:
Payment shall be made to the person in whose favor the obligation has been constituted, or his successor in
interest, or any person authorized to receive it. (Emphasis supplied)
Thus, payment must be made to the obligee himself or to an agent having authority, express or implied, to
receive the particular payment (Ulen v. Knecttle 50 Wyo 94, 58 [2d] 446, 111 ALR 65). Payment made to one
having apparent authority to receive the money will, as a rule, be treated as though actual authority had been
given for its receipt. Likewise, if payment is made to one who by law is authorized to act for the creditor, it will
work a discharge (Hendry v. Benlisa 37 Fla. 609, 20 SO 800,34 LRA 283). The receipt of money due on
ajudgment by an officer authorized by law to accept it will, therefore, satisfy the debt (See 40 Am Jm 729, 25;
Hendry v. Benlisa supra; Seattle v. Stirrat 55 Wash. 104 p. 834,24 LRA [NS] 1275).
The theory is where payment is made to a person authorized and recognized by the creditor, the payment to
such a person so authorized is deemed payment to the creditor. Under ordinary circumstances, payment by
the judgment debtor in the case at bar, to the sheriff should be valid payment to extinguish the judgment debt.
There are circumstances in this case, however, which compel a different conclusion.
The payment made by the petitioner to the absconding sheriff was not in cash or legal tender but in checks.
The checks were not payable to Amelia Tan or Able Printing Press but to the absconding sheriff.

Did such payments extinguish the judgment debt?

Article 1249 of the Civil Code provides:
The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver
such currency, then in the currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall
produce the effect of payment only when they have been cashed, or when through the fault of the creditor they
have been impaired.
In the meantime, the action derived from the original obligation shall be held in abeyance.
In the absence of an agreement, either express or implied, payment means the discharge of a debt or
obligation in money (US v. Robertson, 5 Pet. [US] 641, 8 L. ed. 257) and unless the parties so agree, a debtor
has no rights, except at his own peril, to substitute something in lieu of cash as medium of payment of his debt
(Anderson v. Gill, 79 Md.. 312, 29 A 527, 25 LRA 200,47 Am. St. Rep. 402). Consequently, unless authorized
to do so by law or by consent of the obligee a public officer has no authority to accept anything other than
money in payment of an obligation under a judgment being executed. Strictly speaking, the acceptance by the
sheriff of the petitioner's checks, in the case at bar, does not, per se, operate as a discharge of the judgment
debt.
Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument
does not, by itself, operate as payment (See. 189, Act 2031 on Negs. Insts.; Art. 1249, Civil Code; Bryan
Landon Co. v. American Bank, 7 Phil. 255; Tan Sunco v. Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check,
whether a manager's check or ordinary cheek, is not legal tender, and an offer of a check in payment of a debt
is not a valid tender of payment and may be refused receipt by the obligee or creditor. Mere delivery of checks
does not discharge the obligation under a judgment. The obligation is not extinguished and remains
suspended until the payment by commercial document is actually realized (Art. 1249, Civil Code, par. 3).
If bouncing checks had been issued in the name of Amelia Tan and not the Sheriff's, there would have been no
payment. After dishonor of the checks, Ms. Tan could have run after other properties of PAL. The theory is that
she has received no value for what had been awarded her. Because the checks were drawn in the name of
Emilio Z. Reyes, neither has she received anything. The same rule should apply.
It is argued that if PAL had paid in cash to Sheriff Reyes, there would have been payment in full legal
contemplation. The reasoning is logical but is it valid and proper? Logic has its limits in decision making. We
should not follow rulings to their logical extremes if in doing so we arrive at unjust or absurd results.
In the first place, PAL did not pay in cash. It paid in cheeks.
And second, payment in cash always carries with it certain cautions. Nobody hands over big amounts of cash
in a careless and inane manner. Mature thought is given to the possibility of the cash being lost, of the bearer
being waylaid or running off with what he is carrying for another. Payment in checks is precisely intended to
avoid the possibility of the money going to the wrong party. The situation is entirely different where a Sheriff
seizes a car, a tractor, or a piece of land. Logic often has to give way to experience and to reality. Having paid
with checks, PAL should have done so properly.
Payment in money or cash to the implementing officer may be deemed absolute payment of the judgment debt
but the Court has never, in the least bit, suggested that judgment debtors should settle their obligations by
turning over huge amounts of cash or legal tender to sheriffs and other executing officers. Payment in cash
would result in damage or interminable litigations each time a sheriff with huge amounts of cash in his hands
decides to abscond.

As a protective measure, therefore, the courts encourage the practice of payments by cheek provided
adequate controls are instituted to prevent wrongful payment and illegal withdrawal or disbursement of funds.
If particularly big amounts are involved, escrow arrangements with a bank and carefully supervised by the
court would be the safer procedure. Actual transfer of funds takes place within the safety of bank premises.
These practices are perfectly legal. The object is always the safe and incorrupt execution of the judgment.

property, if they be sufficient, and selling the same, and paying to the judgment creditor, or his attorney, so
much of the proceeds as will satisfy the judgment. ...

It is, indeed, out of the ordinary that checks intended for a particular payee are made out in the name of
another. Making the checks payable to the judgment creditor would have prevented the encashment or the
taking of undue advantage by the sheriff, or any person into whose hands the checks may have fallen,
whether wrongfully or in behalf of the creditor. The issuance of the checks in the name of the sheriff clearly
made possible the misappropriation of the funds that were withdrawn.

We are obliged to rule that the judgment debt cannot be considered satisfied and therefore the orders of the
respondent judge granting the alias writ of execution may not be pronounced as a nullity.

As explained and held by the respondent court:

... [K]nowing as it does that the intended payment was for the private party respondent Amelia Tan, the
petitioner corporation, utilizing the services of its personnel who are or should be knowledgeable about the
accepted procedures and resulting consequences of the checks drawn, nevertheless, in this instance, without
prudence, departed from what is generally observed and done, and placed as payee in the checks the name
of the errant Sheriff and not the name of the rightful payee. Petitioner thereby created a situation which
permitted the said Sheriff to personally encash said checks and misappropriate the proceeds thereof to his
exclusive personal benefit. For the prejudice that resulted, the petitioner himself must bear the fault. The
judicial guideline which we take note of states as follows:
As between two innocent persons, one of whom must suffer the consequence of a breach of trust, the one
who made it possible by his act of confidence must bear the loss. (Blondeau, et al. v. Nano, et al., L-41377,
July 26, 1935, 61 Phil. 625)
Having failed to employ the proper safeguards to protect itself, the judgment debtor whose act made possible
the loss had but itself to blame.
The attention of this Court has been called to the bad practice of a number of executing officers, of requiring
checks in satisfaction of judgment debts to be made out in their own names. If a sheriff directs a judgment
debtor to issue the checks in the sheriff's name, claiming he must get his commission or fees, the debtor must
report the sheriff immediately to the court which ordered the execution or to the Supreme Court for appropriate
disciplinary action. Fees, commissions, and salaries are paid through regular channels. This improper
procedure also allows such officers, who have sixty (60) days within which to make a return, to treat the
moneys as their personal finds and to deposit the same in their private accounts to earn sixty (60) days
interest, before said finds are turned over to the court or judgment creditor (See Balgos v. Velasco, 108 SCRA
525 [1981]). Quite as easily, such officers could put up the defense that said checks had been issued to them
in their private or personal capacity. Without a receipt evidencing payment of the judgment debt, the
misappropriation of finds by such officers becomes clean and complete. The practice is ingenious but evil as it
unjustly enriches court personnel at the expense of litigants and the proper administration of justice. The
temptation could be far greater, as proved to be in this case of the absconding sheriff. The correct and prudent
thing for the petitioner was to have issued the checks in the intended payee's name.
The pernicious effects of issuing checks in the name of a person other than the intended payee, without the
latter's agreement or consent, are as many as the ways that an artful mind could concoct to get around the
safeguards provided by the law on negotiable instruments. An angry litigant who loses a case, as a rule, would
not want the winning party to get what he won in the judgment. He would think of ways to delay the winning
party's getting what has been adjudged in his favor. We cannot condone that practice especially in cases
where the courts and their officers are involved. We rule against the petitioner.

the respondent court held:

xxx xxx xxx

It is clear and manifest that after levy or garnishment, for a judgment to be executed there is the requisite of
payment by the officer to the judgment creditor, or his attorney, so much of the proceeds as will satisfy the
judgment and none such payment had been concededly made yet by the absconding Sheriff to the private
respondent Amelia Tan. The ultimate and essential step to complete the execution of the judgment not having
been performed by the City Sheriff, the judgment debt legally and factually remains unsatisfied.
Strictly speaking execution cannot be equated with satisfaction of a judgment. Under unusual circumstances
as those obtaining in this petition, the distinction comes out clearly.
Execution is the process which carries into effect a decree or judgment (Painter v. Berglund, 31 Cal. App. 2d.
63, 87 P 2d 360, 363; Miller v. London, 294 Mass 300, 1 NE 2d 198, 200; Black's Law Dictionary), whereas the
satisfaction of a judgment is the payment of the amount of the writ, or a lawful tender thereof, or the
conversion by sale of the debtor's property into an amount equal to that due, and, it may be done otherwise
than upon an execution (Section 47, Rule 39). Levy and delivery by an execution officer are not prerequisites
to the satisfaction of a judgment when the same has already been realized in fact (Section 47, Rule 39).
Execution is for the sheriff to accomplish while satisfaction of the judgment is for the creditor to achieve.
Section 15, Rule 39 merely provides the sheriff with his duties as executing officer including delivery of the
proceeds of his levy on the debtor's property to satisfy the judgment debt. It is but to stress that the
implementing officer's duty should not stop at his receipt of payments but must continue until payment is
delivered to the obligor or creditor.
Finally, we find no error in the respondent court's pronouncement on the inclusion of interests to be recovered
under the alias writ of execution. This logically follows from our ruling that PAL is liable for both the lost checks
and interest. The respondent court's decision in CA-G.R. No. 51079-R does not totally supersede the trial
court's judgment in Civil Case No. 71307. It merely modified the same as to the principal amount awarded as
actual damages.
WHEREFORE, IN VIEW OF THE FOREGOING, the petition is hereby DISMISSED. The judgment of the
respondent Court of Appeals is AFFIRMED and the trial court's issuance of the alias writ of execution against
the petitioner is upheld without prejudice to any action it should take against the errant sheriff Emilio Z. Reyes.
The Court Administrator is ordered to follow up the actions taken against Emilio Z. Reyes.
SO ORDERED.
Fernan, C.J., Cruz, Paras, Bidin, Grio-Aquino, Medialdea and Regalado, JJ., concur.

Anent the applicability of Section 15, Rule 39, as follows:

Separate Opinions
Section 15. Execution of money judgments. The officer must enforce an execution of a money judgment by
levying on all the property, real and personal of every name and nature whatsoever, and which may be
disposed of for value, of the judgment debtor not exempt from execution, or on a sufficient amount of such

At any time before the sale of property on execution, the judgment debtor may prevent the sale by paying the
sheriff the amount required by the execution and the costs that have been incurred therein (sec. 20, Rule 39).
NARVASA, J., dissenting:
The execution of final judgments and orders is a function of the sheriff, an officer of the court whose authority
is by and large statutorily determined to meet the particular exigencies arising from or connected with the
performance of the multifarious duties of the office. It is the acknowledgment of the many dimensions of this
authority, defined by statute and chiselled by practice, which compels me to disagree with the decision
reached by the majority.
A consideration of the wide latitude of discretion allowed the sheriff as the officer of the court most directly
involved with the implementation and execution of final judgments and orders persuades me that PAL's
payment to the sheriff of its judgment debt to Amelia Tan, though made by check issued in said officer's name,
lawfully satisfied said obligation and foreclosed further recourse therefor against PAL, notwithstanding the
sheriffs failure to deliver to Tan the proceeds of the check.
It is a matter of history that the judiciary .. is an inherit or of the Anglo-American tradition. While the common
law as such .. "is not in force" in this jurisdiction, "to breathe the breath of life into many of the institutions,
introduced [here] under American sovereignty, recourse must be had to the rules, principles and doctrines of
the common law under whose protecting aegis the prototypes of these institutions had their birth" A sheriff is
"an officer of great antiquity," and was also called the shire reeve. A shire in English law is a Saxon word
signifying a division later called a county. A reeve is an ancient English officer of justice inferior in rank to an
alderman .. appointed to process, keep the King's peace, and put the laws in execution. From a very remote
period in English constitutional history .. the shire had another officer, namely the shire reeve or as we say, the
sheriff. .. The Sheriff was the special representative of the legal or central authority, and as such usually
nominated by the King. .. Since the earliest times, both in England and the United States, a sheriff has
continued his status as an adjunct of the court .. . As it was there, so it has been in the Philippines from the
time of the organization of the judiciary .. . (J. Fernando's concurring opinion in Bagatsing v. Herrera, 65 SCRA
434)
One of a sheriff s principal functions is to execute final judgments and orders. The Rules of Court require the
writs of execution to issue to him, directing him to enforce such judgments and orders in the manner therein
provided (Rule 39). The mode of enforcement varies according to the nature of the judgment to be carried out:
whether it be against property of the judgment debtor in his hands or in the hands of a third person i e. money
judgment), or for the sale of property, real or personal (i.e. foreclosure of mortgage) or the delivery thereof, etc.
(sec. 8, Rule 39).
Under sec. 15 of the same Rule, the sheriff is empowered to levy on so much of the judgment debtor's
property as may be sufficient to enforce the money judgment and sell these properties at public auction after
due notice to satisfy the adjudged amount. It is the sheriff who, after the auction sale, conveys to the
purchaser the property thus sold (secs. 25, 26, 27, Rule 39), and pays the judgment creditor so much of the
proceeds as will satisfy the judgment. When the property sold by him on execution is an immovable which
consequently gives rise to a light of redemption on the part of the judgment debtor and others (secs. 29, 30,
Rule 39), it is to him (or to the purchaser or redemptioner that the payments may be made by those declared
by law as entitled to redeem (sec. 31, Rule 39); and in this situation, it becomes his duty to accept payment
and execute the certificate of redemption (Enage v. Vda. y Hijos de Escano, 38 Phil. 657, cited in Moran,
Comments on the Rules of Court, 1979 ed., vol. 2, pp. 326-327). It is also to the sheriff that "written notice of
any redemption must be given and a duplicate filed with the registrar of deeds of the province, and if any
assessments or taxes are paid by the redemptioner or if he has or acquires any lien other than that upon
which the redemption was made, notice thereof must in like manner be given to the officer and filed with the
registrar of deeds," the effect of failure to file such notice being that redemption may be made without paying
such assessments, taxes, or liens (sec. 30, Rule 39).
The sheriff may likewise be appointed a receiver of the property of the judgment debtor where the appointment
of the receiver is deemed necessary for the execution of the judgment (sec. 32, Rule 39).

The sheriff is also authorized to receive payments on account of the judgment debt tendered by "a person
indebted to the judgment debtor," and his "receipt shall be a sufficient discharge for the amount so paid or
directed to be credited by the judgment creditor on the execution" (sec. 41, Rule 39).
Now, obviously, the sheriff s sale extinguishes the liability of the judgment debtor either in fun, if the price paid
by the highest bidder is equal to, or more than the amount of the judgment or pro tanto if the price fetched at
the sale be less. Such extinction is not in any way dependent upon the judgment creditor's receiving the
amount realized, so that the conversion or embezzlement of the proceeds of the sale by the sheriff does not
revive the judgment debt or render the judgment creditor liable anew therefor.
So, also, the taking by the sheriff of, say, personal property from the judgment debtor for delivery to the
judgment creditor, in fulfillment of the verdict against him, extinguishes the debtor's liability; and the conversion
of said property by the sheriff, does not make said debtor responsible for replacing the property or paying the
value thereof.
In the instances where the Rules allow or direct payments to be made to the sheriff, the payments may be
made by check, but it goes without saying that if the sheriff so desires, he may require payment to be made in
lawful money. If he accepts the check, he places himself in a position where he would be liable to the
judgment creditor if any damages are suffered by the latter as a result of the medium in which payment was
made (Javellana v. Mirasol, et al., 40 Phil. 761). The validity of the payment made by the judgment debtor,
however, is in no wise affected and the latter is discharged from his obligation to the judgment creditor as of
the moment the check issued to the sheriff is encashed and the proceeds are received by Id. office. The
issuance of the check to a person authorized to receive it (Art. 1240, Civil Code; See. 46 of the Code of Civil
Procedure; Enage v. Vda y Hijos de Escano, 38 Phil. 657, cited in Javellana v. Mirasol, 40 Phil. 761) operates
to release the judgment debtor from any further obligations on the judgment.
The sheriff is an adjunct of the court; a court functionary whose competence involves both discretion and
personal liability (concurring opinion of J. Fernando, citing Uy Piaoco v. Osmena, 9 Phil. 299, in Bagatsing v.
Herrera, 65 SCRA 434). Being an officer of the court and acting within the scope of his authorized functions,
the sheriff s receipt of the checks in payment of the judgment execution, may be deemed, in legal
contemplation, as received by the court itself (Lara v. Bayona, 10 May 1955, No. L- 10919).
That the sheriff functions as a conduit of the court is further underscored by the fact that one of the requisites
for appointment to the office is the execution of a bond, "conditioned (upon) the faithful performance of his (the
appointee's) duties .. for the delivery or payment to Government, or the person entitled thereto, of all
properties or sums of money that shall officially come into his hands" (sec. 330, Revised Administrative Code).
There is no question that the checks came into the sheriffs possession in his official capacity. The court may
require of the judgment debtor, in complying with the judgment, no further burden than his vigilance in
ensuring that the person he is paying money or delivering property to is a person authorized by the court to
receive it. Beyond this, further expectations become unreasonable. To my mind, a proposal that would make
the judgment debtor unqualifiedly the insurer of the judgment creditor's entitlement to the judgment amount
which is really what this case is all about begs the question.
That the checks were made out in the sheriffs name (a practice, by the way, of long and common acceptance)
is of little consequence if juxtaposed with the extent of the authority explicitly granted him by law as the officer
entrusted with the power to execute and implement court judgments. The sheriffs requirement that the checks
in payment of the judgment debt be issued in his name was simply an assertion of that authority; and PAL's
compliance cannot in the premises be faulted merely because of the sheriffs subsequent malfeasance in
absconding with the payment instead of turning it over to the judgment creditor.
If payment had been in cash, no question about its validity or of the authority and duty of the sheriff to accept it
in settlement of PAL's judgment obligation would even have arisen. Simply because it was made by checks
issued in the sheriff s name does not warrant reaching any different conclusion.

As payment to the court discharges the judgment debtor from his responsibility on the judgment, so too must
payment to the person designated by such court and authorized to act in its behalf, operate to produce the
same effect.

It is argued that if PAL had paid in cash to Sheriff Reyes, there would have been payment in full legal
contemplation. The reasoning is logical but is it valid and proper?
In the first place, PAL did not pay in cash. It paid in checks.

It is unfortunate and deserving of commiseration that Amelia Tan was deprived of what was adjudged to her
when the sheriff misappropriated the payment made to him by PAL in dereliction of his sworn duties. But I
submit that her remedy lies, not here and in reviving liability under a judgment already lawfully satisfied, but
elsewhere.

And second, payment in cash always carries with it certain cautions. Nobody hands over big amounts of cash
in a careless and inane manner. Mature thought is given to the possibility of the cash being lost, of the bearer
being waylaid or running off with what he is carrying for another. Payment in checks is precisely intended to
avoid the possibility of the money going to the wrong party....

ACCORDINGLY, I vote to grant the petition.

Melencio-Herrera, Gancayco, J., concurs.
FELICIANO, J., dissenting:
I concur in the able dissenting opinions of Narvasa and Padilla, JJ. and would merely wish to add a few
footnotes to their lucid opinions.
1. Narvasa, J. has demonstrated in detail that a sheriff is authorized by the Rules of Court and our case law to
receive either legal tender or checks from the judgment debtor in satisfaction of the judgment debt. In addition,
Padilla, J. has underscored the obligation of the sheriff, imposed upon him by the nature of his office and the
law, to turn over such legal tender, checks and proceeds of execution sales to the judgment creditor. The
failure of a sheriff to effect such turnover and his conversion of the funds (or goods) held by him to his own
uses, do not have the effect of frustrating payment by and consequent discharge of the judgment debtor.
To hold otherwise would be to throw the risk of the sheriff faithfully performing his duty as a public officer upon
those members of the general public who are compelled to deal with him. It seems to me that a judgment
debtor who turns over funds or property to the sheriff can not reasonably be made an insurer of the honesty
and integrity of the sheriff and that the risk of the sheriff carrying out his duties honestly and faithfully is
properly lodged in the State itself The sheriff, like all other officers of the court, is appointed and paid and
controlled and disciplined by the Government, more specifically by this Court. The public surely has a duty to
report possible wrongdoing by a sheriff or similar officer to the proper authorities and, if necessary, to testify in
the appropriate judicial and administrative disciplinary proceedings. But to make the individual members of the
general community insurers of the honest performance of duty of a sheriff, or other officer of the court, over
whom they have no control, is not only deeply unfair to the former. It is also a confession of comprehensive
failure and comes too close to an abdication of duty on the part of the Court itself. This Court should have no
part in that.
2. I also feel compelled to comment on the majority opinion written by Gutierrez, J. with all his customary and
special way with words. My learned and eloquent brother in the Court apparently accepts the proposition that
payment by a judgment debtor of cash to a sheriff produces the legal effects of payment, the sheriff being
authorized to accept such payment. Thus, in page 10 of hisponencia, Gutierrez, J. writes:
The receipt of money due on a judgment by an officer authorized by law to accept it will satisfy the debt.
(Citations omitted)
The theory is where payment is made to a person authorized and recognized by the creditor, the payment to
such a person so authorized is deemed payment to the creditor. Under ordinary circumstances, payment by
the judgment debtor in the case at bar, to the sheriff would be valid payment to extinguish the judgment debt.
Shortly thereafter, however, Gutierrez, J. backs off from the above position and strongly implies that payment
in cash to the sheriff is sheer imprudence on the part of the judgment debtor and that therefore, should the
sheriff abscond with the cash, the judgment debtor has not validly discharged the judgment debt:

Payment in money or cash to the implementing officer may be deemed absolute payment of the judgment debt
but the court has never, in the least bit, suggested that judgment debtors should settle their obligations by
turning over huge amounts of cash or legal tender to sheriffs and other executing officers. ... (Emphasis in the
original) (Majority opinion, pp. 12-13)
There is no dispute with the suggestion apparently made that maximum safety is secured where the judgment
debtor delivers to the sheriff not cash but a check made out, not in the name of the sheriff, but in the judgment
creditor's name. The fundamental point that must be made, however, is that under our law only cash is legal
tender and that the sheriff can be compelled to accept only cash and not checks, even if made out to the
name of the judgment creditor. 1 The sheriff could have quite lawfully required PAL to deliver to him only cash,
i.e., Philippine currency. If the sheriff had done so, and if PAL had complied with such a requirement, as it
would have had to, one would have to agree that legal payment must be deemed to have been effected. It
requires no particularly acute mind to note that a dishonest sheriff could easily convert the money and
abscond. The fact that the sheriff in the instant case required, not cash to be delivered to him, but rather a
check made out in his name, does not change the legal situation. PAL did notthereby become negligent; it
did not make the loss anymore possible or probable than if it had instead delivered plain cash to the sheriffs.
It seems to me that the majority opinion's real premise is the unspoken one that the judgment debtor should
bear the risk of the fragility of the sheriff s virtue until the money or property parted with by the judgment debtor
actually reaches the hands of the judgment creditor. This brings me back to my earlier point that risk is most
appropriately borne not by the judgment debtor, nor indeed by the judgment creditor, but by the State itself.
The Court requires all sheriffs to post good and adequate fidelity bonds before entering upon the performance
of their duties and, presumably, to maintain such bonds in force and effect throughout their stay in office. 2 The
judgment creditor, in circumstances like those of the instant case, could be allowed to execute upon the
absconding sheriff s bond. 3
I believe the Petition should be granted and I vote accordingly.
PADILLA, J., Dissenting Opinion From the facts that appear to be undisputed, I reach a conclusion different
from that of the majority. Sheriff Emilio Z. Reyes, the trial court's authorized sheriff, armed with a writ of
execution to enforce a final money judgment against the petitioner Philippine Airlines (PAL) in favor of private
respondent Amelia Tan, proceeded to petitioner PAL's office to implement the writ.
There is no question that Sheriff Reyes, in enforcing the writ of execution, was acting with full authority as an
officer of the law and not in his personal capacity. Stated differently, PAL had every right to assume that, as an
officer of the law, Sheriff Reyes would perform his duties as enjoined by law. It would be grossly unfair to now
charge PAL with advanced or constructive notice that Mr. Reyes would abscond and not deliver to the
judgment creditor the proceeds of the writ of execution. If a judgment debtor cannot rely on and trust an officer
of the law, as the Sheriff, whom else can he trust?
Pursued to its logical extreme, if PAL had delivered to Sheriff Reyes the amount of the judgment in CASH, i.e.
Philippine currency, with the corresponding receipt signed by Sheriff Reyes, this would have been payment by
PAL in full legal contemplation, because under Article 1240 of the Civil Code, "payment shall be made to the
person in whose favor the obligation has been constituted or his successor in interest or any person
authorized to receive it." And said payment if made by PAL in cash, i.e., Philippine currency, to Sheriff Reyes
would have satisfied PAL's judgment obligation, as payment is a legally recognized mode for extinguishing
one's obligation. (Article 1231, Civil Code).

Under Sec. 15, Rule 39, Rules of Court which provides thatSec. 15. Execution of money judgments. The officer must enforce an execution of a money judgment by
levying on all the property, real and personal of every name and nature whatsoever, and which may be
disposed of for value, of the judgment debtor not exempt from execution, or on a sufficient amount of such
property, if there be sufficient, and selling the same, and paying to the judgment creditor, or his attorney, so
much of the proceeds as will satisfy the judgment. ... .(emphasis supplied)
it would be the duty of Sheriff Reyes to pay to the judgment creditor the proceeds of the execution i.e., the
cash received from PAL (under the above assumption). But, the duty of the sheriff to pay the cash to the
judgment creditor would be a matter separate the distinct from the fact that PAL would have satisfied its
judgment obligation to Amelia Tan, the judgment creditor, by delivering the cash amount due under the
judgment to Sheriff Reyes.
Did the situation change by PAL's delivery of its two (2) checks totalling P30,000.00 drawn against its bank
account, payable to Sheriff Reyes, for account of the judgment rendered against PAL? I do not think so,
because when Sheriff Reyes encashed the checks, the encashment was in fact a payment by PAL to Amelia
Tan through Sheriff Reyes, an officer of the law authorized to receive payment, and such payment discharged
PAL'S obligation under the executed judgment.
If the PAL cheeks in question had not been encashed by Sheriff Reyes, there would be no payment by PAL
and, consequently no discharge or satisfaction of its judgment obligation. But the checks had been encashed
by Sheriff Reyes giving rise to a situation as if PAL had paid Sheriff Reyes in cash, i.e., Philippine currency.
This, we repeat, is payment, in legal contemplation, on the part of PAL and this payment legally discharged
PAL from its judgment obligation to the judgment creditor. To be sure, the same encashment by Sheriff Reyes
of PAL's checks delivered to him in his official capacity as Sheriff, imposed an obligation on Sheriff Reyes to
pay and deliver the proceeds of the encashment to Amelia Tan who is deemed to have acquired a cause of
action against Sheriff Reyes for his failure to deliver to her the proceeds of the encashment. As held:
Payment of a judgment, to operate as a release or satisfaction, even pro tanto must be made to the plaintiff or
to some person authorized by him, or by law, to receive it. The payment of money to the sheriff having an
execution satisfies it, and, if the plaintiff fails to receive it, his only remedy is against the officer (Henderson v.
Planters' and Merchants Bank, 59 SO 493, 178 Ala. 420).
Payment of an execution satisfies it without regard to whether the officer pays it over to the creditor or
misapplies it (340, 33 C.J.S. 644, citing Elliot v. Higgins, 83 N.C. 459). If defendant consents to the Sheriff s
misapplication of the money, however, defendant is estopped to claim that the debt is satisfied (340, 33 C.J.S.
644, citing Heptinstall v. Medlin 83 N.C. 16).
The above rulings find even more cogent application in the case at bar because, as contended by petitioner
PAL (not denied by private respondent), when Sheriff Reyes served the writ of execution on PAL, he (Reyes)
was accompanied by private respondent's counsel. Prudence dictated that when PAL delivered to Sheriff
Reyes the two (2) questioned checks (payable to Sheriff Reyes), private respondent's counsel should have
insisted on their immediate encashment by the Sheriff with the drawee bank in order to promptly get hold of
the amount belonging to his client, the judgment creditor.
ACCORDINGLY, I vote to grant the petition and to quash the court a quo's alias writ of execution.

The Reparations Commission awarded six (6) trawl boats to the Universal Deep-Sea Fishing Corporation
(Universal, for short) which were delivered two at a time, each delivery being covered by a Contract of
Conditional Purchase and Sale providing for identical schedules of payments the first installment
representing 10% of the total cost was to be paid 24 months after delivery and the balance of the total cost to
be paid in ten (10) equal installments, which, in the schedule were numbered as "1", "2", "3", etc., the first of
which was due one year after the first installment. When the Reparations Commission sued Universal and its
surety to recover various amounts of money due under the constracts, they claimed that the amounts were not
yet due and demandable. Universal alleged that there was an obscurity in the terms of the contracts in
question which was caused by the plaintiff as to the amounts and due dates of the first installments which
should have been first fixed before the creditor could demand its payment from the debtor, specifically
referring to the schedule of payments which allegedly indicated two (2) due dates for the payment of the first
installment.
The Supreme Court found the terms of the contracts clear and left no doubt as to the intent of the contracting
parties that the first installment due 24 months after delivery was different from the the first ten (10) equal
yearly installment of the balance of the purchase price (which are not designated as "first", "second", "third",
etc., installments).

SYLLABUS

1. CONTRACTS; INTERPRETATION; CASE AT BAR. Where the schedule of payments specifically

provides that he first installment representing 10% of the purchase price shall be paid within 24 months from
the date of complete delivery of the goods purchased and the balance to be paid in ten (10) equal yearly
installments on the balance of the purchase price is different from the first installment representing 10% of the
purchase price. Moreover, where the schedule of payments specifically designates a payment representing
10% of the purchase price as a "first installment" and the subsequent payments representing the balance of
the purchase price are not designated as the "first", "second", "third", etc., installments but are numbered as
"1", "2", "3", etc., it cannot be claimed that there is obscurity in the terms of the contract as to the amounts an
due dates of the first installment.
2. ACTIONS; RECOVERY OF MONEY DUE ON CONTRACTS NOT PREMATURE. An action to recover
various amounts of money due on a contract filed after the expiration of the specified due dates of said
amounts is not an action filed prematurely.
3. SURETYSHIP; INDEMNITY AGREEMENT; PAYMENT OF PREMIUMS ON THE BOND. The pemium is
the consideration for furnishing a performance bond and the obligation to pay the same subsists for as long as
the liability of the surety exists.
4. OBLIGATIONS AND CONTRACTS; APPLICABILITY OF ARTICLES 1252 TO 1254 OF THE NEW CIVIL
CODE. The rules contained in Articles 1252 to 1254 of the Civil Code apply to a person owing several debts
of the same kind to a single creditor. They cannot be made applicable to a person whose obligation as a mere
surety is both contingent and singular, which in this case is the full and faithful compliance with the terms of
the contract of conditional purchase and sale of reparations goods. The obligation included the payment, not
only of the first installment in the amount of P53,643.00, but also of the ten (10) equal yearly installments of
P56,597.20 per annum. The amount of P10,000.00 was, indeed, deducted from the amount of P53,643.00, but
then the first of the ten (10) equal yearly installments had also accrued; hence, no error was committed in
holding the surety company to the full extent of its undertaking.
5. ID.; EXTENT OF LIABILITY OF PERSON SIGNING IN DUAL CAPACITY. An acting general manager of
a company who appears to have signed an indemnity agreement twice; first, in his capacity as acting general
manager, and second, in his individual capacity, is personally liable on the contract as an indemnitor, more
particularly where the acknowledgment states that he "for himself and on behalf" of the company personally
appeared before the notary and acknowledged that the amount is his own free and voluntary act and deed.

[G.R. Nos. L-21901 and L-21996. June 27, 1978.]

REPARATIONS COMMISSION, Plaintiff-Appellants, v. UNIVERSAL DEEP-SEA FISHING CORPORATION
and MANILA SURETY AND FIDELITY CO., INC., Defendants-Appellants.
MANILA SURETY & FIDELITY CO., INC., third-party plaintiff-appellee, v. PABLO S. SARMIENTO, thirdparty defendant-appellant.
SYNOPSIS

DECISION

CONCEPCION, JR., J.:

Appeal of the defendant Universal Deep-Sea Fishing Corporation, defendant and third-party plaintiff Manila
Surety and Fidelity Co., Inc., and third-party defendant Pablo Sarmiento from the decision of the Court of First
Instance of Manila, the dispositive portion of which reads as follows:jgc:chanrobles.com.ph

9 May 8, 1970 P56,597.20

"WHEREFORE, judgment is rendered as follows:jgc:chanrobles.com.ph

To guarantee the faithful compliance with the obligations under said contract, a performance bond in the
amount of P53,643.00, with UNIVERSAL as principal and the Manila Surety & Fidelity Co., Inc., as surety, was
executed in favor of the Reparations Commission. 3 A corresponding indemnity agreement was executed to
indemnify the surety company for any damage, loss charges, etc., which it may sustain or incur as a
consequence of having become a surety upon the performance bond. 4

"1. The defendant Universal Deep-Sea Fishing Corporation is hereby sentenced to pay the plaintiff the sum of
P100,242.04 in the first cause of action, P141,343.45 in the second cause of action and P54,500.00 in the
third cause of action, all with interest at the rate of 6% per annum from August 10, 1962, the date of the filing
of the complaint, until fully paid;
"2. Defendant Manila Surety & Fidelity Co., Inc., is hereby sentenced to pay the plaintiff, jointly and severally
with defendant Universal Deep-Sea Fishing Corporation, the sum of P53,643.00 in the first cause of action,
P68.777.77 in the second cause of action and P54,508.00 in the third cause of action;
"3. Defendant Universal Deep-Sea Fishing Corporation and Pablo Sarmiento are hereby sentenced to pay,
jointly and severally, the Manila Surety & Fidelity Co., Inc., the sum of P54.643.00 and P68,777.77 with
interest thereon at the rate of 12% per annum from August 10, 1962 until fully paid plus P2,000.00 as
attorneys fees;

10 May 8, 1971 P56.597.20"

The M/S UNIFISH 3 and M/S UNIFISH 4, with a total purchase price of P687,777.76 were delivered to
UNIVERSAL on April 20, 1959 and the Contract of Conditional Purchase and Sale of Reparations Goods,
dated November 25, 1959, 5 provided that "the first installment representing 10% of the amount or SIXTYEIGHT THOUSAND SEVEN HUNDRED SEVENTY-SEVEN PESOS AND SEVENTY-SEVEN CENTAVOS
shall be paid within 24 months from the date of complete delivery thereof, the balance shall be paid in the
manner herein stated as shown in the Schedule of Payments, . . .", to wit:jgc:chanrobles.com.ph
"TOTAL F.O.B. COSTS - P687,777.76
AMOUNT OF 1st INSTALLMENT (10% of F.O.B. COST) P68,777.77

"4. Defendant Universal Deep-Sea Fishing Corporation is hereby sentenced to pay the Manila Surety &
Fidelity Co., Inc., the sum of P54,508.00 with interest thereon at the rate of 12% per annum from August 10,
1962, until fully paid;

DUE DATE OF 1st INSTALLMENT July, 1961

TERM: Ten (10) EQUAL YEARLY INSTALLMENTS

"5. Defendant Universal Deep-Sea Fishing Corporation shall pay the costs." 1
RATE OF INTEREST: THREE PERCENT (3%)PER ANNUM.
It is not disputed that the Universal Deep-Sea Fishing Corporation, hereinafter referred to as UNIVERSAL for
short, was awarded six (6) trawl boats by the Reparations Commission as end-user of reparations goods.
These fishing boats, christened the M/S UNIFISH 1, M/S UNIFISH 2, M/S UNIFISH 3, M/S UNIFISH 4, M/S
UNIFISH 5, and M/S UNIFISH 6, were delivered to UNIVERSAL two at a time, f.o.b. Japanese port.

No. of Installments Date Due Amount

1 July, 1962 P72,565.68

The M/S UNIFISH 1 and M/S UNIFISH a, with an aggregate purchase price of P536,428.44, were delivered to
UNIVERSAL on November 20, 1958, and the contract of Conditional Purchase and Sale of Reparations
Goods, executed by and between the parties on February 12, 1960, provided among others, that "the first
installment representing 10% of the amount or FIFTY THREE THOUSAND SIX HUNDRED FORTY TWO
PESOS AND EIGHTY FOUR CENTAVOS (P53,642.84) shall be paid within 24 months from the date of
complete delivery thereof, the balance shall be paid in the manner herein stated as shown in the Schedule of
Payments", 2 . . . to wit:jgc:chanrobles.com.ph

2 July, 1963 P72,565.68

"TOTAL F.O.B. COST P536,428.44

6 July, 1967 P72,565.68

AMOUNT OF 1st INSTALLMENT (10% OF F.O.B. COST) P53,642.84

7 July, 1968 P72,565.68

DUE DATE OF 1st INSTALLMENT May 8, 1961

8 July, 1969 P72,565.68

TERM: Ten (10) EQUAL YEARLY INSTALLMENTS

9 July, 1970 P72,565.68

RATE OF INTEREST: THREE PERCENT (3%) PER ANNUM.

10 July, 1971 P72,565.68"

No. of Installments Date Due Amount

A performance bond in the amount of P68,777.77, issued by the Manila Surety & Fidelity Co., Inc., was also
submitted to guarantee the faithful compliance with the obligations set forth in the contract, 6 and indemnity
agreement was executed in favor of the surety company in consideration of the said bond. 7

1 May 8, 1962 P56,597.20

2 May 8, 1963 P56,597.20

3 July, 1964 P72,565.68

4 July, 1965 P72,565.68
5 July, 1966 P72,565.68

3 May 8, 1964 P56,597.20

The delivery of the M/S UNIFISH 5 and M/S UNIFISH 6 is covered by a contract for the Utilization of
Reparations Goods (M/S "UNIFISH 5" and M/S "UNIFISH 6") executed by the parties on February 12, 1960, 8
and the Schedule of Payments attached thereto, provided, as follows:jgc:chanrobles.com.ph

4 May 8, 1965 P56,597.20

"AMOUNT OF 1st INSTALLMENT (10% of F.O.B. COST) P54,500.00

5 May 8, 1966 P66,597.20

DUE DATE OF 1st INSTALLMENT Oct. 17, 1961

6 May 8, 1967 P56,597.20

TERM: TEN (10) EQUAL YEARLY INSTALLMENTS

7 May 8, 1968 P56,597.20

RATE OF INTEREST: THREE PERCENT (3%) PER ANNUM.

8 May 8, 1969 P56,597.20

No. of Installments Date Due Amount

1 Oct. 17, 1962 P57,501.57

2 Oct. 17, 1963 P57,501.57
3 Oct. 17, 1964 P57,501.57
4 Oct. 17, 1965 P57,501.57

numerals 1, 2, 3, 4, 5, 6, 7, 8, 9, 10 written before each of said ten 110) equal yearly installments following the
first to accrue after the due date of said first installment. Just the same, the parties have not so described (as
first) in the schedules forming part of their contracts the installments numbered 1 in the list contained
in each. Moreover, considering that the words TERMS: Ten (10) EQUAL YEARLY INSTALLMENTS, appear
after the lines reading: AMOUNT OF 1st INSTALLMENT (10% OF F.O.B. COSTS) P174,761.42 and DUE
DATE OF 1st INSTALLMENT April 25, 1962 (or May 26, 1962) and that, subsequently to said TERM: Ten (10)
EQUAL YEARLY INSTALLMENTS, there is a list of ten (10) equal yearly installments, it is clear that the latter
do not include the one designated as first installment.

5 Oct. 17, 1966 P57,501.57

6 Oct. 17, 1967 P57,501.57
7 Oct. 17, 1968 P57,501.57
8 Oct. 17, 1969 P57,501.57
9 Oct. 17, 1970 P57,501.57
10 Oct. 17, 1971 P57,501.57" 9
A performance bond in the amount of P54,500.00 issued by the Manila Surety & Fidelity Co., Inc., 10 was
submitted, and an indemnity agreement was executed by UNIVERSAL in favor of the surety company. 11
On August 10, 1962, the Reparations Commission instituted the present action against UNIVERSAL and the
surety company to recover various amounts of money due under these contracts. In answer, UNIVERSAL
claimed that the amounts of money sought to be collected are not yet due and demandable. The surety
company also contended that the action is premature, but set up a cross-claim against UNIVERSAL for
reimbursement of whatever amount of money it may have to pay the plaintiff by reason of the complaint,
including interest, and for the collection of accumulated and unpaid premiums on the bonds with interest
thereon. With leave of courts first obtained, the surety company filed a third-party complaint against Pablo S.
Sarmiento, one of the indemnitors in the indemnity agreements. The third-party defendant Pablo S. Sarmiento
denied personal liability claiming that he signed the indemnity agreements in question in his capacity as acting
general manager of UNIVERSAL. After appropriate proceedings and upon the preceding facts, the trial court
rendered the judgment herein before stated. Hence, this appeal.
(1) The principal issue for resolution is whether or not the first installments under the three (3) contracts of
conditional purchase and sale of reparations goods were already due and demandable when the complaint
was filed. UNIVERSAL contends that there is an obscurity in the terms of the contracts in question which were
caused by the plaintiff as to the amounts and due dates of the first installments which should have been first
fixed before a creditor can demand its payment from the debtor. To be explicit, counsel points to the Schedule
of Payment attached to, and forming a part of, the contract for the purchase and sale of the M/S UNIFISH 1
and M/S UNIFISH 2 which states that the amount of first installment is P53,642.84 and the due date of its
payment is May 8, 1861. However, the amount of the first of the succeeding itemized installments is
P56,597.20 and the due date is May 8, 1962. In the case of the M/S UNIFISH 3 and M/S UNIFISH 4, the first
installments are P68,777.77 and due in July, 1961 and P72,565.68 and due in July, 1962, respectively. In the
contract for the purchase and sale of the M/S UNIFISH 5 and M/S UNIFISH 6, the amounts indicated as first
installments are P54,500.00 and P57,501.57, and the due dates of payment are October 17, 1961 and
October 17, 1962, respectively.
The terms of the contracts for the purchase and sale of the reparations vessels, however, are very clear and
leave no doubt as to the intent of the contracting parties. Thus, in the contract concerning the M/S UNIFISH 1
and M/S UNIFISH 2, the parties expressly agreed that the first installment representing 10% of the purchase
price or P53,642.84 shall be paid within 24 months from the date of complete delivery of the vessel or on May
8, 1961, and the balance to be paid in ten 10% equal yearly installments. The amount of P56,597.20 due on
May 8, 1962, which is, also claimed to be a "first installment," is but the first of the ten (10) equal yearly
installments of the balance of the purchase price. In the case of Reparations Commission v. Northern Lines,
Inc., Et Al., 12 where the Schedule of Payments, likewise on RC-LEGAL DEPT FORM NO. 1, also allegedly
indicated two (2) due dates for the payment of the first installment, the Court said:jgc:chanrobles.com.ph
"(a) The major premise in appellants process of reasoning is that the first installments due on April 25, 1963,
and May 26, 1963, are first installments, although they are not so designated in the schedule appended to
each of the contracts between the parties. Appellants, moreover, assume that the first installment is included
in the ten (10) equal yearly installments mentioned subsequently to said first installment. In fact, however,
only one installment is labelled as first in each one of said schedules, and that is the installment due on April
25, 1962 as regards M/S Don Salvador or Magsaysay and that due on May 26, 1962 as regards M/S
Don Amando or Estancia. The schedules do not describe the ten (10) equal yearly installments following
the one characterized therein as first meaning number, not order or sequence, of installments and the

"(b) The pertinent part of Section 12 of Rep. Act No. 1789, pursuant to which the vessels in question were sold
to the Buyer, reads:chanrob1es virtual 1aw library
. . . Capital goods . . . disposed of to private parties as provided for in subsection (a) of Section two hereof
shall be sold on a cash or credit basis, under rules and regulations as may be determined by the Commission.
Sales on a credit basis shall be payable in installments: Provided, That the first installment shall be paid within
twenty-four months after complete delivery of the capital goods and the balance within a period not exceeding
ten years, xxx plus the service provided for in section ten thereof; Provided, further, That the unpaid balance of
the price thereof shall bear interest at the rate of not more than three percent per annum . . . .
"It should be noted that, pursuant to the schedules attached to the contracts with the Buyer, the complete
delivery of the vessels took place on April 25, and May 26, 1960, respectively, so that the 24 months fixed by
law for the payment of the first installment expired on April 25, 1962 and May 26, 1962, which are the very
dates stated in the aforementioned schedules for the payment of the respective 1st installments. What is
more, in view of said legal provision, the Commission had no authority to agree that the 1st installment shall
be paid on any later date, and the Buyer must have been aware of this fact. Hence, the parties could not have
intended the first installments to become due on April 25, and May 26, 1963. It is, likewise, obvious
particularly when considered in relation to the provision above quoted that the ten (10) equal yearly
installments, mentioned in the schedules, refer to the balance of the price to be paid by the buyer, after
deducting the first installment, so that, altogether there would be eleven installments, namely, the first,
which would be the 10% of the F.O.B. cost of the vessel as agreed upon between the Governments of the
Philippines and Japan and ten (10) yearly installments, representing the balance of the amount due to the
Commission from the Buyer, including the interest thereon."cralaw virtua1aw library
Viewing the contracts between the parties in the light of the foregoing exposition, the first installment on the
M/S UNIFISH 1 and M/S UNIFISH 2 of the amount of P53,642.84 was due on May 8, 1961, while the first
installments on the M/S UNIFISH 3 and M/S UNIFISH 4, and the M/S UNIFISH 5 and M/S UNIFISH 6 in the
amounts of P68,777.77 and P54,500.00 were due on July 31, 1961 and October 17, 1961, respectively.
Accordingly, the obligation of UNIVERSAL to pay the first installments on the purchase price of the six (6)
reparations vessels was already due and demandable when the present action was commenced on August
10, 1962. Also due and demanded from UNIVERSAL were the first of the ten (10) equal yearly installments on
the balance of the purchase price of the M/S UNIFISH 1 and M/S UNIFISH 2 in the amount of P56,597.20 and
P72,565.68 on the M/S UNIFISH 3 and M/S UNIFISH 4. The first accrued on May 8, 1962, while the second
fell due on July 31, 1962.
(2) The claim of the surety company to the effect that the trial court erred in not awarding it the amount of
P7,251.42, as premiums on the performance bonds, is well taken. The payment of premiums on the bonds to
the surety company had been expressly undertaken by UNIVERSAL in the indemnity agreements executed by
it in favor of the surety company. The premium is the consideration for furnishing the bonds and the obligation
to pay the same subsists for as long as the liability of the surety shall exist. 13 Hence, UNIVERSAL should pay
the amount of P7,251.42 to the surety company.
(3) The surety company also claims that the trial court erred in not applying the amount of P10,000.00, paid as
down payment by UNIVERSAL, to the Reparations Commission, to the guaranteed indebtedness. According
to the surety company, under Article 1254 of the Civil Code, where there is no imputation of payment made by
either the debtor or creditor, the debt which is the most onerous to the debtor shall be deemed to have been
satisfied, so that the amount of P10,000.00 paid by UNIVERSAL as down payment on the purchase of the M/S
UNIFISH 1 and M/S UNIFISH 2 should be applied to the guaranteed portion of the debt, thus releasing part of
the liability; hence, the obligation of the surety company shall be only P43,643.00, instead of P53,643.00.
The rules contained in Articles 1252 to 1254 of the Civil Code apply to a person owing several debts of the
same kind to a single creditor. They cannot be made applicable to a person whose obligation as a mere surety
is both contingent and singular, 14 which in this case is the full and faithful compliance with the terms of the
contract of conditional purchase and sale of reparations goods. The obligation included the payment, not only

of the first Installment in the amount of P53,643.00, but also of the ten (10) equal yearly installments of
P56,597.20 per annum. The amount of P10,000.00 was, indeed, deducted from the amount of P53,643.00, but
then the first of the ten (10) equal yearly installments had also accrued; hence, no error was committed in
holding the surety company to the full extent of its undertaking.
(4) Finally, We find no merit in the claim of the third-party defendant Pablo S. Sarmiento that he is not
personally liable having merely executed the indemnity agreements 15 in his capacity as acting general
manager of UNIVERSAL. Pablo S. Sarmiento appears to have signed the indemnity agreement twice the
first, in this capacity as acting general manager of UNIVERSAL, and the second, in his individual capacity. The
indemnity agreements in question state the following, among others:jgc:chanrobles.com.ph
"In consideration of the responsibility undertaken by the Company, for the original bond, and for any renewal
extension or substitution thereof, the undersigned, jointly and severally, bind themselves in favor of the said
COMPANY in the following terms:chanrob1es virtual 1aw library
x

PARDO, J.:
The case before the Court is an appeal via certiorari seeking to set aside the decision of the Court of
Appeals[1] which affirmed that of the Regional Trial Court, Quezon City, and the Metropolitan Trial Court,
Quezon City ordering the ejectment of petitioner from the property subject of the controversy.
The facts are as follows:
On December 27, 1990, petitioner Nereo J. Paculdo (hereafter Nereo) and respondent Bonifacio C.
Regalado (hereafter Bonifacio) entered into a contract of lease over a 16,478 square meter parcel of land with
a wet market building, located along Don Mariano Marcos Avenue, Fairview Park, Quezon City. The contract
was for twenty five (25) years, commencing on January 1, 1991 and ending on December 31, 2015. For the
first five (5) years of the contract beginning December 27, 1990, Nereo would pay a monthly rental of
P450,000.00, payable within the first five (5) days of each month at Bonifacios office, with a 2% penalty for
every month of late payment.

"Dated at City of Manila, this day of July 1969.

600 Cottage 3, UNIVERSAL DEEP-SEA FISHING CORP.
Aguinaldo Com- BY:chanrob1es virtual 1aw library

Aside from the above lease, petitioner leased eleven (11) other property from respondent, ten (10) of
which were located within the Fairview compound, while the eleventh was located along Quirino Highway,
Quezon City. Petitioner also purchased from respondent eight (8) units of heavy equipment and vehicles in
the aggregate amount of P1,020,000.00.

pound, Echague, s/PABLO S. SARMIENTO

On account of petitioners failure to pay P361,895.55 [2] in rental for the month of May, 1992, and the
monthly rental of P450,000.00 for the months of June and July 1992, on July 6, 1992, respondent sent a
demand letter to petitioner demanding payment of the back rentals, and if no payment was made within
fifteen (15) days from receipt of the letter, it would cause the cancellation of the lease contract. [3] Another
demand letter followed this on July 17, 1992, reiterating the demand for payment and for petitioner to vacate
the subject premises. [4]

Manila t/PABLO S. SARMIENTO

Signature
Address s/PABLO S. SARMIENTO
t/PABLO S. SARMIENTO
Signature."cralaw virtua1aw library
Besides, the "acknowledgment" stated that "Pablo S. Sarmiento for himself and on behalf of Universal DeepSea Fishing Corporation" personally appeared before the notary and acknowledged that the document is his
own free and voluntary act and deed.
WHEREFORE, the judgment appealed from is hereby affirmed with the modification that the UNIVERSAL
Deep-Sea Fishing Corporation is further ordered to pay the Manila Surety & Fidelity Co., Inc., the amount of
P7,251.42 for the premiums and documentary stamps on the performance bonds. Appellants shall pay
proportionate costs.
SO ORDERED.

Without the knowledge of petitioner, on August 3, 1992, respondent mortgaged the land subject of the
lease contract, including the improvements which petitioner introduced into the land amounting to
P35,000,000.00, to Monte de Piedad Savings Bank, as security for a loan in the amount of P20,000,000.00. [5]
On August 12, 1992, and on subsequent dates thereafter, respondent refused to accept petitioners
daily rental payments.[6]
On August 20, 1992, petitioner filed with the Regional Trial Court, Quezon City an action for injunction
and damages seeking to enjoin respondent from disturbing his possession of the property subject of the lease
contract.[7] On the same day, respondent filed with the Metropolitan Trial Court, Quezon City a complaint for
ejectment against petitioner. Attached to the complaint were the two (2) demand letters dated July 6 and July
17, 1992.[8]
On August 25, 1992, five (5) days after the filing of the ejectment complaint, respondent moved to
withdraw the complaint on the ground that certain details had been omitted in the complaint and must be recomputed.
On April 22, 1993, respondent re-filed the ejectment complaint with the Metropolitan Trial Court,
Quezon City. Computed from August 1992 until March 31, 1993, the monthly reasonable compensation that
petitioner was liable for was in the total sum of P3,924,000.00. [9]

[G.R. No. 123855. November 20, 2000]

On January 31, 1994, the Metropolitan Trial Court, Quezon City rendered a decision in favor of
respondent, the dispositive portion of which reads:

NEREO J. PACULDO, petitioner, vs. BONIFACIO C. REGALADO, respondent.

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant, as follows:
DECISION

1. Ordering the defendant and all persons claiming right under him to vacate the leased premises located at
Don Mariano Marcos Avenue, Fairview Park, Quezon City, Metro-Manila covered by Transfer Certificate of
Title RT-6883 of the Registry of Deeds of Quezon City;
2. Ordering the defendant to pay the sum of P527,119.27 representing the unpaid monthly rentals as of June
30, 1992 plus 2% interest thereon;
3. Ordering the defendant to pay the sum of P450,000.00 a month plus 2% interest thereon starting July 1992
and every month thereafter until the defendant and all persons claiming right under him shall have actually
vacated the premises and surrender possession thereof to the plaintiff;
4. Ordering the defendant to pay the sum of P5,000,000.00 as and for attorneys fees; and
5. Ordering the defendant to pay the costs of suit.
SO ORDERED.

As found by the Metropolitan Trial Court and Regional Trial Court, petitioner made a total payment of
P10,949,447.18, to respondent as of July 2, 1992.
If the payment made by respondent applied to petitioners other obligations is set aside, and the
amount petitioner paid be applied purely to the rentals on the Fairview wet market building, there would be
an excess payment of P1,049,447.18 as of July 2, 1992. The computation in such case would be as follows:
Amount paid as of July 2, 1992

P10,949,447.18

Less:
Monthly rent from January 1991-July 1992
P450,000.00 x 19 months

P 8,550,000.00

[10]

In time, petitioner appealed to the Regional Trial Court, Quezon City, Branch 220.

Less:
[11]

On February 19, 1994, respondent, with the support of fifty (50) armed security guards forcibly entered
the property and took possession of the wet market building. [12]
On July 6, 1994, the Regional Trial Court, Quezon City, Branch 220 rendered a decision affirming in
toto the decision of the Metropolitan Trial Court, to wit:
WHEREFORE, the appealed decision dated January 31, 1994, for being in accordance with the evidence
presented and the law on the matter, is hereby affirmed in toto.
Let a writ of execution issue against defendant and his surety, to answer for the decision of the lower court. [13]
On the same day, the Regional Trial Court issued a writ of execution [14] whereupon, petitioner vacated
the subject premises voluntarily. By July 12, 1994, petitioner had completely turned over possession of
subject property to respondent.
Meanwhile, on July 21, 1994, petitioner filed a petition for review with the Court of Appeals. [15] He
alleged that he had paid the amount of P11,478,121.85 for security deposit and rentals on the wet market
building, but respondent, without his consent, applied portions of the payment to his other obligations. The
vouchers and receipts indicated that the payments made were for rentals. Thus, at the time of payment
petitioner had declared as to which obligation the payment must be applied.
On February 10, 1995, the Court of Appeals promulgated its decision finding that petitioner impliedly
consented to respondents application of payment to his other obligations and, thus, dismissed the petition for
lack of merit.[16]
On March 3, 1995, petitioner filed a motion for reconsideration; [17] however, on February 9, 1996 the
Court of Appeals denied the motion.[18]
Hence, this appeal.[19]
At issue is whether petitioner was truly in arrears in the payment of rentals on the subject property at
the time of the filing of the complaint for ejectment.

Security deposit

P 1,350,000.00

============
Excess amount paid

P 1,049,447.18

In the letter dated November 19, 1991, respondent proposed that petitioners security deposit for the
Quirino lot, in the amount of P643,276.48, be applied as partial payment for his account under the subject lot
as well as to real estate taxes on the Quirino lot. [20] Petitioner interposed no objection, as evidenced by his
signature signifying his conformity thereto.
In an earlier letter, dated July 15, 1991, [21] respondent informed petitioner that the payment was to be
applied not only to petitioners accounts under both the subject land and the Quirino lot but also to heavy
equipment bought by the latter from respondent. Petitioner claimed that the amount applied as payment for
the heavy equipment was critical because it was equivalent to more than two (2) months rental of the subject
property, which was the basis for the ejectment case in the Metropolitan Trial Court.
The controversy stemmed from the fact that unlike the November 19, 1991 letter, which bore a
conformity portion with petitioners signature, the July 15, 1991 letter did not contain the signature of petitioner.
In nevertheless concluding that petitioner gave his consent thereto, the Court of Appeals upheld both
the lower courts and trial courts findings that petitioner received the second letter and its attachment and he
raised no objection thereto.
In other words, would petitioners failure to object to the letter of July 15, 1991 and its proposed
application of payments amount to consent to such application?
Petitioner submits that his silence is not consent but is in fact a rejection.
The right to specify which among his various obligations to the same creditor is to be satisfied first rests
with the debtor,[22] as provided by law, to wit:
Article 1252. He who has various debts of the same kind in favor of one and the same creditor, may declare
at the time of making the payment, to which of them the same must be applied. Unless the parties so

stipulate, or when the application of payment is made by the party for whose benefit the term has been
constituted, application shall not be made as to debts which are not yet due.
If the debtor accepts from the creditor a receipt in which an application of the payment is made, the former
cannot complain of the same, unless there is a cause for invalidating the contract. [23]
At the time petitioner made the payments, he made it clear to respondent that they were to be applied
to his rental obligations on the Fairview wet market property. Though he entered into various contracts and
obligations with respondent, including a lease contract over eleven (11) property in Quezon City and sale of
eight (8) heavy equipment, all the payments made, about P11, 000,000.00, were to be applied to rental and
security deposit on the Fairview wet market property.

ACCORDINGLY, the Court REVERSES the decision of the Regional Trial Court, Quezon City, Branch
220 in Civil Case No. 94-20813, and dismisses the complaint filed with the Metropolitan Trial Court, Quezon
City, Branch 36 in Civil Case No. MTC XXXVI-7089.
No costs.
SO ORDERED.

Respondent Regalado argues that assuming that petitioner expressed at the time of payment which
among his obligations were to be satisfied first, petitioner is estopped by his assent to the application made by
the respondent. This assent is inferred from the silence of petitioner on the July 15, 1991 letter [24] containing a
statement of the application of payments, which was different from the application made by petitioner. A big
chunk of the amount paid by petitioner went into the satisfaction of an obligation which was not yet due and
demandable--the payment of the eight (8) heavy equipment amounting to about P1,020,000.00.
The statement of account prepared by respondent was not the receipt contemplated under the
law. The receipt is the evidence of payment executed at the time of payment, and not the statement of
account executed several days thereafter.

[G.R. No. 118342. January 5, 1998]

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. COURT OF APPEALS and LYDIA
CUBA, respondents.
[G.R. No. 118367. January 5, 1998]

There was no clear assent by petitioner to the change in the manner of application of payment. The
petitioners silence as regards the application of payment by respondent cannot mean that he consented
thereto. There was no meeting of the minds. Though an offer may be made, the acceptance of such offer
must be unconditional and unbounded in order that concurrence can give rise to a perfected contract.
[25]
Hence, petitioner could not be in estoppel.

LYDIA P. CUBA, petitioner, vs. COURT OF APPEALS, DEVELOPMENT BANK OF THE PHILIPPINES and
AGRIPINA P. CAPERAL, respondents.
DECISION

Assuming arguendo that, as alleged by respondent, petitioner did not, at the time the payments were
made, choose the obligation to be satisfied first, respondent may exercise the right to apply the payments to
the other obligations of petitioner. But this is subject to the condition that the petitioner must give his
consent. Petitioners silence is not tantamount to consent. The consent must be clear and definite.
Under the law, if the debtor did not declare at the time he made the payment to which of his debts with
the creditor the payment is to be applied, the law provided the guideline--no payment is to be made to a debt
that is not yet due[26] and the payment has to be applied first to the debt most onerous to the debtor.[27]
In the instant case, the purchase price of the eight (8) heavy equipment was not yet due at the time the
payment was made, for there was no date set for such payment. Neither was there a demand by the creditor
to make the obligation to pay the purchase price due and demandable. [28] Hence, the application made by
respondent is contrary to the provisions of the law.
The lease over the Fairview wet market property is the most onerous among all the obligations of
petitioner to respondent. It was established that the wet market is a going-concern and that petitioner has
invested about P35,000,000.00, in the form of improvements, on the property. Hence, petitioner would stand
to lose more if the lease would be rescinded, than if the contract of sale of heavy equipment would not
proceed.
The decision of the Court of Appeals was based on a misapprehension of the facts and the law on the
application of payment. Hence, the ejectment case subject of the instant petition must be dismissed, without
prejudice to the determination and settlement of the money claims of the parties inter se.
WHEREFORE, the Court GRANTS the petition. The Court REVERSES and SETS ASIDE the decision
of the Court of Appeals in CA-G. R. SP No. 34634.

DAVIDE, JR., J.:

These two consolidated cases stemmed from a complaint [1] filed against the Development Bank of the
Philippines (hereafter DBP) and Agripina Caperal filed by Lydia Cuba (hereafter CUBA) on 21 May 1985 with
the Regional Trial Court of Pangasinan, Branch 54. The said complaint sought (1) the declaration of nullity of
DBPs appropriation of CUBAs rights, title, and interests over a 44-hectare fishpond located in Bolinao,
Pangasinan, for being violative of Article 2088 of the Civil Code; (2) the annulment of the Deed of Conditional
Sale executed in her favor by DBP; (3) the annulment of DBPs sale of the subject fishpond to Caperal; (4) the
restoration of her rights, title, and interests over the fishpond; and (5) the recovery of damages, attorneys
fees, and expenses of litigation.
After the joinder of issues following the filing by the parties of their respective pleadings, the trial court
conducted a pre-trial where CUBA and DBP agreed on the following facts, which were embodied in the pretrial order:[2]
1. Plaintiff Lydia P. Cuba is a grantee of a Fishpond Lease Agreement No. 2083 (new) dated
May 13, 1974 from the Government;
2. Plaintiff Lydia P. Cuba obtained loans from the Development Bank of the Philippines in the
amounts ofP109,000.00; P109,000.00; and P98,700.00 under the terms stated in the
Promissory Notes dated September 6, 1974; August 11, 1975; and April 4, 1977;
3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of Assignment of her
Leasehold Rights;

4. Plaintiff failed to pay her loan on the scheduled dates thereof in accordance with the terms of
the Promissory Notes;
5. Without foreclosure proceedings, whether judicial or extra-judicial, defendant DBP
appropriated the Leasehold Rights of plaintiff Lydia Cuba over the fishpond in question;
6. After defendant DBP has appropriated the Leasehold Rights of plaintiff Lydia Cuba over the
fishpond in question, defendant DBP, in turn, executed a Deed of Conditional Sale of the
Leasehold Rights in favor of plaintiff Lydia Cuba over the same fishpond in question;
7.

In the negotiation for repurchase, plaintiff Lydia Cuba addressed two letters to the Manager
DBP, Dagupan City dated November 6, 1979 and December 20, 1979. DBP thereafter
accepted the offer to repurchase in a letter addressed to plaintiff dated February 1, 1982;

8.

After the Deed of Conditional Sale was executed in favor of plaintiff Lydia Cuba, a new
Fishpond Lease Agreement No. 2083-A dated March 24, 1980 was issued by the
Ministry of Agriculture and Food in favor of plaintiff Lydia Cuba only, excluding her
husband;

9.

Plaintiff Lydia Cuba failed to pay the amortizations stipulated in the Deed of Conditional
Sale;

10. After plaintiff Lydia Cuba failed to pay the amortization as stated in Deed of Conditional
Sale, she entered with the DBP a temporary arrangement whereby in consideration for
the deferment of the Notarial Rescission of Deed of Conditional Sale, plaintiff Lydia Cuba
promised to make certain payments as stated in temporary Arrangement dated February
23, 1982;
11. Defendant DBP thereafter sent a Notice of Rescission thru Notarial Act dated March 13,
1984, and which was received by plaintiff Lydia Cuba;
12. After the Notice of Rescission, defendant DBP took possession of the Leasehold Rights of
the fishpond in question;
13. That after defendant DBP took possession of the Leasehold Rights over the fishpond in
question, DBP advertised in the SUNDAY PUNCH the public bidding dated June 24,
1984, to dispose of the property;
14. That the DBP thereafter executed a Deed of Conditional Sale in favor of defendant Agripina
Caperal on August 16, 1984;

The trial court resolved the issue in favor of CUBA by declaring that DBPs taking possession and
ownership of the property without foreclosure was plainly violative of Article 2088 of the Civil Code which
provides as follows:
ART. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of
them. Any stipulation to the contrary is null and void.
It disagreed with DBPs stand that the Assignments of Leasehold Rights were not contracts of mortgage
because (1) they were given as security for loans, (2) although the fishpond land in question is still a public
land, CUBAs leasehold rights and interest thereon are alienable rights which can be the proper subject of a
mortgage; and (3) the intention of the contracting parties to treat the Assignment of Leasehold Rights as a
mortgage was obvious and unmistakable; hence, upon CUBAs default, DBPs only right was to foreclose the
Assignment in accordance with law.
The trial court also declared invalid condition no. 12 of the Assignment of Leasehold Rights for being a
clear case of pactum commissorium expressly prohibited and declared null and void by Article 2088 of the
Civil Code. It then concluded that since DBP never acquired lawful ownership of CUBAs leasehold rights, all
acts of ownership and possession by the said bank were void. Accordingly, the Deed of Conditional Sale in
favor of CUBA, the notarial rescission of such sale, and the Deed of Conditional Sale in favor of defendant
Caperal, as well as the Assignment of Leasehold Rights executed by Caperal in favor of DBP, were also void
and ineffective.
As to damages, the trial court found ample evidence on record that in 1984 the representatives of
DBP ejected CUBA and her caretakers not only from the fishpond area but also from the adjoining big house;
and that when CUBAs son and caretaker went there on 15 September 1985, they found the said house
unoccupied and destroyed and CUBAs personal belongings, machineries, equipment, tools, and other articles
used in fishpond operation which were kept in the house were missing. The missing items were valued at
about P550,000. It further found that when CUBA and her men were ejected by DBP for the first time in 1979,
CUBA had stocked the fishpond with 250,000 pieces of bangus fish (milkfish), all of which died because the
DBP representatives prevented CUBAs men from feeding the fish. At the conservative price of P3.00 per fish,
the gross value would have been P690,000, and after deducting 25% of said value as reasonable allowance
for the cost of feeds, CUBA suffered a loss of P517,500. It then set the aggregate of the actual damages
sustained by CUBA at P1,067,500.
The trial court further found that DBP was guilty of gross bad faith in falsely representing to the Bureau
of Fisheries that it had foreclosed its mortgage on CUBAs leasehold rights. Such representation induced the
said Bureau to terminate CUBAs leasehold rights and to approve the Deed of Conditional Sale in favor of
CUBA. And considering that by reason of her unlawful ejectment by DBP, CUBA suffered moral shock,
degradation, social humiliation, and serious anxieties for which she became sick and had to be hospitalized
the trial court found her entitled to moral and exemplary damages. The trial court also held that CUBA was
entitled to P100,000 attorneys fees in view of the considerable expenses she incurred for lawyers fees and in
view of the finding that she was entitled to exemplary damages.
In its decision of 31 January 1990,

15. Thereafter, defendant Caperal was awarded Fishpond Lease Agreement No. 2083-A on
December 28, 1984 by the Ministry of Agriculture and Food.
Defendant Caperal admitted only the facts stated in paragraphs 14 and 15 of the pre-trial order.

[3]

Trial was thereafter had on other matters.

The principal issue presented was whether the act of DBP in appropriating to itself CUBAs leasehold
rights over the fishpond in question without foreclosure proceedings was contrary to Article 2088 of the Civil
Code and, therefore, invalid. CUBA insisted on an affirmative resolution. DBP stressed that it merely
exercised its contractual right under the Assignments of Leasehold Rights, which was not a contract of
mortgage. Defendant Caperal sided with DBP.

[4]

the trial court disposed as follows:

WHEREFORE, judgment is hereby rendered in favor of plaintiff:

1. DECLARING null and void and without any legal effect the act of defendant Development Bank of
the Philippines in appropriating for its own interest, without any judicial or extra-judicial
foreclosure, plaintiffs leasehold rights and interest over the fishpond land in question under her
Fishpond Lease Agreement No. 2083 (new);
2. DECLARING the Deed of Conditional Sale dated February 21, 1980 by and between the defendant
Development Bank of the Philippines and plaintiff (Exh. E and Exh. 1) and the acts of notarial
rescission of the Development Bank of the Philippines relative to said sale (Exhs. 16 and 26) as
void and ineffective;

3. DECLARING the Deed of Conditional Sale dated August 16, 1984 by and between
the Development Bank of the Philippines and defendant Agripina Caperal (Exh. F and Exh. 21),
the Fishpond Lease Agreement No. 2083-A dated December 28, 1984 of defendant Agripina
Caperal (Exh. 23) and the Assignment of Leasehold Rights dated February 12, 1985 executed by
defendant Agripina Caperal in favor of the defendant Development Bank of the Philippines (Exh.
24) as void ab initio;

Since their motions for reconsideration were denied, [6] DBP and CUBA filed separate petitions for
review.

4. ORDERING defendant Development Bank of the Philippines and defendant Agripina Caperal, jointly
and severally, to restore to plaintiff the latters leasehold rights and interests and right of
possession over the fishpond land in question, without prejudice to the right of defendant
Development Bank of the Philippines to foreclose the securities given by plaintiff;

Upon the other hand, in her petition (G.R. No. 118367), CUBA contends that the Court of Appeals erred
(1) in not holding that the questioned deed of assignment was a pactum commissorium contrary to Article
2088 of the Civil Code; (b) in holding that the deed of assignment effected a novation of the promissory
notes; (c) in holding that CUBA was estopped from questioning the validity of the deed of assignment when
she agreed to repurchase her leasehold rights under a deed of conditional sale; and (d) in reducing the
amounts of moral damages and attorneys fees, in deleting the award of exemplary damages, and in not
increasing the amount of damages.

5. ORDERING defendant Development Bank of the Philippines to pay to plaintiff the following
amounts:

In its petition (G.R. No. 118342), DBP assails the award of actual and moral damages and attorneys
fees in favor of CUBA.

We agree with CUBA that the assignment of leasehold rights was a mortgage contract.
a) The sum of ONE MILLION SIXTY-SEVEN THOUSAND FIVE HUNDRED PESOS
(P1,067,500.00), as and for actual damages;
b) The sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS as moral damages;

It is undisputed that CUBA obtained from DBP three separate loans totalling P335,000, each of which
was covered by a promissory note. In all of these notes, there was a provision that: In the event of
foreclosure of the mortgage securing this notes, I/We further bind myself/ourselves, jointly and severally, to
pay the deficiency, if any. [7]

c) The sum of FIFTY THOUSAND (P50,000.00) PESOS, as and for exemplary damages;
d) And the sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS, as and for attorneys
fees;
6. And ORDERING defendant Development Bank of the Philippines to reimburse and pay to defendant
Agripina Caperal the sum of ONE MILLION FIVE HUNDRED THIRTY-TWO THOUSAND SIX
HUNDRED TEN PESOS AND SEVENTY-FIVE CENTAVOS (P1,532,610.75) representing the
amounts paid by defendant Agripina Caperal to defendant Development Bank of the Philippines
under their Deed of Conditional Sale.
CUBA and DBP interposed separate appeals from the decision to the Court of Appeals. The former
sought an increase in the amount of damages, while the latter questioned the findings of fact and law of the
lower court.
In its decision [5] of 25 May 1994, the Court of Appeals ruled that (1) the trial court erred in declaring
that the deed of assignment was null and void and that defendant Caperal could not validly acquire the
leasehold rights from DBP; (2) contrary to the claim of DBP, the assignment was not a cession under Article
1255 of the Civil Code because DBP appeared to be the sole creditor to CUBA - cession presupposes plurality
of debts and creditors; (3) the deeds of assignment represented the voluntary act of CUBA in assigning her
property rights in payment of her debts, which amounted to a novation of the promissory notes executed by
CUBA in favor of DBP; (4) CUBA was estopped from questioning the assignment of the leasehold rights, since
she agreed to repurchase the said rights under a deed of conditional sale; and (5) condition no. 12 of the deed
of assignment was an express authority from CUBA for DBP to sell whatever right she had over the
fishpond. It also ruled that CUBA was not entitled to loss of profits for lack of evidence, but agreed with the
trial court as to the actual damages of P1,067,500. It, however, deleted the amount of exemplary damages
and reduced the award of moral damages fromP100,000 to P50,000 and attorneys fees, from P100,000
to P50,000.
The Court of Appeals thus declared as valid the following: (1) the act of DBP in appropriating Cubas
leasehold rights and interest under Fishpond Lease Agreement No. 2083; (2) the deeds of assignment
executed by Cuba in favor of DBP; (3) the deed of conditional sale between CUBA and DBP; and (4) the deed
of conditional sale between DBP and Caperal, the Fishpond Lease Agreement in favor of Caperal, and the
assignment of leasehold rights executed by Caperal in favor of DBP. It then ordered DBP to turn over
possession of the property to Caperal as lawful holder of the leasehold rights and to pay CUBA the following
amounts: (a) P1,067,500 as actual damages; P50,000 as moral damages; and P50,000 as attorneys fees.

Simultaneous with the execution of the notes was the execution of Assignments of Leasehold
Rights[8] where CUBA assigned her leasehold rights and interest on a 44-hectare fishpond, together with the
improvements thereon. As pointed out by CUBA, the deeds of assignment constantly referred to the assignor
(CUBA) as borrower; the assigned rights, as mortgaged properties; and the instrument itself, as mortgage
contract. Moreover, under condition no. 22 of the deed, it was provided that failure to comply with the terms
and condition of any of the loans shall cause all other loans to become due and demandable and all
mortgages shall be foreclosed. And, condition no. 33 provided that if foreclosure is actually accomplished,
the usual 10% attorneys fees and 10% liquidated damages of the total obligation shall be imposed. There is,
therefore, no shred of doubt that a mortgage was intended.
Besides, in their stipulation of facts the parties admitted that the assignment was by way of security for
the payment of the loans; thus:
3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of Assignment of her
Leasehold Rights.
In Peoples Bank & Trust Co. vs. Odom,[9] this Court had the occasion to rule that an assignment to
guarantee an obligation is in effect a mortgage.
We find no merit in DBPs contention that the assignment novated the promissory notes in that the
obligation to pay a sum of money the loans (under the promissory notes) was substituted by the assignment of
the rights over the fishpond (under the deed of assignment). As correctly pointed out by CUBA, the said
assignment merely complemented or supplemented the notes; both could stand together. The former was only
an accessory to the latter. Contrary to DBPs submission, the obligation to pay a sum of money remained, and
the assignment merely served as security for the loans covered by the promissory notes. Significantly, both
the deeds of assignment and the promissory notes were executed on the same dates the loans were
granted. Also, the last paragraph of the assignment stated: The assignor further reiterates and states all
terms, covenants, and conditions stipulated in the promissory note or notes covering the proceeds of this loan,
making said promissory note or notes, to all intent and purposes, an integral part hereof.
Neither did the assignment amount to payment by cession under Article 1255 of the Civil Code for the
plain and simple reason that there was only one creditor, the DBP. Article 1255 contemplates the existence of
two or more creditors and involves the assignment of all the debtors property.

Nor did the assignment constitute dation in payment under Article 1245 of the civil Code, which reads:
Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall be
governed by the law on sales. It bears stressing that the assignment, being in its essence a mortgage, was
but a security and not a satisfaction of indebtedness. [10]
We do not, however, buy CUBAs argument that condition no. 12 of the deed of assignment
constitutedpactum commissorium. Said condition reads:
12. That effective upon the breach of any condition of this assignment, the Assignor hereby appoints the
Assignee his Attorney-in-fact with full power and authority to take actual possession of the property abovedescribed, together with all improvements thereon, subject to the approval of the Secretary of Agriculture and
Natural Resources, to lease the same or any portion thereof and collect rentals, to make repairs or
improvements thereon and pay the same, to sell or otherwise dispose of whatever rights the Assignor has or
might have over said property and/or its improvements and perform any other act which the Assignee may
deem convenient to protect its interest. All expenses advanced by the Assignee in connection with purpose
above indicated which shall bear the same rate of interest aforementioned are also guaranteed by this
Assignment. Any amount received from rents, administration, sale or disposal of said property may be
supplied by the Assignee to the payment of repairs, improvements, taxes, assessments and other incidental
expenses and obligations and the balance, if any, to the payment of interest and then on the capital of the
indebtedness secured hereby. If after disposal or sale of said property and upon application of total amounts
received there shall remain a deficiency, said Assignor hereby binds himself to pay the same to the Assignee
upon demand, together with all interest thereon until fully paid. The power herein granted shall not be revoked
as long as the Assignor is indebted to the Assignee and all acts that may be executed by the Assignee by
virtue of said power are hereby ratified.
The elements of pactum commissorium are as follows: (1) there should be a property mortgaged by
way of security for the payment of the principal obligation, and (2) there should be a stipulation for automatic
appropriation by the creditor of the thing mortgaged in case of non-payment of the principal obligation within
the stipulated period.[11]
Condition no. 12 did not provide that the ownership over the leasehold rights would automatically pass
to DBP upon CUBAs failure to pay the loan on time. It merely provided for the appointment of DBP as
attorney-in-fact with authority, among other things, to sell or otherwise dispose of the said real rights, in case
of default by CUBA, and to apply the proceeds to the payment of the loan. This provision is a standard
condition in mortgage contracts and is in conformity with Article 2087 of the Civil Code, which authorizes the
mortgagee to foreclose the mortgage and alienate the mortgaged property for the payment of the principal
obligation.
DBP, however, exceeded the authority vested by condition no. 12 of the deed of assignment. As
admitted by it during the pre-trial, it had [w]ithout foreclosure proceedings, whether judicial or extrajudicial,
appropriated the [l]easehold [r]ights of plaintiff Lydia Cuba over the fishpond in question. Its contention that it
limited itself to mere administration by posting caretakers is further belied by the deed of conditional sale it
executed in favor of CUBA. The deed stated:
WHEREAS, the Vendor [DBP] by virtue of a deed of assignment executed in its favor by the herein vendees
[Cuba spouses] the former acquired all the rights and interest of the latter over the above-described property;

The title to the real estate property [sic] and all improvements thereon shall remain in the name of the
Vendor until after the purchase price, advances and interest shall have been fully paid. (Emphasis supplied).
It is obvious from the above-quoted paragraphs that DBP had appropriated and taken ownership of
CUBAs leasehold rights merely on the strength of the deed of assignment.

DBP cannot take refuge in condition no. 12 of the deed of assignment to justify its act of appropriating
the leasehold rights. As stated earlier, condition no. 12 did not provide that CUBAs default would operate to
vest in DBP ownership of the said rights. Besides, an assignment to guarantee an obligation, as in the
present case, is virtually a mortgage and not an absolute conveyance of title which confers ownership on the
assignee.[12]
At any rate, DBPs act of appropriating CUBAs leasehold rights was violative of Article 2088 of the Civil
Code, which forbids a creditor from appropriating, or disposing of, the thing given as security for the payment
of a debt.
The fact that CUBA offered and agreed to repurchase her leasehold rights from DBP did not estop her
from questioning DBPs act of appropriation. Estoppel is unavailing in this case. As held by this Court in
some cases,[13] estoppel cannot give validity to an act that is prohibited by law or against public policy. Hence,
the appropriation of the leasehold rights, being contrary to Article 2088 of the Civil Code and to public policy,
cannot be deemed validated by estoppel.
Instead of taking ownership of the questioned real rights upon default by CUBA, DBP should have
foreclosed the mortgage, as has been stipulated in condition no. 22 of the deed of assignment. But, as
admitted by DBP, there was no such foreclosure. Yet, in its letter dated 26 October 1979, addressed to the
Minister of Agriculture and Natural Resources and coursed through the Director of the Bureau of Fisheries and
Aquatic Resources, DBP declared that it had foreclosed the mortgage and enforced the assignment of
leasehold rights on March 21, 1979 for failure of said spouses [Cuba spouces] to pay their loan
amortizations.[14] This only goes to show that DBP was aware of the necessity of foreclosure proceedings.
In view of the false representation of DBP that it had already foreclosed the mortgage, the Bureau of
Fisheries cancelled CUBAs original lease permit, approved the deed of conditional sale, and issued a new
permit in favor of CUBA. Said acts which were predicated on such false representation, as well as the
subsequent acts emanating from DBPs appropriation of the leasehold rights, should therefore be set
aside. To validate these acts would open the floodgates to circumvention of Article 2088 of the Civil Code.
Even in cases where foreclosure proceedings were had, this Court had not hesitated to nullify the
consequent auction sale for failure to comply with the requirements laid down by law, such as Act No. 3135, as
amended.[15] With more reason that the sale of property given as security for the payment of a debt be set
aside if there was no prior foreclosure proceeding.
Hence, DBP should render an accounting of the income derived from the operation of the fishpond in
question and apply the said income in accordance with condition no. 12 of the deed of assignment which
provided: Any amount received from rents, administration, may be applied to the payment of repairs,
improvements, taxes, assessment, and other incidental expenses and obligations and the balance, if any, to
the payment of interest and then on the capital of the indebtedness.
We shall now take up the issue of damages.
Article 2199 provides:
Except as provided by law or by stipulation, one is entitled to an adequate compensation only for such
pecuniary loss suffered by him as he has duly proved. Such compensation is referred to as actual or
compensatory damages.
Actual or compensatory damages cannot be presumed, but must be proved with reasonable degree of
certainty.[16] A court cannot rely on speculations, conjectures, or guesswork as to the fact and amount of
damages, but must depend upon competent proof that they have been suffered by the injured party and on the
best obtainable evidence of the actual amount thereof. [17] It must point out specific facts which could afford a
basis for measuring whatever compensatory or actual damages are borne. [18]

In the present case, the trial court awarded in favor of CUBA P1,067,500 as actual damages consisting
of P550,000 which represented the value of the alleged lost articles of CUBA and P517,500 which represented
the value of the 230,000 pieces of bangus allegedly stocked in 1979 when DBP first ejected CUBA from the
fishpond and the adjoining house. This award was affirmed by the Court of Appeals.
We find that the alleged loss of personal belongings and equipment was not proved by clear
evidence. Other than the testimony of CUBA and her caretaker, there was no proof as to the existence of
those items before DBP took over the fishpond in question. As pointed out by DBP, there was not inventory
of the alleged lost items before the loss which is normal in a project which sometimes, if not most often, is left
to the care of other persons. Neither was a single receipt or record of acquisition presented.
Curiously, in her complaint dated 17 May 1985, CUBA included losses of property as among the
damages resulting from DBPs take-over of the fishpond. Yet, it was only in September 1985 when her son
and a caretaker went to the fishpond and the adjoining house that she came to know of the alleged loss of
several articles. Such claim for losses of property, having been made before knowledge of the alleged actual
loss, was therefore speculative. The alleged loss could have been a mere afterthought or subterfuge to justify
her claim for actual damages.
With regard to the award of P517,000 representing the value of the alleged 230,000 pieces of bangus
which died when DBP took possession of the fishpond in March 1979, the same was not called for. Such loss
was not duly proved; besides, the claim therefor was delayed unreasonably. From 1979 until after the filing of
her complaint in court in May 1985, CUBA did not bring to the attention of DBP the alleged loss. In fact, in her
letter dated 24 October 1979,[19] she declared:
1. That from February to May 1978, I was then seriously ill in Manila and within the same period I neglected
the management and supervision of the cultivation and harvest of the produce of the aforesaid fishpond
thereby resulting to the irreparable loss in the produce of the same in the amount of aboutP500,000.00 to my
great damage and prejudice due to fraudulent acts of some of my fishpond workers.
Nowhere in the said letter, which was written seven months after DBP took possession of the fishpond,
did CUBA intimate that upon DBPs take-over there was a total of 230,000 pieces of bangus, but all of which
died because of DBPs representatives prevented her men from feeding the fish.

G.R. No. L-50449 January 30, 1982

FILINVEST CREDIT CORPORATION, plaintiff-appellee,
vs.
PHILIPPINE ACETYLENE, CO., INC., defendant-appellant.

