THE LAW ON OBLIGATIONS AND CONTRACTS

I. GENERAL PROVISION
(Definition, nature and concepts)
ARTICLE 1305
Art. 1305. A contract is a meeting of minds between two persons whereby one binds himself, with
respect to the other, to give something or to render some service. (1254a)
ARTICLE 1307 AND 1316
Art. 1307. Innominate contracts shall be regulated by the stipulations of the parties, by the provisions
of Titles I and II of this Book, by the rules governing the most analogous nominate contracts, and by the
customs of the place. (n)
Art. 1316. Real contracts, such as deposit, pledge and Commodatum, are not perfected until the
delivery of the object of the obligation. (n)
CASES
FIRST DIVISION

[G.R. No. 138945. August 19, 2003]

FELIX GOCHAN AND SONS REALTY CORPORATION and STA. LUCIA REALTY AND DEVELOPMENT
CORPORATION, petitioners, vs. HEIRS OF RAYMUNDO BABA, namely, BESTRA BABA,
MARICEL BABA, CRESENCIA BABA, ANTONIO BABA, and PETRONILA BABA, represented by
Attorney-in-fact VIRGINIA SUMALINOG, respondents.
DECISION
YNARES-SANTIAGO, J.:
The purpose of an action or suit and the law to govern it, including the period of prescription, is to
be determined by the complaint itself, its allegations and prayer for relief. [1] Thus, while the issues of
possession and fraud are material to the prescriptibility of suits captioned as reconveyance and
quieting of title,[2] it would not be so where, from the allegations of the complaint, the action is in
reality one for declaration of nullity of contracts on the ground of absence of the essential requisites
thereof. These contracts are void ad initio and actions to declare their inexistence do not prescribe.[3]
This is a petition for review on certiorari seeking to set aside the February 12, 1999 Decision[4] of
the Court of Appeals in CA-G.R. CV No. 57080, which reversed the May 3, 1997 Order [5] of the Regional
Trial Court of Lapu-Lapu City, Branch 54, in Civil Case No. 4494-L.
The facts show that Lot No. 3537, a conjugal property of spouses Raymundo Baba and Dorotea
Inot, was originally titled under Original Certificate of Title No. RO-0820,[6] in the name of
Dorotea. After Raymundos demise in 1947, an extrajudicial settlement of his estate, including Lot No.
3537, was executed on December 8, 1966,[7] among the heirs of Raymundo, namely, Dorotea Inot and
his 2 children, Victoriano Baba and Gregorio Baba. One-half undivided portion of the 6,326 square

meter lot was adjudicated in favor of Dorotea, and the other half divided between Victoriano and
Gregorio. On December 28, 1966, Dorotea, Victoriano and Gregorio, in consideration of the amount of
P2,346.70, sold Lot No. 3537 to petitioner Felix Gochan and Sons Realty Corporation (Gochan
Realty).[8] Consequently, OCT No. RO-0820 was cancelled and in lieu thereof, Transfer Certificate of
Title No. T-1842, dated February 23, 1968 was issued in favor of Gochan Realty. [9] Sometime in 1995,
the latter entered into a joint venture agreement with Sta. Lucia Realty and Development Corporation
Inc. for the development, among others, of Lot No. 3537, into a subdivision. [10]
On June 13, 1996, respondents Bestra, Maricel, Crecencia, Antonio and Petronila, all surnamed
Baba, filed a complaint for quieting of title and reconveyance with damages against petitioners with
the RTC of Lapu-Lapu City, Branch 54, docketed as Civil Case No. 4494-L. They alleged that they are
among the 7 children of Dorotea Inot and Raymundo Baba; that petitioners connived with Dorotea Inot,
Victoriano and Gregorio Baba in executing the extrajudicial settlement and deed of sale which
fraudulently deprived them of their hereditary share in Lot No. 3537; and that said transactions are
void insofar as their respective shares are concerned because they never consented to the said sale and
extrajudicial settlement, which came to their knowledge barely a year prior to the filing of the
complaint.[11]
In its answer,[12] petitioner Gochan Realty averred that respondents have no personality to sue
because they are not children of Dorotea Inot and Raymundo Baba; that even assuming they are lawful
heirs of the spouses, their action is barred by estoppel, laches and prescription for having been filed
more than 28 years after the issuance of the transfer certificate of title in its name; and that any
defect in the transactions leading to its acquisition of Lot No. 3537 will not affect its title because it is
a purchaser in good faith and for value.
Meanwhile, petitioner Sta. Lucia Realty and Development Corporation Inc. was declared in default
for failure to file an answer within the reglementary period.[13]
On May 3, 1997, the complaint for quieting of title and reconveyance with damages filed against
petitioner was dismissed on the ground of prescription and laches. The trial court ruled that
respondents action is one for enforcement of implied or constructive trust based on fraud which
prescribes in 10 years from the issuance of title over the property. Hence, respondents action was
barred by prescription and laches for having been filed after 28 years from the time Gochan Realty
obtained title to the property.
Respondents appealed to the Court of Appeals which reversed the decision of the trial court and
reinstated the complaint of respondents. While it also found that respondents action is a suit to
enforce an implied or constructive trust based on fraud, it ruled that since respondents are in
possession of the disputed property, their action cannot be barred by prescription and laches, being in
the nature of a suit for quieting of title. Petitioners motion for reconsideration was denied on May 25,
1999.
Hence, the instant petition where the sole issue raised for resolution is whether or not
respondents complaint is dismissible on the ground of prescription and laches.
In determining whether the complaint is barred by the statute of limitations, both courts held that
respondents action is grounded on fraud, and applied the rule that the fraudulent conveyance of the
property creates an implied trust, an obligation created by law, which prescribes in ten years from the
date of the issuance of the certificate of title.[14] However, the Court of Appeals held that such an
action does not prescribe when the disputed property is in the possession of the plaintiff seeking
reconveyance.[15] The issue of possession, however, is not material in the case at bar. A circumspect
scrutiny of the complaint reveals that although the respondents describe the extrajudicial settlement
and deed of sale as fraudulent insofar as their shares are concerned, their action in reality seeks to
declare said deeds as inexistent for lack of consent, an essential element for the existence of a
contract. The settled rule is that the purpose of an action or suit and the law to govern it, including
the period of prescription, is to be determined by the complaint itself, its allegations and prayer for
relief.[16]

In the case at bar, the allegations of the complaint unmistakably assail the extrajudicial
settlement and deed of sale with respect to their share on the ground of absence of
consent. Thus,respondents alleged in their complaint
2.2 Dorotea Inot, Gregorio Baba, Victoriano Baba and defendant Felix Gochan and Realty Corporation,
conniving and confederating with each other, with the evil motive and bad intent of getting the
corresponding hereditary share of the plaintiffs caused the [issuance of a] Transfer Certificate of Title
covering the entire lot in the name of defendant Felix Gochan and Realty Corporation They have made
to appear in a document denominated as Extrajudicial Settlement dated 8 February 1966 and Deed of
Absolute Sale dated 28 December 1966 in favor of defendant Felix Gochan and Realty Corporation, that
they have validly executed the same free from legal infirmity and element of perjury, notwithstanding
clear and full knowledge about plaintiffs real right and interest thereto, machine copies of the said
document are hereto attached as Annex C and D respectively;
2.3 To all legal intents and purposes, plaintiffs herein never disposed of their share to anybody much
less to the defendant Felix Gochan and Realty Corporation.
2.4 Subsequently, other defendant Sta. Lucia Realty Corporation, despite its knowledge about the
defect in the title entered into a Joint Venture Agreement with other defendant Felix Gochan Realty
Corporation and the same being annotated in TCT No. T-1824 as Entry Nos. 9371-XIII-D.B,9372 and
9373;
2.5 Complainants, upon knowledge about the said humiliating situation, did not waste time in
exhausting all its recovering mode and legal remedies thru seeking relief unto this Honorable Court.
2.6 The assessed value of the lot is P38,220.00;
xxxxxxxxx
3.0 Consequently, the fraudulent acts of the defendant Felix Gochan and Realty Corporation and the
eventual participation of the defendant Sta. Lucia Realty Corporation shall have no legal and valid
effect insofar as the corresponding and respective share of each plaintiff is concerned which is Three
Hundred Fifty Five (355) Square meters, more or less, each or a total area of One Thousand Nine
Hundred Seventy-Five (1,975) square meters, more or less. The deed of conveyance aforestated shall
not therefore bind the plaintiffs;[17]
Hence, for purposes of determining whether respondents action has prescribed, fraud in the
conveyance of the disputed lot and the possession thereof by the respondents are not material.The
fact that the conveyance of a property was fraudulent, either because it was procured without the
knowledge of some of the co-owners or by virtue of the owners forged signature or by a fictitious deed
of sale, does not automatically make fraud the basis for reconveyance of the disputed property. The
real question in the instant case (without, however, prejudging the validity or invalidity of the sale to
Gochan Realty), is whether or not from the allegations of the complaint, there exists a cause of action
to declare the inexistence of the contract of sale with respect to the shares of respondents in Lot No.
3537 on the ground of absence of any of the essential requisites of a valid contract. If the answer is in
the negative, then the dismissal of the complaint must be upheld, otherwise, the dismissal on the
ground of prescription is erroneous because actions for the declaration of inexistence of contracts on
the ground of absence of any of the essential requisites thereof do not prescribe.
Under Article 1318 of the Civil Code, there is no contract unless the following requisites concur:
(1) consent of the contracting parties; (2) object certain which is the subject matter of the contract;
and (3) cause of the obligation. The absence of any of these essential requisites renders the contract
inexistent and an action or defense to declare said contract void ab initio does not prescribe, pursuant
to Article 1410 of the same Code. In Delos Reyes v. Court of Appeals,[18] it was held that one of the

requisites of a valid contract under Article 1318 of the Civil Code, namely, the consent and the
capacity to give consent of the parties to the contract, is an indispensable condition for the existence
of consent. There is no effective consent in law without the capacity to give such consent. In other
words, legal consent presupposes capacity. Thus, there is said to be no consent, and consequently, no
contract when the agreement is entered into by one in behalf of another who has never given him
authorization therefor unless he has by law a right to represent the latter. [19]
In Heirs of Romana Ingjug-Tiro v. Casals,[20] the Court, applying Article 1410 of the Civil Code
declared that a claim of prescription is unavailing where the assailed conveyance is void ab initio with
respect to those who had no knowledge of the transaction. The case involved a fraudulent sale and
extrajudicial settlement of a lot executed without the knowledge and consent of some of the coowners. It was held that the sale of the realty is void in so far as it prejudiced the shares of said coowners and that the issuance of a certificate of title over the whole property in favor of the vendee
does not divest the other co-owners of the shares that rightfully belonged to them. The nullity of the
said sale proceeds from the absence of legal capacity and consent to dispose of the property. Thus
Article 1458 of the New Civil Code provides: By the contract of sale one of the contracting parties
obligates himself to transfer the ownership of and to deliver a determinate thing, and the other to pay
therefor a price certain in money or its equivalent. It is essential that the vendors be the owners of the
property sold otherwise they cannot dispose that which does not belong to them. As the Romans put it:
Nemo dat quod non habet. No one can give more than what he has. The sale of the realty to
respondents is null and void insofar as it prejudiced petitioners interests and participation therein. At
best, only the ownership of the shares of Luisa, Maria and Guillerma in the disputed property could
have been transferred to respondents.
Consequently, respondents could not have acquired ownership over the land to the extent of the shares
of petitioners. The issuance of a certificate of title in their favor could not vest upon them ownership
of the entire property; neither could it validate the purchase thereof which is null and
void. Registration does not vest title; it is merely the evidence of such title. Our land registration laws
do not give the holder any better title than what he actually has. Being null and void, the sale to
respondents of petitioners shares produced no legal effects whatsoever.
Similarly, the claim that Francisco Ingjug died in 1963 but appeared to be a party to the Extrajudicial
Settlement and Confirmation of Sale executed in 1967 would be fatal to the validity of the contract, if
proved by clear and convincing evidence. Contracting parties must be juristic entities at the time of
the consummation of the contract. Stated otherwise, to form a valid and legal agreement it is
necessary that there be a party capable of contracting and a party capable of being contracted
with. Hence, if any one party to a supposed contract was already dead at the time of its execution,
such contract is undoubtedly simulated and false and therefore null and void by reason of its having
been made after the death of the party who appears as one of the contracting parties therein. The
death of a person terminates contractual capacity.
In actions for reconveyance of property predicated on the fact that the conveyance complained of was
null and void ab initio, a claim of prescription of action would be unavailing. The action or defense for
the declaration of the inexistence of a contract does not prescribe[21]
Likewise, in the cases of Solomon v. Intermediate Appellate Court, [22] Vda. De Portugal v.
Intermediate Appellate Court,[23] Garanciang v. Garanciang,[24] and Lacsamana v. Court of
Appeals,[25] the Court ruled that conveyances by virtue of a forged signature or a fictitious deed of sale
are void ab initio. The absence of the essential requites of consent and cause or consideration in these
cases rendered the contract inexistent and the action to declare their nullity is imprescriptible.
Nemo dat quod non habet No one can give more than what he has.[26] Assuming that the
allegations in respondents complaint are true, their claim that the execution of the extrajudicial
settlement and the deed of sale involving Lot No. 3537, which led to the issuance of a certificate of

title in the name of Gochan Realty, was without their knowledge or consent, gives rise to an
imprescriptible cause of action to declare said transactions inexistent on the ground of absence of legal
capacity and consent. Hence, the dismissal of respondents complaint on the ground of prescription was
erroneous.
On the other hand, laches is defined as failure or neglect for an unreasonable and unexplained
length of time, to do that which, by exercising due diligence, could or should have been done
earlier. It is negligence or omission to assert a right within a reasonable time, warranting presumption
that the party entitled to assert it has abandoned it or has declined to assert it.[27] Its elements are: (1)
conduct on the part of the defendant, or of one under whom he claims, giving rise to the situation
which the complaint seeks a remedy; (2) delay in asserting the complainants rights, the complainant
having had knowledge or notice of the defendants conduct as having been afforded an opportunity to
institute a suit; (3) lack of knowledge or notice on the part of the defendant that the complainant
would assert the right in which he bases his suit; and (4) injury or prejudice to the defendant in the
event relief is accorded to the complainant, or the suit is not held barred.[28]
Though laches applies even to imprescriptible actions,[29] its elements must be proved
positively.[30] Laches is evidentiary in nature which could not be established by mere allegations in the
pleadings and can not be resolved in a motion to dismiss.[31] At this stage therefore, the dismissal of the
complaint on the ground of laches is premature.
It is but fair, without prejudging the issues, that the parties be allowed to substantiate their
respective claims and defenses in a full-blown trial, and obtain a ruling on all the issues presented in
their pleadings.[32] Indeed, while the averments in the complaint show that respondents action is
imprescriptible, Gochan Realty is not precluded from presenting evidence that it is a purchaser in good
faith or that respondents have no personality to sue for reconveyance or, even assuming that they are
lawful heirs of Dorotea Inot and Raymundo Baba, that they are guilty of laches or are estopped from
questioning the validity of the extrajudicial partition and deed of sale of Lot No. 3537 with respect to
their shares.
The trial court thus erred in dismissing respondents complaint on the ground of prescription and
laches, and while the Court of Appeals is correct in ordering the reinstatement of the complaint, its
decision is sustained on a different ground.
WHEREFORE, in view of all the foregoing, the petition is DENIED. The Decision of the Court of
Appeals in CA-G.R. CV No. 57080, which ordered that the instant case be REMANDED to the Regional
Trial Court of Lapu-Lapu City, Branch 54, for trial and judgment on the merits is AFFIRMED.
SO ORDERED.

FIRST DIVISION

[G.R. No. 126260. December 16, 2004]

SOUTH PACHEM DEVELOPMENT, INC., petitioner, vs. HONORABLE COURT OF APPEALS AND MAKATI
COMMERCIAL ESTATE ASSOCIATION, INC., respondents.
DECISION
AZCUNA, J.:

This is a petition for review on certiorari of the decision[1] of the Court of Appeals dated August
30, 1996 which affirmed in toto the decision[2] of the Regional Trial Court of Makati, Branch 60, dated
November 5, 1990.
Private respondent Makati Commercial Estate Association, Inc. (formerly Ayala Commercial Estate
Association) is an association of all real estate owners and long-term lessees of parcels of land located
in the Makati commercial area. Pursuant to its Articles of Incorporation, the members of private
respondent are assessed association dues annually, subject to penalty and interest in case of default.
On July 25, 1973, by virtue of two duly notarized deeds of absolute sale, petitioner South Pachem
Development, Inc. purchased from Ayala Corporation two adjoining parcels of land, designated as Lots
Nos. 7 and 8, Block No. 5, located at Legaspi Village, Makati. Subparagraph (1) of paragraph (A) of the
deed restrictions, which was duly annotated in the titles of the property and annexed to the two
deeds, provides that:
1. The owner of this lot or his successor-in-interest is required to be and is automatically a member of
the [Makati Commercial Estate Association, Inc.] or any other Association which may be formed or to
which the area may be affiliated for the purpose, and must abide by the rules and regulations laid
down by the Association in the interest of security, maintenance, beautification and the general
welfare of the area. The Association will also provide for and collect assessments which will constitute
a lien on the property, junior only to liens of the Government for taxes and to voluntary mortgages for
sufficient consideration entered into in good faith, PROVIDED that SCHOOLS, CHURCHES, other
RELIGIOUS institutions and buildings for public use are exempt from the payment of Association dues. [3]
In 1984, petitioner stopped paying its association dues, including the interest and penalty, to
private respondent. According to petitioner, it realized that private respondent was not really
performing the services it promised to perform, e.g., collection of garbage and the maintenance of
roads and ensuring the peace and order situation of the area, which are being undertaken by the city
government of Makati. It claimed that the payment of association fees for forty seven (47) years
amounts to a perpetual imposition upon a member of private respondent (as an association) which
therefore makes it illegal.
On June 16, 1988, private respondent filed a complaint against petitioner in the Regional Trial
Court of Makati, Branch 60, for collection of a sum of money arising from the latters non-payment of
association dues. In its answer, the petitioner admitted that it was aware of the provisions in the deed
restrictions, but questioned its legality for being contrary to morals, public policy, good customs, and
the Constitution, as these constituted a perpetual burden on the property and the purchaser would be
deprived of the use of the property without due process of law.
Meanwhile, on May 10, 1989, petitioner sought leave of court to file a third party complaint
against China Banking Corporation allegedly for having assumed the liability of petitioner by virtue of a
compromise agreement, dated May 27, 1988, in a separate civil case which was executed a month prior
to the filing of the civil case. The trial court denied the motion. On November 5, 1990, the trial court
rendered a decision in favor of the private respondent. The dispositive portion thereof reads:
WHEREFORE, the Court hereby renders judgment as follows:
The defendant SOUTH PACHEM DEVELOPMENT, INC. is ordered to pay the plaintiff MAKATI COMMERCIAL
ESTATE ASSOCIATION, INC. the following:
P165,031.00 The defendants unpaid dues and interest thereon from 1984 to 1988.
Six (6) percent of P165,031.00 Annually from June 16, 1988 until the principal amount is fully paid, as
damages.

Three (3) percent of P165,031.00 compounded monthly from January 1, 1989 until the amount is fully
paid As interest and penalty charges pursuant to Exh. E.
P19,755.00 Annually from January 1, 1989 until it ceases to be a member of the plaintiff as annual
dues.
The unpaid annual dues from January 1, 1989 shall bear an interest of three (3) percent per month;
this interest is compounded monthly.
P10,000.00 As attorneys fees.
The counterclaim is DISMISSED; and
Cost is taxed against the defendant.[4]
On appeal, the Court of Appeals affirmed the decision of the trial court. Hence, this petition.
Petitioner challenges the validity of the stipulation in the deed restrictions, as annexed to the two
deeds of absolute sale, which states that the buyer of a property shall pay the association dues for a
period of 47 years commencing from the date of purchase. It maintains that the period of 47 years
constitutes a restriction on its right to enjoy and dispose of the property under Article 428 of the Civil
Code as the non-payment of the association dues would constitute a lien on the subject property.
Petitioner also mentions that under paragraph (D) of the deed restrictions, in the event of a breach of
any of the special conditions, private respondent shall have the right to rescind the sale without the
necessity of giving notice to the petitioner; return the payments it received less whatever expenses
incurred; and dispose of the property to any other person.
Thus,
D. RESCISSION AND CANCELLATION: The breach of any of the herein special conditions, terms,
restrictions, reservations and stipulations of sale by the VENDEE shall cause the cancellation and
rescission of this sale without necessity of notice to the VENDEE or of any judicial declaration to that
effect, and any amount paid on account of the lot shall be reimbursed to the VENDEE by the VENDOR
minus expenses, if any, of the execution and registration of the corresponding instrument of rescission,
real estate brokers commission, if any, and any unpaid charges on the property, and the VENDEE shall
remove within SIXTY DAYS any and all improvements placed or introduced in the lot to dispose of and
sell said parcel of land to any other person in the same manner as if this contract had never been
executed or entered into.[5]
Private respondent, on the other hand, contends that the deed restrictions is a valid limitation on
petitioners right of ownership. It adds that even assuming that the deed restrictions amounted to a
limitation on petitioners use and enjoyment over the subject properties, the same was voluntarily
entered into with petitioners consent.
The petition has no merit.
To begin with, it is undisputed that petitioner South Pachem Development, Inc. purchased from
Ayala Corporation two adjoining parcels of land, designated as Lots Nos. 7 and 8, Block No. 5, located
in Legaspi Village, Makati. The deed restrictions, duly annotated on the titles, was incorporated in the
contract of sale. The deed restrictions provided, among others, that a buyer or his successor-in interest
automatically becomes a member of the private respondent as an association and enjoined compliance
with its rules and regulations for the security, maintenance, beautification, and general welfare of the
land owners. Assessments collected by the private respondent would constitute a lien on the subject
property. The deed restrictions is a valid agreement freely and voluntarily agreed upon between the

petitioner and private respondent. When an agreement between the parties has been forged, such
contract becomes the law between the parties and each one is bound to comply therewith.
This Court emphasizes that under the principle of estoppel, petitioner is precluded from denying
the validity of the transaction it had earlier freely and voluntarily entered into with private
respondent. It shall not be allowed to disavow or repudiate a valid agreement at this late stage with
regard to the provisions of the deed restrictions after having paid its association dues from 1973 to
1984. As the Court of Appeals rightly stated, the petitioner is guilty of estoppel by acquiescence.
Petitioners inaction for the past 11 years effectively forecloses its right to question the perceived
infirmity in an agreement which it had mutually entered into with the private respondent. In this
regard, petitioners acceptance of the terms of the contract without any dissent raises the presumption
that all the terms therein were brought to its knowledge and duly agreed upon. It is thus estopped
from later denying that it had assented to the terms.[6] In view of its acquiescence, the petitioner is
now barred from challenging the same under the principle that one who sleeps on his rights shall not
be heard to complain.[7]
Even assuming that the fact of estoppel be not considered, the stipulation in the deed restrictions,
with regard to the membership of a lot owner to the association and the payment of the fees, remains
to be valid and binding between the petitioner and respondent for the following reasons:
First. The provision in the deed restrictions which required a purchaser of a parcel of land located
in the Makati area to pay association fees is a valid stipulation. A case in point is Bel Air Village
Association, Inc. v. Dionisio[8] where the village association filed a complaint for collection of the
association dues and also claimed for penalty and other charges. The Court affirmed the rule that an
annotation to the effect that the lot owner becomes an automatic member of the village association
and must abide by such rules and regulations laid down by said association was a valid restraint on ones
ownership over the property as the same was for the interest of the sanitation, security and the
general welfare of the community.
In Cariday Investment Corporation v. Court of Appeals, [9] it was recognized that residents and lot
owners in the subdivision automatically become members of the Forbes Park Association and are bound
by its rules and regulations stipulated in the deed of restrictions. A provision in the deed of restrictions
annotated at the back of the certificate of title of a lot owner in the Forbes Park Subdivision required
the owner to use his lot for residential purposes and stated that not more than one single family
residential building will be constructed thereon; that the property would be subject to an easement of
two meters within the lot and adjacent to the rear and two sides thereof for the purpose of drainage,
sewerage water and other public facilities as may be necessary and desirable; and that additional
restrictions, reservations, or servitudes as the association may, from time to time, adopt and prescribe
would be for a period of fifty (50) years from January 1, 1949. Therein petitioner allowed the
occupancy by two families, thereby violating the single-family residential building restriction. This
Court declared that the purpose of the restriction is valid as it avoids overcrowding both in the houses
and in the subdivision which would result in pressure upon the common facilities such as water, power
and telephone connections; accelerate the deterioration of the roads; and create problems of
sanitation and security in the subdivision. Likewise, the restrictions were for aesthetic consideration
and for the preservation of the peace, beauty, tranquility, and serenity of living at Forbes Park.
Second. Petitioner insists that since the parties had no deliberate intent to clothe private
respondent with the authority to impose fees for a period of 47 years at the time the contract was
executed, it cannot make such imposition which partakes of a stipulation pour autrui.
The contention is untenable. The second paragraph of Article 1311 of the Civil Code explains that
if a contract should contain some stipulation in favor of a third person, he may demand its fulfillment
provided he communicated his acceptance to the obligor before its revocation. A mere incidental
benefit or interest of a person is not sufficient. The contracting parties must have clearly and
deliberately conferred a favor upon a third person. Accordingly, to sustain the theory of the petitioner
would result in a modification of what the parties had expressly agreed to be bound. The imposition of
the association fees in the deed restrictions cannot be regarded as a stipulation pour autrui clearly and
deliberately conferred upon private respondent. What was clearly stated in the contract of sale

between them is that upon purchase by the petitioner of the two parcels of land (Lots Nos. 7 and 8,
Block No. 5, located in Legaspi Village, Makati), it automatically becomes a member of private
respondent and is thus bound to comply with the rules and regulations thereof. Additionally, the
assessments collected by the private respondent would constitute a lien on the properties of the
petitioner. Nowhere can it be inferred that there was a stipulation pour autrui in favor of private
respondent.
The case of Bel Air Village Association, Inc. v. Dionisio,[10] which had the same issues involved,
explained that when therein private respondent voluntarily bought the subject parcel of land, it was
understood that it took the same free from all encumbrances except the notations at the back of the
certificate of title, among which was, that it automatically becomes a member of therein
petitioner. The dues collected are intended for garbage collection, salary of security guards, cleaning
and maintenance of streets and street lights, establishment of parks, and other community projects for
the benefit of all residents within the Bel Air Village. These expenses are necessary, valid, and
reasonable for the community.
Simply put, the requisites of a stipulation pour autrui or a stipulation in favor of a third person are
the following: (1) there must be a stipulation in favor of a third person, (2) the stipulation must be a
part, not the whole, of the contract, (3) the contracting parties must have clearly and deliberately
conferred a favor upon a third person, not a mere incidental benefit or interest, (4) the third person
must have communicated his acceptance to the obligor before its revocation, and (5) neither of the
contracting parties bears the legal representation or authorization of the third party. [11]These
requisites are not present in this case.
Third. Petitioner makes much of the fact that the deed restrictions partake of the nature of a
contract of adhesion wherein a party to the agreement would be subjected to an onerous financial
imposition for 47 years which in effect would curtail its freedom to enter into contracts without
restraint as set forth in Article 1306 of the Civil Code [12] and Sections 1[13] and 8[14] of Article III of the
Constitution.
A contract of adhesion is defined as one where one of the parties imposes a ready-made form of
contract which the other party may accept or reject, but which the latter cannot modify. One party
prepares the stipulation in the contract, while the other party merely affixes his signature or his
"adhesion" thereto, giving no room for negotiation and depriving the latter of the opportunity to
bargain on equal footing. These types of contracts have nonetheless been declared as binding as
ordinary contracts, the reason being that the party who adheres to the contract is free to reject it
entirely.[15] Thus, such agreement is not per se inefficacious. Corollarily, should there be any ambiguity
in a contract of adhesion, such ambiguity is to be construed against the party who prepared it. If,
however, the stipulations are not obscure, but are clear and leave no doubt on the intention of the
parties, the literal meaning of its stipulations must be held controlling.[16] To reiterate, contracts of
adhesion are not prohibited even as the courts remain careful in scrutinizing the factual circumstances
and the situation of the parties concerned in the case to determine the respective claims of contending
parties on their efficacy and enforceability.[17] When petitioner purchased the subject properties in
Makati, the deed restrictions were made an addendum or supplement to the two deeds of absolute
sale. The deed restrictions were pre-printed and duly annotated on the titles corresponding to the
parcels of land purchased and petitioner, through its duly authorized representative, affixed its
signature thereto. The stipulations were plain and unambiguous which leave no room for
interpretation. As such, petitioner was presumed to have full knowledge and to have acted with due
care or, at the very least, to have been aware of the terms and conditions of the contract and that it
had actually assented to the stipulations as there was never any objection interposed prior to the
actual purchase of the subject property.
Nothing in this Decision forecloses the right of petitioner, as member of the association, from
asking for an accounting of the funds of said association and/or the disposition of the dues collected by
it for the avowed purposes stated the deed restrictions, as even, in the event that, as petitioner now
contends, the association in fact no longer performs the aforesaid services, from the petitioners filing

an appropriate complaint for specific performance or the rescission of the agreement and/or the deed
restrictions for non-performance of the corresponding obligation thereunder.
WHEREFORE, the petition is DENIED and the decision of the Court of Appeals is AFFIRMED. Costs
against petitioner.
SO ORDERED.