DE CASTRO, J.:
This case is certified to Us by the Court of Appeals in its Resolution 1 dated March 22, 1979 on the ground that
it involves purely questions of law, as raised in the appeal of the decision of the Court of First Instance of
Manila, Branch XII in Civil Case No. 91932, the dispositive portion of which reads as follows:
In view of the foregoing consideration, the court hereby renders judgment l) directing defendant to pay plaintiff:
a) the sum of P22,227.81 which is the outstanding unpaid
obligation of the defendant under the assigned credit, with 12
%interest from the date of the firing of the complaint in this suit
until the same is fully paid;

The award of actual damages should, therefore, be struck down for lack of sufficient basis.
In view, however, of DBPs act of appropriating CUBAs leasehold rights which was contrary to law and
public policy, as well as its false representation to the then Ministry of Agriculture and Natural Resources that it
had foreclosed the mortgage, an award of moral damages in the amount of P50,000 is in order conformably
with Article 2219(10), in relation to Article 21, of the Civil Code. Exemplary or corrective damages in the
amount of P25,000 should likewise be awarded by way of example or correction for the public good. [20] There
being an award of exemplary damages, attorneys fees are also recoverable. [21]
WHEREFORE, the 25 May 1994 Decision of the Court of Appeals in CA-G.R. CV No. 26535 is hereby
REVERSED, except as to the award of P50,000 as moral damages, which is hereby sustained. The 31
January 1990 Decision of the Regional Trial Court of Pangasinan, Branch 54, in Civil Case No. A-1574 is
MODIFIED setting aside the finding that condition no. 12 of the deed of assignment constituted pactum
commissorium and the award of actual damages; and by reducing the amounts of moral damages
fromP100,000 to P50,000; the exemplary damages, from P50,000 to P25,000; and the attorneys fees,
fromP100,000 to P20,000. The Development Bank of the Philippines is hereby ordered to render an
accounting of the income derived from the operation of the fishpond in question.
Let this case be REMANDED to the trial court for the reception of the income statement of DBP, as well
as the statement of the account of Lydia P. Cuba, and for the determination of each partys financial obligation
to one another.
SO ORDERED.

b) the sum equivalent to l5% of P22,227.81 as and for

attorney's fees; and
2) directing plaintiff to deliver to, and defendant to accept, the motor vehicle, subject of
the chattel may have been changed by the result of ordinary wear and tear of the
vehicle.
Defendant to pay the cost of suit.
SO ORDERED.
The facts, as found in the decision 2 subject of the instant appeal, are undisputed.
On October 30, 1971, the Philippine Acetylene Co., Inc., defendant-appellant herein, purchased from one
Alexander Lim, as evidenced by a Deed of Sale marked as Exhibit G, a motor vehicle described as Chevorlet,
1969 model with Serial No. 136699Z303652 for P55,247.80 with a down payment of P20,000.00 and the
balance of P35,247.80 payable, under the terms and conditions of the promissory note (Exh. B), at a monthly
installment of P1,036.70 for thirty-four (34) months, due and payable on the first day of each month starting

December 1971 through and inclusive September 1, 1974 with 12 % interest per annum on each unpaid
installment, and attorney's fees in the amount equivalent to 25% of the total of the outstanding unpaid amount.

Article 1484. Civil Code. - In a contract of sale of personal property the price of which is
payable in installments, the vendor may exercise any of the following remedies:

As security for the payment of said promissory note, the appellant executed a chattel mortgage (Exh. C) over
the same motor vehicle in favor of said Alexander Lim. Subsequently, on November 2, 1971. Alexander Lim
assigned to the Filinvest Finance Corporation all his rights, title, and interests in the promissory note and
chattel mortgage by virtue of a Deed of Assignment (Exh. D).

1) Exact fulfillment of the obligation, should the vendee fail to pay;

Thereafter, the Filinvest Finance Corporation, as a consequence of its merger with the Credit and
Development Corporation assigned to the new corporation, the herein plaintiff-appellee Filinvest Credit
Corporation, all its rights, title, and interests on the aforesaid promissory note and chattel mortgage (Exh. A)
which, in effect, the payment of the unpaid balance owed by defendant-appellant to Alexander Lim was
financed by plaintiff-appellee such that Lim became fully paid.

3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should
the vendee's failure to pay cover two or more installments. In this case, he shall have
no further action against the purchaser to recover any unpaid balance of the price. Any
agreement to the contrary shall be void.

Appellant failed to comply with the terms and conditions set forth in the promissory note and chattel mortgage
since it had defaulted in the payment of nine successive installments. Appellee then sent a demand letter
(Exh. 1) whereby its counsel demanded "that you (appellant) remit the aforesaid amount in full in addition to
stipulated interest and charges or return the mortgaged property to my client at its office at 2133 Taft Avenue,
Malate, Manila within five (5) days from date of this letter during office hours. " Replying thereto, appellant, thru
its assistant general- manager, wrote back (Exh. 2) advising appellee of its decision to "return the mortgaged
property, which return shall be in full satisfaction of its indebtedness pursuant to Article 1484 of the New Civil
Code." Accordingly, the mortgaged vehicle was returned to the appellee together with the document "Voluntary
Surrender with Special Power of Attorney To Sell" 3 executed by appellant on March 12, 1973 and confirmed to
by appellee's vice-president.
On April 4, 1973, appellee wrote a letter (Exh. H) to appellant informing the latter that appellee cannot sell the
motor vehicle as there were unpaid taxes on the said vehicle in the sum of P70,122.00. On the last portion of
the said letter, appellee requested the appellant to update its account by paying the installments in arrears and
accruing interest in the amount of P4,232.21 on or before April 9, 1973.

2) Cancel the sale, should the vendee's failure to pay cover two or more installments;

In support of the above contention, appellant maintains that when it opted to return, as in fact it did return, the
mortgaged motor vehicle to the appellee, said return necessarily had the effect of extinguishing appellant's
obligation for the unpaid price to the appellee, construing the return to and acceptance by the appellee of the
mortgaged motor vehicle as a mode of payment, specifically, dation in payment or dacion en pago which
according to appellant, virtually made appellee the owner of the mortgaged motor vehicle by the mere delivery
thereof, citing Articles 1232, 1245, and 1497 of the Civil Code, to wit:
Article 1232. Payment means not only the delivery of money but also the performance,
in any manner, of an obligation.
xxx xxx xxx
Article 1245. Dation in payment, whereby property is alienated to the creditor in
satisfaction of a debt in money, shall be governed by the law of sales.
xxx xxx xxx

On May 8, 1973, appellee, in a letter (Exh. 1), offered to deliver back the motor vehicle to the appellant but the
latter refused to accept it, so appellee instituted an action for collection of a sum of money with damages in the
Court of First Instance of Manila on September 14, 1973.
In its answer, appellant, while admitting the material allegations of the appellee's complaint, avers that
appellee has no cause of action against it since its obligation towards the appellee was extinguished when in
compliance with the appellee's demand letter, it returned the mortgaged property to the appellee, and that
assuming arguendo that the return of the property did not extinguish its obligation, it was nonetheless justified
in refusing payment since the appellee is not entitled to recover the same due to the breach of warranty
committed by the original vendor-assignor Alexander Lim.
After the case was submitted for decision, the Court of First Instance of Manila, Branch XII rendered its
decision dated February 25, 1974 which is the subject of the instant appeal in this Court.
Appellant's five assignment of errors may be reduced to, or said to revolve around two issues: first, whether or
not the return of the mortgaged motor vehicle to the appellee by virtue of its voluntary surrender by the
appellant totally extinguished and/or cancelled its obligation to the appellee; second, whether or not the
warranty for the unpaid taxes on the mortgaged motor vehicle may be properly raised and imputed to or
passed over to the appellee.
Consistent with its stand in the court a quo, appellant now reiterates its main contention that appellee, after
giving appellant an option either to remit payment in full plus stipulated interests and charges or return the
mortgaged motor vehicle, had elected the alternative remedy of exacting fulfillment of the obligation, thus,
precluding the exercise of any other remedy provided for under Article 1484 of the Civil Code of the Philippines
which reads:

Article 1497. The thing sold shall be understood as delivered, when it is placed in the
control and possession of the vendee.
Passing at once on the relevant issue raised in this appeal, We find appellant's contention devoid of
persuasive force. The mere return of the mortgaged motor vehicle by the mortgagor, the herein appellant, to
the mortgagee, the herein appellee, does not constitute dation in payment or dacion en pago in the absence,
express or implied of the true intention of the parties. Dacion en pago, according to Manresa, is the
transmission of the ownership of a thing by the debtor to the creditor as an accepted equivalent of the
performance of obligation. 4 In dacion en pago, as a special mode of payment, the debtor offers another thing
to the creditor who accepts it as equivalent of payment of an outstanding debt. The undertaking really partakes
in one sense of the nature of sale, that is, the creditor is really buying the thing or property of the debtor,
payment for which is to be charged against the debtor's debt. As such, the essential elements of a contract of
sale, namely, consent, object certain, and cause or consideration must be present. In its modern concept,
what actually takes place in dacion en pago is an objective novation of the obligation where the thing offered
as an accepted equivalent of the performance of an obligation is considered as the object of the contract of
sale, while the debt is considered as the purchase price. 5 In any case, common consent is an essential
prerequisite, be it sale or innovation to have the effect of totally extinguishing the debt or obligation.
The evidence on the record fails to show that the mortgagee, the herein appellee, consented, or at least
intended, that the mere delivery to, and acceptance by him, of the mortgaged motor vehicle be construed as
actual payment, more specifically dation in payment or dacion en pago. The fact that the mortgaged motor
vehicle was delivered to him does not necessarily mean that ownership thereof, as juridically contemplated by
dacion en pago, was transferred from appellant to appellee. In the absence of clear consent of appellee to the
proferred special mode of payment, there can be no transfer of ownership of the mortgaged motor vehicle
from appellant to appellee. If at all, only transfer of possession of the mortgaged motor vehicle took place, for it
is quite possible that appellee, as mortgagee, merely wanted to secure possession to forestall the loss,

destruction, fraudulent transfer of the vehicle to third persons, or its being rendered valueless if left in the
hands of the appellant.
A more solid basis of the true intention of the parties is furnished by the document executed by appellant
captioned "Voluntary Surrender with Special Power of Attorney To Sell" dated March 12, 1973, attached as
Annex "C" of the appellant's answer to the complaint. An examination of the language of the document reveals
that the possession of the mortgaged motor vehicle was voluntarily surrendered by the appellant to the
appellee authorizing the latter to look for a buyer and sell the vehicle in behalf of the appellant who retains
ownership thereof, and to apply the proceeds of the sale to the mortgage indebtedness, with the undertaking
of the appellant to pay the difference, if any, between the selling price and the mortgage obligation. With the
stipulated conditions as stated, the appellee, in essence was constituted as a mere agent to sell the motor
vehicle which was delivered to the appellee, not as its property, for if it were, he would have full power of
disposition of the property, not only to sell it as is the limited authority given him in the special power of
attorney. Had appellee intended to completely release appellant of its mortgage obligation, there would be no
necessity of executing the document captioned "Voluntary Surrender with Special Power of Attorney To Sell."
Nowhere in the said document can We find that the mere surrender of the mortgaged motor vehicle to the
appellee extinguished appellant's obligation for the unpaid price.
Appellant would also argue that by accepting the delivery of the mortgaged motor vehicle, appellee is
estopped from demanding payment of the unpaid obligation. Estoppel would not he since, as clearly set forth
above, appellee never accepted the mortgaged motor vehicle in full satisfaction of the mortgaged debt.
Under the law, the delivery of possession of the mortgaged property to the mortgagee, the herein appellee,
can only operate to extinguish appellant's liability if the appellee had actually caused the foreclosure sale of
the mortgaged property when it recovered possession thereof. 6 It is worth noting that it is the fact of
foreclosure and actual sale of the mortgaged chattel that bar the recovery by the vendor of any balance of the
purchaser's outstanding obligation not satisfied by the sale. 7 As held by this Court, if the vendor desisted, on
his own initiative, from consummating the auction sale, such desistance was a timely disavowal of the remedy
of foreclosure, and the vendor can still sue for specific performance. 8 This is exactly what happened in the
instant case.
On the second issue, there is no dispute that there is an unpaid taxes of P70,122.00 due on the mortgaged
motor vehicle which, according to appellant, liability for the breach of warranty under the Deed of Sale is
shifted to the appellee who merely stepped into the shoes of the assignor Alexander Lim by virtue of the Deed
of Assignment in favor of appellee. The Deed of Sale between Alexander Lim and appellant and the Deed of
Assignment between Alexander Lim and appellee are very clear on this point. There is a specific provision in
the Deed of Sale that the seller Alexander Lim warrants the sale of the motor vehicle to the buyer, the herein
appellant, to be free from liens and encumbrances. When appellee accepted the assignment of credit from the
seller Alexander Lim, there is a specific agreement that Lim continued to be bound by the warranties he had
given to the buyer, the herein appellant, and that if it appears subsequently that "there are such counterclaims,
offsets or defenses that may be interposed by the debtor at the time of the assignment, such counterclaims,
offsets or defenses shall not prejudice the FILINVEST FINANCE CORPORATION and I (Alexander Lim)
further warrant and hold the said corporation free and harmless from any such claims, offsets, or defenses that
may be availed of." 9
It must be noted that the unpaid taxes on the motor vehicle is a burden on the property. Since as earlier
shown, the ownership of the mortgaged property never left the mortgagor, the herein appellant, the burden of
the unpaid taxes should be home by him, who, in any case, may not be said to be without remedy under the
law, but definitely not against appellee to whom were transferred only rights, title and interest, as such is the
essence of assignment of credit. 10
WHEREFORE, the judgment appealed from is hereby affirmed in toto with costs against defendant-appellant.
SO ORDERED.
Barredo (Chairman), Aquino, Concepcion, Jr., Ericta and Escolin, JJ., concur.

Separate Opinions

ABAD SANTOS, J., concurring:

I concur in the result.
When the appellant returned the vehicle and executed the document entitled, "Voluntary Surrender with
Special Power of Attorney to Sell" said acts did not result in the fulfillment of its obligation under Art. 1884(l) of
the Civil Code. On the contrary the document indicated that the appellee was to foreclose the chattel
mortgage. The surrender of the car to the appellee was a mere preparatory act for its sale in a foreclosure of
the chattel mortgage.
After the appellee discovered, without negligence on its part, that foreclosure of the chattel mortgage was
impractical, it had the right which it exercised to abandon the chattel mortgage and demand fulfillment of the
obligation.
G.R. No. L-52733 July 23, 1985
PILAR DE GUZMAN, ROLANDO GESTUVO, and MINERVA GESTUVO, petitioners,
vs.
THE HON. COURT OF APPEALS, THE HON. JUDGE PEDRO JL. BAUTISTA, Presiding Judge of the
Court of First Instance of Rizal, Branch III, Pasay City, and LEONIDA P. SINGH, respondents.
Barredo, Reyno & Tomacruz Law Office for petitioners.
Adriano T Bruno for private respondent.

CONCEPCION, JR., J.:

Petition for the reversal of the decision of the respondent appeal appellate court which dismissed the petition
to annul and set aside the orders of the Court of First Instance of Rizal, Pasay City Branch, dismissing the
petitioners' appeal in Civil Case No. 5247- P and to restrain the respondents from enforcing the same. Acting
upon the petition, the Court issued a temporary restraining order on May 16, 1980, restraining the respondents
from enforcing and/or carrying out the decision in question. 1
The facts of record show that on February 17, 1971, the petitioners, as SELLER, and the private respondent,
as BUYER, executed a Contract to Sell covering two (2) parcels of land owned by the petitioners located at
Cementina Street, Pasay City and covered by TCT Nos. 11326 and 11327 of the Register of Deeds of Pasay
City. It was stipulated therein that the private respondent should pay the balance of the purchase price of
P133,640.00 on or before February 17, 1975. Two days before the said date, or on February 15, 1975, the
private respondent asked the petitioners to furnish her with a statement of account of the balance due; copies
of the certificates of title covering the two parcels of land subject of the sale; and a copy of the power of
attorney executed by Rolando Gestuvo in favor of Pilar de Guzman. But, the petitioners denied the request. As
a result, the private respondent filed a complaint for specific performance with damages against the petitioners
before the Court of First Instance of Rizal. The case, however, was dismissed for failure to prosecute. But, the

private respondent subsequently refiled the case. The case was docketed in court as Civil Case No. 5247-P. In
her complaint, the private respondent charged that the petitioners, by refusing to furnish her with copies of the
documents requested, deliberately intended not to comply with their obligations under the contract to sell, as a
result of which the said petitioners committed a breach of contract, and had also acted unfairly and in manifest
bad faith for which they should be held liable for damages. Answering the complaint, the petitioners claimed
that the complaint failed to state a cause of action; that the balance due was already pre-determined in the
contract; that the petitioners have no obligation to furnish the private respondent with copies of the documents
requested; and that the private respondent's failure to pay the balance of the purchase price on the date
specified had caused the contract to expire and become ineffective without necessity of notice or of any
judicial declaration to that effect.
On November 29, 1977, the trial court rendered a decision approving the compromise agreement submitted by
the parties wherein they agreed on the following:
1. That, not later than December 18, 1977, plaintiff will pay defendants the total amount of TWO HUNDRED
FORTY THOUSAND (P240,000.00) PESOS, Philippine Currency and in case of failure to do so, she shall
have only until January 27, 1978 within which to pay the total amount of TWO HUNDRED FIFTY THOUSAND
(P250,000.00) PESOS, Philippine Currency, which shall be treated as complete and final payment of the
consideration in the contract to sell, dated February 17, 1971. (Annex "A", Complaint);
2. That, immediately upon receipt of either amounts within the periods so contemplated, defendants undertake
to immediately execute the necessary legal instruments to transfer to plaintiff the title to the parcels of land
subject of the above-mentioned Contract to Sell, free from liens and encumbrances but with the understanding
that all the expenses necessary for the issuance of a new Transfer Certificate of Title in favor of plaintiff or her
assigns including documentary stamp taxes, science stamp taxes and legal research fund fees shall be for her
sole and exclusive account;
3. That defendants would temporarily desist from enforcing their right or possession over the properties
involved herein until January 27, 1978, but this shall not be construed as an abandonment or waiver of its
causes of action as embodied in her Complaint in Civil Case No. 12446 entitled "Pilar de Guzman vs. Wilfredo
C. Tan, etc." for Ejectment pending before Branch IV of the Pasay City Court;
4. Should plaintiff fail to pay either of the amounts abovestated within the period herein stipulated, the
aforesaid Contract to Sell dated February 17, 1971 shall be deemed rescinded and defendants would
immediately enforce its right of possession of the premises and plaintiff agrees to voluntarily surrender and
vacate the same without further notice or demand;
5. That payment of either amounts above-stated shall take place before the Honorable Judge Pedro Jl.
Bautista in the courtroom of the Court of First Instance of Rizal, Branch III in Pasay City at 10:00 a.m. Friday,
January 27, 1978 unless payment has been earlier made, in which case plaintiff shall produce receipt of the
same at the same time and place, otherwise defendants shag immediately be entitled to a Writ of Execution
on its right of possession over the premises;
6. Lastly, that both parties waive and abandon, by reason hereof, their respective claims and counterclaims as
embodied in the Complaint and Answer. 2
On January 28, 1978, the petitioners filed a motion for the issuance of a writ of execution, claiming that the
private respondent had failed to abide by the terms of the compromise agreement and pay the amount
specified in their compromise agreement within the period stipulated. 3 The private respondent opposed the
motion, saying that she had complied with the terms and conditions of the compromise agreement and asked
the court to direct the petitioners to comply with the court's decision and execute the necessary documents to
effect the transfer of ownership of the two parcels of land in question to her. 4
Acting upon the motions, the respondent judge issued an order on March 27, 1978, denying the petitioners'
motion for execution, and instead, directed the petitioners to immediately execute the necessary documents,
transferring to private respondent the title to the properties. He also ordered the Clerk of Court to release to

the petitioners the amount of P250,000.00, which had been deposited by the private respondent, upon proper
receipt therefor. 5
The petitioners filed a motion for the reconsideration of the order, 6 but the trial court denied the same in an
order dated July 24, 1978. 7
Whereupon, the petitioners filed a notice of appeal, appeal bond, 8 and a motion for extension of time (20
days) within which to submit a record on appeal. 9 On August 21, 1978, they filed a second motion for
extension of time (5 days) within which to file their record on appeal, 10 and on August 26, 1978, they
submitted their record on appeal.
On September 30, 1978, the private respondent filed a motion to dismiss the appeal on the grounds that: (1)
the orders appealed from are inappealable; and (2) that the record on appeal is defective as it does not
contain the material data showing that the appeal was perfected on time. 11 The trial court found merit in the
motion and dismissed the appeal of the petitioners. 12 As a result, the petitioners filed a petition for certiorari
with the respondent Court of Appeals to nullify the order of the trial court which dismissed their appeal. On
February 5, 1980, the said appellate court rendered judgment sustaining the decision of the trial
court. 13 Hence, the present recourse.
Passing upon the propriety of the petitioners' appeal, the rule is that a judgment rendered in accordance with a
compromise agreement is not appealable. It is immediately executory unless a motion is filed to set aside the
compromise agreement on the ground of fraud, mistake or duress, in which case an appeal may be taken from
the order denying the motion. 14 It is also a settled rule that an order of execution of judgment is not
appealable. However, where such order of execution in the opinion of the defeated party varies the terms of
the judgment and does not conform to the essence thereof, or when the terms of the judgment are not clear
and there is room for interpretation and the interpretation given by the trial court as contained in its order of
execution is wrong in the opinion of the defeated party, the latter should be allowed to appeal from said order
so that the Appellate Tribunal may pass upon the legality and correctness of the said order. 15
In the instant case, the legality or enforceability of the compromise agreement or the decision of the trial court
approving the compromise agreement is not disputed. The parties both want the said compromise agreement
to be implemented. The petitioners question the ruling of the trial court that the private respondent had
complied with the terms of the compromise agreement. The issue raised, albeit one of fact, is appealable.
As to the sufficiency of the record on appeal filed by the petitioners, the rule is that the submission of a record
on appeal, for purposes of appeal, is no longer required as the original record is elevated to the appellate
court, except in appeals in special proceedings in accordance with Rule 109 of the Rules of Court and other
cases wherein multiple appeals are allowed. 16 Since the appeal of the petitioners is not one of those
mentioned above, the late filing or insufficiency of the record on appeal filed by the petitioners is no longer a
ground for dismissing their appeal.
On the merits of the case, We agree with the findings of the trial court that the private respondent had
substantially complied with the terms and conditions of the compromise agreement. Her failure to deliver to the
petitioners the full amount on January 27, 1978 was not her fault. The blame lies with the petitioners. The
record shows that the private respondent went to the sala of Judge Bautista on the appointed day to make
payment, as agreed upon in their compromise agreement. But, the petitioners were not there to receive it.
Only the petitioners' counsel appeared later, but, he informed the private respondent that he had no authority
to receive and accept payment. Instead, he invited the private respondent and her companions to the house of
the petitioners to effect payment. But, the petitioners were not there either. They were informed that the
petitioner Pilar de Guzman would arrive late in the afternoon, possibly at around 4:00 o'clock. The private
respondent was assured, however, that she would be informed as soon as the petitioners arrived. The private
respondent, in her eagerness to settle her obligation, consented and waited for the call which did not come
and unwittingly let the period lapse. The next day, January 28, 1978, the private respondent went to the office
of the Clerk of the Court of First Instance of Rizal, Pasay City Branch, to deposit the balance of the purchase
price. But, it being a Saturday, the cashier was not there to receive it. So, on the next working day, Monday,
January 30, 1978, the private respondent deposited the amount of P30,000.00 with the cashier of the Office of
the Clerk of the Court of First Instance of Rizal, Pasay City Branch, to complete the payment of the purchase
price of P250,000.00. Since the deposit of the balance of the purchase price was made in good faith and that

the failure of the private respondent to deposit the purchase price on the date specified was due to the
petitioners who also make no claim that they had sustained damages because of the two days delay, there
was substantial compliance with the terms and conditions of the compromise agreement.

The appeal should have been given due course. It was filed on time. The technicality that the petitioners did
not comply with the "material data" rule may be disregarded. That rule has been relaxed in later cases. See
Berkenkotter vs. Court of Appeals, L-36629, September 28, 1973, 53 SCRA 228 and later cases.

WHEREFORE, the petition should be, as it is hereby DISMISSED. The temporary restraining order heretofore
issued is LIFTED and SET ASIDE. With costs against the petitioners.

Instead of ordering the Pasay court to elevate the record of the case to the Intermediate Appellate Court, we
should now resolve the case or the merits of the appeal.

SO ORDERED.

It is indubitable that Singh violated the compromise agreement. She lost the right to purchase the two lots. The
petitioners are entitled to possess them.

Makasiar (Chairman), Abad Santos, Escolin and Cuevas, JJ., concur.

G.R. No. L-35381 October 31, 1972
TLG INTERNATIONAL CONTINENTAL ENTERPRISING, INC., petitioner,
vs.
HON. DELFIN B. FLORES, Presiding Judge, Court of First Instance of Rizal, Branch XI, respondent.
Separate Opinions

L. V. Simbulan, Tiongson and Associates for petitioner.

Respondent Judge in his own behalf.

AQUINO, J., dissenting:

I dissent. On November 29, 1977 the trial court rendered a decision approving a compromise between Pilar de
Guzman, Rolando Gestuvo and Minerva Gestuvo, as sellers, and Leonida P. Singh, buyer. Singh agreed to
pay de Guzman and the Gestuvos, now petitioners, P250,000 for two lots located at Cementina Street, Pasay
City at ten o'clock in the morning of January 27, 1978 in the courtroom of Judge Bautista of Pasay City. In
case no payment was made, then the petitioners would be immediately entitled to a writ of execution for the
possession of the said lots.
Singh did not pay the P250,000. Ben Restrivera, in behalf of Singh, on January 24, 1978 deposited P220,000
with the clerk of court. Restrivera on January 27, 1978 tried to deliver to Antonio G. Barredo, petitioners'
counsel, P5,000 cash and P25,000 in postdated checks, or P30,000 to complete the price of P250,000.
Barredo refused to accept that payment. On January 30, 1978 (3 days after the deadline) Singh deposited with
the clerk of court cash of P30,000.
On that same day, January 30, the petitioners filed a motion for execution. It was opposed by Singh. Judge
Bautista in his order of March 27, 1978 denied the motion and ordered the petitioners to execute the
corresponding deed of sale. He ordered the clerk of court to release the P250,000 to them.
The petitioners filed a motion for reconsideration which the trial court denied in an order dated July 24, 1978, a
copy of which was received by the petitioners on July 31, 1978. The next day, August 1, the petitioners filed a
notice of appeal and an appeal bond and asked for an extension of twenty days within which to file their record
on appeal. They asked for a second extension of five days. The record on appeal was filed on August 26,
1978.
The trial court did not give due course to the appeal. The petitioners filed a petition for mandamus with the
Court of Appeals to compel the trial court to elevate their appeal. The Court of Appeals in its decision dated
February 5, 1980 sustained the trial court. The petitioners appealed to this Court.
The trial court erred in ordering the petitioners to execute the deed of sale. Singh did not comply with the
compromise agreement. She did not pay the P250,000 on January 27, 1978. The petitioners were entitled to a
writ of execution

RESOLUTION

ANTONIO, J.:p
Petition for certiorari to set aside the orders dated June 23, 1972 and July 15, 1972 in Civil Case No. 14880 of
Respondent, Hon. Delfin B. Flores as the Presiding Judge of the Court of First Instance of Rizal, Branch XI,
denying the motion of petitioner to withdraw the sum of P3,750.00 deposited by it, by way of consignation.
This Court after considering the allegations contained and the issues raised in the petition and the
"manifestation" of Respondent admitting the facts therein alleged, resolved to give due course to the petition,
and treat the "manifestation" of Respondent, as his answer. As the issue involved is of minor importance, and
the interest of the parties could be better served by an expeditious resolution thereof ... We dispensed with the
filing of briefs or memoranda and considered the case as submitted for decision.
Respondent in an order dated October 5, 1971, granted petitioner's "Motion To Intervene" and admitted its
"Complaint In Intervention", in Civil Case No. 14880, (Bearcon Trading Co., Inc. vs. Juan Fabella Et Al) of the
Court of First Instance of Rizal, Branch XI. The aforecited case was an action for declaratory relief involving
the rights of Bearcon Trading Co., Inc. as lessee of the premises of the aforesaid defendants. Petitioner
intervened as sub-lessee of Bearcon over the property, and the purpose of its intervention was to protect its
rights as such sub-lessee and to enable it, during pendency of the case, to make a consignation of the
monthly rentals as it was "at a loss as to who is lawfully and rightfully entitled to receive payments of the
monthly" rentals.
As a consequence of the admission of the "Complaint In Intervention", petitioner deposited with the Clerk of
Court of the Court of First Instance of Rizal, the following sums by way of rentals: .
October 27, 1971 P900.00
November 29, 1971 600.00
January 19, 1972 750.00
March 8, 1972 1,500.00

or a total of P3,750.00, which deposits are properly covered by official receipts.

On October 20, 1971, defendants in Civil Case No. 14880, filed with said Court, an "Omnibus Motion" in which
they prayed that the complaint, as well as the Complaint In Intervention, be dismissed on the ground that the
subject matter thereof could be better ventilated in the ejectment case filed by Juan Fabella against Bearcon
Trading Co., Inc. (Civil Case No. 3979) then pending before the municipal court of Mandaluyong Rizal.
The court a quo under date of April 24, 1972 issued an "Omnibus Order", dismissing both the complaint and
the complaint in intervention.
On May 27, 1972, petitioner filed its Motion to withdraw the sums it deposited, as "the order dismissing the ...
case as well as the complaint in intervention without a resolution having been made as to the right of the
plaintiff or the defendants to the rentals deposited by the intervenor, left the intervenor without any recourse
but to apply for authority to withdraw the ... amount ... and turn over the same to the defendants in accordance
with the understanding arrived at between the parties hereto". This was denied by Respondent in its order of
June 23, 1972. The motion for reconsideration of petitioner was likewise denied by Respondent on July 15,
1972.
Hence this petition for certiorari.
The only issue is whether or not Respondent could authorize the withdrawal of the deposits considering that
according to Respondent, the Court "has not ordered the intervenor to make any deposit in connection" with
the case.
There is no question that in cases of consignation the debtor is entitled as a matter of right to withdraw the
deposit made with the court, before the consignation is accepted by the creditor or prior to the judicial approval
of such consignation. This is explicit from the second paragraph of Article 1260 of the new Civil Code which
states that: "Before the creditor has accepted the consignation, or before a judicial declaration that the
consignation has been properly made, the debtor may withdraw the thing or the sum deposited, allowing the
obligation to remain in force".
In the case at bar, the case was dismissed before the amount deposited was either accepted by the creditor or
a declaration made by the Court approving such consignation. Such dismissal rendered the consignation
ineffectual (Bravo v. Barreras, 92 Phil. 679, 681). Under such circumstances it was incumbent upon
Respondent to have allowed the withdrawal by petitioner of the sums of money deposited by it with the Court.
Respondent nevertheless insists that the Court had no authority to authorize its withdrawal since it "has not
ordered intervenor to make" the deposit. This contention ignores the fact that the deposit was made by
petitioner as a consequence of the admission by the Court of its "Complaint In Intervention". It must be noted
that the aforesaid deposit was made with and officially receipted by the Clerk of Court. The deposit was made
pursuant to Article 1258 of the new Civil Code which states that: "Consignation shall be made by depositing
the things due at the disposal of judicial authority, before whom the tender of payment shall be proved, in a
proper case, ...". It was therefore money received by the Clerk of Court pursuant to Section 6 of the Judiciary
Act. (Rep. Act 296 as Amended). From the moment the deposit was made by petitioner, "the money remained
under the control and jurisdiction of the court and the former could not recover it without an express order of
restitution" (Manajero v. Buyson Lampa, 61 Phil. 66, 69). In the light of the aforecited statutory provisions and
jurisprudence We find no justification for Respondent's intransigent posture.
WHEREFORE, the orders dated June 23, 1972 and July 15, 1972 subject of the petition for certiorari are
hereby set aside and Respondent directed to grant the withdrawal of the deposit in accordance with the
foregoing. Without pronouncement as to costs.
G.R. No. L-57552 October 10, 1986

LUISA F. MCLAUGHLIN, petitioner,

vs.
THE COURT OF APPEALS AND RAMON FLORES, respondents.
R.C. Domingo Jr. & Associates for private respondent.

FERIA, Actg. C.J.

This is an appeal by certiorari from the decision of the Court of Appeals, the dispositive part of which reads as
follows:
IN VIEW OF THE FOREGOING PREMISES, the petition for certiorari and mandamus is hereby GRANTED
and the Orders of respondent court dated November 21 and 27 both 1980 are hereby nullified and set aside
and respondent Judge is ordered to order private respondent to accept petitioner's Pacific Banking
Corporation certified manager's Check No. MC-A-000311 dated November 17, 1980 in the amount of
P76,059.71 in full settlement of petitioner's obligation, or another check of equivalent kind and value, the
earlier check having become stale.
On February 28, 1977, petitioner Luisa F. McLaughlin and private respondent Ramon Flores entered into a
contract of conditional sale of real property. Paragraph one of the deed of conditional sale fixed the total
purchase price of P140,000.00 payable as follows: a) P26,550.00 upon the execution of the deed; and b) the
balance of P113,450.00 to be paid not later than May 31, 1977. The parties also agreed that the balance shall
bear interest at the rate of 1% per month to commence from December 1, 1976, until the full purchase price
was paid.
On June 19, 1979, petitioner filed a complaint in the then Court of First Instance of Rizal (Civil Case No.
33573) for the rescission of the deed of conditional sale due to the failure of private respondent to pay the
balance due on May 31, 1977.
On December 27, 1979, the parties submitted a Compromise Agreement on the basis of which the court
rendered a decision on January 22, 1980. In said compromise agreement, private respondent acknowledged
his indebtedness to petitioner under the deed of conditional sale in the amount of P119,050.71, and the parties
agreed that said amount would be payable as follows: a) P50,000.00 upon signing of the agreement; and b)
the balance of P69,059.71 in two equal installments on June 30, 1980 and December 31, 1980.
As agreed upon, private respondent paid P50,000.00 upon the signing of the agreement and in addition he
also paid an "escalation cost" of P25,000.00.
Under paragraph 3 of the Compromise Agreement, private respondent agreed to pay one thousand (P
l,000.00) pesos monthly rental beginning December 5, 1979 until the obligation is duly paid, for the use of the
property subject matter of the deed of conditional sale.
Paragraphs 6 and 7 of the Compromise Agreement further state:
That the parties are agreed that in the event the defendant (private respondent) fails to comply with his
obligations herein provided, the plaintiff (petitioner) will be entitled to the issuance of a writ of execution
rescinding the Deed of Conditional Sale of Real Property. In such eventuality, defendant (private respondent)
hereby waives his right to appeal to (from) the Order of Rescission and the Writ of Execution which the Court
shall render in accordance with the stipulations herein provided for.
That in the event of execution all payments made by defendant (private respondent) will be forfeited in favor of
the plaintiff (petitioner) as liquidated damages.

On October 15, 1980, petitioner wrote to private respondent demanding that the latter pay the balance of
P69,059.71 on or before October 31, 1980. This demand included not only the installment due on June 30,
1980 but also the installment due on December 31, 1980.
On October 30, 1980, private respondent sent a letter to petitioner signifying his willingness and intention to
pay the full balance of P69,059.71, and at the same time demanding to see the certificate of title of the
property and the tax payment receipts.
Private respondent states on page 14 of his brief that on November 3, 1980, the first working day of said
month, he tendered payment to petitioner but this was refused acceptance by petitioner. However, this does
not appear in the decision of the Court of Appeals.
On November 7, 1980, petitioner filed a Motion for Writ of Execution alleging that private respondent failed to
pay the installment due on June 1980 and that since June 1980 he had failed to pay the monthly rental of P
l,000.00. Petitioner prayed that a) the deed of conditional sale of real property be declared rescinded with
forfeiture of all payments as liquidated damages; and b) the court order the payment of Pl,000.00 back rentals
since June 1980 and the eviction of private respondent.

It is significant to note that on November 17, 1980, or just seventeen (17) days after October 31, 1980, the
deadline set by McLaughlin, Flores tendered the certified manager's check. We hold that the Song Fo ruling is
applicable herein considering that in the latter case, there was a 20-day delay in the payment of the obligation
as compared to a 17-day delay in the instant case.
Furthermore, as held in the recent case of New Pacific Timber & Supply Co., Inc. vs. Hon. Alberto Seneris, L41764, December 19, 1980, it is the accepted practice in business to consider a cashier's or manager's check
as cash and that upon certification of a check, it is equivalent to its acceptance (Section 187, Negotiable
Instrument Law) and the funds are thereby transferred to the credit of the creditor (Araneta v. Tuason, 49 O.G.
p. 59).
In the New Pacific Timber & Supply Co., Inc. case, the Supreme Court further held that the object of certifying
a check is to enable the holder thereof to use it as money, citing the ruling in PNB vs. National City Bank of
New York, 63 Phil. 711.
In the New Pacific Timber case, it was also ruled that the exception in Section 63 of the Central Bank Act that
the clearing of a check and the subsequent crediting of the amount thereof to the account of the creditor is
equivalent to delivery of cash, is applicable to a payment through a certified check.

On November 14, 1980, the trial court granted the motion for writ of execution.
On November 17, 1980, private respondent filed a motion for reconsideration tendering at the same time a
Pacific Banking Corporation certified manager's check in the amount of P76,059.71, payable to the order of
petitioner and covering the entire obligation including the installment due on December 31, 1980. However, the
trial court denied the motion for reconsideration in an order dated November 21, 1980 and issued the writ of
execution on November 25, 1980.
In an order dated November 27, 1980, the trial court granted petitioner's ex-parte motion for clarification of the
order of execution rescinding the deed of conditional sale of real property.
On November 28, 1980, private respondent filed with the Court of Appeals a petition for certiorari and
prohibition assailing the orders dated November 21 and 27, 1980.
As initially stated above, the appellate court nullified and set aside the disputed orders of the lower court. In its
decision, the appellate court ruled in part as follows:
The issue here is whether respondent court committed a grave abuse of discretion in issuing the orders dated
November 21, 1980 and November 27,1980.
The general rule is that rescission will not be permitted for a slight or casual breach of the contract, but only for
such breaches as are substantial and fundamental as to defeat the object of the parties in making the
agreement. (Song Fo & Co. vs. Hawaiian-Philippine Co., 47 Phil. 821)
In aforesaid case, it was held that a delay in payment for a small quantity of molasses, for some twenty days is
not such a violation of an essential condition of the contract as warrants rescission for non-performance.
In Universal Food Corp. vs. Court of Appeals, 33 SCRA 1, the Song Fo ruling was reaffirmed.
In the case at bar, McLaughlin wrote Flores on October 15, 1980 demanding that Flores pay the balance of
P69,059.71 on or before October 31, 1980. Thus it is undeniable that despite Flores' failure to make the
payment which was due on June 1980, McLaughlin waived whatever right she had under the compromise
agreement as incorporated in the decision of respondent court, to demand rescission.
xxx xxx xxx

Considering that Flores had already paid P101,550.00 under the contract to sell, excluding the monthly rentals
paid, certainly it would be the height of inequity to have this amount forfeited in favor McLaughlin. Under the
questioned orders, McLaughlin would get back the property and still keep P101,550.00.
Petitioner contends that the appellate court erred in not observing the provisions of Article No. 1306 of the Civil
Code of the Philippines and in having arbitrarily abused its judicial discretion by disregarding the penal clause
stipulated by the parties in the compromise agreement which was the basis of the decision of the lower court.
We agree with the appellate court that it would be inequitable to cancel the contract of conditional sale and to
have the amount of P101,550.00 (P l48,126.97 according to private respondent in his brief) already paid by
him under said contract, excluding the monthly rentals paid, forfeited in favor of petitioner, particularly after
private respondent had tendered the amount of P76,059.71 in full payment of his obligation.
In the analogous case of De Guzman vs. Court of Appeals, this Court sustained the order of the respondent
judge denying the petitioners' motion for execution on the ground that the private respondent had substantially
complied with the terms and conditions of the compromise agreement, and directing the petitioners to
immediately execute the necessary documents transferring to the private respondent the title to the properties
(July 23, 1985, 137 SCRA 730). In the case at bar, there was also substantial compliance with the compromise
agreement.
Petitioner invokes the ruling of the Court in its Resolution of November 16, 1978 in the case of Luzon
Brokerage Co., Inc. vs. Maritime Building Co., Inc., to the effect that Republic Act 6552 (the Maceda Law)
"recognizes and reaffirms the vendor's right to cancel the contract to sell upon breach and non-payment of the
stipulated installments but requires a grace period after at least two years of regular installment payments ... .
" (86 SCRA 305, 329)
On the other hand, private respondent also invokes said law as an expression of public policy to protect
buyers of real estate on installments against onerous and oppressive conditions (Section 2 of Republic Act No.
6552).
Section 4 of Republic Act No. 6552 which took effect on September 14, 1972 provides as follows:
In case where less than two years of installments were paid, the seller shall give the buyer a grace period of
not less than sixty days from the date the installment became due. If the buyer fails to pay the installments due
at the expiration of the grace period, the seller may cancel the contract after thirty days from receipt by the
buyer of the notice of the cancellation or the demand for rescission of the contract by a notarial act.

Section 7 of said law provides as follows:

Any stipulation in any contract hereafter entered into contrary to the provisions of Sections 3, 4, 5 and 6, shall
be null and void.
The spirit of these provisions further supports the decision of the appellate court. The record does not contain
the complete text of the compromise agreement dated December 20, 1979 and the decision approving it.
However, assuming that under the terms of said agreement the December 31, 1980 installment was due and
payable when on October 15, 1980, petitioner demanded payment of the balance of P69,059.71 on or before
October 31, 1980, petitioner could cancel the contract after thirty days from receipt by private respondent of
the notice of cancellation. Considering petitioner's motion for execution filed on November 7, 1980 as a notice
of cancellation, petitioner could cancel the contract of conditional sale after thirty days from receipt by private
respondent of said motion. Private respondent's tender of payment of the amount of P76,059.71 together with
his motion for reconsideration on November 17, 1980 was, therefore, well within the thirty-day period grants by
law..
The tender made by private respondent of a certified bank manager's check payable to petitioner was a valid
tender of payment. The certified check covered not only the balance of the purchase price in the amount of
P69,059.71, but also the arrears in the rental payments from June to December, 1980 in the amount of
P7,000.00, or a total of P76,059.71. On this point the appellate court correctly applied the ruling in the case of
New Pacific Timber & Supply Co., Inc. vs. Seneris (101 SCRA 686, 692-694) to the case at bar.
Moreover, Section 49, Rule 130 of the Revised Rules of Court provides that:
An offer in writing to pay a particular sum of money or to deliver a written instrument or specific property is, if
rejected, equivalent to the actual production and tender of the money, instrument, or property.
However, although private respondent had made a valid tender of payment which preserved his rights as a
vendee in the contract of conditional sale of real property, he did not follow it with a consignation or deposit of
the sum due with the court. As this Court has held:
The rule regarding payment of redemption prices is invoked. True that consignation of the redemption price is
not necessary in order that the vendor may compel the vendee to allow the repurchase within the time
provided by law or by contract. (Rosales vs. Reyes and Ordoveza, 25 Phil. 495.) We have held that in such
cases a mere tender of payment is enough, if made on time, as a basis for action against the vendee to
compel him to resell. But that tender does not in itself relieve the vendor from his obligation to pay the price
when redemption is allowed by the court. In other words, tender of payment is sufficient to compel redemption
but is not in itself a payment that relieves the vendor from his liability to pay the redemption price. " (Paez vs.
Magno, 83 Phil. 403, 405)

cases enumerated therein; Article 1257 provides that in order that the consignation of the thing (or sum) due
may release the obligor, it must first be announced to the persons interested in the fulfillment of the obligation;
and Article 1258 provides that consignation shall be made by depositing the thing (or sum) due at the disposal
of the judicial authority and that the interested parties shall also be notified thereof.
As the Court held in the case of Soco vs. Militante, promulgated on June 28, 1983, after examining the abovecited provisions of the law and the jurisprudence on the matter:
Tender of payment must be distinguished from consignation. Tender is the antecedent of consignation, that is,
an act preparatory to the consignation, which is the principal, and from which are derived the immediate
consequences which the debtor desires or seeks to obtain. Tender of payment may be extrajudicial, while
consignation is necessarily judicial, and the priority of the first is the attempt to make a private settlement
before proceeding to the solemnities of consignation. (8 Manresa 325). (123 SCRA 160,173)
In the above-cited case of De Guzman vs. Court of Appeals (137 SCRA 730), the vendee was released from
responsibility because he had deposited with the court the balance of the purchase price. Similarly, in the
above-cited case of New Pacific Timber & Supply Co., Inc. vs. Seneris (101 SCRA 686), the judgment debtor
was released from responsibility by depositing with the court the amount of the judgment obligation.
In the case at bar, although as above stated private respondent had preserved his rights as a vendee in the
contract of conditional sale of real property by a timely valid tender of payment of the balance of his obligation
which was not accepted by petitioner, he remains liable for the payment of his obligation because of his failure
to deposit the amount due with the court.
In his manifestation dated September 19, 1986, private respondent states that on September 16, 1980, he
purchased a Metrobank Cashier's Check No. CC 004233 in favor of petitioner Luisa F. McLaughlin in the
amount of P76,059.71, a photocopy of which was enclosed and marked as Annex "A- 1;" but that he did not
continue paying the monthly rental of Pl,000.00 because, pursuant to the decision of the appellate court,
petitioner herein was ordered to accept the aforesaid amount in full payment of herein respondent's obligation
under the contract subject matter thereof.
However, inasmuch as petitioner did not accept the aforesaid amount, it was incumbent on private respondent
to deposit the same with the court in order to be released from responsibility. Since private respondent did not
deposit said amount with the court, his obligation was not paid and he is liable in addition for the payment of
the monthly rental of Pl,000.00 from January 1, 1981 until said obligation is duly paid, in accordance with
paragraph 3 of the Compromise Agreement. Upon full payment of the amount of P76,059.71 and the rentals in
arrears, private respondent shall be entitled to a deed of absolute sale in his favor of the real property in
question.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED with the following modifications:

On September 1, 1986, the Court issued the following resolution

Considering the allegation in petitioner's reply brief that the Manager's Check tendered by private respondent
on November 17, 1980 was subsequently cancelled and converted into cash, the Court RESOLVED to
REQUIRE the parties within ten (10) days from notice to inform the Court whether or not the amount thereof
was deposited in court and whether or not private respondent continued paying the monthly rental of
P1,000.00 stipulated in the Compromise Agreement.
In compliance with this resolution, both parties submitted their respective manifestations which confirm that the
Manager's Check in question was subsequently withdrawn and replaced by cash, but the cash was not
deposited with the court.

(a) Petitioner is ordered to accept from private respondent the Metrobank Cashier's Check No. CC 004233 in
her favor in the amount of P76,059.71 or another certified check of a reputable bank drawn in her favor in the
same amount;
(b) Private respondent is ordered to pay petitioner, within sixty (60) days from the finality of this decision, the
rentals in arrears of P l,000.00 a month from January 1, 1981 until full payment thereof; and
(c) Petitioner is ordered to execute a deed of absolute sale in favor of private respondent over the real
property in question upon full payment of the amounts as provided in paragraphs (a) and (b) above. No costs.
SO ORDERED.

According to Article 1256 of the Civil Code of the Philippines, if the creditor to whom tender of payment has
been made refuses without just cause to accept it, the debtor shall be released from responsibility by the
consignation of the thing or sum due, and that consignation alone shall produce the same effect in the five

G.R. No. L-58961 June 28, 1983

SOLEDAD SOCO, petitioner,

vs.
HON. FRANCIS MILITANTE, Incumbent Presiding Judge of the Court of First Instance of Cebu, Branch
XII, Cebu City and REGINO FRANCISCO, JR., respondents.
Chua & Associates Law Office (collaborating counsel) and Andales, Andales & Associates Law Office for
petitioner.
Francis M. Zosa for private respondent.

GUERRERO, J.:
The decision subject of the present petition for review holds the view that there was substantial compliance
with the requisites of consignation and so ruled in favor of private respondent, Regino Francisco, Jr., lessee of
the building owned by petitioner lessor, Soledad Soco in the case for illegal detainer originally filed in the City
Court of Cebu City, declaring the payments of the rentals valid and effective, dismissed the complaint and
ordered the lessor to pay the lessee moral and exemplary damages in the amount of P10,000.00 and the
further sum of P3,000.00 as attorney's fees.
We do not agree with the questioned decision. We hold that the essential requisites of a valid consignation
must be complied with fully and strictly in accordance with the law, Articles 1256 to 1261, New Civil Code. That
these Articles must be accorded a mandatory construction is clearly evident and plain from the very language
of the codal provisions themselves which require absolute compliance with the essential requisites therein
provided. Substantial compliance is not enough for that would render only a directory construction to the law.
The use of the words "shall" and "must" which are imperative, operating to impose a duty which may be
enforced, positively indicate that all the essential requisites of a valid consignation must be complied with. The
Civil Code Articles expressly and explicitly direct what must be essentially done in order that consignation shall
be valid and effectual. Thus, the law provides:
1257. In order that the consignation of the thing due may release the obligor, it must first be announced to the
persons interested in the fulfillment of the obligation.
The consignation shall be ineffectual if it is not made strictly in consonance with the provisions which regulate
payment.
Art. 1258. Consignation shall be made by depositing the things due at the disposal of judicial authority, before
whom the tender of payment shall be proved, in a proper case, and the announcement of the consignation in
other cases.

The antecedent facts are substantially recited in the decision under review, as follows:
It appears from the evidence that the plaintiff-appellee-Soco, for short-and the 'defendant-appellant-Francisco,
for brevity- entered into a contract of lease on January 17, 1973, whereby Soco leased her commercial
building and lot situated at Manalili Street, Cebu City, to Francisco for a monthly rental of P 800.00 for a period
of 10 years renewable for another 10 years at the option of the lessee. The terms of the contract are embodied
in the Contract of Lease (Exhibit "A" for Soco and Exhibit "2" for Francisco). It can readily be discerned from
Exhibit "A" that paragraphs 10 and 11 appear to have been cancelled while in Exhibit "2" only paragraph 10
has been cancelled. Claiming that paragraph 11 of the Contract of Lease was in fact not part of the contract
because it was cancelled, Soco filed Civil Case No. R-16261 in the Court of First Instance of Cebu seeking the
annulment and/or reformation of the Contract of Lease. ...
Sometime before the filing of Civil Case No. R-16261 Francisco noticed that Soco did not anymore send her
collector for the payment of rentals and at times there were payments made but no receipts were issued. This
situation prompted Francisco to write Soco the letter dated February 7, 1975 (Exhibit "3") which the latter
received as shown in Exhibit "3-A". After writing this letter, Francisco sent his payment for rentals by checks
issued by the Commercial Bank and Trust Company. Obviously, these payments in checks were received
because Soco admitted that prior to May, 1977, defendant had been religiously paying the rental. ....
1. The factual background setting of this case clearly indicates that soon after Soco learned that Francisco
sub-leased a portion of the building to NACIDA, at a monthly rental of more than P3,000.00 which is definitely
very much higher than what Francisco was paying to Soco under the Contract of Lease, the latter felt that she
was on the losing end of the lease agreement so she tried to look for ways and means to terminate the
contract. ...
In view of this alleged non-payment of rental of the leased premises beginning May, 1977, Soco through her
lawyer sent a letter dated November 23, 1978 (Exhibit "B") to Francisco serving notice to the latter 'to vacate
the premises leased.' In answer to this letter, Francisco through his lawyer informed Soco and her lawyer that
all payments of rental due her were in fact paid by Commercial Bank and Trust Company through the Clerk of
Court of the City Court of Cebu (Exhibit " 1 "). Despite this explanation, Soco filed this instant case of Illegal
Detainer on January 8, 1979. ...
2. Pursuant to his letter dated February 7, 1975(Exhibit"3") and for reasons stated therein, Francisco paid his
monthly rentals to Soco by issuing checks of the Commercial Bank and Trust Company where he had a
checking account. On May 13, 1975, Francisco wrote the Vice-President of Comtrust, Cebu Branch (Exhibit
"4") requesting the latter to issue checks to Soco in the amount of P 840.00 every 10th of the month, obviously
for payment of his monthly rentals. This request of Francisco was complied with by Comtrust in its letter dated
June 4, 1975 (Exhibit "5"). Obviously, these payments by checks through Comtrust were received by Soco
from June, 1975 to April, 1977 because Soco admitted that an rentals due her were paid except the rentals
beginning May, 1977. While Soco alleged in her direct examination that 'since May, 1977 he (meaning
Francisco) stopped paying the monthly rentals' (TSN, Palicte, p. 6, Hearing of October 24, 1979), yet on cross
examination she admitted that before the filing of her complaint in the instant case, she knew that payments
for monthly rentals were deposited with the Clerk of Court except rentals for the months of May, June, July and
August, 1977. ...

The consignation having been made, the interested parties shall also be notified thereof.
Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to
deliver such currency, then in the currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall
produce the effect of payment only when they have been cashed, or when through the fault of the creditor they
have been impaired.
In the meantime, the action derived from the original obligation shall be held in abeyance.
We have a long line of established precedents and doctrines that sustain the mandatory nature of the above
provisions. The decision appealed from must, therefore, be reversed.

Pressing her point, Soco alleged that 'we personally demanded from Engr. Francisco for the months of May,
June, July and August, but Engr. Francisco did not pay for the reason that he had no funds available at that
time.' (TSN-Palicte, p. 28, Hearing October 24, 1979). This allegation of Soco is denied by Francisco because
per his instructions, the Commercial Bank and Trust Company, Cebu Branch, in fact, issued checks in favor of
Soco representing payments for monthly rentals for the months of May, June, July and August, 1977 as shown
in Debit Memorandum issued by Comtrust as follows:
(a) Exhibit "6"-Debit Memo dated May 11, 1977 for P926.10 as payment for May, 1977;
(b) Exhibit"7"-Debit Memo dated June l5, 197 7for P926.10 as payment for June, 1977;
(c) Exhibit "8"-Debit Memo dated July 11, 1977 for P1926.10 as payment for July, 1977;

(d) Exhibit "9"-Debit Memo dated August 10, 1977 for P926. 10 as payment for August, 1977.
These payments are further bolstered by the certification issued by Comtrust dated October 29, 1979 (Exhibit
"13"). Indeed the Court is convinced that payments for rentals for the months of May, June, July and August,
1977 were made by Francisco to Soco thru Comtrust and deposited with the Clerk of Court of the City Court of
Cebu. There is no need to determine whether payments by consignation were made from September, 1977 up
to the filing of the complaint in January, 1979 because as earlier stated Soco admitted that the rentals for
these months were deposited with the Clerk of Court. ...
Taking into account the factual background setting of this case, the Court holds that there was in fact a tender
of payment of the rentals made by Francisco to Soco through Comtrust and since these payments were not
accepted by Soco evidently because of her intention to evict Francisco, by all means, culminating in the filing
of Civil Case R-16261, Francisco was impelled to deposit the rentals with the Clerk of Court of the City Court
of Cebu. Soco was notified of this deposit by virtue of the letter of Atty. Pampio Abarientos dated June 9, 1977
(Exhibit "10") and the letter of Atty. Pampio Abarientos dated July 6. 1977 (Exhibit " 12") as well as in the
answer of Francisco in Civil Case R-16261 (Exhibit "14") particularly paragraph 7 of the Special and
Affirmative Defenses. She was further notified of these payments by consignation in the letter of Atty.
Menchavez dated November 28, 1978 (Exhibit " 1 "). There was therefore substantial compliance of the
requisites of consignation, hence his payments were valid and effective. Consequently, Francisco cannot be
ejected from the leased premises for non-payment of rentals. ...
As indicated earlier, the above decision of the Court of First Instance reversed the judgment of the City Court
of Cebu, Branch 11, the dispositive portion of the latter reading as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff, ordering the defendant, Regino Francisco,
Jr.:
(1) To vacate immediately the premises in question, consisting of a building located at Manalili St., Cebu City;
(2) To pay to the plaintiff the sum of P40,490.46 for the rentals, covering the period from May, 1977 to August,
1980, and starting with the month of September, 1980, to pay to the plaintiff for one (1) year a monthly rental
of P l,072.076 and an additional amount of 5 per cent of said amount, and for so much amount every month
thereafter equivalent to the rental of the month of every preceding year plus 5 percent of same monthly rental
until the defendant shall finally vacate said premises and possession thereof wholly restored to the plaintiff-all
plus legal interest from date of filing of the complaint;
(3) To pay to the plaintiff the sum of P9,000.00 for attorney's fee;
(4) To pay to the plaintiff the sum of P5,000.00 for damages and incidental litigation expenses; and
(5) To pay the Costs.
SOORDERED.
Cebu City, Philippines, November 21, 1980.
(SGD.) PATERNO D. MONTESCLAROS
Acting Presiding Judge
According to the findings of fact made by the City Court, the defendant Francisco had religiously paid to the
plaintiff Soco the corresponding rentals according to the terms of the Least Contract while enjoying the leased
premises until one day the plaintiff had to demand upon the defendant for the payment of the rentals for the
month of May, 1977 and of the succeeding months. The plaintiff also demanded upon the defendant to vacate
the premises and from that time he failed or refused to vacate his possession thereof; that beginning with the

month of May, 1977 until at present, the defendant has not made valid payments of rentals to the plaintiff who,
as a consequence, has not received any rental payment from the defendant or anybody else; that for the
months of May to August, 1977, evidence shows that the plaintiff through her daughter, Teolita Soco and
salesgirl, Vilma Arong, went to the office or residence of defendant at Sanciangko St., Cebu City, on various
occasions to effect payment of rentals but were unable to collect on account of the defendant's refusal to pay;
that defendant contended that payments of rental thru checks for said four months were made to the plaintiff
but the latter refused to accept them; that in 1975, defendant authorized the Commercial Bank and Trust
Company to issue checks to the plaintiff chargeable against his bank account, for the payment of said rentals,
and the delivery of said checks was coursed by the bank thru the messengerial services of the FAR
Corporation, but the plaintiff refused to accept them and because of such refusal, defendant instructed said
bank to make consignation with the Clerk of Court of the City Court of Cebu as regard said rentals for May to
August, 1977 and for subsequent months.
The City Court further found that there is no showing that the letter allegedly delivered to the plaintiff in May,
1977 by Filomeno Soon, messenger of the FAR Corporation contained cash money, check, money order, or
any other form of note of value, hence there could never be any tender of payment, and even granting that
there was, but plaintiff refused to accept it without any reason, still no consignation for May, 1977 rental could
be considered in favor of the defendant unless evidence is presented to establish that he actually made rental
deposit with the court in cash money and prior and subsequent to such deposit, he notified the plaintiff thereof.
Notwithstanding the contradictory findings of fact and the resulting opposite conclusions of law by the City
Court and the Court of First Instance, both are agreed, however, that the case presents the issue of whether
the lessee failed to pay the monthly rentals beginning May, 1977 up to the time the complaint for eviction was
filed on January 8, 1979. This issue in turn revolves on whether the consignation of the rentals was valid or not
to discharge effectively the lessee's obligation to pay the same. The City Court ruled that the consignation was
not valid. The Court of First Instance, on the other hand, held that there was substantial compliance with the
requisites of the law on consignation.
Let us examine the law and consider Our jurisprudence on the matter, aside from the codal provisions already
cited herein.
According to Article 1256, New Civil Code, if the creditor to whom tender of payment has been made refuses
without just cause to accept it, the debtor shall be released from responsibility by the consignation of the thing
or sum due. Consignation alone shall produce the same effect in the following cases: (1) When the creditor is
absent or unknown, or does not appear at the place of payment; (2) When he is incapacitated to receive the
payment at the time it is due; (3) When, without just cause, he refuses to give a receipt; (4) When two or more
persons claim the same right to collect; (5) When the title of the obligation has been lost.
Consignation is the act of depositing the thing due with the court or judicial authorities whenever the creditor
cannot accept or refuses to accept payment and it generally requires a prior tender of payment. (Limkako vs.
Teodoro, 74 Phil. 313).
In order that consignation may be effective, the debtor must first comply with certain requirements prescribed
by law. The debtor must show (1) that there was a debt due; (2) that the consignation of the obligation had
been made because the creditor to whom tender of payment was made refused to accept it, or because he
was absent or incapacitated, or because several persons claimed to be entitled to receive the amount due
(Art. 1176, Civil Code); (3) that previous notice of the consignation had been given to the person interested in
the performance of the obligation (Art. 1177, Civil Code); (4) that the amount due was placed at the disposal of
the court (Art. 1178, Civil Code); and (5) that after the consignation had been made the person interested was
notified thereof (Art. 1178, Civil Code). Failure in any of these requirements is enough ground to render a
consignation ineffective. (Jose Ponce de Leon vs. Santiago Syjuco, Inc., 90 Phil. 311).
Without the notice first announced to the persons interested in the fulfillment of the obligation, the consignation
as a payment is void. (Limkako vs. Teodoro, 74 Phil. 313),
In order to be valid, the tender of payment must be made in lawful currency. While payment in check by the
debtor may be acceptable as valid, if no prompt objection to said payment is made (Desbarats vs. Vda. de

Mortera, L-4915, May 25, 1956) the fact that in previous years payment in check was accepted does not place
its creditor in estoppel from requiring the debtor to pay his obligation in cash (Sy vs. Eufemio, L-10572, Sept.
30, 1958). Thus, the tender of a check to pay for an obligation is not a valid tender of payment thereof
(Desbarats vs. Vda. de Mortera, supra). See Annotation, The Mechanics of Consignation by Atty. S. Tabios,
104 SCRA 174-179.

We may agree that the above exhibit proves tender of payment of the particular monthly rental referred to (the
letter does not, however, indicate for what month and also the intention to deposit the rental with the court,
which is the first notice. But certainly, it is no proof of tender of payment of other or subsequent monthly
rentals. Neither is it proof that notice of the actual deposit or consignation was given to the lessor, which is the
second notice required by law.

Tender of payment must be distinguished from consignation. Tender is the antecedent of consignation, that is,
an act preparatory to the consignation, which is the principal, and from which are derived the immediate
consequences which the debtor desires or seeks to obtain. Tender of payment may be extrajudicial, while
consignation is necessarily judicial, and the priority of the first is the attempt to make a private settlement
before proceeding to the solemnities of consignation. (8 Manresa 325).

(2) Exhibit 12 (see p. 237, Records) states:

Reviewing carefully the evidence presented by respondent lessee at the trial of the case to prove his
compliance with all the requirements of a valid tender of payment and consignation and from which the
respondent Judge based his conclusion that there was substantial compliance with the law on consignation,
We note from the assailed decision hereinbefore quoted that these evidences are: Exhibit 10, the letter of Atty.
Pampio Abarintos dated June 9, 1977: Exhibit 12, letter of Atty. Pampio Abarintos dated July 6, 1977; Exhibit
14, the Answer of respondent Francisco in Civil Case R- 16261, particularly paragraph 7 of the Special and
Affirmative Defenses; and Exhibit 1, letter of Atty. Eric Menchavez dated November 28, 1978. All these
evidences, according to respondent Judge, proved that petitioner lessor was notified of the deposit of the
monthly rentals.
We have analyzed and scrutinized closely the above exhibits and We find that the respondent Judge's
conclusion is manifestly wrong and based on misapprehension of facts. Thus(1) Exhibit 10 reads: (see p. 17, Records)
June 9, 1977

July 6, 1977
Miss Soledad Soco
Soledad Soco Reta
P. Gullas St., Cebu City
Dear Miss Soco:
This is to advise and inform you that my client, Engr. Regino Francisco, Jr., has consigned to you, through the
Clerk of Court, City Court of Cebu, Cebu City, the total amount of Pl,852.20, as evidenced by cashier's checks
No. 478439 and 47907 issued by the Commercial Bank and Trust Company (CBTC) Cebu City Branch, dated
May 11, 1977 and June 15, 1977 respectively and payable to your order, under Official Receipt No. 0436936
dated July 6,1977.
This amount represents payment of the rental of your building situated at Manalili St., Cebu City which my
client, Engr. Regino Francisco, Jr., is renting. You can withdraw the said amount from the Clerk of Court, City
Court of Cebu, Cebu City at any time.
Please be further notified that all subsequent monthly rentals will be deposited to the Clerk of Court, City Court
of Cebu, Cebu City.

Miss Soledad Soco

Soledad Soco Retazo
P. Gullas St., Cebu City

Very truly yours,

Dear Miss Soco:

(SGD.) PAMPIO A. ABARINTOS

Counsel for ENGR. REGINO FRANCISCO, JR.

This is in connection with the payment of rental of my client, Engr. Regino Francisco, Jr., of your building
situated at Manalili St., Cebu City.

The above evidence is, of course, proof of notice to the lessor of the deposit or consignation of only the two
payments by cashier's checks indicated therein. But surely, it does not prove any other deposit nor the notice
thereof to the lessor. It is not even proof of the tender of payment that would have preceded the consignation.

It appears that twice you refused acceptance of the said payment made by my client.
(3) Exhibit 14, paragraph 7 of the Answer (see p. 246, Records) alleges:
It appears further that my client had called your office several times and left a message for you to get this
payment of rental but until the present you have not sent somebody to get it.
In this connection, therefore, in behalf of my client, you are hereby requested to please get and claim the
rental payment aforestated from the Office of my client at Tagalog Hotel and Restaurant, Sanciangko St.,
Cebu City. within three (3) days from receipt hereof otherwise we would be constrained to make a
consignation of the same with the Court in accordance with law.
Hoping for your cooperation on this matter, we remain.
Very truly yours,
(SGD.) PAMPIO A. ABARINTOS
Counsel for Engr. REGINO FRANCISCO, Jr.

7. That ever since, defendant had been religiously paying his rentals without any delay which, however, the
plaintiff had in so many occasions refused to accept obviously in the hope that she may declare non-payment
of rentals and claim it as a ground for the cancellation of the contract of lease. This, after seeing the
improvements in the area which were effected, at no small expense by the defendant. To preserve defendant's
rights and to show good faith in up to date payment of rentals, defendant had authorized his bank to issue
regularly cashier's check in favor of the plaintiff as payment of rentals which the plaintiff had been accepting
during the past years and even for the months of January up to May of this year, 1977 way past plaintiff's claim
of lease expiration. For the months of June and July, however, plaintiff again started refusing to accept the
payments in going back to her previous strategy which forced the defendant to consign his monthly rental with
the City Clerk of Court and which is now the present state of affairs in so far as payment of rentals is
concerned. These events only goes to show that the wily plaintiff had thought of this mischievous scheme only
very recently and filed herein malicious and unfounded complaint.

The above exhibit which is lifted from Civil Case No. R-16261 between the parties for annulment of the lease
contract, is self-serving. The statements therein are mere allegations of conclusions which are not evidentiary.
(4) Exhibit 1 (see p. 15, Records) is quoted thus:
November 28, 1978
Atty. Luis V. Diores
Suite 504, SSS Bldg.
Jones Avenue, Cebu City
Dear Compaero:

There is no factual basis for the lower court's finding that the lessee had tendered payment of the monthly
rentals, thru his bank, citing the lessee's letter (Exh. 4) requesting the bank to issue checks in favor of Soco in
the amount of P840.00 every 10th of each month and to deduct the full amount and service fee from his
current account, as well as Exhibit 5, letter of the Vice President agreeing with the request. But scrutinizing
carefully Exhibit 4, this is what the lessee also wrote: "Please immediately notify us everytime you have the
check ready so we may send somebody over to get it. " And this is exactly what the bank agreed: "Please be
advised that we are in conformity to the above arrangement with the understanding that you shall send
somebody over to pick up the cashier's check from us." (Exhibit 4, see p. 230, Original Records; Exhibit 5, p.
231, Original Records)
Evidently, from this arrangement, it was the lessee's duty to send someone to get the cashier's check from the
bank and logically, the lessee has the obligation to make and tender the check to the lessor. This the lessee
failed to do, which is fatal to his defense.

Your letter dated November 23, 1978 which was addressed to my client, Engr. Regino Francisco, Jr. has been
referred to me for reply.

Third, respondent lessee likewise failed to prove the second notice, that is after consignation has been made,
to the lessor except the consignation referred to in Exhibit 12 which are the cashier's check Nos. 478439 and
47907 CBTC dated May 11, 1977 and June 15, 1977 under Official Receipt No. 04369 dated July 6, 1977.

It is not true that my client has not paid the rentals as claimed in your letter. As a matter of fact, he has been
religiously paying the rentals in advance. Payment was made by Commercial Bank and Trust Company to the
Clerk of Court, Cebu City. Attached herewith is the receipt of payment made by him for the month of
November, 1978 which is dated November 16, 1978.

Respondent lessee, attempting to prove compliance with the requisites of valid consignation, presented the
representative of the Commercial Bank and Trust Co., Edgar Ocaada, Bank Comptroller, who unfortunately
belied respondent's claim. We quote below excerpts from his testimony, as follows:

You can check this up with the City Clerk of Court for satisfaction.

ATTY. LUIS DIORES:

Regards.

Q What month did you say you made ,you started making the deposit? When you first deposited the check to
the Clerk of Court?

(SGD.) ERIC MENCHAVEZ Counsel for Regino Francisco, Jr.

377-B Junquera St., Cebu City
(new address)

A The payment of cashier's check in favor of Miss Soledad Soco was coursed thru the City Clerk of Court from
the letter of request by our client Regino Francisco, Jr., dated September 8, 1977. From that time on, based on
his request, we delivered the check direct to the City Clerk of Court.

Again, Exhibit 1 merely proves rental deposit for the particular month of November, 1978 and no other. It is no
proof of tender of payment to the lessor, not even proof of notice to consign. We hold that the best evidence of
the rental deposits with the Clerk of Court are the official receipts issued by the Clerk of Court. These the
respondent lessee utterly failed to present and produce during the trial of the case. As pointed out in
petitioner's Memorandum, no single official receipt was presented in the trial court as nowhere in the formal
offer of exhibits for lessee Francisco can a single official receipt of any deposit made be found (pp. 8-9,
Memorandum for Petitioner; pp. 163-164, Records).

Q What date, what month was that, you first delivered the check to the Clerk of Court.?

Summing up Our review of the above four (4) exhibits, We hold that the respondent lessee has utterly failed to
prove the following requisites of a valid consignation: First, tender of payment of the monthly rentals to the
lessor except that indicated in the June 9, l977 Letter, Exhibit 10. In the original records of the case, We note
that the certification, Exhibit 11 of Filemon Soon, messenger of the FAR Corporation, certifying that the letter
of Soledad Soco sent last May 10 by Commercial Bank and Trust Co. was marked RTS (return to sender) for
the reason that the addressee refused to receive it, was rejected by the court for being immaterial, irrelevant
and impertinent per its Order dated November 20, 1980. (See p. 117, CFI Records).
Second, respondent lessee also failed to prove the first notice to the lessor prior to consignation, except the
payment referred to in Exhibit 10.

A We started September 12, 1977.

Q September 1977 up to the present time, you delivered the cashier's check to the City Clerk of Court?
A Yes.
Q You were issued the receipts of those checks?
A Well, we have an acknowledgment letter to be signed by the one who received the check.
Q You mean you were issued, or you were not issued any official receipt? My question is whether you were
issued any official receipt? So, were you issued, or you were not issued?
A We were not issued.

In this connection, the purpose of the notice is in order to give the creditor an opportunity to reconsider his
unjustified refusal and to accept payment thereby avoiding consignation and the subsequent litigation. This
previous notice is essential to the validity of the consignation and its lack invalidates the same. (Cabanos vs.
Calo, 104 Phil. 1058; Limkako vs. Teodoro, 74 Phil. 313).

Q On September, 1977, after you deposited the manager's check for that month with the Clerk of Court, did
you serve notice upon Soledad Soco that the deposit was made on such amount for the month of September,
1977 and now to the Clerk of Court? Did you or did you not?

A Well, we only act on something upon the request of our client.

Q Please answer my question. I know that you are acting upon instruction of your client. My question was-after
you made the deposit of the manager's check whether or not you notified Soledad Soco that such manager's
check was deposited in the Clerk of Court from the month of September, 1977?
A We are not bound to.
Q I am not asking whether you are bound to or not. I'masking whether you did or you did not?
A I did not.
Q Alright, for October, 1977, after having made a deposit for that particular month, did you notify Miss Soledad
Soco that the deposit was in the Clerk of Court?
A No, we did not.
Q Now, on November, 1977, did you notify Soledad Soco that you deposited the manager's check to the City
Clerk of Court for that month?
A I did not.
Q You did not also notify Soledad Soco for the month December, 1977, so also from January, February,
March, April, May, June, July until December, 1978, you did not also notify Miss Soledad Soco all the deposits
of the manager's check which you said you deposited with the Clerk of Court in every end of the month? So
also from each and every month from January 1979 up to December 1979, you did not also serve notice upon
Soledad Socco of the deposit in the Clerk of Court, is that correct?
A Yes.
Q So also in January 1980 up to this month 1980, you did not instructed by your client Mr. and Mrs. Regino
Francisco, jr. to make also serve notice upon Soledad Soco of the Manager's check which you said you
deposited to the Clerk of Court?
A I did not.
Q Now, you did not make such notices because you were not such notices after the deposits you made, is that
correct?
A Yes, sir.
Q Now, from 1977, September up to the present time, before the deposit was made with the Clerk of Court,
did you serve notice to Soledad Soco that a deposit was going to be made in each and every month?
A Not.
Q In other words, from September 1977 up to the present time, you did not notify Soledad Soco that you were
going to make the deposit with the Clerk of Court, and you did not also notify Soledad Soco after the deposit
was made, that a deposit has been made in each and every month during that period, is that correct?
A Yes

Q And the reason was because you were not instructed by Mr. and Mrs. Regino Francisco, Jr. that such
notification should be made before the deposit and after the deposit was made, is that correct?
A No, I did not. (Testimony of Ocanada pp. 32-41, Hearing on June 3, 1980).
Recapitulating the above testimony of the Bank Comptroller, it is clear that the bank did not send notice to
Soco that the checks will be deposited in consignation with the Clerk of Court (the first notice) and also, the
bank did not send notice to Soco that the checks were in fact deposited (the second notice) because no
instructions were given by its depositor, the lessee, to this effect, and this lack of notices started from
September, 1977 to the time of the trial, that is June 3, 1980.
The reason for the notification to the persons interested in the fulfillment of the obligation after consignation
had been made, which is separate and distinct from the notification which is made prior to the consignation, is
stated in Cabanos vs. Calo, G.R. No. L-10927, October 30, 1958, 104 Phil. 1058. thus: "There should be
notice to the creditor prior and after consignation as required by the Civil Code. The reason for this is obvious,
namely, to enable the creditor to withdraw the goods or money deposited. Indeed, it would be unjust to make
him suffer the risk for any deterioration, depreciation or loss of such goods or money by reason of lack of
knowledge of the consignation."
And the fourth requisite that respondent lessee failed to prove is the actual deposit or consignation of the
monthly rentals except the two cashier's checks referred to in Exhibit 12. As indicated earlier, not a single copy
of the official receipts issued by the Clerk of Court was presented at the trial of the case to prove the actual
deposit or consignation. We find, however, reference to some 45 copies of official receipts issued by the Clerk
of Court marked Annexes "B-1 " to "B-40" to the Motion for Reconsideration of the Order granting execution
pending appeal filed by defendant Francisco in the City Court of Cebu (pp, 150-194, CFI Original Records) as
well as in the Motion for Reconsideration of the CFI decision, filed by plaintiff lessor (pp. 39-50, Records,
marked Annex "E ") the allegation that "there was no receipt at all showing that defendant Francisco has
deposited with the Clerk of Court the monthly rentals corresponding to the months of May and June, 1977.
And for the months of July and August, 1977, the rentals were only deposited with the Clerk of Court on 20
November 1979 (or more than two years later)."... The deposits of these monthly rentals for July and August,
1977 on 20 November 1979, is very significant because on 24 October 1979, plaintiff Soco had testified before
the trial court that defendant had not paid the monthly rentals for these months. Thus, defendant had to make
a hurried deposit on the following month to repair his failure. " (pp. 43-44, Records).
We have verified the truth of the above claim or allegation and We find that indeed, under Official Receipt No.
1697161Z, the rental deposit for August, 1977 in cashier's check No. 502782 dated 8-10-77 was deposited on
November 20, 1979 (Annex "B-15", p. 169, Original CFI Records) and under Official Receipt No. 1697159Z,
the rental deposit for July under Check No. 479647 was deposited on November 20, 1979 (Annex "B-16", p.
170, Original CFI Records). Indeed, these two rental deposits were made on November 20, 1979, two years
late and after the filing of the complaint for illegal detainer.
The decision under review cites Exhibits 6, 7, 8 and 9, the Debit Memorandum issued by Comtrust Bank
deducting the amounts of the checks therein indicated from the account of the lessee, to prove payment of the
monthly rentals. But these Debit Memorandums are merely internal banking practices or office procedures
involving the bank and its depositor which is not binding upon a third person such as the lessor. What is
important is whether the checks were picked up by the lessee as per the arrangement indicated in Exhibits 4
and 5 wherein the lessee had to pick up the checks issued by CBTC or to send somebody to pick them up,
and logically, for the lessee to tender the same to the lessor. On this vital point, the lessee miserably failed to
present any proof that he complied with the arrangement.
We, therefore, find and rule that the lessee has failed to prove tender of payment except that in Exh. 10; he
has failed to prove the first notice to the lessor prior to consignation except that given in Exh. 10; he has failed
to prove the second notice after consignation except the two made in Exh. 12; and he has failed to pay the
rentals for the months of July and August, 1977 as of the time the complaint was filed for the eviction of the
lessee. We hold that the evidence is clear, competent and convincing showing that the lessee has violated the
terms of the lease contract and he may, therefore, be judicially ejected.

The other matters raised in the appeal are of no moment. The motion to dismiss filed by respondent on the
ground of "want of specific assignment of errors in the appellant's brief, or of page references to the records as
required in Section 16(d) of Rule 46," is without merit. The petition itself has attached the decision sought to be
reviewed. Both Petition and Memorandum of the petitioner contain the summary statement of facts; they
discuss the essential requisites of a valid consignation; the erroneous conclusion of the respondent Judge in
reversing the decision of the City Court, his grave abuse of discretion which, the petitioner argues, "has so far
departed from the accepted and usual course of judicial proceeding in the matter of applying the law and
jurisprudence on the matter." The Memorandum further cites other basis for petitioner's plea.
In Our mind, the errors in the appealed decision are sufficiently stated and assigned. Moreover, under Our
rulings, We have stated that:
This Court is clothed with ample authority to review matters, even if they are not assigned as errors in the
appeal, if it finds that their consideration is necessary in arriving at a just decision of the case. Also, an
unassigned error closely related to an error properly assigned or upon which the determination of the
questioned raised by the error properly assigned is dependent, will be considered by the appellate court
notwithstanding the failure to assign it as an error." (Ortigas, Jr. vs. Lufthansa German Airlines, L-28773, June
30, 1975, 64 SCRA 610)
Under Section 5 of Rule 53, the appellate court is authorized to consider a plain error, although it was not
specifically assigned by appellants." (Dilag vs. Heirs of Resurreccion, 76 Phil. 649)
Appellants need not make specific assignment of errors provided they discuss at length and assail in their brief
the correctness of the trial court's findings regarding the matter. Said discussion warrants the appellate court
to rule upon the point because it substantially complies with Section 7, Rule 51 of the Revised Rules of Court,
intended merely to compel the appellant to specify the questions which he wants to raise and be disposed of
in his appeal. A clear discussion regarding an error allegedly committed by the trial court accomplishes the
purpose of a particular assignment of error." (Cabrera vs. Belen, 95 Phil. 54; Miguel vs Court of Appeals, L20274, Oct. 30, 1969, 29 SCRA 760-773, cited in Moran, Comments on the Rules of Court, Vol. 11, 1970 ed.,
p. 534).
Pleadings as well as remedial laws should be construed liberally in order that the litigants may have ample
opportunity to prove their respective claims, and that a possible denial of substantial justice, due to legal
technicalities, may be avoided." (Concepcion, et al. vs. The Payatas Estate Improvement Co., Inc., 103 Phil.
10 17).
WHEREFORE, IN VIEW OF ALL THE FOREGOING, the decision of the Court of First Instance of Cebu, 14th
Judicial District, Branch XII is hereby REVERSED and SET ASIDE, and the derision of the City Court of Cebu,
Branch II is hereby reinstated, with costs in favor of the petitioner.
SO ORDERED.
G.R. No. L-23563

May 8, 1969

CRISTINA SOTTO, plaintiff-appellee,

vs.
HERNANI MIJARES, ET AL., defendants-appellants.

Clerk of Court the amount of P5,106.00 within ten (10) days from receipt of said order. Originally appealed to
the Court of Appeals, this case was subsequently certified to this Court, the only issue being one of law.
In the aforesaid Civil case 1 plaintiff filed a "Motion for Deposit" on November 13, 1962, the pertinent portions of
which read:
2. That in accordance with the contract including the allied transactions as evidenced by other documents, the
balance indebtedness of the defendants in favor of the plaintiff is the amount of P5,106.00 only, Philippine
Currency ...;
3. That according to the answer of the defendants, the said claim of P5,106.00 is admitted ..., with the
defendants further alleging that they have offered the said amount to the plaintiff who refused to receive the
said amount;
4. That in view of the admission of the defendants of the same and in order to limit the other controversial
issue ... it is fitting and proper that the said amount of P5,106.00 be deposited in the Office of the Clerk of
Court of this province or to deliver the same to the plaintiff and/or her counsel.
Defendants, in their "Opposition" dated November 23, 1962, signified their willingness to deposit the requested
amount provided that the complaint be dismissed and that they be absolved of all other liabilities, expenses
and costs.
On November 26, 1962 the lower court issued the following order:
It appearing that the defendants have admitted the claim of the plaintiff in the sum of P5,106.00, as prayed for
by the counsel for the plaintiff the said defendants are hereby ordered to deposit said amount to the Clerk of
Court pending the final termination of this case.
On November 28, 1962 plaintiff this time represented by new counsel filed a motion for partial judgment
on the pleadings with respect to the amount of P5,106.00, modifying their previous request for judicial deposit,
which had already been granted. On the other hand, defendants moved to reconsider the order of November
26, explaining that through oversight they failed to allege in their "Opposition" that the sum of P5,106.00 was
actually secured by a real estate mortgage. They would thus premise their willingness to deposit said amount
upon the condition "... that the plaintiff will cancel the mortgage abovementioned and that the plaintiff be
ordered to return to the defendants Transfer Certificate of Title No. 29326 covering Lot No. 327 of Pontevedra
and Transfer Certificate of Title No. 29327 covering Lot No. 882 of Hinigaran Cadastre, Negros Occidental."
On March 20, 1963 the lower court resolved both motions, in effect denying them and reiterating its previous
order, as follows:
WHEREFORE, the motion for partial judgment on the pleadings dated November 28, 1962 is hereby denied
but in its stead the defendants are hereby ordered to deposit with the Clerk of Court the amount of P5,106.00
within ten (10) days from receipt of this order subject to further disposition thereof in accordance with the
decision to be rendered after trial.

MAKALINTAL, J.:

It is the foregoing order from which the present appeal has been taken. Since this case was submitted upon
the filing of the briefs, there has been no showing as to the outcome of the main case below for foreclosure of
mortgage. The decision therein, if one has been rendered, since no injunction was sought in or granted by this
Court, must have rendered this appeal moot and academic, considering that the defendants admit their
indebtedness to the plaintiff but object merely to their being compelled to deposit the amount thereof in court
during the pendency of the foreclosure case. However, no manifestation having been received on the matter,
we shall proceed to the issues raised by the parties.lawphi1.et

This is an appeal taken by herein defendants from that portion of the order of the Court of First Instance of
Negros Occidental dated March 20, 1963 in its Civil Case No. 6796 which requires them to deposit with the

The first of said issue is procedural, and has been set up by the appellee as a roadblock to this appeal. She
maintains that the controverted order is interlocutory, since it does not dispose of the case with finality but

Arboleda and Arboleda for plaintiff-appellee.

Eugenio T. Sanicas for defendants-appellants.

leaves something still to be done, and hence is unappealable. The remedy, it is pointed out, should have been
by petition for certiorari. The point, strictly speaking, is well taken; but this Court sees fit to disregard
technicalities and treat this appeal as such a petition and consider it on the merits, limiting the issue,
necessarily, to whether or not the court below exceeded its jurisdiction or committed a grave abuse of
discretion in issuing the order complained of.
The defendants admit their indebtedness to the plaintiff, but only in the sum of P5,106.00. It seems that the
controversy refers to the plaintiff's additional claim for interest, attorney's fees and costs.
The defendants expressed their willingness to deposit the said amount in court, subject to the condition that
the mortgage they had executed as security be cancelled. The question, then, is: Did the court act with
authority and in the judicious exercise of its discretion in ordering the defendants to make the deposit but
without the condition they had stated? Whether or not to deposit at all the amount of an admitted
indebtedness, or to do so under certain conditions, is a right which belongs to the debtor exclusively. If he
refuses he may not be compelled to do so, and the creditor must fall back on the proper coercive processes
provided by law to secure or satisfy his credit, as by attachment, judgment and execution. From the viewpoint
of the debtor a deposit such as the one involved here is in the nature of consignation, and consignation is a
facultative remedy which he may or may not avail himself of. If made by the debtor, the creditor merely
accepts it, if he wishes; or the court declares that it has been properly made, in either of which events the
obligation is ordered cancelled. Indeed, the law says that "before the creditor has accepted the consignation or
before a judicial declaration that the consignation has been properly made, the debtor may withdraw the thing
or the sum deposited, allowing the obligation to remain in force." 2 If the debtor has such right of withdrawal, he
surely has the right to refuse to make the deposit in the first place. For the court to compel him to do so was a
grave abuse of discretion amounting to excess of jurisdiction.
The order appealed from is set aside, without pronouncement as to costs.
G.R. No. 90359 June 9, 1992
JOHANNES RIESENBECK, petitioner,
vs.
THE HON. COURT OF APPEALS, and JUERGEN MAILE, respondents.