BASIC PRINCIPLES OR CHARACTERISTICS OF CONTRACTS

A. Consensuality (Arts. 1315 & 1317)
Art. 1315. Contracts are perfected by mere consent, and from that moment the parties are bound not
only to the fulfillment of what has been expressly stipulated but also to all the consequences which,
according to their nature, may be in keeping with good faith, usage and law. (1258)
Art. 1317. No one may contract in the name of another without being authorized by the latter, or
unless he has by law a right to represent him.

B. Autonomy; Limitations (Art. 1306)

Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as
they may deem convenient, provided they are not contrary to law, morals, good customs, public order,
or public policy. (1255a)
Cases:
THIRD DIVISION

[G.R. No. 131622. November 27, 1998]

LETICIA Y. MEDEL DR. RAFAEL MEDEL and SERVANDO FRANCO, petitioners, vs. COURT OF APPEALS,
SPOUSES VERONICA R. GONZALES and DANILO G. GONZALES, JR., doing lending business
under the trade name and style "GONZALES CREDIT ENTERPRISES", respondents.
DECISION
PARDO, J.:
The case before the Court is a petition for review on certiorari, under Rule 45 of the Revised Rules
of Court, seeking to set aside the decision of the Court of Appeals, [1] and its resolution denying
reconsideration,[2]the dispositive portion of which decision reads as follows:

"WHEREFORE, the appealed judgment is hereby MODIFIED such that

defendants are hereby ordered to pay the plaintiff: the sum of P500,000.00, plus 5.5%
per month interest and 2% service charge per annum effective July 23, 1986, plus 1%
per month of the total amount due and demandable as penalty charges effective
August 23, 1986, until the entire amount is fully paid.
"The award to the plaintiff of P50,000.00 as attorney's fees is affirmed. And so
is the imposition of costs against the defendants.
SO ORDERED."[3]
The Court required the respondents to comment on the petition, [4] which was filed on April 3,
1998,[5] and the petitioners to reply thereto, which was filed on May 29, 1998. [6] We now resolve to give
due course to the petition and decide the case.
The facts of the case, as found by the Court of Appeals in its decision, which are considered
binding and conclusive on the parties herein, as the appeal is limited to questions of law, are as
follows:
On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando and Leticia)
obtained a loan from Veronica R. Gonzales (hereafter Veronica), who was engaged in the money
lending business under the name "Gonzales Credit Enterprises", in the amount of P50,000.00, payable in
two months. Veronica gave only the amount of P47,000.00, to the borrowers, as she
retained P3,000.00, as advance interest for one month at 6% per month. Servado and Leticia executed
a promissory note for P50,000.00, to evidence the loan, payable on January 7, 1986.
On November 19, 1985, Servando and Leticia obtained from Veronica another loan in the amount
of P90,000.00, payable in two months, at 6% interest per month. They executed a promissory note to
evidence the loan, maturing on January 19, 1986. They received only P84,000.00, out of the proceeds
of the loan.
On maturity of the two promissory notes, the borrowers failed to pay the indebtedness.
On June 11, 1986, Servando and Leticia secured from Veronica still another loan in the amount
of P300,000.00, maturing in one month, secured by a real estate mortgage over a property belonging to
Leticia Makalintal Yaptinchay, who issued a special power of attorney in favor of Leticia Medel,
authorizing her to execute the mortgage. Servando and Leticia executed a promissory note in favor of
Veronica to pay the sum ofP300,000.00, after a month, or on July 11, 1986. However, only the sum
of P275,000.00, was given to them out of the proceeds of the loan.
Like the previous loans, Servando and Medel failed to pay the third loan on maturity.
On July 23, 1986, Servando and Leticia with the latter's husband, Dr. Rafael Medel, consolidated
all their previous unpaid loans totaling P440,000.00, and sought from Veronica another loan in the
amount ofP60,000.00, bringing their indebtedness to a total of P500,000.00, payable on August 23,
1986. The executed a promissory note, reading as follows:
"Baliwag, Bulacan July 23, 1986
"Maturity Date August 23, 1986
"P500,000.00
"FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to the order of VERONICA R.
GONZALES doing business in the business style of GONZALES CREDIT ENTERPRISES, Filipino, of
legal age, married to Danilo G. Gonzales, Jr., of Baliwag Bulacan, the sum of PESOS ........
FIVE HUNDRED THOUSAND ..... (P500,000.00) Philippine
Currency with interest thereon at the rate of 5.5 PERCENT per month plus 2% service charge p

er annum from date hereof until fully paid according to the amortization schedule contained
herein. (Underscoring supplied)
"Payment will be made in full at the maturity date.
"Should I/WE fail to pay any amortization or portion hereof when due, all the other
installments together with all interest accrued shall immediately be due and payable and
I/WE hereby agree to pay
an additionalamount equivalent to one per cent (1%) per month of the amount due and deman
dable as penalty charges in the form of liquidated damages until fully paid; and the
further sum of TWENTY FIVE PER CENT(25%) thereon in full, without
deductions as Attorney's Fee whether actually incurred or not, of the total amount due and
demandable, exclusive of costs and judicial or extra judicial expenses. (Underscoring
supplied)
"I, WE further agree that in the event the present rate of interest on loan is increased by law
or the Central Bank of the Philippines, the holder shall have the option to apply and collect
the increased interest charges without notice although the original interest have already been
collected wholly or partially unless the contrary is required by law.
"It is also a special condition of this contract that the parties herein agree that the amount of
peso-obligation under this agreement is based on the present value of peso, and if there be
any change in the value thereof, due to extraordinary inflation or deflation, or any other
cause or reason, then the peso-obligation herein contracted shall be adjusted in accordance
with the value of the peso then prevailing at the time of the complete fulfillment of
obligation.
"Demand and notice of dishonor waived. Holder may accept partial payments and grant
renewals of this note or extension of payments, reserving rights against each and all indorsers
and all parties to this note.
"IN CASE OF JUDICIAL Execution of this obligation, or any part of it, the debtors waive all
his/their rights under the provisions of Section 12, Rule 39, of the Revised Rules of Court."
On maturity of the loan, the borrowers failed to pay the indebtedness of P500,000.00, plus
interests and penalties, evidenced by the above-quoted promissory note.
On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo G. Gonzales, filed with
the Regional Trial Court of Bulacan, Branch 16, at Malolos, Bulacan, a complaint for collection of the
full amount of the loan including interests and other charges.
In his answer to the complaint filed with the trial court on April 5, 1990, defendant Servando
alleged that he did not obtain any loan from the plaintiffs; that it was defendants Leticia and Dr.
Rafael Medel who borrowed from the plaintiffs the sum of P500,000.00, and actually received the
amount and benefited therefrom; that the loan was secured by a real estate mortgage executed in
favor of the plaintiffs, and that he (Servando Franco) signed the promissory note only as a witness.
In their separate answer filed on April 10,1990, defendants Leticia and Rafael Medel alleged that
the loan was the transaction of Leticia Yaptinchay, who executed a mortgage in favor of the plaintiffs
over a parcel of real estate situated in San Juan, Batangas; that the interest rate is excessive at 5.5%
per month with additional service charge of 2% per annum, and penalty charge of 1% per month; that
the stipulation for attorney's fees of 25% ofthe amount due is unconscionable, illegal and excessive,
and that substantial payments made were applied to interest, penalties and other charges.
After due trial, the lower court declared that the due execution and genuineness of the four
promissory notes had been duly proved, and ruled that although the Usury Law had been repealed, the
interest charged by the plaintiffs on the loans was unconscionable and "revolting to the
conscience". Hence, the trial court applied "the provision of the New [Civil] Code" that the "legal rate
of interest for loan or forbearance of money, goods or credit is 12% per annum." [7]

Accordingly, on December 9, 1991, the trial court rendered judgment, the dispositive portion of
which reads as follows:
"WHEREFORE, premises considered, judgment is hereby rendered, as follows:
"1. Ordering the defendants Servando Franco and Leticia Medel, jointly and severally, to pay plaintiffs
the amount of P47,000.00 plus 12% interest per annum from November 7, 1985 and 1% per month as
penalty, until the entire amount is paid in full.
"2. Ordering the defendants Servando Franco and Leticia Y. Medel to plaintiffs, jointly and severally
the amount of P84,000.00 with 12% interest per annum and 1% per cent per month as penalty from
November 19,1985 until the whole amount is fully paid;
"3. Ordering the defendants to pay the plaintiffs, jointly and severally, the amount of P285,000.00 plus
12% interest per annum and 1% per month as penalty from July 11, 1986, until the whole amount is
fully paid;
"4. Ordering the defendants to pay plaintiffs, jointly and severally, the amount of P50,000.00 as
attorney's fees;
"5. All counterclaims are hereby dismissed.
"With costs against the defendants."[8]
In due time, both plaintiffs and defendants appealed to the Court of Appeals.
In their appeal, plaintiffs-appellants argued that the promissory note, which consolidated all the
unpaid loans of the defendants, is the law that governs the parties. They further argued that Circular
No. 416 of the CentralBank prescribing the rate of interest for loans or forbearance of money, goods or
credit at 12% per annum, applies only in the absence of a stipulation on interest rate, but not when the
parties agreed thereon.
The Court of Appeals sustained the plaintiffs-appellants' contention. It ruled that "the Usury Law
having become 'legally inexistent' with the promulgation by the Central Bank in 1982 of Circular No.
905, the lender and borrower could agree on any interest that may be charged on the loan". [9] The
Court of Appeals further held that "the imposition of 'an additional amount equivalent to 1% per month
of the amount due and demandable as penalty charges in the form of liquidated damages until fully
paid' was allowed by law".[10]
Accordingly, on March 21, 1997, the Court of Appeals promulgated it decision reversing that of the
Regional Trial Court, disposing as follows:
"WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants
are hereby ordered to pay the plaintiffs the sum of P500,000.00, plus 5.5% per month
interest and 2% service charge per annum effective July 23, 1986, plus 1% per month
of the total amount due and demandable as penalty charges effective August 24,
1986, until the entire amount is fully paid.
"The award to the plaintiffs of P50,000.00 as attorney's fees is affirmed. And so
is the imposition of costs against the defendants.
"SO OREDERED."[11]
On April 15, 1997, defendants-appellants filed a motion for reconsideration of the said
decision. By resolution dated November 25, 1997, the Court of Appeals denied the motion. [12]
Hence, defendants interposed the present recourse via petition for review on certiorari.[13]

We find the petition meritorious.

Basically, the issue revolves on the validity of the interest rate stipulated upon. Thus, the question
presented is whether or not the stipulated rate of interest at 5.5% per month on the loan in the sum
of P500,000.00, that plaintiffs extended to the defendants is usurious. In other words, is the Usury Law
still effective, or has it been repealed by Central Bank Circular No. 905, adopted on December 22,
1982, pursuant to its powers under P.D. No. 116, as amended by P.D. No. 1684?
We agree with petitioners that the stipulated rate of interest at 5.5% per month on
the P500,000.00 loan is excessive, iniquitous, unconscionable and exorbitant. 13 However, we can not
consider the rate "usurious" because this Court has consistently held that Circulr No. 905 of the Central
Bank, adopted on December 22, 1982, has expressly removed the interest ceilings prescribed by the
Usury Law[14] and that the Usury Law is now "legally inexistent".[15]
In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61 [16] the Court held
that CB Circular No. 905 "did not repeal nor in anyway amend the Usury Law but simply suspended the
latter's effectivity." Indeed, we have held that "a Central Bank Circular can not repeal a law. Only a law
can repeal another law."[17] In the recent case of Florendo vs. Court of Appeals [18], the Court reiterated
the ruling that "by virtue of CB Circular 905, the Usury Law has been rendered ineffective". "Usury has
been legally non-existent in our jurisdiction. Interest can now be charged as lender and borrower may
agree upon."[19]
Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated upon by the
parties in the promissory note iniquitous or unconscionable, and, hence, contrary to morals ("contra
bonos mores"), if not against the law.[20] The stipulation is void.[21] The courts shall reduce equitably
liquidated damages, whether intended as an indemnity or a penalty if they are iniquitous or
unconscionable.[22]
Consequently, the Court of Appeals erred in upholding the stipulation of the parties. Rather, we
agree with the trial court that, under the circumstances, interest at 12% per annum, and an additional
1% a month penalty charge as liquidated damages may be more reasonable.
WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court of Appeals
promulgated on March 21, 1997, and its resolution dated November 25, 1997. Instead, we render
judgment REVIVING and AFFIRMING the decision dated December 9, 1991, of the Regional Trial Court of
Bulacan, Branch 16, Malolos, Bulacan, in Civil Case No. 134-M-90, involving the same parties.
No pronouncement as to costs in this instance
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 146942

April 22, 2003

CORAZON G. RUIZ, petitioner,

vs.
COURT OF APPEALS and CONSUELO TORRES, respondents.
PUNO, J.:

On appeal is the decision1 of the Court of Appeals in CA-G.R. CV No. 56621 dated 25 August 2000,
setting aside the decision2 of the trial court dated 19 May 1997 and lifting the permanent injunction on
the foreclosure sale of the subject lot covered by TCT No. RT-96686, as well as its subsequent
Resolution3 dated 26 January 2001, denying petitioners Motion for Reconsideration.
The facts of the case are as follows:
Petitioner Corazon G. Ruiz is engaged in the business of buying and selling jewelry. 4 She obtained loans
from private respondent Consuelo Torres on different occasions, in the following amounts:
P100,000.00; P200,000.00; P300,000.00; and P150,000.00.5 Prior to their maturity, the loans were
consolidated under one (1) promissory note dated March 22, 1995, which reads as follows: 6
"P750,000.00

Quezon City, March

22, 1995
PROMISSORY NOTE

For value received, I, CORAZON RUIZ, as principal and ROGELIO RUIZ as surety in solidum,
jointly and severally promise to pay to the order of CONSUELO P. TORRES the sum of SEVEN
HUNDRED FIFTY THOUSAND PESOS (P750,000.00) Philippine Currency, to earn an interest at the
rate of three per cent (3%) a month, for thirteen months, payable every _____ of the month,
and to start on April 1995 and to mature on April 1996, subject to renewal.
If the amount due is not paid on date due, a SURCHARGE of ONE PERCENT of the principal loan,
for every month default, shall be collected.
Remaining balance as of the maturity date shall earn an interest at the rate of ten percent a
month, compounded monthly.
It is finally agreed that the principal and surety in solidum, shall pay attorneys fees at the rate
of twenty-five percent (25%) of the entire amount to be collected, in case this note is not paid
according to the terms and conditions set forth, and same is referred to a lawyer for
collection.
In computing the interest and surcharge, a fraction of the month shall be considered one full
month.
In the event of an amicable settlement, the principal and surety in solidum shall reimburse the
expenses of the plaintiff.
(Sgd.) Corazon Ruiz
Principal

__________________
Surety"

The consolidated loan of P750,000.00 was secured by a real estate mortgage on a 240-square meter lot
in New Haven Village, Novaliches, Quezon City, covered by Transfer Certificate of Title (TCT) No. RT96686, and registered in the name of petitioner. 7 The mortgage was signed by Corazon Ruiz for herself
and as attorney-in-fact of her husband Rogelio. It was executed on 20 March 1995, or two (2) days
before the execution of the subject promissory note.8
Thereafter, petitioner obtained three (3) more loans from private respondent, under the following
promissory notes: (1) promissory note dated 21 April 1995, in the amount of P100,000.00; 9 (2)
promissory note dated May 23, 1995, in the amount of P100,000.00; 10 and (3) promissory note dated

December 21, 1995, in the amount of P100,000.00.11 These combined loans of P300,000.00 were
secured by P571,000.00 worth of jewelry pledged by petitioner to private respondent. 12
From April 1995 to March 1996, petitioner paid the stipulated 3% monthly interest on the P750,000.00
loan,13amounting to P270,000.00.14 After March 1996, petitioner was unable to make interest payments
as she had difficulties collecting from her clients in her jewelry business. 15
Due to petitioners failure to pay the principal loan of P750,000.00, as well as the interest payment for
April 1996, private respondent demanded payment not only of the P750,000.00 loan, but also of the
P300,000.00 loan.16When petitioner failed to pay, private respondent sought the extra-judicial
foreclosure of the aforementioned real estate mortgage.17
On September 5, 1996, Acting Clerk of Court and Ex-Officio Sheriff Perlita V. Ele, Deputy Sheriff InCharge Rolando G. Acal and Supervising Sheriff Silverio P. Bernas issued a Notice of Sheriffs Sale of
subject lot. The public auction was scheduled on October 8, 1996.18
On October 7, 1996, one (1) day before the scheduled auction sale, petitioner filed a complaint with
the RTC of Quezon City docketed as Civil Case No. Q-96-29024, with a prayer for the issuance of a
Temporary Restraining Order to enjoin the sheriff from proceeding with the foreclosure sale and to fix
her indebtedness to private respondent to P706,000.00. The computed amount of P706,000.00 was
based on the aggregate loan of P750,000.00, covered by the March 22, 1995 promissory note, plus the
other loans of P300,000.00, covered by separate promissory notes, plus interest, minus P571,000.00
representing the amount of jewelry pledged in favor of private respondent.19
The trial court granted the prayer for the issuance of a Temporary Restraining Order,20 and on 29
October 1996, issued a writ of preliminary injunction. 21 In its Decision dated May 19, 1997, it ordered
the Clerk of Court and Ex-Officio Sheriff to desist with the foreclosure sale of the subject property, and
it made permanent the writ of preliminary injunction. It held that the real estate mortgage is
unenforceable because of the lack of the participation and signature of petitioners husband. It noted
that although the subject real estate mortgage stated that petitioner was "attorney-in-fact for herself
and her husband," the Special Power of Attorney was never presented in court during the trial. 22
The trial court further held that the promissory note in question is a unilateral contract of adhesion
drafted by private respondent. It struck down the contract as repugnant to public policy because it was
imposed by a dominant bargaining party (private respondent) on a weaker party
(petitioner).23 Nevertheless, it held that petitioner still has an obligation to pay the private
respondent. Private respondent was further barred from imposing on petitioner the obligation to pay
the surcharge of one percent (1%) per month from March 1996 onwards, and interest of ten percent
(10%) a month, compounded monthly from September 1996 to January 1997. Petitioner was thus
ordered to pay the amount of P750,000.00 plus three percent (3%) interest per month, or a total of
P885,000.00, plus legal interest from date of [receipt of] the decision until the total amount of
P885,000.00 is paid.24
Aside from the foregoing, the trial court took into account petitioners proposal to pay her other
obligations to private respondent in the amount of P392,000.00. 25
The trial court also recognized the expenses borne by private respondent with regard the foreclosure
sale and attorneys fees. As the notice of the foreclosure sale has already been published, it ordered
the petitioner to reimburse private respondent the amount of P15,000.00 plus attorneys fees of the
same amount.26
Thus, the trial court computed petitioners obligation to private respondent, as follows:

Principal Loan .

P 750,000.00

Interest..

135,000.00

Other Loans.

392,000.00

Publication Fees.

15,000.00

Attorneys Fees

15,000.00

TOTAL

P1,307,000.00

with legal interest from date of receipt of decision until payment of total amount of P1,307,000.00 has
been made.27
Private respondents motion for reconsideration was denied in an Order dated July 21, 1997.
Private respondent appealed to the Court of Appeals. The appellate court set aside the decision of the
trial court. It ruled that the real estate mortgage is valid despite the non-participation of petitioners
husband in its execution because the land on which it was constituted is paraphernal property of
petitioner-wife. Consequently, she may encumber the lot without the consent of her husband. 28 It
allowed its foreclosure since the loan it secured was not paid.
Nonetheless, the appellate court declared as invalid the 10% compounded monthly interest 29 and the
10% surcharge per month stipulated in the promissory notes dated May 23, 1995 and December 1,
1995,30 and so too the 1% compounded monthly interest stipulated in the promissory note dated 21
April 1995,31 for being excessive, iniquitous, unconscionable, and contrary to morals. It held that the
legal rate of interest of 12% per annum shall apply after the maturity dates of the notes until full
payment of the entire amount due, and that the only permissible rate of surcharge is 1% per month,
without compounding.32 The appellate court also granted attorneys fees in the amount of P50,000.00,
and not the stipulated 25% of the amount due, following the ruling in the case of Medel v. Court of
Appeals.33
Now, before this Court, petitioner assigns the following errors:
(1) PUBLIC RESPONDENT COURT OF APPEALS GRAVELY ERRED IN RULING THAT THE PROMISSORY
NOTE OF P750,000.00 IS NOT A CONTRACT OF ADHESION DESPITE THE CLEAR SHOWING THAT
THE SAME IS A READY-MADE CONTRACT PREPARED BY (THE) RESPONDENT CONSUELO TORRES
AND DID NOT REFLECT THEIR TRUE INTENTIONS AS IT WEIGHED HEAVILY IN FAVOR OF
RESPONDENT AND AGAINST PETITIONER.
(2) PUBLIC RESPONDENT COURT OF APPEALS GRAVELY ERRED IN DECLARING THAT THE
PROPERTY COVERED BY THE SUBJECT DEED OF MORTGAGE OF MARCH 20, 1995 IS A
PARAPHERNAL PROPERTY OF THE PETITIONER AND NOT CONJUGAL EVEN THOUGH THE ISSUE OF
WHETHER OR NOT THE MORTGAGED PROPERTY IS PARAPHERNAL WAS NEVER RAISED, NOR
DISCUSSED AND ARGUED BEFORE THE TRIAL COURT.
(3) PUBLIC RESPONDENT COURT OF APPEALS GRAVELY ERRED IN DISREGARDING THE TRIAL
COURTS COMPUTATION OF THE ACTUAL OBLIGATIONS OF THE PETITIONER WITH (THE)
RESPONDENT TORRES EVEN THOUGH THE SAME IS BASED ON EVIDENCE SUBMITTED BEFORE IT.
The pertinent issues to be resolved are:
(1) Whether the promissory note of P750,000.00 is a contract of adhesion;

(2) Whether the real property covered by the subject deed of mortgage dated March 20, 1995 is
paraphernal property of petitioner; and
(3) Whether the rates of interests and surcharges on the obligation of petitioner to private respondent
are valid.
I
We hold that the promissory note in the case at bar is not a contract of adhesion. In Sweet Lines, Inc.
vs. Teves,34this Court discussed the nature of a contract of adhesion as follows:
". . . there are certain contracts almost all the provisions of which have been drafted only by
one party, usually a corporation. Such contracts are called contracts of adhesion, because the
only participation of the other party is the signing of his signature or his adhesion thereto.
Insurance contracts, bills of lading, contracts of sale of lots on the installment plan fall into
this category.35
" . . . it is drafted only by one party, usually the corporation, and is sought to be accepted or
adhered to by the other party . . . who cannot change the same and who are thus made to
adhere hereto on the take it or leave it basis . . . "36
In said case of Sweet Lines,37 the conditions of the contract on the 4 x 6 inches passenger ticket are in
fine print. Thus we held:
" . . . it is hardly just and proper to expect the passengers to examine their tickets received
from crowded/congested counters, more often than not during rush hours, for conditions that
may be printed thereon, much less charge them with having consented to the conditions, so
printed, especially if there are a number of such conditions in fine print, as in this case." 38
We further stressed in the said case that the questioned Condition No. 14 was prepared solely by one
party which was the corporation, and the other party who was then a passenger had no say in its
preparation. The passengers have no opportunity to examine and consider the terms and conditions of
the contract prior to the purchase of their tickets.39
In the case at bar, the promissory note in question did not contain any fine print provision which could
not have been examined by the petitioner. Petitioner had all the time to go over and study the
stipulations embodied in the promissory note. Aside from the March 22, 1995 promissory note for
P750,000.00, three other promissory notes of different dates and amounts were executed by petitioner
in favor of private respondent. These promissory notes contain similar terms and conditions, with a
little variance in the terms of interests and surcharges. The fact that petitioner and private respondent
had entered into not only one but several loan transactions shows that petitioner was not in any way
compelled to accept the terms allegedly imposed by private respondent. Moreover, petitioner, in her
complaint40 dated October 7, 1996 filed with the trial court, never claimed that she was forced to sign
the subject note. Paragraph five of her complaint states:
"That on or about March 22, 1995 plaintiff was required by the defendant Torres to execute a
promissory note consolidating her unpaid principal loan and interests which said defendant
computed to be in the sum of P750,000.00 . . ."
To be required is certainly different from being compelled. She could have rejected the conditions
made by private respondent. As an experienced business- woman, she ought to understand all the
conditions set forth in the subject promissory note. As held by this Court in Lee, et al. vs. Court of
Appeals, et al.,41 it is presumed that a person takes ordinary care of his concerns.42 Hence, the natural

presumption is that one does not sign a document without first informing himself of its contents and
consequences. This presumption acquires greater force in the case at bar where not only one but
several documents were executed at different times by petitioner in favor of private respondent.
II
We also affirm the ruling of the appellate court that the real property covered by the subject deed of
mortgage is paraphernal property. The property subject of the mortgage is registered in the name of
"Corazon G. Ruiz, of legal age, married to Rogelio Ruiz, Filipinos." Thus, title is registered in the name
of Corazon alone because the phrase "married to Rogelio Ruiz" is merely descriptive of the civil status
of Corazon and should not be construed to mean that her husband is also a registered owner.
Furthermore, registration of the property in the name of "Corazon G. Ruiz, of legal age, married to
Rogelio Ruiz" is not proof that such property was acquired during the marriage, and thus, is presumed
to be conjugal. The property could have been acquired by Corazon while she was still single, and
registered only after her marriage to Rogelio Ruiz. Acquisition of title and registration thereof are two
different acts.43 The presumption under Article 116 of the Family Code that properties acquired during
the marriage are presumed to be conjugal cannot apply in the instant case. Before such presumption
can apply, it must first be established that the property was in fact acquired during the marriage. In
other words, proof of acquisition during the marriage is a condition sine qua non for the operation of
the presumption in favor of conjugal ownership.44 No such proof was offered nor presented in the case
at bar. Thus, on the basis alone of the certificate of title, it cannot be presumed that said property
was acquired during the marriage and that it is conjugal property. Since there is no showing as to when
the property in question was acquired, the fact that the title is in the name of the wife alone is
determinative of its nature as paraphernal, i.e., belonging exclusively to said spouse.45 The only import
of the title is that Corazon is the owner of said property, the same having been registered in her name
alone, and that she is married to Rogelio Ruiz. 46
III
We now resolve the issue of whether the rates of interests and surcharges on the obligation of
petitioner to private respondent are legal.
The four (4) unpaid promissory notes executed by petitioner in favor of private respondent are in the
following amounts and maturity dates:
(1) P750,000.00, dated March 22, 1995 matured on April 21, 1996;
(2) P100,000.00, dated April 21, 1995 matured on August 21, 1995;
(3) P100,000.00, dated May 23, 1995 matured on November 23, 1995; and
(4) P100,000.00, dated December 21, 1995 matured on March 1, 1996.
The P750,000.00 promissory note dated March 22, 1995 has the following provisions:
(1) 3% monthly interest, from the signing of the note until its maturity date;
(2) 10% compounded monthly interest on the remaining balance at maturity date;
(3) 1% surcharge on the principal loan for every month of default; and
(4) 25% attorneys fees.

The P100,000.00 promissory note dated April 21, 1995 has the following provisions:
(1) 3% monthly interest, from the signing of the note until its maturity date;
(2) 10% monthly interest on the remaining balance at maturity date;
(3) 1% compounded monthly surcharge on the principal loan for every month of default; and
(4) 10% attorneys fees.
The two (2) other P100,000.00 promissory notes dated May 23, 1995 and December 1, 1995 have the
following provisions:
(1) 3% monthly interest, from the signing of the note until its maturity date;
(2) 10% compounded monthly interest on the remaining balance at maturity date;
(3) 10% surcharge on the principal loan for every month of default; and
(4) 10% attorneys fees.
We affirm the ruling of the appellate court, striking down as invalid the 10% compounded monthly
interest, the 10% surcharge per month stipulated in the promissory notes dated May 23, 1995 and
December 1, 1995, and the 1% compounded monthly interest stipulated in the promissory note dated
April 21, 1995. The legal rate of interest of 12% per annum shall apply after the maturity dates of the
notes until full payment of the entire amount due. Also, the only permissible rate of surcharge is 1%
per month, without compounding. We also uphold the award of the appellate court of attorneys fees,
the amount of which having been reasonably reduced from the stipulated 25% (in the March 22, 1995
promissory note) and 10% (in the other three promissory notes) of the entire amount due, to a fixed
amount of P50,000.00. However, we equitably reduce the 3% per month or 36% per annum interest
present in all four (4) promissory notes to 1% per month or 12% per annum interest.
The foregoing rates of interests and surcharges are in accord with Medel vs. Court of Appeals,47 Garcia
vs. Court of Appeals,48 Bautista vs. Pilar Development Corporation,49 and the recent case of Spouses
Solangon vs. Salazar.50 This Court invalidated a stipulated 5.5% per month or 66% per annum interest on
a P500,000.00 loan in Medel51 and a 6% per month or 72% per annum interest on a P60,000.00 loan
in Solangon52 for being excessive, iniquitous, unconscionable and exorbitant. In both cases, we reduced
the interest rate to 12% per annum. We held that while the Usury Law has been suspended by Central
Bank Circular No. 905, s. 1982, effective on January 1, 1983, and parties to a loan agreement have
been given wide latitude to agree on any interest rate, still stipulated interest rates are illegal if they
are unconscionable. Nothing in the said circular grants lenders carte blanche authority to raise interest
rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets. 53 On
the other hand, in Bautista vs. Pilar Development Corp.,54 this Court upheld the validity of a 21% per
annum interest on a P142,326.43 loan, and in Garcia vs. Court of Appeals, sustained the agreement of
the parties to a 24% per annum interest on an P8,649,250.00 loan. It is on the basis of these cases that
we reduce the 36% per annum interest to 12%. An interest of 12% per annum is deemed fair and
reasonable. While it is true that this Court invalidated a much higher interest rate of 66% per annum
in Medel55 and 72% inSolangon56 it has sustained the validity of a much lower interest rate of 21%
in Bautista57 and 24% in Garcia.58We still find the 36% per annum interest rate in the case at bar to be
substantially greater than those upheld by this Court in the two (2) aforecited cases.
The 1% surcharge on the principal loan for every month of default is valid. This surcharge or penalty
stipulated in a loan agreement in case of default partakes of the nature of liquidated damages under

Art. 2227 of the New Civil Code, and is separate and distinct from interest payment.59 Also referred to
as a penalty clause, it is expressly recognized by law. It is an accessory undertaking to assume greater
liability on the part of an obligor in case of breach of an obligation. 60 The obligor would then be bound
to pay the stipulated amount of indemnity without the necessity of proof on the existence and on the
measure of damages caused by the breach.61 Although the courts may not at liberty ignore the freedom
of the parties to agree on such terms and conditions as they see fit that contravene neither law nor
morals, good customs, public order or public policy, a stipulated penalty, nevertheless, may be
equitably reduced if it is iniquitous or unconscionable.62 In the instant case, the 10% surcharge per
month stipulated in the promissory notes dated May 23, 1995 and December 1, 1995 was properly
reduced by the appellate court.
In sum, petitioner shall pay private respondent the following:
1. Principal of loan under promissory note dated March 22,
1995
a.

1% interest per month on principal from March 22,

1995 until fully paid, less P270,000.00 paid by
petitioner as interest from April 1995 to March 1996

b.

1% surcharge per month on principal from May 1996

until fully paid

2. Principal of loan under promissory note dated April 21,

1995
a.

1% interest per month on principal from April 21,

1995 until fully paid

b.

1% surcharge per month on principal from

September 1995 until fully paid

3. Principal of loan under promissory note dated May 23,

1995
a.

1% interest per month on principal from May 23,

1995 until fully paid

b.

1% surcharge per month on principal from

December 1995 until fully paid

4. Principal of loan under promissory note dated December

1, 1995
a.

1% interest per month on principal from December

1, 1995 until fully paid

b.

1% surcharge per month on principal from April

1996 until fully paid

5. Attorneys fees

P750,000.00

P100,000.00

P100,000.00

P100,000.00

P 50,000.00

Hence, since the mortgage is valid and the loan it secures remains unpaid, the foreclosure proceedings
may now proceed.

IN VIEW WHEREOF, the appealed Decision of the Court of Appeals is AFFIRMED, subject to the
MODIFICATION that the interest rate of 36% per annum is ordered reduced to 12 % per annum.
SO ORDERED.

SPECIAL SECOND DIVISION

[G.R. No. 183789 : December 14, 2011]
POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT CORPORATION VS. POZZOLANIC PHILIPPINES,
INCORPORATED
Sirs/Mesdames:
Please take notice that the Court, Second Division, issued a Resolution dated 14 DECEMBER
2011which reads as follows:cralaw
G.R. No. 183789 (Power Sector Assets and Liabilities Management Corporation vs. Pozzolanic
Philippines, Incorporated). - For resolution of the Court are the following: (1) Manifestation and
Compliance[1] dated 28 September 2011 filed by petitioner Power Sector Assets and Liabilities
Management Corporation, (2) Urgent Motion for Leave to Admit "Urgent Motion to Dismiss Appeal" [2]
dated 10 October 2011 filed by respondent Pozzolanic Philippines, Incorporated; (3) Urgent Motion (To
Consider the "Urgent Motion for Leave to Admit 'Urgent Motion to Dismiss Appeal as a Supplement to
the "Motion for Reconsideration of Pozzolanic Philippines, Inc.) [3] dated 11 October 2011 filed by
respondent; and (4) Urgent Motion for Leave to Present Additional Annex [4]dated 19 October 2011,
likewise filed by respondent.
In the Decision of the Court dated 24 August 2011, the Court: (1) granted petitioner's petition for
review on certiorari; (2) reversed and set aside the Decision of the Regional Trial Court declaring
respondent's right of first refusal to the fly ash of National Power Corporation's (NPC) power plants
valid and binding on petitioner; (3) declared as null and void the respective contracts granting
respondent the right to withdraw the fly ash of the Calaca, Sual and Masinloc Power Plants; and (4)
ordered petitioner to conduct a bidding of the right to purchase the fly ash produced by the aforesaid
power plants.
Respondent filed a motion for reconsideration of the above-mentioned Decision, which motion was
denied by the Court with finality in a Resolution dated 5 October 2011.
On 30 September 2011, petitioner filed a Manifestation and Compliance informing the Court of the
following:
1. The Masinloc Plant was bid out through an open and competitive public bidding on 26 July 2007 and
turned over to Power Partners Co. Ltd. (MPPCL), the winning bidder, on 16 April 2008;
2. The Calaca Plant was bid out through open and competitive negotiation process on 8 July 2009 and
turned over to the winning bidder, DMCI Holdings, Inc. (DMCI), on 3 December 2009. The negotiation
process was conducted after two failed competitive biddings;[5] and
3. The Sual Power Plant was constructed by CEPA Pangasinan Electric Ltd. (CEPA) under an Energy
Conversion Agreement (ECA). The ECA for the Sual Power Plant is one of the Independent Power
Producer (IPP) contracts which petitioner is mandated to privatize through the appointment of IPP

administrators. In the bidding conducted for the purpose, San Miguel Energy Corporation (SMEC)
emerged as the winning bidder. Consequently, the operation of the plant was turned over to SMEC on 6
November 2009.[6]
In view of the foregoing, petitioner prays that the biddings it conducted for the sale of the Calaca and
Masinloc Plants and the bidding for the appointment of an IPP administrator for the Sual Plant be
deemed as sufficient compliance with the directive of the Court to conduct a bidding of the right to
purchase the fly ash produced by the aforementioned power plants.
As a result of the disclosures made by petitioner in its Manifestation and Compliance, respondent is
once again before Us through an Urgent Motion for Leave to Admit "Urgent Motion to Dismiss Appeal"
praying that: (1) the 24 August 2011 Decision of the Court be reversed and set aside; (2) the appeal of
petitioner be dismissed in toto; and (3) the Decision of the RTC be affirmed and declared final.
Further to its Motion for Leave to Admit "Urgent Motion to Dismiss Appeal," respondent also filed: (1)
another Urgent Motion (To Consider the "Urgent Motion for Leave to Admit 'Urgent Motion to Dismiss
Appeal,'" as a Supplement to the "Motion for Reconsideration" of Pozzolanic Philippines, Inc.) praying
that its Urgent Motion for Leave to Admit "Urgent Motion to Dismiss Appeal" be considered and treated
as a Supplement to the Motion for Reconsideration and be resolved together with the Motion for
Reconsideration; and (2) an Urgent Motion for Leave to Present Additional Annex praying that the Court
allow and consider the affidavit executed by Mr. Edgardo Espiritu, the Chairman of NPC from the year
1986 to 1988. The affidavit of Mr. Espiritu alleged that the Batangas Contract "was a negotiated
contract, precisely because previous attempts of NPC to bid the fly ash had failed as there were no
bidders."
In its Urgent Motion for Leave to Admit ''Urgent Motion to Dismiss Appeal," respondent argued that after
the sale of the three power plants to private entities, petitioner lost its personality to continue
prosecuting its appeal and the issues in this case became moot and academic as early as 3 December
2009 - when the last of the three power plants were disposed of by petitioner by public auction - way
before the Decision of the Supreme Court in this case was promulgated. Thus, according to respondent,
it is imperative that the appeal of petitioner be dismissed, as the adverse Decision of the Court, if
continued to be enforced, would constitute a grave injustice to both respondent and the administration
of justice.
The lack of merit in respondent's position is readily discernible; one need only recall the focal
issue in this case.
Our decision of 24 August 2011 declared as invalid respondent's right of first refusal to the fly ash
of NPC's power plants for having been obtained in contravention of the requirements of public
bidding and therefore contrary to public policy. Therefore, the basic issue presented in this case was
the validity of respondent's right of first refusal. It confounds the Court how, as claimed by respondent,
this issue is mooted by the fact that petitioner has, in the meantime, sold the power
plants. Regardless of such sale, the question of whether or not respondent acquired any right to
withdraw the fly ash of NPC's power plants by virtue of its supposed right of first refusal remains.
The trial court declared such right valid, and furthermore, binding on petitioner. In our Decision, We
said otherwise because it violates the rules of competitive public bidding.
Respondent cannot claim that: (1) the sale of the power plants renders moot the present petition; (2)
the mootness of this petition renders moot the issue of the correctness of the RTC decision; and (3)
ergo, its right of first refusal over the purchase of the fly ash of NPC's power plants should now be
honored. Put otherwise, the sale of the power plants by petitioner do not and cannot validate
respondent's right of first refusal; the defect in the bidding process by which the same was acquired is
not erased.

The allegation in the affidavit of the Chairman of NPC that at the time the Batangas Contract was
drafted the contract for the purchase of the fly ash of the Calaca Plant had to be negotiated because
of a failure of public bidding - and, therefore, no public bidding was actually conducted, much less did
respondent win in any such bidding - is a new matter which is now only being raised for the first time
after our 24 August 2011 Decision. It is well-settled that issues not raised and/or ventilated in the
lower court cannot be raised for the first time on appeal.[7] From the time its complaint was filed in
the trial court until the promulgation of the decision in this case, respondent has maintained that it
entered into a long-term contract with NPC for the purchase of the fly ash produced by its plants "after
it won the public bidding of the same.[8] Thus, respondent cannot, at this late stage, raise this matter
for the first time.
If there was a mistake on the part of the counsel of respondent in alleging that it participated in a
public bidding of the right to purchase the fly ash of the Calaca Plant and won the same, then
respondent is bound by such mistake. It is settled that clients are bound by the mistakes, negligence
and omissions of their counsel.[9]cralaw
In any case, this allegation does not in any way affect the earlier findings and disquisitions of the Court
in this case. The right of first refusal remains invalid because, as We pointed out in our Decision, it
bars any and all true biddings in the future. The grant of the right to respondent was a grant of the
right to buy the fly ash of all the coal-fired plants of NPC without having to go through public bidding.
WHEREFORE, the Court hereby RESOLVES to:
1. NOTE petitioner's Manifestation and Compliance dated 28 September 2011;
2. CONSIDER AS SUFFICIENT COMPLIANCE with the directive of the Court contained in its 24 August
2011 Decision, the sale through public bidding and the turn over of the Calaca, Masinloc and Sual Power
Plants to private corporations on 3 December 2009, 16 April 2008, and 6 November 2009, respectively;
and
3. DENY FOR UTTER LACK OF MERIT respondent's Urgent Motion for Leave to Admit "Urgent Motion to
Dismiss Appeal." Accordingly, the Urgent Motion (To Consider the "Urgent Motion for Leave to Admit
'Urgent Motion to Dismiss Appeal,'" as a Supplement to the "Motion for Reconsideration" of Pozzolanic
Philippines, Inc.) and the Urgent Motion for Leave to Present Additional Annex, filed in connection
therewith, are likewise DENIED.
SO ORDERED.
Republic of the Philippines
Supreme Court
Manila
FIRST DIVISION

RODOLFO MORLA,
Petitioner,

G.R. No. 171146

Present:

- versus CORAZON NISPEROS BELMONTE, ABRAHAM

U. NISPEROS, PERLITA NISPEROS OCAMPO,
ARMANDO U. NISPEROS, ALBERTO U.
NISPEROS,
HILARIO
U.
NISPEROS,
ARCHIMEDES
U.
NISPEROS,
BUENAFE
NISPEROS
PEREZ,
ARTHUR
U.
NISPEROS, andESPERANZA
URBANO
NISPEROS,
Respondents.

CORONA, C.J.,
Chairperson,
LEONARDO-DE CASTRO,
BERSAMIN,
DEL CASTILLO, and
VILLARAMA, JR., JJ.

Promulgated:
December 7, 2011

x----------------------------------------------------x
DECISION

LEONARDO-DE CASTRO, J.:

This petition for review on certiorari[1] seeks to annul and set aside the March 9,
2005 Decision[2] and December 29, 2005 Resolution[3] of the Court of Appeals in CA-G.R. CV No.
53527, which affirmed with modification the February 19, 1996 Judgment [4] of the Regional Trial Court
(RTC) of Ilagan, Isabela, Branch 17 in Civil Case No. 810.
Spouses Alfredo Nisperos and Esperanza Urbano (the Nisperos spouses) were the original
homesteaders of an 80,873-square meter tract of public land known and identified as Lot No. 4353 of
Pls. 62, situated in Caliguian, Burgos, Isabela,[5] by virtue of Original Certificate of Title (OCT) No. P1542, issued on May 4, 1951.[6]
On June 8, 1988, the Nisperos spouses executed a Partial Deed of Absolute Sale, [7] wherein they
sold a portion of Lot No. 4353 with an area of 50,000 square meters (subject land) to the brothers
Ramon and Rodolfo Morla (the Morla brothers) for the sum of Two Hundred Fifty Thousand Pesos
(250,000.00).
On August 2, 1988, the Morla brothers acknowledged and confirmed in writing (the 1988
contract) that they had bought from the Nisperos spouses the subject land, and that they had agreed to

give the Nisperos spouses a period of ten (10) years within which to repurchase the subject land for the
price of Two Hundred Seventy-Five Thousand Pesos (275,000.00). The 1988 contract was written in
Ilocano and executed at the Office of the Barangay Captain in the Municipality of Burgos, Province of
Isabela.[8]
On June 27, 1994, the Nisperos spouses filed a Complaint[9]for Repurchase and/or Recovery of
Ownership Plus Damages against the Morla brothers. They alleged that the deed of sale was registered
by the Morla brothers only when they had signified their intention to repurchase their
property.[10] Thus, Transfer Certificate of Title (TCT) No. 225544 for the subject land was issued in
favor of the Morla brothers, and TCT No. 225545,[11] for the remaining 30,870 square meters of Lot No.
4353, to the Nisperos spouses.
In response,[12] the Morla brothers claimed that the Nisperos spouses had no cause of action, as
the repurchase of the subject land was improper for being outside the five-year period provided under
Section 119 of Commonwealth Act No. 141.[13]
At the pre-trial conference held on June 19, 1995, the parties settled that the only issue to be
resolved by the RTC was whether the 1988 contract executed by the parties, wherein it was stipulated
that the Nisperos spouses may repurchase the land sold to the Morla brothers within a period of ten
(10) years, was valid or not.[14]
On July 28, 1995, the RTC issued an Order[15] requiring the parties to submit their position papers or
memoranda in light of their agreement to submit the case for Summary Judgment on the issue of the
validity of the 1988 contract.
The Nisperos spouses then filed a Motion for Summary Judgment [16] on the ground that there
was no genuine issue of material facts in the case except for damages and attorneys fees, which may
be heard separately and independently.
On September 15, 1995, the Nisperos spouses deposited the amount of 275,000.00, with the
clerk of court of the RTC for the repurchase of the subject land.[17]
The RTC rendered its Judgment dated February 19, 1996, the dispositive portion of which reads:
WHEREFORE, for and in consideration of the foregoing, judgment is hereby rendered in
favor of the plaintiffs and against the defendants ordering the defendants to reconvey
the portion of five (5) hectares of plaintiffs land covered by their original title, Original
Certificate of Title No. P-1542 unto the plaintiffs and to receive and accept the
275,000.00 from the plaintiffs as repurchase; to pay attorneys fees in the amount of
5,000.00 and to pay the costs of this suit.[18]

The RTC said that the only issue to be resolved was the validity of the 1988 contract, which the Morla
brothers neither attacked nor denied. The RTC held that it was clear from the 1988 contract, which the
Morla brothers executed, that they had bound themselves to its terms and conditions. The RTC further
proclaimed that what was prohibited was the shortening of the five-year redemption period under
Section 119 of Commonwealth Act No. 141, and not its prolongation. [19]
On March 14, 1996, the Morla brothers moved for the reconsideration [20] of the RTCs judgment on the
ground that it could not affect them since they were no longer the real parties-in-interest as they had
already sold the subject land to Rosie Ocampo, married to Delfin Gragasin, and Hilario Bernardino,
married to Manolita Morla, on May 2, 1994.[21]
The Nisperos spouses, in their Opposition to the Motion for Reconsideration, [22] attacked the
validity of the purported sale and alleged that such sale in favor of the Morla brothers close relatives
was a last ditch attempt to win the case. The Nisperos spouses pointed out that the Morla brothers
never mentioned such sale considering that it supposedly happened in May 1994, before the case was
instituted in June 1994.[23]
The RTC denied the Morla brothers motion for reconsideration in an Order[24] dated July 19, 1996. The
RTC noted how such purported sale was not mentioned by the Morla brothers in their confrontations
with the Nisperos spouses prior to the filing of the case, or in any of their pleadings filed before the
RTC. The RTC agreed with the Nisperos spouses contention that if the sale really did happen, then the
Morla brothers should have brought it up at the earliest opportune time. Finally, the RTC said that the
belated issue would not in any way affect the standing of the parties.
The Morla brothers timely[25] appealed this decision to the Court of Appeals and assigned the
following errors in support thereof:
I
The TRIAL COURT GRAVELY ERRED IN HOLDING THAT APPELLANTS AUGUST 2, 1988
private writing, Exh. A WAS AN AGREEMENT BY PARTIES FOR APPELLEES TO
REPURCHASE WITHIN TEN (10) YEARS THEREFROM THE FIVE (5) HECTARES PORTION OF
THEIR HOMESTEAD THEY SOLD TO THE FORMER AS PER JUNE 28, 1988 PARTIAL DEED OF
ABSOLUTE SALE, EXH. 1 NOTWITHSTANDING THE MANDATORY FIVE (5) YEARS
REPURCHASE PERIOD FROM THE DATE OF SALE PROVIDED BY SECTION 119 OF THE
PUBLIC LAND LAW (COMMONWEALTH ACT NO. 141).
II
THE TRIAL COURT GRAVELY ERRED IN RELYING ON THE PRECEDENT LAID IN THE CASES
OF MENJE, ET AL., VS. ANGELES, 101 PHIL. 563 AND MANUEL VS. PHILIPPINE NATIONAL
BANK, 101 PHIL. 568, WHICH TREAT OF REDEMPTION OF FORECLOSED HOMESTEAD

AFTER FORECLOSURE SALES NOTWITHSTANDING THE CLEAR ISSUE IN THE CASE AT BAR
WHICH IS FOR REPURCHASE OF A PORTION OF A HOMESTEAD. [26]

On March 9, 2005, the Court of Appeals affirmed the RTCs decision, with the deletion of the
award of attorneys fees for lack of basis in the decision, as the only modification. While the Court of
Appeals agreed with the Morla brothers assertion that the cases cited by the RTC were not applicable
to their case, it declared that the RTC did not err in allowing the Nisperos spouses to repurchase the
subject land. The Court of Appeals immediately noted that there clearly was no genuine issue as to any
material fact, except for the claim of attorneys fees. It upheld the validity of the 1988 contract and
concurred with the RTCs rationale that the arrangement to prolong the period for redemption of the
subject land was not prohibited by law as it was in line with the intent of Section 119 to give the
homesteader or patentee every chance to preserve for himself and his family the land that the State
had gratuitously given to him as a reward for his labor in cleaning and cultivating it. The Court of
Appeals further held that the 1988 contract, contrary to the Morla brothers contention, was not
unenforceable as the necessity to embody certain contracts in a public instrument was only for
convenience and not for its validity or enforceability.[27]
The Morla brothers sought to have this decision reconsidered on the strength of a newly
discovered Contract of Sale of farm land dated June 28, 1978 (1978 contract). The Morla brothers
alleged that this contract, which covered the subject land, was found only upon the prodding of their
new lawyer; thus, even the ten-year period to repurchase the subject land under Article 1606 of the
Civil Code had already expired.[28]
The Court of Appeals issued a Resolution[29] on December 29, 2005, denying the Morla brothers
motion for reconsideration in this wise:
[The Morla brothers] assert a new theory on the basis of a handwritten contract
dated June 28, 1978 a private document allegedly executed by [the Nisperos
spouses]. Said document is being introduced for the first time on appeal. And it is
settled that issues not raised in the court a quo cannot be raised for the first time on
appeal in the case at bench, in a motion for reconsideration for being offensive to the
basic rules of fair play, justice and due process x x x.[30]

As Ramon Morla died on March 5, 2001, single and without any descendants or ascendants,
Rodolfo Morla (petitioner), by himself, elevated the instant case before this Court with the Nisperos
spouses as respondents. Alfredo Nisperos, however, also died on September 19, 2010. [31] Consequently,
Alfredo Nisperos legal heirs filed a motion[32]to be substituted as respondents, in lieu of their deceased
father. This motion was granted on October 3, 2011 [33] thus, Corazon Nisperos Belmonte, Abraham U.

Nisperos, Perlita Nisperos Ocampo, Armando U. Nisperos, Alberto U. Nisperos, Hilario U. Nisperos,
Archimedes U. Nisperos, Buenafe Nisperos Perez, and Arthur U. Nisperos, now join their mother
Esperanza Urbano Nisperos as respondents in this case.
Issue
Petitioner, claiming that his petition is of transcendental importance as it poses a novel
question of law, is asking us to resolve the following question:
[M]ay parties to a deed of sale of a land covered by a homestead patent extend or
prolong the 5-year period of repurchase under Section 119 of Act 141, under a
private writing subsequently executed by them?[34]

The Courts Ruling

This Court would like to address the admissibility of the 1978 contract at the outset as
petitioner posits that by virtue of this contract, the respondents claim had already prescribed, even if
the redemption period under Section 119 of Commonwealth Act No. 141 were extended to ten
years. Petitioner claims that the June 8, 1988 Partial Deed of Sale was actually the formal culmination
of an earlier transaction between the Morla brothers and the Nisperos spouses, as shown by the 1978
contract. Hence, more than ten years have already lapsed from the time such contract was executed to
the time the right to repurchase was sought to be exercised.[35]
Contrary to petitioners allegation in its Motion for Reconsideration before the Court of Appeals, the
1978 contract did not surface only after the appeal; it was actually attached to the Morla brothers
Answer[36] filed with the RTC on July 12, 1994. Referencing this 1978 contract, the Morla brothers
stated the following in their Answer:
8. Since June 28, 1978 and continuously up to the present, the defendants are
in the open, continuous, exclusive, and notorious actual physical possession,
occupation, and cultivation of the (50,000 SQUARE METERS) portion of Lot No. 4353,
Pls-62, as evidenced by a private document, a xerox copy of which document is hereto
attached as Annex 2 to this answer.[37]

During the pre-trial, the Morla brothers and the Nisperos spouses also agreed on only the following
stipulation of facts, as stated in the RTCs June 19, 1995 Order:
1.

That the land is a Homestead originally applied for by the plaintiffs and a
Homestead Patent and Original Certificate of Title were issued to the plaintiffs;

2.

That on August 2, 1988, at Caliguian, Burgos, Isabela, in the presence of the

Barangay Captain, an Ilocano writing or contract was acknowledged and confirmed
by the defendants and the defendants admitted as to its authenticity;

3.

That the Transfer Certificate of Title No. T-225545 is the remaining portion of
Three (3) hectares or 30, 873 square meters, which was only issued by the Register
of Deeds of Isabela on March 11, 1994, and this remaining portion was derived from
the Original Certificate of Title of Alfredo Nisperos, which is OCT No. P-1542 issued
in 1951;

4.

That on June 8, 1988, a Partial Deed of Absolute Sale was prepared, as per Doc.
No. 419; Page 84; Book 17; Series of 1988, entered into the Notarial Book of Notary
Public Severo Ladera;

5.

That Transfer Certificate of Title No. T-225544 was registered in the name of the
defendants, Rodolfo Morla and Ramon Morla at the Office of the Registry of Deeds
of Isabela on March 11, 1994.[38]

The Morla brothers Position Paper/Memorandum[39] likewise reiterated that the sale of the
subject land happened on June 8, 1988, and referred to the 1978 contract only to prove their long
possession of the subject land, just as they did in their Answer.
If it were true that the subject lands ownership was ceded to the Morla brothers as early as
1978, then it is inconceivable that they would forget to bring up this important fact and use it as their
key defense when they filed their Answer to the Complaint on July 12, 1994. Even then, the Morla
brothers had every opportunity to correct this lapse as they had always been aware and in possession
of the 1978 contract. They could have stipulated it during the pre-trial conference, or at least stated it
in their Position Paper. The theory advanced by the Morla brothers from the very beginning is that they
are entitled to the possession of the subject land as the owner thereof because the property was sold
to them by virtue of the Partial Deed of Sale executed on June 8, 1988. They presented the 1978
contract only to prove that they had been in continuous and open possession since 1978.The first time
the Morla brothers claimed ownership, and not mere possession, of the subject land by virtue of the
1978 contract, was in their motion for reconsideration, after they had lost their appeal before the
Court of Appeals. The Court of Appeals was correct in not considering this argument for not having
been raised at the earliest opportunity. It is a well-settled rule that a party who deliberately adopts a
certain theory upon which the case was decided by the lower court will not be permitted to change [it]
on appeal.[40]Petitioner is bound by the statements and stipulations he made while the case was being
heard in the lower courts.[41] In Manila Electric Company v. Benamira,[42] we said:
[I]t is a fundamental rule of procedure that higher courts are precluded from
entertaining matters neither alleged in the pleadings nor raised during the proceedings
below, but ventilated for the first time only in a motion for reconsideration or on
appeal. The individual respondents are bound by their submissions that AFSISI is their

employer and they should not be permitted to change their theory. Such a change of
theory cannot be tolerated on appeal, not due to the strict application of procedural
rules but as a matter of fairness. A change of theory on appeal is objectionable
because it is contrary to the rules of fair play, justice and due process. [43]

Having settled the inadmissibility of the 1978 contract, we now go to the legality of the 1988
contract.
Since the subject land was acquired by the Nisperos spouses pursuant to a homestead patent,
the applicable law is Commonwealth Act No. 141, or the Public Land Act.[44] Section 119 thereof
specifically speaks about repurchases of a homestead or free patent land:
Sec. 119. Every conveyance of land acquired under the free patent or
homestead provisions, when proper, shall be subject to repurchase by the applicant,
his widow, or legal heirs, within a period of five years from the date of the
conveyance.

The petitioner does not dispute the existence or validity of the 1988 contract. He simply argues
that the 10-year repurchase period he and his brother Ramon Morla had agreed to grant the Nisperos
spouses, as evidenced by the 1988 contract, was contrary to law and jurisprudence, viz:
In no uncertain terms can the statutory period of five (5) years, which is fixed
and non-extendible, be prolonged or extended by agreement of the parties since it runs
athwart with the express limitation of the right to repurchase provided for in Section
119, Act 141. Spouses Nisperos cannot, therefore, use the August 2, 1988 private
writing to extend the already expired period granted under the law. To do so is to
violate the law. The law must control over the revised intention of the
parties.[45] (Emphasis supplied.)
Elucidating on the purpose of the homestead laws, this Court held in Republic of the
Philippines v. Court of Appeals[46]:
It is well-known that the homestead laws were designed to distribute
disposable agricultural lots of the State to land-destitute citizens for their home and
cultivation. Pursuant to such benevolent intention the State prohibits the sale or
encumbrance of the homestead (Section 116) within five years after the grant of the
patent. After that five-year period the law impliedly permits alienation of the
homestead; but in line with the primordial purpose to favor the homesteader and his
family the statute provides that such alienation or conveyance (Section 117) shall be
subject to the right of repurchase by the homesteader, his widow or heirs within five
years. This section 117 is undoubtedly a complement of section 116. It aims to preserve
and keep in the family of the homesteader that portion of public land which the State
had gratuitously given to him. It would, therefore, be in keeping with this fundamental
idea to hold, as we hold, that the right to repurchase exists not only when the original
homesteader makes the conveyance, but also when it is made by his widow or
heirs. This construction is clearly deducible from the terms of the statute.[47]

In Fontanilla, Sr. v. Court of Appeals,[48] we said:

The applicant for a homestead is to be given all the inducement that the law offers and
is entitled to its full protection. Its blessings, however, do not stop with him. This is
particularly so in this case as the appellee is the son of the deceased. There is no
question then as to his status of being a legal heir. The policy of the law is not difficult
to understand. The incentive for a pioneer to venture into developing virgin land
becomes more attractive if he is assured that his effort will not go for naught should
perchance his life be cut short. This is merely a recognition of how closely bound
parents and children are in Filipino family. Logic, the sense of fitness and of right, as
well as pragmatic considerations thus call for continued adherence to the policy that
not the individual applicant alone but those so closely related to him as are entitled to
legal succession may take full advantage of the benefits the law confers. [49]

We are in full accord with the clear findings and apt ruling of the lower courts. Nowhere in
Commonwealth Act No. 141 does it say that the right to repurchase under Section 119 thereof could
not be extended by mutual agreement of the parties involved. Neither would extending the period in
Section 119 be against public policy as the evident purpose of the Public Land Act, especially the
provisions thereof in relation to homesteads, is to conserve ownership of lands acquired as homesteads
in the homesteader or his heirs.[50]What cannot be bartered away is the homesteaders right to
repurchase the homestead within five years from its conveyance, as this is what public policy by law
seeks to preserve.[51] This, in our opinion, is the only logical meaning to be given to the law, which
must be liberally construed in order to carry out its purpose.[52]
Petitioner does not dispute that the 1988 contract was executed freely and willingly between
him and his late brother, and the Nisperos spouses. The freedom of contract is both a constitutional
and statutory right,[53] and the contracting parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law, morals, good customs,
public order, or public policy.[54] The 1988 contract neither shortens the period provided under Section
119 nor does away with it.Instead, it gives the Nisperos spouses more time to reacquire the land that
the State gratuitously gave them. The 1988 contract therefore is not contrary to law; instead it is
merely in keeping with the purpose of the homestead law. Since the 1988 contract is valid, it should be
given full force and effect. In Roxas v. De Zuzuarregui, Jr.,[55] we held:
It is basic that a contract is the law between the parties. Obligations arising
from contracts have the force of law between the contracting parties and should be
complied with in good faith. Unless the stipulations in a contract are contrary to law,
morals, good customs, public order or public policy, the same are binding as between
the parties.[56]

Petitioner, who freely signed the 1988 contract, cannot now be allowed to renege on his
obligation under it, simply because he changed his mind. Article 1308 of the Civil Code provides:
The contract must bind both contracting parties; its validity or compliance cannot be
left to the will of one of them.