GRIO-AQUINO, J.:
This is a petition for review on certiorari to annul the decision dated April 21, 1989 of the Court of Appeals
which dismissed for lack of merit the petition for certiorari against two (2) orders of Regional Trial Court Judge
Teodoro K. Risos.
On July 25, 1988, petitioner Riesenbeck filed in the Regional Trial Court of Cebu, Branch 27, a complaint for
consignation and damages against respondent Juergen Maile. On July 27, 1988, petitioner consigned and
deposited with the Clerk of Court of the Regional Trial Court of Cebu the sum of P113,750. The private
respondent subsequently filed a Manifestation Accepting Consignation and Motion to Dismiss dated August 1,
1988, wherein he stated, inter alia, that "without necessarily admitting the correctness of obligation of plaintiff
to defendant, the latter hereby manifests to accept the said amount of P113,750 which is consigned by
plaintiff, provided that the present complaint be dismissed outright with cost against plaintiff." (p. 14, CA Rollo.)
The petitioner opposed the manifestation, respondent Maile filed an Answer with Special Defenses and
Counterclaim. On August 23, 1988, petitioner filed his Answer to Counterclaim. Private respondent filed a
rejoinder/reply to the petitioner's opposition.
Thereafter, on September 28, 1988, respondent Judge issued the first questioned order reading in part as
follows:

After a thorough evaluation of the issues involved in the manifestation and the opposition thereto, the Court is
of the opinion that there was a valid consignation, and defendant could legally accept the payment by
consignation with reservation to prove damages and other claims as held by the Supreme Court in the case
of Sing Juco vs. Cuaycong, 46 Phil. 81.
WHEREFORE the Clerk of Court of this Court is hereby ordered to deliver to defendant Juergen Maile the
sum of P113,750.00 immediately, but the motion to dismiss is hereby in the meantime DENIED. (p.31,
CA, Rollo.)
On November 11. 1988, Judge Risos denied petitioner's motion for reconsideration.
On November 18, 1988, petitioner filed a petition for certiorari in the Court of Appeals to annul and set aside
the two orders of Judge Risos.
In a decision dated April 21, 1989, the Court of Appeals dismissed the petition for certiorari.
Petitioner's motion for reconsideration was denied by the Court of Appeals in a Resolution dated August 29,
1989.
In this petition for review, the petitioner raises the following issue: What is the effect on the petitioner's
obligation to the private respondent of the latter's acceptance with reservation of the amount consigned by the
petitioner?
Private respondent's acceptance of the amount consigned by the petitioner-debtor with a reservation or
qualification as to the correctness of the petitioner's obligation, is legally permissible. There is authority for the
view that before a consignation can be judicially declared proper, the creditor may prevent the withdrawal of
the amount consigned by the debtor, by accepting the consignation, even with reservations (Tolentino, Civil
Code of the Phil., Vol. IV, 1973 Ed., p. 317, citing 3 Llerena 263).
In ruling that there was a valid consignation and that the respondent creditor could accept the same with a
reservation of his damages and other claims, the Court of Appeals relied on the 1924 case of Sing Juco vs.
Cuaycong, 46 Phil. 81. In that case, the defendants consigned in court the amount which they had received
from the plaintiff as the price of sugar, the sale of which did not materialize. The defendants were given the
alternative of delivering the sugar or returning the price per stipulation in the contract. We ruled that plaintiff's
acceptance of the money consigned, unconditionally and without reservation, was a waiver of his other claims
under the contract.
A sensu contrario, when the creditor's acceptance of the money consigned is conditional and with
reservations, he is not deemed to have waived the claims he reserved against his debtor. Thus, when the
amount consigned does not cover the entire obligation, the creditor may accept it, reserving his right to the
balance (Tolentino, Civil Code of the Phil., Vol. IV, 1973 Ed., p. 317, citing 3 Llerena 263). The same factual
milieu obtains here because the respondent creditor accepted with reservation the amount consigned in court
by the petitioner-debtor. Therefore, the creditor is not barred from raising his other claims, as he did in his
answer with special defenses and counterclaim against the petitioner-debtor.
As respondent-creditor's acceptance of the amount consigned was with reservations, it did not completely
extinguish the entire indebtedness of the petitioner-debtor. It is apposite to note here that consignation is
completed at the time the creditor accepts the same without objections, or, if he objects, at the time the court
declares that it has been validly made in accordance with law. (Tolentino, Civil Code of the Phil., Vol. IV, 1973
Ed., p. 315.)
Since the lower court in this case declared on September 28, 1988 that there was a valid consignation by the
petitioner, the latter cannot tenably argue that he is still the owner of the amount consigned and that he can
still withdraw it.

The consignation has retroactive effect. The payment is deemed to have been made at the time of the deposit
of the money in court, or when it was placed at the disposal of the judicial authority, supra. In this case,
payment is considered made on July 27, 1988 when petitioner consigned and deposited with the respondent
court the sum of P113,750.

On February 13, 1961, the sheriff of Manila, thru Acting Chief Deputy Sheriff Basilio Magsambol, sent a notice
of sheriff's sale addressed to Castro, announcing that her property covered by T.C.T. No. 7419 would be sold
at public auction on March 10, 1961 to satisfy the obligation covering the two promissory notes plus interest
and attorney's fees.

WHEREFORE, the instant petition is hereby DISMISSED for lack of merit.

Upon request by Castro and the Valencias and with conformity of the bank, the auction sale that was
scheduled for March 10, 1961 was postponed for April 10, 1961. But when April 10, 1961 was subsequently
declared a special holiday, the sheriff of Manila sold the property covered by T.C.T. No. 7419 at a public
auction sale that was held on April 11, 1961, which was the next succeeding business day following the
special holiday.

SO ORDERED.

Castro alleged that it was only when she received the letter from the Acting Deputy Sheriff on February 13,
1961, when she learned for the first time that the mortgage contract (Exhibit "6") which was an encumbrance
on her property was for P6.000.00 and not for P3,000.00 and that she was made to sign as co-maker of the
promissory note (Exhibit "2") without her being informed of this.
On April 4, 1961, Castro filed a suit denominated "Re: Sum of Money," against petitioners Bank and Desiderio,
the Spouses Valencia, Basilio Magsambol and Arsenio Reyes as defendants in Civil Case No. 46698 before
the Court of First Instance of Manila upon the charge, amongst others, that thru mistake on her part or fraud
on the part of Valencias she was induced to sign as co-maker of a promissory note (Exhibit "2") and to
constitute a mortgage on her house and lot to secure the questioned note. At the time of filing her complaint,
respondent Castro deposited the amount of P3,383.00 with the court a quo in full payment of her personal
loan plus interest.

G.R. No. L-32116 April 2l, 1981

RURAL BANK OF CALOOCAN, INC. and JOSE O. DESIDERIO, JR., petitioners,
vs.
THE COURT OF APPEALS and MAXIMA CASTRO, respondents.

In her amended complaint, Castro prayed, amongst other, for the annulment as far as she is concerned of the
promissory note (Exhibit "2") and mortgage (Exhibit "6") insofar as it exceeds P3,000.00; for the discharge of
her personal obligation with the bank by reason of a deposit of P3,383.00 with the court a quo upon the filing
of her complaint; for the annulment of the foreclosure sale of her property covered by T.C.T. No. 7419 in favor
of Arsenio Reyes; and for the award in her favor of attorney's fees, damages and cost.
In their answers, petitioners interposed counterclaims and prayed for the dismissal of said complaint, with
damages, attorney's fees and costs. 2
The pertinent facts arrived from the stipulation of facts entered into by the parties as stated by respondent
Court of Appeals are as follows:

DE CASTRO, * J.:
This is a petition for review by way of certiorari of the decision 1 of the Court of Appeals in CA-G.R. No. 39760R entitled "Maxima Castro, plaintiff-appellee, versus Severino Valencia, et al., defendants; Rural Bank of
Caloocan, Inc., Jose Desiderio, Jr. and Arsenio Reyes, defendants-appellants," which affirmed in toto the
decision of the Court of First Instance of Manila in favor of plaintiff- appellee, the herein private respondent
Maxima Castro.
On December 7, 1959, respondent Maxima Castro, accompanied by Severino Valencia, went to the Rural
Bank of Caloocan to apply for an industrial loan. It was Severino Valencia who arranged everything about the
loan with the bank and who supplied to the latter the personal data required for Castro's loan application. On
December 11, 1959, after the bank approved the loan for the amount of P3,000.00, Castro, accompanied by
the Valencia spouses, signed a promissory note corresponding to her loan in favor of the bank.
On the same day, December 11, 1959, the Valencia spouses obtained from the bank an equal amount of loan
for P3,000.00. They signed a promissory note (Exhibit "2") corresponding to their loan in favor of the bank and
had Castro affixed thereon her signature as co-maker.
The two loans were secured by a real-estate mortgage (Exhibit "6") on Castro's house and lot of 150 square
meters, covered by Transfer Certificate of Title No. 7419 of the Office of the Register of Deeds of Manila.

Spawning the present litigation are the facts contained in the following stipulation of facts submitted by the
parties themselves:
1. That the capacity and addresses of all the parties in this case are admitted .
2. That the plaintiff was the registered owner of a residential house and lot located at Nos. 1268-1270 Carola
Street, Sampaloc, Manila, containing an area of one hundred fifty (150) square meters, more or less, covered
by T.C.T. No. 7419 of the Office of the Register of Deeds of Manila;
3. That the signatures of the plaintiff appearing on the following documents are genuine:
a) Application for Industrial Loan with the Rural Bank of Caloocan, dated December 7, 1959 in the amount of
P3,000.00 attached as Annex A of this partial stipulation of facts;
b) Promissory Note dated December 11, 1959 signed by the plaintiff in favor of the Rural Bank of Caloocan for
the amount of P3,000.00 as per Annex B of this partial stipulation of facts;

c) Application for Industrial Loan with the Rural Bank of Caloocan, dated December 11, 1959, signed only by
the defendants, Severino Valencia and Catalina Valencia, attached as Annex C, of this partial stipulation of
facts;
d) Promissory note in favor of the Rural Bank of Caloocan, dated December 11, 1959 for the amount of
P3000.00, signed by the spouses Severino Valencia and Catalina Valencia as borrowers, and plaintiff Maxima
Castro, as a co-maker, attached as Annex D of this partial stipulation of facts;
e) Real estate mortgage dated December 11, 1959 executed by plaintiff Maxima Castro, in favor of the Rural
Bank of Caloocan, to secure the obligation of P6,000.00 attached herein as Annex E of this partial stipulation
of facts;
All the parties herein expressly reserved their right to present any evidence they may desire on the
circumstances regarding the execution of the above-mentioned documents.
4. That the sheriff of Manila, thru Acting Chief Deputy Sheriff, Basilio Magsambol, sent a notice of sheriff's
sale, address to the plaintiff, dated February 13, 1961, announcing that plaintiff's property covered by TCT No.
7419 of the Register of Deeds of the City of Manila, would be sold at public auction on March 10, 1961 to
satisfy the total obligation of P5,728.50, plus interest, attorney's fees, etc., as evidenced by the Notice of
Sheriff's Sale and Notice of Extrajudicial Auction Sale of the Mortgaged property, attached herewith as
Annexes F and F-1, respectively, of this stipulation of facts;
5. That upon the request of the plaintiff and defendants-spouses Severino Valencia and Catalina Valencia, and
with the conformity of the Rural Bank of Caloocan, the Sheriff of Manila postponed the auction sale scheduled
for March 10, 1961 for thirty (30) days and the sheriff re-set the auction sale for April 10, 1961;
6. That April 10, 1961 was declared a special public holiday; (Note: No. 7 is omitted upon agreement of the
parties.)
8. That on April 11, 1961, the Sheriff of Manila, sold at public auction plaintiff's property covered by T.C.T. No.
7419 and defendant, Arsenio Reyes, was the highest bidder and the corresponding certificate of sale was
issued to him as per Annex G of this partial stipulation of facts;
9. That on April 16, 1962, the defendant Arsenio Reyes, executed an Affidavit of Consolidation of Ownership, a
copy of which is hereto attached as Annex H of this partial stipulation of facts;
10. That on May 9, 1962, the Rural Bank of Caloocan Incorporated executed the final deed of sale in favor of
the defendant, Arsenio Reyes, in the amount of P7,000.00, a copy of which is attached as Annex I of this
partial stipulation of facts;
11. That the Register of Deeds of the City of Manila issued the Transfer Certificate of Title No. 67297 in favor
of the defendant, Arsenio Reyes, in lieu of Transfer Certificate of Title No. 7419 which was in the name of
plaintiff, Maxima Castro, which was cancelled;
12. That after defendant, Arsenio Reyes, had consolidated his title to the property as per T.C.T. No. 67299,
plaintiff filed a notice of lis pendens with the Register of Deeds of Manila and the same was annotated in the
back of T.C.T. No. 67299 as per Annex J of this partial stipulation of facts; and
13. That the parties hereby reserved their rights to present additional evidence on matters not covered by this
partial stipulation of facts.
WHEREFORE, it is respectfully prayed that the foregoing partial stipulation of facts be approved and admitted
by this Honorable Court.

As for the evidence presented during the trial, We quote from the decision of the Court of Appeals the
statement thereof, as follows:
In addition to the foregoing stipulation of facts, plaintiff claims she is a 70-year old widow who cannot read and
write the English language; that she can speak the Pampango dialect only; that she has only finished second
grade (t.s.n., p. 4, December 11, 1964); that in December 1959, she needed money in the amount of
P3,000.00 to invest in the business of the defendant spouses Valencia, who accompanied her to the
defendant bank for the purpose of securing a loan of P3,000.00; that while at the defendant bank, an
employee handed to her several forms already prepared which she was asked to sign on the places indicated,
with no one explaining to her the nature and contents of the documents; that she did not even receive a copy
thereof; that she was given a check in the amount of P2,882.85 which she delivered to defendant spouses;
that sometime in February 1961, she received a letter from the Acting Deputy Sheriff of Manila, regarding the
extrajudicial foreclosure sale of her property; that it was then when she learned for the first time that the
mortgage indebtedness secured by the mortgage on her property was P6,000.00 and not P3,000.00; that
upon investigation of her lawyer, it was found that the papers she was made to sign were:
(a) Application for a loan of P3,000.00 dated December 7, 1959 (Exh. B-1 and Exh. 1);
(b) Promissory note dated December 11, 1959 for the said loan of P3,000.00 (Exh- B-2);
(c) Promissory note dated December 11, 1959 for P3,000.00 with the defendants Valencia spouses as
borrowers and appellee as co-maker (Exh. B-4 or Exh. 2).
The auction sale set for March 10, 1961 was postponed co April 10, 1961 upon the request of defendant
spouses Valencia who needed more time within which to pay their loan of P3,000.00 with the defendant bank;
plaintiff claims that when she filed the complaint she deposited with the Clerk of Court the sum of P3,383.00 in
full payment of her loan of P3,000.00 with the defendant bank, plus interest at the rate of 12% per annum up
to April 3, 1961 (Exh. D).
As additional evidence for the defendant bank, its manager declared that sometime in December, 1959,
plaintiff was brought to the Office of the Bank by an employee- (t.s.n., p 4, January 27, 1966). She wept, there
to inquire if she could get a loan from the bank. The claims he asked the amount and the purpose of the loan
and the security to he given and plaintiff said she would need P3.000.00 to be invested in a drugstore in which
she was a partner (t.s.n., p. 811. She offered as security for the loan her lot and house at Carola St.,
Sampaloc, Manila, which was promptly investigated by the defendant bank's inspector. Then a few days later,
plaintiff came back to the bank with the wife of defendant Valencia A date was allegedly set for plaintiff and the
defendant spouses for the processing of their application, but on the day fixed, plaintiff came without the
defendant spouses. She signed the application and the other papers pertinent to the loan after she was
interviewed by the manager of the defendant. After the application of plaintiff was made, defendant spouses
had their application for a loan also prepared and signed (see Exh. 13). In his interview of plaintiff and
defendant spouses, the manager of the bank was able to gather that plaintiff was in joint venture with the
defendant spouses wherein she agreed to invest P3,000.00 as additional capital in the laboratory owned by
said spouses (t.s.n., pp. 16-17) 3
The Court of Appeals, upon evaluation of the evidence, affirmed in toto the decision of the Court of First
Instance of Manila, the dispositive portion of which reads:
FOR ALL THE FOREGOING CONSIDERATIONS, the Court renders judgment and:
(1) Declares that the promissory note, Exhibit '2', is invalid as against plaintiff herein;
(2) Declares that the contract of mortgage, Exhibit '6', is null and void, in so far as the amount thereof exceeds
the sum of P3,000.00 representing the principal obligation of plaintiff, plus the interest thereon at 12% per
annum;

(3) Annuls the extrajudicial foreclosure sale at public auction of the mortgaged property held on April 11, 1961,
as well as all the process and actuations made in pursuance of or in implementation thereto;
(4) Holds that the total unpaid obligation of plaintiff to defendant Rural Bank of Caloocan, Inc., is only the
amount of P3,000.00, plus the interest thereon at 12% per annum, as of April 3, 1961, and orders that
plaintiff's deposit of P3,383.00 in the Office of the Clerk of Court be applied to the payment thereof;

THE COURT OF APPEALS ERRED IN NOT FINDING THAT, BETWEEN PETITIONERS AND RESPONDENT
CASTRO, THE LATTER SHOULD SUFFER THE CONSEQUENCES OF THE FRAUD PERPETRATED BY
THE VALENCIA SPOUSES, IN AS MUCH AS IT WAS THRU RESPONDENT CASTRO'S NEGLIGENCE OR
ACQUIESCENSE IF NOT ACTUAL CONNIVANCE THAT THE PERPETRATION OF SAID FRAUD WAS
MADE POSSIBLE.
V

(5) Orders defendant Rural Bank of Caloocan, Inc. to return to defendant Arsenio Reyes the purchase price
the latter paid for the mortgaged property at the public auction, as well as reimburse him of all the expenses
he has incurred relative to the sale thereof;
(6) Orders defendants spouses Severino D. Valencia and Catalina Valencia to pay defendant Rural Bank of
Caloocan, Inc. the amount of P3,000.00 plus the corresponding 12% interest thereon per annum from
December 11, 1960 until fully paid; and
Orders defendants Rural Bank of Caloocan, Inc., Jose Desiderio, Jr. and spouses Severino D. Valencia and
Catalina Valencia to pay plaintiff, jointly and severally, the sum of P600.00 by way of attorney's fees, as well as
costs.
In view of the conclusion that the court has thus reached, the counterclaims of defendant Rural Bank of
Caloocan, Inc., Jose Desiderio, Jr. and Arsenio Reyes are hereby dismissed, as a corollary
The Court further denies the motion of defendant Arsenio Reyes for an Order requiring Maxima Castro to
deposit rentals filed on November 16, 1963, resolution of which was held in abeyance pending final
determination of the case on the merits, also as a consequence of the conclusion aforesaid. 4
Petitioners Bank and Jose Desiderio moved for the reconsideration 5 of respondent court's decision. The
motion having been denied, 6 they now come before this Court in the instant petition, with the following
Assignment of Errors, to wit:
I
THE COURT OF APPEALS ERRED IN UPHOLDING THE PARTIAL ANNULMENT OF THE PROMISSORY
NOTE, EXHIBIT 2, AND THE MORTGAGE, EXHIBIT 6, INSOFAR AS THEY AFFECT RESPONDENT
MAXIMA CASTRO VIS-A-VIS PETITIONER BANK DESPITE THE TOTAL ABSENCE OF EITHER
ALLEGATION IN THE COMPLAINT OR COMPETENT PROOF IN THE EVIDENCE OF ANY FRAUD OR
OTHER UNLAWFUL CONDUCT COMMITTED OR PARTICIPATED IN BY PETITIONERS IN PROCURING
THE EXECUTION OF SAID CONTRACTS FROM RESPONDENT CASTRO.

THE COURT OF APPEALS ERRED IN UPHOLDING THE VALIDITY OF THE DEPOSIT BY RESPONDENT
CASTRO OF P3,383.00 WITH THE COURT BELOW AS A TENDER AND CONSIGNATION OF PAYMENT
SUFFICIENT TO DISCHARGE SAID RESPONDENT FROM HER OBLIGATION WITH PETITIONER BANK.
VI
THE COURT OF APPEALS ERRED IN NOT DECLARING AS VALID AND BINDING UPON RESPONDENT
CASTRO THE HOLDING OF THE SALE ON FORECLOSURE ON THE BUSINESS DAY NEXT FOLLOWING
THE ORIGINALLY SCHEDULED DATE THEREFOR WHICH WAS DECLARED A HOLIDAY WITHOUT
NECESSITY OF FURTHER NOTICE THEREOF.
The issue raised in the first three (3) assignment of errors is whether or not respondent court correctly affirmed
the lower court in declaring the promissory note (Exhibit 2) invalid insofar as they affect respondent Castro visa-vis petitioner bank, and the mortgage contract (Exhibit 6) valid up to the amount of P3,000.00 only.
Respondent court declared that the consent of Castro to the promissory note (Exhibit 2) where she signed as
co-maker with the Valencias as principal borrowers and her acquiescence to the mortgage contract (Exhibit 6)
where she encumbered her property to secure the amount of P6,000.00 was obtained by fraud perpetrated on
her by the Valencias who had abused her confidence, taking advantage of her old age and ignorance of her
financial need. Respondent court added that "the mandate of fair play decrees that she should be relieved of
her obligation under the contract" pursuant to Articles 24 7 and 1332 8 of the Civil Code.
The decision in effect relieved Castro of any liability to the promissory note (Exhibit 2) and the mortgage
contract (Exhibit 6) was deemed valid up to the amount of P3,000.00 only which was equivalent to her
personal loan to the bank.
Petitioners argued that since the Valencias were solely declared in the decision to be responsible for the fraud
against Castro, in the light of the res inter alios acta rule, a finding of fraud perpetrated by the spouses against
Castro cannot be taken to operate prejudicially against the bank. Petitioners concluded that respondent court
erred in not giving effect to the promissory note (Exhibit 2) insofar as they affect Castro and the bank and in
declaring that the mortgage contract (Exhibit 6) was valid only to the extent of Castro's personal loan of
P3,000.00.

II
THE COURT OF APPEALS ERRED IN IMPUTING UPON AND CONSIDERING PREJUDICIALLY AGAINST
PETITIONERS, AS BASIS FOR THE PARTIAL ANNULMENT OF THE CONTRACTS AFORESAID ITS
FINDING OF FRAUD PERPETRATED BY THE VALENCIA SPOUSES UPON RESPONDENT CASTRO IN
UTTER VIOLATION OF THE RES INTER ALIOS ACTA RULE.
III
THE COURT OF APPEAL ERRED IN NOT HOLDING THAT, UNDER THE FACTS FOUND BY IT,
RESPONDENT CASTRO IS UNDER ESTOPPEL TO IMPUGN THE REGULARITY AND VALIDITY OF HER
QUESTIONED TRANSACTION WITH PETITIONER BANK.
IV

The records of the case reveal that respondent court's findings of fraud against the Valencias is well supported
by evidence. Moreover, the findings of fact by respondent court in the matter is deemed final. 9 The decision
declared the Valencias solely responsible for the defraudation of Castro. Petitioners' contention that the
decision was silent regarding the participation of the bank in the fraud is, therefore, correct.
We cannot agree with the contention of petitioners that the bank was defrauded by the Valencias. For one, no
claim was made on this in the lower court. For another, petitioners did not submit proof to support its
contention.
At any rate, We observe that while the Valencias defrauded Castro by making her sign the promissory note
(Exhibit 2) and the mortgage contract (Exhibit 6), they also misrepresented to the bank Castro's personal
qualifications in order to secure its consent to the loan. This must be the reason which prompted the bank to
contend that it was defrauded by the Valencias. But to reiterate, We cannot agree with the contention for

reasons above-mentioned. However, if the contention deserves any consideration at all, it is in indicating the
admission of petitioners that the bank committed mistake in giving its consent to the contracts.
Thus, as a result of the fraud upon Castro and the misrepresentation to the bank inflicted by the Valencias
both Castro and the bank committed mistake in giving their consents to the contracts. In other words,
substantial mistake vitiated their consents given. For if Castro had been aware of what she signed and the
bank of the true qualifications of the loan applicants, it is evident that they would not have given their consents
to the contracts.
Pursuant to Article 1342 of the Civil Code which provides:
Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has
created substantial mistake and the same is mutual.
We cannot declare the promissory note (Exhibit 2) valid between the bank and Castro and the mortgage
contract (Exhibit 6) binding on Castro beyond the amount of P3,000.00, for while the contracts may not be
invalidated insofar as they affect the bank and Castro on the ground of fraud because the bank was not a
participant thereto, such may however be invalidated on the ground of substantial mistake mutually committed
by them as a consequence of the fraud and misrepresentation inflicted by the Valencias. Thus, in the case
of Hill vs. Veloso, 10this Court declared that a contract may be annulled on the ground of vitiated consent if
deceit by a third person, even without connivance or complicity with one of the contracting parties, resulted in
mutual error on the part of the parties to the contract.
Petitioners argued that the amended complaint fails to contain even a general averment of fraud or mistake,
and its mention in the prayer is definitely not a substantial compliance with the requirement of Section 5, Rule
8 of the Rules of Court. The records of the case, however, will show that the amended complaint contained a
particular averment of fraud against the Valencias in full compliance with the provision of the Rules of Court.
Although, the amended complaint made no mention of mistake being incurred in by the bank and Castro, such
mention is not essential in order that the promissory note (Exhibit 2) may be declared of no binding effect
between them and the mortgage (Exhibit 6) valid up to the amount of P3,000.00 only. The reason is that the
mistake they mutually suffered was a mere consequence of the fraud perpetrated by the Valencias against
them. Thus, the fraud particularly averred in the complaint, having been proven, is deemed sufficient basis for
the declaration of the promissory note (Exhibit 2) invalid insofar as it affects Castro vis-a-vis the bank, and the
mortgage contract (Exhibit 6) valid only up to the amount of P3,000.00.
The second issue raised in the fourth assignment of errors is who between Castro and the bank should suffer
the consequences of the fraud perpetrated by the Valencias.
In attributing to Castro an consequences of the loss, petitioners argue that it was her negligence or
acquiescence if not her actual connivance that made the fraud possible.
Petitioners' argument utterly disregards the findings of respondent Court of Appeals wherein petitioners'
negligence in the contracts has been aptly demonstrated, to wit:
A witness for the defendant bank, Rodolfo Desiderio claims he had subjected the plaintiff-appellee to several
interviews. If this were true why is it that her age was placed at 61 instead of 70; why was she described in the
application (Exh. B-1-9) as drug manufacturer when in fact she was not; why was it placed in the application
that she has income of P20,000.00 when according to plaintiff-appellee, she his not even given such kind of
information -the true fact being that she was being paid P1.20 per picul of the sugarcane production in her
hacienda and 500 cavans on the palay production. 11
From the foregoing, it is evident that the bank was as much , guilty as Castro was, of negligence in giving its
consent to the contracts. It apparently relied on representations made by the Valencia spouses when it should
have directly obtained the needed data from Castro who was the acknowledged owner of the property offered
as collateral. Moreover, considering Castro's personal circumstances her lack of education, ignorance and
old age she cannot be considered utterly neglectful for having been defrauded. On the contrary, it is

demanded of petitioners to exercise the highest order of care and prudence in its business dealings with the
Valencias considering that it is engaged in a banking business a business affected with public interest. It
should have ascertained Castro's awareness of what she was signing or made her understand what
obligations she was assuming, considering that she was giving accommodation to, without any consideration
from the Valencia spouses.
Petitioners further argue that Castro's act of holding the Valencias as her agent led the bank to believe that
they were authorized to speak and bind her. She cannot now be permitted to deny the authority of the
Valencias to act as her agent for one who clothes another with apparent authority as her agent is not permitted
to deny such authority.
The authority of the Valencias was only to follow-up Castro's loan application with the bank. They were not
authorized to borrow for her. This is apparent from the fact that Castro went to the Bank to sign the promissory
note for her loan of P3,000.00. If her act had been understood by the Bank to be a grant of an authority to the
Valencia to borrow in her behalf, it should have required a special power of attorney executed by Castro in
their favor. Since the bank did not, We can rightly assume that it did not entertain the notion, that the Valencia
spouses were in any manner acting as an agent of Castro.
When the Valencias borrowed from the Bank a personal loan of P3,000.00 evidenced by a promissory note
(Exhibit 2) and mortgaged (Exhibit 6) Castro's property to secure said loan, the Valencias acted for their own
behalf. Considering however that for the loan in which the Valencias appeared as principal borrowers, it was
the property of Castro that was being mortgaged to secure said loan, the Bank should have exercised due
care and prudence by making proper inquiry if Castro's consent to the mortgage was without any taint or
defect. The possibility of her not knowing that she signed the promissory note (Exhibit 2) as co-maker with the
Valencias and that her property was mortgaged to secure the two loans instead of her own personal loan only,
in view of her personal circumstances ignorance, lack of education and old age should have placed the
Bank on prudent inquiry to protect its interest and that of the public it serves. With the recent occurrence of
events that have supposedly affected adversely our banking system, attributable to laxity in the conduct of
bank business by its officials, the need of extreme caution and prudence by said officials and employees in the
discharge of their functions cannot be over-emphasized.
Question is, likewise, raised as to the propriety of respondent court's decision which declared that Castro's
consignation in court of the amount of P3,383.00 was validly made. It is contended that the consignation was
made without prior offer or tender of payment to the Bank, and it therefore, not valid. In holding that there is a
substantial compliance with the provision of Article 1256 of the Civil Code, respondent court considered the
fact that the Bank was holding Castro liable for the sum of P6,000.00 plus 12% interest per annum, while the
amount consigned was only P3,000.00 plus 12% interest; that at the time of consignation, the Bank had long
foreclosed the mortgage extrajudicially and the sale of the mortgage property had already been scheduled for
April 10, 1961 for non-payment of the obligation, and that despite the fact that the Bank already knew of the
deposit made by Castro because the receipt of the deposit was attached to the record of the case, said Bank
had not made any claim of such deposit, and that therefore, Castro was right in thinking that it was futile and
useless for her to make previous offer and tender of payment directly to the Bank only in the aforesaid amount
of P3,000.00 plus 12% interest. Under the foregoing circumstances, the consignation made by Castro was
valid. if not under the strict provision of the law, under the more liberal considerations of equity.
The final issue raised is the validity or invalidity of the extrajudicial foreclosure sale at public auction of the
mortgaged property that was held on April 11, 1961.
Petitioners contended that the public auction sale that was held on April 11, 1961 which was the next business
day after the scheduled date of the sale on April 10, 1961, a special public holiday, was permissible and valid
pursuant to the provisions of Section 31 of the Revised Administrative Code which ordains:
Pretermission of holiday. Where the day, or the last day, for doing any act required or permitted by law falls
on a holiday, the act may be done on the next succeeding business day.
Respondent court ruled that the aforesaid sale is null and void, it not having been carried out in accordance
with Section 9 of Act No. 3135, which provides:

Section 9. Notice shall be given by posting notices of the sale for not less than twenty days in at least three
public places of the municipality or city where the property is situated, and if such property is worth more than
four hundred pesos, such notice shall also be published once a week for at least three consecutive weeks in a
newspaper of general circulation in the municipality or city.
We agree with respondent court. The pretermission of a holiday applies only "where the day, or the last day for
doing any act required or permitted by law falls on a holiday," or when the last day of a given period for doing
an act falls on a holiday. It does not apply to a day fixed by an office or officer of the government for an act to
be done, as distinguished from a period of time within which an act should be done, which may be on any day
within that specified period. For example, if a party is required by law to file his answer to a complaint within
fifteen (15) days from receipt of the summons and the last day falls on a holiday, the last day is deemed
moved to the next succeeding business day. But, if the court fixes the trial of a case on a certain day but the
said date is subsequently declared a public holiday, the trial thereof is not automatically transferred to the next
succeeding business day. Since April 10, 1961 was not the day or the last day set by law for the extrajudicial
foreclosure sale, nor the last day of a given period but a date fixed by the deputy sheriff, the aforesaid sale
cannot legally be made on the next succeeding business day without the notices of the sale on that day being
posted as prescribed in Section 9, Act No. 3135.
WHEREFORE, finding no reversible error in the judgment under review, We affirm the same in toto. No
pronouncement as to cost.
SO ORDERED.
G.R. No. L-59805 July 21, 1989
LEONILA J. LICUANAN, petitioner,
vs.
HON. RICARDO D. DIAZ, Judge, Branch XXVII Court of First Instance of Manila, and AIDA
PINEDA,respondents.

PARAS, J.:
This is a petition for review on certiorari of the October 15, 1981 Decision of the then Court of First Instance of
Manila affirming the August 8, 1979 Decision of the City Court of Manila.

Private respondent, reacting to the said letter, on April 12, 1979, wrote the Civil Relations Service, AFP, Camp
Aguinaldo, Quezon City, for help. A portion of her letter, reads:
May I have the honor to solicit the help of your good office with regard to the letter I received from the law
office of Amado C. Sagalongos & Associates attached herein.
The accusations implied therein are not true and for your information, Sir, I have faithfully paid my monthly
rentals from the time we occupied our apartment on March, 1973 up to March, 1978.
On April 24, 1978, both petitioner and private respondent appeared before Lt. Col. Antonio Penala, Hearing
Officer of the Civil Relations Service, but since the parties failed to reach any agreement, Lt. Col. Penala
placed the notation "HOLD" on the pertinent document; and as precautionary measure, instructed private
respondent to deposit the amount of rental due for that month so that she could not be charged with nonpayment, which directive private respondent readily complied with and she was issued the corresponding
receipt.
On August 30,1978, private respondent received a letter from Atty. Manuel Melo, counsel for petitioner,
demanding payment of the April to August, 1978 rentals amounting to P900.00.
On September 13, 1978, petitioner filed Civil Case No. 037226-V with the City Court of Manila, Branch VII,
presided over by Hon. Priscilla C. Mijares against private respondent for unlawful detainer with damages
(Rollo, pp. 11-13). In the same, petitioner alleged, among others, that private respondent had failed to pay her
monthly rentals from April to September, 1978, amounting to Pl,080.00; that a demand letter dated August 23,
1978, was sent and received by private respondent on August 30, 1978, wherein it is demanded that she pay
her rentals in arrears and to vacate the premises; and that despite repeated demands, written and verbal, she
refuses to pay her rentals in arrears and to vacate the premises.
On September 27,1978, private respondent filed her answer (Ibid., pp. 14-17). In the same, private
respondent, among others, denies that she failed in paying her monthly rentals, claiming that petitioner has
refused the rental being tendered and that upon advice of the Office of the Civil Relations, AFP, she deposited
her monthly rentals with that office for the months of April to September, 1978, inclusive at P80.00 a month;
and that she admits having received the letter of demand dated August 23, 1978, and claims that upon receipt
of the said letter, she called up by telephone petitioner's counsel, Atty. Manuel Melo, informing him that the
rentals due for the months of April to August, 1978 have been deposited with the Office of Civil Relations, AFP,
and that petitioner can withdraw the said amount due from the said office.
The trial court, in a Decision dated August 8, 1979, ruled in favor of private respondent (Ibid., pp. 37-42). The
dispositive portion of the said decision reads:

Herein petitioner is the owner of an apartment situated at 3415 F. Aguilar St., Bo. Obrero, Tondo, Manila, being
rented by herein private respondent since March, 1973. On January 22, 1974, they executed a lease contract,
and stipulated therein, among others, that the monthly rental is One Hundred Eighty Pesos (Pl80.00) to be
paid within the first five (5) days of every month.

In view thereof, the complaint for unlawful detainer with damages is hereby dismissed for lack of merit. The
petition for consignation having been rendered moot and academic, said petition is also hereby dismissed.

On April 4, 1978, the law office of Amado E. Salalongos and Associates sent private respondent a letter, the
body of which, reads:

Petitioner appealed the decision, but the then Court of First Instance of Manila, presided over by herein
respondent judge, in a Decision dated October 15, 1981, affirmed the appealed judgment (lbid., pp. 71-74).
The decretal portion of the said decision reads:

Upon arrival of your lessor, Mrs. Leonila Licuanan from the United States, she found out that you have
occupied her garage situated at 3415 F. Aguilar, Bo. Obrero, Tondo, Manila, which portion is not included in
your lease contract, and that despite her request that you remove the aparador and other things which you
have placed there as your stockpile, you have failed and refused to do so, and instead showed arrogance by
telling her that it will need a court order before she removes the same and restores possession to you, in
violation of the terms of your contract.

WHEREFORE, the decision of the lower Court dismissing the instant cases for unlawful detainer with
damages and for consignation is hereby AFFIRMED.

In view thereof, we are giving you five (5) days from receipt hereof within which to vacate the premises at 3415
F. Aguilar, otherwise, we shall be constrained to file an ejectment suit against you.

A Motion for Reconsideration was filed (Ibid., pp. 75-77), but the same was denied in an Order dated February
18, 1982 (Ibid., pp. 92-93). Hence, the instant petition.

Defendant-appellee, Aida Pineda, is hereby ordered to pay the plaintiff the monthly rentals as provided for in
the lease contract for all the succeeding months from September, 1981.

Petitioner raised six (6) assignments of error to wit:

Error 1, the finding as valid and legal 'consignation' Pineda's deposit with the Office of Civilian Relations of the
Armed Forces at Camp Aguinaldo, her rent due to Licuanan, instead of making proper CONSIGNATION with a
court or with a bank as provided by law.
Error 2, the finding as sufficient and valid in the law the testimony of Pineda one year after the alleged deposit
with the Army.
Error 3, in affirming the lower Court's grave legal error of injecting a totally outlandish matter into the case and
improperly converting the same to form part of the ground for its erroneous decision.
Error 4, in not finding as REASONABLE COMPENSATION for illegally detained property the payments made
by Pineda to Licuanan which were delayed far beyond the three months at any one time provided by the rental
law.
Error 5, in finding as bona fide rent what Pineda paid which was delayed for sixteen months (16) from October
of 1978 to January of 1980, which was five times the three (3) months at any one time provided by law.
Error 6, being germane to Error I supra, but earlier omitted by inadvertence, is in finding that Pineda tendered
her rent payment to Licuanan but that Licuanan refused to accept the same.
The instant petition is impressed with merit.
The main issue in this case is whether or not private respondent's deposit of the rentals due to petitioner with
Civil Relations Service, now Office for Civil Relations, AFP, is a valid consignation. This issue was already
answered in the negative by this Court in the case of Landicho v. Tensuan (150 SCRA 410, 415 [1987])
wherein it stated-

The reason for the notification to the persons interested in the fulfillment of the obligation after consignation
had been made, which is separate and distinct from the notification which is made prior to the consignation, is
stated in Cabanas v. Calo, G.R. No. L-10927, October 30, 1958, 104 Phil. 1058, thus: 'There should be notice
to the creditor prior and after consignation as required by the Civil Code. The reason for this is obvious,
namely, to enable the creditor to withdraw the goods or money deposited. Indeed, it would be unjust to make
him suffer the risk for any deterioration, depreciation or loss of such goods or money by reason of lack of
knowledge of the consignation. (P. 181)
In the instant case, perusal of the records will readily show that private respondent failed to comply with this
requirement. Even granting that petitioner was present when the hearing officer of the Office for Civil
Relations, AFP, instructed private respondent to deposit the April rental, it will be noted that petitioner
thereafter was never notified that a deposit was made in the said office; and in the succeeding monthly rentals,
no tender of payment was made to petitioner, nor was she given any notice that consignation will be made or
that consignation had been made.
PREMISES CONSIDERED, the October 15,1981, Decision of the then Court of First Instance of Manila is
REVERSED and SET ASIDE, and the respondent is ordered to vacate the premises and to pay all accrued
rentals.
SO ORDERED.
G.R. No. 109020 March 3, 1994
FELISA CHAN, petitioner,
vs.
HON. COURT OF APPEALS, and GRACE CU, respondents.
Arthur D. Lim Law Office for petitioner.
Nicolas V. Benedicto, Jr. for private respondent.

Their protestation that they deposited the rentals due though belatedly in the Office of then Presidential
Assistant Ronaldo Zamora does not help their cause at all. The law prescribes that such consignation or
deposit of rentals should be made with the Court and/or under Batas Pambansa Blg. 25 in the bank and not
elsewhere.
DAVIDE, JR., J.:
In addition, it must be stated that in the case of Soco v. Militante (123 SCRA 160, 166-167 [1983]), this Court
ruled that the codal provision of the Civil Code dealing with consignation (Articles 1252-1261) should be
accorded a mandatory constructionWe do not agree with the questioned decision. We hold that the essential requisites of a valid consignation
must be complied with fully and strictly in accordance with the law. Articles 1256 to 1261, New Civil Code. That
these Articles must be accorded a mandatory construction is clearly evident and plain from the very language
of the codal provisions themselves which require absolute compliance with the essential requisites therein
provided. Substantial compliance is not enough for that would render only directory construction to the law.
The use of the words 'shall' and 'must' which are imperative, operating to impose a duty which may be
enforced, positively indicated that all the essential requisites of a valid consignation must be complied with.
The Civil Code Articles expressly and explicitly direct what must be essentially done in order that consignation
shall be valid and effectual ...
Likewise, in the said Soco case, this Court enumerated the requirements prescribed by law for a valid
consignation (p. 173). One of the given requirements is that after consignation had been made, the person
interested was notified thereof (Art. 1178, Civil Code). The reason for such a requirement was given by this
Court. lt stated-

This is a petition for review on certiorari of the decision of the Court of Appeals in CA-G.R. SP No.
28870 1 which reversed and set aside the decision of the Regional Trial Court (RTC) of Manila in Civil Case
No. 91-55879. 2 The RTC had affirmed the decision of the Metropolitan Trial Court (MTC) of Manila in civil
Case No. 131203-CV. 3
The antecedent facts are set forth in the challenged decision of the public respondent Court of Appeals as
follows:
It appears from the records that on February 1, 1983, Felisa Chan and Grace Cu entered into a contract of
lease whereby the latter will occupy for residential purposes Room 401 and the roof top of Room 442 of a
building owned by the former located at Elcano corner Urbistondo, Manila. The term of the lease is one year or
up to February 1, 1984 at a monthly rental of P2,400.00. Said contract of lease was renewed every year for
two successive years or up to February 1, 1986. In the contracts, it was agreed that the premises shall be
used as a learning center. After February 1, 1986, there was no written contract of lease executed by the
parties, but Grace has continuously occupied the premises as a learning center.
The monthly rental was raised every year. In January, 1989, it was increased to P3,484.80.

Sometime in November, 1989, Felisa padlock the way to the roof top. Thereafter, there was an exchange of
communications between the parties. Grace insisted that she should be allowed to use the roof top of Room
442, while Felisa maintained that only Room 401 was leased and that the use of the roof top which, according
to her poses danger to the students, was merely tolerated. Eventually, Felisa terminated the lease, giving
Grace until January 1, 1990 to vacate the premises.
Because of the dispute between the parties, Felisa did not collect the rental for December, 1989. Whereupon,
Grace tendered to Felisa a check amounting to P3,310.56. The latter refused to accept the check. So Grace's
lawyer tendered the payment in cash in the same amount of P3,310.56, with notice to Felisa that if she will not
accept the payment, the same will be deposited in court by way of consignation. At this juncture, Felisa
allowed Grace to hold classes only up the March, 1990.
On January 15, 1990, Grace filed Civil Case No. 131203 for consignation with the Metropolitan Trial Court of
Manila, Branch 15, alleging in her complaint that Felisa refused to accept, without justifiable cause, the rentals
for the premises in question. Felisa interposed in her answer a counterclaim for ejectment, contending that the
lease, being month to month, had expired but that despite demand, Grace refused to vacate the premises. 4

Thus, the respondent [Chan] allowed the petitioner [Cu] to hold classes in the premises only until March,
1981. 7 Obviously, from respondent landlord's point of view, beyond March, 1989, 8 (1) the petitioner may no
longer be considered as lessee or debtor who may relieve herself of liability by tendering payment of the
rentals and if refused, by consigning them in court; and that (2) the petitioner is a squatter or trespasser who
has occupied the premises not only without any agreement with the respondent but against her will. So, as far
as the respondent is concerned, this consignation may not come under the provisions of Article 1256 of the
Civil Code cited above. Simply put, respondent's refusal to accept petitioner['s] rental payments was with just
cause and that, therefore, the respondent may not be compelled to accept such rental payments. 9
On the issue of ejectment, the Court of Appeals made the following observations:
Now, for a digression, We cannot see our way clear why the MTC and the RTC passed upon the issue of
ejectment raised in respondent's counterclaim and fixed the term of the lease up to June 10, 1992. Under
Section 1, Rule 70 of the Revised Rules of Court, an action for ejectment can only be initiated through a
verified complaint, not counterclaim. This is basic. Thus, the said courts should not have fixed the terms of the
lease. This issue can only be decided in a case of ejectment filed pursuant to the said rule. The supreme
Court, in Ching Pue vs. Gonzales [87 Phil. 81] held:

On 18 December 1990, the MTC rendered its decision, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered as follows:
1. The court declares that the roof top of the building at 442 Elcano corner Urbistondo Street, Manila is
included in the lease;
2. The court fixes the term of the lease over the subject premises until June 30, 1992 upon the expiration of
which, petitioner [Grace Cu] is ordered to vacate the said premises;
3. The court declares the consignation of rentals made by the petitioner to be valid and legal and hereby
release[s] the petitioner from the obligation of paying the said rentals;
4. All the respective claims of the parties against each other for damages and attorney's fees are hereby
dismissed.
SO ORDERED. 5
Both parties appealed to the RTC of Manila. Grace Cu maintained that the MTC should have fixed a longer
period, while Felisa Chan contended that the MTC erred in extending the term of the lease and in upholding
the validity of the consignation. In its Decision of 27 March 1992, the RTC affirmed the decision of the MTC.
Cu then went to the Court of Appeals on a petition for review 6 alleging therein that the RTC erred "in not fixing
a longer period of extension of the lease" and "in extending the duration of the lease to 30 June 1992 but
subverting its factual findings in justification of the extension as it concluded that the period was intended by
the parties for a longer duration." In its challenged Decision of 20 January 1993, the Court of Appeals reversed
and set aside the decisions of the MTC and the RTC and dismissed the complaint for consignation for lack of
merit. It likewise said that the MTC and the RTC erred in passing upon the issue of ejectment raised in Chan's
counterclaim since an action for ejectment can only be initiated through a verified complaint, not a
counterclaim.
In dismissing the complaint for consignation, the Court of Appeals ruled that under Article 1256 of the Civil
Code, consignation may only be resorted to by a debtor if the creditor to whom tender of payment has been
made refuses without just cause to accept it. The court of Appeals held that Chan's refusal to accept the rental
was justified. It said:

Consignation in court under article 1176 of the Civil Code, is not the proper proceedings to determine the
relation between landlord and tenant, the period or life of the lease or tenancy, the reasonableness of the
rental, the right of the tenant to keep the premises against the will of landlord, etc. These questions should be
decided in a case of ejectment or detainer like those two cases brought by Gonzales against two of the
petitioners under the provisions of Rule 72 of the Rules of Court. In a case of ejectment, the landlord claims
either that the lease has ended or been terminated or that the lessee has forfeited his right as such because of
his failure to pay the rents as agreed upon or because he failed or refused to pay the new rentals fixed and
demanded by the lessor. The lessee in his turn may put up the defense that according to law, the rental
demanded of him is unreasonable, exorbitant and illegal, or that the period of the lease has not yet expired, or
that if the rental law is applicable, and that the premises are destined solely for dwelling, he may not be ousted
therefrom because the owner does not need them for his own use, etc. We repeat that all these questions
should be submitted and decided in a case of ejectment and cannot be decided in a case of consignation. 10
Chan's motion to reconsider the decision 11 having been denied by the Court of Appeals in its Resolution of 23
February 1993, 12 she filed the instant petition wherein she alleges that:
1. THE HONORABLE COURT OF APPEALS HAS DECIDED THE CASE IN A WAY PROBABLY NOT IN
ACCORD WITH THE LAW OR APPLICABLE JURISPRUDENCE OF THE SUPREME COURT (SECTION 4
(A), RULE 45 OF THE RULES OF COURT);
2. THE HONORABLE COURT OF APPEALS, WITH UTMOST RESPECT, COMMITTED AN ERROR:
(A) IN HOLDING THAT THE COUNTERCLAIM FOR UNLAWFUL DETAINER WAS IMPROPERLY INCLUDED
IN THE COMPLAINT FOR CONSIGNATION;
(B) IN RELYING ON THE CASE OF CHING PUE VS. GONZALES (87 PHIL. 81) AS BASIS FOR NOT
ACTING UPON THE COUNTERCLAIM FOR UNLAWFUL DETAINER AND IN IMPLIEDLY DISMISSING THE
SAME;
(C) IN RENDERING A DECISION WHICH PROMOTES, INSTEAD OF AVOID, A MULTIPLICITY OF SUITS;
(D) IN RENDERING A DECISION WHICH GAVE THE PRIVATE RESPONDENT UNWARRANTED BENEFITS
BECAUSE SHE IS PRACTICALLY ALLOWED TO CONTINUE OCCUPYING PETITIONER'S PREMISES
WHILE PETITIONER, WHOSE RIGHTS OVER THE PREMISES WERE UPHELD, IS FORCED TO LITIGATE
ANEW AND/OR TO RE-COMMENCE UNLAWFUL DETAINER PROCEEDINGS. 13

Chan maintains that the Court of Appeals erred in giving due course to Cu's petition for review and in deciding
upon issues which Cu never raised in her petition. Chan contends that the Court of Appeals should have
limited itself to the matter of the extension of the lease period and not on the jurisdiction over the action or
subject matter of the suit which was never raised, nor on the propriety of the counterclaim for ejectment.
Chan submits that while it is true that her cause of action for unlawful detainer was incorporated in her answer
to the complaint for consignation, the Rules of Court do not prohibit such procedure, and in her case the MTC
has exclusive original jurisdiction on the counterclaim for ejectment. The summary disposition of the complaint
for consignation as determined by the trial court was not affected by the filing of the counterclaim since it is a
counterclaim allowed under Section 1 of the Rule on Summary Procedure as it did not involve any question of
ownership nor did it allege any claim in excess of P20,000.00. She then concludes that what the Court of
Appeals has impliedly suggested was for her to file a separate complaint for unlawful detainer, which would be
laborious and would encourage multiplicity of suits; hence, the counterclaim for unlawful detainer should not
have been dismissed.
Chan also contends that the case of Ching Pue vs. Gonzales 14 is not applicable because in Ching Pue the
consignation cases were filed with the Court of First Instance of Manila which did not have jurisdiction to pass
upon the unlawful detainer cases that were properly cognizable by the Municipal Court. In the instant case, the
consignation case was filed with the MTC which also has jurisdiction over the counterclaim for ejectment. The
Court of Appeals should have ordered the ejectment of Cu not only because it found that her refusal to accept
the payment was with just cause, thereby impliedly holding that Cu has no right to stay in the premises in
question, but also because when it promulgated its decision on 20 January 1993, the extended period (until 30
June 1992) fixed by the trial court and the Regional Trial Court had already expired.
Chan further asserts that the Court of Appeals' decision gives Cu undue and unwarranted benefits since Cu
was granted much more than what she prayed for in her complaint for consignation and Chan's counterclaim
was dismissed. A new ejectment suit may last for years, even beyond March 1995 which is the expiration date
originally prayed for by Cu, for the duration of which Chan would be precluded from increasing the rentals.
In her Comment, 15 Cu claims that the Court of Appeals decided the case properly and in accord with
applicable law and jurisprudence. As to the dismissal of the counterclaim for ejectment, Cu cites Metals
Engineering Resources Corp. vs.Court of Appeals 16 which holds that where there is no claim against the
counterclaimant, the counterclaim is improper and should be dismissed, and that a compulsary counterclaim is
auxiliary to the proceeding in the original suit and derives its jurisdictional support therefrom inasmuch as it
arises out of or is necessarily connected with the transaction or occurrence that is the subject matter of the
complaint. It follows that if the court does not have jurisdiction to entertain the main action of the case and
dismisses the same, then the compulsory counterclaim, being ancillary to the principal controversy, must
likewise be dismissed since no jurisdiction remained for any grant of relief under the counterclaim.
In her Reply to the Comment, 17 Chan maintains that the Court of Appeals should not have dismissed the
counterclaim because such dismissal would deny her justice and give undue advantage to Cu. She set up the
counterclaim for ejectment to avoid the effects of Section 4, Rule 9 of the Rules of Court which bars a
counterclaim not set up and Section 2(A) of the Rules of Summary Procedure which states that a compulsory
counterclaim "must be asserted in the answer, or be considered barred." The Metals case is not applicable to
this case because the issue therein was lack of jurisdiction by reason of non-payment of docket fees.

with all the requisites laid down in the said case, namely; "The debtor must show (1) that there was a debt
due; (2) that the consignation of the obligation had been made because the creditor to whom tender of
payment was made refused to accept it, or because he was absent or incapacitated, or because several
persons claimed to be entitled to receive the amount due (Art 1176, Civil Code); (3) that previous notice of the
consignation had been given to the person interested in the performance of the obligation (Art. 1177, Civil
Code); (4) that the amount due was placed at the disposal of the court and (5) that after the consignation had
been made the person interested was notified thereof. 19
The RTC explicitly affirmed the MTC on this issue, thus:
3. With respect to the validity of the consignation, the Court affirms the finding of the trial court that indeed
plaintiff substantially complied with all the requirements of consignation and, therefore, the same was valid and
effective. 20
Chan filed no petition for the review of the RTC decision and had, therefore, accepted the said ruling. Cu did
not, for obvious reasons, raise the issue on consignation in her petition for review in CA-G.R. SP No. 28870.
Since the validity of the consignation was not raised before it, the Court of Appeals seriously erred when it
dismissed the complaint for consignation on the ground that it has no merit. Section 7, Rule 51 of the Revised
Rules of Court provides:
Sec. 7. Question that may be decided. No error which does not effect the jurisdiction over the subject
matter will be considered unless stated in the assignment of errors and properly argued in the brief, save as
the court, at its option, may notice plain errors not specified, and also clerical errors.
Jurisdiction is not involved in the consignation case, and no plain errors with respect thereto are discernible
from the MTC and RTC decisions.
As to the counterclaim for ejectment, it must be emphasized that the parties have conceded its propriety and
accepted the MTC's jurisdiction thereon. As a matter of fact, the consignation was relegated to the background
and the parties heatedly tangled on the nagging issues on the duration of the lease after the expiration of the
last written contract, the power of the court to extend the lease, and the length of the extension all of which
were provoked by and linked to the counterclaim for ejectment. In her Position Paper for the Plaintiff filed with
the MTC,21 Cu admitted having filed an answer to the counterclaim and even a counterclaim to the
counterclaim:
In answer to the counterclaim, plaintiff [Cu] asserted that the lease is not on a month-to-month basis but for as
long as the premises is being used as a learning center. She contends that it will be highly iniquitous that after
undergoing so much expenses, her occupancy of the premises will be abruptly terminated. . . . that on the
basis of justice and equity, the period of plaintiff's lease should be fixed for at least five years from February
1990 . . .
As counterclaim to the counterclaim, plaintiff alleged . . .

22

and assigned as one of the errors to be resolved by the court the following:
Cu filled a Rejoinder to the Reply. 18
After deliberating on the allegations, issues, and arguments raised by the parties in their pleadings, we find
merit in the petition.
It must be stressed that the validity of the consignation and the propriety of the counterclaim for ejectment
were not raised before the Court of Appeals. As to the first, both the MTC and the RTC ruled that the
consignation was valid. The MTC specifically stated in its decision:
On the validity of the consignation, both parties agree that the controlling case is Ponce de Leon vs.Syjuco
Inc., 90 Phil. 311. The court believes that under the undisputed facts earlier narrated, petitioner has complied

2. Whether or not the plaintiff may be ejected from the subject

premises. 23
A counterclaim is any claim for money or other relief which a defending party may have against an opposing
party. It need not diminish or defeat the recovery sought by the opposing party, but may claim relief exceeding
in amount or different in kind from that sought by the opposing party's claim. 24 Counterclaims are designed to
enable the disposition of a whole controversy of interested parties' conflicting claims, at one time and in one
action, provided all the parties can be brought before the court and the matter decided without prejudicing the
rights of any party. 25 A counterclaim "is in itself a distinct and independent cause of action, so that when
properly stated as such, the defendant becomes, in respect to the matter stated by him, an actor, and there

are two simultaneous actions pending between the same parties, wherein each is at the same time both a
plaintiff and a defendant . . . A counterclaim stands on the same footing and is to be tested by the same rules,
as if it were an independent action." 26 In short, the defendant is a plaintiff with respect to his counterclaim.

Article 1687 grants the court the authority to fix the term of the lease depending on how the rentals are paid
and on the length of the lessee's occupancy of the leased premises. In the light of the special circumstances
of this case, we find the extended term fixed by the MTC to be reasonable.

Section 8, Rule 6 of the Rules of Court provides that the answer may contain any counterclaim which a party
may have against the opposing party provided that the court has jurisdiction to entertain the claim and can, if
the presence of third parties is essential for its adjudication, acquire jurisdiction of such parties. Under Section
4 of Rule 9, a counterclaim not set up shall be barred if it arises out of or is necessarily connected with the
transaction or occurrence that is the subject matter of the opposing party's claim and does not require for its
adjudication the presence of third parties of whom the court cannot acquire jurisdiction. A counterclaim may be
compulsary or permissive. The former is that covered by Section 4 of Rule 9.

WHEREFORE, the instant petition is GRANTED and the challenged Decision of 20 January 1993 of the Court
of Appeals in CA-G.R. SP No. 28870 is hereby SET ASIDE, and the Decisions of 27 March 1992 of Branch 11
of the Regional Trial Court of Manila in Civil Case No. 91-55879, and of 18 December 1990 of Branch 15 of
the Metropolitan Trial Court of Manila in Civil Case No. 131203- CV are REINSTATED.

Chan's counterclaim for ejectment is a compulsary counterclaim because it is necessarily connected with the
transaction or occurrence which is the subject matter of Cu's complaint, viz., the lease contract between them.
Consequently, the Court of Appeals erred when it held that Chan's cause of action for ejectment should not be
set up in a counterclaim.

SO ORDERED.

We agreed with Chan that Ching Pue vs. Gonzales is inapplicable because in Ching Pue the consignation
cases were filed with the Court of First Instance which did not have jurisdiction over ejectment cases;
necessarily, no counterclaim for ejectment could have been interposed therein. The ratio decidendi of the said
case is that consignation is not proper where the refusal of the creditor to accept tender of payment is with just
cause. One will search therein in vain even for an obiter dictum which suggests that an action for ejection
cannot be set up in a counterclaim. In the instant case, the ejectment was set up as a counterclaim in the MTC
which has jurisdiction over it and Cu joined that issue and the incidents thereto by her answer to the
counterclaim and the counterclaim to the counterclaim.
The Court of Appeals therefore should have confined itself to the principal error raised in Cu's petition in CAG.R. SP No. 28870, viz., the duration of the extended term of the lease fixed in the decision of the MTC and
affirmed by the RTC. As fixed, the term of the lease was extended to 30 June 1992. That period had expired
six months before the Court of Appeals promulgated its challenged decision. Considering that Chan did not file
any petition for the review of the RTC decision and was, therefore, deemed to have agreed to the extension;
and considering further that Cu, as petitioner in CA-G.R. SP No. 28870 , did not come to us on a petition for
review to seek reversal of the decision therein and should thus be considered to have agreed to the dismissal
of her consignation case, the parties must be deemed bound by the extended term, which has, nevertheless,
already lapsed.
We hold that the MTC had the authority to extend the period of the lease. The parties started with a written
contract of lease with a term for one year from 1 February 1983 to 1 February 1984. This was renewed every
year for two successive years, or up to 1 February 1986. No written contract was made thereafter, but Cu was
allowed to occupy the premises at a monthly rental which was increased every year. In November 1989, Chan
informed Cu of the termination of the lease and gave her until 1 January 1990 to vacate the premises. Articles
1670 and 1687 of the Civil Code thus came into play:
Art. 1670. If at the end of the contract the lessee should continue enjoying the thing leased for fifteen days with
the acquiescence of the lessor and unless a notice to the contrary by either party has previously been given, it
is understood that there is an implied new lease, not for the period of the original contract, but for the time
established in Articles 1682 and 1687. The other terms of the original contract shall be revived.
xxx xxx xxx
Art. 1687. If the period for the lease has not been fixed, it is understood to be from year to year, if the rent
agreed upon is annual; from month to month, if it is monthly; from week to week, if the rent is weekly; and from
day to day, if the rent is to be paid daily. However, even though a monthly rent is paid, and no period for the
lease has been set, the courts may fix a longer term for the lease after the lessee has occupied the premises
for over one year. If the rent is weekly, the courts may likewise determine a longer period after the lessee has
been in possession for over six months. In case of daily rent, the courts may also fix a longer period after the
lessee has stayed in the place for over one month.

Costs against the private respondent.

[G.R. No. 103068. June 22, 2001]

MEAT

PACKING CORPORATION OF THE PHILIPPINES, petitioner, vs. THE HONORABLE

SANDIGANBAYAN, THE PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT and
PHILIPPINE INTEGRATED MEAT CORPORATION,respondents.
DECISION

YNARES-SANTIAGO, J.:
This is a petition for certiorari, mandamus and prohibition, assailing the Resolutions of the
Sandiganbayan in Civil Case No. 0024, dated July 2, 1991 and November 29, 1991, directing petitioner to
accept the tender of payment of rentals by the Presidential Commission on Good Government (hereinafter,
PCGG).
Petitioner Meat Packing Corporation of the Philippines (hereinafter, MPCP), is a corporation wholly
owned by the Government Service Insurance System (GSIS). It is the owner of three (3) parcels of land
situated in Barrio Ugong, Pasig City, as well as the meat processing and packing plant thereon. On November
3, 1975, MPCP and the Philippine Integrated Meat Corporation (hereinafter, PIMECO) entered into an
Agreement[1] whereby MPCP leased to PIMECO, under a lease-purchase arrangement, its aforesaid property
at an annual rental rate of P1,375,563.92, payable over a period of twenty-eight years commencing on the
date of execution of the Agreement, or for a total consideration of P38,515,789.87. The Agreement contained
rescission clauses, to wit:
5. If for any reason whatsoever the LESSEE-VENDEE should fail or default in the payment of rentals
equivalent to the cumulative sum total of three (3) annual installments, this Agreement shall be deemed
automatically cancelled and forfeited without need of judicial intervention, and LESSOR-VENDOR shall have
the complete and absolute power, authority, and discretion, and without reservation by the LESSEE-VENDEE,
to dispose of, sell, transfer, convey, lease, assign, or encumber the project to any person or persons, natural
or juridical, in the same manner as if this lease-purchase arrangement was never entered into. In the event of
such cancellation or forfeiture, the LESSEE-VENDEE unconditionally agrees that all forms of money paid or
due from the LESSEE-VENDEE shall be considered as rentals for the use and occupancy of the project, and
the LESSEE-VENDEE hereby waives and forfeits all rights to ask for and demand the return or reimbursement
thereof.[2]
xxx xxx

xxx.

16. Violation of any of the terms and conditions of this Agreement shall be sufficient ground for the LESSORVENDOR to rescind and/or consider null and void this Agreement without need of judicial intervention by
giving the LESSEE-VENDEE one hundred eighty (180) days written notice to that effect, which shall be final
and binding on the LESSEE-VENDEE, and the LESSEE-VENDEE shall thereupon leave and vacate the
project, provided that if LESSEE-VENDEE has subleased portions of the project, LESSEE-VENDEE shall

relinquish all its rights and/or interests over the sublease contracts in favor of the LESSORVENDOR. LESSEE-VENDEE shall leave all improvements, whether finished or unfinished, in good and
serviceable condition immediately after the corresponding notice in writing has been received by the LESSEEVENDEE, and all said improvements shall automatically belong to and become the property of the LESSORVENDOR without liability or obligation on the part of the LESSOR-VENDOR to pay for the value
thereof. LESSEE-VENDEE further holds the LESSOR-VENDOR free and harmless from any and all liabilities
arising from and/or connected with such sublease contracts. [3]
Subsequently, on November 3, 1975, MPCP and PIMECO entered into a Supplementary and Loan
Agreement,[4]whereby, in consideration of the additional expenditures incurred by MPCP for rehabilitating and
refurbishing the meat processing and packing plant, the total contract price of the lease-purchase agreement
was increased to P93,695,552.59, payable over a period of twenty-eight years commencing on January 1,
1981, at the annual rental rate of P3,346,269.70.
On March 17, 1986, the PCGG, in a letter signed by then Commissioner Ramon A. Diaz, sequestered
all the assets, properties and records of PIMECO. [5] The sequestration included the meat packing plant and
the lease-purchase agreement.
MPCP wrote a letter on November 17, 1986 to PIMECO, [6] giving notice of the rescission of the leasepurchase agreement on the ground, among others, of non-payment of rentals of more than P2,000,000.00 for
the year 1986.
GSIS asked the PCGG to exclude the meat packing plant from the sequestered assets of PIMECO,
inasmuch as the same is owned by MPCP. However, PCGG denied the request. Likewise, MPCP sought the
turnover to it of the meat packing plant on the ground that the lease-purchase agreement had already been
rescinded. Acceding to this, PCGG passed on January 24, 1989 a resolution stating thus:
WHEREAS, the Presidential Commission on Good Government at its session en banc on September 20, 1988
ordered the transfer of subject property, consisting of a meat packing complex including the land located at
Barrio Ugong, Pasig, Metro Manila, to the GSIS under the condition then that the PCGG management team
might continue its operations for the purpose of completing the outstanding orders up to December 1988;
WHEREAS, the Government Service Insurance System has shown, to the satisfaction of the Commission, that
it owns the said plant complex; that it has the legal and equitable right to regain possession and control
thereof; that whatever claim PIMECO had to the complex under its so-called agreement to lease/purchase
with GSIS/MPCP has been validly rescinded by the GSIS; and that the projected turn-over to the GSIS will not
adversely affect the ill-gotten wealth case pending against crony Peter Sabido before the Sandiganbayan;
WHEREFORE, the turn-over to the GSIS of the said property should be done forthwith upon compliance with
these conditions, to be implemented by the Operations and Legal Departments: (a) joint PCGG-COA audit; (b)
approval by the Sandiganbayan; and (c) execution of a Memorandum of Agreement to contain these
stipulations, among others: (a) that the shares of Peter Sabido in PIMECO are subject to the Sandiganbayan
case; (b) that any disposition or transfer by the GSIS of said property or any part thereof shall be with the
conformity of the PCGG; and (c) that this Memorandum be annotated on the title of the property. [7]
Meanwhile, PCGG instituted with the Sandiganbayan on July 29, 1987 a complaint for reconveyance,
reversion, accounting, restitution and damages, docketed as Civil Case No. 0024, entitled, Republic of the
Philippines, Plaintiff versus Peter Sabido, et al., Defendants. [8] The complaint alleged, in pertinent part, that
Peter Sabido obtained, under favored and very liberal terms, huge loans from the GSIS in favor of PIMECO,
among other corporations, which was beneficially held and controlled by defendants Peter Sabido, Roberto S.
Benedicto and Luis D. Yulo; and that PIMECO was granted the monopoly to supply meat products in the
Greater Manila Area.
Defendant Peter Sabido filed his answer,[9] alleging that the acts, deeds, transactions and contracts
referred to in the complaint were negotiated and/or executed by his father, the late Roberto M. Sabido, and not
by him; and that, far from being illegal, the acts performed or committed by the late Roberto M. Sabido as a
corporate officer of PIMECO were done in good faith, to the best of his ability and in accordance with law, and

whatever income he received as an officer of PIMECO and whatever assets or properties he acquired during
his lifetime were the fruits of his dedication to his profession, hard work, and honest labor.
On April 28, 1989, defendant Sabido filed with the Sandiganbayan an Urgent Manifestation and Motion,
to the effect that he has come across newspaper reports stating that PCGG intends to turn over the
management, control and possession of PIMECO to the GSIS and MPCP. Sabido also learned from a reliable
source that the PCGG has passed a resolution to implement the said turnover. Hence, Sabido argued that
inasmuch as PIMECO was a sequestered asset, the projected turnover must be approved by the
Sandiganbayan. He prayed that PCGG be required to admit or deny these matters.
[10]

The Sandiganbayan, in a Resolution dated May 4, 1989, [11] ordered the PCGG to submit its comment
as to the veracity of the alleged turnover of the management, control and possession of PIMECO to the GSIS
or MPCP, and if true, to furnish movant Sabido a copy of the PCGG resolution approving the same.
Meanwhile, on May 20, 1989, Sabido filed an Urgent Manifestation and Motion, [12] alleging that,
according to newspaper accounts, PCGG had in fact already turned over the management and operation of
PIMECO to the GSIS/MPCP. Thus, he prayed that the transfer of the management, control and possession of
PIMECO to GSIS be declared null and void ab initio for having been done without the approval of the
Sandiganbayan.
Sometime thereafter, the Sandiganbayan received a letter [13] from members of the PIMECO Labor
Union, praying for the maintenance of the status quo to enable PIMECO to continue its business operations
and to ensure their continuity of work and security of tenure. Thus, on June 2, 1989, the Sandiganbayan
issued a Resolution, the dispositive portion of which reads:
WHEREFORE, in the interest of justice, and conformably with this Courts adherence to the rule of law, to the
end that undue prejudice and/or injury may be avoided to any and all parties affected by these proceedings,
especially the avoidance of any cessation in the operations of PIMECO, a temporary restraining order is
hereby issued commanding the Presidential Commission on Good Government, their officers, agents,
representatives, monitors or persons acting in their behalf or stead, to cease and desist from enforcing the
contemplated turnover of the management, control and possession of PIMECO to the Meat Packing
Corporation of the Philippines until further orders. In view of the serious issues involved, let the instant
incident be re-scheduled for hearing and consideration on June 6, 1989, at 2:30 oclock p.m.
SO ORDERED.[14]
On June 22, 1989, Sabido filed with the Sandiganbayan a Motion for the Issuance of a Writ of
Preliminary Injunction, alleging that the PCGG, in an Order dated May 11, 1989, had ordered that the status
quo as regards the management and operations of PIMECO be maintained pending submission of inventory
and financial audit. However, at the hearings of this incident, it was sufficiently shown that the transfer of
PIMECO to MPCP will result in the dissipation of assets which will cause irreparable injury to Sabidos rights
and interests in the company in the event that the Sandiganbayan shall ultimately rule that the same was not
ill-gotten.
The Sandiganbayan, finding that the PCGG committed grave abuse of authority, power and discretion
in unilaterally terminating the lease-purchase agreement of PIMECO with MPCP and in turning over its
management, control and operation to the latter, ordered the issuance of a writ of preliminary injunction, to wit:
WHEREFORE, finding the verified application for issuance of a writ of preliminary injunction to be sufficient in
form and substance and that after due hearing, it appears that great and irreparable injury will be caused not
only to defendant-applicant but also to PIMECO should the acts sought to be enjoined be allowed to be done
or performed, accordingly, upon defendant-applicants posting of a bond of P50,000.00, let the corresponding
writ of preliminary injunction issue commanding the Presidential Commission on Good Government, its
officers, representatives, nominees or agents from proceeding or consummating the projected turnover of
PIMECO to the GSIS-MPCP or to interfere with its present management and operations, until further orders of
this Court.

SO ORDERED.[15]
Accordingly, upon the posting of the requisite bond, the Writ of Preliminary Injunction was issued on
July 10, 1989, enjoining the Presidential Commission on Good Government, its officers, representatives,
nominees or agents, from proceeding or consummating the projected turn-over of PIMECO to GSIS-MPCP or
to interfere with its present management and operations, until further orders from this Court. [16]
PCGG filed a Motion for Reconsideration of the Resolution of June 22, 1989. On August 3, 1989, the
Sandiganbayan issued its Resolution, viz:
WHEREFORE, premises considered, plaintiffs Motion for Reconsideration (Re: Resolution dated June 22,
1989) dated July 3, 1989 is hereby GRANTED, and the dispositive portion of Our Resolution of June 22,
1989, ordered amended to read as follows:
WHEREFORE, finding the verified application for issuance of a writ of preliminary injunction to be sufficient in
form and substance and that after due hearing, it appears that great and irreparable injury will be caused not
only to defendant-applicant but also to PIMECO should the acts sought to be enjoined be allowed to be done
or performed, accordingly, upon defendant-applicants posting of a bond of P50,000.00, let the corresponding
writ of preliminary injunction issue commanding the Presidential Commission on Good Government, its
officers, representatives, nominees or agents from proceeding or consummating the projected turnover of
PIMECO to the GSIS-MPCP until further orders of this Court and from replacing, dismissing, demoting,
reassigning, grounding, or otherwise prejudicing the present members of the PCGG management team in
PIMECO, except for valid and serious reasons not attributable to or arising from their objection or opposition to
or activities of statements against the said turnover.
SO ORDERED.

[17]

Thereafter, the Sandiganbayan continued to conduct hearings on the issue of the validity of the turnover of the meat packing plant to GSIS. On November 29, 1989, it issued a Resolution disposing thus:

In its petition, PIMECO alleged that from 1981 to 1985, PIMECO has been regularly paying the annual
rentals in the amount of P3,346,269.70; and that prior to its sequestration in January 1986, PIMECO was able
to pay MPCP the amount of P846,269.70. However, after its sequestration, the PCGG Management Team
that took over the plant became erratic and irregular in its payments of the annual rentals to MPCP, thus
presenting the danger that PIMECO may be declared in default in the payment of rentals equivalent to three
(3) annual installments and causing the cancellation of the lease-purchase agreement. Hence, PIMECO
prayed for a declaration that it is no longer bound by the provisions of the above-quoted paragraph 5 of the
lease-purchase agreement.
In the meantime, PCGG tendered to MPCP two checks in the amounts of P3,000,000.00 and
P2,000,000.00, or a total of P5,000,000.00, representing partial payment of accrued rentals on the meat
packing plant, which MPCP refused to accept on the theory that the lease-purchase agreement had been
rescinded. Thus, the PCGG filed an Urgent Motion [20] praying that the Sandiganbayan order MPCP to accept
the tendered amount of P5,000,000.00.
The Sandiganbayan set the aforesaid Urgent Motion for hearing. On April 3, 1991, MPCP, by special
appearance, filed its Comment, [21] alleging that the Sandiganbayan had no jurisdiction over MPCP since it was
not a party in Civil Case No. 0024; that its lease-purchase agreement with PIMECO has been rescinded as
early as November 19, 1986; and that PIMECO was in arrears in the payment of rentals in the amount of
P12,378,171.06, which is more than the equivalent of three cumulative rentals at the annual rate of
P3,346,269.70.
On July 2, 1991, the Sandiganbayan issued the first assailed Resolution, as follows:
WHEREFORE, the Court declares that the tender of payment and consignation of P5,000,000.00 in the form
of two checks, namely: China Banking Corporation Check No. LIB M 003697 for P3,000,000.00 and Far East
Bank and Trust Company Check No. 29A A 021341 for P2,000,000.00, both dated January 30, 1991, and
payable to GSIS-MPCP, have been validly made in accordance with law and, accordingly, orders Meat
Packing Corporation of the Philippines to accept the payment and issue the corresponding receipt.
SO ORDERED.[22]

WHEREFORE, considering the attendant circumstances of the present incident in light of the standard laid
down by the Supreme Court, this Court finds and holds:

MPCP, still under a special appearance, filed a Motion for Reconsideration of the above Resolution.
On November 29, 1991, the Sandiganbayan issued the second assailed Resolution, [24] denying MPCPs
Motion for Reconsideration. Said the Sandiganbayan:
[23]

(1) That the PCGG gravely abused its discretion when it passed the resolutions dated September 20, 1988,
and January 24, 1989, turning over the meat packing complex including the land located at Barrio Ugong,
Pasig, Metro Manila, to the GSIS/MPCP (Exh. E).
(2) That the PCGG commissioner concerned exceeded his authority when he executed the Memorandum of
Agreement with MPCP on April 28, 1989, transferring the management and operation of PIMECO to the
GSIS/MPCP (Record, pp. 1828-1832).
(3) That, accordingly, the said turnovers or transfers are declared null and void ab initio, and
(4) That the PCGG, its commissioners, officers, representatives, and agents are permanently enjoined from
implementing the same turnovers or transfers.
SO ORDERED.[18]
On August 30, 1990, PIMECO filed with the Sandiganbayan a petition, docketed as Civil Case No.
0108, entitled, Philippine Integrated Meat Corporation (PIMECO), Petitioner versus Meat Packing Corporation
of the Philippines (MPCP) and Presidential Commission on Good Government (PCGG),
Respondents, captioned as for Declaratory Relief and Other Similar Remedies (Related to PCGG Case No.
25 and Civil Case No. 0024).[19]

When the PCGG sequestered the assets and records of PIMECO, including the lease-purchase agreement
over MPCPs meat packing plant, it assumed the duty to preserve and conserve those assets and documents
while they remained in its possession and control. That duty did not disappear when the writ was
deemed ipso facto lifted. On the contrary, it continued until the sequestered assets and records where
returned to PIMECO. And in the performance of that duty in order to prevent the cancellation of the leasepurchase agreement by reason of the failure to pay three accumulated yearly rentals-installments, the PCGG
made the timely tender of payment and consignation which the Resolution sought to be reconsidered
sustained. To rule otherwise would be unfair and unjust to PIMECO considering that during the time the
PCGG had possession and control of the sequestered assets and records, PIMECO was not in the position to
take steps necessary for the preservation and conservation of those assets and records. [25]
Meanwhile, on December 2, 1991, the Sandiganbayan dismissed Civil Case No. 0108, i.e., the petition
for declaratory relief, it appearing that while the unpaid rentals as of January 27, 1991 have reached
P7,530,036.21, PCGGs tender of payment and consignation of the amount of P5,000,000.00, which was
upheld by the Sandiganbayan in Civil Case No. 0024, averted the accumulation of the unpaid rentals to three
yearly rentals-installments. Consequently, the petition for declaratory relief has become moot and academic.
[26]

Hence, MPCP brought this petition for certiorari, mandamus and prohibition, arguing in fine that the
Sandiganbayan did not have jurisdiction over its person since it was not a party to Civil Case No. 0024; that
the Sandiganbayan likewise did not acquire jurisdiction over the person of PIMECO since it has not been

served summons; and that the PCGG is in estoppel because it has already admitted in its en banc resolutions
that the lease-purchase agreement between MPCP and PIMECO has been rescinded. MPCP prays for
injunctive relief and for judgment setting aside the assailed Resolutions of the Sandiganbayan; ordering the
Sandiganbayan to deny the PCGGs motion for consignation and to compel MPCP to accept the tendered
amount of P5,000,000.00; and prohibiting the Sandiganbayan from accepting any papers or pleadings from
PCGG or PIMECO against MPCP in Civil Case No. 0024.
Counsel for Peter Sabido filed his Comment, [27] with the qualification that the same was being filed only
on behalf of Sabido, a stockholder of PIMECO, and not on behalf of the corporation. He argued that the
Sandiganbayan correctly held that the MPCP voluntarily submitted itself to the courts jurisdiction; that there
was a valid consignation made by PCGG; and that the Sandiganbayan did not commit grave abuse of
discretion in issuing the assailed resolutions.
PCGG filed its Comment,[28] also contending that MPCP voluntarily submitted itself to the jurisdiction of
the Sandiganbayan; and that the consignation was validly made.
Copies of this Courts resolutions were furnished PIMECO at its principal office at 117 E. Rodriguez, Sr.
Ave., Barrio Ugong, Pasig City. However, all of these were returned unserved with the notation, RTS
Closed.[29] Thus, on June 19, 1995, this Court resolved to dispense with the comment of PIMECO. [30]
The petition, being one for certiorari, mandamus and prohibition, is mainly anchored on the alleged
grave abuse of discretion amounting to want of jurisdiction on the part of the Sandiganbayan.
Grave abuse of discretion implies a capricious and whimsical exercise of judgment as is equivalent to
lack of jurisdiction, or, when the power is exercised in an arbitrary or despotic manner by reason of passion or
personal hostility, and it must be so patent and gross as to amount to an evasion of positive duty enjoined or to
act at all in contemplation of law.[31] It is not sufficient that a tribunal, in the exercise of its power, abused its
discretion; such abuse must be grave.[32]
In the assailed resolutions, the Sandiganbayan approved the consignation by PCGG of the amount of
P5,000,000.00 as payment for back rentals or accrued amortizations on the meat packing plant, after the
MPCP refused the tender of payment of the same.
Consignation is the act of depositing the thing due with the court or judicial authorities whenever the
creditor cannot accept or refuses to accept payment, and it generally requires a prior tender of payment. [33] It
should be distinguished from tender of payment. Tender is the antecedent of consignation, that is, an act
preparatory to the consignation, which is the principal, and from which are derived the immediate
consequences which the debtor desires or seeks to obtain. Tender of payment may be extrajudicial, while
consignation is necessarily judicial, and the priority of the first is the attempt to make a private settlement
before proceeding to the solemnities of consignation. [34] Tender and consignation, where validly made,
produces the effect of payment and extinguishes the obligation.
If the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor
shall be released from responsibility by the consignation of the thing or sum due.
Consignation alone shall produce the same effect in the following cases:

(5) When the title of the obligation has been lost. [35]
In the case at bar, there was prior tender by PCGG of the amount of P5,000,000.00 for payment of the
rentals in arrears. MPCPs refusal to accept the same, on the ground merely that its lease-purchase
agreement with PIMECO had been rescinded, was unjustified. As found by the Sandiganbayan, from January
29, 1986 to January 30, 1990, PIMECO paid, and GSIS/MPCP received, several amounts due under the
lease-purchase agreement, such as annual amortizations or rentals, advances, insurance, and taxes, in total
sum of P15,921,205.83.[36] Surely, the acceptance by MPCP and GSIS of such payments for rentals and
amortizations negates any rescission of the lease-purchase agreement. Parenthetically, the factual findings of
the Sandiganbayan are conclusive upon this Court, subject to certain exceptions. [37] The aforesaid factual
findings, moreover, have not been disputed by petitioner.
In support of its contention that the lease-purchase agreement has been rescinded, MPCP makes
reference to the resolutions of the PCGG turning over to the GSIS the meat packing complex and the land on
which it is situated. MPCP argues that PCGG was estopped from taking a contrary position. A closer perusal
of the resolutions, however, readily shows that the turn-over was explicitly made dependent on certain
conditions precedent, among which was the approval by the Sandiganbayan and the execution of a
Memorandum of Agreement between PCGG and MPCP.[38] A Memorandum of Agreement was in fact executed
on April 28, 1989, although the same suffers from formal and substantial infirmities. However, no approval
was sought from the Sandiganbayan. On the contrary, the Sandiganbayan, in its Resolution declaring the
turn-over null and void, refused to honor the PCGG resolutions, reasoning thus:
First, what was approved by the PCGG in its resolutions of September 20, 1988, and January 24, 1989, is the
transfer of the meat packing complex including the land located at Barrio Ugong, Pasig, Metro Manila, and
not the management and operation of PIMECO. It is, however, the latter that the Memorandum of
Agreement, executed on April 28, 1989, pursuant to the said resolutions, transferred to the GSIS.
Second, the second resolution made the turnover of the meat packing complex including the land located at
Barrio Ugong, Pasig Metro Manila, upon compliance with these conditions, to be implemented by the
[PCGG] Operations and Legal Departments: . . . (b) approval by the Sandiganbayan . . . Until now, however,
no motion has been presented to secure that approval, and none can be expected because the same
Memorandum of Agreement changed the requirement of approval to (t)he Sandiganbayan shall be advised of
this Agreement. Even the advice stipulated has never been given by the PCGG.
Since the Memorandum of Agreement was executed by one PCGG commissioner only, the same cannot
validly amend the resolutions passed by the PCGG itself. Consequently, the turnover of the management and
operation of PIMECO, which, of course, include the meat packing complex and the land of which it stands,
stipulated in the Memorandum of Agreement, cannot be legally enforced. Needless to say, the commissioners
should be the first to abide by the PCGGs resolutions.[39]
Under the terms of the lease-purchase agreement, the amount of arrears in rentals or amortizations
must be equivalent to the cumulative sum of three annual installments, in order to warrant the rescission of the
contract. Therefore, it must be shown that PIMECO failed to pay the aggregate amount of at least
P10,038,809.10 before the lease-purchase agreement can be deemed automatically cancelled. Assuming in
the extreme that, as alleged by MPCP, the arrears at the time of tender on January 30, 1991 amounted to
P12,578,171.00,[40] the tender and consignation of the sum of P5,000,000.00, which had the effect of payment,
reduced the back rentals to only P7,578,171.00, an amount less than the equivalent of three annual
installments. Thus, with the Sandiganbayans approval of the consignation and directive for MPCP to accept
the tendered payment, the lease-purchase agreement could not be said to have been rescinded.