Petitioner is thus bound by the terms of the 1988 Contract, and must comply with it in good
faith. Since the right to repurchase was exercised by the Nisperos spouses before the expiration of the
time given to them by the Morla brothers, the lower courts correctly ruled in their favor.
WHEREFORE, the Petition is hereby DENIED and the March 9, 2005 Decision and December 29,
2005 Resolution of the Court of Appeals in CA-G.R. CV No. 53527, are AFFIRMED.
SO ORDERED.

C. Mutuality (Arts. 1308, 1309, 1182 & 1469)

Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to
the will of one of them. (1256a)
Art. 1309. The determination of the performance may be left to a third person, whose decision shall
not be binding until it has been made known to both contracting parties. (n)
Art. 1182. When the fulfillment of the condition depends upon the sole will of the debtor, the
conditional obligation shall be void. If it depends upon chance or upon the will of a third person, the
obligation shall take effect in conformity with the provisions of this Code. (1115)
Art. 1469. In order that the price may be considered certain, it shall be sufficient that it be so with
reference to another thing certain, or that the determination thereof be left to the judgment of a
special person or persons.
Cases:
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 124290 January 16, 1998

ALLIED BANKING CORPORATION, petitioner,

vs.
COURT OF APPEALS , HON. JOSE C. DE GUZMAN, OSCAR D. TAN-QUECO, LUCIA D. TANQUECOMATIAS, RUBEN D. TANQUECO and NESTOR D. TANQUECO, respondents.

BELLOSILLO, J.:
There are two (2) main issues in this petition for review: namely, (a) whether a stipulation in a
contract of lease to the effect that the contract "may be renewed for a like term at the option of the
lessee" is void for being potestative or violative of the principle of mutuality of contracts under Art.
1308 of the Civil Code and, corollarily, what is the meaning of the clause "may be renewed for a like
term at the option of the lessee;" and, (b) whether a lessee has the legal personality to assail the
validity of a deed of donation executed by the lessor over the leased premises.
Spouses Filemon Tanqueco and Lucia Domingo-Tanqueco owned a 512-square meter lot located at No. 2
Sarmiento Street corner Quirino Highway, Novaliches, Quezon City, covered by TCT No. 136779 in their
name. On 30 June 1978 they leased the property to petitioner Allied Banking Corporation (ALLIED) for a
monthly rental of P1,000.00 for the first three (3) years, adjustable by 25% every three (3) years
thereafter. 1 The lease contract specifically states in its Provision No. 1 that "the term of this lease
shall be fourteen (14) years commencing from April 1, 1978 and may be renewed for a like term at the
option of the lessee."
Pursuant to their lease agreement, ALLIED introduced an improvement on the property consisting of a
concrete building with a floor area of 340-square meters which it used as a branch office. As
stipulated, the ownership of the building would be transferred to the lessors upon the expiration of the
original term of the lease.
Sometime in February 1988 the Tanqueco spouses executed a deed of donation over the subject
property in favor of their four (4) children, namely, private respondents herein Oscar D. Tanqueco,
Lucia Tanqueco-Matias, Ruben D. Tanqueco and Nestor D. Tanqueco, who accepted the donation in the
same public instrument.
On 13 February 1991, a year before the expiration of the contract of lease, the Tanquecos notified
petitioner ALLIED that they were no longer interested in renewing the lease. 2 ALLIED replied that it
was exercising its option to renew their lease under the same terms with additional
proposals. 3 Respondent Ruben D. Tanqueco, acting in behalf of all the donee-lessors, made a counterproposal. 4 ALLIED however rejected the counter-proposal and insisted on Provision No. 1 of their lease
contract.
When the lease contract expired in 1992 private respondents demanded that ALLIED vacate the
premises. But the latter asserted its sole option to renew the lease and enclosed in its reply letter a
cashier's check in the amount of P68,400.00 representing the advance rental payments for six (6)
months taking into account the escalation clause. Private respondents however returned the check to
ALLIED, prompting the latter to consign the amount in court.
An action for ejectment was commenced before the Metropolitan Trial Court of Quezon City. After
trial, the MeTC-Br. 33 declared Provision No. 1 of the lease contract void for being violative of Art.
1308 of the Civil Code thus
. . . but such provision [in the lease contract], to the mind of the Court, does not add
luster to defendant's cause nor constitutes as an unbridled or unlimited license or

sanctuary of the defendants to perpetuate its occupancy on the subject property. The
basic intention of the law in any contract is mutuality and equality. In other words, the
validity of a contract cannot be left at (sic) the will of one of the contracting parties.
Otherwise, it infringes (upon) Article 1308 of the New Civil Code, which provides: The
contract must bind both contracting parties; its validity or compliance cannot be left to
the will of one of them . . . Using the principle laid down in the case of Garcia
v. Legarda as cornerstone, it is evident that the renewal of the lease in this case
cannot be left at the sole option or will of the defendant notwithstanding provision no.
1 of their expired contract. For that would amount to a situation where the
continuance and effectivity of a contract will depend only upon the sole will or power
of the lessee, which is repugnant to the very spirit envisioned under Article 1308 of the
New Civil Code . . . . the theory adopted by this Court in the case at bar finds ample
affirmation from the principle echoed by the Supreme Court in the case of Lao Lim
v. CA, 191 SCRA 150, 154, 155.
On appeal to the Regional Trial Court, and later to the Court of Appeals, the assailed decision was
affirmed. 5
On 20 February 1993, while the case was pending in the Court of Appeals ALLIED vacated the leased
premises by reason of the controversy. 6
ALLIED insists before us that Provision No. 1 of the lease contract was mutually agreed upon hence
valid and binding on both parties, and the exercise by petitioner of its option to renew the contract
was part of their agreement and in pursuance thereof.
We agree with petitioner. Article 1308 of the Civil Code expresses what is known in law as the principle
of mutuality of contracts. It provides that "the contract must bind both the contracting parties; its
validity or compliance cannot be left to the will of one of them." This binding effect of a contract on
both parties is based on the principle that the obligations arising from the contracts have the force of
law between the contracting parties, and there must be mutuality between them based essentially on
their equality under which it is repugnant to have one party bound by the contract while leaving the
other free therefrom. The ultimate purpose is to render void a contract containing a condition which
makes its fulfillment dependent solely upon the uncontrolled will of one of the contracting parties.
An express agreement which gives the lessee the sole option to renew the lease is frequent and subject
to statutory restrictions, valid and binding on the parties. This option, which is provided in the same
lease agreement, is fundamentally part of the consideration in the contract and is no different from
any other provision of the lease carrying an undertaking on the part of the lessor to act conditioned on
the performance by the lessee. It is a purely executory contract and at most confers a right to obtain a
renewal if there is compliance with the conditions on which the rights is made to depend. The right of
renewal constitutes a part of the lessee's interest in the land and forms a substantial and integral part
of the agreement.
The fact that such option is binding only on the lessor and can be exercised only by the lessee does not
render it void for lack of mutuality. After all, the lessor is free to give or not to give the option to the
lessee. And while the lessee has a right to elect whether to continue with the lease or not, once he
exercises his option to continue and the lessor accepts, both parties are thereafter bound by the new
lease agreement. Their rights and obligations become mutually fixed, and the lessee is entitled to
retain possession of the property for the duration of the new lease, and the lessor may hold him liable
for the rent therefor. The lessee cannot thereafter escape liability even if he should subsequently
decide to abandon the premises. Mutuality obtains in such a contract and equality exists between the
lessor and the lessee since they remain with the same faculties in respect to fulfillment. 7

The case of Lao Lim v. Court of Appeals 8 relied upon by the trial court is not applicable here. In that
case, the stipulation in the disputed compromise agreement was to the effect that the lessee would be
allowed to stay in the premises "as long as he needs it and can pay the rents." In the present case, the
questioned provision states that the lease "may be renewed for a like term at the option of the lessee."
The lessor is bound by the option he has conceded to the lessee. The lessee likewise becomes bound
only when he exercises his option and the lessor cannot thereafter be executed from performing his
part of the agreement.
Likewise, reliance by the trial court on the 1967 case of Garcia v. Rita Legarda, Inc., 9 is misplaced. In
that case, what was involved was a contract to sell involving residential lots, which gave the vendor
the right to declare the contract called and of no effect upon the failure of the vendee to fulfill any of
the conditions therein set forth. In the instant case, we are dealing with a contract of lease which
gives the lessee the right to renew the same.
With respect to the meaning of the clause "may be renewed for a like term at the option of the lessee,"
we sustain petitioner's contention that its exercise of the option resulted in the automatic extension of
the contract of lease under the same terms and conditions. The subject contract simply provides that
"the term of this lease shall be fourteen (14) years and may be renewed for a like term at the option of
the lessee." As we see it, the only term on which there has been a clear agreement is the period of the
new contract, i.e., fourteen (14) years, which is evident from the clause "may be renewed for a like
term at the option of the lessee," the phrase "for a like term"referring to the period. It is silent as to
what the specific terms and conditions of the renewed lease shall be. Shall it be the same terms and
conditions as in the original contract, or shall it be under the terms and conditions as may be mutually
agreed upon by the parties after the expiration of the existing lease?
In Ledesma v. Javellana 10 this Court was confronted with a similar problem. In the case the lessee was
given the sole option to renew the lease, but the contract failed to specify the terms and conditions
that would govern the new contract. When the lease expired, the lessee demanded an extension under
the same terms and conditions. The lessor expressed conformity to the renewal of the contract but
refused to accede to the claim of the lessee that the renewal should be under the same terms and
conditions as the original contract. In sustaining the lessee, this Court made the following
pronouncement:
. . . in the case of Hicks v. Manila Hotel Company, a similar issue was resolved by this
Court. It was held that "such a clause relates to the very contract in which it is placed,
and does not permit the defendant upon the renewal of the contract in which the
clause is found, to insist upon different terms and those embraced in the contract to be
renewed;" and that "a stipulation to renew always relates to the contract in which it is
found and the rights granted thereunder, unless it expressly provides for variations in
the terms of the contract to be renewed."
The same principle is upheld in American Law regarding the renewal of lease contracts.
In 50 Am. Jur. 2d, Sec. 1159, at p. 45, we find the following citations: "The rule is wellestablished that a general covenant to renew or extend a lease which makes no
provision as to the terms of a renewal or extension implies a renewal or extension upon
the same terms as provided in the original lease."
In the lease contract under consideration, there is no provision to indicate that the
renewal will be subject to new terms and conditions that the parties may yet agree
upon. It is to renewal provisions of lease contracts of the kind presently considered
that the principles stated above squarely apply. We do not agree with the contention
of the appellants that if it was intended by the parties to renew the contract under the
same terms and conditions stipulated in the contract of lease, such should have
expressly so stated in the contract itself. The same argument could easily be

interposed by the appellee who could likewise contend that if the intention was to
renew the contract of lease under such new terms and conditions that the parties may
agree upon, the contract should have so specified. Between the two assertions, there is
more logic in the latter.
The settled rule is that in case of uncertainty as to the meaning of a provision granting
extension to a contract of lease, the tenant is the one favored and not the landlord.
"As a general rule, in construing provisions relating to renewals or extensions, where
there is any uncertainty, the tenants is favored, and not the landlord, because the
latter, having the power of stipulating in his own favor, has neglected to do so; and
also upon the principle that every man's grant is to be taken most strongly against
himself (50 Am Jur. 2d, Sec. 1162, p. 48; see also 51 C.J.S. 599).
Besides, if we were to adopt the contrary theory that the terms and conditions to be embodied in the
renewed contract were still subject to mutual agreement by and between the parties, then the option
which is an integral part of the consideration for the contract would be rendered worthless. For
then, the lessor could easily defeat the lessee's right of renewal by simply imposing unreasonable and
onerous conditions to prevent the parties from reaching an agreement, as in the case at bar. As in a
statute no word, clause, sentence, provision or part of a contract shall be considered surplusage or
superfluous, meaningless, void, insignificant or nugatory, if that can be reasonably avoided. To this
end, a construction which will render every word operative is to be preferred over that which would
make some words idle and nugatory. 11
Fortunately for respondent lessors, ALLIED vacated the premises on 20 February 1993 indicating its
abandonment of whatever rights it had under the renewal clause. Consequently, what remains to be
done is for ALLIED to pay rentals for the continued use of premises until it vacated the same, computed
from the expiration of the original term of the contract on 31 March 1992 to the time it actually left
the premises on 20 February 1993, deducting therefrom the amount of P68,400.00 consigned in court
by ALLIED and any other amount which it may have deposited or advanced in connection with the
lease. Since the old lease contract was deemed renewed under the same terms and conditions upon the
exercise by ALLIED of its option, the basis of the computation of rentals should be the rental rate
provided for in the existing contract.
Finally, ALLIED cannot assail the validity of the deed of donation, not being a party thereto. A person
who is not principally or subsidiarily bound has no legal capacity to challenge the validity of the
contract. 12 He must first have an interest in it. "Interest" within the meaning of the term means
material interest, an interest to be affected by the deed, as distinguished from a mere incidental
interest. Hence, a person who is not a party to a contract and for whose benefit it was not expressly
made cannot maintain an action on it, even if the contract, if performed by the parties thereto would
incidentally affect him, 13 except when he is prejudiced in his rights with respect to one of the
contracting parties and can show the detriment which could positively result to him from the contract
in which he had no intervention. 14 We find none in the instant case.
WHEREFORE, the Decision of the Court of Appeals is REVERSED and SET ASIDE. Considering that
petitioner ALLIED BANKING CORPORATION already vacated the leased premises as of 20 February 1993,
the renewed lease contract is deemed terminated as of that date. However, petitioner is required to
pay rentals to respondent lessors at the rate provided in their existing contract, subject to
computation in view of the consignment in court of P68,400.00 by petitioner, and of such other
amounts it may have deposited or advanced in connection with the lease.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 116710

June 25, 2001

DANILO D. MENDOZA, also doing business under the name and style of ATLANTIC EXCHANGE
PHILIPPINES, petitioner,
vs.
COURT OF APPEALS, PHILIPPINE NATIONAL BANK, FERNANDO MARAMAG, JR., RICARDO G. DECEPIDA
and BAYANI A. BAUTISTA, respondents.
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the Decision1 dated August 8, 1994 of the respondent
Court of Appeals (Tenth Division) in CA-G.R. CV No. 38036 reversing the judgment2 of the Regional Trial
Court (RTC) and dismissing the complaint therein.
Petitioner Danilo D. Mendoza is engaged in the domestic and international trading of raw materials and
chemicals. He operates under the business name Atlantic Exchange Philippines (Atlantic), a single
proprietorship registered with the Department of Trade and Industry (DTI). Sometime in 1978 he was
granted by respondent Philippine National Bank (PNB) a Five Hundred Thousand Pesos (P500,000.00)
credit line and a One Million Pesos (P1,000,000.00) Letter of Credit/Trust Receipt (LC/TR) line.
As security for the credit accommodations and for those which may thereinafter be granted, petitioner
mortgaged to respondent PNB the following: 1) three (3) parcels of land 3 with improvements in F.
Pasco Avenue, Santolan, Pasig; 2) his house and lot in Quezon City; and 3) several pieces of machinery
and equipment in his Pasig coco-chemical plant.
The real estate mortgage4 provided the following escalation clause:
(f) The rate of interest charged on the obligation secured by this mortgage as well as the
interest on the amount which may have been advanced by the Mortgagee in accordance with
paragraph (d) of the conditions herein stipulated shall be subject during the life of this
contract to such increase within the rates allowed by law, as the Board of Directors of the
Mortgagee may prescribe for its debtors.
Petitioner executed in favor of respondent PNB three (3) promissory notes covering the Five Hundred
Thousand Pesos (P500,000.00) credit line, one dated March 8, 1979 for Three Hundred Ten Thousand
Pesos (P310,000.00); another dated March 30, 1979 for Forty Thousand Pesos (P40,000.00); and the last
dated September 27, 1979 for One Hundred Fifty Thousand Pesos (P150,000.00). The said 1979
promissory notes uniformly stipulated: "with interest thereon at the rate of 12% per annum, until paid,
which interest rate the Bank may, at any time, without notice, raise within the limits allowed by law
xxx."5
Petitioner made use of his LC/TR line to purchase raw materials from foreign importers. He signed a
total of eleven (11) documents denominated as "Application and Agreement for Commercial Letter of
Credit,"6 on various dates from February 8 to September 11, 1979, which uniformly contained the
following clause: "Interest shall be at the rate of 9% per annum from the date(s) of the draft(s) to the
date(s) of arrival of payment therefor in New York. The Bank, however, reserves the right to raise the
interest charges at any time depending on whatever policy it may follow in the future." 7

In a letter dated January 3, 1980 and signed by Branch Manager Fil S. Carreon Jr., respondent PNB
advised petitioner Mendoza that effective December 1, 1979, the bank raised its interest rates to 14%
per annum, in line with Central Bank's Monetary Board Resolution No. 2126 dated November 29, 1979.
On March 9, 1981, he wrote a letter to respondent PNB requesting for the restructuring of his past due
accounts into a five-year term loan and for an additional LC/TR line of Two Million Pesos
(P2,000,000.00).8 According to the letter, because of the shut-down of his end-user companies and the
huge amount spent for the expansion of his business, petitioner failed to pay to respondent bank his
LC/TR accounts as they became due and demandable.
Ceferino D. Cura, Branch Manager of PNB Mandaluyong replied on behalf of the respondent bank and
required petitioner to submit the following documents before the bank would act on his request: 1)
Audited Financial Statements for 1979 and 1980; 2) Projected cash flow (cash in - cash out) for five (5)
years detailed yearly; and 3) List of additional machinery and equipment and proof of ownership
thereof. Cura also suggested that petitioner reduce his total loan obligations to Three Million Pesos
(P3,000,000.00) "to give us more justification in recommending a plan of payment or restructuring of
your accounts to higher authorities of the Bank."9
On September 25, 1981, petitioner sent another letter addressed to PNB Vice-President Jose Salvador,
regarding his request for restructuring of his loans. He offered respondent PNB the following proposals:
1) the disposal of some of the mortgaged properties, more particularly, his house and lot and a vacant
lot in order to pay the overdue trust receipts; 2) capitalization and conversion of the balance into a 5year term loan payable semi-annually or on annual installments; 3) a new Two Million Pesos
(P2,000,000.00) LC/TR line in order to enable Atlantic Exchange Philippines to operate at full capacity;
4) assignment of all his receivables to PNB from all domestic and export sales generated by the LC/TR
line; and 5) maintenance of the existing Five Hundred Thousand Pesos (P500,000.00) credit line.
The petitioner testified that respondent PNB Mandaluyong Branch found his proposal favorable and
recommended the implementation of the agreement. However, Fernando Maramag, PNB Executive
Vice-President, disapproved the proposed release of the mortgaged properties and reduced the
proposed new LC/TR line to One Million Pesos (P1,000,000.00).10 Petitioner claimed he was forced to
agree to these changes and that he was required to submit a new formal proposal and to sign two (2)
blank promissory notes.
In a letter dated July 2, 1982, petitioner offered the following revised proposals to respondent bank: 1)
the restructuring of past due accounts including interests and penalties into a 5-year term loan,
payable semi-annually with one year grace period on the principal; 2) payment of Four Hundred
Thousand Pesos (P400,000.00) upon the approval of the proposal; 3) reduction of penalty from 3% to
1%; 4) capitalization of the interest component with interest rate at 16% per annum; 5) establishment
of a One Million Pesos (P1,000,000.00) LC/TR line against the mortgaged properties; 6) assignment of
all his export proceeds to respondent bank to guarantee payment of his loans.
According to petitioner, respondent PNB approved his proposal. He further claimed that he and his wife
were asked to sign two (2) blank promissory note forms. According to petitioner, they were made to
believe that the blank promissory notes were to be filled out by respondent PNB to conform with the 5year restructuring plan allegedly agreed upon. The first Promissory Note, 11 No. 127/82, covered the
principal while the second Promissory Note,12 No. 128/82, represented the accrued interest.
Petitioner testified that respondent PNB allegedly contravened their verbal agreement by 1) affixing
dates on the two (2) subject promissory notes to make them mature in two (2) years instead of five (5)
years as supposedly agreed upon; 2) inserting in the first Promissory Note No. 127/82 an interest rate
of 21% instead of 18%; 3) inserting in the second Promissory Note No. 128/82, the amount stated
therein representing the accrued interest as One Million Five Hundred Thirty Six Thousand Four
Hundred Ninety Eight Pesos and Seventy Three Centavos (P1,536,498.73) when it should only be Seven

Hundred Sixty Thousand Three Hundred Ninety Eight Pesos and Twenty Three Centavos (P760,398.23)
and pegging the interest rate thereon at 18% instead of 12%.
The subject Promissory Notes Nos. 127/82 and 128/82 both dated December 29, 1982 in the principal
amounts of Two Million Six Hundred Fifty One Thousand One Hundred Eighteen Pesos and Eighty Six
Centavos (P2,651,118.86) and One Million Five Hundred Thirty Six Thousand Seven Hundred Ninety
Eight and Seventy Three Centavos (P1,536,798.73) respectively and marked Exhibits "BB" and "CC"
respectively, were payable on equal semi-annual amortization and contained the following escalation
clause:
x x x which interest rate the BANK may increase within the limits allowed by law at any time
depending on whatever policy it may adopt in the future; Provided, that, the interest rate on
this note shall be correspondingly decreased in the event that the applicable maximum interest
rate is reduced by law or by the Monetary Board. In either case, the adjustment in the interest
rate agreed upon shall take effect on the effectivity date of the increase or decrease in the
maximum interest rate. x x x
It appears from the record that the subject Promissory Notes Nos. 127/82 and 128/82 superseded and
novated the three (3) 1979 promissory notes and the eleven (11) 1979 "Application and Agreement for
Commercial Letter of Credit" which the petitioner executed in favor of respondent PNB.
According to the petitioner, sometime in June 1983 the new PNB Mandaluyong Branch Manager Bayani
A. Bautista suggested that he sell the coco-chemical plant so that he could keep up with the semiannual amortizations. On three (3) occasions, Bautista even showed up at the plant with some
unidentified persons who claimed that they were interested in buying the plant.
Petitioner testified that when he confronted the PNB management about the two (2) Promissory Notes
Nos. 127/82 and 128/82 (marked Exhibits "BB" and "CC" respectively) which he claimed were improperly
filled out, Bautista and Maramag assured him that the five-year restructuring agreement would be
implemented on the condition that he assigns 10% of his export earnings to the Bank. 13 In a letter dated
August 22, 1983, petitioner Mendoza consented to assign 10% of the net export proceeds of a Letter of
Credit covering goods amounting to One Hundred Fourteen Thousand Dollars ($114,000.00). 14 However,
petitioner claimed that respondent PNB subsequently debited 14% instead of 10% from his export
proceeds.15
Pursuant to the escalation clauses of the subject two (2) promissory notes, the interest rate on the
principal amount in Promissory Note No. 127/82 was increased from 21% to 29% on May 28, 1984, and to
32% on July 3, 1984 while the interest rate on the accrued interest per Promissory Note No. 128/82 was
increased from 18% to 29% on May 28, 1984, and to 32% on July 3, 1984.
Petitioner failed to pay the subject two (2) Promissory Notes Nos. 127/82 and 128/82 (Exhibits "BB" and
"CC") as they fell due. Respondent PNB extra-judicially foreclosed the real and chattel mortgages, and
the mortgaged properties were sold at public auction to respondent PNB, as highest bidder, for a total
of Three Million Seven Hundred Ninety Eight Thousand Seven Hundred Nineteen Pesos and Fifty
Centavos (P3,798,719.50).
The petitioner filed in the RTC in Pasig, Rizal a complaint for specific performance, nullification of the
extra-judicial foreclosure and damages against respondents PNB, Fernando Maramag Jr., Ricardo C.
Decepida, Vice-President for Metropolitan Branches, and Bayani A. Bautista. He alleged that the
Extrajudicial Foreclosure Sale of the mortgaged properties was null and void since his loans were
restructured to a five-year term loan; hence, it was not yet due and demandable; that the escalation
clauses in the subject two (2) Promissory Notes Nos. 127/82 and 128/82 were null and void, that the
total amount presented by PNB as basis of the foreclosure sale did not reflect the actual loan
obligations of the plaintiff to PNB; that Bautista purposely delayed payments on his exports and caused

delays in the shipment of materials; that PNB withheld certain personal properties not covered by the
chattel mortgage; and that the foreclosure of his mortgages was premature so that he was unable to
service his foreign clients, resulting in actual damages amounting to Two Million Four Thousand Four
Hundred Sixty One Pesos (P 2,004,461.00).
On March 16, 1992, the trial court rendered judgment in favor of the petitioner and ordered the
nullification of the extrajudicial foreclosure of the real estate mortgage, the Sheriffs sale of the
mortgaged real properties by virtue of consolidation thereof and the cancellation of the new titles
issued to PNB; that PNB vacate the subject premises in Pasig and turn the same over to the petitioner;
and also the nullification of the extrajudicial foreclosure and sheriff's sale of the mortgaged chattels,
and that the chattels be returned to petitioner Mendoza if they were removed from his Pasig premises
or be paid for if they were lost or rendered unserviceable.
The trial court also ordered respondent PNB to restructure to five-years petitioner's principal loan of
Two Million Six Hundred Fifty One Thousand One Hundred Eighteen Pesos and Eighty Six Centavos
(P2,651,118.86) and the accumulated capitalized interest on the same in the amount of Seven Hundred
Sixty Thousand Three Hundred Eighty Nine Pesos and Twenty Three Centavos (P760,389.23) as of
December 1982, and that respondent PNB should compute the additional interest from January 1983 up
to October 15, 1984 only when respondent PNB took possession of the said properties, at the rate of
12% and 9% respectively.
The trial court also ordered respondent PNB to grant petitioner Mendoza an additional Two Million
Pesos (P2,000,000.00) loan in order for him to have the necessary capital to resume operation. It also
ordered respondents PNB, Bayani A. Bautista and Ricardo C. Decepida to pay to petitioner actual
damages in the amount of Two Million One Hundred Thirteen Thousand Nine Hundred Sixty One Pesos
(P2,113,961.00) and the peso equivalent of Six Thousand Two Hundred Fifteen Dollars ($6,215.00) at
the prevailing foreign exchange rate on October 11, 1983; and exemplary damages in the amount of
Two Hundred Thousand Pesos (P200,000.00).
Respondent PNB appealed this decision of the trial court to the Court of Appeals. And the Court of
Appeals reversed the decision of the trial court and dismissed the complaint. Hence, this petition.
It is the petitioners contention that the PNB management restructured his existing loan obligations to
a five-year term loan and granted him another Two Million Pesos (P2,000,000.00) LC/TR line; that the
Promissory Notes Nos. 127/82 and 128/82 evidencing a 2-year restructuring period or with the due
maturity date "December 29, 1984" were filled out fraudulently by respondent PNB, and contrary to his
verbal agreement with respondent PNB; hence, his indebtedness to respondent PNB was not yet due
and the extrajudicial foreclosure of his real estate and chattel mortgages was premature. On the other
hand, respondent PNB denies that petitioner's loan obligations were restructured to five (5) years and
maintains that the subject two (2) Promissory Notes Nos. 127/82 and 128/82 were filled out regularly
and became due as of December 29, 1984 as shown on the face thereof.
Respondent Court of Appeals held that there is no evidence of a promise from respondent PNB,
admittedly a banking corporation, that it had accepted the proposals of the petitioner to have a fiveyear restructuring of his overdue loan obligations. It found and held, on the basis of the evidence
adduced, that "appellee's (Mendoza) communications were mere proposals while the bank's responses
were not categorical that the appellee's request had been favorably accepted by the bank."
Contending that respondent PNB had allegedly approved his proposed five-year restructuring plan,
petitioner presented three (3) documents executed by respondent PNB officials. The first document is
a letter dated March 16, 1981 addressed to the petitioner and signed by Ceferino D. Cura, Branch
Manager of PNB Mandaluyong, which states:

x x x In order to study intelligently the feasibility of your above request, please submit the
following documents/papers within thirty (30) days from the date thereof, viz:
1. Audited Financial Statements for 1979 and 1980;
2. Projected cash flow (cash in - cash out) for five years detailed yearly; and
3. List of additional machinery and equipment and proof of ownership thereof.
We would strongly suggest, however, that you reduce your total obligations to at least P3
million (principal and interest and other charges) to give us more justification in recommending
a plan of payment or restructuring of your accounts to higher authorities of this bank.
The second document is a letter dated May 11, 1981 addressed to Mr. S. Pe Benito, Jr., Managing
Director of the Technological Resources Center and signed by said PNB Branch Manager, Ceferino D.
Cura. According to petitioner, this letter showed that respondent PNB seriously considered the
restructuring of his loan obligations to a five-year term loan, to wit:
xxx
At the request of our client, we would like to furnish you with the following information
pertinent to his accounts with us:
xxx
We are currently evaluating the proposal of the client to re-structure his accounts with
us into a five-year plan.
We hope that the above information will guide you in evaluating the proposals of Mr. Danilo
Mendoza.
xxx
The third document is a letter dated July 8, 1981 addressed to petitioner and signed by PNB Assistant
Vice-President Apolonio B. Francisco.
xxx
Considering that your accounts/accommodations were granted and carried in the books of our
Mandaluyong Branch, we would suggest that your requests and proposals be directed to
Ceferino Cura, Manager of our said Branch.
We feel certain that Mr. Cura will be pleased to discuss matters of mutual interest with you.
xxx
Petitioner also presented a letter which he addressed to Mr. Jose Salvador, Vice-President of the
Metropolitan Branches of PNB, dated September 24, 1981, which reads:
Re: Restructuring of our Account into a 5-year Term Loan and Request for the Establishment of
a P2.0 Million LC/TR Line

Dear Sir:
In compliance with our discussion last September 17, we would like to formalize our proposal
to support our above requested assistance from the Philippine National Bank.
xxx
Again we wish to express our sincere appreciation for your open-minded approach towards the
solution of this problem which we know and will be beneficial and to the best interest of the
bank and mutually advantageous to your client.
xxx
Petitioner argues that he submitted the requirements according to the instructions given to him and
that upon submission thereof, his proposed five-year restructuring plan was deemed automatically
approved by respondent PNB.
We disagree.
Nowhere in those letters is there a categorical statement that respondent PNB had approved the
petitioners proposed five-year restructuring plan. It is stretching the imagination to construe them as
evidence that his proposed five-year restructuring plan has been approved by the respondent PNB
which is admittedly a banking corporation. Only an absolute and unqualified acceptance of a definite
offer manifests the consent necessary to perfect a contract.16 If anything, those correspondences only
prove that the parties had not gone beyond the preparation stage, which is the period from the start of
the negotiations until the moment just before the agreement of the parties.17
There is nothing in the record that even suggests that respondent PNB assented to the alleged five-year
restructure of petitioners overdue loan obligations to PNB. However, the trial court ruled in favor of
petitioner Mendoza, holding that since petitioner has complied with the conditions of the alleged oral
contract, the latter may not renege on its obligation to honor the five-year restructuring period, under
the rule of promissory estoppel. Citing Ramos v. Central Bank,18 the trial court said:
The broad general rule to the effect that a promise to do or not to do something in the future
does not work an estoppel must be qualified, since there are numerous cases in which an
estoppel has been predicated on promises or assurances as to future conduct. The doctrine of
promissory estoppel is by no means new, although the name has been adopted only in
comparatively recent years. According to that doctrine, an estoppel may arise from the making
of a promise, even though without consideration, if it was intended that the promise should be
relied upon and in fact it was relied upon, and if a refusal to enforce it would be virtually to
sanction the perpetration of fraud or would result in other injustice. In this respect, the
reliance by the promisee is generally evidenced by action or forbearance on his part, and the
idea has been expressed that such action or forbearance would reasonably have been expected
by the promissor. xxx
The doctrine of promissory estoppel is an exception to the general rule that a promise of future
conduct does not constitute an estoppel. In some jurisdictions, in order to make out a claim of
promissory estoppel, a party bears the burden of establishing the following elements: (1) a promise
reasonably expected to induce action or forebearance; (2) such promise did in fact induce such action
or forebearance, and (3) the party suffered detriment as a result.19
It is clear from the forgoing that the doctrine of promissory estoppel presupposes the existence of a
promise on the part of one against whom estoppel is claimed. The promise must be plain and

unambiguous and sufficiently specific so that the Judiciary can understand the obligation assumed and
enforce the promise according to its terms.20 For petitioner to claim that respondent PNB is estopped
to deny the five-year restructuring plan, he must first prove that respondent PNB had promised to
approve the plan in exchange for the submission of the proposal. As discussed earlier, no such promise
was proven, therefore, the doctrine does not apply to the case at bar. A cause of action for promissory
estoppel does not lie where an alleged oral promise was conditional, so that reliance upon it was not
reasonable.21 It does not operate to create liability where it does not otherwise exist. 22
Since there is no basis to rule that petitioner's overdue loan obligations were restructured to mature in
a period of five (5) years, we see no other option but to respect the two-year period as contained in
the two (2) subject Promissory Notes Nos. 127/82 and 128/82, marked as Exhibits "BB" and "CC"
respectively which superseded and novated all prior loan documents signed by petitioner in favor of
respondent PNB. Petitioner argues, in his memorandum, that "respondent Court of Appeals had no basis
in saying that the acceptance of the five-year restructuring is totally absent from the record."23 On the
contrary, the subject Promissory Notes Nos. 127/82 and 128/82 are clear on their face that they were
due on December 29, 1984 or two (2) years from the date of the signing of the said notes on December
29, 1982.
Petitioner claims that the two (2) subject Promissory Notes Nos. 127/82 and 128/82 were signed by him
in blank with the understanding that they were to be subsequently filled out to conform with his
alleged oral agreements with PNB officials, among which is that they were to become due only after
five (5) years. If petitioner were to be believed, the PNB officials concerned committed a fraudulent
act in filling out the subject two (2) promissory notes in question. Private transactions are presumed to
be fair and regular.24 The burden of presenting evidence to overcome this presumption falls upon
petitioner. Considering that petitioner imputes a serious act of fraud on respondent PNB, which is a
banking corporation, this court will not be satisfied with anything but the most convincing evidence.
However, apart from petitioner's self-serving verbal declarations, we find no sufficient proof that the
subject two (2) Promissory Notes Nos. 127/82 and 128/82 were completed irregularly. Therefore, we
rule that the presumption has not been rebutted.
Besides, it could be gleaned from the record that the petitioner is an astute businessman who took
care to reduce in writing his business proposals to the respondent bank. It is unthinkable that the same
person would commit the careless mistake of leaving his subject two (2) promissory notes in blank in
the hands of other persons. As the respondent Court of Appeals correctly pointed out:
Surely, plaintiff-appellee who is a C.P.A and a Tax Consultant (p. 3 TSN, January 9, 1990) will
insist that the details of the two promissory notes he and his wife executed in 1982 should be
specific to enable them to make the precise computation in the event of default as in the case
at bench. In fact, his alleged omission as a C.P.A. and a Tax Consultant to insist that the two
promissory notes be filled up on important details like the rates of interest is inconsistent with
the legal presumption of a person who takes ordinary care of his concerns (Section 3 (c), Rule
131, Revised Rules on Evidence).
As pointed out by the Court of Appeals, Orlando Montecillo, Chief, Loans and Discounts, PNB
Mandaluyong Branch, testified that the said Promissory Notes Nos. 127/82 and 128/82 were completely
filled out when Danilo Mendoza signed them (Rollo, p. 14).
In a last-ditch effort to save his five-year loan restructuring theory, petitioner contends that
respondent PNB's action of withholding 10% from his export proceeds is proof that his proposal had
been accepted and the contract had been partially executed. He claims that he would not have
consented to the additional burden if there were no corresponding benefit. This contention is not well
taken. There is no credible proof that the 10% assignment of his export proceeds was not part of the
conditions of the two-year restructuring deal. Considering that the resulting amount obtained from this
assignment of export proceeds was not even enough to cover the interest for the corresponding

month,25 we are hard-pressed to construe it as the required proof that respondent PNB allegedly
approved the proposed five-year restructuring of petitioners overdue loan obligations.
It is interesting to note that in his Complaint, petitioner made no mention that the assignment of his
export proceeds was a condition for the alleged approval of his proposed five-year loan restructuring
plan. The Complaint merely alleged that "plaintiff in a sincere effort to make payments on his
obligations agreed to assign 10% of his export proceeds to defendant PNB." This curious omission leads
the court to believe that the alleged link between the petitioners assignment of export proceeds and
the alleged five-year restructuring of his overdue loans was more contrived than real.
It appears that respondent bank increased the interest rates on the two (2) subject Promissory Notes
Nos. 127/82 and 128/82 without the prior consent of the petitioner. The petitioner did not agree to the
increase in the stipulated interest rate of 21% per annum on Promissory Note No. 127/82 and 18% per
annum on Promissory Note No. 128/82. As held in several cases, the unilateral determination and
imposition of increased interest rates by respondent bank is violative of the principle of mutuality of
contracts ordained in Article 1308 of the Civil Code.26As held in one case:27
It is basic that there can be no contract in the true sense in the absence of the element of
agreement, or of mutual assent of the parties. If this assent is wanting on the part of one who
contracts, his act has no more efficacy than if it had been done under duress or by a person of
unsound mind.
Similarly, contract changes must be made with the consent of the contracting parties. The
minds of all the parties must meet as to the proposed modification, especially when it affects
an important aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that
the rate of interest is always a vital component, for it can make or break a capital venture.
It has been held that no one receiving a proposal to change a contract to which he is a party is obliged
to answer the proposal, and his silence per se cannot be construed as an acceptance. 28 Estoppel will
not lie against the petitioner regarding the increase in the stipulated interest on the subject Promissory
Notes Nos. 127/82 and 128/82 inasmuch as he was not even informed beforehand by respondent bank
of the change in the stipulated interest rates. However, we also note that the said two (2) subject
Promissory Notes Nos. 127/82 and 128/82 expressly provide for a penalty charge of 3% per annum to be
imposed on any unpaid amount when due.
Petitioner prays for the release of some of his movables29 being withheld by respondent PNB, alleging
that they were not included among the chattels he mortgaged to respondent bank. However, petitioner
did not present any proof as to when he acquired the subject movables and hence, we are not disposed
to believe that the same were "after-acquired" chattels not covered by the chattel and real estate
mortgages.
In asserting its rights over the subject movables, respondent PNB relies on a common provision in the
two (2) subject Promissory Notes Nos. 127/82 and 128/82 which states:
In the event that this note is not paid at maturity or when the same becomes due under any of
the provisions hereof, we hereby authorized the BANK at its option and without notice, to
apply to the payment of this note, any and all moneys, securities and things of value which
may be in its hands on deposit or otherwise belonging to me/us and for this purpose. We
hereby, jointly and severally, irrevocably constitute and appoint the BANK to be our true
Attorney-in-Fact with full power and authority for us in our name and behalf and without prior
notice to negotiate, sell and transfer any moneys securities and things of value which it may
hold, by public or private sale and apply the proceeds thereof to the payment of this note.

It is clear, however, from the above-quoted provision of the said promissory notes that respondent
bank is authorized, in case of default, to sell "things of value" belonging to the mortgagor "which may
be on its hands for deposit or otherwise belonging to me/us and for this purpose." Besides the
petitioner executed not only a chattel mortgage but also a real estate mortgage to secure his loan
obligations to respondent bank.
A stipulation in the mortgage, extending its scope and effect to after-acquired property is valid and
binding where the after-acquired property is in renewal of, or in substitution for, goods on hand when
the mortgage was executed, or is purchased with the proceeds of the sale of such goods. 30 As earlier
pointed out, the petitioner did not present any proof as to when the subject movables were acquired.
More importantly, respondent bank makes a valid argument for the retention of the subject movables.
Respondent PNB asserts that those movables were in fact "immovables by destination" under Art. 415
(5) of the Civil Code.31 It is an established rule that a mortgage constituted on an immovable includes
not only the land but also the buildings, machinery and accessories installed at the time the mortgage
was constituted as well as the buildings, machinery and accessories belonging to the mortgagor,
installed after the constitution thereof.32
Petitioner also contends that respondent PNBs bid prices for this foreclosed properties in the total
amount of Three Million Seven Hundred Ninety Eight Thousand Seven Hundred Nineteen Pesos and Fifty
Centavos (P3,798,719.50), were allegedly "unconscionable and shocking to the conscience of men". He
claims that the fair market appraisal of his foreclosed plant site together with the improvements
thereon located in Pasig, Metro Manila amounted to Five Million Four Hundred Forty One Thousand Six
Hundred Fifty Pesos (P5,441,650.00) while that of his house and lot in Quezon City amounted to Seven
Hundred Twenty Two Thousand Pesos (P722,000.00) per the appraisal report dated September 20, 1990
of Cuervo Appraisers, Inc.33 That contention is not well taken considering that:
1. The total of the principal amounts alone of petitioners subject Promissory Notes Nos.
127/82 and 128/82 which are both overdue amounted to Four Million One Hundred Eighty Seven
Thousand Nine Hundred Seventeen Pesos and Fifty Nine Centavos (P 4,187,917.59).
2. While the appraisal of Cuervo Appraisers, Inc. was undertaken in September 1990, the
extrajudicial foreclosure of petitioners real estate and chattel mortgages have been effected
way back on October 15, 1984, October 23, 1984 and December 21, 1984. 34 Common
experience shows that real estate values especially in Metro Manila tend to go upward due to
developments in the locality.1wphi1.nt
3. In the public auction/foreclosure sales, respondent PNB, as mortgagee, was not obliged to
bid more than its claims or more than the amount of petitioners loan obligations which are all
overdue. The foreclosed real estate and chattel mortgages which petitioner earlier executed
are accessory contracts covering the collaterals or security of his loans with respondent PNB.
The principal contracts are the Promissory Notes Nos. 127/82 and 128/82 which superseded and
novated the 1979 promissory notes and the 1979 eleven (11) Applications and Agreements for
Commercial Letter of Credit.
Finally, the record shows that petitioner did not even attempt to tender any redemption price to
respondent PNB, as highest bidder of the said foreclosed real estate properties, during the one-year
redemption period.
In view of all the foregoing, it is our view and we hold that the extrajudicial foreclosure of petitioners
real estate and chattel mortgages was not premature and that it was in fact legal and valid.

WHEREFORE, the petition is hereby DENIED. The challenged Decision of the Court of Appeals in CA-G.R.
CV No. 38036 is AFFIRMED with modification that the increase in the stipulated interest rates of 21%
per annum and 18% per annum appearing on Promissory Notes Nos. 127/82 and 128/82 respectively is
hereby declared null and void.
SO ORDERED.

[G.R. No. 192986, January 15, 2013]

ADVOCATES FOR TRUTH IN LENDING, INC. AND EDUARDO B. OLAGUER, Petitioners, v. BANGKO
SENTRAL MONETARY BOARD, REPRESENTED BY ITS CHAIRMAN, GOVERNOR ARMANDO M. TETANGCO,
JR., AND ITS INCUMBENT MEMBERS: JUANITA D. AMATONG, ALFREDO C. ANTONIO, PETER FAVILA,
NELLY F. VILLAFUERTE, IGNACIO R. BUNYE AND CESAR V. PURISIMA, Respondents.
DECISION
REYES, J.:
Petitioners, claiming that they are raising issues of transcendental importance to the public, filed
directly with this Court this Petition for Certiorari under Rule 65 of the 1997 Rules of Court, seeking to
declare that the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), replacing the Central Bank
Monetary Board (CB-MB) by virtue of Republic Act (R.A.) No. 7653, has no authority to continue
enforcing Central Bank Circular No. 905,1rl1 issued by the CB-MB in 1982, which "suspended" Act
No. 2655, or the Usury Law of 1916.cralawlibrary
Factual Antecedents
Petitioner "Advocates for Truth in Lending, Inc." (AFTIL) is a non- profit, non-stock corporation
organized to engage in pro bono concerns and activities relating to money lending issues. It was
incorporated on July 9, 2010,2rl1 and a month later, it filed this petition, joined by its founder and
president, Eduardo B. Olaguer, suing as a taxpayer and a citizen.cralawlibrary
R.A. No. 265, which created the Central Bank (CB) of the Philippines on June 15, 1948, empowered the
CB-MB to, among others, set the maximum interest rates which banks may charge for all types of loans
and other credit operations, within limits prescribed by the Usury Law. Section 109 of R.A. No. 265
reads:chanroblesvirtualawlibrary
Sec. 109. Interest Rates, Commissions and Charges. The Monetary Board may fix the maximum rates
of interest which banks may pay on deposits and on other obligations.cralawlibrary
The Monetary Board may, within the limits prescribed in the Usury Law fix the maximum rates of
interest which banks may charge for different types of loans and for any other credit operations, or
may fix the maximum differences which may exist between the interest or rediscount rates of the

Central Bank and the rates which the banks may charge their customers if the respective credit
documents are not to lose their eligibility for rediscount or advances in the Central Bank.cralawlibrary
Any modifications in the maximum interest rates permitted for the borrowing or lending operations of
the banks shall apply only to future operations and not to those made prior to the date on which the
modification becomes effective.cralawlibrary
In order to avoid possible evasion of maximum interest rates set by the Monetary Board, the Board may
also fix the maximum rates that banks may pay to or collect from their customers in the form of
commissions, discounts, charges, fees or payments of any sort. (Underlining ours)
On March 17, 1980, the Usury Law was amended by Presidential Decree (P.D.) No. 1684, giving the CBMB authority to prescribe different maximum rates of interest which may be imposed for a loan or
renewal thereof or the forbearance of any money, goods or credits, provided that the changes are
effected gradually and announced in advance. Thus, Section 1-a of Act No. 2655 now
reads:chanroblesvirtualawlibrary
Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest
for the loan or renewal thereof or the forbearance of any money, goods or credits, and to change such
rate or rates whenever warranted by prevailing economic and social conditions: Provided, That changes
in such rate or rates may be effected gradually on scheduled dates announced in
advance.cralawlibrary
In the exercise of the authority herein granted the Monetary Board may prescribe higher maximum
rates for loans of low priority, such as consumer loans or renewals thereof as well as such loans made
by pawnshops, finance companies and other similar credit institutions although the rates prescribed for
these institutions need not necessarily be uniform. The Monetary Board is also authorized to prescribe
different maximum rate or rates for different types of borrowings, including deposits and deposit
substitutes, or loans of financial intermediaries. (Underlining and emphasis ours)
In its Resolution No. 2224 dated December 3, 1982,3rl1 the CB-MB issued CB Circular No. 905, Series
of 1982, effective on January 1, 1983. Section 1 of the Circular, under its General Provisions, removed
the ceilings on interest rates on loans or forbearance of any money, goods or credits, to
wit:chanroblesvirtualawlibrary
Sec. 1. The rate of interest, including commissions, premiums, fees and other charges, on a loan or
forbearance of any money, goods, or credits, regardless of maturity and whether secured or unsecured,
that may be charged or collected by any person, whether natural or juridical, shall not be subject
to any ceiling prescribed under or pursuant to the Usury Law, as amended. (Underscoring and emphasis
ours)
The Circular then went on to amend Books I to IV of the CB's "Manual of Regulations for Banks and
Other Financial Intermediaries" (Manual of Regulations) by removing the applicable ceilings on specific
interest rates. Thus, Sections 5, 9 and 10 of CB Circular No. 905 amended Book I, Subsections 1303,
1349, 1388.1 of the Manual of Regulations, by removing the ceilings for interest and other charges,
commissions, premiums, and fees applicable to commercial banks; Sections 12 and 17 removed the
interest ceilings for thrift banks (Book II, Subsections 2303, 2349); Sections 19 and 21 removed the
ceilings applicable to rural banks (Book III, Subsection 3152.3-c); and, Sections 26, 28, 30 and 32
removed the ceilings for non-bank financial intermediaries (Book IV, Subsections 4303Q.1 to 4303Q.9,
4303N.1, 4303P).4rl1
On June 14, 1993, President Fidel V. Ramos signed into law R.A. No. 7653 establishing the Bangko
Sentral ng Pilipinas (BSP) to replace the CB. The repealing clause thereof, Section 135,
reads:chanroblesvirtualawlibrary

Sec. 135. Repealing Clause. Except as may be provided for in Sections 46 and 132 of this Act, Republic
Act No. 265, as amended, the provisions of any other law, special charters, rule or regulation issued
pursuant to said Republic Act No. 265, as amended, or parts thereof, which may be inconsistent with
the provisions of this Act are hereby repealed. Presidential Decree No. 1792 is likewise repealed.
Petition for Certiorari
To justify their skipping the hierarchy of courts and going directly to this Court to secure a writ
ofcertiorari, petitioners contend that the transcendental importance of their Petition can readily be
seen in the issues raised therein, to wit:chanroblesvirtualawlibrary
a)
b)
c)

Whether under R.A. No. 265 and/or P.D. No. 1684, the CB-MB had the statutory or constitutional
authority to prescribe the maximum rates of interest for all kinds of credit transactions and
forbearance of money, goods or credit beyond the limits prescribed in the Usury Law;
If so, whether the CB-MB exceeded its authority when it issued CB Circular No. 905, which
removed all interest ceilings and thus suspended Act No. 2655 as regards usurious interest rates;
Whether under R.A. No. 7653, the new BSP-MB may continue to enforce CB Circular No.
905.5rl1

Petitioners attached to their petition copies of several Senate Bills and Resolutions of the 10th
Congress, which held its sessions from 1995 to 1998, calling for investigations by the Senate Committee
on Banks and Financial Institutions into alleged unconscionable commercial rates of interest imposed by
these entities. Senate Bill (SB) Nos. 376rl1 and 1860,7rl1 filed by Senator Vicente C. Sotto III and
the late Senator Blas F. Ople, respectively, sought to amend Act No. 2655 by fixing the rates of interest
on loans and forbearance of credit; Philippine Senate Resolution (SR) No. 1053,8rl1 10739rl1 and
1102,10rl1 filed by Senators Ramon B. Magsaysay, Jr., Gregorio B. Honasan and Franklin M. Drilon,
respectively, urged the aforesaid Senate Committee to investigate ways to curb the high commercial
interest rates then obtaining in the country; Senator Ernesto Maceda filed SB No. 1151 to prohibit the
collection of more than two months of advance interest on any loan of money; and Senator Raul Roco
filed SR No. 114411rl1 seeking an investigation into an alleged cartel of commercial banks, called
"Club 1821, reportedly behind the regime of high interest rates. The petitioners also attached
news clippings12rl1 showing that in February 1998 the banks' prime lending rates, or interests on
loans to their best borrowers, ranged from 26% to 31%.cralawlibrary
Petitioners contend that under Section 1-a of Act No. 2655, as amended by P.D. No. 1684, the CB-MB
was authorized only to prescribe or set the maximum rates of interest for a loan or renewal thereof or
for the forbearance of any money, goods or credits, and to change such rates whenever warranted by
prevailing economic and social conditions, the changes to be effected gradually and on scheduled
dates; that nothing in P.D. No. 1684 authorized the CB-MB to lift or suspend the limits of interest on all
credit transactions, when it issued CB Circular No. 905. They further insist that under Section 109 of
R.A. No. 265, the authority of the CB-MB was clearly only to fix the banks' maximum rates of interest,
but always within the limits prescribed by the Usury Law.cralawlibrary
Thus, according to petitioners, CB Circular No. 905, which was promulgated without the benefit of any
prior public hearing, is void because it violated Article 5 of the New Civil Code, which provides that
"Acts executed against the provisions of mandatory or prohibitory laws shall be void, except when the
law itself authorizes their validity.
They further claim that just weeks after the issuance of CB Circular No. 905, the benchmark 91-day
Treasury bills (T-bills),13rl1 then known as "Jobo" bills14rl1 shot up to 40% per annum, as a
result. The banks immediately followed suit and re-priced their loans to rates which were even higher
than those of the "Jobo" bills. Petitioners thus assert that CB Circular No. 905 is also unconstitutional in
light of Section 1 of the Bill of Rights, which commands that "no person shall be deprived of life, liberty
or property without due process of law, nor shall any person be denied the equal protection of the
laws.

Finally, petitioners point out that R.A. No. 7653 did not re-enact a provision similar to Section 109 of
R.A. No. 265, and therefore, in view of the repealing clause in Section 135 of R.A. No. 7653, the BSPMB has been stripped of the power either to prescribe the maximum rates of interest which banks may
charge for different kinds of loans and credit transactions, or to suspend Act No. 2655 and continue
enforcing CB Circular No. 905.cralawlibrary
Ruling
The petition must fail.cralawlibrary
A. The Petition is procedurally infirm.
The decision on whether or not to accept a petition for certiorari, as well as to grant due course
thereto, is addressed to the sound discretion of the court. 15rl1 A petition for certiorari being an
extraordinary remedy, the party seeking to avail of the same must strictly observe the procedural rules
laid down by law, and non-observance thereof may not be brushed aside as mere technicality.16rl1
As provided in Section 1 of Rule 65, a writ of certiorari is directed against a tribunal exercising judicial
or quasi-judicial functions.17rl1 Judicial functions are exercised by a body or officer clothed with
authority to determine what the law is and what the legal rights of the parties are with respect to the
matter in controversy. Quasi-judicial function is a term that applies to the action or discretion of
public administrative officers or bodies given the authority to investigate facts or ascertain the
existence of facts, hold hearings, and draw conclusions from them as a basis for their official action
using discretion of a judicial nature.18rl1
The CB-MB (now BSP-MB) was created to perform executive functions with respect to the
establishment, operation or liquidation of banking and credit institutions, and branches and agencies
thereof.19rl1 It does not perform judicial or quasi-judicial functions. Certainly, the issuance of CB
Circular No. 905 was done in the exercise of an executive function. Certiorari will not lie in the instant
case.20rl1
B. Petitioners have no locus standi
to file the Petition
Locus standi is defined as "a right of appearance in a court of justice on a given question." In private
suits, Section 2, Rule 3 of the 1997 Rules of Civil Procedure provides that "every action must be
prosecuted or defended in the name of the real party in interest," who is "the party who stands to be
benefited or injured by the judgment in the suit or the party entitled to the avails of the suit."
Succinctly put, a party's standing is based on his own right to the relief sought. 21rl1
Even in public interest cases such as this petition, the Court has generally adopted the "direct injury"
test that the person who impugns the validity of a statute must have "a personal and substantial
interest in the case such that he has sustained, or will sustain direct injury as a
result.22rl1 Thus, while petitioners assert a public right to assail CB Circular No. 905 as an
illegal executive action, it is nonetheless required of them to make out a sufficient interest in the
vindication of the public order and the securing of relief. It is significant that in this petition, the
petitioners do not allege that they sustained any personal injury from the issuance of CB Circular No.
905.cralawlibrary
Petitioners also do not claim that public funds were being misused in the enforcement of CB Circular
No. 905. In Kilosbayan, Inc. v. Morato,23rl1 involving the on-line lottery contract of the PCSO, there
was no allegation that public funds were being misspent, which according to the Court would have
made the action a public one, "and justify relaxation of the requirement that an action must be
prosecuted in the name of the real party-in-interest." The Court held, moreover, that the status

of Kilosbayan as a people's organization did not give it the requisite personality to question the validity
of the contract. Thus:chanroblesvirtualawlibrary
Petitioners do not in fact show what particularized interest they have for bringing this suit. It does not
detract from the high regard for petitioners as civic leaders to say that their interest falls short of that
required to maintain an action under the Rule 3, Sec. 2.24rl1
C. The Petition raises no issues of
transcendental importance.
In the 1993 case of Joya v. Presidential Commission on Good Government,25rl1 it was held that no
question involving the constitutionality or validity of a law or governmental act may be heard and
decided by the court unless there is compliance with the legal requisites for judicial inquiry, namely:
(a) that the question must be raised by the proper party; (b) that there must be an actual case or
controversy; (c) that the question must be raised at the earliest possible opportunity; and (d) that the
decision on the constitutional or legal question must be necessary to the determination of the case
itself.cralawlibrary
In Prof. David v. Pres. Macapagal-Arroyo,26rl1 the Court summarized the requirements before
taxpayers, voters, concerned citizens, and legislators can be accorded a standing to
sue, viz:chanroblesvirtualawlibrary
(1)
(2)
(3)
(4)

the cases involve constitutional issues;

for taxpayers, there must be a claim of illegal disbursement of public funds or that the tax
measure is unconstitutional;
for voters, there must be a showing of obvious interest in the validity of the election law in
question;
for concerned citizens, there must be a showing that the issues raised are of transcendental
importance which must be settled early; and (5) for legislators, there must be a claim that the
official action complained of infringes upon their prerogatives as legislators.