(1) When the creditor is absent or unknown, or does not appear at the place of payment;
(2) When he is incapacitated to receive the payment at the time it is due;
(3) When, without just cause, he refuses to give a receipt;
(4) When two or more persons claim the same right to collect;

MPCPs chief complaint in its present petition is that it was not a party in Civil Case No. 0024. As such,
it alleges that the Sandiganbayan had no jurisdiction over its person and may not direct it to accept the
consigned amount of P5,000,000.00. In rejecting this argument, the Sandiganbayan held that Civil Case No.
0024, i.e., the sequestration case, on the one hand, and Civil Case No. 0108, i.e., the petition for declaratory
relief in which it was the named respondent, on the other hand, were interrelated since they both involved the
sequestered assets of PIMECO. Thus, the titles of both cases appear on the caption of the assailed
Resolutions dated July 2, 1991. On this point, the Sandiganbayan further ruled:

While MPCP is not a named party in Civil Case No. 0024, it is in Civil Case No. 0108. These two civil
actions are interrelated in the sense that they both involve the sequestered and taken-over assets of PIMECO,
principal of which are the lease-purchase agreement, the rights thereunder of PIMECO, and, since these
rights can not be exercised without possession of the meat processing plant, the plant itself. It is for this
reason that the caption of the present Urgent Motion expressly indicates that Civil Case No. 0024 is Related
to Civil Case No. 0108. In view of these circumstances, the Court considers the Urgent Motion as also filed in
Case No. 0108.
Moreover, when the propriety of the turn-over of the management and control of PIMECO, including the
meat packing plant, to MPCP was in issue in Civil Case No. 0024, MPCP, through its officers, appeared in all
the proceedings and actively coordinated with PCGG. To justify the turn-over, the Office of the Solicitor
General echoed the stand of MPCP that the lease-purchase agreement had already been rescinded. And in
the present Urgent Motion, MPCP again appeared. In fact, it appeared in Case No. 0024 even if the matter at
hand was not the said motion. Although MPCPs lawyer entered a special appearance in the present incident,
he did not confine himself to assailing the jurisdiction of this Court over MPCP, but went to the extent of
participating in the oral argument on the merits of the motion,. Indeed, his Comment devoted only one page
on the issue of jurisdiction and seven pages to the alleged untenability of the motion. Although MPCP did not
expressly pray for the denial of the urgent motion, not even for lack of jurisdiction over it, by setting forth
therein arguments not only on the jurisdictional issue, but more extensively on the alleged lack of merit of the
motion, it thereby impliedly prayed for affirmative relief in its favor. Under these circumstances, MPCP
voluntarily submitted itself to the jurisdiction of the Court. [41]
Jurisdiction over the person of the defendant in civil cases is acquired either by his voluntary
appearance in court and his submission to its authority or by service of summons. [42] Furthermore, the active
participation of a party in the proceedings is tantamount to an invocation of the courts jurisdiction and a
willingness to abide by the resolution of the case, and will bar said party from later on impugning the court or
bodys jurisdiction.[43] In this case, petitioner MPCP is precluded from questioning the jurisdiction of the
Sandiganbayan over its person in Civil Case No. 0024, considering that, as shown by the records, it actively
participated in the discussion of the merits of the said case, even going to the extent of seeking affirmative
relief. The Sandiganbayan did not commit grave abuse of discretion in saying so.
WHEREFORE, in view of the foregoing, the instant petition is DISMISSED for lack of merit.
SO ORDERED.

HON. RAMON V. JABSON, Presiding Judge of the Court Of First Instance of Rizal, Branch XXVI;
COURT OF APPEALS and TROPICAL HOMES, INC., respondents.
Occena Law Office for petitioners.
Serrano, Diokno & Serrano for respondents.

TEEHANKEE, J.:
The Court reverses the Court of Appeals appealed resolution. The Civil Code authorizes the release of an
obligor when the service has become so difficult as to be manifestly beyond the contemplation of the parties
but does not authorize the courts to modify or revise the subdivision contract between the parties or fix a
different sharing ratio from that contractually stipulated with the force of law between the parties. Private
respondent's complaint for modification of the contract manifestly has no basis in law and must therefore be
dismissed for failure to state a cause of action. On February 25, 1975 private respondent Tropical Homes, Inc.
filed a complaint for modification of the terms and conditions of its subdivision contract with petitioners
(landowners of a 55,330 square meter parcel of land in Davao City), making the following allegations:
"That due to the increase in price of oil and its derivatives and the concomitant worldwide spiralling of prices,
which are not within the control of plaintiff, of all commodities including basis raw materials required for such
development work, the cost of development has risen to levels which are unanticipated, unimagined and not
within the remotest contemplation of the parties at the time said agreement was entered into and to such a
degree that the conditions and factors which formed the original basis of said contract, Annex 'A', have been
totally changed; 'That further performance by the plaintiff under the contract.
That further performance by the plaintiff under the contract,Annex 'S', will result in
situation where defendants would be unustly enriched at the expense of the plaintiff;
will cause an inequitous distribution of proceeds from the sales of subdivided lots in
manifest actually result in the unjust and intolerable exposure of plaintiff to implacable
losses, all such situations resulting in an unconscionable, unjust and immoral situation
contrary to and in violation of the primordial concepts of good faith, fairness and equity
which should pervade all human relations.
Under the subdivision contract, respondent "guaranteed (petitioners as landowners) as the latter's fixed and
sole share and participation an amount equivalent to forty (40%) percent of all cash receifpts fromthe sale of
the subdivision lots"
Respondent pray of the Rizal court of first instance that "after due trial, this Honorable Court render judgment
modifying the terms and conditions of the contract ... by fixing the proer shares that shouls pertain to the
herein parties out of the gross proceeds from the sales of subdivided lots of subjects subdivision".
Petitioners moved to dismiss the complaint principally for lack of cause of action, and upon denial thereof and
of reconsideration by the lower court elevated the matter on certiorari to respondent Court of Appeals.
Respondent court in its questioned resolution of June 28, 1976 set aside the preliminary injunction previously
issued by it and dimissed petition on the ground that under Article 1267 of the Civil Code which provides that

G.R. No. L-44349 October 29, 1976

JESUS V. OCCENA and EFIGENIA C. OCCENA, petitioners,
vs.

ART. 1267. When the service has become so difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also be released therefrom, in whole or in
part. 1

... a positive right is created in favor of the obligor to be released from the performance
of an obligation in full or in part when its performance 'has become so difficult as to be
manifestly beyond the contemplation of the parties.
Hence, the petition at abar wherein petitioners insist that the worldwide increase inprices cited by respondent
does not constitute a sufficient casue of action for modification of the subdivision contrct. After receipt of
respondent's comment, the Court in its Resolution of September 13, 1976 resolved to treat the petition as
special civil actionand declared the case submitted for decision.
The petition must be granted.
While respondent court correctly cited in its decision the Code Commission's report giving the rationale for
Article 1267 of the Civil Code, to wit;
The general rule is that impossibility of performance releases the obligor. However, it is
submitted that when the service has become so difficult as to be manifestly beyond the
contemplation of the parties, the court should be authorized to release the obligor in
whole or in part. The intention of the parties should govern and if it appears that the
service turns out to be so difficult as have been beyond their contemplation, it would be
doing violence to that intention to hold the obligor still responsible. ... 2
It misapplied the same to respondent's complaint.
If respondent's complaint were to be released from having to comply with the subdivision contract, assuming it
could show at the trial that the service undertaken contractually by it had "become so difficult as to be
manifestly beyond the contemplation of the parties", then respondent court's upholding of respondet's
complaint and dismissal of the petition would be justifiable under the cited codal article. Without said article,
respondent would remain bound by its contract under the theretofore prevailing doctrine that performance
therewith is ot excused "by the fact that the contract turns out to be hard and improvident, unprofitable, or
unespectedly burdensome", 3since in case a party desires to be excuse from performance in the event of such
contingencies arising, it is his duty to provide threfor in the contract.

G.R. No. 107112 February 24, 1994

NAGA TELEPHONE CO., INC. (NATELCO) AND LUCIANO M. MAGGAY, petitioners,
vs.
THE COURT OF APPEALS AND CAMARINES SUR II ELECTRIC COOPERATIVE, INC. (CASURECO
II),respondents.
Ernesto P. Pangalangan for petitioners.
Luis General, Jr. for private respondent.

NOCON, J.:
The case of Reyes v. Caltex (Philippines), Inc. 1 enunciated the doctrine that where a person by his contract
charges himself with an obligation possible to be performed, he must perform it, unless its performance is
rendered impossible by the act of God, by the law, or by the other party, it being the rule that in case the party
desires to be excused from performance in the event of contingencies arising thereto, it is his duty to provide
the basis therefor in his contract.
With the enactment of the New Civil Code, a new provision was included therein, namely, Article 1267 which
provides:
When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the
obligor may also be released therefrom, in whole or in part.
In the report of the Code Commission, the rationale behind this innovation was explained, thus:

But respondent's complaint seeks not release from the subdivision contract but that the court "render judgment
I modifying the terms and Conditions of the Contract by fixing the proper shares that should pertain to the
herein parties out of the gross proceed., from the sales of subdivided lots of subject subdivision". The cited
article does not grant the courts this authority to remake, modify or revise the contract or to fix the division of
shares between the parties as contractually stipulated with the force of law between the parties, so as to
substitute its own terms for those covenanted by the partiesthemselves. Respondent's complaint for
modification of contract manifestly has no basis in law and therefore states no cause of action. Under the
particular allegations of respondent's complaint and the circumstances therein averred, the courts cannot even
in equity grant the relief sought.

The general rule is that impossibility of performance releases the obligor. However, it is submitted that when
the service has become so difficult as to be manifestly beyond the contemplation of the parties, the court
should be authorized to release the obligor in whole or in part. The intention of the parties should govern and if
it appears that the service turns out to be so difficult as to have been beyond their contemplation, it would be
doing violence to that intention to hold their contemplation, it would be doing violence to that intention to hold
the obligor still responsible. 2
In other words, fair and square consideration underscores the legal precept therein.

A final procedural note. Respondent cites the general rule that an erroneous order denying a motion to dismiss
is interlocutory and should not be corrected by certiorari but by appeal in due course. This case however
manifestly falls within the recognized exception that certiorari will lie when appeal would not prove to be a
speedy and adequate remedy.' Where the remedy of appeal would not, as in this case, promptly relieve
petitioners from the injurious effects of the patently erroneous order maintaining respondent's baseless action
and compelling petitioners needlessly to go through a protracted trial and clogging the court dockets by one
more futile case, certiorari will issue as the plain, speedy and adequate remedy of an aggrieved party.
ACCORDINGLY, the resolution of respondent appellate court is reversed and the petition for certiorari is
granted and private respondent's complaint in the lower court is ordered dismissed for failure to state a
sufficient cause of action. With costs in all instances against private respondent.

Naga Telephone Co., Inc. remonstrates mainly against the application by the Court of Appeals of Article 1267
in favor of Camarines Sur II Electric Cooperative, Inc. in the case before us. Stated differently, the former
insists that the complaint should have been dismissed for failure to state a cause of action.
The antecedent facts, as narrated by respondent Court of Appeals are, as follows:
Petitioner Naga Telephone Co., Inc. (NATELCO) is a telephone company rendering local as well as long
distance telephone service in Naga City while private respondent Camarines Sur II Electric Cooperative, Inc.
(CASURECO II) is a private corporation established for the purpose of operating an electric power service in
the same city.

On November 1, 1977, the parties entered into a contract (Exh. "A") for the use by petitioners in the operation
of its telephone service the electric light posts of private respondent in Naga City. In consideration therefor,
petitioners agreed to install, free of charge, ten (10) telephone connections for the use by private respondent
in the following places:
(a) 3 units The Main Office of (private respondent);

enjoyed by private respondent free of charge are far in excess of the amounts claimed by the latter for the use
of the posts, so that if there was any inequity, it was suffered by them.
Regarding the second cause of action, petitioners claimed that private respondent had asked for telephone
lines in areas outside Naga City for which its posts were used by them; and that if petitioners had refused to
comply with private respondent's demands for payment for the use of the posts outside Naga City, it was
probably because what is due to them from private respondent is more than its claim against them.

(b) 2 Units The Warehouse of (private respondent);

(c) 1 Unit The Sub-Station of (private respondent) at Concepcion Pequea;

And with respect to the third cause of action, petitioners claimed, inter alia, that their telephone service had
been categorized by the National Telecommunication Corporation (NTC) as "very high" and of "superior
quality."

(d) 1 Unit The Residence of (private respondent's) President;

During the trial, private respondent presented the following witnesses:

(e) 1 Unit The Residence of (private respondent's) Acting General Manager; &

(1) Dioscoro Ragragio, one of the two officials who signed the contract in its behalf, declared that it was
petitioner Maggay who prepared the contract; that the understanding between private respondent and
petitioners was that the latter would only use the posts in Naga City because at that time, petitioners' capability
was very limited and they had no expectation of expansion because of legal squabbles within the company;
that private respondent agreed to allow petitioners to use its posts in Naga City because there were many
subscribers therein who could not be served by them because of lack of facilities; and that while the telephone
lines strung to the posts were very light in 1977, said posts have become heavily loaded in 1989.

(f) 2 Units To be determined by the General Manager. 3

Said contract also provided:
(a) That the term or period of this contract shall be as long as the party of the first part has need for the electric
light posts of the party of the second part it being understood that this contract shall terminate when for any
reason whatsoever, the party of the second part is forced to stop, abandoned [sic] its operation as a public
service and it becomes necessary to remove the electric lightpost; (sic) 4
It was prepared by or with the assistance of the other petitioner, Atty. Luciano M. Maggay, then a member of
the Board of Directors of private respondent and at the same time the legal counsel of petitioner.
After the contract had been enforced for over ten (10) years, private respondent filed on January 2, 1989 with
the Regional Trial Court of Naga City (Br. 28) C.C. No. 89-1642 against petitioners for reformation of the
contract with damages, on the ground that it is too one-sided in favor of petitioners; that it is not in conformity
with the guidelines of the National Electrification Administration (NEA) which direct that the reasonable
compensation for the use of the posts is P10.00 per post, per month; that after eleven (11) years of petitioners'
use of the posts, the telephone cables strung by them thereon have become much heavier with the increase in
the volume of their subscribers, worsened by the fact that their linemen bore holes through the posts at which
points those posts were broken during typhoons; that a post now costs as much as P2,630.00; so that justice
and equity demand that the contract be reformed to abolish the inequities thereon.
As second cause of action, private respondent alleged that starting with the year 1981, petitioners have used
319 posts in the towns of Pili, Canaman, Magarao and Milaor, Camarines Sur, all outside Naga City, without
any contract with it; that at the rate of P10.00 per post, petitioners should pay private respondent for the use
thereof the total amount of P267,960.00 from 1981 up to the filing of its complaint; and that petitioners had
refused to pay private respondent said amount despite demands.
And as third cause of action, private respondent complained about the poor servicing by petitioners of the ten
(10) telephone units which had caused it great inconvenience and damages to the tune of not less than
P100,000.00
In petitioners' answer to the first cause of action, they averred that it should be dismissed because (1) it does
not sufficiently state a cause of action for reformation of contract; (2) it is barred by prescription, the same
having been filed more than ten (10) years after the execution of the contract; and (3) it is barred by estoppel,
since private respondent seeks to enforce the contract in the same action. Petitioners further alleged that their
utilization of private respondent's posts could not have caused their deterioration because they have already
been in use for eleven (11) years; and that the value of their expenses for the ten (10) telephone lines long

(2) Engr. Antonio Borja, Chief of private respondent's Line Operation and Maintenance Department, declared
that the posts being used by petitioners totalled 1,403 as of April 17, 1989, 192 of which were in the towns of
Pili, Canaman, and Magarao, all outside Naga City (Exhs. "B" and "B-1"); that petitioners' cables strung to the
posts in 1989 are much bigger than those in November, 1977; that in 1987, almost 100 posts were destroyed
by typhoon Sisang: around 20 posts were located between Naga City and the town of Pili while the posts in
barangay Concepcion, Naga City were broken at the middle which had been bored by petitioner's linemen to
enable them to string bigger telephone lines; that while the cost per post in 1977 was only from P700.00 to
P1,000.00, their costs in 1989 went up from P1,500.00 to P2,000.00, depending on the size; that some lines
that were strung to the posts did not follow the minimum vertical clearance required by the National Building
Code, so that there were cases in 1988 where, because of the low clearance of the cables, passing trucks
would accidentally touch said cables causing the posts to fall and resulting in brown-outs until the electric lines
were repaired.
(3) Dario Bernardez, Project Supervisor and Acting General Manager of private respondent and Manager of
Region V of NEA, declared that according to NEA guidelines in 1985 (Exh. "C"), for the use by private
telephone systems of electric cooperatives' posts, they should pay a minimum monthly rental of P4.00 per
post, and considering the escalation of prices since 1985, electric cooperatives have been charging from
P10.00 to P15.00 per post, which is what petitioners should pay for the use of the posts.
(4) Engineer Antonio Macandog, Department Head of the Office of Services of private respondent, testified on
the poor service rendered by petitioner's telephone lines, like the telephone in their Complaints Section which
was usually out of order such that they could not respond to the calls of their customers. In case of disruption
of their telephone lines, it would take two to three hours for petitioners to reactivate them notwithstanding their
calls on the emergency line.
(5) Finally, Atty. Luis General, Jr., private respondent's counsel, testified that the Board of Directors asked him
to study the contract sometime during the latter part of 1982 or in 1983, as it had appeared very
disadvantageous to private respondent. Notwithstanding his recommendation for the filing of a court action to
reform the contract, the former general managers of private respondent wanted to adopt a soft approach with
petitioners about the matter until the term of General Manager Henry Pascual who, after failing to settle the
matter amicably with petitioners, finally agreed for him to file the present action for reformation of contract.
On the other hand, petitioner Maggay testified to the following effect:

(1) It is true that he was a member of the Board of Directors of private respondent and at the same time the
lawyer of petitioner when the contract was executed, but Atty. Gaudioso Tena, who was also a member of the
Board of Directors of private respondent, was the one who saw to it that the contract was fair to both parties.

And with respect to private respondent's third cause of action, the trial court found the claim not sufficiently
proved.
Thus, the following decretal portion of the trial court's decision dated July 20, 1990:

(2) With regard to the first cause of action:

(a) Private respondent has the right under the contract to use ten (10) telephone units of petitioners for as long
as it wishes without paying anything therefor except for long distance calls through PLDT out of which the
latter get only 10% of the charges.
(b) In most cases, only drop wires and not telephone cables have been strung to the posts, which posts have
remained erect up to the present;
(c) Petitioner's linemen have strung only small messenger wires to many of the posts and they need only small
holes to pass through; and
(d) Documents existing in the NTC show that the stringing of petitioners' cables in Naga City are according to
standard and comparable to those of PLDT. The accidents mentioned by private respondent involved trucks
that were either overloaded or had loads that protruded upwards, causing them to hit the cables.
(3) Concerning the second cause of action, the intention of the parties when they entered into the contract was
that the coverage thereof would include the whole area serviced by petitioners because at that time, they
already had subscribers outside Naga City. Private respondent, in fact, had asked for telephone connections
outside Naga City for its officers and employees residing there in addition to the ten (10) telephone units
mentioned in the contract. Petitioners have not been charging private respondent for the installation, transfers
and re-connections of said telephones so that naturally, they use the posts for those telephone lines.
(4) With respect to the third cause of action, the NTC has found petitioners' cable installations to be in
accordance with engineering standards and practice and comparable to the best in the country.
On the basis of the foregoing countervailing evidence of the parties, the trial court found, as regards private
respondent's first cause of action, that while the contract appeared to be fair to both parties when it was
entered into by them during the first year of private respondent's operation and when its Board of Directors did
not yet have any experience in that business, it had become disadvantageous and unfair to private respondent
because of subsequent events and conditions, particularly the increase in the volume of the subscribers of
petitioners for more than ten (10) years without the corresponding increase in the number of telephone
connections to private respondent free of charge. The trial court concluded that while in an action for
reformation of contract, it cannot make another contract for the parties, it can, however, for reasons of justice
and equity, order that the contract be reformed to abolish the inequities therein. Thus, said court ruled that the
contract should be reformed by ordering petitioners to pay private respondent compensation for the use of
their posts in Naga City, while private respondent should also be ordered to pay the monthly bills for the use of
the telephones also in Naga City. And taking into consideration the guidelines of the NEA on the rental of posts
by telephone companies and the increase in the costs of such posts, the trial court opined that a monthly
rental of P10.00 for each post of private respondent used by petitioners is reasonable, which rental it should
pay from the filing of the complaint in this case on January 2, 1989. And in like manner, private respondent
should pay petitioners from the same date its monthly bills for the use and transfers of its telephones in Naga
City at the same rate that the public are paying.
On private respondent's second cause of action, the trial court found that the contract does not mention
anything about the use by petitioners of private respondent's posts outside Naga City. Therefore, the trial court
held that for reason of equity, the contract should be reformed by including therein the provision that for the
use of private respondent's posts outside Naga City, petitioners should pay a monthly rental of P10.00 per
post, the payment to start on the date this case was filed, or on January 2, 1989, and private respondent
should also pay petitioners the monthly dues on its telephone connections located outside Naga City
beginning January, 1989.

WHEREFORE, in view of all the foregoing, decision is hereby rendered ordering the reformation of the
agreement (Exh. A); ordering the defendants to pay plaintiff's electric poles in Naga City and in the towns of
Milaor, Canaman, Magarao and Pili, Camarines Sur and in other places where defendant NATELCO uses
plaintiff's electric poles, the sum of TEN (P10.00) PESOS per plaintiff's pole, per month beginning January,
1989 and ordering also the plaintiff to pay defendant NATELCO the monthly dues of all its telephones
including those installed at the residence of its officers, namely; Engr. Joventino Cruz, Engr. Antonio Borja,
Engr. Antonio Macandog, Mr. Jesus Opiana and Atty. Luis General, Jr. beginning January, 1989. Plaintiff's
claim for attorney's fees and expenses of litigation and defendants' counterclaim are both hereby ordered
dismissed. Without pronouncement as to costs.
Disagreeing with the foregoing judgment, petitioners appealed to respondent Court of Appeals. In the decision
dated May 28, 1992, respondent court affirmed the decision of the trial court, 5 but based on different grounds
to wit: (1) that Article 1267 of the New Civil Code is applicable and (2) that the contract was subject to a
potestative condition which rendered said condition void. The motion for reconsideration was denied in the
resolution dated September 10, 1992. 6Hence, the present petition.
Petitioners assign the following pertinent errors committed by respondent court:
1) in making a contract for the parties by invoking Article 1267 of the New Civil Code;
2) in ruling that prescription of the action for reformation of the contract in this case commenced from the time
it became disadvantageous to private respondent; and
3) in ruling that the contract was subject to a potestative condition in favor of petitioners.
Petitioners assert earnestly that Article 1267 of the New Civil Code is not applicable primarily because the
contract does not involve the rendition of service or a personal prestation and it is not for future service with
future unusual change. Instead, the ruling in the case of Occea, et al. v. Jabson, etc., et al., 7 which
interpreted the article, should be followed in resolving this case. Besides, said article was never raised by the
parties in their pleadings and was never the subject of trial and evidence.
In applying Article 1267, respondent court rationalized:
We agree with appellant that in order that an action for reformation of contract would lie and may prosper,
there must be sufficient allegations as well as proof that the contract in question failed to express the true
intention of the parties due to error or mistake, accident, or fraud. Indeed, in embodying the equitable remedy
of reformation of instruments in the New Civil Code, the Code Commission gave its reasons as follows:
Equity dictates the reformation of an instrument in order that the true intention of the contracting parties may
be expressed. The courts by the reformation do not attempt to make a new contract for the parties, but to
make the instrument express their real agreement. The rationale of the doctrine is that it would be unjust and
inequitable to allow the enforcement of a written instrument which does not reflect or disclose the real meeting
of the minds of the parties. The rigor of the legalistic rule that a written instrument should be the final and
inflexible criterion and measure of the rights and obligations of the contracting parties is thus tempered to
forestall the effects of mistake, fraud, inequitable conduct, or accident. (pp. 55-56, Report of Code
Commission)
Thus, Articles 1359, 1361, 1362, 1363 and 1364 of the New Civil Code provide in essence that where through
mistake or accident on the part of either or both of the parties or mistake or fraud on the part of the clerk or
typist who prepared the instrument, the true intention of the parties is not expressed therein, then the

instrument may be reformed at the instance of either party if there was mutual mistake on their part, or by the
injured party if only he was mistaken.
Here, plaintiff-appellee did not allege in its complaint, nor does its evidence prove, that there was a mistake on
its part or mutual mistake on the part of both parties when they entered into the agreement Exh. "A", and that
because of this mistake, said agreement failed to express their true intention. Rather, plaintiff's evidence
shows that said agreement was prepared by Atty. Luciano Maggay, then a member of plaintiff's Board of
Directors and its legal counsel at that time, who was also the legal counsel for defendant-appellant, so that as
legal counsel for both companies and presumably with the interests of both companies in mind when he
prepared the aforesaid agreement, Atty. Maggay must have considered the same fair and equitable to both
sides, and this was affirmed by the lower court when it found said contract to have been fair to both parties at
the time of its execution. In fact, there were no complaints on the part of both sides at the time of and after the
execution of said contract, and according to 73-year old Justino de Jesus, Vice President and General
manager of appellant at the time who signed the agreement Exh. "A" in its behalf and who was one of the
witnesses for the plaintiff (sic), both parties complied with said contract "from the very beginning" (p. 5, tsn,
April 17, 1989).
That the aforesaid contract has become inequitous or unfavorable or disadvantageous to the plaintiff with the
expansion of the business of appellant and the increase in the volume of its subscribers in Naga City and
environs through the years, necessitating the stringing of more and bigger telephone cable wires by appellant
to plaintiff's electric posts without a corresponding increase in the ten (10) telephone connections given by
appellant to plaintiff free of charge in the agreement Exh. "A" as consideration for its use of the latter's electric
posts in Naga City, appear, however, undisputed from the totality of the evidence on record and the lower court
so found. And it was for this reason that in the later (sic) part of 1982 or 1983 (or five or six years after the
subject agreement was entered into by the parties), plaintiff's Board of Directors already asked Atty. Luis
General who had become their legal counsel in 1982, to study said agreement which they believed had
become disadvantageous to their company and to make the proper recommendation, which study Atty.
General did, and thereafter, he already recommended to the Board the filing of a court action to reform said
contract, but no action was taken on Atty. General's recommendation because the former general managers of
plaintiff wanted to adopt a soft approach in discussing the matter with appellant, until, during the term of
General Manager Henry Pascual, the latter, after failing to settle the problem with Atty. Luciano Maggay who
had become the president and general manager of appellant, already agreed for Atty. General's filing of the
present action. The fact that said contract has become inequitous or disadvantageous to plaintiff as the years
went by did not, however, give plaintiff a cause of action for reformation of said contract, for the reasons
already pointed out earlier. But this does not mean that plaintiff is completely without a remedy, for we believe
that the allegations of its complaint herein and the evidence it has presented sufficiently make out a cause of
action under Art. 1267 of the New Civil Code for its release from the agreement in question.
xxx xxx xxx
The understanding of the parties when they entered into the Agreement Exh. "A" on November 1, 1977 and
the prevailing circumstances and conditions at the time, were described by Dioscoro Ragragio, the President
of plaintiff in 1977 and one of its two officials who signed said agreement in its behalf, as follows:
Our understanding at that time is that we will allow NATELCO to utilize the posts of CASURECO II only in the
City of Naga because at that time the capability of NATELCO was very limited, as a matter of fact we do [sic]
not expect to be able to expand because of the legal squabbles going on in the NATELCO. So, even at that
time there were so many subscribers in Naga City that cannot be served by the NATELCO, so as a mater of
public service we allowed them to sue (sic) our posts within the Naga City. (p. 8, tsn April 3, 1989)
Ragragio also declared that while the telephone wires strung to the electric posts of plaintiff were very light
and that very few telephone lines were attached to the posts of CASURECO II in 1977, said posts have
become "heavily loaded" in 1989 (tsn, id.).
In truth, as also correctly found by the lower court, despite the increase in the volume of appellant's
subscribers and the corresponding increase in the telephone cables and wires strung by it to plaintiff's electric
posts in Naga City for the more 10 years that the agreement Exh. "A" of the parties has been in effect, there
has been no corresponding increase in the ten (10) telephone units connected by appellant free of charge to

plaintiff's offices and other places chosen by plaintiff's general manager which was the only consideration
provided for in said agreement for appellant's use of plaintiffs electric posts. Not only that, appellant even
started using plaintiff's electric posts outside Naga City although this was not provided for in the agreement
Exh. "A" as it extended and expanded its telephone services to towns outside said city. Hence, while very few
of plaintiff's electric posts were being used by appellant in 1977 and they were all in the City of Naga, the
number of plaintiff's electric posts that appellant was using in 1989 had jumped to 1,403,192 of which are
outside Naga City (Exh. "B"). Add to this the destruction of some of plaintiff's poles during typhoons like the
strong typhoon Sisang in 1987 because of the heavy telephone cables attached thereto, and the escalation of
the costs of electric poles from 1977 to 1989, and the conclusion is indeed ineluctable that the agreement Exh.
"A" has already become too one-sided in favor of appellant to the great disadvantage of plaintiff, in short, the
continued enforcement of said contract has manifestly gone far beyond the contemplation of plaintiff, so much
so that it should now be released therefrom under Art. 1267 of the New Civil Code to avoid appellant's unjust
enrichment at its (plaintiff's) expense. As stated by Tolentino in his commentaries on the Civil Code citing
foreign civilist Ruggiero, "equity demands a certain economic equilibrium between the prestation and the
counter-prestation, and does not permit the unlimited impoverishment of one party for the benefit of the other
by the excessive rigidity of the principle of the obligatory force of contracts (IV Tolentino, Civil Code of the
Philippines, 1986 ed.,
pp. 247-248).
We therefore, find nothing wrong with the ruling of the trial court, although based on a different and wrong
premise (i.e., reformation of contract), that from the date of the filing of this case, appellant must pay for the
use of plaintiff's electric posts in Naga City at the reasonable monthly rental of P10.00 per post, while plaintiff
should pay appellant for the telephones in the same City that it was formerly using free of charge under the
terms of the agreement Exh. "A" at the same rate being paid by the general public. In affirming said ruling, we
are not making a new contract for the parties herein, but we find it necessary to do so in order not to disrupt
the basic and essential services being rendered by both parties herein to the public and to avoid unjust
enrichment by appellant at the expense of plaintiff, said arrangement to continue only until such time as said
parties can re-negotiate another agreement over the same
subject-matter covered by the agreement Exh. "A". Once said agreement is reached and executed by the
parties, the aforesaid ruling of the lower court and affirmed by us shall cease to exist and shall be substituted
and superseded by their new agreement. . . .. 8
Article 1267 speaks of "service" which has become so difficult. Taking into consideration the rationale behind
this provision, 9 the term "service" should be understood as referring to the "performance" of the obligation. In
the present case, the obligation of private respondent consists in allowing petitioners to use its posts in Naga
City, which is the service contemplated in said article. Furthermore, a bare reading of this article reveals that it
is not a requirement thereunder that the contract be for future service with future unusual change. According to
Senator Arturo M. Tolentino, 10 Article 1267 states in our law the doctrine of unforseen events. This is said to be
based on the discredited theory of rebus sic stantibusin public international law; under this theory, the parties
stipulate in the light of certain prevailing conditions, and once these conditions cease to exist the contract also
ceases to exist. Considering practical needs and the demands of equity and good faith, the disappearance of
the basis of a contract gives rise to a right to relief in favor of the party prejudiced.
In a nutshell, private respondent in the Occea case filed a complaint against petitioner before the trial court
praying for modification of the terms and conditions of the contract that they entered into by fixing the proper
shares that should pertain to them out of the gross proceeds from the sales of subdivided lots. We ordered the
dismissal of the complaint therein for failure to state a sufficient cause of action. We rationalized that the Court
of Appeals misapplied Article 1267 because:
. . . respondent's complaint seeks not release from the subdivision contract but that the court "render
judgment modifying the terms and conditions of the contract . . . by fixing the proper shares that
should pertain to the herein parties out of the gross proceeds from the sales of subdivided lots of subject
subdivision". The cited article (Article 1267) does not grant the courts (the) authority to remake, modify or
revise the contract or to fix the division of shares between the parties as contractually stipulated with the force
of law between the parties, so as to substitute its own terms for those covenanted by the parties themselves.
Respondent's complaint for modification of contract manifestly has no basis in law and therefore states no
cause of action. Under the particular allegations of respondent's complaint and the circumstances therein
averred, the courts cannot even in equity grant the relief sought. 11

The ruling in the Occea case is not applicable because we agree with respondent court that the allegations in
private respondent's complaint and the evidence it has presented sufficiently made out a cause of action under
Article 1267. We, therefore, release the parties from their correlative obligations under the contract. However,
our disposition of the present controversy does not end here. We have to take into account the possible
consequences of merely releasing the parties therefrom: petitioners will remove the telephone wires/cables in
the posts of private respondent, resulting in disruption of their service to the public; while private respondent,
in consonance with the contract 12 will return all the telephone units to petitioners, causing prejudice to its
business. We shall not allow such eventuality. Rather, we require, as ordered by the trial court: 1) petitioners to
pay private respondent for the use of its posts in Naga City and in the towns of Milaor, Canaman, Magarao
and Pili, Camarines Sur and in other places where petitioners use private respondent's posts, the sum of ten
(P10.00) pesos per post, per month, beginning January, 1989; and 2) private respondent to pay petitioner the
monthly dues of all its telephones at the same rate being paid by the public beginning January, 1989. The
peculiar circumstances of the present case, as distinguished further from the Occea case, necessitates
exercise of our equity jurisdiction. 13 By way of emphasis, we reiterate the rationalization of respondent court
that:
. . . In affirming said ruling, we are not making a new contract for the parties herein, but we find it necessary to
do so in order not to disrupt the basic and essential services being rendered by both parties herein to the
public and to avoid unjust enrichment by appellant at the expense of plaintiff . . . . 14
Petitioners' assertion that Article 1267 was never raised by the parties in their pleadings and was never the
subject of trial and evidence has been passed upon by respondent court in its well reasoned resolution, which
we hereunder quote as our own:
First, we do not agree with defendant-appellant that in applying Art. 1267 of the New Civil Code to this case,
we have changed its theory and decided the same on an issue not invoked by plaintiff in the lower court. For
basically, the main and pivotal issue in this case is whether the continued enforcement of the contract Exh. "A"
between the parties has, through the years (since 1977), become too inequitous or disadvantageous to the
plaintiff and too one-sided in favor of defendant-appellant, so that a solution must be found to relieve plaintiff
from the continued operation of said agreement and to prevent defendant-appellant from further unjustly
enriching itself at plaintiff's expense. It is indeed unfortunate that defendant had turned deaf ears to plaintiffs
requests for renegotiation, constraining the latter to go to court. But although plaintiff cannot, as we have held,
correctly invoke reformation of contract as a proper remedy (there having been no showing of a mistake or
error in said contract on the part of any of the parties so as to result in its failure to express their true intent),
this does not mean that plaintiff is absolutely without a remedy in order to relieve itself from a contract that has
gone far beyond its contemplation and has become so highly inequitous and disadvantageous to it through the
years because of the expansion of defendant-appellant's business and the increase in the volume of its
subscribers. And as it is the duty of the Court to administer justice, it must do so in this case in the best way
and manner it can in the light of the proven facts and the law or laws applicable thereto.
It is settled that when the trial court decides a case in favor of a party on a certain ground, the appellant court
may uphold the decision below upon some other point which was ignored or erroneously decided by the trial
court (Garcia Valdez v. Tuazon, 40 Phil. 943; Relativo v. Castro, 76 Phil. 563; Carillo v. Salak de Paz, 18 SCRA
467). Furthermore, the appellate court has the discretion to consider an unassigned error that is closely
related to an error properly assigned (Paterno v. Jao Yan, 1 SCRA 631; Hernandez v. Andal, 78 Phil. 196). It
has also been held that the Supreme Court (and this Court as well) has the authority to review matters, even if
they are not assigned as errors in the appeal, if it is found that their consideration is necessary in arriving at a
just decision of the case (Saura Import & Export Co., Inc. v. Phil. International Surety Co. and PNB, 8 SCRA
143). For it is the material allegations of fact in the complaint, not the legal conclusion made therein or the
prayer, that determines the relief to which the plaintiff is entitled, and the plaintiff is entitled to as much relief as
the facts warrant although that relief is not specifically prayed for in the complaint (Rosales v. Reyes and
Ordoveza, 25 Phil. 495; Cabigao v. Lim, 50 Phil. 844; Baguioro v. Barrios, 77 Phil. 120). To quote an old but
very illuminating decision of our Supreme Court through the pen of American jurist Adam C. Carson:
"Under our system of pleading it is the duty of the courts to grant the relief to which the parties are shown to
be entitled by the allegations in their pleadings and the facts proven at the trial, and the mere fact that they
themselves misconstrue the legal effect of the facts thus alleged and proven will not prevent the court from
placing the just construction thereon and adjudicating the issues accordingly." (Alzua v. Johnson, 21 Phil. 308)

And in the fairly recent case of Caltex Phil., Inc. v IAC, 176 SCRA 741, the Honorable Supreme Court also
held:
We rule that the respondent court did not commit any error in taking cognizance of the aforesaid issues,
although not raised before the trial court. The presence of strong consideration of substantial justice has led
this Court to relax the well-entrenched rule that, except questions on jurisdiction, no question will be
entertained on appeal unless it has been raised in the court below and it is within the issues made by the
parties in their pleadings (Cordero v. Cabral, L-36789, July 25, 1983, 123 SCRA 532). . . .
We believe that the above authorities suffice to show that this Court did not err in applying Art. 1267 of the
New Civil Code to this case. Defendant-appellant stresses that the applicability of said provision is a question
of fact, and that it should have been given the opportunity to present evidence on said question. But
defendant-appellant cannot honestly and truthfully claim that it (did) not (have) the opportunity to present
evidence on the issue of whether the continued operation of the contract Exh. "A" has now become too onesided in its favor and too inequitous, unfair, and disadvantageous to plaintiff. As held in our decision, the
abundant and copious evidence presented by both parties in this case and summarized in said decision
established the following essential and vital facts which led us to apply Art. 1267 of the New Civil Code to this
case:
xxx xxx xxx 15
On the issue of prescription of private respondent's action for reformation of contract, petitioners allege that
respondent court's ruling that the right of action "arose only after said contract had already become
disadvantageous and unfair to it due to subsequent events and conditions, which must be sometime during
the latter part of 1982 or in 1983 . . ." 16 is erroneous. In reformation of contracts, what is reformed is not the
contract itself, but the instrument embodying the contract. It follows that whether the contract is
disadvantageous or not is irrelevant to reformation and therefore, cannot be an element in the determination of
the period for prescription of the action to reform.
Article 1144 of the New Civil Code provides, inter alia, that an action upon a written contract must be brought
within ten (10) years from the time the right of action accrues. Clearly, the ten (10) year period is to be
reckonedfrom the time the right of action accrues which is not necessarily the date of execution of the
contract. As correctly ruled by respondent court, private respondent's right of action arose "sometime during
the latter part of 1982 or in 1983 when according to Atty. Luis General, Jr. . . ., he was asked by (private
respondent's) Board of Directors to study said contract as it already appeared disadvantageous to (private
respondent) (p. 31, tsn, May 8, 1989). (Private respondent's) cause of action to ask for reformation of said
contract should thus be considered to have arisen only in 1982 or 1983, and from 1982 to January 2, 1989
when the complaint in this case was filed, ten (10) years had not yet elapsed." 17
Regarding the last issue, petitioners allege that there is nothing purely potestative about the prestations of
either party because petitioner's permission for free use of telephones is not made to depend purely on their
will, neither is private respondent's permission for free use of its posts dependent purely on its will.
Apart from applying Article 1267, respondent court cited another legal remedy available to private respondent
under the allegations of its complaint and the preponderant evidence presented by it:
. . . we believe that the provision in said agreement
(a) That the term or period of this contract shall be as long as the party of the first part[herein appellant] has
need for the electric light posts of the party of the second part [herein plaintiff] it being understood that this
contract shall terminate when for any reason whatsoever, the party of the second part is forced to stop,
abandoned [sic] its operation as a public service and it becomes necessary to remove the electric light post
[sic]"; (Emphasis supplied)
is invalid for being purely potestative on the part of appellant as it leaves the continued effectivity of the
aforesaid agreement to the latter's sole and exclusive will as long as plaintiff is in operation. A similar provision

in a contract of lease wherein the parties agreed that the lessee could stay on the leased premises "for as long
as the defendant needed the premises and can meet and pay said increases" was recently held by the
Supreme Court in Lim v. C.A., 191 SCRA 150, citing the much earlier case of Encarnacion v. Baldomar, 77
Phil. 470, as invalid for being "a purely potestative condition because it leaves the effectivity and enjoyment of
leasehold rights to the sole and exclusive will of the lessee." Further held the High Court in the Lim case:
The continuance, effectivity and fulfillment of a contract of lease cannot be made to depend exclusively upon
the free and uncontrolled choice of the lessee between continuing the payment of the rentals or not,
completely depriving the owner of any say in the matter. Mutuality does not obtain in such a contract of lease
of no equality exists between the lessor and the lessee since the life of the contract is dictated solely by the
lessee.
The above can also be said of the agreement Exh. "A" between the parties in this case. There is no mutuality
and equality between them under the afore-quoted provision thereof since the life and continuity of said
agreement is made to depend as long as appellant needs plaintiff's electric posts. And this is precisely why,
since 1977 when said agreement was executed and up to 1989 when this case was finally filed by plaintiff, it
could do nothing to be released from or terminate said agreement notwithstanding that its continued effectivity
has become very disadvantageous and inequitous to it due to the expansion and increase of appellant's
telephone services within Naga City and even outside the same, without a corresponding increase in the ten
(10) telephone units being used by plaintiff free of charge, as well as the bad and inefficient service of said
telephones to the prejudice and inconvenience of plaintiff and its customers. . . . 18
Petitioners' allegations must be upheld in this regard. A potestative condition is a condition, the fulfillment of
which depends upon the sole will of the debtor, in which case, the conditional obligation is void. 19 Based on
this definition, respondent court's finding that the provision in the contract, to wit:
(a) That the term or period of this contract shall be as long as the party of the first part (petitioner) has need for
the electric light posts of the party of the second part (private respondent) . . ..
is a potestative condition, is correct. However, it must have overlooked the other conditions in the same
provision, to wit:
. . . it being understood that this contract shall terminate when for any reason whatsoever, the party of the
second part (private respondent) is forced to stop, abandoned (sic) its operation as a public service and it
becomes necessary to remove the electric light post (sic);
which are casual conditions since they depend on chance, hazard, or the will of a third person. 20 In sum, the
contract is subject to mixed conditions, that is, they depend partly on the will of the debtor and partly on
chance, hazard or the will of a third person, which do not invalidate the aforementioned
provision. 21 Nevertheless, in view of our discussions under the first and second issues raised by petitioners,
there is no reason to set aside the questioned decision and resolution of respondent court.
WHEREFORE, the petition is hereby DENIED. The decision of the Court of Appeals dated May 28, 1992 and
its resolution dated September 10, 1992 are AFFIRMED.

DAVIDE, JR., J.:

This petition for review on certiorari has its roots in Civil Case No. 53444, which was sparked by the
petitioner's refusal to pay the rentals as stipulated in the contract of lease [1] on an undivided portion of 30,000
square meters of a parcel of land owned by the private respondents.
The lease contract, executed on 18 November 1985, reads in part as follows:
1. TERM OF LEASE - This lease shall be for a period of five (5) years, commencing on the date of
issuance of the industrial clearance by the Ministry of Human Settlements, renewable for a like or
other period at the option of the LESSEE under the same terms and conditions.
2. RATE OF RENT - LESSEE shall pay to the LESSOR rent at the monthly rate of TWENTY
THOUSAND PESOS (P20,000.00), Philippine Currency, in the manner set forth in Paragraph 3
below. This rate shall be increased yearly by Five Percent (5%) based on the agreed monthly
rate of P20,000.00 as follows:
Monthly Rate

Period Applicable

P21,000.00

Starting on the 2nd year

P22,000.00

Starting on the 3rd year

P23,000.00

Starting on the 4th year

P24,000.00

Starting on the 5th year

3. TERMS OF PAYMENT - The rent stipulated in Paragraph 2 above shall be paid yearly in advance by
the LESSEE. The first annual rent in the amount of TWO HUNDRED FORTY THOUSAND
PESOS (P240,000.00), Philippine currency, shall be due and payable upon the execution of this
Agreement and the succeeding annual rents shall be payable every twelve (12) months thereafter
during the effectivity of this Agreement.
4. USE OF LEASED PROPERTY - It is understood that the Property shall be used by the LESSEE as
the site, grounds and premises of a rock crushing plant and field office, sleeping quarters and
canteen/mess hall. The LESSORS hereby grant to the LESSEE the right to erect on the Leased
Property such structure(s) and/or improvement(s) necessary for or incidental to the LESSEE's
purposes.
...
11. TERMINATION OF LEASE - This Agreement may be terminated by mutual agreement of the
parties. Upon the termination or expiration of the period of lease without the same being
renewed, the LESSEE shall vacate the Leased Property at its expense.

SO ORDERED.
[G.R. No. 116896. May 5, 1997]
PHILIPPINE NATIONAL CONSTRUCTION CORPORATION petitioner, vs. COURT OF APPEALS, MA.
TERESA S. RAYMUNDO-ABARRA, JOSE S. RAYMUNDO, ANTONIO S. RAYMUNDO, RENE
S. RAYMUNDO, and AMADOR S. RAYMUNDO,respondents.
DECISION

On 7 January 1986, petitioner obtained from the Ministry of Human Settlements a Temporary Use
Permit[2] for the proposed rock crushing project. The permit was to be valid for two years unless sooner
revoked by the Ministry.
On 16 January 1986, private respondents wrote petitioner requesting payment of the first annual rental
in the amount of P240,000 which was due and payable upon the execution of the contract. They also assured
the latter that they had already stopped considering the proposals of other aggregates plants to lease the
property because of the existing contract with petitioner.[3]

In its reply-letter, petitioner argued that under paragraph 1 of the lease contract, payment of rental
would commence on the date of the issuance of an industrial clearance by the Ministry of Human Settlements,
and not from the date of signing of the contract. It then expressed its intention to terminate the contract, as it
had decided to cancel or discontinue with the rock crushing project "due to financial, as well as technical,
difficulties."[4]
The private respondents refused to accede to petitioner's request for the pretermination of the lease
contract. They insisted on the performance of petitioner's obligation and reiterated their demand for the
payment of the first annual rental. [5]
Petitioner objected to the claim of the private respondents and argued that it was "only obligated to
pay ... the amount of P20,000.00 as rental payments for the one-month period of lease, counted from 07
January 1986 when the Industrial Permit was issued by the Ministry of Human Settlements up to 07 February
1986 when the Notice of Termination was served" [6] on private respondents.
On 19 May 1986, the private respondents instituted with the Regional Trial Court of Pasig an action
against petitioner for Specific Performance with Damages. [7] The case was docketed as Civil Case No. 53444
at Branch 160 of the said court. After the filing by petitioner of its Answer with Counterclaim, the case was set
for trial on the merits.
What transpired next was summarized by the trial court in this wise:
Plaintiffs rested their case on September 7, 1987 (p. 87 rec.). Defendant asked for postponement of the
reception of its evidence scheduled on August 10, 1988 and as prayed for, was reset to August 25, 1988 (p. 91
rec.) Counsel for defendant again asked for postponement, through representative, as he was presently
indisposed. The case was reset, intransferable to September 15 and 26, 1988 (p. 94 rec.) On September 2,
1988, the office of the Government Corporate Counsel entered its appearance for defendant (p. 95, rec.) and
the original counsel later withdrew his appearance. On September 15, 1988 the Government Corporate
Counsel asked for postponement, represented by Atty. Elpidio de Vega, and with his conformity in open court,
the hearing was reset, intransferable to September 26 and October 17, 1988. (p. 98, rec.) On September 26,
1988 during the hearing, defendant's counsel filed a motion for postponement (urgent) as he had "sore eyes",
a medical certificate attached.
Counsel for plaintiffs objected to the postponement and the court considered the evidence of the government
terminated or waived. The case was deemed submitted for decision upon the filing of the
memorandum. Plaintiffs filed their memorandum on October 26, 1988. (p. 111, rec.).
On October 18, 1988 in the meantime, the defendant filed a motion for reconsideration of the order of the court
on September 26, 1988 (p. 107, rec.) The motion was not asked to be set for hearing (p. 110 rec.) There was
also no proof of notice and service to counsel for plaintiff. The court in the interest of justice set the hearing on
the motion on November 29, 1988. (p. 120, rec.) but despite notice, again defendant's counsel was absent (p.
120-A, dorsal side, rec.) without reason. The court reset the motion to December 16, 1988, in the interest of
justice. The motion for reconsideration was denied by the court. A second motion for reconsideration was
filed and counsel set for hearing the motion on January 19, 1989. During the hearing, counsel for the
government was absent. The motion was deemed abandoned but the court at any rate, after a review of the
incidents and the grounds relied upon in the earlier motion of defendant, found no reason to disturb its
previous order.[8]
On 12 April 1989, the trial court rendered a decision ordering petitioner to pay the private respondents
the amount of P492,000 which represented the rentals for two years, with legal interest from 7 January 1986
until the amount was fully paid, plus attorney's fees in the amount of P20,000 and costs.[9]
Petitioner then appealed to the Court of Appeals alleging that the trial court erred in ordering it to pay
the private respondent the amount of P492,000 and in denying it the right to be heard.

Upon the affirmance of the trial court's decision [10] and the denial of its motion for reconsideration,
petitioner came to this Court ascribing to the respondent Court of Appeals the same alleged errors and
reiterating their arguments.
First. Petitioner invites the attention of this Court to paragraph 1 of the lease contract, which reads:
"This lease shall be for a period of five (5) years, commencing on the date of issuance of the industrial
clearance by the Ministry of Human Settlements...." It then submits that the issuance of an industrial
clearance is a suspensive condition without which the rights under the contract would not be acquired. The
Temporary Use Permit is not the industrial clearance referred to in the contract; for the said permit requires
that a clearance from the National Production Control Commission be first secured, and besides, there is a
finding in the permit that the proposed project does not conform to the Zoning Ordinance of Rodriguez,
(formerly Montalban), Rizal, where the leased property is located. Without the industrial clearance the lease
contract could not become effective and petitioner could not be compelled to perform its obligation under the
contract.
Petitioner is now estopped from claiming that the Temporary Use Permit was not the industrial
clearance contemplated in the contract. In its letter dated 24 April 1986, petitioner states:
We wish to reiterate PNCC Management's previous stand that it is only obligated to pay your clients the
amount of P20,000.00 as rental payments for the one-month period of the lease, counted from 07
January 1986 when the Industrial Permit was issued by the Ministry of Human Settlements up to 07
February 1986 when the Notice of Termination was served on your clients. [11] (Underscoring Supplied).
The "Industrial Permit" mentioned in the said letter could only refer to the Temporary Use Permit issued by the
Ministry of Human Settlements on 7 January 1986. And it can be gleaned from this letter that petitioner has
considered the permit as industrial clearance; otherwise, petitioner could have simply told the private
respondents that its obligation to pay rentals has not yet arisen because the Temporary Use Permit is not the
industrial clearance contemplated by them. Instead, petitioner recognized its obligation to pay rental counted
from the date the permit was issued.
Also worth noting is the earlier letter of petitioner; thus:
[P]lease be advised of PNCC Management's decision to cancel or discontinue with the rock
crushing project due to financial as well as technical difficulties. In view thereof, we would like to
terminate our Lease Contract dated 18 November, 1985. Should you agree to the mutual
termination of our Lease Contract, kindly indicate your conformity hereto by affixing your signature
on the space provided below. May we likewise request Messrs. Rene, Jose and Antonio, all
surnamed Raymundo and Mrs. Socorro A. Raymundo as Attorney-in-Fact of Amador S. Raymundo
to sign on the spaces indicated below.[12]
It can be deduced from this letter that the suspensive condition - issuance of industrial clearance - has
already been fulfilled and that the lease contract has become operative. Otherwise, petitioner did not have to
solicit the conformity of the private respondents to the termination of the contract for the simple reason that no
juridical relation was created because of the non-fulfillment of the condition.
Moreover, the reason of petitioner in discontinuing with its project and in consequently cancelling the
lease contract was financial as well as technical difficulties, not the alleged insufficiency of the Temporary
Use Permit.
Second. Invoking Article 1266 and the principle of rebus sic stantibus, petitioner asserts that it should
be released from the obligatory force of the contract of lease because the purpose of the contract did not
materialize due to unforeseen events and causes beyond its control, i.e., due to abrupt change in political
climate after the EDSA Revolution and financial difficulties.
It is a fundamental rule that contracts, once perfected, bind both contracting parties, and obligations
arising therefrom have the force of law between the parties and should be complied with in good faith. [13]But

the law recognizes exceptions to the principle of the obligatory force of contracts. One exception is laid down
in Article 1266 of the Civil Code, which reads: "The debtor in obligations to do shall also be released when the
prestation becomes legally or physically impossible without the fault of the obligor."
Petitioner cannot, however, successfully take refuge in the said article, since it is applicable only to
obligations "to do", and not to obligations "to give". [14] An obligation "to do" includes all kinds of work or service;
while an obligation "to give" is a prestation which consists in the delivery of a movable or an immovable thing
in order to create a real right, or for the use of the recipient, or for its simple possession, or in order to return it
to its owner.[15]
The obligation to pay rentals[16] or deliver the thing in a contract of lease [17] falls within the prestation to
give; hence, it is not covered within the scope of Article 1266. At any rate, the unforeseen event and causes
mentioned by petitioner are not the legal or physical impossibilities contemplated in said article. Besides,
petitioner failed to state specifically the circumstances brought about by the abrupt change in the political
climate in the country except the alleged prevailing uncertainties in government policies on infrastructure
projects.
The principle of rebus sic stantibus[18] neither fits in with the facts of the case. Under this theory, the
parties stipulate in the light of certain prevailing conditions, and once these conditions cease to exist the
contract also ceases to exist.[19] This theory is said to be the basis of Article 1267 of the Civil Code, which
provides:
ART. 1267. When the service has become so difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also be released therefrom, in whole or in part.
This article, which enunciates the doctrine of unforeseen events, is not, however, an absolute
application of the principle of rebus sic stantibus, which would endanger the security of contractual
relations. The parties to the contract must be presumed to have assumed the risks of unfavorable
developments. It is therefore only in absolutely exceptional changes of circumstances that equity demands
assistance for the debtor.[20]
In this case, petitioner wants this Court to believe that the abrupt change in the political climate of the
country after the EDSA Revolution and its poor financial condition rendered the performance of the lease
contract impractical and inimical to the corporate survival of the petitioner.
This Court cannot subscribe to this argument. As pointed out by private respondents: [21]
It is a matter of record that petitioner PNCC entered into a contract with private respondents on
November 18, 1985. Prior thereto, it is of judicial notice that after the assassination of Senator
Aquino on August 21, 1983, the country has experienced political upheavals, turmoils, almost daily
mass demonstrations, unprecedented, inflation, peace and order deterioration, the Aquino trial and
many other things that brought about the hatred of people even against crony corporations. On
November 3, 1985, Pres. Marcos, being interviewed live on U.S. television announced that there
would be a snap election scheduled for February 7, 1986.
On November 18, 1985, notwithstanding the above, petitioner PNCC entered into the contract of
lease with private respondents with open eyes of the deteriorating conditions of the country.
Anent petitioners alleged poor financial condition, the same will neither release petitioner from the
binding effect of the contract of lease. As held in Central Bank v. Court of Appeals, [22] cited by the private
respondents, mere pecuniary inability to fulfill an engagement does not discharge a contractual obligation, nor
does it constitute a defense to an action for specific performance.
With regard to the non-materialization of petitioners particular purpose in entering into the contract of
lease, i.e., to use the leased premises as a site of a rock crushing plant, the same will not invalidate the

contract. The cause or essential purpose in a contract of lease is the use or enjoyment of a thing. [23] As a
general principle, the motive or particular purpose of a party in entering into a contract does not affect the
validity or existence of the contract; an exception is when the realization of such motive or particular purpose
has been made a condition upon which the contract is made to depend. [24] The exception is not apply here.
Third. According to petitioner, the award of P492,000 representing the rent for two years is excessive,
considering that it did not benefit from the property. Besides, the temporary permit, conformably with the
express provision therein, was deemed automatically revoked for failure of petitioner to use the same within
one year from the issuance thereof. Hence, the rent payable should only be for one year.
Petitioner cannot be heard to complain that the award is excessive. The temporary permit was valid
for two years but was automatically revoked because of its non-use within one year from its issuance. The
non-use of the permit and the non-entry into the property subject of the lease contract were both imputable to
petitioner and cannot, therefore, be taken advantage of in order to evade or lessen petitioners monetary
obligation. The damage or prejudice to private respondents is beyond dispute. They unquestionably suffered
pecuniary losses because of their inability to use the leased premises. Thus, in accordance with Article 1659
of the Civil Code,[25] they are entitled to indemnification for damages; and the award ofP492,000 is fair and just
under the circumstances of the case.
Finally, petitioner submits that the trial court gravely abused its discretion in denying petitioner the right
to be heard.
We disagree. The trial court was in fact liberal in granting several postponements [26] to petitioner before
it deemed terminated and waived the presentation of evidence in petitioners behalf.
It must be recalled that private respondents rested their case on 7 September 1987 yet. [27] Almost a
year after, or on 10 August 1988 when it was petitioners turn to present evidence, petitioners counsel asked
for postponement of the hearing to 25 August 1988 due to conflict of schedules, [28] and this was granted.[29] At
the rescheduled hearing, petitioners counsel, through a representative, moved anew for postponement, as he
was allegedly indisposed.[30] The case was then reset intransferable to September 15 and 26, 1988. [31] On 2
September 1988, the Office of the Government Corporate Counsel, through Atty. Elpidio J. Vega, entered its
appearance for the petitioner,[32] and later the original counsel withdrew his appearance. [33] On 15 September
1988, Atty. Vega requested for postponement to enable him to go over the records of the case. [34] With his
conformity, the hearing was reset intransferable to September 26 and October 17, 1988. [35] In the morning of
26 September 1988, the court received Atty. Vegas Urgent Motion for Postponement on the ground that he
was afflicted with conjunctivitis or sore eyes. [36] This time, private respondents objected; and upon their motion,
the court deemed terminated and waived the presentation of evidence for the petitioner. [37] Nevertheless,
before the court considered the case submitted for decision, it required the parties to submit their respective
memoranda within thirty days.[38] But petitioner failed to file one.
Likewise, the court was liberal in respect to petitioners motion for reconsideration. Notwithstanding the
lack of request for hearing and proof of notice and service to private respondents, the court set the hearing of
the said motion on 29 November 1988. [39] Upon the denial of the said motion for lack of merit, [40]petitioner filed
a second motion for reconsideration. But during the hearing of the motion on a date selected by him, Atty.
Vega was absent for no reason at all, despite due notice. [41]
From the foregoing narration of procedural antecedents, it cannot be said that the petitioner was
deprived of its day in court. The essence of due process is simply an opportunity to be heard. [42] To be heard
does not only mean oral arguments in court; one may be heard also through pleadings. Where opportunity to
be heard, either through oral arguments or pleadings, is accorded, there is no denial of procedural due
process.[43]
WHEREFORE, the instant petition is DENIED and the challenged decision of the Court of Appeals is
AFFIRMED in toto.
No pronouncements as to costs.

SO ORDERED.

Interest

165,385.00

Penalties

254,820.55

Service Charges

11,326.33

TOTAL

[G.R. No. 104726. February 11, 1999]

VICTOR YAM & YEK SUN LENT, doing business under the name and style of Philippine Printing
Works, petitioners, vs. THE COURT OF APPEALS and MANPHIL INVESTMENT
CORPORATION, respondents.
DECISION
MENDOZA, J.:
This is a petition for review of the decision [1] of the Court of Appeals affirming in toto the decision of the
Regional Trial Court of Manila (Branch 149), ordering petitioners to pay private respondent the amount
ofP266,146.88 plus interest, service charge, penalty fees, and attorneys fees and the costs, otherwise the
chattel mortgage given to secure payment of the loan would be foreclosed.

P 727,001.35

On this date, petitioners paid P410,854.47 by means of a Pilipinas Bank check, receipt of which was
acknowledged by Destajo.[8] The corresponding voucher for the check bears the following notation: full
payment of IGLF LOAN.[9]
The amount of P410,854.47 was the sum of the principal (P295,469.47) and the interest (P165,385.00)
less the partial payment of P50,000.00. The private respondent sent two demand letters to petitioners, dated
September 4, 1986 and September 25, 1986, seeking payment of the balance of P266,146.88. As petitioners
did not respond, private respondent filed this case in the Regional Trial Court of Metro Manila for
the collection of P266,146.88 plus interests, penalties, and service charges or, in the alternative, for the
foreclosure of the mortgaged machineries.
In their Answer, petitioners claimed that they had fully paid their obligation to private respondent. They
contended that some time after receiving private respondents letter of July 2, 1986 (concerning the conditional
offer to reduce their penalty charges), petitioner Victor Yam and his wife, Elena Yam, met with Carlos
Sobrepeas, president of respondent corporation, during which the latter agreed to waive the penalties and
service charges, provided petitioners paid the principal and interest, computed as of July 31, 1986, less the
earlier payment ofP50,000.00. This is the reason why according to them they only paid P410,854.47.
Petitioners added that this fact of full payment is reflected in the voucher accompanying the Pilipinas Bank
check they issued, which bore the notation full payment of IGLF loan.

The following are the facts:

On April 30, 1990, the lower court rendered a decision, the dispositive portion of which reads:
On May 10, 1979, the parties in this case entered into a Loan Agreement with Assumption of Solidary
Liability whereby petitioners were given a loan of P500,000.00 by private respondent. The contract provided
for the payment of 12% annual interest, 2% monthly penalty, 1 1/2% monthly service charge, and 10%
attorneys fees.[2]Denominated the first Industrial Guarantee and Loan Fund (IGLF), the loan was secured by a
chattel mortgage on the printing machinery in petitioners establishment. [3]
Petitioners subsequently obtained a second IGLF loan of P300,000.00 evidenced by two promissory
notes, dated July 3, 1981 and September 30, 1981. For this purpose, a new loan agreement [4] was entered
into by the parties containing identical provisions as the first one, except as to the annual interest which was
increased to 14% and the service charge which was reduced to 1% per annum. The deed of chattel mortgage
was amended correspondingly.[5]
By April 2, 1985, petitioners had paid their first loan of P500,000.00. On November 4, 1985, private
respondent was placed under receivership by the Central Bank and Ricardo Lirio and Cristina Destajo were
appointed as receiver and in-house examiner, respectively.
On May 17, 1986, petitioners made a partial payment of P50,000.00 on the second loan. They later
wrote private respondent a letter, dated June 18, 1986, proposing to settle their obligation. On July 2, 1986,
private respondent, through its counsel, replied with a counter-offer, namely, that it would reduce the penalty
charges up to P140,000.00, provided petitioners can pay their obligation on or before July 30, 1986. [6]
As of July 31, 1986, petitioners total liability to private respondent was P727,001.35, broken down as
follows:[7]
Principal

P295,469.47

WHEREFORE, in view of the foregoing, the defendants Victor Yam and Yek Sun Lent are hereby ordered to
pay jointly and severally, the principal loan balance of P266,146.88 as of September 4, 1986 plus interest at
14% per annum, service charge at 1% per annum and penalty fees at 2% per month and to pay plaintiff
attorneys fees equivalent to 10% of the amount to be recovered, and to pay the costs of suit, failing in which,
the chattel mortgage instituted on the printing machineries and equipment described in the Deed of Chattel
Mortgage dated May 10, 1979, as amended, is hereby declared foreclosed and the subject thereof sold in
accordance with law to satisfy the judgment herein rendered.
SO ORDERED.[10]
On appeal, the Court of Appeals affirmed the decision of the trial court in toto. Hence, this petition.
Petitioners reiterate the same assignment of errors made by them before the Court of Appeals, to wit: [11]
FIRST ASSIGNED ERROR
THAT THE LOWER COURT GRIEVOUSLY ERRED IN FAILING TO GIVE CREDENCE TO THE
DOCUMENTARY AS WELL AS TESTIMONIAL EVIDENCE OF THE PETITIONERS RELATIVE TO THE
PAYMENT TO THE RESPONDENT OF THE ADDITIONAL LOAN UNDER THE AMENDMENT OF DEED OF
CHATTEL MORTGAGE (EXHIBIT K, RESPONDENT) AND AS AGAINST THE TESTIMONY OF
RESPONDENTS WITNESS, CRISTINA L. DESTAJO.
SECOND ASSIGNED ERROR

THAT THE COURT BELOW ERRED IN NOT TOTALLY DISREGARDING EXHIBITS E AND F OF THE
RESPONDENTS
The question is whether petitioners are liable for the payment of the penalties and service charges on
their loan which, as of July 31, 1986, amounted to P266,146.88.
The answer is in the affirmative. Art. 1270, par. 2 of the Civil Code provides that express condonation
must comply with the forms of donation. [12] Art. 748, par. 3 provides that the donation and acceptance of a
movable, the value of which exceeds P5,000.00, must be made in writing, otherwise the same shall be void. In
this connection, under Art. 417, par. 1, obligations, actually referring to credits, [13] are considered movable
property. In the case at bar, it is undisputed that the alleged agreement to condone P266,146.88 of the second
IGLF loan was not reduced in writing. [14]
Nonetheless, petitioners insist that the voucher covering the Pilipinas Bank check for P410,854.47,
containing the notation that the amount is in full payment of IGLF loan, constitutes documentary evidence of
such oral agreement. This contention is without merit. The notation in full payment of IGLF loan merely
states petitioners intention in making the payment, but in no way does it bind private respondent. It would
have been a different matter if the notation appeared in a receipt issued by respondent corporation, through its
receiver, because then it would be an admission against interest. Indeed, if private respondent really
condoned the amount in question, petitioners should have asked for a certificate of full payment from
respondent corporation, as they did in the case of their first IGLF loan of P500,000.00.[15]
Petitioners, however, contend that the Central Bank examiner assigned to respondent corporation,
Cristina Destajo, signed the voucher in question. Destajo claimed that, when she signed the voucher, she
failed to notice the statement that the amount of P410,854.47 was being given in full payment of IGLF
Loan. She said she merely took note of the amount and the check number indicated therein. [16] In any event,
Destajo, by countersigning the voucher, did no more than acknowledge receipt of the payment. She cannot be
held to have ascented thereby to the payment in full of petitioners indebtedness to private respondent. It was
obvious she had no authority to condone any indebtedness, her duties being limited to issuing official
receipts, preparing check vouchers and documentation. [17]
Moreover, it is to be noted that the alleged agreement to condone the amount in question was
supposedly entered into by the parties sometime in July 1986, that is, after respondent corporation had been
placed under receivership on November 4, 1985. As held in Villanueva v. Court of Appeals [18] the appointment
of a receiver operates to suspend the authority of a [corporation] and of its directors and officers over its
property and effects, such authority being reposed in the receiver. [19] Thus, Sobrepeas had no authority to
condone the debt.
Indeed, Mrs. Yam herself testified that when she and her husband sought the release of the chattel
mortgage over their property, they were told that only the Central Bank would authorize the same because
[the CB] is the receiver.[20] Considering this, petitioners cannot feign ignorance and plead good faith.
The second assignment of error pertains to the petitioners allegation that they did not receive the two
letters of demand sent by private respondent on September 4 and September 25, 1986. Both the lower court
and the Court of Appeals found otherwise. We have no reason to disturb this factual finding. It is settled that
findings of fact of trial courts, adopted and confirmed by the Court of Appeals, are final and conclusive and, as
a rule, will not be reviewed on appeal. [21]

GAN TION, petitioner,

vs.
HON. COURT OF APPEALS, HON. JUDGE AGUSTIN P. MONTESA, as Judge of the Court of First
Instance of Manila, ONG WAN SIENG and THE SHERIFF OF MANILA, respondents.
Burgos and Sarte for petitioner.
Roxas, Roxas, Roxas and Associates for respondents.
MAKALINTAL, J.:
The sole issue here is whether or not there has been legal compensation between petitioner Gan Tion and
respondent Ong Wan Sieng.
Ong Wan Sieng was a tenant in certain premises owned by Gan Tion. In 1961 the latter filed an ejectment
case against the former, alleging non-payment of rents for August and September of that year, at P180 a
month, or P360 altogether. The defendant denied the allegation and said that the agreed monthly rental was
only P160, which he had offered to but was refused by the plaintiff. The plaintiff obtained a favorable judgment
in the municipal court (of Manila), but upon appeal the Court of First Instance, on July 2, 1962, reversed the
judgment and dismissed the complaint, and ordered the plaintiff to pay the defendant the sum of P500 as
attorney's fees. That judgment became final.
On October 10, 1963 Gan Tion served notice on Ong Wan Sieng that he was increasing the rent to P180 a
month, effective November 1st, and at the same time demanded the rents in arrears at the old rate in the
aggregate amount of P4,320.00, corresponding to a period from August 1961 to October 1963.lwphi1.et
In the meantime, over Gan Tion's opposition, Ong Wan Sieng was able to obtain a writ of execution of the
judgment for attorney's fees in his favor. Gan Tion went on certiorari to the Court of Appeals, where he
pleaded legal compensation, claiming that Ong Wan Sieng was indebted to him in the sum of P4,320 for
unpaid rents. The appellate court accepted the petition but eventually decided for the respondent, holding that
although "respondent Ong is indebted to the petitioner for unpaid rentals in an amount of more than
P4,000.00," the sum of P500 could not be the subject of legal compensation, it being a "trust fund for the
benefit of the lawyer, which would have to be turned over by the client to his counsel." In the opinion of said
court, the requisites of legal compensation, namely, that the parties must be creditors and debtors of each
other in their own right (Art. 1278, Civil Code) and that each one of them must be bound principally and at the
same time be a principal creditor of the other (Art. 1279), are not present in the instant case, since the real
creditor with respect to the sum of P500 was the defendant's counsel.
This is not an accurate statement of the nature of an award for attorney's fee's. The award is made in favor of
the litigant, not of his counsel, and is justified by way of indemnity for damages recoverable by the former in
the cases enumerated in Article 2208 of the Civil Code.1 It is the litigant, not his counsel, who is the judgment
creditor and who may enforce the judgment by execution. Such credit, therefore, may properly be the subject
of legal compensation. Quite obviously it would be unjust to compel petitioner to pay his debt for P500 when
admittedly his creditor is indebted to him for more than P4,000.
WHEREFORE, the judgment of the Court of Appeals is reversed, and the writ of execution issued by the Court
of First Instance of Manila in its Civil Case No. 49535 is set aside. Costs against respondent.
[G.R. No. 116792. March 29, 1996]

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

BANK OF THE PHILIPPINE ISLANDS and GRACE ROMERO, petitioners, vs. COURT OF APPEALS and
EDVIN F. REYES, respondents.

SO ORDERED.
G.R. No. L-22490

May 21, 1969

DECISION
PUNO, J.:

Petitioners seek a review of the Decision 1 of respondent Court of Appeals in CA-G.R. CV No. 41543
reversing the Decision2 of the Regional Trial Court of Quezon City, Branch 79, and ordering petitioners to
credit private respondents Savings

WHEREFORE, the judgment appealed from is set aside, and another one entered ordering defendant
(petitioner) to credit plaintiffs (private respondents) S.A. No. 3 185-0172-56 with P10,556.00 plus interest at
the applicable rates for express teller savings accounts from February 19,1991, until compliance herewith. The
claim and counterclaim for damages are dismissed for lack of merit.

Account No. 3185-0172-56 with P10,556.00 plus interest.

SO ORDERED.11
The facts reveal that on September 25, 1985, private respondent Edvin F. Reyes opened Savings
Account No. 3 185-0172-56 at petitioner Bank of the Philippine Islands (BPI) Cubao, Shopping Center Branch.
It is a joint AND/OR account with his wife, Sonia S. Reyes.

Petitioners now contend that respondent Court of Appeals erred:

I

Private respondent also held a joint AND/OR Savings Account No. 3185-0128-82 with his
grandmother, Emeteria M. Fernandez, opened3 on February 11, 1986 at the same BPI branch. He regularly
deposited in this account the U.S. Treasury Warrants payable to the order of Emeteria M. Fernandez as her
monthly pension.
Emeteria M. Fernandez died on December 28, 1989 without the knowledge of the U.S. Treasury
Department. She was still sent U.S. Treasury Warrant No. 21667302 dated January 1, 1990 in the amount of
U.S. $377.003 or P10,556.00. On January 4, 1990, private respondent deposited the said U.S.treasury check
of Fernandez in Savings Account No. 3 185-0128-82. The U.S. Veterans Administration Office
in Manila conditionally cleared the check.4 The check was then sent to the United States for further clearing.5
Two months after or on March 8, 1990, private respondent closed Savings Account No. 3 185-0128-82
and transferred its funds amounting to P13,112.91 to Savings Account No. 3 185-0172-56, the joint account
with his wife.
On January 16, 1991, U.S. Treasury Warrant No. 21667302 was dishonored as it was discovered that
Fernandez died three (3) days prior to its issuance. The U.S. Department of Treasury requested petitioner
bank for a refund.6 For the first time petitioner bank came to know of the death of Fernandez.
On February 19, 1991, private respondent received a PT & T urgent telegram from petitioner bank
requesting him to contact Manager Grace S. Romero or Assistant Manager Carmen Bernardo. When he
called up the bank, he was informed that the treasury check was the subject of a claim by Citibank NA,
correspondent of petitioner bank. He assured petitioners that he would drop by the bank to look into the
matter. He also verbally authorized them to debit from his other joint account the amount stated in the
dishonored U.S. Treasury Warrant.7 On the same day, petitioner bank debited the amount of P10,556.00 from
private respondents Savings Account No. 3185-0172-56.

RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING THAT RESPONDENT REYES
GAVE EXPRESS AUTHORITY TO PETITIONER BANK TO DEBIT HIS JOINT ACCOUNT WITH HIS WIFE
FOR THE VALUE OF THE RETURNED U.S. TREASURY WARRANT.
II
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING THAT PETITIONER BANK HAS
LEGAL RIGHT TO APPLY THE DEPOSIT OF RESPONDENT REYES TO HIS OUTSTANDING OBLIGATION
TO PETITIONER BANK BROUGHT ABOUT BY THE RETURN OF THE U.S. TREASURY WARRANT HE
EARLIER DEPOSITED UNDER THE PRINCIPLE OF LEGAL COMPENSATION.
III
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT APPLYING CORRECTLY THE
PRINCIPLES ENUNCIATED BY THE SUPREME COURT IN THE CASE OF GULLAS V. PNB, 62 PHIL. 519.
IV
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT APPRECIATING THE FACT THAT THE
MONEY DEBITED BY PETITIONER BANK WAS THE SAME MONEY TRANSFERRED BY RESPONDENT
REYES FROM HIS JOINT AND/OR ACCOUNT WITH HIS GRANDMOTHER TO HIS JOINT AND/OR
ACCOUNT WITH HIS WIFE.12
We find merit in the petition.

On February 21, 1991, private respondent with his lawyer Humphrey Tumaneng visited the petitioner
bank and the refund documents were shown to them. Surprisingly, private respondent demanded from
petitioner bank restitution of the debited amount. He claimed that because of the debit, he failed to withdraw
his money when he needed them. He then filed a suit for Damages8 against petitioners before the Regional
Trial Court of Quezon City, Branch 79.
Petitioners contested the complaint and counter-claimed for moral and exemplary damages. By way of
Special
and
Affirmative
Defense,
they
averred
that
private
respondent
gave
them
his express verbalauthorization to debit the questioned amount. They claimed that private respondent later
refused to execute a written authority.9

The first issue for resolution is whether private respondent verbally authorized petitioner bank to debit
his joint account with his wife for the amount of the returned U.S. Treasury Warrant. We find that petitioners
were able to prove this verbal authority by preponderance of evidence. The testimonies of Bernardo and
Romero deserve credence. Bernardo testified:
xxx
Q: After that, what

xxx

happened?

In a Decision dated January 20, 1993, the trial court dismissed the complaint of private respondent for
lack of cause of action.10

A:

Private respondent appealed to the respondent Court of Appeals. On August 16, 1994, the Sixteenth
Division of respondent court in AC-G.R. CV No. 41543 reversed the impugned decision, viz:

Q: What was his response if any?

A:

xxx

x x x Dr. Reyes called me up and I informed him about the return of the U.S. Treasury
Warrant and we are requested to reimburse for the amount.

Dont you worry about it, there is no personal problem.

xxx

xxx

xxx

Q: And so what was his response?

A:

He said that dont you worry about it.

xxx

Article 1279 states that in order that compensation may be proper, it is necessary:
xxx

xxx

Q: You said that you asked him the advice and he did not answer, what advice are you
referring to?
A:

In our conversation, he promised me that he will give me written confirmation or

authorization.13

The conversation was promptly relayed to Romero who testified:

xxx

xxx

xxx

This was immediately relayed to me as manager of the Bank of the Philippine Islands, sir.

Q: What, if any was the content of her conversation, if you know?

A:

Mr. Reyes instructed Mrs. Bernardo to debit his account with the bank. His account
was maintained jointly with his wife then he promised to drop by to give us a
written confirmation, sir.
xxx

xxx

xxx

Q: You said that you authorized the debiting of the account on February 19, 1991, is that
correct?
A:

(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of
the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind,
and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;

Q: x x x Was there any opportunity wherein said Mrs. Bernardo was able to convey to you the
contents of their conversation?
A:

concurrent amount, even though the creditors and debtors are not aware of the compensation. Legal
compensation operates even against the will of the interested parties and even without the consent of
them.19 Since this compensation takes place ipso jure, its effects arise on the very day on which all its
requisites concur.20 When used as a defense, it retroacts to the date when its requisites are fulfilled. 21

I did not authorize, we merely followed the instruction of Mr. Reyes, sir. 14

We are not disposed to believe private respondents allegation that he did not give any verbal
authorization. His testimony is uncorroborated. Nor does he inspire credence. His past and fraudulent
conduct is an evidence against him. 15 He concealed from petitioner bank the death of Fernandez onDecember
28, 1989.16 As of that date, he knew that Fernandez was no longer entitled to receive any
pension. Nonetheless, he still received the U.S. Treasury Warrant of Fernandez, and on January 4,
1990deposited the same in Savings Account No. 3185-0128-82. To pre-empt a refund, private respondent
closed his joint account with Fernandez (Savings Account No. 31-85- 0128-82) on March 8,
1990 andtransferred its balance to his joint account with his wife (Savings Account No. 3 185-017256). Worse, private respondent declared under the penalties of perjury in the withdrawal slip 17 dated March 8,
1990 that his co-depositor, Fernandez, is still living. By his acts, private respondent has stripped himself of
credibility.
More importantly, the respondent court erred when it failed to rule that legal compensation is
proper. Compensation shall take place when two persons, in their own right, are creditors and debtors of
each other.18 Article 1290 of the Civil Code provides that when all the requisites mentioned in Article 1279
are present, compensation takes effect by operation of law, and extinguishes both debts to the

(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.
The elements of legal compensation are all present in the case at bar. The obligors bound principally
are at the same time creditors of each other. Petitioner bank stands as a debtor of the private respondent, a
depositor. At the same time, said bank is the creditor of the private respondent with respect to the dishonored
U.S. Treasury Warrant which the latter illegally transferred to his joint account. The debts involved consist of a
sum of money. They are due, liquidated, and demandable. They are not claimed by a third person.
It is true that the joint account of private respondent and his wife was debited in the case at bar. We
hold that the presence of private respondents wife does not negate the element of mutuality of parties, i.e.,
that they must be creditors and debtors of each other in their own right. The wife of private respondent is not a
party in the case at bar. She never asserted any right to the debited U.S. Treasury Warrant. Indeed, the right
of the petitioner bank to make the debit is clear and cannot be doubted. To frustrate the application of legal
compensation on the ground that the parties are not all mutually obligated would result in unjust enrichment
on the part of the private respondent and his wife who herself out of honesty has not objected to the debit.
The rule as to mutuality is strictly applied at law. But not in equity, where to allow the same
would defeat a clear right or permit irremediable injustice.22
IN VIEW HEREOF, the Decision of respondent Court of Appeals in CA-G.R. CV No. 41543
datedAugust 16,1994 is ANNULLED and SET ASIDE and the Decision of the trial court in Civil Case No. Q-918451 dated January 20, 1993 is REINSTATED. Costs against private respondent.
SO ORDERED.

(c) The plaintiff made a written demand upon the defendant for remittance of the equivalent of P2,627.11 by
means of a letter dated December 4, 1986 (Exh. D). This was answered by the defendant on December 22,
1986 (Exh. 13), inviting the plaintiff to come for a conference;

[G.R. No. 108052. July 24, 1996]

PHILIPPINE NATIONAL BANK, petitioner, vs. THE COURT OF APPEALS and RAMON LAPEZ, [1] doing
business under the name and style SAPPHIRE SHIPPING, respondents.
DECISION
PANGANIBAN, J.:

"'(d) There were indeed two instances in the past, one in November 1980 and the other in January 1981 when
the plaintiff's account No. 830-2410 was doubly credited with the equivalents of $5,679.23 and $5,885.38,
respectively, which amounted to an aggregate amount of P87,380.44. The defendant's evidence on this point
(Exhs. 1 thru 11, 14 and 15; see also Annexes C and E to defendant's Answer), were never refuted nor
impugned by the plaintiff. He claims, however, that plaintiffs claim has prescribed.
"'(e) Defendant PNB made a demand upon the plaintiff for refund of the double or duplicated credits
erroneously made on plaintiff's account, by means of a letter (Exh. 12) dated October 23, 1986 or 5 years and
11 months from November 1980, and 5 years and 9 months from January 1981. Such letter was answered by
the plaintiff on December 2, 1986 (Annex C, Complaint). This plaintiff's letter was likewise replied to by the
defendant through Exh. 13;

Does a local bank, while acting as local correspondent bank, have the right to intercept funds being
coursed through it by its foreign counterpart for transmittal and deposit to the account of an individual with
another local bank, and apply the said funds to certain obligations owed to it by the said individual?

"'(f) The deduction of P34,340.38 was made by the defendant not without the knowledge and consent of the
plaintiff, who was issued a receipt No. 857576 dated February 18, 1987 (Exh. E) by the defendant.

Assailed in this petition is the Decision of respondent Court of Appeals [2] in CA-G.R. CV No. 27926
rendered on June 16, 1992 affirming the decision of the Regional Trial Court, Branch 107 of Quezon City, the
dispositive portion of which read: [3]

"'There is no question that the two erroneous double payments made to plaintiff's accounts in 1980 and 1981
created an extra-contractual obligation on the part of the plaintiff in favor of the defendant, under the principle
of solutio indebiti, as follows:

"WHEREFORE, judgment is hereby rendered:

"'If something is received when there is no right to demand it, and it was unduly delivered throughg (sic)
mistake, the obligation to return it arises."' (Article 2154, Civil Code of the Phil.)

1) In the main complaint, ordering the defendant (herein petitioner PNB) to pay the plaintiff (private
respondent herein) the sum of US$2,627.11 or its equivalent in Philippine currency with interest at the legal
rate from January 13, 1987, the date of judicial demand;
2) The plaintiff's supplemental complaint is hereby dfismissed (sic);
3) The defendant's counterclaims are likewise dismissed.
The Facts
The factual antecedents as quoted by the respondent Court are reproduced hereinbelow, the same
being undisputed by the parties:[4]
"The body of the decision reads:
"'After a close scrutiny and analysis of the pleadings as well as the evidence of both parties, the Court makes
the following conclusions:
"'(a) The defendant applied/appropriated the amounts of $2,627.11 and P34,340.38 from remittances of the
plaintiff's principals (sic) abroad. These were admitted by the defendant, subject to the affirmative defenses of
compensation for what is owing to it on the principle of solution (sic) indebiti;
"'(b) The first remittance was made by the NCB of Jeddah for the benefit of the plaintiff, to be credited to his
account at Citibank, Greenhills Branch; the second was from Libya, and was intended to be deposited at the
plaintiff's account with the defendant, No. 830-2410;

Two issues were raised before the trial court, namely, first, whether the herein petitioner was legally
justified in making the compensation or set-off against the two remittances coursed through it in favor of
private respondent to recover on the double credits it erroneously made in 1980 and 1981, based on the
principle of solutio indebiti, and second, whether or not petitioner's claim is barred by the statute of
limitations. The trial court's ratiocination, as quoted by the appellate Court, follows: [5]
"'Article 1279 of the Civil Code provides:
"'In order that compensation may prosper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
(2) That both debts consists in a sum of money, or if the things due are consumable, they be of
the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there by any retention or controversy, commenced by third persons
and communicated in due time to the debtor."'
"'In the case of the $2,627.11, requisites Nos. 2 through 5 are apparently present, for both debts consist in a
sum of money, are both due, liquidated and demandable, and over neither of them is there a retention or
controversy commenced by third persons and communicated in due time to the debtor. The question,
however, is, where both of the obligors bound principally, and was each one of them a debtor and creditor of
the other at the same time?

"'Analyzing now the relationship between the parties, it appears that:

"'(a) With respect to the plaintiff's being a depositor of the defendant bank, they are creditor and debtor
respectively (Guingona, et al. vs. City Fiscal, et al., 128 SCRA 577);
"'(b) As to the relationship created by the telexed fund transfers from abroad: A contract between a foreign
bank and local bank asking the latter to pay an amount to a beneficiary is a stipulation pour autrui. (Bank of
America NT & SA vs. IAC, 145 SCRA 419).
"'A stipulation pour autrui is a stipulation in favor of a third person (Florentino vs. Encarnacion, 79 SCRA 193;
Bonifacio Brothers vs. Mora, 20 SCRA 261; Uy Tam vs. Leonard, 30 Phils. 475).
"'Thus between the defendant bank (as the local correspondent of the National Commercial Bank of Jeddah)
and the plaintiff as beneficiary, there is created an implied trust pursuant to Art. 1453 of the Civil Code, quoted
as follows:
"'When the property is conveyed to a person in reliance upon his declared intention to hold it for, or transfer it
to another or the grantor, there is an implied trust in favor of the person whose benefit is contemplated (sic).
"'c) By the principle of solutio indebiti (Art. 2154, Civil Code), the plaintiff who unduly received something (sic)
by mistake (i.e., the 2 double credits, although he had no right to demand it), became obligated to the
defendant to return what he unduly received. Thus, there was created between them a relationship of obligor
and obligee, or of debtor and creditor under a quasi-contract.
"In view of the foregoing, the Court is of the opinion that the parties are not both principally bound with respect
to the $2,627.11 from Jeddah neither are they at the same time principal creditor of the other. Therefore, as
matters stand, the parties' obligations are not subject to compensation or set off under Art. 1279 of the Civil
Code, for the reason that the defendant is not a principal debtor nor is the plaintiff a principal creditor insofar
as the amount of $2,627.11 is concerned. They are debtor and creditor only with respect to the double
payments; but are trustee-beneficiary as to the fund transfer of $2,627.11.
"'Only the plaintiff is principally bound as a debtor of the defendant to the extent of the double credits. On the
other hand, the defendant was an implied trustee, who was obliged to deliver to the Citibank for the benefit of
the plaintiff the sum of $2,627.11.
"'Thus while it may be concluded that the plaintiff owes the defendant the equivalent of the sums of $5,179.23
and $5,885.38 erroneously doubly credited to his account, the defendant's actuation in intercepting the
amount of $2,627.11 supposed to be remitted to another bank is not only improper; it will also erode the trust
and confidence of the international banking community in the banking system of the country, something we
can ill afford at this time when we need to attract and invite deposits of foreign currencies."'