While the Court may have shown in recent decisions a certain toughening in its attitude concerning the
question of legal standing, it has nonetheless always made an exception where the transcendental
importance of the issues has been established, notwithstanding the petitioners' failure to show a direct
injury.27rl1 In CREBA v. ERC,28rl1 the Court set out the following instructive guides as
determinants on whether a matter is of transcendental importance, namely: (1) the character of the
funds or other assets involved in the case; (2) the presence of a clear case of disregard of a
constitutional or statutory prohibition by the public respondent agency or instrumentality of the
government; and (3) the lack of any other party with a more direct and specific interest in the
questions being raised. Further, the Court stated in Anak Mindanao Party-List Group v. The Executive
Secretary29rl1 that the rule on standing will not be waived where these determinants are not
established.cralawlibrary
In the instant case, there is no allegation of misuse of public funds in the implementation of CB
Circular No. 905. Neither were borrowers who were actually affected by the suspension of the Usury
Law joined in this petition. Absent any showing of transcendental importance, the petition must
fail.cralawlibrary
More importantly, the Court notes that the instant petition adverted to the regime of high interest
rates which obtained at least 15 years ago, when the banks' prime lending rates ranged from 26% to
31%,30rl1 or even 29 years ago, when the 91-day Jobo bills reached 40% per annum. In contrast,
according to the BSP, in the first two (2) months of 2012 the bank lending rates averaged 5.91%, which
implies that the banks' prime lending rates were lower; moreover, deposit interests on savings and
long-term deposits have also gone very low, averaging 1.75% and 1.62%, respectively.31rl1

Judging from the most recent auctions of T-bills, the savings rates must be approaching 0%. In the
auctions held on November 12, 2012, the rates of 3-month, 6-month and 1-year T-bills have dropped to
0.150%, 0.450% and 0.680%, respectively.32rl1 According to Manila Bulletin, this very low interest
regime has been attributed to "high liquidity and strong investor demand amid positive economic
indicators of the country.33rl1
While the Court acknowledges that cases of transcendental importance demand that they be settled
promptly and definitely, brushing aside, if we must, technicalities of procedure, 34rl1 the delay of at
least 15 years in the filing of the instant petition has actually rendered moot and academic the issues it
now raises.cralawlibrary
For its part, BSP-MB maintains that the petitioners' allegations of constitutional and statutory violations
of CB Circular No. 905 are really mere challenges made by petitioners concerning the wisdom of the
Circular. It explains that it was in view of the global economic downturn in the early 1980's that the
executive department through the CB-MB had to formulate policies to achieve economic recovery, and
among these policies was the establishment of a market-oriented interest rate structure which would
require the removal of the government-imposed interest rate ceilings.35rl1
D. The CB-MB merely suspended
the effectivity of the Usury Law
when it issued CB Circular No. 905.
The power of the CB to effectively suspend the Usury Law pursuant to P.D. No. 1684 has long been
recognized and upheld in many cases. As the Court explained in the landmark case of Medel v.
CA,36rl1citing several cases, CB Circular No. 905 "did not repeal nor in anyway amend the Usury Law
but simply suspended the latter's effectivity;37rl1 that "a [CB] Circular cannot repeal a law,
[for] only a law can repeal another law;38rl1 that "by virtue of CB Circular No. 905, the Usury
Law has been rendered ineffective;39rl1 and "Usury has been legally non-existent in our
jurisdiction. Interest can now be charged as lender and borrower may agree upon.40rl1
In First Metro Investment Corp. v. Este Del Sol Mountain Reserve, Inc.41rl1 cited in DBP v.
Perez,42rl1 we also belied the contention that the CB was engaged in self-legislation.
Thus:chanroblesvirtualawlibrary
Central Bank Circular No. 905 did not repeal nor in any way amend the Usury Law but simply suspended
the latter's effectivity. The illegality of usury is wholly the creature of legislation. A Central Bank
Circular cannot repeal a law. Only a law can repeal another law. x x x. 43rl1
In PNB v. Court of Appeals,44rl1 an escalation clause in a loan agreement authorized the PNB to
unilaterally increase the rate of interest to 25% per annum, plus a penalty of 6% per annum on past
dues, then to 30% on October 15, 1984, and to 42% on October 25, 1984. The Supreme Court
invalidated the rate increases made by the PNB and upheld the 12% interest imposed by the CA, in this
wise:chanroblesvirtualawlibrary
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely
regarding any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of
money, goods or credits. In fine, they can agree to adjust, upward or downward, the interest
previously stipulated. x x x.45rl1
Thus, according to the Court, by lifting the interest ceiling, CB Circular No. 905 merely upheld the
parties' freedom of contract to agree freely on the rate of interest. It cited Article 1306 of the New
Civil Code, under which the contracting parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law, morals, good customs,
public order, or public policy.cralawlibrary

E. The BSP-MB has authority to

enforce CB Circular No. 905.
Section 1 of CB Circular No. 905 provides that "The rate of interest, including commissions, premiums,
fees and other charges, on a loan or forbearance of any money, goods, or credits, regardless of
maturity and whether secured or unsecured, that may be charged or collected by any person, whether
natural or juridical, shall not be subject to any ceiling prescribed under or pursuant to the Usury Law,
as amended. It does not purport to suspend the Usury Law only as it applies to banks, but to all
lenders.cralawlibrary
Petitioners contend that, granting that the CB had power to "suspend" the Usury Law, the new BSP-MB
did not retain this power of its predecessor, in view of Section 135 of R.A. No. 7653, which expressly
repealed R.A. No. 265. The petitioners point out that R.A. No. 7653 did not reenact a provision similar
to Section 109 of R.A. No. 265.cralawlibrary
A closer perusal shows that Section 109 of R.A. No. 265 covered only loans extended by banks, whereas
under Section 1-a of the Usury Law, as amended, the BSP-MB may prescribe the maximum rate or rates
of interest for all loans or renewals thereof or the forbearance of any money, goods or credits,
including those for loans of low priority such as consumer loans, as well as such loans made by
pawnshops, finance companies and similar credit institutions. It even authorizes the BSP-MB to
prescribe different maximum rate or rates for different types of borrowings, including deposits and
deposit substitutes, or loans of financial intermediaries.cralawlibrary
Act No. 2655, an earlier law, is much broader in scope, whereas R.A. No. 265, now R.A. No. 7653,
merely supplemented it as it concerns loans by banks and other financial institutions. Had R.A. No.
7653 been intended to repeal Section 1-a of Act No. 2655, it would have so stated in unequivocal
terms.cralawlibrary
Moreover, the rule is settled that repeals by implication are not favored, because laws are presumed to
be passed with deliberation and full knowledge of all laws existing pertaining to the
subject.46rl1 An implied repeal is predicated upon the condition that a substantial conflict or
repugnancy is found between the new and prior laws. Thus, in the absence of an express repeal, a
subsequent law cannot be construed as repealing a prior law unless an irreconcilable inconsistency and
repugnancy exists in the terms of the new and old laws.47rl1 We find no such conflict between the
provisions of Act 2655 and R.A. No. 7653.cralawlibrary
F. The lifting of the ceilings for interest
rates does not authorize stipulations
charging excessive, unconscionable,
and iniquitous interest.
It is settled that nothing in CB Circular No. 905 grants lenders a carte blanche authority to raise
interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their
assets.48rl1 As held in Castro v. Tan:49rl1
The imposition of an unconscionable rate of interest on a money debt, even if knowingly and
voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an iniquitous
deprivation of property, repulsive to the common sense of man. It has no support in law, in principles
of justice, or in the human conscience nor is there any reason whatsoever which may justify such
imposition as righteous and as one that may be sustained within the sphere of public or private
morals.50rl1
Stipulations authorizing iniquitous or unconscionable interests have been invariably struck down for
being contrary to morals, if not against the law.51rl1 Indeed, under Article 1409 of the Civil Code,
these contracts are deemed inexistent and void ab initio, and therefore cannot be ratified, nor may

the right to set up their illegality as a defense be waived.cralawlibrary

Nonetheless, the nullity of the stipulation of usurious interest does not affect the lender's right to
recover the principal of a loan, nor affect the other terms thereof. 52rl1 Thus, in a usurious loan
with mortgage, the right to foreclose the mortgage subsists, and this right can be exercised by the
creditor upon failure by the debtor to pay the debt due. The debt due is considered as without the
stipulated excessive interest, and a legal interest of 12% per annum will be added in place of the
excessive interest formerly imposed,53rl1 following the guidelines laid down in the landmark case
of Eastern Shipping Lines, Inc. v. Court of Appeals,54rl1 regarding the manner of computing legal
interest:chanroblesvirtualawlibrary
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the
Civil Code.cralawlibrary
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or
until the demand can be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal interest shall, in any case,
be on the amount finally adjudged.cralawlibrary
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum
from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to
a forbearance of credit.55rl1(Citations omitted)
The foregoing rules were further clarified in Sunga-Chan v. Court of Appeals,56rl1 as
follows:chanroblesvirtualawlibrary
Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if proper, and the
applicable rate, as follows: The 12% per annum rate under CB Circular No. 416 shall apply only to loans
or forbearance of money, goods, or credits, as well as to judgments involving such loan or forbearance
of money, goods, or credit, while the 6%per annum under Art. 2209 of the Civil Code applies "when the
transaction involves the payment of indemnities in the concept of damage arising from the breach or a
delay in the performance of obligations in general," with the application of both rates reckoned "from
the time the complaint was tiled until the [adjudged] amount is fully paid." In either instance, the
reckoning period for the commencement of the running of the legal interest shall be subject to the
condition "that the courts are vested with discretion, depending on the equities of each case, on the
award of interest."57rl1 (Citations omitted)
WHEREFORE, premises considered, the Petition for certiorari is DISMISSED.
SO ORDERED.cr

THIRD DIVISION

[G.R. No. 156841. June 30, 2005]

GF EQUITY, INC., petitioner, vs. ARTURO VALENZONA, respondent.

DECISION
CARPIO-MORALES, J.:
On challenge via Petition for Review on Certiorari is the Court of Appeals October 14, 2002
Decision[1] reversing that of the Regional Trial Court (RTC) of Manila dated June 28, 1997 [2]which
dismissed the complaint of herein respondent Arturo Valenzona (Valenzona) for breach of contract with
damages against herein petitioner GF Equity, Inc. (GF Equity).
The factual antecedents of the case are as follows:
GF Equity, represented by its Chief Financial Officer W. Steven Uytengsu (Uytengsu), hired
Valenzona as Head Coach of the Alaska basketball team in the Philippine Basketball Association (PBA)
under a Contract of Employment.[3]
As head coach, the duties of Valenzona were described in the contract to include the following:
xxx
1. . . . coaching at all practices and games scheduled for the CORPORATIONs TEAM during the
scheduled season of the ASSOCIATION . . ., coaching all exhibition games scheduled by the corporation
as approved by the PBA during and prior to the scheduled season, coaching (if invited to participate) in
the ASSOCIATIONs All Star Game and attending every event conducted in association with the All Star
Game, and coaching the play-off games subsequent to the scheduled season based on the athletic
program of the PBA.
xxx
3. The COACH agrees to observe and comply with all requirements of the CORPORATION respecting
conduct of its TEAM and its players, at all times whether on or off the playing floor. The CORPORATION
may, from time to time during the continuance of this contract, establish reasonable rules for the
government of its players at home and on the road; and such rules shall be part of this contract as fully
is (sic) if herein written and shall be the responsibility of the COACH to implement; x x x
4. The COACH agrees (a) to report at the time and place fixed by the CORPORATION in good physical
condition; (b) to keep himself throughout the entire season in good physical condition; (c) to give his
best services, as well as his loyalty to the CORPORATION, and to serve as basketball coach for the
CORPORATION and its assignees; (d) to be neatly and fully attired in public and always to conduct
himself on and off the courtaccording to the highest standards of honesty, morality, fair play and
sportsmanship; (e) not to do anything which is detrimental to the best interests of the CORPORATION.
xxx
7. The COACH agrees that if so requested by the CORPORATION, he will endorse the CORPORATIONs
products in commercial advertising, promotions and the like. The COACH further agrees to allow

theCORPORATION or the ASSOCIATION to take pictures of the COACH alone or together with others, for
still photographs, motion pictures or television, at such times as the CORPORATION or the ASSOCIATION
may designate, and no matter by whom taken may be used in any manner desired by either of them for
publicity or promotional purposes. (Underscoring supplied).
xxx
Even before the conclusion of the contract, Valenzona had already served GF Equity under a
verbal contract by coaching its team, Hills Brothers, in the 3 rd PBA Conference of 1987 where the team
was runner-up.
Under the contract, GF Equity would pay Valenzona the sum of Thirty Five Thousand Pesos
(P35,000.00) monthly, net of taxes, and provide him with a service vehicle and gasoline allowance.
While the employment period agreed upon was for two years commencing on January 1, 1988 and
ending on December 31, 1989, the last sentence of paragraph 3 of the contract carried the following
condition:
3. x x x If at any time during the contract, the COACH, in the sole opinion of the CORPORATION, fails to
exhibit sufficient skill or competitive ability to coach the team, the CORPORATION may terminate this
contract. (Emphasis supplied)
Before affixing his signature on the contract, Valenzona consulted his lawyer who pointed out the
one-sidedness of the above-quoted last sentence of paragraph 3 thereof. The caveatnotwithstanding,
Valenzona still acceded to the terms of the contract because he had trust and confidence in Uytengsu
who had recommended him to the management of GF Equity.
During his stint as Alaskas head coach, the team placed third both in the Open and All-Filipino PBA
Conferences in 1988.
Valenzona was later advised by the management of GF Equity by letter of September 26, 1988 of
the termination of his services in this wise:
We regret to inform you that under the contract of employment dated January 1, 1988
we are invoking our rights specified in paragraph 3.
You will continue to be paid until your outstanding balance which, as of September 25, 1988,
is P75,868.38 has been fully paid.
Please return the service vehicle to my office no later than September 30, 1988. [4] (Emphasis
supplied)
Close to six years after the termination of his services, Valenzonas counsel, by letter of July 30,
1994,[5] demanded from GF Equity payment of compensation arising from the arbitrary and unilateral
termination of his employment. GF Equity, however, refused the claim.
Valenzona thus filed on September 26, 1994 before the Regional Trial Court of Manila a
complaint[6] against GF Equity for breach of contract with damages, ascribing bad faith, malice and
disregard to fairness and to the rights of the plaintiff by unilaterally and arbitrarily pre-terminating the
contract without just cause and legal and factual basis. He prayed for the award of actual damages in
the amount of P560,000.00 representing his unpaid compensation from September 26, 1988 up to
December 31, 1989, at the rate of P35,000.00 a month; moral damages in the amount of P100,000.00;
exemplary damages in the amount of P50,000.00; attorneys fees in the amount of P100,000.00; and
costs of suit.

Before the trial court, Valenzona challenged the condition in paragraph 3 of the contract as
lacking the element of mutuality of contract, a clear transgression of Article 1308 of the New Civil
Code, and reliance thereon, he contended, did not warrant his unjustified and arbitrary dismissal.
GF Equity maintained, on the other hand, that it merely exercised its right under the contract to
pre-terminate Valenzonas employment due to incompetence. And it posited that he was guilty of
laches and, in any event, his complaint should have been instituted before a labor arbiter.
The trial court, upholding the validity of the assailed provision of the contract, dismissed, by
decision of June 28, 1997,[7] the complaint of Valenzona who, it held, was fully aware of entering into a
bad bargain.
The Court of Appeals, before which Valenzona appealed, reversed the trial courts decision, by
decision of October 14, 2002,[8] and accordingly ordered GF Equity to pay him damages.
In its decision, the appellate court held that the questioned provision in the contract merely
confers upon GF Equity the right to fire its coach upon a finding of inefficiency, a valid reason within
the ambit of its management prerogatives, subject to limitations imposed by law, although not
expressly
stated
in
the
clause;
and the right granted in the contract can neither be said to be immoral,unlawful, or contrary to public
policy. It concluded, however, that while the mutuality of the clause is evident, GF Equity abused its
right by arbitrarily terminating . . . Valenzonas employment and opened itself to a charge of bad faith.
Hence, finding that Valenzonas claim for damages is obviously . . . based on Art. 19 of the Civil Code
which provides:
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.,
the appellate court awarded Valenzona the following damages, furnishing the justification therefor:
. . . a) Compensatory damages representing his unearned income for 15 months. Actual and
compensatory damages are those recoverable because of a pecuniary loss in business, trade, property,
profession, job or occupation. As testified, his employment contract provided a monthly income of
PhP35,000, which he lost from September 26, 1988 up to December 31, 1989 as a consequence of his
arbitrary dismissal; b) Moral damages of PhP20,000. The act caused wounded feelings on the part of
the plaintiff. Moral damages is recoverable under Article 2220 and the chapter on Human Relations of
the Civil Code (Articles 1936) when a contract is breached in bad faith; c) Exemplary damages of
PhP20,000, by way of example or correction for the public good; and d) When exemplary damages are
awarded, attorneys fees can also be given. We deem it just to grant 10% of the actual damages
as attorneys fees. (Underscoring supplied)
Hence, this petition at bar, GF Equity faulting the appellate court in
. . . CONCLUD[ING] WRONGLY FROM ESTABLISHED FACTS IN A MANNER VIOLATIVE OF APPLICABLE LAWS
AND ESTABLISHED JURISPRUDENCE.[9]
GF Equity argues that the appellate court committed a non-sequitur when it agreed with the
findings of fact of the lower court but reached an opposite conclusion. It avers that the appellate court
made itself a guardian of an otherwise intelligent individual well-versed in tactical maneuvers; that the
freedom to enter into contracts is protected by law, and the courts will not interfere therewith unless
the contract is contrary to law, morals, good customs, public policy or public order; that there was
absolutely no reason for the appellate court to have found bad faith on its part; and that, at all events,
Valenzona is guilty of laches for his unexplained inaction for six years.
Central to the resolution of the instant controversy is the determination of whether the
questioned last sentence of paragraph 3 is violative of the principle of mutuality of contracts.

Mutuality is one of the characteristics of a contract, its validity or performance or compliance of

which cannot be left to the will of only one of the parties. [10] This is enshrined in Article 1308 of the
New Civil Code, whose underlying principle is explained in Garcia v. Rita Legarda, Inc.,[11] viz:
Article 1308 of the New Civil Code reads as follows:
The contract must bind both contracting parties; its validity or compliance cannot be left to the will of
one of them.
The above legal provision is a virtual reproduction of Article 1256 of the old Civil Code but it was so
phrased as to emphasize the principle that the contract must bind both parties. This, of course is based
firstly, on the principle that obligations arising from contracts have the force of law between the
contracting parties and secondly, that there must be mutuality between the parties based on
their essential equality to which is repugnant to have one party bound by the contract leaving
the other free therefrom (8 Manresa 556). Its ultimate purpose is to render void a contract
containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled
will of one of the contracting parties.
x x x (Emphasis, italics and underscoring supplied)
The ultimate purpose of the mutuality principle is thus to nullify a contract containing a condition
which makes its fulfillment or pre-termination dependent exclusively upon the uncontrolled willof one
of the contracting parties.
Not all contracts though which vest to one party their determination of validity or compliance or
the right to terminate the same are void for being violative of the mutuality principle. Jurisprudence is
replete with instances of cases[12] where this Court upheld the legality of contracts which left their
fulfillment or implementation to the will of either of the parties. In these cases, however, there was a
finding of the presence of essential equality of the parties to the contracts, thus preventing the
perpetration of injustice on the weaker party.
In the case at bar, the contract incorporates in paragraph 3 the right of GF Equity to preterminate the contract that if the coach, in the sole opinion of the corporation, fails to exhibit
sufficient skill or competitive ability to coach the team, the corporation may terminate the
contract. The assailed condition clearly transgresses the principle of mutuality of contracts. It leaves
the determination of whether Valenzona failed to exhibit sufficient skill or competitive ability to coach
Alaska team solely to the opinion of GF Equity. Whether Valenzona indeed failed to exhibit the
required skill or competitive ability depended exclusively on the judgment of GF Equity. In other
words, GF Equity was given an unbridled prerogative to pre-terminate the contract irrespective of the
soundness, fairness or reasonableness, or even lack of basis of its opinion.
To sustain the validity of the assailed paragraph would open the gate for arbitrary and illegal
dismissals, for void contractual stipulations would be used as justification therefor.
The assailed stipulation being violative of the mutuality principle underlying Article 1308 of the
Civil Code, it is null and void.
The nullity of the stipulation notwithstanding, GF Equity was not precluded from the right to preterminate the contract. The pre-termination must have legal basis, however, if it is to be declared
justified.
GF Equity failed, however, to advance any ground to justify the pre-termination. It simply invoked
the assailed provision which is null and void.
While GF Equitys act of pre-terminating Valenzonas services cannot be considered willful as it was
based on a stipulation, albeit declared void, it, in doing so, failed to consider the abuse of rights
principle enshrined in Art. 19 of the Civil Code which provides:

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.
This provision of law sets standards which must be observed in the exercise of ones rights as well as in
the performance of its duties, to wit: to act with justice; give every one his due; andobserve honesty
and good faith.
Since the pre-termination of the contract was anchored on an illegal ground, hence, contrary to
law, and GF Equity negligently failed to provide legal basis for such pre-termination, e.g. that
Valenzona breached the contract by failing to discharge his duties thereunder, GF Equity failed to
exercise in a legitimate manner its right to pre-terminate the contract, thereby abusing the right of
Valenzona to thus entitle him to damages under Art. 19 in relation to Article 20 of the Civil Code the
latter of which provides:
Art. 20. Every person who, contrary to law, willfully or negligently causes damage to another, shall
indemnify the latter for the same.
In De Guzman v. NLRC,[13] this Court quoted the following explanation of Tolentino why it is
impermissible to abuse our rights to prejudice others.
The exercise of a right ends when the right disappears, and it disappears when it is abused, especially
to the prejudice of others. The mask of a right without the spirit of justice which gives it life is
repugnant to the modern concept of social law. It cannot be said that a person exercises a right when
he unnecessarily prejudices another or offends morals or good customs. Over and above the specific
precepts of positive law are the supreme norms of justice which the law develops and which are
expressed in three principles: honeste vivere,[14] alterum non laedere[15] and jus suum quique
tribuere;[16] and he who violates them violates the law. For this reason, it is not permissible to abuse
our rights to prejudice others.
The disquisition in Globe Mackay Cable and Radio Corporation v. Court of Appeals [17] is just as
relevant as it is illuminating on the present case. In that case, this Court declared that even granting
that the therein petitioners might have had the right to dismiss the therein respondent from work, the
abusive manner in which that right was exercised amounted to a legal wrong for which the petitioners
must be held liable.
One of the more notable innovations of the New Civil Code is the codification of "some basic principles
that are to be observed for the rightful relationship between human beings and for the stability of the
social order." [REPORT ON THE CODE COMMISSION ON THE PROPOSED CIVIL CODE OF THE PHILIPPINES,
p. 39]. The framers of the Code, seeking to remedy the defect of the old Code which merely stated the
effects of the law, but failed to draw out its spirit, incorporated certain fundamental precepts which
were "designed to indicate certain norms that spring from the fountain of good conscience" and which
were also meant to serve as "guides for human conduct [that] should run as golden threads through
society, to the end that law may approach its supreme ideal, which is the sway and dominance of
justice" (Id.) Foremost among these principles is that pronounced in Article 19 which provides:
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.
This article, known to contain what is commonly referred to as the principle of abuse of rights, sets
certain standards which must be observed not only in the exercise of one's rights but also in the
performance of one's duties. These standards are the following: to act with justice; to give everyone
his due; and to observe honesty and good faith. The law, therefore, recognizes a primordial limitation
on all rights; that in their exercise, the norms of human conduct set forth in Article 19 must be
observed. A right, though by itself legal because recognized or granted by law as such, may

nevertheless become the source of some illegality. When a right is exercised in a manner which
does not conform with the norms enshrined in Article 19 and results in damage to another, a legal
wrong is thereby committed for which the wrongdoer must be held responsible. But while Article 19
lays down a rule of conduct for the government of human relations and for the maintenance of social
order, it does not provide a remedy for its violation. Generally, an action for damages under either
Article 20 or Article 21 would be proper.[18] Emphasis and underscoring supplied).
As for GF Equitys defense of laches on account of Valenzonas invocation of his right under the
contract only after the lapse of six years, the same fails.
Laches has been defined as the failure or neglect for an unreasonable and unexplained length of
time to do that which by exercising due diligence, could or should have been done earlier, thus giving
rise to a presumption that the party entitled to assert it either has abandoned or declined to assert it.
It is not concerned with mere lapse of time; the fact of delay, standing alone, is insufficient to
constitute laches.[19]
Laches applies in equity, whereas prescription applies at law. Our courts are basically courts of
law, not courts of equity. Laches cannot thus be invoked to evade the enforcement of an existing legal
right. Equity, which has been aptly described as a justice outside legality, is applied only in the
absence of, and never against, statutory law. Aequetas nunquam contravenit legis.Thus, where the
claim was filed within the statutory period of prescription, recovery therefor cannot be barred by
laches. The doctrine of laches should never be applied earlier than the expiration of time limited for
the commencement of actions at law,[20] unless, as a general rule, inexcusable delay in asserting a right
and acquiescense in existing conditions are proven.[21] GF Equity has not proven, nay alleged, these.
Under Article 1144[22] of the New Civil Code, an action upon a written contract must be brought
within 10 years from the time the right of action accrues. Since the action filed by Valenzona is an
action for breach upon a written contract, his filing of the case 6 years from the date his cause of
action arose was well within the prescriptive period, hence, the defense of laches would not, under the
circumstances, lie.
Consequently, Valenzona is entitled to recover actual damages his salary which he should have
received from the time his services were terminated up to the time the employment contract
expired.[23]
As for moral damages which the appellate court awarded, Article 2220 of the New Civil Code
allows such award to breaches of contract where the defendant acted fraudulently or in bad faith.
Malice or bad faith implies a conscious and intentional design to do a wrongful act for a dishonest
purpose or moral obliquity. It contemplates a state of mind affirmatively operating with furtive design
or ill-will.[24] Bad faith means a breach of a known duty through some motive of interest or ill will. It
must, however, be substantiated by evidence. Bad faith under the law cannot be presumed, it must be
established by clear and convincing evidence.
As earlier stated, however, the pre-termination of the contract was not willful as GF Equity based
it on a provision therein which is void. Malice or bad faith cannot thus be ascribed to GF Equity.
The unbroken jurisprudence is that in breach of contract cases where a party is not shown to have
acted fraudulently or in bad faith, liability for damages is limited to the natural and probable
consequences of the breach of the obligation which the parties had foreseen or could reasonably have
foreseen. The damages, however, do not include moral damages.[25]
The award by the appellate court of moral damages must thus be set aside. And so must the award
of exemplary damages, absent a showing that GF Equity acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner.[26]
The award to Valenzona of attorneys fees must remain, however, GF Equity having refused to pay
the balance of Valenzonas salaries to which he was, under the facts and circumstances of the case,
entitled under the contract, thus compelling him to litigate to protect his interest.[27]

WHEREFORE, the decision of the Court of Appeals dated October 14, 2002 is hereby SET ASIDE and
another rendered declaring the assailed provision of the contract NULL AND VOID and ORDERING
petitioner, GF Equity, to pay private respondent, Arturo Valenzona, actual damages in the amount
of P525,000.00 and attorneys fees in the amount of P60,000.00.
Costs against petitioner.
SO ORDERED.

D. Relativity, Exceptions (Arts. 1311, 1312, 1313, 1314)

Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where
the rights and obligations arising from the contract are not transmissible by their nature, or by
stipulation or by provision of law. The heir is not liable beyond the value of the property he received
from the decedent.
If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment
provided he communicated his acceptance to the obligor before its revocation. A mere incidental
benefit or interest of a person is not sufficient. The contracting parties must have clearly and
deliberately conferred a favor upon a third person. (1257a)
Art. 1312. In contracts creating real rights, third persons who come into possession of the object of the
contract are bound thereby, subject to the provisions of the Mortgage Law and the Land Registration
Laws. (n)
Art. 1313. Creditors are protected in cases of contracts intended to defraud them. (n)
Art. 1314. Any third person who induces another to violate his contract shall be liable for damages to
the other contracting party. (n)

Cases:

FIRST DIVISION
[G.R. No. 118248. April 5, 2000]
DKC HOLDINGS CORPORATION, petitioner, vs. COURT OF APPEALS, VICTOR U. BARTOLOME and
REGISTER OF DEEDS FOR METRO MANILA, DISTRICT III, respondents. francis
DECISION
YNARES_SANTIAGO, J.:
This is a petition for review on certiorari seeking the reversal of the December 5, 1994 Decision of the
Court of Appeals in CA-G.R. CV No. 40849 entitled "DKC Holdings Corporation vs. Victor U. Bartolome,
et al.",[1] affirming in toto the January 4, 1993 Decision of the Regional Trial Court of Valenzuela,

Branch 172,[2] which dismissed Civil Case No. 3337-V-90 and ordered petitioner to pay P30,000.00 as
attorneys fees.
The subject of the controversy is a 14,021 square meter parcel of land located in Malinta, Valenzuela,
Metro Manila which was originally owned by private respondent Victor U. Bartolomes deceased mother,
Encarnacion Bartolome, under Transfer Certificate of Title No. B-37615 of the Register of Deeds of
Metro Manila, District III. This lot was in front of one of the textile plants of petitioner and, as such,
was seen by the latter as a potential warehouse site.
On March 16, 1988, petitioner entered into a Contract of Lease with Option to Buy with Encarnacion
Bartolome, whereby petitioner was given the option to lease or lease with purchase the subject land,
which option must be exercised within a period of two years counted from the signing of the Contract.
In turn, petitioner undertook to pay P3,000.00 a month as consideration for the reservation of its
option. Within the two-year period, petitioner shall serve formal written notice upon the lessor
Encarnacion Bartolome of its desire to exercise its option. The contract also provided that in case
petitioner chose to lease the property, it may take actual possession of the premises. In such an event,
the lease shall be for a period of six years, renewable for another six years, and the monthly rental fee
shall be P15,000.00 for the first six years and P18,000.00 for the next six years, in case of renewal.
Petitioner regularly paid the monthly P3,000.00 provided for by the Contract to Encarnacion until her
death in January 1990. Thereafter, petitioner coursed its payment to private respondent Victor
Bartolome, being the sole heir of Encarnacion. Victor, however, refused to accept these payments. iska
Meanwhile, on January 10, 1990, Victor executed an Affidavit of Self-Adjudication over all the
properties of Encarnacion, including the subject lot. Accordingly, respondent Register of Deeds
cancelled Transfer Certificate of Title No. B-37615 and issued Transfer Certificate of Title No. V-14249
in the name of Victor Bartolome.
On March 14, 1990, petitioner served upon Victor, via registered mail, notice that it was exercising its
option to lease the property, tendering the amount of P15,000.00 as rent for the month of March.
Again, Victor refused to accept the tendered rental fee and to surrender possession of the property to
petitioner.
Petitioner thus opened Savings Account No. 1-04-02558-I-1 with the China Banking Corporation, Cubao
Branch, in the name of Victor Bartolome and deposited therein the P15,000.00 rental fee for March as
well as P6,000.00 reservation fees for the months of February and March.
Petitioner also tried to register and annotate the Contract on the title of Victor to the property.
Although respondent Register of Deeds accepted the required fees, he nevertheless refused to register
or annotate the same or even enter it in the day book or primary register.
Thus, on April 23, 1990, petitioner filed a complaint for specific performance and damages against
Victor and the Register of Deeds,[3] docketed as Civil Case No. 3337-V-90 which was raffled off to
Branch 171 of the Regional Trial Court of Valenzuela. Petitioner prayed for the surrender and delivery
of possession of the subject land in accordance with the Contract terms; the surrender of title for
registration and annotation thereon of the Contract; and the payment of P500,000.00 as actual
damages, P500,000.00 as moral damages, P500,000.00 as exemplary damages and P300,000.00 as
attorneys fees.
Meanwhile, on May 8, 1990, a Motion for Intervention with Motion to Dismiss [4] was filed by one Andres
Lanozo, who claimed that he was and has been a tenant-tiller of the subject property, which was
agricultural riceland, for forty-five years. He questioned the jurisdiction of the lower court over the

property and invoked the Comprehensive Agrarian Reform Law to protect his rights that would be
affected by the dispute between the original parties to the case. ella
On May 18, 1990, the lower court issued an Order[5] referring the case to the Department of Agrarian
Reform for preliminary determination and certification as to whether it was proper for trial by said
court.
On July 4, 1990, the lower court issued another Order[6] referring the case to Branch 172 of the RTC of
Valenzuela which was designated to hear cases involving agrarian land, after the Department of
Agrarian Reform issued a letter-certification stating that referral to it for preliminary determination is
no longer required.
On July 16, 1990, the lower court issued an Order denying the Motion to Intervene, [7] holding that
Lanozos rights may well be ventilated in another proceeding in due time.
After trial on the merits, the RTC of Valenzuela, branch 172 rendered its Decision on January 4, 1993,
dismissing the Complaint and ordering petitioner to pay Victor P30,000.00 as attorneys fees. On appeal
to the CA, the Decision was affirmed in toto.
Hence, the instant Petition assigning the following errors:
(A)
FIRST ASSIGNMENT OF ERROR
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE PROVISION ON THE
NOTICE TO EXERCISE OPTION WAS NOT TRANSMISSIBLE.
(B)
SECOND ASSIGNMENT OF ERROR
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE NOTICE OF OPTION
MUST BE SERVED BY DKC UPON ENCARNACION BARTOLOME PERSONALLY.
(C) nigel
THIRD ASSIGNMENT OF ERROR
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE CONTRACT WAS ONESIDED AND ONEROUS IN FAVOR OF DKC.
(D)
FOURTH ASSIGNMENT OF ERROR
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE EXISTENCE OF A
REGISTERED TENANCY WAS FATAL TO THE VALIDITY OF THE CONTRACT.
(E)

FIFTH ASSIGNMENT OF ERROR

THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT PLAINTIFF-APPELLANT
WAS LIABLE TO DEFENDANT-APPELLEE FOR ATTORNEYS FEES.[8]
The issue to be resolved in this case is whether or not the Contract of Lease with Option to Buy entered
into by the late Encarnacion Bartolome with petitioner was terminated upon her death or whether it
binds her sole heir, Victor, even after her demise.
Both the lower court and the Court of Appeals held that the said contract was terminated upon the
death of Encarnacion Bartolome and did not bind Victor because he was not a party thereto.
Article 1311 of the Civil Code provides, as follows"ART. 1311. Contracts take effect only between the parties, their assigns and heirs,
except in case where the rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by provision of law. The heir is not
liable beyond the value of the property he received from the decedent. brnado
x x x x x x x x x."
The general rule, therefore, is that heirs are bound by contracts entered into by their predecessors-ininterest except when the rights and obligations arising therefrom are not transmissible by (1) their
nature, (2) stipulation or (3) provision of law.
In the case at bar, there is neither contractual stipulation nor legal provision making the rights and
obligations under the contract intransmissible. More importantly, the nature of the rights and
obligations therein are, by their nature, transmissible.
The nature of intransmissible rights as explained by Arturo Tolentino, an eminent civilist, is as follows:
"Among contracts which are intransmissible are those which are purely personal, either
by provision of law, such as in cases of partnerships and agency, or by the very nature
of the obligations arising therefrom, such as those requiring special personal
qualifications of the obligor. It may also be stated that contracts for the payment of
money debts are not transmitted to the heirs of a party, but constitute a charge
against his estate. Thus, where the client in a contract for professional services of a
lawyer died, leaving minor heirs, and the lawyer, instead of presenting his claim for
professional services under the contract to the probate court, substituted the minors as
parties for his client, it was held that the contract could not be enforced against the
minors; the lawyer was limited to a recovery on the basis of quantum meruit."[9]
In American jurisprudence, "(W)here acts stipulated in a contract require the exercise of special
knowledge, genius, skill, taste, ability, experience, judgment, discretion, integrity, or other personal
qualification of one or both parties, the agreement is of a personal nature, and terminates on the
death of the party who is required to render such service."[10] marinella
It has also been held that a good measure for determining whether a contract terminates upon the
death of one of the parties is whether it is of such a character that it may be performed by the
promissors personal representative. Contracts to perform personal acts which cannot be as well
performed by others are discharged by the death of the promissor. Conversely, where the service or
act is of such a character that it may as well be performed by another, or where the contract, by its

terms, shows that performance by others was contemplated, death does not terminate the contract or
excuse nonperformance.[11]
In the case at bar, there is no personal act required from the late Encarnacion Bartolome. Rather, the
obligation of Encarnacion in the contract to deliver possession of the subject property to petitioner
upon the exercise by the latter of its option to lease the same may very well be performed by her heir
Victor.
As early as 1903, it was held that "(H)e who contracts does so for himself and his heirs." [12] In 1952, it
was ruled that if the predecessor was duty-bound to reconvey land to another, and at his death the
reconveyance had not been made, the heirs can be compelled to execute the proper deed for
reconveyance. This was grounded upon the principle that heirs cannot escape the legal consequence of
a transaction entered into by their predecessor-in-interest because they have inherited the property
subject to the liability affecting their common ancestor.[13]
It is futile for Victor to insist that he is not a party to the contract because of the clear provision of
Article 1311 of the Civil Code. Indeed, being an heir of Encarnacion, there is privity of interest
between him and his deceased mother. He only succeeds to what rights his mother had and what is
valid and binding against her is also valid and binding as against him. [14] This is clear fromParaaque
Kings Enterprises vs. Court of Appeals,[15] where this Court rejected a similar defense-alonzo
With respect to the contention of respondent Raymundo that he is not privy to the
lease contract, not being the lessor nor the lessee referred to therein, he could thus
not have violated its provisions, but he is nevertheless a proper party. Clearly, he
stepped into the shoes of the owner-lessor of the land as, by virtue of his purchase, he
assumed all the obligations of the lessor under the lease contract. Moreover, he
received benefits in the form of rental payments. Furthermore, the complaint, as well
as the petition, prayed for the annulment of the sale of the properties to him. Both
pleadings also alleged collusion between him and respondent Santos which defeated
the exercise by petitioner of its right of first refusal.
In order then to accord complete relief to petitioner, respondent Raymundo was a
necessary, if not indispensable, party to the case. A favorable judgment for the
petitioner will necessarily affect the rights of respondent Raymundo as the buyer of the
property over which petitioner would like to assert its right of first option to buy.
In the case at bar, the subject matter of the contract is likewise a lease, which is a property right. The
death of a party does not excuse nonperformance of a contract which involves a property right, and
the rights and obligations thereunder pass to the personal representatives of the deceased. Similarly,
nonperformance is not excused by the death of the party when the other party has a property interest
in the subject matter of the contract.[16]
Under both Article 1311 of the Civil Code and jurisprudence, therefore, Victor is bound by the subject
Contract of Lease with Option to Buy.
That being resolved, we now rule on the issue of whether petitioner had complied with its obligations
under the contract and with the requisites to exercise its option. The payment by petitioner of the
reservation fees during the two-year period within which it had the option to lease or purchase the
property is not disputed. In fact, the payment of such reservation fees, except those for February and
March, 1990 were admitted by Victor.[17] This is clear from the transcripts, to wit"ATTY. MOJADO:

One request, Your Honor. The last payment which was allegedly made in January 1990
just indicate in that stipulation that it was issued November of 1989 and postdated
Janaury 1990 and then we will admit all. rodp;fo
COURT:
All reservation fee?
ATTY. MOJADO:
Yes, Your Honor.
COURT:
All as part of the lease?
ATTY. MOJADO:
Reservation fee, Your Honor. There was no payment with respect to payment of
rentals."[18]
Petitioner also paid the P15,000.00 monthly rental fee on the subject property by depositing the same
in China Bank Savings Account No. 1-04-02558-I-1, in the name of Victor as the sole heir of Encarnacion
Bartolome,[19] for the months of March to July 30, 1990, or a total of five (5) months, despite the
refusal of Victor to turn over the subject property.[20]
Likewise, petitioner complied with its duty to inform the other party of its intention to exercise its
option to lease through its letter dated Match 12, 1990,[21] well within the two-year period for it to
exercise its option. Considering that at that time Encarnacion Bartolome had already passed away, it
was legitimate for petitioner to have addressed its letter to her heir.
It appears, therefore, that the exercise by petitioner of its option to lease the subject property was
made in accordance with the contractual provisions. Concomitantly, private respondent Victor
Bartolome has the obligation to surrender possession of and lease the premises to petitioner for a
period of six (6) years, pursuant to the Contract of Lease with Option to Buy. micks
Coming now to the issue of tenancy, we find that this is not for this Court to pass upon in the present
petition. We note that the Motion to Intervene and to Dismiss of the alleged tenant, Andres Lanozo,
was denied by the lower court and that such denial was never made the subject of an appeal. As the
lower court stated in its Order, the alleged right of the tenant may well be ventilated in another
proceeding in due time.
WHEREFORE, in view of the foregoing, the instant Petition for Review is GRANTED. The Decision of the
Court of Appeals in CA-G.R. CV No. 40849 and that of the Regional Trial Court of Valenzuela in Civil
Case No. 3337-V-90 are both SET ASIDE and a new one rendered ordering private respondent Victor
Bartolome to:
(a) surrender and deliver possession of that parcel of land covered by Transfer
Certificate of Title No. V-14249 by way of lease to petitioner and to perform all
obligations of his predecessor-in-interest, Encarnacion Bartolome, under the subject
Contract of Lease with Option to Buy;

(b) surrender and deliver his copy of Transfer Certificate of Title No. V-14249 to
respondent Register of Deeds for registration and annotation thereon of the subject
Contract of Lease with Option to Buy;
(c) pay costs of suit. Sc
Respondent Register of Deeds is, accordingly, ordered to register and annotate the subject Contract of
Lease with Option to Buy at the back of Transfer Certificate of Title No. V-14249 upon submission by
petitioner of a copy thereof to his office.
SO ORDERED.

THIRD DIVISION

[G.R. No. 119850. June 20, 1996]

MANDARIN
VILLA,
INC., petitioner,
JESUS, respondents.

vs. COURT

OF

APPEALS

and

CLODUALDO

DE

RESOLUTION
FRANCISCO, J.:
With ample evidentiary support are the following antecedent facts:
In the evening of October 19, 1989, private respondent, Clodualdo de Jesus, a practicing lawyer
and businessman, hosted a dinner for his friends at the petitioner's restaurant the Mandarin Villa
Seafoods Village, Greenhills, Mandaluyong City. After dinner the waiter handed to him the bill in the
amount of P2,658.50. Private respondent offered to pay the bill through his credit card issued by
Philippine Commercial Credit Card Inc. (BANKARD). This card was accepted by the waiter who
immediately proceeded to the restaurant's cashier for card verification. Ten minutes later, however,
the waiter returned and audibly informed private respondent that his credit card had expired. [1] Private
respondent remonstrated that said credit card had yet to expire on September 1990, as embossed on
its face.[2] The waiter was unmoved, thus, private respondent and two of his guests approached the
restaurant's cashier who again passed the credit card over the verification computer. The same
information was produced, i.e., CARD EXPIRED. Private respondent and his guests returned to their
table and at this juncture, Professor Lirag, another guest, uttered the following remarks: "Clody
[referring to Clodualdo de Jesus], may problema ba? Baka kailangang maghugas na kami ng
pinggan?"[3] Thereupon, private respondent left the restaurant and got his BPI Express Credit Card from
his car and offered it to pay their bill. This was accepted and honored by the cashier after
verification.[4] Petitioner and his companions left afterwards.
The incident triggered the filing of a suit for damages by private respondent. Following a full-dress
trial, judgment was rendered directing the petitioner and BANKARD to pay jointly and severally the
private respondent: (a) moral damages in the amount of P250,000.00; (b) exemplary damages in the
amount of P100,000.00; and (c) attorney's fees and litigation expenses in the amount of P50,000.00.
Both the petitioner and BANKARD appealed to the respondent Court of Appeals which rendered a
decision, thus:

"WHEREFORE, the decision appealed from is hereby MODIFIED by:

1. Finding appellant MANDARIN solely responsible for damages in favor of appellee;
2. Absolving appellant BANKARD of any responsibility for damages;
3. Reducing moral damages awarded to appellee to TWENTY FIVE THOUSAND and 00/100 (P25,000.00)
PESOS;
4. Reducing exemplary damages awarded to appellee to TEN THOUSAND and 00/100 (P10,000.00)
PESOS;
5. Reversing and setting aside the award of P50,000.00 for attorney's fees as well as interest awarded;
and
6. AFFIRMING the dismissal of all counterclaims and cross-claims.
Costs against appellant Mandarin.
SO ORDERED."[5]
Mandarin Villa, thus, interposed this present petition, faulting the respondent court with six (6)
assigned errors which may be reduced to the following issues, to wit: (1) whether or not petitioner is
bound to accept payment by means of credit card; (2) whether or not petitioner is negligent under the
circumstances obtaining in this case; and (3) if negligent, whether or not such negligence is the
proximate cause of the private respondent's damage.
Petitioner contends that it cannot be faulted for its cashier's refusal to accept private respondent's
BANKARD credit card, the same not being a legal tender. It argues that private respondent's offer to
pay by means of credit card partook of the nature of a proposal to novate an existing obligation for
which petitioner, as creditor, must first give its consent otherwise there will be no binding contract
between them. Petitioner cannot seek refuge behind this averment.
We note that Mandarin Villa Seafood Village is affiliated with BANKARD. In fact, an
"Agreement"[6] entered into by petitioner and BANKARD dated June 23, 1989, provides inter alia:
"The MERCHANT shall honor validly issued PCCCI credit cards presented by their corresponding holders
in the purchase of goods and/or services supplied by it provided that the card expiration date has not
elapsed and the card number does not appear on the latest cancellation bulletin of lost, suspended and
cancelled PCCCI credit cards and, no signs of tampering, alterations or irregularities appear on the face
of the credit card."[7]
While private respondent may not be a party to the said agreement, the above-quoted stipulation
conferred a favor upon the private respondent, a holder of credit card validly issued by BANKARD. This
stipulation is a stipulation pour autri and under Article 1311 of the Civil Code private respondent may
demand its fulfillment provided he communicated his acceptance to the petitioner before its
revocation.[8] In this case, private respondent's offer to pay by means of his BANKARD credit card
constitutes not only an acceptance of the said stipulation but also an explicit communication of his
acceptance to the obligor.
In addition, the record shows that petitioner posted a logo inside Mandarin Villa Seafood Village
stating that "Bankard is accepted here."[9] This representation is conclusive upon the petitioner which it
cannot deny or disprove as against the private respondent, the party relying thereon. Petitioner,

therefore, cannot disclaim its obligation to accept private respondent's BANKARD credit card without
violating the equitable principle of estoppel.[10]
Anent the second issue, petitioner insists that it is not negligent. In support thereof, petitioner
cites its good faith in checking, not just once but twice, the validity of the aforementioned credit card
prior to its dishonor. It argues that since the verification machine flashed an information that the
credit card has expired, petitioner could not be expected to honor the same much less be adjudged
negligent for dishonoring it. Further, petitioner asseverates that it only followed the guidelines and
instructions issued by BANKARD in dishonoring the aforementioned credit card. The argument is
untenable.
The test for determining the existence of negligence in a particular case may be stated as
follows: Did the defendant in doing the alleged negligent act use the reasonable care and caution
which an ordinary prudent person would have used in the same situation? If not, then he is guilty of
negligence.[11] The Point of Sale (POS) Guidelines which outlined the steps that petitioner must follow
under the circumstances provides:
"x x x x x x x x x
"CARD EXPIRED
a. Check expiry date on card.
b. If unexpired, refer to CB.
b.1. If valid, honor up to maximum of SPL only.
b.2. If in CB as Lost, do procedures 2a to 2e.,
b.3. If in CB as Suspended/Cancelled, do not honor card.
c. If expired, do not honor card."[12]
A cursory reading of said rule reveals that whenever the words CARD EXPIRED flashes on the screen
of the verification machine, petitioner should check the credit card's expiry date embossed on the card
itself. If unexpired, petitioner should honor the card provided it is not invalid, cancelled or otherwise
suspended. But if expired, petitioner should not honor the card. In this case, private respondent's
BANKARD credit card has an embossed expiry date of September 1990. [13] Clearly, it has not yet expired
on October 19,1989, when the same was wrongfully dishonored by the petitioner. Hence, petitioner did
not use the reasonable care and caution which an ordinary prudent person would have used in the same
situation and as such petitioner is guilty of negligence. In this connection, we quote with approval the
following observations of the respondent Court.
"Mandarin argues that based on the POS Guidelines (supra), it has three options in case the
verification machine flashes 'CARD EXPIRED.' It chose to exercise option (c) by not honoring appellee's
credit card. However, appellant apparently intentionally glossed over option '(a) Check expiry date on
card" (id.) which would have shown without any shadow of doubt that the expiry date embossed on the
BANKARD was 'SEP 90.' (Exhibit "D".) A cursory look at the appellee's BANKARD would also reveal that
appellee had been as of that date a cardholder since 1982, a fact which would have entitled the
customer the courtesy of better treatment."[14]
Petitioner, however, argues that private respondent's own negligence in not bringing with him
sufficient cash was the proximate cause of his damage. It likewise sought exculpation by contending
that the remark of Professor Lirag[15] is a supervening event and at the same time the proximate cause
of private respondent's injury.

We find this contention also devoid of merit. While it is true that private respondent did not have
sufficient cash on hand when he hosted a dinner at petitioner's restaurant, this fact alone does not
constitute negligence on his part. Neither can it be claimed that the same was the proximate cause of
private respondent's damage. We take judicial notice[16] of the current practice among major
establishments, petitioner included, to accept payment by means of credit cards in lieu of cash. Thus,
petitioner accepted private respondent's BPI Express Credit Card after verifying its validity,[17] a fact
which all the more refutes petitioner's imputation of negligence on the private respondent.
Neither can we conclude that the remark of Professor Lirag was a supervening event and the
proximate cause of private respondent's injury. The humiliation and embarrassment of the private
respondent was brought about not by such a remark of Professor Lirag but by the fact of dishonor by
the petitioner of private respondent's valid BANKARD credit card. If at all, the remark of Professor Lirag
served only to aggravate the embarrassment then felt by private respondent, albeit silently within
himself.
WHEREFORE, the instant petition is hereby DISMISSED.
SO ORDERED.

THIRD DIVISION

[G.R. No. 119107. March 18, 2005]

JOSE

V. LAGON, petitioner, vs. HONORABLE

LAPUZ, respondents.

COURT

OF

APPEALS

and

MENANDRO

V.

DECISION
CORONA, J.:
On June 23, 1982, petitioner Jose Lagon purchased from the estate of Bai Tonina Sepi, through an
intestate court,[1] two parcels of land located at Tacurong, Sultan Kudarat. A few months after the
sale, private respondent Menandro Lapuz filed a complaint for torts and damages against petitioner
before the Regional Trial Court (RTC) of Sultan Kudarat.
In the complaint, private respondent, as then plaintiff, claimed that he entered into a contract of
lease with the late Bai Tonina Sepi Mengelen Guiabar over three parcels of land (the property) in Sultan
Kudarat, Maguindanao beginning 1964. One of the provisions agreed upon was for private respondent to
put up commercial buildings which would, in turn, be leased to new tenants. The rentals to be paid by
those tenants would answer for the rent private respondent was obligated to pay Bai Tonina Sepi for
the lease of the land. In 1974, the lease contract ended but since the construction of the commercial
buildings had yet to be completed, the lease contract was allegedly renewed.
When Bai Tonina Sepi died, private respondent started remitting his rent to the court-appointed
administrator of her estate. But when the administrator advised him to stop collecting rentals from the
tenants of the buildings he constructed, he discovered that petitioner, representing himself as the new
owner of the property, had been collecting rentals from the tenants. He thus filed a complaint against
the latter, accusing petitioner of inducing the heirs of Bai Tonina Sepi to sell the property to him,
thereby violating his leasehold rights over it.
In his answer to the complaint, petitioner denied that he induced the heirs of Bai Tonina to sell
the property to him, contending that the heirs were in dire need of money to pay off the obligations of

the deceased. He also denied interfering with private respondents leasehold rights as there was no
lease contract covering the property when he purchased it; that his personal investigation and inquiry
revealed no claims or encumbrances on the subject lots.
Petitioner claimed that before he bought the property, he went to Atty. Benjamin Fajardo, the
lawyer who allegedly notarized the lease contract between private respondent and Bai Tonina Sepi, to
verify if the parties indeed renewed the lease contract after it expired in 1974. Petitioner averred that
Atty. Fajardo showed him four copies of the lease renewal but these were all unsigned. To refute the
existence of a lease contract, petitioner presented in court a certification from the Office of the Clerk
of Court confirming that no record of any lease contract notarized by Atty. Fajardo had been entered
into their files. Petitioner added that he only learned of the alleged lease contract when he was
informed that private respondent was collecting rent from the tenants of the building.
Finding the complaint for tortuous interference to be unwarranted, petitioner filed his
counterclaim and prayed for the payment of actual and moral damages.
On July 29, 1986, the court a quo found for private respondent (plaintiff below):
ACCORDINGLY, judgment is hereby rendered in favor of the plaintiff:
1.

Declaring the Contract of Lease executed by Bai Tonina Sepi Mangelen Guiabar in
favor of the plaintiff on November 6, 1974 (Exh. A and A-1) over Lot No. 6395, Pls-73.
Lot No 6396. Pls.-73. Lot No. 6399. 3ls-73, and Lot no.9777-A. CSD-11-000076-D (Lot
No. 3-A. 40124), all situated along Ledesma St., Tacurong, Sultan Kudarat, which
document was notarized by Atty. Benjamin S. Fajardo, Sr. and entered into his
notarial register as Doc. No. 619. Page No. 24. Book No. II. Series of 1974, to be
authentic and genuine and as such valid and binding for a period of ten (10) years
specified thereon from November 1, 1974 up to October 31, 1984;

2.

Declaring the plaintiff as the lawful owner of the commercial buildings found on the
aforesaid lots and he is entitled to their possession and the collection (of rentals) of
the said commercial buildings within the period covered by this Contract of Lease in
his favor;

3.

Ordering the defendant to pay to the plaintiff the following:

a)

Rentals of the commercial buildings on the lots covered by the Contract of Lease
in favor of the plaintiff for the period from October 1, 1978 up to October 31,
1984, including accrued interests in the total amount of Five Hundred Six
Thousand Eight Hundred Five Pesos and Fifty Six Centavos (P506, 850.56), the
same to continue to bear interest at the legal rate of 12% per annum until the
whole amount is fully paid by the defendant to the plaintiff;

b)

Moral damages in the amount of One Million Sixty Two Thousand Five Hundred
Pesos (P1,062,500.00);

c)

Actual or compensatory damages in the amount of Three Hundred Twelve

Thousand Five Hundred Pesos (P312, 500.00);

d)

Exemplary or corrective damages in the amount of One Hundred Eighty

Thousand Five Hundred Pesos (P187,500.00)

e)

Temperate or moderate damages in the amount of Sixty Two Thousand Five

Hundred Pesos (P62,500.00);

4.

f)

Nominal damages in the amount of Sixty Two Thousand Five Hundred Pesos
(P62,500.00);

g)

Attorneys fees in the amount of One Hundred Twenty Five Thousand Pesos
(P125,000.00);

h)

Expenses of litigation in the amount of Sixty Two Thousand Five Hundred Pesos
(P62,500.00);

i)

Interest on the moral damages, actual or compensatory damages temperate or

moderate damages, nominal damages, attorneys fees and expenses of litigation in
the amounts as specified hereinabove from May 24, 1982 up to June 27, 1986, in
the total amount of Nine Hundred Thousand Pesos (P900,000.00); all of which will
continue to bear interests at a legal rate of 12% per annum until the whole
amounts are fully paid by the defendants to the plaintiffs;

For failure of the defendant to deposit with this Court all the rentals he had
collected from the thirteen (13) tenants or occupants of the commercial buildings in
question, the plaintiff is hereby restored to the possession of his commercial buildings
for a period of seventy-three (73) months which is the equivalent of the total period
for which he was prevented from collecting the rentals from the tenants or occupants
of his commercial buildings from October 1, 1978 up to October 31, 1984, and for this
purpose a Writ of Preliminary Injunction is hereby issued, but the plaintiff is likewise
ordered to pay to the defendant the monthly rental of Seven Hundred Pesos (P700.00)
every end of the month for the entire period of seventy three (73) months. This
portion of the judgment should be considered as a mere alternative should the
defendant fail to pay the amount of Five Hundred Five Pesos and Fifty Six Centavos
(P506,805.56) hereinabove specified;

5.

Dismissing the counterclaim interposed by the defendant for lack of merit;

6.