"'The P34,340.38 subject of the supplemental complaint is quite another thing. The plaintiff's Exh. "E", which
is a receipt issued to the plaintiff by the defendant for the amount of P34,340.00 in "full settlement of accounts
receivables with RICB Fund Transfer Department, PNB-Escolta base on Legal Department Memo dated
February 28, 1987" seems to uphold the defendant's theory that the said amount was voluntarily delivered by
the plaintiff to the defendant as alleged in the last paragraph of defendant's memorandum. The same is
in accordance with the defendant's answer, as follows:
"The retention and application of the amount of P34,340.38 was done in a manner consonant with basic due
process considering that
plaintiff was not only furnished documented proof of the cause but was also giventhe opportunity to con(tro)ver
t such Proof.
"Moreover, plaintiff, through counsel, communicated his unequivocal and unconditional consent to theretention
and application of the amount in question." (Pls. see paragraphs 8-9, defendant's Answer with Compulsory
Counterclaim to Plaintiff's Supplemental Complaint)."
This conclusion is borne by the fact that the receipt is in the hands of the plaintiff, indicating that such receipt
was handed over to the plaintiff when he "paid" or allowed the deduction from the amount of $28,392.38 from
Libya.
"'At any rate, the plaintiff in his Memorandum, stated that the subsequent fund transfer from Brega Petroleum
Marketing Company of Libya (from where the P34,340.38 was deducted) was intended for credit and deposit
in plaintiff's account at the defendant's Bank CA No. 830-2410 (per par. 1, page 2, Memorandum for the
plaintiff). Such being the case, the Court believes that insofar as the amount of P34,340.38 is concerned, all
the requirements of Art. 1279 of the Civil Code are present, and the said amount may properly be the subject
of compensation or set-off. And since all the requisites of Art. 1279 of the Civil Code are present (insofar as
the amount of P34,392.38 is concerned), compensation takes place by operation of law (Art. 1286, Ibid.),albeit
only partial with respect to plaintiff's indebtedness of P7,380.44.
"Now, on the question of prescription, the Court believes that Art. 1149 as cited by the plaintiff is not applicable
in this case. Rather, the applicable law is Art. 1145, which fixes the prescriptive period for actions upon a
quasi-contract (such as solutio indebiti) at six years.
In the dispositive portion of its decision, the trial court ruled that the herein petitioner was obligated to
pay private respondent the amount of US$2,627.11 or its peso equivalent, with interest at the legal rate. The
court dismissed all other claims and counterclaims.
On appeal to the respondent Court, petitioner bank continued to insist that it validly retained the
US$2,627.11 in payment of the private respondent's indebtedness by way of compensation or set-off, as
provided under Art. 1279 of the Civil Code.
The respondent Court of Appeals rejected such argument, saying:

"It would have been different has the telex advice from NCB of Jeddah been for deposit of $2,627.11 to
plaintiffs account No. 830-2410 with the defendant bank. However, the defendant alleged this for the firsttime
in its Memorandum (Pls. see par. 16, p. 6 of defendant's Memorandum). There was neither any allegation
thereof in its pleadings, nor was there any evidence to prove such fact. On the contrary, the defendant
admitted that the telex advice was for credit of the amount of $2,627.11 to plaintiffs account with Citibank,
Greenhills, San Juan, MetroManila (Pls. see par. of defendant's Answer with Compulsory Counterclaim, in
relation to plaintiff's Complaint). Hence, it is submitted that the set-off or compensation of $2,627.11 against
the double payments to plaintiff's account is not in accordance with law.
"'On this point, the Court finds the plaintiff's theory of agency to be untenable. For one thing, there was no
express contract of agency. On the other hand, were we to infer that there was an implied agency, the same
would not be between the plaintiff and defendant, but rather, between the National Commercial Bank of
Jeddah as principal on the one hand, and the defendant as agent on the other. Thus, in case of violation of
the agency, the cause of action would accrue to the NCB and not to the plaintiff.

"The telegraphic money transfer was sent by the IBN, plaintiff's principal in Jeddah, Saudi Arabia, thru the
National Commercial Bank of Jeddah, Saudi Arabia (NCB, for short), for the credit/account of Plaintiff with the
Citibank, Greenhills Branch, San Juan, Metro Manila, coursed thru the PNB's head office, the NCB's
corresponden(t) bank in the Philippines.
"The credit account, or simply account means
that the amount stated in the telegraphic money transfer is to becredited in the account of plaintiff with the Citi
bank, and, in that sense, presupposes a creditor-debtorrelationship between the plaintiff, as creditor and the C
itibank, as debtor. Withal the telegraphic moneytransfer, no such creditor-debtor relationship could have been
created between the plaintiff and defendant.

"The telegraphic money transfer, or simply telegraphic transfer(,) was purchased by the IBN from the NCB in
Saudi Arabia, and since the PNB is the NCB's corresponden(t) bank in the Philippines, there is created
between the two banks a sort of communication exchange for the corresponden(t) bank to transmit and/or
remit and/or pay the value of the telegraphic transfer in accordance with the dictate of the correspondence
exchange. Some such responsibility of the corresponden(t) bank is akin to Section 7 of the Rules and
Regulations Implementing E.O. 857, as amended by E.O. 925, "x x x to take charge of the prompt payment" of
the telegraphic transfer, that is,
by transmitting the telegraphic money transfer to the Citibank so that theamount can be promptly credited to th
e account of the plaintiff with the said bank. That is all that the PNBcan do under the remittance arrangement
that it has with the NCB. With its responsibility as defined as well as by the nature of its banking business and
the responsibility attached to it, and through which the industry, trade and commerce of all countries and
communities are carried on, the PNB's liability as corresponden(t) bank continues until it has completgely (sic)
performed and discharged it(s) obligation thereunder." (underscoring ours)

We see in this petition a clever ploy to use this Court to validate or legalize an improper act of the
petitioner bank, with the not impossible intention of using this case as a precedent for similar acts of
interception in the future. This piratical attitude of the nation's premier bank deserves a warning that it should
not abuse the justice system in its collection efforts, particularly since we are aware that if the petitioner bank
had been in good faith, it could have easily disposed of this controversy in ten minutes flat by means of an
exchange of checks with private respondent for the same amount. The litigation could have ended there, but it
did not. Instead, this plainly unmeritorious case had to clog our docket and take up the valuable time of this
Court.
WHEREFORE, the instant petition is herewith DENIED for being plainly unmeritorious, and the assailed
Decision is AFFIRMED in toto. Costs against petitioner.
SO ORDERED.

Hence, the respondent Court affirmed the trial court's holding in toto.
Dissatisfied, petitioner bank comes before this Court seeking a review of the assailed Decision.
[G.R. No. 111890. May 7, 1997]
The Issue
Petitioner's arguments revolve around one single issue: [6]
"WHILE THE RESPONDENT COURT CORRECTLY FOUND PRIVATE RESPONDENT LEGALLY BOUND
(UNDER THE PRINCIPLE OF SOLUTIO INDEBITI) TO RETURN TO PNB THE SUM OF US$2,627.11, IT
ERRED IN NOT RULING THAT LEGAL COMPENSATION HAS TAKEN PLACE WHEN PNB WAS ORDERED
BY THE TRIAL COURT TO RETURN TO PRIVATE RESPONDENT THE SAME AMOUNT. SUCH COURSE
OF ACTION IS IN CONSONANCE WITH SPEEDY AND SUBSTANTIAL JUSTICE, AND WOULD PREVENT
THE UNNECESSARY FILING OF A SUBSEQUENT SUIT BY PNB FOR THE COLLECTION OF THE SAME
AMOUNT FROM PRIVATE RESPONDENT."

CKH INDUSTRIAL AND DEVELOPMENT CORPORATION and RUBI SAW, petitioners, vs. THE COURT
OF APPEALS, (FORMER 13TH DIVISION), THE REGISTER OF DEEDS OF METRO MANILA DISTRICT III (VALENZUELA), CENTURY-WELL PHIL. CORPORATION, LOURDES CHONG,
CHONG TAK KEI and UY CHI KIM, respondents.
DECISION
TORRES, JR., J.:

The Court's Ruling

The present petition springs from a civil action instituted by herein petitioners, to rescind and/or annul
the sale of two parcels of land, from petitioner CKH Industrial and Development Corporation (CKH, for brevity)
to private respondent Century-Well Phil. Corporation (Century-Well, for brevity), for failure to pay the stipulated
price of P800,000.00.

We note that in framing the issue in the manner aforecited, the petitioner implicitly admits the
correctness of the respondent Court's affirmance of the trial court's ruling finding herein petitioner liable to
private respondent for the sum of US$2,627.11 or its peso equivalent. And it could not have done
otherwise. After a careful scrutiny of both the decision of the trial court and that of the appellate court, we find
no reversible error whatsoever in either ruling, and see no need to add to the extensive discussions already
made regarding the non-existence of all the requisites for legal compensation to take place.

Petitioners specifically assail the Decision [1] of the respondent Court of Appeals, which denied the
annulment of the sale. The appellate court found that there was payment of the consideration by way of
compensation, and ordered petitioners to pay moral damages and attorney's fees to private respondents. The
dispositive portion of the questioned decision reads:

But petitioner has adopted a novel theory, contending that since respondent Court found that private
respondent is "an obligor of PNB and the latter, as aforesaid, has become an obligor of private respondent
(resulting in legal compensation), the (h)onorable respondent court should have ordered private respondent to
pay PNB what the latter is bound by the trial court's decision to return the former. [7]

"WHEREFORE, in view of all the foregoing, the appealed Decision is REVERSED. The complaint is
DISMISSED with costs against the plaintiffs. The plaintiffs jointly and severally are required to pay each
of the defendants Lourdes Chong, Chong Tak Kei, and Uy Chi Kim moral damages of P20,000.00; and
further requiring the plaintiffs, jointly and severally, to pay to each of the defendants Century-Well
Phil. Corporation, Lourdes Chong, Chong Tak Kei and Uy Chi Kim attorney's fees of P20,000.00

By this simplistic approach, petitioner in effect seeks to render nugatory the decisions of the trial court
and the appellate Court, and have this Court validate its original misdeed, thereby making a mockery of the
entire judicial process of this country. What the petitioner bank is effectively saying is that since the
respondent Court of Appeals ruled that petitioner bank could not do a shortcut and simply intercept
funds being coursed through it, for transmittal to another bank, and eventually to be deposited to the account
of an individual who happens to owe some amount of money to the petitioner, and because respondent Court
ordered petitioner bank to return the intercepted amount to said individual, who in turn was found by the
appellate Court to be indebted to petitioner bank, THEREFORE, there must now be legal compensation of the
amounts each owes the other, and hence, there is no need for petitioner bank to actually return the amount,
and finally, that petitioner bank ends up in exactly the same position as when it first took the improper and
unwarranted shortcut by intercepting the said money transfer, notwithstanding the assailed Decision saying
that this could not be done!

With costs in this instance against the plaintiffs-appellees.

SO ORDERED."[2]
The said decision reversed the disposition of the Regional Trial Court of Valenzuela, Branch 172 in Civil
Case No. 2845-V-88 entitled "CKH Industrial & Development Corporation vs. Century-Well Philippine
Corporation, Lourdes Chong, Chong Tak Kei, Uy Chi Kim, and the Register of Deeds of Metro Manila, District
III (Valenzuela)." The trial court's decision stated pertinently:
"WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of plaintiff:

1. Ordering the rescission/annulment of the Deed of Absolute Sale of Realty.

2. Ordering defendants Lourdes Chong, Chong Tak Kei and Century-Well to pay plaintiffs moral damages in the sum
of P200,000.00;

which is owned by Filipino citizens, duly qualified to own and acquire lands in the Philippines, with office
and business address at 66 F Bautista St., Valenzuela, Metro Manila and represented in this act by its
Treasurer and authorized representative, Ms. Lourdes Chong, hereinafter referred to as VENDEE,
WITNESSETH:

3. Ordering defendants Lourdes Chong, Chong Tak Kei and Century Well to pay plaintiffs Attorney's fees in the amount
of 15% of the agreed price of P800,000.00 plus appearance fees of P500.00 per appearance;
4. Ordering defendants Lourdes Chong, Chong Tak Kei and Century Well to pay the costs of suit;

That vendor is the registered owner of two adjacent parcels of residential land situated in the Bo. of
Karuhatan, Municipality of Valenzuela, Metro Manila, covered by Transfer Certificates of Titles Nos. B8710 and B-8711 of the Registry of Deeds for Metro Manila District III, and more particularly described as
follows:

5. As the writ of preliminary injunction was denied, the defendant Register of Deeds of Valenzuela is hereby ordered to
cancel the certificates of title issued to Century-Well by virtue of the Deed of Absolute Sale of Realty and to reissue a
new title in the name of CKH.
The case is dismissed as far as defendant Uy Chi Kim is concerned. His counterclaim is
likewise dismissed considering that by his mediation he took it upon himself to assume the
damages he allegedly suffered.
SO ORDERED."[3]

xxx
That for and in consideration of the sum of EIGHT HUNDRED THOUSAND (P800,000.00) PESOS,
Philippine Currency, paid by VENDEE to VENDOR, receipt of which is hereby acknowledged by the
latter to its entire satisfaction, said VENDOR, by these presents, has SOLD, CEDED, TRANSFERRED,
and CONVEYED by way of absolute sale unto said VENDEE, its successors and assigns, the two parcels
of land above described and any and all improvements therein;
That the above-described parcels of land are free from liens and encumbrances of whatever kind and
nature.

The records disclose that petitioner CKH is the owner of two parcels of land, consisting of 4,590 sq. m.
and 300 sq. m. respectively, located in Karuhatan, Valenzuela, and covered by Transfer Certificates of Title
Nos. 8710 and 8711, Register of Deeds of Caloocan City (now Register of Deeds District III [Valenzuela]).
[4]
CKH is a corporation established under Philippine law by the late Cheng Kim Heng (Cheng), an immigrant of
Chinese descent. Upon Cheng's demise, control over the petitioner corporation was transferred to Rubi Saw,
also of Chinese descent, and Cheng's second wife.
It also appears that before coming to the Philippines, Cheng Kim Heng was married to Hung Yuk Wah
(Wah), who lived in Hongkong together with their children, Chong Tak Kei, (Kei), Chong Tak Choi (Choi), and
Chong Tak Yam (Yam). After Cheng immigrated to the Philippines in 1976, and married Rubi Saw in 1977, he
brought his first wife, Heng, and their children to this country, and established himself and his Chinese family
as naturalized Filipino citizens. Heng died in 1984.
On May 8, 1988, Rubi Saw and Lourdes Chong, the wife of Cheng's son, Kei, met at the 1266 Soler
St., Sta. Cruz, Manila, the residence of Cheng's friend, Uy Chi Kim, and executed a Deed of Absolute Sale,
[5]
whereby Rubi Saw, representing CKH, agreed to sell the subject properties to Century-Well, a corporation
owned in part by Lourdes Chong, Kei and Choi. [6]
The pertinent portions of the Deed of Sale are hereby reproduced:
"KNOW ALL MEN BY THESE PRESENTS:
This Deed of Absolute Sale of Realty executed by and between:
CKH INDUSTRIAL & DEVELOPMENT CORPORATION, a corporation duly organized and existing
under and by virtue of the laws of the Republic of the Philippines, with business address at 553 Bermuda
St., Sta. Cruz, Manila, represented in this act by its authorized representative, Ms. RUBI SAW, hereinafter
referred to as VENDOR,
- in favor of CENTURY-WELL PHIL. CORPORATION, a corporation duly organized and existing under and by virtue
of the laws of the Republic of the Philippines at least sixty (60%) percent of the subscribed capital stock of

IN WITNESS WHEREOF, the parties hereto and their instrumental witnesses have hereunto set their hand
on ________ at ________."
Rubi Saw signed on behalf of CKH, while Lourdes Chong signed for Century Well. [7] The document was
notarized the day after the parties signed the same, i. e., March 9, 1988. [8]
Claiming that the consideration for the sale of the subject properties was not paid by the private
respondent-vendee despite several demands to do so, Petitioners CKH and Rubi Saw filed the instant
complaint[9] on May 23, 1988, with the Regional Trial Court of Valenzuela, Branch 172, against Century-Well,
Lourdes Chong, Chong Tak Kei and Uy Chi Kim. Petitioners prayed for the annulment/rescission of the Deed
of Absolute Sale, and in the meantime, for the issuance of a writ of preliminary injunction restraining the
Register of Deeds of Valenzuela from registering the Certificates of Title over the subject properties in the
name of the private respondent Century-Well.
The trial court synthesized the petitioners' submissions as follows:
"The complaint alleges the following:
Lourdes Chong and Rubi Saw agreed that the full payment of P800,000.00 as purchase price
shall be in the form of a Manager's Check, to be delivered to Rubi Saw upon the execution
of the Deed of Sale, the preparation of which, Lourdes Chong undertook. On May 8, 1988,
the date agreed upon for the execution of the Deed of Sale, plaintiff Rubi Saw, accompanied
by her friend Aurora Chua Ng, went to 1266 Soler St., Sta. Cruz, Manila which is the
residence and place of business of defendant Uy Chi Kim, an elderly man of Chinese
ancestry and the place suggested by Lourdes Chong as their meeting place. During the
meeting, Uy Chi Kim who was there presented to Rubi Saw a Deed of Absolute Sale in
favor of defendant Century Well for her signature. Before Rubi Saw signed the Deed of
Absolute Sale she inquired about the payment of the P800,000.00. Defendant Uy Chi Kim
presented to her a personal check but she refused the same because it was contrary to her
arrangement with Lourdes Chong that the payment would be in the form of Manager's
Check. Uy Chi Kim then explained to Rubi Saw that since it was a Sunday that day, they
were unable to obtain the Manager's Check. He assured her that he had sufficient cash
money at the first floor of his residence which is a store owned by Uy Chi Kim. Before Uy

Chi Kim left on the pretext of getting the money, he persuaded plaintiff Rubi Saw to sign the
Deed of Absolute Sale and give the same to Lourdes Chong together with the two
Certificates of Title. Since Uy Chi Kim is an elderly Chinese whom Rubi Saw had no reason
to mistrust, following Chinese custom, plaintiff Rubi Saw acceded to the request of Uy Chi
Kim, trusting that he had sufficient cash amounting to P800,000.00 kept in the first floor of
his residence. When Uy Chi Kim returned, he told Rubi Saw that he had only P20,000 on
hand. He assured plaintiff, however, that there was no cause for her to worry (as) he was
certain he would have the entire amount ready by the next day when the banks would be
open. Again, trusting the elderly defendant Uy Chi Kim, Rubi Saw did not object and did
not insist on the return of the Deed of Absolute Sale that she signed, together with the
Certificate of Title which she delivered to Lourdes Chong. The next day, May 9, 1988 Rubi
Saw called Lourdes Chong and Uy Chi Kim over the telephone but was told they were not
around. She could not go to the residence of Uy Chi Kim because she could not leave her
office due to business concerns. On May 10, 1988 Rubi Saw repeatedly called the two but
was informed they were not around. On May 11, 1988 already anxious, she personally went
to the residences and offices of the two defendants but they were not around. On May 12,
1988 Rubi Saw wrote defendant Century Well advising Lourdes Chong of the rescission and
cancellation of the Deed of Absolute Sale because of lack of consideration. Lourdes Chong
refused to receive the letter. Thereafter, several demand letters were sent to the defendants
but they refused to pay plaintiffs. Worried that defendants might surreptitiously transfer the
certificates of title to their names, Rubi Saw wrote the public defendant Register of Deeds
on May 16, 1988, giving information about the circumstances of the sale and requesting not
to allow registration of the Deed of Absolute Sale, together with an Affidavit of Adverse
Claim. On May 20, 1988, plaintiffs' representative was informed by the Register of Deeds
that defendants have made representations with defendant to Register the Deed of Absolute
Sale on May 23, 1988.
Plaintiff Rubi Saw filed this Complaint alleging that Lourdes Chong and Uy Chi Kim
maliciously misled her to believe that they would pay the P800,000 as consideration when in
fact they had no intention to pay plaintiffs, and prayed that they should be awarded moral
damages; that defendants be restrained from registering the Deed of Absolute Sale, and be
ordered to return to them the 2 titles of the properties together with the Deed of Absolute
Sale."[10]
On the other hand, private respondents Century-Well, Lourdes Chong, and Chong Tak Kei alleged that:
"...the consideration for the two parcels of land was paid by means of off-setting or legal compensation in
the amount of P700,000 thru alleged promissory notes executed by Cheng Kim Heng in favor of his sons
Chong Tak Choi and Chong Tak Kei (Exh. 6, 7, & 8) and payment of P100,000.00 in cash.
The defendant Century Well filed its Answer stating that during the operation of plaintiff CKH, the latter
borrowed from Chong Tak Choi and Chong Tak Kei the total sum of P700,000.00 paying interest
on P300,000.00 while the remaining P400,000.00 was interest free, and upon the death of Cheng Kim
Heng, it stopped making said payments. Defendant tried to prove that the source of thisP700,000 was
Hung Yuk Wah while she was still residing in Hongkong, sent via bank draft from Hongkong to Chong
Tak Choi and Chong Tak Kei on a bank to bank transfer. Defendant likewise tried to prove that after the
death of Cheng Kim Heng, Rubi Saw unilaterally arrogated to herself the executive positions in plaintiff
corporation such as President, Secretary, Treasurer and General Manager; thus effectively shunting aside
Hung Yuk Wah and her children in the management of plaintiff corporation. Family differences (arose)
between Rubi Saw on one hand, and Hung Yuk Wah and her children on the other hand which turned to
worst after the death of Cheng Kim Heng. This brought about the entry of Chinese mediators between
them, one of whom is defendant Uy Chi Kim, a reason why the execution of the Deed of Absolute Sale
was to be done at the residence and business address of Uy Chi Kim."[11]
Uy Chi Kim, on the other hand, answered on his behalf, that:
"...his only participation in the transaction was as a mediator, he being one of the closest friends of Cheng
Kim Heng; that because the heirs of Cheng Kim Heng could not settle their problems he, together with
Machao Chan and Tomas Ching tried to mediate in accordance with Chinese traditions; that after long and

tedious meetings the parties finally agreed to meet at his residence at 1266 Soler St., Sta. Cruz, Manila for
the purpose of pushing thru the sale of the properties in question as part of the settlement of the
estate. Defendant Uy Chi Kim corroborated the defense of his co-defendants that the purchase price of the
properties was P800,000.00 the payment of which consists in the form of P100,000.00 in cash Philippine
Currency; and the balance of P700,000.00 will be applied as a set-off to the amount borrowed by plaintiff
CKH from Chong Tak Choi and Chong Tak Kei. He advanced the amount of P100,000.00 by way of his
personal check to Rubi Saw but because Rubi Saw refused, he gave Rubi Saw P100,000 in the form
of P100 bills which Rubi Saw and Jacinto Say even counted. After the P100,000.00 cash was given and
the promissory notes, Rubi Saw signed the document of sale. It was during the registration of the sale that
a problem arose as to the payment of the capital gains (tax) which Rubi Saw refused to pay. The buyer
likewise refused to pay the same. The complaint against him is baseless and which besmirched his
reputation. Hence his counterclaim for damages."[12]
The trial court denied the petitioners' prayer for issuance of the writ of preliminary injunction in its Order
dated August 4, 1988.[13]
After trial, the lower court rendered its Decision on February 4, 1991, finding that the annulment of the
Deed of Absolute Sale was merited, as there was no payment of the stipulated consideration for the sale of the
real properties involved to Rubi Saw.
In the first place, said the court, the Deed of Sale itself, which is the best evidence of the agreement
between the parties, did not provide for payment by off-setting a portion of the purchase price with the
outstanding obligation of Cheng Kim Heng to his sons Chong Tak Choi and Chong Tak Kei. On the contrary, it
provided for payment in cash, in the amount ofP800,000.00. The evidence presented, however, did not
disclose that payment of the said amount had ever been made by the private respondent. Moreover, there
cannot be any valid off-setting or compensation in this case, as Article 1278 of the Civil Code [14] requires, as a
prerequisite for compensation, that the parties be mutually bound principally as creditors and debtors, which is
not the case in this instance. The rescission of the contract is, therefore, called for, ruled the court.
Upon appeal, the respondent Court of Appeals reversed the findings and pronouncements of the trial
court. In its Decision[15] dated April 21, 1993, the appellate court expressed its own findings, that the execution
of the Deed of Absolute Sale was in settlement of a dispute between Rubi Saw and the first family of Cheng
Kim Heng, which arose upon Cheng's death. The appellate court described the history of their dispute as
follows:
"In 1977, Heng formed plaintiff-appellee CKH Industrial & Development Corporation (CKH), with his
first wife Wah, children Choi and Kei, and second wife Rubi as his co-incorporators/stockholders, along
with other individuals (Exhs. C and D; ibid., p. 9 and pp. 10-13, respectively). On April 15 and July 17
the following year, Heng, on behalf of CHK [sic], obtained loans of P400,000.00 and P100,000.00 from
Choi, for which Heng executed two promissory notes in Choi's favor (Exhs. 6 and 7; ibid., p. 40 and p. 41,
respectively). On November 24, 1981, Heng obtained from his other son, Kei, another loan this time in
the sum of P200,000.00 on behalf of CKH for which he issued another promissory note (Exh. 8, ibid., p.
42).
After its incorporation, CKH acquired two parcels of land situated in Karuhatan, Valenzuela, Bulacan
(now Metro Manila) covered by Transfer Certificates of Title Nos. B-8710 (Annex A-Complaint; Record,
p. 13) and B-8711 (Annex B-Complaint; ibid., p. 14), which are now the subject of litigation in instant
case.
On October 11, 1982, Kei was married to defendant-appellant Lourdes Chong nee Lourdes Gochico Hai
Huat (Lourdes). During their marriage, Kei and Lourdes resided in the house on Tetuan St., Sta. Cruz,
Manila, which CKH was then utilizing as its office. At about this time, Heng and Rubi had moved
residence from Valenzuela, Metro Manila, to Bermuda St., Sta. Cruz, Manila.
Two years later, or in late 1984, Heng died. Thenceforth, there appeared to be a falling out between Heng's
first wife Wah and their three children on the one hand, and his second wife Rubi, on the other, which
came to a head when, Rubi as president of CKH wrote a letter dated August 21, 1985 to the mayor of

Valenzuela, Metro Manila, to prevent issuance of a business permit to American Metals managed by
Chong Tak Choi, stating that CKH has not allowed it to make use of the property, and on November 7,
1985, when CKH, through counsel, demanded that Wah, Choi and Yam vacate the residential and factory
buildings and premises owned by CKH and located on one of the subject lots on 76 F. Bautista St.,
Valenzuela, which the three and the corporation (of which two of them were stockholders), had been
allegedly illegally occupying (Exhs. 10 and 10-A; Folio, pp. 44-45).
Respected mediators from the Chinese community in the persons of defendant-appellant Uy Chi Kim, Ma
Chao, Tomas Cheng and Johnny Saw, were called in to mediate. The mediation efforts which resulted in
the withdrawal by Rubi Saw of her letter about the withholding of a license to American Metals, Inc. and
much later, had culminated in the transaction now under litigation.
The formula for settlement in the dispute was for the Valenzuela properties of CKH to be sold to Century
Well for the amount of P800,000.00, P100,000.00 of which will be paid in cash and the balance
of P700,000.00 to be set-off by the three (3) promissory notes executed in behalf of CKH in favor of
Chong Tak Choi and Chong Tak Kei (Exhs. 6, 7 and 8) the accumulated interests thereon to be waived as
unstated consideration of the sale.
Having reached such agreement, on May 8, 1988, the parties met at the residence of Kim at Soler St.,
where the corresponding deed of absolute sale of realty was executed (Exhs. 11, 11-A to 11-C;ibid., pp.
46-49), with mediator Cheng and CKH stockholder and Rubi's secretary, Jacinto Say, signing as
instrumental witnesses. After having received the cash consideration of P100,000.00 and the promissory
notes amounting to P700,000.00 Rubi had signed the deed, and thereafter delivered to Lourdes the
document of sale and the owner's copies of the certificates of title for the two lots. The deed having been
executed on a Sunday, the parties agreed to have the same notarized the following day, May 9, 1988. The
parties again met the next day, May 9, 1988, when they acknowledged the deed before a notary public."[16]
In sum, the appellate court found that there was indeed payment of the purchase price, partially in cash
for P100,000.00 and partially by compensation by off-setting the debt of Cheng Kim Heng to his sons Choi and
Kei for P500,000.00 and P200,000.00 respectively, against the remainder of the stipulated price. Such mode
of payment is recognized under Article 1249[17]of the Civil Code.
As observed by the appellate court:
We are of the considered view that the appellees have not established what they claim to be the invalidity
of the subject deed of sale. The appellees are therefore neither entitled to the rescission or annulment of
the document nor to the award made in their favor in the decision under question and those other reliefs
they are seeking.[18]
The question the Court is now tasked to answer is whether or not there was payment of the
consideration for the sale of real property subject of this case. More specifically, was there a valid
compensation of the obligations of Cheng Kim Heng to his sons with the purchase price of the sale?
To resolve this issue, it is first required that we establish the true agreement of the parties.
Both parties take exception to the provisions of the Deed of Absolute Sale to bolster their respective
claims. Petitioners, while submitting that as worded, the Deed of Absolute Sale does not provide for payment
by compensation, thereby ruling out the intention of the parties to provide for such mode of payment, submit
on the other hand, that they had not received payment of the stipulated cash payment of P800,000.00. The
testimony of Rubi Saw during the hearings for preliminary injunction and during trial was submitted to advance
the submission that she was never paid the price of the subject lots, in cash or in promissory notes.
On the other side of the fence, private respondents, who, ironically, were the parties who drafted the
subject document, claim that the Deed of Sale does not express the true agreement of the parties, specifically
with regard to the mode of payment. Private respondents allege that the execution of the deed of absolute
sale was the culmination of mediation of the dispute of the first and second families of Cheng Kim Heng, over

the properties of the decedent; that the price of the real property subject of the contract of sale was partly in
cash, and the reminder to be compensated against Cheng's indebtedness to his sons Choi and Kei, reflected
in the promissory notes submitted as Exhibits 6, 7 and 8 during the trial; that by virtue of such compensation,
the sale has been consummated and the private respondent Century-Well is entitled to the registration of the
certificates of title over the subject properties in its name.
These contrasting submissions of the circumstances surrounding the execution of the subject
document have led to this stalemate of sorts. Still, the best test to establish the true intent of the parties
remains to be the Deed of Absolute Sale, whose genuineness and due execution, are unchallenged. [19]
Section 9 of Rule 130 of the Rules of Court states that when the terms of an agreement have been
reduced to writing, it is considered as containing all the terms agreed upon and there can be, between the
parties and their successors-in-interest, no evidence of such terms other than the contents of the written
agreement.
The so-called parol evidence rule forbids any addition to or contradiction of the terms of a written
instrument by testimony or other evidence purporting to show that, at or before the execution of the parties
written agreement, other or different terms were agreed upon by the parties, varying the purport of the written
contract. When an agreement has been reduced to writing, the parties cannot be permitted to adduce
evidence to prove alleged practices which to all purposes would alter the terms of the written
agreement. Whatever is not found in the writing is understood to have been waived and abandoned. [20]
The rule is not without exceptions, however, as it is likewise provided that a party to an action may
present evidence to modify, explain, or add to the terms of the written agreement if he puts in issue in his
pleadings: (a) An intrinsic ambiguity, mistake or imperfection in the written agreement; (b) The failure of the
written agreement to express the true intent and agreement of the parties thereto; (c) The validity of the written
agreement; or (d) The existence of other terms agreed to by the parties or their successors in interest after the
execution of the written agreement.[21]
We reiterate the pertinent provisions of the deed:
That for and in consideration of the sum of EIGHT HUNDRED THOUSAND (P800,000.00) PESOS,
Philippine Currency, paid by VENDEE to VENDOR, receipt of which is hereby acknowledged by the
latter to its entire satisfaction, said VENDOR, by these presents, has SOLD, CEDED, TRANSFERRED,
and CONVEYED by way of absolute sale unto said VENDEE, its successors and assigns, the two parcels
of land above described and any and all improvements therein;[22]
The foregoing stipulation is clear enough in manifesting the vendors admission of receipt of the
purchase price, thereby lending sufficient, though reluctant, credence to the private respondents submission
that payment had been made by off-setting P700,000.00 of the purchase price with the obligation of Cheng
Kim Heng to his sons Choi and Kei. By signing the Deed of Absolute Sale, petitioner Rubi Saw has given
her imprimatur to the provisions of the deed, and she cannot now challenge its veracity.
However, the suitability of the said stipulations as benchmarks for the intention of the contracting
parties, does not come clothed with the cloak of validity. It must be remembered that agreements affecting the
civil relationship of the contracting parties must come under the scrutiny of the provisions of law existing and
effective at the time of the execution of the contract.
We refer particularly to the provisions of the law on compensation as a mode of extinguishment of
obligations. Under Article 1231 of the Civil Code, an obligation may be extinguished: (1) by payment or
performance; (2) by the loss of the thing due, (3) by the condonation or remission of the debt; (4) by the
confusion or merger of the rights of creditor and debtor, (5) by compensation; or (6) by novation. Other causes
of extinguishment of obligations include annulment, rescission, fulfillment of a resolutory condition and
prescription.

Compensation may take place by operation of law (legal compensation), when two persons, in their
own right, are creditors and debtors of each other. [23] Article 1279 of the Civil Code provides for the requisites
of legal compensation:
Article 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be
of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;

Exhibit 7
Manila,
July 17, 1978
For Value received, we, CKH INDUSTRIAL & DEVELOPMENT CORPORATION, a duly registered
domestic corporation in the City of Manila, represented by its president, CHENG KIM HENG with
residence certificate no. 118824650 issued at Manila, on 2-28-78 do promise to pay on demand the sum of
ONE HUNDRED THOUSAND PESOS ONLY (P100,000.00), Philippine currency with interest from the
date hereof at the rate of ten per cent (10%) per annum to Mr. CHONG TAK CHOI.
In witness hereof on the consents [sic] of the parties to this promissory note, I, CHENG KIM HENG,
president of CKH INDUSTRIAL & DEVELOPMENT CORPORATION do hereby affixed [sic] my
signature below.
signed:

(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.
CHENG KIM HENG
Compensation may also be voluntary or conventional, that is, when the parties, who are mutually
creditors and debtors agree to compensate their respective obligations, even though not all the requisites for
legal compensation are present. Without the confluence of the characters of mutual debtors and creditors,
contracting parties cannot stipulate to the compensation of their obligations, for then the legal tie that binds
contracting parties to their obligations would be absent. At least one party would be binding himself under an
authority he does not possess. As observed by a noted author, the requirements of conventional
compensation are (1) that each of the parties can dispose of the credit he seeks to compensate, and (2) that
they agree to the mutual extinguishment of their credits. [24]
In the instant case, there can be no valid compensation of the purchase price with the obligations of
Cheng Kim Heng reflected in the promissory notes, for the reason that CKH and Century-Well the principal
contracting parties, are not mutually bound as creditors and debtors in their own name. A close scrutiny of the
promissory notes does not indicate the late Cheng, as then president of CKH, acknowledging any
indebtedness to Century-Well. As worded, the promissory notes reveal CKHs indebtedness to Chong Tak
Choi and Chong Tak Kei.
Exhibit 6
Metro Manila, Philippines
April 15, 1978
For Value Received, We, CKH INDUSTRIAL & DEVELOPMENT CORPORATION, a duly registered
corporation with postal address at Rm. 330, MTM Bldg. 1002 C. M. Recto Avenue, Manila, promises [sic]
to pay on demand to Mr. CHONG TAK CHOI, the sum of FOUR HUNDRED THOUSAND PESOS,
Philippine currency (P400,000.00)
To certify the correctness of the indebtedness to the party, I, CHENG KIM HENG, President of CKH
INDUSTRIAL & DEVELOPMENT CORPORATION, do hereby signed [sic] in behalf of the Corporation.
CKH INDUSTRIAL & DEVELOPMENT CORPORATION signed:
CHENG KIM HENG"

Exhibit 8
Manila, Philippines,
November 24, 1981
I, CHENG KIM HENG, President of CKH INDUSTRIAL & DEVELOPMENT CORPORATION, 831
Tetuan St. (2nd floor) Sta. Cruz, Manila, promises to pay to CHONG TAK KEI, with postal address at 76
F. Bautista St., Valenzuela, Metro Manila, the sum of PESOS: TWO HUNDRED THOUSAND
ONLY (P200,000.00) Philippine Currency, with interest at the rate of Ten per cent (10%) per annum from
date stated above to a period of one year and I hereby consent to any renewal, or extension of same amount
to a same period which may be requested by any one of us for the payment of this note.
I also acknowledge the receipt of the above sum of money today from MR. CHONG TAK KEI.
CKH IND. & DEV. CORP.signed:
CHENG KIM HENG
President
In fact, there is no indication at all, that such indebtedness was contracted by Cheng from Choi and Kei
as stockholders of Century-Well. Choi and Kei, in turn, are not parties to the Deed of Absolute Sale. They are
merely stockholders of Century-Well,[25] and as such, are not bound principally, not even in a representative
capacity, in the contract of sale. Thus, their interest in the promissory notes cannot be off-set against the
obligations between CKH and Century-Well arising out of the deed of absolute sale, absent any allegation,
much less, even a scintilla of substantiation, that Choi and Keis interest in Century-Well are so considerable
as to merit a declaration of unity of their civil personalities. Under present law, corporations, such as CenturyWell, have personalities separate and distinct from their stockholders, [26] except only when the law sees it fit to
pierce the veil of corporate identity, particularly when the corporate fiction is shown to be used to defeat public
convenience, justify wrong, protect fraud or defend crime, or where a corporation the mere alter ego or
business conduit of a person. [27]The Court cannot, in this instance make such a ruling absent a demonstration
of the merit of such a disposition.

Considering the foregoing premises, the Court finds it proper to grant the prayer for rescission of the
subject deed of sale, for failure of consideration.[28]
IN VIEW WHEREOF, the Court hereby RESOLVED to GRANT the present petition. The decision of
the Court of Appeals dated April 21, 1993, is hereby REVERSED and SET ASIDE. The decision of the
Regional Trial Court of Valenzuela, Branch 173 dated February 4, 1991, is hereby REINSTATED, with the
MODIFICATION that the award of moral damages and attorney's fees to Rubi Saw, and the order for payment
of costs are DELETED.

The Mirasols are sugarland owners and planters. In 1973-1974, they produced 70,501.08 piculs [1] of sugar,
25,662.36 of which were assigned for export. The following crop year, their acreage planted to the same crop was lower,
yielding 65,100 piculs of sugar, with 23,696.40 piculs marked for export.
Private respondent Philippine National Bank (PNB) financed the Mirasols sugar production venture for crop
years, 1973-1974 and 1974-1975 under a crop loan financing scheme. Under said scheme, the Mirasols signed Credit
Agreements, a Chattel Mortgage on Standing Crops, and a Real Estate Mortgage in favor of PNB. The Chattel Mortgage
empowered PNB as the petitioners attorney-in-fact to negotiate and to sell the latters sugar in both domestic and export
markets and to apply the proceeds to the payment of their obligations to it.

The parties shall bear their respective costs.

Exercising his law-making powers under Martial Law, then President Ferdinand Marcos issued Presidential
Decree (P.D.) No. 579[2] in November, 1974. The decree authorized private respondent Philippine Exchange Co., Inc.
(PHILEX) to purchase sugar allocated for export to the United States and to other foreign markets. The price and quantity
was determined by the Sugar Quota Administration, PNB, the Department of Trade and Industry, and finally, by the
Office of the President. The decree further authorized PNB to finance PHILEXs purchases. Finally, the decree directed
that whatever profit PHILEX might realize from sales of sugar abroad was to be remitted to a special fund of the national
government, after commissions, overhead expenses and liabilities had been deducted. The government offices and
entities tasked by existing laws and administrative regulations to oversee the sugar export pegged the purchase price of
export sugar in crop years 1973-1974 and 1974-1975 at P180.00 per picul.

SO ORDERED.

PNB continued to finance the sugar production of the Mirasols for crop years 1975-1976 and 1976-1977. These
crop loans and similar obligations were secured by real estate mortgages over several properties of the Mirasols and
chattel mortgages over standing crops. Believing that the proceeds of their sugar sales to PNB, if properly accounted for,
were more than enough to pay their obligations, petitioners asked PNB for an accounting of the proceeds of the sale of
their export sugar. PNB ignored the request. Meanwhile, petitioners continued to avail of other loans from PNB and to
make unfunded withdrawals from their current accounts with said bank. PNB then asked petitioners to settle their due and
demandable accounts. As a result of these demands for payment, petitioners on August 4, 1977, conveyed to PNB real
properties valued atP1,410,466.00 by way of dacion en pago, leaving an unpaid overdrawn account of P1,513,347.78.
On August 10, 1982, the balance of outstanding sugar crop and other loans owed by petitioners to PNB stood
at P15,964,252.93. Despite demands, the Mirasols failed to settle said due and demandable accounts. PNB then
proceeded to extrajudicially foreclose the mortgaged properties. After applying the proceeds of the auction sale of the
mortgaged realties, PNB still had a deficiency claim of P12,551,252.93.

[G.R. No. 128448. February 1, 2001]

SPOUSES ALEJANDRO MIRASOL and LILIA E. MIRASOL, petitioners, vs. THE COURT OF APPEALS,
PHILIPPINE NATIONAL BANK, and PHILIPPINE EXCHANGE CO., INC., respondents.
DECISION
QUISUMBING, J.:
This is a petition for review on certiorari of the decision of the Court of Appeals dated July 22, 1996, in CA-G.R.
CV No. 38607, as well as of its resolution of January 23, 1997, denying petitioners motion for reconsideration. The
challenged decision reversed the judgment of the Regional Trial Court of Bacolod City, Branch 42 in Civil Case No.
14725.
The factual background of this case, as gleaned from the records, is as follows:

Petitioners continued to ask PNB to account for the proceeds of the sale of their export sugar for crop years 19731974 and 1974-1975, insisting that said proceeds, if properly liquidated, could offset their outstanding obligations with
the bank. PNB remained adamant in its stance that under P.D. No. 579, there was nothing to account since under said law,
all earnings from the export sales of sugar pertained to the National Government and were subject to the disposition of
the President of the Philippines for public purposes.
On August 9, 1979, the Mirasols filed a suit for accounting, specific performance, and damages against PNB with
the Regional Trial Court of Bacolod City, docketed as Civil Case No. 14725.
On June 16, 1987, the complaint was amended to implead PHILEX as party-defendant.
The parties agreed at pre-trial to limit the issues to the following:
1. The constitutionality and/or legality of Presidential Decrees numbered 338, 579, and 1192;
2. The determination of the total amount allegedly due the plaintiffs from the defendants corresponding to the allege(d)
unliquidated cost price of export sugar during crop years 1973-1974 and 1974-1975.[3]
After trial on the merits, the trial court decided as follows:

WHEREFORE, the foregoing premises considered, judgment is hereby rendered in favor of the plaintiffs and against the
defendants Philippine National Bank (PNB) and Philippine Exchange Co., Inc. (PHILEX):
(1)Declaring Presidential Decree 579 enacted on November 12, 1974 and all circulars, as well as policies,
orders and other issuances issued in furtherance thereof, unconstitutional and therefore, NULL and
VOID being in gross violation of the Bill of Rights;
(2) Ordering defendants PNB and PHILEX to pay, jointly and severally, plaintiffs the whole amount
corresponding to the residue of the unliquidated actual cost price of 25,662 piculs in export sugar for
crop year 1973-1974 at an average price of P300.00 per picul, deducting therefrom however, the
amount of P180.00 already paid in advance plus the allowable deductions in service fees and other
charges;

3. Ordering the PNB to recompute in accordance with RA 7202 Mirasols indebtedness to it crediting to the latter
payments already made as well as the auction price of their foreclosed real estate and stipulated value of their properties
ceded to PNB in the dacon (sic) en pago;
4. Whatever the result of the recomputation of Mirasols account, the outstanding balance or the excess payment shall be
governed by the pertinent provisions of RA 7202.
SO ORDERED.[6]
On August 28, 1996, petitioners moved for reconsideration, which the appellate court denied on January 23, 1997.
Hence, the instant petition, with petitioners submitting the following issues for our resolution:

(3) And also, for the same defendants to pay, jointly and severally, same plaintiffs the whole amount
corresponding to the unpaid actual price of 14,596 piculs of export sugar for crop year 1974-1975 at
an average rate of P214.14 per picul minus however, the sum of P180.00 per picul already paid by
the defendants in advance and the allowable deducting (sic) in service fees and other charges.
The unliquidated amount of money due the plaintiffs but withheld by the defendants, shall earn the legal rate of interest
at 12% per annum computed from the date this action was instituted until fully paid; and, finally
(4) Directing the defendants PNB and PHILEX to pay, jointly and severally, plaintiffs the sum of
P50,000.00 in moral damages and the amount of P50,000.00 as attorneys fees, plus the costs of this
litigation.
SO ORDERED.[4]
The same was, however, modified by a Resolution of the trial court dated May 14, 1992, which added the
following paragraph:
This decision should however, be interpreted without prejudice to whatever benefits that may have accrued in favor of
the plaintiffs with the passage and approval of Republic Act 7202 otherwise known as the Sugar Restitution Law,
authorizing the restitution of losses suffered by the plaintiffs from Crop year 1974-1975 to Crop year 1984-1985
occasioned by the actuations of government-owned and controlled agencies. (Underscoring in the original).

1. Whether the Trial Court has jurisdiction to declare a statute unconstitutional without notice to the Solicitor General
where the parties have agreed to submit such issue for the resolution of the Trial Court.
2. Whether PD 579 and subsequent issuances[7] thereof are unconstitutional.
3. Whether the Honorable Court of Appeals committed manifest error in not applying the doctrine of piercing the
corporate veil between respondents PNB and PHILEX.
4. Whether the Honorable Court of Appeals committed manifest error in upholding the validity of the foreclosure on
petitioners property and in upholding the validity of the dacion en pago in this case.
5. Whether the Honorable Court of Appeals committed manifest error in not awarding damages to petitioners grounds
relied upon the allowance of the petition. (Underscored in the original)[8]
On the first issue. It is settled that Regional Trial Courts have the authority and jurisdiction to consider the
constitutionality of a statute, presidential decree, or executive order. [9] The Constitution vests the power of judicial review
or the power to declare a law, treaty, international or executive agreement, presidential decree, order, instruction,
ordinance, or regulation not only in this Court, but in all Regional Trial Courts. [10]In J.M. Tuason and Co. v. Court of
Appeals, 3 SCRA 696 (1961) we held:

SO ORDERED.[5]

Plainly, the Constitution contemplates that the inferior courts should have jurisdiction in cases involving
constitutionality of any treaty or law, for it speaks of appellate review of final judgments of inferior courts in cases where
such constitutionality happens to be in issue.[11]

The Mirasols then filed an appeal with the respondent court, docketed as CA-G.R. CV No. 38607, faulting the
trial court for not nullifying the dacion en pago and the mortgage contracts, as well as the foreclosure of their mortgaged
properties. Also faulted was the trial courts failure to award them the full money claims and damages sought from both
PNB and PHILEX.

Furthermore, B.P. Blg. 129 grants Regional Trial Courts the authority to rule on the conformity of laws or treaties
with the Constitution, thus:

On July 22, 1996, the Court of Appeals reversed the trial court as follows:
WHEREFORE, this Court renders judgment REVERSING the appealed Decision and entering the following verdict:

SECTION 19. Jurisdiction in civil cases. Regional Trial Courts shall exercise exclusive original jurisdiction:
(1) In all civil actions in which the subject of the litigations is incapable of pecuniary estimation;
The pivotal issue, which we must address, is whether it was proper for the trial court to have exercised judicial

1. Declaring the dacion en pago and the foreclosure of the mortgaged properties valid;

review.

2. Ordering the PNB to render an accounting of the sugar account of the Mirasol[s] specifically stating the indebtedness
of the latter to the former and the proceeds of Mirasols 1973-1974 and 1974-1975 sugar production sold pursuant to and
in accordance with P.D. 579 and the issuances therefrom;

Petitioners argue that the Court of Appeals erred in finding that it was improper for the trial court to have declared
P.D. No. 579[12] unconstitutional, since petitioners had not complied with Rule 64, Section 3, of the Rules of
Court. Petitioners contend that said Rule specifically refers only to actions for declaratory relief and not to an ordinary
action for accounting, specific performance, and damages.

Petitioners contentions are bereft of merit. Rule 64, Section 3 of the Rules of Court provides:
SEC. 3. Notice to Solicitor General. In any action which involves the validity of a statute, or executive order or
regulation, the Solicitor General shall be notified by the party attacking the statute, executive order, or regulation, and
shall be entitled to be heard upon such question.

petitioners agent. In other words, the requisite that the constitutionality of the law in question be the very lis mota of the
case is absent. Thus we cannot rule on the constitutionality of P.D. No. 579.
Petitioners further contend that the passage of R.A. No. 7202 [19] rendered P.D. No. 579 unconstitutional, since
R.A. No. 7202 affirms that under P.D. 579, the due process clause of the Constitution and the right of the sugar planters
not to be deprived of their property without just compensation were violated.

This should be read in relation to Section 1 [c] of P.D. No. 478,[13] which states in part:
A perusal of the text of R.A. No. 7202 shows that the repealing clause of said law merely reads:
SECTION 1. Functions and Organizations (1) The Office of the Solicitor General shallhave the following specific
powers and functions:
xxx
[c] Appear in any court in any action involving the validity of any treaty, law, executive order or proclamation, rule or
regulation when in his judgment his intervention is necessary or when requested by the court.
It is basic legal construction that where words of command such as shall, must, or ought are employed,
they are generally and ordinarily regarded as mandatory.[14] Thus, where, as in Rule 64, Section 3 of the Rules of Court,
the word shall is used, a mandatory duty is imposed, which the courts ought to enforce.
The purpose of the mandatory notice in Rule 64, Section 3 is to enable the Solicitor General to decide whether or
not his intervention in the action assailing the validity of a law or treaty is necessary. To deny the Solicitor General such
notice would be tantamount to depriving him of his day in court. We must stress that, contrary to petitioners stand, the
mandatory notice requirement is not limited to actions involving declaratory relief and similar remedies. The rule itself
provides that such notice is required in any action and not just actions involving declaratory relief. Where there is no
ambiguity in the words used in the rule, there is no room for construction. [15] In all actions assailing the validity of a
statute, treaty, presidential decree, order, or proclamation, notice to the Solicitor General is mandatory.
In this case, the Solicitor General was never notified about Civil Case No. 14725. Nor did the trial court ever
require him to appear in person or by a representative or to file any pleading or memorandum on the constitutionality of
the assailed decree. Hence, the Court of Appeals did not err in holding that lack of the required notice made it improper
for the trial court to pass upon the constitutional validity of the questioned presidential decrees.
As regards the second issue, petitioners contend that P.D. No. 579 and its implementing issuances are void for
violating the due process clause and the prohibition against the taking of private property without just compensation.
Petitioners now ask this Court to exercise its power of judicial review.
Jurisprudence has laid down the following requisites for the exercise of this power: First, there must be before the
Court an actual case calling for the exercise of judicial review. Second, the question before the Court must be ripe for
adjudication. Third, the person challenging the validity of the act must have standing to challenge. Fourth, the question
of constitutionality must have been raised at the earliest opportunity, and lastly, the issue of constitutionality must be the
very lis mota of the case. [16]
As a rule, the courts will not resolve the constitutionality of a law, if the controversy can be settled on other
grounds.[17] The policy of the courts is to avoid ruling on constitutional questions and to presume that the acts of the
political departments are valid, absent a clear and unmistakable showing to the contrary. To doubt is to sustain. This
presumption is based on the doctrine of separation of powers. This means that the measure had first been carefully
studied by the legislative and executive departments and found to be in accord with the Constitution before it was finally
enacted and approved.[18]
The present case was instituted primarily for accounting and specific performance. The Court of Appeals correctly
ruled that PNBs obligation to render an accounting is an issue, which can be determined, without having to rule on the
constitutionality of P.D. No. 579. In fact there is nothing in P.D. No. 579, which is applicable to PNBs intransigence in
refusing to give an accounting. The governing law should be the law on agency, it being undisputed that PNB acted as

SEC. 10. All laws, acts, executive orders and circulars in conflict herewith are hereby repealed or modified accordingly.
The settled rule of statutory construction is that repeals by implication are not favored. [20] R.A. No. 7202 cannot
be deemed to have repealed P.D. No. 579. In addition, the power to declare a law unconstitutional does not lie with the
legislature, but with the courts. [21] Assuming arguendo that R.A. No. 7202 did indeed repeal P.D. No. 579, said repeal is
not a legislative declaration finding the earlier law unconstitutional.
To resolve the third issue, petitioners ask us to apply the doctrine of piercing the veil of corporate fiction with
respect to PNB and PHILEX. Petitioners submit that PHILEX was a wholly-owned subsidiary of PNB prior to the latters
privatization.
We note, however, that the appellate court made the following finding of fact:
1. PNB and PHILEX are separate juridical persons and there is no reason to pierce the veil of corporate personality.
Both existed by virtue of separate organic acts. They had separate operations and different purposes and powers.[22]
Findings of fact by the Court of Appeals are conclusive and binding upon this Court unless said findings are not
supported by the evidence. [23] Our jurisdiction in a petition for review under Rule 45 of the Rules of Court is limited only
to reviewing questions of law and factual issues are not within its province. [24] In view of the aforequoted finding of fact,
no manifest error is chargeable to the respondent court for refusing to pierce the veil of corporate fiction.
On the fourth issue, the appellate court found that there were two sets of accounts between petitioners and PNB,
namely:
1. The accounts relative to the loan financing scheme entered into by the Mirasols with PNB (PNBs Brief, p. 16) On the
question of how much the PNB lent the Mirasols for crop years 1973-1974 and 1974-1975, the evidence recited by the
lower court in its decision was deficient. We are offered (sic) PNB the amount of FIFTEEN MILLION NINE HUNDRED
SIXTY FOUR THOUSAND TWO HUNDRED FIFTY TWO PESOS and NINETY THREE Centavos (Ps15,964,252.93)
but this is the alleged balance the Mirasols owe PNB covering the years 1975 to 1982.
2. The account relative to the Mirasols current account Numbers 5186 and 5177 involving the amount of THREE
MILLION FOUR HUNDRED THOUSAND Pesos (P3,400,000.00) PNB claims against the Mirasols. (PNBs Brief, p.
17)
In regard to the first set of accounts, besides the proceeds from PNBs sale of sugar (involving the defendant PHILEX in
relation to the export portion of the stock), the PNB foreclosed the Mirasols mortgaged properties realizing therefrom in
1982 THREE MILLION FOUR HUNDRED THIRTEEN THOUSAND Pesos (P3,413,000.00), the PNB itself having
acquired the properties as the highest bidder.
As to the second set of accounts, PNB proposed, and the Mirasols accepted, a dacion en pago scheme by which the
Mirasols conveyed to PNB pieces of property valued at ONE MILLION FOUR HUNDRED TEN THOUSAND FOUR
HUNDRED SIXTY-SIX Pesos (Ps1,410,466.00) (PNBs Brief, pp. 16-17).[25]
Petitioners now claim that the dacion en pago and the foreclosure of their mortgaged properties were void for
want of consideration. Petitioners insist that the loans granted them by PNB from 1975 to 1982 had been fully paid by

virtue of legal compensation. Hence, the foreclosure was invalid and of no effect, since the mortgages were already fully
discharged. It is also averred that they agreed to the dacion only by virtue of a martial law Arrest, Search, and Seizure
Order (ASSO).
We find petitioners arguments unpersuasive. Both the lower court and the appellate court found that the Mirasols
admitted that they were indebted to PNB in the sum stated in the latters counterclaim. [26]Petitioners nonetheless insist that
the same can be offset by the unliquidated amounts owed them by PNB for crop years 1973-74 and 1974-75. Petitioners
argument has no basis in law. For legal compensation to take place, the requirements set forth in Articles 1278 and 1279
of the Civil Code must be present. Said articles read as follows:
Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other.
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the
other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and
also of the same quality if the latter has been stated;
(3) That the two debts are due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.

An agents failure to render an accounting to his principal is contrary to Article 1891 of the Civil Code. [30] The
erring agent is liable for damages under Article 1170 of the Civil Code, which states:
Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner
contravene the tenor thereof, are liable for damages.
Article 1170 of the Civil Code, however, must be construed in relation to Article 2217 of said Code which reads:
Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded
feelings, moral shock, social humiliation, and similar injury. Though incapable of pecuniary computation, moral damages
may be recovered if they are the proximate result of the defendants wrongful act or omission.
Moral damages are explicitly authorized in breaches of contract where the defendant acted fraudulently or in bad
faith.[31] Good faith, however, is always presumed and any person who seeks to be awarded damages due to the acts of
another has the burden of proving that the latter acted in bad faith, with malice, or with ill motive. In the instant case,
petitioners have failed to show malice or bad faith [32] on the part of PNB in failing to render an accounting. Absent such
showing, moral damages cannot be awarded.
Nor can we restore the award of attorneys fees and costs of suit in favor of petitioners. Under Article 2208 (5) of
the Civil Code, attorneys fees are allowed in the absence of stipulation only if the defendant acted in gross and evident
bad faith in refusing to satisfy the plaintiffs plainly valid, just, and demandable claim. As earlier stated, petitioners have
not proven bad faith on the part of PNB and PHILEX.
WHEREFORE, the instant petition is DENIED and the assailed decision of the respondent court in CA-G.R. CV
38607 AFFIRMED. Costs against petitioners.
SO ORDERED.

In the present case, set-off or compensation cannot take place between the parties because:
First, neither of the parties are mutually creditors and debtors of each other. Under P.D. No. 579, neither PNB nor
PHILEX could retain any difference claimed by the Mirasols in the price of sugar sold by the two firms. P.D. No. 579
prescribed where the profits from the sales are to be paid, to wit:

[G.R. No. 156940. December 14, 2004]

ASSOCIATED BANK (Now WESTMONT BANK), petitioner, vs. VICENTE HENRY TAN, respondent.

SECTION 7. x x x After deducting its commission of two and one-half (2-1/2%) percent of gross sales, the balance of
the proceeds of sugar trading operations for every crop year shall be set aside by the Philippine Exchange Company, Inc,.
as profits which shall be paid to a special fund of the National Government subject to the disposition of the President for
public purposes.
Thus, as correctly found by the Court of Appeals, there was nothing with which PNB was supposed to have offset Mirasols admitted indebtedness.[27]
Second, compensation cannot take place where one claim, as in the instant case, is still the subject of litigation, as
the same cannot be deemed liquidated.[28]
With respect to the duress allegedly employed by PNB, which impugned petitioners consent to thedacion en
pago, both the trial court and the Court of Appeals found that there was no evidence to support said claim. Factual
findings of the trial court, affirmed by the appellate court, are conclusive upon this Court. [29]
On the fifth issue, the trial court awarded petitioners P50,000.00 in moral damages and P50,000.00 in attorneys
fees. Petitioners now theorize that it was error for the Court of Appeals to have deleted these awards, considering that the
appellate court found PNB breached its duty as an agent to render an accounting to petitioners.

DECISION
PANGANIBAN, J.:
While banks are granted by law the right to debit the value of a dishonored check from a depositors
account, they must do so with the highest degree of care, so as not to prejudice the depositor unduly.
The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, assailing the January 27, 2003
Decision[2] of the Court of Appeals (CA) in CA-GR CV No. 56292. The CA disposed as follows:
WHEREFORE, premises considered, the Decision dated December 3, 1996, of
the Regional Trial Court ofCabanatuan City, Third Judicial Region, Branch 26, in Civil Case No. 892-AF is
hereby AFFIRMED. Costs against the [petitioner].[3]
The Facts

The CA narrated the antecedents as follows:

return of his UCPB check deposit in the amount of P101,000.00, hence, on even date, [respondent] deposited the amount
of P50,000.00 to cover the returned check.

Vicente Henry Tan (hereafter TAN) is a businessman and a regular depositor-creditor of the Associated Bank
(hereinafter referred to as the BANK). Sometime in September 1990, he deposited a postdated UCPB check with the said
BANK in the amount of P101,000.00 issued to him by a certain Willy Cheng from Tarlac. The check was duly entered in
his bank record thereby making his balance in the amount ofP297,000.00, as of October 1, 1990, from his original deposit
of P196,000.00. Allegedly, upon advice and instruction of the BANK that the P101,000.00 check was already cleared
and backed up by sufficient funds, TAN, on the same date, withdrew the sum of P240,000.00, leaving a balance
of P57,793.45. A day after, TAN deposited the amount of P50,000.00 making his existing balance in the amount
of P107,793.45, because he has issued several checks to his business partners, to wit:
CHECK NUMBERS

DATE

a. 138814

AMOUNT

Sept. 29, 1990

P9,000.00

By way of affirmative defense, [petitioner] averred that [respondent] had no cause of action against it and argued that it
has all the right to debit the account of the [respondent] by reason of the dishonor of the check deposited by the
[respondent] which was withdrawn by him prior to its clearing. [Petitioner] further averred that it has no liability with
respect to the clearing of deposited checks as the clearing is being undertaken by the Central Bank and in accepting [the]
check deposit, it merely obligates itself as depositors collecting agent subject to actual payment by the drawee
bank. [Petitioner] therefore prayed that [respondent] be ordered to pay it the amount of P1,000,000.00 by way of loss of
goodwill, P7,000.00 as acceptance fee plus P500.00 per appearance and by way of attorneys fees.
Considering that Westmont Bank has taken over the management of the affairs/properties of the BANK, [respondent] on
October 10, 1996, filed an Amended Complaint reiterating substantially his allegations in the original complaint, except
that the name of the previous defendant ASSOCIATED BANK is now WESTMONT BANK.
Trial ensured and thereafter, the court rendered its Decision dated December 3, 1996 in favor of the [respondent] and
against the [petitioner], ordering the latter to pay the [respondent] the sum of P100,000.00 by way of moral
damages, P75,000.00 as exemplary damages, P25,000.00 as attorneys fees, plus the costs of this suit. In making said
ruling, it was shown that [respondent] was not officially informed about the debiting of the P101,000.00 [from] his
existing balance and that the BANK merely allowed the [respondent] to use the fund prior to clearing merely for
accommodation because the BANK considered him as one of its valued clients. The trial court ruled that the bank
manager was negligent in handling the particular checking account of the [respondent] stating that such lapses caused all
the inconveniences to the [respondent]. The trial court also took into consideration that [respondents] mother was
originally maintaining with the x x x BANK [a] current account as well as [a] time deposit, but [o]n one occasion,
although his mother made a deposit, the same was not credited in her favor but in the name of another. [4]

b. 138804

Oct. 8, 1990

9,350.00

c. 138787

Sept. 30, 1990

6,360.00

d. 138847

Sept. 29, 1990

21,850.00

e. 167054

Sept. 29, 1990

4,093.40

Sept. 29, 1990

3,546.00

g. 138774

Oct. 2, 1990

6,600.00

Petitioner appealed to the CA on the issues of whether it was within its rights, as collecting bank, to
debit the account of its client for a dishonored check; and whether it had informed respondent about the
dishonor prior to debiting his account.

h. 167072

Oct. 10, 1990

9,908.00

Ruling of the Court of Appeals

f. 138792

i. 168802

Oct. 10, 1990

3,650.00

However, his suppliers and business partners went back to him alleging that the checks he issued bounced for
insufficiency of funds. Thereafter, TAN, thru his lawyer, informed the BANK to take positive steps regarding the matter
for he has adequate and sufficient funds to pay the amount of the subject checks. Nonetheless, the BANK did not bother
nor offer any apology regarding the incident. Consequently, TAN, as plaintiff, filed a Complaint for Damages on
December 19, 1990, with the Regional Trial Court of Cabanatuan City, Third Judicial Region, docketed as Civil Case No.
892-AF, against the BANK, as defendant.
In his [C]omplaint, [respondent] maintained that he ha[d] sufficient funds to pay the subject checks and alleged that his
suppliers decreased in number for lack of trust. As he has been in the business community for quite a time and has
established a good record of reputation and probity, plaintiff claimed that he suffered embarrassment, humiliation,
besmirched reputation, mental anxieties and sleepless nights because of the said unfortunate incident. [Respondent]
further averred that he continuously lost profits in the amount ofP250,000.00. [Respondent] therefore prayed for
exemplary damages and that [petitioner] be ordered to pay him the sum of P1,000,000.00 by way of moral
damages, P250,000.00 as lost profits, P50,000.00 as attorneys fees plus 25% of the amount claimed including P1,000.00
per court appearance.
Meanwhile, [petitioner] filed a Motion to Dismiss on February 7, 1991, but the same was denied for lack of merit in an
Order dated March 7, 1991. Thereafter, [petitioner] BANK on March 20, 1991 filed its Answer denying, among others,
the allegations of [respondent] and alleged that no banking institution would give an assurance to any of its
client/depositor that the check deposited by him had already been cleared and backed up by sufficient funds but it could
only presume that the same has been honored by the drawee bank in view of the lapse of time that ordinarily takes for a
check to be cleared. For its part, [petitioner] alleged that onOctober 2, 1990, it gave notice to the [respondent] as to the

Affirming the trial court, the CA ruled that the bank should not have authorized the withdrawal of the
value of the deposited check prior to its clearing. Having done so, contrary to its obligation to treat
respondents account with meticulous care, the bank violated its own policy. It thereby took upon itself the
obligation to officially inform respondent of the status of his account before unilaterally debiting the amount
of P101,000. Without such notice, it is estopped from blaming him for failing to fund his account.
The CA opined that, had the P101,000 not been debited, respondent would have had sufficient funds
for the postdated checks he had issued. Thus, the supposed accommodation accorded by petitioner to him is
the proximate cause of his business woes and shame, for which it is liable for damages.
Because of the banks negligence, the CA awarded respondent moral damages of P100,000. It also
granted him exemplary damages of P75,000 and attorneys fees of P25,000.
Hence this Petition.[5]
Issue
In its Memorandum, petitioner raises the sole issue of whether or not the petitioner, which is acting as
a collecting bank, has the right to debit the account of its client for a check deposit which was dishonored by
the drawee bank.[6]
The Courts Ruling

The Petition has no merit.

Obligation as
Sole Issue:
Debit of Depositors Account

Petitioner-bank contends that its rights and obligations under the present set of facts were
misappreciated by the CA. It insists that its right to debit the amount of the dishonored check from the account
of respondent is clear and unmistakable. Even assuming that it did not give him notice that the check had
been dishonored, such right remains immediately enforceable.
In particular, petitioner argues that the check deposit slip accomplished by respondent onSeptember
17, 1990, expressly stipulated that the bank was obligating itself merely as the depositors collecting agent and
-- until such time as actual payment would be made to it -- it was reserving the right to charge against the
depositors account any amount previously credited. Respondent was allowed to withdraw the amount of the
check prior to clearing, merely as an act of accommodation, it added.
At the outset, we stress that the trial courts factual findings that were affirmed by the CA are not subject
to review by this Court. [7] As petitioner itself takes no issue with those findings, we need only to determine the
legal consequence, based on the established facts.

Depositary Bank
In BPI v. Casa Montessori,[14] the Court has emphasized that the banking business is impressed with
public interest. Consequently, the highest degree of diligence is expected, and high standards of integrity and
performance are even required of it. By the nature of its functions, a bank is under obligation to treat the
accounts of its depositors with meticulous care.[15]
Also affirming this long standing doctrine, Philippine Bank of Commerce v. Court of Appeals [16]has held
that the degree of diligence required of banks is more than that of a good father of a family where the
fiduciary nature of their relationship with their depositors is concerned. [17] Indeed, the banking business is
vested with the trust and confidence of the public; hence the appropriate standard of diligence must be very
high, if not the highest, degree of diligence. [18] The standard applies, regardless of whether the account
consists of only a few hundred pesos or of millions. [19]
The fiduciary nature of banking, previously imposed by case law, [20] is now enshrined in Republic Act
No. 8791 or the General Banking Law of 2000. Section 2 of the law specifically says that the State recognizes
the fiduciary nature of banking that requires high standards of integrity and performance.
Did petitioner treat respondents account with the highest degree of care? From all indications, it did

Right of Setoff
A bank generally has a right of setoff over the deposits therein for the payment of any withdrawals on
the part of a depositor.[8] The right of a collecting bank to debit a clients account for the value of a dishonored
check that has previously been credited has fairly been established by jurisprudence. To begin with, Article
1980 of the Civil Code provides that [f]ixed, savings, and current deposits of money in banks and similar
institutions shall be governed by the provisions concerning simple loan.
Hence, the relationship between banks and depositors has been held to be that of creditor and debtor.
Thus, legal compensation under Article 1278 [10] of the Civil Code may take place when all the requisites
mentioned in Article 1279 are present,[11] as follows:
[9]

(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;

not.
It is undisputed -- nay, even admitted -- that purportedly as an act of accommodation to a valued client,
petitioner allowed the withdrawal of the face value of the deposited check prior to its clearing. That act
certainly disregarded the clearance requirement of the banking system. Such a practice is unusual, because a
check is not legal tender or money; [21] and its value can properly be transferred to a depositors account only
after the check has been cleared by the drawee bank.[22]
Under ordinary banking practice, after receiving a check deposit, a bank either immediately credit the
amount to a depositors account; or infuse value to that account only after the drawee bank shall have paid
such amount.[23] Before the check shall have been cleared for deposit, the collecting bank can only assume
at its own risk -- as herein petitioner did -- that the check would be cleared and paid out.

(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same
kind, and also of the same quality if the latter has been stated;

Reasonable business practice and prudence, moreover, dictated that petitioner should not have
authorized the withdrawal by respondent of P240,000 on October 1, 1990, as this amount was over and above
his outstanding cleared balance of P196,793.45.[24] Hence, the lower courts correctly appreciated the evidence
in his favor.

(3)

That the two debts be due;

Obligation as

(4)

That they be liquidated and demandable;

Collecting Agent

(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in
due time to the debtor.[12]
Nonetheless, the real issue here is not so much the right of petitioner to debit respondents account but,
rather, the manner in which it exercised such right. The Court has held that even while the right of setoff is
conceded, separate is the question of whether that remedy has properly been exercised. [13]
The liability of petitioner in this case ultimately revolves around the issue of whether it properly
exercised its right of setoff. The determination thereof hinges, in turn, on the banks role and obligations, first,
as respondents depositary bank; and second, as collecting agent for the check in question.

Indeed, the bank deposit slip expressed this reservation:

In receiving items on deposit, this Bank obligates itself only as the Depositors Collecting agent, assuming no
responsibility beyond carefulness in selecting correspondents, and until such time as actual payments shall have come to
its possession, this Bank reserves the right to charge back to the Depositors account any amounts previously credited
whether or not the deposited item is returned. x x x."[25]
However, this reservation is not enough to insulate the bank from any liability. In the past, we have
expressed doubt about the binding force of such conditions unilaterally imposed by a bank without the consent
of the depositor.[26] It is indeed arguable that in signing the deposit slip, the depositor does so only to identify
himself and not to agree to the conditions set forth at the back of the deposit slip. [27]

Further, by the express terms of the stipulation, petitioner took upon itself certain obligations as
respondents agent, consonant with the well-settled rule that the relationship between the payee or holder of a
commercial paper and the collecting bank is that of principal and agent. [28] Under Article 1909[29] of the Civil
Code, such bank could be held liable not only for fraud, but also for negligence.
As a general rule, a bank is liable for the wrongful or tortuous acts and declarations of its officers or
agents within the course and scope of their employment. [30] Due to the very nature of their business, banks are
expected to exercise the highest degree of diligence in the selection and supervision of their employees.
[31]
Jurisprudence has established that the lack of diligence of a servant is imputed to the negligence of the
employer, when the negligent or wrongful act of the former proximately results in an injury to a third person;
[32]
in this case, the depositor.
The manager of the banks Cabanatuan branch, Consorcia Santiago, categorically admitted that she
and the employees under her control had breached bank policies. They admittedly breached those policies
when, without clearance from the drawee bank in Baguio, they allowed respondent to withdraw on October 1,
1990, the amount of the check deposited. Santiago testified that respondent was not officially informed about
the debiting of the P101,000 from his existing balance of P170,000 on October 2, 1990 x x x.[33]
Being the branch manager, Santiago clearly acted within the scope of her authority in authorizing the
withdrawal and the subsequent debiting without notice. Accordingly, what remains to be determined is
whether her actions proximately caused respondents injury. Proximate cause is that which -- in a natural and
continuous sequence, unbroken by any efficient intervening cause --produces the injury, and without which the
result would not have occurred.[34]
Let us go back to the facts as they unfolded. It is undeniable that the banks premature authorization of
the withdrawal by respondent on October 1, 1990, triggered -- in rapid succession and in a natural sequence -the debiting of his account, the fall of his account balance to insufficient levels, and the subsequent dishonor of
his own checks for lack of funds. The CA correctly noted thus:

x x x. The fact we believe is undeniable that prior to the mailing of notice of dishonor, and without waiting for any
action by Gullas, the bank made use of the money standing in his account to make good for the treasury warrant. At this
point recall that Gullas was merely an indorser and had issued checks in good faith. As to a depositor who has funds
sufficient to meet payment of a check drawn by him in favor of a third party, it has been held that he has a right of action
against the bank for its refusal to pay such a check in the absence of notice to him that the bank has applied the funds so
deposited in extinguishment of past due claims held against him. (Callahan vs. Bank of Anderson [1904], 2 Ann. Cas.,
203.) However this may be, as to an indorser the situation is different, and notice should actually have been given him in
order that he might protect his interests.[40]
Third, regarding the deposit of P50,000 made by respondent on October 2, 1990, we fully subscribe to
the CAs observations that it was not unusual for a well-reputed businessman like him, who ordinarily takes
note of the amount of money he takes and releases, to immediately deposit money in his current account to
answer for the postdated checks he had issued.[41]
Damages
Inasmuch as petitioner does not contest the basis for the award of damages and attorneys fees, we
will no longer address these matters.

WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner.
SO ORDERED.

x x x [T]he depositor x x x withdrew his money upon the advice by [petitioner] that his money was already
cleared. Without such advice, [respondent] would not have withdrawn the sum of P240,000.00. Therefore, it cannot be
denied that it was [petitioners] fault which allowed [respondent] to withdraw a huge sum which he believed was already
his.
To emphasize, it is beyond cavil that [respondent] had sufficient funds for the check. Had the P101,000.00 not [been]
debited, the subject checks would not have been dishonored. Hence, we can say that [respondents] injury arose from the
dishonor of his well-funded checks. x x x.[35]
Aggravating matters, petitioner failed to show that it had immediately and duly informed respondent of
the debiting of his account. Nonetheless, it argues that the giving of notice was discernible from his act of
depositing P50,000 on October 2, 1990, to augment his account and allow the debiting. This argument
deserves short shrift.
First, notice was proper and ought to be expected. By the bank managers account, respondent was
considered a valued client whose checks had always been sufficiently funded from 1987 to 1990, [36] until the
October imbroglio. Thus, he deserved nothing less than an official notice of the precarious condition of his
account.
Second, under the provisions of the Negotiable Instruments Law regarding the liability of a general
indorser[37] and the procedure for a notice of dishonor, [38] it was incumbent on the bank to give proper notice to
respondent. In Gullas v. National Bank,[39] the Court emphasized:
x x x [A] general indorser of a negotiable instrument engages that if the instrument the check in this case is
dishonored and the necessary proceedings for its dishonor are duly taken, he will pay the amount thereof to the holder
(Sec. 66) It has been held by a long line of authorities that notice of dishonor is necessary to charge an indorser and that
the right of action against him does not accrue until the notice is given.

G.R. No. L-53585 February 15, 1990

ROMULO VILLANUEVA, petitioner,
vs.
HON. FRANCISCO TANTUICO, JR., and EMILIANA CRUZ, respondents.

Mariano C. Cortezano for petitioner.

On top of this, Villanueva was charged by the Commission on Audit with malversation of public funds before
the Tanodbayan. 2 The Tanodbayan however dismissed the case upon the Special Prosecutor's finding that
the seminar fees were not public funds, and they had been disbursed by Villanueva in good faith. The
Commission's motion for reconsideration was denied for lack of merit.

NARVASA, J.:

Villanueva then addressed a letter to the President of the Philippines, appealing for reversal of Auditor Cruz's
action in preventing the payment of his salaries and other money benefits due him. The matter was referred to
the Commission on Audit which however found no cogent reason to recommend favorable action on
Villanueva's appeal. 3

This case treats of the liability of a Government officer of the Bureau of Records Management who was
designated Administrative Officer and Training Coordinator of two (2) regional seminars of the Bureau, and
who, as such, and having custody of seminar fees collected from the participants, authorized disbursements to
certain of the latter for transportation expenses, food, etc. although, as subsequently disclosed, they had
already collected and received amounts corresponding to said items from their respective offices.
The officer involved is Romulo Villanueva, petitioner herein. The seminars of his Bureau were organized and
conducted pursuant to a directive of the Secretary of General Services with a view to updating records
management techniques. 1 The seminar fees were charged against the appropriations of the participants'
respective offices in accordance with Memo Circular 830 issued by the Office of the President, authorizing the
attendance of records officers from the different government agencies at the seminars. All the fees collected,
P43,000.00 in the aggregate, were placed under Villanueva's control and supervision, and were made
disbursable only upon his authorization and for the purposes of the seminars specified in Seminar Operation
Plans Numbered 001 and 002.
For both seminars, Villanueva authorized disbursements of P41,148.20 in payment of food, snacks,
transportation expenses, seminar kits and hand-outs of the participants; hauling services; additional allowance
for training staff (including snacks for personnel who worked overtime in preparation for the seminars); hotel
bills and honoraria of resource speakers. The balance of P1,851.80 was deposited with the Cashier of the
Bureau of Records Management after the conclusion of the seminars, this being evidenced by Official Receipt
No. 0926496 dated October 8, 1975.
It was subsequently discovered that employees and officers designated to take part in the seminars had
earlier collected from the offices or corporations to which they pertained, their transportation expenses, per
diems, and other allowances. For this reason, the Auditor of the Bureau of Records Management, herein
respondent Emiliana Cruz, disallowed the disbursement of seminar funds in the total amount of P31,949.15
which Villanueva had authorized for the transportation expenses, food and other expenses of said employees
and officers. In Auditor Cruz's view, this amount should also have been deposited with the Cashier of the
Bureau of Records Management.
Auditor Cruz accordingly wrote to Villanueva demanding restitution of this sum of P31,949.15. Villanueva
demurred, claiming that the seminar funds were private funds, and they had been disbursed in pursuance to
the objectives of the seminars.
What Cruz did was to cause the issuance to Villanueva of a certificate of permanent disallowance in virtue of
which all money collectible by him from the Government would be applied in satisfaction of the amount of
P31,949.15 which she had disallowed in audit. She did this in reliance on Section 624 of the Revised
Administrative Code, viz.:
SEC. 624. When any person is indebted to the Government of the Philippine Islands,
the Insular Auditor may direct the proper officer to withhold the payment of any money
due him or his estate, the same to be applied in satisfaction of such indebtedness.
Auditor Cruz characterized as an "indebtedness" within the meaning of Section 624, the disbursement of
P31,949.15 authorized by Villanueva to certain seminar participants (which she had disallowed as
aforestated). The result was that Villanueva was prevented from receiving (1) his salaries in the total amount
of P13,313.30, (2) his transportation and representation expenses as Administrative Officer and Training
Coordinator of the seminars amount in to P2,205.00, and (3) the money value of his terminal leave,
P14,796.29.

To obtain relief from these adverse dispositions, Villanueva has instituted the special civil action of certiorari at
bar, faulting the respondents with having acted with lack or excess of jurisdiction or grave abuse of discretion.
He argues that:
1) the seminar fees entrusted to him were private, not public funds;
2) any conclusion that he "is indebted to the Government" so that, according to Section
624 of the Revised Administrative Code, "any money due him or his estate" may be
withheld and "applied in satisfaction of such indebtedness," must proceed from
judgment of a competent court, not a mere opinion and pronouncement of an auditor or
even by the COA; and
3) in any event, he is not in truth "indebted to the Government," no disbursement
authorized by him being in violation of the President's Memo Circular 830, or Seminar
Regulations Nos. 001 and 002 of the Bureau of Records Management, or any existing
auditing rule or regulation.
1. The petitioner's first submission is quickly disposed of. The record shows that the seminar fees collected
from seminar participants and entrusted to Villanueva were chargeable against the appropriations of the
participants' respective offices or agencies in accordance with the President's Memorandum Circular No. 830.
Those fees must therefore be deemed public, not private, funds. The audit of the disbursements of said funds
conducted by a government auditor was therefore entirely in order.
2. The ratiocinations and conclusions of the auditor, sustained by the Commission on Audit, are something
else. Auditor Cruz made the finding, on the basis of her examination of the relevant records, that Villanueva
was indebted to the Government in the sum of P31,949.15 representing supposedly unauthorized
disbursements, which she had consequently disallowed and in reliance on Section 624 of the Revised
Administrative Code,supra, the indebtedness may properly. be offset against Villanueva's salary and other
monetary benefits payable to him by the Government. The proposition is untenable.
While Section 624 of the Revised Administrative Code does indeed authorize the set-off of a person's
indebtedness to the Government against "any money due him or his estate to be applied in satisfaction of
such indebtedness," that indebtedness must be one that is admitted by the alleged debtor or pronounced by
final judgment of a competent court. In such a case, the person and the Government are in their own right both
debtors and creditors of each other, and compensation takes place by operation of law in accordance with
Article 1278 of the Civil Code. 4 Absent, however, any such categorical admission by an obligor or final
adjudication, no legal compensation can take place, as this Court has already had occasion to rule in an early
case. 5 Unless admitted by a debtor himself, the conclusion that he is in truth indebted to the Government
cannot be definitely and finally pronounced by a Government auditor, no matter how convinced he may be
from his examination of the pertinent records of the validity of that conclusion. Such a declaration, that a
government employee or officer is indeed indebted to the Government, if it is to have binding authority, may
only be made by a court. That determination is after all, plainly a judicial, not an administrative function. No
executive officer or administrative body possesses such a power.
3. In any case, the record does not show Villanueva to have made illegitimate disbursements of the public
funds in his custody for reimbursement of which to the Government he had become obliged. The Court is
satisfied that his disbursements were within the letter and contemplation of the Seminar Operation Plans in

question, Numbered 001 and 002. The disbursements were for items explicitly specified as authorized
expenditures, i.e., food, snacks, transportation, hauling services, additional allowances for the training staff,
acquisition costs of seminar kits and hand-outs, and grocery items for the snacks of the training staff who had
worked overtime without pay, or for items which were allowable as reasonably necessary expenses for the
seminars upon approval (actually given) of the Director of the Bureau of Records Management, such as hotel
bills and honoraria for resource speakers. There is moreover no showing whatever, contrary to Auditor Cruz's
claim, that Villanueva had knowledge at the time of making the disputed disbursements, that some of the
seminar participants had already collected from their home offices or agencies certain amounts to cover some
of their expenses for attendance at the seminar. Hence, assuming that some of the participants, after having
received certain amounts from their home offices in connection with their participation in the seminars, had
again received other amounts for the same purpose from petitioner Villanueva, the liability for that duplication
in disbursements should be exacted from the participants concerned, not from Villanueva.
It is difficult, in fine, to discern any irregularity in Villanueva's conduct as officer in charge of the seminars such
as would make him a debtor of the Government, it appearing on the contrary that he has done naught but fulfill
his duties in good faith and in accordance with the applicable rules and guidelines. He did not deserve the
harsh treatment accorded to him in the premises. In meting it out to him, there was grave abuse of discretion.
WHEREFORE, the writ of certiorari prayed for is granted, annulling and declaring void ab initio the certificate
of permanent disallowance issued by Auditor Cruz against petitioner Villanueva and the resolution or order of
the Commission on Audit sustaining the same, and ordering the Commission on Audit to cause the immediate
payment to the petitioner of the sums rightfully due but improperly withheld from him, i.e., his salaries in the
total amount of P13,313.30, the transportation and representation expenses due him as Administrative Officer
and Training Coordinator of the seminars in the sum of P2,205.00, and the money value of his terminal leave:
P14,796.29.
SO ORDERED.
[G.R. No. L-56101. February 20, 1984.]
CORAZON PEREZ, Petitioner, v. HON. COURT OF APPEALS and MEVER FILMS,
INCORPORATED,Respondents.

factual matter that had been overlooked by the Courts below (Heirs of Enrique Zambales v. CA,
120 SCRA 897 [1983]). The Supreme Court is clothed with ample authority to review palpable
errors not assigned as such if it finds that their consideration is necessary in arriving at a just
decision (Tumalad v. Vicencio, 41 SCRA 146 [1971]).
3. MERCANTILE LAW; CREDIT TRANSACTIONS; MONEY MARKET TRANSACTION DEFINED.
There is another aspect to this case. What is involved here is a money market transaction. As
defined by Lawrence Smith "the money market is a market dealing in standardized short-term
credit instruments (involving large amounts) where lenders and borrowers do not deal directly
with each other but through a middle man or dealer in the open market." It involves
"commercial papers" which are instruments "evidencing indebtedness of any person or
entity . . ., which are issued, endorsed, sold or transferred or in any manner conveyed to
another person or entity, with or without recourse" (The Money Market Industry Today A
Question of Survival by Horacio T. Lava, Jr., in the PNB Quarterly, A Supplement of the
Philnabank News, Second Quarter 1978.) The fundamental function of the money market device
in its operation is to match and bring together in a most impersonal manner both the "fund
users" and the "fund suppliers." The money market is an "impersonal market", free from
personal considerations." (The Money Market mechanism is intended to provide quick mobility of
money and securities." (Woodworth, p. 5.)
4. ID.; ID.; ID.; NOTICE OF TRANSFER, NOT REQUIRED. The impersonal character of the
money market device overlooks the individuals or entities concerned. The issuer of a commercial
paper in the money market necessarily knows in advance that it would be expeditiously
transacted and transferred to any investor/lender without need of notice to said issuer. In
practice, no notification is given to the borrower or issuer of commercial paper of the sale or
transfer to the investor. Accordingly, we find no applicability herein of Article 1285, 3rd
paragraph of the Civil Code. Rather, it is the first paragraph of the same legal provision that is
applicable which states that the debtor who has consented to the assignment of rights made by
a creditor in favor of a third person, cannot set up against the assignor, unless the assignor was
notified by the debtor at the time he gave his consent, that he reserved his right to the
compensation.