With costs against the defendant.[2]

Petitioner appealed the judgment to the Court of Appeals.[3] In a decision dated January 31,
1995,[4] the appellate court modified the assailed judgment of the trial court as follows:
a)
The award for moral damages, compensatory damages, exemplary
damages, temperate or moderate damages, and nominal damages as well as expenses of
litigation in the amount of P62,500.00 and interests under paragraph 3-a(a), (b), (c), (d),
(e), (f), (g), (h), and (i) are deleted;
b)

The award for attorneys fees is reduced to P30,000.00;

c)

Paragraphs 1,2,5 and 6 are AFFIRMED;

d)
Additionally, the defendant is hereby ordered to pay to the plaintiff
by way of actual damages the sum of P178,425.00 representing the amount of rentals he
collected from the period of October 1978 to August 1983, and minus the amount
of P42,700.00 representing rentals due the defendant computed at P700.00 per month
for the period from August 1978 to August 1983, with interest thereon at the rate until
the same is fully paid;
e)

Paragraph 4 is deleted.[5]

Before the appellate court, petitioner disclaimed knowledge of any lease contract between the
late Bai Tonina Sepi and private respondent. On the other hand, private respondent insisted that it was
impossible for petitioner not to know about the contract since the latter was aware that he was
collecting rentals from the tenants of the building. While the appellate court disbelieved the

contentions of both parties, it nevertheless held that, for petitioner to become liable for damages, he
must have known of the lease contract and must have also acted with malice or bad faith when he
bought the subject parcels of land.
Via this petition for review, petitioner cites the following reasons why the Court should rule in his
favor:
1. The Honorable Court of Appeals seriously erred in holding that petitioner is liable for
interference of contractual relation under Article 1314 of the New Civil Code;
2. The Honorable Court of Appeals erred in not holding that private respondent is precluded
from recovering, if at all, because of laches;
3. The Honorable Court of Appeals erred in holding petitioner liable for actual damages and
attorneys fees, and;
4. The Honorable Court of Appeals erred in dismissing petitioners counterclaims. [6]
Article 1314 of the Civil Code provides that any third person who induces another to violate his
contract shall be liable for damages to the other contracting party. The tort recognized in that
provision is known as interference with contractual relations.[7] The interference is penalized because
it violates the property rights of a party in a contract to reap the benefits that should result
therefrom.[8]
The core issue here is whether the purchase by petitioner of the subject property, during the
supposed existence of private respondents lease contract with the late Bai Tonina Sepi, constituted
tortuous interference for which petitioner should be held liable for damages.
The Court, in the case of So Ping Bun v. Court of Appeals,[9] laid down the elements of tortuous
interference with contractual relations: (a) existence of a valid contract; (b) knowledge on the part of
the third person of the existence of the contract and (c) interference of the third person without legal
justification or excuse. In that case, petitioner So Ping Bun occupied the premises which the
corporation of his grandfather was leasing from private respondent, without the knowledge and
permission of the corporation. The corporation, prevented from using the premises for its business,
sued So Ping Bun for tortuous interference.
As regards the first element, the existence of a valid contract must be duly established. To prove
this, private respondent presented in court a notarized copy of the purported lease renewal. [10]While
the contract appeared as duly notarized, the notarization thereof, however, only proved its due
execution and delivery but not the veracity of its contents. Nonetheless, after undergoing the rigid
scrutiny of petitioners counsel and after the trial court declared it to be valid and subsisting, the
notarized copy of the lease contract presented in court appeared to be incontestable proof that private
respondent and the late Bai Tonina Sepi actually renewed their lease contract. Settled is the rule that
until overcome by clear, strong and convincing evidence, a notarized document continues to be prima
facie evidence of the facts that gave rise to its execution and delivery. [11]
The second element, on the other hand, requires that there be knowledge on the part of the
interferer that the contract exists. Knowledge of the subsistence of the contract is an essential
element to state a cause of action for tortuous interference. [12] A defendant in such a case cannot be
made liable for interfering with a contract he is unaware of.[13] While it is not necessary to prove actual
knowledge, he must nonetheless be aware of the facts which, if followed by a reasonable inquiry, will
lead to a complete disclosure of the contractual relations and rights of the parties in the contract. [14]
In this case, petitioner claims that he had no knowledge of the lease contract. His sellers (the
heirs of Bai Tonina Sepi) likewise allegedly did not inform him of any existing lease contract.
After a careful perusal of the records, we find the contention of petitioner meritorious. He
conducted his own personal investigation and inquiry, and unearthed no suspicious circumstance that
would have made a cautious man probe deeper and watch out for any conflicting claim over the

property. An examination of the entire propertys title bore no indication of the leasehold interest of
private respondent. Even the registry of property had no record of the same.[15]
Assuming ex gratia argumenti that petitioner knew of the contract, such knowledge alone was not
sufficient to make him liable for tortuous interference. Which brings us to the third element. According
to our ruling in So Ping Bun, petitioner may be held liable only when there was no legal justification or
excuse for his action[16] or when his conduct was stirred by a wrongful motive. To sustain a case for
tortuous interference, the defendant must have acted with malice[17] or must have been driven by
purely impious reasons to injure the plaintiff. In other words, his act of interference cannot be
justified.[18]
Furthermore, the records do not support the allegation of private respondent that petitioner
induced the heirs of Bai Tonina Sepi to sell the property to him. The word induce refers to situations
where a person causes another to choose one course of conduct by persuasion or intimidation. [19] The
records show that the decision of the heirs of the late Bai Tonina Sepi to sell the property was
completely of their own volition and that petitioner did absolutely nothing to influence their judgment.
Private respondent himself did not proffer any evidence to support his claim. In short, even assuming
that private respondent was able to prove the renewal of his lease contract with Bai Tonina Sepi, the
fact was that he was unable to prove malice or bad faith on the part of petitioner in purchasing the
property. Therefore, the claim of tortuous interference was never established.
In So Ping Bun, the Court discussed whether interference can be justified at all if the interferer
acts for the sole purpose of furthering a personal financial interest, but without malice or bad faith. As
the Court explained it:
x x x, as a general rule, justification for interfering with the business relations of another exists where
the actors motive is to benefit himself. Such justification does not exist where the actors motive is to
cause harm to the other. Added to this, some authorities believe that it is not necessary that the
interferers interest outweigh that of the party whose rights are invaded, and that an individual acts
under an economic interest that is substantial, not merely de minimis, such that wrongful and
malicious motives are negatived, for he acts in self-protection. Moreover, justification for protecting
ones financial position should not be made to depend on a comparison of his economic interest in the
subject matter with that of the others. It is sufficient if the impetus of his conduct lies in a proper
business interest rather than in wrongful motives.[20]
The foregoing disquisition applies squarely to the case at bar. In our view, petitioners purchase of
the subject property was merely an advancement of his financial or economic interests, absent any
proof that he was enthused by improper motives. In the very early case of Gilchrist v. Cuddy,[21] the
Court declared that a person is not a malicious interferer if his conduct is impelled by a proper business
interest. In other words, a financial or profit motivation will not necessarily make a person an officious
interferer liable for damages as long as there is no malice or bad faith involved.
In sum, we rule that, inasmuch as not all three elements to hold petitioner liable for tortuous
interference are present, petitioner cannot be made to answer for private respondents losses.
This case is one of damnun absque injuria or damage without injury. Injury is the legal invasion of
a legal right while damage is the hurt, loss or harm which results from the injury. [22] In BPIExpress Card
Corporation v. Court of Appeals,,[23] the Court turned down the claim for damages of a cardholder
whose credit card had been cancelled by petitioner corporation after several defaults in payment. We
held there that there can be damage without injury where the loss or harm is not the result of a
violation of a legal duty. In that instance, the consequences must be borne by the injured person alone
since the law affords no remedy for damages resulting from an act which does not amount to legal
injury or wrong.[24] Indeed, lack of malice in the conduct complained of precludes recovery of
damages.[25]
With respect to the attorneys fees awarded by the appellate court to private respondent, we rule
that it cannot be recovered under the circumstances. According to Article 2208 of the Civil Code,

attorneys fees may be awarded only when it has been stipulated upon or under the instances provided
therein.[26] Likewise, being in the concept of actual damages, the award for attorneys fees must have
clear, factual and legal bases[27] which, in this case, do not exist.
Regarding the dismissal of petitioners counterclaim for actual and moral damages, the appellate
court affirmed the assailed order of the trial court because it found no basis to grant the amount of
damages prayed for by petitioner. We find no reason to reverse the trial court and the Court of
Appeals. Actual damages are those awarded in satisfaction of, or in recompense for, loss or injury
sustained. To be recoverable, they must not only be capable of proof but must actually be proved with
a reasonable degree of certainty.[28] Petitioner was unable to prove that he suffered loss or injury,
hence, his claim for actual damages must fail. Moreover, petitioners prayer for moral damages was not
warranted as moral damages should result from the wrongful act of a person. The worries and anxieties
suffered by a party hailed to court litigation are not compensable.[29]
With the foregoing discussion, we no longer deem it necessary to delve into the issue of laches.
WHEREFORE, premises considered, the petition is hereby GRANTED. The assailed decision of the
Court of Appeals is hereby REVERSED and SET ASIDE.
No costs.
SO ORDERED.

FIRST DIVISION
SPS. DOMINADOR R. NARVAEZ G.R. No. 165907
and LILIA W. NARVAEZ,
Petitioners, Present:
PUNO, C.J., Chairperson,
CARPIO,
CORONA,
- versus - LEONARDO-DE CASTRO, and
BERSAMIN, JJ.
SPS. ROSE OGAS ALCISO Promulgated:
and ANTONIO ALCISO,
Respondents. July 27, 2009
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
DECISION
CARPIO, J.:
The Case
This is a petition[1] for review on certiorari under Rule 45 of the Rules of Court. The petition
challenges the 29 October 2004 Decision[2] of the Court of Appeals in CA-G.R. CV No. 63757. The Court

of Appeals affirmed with modification the 6 April 1998 Decision [3] of the Regional Trial Court (RTC),
Judicial Region 1, Branch 8, La Trinidad, Benguet, in Civil Case No. 84-CV-0094.
The Facts
Larry A. Ogas (Ogas) owned a 1,329-square meter parcel of land situated in Pico, La Trinidad,
Benguet. The property was covered by Transfer Certificate of Title (TCT) No. T-1068, and a portion was
subject to a 30-year lease agreement[4] with Esso Standard Eastern, Inc. Ogas sold the property to his
daughter Rose O. Alciso (Alciso). TCT No. T-1068 was cancelled and TCT No. T-12422[5] was issued in
the name of Alciso.
On 25 August 1979, Alciso entered into a Deed of Sale with Right to Repurchase,[6] selling the
property to Jaime Sansano (Sansano) for P10,000. Alciso later repurchased the property from Sansano
and, on 28 March 1980, she entered into another Deed of Absolute Sale, [7] this time selling the property
to Celso S. Bate (Bate) for P50,000. The Deed stated that:
The SELLER warrants that her title to and ownership of the property herein
conveyed are free from all liens and encumbrances except those as appear on the face
of the title, specifically, that lease over the said property in favor of ESSO STANDARD
EASTERN, INC., the rights over which as a lessor the SELLER likewise hereby transfers in
full to the buyer.[8]
TCT No. T-12422 was cancelled and TCT No. T-16066[9] was issued in the name of Bate. On 14
August 1981, Bate entered into a Deed of Sale of Realty, [10] selling the property to the spouses
Dominador R. Narvaez and Lilia W. Narvaez (Spouses Narvaez) for P80,000. TCT No. T-16066 was
cancelled and TCT No. T-16528[11] was issued in the name of the Spouses Narvaez. In 1982, the Spouses
Narvaez built a commercial building on the property amounting to P300,000.
Alciso demanded that a stipulation be included in the 14 August 1981 Deed of Sale of Realty
allowing her to repurchase the property from the Spouses Narvaez. In compliance with Alcisos demand,
the Deed stated that, The SELLER (Bate) carries over the manifested intent of the original SELLER of
the property (Alciso) to buy back the same at a price under such conditions as the present BUYERS
(Spouses Narvaez) may impose. The Spouses Narvaez furnished Alciso with a copy of the Deed.
Alciso alleged that she informed the Spouses Narvaez that she wanted to repurchase the
property. The Spouses Narvaez demanded P300,000, but Alciso was willing to pay only P150,000. Alciso
and the Spouses Narvaez failed to reach an agreement on the repurchase price.

In a Complaint[12] dated 15 June 1984 and filed with the RTC, Alciso prayed that (1) the 25
August 1979 Deed of Sale with Right to Repurchase, the 28 March 1980 Deed of Absolute Sale, and the
14 August 1981 Deed of Sale of Realty be annulled; (2) the Register of Deeds be ordered to cancel TCT
Nos. T-16066 and T-16528; (3) the Spouses Narvaez be ordered to reconvey the property; and (4)
Sansano, Bate, and the Spouses Narvaez be ordered to pay damages, attorneys fees and expenses of
litigation. Alciso claimed that the intention of the parties was to enter into a contract of real estate
mortgage and not a contract of sale with right of repurchase. She stated that:
[C]ontrary to the clear intention and agreement of the parties, particularly the
plaintiffs herein, defendant JAIME SANSANO, taking advantage of the good faith and
financial predicament and difficulties of plaintiffs at the time, caused to be prepared
and induced with insidous [sic] words and machinations, prevailed upon plaintiff to sign
a contract denominated as Sale With Right to Repurchase, instead of Deed of Real
Estate Mortgage as was the clear intention and agreement of the parties.
xxxx
Defendant JAIME SANSANO caused to be prepared a contract denominated as DEED OF
ABSOLUTE SALE, covering the lot in question, contrary to the clear intention and
understanding of plaintiff who was inveigled into signing said contract under the
impression that what she was executing was a real estate mortgage.[13]

The RTCs Ruling

In its 6 April 1998 Decision, the RTC held that (1) the 25 August 1979 Deed of Sale with Right to
Repurchase became functus officio when Alciso repurchased the property; (2) the action to annul the
28 March 1980 Deed of Absolute Sale had prescribed; (3) Alciso had no legal personality to annul the 14
August 1981 Deed of Sale of Realty; (4) the 14 August 1981 Deed of Sale of Realty contained a
stipulation pour autrui in favor of Alciso Alciso could repurchase the property; (5) Alciso communicated
to the Spouses Narvaez her acceptance of the favor contained in the stipulation pour autrui; (6) the
repurchase price was P80,000; (7) Alciso could either appropriate the commercial building after
payment of the indemnity equivalent to one-half of its market value when constructed or sell the land
to the Spouses Narvaez; and (8) Alciso was entitled to P100,000 attorneys fees and P20,000 nominal
damages.
The Spouses Narvaez appealed to the Court of Appeals. In their Appellants Brief[14] dated 21
November 2000, the Spouses Narvaez claimed that (1) the 14 August 1981 Deed of Sale of Realty did
not contain a stipulation pour autrui not all requisites were present; (2) the RTC erred in setting the

repurchase price at P80,000; (3) they were purchasers for value and in good faith; and (4) they were
builders in good faith.

The Court of Appeals Ruling

In its 29 October 2004 Decision, the Court of Appeals held that (1) the 14 August 1981 Deed of
Sale of Realty contained a stipulation pour autrui; (2) Alciso accepted the favor contained in the
stipulation pour autrui; (3) the RTC erred in setting the repurchase price at P80,000; (4) the 14 August
1981 Deed of Sale of Realty involved a contract of sale with right of repurchase and not real estate
mortgage; (5) the Spouses Narvaez were builders in good faith; and (6) Alciso could either appropriate
the commercial building after payment of the indemnity or oblige the Spouses Narvaez to pay the price
of the land, unless the price was considerably more than that of the building. The Court of Appeals
remanded the case to the RTC for determination of the propertys reasonable repurchase price.
The Issue
The Spouses Narvaez elevated the case to the Court. In their Petition dated 15 December 2004,
the Spouses Narvaez claimed that Alciso did not communicate her acceptance of the favor contained in
the stipulation pour autrui; thus, she could not repurchase the property.
The Courts Ruling
The petition is unmeritorious.
Article 1311, paragraph 2, of the Civil Code states the rule on stipulations pour autrui:

If a contract should contain some stipulation in favor of a third person, he may

demand its fulfillment provided he communicated his acceptance to the obligor before
its revocation. A mere incidental benefit or interest of a person is not sufficient. The
contracting parties must have clearly and deliberately conferred a favor upon a third
person.

In Limitless Potentials, Inc. v. Quilala,[15] the Court laid down the requisites of a
stipulation pour autrui: (1) there is a stipulation in favor of a third person; (2) the stipulation is a part,
not the whole, of the contract; (3) the contracting parties clearly and deliberately conferred a favor to
the third person the favor is not an incidental benefit; (4) the favor is unconditional and
uncompensated; (5) the third person communicated his or her acceptance of the favor before its
revocation; and (6) the contracting parties do not represent, or are not authorized by, the third party.
All the requisites are present in the instant case: (1) there is a stipulation in favor of Alciso; (2)
the stipulation is a part, not the whole, of the contract; (3) Bate and the Spouses Narvaez clearly and
deliberately conferred a favor to Alciso; (4) the favor is unconditional and uncompensated; (5) Alciso
communicated her acceptance of the favor before its revocation she demanded that a stipulation be
included in the 14 August 1981 Deed of Sale of Realty allowing her to repurchase the property from the
Spouses Narvaez, and she informed the Spouses Narvaez that she wanted to repurchase the property;
and (6) Bate and the Spouses Narvaez did not represent, and were not authorized by, Alciso.
The Spouses Narvaez claim that Alciso did not communicate her acceptance of the favor. They
state that:

A perusal of the provision of the Deed of Sale of Realty between Celso Bate and
the spouses Dominador R. Narvaez and Lilia W. Narvaez (Annex B) which clearly
provides that the third person (Rose O. Alciso) must have communicated her
acceptance to the obligors (spouses Dominador R. Narvaez and Lilia W. Narvaez) before
its revocation was not complied with. The acceptance is at best by mere inference.
xxxx
Petitioner Narvaez clearly stated that while the contract (Deed of Sale of
Realty, Annex D) contained an [sic] stipulation in favor of a third person (Rose O.
Alciso), she did not demand its fulfillment and communicate her acceptance to the
obligors before its revocation.
xxxx
We maintain that the stipulation aforequoted is not a stipulation pour
autrui. Let the following be emphasized:
1.While the contract contained a stipulation in favor of a third person (Rose Alciso) she
did not demand its fulfillment and she never communicated her acceptance to the

obligors (Spouses Narvaez) before its revocation (Uy Tam vs. Leonard, 30 Phil. 471;
Coquia vs. Fieldmens Insurance Co., Inc., 26 SCRA 178)
2.Granting arguendo that the stipulation is a pour autrui yet in the three meetings Rose
Alciso had with Mrs. Narvaez she never demanded fulfillment of the alleged
stipulation pour autrui and, what is worse, she did not communicate her acceptance to
the obligors before it is revoked.[16]
A petition for review on certiorari under Rule 45 of the Rules of Court should include only
questions of law questions of fact are not reviewable. A question of law exists when the doubt centers
on what the law is on a certain set of facts, while a question of fact exists when the doubt centers on
the truth or falsity of the alleged facts. There is a question of law if the issue raised is capable of being
resolved without need of reviewing the probative value of the evidence. Once the issue invites a
review of the evidence, the question is one of fact.[17]

Whether Alciso communicated to the Spouses Narvaez her acceptance of the favor contained in
the stipulation pour autrui is a question of fact. It is not reviewable.
The factual findings of the trial court, especially when affirmed by the Court of Appeals, are
binding on the Court.[18] In its 6 April 1998 Decision, the RTC found that Alciso communicated to the
Spouses Narvaez her acceptance of the favor contained in the stipulation pour autrui. The RTC stated
that:
Rose Alciso communicated her acceptance of such favorable stipulation when she
went to see defendant Lillia [sic] Narvaez in their house. Under the foregoing
circumstances, there is no question that plaintiff Rose Alciso can maintain her instant
action for the enforcement and/or fulfillment of the aforestated stipulation in her
favor to by [sic] back the property in question.[19] (Emphasis supplied)

In Florentino v. Encarnacion, Sr.,[20] the Court held that the acceptance may be made at any
time before the favorable stipulation is revoked and that the acceptance may be in any form it does
not have to be formal or express but may be implied. During the trial, Alciso testified that she
informed the Spouses Narvaez that she wanted to repurchase the property:
q What was your proposal to Mrs. Narvaez by way of settlement?
a I tried to go to her and asked her if I could redeem the property and Mrs. Narvaez told
me why not, you could redeem the property but not our price.
xxxx

q Now, when you went back to her, what if any did you propose to her or tell her,
Madam witness?
a I just asked for the redemption for the property, sir and she just told me wa [sic] the
price that I could only redeem the property.
q Three Hundred thousand pesos?
a Yes, sir.
q Did you make any counter proposal?
a Yes, for the third time I want [sic] back again your Honor...[21]
The exceptions to the rule that the factual findings of the trial court are binding on the Court
are (1) when there is grave abuse of discretion; (2) when the findings are grounded on speculations; (3)
when the inference made is manifestly mistaken; (4) when the judgment of the Court of Appeals is
based on a misapprehension of facts; (5) when the factual findings are conflicting; (6) when the Court
of Appeals went beyond the issues of the case and its findings are contrary to the admissions of the
parties; (7) when the Court of Appeals overlooked undisputed facts which, if properly considered,
would justify a different conclusion; (8) when the findings of the Court of Appeals are contrary to
those of the trial court; (9) when the facts set forth by the petitioners are not disputed by the
respondents; and (10) when the findings of the Court of Appeals are premised on the absence of
evidence and are contradicted by the evidence on record.[22] The Spouses Narvaez did not show that
the instant case falls under any of the exceptions.
In its 29 October 2004 Decision, the Court of Appeals held that Bate and the Spouses Narvaez
entered into a sale with right of repurchase and that, applying Article 448 of the Civil Code, Alciso
could either appropriate the commercial building after payment of the indemnity or oblige the Spouses
Narvaez to pay the price of the land, unless the price was considerably more than that of the
building. Article 448 states:
Art. 448. The owner of the land on which anything has been built, sown or
planted in good faith, shall have the right to appropriate as his own the works, sowing
or planting, after payment of the indemnity provided for in Articles 546 and 548, or to
oblige the one who built or planted to pay the price of the land, and the one who
sowed, the proper rent. However, the builder or planter cannot be obliged to buy the
land if its value is considerably more than that of the building or the trees. In such
case, he shall pay reasonable rent, if the owner of the land does not choose to
appropriate the building or trees after proper indemnity. The parties shall agree upon
the terms of the lease and in case of disagreement, the court shall fix the terms
thereof.
The Court of Appeals stated that:

[T]he contract between defendants-appellants Bate and Narvaez spouses is a

contract of sale with a stipulation granting plaintiffs-appellees the right to repurchase
the property at a reasonable price.Being the absolute owners of the property in
question, defendants-appellants Narvaez spouses have the undisputed right to use,
enjoy and build thereon.
Having built the improvement on the land they own and registered in their
names, they are likened to builders in good faith and their rights over the improvement
shall be governed by Article 448 of the Civil Code which provides:
ART. 448. The owner of the land on which anything has been
built, sown or planted in good faith, shall have the right to appropriate
as his own the works, sowing or planting, after payment of the
indemnity provided for in articles 546 and 548, or to oblige the one
who built or planted to pay the price of the land, and the one who
sowed, the proper rent. However, the builder or planter cannot be
obliged to buy the land if its value is considerably more than that of
the building or tress. In such case, he shall pay reasonable rent, if the
owner of the land does not choose to appropriate the building or trees
after proper indemnity. The parties shall agree upon the terms of the
lease and in case of disagreement, the court shall fix the terms
thereof.
Applying said Article, plaintiffs-appellees, after repurchasing the land, will
have the following options:
(1)
to appropriate for themselves the
building upon payment of its value to defendants-appellants Narvaez
spouses; OR
(2)
to compel the defendants-appellants
Narvaez spouses to buy the land, unless the value of thereof [sic] be
considerably more than that of the building, in which case, said spouses
may lease the land instead. The parties shall agree upon the terms of
the lease and in case of disagreement, the courts shall fix the terms
thereof.[23]

The Court disagrees.

The rule is that only errors specifically assigned and properly argued in the appellants brief will
be considered, except jurisdictional and clerical errors.[24] However, the Court is clothed with ample
authority to review matters not assigned as errors if their consideration is necessary in arriving at a just
decision.[25]
Article 448 is inapplicable in cases involving contracts of sale with right of repurchase it is
inapplicable when the owner of the land is the builder, sower, or planter. InPecson v. Court of
Appeals,[26] the Court held that:

Article 448 does not apply to a case where the owner of the land is the
builder, sower, or planter who then later loses ownership of the land by sale or
donation. This Court said so inColeongco v. Regalado:
Article 361 of the old Civil Code is not applicable in this
case, for Regalado constructed the house on his own land before he
sold said land to Coleongco. Article 361 applies only in cases where a
person constructs a building on the land of another in good or in bad
faith, as the case may be. It does not apply to a case where a person
constructs a building on his own land, for then there can be no
question as to good or bad faith on the part of the builder.
Elsewise stated, where the true owner himself is the builder of the works on his
own land, the issue of good faith or bad faith is entirely irrelevant. (Emphasis
supplied)

Article 448 is inapplicable in the present case because the Spouses Narvaez built the
commercial building on the land that they own. Besides, to compel them to buy the land, which they
own, would be absurd.
As the Court of Appeals correctly observed, the terms of the 14 August 1981 Deed of Sale of
Realty show that Bate and the Spouses Narvaez entered into a sale with right of repurchase, where
Bate transferred his right of repurchase to Alciso. The Deed states that, The SELLER (Bate) carries over
the manifested intent of the original SELLER of the property (Alciso) to buy back the same at a price
under such conditions as the present BUYERS (Spouses Narvaez) may impose. Article 1601 of the Civil
Code states that, Conventional redemption shall take place when the vendor reserves the right to
repurchase the thing sold, with the obligation to comply with the provisions of Article 1616 and other
stipulations which may have been agreed upon. In Gallar v. Husain,[27] the Court held that the right of
repurchase may be exercised only by the vendor in whom the right is recognized by contract or by any
person to whom the right may have been transferred.
In a sale with right of repurchase, the applicable provisions are Articles 1606 and 1616 of the
Civil Code, not Article 448. Articles 1606 and 1616 state:
Art. 1606. The right referred to in Article 1601, in the absence of an express
agreement, shall last four years from the date of the contract.
Should there be an agreement, the period cannot exceed ten years.
However, the vendor may still exercise the right to repurchase within thirty
days from the time final judgment was rendered in a civil action on the basis that the
contract was a true sale with right to repurchase.

Art. 1616. The vendor cannot avail himself of the right of repurchase without
returning to the vendee the price of the sale, and in addition:
(1)
The expenses of the contract, and any other
legitimate payments made by reason of the sale;
(2)
made on the thing sold.

The necessary and useful expenses

Under Article 1616, Alciso may exercise her right of redemption by paying the Spouses Narvaez
(1) the price of the sale, (2) the expenses of the contract, (3) legitimate payments made by reason of
the sale, and (4) the necessary and useful expenses made on the thing sold. In the present case, the
cost of the building constitutes a useful expense.Useful expenses include improvements which augment
the value of the land.[28]
Under the first paragraph of Article 1606, Alciso had four years from 14 August 1981 to
repurchase the property since there was no express agreement as to the period when the right can be
exercised. Tender of payment of the repurchase price is necessary in the exercise of the right of
redemption. Tender of payment is the sellers manifestation of his or her desire to repurchase the
property with the offer of immediate performance.[29]
Alcisos intimation to the Spouses Narvaez that she wanted to repurchase the property was
insufficient. To have effectively exercised her right of repurchase, Alciso should have tendered
payment. In Lee v. Court of Appeals,[30] the Court held that:
The rule that tender of payment of the repurchase price is necessary to
exercise the right of redemption finds support in civil law. Article 1616 of the Civil
Code of the Philippines x x x furnishes the guide, to wit: The vendor cannot avail
himself of the right of repurchase without returning to the vendee the price of the
sale...
Thus, in the case of Angao vs. Clavano, 17 Phil. 152, it was held that it is not
sufficient for the vendor to intimate or to state to the vendee that the former desires
to redeem the thing sold, but he must immediately thereupon offer to repay the
price... Likewise, in several other cases decided by the Supreme Court (Fructo vs.
Fuentes, 15 Phil. 362; Retes vs. Suelto, 20 Phil. 394; Rosales vs. Reyes, et al., 25 Phil.
495; Canuto vs. Mariano, 37 Phil. 840; De la Cruz, et al. vs. Resurreccion, et al., 98
Phil. 975; and other cases) where the right to repurchase was held to have been
properly exercised, there was a definite finding of tender of payment having been
made by the vendor. (Emphasis supplied)
Nevertheless, under the third paragraph of Article 1606, Alciso has 30 days from the finality of
this Decision to exercise her right of repurchase. In Laserna v. Javier,[31] the Court held that:
The new Civil Code in Article 1606, thereof gives the vendors a retro the right
to repurchase within thirty days from the time final judgment was rendered in a civil

action, on the basis that the contract was a true sale with the right to repurchase. This
provision has been construed to mean that after the courts have decided by a final or
executory judgment that the contract was a pacto de retro and not a mortgage, the
vendor (whose claim as mortgagor had definitely been rejected) may still have the
privilege of repurchasing within 30 days. (Perez, et al. vs. Zulueta, 106 Phil., 264.)

The third paragraph of Article 1606 allows sellers, who considered the transaction they entered
into as mortgage, to repurchase the property within 30 days from the time they are bound by the
judgment finding the transaction to be one of sale with right of repurchase.
WHEREFORE, the Court DENIES the petition. The Court AFFIRMS the 29 October 2004 Decision of the
Court of Appeals in CA-G.R. CV No. 63757 withMODIFICATION. Respondent Rose O. Alciso may
exercise her right of redemption by paying the petitioners Spouses Dominador R. Narvaez and Lilia W.
Narvaez (1) the price of the sale, (2) the expenses of the contract, (3) legitimate payments made by
reason of the sale, and (4) the necessary and useful expenses made on the subject property.The
Court DIRECTS the Regional Trial Court, Judicial Region 1, Branch 8, La Trinidad, Benguet, to
determine the amounts of the expenses of the contract, the legitimate expenses made by reason of
the sale, and the necessary and useful expenses made on the subject property.

After such determination, respondent Rose O. Alciso shall have 30 days to pay the amounts to
petitioners Spouses Dominador R. Narvaez and Lilia W. Narvaez.
SO ORDERED.
E. Obligatory Force and Effect (Arts. 1315 & 1159)
Art. 1315. Contracts are perfected by mere consent, and from that moment the parties are bound not
only to the fulfillment of what has been expressly stipulated but also to all the consequences which,
according to their nature, may be in keeping with good faith, usage and law. (1258)
Art. 1159. Obligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith. (1091a)