DECISION

Francisco A. Lava, Jr. for Petitioner.

Alberto O. Villaraza for Private Respondent.

SYLLABUS

1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; COMPENSATION; NOT PROPER WHERE ONE
DEBT IS NOT YET DUE AND DEMANDABLE; CASE AT BAR. Since, on the respective dates of
maturity, specifically, August 6, 1974 and August 13, 1974, respectively, Ramon C. Mojica was
still the holder of those bills, it can be safely assumed that it was he who had asked for the rollovers on the said dates. MEVER was bound by the roll-overs since the assignment to it was
made only on September 9, 1974. The inevitable result of the roll-overs of the principals was
that Bill No. 1298 and Bill No. 1419 were not yet due and demandable as of the date of their
assignment by MOJICA to MEVER on September 9, 1974, nor as of October 3, 1974 when
MEVER surrendered said Bills to CONGENERIC. As a consequence, no legal compensation could
have taken place because, for it to exist, the two debts, among other requisites, must be due
and demandable (Article 1279, Civil Code).
2. REMEDIAL LAW; APPEALS; AUTHORITY OF SUPREME COURT TO REVIEW ERRORS NOT
ASSIGNED. We note that the xerox copies of Bill No. 1298 and Bill No. 1419 attached by
MEVER to its Brief do not contain the "roll-over" notations. However, MEVERs own exhibits
before respondent Appellate Court, Exhibits "3" and "3-A", do show those notations and MEVER
must be held bound by them. And although this issue may not have been squarely raised below,
in the interest of substantial justice this Court is not prevented from considering such a pivotal

MELENCIO-HERRERA, J.:

This is a Petition for Review on Certiorari of a Decision of the then Court of Appeals. The
relevant facts of the case may be stated as follows:chanrob1es virtual 1aw library
1. CONGENERIC Development & Finance Corporation is, or was, a company engaged in "money
market" operations
2. (a) On May 8, 1974, CONGENERIC issued what was in effect a promissory note in the amount
of P111,973.58 in favor of bearer No. 049, later identified as Ramon C. MOJICA, or an entity
owned by him. That promissory note, denominated hereinafter as Bill 1298, was to mature on
August 6, 1974.
(b) On May 15, 1974, CONGENERIC issued another bearer promissory note for the sum of
P208,666.67, also in favor of MOJICA or an entity owned by him. The note, denominated
hereinafter as Bill 1419, was to mature on August 13, 1974.
3. On June 5, 1974, MEVER Films, Inc. the private respondent herein, borrowed P500,000.00
from CONGENERIC, the former issuing in favor of the latter a negotiable promissory note to
mature on August 5, 1974. That note shall hereinafter be referred to as NCI-0352. What may be
stated in connection with the note is that it had no provision for interest, except that, if not paid
on due date, it would be subject to interest at 14% per annum.
4. On July 3, 1974, CONGENERIC received P200,000.00 from petitioner herein (CORAZON, for
short), and issued to her, as BEARER 209, a confirmation of sale (CS) numbered 0366. Under

the terms of CS-0366, CORAZON was to be paid P203,483.33 on August 5, 1974, CONGENERIC
would make collection on behalf of CORAZON; and ALL OF CONGENERICS INTEREST IN NCI0352 WAS BEING TRANSFERRED TO HER. Under this last provision, CORAZON, subject to
defenses, could have sued MEVER for payment of the full amount of P500,000.00, specially if
CONGENERIC should not object. It may also be noted that while NCI-0352 was not subject to
interest prior to August 5, 1974, CONGENERIC obligated itself to pay CORAZON interest on
August 5, 1974 in the amount of P3,483.33, or roughly an interest rate of 19% per annum.
5. (a) On August 5, 1974, MEVER paid P100,000.00 to CONGENERIC on account of NCI-0352.
(b) On the same date of August 5, 1974, CONGENERIC paid CORAZON the sum of P103,483.33,
the P3,483.33 coming from its own funds.
6. (a) On August 6, 1974, CONGENERIC paid MOJICA the interest due on Bill 1298, the principal
being rolled-over to mature on October 4, 1974. The roll-over was annotated on the original of
Bill 1298.

(c) On Mevers appeal, the Court of Appeals reversed the judgment of the Trial Court.
Before us, petitioner has made the following Assignments of Error:chanrob1es virtual 1aw
library
A.
"Respondent Court of Appeals erred gravely in applying Article 1626 of the Civil Code, which
refers to a debtor who pays his creditor before knowledge of an assignment, when what is
involved principally in the case at bar is compensation rather than payment.
B.
"Respondent Court of Appeals erred gravely in completely disregarding the essentially
impersonal, fluid and mobile nature of money market transactions.
C.

(b) On August 13, 1974, CONGENERIC paid MOJICA the interest due on Bill 1419, the principal
being rolled-over to mature on October 11, 1974. The roll-over was annotated on Bill 1419.
7. On September 9, 1974, MOJICA assigned Bill 1298 and Bill 1419 to MEVER through a
notarized deed.
8. On October 3, 1974, MEVER surrendered the originals of Bill 1298 and Bill 1419 to
CONGENERIC, and asked the latter to compute the balance of the account of MEVER with
CONGENERIC, taking account of the amounts of the two Bills, which balance MEVER would then
pay.
9. (a) On October 7, 1974, MEVER was served with garnishment by the Provincial Sheriff of
Rizal in two collection cases filed against CONGENERIC by two of its creditors whose credits
totaled P185,693.78.

"Respondent Court of Appeals erred gravely in completely disregarding the vital circumstance
that respondent Mever Films, Inc. necessarily consented in advance to the purchase by
petitioner Corazon Perez of part of its obligation under its Negotiable Certificate of Indebtedness
(NCI).
D.
"Respondent Court of Appeals erred gravely in applying the third parag. of Article 1285 of the
Civil Code allowing compensation of credits if assignment of credit is made without knowledge of
the debtor, and in not applying the first paragraph of said Article 1285 barring the defense of
compensation where the debtor has consented to the assignment of rights in favor of a third
person.
E.

(b) On the same date of October 7, 1974, CONGENERIC advised MEVER by telephone that of the
original amount of P500,000.00 of NCI-0352, the sum of P200,000.00 was sold on July 3, 1974
to a third party, but not naming CORAZON as the third party.
10. On October 8, 1974, CONGENERIC confirmed in writing to MEVER the previous "sale" of
P200,000.00 out of the P500,000.00 amount of NCI-0352; and advised that it could not take
account of the assignment to MEVER of Bill 1298 and Bill 1419.
11. On November 15, 1974, MEVER turned over to the Provincial Sheriff of Rizal (Exhibit "5"),
the sum of P79,359.75, which MEVER had computed as the amount it was still owing
CONGENERIC and which was subject to garnishment.

"Respondent Court of Appeals erred gravely in holding that compensation had set in and
reduced respondent Mevers obligation to P79,359.75.
F.
"Respondent Court of Appeals erred gravely in holding that payment by respondent Mever of
P79,359.75 to the Sheriff in connection with garnishment in certain civil cases against
Congeneric extinguished Mevers obligation and could be set up as another defense to the claim
of petitioner Corazon Perez.
G.

12. (a) On October 23, 1974, CONGENERIC filed a Petition for Suspension of Payments in Civil
Case No. 20212 of the Court of First Instance of Rizal. In that petition, MEVER was listed as a
debtor.
(b) On November 11, 1974, the Court issued an order enjoining CONGENERIC from making any
payment to creditors.
13. In subsequent proceedings in Civil Case No. 20212, the Court promulgated an Order, dated
January 24, 1975 (Exhibit "10"), to the effect that MEVER was not a debtor of CONGENERIC,
and said Order has become final.
14. (a) On July 14, 1975, CORAZON filed suit before the Court of First Instance of Rizal against
MEVER for the recovery of P100,000.00, plus interest, damages, and attorneys fees. She
admits that CS-0366 issued to her by CONGENERIC was a "without recourse" instrument.
(b) The Trial Court rendered judgment in favor of CORAZON and, upon her filing a bond, she
was able to have execution pending appeal. MEVER had to pay her P131,166.00 under the Trial
Courts judgment.

"Respondent Court of Appeals erred gravely in reversing the decision of the Trial Court, in
denying the motion for reconsideration of petitioner Corazon Perez, and in granting respondent
Mevers motion for resolution and/or clarification by ordering refund of P139,141.63 with
interest at 14% per annum, and ordering payment of P10,000.00 as attorneys fees." 1
The foregoing take issue with the following observations and findings of respondent Appellate
Court:jgc:chanrobles.com.ph
". . . We agree with the appellant (MEVER) that there was legal compensation under Article
1279 of the New Civil Code which caused the extinguishment of the obligation under Negotiable
Certificate of Indebtedness No. 0352.
"The original obligation of defendant-appellant to Congeneric is P500,000.00 (Exhibit 1) out of
which it paid P100,000.00 on the maturity date of the note leaving a balance of P400,000.00.
"By a Deed of Assignment dated September 9, 1974 executed by Ramon C. Mojica in favor of
the appellant (Exhibit 2), the latter acquired the rights of the assignor to two Congeneric bills
Nos. 1298 for P111,973.58 which matured on August 6, 1974 (Exhibit 3) and No. 1419 for

P208,666.67 which matured on August 13, 1974 (Exhibit 4) or a total of P320,640.25. As of

September 9, 1974, therefore, said bills were already due and demandable.
"On the other hand, appellants obligation in favor of Congeneric matured on August 5, 1974. As
a result defendant-appellant became both a debtor and a creditor of Congeneric. A debtor to the
extent of P400,000.00 under the Negotiable Certificate of Indebtedness (Exhibit 1) and a
creditor for the sum of P320,640.25. By operation of law, there was partial compensation to the
extent of P320,640.25 (Articles 1281 & 1290, New Civil Code).
x

"As a consequence of compensation, the obligation of defendant-appellant to Congeneric as of

September 9, 1974 was reduced to P79,359.75.
"On October 7, 1974, Defendant-Appellant was served notices of garnishment in connection with
Civil Cases Nos. 20043 and 20044 of the Court of First Instance of Rizal against Congeneric. It
consists in the citation of some stranger to the litigation, who is debtor to one of the parties to
the action. By this means such debtor stranger becomes a forced intervenor, and the court,
having acquired jurisdiction over his person by means of the citation, requires him to pay his
debt, not to his former creditor, but to the new creditor, who is the creditor in the main
litigation. It is merely a case of involuntary novation by the substitution of one creditor for
another (Tayabas Land Co. v. Sharuff, 41 Phil. 382, 387). Consequently, DefendantAppellant held the amount it still owed Congeneric, which is P79,359.75, as any payment to the
creditor by the debtor after the latter has been judicially ordered to retain the debt shall not be
valid (see Article 1243, New Civil Code). On November 15, 1975, the garnished amount was
delivered by the appellant to the deputy sheriff (Exhibit 5). Consequently, the balance of the
obligation of defendant-appellant to Congeneric in the sum of P79,359.75 was extinguished and
therefore no longer obligated under its Negotiable Certificate of Indebtedness.
". . . the evidence on record disclosed no notice to defendant-appellant of the purchase by
appellee of part of defendant-appellants obligation prior to compensation and consequently its
non-liability to appellee.
"Prior to the telephone call of Mr. Dumadag to Mr. Jesus G. Sanchez on October 7, 1974
disclosing the sale to appellee by Congeneric of part of its promissory note, appellant was
unaware of the sale. In fact, it was the first time that it came to know of the transaction (tsn.
pp. 11-12 S, August 10, 1976) so much so that upon maturity of the note on August 5, 1974,
appellant made a partial payment of P100,000.00 not to appellee but to Congeneric. The
telephone advice to the appellant which was confirmed in writing or October 8, 1974 was too
late. By that time the entire obligation of appellant was already extinguished by payment,
compensation and novation. A debtor who, before having knowledge of the assignment, pays his
creditor is released from his obligation (Article 1626, New Civil Code).
"Appellant correctly invoked compensation as a defense, for under Article 1285, 3rd paragraph

If the assignment is made without the knowledge of the debtor, he may set up compensation of
all credits prior to the same and also later ones until he had knowledge of the assignment."
If, in fact, Bill No. 1298 and Bill No. 1419 were due and demandable on September 9, 1974, the
date of the assignment from MOJICA to MEVER, or on October 3, 1974, the date of surrender of
said Bills by MEVER to CONGENERIC, it could be rightfully said that legal compensation had
taken place. As pointed out by CORAZON, however, said two bills contain the following
notations:jgc:chanrobles.com.ph
"Bill No. 1298 Paid 8/6/74 interest only, principal roll over up to 10/4/74 (Annexes A-1, A-2,
Petitioners Reply Brief; Exh. 3, Folder of Exhibits).
"Bill No. 1419 Paid 8/13/74 interest only, principal roll over up to 10/11/74 (Annexes A, A-3,
ibid.; Exh. 3-A, Folder of Exhibits).
Since, on the respective dates of maturity, specifically, August 6, 1974 and August 13, 1974,

respectively, Ramon C. Mojica was still the holder of those bills, it can be safely assumed that it
was he who had asked for the roll-overs on the said dates. MEVER was bound by the roll-overs
since the assignment to it was made only on September 9, 1974. The inevitable result of the
roll-overs of the principals was that Bill No. 1298 and Bill No. 1419 were not yet due and
demandable as of the date of their assignment by MOJICA to MEVER on September 9, 1974, nor
as of October 3, 1974 when MEVER surrendered said Bills to CONGENERIC. As a consequence,
no legal compensation could have taken place because, for it to exist, the two debts, among
other requisites, must be due and demandable.chanrobles.com:cralaw:red
"Art. 1279. In order that compensation may be proper, it is necessary:jgc:chanrobles.com.ph
"(1) That each one of the obligors be found principally, and that he be at the same time a
principal creditor of the other;
"(2) That both debts consist in a sum of money, or if the things due are consumable, they be of
the same kind, and also of the same quality if the latter has been stated;
"(3) That the two debts be due;
"(4) That they be liquidated and demandable;
"(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor."cralaw virtua1aw library
We note that the xerox copies of Bill No. 1298 and Bill No. 1419 attached by MEVER to its Brief
do not contain the "roll-over" notations. However, MEVERs own exhibits before respondent
Appellate Court, Exhibits "3" and "3-A", do show those notations and MEVER must be held
bound by them. And although this issue may not have been squarely raised below, in the
interest of substantial justice this Court is not prevented from considering such a pivotal factual
matter that had been overlooked by the Courts below. 2 The Supreme Court is clothed with
ample authority to review palpable errors not assigned as such if it finds that their consideration
is necessary in arriving at a just decision. 3
There is another aspect to this case. What is involved here is a money market transaction. As
defined by Lawrence Smith "the money market is a market dealing in standardized short-term
credit instruments (involving large amounts) where lenders and borrowers do not deal directly
with each other but through a middle man or dealer in the open market." It involves
"commercial papers" which are instruments "evidencing indebtedness of any person or
entity . . ., which are issued, endorsed, sold or transferred or in any manner conveyed to
another person or entity, with or without recourse." 4 The fundamental function of the money
market device in its operation is to match and bring together in a most impersonal manner both
the "fund users" and the "fund suppliers." The money market is an "impersonal market", free
from personal considerations." 5 The market mechanism is intended to provide quick mobility of
money and securities." 6
The impersonal character of the money market device overlooks the individuals or entities
concerned. The issuer of a commercial paper in the money market necessarily knows in advance
that it would be expeditiously transacted and transferred to any investor/lender without need of
notice to said issuer. In practice, no notification is given to the borrower or issuer of commercial
paper of the sale or transfer to the investor.
Accordingly, we find no applicability herein of Article 1285, 3rd paragraph of the Civil Code.
Rather, it is the first paragraph of the same legal provision that is
applicable:jgc:chanrobles.com.ph
"ART. 1285. The debtor who has consented to the assignment of rights made by a creditor in
favor of a third person, cannot set up against the assignee the compensation which would
pertain to him against the assignor, unless the assignor was notified by the debtor at the time
he gave his consent, that he reserved his right to the compensation."cralaw virtua1aw library
x

There is need to individuate a money market transaction, a relatively novel institution in the
Philippine commercial scene. It has been intended to facilitate the flow and acquisition of capital
on an impersonal basis. And as specifically required by Presidential Decree No. 678, the
investing public must be given adequate and effective protection in availing of the credit of a
borrower in the commercial paper market.
WHEREFORE, the judgment of respondent Appellate Court, dated September 3, 1979 as well as
its Resolution dated January 16, 1981 is hereby reversed, and that of the then Court of First
Instance of Manila, Branch XXXI, dated December 27, 1976, hereby reinstated.
SO ORDERED.

G. R. No. L-74027 December 7, 1989

SILAHIS MARKETING CORPORATION, petitioner
vs.
INTERMEDIATE APPELLATE COURT and GREGORIO DE LEON, doing business under the name and
style of "MARK INDUSTRIAL SALES", respondents.
Jaime V. Villanueva for petitioner.

There is no question that the defendant received from the plaintiff the items contained
in Exhs. 'A' to 'F'. The only question is whether or not the defendant is entitled to set off
against the claim of the plaintiff the amount contained in the debit memo of the
defendant, Exh. '1', and whether or not the defendant is entitled to return the steel wire
mesh which was returned to them by Borden Philippines, as shown by Exhs. '6-A' and
'6-B'. The Court believes that the defendant is properly chargeable for the amounts of
the unpaid invoices set forth in the complaint. However, the Court also believes that the
plaintiff is also properly chargeable for the debit memo of P 22,200.00, Exh. '1'. This is
because it was proven by the defendant from the testimonies of Isaias Fernando, Jr.
and Jose Joel Tamon that contrary to the agreement between plaintiff and defendant
that the latter was to serve the account of Dole Philippines in Davao, the plaintiff made
a direct sale of sprockets for P 111,000.00 which therreby deprives the defendant of its
corresponding commission for P 22,200.00 which the defendant would have otherwise
made if the plaintiff had followed its previous arrangement with the defendant.
However, as to the counterclaim of the defendant for a cancellation of the amount of P
6,000.00 for defective stainless screen wire purchased and intended for Borden
International, Davao City, the Court believes that it is much too late now to present said
claim because the purchase was made and delivered as early as December 22,1975
and the proposed return to the defendant by Borden was made on April 1, 1976 only.
The Court is not ready to award damages to any of the parties. After deducting the
amount of P 22,200.00, which is the unpaid commission of the defendant from the
principal total amount of the unpaid invoices of the plaintiff of P 22,213.75, the unpaid
balance in favor of the plaintiff is P 13.75. The claim for interest and attorney's fees of
the plaintiff may be offset against the interest and attorney's fees of the defendant.

Tinga, Fuentes, Tagle & Malate for private respondent.

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendant ordering the defendant to pay to the plaintiff the amount of P 13.75, with
interest at 12% per annum from the date of the filing of the action on July 1, 1976 until
fully paid, without pronouncement as to costs.

FERNAN, C.J.

SO ORDERED. 2

Petitioner Silahis Marketing Corporation seeks in this petition for review on certiorari a reversal of the decision
of the then Intermediate Appellate Court (IAC) in AC-G.R. CV No. 67162 entitled "De Leon, etc. v. Silahis
Marketing Corporation", disallowing petitioner's counterclaim for commission to partially offset the claim
against it of private respondent Gregorio de Leon for the purchase price of certain merchandise.
A review of the record shows that on various dates in October, November and December, 1975, Gregorio de
Leon (De Leon for short) doing business under the name and style of Mark Industrial Sales sold and delivered
to Silahis Marketing Corporation (Silahis for short) various items of merchandise covered by several invoices
in the aggregate amount of P 22,213.75 payable within thirty (30) days from date of the covering invoices.
Allegedly due to Silahis' failure to pay its account upon maturity despite repeated demands, de Leon filed
before the then Court of First Instance of Manila a complaint for the collection of the said accounts including
accrued interest thereon in the amount of P 661.03 and attorney's fees of P 5,000.00 plus costs of litigation.
The answer admitted the allegations of the complaint insofar as the invoices were concerned but presented as
affirmative defenses; [al a debit memo for P 22,200.00 as unrealized profit for a supposed commission that
Silahis should have received from de Leon for the sale of sprockets in the amount of P 111,000.00 made
directly to Dole Philippines, Incorporated by the latter sometime in August 1975 without coursing the same
through the former allegedly in violation of the usual practice concerning sale of merchandise to Dole
Philippines, Inc.; and [b] Silahis' claim that it is entitled to return the stainless steel screen covered by Exhibits
'6-A' and '6-B' which was found defective by its client, Borden International, Davao City, and to have the
corresponding amount cancelled from its account with de Leon.
In a decision dated August 25, 1978, 1 the lower court confirmed the liability of Silahis for the claim of de Leon
but at the same time ordered that it be partially offset by Silahis' counterclaim as contained in the debit memo
for unrealized profit and commission. Judge Bienvenido C. Ejercito of said court held:

De Leon appealed from the said decision insofar as it directed partial compensation and its failure to award
interest on his principal claim as well as attomey's fees in his favor. In a decision dated March 1 7,
1986, 3respondent Intermediate Appellate Court 4 set aside the decision of the lower court and dismissed
herein petitioner's (therein defendant- appellee's) counterclaim for lack of factual or legal basis. The appellate
court found that there was no agreement, verbal or otherwise, nor was there any contractual obligation
between De Leon and Silahis prohibiting any direct sales to Dole Philippines, Inc. by de Leon; nor was there
anything in the debit memo obligating de Leon to pay a commission to Silahis for the sale of P 111,000.00
worth of sprockets to Dole Philippines although in the past, the former did supply certain items to the latter for
delivery to Dole Philippines, Incorporated.
Hence, in this petition for review on certiorari, the central issue is whether or not private respondent is liable to
the petitioner for the commission or margin for the direct sale which the former concluded and consummated
with Dole Philippines, Incorporated without coursing the same through herein petitioner.
We have carefully gone over the record of this case particularly the debit memo upon which petitioner's
counterclaim rests and found nothing contained therein to show that private respondent obligated himself to
set-off or compensate petitioner's outstanding accounts with the alleged unrealized commission from the
assailed sale of sprockets in the amount of P 111,000.00 to Dole Philippines, Inc.
It must be remembered that compensation takes place when two persons, in their own right, are creditors and
debtors to each other. Article 1279 of the Civil Code provides that: "In order that compensation may be proper,
it is necessary: [1] that each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other; [2] that both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the latter has been stated; [3] that the
two debts be due; [4] that they be liquidated and demandable; [5] that over neither of them there be any
retention or controversy, commenced by third persons and communicated in due time to the debtor.

When all the requisites mentioned in Art. 1279 of the Civil Code are present, compensation takes effect by
operation of law, even without the consent or knowledge of the creditors and debtors. 5 Article 1279 requires,
among others, that in order that legal compensation shall take place, "the two debts be due" and "they be
liquidated and demandable." Compensation is not proper where the claim of the person asserting the set-off
against the other is not clear nor liquidated; compensation cannot extend to unliquidated, disputed claim
existing from breach of contract. 6
Undoubtedly, petitioner admits the validity of its outstanding accounts with private respondent in the amount of
P 22,213.75 as contained in its answer. But whether private respondent is liable to pay the petitioner a 20%
margin or commission on the subject sale to Dole Philippines, Inc. is vigorously disputed. This circumstance
prevents legal compensation from taking place.
The Court agrees with respondent appellate court that there is no evidence on record from which it can be
inferred that there was any agreement between the petitioner and private respondent prohibiting the latter from
selling directly to Dole Philippines, Incorporated. Definitely, it cannot be asserted that the debit memo was a
contract binding between the parties considering that the same, as correctly found by the appellate court, was
not signed by private respondent nor was there any mention therein of any commitment by the latter to pay
any commission to the former involving the sale of sprockets to Dole Philippines, Inc. in the amount of P
111,000.00. Indeed, such document can be taken as self-serving with no probative value absent a showing or
at the very least an inference, that the party sought to be bound assented to its contents or showed conformity
thereto.

Subsequently, on February 15, 1957, after remand by the Court of Appeals of the case, the petitioner
moved ex parte in the court of origin for the issuance of the corresponding writ of execution to enforce the
judgment. Acting upon the motion, the lower court issued the writ of execution applied for, on the basis of
which the sheriff of Manila seized the respondent's Willy's Ford jeep (with motor no. B-192297 and plate no.
7225, Manila, 1956).
The respondent, however, pleaded with the petitioner to release the jeep under an arrangement whereby the
respondent, to secure the payment of the judgement debt, agreed to mortgage the vehicle in favor of the
petitioner. The petitioner agreed to the arrangement; thus, the parties, on February 22, 1957, executed a
chattel mortgage on the jeep, stipulating, inter alia, that
This mortgage is given as security for the payment to the said EUSEBIO S. MILLAR,
mortgagee, of the judgment and other incidental expenses in Civil Case No. 27116 of
the Court of First Instance of Manila against Antonio P. Gabriel, MORTGAGOR, in the
amount of ONE THOUSAND SEVEN HUNDRED (P1,700.00) PESOS, Philippine
currency, which MORTGAGOR agrees to pay as follows:
March 31, 1957 EIGHT HUNDRED FIFTY (P850) PESOS;
April 30, 1957 EIGHT HUNDRED FIFTY (P850.00) PESOS.

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

Upon failure of the respondent to pay the first installment due on March 31, 1957, the petitioner obtained an
alias writ of execution. This writ which the sheriff served on the respondent only on May 30, 1957 after the
lapse of the entire period stipulated in the chattel mortgage for the respondent to comply with his obligation
was returned unsatisfied.

WHEREFORE, in view of the foregoing, the questioned decision of respondent appellate court is hereby
AFFIRMED.

So on July 17, 1957 and on various dates thereafter, the lower court, at the instance of the petitioner, issued
several alias writs, which writs the sheriff also returned unsatisfied. On September 20, 1961, the petitioner
obtained a fifth alias writ of execution. Pursuant to this last writ, the sheriff levied on certain personal
properties belonging to the respondent, and then scheduled them for execution sale.

SO ORDERED.
G.R. No. L-29981 April 30, 1971
EUSEBIO S. MILLAR, petitioner,
vs.
THE HON. COURT OF APPEALS and ANTONIO P. GABRIEL, respondents.
Fernandez Law Office and Millar and Esguerra for petitioner.

However, on November 10, 1961, the respondent filed an urgent motion for the suspension of the execution
sale on the ground of payment of the judgment obligation. The lower court, on November 11, 1961, ordered
the suspension of the execution sole to afford the respondent the opportunity to prove his allegation of
payment of the judgment debt, and set the matter for hearing on November 25, 1961. After hearing, the lower
court, on January 25, 1962, issued an order the dispositive portion of which reads:
IN VIEW WHEREOF, execution reiterated for P1,700.00 plus costs of execution.
The lower court ruled that novation had taken place, and that the parties had executed the chattel mortgage
only "to secure or get better security for the judgment.

Francisco de la Fuente for respondents.

The respondent duly appealed the aforesaid order to the Court of Appeals, which set aside the order of
execution in a decision rendered on October 17, 1968, holding that the subsequent agreement of the parties
impliedly novated the judgment obligation in civil case 27116.
CASTRO, J.:
On February 11, 1956, Eusebio S. Millar (hereinafter referred to as the petitioner) obtained a favorable
judgment from the Court of First Instance of Manila, in civil case 27116, condemning Antonio P. Gabriel
(hereinafter referred to as the respondent) to pay him the sum of P1,746.98 with interest at 12% per annum
from the date of the filing of the complaint, the sum of P400 as attorney's fees, and the costs of suit. From the
said judgment, the respondent appealed to the Court of Appeals which, however, dismissed the appeal on
January 11, 1957.

The appellate court stated that the following circumstances sufficiently demonstrate the incompatibility
between the judgment debt and the obligation embodied in the deed of chattel mortgage, warranting a
conclusion of implied novation:
1. Whereas the judgment orders the respondent to pay the petitioner the sum of P1,746.98 with interest at
12% per annum from the filing of the complaint, plus the amount of P400 and the costs of suit, the deed of
chattel mortgage limits the principal obligation of the respondent to P1,700;

2. Whereas the judgment mentions no specific mode of payment of the amount due to the petitioner, the deed
of chattel mortgage stipulates payment of the sum of P1,700 in two equal installments;
3. Whereas the judgment makes no mention of damages, the deed of chattel mortgage obligates the
respondent to pay liquidated damages in the amount of P300 in case of default on his part; and
4. Whereas the judgment debt was unsecured, the chattel mortgage, which may be foreclosed extrajudicially
in case of default, secured the obligation.
On November 26, 1968, the petitioner moved for reconsideration of the appellate court's decision, which
motion the Court of Appeals denied in its resolution of December 7, 1968. Hence, the present petition
for certiorari to review the decision of the Court of Appeals, seeking reversal of the appellate court's decision
and affirmance of the order of the lower court.
Resolution of the controversy posed by the petition at bar hinges entirely on a determination of whether or not
the subsequent agreement of the parties as embodied in the deed of chattel mortgage impliedly novated the
judgment obligation in civil case 27116. The Court of Appeals, in arriving at the conclusion that implied
novation has taken place, took into account the four circumstances heretofore already adverted to as
indicative of the incompatibility between the judgment debt and the principal obligation under the deed of
chattel mortgage.
1. Anent the first circumstance, the petitioner argues that this does not constitute a circumstance in implying
novation of the judgment debt, stating that in the interim from the time of the rendition of the judgment in
civil case 27116 to the time of the execution of the deed of chattel mortgage the respondent made partial
payments, necessarily resulting in the lesser sum stated in the deed of chattel mortgage. He adds that on
record appears the admission by both parties of the partial payments made before the execution of the deed
of chattel mortgage. The erroneous conclusion arrived at by the Court of Appeals, the petitioner argues,
creates the wrong impression that the execution of the deed of chattel mortgage provided the consideration or
the reason for the reduced judgment indebtedness.
Where the new obligation merely reiterates or ratifies the old obligation, although the former effects but minor
alterations or slight modifications with respect to the cause or object or conditions of he latter, such changes
do not effectuate any substantial incompatibility between the two obligations Only those essential and principal
changes introduced by the new obligation producing an alteration or modification of the essence of the old
obligation result in implied novation. In the case at bar, the mere reduction of the amount due in no sense
constitutes a sufficient indictum of incompatibility, especially in the light of (a) the explanation by the petitioner
that the reduced indebtedness was the result of the partial payments made by the respondent before the
execution of the chattel mortgage agreement and (b) the latter's admissions bearing thereon.
At best, the deed of chattel mortgage simply specified exactly how much the respondent still owed the
petitioner by virtue of the judgment in civil case 27116. The parties apparently in their desire to avoid any
future confusion as to the amounts already paid and as to the sum still due, decoded to state with specificity in
the deed of chattel mortgage only the balance of the judgment debt properly collectible from the respondent.
All told, therefore, the first circumstance fails to satisfy the test of substantial and complete incompatibility
between the judgment debt an the pecuniary liability of the respondent under the chattel mortgage agreement.
2. The petitioner also alleges that the third circumstance, considered by the Court of Appeals as indicative of
incompatibility, is directly contrary to the admissions of the respondent and is without any factual basis. The
appellate court pointed out that while the judgment made no mention of payment of damages, the deed of
chattel mortgage stipulated the payment of liquidated damages in the amount of P300 in case of default on the
part of the respondent.

The discrepancy between the amount of P400 and tile sum of P300 fixed as attorney's fees in the judgment
and the deed of chattel mortgage, respectively, is explained by the petitioner, thus: the partial payments made
by the respondent before the execution of the chattel mortgage agreement were applied in satisfaction of part
of the judgment debt and of part of the attorney's fee fixed in the judgment, thereby reducing both amounts.
At all events, in the absence of clear and convincing proof showing that the parties, in stipulating the payment
of P300 as attorney's fees in the deed of chattel mortgage, intended the same as an obligation for the
payment of liquidated damages in case of default on the part of the respondent, we find it difficult to agree with
the conclusion reached by the Court of Appeals.
3. As to the second and fourth circumstances relied upon by the Court of Appeals in holding that the montage
obligation superseded, through implied novation, the judgment debt, the petitioner points out that the appellate
court considered said circumstances in a way not in accordance with law or accepted jurisprudence. The
appellate court stated that while the judgment specified no mode for the payment of the judgment debt, the
deed of chattel mortgage provided for the payment of the amount fixed therein in two equal installments.
On this point, we see no substantial incompatibility between the mortgage obligation and the judgment liability
of the respondent sufficient to justify a conclusion of implied novation. The stipulation for the payment of the
obligation under the terms of the deed of chattel mortgage serves only to provide an express and specific
method for its extinguishment payment in two equal installments. The chattel mortgage simply gave the
respondent a method and more time to enable him to fully satisfy the judgment indebtedness. 1 The chattel
mortgage agreement in no manner introduced any substantial modification or alteration of the judgment.
Instead of extinguishing the obligation of the respondent arising from the judgment, the deed of chattel
mortgage expressly ratified and confirmed the existence of the same, amplifying only the mode and period for
compliance by the respondent.
The Court of Appeals also considered the terms of the deed of chattel mortgage incompatible with the
judgment because the chattel mortgage secured the obligation under the deed, whereas the obligation under
the judgment was unsecured. The petitioner argues that the deed of chattel agreement clearly shows that the
parties agreed upon the chattel mortgage solely to secure, not the payment of the reduced amount as fixed in
the aforesaid deed, but the payment of the judgment obligation and other incidental expenses in civil case
27116.
The unmistakable terms of the deed of chattel mortgage reveal that the parties constituted the chattel
mortgage purposely to secure the satisfaction of the then existing liability of the respondent arising from the
judgment against him in civil case 27116. As a security for the payment of the judgment obligation, the chattel
mortgage agreement effectuated no substantial alteration in the liability of the respondent.
The defense of implied novation requires clear and convincing proof of complete incompatibility between the
two obligations. 2 The law requires no specific form for an effective novation by implication. The test is whether
the two obligations can stand together. If they cannot, incompatibility arises, and the second obligation novates
the first. If they can stand together, no incompatibility results and novation does not take place.
We do not see any substantial incompatibility between the two obligations as to warrant a finding of an implied
novation. Nor do we find satisfactory proof showing that the parties, by explicit terms, intended the full
discharge of the respondent's liability under the judgment by the obligation assumed under the terms of the
deed of chattel mortgage so as to justify a finding of express novation.
ACCORDINGLY, the decision of the Court of Appeals of October 17, 1968 is set aside, and the order of the
Court of First Instance of Manila of January 25, 1962 is affirmed, at respondent Antonio Gabriel's cost.
Concepcion, C. J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Fernando and Makasiar, JJ., concur.

However, the petitioner contends that the respondent himself in his brief filed with the Court of Appeals
admitted his obligation, under the deed of chattel mortgage, to pay the amount of P300 by way of attorney's
fees and not as liquidated damages. Similarly, the judgment makes mention of the payment of the sum of
P400 as attorney's fees and omits any reference to liquidated damages.

Villamor, J., abstains.

Separate Opinions
BARREDO, J., concurring:
I concur. I would like to add the following considerations to the rationale of the main opinion:
As evidenced by the express terms of the chattel mortgage by repondent Gabriel in favor of petitioner Millar, it
was unmistakably the intent of the parties that the said mortgage be merely a "security for the payment to the
said Eusebio Millar, mortgagee, of the judgment and other incidental expenses in Civil Case No. 27116 of the
Court of First Instance of Manila against Antonio P. Gabriel, mortgagor," to be paid in the amount and manner
therein stated. If this can in any sense in which the parties must be held to have newly bound themselves. In
other words, by their explicit covenant, the parties contemplated the chattel mortgage to be a security for the
payment of the judgment and not the payment itself thereof. Such being the case, and it appearing that
respondent Gabriel has not paid the judgment remains unimpaired in its full existence and vigor, and the resort
to the execution thereof thru the ordinary procedure of a writ of execution by the petitioner is an election to
which every mortgage creditor is entitled when he decides to abandon his security.
Teehankee, J., concurs.
G.R. No. L-25897 August 21, 1976
AGUSTIN DORMITORIO and LEONCIA D. DORMITORIO, petitioner
vs.
HONORABLE JOSE FERNANDEZ, Judge of the Court of First Instance of Negros Occidental, Branch
Bacolod City, and SERAFIN LAZALITA, respondents.
Graciano H. Arinday, Jr. for petitioners.
Antonio L. Balinas for respondent.

FERNANDO, Acting C.J.:

The filing of this suit for certiorari could have been avoided had there full awareness by petitioners of the legal
import and significance of a later decision involving the parties. If such were the case, they would have
realized that no grave abuse of discretion, no abuse of discretion for that matter, could be imputed to
respondent Judge for issuing the challenged order, 1 setting aside a writ of execution conformably to a petition
for relief by private respondent Serafin Lazalita. 2 Insofar as pertinent, it is worded thus: "That the abovementioned order of Execution to be set aside is based on the decision of the Honorable Court dated
September 5, 1961 in the above-entitled case which is no longer enforceable, and executory by virtue of the
"Agreed Stipulation of Facts" entered into by the Plaintiffs and Defendants in Civil Case No. 6553, and which
said "Agreed Stipulation of Facts" was the basis for the judgment of the Honorable Court dated February 12,
1965. That the parties and subject matter in Civil Case No. 5111 and Civil Case No. 6553 are the same except
that the plaintiffs in Civil Case No. 5111 were the defendants in Civil Case No. 6553, and vice-versa; ... That in
the "Agreed Stipulation of Facts" in Civil Case No. 6553 which was the basis of the Honorable Court judgment
dated February 12, 1965, it was agreed by the defendant spouses Dormitorio, who are the plaintiffs in Civil
Case No. 5111 that the defendant Serafin Lazalita should be reimbursed for his expenses in transferring his
house to another Lot to be assigned to him by the Municipality of Victorias, and that the Decision in Civil Case
No. 5111 shall not be enforced and executed anymore; That by means of fraud, misrepresentation and
concealment of the true facts of the case, the plaintiffs were able to mislead the Honorable Court, thru an ExParte Motion to issue by mistake an Order for the issuance of a Writ of Execution by making this Honorable
Court believe that the Decision of September 5, 1961 is still enforceable and executory; ..." 3 Respondent
Judge granted the relief prayed for and set aside the writ of execution, in view of the conclusion reached by
him that such later decision, arrived at as the result of a compromise between the same parties, evidenced by

the agreed stipulation of facts, was clear proof of an animus novandi and thus superseded the previous
judgment which as a result of an ex parte motion was mistakenly ordered executed. Such a conclusion is
borne out by a study of the records of the case. certiorari does not lie.
The decision in the aforecited Civil Case No. 6553, which as contended by private respondent, a submission
that earned the approval of respondent Judge, sufficed for the lifting of the writ of execution, pursuant to the
decision in Civil Case No. 5111 deemed superseded, started with a stipulation of facts. Thus: "When this case
was called for hearing the parties submitted an Agreed Stipulation of Facts duly signed by the parties and their
respective counsel, as follows: "[Agreed Stipulation of Facts]," Come now the parties, in the above-entitled
case, represented by their respective counsel and before this Honorable Court, respectfully submit the
following agreed stipulation of facts: 1. That the defendant Municipality of Victorias, is the owner of several
parcels of lands in Victorias, Negros Occidental, known as Lots Nos. 102 and 120 and 138 and 102-New,
which [are] consolidated and subdivided into small lots for sale to the inhabitants thereof; the lots were sold by
the Municipality, either in cash or installment for ten (10) years at [one peso] (P1.00) per square meter; 2. That
on December 7, 1948, the plaintiff Serafin Lazalita, bought from the Municipality of Victorias, Lot No. 1, Block
16 of the consolidated-subdivision plan PCs-118 having an area of Two Hundred Thirty (230) Square Meters,
payable in installment at [one peso] (P1.00) per square meter, and in the year 1958, upon full payment by
plaintiff Lazalita of the purchase price of the land, a deed of definite sale was executed in his favor by the then
Municipal Mayor Montinola of Victorias, Negros Occidental, and thereafter a Certificate of Title No. T-23098
covering the property, was issued him by the Register of Deeds of Bacolod, Negros Occidental; 3. That from
February 7, 1948, until about eight continuous years thereafter, plaintiff had been in full and peaceful
possession of the said land, and he introduced permanent and valuable improvements thereon, [namely] fruit
trees, like coconuts, avocados, pumelos and oranges, which have long been fruit bearing, and built a house of
strong materials, valued at P5,000.00; 4. That plaintiff Lazalita, was placed in possession of the said Lot No. 1,
Block 16 of the subdivision plan of Victorias, by the persons designated by the Municipality to take charge of
the sale of said lots to the people, and from the time, he had occupied by same, up to the present, there has
not been a change in the location thereof, as described in the Certificate of Title covering the property, now
registered in plaintiff's name; 5. That about the year 1955, however, the other co-defendants herein the
spouses Agustin Dormitorio and Leoncia D. Dormitorio, purchased also, from the defendant Municipality of
Victorias, their lot known as Lot 2, Block 16, of the same consolidation-subdivision plan PCs-118, having an
area of Three Hundred Forty-Three (343) Square meters, in cash, at [one peso) (P1.00) per square meter.
Immediately thereafter, the Dormitorios, obtained a transfer Certificate of Title known as T-18189 for their
property, from the Office of the Register of Deeds, Bacolod, Negros Occidental. However, the spouses
Dormitorio, have not taken actual possession of the land, they have purchased from the defendant
Municipality of Victorias, up to the present; 6. That on December 12, 1958, the spouses Dormitorio, brought a
suit against the plaintiff Lazalita, for Ejectment and the conflict between them was made known to the office of
the Municipal Mayor and the Council of Victorias, who tried to settle the matter between the parties
Dormitorio and Lazalita. Later, a private Land Surveyor, was hired by the Municipality of Victorias, and it was
found out, according to said Surveyor, Mr. Ceballos, that the Lot sold by the Municipality of Victorias, to the
plaintiff, was converted into the new Municipal. Road known as "Jover Street" and that the lot presently
occupied by him, is supposed to be the lot No. 2, bought by the spouses Dormitorio from the Municipality of
Victorias; and so, availing of the said discovery, the Court of First Instance of Negros Occidental, Branch V,
Presided over by Hon. Jose F. Fernandez, rendered judgment in that case No. 5111, in favor of Dormitorio,
ordering the plaintiff herein Lazalita, to vacate the land and to pay a monthly rental of P20.00, to said
Dormitorio, besides his Attorney's fees; 7. That Lazalita, having failed to appeal from said judgment in Civil
Case No. 5111 of this Honorable Court, brought this present action, against the Municipality of Victorias, and
joined the Dormitorios, as formal parties, because of the value of his permanent improvements and building
introduced or constructed on Lot No. 2, Block 16, ascertained to be that, very lot purchased by Dormitorio from
the defendant Municipality of Victorias, which building and improvements, have far exceed then, the original
purchase price of the land; 8. That the present fair market value of residential lots in the Poblacion of Victorias,
ranges between P15.00 to P25.00 per square meter and the lots in controversy, are saleable at present, at
P20.00 per square meter; 9. That the Municipality of Victorias, under the present administration, is willing to
amicably settle the case, now before this Honorable Court, by giving the plaintiff another lot, if they could open
their newly proposed subdivision, or pay back Lazalita the amount necessary and just for plaintiff to acquire
another lot for his residence, and for the expenses of transferring his present residential house
thereto. ....:" 4 Then, as noted in the decision, the parties did respectfully pray "that judgment be rendered by
this Honorable Court, on the basis of the foregoing agreed stipulation of facts, and on such other basis just
and equitable, without special pronouncement of costs." 5 So it was granted in the dispositive portion of such
decision: "[Wherefore], judgment is hereby rendered in accordance with the above-mentioned Agreed
Stipulation of Facts." 6

grave abuse of discretion when he set aside the writ of execution is thus clearly apparent. He had no choice
on the matter. That was made even more evident in the answer to the petition filed by respondents. It must
have been the realization by petitioners that certiorari certainly did not lie that led to their not only failing to
make an attempt at a refutation of what was asserted in the answer but also failing to appear at the hearing
when this case was set for oral argument. As noted at the outset, this petition must be dismissed.

REGALA, J.:
Appeal from the decision of the Court of First Instance of Manila ordering the defendants-appellants to pay
jointly and severally to the plaintiff-appellee the sum of P655.89, plus legal interest thereon from date of the
judicial demand, the sum of P100.00 as attorney's fees, and to pay the costs.

1. What was done by respondent Judge in setting aside the writ of execution in Civil Case No. 5111 finds
The appellants bought from the appellee a parcel of land in Quezon City known as Lot 7-K-2-G, Psd-26193. In
support in the applicable authorities. There is this relevant excerpt in Barretta v. Lopez, 7 this Court speaking
view of an unpaid balance of P5,000.00 on account of the purchase price of the lot, the appellants executed
through the then Chief Justice Paras: "Alleging that the respondent judge of the municipal court had acted in
on January 4, 1957, the following promissory note representing the said account:
excess of her jurisdiction and with grave abuse of discretion in issuing the writ of execution of December 15,
1947, the petitioner has filed the present petition for certiorari and prohibition for the purpose of having said
writ of execution annulled. Said petition is meritorious. The agreement filed by the parties in the ejectment
NOTE
case created as between them new rights and obligations which naturally superseded the judgmentPROMISSORY
of the
municipal court." 8 In Santos v. Acua, 9 it was contended that a lower court decision was novated by
subsequent agreement of the parties. Implicit in this Court's ruling is that such a plea would merit approval if
indeed that was what the parties intended. Nonetheless, it was not granted, for as explained by
the ponente,Justice J. B. L. Reyes: "Appellants understood and expressly agreed to be bound by this
condition, when they stipulated that "they will voluntarily deliver and surrender possession of the premises to
the plaintiff in such event" ... Hence, it is plain that in no case were the subsequent arrangements entered into
with any unqualified intention to discard or replace the judgment in favor of the plaintiff-appellee; and without
Manila, January 4, 1957
such intent or animus novandi, no substitution of obligations could possibly take place." 10 Can there be any
doubt that if it could be shown, as it was in this case, that there was such clear manifestation of will by the
parties, the original decision had lost force and effect? To ask the question is to answer it. The presence of
the animus novandi is undeniable. Nor is there anything novel in such an approach. So it was notedWe,
by then
the Spouses ANTONIO A. RODRIGUEZ and HERMINIA C. RODRIGUEZ, jointly and severally promise to pay the Magdalena Estates, Inc., o
Chief Justice Concepcion in De los Santos v. Rodriguez: 11 "As early as Molina v. De la Riva the principle
has in the City of Manila, without any demand the sum of FIVE THOUSAND PESOS (P5,000.00), Philippine currency, with interest at the rat
its offices
been laid down that, when, after judgment has become final, facts and circumstances transpire which
Perrender
Cent 9% per annum, within sixty (60) days from January 7, 1957. The sum of P5,000.00 represents the balance of the purchase price of the p
its execution impossible or unjust, the interested party may ask the court to modify or alter the judgment
land to
known as Lot 7-K-2-G, Psd. 26193, containing an area of 2,191 square meters, Quezon City.
harmonize the same with justice and the facts" 12 Molina v. de la Riva 13 was a 1907 decision. Again, the
present case is far stronger, for there is a later decision expressly superseding the earlier one relied upon on
which the writ of execution thereafter set aside was based.
(Sgd.) Antonio A. Rodriguez
( T ) ANTONIO A. RODRIGUEZ
2. Nor can it be denied that as the later decision in Civil Case No. 6553 was the result of a compromise, it had
14
the effect of res judicata. This was made clear in Salazar v. Jarabe. There are later decisions to the
sameHerminia C. Rodriguez
(Sgd.)
effect. 15The parties were, therefore, bound by it. There was thus an element of bad faith when petitioners
did
( T ) HERMINIA
C. RODRIGUEZ
try to evade its terms. At first, they were quite successful. Respondent Judge, however, upon being duly
informed, set matters right. He set aside the writ of execution. That was to act in accordance with law. He is to
be commended, not condemned.
Signed in the Presence of:
3. There is no merit likewise to the point raised by petitioners that they were not informed by respondent Judge
of the petition by private respondent to set aside the writ of execution. The order granting such petition
wasILLEGIBLE
the
(Sgd.)
subject of a motion for reconsideration. 16 The motion for reconsideration was thereafter denied. 17 Under the
18
circumstances, the failure to give notice to petitioners had been cured. That is a well-settled doctrine.
Their
(Sgd.)
ILLEGIBLE
complaint was that they were not heard. They were given the opportunity to file a motion for reconsideration.
So they did. That was to free the order from the alleged infirmity. Petitioners then cannot be heard to claim that
they were denied procedural due process.

On the same date, the appellants and the Luzon Surety Co., Inc. executed a bond in favor of the appellee, the
undertaking thereof being embodied therein as follows:

WHEREFORE, the petition for certiorari is dismissed. Costs against petitioners.

G.R. No. L-18411

December 17, 1966

MAGDALENA ESTATES, INC., plaintiff-appellee,

vs.
ANTONIO A. RODRIGUEZ and HERMINIA C. RODRIGUEZ, defendants-appellants.
Roxas and Sarmiento for plaintiff-appelle.
Somero, Baclig and Savello for defendants-appellants.

. . . comply with the obligation to pay the amount of P5,000.00 representing balance of the purchase price of a
parcel of land known as Lot 7-K-2-G, Psd-26193, with an area of 2191 square meters, Quezon City, covered
by Transfer Certificate of Title No. 13 (6947), Quezon City, within a period of sixty (60) days from January 7,
1957; That the Surety shall be notified in writing within Ten (10) days from moment of default otherwise, this
undertaking is automatically null and void.
On June 20, 1958, when the obligation of the appellants became due and demandable, the Luzon Surety Co.,
Inc. paid to the appellee the sum of P5,000.00. Subsequently, the appellee demanded from the appellants the
payment of P655.89 corresponding to the alleged accumulated interests on the principal of P5,000.00. Due to
the refusal of the appellants to pay the said interest, the appellee started this suit in the Municipal Court of
Manila to enforce the collection thereof. The said court, on February 5, 1959, rendered judgment in favor of
the appellee and against the appellants, ordering the latter to pay jointly and severally the appellee the sum of

P655.89 with interest thereon at the legal rate from November 10, 1958, the date of the filing of the complaint,
until the whole amount is fully paid. Not satisfied with that judgment, appellants appealed to the Court of First
Instance of Manila, where the case was submitted for decision on the pleadings. The Court of First Instance of
Manila rendered the judgment stated at the outset of this decision.
On appeal directly to this Court, the following errors are assigned:
I. The lower court erred in concluding as a fact from the pleadings that the plaintiff-appellee demanded, and
the Luzon Surety Co., Inc. refused, the payment of interest in the amount of P655.89, and in not finding and
declaring that said plaintiff-appellee waived or condoned the said interests.
II. The lower court erred in not finding and declaring that the obligation of the defendants-appellants in favor of
the plaintiff-appellee was totally extinguished by payment and/or condonation.
III. The lower court erred in not finding and declaring that the promissory note executed by the defendantsappellants in favor of the plaintiff-appellee was, insofar as the said document provided for the payment of
interests, novated when the plaintiff-appellee unqualifiedly accepted the surety bond which merely guaranteed
payment of the principal in the sum of P5,000.00.
Appellants claim that the pleadings do not show that there was demand made by the appellee for the payment
of accrued interest and what could be deduced therefrom was merely that the appellee demanded from the
Luzon Surety Co., Inc., in the capacity of the latter as surety, the payment of the obligation of the appellants,
and said appellee accepted unqualifiedly the amount of P5,000.00 as performance by the obligor and/or
obligors of the obligation in its favor. It is further claimed that the unqualified acceptance of payment made by
the Luzon Surety Co., Inc. of P5,000.00 or only the amount of the principal obligation and without exercising its
(appellee's) right to apply a portion of P655.89 thereof to the payment of the alleged interest due despite its
presumed knowledge of its right to do so, the appellee showed that it waived or condoned the interests due,
because Articles 1235 and 1253 of the Civil Code provide:
ART. 1235. When the obligee accepts the performance, knowing its incompleteness or irregularity, and without
expressing any protest or objection, the obligation is deemed fully complied with.
ART. 1253. If the debt produces interest, payment of the principal shall not be deemed to have been made
until the interests have been recovered.
We do not agree with the contention of the appellants. It is very clear in the promissory note that the principal
obligation is the balance of the purchase price of the parcel of land known as Lot 7-K-2-G, Psd-26193, which
is the sum of P5,000.00, and in the surety bond, the Luzon Surety Co., Inc. undertook "to pay the amount of
P5,000.00 representing balance of the purchase price of a parcel of land known as Lot 7-K-2-G, Psd-26193, . .
. ." The appellee did not protest nor object when it accepted the payment of P5,000.00 because it knew that
that was the complete amount undertaken by the surety as appearing in the contract. The liability of a surety is
not extended, by implication, beyond the terms of his contract. 1 It is for the same reason that the appellee
cannot apply a part of the P5,000.00 as payment for the accrued interest. Appellants are relying on Article
1253 of the Civil Code, but the rules contained in Articles 1252 to 1254 of the Civil Code apply to a person
owing several debts of the same kind of a single creditor. They cannot be made applicable to a person whose
obligation as a mere surety is both contingent and singular; his liability is confined to such obligation, and he is
entitled to have all payments made applied exclusively to said application and to no other. 2 Besides, Article
1253 of the Civil Code is merely directory, and not mandatory.3 Inasmuch as the appellee cannot protest for
non-payment of the interest when it accepted the amount of P5,000.00 from the Luzon Surety Co., Inc., nor
apply a part of that amount as payment for the interest, we cannot now say that there was a waiver or
condonation on the interest due.
It is claimed that there was a novation and/or modification of the obligation of the appellants in favor of the
appellee because the appellee accepted without reservation the subsequent agreement set forth in the surety
bond despite its failure to provide that it also guaranteed payment of accruing interest.

The rule is settled that novation by presumption has never been favored. To be sustained, it needs to be
established that the old and new contracts are incompatible in all points, or that the will to novate appears by
express agreement of the parties or in acts of similar import.4
An obligation to pay a sum of money is not novated, in a new instrument wherein the old is ratified, by
changing only the terms of payment and adding other obligations not incompatible with the old one, 5 or
wherein the old contract is merely supplemented by the new one. 6 The mere fact that the creditor receives a
guaranty or accepts payments from a third person who has agreed to assume the obligation, when there is no
agreement that the first debtor shall be released from responsibility does not constitute a novation, and the
creditor can still enforce the obligation against the original debtor. (Straight v. Haskel, 49 Phil. 614; Pacific
Commercial Co. v. Sotto, 34 Phil. 237; Estate of Mota v. Serra, 47 Phil. 464; Dugo v. Lopena, supra ). In the
instant case, the surety bond is not a new and separate contract but an accessory of the promissory note.
WHEREFORE, the judgment appealed from should be, as it is hereby, affirmed, with costs against the
appellants.
G.R. No. 120817 November 4, 1996
ELSA B. REYES, petitioner,
vs.
COURT OF APPEALS, SECRETARY OF JUSTICE, AFP-MUTUAL BENEFIT ASSOCIATION, INC., and
GRACIELA ELEAZAR, respondents.

TORRES, JR., J.:

Petitioner assails the respondent court's decision 1 dated May 12, 1995 which sustained the two resolutions of
the respondent Secretary of Justice, namely: 1) the Resolution dated January 23, 1992 affirming the resolution
of the Provincial Prosecutor of Rizal dismissing the complaints of petitioner against private respondent Eleazar
in I.S. Nos. 91-2853, 91-4328 to 29, 91-4585 to 91 and 91-4738 to 39 for violations of B.P. Blg. 22 and estafa
under Article 315, par. 4, no. 2 (d) of the Revised Penal Code, and 2) the Resolution dated January 12, 1993
affirming the resolution of the City Prosecutor of Quezon City finding a prima facie case in I.S. No. 92-926 for
violation of B.P. Blg. 22 and estafa filed by respondent AFP-Mutual Benefit Association, Inc. (AFP-MBAI, for
brevity) against petitioner Reyes.
The facts as summarized by the respondent court are as follows:
Elsa Reyes is the president of Eurotrust Capital Corporation (EUROTRUST), a domestic corporation engaged
in credit financing. Graciela Eleazar, private respondent, is the president of B.E. Ritz Mansion International
Corporation (BERMIC), a domestic enterprise engaged in real estate development. The other respondent,
Armed Forces of the Philippines Mutual Benefit Asso., Inc. (AFP-MBAI), is a corporation duly organized
primarily to perform welfare services for the Armed Forces of the Philippines.
A. Re: Resolution dated January 23, 1992.
In her various affidavits-complaint with the Office of the Provincial Prosecutor of Rizal, Elsa Reyes alleges that
Eurotrust and Bermic entered into a loan agreement. Pursuant to the said contract, Eurotrust extended to
Bermic P216.053,126.80 to finance the construction of the latter's Ritz Condominium and Gold Business Park.
The loan was without collateral but with higher interest rates than those allowed by the banks. In turn, Bermic
issued 21 postdated checks to cover payments of the loan packages. However, when those checks were
presented for payment, the same were dishonored by the drawee bank, Rizal Commercial Banking
Corporation (RCBC), due to stop payment order made by Graciela Eleazar. Despite Eurotrust's notices and
repeated demands to pay, Eleazar failed to make good the dishonored checks, prompting Reyes to file against

her several criminal complaints for violation of B.P. 22 and estafa under Article 315, 4th paragraph, No. 2 (d) of
the Revised Penal Code.
Graciela Eleazar, in her counter-affidavits, asserts that beginning December 1989, Eurotrust extended to
Bermic several loan packages amounting to P190,336,388.86. For its part, Bermic issued several postdated
checks to cover payments of the principal and interest of every a loan packages involved.
Subsequently, Elsa Reyes was investigated by the Senate Blue Ribbon Committee. She was involved in a
large scale scam amounting to millions of pesos belonging to Instructional Material Corporation (IMC), an
agency under the Department of Education, Culture and Sports.
Meanwhile, respondent AFP-MBAI which invested its funds with Eurotrust, by buying from it government
securities, conducted its own investigation and found that after Eurotrust delivered to AFP-MBAI the securities
it purchased, the former borrowed the same securities but failed to return them to AFP-MBAI; and that the
amounts paid by AFP-MBAI to Eurotrust for those securities were in turn lent by Elsa Reyes to Bermic and
others.
When Eleazar came to know that the funds originally loaned by Eurotrust to Bermic belonged to AFP-MBAI,
she, as President of Bermic, requested a meeting with Eurotrust representatives. Thus, on February 15, 1991,
the representatives of Eurotrust and Bermic agreed that Bermic would directly settle its obligations with the
real owners of the fund-AFP-MBAI and DECS-IMC. This agreement was formalized in two letters dated March
19, 1991. Pursuant to this understanding, Bermic negotiated with AFP-MBAI and DECS-IMC and made
payments to the latter. In fact, Bermic paid AFP-MBAI P31,711.11 and a check of P1-million.
However, Graciela Eleazar later learned that Elsa Reyes continued to collect on the postdated checks issued
by her (Eleazar) contrary to their agreement. So, Bermic wrote to Eurotrust to hold the amounts "in
constructive trust" for the real owners. But Reyes continued to collect on the other postdated checks dated
April 17 to June 28, 1991. Upon her counsel's advise, Eleazar had the payment stopped. Hence, her checks
issued in favor of Eurotrust were dishonored.
After investigation, the Office of the Provincial Prosecutor of Rizal issued a resolution dismissing the
complaints filed by Elsa Reyes against Graciela Eleazar on the ground that when the latter assumed the
obligation of Reyes to AFP-MBAI, it constituted novation, extinguishing any criminal liability on the part of
Eleazar.
Reyes filed a petition for review of the said resolution with respondent Secretary of Justice contending that
novation did not take place.
The Secretary of Justice dismissed the petition holding that "the novation of the loan agreement prevents the
rise of any incipient criminal liability since the novation had the effect of canceling the checks and rendering
without effect the subsequent dishonor of the already cancelled checks."

treasury notes amounting to P73 million. However, Eurotrust fraudulently borrowed all those treasury notes
from the AFP-MBAI for purposes of verification with the Central Bank. Despite AFP-MBAI's repeated
demands, Eurotrust failed to return the said treasury notes. Instead it delivered 21 postdated checks in favor of
AFP-MBAI which were dishonored upon presentment for payment. Eurotrust nonetheless made partial
payment to AFP-MBAI amounting to P35,151,637.72. However, after deducting this partial payment, the
amounts of P73 million treasury notes with interest and P35,151,637.72 have remained unpaid. Consequently,
AFP-MBAI filed with the Office of the City Prosecutor of Quezon City a complaint for violation of BP 22 and
estafa against Elsa Reyes.
Reyes interposed the defense of novation and insisted that AFP-MBAI's claim of unreturned P73 million worth
of government securities has been satisfied upon her payment of P30 million. With respect to the remaining
P43 million, the same was paid when Eurotrust assigned its Participation Certificates to AFP-MBAI.
Eventually, the Office of the City Prosecutor of Quezon City issued a resolution recommending the filing of an
information against Reyes for violation of BP 22 and estafa.
Whereupon, Reyes filed a petition for review with respondent Secretary of Justice. The latter dismissed the
petition on the ground that only resolutions of the prosecutors dismissing criminal complaints are cognizable
for review by the Department of Justice. 2
On February 2, 1994, petitioner seeking the nullification of either of the two resolutions of the respondent
Secretary of Justice filed a petition for certiorari, prohibition and mandamus 3 with the respondent court which,
however, denied and dismissed her petition. Her motion for reconsideration 4 was likewise denied in a
Resolution 5 dated June 27, 1995. Hence, this present petition.
The first Department of Justice Resolution dated January 23, 1992 which sustained the Provincial
Prosecutor's decision dismissing petitioner's complaints against respondent Eleazar for violation of B.P. 22
and estafa ruled that the contract of loan between petitioner and respondent Eleazar had been novated when
they agreed that respondent Eleazar should settle her firm's (BERMIC) loan obligations directly with AFPMBAI and DECS-IMC instead of settling it with petitioner Reyes. This finding was affirmed by the respondent
court which pointed out that "the first contract was novated in the sense that there was a substitution of
creditor" 6 when respondent Eleazar, with the agreement of Reyes, directly paid her obligations to AFP-MBAI.
We cannot see how novation can take place considering the surrounding circumstances which negate the
same. The principle of novation by substitution of creditor was erroneously applied in the first questioned
resolution involving the contract of loan between petitioner and respondent Eleazar.
Admittedly, in order that a novation can take place, the concurrence of the following requisites 7 is
indispensable:
1. there must be a previous valid obligation,

B. Re: Resolution dated January 12, 1993

2 there must be an agreement of the parties concerned to a new contract,

At the time of the pendency of the cases filed by Elsa Reyes against Graciela Eleazar, AFP-MBAI lodged a
separate complaint for estafa and a violation of BP 22 against Elsa Reyes with the office of the city prosecutor
of Quezon City docketed as I.S. 92-926. The affidavit of Gudelia Dinapo a member of the investigating
committee formed by AFP-MBAI to investigate the anomalies committed by Eurotrust/Reyes, shows that
between August 1989 and September 1990, Eurotrust offered to sell to AFP-MBAI various marketable
securities, including government securities, such as but not limited to treasury notes, treasury bills, Land Bank
of the Philippines Bonds and Asset Participation Certificates.

3. there must be the extinguishment of the old contract, and

Relying on a canvass conducted by one of its employees, Cristina Cornista, AFP-MBAI decided to purchase
several securities amounting to P120,000,000.00 from Eurotrust. From February 1990 to September 1990, a
total of 21 transactions were entered into between Eurotrust and AFP-MBAI. Eurotrust delivered to AFP-MBAI

4. there must be the validity of the new contract.

Upon the facts shown in the record, there is no doubt that the last three essential requisites of novation are
wanting in the instant case. No new agreement for substitution of creditor war forged among the parties
concerned which would take the place of the preceding contract. The absence of a new contract extinguishing
the old one destroys any possibility of novation by conventional subrogation, In concluding that a novation took
place, the respondent court relied on the two letters dated March 19, 1991, 8 which, according to it, formalized
petitioner's and respondent Eleazar's agreement that BERMIC would directly settle its obligation with the real
owners of the funds - the AFP MBAI and DECS IMC. 9 Be that as it may, a cursory reading of these letters,

however clearly and unmistakably shows that there was nothing therein that would evince that respondent
AFP-MBAI agreed to substitute for the petitioner as the new creditor of respondent Eleazar in the contract of
loan. It is evident that the two letters merely gave respondent Eleazar an authority to directly settle the
obligation of petitioner to AFP-MBAI and DECS-IMC. It is essentially an agreement between petitioner and
respondent Eleazar only. There was no mention whatsoever of AFP-MBAI's consent to the new agreement
between petitioner and respondent Eleazar much less an indication of AFP-MBAI's intention to be the
substitute creditor in the loan contract. Well settled is the rule that novation by substitution of creditor requires
an agreement among the three parties concerned the original creditor, the debtor and the new creditor. 10 It
is a new contractual relation based on the mutual agreement among all the necessary parties, Hence, there is
no novation if no new contract was executed by the parties. Article 1301 of the Civil Code is explicit, thus:
Conventional subrogation of a third person requires the consent of the original parties and of the third person.
The fact that respondent Eleazar made payments to AFP-MBAI and the latter accepted them does not ipso
factoresult in novation. There must be an express intention to novate animus novandi. 11 Novation is never
presumed. 12 Article 1300 of the Civil Code provides inter alia that conventional subrogation must be clearly
established in order that it may take effect.
Notwithstanding our disagreement with the decision of the respondent court and the ruling of the Secretary of
Justice that a novation by substitution of creditor has taken place, we opt not to disturb the Resolution of the
respondent Secretary of Justice dated January 23, 1992 finding a prima facie case against the petitioner in as
much as it had already become final. It appears that petitioner filed two motions for reconsideration to the said
resolution, the first one on February 6, 1992 and the second one in June 2, 1992. These two motions were,
however, denied by the respondent Secretary of Justice, the last denial was contained in a Resolution dated
June 25, 1992 which was received by petitioner on July 9, 1992. Petitioner made no prompt attempt to
question the said resolutions before the proper forum. It took her almost seventeen months (from July 9, 1992
to February 2, 1994) to challenge the January 23, 1992 Resolution when she filed the petition
for certiorari with the respondent court on February 3, 1994, 13 which resolved to affirm the aforesaid resolution
of the Secretary of Justice.
Petitioner who chose her forum but unfortunately lost her claim is bound by such adverse judgment on
account of finality of judgment, otherwise, there would be no end to litigation. Litigation must end and
terminate sometime and somewhere, and it is essential to an effective administration of justice that once a
judgment has become final, the issue or cause therein should be laid at rest. 14 While the respondent Secretary
of Justice was in error in applying the rule on novation in the January 23, 1992 Resolution, such irregularity,
however, does not affect the validity of the proceedings in the Department of Justice. Erroneous application of
a legal principle cannot bring a judgment that has already attained the status of finality to an absolute nullity
under the well entrenched rule of finality of judgment. The basic rule of finality of judgment is grounded on the
fundamental principle of public policy and sound practice that at the risk of occasional error, the judgment of
court and award of quasi-judicial agencies must become final at some definite date fixed by law. 15
We find no plausible explanation nor justifiable reason offered by petitioner for the obvious delay or omission
to take a timely action against the questioned resolution. She is apparently guilty of laches which bars her from
seeking relief in a court of law after she intentionally and unreasonably fails to guard of her rights. Laches is
the failure or neglect for an unreasonable and unexplained length of time to do that which by exerting due
diligence could/should have been done earlier. 16 Petitioner's omission to assert her right to avail of the
remedies in law within a reasonable time warrants a presumption that she abandoned it or declined to assert
it. The law serves those who are vigilant and diligent and no those who sleep when the law requires to act. 17
Its bears emphasis that the above pronouncement we laid down applies only pro hac vice. This Court in
affirming the questioned resolution despite the erroneous application of a legal principle acted according to
what the peculiar circumstances of the instant case demand. Its factual setting led us to consider that to
sustain the resolution is but the proper action to take in this particular case.
Regarding the second Resolution of respondent Secretary of Justice dated January 12, 1993 which affirms the
City Prosecutor's finding of a prima facie case against petitioner for violation of B.P. Blg. 22 and estafa
involving the contract of sale of securities, petitioner avers that she could not be held criminally liable for the
crime charged because the contract of sale of securities between her and respondent AFP-MBAI was novated

by substitution of debtor. According to petitioner, the obligation assumed by respondent Eleazar pursuant to
the authority given by her to respondent Eleazar in a letter dated March 19, 1991 was precisely her
(petitioner's) obligation to respondent AFP-MBAI under the contract of sale of securities. She claims that
private respondent Eleazar, instead of fulfilling her obligation under the contract of loan to pay petitioner the
amount of debts, assumed petitioner's obligation under the contract of sale to make payments to respondent
AFP-MBAI directly. 18
This contention is bereft of any legal and factual basis. Just like in the first questioned resolution, no novation
took place in this case. A thorough examination of the records shows that no hard evidence was presented
which would expressly and unequivocably demonstrate the intention of respondent AFP-MBAI to release
petitioner from her obligation to pay under the contract of sale of securities. It is a rule that novation by
substitution of debtor must always be made with the consent of the creditor. 19 Article 1293 of the Civil Code is
explicit, thus:
Novation which consists in substituting a new debtor in the place of the original one, may be made even
without or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor
gives him the rights mentioned in Articles 1236 and 1237.
The consent of the creditor to a novation by change of debtor is as indispensable as the creditor's consent in
conventional subrogation in order that a novation shall legally take place. The mere circumstance of AFPMBAI receiving payments from respondent Eleazar who acquiesced to assume the obligation of petitioner
under the contract of sale of securities, when there is clearly no agreement to release petitioner from her
responsibility, does not constitute novation, at most, it only creates a juridical relation of co-debtorship or
suretyship on the part of respondent Eleazar to the contractual obligation of petitioner to AFP-MBAI and the
latter can still enforce the obligation against the petitioner. In Ajax Marketing and Development Corporation
vs. Court of Appeals. 20 which is relevant in the instant case, we stated that
In the same vein, to effect a subjective novation by a change in the person of the debtor, it is necessary that
the old debtor be released expressly from the obligation, and the third person or new debtor assumes his
place in the relation. There is no novation without such release as the third person who has assumed the
debtor's obligation becomes merely a co-debtor or surety. . . Novation arising from a purported change in the
person of the debtor must be clear and express. . .
In the civil law setting, novatio is literally construed as to make new. So it is deeply rooted in the Roman Law
jurisprudence, the principle novatio non praesumitur that novation is never presumed. At bottom, for
novation to be a jural reality, its animus must be ever present, debitum pro debito basically extinguishing
the old obligation for the new one.
The foregoing elements are found wanting in the case at bar.
ACCORDINGLY, finding no reversible error in the decision appealed from dated May 12, 1995, the same is
hereby AFFIRMED in all respects.
SO ORDERED.
G.R. No. L-47369 June 30, 1987
JOSEPH COCHINGYAN, JR. and JOSE K. VILLANUEVA, petitioners,
vs.
R & B SURETY AND INSURANCE COMPANY, INC., respondent.

FELICIANO, J.:

This case was certified to us by the Court of Appeals in its resolution dated 11 November 1977 as one
involving only questions of law and, therefore, falling within the exclusive appellate jurisdiction of this Court
under Section 17, Republic Act 296, as amended.

themselves to indemnify the SURETY COMPANY of any and all such payments as stated in the preceding
clauses.
xxx xxx xxx

In November 1963, Pacific Agricultural Suppliers, Inc. (PAGRICO) applied for and was granted an increase in
its line of credit from P400,000.00 to P800,000.00 (the "Principal Obligation"), with the Philippine National
Bank (PNB). To secure PNB's approval, PAGRICO had to give a good and sufficient bond in the amount of
P400,000.00, representing the increment in its line of credit, to secure its faithful compliance with the terms
and conditions under which its line of credit was increased. In compliance with this requirement, PAGRICO
submitted Surety Bond No. 4765, issued by the respondent R & B Surety and Insurance Co., Inc. (R & B
Surety") in the specified amount in favor of the PNB. Under the terms of the Surety Bond, PAGRICO and R &
B Surety bound themselves jointly and severally to comply with the "terms and conditions of the advance line
[of credit] established by the [PNB]." PNB had the right under the Surety Bond to proceed directly against R &
B Surety "without the necessity of first exhausting the assets" of the principal obligor, PAGRICO. The Surety
Bond also provided that R & B Surety's liability was not to be limited to the principal sum of P400,000.00, but
would also include "accrued interest" on the said amount "plus all expenses, charges or other legal costs
incident to collection of the obligation [of R & B Surety]" under the Surety Bond.
In consideration of R & B Surety's issuance of the Surety Bond, two Identical indemnity agreements were
entered into with R & B Surety: (a) one agreement dated 23 December 1963 was executed by the Catholic
Church Mart (CCM) and by petitioner Joseph Cochingyan, Jr, the latter signed not only as President of CCM
but also in his personal and individual capacity; and (b) another agreement dated 24 December 1963 was
executed by PAGRICO, Pacific Copra Export Inc. (PACOCO), Jose K. Villanueva and Liu Tua Ben Mr.
Villanueva signed both as Manager of PAGRICO and in his personal and individual capacity; Mr. Liu signed
both as President of PACOCO and in his individual and personal capacity.
Under both indemnity agreements, the indemnitors bound themselves jointly and severally to R & B Surety to
pay an annual premium of P5,103.05 and "for the faithful compliance of the terms and conditions set forth in
said SURETY BOND for a period beginning ... until the same is CANCELLED and/or DISCHARGED." The
Indemnity Agreements further provided:
(b) INDEMNITY: TO indemnify the SURETY COMPANY for any damage, prejudice, loss, costs, payments,
advances and expenses of whatever kind and nature, including [of] attorney's fees, which the CORPORATION
may, at any time, become liable for, sustain or incur as consequence of having executed the above mentioned
Bond, its renewals, extensions or substitutions and said attorney's fees [shall] not be less than twenty [20%]
per cent of the total amount claimed by the CORPORATION in each action, the same to be due, demandable
and payable, irrespective of whether the case is settled judicially or extrajudicially and whether the amount has
been actually paid or not;
(c) MATURITY OF OUR OBLIGATIONS AS CONTRACTED HEREWITH: The said indemnities will be paid
to the CORPORATION as soon as demand is received from the Creditor or upon receipt of Court order or as
soon as it becomes liable to make payment of any sum under the terms of the above-mentioned Bond, its
renewals, extensions, modifications or substitutions, whether the said sum or sums or part thereof, have been
actually paid or not.
We authorize the SURETY COMPANY, to accept in any case and at its entire discretion, from any of us,
payments on account of the pending obligations, and to grant extension to any of us, to liquidate said
obligations, without necessity of previous knowledge of [or] consent from the other obligors.
xxx xxx xxx
(e) INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY. Any payment or disbursement made
by the SURETY COMPANY on account of the above-mentioned Bonds, its renewals, extensions or
substitutions, either in the belief that the SURETY COMPANY was obligate[d] to make such payment or in the
belief that said payment was necessary in order to avoid greater losses or obligations for which the SURETY
COMPANY might be liable by virtue of the terms of the above-mentioned Bond, its renewals, extensions or
substitutions, shall be final and will not be disputed by the undersigned, who jointly and severally bind

When PAGRICO failed to comply with its Principal Obligation to the PNB, the PNB demanded payment from R
& B Surety of the sum of P400,000.00, the full amount of the Principal Obligation. R & B Surety made a series
of payments to PNB by virtue of that demand totalling P70,000.00 evidenced by detailed vouchers and
receipts.
R & B Surety in turn sent formal demand letters to petitioners Joseph Cochingyan, Jr. and Jose K. Villanueva
for reimbursement of the payments made by it to the PNB and for a discharge of its liability to the PNB under
the Surety Bond. When petitioners failed to heed its demands, R & B Surety brought suit against Joseph
Cochingyan, Jr., Jose K. Villanueva and Liu Tua Ben in the Court of First Instance of Manila, praying
principally that judgment be rendered:
b. Ordering defendants to pay jointly and severally, unto the plaintiff, the sum of P20,412.20 representing the
unpaid premiums for Surety Bond No. 4765 from 1965 up to 1968, and the additional amount of P5,103.05
yearly until the Surety Bond No. 4765 is discharged, with interest thereon at the rate of 12% per annum; [and]
c. Ordering the defendants to pay jointly and severally, unto the plaintiff the sum of P400,000.00 representing
the total amount of the Surety Bond No. 4765 with interest thereon at the rate of 12% per annum on the
amount of P70,000.00 which had been paid to the Phil. National Bank already, the interest to begin from the
month of September, 1966;
xxx xxx xxx
Petitioner Joseph Cochingyan, Jr. in his answer maintained that the Indemnity Agreement he executed in favor
of R & B Surety: (i) did not express the true intent of the parties thereto in that he had been asked by R & B
Surety to execute the Indemnity Agreement merely in order to make it appear that R & B Surety had complied
with the requirements of the PNB that credit lines be secured; (ii) was executed so that R & B Surety could
show that it was complying with the regulations of the Insurance Commission concerning bonding companies;
(iii) that R & B Surety had assured him that the execution of the agreement was a mere formality and that he
was to be considered a stranger to the transaction between the PNB and R & B Surety; and (iv) that R & B
Surety was estopped from enforcing the Indemnity Agreement as against him.
Petitioner Jose K. Villanueva claimed in his answer that. (i) he had executed the Indemnity Agreement in favor
of R & B Surety only "for accommodation purposes" and that it did not express their true intention; (ii) that the
Principal Obligation of PAGRICO to the PNB secured by the Surety Bond had already been assumed by CCM
by virtue of a Trust Agreement entered into with the PNB, where CCM represented by Joseph Cochingyan, Jr.
undertook to pay the Principal Obligation of PAGRICO to the PNB; (iii) that his obligation under the Indemnity
Agreement was thereby extinguished by novation arising from the change of debtor under the Principal
Obligation; and (iv) that the filing of the complaint was premature, considering that R & B Surety filed the case
against him as indemnitor although the PNB had not yet proceeded against R & B Surety to enforce the
latter's liability under the Surety Bond.
Petitioner Cochingyan, however, did not present any evidence at all to support his asserted defenses.
Petitioner Villanueva did not submit any evidence either on his "accommodation" defense. The trial court was
therefore constrained to decide the case on the basis alone of the terms of the Trust Agreement and other
documents submitted in evidence.
In due time, the Court of First Instance of Manila, Branch 24 1 rendered a decision in favor of R & B Surety,
the dispositive portion of which reads as follows;

Premises considered, judgment is hereby rendered: (a) ordering the defendants Joseph Cochingyan, Jr. and
Jose K. Villanueva to pay, jointly and severally, unto the plaintiff the sum of 400,000,00, representing the total
amount of their liability on Surety Bond No. 4765, and interest at the rate of 6% per annum on the following
amounts:
On P14,000.00 from September 27, 1966;

We address these issues seriatim.

1. The Trust Agreement referred to by both petitioners in their separate briefs, was executed on 28 December
1965 (two years after the Surety Bond and the Indemnity Agreements were executed) between: (1) Jose and
Susana Cochingyan, Sr., doing business under the name and style of the Catholic Church Mart, represented
by Joseph Cochingyan, Jr., as Trustor[s]; (2) Tomas Besa, a PNB official, as Trustee; and (3) the PNB
asbeneficiary. The Trust Agreement provided, in pertinent part, as follows:

On P4,000.00 from November 28, 1966;

On P4,000.00 from December 14, 1966;

WHEREAS, the TRUSTOR has guaranteed a bond in the amount of P400,000.00 issued by the R & B Surety
and Insurance Co. (R & B) at the instance of Pacific Agricultural Suppliers, Inc. (PAGRICO) on December 21,
1963, in favor of the BENEFICIARY in connection with the application of PAGRICO for an advance line of
P400,000.00 to P800,000.00;

On P4,000.00 from January 19, 1967;

On P8,000.00 from February 13, 1967;
On P4,000.00 from March 6, 1967;
On P8,000.00 from June 24, 1967;

WHEREAS, the TRUSTOR has also guaranteed a bond issued by the Consolacion Insurance & Surety Co.,
Inc. (CONSOLACION) in the amount of P900,000.00 in favor of the BENEFICIARY to secure certain credit
facilities extended by the BENEFICIARY to the Pacific Copra Export Co., Inc. (PACOCO);
WHEREAS, the PAGRICO and the PACOCO have defaulted in the payment of their respective obligations in
favor of the BENEFICIARY guaranteed by the bonds issued by the R & B and the
CONSOLACION, respectively, and by reason of said default, the BENEFICIARY has demanded compliance
by the R & B and the CONSOLACION of their respective obligations under the aforesaid bonds;

On P8,000. 00 from September 14, 1967;

On P8,000.00 from November 28, 1967; and
On P8,000. 00 from February 26, 1968
until full payment; (b) ordering said defendants to pay, jointly and severally, unto the plaintiff the sum of
P20,412.00 as the unpaid premiums for Surety Bond No. 4765, with legal interest thereon from the filing of
plaintiff's complaint on August 1, 1968 until fully paid, and the further sum of P4,000.00 as and for attorney's
fees and expenses of litigation which this Court deems just and equitable.
There being no showing the summons was duly served upon the defendant Liu Tua Ben who has filed no
answer in this case, plaintiff's complaint is hereby dismissed as against defendant Liu Tua Ben without
prejudice.
Costs against the defendants Joseph Cochingyan, Jr. and Jose K. Villanueva.
Not satisfied with the decision of the trial court, the petitioners took this appeal to the Court of Appeals which,
as already noted, certified the case to us as one raising only questions of law.
The issues we must confront in this appeal are:
1. whether or not the Trust Agreement had extinguished, by novation, the obligation of R & B Surety to the
PNB under the Surety Bond which, in turn, extinguished the obligations of the petitioners under the Indemnity
Agreements;
2. whether the Trust Agreement extended the term of the Surety Bond so as to release petitioners from their
obligation as indemnitors thereof as they did not give their consent to the execution of the Trust Agreement;
and
3. whether or not the filing of this complaint was premature since the PNB had not yet filed a suit against R &
B Surety for the forfeiture of its Surety Bond.

WHEREAS, the TRUSTOR is, therefore, bound to comply with his obligation under the indemnity agreements
aforementioned executed by him in favor of R & B and the CONSOLACION, respectively and in order to
forestall impending suits by the BENEFICIARY against said companies, he is willing as he hereby agrees to
pay the obligations of said companies in favor of the BENEFICIARY in the total amount of P1,300,000 without
interest from the net profits arising from the procurement of reparations consumer goods made thru the
allocation of WARVETS; . . .
l. TRUSTOR hereby constitutes and appoints Atty. TOMAS BESA as TRUSTEE for the purpose of paying to
the BENEFICIARY Philippine National Bank in the manner stated hereunder, the obligations of the R & B
under the R & B Bond No. G-4765 for P400,000.00 dated December 23, 1963, and of the CONSOLACION
under The Consolacion Bond No. G-5938 of June 3, 1964 for P900,000.00 or the total amount of
P1,300,000.00 without interest from the net profits arising from the procurement of reparations consumer
goods under the Memorandum of Settlement and Deeds of Assignment of February 2, 1959 through the
allocation of WARVETS;
xxx xxx xxx
6. THE BENEFICIARY agrees to hold in abeyance any action to enforce its claims against R & B and
CONSOLACION, subject of the bond mentioned above. In the meantime that this TRUST AGREEMENT is
being implemented, the BENEFICIARY hereby agrees to forthwith reinstate the R & B and the
CONSOLACION as among the companies duly accredited to do business with the BENEFICIARY and its
branches, unless said companies have been blacklisted for reasons other than those relating to the obligations
subject of the herein TRUST AGREEMENT;
xxx xxx xxx
9. This agreement shall not in any manner release the R & B and CONSOLACION from their respective
liabilities under the bonds mentioned above. (emphasis supplied)
There is no question that the Surety Bond has not been cancelled or fully discharged 2 by payment of the
Principal Obligation. Unless, therefore, the Surety Bond has been extinguished by another means, it must still
subsist. And so must the supporting Indemnity Agreements. 3

We are unable to sustain petitioners' claim that the Surety Bond and their respective obligations under the
Indemnity Agreements were extinguished by novation brought about by the subsequent execution of the Trust
Agreement.

2. We turn to the contention of petitioner Jose K. Villanueva that his obligation as indemnitor under the 24
December 1963 Indemnity Agreement with R & B Surety was extinguished when the PNB agreed in the Trust
Agreement "to hold in abeyance any action to enforce its claims against R & B Surety .

Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent
one which terminates it, either by changing its object or principal conditions, or by substituting a new debtor in
place of the old one, or by subrogating a third person to the rights of the creditor. 4 Novation through a change
of the object or principal conditions of an existing obligation is referred to as objective (or real) novation.
Novation by the change of either the person of the debtor or of the creditor is described as subjective (or
personal) novation. Novation may also be both objective and subjective (mixed) at the same time. In both
objective and subjective novation, a dual purpose is achieved-an obligation is extinguished and a new one is
created in lieu thereof. 5

The Indemnity Agreement speaks of the several indemnitors "apply[ing] jointly and severally (in solidum) to the
R & B Surety] to become SURETY upon a SURETY BOND demanded by and in favor of [PNB] in the sum
of [P400,000.00] for the faithful compliance of the terms and conditions set forth in said SURETY BOND ."
This part of the Agreement suggests that the indemnitors (including the petitioners) would become co-sureties
on the Security Bond in favor of PNB. The record, however, is bereft of any indication that the petitionersindemnitors ever in fact became co-sureties of R & B Surety vis-a-vis the PNB. The petitioners, so far as the
record goes, remained simply indemnitors bound to R & B Surety but not to PNB, such that PNB could not
have directly demanded payment of the Principal Obligation from the petitioners. Thus, we do not see how
Article 2079 of the Civil Code-which provides in part that "[a]n extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes the guaranty" could apply in the instant case.

If objective novation is to take place, it is imperative that the new obligation expressly declare that the old
obligation is thereby extinguished, or that the new obligation be on every point incompatible with the old
one. 6Novation is never presumed: it must be established either by the discharge of the old debt by the
express terms of the new agreement, or by the acts of the parties whose intention to dissolve the old
obligation as a consideration of the emergence of the new one must be clearly discernible. 7
Again, if subjective novation by a change in the person of the debtor is to occur, it is not enough that the
juridical relation between the parties to the original contract is extended to a third person. It is essential that
the old debtor be released from the obligation, and the third person or new debtor take his place in the new
relation. If the old debtor is not released, no novation occurs and the third person who has assumed the
obligation of the debtor becomes merely a co-debtor or surety or a co-surety. 8
Applying the above principles to the instant case, it is at once evident that the Trust Agreement does not
expressly terminate the obligation of R & B Surety under the Surety Bond. On the contrary, the Trust
Agreement expressly provides for the continuing subsistence of that obligation by stipulating that "[the Trust
Agreement] shall not in any manner release" R & B Surety from its obligation under the Surety Bond.
Neither can the petitioners anchor their defense on implied novation. Absent an unequivocal declaration of
extinguishment of a pre-existing obligation, a showing of complete incompatibility between the old and the new
obligation (and nothing else) would sustain a finding of novation by implication. 9 But where, as in this case,
the parties to the new obligation expressly recognize the continuing existence and validity of the old one,
where, in other words, the parties expressly negated the lapsing of the old obligation, there can be no
novation. The issue of implied novation is not reached at all.
What the trust agreement did was, at most, merely to bring in another person or persons-the Trustor[s]-to
assume the same obligation that R & B Surety was bound to perform under the Surety Bond. It is not unusual
in business for a stranger to a contract to assume obligations thereunder; a contract of suretyship or
guarantee is the classical example. The precise legal effect is the increase of the number of persons liable to
the obligee, and not the extinguishment of the liability of the first debtor. 10 Thus, in Magdalena Estates vs.
Rodriguez, 11 we held that:
[t]he mere fact that the creditor receives a guaranty or accepts payments from a third person who has agreed
to assume the obligation, when there is no agreement that the first debtor shall be released from responsibility,
does not constitute a novation, and the creditor can still enforce the obligation against the original debtor.
In the present case, we note that the Trustor under the Trust Agreement, the CCM, was already previously
bound to R & B Surety under its Indemnity Agreement. Under the Trust Agreement, the Trustor also
became directly liable to the PNB. So far as the PNB was concerned, the effect of the Trust Agreement was
that where there had been only two, there would now be three obligors directly and solidarily bound in favor of
the PNB: PAGRICO, R & B Surety and the Trustor. And the PNB could proceed against any of the three, in
any order or sequence. Clearly, PNB never intended to release, and never did release, R & B Surety. Thus, R
& B Surety, which was not a party to the Trust Agreement, could not have intended to release any of its own
indemnitors simply because one of those indemnitors, the Trustor under the Trust Agreement, became also
directly liable to the PNB.

The petitioner-indemnitors are, as, it were, second-tier parties so far as the PNB was concerned and any
extension of time granted by PNB to any of the first-tier obligators (PAGRICO, R &B Surety and the trustors[s])
could not prejudice the second-tier parties.
There is no other reason why petitioner Villanueva's contention must fail. PNB's undertaking under the Trust
Agreement "to hold in abeyance any action to enforce its claims" against R & B Surety did not extend the
maturity of R & B Surety's obligation under the Surety Bond. The Principal Obligation had in fact already
matured, along with that of R &B Surety, by the time the Trust Agreement was entered into. Petitioner's
Obligation had in fact already matured, for those obligations were to amture "as soon as [R & B
Surety] became liable to make payment of any sum under the terms of the [Surety Bond] whether the said
sum or sums or part thereof have been actually paid or not." Thus, the situation was that precisely envisaged
in Article 2079:
[t]he mere failure on the part of the creditor to demand payment after the debt has become due does not of
itself constitute any extension of the referred to herein.(emphasis supplied)
The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without
the surety of his right to pay the creditor and to be immediately subrogated to the creditor's remedies against
the principal debtor upon the original maturity date. The surety is said to be entitled to protect himself against
the principal debtor upon the orginal maturity date. The surety is said to be entitled to protect himself against
the contingency of the principal debtor or the indemnitors becoming insolvent during the extended period. The
underlying rationale is not present in the instant case. As this Court has held,
merely delay or negligence in proceeding against the principal will not discharge a surety unless there is
between the creditor and the principal debtor a valid and binding agreement therefor, one which tends to
prejudice [the surety] or to deprive it of the power of obtaining indemnity by presenting a legal objection for the
time, to the prosecution of an action on the original security. 12
In the instant case, there was nothing to prevent the petitioners from tendering payment, if they were so
minded, to PNB of the matured obligation on behalf of R & B Surety and thereupon becoming subrogated to
such remedies as R & B Surety may have against PAGRICO.
3. The last issue can be disposed of quicjly, Clauses (b) and (c) of the Indemnity Agreements (quoted above)
allow R & B Surety to recover from petitioners even before R & B Surety shall have paid the PNB. We have
previously held similar indemnity clauses to be enforceable and not violative of any public policy. 13
The petitioners lose sight of the fact that the Indemnity Agreements are contracts of indemnification not only
against actual loss but against liability as well. 14 While in a contract of indemnity against loss as indemnitor
will not be liable until the person to be indemnified makes payment or sustains loss, in a contract of
indemnity against liability, as in this case, the indemnitor's liability arises as soon as the liability of the person
to be indemnified has arisen without regard to whether or not he has suffered actual loss. 15 Accordingly, R &

B Surety was entitled to proceed against petitioners not only for the partial payments already made but for the
full amount owed by PAGRICO to the PNB.

of a previous demand or the services of a collector, within the first five (5) days of the month to which said
rental shall correspond, at the Office of the LESSOR at Broadway Centrum.

Summarizing, we hold that :

During the first year of the lessor-lessee relationship between Broadway and Tropical, no problems were
apparently experienced by either of them. On 5 February 1982, however, Tropical wrote to Broadway stating
that Tropical's rental payments to Broadway were equivalent to 7.31% of Tropical's actual sales of
P17,246,103.00 in 1981, while "[Tropical's] gross profit, rate [was] only 10%." Tropical went on to say that the
rental specified in that contract had been "based merely on [Tropical's) projections that [Tropical] could reach
an average sale of P120,000.00 a day;" however, Tropical's total sales projection for 1982 was only
P23,000,000.00. This would mean again a rental rate of 6.08% of sales "which is too high for Tropical HutBroadway considering that the present rental rates of other Tropical branches are even below the normal rate
of 1.5% on sales." Accordingly. Tropical made the following proposal to Broadway:

(1) The Surety Bond was not novated by the Trust Agreement. Both agreements can co-exist. The Trust
Agreement merely furnished to PNB another party obligor to the Principal Obligation in addition to PAGRICO
and R & B Surety.
(2) The undertaking of the PNB to 'hold in abeyance any action to enforce its claim" against R & B Surety did
not amount to an "extension granted to the debtor" without petitioner's consent so as to release petitioner's
from their undertaking as indemnitors of R & B Surety under the INdemnity Agreements; and
(3) Petitioner's are indemnitors of R & B Surety against both payments to and liability for payments to the
PNB. The present suit is therefore not premature despite the fact that the PNB has not instituted any action
against R & B Surety for the collection of its matured obligation under the Surety Bond.
WHEREFORE, the petitioner's appeal is DENIED for the lack of merit and the decision of the trial court is
AFFIRMED in toto. Costs against the petitioners.
SO ORDERED.
G.R. No. 79642 July 5, 1993
BROADWAY CENTRUM CONDOMINIUM CORPORATION, petitioner,
vs.
TROPICAL HUT FOOD MARKET, INC. and THE HONORABLE COURT OF APPEALS, respondents.
Gozon, Berenguer, Fernandez & Defensor Law Offices for petitioner.
Romulo, Mabanta, Buenaventura, Sayoc & Delos Angeles Law Office for respondent.

FELICIANO, J.:
Petitioner Broadway Centrum Condominium Corporation ("Broadway") and private respondent Tropical Hut
Food Market. Inc. ("Tropical") executed an 28 November 1980 a contract of lease. Broadway, as lessor,
agreed to lease a 3,042.19 square meter portion of the Broadway Centrum Commercial Complex for a period
of ten (10) years, commencing from 1 February 1981 and expiring on 1 February 1991, "renewable for a like
period upon the mutual agreement of both parties." The rental provision of this contract reads as follows:
3. BASIC RENTAL ON LEASED PREMISES LESSEE agrees to pay LESSOR a basic monthly rental on
the leased promises in the amount of ONE HUNDRED TWENTY THOUSAND PESOS (P120,000.00)
Philippine Currency, during the first three (3) years of this lease contract from February 1, 1981 to February 1,
1984, allowing two (2) months grace period on rental for renovation/improvements on the leased promises
from December 1, 1980 to January 31. 1961. The basic rental shall be increased to ONE HUNDRED FORTY
THOUSAND PESOS (P140,000.00) per month during the next three (3) years from February 1, 1984 to
February 1, 1987, and ONE HUNDRED SIXTY FIVE THOUSAND PESOS (P165,000.00) per month during
the last four (4) years from February 1, 1967 to February 1, 1991.
The first basic monthly rental shall be paid in advance to the LESSOR on or before December 1, 1980.
Succeeding basic monthly rentals starting March, 1981 be paid by LESSEE to LESSOR, without the necessity

[Tropical] would therefore propose to reduce the present monthly rental to P50,000.00 or 2.0% of their monthly
sales whichever is higher, up to the end of the third year after which it shall again be subject to renegotiations.
(Emphasis supplied)
On 4 March 1962, Broadway responded to Tropical's latter by stating that it (Broadway) believed that the
problems of Tropical's supermarket in the Broadway Centrum were within the control of Tropical's
management. Broadway offered six (6) suggestions which, if implemented, should result in increased sales for
Tropical of at least 15% in the succeeding months. In the meantime, Broadway made the following counterproposal consisting of conditional reduction of the stipulated rental by P20,000.00 for a limited period of four
(4) months:
. . . Meantime, we are agreeable to a conditional reduction of your rental by P20,000.00 per monthfor four
months starting this month on a trial basis; that is, the P20,000.00 per month reduction in rental will be paid
back to us and spread over the last six months of the years should the target of 15% increase in sales be
achieved by the fourth month. However, should your sales not increased by 5% in spite of the improvements
you have introduced, the reduction in rental of P20,000.00 per month of P80,000.00 for four months will not
have to be paid anymore. In other words, the monthly reduction in rental is conditioned upon your not
achieving the desired 15% increased in sales volume by the fourth month assuming you implement all of the
above changes.
It is understood, however, that any reduction in rental extended is merely a temporary suspension of the
original rate of rental stipulated in our contract of lease and not an amendment thereto. 2(Emphases supplied)
Officers of Tropical met with the President of Broadway and during this conference, Tropical's officers
recounted the "low sales volume" that the Tropical Supermarket in the Broadway Centrum was experiencing,
apparently as a result of the temporary closure of Doa Juana Rodriguez Avenue. 3 This Avenue is a major
thoroughfare adjacent to the Broadway Centrum and was then closed to vehicular traffic because of the road
expansion project of the Government. Broadway's President, Mrs. Cita Fernandez Orosa, was aware that the
temporary closure of the Doa Juana Rodriguez Avenue had affected the business of all the Broadway's
tenants, including Tropical. She, therefore, agreed on 20 April 1982 to a "provisional and temporary
agreement" which agreement needs to be quoted in full:
Further to our letter dated April 6, 1982, we hereby make formal our provisional and temporary agreement to a
reduction of your monthly rental on the basis of 2% of gross receipts or P60,000.00 whichever is higher. Gross
receipts should be construed as the total sales and receipts from sublessees of your area and from whatever
source arising from the area leased by you. This Provisional arrangement should not be interpreted as
amendment to the lease contract entered into between us.
We invite your attention to the fact that, as agreed upon, you have committed to return by the end of April a
certain portion of your leased premises totalling 466.56 square meters and presently occupied by your drug
store and coffee shop outlets and half of the hallway.
Finally we wish to remind you that the temporary alteration in rental is conditioned on your good faith
implementation an the suggestions we conveyed to you in our letter of March 4, 1982 regarding the operations

of the supermarket and shall not commence until the area mentioned above to be surrendered is actually
surrendered.

a considerable reduction on the provisions of our existing long term contract. Consequently, we have to
reiterate our advise on you regarding your rental increased. 6 (Emphasis supplied).

Should you find the foregoing in accordance with our previous verbal agreement, please signify your
acceptance by signing above the word "conforme."

Tropical continued its renegotiation efforts. In another letter dated 29 March 1983, Broadway's President wrote
to Mr. Luis Que turning down his request for reconsideration. Broadway, however, was evidently desirous of
keeping Tropical as a tenant if possible and so stated that the P100,000.00 monthly rental would begin, not on
April 1983 as stated in its letter of 15 December 1982 but rather on July 1983. By a letter, dated 9 April 1983,
the Credit and Collection Officer of Broadway sent Mr. Luis Que a bill for P81,320.00 representing the accrued
differential of P20,000.00 per month between the rental which Broadway was willing to grant to Tropical
(P80,000.00 per month starting 1 January, 1983) and up to 30 June 1983)and the P60,000.00 per month or
2% of gross receipts whichever is higher, under the temporary and provisional letter-agreement of 20 April
1982.

Thank you for your, continued patronage.

C o n f o r m e: Very, truly yours,
Tropical Hut Food Broadway Centrum
Market, Inc. Condominium Corp.
4

By: (Signed) By: (Signed)

___________________ _____________________
(Emphasis supplied).
Months later, the road expansion project at the Doa Juana Rodriguez Avenue was completed. By a letter
dated 15 December 1982, addressed to Tropical, Broadway referred to the rental which "as of last, April 20,
1982, wasprovisionally reduced" to P60,000.00 a month or 2% of gross receipts whichever is higher "without
waving any of [Broadway's] rights under our rental agreement." Broadway then went on to say that:
After careful deliberation, we regret that this concession can no longer be extended in its present form. We,
therefore, advising that we shall increase the monthly rental to P100,000.00.
This increase, however, shall be implemented gradually as follows: P80,000.00 effective January, 1983 and
P100,000.00 effective April, 1993 until further notice.
Considering the fact that you collect a monthly gross rental of P24,600.00 from your concessionaires (other
forms of income not considered), the previous temporary arrangement afforded you mare than sufficient
respite from whatever business constraints you may have had then. The consequent effect of said temporary
arrangement is your payment of a monthly rental of P35,400.00 or an effective rate of P14.32 only per square
mater. We are sure that you will agree with us that this rate is very low and cannot therefore be sustained
indefinitely. 5 (Emphases supplied).
While the rental rate above fixed by Broadway was higher than that set out in the provisional and temporary
agreement of the parties of 20 April 1982, the rates so fixed were nonetheless lower than that stipulated in
their contract of 28 November 1980. Tropical, however, was not satisfied with the adjusted rates fixed by
Broadway. In a letter dated 4 January 1983, Mr. Luis Que of Tropical wrote to Broadway's President appealing
to Broadway "to fix our monthly rental at P60,000.00 or 2% of our gross receipts whichever is higher." In this
letter, Mr. Que expressly hoped that
[Broadway would] understand our position, and may we reiterate our appeal to maintain our
presentprovisional rates until such time that more sales are achieved. (Emphasis supplied)
Mr. Luis Que's appeal was, however, found unsatisfactory by Broadway. In a letter dated 13 January 1983,
Broadway said:
We are replying to your letter of January 4, 1983. While it may be admitted that you are incurring losses in
your operations, the same is not a monopoly experienced solely by your corporation.Broadway Centrum itself
has had its share of business setbacks but we have nevertheless decided toabsorb part of your losses last
year by agreeing to a temporary reduction of your monthly rental. However, as we have stated in our
December 15, 1982 letter, this concession can no longer be extended in its present form which continues to be

Tropical responded to the statement of account sent by Broadway by pleading, once more, in a letter dated 15
April 1983, that Tropical's present rentals of P60,000.00 monthly or 2% of gross receipts, whichever is higher,
"would at least stay until we have somehow recovered," to which Tropical proposed, however, to add 20% of
its income from concessionaires (i.e., concessionaires at Tropical-Broadway Supermarket). 7
Tropical's last counter-offer was not acceptable to Broadway. In a letter dated 22 April 1983, Broadway's
President wrote to Mr. Luis Que stating that "the matter was no longer negotiable":
We are responding to your letter of April 15, 1983 proposing a counter offer to the payment of your rentals.
You will remember that in our last meeting our position on the matter has been unequivocably stated. The
temporary arrangement of reducing your monthly rentals was extended as an assistance. This had caused
us to lose P620,000.00 on rental income.
You will agree that this is a sizeable amount which had tremendous adverse effects on our financial
position. This can no longer be sustained.
We reiterate, therefore, that the matter is no longer negotiable and we strongly urge you to settle your
obligation to minimize the 2% penalty on delayed payments provided for in our contract.
We trust that you will see the merits of the foregoing. 8 (Emphasis supplied).
On 5 May 1983, Mr. Mariano Gue, adopting a new and much harder posture than Mr. Luis Que had, wrote to
Broadway as follows:
. . . I could only confirm what I told you in our conference that we cannot afford any increase in rentals in the
space occupied by us at Broadway Centrum. And I could only repeat what is contained in the letter sent you
by our Mr. Luis Que dated April 15, 1983. We cannot agree to an increase in rentals at this time. To do so
would put us in a financial situation worse then we were in before we agreed to reduce the leased premises
and adjust the rentals. Our position is that you cannot arbitrarily and unilaterally increase the rentals. This is a
matter which should be mutually agreed upon by us and as stated, we are not in a financial position to agree
to such an increase. 9 (Emphasis supplied).
On the same day, 5 May 1983, Mrs. Orosa wrote to Mr. Mariano Que expressing shock and dismay at the
posture suddenly adopted by the latter. Mrs. Orosa wrote:
We are replying to your letter of May 5, 1983 categorically stating that your position is that we cannot arbitrarily
and unilaterally increase the rentals. We are appealed by the apparent attempt to distort the very crystal clear
arrangement we reached last April 20, 1982 anent the temporary alteration of your rentals. We hereby
attached a xerox copy of said agreement with our underscores to refresh your memory.
We have exhaustively, repeatedly but patiently labored to explain to you the temporary and provisional
arrangement to reduce your monthly rentals is not amendment to the lease contract andthis was done merely

as an assistance. There is, therefore, absolutely no basis to your claim that we cannot arbitrarily and
unilaterally increase the rentals. We strongly feel that we should have instead been the recipient an act of
gratitude from you.
In view therefore of your obstinate decision to blur your view and continue refusing to heed our demands, we
are hereby formally serving you notice that if you still fail to pay your back accounts amounting to P100,000.00
exclusive of penalty charges by Monday, May 9, 1983, paragraph five (5) of our lease contract will be
implemented. 10 (Emphasis supplied).
A week later, on 12 May 1983, Tropical filed a Complaint before the Regional Trial Court, Quezon City, seeking
a restraining order or preliminary injunction to prevent Broadway from invoking and implementing Section 5 of
their Lease Contract and asking the court to decree that the, rental provided for in the letter-agreement of 20
April 1982 "should subsist while the low volume of sales [of Tropical] still continues." A restraining order was
issued by the trial court ex parte the next day and a preliminary injunction was granted on 2 June 1983, upon
Tropical's filing of a bond in the amount of P100,000.00.

Correspondingly, defendant's counterclaim is dismissed.

Costs against the defendant.
So Ordered. 11 (Emphasis supplied).
On appeal, the Court of Appeals affirmed the decision of the trial court. The Court of Appeals held that the
letter-agreement dated 20 April 1982 had novated the principal conditions of the Lease Contract. The Court of
Appeals also hold that the reduction in the rentals was not entirely a gratuitous accommodation on the part of
Broadway since the reduction of the leased space by 466.56 square meters, possession of which was
returned by Tropical to Broadway, constituted valuable consideration for the reduction of rentals while the "low
sales volume" of Tropical continued. The Court of Appeals corrected a microscopic arithmetical error
committed by the trial court and in effect directed Tropical to pay, when its "low sales volume" shall hove been
overcome, the following rental rates:

On 6 January 1984, while trial before the Regional Trial Court was pending, Broadway informed Tropical that
the basic rental would be increased to P140,000.00 per month during the next three (3) years from 1 February
1984 to 1 February 1987 in accordance with paragraph (3) of the Lease Contract dated 28 November 1980.

From 1 February 1984 up to 1 February 1987 P118.529.15 per month;

Tropical reacted by filing a supplemental complaint with the trial court raising for the first time the issue of
whether or not the letter-agreement dated 20 April 1982 had novated the Lease Contract of 28 November
1980. Tropical alleged that the original Contract. of Lease had been novated in its principal conditions i.e.,
the area subject to the lease and the lease rentals by the letter-agreement dated 20 April 1982 and that the
reduced lease rates set out in the letter-agreement are to subsist while Tropical's sales volume "remains low."

Petitioner Broadway now asks us to review and set aside the Decision of the Court of Appeals.

Petitioner, upon the other hand, vehemently denied that the original Lease Contract had been novated by the
letter-agreement of 20 April 1982.

We start with the basic conception that novation is the extinguishment of an obligation by the substitution of
that obligation with a subsequent one, which terminates it, either by changing its object or principal conditions
or by substituting a now debtor in place of the old one, or by subrogating a third person to the rights of the
creditor. 12Novation through a change of the object or principal conditions of an existing obligation is referred to
as objective (or real) novation. Novation by the change of either the person of the debtor or of the creditor is
described as subjective (or personal) novation. Novation may also be objective and subjective (mixed) at the
same time. In both objective and subjective novation, a dual purpose is achieved an obligation in
extinguished and a news one is created In lieu thereof. 13

In time, the trial court rendered its decision dated 14 March 1985, the dispositive portion of which reads as
follows:
WHEREFORE, judgment, is hereby rendered in favor of the plaintiff and against the defendant as follows:
1. The writ of preliminary injunction previously issued is made permanent;
2. The reduced rental provided for in the letter-agreement of April 20, 1982 (Exh. "G" or "5") shall subsist or
be effective during the period that a plaintiff cannot achieve its Projected daily sales average as envisioned in
its feasibility study;
3. The contract of leased dated November 28, 1980 (Exh. "A" or "1") is declared as partially novated or
modified by the letter-agreement;
4. The amount of monthly rentals payable by plaintiff for the reduced area of the leased promisesafter plaintiff
has achieved its projected daily sales average is fixed as follows:

From 1 February 1987 up to 1 February 1991 P139,695.07 per month.

The sole issue confronting us here is Whether or not the latter-agreement dated 20 April 1982 had novated the
Contract of Lease of 28 November 1980.

If objective novation is to take place, it is essential that the new obligation expressly declare that the old
obligation to be extinguished, or that now obligation be on every point incompatible with the old
one. 14 Novation is never presumed; it must be established either by the discharge of use old debt by the
express terms of the new agreement, or by the acts of the parties whose intention to dissolve the old
obligation as a consideration of the emergence of the new one must be clearly manifested. 15 It is hardly
necessary to add that the role that novation is never presumed, is not avoided by merely referring to partial
novation. The will to novate, whether totally or partially, must appear by express agreement of the parties, by
their acts which are too clear and unequivocal to be mistaken.
Applying the above principles to the case at bar, it is entirely clear to the court that the letter-agreement of 20
April 1992 did not extinguish or alter the obligations of respondent Tropical and the rights of petitioner
Broadway under their lease contract dated 28 November 1980.

February 1, 1981 to February 1, 1984

P39.45 per square meter or P101,609.00;

In the first place, the letter-agreement of 20 April 1982 was, by its own terms, a " provisional and
temporaryagreement to a reduction of [Tropical's] monthly rental ." The letter-agreement, as noted earlier,
also contained the following sentence:

February 1, 1984 to February 1, 1987

P46.02 per square meter or P118.530.00;

This provisional agreement should not be interpreted as amendment to the contract entered into by us.

February 1, 1987 to February 1, 1991

P54.24 per square mater or P139,702.00.

The same letter also referred to the reduction of rental as a "temporary alteration in rental" which was
"conditioned" upon good faith implementation by Tropical of the six (6) principal suggestions Broadway had

conveyed to Tropical concerning improvement of the operations of Tropical's supermarket at the Broadway
Centrum. The non-specification by Broadway (who had prepared the letter-agreement an which Tropical
placed its conforme) of the period of time during which the reduced rentals would remain in effect, only meant
that Broadway retained for itself the discretionary right to return to the original contractual rates of rental
whenever Broadway felt it appropriate to do so. There is nothing in the text of the 20 April 1982 letteragreement to suggest that the reduced concessional rental rates could not be terminated Broadway without
the consent of Tropical.
In the second place, the formal notarized Lease Contract of 28 November 1980 made it clear that a temporary
and provisional concessional reduction of rentals which Broadway might grant to Tropical was not to be
construed as alteration or waiver of any; of the terms of the Lease Contract itself. That Lease Contract
provided, among other things, as follows:
32. NON-WAIVER OF CONDITIONS & COVENANTS The failure of the LESSOR to insist upon strict
performance of any of the terms, conditions and stipulation hereof shall not be deemed a relinquishment or
waiver of any right or remedy that said LESSOR may have, nor shall it be construed as a waiver of any
subsequent breach of, or default in the terms, conditions and covenants hereof, which terms, conditions and
covenants shall continue under this Contract and shall be deemed to have been made unless express in
writing and signed by the LESSOR. 16 (Emphasis supplied).
In the third place, the course of negotiations between Broadway and Tropical before the execution of their
letter-agreement of 20 April 1982, quite clearly indicated that what they were negotiating was a temporary and
provisional reduction of rentals. Thus, Tropical itself, in its letter to Broadway dated 5 February 1982, quoted
earlier, had proposed reduction of rentals from the stipulated contractual rates to P50,000.00 per month or 2%
of monthly sales, whichever is higher, "up to the end of the third year after which it shall again subject, to
renegotiation."
Any reduction in rental extended is merely a temporary suspension of the original rate of rental stipulated in
our contract of lease and not an amendment thereto.
In the fourth place, the course of discussions between Broadway and Tropical, as disclosed in their
correspondence, after execution of the 20 April 1982 letter-agreement, shows that the reduction of rentals
agreed upon in the letter-agreement was not to persist, for the rest of the life of the ten (10)-year Contract of
Lease. That correspondence is bereft of any, sign of mutual agreement or recognition that the reduced rentals
had so permanently replaced the contract stipulations on rentals as to have become immune to change save
by common consent of Tropical and Broadway. Quite the contrary. In Broadway's letter to Tropical dated 15
December 1982, Mrs. Orosa referred to the letter-agreement of 20 April 1982 which "provisionally reduced to
P60,000.00 a month or 2% of [Tropical's] gross receipts, whichever is higher, without waiving any of our right
under our rental agreement." This 15 December 1982 letter, quoted earlier, in an obvious effort to be
conciliatory, did not try to go back immediately to the contract stipulation of P120,000.00 monthly rental, from 1
February 1981 to 1 February 1984. Instead, Broadway proposed P80,000.00 per month effective January
1983 and P100 000.00 per month effective April 1983 "until further notice." In its reply letter of 4 January 1983,
Tropical appealed to Broadway to maintain "our present provisional rates until such time that more sales are
achieved." In its rejoinder of 13 January 1983, Broadway stressed that though it had its own share of business
set backs, it had "nevertheless decided to absorb part of [Tropical-Broadway Centrum's] losses last year by
agreeing to a temporary reduction of the monthly rental." At the same time, Broadway stressed that
"this concession" could no longer be extended "in its present form which continues to be a considerable
reduction on the provisions of our existing long-term contract." Finally, in his last letter of 15 April 1983, Mr.
Luis Que of Tropical appealed once more to Broadway to continue the reduction in rental under the 20 April
1982 letter-agreement "until we have somehow recovered" and then, at the same time, offered to increase that
reduced rental by adding to it 20% of Tropical's income from concessionaires at its Broadway Centrum
Supermarket. Turning down Mr. Que's last counter-officer, Mrs. Orosa of Broadway on 22 April 1983 once
again stressed that:

It is thus clear to the Court that Tropical was attempting to modify its formal Lease Contract with Broadway by
implying or inserting terms into the 20 April 1982 letter-agreement which are not found in that letter-agreement.
Under both the Civil Code and our case law on novation and as well the express terms of the 28 November
1980 Contract of Lease, only evidence of the clearest and most explicit kind will suffice for that purpose.
Tropical's theory that Broadway had agreed in the 20 April 1982 letter-agreement to maintain the reduced
rental so long as Tropical was suffering from a "low volume of sales" appears to us as an afterthought,
imaginative and original no doubt, but still an afterthought. Tropical did not pretend to have reached agreement
with Broadway on what level of sales would constitute the critical "low volume of sales." And so, the trial court
ended up with the truly extraordinary recourse of referring to the feasibility study that Tropical had made on it's
own, before Tropical and Broadway executed their 28 November 1980 Contract of Lease. That feasibility study
was no mare than an expression of Tropical's own expectations when it entered into the 1980 Contract of
Lease; yet the trial court held that the reduced rentals were to remain in effect until Tropical achieved its own
expectations concerning its sales at the Broadway Centrum, which presumably were not "low."
Tropical, in its Memorandum, stressed that Broadway had supplied the number of customers which Tropical
had inputted in its feasibility study. Whatever number Broadway may have submitted to Tropical in their precontract negotiations was no more than an estimate or speculation as to the number of customers that might
be coming into the then proposed Tropical Supermarket at the Broadway Centrum. We do not understand
Tropical to have suggested that that number constituted a representation on the part of Broadway which
turned out to be false and which vitiated Tropical's consent to the original 1980 Contract, of Lease. Neither do
we understand Tropical to be suggesting that Broadway had warranted to Tropical that a certain number of
customers would in fact be visiting the then proposed Tropical Supermarket at Broadway Centrum. The 1980
Contract of Lease itself was totally silent as to any such estimated or expected number of customers either as
a representation or as a warranty on the part, of Broadway. That silence rendered any estimate which
Broadway may have conveyed to Tropical, quite immaterial. 17
We turn to the holding of the Court of Appeals that the surrender of 466.56 square meters of leased space by
Tropical to Broadway constituted valuable consideration, acceptance of which disabled Broadway from
insisting on the original terms of their Contract of Lease. Under the view we have taken above of the legal
effects of the 20 April 1982 letter-agreement, this supposed valuable consideration appears quite immaterial.
We must, nonetheless, note that comparison of the lease rentals reduced and the floor space surrendered
yields a strong presumption that Broadway could not have agreed to the supposed partial novation. The
rentals were reduced by Broadway by 50% (from P120,000.00 to P60,000.00 per month). The floor space was
reduced by slightly over 15% only. No substantial relationship existed between the amount of the reduction of
rental and the area of the space returned by Tropical. Hence, no reasonable presumption can be indulged that
that, return of part of the leased space constituted consideration for the reduction of rental rates. In that
Contract of Lease, moreover, the rentals were stipulated for a specified portion of the Broadway Centrum
having a total floor area of 3,042.19 square meters; the rental rate was not specified on a per square meter
basis.
We conclude that the Court, of Appeals fell into reversible error when it affirmed the decision of the trial court.
We believe and so hold that the letter-agreement of 20 April 1982 did not constitute a novation, Whether
partial or total, of the 28 November 1980 Contract of Lease between Broadway and Tropical.
WHEREFORE, for all the foregoing, the Petition for Review on Certiorari is hereby GIVEN DUE COURSE, and
the Comment filed by private respondent Tropical is hereby TREATED as its ANSWER and the Decision dated
30 January 1987 of the Court, of Appeals and the Decision dated 14 March 1985 of the trial court are
herebyREVERSED and SET ASIDE. A new judgment is hereby entered dismissing the complaint filed by
private respondent Tropical, and requiring private respondent Tropical to pay to petitioner Broadway the
following rental rates:
1. P80,000.00 per month from 1 January 1983 up to 30 June 1983;
2. P100,000.00 per, month from 1 July 1983 up to 31 January 1984;

The temporary arrangement of reducing your monthly rentals was extended as an assistance. This had
caused us to lose P620,000.00 on rental income. (Emphasis supplied).

3. P140,000.00 per month from 1 February 1984 to 1 February 1987; and

4. P160,000.00 per month from 1 February 1987 to 31 January 1991.

The penalty of 2% per month on unpaid rentals specified in Section 5 of the 28 November 1980 Contract of
Lease is, in the exercise of the Court's discretion, hereby equitably REDUCED to ten percent (10%) per
annumcomputed from accrual of such rentals as above specified until fully paid. In addition, private
respondent Tropical shall pay to petitioner Broadway attorney's fees in the amount of ten percent (10%) (and
not twenty percent [20%] as specified in Section 33 of the Contract of lease) of the total amount due and
payable to petitioner Broadway under this Decision. Costs against, private respondent.
SO ORDERED.
G.R. No. 136780

this Surety Undertaking, it being understood that said undertaking is a continuing one and shall subsist and
bind me/us until all such obligations, charges and fees have been fully paid and satisfied.
It is understood that the indication of a credit limit to the cardholder shall not relieve me/us of liability for
charges and all other amounts voluntarily incurred by the cardholder in excess of the credit limit.
On the basis of the completed and signed Application Form and Surety Undertaking, the SDIC issued to
Danilo Diners Card No. 36510293216-0006. The latter used this card and initially paid his obligations to SDIC.
On February 8, 1988, Danilo wrote SDIC a letter (Exhibit "B") requesting it to upgrade his Regular (Local)
Diners Club Card to a Diamond (Edition) one. As a requirement of SDIC, Danilo secured from Jeanette her
approval. The latter obliged and so on March 2, 1988, she signed a Note (Exhibit 'C') which states:

August 16, 2001

JEANETTE D. MOLINO, petitioner,

vs.
SECURITY DINERS INTERNATIONAL CORPORATION, respondent.

"This certifies that I, Jeanette D. Molino, approve of the request of Danilo and Gloria Alto with Card No. 3651203216 0006 and 3651-203412-5007 to upgrade their card from regular to diamond edition."

GONZAGA-REYES, J.:

Danilo's request was granted and he was issued a Diamond (Edition) Diners Club Card. He used this card and
made purchases (Exhibits "D", "D-1" to "D-7") from member establishments. On October 1, 1988 Danilo had
incurred credit charged plus appropriate interest and service charges in the aggregate amount of
P166,408.31. He defaulted in the payment of this obligation.

Assailed by this petition for review on certiorari is the decision of the Court of Appeals dated September 28,
19981which held petitioner liable as surety for the outstanding credit card debts of Danilo Alto with herein
respondent corporation.

SDIC demanded of Danilo and Jeanette to pay said obligation but they did not pay. So, on November 9, 1988,
SDIC filed an action to collect said indebtedness against Danilo and Jeanette. This was docketed in the
Regional Trial Court of Makati, Branch 145 as Civil Case No. 88-2381 x x x 2

The decision of the Court of Appeals satisfactorily sums up the facts that led to the filing of this case:

Defendant Danilo Alto failed to file an Answer, and during the pre-trial conference respondent moved to have
the complaint dismissed against him, without prejudice to a subsequent re-filing. Petitioner was left as the lone
defendant, sued in her capacity as surety of Danilo.

The Security Diners International Corporation ("SDIC') operates a credit card system under the name of
Diners Club through which it extends credit accommodation to its cardholders for the purchase of goods and
payment of services from its member establishments to be reimbursed later on by the cardholder upon proper
billing. There are two types of credit cards issued: one, the Regular (Local) Card which entitles the cardholder
to purchase goods and pay services from member establishments in an amount not exceeding P10,000.00;
and two, the Diamond (Edition) Card which entitles the cardholder to purchase goods and pay services from
member establishments in unlimited amounts. One of the requirements for the issuance of either of these
cards is that an applicant should have a surety.
On July 24, 1987, Danilo A. Alto applied for a Regular (Local) Card with SDIC. He got as his surety his own
sister-in-law Jeanette Molino Alto. Thus, Danilo signed the printed application form (Exhibit 'A') and Jeanette
signed the Surety Undertaking (Exhibit 'A-5"). Attached to the Application Form was an Agreement (Use of
Diners' Club Card), paragraph 16 of which reads:
16. SURETY. The cardholder shall furnish an adequate surety or sureties acceptable to Security Diners
who shall be jointly and severally liable with the cardholder to pay Security Diners all the obligations and
charges incurred and credit extended on the basis of the card. In the event the surety/sureties furnished the
cardholder are discharged the cardholder must furnish a new surety or sureties acceptable to Security Diners
within thirty (30) days. Otherwise the cardholder's privileges shall be automatically terminated in accordance
with Section 11 hereof."
The Surety Undertaking signed by Jeanette states:
"I/WE, the undersigned, bind myself/ourselves jointly and severally with Mr. Danilo Alto to pay SECURITY
DINERS INTERNATIONAL CORPORATION, hereinafter referred to as 'Security Diners' all the obligations and
charges including but not limited to fees, interest, attorney's fees and all other costs incurred by him/her in
connection with the use of the DINERS CLUB CARD in accordance with the terms and conditions governing
the issuance and use of the Diners Club Card. Any change or novation in the agreement or any extension of
time granted by SECURITY DINERS to pay such obligations, charges and fees, shall not release me/us from

In the Answer with Compulsory Counterclaim that she filed with the RTC, petitioner claimed that her liability
under the Surety Undertaking was limited to P10,000.00 and that she did not expressly and categorically
agree to act as surety for Danilo in an amount higher than P10,000.00. 3 By way of counterclaim, she asked for
moral and exemplary damages.
On August 19, 1991, the trial court rendered a decision dismissing the complaint for failure of respondent to
prove its case by a preponderance of the evidence. It found that while petitioner clearly bound herself as
surety under the terms of Danilo Alto's Regular Diners Club Card, there was no evidence that after the card
had been upgraded to Diamond (Edition) petitioner consented or agreed to act as surety for Danilo. Exhibit "C"
or Exhibit "1", inter alia, which was a note bearing petitioner's signature certifying to her approval of Danilo's
request to have his card upgraded should be read simply as a statement of and objection to his request for
upgrading, and not as an assumption of liability for the debts that Danilo may later owe through the said
card.4 The trial court also took note of the testimony of Alfredo Vicente, an officer of respondent, who opined
that the consent to be bound as surety to an upgraded card should be categorical 5 and not in a simple "no
objection" form.
The trial court went on further to state that petitioner was not liable for any amount, not even for P10,000.00
which is the maximum credit limit for Regular Diners Club Cards, since at the time of the upgrading Danilo had
no outstanding credit card debts. 6 This is evident from the fact that Danilo's request for upgrading was
approved, since one of the requirements for the approval of a request for the upgrading of a credit card from
Regular to Diamond is that the applicant must have paid all his billings for the last three months prior to his
request.
Hence, the trial court disposed of the case with these pronouncements:
WHEREFORE, judgment is rendered dismissing the complaint against defendant Jeanette D. Molino-Alto for
failure of the plaintiff to prove its case by a clear preponderance of evidence.

Said defendants counterclaim is also dismissed.

III.

No pronouncement as to costs.

The Court of Appeals erred in disregarding the applicable legal principle established by this Honorable Court
that, unlike in ordinary solidary debtors, the surety does not incur liability unless the principal debtor is held
liable.10

SO ORDERED.7
The Court of Appeals found contrary to the lower court, and declared that the Surety Undertaking signed by
petitioner when Danilo Alto first applied for a Regular Diners Club Card clearly applied to the unpaid purchases
of Danilo Alto under the Diamond card. In holding thus, the Court of Appeals referred to the terms of the said
Surety Undertaking, which stated that any change or novation in the agreement on the use of the Diners Club
card does not release the surety from his obligations, it being understood that the undertaking is a continuing
one which subsists until all obligations and charges under the subject credit card are paid and satisfied. It also
cited Pacific Banking Corporation vs. Intermediate Appellate Court,8 a 1991 decision which held the surety
liable to the extent of the credit cardholder's indebtedness, under the clear terms of the Guarantor's
Undertaking that the surety signed with the credit card company.

Petitioner posits that she did not expressly give her consent to be bound as surety under the upgraded card.
She points out that the note she signed, marked as Exhibit "C", registering her approval of the request of
Danilo Alto to upgrade his card, renders the Surety Undertaking she signed under the terms of the previous
card "without probative value, immaterial and irrelevant as it covers only the liability of the surety in the use of
the regular credit card by the principal debtor x x x. 11 " She argues further that because the principal debtor,
Danilo Alto, was not held liable, having been dropped as a defendant, she could not be said to have incurred
liability as surety.
The petition is devoid of merit.

The Court of Appeals further declared that it was erroneous of the trial court to conclude that petitioner was
completely relieved of liability under Danilo Alto's credit card since the Surety Undertaking she signed
remained valid and enforceable even after the upgrading of the said card; besides, petitioner herself admitted
that she was liable to the extent of P10,000.00.

The resolution of whether petitioner is liable as surety under the Diamond card revolves around the effect of
the upgrading by Danilo Alto of his card. Was the upgrading a novation of the original agreement governing
the use of Danilo Alto's first credit card, as to extinguish that obligation and the Surety Undertaking which was
simply accessory to it?

Additionally, the Court of Appeals reduced the attorney's fees (stipulated in the Agreement for the Use of
Diners Club Card) from 25% to 10% of the amount due, judging this to be a more reasonable rate under the
circumstances.

Novation, as a mode of extinguishing obligations, may be done in two ways: by explicit declaration, or by
material incompatibility (implied novation). As we stated in Fortune Motors vs. Court of Appeals, supra:

The dispositive portion of the decision of the Court of Appeals reads:

WHEREFORE, the appealed Decision is REVERSED and one is rendered ordering defendant-appellee
Jeanette D. Molino-Alto to pay plaintiff-appellant Security Diners Intentional, Inc. the following:
1. The sum of P166,408.31 plus interest of 3% per annum and 2% per month from November 9, 1988 until the
obligation is fully paid;
2. The amount equivalent to 10% of the obligation mentioned in the preceding paragraph as attorneys fees;
and
3. Costs.
SO ORDERED.9
Petitioner's motion for reconsideration of the above decision was denied for lack of merit on December 1,
1998. Hence, the petition before us, which assigns the following errors:
I.
The material findings of the Court of Appeals, which are contrary to those of the lower court are erroneous.

x x x The test of incompatibility is whether the two obligations can stand together, each one having its
independent existence. If they cannot, they are incompatible and the latter obligation novates the first.
Novation must be established either by the express terms of the new agreement or by the acts of the parties
clearly demonstrating the intent to dissolve the old obligation as a consideration for the emergence of the new
one. The will to novate, whether totally or partially, must appear by express agreement of the parties, or by
their acts which are too clear or unequivocal to be mistaken.
There is no doubt that the upgrading was a novation of the original agreement covering the first credit card
issued to Danilo Alto, basically since it was committed with the intent of canceling and replacing the said card.
However, the novation did not serve to release petitioner from her surety obligations because in the Surety
Undertaking she expressly waived discharge in case of change or novation in the agreement governing the
use of the first credit card.
The nature and extent of petitioner's obligations are set out in clear and unmistakable terms in the Surety
Undertaking. Thus:
1. She bound herself jointly and severally with Danilo Alto to pay SDIC all obligations and charges in the use of
the Diners Club Card, including fees, interest, attorney's fees, and costs;
2. She declared that "any change or novation in the Agreement or any extension of time granted by
SECURITY DINERS to pay such obligation, charges, and fees, shall not release (her) from this Surety
Undertaking";
3. "(S)aid undertaking is a continuous one and shall subsist and bind (her) until all such obligations, charges
and fees have been fully paid and satisfied"; and

II.
The findings of the Court of Appeals are conflicting and/or without citation of specific evidence on which they
are based.

4. "The indication of a credit limit to the cardholder shall not relieve (her) of liability for charges and all other
amounts voluntarily incurred by the cardholder in excess of said credit limit." 12

We cannot give any additional meaning to the plain language of the subject undertaking. The extent of a
surety's liability is determined by the language of the suretyship contract or bond itself. 13 Article 1370 of the
Civil Code provides: "If the terms of contract are clear and leave no doubt upon the intention of the contracting
parties, the literal meaning of its stipulations shall control."
This case is no different from Pacific Banking Corporation vs. IAC, supra, correctly applied by the Court of
Appeals, which involved a Guarantor's Undertaking (although thus denominated, it was in substance a
contract of surety signed by the husband for the credit card application of his wife. Like herein petitioner, the
husband also argued that his liability should be limited to the credit limit allowed under his wife's card but the
Court declared him liable to the full extent of his wife's indebtedness. Thus:
We need not look elsewhere to determine the nature and extent of private respondent Roberto Regala, Jr.'s
undertaking. As a surety he bound himself jointly and severally with the debtor Celia Regala "to pay the Pacific
Banking Corporation upon demand, any and all indebtedness, obligations, charges or liabilities due and
incurred by said Celia Syjuco Regala with the use of Pacificard or renewals thereof issued in (her) favor by
Pacific Banking Corporation. x x x.
xxx

xxx

xxx

It is likewise not disputed by the parties that the credit limit granted to Celia Regala was P2,000.00 per month
and that Celia Regala succeeded in using the card beyond the original period of its effectivity, October 29,
1979. We do not agree, however, that Roberto Jr.'s liability should be limited to that extent. Private respondent
Roberto Regala, Jr., as surety of his wife, expressly bound himself up to the extent of the debtor's (Celia's)
indebtedness likewise expressly waiving any "discharge in case of any change or novation of the terms and
conditions in connection with the issuance of the Pacificard credit card." Roberto, in fact, made his
commitment as a surety a continuing one, binding upon himself until all the liabilities of Celia Regala have
been fully paid. All these were clear under the "Guarantor's Undertaking" Roberto signed, thus:
"x x x Any changes of or novation in the terms and conditions in connection with the issuance or use of said
Pacificard, or any extension of time to pay such obligations, charges or liabilities shall not in any manner
release me/us from the responsibility hereunder, it being understood that the undertaking is a continuing one
and shall subsist and bind me/us until all the liabilities of the said Celia Syjuco Regala have been fully satisfied
or paid." (italics supplied)
As a last-ditch measure, petitioner asseverates that, being merely a surety, a pronouncement should first be
made declaring the principal debtor liable before she herself can be proceeded against. The argument, which
is hinged upon the dropping of Danilo as defendant in the complaint, is bereft of merit.
The Surety Undertaking expressly provides that petitioner's liability is solidary. A surety is considered in law as
being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and
their liabilities are interwoven as to be inseparable. 14 Although the contract of a surety is in essence secondary
only to a valid principal obligation, his liability to the creditor is direct, primary and absolute; he becomes liable
for the debt and duty of another although he possesses no direct or personal interest over the obligations nor
does he receive any benefit therefrom. 15 There being no question that Danilo Alto incurred debts of
P166,408.31 in credit card advances, an obligation shared solidarily by petitioner, respondent was certainly
within its rights to proceed singly against petitioner, as surety and solidary debtor, without prejudice to any
action it may later file against Danilo Alto, until the obligation is fully satisfied. This is so provided under Article
1216 of the Civil Code:
The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The
demand made against one of them shall not be an obstacle to those which may be subsequently directed
against the others, so long as the debt has not been fully collected.
Petitioner is a graduate of business administration, and possesses considerable work experience in several
banks. She knew the full import and consequence of the Surety Undertaking that she executed. She had the
option to withdraw her suretyship when Danilo upgraded his card to one that permitted unlimited purchases,
but instead she approved the upgrading. While we commiserate in the financial predicament she now faces, it

is also evident that the liability she incurred is only the legitimate consequence of an undertaking that she
freely and intelligently obliged to. Prospective sureties to credit card applicants would be well-advised to study
carefully the terms of the agreements prepared by the credit card companies before giving their consent, and
pay heed to speculations that could lead to onerous effects, like in the present case where the credit applied
for was limitless. At the same time, it bears articulating that although courts in appropriate cases may equitably
reduce the award for penalty as provided under such suretyship agreements if the same is iniquitous or
unconscionable,16 we are unable to give relief to petitioner by way of reducing the amount of the principal
liability as surety under the circumstances of this case.
WHEREFORE, the petition is dismissed for lack of merit The decision of the Court of Appeals is AFFIRMED in
all respects.
SO ORDERED.
[G.R. No. 154127. December 8, 2003]
ROMEO C. GARCIA, petitioner, vs. DIONISIO V. LLAMAS, respondent.
DECISION
PANGANIBAN, J.:
Novation cannot be presumed. It must be clearly shown either by the express assent of the parties or
by the complete incompatibility between the old and the new agreements. Petitioner herein fails to show either
requirement convincingly; hence, the summary judgment holding him liable as a joint and solidary debtor
stands.
The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to nullify theNovember
26, 2001 Decision[2] and the June 26, 2002 Resolution[3] of the Court of Appeals (CA) in CA-GR CV No.
60521. The appellate court disposed as follows:
UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment appealed from, insofar as it pertains to
[Petitioner] Romeo Garcia, must be, as it hereby is, AFFIRMED, subject to the modification that the award for
attorneys fees and cost of suit is DELETED. The portion of the judgment that pertains to x xx Eduardo de Jesus is SET
ASIDE and VACATED. Accordingly, the case against x x x Eduardo de Jesus isREMANDED to the court of origin for
purposes of receiving ex parte [Respondent] Dionisio Llamas evidence against x x x Eduardo de Jesus.[4]
The challenged Resolution, on the other hand, denied petitioners Motion for Reconsideration.
The Antecedents
The antecedents of the case are narrated by the CA as follows:
This case started out as a complaint for sum of money and damages by x x x [Respondent] Dionisio Llamas against
x x x [Petitioner] Romeo Garcia and Eduardo de Jesus. Docketed as Civil Case No. Q97-32-873, the complaint alleged
that on 23 December 1996[,] [petitioner and de Jesus] borrowed P400,000.00 from [respondent]; that, on the same day,
[they] executed a promissory note wherein they bound themselves jointly and severally to pay the loan on or before 23
January 1997 with a 5% interest per month; that the loan has long been overdue and, despite repeated demands,
[petitioner and de Jesus] have failed and refused to pay it; and that, by reason of the[ir] unjustified refusal, [respondent]
was compelled to engage the services of counsel to whom he agreed to pay 25% of the sum to be recovered from
[petitioner and de Jesus], plusP2,000.00 for every appearance in court. Annexed to the complaint were the promissory
note above-mentioned and a demand letter, dated 02 May 1997, by [respondent] addressed to [petitioner and de Jesus].

Resisting the complaint, [Petitioner Garcia,] in his [Answer,] averred that he assumed no liability under the promissory
note because he signed it merely as an accommodation party for x x x de Jesus; and, alternatively, that he is relieved from
any liability arising from the note inasmuch as the loan had been paid by x x x de Jesus by means of a check dated 17
April 1997; and that, in any event, the issuance of the check and [respondents] acceptance thereof novated or superseded
the note.
[Respondent] tendered a reply to [Petitioner] Garcias answer, thereunder asserting that the loan remained unpaid for the
reason that the check issued by x x x de Jesus bounced, and that [Petitioner] Garcias answer was not even accompanied
by a certificate of non-forum shopping. Annexed to the reply were the face of the check and the reverse side thereof.
For his part, x x x de Jesus asserted in his [A]nswer with [C]ounterclaim that out of the supposedP400,000.00 loan, he
received only P360,000.00, the P40,000.00 having been advance interest thereon for two months, that is, for January and
February 1997; that[,] in fact[,] he paid the sum of P120,000.00 by way of interests; that this was made when
[respondents] daughter, one Nits Llamas-Quijencio, received from the Central Police District Command
at Bicutan, Taguig, Metro Manila (where x x x de Jesus worked), the sum of P40,000.00, representing the peso equivalent
of his accumulated leave credits, another P40,000.00 as advance interest, and still another P40,000.00 as interest for the
months of March and April 1997; that he had difficulty in paying the loan and had asked [respondent] for an extension of
time; that [respondent] acted in bad faith in instituting the case, [respondent] having agreed to accept the benefits he (de
Jesus) would receive for his retirement, but [respondent] nonetheless filed the instant case while his retirement was being
processed; and that, in defense of his rights, he agreed to pay his counsel P20,000.00 [as] attorneys fees, plusP1,000.00
for every court appearance.

even though De Jesus had been declared in default. The case against the latter was therefore remanded by
the CA to the trial court for the ex partereception of the formers evidence.
As to petitioner, the CA treated his case as a summary judgment, because his Answer had failed to
raise even a single genuine issue regarding any material fact.
The appellate court ruled that no novation -- express or implied -- had taken place when respondent
accepted the check from De Jesus. According to the CA, the check was issued precisely to pay for the loan
that was covered by the promissory note jointly and severally undertaken by petitioner and De Jesus.
Respondents acceptance of the check did not serve to make De Jesus the sole debtor because, first, the
obligation incurred by him and petitioner was joint and several; and, second, the check -- which had been
intended to extinguish the obligation -- bounced upon its presentment.
Hence, this Petition.[7]
Issues
Petitioner submits the following issues for our consideration:
I

During the pre-trial conference, x x x de Jesus and his lawyer did not appear, nor did they file any pre-trial
brief. Neither did [Petitioner] Garcia file a pre-trial brief, and his counsel even manifested that he would no [longer]
present evidence. Given this development, the trial court gave [respondent] permission to present his
evidence ex parte against x x x de Jesus; and, as regards [Petitioner] Garcia, the trial court directed [respondent] to file a
motion for judgment on the pleadings, and for [Petitioner] Garcia to file his comment or opposition thereto.
Instead, [respondent] filed a [M]otion to declare [Petitioner] Garcia in default and to allow him to present his
evidence ex parte. Meanwhile, [Petitioner] Garcia filed a [M]anifestation submitting his defense to a judgment on the
pleadings. Subsequently, [respondent] filed a [M]anifestation/[M]otion to submit the case for judgement on the pleadings,
withdrawing in the process his previous motion. Thereunder, he asserted that [petitioners and de Jesus] solidary liability
under the promissory note cannot be any clearer, and that the check issued by de Jesus did not discharge the loan since the
check bounced.[5]
On July 7, 1998, the Regional Trial Court (RTC) of Quezon City (Branch 222) disposed of the case as
follows:
WHEREFORE, premises considered, judgment on the pleadings is hereby rendered in favor of [respondent] and against
[petitioner and De Jesus], who are hereby ordered to pay, jointly and severally, the [respondent] the following sums, to
wit:
1)
P400,000.00 representing the principal amount plus 5% interest thereon per month from January 23, 1997 until
the same shall have been fully paid, less the amount of P120,000.00 representing interests already paid by x x x de Jesus;
2)

P100,000.00 as attorneys fees plus appearance fee of P2,000.00 for each day of [c]ourt appearance, and;

3)

Cost of this suit.[6]

Ruling of the Court of Appeals

The CA ruled that the trial court had erred when it rendered a judgment on the pleadings against De
Jesus. According to the appellate court, his Answer raised genuinely contentious issues. Moreover, he was still
required to present his evidence ex parte. Thus, respondent was notipso facto entitled to the RTC judgment,

Whether or not the Honorable Court of Appeals gravely erred in not holding that novation applies in the instant case as
x x x Eduardo de Jesus had expressly assumed sole and exclusive liability for the loan obligation he obtained from
x x x Respondent Dionisio Llamas, as clearly evidenced by:
a)

Issuance by x x x de Jesus of a check in payment of the full amount of the loan

ofP400,000.00 in favor of Respondent Llamas, although the check subsequently
bounced[;]

b)

Acceptance of the check by the x x x respondent x x x which resulted in [the] substitution

by x x x de Jesus or [the superseding of] the promissory note;

c)

x x x de Jesus having paid interests on the loan in the total amount of P120,000.00;

d)

The fact that Respondent Llamas agreed to the proposal of x x x de Jesus that due to
financial difficulties, he be given an extension of time to pay his loan obligation
and that his retirement benefits from the Philippine National Police will answer for
said obligation.
II

Whether or not the Honorable Court of Appeals seriously erred in not holding that the defense of petitioner that he was
merely an accommodation party, despite the fact that the promissory note provided for a joint andsolidary liability, should
have been given weight and credence considering that subsequent events showed that the principal obligor was in truth
and in fact x x x de Jesus, as evidenced by the foregoing circumstances showing his assumption of sole liability over the
loan obligation.
III
Whether or not judgment on the pleadings or summary judgment was properly availed of by Respondent Llamas, despite
the fact that there are genuine issues of fact, which the Honorable Court of Appeals itself admitted in its Decision, which
call for the presentation of evidence in a full-blown trial.[8]

Simply put, the issues are the following: 1) whether there was novation of the obligation; 2) whether the
defense that petitioner was only an accommodation party had any basis; and 3) whether the judgment against
him -- be it a judgment on the pleadings or a summary judgment -- was proper.
The Courts Ruling

4)

There must be a valid new contract.[15]

Novation may also be express or implied. It is express when the new obligation declares in unequivocal
terms that the old obligation is extinguished. It is implied when the new obligation is incompatible with the old
one on every point.[16] The test of incompatibility is whether the two obligations can stand together, each one
with its own independent existence.[17]

The Petition has no merit.

Applying the foregoing to the instant case, we hold that no novation took place.
First Issue:
Novation
Petitioner seeks to extricate himself from his obligation as joint and solidary debtor by insisting
that novation took place, either through the substitution of De Jesus as sole debtor or the replacement of the
promissory note by the check. Alternatively, the former argues that the original obligation was extinguished
when the latter, who was his co-obligor, paid the loan with the check.
The fallacy of the second (alternative) argument is all too apparent. The check could not have
extinguished the obligation, because it bounced upon presentment. By law, [9] the delivery of a check produces
the effect of payment only when it is encashed.
We now come to the main issue of whether novation took place.
Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by
substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor.
[10]
Article 1293 of the Civil Code defines novation as follows:
Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made even
without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new
debtor gives him rights mentioned in articles 1236 and 1237.
In general, there are two modes of substituting the person of the debtor: (1) expromision and
(2) delegacion. In expromision, the initiative for the change does not come from -- and may even be made
without the knowledge of -- the debtor, since it consists of a third persons assumption of the obligation. As
such, it logically requires the consent of the third person and the creditor. Indelegacion, the debtor offers, and
the creditor accepts, a third person who consents to the substitution and assumes the obligation; thus, the
consent of these three persons are necessary.[11]Both modes of substitution by the debtor require the consent
of the creditor.[12]
Novation may also be extinctive or modificatory. It is extinctive when an old obligation is terminated by
the creation of a new one that takes the place of the former. It is merely modificatorywhen the old obligation
subsists to the extent that it remains compatible with the amendatory agreement. [13] Whether extinctive
or modificatory, novation is made either by changing the object or the principal conditions, referred to as
objective or real novation; or by substituting the person of the debtor or subrogating a third person to the rights
of the creditor, an act known as subjective or personal novation.[14] For novation to take place, the following
requisites must concur:
1)

There must be a previous valid obligation.

2)

The parties concerned must agree to a new contract.

3)

The old contract must be extinguished.

The parties did not unequivocally declare that the old obligation had been extinguished by the issuance
and the acceptance of the check, or that the check would take the place of the note. There is no incompatibility
between the promissory note and the check. As the CA correctly observed, the check had been issued
precisely to answer for the obligation. On the one hand, the note evidences the loan obligation; and on the
other, the check answers for it. Verily, the two can stand together.
Neither could the payment of interests -- which, in petitioners view, also constitutes novation[18]-change the terms and conditions of the obligation. Such payment was already provided for in the promissory
note and, like the check, was totally in accord with the terms thereof.
Also unmeritorious is petitioners argument that the obligation was novated by the substitution of
debtors. In order to change the person of the debtor, the old one must be expressly released from the
obligation, and the third person or new debtor must assume the formers place in the relation.[19] Well-settled is
the rule that novation is never presumed.[20] Consequently, that which arises from a purported change in the
person of the debtor must be clear and express. [21] It is thus incumbent on petitioner to show clearly and
unequivocally that novation has indeed taken place.
In the present case, petitioner has not shown that he was expressly released from the obligation, that a
third person was substituted in his place, or that the joint and solidary obligation was cancelled and substituted
by the solitary undertaking of De Jesus. The CA aptly held:
x x x. Plaintiffs acceptance of the bum check did not result in substitution by de Jesus either, the nature of the obligation
being solidary due to the fact that the promissory note expressly declared that the liability of appellants thereunder is joint
and [solidary.] Reason: under the law, a creditor may demand payment or performance from one of the solidary debtors
or some or all of them simultaneously, and payment made by one of them extinguishes the obligation. It therefore
follows that in case the creditor fails to collect from one of the solidary debtors, he may still proceed against the other or
others. x x x [22]
Moreover, it must be noted that for novation to be valid and legal, the law requires that the creditor
expressly consent to the substitution of a new debtor.[23] Since novation implies a waiver of the right the
creditor had before the novation, such waiver must be express. [24] It cannot be supposed, without clear proof,
that the present respondent has done away with his right to exact fulfillment from either of the solidary debtors.
[25]

More important, De Jesus was not a third person to the obligation. From the beginning, he was a joint
and solidary obligor of the P400,000 loan; thus, he can be released from it only upon its
extinguishment. Respondents acceptance of his check did not change the person of the debtor, because a
joint and solidary obligor is required to pay the entirety of the obligation.
It must be noted that in a solidary obligation, the creditor is entitled to demand the satisfaction of the
whole obligation from any or all of the debtors. [26] It is up to the former to determine against whom to enforce
collection.[27] Having made himself jointly and severally liable with De Jesus, petitioner is therefore liable [28] for
the entire obligation.[29]
Second Issue:

Accommodation Party
Petitioner avers that he signed the promissory note merely as an accommodation party; and that, as
such, he was released as obligor when respondent agreed to extend the term of the obligation.
This reasoning is misplaced, because the note herein is not a negotiable instrument. The note reads:
PROMISSORY NOTE
P400,000.00
RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of FOUR HUNDRED THOUSAND PESOS, Philippine
Currency payable on or before January 23, 1997 at No. 144 K-10 St. Kamias, Quezon City, with interest at the rate of 5%
per month or fraction thereof.
It is understood that our liability under this loan is jointly and severally [sic].
Done at Quezon City, Metro Manila this 23rd day of December, 1996.[30]
By its terms, the note was made payable to a specific person rather than to bearer or to order [31] -- a
requisite for negotiability under Act 2031, the Negotiable Instruments Law (NIL). Hence, petitioner cannot avail
himself of the NILs provisions on the liabilities and defenses of an accommodation party. Besides, a nonnegotiable note is merely a simple contract in writing and is evidence of such intangible rights as may have
been created by the assent of the parties. [32] The promissory note is thus covered by the general provisions of
the Civil Code, not by the NIL.
Even granting arguendo that the NIL was applicable, still, petitioner would be liable for the promissory
note. Under Article 29 of Act 2031, an accommodation party is liable for the instrument to a holder for value
even if, at the time of its taking, the latter knew the former to be only an accommodation party. The relation
between an accommodation party and the party accommodated is, in effect, one of principal and surety -- the
accommodation party being the surety.[33] It is a settled rule that a surety is bound equally and absolutely with
the principal and is deemed an original promissor and debtor from the beginning. The liability is immediate
and direct.[34]

On the other hand, under Section 1 of Rule 34 of the Rules of Court, a judgment on the pleadings is
proper when an answer fails to render an issue or otherwise admits the material allegations of the adverse
partys pleading. The essential question is whether there are issues generated by the pleadings. [38] A
judgment on the pleadings may be sought only by a claimant, who is the party seeking to recover upon a
claim, counterclaim or cross-claim; or to obtain a declaratory relief. [39]
Apropos thereto, it must be stressed that the trial courts judgment against petitioner was correctly
treated by the appellate court as a summary judgment, rather than as a judgment on the pleadings. His
Answer[40] apparently raised several issues -- that he signed the promissory note allegedly as a mere
accommodation party, and that the obligation was extinguished by either payment or novation. However, these
are not factual issues requiring trial. We quote with approval the CAs observations:
Although Garcias [A]nswer tendered some issues, by way of affirmative defenses, the documents submitted by
[respondent] nevertheless clearly showed that the issues so tendered were not valid issues. Firstly, Garcias claim that he
was merely an accommodation party is belied by the promissory note that he signed. Nothing in the note indicates that he
was only an accommodation party as he claimed to be. Quite the contrary, the promissory note bears the statement: It is
understood that our liability under this loan is jointly and severally [sic]. Secondly, his claim that his co-defendant de
Jesus already paid the loan by means of a check collapses in view of the dishonor thereof as shown at the dorsal side of
said check.[41]
From the records, it also appears that petitioner himself moved to submit the case for judgment on the
basis of the pleadings and documents. In a written Manifestation,[42] he stated that judgment on the pleadings
may now be rendered without further evidence, considering the allegations and admissions of the parties. [43]
In view of the foregoing, the CA correctly considered as a summary judgment that which the trial court
had issued against petitioner.
WHEREFORE, this Petition is hereby DENIED and the assailed Decision AFFIRMED. Costs against
petitioner.
SO ORDERED.

[G.R. No. 147950. December 11, 2003]

Third Issue:
Propriety of Summary Judgment
CALIFORNIA BUS LINES, INC., petitioner, vs. STATE INVESTMENT HOUSE, INC., respondent.
or Judgment on the Pleadings
DECISION
The next issue illustrates the usual confusion between a judgment on the pleadings and a summary
judgment. Under Section 3 of Rule 35 of the Rules of Court, a summary judgment may be rendered after a
summary hearing if the pleadings, supporting affidavits, depositions and admissions on file show that (1)
except as to the amount of damages, there is no genuine issue regarding any material fact; and (2) the moving
party is entitled to a judgment as a matter of law.
A summary judgment is a procedural device designed for the prompt disposition of actions in which the
pleadings raise only a legal, not a genuine, issue regarding any material fact. [35]Consequently, facts are
asserted in the complaint regarding which there is yet no admission, disavowal or qualification; or specific
denials or affirmative defenses are set forth in the answer, but the issues are fictitious as shown by the
pleadings, depositions or admissions. [36] A summary judgment may be applied for by either a claimant or a
defending party.[37]

QUISUMBING, J.:
In this petition for review, California Bus Lines, Inc., assails the decision, [1] dated April 17, 2001, of the
Court of Appeals in CA-G.R. CV No. 52667, reversing the judgment [2], dated June 3, 1993, of the Regional
Trial Court of Manila, Branch 13, in Civil Case No. 84-28505 entitled State Investment House, Inc. v. California
Bus Lines, Inc., for collection of a sum of money. The Court of Appeals held petitioner California Bus Lines,
Inc., liable for the value of five promissory notes assigned to respondent State Investment House, Inc.
The facts, as culled from the records, are as follows:
Sometime in 1979, Delta Motors CorporationM.A.N. Division (Delta) applied for financial assistance
from respondent State Investment House, Inc. (hereafter SIHI), a domestic corporation engaged in the
business of quasi-banking. SIHI agreed to extend a credit line to Delta forP25,000,000.00 in three separate
credit agreements dated May 11, June 19, and August 22, 1979.[3] On several occasions, Delta availed of the

credit line by discounting with SIHI some of its receivables, which evidence actual sales of Deltas
vehicles. Delta eventually became indebted to SIHI to the tune of P24,010,269.32.[4]
Meanwhile, from April 1979 to May 1980, petitioner California Bus Lines, Inc. (hereafter CBLI),
purchased on installment basis 35 units of M.A.N. Diesel Buses and two (2) units of M.A.N. Diesel Conversion
Engines from Delta. To secure the payment of the purchase price of the 35 buses, CBLI and its president,
Mr. Dionisio O. Llamas, executed sixteen (16) promissory notes in favor of Delta on January 23 and April 25,
1980.[5] In each promissory note, CBLI promised to pay Delta or order, P2,314,000 payable in 60 monthly
installments starting August 31, 1980, with interest at 14% per annum. CBLI further promised to pay the
holder of the said notes 25% of the amount due on the same as attorneys fees and expenses of collection,
whether actually incurred or not, in case of judicial proceedings to enforce collection. In addition to the notes,
CBLI executed chattel mortgages over the 35 buses in Deltas favor.
When CBLI defaulted on all payments due, it entered into a restructuring agreement with Delta
on October 7, 1981, to cover its overdue obligations under the promissory notes. [6] The restructuring
agreement provided for a new schedule of payments of CBLIs past due installments, extending the period to
pay, and stipulating daily remittance instead of the previously agreed monthly remittance of payments. In case
of default, Delta would have the authority to take over the management and operations of CBLI until CBLI
and/or its president, Mr. Dionisio Llamas, remitted and/or updated CBLIs past due account. CBLI and Delta
also increased the interest rate to 16% p.a. and added a documentation fee of 2% p.a. and a 4% p.a.
restructuring fee.
On December 23, 1981, Delta executed a Continuing Deed of Assignment of Receivables [7] in favor of
SIHI as security for the payment of its obligations to SIHI per the credit agreements. In view of Deltas failure
to pay, the loan agreements were restructured under a Memorandum of Agreement dated March 31, 1982.
[8]
Delta obligated itself to pay a fixed monthly amortization ofP400,000 to SIHI and to discount with
SIHI P8,000,000 worth of receivables with the understanding that SIHI shall apply the proceeds against
Deltas overdue accounts.
CBLI continued having trouble meeting its obligations to Delta. This prompted Delta to threaten CBLI
with the enforcement of the management takeover clause. To pre-empt the take-over, CBLI filed on May 3,
1982, a complaint for injunction [9], docketed as Civil Case No. 0023-P, with the Court of First Instance
of Rizal, Pasay City, (now Regional Trial Court of Pasay City). In due time, Delta filed its amended answer
with applications for the issuance of a writ of preliminary mandatory injunction to enforce the management
takeover clause and a writ of preliminary attachment over the buses it sold to CBLI. [10] On December 27,
1982,[11] the trial court granted Deltas prayer for issuance of a writ of preliminary mandatory injunction and
preliminary attachment on account of the fraudulent disposition by CBLI of its assets.
On September 15, 1983, pursuant to the Memorandum of Agreement, Delta executed a Deed of
Sale[12] assigning to SIHI five (5) of the sixteen (16) promissory notes [13] from California Bus Lines, Inc. At the
time of assignment, these five promissory notes, identified and numbered as 80-53, 80-54, 80-55, 80-56, and
80-57, had a total value of P16,152,819.80 inclusive of interest at 14% per annum.
SIHI subsequently sent a demand letter dated December 13, 1983,[14] to CBLI requiring CBLI to remit
the payments due on the five promissory notes directly to it. CBLI replied informing SIHI of Civil Case No.
0023-P and of the fact that Delta had taken over its management and operations. [15]
As regards Deltas remaining obligation to SIHI, Delta offered its available bus units, valued
atP27,067,162.22, as payment in kind. [16] On December 29, 1983, SIHI accepted Deltas offer, and Delta
transferred the ownership of its available buses to SIHI, which in turn acknowledged full payment of Deltas
remaining obligation.[17] When SIHI was unable to take possession of the buses, SIHI filed a petition for
recovery of possession with prayer for issuance of a writ of replevin before the RTC of Manila, Branch 6,
docketed as Civil Case No. 84-23019. The Manila RTC issued a writ of replevin and SIHI was able to take
possession of 17 bus units belonging to Delta. SIHI applied the proceeds from the sale of the said 17 buses
amounting to P12,870,526.98 to Deltas outstanding obligation. Deltas obligation to SIHI was thus reduced
to P20,061,898.97. OnDecember 5, 1984, Branch 6 of the RTC of Manila rendered judgment in Civil Case
No. 84-23019 ordering Delta to pay SIHI this amount.
Thereafter, Delta and CBLI entered into a compromise agreement on July 24, 1984,[18] in Civil Case No.
0023-P, the injunction case before the RTC of Pasay. CBLI agreed that Delta would exercise its right
to extrajudicially foreclose on the chattel mortgages over the 35 bus units. The RTC of Pasay approved this
compromise agreement the following day, July 25, 1984.[19] Following this, CBLI vehemently refused to pay
SIHI the value of the five promissory notes, contending that the compromise agreement was in full settlement
of all its obligations to Delta including its obligations under the promissory notes.
On December 26, 1984, SIHI filed a complaint, docketed as Civil Case No. 84-28505, against CBLI in
the Regional Trial Court of Manila, Branch 34, to collect on the five (5) promissory notes with interest at 14%
p.a. SIHI also prayed for the issuance of a writ of preliminary attachment against the properties of CBLI. [20]

On December 28, 1984, Delta filed a petition for extrajudicial foreclosure of chattel mortgages pursuant
to its compromise agreement with CBLI. On January 2, 1985, Delta filed in the RTC ofPasay a motion for
execution of the judgment based on the compromise agreement. [21] The RTC ofPasay granted this motion the
following day.[22]
In view of Deltas petition and motion for execution per the judgment of compromise, the RTC of Manila
granted in Civil Case No. 84-28505 SIHIs application for preliminary attachment onJanuary 4, 1985.
[23]
Consequently, SIHI was able to attach and physically take possession of thirty-two (32) buses belonging to
CBLI.[24] However, acting on CBLIs motion to quash the writ of preliminary attachment, the same court
resolved on January 15, 1986,[25] to discharge the writ of preliminary attachment. SIHI assailed the discharge
of the writ before the Intermediate Appellate Court (now Court of Appeals) in a petition for certiorari and
prohibition, docketed as CA-G.R. SP No. 08378. On July 31, 1987, the Court of Appeals
granted SIHIs petition in CA-GR SP No. 08378 and ruled that the writ of preliminary attachment issued by
Branch 34 of the RTC Manila in Civil Case No. 84-28505 should stay. [26] The decision of the Court of Appeals
attained finality on August 22, 1987.[27]
Meanwhile, pursuant to the January 3, 1985 Order of the RTC of Pasay, the sheriff of PasayCity
conducted a public auction and issued a certificate of sheriffs sale to Delta on April 2, 1987, attesting to the
fact that Delta bought 14 of the 35 buses for P3,920,000.[28] On April 7, 1987, the sheriff of Manila, by virtue of
the writ of execution dated March 27, 1987, issued by Branch 6 of the RTC of Manila in Civil Case No. 8423019, sold the same 14 buses at public auction in partial satisfaction of the judgment SIHI obtained against
Delta in Civil Case No. 84-23019.
Sometime in May 1987, Civil Case No. 84-28505 was raffled to Branch 13 of the RTC of Manila in view
of the retirement of the presiding judge of Branch 34. Subsequently, SIHI moved to sell the sixteen (16) buses
of CBLI which had previously been attached by the sheriff in Civil Case No. 84-28505 pursuant to the January
4, 1985, Order of the RTC of Manila. [29] SIHIs motion was granted on December 16, 1987.[30] On November
29, 1988, however, SIHI filed an urgent ex-parte motion to amend this order claiming that through
inadvertence and excusable negligence of its new counsel, it made a mistake in the list of buses in the Motion
to Sell Attached Properties it had earlier filed. [31]SIHI explained that 14 of the buses listed had already been
sold to Delta on April 2, 1987, by virtue of the January 3, 1985 Order of the RTC of Pasay, and that two of the
buses listed had been released to third party, claimant Pilipinas Bank, by Order dated September 16,
1987[32] of Branch 13 of the RTC of Manila.
CBLI opposed SIHIs motion to allow the sale of the 16 buses. On May 3, 1989,[33] Branch 13 of the
RTC of Manila denied SIHIs urgent motion to allow the sale of the 16 buses listed in its motion to amend. The
trial court ruled that the best interest of the parties might be better served by denying further sales of the buses
and to go direct to the trial of the case on the merits. [34]
After trial, judgment was rendered in Civil Case No. 84-28505 on June 3, 1993, discharging CBLI from
liability on the five promissory notes. The trial court likewise favorably ruled on CBLIscompulsory
counterclaim. The trial court directed SIHI to return the 16 buses or to pay CBLIP4,000,000 representing the
value of the seized buses, with interest at 12% p.a. to begin fromJanuary 11, 1985, the date SIHI seized the
buses, until payment is made. In ruling against SIHI, the trial court held that the restructuring agreement
dated October 7, 1981, between Delta and CBLI novated the five promissory notes; hence, at the time Delta
assigned the five promissory notes to SIHI, the notes were already merged in the restructuring agreement and
cannot be enforced against CBLI.
SIHI appealed the decision to the Court of Appeals. The case was docketed as CA-G.R. CV No.
52667. On April 17, 2001, the Court of Appeals decided CA-G.R. CV No. 52667 in this manner:
WHEREFORE, based on the foregoing premises and finding the appeal to be meritorious, We find defendantappellee CBLI liable for the value of the five (5) promissory notes subject of the complaint a quoless the
proceeds from the attached sixteen (16) buses. The award of attorneys fees and costs is eliminated. The
appealed decision is hereby REVERSED. No costs.
SO ORDERED.[35]
Hence, this appeal where CBLI contends that
I. THE COURT OF APPEALS ERRED IN DECLARING THAT THE RESTRUCTURING
AGREEMENT BETWEEN DELTA AND THE PETITIONER DID NOT SUBSTANTIALLY
NOVATE THE TERMS OF THE FIVE PROMISSORY NOTES.

II. THE COURT OF APPEALS ERRED IN HOLDING THAT THE COMPROMISE AGREEMENT
BETWEEN DELTA AND THE PETITIONER IN THE PASAY CITY CASE DID NOT
SUPERSEDE AND DISCHARGE THE PROMISSORY NOTES.
III. THE COURT OF APPEALS ERRED IN UPHOLDING THE CONTINUING VALIDITY OF THE
PRELIMINARY ATTACHMENT AND EXONERATING THE RESPONDENT OF
MALEFACTIONS IN PRESERVING AND ASSERTING ITS RIGHTS THEREUNDER.[36]
Essentially, the issues are (1) whether the Restructuring Agreement dated October 7, 1981, between
petitioner CBLI and Delta Motors, Corp. novated the five promissory notes Delta Motors, Corp. assigned to
respondent SIHI, and (2) whether the compromise agreement in Civil Case No. 0023-P superseded and/or
discharged the subject five promissory notes. The issues being interrelated, they shall be jointly discussed.
CBLI first contends that the Restructuring Agreement did not merely change the incidental elements of
the obligation under all sixteen (16) promissory notes, but it also increased the obligations of CBLI with the
addition of new obligations that were incompatible with the old obligations in the said notes. [37] CBLI adds that
even if the restructuring agreement did not totally extinguish the obligations under the sixteen (16) promissory
notes, the July 24, 1984, compromise agreement executed in Civil Case No. 0023-P did. [38] CBLI cites
paragraph 5 of the compromise agreement which states that the agreement between it and CBLI was in full
and final settlement, adjudication and termination of all their rights and obligations as of the date of (the)
agreement, and of the issues in (the) case. According to CBLI, inasmuch as the five promissory notes were
subject matters of the Civil Case No. 0023-P, the decision approving the compromise agreement operated
as res judicata in the present case.[39]
Novation has been defined as the extinguishment of an obligation by the substitution or change of the
obligation by a subsequent one which terminates the first, either by changing the object or principal conditions,
or by substituting the person of the debtor, or subrogating a third person in the rights of the creditor. [40]
Novation, in its broad concept, may either be extinctive or modificatory.[41] It is extinctive when an old
obligation is terminated by the creation of a new obligation that takes the place of the former; it is
merely modificatory when the old obligation subsists to the extent it remains compatible with the amendatory
agreement.[42] An extinctive novation results either by changing the object or principal conditions (objective or
real), or by substituting the person of the debtor or subrogating a third person in the rights of the creditor
(subjective or personal).[43] Novation has two functions: one to extinguish an existing obligation, the other to
substitute a new one in its place. [44] For novation to take place, four essential requisites have to be met,
namely, (1) a previous valid obligation; (2) an agreement of all parties concerned to a new contract; (3) the
extinguishment of the old obligation; and (4) the birth of a valid new obligation. [45]
Novation is never presumed,[46] and the animus novandi, whether totally or partially, must appear by
express agreement of the parties, or by their acts that are too clear and unequivocal to be mistaken. [47]
The extinguishment of the old obligation by the new one is a necessary element of novationwhich may
be effected either expressly or impliedly.[48] The term "expressly" means that the contracting parties
incontrovertibly disclose that their object in executing the new contract is to extinguish the old one. [49] Upon the
other hand, no specific form is required for an implied novation, and all that is prescribed by law would be an
incompatibility between the two contracts. [50] While there is really no hard and fast rule to determine what might
constitute to be a sufficient change that can bring about novation, the touchstone for contrariety, however,
would be an irreconcilable incompatibility between the old and the new obligations.
There are two ways which could indicate, in fine, the presence of novation and thereby produce the
effect of extinguishing an obligation by another which substitutes the same. The first is whennovation has
been explicitly stated and declared in unequivocal terms. The second is when the old and the new obligations
are incompatible on every point. The test of incompatibility is whether the two obligations can stand together,
each one having its independent existence. [51] If they cannot, they are incompatible and the latter
obligation novates the first.[52] Corollarily, changes that breed incompatibility must be essential in nature and
not merely accidental. The incompatibility must take place in any of the essential elements of the obligation,
such as its object, cause or principal conditions thereof; otherwise, the change would be merely modificatory in
nature and insufficient to extinguish the original obligation. [53]
The necessity to prove the foregoing by clear and convincing evidence is accentuated where the
obligation of the debtor invoking the defense of novation has already matured.[54]
With respect to obligations to pay a sum of money, this Court has consistently applied the well-settled
rule that the obligation is not novated by an instrument that expressly recognizes the old, changes only the
terms of payment, and adds other obligations not incompatible with the old ones, or where the new contract
merely supplements the old one.[55]

In Inchausti & Co. v. Yulo[56] this Court held that an obligation to pay a sum of money is notnovated in a
new instrument wherein the old is ratified, by changing only the term of payment and adding other obligations
not incompatible with the old one. In Tible v. Aquino[57] and Pascual v.Lacsamana[58] this Court declared that it
is well settled that a mere extension of payment and the addition of another obligation not incompatible with
the old one is not a novation thereof.
In this case, the attendant facts do not make out a case of novation. The restructuring agreement
between Delta and CBLI executed on October 7, 1981, shows that the parties did not expressly stipulate that
the restructuring agreement novated the promissory notes. Absent an unequivocal declaration of
extinguishment of the pre-existing obligation, only a showing of complete incompatibility between the old and
the new obligation would sustain a finding of novation by implication.[59] However, our review of its terms yields
no incompatibility between the promissory notes and the restructuring agreement.
The five promissory notes, which Delta assigned to SIHI on September 13, 1983, contained the
following common stipulations:
1.

They were payable in 60 monthly installments up to July 31, 1985;

2.

Interest: 14% per annum;

3.

Failure to pay any of the installments would render the entire remaining balance due and
payable at the option of the holder of the notes;

4.

In case of judicial collection on the notes, the maker (CBLI) and co-maker (its president,
Mr.Dionisio O. Llamas, Jr) were solidarily liable of attorneys fees and expenses of 25%
of the amount due in addition to the costs of suit.

The restructuring agreement, for its part, had the following provisions:
WHEREAS, CBL and LLAMAS admit their past due installment on the following promissory notes:
a. PN Nos. 16 to 26 (11 units)
Past Due as of September 30, 1981 P1,411,434.00
b. PN Nos. 52 to 57 (24 units)
Past Due as of September 30, 1981 P1,105,353.00
WHEREAS, the parties agreed to restructure the above-mentioned past due installments under the following
terms and conditions:
a. PN Nos. 16 to 26 (11 units) 37 months
PN Nos. 52 to 57 (24 units) 46 months
b. Interest Rate: 16% per annum
c. Documentation Fee: 2% per annum
d. Penalty previously incurred and Restructuring fee: 4% p.a.
e. Mode of Payment: Daily Remittance
NOW, THEREFORE, for and in consideration of the foregoing premises, the parties hereby agree and
covenant as follows:
1. That the past due installment referred to above plus the current and/or falling due amortization as of
October 1, 1981 for Promissory Notes Nos. 16 to 26 and 52 to 57 shall be paid by CBL and/or LLAMAS in
accordance with the following schedule of payments:

Daily payments of P11,000.00 from

October 1 to December 31, 1981

consisting of at least ninety (90%) percent of the needs of CBL based on a moving 6-month requirement to be
prepared and submitted by CBL, and acceptable to DMC, within the first week of each month.

Daily payments of P12,000.00 from

January 1, 1982 to March 31, 1982

8. Except as otherwise modified in this Agreement, the terms and conditions stipulated in PN Nos. 16 to 26
and 52 to 57 shall continue to govern the relationship between the parties and that the Chattel Mortgage over
various M.A.N. Diesel Buses with Nos. CM No. 80-39, 80-40, 80-41, 80-42, 80-43, 80-44 and CM No. 80-15
as well as the Deed of Pledge executed by Mr. Llamas shall continue to secure the obligation until full
payment.

Daily payments of P13,000.00 from

April 1, 1982 to June 30, 1982
Daily payments of P14,000.00 from
July 1, 1982 to September 30, 1982
Daily payments of P15,000.00 from
October 1, 1982 to December 31, 1982
Daily payments of P16,000.00 from
January 1, 1983 to June 30, 1983
Daily payments of P17,000.00 from
July 1, 1983
2. CBL or LLAMAS shall remit to DMC on or before 11:00 a.m. everyday the daily cash payments due to DMC
in accordance with the schedule in paragraph 1. DMC may send a collector to receive the amount due
at CBLs premises. All delayed remittances shall be charged additional 2% penalty interest per month.
3. All payments shall be applied to amortizations and penalties due in accordance with paragraph of the
restructured past due installments above mentioned and PN Nos. 16 to 26 and 52 to 57.
4. DMC may at anytime assign and/or send its representatives to monitor the operations of CBL pertaining to
the financial and field operations and service and maintenance matters of M.A.N. units. Records needed by
the DMC representatives in monitoring said operations shall be made available by CBL and LLAMAS.
5. Within thirty (30) days after the end of the terms of the PN Nos. 16 to 26 and 52 to 57, CBL or LLAMAS
shall remit in lump sum whatever balance is left after deducting all payments made from what is due and
payable to DMC in accordance with paragraph 1 of this agreement and PN Nos. 16 to 26 and 52 to 57.
6. In the event that CBL and LLAMAS fail to remit the daily remittance agreed upon and the total
accumulated unremitted amount has reached and (sic) equivalent of Sixty (60) days, DMC and Silverio shall
exercise any or all of the following options:
(a)

The whole sum remaining then unpaid plus 2% penalty per month and 16% interest per
annum on total past due installments will immediately become due and payable. In
the event of judicial proceedings to enforce collection, CBL and LLAMAS will pay to
DMC an additional sum equivalent to 25% of the amount due for attorneys fees and
expenses of collection, whether actually incurred or not, in addition to the cost of suit;

(b)

To enforce in accordance with law, their rights under the Chattel Mortgage over various
M.A.N. Diesel bus with Nos. CU 80-39, 80-40, 80-41, 80-42, 80-43, 80-44 and 80-15,
and/or

(c)

To take over management and operations of CBL until such time that CBL and/or
LLAMAS have remitted and/or updated their past due account with DMC.

7. DMC and SILVERIO shall insure to CBL continuous supply of spare parts for the M.A.N. Diesel Buses and
shall make available to CBL at the price prevailing at the time of purchase, an inventory of spare parts

9. DMC and SILVERIO undertake to recall or withdraw its previous request to Notary Public Alberto
G.Doller and to instruct him not to proceed with the public auction sale of the shares of stock of CBL subjectmatter of the Deed of Pledge of Shares. LLAMAS, on the other hand, undertakes to move for the immediate
dismissal of Civil Case No. 9460-P entitled Dionisio O. Llamas vs. Alberto G. Doller, et al., Court of First
Instance of Pasay, Branch XXIX.[60]
It is clear from the foregoing that the restructuring agreement, instead of containing provisions
absolutely incompatible with the obligations of the judgment, expressly ratifies such obligations in paragraph
8 and contains provisions for satisfying them. There was no change in the object of the prior obligations. The
restructuring agreement merely provided for a new schedule of payments and additional security in paragraph
6 (c) giving Delta authority to take over the management and operations of CBLI in case CBLI fails to pay
installments equivalent to 60 days. Where the parties to the new obligation expressly recognize the continuing
existence and validity of the old one, there can be no novation.[61] Moreover, this Court has ruled that an
agreement subsequently executed between a seller and a buyer that provided for a different schedule and
manner of payment, to restructure the mode of payments by the buyer so that it could settle its outstanding
obligation in spite of its delinquency in payment, is not tantamount to novation. [62]
The addition of other obligations likewise did not extinguish the promissory notes. In Young v. CA[63],
this Court ruled that a change in the incidental elements of, or an addition of such element to, an obligation,
unless otherwise expressed by the parties will not result in its extinguishment.
In fine, the restructuring agreement can stand together with the promissory notes.
Neither is there merit in CBLIs argument that the compromise agreement dated July 24, 1984, in Civil
Case No. 0023-P superseded and/or discharged the five promissory notes. Both Delta and CBLI cannot deny
that the five promissory notes were no longer subject of Civil Case No. 0023-P when they entered into the
compromise agreement on July 24, 1984.
Having previously assigned the five promissory notes to SIHI, Delta had no more right to compromise
the same. Deltas limited authority to collect for SIHI stipulated in the September 13, 1985, Deed of Sale
cannot be construed to include the power to compromise CBLIs obligations in the said promissory notes. An
authority to compromise, by express provision of Article 1878 [64] of the Civil Code, requires a special power of
attorney, which is not present in this case. Incidentally, Deltas authority to collect in behalf of SIHI was, by
express provision of the Continuing Deed of Assignment, [65] automatically revoked when SIHI opted to collect
directly from CBLI.
As regards CBLI, SIHIs demand letter dated December 13, 1983, requiring CBLI to remit the payments
directly to SIHI effectively revoked Deltas limited right to collect in behalf of SIHI. This should have
dispelled CBLIs erroneous notion that Delta was acting in behalf of SIHI, with authority to compromise the five
promissory notes.
But more importantly, the compromise agreement itself provided that it covered the rights and
obligations only of Delta and CBLI and that it did not refer to, nor cover the rights of, SIHI as the new creditor
of CBLI in the subject promissory notes. CBLI and Delta stipulated in paragraph 5 of the agreement that:
5. This COMPROMISE AGREEMENT constitutes the entire understanding by and between the plaintiffs
and the defendants as well as their lawyers , and operates as full and final settlement, adjudication and
termination of all their rights and obligations as of the date of this agreement, and of the issues in this case. [66]
Even in the absence of such a provision, the compromise agreement still cannot bind SIHI under the
settled rule that a compromise agreement determines the rights and obligations of only the parties to it.
[67]
Therefore, we hold that the compromise agreement covered the rights and obligations only of Delta and
CBLI and only with respect to the eleven (11) other promissory notes that remained with Delta.

CBLI next maintains that SIHI is estopped from questioning the compromise agreement because SIHI
failed to intervene in Civil Case No. 0023-P after CBLI informed it of the takeover by Delta
of CBLIs management and operations and the resultant impossibility for CBLI to comply with its obligations in
the subject promissory notes. CBLI also adds that SIHIs failure to intervene in Civil Case No. 0023-P is proof
that Delta continued to act in SIHIs behalf in effecting collection under the notes.
The contention is untenable. As a result of the assignment, Delta relinquished all its rights to the
subject promissory notes in favor of SIHI. This had the effect of separating the five promissory notes from the
16 promissory notes subject of Civil Case No. 0023-P. From that time, CBLIsobligations to SIHI embodied in
the five promissory notes became separate and distinct fromCBLIs obligations in eleven (11) other promissory
notes that remained with Delta. Thus, any breach of these independent obligations gives rise to a separate
cause of action in favor of SIHI against CBLI. Considering that Deltas assignment to SIHI of these five
promissory notes had the effect of removing the said notes from Civil Case No. 0023-P, there was no reason
for SIHI to intervene in the said case. SIHI did not have any interest to protect in Civil Case No. 0023-P.
Moreover, intervention is not mandatory, but only optional and permissive. [68] Notably, Section 2,[69] Rule
12 of the then 1988 Revised Rules of Procedure uses the word may in defining the right to intervene. The
present rules maintain the permissive nature of intervention in Section 1, Rule 19 of the 1997 Rules of Civil
Procedure, which provides as follows:
SEC. 1. Who may intervene.A person who has a legal interest in the matter in litigation, or in the success of
either of the parties, or an interest against both, or is so situated as to be adversely affected by a distribution
or other disposition of property in the custody of the court or of an officer thereof may, with leave of court, be
allowed to intervene in the action. The court shall consider whether or not the intervention will unduly delay or
prejudice the adjudication of the rights of the original parties, and whether or not theintervenor's rights may be
fully protected in a separate proceeding.[70]
Also, recall that Delta transferred the five promissory notes to SIHI on September 13, 1983while Civil
Case No. 0023-P was pending. Then as now, the rule in case of transfer of interest pendente lite is that the
action may be continued by or against the original party unless the court, upon motion, directs the person to
whom the interest is transferred to be substituted in the action or joined with the original party. [71] The noninclusion of a necessary party does not prevent the court from proceeding in the action, and the judgment
rendered therein shall be without prejudice to the rights of such necessary party.[72]
In light of the foregoing, SIHIs refusal to intervene in Civil Case No. 0023-P in another court does not
amount to an estoppel that may prevent SIHI from instituting a separate and independent action of its own.
[73]
This is especially so since it does not appear that a separate proceeding would be inadequate to protect
fully SIHIs rights.[74] Indeed, SIHIs refusal to intervene is precisely because it considered that its rights would
be better protected in a separate and independent suit.

the levy on execution to satisfy its judgment credit against Delta in Civil Case No. 84-23019, the said buses
already pertained to Delta by virtue of the April 2, 1987 auction sale. CBLI no longer had any interest in the
said buses. Under the circumstances, we cannot see howSIHIs belated acquisition of the foreclosed buses
operates to hold the compromise agreementand consequently Article 1484(3)applicable to SIHI as CBLI
contends. CBLIs last contention must, therefore, fail. We hold that the writ of execution to enforce the
judgment of compromise in Civil Case No. 0023-P and the foreclosure sale of April 2, 1987, done pursuant to
the said writ of execution affected only the eleven (11) other promissory notes covered by the compromise
agreement and the judgment on compromise in Civil Case No. 0023-P.
In support of its third assignment of error, CBLI maintains that there was no basis for SIHIsapplication
for a writ of preliminary attachment. [76] According to CBLI, it committed no fraud in contracting its obligation
under the five promissory notes because it was financially sound when it issued the said notes on April 25,
1980.[77] CBLI also asserts that at no time did it falsely represent to SIHI that it would be able to pay its
obligations under the five promissory notes. [78] According to CBLI, it was not guilty of fraudulent concealment,
removal, or disposal, or of fraudulent intent to conceal, remove, or dispose of its properties to defraud its
creditors;[79] and that SIHIs bare allegations on this matter were insufficient for the preliminary attachment
of CBLIs properties.[80]
The question whether the attachment of the sixteen (16) buses was valid and in accordance with law,
however, has already been resolved with finality by the Court of Appeals in CA-G.R. SP No. 08376. In its July
31, 1987, decision, the Court of Appeals upheld the legality of the writ of preliminary attachment SIHI obtained
and ruled that the trial court judge acted with grave abuse of discretion in discharging the writ of attachment
despite the clear presence of a determined scheme on the part of CBLI to dispose of its property. Considering
that the said Court of Appeals decision has already attained finality on August 22, 1987, there exists no reason
to resolve this question anew. Reasons of public policy, judicial orderliness, economy and judicial time and the
interests of litigants as well as the peace and order of society, all require that stability be accorded the solemn
and final judgments of courts or tribunals of competent jurisdiction. [81]
Finally, in the light of the justness of SIHIs claim against CBLI, we cannot sustain CBLIscontention that
the Court of Appeals erred in dismissing its counterclaim for lost income and the value of the 16 buses over
which SIHI obtained a writ of preliminary attachment. Where the party who requested the attachment acted in
good faith and without malice, the claim for damages resulting from the attachment of property cannot be
sustained.[82]
WHEREFORE, the decision dated April 17, 2001, of the Court of Appeals in CA-G.R. CV No. 52667 is
AFFIRMED. Petitioner California Bus Lines, Inc., is ORDERED to pay respondent State Investment House,
Inc., the value of the five (5) promissory notes subject of the complaint in Civil Case No. 84-28505 less the
proceeds from the sale of the attached sixteen (16) buses. No pronouncement as to costs.
SO ORDERED.

The judgment on compromise in Civil Case No. 0023-P did not operate as res judicata to prevent SIHI
from prosecuting its claims in the present case. As previously discussed, the compromise agreement and the
judgment on compromise in Civil Case No. 0023-P covered only Delta and CBLI and their respective rights
under the 11 promissory notes not assigned to SIHI. In contrast, the instant case involves SIHI and CBLI and
the five promissory notes. There being no identity of parties and subject matter, there is no res judicata.
CBLI maintains, however, that in any event, recovery under the subject promissory notes is no longer
allowed by Article 1484(3)[75] of the Civil Code, which prohibits a creditor from suing for the deficiency after it
has foreclosed on the chattel mortgages. SIHI, being the successor-in-interest of Delta, is no longer allowed
to recover on the promissory notes given as security for the purchase price of the 35 buses because Delta had
already extrajudicially foreclosed on the chattel mortgages over the said buses on April 2, 1987.
This claim is likewise untenable.
Article 1484(3) finds no application in the present case. The extrajudicial foreclosure of the chattel
mortgages Delta effected cannot prejudice SIHIs rights. As stated earlier, the assignment of the five notes
operated to create a separate and independent obligation on the part of CBLI to SIHI, distinct and separate
from CBLIs obligations to Delta. And since there was a previous revocation of Deltas authority to collect for
SIHI, Delta was no longer SIHIs collecting agent. CBLI, in turn, knew of the assignment and Deltas lack of
authority to compromise the subject notes, yet it readily agreed to the foreclosure. To
sanction CBLIs argument and to apply Article 1484 (3) to this case would work injustice to SIHI by depriving it
of its right to collect against CBLI who has not paid its obligations.
That SIHI later on levied on execution and acquired in the ensuing public sale in Civil Case No. 8423019 the buses Delta earlier extrajudicially foreclosed on April 2, 1987, in Civil Case No. 0023-P, did not
operate to render the compromise agreement and the foreclosure binding on SIHI. At the time SIHI effected

G.R. No. 99398 & 104625

January 26, 2001

CHESTER BABST, petitioner,

vs.
COURT OF APPEALS, BANK OF THE PHILIPPINE ISLANDS, ELIZALDE STEEL CONSOLIDATED, INC.,
and PACIFIC MULTI-COMMERCIAL CORPORATION, respondents.

x ------------------------------------------------ x
ELIZALDE STEEL CONSOLIDATED, INC., petitioner,
vs.
COURT OF APPEALS, BANK OF THE PHILIPPINE ISLANDS, PACIFIC MULTI-COMMERCIAL
CORPORATION and CHESTER BABST, respondents.

which ELISCON used to purchase tin black plates from National Steel Corporation. ELISCON defaulted in its
obligation to pay the amounts of the letters of credit, leaving an outstanding account, as of October 31, 1982,
in the total amount of P3,963,372.08. 9
On December 22, 1980, the Bank of the Philippine Islands (BPI) and CBTC entered into a merger, wherein
BPI, as the surviving corporation, acquired all the assets and assumed all the liabilities of CBTC. 10

YNARES-SANTIAGO, J.:
These consolidated petitions seek the review of the Decision dated April 29, 1991 of the Court of Appeals in
CA-G.R. CV No. 172821 entitled, "Bank of the Philippine Islands, Plaintiff-Appellee versus Elizalde Steel
Consolidated, Inc., Pacific Multi-Commercial Corporation, and Chester G. Babst, Defendants-Appellants."

Meanwhile, ELISCON encountered financial difficulties and became heavily indebted to the Development
Bank of the Philippines (DBP). In order to settle its obligations, ELISCON proposed to convey to DBP by way
of dacion en pago all its fixed assets mortgaged with DBP, as payment for its total indebtedness in the amount
of P201,181,833.16. On December 28, 1978, ELISCON and DBP executed a Deed of Cession of Property in
Payment of Debt.11

The complaint was commenced principally to enforce payment of a promissory note and three domestic letters
of credit which Elizalde Steel Consolidated, Inc. (ELISCON) executed and opened with the Commercial Bank
and Trust Company (CBTC).

In June 1981, ELISCON called its creditors to a meeting to announce the take-over by DBP of its assets.

On June 8, 1973, ELISCON obtained from CBTC a loan in the amount of P 8,015,900.84, with interest at the
rate of 14% per annum, evidenced by a promissory note. 2 ELISCON defaulted in its payments, leaving an
outstanding indebtedness in the amount of P2,795,240.67 as of October 31, 1982. 3
The letters of credit, on the other hand, were opened for ELISCON by CBTC using the credit facilities of
Pacific Multi-Commercial Corporation (MULTI) with the said bank, pursuant to the Resolution of the Board of
Directors of MULTI adopted on August 31, 1977 which reads:
WHEREAS, at least 90% of the Company's gross sales is generated by the sale of tin-plates
manufactured by Elizalde Steel Consolidated, Inc.;
WHEREAS, it is to the best interests of the Company to continue handling said tin-plate line;
WHEREAS, Elizalde Steel Consolidated, Inc. has requested the assistance of the Company in
obtaining credit facilities to enable it to maintain the present level of its tin-plate manufacturing
output and the Company is willing to extend said requested assistance;
NOW, THEREFORE, for and in consideration of the foregoing premises --BE IT RESOLVED AS IT IS HEREBY RESOLVED, That the PRESIDENT & GENERAL
MANAGER, ANTONIO ROXAS CHUA, be, as he is hereby empowered to allow and authorize
ELIZALDE STEEL CONSOLIDATED, INC. to avail and make use of the Credit Line of PACIFIC
MULTI-COMMERCIAL CORPORATION with the COMMERCIAL BANK & TRUST COMPANY OF
THE PHILIPPINES, Makati, Metro Manila;
RESOLVED, FURTHER, That the Pacific Multi-Commercial Corporation guarantee, as it does
hereby guarantee, solidarily, the payment of the corresponding Letters of Credit upon maturity of
the same;
RESOLVED, FINALLY, That copies of this resolution be furnished the Commercial Bank & Trust
Company of the Philippines, Makati, Metro Manila, for their information. 4
Subsequently, on September 26, 1978, Antonio Roxas Chua and Chester G. Babst executed a Continuing
Suretyship,5 whereby they bound themselves jointly and severally liable to pay any existing indebtedness of
MULTI to CBTC to the extent of P8,000,000.00 each.1wphi1.nt
Sometime in October 1978, CBTC opened for ELISCON in favor of National Steel Corporation three (3)
domestic letters of credit in the amounts of P1,946,805.73, 6 P1,702,869.327 and P200,307.72,8 respectively,

In October 1981, DBP formally took over the assets of ELISCON, including its indebtedness to BPI.
Thereafter, DBP proposed formulas for the settlement of all of ELISCON's obligations to its creditors, but BPI
expressly rejected the formula submitted to it for not being acceptable. 12
Consequently, on January 17, 1983, BPI, as successor-in-interest of CBTC, instituted with the Regional Trial
Court of Makati, Branch 147, a complaint13 for sum of money against ELISCON, MULTI and Babst, which was
docketed as Civil Case No. 49226.
ELISCON, in its Answer,14 argued that the complaint was premature since DBP had made serious efforts to
settle its obligations with BPI.
Babst also filed his Answer alleging that he signed the Continuing Suretyship on the understanding that it
covers only obligations which MULTI incurred solely for its benefit and not for any third party liability, and he
had no knowledge or information of any transaction between MULTI and ELISCON. 15
MULTI, for its part, denied knowledge of the merger between BPI and CBTC, and averred that the guaranty
under its board resolution did not cover purchases made by ELISCON in the form of trust receipts. It set up a
cross-claim against ELISCON alleging that the latter should be held liable for any judgment which the court
may render against it in favor of BPI.16
On February 20, 1987, the trial court rendered its Decision, 17 the dispositive portion of which reads:
WHEREFORE, in view of all the foregoing, the Court hereby renders judgment in favor of the
plaintiff and against all the defendants:
1) Ordering defendant ELISCON to pay the plaintiff the amount of P2,795,240.67 due on the
promissory note, Annex "A" of the Complaint as of 31 October 1982 and the amount of
P3,963,372.08 due on the three (3) domestic letters of credit, also as of 31 October 1982;
2) Ordering defendant ELISCON to pay the plaintiff interests and related charges on the principal
of said promissory note of P2,102,232.02 at the rates provided in said note from and after 31
October 1982 until full payment thereof, and on the principal of the three (3) domestic letters of
credit of P3,564,349.25 interests and related charges at the rates provided in said letters of credit,
from and after 31 October 1982 until full payment;
3) Ordering defendant ELISCON to pay interests at the legal rate on all interests and related
charges but unpaid as of the filing of this complaint, until full payment thereof;

4) Ordering defendant ELISCON to pay attorney's fees equivalent to 10% of the total amount due
under the preceding paragraphs;
5) Ordering defendants Pacific Multi-Commercial Corporation and defendant Chester Babst to pay,
jointly and severally with defendant ELISCON, the total sum of P3,963,372.08 due on the three (3)
domestic letters of credit as of 31 October 1982 with interests and related charges on the principal
amount of P3,963,372.08 at the rates provided in said letters of credit from 30 October 1982 until
fully paid, but to the extent of not more than P8,000,000.00 in the case of defendant Chester
Babst;
6) Ordering defendant Pacific Multi-Commercial Corporation and defendant Chester Babst to pay,
jointly and severally plaintiff interests at the legal rate on all interests and related charges already
accrued but unpaid on said three (3) domestic letters of credit as of the date of the filing of this
Complaint until full payment thereof;
7) Ordering defendant Pacific Multi-Commercial Corporation and defendant Chester Babst to pay,
jointly and severally, attorney's fees of not less than 10% of the total amount due under paragraphs
5 and 6 hereof. With costs.
SO ORDERED.
In due time, ELISCON, MULTI and Babst filed their respective notices of appeal. 18
On April 29, 1991, the Court of Appeals rendered the appealed Decision as follows:
WHEREFORE, the judgment appealed from is MODIFIED, to now read (with the underlining to
show the principal changes from the decision of the lower court) thus:
1) Ordering appellant ELISCON to pay the appellee BPI the amount of P2,731,005.60 due on the
promissory note, Annex "A" of the Complaint as of 31 October 1982 and the amount of
P3,963,372.08 due on the three (3) domestic letters of credit, also as of 31 October 1982;
2) Ordering appellant ELISCON to pay the appellee BPI interests and related charges on the
principal of said promissory note of P2,102,232.02 at the rates provided in said note from and after
31 October 1982 until full payment thereof, and on the principal of the three (3) domestic letters of
credit of P3,564,349.25 interests and related charges at the rates provided in said letters of credit,
from and after 31 October 1982 until full payment;
3) Ordering appellant ELISCON to pay appellee BPI interest at the legal rate on all interests and
related charges but unpaid as of the filing of this complaint, until full payment thereof;
4) Ordering appellant Pacific Multi-Commercial Corporation and appellant Chester G. Babst to pay
appellee BPI, jointly and severally with appellant ELISCON, the total sum of P3,963,372.08 due on
the three (3) domestic letters of credit as of 31 October 1982 with interest and .related charges on
the principal amount of P3,963,372.08 at the rates provided in said letters of credit from 30
October 1982 until fully paid, but to the extent of not more than P8,000,000.00 in the case of
defendant Chester Babst;
5) Ordering appellant Pacific Multi-Commercial Corporation and defendant Chester Babst to pay,
jointly and severally, appellee BPI interests at the legal rate on all interests and related charges
already accrued but unpaid on said three (3) domestic letters of credit as of the date of the filing of
this Complaint until full payment thereof and the plaintiff's lawyer's fees in the nominal amount of
P200.000.00;

6) Ordering appellant ELISCON to reimburse appellants Pacific Multi-Commercial Corporation and

Chester Babst whatever amount they shall have paid in said Eliscon's behalf particularly referring
to the three (3) letters of credit as of 31 October 1982 and other related charges.
No costs.
SO ORDERED.19
ELISCON filed a Motion for Reconsideration of the Decision of the Court of Appeals which was, however,
denied in a Resolution dated March 9, 1992. 20 Subsequently, ELISCON filed a petition for review on certiorari,
docketed as G.R. No. 104625, on the following grounds:
A. THE BANK OF THE PHILIPPINE ISLANDS IS NOT ENTITLED TO RECOVER FROM
PETITIONER ELISCON THE LATTER'S OBLIGATION WITH COMMERCIAL BANK AND TRUST
COMPANY (CBTC)
B. THERE WAS A VALID NOVATION OF THE CONTRACT BETWEEN ELISCON AND BPI
THERE BEING A PRIOR CONSENT TO AND APPROVAL BY BPI OF THE SUBSTITUTION BY
DBP AS DEBTOR IN LIEU OF THE ORIGINAL DEBTOR, ELISCON, THEREBY RELEASING
ELISCON FROM ITS OBLIGATION TO BPI.
C. PACIFIC MULTI COMMERCIAL CORPORATION AND CHESTER BABST CANNOT
LAWFULLY RECOVER FROM ELISCON WHATEVER AMOUNT THEY MAY BE REQUIRED TO
PAY TO BPI AS SURETIES OF ELISCON'S OBLIGATION TO BPI; THEIR CAUSE OF ACTION
MUST BE DIRECTED AGAINST DBP AS THE NEWLY SUBSTITUTED DEBTOR IN PLACE OF
ELISCON.
D. THE DBP TAKEOVER OF THE ENTIRE ELISCON AMOUNTED TO AN ACT OF
GOVERNMENT WHICH WAS A FORTUITOUS EVENT EXCULPATING ELISCON FROM
FURTHER LIABILITIES TO RESPONDENT BPI.
E. PETITIONER ELISCON SHOULD NOT BE HELD LIABLE TO PAY RESPONDENT BPI THE
AMOUNTS STATED IN THE DISPOSITIVE PORTION OF RESPONDENT COURT OF APPEALS'
DECISION:21
BPI filed its Comment22 raising the following arguments, to wit:
1. Respondent BPI is legally entitled to recover from ELISCON, MULTI and Babst the past due
obligations with CBTC prior to the merger of BPI with CBTC.
2. BPI did not give its consent to the DBP take-over of ELISCON. Hence, no valid novation has
been effected.
3. Express consent of creditor to substitution should be recorded in the books.
4. Petitioner Chester G. Babst and respondent MULTI are jointly and solidarily liable to BPI for the
unpaid letters of credit of ELISCON.
5. The question of the liability of ELISCON to BPI has been clearly established.
6. Since MULTI and Chester G. Babst are guarantors of the debts incurred by ELISCON, they may
recover from the latter what they may have paid for on account of that guaranty.

Chester Babst filed a Comment with Manifestation,23 wherein he contends that the suretyship agreement he
executed with Antonio Roxas Chua was in favor of MULTI; and that there is nothing therein which authorizes
MULTI, in turn, to guarantee the obligations of ELISCON.

they stipulated,inter alia, that NDC shall pay to ELISCON's creditors, through DBP, the amount of
P299,524,700.00. Among the creditors mentioned in the agreement was BPI, with a listed credit of
P4,015,534.54.

In its Comment,24 MULTI maintained that inasmuch as BPI had full knowledge of the purpose of the meeting in
June 1981, wherein the takeover by DBP of ELISCON was announced, it was incumbent upon the said bank
to formally communicate its objection to the assumption of ELISCON's liabilities by DBP in answer to the call
for the meeting. Moreover, there was no showing that the availment by ELISCON of MULTI's credit facilities
with CBTC, which was supposedly guaranteed by Antonio Roxas Chua, was indeed authorized by the latter
pursuant to the resolution of the Board of Directors of MULTI.

Furthermore, petitioner Babst averred that the assets of ELISCON which were acquired by the DBP, and later
transferred to the NDC, were placed under the Asset Privatization Trust pursuant to Proclamation No. 50,
issued by then President Corazon C. Aquino on December 8, 1986.

In compliance with this Court's Resolution dated March 17, 1993, 25 the parties submitted their respective
memoranda.
Meanwhile, in a petition for review filed with this Court, which was docketed as G.R. No. 99398, Chester Babst
alleged that the Court of Appeals acted without jurisdiction and/or with grave abuse of discretion when:
1. IT AFFIRMED THE LOWER COURT'S HOLDING THAT THERE WAS NO NOVATION
INASMUCH AS RESPONDENT BANK OF THE PHILIPPINE ISLANDS (OR BPI) HAD PRIOR
CONSENT TO AND APPROVAL OF THE SUBSTITUTION AS DEBTOR BY THE DEVELOPMENT
BANK OF THE PHILIPPINES (OR DBP) IN THE PLACE OF ELIZALDE STEEL CONSOLIDATED,
INC. (OR ELISCON) IN THE LATTER 'S OBLIGATION TO BPI.
2. IT CONFIRMED THE LOWER COURT'S CONCLUSION THAT THERE WAS NO IMPLIED
CONSENT OF THE CREDITOR BANK OF THE PHILIPPINE ISLANDS TO THE SUBSTITUTION
BY DEVELOPMENT BANK OF THE PHILIPPINES OF THE ORIGINAL DEBTOR ELIZALDE
STEEL CONSOLIDATED, INC.
3. IT AFFIRMED THE LOWER COURT'S FINDING OF LACK OF MERIT OF THE CONTENTION
OF ELISCON THAT THE FAILURE OF THE OFFICER OF BPI, WHO WAS PRESENT DURING
THE MEETING OF ELISCON'S CREDITORS IN JUNE 1981 TO VOICE HIS OBJECTION TO THE
ANNOUNCED TAKEOVER BY THE DBP OF THE ASSETS OF ELISCON AND ASSUMPTION OF
ITS LIABILITIES, CONSTITUTED AN IMPLIED CONSENT TO THE ASSUMPTION BY DBP OF
THE OBLIGATIONS OF ELISCON TO BPI.
4. IN NOT TAKING JUDICIAL NOTICE THAT THE DBP TAKEOVER OF THE ENTIRE ELISCON
WAS AN ACT OF GOVERNMENT CONSTITUTING A FORTUITOUS EVENT EXCULPATING
ELISCON FROM ANY LIABILITY TO BPI.
5. IN NOT FINDING THAT THE DACION EN PAGO BETWEEN DBP AND BPI RELIEVED
ELISCON, MULTI AND BABST OF ANY LIABILITY TO BPI.
6. IN FINDING THAT MULTI AND BABST BOUND THEMSELVES SOLIDARILY WITH ELISCON
WITH RESPECT TO THE OBLIGATION INVOLVED HERE.
7. IN RENDERING JUDGMENT IN FAVOR OF BPI AND AGAINST ELISCON ORDERING THE
LATTER TO PAY THE AMOUNTS STATED IN THE DISPOSITIVE PORTION OF THE DECISION;
AND ORDERING PETITIONER AND MULTI TO PAY SAID AMOUNTS JOINTLY AND
SEVERALLY WITH ELISCON.26
Petitioner Babst alleged that DBP sold all of ELISCON's assets to the National Development Company, for the
latter to take over and continue the operation of its business. On September 11, 1981, the Board of Governors
of the DBP adopted Resolution No. 2817 which states that DBP shall enter into a contractual arrangement
with NDC for the latter to pay ELISCON's creditors, including BPI in the amount of P4,015,534.54. This was
followed by a Memorandum of Agreement executed on May 4,1983 by and between DBP and NDC, wherein

In its Comment,27 BPI countered that by virtue of its merger with CBTC, it acquired all the latter's rights and
interest including all receivables; that in order to effect a valid novation by substitution of debtors, the consent
of the creditor must be express; that in addition, the consent of BPI must appear in its books, it being a private
corporation; that BPI intentionally did not consent to the assumption by DBP of the obligations of ELISCON
because it wanted to preserve intact its causes of action and legal recourse against Pacific Multi-Commercial
Corporation and Babst as sureties of ELISCON and not of DBP; that MULTI expressly bound itself solidarily
for ELISCON's obligations to CBTC in its Resolution wherein it allowed the latter to use its credit facilities; and
that the suretyship agreement executed by Babst does not exclude liabilities incurred by MULTI on behalf of
third parties, such as ELISCON.
ELISCON likewise filed a Comment, 28 wherein it manifested that of the seven errors raised by Babst in his
petition, six are arguments which ELISCON itself raised in its previous pleadings. It is only the sixth assigned
error --- that the Court of Appeals erred in finding that MULTI and Babst bound themselves solidarily with
ELISCON --- that ELISCON takes exception to. More particularly, ELISCON pointed out the contradictory
positions taken by Babst in admitting that he bound himself to pay the indebtedness of MULTI, while at the
same time completely disavowing and denying any such obligation. It stressed that should MULTI or Babst be
finally adjudged liable under the suretyship agreement, they cannot lawfully recover from ELISCON, but from
the DBP which had been substituted as the new debtor.
MULTI filed its Comrnent,29 admitting the correctness of the petition and adopting the Comment of ELISCON
insofar as it is not inconsistent with the positions of Babst and MULTI.
At the outset, the preliminary issue of BPI's right of action must first be addressed. ELISCON and MULTI
assail BPI's legal capacity to recover their obligation to CBTC. However, there is no question that there was a
valid merger between BPI and CBTC. It is settled that in the merger of two existing corporations, one of the
corporations survives and continues the business, while the other is dissolved and all its rights, properties and
liabilities are acquired by the surviving corporation.30 Hence, BPI has a right to institute the case a quo.
We now come to the primordial issue in this case whether or not BPI consented to the assumption by DBP
of the obligations of ELISCON.
Article 1293 of the Civil Code provides:
Novation which consists in substituting a new debtor in the place of the original one, may be made
even without the knowledge or against the will of the latter, but not without the consent of the
creditor. Payment by the new debtor gives him the rights mentioned in articles 1236 and 1237.
BPI contends that in order to have a valid novation, there must be an express consent of the creditor. In the
case of Testate Estate of Mota, et al. v. Serra,31 this Court held:
It should be noted that in order to give novation its legal effect, the law requires that the creditor
should consent to the substitution of a new debtor. This consent must be given expressly for the
reason that, since novation extinguishes the personality of the first debtor who is to be substituted
by a new one, it implies on the part of the creditor a waiver of the right that he had before the
novation, which waiver must be express under the principle of renuntiatio non
proesumitur, recognized by the law in declaring that a waiver of right may not be
performed [should read: presumed] unless the will to waive is indisputably shown by him who
holds the right.32

The import of the foregoing ruling, however, was explained and clarified by this Court in the later case of Asia
Banking Corporation v. EIser33 in this wise:
The aforecited article 1205 [now 1293] of the Civil Code does not state that the creditor's
consent to the substitution of the new debtor for the old be express, or given at the time of
the substitution, and the Supreme Court of Spain, in its judgment of June 16, 1908, construing said
article, laid down the doctrine that "article 1205 of the Civil Code does not mean or require that the
creditor's consent to the change of debtors must be given simultaneously with the debtor's consent
to the substitution, its evident purpose being to preserve the creditor's full right, it is sufficient that
the latter's consent be given at any time and in any form whatever, while the agreement of the
debtors subsists." The same rule is stated in theEnciclopedia Juridica Espaola, volume 23, page
503, which reads: "'The rule that this kind of novation, like all others, must be express, is not
absolute; for the existence of the consent may well be inferred from the act of the creditor,
since volition may as well be expressed by deeds as by words." The understanding between
Henry W. Elser and the principal director of Yangco, Rosenstock & Co., Inc., with respect to Luis R.
Yangco's stock in said corporation, and the acts of the board of directors after Henry W. Elser had
acquired said shares, in substituting the latter for Luis R. Yangco, are a clear and unmistakable
expression of its consent. When this court said in the case of Estate of Mota vs. Serra (47
Phil. 464), that the creditor's express consent is necessary in order that there may be a
novation of a contract by the substitution of debtors, it did not wish to convey the
impression that the word "express" was to be given an unqualified meaning. as indicated in
the authorities or cases. both Spanish and American, cited in said decision. 34
Subsequently, in the case of Vda. e Hijos de Pio Barretto y Cia., Inc. v. Albo & Sevilla, Inc., et al.,35 this Court
reiterated the rule that there can be implied consent of the creditor to the substitution of debtors.
In the case at bar, Babst, MULTI and ELISCON all maintain that due to the failure of BPI to register its
objection to the take-over by DBP of ELISCON's assets, at the creditors' meeting held in June 1981 and
thereafter, it is deemed to have consented to the substitution of DBP for ELISCON as debtor.
We find merit in the argument. Indeed, there exist clear indications that BPI was aware of the assumption by
DBP of the obligations of ELISCON. In fact, BPI admits that --"the Development Bank of the Philippines (DBP), for a time, had .proposed a formula for the
settlement of Eliscon's past obligations to its creditors, including the plaintiff [BPI], but the formula
was expressly rejected by the plaintiff as not acceptable (long before the filing of the complaint at
bar)."36
The Court of Appeals held that even if the account officer who attended the June 1981 creditors' meeting had
expressed consent to the assumption by DBP of ELISCON' s debts, such consent would not bind BPI for lack
of a specific authority therefor. In its petition, ELISCON counters that the mere presence of the account officer
at the meeting necessarily meant that he was authorized to represent BPI in that creditors' meeting. Moreover,
BPI did not object to the substitution of debtors, although it objected to the payment formula submitted by DBP.
Indeed, the authority granted by BPI to its account officer to attend the creditors' meeting was an authority to
represent the bank, such that when he failed to object to the substitution of debtors, he did so on behalf of and
for the bank. Even granting arguendo that the said account officer was not so empowered, BPI could have
subsequently registered its objection to the substitution, especially after it had already learned that DBP had
taken over the assets and assumed the liabilities of ELISCON. Its failure to do so can only mean an
acquiescence in the assumption by DBP of ELISCON's obligations. As repeatedly pointed out by ELISCON
and MULTI, BPI's objection was to the proposed payment formula, not to the substitution itself.
BPI gives no cogent reason in withholding its consent to the substitution, other than its desire to preserve its
causes of action and legal recourse against the sureties of ELISCON. It must be remembered, however, that
while a surety is solidarily liable with the principal debtor, his obligation to pay only arises upon the principal
debtor's failure or refusal to pay. A contract of surety is an accessory promise by which a person binds himself

for another already bound, and agrees with the creditor to satisfy the obligation if the debtor does not. 37 A
surety is an insurer of the debt; he promises to pay the principal's debt if the principal will not pay. 38
In the case at bar, there was no indication that the principal debtor will default in payment. In fact, DBP, which
had stepped into the shoes of ELISCON, was capable of payment. Its authorized capital stock was increased
by the government.39 More importantly, the National Development Company took over the business of
ELISCON and undertook to pay ELISCON's creditors, and earmarked for that purpose the amount of
P4,015,534.54 for payment to BPI. 40
Notwithstanding the fact that a reliable institution backed by government funds was offering to pay ELISCON's
debts, not as mere surety but as substitute principal debtor, BPI, for reasons known only to itself, insisted in
going after the sureties. The course of action chosen taxes the credulity of this Court. At the very least, suffice
it to state that BPI's actuation in this regard runs counter to the good faith covenant in contractual relations,
provided for by the Civil Code, to wit:
ART. 19. Every person must, in the exercise of his rights and in the performance of his duties, act
with justice, give everyone his due, and observe honesty and good faith.1wphi1.nt
ART. 1159. Obligations arising from contract have the force of law between the contracting parties
and should be complied with in good faith.
BPI's conduct evinced a clear and unmistakable consent to the substitution of DBP for ELISCON as debtor.
Hence, there was a valid novation which resulted in the release of ELISCON from its obligation to BPI, whose
cause of action should be directed against DBP as the new debtor.
Novation, in its broad concept, may either be extinctive or modificatory .It is extinctive when an old
obligation is terminated by the creation of a new obligation that takes the place of the former; it is
merely modificatory when the old obligation subsists to the extent it remains compatible with the
amendatory agreement. An extinctive novation results either by changing the object or principal
conditions (objective or real), or by substituting the person of the debtor or subrogating a third
person in the rights of the creditor (subjective or personal). Under this mode, novation would have
dual functions one to extinguish an existing obligation, the other to substitute a new one in its
place requiring a conflux of four essential requisites, (1) a previous valid obligation; (2) an
agreement of all parties concerned to a new contract; (3) the extinguishment of the old obligation;
and (4) the birth of a valid new obligation.41
The original obligation having been extinguished, the contracts of suretyship executed separately by Babst
and MULTI, being accessory obligations, are likewise extinguished. 42
Hence, BPI should enforce its cause of action against DBP. It should be stressed that notwithstanding the
lapse of time within which these cases have remained pending, the prescriptive period for BPI to file its action
was interrupted when it filed Civil Case No. 49226.43
WHEREFORE, the consolidated petitions are GRANTED. The appealed Decision of the Court of Appeals,
which held ELISCON, MULTI and Babst solidarily liable for payment to BPI of the promissory note and letters
of credit, isREVERSED and SET ASIDE. BPI's complaint against ELISCON, MULTI and Babst is DISMISSED.
SO ORDERED.

"Contrary to law "[1]

Upon her arraignment on 28 March 1978, petitioner Quinto pleaded not guilty; trial on the merits
thereupon ensued.
According to the prosecution, on or about 23 March 1977, Leonida went to see Aurelia Cariaga (private
complainant) at the latter's residence in Makati. Leonida asked Aurelia to allow her have some pieces of
jewelry that she could show to prospective buyers. Aurelia acceded and handed over to Leonida one (1) set
of marques with briliantitos worth P17,500.00, one (1) solo ring of 2.30 karats worth P16,000.00 and one
(1) rosetas ring worth P2,500.00. Leonida signed a receipt (Exhibit "A") therefor, thus:
[G.R. No. 126712. April 14, 1999]
"RECEIPT
LEONIDA C. QUINTO, petitioner, vs. PEOPLE OF THE PHILIPPINES,respondent.
DECISION
VITUG, J.:
Assailed in this Petition for Review on Certiorari under Rule 45 of the Rules of Court is the decision of
the Court of Appeals, promulgated on 27 September 1996, in People of the Philippinesvs. Leonida Quinto y
Calayan, docketed CA-G.R. CR No. 16567, which has affirmed the decision of Branch 157 of the Regional
Trial Court (RTC), National Capital Judicial Region, Branch 157, Pasig City, finding Leonida Quinto y Calayan
guilty beyond reasonable doubt of the crime of Estafa.
Leonida Quinto y Calayan, herein petitioner, was indicted for the crime of estafa under Article 315,
paragraph 1(b), of the Revised Penal Code, in an information which read:
"That on or about the 23rd day of March 1977, in the Municipality of Makati, Metro Manila, Philippines and
within the jurisdiction of this Honorable Court, the above-named accused, received in trust from one Aurelia
Cariaga the following pieces of jewelry, to wit:
One (1) set of marques with briliantitos
valued at .............................................P17,500.00
One (1) solo ring (2 karats & 30 points)
valued at .............................................P16,000.00
One (1) diamond ring (rosetas)
valued at .............................................P 2,500.00
with a total value of P36,000.00 for the purpose of selling the same on commission basis and with the express
obligation on the part of the accused to turn over the proceeds of sale thereof, or to return the said jewelries
(sic), if not sold, five (5) days after receipt thereof, but the accused once in possession of the jewelries (sic),
far from complying with her obligation, with intent of gain, gave abuse of confidence and to defraud said
Aurelia Cariaga, did then and there wilfully, unlawfully and feloniously misappropriate, misapply and convert to
her own personal use and benefit the said jewelries (sic) and/or the proceeds of sale or to return the pieces of
jewelry, to the damage and prejudice of the said Aurelia Cariaga in the aforementioned amount of P
36,000.00.

Pinatutunayan ko na tinanggap ko kay Gng. Aurelia B. Cariaga (ang) mga alahas na nakatala sa ibaba, upang
aking ipagbili sa pamamagitan ng BIGAY PALA o Commission at Kaliwaan lamang. Ako'y hindi
pinahihintulutan (na) ipagbili ang mga ito ng Pautang. Pinananagutan ko na ang mga alahas na ito ay hindi ko
ipagkakaloob o ipagkakatiwala sa kanino pa man upang ilagak o maipagbili nila, at ang mga ito ay ako ang
magbibili sa ilalim ng aking pangangasiwa at pananagutan sa halagang nakatala sa ibaba. At aking isasauli
ang mga hindi na maipagbili sa loob ng 5 days (sic) araw mula sa petsa nito o sa kahilingan, na nasa mabuti
at malinis na kalagayan katulad ng tanggapin ko sa petsang ito.
MGA URI NG ALAHAS
1 set marques with titos
1 solo 2 karats & 30 points

17,500.
16,000.

1 ring Rosetas brill

2,500.
Makati, March 23, 1977
(Sgd.)"[2]

When the 5-day period given to her had lapsed, Leonida requested for and was granted additional time within
which to vend the items. Leonida failed to conclude any sale and, about six (6) months later, Aurelia asked
that the pieces of jewelry be returned. She sent to Leonida a demand letter which the latter ignored. The
inexplicable delay of Leonida in returning the items spurred the filing of the case for estafa against her.
The defense proffered differently. In its version, the defense sought to prove that Leonida was engaged
in the purchase and sale of jewelry. She was used to buying pieces of jewelry from a certain Mrs. Antonia
Ilagan who later introduced her (Leonida) to Aurelia. Sometime in 1975, the two, Aurelia and Leonida, started
to transact business in pieces of jewelry among which included a solo ring worth P40,000.00 which was sold
to Mrs. Camacho who paid P20,000.00 in check and the balance of P20,000.00 in installments later paid
directly to Aurelia. The last transaction Leonida had-with Mrs. Camacho involved a "marques" worth
P16,000.00 and a ring valued at P4,000.00. Mrs. Camacho was not able to pay the due amount in full and left
a balance of P13,000.00. Leonida brought Mrs. Camacho to Aurelia who agreed to allow Mrs. Camacho to pay
the balance in installments. Leonida was also able to sell for Aurelia a 2-karat diamond ring worth P17,000.00
to Mrs. Concordia Ramos who, unfortunately, was unable to pay the whole amount. Leonida brought Mrs.
Ramos to Aurelia and they talked about the terms of payment. As first payment, Mrs. Ramos gave Leonida a
ring valued at P3,000.00. The next payment made by her was P5,000.00. Leonida herself then
paid P2,000.00.

The RTC, in its 25th January 1993 decision, found Leonida guilty beyond reasonable doubt of the crime
of estafa and sentenced her to suffer the penalty of imprisonment of seven (7) years and one (1) day
of prision mayor as minimum to nine (9) years of prision mayor as maximum and to indemnify private
complainant in the amount of P36,000.00.
Leonida interposed an appeal to the Court of Appeals which affirmed, in its 27th September 1996
decision, the RTC's assailed judgment.
The instant petition before this Court would have it that the agreement between petitioner and private
complainant was effectively novated when the latter consented to receive payment on installments directly
from Mrs. Camacho and Mrs. Ramos.
The petition is bereft of merit.
Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive when an old
obligation is terminated by the creation of a new obligation that takes the place of the former; it is merely
modificatory when the old obligation subsists to the extent it remains compatible with the amendatory
agreement. An extinctive novation results either by changing the object or principal conditions (objective or
real), or by substituting the person of the debtor or subrogating a third person in the rights of the creditor
(subjective or personal).[3] Under this mode, novation would have dual functions - one to extinguish an existing
obligation, the other to substitute a new one in its place [4] - requiring a conflux of four essential requisites: (1) a
previous valid obligation; (2) an agreement of all parties concerned to a new contract; (3) the extinguishment
of the old obligation; and (4) the birth of a valid new obligation. [5]
Novation is never presumed,[6] and the animus novandi, whether totally or partially, must appear by
express agreement of the parties, or by their acts that are too clear and unequivocal to be mistaken. [7]
The extinguishment of the old obligation by the new one is a necessary element of novation which may
be effected either expressly or impliedly.[8] The term "expressly" means that the contracting parties
incontrovertibly disclose that their object in executing the new contract is to extinguish the old one. [9] Upon the
other hand, no specific form is required for an implied novation, [10] and all that is prescribed by law would be an
incompatibility between the two contracts. While there is really no hard and fast rule to determine what might
constitute to be a sufficient change that can bring about novation, the touchstone for contrariety, however,
would be an irreconcilable incompatibility between the old and the new obligations. [11]
There are two ways which could indicate, in fine, the presence of novation and thereby produce the
effect of extinguishing an obligation by another which substitutes the same. The first is when novation has
been explicitly stated and declared in unequivocal terms. The second is when the old and the new obligations
are incompatible on every point. The test of incompatibility is whether or not the two obligations can stand
together, each one having its independent existence. If they cannot, they are incompatible and the latter
obligation novates the first.[12] Corollarily, changes that breed incompatibility must be essential in nature and
not merely accidental. The incompatibility must take place in any of the essential elements of the obligation,
such as its object, cause or principal conditions thereof; otherwise, the change would be merely modificatory in
nature and insufficient to extinguish the original obligation.
The changes alluded to by petitioner consists only in the manner of payment. There was really no
substitution of debtors since private complainant merely acquiesced to the payment but did not give her
consent[13] to enter into a new contract. The appellate court observed:
"Appellant, however, insists that their agreement was novated when complainant agreed to be paid directly by
the buyers and on installment basis. She adds that her liability is merely civil in nature.

"It is to remembered that one of the buyers, Concordia Ramos, was not presented to testify on the alleged
aforesaid manner of payment.
"The acceptance by complainant of partial payment tendered by the buyer, Leonor Camacho, does not evince
the intention of the complainant to have their agreement novated. It was simply necessitated by the fact that,
at that time, Camacho had substantial accounts payable to complainant, and because of the fact that appellant
made herself scarce to complainant. (TSN, April 15, 1981, 31-32) Thus, to obviate the situation where
complainant would end up with nothing, she was forced to receive the tender of Camacho. Moreover, it is to
be noted that the aforesaid payment was for the purchase, not of the jewelry subject of this case, but of some
other jewelry subject of a previous transaction. (Ibid. June 8, 1981, 10-11)"[14]
There are two forms of novation by substituting the person of the debtor, depending on whose initiative
it comes from, to wit: expromision and delegacion. In the former, the initiative for the change does not come
from the debtor and may even be made without his knowledge. Since a third person would substitute for the
original debtor and assume the obligation, his consent and that of the creditor would be required. In the latter,
the debtor offers, and the creditor accepts, a third person who consents to the substitution and assumes the
obligation, thereby releasing the original debtor from the obligation, here, the intervention and the consent of
all parties thereto would perforce be necessary.[15] In either of these two modes of substitution, the consent of
the creditor, such as can be seen, is an indispensable requirement. [16]
It is thus easy to see why Cariaga's acceptance of Ramos and Camacho's payment on installment
basis cannot be construed as a case of either expromision or delegacion sufficient to justify the attendance of
extinctive novation. Not too uncommon is when a stranger to a contract agrees to assume an obligation; and
while this may have the effect of adding to the number of persons liable, it does not necessarily imply the
extinguishment of the liability of the first debtor. [17]Neither would the fact alone that the creditor receives
guaranty or accepts payments from a third person who has agreed to assume the obligation,
constitute an extinctive novation absent an agreement that the first debtor shall be released from
responsibility.[18]
Petitioner's reliance on Candida Mariano vs. People[19] is misplaced. The factual milieu
inMariano would indicate a clear intention on the part of the parties to release the accused from her
responsibility as an agent and for her to instead assume the obligation of a guarantor. Unfortunately for
petitioner in the case at bar, the factual findings of both the trial court and the appellate court prove just the
opposite which is that there has never been any animus novandibetween or among the parties.
Article 315 of the Revised Penal Code defines estafa and penalizes any person who shall defraud
another by "misappropriating or converting, to the prejudice of another, money, goods, or any other personal
property received by the offender in trust or on commission, or for administration, or under any other obligation
involving the duty to make delivery of or to return the same, even though such obligation be totally or partially
guaranteed by a bond; or by denying having received such money, goods, or other property." It is axiomatic
that the gravamen of the offense is the appropriation or conversion of money or property received to the
prejudice of the owner. The terms "convert" and "misappropriate" have been held to connote "an act of using
or disposing of another's property as if it were one's own or devoting it to a purpose or use different from that
agreed upon." The phrase, 'to misappropriate to one's own use" has been said to include "not only conversion
to one's personal advantage, but also every attempt to dispose of the property of another without
right."[20] Verily, the sale of the pieces of jewelry on installments in contravention of the explicit terms of the
authority granted to her in Exhibit "A" (supra) is deemed to be one of conversion. Thus, neither the theory of
"delay in the fulfillment of commission" nor that of novation posed by petitioner, can avoid the incipient criminal
liability. In People vs. Nery,[21] this Court held:
"It may be observed in this regard that novation is not one of the means recognized by the Penal Code
whereby criminal liability can be extinguished; hence, the role of novation may only be either to prevent the
rise of criminal liability or to cast doubt on the true nature of the original basic transaction, whether or not it
was such that its breach would not give rise to penal responsibility ..."

"We are unimpressed.

The criminal liability for estafa already committed is then not affected by the subsequent novation of contract,
for it is a public offense which must be prosecuted and punished by the State in its own conation. [22]

Finally, this Court fails to see any reversible error, let alone any grave abuse of discretion, in the
appreciation of the evidence by the Court of Appeals which, in fact, hews with those of the trial court. Indeed,
under the circumstances, this Court must be deemed bound by the factual findings of those courts.
Article 315, 1st paragraph, of the Revised Penal Code, as amended by Presidential Decree No. 818,
provides that the penalty of "prision correccional in its maximum period to prison mayor in its minimum period,
if the amount of the fraud is over 12,000 but does not exceed 22,000 pesos, and if such amount exceeds the
latter sum, the penalty provided in this paragraph shall be imposed in its maximum period, adding one year for
each additional 10,000 pesos; but the total penalty which may be imposed shall not exceed twenty years. In
such case, and in connection with the accessory penalties which may be imposed and for the purpose of the
other provisions of this Code, the penalty shall be termed prision mayor or reclusion temporal, as the case
may be."
In the leading case of People vs. Gabres[23] this Court ruled:
"Under the Indeterminate Sentence Law, the maximum term of the penalty shall be 'that which, in view of the
attending circumstances, could be properly imposed' under the Revised Penal Code, and the minimum shall
be 'within the range of the penalty next lower to that prescribed' for the offense. The penalty next lower should
be based on the penalty prescribed by the Code for the offense, without first considering any modifying
circumstance attendant to the commission of the crime. The determination of the minimum penalty is left by
law to the sound discretion of the court and it can be anywhere within the range of the penalty next lower
without any reference to the periods into which it might be subdivided. The modifying circumstances are
considered only in the imposition of the maximum term of the indeterminate sentence.
"The fact that the amounts involved in the instant case exceed P22,000.00 should not be considered in the
initial determination of the indeterminate penalty; instead, the matter should be so taken as analogous to
modifying circumstances in the imposition of the maximum term of the full indeterminate sentence. This
interpretation of the law accords with the rule that penal laws should be construed in favor of the
accused. Since the penalty prescribed by law for the estafa charge against accused-appellant is prision
correccional maximum to prision mayor minimum, the penalty next lower would then be prision
correccional minimum to medium. Thus, the minimum term of the indeterminate sentence should be
anywhere within six (6) months and one (1) day to four (4) years and two (2) months while the maximum term
of the indeterminate sentence should at least be six (6) years and one (1) day because the amounts involved
exceeded P22,000.00, plus an additional one (1) year for each additional P10,000.00." [24]

GONZAGA-REYES, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court. The petition seeks to reverse and
set aside the Decision1 dated February 10, 2000 of the Court of Appeals and its Resolution 2 dated April 7,
2000 denying petitioner's Motion for Reconsideration thereto. The appellate court decision reversed the
Decision3dated November 11, 1997 of the Regional Trial Court of Makati, Branch 145 in Civil Case No. 961211.
The facts of the case, as stated in the Decision of the Court o Appeals dated February 10, 2000, are as
follows:
"The Anglo-Asean Bank and Trust Limited (Anglo-Asean, for brevity), is a private bank registered
and organized to do business under the laws of the Republic of Vanuatu but not in the Philippines.
Its business consists primarily in receiving fund placements by way of deposits from institutions
and individuals investors from different parts of the world and thereafter investing such deposits in
money market placements and potentially profitable capital ventures in Hongkong, Europe and the
United States for the purpose of maximizing the returns on those investments.
Enticed by the lucrative prospects of doing business with Anglo-Asean, Abelardo Licaros, a Filipino
businessman, decided to make a fund placement with said bank sometime in the 1980's. As it
turned out, the grim outcome of Licaros' foray in overseas fund investment was not exactly what he
envisioned it to be. More particularly, Licaros, after having invested in Anglo-Asean, encountered
tremendous and unexplained difficulties in retrieving, not only the interest or profits, but even the
very investments he had put in Anglo-Asean.1wphi1.nt
Confronted with the dire prospect of not getting back any of his investments, Licaros then decide to
seek the counsel of Antonio P. Gatmaitan, a reputable banker and investment manager who had
been extending managerial, financial and investment consultancy services to various firms and
corporations both here and abroad. To Licaros' relief, Gatmaitan was only too willing enough to
help. Gatmaitan voluntarily offered to assume the payment of Anglo-Asean's indebtedness to
Licaros subject to certain terms and conditions. In order to effectuate and formalize the parties'
respective commitments, the two executed a notarized MEMORANDUM OF AGREEMENT on July
29, 1988 (Exh. "B"); also Exhibit "1"), the full text of which reads:
Memorandum of Agreement

The penalty imposed by the trial court, affirmed by the appellate court, should accordingly be modified.
WHEREFORE, the assailed decision of the Court of Appeals is AFFIRMED except that the
imprisonment term is MODIFIED by now sentencing petitioner to an indeterminate penalty of from two (2)
years, eight (8) months and one (1) day of prison correccional to seven (7) years and one (1) day of prision
mayor. The civil liability of appellant for P36,000.00 in favor of private complainant is maintained. Costs
against petitioner.

SO ORDERED

KNOW ALL MEN BY THESE PRESENTS:

This MEMORANDUM OF AGREEMENT made and executed this 29th day of July 1988, at Makati by and
between:
ABELARDO B. LICAROS, Filipino, of legal age and holding office at Concepcion Building, Intramuros, Manila
hereinafter referred to as THE PARTY OF THE FIRST PART,
and
ANTONIO P. GATMAITAN, Filipino, of legal age and residing at 7 Mangyan St., La vista, hereinafter referred to
as the PARTY OF THE SECOND PART,

G.R. No. 142838

August 9, 2001

ABELARDO B. LICAROS, petitioner,

vs.
ANTONIO P. GATMAITAN, respondent.

WITNESSETH THAT:
WHEREAS, ANGLO-ASEAN BANK & TRUST, a company incorporated by the Republic of Vanuatu,
hereinafter referred to as the OFFSHORE BANK, is indebted to the PARTY OF THE FIRST PART in the

amount of US dollars; ONE HUNDRED FIFTY THOUSAND ONLY (US$150,000) which debt is now due and
demandable.
WHEREAS, the PARTY OF THE FIRST PART has encountered difficulties in securing full settlement of the
said indebtedness from the OFFSHORE BANK and has sought a business arrangement with the PARTY OF
THE SECOND PART regarding his claims;

IN WITNESS WHEREOF, the parties have caused this MEMORANDUM OF AGREEMENT to be signed on
the date and place first written above.

Sgd.

Sgd.

WHEREAS, the PARTY OF THE SECOND PART, with his own resources and due to his association with the ABELARDO B. LICAROS
OFFSHORE BANK, has offered to the PARTY OF THE FIRST PART to assume the payment of the aforesaid
indebtedness, upon certain terms and conditions, which offer, the PARTY OF THE FIRST PART has accepted;
PARTY OF THE FIRST PART

ANTONIO P. GATMAITAN

PARTY OF THE FIRST ART

WHREAS, the parties herein have come to an agreement on the nature, form and extent of their mutual
prestations which they now record herein with the express conformity of the third parties concerned;
NOW, THEREFORE, for and in consideration of the foregoing and the mutual covenants stipulated herein, the
PARTY OF THE FIRST PART and the PARTY OF THE SECOND PART have agreed, as they do hereby
agree, as follows:
WITH OUR CONFORME:
1. The PARTY OF THE SECOND PART hereby undertakes to pay the PARTY OF THE FIRST
PART the amount of US DOLLARS ONE HOUNDRED FIFTY THOUSAND (US$150,000) payable ANGLO-ASEAN BANK & TRUST
in Philippine Currency at the fixed exchange rate of Philippine Pesos 21 to US$1 without interest
on or before July 15, 1993.
For this purpose, the PARTY OF THE SECOND PART shall execute and deliver a non negotiable
promissory note, bearing the aforesaid material consideration in favor of the PARTY OF THE
FIRST PART upon execution of this MEMORANDUM OF AGREEMENT, which promissory note
shall form part as ANNEX A hereof.
2. For and in consideration of the obligation of the PARTY OF THE SECOND PART, the PARTY
OF THE FIRST does hereby;
a. Sell, assign, transfer and set over unto the PARTY OF THE SECOND PART that
certain debt now due and owing to the PARTY OF THE FIRST PART by the
OFFSHORE BANK, to the amount of US Dollars One Hundred Fifty Thousand plus
interest due and accruing thereon;
b. Grant the PART OF THE SECOND PART the full power and authority, for his own
use and benefit, but at his own cost and expense, to demand, collect, receive,
compound, compromise and give acquittance for the same or any part thereof, and in
the name of the PARTY OF THE FIRST PART, to prosecute, and withdraw any suit or
proceedings therefor;
c. Agree and stipulate that the debt assigned herein is justly owing and due to the
PARTY OF THE FIRST PART from the said OFFSHORE BANK, and that the PARTY
OF THE FIRST PART has not done and will not cause anything to be done to diminish
or discharge said debt, or to delay or prevent the PARTY OF THE SECOND PART
from collecting the same; and;
d. At the request of the PARTY OF SECOND PART and the latter's own cost and
expense, to execute and do all such further acts and deeds as shall be reasonably
necessary for proving said debt and to more effectually enable the PARTY OF THE
SECOND PART to recover the same in accordance with the true intent and meaning of
the arrangements herein.

BY: (Unsigned)

SIGNED IN THE PRESENCE OF:

Sgd. (Illegible)

________________________________

________________________________

Conformably with his undertaking under paragraph 1 of the aforequoted agreement, Gatmaitan executed in
favor of Licaros a NON-NEGOTIABLE PROMISSORY NOTE WITH ASSIGNMENT OF CASH
DIVIDENDS (Exhs. "A"; Also Exh. "2"), which promissory note, appended as Annex "A" to the same
Memorandum of Agreement, states in full, thus
"NON-NEGOTIABLE PROMISSORY NOTE WITH ASSIGNMENT OF CASH DIVIDENDS
This promissory note is Annex A of the Memorandum of Agreement executed between Abelardo B.
Licaros and Antonio P. Gatmaitan, on ______ 1988 at Makati, Philippines and is an integral part of
said Memorandum of Agreement.

P3,150.00.
On or before July 15, 1993, I promise to pay to Abelardo B. Licaros the sum of Philippine Pesos
3,150,000 (P3,150,000) without interest as material consideration for the full settlement of his
money claims from ANGLO-ASEAN BANK, referred to in the Memorandum of Agreement as the
'OFFSHORE BANK".
As security for the payment of this of Promissory Note. I hereby ASSIGN, CEDE and TRANSFER,
Seventy Percent (70%) of ALL CASH DIVIDENDS, that may be due or owing to me as the
registered owner of __________________ (______________) shares of stock in the Prudential
Life Realty, Inc.
This assignment shall likewise include SEVENTY PERCENT (70%) of cash dividends that may be
declared by Prudential Life Realty, Inc. and due or owing to Prudential Life Plan, Inc., of which I am
a stockholder, to the extent of or in proportion to my aforesaid shareholding in Prudential Life Plan,
Inc, the latter being the holding company of Prudential Life Realty, Inc.
In the event that I decide to sell or transfer my aforesaid shares in either or both the Prudential Life
Plan, Inc. or Prudential Life Realty, Inc. and the Promissory Note remains unpaid or outstanding, I
hereby give Mr. Abelardo B. Licaros the first option to buy the said shares.

Hence, on August 1, 1996, in the Regional Trial Court at Makati, Licaros filed the complaint in this case. In his
complaint, docketed in the court below as Civil case No. 96-1211, Licaros prayed for a judgment ordering
Gatmaitan to pay him the following:
'a) Principal Obligation in the amount of Three Million Five Hundred Thousand Pesos
(P3,500,000.00);
b) Legal interest thereon at the rate of six (6%) percent per annum from July 16, 1993 when the
amount became due until the obligation is fully paid;
b) Twenty percent (20%) of the amount due as reasonable attorney's fees;
d) Costs of the suit.'"4
After trial on the merits, the court a quo rendered judgment in favor of petitioner Licaros and found respondent
Gatmaitan liable under the Memorandum of Agreement and Promissory Note for P3,150,000.00 plus 12%
interest per annum from July 16, 1993 until the amount is fully paid. Respondent was likewise ordered to pay
attorney's fees of P200,000.00. 5
Respondent Gatmaitan appealed the trial court's decision to the Court of Appeals. In a decision promulgated
on February 10, 2000, the appellate court reversed the decision of the trial court and held that respondent
Gatmaitan did not at any point become obligated to pay to petitioner Licaros the amount stated in the
promissory note. In a Resolution dated April 7, 2000 the Court of Appeals denied petitioner's Motion for
Reconsideration of its February 10, 2000 Decision.

Manila, Philippines
July ______, 1988
(SGD.)

Hence this petition for review on certiorari where petitioner prays for the reversal of the February 10, 2000
Decision of the Court of Appeals and the reinstatement of the November 11, 1997 decision of the Regional
Trial Court.

ANTONIO P. GATMAITAN
7 Mangyan St., La Vista QC

The threshold issue for the determination of this Court is whether the Memorandum of Agreement between
petitioner and respondent is one of assignment of credit or one of conventional subrogation. This matter is
determinative of whether or not respondent became liable to petitioner under the promissory note considering
that its efficacy is dependent on the Memorandum of Agreement, the note being merely an annex to the said
memorandum.6

SIGNED IN THE PRESENCE OF:

(SGD.)
______________________________
Francisco A. Alba
President, Prudential Life Plan, Inc."

______________________________

Thereafter, Gatmaitan presented to Anglo-Asean the Memorandum of Agreement earlier executed by him and
Licaros for the purpose of collecting the latter's placement thereat of U.S. $150,000.00. Albeit the officers of
Anglo-Asean allegedly committed themselves to "look into [this matter]", no formal response was ever made
by said bank to either Licaros or Gatmaitan. To date, Anglo-Asean has not acted on Gatmaitan's monetary
claims.
Evidently, because of his inability to collect from Anglo-Asean, Gatmaitan did not bother anymore to make
good his promise to pay Licaros the amount stated in his promissory note (Exh. "A"; also Exh. 2"). Licaros,
however, thought differently. He felt that he had a right to collect on the basis of the promissory note
regardless of the outcome of Gatmaitan's recovery efforts. Thus, in July, 1996, Licaros, thru counsel,
addressed successive demand letters to Gatmaitan (Exhs. "C" and "D"), demanding payment of the later's
obligations under the promissory note. Gatmaitan, however, did not accede to these demands.

An assignment of credit has been defined as the process of transferring the right of the assignor to the
assignee who would then have the right to proceed against the debtor. The assignment may be done
gratuitously or onerously, in which case, the assignment has an effect similar to that of a sale. 7
On the other hand, subrogation has been defined as the transfer of all the rights of the creditor to a third
person, who substitutes him in all his rights. It may either be legal or convention. Legal subrogation is that
which takes place without agreement but by operation of law because of certain acts. Conventional
subrogation is that which takes place by agreement of parties. 8
The general tenor of the foregoing definitions of the terms "subrogation" and "assignment of credit" may make
it seem that they are one and the same which they are not. A noted expert in civil law notes their distinctions
thus:
"Under our Code, however, conventional subrogation is not identical to assignment of credit. In the
former, the debtor's consent is necessary; in the latter it is not required. Subrogation extinguishes
the obligation and gives rise to a new one; assignment refers to the same right which passes from
one person to another. The nullity of an old obligation may be cured by subrogation, such that a
new obligation will be perfectly valid; but the nullity of an obligation is not remedied by the
assignment of the creditor's right to another." 9

For our purposes, the crucial distinction deals with the necessity of the consent of the debtor in the original
transaction. In an assignment of credit, the consent of the debtor is not necessary in order that the assignment
may fully produce legal effects.10 What the law requires in an assignment of credit is not the consent of the
debtor but merely notice to him as the assignments takes effect only from the time he has knowledge
thereof.11 A creditor may, therefore, validly assign his credit and its accessories without the debtor's
consent.12 On the other hand, conventional subrogation requires an agreement among the three parties
concerned the original creditor, the debtor, and the new creditor. It is a new contractual relation based on the
mutual agreement among all the necessary parties. Thus, Article 1301 of the Civil Code explicitly states that
"(C)onventional subrogation of a third person requires the consent of the original parties and of the third
person."
The trial court, in finding for the petitioner, ruled that the Memorandum of Agreement was in the nature of an
assignment of credit. As such, the court a quo held respondent liable for the amount stated in the said
agreement even if the parties thereto failed to obtain the consent of Anglo-Asean Bank. On the other hand, the
appellate court held that the agreement was one of conventional subrogation which necessarily requires the
agreement of all the parties concerned. The Court of Appeals thus ruled that the Memorandum of Agreement
never came into effect due to the failure of the parties to get the consent of Anglo-Asean Bank to the
agreement and, as such, respondent never became liable for the amount stipulated.
We agree with the finding of the Court of Appeals that the Memorandum of Agreement dated July 29, 1988
was in the nature of a conventional subrogation which requires the consent of the debtor, Anglo-Asean Bank,
for its validity. We note with approval the following pronouncement of the Court of Appeals:
"Immediately discernible from above is the common feature of contracts involving conventional
subrogation, namely, the approval of the debtor to the subrogation of a third person in place of the
creditor. That Gatmaitan and Licaros had intended to treat their agreement as one of conventional
subrogation is plainly borne by a stipulation in their Memorandum of Agreement, to wit:
"WHEREAS, the parties herein have come to an agreement on the nature, form and extent of their
mutual prestations which hey now record herein with the express conformity of the third
parties concerned" (emphasis supplied), which third party is admittedly Anglo-Asean Bank.
Had the intention been merely to confer on appellant the status of a mere "assignee" of appellee's
credit, there is simply no sense for them to have stipulated in their agreement that the same is
conditioned on the "express conformity" thereto of Anglo-Asean Bank. That they did so only
accentuates their intention to treat the agreement as one of conventional subrogation. And it is
basic in the interpretation of contracts that the intention of the parties must be the one pursued
(Rule 130, Section 12, Rules of Court).
Given our finding that the Memorandum of Agreement (Exh. "B"; also Exh. "1"), is not one of
"assignment of credit" but is actually a "conventional subrogation", the next question that comes to
mind is whether such agreement was ever perfected at all. Needless to state, the perfection or
non-perfection of the subject agreement is of utmost relevance at this point. For, if the same
Memorandum of Agreement was actually perfected, then it cannot be denied that Gatmaitan still
has a subsisting commitment to pay Licaros on the basis of his promissory note. If not, Licaros' suit
for collection must necessarily fail.
Here, it bears stressing that the subject Memorandum of Agreement expressly requires the
consent of Anglo-Asean to the subrogation. Upon whom the task of securing such consent
devolves, be it on Licaros or Gatmaitan, is of no significance. What counts most is the hard reality
that there has been an abject failure to get Anglo-Asean's nod of approval over Gatmaitan's being
subrogated in the place of Licaros. Doubtless, the absence of such conformity on the part of AngloAsean, which is thereby made a party to the same Memorandum of Agreement, prevented the
agreement from becoming effective, much less from being a source of any cause of action for the
signatories thereto"13

Aside for the "whereas clause" cited by the appellate court in its decision, we likewise note that on the
signature page, right under the place reserve for the signatures of petitioner and respondent, there is,
typewritten, the words "WITH OUR CONFORME." Under this notation, the words "ANGLO-ASEAN BANK
AND TRUST" were written by hand.14 To our mind, this provision which contemplates the signed conformity of
Anglo-Asean Bank, taken together with the aforementioned preambulatory clause leads to the conclusion that
both parties intended that Anglo-Asean Bank should signify its agreement and conformity to the contractual
arrangement between petitioner and respondent. The fact that Anglo-Asean Bank did not give such consent
rendered the agreement inoperative considering that, as previously discussed, the consent of the debtor is
needed in the subrogation of a third person to the rights of a creditor.
In this petition, petitioner assails the ruling of the Court of Appeals that what was entered into by the parties
was a conventional subrogation of petitioner's rights as creditor of the Anglo-Asean Bank which necessary
requires the consent of the latter. In support, petitioner alleges that: (1) the Memorandum of Agreement did not
create a new obligation and, as such, the same cannot be a conventional subrogation; (2) the consent of
Anglo-Asean Bank was not necessary for the validity of the Memorandum of Agreement; (3) assuming that
such consent was necessary, respondent failed to secure the same as was incumbent upon him; and (4)
respondent himself admitted that the transaction was one of assignment of credit.
Petitioner argues that the parties to the Memorandum of Agreement could not have intended the same to be a
conventional subrogation considering that no new obligation was created. According to petitioner, the
obligation of Anglo-Asean Bank to pay under Contract No. 00193 was not extinguished and in fact, it was the
basic intention of the parties to the Memorandum of Agreement to enforce the same obligation of Anglo-Asean
Bank under its contract with petitioner. Considering that the old obligation of Anglo-Asean Bank under Contract
No. 00193 was never extinguished under the Memorandum of Agreement, it is contended that the same could
not be considered as a conventional subrogation.
We are not persuaded.
It is true that conventional subrogation has the effect of extinguishing the old obligation and giving rise to a
new one. However, the extinguishment of the old obligation is the effect of the establishment of a contract for
conventional subrogation. It is not a requisite without which a contract for conventional subrogation may not be
created. As such, it is not determinative of whether or not a contract of conventional subrogation was
constituted.
Moreover, it is of no moment that the subject of the Memorandum of Agreement was the collection of the
obligation of Anglo-Asean Bank to petitioner Licaros under Contract No. 00193. Precisely, if conventional
subrogation had taken place with the consent of Anglo-Asian Bank to effect a change in the person of its
creditor, there is necessarily created a new obligation whereby Anglo-Asean Bank must now give payment to
its new creditor, herein respondent.
Petitioner next argues that the consent or conformity of Anglo-Asean Bank is not necessary to the validity of
the Memorandum of Agreement as the evidence on record allegedly shows that it was never the intention of
the parties thereto to treat the same as one of conventional subrogation. He claims that the preambulatory
clause requiring the express conformity of third parties, which admittedly was Anglo-Asean Bank, is a mere
surplusage which is not necessary to the validity of the agreement.
As previously discussed, the intention of the parties to treat the Memorandum of Agreement as embodying a
conventional subrogation is shown not only by the "whereas clause" but also by the signature space captioned
"WITH OUR CONFORME" reserved for the signature of a representative of Anglo-Asean Bank. These
provisions in the aforementioned Memorandum of Agreement may not simply be disregarded or dismissed as
superfluous.
It is a basic rule in the interpretation of contracts that "(t)he various stipulations of a contract shall be
interpreted together, attributing to the doubtful ones that sense which may result from all of them taken
jointly."15 Moreover, under our Rules of Court, it is mandated that "(I)n the construction of an instrument where
there are several provisions or particulars, such a construction is, if possible, to be adopted as will give effect

to all."16 Further, jurisprudence has laid down the rule that contracts should be so construed as to harmonize
and give effect to the different provisions thereof. 17
In the case at bench, the Memorandum of Agreement embodies certain provisions that are consistent with
either a conventional subrogation or assignment of credit. It has not been shown that any clause or provision
in the Memorandum of Agreement is inconsistent or incompatible with a conventional subrogation. On the
other hand, the two cited provisions requiring consent of the debtor to the memorandum is inconsistent with a
contract of assignment of credit. Thus, if we were to interpret the same as one of assignment of credit, then
the aforementioned stipulations regarding the consent of Anglo-Asean Bank would be rendered inutile and
useless considering that, as previously discussed, the consent of the debtor is not necessary in an assignment
of credit.
Petitioner next argues that assuming that the conformity of Anglo-Asean was necessary to the validity of the
Memorandum of Agreement, respondently only had himself to blame for the failure to secure such conformity
as was, allegedly, incumbent upon him under the memorandum.
As to this argument regarding the party responsible for securing the conformity of Anglo-Asean Bank, we fail to
see how this question would have any relevance on the outcome of this case. Having ruled that the consent of
Anglo-Asean was necessary for the validity of the Memorandum of Agreement, the determinative fact is that
such consent was not secured by either petitioner or respondent which consequently resulted in the invalidity
of the said memorandum.

Assailed in this petition for review on certiorari under Rule 45 of the Rules of Court is the decision of the
Court of Appeals in CA-G.R. CV No. 41274, [1] affirming the decision of the Regional Trial Court (Branch 147) of
Makati, then Metro Manila, whereby petitioners Peter Roxas and Astro Electronics Corp. (Astro for brevity)
were ordered to pay respondent Philippine Export and Foreign Loan Guarantee Corporation (Philguarantee),
jointly and severally, the amount of P3,621,187.52 with interests and costs.
The antecedent facts are undisputed.
Astro was granted several loans by the Philippine Trust Company (Philtrust) amounting to
P3,000,000.00 with interest and secured by three promissory notes: PN NO. PFX-254 dated December 14,
1981 for P600,000.00, PN No. PFX-258 also dated December 14, 1981 for P400,000.00 and PN No. 15477
dated August 27, 1981 for P2,000,000.00. In each of these promissory notes, it appears that petitioner Roxas
signed twice, as President of Astro and in his personal capacity. [2] Roxas also signed a Continuing Surety ship
Agreement in favor of Philtrust Bank, as President of Astro and as surety.[3]
Thereafter, Philguarantee, with the consent of Astro, guaranteed in favor of Philtrust the payment of
70% of Astros loan,[4] subject to the condition that upon payment by Philguanrantee of said amount, it shall be
proportionally subrogated to the rights of Philtrust against Astro. [5]
As a result of Astros failure to pay its loan obligations, despite demands, Philguarantee paid 70% of the
guaranteed loan to Philtrust. Subsequently, Philguarantee filed against Astro and Roxas a complaint for sum
of money with the RTC of Makati.

With respect to the argument of petitioner that respondent himself allegedly admitted in open court that an
assignment of credit was intended, it is enough to say that respondent apparently used the word "assignment"
in his testimony in the general sense. Respondent is not a lawyer and as such, he is no so well versed in law
that he would be able to distinguish between the concepts of conventional subrogation and of assignment of
credit. Moreover, even assuming that there was an admission on his part, such admission is not conclusive on
this court as the nature and interpretation of the Memorandum of Agreement is a question of law which may
not be the subject of stipulations and admission.18

In his Answer, Roxas disclaims any liability on the instruments, alleging, inter alia, that he merely
signed the same in blank and the phrases in his personal capacity and in his official capacity were
fraudulently inserted without his knowledge.[6]

Considering the foregoing, it cannot then be said that the consent of the debtor Anglo-Asean Bank is not
necessary to the validity of the Memorandum of Agreement. As above stated, the Memorandum of Agreement
embodies a contract for conventional subrogation and in such a case, the consent of the original parties and
the third person is required.19 The absence of such conformity by Anglo-Asean Bank prevented the
Memorandum of Agreement from becoming valid and effective. Accordingly, the Court of Appeals did not err
when it ruled that the Memorandum of Agreement was never perfected.

WHEREFORE, in view of all the foregoing, the Court hereby renders judgment in favor or (sic) the plaintiff and against
the defendants Astro Electronics Corporation and Peter T. Roxas, ordering the then (sic) to pay, jointly and severally, the
plaintiff the sum of P3,621.187.52 representing the total obligation of defendants in favor of plaintiff Philguarantee as of
December 31, 1984 with interest at the stipulated rate of 16% per annum and stipulated penalty charges of 16% per
annum computed from January 1, 1985 until the amount is fully paid. With costs.

Having arrived at the above conclusion, the Court finds no need to discuss the other issues raised by
petitioner.
WHEREFORE, the instant petition is DENIED and the Decision of the Court of Appeals dated February 10,
2000 and its Resolution dated April 7, 2000 are hereby AFFIRMED.1wphi1.nt

After trial, the RTC rendered its decision in favor of Philguarantee with the following dispositive portion:

SO ORDERED.[7]
The trial court observed that if Roxas really intended to sign the instruments merely in his capacity as
President of Astro, then he should have signed only once in the promissory note. [8]

[G.R. No. 136729. September 23 ,2003]

On appeal, the Court of Appeals affirmed the RTC decision agreeing with the trial court that Roxas
failed to explain satisfactorily why he had to sign twice in the contract and therefore the presumption that
private transactions have been fair and regular must be sustained. [9]

ASTRO ELECTRONICS CORP. and PETER ROXAS, petitioner, vs. PHILIPPINE EXPORT AND FOREIGN
LOAN GUARANTEE CORPORATION, respondent.

In the present petition, the principal issue to be resolved is whether or not Roxas should be jointly and
severally liable (solidary) with Astro for the sum awarded by the RTC.

DECISION
AUSTRIA-MARTINEZ, J.:

The answer is in the affirmative.

Astros loan with Philtrust Bank is secured by three promissory notes. These promissory notes are
valid and binding against Astro and Roxas. As it appears on the notes, Roxas signed twice: first, as president
of Astro and second, in his personal capacity. In signing his name aside from being the President of Asro,
Roxas became a co-maker of the promissory notes and cannot escape any liability arising from it. Under the
Negotiable Instruments Law, persons who write their names on the face of promissory notes are makers,

[10]

promising that they will pay to the order of the payee or any holder according to its tenor. [11] Thus, even
without the phrase personal capacity, Roxas will still be primarily liable as a joint and several debtor under
the notes considering that his intention to be liable as such is manifested by the fact that he affixed his
signature on each of the promissory notes twice which necessarily would imply that he is undertaking the
obligation in two different capacities, official and personal.
Unnoticed by both the trial court and the Court of Appeals, a closer examination of the signatures
affixed by Roxas on the promissory notes, Exhibits A-4 and 3-A and B-4 and 4-A readily reveals that
portions of his signatures covered portions of the typewritten words personal capacity indicating with
certainty that the typewritten words were already existing at the time Roxas affixed his signatures thus
demolishing his claim that the typewritten words were just inserted after he signed the promissory notes. If
what he claims is true, then portions of the typewritten words would have covered portions of his signatures,
and not vice versa.
As to the third promissory note, Exhibit C-4 and 5-A, the copy submitted is not clear so that this
Court could not discern the same observations on the notes, Exhibits A-4 and 3-A and B-4 and 4-A.
Nevertheless, the following discussions equally apply to all three promissory notes.
The three promissory notes uniformly provide: FOR VALUE RECEIVED, I/We jointly, severally and
solidarily, promise to pay to PHILTRUST BANK or order... [12] An instrument which begins with I, We, or
Either of us promise to pay, when signed by two or more persons, makes them solidarily liable. [13] Also, the
phrase joint and several binds the makers jointly and individually to the payee so that all may be sued
together for its enforcement, or the creditor may select one or more as the object of the suit. [14] Having signed
under such terms, Roxas assumed the solidary liability of a debtor and Philtrust Bank may choose to enforce
the notes against him alone or jointly with Astro.
Roxas claim that the phrases in his personal capacity and in his official capacity were inserted on
the notes without his knowledge was correctly disregarded by the RTC and the Court of Appeals. It is not
disputed that Roxas does not deny that he signed the notes twice. As aptly found by both the trial and
appellate court, Roxas did not offer any explanation why he did so. It devolves upon him to overcome the
presumptions that private transactions are presumed to be fair and regular [15] and that a person takes ordinary
care of his concerns.[16] Aside from his self-serving allegations, Roxas failed to prove the truth of such
allegations. Thus, said presumptions prevail over his claims. Bare allegations, when unsubstantiated by
evidence, documentary or otherwise, are not equivalent to proof under our Rules of Court. [17]
Roxas is the President of Astro and reasonably, a businessman who is presumed to take ordinary care
of his concerns. Absent any countervailing evidence, it cannot be gainsaid that he will not sign document
without first informing himself of its contents and consequences. Clearly, he knew the nature of the

transactions and documents involved as he not only executed these notes on two different dates but he also
executed, and again, signed twice, a continuing Surety ship Agreement notarized on July 31, 1981, wherein
he guaranteed, jointly and severally with Astro the repayment of P3,000,000.00 due to Philtrust. Such
continuing suretyship agreement even re-enforced his solidary liability Philtrust because as a surety, he bound
himself jointly and severally with Astros obligation. [18] Roxas cannot now avoid liability by hiding under the
convenient excuse that he merely signed the notes in blank and the phrases in personal capacity and in his
official capacity were fraudulently inserted without his knowledge.
Lastly, Philguarantee has all the right to proceed against petitioner, it is subrogated to the rights of
Philtrust to demand for and collect payment from both Roxas and Astro since it already paid the value of 70%
of roxas and Astro Electronics Corp.s loan obligation. In compliance with its contract of Guarantee in favor of
Philtrust.
Subrogation is the transfer of all the rights of the creditor to a third person, who substitutes him in all his
rights.[19] It may either be legal or conventional. Legal subrogation is that which takes place without agreement
but by operation of law because of certain acts. [20] Instances of legal subrogation are those provided in Article
1302 of the Civil Code. Conventional subrogation, on the other hand, is that which takes place by agreement
of the parties.[21]
Roxas acquiescence is not necessary for subrogation to take place because the instant case is one of
the legal subrogation that occurs by operation of law, and without need of the debtors knowledge. [22] Further,
Philguarantee, as guarantor, became the transferee of all the rights of Philtrust as against Roxas and Astro
because the guarantor who pays is subrogated by virtue thereof to all the rights which the creditor had
against the debtor.[23]
WHEREFORE, finding no error with the decision of the Court of Appeals dated December 10, 1998, the
same is hereby AFFIRMED in toto.
SO ORDERED.